Court Opinion

ID: 4478362
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:13:01.895026+00
Date Added: 2024-06-11T14:53:55.824778
License: Public Domain

HaReoit, /., dissenting: The prevailing opinion treats the issue in a manner which is reminiscent of the evolution through the judicial process of concepts of the nature of taxable income and of what constitutes the realization of income. Indeed, the majority view seems to regard the Commissioner’s determination as one which serves to extend the frontier of the legal concept of income. Finally, in reaching the conclusion that no income was realized by petitioner, the majority has undertaken, I believe, to reduce the scope of the present legal concepts of income, and has disregarded well established principles defining the nature of income. Also, there has been introduced into the issue raised by the pleadings a question of doubtful validity, namely, whether taxable income is realized from the acquisition of property at “wholesale cost.” Such question is not, in my opinion, the one presented for decision here. I am unable to concur with the conclusions that the evidence establishes that petitioner bought insurance on his own life at “wholesale cost”; that he did not earn commissions in the amount of $455.11; that the amount involved is not actually compensatory in nature; and that the net result of the entire transaction was that petitioner realized economic benefits which were not compensatory. Therefore, I respectfully dissent. It has been said that a definition of income does not aid materially in solving a problem, but that it is advisable to take a realistic view of the facts in a case and to take into account the plain meaning of the word “income.” United States v. Kirby Lumber Co., 284 U.S. 1. It is necessary here, as in most cases, to consider all of the facts, and they are discussed hereinafter at some length. Also, particular-attention is given to the nature of an insurance agent’s commissions, to the nature of premiums for insurance, to the policy involved in State statutes which are aimed at preventing discrimination and rebates of premiums, and to the status of the Commissioner’s longstanding ruling that, “a commission retained by a life insurance agent on his own life insurance policy is held to be income accruing to the agent.” T.D. 2137, supra. It is well known that the commissions of the representative (broker or general agent) of a life insurance company are based upon a percentage of the premiums paid by the insured to the company, and that they are compensation for the representative’s services to the company in presenting to it the application for the insurance contract which the company issues. It is well established that such commissions are compensatory and come within the broad definition of gross income contained in all of the revenue acts and codes.1  In petitioner’s agreements with Occidental and California-Western States it was stated that Minzer was authorized to procure and submit to the company applications for life insurance, and that in consideration for such services the company agreed to pay Minzer commissions on premiums paid to the company in cash by the insured.2 Whether Minzer is called a broker, which I believe is not significant, or a general agent, he was without any doubt under these contracts a general agent of each insurance company,3 and all of his commissions were compensation for his services to the life insurance company in procuring and submitting applications for insurance, which the insurance companies were obligated to pay him upon the receipt of cash payments of premiums by the insured individuals. No distinction was made in the agency contracts between an application for insurance on Minzer’s life and an application for insurance on the life of any other individual; or between a premium paid by Minzer and one paid by someone else; or between the commissions to be paid to Minzer for his submitting an application for insurance on his own life and those to be paid upon his submitting an application for insurance on the life of another person. Furthermore, both Minzer and the two insurance companies made no distinction with respect to the above. Minzer, in his income tax return for 1954, reported the receipt of the disputed commissions which, accrued to him on the insurance policies on his own life, in the amount of $455.11, by including that amount in the total sum of all commissions received from all the insurance companies he represented, namely, $43,196.31. However, he deducted $455.11, and included in his taxable income only the net amount of $42,741.20. California-Western States charged Minzer with having earned the full amount of the commissions on the life insurance policies issued on Minzer’s life, $119.41.4 The petitioner has not shown that Occidental did not do the same with respect to the commissions of $335.70. Minzer was free to apply to any insurer for insurance on his own life. When he applied to Occidental and California-Western States for the issuance by them of insurance contracts on his own life, he rendered a service to each company for which each was obligated, under the agency contract, to pay him compensation for such service, consisting of commissions. The commissions were compensatory. I believe that no distinction can he made between commissions earned by Minzer on the insurance, for which he submitted the application, on his own life, and commissions earned by submitting applications for insurance on the lives of others. The nature of both commissions is the same; they are all earned income. Ostheimer v. United States, supra; Rogers v. Ramey, 198 Ky. 138, 248 S.W. 254; Edwards