Casale v. Comm'r of Internal Revenue

• Decision Date: 12 September 1956
• Docket Number: Docket No. 54287.
• Citation: 26 T.C. 1020
• Parties: ORESTE CASALE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

26 T.C. 1020

ORESTE CASALE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 54287.

Tax Court of the United States.

Filed September 12, 1956.

Alexander D. Hanko, Esq., for the petitioner.

A. Jesse Duke, Jr., Esq., for the respondent.

To fund a deferred compensation agreement executed with its president and majority stockholder, a corporation purchased a combined life and annuity contract insuring his life. The corporation was the declared owner and beneficiary of the policy and its terms were substantially similar to the terms of the agreement. The stockholder was given the right under the agreement to designate who would take in the event of his death. Held, the annual premium paid on the policy in 1950 was a distribution to its majority stockholder equivalent to a taxable dividend under section 115(a) of the 1939 Code.

OPINION.

RICE, Judge:

This proceeding involves a deficiency in income taxes of $1,953.14 for the year 1950 determined by the respondent against Oreste Casale.

The sole issue is whether the sum of $6,839.50 paid by O. Casale, Inc., as the annual premium upon an insurance policy on the life of petitioner, represented a distribution to him of a taxable dividend under section 115(a)¹ of the Internal Revenue Code of 1939 in the year of its payment.

All of the facts were stipulated, are so found, and are incorporated herein by this reference.

Petitioner, residing in New York City, New York, filed his individual Federal income tax return for the year in issue with the former collector of internal revenue for the second district of New York on the cash receipts and disbursements basis.

During the taxable year, petitioner was the president and principal stockholder of O. Casale, Inc. (hereinafter referred to as the corporation), a New York corporation organized October 1, 1946, owning 98 of the 100 shares of its outstanding stock. The other shares were owned, 1 by his daughter, Philomena Casale, and 1 by an employee, Anna Prugner. Petitioner was also chairman of the corporation's board of directors.

As president of the corporation, petitioner was authorized to receive an annual salary of $20,000. In the years 1947 to 1950, he received as salary the following amounts:

+----------------+
                ¦1947¦$20,000.00 ¦
                +----+-----------¦
                ¦1948¦11,833.63  ¦
                +----+-----------¦
                ¦1949¦8,043.60   ¦
                +----+-----------¦
                ¦1950¦7,454.49   ¦
                +----------------+
                

During the taxable year, the corporation was engaged in the manufacture of topcoats, overcoats, and raincoats for various retail organizations. These organizations purchased their own material, had it cut, then the corporation made it into the finished product.

The corporation's fiscal year ended September 30. Its profit and loss statements for the fiscal years ended in 1947 to 1950, inclusive, showed net profits as follows:

+------------------+
                ¦1947¦$28,427.56   ¦
                +----+-------------¦
                ¦1948¦19,107.83    ¦
                +----+-------------¦
                ¦1949¦1,368.61     ¦
                +----+-------------¦
                ¦1950¦1   (295.32) ¦
                +------------------+
                

At the close of each such year, the net profit or loss was transferred to earned surplus on the corporation's books.

At no time since its incorporation did it pay any dividends to its stockholders, either in cash in in stock.

On December 7, 1948, a meeting of the corporation's board of directors was held, at which the following directors were present: Petitioner, Philomena Casale, and Anna Prugner. The minutes of the meeting stated its purpose to be the consideration of a pension plan for petitioner. A resolution was passed authorizing the corporation to enter into a contract with petitioner, whereby it would obligate itself to pay to him, upon certain stated contingencies, a certain monthly income upon his reaching the age of 65 years, or if he should die prior thereto, a certain sum to his nominees or his estate.

