Finley v. Comm'r of Internal Revenue, Docket Nos. 58664

• Citation: 33 T.C. 753
• Decision Date: 29 January 1960
• Docket Number: 58665.,Docket Nos. 58664
• Parties: CHARLES O. FINLEY, SHIRLEY FINLEY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.CALVIN L. SMITH, THELMA F. SMITH, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

33 T.C. 753

CHARLES O. FINLEY, SHIRLEY FINLEY, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.CALVIN L. SMITH, THELMA F. SMITH, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 58664

58665.

Tax Court of the United States.

Filed January 29, 1960.

Lester M. Ponder, Esq., and William P. Wooden, Esq., for the petitioners.

Robert E. Johnson, Esq., for the respondent.

1. Petitioners received commissions in the taxable year with respect to accident and health group insurance policies; held, the commission income does not qualify under section 107(a) of the Internal Revenue Code of 1939 so that petitioners are not entitled to allocate the income ratably to several taxable years.

2. Respondent's disallowance of additional printing expenses sustained.

3. The failure of petitioners Smith to make or file a declaration of estimated tax for 1952, held, not due to reasonable cause and respondent's determination of an addition to tax under section 294(d)(1)(A) sustained; held, further, respondent's imposition of an addition to tax under section 294(d)(2) for substantial underestimation of tax with respect to same year not sustained. Commissioner v. Acker, 361 U.S. 87 (1959).

TRAIN, Judge:

The respondent determined deficiencies in income tax and additions to tax for 1952 as follows:

+-----------------------------------------------------------------------------+
                ¦     ¦                               ¦            ¦Additions to tax          ¦
                +-------------------------------------+------------+--------------------------¦
                ¦Docket No.                           ¦Deficiency  ¦294(d)(1)(A)  ¦294(d)(2)  ¦
                +-------------------------------------+------------+--------------+-----------¦
                ¦58664¦(Charles O. and Shirley Finley)¦$83,696.32  ¦              ¦           ¦
                +-----+-------------------------------+------------+--------------+-----------¦
                ¦58665¦(Calvin L. and Thelma F. Smith)¦85,496.05   ¦$13,135.76    ¦$7,881.45  ¦
                +-----------------------------------------------------------------------------+
                

The issues for decision are:

(1) Whether Finley and Smith, as partners, are entitled to allocate income of $441,563.22 received from Continental Casualty Company in 1952, as accident and health group insurance commissions, ratably over the years 1946 to 1952, inclusive, pursuant to section 107(a) of the Internal Revenue Code of 1939;

(2) Whether petitioners' partnership expended for printing, in 1952, $25,629.52 or any amount in excess of that claimed on the 1952 partnership return; and

(3) Whether petitioners Smith are liable for additions to tax under sections 294(d)(1)(A) and (d)(2).

FINDINGS OF FACT.

Charles O. Finley (hereinafter referred to as Finley), and Shirley Finley are husband and wife who reside at Gary, Indiana. They filed a joint Federal income tax return for the calendar year 1952 with the district director of internal revenue, Indianapolis, Indiana.

Calvin L. Smith (hereinafter referred to as Smith) and Thelma F. Smith are husband and wife who reside at Los Angeles, California. They filed a joint Federal income tax return for the calendar year 1952 with the district director of internal revenue, Indianapolis, Indiana.

Finley and Smith are brothers-in-law.

Finley, after graduating from high school in 1936, worked in Gary, Indiana, steel mills until 1941. After leaving the steel mills, he was employed by the Kingsbury Ordnance Plant in Michigan City, Indiana, until September 1945. Late in 1941, Finley, on the side, started selling life insurance and continued as a part-time life insurance agent until the end of 1945. On September 28, 1945, Finley, after leaving Kingsbury, became a full-time agent and sales representative for the Travelers Insurance Company, a life, accident, and group insurance company of Hartford, Connecticut, in the Lake County, Indiana, area.

Finley, while with Travelers in 1946, wrote more health and accident insurance policies than had ever been written in the previous history of the company by one man. These policies were written on an individual basis with doctors exclusively and could be canceled by the company at any time. The accident insurance policy written by Finley paid lifetime benefits and the health policy paid 1-year sickness benefits. Finley remained an agent for Travelers until December 1947 but did not continue life insurance sales work in 1947. On December 17, 1946, he entered the James D. Parramore Hospital, Crown Point, Indiana, with a diagnosis of advanced pulmonary tuberculosis. He was confined in the hospital until November 30, 1947.

