Prime v. Commissioner of Internal Revenue
| Citation | 39 BTA 487 |
| Decision Date | 24 February 1939 |
| Docket Number | Docket No. 83019. |
| Parties | NINA CORNELIA PRIME, EXECUTRIX OF THE ESTATE OF WILLIAM A. PRIME, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Mitchell Salem Fisher, Esq., and Henry Varay, C. P. A., for the petitioner.
S. L. Young, Esq., for the respondent.
The Commissioner determined a deficiency in income tax liability of William A. Prime, deceased, for the calendar year 1933, in the amount of $560.45. It is alleged that the Commissioner erred in disallowing a deduction in the amount of $12,418.54 claimed as "interest paid" during the taxable year on certain life insurance policy "loans."
FINDINGS OF FACT.
In addition to certain documents, the parties have filed a written stipulation of facts and the findings of fact set forth below are stated in accordance with the written stipulation.
The original petitioner, William A. Prime, resided in New York, New York. He died on May 2, 1936. Nina Cornelia Prime was appointed executrix under the last will and testament of William A. Prime by the Surrogate of New York County, New York, on May 15, 1936, and was substituted as petitioner in this proceeding by order of the Board September 2, 1936.
The decedent was a general trader and broker. He kept his books on the cash receipts and disbursements basis. On February 14, 1933, he was indebted to the Aetna Life Insurance Co., in the following amounts:
Previous loan on policy No. N-182563 ________________ $34,200.00
Interest thereon ____________________________________ 4,589.35
Premiums due ________________________________________ 191.00
__________
Total _________________________________________ 38,980.35
On February 14, 1933, the decedent gave a new note to the Aetna Life Insurance Co. in the amount of $40,100 as a loan on policy No. N-182563. This amount was applied by the insurance company against the three items listed above, and the balance of $1,119.65 was paid to the decedent by check of the insurance company.
On July 1, 1933, the decedent was indebted to the Massachusetts Mutual Life Insurance Co., Springfield, Massachusetts, in the amount of $5,300.02, representing a loan of $5,145.65 against policy No. 221384, together with interest of $154.37 due on April 1, 1933. On July 1, 1933, the decedent gave a new note in the amount of $5,300.02 to the Massachusetts Mutual Life Insurance Co. to cover the amount of the previous loan with interest thereon.
On December 28, 1933, the decedent was indebted to the Massachusetts Mutual Life Insurance Co. in the amount of $5,459.02, representing the amount of the note described in the preceding paragraph, with interest of $159 thereon. On December 28, 1933, the decedent gave to the Massachusetts Mutual Life Insurance Co. a new note in the amount of $5,459.02 as a loan against policy No. 221384 to cover the amount of the previous loan with interest thereon.
On November 16, 1933, the decedent was indebted to the London Life Association, Ltd., with which is associated the Metropolitan Life Assurance Society of London, England, for interest in the aggregate amount of £1,375.5.3 on various policy loans. He was indebted to the same companies in the aggregate amount of £476.9.7 for premiums and revival charges, making a total of £1,851.14.10. On November 16, 1933, the decedent gave to the insurance companies mentioned above a note for £985 as a further loan on policies Nos. 41515, 41788, and 42726; a note for £670 as a further loan on policy No. 50852; and a check of C. T. Bowring & Co., Ltd., in the amount of £196.14.10, making an aggregate of £1,851.14.10.
The rate of exchange on November 16, 1933, was $5.46½ per £. In 1933 the total amount of interest due on all of the above insurance policy loans was $12,418.54.
The decedent, in his income tax return for the year 1933, deducted the amount of $12,418.54 as interest paid in the taxable year. The deduction was disallowed by the Commissioner, with the following explanation:
You had loans on seven life insurance policies on which interest of $12,418.54 became due in 1933. In each instance the interest was satisfied by an increase in the loan. The examining officer proposed to disallow this amount, inasmuch as your records are kept on a cash receipts and disbursements basis and no actual payment for interest was made.
The Commissioner also disallowed a claimed deduction of $257.50 reported as a loss on the exchange of automobiles. Petitioner does not contest this determination.
The statutory provision under which the deduction is claimed allows a taxpayer on a cash basis deduction from gross income of interest paid in the taxable year on an indebtedness.1 Petitioner's decedent made his income tax return on the cash receipts and disbursements basis. Petitioner contends that the addition of interest accrued and unpaid to the amount of indebtedness and the giving of new notes constituted "payment" of interest within section 23 (b). Petitioner makes a further contention that there was a constructive payment of interest by the decedent. Respondent concedes that decedent was "indebted" to the insurance companies on account of the policy loans and raises no question on this point.
The facts are stipulated. They show that in 1933 petitioner's decedent gave new notes to several insurances companies "to cover the amount of the previous loan with interest thereon", and in some instances to cover "further loans", meaning further advancements and not interest. The notes are not in evidence. There is no evidence relating to what entries or treatment the various insurance companies made on their books in their reserve accounts in 1933 with respect to the taking of new notes for interest due and unpaid. Only the policies purchased from the American insurance companies are in evidence. It is assumed that all the policy loans were made upon the terms that appear in the evidence. It is noted that, under the loan provisions of the insurance contracts, interest not paid when accrued was to be added to the amount of the principal of the loan and reckoned as part thereof.
The same question was before this Board in John C. Hermann, 27 B. T. A. 409. The facts in that case are, in several respects, different from the facts in this proceeding. But there was involved there, nevertheless, the question whether the giving of a new note in an amount including accrued interest constitutes such payment of interest in the taxable year as the statute contemplates in providing for an income tax deduction. Subsequent to the decision in the Hermann case, this Board reviewed the question of whether interest is paid by the giving of a new note to cover interest accrued and unpaid, in S. E. Thomason, 33 B. T. A. 576. The Board held that the giving of a new note represents another...
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