Wong Wing Non v. Commissioner

Estate of Wong Wing Non, Deceased, Bank of America National Trust and Savings Association, Administrator, c. t. a., Petitioner, v. Commissioner of Internal Revenue, Respondent. Chinn Shee Wong, Petitioner, v. Commissioner of Internal Revenue, Respondent Wong Wing Non v. Commissioner Docket Nos. 33791, 33792 United States Tax Court 18 T.C. 205; 1952 U.S. Tax Ct. LEXIS 201; May 9, 1952, Promulgated *201 Decisions will be entered under Rule 50. Petitioners' decedent was the insured under a 20-year endowment life insurance policy. After having paid the premiums thereon for 10 years in the aggregate amount of $ 5,406, decedent became disabled within the meaning of the policy and premiums thereafter were waived pursuant to the provisions therein. Upon the maturing of the policy in 1945, decedent was paid the $ 10,000 as face amount of the policy and $ 1,648.19 as representing accumulated mutual insurance dividends and interest. Held, of the $ 11,648.19 received by decedent in 1945, the face amount of the policy, $ 10,000, is excludible under section 22 (b) (2) and (5) and the amount of $ 1,648.19 paid by the company as accumulated mutual insurance dividends and interest is taxable income. Frank C. Scott, C. P. A., for the petitioners. Leonard A. Marcussen, Esq., for the respondent. Van Fossan, Judge. Kern, J., concurs in the result. VAN FOSSAN *206 These proceedings involve deficiencies in income taxes for the year 1945, as follows: Docket No. 33791 $ 1,892.51 Docket No. 33792 $ 1,892.52 The Estate of Wong Wing Non has been substituted as party petitioner in Docket No. 33791 inasmuch as the original petitioner, Wong Wing Non, died pendente lite. In making his determination of deficiency, respondent included in petitioners' taxable income the excess of the amount received by them under a maturing endowment insurance policy over the aggregate of premiums paid on such policy. Respondent now concedes that a portion of the amount so received under the policy is excludible from gross income pursuant to section 22 (b) (5), Internal Revenue Code. The sole issue remaining*203 for our consideration is whether that portion of such amount as represents accumulated dividends and interest upon the policy fund should be taxed to petitioners. FINDINGS OF FACT. We adopt as our findings of fact the stipulation filed by the parties, together with the exhibit attached. The pertinent facts are as follows: The petitioners herein are the Estate of Wong Wing Non, deceased, and Chinn Shee Wong. At all times material to these proceedings, Wong Wing Non, hereinafter referred to as decedent, and petitioner Chinn Shee Wong, were husband and wife, residing in Stockton, California. They kept their accounts on the cash receipts and disbursements principle of accounting and so filed their returns for the taxable year 1945 on a community property basis with the collector of internal revenue for the first district of California at San Francisco. The notices of deficiencies here involved were mailed to petitioners on February 5, 1951. On or about the twenty-second day of June 1925, the decedent entered into a contract of endowment life insurance on his life with New York Life Insurance Company, a mutual company of New York, hereinafter referred to as the Company. This contract*204 was evidenced *207 by an endowment life insurance policy of that Company numbered 9,150,663, and duly executed by the officers of that Company on the thirtieth day of June 1925. The endowment life insurance policy provided, among other things, that the Company would pay to the insured (the decedent) on the twenty-second day of June 1945, the sum of $ 10,000, if the insured be then living, in consideration of the payment in advance of the sum of $ 568.60 (the first annual premium) and a like sum annually thereafter during the life of the insured until premiums for twenty full years in all had been paid from the effective date of the policy. The annual premium of $ 568.60 included, according to the terms of the policy, an annual premium of $ 10 for a certain "Double Indemnity Benefit" under the terms of the policy and an annual premium of $ 18 for certain "Disability Benefits" under the terms of the policy. The subtraction of these included annual premiums from the total premium of $ 568.60 leaves a remainder of $ 540.60 as premium for the endowment life insurance, the endowment terms of which have been described above. In order to complete a certain Convention Blank Annual*205 Statement prescribed for life insurance companies by the National Association of Insurance Commissioners, these parts of the total premium of $ 568.60 were shown in the Annual Statement as follows: $ 540.60 as premiums for "Life" 18.00 as premiums for "Disability Benefits" 10.00 as premiums for "Additional Accidental Death Benefits" The endowment life insurance policy also provided that if the insured should become wholly and presumably permanently disabled during the term of the policy, the Company would then and in that event pay him $ 100 per month during the endowment period and would waive the payment of premiums thereafter. In or prior to the month of June 1935, the insured became wholly and permanently disabled within the purview of the terms of the endowment life insurance policy and thereafter, during the remainder of the endowment period of the policy, received from the Company the cash disability benefits of $ 100 per month as provided in the policy. The initial annual premium of $ 568.60 received under the endowment life insurance policy was credited as revenue of the Company in its account entitled "Premiums -- First Year." The annual renewal premiums of $ 568.60*206 each received by the Company for the policy years beginning in the calendar years 1926 to 1934, both inclusive, were credited as revenue of the Company in its account entitled "Premiums -- Renewal." In order to comply with a certain Convention Blank Annual Statement prescribed for life