Blaess v. Commissioner

Marvin J. Blaess and Mildred C. Blaess, Petitioners, v. Commissioner of Internal Revenue, Respondent Blaess v. Commissioner Docket No. 56361 United States Tax Court 28 T.C. 710; 1957 U.S. Tax Ct. LEXIS 152; June 25, 1957, Filed *152 Decision will be entered for the respondent. 1. Deductions -- Insurance Premiums -- Sec. 23 (a) (1) (A) and (a) (2), I. R. C. 1939. -- Petitioner, a doctor, acquired three disability insurance policies which provided that he would receive monthly payments in the event of disability from accident or sickness. The insurance policies did not provide for payments to reimburse petitioner for business overhead expenses incurred by him during disability in the operation of his office; they were not issued for business purposes. Held, that the insurance premiums paid in the taxable year were not ordinary and necessary expenses of petitioner's business, a medical practice. Held, further, that the insurance premiums were not ordinary and necessary expenses paid during the taxable year for the production of income or for the management, conservation, or maintenance of property held for the production of income. Therefore, the insurance premium expense is not deductible under either section 23 (a) (1) (A) or section 23 (a) (2), 1939 Code. 2. Nondeductible Personal Expense -- Sec. 24 (a) (1), 1939 Code. -- The monthly payments which petitioner could receive under the disability*153 insurance policies will replace earnings which petitioner might lose during a period of disability, and will constitute compensation for injuries or sickness. The terms of the insurance policies do not restrict application of such payments to business or any particular purpose; they can be used for living and personal expenses. Held, that the insurance premiums are nondeductible personal expenses under section 24 (a) (1). Marvin J. Blaess, pro se. Rutheled B. Wolter, Esq., for the respondent. Harron, Judge. HARRON *710 The Commissioner determined a deficiency in income tax for the taxable year 1951 in the amount of*154 $ 121.05. Several adjustments by the Commissioner are not contested. The only question is whether petitioner Marvin J. Blaess is entitled to a deduction for premiums on health and accident insurance policies in the amount of $ 431.80 under either section 23 (a) (1) (A) or section 23 (a) (2), 1939 Code. FINDINGS OF FACT. Petitioners reside in Gross Pointe Woods, Michigan. They filed a joint return and an amended joint return for the taxable year 1951 with the collector of internal revenue for the district of Michigan. The petitioner Mildred C. Blaess is before the Court because a joint return was filed. The issue to be decided relates to petitioner Marvin J. Blaess, and he is referred to hereinafter as the petitioner. Petitioner is a practicing physician in Detroit, Michigan. He was born on December 28, 1903. He has been licensed to practice medicine in the State of Michigan since July 6, 1933. Petitioner maintained *711 an office for the practice of medicine during the taxable year 1951 in conjunction with another doctor. On February 28, 1939, petitioner entered into an insurance policy contract with the Massachusetts Indemnity Insurance Company, which is called a "Non-cancellable*155 Silver Seal Disability Policy," and which is renewable to age 60. The coverage of the Massachusetts Indemnity policy is, in general, as follows: It provides for payments in the amount of $ 200 per month to be made to petitioner in case of total disability and total loss of all business time, resulting from accidental bodily injury or sickness, during the continuance of such total disability and loss; for payments in the amount of $ 200 per month in case of injury or sickness requiring confinement in a hospital or continuous attendance by a registered nurse, during a maximum period of 6 months; for payments in the amount of $ 200 per month for the rest of petitioner's life, in case of injury resulting in loss of one or both of his hands or feet or loss of sight of both of his eyes; and for payments in the amount of $ 100 per month in case petitioner should become partially disabled and unable to perform a majority of his occupational duties, during a maximum period of 6 months. No benefits are payable under the policy unless petitioner shall have the regular and frequent attendance of a physician throughout the period of disability. On February 12, 1951, petitioner entered into an*156 insurance policy contract with the Paul Revere Life Insurance Company, which is called a "Lexington Policy," and which is to run until petitioner's 65th birthday. The coverage of the Paul Revere policy is, in general, as follows: It defines "total disability" to mean "complete inability of the insured to engage in gainful occupations for which he is reasonably fitted," and it defines "partial disability" to mean "inability of the insured to perform a majority of his regular business duties." The policy provides for monthly indemnity payments in the amount of $ 200, for a maximum of 30 months, during any period of total disability requiring the regular and personal attendance of a licensed physician, resulting from accident or sickness, and for monthly indemnity payments in the amount of $ 100, for a maximum of 6 months, during any period of partial disability requiring the attendance of a licensed physician, resulting from accident. In lieu of monthly indemnity payments, the Paul Revere policy provides for a single payment in the amount of $ 2,000, in case of death, loss of both hands or both feet, loss of one hand and one foot, or loss of sight of both eyes; for a single payment*157 in the amount of $ 1,000 in case of loss of either hand or either foot; and for a single payment in the amount of $ 500 in case of loss of sight of one eye. Except in case of death, petitioner may elect to receive the monthly indemnity *712 payments provided for in the policy, instead of a single payment in case of a specific loss. On February 21, 1951, petitioner entered into an insurance policy contract with the American Standard Insurance Corporation, which was called a "professional full coverage non-cancellable income policy," and which was renewable to age 65. The coverage of the American Standard policy was, in general, as follows: It provided for a monthly indemnity in the amount of $ 200, to be paid in case of total disability from accident or confining sickness during the period of disability; for a monthly indemnity in the amount of $ 100 to be paid in case of partial disability from accident, or total disability from nonconfining sickness, during a maximum period of 3 months; and for a monthly indemnity in the amount of $ 100 to be paid in case of total disability from insanity or mental infirmity during a maximum period of 1 year. Benefits were to be paid under*158 the American Standard policy only while the insured was continuously under the professional care and regular attendance of a licensed physician or surgeon. Any benefits payable after age 65 were payable in one-half the amount provided in the policy. The maximum total monthly indemnity payable to petitioner in the event he became totally disabled, under all three policies which were in effect during 1951, was $ 600. The share paid by petitioner of the expenses of operating his office in conjunction with another physician during 1951 amounted to approximately $ 800 per month. The total costs paid by both doctors for operating the office included about $ 300 for rent, $ 285 for salary of one nurse, $ 250 for salary of another nurse, and $ 250 for salary of a receptionist, per month, in addition to costs of supplies and other miscellaneous expenses. All of the three insurance policies referred to above were in force in the year 1951. The American Standard policy was canceled by petitioner at the beginning of 1952. The premiums which petitioner paid on the policies in 1951 were as follows: $ 172.80 under the Massachusetts Indemnity policy; $ 160 under the Paul Revere policy; and $ *159 108 under the American Standard policy; or a total amount of premiums of $ 440.80. In his income tax return for 1951, petitioner deducted the amount of $ 875.11 as "Bus. & Prof. insurance." Respondent, in his notice of deficiency, disallowed $ 431.80, with the following explanation: It is held that premiums paid on health and accident insurance policies in the taxable year ended December 31, 1951, in the total amount of $ 431.80 are not deductible as business expense under section 23 (a) (2) of the Internal Revenue Code. The record contains no explanation for the discrepancy in the amount of $ 9, between the amount of $ 440.80 paid by petitioner as *713 premiums on health and accident insurance, and the amount of $ 431.80 disallowed by respondent. However, the premiums on the American Standard policy were paid by two checks dated February 7, 1951, and March 8, 1951, in the amounts of $ 9 and $ 99, respectively, and the discrepancy corresponds in amount to the former check. Petitioner claims a deduction of only $ 431.80. In the event that any benefits were to be paid to petitioner under any of the three indemnity insurance policies on which he paid premiums in the year 1951, *160 petitioner would be free to use the amount of such benefits for any purpose he desired. None of the policies contained any restriction on the uses to which payments received under the policies could be put. Petitioner was free to use such payments for personal, living, family, or medical expenses. He was not required to use them for the payment of office expenses. If petitioner qualified for any indemnities under any of the policies, such indemnities would be payable whether or not he continued to maintain his medical office. The amount of $ 431.80 paid by petitioner in the year 1951, as premiums on health and accident insurance policies, is a nondeductible personal expense; it is not an ordinary and necessary expense paid or incurred in carrying on a trade or business, and it is not an ordinary and necessary expense paid or incurred for the conservation or maintenance of property held for the production of income. OPINION. The sole issue for decision is whether premiums on three disability insurance policies, paid by petitioner in 1951, in the total amount of $ 431.80, are deductible under the provisions of section 23 (a) (1) (A) or section 23 (a) (2), 1939 Code, 1*162 or are nondeductible*161 personal expenses under the provisions of section 24 (a) (1). 2 *714 Respondent determined that the premium payments are not deductible under section 23 (a) (2). Petitioner contends that the premium payments are deductible as ordinary and necessary expenses of carrying on a trade or business, within the meaning of section 23 (a) (1) (A), or as ordinary and necessary expenses paid or incurred for the conservation or maintenance of property held for the production of income, within the meaning of section 23 (a) (2). A question under each section is raised by the pleadings. The allowance of deductions from gross income does not turn on general equitable considerations. It "depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed." New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440; Deputy v. Du Pont, 308 U.S. 488, 493.