1934-04

Parker v. Commissioner ( 1934 )

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EMILY KING PARKER AND ST. LOUIS TRUST COMPANY, A CORPORATION, TRUSTEES, RESIDUARY LEGATEES UNDER THE WILL OF HERBERT L. PARKER, DECEASED, AND TRANSFEREES, ESTATE OF HERBERT L. PARKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Parker v. Commissioner

Docket No. 53320.

United States Board of Tax Appeals

30 B.T.A. 342; 1934 BTA LEXIS 1343;

April 10, 1934, Promulgated

*1343 1. The executors of the estate filed their return on December 15, 1925. The Commissioner determined a deficiency and on July 5, 1927, mailed a notice of deficiency to the executors. On August 22, 1927, the trustees of the estate, being the same persons as the executors, filed an appeal with this Board, which the Board dismissed on October 20, 1930, for want of jurisdiction. On February 16, 1931, the Commissioner mailed a deficiency notice to the petitioners as transferees. The petition in this proceeding was filed by the petitioners as transferees on March 2, 1931. Held, that under section 402, Revenue Act of 1928, the statute of limitations was suspended during the pendency before this Board of the appeal of the estate's trustees. American Equitable Assurance Co. v. Helvering, 68 Fed.(2d) 46.

2. A 20-payment life insurance policy on the accumulation plan, in which the wife of the insured was designated as beneficiary with no right to change the beneficiary, became paid up on March 7, 1913, and was continued by the insured. Thereafter, the only right the insured had was to receive at the end of each one-year period, in whichever form he elected, *1344 the profits apportioned to the policy. held, the right of the beneficiary to receive the face amount of the policy was irrevocably vested and could not be defeated or diminished by any act of the insured, and, therefore, the proceeds in the amount of the face of the policy are not includable in gross estate. Levy's Estate v. Commissioner, 65 Fed.(2d) 412; Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339. Held, further, that the excess of the proceeds of the policy over the face amount thereof represents accumulations purchased with profits accrued to insured to date of his death and such excess is includable in gross estate. Chase Nat. Bank v. United States,278 U.S. 327">278 U.S. 327.

3. In three ordinary participating life 20-installment bond policies taken out in 1903, the wife of the insured was named beneficiary with no right to change the beneficiary, the insured could surrender the policies for cash in 1923, but not thereafter. The contained provisions for paid-up insurance, for extended insurance in case of default of premiums, and for loans on the policy upon legal assignment of the policies to the company as collateral*1345 security. Held, that insured could not borrow on the policies without beneficiary's consent, under the law of Ohio, where the contracts were signed by the insurance company, and of Missouri, where the insured lived, made application, and received the policies: Held, further, that at the time of his death decedent had no interest in the policies and the proceeds thereof should be excluded from gross estate. Levy's Estate v. Commissioner, 65 Fed.(2d) 412; Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339.

Abraham Lowenhaupt, Esq., and Stanley S. Waite, Esq., for the petitioners.

J. H. Yeatman, Esq., for the respondent.

MATTHEWS

*343 This proceeding is for the redetermination of a deficiency in estate tax in the amount of $3,394.58, which has been asserted against the petitioners as transferees of the property and assets of Herbert L. Parker, deceased, under the provisions of section 316 of the Revenue Act of 1926. Of the five assignments of error contained in the petition, three have been waived by the petitioners, leaving for our determination two issues: (1) Whether the proposed deficiency is*1346 barred by the statute of limitations; and (2) whether the respondent erred in including in the decedent's gross estate the proceeds of four certain life insurance policies which will be hereinafter described.

The case was submitted upon an agreed statement of facts. Photostatic copies of the four policies of insurance which are in controversy were received in evidence.

FINDINGS OF FACT.

Herbert L. Parker died on December 15, 1924, leaving a last will under which the St. Louis Union Trust Co. and Emily L. Parker, his widow, were named executors. The will was duly probated in the Probate Court of the City of St. Louis, Missouri; the executors filed their final settlement with the court on June 23, 1926, and, having settled all liabilities of the estate and disclosed to the court a full settlement of their transactions, they were discharged as executors on the same day. Under the will they were appointed trustees of the estate so that, having performed their duties as executors, the petitioners took over the estate as trustees. The petitioners are transferees of the property of Herbert L. Parker, deceased.

