Before CHASE, HINCKS and LUMBARD, Circuit Judges.
This is a petition by the taxpayer for review of a decision of the Tax Court which affirmed the Commissioner's determination that an annual premium paid by O. Casale, Inc. (hereinafter called the Corporation) on a policy on the life of the taxpayer was a distribution to him of a taxable dividend in the year of its payment under Section 115(a) of the 1939 Code, 26 U.S.C.A. § 115(a).
The facts, which were stipulated, were fully stated in the Tax Court opinion from which the following summary is drawn.
During the taxable year, viz ., 1950, petitioner was the president and principal stockholder of O. Casale, Inc., a New York corporation organized October 1, 1946, owning 98 of the 100 shares of its outstanding stock. The other shares were owned, one by his daughter, Philomena Casale, and one by an employee, Anna Prugner. Petitioner was also chairman of the Corporation's board of directors.
During the taxable year, the Corporation was engaged in the manufacture of topcoats, overcoats, and raincoats for various retail organizations.These organizations purchased their own material, had it cut, then the Corporation made it into the finished product. At no time since its incorporation did it pay any dividends to its stockholders, either in cash or in stock.
On December 7, 1948, when petitioner was 52 years old, a meeting of the Corporation's board of directors was held, at which the following directors were present: Petitioner Philomena Casale, and Anna Prugner. The minutes of the meeting stated its purpose to be the consideration of a pension plan for petitioner. A resolution was passed authorizing the Corporation to enter into a contract with petitioner, whereby it would obligate itself to pay him, upon certain stated contingencies, a certain monthly income upon his reaching the age of 65 years, or, if he should die prior thereto, a certain sum to his nominees or his estate.
On the same date, December 7, 1948, the Corporation entered into a deferred compensation agreement with petitioner as authorized. The agreement recited that inasmuch as petitioner "had rendered to the Corporation services in excess of the compensation paid therefor, and as the Corporation was indebted to him for a large measure of its success and desired that he continue in his capacity as its president and treasurer, the parties agreed that additional, but deferred, compensation should be paid petitioner for the services rendered by him * * *."
Also on December 7, 1948, the Corporation applied to The Equitable Life Assurance Society (hereinafter referred to as Equitable) for a life insurance policy in the principal sum of $50,000 insuring petitioner's life for the benefit of the Corporation.
On December 13, 1948, Equitable issued the policy applied for, wherein the petitioner was designated as the insured. An annual premium of $6,839.50, commencing December 7, 1948, and coming due each December 7th thereafter until maturity of the contract, was provided. The December 7th upon which the insured's age at his nearest birthday was 65 years was agreed upon as the maturity date of the policy.It was further provided that prior to maturity, death benefits in the amount of $50,000 in the event of the insured's death, or the cash value of the policy at the end of the policy year in which the insured's death occurred, whichever was greater, were payable to the Corporation as beneficiary. Upon maturity, a monthly income payment of $500 was to be made to the insured for life or a 10 year certain period, whichever was longer. The Corporation was declared to be the owner of the policy.The Corporation possessed the right to assign the policy; the right to change its beneficiary; the right to receive dividends as declared by the insurer; and the right to borrow on the policy in an amount not exceeding its loan value.
The insurance contract recited the following amounts to be its cash values at the end of each policy year:
End of Pol- icy Year Cash or Loan Value