1938 BTA LEXIS 880">*880 In 1927 petitioner and Eskridge organized a corporation for the purpose of selling Dodge automobiles. In 1930, due to heavy financial losses, the corporation lost its franchise as a Dodge dealer and ceased to do business. In November of that year it transferred to petitioner two life insurance policies on the lives of petitioner and Eskridge. The policies had no cash surrender value at the time of transfer. Eskridge died in 1931 and the proceeds of the policy on his life were paid to petitioner during that year. By the end of 1931 all of the assets of the corporation had been disposed of and, with the exception of the insurance policies transferred to petitioner, the stockholders received nothing from the corporation. The amount paid by petitioner for his stock was greatly in excess of the amount of the proceeds of the insurance policy on the life of Eskridge. Held, that the amount paid by petitioner for his stock in the corporation constituted consideration for the transfer of the insurance policy to him, but since the actual value of the consideration was in excess of the proceeds of the policy, the exclusion of the consideration under section 22(b)(2) of the Revenue1938 BTA LEXIS 880">*881 Act of 1928 leaves no part of the proceeds of the policy which may be included in petitioner's gross income.
38 B.T.A. 351">*351 This proceeding was brought to redetermine a deficiency in income tax for the year 1931 in the amount of $1,352.48. The only issue presented is whether the respondent erred in including in the petitioner's taxable income the proceeds received by him from a certain life insurance policy.
38 B.T.A. 351">*352 FINDINGS OF FACT.
The petitioner is an individual, residing at Charlotte, North Carolina. He filed his Federal income tax return with the collector of internal revenue at Greensboro, North Carolina.
In 1927 the petitioner and B. L. Eskridge organized and caused the incorporation of the Lambeth-Eskridge Motor Co. under the laws of the State of Georgia. It was organized for the purpose of operating the Atlanta, Georgia, agency for the sale of Dodge automobiles. The petitioner invested $75,000 cash in its capital stock, which made him its principal stockholder. He was also an officer of the corporation. Eskridge was a minority stockholder1938 BTA LEXIS 880">*882 and served as vice president and manager of the corporation. He purchased some shares for cash and was indebted to the petitioner to the extent of some $10,000 or $15,000 for other shares purchased on credit.
In 1929 the motor company took out two life insurance policies, one on the life of Eskridge in the amount of $25,000, and one on the life of the petitioner in the amount of $15,000, both of which were payable to the company upon their death.
The company sustained heavy losses in 1929 and 1930. In 1930 it lost its franchise as a Dodge dealer and ceased to do business. During that year it disposed of its parts, accessories, and furniture and fixtures. Its balance sheet as of December 31, 1930, showed assets in the amount of $52,957.88 and liabilities in the amount of $154,772.40, which included liabilities for capital stock outstanding in the amounts of $134,000.
On November 26, 1930, the directors of the motor company held a special meeting and adopted the following resolution:
RESOLVED: That the Life Insurance policy #1487806 on the life of Chas. E. Lambeth, with Lambeth-Eskridge Motor Company, the beneficiary, be changed and made payable to the Estate of Chas. 1938 BTA LEXIS 880">*883 E. Lambeth.
It was further resolved that the life insurance policy on B. L. Eskridge #5976100 in the Prudential Life Insurance Company, be changed to read "Payable to Chas. E. Lambeth."
It was further resolved that Chas. E. Lambeth is to pay the premiums on these policies in the future.
At the time the above resolution was adopted the two policies had no cash surrender value. Eskridge did not want the policies and they were assigned to the petitioner.
Eskridge died in 1931 after an operation for appendicitis and the proceeds of the policy on his life, amounting to $25,111.04, were paid to the petitioner during that year. The petitioner had paid one premium on the policy after its assignment to him. The respondent has included in petitioner's taxable income the amount of $24,926.04, representing the excess of the proceeds of the policy over the single premium paid.
38 B.T.A. 351">*353 The company was liquidated by a law firm in Atlanta, but there was no formal dissolution in accordance with the laws of the State of Georgia. Most of the assets reflected in the balance sheet of December 31, 1930, consisted of investments and accounts receivable, and at the end of 1931 the petitioner1938 BTA LEXIS 880">*884 was advised that all assets upon which anything could be realized had been disposed of, that the remaining notes and accounts receivable were worthless, and that there would be nothing for distribution to stockholders. With the exception of the insurance policies received by petitioner under the circumstances stated, nothing was distributed to the stockholders in liquidation of the corporation.
OPINION.
