*82 Decision will be entered under Rule 50.
Petitioner Donald B. Jones purchased contingent remainder interests in certain trust estates from remaindermen. In each case if the remainderman had died prior to the death of the life tenant the petitioner would have received nothing by reason of his purchase and would have lost the amounts which he paid for the contingent remainder interests. In order to protect himself against such possible losses petitioner, as part of the transactions of purchase, had the sellers take out insurance on their lives and petitioner was made the beneficiary in each of the two policies. It was agreed that petitioner was to pay all the premiums on the life insurance policies and was not to be reimbursed therefor. In 1950, he paid out $ 1,486.90 in premiums and claims a deduction therefor from gross income under section 23(a)(2), Internal Revenue Code of 1939. The Commissioner disallowed such deduction on the ground that such premiums are not deductible under the provisions of section 24 (a) (5) of the 1930 Code, inasmuch as the proceeds of the insurance policies, if and when paid to petitioner by reason of the death of those insured, would constitute *83 tax-exempt income to petitioners by virtue of the provisions of section 22 (b) (1) of the 1939 Code. Held, the respondent's determination that the life insurance premiums thus paid by petitioner in 1950 are not deductible, is sustained.
*5 The Commissioner has determined a deficiency in petitioners' income tax of $ 513.64 for the year 1950. The deficiency is due to three adjustments made by the Commissioner to the net income reported by petitioners on their return. The adjustments were as follows:
| (a) Income from profession | $ 750.00 |
| (b) Casualty losses | 160.00 |
| (c) Insurance premiums paid on debtors' lives | 1,597.40 |
Petitioners do not contest adjustments (a) and (b). They do assign error as to part of adjustment (c). Adjustment (c) to which petitioners assign error is explained in the deficiency notice as follows:
(c) It has been determined that the amount of $ 1,597.40, which you deducted in your income tax return for the taxable year 1950 for "Insurance Premiums Paid on Debtors' Lives", is not allowable for the following reasons:
1. To the extent of*85 $ 110.50, the deduction is not allowable for the reason that it was not substantiated and for the further reason that a deduction for premiums paid for insurance on the life of J. Robert Sowder is prohibited by section 24 (a) (4) of the Internal Revenue Code since you and the said Sowder were financially interested in the same business and, if such a premium was paid, you were the beneficiary under the insurance policy.
2. To the extent of the balance of $ 1,486.90, the deduction is not allowable for the reason that the amounts of $ 1,105.60 and $ 381.30 thereof were paid by you for premiums on life insurance policies, of which you were the beneficiary, covering the life of William E. Pulsifer, 2nd, whose contingent remainder interest in a trust you had purchased, and the life of Elizabeth E. Sloan, part of whose contingent remainder interest in an estate you had purchased, and such premiums are not deductible under the provisions of section 24 (a) (5) of the Internal Revenue Code inasmuch as the proceeds of those insurance policies, when paid to you by reason of the death of those insured, will constitute tax exempt income to you by virtue of the provisions of section 22 (b) (1) *86 of the Internal Revenue Code.
*9 Petitioners assigned error as to adjustment (c) as follows:
(a) The Commissioner erred in disallowing petitioners a deduction from gross income in the amount of $ 1,486.90 for premiums paid on life insurance policies.
Thus it will be noted that petitioners do not assign error as to the $ 110.50 disallowed by the Commissioner in paragraph 1 of his explanation of adjustment (c).
FINDINGS OF FACT.
The petitioners are individuals and during the calendar year 1950 were husband and wife and resided in Newark, New Jersey. The joint return for the period here involved was filed with the collector of internal revenue for the fifth district of New Jersey. The petitioners employed the cash basis of accounting.
Petitioner Donald B. Jones, hereinafter referred to as petitioner, has been a practicing lawyer in the State of New Jersey since 1937. He is also president of a title and abstract company and of a small investment company operating in New Jersey.
Pulsifer Transaction.
Sometime in 1948, petitioner heard through an attorney in Newark, New Jersey, that William E. Pulsifer, II, hereinafter referred to as Pulsifer, was interested in borrowing money*87 against an interest he had as beneficiary under an inter vivos trust. Petitioner examined the trust instrument and informed the attorney that he was not interested in lending money but would be interested in purchasing Pulsifer's share of the estate.
