Lauinger, the taxpayer, petitions to review an order of the Tax Court holding him liable for a deficiency in income tax for the year 1947.
In December, 1942, Conlan Electric Corporation created a non-contributory pension plan trust for its employees, including petitioner, who was president of Conlan and owner of one half of its stock. The pension plan was exempt from taxation under Section 165(a) of the Internal Revenue Code of 1939.*fn1
The trustees of the pension trust purchased an insurance policy from Home Life Insurance Company of New York, in which petitioner was named as insured. Petitioner's wife was named as primary beneficiary and his children as secondary beneficiaries. The policy, called a "personal income at 65 policy" by the insurance company and a "retirement income life insurance policy" by the Tax Court and Commissioner, provided (1) that if petitioner died before attaining the age of 65, a death benefit of $49,000 would be payable to his beneficiaries; and (2) upon attaining the age 65, petitioner would receive $490 per month for life, and in the event of his death within 10 years, his beneficiaries would receive the monthly payments during the balance of the 10 year period.
The Tax Court found that "petitioner withdrew from the active employ of Conlan in 1946, but returned in 1947 and continued thereafter to serve as its president." In December of 1946, petitioner was informed that financial difficulties made it impossible for Conlan to continue to pay the annual premium on the insurance policy. On December 15, 1946, petitioner, as president of Conlan, executed an amendment to the trust which would have permitted the trustees to transfer the policies of insurance to the respective participants. This amendment was not approved by the Commissioner. On April 24, 1947 another amendment was executed by petitioner as president of Conlan, authorizing the trustees to transfer the policies to the participants, free of the terms and conditions of the trust, when the participants either left the employ of Conlan or voluntarily ceased to be participants under the trust. This amendment, effective retroactively to December 12, 1946, was approved by the Commissioner.
Early in January, 1947, the Home Life Insurance Company received a request from the trustees for forms to enable them to transfer the ownership of the insurance policy to petitioner. The form was executed by the trustees on January 7, 1947, and provided in part:
"Anything in this policy to the contrary notwithstanding, the insured shall be the owner of this policy and may, without the consent of any beneficiary not irrevocably designated, exercise any option, enjoy any privilege and receive any benefit whatsoever contained in this policy."
On January 8, 1947, the change of ownership was noted on the records of the insurance company.
On January 9, 1947, petitioner obtained a loan from Home Life Insurance Company for $25,284, an amount equal to the cash surrender value of the policy as of December 15, 1947. The annual premium for 1947 in the amount of $6,999.15 and interest on the loan for that year in the amount of $1122.03 were deducted, and a check was issued to petitioner for $17,477.88, representing the cash proceeds of the loan plus dividends of $315.07. Petitioner endorsed the check and it was deposited to the account of Conlan. The amount so deposited was never repaid by Conlan.
In January, 1948 and again in January, 1949, petitioner obtained additional loans on the policy for the purpose of paying the premiums due in December, 1947 and December, 1948. The policy lapsed in December, 1949 for nonpayment of the premium then due.
The Tax Court held that the transfer of the policy occurred on January 8, 1947, that the transfer represented a distribution from a pension trust under Section 165(b) of the 1939 Code,*fn2 and that the cash surrender value of the policy on January 8, 1947, $19,817.07, constituted ordinary income taxable to petitioner for 1947.
Plaintiff has specified seven points of error. Points I, II and VI were considered by the Tax Court. Points III, IV, V and VII were either first raised on the petition for review or inadequately presented in the court below.
Petitioner contends under Points I and II that he was a mere conduit whereby the corporation recaptured its own funds; that petitioner received no benefit from the transfer; and that he cannot be taxed on value which he did not receive.
Petitioner, however, did in fact benefit from the transaction in that (1) a substantial part of the loan was used to pay the premium on an insurance policy for his benefit and (2) the balance of the proceeds of the loan was contributed to a corporation in which he owned one-half of the stock. There is no evidence that the policy was transferred to the taxpayer by the trustees for the purpose of obtaining a loan for the benefit of the corporation. Nor could the corporation by such a contrivance obtain funds for its own use. The trust enjoyed a tax exempt status under Section 165(a), which specifically provides that the trust must be for the ...