Ducros v. CIR, 13793.

• Citation: 272 F.2d 49
• Decision Date: 25 November 1959
• Docket Number: No. 13793.,13793.
• Parties: Francis H. W. DUCROS and Phyllis A. Ducros, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

272 F.2d 49 (1959)

Francis H. W. DUCROS and Phyllis A. Ducros, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 13793.

United States Court of Appeals Sixth Circuit.

November 25, 1959.

Robert D. Wallick, Washington, D. C., Earle W. Wallick of Steptoe & Johnson, Washington, D. C., on the brief, for petitioners.

Helen A. Buckley, Washington, D. C., Charles K. Rice, Lee A. Jackson and I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., on the brief, for respondent.

Before McALLISTER, Chief Judge, SIMONS, Senior Circuit Judge, and WEICK, Circuit Judge.

WEICK, Circuit Judge.

This is an appeal from a decision of the Tax Court sustaining a deficiency in income tax and an addition thereto for the year 1951.

The sole issue is whether the proceeds of a life insurance policy paid to Mrs. Phyllis A. Ducros, upon the death of Carlton L. Small, are taxable to her as income. Section 22(b) (1) (A) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 22(b) (1) (A) exempts from taxation amounts received under a life insurance contract, paid by reason of the death of the insured.

Carlton L. Small was the President of Smead & Small, Inc., at the time of his death on or about July 31, 1951. At that date Francis H. W. Ducros was the Treasurer of the corporation, and his wife Phyllis owned ten shares of its stock.

On or about May 17, 1938, insurance was taken out on the life of Carlton L. Small with the New England Mutual Life Insurance Company in the amount of $15,000. It is stated in the opinion of the Tax Court that "the policy was taken out by the corporation on the life of its president, Carlton Small." This conclusion was apparently founded on Stipulation of Fact No. 3 which recites, "on or about May 17, 1938, Smead & Small, Inc. * * * insured the life of Carlton L. Small * * *"

Irrespective of the conclusion, it is clear, from the documentary evidence submitted with the Stipulation of Facts, that the written application for the policy of insurance was signed on May 17, 1938, by the insured, Carlton L. Small alone. He named Smead & Small, Inc., as beneficiary and reserved to it the right to change the beneficiary. One month later the corporation became vested with all the incidents of ownership of said policy, by virtue of an endorsement thereon, and changed the beneficiaries to Marie O. Smead, Constance S. Small and Francis H. W. Ducros. Several changes in beneficiaries were made thereafter. As of February 1950, and continuing until the death of Carlton L. Small, the beneficiaries were Phyllis A. Ducros as to 40% and Constance S. Small as to 60% of the proceeds. It was admitted that the insurance was procured, and all premium payments made by the corporation, pursuant to a predetermined plan. Only the proceeds payable to Phyllis A. Ducros are in issue here.

The Government's principal theory in the Tax Court was that the proceeds were a taxable dividend flowing from the corporation to the beneficiaries. The judge requested that counsel consider the question whether the contract with the New England Mutual Life Insurance Company was a "life insurance contract" within the meaning of Section 22(b) (1) (A) or whether it was a wagering contract.

In his opinion, the judge stated, "The only question in this case is whether the contract under which the payment was made to Phyllis was a `life insurance contract' within the meaning of the statute." He held that it was not; that the contract was strictly a wagering contract; that the proceeds were therefore subject to taxation.

The question of whether this contract of insurance was a valid one is to be determined by the law of the place where the contract was made, which was Ohio. Commissioner v. Hyde, 2 Cir., 1936, 82 F.2d 174, Cf. United States v. Bess, 1957, 357 U.S. 51, 55, 78 S.Ct. 1054, 2 L.Ed.2d 1135.

Under the law of Ohio, an individual taking out insurance on his own life has a right to designate anyone he chooses as his beneficiary, irrespective of whether such beneficiary has an insurable interest in his life. Shepard v. Espy, Ohio App.1955, 142 N.E.2d 238; Pierce v. Metropolitan Life Insurance Co., 1933, 46 Ohio App. 36, 187 N.E. 77; 30 O.Jur. 2d, Insurance, § 321. Thus, Carlton L. Small had a right to name the corporation as his beneficiary without affecting the validity of the contract. Thereafter, the corporation had a right to designate the individuals to replace it as beneficiaries, both by virtue of the specific reservation to that effect in the original policy and by reason of the fact that it was in law the owner of the policy following the endorsement of June 17, 1938. Doyle v. Gifford, Ohio App.1938, 28 Ohio Law Abs. 602.

Even if the corporation is considered as having procured the policy on the life of Carlton L. Small, its president, it had an insurable interest in him at the time the insurance became operative, and, therefore, the policy was a valid one. United States v. Supplee-Biddle Hardware Co., 1924, 265 U.S. 189, 44 S.Ct. 546, 68 L.Ed. 970; Connecticut Mutual Life Insurance Company v. Schaefer, 1876, 94 U.S. 457, 24 L.Ed. 251; Keckley v. Coshocton Glass Co., 1912, 86 Ohio St. 213, 99 N.E. 299; 30 O.Jur.2d, Insurance, § 323.

The decision of the Supreme Court in Warnock v. Davis, 1881, 104 U.S. 775, 26 L.Ed. 924, was cited as being contrary to appellants' position. In that case, however, the Court condemned the practice of an individual insuring his own life and thereafter assigning the policy to one not having an insurance interest in him. It was said that such a situation promotes a desire for the early death of the insured. That rationale cannot be applied to the case of a corporation insuring the life of its president and thereafter naming its shareholders as beneficiaries. Neither the corporation nor the shareholders stands to benefit by the early demise of the president, except in the most fundamentally pecuniary sense of the term "benefit". But the same is true of every policy of life insurance, that the beneficiary will at some time realize a pecuniary benefit from the death of the insured. That consideration cannot be utilized to label an otherwise valid life insurance contract as a wagering contract.

Thus, it appears that whether the contract be considered as having been taken out either by Carlton L. Small or by the firm of Smead & Small, Inc., it was a valid one at its inception under Ohio law.

The policy having been valid at its inception it cannot be considered as a wagering contract. It is sufficient that there...