Pillsbury v. Commissioner

ALFRED F. PILLSBURY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Pillsbury v. Commissioner Docket No. 37237. United States Board of Tax Appeals 19 B.T.A. 1229; 1930 BTA LEXIS 2245; May 28, 1930, Promulgated *2245 Income in 1924 and 1925 of a trust created by petitioner in 1922 for the purpose of paying premiums on life insurance policies on his own life is held taxable to petitioner in 1924 and 1925 under the provisions of section 219(h) of the Revenue Acts of 1924 and 1926. James B. Templeton, Esq., for the petitioner. Philip A. Bayer, Esq., for the respondent. SEAWELL *1229 This proceeding involves deficiencies in income tax as determined by the Commissioner for 1924 and 1925 in the respective amounts of $2,688.26 and $1,167.59. Two issues are involved: (1) Whether the Commissioner erred in including the net income of a certain trust as a part of petitioner's taxable net income, and (2) whether section 219(h) of the Revenue Acts of 1924 and 1926 is constitutional. The facts were stipulated, from which we make the following findings. FINDING OF FACTS. The petitioner is an individual and has his office in Minneapolis, Minn. On December 30, 1922, the petitioner created a trust, under the terms of which he caused to be issued, assigned, transferred and set over certain life insurance policies on his own life in favor of a trustee (Minneapolis*2246 Trust Co.) and at the same time assigned, transferred, conveyed and set over to the said trustee certain bonds, which were described as having a value of $150,000. The insurance policies and bonds were accepted by the trustee for the following uses and purposes. To collect the income, returns and avails of and from said bonds, or of any evidences of indebtedness which may be substituted therefor, as hereinafter provided, and to expend the same in the following manner, to wit: (1) To pay any government income tax or other tax charges on said property so held in trust. (2) To pay the fees, charges and expenses, if any, of the trustee. *1230 (3) To pay the premiums or charges payable as the same may accrue with respect to said policies, and all of them, so as to keep and maintain the same in force and effect until the maturity thereof, whether by reason of the terms thereof or by reason of the death of the assured thereunder. (4) To pay the balance of said income, if any, to the party of the first part. The insurance policies which were issued prior to December 30. 1922, named petitioner's wife or his estate as beneficiary, with the right reserved to change the*2247 beneficiary, and the policies issued immediately after December 30, 1922, named the Minneapolis Trust Co., trustee, as beneficiary, with the right reserved to change the beneficiary. The trust agreement provided that upon the death of the petitioner, and after the proceeds of the said life insurance policies have been paid to the trustee, the property of said trust was to be held in trust by the trustee for the benefit of Eleanor F. Pillsbury, wife of the petitioner, and was to be distributed to her not sooner than six months after the death of the petitioner and in no event more than eighteen months after his death. The trustee was given authority, in its discretion, to sell and dispose of the bonds which were transferred to it or other securities which might be substituted therefor and invest the proceeds in other securities for the benefit of the trust. The insurance policies were made payable to the Minneapolis Trust Co. as trustee and such trustee was given authority to pledge such policies as collateral, surrender for cash or paid-up insurance or avail itself of any option granted in the policies. It was provided further that no duty should rest on the trustee to pay the*2248 premiums on the insurance policies unless there were funds available for such payments. The trust agreement contained no provision with respect to it revocation. On December 31, 1922, the day following the execution of the trust agreement, a collateral agreement was entered into, under which the petitioner delivered to the trustee his 6 per cent promissory note for $150,000, in lieu of the aforementioned securities then held by the trustee, but the securities were pledged as collateral for the payment of the note. The petitioner was given the right to substitute other securities, satisfactory to the trustee, for the collateral held by the trustee. In the event the character and value of the collateral so held by the trustee should at any time be not satisfactory to it, it had the right to require the petitioner to furnish such additional collateral as the trustee might desire. The note ran for five years and might be renewed, at the election of the petitioner, for like periods, provided the collateral was deemed sufficient and satisfactory to the trustee. In the event the note had not been paid prior to petitioner's death, the trustee was given authority to sell the collateral*2249 in satisfaction *1231 of the same and turn over the excess, if any, to the executors or administrators of the petitioner. The net income of the aforementioned trust and the insurance premiums paid thereunder for the calendar years 1924 and 1925 were as follows: Year 1924 INCOME Interest on note and account $9,020.60 DEDUCTIONS Interest paid $20.41 Trustee fees 300.00 320.41 Net income 8,700.19 Net insurance premiums paid 7,109.45 Year 1925 INCOME Interest on note and account $9,039.10 DEDUCTIONS Interest paid $0.98 Trustee fees 150.00 150.98 Net income 8,888.12 Net insurance premiums paid 7,653.10 The petitioner omitted the foregoing amounts of net income (1924, $8,700.19, and 1925, $8,888.12) from his income-tax returns for 1924 and 1925, respectively, whereas the Commissioner, in the determination of the deficiencies here in question, included the above amounts as a part of net income for those respective years. In his income-tax returns for 1924 and 1925 the petitioner claimed as a deduction from gross income in each year $9,000 as interest on the note of $150,000 referred*2250 to in the agreement of December 31, 1922, which deductions were allowed by the Commissioner. During the year 1924 the total contributions made by petitioner amounted to $18,424.61. The Commissioner in his determination of the proposed deficiency for 1924 allowed $16,575.14 as a deduction for contributions, such