Blacksher v. Commissioner ( 1938 )

D. W. BLACKSHER AND FIRST NATIONAL BANK OF MOBILE, ALABAMA, EXECUTORS OF THE ESTATE OF JAMES URIAH BLACKSHER, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Blacksher v. Commissioner

Docket No. 88453.

United States Board of Tax Appeals

38 B.T.A. 998; 1938 BTA LEXIS 799;

October 25, 1938, Promulgated

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1. The proceeds of life insurance policies which provided for payment to the beneficiaries after decedent's death of annuities for a period of 20 years certain and as long thereafter as the beneficiaries should live, the decedent at the time of his death having no right to change the beneficiaries, to receive the cash surrender value of the policies, or to borrow money on the policies without the consent of the beneficiaries, held not includable in decedent's gross estate for estate tax purposes.

2. The values of certain life insurance policies includable in decedent's gross estate determined in accordance with article 13(10) of Regulations 70.

George E. H. Goodner, Esq., for the petitioners.

Francis S. Gettle, Esq., for the respondent.

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SMITH

The petitioners ask the redetermination of a deficiency in estate tax in the amount of $33,827.41. The deficiency arises from the respondent's inclusion in the gross estate of the decedent of the value of certain life insurance policies on the life of the decedent and his valuation of certain other life insurance policies admittedly a part of the decednet's gross estate.

The petitioner alleges eleven errors on the part of the respondent in the determination of the deficiency in paragraphs 4(a) to 4(k), inclusive. At the hearing of this proceeding the petitioners waived allegations 4(i) and 4(j). In his brief the respondent concedes the correctness of the petitioners' contentions with regard to 4(b), 4(e), 4(f), and 4(k). The allegations of error not settled by the waivers and concessions are:

4. * * *

(a) In arriving at the gross estate, and therefore the net estate, respondent has erroneously included therein the sum of $43,250.00 representing the value as determined by him of insurance policy No. 1,176,103 in the Mutual Life Insurance Company of New York, when decedent had no property interest in said policy at the time of his death.

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(c) In arriving at the gross estate, and therefore the net estate, respondent has erroneously included therein the sum of $18,750.00 representing the value as determined by him of insurance policy No. 328,783 in the Union Central Life Insurance Company, when decedent had no property interest in said policy at the time of his death.

(d) In arriving at the gross estate, and therefore the net estate, respondent has erroneously included therein the sum of $18,750.00 representing the value as determined by him of insurance policy No. 328,782 in the Union Central Life Insurance Company, when decedent had no property interest in said policy at the time of his death.

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(g) In arriving at the gross estate, and therefore the net estate, respondent has erroneously included therein the sum of $31,022.40 as the value of insurance policy No. 1,603,359 in the Equitable Life Assurance Society of New York at the date of death of decedent, when the value was not in excess of $25,224.15.

(h) In arriving at the gross estate, and therefore the net estate, respondent has erroneously included therein the sum of $30,000.00 as the value of insurance policy No. 1,100,992 in the Prudential Insurance Company of America at the date of death of the decedent, when the value was not in excess of $21,925.00.

By an amendment to the petition filed April 6, 1938, the petitioners allege:

4. (1) If it should be held that the value of insurance policy No. 1,176,103 in the Mutual Life Insurance Company of New York (referred to in paragraph 4(a) above) should be included in the gross estate, then respondent has erroneously included therein the sum of $43,250.00 as its value, when the value at the date of death of decedent was not in excess of $36,475.82.

FINDINGS OF FACT.

1. The petitioners are the executors of the estate of James Uriah Blacksher, hereinafter sometimes referred to as the insured, who died August 3, 1934, a resident of Mobile, Alabama.

2. A Federal estate tax return for James Uriah Blacksher was filed by petitioners with the collector of internal revenue for the district of Alabama, on or about June 15, 1935. A Federal estate tax was paid thereon on July 31, 1935, in the amount of $54,454.06, no part of which has ever been refunded. Likewise, there was paid to the State of Alabama as inheritance tax on the estate of James Uriah Blacksher the sum of $11,427.74, by check on July 31, 1935, no part of which has ever been refunded.