v. Keith, 231 F. 110 (C.A. 2, 1915), see note 1; Gerald A. Eubank, 39 B.T.A. 583, affd. 311 U.S. 122, see note 1. Minzer was not rendering a service to himself when he applied to each company for insurance on his own life. He did not pay himself for submitting the applications for insurance on his own life; rather, the insurance companies paid him, and they did so on exactly the same basis as they paid him for submitting applications for insurance on the lives of others. Not only were the commissions involved necessarily compensation for petitioner’s services, and, therefore, taxable income to him, but equally, the entire amount received as life insurance premium by each insurance company must have been premium and no part thereof could have been deducted for a so-called discount, bargain purchase, or to arrive at a so-called wholesale cost. There is no proof that under the contracts of insurance on Minzer’s life, under which he was obligated to pay premiums to the companies, the regular amount of the premium was reduced in any respect, or, for example, was computed in an amount which eliminated the sum which the insurance company was obligated to pay Minzer as a commission under his general agency contract. Minzer was required under the insurance contracts on his life to pay premiums in the same amount and at the same rate as was required by the terms of insurance contracts on the lives of others. That no part of the premiums for insurance on petitioner’s life could have been deducted for a so-called discount flows, not alone from the statutes commonly in force forbidding discrimination and rebating,5 but basically from the whole concept of life insurance which the present Opinion seems completely to ignore. It is rudimentary that the actuarial concept of life insurance is the placing of all risks similarly situated in a class for which insurance reserves will be established and maintained. This must be done for all of the class equally since any member of the class may at any time participate in some way in the established reserve. Not only the payment at death but intervening surrender and loan values and even the distribution of dividends have as their genesis this participation in a mutual reserve. It is hence inadmissible to assume that any individual insured could be paying a smaller premium for the same protection than anyone else.6 If this is so, all of the money received by the insurance company was premium and what petitioner received was necessarily something other than a discount. The “true premium,” to be sure, for any insured class, see IX Encyc. Soc. Sci. 464, is computed less assumed commission and other authorized “loading charges.” But under the basic concept of insurance this must result for the class as a whole and not for each individual member. It follows that petitioner’s share in the reserves for purposes of surrender, loan, and other values continues to be the same as that of any other member of the insured group. Under the present Opinion’s theory, however, he paid less for it than his associates although what he received had a value equivalent to the full premium. Guggenheim v. Rasquin, 312 U.S. 254. Of course, this is not what actually occurred here. Petitioner paid the insurer the full premium for the insurance value he received and was paid in turn what the insurer owed him for his services, just as he might have been paid rent, or interest, or a legal fee if their relationship had called for it. See, e.g., Otis v. Provident S. L. Assn. Soc., 173 Ill. App. 70. This is the theory on which, under State statutes prohibiting discrimination and rebates, a broker is permitted to offset his commission against the premium due. Whether it is described as payment of premium and a counterpayment of commission, or a payment part in cash and part in services worth the difference, see Rogers v. Ramey, supra, it is clearly compensatory and the result is the same. It is of no consequence that petitioner may have been an “agent” instead of an “employee” of each insurance company. In either event, he rendered personal services and was paid the agreed compensation for them. Gerald A. Eubank, supra, see note 1. To hold otherwise does violence not only to the principle that property rights are determined by State law, Blair v. Commissioner, 300 U.S. 5, and Helvering v. Stuart, 317 U.S. 154, but places the tax authorities in the position of contravening a clearly defined State policy. Tank Truck Rentals, Inc., 356 U.S. 30, affirming 26 T.C. 427. The reasoning employed by the present Opinion to the effect that part of the obligation of Minzer to pay premiums on his own life insurance was in effect “forgiven” by way of some legerdemain which wiped out the commissions due him on such insurance so that any “economic benefit” received by Minzer was “not compensatory,” does violence to the doctrines of realization of income and of constructive receipt of income.7  The present Opinion holds directly contrary to the ruling of the Treasury Department, T.D. 2137, supra, which has stood unchanged for more than 43 years. This ruling was only reaffirmed in 1932 and 1955 by the respective rulings G.C.M. 10486, supra, and Bev. Bul. 55-273, supra. Treasury regulations, rulings, and interpreta-fcions which, are consistent with statutes and have remained in effect for a long period of time are deemed to have received congressional approval and have the effect of law. Helvering v. Winmill, 305 U.S. 79; 1 Mertens, Law of Federal Income Taxation sec. 3.20. The determination of the Commissioner should be sustained. Upper, Withey, and AtkiNS, JJ., agree with this dissent.   