Kaufman v. United States

• Decision Date: 12 November 1942
• Docket Number: No. 4941.,4941.
• Citation: 131 F.2d 854
• Parties: KAUFMAN v. UNITED STATES.
• Court: U.S. Court of Appeals — Fourth Circuit

131 F.2d 854 (1942)

KAUFMAN v. UNITED STATES.

No. 4941.

Circuit Court of Appeals, Fourth Circuit.

November 12, 1942.

LeRoy R. Cohen, Jr., of Richmond, Va., for appellant.

Warren F. Wattles, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., Sterling Hutcheson, U. S. Atty., and John V. Cogbill, Asst. U. S. Atty., both of Richmond, Va., on the brief), for appellee.

Before SOPER, DOBIE, and NORTHCOTT, Circuit Judges.

NORTHCOTT, Circuit Judge.

This is an action brought in October, 1940, by the appellant, Louise E. Kaufman, here referred to as the plaintiff, against the United States of America, here referred to as the defendant, in the District Court of the United States for the Eastern District of Virginia, at Richmond.

The object of the action was to recover income taxes, in the amount of $988.90 for the years 1934, 1935 and 1936, paid by the plaintiff under protest and alleged to have been unlawfully assessed.

A jury was waived and a hearing had before the judge below in June, 1941. After the hearing the judge filed findings of fact and conclusions of law holding for the defendant. A judgment was entered for the defendant and from this action this appeal was brought. The opinion of the court is reported in 40 F.Supp. 505.

There is no dispute as to the facts and as found by the judge below they are as follows:

"The plaintiff, a resident of the City of Richmond, Virginia, is the beneficiary under five certain policies of life insurance issued one each by New York Life Insurance Company, Northwestern Mutual Life Insurance Company and Massachusetts Mutual Life Insurance Company and two by Mutual Life Insurance Company upon the life of her husband, Bert S. Kaufman, who died on March 12, 1922, leaving surviving him the plaintiff as his widow and two children, Virginia S. Kaufman and Ralph N. Kaufman. The face amount of the policies aggregated $50,000 and the policies provided for the payment in a lump sum of the face amount of each policy to the beneficiary on the date of the death of the insured. Each of said policies also contained certain options which permitted the insured to designate that instead of the lump sum being paid at the time of his death, the companies should retain the death benefits and pay to the beneficiary certain stipulated payments over a period of years. Prior to his death the insured, Bert S. Kaufman, in the case of each of said policies, exercised the option providing that the face amount of the policies should be retained by the company and that the company would make payments of certain installments for a limited period of twenty years to the plaintiff, Louise E. Kaufman, if she lived, and in the event of her death before the expiration of said twenty years the remaining installments to be payable to the above named children of the said Bert S. Kaufman.

"Upon the death of the insured, the basis upon which the installment payments were computed was the aggregate sum of $50,804.86, the $804.86 being on account of dividend accumulations. From March 12, 1922, to December 31, 1936, the plaintiff received from said companies each year (except pro rate for the year 1922) the sum of $3,328.92, which amounts exceed one-twentieth of the aforesaid basis of $50,804.86 by the sum of $788.67. In addition, the plaintiff also received varying amounts from earnings in accordance with the provisions of the respective contracts, these varying amounts being as follows: prior to the year 1933, the sum of $7,048.25, and for the years 1934, 1935 and 1936 the respective sums of $345.45, $251.54 and $127.82. Neither the aforesaid sum of $788.67 nor the aforesaid additional varying amounts were included by the plaintiff in her gross income subject to tax as returned for each of the several years. The Commissioner of Internal Revenue assessed the deficiencies in taxes and interest for the years 1934, 1935 and 1936. The amounts so assessed were paid by the plaintiff under protest and claims for refund were filed but not allowed. The plaintiff then filed this suit to recover such payments with interest."

The statute involved is Section 22(b) (1) of the Revenue Act of 1934, 26 U.S. C.A. Int.Rev.Code § 22(b)(1), which reads as follows:

"(b) Exclusions from gross income. The following items shall not be included in gross income and shall be exempt from taxation under this chapter:

"(1) Life insurance. Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income)."

Under this Revenue Act of 1934 Treasury Regulation 86 was promulgated. This Regulation provided in part as follows: "* * * only the amount paid solely by reason of the death of the insured is exempted. The amount exempted is the amount payable had the insured or the beneficiary not elected to exercise an option to receive the proceeds of the policy or any part thereof at a later date or dates."

The question involved is whether all amounts paid to the plaintiff in excess of the face amount of the policies are taxable to her as income.

The plaintiff admits that under Treasury Regulation 86 such sums are properly taxable to her but contends that this Regulation is contrary to the intent of Congress as expressed by the statute and therefore void.

The defendant contends that all such excess payments constitute...