Golden v. Commissioner , 39 B.T.A. 676 ( 1939 )

DELIA B. GOLDEN, EXECUTRIX OF THE ESTATE OF ELIZABETH B. GOLDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

FIDELITY TRUST COMPANY, CO-EXECUTOR OF THE ESTATE OF CHARLES E. GOLDEN, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

CLAYTON W. ANDERSON AND MELFORD J. ANDERSON, EXECUTORS OF

THE ESTATE OF E. V. ANDERSON, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ESTATE OF CHARLES E. GOLDEN, DECEASED, FIDELITY TRUST COMPANY, CO-EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Golden v. Commissioner

Docket Nos. 91451, 91452, 91453, 92621.

United States Board of Tax Appeals

39 B.T.A. 676; 1939 BTA LEXIS 994;

April 5, 1939, Promulgated

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">*994 A corporation carried life insurance policies whose face values aggregated $105,000 upon the life of its president, under which it was sole beneficiary. Pursuant to an agreement between the corporation, its president, and a trust company, the latter was made trustee beneficiary, with duties to collect and distribute all proceeds paid upon the policies after death of the insured among the corporation's stockholders in proportion to their stock ownership on the date of distribution. In the agreement, the corporation reserved the right to receive all dividends accruing on the policies during the insured's life, and to hypothecate all policies for the purpose of making loans. The corporation paid all premiums on the policies out of its own funds to the date of the insured's death. Held, the distribution of the proceeds of the policies among the corporation's stockholders after the death of the insured, made by the trustee pursuant to the agreement, constituted cash dividends subject to taxation. Isaac May,20 B.T.A. 282">20 B.T.A. 282; Cummings v. Commissioner, 73 Fed.(2d) 477.

A. G. Wallerstedt, C.P.A., and Robert L. Kirkpatrick, Esq., for">*995 the petitioners.

Loren P. Oakes, Esq., for the respondent.

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HILL

">*677 The several proceedings here consolidated involve income tax deficiencies as follows:

Petitioner	Docket	Taxable	Defic-
	No.	period	iency
Delia B. Golden, executrix of the estate of Elizabeth B. Golden, deceased.	91451	1934	$3,026.43
Fidelity Trust Co., co-executor, estate of Charles E. Golden, deceased.	91452	Jan. 1 to Apr. 9, 1934, inclusive.	10,932.81
Clayton W. Anderson and Melford J. Anderson, executors of the estate of E. V. Anderson, deceased.	91453	Jan. 1 to Sept. 13, 1934, inclusive.	1,138.77
Estate of Charles E. Golden, deceased, Fidelity Trust Co., co-executor.	92621	Apr. 9 to Dec. 31, 1934, inclusive.	12,962.71

The common issue here relates to the question whether distributions of the proceeds of life insurance carried by a corporation upon the life of its president, made ratably among its shareholders pursuant to an agreement hereinafter set forth, constitute taxable dividends to the distributees. As an alternative issue, the respondent pleads estoppel against petitioners' rights to claim exemption from the tax at this time. ">*996 The facts are stipulated and we adopt the stipulation as our findings by reference. We deem it necessary for our discussion to set forth only the following of our findings of fact.

FINDINGS OF FACT.

For a number of years next preceding his death the decedent, Charles E. Golden, was president and principal stockholder of the Golden-Anderson Valve Specialty Co., a Pennsylvania corporation, which he and decedent, E. V. Anderson, organized in 1905. The capital stock of this corporation consisted of 2,164 shares, of which Golden owned 1,124; the decedent, Elizabeth B. Golden, 480; and decedent Anderson, 320. During his lifetime Golden was the principal director and manager of the corporation's business, and for a number of years the corporation pursued a business policy of carrying insurance upon his life. On December 12, 1928, the corporation owned eleven of such insurance policies, carried as aforesaid upon the life of its president, the face values of which amounted to the aggregate sum of $105,000, and cash surrender values to the total of $25,912.31.

