1941 BTA LEXIS 1477 | B.T.A. | 1941
Lead Opinion
By his notice of deficiency for 1934 respondent included in petitioner’s income:
* * * the net income for 1934 of Estate Planning Corporation, after disallowance of a deduction claimed for bond interest in amount of $24,000.00. The income of Estate Planning Corporation appears to consist entirely of original commissions on life insurance policies and annuity insurance policies sold by you (and your sub-agents) under contracts in your name personally. In view of the nature of the income involved, it is held by this office to be taxable in your hands, subject to the ordinary and necessary business expenses attaching thereto as provided by the income tax law.
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We institute this inquiry as to who earned the income in question with an examination of the services for which it was paid; for it seems to us to follow that, when this has been ascertained, the one who performed the services will be disclosed as the one who earned the compensation therefor. The income involved is insurance commissions; that is, remuneration comparable to brokerage paid by insurance companies for procuring purchasers from them of insurance policies. It is the person who performs this service, the agent procuring the application for insurance, to whom for this service the insurance company is indebted for the commission. McCloskey v. Thompson, 26 Misc. Rep. 135; 56 N. Y. S. 1076; Esterly-Hoppin Co. v. Burns, 135 Minn. 1; 159 N. W. 1069; Morehead v. Reem, 236 N. W. 802 (Mich.). The facts amply demonstrate to our mind that in the comparatively intricate plan of operation adopted by petitioner and the corporation no one but petitioner can be said to conform to that description of the earner of the insurance commissions. Not only was he the one designated by the insurance company as its agent to take the application,
* * * The statute was strictly complied with in that the commissions were paid by the life insurance corporation to, and each application was procured by, a licensed agent [petitioner],
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* * * The arrangement was exactly to the contrary. The corporation was not to act as the life insurance agent. Its services were in a peculiarly different field, i. e., estate planning. It did not receive the payments as commissions from the insurance carrier. It received the payments from Davidson on the basis of his contract with it.
To this it may be added that petitioner’s receipt of the payments in question erects at the threshold a compelling inference that as recipient of the income he was taxable upon it. National City Bank of New York v. Helvering (C. C. A., 2d Cir.), 98 Fed. (2d) 93; North American Oil Consolidated v. Burnet, 286 U. S. 417. Not only as a matter of factual burden of proof arising generally by virtue of the prima facie correctness of respondent’s determination, but as a true legal presumption to be overcome by persuasive argnment, we think this casts upon petitioner the necessity of showing that the 'legal effect of the transaction was to preclude his ownership of the funds received by him. In our view no satisfactory basis for such a conclusion has been established. That he might have, become the debtor of the corporation is an irrelevant consideration on this aspect of the case; for that would be no more than an offsetting deduction, a distinct contention which we shall separately consider hereafter. As an assignment of all or part of the commissions the transaction would not only have been without legal effect under
It may be recognized that activities which for present purposes we shall assume to have been those of the corporation were an essential inducement and preliminary to petitioner’s success in obtaining the insurance business and receiving the compensation of which it was the root. In this phase of the matter an expenditure ordinarily and necessarily incurred by him would, in the usual circumstance, constitute the ground for a deduction as business expense. It may not be allowed, however, unless it is both ordinary and necessary, and compensation for services must be reasonable; and where as here it is the offshoot of an arrangement between an individual and his controlled corporation, it must survive more than the usual scrutiny for this to be established. Botany Worsted Mills v. United States, 278 U. S. 282; Alexander Sprunt & Son, Inc. v. Commissioner (C. C. A., 4th Cir.), 64 Fed. (2d) 424. We consider that the assignment to the corporation of the entire amount of the original commissions was not reasonable compensation to it for any contribution which it made to the earning of those commissions. As the originator and proprietor of a business writing upward of $4,000,000 of insurance annually, it is inconceivable that petitioner would have made such an arrangement at arm’s length with a stranger. We are, accordingly, unable to determine that the payments due the corporation under the contract were the true measure of petitioner’s expense and correspondingly deductible.
