83 T.C. 356">*357 OPINION

The Commissioner determined deficiencies in petitioners' Federal income tax in the amounts of $ 12,937.90 and $ 2,354.41 for 1977 and 1978, respectively. After concessions, the sole issue for decision is whether petitioners may deduct premiums paid with respect to an insurance policy on the life of petitioner John D. Carbine. The case was submitted on the basis of a stipulation of facts.

Petitioners John D. Carbine (sometimes hereinafter referred to as petitioner or Carbine) and Eleanor W. Carbine, husband and wife, resided in Haines City, FL, when they filed their petition herein. They timely filed joint Federal income tax returns for the calendar years 1977 and 1978 with the Internal Revenue Service at Andover, MA. These returns list Carbine's occupation as "attorney," and attached Forms W-2 show his "Wages, tips and other compensation" (presumably related to his occupation as an attorney) to be $ 91,347.20 for 1977 and $ 105,496.85 for 1978.

During the years in issue, Carbine resided in Vermont and practiced law in that State. 1984 U.S. Tax Ct. LEXIS 31">*34 Among other investments, he held a 20-percent stock interest in Burgess-Carbine Associates, Inc. (BCA), a Vermont corporation engaged in the business of a general insurance agency. The other shareholders of BCA, each of whom also owned 20 percent of BCA's stock, were Stephen A. Carbine (Carbine's son), Ronald N. Burgess, Mr. Burgess' mother-in-law, and Mr. Burgess' brother.

On November 28, 1973, BCA obtained a loan commitment from First Vermont Bank & Trust Co. (the bank) for the purpose of financing the purchase of the L.A. Appell Agency (the agency), an insurance agency then owned by Leonard A. Appell (Appell). The bank agreed to advance BCA an initial amount of $ 65,000, with subsequent advances to be made up to a total of $ 225,000. The commitment provided that an aggregate 83 T.C. 356">*358 of $ 125,000 would be advanced on an unsecured basis (subject to a review of the combined operating figures for BCA and the agency as of September 30, 1974) with the remainder secured by stocks and bonds. In addition, it specifically required Carbine to guarantee all BCA notes issued under the commitment and to hypothecate the stocks and/or bonds needed to secure the loan.

On December 14, 1973, 1984 U.S. Tax Ct. LEXIS 31">*35 BCA and Appell entered into an agreement whereby BCA purchased all of the agency's assets for $ 250,000. ¹ Under the terms of the sales agreement, BCA was required to pay $ 5,000 of the purchase price immediately and the remainder in equal installments of $ 20,416.67 on the 10th day of January, April, July, and October of 1974, 1975, and 1976. The bank disbursed the initial $ 65,000 loan amount to BCA as follows:

Subsequent to these disbursements, the bank made several additional advances pursuant to the loan commitment, all of which were evidenced by notes to BCA.

The record is unclear as to whether Carbine in fact ever hypothecated any securities pursuant to the loan commitment. However, on October 8, 1975, in a transaction independent of that loan, Carbine signed a general hypothecation agreement1984 U.S. Tax Ct. LEXIS 31">*36 covering all obligations of BCA to the bank whenever arising. Pursuant to this latter agreement, Carbine pledged certain securities and insurance policies ² which he owned to the bank.

In 1976 BCA sold the major part of its assets and its casualty insurance business to Smith-Bell, another insurance agency, for cash and a note. Thereafter, BCA continued to conduct only a small volume of life insurance and pension business.

On November 1, 1976, the outstanding notes of BCA under the 1973 loan commitment were consolidated into a single new 7-year term note of $ 137,000. Carbine guaranteed this term note as an endorser and, "Pursuant to [this] * * * term Loan 83 T.C. 356">*359 * * * pledged stock owned by him to the Bank to secure BCA's indebtedness." ³ Under the provisions of this term note, the bank could dispose of the pledged stock if BCA defaulted on its obligations or if the bank determined that the collateral available to it had become insufficient to secure1984 U.S. Tax Ct. LEXIS 31">*37 BCA's obligations unless additional collateral was deposited or the note was paid down.

