Slider v. Comm'r of Internal Revenue, Docket No. 5601.

• Decision Date: 18 June 1945
• Docket Number: Docket No. 5601.
• Citation: 5 T.C. 263
• Parties: E. T. SLIDER, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

5 T.C. 263

E. T. SLIDER, INCORPORATED, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 5601.

Tax Court of the United States.

Promulgated June 18, 1945.

1. Right of petitioner to proceeds of three insurance policies, transferred to it by one of its officers who died in 1939, was questioned by the decedent's widow. The insurance company refused to release the proceeds until 1940, when litigation instigated by the widow was settled and she withdrew her claim to the insurance proceeds. Held, petitioner, on the accrual basis, properly refrained from accruing the taxable proceeds of these policies as income in 1939, and correctly included them in income for 1940.

2. The proceeds of the three insurance policies referred to in the preceding headnote held to constitute abnormal income attributable to 1940, and not to 1939, for excess profits tax purposes. Premier Products Co., 2 T.C. 445, followed. D. L. Street, Esq., and Squire R. Odgen, Esq., for the petitioner.

Lester M. Ponder, Esq., for the respondent.

OPINION.

MELLOTT, Judge:

Respondent determined deficiencies in income, declared value excess profits, and excess profits taxes for the calendar year 1940 in the respective amounts of $5,927.73, $3,642, and $3,336.93. and a deficiency in excess profits taxes for the calendar year 1941 in the amount of $12,237.74. Some of the adjustments to income are not contested.

The questions presented are: (1) Were the taxable proceeds of insurance policies on the life of petitioner's former president accruable as income to petitioner in the year 1939 or the year 1940?

(2) Do the insurance proceeds constitute abnormal income attributable to other years for excess profits tax purposes, so as not to be includible in petitioner's excess profits net income for the year 1940?

There is no dispute as to the facts and we find them to be as stipulated. For the purposes of this opinion they will be summarized.

Petitioner, hereinafter sometimes called Slider, Inc., an Indiana corporation, has its principal office and place of business at New Albany, Indiana. Its returns for 1939, 1940, and 1941 were filed with the collector of internal revenue for the district of Indiana. Its books were kept and its returns were filed on an accrual basis.

For some years prior to 1935, E. T. Slider, individually, had conducted a business of producing sand and gravel and dealing in coal and building materials in New Albany, Indiana. On June 1, 1935, he caused petitioner to be organized and transferred to it all of the assets of his individual business and his interest in nine policies of life insurance on his life, as follows:

+-------------------------------------------------------+
                ¦             ¦                                ¦Policy  ¦
                +-------------+--------------------------------+--------¦
                ¦Date of issue¦Issuing company                 ¦number  ¦
                +-------------+--------------------------------+--------¦
                ¦1920         ¦Mutual Life Ins. Co. of New York¦2769053 ¦
                +-------------+--------------------------------+--------¦
                ¦1899         ¦Mutual Life Ins. Co. of New York¦965049  ¦
                +-------------+--------------------------------+--------¦
                ¦1899         ¦New York Life Ins. Co.          ¦954743  ¦
                +-------------+--------------------------------+--------¦
                ¦1899         ¦John Hancock Life Ins. Co.      ¦61833   ¦
                +-------------+--------------------------------+--------¦
                ¦1903         ¦John Hancock Life Ins. Co.      ¦110282  ¦
                +-------------+--------------------------------+--------¦
                ¦1927         ¦Aetna Life Ins. Co.             ¦W-3492-1¦
                +-------------+--------------------------------+--------¦
                ¦1917         ¦Penn Mutual Life Ins. Co.       ¦791119  ¦
                +-------------+--------------------------------+--------¦
                ¦1917         ¦Penn Mutual Life Ins. Co.       ¦788901  ¦
                +-------------+--------------------------------+--------¦
                ¦1917         ¦Penn Mutual Life Ins. Co.       ¦788902  ¦
                +-------------------------------------------------------+
                

The policies had an aggregate cash surrender value of $39,434.74 on the date assigned to petitioner. Thereafter petitioner paid the premiums on the policies, amounting to $15,471.89. Petitioner had no other policy of insurance on the life of any of its officers.

Petitioner was organized with a capital stock of 4,000 shares of no par value. At Slider's direction 3,000 shares were issued to 6 of his children, 840 shares were issued to employees of petitioner, and the remaining 160 shares were issued to him.

