Golsen v. Comm'r of Internal Revenue , Docket No. 5863-65.
| Citation | 54 T.C. 742 |
| Decision Date | 09 April 1970 |
| Docket Number | Docket No. 5863-65. |
| Parties | JACK E. GOLSEN AND SYLVIA H. GOLSEN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Julian P. Kornfeld and Robert B. Milsten, for the petitioners.
Harold Friedman, for the respondent.
T purchased 20 ‘executive special’ life insurance policies that were specially designed, calling for abnormally high premiums and providing for correspondingly high loan and cash surrender values. As part of a prearranged plan T not only ‘paid’ the first year's premiums but also made ‘payments' into a ‘prepaid premium fund’ in respect of the premiums to become due in the next 4 years, and he simultaneously ‘borrowed’ back not only the full amount of the ‘prepaid premium fund’ but also the full loan value of the policies created by the first year's premium. His ‘interest’ obligations in respect of such ‘loans' were at the annual rate of 4 percent, whereas the company's ‘interest’ obligation to him on the ‘prepaid premium fund’ was at the rate of 3 percent. The plan contemplated the ‘borrowing’ annually of the full amount of the annual increase in the cash surrender value of the policies, which was greater than the amount to be paid annually into the ‘prepaid premium fund’ to maintain it for a 4-year period. The net result of the transaction was that, apart from a portion of the cash actually paid by T as the first year's premium, no part of his out-of-pocket costs over the life of the policies would be treated as premium but would all be reflected as ‘interest’ paid by him. Held: T's out-of-pocket costs were in substance the true cost of the insurance purchased by him and he did not in fact pay any ‘interest’ on borrowed funds. T is not entitled to any deduction for ‘interest’ paid. Sec. 163. I.R.C. 1954. The result follows Goldman v. United States, 403 F.2d 776 (C.A. 10), rather than the contrary holding in Campbell v. Cen-Tex, Inc., 337 F.2d 688 (C.A. 5). The present case is within the Tenth Circuit and is therefore governed by Goldman. To the extent that Arthur L. Lawrence, 27 T.C. 713, is inconsistent herewith it is overruled.
The Commissioner determined a deficiency of $2,918.15 in petitioner's income tax for 1962. The only issue is whether a $12,441.40 payment made by petitioner Jack E. Golsen to the Western Security Life Insurance Co. is deductible as an interest payment pursuant to section 163, I.R.C. 1954.
The parties have stipulated certain facts, which, together with the attached exhibits, are incorporated herein by this reference.
Petitioners Jack E. and Sylvia H. Golsen are husband and wife. They filed a joint Federal income tax return for the calendar year 1962 with the district director of internal revenue, Oklahoma City, Okla., and resided in Oklahoma City at the time the petition was filed in this case.
During the latter part of 1961 and during 1962, Jack E. Golsen (Golsen) served as president of Hart Industrial Supply Co. and several affiliated corporations. The corporations were privately owned and did business in Texas and Oklahoma. By the end of 1961 the corporations had incurred indebtedness to banks in the aggregate amount of about $1.75 million, and Golsen had personally guaranteed all of it. Golsen was also personally indebted to a bank in the amount of $15,000. Moreover, during 1961 he had purchased 50 percent of the stock of the L & S Bearing Co. for approximately $625,000.
In December of 1961, Golsen carried about $230,000 in life insurance protection. In addition, several of the corporations whose loans he had guaranteed had taken out insurance on his life. However, in view of the size of his potential liabilities and his relatively illiquid financial position in late 1961, Golsen though that he ought to purchase additional life insurance to protect his family in the event of his unexpected death.
On or about December 28, 1961, an application was made to Western Security Life Insurance Co. of Oklahoma City (hereinafter sometimes referred to as Western or the insurance company) for insurance on Golsen's life. The application ‘executive special’ policies of $50,000 each, with Mrs. Golsen as the beneficiary and the couple's three children as contingent beneficiaries. No cash was submitted with the application.
Subsequently, on or before January 31, 1962, Western issued to Golsen such life insurance in the amount of $1 million embodied in 20 ‘executive special’ policies, each with a face amount of $50,000 and an effective date of December 28, 1961.1 On the date of issue Golsen was 33 years old and had a life expectancy of 35.15 years.
