Comm'r of Internal Revenue

This case is not covered by Casetext's citator
United States Tax CourtJan 21, 1970
54 T.C. 54 (U.S.T.C. 1970)

Docket No. 4816-68.



Arthur A. Atha, for the petitioners. Barry N. Mosebach, for the respondent.

Arthur A. Atha, for the petitioners. Barry N. Mosebach, for the respondent.

Held, petitioners realized capital gain upon the transfer by one of them to the corporation by which he was employed of ownership of its stock in return for the corporation's transfer to him of an insurance policy on his life.

SCOTT, Judge:

Respondent determined a deficiency in petitioners' income tax for the calendar year 1963 in the amount of $1,081.68.

The only issue for decision is whether petitioners realized a long-term capital gain in February 1963 when George W. Parsons transferred of 50 shares of stock of Lucey Export Corp. to that corporation and the Lucey Export Corp. transferred to him a life insurance policy on his life.


Most of the facts have been stipulated and are found accordingly.

Petitioners, husband and wife who resided in Glen Rock, N.J., at the time the petition in this case was filed, filed a joint Federal income tax return for the calendar year 1963 with the district director of internal revenue at Newark, N.J.

George W. Parsons (hereinafter referred to as petitioner) was employed in 1920 by a predecessor of Lucey Export Corp. and continued to work for the predecessor and Lucey Export Corp. until 1967. During much of the period of his employment by Lucey Export Corp., he was secretary of the corporation.

On October 6, 1939, an agreement was entered into between William S. Evans (hereinafter referred to as Evans), who was president and at that time the sole stockholder of Lucey Export Corp., and the corporation providing a plan whereby certain of the employees of the corporation might share in the profits and growth of the business. Under the plan Evans was to transfer certain of the stock of the corporation to each of these employees and the corporation was to cause a policy of insurance to be carried on the life of each of these employees so that the proceeds or cash value of the policy might be used to purchase the stock of the corporation held by such employee in the event of the death or resignation of that employee. The agreement between Evans and Lucey Export Corp. covered five employees.

The agreement provided for the corporation to purchase an insurance policy in the face amount of $15,000 on the life of petitioner and that the beneficiary of the policy was to be designated by petitioner. The corporation retained the right and power to sell or assign the policy, to discontinue the policy, to borrow on such policy, to hypothecate the policy to secure any loan, and to exercise any benefit optional to the privilege granted by the policy. The corporation also had the right to receive all dividends, refunds, cash surrender value, and other payments which might accrue during the lifetime of the insured.

The insurance policy purchased by Lucey Export Corp. in October 1939 on petitioner's life was an ‘Owner Form Ordinary Life Policy.’ It provided under the designation, ‘Owner,‘ and ‘The rights conferred upon the Owner by the terms of this policy are vested in the LUCEY EXPORT CORPORATION.’ It further provided that Lucey Export Corp. might, prior to the death of the insured, exercise the rights conferred upon the owner by the terms of the policy without the consent of the insured, any beneficiary, or any other person referred to in the policy. The policy contained a table of loan and cash surrender values. It also provided for participation in dividends, for conversion to a paid-up policy, and for payment as a matured endowment. The policy also contained the following provision:

RE-ISSUE TO INSURED. Upon the written request of the Insured, accompanied by this policy and an assignment satisfactory to the Society of all rights and interest hereunder to the Insured, this policy if in force will be rewritten (without medical re-examination) in favor of the Insured on a policy form issued by the Society at the Register date hereof for the same plan of insurance as that upon which the policy is written. The new policy will be effective as of the Register date of this policy and will be subject to any indebtedness to the Society existing against this policy.

The application for the insurance policy was signed by petitioner as the person to be insured and was signed by Lucey Export Corp. by its president under the designation, ‘Signature of Owner.’ The application for the policy stated that the owner was to be the Lucey Export Corp. and that the pecuniary insurable interest of the owner in the continuance of the life of the insured was that he was secretary of the Lucey Export Corp.