Edwards v. Keiths 231 F. 110 (C.A. 2, 1915) ; Woods v. Lewellyn, 252 F. 106 (C.A. 3, 1918); Bishop v. Commissioner, 54 F. 2d 298 (C.A. 7, 1931) ; Parker v. Routzahn, 56 F. 2d 730 (C.A. 6, 1932) ; James M. Stokes, Jr., 22 B.T.A. 1386; Gerald A. Eubank, 39 B.T.A. 583, affd. 311 U.S. 122. The cited cases involved taxation of renewal commissions on renewal premiums paid by the insured, but the principle applies equally to the first-year commissions on the first-year premiums which are paid.    The agreement with Occidental provides, in part, as follows: “You are hereby authorized, provided and while you have a proper license authorizing you to solicit insurance for Occidental Life Insurance Company of California, * * * to procure and submit applications for life insurance in the Company subject to the rate book and the rules and regulations of the Company, * * * and the terms and conditions of this Agreement. In consideration of such service, the Company agrees to pay you a commission in accordance with the Schedule below on premiums collected and paid to the Company in cash on account of policies issued upon said applications, as follows, to wit The agreement with California-Western States provides, in part, as follows : “The Company hereby appoints said second party its special agent for the purpose of canvassing for applications for insurance on the lives of individuals, and of performing such other duties in connection therewith as the officers of the Company may in writing expressly require of him * * * ******* “Twentieth: Until further notice the Company shall pay and the Agent shall receive under this contract, but subject to all of its terms and conditions, the following compensation only, to wit    The parties have not stipulated that the relationship of Minzer to any of the life insurance companies he represented was that of a broker. During the taxable year 1954 petitioner represented eight insurance companies, including the two companies involved. It has been stipulated that petitioner “was engaged in the business of soliciting and writing life insurance and casualty insurance as a representative of si® life insurance companies and under brokerage arrangements with two firms writing casualty insuranceJ” (Italic supplied.) The Court has made a finding that, “Petitioner was an insurance broker.” This represents the Court's conclusion.    There is attached to the stipulation of facts a letter from California-Western States to a regional counsel of the Commissioner which states as follows : “This is a reply to your letter of January 13, 1958. This company reports all commissions from policies on an agent’s own life as commissions earned by him for the calendar year in which commissions are paid by the company or retained by the agent. “You have asked for verification of the commissions paid to Mr. Minzer on his own life during the year of 1954. You have asked further whether the amount was actually sent to him or whether the premiums were discounted prior to remittance. “We do not permit our agents to discount premiums prior to remittance, except on first policy year policies [sic]. However, in such first year cases, if the net premium is remitted, we do charge the agent with having earned the full amount of such commissions. Such commissions are, therefore, included in the amounts as reported on our Forms 1099 or Forms W-2 of which copies are sent to our agents as well as to the U. S. Treasury Department."    In a similar case, the court noted In Ostheimer v. United States, 160 F. Supp. 669, as follows: “In fact, It would be a violation of the law for an Insurance company to have sold Insurance to him at a lower rate than that charged other policyholders.” The same is true In the instant case. The Texas statute prohibits all discrimination by an insurance company with respect to premiums and any rebate of premiums. Tex. Ins. Code art. 21.21 (Vernon), provides, in part: “No insurance company of any kind doing business in this State shall make or permit any distinction or discrimination in favor of individuals between the insured of the same class and of equal expectation of life in the amount of, or payment of, premiums * * * nor shall any such company, or any officer, agent, solicitor or representative thereof, pay, allow, or give, or offer to pay, allow or give directly or indirectly, as an inducement to insurance, any rebate of premiums payable on the policy * * *” The statute provides for a criminal penalty, for its violation. The reason it is not rebating of a premium for an insurance agent to apply for insurance on his own life and receive a commission for doing so is because the commission is for services performed. See Rogers v. Ramey, 198 Ky. 138.    See 3 Couch, Insurance sec. 584, where the following is stated : “* * * the object or intent of statutes aimed against discriminations and rebates is that uniform rates shall be established and maintained, so as to secure to all persons equality as to burdens imposed, as well as to benefits derived, by preventing discrimination by insurers in favor of individuals of the same class, either as to premiums charged or dividends allowed, or, as it has been stated, in order that prospective insurants of the same class shall not be unfairly treated or discriminated against, by inducements being given to one of such class, which are not available to all therein. * * *”    See the following: Corliss v. Bowers, 281 U.S. 376; Old Colony Trust Co. v. Commissioner, 279 U.S. 716; United States v. Boston & Maine Railroad, 279 U.S. 732; Burnet v. Wells, 289 U.S. 670; Helvering v. Stuart, 317 U.S. 154; Helvering v. Horst, 311 U.S. 112, 115; Harrison v. Schaffner, 312 U.S. 580; Acer Realty Co. v. Commissioner, 132 F. 2d 512, 516.