Adams v. Commissioner , 18 B.T.A. 381 ( 1929 )

GEORGE MATTHEW ADAMS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Adams v. Commissioner

Docket No. 27799.

United States Board of Tax Appeals

18 B.T.A. 381; 1929 BTA LEXIS 2068;

November 29, 1929, Promulgated

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">*2068 The petitioner owned substantially all of the stock of a corporation of which he was president. During the years 1922 and 1923 the corporation paid the premiums on certain life insurance policies issued on the life of the petitioner, in which the corporation was not named as beneficiary. Held that the premiums paid by the corporation on such policies constituted taxable income to the petitioner for the years involved.

Lawrence H. Hellenberg, C.P.A., for the petitioner.

P. L. Peyton, Esq., for the respondent.

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SMITH

">*381 This proceeding is for the redetermination of alleged deficiencies in income tax for the calendar years 1922 and 1923, amounting to $571.97 and $319.46, respectively. The petitioner alleges that the respondent erred in adding to net income for each of those years the amount of certain premiums paid by The George Matthew Adams Service, Inc., on life insurance policies issued on the life of the petitioner.

FINDINGS OF FACT.

The petitioner is president of and majority stockholder in The George Matthew Adams Service, Inc. Prior to 1916 the petitioner had contracts with various authors and artists throughout the United">*2069 States to syndicate and sell their productions to various publishers. In 1916 The George Matthew Adams Service, Inc., was organized and the petitioner transferred his contracts to the corporation in return for substantially all of its capital stock. The corporation continued the business formerly carried on by the petitioner and is still engaged in securing contracts from various authors and artists and in syndicating their productions.

The fact that The George Matthew Adams Service, Inc., was the agency through which the work of such authors and artists was offered for sale to newspapers and other publications had very little bearing upon the success of the corporation. It was the publicity and demand for the work of the authors or artists, as the case might be, which was the controlling factor in the success of the company, and the corporation would have suffered serious loss in the event that any of its more featured authors or artists should abandon it as an agency through which to offer their productions for sale. At the annual meeting of the board of directors of The George Matthew Adams Service, Inc., held January 2, 1922, ">*382 it was decided that the company should">*2070 insure all of its principal employees. The minutes of that meeting read in part as follows:

The matter of life insurance was then discussed. It was the sense of the meeting that the Company should insure all its principal employees whether financially interested or not to stimulate their efficiency and leave their minds free from all financial cares. It was decided that the Directors were to name the dependents of each employee to be insured as beneficiaries.

In accordance with this view, it was decided that the following policies be taken out: -

On the life of Mr. George Matthew Adams, Harriet Breese Adams, Leland Breese Adams and George Matthew Adams, Jr., beneficiaries.

On the life of Mr. Bruno Pascale, Louise Marguerite and Robert Pascale beneficiaries.

On the life of Ramona Brady, Mary Brady beneficiary.

In pursuance of the policy adopted by the board of directors, life insurance policies were issued on the lives of certain stockholders in the corporation. The premiums thereon were paid by the corporation direct to the insurance company. All of those whose lives were so insured were either officers or employees of the corporation. Each made application for">*2071 the policy which was later issued to the applicant, and each named the beneficiary or beneficiaries. In no case was The George Matthew Adams Service, Inc., named as a beneficiary. Upon the severance of the connection of the insured with the corporation the policy terminated, except that the insured might keep the policy in force by thereafter personally paying the premiums.

The petitioner was one of those so insured and there were issued to him three policies in the principal amounts of $70,000, $20,000, and $10,000, respectively. During the year 1922 the corporation paid premiums on such policies amounting to $3,299.21, and during the year 1923 paid premiums amounting to $2,515.81 on policies issued on the life of the petitioner.

OPINION.

SMITH: The only issue before us is whether the amounts of $3,299.21 and $2,515.81 constituted taxable income to the petitioner for the calendar years 1922 and 1923, respectively. In order to arrive at a decision it will be necessary to consider the nature of the premium payments from the standpoint of the petitioner, i.e., whether or not they constituted additional compensation.

Counsel for the petitioner contends that the success">*2072 of The George Matthew Adams Service, Inc., was and is due to the continued maintenance of friendly relations with the authors and artists having contracts with it to syndicate their productions; that the death of any of its principal employees, and more especially the death of the petitioner, leaving dependents who would not be interested in ">*383 the corporation, would tend to disrupt the continuance of such friendly relations; that it was felt that any dependent who might be left in straitened financial circumstances would be less likely to maintain an interest in the corporation than would otherwise be the case; and that it was further felt that in the event the dependents of George Matthew Adams were left with only his interest in the corporation to look to for support they would dispose of such interest in the corporation and thereby remove from the business all traces of the petitioner's personality or influence.

