Essenfeld v. Comm'r of Internal Revenue
| Citation | 37 T.C. 117 |
| Decision Date | 31 October 1961 |
| Docket Number | Docket No. 79079. |
| Parties | MARIAN ESSENFELD, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Samuel Byer, Esq., for the petitioner.
Hyman Maron, Esq., for the respondent.
Amounts received by petitioner from the employer of her deceased husband under the employment contract in effect at his death, held not excludible from her gross income as ‘life insurance.’
A deficiency in petitioner's income tax for the years 1953 and 1954 in the respective amounts of $3,171.13 and $10,034.35 is in controversy. Petitioner also claims an overpayment for the year 1953. The issue is whether amounts received by petitioner from the employer of her deceased husband are excludible from her gross income as being life insurance. Respondent now concedes that if this question is answered in the negative, petitioner is entitled to deductions for the portion of the estate tax on her husband's estate attributable to the inclusion therein of the amounts in controversy here. Respondent's computations of such deductions are $3,431.67 for the year 1953 and $2,958.34 for the year 1954.
The evidence in this case consists of a written stipulation of facts, with exhibits annexed thereto, and admissions by respondent in his answer to the petition. All are hereby found accordingly.
Petitioner is an individual with her principal residence at 47-25 40th Street, Sunnyside, New York.
Petitioner timely filed her individual income tax returns for the taxable years ended December 31, 1953 and 1954, with the then district director of internal revenue for the first district of New York.
On December 10, 1958, respondent duly issued his notice of deficiency to petitioner, together with a statement setting forth petitioner's tax liability for the taxable years ended December 31, 1953 and 1954, his proposed adjustments to petitioner's reported taxable income, and explanations of such adjustments.
Supreme Sunrise Food Exchange, Inc., was chartered in the State of New York on February 25, 1936, to operate supermarkets. Prior to February 1951 the business was conducted by several subsidiary corporations and partnerships operating separately, but having common ownership. In February 1951 the company was reorganized so as to acquire ownership of all such businesses which it then operated directly and through wholly owned subsidiary corporations.
In February 1951 and up to the date of his death on October 31, 1952, David Essenfeld, husband of petitioner, owned 25 percent of the outstanding stock of Supreme Sunrise Food Exchange, Inc.
Philip Kessler and Morris Rapoport each owned 25 percent of the outstanding stock of Supreme Sunrise Food Exchange, Inc., and Isidor Pols and his son, Abner Pols, owned the remaining 25 percent of the outstanding stock of the aforementioned corporation.
From March 1, 1951, until his death on October 31, 1952, David Essenfeld was treasurer and director of Supreme Sunrise Food Exchange, Inc.
In June 1953, after the death of David Essenfeld, the name of the corporation was changed from Supreme Sunrise Food Exchange, Inc., to Sunrise Supermarkets Corp.
On March 1, 1951, David Essenfeld, Philip Kessler, Morris Rapoport, and Isidor Pols executed identical agreements with the Supreme Sunrise Food Exchange, Inc., which agreements provided, in part, for employment for a 10-year period commencing with March 1, 1951; compensation for services starting with $17,500 per annum plus 2 1/2 percent of the net consolidated profits after taxes over and above $240,000 and increasing the compensation by $2,500 each year until the compensation reached $25,000 per annum plus 2 1/2 percent of the net consolidated profits over and above $240,000.
Provision was also made for continued compensation for a period of 2 years in the event of total incapacity and for retirement pay of $30,000 ($15,000 per year for a 2-year period) in the event that the individuals performed their duties during the full 10-year term of the agreement; in the event of death before the individuals received the full amount of the incapacity benefit ($50,000) or retirement allowance ($30,000), the unpaid balance of such benefit was to be paid to the surviving widow or, if there was no surviving widow, to the surviving children.
In addition to the foregoing, the agreement provided that the widow or surviving children of the individual signatory of the agreement would receive a total of $50,000 if the individual died at any time during the 10-year term of the contract. If death were to occur at any time after the 10-year term of the contract, no amount would be paid to the widow or surviving children under this provision of the contract.
