1942 BTA LEXIS 813">*813 A corporation obtained policies of insurance on decedent's life. It was the beneficiary, paid the premiums, entered the premiums as expense items on its books, credited itself with the annually increasing cash surrender values of the policies, kept the policies in its own custody and received the entire proceeds on the death of decedent. In the printed form of the policy, decedent, as insured, had the right to change the beneficiary, to surrender or cancel the policy, to pledge the policy for a loan or to obtain a loan against the surrender value. He did not exercise such rights during the 13 years of the policies' existence. Held, that decedent, as the insured, was the nominal holder of such reserved rights for the corporation's benefit; that the corporation was the real owner of the policies, and that hence the proceeds thereof should be excluded from decedent's estate.
46 B.T.A. 809">*809 Respondent determined a deficiency of $17,714.34 in estate tax in the estate of Edward Doerken. Petitioners contend that respondent 46 B.T.A. 809">*810 erred in1942 BTA LEXIS 813">*814 including in decedent's gross estate the sum of $100,283.60 representing the proceeds of two insurance policies on the life of the decedent, the proceeds of which were paid to the Audiger & Meyer Silk Co., as sole beneficiary.
FINDINGS OF FACT.
The facts are stipulated. We hereby adopt them as our findings of fact.
Edward Doerken died, a resident of Ridgewood, New Jersey, on December 29, 1938. The estate tax return of decedent was filed with the collector of internal revenue for the fifth district of New Jersey. Decedent died testate, leaving his entire estate to his widow, Stephanie Doerken. She was also the sole beneficiary in thirteen policies of insurance carried by decedent upon his life, the proceeds of which amounted to $101,788.70.
The decedent for many years prior to his death was one of the principal officers and stockholders of the Audiger & Meyer Silk Co., a New Jersey corporation having its principal office in Paterson, New Jersey. The capital stock of the corporation after August 29, 1924, was all owned by the decedent, Kurt A. Meyer, and their respective wives in the following amounts:
| Edward Doerken | 251 shares |
| Stephanie Doerken, his wife | 249 shares |
| Kurt A. Meyer | 251 shares |
| Alice Meyer, his wife | 249 shares |
1942 BTA LEXIS 813">*815 The decedent was treasurer of the company and Kurt A. Meyer was and now is the president. Meyer was in charge of the selling office in New York, New York, and the decedent was in charge of manufacturing operations at the mill in Paterson, New Jersey.
The salaries and bonuses paid to Doerken and Meyer by the company from 1925 through 1938 and the rate of dividends declared and paid upon the 1,000 shares of its stock (having $100 par value), and the company's surpluses in the various years were as follows:
| Doerken | Meyer | |||||
| Year | Salary | Bonus | Salary | Bonus | Dividend rate | Surplus |
| 1925 | $25,000 | $1,000 | $25,000 | $1,000 | 40% | $166,997.54 |
| 1926 | 25,000 | 1,000 | 25,000 | 1,000 | 75% | 295,453.34 |
| 1927 | 25,000 | 1,000 | 25,000 | 1,000 | 150% | 381,362.34 |
| 1928 | 30,000 | 1,000 | 30,000 | 1,000 | 190% | 478,557.01 |
| 1929 | 39,166 | 1,000 | 39,166 | 1,000 | 250% | 570,468.44 |
| 1930 | 36,000 | 1,000 | 36,000 | 1,000 | 300% | 288,576.20 |
| 1931 | 36,000 | 36,000 | 60% | 159,625.79 | ||
| 1932 | 16,500 | 16,500 | none | 132,988.13 | ||
| 1933 | 18,000 | 18,000 | 14% | 132,271.91 | ||
| 1934 | 18,000 | 18,000 | 10% | 118,439.89 | ||
| 1935 | 18,000 | 18,000 | 15% | 125,361.71 | ||
| 1936 | 18,000 | 1,000 | 18,000 | 1,000 | 10% | 123,423.70 |
| 1937 | 18,000 | 21,000 | none | 105,848.46 | ||
| 1938 | 18,000 | 24,000 | none | 125,609.69 |
1942 BTA LEXIS 813">*816 46 B.T.A. 809">*811 On July 17, 1925, at the instance of the company decedent made application with the Equitable Life Assurance Society of the United States for two policies of insurance. Two term policies of insurance for $50,000 each were issued upon decedent's life and were thereafter automatically converted into two ordinary life policies, each bearing date of October 17, 1925. The names of the insured and the beneficiaries appear on the policies in typewriting and the reserved rights are all embodied in the printed form of the policy. The company was the sole beneficiary designated in the policies and at all times retained them in its custody. The company also paid all premiums upon the policies as they became due, less the dividend credit in reduction thereof, and charged the net payment in its ledger to an account called "Life Insurance - Edward Doerken - Expense." During each year the increase in the cash surrender value of the policies was transferred from the above expense account to an asset account called "Life Insurance Policies - Edward Doerken - Cash Value", and the remaining balance in the expense account at the end of each calendar year was then charged to the "Profit1942 BTA LEXIS 813">*817 and Loss Account." The net gain or loss in the latter account was transferred to the "Surplus Account" annually when the books were closed, and in this manner the cash surrender value of the policies was always carried as an asset upon the company's books of account and reflected in its financial statements.
