Court Opinion

ID: 4478314
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:13:00.411289+00
Date Added: 2024-06-11T14:53:31.626202
License: Public Domain

Harron, J., dissenting: The initial question here is whether the transaction on March 7, 1952, between petitioner and his two close business associates, Barker and Reid, constituted a sale. I am unable to agree that there was a true Sale. The answer to this question is determined by the facts which are restated below. Other facts relating to reserves and what is regarded as a second, or alternative question, are beside the point and serve to confuse and detract from the only substantive question. The 21-year endowment policy in the principal amount of $27,000, effective from March 19, 1931, became fully paid on April 18, 1938, on the basis of petitioner s payment of annual premiums of $1,317.33 (excluding the disability premium of $127.45) for 21 years. The total premiums were prepaid as of April 18,1988, presumably at a discount which is not shown by the record before us. The Connecticut Mutual Life Insurance Company held the fund created by petitioner’s payments for several years. On March 7,1952 (when the transaction of petitioner took place), the policy had a cash surrender value of $26,973.78, and the principal amount of $27,000 was to become payable 12 days later on March 19,1952. Phillips had a right to demand and receive from Connecticut Mutual Life, the obligor, $26,973.78 on March 7,1952. Instead of making demand on the obligor under the contract for payment of the amount payable to him under the matured contract on March 7, 1952, Phillips made use of the form of assignment of the contract which was available and turned the policy over to Barker and Reid, who, again, made use of a form of assignment and turned the contract over to a bank, which in turn surrendered the contract to the obi igor, Connecticut Mutual Life Insurance Company, which then paid the principal amount of the contract, or policy, as of its maturity date. These steps were taken at the time that the cash surrender value of the policy was $26.22 less than the principal amount payable on maturity 12 days after the first step was taken. Phillips’ procedure was instituted so close to the date of maturity of the policy as to be on the eve thereof. But the fact that the policy would mature on March 19,1952, should not divert attention from the point that on March 7, 1952, the cash surrender value of the policy was $29,973.78, and on that date nothing stood in the way of Phillips’ surrendering the policy to the obi igor for payment of the then cash surrender value. The record does not support the conclusion that there were any business purposes served, or real needs taken care of, by his going to Barker and Reid for the amount which he could have obtained as readily from the obligor. Rather, the record shows clearly that the desire of Phillips’ to obtain capital gains treatment of the gain he stood to realize, and to avoid tax on the full amount of the gain was his primary purpose. Also, it appears that Phillips may have had the idea that there was a precedent in an unreported memorandum decision of this Court where under the particular facts of that case a taxpayer received capital gains treatment of the accrued profit under a policy by assigning it to a third party for a consideration. See 1 C. C. II. 1953 Fed. Tax Rep., par. 91.0233, “Gain or loss on surrender or exchange of policies.” The issue here presents a substance versus form problem. It is similar to the problem presented in Lucas v. Earl, 281 U. S. 111, because Phillips’ arrangement was clearly an anticipatory arrangement for the following reasons: The rule had been established in 1939 in Bodine v. Commissioner, supra, that the surrender of a policy (very much like the one involved here) to the obligor (insurer) constitutes neither a sale nor exchange, and that the excess of the sum payable by the obligor over the premiums or consideration paid is ordinary income, taxable in full, under the all-inclusive definition of gross income in section 22 (a), 1939 Code. Furthermore, the Commissioner had promulgated in Regulations 111, section 29.22 (a)-12, the ruling that the so-called dividends paid by a mutual insurance company under a policy (such as the one in question) are not includible in the gross income of the “insured” (or the owner of the contract, or policy) in the year of payment or accrual by the mutual insurance company because such so-called dividends constitute a partial return of premiums and serve to reduce the cost of the policy to the owner, insured, obligee, or whatever term is most suitable. In this instance, during the existence of the policy, Connecticut Mutual Life Insurance Company had paid Phillips so-called dividends, totaling in the neighborhood of $0,303.44 (the difference between $27,063.93 and $21,360.49), and, therefore, that amount of premiums had been returned to him; and, therefore, his cost of the policy had been reduced from $27,603.93 (subject to adjustment for prepayment