Card v. Comm'r of Internal Revenue, Docket Nos. 35870
| Decision Date | 17 June 1953 |
| Docket Number | 35871.,Docket Nos. 35870 |
| Citation | 20 T.C. 620 |
| Parties | F. E. CARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.W. S. ADAMS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioners applied for and obtained endowment life insurance policies. Petitioners were the insured and held all of the incidents of ownership throughout the life of the policies. Their employer was at all times the beneficiary. Employer paid premiums upon petitioners' policies directly to the issuing company. Petitioners surrendered their policies and received the case surrender value. Under section 22(b)(2)(A), Internal Revenue Code, they seek to avoid taxation on said cash surrender value because premiums paid by their employer plus premiums paid by them exceed proceeds of policies. Premiums paid by petitioners alone are less than cash surrender value of policies. Deficiencies have been determined in the amount representing the cash surrender valued received by petitioners less only premiums paid by them. Held, words ‘aggregate premiums or consideration paid‘ in section 22(b)(2)(A) mean paid by petitioners only. Held, due to complete lack of evidence as to facts and circumstances regarding payment by employer of petitioners' premiums, petitioners have failed to sustain burden of proof that such payments constituted income to them by way of constructive receipt or under the general provisions of section 22(a).
2. Petitioner, on the cash basis, seeks to deduct in 1945 (7,581.54 as lump-sum settlement of amounts owing under oral contract to pay ranch manager's salary entered into in 1935. Respondent contends no contract existed and that services were not actually performed. Held, oral contract did exist, services were performed, and amount paid as lump-sum settlement properly deductible. Thomas M. Davies, Esq., and Oscar R. Martin, C.P.A., for the petitioners.
Mark Townsend, Esq., for the respondent.
These cases have been duly consolidated for hearing and opinion. The respondent has determined deficiencies in income tax for the year 1945 against petitioner F. E. Card in the amount of $7,369.80 and against petitioner W. S. Adams in the amount of $3,935.91. Two questions are presented for decision: (1) Did petitioners F. E. Card and W. S. Adams realize taxable income on the receipt by them in 1945 of the cash surrender value of endowment life insurance policies upon the life of each to the extent the proceeds realized by them exceeded the premiums paid by them, and (2) was petitioner Card entitled to the deduction of $7,581.54 claimed on his 1945 Federal income tax return as compensation for services rendered in the management of his ranch, the Commissioner having disallowed the deduction to the extent of $5,181.54 as being in excess of a reasonable allowance for compensation paid for personal services actually rendered?
The petitioners F. E. Card and W. S. Adams (hereinafter referred to as Card and Adams) are individuals residing in Lincoln, Nebraska. Their returns for the taxable year ended December 31, 1945, were duly and timely filed with the collector for the district of Nebraska. Both petitioners prepared and filed their individual income tax returns for the years 1936 and 1945, inclusive, on the cash receipts and disbursements basis. Certain facts have been stipulated and are so found.
In 1936 petitioners owned in equal proportion the entire 1,000 shares of the outstanding capital stock of the Card-Adams Company, a Nebraska corporation. The Card-Adams Company in turn was the owner of 200 shares of a total of 500 shares of the outstanding capital stock of State Securities Company, also a Nebraska corporation. In addition, Card owned 77 1/2 shares and Adams owned 48 shares of the outstanding capital stock of State Securities Company. During the period 1936-1945, inclusive, Card was president of State Securities and Adams was its executive vice president.
