Court Opinion

ID: 4589436
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:44:11.605689+00
Date Added: 2024-06-11T07:58:35.358106
License: Public Domain

STROUD & COMPANY, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stroud & Co. v. CommissionerDocket No. 104012.United States Board of Tax Appeals45 B.T.A. 862; 1941 BTA LEXIS 1063; December 2, 1941, Promulgated *1063  1.  In June 1932 Stroud & Co., a Delaware corporation, found itself in financial diffculties.  In order to enable it to pay its debts and to continue the business a new corporation, called the New Jersey company, was organized with the same name.  The Delaware company transferred to the New Jersey company certain liquid assets and also its interest in insurance policies on the life of Edward B. Robinette, a former officer of the Delaware company, and received 900 shares of the New Jersey company's preferred stock.  The reorganization was effected under an agreement dated June 9, 1932, which provided for the application of the proceeds of the insurance policies in a manner which would benefit both the Delaware company and the New Jersey company.  Held, that the transfer was for a valuable consideration and section 22(b)(2), Revenue Act of 1936, governs the amount of taxable gain.  2.  Premiums paid by the transferee, even if claimed and allowed as deductions in previous years, are exempt from taxation under section 22(b)(1).  Thomas R. White, Esq., and Bernard V. Lentz, Esq., for the petitioner.  Eugene G. Smith, Esq., for the respondent.  VAN FOSSAN*1064 *862  The respondent determined a deficiency of $29,687.41 in the petitioner's income tax for the year 1936 and a deficiency of $5,202.99 in its excess profits tax for the same year.  The primary issue is whether or not the proceeds of life insurance policies are includible in the petitioner's gross income under the provisions of section 22(b)(2) of the Revenue Act of 1936.  The specific question is whether or not a transfer was made for a valuable consideration.  If such proceeds are so includible, the petitioner asserts that it is entitled to deduct from the proceeds all premiums paid by it even if some of the payments had been allowed as deductions in previous years.  FINDINGS OF FACT.  Certain facts were stipulated and we adopt them as our findings of fact.  Such facts are substantially as follows: The petitioner is a corporation incorporated under the laws of the Commonwealth of Pennsylvania, with its principal office at 1429 Walnut Street, Philadelphia, Pennsylvania, and is the successor by statutory merger, effective July 1, 1939, to "Stroud & Company, Incorporated", a corporation incorporated under the laws of the State of New *863  Jersey (hereinafter*1065  referred to as the New Jersey company).  As a result of the merger, the petitioner acquired all the assets and franchises of the New Jersey company and became directly and primarily liable for all Federal tax liabilities, if any, of the New Jersey company.  The income tax return for the year 1936 was filed by and on behalf of the New Jersey company with the collector of internal revenue for the first district of Pennsylvania.  During the calendar year 1936 the New Jersey company received a total of $151,012.96 as life insurance proceeds upon policies insuring the life of Edward B. Robinette, by reason of the death of the insured on March 7, 1936.  The said sum of $151,012.96, plus premiums in the amount of $6,120.64 paid by and allowed as deductions to the New Jersey company during the years 1932 to 1935, inclusive, and additional premiums in the amount of $149.18 paid by the New Jersey company and claimed as a deduction in the year 1936, less the cost of the policies as determined by the respondent in the amount of $52,062.48, represents the gain on life insurance proceeds in the amount of $105,220.30, as computed by the respondent.  The life insurance policies were originally*1066  applied for and taken out between 1922 and 1928 by "Stroud & Company, Inc.", a corporation incorporated under the laws of Delaware (hereinafter referred to as the Delaware company), and were owned by it until June 1, 1932.  Throughout the period of its ownership of the policies, the Delaware company was named as sole beneficiary therein and paid the premiums due thereon.  During the same period the insured, Edward B. Robinette, was an officer, stockholder, and director of the Delaware company.  By a document designated a bill of sale, effective on June 1, 1932, the Delaware company transferred assets aggregating $333,191.43, including the said life insurance policies, to a new corporation, the New Jersey company, which had been formed on May 27, 1932, to take over the business and the liquid assets of the Delaware company under an agreement of reorganization reduced to writing on June 9, 1932.  