United States v. Drescher
Encyclopedia
United States v. Drescher 179 F.2d 863 (2nd Cir.1950) was a United States
income tax
case before the Second Circuit. The Court held as follows:
, anticipating its executive's retirement, purchases an "endowment policy
," entitling him (the policy-holder) to a lump-sum-certain
when he retires in 15 years.
are as follows:
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
case before the Second Circuit. The Court held as follows:
- The value of the employer-purchased annuitiesAnnuity (US financial products)In the United States an annuity contract is created when an insured party, usually an individual, pays a life insurance company a single premium that will later be distributed back to the insured party over time...
in question was taxable as part of taxpayer's gross incomeGross incomeGross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...
in the year in which the annuities were purchased. - The annuities in question were nonassignable, and possession was retained by the employer until taxpayer reached age of retirementRetirementRetirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
; and the employee's compensationCompensationCompensation can refer to:*Financial compensation, various meanings*Compensation , various advantages a player has in exchange for a disadvantage*Compensation *Compensation , by Ralph Waldo Emerson...
was not reduced during these years, nor did he have election to receive in cash the amount paid
Facts
A corporationCorporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, anticipating its executive's retirement, purchases an "endowment policy
Endowment policy
An endowment policy is a life insurance contract designed to pay a lump sum after a specified term or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit...
," entitling him (the policy-holder) to a lump-sum-certain
Lump sum
A lump sum is a single payment of money, as opposed to a series of payments made over time .The United States Department of Housing and Urban Development distinguishes between "price analysis" and "cost analysis" by whether the decision maker compares lump sum amounts, or subjects contract prices...
when he retires in 15 years.
Academic Commentary
The stakes for the governmentGovernment
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
are as follows:
- Due to the declining present value of future money, a taxpayer pays less in taxes if he can defer his tax payment.
- In the case of this endowment policy:
- If the Premium = $B, the [lump sum] will be $[B*(1+i)^Y].
- If deferral is permitted, the executive's tax savings = (marginal rate R)*[lump sum]
- Reasons in favor of deferral: it was issued to the company in the interim; and, unlike the stock bonus above, his rights are nonforfeitable: he can't sell/borrow against it, nor can he be denied it by being fired.
- Reasons against deferral: it names him as the beneficiaryBeneficiaryA beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example: The beneficiary of a life insurance policy, is the person who receives the payment of the amount of insurance after the death of the insured...
; he should feel better off at issuance—and he certainly consented to the policy purchase in lieu of salarySalaryA salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....
(e.g. as consideration).