On the above date a meeting was held by the stockholders of the corporation, at which certain action was taken looking">*997 to the future distribution of the proceeds of the aforesaid life insurance policies when paid. The result of this meeting was the execution of a contract captioned "Agreement for the Distribution of Insurance." This ">*678 contract was amended on February 11, and reexecuted May 21, 1929. As last revised (omitting listings of policies involved) the agreement is as follows:

AGREEMENT FOR THE DISTRIBUTION OF INSURANCE

THIS AGREEMENT made the 12th day of December, 1928, by and between the GOLDEN-ANDERSON VALVE SPECIALTY COMPANY, hereinafter called the Corporation, CHARLES E. GOLDEN, hereinafter called the Stockholder, and FIDELITY TITLE AND TRUST COMPANY, hereinafter called the Trustee, all of Pittsburgh, Pennsylvania.

Witnesseth:

WHEREAS, the said Corporation carries insurance on the life of the Stockholder in the amount of ONE HUNDERED FIVE THOUSAND ($105,000.00) DOLLARS.

WHEREAS, the Corporation and the Stockholder desire that upon the death of the Stockholder the insurance so carried on his life shall be paid to the Trustee.

WHEREAS, a meeting of all the stockholders of the said Corporation was held on the 12th day of December, 1928, for the purpose of voting">*998 on the plan herein contained for the distribution of the said insurance upon the death of the Stockholder.

WHEREAS, at the said stockholders' meeting a resolution in the following form was presented and voted upon in the affirmative by a majority of the stockholders then present, either by proxy or in person, the said vote being a majority of the outstanding stock of the said company; and the said resolution has been duly spread upon the minutes of the said stockholders' meeting.

"Be it and it is hereby resolved that the Board of Directors of the Golden-Anderson Valve Specialty Company be authorized and empowered to enter into an agreement with the Fidelity Title and Trust Company and Charles E. Golden, which agreement shall provide for the distribution of the insurance carried by the Corporation on his life in the manner set forth in an agreement submitted and read to the stockholders at their meeting this 12th day of December 1928."

NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the said Corporation, for itself and its successors, through its duly authorized officers, the said Stockholder, for himself, his heirs, executors and assigns, ">*999 and the said Trustee for itself and its successors, agree together as follows:

ARTICLE I

The Corporation has or will hereafter cause to be made payable to the Trustee, the policies of insurance carried on the life of the Stockholder, in which the Corporation is now named as beneficiary.

ARTICLE II

The Trustee hereby acknowledges the receipt of the policies of insurance as stated above and agrees to hold them subject to the conditions herein set forth.

ARTICLE III

The Corporation reserves the right at all times without the consent or approval of the Trustee:

(a) To hypothecate the policies of insurance deposited hereunder for the purpose of making loans thereon.

">*679 (b) To receive all dividends which may accrue on account of said policies during the lifetime of the Stockholder.

(c) To deposit additional policies of insurance on the life of the Stockholder under the terms of this agreement.

The Corporation renounces its right:

(a) To sell or assign any of the policies deposited hereunder except for purposes of hypothecation in the making of loans thereon.

(b) To exercise any option or privilege granted in the said policies not hereinabove specifically">*1000 reserved to itself.

(c) To change the beneficiary in the said policies except with the consent and approval of the Trustee and Trust Beneficiaries.

ARTICLE IV

Upon receipt of due notice of the death of the said Stockholder, the Trustee shall collect the proceeds of the policies of insurance on his life, which have been deposited hereunder, and shall distribute the same in manner following:

(1) The said proceeds shall be paid directly to the several stockholders of the Corporation in amounts proportionate to the number of shares of stock of the Corporation which they may respectively own at the date of such distribution; provided, however, that the proportionate amount of such distribution which shall be payable to the estate of the Stockholder shall be transferred, set over and delivered by the Trustee hereunder unto the Fidelity Title and Trust Company, Trustee under deed of trust executed by the Stockholder the 28th day of November, 1928, to be held, managed and distributed as therein directed.

Executed in triplicate.

IN WITNESS WHEREOF, The Corporation, the Stockholder and the Trustee have duly re-executed these presents, this 11th day of February, 1929.