At the same meeting, but subsequent to the aforementioned authorization, the following resolution was adopted: WHEREAS, this CORPORATION has obligated itself to pay a monthly income under certain contingencies to its President and Treasurer, ORESTE CASALE; and WHEREAS, it is deemed advisable by this Board of Directors that the contingent obligation of the CORPORATION to pay such retirement pension be provided for through retirement income contract issued by a life insurance company; THEREFORE, BE IT RESOLVED that the President of this Corporation or any officer whom he may delegate, is hereby authorized and directed to purchase from The Equitable Life Assurance Society of the United States, for and on behalf of this Corporation, a retirement income contract (10 years certain) on the life of this ORESTE CASALE which will provide for the pension payments which this CORPORATION may become obligated to pay to him pursuant to the resolutions adopted today by this Board of Directors; said retirement income contract to provide that all rights of ownership thereof are vested in this CORPORATION and that all payments to be made thereunder shall be made to this CORPORATION.

On the same date, December 7, 1948, the corporation entered into a deferred compensation agreement with petitioner as authorized. The agreement recited that inasmuch as petitioner had rendered to the corporation services in excess of the compensation paid therefor, and as the corporation was indebted to him for a large measure of its success and desired that he continue in his capacity as its president and treasurer, the parties agreed that additional, but deferred, compensation should be paid petitioner for the services rendered by him. It further provided that the deferred compensation should take the form of $500, commencing on the December 7th nearest the date upon which he attained the age of 65 years, and to continue throughout the remainder of his life. In the event of his death on or after the due date of the first payment, and before the payments had been made throughout 10 full years, the corporation agreed to continue the monthly payments to his daughters, Philomena and Josephine Casale, and his brother, Alfred Casale, in equal shares, or to the survivor, until the expiration of the 10-year certain period. Petitioner had the fight during his lifetime to change the designation of beneficiaries under the agreement, and if none survived him, it was agreed that the payments were to be made to his estate. If he should die before the first payment became due, the corporation agreed to pay to his nominee, or if none, to his estate, the sum of $50,000. Should he voluntarily leave the employ of the corporation against its wishes, prior to the age of 65 years, or such earlier retirement date as might be agreed upon by the parties, or should he, subsequent to retirement, accept employment from any competitor of the corporation without the corporation's consent, then it was provided that petitioner, or his nominees, would forfeit all right to any payments coming due by virtue of the agreement.

On December 7, 1948, the corporation applied to the Equitable Life Assurance Society (hereinafter referred to as Equitable) for a life insurance policy in the principal sum of $50,000 insuring petitioner's life for the benefit of the corporation.

On December 13, 1948, Equitable issued the policy applied for, wherein the petitioner was designated as the insured. An annual premium of $6,839.50, commencing December 7, 1948, and coming due each December 7th thereafter until maturity of the contract, was provided. The December 7th upon which the insured's age at his nearest birthday was 65 years was agreed upon as the maturity date of the policy. It was further provided that prior to maturity, death benefits in the amount of $50,000 in the event of the insured's death, or the cash value of the policy at the end of the policy year in which the insured's death occurred, whichever was greater, were payable to the corporation as beneficiary. Upon maturity, a monthly income payment of $500 was to be made to the insured for life or a 10-year certain period, whichever was longer. The corporation was declared to be the owner of the policy, and was given the following election by virtue of a rider attached thereto:

SPECIAL ANNUITY PAYMENT PROVISION.

A. Prior to the Maturity Date, the Owner may elect (with the right to revoke such election) to have the income payments provided for on the face of this policy, including any payments for the certain period that may become due after the death of the Insured, made to the Owner. After the Maturity Date, if such an election has become effective and if the Insured is living, the Owner may cancel such election as to subsequent income payments. Any election, revocation or cancellation must be in writing, and shall not take effect until filed at the Society's Home Office.

By an acknowledgment dated February 4, 1949, attached to and made a part of the policy, Equitable noted that at election in accordance with the provisions of the foregoing rider had been made by the corporation.

The corporation possessed the right to assign the policy; the right to change its beneficiary; the right to receive dividends as declared by the insurer; and the right to borrow on the policy in an amount not exceeding its loan value.

At the time of the issuance of the policy the petitioner was 52 years old.

The insurance contract recited the following amounts to be its cash values at the end of each policy year:

+---------------------+
                ¦End of policy year

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