Paramount Finance Company v. United States

• Decision Date: 06 June 1962
• Docket Number: No. 2-59,3-59.,2-59
• Citation: 304 F.2d 460
• Parties: The PARAMOUNT FINANCE COMPANY v. The UNITED STATES. Edward T. KIRTZ and Rosalyn S. Kirtz v. The UNITED STATES.
• Court: U.S. Claims Court

304 F.2d 460 (1962)

The PARAMOUNT FINANCE COMPANY v. The UNITED STATES.

Edward T. KIRTZ and Rosalyn S. Kirtz v. The UNITED STATES.

Nos. 2-59, 3-59.

United States Court of Claims.

June 6, 1962.

Harlan Pomeroy, Washington, D. C., for plaintiffs. Norman A. Sugarman, Cleveland, Ohio, on the briefs.

S. Laurence Shaiman, Washington, D. C., with whom was Acting Asst. Atty. Gen., John B. Jones, Jr., for defendant. Lyle M. Turner, Philip R. Miller, and Eugene Emerson, Washington, D. C., on the brief.

LARAMORE, Judge.

This suit arises from the determination of a deficiency in plaintiffs' income taxes assessed and collected by the Internal Revenue Service. The plaintiffs in this action are Edward T. Kirtz and Rosalyn S. Kirtz (hereinafter referred to as Kirtz), and the Paramount Finance Company (hereinafter referred to as Paramount).

At all times material Kirtz was an insurance agent duly licensed by the Ohio Superintendent of Insurance and engaged in the business of writing life insurance. Kirtz and his wife filed a timely joint Federal income tax return on the cash basis for the calendar year 1955, the year involved in their petition.

Max Feldman, Arthur L. Feldman, and Herbert I. Baker, are the principal officers of Paramount, and at all times pertinent herein they were in control of management and were the majority stockholders therein. For conciseness and ease of comprehension these officers will hereinafter be referred to simply as the Feldmans.

In 1951, the Feldmans first discussed the possibilities of making arrangements to refer insurance business to insurance companies. They contacted a representative of the Credit Life Insurance Company of Springfield, Ohio, and an oral agreement was accomplished along lines suggested by the insurance company, which required that such insurance be written through a licensed insurance agent in order to comply with Ohio law. The Feldmans were given the privilege of selecting the agent through whom insurance would be written. They selected Kirtz, a personal friend of Arthur L. Feldman, who agreed to become the licensed agent in this arrangement. The insurance company sent the necessary papers to the Feldmans for having Kirtz designated as an agent of the insurance company, the Feldmans had Kirtz sign them, then they sent the papers back to the insurance company.

After Kirtz became the insurance agent for their operations, the Feldmans proceeded to contact automobile dealers and other types of retail and installment-sale dealers and point out the advantages of having available credit life, health, and accident insurance for their customers. These activities tied in with their operations conducted for Paramount since, during the years in question, Paramount did discount business with at least 150 automobile dealers.

The Feldmans actively engaged in handling the details of their arrangements with the Credit Life Insurance Company, seeking to persuade the dealers that it was to their advantage as well as that of their customers to have credit life insurance coverage. This activity on the part of the Feldmans was solely with the dealers and was not done directly with the customers, nor at the Paramount offices. It is impossible to determine precisely what amount of time the Feldmans spent on insurance business since such activities were correlated with their contacts with dealers for promotion of the finance business of Paramount.

Pursuant to the agreements between the Feldmans and the Credit Life Insurance Company, and between the Feldmans and Kirtz, the amounts received in the years 1954 and 1955 by the Feldmans from Kirtz were for the promotion of insurance and the referral of insurance business.

In making payment for these policies to the Credit Life Insurance Company, a monthly check for the total of all premiums that month was drawn on the account of Paramount payable to Kirtz. These premiums were derived from the financial paper purchased by Paramount from dealers. This check, together with a summary of policies written during the month, was delivered personally to Kirtz by Arthur Feldman. Kirtz deposited the check in a special account entitled "Edward Kirtz, Special Account." Kirtz then forwarded a check issued on such account to Credit Life Insurance Company for 60 percent of the premiums, retaining 40 percent. In accordance with his previous agreement with the Feldmans, he retained 5 percent of the premiums and returned 35 percent of the premiums to the Feldmans.

The amount received by Kirtz in 1955, representing 5 percent of the premiums, was reported by him as taxable income, but he did not report as taxable income the 35 percent of the premiums which were paid to the Feldmans.

The amounts paid to the Feldmans for the referral of insurance business were not received or controlled by Paramount, and were not treated by it as its income. The amounts received by the Feldmans were treated as income by them and reported on their tax returns for 1954 and 1955.

The arrangements between Paramount, the Feldmans, and Credit Life Insurance Company were made known to the Ohio Superintendent of Insurance in the course of an investigation requested by the Internal Revenue Service to the Insurance Department. The Department of Insurance did not advise any of the parties to stop or alter in any way the arrangements. In fact, payments such as those made herein to the Feldmans have been made by other insurance agents in connection with other finance companies. Such payments have been a practice in the Cleveland area for many years.

Simply stated, we have a situation where a customer pays a premium for insurance, let us say, in the amount of $100. He pays the full amount to Paramount, which in turn performs the necessary paperwork. Paramount then forwards the full $100 to Kirtz, who in turn sends $60 to the insurance company. There is no dispute at this point. Kirtz, however, sends $35 to the Feldmans. The Government contends that this payment to the Feldmans is in violation of Ohio law, thus no deduction should be permitted Kirtz. Further, the Government contends that this payment should be treated as if it were constructively received by Paramount, should be included in its gross income, and that no deduction be permitted Paramount because there is nothing to indicate that Paramount regarded the payment to the Feldmans as necessary expenses of the corporation. Thus, the Government has collected income tax on the same $35 from the Feldmans, Paramount, and Kirtz.

The plaintiffs first contend that receipt of this payment should not be included in their gross income. They allege that they were mere conduits through whom the money passed and that they held the money with no "claim of right." Second, plaintiffs contend that if receipt of the payment is includable in gross income, it is a deductible trade or business expense.

As to Paramount, the facts reveal that it never received payment from Kirtz. We think it is quite unreasonable to attribute to the corporation receipt of income which it never realized, then deny a deduction for an amount equal to the sum of a payment made to several of its officers. Conceivably there may be instances where receipt of income by an officer of a corporation is tantamount to receipt of income by the corporation. In our view, if the income should be attributable to the corporation for reasons owing to the fact that corporate officers were actually performing services for the corporation, then this amount should be deductible under applicable Code provisions.¹ Since the result is identical whether the amount involved is includable in gross income then deducted or not included in gross income, we conclude it is moot as to the method employed.

As to Kirtz, he actually received payment from Paramount and it should properly be included in his gross income. If Kirtz is to be entitled to a tax benefit with respect to the amounts paid the...