Suitable">*1001 notices of the contract were sent to the several insurance companies which carried policies of insurance on the life of Golden, as aforesaid, and the companies after some negotiations made endorsements to the policies designating the Fidelity Title & Trust Co. as trustee beneficiary under them. These endorsements were not uniform, but varied in substance and form according to the methods, forms, or requirements adopted or made by the different issuing companies. For example, two policies issued by the Penn Mutual Life Insurance Co. carried "sticker" endorsements dated March 25, 1929, evidence complete assignments with powers of attorney to the Fidelity Title & Trust Co., as "trustee", but without describing the trust to be served. To each of the several policies issued by Massachussetts Mutual Life Insurance Co. was attached a memorandum dated June 3, 1929, reading as follows:

As absolute beneficiary under said Policy, the Golden Anderson Valve Specialty Co. hereby requests that, if the policy shall mature as a death claim, the proceeds shall be paid to the Fidelity Title and Trust Company, of Pittsburgh, Pa., as trustee, or its successor in trust, in accordance with the trust">*1002 agreement dated March 11, 1929, as amended May 21, 1929, without liability on the part of the Insurance Company to see to the carrying out of the terms of the trust.

">*680 One policy issued by the National Life Insurance Co. was endorsed by that company on March 30, 1929, as follows:

BENEFICIARY AGREEMENT

Attached to and made a part of Policy No. 286,168 on the life of

CHARLES E. GOLDEN

The proceeds of this policy will be paid to Fidelity Title and Trust Company, of Pittsburgh, Pennsylvania, a Pennsylvania corporation, trustee under an agreement or declaration of trust between the Golden Anderson Valve Specialty Co. and said trustee dated the 12th day of December 1928, or its successor in said trust. If said trust has been terminated or this policy withdrawn therefrom and notice thereof given the National Life Insurance Company, then the proceeds will be paid to the executors or administrators of the insured. In no event shall the insurance company be responsible for the application or disposition of the proceeds of said policy by the trustee. The payment to and receipt of said trustee, or of said executors or administrators in case of notice that the trust has">*1003 been terminated or this policy withdrawn and no other beneficiary designated, shall be a full discharge of the liability of the insurance company hereunder.

The Golden-Anderson Valve Specialty Co., assignee, subject to the provisions of said trust instrument and subject to any assignment of the policy duly filed with the Company, may designate a new beneficiary from time to time by filing at the Home Office of the Company written request therefor in such form as the Company may require, such change to take effect only when endorsed on the policy by the Company in the lifetime of the insured.

Each of the six policies issued by the Prudential Life Insurance Co. was endorsed with two "riders" reading as follows:

Rider form attached to and made a part of Policy No. 4875961:

Life of Charles E. Golden

CHANGE OF BENEFICIARY

At the request of the Insured and The Beneficiary, dated March 4, 1929, it is specially agreed that if this Policy shall become a claim by the death of the Insured the amount of insurance then payable in accordance with the terms of the Policy shall be payable as follows; and not as heretofore provided:

To Fidelity Title and Trust Company of Pittsburgh,">*1004 Pa., Trustee, Beneficiary.

It is further agreed that The Prudential Insurance Company of America shall not be responsible for any act or omission of said Beneficiary as trustee, and that payment to said Beneficiary shall fully discharge said The Prudential Insurance Company of America from any and all liability whatsoever under this Policy, and said last mentioned Company may assume that said Beneficiary is acting and continues to act as Trustee until valid notice in writing to the contrary is given to said The Prudential Insurance Company of America at its Home Office in Newark, New Jersey.

Newark, N.J. April 2, 1929.

Rider form attached to Policy No. 4875961:

Life of Charles E. Golden

CHANGE OF BENEFICIARY PROVISION OPERATIVE

At the request of the Insured and the Beneficiary, dated March 4, 1929, it is specially agreed that the Insured shall have the right to change the Beneficiary ">*681 or Beneficiaries under this Policy in accordance with the terms of the clause "Change of Beneficiary" in the Policy, anything on the first page of the Policy to the contrary notwithstanding.

Newark, N.J. April 2, 1929.