The trust in question had been set up by William E. Pulsifer of New York City as donor on January 30, 1926. The president and directors of the Manhattan Company were the named trustees. The primary life beneficiary was Mary G. Pulsifer, the daughter of the donor. Upon her death, provided the donor was not then living, the trust principal was to be divided into five equal shares to be held for the benefit of the five children of the donor's son, Lester S. Pulsifer, until each became 25 years of age, at which point distribution was to occur. Pulsifer was one of these five children. In the event any of these children died before the termination of the trust, the trust instrument provided for alternative takers.
In October or November of 1948, petitioner met with Pulsifer and discussed with him the possibility of the latter's selling his interest under the trust of his grandfather. Pulsifer at that time was 35 years of age and the *88 life tenant under the trust was 73. In December of that year the parties reached an agreement as to the terms under which the beneficiary would sell to petitioner. A price of *7 $ 37,500 was agreed upon. One of the conditions of the sale stipulated by the buyer was that the seller procure a policy of life insurance on his life. Petitioner was not interested in this life insurance as an investment but merely as a protection against the possibility that Pulsifer would predecease the then living life tenant under the trust. If such an eventuality occurred, petitioner, as purchaser, would receive nothing from the trust upon distribution. He considered the life insurance as a necessary protection of his investment. He had no other reason for insuring Pulsifer's life.
The sale was consummated on December 1, 1948, at which time Pulsifer, in return for $ 37,500 paid to him by petitioner, by written instrument assigned to petitioner:
all of the Assignor's right, title, interest, claim and demand as a beneficiary under the Indenture of Trust made on January 30, 1926 between WILLIAM E. PULSIFER as the "Donor" and the PRESIDENT AND DIRECTORS OF THE MANHATTAN COMPANY as the "Trustee", *89 including the Assignor's right to receive if he be living at the time of the death of the life tenant, Mary G. Pulsifer, one of five equal parts of the corpus of said trust fund and his proportionate part of the share of any other remainder beneficiary who dies prior to the death of said life tenant without leaving lawful issue, together with all the Assignor's powers, rights, and remedies for the recovery thereof. * * *
In addition, petitioner paid a $ 5,000 commission on the sale which he treated as a part of the cost of his investment. He made this purchase solely as an investment.
As a part of the transaction Pulsifer applied for, and received from, the Manhattan Life Insurance Company of New York a so-called modified life insurance policy on his life in the face amount of $ 80,000. Petitioner became the beneficiary under the policy and the sole owner thereof. This policy had a 2-year incontestability and suicide clause. To guard against the possible cancellation of the policy during this 2-year period petitioner procured from Lloyd's of London a single premium policy indemnifying him to the extent of $ 43,000 against his inability to collect under the Manhattan Life policy*90 because of the possible operation of the suicide or contestability clauses thereof. The premium of $ 860 was paid by petitioner. That $ 860 is not involved in this proceeding because it was paid prior to the taxable year 1950.
Petitioner determined the amount of insurance under the Manhattan Life policy at $ 80,000 on the basis of an estimated life expectancy of the life tenant under the Pulsifer trust of about 10 years. He believed that he would have to wait that long before realizing on his investment of $ 42,500, and during that period he felt that normally he would have been able to double his money at compound interest. The then value of the interest under the trust he purchased from Pulsifer, assuming the life tenant died at that time, was in excess of $ 80,000.
*8 Petitioner paid all the premiums under the Manhattan Life policy. He followed the practice of paying only the net premium after reduction of the gross premium by any dividend. In 1950, petitioner paid on this policy a net premium of $ 1,105.60. It was this amount he sought to deduct on his 1950 return. He never received any reimbursement of that payment, and had no claim of any kind against Pulsifer or*91 his estate in the event the latter predeceased the life tenant. Petitioner never saw Pulsifer again after the purchase of his trust interest.