On December 15, 1925, the above named executors filed with the*1347 collector of internal revenue, St. Louis, Missouri, the Federal estate tax return for the decedent's estate on Form 706. On Schedule C thereof was listed the value, at decedent's death, of all of the life insurance policies issued on the life of the decedent in the total sum of $232,347.59. No part of the value of these policies was included by the executors in the decedent's gross estate, nor was any tax paid thereon.

On July 5, 1927, respondent mailed a letter to the "St. LouisUnion Trust Company, et al., Executors, Estate of Herbert L. Parker," in which a deficiency of $3,522.58 in estate taxes was proposed for assessment. A petition for redetermination of the proposed deficiency (Docket No. 30630) was filed by the St. Louis Union Trust Co. and *344 Emily L. Parker, as trustees of the estate of Herbert L. Parker, on August 22, 1927. That petition was dismissed by this Board on its own motion for lack of jurisdiction in an opinion promulgated on October 20, 1930, and reported at . No appeal was ever filed by Emily L. Parker and the St. Louis Union Trust Co. as executors of the estate. The St. Louis Union Trust Co. and Emily King Parker, trustees, *1348 the petitioners in the instant proceeding, are the same legal persons, and Emily King Parker the same natural person, who filed the appeal with this Board based on the notice of deficiency dated July 5, 1927.

The notice of deficiency in the instant proceeding was mailed to the petitioners as transferees on February 16, 1931, and the petition was filed on March 2, 1931.

The deficiency in this case results from the following adjustments made by the respondent in the gross estate of the decedent as returned by his executors:

	Value returned	Value as determined by respondent
1. Real estate	$8,000.00	$20,000.00
2. Insurance payable to beneficiaries other than the estate in excess of $40,000		191,347.59
3. Other miscellaneous property	900.00	1,400.00

The following life insurance policies of an aggregate value of $29,155.36 are included in the insurance, totaling $191,347.59, which was added to the decedent's gross estate by the respondent:

Issued by New York Life Insurance Company, policy No. 518884, dated March 7, 1893, payable to Emily L. Parker, wife of decedent, value $10,105.36.

Issued by Union Central Life Insurance Company, policy No. *1349 262255, dated May 15, 1903, for $10,000.00, payable to Emily L. Parker, wife of decedent, in annual installments of $250.00 for a period of twenty years, and in addition she is to receive at the end of twenty years, a $5,000.00 Bond - the commuted value $6,350.00.

Issued by Union Central Life Insurance Company, policy No. 262256, dated May 15, 1903 for $10,000.00 payable to Emily L. Parker, wife of decedent, in annual installments of $250.00 for a period of twenty years, and in addition she is to receive at the end of twenty years a $5,000.00 Bond - commuted value $6,350.00.

Issued by Union Central Life Insurance Company, policy No. 262257, dated May 15, 1903, for $10,000, payable to Emily L. Parker, wife of decedent, in annual installments of $250.00 for a period of twenty years, and in addition she is to receive at the end of twenty years, a $5,000.00 Bond - the commuted value $6,350.00.

All four of these policies were taken out by the decedent upon his own life on the dates stated in the respective policies, the premiums thereon were paid by him, and the beneficiaries thereof were other than the decedent's executors, trustees, or estate and the proceeds *345 of none*1350 of such policies were paid to the decedent's executors, trustees, or estate. The decedent was a resident of St. Louis, Missouri, when the applications for these policies were made and when the policies were delivered, and the applications for the policies were made and signed by, and the policies were delivered to, the insured in St. Louis, Missouri. The last premium on the New York Life Insurance Co. Policy No. 518884 was paid in 1912 and after that date the policy became a paid-up policy.

The policy held by the decedent with the New York Life Insurance Co., No. 518884, dated March 7, 1893, was a 20-payment life insurance policy. It named the decedent's wife as beneficiary and in the event of her prior death the decedent's executors were to receive the proceeds. It contained no provision giving the insured the power to change the designation of the beneficiary.