It was also urged on behalf of the petitioner that the premiums in question did not constitute income to him, since they were not received by him and he did not have the free use and disposition thereof, but that, if it were considered that the petitioner had">*2073 received additional compensation through the action of the corporation, the amount thereof would not be in excess of the cash surrender value of the policies. Our attention was further invited by counsel for the petitioner to a claimed analogy existing between the insurance scheme in question and the general scheme of group insurance.

Counsel for the respondent argues that ordinarily group insurance is taken out without the consent and without the knowledge, in most cases, of the employee, who is not consulted, who does not make the application for the insurance, and who is told about the matter after the thing has been accomplished; that here we have the actual participation by all the employees insured, who were also directors, as well as the beneficiaries; that the employees on whom the policies were taken out made out the applications, had knowledge of what was being done, and gave their consent to what was done; and that the amount of the insurance (the face value of the policy) obviously was set by the individuals, since they were directors of the corporation and the minutes show that the directors passed on such insurance.

It was also urged upon us on behalf of the respondent">*2074 that group insurance could not be compared to the situation existing in the instant proceeding, since it would appear that the corporation was practically a personal service corporation where the activities of the stockholders, and especially the activities of the petitioner, produced the income and that such a situation is not at all analogous to one where insurance is taken out for thousands of employees who know nothing about it.

The minutes of the meeting of the board of directors of The George Matthew Adams Service, Inc., held January 2, 1922, state:

* * * It was the sense of the meeting that the Company should insure all its principal employees whether financially interested or not to stimulate their efficiency and leave their minds free from all financial cares. * * *

In ">*384 the light of the foregoing extract from the minutes of the corporation, it seems to us that the evidence presented, as well as arguments of counsel for the petitioner, leads to the conclusion that the policy adopted by the corporation with respect to insuring the lives of its principal employees was adopted primarily for its own benefit.

That any progressive policy of compensation has">*2075 for its foundation the financial needs of the employee as related to his skill and to the ability of the employer to pay can not be doubted. Increases in compensation are designed not only to reward for past services and compensate for increased efficiency, but also to stimulate future activity. Consequently, we find increases in compensation assuming various forms such as bonuses, pensions, etc., but in all such cases the primary factor considered by the employer is that of his own benefit, be it past, present, or future.

We agree with counsel for the respondent that the situation here is quite different from the one contemplated by that portion of article 33, Regulations 62, relative to premiums paid on group insurance policies, and in the last analysis the premium payments now under consideration constituted either a gift or additional compensation to the petitioner.

On the reasoning and authority of (certiorari denied, ), wherein the court, in considering whether a certain corporate act resulted in the making of a gift or the payment of additional compensation, said:

">*2076 * * * Although it is held that the motive accompanying a gift is not material, gifts usually proceed from the generosity of the giver; and, where there is any doubt as to the nature of the transaction, the absence of such motive is a pertinent circumstance for consideration. It is an essential characteristic of a gift, however, that it be a transfer without consideration. * * *

* * * It needs neither argument nor citation of authority to establish the proposition that the directors were without authority to give away the corporate assets, and that for them to make to several of their members and other persons a gift of a large sum of money from the corporate assets would be neither "wise" nor "proper," and would amount to an illegal misapplication of corporate funds. We must assume that the directors did not intend such a flagrant violation of their trust. * * *

we conclude that the premium payments herein did not constitute a gift to the petitioner. Cf. ; ; and ">*2077 .

As shown by the findings of fact, each person upon whose life an insurance policy was written made application for the policy himself and the policy was issued to the applicant. The applicant was permitted to designate the beneficiaries and in no case was the ">*385 corporation designated as a beneficiary. Section 213 of the Revenue Act of 1921, under the provisions of which the petitioner's tax returns for 1922 and 1923 were filed, defines gross income as including "gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid." We think that the premiums paid upon the life insurance policies taken out on the life of the petitioner constituted additional compensation for him for the years 1922 and 1923, within the meaning of the taxing act. Consequently, we are of the opinion that the amounts of $3,299.21 and $2,515.81 constituted additional compensation of the petitioner for the calendar years 1922 and 1923, respectively, and that the respondent committed no error in including such amounts in his taxable income for the respective years.

">*2078 Judgment will be entered for the respondent.