Under the printed terms of the policies the decedent had the power to change the beneficiary, to surrender or cancel the policies, to assign them, to pledge them for a loan, or to obtain from the insurer a loan against the surrender value of the policies. The decedent never exercised any of these legal incidents of ownership.
In 1928 two insurance policies, each having a face value of $100,000, were taken out on the life of Kurt A. Meyer, and in each policy the Audiger & Meyer Silk Co. was named beneficiary. An attempt was made to procure policies on the life of Kurt A. Meyer in October 1925 when the policies were issued on the life of decedent. The reason for the delay was that at that time Kurt A. Meyer was unable to pass the physical examination required by the insurance company, which examination he did succeed in passing in 1928 when the policies were issued. One1942 BTA LEXIS 813">*818 of the policies on the life of Kurt A. Meyer was issued by the Equitable Life Assurance Society of the United States on January 27, 1928, and the other by the Mutual Life Insurance Co. of New York on February 10, 1928.
The total premiums paid each year by the Audiger & Meyer Silk Co. upon the two policies on the life of Edward Doerken amounted to $7,022. The total premiums paid each year by the same company upon the two policies on the life of Kurt A. Meyer amounted to $8,558. The difference in the ages of Doerken and Meyer accounts for the lesser rate of insurance upon Meyer.
46 B.T.A. 809">*812 The decedent died December 29, 1938, and on January 5, 1939, the insurance proceeds, amounting to $100,283.60, were paid to the company as the named beneficiary in the policies.
In the estate tax return petitioners reported the decedent's ownership of 251 shares of the company stock at a value of $162.58 per share, based upon net worth. In the deficiency notice respondent reduced the value of the stock to $100 per share, the reason for the reduction being that respondent determined that the proceeds of the two insurance policies were a part of the decedent's gross estate. The parties1942 BTA LEXIS 813">*819 agree that if the insurance proceeds were not a part of the decedent's gross estate the value of the stock was $182.69 per share, or a total of $45,855.19.
OPINION.
VAN FOSSAN: The issue before us is whether or not the proceeds of two policies of insurance taken out upon the life of the decedent, Edward Doerken, are includible in his estate.
The statute controlling the situation is section 302(g) of the Revenue Act of 1926, as amended by section 404 of the Revenue Act of 1934, 1 and the decision turns upon the correct construction of the words "taken out by the decedent upon his own life."
1942 BTA LEXIS 813">*820 The petitioners contend that the policies in question were not literally taken out by the decedent on his own life; that they were not acquired through expenditure by him; that there was no shifting of interest in the policies as a result of the decedent's death; and that the regulations in effect at the time of the decedent's death were ineffectual to throw the proceeds of the policies into his estate.
The respondent argues that the premiums were paid indirectly by the decedent; that he retained all the legal incidents of ownership in the policies; and that, in any event, the proceeds are includible in the decedent's estate under the provisions of section 302(a) (footnote 1) because the payment of the premiums by the corporation amounted to gifts, additional compensation, or distributions of corporate earnings, made to him or for his benefit.
We shall first discuss the points raised by the respondent. The first and third are interdependent and will be considered together. The respondent draws inferences from the record which find no support 46 B.T.A. 809">*813 therein. He states repeatedly that the decedent was owner of half the stock of the corporation. The decedent owned only1942 BTA LEXIS 813">*821 251 shares out of the 1,000 shares of the corporation, which was conducted strictly as a manufacturing company, with a definite and recognized corporate entity. Though decedent's wife owned an almost equal share, there is no fact justifying the disregard of the corporate entity. The respondent assumes that because of such relationship to the corporation the decedent caused the corporation to pay the premiums as gifts, additional compensation, or the distribution of earnings.
There is no intimation in the record that the payment of premiums by the corporation through its directors reflected an intent to make a gift to a stockholder - an illegal act in itself. The corporation neither sought nor obtained a deduction from its gross income by reason of any additional compensation, paid or credited to either the decedent or to Meyer. There is no suggestion that either of those officers or the corporation ever treated or thought of the premium payments as such or that the decedent included them in his own income tax return. The corporation had four stockholders and there is no evidence leading us to disregard this fact.
