## Facts

- Henry E. Prunier and Joseph E. Prunier were brothers, principal shareholders, and officers of J.S. Prunier & Sons, Inc., a closely held Massachusetts corporation.
- The corporation had 450 shares; until late 1950 Henry and Joseph each held 225 shares, later transferring small portions to a cousin who served as corporate clerk/bookkeeper.
- Between 1942 and 1950, eight life insurance policies were arranged: four on Henry’s life naming Joseph as beneficiary (total $45,000) and four on Joseph’s life naming Henry as beneficiary (total $45,000).
- From at least 1946 through 1950, the corporation paid the premiums on the policies; for 1950 the policy documents did not identify the corporation as owner or beneficiary.
- The premiums were not deducted as business expenses on the corporate returns; they were recorded as surplus adjustments.
- The insurance was connected to a stock-purchase (“buy-sell”) plan intended to provide funds for the corporation to purchase the deceased brother’s shares, maintaining continuity of ownership/control.
- In 1952 (after the 1950 tax year and after tax scrutiny), endorsements were added naming the corporation as beneficiary, while also reserving Henry a power to change beneficiaries.

## Issues

1. Whether premiums paid in 1950 by a closely held corporation on life insurance policies insuring its shareholder-officers were taxable income to the insured individuals under § 22(a) of the Internal Revenue Code of 1939.

## Decision

- The First Circuit vacated the Tax Court decisions and remanded.
- The court held the 1950 premium payments were not taxable income to Henry and Joseph under § 22(a).
- The court treated the corporation as the intended beneficial owner of the policies under state law and the buy-sell plan, making the premium payments corporate expenditures rather than shareholder compensation or dividends.

## Legal Principles

- Under § 22(a) (1939 Code), a corporate payment is includible in a shareholder-employee’s income when it is primarily for the individual’s benefit (e.g., compensation or a constructive dividend), not when it is a corporate expenditure for a corporate purpose.
- A corporation is generally respected as a separate taxable entity even when closely held; corporate and shareholder tax consequences are not merged merely due to informal governance.
- For insurance arrangements tied to stock-purchase plans, beneficial ownership may be determined from the parties’ agreement, corporate records and accounting treatment, and surrounding circumstances, not solely from policy forms.
- Premium payments funding a bona fide corporate stock-redemption plan, where the corporation is the beneficial owner and expected recipient of proceeds, do not create current taxable income to the insured shareholders absent a present, direct economic benefit to them.

## Conclusion

The court concluded that because the life insurance was acquired and maintained to implement a corporate buy-sell stock plan and the corporation was the intended beneficial owner, the corporation’s 1950 premium payments were not taxable income to the shareholder-officers under § 22(a).


Prunier v. Commissioner, 248 F.2d 818 (1st Cir. 1957)