Parrott v. Comm'r of Internal Revenue (In re Estate of Crocker), Docket No.88086.

• Decision Date: 05 January 1962
• Docket Number: Docket No.88086.
• Citation: 37 T.C. 605
• Parties: ESTATE OF GERTRUDE H. CROCKER, DECEASED, WILLIAM G. PARROTT, JR., ADMINISTRATOR, AND WILLIAM W. CROCKER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

37 T.C. 605

ESTATE OF GERTRUDE H. CROCKER, DECEASED, WILLIAM G. PARROTT, JR., ADMINISTRATOR, AND WILLIAM W. CROCKER, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No.88086.

Tax Court of the United States.

Filed January 5, 1962.

[37 T.C. 605]

Franklin C. Latcham, Esq., for the petitioners.

Donald G. Daiker, Esq., for the respondent.

Gain, predominantly composed of previously earned investment income, realized on transfer for consideration to third person of insurance policies on petitioner's life, held ordinary income notwithstanding transaction may have incorporated sale of a capital asset. Harry Roff, 36 T.C. 818 (1961), followed; Percy W. Phillips, 30 T.C. 866 (1958), distinguished.

Respondent determined a deficiency in income tax for the year 1955 in the amount of $14,178.67. The issues remaining for decision are (1) whether the petitioners made a bona fide sale of life insurance policies and (2), if so, whether the increment or profit realized upon the sale of these policies is taxable as ordinary income.

[37 T.C. 606]

FINDINGS OF FACT.

Petitioners are a surviving husband and the estate of his deceased wife. A joint income tax return for the calendar year 1955, the period here involved, was filed with the district director of internal revenue at San Francisco, California.

William W. Crocker (hereinafter sometimes referred to as petitioner) is now and has been for many years, including the year 1955, an officer and director of Crocker-Anglo National Bank (formerly Crocker First National Bank of San Francisco), with main offices in San Francisco, California. During the year 1955, petitioner was chairman of the board of directors of Crocker First National Bank. He also was, and is, a director of a number of other corporations.

During the year 1955, petitioner was the owner of the following eight policies of life insurance on his own life:

+-----------------------------------------------------------------------------+
                ¦ ¦ ¦Cash value¦Increase ¦Face ¦Premiums ¦“Dividends”¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Policy and ¦Cost ¦at ¦in value ¦amount ¦paid ¦ ¦
                ¦date ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦of issue ¦ ¦assignment¦ ¦of ¦ ¦ ¦
                ¦ ¦ ¦ ¦ ¦policy ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Pacific Mutual¦ ¦ ¦ ¦ ¦ ¦ ¦
                ¦401107, July ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦4, 1920 ¦$12,450.00¦$16,365.50¦$3,915.50¦$25,000¦$12,450.00¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Pacific Mutual¦ ¦ ¦ ¦ ¦ ¦ ¦
                ¦445690, Dec. ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦28, 1921 ¦15,100.00 ¦16,568.41 ¦1,468.41 ¦25,000 ¦17,194.75 ¦$2,094.75 ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Pacific Mutual¦ ¦ ¦ ¦ ¦ ¦ ¦
                ¦621007, June ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦11, 1926 ¦6,690.00 ¦6,546.20 ¦(143.80) ¦10,000 ¦7,772.60 ¦1,082.60 ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Travelers ¦ ¦ ¦ ¦1 ¦ ¦ ¦
                ¦775167, Dec. ¦15,630.00 ¦22,525.25 ¦6,895.25 ¦34,150 ¦15,630.00 ¦ ¦
                ¦28, 1921 ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Aetna ¦ ¦ ¦ ¦ ¦ ¦ ¦
                ¦N-258386, July¦11,920.00 ¦16,367.50 ¦4,447.50 ¦25,000 ¦11,920.00 ¦ ¦
                ¦11, 1920 ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Aetna ¦ ¦ ¦ ¦ ¦ ¦ ¦
                ¦N-305807, Dec.¦12,140.00 ¦16,249.50 ¦4,109.50 ¦25,000 ¦12,140.00 ¦ ¦
                ¦28, 1921 ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Aetna ¦ ¦ ¦ ¦ ¦ ¦ ¦
                ¦P-581619, June¦5,691.40 ¦6,564.70 ¦873.30 ¦10,000 ¦6,647.70 ¦956.30 ¦
                ¦18, 1926 ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Metropolitan ¦ ¦ ¦ ¦ ¦ ¦ ¦
                ¦1363420A, Dec.¦ ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦28, 1921 ¦17,996.23 ¦19,194.57 ¦1,198.34 ¦39,691 ¦22,840.61 ¦4,844.38 ¦
                +--------------+----------+----------+---------+-------+----------+-----------¦
                ¦Total ¦97,617.63 ¦120,381.63¦22,764.00¦193,841¦106,595.66¦8,978.03 ¦
                +-----------------------------------------------------------------------------+
                

None of the policies matured until petitioner's death and all of the policies, except the Metropolitan Life Insurance Company policy, were 20-payment life policies, that is, premiums were payable for a period of 20 years beginning with the year in which the policy was issued. The Metropolitan Life Insurance Company policy provided for payment of premiums throughout the life of the policy.

Petitioner received so-called dividends, either in the form of credits against premiums or of direct cash payments. Pacific Mutual Life Insurance Company and Metropolitan Life Insurance Company are mutual insurance companies. Aetna Life Insurance Company is a stock company but issues participating as well as nonparticipating policies. The Aetna Life Insurance Company policy No. P-581619 was a participating policy upon which dividends were paid to petitioner. The Travelers Insurance Company is a stock company and dividends were not payable on the policy issued to petitioner.

Each of the policies provided that, after payment of a certain number of full annual premiums, usually two, the insured would have

[37 T.C. 607]

three options. The insurance companies would pay a cash amount on surrender of the policy by the insured, term the ‘cash surrender value.’ In the alternative, the insured had the...