In the absence of any other gauge of a reasonable offset for the expense of obtaining the business, we might have been relegated to the figure which the corporation itself paid out for those purposes as the nearest approximation thereto. To a comparable deduction, however, petitioner was held to be entitled by respondent’s original determination. The deficiency notice charged petitioner only with the net income of the corporation, with the result that petitioner’s income was in turn reduced by the amount of such expenditures as were involved in the inducing operations conducted by the corporation. It was not petitioner’s burden to prove in detail the propriety of the deductions thus permitted. Only two items of corporation expense were disallowed in this determination, of which one was interest on the corporation’s bonds. While it is true that in litigation by which respondent is presumably bound it has been decided that the corporation was
It is true that by amended answer respondent seeks to increase the deficiency so determined by including in petitioner’s income all of the corporation’s gross income without offset for any disbursements. Since, in our view, however, respondent has failed satisfactorily to prove the amount of the commissions received by petitioner, apparently the only justification for a charge against him on that theory, and since respondent has in other respects failed to sustain his burden of proving the absence of petitioner’s right to deductions, we are of the opinion that the attempt to increase the deficiency can not succeed. There are implications that not all of the insurance premiums which eventually found their way to the corporation were paid to Davidson in the first instance. But it is clear that the great bulk were, and if this was something less than all, petitioner, on whom rested the burden, has not shown to our satisfaction the extent by which this total should be diminished. However, he has made it clear that a small fragment of the corporation’s receipts represented payment for its services, not insurance commissions. As to these amounts petitioner’s income should not be increased. The result is that the amount originally determined, adjusted for payments which were shown to have been received by the corporation as compensation for its services and not through insurance premiums, is chargeable against petitioner as his income. To that extent respondent’s determination is approved.
With respect to the corporation, its taxable income should be adjusted to reflect the payments which are being charged to the individual petitioner.
The notices of deficiency also charge petitioner with the net income of the partnership, Davidson & Co., “because its gross income was derived largely from personal services rendered by” petitioner. This issue must be determined in favor of petitioner. It appears that the other members of the partnership contributed both capital and services to the business of the enterprise. In this situation we can not say that elements requiring the recognition of the partnership for tax purposes are lacking. Walter W. Moyer, 35 B. T. A. 1155. Bespondent’s inclusion of the proportionate parts of the partnership income in those of petitioner’s wife and son is sustained, as petitioners concede it must be on that result.
Under the notices of deficiency and in the condition of the pleadings the issue as to the trust income, both with respect to the attempt
The income of the trust consisted of amounts paid to it by Estate Planning Corporation, allegedly as interest on bonds. * * * For the taxable year 1934, it is being held by this office that due to the nature of the income reported by Estate Planning Corporation, it is taxable not to the corporation but to the assignor of such income. Pending a final decision in these matters, the amount received by you from the trust is being included as interest income to you, in order to protect the interests of the Government.
The notice of deficiency in the Flora Davidson case is similar. Since we have determined the primary issue in respondent’s favor, it is unnecessary to consider his arguments for the application to petitioner of the sections in question. Our disposition of petitioner’s liability likewise carries with it the necessity of eliminating the items of trust income in adjusting the deficiencies determined against petitioner’s wife and son.
Petitioner’s motion for judgment, upon which decision was reserved at the hearing, is accordingly denied and the proceedings will be disposed of in accordance with the foregoing opinion.
Decisions will be entered under Rule 50.
A “single policy” contract awarded to petitioner and conceded to be typical commences :
ORIGINAL
(For Agent)
January 5th, 1935.
Mr. Clinton Davidson New York City
Deae Sie : It is hereby agreed to allow you the following commissions on the premiums not exceeding in amount in any one year the first year’s premium as paid in cash to the Society on Policy No. 9655,006 * * *.
For example, a memorandum to, one of the insurance companies, giving detailed informa, tion about a “prospect,” inclosed in a letter signed by petitioner as president of the corporation, while itself unsigned is worded throughout in the first person singular.
The Corporation’s directors resolved that “* * * all commissions allowed1 him [petitioner] by Insurance Companies on initial premiums of policies written during that peiúod to be turned over by him to the Company * * And when petitioner terminated this arrangement with the corporation his letter to it stipulated :
“2. Xou are to formulate such plans in connection with my insurance business for estates of the same character that has been heretofore furnished by your corporation."’
A typical “single policy’’ contract recites:
“a. No assignment of this agreement or of commissions hereunder shall be valid unless authorized in advance in writing by the Society [Insurer].’’