Petition for Review of the Decision of the United States Board of Tax Appeals.
Before EVANS, MAJOR, and TREANOR, Circuit Judges.
We have before us a petition for review of a decision of the Board of Tax Appeals entered February 25, 1938, determining that the Commissioner correctly asserted an income tax deficiency for the calendar year 1932, in the amount of $5982.24.
Petitioner was the insured in four 20-payment life insurance policies issued by the Commercial Life Insurance Company of Chicago (later taken over by the Old Colony Life Insurance Company), Nos. 2190 issued September 16, 1907, 4268, 4269 and 4270 issued January 26, 1910. Each of the policies was in the amount of $10,000 and provided that, after the payment of premiums for twenty years, the insured might eighter cntinue the contract in force without further payment of premiums, or exercise the option to surrender the policy for a stated cash value, or the option of receiving an annuity. Policy No. 2190 was fully paid up in 1927 and at that time had a cash surrender value of $4980. Policy No. 4268 was fully paid up in 1929 and had a cash surrender value of $5200. The other two policies, Nos. 4269 and 4270 were fully paid up in 1930 and had a cash surrender value of $5200 each. The total amount of premiums paid upon such policies was $21,744.
All of the policies were originally payable to the petitioner's estate. On January 11, 1928, the petitioner, by causing proper endorsement on the policies, designated his son, John, as beneficiary under policies Nos. 4269 and 4270, and his daughter, Barbara Joan, as beneficiary under policies Nos. 2190 and 4268, reserving the power of revocation. On June 24, 1932, petitioner, by causing proper endorsement on the policies, irrevocably designated the same individuals as beneficiaries of the same policies.
In 1932, the Old Colony Life Insurance Company became insolvent and on September 20, 1932, receivers were appointed by the Circuit Court of Cook County, Illinois. On that date, the policies had a total cash value of $21,996.20, being the cash value of the respective policies at the end of twenty years, plus interest at 3 1/2%. November 7, 1932, the court approved the first report of the receivers and ordered the liquidation of the business of the company. November 10, 1932, the court approved and ordered the receivers to accept a proposed agreement of the Life and Casualty Insurance Company of Chicago, which agreed to reinsure, under certain conditions (including a 100% lien on reserves) the policies which had been written by the insolvent company.
In his income tax return for the year in question, petitioner claimed a loss of $21,996.20 (the cash value of the policies) as a deduction under Section 23(e) of the Revenue Act of 1932, 47 Stat. 179, 26 U.S.C.A. § 23(e). Said act is as follows:
"(e) Losses by Individuals. - Subject to the limitations provided in subsection (r) of this section, in the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -
"(1) if incurred in trade or business; or
"(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *"
The Board of Tax Appeals based its decision upon the premise that because of the irrevocable designation by petitioner of his son and daughter as beneficiaries under the policies, no loss was sustained by petitioner. Respondent argues three propositions in support of the Board's decision: First, the loss, as claimed, was not one recognizable under the pertinent provision of the Revenue Act; second, the petitioner has sustained no deductible loss, and third, petitioner has not proved either the amount or the year of the alleged loss. As related, the Board disposed of the matter by deciding the second question adversely to petitioner. In view of our conclusion that the decision of the Board must be sustained, we shall likewise consider only the same question. In other words, assuming, but not deciding, that the alleged loss is within the language of the Revenue Act in question, and also assuming, but likewise not deciding, that the time and amount of the alleged loss were properly fixed, we shall consider only the question as to whether the petitioner sustained a deductible loss. A determination of this question must depend upon the interest or property right, if any, retained by the petitioner in the policies after irrevocably designating his children as beneficiaries.
It seems to be the general rule, which, we gather from petitioner's brief, is not disputed, that the irrevocable designation of a beneficiary creates therein a vested right in the proceeds of the policy. Washington Central Nat. Bank v. Hume, 128 U.S. 195, 206, 9 S. Ct. 41, 32 L. Ed. 370. Petitioner, however, by some process not entirely clear to us, seeks to distinguish between the right acquired by the irrevocable beneficiary to the proceeds of an insurance policy having a cash surrender value, and one which does not. No case is cited, and our own investigation has failed to produce one, where the exact question here raised has been determined.
In Morgan v. Penn Mutual Life Insurance Company, 8 Cir., 94 F.2d 129, we find a discussion which, though not entirely in point, furnishes some light on the question. There the action was by the beneficiary as plaintiff against the insurance company to recover on a policy which had been surrendered by the insured for the cash value without the consent or knowledge of the beneficiary. The court points out that the policy in suit reserved to the insured the right to change the beneficiary and also the right of assignment. In discussing the question, the court on page 130 said: "Where no right is reserved in the policy to change the beneficiary without his consent, the policy confers immediately upon its issue a vested right in the beneficiary that cannot be defeated by assignment or transfer without his consent, but it is equally well settled by controlling authority in the national ...