Lucas v. Alexander

• Decision Date: 20 May 1929
• Docket Number: No. 481,481
• Citation: 61 A. L. R. 906,73 L.Ed. 851,279 U.S. 573,49 S.Ct. 426
• Parties: LUCAS, Collector of Internal Revenue, v. ALEXANDER et al
• Court: U.S. Supreme Court

279 U.S. 573

49 S.Ct. 426

73 L.Ed. 851

LUCAS, Collector of Internal Revenue,

v ALEXANDER et al.

No. 481.

Argued April 12, 1929.

Decided May 20, 1929.

Mrs. Mabel Walker Willebrandt, Asst. Atty. Gen., for petitioner.

Mr. Elwood Hamilton, of Louisville, Ky., for respondents.

Mr. Justice STONE delivered the opinion of the Court.

This case is here on certiorari, granted November 19, 1928, 278 U. S. 594, 49 S. Ct. 80, 73 L. Ed. —, to review a judgment of the Court of Appeals for the Sixth Circuit, 27 F.(2d) 237, affirming a judgment of the District Court for Western Kentucky, 21 F.(2d) 68, allowing recovery from the collector of inter nal revenue of federal income taxes alleged to have been illegally exacted.

On May 19, 1899, respondents' testator procured two life insurance policies for $50,000 each upon his own life and payable to his estate. On May 19, 1908, they became fully paid-up policies, upon the payment of the last of ten annual premiums aggregating, for both policies, $78,100. Each policy stipulated that in the event of death within ten years the amount payable should be $50,000 and, from the eleventh to the twentieth year, inclusive, an annually increasing amount ranging from $50,700 in the eleventh year to $72,150 in the twentieth year. The death benefit on each policy during the year ending May 19, 1913, was $59,300. The policies participated in the surplus of the company and 'dividends' properly allocable to each were set aside or ascertainable on its books each year, but were payable only at the end of the tontine period of 20 years and only to holders of policies still in force at that time.

The insured was given an option at the end of the period of receiving on each policy the sum of $50,000 'and in addition the cash dividend then apportioned by the company.' The insured elected to exercise this option May 19, 1919, receiving as proceeds of the two policies $120,797, representing $100,000 face value plus $20,797 dividends. The gain to him over his total premium expenditure was thus $42,697. The commissioner assessed this amount as taxable income under the Revenue Act of 1918, c. 18, 40 Stat. 1057.

Both the District Court and the Court of Appeals thought that, under § 202(a) (1) of the act, only so much of the proceeds of the policies as exceeded their value on March 1, 1913, was subject to tax. They found that the amount provisionally set aside by the company as surplus accum ulations applicable to the two policies on that date was $13,600, and that it was then evident that the rate of accumulation, although not certain, would probably be greater during the later years of the tontine period than before March 1, 1913. Even at the same rate, the accumulation at the end of the period would amount to $19,428.57. Both courts, therefore, concluded that the insured might reasonably have anticipated that the policies would have been worth on their maturity date, if then in force, their face value plus the anticipated accumulations, or a total for both policies of $119,428.57. Since, under the sliding scale, the death benefits would have been even proportionately larger had the insured died before the end of the period, they decided that the combined value of the policies on March 1, 1913, was the smaller amount discounted at the rate of 4 per cent. compounded annually to that date, or $93,587.81. The taxable gain on the policies, accordingly, was taken to be the difference between this amount and the actual proceeds of the policies, or $27,209.19. A recovery was allowed of the difference between the tax as assessed and that as computed on the gain after March 1, 1915, so ascertained.

As respondents did not ask certiorari, we may disregard their argument that the judgment below was erroneous, in that the proceeds of an insurance policy paid to the insured are not taxable income, except as the determination of that question may be involved in passing upon the assignments of error of petitioner. See Federal Trade Commission v. Pacific Paper Ass'n, 273 U. S. 52, 66, 47 S. Ct. 255, 71 L. Ed. 534.

By the expenditure of $78,100 in premiums, the insured secured a return of $120,797, resulting in an economic and realized money gain to him of $42,697. The question of liability for the tax on this gain is different from that mooted by counsel, but not decided, in United States v. Supplee-Biddle Hardware Co., 265 U. S. 189, 194, 44 S. Ct. 546, 68 L. Ed. 970, which was whether insurance upon the life of a corporate officer, paid at his death to the corporation, could be constitutionally subjected to a tax on income. Here the amount paid was not a death benefit or in the nature of a gift to a beneficiary, and was in no sense an indemnity for, or repayment of, an economic loss suffered by the insured, but was a profit or gain upon his premium investment, and would seem to be plainly embraced within the provisions of section 213 taxing 'gains or profits and income derived from any source whatever,' and not exempted as such from tax by any other provision of the act. See Penn. Mutual Co. v. Lederer, 252 U. S. 523, 532, 534, 40 S. Ct. 397, 64 L. Ed. 698; Eisner v. Macomber, 252 U. S. 189, 207, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570; Merchants' Loan & Trust Co. v. Smietanka, 255 U. S. 509, 518, 41 S. Ct. 386, 65 L. Ed. 751, 15 A. L. R. 1305.

But of this total gain received by the insured a part is attributable to and accrued during the period before the effective date of the Sixteenth Amendment (February 25, 1913), and of the first law taxing the income of individuals (March 1, 1913), and hence, for income tax purposes, must be deemed an accretion to capital not taxable by the income tax act enacted under the Sixteenth Amendment. See Southern Pacific Co. v. Lowe, 247 U. S. 330, 334, 38 S. Ct. 540, 62 L. Ed. 1142; cf. Doyle v. Mitchell Bros. Co., 247 U. S. 179, 38 S. Ct. 467, 67 L. Ed. 1054; Lynch v. Turrish, 247 U. S. 221, 38 S. Ct. 537, 62 L. Ed. 1087. Whether or not such accretions may be constitutionally subjected to tax, we have no occasion to decide. The present act, at least, does not attempt it. But the question presented necessarily involves a determination of what part of the total gain received by the taxpayer accrued to him after March 1, 1913. In answering it, provisions of the taxing statute enacted as aids in arriving at the answer must be construed with an eye to possible constitutional limitations so as to avoid doubts as to its validity. United States v. Delaware & Hudson Co., 213 U. S. 366, 407, 408, 29 S. Ct. 527, 53 L. Ed. 836; United States v. Standard Brewery, 251 U. S. 210, 220, 40 S. Ct. 139, 64 L. Ed. 229; Texas v. Eastern Texas R. R Co., 258 U. S. 204, 217, 42 S. Ct. 281, 66 L. Ed. 566; Bratton v. Chandler, 260 U. S. 110, 114, 43 S. Ct. 43, 67 L. Ed. 157; Panama R. R. Co. v. Johnson, 264 U. S. 375, 390, 44 S. Ct. 391, 68 L. Ed. 748.

Section 202 of the Revenue Act of 1918 provides:

'(a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be—

'(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date.'

The...