Premier Prods. Co. v. Comm'r of Internal Revenue, Docket Nos. 110690
| Decision Date | 21 July 1943 |
| Docket Number | Docket Nos. 110690,110691. |
| Parties | PREMIER PRODUCTS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF WILLIAM D. MCCULLOUGH, DECEASED, JOHN J. BROWNE AND JOHN F. LINEHAN, EXECUTORS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
EXCESS PROFITS TAX UNDER SUBCHAPTER E OF INTERNAL REVENUE CODE.— Several years prior to the taxable year 1940 the taxpayer corporation acquired policies of insurance on the life of its principal stockholder. During the taxable year the stockholder died and the proceeds of the policies were paid to the taxpayer corporation. Held, the net proceeds thus received (after deducting from the gross proceeds the taxpayer's investment in the policies and the portion of the income and defense taxes applicable to such gross proceeds less the investment) constituted ‘abnormal income‘ as that term is defined in section 721(a)(1) of the Internal Revenue Code as amended, and also ‘net abnormal income‘ as that term is defined in section 721(a)(3) of the Internal Revenue Code as amended; held, further, no portion of the ‘net abnormal income‘ is attributable to years other than the taxable year under section 721(b) of the Internal Revenue Code as amended. Briggs G. Simpich, Esq., for the petitioners.
Philip M. Clark, Esq., for the respondent.
These consolidated proceedings are for a redetermination of a deficiency in excess profits tax for the calendar year 1940 in the amount of $2,194.39 which the respondent has determined against Premier Products Co. as the taxpayer and against the Estate of William D. McCullough, deceased, as transferee of all the assets of premier Products Co. Transferee liability is admitted, but the amount of the liability, if any, plus interest as provided by law is in controversy.
The sole issue in both proceedings is whether the respondent erred in adding to the ‘excess profits net income‘ of Premier Products Co. for the calendar year 1940 an amount of $53,471.70. In a statement attached to each deficiency notice, the respondent explained this adjustment as follows:
(a) Under abnormal income attributable to other years, Schedule 1, item 11 of the return, a deduction of $53,471.70 was claimed representing proceeds of life insurance included in normal tax net income, less income and defense taxes allocated to such income. It is held that life insurance proceeds do not constitute abnormal income under Section 721 of the Internal Revenue Code as amended by the Second Revenue Act of 1940. Accordingly, the amount of $53,471.70 has been added to the excess profits net income.
Petitioner Premier Products Co. hereinafter sometimes referred to as the ‘Products Co.‘ was a corporation organized on January 21, 1922 under the laws of the State of Michigan, with its principal office in Detroit. Its returns (Forms 1120 and 1121) for the calendar year 1940 were filed with the collector of internal revenue for the district of Michigan on March 15, 1941.
The Products Co. was dissolved and its assets were transferred to its sole stockholder, estate of William D. McCullough, on December 31, 1940. From the date of its organization in 1922 to the date of dissolution on December 31, 1940, the Products Co. was engaged in the manufacture and sale of cotton padding for automobile seats and upholstering. William D. McCullough was an officer and principal stockholder of the Products Co. from the date of its organization to the date of his death on May 30, 1940.
The petitioner, Estate of William D. McCullough, Deceased, is the estate of William D. McCullough, deceased, acting through John F. Linehan, sole surviving executor of said estate. The estate of William D. McCullough, deceased, is the transferee of all of the assets of the Products Co., having received such assets upon dissolution of the Products Co. on December 31, 1940. The assets so received were in excess of the deficiency asserted. Transferee liability is admitted.
Prior to October 1, 1929, McCullough had been an officer and principal stockholder in the Premier Cushion Spring Co. of Detroit, Michigan, a corporation engaged in the manufacture and sale of springs for automobile seats and upholstery. On March 9, 1923, the Premier Cushion Spring Co. took out a life insurance policy (No. 8407819) on the life of McCullough in the amount of $50,000 with the New York Life Insurance Co. A similar policy (No. 9168069) was taken out by the Premier Cushion Spring Co. on the life of McCullough in the amount of $50,000 with the New York Life Insurance Co. on July 14, 1925. Premiums were paid on these policies by the Premier Cushion Spring Co. from the date of issuance to October 1, 1929, when all of the stock of the Premier Cushion Spring Co. was sold to the Reynolds Spring Co. On December 3, 1929, the Products Co. purchased the life insurance policies above referred to from the Reynolds Spring Co. for the sum of $8,400, and had the policies assigned to the Products Co. Thereafter the Products Co. paid the premiums on the said policies and during the period from December 3, 1929, to the date of death of McCullough on May 30, 1940, a total amount of $20,898.50 was paid by the Products Co. as premiums on said policies. On July 18, 1940, the Products Co. received the entire proceeds of the said policies in the amount of $100,376.23. The Products Co. did no receive any income on account of proceeds from life insurance policies at any time during the period of its existence from January 21, 1922, to December 31, 1940, other than the proceeds of $100,376.23 received on July 18, 1940, from the two policies on the life of McCullough, above described.
Policy No. 8407819 was a life insurance policy, with disability benefits and double indemnity in case of accidental death. The policy became effective on March 9, 1923, upon the payment of a premium of $1,655.50 and provided for the payment of an annual premium in like amount on the 9th day of March of each year during the life of the insured.
Policy No. 9168069 was an ordinary life insurance policy. This policy became effective on July 14, 1925, upon the payment of a premium of $1,595.50, and provided for the payment of an annual premium in like amount on the 14th day of July of each year during the life of the insured.
On March 15, 1941, the Products Co. filed its ‘Corporation Income, Declared Value Excess-Profits, and Defense Tax Return For Calendar Year 1940‘ on Form 1120 and reported a ‘Net income for declared value excess-profits tax computation‘ of $83,241.71. Included in this net income was ‘Other Income‘ of $71,859.46. Upon the net income of $83,241.71 tax liabilities were computed and paid as follows:
+---------------------------------------------------+
¦Declared value excess profits tax ¦$4,847.01¦
+-----------------------------------------+---------¦
¦Declared value excess profits defense tax¦484.70 ¦
+-----------------------------------------+---------¦
¦Total ¦5,331.71 ¦
+---------------------------------------------------+
After deducting the above taxes of $5,331.71 and a dividends received credit of $850 from the above net income, the return reported a ‘Normal-tax net income‘ of $77,060, upon which tax liabilities were computed and paid as follows:
+------------------------------+
¦Income tax ¦$17,030.26¦
+-------------------+----------¦
¦Income defense tax ¦1,464.14 ¦
+-------------------+----------¦
¦Total ¦18,494.40 ¦
+------------------------------+
The respondent did not make any adjustments in connection with the above mentioned Form 1120.
On March 15, 1941, the Products Co. also filed its ‘Corporation Excess Profits Tax Return For Calendar Year 1940‘ on Form 1121, and reported items Nos. 1 to 24, inclusive, as follows (‘None‘ was reported under items here omitted):
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