Cummings v. Commissioner of Internal Revenue, 2927.

• Decision Date: 10 November 1934
• Docket Number: No. 2927.,2927.
• Citation: 73 F.2d 477
• Parties: CUMMINGS et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

73 F.2d 477 (1934)

CUMMINGS et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 2927.

Circuit Court of Appeals, First Circuit.

November 10, 1934.

Samuel Gottlieb and Israel Gorovitz, both of Boston, Mass., for petitioners.

Helen R. Carloss, Sp. Asst. Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, Sp. Asst. Atty. Gen., on the brief), for Commissioner of Internal Revenue.

Before BINGHAM, WILSON, and MORTON, Circuit Judges.

BINGHAM, Circuit Judge.

The Commissioner of Internal Revenue determined deficiencies for the year 1929 in the income tax returns for that year of Edwin L. Cummings of Providence, R. I., George L. Webb of Boston, Mass., and William N. Stetson, Jr., of East Milton, Mass. They each petitioned the Board of Tax Appeals for a redetermination of the deficiency, which petitions, as they involved the same facts and legal principles, were consolidated and heard together. The Board in each case sustained the rulings of the Commissioner, and the parties are here on petitions for review by the three taxpayers.

The petitioners were stockholders of Storrs & Bement Company, a Massachusetts corporation engaged in the wholesale paper business.

In the latter part of 1926, or early in 1927, a discussion was had among the officers and directors of Storrs & Bement Company, hereafter referred to as the company, in regard to procuring insurance policies on the lives of some of its officers. On January 10, 1927, policies were procured on the lives of the company's president, William B. Stevenson; and its treasurer, Bryant McQuillen, for $100,000 each. In each policy the company was named as the sole beneficiary. At a meeting of the board of directors held January 10, 1927, the following resolution was adopted:

"Voted: that Whereas Storrs and Bement Company, a corporation duly established and existing by law and having its usual place of business in Boston, Suffolk County, Massachusetts, has recently insured the lives of William B. Stevenson and Bryant McQuillen, officers of said company, for the sum of $100,000 each, and

"Whereas it is not practical to have the proceeds of said policies payable in the form and manner intended by Storrs and Bement Company at the time the lives of the said William B. Stevenson and Bryant McQuillen were insured because of the laws relating to the naming of beneficiaries under insurance policies and because of that fact said policies of insurance are now payable in case of death to the Storrs and Bement Company;

"Voted: that in order to carry out the agreement and understanding of the officers and common stockholders of Storrs and Bement Company in regard to said insurance, it is hereby agreed that if and when a policy of insurance so taken shall become payable by reason of the death of either or both the insured and the proceeds of a policy are paid to Storrs & Bement Company, that Storrs and Bement Company will promptly after receipt of the proceeds of said insurance policy, vote to declare and pay said proceeds as a dividend on the common stock of Storrs and Bement Company, payable to common stockholders of record at the time of the death of said insured; it being understood that the estate of any common stockholder so deceased whose life was insured as aforesaid, shall receive its pro rata share of said proceeds the same as the surviving stockholders previously mentioned."

There was also incorporated in the records of the directors' meeting of the above date a so-called agreement setting forth the matters stated in the resolution quoted with respect to the insurance policies on the lives of the officers and signed by all of the corporation's nine common stockholders. That is, the stockholders agreed that the directors should and authorized them to declare the dividends as above voted.

On February 14, 1928, three other policies totaling $100,000 were procured on the life of William B. Stevenson upon substantially the same terms and conditions as the policy taken out in the prior year.

William B. Stevenson died on January 12, 1929, and soon thereafter the company received payment of $200,000 from the insurance companies on the above policies. Thereafter the company received additional amounts of $1,388.07, representing post mortem dividends, and $6,984.55, representing a payment in settlement of a claim on a $50,000 policy which the company had procured from the Sun Life Insurance Company of Canada, but which policy was not one of those referred to in the votes and agreements specified above. The amounts received from the insurance policies were credited on the books of the corporation to general surplus. All of the above amounts were deposited by the company in a special bank account, which it opened for that purpose, and were not mixed with the other company funds.

A meeting of the board of directors of Storrs & Bement Company was held on February 25, 1929, at which time the vice president stated that William B. Stevenson, president of the corporation, deceased on January 12, 1929; that the $200,000 had been received as the proceeds of the first four policies; and that "in accordance with the terms and provisions of votes of the directors duly passed at meetings held on January 10, 1927, and February 14, 1928, and in accordance with the provisions of agreements signed by all the common stockholders of the company on said January 10, 1927, and February 14, 1928, it now becomes necessary to pay out the proceeds of said policies of insurance in the amount of $200,000 on the life of William B. Stevenson as a cash dividend on the common stock of Storrs & Bement Company, payable to common stockholders of record at the date of the death of said William B. Stevenson." And:

"Upon motion duly made and seconded and in accordance with and in pursuance of said votes and agreements of January 10, 1928 and February 14, 1928, the following resolution was unanimously adopted:

"That a cash dividend of 50% ($50.00 a share) on the par value of the common capital stock of $400,000 consisting of 4000 shares each of the par value of $100, said dividend amounting to $200,000, be paid on February 25, 1929, to common stockholders of record on that date January 12, 1929."

By similar corporate actions had on March 12, 1929, and May 27, 1929, authorization was given for distribution to the common stockholders of the further amounts of $1,388.07 and $6,984.55 referred to above.

The surplus of the company on January 1, 1929, was $224,945.78 and on June 30, 1929, $250,307.58. These amounts were exclusive of any proceeds from insurance policies.

At the date of Stevenson's death there were seven common stockholders of Storrs & Bement Company besides the estate of the decedent, which held 2,200 shares of common stock. The estate sold all of its common stock on March 9, 1929, and by the purchase of this stock six new stockholders were added to the list and the shares of the old surviving stockholders were...