The benefits at the end of the accumulation period were set out as follows:

If the insured is living on the 7th day of March in the year Nineteen Hundred and Thirteen, on which date the Accumulation Period of this Policy ends, and if the premiums have been paid in full to said date, the insured shall be entitled*1351 to one of the six benefits following:

First. To continue the Policy, and receive the dividend then apportioned by the Company, either

(1) in Cash; or

(2) in an Annuity; or

(3) in additional Paid-up Insurance, conditioned upon satisfactory re-examination.

Second. To exchange the Policy for its entire value, as stated below (*), either

(4) in Cash; or

(5) in an Annuity for life; or

(6) in a paid-up Policy; provided that for any amount of paio-up insurance in excess of the face amount of this Policy a satisfactory re-examination is necessary.

*[The said entire value of the Policy consists of the guaranteed Reserve Fifty-eight hundred and seventy Dollars ($5870), and in addition thereto the dividend then apportioned by the Company.]

The insured shall notify the Company, in writing, prior to the end of the Accumulation Period, which benefit is selected. Failing such notification, the apportioned dividend shall be applied to the purchase of an Annuity as stipulated in benefit (2) above.

No dividend was to be apportioned or paid before the end of the accumulation period. If the policy were continued in force beyond that period and all premiums had been paid, *1352 a dividend was to be apportioned to the insured at the end of each five-year period thereafter.

The company agreed to make advances as loans on the policy within the accumulation period, after the policy had been in force five years, on condition that premiums should be paid in full to the *346 time of making any loan, and with a limitation on the aggregate amount of loans outstanding for each five-year period, the largest sum being $3,980, the policy to be assigned to the company as security for the loans and interest to be paid thereon at the rate of 5 percent. The loans were to be for such time as the borrower might elect, with the limitation that they should not be for longer than to the end of the accumulation period.

Any assignment of the policy had to be made in duplicate, both copies to be sent to the company's home office, and one copy retained by the company,

A table of guarantees of continuance of the policy to certain dates or its conversion into paid-up insurance on discontinuance of the payment of premiums, in accordance with New York law, concluded the terms of the policy.

The following statement, signed by a vice president of the company, was added*1353 at the bottom of the policy:

Pursuant to written request, it is hereby mutually agreed that if the policy is continued beyond the accumulation period, profits after the accumulation period shall be apportioned at the end of every one year during the continuance of the policy instead of at the end of every five years; and such profits may then at the option of the insured be either (1) paid in cash; or (2) applied to the purchase of paid up additions to the policy; or (3) left to accumulate to the credit of the policy, with interest at the rate of three per centum per annum, and payable at the maturity of the policy, but withdrawable on any anniversary of the policy.

Unless the insured shall elect otherwise within three months after the mailing by the Company of a written notice requiring the election of one of the three above options, said profits will be applied to the purchase of paid-up additions.

New York, January 28, 1913.

The three policies, Nos. 262255, 262256, and 262257, issued on the decedent's life by the Union Central Life Insurance Co. on May 15, 1903, but with premiums payable annually on July 15, were identical in their terms. Each policy was a "Participating*1354 Life 20-year Installment Bond" policy for the face amount of $10,000, and was payable to Emily L. Parker, insured's wife "if living, otherwise to the executors * * * of the insured," as follows: 20 annual installments of $250 each, the first payment to be made within 60 days after receipt of proof of the insured's death, and the remaining $5,000 at the end of 20 years after the payment of the first installment. These policies contained no provision giving the insured the power to change the designation of the beneficiary.

Among the conditions set out in each policy, one required that in the case of assignment a duplicate of the assignment should be filed with the company and due proofs of interest produced when the policy became payable.

*347 Each policy was written on the "Annual Dividend plan" and, beginning with the end of the second year, was to participate annually in profits as apportioned by the company. The insured was given the option of taking the dividends in reduction of the next premium, or in cash, or to purchase a paid-up addition.

The insured was given an option of a cash settlement, as follows: Upon July 15, 1923, if the policy was still in force, *1355 the insured could surrender the policy to the company and receive its reserve value in cash, to wit, the sum of $3,004, and in addition thereto the reserve value of the reversionary additions, if any, any indebtedness to the company to be deducted from the amount payable to the insured.