From and after the date of the agreement of reorganization, the New Jersey company was named as beneficiary in the life insurance policies and paid the premiums due thereon until the death of the insured on March 7, 1936.  Immediately prior to June 9, 1932, the insured, Edward B. Robinette, *1067  terminated all official connection with the Delaware company and was at no time an officer of the New Jersey company; but in accordance with a written agreement dated March 30, 1932, he continued to assist the New Jersey company in obtaining business and the latter company retained an economic interest in his life until the time of his death.  *864  The reorganization which occurred under the agreement of June 9, 1932, was made necessary by reason of the seriously impaired financial condition of the Delaware company and the terms of the reorganization were dictated by its creditors.  Among the terms so dictated was a provision incorporated in the agreement of reorganization dated June 9, 1932, requiring that any proceeds derived from the life insurance policies from and after the date of the transfer of June 1, 1932, be paid to the trustee representing four Philadelphia banks, in liquidation of the obligations owing to such banks by the Delaware company, such proceeds to be held and applied by the trustee substantially in the following manner: The proceeds of any insurance policy paid to the trustee (including specifically those held on Robinette's life) were to be treated*1068  in the same manner as monies paid to it as dividends on common stock of the new (New Jersey) company.  The common stock dividends were to be used to purchase any remaining assets of the old (Delaware) company to assist in paying its debts.  Assets so purchased were to be transferred to the New Jersey Company as contributed surplus.  After all assets of the old company were disposed of, the dividends were to be used for the direct payment of the old company's debts.  When the debts were paid in full the balance of the dividend fund and proceeds from life insurance policies were to be paid to Samuel A. Crozer, Homer Reed, Jr., Robert G. Rowe, and R. V. Mosley, parties of the fourth part to the reorganization agreement, in proportion to their holdings of common stock in the New Jersey Company.  At the time of the transfer such obligations far exceeded the combined value of the life insurance policies and the assets remaining in the Delaware company.  The reorganization agreement of June 9, 1932, was amended and superseded by an agreement dated January 25, 1933, but effective as of June 9, 1932.  In so far as material here the amended agreement did not alter the terms of the original*1069  agreement of June 9, 1932.  The liabilities assumed by the New Jersey company set forth in the bill of sale aggregated $243,191.43 but did not include the obligations owing by its predecessor, the Delaware company, to the Philadelphia banks.  The New Jersey company gave nothing to the Delaware company in exchange for the liquid assets which it acquired under the agreement of reorganization dated June 9, 1932, except 900 shares of its preferred stock of no par value, and the value of the shares of stock was based exclusively on the value of such liquid assets, the New Jersey company having been formed for the sole purpose of employing those assets in carrying on the same business previously operated by its predecessor, the Delaware company.  Upon the death of the insured, Edward B. Robinette, the New Jersey company received the insurance proceeds free and clear of claims against the Delaware company, the obligations owing from the Delaware company to the Philadelphia banks having been theretofore *865  discharged through payments made by or on behalf of the Delaware company, but not by the New Jersey company.  The obligations owing by the Delaware company to the Philadelphia*1070  banks were discharged in full on April 29, 1935, and on May 16, 1935, the Delaware company was completely liquidated.  The New Jersey company, being the only shareholder entitled to share in the liquidation, received the only remaining assets of the Delaware company, consisting of 670 out of the 900 shares of the New Jersey company's preferred stock issued under the bill of sale dated June 1, 1932.  At the same time, the balance (230) of the preferred shares originally so issued, was also returned to the New Jersey company in discharge of a cash advance made by the New Jersey company to the Delaware company to cover the expenses of its liquidation.  The premiums actually paid by the New Jersey company and by its predecessor, the Delaware company, in carrying the life insurance policies totaled many thousands of dollars and are set forth in Exhibit B attached to the petition.  