of premiums) to $21,360.49; and, therefore, he stood to realize gain in the amount of at least $5,013.29 (the excess of cash surrender value of $20,973.78 over cost of $21,360.49) upon surrender of the policy to Connecticut Mutual on or about March 7, 1952. Phillips wanted to avoid tax on the full amount of $5,613.29, which he would have to pay if that amount constituted ordinary income under section 22 (a). If he could convert the already accrued gain on the policy to capital gain in advance of surrender of the policy to Connecticut Mutual, only one-half, $2,806.65, would be taxable. The step which was taken which involved Barker and Reid must have been practically a wash-out as far as tax consequences to them was concerned because their so-called “cost,” on March 7, 1952, was $26,750 (the amount they advanced momentarily to Phillips); they turned the policy over to a bank on the same day and received from the bank (presumably and at least) the then cash surrender value $26,973.78; and their “gain” of at least $223.78 was so small that the tax thereon would be offset by their “gain” and they would not be out anything. (The record does not show what the bank gave Barker and Reid under the second step. The bank may have given them only $26,750; we do not know.) In this anticipatory arrangement, Barker and Reid were no more than intermediaries between Phillips and Connecticut Mutual, or Phillips’ agent. See Bessie Laskey, supra. Since Phillips could have received directly from the obligor on March 7, 1952, the sum of $20,973.78, had he dealt directly with it, he realized $223.78 less than the then cash surrender value of the policy, and that amount was in reality the fee he gave Barker and Reid for acting as his agents, or as intermediaries. So regarded, the sum of $223.78 should be treated as a cost to Phillips, increasing his total cost to $21,584.27, which results in gain to him of $5,389.51 from the cash surrender value of the policy on March 7, 1952, of $26,973.78. Looking through form to substance, the holding here should be that on March 7, 1952, Phillips realized ordinary income in the amount of $5,389.51, and respondent’s determination should be sustained. If the above conclusion about petitioner’s cost represents an adjustment in respondent’s computation we can and should make such adjustment. Gregory v. Helvering, supra at 811. The transaction with Barker and Reid, undertaken when the Connecticut Mutual policy (or contract) was about to mature and when it had a cash surrender value of only $26.22 less than the principal amount, should not be recognized as a sale of the policy under the doctrine of the following authorities: Lucas v. Earl, supra; United States v. Phellis, 257 U. S. 156; Corliss v. Bowers, 281 U. S. 376, 378; Griffiths v. Helvering, 308 U. S. 355; Helvering v. Horst, supra; Helvering v. Eubank, 311 U. S. 122; Macqueen Co. v. Commissioner, 67 F. 2d 856; Hale v. Helvering, 85 F. 2d 819, 821; Helvering v. Smith, 90 F. 2d 590, 592; United States v. Fairbanks, 95 F. 2d 794; Felin v. Kyle, 102 F. 2d 349. Cf. United States v. Virgin, 230 F. 2d 880. In the Macqueen case the form of a transaction was a sale but the substance was not, and the question of the amount of the tax was determined on the basis of the substance of the transaction. The reasoning of the Hale and the Smith cases, cited above, is pertinent here. The principle of Lucas v. Earl should not be put aside under the facts of this case. The conclusion which in my opinion caimot be escaped here might be different where a policy was not about to mature, or did not have a cash surrender value in an amount close to the full value at maturity, and where the taxpayer could recover his investment only through a sale to a third party. But here, the petitioner’s arrangement was no more than the adoption of a convenient intermediary step prior to the surrender of the policy to the obligor under the policy, which was not necessary from a practical viewpoint and which served no business purpose. Petitioner’s effort to substitute Barker and Reid for Connecticut Mutual as the payor of the sum accrued and due under the policy should not be given any effect and should not be recognized. And, the consideration of the issue should not be confused by the point that the so-called dividends paid under a policy by a mutual company constitute a return of premiums paid and, therefore, serve to reduce the taxpayer’s cost of the policy. The so-called dividends and their treatment may constitute something of a detriment to the taxpayer when the final accounting with the taxing authorities must be made, but such is the toll exacted by the far-reaching sweep of section 22 (a), and its reach cannot be avoided by neatly conceived anticipatory arrangements with agreeable parties! I respectfully dissent from the bolding that the arrangement with Barker and Eeid constituted “a real and bona fide sale,” and from the view that such authorities as Gregory v. UeVvering, and others relied on by respondent, and others above cited do not apply here.