*163 "Deductions from an individual's taxable income are limited to those allowed by section 23. Their extent depends upon the legislative policy expressed in the fair and natural meaning of that section." Lykes v. United States, 343 U.S. 118. In construing statutory provisions under which deductions are sought, the meaning ordinarily attributable to the words in the statutory provisions is to be applied. Deputy v. Du Pont, supra. Not only does section 23 specify with limitations the deductions from taxable income which are allowable, but also section 24 specifies the expenses for which no deduction shall be allowed, namely, personal, living, or family expenses. Consideration is given first to petitioner's contention that the disability insurance premium expense is a business expense, deductible under section 23 (a) (1) (A). Petitioner's "business" is the practice of medicine, and in the conduct of his medical practice he maintains an office for which he incurs ordinary and necessary expenses. The three insurance policies involved were not issued to provide reimbursement for professional overhead expenses in cases*164 of prolonged disability of the insured. There are no provisions in any of the policies specifying that payments thereunder during disability are to defray or reimburse the holder for business overhead expenses of any kind, such as office expenses, rent, employees' salaries, and similar expenses actually incurred by the insured in the operation of his office. Rather, the policies provide indemnity for loss of life, limb, sight, and business time resulting from accidental bodily injuries and disability form sickness Each policy provides indemnity of $ 200 per month during a period of disability. Such monthly indemnity has no specified relationship to business expenses of any sort. Petitioner would receive the monthly payments under each policy regardless of whether any business expenses were incurred during disability. He could close his office, as he might have to do under some circumstances, and have no business *715 expense, and continue to receive the stated monthly payments without any reduction in the amount, namely, $ 200 per month under each policy. The monthly indemnity under each policy is for the purpose of compensating the insured for loss of business time, i. *165 e., for loss of earnings. Section 23 (a) (1) (A) allows deduction of all ordinary and necessary expenses paid or incurred during the taxable year "in carrying on any trade or business * * *." (Emphasis supplied.) In order to come within the scope of section 23 (a) (1) (A), the expenditure must proximately result from the business conducted by the taxpayer, Kornhauser v. United States, 276 U.S. 145; and it must be ordinary as well as necessary in the carrying on of the trade or business. Welch v. Helvering, 290 U.S. 111. Giving the words in section 23 (a) (1) (A) their ordinary meaning, the premiums paid in the taxable year by petitioner do not satisfy the requirements of the statute. The taking of the contracts of disability insurance did not proximately result from the operation of petitioner's business, 3 nor did the payment of the premiums which kept the policies alive. *166 The Commissioner, in a revenue ruling, Rev. Rul. 264, 1955-1 C. B. 11, has held that where a taxpayer purchases an insurance policy which, in accordance with its terms, would reimburse the taxpayer, to the extent specified in the policy, for certain business overhead expenses incurred by him during prolonged periods of disability due to injury or sickness, any premiums paid on such policy constitute business expenses and are deductible under the provisions of section 23 (a) of the 1939 Code. Petitioner relies upon this ruling. It is the only authority which he cites in support of his contention. Without any doubt, that ruling does not apply here because it is based upon entirely different facts and it relates to a wholly different insurance contract than the disability insurance policies which petitioner acquired. Petitioner argues, nevertheless, that he should be given the same allowance of deduction for the premiums which he paid because it is his intention to apply any indemnity payment which he may receive under his disability policies to pay his office expenses, in the event he becomes disabled and is thereby deprived of income from*167 his medical practice. We are obliged to reject this argument entirely. Petitioner's present intent cannot be determinative of the question. His mere declaration of his intent does not satisfy the requirements of section 23 (a) (1) (A). Cf. Anne Laughlin, 27 T. C. 23, 26. The premium *716 payments here involved are deductible as business expense only if they come within the terms and conditions of section 23 (a) (1) (A); petitioner's present intentions ae immaterial. It is held that the disability insurance premiums paid by petitioner in 1951 are not ordinary and necessary business expenses paid during the taxable year in carrying on his business and, therefore, they are not deductible under section 23 (a) (1) (A). In the alternative, petitioner contends that the insurance premium payments are nonbusiness expenses paid during 1951 for the conservation of property held for the