Court Opinion

ID: 4628287
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:03:04.834744+00
Date Added: 2024-06-11T07:57:11.445701
License: Public Domain

CLARENCE W. MCKAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McKay v. CommissionerDocket No. 9465.United States Board of Tax Appeals10 B.T.A. 949; 1928 BTA LEXIS 3991; February 23, 1928, Promulgated *3991  Amounts paid by a partner of a portion of the insurance premiums on policies on the lives of himself and his partners under a partnership agreement, held not deductible as business expenses.  Clarence W. McKay, Esq., pro se.  J. F. Greaney, Esq., for the respondent.  SIEFKIN*949  This is a proceeding for the redetermination of a deficiency in income tax for 1924 in the amount of $54.95.  The only item in controversy is the disallowance as a deduction from gross income for such year of $808.78, insurance premiums paid by petitioner in 1924.  FINDINGS OF FACT.  On January 2, 1923, the petitioner, Carlton F. Bown, and Byron A. Johnson formed a partnership for the practice of law continue to December 31, 1923.  Petitioner had a 40 per cent interest, Bown 37 per cent, and Johnson 23 per cent.  By agreement dated February 1, 1924, the partnership continued through the year 1924, which agreement, so far as material here, was as follows: WHEREAS the parties hereto entered into an agreement of co-partnership dated the 2nd day of January, 1923, to continue for one year, and WHEREAS the parties hereto desire to continue such partnership for one*3992  year from January 1st, 1924, on the same terms and conditions with the additions and exception herein specified, and WHEREAS on the 1st day of February, 1924, life insurance on the lives of each of the co-partners was issued to each individually, payable to the estate of each, by the National Life Insurance Company of Vermont in the following amounts: Mr. McKay $14,000, Mr. Bown, $13,000, Mr. Johnson $8,000, and WHEREAS such insurance was taken with the design of making it a firm matter under an agreement to be executed, *950  NOW THEREFORE, this agreement witnesseth, that in consideration of the foregoing premises and in consideration of the mutual covenants of the parties herein contained, they agree as follows: That such co-partnership agreement be and the same hereby is continued under the same terms except as herein specifically notied, for one year from January 1st, 1924, which term will end December 31st, 1924.  That the premiums on the policies above mentioned shall be paid by the co-partnership and the said policies shall be forthwith assigned by each individual member to the co-partnership.  In the event of the death of any member of the co-partnership during*3993  the term of this agreement, or during any continuance of the co-partnership and previous to either a renewal agreement or a decision not to renew, the proceeds of the policy on the life of such decedent shall be paid forthwith when received to the estate of said decedent in full of his interest in the co-partnership assets and the interest of said decedent in such assets of the co-partnership including physical assets, good will, and all uncompleted business and accounts receivable shall terminate with the death of said decedent and vest in and be the property of the surviving members of the co-partnership.  In case of the termination of the co-partnership by mutual agreement or otherwise prior to the death of any member, the cash surrender value of the said policies of life insurance shall be collected by the co-partnership and be an asset thereof.  Any member of the co-partnership, however, may elect under such circumstances to take over the policy on his own life by paying to the terminated co-partnership a sum equal to its surrender value.  In case, however, at the termination of the co-partnership by mutual agreement, or otherwise than by the death of any partner, one should*3994  withdrawl and instead of dividing the assets, should elect to have his share paid in cash, and the other two remaining members should elect to continue the business by an agreement between them, then and in that event the remaining members shall have at their election the right to continue the insurance on the life of the withdrawing partner for the period of two years instead of assigning the same to him on payment of the surrender value thereof.  In case of the death of such withdrawing partner within the period of two years, the proceeds thereof shall be collected by the remaining partners who shall deduct therefrom (1) the amount paid in premiums by the remaining members and (2) all sums paid to the withdrawing partner at or since his withdrawal in settlement of his co-partnership interest.  The balance of the proceeds of such policy if any shall be paid by them to the estate of the withdrawing partner.  In case this election is not exercised by the remaining partners, or if exercised, at the expiration of the two years, the policy shall be surrendered to the company for the benefit of the partnership, or if he desires, to the withdrawing partner on payment of its cash surrender*3995  value as above provided.  Any payments under the policies on account of disability of any member, shall be paid to the partnership so long as the insured shall continue a member thereof.  If he ceases to become a member of the partnership and tales an assignment of the policy on payment of the cash surrender value, such disability claim shall be paid to him.  If in case of the withdrawal of one partner, the others should elect to continue the business and carry the policy for the period of two years as above provided the withdrawing member alone shall be entitled to any payments accruing by virtue of the terms of the policy on account of his disability.  