Prunier v. Commissioner of Internal Revenue

• Decision Date: 08 November 1957
• Docket Number: No. 5280.,5280.
• Parties: Henry E. PRUNIER et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — First Circuit

248 F.2d 818 (1957)

Henry E. PRUNIER et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 5280.

United States Court of Appeals First Circuit.

November 8, 1957.

George B. Lourie, Boston, Mass., with whom John P. Martin, Boston, Mass., and Saul A. Seder, Worcester, Mass., were on brief, for petitioners.

Charles B. E. Freeman, Attorney, Department of Justice, Washington, D. C., with whom John N. Stull, Acting Asst. Atty. Gen., and Lee A. Jackson and Harry Baum, Attorneys, Department of Justice, Washington, D. C., were on brief, for respondent.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.

MAGRUDER, Chief Judge.

There is now before us a joint petition for review of two decisions of the Tax Court entered on April 12, 1957 — one determining that there is a deficiency in income tax of Henry E. Prunier and wife for the taxable year 1950 in the amount of $1,080.88, the other determining that there is a deficiency in income tax of Joseph E. Prunier and wife for the same taxable year in the amount of $1,348.98. The Tax Court (three judges dissenting) thus sustained a determination by the Commissioner that certain premiums paid by the corporation J. S. Prunier & Sons, Inc., on insurance policies on the lives of Henry and Joseph Prunier constituted taxable income to the taxpayers under the general language of § 22(a) of the Internal Revenue Code, 26 U.S.C.A. § 22(a).

Of the 450 shares of stock of J. S. Prunier & Sons, Inc., outstanding, Henry Prunier and his brother Joseph each owned one half or 225 shares until late in 1950, when it was voted at a stockholders' meeting that the two brothers would transfer five shares each to their cousin Irene M. Prunier, clerk of the corporation, who also served as the corporation's bookkeeper. Henry held the offices of president and treasurer, and Joseph was vice-president of the corporation.

As not infrequently happens in these closely held family corporations, the corporate books and records were kept in so sketchy and messy a fashion as to make it difficult to determine what was corporate action and what was the individual action of the two dominant stockholders.

Beginning in 1942 and running up to and including 1950, the brothers took out a total of eight life insurance policies. Four were purchased by Henry on his own life, naming his brother Joseph as beneficiary, in a total face amount of $45,000. Four were taken out by Joseph on his own life, naming his brother Henry as beneficiary, in a total amount of $45,000.

During the taxable year 1950 there was nothing in the terms of the policies, nor in the endorsements thereon, to indicate that the corporation had become their beneficial owner. Some question having been raised by the taxing authorities about this, it appears that at various dates in 1952 (which was subsequent to the tax year in question) endorsements were placed on each of the eight policies naming the corporation J. S. Prunier & Sons, Inc., beneficiary, but inexplicably containing the reservation, in all eight policies, of a right in Henry to change the beneficiary.

From at least as far back as 1946 the corporation has paid the premiums due on the various policies. It was testified on behalf of the taxpayers, and found as a fact by the Tax Court, as follows:

"When the policies were written, Henry and Joseph informed the agent of the substance of the written agreements which the policies were to carry out. They intended that in the event of the death of either the corporation should be the owner of the proceeds of the policies on the life of the deceased party for a single specific purpose, namely, use the proceeds to purchase the stock interest of the deceased party in the corporation at a price agreed upon by them prior to the death of either."

The tax treatment given to these transactions by the corporation was consistent with this found intention of the parties. Thus, in the agreed stipulation of facts the following statements appear:

"The corporation did not claim a deduction for the premiums paid on the above-mentioned insurance policies on its income tax return for the taxable year 1950, but did include the amount thereof in the adjustment made to surplus on Schedule M of its said return as follows:

"`8. Insurance premiums paid on the life of any officer or employee where the corporation is directly or indirectly a beneficiary . . . $8,081.44\'

"Similar adjustments were made by the corporation on its income tax returns for the taxable years 1946 to 1949, inclusive, for the premiums paid on those of the above-mentioned policies in effect during those years."

The aforesaid understanding that the corporation was to become the owner of the policies was first reflected on the books of the corporation, sometime toward the end of 1946, by the following entry in the minute book of the corporation describing a meeting of the directors:

"It is understood and agreed that any policies that Henry E. Prunier has on Joseph E. Prunier and any policies that Joseph E. Prunier has on Henry E. Prunier shall go to the corporation in the event of the death of either of them and this money is to be used by the corporation to buy out the interest of the party that dies.

"These policies are the ones that the corporation pays the premiums on.

"This will apply to any policies that may be bought in the future.

"(s) Henry E. Prunier (s) Joseph E. Prunier "Witness (s) Irene M. Prunier"

A further corporate record appeared as Petitioners' Exhibit No. 2, reading:

"A special meeting of the stockholders and directors of J. S. Prunier & Sons, Inc., was held at the office of the corporation, on Thursday, November 2, 1950 at 7:30 P.M.

"On motion duly made and seconded, the following was proposed and agreed upon and made part of the by-laws:

"It was agreed by and between Joseph E. Prunier, Vice-President and Henry E. Prunier, President and Treasurer and present stockholders that the fair value of the Corporation stock is One Hundred and Ten Thousand Dollars ($110,000.00), and it is their desire that this be the value used should a stockholder sever his connection with the corporation, or in the event of death of either that the corporation will purchase the interest of the deceased party at said value, with the insurance money.

"It was also voted, at said meeting that both Joseph E. and Henry E. Prunier would issue each five of their shares to Irene M. Prunier, Clerk.

"In witness whereof they have executed this agreement, on this third day of November 1950.

"(s) Joseph E. Prunier Vice-Pres. (s) Henry E. Prunier President & Treas. "Witness (s) Omer E. Prunier"

Petitioners place their reliance upon the settled ruling that where a corporation is the beneficiary and owner of a policy of insurance on the life of an employee or stockholder, the payment of premiums by the corporation does not constitute income to the insured individual. Casale v. Commissioner, 2 Cir., 1957, 247 F.2d 440. See Emeloid Co., Inc., v. Commissioner, 3 Cir., 1951, 189 F.2d 230; Lewis v. O'Malley, 8 Cir., 1944, 140 F.2d 735.

On the other hand, the Commissioner thinks the present case falls within the equally settled ruling that where a corporate employee or stockholder, or someone related to him, is beneficiary, and not the corporation, on a policy of life insurance on such employee or stockholder, payment of the premiums on such policy by the corporation constitutes income to the insured individual. Paramount-Richards Theatres, Inc. v. Commissioner, 5 Cir., 1946, 153 F.2d 602; ...