On January 24, 1977, BCA obtained an insurance policy on Carbine's life (the policy). The policy listed BCA as its owner and BCA and the First National Bank of Boston, Trustee of the John D. Carbine Trust dated May 19, 1975, ⁴ as its beneficiaries. On March 3, 1977, BCA assigned the policy to the bank as additional security for the term note. BCA also altered the policy's beneficiary designation so as to eliminate any interest of the First National Bank of Boston, Trustee of the John D. Carbine Trust, and so as to provide that the policy's proceeds would continue to be payable to BCA to the extent of any premiums that had become due and been paid at the time of Carbine's death, less any policy indebtedness. The bank's interest as assignee of the policy does not appear to have been adversely1984 U.S. Tax Ct. LEXIS 31">*38 affected.

During 1977 and 1978, BCA encountered financial difficulties and became unable to pay both the amounts owing on the term note to the bank and the policy's premiums. BCA chose to apply its limited funds first to the payment of the term note ⁵ and then to the payment of some of the premiums. Because nonpayment of the premiums would have allowed the bank to sell the securities owned by Carbine and held by the bank under the general hypothecation agreement and the term loan, Carbine personally paid all premiums on the policy which were not paid by BCA. BCA was not obligated to, and did not in fact, reimburse petitioner Carbine for these payments.

1984 U.S. Tax Ct. LEXIS 31">*39 Carbine made total premium payments with respect to the policy of $ 14,486.59 in 1977 and $ 8,912.73 in 1978. Petitioners treated these amounts as expenses incurred "to protect * * * 83 T.C. 356">*360 collateral" and claimed a deduction under section 212, I.R.C. 1954, for the respective amounts on their 1977 and 1978 Federal income tax returns. In the deficiency notice herein, the Commissioner disallowed these deductions on the ground that petitioners had not established that the amounts were "ordinary and necessary business expenses [within section 162(a)]."

Petitioners never did claim any such section 162(a) "business" expense deduction; their sole position rests upon section 212(2), and indeed they argue affirmatively, as will hereinafter appear, that the expenses were not incurred in any trade or business conducted by Carbine. Their basic position is that the claimed deduction is allowed by section 212(2) since the payments were made to protect Carbine's securities which had been put up as collateral for the bank's loan to BCA. The Commissioner now contends (1) that section 212(2) is inapplicable because the payments were not "ordinary and necessary," (2) that in any event, the deduction1984 U.S. Tax Ct. LEXIS 31">*40 is forbidden by section 262 relating to "personal, living, or family expenses," and (3) that it is also foreclosed by section 264(a)(1) relating to life insurance premiums. We shall proceed to consider each of these points.

1. Section 212(2). -- The pertinent provisions of section 212(2) of the 1954 Code allow a deduction to individuals for all the "ordinary and necessary expenses" incurred or paid "for the management, conservation, or maintenance of property held for the production of income." These provisions had their origin in section 23(a)(2) of the 1939 Code, which had been added to that Code in 1942 by section 121 of the Revenue Act of 1942, 56 Stat. 798, 819. Theretofore, deductions for "ordinary and necessary" expenses were allowed under section 23(a) of the 1939 Code only with respect to the carrying on of a "trade or business." The 1942 amendment divided the old section 23(a) into two parts, one, section 23(a)(1), dealt with the previously deductible "trade or business" expenses, now covered by section 162 of the 1954 Code; the other, section 23(a)(2), dealt with a new category of deductions relating to non-trade or non-business expenses, now covered by section 2121984 U.S. Tax Ct. LEXIS 31">*41 of the 1954 Code involved herein. These new provisions were intended to allow deductions in respect of certain income or profit-oriented situations, notwithstanding the absence of a related 83 T.C. 356">*361 "trade or business." But all the other requirements for deductibility of "trade or business" expenses remained applicable to this new class of nontrade or nonbusiness deductions. See Trust of Bingham v. Commissioner, 325 U.S. 365">325 U.S. 365, 325 U.S. 365">373-374 (1945); Davis v. Commissioner, 4 T.C. 329">4 T.C. 329, 4 T.C. 329">334 (1944). It is the Government's contention that petitioner's payment of premiums involved herein fail to satisfy one of those requirements, namely, that the payments must qualify as "ordinary and necessary" expenses. We hold otherwise.

Petitioner had guaranteed BCA's indebtedness to the bank, and had pledged his securities as collateral. Moreover, in order to provide additional security, BCA had taken out an insurance policy on petitioner's life; as owner of the policy, BCA assigned it to the bank as security for the note, and eliminated the John D. Carbine Trust as a named beneficiary. As things thus stood, BCA's failure to maintain the policy1984 U.S. Tax Ct. LEXIS 31">*42 by paying the premiums would cause the policy to lapse, and, in such circumstances, the bank had the right to dispose of petitioner's pledged securities if the total collateral should become insufficient to secure BCA's outstanding indebtedness to the bank.