Neither petitioner nor Pulsifer after this sale was a creditor of the other, or in the employ of each other. Pulsifer was not an officer or employee of any corporation in which petitioner had an interest. He likewise had no interest in 1950 in any trade or business of petitioner's.
Elizabeth B. Sloan Transaction.
In 1947, petitioner met Elizabeth B. Sloan who was introduced to him as a person wishing to borrow against her interest in an estate. She will sometimes hereinafter be referred to as Elizabeth. Elizabeth was a beneficiary under the will of her grandfather, Leon N. F. Blanchard, deceased. Her maiden name had been Elizabeth Blanchard.
The testator's will had been drawn by himself and was not entirely clear as to the interest Elizabeth held under it. Petitioner made a detailed study of the will and consulted with other attorneys in New Jersey as to the proper construction thereof. He concluded that Elizabeth had a vested one-sixth remainder interest in the estate subject to the life estate of her grandmother, Annie Blanchard. *92 Petitioner also interpreted the will as giving to Elizabeth a further interest in the estate provided she survived her aunt, Bertha Clayton, who was also a life tenant under the will.
Loans aggregating a total of $ 30,000 were made to Elizabeth by the Morris & Essex Investment Co., Inc., a corporation of which petitioner was an officer. As security therefor Elizabeth pledged all her right, title, and interest in the estate of Leon N. F. Blanchard, deceased. This included any interest she might have under her grandmother, as well as her aunt.
Petitioner calculated the value of Elizabeth's interest in the estate through her grandmother at about $ 33,000 to $ 35,000. In 1950, Elizabeth again approached petitioner and sought to borrow additional funds. He refused to have the Morris & Essex Investment Co. lend any further sums. He did offer, however, to purchase from her a part of her estate subject to the existing loans. After negotiations lasting about 2 months an agreement was reached between the parties. Petitioner agreed to pay Elizabeth $ 4,000 for a one-half *9 interest in her rights under the Blanchard will, subject to the outstanding loans of $ 30,000. He also agreed*93 to assume and pay any further interest on these loans subject to recoupment when Elizabeth realized on the estate. As a condition of the sale petitioner required that Elizabeth obtain an ordinary life insurance policy on her life in the face amount of $ 10,000. He agreed to pay the entire cost of this insurance.
Under date of May 31, 1950, the Equitable Life Assurance Society issued to Elizabeth a policy of ordinary life insurance on her life in the face amount of $ 10,000. On June 3, 1950, she made an absolute assignment of all her rights in the policy to petitioner. The premium of $ 381.30 was paid by petitioner and was claimed as a deduction on his 1950 return. He never received any reimbursement for that payment and had no claim of any kind against Elizabeth or her estate with respect to such payment.
On June 3, 1950, Elizabeth assigned to petitioner, in writing, one-half of all her right, title, and interest under the trusts created in the Blanchard will. In this assignment it was provided, in part, as follows:
(1) This absolute assignment is made subject to the aforementioned collateral assignment to the Morris & Essex Investment Co. Inc., its successors and assigns, and*94 to the repayment of the indebtedness secured thereby as well as the interest to accrue on said indebtedness.
(2) As each distribution of moneys and/or property is made from time to time hereafter by the Executors and/or Trustees of said decedent for the account of the Assignor, the amount or value thereof shall be applied, paid over and delivered as follows:
First: As a payment on account of the full principal indebtedness then owing by the Assignor to the Morris & Essex Investment Co. Inc., its successors and assigns.
Secondly: The balance, if any, to reimburse the Assignee for interest payments theretofore made or incurred by him to said Morris & Essex Investment Co. Inc., its successors and assigns, under his above recited assumption of interest agreement, it being agreed, however, that no interest is to be charged against the Assignor upon the amounts of interest thus paid or incurred by the Assignee.
Finally: The balance, if any, to be equally divided between the Assignor and the Assignee.
