Phillips v. Comm'r of Internal Revenue
| Citation | 30 T.C. 866 |
| Decision Date | 30 June 1958 |
| Docket Number | Docket No. 60084. |
| Parties | PERCY W. PHILLIPS AND BETTY R. PHILLIPS (HUSBAND AND WIFE), PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Percy W. Phillips, pro se.
William Schwerdtfeger, Esq., for the respondent.
Petitioner owned an endowment insurance policy on his life in the amount of $27,000. Twelve days before the policy matured and when its cash value was. $26,973.78, petitioner sold it to his law partners for $26,750. The cost of the policy to petitioner was $21,360.49. Held, upon the facts, the sale was bona fide and is recognizable for tax purposes. Held, further, that petitioner is entitled to treat the increment received from such sale as gain from the sale or exchange of a capital asset.
Respondent determined a deficiency in income tax for the year 1952 in the amount of $10,061.59. The petition raised two issues and made a claim for a refund based on respondent's determination in the statutory notice of deficiency that petitioners had overstated their dividend income and income from a partnership. In his answer respondent admitted that dividend income and income from a partnership had been overstated. One of the issues raised by the petition has been settled by the stipulation filed herein. The remaining question for our decision is whether the respondent erred in his determination that ‘the increment or profit (petitioner) realized on the assignment in 1952 of an endowment insurance policy is taxable as ordinary income.’1
Some of the facts have been stipulated. The stipulation and exhibits annexed thereto are incorporated herein by this reference.
Petitioners Percy W. Phillips (hereinafter referred to as petitioner) and Betty R. Phillips are husband and wife residing in Chevy, Chase Marland. For the calendar year 1952 they timely filed a joint income tax return with the district director of internal revenue at Baltimore, Maryland.
Petitioner is currently a practicing lawyer, a partner in the law firm of Ivins, Phillips and Barker. Richard B. Barker and John C. Reid are also partners in the firm. Petitioner, Barker, and Reid largely specialize in Federal tax matters.
In the year 1931 petitioner insured his life with the Connecticut Mutual Life Insurance Company (hereinafter referred to as the company) for the sum of $27,000. At the time the petitioner was married and had 4 children, the oldest of whom was 9, and the youngest of whom was 3 years of age.
On or about April 18, 1938, pursuant to provisions contained in the life insurance policy, it was converted to a fully paid endowment policy providing for the payment of $27,000 to petitioner on March 19, 1952, if he was still living at that time, or to his estate or named beneficiary upon his earlier death. Petitioner agreed to pay annual premiums of $1,444.782 for 21 years from the date of the issuance of the original policy (March 19, 1931) or until his earlier death. This policy is endorsed: ‘Issued in exchange for original policy of same number, in the sum of $27,000, dated February 10, 1931, with premiums paid in full.’
Petitioner is not a dealer in securities or life insurance policies.
The policy contained, inter alia, the following clauses:
The Dividend. This Policy, upon payment of the second annual premium and during its continuance thereafter as a premium-paying, paid-up or extended insurance policy, will participate annually in the divisible surplus which shall be determined and apportioned by the Company.
Assignments. No assignment of this Policy shall be binding upon the Company until the original or a copy thereof is filed at the Home Office of the Company in Hartford, Connecticut. The Company will not be responsible for the validity of any assignment.
Cash Value. At any time after due payment of two or more full annual premiums hereon, and on surrender of this Policy by the Insured, the Company will pay the Cash Value of this Policy in full settlement of the liability of the Company hereunder; provided that the Company may defer such surrender and payment for a period not exceeding sixty days after application therefor.
