Yarnall v. Commissioner

Alexander C. Yarnall, Petitioner, v. Commissioner of Internal Revenue, Respondent Yarnall v. Commissioner Docket No. 12998 United States Tax Court 9 T.C. 616; 1947 U.S. Tax Ct. LEXIS 70; October 9, 1947, Promulgated *70 Decision will be entered for the respondent. Income -- Nondeductible Item -- Premiums on Life Insurance -- Section 24 (a) (4). -- Premiums on life insurance upon the life of a debtor-partner paid by the creditor-partner are nondeductible under section 24 (a) (4), I. R. C. H. Ober Hess, Esq., for the petitioner. William H. Best, Jr., Esq., for the respondent. Murdock, Judge. MURDOCK *616 The Commissioner determined deficiencies of $ 2,472.71 and $ 2,422.60 in the petitioner's income tax for the calendar years 1943 and 1944. The only issue for decision is whether the petitioner is entitled to *617 deduct for each year the amount which he paid in that year as premiums on policies of insurance on the life of his debtor and partner in his brokerage business, Herbert V. B. Gallager. *71 FINDINGS OF FACT. The petitioner filed his individual returns for the years in question with the collector of internal revenue for the first district of Pennsylvania. The petitioner and Herbert V. B. Gallager had been partners in the securities brokerage business in Philadelphia at least since 1925 and were still partners in that business during the taxable years. The firm had heavy losses for 1929 and for several years thereafter. The losses were so heavy that the capital of all partners other than the petitioner was exhausted and a large part of his capital was lost. A new partner was taken into the business in June 1932. Gallager gave his note in the amount of $ 189,535.66 to the petitioner on May 31, 1932. It represented his share of prior firm losses paid by the petitioner. Thereafter, Gallager withdrew from the firm only sufficient funds to cover his living expenses and taxes. If his share of the earnings of the partnership for a year exceeded the amount which he had withdrawn, the excess was paid to the petitioner and credited on the debt due him from Gallager. But if there was a loss, or if Gallager's share of the earnings was less than the amount he had withdrawn during*72 the year, the indebtedness was increased. Gallager signed a new note at the end of each year for the new balance. The indebtedness thus fluctuated from year to year and amounted to $ 168,728.17 at the end of 1943 and to $ 128,612.20 at the end of 1944. No interest was charged on the indebtedness after 1936. The petitioner held policies of insurance on Gallager's life during each of the taxable years. He held two policies for $ 50,000 each during 1943 and two policies for $ 50,000 each and one for $ 25,000 during 1944. Policy No. 1018652 in the New England Mutual Life Insurance Co. in the amount of $ 50,000 was taken out on December 31, 1938. It contained a provision that it was payable at the death of the insured "to Alexander C. Yarnall, business associate of the Insured, and to the executors, administrators or assigns of said business associate." It also provided: "The Insured shall have no right to change the beneficiary and shall have no right, title or interest whatsoever in the policy." All incidents of ownership in the policy were vested in the beneficiary, including the right to change the provisions governing control of the policy. The petitioner held that policy during*73 1943, but did not hold it during 1944. The record does not contain any explanation of why he ceased to hold that policy. *618 All of the policies above mentioned, while held by the petitioner, were held as collateral for Gallager's indebtedness under an agreement entered into in 1941, which provided that any part of the insurance proceeds in excess of Gallager's indebtedness should be paid to his estate or appointees. That agreement also provided that the premiums on the policies should be paid by Gallager or added to his indebtedness to the petitioner, but petitioner orally agreed in January 1943 that he would pay the premiums, would not charge them to Gallager, and would forever waive any right to be reimbursed for them. The petitioner paid premiums on the policies of $ 3,273.95 during 1943, ($ 971.00 of which was on New England Mutual Policy No. 1018652) and of $ 3,865.80 during 1944. He claimed deductions in those amounts on his returns, and the Commissioner, in determining the deficiencies, disallowed the deductions. The stipulation of facts is incorporated herein by this reference. OPINION. The petitioner argues that the premiums here in question are deductible under*74 section 23 (a) (1) (A) or (a) (2), since they were paid by a creditor to obtain some collateral security for an indebtedness which exceeded the face amount of the policies. He also argues that the deductions are not to be disallowed by reason of section 24 (a) (4), which provides: * * * no deduction shall in any case be allowed in respect of -- * * * * (4) 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. The petitioner concedes that the present case comes precisely within the words of that provision, but contends that the words should not be read literally, while forgetting the object which Congress intended the provision to accomplish. The words of statutes are sometimes not read literally ( Harrison v. Northern Trust Co., 317 U.S. 476; Central Hanover Bank & Trust Co. v. Commissioner, 159 Fed. (2d) 167), where some obvious and overriding purpose would be frustrated by the literal interpretation. However, *75 the unambiguous words of section 24 (a) (4) can not be disregarded in the absence of some compelling indication that Congress did not intend them to apply to a situation like the present or that it intended them to remedy some particular evil of which the present situation is not a part. The petitioner says that Congress meant to prohibit a deduction only where the life insurance was actually taken out as a hedge against the adverse effect upon the taxpayer's business of the death of the *619 insured employee or other person financially interested in the business, and the obvious mischief which Congress must have had in mind was a corporation insuring the life of its president and partners mutually insuring each other, in an effort to bridge the financial gap which would be left by the untimely death of the insured. He says reasons are apparent why a deduction should not be allowed in such circumstances, but he can think of none for denying a deduction where the relation giving rise to the insurance is that of debtor and creditor and the other relationship is merely collateral and coincidental. This provision has been applied mostly in cases in which the taxpayer has used the*76 insurance to obtain a loan. The petitioner concedes that this provision has been in the law for many years without comment in the committee reports of Congress. Thus, there is nothing to indicate what Congress meant except the words themselves. The theory of the petitioner does not emerge forcefully from those words or from any reason or policy which we would be justified in assuming that Congress had in mind. Here, a member of a partnership, in the course of business, has obtained a loan from another member of the firm and the latter has paid the premiums on insurance which he holds as security for the indebtedness. The petitioner regarded Gallager as important in the partnership business and wanted him to continue. His continuance also provided a means whereby he might repay some of the indebtedness. Gallager's death before payment of this indebtedness might have an adverse effect upon the business of the petitioner and the insurance would be a hedge against that possibility. We are unable to say under the circumstances of this case that Congress did not intend section 24 (a) (4) to cover such a situation. That being so, it is unnecessary to consider the petitioner's other*77 contentions under section 23 (a) (1) and (2). Decision will be entered for the respondent.