Card v. Commissioner of Internal Revenue

• Decision Date: 13 October 1954
• Docket Number: No. 15005.,15005.
• Citation: 216 F.2d 93
• Parties: F. E. CARD and W. S. Adams, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

216 F.2d 93 (1954)

F. E. CARD and W. S. Adams, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15005.

United States Court of Appeals Eighth Circuit.

October 13, 1954.

Thomas M. Davies, Lincoln, Neb., for petitioners.

Karl Schmeidler, Special Asst. to the Atty. Gen., H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Howard P. Locke, Davis W. Morton, Jr., Special Assts. to the Atty. Gen. on the brief, for respondent.

Before SANBORN, WOODROUGH and JOHNSEN, Circuit Judges.

WOODROUGH, Circuit Judge.

This appeal is taken to review decisions of the Tax Court of the United States adjudging deficiencies in petitioners' income tax returns for the calendar year 1945. 20 T.C. 620. The cases were consolidated for hearing before the Tax Court and on appeal to this court.

The sole question on appeal is the correctness of the Tax Court's ruling that the words "aggregate premiums or consideration paid", as contained in section 22(b) (2) (A), Internal Revenue Code, 26 U.S.C.A.¹, mean premiums paid by petitioners only and not those paid by petitioners' employer.

The facts were stipulated by the parties herein and are wholly undisputed. Petitioners, cash basis taxpayers, in 1936 owned in equal proportions the entire 1000 shares of outstanding capital stock of the Card-Adams Company, a Nebraska corporation. Card-Adams Company was the owner of 200 shares of a total of 500 shares of the outstanding capital stock of State Securities Company, another Nebraska corporation. In addition, petitioner Card owned 77½ shares and petitioner Adams owned 48 shares of stock in State Securities Company. During the period 1936-1945, inclusive, Card and Adams were president and executive vice-president, respectively, of State Securities Company.

In 1936 petitioners individually made application for and were issued ten-year endowment life insurance policies, payable at maturity to them. Petitioner Card's policy was in the face amount of $14,100 and designated his employer, State Securities Company, as death beneficiary. The face value of petitioner Adams' policy was $10,000 and also named his employer, State Securities Company, as death beneficiary. Each policy granted the insured the right to change the beneficiary at any time. However, neither of the petitioners exercised that right and State Securities Company remained death beneficiary on both policies at all times pertinent herein.

During the nine year period from 1936 to 1945, inclusive, petitioners paid the annual premiums due on said policies in the years 1940-41-42 and petitioners employer, State Securities Company, paid the premiums the remaining six years. On the Card policy, petitioner paid $4,331.44 and State Securities Company $8,861.00 in premiums, a total of $13,192.44. On Adams' policy, petitioner paid $3,507.00 and State Securities Company $7,041.00 in premiums, a total of $10,548.00. Neither of the petitioners nor State Securities Company deducted the premiums paid by each in their respective income tax returns, nor did petitioners report as taxable income to them any of the premiums paid by State Securities Company.

In 1945 petitioners elected to receive the cash surrender value of their policies. Accordingly, Card and Adams were issued checks in the amount of $12,406.26 and $8,518.20, respectively, as the full cash surrender value of said policies. The petitioners did not report any part of the sums so received as taxable income in 1945. Thereafter the Commissioner determined deficiencies in petitioners' 1945 income tax returns in amounts by which the cash surrender value of said policies exceeded the premiums paid by the petitioners. Decisions in the suits brought before the Tax Court for redetermination of deficiencies being adverse, petitioners took this appeal.

Petitioners contend that the language of section 22(b) (2) (A) of the Internal Revenue Code is clear and unambiguous and was therefore not subject to construction by the Tax Court. They urge that the words "aggregate premiums or consideration paid" clearly mean all premiums paid from whatever source and not, as ruled by the Tax Court, only those premiums paid by petitioners.

The Tax Court has heretofore considered and decided the precise issue here involved. Its decision in Charles L. Jones, 2 T.C. 924, was the basis for its ruling in this case. In discussing this same issue in the Jones case, supra, the Tax Court, at page 933, said:

"The clause `aggregate premiums or consideration paid for such annuity\' at first blush seems to be unambiguous and to connote that the payments need not be made by the annuitant. Ignoring for the time being the administrative interpretation, there seems to be but slight basis for a conclusion that payment need be made by any particular person. Yet there is some. First, it must be kept in mind that we are dealing with a revenue act, the purpose of which is to tax all `gains, profits, and income\' including `compensation for personal service, of whatever kind and in whatever form paid.\' * * * Then, too, it will be noted that the provision with reference to annuities is contained in the section dealing with amounts received under life insurance and endowment policies, which are usually purchased by the insured himself and made payable to him or to members of his family. In this connection substantially the same language is used, the expressed intention being to tax as income such amounts as `exceed the aggregate premiums or consideration paid.\' The obvious intention of Congress in dealing with the three types of contracts was to permit the insured or annuitant and his beneficiaries to recover tax-free the cost, i. e., the amount paid by them for the policies. This view is supported by the concluding sentence in the section, dealing with a transfer for a valuable consideration, under which only the sums actually paid by the transferee may be recovered tax-free."

We think the Tax Court in the Jones case properly construed the clause "aggregate premiums or consideration paid" contained in section 22(b)(2)(A) of the Internal Revenue Code. It seems apparent that Congress intended that an insured, under this section, should recover tax-free only an amount equal to that which he paid on his insurance contract. We note in this connection that Congress, obviously cognizant of the construction placed on this section by the Tax Court in the Jones case, has incorporated this clause, without substantial change, into the new internal revenue laws. See Internal Revenue Code of 1954, § 72(c)(1), 26 U.S.C.A.

We are not persuaded by petitioners' argument that the Jones case is inapplicable here because it involved an annunity contract whereas we have under consideration an endowment contract. The Tax Court in the Jones case specifically noted that the words "aggregate premiums or consideration paid" applied to all three types of insurance contracts referred to in section 22(b)(2).

We therefore conclude that the Tax Court was not in error in ruling that the exclusion granted by section 22(b) (2) (A) applied only to premium payments made by petitioners.

Petitioners have presented an alternate argument to apply in the event the above contention is rejected, as it has been. They contend that the premium payments made by State Securities Company should be considered as having been paid by them, either under the familiar doctrine of constructive receipt or under the broad terms of section 22 (a) of the Internal Revenue Code. In support of this argument petitioners rely heavily upon the fact, which was found by the Tax Court, that all the incidents of ownership of the endowment contracts were possessed by petitioners and their employer had no rights with respect...