After the payment of premiums on the policy for three years, if no indebtedness to the company was outstanding, the company would, upon application in writing and surrender of the policy, issue a paid-up nonparticipating policy, payable one half in 20 annual installments and the other half 20 years after the payment of the first installment.

In case of default in the payment of any premium after premiums had been paid for three years, if no indebtedness to the company was outstanding and the policy had not been surrendered for a paid-up policy, the policy would be continued in force as a paid-up nonparticipating term policy for a specified time. If the insured should die within three years from the date of such default and while the term policy was in force, there would be deducted from the amounts payable thereunder a sum equal to the regular premiums, with interest, which would have been paid*1356 if the original policy had been kept in force.

"Upon legal assignment of this Policy to the Company as collateral security" after three or more full years' premiums had been paid, the company agreed to lend at interest not more than the amount of the loan value for the particular year, as stated in the table of loan values, but no loan for less than $100 would be made.

Tables indicated the paid-up values of the policy, the periods for extended insurance, and the loan values up to the thirtieth year.

Each policy states on its face that the contract shall be held and construed to have been made in the city of Cincinnati, Ohio, and each is signed for the company by its president and secretary, at Cincinnati, on May 15, 1903. The application for the policy, which was attached to and made a part of the policy, contains a space for the "Signature of the person to whom the insurance is payable," and "Emily Lizette Parker, by H.L.P." signed in such space.

OPINION.

MATTHEWS: In the stipulation of facts filed by the parties to this proceeding it is agreed that if there is any deficiency in estate tax *348 due from the estate of Herbert L. Parker not barred by the statute*1357 of limitations, the petitioners, who were appointed trustees of the estate under the decedent's will, are liable for the tax as transferees under section 316 of the Revenue Act of 1926. We shall first consider the question whether the proposed deficiency is barred by the statute of limitations.

The decedent died on December 15, 1924, and the estate tax return was filed on December 15, 1925, by the present petitioners in their capacity of executors. Section 310(a) of the Revenue Act of 1926 provides for assessment of estate taxes within three years after the return was filed and prohibits any proceeding in court without assessment for the collection of such taxes after the expiration of this three-year period. Assessment against the transferees of the estate, under section 316, must be made within one year after the expiration of the period of limitation for assessment against the executors. Thus, if the running of the statute of limitations had not been suspended, the three-year period of limitation for assessment against the executors and the one-year extension as to the transferees would have expired on December 15, 1929, which date is after the enactment of the Revenue Act*1358 of 1928. Section 402 of the Revenue Act of 1928, which is specifically made to apply in all cases where the period of limitation has not expired prior to the enactment of the 1928 Act, amends section 310(b) of the Revenue Act of 1926 to read as follows:

The running of the statute of limitations provided in this section or in section 311 on the making of assessments and the beginning of distraint or a proceeding in court for collection, in respect of any deficiency, shall (after the mailing of a notice under subdivision (a) of section 308) be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Board, until the decision of the Board becomes final), and for 60 days thereafter.

A notice of deficiency was addressed to the petitioners herein as "executors" on July 5, 1927, and a petition, Docket No. 30630, was filed with the Board on August 22, 1927, by these petitioners in their then capacity of "trustees." In the hearing before the Board it was developed that Emily King Parker and the St. Louis Union*1359 Trust Co. had been discharged as executors by the Probate Court on June 23, 1926, and had thereafter, in accordance with the provisions of the decedent's will, turned over the estate to themselves as trustees. It was held that since the executors and the trustees of the estate were separate and distinct legal entities, the Board had no jurisdiction of a petition filed by the latter for the redetermination of a deficiency determined against the former. That proceeding was accordingly dismissed on October 20, 1930, for lack of jurisdiction, . *349 The notice of deficiency in the instant proceeding was mailed on February 16, 1931.