Prior to December 12, 1928, the corporation paid">*1005 a total of $44,316.99 in premiums upon the aforesaid insurance policies, which it charged to capital expenditures. After that date the corporation paid additional premiums on the policies to the date of Golden's death in the aggregate sum of $29,924.55 out of its surplus. At the end of the year 1928, the corporation made a so-called "correcting entry" in its books as of December 31 that year, whereby it transferred from capital to surplus account the life insurance premiums theretofore paid. In all income tax returns filed by the corporation after 1928, charges against its surplus are shown in amounts equivalent to the life insurance premiums paid for such year. The amount of the corporation's undistributed earnings and profits was at all times in excess of the aggregate cash surrender value of, or premiums paid on, all policies here involved; The corporation's surplus available for distribution as dividends to its stockholders was, on April 9, 1934, in excess of the sum collected by the Fidelity Title & Trust Co. under the life insurance policies here involved.

Charles E. Golden died April 9, 1934, and the Fidelity Title & Trust Co., as trustee, collected $107,818.09 as proceeds">*1006 from the insurance policies carried on his life. On May 18, following, this sum, less costs, was distributed by the trustee to the corporation's stockholders of record, as of April 9, 1934, in proportion to the shares owned by them. In the trustee's distribution the petitioners herein received amounts as follows: Estate of Charles E. Golden, $55,247.71; Elizabeth B. Golden, $23,593.32; and E. V. Anderson, $15,728.88.

E. V. Anderson died September 13, 1934, and Elizabeth B. Golden died September 23, 1936. The estates of these distributees are petitioners herein through their proper legally authorized executors.

The executors for the estate of Charles E. Golden filed one income tax return for the period ended with his death, April 9, 1934. They filed another return for the estate for the period after April 9 and ended December 31, 1934. The respondent determined separate income tax deficiencies for each of these periods, and in both computations he included in gross income the amount distributed to that estate from the proceeds of the life insurance paid to the trustee. The petitioner herein, Docket No. 91452, challenges the respondent's inclusion of that distribution in">*1007 the income for the period ended April 9, and the proceeding docketed at No. 92621 challenges the computation for the period ended December 31, 1934.

Respondent has held that the distributions here involved must be treated as dividends paid by a corporation and included in the taxable ">*682 incomes of these petitioners. The petitioners contend that the distributions are exempt from the tax as proceeds from life insurance.

OPINION.

HILL: The petitioners plead the benefits of subdivision (b)(1) of section 22 of the Revenue Act of 1934, which excludes from a taxpayer's gross income amounts received under a life insurance contract paid by reason of the death of the insured. They claim that the payments here in dispute were amounts received by these recipients within such exemption provisions.

It is respondent's contention that the disputed disbursements were made from corporation surplus accumulated, in part, from investments of corporate earnings in life insurance policies. That the corporation made such investments from its surplus in the first instance can not be disputed. The parties also agree that the corporation, at all times here material, had ample earnings">*1008 from which it could have distributed dividends, equal to the sums here involved, to its stockholders had it seen fit to do so. In the absence of any showing as to what part, if any, of such surplus was earned before March 1, 1913, the admitted facts would make these distributions dividends, if they belonged to the corporation's surplus when disbursed. .

The petitioners contend that the funds here did not belong to the corporation when distributed, but that they belonged to the corporation's stockholders by virtue of an irrevocable trust. The same claim was made in , where it was contended that a corporation collected and distributed the proceeds of life insurance to its stockholders as their trustee and not as owner of the funds. There, the distribution was made pursuant to a prearranged plan, as in this case, which had been agreed to by the stockholders and ratified by the board of directors in a resolution which committed the board to the duty of distributing the proceeds "if and when" collected as "dividends" to the stockholders of record. ">*1009 The petitioners claimed that the effect there was to divest the corporation of all interest in the policies and create a trust in favor of the stockholders, and that the board's resolution committing it to the single duty of collecting and distributing the insurance among the stockholders made the corporation a bare trustee for that sole function. We found against that contention and our decision was affirmed in . The petitioners do not question the correctness of that decision, but contend that certain language in the court's opinion in the Cummings case supports the view that in the instant case the distributions in question are exempt from tax in the hands of the stockholders. The language referred to is as follows: ">*683 * * * This intention could have been fulfilled in two ways: (1) By taking out the policies in the name of the company as trustee for such stockholders, in which case there would be no question but the amounts received by the petitioners were received under the life insurance contracts; or (2) by a contract or undertaking on the part of the company that these proceeds should be paid to">*1010 them, not by reason of their interests in the life insurance contracts, but by reason of their interests in the company as stockholders and as a distribution of a part of its surplus, in which case the amounts so distributed would be taxable to the receivers thereof. [Italics supplied.]