During the first 3 or 4 months that Finley was in the sanatorium, a competing insurance agent from Chicago sold a group policy throughout Finley's territory that paid 5-year benefits for accidents and 2-year benefits for sickness. About 80 per cent of the doctors with respect to whom Finley had written policies dropped their individual policies with him in favor of the group policy of his competitor. The loss of this business started Finley thinking about how to get it back, and it was at this time that he began to consider the idea of a group insurance policy for the members of the medical profession that would provide lifetime benefits for accident and a minimum of 5-year benefits for sickness. In the course of developing this idea, while in the hospital, Finley studied books, periodicals, and statistics on the past experience of insurance companies relative to accident and health group insurance. These various activities with respect to his idea took up most of Finley's spare time at the hospital, up to about 5 hours daily. The head nurse kept telling Finley that studying these books would delay his recovery, and Finley then studied his books furtively. After about 6 months, the superintendent of the hospital took all of his books away from Finley. His brother-in-law, Smith, visited Finley in the hospital, and Finely told him about the group plan that he had in mind. Finley explained to Smith that the only policies available for professional groups at the time were ones limited in scope and that a program of long-term coverage for sickness and accident would receive wide acceptance if an insurance company could be found which would underwrite the policies.

Thereafter, in October 1947, Smith, who had never before been in the insurance business, returned to Birmingham, Alabama, where he began to sell insurance for Prudential Insurance Company and later for Massachusetts Protective and Paul Revere Life Insurance Company, continuing until the early part of 1949.

Finley was released from the hospital on November 30, 1947, and spent the next 14 months recuperating at home. During the first 6 or 7 months of this latter period, it was his practice to spend 1 or 2 hours a day selling insurance and then to return to bed. However, about 2 months after his discharge from the sanatorium, Finley took his wife to Hartford, Connecticut, to talk to the president of Travelers Insurance Company about writing the type of insurance which he had in mind (group insurance for members of the medical profession, providing lifetime accident benefits and a minimum of 5-year benefits for sickness). Upon Travelers declining to underwrite such a policy, Finley went to Boston and talked with the president of Massachusetts Casualty Insurance Company to try to interest that company in writing such a policy but was again unsuccessful.

Similarly, in the spring of 1948, Finley talked unsuccessfully to the president and executive vice president of North American Accident Insurance about such a policy. Likewise, in 1948, Finley unsuccessfully contacted the vice president of Provident Life and Accident Insurance Company of Chattanooga, Tennessee, and the executive vice president of the Washington National Insurance Company of Evanston, Illinois, about his plan. Also, in 1948, Finley asked Washington National Insurance Company to quote on a 5- and 7-year sickness coverage and lifetime indemnity for accidents.

Smith moved to Gary, Indiana, and he and Finley formed an equal partnership on January 1, 1949, known as Charles O. Finley and Company to engage in the insurance brokerage business and specialize in group plans for county and State professional associations, particularly medical associations and societies. The partnership agreement was oral. The partnership established two offices, one at 504 Broadway, Gary, Indiana, and the other at 310 South Michigan Avenue, Chicago, Illinois. At this time, Finley was still confined to his home part of the time. An important factor leading to the formation of the partnership was Finley's realization that his physical condition upon his release from the hospital would necessitate the assistance of a business associate in whom he had confidence.

Charles O. Finley and Company sold group accident and health insurance plans to professional associations. The first group coverage was for the Lake County Medical Society in Gary, Indiana, for which 5-year accident and 2-year sickness insurance effective May 1, 1949, was underwritten by Provident Life and Accident Insurance Company. Shortly thereafter in 1949, Charles O. Finley and Company sold group insurance to the La Porte County Medical Society of Indiana; St. Joseph County Medical Society of Indiana; The Northwest Indiana Dental Society of Indiana; and several other county medical societies in Indiana. Also, during 1949 and 1950, Finley and Smith continued to contact the insurance companies referred to above and endeavored without success to interest them in underwriting accident and health group insurance in line with the plan developed by Finley while in the hospital. No written plans were presented to the companies on these occasions. During these years, including 1948, it was the practice in the insurance industry to write 5-year accident and 2-year sickness group insurance policies. No company was writing group policies providing the longer...