Petitioner required that this insurance be obtained solely as a protection for his investment in the Blanchard estate. He had no other interest in Elizabeth. Petitioner calculated the amount*95 of insurance that would be required at $ 10,000 because he thought it would be about 10 years before he could realize anything from the Blanchard estate. He believed he would get nothing when Annie Blanchard died because of the prior loans made by the Morris & Essex Investment Co. and that his hope of recovery lay in Elizabeth's surviving her aunt, Bertha Clayton. He also anticipated possible trouble in the construction of the will upon the death of the life tenants. Neither life tenant *10 died during 1950. Elizabeth's aunt, Bertha Clayton, one of the life tenants, died in 1951. After her death petitioner paid no further premiums on the policy taken out on the life of Elizabeth.
Neither petitioner nor Elizabeth, after this sale, was a creditor of the other, or in the employ of each other. Elizabeth was not an officer or employee of any corporation in which petitioner had an interest. She likewise had no interest in 1950 in any trade or business of petitioner's.
Petitioner never collected the face amount of either of the policies of life insurance he held on the lives of Pulsifer and Elizabeth. So far as the record shows, the policy on the life of Pulsifer is still in*96 force.
OPINION.
Some of the adjustments made by the Commissioner in his deficiency notice are not in dispute and effect will be given to them in a recomputation under Rule 50. There is really no dispute between the parties as to the facts. The issue is one of law.
The issue is whether the premiums paid by petitioner in 1950 on the policies of life insurance on the lives of Pulsifer and Elizabeth in the amounts of $ 1,105.60 and $ 381.30, respectively, are proper deductions from gross income in that year pursuant to the provisions of section 23 (a) (2), Internal Revenue Code of 1939, as petitioner contends, or whether such deductions must be disallowed because of the provisions of sections 22 (b) (1) and 24 (a) (5) of the 1939 Code, as the Commissioner has determined. Section 23 (a) (2) upon which petitioner relies is printed in the margin. 1
*97 The facts may be summed up briefly as follows:
In 1948, petitioner bought an interest in an inter vivos trust from one of the named remaindermen. A similar purchase of an interest under a testamentary trust was made in 1950. In each instance petitioner considered the purchase as an investment. In each instance petitioner was faced with the situation that if either of the remaindermen predeceased the life tenant then on the death of the latter the petitioner would get nothing. In other words, petitioner would realize on his investment only if the life tenant in question died before the remainderman. In the Elizabeth Sloan transaction this applied *11 only as to the one of the two life tenants. Under these circumstances petitioner took steps which he thought would protect his investment against possible loss. Petitioner decided that insurance on the life of the remaindermen was the only practical protection available. Neither remainderman was willing to give any guarantee against loss. The remaindermen wished to realize in advance on their trust interests as much as they could and petitioner was willing to purchase their interests, or a part thereof, provided the former*98 would cooperate in the procurement of insurance on their lives. Such insurance was obtained, and petitioner became the sole owner of the policies. He had no interest in this insurance as an investment and considered it solely as a protection for his investments.
The question is whether, under these facts just summarized, petitioner is entitled to a deduction of the premiums which he paid in 1950 on the insurance policies taken out on the lives of Pulsifer and Elizabeth. The regulations under section 23 (a) (1) have expressly recognized that an insurance premium paid to insure against the loss of business property is a deductible business expense, Regulations 111, section 29.23 (a)-1. Petitioner contends that the same rule is applicable to section 23 (a) (2) where a nontrade or nonbusiness expense is incurred. In support of his contention petitioner cites and relies upon Higgins v. United States, 75 F. Supp. 252">75 F. Supp. 252.