The petitioners contend that the corporation's acts in transferring beneficial rights in these policies to the trustee herein meet the condition or plan first stated in the above quotation and bring their distributions under the tax exempt classification suggested by the court.

We are unable to see the parallel the petitioners suggest. Here all policies were taken out in behalf of the corporation, and paid for by it out of earnings. The investment in the policies was a corporation asset which it could not gratuitously dispose of, or legally distribute to, its stockholders except by the process of dividends. Cook on Corporations, sec. 534; ; . The naming of a trustee for the policies in this case did not dispose of the corporation's interests in them, as the specific">*1011 reservations set out in the so-called "trust agreement" clearly show. . It is also obvious that the endorsements affixed to the policies fall far short of vesting their titles in the trustee, much less as trustee for the stockholders. True, the two Penn Mutual policies were assigned outright to "Fidelity Title and Trust Company, Trustee," but without words creating any trust, or designating any beneficiaries. Under such conveyances, the title of the trustee is held merely in a custodial capacity for the transferor. ; ; ; . Endorsements on the remaining policies make no pretense of intending a transfer of the policies themselves to the trustee. The one policy issued by the National Life Insurance Co. carries that company's "rider" announcing that the proceeds will be paid to the trustee, subject, however, to the corporation's right to change beneficiaries from time to time by notice to it. To the same effect and">*1012 import are the insurance company's "riders" on all policies issued by the Prudential insurance Co.

The reservation by the corporation of valuable property rights in all of these policies negatives petitioners' claims that they were irrevocably assigned to the trustee. A completed assignment of choses in action leaves no interest or control, however small, in the assignor which could prejudice or defeat the right of the assignee. 5 C.J. 959; ">*684 ; ; . Nor do we think the parties to these transactions intended at transfer of the corporation's interests in these policies. The fact that the corporation continued payments of the premiums until the insured died is inconsistent with such theory. We are convinced that the mechanics here employed were only intended to make certain an immediate distribution upon the death of the insured of the proceeds of the policies among such stockholders as might exist at the time of such distribution, in lieu of leaving it to the discretion">*1013 of a future board of directors. In other words, the so-called "trust agreement" was, in effect, an agreement committing the corporation to distribute dividends in the future. The naming of the trustee was a mere convenience to make more certain the carrying into effect of the agreement.

In , it was held that the right to borrow upon an insurance policy alone was an incident of ownership which prevented title to it passing while the insured lived. To the same effect was our holding in On authority of these decisions, and for the other reasons indicated above, we sustain the respondent on this issue.

Our holding on the issue just disposed of makes unnecessary a consideration of respondent's plea in estoppel, alternatively urged against petitioners' right to claim exemptions for the income items involved.

The remaining issue is common to Docket Nos. 91452 and 92621 only, and requires a determination of whether the taxable period to which the proceeds from the insurance policies distributed to the estate of Charles E. Golden should be attributed">*1014 for income tax purposes is the period from January 1 to April 9, 1934, or from April 9 to December 31, 1934. The respondent in determining the deficiencies herein included the item in both periods, but concedes that it is properly includible in only one. Section 42 of the Revenue Act of 1934 provides:

* * * In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. [Italics supplied.]

The petitioners contend that the distribution accrued to the estate coincident with Golden's death and therefore, is includible in the first period. The respondent agrees with the petitioners. We hold that the item belongs to the latter period and not to the former. The distribution of money which Golden's estate received was not received as proceeds of insurance, but as a dividend from the corporation. Such dividend had not accrued up to the date of his death. The "trust ">*685 agreement" provided that the distribution to the stockholders of the corporation should be">*1015 made out of moneys derived from the proceeds of insurance and necessarily contemplated that such dividend distribution should be made only after such proceeds should be collected. The distribution in question was made on May 18, 1934.

Reviewed by the Board.

Decision in Docket No. 91452 will be entered under Rule 50. Decisions sustaining deficiencies in Docket Nos. 91451, 91453, and 92621 will be entered.