3. In auditing the Federal estate tax return filed respondent determined the net estate of the decedent to be $605,041.88 under the provisions of the Revenue Act of 1926, and $655,041.88 under the provisions of the Revenue Act of 1932; and a total tax liability based thereon of $99,709.21, less a credit of $11,427.74 (inheritance tax paid to the State of Alabama), and a deficiency in tax of $33,827.41.

4. On September 28, 1901, there was issued to the decedent by the Mutual Life Insurance Co. of New York a life insurance policy, No. 1,176,103, in the fact amount of $50,000. Willie C. Blacksher, wife of the decedent, was named as beneficiary. The policy provided for the payment upon the death of the insured of an annuity of $2,500 per year to the beneficiary for a period of 20 years certain and as long thereafter as she might live. If she died within the 20 years the remaining payments during that period were payable to the executors or administrators of the insured. The pertinent provisions of the policy are as follows:

Upon acceptance of the Head Office of the Company in the City of New York of satisfactory proofs of the death of the said insured during the continuance of this Policy and on the surrender of this Policy at said office the said insurance will be adjusted in instalments without interest by the issuance of an Annuity Contract in lieu thereof as hereinafter provided.

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ANNUITY CONTRACT. - Upon surrender of this policy after acceptance by the Company of satisfactory proofs of the death of the insured the Company will issue a non-participating annuity contract, the single premium for which shall be entered on the Company's books as a death claim under this policy. The said annuity contract shall provide as follows:

(a) If the beneficiary be living at the date of said annuity contract the Company will pay to the beneficiary on such date a first instalment equal to five per cent. of the face amount of this policy, and thereafter on each anniversary of said date an instalment of like amount without interest, until twenty such instalments shall have been paid, and furthermore the Company will continue the payment of such annuity in like instalments throughout the remaining lifetime of said beneficiary.

Should the beneficiary die during the continuance of said annuity contract and before the completed payment of said twenty annual instalments, the Company will pay the remainder thereof, as they become due, to the executors or administrators of the Insured.

(b) If the beneficiary be not living at the date of said annuity contract, the Company will pay twenty instalments only, as above described, to the executors or administrators of the insured.

CASH SURRENDER VALUE. - After three full years' premiums have been paid, upon the non-payment of any subsequent premium on the date called for in the policy and within sixty days thereafter, or at any time after all the premiums required have been paid, this policy may be surrendered and the Company will pay therefor, within sixty days from the date of such surrender, the amount stated in the table below for the end of the last completed policy year; deducting any unpaid loan hereon.

LOANS. - After this policy shall have been in force three full years, the Company, within sixty days after written application, and upon the assignment of this policy as security, will, in conformity with its rules then in force, loan amounts within the limits of the cash surrender value, with interest in advance, at the rate of five per cent. per annum, provided: (1) that premiums be fully paid to the end of the policy year in which the loan falls due; (2) that in any settlement of this policy all outstanding indebtedness must be paid.

SURPLUS. - The first distributive share of surplus shall be apportioned to this policy, if in force, at the expiration of twenty years from date, and may be drawn in cash or be applied to purchase an annuity. Subsequent distributions shall be made annually during the lifetime of the insured only.

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ASSIGNMENTS. - The Company declines to notice any assignment of this policy until the original assignment, or a duplicate or certified copy thereof shall be filed in the Company's Head Office. The Company will not assume any responsibility for the validity of an assignment. No assignment or hypothecation of this policy, or of any part thereof or interest therein, or of any instalment accruing thereon, made by the beneficiary without the written concurrence of the insured, shall be valid, and if assigned without such concurrence no payment shall be made by the Company during the lifetime of the beneficiary, except to the beneficiary within named, personally, or upon his or her order for each payment as the same may become due.

