Casale v. Commissioner of Internal Revenue

• Decision Date: 05 September 1957
• Docket Number: Docket 24476.,No. 373,373
• Citation: 247 F.2d 440
• Parties: Oreste CASALE, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

247 F.2d 440 (1957)

Oreste CASALE, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 373, Docket 24476.

United States Court of Appeals Second Circuit.

Argued May 10, 1957.

Decided September 5, 1957.

Maurice H. Greenberger, New York City (David Boyd Chase, New York City, on the brief), for petitioner.

Davis W. Morton, Jr., Atty., Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Ellis N. Slack, and I. Henry Kutz, Attorneys, Department of Justice, Washington, D. C., on the brief), for respondent.

Before CHASE, HINCKS and LUMBARD, Circuit Judges.

HINCKS, Circuit Judge.

This is a petition by the taxpayer for review of a decision of the Tax Court which affirmed the Commissioner's determination that an annual premium paid by O. Casale, Inc. (hereinafter called the Corporation) on a policy on the life of the taxpayer was a distribution to him of a taxable dividend in the year of its payment under Section 115(a) of the 1939 Code, 26 U.S.C.A. § 115(a).

The facts, which were stipulated, were fully stated in the Tax Court opinion from which the following summary is drawn.

During the taxable year, viz., 1950, petitioner was the president and principal stockholder of O. Casale, Inc., a New York corporation organized October 1, 1946, owning 98 of the 100 shares of its outstanding stock. The other shares were owned, one by his daughter, Philomena Casale, and one by an employee, Anna Prugner. Petitioner was also chairman of the Corporation's board of directors.

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

On December 7, 1948, when petitioner was 52 years old, 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 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.

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 * * *."

Also 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. 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.

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

                End of Policy Cash or Loan
                Year Value
                   1                     3,050.00
                   2                     8,600.00
                   3                    14,650.00
                   4                    20,300.00
                   5                    26,300.00
                   6                    32,650.00
                   7                    39,300.00
                   8                    46,300.00
                   9                    53,500.00
                  10                    60,650.00
                  11                    67,950.00
                  12                    75,400.00
                  13                    83,050.00
                

The Corporation paid the annual premium of $6,839.50 on said insurance policy for the years 1948, 1949, and 1950.

During 1950, the Corporation kept its books and reported its income on the cash receipts and disbursements basis. In computing its taxable income for such year, it did not claim a deduction for the premium it paid on the insurance contract, but charged it against earned surplus. The policy was always treated as an asset of the Corporation on its books.

During the year in question, petitioner did not include in his gross income any portion of the premium paid by the Corporation on the contract of insurance.

In his deficiency notice, respondent made the following determination:

"(a) It is held that the premium of $6,839.50 for the year 1950 paid by O. Casale, Inc., to the Equitable Life Assurance Society of the United States for a life insurance policy in the principal sum of $50,000.00 insuring the life of Oreste Casale is the equivalent of a distribution of a dividend and is therefore includable in * * * gross income."

In affirming, the Tax Court declared:

"Considering the features of the policy in conjunction with the provisions of the compensation agreement, we must conclude that the Corporation was no more than a conduit running from the insurer to petitioner, or his beneficiaries, with respect to any payments which might come due under the insurance contract. Essentially, petitioner stood in the same relationship to the policy as if he had taken it out himself and the Corporation had paid the premiums for him. The similarity in terms between the policy and compensation agreement afford recourse to no other conclusion.

"The necessity for such a conclusion becomes more apparent when we consider the position petitioner occupied in relation to the Corporation. For all practical purposes he was the Corporation. He maintained complete dominion and control of its every move; and any future disposition of insurance proceeds would be subject to his assent and approval."

On appeal, the Commissioner has attempted to characterize this case as one which is determinable as a factual question. This explains the emphasis placed upon the Tax Court's finding of strong similarity between the agreement and the policy. But this is hardly a realistic approach to the problem at hand. For, if the resolutions had not been enacted simultaneously and the policy had not been applied for on the same day would not the Commissioner still contend for the result he seeks here? The argument in the supposed factual situation would be that the controlling shareholder sought to separate the several corporate actions taken merely to give them an air of corporate respectability thus masking the fact that the shareholder was in a position to carry on the Corporation's affairs in any manner he chose. So, the Commissioner would conclude, the situation should be treated in the same manner whether the corporate...