IT IS FURTHER understood and agreed that the policy on Mr. Johnson's life shall be treated as an eight thousand dollar policy so far as the co-partnership *951  is concerned, and that the remaining two thousand dollars shall be treated as entirely personal to him, and that the pro rata premium paid for the additional two thousand dollars shall be charged to his account on the books of the co-partnership.  On the same date the National Life Insurance Co. of Montpelier, Vt., insured the petitioner against death in the principal*3996  sum of $14,000, and issued a policy payable to his executors, administrators and assigns and containing a reservation of the right to change the beneficiary.  The annual premium payable on such policy was $726.46.  On February 26, 1924, the petitioner executed and delivered to the partnership of McKay, Bown & Johnson an absolute assignment of such policy and such assignment was received and filed by the insurance company on March 1, 1924.  The premiums payable on the above policy were paid by the partnership which also paid the premiums on the policies on the lives of Bown and Johnson.  The petitioner was, during 1924, charged by the partnership with $808.78 of such premiums, such amount being ascertained by taking 40 per cent of the total premiums paid on the policies on the lives of all three partners.  He deducted such amount of $808.78 as a business expense in ascertaining his net income subject to tax in 1924, and the respondent, in determining the deficiency herein, disallowed such deduction.  OPINION.  SIEFKIN: The petitioner, on the one hand, contends that the sum of $808.78 is a business expense and so properly deductible.  The respondent, on the other hand, points*3997  to section 215(a)(4) of the Revenue Act of 1924, which provides that in computing net income no deduction shall in any case be allowed in respect of - Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy. (Italics supplied.) and also to section 215(a)(1), which prohibits a deduction for "Personal, living or family expenses." We have here a different situation from that which we considered in , and in , where the insurance policies were used as security for a loan.  Here we have a situation in which each of three partners has his hife insured and immediately assigns the policy to the partnership.  By agreement the proceeds of the policy, in the event of death, are to be paid by the partnership to the estate of the deceased partner - in full of his interest in the co-partnership assets and the interest of said decedent in such assets of the co-partnership including physical assets, *3998  good will, *952  and all uncompleted business and accounts receivable shall terminate with the death of said decedent and vest in and be the property of the surviving members of the co-partnership.  It is further provided that in the event of the termination of the partnership by mutual agreement or otherwise, prior to the death of any member, the cash surrender value of each of the policies was to be collected by the partnership and thereupon became an asset of the partnership, the right being reserved to each member to pay into the firm the cash surrender value of the policy on his life and to take over said policy.  It is further provided that upon the withdrawal of any member electing to have his share paid in cash, the remaining members might elect to continue the insurance on the withdrawing member for two years instead of assigning the policy to him on payment of the surrender value.  In such a case, and if death of the withdrawing partner occurred within the two years, any balance after deducting premiums paid by the remaining members and sums paid to the withdrawing member in settlement was to be paid to the estate of the withdrawing partner.  Although it appears*3999  from the evidence that the agreement was made to facilitate settlement of claims of a deceased partner's estate, it must be pointed out that no one of the partners knew whether he would be a surviving partner or would be known as "the decedent" when the event insured against occurred.  Each was interested as much in seeing that his estate was paid a certain amount expeditiously if the policy on his life was the one which matured by death as he was in knowing that if he were one of the two survivors the firm might proceed without liability to the estate of the third above the amount of the policy on the life of the third.  Each was protected, if he lived or if he died, and it is fair to assume that there was no overreaching on either side.  It has been assumed by both parties here, as it was assumed by the respondent in his determination of the case in the Bureau, that the premium of $808.78 was upon the petitioner's life.  We do not believe that to be the case, and we have found that amount to be the petitioner's 40 per cent of the premiums upon the lives of himself, Bown, and Johnson.  It is apparent, therefore, that the payment has a double character.  To the extent of 40 per cent*4000  of $726.46 (the premium on the policy on his own life), the petitioner is paying for protection on his own life and his principal interest as to that must be for his estate.  To the extent of the balance, he is paying for protection on the lives of his partners on the presumable theory that he, as a surviving partner, will benefit.  Under such circumstances we can not say that the petitioner is not directly or indirectly *953  a beneficiary of the policies of life insurance as to which he paid the premiums or that, if the benefit be construed to flow to his estate, the deduction is not a personal or family expense.  Judgment will be entered for the respondent.