In the view we take of the case it is not necessary to discuss the point that the first petition was filed in the names of the petitioners as trustees, although the notice of deficiency dated July 5, 1927, was addressed to them as executors, and in the instant proceeding they describe themselves as trustees and admit their liability as transferees of the property of the deceased taxpayer. The deficiency in controversy was asserted against the estate of the deceased taxpayer. It was clearly a "proceeding in respect of the*1360 deficiency" which was placed on the docket of the Board on August 22, 1927, and that proceeding suspended the running of the statute of limitations in accordance with the provisions of section 402, quoted above.

The proceeding in Docket No. 30630 was pending before the Board for more than three years, and when the period of suspension is added to the date the period of limitation would have expired if no appeal had been taken to the Board, which was December 15, 1929, it is clear that the notice of deficiency involved in the instant proceeding, dated February 16, 1931, was forwarded well within the extended period. We hold, therefore, that the deficiency asserted herein is not barred by the statute of limitations.

The position which this Board takes with respect to the suspension of the running of the statute after the filing of a petition with the Board, where the proceeding is later dismissed by the Board for lack of jurisdiction, has been approved by the Circuit Court of Appeals for the Second Circuit in its opinion dated December 11, 1933, in the case of *1361 ; affirming . This case involved a deficiency in income tax, but the provisions of the statute with respect to the suspension of the running of the statute of limitations are the same as to deficiencies in income and estate taxes. The court held that the mere placing on the docket of the Board of a proceeding in respect of a proposed deficiency suspends the running of the statute of limitations with respect to the deficiency, even though the Board subsequently dismisses the proceeding for want of jurisdiction. The court said:

* * * At any rate, a proceeding had been commenced which required the Board of Tax Appeals to make a decision though not necessarily on the merits. Because the effect of the passage of time would be the same whether the Board made its decision on the merits or on some other ground, if the period stated in the statute of limitations meantime expired, it is reasonable to believe that Congress did not intend to have the time a proceeding was pending before the Board counted any more when the decision was a dismissal for want of jurisdiction*1362 than when it was not. In other words, the time after such a proceeding was placed on the docket was not to be added to what had gone by since the return had been filed until the Board disposed of the *350 matter in some way and sixty days had passed thereafter in which further action could be taken. Certainly, the words Congress used have this meaning literally and we are disposed to believe that such is their intended effect.

We pass now to the sole question raised on the merits, whether the proceeds of four certain insurance policies should have been included in decedent's gross estate. The petitioners in the stipulation have conceded the correctness of respondent's inclusion of real and other property in the gross estate in the amounts of $20,000 and $1,400; and also the inclusion of the proceeds of other insurance policies in an aggregate amount of $162,192.23 over and above the $40,000 exemption allowed by the statute. The applicable provisions of the 1924 Revenue Act are set out in the margin. ^{*1363 Under the express provisions of the statute the amounts receivable by the beneficiary under the four policies here in question are required to be included in the gross estate.}

So was the value of the trust estates before the Supreme Court in , and in , under the terms of the statutes there applicable.

In , it was held that property transferred in trust, long prior to the passage of any estate tax act, and not in contemplation of death, under which the beneficiary took a vested interest, could not be subjected to the estate tax merely because the conveyance took effect in possession after death.

In , the Court ruled that the five trusts created in 1919, where the grantor reserved the right to modify the trusts with the consent of the beneficiary, were not subject to estate tax, but that the two trusts created in 1903 and 1910, where the grantor alone reserved the right to change the trust, were subject to the estate tax.

*1364 On the same day that the Reinecke v. Northern Trust Co. decision was rendered, the Court in , following the principle applied in the Northern Trust Co. case, held that the proceeds of life insurance policies in which the decedent had until the moment of death the right to change the beneficiary were includable in gross estate, such right giving the insured the power to control the policies and their proceeds until death.

Under the authority of these decisions petitioners submit that the question for determination is whether the insured until his death *351 possessed any of the powers enumerated in the Chase Nat. Bank case, the termination of which by death alone constituted a transfer. It is contended that in the four policies here in question decedent had none of the powers enumerated in the Chase Nat. Bank case at his death and therefore that no taxable interest was thereby transferred.