The premiums allowed as deductions in the amount of $6,120.64 for the years 1932 to 1935, inclusive, and added to income for the year 1936 were paid by the New Jersey company as follows: YearPremiums paid1932$531.0019331,525.0119342,950.5019351,114.136,120.64*1071  The foregoing amounts were claimed and allowed as deductions in computing the New Jersey company's taxable net income for the years 1933, 1934, and 1935, respectively, and in computing its net loss for the year 1932.  The record discloses the following additional facts: Philadelphia Liquidators, Inc., became the successor to the Delaware company and confined its activities solely to liquidating the Delaware company's assets.  The plan of reorganization adopted shortly before June 1, 1932, and formally reduced to writing on June 9, 1932, was necessitated by the fact that the Delaware company would have been unable to obtain licenses to do business if it had submitted a balance sheet showing insolvency.  Samuel A. Crozer, Robert G. Rowe, Homer Reed, Jr., R. V. Mosley, Arthur B. Miller, J. C. Marsh, and R. C. Kurts were the stockholders and officers of the Delaware company.  *866  OPINION.  VAN FOSSAN: The issue as here drawn is whether or not a valuable consideration passed from the New Jersey company to the Delaware company for the transfer of the insurance policies on the life of Edward B. Robinette.  If it did, the amounts received by the petitioner, as successor*1072  to the New Jersey company, by reason of the death of Robinette, less the actual value of the consideration and the amount of the premiums and other sums subsequently paid by the transferee, are includible in income.  Section 22(b)(1) and (2) of the Revenue Act of 1936 1 governs the situation.  The petitioner concedes*1073  that if the bill of sale of June 1, 1932, were to be considered alone, the Delaware company voluntarily transferred its interest in the insurance policies to the New Jersey company for the stock of the latter company, a valuable consideration.  However, it assumes the position that the New Jersey company actually had no interest in the policies, but that it merely held them under the dictation of the creditor banks in order to effect the payment of the Delaware company's debts.  It then argues that in reality the policies continued to be held by and for the Delaware company under the control of its creditors and that hence there was no real transfer, but that only a sort of trust relationship was created under which the entire benefit of the policies would inure to the Delaware company.  The petitioner's view of the situation is not complete.  It ignores the dual purpose of the reorganization.  True, one object was to pay the Delaware company's debts, if possible.  But that could have been accomplished by a receivership or other form of liquidation.  The other and more important purpose was to enable Stroud & Co. to continue its business under its own name and with the advantages*1074  of its business reputation and good will.  The New Jersey company undertook to justify that business purpose.  In fact, it is apparent that the creditor banks relied on it and its successful operation to assist materially in the ultimate payment of the Delaware company debts.  A careful inspection of the reorganization agreement shows that the New Jersey company *867  and its officers were meticulously circumscribed in their functions, salaries, and activities, to accomplish that end.  But that was the price which the New Jersey company and its officers and stockholders had to pay in order to carry on the Stroud & Co. business.  Their vital concern was to weather the financial storm and to emerge therefrom unencumbered by the weight of the frozen assets which the Delaware company retained.  We note that only four of the seven Delaware company stockholders became the sole stockholders in the New Jersey company.  They were willing to gamble on the eventual rehabilitation of the enterprise through the reorganization plan, and the creditor banks were also willing to chance the payment of the Delaware company obligations to them by such means.  In keeping with those motives and*1075  purposes the insurance policies were included in the transfer of assets from the Delaware company to the New Jersey company.  At the time of their transfer they were potentially of considerable value.  If Robinette had died before all the Delaware company debts had been paid, the proceeds of the insurance policies would have been applied as set forth in our findings of fact.  If only a portion of them had been required to purchase the remaining assets of the Delaware company or to satisfy its debts, the rest of the proceeds would have gone to the sole stockholders of the New Jersey company in proportion to their stock ownership.  Thus, a very real benefit would have been gained by the New Jersey company and its stockholders.  