Cummings v. Commissioner

EDWIN LINDSEY CUMMINGS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. GEORGE L. WEBB, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WILLIAM N. STETSON, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Cummings v. Commissioner Docket Nos. 60321, 60401, 64923. United States Board of Tax Appeals 28 B.T.A. 1045; 1933 BTA LEXIS 1055; August 11, 1933, Promulgated *1055 Life insurance policies were procured by a corporation on the life of its president, the corporation being named as beneficiary. Thereafter, and pursuant to an agreement among the stockholders, the corporation agreed that upon receipt of the proceeds of any of said policies it would immediately declare a cash dividend of such proceeds to the common stockholders of record as of the date of the decedent's death. Held, that the distributions by the corporation in 1929 of such proceeds to its stockholders, including the petitioners herein, were cash dividends subject to taxation. Samuel Gottlieb, Esq., for the petitioners. Thos. F. Callahan, Esq., and E. G. Sievers, Esq., for the respondent. SMITH *1045 The respondent has determined deficiencies against the petitioners for the calendar year 1929 as follows: Docket No. Petitioner Deficiency 60321 Edwin Lindsey Cummings $1,527.74 60401 George L. Webb 1,849.01 64923 William N. Stetson, Jr 5,367.72 The single issue, common to each proceeding, is whether certain amounts paid to each petitioner by a corporation of which they were stockholders constituted taxable*1056 dividends, or were exempt from *1046 taxation as proceeds of life insurance policies. The proceedings were consolidated for hearing. FINDINGS OF FACT. The petitioners are stockholders of Storrs & Bement Co., a Massachusetts corporation engaged in the wholesale paper business, with its principal office at 282 Congress Street, Boston. In the latter part of 1926, or early in 1927, a discussion was had among the officers and directors of Storrs & Bement Co., hereinafter sometimes referred to as the corporation, in regard to procuring insurance policies on the lives of some of its officers. On January 10, 1927, policies were procured on the lives of the corporation's president, William B. Stevenson, and its treasurer, Bryant McQuillen, for $100,000 each. In each policy the corporation was named as the sole beneficiary. At a meeting of the board of directors held January 10, 1927, the following resolution was adopted: VOTED: that WHEREAS Storrs and Bement Company, a corporation duly established and existing by law and having its usual place of business in Boston, Suffolk County, Massachusetts, has recently insured the lives of William B. Stevenson and Bryant McQuillen, *1057 officers of said company, for the sum of $100,000 each, and WHEREAS it is not practical to have the proceeds of said policies payable in the form and manner intended by Storrs and Bement Company at the time the lives of the said William B. Stevenson and Bryant McQuillen were insured because of the laws relating to the naming of beneficiaries under insurance policies and because of that fact said policies of insurance are now payable in case of death to the Storrs and Bement Company; VOTED: that in order to carry out the agreement and understanding of the officers and common stockholders of Storrs and Bement Company in regard to said insurance, it is hereby agreed that if and when a policy of insurance so taken shall become payable by reason of the death of either or both the insured and the proceeds of a policy are paid to Storrs & Bement Company, that Storrs and Bement Company will promptly after receipt of the proceeds of said insurance policy, vote to declare and pay said proceeds as a dividend on the common stock of Storrs and Bement Company, payable to common stockholders of record at the time of the death of said insured; it being understood that the estate of any common*1058 stockholder so deceased whose life was insured as aforesaid, shall receive its pro rata share of said proceeds the same as the surviving stockholders previously mentioned. There was also incorporated in the records of the directors' meeting of the above data an agreement setting forth the matters stated in the resolution quoted with respect to the insurance policies on the lives of the officers and signed by all of the corporation's nine common stockholders. On February 14, 1928, another policy of $100,000 was procured on the life of William B. Stevenson upon substantially the same terms and conditions as the policy taken out in the prior year. *1047 William B. Stevenson died on January 12, 1929, and soon thereafter the corporation received payment of $200,000 from the insurance companies on the above policies. Thereafter, the corporation received additional amounts of $1,388.07, representing post mortem dividends, and $6,984.55, representing a payment in settlement of a claim on a $50,000 policy which the corporation had procured from the Sun Life Insurance Co. of Canada. The amounts received from the insurance policies were credited on the books of the corporation*1059 to general surplus. All of the above amounts were deposited by the corporation in a special bank account which it opened for that purpose and were not mixed with other corporate