Before MARIS, GOODRICH and KALODNER, Circuit Judges.
Are commissions received by a life insurance agent on premiums which he paid on policies he had placed on the lives of his partner, key employees and children, "gross income" under Section 22(a) of the Internal Revenue Code of 1939?*fn1
That is the single question presented by this appeal from the judgment of the District Court*fn2 which answered it affirmatively, in rejection of the contention that the commissions were merely a reduction of the cost of the policies.
The facts, critical to this appeal, may be summarized as follows:
During 1947, 1948, and 1949, the tax years here involved, A. J. Ostheimer, 3rd ("taxpayer")*fn3 conducted a business as a life insurance agent. During the first seven months of 1947, the business was conducted in partnership with one Earl Zebley, and thereafter as a sole proprietorship.
Taxpayer, during the years stated, was licensed to act as a life insurance agent in Pennsylvania for eleven life insurance companies. Among them were the Northwestern Mutual Life Insurance Company of Milwaukee, Wisconsin ("Northwestern"), of which he was a "Special Agent", and the Aetna Life Insurance Company ("Aetna").
Under his contracts with these insurance companies, the taxpayer was to receive commission on all life insurance business he wrote for them. By the contracts, as well as by Pennsylvania statutes,*fn4 the companies and their agents were required to sell insurance at fixed prices without rebate of premiums or commissions.
During the taxable years involved, taxpayer was the owner and beneficiary of life insurance policies which he had purchased on the lives of his business partner, Zebley and three of his key employees. Four of his children also owned policies issued on their lives which were purchased by taxpayer and given to them. All but one of the policies were issued by Northwestern, the remaining one was issued by Aetna.
Taxpayer personally, and through his secretary, prepared the applications for the policies on which he was designated as agent. From the dates of their issuance, including the taxable years involved, he paid the standard premiums on all the policies, by checks drawn on his personal bank account. The policies and premium payments were processed by the general agents of Northwestern and Aetna in the same manner as other policies and premiums. The general agents periodically submitted "Commission Statements" to taxpayer and these statements covered all amounts due him from time to time, and were accompanied by checks for the total amount then due, including among others the regular commissions on the policies here involved.
Taxpayer was a "Special Agent" of Northwestern and an "authorized agent" for Aetna. As "Special Agent" taxpayer was not required to spend a fixed amount of time for Northwestern. He was obligated to give Northwestern a right of first refusal on policies of the type issued by it. His agency contract specifically provided that it did not create an employer-employee relationship.
Taxpayer (and his wife) did not include in their gross income on their tax returns any of the amounts equal to contractual commissions on the policies involved. It may be noted, parenthetically, that taxpayer deducted as necessary and ordinary business expenses the nominal expenses incident to the policies agreed to be in the amount of $5.00 per annum.
The Commissioner determined that the commissions received by taxpayer on these policies should properly have been included in the taxable years at issue and accordingly assessed deficiencies. The District Court, as stated, sustained the Commissioner's determination.
Here, as below, taxpayer urges that his commissions merely effectuated a reduction of his cost in purchasing and maintaining the policies and consequently did not constitute "income". He says he merely acted as his own middleman and thereby obtained the middleman's benefit, viz., the ...