That outcome was contemplated at the time of transfer and certainly was of value to the New Jersey company.  The fact that the New Jersey company paid the premiums on the policies for five years also is indicative that it considered them both potential and actual valuable assets.  We find nothing in the record showing that the New Jersey company was compelled to pay the premiums.  It is stipulated that the New Jersey company retained an economic interest in*1076  Robinette's life.  That fact likewise imputed value to the transfer.  A retrospective survey of the events set forth in the findings of fact affords the petitioner no support.  The fortuitous circumstance that the Delaware company's debts were paid prior to Robinette's death, enabling the petitioner's predecessor (New Jersey company) to collect insurance of over $150,000 thereby, confirmed the hope, expectation, and belief of the New Jersey company and its stockholders that the Delaware company would be successfully liquidated.  The provision of the reorganization agreement that the proceeds from the insurance policies were to be used to purchase from the Delaware company assets which would be transferred to the New *868  Jersey company as contributed surplus furnishes further proof that the consideration for the transfer was valuable.  We conclude, therefore, that while the transfer of the insurance policies may have been for the primary purpose of facilitating the payment of the Delaware company's debts, the direct benefits to the New Jersey company were several and real and a valuable consideration therefor.  Certainly petitioner has not proven respondent to be in error*1077  in his holding that the transfer of the insurance policies was for a valuable consideration.  The respondent has filed no brief, but has submitted a memorandum of authorities stating that he relies on  (affirming memorandum opinion of the Board, June 30, 1939); ; and . The King Plow Co. case is authority for the general principle that where an insurance policy is acquired with other assets for stock, in a nontaxable reorganization merger, the transfer is for "a valuable consideration." We are of the opinion that here the policies were transferred as a part of the assets for which the stock was given and to that extent the cited case applies.  The petitioner raises the further issue that it may deduct from the proceeds of the insurance policies all premiums paid by its predecessor, regardless of the fact that they may have been allowed as deductions in previous years.  The respondent has added to the net proceeds of the policies, after deducting their cost, the sum of $6,120.64 representing premiums paid by*1078  the New Jersey company during 1932 to 1935, inclusive, and also $149.18, so paid by it in 1936.  Apparently he seeks to justify his action on the ground that such amounts were claimed and allowed as deductions in previous years.  We find no statutory authority for respondent's action in adding the premiums to petitioner's gross income.  Section 22(b)(2) specifically states that the actual value of the consideration and the amount of premiums and other sums subsequently paid by the transferee shall be exempt under section 22(b)(1).  The premiums here were paid by the transferee (the petitioner's predecessor) and hence serve to increase the exemption.  As we said in , "we are not dealing with the ordinary case but with the proceeds of life insurance contracts in respect of which Congress has seen fit to legislate specifically." We also observed: The fact that the petitioner might be permitted a deduction in some year by reason of the worthlessness of the corporate stock does not change the situation, for Congress has seen fit to deal specifically with the proceeds of life insurance and we must apply the statute as it is enacted.  *869 *1079  In the case at bar no reference is made in the statute to deductions claimed or allowed relating to such "premiums and other sums subsequently paid by the transferee" either during the taxable year or theretofore.  The language of the statute is clear and unambiguous.  We must apply it as we find it.  Therefore, the amount of the premiums aggregating $6,269.82 should be deducted from the $105,220.30, computed by the respondent to be the taxable gain on the life insurance proceeds.  The respondent's motion, made at the hearing, to strike from the record the testimony of Norman Baumm, the petitioner's witness, relating to the discussions and understandings of the parties to the June 9, 1932, agreement prior to its execution is denied.  An exception is allowed.  Decision will be entered under Rule 50.Footnotes1. SEC. 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 otherwise (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); (2) ANNUITIES, ETC. - * * * In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) of this paragraph. ↩