funds. A meeting of the board of directors of Storrs & Bement Co. was held on February 25, 1929, the records of which read in part as follows: The vice president then stated that William B. Stevenson, president of the corporation deceased on January 12, 1929 and that the corporation had received from insurance companies the proceeds of four policies of insurance amounting to $200,000.00 held by the corporation on the life of said William B. Stevenson as follows: John Hancock Mutual Life Insurance Co $100,000 John Hancock Mutual Life Insurance Co 25,000 Massachusetts Mutual Life Insurance Co 50,000 New England Mutual Life Insurance Co 25,000 TOTAL $200,000 and that in accordance with the terms and provisions of votes of the directors duly passed at meetings held on January 10, 1927 and February 14, 1928 and in accordance with the provisions of agreements signed by all the common stockholders of the company on said January 10, 1927, and February 14, 1928, it now becomes necessary*1060 to pay out the proceeds of said policies of insurance in the amount of $200,000 on the life of William B. Stevenson as a cash dividend on the common stock of Storrs & Bement Company, payable to common stockholders of record at the date of the death of the said William B. Stevenson, the estate of said William B. Stevenson being entitled to its pro rata share of the said proceeds, the same as the surviving common stockholders of the company. The vice president further stated that the common stockholders of record as of February 25, 1929, are the same as the common stockholders of record on January 12, 1929, the date of death of William B. Stevenson, and that under the provisions of and in accordance with said votes and agreements the estate of William B. Stevenson is entitled to receive the same dividend per share on each share of common stock held by said estate as shall be received by the surviving common stockholders of the company. Upon motion duly made and seconded and in accordance with and in pursuance of said votes and agreements of January 10, 1927 and February 14, 1928, the following resolution was unanimously adopted: That a cash dividend of 50% ($50.00 per share) *1061 on the par value of the common capital stock of $400,000. consisting of 4000 shares each of the par value of $100. said dividend amounting to $200,000. be paid on February 25, 1929 to common stockholders of record on that date. *1048 By similar corporate action had on March 12, 1929, and May 27, 1929, authorization was given for distribution to the stockholders of the further amounts of $1,388.07 and $6,984.55 referred to above. The surplus of the corporation on January 1, 1929, was $224,945.78 and on January 30, 1929, $250,307.58. These amounts were exclusive of any proceeds from insurance policies. At the date of the decedent's death, the common stock of Storrs & Bement Co. was owned as follows: Shares William B. Stevenson 2,200 William N. Stetson, Jr [778] George L. Webb [447] Edwin L. Cummings [447] John H. Brewer [64] Paul M. Jones [32] John Appell [16] Stephen P. Bumpus [16] Total 4,000 Of the aforesaid distributions by the corporation of the proceeds of the life insurance policies, the petitioners herein received the following amounts: Petitioner Feb. 25, 1929 Mar. 12, 1929 May 27, 1929 Edwin Lindsey Cummings $22,350 $155.12 $780.53 George L. Webb 22,350 155.12 780.53 William N. Stetson, Jr 38,900 269.98 1,358.49 *1062 The estate of William B. Stevenson sold all of its common stock of the corporation on March 9, 1929. All of the premiums on the aforesaid insurance policies on the life of William B. Stevenson were paid by the corporation. In their returns for the calendar year 1929 none of the petitioners included the above stated amounts distributed to them by the corporation in their taxable income. The respondent has determined that such amounts represent cash dividends and are taxable as such to the petitioners. OPINION. SMITH: The petitioners contend that they and the other stockholders, and not the corporation, were the beneficiaries of the insurance policies on the life of William B. Stevenson; that the proceeds from such policies were received by the corporation as trustee for the stockholders and not as its own funds; and that the amounts of the proceeds distributed to the stockholders were therefore not dividends but were "amounts received under a life insurance contract" and as such are exempt from taxation under the provisions of section 22(b)(1) of the Revenue Act of 1928. This section of the statute reads as follows: (b) Exclusions from gross income. - The following*1063 items shall not be included in gross income and shall be exempt from taxation under this title: *1049 (1) LIFE INSURANCE. - Amounts received 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). Section 22(a) provides that: (a) General definition. - "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The term "dividend" is defined in section 115(a) as: (a) Definition of dividend. - The term "dividend" when used in this title (except in section 203(a)(4) and section 208(c)(1), *1064 relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913. Conceivably, the corporation might have acted lawfully as a trustee or at least in a fiduciary capacity