Under the practice of the company the cash surrender value of the policy could be obtained only by the beneficiary upon her application therefor, and any check representing such cash surrender value would have been made in the name of the beneficiary. No loan on the policy could have been obtained without the beneficiary's written consent. The insured had no right to change the beneficiary.

The respondent determined the value of this policy at the date of the death of the insured to be $43,250 and included that amount in the gross value of the estate of the insured.

5. On December 1, 1906, there was issued to the decedent by the Union Central Life Insurance Co. two life insurance policies, Nos. 328,782 and 328,783, identical in terms and each in the face amount of $25,000. Wesley May Blacksher and David William Blacksher, children of the insured, were named, respectively, as beneficiaries. Each policy provided that upon the death of the insured the insurer would pay to the beneficiary $1,250 annually for 20 years certain and as long thereafter as the beneficiary might live. Each policy expressly reserved to the insured the right to participate in the profits, or annual dividends, accruing from the policies for the term of his natural life. The pertinent provisions of these policies are as follows:

IV. Distribution of Surplus. This Policy is written upon the Annual Dividend plan, and beginning with the end of the second year will participate annually in profits as apportioned by the Company, dividends being due and payable only upon the payment of the next succeeding year's premium, if any.

Dividends may be applied by the insured in any one of the following ways:

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(2) In cash, if all premiums required under the terms of the Policy have been paid.

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V. Option of Cash Settlement. Upon the 30th day of November, 1926, the Insured shall have the option of discontinuing this Policy by surrender to the Company, and receiving in lieu the sum of $9731-00/100; and in addition thereto the Reserve Value of the Reversionary Additions, if any, calculated according to the American Table of Mortality with three and one-half per cent. interest; provided that this Policy shall not have been terminated previously by lapse, death or otherwise, and that all indebtedness to the Company, if any, shall be deducted from the amount payable as defined above.

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VIII. Cash Loans. Upon legal assignment of this Policy to the Company as collateral security, the said Company will loan thereon, after three or more full years' premiums have been paid, and while it is in full force and effect, the amount stated in Table "C" below. * * *

The insured did not reserve the right to change the beneficiary in either of the policies. Under the practice of the company the insured could apply for a cash surrender value only with the written consent of the beneficiary. If a loan had been made on either of the policies the check would have been drawn to the order of the beneficiary.

The respondent has determined the present value of each policy to be $18,750 and has included the amounts in the gross estate of the insured.

6. On August 3, 1909, there was issued to the decedent by the Equitable Life Assurance Society a life insurance policy, No. 1,603,359, in the face amount of $30,000. Willie C. Blacksher, the wife of the insured, was named the beneficiary. The policy provided for payment to the beneficiary upon the death of the insured of an annuity of $1,500 payable monthly for a period of 20 years. It also contained an option for the payment of equal annual installments payable at the beginning of each year for a fixed period of 20 years and for so many years longer as the beneficiary might survive.

At the time of the death of the insured settlement of the policy was made by the company by the issuance of a contract providing for the payment to the beneficiary of an annuity payable on a monthly basis of $129.26 for a period of 20 years certain and for the payment of an additional annuity payable on a monthly basis of $126.72 for as long thereafter as the beneficiary should live.

The respondent included the above described policy No. 1,603,359 in the gross estate of the insured at a value of $31,022.40.

7. On September 16, 1909, there was issued to the decedent by the Prudential Insurance Co. of America a life insurance policy, No. 1,100,992, wherein Willie C. Blacksher, the wife of the insured, was named beneficiary. This policy provided for payment to the beneficiary, after the death of the insured, of an annuity payable in monthly installments of $125 for a period of 20 years certain, and thereafter for as long as the beneficiary might live. Following the death of the insured, settlement of this policy was made by the company on the basis of an annuity to the beneficiary payable in monthly installments of $126.74 for a period of 20 years certain and thereafter in monthly installments of $126 for as long as the beneficiary should live. The respondent determined the value of the policy at the date of death of the insured to be $30,000 and included that amount in the decedent's gross estate.

OPINION.