The bonus provision of the agreement which provided for additional compensation of 2 1/2 percent of net consolidated profit, after taxes, in excess of $240,000, became operative in the fiscal year ended January 31, 1955, when $4,957.71 was available for distribution in accordance with the bonus provision. Subsequently, on January 10, 1956, the bonus base was raised from $240,000 to $400,000.
On March 1, 1951, the ages of the individuals who executed the agreement (referred to above) were as follows:
+-------------------+
¦Isidor Pols ¦64¦
+----------------+--¦
¦Philip Kessler ¦50¦
+----------------+--¦
¦Morris Rapoport ¦38¦
+----------------+--¦
¦David Essenfeld ¦57¦
+-------------------+
On June 27 and July 7, 1950, the Continental Assurance Company issued life insurance policies in the respective amounts of $45,000 and $30,000 on the life of Dave (David) Essenfeld. The semiannual premiums were $936.90 and $624.60, respectively, a total of $3,123 per annum.
At the date of the execution of the aforementioned agreement and at all times thereafter, only the lives of Philip Kessler, Morris Rapoport, and David Essenfeld were insured by insurance companies. The face amount of the insurance carried on the lives of the aforementioned individuals totaled $225,000, distributed as follows:
+--------------------------------+
¦ ¦Face amount ¦
+-----------------+--------------¦
¦Name of insured ¦of insurance ¦
+-----------------+--------------¦
¦Philip Kessler ¦$75,000 ¦
+-----------------+--------------¦
¦Morris Rapoport ¦75,000 ¦
+-----------------+--------------¦
¦David Essenfeld ¦75,000 ¦
+-----------------+--------------¦
¦Total ¦225,000 ¦
+--------------------------------+
The Supreme Sunrise Food Exchange, Inc., was the owner and beneficiary of, and paid the premiums on, all the aforementioned policies.
David Essenfeld died on October 31, 1952. Subsequent to the death of David Essenfeld and prior to the end of its fiscal year ended January 31, 1953, the Supreme Sunrise Food Exchange, Inc., received $75,000 representing the proceeds of the two life insurance policies.
On November 28, 1952, the following resolution was passed by the Supreme Sunrise Food Exchange, Inc.:
NOW THEREFORE, it is resolved that Mrs. David Essenfeld, the surviving widow is hereby entitled to receive the total sum of $50,000.00 for a period of two (2) years, $25,000.00 per year in equal monthly installments and the officers are directed to make such payments.
Marian Essenfeld, the petitioner, received the following amounts pursuant to the foregoing resolution:
+--------------------------+
¦Calendar year ¦Amount ¦
+----------------+---------¦
¦1952 ¦$4,166.66¦
+----------------+---------¦
¦1953 ¦25,000.00¦
+----------------+---------¦
¦1954 ¦20,833.34¦
+----------------+---------¦
¦Total ¦50,000.00¦
+--------------------------+
The corporation continued to pay the premiums on the insurance policies covering the lives of Philip Kessler and Morris Rapoport and continued as owner and beneficiary of the policies until January 10, 1959, when the aforementioned individuals paid to the corporation the following amounts which represented the then cash surrender value of the policies ($75,000 face amount each) covering their lives:
+--------------------------------+
¦ ¦Cash surrender ¦
+---------------+----------------¦
¦Individual ¦value ¦
+---------------+----------------¦
¦Morris Rapoport¦$9,932.61 ¦
+---------------+----------------¦
¦Philip Kessler ¦11,226.00 ¦
+---------------+----------------¦
¦Total ¦21,158.61 ¦
+--------------------------------+
Upon payment of the cash surrender value to the corporation, the aforementioned individuals received the policies and became the owners thereof.
On January 10, 1956, the original agreement dated March 1, 1951 (referred to above), was modified in the following manner as to Isidor Pols, Morris Rapoport, and Philip Kessler: (a) The expiration date of the agreement was extended from March 1, 1961, to February 28, 1966; (b) the base over which they were to receive a bonus was increased from $240,000 to $400,000; and (c) an expense allowance of $7,500 per annum was added.
The Grand Union Company acquired controlling interest in the Sunrise Supermarkets Corp. (formerly Supreme Sunrise Food Exchange, Inc.) on or about October 10, 1958, by exchanging its stock for the stock of...
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