in collecting the proceeds of insurance policies and paying them to the stockholders, with the result that the proceeds would never have become the corporation's own funds subject to distribution to the stockholders as dividends. This would have been true, no doubt, if the insurance policies had been taken out in the names of the individual stockholders, with the corporation designated merely as agent for them, the premiums on the policies being paid by the stockholders. These, however, are not the facts. The policies were all made payable to the corporation as sole beneficiary and the corporation paid all the premiums. The corporate resolutions of January 10, 1927, and February 14, 1928, both refer to the corporation as the insurer of the life of William B. Stevenson. The agreement between the corporation and the stockholders was not that the corporation would merely receive*1065 the proceeds of the insurance policies for the benefit of the stockholders, but that, upon receipt of the proceeds of the policies, it would pay them over to the stockholders as a cash dividend. Nowhere is there any reference to the corporation as a trustee nor are there present any circumstances which can be said to create a resulting trust in favor of the stockholders. It does not appear that there was any consideration for the promise of the corporation to distribute the proceeds as a cash dividend. It is not explained why, if the corporation was intended to be only the nominal beneficiary, it paid all of the premiums on the policies. There is nothing to indicate that either the corporation or the individual officers or stockholders considered the payment of the premiums as a distribution of corporate *1050 funds in the nature of dividends or as additional compensation to any of the officers or employees. See ; . We see no reason for treating the agreement between the corporation and the stockholders as anything different from what it purports to be, that is, an*1066 agreement that the corporation would declare and pay "a cash dividend" out of the proceeds of the insurance policies when and if received. In , we held upon facts very similar to those in the instant case that the distribution by a corporation of certain of the proceeds of a life insurance policy on its president was a taxable dividend to the stockholders. There, as in the instant case, the corporation had agreed in advance to distribute the proceeds, when received, upon a certain basis. In deciding that the corporation and not the distributees was the beneficiary under the insurance contracts, we rejected the petitioner's contention that the corporation received and distributed the proceeds of the policy as a trustee for the stockholders. The petitioners in their brief cite , as sustaining their contention that a distribution by a corporation is not necessarily a dividend because declared to be a dividend by the corporation and made in the corporate form of a dividend. In that case the court held, reversing the *1067 , that a distribution made to a stockholder was in reality payment for certain property which the stockholder had transferred to the corporation, and was not a taxable dividend. That case is clearly distinguishable on the facts from the instant case and is not authority for the conclusion herein sought by the petitioners. The same is true of (reversing ), also cited by the petitioners. The court held in that case that where the petitioner, a mutual company, succeeded to the business of a predecessor stock company, agreeing as part consideration to pay to the former stockholders all of the income for a certain period from the nonparticipating insurance taken over, such income was not taxable to the petitioner, but was received in trust by it for distribution to the former stockholders. Certainly we would not feel compelled to hold that the distributions of the proceeds of the insurance policies to the petitioners constituted cash dividends merely because so termed by the corporation if, upon the evidence before us, it appeared that the distributions*1068 were made by the corporation as trustee or were other than distributions of its own assets. The petitioners make the further contention that since the proceeds of life insurance policies are not income or profits under the decision *1051 of the Supreme Court in , any payment or distribution of such proceeds by a corporation to its stockholders does not come within the statutory definition of a dividend, which is "any distribution made by a corporation to its shareholders * * * out of its earnings or profits" (see sec. 115(a), Revenue Act of 1928.) This contention also was made by the taxpayer in , and was rejected for reasons therein discussed. On the record before us, we find no error in the respondent's determination that Storrs & Bement Co. was the beneficiary of insurance policies on the life of William B. Stevenson and that it received the proceeds of the policies and paid them over to its stockholders as cash dividends. If the dividends were paid from earnings accumulated subsequent to February 28, 1913, the recipients are liable to surtax upon them. The*1069 evidence indicates that they were. It does not prove that they were not. Judgment will be entered for the respondent.