Albright v. Commissioner

CHARLES E. ALBRIGHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Albright v. Commissioner

Docket No. 20786.

United States Board of Tax Appeals

16 B.T.A. 1228; 1929 BTA LEXIS 2429;

June 28, 1929, Promulgated

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A life insurance agent who advances the first premiums due upon policies he writes for customers, believing and expecting that the money will be repaid to him, held not entitled to deduct as "ordinary and necessary expenses," the amounts so paid.

William C. Quarles, Esq., for the petitioner.

Arthur Carnduff, Esq., and S. B. Anderson, Esq., for the respondent.

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MARQUETTE

This proceeding is for the redetermination of a deficiency in income taxes, asserted by the respondent for the year 1922. The deficiency amounts to $7,668.68. It arises by reason of the respondent's disallowance, as a necessary business expense, of insurance premiums paid by the petitioner for one of his policy holders, petitioner not being reimbursed until 1923.

FINDINGS OF FACT.

The petitioner is a life insurance solicitor in Milwaukee, Wis. He has been very successful, writing large amounts of insurance and thereby earning a large income. In 1922, the taxable year, his earnings averaged about $100,000 per year. He, and members of his family, had considerable investments in real estate and in various corporate enterprises in Milwaukee. Among others, they had large stockholdings in the First Wisconsin National Bank, the petitioner also being one of the bank's directors; he also had stock in the Marshall & Illsley Bank.

In 1921 the grain commission firm of Donahue-Stratton lost a great deal of money through heavy falling of prices, and became very seriously involved financially. This firm was a heavy borrower at the two banks mentioned. Stratton was considered the key man of the firm, and he had endorsed all of the firm's paper to the banks, aggregating approximately $1,000,000. Stratton had little or no estate after his firm became so involved. The petitioner believed that if Stratton lived the grain firm would make enough in four or five years to pay off the bank loans; but if Stratton should die, the loans would be lost to the banks. To guard against this possibility the petitioner wrote several insurance policies on Stratton's life, for an aggregate amount of $700,000. Stratton was unable to pay the premiums, which amounted to $16,785.06, and the two bank directorates declined to do so at the time. The petitioner was obliged to settle with the companies for the premiums within 60 days, and did so by paying the premiums himself. The amount so paid in 1922 was $13,095.95; he having paid $3,689.11 of the premiums in 1921. The petitioner's commission upon these policies was $8,392.53 for the first year, and a further commission (amount or percentage not stated) for each of the succeeding nine years if the policies were kept in force.

When the policies were written, and the premiums paid by the petitioner, he had no promise of reimbursement, nor any understanding to that effect, with any individual, bank, or other corporation. He did not receive any reimbursement, or promise or agreement therefor, during the taxable year. In 1923 the petitioner persuaded the banks to reimburse him. The money so received was reported by him as income for that year.

It was the petitioner's custom, when an applicant for life insurance was unable to pay the premiums at the time, to advance the necessary amount in the expectation that he would be reimbursed. Petitioner thus secured considerable business and earned substantial commissions, which otherwise he might have lost. In the present instance, the insurance upon Stratton's life could not have been effected unless petitioner paid the premiums. The petitioner had no legal interest in these Stratton policies, as assignee or otherwise.

The principal motive of the petitioner in writing the Stratton life insurance and advancing the premiums was to secure some protection for his stockholdings in the two banks which were such large creditors of Stratton.

In his income-tax return for 1922, the petitioner included as income the commissions from the Stratton insurance policies, and deducted the premiums which he had paid on account of those policies as a necessary, ordinary business expense. This was disallowed by the respondent. At the hearing, petitioner eliminated from his claimed deductions the amount paid by him in 1921, and now asks that he be allowed, for 1922, a deduction of $13,095.95.

OPINION.

MARQUETTE: The petitioner contends that his payment, in the first instance, of the premiums on the life insurance policies which he wrote for Stratton was an "ordinary and necessary expense paid * * * during the taxable year in carrying on" his trade or business; and that it is, therefore, deductible from gross income under section 214(a)(1) of the 1921 Revenue Act.

In our opinion, the amount of premiums paid by the petitioner is not deductible as a business expense. We have no doubt that advancement of premiums for new policyholders was an ordinary procedure, frequently followed by the petitioner; we have no doubt that it was expedient to make such advances, in order to secure the business and augment petitioner's income by the resulting commissions. But, we think it was not a "necessary expense" within the meaning of the statute. The petitioner expected that he would be reimbursed for this outlay, and he was. What the petitioner did in this case was to make an advance, in the nature of a loan, of the amount of the premiums. His own testimony shows clearly that he had faith in his ability to collect the full amount advanced by him from the banks, which would largely benefit from the proceeds of the insurance in case of the death of the insured; and the same testimony leads us to believe that, if he had not expected to be repaid and believed he would be able to secure repayment, he would not have advanced the money. Manifestly, no business man would pay out $16,000 without hope or expectation or being repaid, in order to secure $8,000 of income for himself.

But it is further contended that the petitioner was using only due and proper precaution, in advancing the premiums for life insurance as a protection of his business interests - his stock in the two banks to which Stratton was so heavily indebted. In support of that contention reliance is placed upon . In that case Mortenson owned 28 per cent of the stock of a company whose only capital asset was a steamship. The directors decided not to carry any marine insurance on the vessel during 1920; and Mortenson, to protect his interest, personally carried $15,000 of insurance. It was held that he might deduct the premium paid as an ordinary and necessary business expense. But in our opinion there is a clear and distinct difference between the facts and circumstances of that case, and those of the present proceeding. There, the taxpayer paid the premium with no hope or expectation of reimbursement; here, the petitioner not only expected and believed that he would be reimbursed, but the evidence indicates that he would not have paid the premium in the absence of such belief and expectancy. The other cases cited by the petitioner are not, we think, particularly in point; and, like the Mortenson case, they are clearly distinguishable from the present matter, upon the facts. In each of the cited cases the benefit derived, or which might be derived, as a result of the expenditures, flowed directly to the taxpayer and to him alone; he was protecting his own interest solely and directly. Here, the interest to be protected was not that of the petitioner alone; neither would the protection reach him except in a roundabout, indirect fashion. If Stratton had died during the taxable year, the insurance would have been paid, not to the petitioner, as in the Mortenson case, supra; not to the creditor banks, but to Stratton's administrator.

It is our opinion, after carefully considering the facts, that the petitioner has failed to show that the determination appealed from was incorrect.

Judgment will be entered for the respondent.