The ‘executive special’ policies appeared on their face to be whole life policies, providing for aggregate premiums of $68,180 a year for the first 20 years and $18,180 (reflecting a reduction of $50,000) a year thereafter. The premiums during the first 20 years were substantially higher than were actuarially required, and consequently the aggregate amount payable on death (‘death benefits') as well as the cash surrender and loan values increased substantially during each of the first 20 years. The following table shows by policy year, the total death benefits, cash or loan values, and the net death benefits remaining if loans in the maximum permissible amounts were made against the policies:
+-----------------------------------------------+
¦ ¦ ¦ ¦ ¦
+-----------+-----------+------------+----------¦
¦Policy year¦Total death¦Cash or loan¦Net death ¦
+-----------+-----------+------------+----------¦
¦ ¦benefit ¦value 1 ¦benefit ¦
+-----------+-----------+------------+----------¦
¦ ¦ ¦ ¦ ¦
+-----------+-----------+------------+----------¦
¦1 ¦$1,108,000 ¦$50,000 ¦$1,058,000¦
+-----------+-----------+------------+----------¦
¦2 ¦1,216,000 ¦116,940 ¦1,099,060 ¦
+-----------+-----------+------------+----------¦
¦3 ¦1,324,000 ¦185,440 ¦1,138,560 ¦
+-----------+-----------+------------+----------¦
¦4 ¦1,432,000 ¦255,500 ¦1,176,500 ¦
+-----------+-----------+------------+----------¦
¦5 ¦1,540,000 ¦327,130 ¦1,212,870 ¦
+-----------+-----------+------------+----------¦
¦6 ¦1,648,000 ¦400,350 ¦1,247,650 ¦
+-----------+-----------+------------+----------¦
¦7 ¦1,756,000 ¦475,140 ¦1,280,860 ¦
+-----------+-----------+------------+----------¦
¦8 ¦1,864,000 ¦551,500 ¦1,312,500 ¦
+-----------+-----------+------------+----------¦
¦9 ¦1,972,000 ¦629,420 ¦1,342,580 ¦
+-----------+-----------+------------+----------¦
¦10 ¦2,080,000 ¦708,880 ¦1,371,120 ¦
+-----------+-----------+------------+----------¦
¦11 ¦2,188,000 ¦789,860 ¦1,398,140 ¦
+-----------+-----------+------------+----------¦
¦12 ¦2,296,000 ¦872,330 ¦1,423,670 ¦
+-----------+-----------+------------+----------¦
¦13 ¦2,404,000 ¦956,250 ¦1,447,750 ¦
+-----------+-----------+------------+----------¦
¦14 ¦2,512,000 ¦1,041,590 ¦1,470,410 ¦
+-----------+-----------+------------+----------¦
¦15 ¦2,620,000 ¦1,128,270 ¦1,491,730 ¦
+-----------+-----------+------------+----------¦
¦16 ¦2,728,000 ¦1,216,250 ¦1,511,750 ¦
+-----------+-----------+------------+----------¦
¦17 ¦2,836,000 ¦1,305,430 ¦1,530,570 ¦
+-----------+-----------+------------+----------¦
¦18 ¦2,944,000 ¦1,395,730 ¦1,548,270 ¦
+-----------+-----------+------------+----------¦
¦19 ¦3,052,000 ¦1,487,060 ¦1,564,940 ¦
+-----------+-----------+------------+----------¦
¦20 ¦3,160,000 ¦1,579,280 ¦1,580,720 ¦
+-----------+-----------+------------+----------¦
¦22 ¦3,160,000 ¦1,664,100 ¦1,495,900 ¦
+-----------+-----------+------------+----------¦
¦27 ¦3,160,000 ¦1,876,110 ¦1,283,890 ¦
+-----------+-----------+------------+----------¦
¦32 ¦3,160,000 ¦2,082,770 ¦1,077,230 ¦
+-----------+-----------+------------+----------¦
¦ ¦ ¦ ¦ ¦
+-----------------------------------------------+
Prior to acquisition of the policies Golsen was furnished with a schedule (based upon assumed insurance in the amount of $100,000) outlining the mechanics of the ‘executive special’ plan. The schedule showed that under the plan there would be no net cash premium outlay after the first year and that if the ‘interest’ payments were treated as deductible for income tax purposes, the actual net cost of the insurance over the first 20 years to the taxpayer at an assumed tax bracket would be a comparatively nominal amount, and in some years there might even be a net profit. That schedule (when multiplied by 10 so as to conform to the $1 million insurance involved herein) in general reflects the plan which Golsen and Western ultimately adopted. It is set forth below:
+------------------------------------------------------------------------------------------------------------------------+
¦JACK GOLSEN ¦
+------------------------------------------------------------------------------------------------------------------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+----------+-----------+----------+---------+---------+---------+-----------------+---------+----------¦
¦(Annual ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
¦Premium—$6,818 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+----------+----------------------+---------+---------+---------+-----------------+---------+----------¦
¦(a) (Discounted ¦ ¦Age 33...To continue reading
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