Such Cash Value shall be as follows:
(1) If there shall have been no failure to pay premiums as provided in this Policy, the Cash Value on the due date of an annual premium shall be the then reserve hereon, increased by the reserve on any outstanding paid-up additions hereto, less a charge per $1,000 face amount of this Policy, which if two full annual premiums are paid is $12, if three are paid is $8, if four are paid is $4, and which after five full annual premiums are paid is eliminated; a proportionate adjustment to be made on account of the payment of any additional installment of an annual premium in excess of full annual premiums; and the Cash Value at other than premium due dates to be the Cash Value at the end of the term for which premiums are paid discounted at the rate of 5% per annum, but in no event less than any previous Cash Value;
(2) If this Policy be a policy of Paid-up * * * Insurance the Cash Value shall be the then reserve hereon * * *
The policy also provided that ‘the Values guaranteed by this Policy for the end of the years specified appear below. * * * ’:
+----------------------------------+
¦Years ¦Per $1,000 face amount ¦
+---------+------------------------¦
¦elapsed ¦cash or loan value ¦
+---------+------------------------¦
¦ ¦ ¦
+---------+------------------------¦
¦2 ¦$54.32 ¦
+---------+------------------------¦
¦3 ¦93.20 ¦
+---------+------------------------¦
¦4 ¦133.27 ¦
+---------+------------------------¦
¦5 ¦174.59 ¦
+---------+------------------------¦
¦6 ¦213.19 ¦
+---------+------------------------¦
¦7 ¦253.13 ¦
+---------+------------------------¦
¦8 ¦294.45 ¦
+---------+------------------------¦
¦9 ¦337.21 ¦
+---------+------------------------¦
¦10 ¦381.47 ¦
+---------+------------------------¦
¦11 ¦427.29 ¦
+---------+------------------------¦
¦12 ¦474.75 ¦
+---------+------------------------¦
¦13 ¦523.95 ¦
+---------+------------------------¦
¦14 ¦575.01 ¦
+---------+------------------------¦
¦15 ¦628.07 ¦
+---------+------------------------¦
¦16 ¦683.28 ¦
+---------+------------------------¦
¦17 ¦740.85 ¦
+---------+------------------------¦
¦18 ¦801.00 ¦
+---------+------------------------¦
¦19 ¦864.01 ¦
+---------+------------------------¦
¦20 ¦930.21 ¦
+---------+------------------------¦
¦21 ¦1,000.00 ¦
+----------------------------------+
The cash values set out in the policy represented the amounts of reserve set up by the company for the payment of the obligations called for by the contract of insurance. These amounts were calculated by actuaries employed by the company, who assumed in these calculations, inter alia, that the mortality rate among its insureds would be according to the American Experience Table of Mortality, that the earnings of the company upon the moneys paid into it would be at the rate of 3 per cent compounded annually, and that the expenses embraced in the term ‘cost of insurance’ would be a certain amount. At no time would the amount of the reserve, or cash surrender value, of the policy here in question be greater than the gross amount of the premiums payable in the amounts and at the time called for by the policy undiminished by so-called ‘dividends' paid or credited to the policyholders of the company, which was a mutual insurance company. If petitioner had paid all of the premiums at the times called for by the policy (undiminished by such ‘dividends') the total amount of such premiums paid (omitting that part paid for Disability Benefit) would have been $27,663.93 at the time the policy matured, while the reserve would have been $27,000. The parties are in agreement that the cost of the policy to petitioner as of March 7, 1952, was $21,360.49. On the same date the cash surrender value of the policy was.$26,973.78.
On March 7, 1952,3 petitioner assigned and transferred all his right, title, and interest in and to the policy to Barker and Reid in exchange for $26,750 in cash. This transfer was accomplished on a form provided by the company which petitioner had secured sometime in advance of the transfer. The assignment was received and filed at the home office of the company on March 11, 1952. This assignment reads in material part as follows:
For value received, I hereby assign and transfer to Richard B. Barker and John C. Reid, jointly or survivor of them, or if neither be living, the executors, administrators or assigns of the last to die of the said Richard B. Barker and John C. Reid of Washington, D.C. for their own use and benefit all my right, title and interest in and to Policy No. 731,300 on the life of Percy W. Phillips issued by The Connecticut Mutual Life Insurance Company in the face amount of Twenty-Seven Thousand dollars together with all profits due or to become due thereon and all fights, privileges and benefits contained therein or that may be attached thereto. And I agree for myself, my executors, administrators and assigns, to warrant and defend the title to the policy to the above named assignee against all persons, and I guarantee the validity and sufficiency of this assignment.
I appoint the above named assignee my attorney in fact with full power of substitution for me and in my name, but for his own use and benefit, to
exercise use of any and all options, privileges and rights accorded by the policy;
execute...
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