On October 6, 1939, an agreement was entered into between Evans, party of the first part, petitioner, referred to in the agreement as the depositor, party of the second part, and Brooklyn Trust Co., referred to in the agreement as the depositary, party of the third part. This agreement referred to the agreement entered into between Evans and the Lucey Export Corp. and provided that petitioner agreed to deposit with the depositary all of the stock of Lucey Export Corp. transferred to him by Evans, as well as the certificates for all additional stock of the Lucey Export Corp. which he might acquire thereafter directly from the corporation. The agreement further provided that petitioner should have the right to vote the deposited stock and receive all dividends declared thereon, and that all certificates for stock deposited with the depositary should be accomplished by powers of assignment and transfer in blank and that the stock should remain registered in the name of petitioner so long as held by the depositary. Petitioner irrevocably appointed the depositary as his agent to transfer title to the deposited stock in the event it became necessary to make such transfer under the terms of the agreement. The agreement then provided that if petitioner died while still employed by Lucey Export Corp., Evans would certify to the depositary the date of petitioner's death, the amount of the surplus of the corporation allocable to the stock registered in petitioner's name and deposited under the agreement with the depositary, and the amount of the proceeds of any life insurance carried on petitioner's life by Lucey Export Corp. or by Evans and paid or payable to petitioner's estate or to a beneficiary designated by petitioner. It further provided that upon receipt of such certificate, the depositary should deliver to Evans, without any payment by him, certificates for all stock registered in petitioner's name and deposited with the depositary, if the proceeds of ‘such insurance are equal to or greater than the said surplus' allocable to the stock registered in petitioner's name, or the certificates for the number of shares which represented an allocable portion of the corporate surplus most nearly equal to the proceeds of such insurance policy. The agreement further provided that Evans or Lucey Export Corp. should have the right to purchase any shares not covered by the insurance policy. There was a provision giving Evans or Lucey Export Corp. the right to purchase the stock should petitioner cease to be employed by the corporation.

At the time the agreement of October 6, 1939, was entered into, petitioner received 50 shares of capital stock of Lucey Export Corp. out of the then outstanding 500 shares. Petitioner deposited these shares of stock with the Brooklyn Trust Co. in accordance with his agreement. Petitioner attended stockholders' meetings and voted the stock. From the time he received the stock until February 26, 1963, no dividends were paid on the stock.

Lucey Export Corp. in 1939 purchased life insurance policies on the lives of the other four employees covered by its agreement with Evans. Lucey Export Corp. paid all the premiums which became due on the life insurance policy purchased on petitioner's life from October 1939 through February 1963.

In early 1963, Evans died, and John D. Evans was appointed administrator of his estate. On February 26, 1963, an agreement was entered into between John D. Evans, as administrator, and petitioner providing for the transfer to Lucey Export Corp. of the 50 shares of the stock of that corporation owned by petitioner in exchange for the assignment by Lucey Export Corp. to petitioner of the life insurance policy carried by the corporation on petitioner's life. Ownership of the policy was assigned to petitioner in 1963, and the insurances company, as of March 15, 1963, rewrote the policy originally issued on October 10, 1939. Under the rewritten policy petitioner, as the insured, was granted all ownership rights of the policy. The value of the policy when it was assigned to petitioner on February 26, 1963, was the amount of $6,130.05. Upon the assignment of the policy to petitioner, ownership of the stock in Lucey Export Corp. which had been held with no cost basis by petitioner was transferred to Lucey Export Corp.

Petitioner on his Federal income tax return for the calendar year 1963 did not report any receipt of income or any gain or loss with respect to the transaction involving the assignment to him of the insurance policy and the transfer by him to Lucey Export Corp. of the 50 shares of stock.