BCA came upon hard times, and notwithstanding its obligation to pay the premiums on the policy, it was unable both to make the required payments on the note and to pay the premiums in full. It elected to use its limited resources in the first instance for payments on its note to the bank, and was thus left without sufficient funds to carry out in full its contractual obligation to maintain the policy. Petitioner was then faced with the very real hazard of losing his pledged securities unless he himself paid that portion of the premiums that remained unpaid. The parties have stipulated the circumstances of petitioner's payments here in controversy as follows:

Because non-payment of the premiums would have allowed the Bank to sell the securities owned by petitioner Carbine and held by the Bank under the general hypothecation agreement and the term loan, petitioner Carbine personally paid all premiums on the life insurance policy1984 U.S. Tax Ct. LEXIS 31">*43 which were not paid by BCA. BCA was not obligated to, and did not in fact, reimburse petitioner Carbine for these payments.

In the light of the foregoing, it is difficult to imagine a more direct or proximate connection between the payments thus made by petitioner and his reasonable effort to protect his pledged securities. In the language of section 212(2), such 83 T.C. 356">*362 payments were made for the "conservation" of petitioner's securities held "for the production of income" ⁶ that had been pledged to the bank.

The Government argues, however, that since it was BCA's obligation to pay the premiums and since any such payment by BCA would be deductible by it as an "ordinary and necessary expense" of its business, the voluntary payment by Carbine of BCA's expense1984 U.S. Tax Ct. LEXIS 31">*44 in discharge of its obligation cannot qualify as his deductible "ordinary and necessary" expense. The point is specious. That such expenses might have been "ordinary and necessary" in respect of BCA had it made the payments is not inconsistent with such classification in respect of Carbine's payments that were made for entirely different reasons. His payments were directly and proximately connected with the protection of his own pledged securities. In this respect, the instant case is unlike Deputy v. du Pont, 308 U.S. 488">308 U.S. 488 (1940), where the Court noted (p. 494) that the payments there involved resulted "proximately * * * not from the taxpayer's business but from the business of the du Pont Company." In sharp contrast, the payments here resulted proximately from petitioner's own situation, notwithstanding that they also served a very good purpose for BCA.

Nor is it of critical significance that petitioner might have avoided losing (or at least have delayed the loss of) his securities by putting up additional collateral instead of paying the insurance premiums. For whatever reason, he chose to pay the premiums rather than to put at risk even more1984 U.S. Tax Ct. LEXIS 31">*45 of his own property, and we will not undertake to second guess why. The point is that the course he followed was in fact clearly and reasonably related to the "conservation" of his securities, notwithstanding that he might conceivably have attained that objective in some other manner.

The Government pursues the matter further, focusing separately on each of the words "ordinary" and "necessary," and contends that the payments were neither "ordinary" nor "necessary." Here again, we disagree on the record before us. As to the "ordinary" requirement, the statute "does not mean that the payments must be habitual or normal in the sense 83 T.C. 356">*363 that the same taxpayer will have to make them often." Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">114 (1933). The requirement is satisfied if the payment is one that may ordinarily or customarily be made by a person in the taxpayer's position in response to a situation like the one faced by the taxpayer. Cf. 290 U.S. 111">Welch v. Helvering, supra at 114. Indeed, it has been recognized that an "expense may be ordinary though it happen but once in the taxpayer's lifetime." Deputy v. du Pont, 308 U.S. 488">308 U.S. at 495.1984 U.S. Tax Ct. LEXIS 31">*46 The meaning of "ordinary" in the context of the statutory provisions before us was also indicated in Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, 320 U.S. 467">472 (1943), where that word was regarded as being the equivalent of "normal," or "the response ordinarily to be expected." In our judgment, petitioner's response here in paying the premiums was a "response ordinarily to be expected" of a person in his situation. It was "ordinary" within the meaning of the statute.

To be sure, as argued by the Government, it is not "ordinary" for one to pay the debts of another. Welch v. Helvering, 290 U.S. 111">290 U.S. at 111. But the rule of Welch v. Helvering is not inflexible; circumstances may exist calling for a different result (cf. Lohrke v. Commissioner, 48 T.C. 679">48 T.C. 679, 48 T.C. 679">684-687 (1967)). And in our view, not only were such circumstances present here, but petitioner's payments of the premiums were motivated by considerations peculiar to himself that were extraneous to the interests of BCA.