TURNER: The only question involved in this proceeding is whether or not the proceeds of the life insurance policy paid to petitioner by reason of the death of Eskridge are to be included in petitioner's gross income. In section 22(b)(1) of the Revenue Act of 1928 1 it is provided that "Amounts received under a life insurance contract paid by reason of the death of the insured" shall not be included in gross income and shall be exempt from Federal income tax. In section 22(b)(2), 2 however, the effect of section 22(b)(1) is modified in cases where the life insurance contract under which the amounts above referred to are paid has been acquired by "transfer for a valuable consideration", and in that event the excess, if any, of the amount received, over the "actual value" of1938 BTA LEXIS 880">*885 such consideration and the amount of premiums thereafter paid by the transferee, is to be included in gross income. The terms of section 22(b)(1) are plain and there can be no question that the amount here in question is to be excluded from petitioner's gross income unless section 22(b)(2) applies.
The1938 BTA LEXIS 880">*886 respondent contends that the petitioner did give valuable comsideration for the contract in 1930 and that the consideration so given was the $75,000 paid by him in 1927 for his stock in the Lambeth-Eskridge Motor Co. The respondent further contends that the stock became worthless in 1930, prior to the taxable year, and that petitioner 38 B.T.A. 351">*354 was then entitled to a loss deduction of the entire amount paid by him for the stock, and for that reason and the further reason that the insurance contract had no cash surrender value in 1930, when acquired, its basis for income tax purposes is zero and the full amount received less the one premium paid by petitioner is income to him. The petitioner, on the other hand, claims that he gave no consideration, valuable or otherwise, in acquiring the insurance contract and for that reason section 22(b)(2), supra, is not operative and the proceeds of the insurance contract are excluded from gross income under section 22(b)(1).
While it is true that the petitioner, in purchasing the stock in the Lambeth-Eskridge Motor Co., did not contract specifically for the insurance policy on the life of Eskridge and most likely had no thought of acquiring1938 BTA LEXIS 880">*887 such a policy when he paid for his stock, it is nevertheless true that the consideration paid by him for the stock constituted consideration not only for the stock out also for any distributions to which he might become entitled as a stockholder. Accordingly, we can reach no other conclusion than that the petitioner received the insurance policy by reason of his ownership of stock in the corporation, and, if so, the $75,000 paid for the stock and the rights flowing therefrom constituted consideration for the insurance contract here in question. But even so, this conclusion does not benefit the respondent, for while section 22(b)(2), Supra, does definitely provide that the proceeds of a life insurance contract acquired for a valuable consideration are not unqualifiedly to be excluded from gross income, it also and as definitely provides that where the contract is acquired for valuable consideration the actual value of such consideration is to be excluded in determining the amount of the proceeds which is to be included in gross income. Accordingly, if the valuable consideration given for the transfer of the life insurance contract was the $75,000 in cash paid by the petitioner1938 BTA LEXIS 880">*888 for the stock of the corporation, as the respondent himself claims, the exclusion fo the actual value of such consideration as the statute requires leaves no amount to be included in petitioner's gross income. According to the record the petitioner has received nothing from the corporation for the $75,000 so paid except the bare stock certificates and the insurance policies and by the end of the taxable year it was known that he would never receive anything more. The fact that the petitioner might be permitted a deduction in some year by reason of the worthlessness of the corporate stock does not change the situation, for Congress has seen fit to deal specifically with the proceeds of life insurance contracts and we must apply the statute as it is enacted. It is also true that in the case of property acquired by a stockholder as a distribution from a corporation, other than a dividend, 38 B.T.A. 351">*355 the basis of that property in the hands of the stockholder for the purpose of determining subsequent gain or loss is its fair market value at the time of distribution, and if the distribution of the life insurance contracts in question was subject to the ordinary rule fixing the basis1938 BTA LEXIS 880">*889 for property so distributed, the conclusion of the respondent that the basis is zero might be correct. Here, however, as we have indicated, we are not dealing with the ordinary case, but with the proceeds of life insurance contracts in respect of which Congress has been fit to legislate specifically. The language of the statute is pointed and clear. It is obvious that if valuable consideration was given that consideration was the $75,000 paid by the petitioner for the stock of Lambeth-Eskridge Motor Co. and further that the exclusion of the actual value of that consideration, under the provisions of section 22(b)(2), supra, leaves no part of the proceeds of the life insurance contract which may be included in petitioner's gross income.
Decision will be entered for the petitioner.
Footnotes
1. 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 title:
(1) LIFE INSURANCE. - Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or in installments (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income). ↩
2. (2) ANNUITIES, ETC. - * * *. In the case of a transfer for valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) or this paragraph. ↩