Respondent in his notice of deficiency determined that petitioner had a net long-term capital gain for the year 1963 of $4,276.07 which was arrived at by offsetting the long-term capital loss of $1,853.98 shown on petitioner's return by the amount of $6,130.05 which respondent determined to represent petitioner's long-term capital gain on his transfer of ‘50 shares of stock of Lucey Export Corporation (your basis in the stock being zero) in exchange for a life insurance policy with a fair market value of $6,130.05.’


Petitioners take the position that since Lucey Export Corp. while it owned the policy paid premiums thereon in excess of the amount of the cash surrender value of the policy when it was transferred to petitioner, the transfer of the policy to petitioner should not result in a taxable transaction. They contend that to tax petitioner on the value of the policy would in effect constitute the levy of a double tax. In the alternative petitioners contend that under section 79, I.R.C. 1954, the insurance policy transferred to petitioner should be considered group-term life insurance purchased for employees and therefore the cost of such insurance should not be taxable to petitioner.

It is respondent's position that the insurance policy was transferred to petitioner in exchange for stock which petitioner held with a zero basis and that the value of the insurance policy constituted capital gain to petitioner. Respondent argues that if the transfer of the insurance policy is not considered to be a transfer in exchange for the stock, the value of the policy at the date of its transfer would constitute ordinary income to petitioner. Respondent takes the position that the insurance policy was clearly not group-term life insurance and therefore section 79 is not applicable to this case.

We agree with respondent that section 79 is totally inapplicable to this case. The insurance policy here involved was issued covering only petitioner's life and apparently separate similar policies were issued on the lives of four other employees of Lucey Export Corp. The policy contained provisions for a cash surrender value and for its conversion to a paid-up life or an endowment policy. It is clear from the policy of insurance issued in this case that it is not a group-term insurance policy, but rather an ordinary life policy with Lucey Export Corp. as owner. So far as this record shows no group policy was issued to Lucey Export Corp. covering employees of that corporation who might be participants by reason of their employment in a group-term life insurance policy. Cf. Edward P. Clay, 46 T.C. 505 (1966).

SEC. 79. GROUP-TERM LIFE INSURANCE PURCHASED FOR EMPLOYEES.(a) GENERAL RULE.— There shall be included in the gross income of an employee for the taxable year an amount equal to the cost of group-term life insurance on his life provided for part or all of such year under a policy (or policies) carried directly or indirectly by his employer (or employers); but only to the extent that such cost exceeds the sum of—(1) the cost of $50,000 of such insurance, and(2) the amount (if any) paid by the employee toward the purchase of such insurance.

It is difficult to follow petitioner's argument that because Lucey Export Corp., the owner of the policy, had paid all the premiums thereon until the policy was assigned to petitioner on February 26, 1963, petitioner received no income upon the assignment to him of the policy. The fact that Lucey Export Corp. was the owner of the policy until it was assigned to petitioner would indicate that petitioner received income to the extent of the value of the policy when it was assigned to him, except for the fact that petitioner, in return for the assignment to him of the policy, transferred to Lucey Export Corp. his 50 shares of stock. Respondent states that because of the transfer by petitioner of the stock to Lucey Export Corp., it is his position that the transaction resulted in a capital gain to petitioner.

If petitioner is contending that he should have been considered to have received additional compensation in 1939 to the extent of the value of the stock which was transferred to him in that year and therefore has a basis in the stock of the amount of its fair market value when it was transferred to him, he has not so stated. In fact, the parties stipulated that the stock had no cost basis to petitioner. In any event, there has been no showing of what the fair market value, if any, of the stock was in October 1939. Since the burden to prove error in respondent's determination is upon petitioner, we cannot, on this record, find that petitioner had any cost basis in the stock other than zero. On the basis of this report petitioner has failed to show error in respondent's determination that petitioners had a long-term capital gain of $6,130.05 resulting from the exchange of 50 shares of Lucey Export Corp. stock for the life insurance policy. We therefore sustain respondent's determination.

Decision will be entered for respondent.