Slider was married three times. He had six children by his first wife, from whom he had been divorced. He had one child by his second wife, Rose B. Slider, from whom he was divorced on August 1, 1930, she being awarded a judgment for alimony in the sum of $100,000, payable over a period of years. Some time following November 5, 1930, Slider and Rose were remarried. Prior to such remarriage, and on November 5, 1930, they entered into an antenuptial agreement under which Slider agreed to pay Rose the balance of $90,000 due on the judgment for alimony and to waive any claim in her estate, in consideration of which she waived any claim of any nature which she might have in his estate. The last payment due on the $100,000 judgment for alimony and under the antenuptial agreement was made on July 27, 1939.

Slider died testate on October 4, 1939. By his will he made certain specific bequests in money to his grandchildren and others; gave Rose B. Slider his home located in Louisville, Ky., on condition that such devise should not modify, in any way, the antenuptial agreement theretofore entered into; gave three grandchildren by the daughter of his second marriage a home in Louisville; and directed distribution of all the residue of his estate to the six children by his first marriage.

Between October 4 and December 31, 1939, the proceeds of the six policies issued by the companies other than the Penn Mutual were paid to petitioner. Those proceeds amounted to $44,496.82, of which amount $24,507.78 was not subject to taxation and $19,989.04 was subject to taxation. In its tax return for 1939 petitioner did not include the sum of $19,989.04 in its income for that year. Subsequently, and on April 16, 1941, petitioner filed an amended return, including in its income for 1939 the said sum of $19,989.04. This amount or the tax thereon is not presently in issue.

Petitioner filed proofs of loss with the Penn Mutual Life Insurance Co. (hereinafter referred to as Penn Mutual), which had issued policies 791119, 788901, and 788902, assigned to petitioner in 1935. Prior to the payment of these three policies, counsel for Rose B. Slider sent a telegram to Penn Mutual on November 1, 1939, asking for advice as to the present beneficiaries of them. This information was forwarded on the same date. On November 3, 1939, counsel for Rose wrote Penn Mutual that ‘our preliminary investigation in connection with this matter, * * * justifies our present position in presenting to you this claim in behalf of our clients, for the proceeds of the policies issued by your company and to insure the legality of the assignments which you advise were made July 15, 1935.‘ The letter concluded with the request ‘that payment of the proceeds of these policies be withheld until further investigation can be completed by us‘ and that ‘In the interim you may consider this a formal demand on your company in behalf of Mrs. Slider, Mr. Slider's widow, and Margaret Slider Bruckert,¹ his daughter, for the proceeds of the policies referred to in our first communication to you.‘

On November 8, 1939, Penn Mutual advised its general agency at Louisville, Kentucky, A. W. Finley & Co. (hereinafter referred to as Finley) that satisfactory proofs of loss in connection with the claim under the three policies had been made, but that in view of the conflicting claim which had been filed by counsel on behalf of the wife and daughter of the insured with respect to the proceeds Penn Mutual was withholding settlement of the claim ‘for the time being.‘ It also suggested to Finley that efforts be made to work out some amicable settlement ‘between these conflicting claimants‘ and directed that it be explained to the claimants ‘in cases of this nature the company becomes a mere stakeholder,‘ with the result that ‘if a settlement cannot be agreed upon, the only course open for the company would be to interplead, pay the money to the court and thereby secure a full legal release.‘

On November 13, 1939, the attorney for petitioner wrote to Finley suggesting ‘that your company should continue to retain the funds until such time as we may demand them on behalf of E. T. Slider, Inc.‘ On November 15, 1939, Penn Mutual advised Finley by letter that it would withhold any legal action pending a determined attempt between respective counsel ‘to straighten out the conflicting claims of the corporation and the divorced wife.‘ Subsequently, correspondence ensued between counsel for E. T. Slider, Inc., Penn Mutual, and Finley with respect to petitioner obtaining the proceeds of the three policies under a penalty bond, and on January 8, 1940, counsel for E. T. Slider, Inc., wrote to Finley, stating that its officials were undecided on that date whether to incur the expense of giving a bond and paying the premium incident thereto in order to receive payment of the proceeds of the three policies. In this letter Penn Mutual was requested to advise whether it would agree to hold the proceeds and pay 3 percent interest thereon upon the commitment of the named beneficiary to leave the funds with it for a period of not less than six months.

On January 16, 1940, Penn Mutual wrote a letter to Slider, Inc., indicating its willingness to hold the proceeds and pay 3 percent interest thereon for a period of not more than six months from January 15, 1940. On January 19, 1940, counsel for the corporation requested that the proceeds be retained for the six-month period. On June 26,...