production of income and, therefore, are deductible under section 23 (a) (2). Petitioner's argument is the same under this issue as above. That is to say, he asserts that he intends, if he becomes disabled, to use the monthly indemnity payments which he will receive to*168 pay his office expenses and, thereby, to conserve and maintain his medical practice, which, he argues, is "property held for the production of income." By this reasoning, petitioner claims that the disability insurance premiums are expenses paid or incurred for the conservation or maintenance of property held for the production of income. It is true that a medical practice is "property" for the purposes of the income tax statutes, cf. Alfred Meurlin, 25 T. C. 118, and it produces income. But in order to obtain deduction of the amount of the insurance premiums under section 23 (a) (2), petitioner must show that payment of such amount is reasonably or proximately related to the conservation of his medical practice. Cf. Warren Leslie, 6 T. C. 488, 494-495. Petitioner has not shown such proximate relationship. Furthermore, section 23 (a) (2) is applicable "to expenses on the basis of their immediate purposes rather than upon the basis of the remote contributions they might make to the conservation of a taxpayer's income-producing assets * * *." (Emphasis supplied.) Lykes v. United States, supra, p. 125.*169 Petitioner's claim is based upon his present belief of what he might do in the future if he incurs and pays business expenses out of indemnity payments during a period of disability. Petitioner's argument is not acceptable under the construction stated in Lykes v. United States, supra.His payments of the disability insurance premiums in 1951 were not for the immediate purpose of conserving or maintaining property held for the production of income; and, of course, they were not for the immediate production or collection of income. That such expense in 1951 might at some future time serve to accomplish the purpose stated in section 23 (a) (2), if petitioner chose to use indemnity payments in such way, is too remote a contingency to satisfy the requirements of that statutory provision. As has been noted above, the indemnity payments, under the terms of the disability insurance policies involved, are not for the payment *717 of expenses of maintaining or conserving petitioner's medical practice. Instead, they are to compensate for petitioner's loss of earnings, and to replace them, during a period of disability when petitioner would become unable*170 to render the personal services through which he receives income. Under the disability insurance policies, petitioner is free to use any and all indemnity payments for any purpose, including his personal needs and those of his family. The payment of the disability insurance premiums in question is not the kind of expense to which section 23 (a) (2) by its plain language applies. The insurance premiums were paid in 1951 to keep the insurance policies in effect. That purpose is not akin to the clear intent of the statute. United States v. Mellinger, 228 F. 2d 688, 692; Lykes v. United States, supra. Petitioner cites no authority in support of his claim for deduction of the disability insurance premiums under section 23 (a) (2), and we find none. It is held that the payments of the insurance premiums are not deductible under section 23 (a) (2). We are not obliged to decide a related question, whether the insurance premium expenses are personal expenses which are nondeductible under section 24 (a) (1), in order to disallow the deduction under either section 23 (a) (1) (A) or section 23 (a) (2). Allowance of the*171 deduction under either statutory provision depends upon whether either section makes clear provision for the deduction. New Colonial Ice Co. v. Helvering, supra;McDonald v. Commissioner, 323 U.S. 57. Our conclusion is that deduction of the insurance premium expense in question is not allowed by the clear provisions of either section 23 (a) (1) (A) or section 23 (a) (2). Nevertheless, since the insurance premiums were paid to maintain insurance policies which provide monthly indemnity payments during disability to compensate the insured for loss of earnings, and since under the provisions of the policies the insured (petitioner) is free to use such indemnity payments for his living expenses, or personal expenses, or the expenses of his family, it is concluded that the premium expenses are personal expenses, deduction of which is prohibited by section 24 (a) (1). Decision will be entered for the respondent. Footnotes 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (a) Expenses. -- (1) Trade or business expenses. -- (A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. * * * * * * * (2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.↩ 2. SEC. 24. ITEMS NOT DEDUCTIBLE. (a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of -- (1) Personal, living, or family expenses, except extraordinary medical expenses deductible under section 23 (x)↩; 3. This case is clearly distinguishable from those where a creditor pays premiums on policies of life insurance which are assigned to him by a debtor as security, and payments of premiums are made by the creditor with the hope of recovery of the full amount of the indebtedness. See Dominion National Bank, 26 B. T. A. 421; and Charleston National Bank, 20 T. C. 253, affd. 213 F. 2d 45, where insurance premium payments were held to be deductible under section 23 (a) (1) (A)↩.