Keefe v. Comm'r of Internal Revenue
| Decision Date | 28 December 1950 |
| Docket Number | Docket No. 17321. |
| Citation | 15 T.C. 947 |
| Parties | ERNEST J. KEEFE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner and his business partner each took out and maintained life insurance in equal amounts on his own life, and each named the other his beneficiary without reserving a power to change the beneficiary. They agreed that, in the event of the death of either, the insurance proceeds collected by the survivor were to be turned over to the decedent's representative, and such payment, together with a portion of certain cash, was to be in satisfaction of the decedent's interest in the partnership. In addition to becoming the sole owner of the business, the surviving partner was to reacquire all rights in the policies on his own life. Held: Petitioner was ‘directly or indirectly a beneficiary‘ of the policies on his own life within the meaning of section 24(a)(4), I.R.C., and therefore not entitled to a deduction from gross income with respect to premiums which he paid.
2. In computing the petitioner's tax liability for 1944, held, there must be taken into account a net operating loss deduction resulting from a carry-back from 1946.
3. Petitioner made payments on his declaration of estimated income tax in excess of the liability shown on his returns. Held: Although such excess payments may not be taken into account in finding a ‘deficiency‘ by reason of section 271, I.R.C., the Tax Court, is nevertheless authorized to determine the amount of such overpayments pursuant to section 322(d), I.R.C. William W. Johnston, C.P.A., for the petitioner.
Leo C. Duersten, Esq., for the respondent.
The Commissioner has determined deficiencies in the petitioner's income tax for 1944 and 1945 in the respective amounts of $2,139.78 and $2,670.19.
The principal question is whether the Commissioner erred in disallowing deduction of certain life insurance premiums paid by the petitioner in 1944 and 1945.
In addition there are two subsidiary questions: (1) Whether the Court has jurisdiction to consider a net loss sustained in 1946 for the purpose of determining a net operating loss deduction for 1944 based on a carry-back from 1946; and (2) whether the Court has jurisdiction to consider alleged overpayments made by petitioner for 1944 and 1945 in connection with payments on his declarations of estimated tax for those years.
The petitioner resides in Springfield, Massachusetts. For the calendar years 1944 and 1945 he filed his income tax returns, prepared on the cash receipts and disbursements basis, with the collector of internal revenue for the district of Massachusetts.
During the calendar years 1944, 1945, and 1946, petitioner and A. Linton Bausman were partners doing business under the firm name of Mill River Tool Co. The business of the partnership consisted of the manufacture of gauges, tools, cutters, and jigs. On June 26, 1942, petitioner and Bausman executed a partnership agreement containing the following provisions:
5. Upon the dissolution of the partnership by the death of one of the partners, the survivor shall wind up the partnership affairs as provided in paragraphs (a) and (b) of this Section 5.
(a) Bills, accounts and notes receivable shall be collected by the survivor, and the proceeds thereof together with cash in bank or otherwise shall be promptly applied to the payment of all partnership debts and obligations then incurred, including all payroll and other expenses of operations and manufacture down to the date of said death, and including all partnership income taxes and other taxes. The survivor shall reserve from said funds an adequate amount from which to pay income or other taxes not then determined or payable. Taxes assessed on the partnership machinery, equipment and other chattel property shall be pro-rated as of said date of death, as shall rental obligations of the partnership under any existing lease. In addition to reservation of funds above provided for, the survivor shall reserve from said funds the sum of $5,000 from which to meet any then existing disputed claims referable to the partnership business as well as claims thereafter made or arising, and including claims by customers for errors in respect to the partnership manufactured products then in process of manufacture or finished but not then shipped. The said reserve of $5,000 shall be continued and administered only during the period of one year following the qualification of the executor or administrator of the deceased partner, and thereafter only until such claims shall have been disposed of. The excess of said proceeds and cash above the payments and reserves in this paragraph provided for shall be promptly divided one-half to said executor or administrator and one-half to the survivor, as shall also the balance of reserve funds when such reserve is no longer required.
(b) The surviving partner shall wind up the remaining affairs of the partnership by promptly collecting and paying over to the said executor or administrator the proceeds of all those life insurance policies heretofore issued on the life of the deceased partner and payable to the said survivor, which policies are set forth in the attached schedule, and also the proceeds of any such policies hereafter issued and added to said schedule and initialed by the parties thereon, and the parties hereto severally declare that they each respectively hold said policies on the life of the other, and any such policies hereafter issued in trust for the benefit of the other, his executor or administrator, for the purposes set forth in this paragraph (b). The parties further agree with each other that if either shall so desire the said policies shall be made payable to some third party as trustee to carry out the provisions of this paragraph (b).
(c) Upon the death of a partner the title to all assets of the partnership other than bills, account and notes receivable and cash which are to be administered and divided under paragraph (a) shall vest in the surviving partner including without limiting the generality of this paragraph (c) all materials, raw or in process or finished but not shipped, and all the proceeds referable to such materials and products, all the machinery and equipment of the partnership, and the good will thereof, and the said survivor shall be under no liability to account therefor to the executor or administrator, legatees or devisees of the deceased partner, it being the intent of the parties that the proceeds of the life insurance policies upon the life of the deceased partner, as provided in paragraph (b), together with one-half of the surplus of bills, accounts and notes receivable and cash as provided in paragraph (a), shall compensate the estate of the deceased partner for his entire interest in the partnership, and constitute a complete winding up of its affairs, and that the surviving partner shall have full right in his own behalf to continue as his own the partnership business.
6. Upon the death of either of the parties hereto, scheduled insurance policies upon the life of the survivor which under the provisions of paragraph 5(b) of this agreement are payable to the party who shall have died, shall accrue to the survivor, who shall have all rights therein and shall not be accountable to the estate of the deceased party for any cash value of said policies or for any other rights therein.
7. The parties agree that the premiums payable in respect to the policies of insurance appearing on the attached schedule shall be paid by the partnership, and hereby ratify all such previous payments. Any taxes or other charges arising out of the payment to the executor or administrator of the proceeds of said policies under paragraph (b) of Section 5 shall be borne by such executor or administrator.
Bausman was designated as beneficiary in these policies on petitioner's life, and petitioner did not reserve a power to change the beneficiary. Similarly, petitioner was named as beneficiary in Bausman's policies. Each partner paid the premiums on the policies issued on his own life despite the foregoing provision in Section 7 of the partnership agreement.
The partnership agreement continued in force during 1944, 1945, and 1946. In 1947 petitioner and Bausman discontinued their arrangement concerning the insurance, and agreed upon a different method for settling claims in the event of the death of either partner. As to the policies then in effect, each consented to a change in the beneficiary designated under the policies maintained by the other.
During the calendar years 1944, 1945, and 1946, the petitioner paid the following premiums respectively on the policies taken...
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