As to the "necessary" requirement, we need only call attention to the fact that "necessary" is not used in the statute to mean "indispensable" 1984 U.S. Tax Ct. LEXIS 31">*47 or to require that the taxpayer be legally obligated to make the payment. See Waring Products Corp. v. Commissioner, 27 T.C. 921">27 T.C. 921, 27 T.C. 921">929 (1957). A payment may qualify as "necessary" if it is "appropriate and helpful." See Commissioner v. Heininger, 320 U.S. 467">320 U.S. at 471; Welch v. Helvering, 290 U.S. 111">290 U.S. at 113. On the record before us, we find that Carbine's payments here were "appropriate and helpful" and therefore "necessary."

We add a final word on the "ordinary and necessary" requirement. The number of cases in this field runs well into the hundreds, and it would serve no useful purpose to undertake a comprehensive analysis of them. Many are borderline and some are arguably inconsistent with others. Cf. Welch v. Helvering, 290 U.S. 111">290 U.S. at 116: "To attempt to harmonize 83 T.C. 356">*364 them would be a futile task." In Deputy v. du Pont, 308 U.S. 488">308 U.S. at 496, the Court stated "Review of the many decided cases is of little aid since each turns on its special facts." We decide the present case on the facts before us, and find that on this record, the payments1984 U.S. Tax Ct. LEXIS 31">*48 were "ordinary and necessary," notwithstanding some troubling language in O'Donohue v. Commissioner, 33 T.C. 698">33 T.C. 698, 33 T.C. 698">701 (1960), a case presenting an analogous but nevertheless a different set of facts.

2. Section 262. -- The 1954 Code provides in section 262 that "Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses." The Commissioner relies upon this provision, and particularly upon section 1.262-1(b)(1) of the related income tax regulations. The regulations undertake to give examples of nondeductible personal, living, and family expenses the first of which is stated as follows: "(1) Premiums paid for life insurance by the insured are not deductible." We hold that the statute and regulations were not intended to rule out the claimed deduction here in issue.

The statute was obviously referring to expenses incurred in a personal context, unrelated to the taxpayer's business or to his income or profit-oriented activities. And since life insurance maintained by the insured is ordinarily of a "personal, living, or family" character, the regulations quite properly characterized1984 U.S. Tax Ct. LEXIS 31">*49 life insurance premiums as an example of a nondeductible expense. But although the regulations are phrased in general terms, they do not go further to state specifically that life insurance premiums paid in an exclusively business or profit-oriented context are always nondeductible. To have done so would have run afoul of the explicit provisions of sections 162 and 212 of the 1954 Code and the "Except as otherwise expressly provided in this chapter" language of section 262 itself. Notwithstanding the generality of the terms of section 1.262-1(b)(1), Income Tax Regs., we think that it was never intended to render nondeductible the payment of all life insurance premiums in a business or profit-oriented or other context that would otherwise be deductible. The following cases demonstrate that any such sweeping rule would be erroneous: Carmichael v. Commissioner, 14 T.C. 1356">14 T.C. 1356, 14 T.C. 1356">1362-1365 (1950); Hunton, IV v. Commissioner, 1 T.C. 821">1 T.C. 821 (1943); Behrend v. Commissioner, 23 B.T.A. 1037">23 B.T.A. 1037 (1931).

83 T.C. 356">*365 Although there is superficial support for the Government's position based upon an uncritically1984 U.S. Tax Ct. LEXIS 31">*50 literal reading of the regulations, we think it is unsound as applied in this case. We do not construe the regulations as prohibiting the deduction of life insurance premiums by the insured under all circumstances. A reasonable interpretation of the regulations compatible with the purpose of the statute would not foreclose the deduction of such premiums where the payments are occasioned by, and are proximately related to, the insured's business (section 162) or profit-oriented (section 212(2)) affairs.

3. Section 264(a)(1). -- The Commissioner argues finally that the claimed deductions are prohibited by section 264(a)(1), which provides:

SEC. 264. CERTAIN AMOUNTS PAID IN CONNECTION WITH INSURANCE CONTRACTS.

(a) General Rule. -- No deduction shall be allowed for --

(1) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.