Ten-year endowment life insurance policies, payable at maturity in each instance to the respective petitioners, were issued to Card and Adams upon their individual applications in 1936. Each of the policies had accumulated a cash surrender value by the year 1945. Certain of the premiums on each policy were paid by State Securities and certain premiums were paid on their respective policies by petitioners as follows:
+-------------------------------------------------------------+
¦Card ¦Adams ¦ ¦ ¦ ¦
+-------------------+----------+------+------------+----------¦
¦ ¦Premiums ¦ ¦ ¦Premiums ¦ ¦
+------+------------+----------+------+------------+----------¦
¦ ¦paid by ¦Premiums ¦ ¦paid by ¦Premiums ¦
+------+------------+----------+------+------------+----------¦
¦Year ¦State ¦paid by ¦Year ¦State ¦paid by ¦
+------+------------+----------+------+------------+----------¦
¦ ¦Securities ¦petitioner¦ ¦Securities ¦petitioner¦
+------+------------+----------+------+------------+----------¦
¦ ¦Co. ¦ ¦ ¦Co. ¦ ¦
+------+------------+----------+------+------------+----------¦
¦1936 ¦$1,554.61 ¦ ¦1936 ¦$1,295.30 ¦ ¦
+------+------------+----------+------+------------+----------¦
¦1937 ¦1,462.55 ¦ ¦1937 ¦1,112.40 ¦ ¦
+------+------------+----------+------+------------+----------¦
¦1938 ¦1,454.92 ¦ ¦1938 ¦1,123.80 ¦ ¦
+------+------------+----------+------+------------+----------¦
¦1939 ¦1,447.44 ¦ ¦1939 ¦1,164.00 ¦ ¦
+------+------------+----------+------+------------+----------¦
¦1940 ¦ ¦$1,439.81 ¦1940 ¦ ¦$1,158.70 ¦
+------+------------+----------+------+------------+----------¦
¦1941 ¦ ¦1,447.86 ¦1941 ¦ ¦1,174.30 ¦
+------+------------+----------+------+------------+----------¦
¦1942 ¦ ¦1,443.77 ¦1942 ¦ ¦1,174.30 ¦
+------+------------+----------+------+------------+----------¦
¦1943 ¦1,469.33 ¦ ¦1943 ¦1,173.60 ¦ ¦
+------+------------+----------+------+------------+----------¦
¦1944 ¦1,472.15 ¦ ¦1944 ¦1,171.90 ¦ ¦
+------+------------+----------+------+------------+----------¦
¦Total ¦$8,861.00 ¦$4,331.44 ¦Total ¦$7,041.00 ¦$3,507.00 ¦
+-------------------+----------+-------------------+----------¦
¦Total premiums paid¦$13,192.44¦Total premiums paid¦$10,548.00¦
+-------------------------------------------------------------+
In each of said policies State Securities were designated the beneficiary. This designation of beneficiary was not changed at any time pertinent hereto.
On May 3, 1945, prior to its maturity, Card surrendered his policy to the issuing company for its cash surrender value and received a check representing the cash value in the sum of $12,406.26. On August 20, 1945, prior to its maturity, Adams surrendered his policy to the issuing company for its cash surrender value and received a check representing the cash value in the sum of $8,518.20. During the years 1936-1945, inclusive, neither of the petitioners nor State Securities at any time deducted the premiums paid by each in their respective income tax returns, nor did either petitioner report as income taxable to him any of the premiums paid by State Securities. Card's insurance policy, by its terms, granted to him the following rights:
(a) The right at any time, and from time to time, to change the beneficiary.
(b) The right to exercise every right and receive every benefit reserved to the insured and owner of the policy, including the right of assignment.
(c) The right to agree with the Company to any change in or amendment of the policy, without the consent of any beneficiary.
(d) The right to receive annual dividends.
(e) The right to chose optional modes of settlement.
(f) The right to receive a loan on the policy.
(g) The right to surrender the policy for its cash value.
Adams' insurance policy, by its terms, granted to him the following rights:
(a) The right to change the beneficiary from time to time.
(b) The right, without the consent and to the exclusion of the beneficiary, to receive, exercise and enjoy every benefit, option, right and privilege conferred by the policy or allowed by the Company.
(c) The right to assign the policy.
(d) The right to choose optional modes of settlement.
(e) The right to receive annual dividends.
(f) The right to change to other forms of policy.
(g) The right to receive a loan on the policy.
(h) The right to chose options upon lapse of the policy.
(i) The right to surrender the policy for its cash value.
With respect to each policy, Card and Adams, respectively, at all times pertinent hereto were possessed of all of the incidents of ownership, and State Securities had no rights with respect thereto except such rights as would have accrued to it as beneficiary in the event of the death of either petitioner.
Prior to 1935 petitioner Card owned a cattle ranch composed of approximately 3,500 acres in Dundy County, Nebraska. At that time the ranch was under written lease to a tenant. In 1934 petitioner's son, Clyde F. Card (hereinafter referred to as the ‘son‘), was graduated from the College of Agriculture, University of Nebraska. In the spring of 1935 Card and his son made an oral agreement whereby the son was to manage and operate the ranch on a share basis as soon as the tenant moved.
Approximately 500 shares of the ranch was a natural hay meadow. In the spring of 1935 a flood occurred which for all practical purposes destroyed the hay meadow as a source of winter feed for cattle raised on the ranch. For the profitable operation of the ranch it was necessary that a natural source of winter feed, as well as summer feed, be available. Failure of Card's natural hay...
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