SMITH: Section 302(g) of the Revenue Act of 1926 provides in material part as follows:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property. * * *

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(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

Article 27 of Regulations 70 (1929 Edition) provides in part:

Insurance receivable by other beneficiaries. - All insurance in excess of $40,000 receivable by beneficiaries other than the estate, regardless of when taken out, must be included in the gross estate where the decedent during his life retained legal incidents of ownership in the policies of insurance, as, for example, a power * * * to surrender or cancel the policies, to assign them, to revoke an assignment of them, to pledge them for loans, or to dispose otherwise of them and their proceeds for his own benefit, etc.

The first question for our determination is whether the value at the time of decedent's death of the three above described insurance policies on decedent's life, policy No. 1,176,103 issued by the Mutual Life Insurance Co. of New York, and policies Nos. 328,782 and 328,783 issued by the Union Central Life Insurance Co., are includable in decedent's gross estate. See allegations of error 4(a), (c), and (d) above.

The respondent contends as to those policies that the decedent retained until his death certain incidents of ownership which rendered them includable in his gross estate under the above regulations and the rule laid down by theSupreme Court in . The holding in that case was that the proceeds of certain life insurance policies were includable in the decedent's gross estate. The Court said:

A power in the decedent to surrender and cancel the policies, to pledge them as security for loans and the power to dispose of them and their proceeds for his own benefit during his life which subjects them to the control of a bankruptcy court for the benefit of his creditors, * * * and which may, under local law applicable to the parties here, subject them in part to the payment of his debts, * * * is by no means the least substantial of the legal incidents of ownership, and its termination at his death so as to free the beneficiaries of the policy from the possibility of its exercise would seem to be no less a transfer within the reach of the taxing power than a transfer effected in other ways through death.

The respondent submits that under the laws of the State of Alabama, where the policy contracts were executed, the rights and interests of the decedent in the policies at the time of his death must be determined in accordance with the express provisions of the policies themselves as those provisions may have been construed by the courts of that state. Reference is made to sections 8371 and 8375 of the Alabama Code of 1928, Annotated, and to ; .

We said in Thomas C. Boswell et al., executors,, that:

Whether or not the proceeds of these policies are to be included in the gross estate depends, regardless of the time or terms of their issuance, upon whether decedent had any interest in them at the time of his death. ; ; ; * * *

The decedent did not reserve the right to change the beneficiary in any of the policies under consideration and no contention is made that they are includable in his gross estate for such reason. Policy No. 1,176,103, issued by the Mutual Life Insurance Co. of New York, contained these provisions:

CASH SURRENDER VALUE. - After three full years' premiums have been paid, * * * this policy may be surrendered and the Company will pay therefor, * * * the amount stated in the table below * * *

LOANS. - After this policy shall have been in force three full years, the Company, within sixty days after written application, and upon the assignment of this policy as security, will, in conformity with its rules then in force, loan amounts within the limits of the cash surrender value, with interest in advance, at the rate of five per cent. per annum, provided: (1) that premiums be fully paid to the end of the policy year in which the loan falls due; (2) that in any settlement of this policy all outstanding indebtedness must be paid.

SURPLUS. - The first distributive share of surplus shall be apportioned to this policy, if in force, at the expiration of twenty years from date, and may be drawn in cash or be applied to purchase an annuity. Subsequent distributions shall be made annually during the lifetime of the insured only.

These provisions of the policy do not specify to whom the cash surrender value or loans or surplus shall be paid. There is the provision that "no assignment or hypothecation" of any interest in the policy made by the beneficiary without the written consent of the insured shall be valid.

In , which involved the question whether the proceeds of certain life insurance policies, under facts similar to those in the instant proceeding, should be included in the gross estate, the Court said:

* * * The decedent had no power, none being reserved, to change the beneficiaries, to pledge or assign the policies after the assignment to his wife, or revoke that assignment or surrender the policies without the consent of the beneficiaries. ; , compare dissent ; ; .

