Haverty Realty & Inv. Co. v. Comm'r of Internal Revenue

• Decision Date: 31 January 1944
• Docket Number: Docket No. 112002.
• Citation: 3 T.C. 161
• Parties: HAVERTY REALTY & INVESTMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

3 T.C. 161

HAVERTY REALTY & INVESTMENT COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 112002.

Tax Court of the United States.

Promulgated January 31, 1944.

Petitioner acquired two life insurance contracts, collected upon one upon the death of the insured and transferred the other for a consideration. Held, on the facts, that the policies were not acquired for valuable consideration. Under the first policy the petitioner received income by reason of the death of the insured, and it was therefore properly excluded from gross income under section 22(b)(1), Internal Revenue Code; and upon assignment of the second policy the petitioner realized no gain. E. D. Smith, Jr., Esq., for the petitioner.

Bernard D. Hathcock, Esq., for the respondent.

The petition herein was filed by the Haverty Realty & Investment Co. for the purpose of redetermining deficiencies for the year 1940 in income tax, declared value excess profits tax, and excess profits tax in the amounts of $3,517.99, $1,263.39, and $3,522.95, respectively, together with a penalty, as provided for by section 291, Internal Revenue Code, of $880.74 for failure to file an excess profits tax return.

The first issue presented is whether the net proceeds of two life insurance policies transferred to the Haverty Realty & Investment Co. by the Haverty Furniture Co. of Atlanta are includible in petitioner's gross income, or are to be excluded therefrom.

The second issue is whether, if we should hold that the net proceeds of the two life insurance policies are not excludible from the gross income of Haverty Realty & Investment Co., the income so received is abnormal income within the meaning of section 721(a) of the Internal Revenue Code.

FINDINGS OF FACT.

Certain facts are admitted by the pleadings in these cases; other facts have been stipulated. The admitted facts and the stipulation of facts are by reference incorporated herein as part of our findings of fact. Those facts are summarized herein only in so far as they are necessary to an examination of the issues involved. In addition, from evidence adduced, we have found certain other facts hereinafter set forth.

Petitioner is a corporation organized and existing under the laws of the State of Georgia, having been incorporated on December 4, 1920. Its principal office and place of business was in Atlanta, Georgia. It had only two stockholders, Clarence Haverty and J. J. Haverty, each of whom owned 50 percent of the stock. Clarence and J. J. Haverty were the only two directors of the company.

The Haverty Furniture Co. of Atlanta (hereinafter sometimes called the Furniture Co.) was also a corporation whose entire stock was owned in equal proportions by Clarence Haverty (and his children) and by J. J. Haverty (and his children).

On May 10, 1928, the Furniture Co. owned two life insurance policies which it had taken out insuring the lives of John Rhodes Haverty and Clarence Haverty for $25,000, Union Central Life Insurance Co. Policy No. 1010913, was issued in 1929. The policy insuring the life of Clarence Haverty for $100,000, Union Central Life Insurance Co. Policy No. 719351, was issued in 1922. The policies were regarded by the directors and stockholders of the Furniture Co. as personal insurance and not as part of the assets of the Furniture Co.

On May 10, 1929, the Furniture Co. transferred said two policies to petitioner. The transfer was authorized at a special meeting of all stockholders of the Furniture Co. The following resolution was unanimously adopted:

WHEREAS: Certain life insurance policies insuring the lives of Clarence Haverty and John R. Haverty having become a burden of expense for this Company, and incurred heretofore more as a personal matter, therefore,

BE IT RESOLVED: That an offer from the Haverty Realty and Investment Company of Atlanta, Ga., be accepted, whereby said Haverty Realty and Investment Company agrees to pay to this Company the sum of Twenty Eight Hundred Forty Dollars and Twenty Five Cents ($2,840.25), which represents the premiums paid since January 1st, 1929, on policies 719351 and 1010913 of the Union Central Life Insurance Co. covering the lives of Clarence Haverty and John R. Haverty, respectively.

RESOLVED FURTHER: That in consideration of such sum, these policies be transferred to the Haverty Realty and Investment Company, and the President and Secretary be empowered to fill out the necessary forms with the Union Central Life Insurance Company for making this transfer.