In the instant case, as shown in the deficiency notice, respondent's reason for denying the deduction of the $ 1,486.90 life insurance premiums here involved was that such premiums are not deductible by reason of the provisions of section*99 24 (a) (5) inasmuch as the proceeds of the policies when and if paid to petitioner by reason of the death of those insured will constitute tax-exempt income to petitioner by reason of the provisions of section 22 (b) (1). Respondent still relies on this determination made in his deficiency notice. The sections of the Internal Revenue Code of 1939 upon which respondent relies are printed in the margin. 2
*100 We think respondent's determination must be sustained. In Higgins v. United States, supra, upon which petitioner strongly relies, *12 sections 22 (b) (1) (A) and 24 (a) (5) were in no sense applicable. Therefore, we do not think that case is in point here. The first of these sections relied upon by respondent distinctly provides that amounts received by the beneficiary of a life insurance policy shall not be included in gross income. The second of the sections mentioned, section 24 (a) (5), provides, in substance, that amounts which are allocable to exempt income shall not be deductible even though they would otherwise be deductible. It is true, of course, that petitioner has never received any proceeds from either of the insurance policies which he took out on the lives of Pulsifer and Elizabeth. But we do not think this fact would have the effect of making the premiums which he paid in 1950 deductible. It seems to us that the payments of the life insurance premiums are properly allocable to the two life insurance policies of which, during the taxable year, petitioner was the beneficiary and that any insurance he might receive thereunder*101 would be exempt from taxation. That being true, we think the premiums are rendered nondeductible by section 24 (a) (5). Section 29.22 (b) (1)-1 of Regulations 111 reads as follows:
Sec. 29.22 (b) (1)-1. Life Insurance -- Amounts Paid by Reason of the Death of the Insured. -- The proceeds of life insurance policies, paid by reason of the death of an insured to his estate or to a beneficiary (individual, partnership, or corporation), directly or in trust, are excluded from the gross income of the beneficiary, except in the case of certain transferees as provided in section 29.22 (b) (2)-3 and in the case of a spouse to whom such payments are income under section 22 (k). It is immaterial whether the proceeds are received in a single sum or otherwise. If, however, such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments must be included in gross income. * * *
Respondent cites, as supporting his contentions, National Engraving Co., 3 T. C. 179. In that case the taxpayer agreed with one of its stockholders to buy from his estate all of his stock in the taxpayer for $ 15,000. The taxpayer insured the stockholder's*102 life for that amount in order to have available funds for the purchase. One of the insurance policies contained a double indemnity clause on which the taxpayer realized so that the total insurance collected was $ 25,000. The taxpayer, after paying $ 15,000 to the stockholder's executrix for the stock, was sued for the additional insurance which had been collected. In successfully defending that suit the taxpayer incurred legal fees which it claimed as a deductible expense on its income tax returns. We held that the deductions claimed under section 23 (a) (2), the same section under which the petitioner here claims the deduction, must be disallowed because of the provisions of section 24 (a) (5) and section 22 (b) (1). In holding against the taxpayer in the National Engraving Co. case, supra, we said:
Once it be determined that an expense is allocable to exempt income, the item is not deductible and there is an end of the matter. Both sides of the *13 equation must be considered. If the income is exempt from taxation expenses allocable to such income are not to be allowed as deductions. Any other treatment would result in double benefits by double exemption. Respondent's*103 action is wholly within the letter and the spirit of the cited section.
It is true that in the National Engraving Co. case, supra, the deduction sought by the taxpayer was for attorney's fees expended in defense of a suit involving a portion of the proceeds of a life insurance policy which had been paid to the taxpayer upon the death of one of its stockholders, whereas the deduction involved in the instant case is for premiums paid on life insurance policies taken out on the lives of persons from whom petitioner had purchased contingent remainder interests and which policies were made payable to petitioner. This difference in the class of payments for which deduction is sought from those made in the National Engraving Co. case, supra, we think, makes no difference in the principle involved. The insurance proceeds from the two insurance policies, if and when collected by petitioner, we think would be exempt from taxation under section 22 (b) (1) (A). Therefore, deduction of the premiums is to be disallowed under section 24 (a) (5).
We sustain the Commissioner in his determination against the allowance of the deduction of the premiums.
Decision will be entered under*104 Rule 50.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. --
(1) Trade or business expenses. --
(A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *
* * * *
(2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.↩
2. SEC. 22. GROSS INCOME.
(b) Exclusions from Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter:
(1) Life insurance, etc. -- Amounts received --
(A) under a life insurance contract, paid by reason of the death of the insured; * * *
SEC. 24. ITEMS NOT DEDUCTIBLE.(a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of --
* * * *
(5) Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this chapter, or any amount otherwise allowable under section 23 (a) (2)↩ which is allocable to interest (whether or not any amount of such interest is reecived or accrued) wholly exempt from the taxes imposed by this chapter;