Also, in ; affd., , it was said:

* * * The policies now under discussion did not expressly nor by implication reserve to the insured the right to claim the loan or surrender values without the consent of the beneficiary, and by the overwhelming weight of the authorities he could not surrender these policies for the cash surrender value, or secure a loan on them, without the consent of the beneficiary. No control of his over the proceeds and benefits of the policies was terminated by his death. His control had already been terminated by his voluntary act in irrevocably assigning two of them, and by irrevocably designating Mrs. Ballard as beneficiary in the others. Nor can it be said that any interest in the proceeds passed at his death from the insured to the beneficiary. Her interest in the proceeds had already vested by virtue of the assignment of two of the policies and by virtue of designation as beneficiary in the others. * * *

The agreement in the policy contract was that the loans on the policy would be made by the issuing company "in conformity with its rules then in force." An official of the issuing company testified in this proceeding that as to the policy under consideration the consent of the beneficiary would have been required either to change the beneficiary, to obtain a loan thereon, or to surrender the policy for its cash value. In Thomas C. Boswell et al., Executors, supra, we said that "absence of the power to change beneficiaries in itself deprives an insured of authority in his own right to obtain the surrender value, " citing , and .

It does not appear that the laws of the State of Alabama require any different conclusion as to the policies here in question. In ; , the court said:

* * * The written assent and concurrence of the named beneficiary in the policy not reserving the right of change of beneficiary is required to a valid and binding assignment of such policy as to affect the rights of the beneficiary. * * *

The Union Central Life Insurance Co. policies Nos. 328,782 and 328,783 contain substantially the same features as those of the Mutual Life Insurance Co. of New York described above, with the additional provision that the insured should have the benefit of annual dividends. This right to dividends, however, ceased upon decedent's death and was not thereby transferred to any other person. The retention of a life interest in the income from property transferred does not require the inclusion of the property in the transferor's estate for estate tax purposes. ; ; . The right to receive the dividends was not such an interest or "incidents of ownership" in the policies as the Court had reference to in , and as is contemplated by article 27 of Regulations 70, supra.

We are of the opinion that the proceeds of the above described policies, Nos. 1,176,103, 328,782, and 328,783, are not includable in decedent's gross estate.

Since we have determined that the proceeds of Mutual Life Insurance Co. of New York policy No. 1,176,103 are not includable in decedent's gross estate, it is not necessary to determine its value.

The only other question for decision relates to the values of policy No. 1,603,359, issued by the Equitable Life Assurance Society, and policy No. 1,100,992, issued by the Prudential Insurance Co. of America. The respondent has determined that the values of these policies were $31,022.40 and $30,000, respectively, while the petitioners contend that the values determined in accordance with article 13(10) of Regulations 70, which regulations were in force at the date of death of the decedent, were $22,215.96 and $21,786.90, respectively.

The basis of respondent's determination of the values is not in evidence. The evidence of record does show, however, that the values were not determined by the respondent on the basis of a valuation of the life annuities payable to the beneficiaries by reference to mortality tables and in accordance with article 13(10) of Regulations 70. This method of valuing such life insurance policies for estate tax purposes was given approval in , where we said:

At the time of his death, the decedent had effectually elected to leave to the beneficiaries only the right to receive future periodical payments during their several lives. * * *

The valuation of such a right or expectancy is a commonplace problem, . There is no dispute as to the determination through the use of mortality tables of the period of payments to be adopted as to each beneficiary, and in article 20 of Regulations 70, in effect at the time of the decedent's death, the factor of discount and the resulting commuted value is correctly set forth. There is no reason, therefore, why a correct computation can not be made in the conventional manner of the value at the date of death of the future payments to be received by each beneficiary.

In , involving the question of determining the value of a gift to charity subject to a life estate, the Court said:

* * * Tempting as it is to correct uncertain probabilities by the now certain fact, we are of opinion that it cannot be done, but that the value of the wife's life interest must be estimated by the mortality tables. Our opinion is not changed by the necessary exceptions to the general rule specifically made by the act.

The values of the policies here under consideration will be determined under the method indicated above.

Judgment will be entered under Rule 50.