On May 10, 1929, at a special meeting of all the directors of the Haverty Realty & Investment Co., the following resolution was adopted:

WHEREAS: The Haverty Furniture Company of Atlanta now carries life insurance on Mr. Clarence Haverty and Mr. John R. Haverty, the policies specifically being #719351 and #1010913 of the Union Central Life Insurance Company on Mr. Clarence Haverty and Mr. John R. Haverty, respectively, therefore.

BE IT RESOLVED: That for a consideration of twenty eight hundred forty dollars and twenty five cents ($2,840.25), being the amount of premium paid by the Haverty Furniture Company on the above policies since January 1st, 1929, this Company agrees to pay this sum to the Haverty Furniture Company for transferring these policies to this Company, together with all the benefits and obligations resulting thereof.

RESOLVED FURTHER: That this offer be presented to the Haverty Furniture Company, acceptance of which constitutes a binding contract on our part.

The assignment of Union Central Life Insurance Policy No. 719351, insuring the life of Clarence Haverty, from the Furniture Co. to petitioner pursuant to the authorization of all the stockholders of Haverty Furniture Co. was dated May 10, 1929, and was set forth on the insurance company's form. It consists of two parts. The first part is a certified copy of the resolution of the stockholders of the Haverty Furniture Co. of Atlanta, the text of which is set forth above. The second part is the assignment itself, in the following language: ‘In consideration of $2,467.00, receipt of which is hereby acknowledged, The Haverty Furniture Company hereby sells, assigns, and sets over policy No. 719351 issued by the Union Central Life Insurance Company, on the life of Clarence Haverty, and all right, title and interest of the said corporation therein unto Haverty Realty & Investment Company.‘ An assignment, identical in all respects to the one described above, except that the recited consideration was $373.25, was executed in connection with the transfer of Union Central Life Insurance Policy No. 1010913, insuring the life of John Rhodes Haverty.

The consideration expressed in the assignments was never actually paid. It was mutually understood by both the transferor and the transferee that the latter never had any intention of paying the stated consideration, that it would not be paid, and that the promise to pay it was merely a formal expression used to comply with the request of the insurance company. No promise to pay the recited consideration was actually made by the transferee. The books of the Haverty Realty & Investment Co. do not contain either a charge of an account payable or a record of any actual payment of cash covering the stated consideration. The transaction was never entered in any form on the books of that corporation. There was no consideration for the transfer of the policies from the Haverty Furniture Co. of Atlanta to the petitioner.

On or about the date of the transfer, the Furniture Co. and several other local furniture companies were to be merged. Each local company was to turn over 100 percent of its stock to a holding company. The new holding company was to be financed partially through the sale of its stock to the public. The underwriters knew about the insurance policies, but did not wish them to be part of the transaction. The policies were therefore transferred to petitioner in order to avoid their becoming part of the assets of the new holding company, as they were not regarded by the underwriters as part of the assets of the Furniture Co.

The cash surrender value of the policy on the life of Clarence Haverty at the time the policy was assigned to petitioner was $11,520.21.

On January 28, 1940, John Rhodes Haverty died, and petitioner was paid the full amount of insurance policy No. 1010913, to wit, $25,087.50.

On March 28, 1940, petitioner transferred policy No. 719351 on the life of Clarence Haverty to Elizabeth Rawson Haverty for a consideration of $32,069, which sum was actually paid.

The receipt by petitioner of the sums of $25,087.50 and of $32,069 were the only sums it ever received from insurance policies during its existence as a corporation. It was not in the business of buying and selling life insurance policies.

On May 14, 1940, a complete liquidation of Haverty Realty & Investment Co. was effected by distribution of its entire assets to its stockholders; it surrendered its charter to the State of Georgia; and it ceased its corporate existence except for the purpose of winding up its corporate affairs. Georgia Code (1933), sec. 22-1210.

Prior to the transfer of these policies to the petitioner on May 10, 1929, all the premiums were paid by the Furniture Co., the total amounts paid being $20.045 on the policy on the life of Clarence Haverty and $373 on the policy on the life of John Rhodes Haverty.

After May 10, 1929, and until the liquidation of the petitioner on May 14, 1940, that company paid all the premiums on these policies in the following amounts: $25,658.34 on the policy on the life of Clarence Haverty, and $3,971.04 on the policy on the life of John Rhodes Haverty.

An United States corporation income tax and declared value excess profits tax return for the year ended December 31, 1940, was filed by petitioner with the collector of internal revenue for the Atlanta, Georgia, district. The return showed no tax liability. The invested capital of ...