Castner Garage, Limited v. Commissioner of Internal Revenue

• Decision Date: 04 December 1940
• Docket Number: Docket No. 98502,99752.,98503,99082
• Citation: 43 BTA 1
• Parties: CASTNER GARAGE, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. UNIVERSAL MOTOR COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ISLAND SECURITIES, LIMITED, A DISSOLVED CORPORATION, J. W. A. BAIRD, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

43 B.T.A. 1 (1940)

CASTNER GARAGE, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

UNIVERSAL MOTOR COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ISLAND SECURITIES, LIMITED, A DISSOLVED CORPORATION, J. W. A. BAIRD, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 98502, 98503, 99082, 99752.

Board of Tax Appeals.

Promulgated December 4, 1940.

Urban E. Wild, Esq., Milton Cades, C. P. A., and E. J. Greaney, C. P. A., for the petitioners.

B. H. Neblett, Esq., for the respondent.

OPINION.

MURDOCK:

The Commissioner determined deficiencies as follows:

                --------------------------------------------------------------------------------
                                                        |         |       |           | Excess
                                                        |  Docket |  Year |  Income   | profits
                             Petitioner                 |  No.    |       |   tax     |  tax
                ----------------------------------------|---------|-------|-----------|---------
                Castner Garage, Ltd __________________  |  98502  |  1935 |   $615.16 | ________
                Universal Motor Co., Ltd _____________  |  98503  |  1935 |  1,435.04 |  $521.83
                Universal Motor Co., Ltd _____________  |  99752  |  1936 |  1,153.51 |   405.06
                Island Securities, Ltd _______________  |  99082  |  1935 |  1,001.52 | ________
                --------------------------------------------------------------------------------
                

The issue for decision by the Board is whether and to what extent the petitioners are taxable upon amounts received by them in 1935 and 1936 from the Prudential Insurance Co. of America as disability payments under policies of combined life, health, and accident insurance upon their president, Charles C. Pittam. The Board adopts as its findings of fact the stipulations of the parties, together with exhibits attached thereto.

The Castner Garage, Ltd., and Universal Motor Co., Ltd., hereinafter referred to as Castner and Universal, are corporations organized under the laws of the Territory of Hawaii. Island Securities, Ltd., hereinafter referred to as Island, formerly a Hawaiian corporation, was dissolved on August 26, 1936, and its remaining assets are now held by a trustee for the benefit of its creditors and stockholders. Charles C. Pittam owned a majority of the outstanding capital stock of Island, which in turn owned a majority of the stock of both Castner and Universal. Most of the remaining stock of the three companies was owned by Pittam's brother-in-law and by officers or employees.

Four policies of combined life, health, and accident insurance in the Prudential Insurance Co. of America were taken out upon Charles C. Pittam prior to 1930. The premiums on the policies covered both the life and the health and accident features of the policies. Castner procured one of the policies and was named beneficiary therein. Universal procured one of the policies and was named beneficiary therein. Pittam procured the other two policies and the Hawaiian Trust Co., Ltd., trustee, was named beneficiary therein. The Hawaiian Trust Co., under its trusteeship, was to use the proceeds of the two policies, in the event of the death of the insured, to purchase the capital stock of Island at face value from the estate of the insured. Several changes of beneficiaries and of rights in one or more of the policies were made prior to 1935. Suffice to say that each of the petitioners, prior to the taxable years, acquired for valuable considerations certain beneficial rights in one or more of the policies and was thereby entitled to receive and did receive during the taxable years certain payments on account of the fact that Pittam became disabled from ill health. He had been regularly engaged in the business of these petitioners at salaries prior to his disability. The rights and interests in the four policies held by the petitioners during the taxable years were acquired by the petitioners for the purpose of strengthening their credit and for their use as collateral for bank loans. That purpose had been accomplished and all of the policies were assigned to the insured on May 23, 1936.

The petitioners, while the policies were assigned to them, paid all of the premiums due. Also, the petitioners made certain payments when the policies were assigned to them or when certain changes in the policies were made. No deductions on account of the payments made by them in respect to the policies were ever claimed by or allowed to the petitioners.

The petitioners in their income tax returns for 1935 reported as income the excess of the amounts which they received during that year from the insurer, over the amounts which they had paid as premiums or otherwise in respect to the policies. Universal alone received a payment in 1936, but it did not report as income any part of the amount which it received from the insurer in that year. The Commissioner, in determining the deficiencies, has included in the taxable income of the petitioners the full amounts received by them.

The petitioners contend that the amounts received by them during the taxable years by reason of the disability of the insured are exempt from taxation under the express provisions of sections 22 (b) (5) of the Revenue Acts of 1934 and 1936, which exempt from taxation:

(5) COMPENSATION FOR INJURIES OR SICKNESS. Amounts received, through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness.

The respondent recognizes that the health features of the insurance are separable from the life insurance features and the amounts in question were received by the petitioners through health insurance on account of the sickness of Pittam. The respondent's only reply to the contention of the petitioners is that section 22 (b) (5) does not apply in the case of a corporation. He argues at considerable length that the exemption applies only to individuals, and goes even further, as his logic forces him, to say "Congress intended the exemption to be personal to the insured."

Section 22, entitled "GROSS INCOME", applies generally to both individual taxpayers and corporate taxpayers. Unlike the next section (see section 23 (e) and (f)), none of its provisions are expressly limited in their application to one or the other class of taxpayers. However, some of the provisions of section 22 (b) obviously refer only to individuals. See, for example, paragraph 6, relating to ministers, that part of paragraph 3 relating to inheritance, and the sentence in paragraph 7 relating to earned income. Other provisions of (b) are just as obviously applicable to both individuals and corporations. See, for example, paragraph 1, dealing with proceeds of life insurance, paragraph 2, on annuities, paragraph 4, on tax-free interest. Thus, it is necessary to...