Tawes v. Strouse

Adams, J., delivered the opinion of the Court. The problem presented by this appeal is the determination of the legislative intent as expressed in the 1939 Income Tax Statute, with reference to a paid-up life insurance policy which was surrendered by Eli Strouse, one of the appellees. On March 10, 1902, the New York Life Insurance Company issued a twenty-payment life policy on the life of Eli Strouse, providing for the payment of a pre ⁵¹⁰ mium of $354.20 for the first year, and pf $277.80 each year thereafter until twenty years after issuance, when no further premiums were required, and the policy became fully paid up. The policy provided a guaranteed cash surrender value, as set out in a table accompanying the policy, for each year the policy was in force, beginning with the third year.

The total of premiums paid amounted to $5,632.40. Two dividends were allowed during the period when the policyholder was paying premiums: in 1909, the sum of $166.70; and in 1916, the sum of $173.60. These two dividends aggregated $340.30, and reduced the net premiums paid during the twenty-year period to $5,-292.10. Subsequent to the time that the policy became paid up, between the years 1923 to 1939, the dividends paid aggregated $2,293.10.

On September 25, 1939, Eli Strouse surrendered the policy to the insurance company and received as the cash surrender value therefor the sum of $7,560. If all dividends paid prior to and including 1939 are deducted from the aggregate of premiums paid, the excess of surrender value, $7,560, over total net premiums, would be the sum of $4,561. If the determination of net premiums is confined to the twenty-year period during which premiums were paid, the net premiums during the twenty-year period total $5,-292.10, and the proceeds of policy in excess of premiums paid would be $2,267.90. The pertinent provisions of the Income Tax Act of 1939, Code, 1939, Art. 81, are the following: 222. “(m) ‘Interest’ means interest from whatever source derived, and includes interest from bonds, certificates of indebtedness, evidences of debt, judgments, notes, mortgages and money at interest. “(n) ‘Investment income’ means that portion of the gross income which is derived from dividends, ground rents, annuity income and interest, * * *. “(o) ‘Ordinary income’ means that portion of the gross income which is not investment income. ⁵¹¹ “223.

(Gross Income and Exclusions Therefrom.) ‘Gross income’ means income from whatever source derived, including salaries, wages or compensation for personal services of whatever kind and in whatever form paid; interest, dividends, rents, royalties and annuity income; and gains, profits and income derived from professions, vocations, trades, businesses and commerce. ‘Gross income’ shall not include the following: “(a) Capital gains realized from the sale, exchange or other disposition of property held by a taxpayer * ❖ ❖ “(b) The proceeds of life insurance policies paid by reason of the death of the insured. “(c) Amounts received (other than amounts paid by reason of the death of the insured) under life insurance or endowment contracts, either during the term or at maturity or upon surrender of the contract, equal to the total amount of the premiums paid therefor.” “244. (Comptroller to Administer.) The Comptroller is hereby authorized and required to administer the provisions of this sub-title. * * * He shall apply as far as practicable the administrative and judicial interpretations of the Federal Income tax law.” The phrase, “income from whatever source derived,” has been used in every Federal Income Tax Act since the effective date of the Sixteenth Amendment. It has been used in many State Acts, and the phrase had a fixed and definite legal meaning at the time it was enacted as a part of the Maryland Income Tax Law. The phrase as construed included the proceeds of a surrendered life insurance policy.

The case of Lucas v. Alexander, 279 U. S. 573 , 73 L. Ed. 851 , settled the point so far as the federal statute was concerned, and as the Comptroller by Section 244 of Article 81 of the Maryland Act is to apply the “judicial interpretations of the Federal income tax law,” it settles also the construction of the Maryland Income Tax Law. The facts briefly stated were that on May 19, 1908, two policies of life insurance on the life of Alexander, each in the ⁵¹² sum of $50,000, became fully paid up. On May 19, 1919, Alexander surrendered the two policies, receiving $120,-797, representing $100,000 face value, plus $20,797