Du Pont v. Commissioner ( 1930 )

IRENEE DU PONT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Du Pont v. Commissioner

Docket No. 41368.

United States Board of Tax Appeals

20 B.T.A. 482; 1930 BTA LEXIS 2102;

August 6, 1930, Promulgated

---

">*2102 TRUST - INCOME - INSURANCE. - Where the petitioner created trusts and the income therefrom was used for the purpose of paying premiums on insurance on his own life, the income of the trusts should be included in petitioner's income under section 219(h) of the Revenue Acts of 1924 and 1926.

Kingman Brewster, Esq., and J. S. Y. Ivins, Esq., for the petitioner.

F. R. Shearer, Esq., for the respondent.

---

BLACK

">*483 Deficiencies in income tax and surtax were determined by respondent as follows: 1924, $16,955.37; 1925, $6,476.22; 1926, $10,201.31, amounting in all to $33,632.90. The petitioner created several trust funds, the income from which was used to pay premiums on insurance on his own life. This income, amounting to $50,422.40 for 1924, $50,370.10 for 1925, and $50,422.40 for 1926, was added to that of petitioner by respondent, thus creating the deficiencies and this is alleged to be erroneous by petitioner in asking redetermination.

FINDINGS OF FACT.

The petitioner, under date of September 18, 1923, executed nine trust agreements for the benefit of his wife, their nine children, and other members and relatives of his family. These">*2103 trusts were irrevocable for their duration, which was in the first instance until December 18, 1926, with provision for further extension upon notice by the trustor to the trustee. Two such notices have been given and the trusts have been extended to December 18, 1932.

By the trust agreements, the petitioner transferred to the Wilmington Trust Co., as trustee, the following properties:

(a) 32 insurance policies on the petitioner's life.

(b) 830 shares of 7% preferred stock of the Christiana Securities Co., a corporation existing under the laws of the State of Delaware.

The nine trust agreements were in full force and effect during the years 1924 to 1926, inclusive, and the 32 insurance policies were likewise in full force and effect and held under the terms of the trusts during those years.

The transfer of the insurance policies was absolute and complete. By the trust instruments the trustee was made the owner of such policies and, if the trusts terminated prior to the petitioner's death, all interest in the policies would vest in certain named beneficiaries. The petitioner is not one of such beneficiaries.

If the petitioner dies prior to December 18, 1932 (or">*2104 such other date to which the trusts might further be extended), the proceeds of the life insurance policies are to become a trust fund in the hands of the trustee, designated as the "Primary Trust Fund." The net income therefrom and the fund itself would be distributed and paid over to named beneficiaries, other than the petitioner or his estate, as indicated in the trust agreements.

The petitioner retains no right to change the beneficiaries under the insurance policies named in the trust agreements. He has no right to surrender the policies for the surrender values indicated therein, nor to borrow against them. There is no provision under which title to the policies could revest in the taxpayer either at his own discretion or the joint discretion of himself and anybody else.

">*484 As to the shares of stock transferred under the trust agreements, the trustee receives the income from the securities, applies the same to the payment of taxes, governmental charges, and incidental expenses, including its commissions, and uses the balance of the income for the payment of premiums on the policies of life insurance for the period of the trusts, or so long as the petitioner lives, ">*2105 whichever is the shorter.

If the trusts terminate prior to the petitioner's death, the securities and any income not paid out, all of which is designated the "Secondary Trust Fund," are to be transferred to the petitioner. If the petitioner dies prior to the end of the trusts, the securities and any net income thereon are to be distributed to the nine children or their issue in the manner specified therein. In such case no part of the "Secondary Trust Fund" goes to the petitioner's estate.

Such is the combined substantive effect of the provisions of the nine trust agreements. To simplify the description of the separate interest of each child dependent upon contingencies, nine distinct trusts (each applying to a one-ninth share in the trust funds) are provided for.

During the year 1924 dividends from securities transferred to and held by the Wilmington Trust Co. as trustee, amounting to $50,422.40, were received by such trustee and, pursuant to the terms of the trusts, were used to pay insurance premiums. During the year 1925 dividends amounting to $50,370.10, and during the year 1926 dividends amounting to $50,422.40, were so received and applied. These amounts have been">*2106 treated by the Bureau as income taxable to the petitioner and subject to income tax and surtax under the Revenue Acts of 1924 and 1926. This action is based upon the Commissioner's interpretation of section 219(h) of the Revenue Acts of 1924 and 1926.

The petitioner's wife and all the children, who were beneficiaries of the trusts, were living during the years 1924 to 1926, and are still living.

OPINION.

BLACK: The taxable years involved in this proceeding are 1924, 1925, and 1926 and hence are governed by the Revenue Acts of 1924 and 1926. Under section 219 of each of these acts it is provided that the tax shall be computed upon the net income of the estate or trust and shall be paid by the fiduciary, except under certain conditions prescribed in subdivisions (g) and (h) of said section.

In this proceeding we are not concerned with subdivision (g) and only with that part of subdivision (h) which reads as follows:

">*485 Where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph">*2107 (10) of subdivision (a) of section 214), such part of the income of the trust shall be included in computing the net income of the grantor.

The petitioner was the grantor of the trusts involved in this proceeding, the part of the income of the trusts upon which the deficiencies are based was used to pay premiums on policies of insurance on the life of the grantor, and respondent has included the amount of such premiums in computing the net income of the grantor for the respective taxable years, as is provided in section 219(h).

Petitioner attacks this determination of respondent on the following grounds: (1) subdivision (h) of section 219 has no application to the income of an irrevocable trust; (2) even if the language of the subdivision does have application to an irrevocable trust, it does not have any application to an irrevocable trust created prior to the enactment of such subdivision; and (3) if said subdivision (h) of section 219 does have the application contended for by the Commissioner, it is unconstitutional and void because it is violative of the Fifth Amendment to the Constitution of the United States. Similar contentions have already been fully considered by the">*2108 Board in Frederick B. Wells,19 B.T.A. 1213">19 B.T.A. 1213, and Alfred F. Pillsbury,19 B.T.A. 1229">19 B.T.A. 1229, and decided adversely to the contentions made by petitioner. See also Corliss v. Bowers,281 U.S. 376">281 U.S. 376.

Counsel for petitioner lay considerable stress in their brief on their contention that petitioner was under no obligation to pay premiums on the insurance policies assigned to the trustee, and that since the evidence shows that the policies had been irrevocably assigned to the trustee, the petitioner no longer had any interest in them. It is of course true that in an ordinary insurance policy the insured is under no legal obligation to pay the premiums due on the policy. If he fails to make the payments within the time prescribed in the policy, it lapses. But if he wants to keep the policies alive and in force he must make payment of the premiums. The policies of insurance involved in this proceeding were for the benefit of petitioner's wife and nine children. Evidently it was the desire of the petitioner to keep these policies alive and in full force. The expense involved in the payment of life insurance premiums by a husband and father">*2109 on policies for the benefit of his wife and children is regarded as a personal expense under the internal revenue laws, and is not an allowable deduction in determining the net income of the taxpayer. If, by the method used in this proceeding, the petitioner can transfer to a trust the burden of paying these insurance ">*486 premiums and secure the deduction that way, in so far as payment of surtax is concerned, then he has accomplished by indirect means that which the law would not permit him to accomplish directly. It was this sort of thing which Congress sought to prevent when it enacted the part of subdivision (h) of section 219, Revenue Acts of 1924 and 1926, which we have quoted at the beginning of this opinion.

Under the authorities above cited,

Judgment will be entered for the respondent.