Anthony v. Perose ( 1973 )

Opinion

Per Curiam,

Lehigh Tile & Marble Co., a partnership, appellee herein, in 1952 purchased from New York Life Insurance Company a “key man” policy of insurance in the face amount of $25,000 on the life of its Office Manager, John Anthony. Upon appellant’s resignation from Le-high to take a position with another firm, he demanded delivery of the policy to him. This denied, the present suit in equity was brought to compel transfer of ownership of the policy, including all dividends thereon, to plaintiff. The complaint also prayed that the employer be declared a trustee of the policy for plaintiff’s benefit, and that it be ordered to pay to plaintiff an amount equal to all of the premiums paid on the policy from the date of issuance, together with dividends and interest thereon. After a trial the complaint was dismissed. The court en bane overruled exceptions to the chancellor’s adjudication, and entered a final decree, from which this appeal was taken.

The court below found that the policy had been obtained pursuant to an application signed jointly by the Company and by Anthony. As requested in the application, the policy, a 20-year endowment contract, named the appellant as the insured and the Company as owner and beneficiary. The annual premium was $1077.00 and, as the chancellor found, the premium payments were made by the Company with its own funds; its cancelled checks representing the payments were in evidence. The Company received dividends on the policy and paid income tax thereon.

Had this been the whole story, no doubt the present suit would not have been brought; the complaint has its foundation in the manner in which the Company handled the premium payments. Presumably knowing that premiums on key man insurance on the life of an employee of a taxpayer are not deductible where the taxpayer-partnership is a beneficiary under the policy,¹ the Company’s accountant suggested that deductibility be achieved indirectly by pv/rportmg to increase the amount of Anthony’s year-end bonus payments by an amount equivalent to the annual premium.² Mr. Anthony was informed of the nature of and acquiesced in this tax avoidance device.³ The chancellor found that whatever the tax consequences of this arrangement might be, “the source of the funds used to pay the premiums was clearly Lehigh Tile & Marble Co., and not the plaintiff.” He further found that appellant had failed to prove that Lehigh had been unjustly enriched, or that there was any evidence of an agreement that appellant was to be the owner or beneficiary of the policy.⁴

It is, of course, well established that the findings of a chancellor, sustained by a court en banc have the force and effect of a jury verdict and will not be disturbed on appeal if supported by evidence. Lewkowicz v. Blumish, 442 Pa. 369, 275 A. 2d 69 (1971); Horsham Township v. Weiner, 435 Pa. 35, 255 A. 2d 126 (1969). There was ample evidence here to support the chancellor’s finding that the crediting to appellant of the amount of the premium, |1077.00 per annum, was never intended by the employer as real compensation for appellant’s services and was never understood by the employee to be such. The further additional payment to Mr. Anthony to cover the payment of income tax incurred by reason of the enhanced bonus is clear indication that the f1077.00 was not compensation; this additional payment was obviously designed to make Mr. Anthony whole with respect to tax paid by him on income purportedly his but which was not in fact his and which he never actually received. Appellant’s claim that the employer Company has been unjustly enriched at his expense seems clearly to be an attempt to make of the Company’s tax manipulation a windfall to himself. But the fact that fictitious accounting, which we of course do not condone, may entail liability to the taxing authorities does not serve to vest a right of action in this appellant, who was in no way injured.

Decree affirmed. Each party to bear own costs.

Mr. Justice Nix concurs in the result.

1 See Internal Revenue Code of 1954, §264; Treas. Reg. §1.264-1(a).

2 The bonus also included the approximate amount of additional federal income tax Anthony would have to pay because of the purported additional $1077 in his yearly compensation, as reflected in the W-2 form and the 1099 form furnished by the Company. Compensation paid to employees is, of course, an ordinary and necessary expense of doing business and is deductible.

3 The senior and controlling partner, Roger Perose, Sr., who caused the insurance to be taken out and who reviewed appellant’s compensation with him annually, had died prior to this litigation. The principal evidence concerning the treatment of the premium as income to Anthony was given by the accountant, Philip T. Verrichio. He testified as follows: “Q. Now then was this payment of $1077.00 charged in any way to John P. Anthony? A. The amount was credited to John P. Anthony, yes. Q. Now can you explain to the court just how this was done? A. The law states that it would be discriminatory to take a key man insurance policy out on one man and not all the employees of the company and therefore you could not deduct, the partnership could not deduct the amount of the premium paid. When I related this to Mr. Perose I stated and recommended that it would not be contradictory that if he issued this amount to the New York Life but if John Anthony would pick this amount up on his personal tax return <md if we included an amount in Ms bonus to pay the taxes— . . . [objection made and overruled] That the additional tax dollars to cover the tax of, to cover the income of $1017.00 ims included in the annual year end remuneration— . . .[objection made and overruled] Q. Now the $1077.00 was paid by the partnership and the corporation, correct? A. Yes sir. Q. However, if you know, did this payment show in the income tax return of John P. Anthony? A. Yes sir. Q. Now can you state of your own knowledge how that was covered as far as the company was concerned; that is, the payment of income tax on the $1077.00? . . . [objection made and overruled] A. . . . IT'¡here was included in the year end remuneration to John P. Anthony sufficient dollars therein to cover the taw consequently [sic] of including the $1077.00 in his own income taw return. Q. Did you have anything to do with including the amount of income tax in the money which was allowed as a bonus to Mr. Anthony? . . . [objection made and overruled] A. Yes, because I was very closely in confidence with the partnership and the partners therein even to the extent that the $5000.00 check in September 30, 1967 is in my own handwriting and, therefore, I determined in what percentage bracket the tax impact of this $1077.00 would fall, and therefore, mentioned that to Mr. Perose or the partners as to what could he included therein to cover the taw. Q. Did you ever have any conversation with Mr. Anthony in connection with the $1077.00 that was paid for the premium for this policy? A. Yes sir. ... I mentioned to Mr. Anthony that, what accounting procedures I was implementing for the best tax advantage of all parties concerned, and that everyone would benefit therefrom, and if he had any objection thereto that he would advise me since I did include this amount on his W-B or issue to him a 1099. Q. What did he say? A. He, not quoting exact words, but it was agreeable even to the fact that for two years I filed his personal tax so that we both had adequate knowledge of what procedures we were following. ... Q. At that time was there anything said about the $1077.00, the amount of the premium? A. Just that I asked him if he was receiving ample dollars to pay the tax thereon. Q. Did you ask him whether he was receiving ample dollars to pay the tax on this amount, the yearly premium? A. Yes sir. Q. In making up his income tax return did you take into consideration the amount of money that was necessary for him to pay the income tax on the $1077.00? A. Yes sir.” (Emphasis added throughout.)

4 “A contrary intent cannot he found from plaintiff’s vague testimony attributing to Eoger L. Perose Sr. statements that plaintiff needed insurance for the protection of himself and his family.” Adjudication, 160(a)-161(a).