amount being 15 per cent of the net income determined by him without allowance for any deduction for contributions. For the year 1925 the total contributions made by petitioner amounted to $20,740.33 and the Commissioner in his determination of the proposed deficiency for 1925 allowed $18,508.85 as a deduction *1232 for contributions, such amount being 15 per cent of the net income determined by him without allowance for any deduction for contributions. OPINION. SEAWELL: The Commissioner held that income of the trust which was used for the purpose of paying premiums on petitioner's life insurance policies is taxable to the petitioner under the provisions of section 219(h) of the Revenue Acts of 1924 and 1926 which reads as follows: Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with*2251 any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 214), such part of the income of the trust shall be included in computing the net income of the grantor. The contention of the petitioner is that because of the broad powers granted to the trustee under the trust agreement and the completeness of the transfer of the securities to the trustee, the foregoing statutory provision is not applicable to the situation with which we are concerned. In our opinion, the petitioner's position is not well taken. Whatever may be said as to the powers and rights conferred upon the trustee with respect to the insurance policies and the securities, the fact remains that all of this was done for one primary purpose, namely, the creation of a trust through which the premiums on petitioner's life insurance policies would be paid. There*2252 is nothing in the statute to the effect that it is applicable only in the case of a revocable trust, but rather the broad language is used that "where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor * * * such part of the income of the trust shall be included in computing the net income of the grantor." The exception to the foregoing provision is where an irrevocable trust is created for certain charitable purposes, but we are not concerned with a trust created for such purposes. Here we have the petitioner as grantor creating a trust the income from which is to be used to pay the premiums on his own life insurance policies. The only income of the trustee is interest on a promissory note of the petitioner, which interest is paid by the petitioner to the trustee who in tern uses this interest to pay the premiums and then turns the excess (except for a small amount of trust expenses) back to the petitioner. That is, in effect the petitioner is seeking through the medium of a trust to have insurance premiums allowed as a *1233 deduction from gross income when such deduction could not be allowed*2253 if the premiums had been paid directly by petitioner himself. In however good faith the trust may have been created, it is plain that a failure to tax the income arising therefrom would be contrary to the express provisions of section 219(h), supra, and in direct conflict with the stated purpose of both the Senate and House in effecting its enactment, namely, "to prevent the evasion of taxes by means of estates and trusts." (See House Report No. 179, Committee on Ways and Means, p. 21, and Senate Report No. 398, Committee on Finance, p. 25.) The statement of petitioner's counsel that he (petitioner) derives "no benefits from the income which is used to pay the premiums on the said life insurance policies as he no longer has any rights or benefits under the said policies," is little more persuasive than the statement that premiums on life insurance policies should be allowed as a deduction because some one other than the person paying such premiums is benefited thereby. Here, as in many cases, the petitioner's wife is the real and ultimate beneficiary under the policies in question, and payments for such a purpose are personal in character and therefore not deductible from gross*2254 income. Nor are we able to agree with petitioner's contention that if section 219(h) would require the income of the trust here involved to be taxed to the petitioner, such statutory provision is unconstitutional. This contention is based on the reasoning that the section is so "arbitrary and capricious as to amount to confiscation as it shifts the burden of tax from the person benefited to those who have no beneficial interest in the income taxed," and therefore offensive to the Fifth Amendment. A case involving this section was passed upon by the court in Corliss v. Bowers, 30 Fed.(2d) 135 affd. 34 Fed.(2d) 656; and 281 U.S. 376, wherein the constitutionality of the section was upheld. It is true that the situation there presented involved income from a revocable trust whereas in the case at bar the trust instrument contains no provision for revocation, but much of the reasoning used by the court in reaching its conclusion is here applicable. Suffice it to say that we find nothing arbitrary and capricious in the application of the statute to the situation before us. Certainly, Congress intended that the income of an individual*2255 should be taxed without the allowance of a deduction for insurance premiums which were in the nature of personal, family or living expenses, and that, in the final analysis, is all that is being accomplished in the circumstances of this case. The burden is no more shifted from the person benefited to the person who has no beneficial interest in the income to be taxed than is true in the usual case where an insurance premium is not allowed as *1234 a deduction. It would be equally logical to say that a failure to allow a life insurance premium deduction amounted to confiscation where the insured and payor made the payment only for the benefit of another person. Congress concededly has power to enact legislation appropriate for enforcing a general scheme of lawful taxation, including the prevention of tax evasion. And if the taxation involves reasonableness, it is valid. Nichols v. Coolidge,274 U.S. 531, and Taft v. Bowers,278 U.S. 470. The purpose of the statute here involved was to prevent tax evasion and we find nothing unreasonable in its application to the case before us. Accordingly, we are of the opinion that its constitutionality*2256 should be upheld. See Frederick B. Wells,19 B.T.A. 1213. Reviewed by the Board. Judgment will be entered for the respondent.