1942 BTA LEXIS 813">*822 The respondent's argument that the insurance proceeds are taxable under section 302(a) as well as under section 302(g) is answered in Proutt v. Commissioner, 125 Fed.(2d) 57, as follows:
It would seem that Section 302(a) of both the 1924 and 1926 Acts refers to real estate and personal property exclusive of life insurance, for the reason that Section 302(g) deals separately and specifically with such insurance. Therefore, the amendment of Section 302(a) is not reasonably to be construed as intended to change or affect the meaning of the separate provisions of Section 302(g). The long life of the section strengthens this inference. "Section 302(g) first appeared in identical language in the Revenue Act of 1918 as Section 402(f), 40 Stat. 1057, 1098. It has never been changed." Helvering v. LeGierse,312 U.S. 531">312 U.S. 531, 312 U.S. 531">538. Had Congress intended to effectuate a change in the meaning of the section, it could easily have done so by express amendment. Amendment by implication should not be assumed, unless clearly indicated from the context.
We think that section 302(g) "deals separately and specifically" with taxation of insurance policies and1942 BTA LEXIS 813">*823 excludes the consideration of the present question under the provisions of section 302(a). The respondent's inclusion of the proceeds of the insurance policies in the decedent's estate was justified on neither the first nor the third grounds advanced by him.
The respondent asserts that the decedent "possessed", "had", and "reserved" the incidents of ownership in the insurance policies. With this statement we do not agree. The reservation clause relating to the powers to change the beneficiary, to surrender or cancel the policy, to pledge the policy for a loan, or to obtain a loan against the surrender value did remain in the policy in the name of the decedent, but 46 B.T.A. 809">*814 he was only the nominal owner thereof. A careful study of the facts shows conclusively that the policies were wholly the property of the corporation. It obtained the insurance and paid the premiums. It kept the policies in its custody, thus preventing the decedent from exercising any of the rights reserved to him as the insured, even if he had wished or attempted to do so. The corporation charged the premium payments on its books to expense and meticulously credited itself with the cash surrender value1942 BTA LEXIS 813">*824 of the policies as it increased yearly,
Thus the corporation's control of the policies and its treatment of them shows that it considered them its sole and exclusive property. For more than 13 years, during which the policies were in force, the decedent exercised none of the "legal incidents of ownership" thereof. The counsel for petitioner states in his brief that the reservation of such rights must have been an error on the insurance agent's part and that the possession of the rights was not brought to the attention of the corporation until after the decedent's death. Whether this was true we do not know and, since the insured is dead, can not ascertain. However, there is ample evidence of record to demonstrate that the policies in reality belonged to the corporation.
If the decedent had attempted to exercise for himself any of the rights nominally held by him, the corporation could have restrained him by proper equity procedure. In fact, it would have been difficult, if not impossible, for him to do so while the policies were held in the corporation's custody.
The fundamental test now recognized to be controlling is the expenditure for the premium. The insurance is1942 BTA LEXIS 813">*825 not considered to have been "taken out" if no part of the premium or other consideration was paid either directly or indirectly by the insured. Therefore, in the case at bar the payment of the premium by the corporation meets that test, with the resulting effect of excluding the proceeds of the insurance policies from the decedent's estate.
Since the policies were not "taken out by the decedent upon his own life", the provisions of article 27 of Regulations 80, as amended, 2 do 46 B.T.A. 809">*815 not govern and we need not consider the question of its validity. As stipulated, the value of the stock of Audiger & Meyer Silk Co., owned by the decedent at the time of his death, was $182.69 per share, or a total of $45,855.19. This value will be taken into consideration upon recomputation of the estate tax.
1942 BTA LEXIS 813">*826 Decision will be entered under Rule 50.
Footnotes
1. SEC. 302. [as amended by section 404 of the Revenue Act of 1934]. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the United States.
(a) To the extent of the interest therein of the decedent at the time of his death; * * *
* * *
(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life. * * * ↩
2. ART. 27. Insurance receivable by other beneficiaries. - The amount in excess of $40,000 of the aggregate proceeds of all insurance on the decedent's life not receivable by or for the benefit of his estate must be included in his gross estate as follows:
(1) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) after January 10, 1941, the date of Treasury Decision 5032, and
(2) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) on or before January 10, 1941, and with respect to which the decedent possessed any of the legal incidents of ownership at any time after such date or, in the case of a decedent dying on or before such date, at the time of his death.
Legal incidents of ownership in the policy include, for example, the right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. The insured possesses a legal incident of ownership if his death is necessary to terminate his interest in the insurance, as for example if the proceeds would become payable to his estate, or payable as he might direct, should the beneficiary predecease him. [T.D. 5032↩; C.B. 1941-1, p. 429.]