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Klein v. Commissioner of Internal Revenue

June 9, 1936


Petition for Review of Decisions of the United States Board of Tax Appeals.

Author: Evans

Before EVANS and SPARKS, Circuit Judges, and LINDLEY, District Judge.

Deductions from taxable incomes. When allowed.

EVANS, Circuit Judge.

This appeal presents three questions growing out of the Board's denial of taxpayers' asserted right to make deductions from their taxable income.

The first asserted deduction is from the 1924 and 1925 returns and applies to both petitioners. It represents the amounts paid to sisters, pursuant to a contract negotiated April 19, 1913, in settlement of a threatened contest of the will of the father by said sisters.

The second question arises out of asserted deductions, from the gross 1926 and 1927 income, of substantial premium payments upon life insurance negotiated by the taxpayer Irving N. Klein and assigned as additional security to a bank to secure a loan which was made in order that said petitioner might purchase a larger block of the capital stock of the corporation of which he was president and general manager.

The third question arises out of an asserted deduction which represents one-fifth of the depreciation of the value of assets of a trust wherein petitioner Irving N. Klein had a one-fifth financial interest.

(1) The taxpayers' father died December 28, 1912, survived by a widow, three daughters, and two sons, the latter being the petitioners herein. His will was admitted to probate January 2, 1913, and his estate was valued at $2,868,442.39. Each of his daughters was given $75,000. To his sons he left his stock, valued at $1,500,000, in the L. Klein Corporation. The balance went to his widow and the five children. The daughters threatened a contest and a compromise resulted. An agreement was entered into wherein the sons agreed to pay $5,000 per annum to each of the sisters during the life of their mother. The mother died February 2, 1925. During the year 1924 the three sisters were each paid $5,000. Only $7,500 was paid during the year 1925.

We are satisfied that the Board correctly held that the payments were capital expenditures and not deductible by the taxpayers. Scott v. Commissioner (C.C.A.) 29 F.2d 472; Helvering v. Louis, 64 App. D.C. 263, 77 F.2d 386, 99 A.L.R. 620; Warner v. Walsh (C.C.A.) 15 F.2d 367.

The distribution of payments over a period of years in equal or unequal amounts does not change the character or nature of an investment or of an expenditure. Petitioners' right to the large legacy provisions which appeared in their father's will had been assailed by their sisters. They compromised with those whose challenge cast a cloud on their inheritances. They bought their peace. The amount paid, either at one time or over a period of years, was clearly a capital charge. It was not a loss suffered during the taxable year, not was it an interest payment nor any other deduction authorized by any section of the Revenue Act to which our attention has been called.

(2) As to the second question, only Irving N. Klein is interested. He was president of the L. Klein Corporation and general manager of its business. Until February, 1925, the stock of said corporation was owned in equal shares by Irving, his brother Edwin, and his mother. Differences arose upon the death of his mother, and Irving purchased the stock of his brother and others. In order to do so he was required to make a loan of $800,000. The bank insisted that borrower include insurance upon his life in the amount of $500,000 as additional security. Petitioner secured the insurance in the form of ten ordinary life policies of $50,000. In each policy the bank, as trustee, was designated as beneficiary. Right to change the beneficiary was not reserved in the policies, but petitioner reserved the right to substitute other policies and reduce the amount of the policies if and when the loan was reduced as specified. Petitioner paid premiums of $15,881 in 1926, and $13,718 in 1927.

The applicable statutes are sections 213 and 214 of the Revenue Act of 1924 (43 Stat. 267), section 214, Revenue Act of 1926 (44 Stat. 26) and Treasury Regulations 29, articles 291, 293.

Similar questions have frequently been before the courts, and there is not much left undecided. Rieck v. Heiner (D.C.) 20 F.2d 208, affirmed (C.C.A.) 25 F.2d 453, 454; Lloyd v. Commissioner (C.C.A.) 55 F.2d 842; Welch v. Helvering, 290 U.S. 111, 54 S. Ct. 8, 78 L. Ed. 212. See, also, Barber v. ...

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