The New York Life policy became paid up on March 7, 1913, and was continued. No loans on the policy could be obtained or continued after the end of the accumulation period, March 7, 1913, and after*1365 that date the insured could not surrender the policy. It became a paid-up policy for $10,000 to be paid upon the death of the insured to the wife of the insured, the beneficiary, or in the event of her prior death, to the executors, administrators, or assigns of the insured.

The provision in the policy that in case of death of beneficiary prior to that of insured, the insurance would be payable to the executors, administrators, or assigns of the insured, is not sufficient to prevent the vesting in the beneficiary from being complete. No act of the insured could prevent the beneficiary from receiving the full $10,000 of insurance on his death. Her interest could be defeated only by her death prior to that of the insured. In , in which the settlor of a trust provided in the trust deed that if the beneficiary should predecease him the trust res should revert to him, we said that "such possibility of reversion did not prevent the gift from being complete", citing . Our decision in the Duke case was affirmed by the *1366 , and affirmed per curiam by the Supreme Court (divided), .

After March 7, 1913, the only interest which the insured had in the policy was in the dividends to be apportioned to it. We do not know how the insured elected to take the dividends accumulated during the accumulation period, but the endorsement on the policy dated January 28, 1913, a little over a month before the end of the accumulation period, provided that any profits after the accumulation period were to be apportioned at the end of every one year instead of at the end of every five years as the policy provided, and at the end of each year the insured had the option of taking such profits in one of three ways; but if the insured did not elect within three months of the notice requiring election, the profits would be applied to the purchase of paid-up additions.

Presumably the excess over the face of the policy, $105.36, was the paid-up addition purchased with the profits accrued in the year of decedent's death, which had not been paid to him in cash. As decedent had control over such profits until his death, the paid-up *352 *1367 addition which such profits purchased, $105.36, should be included in the gross estate. But since the insured had no power the exercise of which could affect the beneficiary's right to the full amount of the insurance, $10,000, the proceeds of the policy in such amount are not includable in decedent's gross estate. .

We come now to the three Union Central Life Insurance policies which were taken out in 1903. Although the parties stipulated that the last premiums due on the three Union Central policies were paid in 1922, and that after that date the policies became paid-up policies, we have not found such to be the fact. The policies, photostatic copies of which were received in evidence, show that the premiums were to continue for the life of the insured and there is no provision in the policies providing that they will be paid up in 20 years. In the application for the policies signed by the insured, which is attached to and made a part of the policies, there is written in the space after "Kind of Policy", "Ord. Life Bond 20 Yr. Installment Participating. *1368 " Each policy is described on the back as "Participating Life 20 Inst. Bond." They do not purport to be 20-payment life policies.

The policies do provide for paid-up insurance in case of default in payment of premiums. Under this provision, after the twentieth year, if no further premiums had been paid, the policies would have been continued in force as paid-up nonparticipating term policies for 8 years and 136 days; but if the death of the insured occurred within 3 years from default of premium there would have been deducted from the amounts payable under the policies a sum equal to the regular premiums with interest, which would have been paid had the original policies been kept in force. The insured died 2 1/2 years after the 1922 premiums were paid. The evidence does not show that any amount was deducted from the amount payable to the beneficiary on the death of decedent, hence we assume that the insured continued to pay the premiums until his death.

In each of the three Union Central Life insurance policies the insured had the right to surrender the policy on July 15, 1923, and receive its reserve value in cash and the reserve value of any reversionary additions less any*1369 indebtedness to the company. That is the only date on which the insured did have the right to surrender the policy. Cash loans could be made on the policy after the third year in the amounts designated in the table of loan values. The provision of the policy permitting the loan does not state that the loan will be made to the insured, but that "upon legal assignment of the policy to the company as collateral security", the loan will be made. As the beneficiary was required to sign, and did sign, *353 the application for the insurance, it would appear that no legal assignment could be made of the policy without the joining in of the beneficiary. But, aside from this, and whether the insurance policies are to be construed as Ohio contracts, as the policies provide, or as made in Missouri, where the application for the insurance was made, the insured lived, and the policies were delivered, the rule applied by the courts in both Ohio and Missouri is that the insured can not borrow on life insurance policies in which there is no right to change the beneficiary without the consent of the beneficiary. The rule is Missouri is thus stated in *1370 ; :