Kinnear v. Commissioner

EDITH M. KINNEAR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Kinnear v. Commissioner Docket No. 38158. United States Board of Tax Appeals 20 B.T.A. 718; 1930 BTA LEXIS 2055; September 9, 1930, Promulgated *2055 The petitioner was the beneficiary under certain insurance policies under the terms of which the insurer was annually to pay to her 3 per cent interest and apportioned dividends on the face value of the policies, and on her death the principal sum was to be paid to other beneficiaries. Held that annual payment to petitioner is properly includable in gross income. (Section 213(b)(1), Revenue Act of 1926.) Fred S. Houston, Esq., for the petitioner. Hartford Allen, Esq., for the respondent. BLACK *718 In this proceeding the petitioner seeks a redetermination of her income-tax liability for the calendar year 1926, for which year the respondent has determined a deficiency in the amount of $121.92. The petitioner alleges that the respondent erred in including in gross income for the year 1926 the sum of $2,454 received by her from the Northwestern Mutual Life Insurance Co. FINDINGS OF FACT. The petitioner is the surviving widow of James W. Kinnear, who died on September 8, 1922. On February 1, 1919, the Northwestern Mutual Life Insurance Co. issued to the decedent two life insurance policies, wherein in each it agreed as follows: "Upon*2056 receipt of due proof of the death of the insured to pay unto such beneficiaries as may hereafter be designated under this contract, if any, the sum of Twenty Five Thousand Dollars." These policies, among other provisions, contained Option A, which reads as follows: To have the whole or any part not less than $1,000 of the net proceeds of this Policy at the death of the Insured retained by the Company until the death of the last surviving Beneficiary or Contingent Beneficiary, the Company in the meantime to pay interest thereon annually at the rate of three per cent of the amount so retained, the first payment being due one year after the death of the Insured. At the time any interest payment becomes due, the Beneficiary, provided the Company shall not have been specifically directed to the contrary by the Insured, shall have the right, upon due surrender of this Policy, to withdraw the amount so retained. Each policy also contained a clause reading: All payments under Option "A" will be increased by such annual dividends as may be apportioned by the Company. *719 At the time of the death of the insured, the following endorsements were on the policies: Milwaukee, *2057 Wis., April 28, 1919. By request of the insured, Edith M. Kinnear, wife, is hereby named as beneficiary in this policy, Jeanette, Esther and James W. Kinnear, Jr., children, the survivors or survivor, are named as contingent beneficiaries, share and share alike; provided, however, that in event of the death of any of the said contingent beneficiaries leaving children surviving, then and in that case, such share or shares shall be paid to their surviving children, if any (per stirpes) jointly the survivors or survivor of them. The above is subject to the right of the insured to change the beneficiary or contingent beneficiaries. E. D. Jones, Asst. Secretary. Milwaukee, Wis., April 28, 1919. By request of the insured, settlement of the full proceeds of this policy shall be made with Edith M. Kinnear, the beneficiary, in accordance with the provisions of Option A, payable monthly, without privilege of revocation or surrender. Settlement shall be made in the same manner with Jeanette, Esther and James W. Kinnear, Jr., the contingent beneficiaries, withholding from them the privilege of revocation or surrender, excepting that in event of the death of the said beneficiary, then Jeanette*2058 and James W. Kinnear, Jr., shall have the privilege of revocation or surrender as to their respective shares after attaining the age of forty years, respectively. The surviving children, if any, of Jeanette, Esther or James W. Kinnear, Jr., shall receive in one sum such share or shares of the principal amount then retained by the Company on account of this policy as would be payable to the deceased parent, if living. E. D. Jones, Asst. Secretary. After the receipt of the proof of death of the insured, the insurance company commenced paying to the petitioner as beneficiary under the policies monthly installments under Option A. The amount thus received by the petitioner in 1926 was $2,454. OPINION. BLACK: The question involved in this proceeding is how to treat for income-tax purposes the $2,454 received by the petitioner in 1926 from the Northwestern Mutual Life Insurance Co. as interest and dividends on the two life insurance policies described in our findings of fact. Section 213(b)(1) of the Revenue Act of 1926 reads as follows: (b) The term "gross income" does not include the following items, which shall be exempt from taxation under this title: (1) Amounts received*2059 under a life insurance contract paid by reason of the death of the insured, whether in a single sum or in installments (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income). Counsel for petitioner in his brief contends that the agreement to pay interest and dividends referred to in the foregoing language of the statute contemplates a situation where the beneficiary voluntarily *720 leaves the proceeds of life insurance policies with the company and receives interest thereon, but does not contemplate a situation where the insured by direction prior to his death has instructed the insurance company to retain the principal amount of the policy and pay to the beneficiary only the interest and dividends, without privilege of revocation or surrender on the part of the beneficiary. It was contended by counsel for petitioner that the amount of interest and dividends received by the petitioner on these insurance policies during the taxable year was as much a part of the proceeds of the policies as the principal sum stated therein, and are therefore exempt from inclusion in gross income. We*2060 do not agree to this interpretation of the statute. H.R. 1, 69th Congress, 1st Session, which finally became the Revenue Act of 1926, contained the following provision: The term gross income does not include the following items which shall be exempt from taxation under this Title - (1) amounts received under a life insurance contract paid by reason of the death of the insured whether in a single sum or in installments. After the bill had passed the House of Representatives, the provision above referred to was amended in the Senate by adding: (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income). The foregoing amendment was agreed to in conference and the provision became the law in the language set forth in the beginning of our opinion herein. As throwing light on what Congress had in mind when it used the language: "(but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income)," we quote from the Report of the Senate Finance Committee, Report No. 52, to accompany H.R. 1. On page 20 of said report*2061 we find the following: PROCEEDS OF LIFE-INSURANCE POLICIES Section 213(b)(1): Under existing law, the proceeds of life-insurance policies "paid upon the death" of the insured are exempt. The House bill, in order to prevent any interpretation which would deny the exemption in the case of installment payments, amended this provision so that proceeds "paid by reason of the death" of the insured would be exempt. In order to prevent an exemption of earnings, where the amount payable under the policy is placed in trust, upon the death of the insured, and the earnings thereon paid, the committee amendment provides specifically that such payments shall be included in gross income. * * * To *721 the same effect is the statement accompanying the Conference Report to the House of Representatives, submitted February 22, 1926, to accompany H.R. 1. On page 33 of that statement is found the following language: Amendment No. 17: Under existing law, the proceeds of life insurance policies "paid upon the death" of the insured are exempt. The House bill, in order to prevent any interpretation which would deny the exemption in the case of installment payments, amended this provision*2062 so that proceeds "paid by reason of the death" of the insured would be exempt. In order to prevent an exemption of earnings where the amount payable under the policy is placed in trust upon the death of the insured and the earnings thereon paid, the Senate amendment provides specifically that such payments shall be included in gross income. From a study of the language above cited, we conclude that it was clearly the intent of Congress to include in gross income of the taxpayer earnings received during the taxable year from a life insurance policy, where the amount payable under such life insurance policy has been placed in trust by the insured under an agreement that the earnings thereon shall be paid to the beneficiary. The $2,454 received by the petitioner during the taxable year from the Northwestern Mutual Life Insurance Co. appears to have been payments of that kind, and we hold that respondent did not err in including such amount in gross income for the taxable year. Reviewed by the Board. Judgment will be entered for the respondent.