The opinion of the court was delivered by: KNIGHT
Statement of Stipulated Facts.
This is an action by Paul A. Schoellkopf, a taxpayer, against George T. McGowan, Collector of Internal Revenue, for the 28th District of New York, to recover certain taxes and interest collected by the defendant from the plaintiff under protest.
The plaintiff on November 14, 1917, and March 3, 1921, executed instruments by which the plaintiff transferred certain shares of stock to himself as trustee for his infant son, Paul Penn Schoellkopf, now known as Paul A. Schoellkopf, Jr. These instruments purported to convey to the plaintiff's infant son full beneficial and equitable title, but reserved legal title in the plaintiff during the son's minority, in trust, with full power to sell, exchange, dispose of or transfer the stock as if the son were of full age. All the dividends, income, increment or rights were to be held by the plaintiff for the benefit of the son, but the plaintiff retained the right to re-invest the income, increment or proceeds during the minority of the son for the benefit of the son.
In 1925 the plaintiff applied for and obtained two policies of life insurance on his life, in each of which the said infant son, Paul Penn Schoellkopf, was the beneficiary.In 1927 plaintiff's wife procured two policies on the life of the plaintiff, and she was then named beneficiary in each.Later in the same year the beneficiary was changed to the infant son with contingent interest in the plaintiff if he survived wife and son. On May 11, 1932, the plaintiff executed written instruments purporting to transfer all of his right, title and interest in the four policies of insurance "together with all benefits and advantage to be derived therefrom." The plaintiff never individually paid any premiums on any of the policies.
During the year 1935 the plaintiff received an income of $27,581.90 from the trust estate. The plaintiff deposited the moneys of Paul Penn Schoellkopf in an account at the Power City Trust Company in the City of Niagara Falls, New York, in the name "Paul Penn Schoellkopf c/o Paul Schoellkopf, Niagara Falls Power Company, Niagara Falls, New York." This income of $27,581.90 consisted of $11,606.90 interest, and $15,975 dividends on shares of stock held in domestic corporations.
During the year 1935 the plaintiff withdrew from the account of "Paul Penn Schoellkopf c/o Paul Schoellkopf, Niagara Falls Power Company, Niagara Falls, New York," the sum of $13,363.50 and applied it to the payment of premiums on the aforesaid four life insurance policies by which the life of plaintiff was insured and in which Paul Penn Schoellkopf was then the beneficiary.
The Commissioner of Internal Revenue included in the taxable gross income of the plaintiff the sum of $13,363.50, representing payments of premiums upon the aforementioned policies of life insurance. The Commissioner of Internal Revenue treated $5,393.77 as interest received during the said year by the plaintiff subject to normal tax and surtax, and $7,966.73 as dividends subject to surtax only.
The plaintiff duly filed with the defendant his individual income tax return for the calendar year 1935 on March 13, 1936, and such return was on a cash receipts and cash disbursements basis, and plaintiff paid to defendant the tax shown to be due on said return. The plaintiff on March 1, 1939, was notified of a determination of additional income taxes due from him for the calendar year 1935 in the amount of $6,690.48, and such deficiency plus the statutory interest computed thereon in the amount of $1,188.69 made an aggregate amount of $7,879.17 which was paid by the plaintiff under protest. Plaintiff thereafter duly filed a claim for a refund of the sum of $7,879.17 with interest thereon from March 7, 1939, the date of payment of the disputed amount. On May 10, 1940, the claim for such refund was disallowed by the Commissioner of Internal Revenue, and no part of said sum has been refunded or credited to the plaintiff. The plaintiff received all income and proceeds from the trust instruments and nothing was at any time paid toward the support or maintenance of the infant. All the income and proceeds were invested and re-invested by the plaintiff.
These facts have been stipulated, and the dispute is as to the effect thereof and the application of the law.
This action arises under the Revenue Act of 1934, as amended by the Revenue Act of 1935. The only pertinent sections of the Revenue Act that are involved are Section 167(a) (3) and Section 22(a):
"§ 167. Income for benefit of grantor.
"(a) Where any part of the income of a trust -- * * *
"(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor * * * then such part of the income of ...