insurance companies by the National Association of Insurance Commissioners and to exhibit the benefits allowed under the waiver provisions of the policy, the *208 Company's disbursement account entitled "Waived Premiums on account of Disability" was charged with $ 568.60 for each of the policy years beginning in the calendar years 1935 to 1944, inclusive, without any actual cash payment being made by the Company; and for each of the policy years beginning in the calendar years 1935 to 1944, inclusive, the amount of $ 568.60 was credited as revenue in its account entitled "Premiums -- Renewal." At the maturity of the endowment life insurance policy on June 22, 1945, or shortly thereafter, the Company paid to the insured (decedent) the full endowment benefits according to the terms of the policy, as follows: The face amount of the policy $ 10,000.00 Accumulated mutual insurance dividends and interest 1,648.19 Total amount received $ 11,648.19 *207 The amount so paid in settlement of the endowment life insurance provisions of the policy was in no wise reduced or diminished by any claim or offset by reason of the disability provisions of the policy having been effective for the last ten years of the endowment period. OPINION. We are called upon in these proceedings to determine the taxable gain realized by petitioner's decedent upon the maturity of a certain insurance policy prior to the death of the insured. The pertinent provisions of the Internal Revenue Code are section 22 (b) (2) and (5). 1 *208 *209 Petitioners' decedent, in 1925, took out a 20-year endowment life insurance policy in the face amount of $ 10,000. The policy provided, among other things, for waiver of premiums should the insured become permanently disabled, and for a double indemnity in case of the insured's accidental death. The payment of 20 annual premiums of $ 568.60 was called for in the policy. This amount included a $ 10 annual premium for the double indemnity provision and an $ 18 annual premium for the disability benefits. The remaining $ 540.60 was for the endowment life provisions. After the payment of 10 such premiums, the insured (decedent) became totally disabled. Thereafter, all premiums were waived and the insured was paid $ 100 monthly. Upon maturity of the policy in 1945, decedent was paid $ 10,000, representing the face amount of the policy and $ 1,648.19 as consisting of the accumulated dividends and interest. Respondent has conceded in his brief that the $ 10,000 received by decedent as the face of the policy is excludible from gross income under section 22 (b) (2) (A) and (5). 2 He accordingly views the issue as having narrowed as to whether the remaining $ 1,648.19, representing*209 accumulated dividends and interest upon the policy fund, should be included in the decedent's gross income. *210 Petitioners argue that the total amount of premiums paid ($ 5,406), plus the total amount of premiums waived ($ 5,406), or $ 10,812, should be excluded from gross income, and contend that such waived premiums were constructively received by petitioners as disability benefits. We are unable to follow petitioners to this conclusion. It is our opinion that petitioners have not established that the $ 1,648.19 constituted anything other than the "accumulated mutual insurance dividends and interest," as labeled by the parties in the stipulation filed herein. While "dividends" may be excluded from income as a reduction of premium, at the time of the periodic payment of premiums, they, nonetheless, become a taxable income item when the amount paid for the policy has been fully recovered. Regs. 111, sec. 29.22 (a)-12 and sec. 29.22 (b) (2)-1. Consequently, we hold that *210 the sum of $ 10,000, constituting the face amount of the policy paid by the company in 1945, is excludible and the remainder, or $ 1,648.19, is taxable as ordinary income. Decisions will be entered under Rule 50. Footnotes 1. 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 chapter: * * * * (2) Annuities, etc. -- (A) In general. -- Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. Amounts received as an annuity under an annuity or endowment contract shall be included in gross income; except that there shall be excluded from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the aggregate premiums or consideration paid for such annuity (whether or not paid during such year), until the aggregate amount excluded from gross income under this chapter or prior income tax laws in respect of such annuity equals the aggregate premiums or consideration paid for such annuity. * * * * * * * (5) Compensation for injuries or sickness. -- Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 23 (x) in any prior taxable year, amounts received through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness, and amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country;↩ 2. From Respondent's Brief: * * * petitioners are entitled under section 22 (b) (5) of the Internal Revenue Code to exclude from gross income the portion of the insurance proceeds attributable to the operation of the disability provision of the policy. It is considered that the amount to be so excluded should be the difference between the amount actually paid by the decedent for the endowment life feature of the policy, $ 5,406, and the face amount of the policy, $ 10,000. This difference, amounting to $ 4,594, represents the benefit received which is attributable to the disability provision of the policy. Petitioners are also entitled under section 22 (b) (2) (A)↩ to exclude the premiums actually paid by the decedent since to that extent the amount received in 1945 represents a return of capital. The balance of the amount received under the insurance contract, consisting of $ 1,648.19 in accumulated dividends and interest, is neither a return of capital nor a disability benefit but represents earnings on the fund while held by the insurance company and as such is properly includible in gross income.