Alsberg v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 96296.

• Citation: 42 BTA 61
• Decision Date: 13 June 1940
• Docket Number: Docket No. 96296.
• Parties: ALBERT J. ALSBERG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

42 B.T.A. 61 (1940)

ALBERT J. ALSBERG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 96296.

Board of Tax Appeals.

Promulgated June 13, 1940.

Paul D. Sagers, Esq., for the petitioner.

Francis S. Gettle, Esq., for the respondent.

OPINION.

MURDOCK:

The Commissioner determined a deficiency of $291.09 in income tax for the calendar year 1936. The petitioner assigns as error the action of the Commissioner in disallowing a deduction of $1,527.54 claimed as interest paid on account of money borrowed from life insurance companies. The facts have been stipulated and the stipulation is adopted by the Board as its findings of fact.

The petitioner kept his books upon a cash basis. He had borrowed money from insurance companies on thirteen policies of insurance on his own life prior to 1936. The total amount of his borrowings as of the beginning of the taxable year was $25,459. The insurance companies entered on their books during the year 1936 charges for interest in accounts bearing the name of the petitioner. The total amount of those charges was $1,527.54. The petitioner paid $2,740.51 to the insurance companies during the year, apparently as premiums on the policies. The cash surrender value of the policies at the beginning of the year was $26,502.70, and at the end of the year was $28,607.61, an increase of $2,104.91.

Attached to one policy is a document executed by the insured dated May 23, 1932, stating in part that the insured promised to pay on October 19, 1932, $1,550 with interest at 6 percent to the insurance company; the policy was assigned as collateral security for the repayment of the loan; the borrower might repay the loan with accrued interest at any time; the loan might be extended for annual periods upon payment of premiums then due and payment of interest accrued at maturity; and if no extension was made, the interest due was to be added to the existing loan on the due date of the loan and annually thereafter, the interest was to bear interest at the same rate as the loan, and the loan would thus be extended automatically, except that no extension would continue beyond a default in premium or beyond any date on which the amount of the loan, together with added and accrued interest, became equal to or greater than the cash value of the policy. Other policies bear a notation that the policy and the value thereof had been assigned to the company as sole security for a loan, which loan and interest thereon constitute an indebtedness against the policy.

The petitioner claimed on his return, as a deduction representing interest, $1,527.54, the amount of the interest charged on the books of the insurance companies during the year. The Commissioner in determining the deficiency disallowed that deduction, with the explanation that the amount was not paid by the petitioner during the year and, since he was on the cash receipts basis, it was not an allowable deduction, citing S. E. Thomason, 33 B. T. A. 576.

The petitioner argues that the cash surrender value of each policy, together with any increase therein, was a fund or credit balance belonging to him and from which he could have drawn; the insurer charged interest against his account during the taxable year and thereby reduced the fund or credit balance; and, therefore, the interest charged during the taxable year was constructively paid by the petitioner. The insurance companies expected to have the loans and interest repaid to them, either in cash or through a retention by them of a part of the amount which they were otherwise obligated to pay upon the policies. It is proper to assume from this record that the insurance companies did not credit the loan accounts...