United States v. Heilbroner, 20.

• Decision Date: 05 December 1938
• Docket Number: No. 20.,20.
• Parties: UNITED STATES v. HEILBRONER.
• Court: U.S. Court of Appeals — Second Circuit

100 F.2d 379 (1938)

UNITED STATES v. HEILBRONER.

No. 20.

Circuit Court of Appeals, Second Circuit.

December 5, 1938.

Maass & Davidson, of New York City (Herbert H. Maass and David J. Levy, both of New York City, and Andrew B. Trudgian, of Washington, D. C., of counsel), for appellant.

Lamar Hardy, U. S. Atty., of New York City (Richard Delafield and Robert L. Werner, Asst. U. S. Attys., both of New York City, of counsel), for the United States.

Before MANTON, L. HAND, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The above action was brought by the United States to recover from the defendant Helen W. Heilbroner the amount of certain taxes paid by her on her income for the year 1931 and afterwards refunded by the government. The court directed a verdict in favor of the plaintiff for $4,525.19 (the amount refunded) together with interest and costs, and from the judgment entered thereon the defendant has taken this appeal.

On or about March 15, 1932, the defendant Helen W. Heilbroner filed her income tax return for the year 1931 and included in it $19,109 of income which she had received during that year from four life insurance companies on seven policies of insurance upon the life of her deceased husband, Louis Heilbroner. Under the terms of the policies as they were in force at the death of the insured the companies were to make settlement of their obligations by paying to the defendant annual sums which were variously described either as "interest" or "annuity" payments and by further paying to named children of the insured upon the death of the defendant the face amount of the policies. This mode of settlement was chosen by the insured during his lifetime through the exercise of options given to him in the policies and there was no power in her after his death to make any change in the terms of settlement.

After the defendant had included in her 1931 income tax return the above sum of $19,109 and paid the tax thereon the Commissioner of Internal Revenue made a ruling on or about January 27, 1933, determining that amounts received by a beneficiary under policies of life insurance such as those here involved constituted part of the consideration for the premium payments of the insured and formed a part of the amounts paid by reason of the death of the insured within the meaning of the income tax provisions excluding insurance from taxable income.

The income tax provisions referred to were Section 22(b) (1) of the Revenue Act of 1928, 26 U.S.C.A. § 22, reading as follows:

"§ 22. Gross income * * *

"(b) Exclusions from gross income. The following items shall not be included in gross income and shall be exempt from taxation under this title:

"(1) Life insurance. Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or in installments (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income) * * *."

Upon the basis of the ruling of the Commissioner the defendant filed a claim for refund covering the income taxes she had paid for 1931 on the insurance proceeds. Her claim was allowed and paid, but subsequently a new Commissioner reversed the earlier ruling and demanded a return of the refund and interest. His demand having been refused, this action was brought, resulting in the judgment for the United States already described. The question before us is whether the amounts received by the defendant from the insurance companies constituted taxable income. We hold that they were such income.

After the exercise by the insured of his options to have the proceeds of his policies retained upon his death by the respective companies and specified sums paid to his widow, the defendant as the life beneficiary became entitled to receive during her life annual payments upon the respective policies to a minimum of $2.47 per month for each $1,000 of the Northwestern Mutual policies and to a minimum of three per cent upon the policies of the other companies, such amounts to be increased by any annual dividend that might be apportioned to it by the directors of the company issuing the policy. The items aggregating $19,109 paid to the defendant during the year 1931 constituted the amounts due her that year both as to the guaranteed minima and as dividends apportioned to the respective policies.

The defendant argues that the payments received during 1931 were all installments "paid by reason of the death of the insured", were not "amounts * * * held by the insurer under an agreement to pay interest", and were consequently exempt from taxation under Section 22(b) (1) above quoted. This contention may be justified by some of the reasoning of the Court of Appeals of the Third Circuit in Penn Mutual Life Insurance Company v. Commissioner, 92 F.2d 962, which...