Boswell v. Commissioner

THOMAS C. BOSWELL, ANNIE M. BOSWELL, AND MANUFACTURES NATIONAL BANK OF TROY, NEW YORK, EXECUTORS OF THE ESTATE OF WILLIAM D. BOSWELL, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Boswell v. Commissioner

Docket No. 81811.

United States Board of Tax Appeals

37 B.T.A. 970; 1938 BTA LEXIS 957;

June 1, 1938, Promulgated

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1. Where decedent in 1929 transferred certain securities to a trustee to pay the income to himself for life and after his death to his wife and daughter during the life of the wife, the principal to be distributed to decedent's heirs at law and next of kin upon death of the survivor of himself and his wife, and the admitted purpose of the transfer was to protect the property transferred from the hazards of his stock-market operations, decedent being in excellent health at the time of the transfer and dying in 1933 as a result of acute indigestion, held, the transfer was not made in contemplation of death; held, further, the fact that decedent reserved the income to himself for life did not result in the transfer taking effect in possession or enjoyment at or after death, and the Joint Resolution of March 3, 1931, applies only to transfers made after its passage. May v. Heiner,281 U.S. 238">281 U.S. 238; Hassett v. Welch,302 U.S. 674">302 U.S. 674.

2. Proceeds of insurance policies in New Jersey companies taken out by decedent, a resident of New York, on his own life in 1905 and 1910, under which by rider executed in 1922 decedent's wife and daughter were made life beneficiaries and the right to change beneficiaries during their lifetime without their written consent was specifically renounced, held, not subject to inclusion in decedent's gross estate where wife and daughter survived decedent.

J. Robert Sherrod, Esq., for the petitioners.

R. F. Staubly, Esq., for the respondent.

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OPPER

This proceeding involves a deficiency of $55,452.92 in estate tax. The decedent died on September 18, 1933. The deficiency arises chiefly from the inclusion by respondent in the decedent's gross estate of the value of the corpus of a trust created by the decedent on May 22, 1929, and the proceeds of two insurance policies taken out by the decedent upon his own life. These items only are in issue.

FINDINGS OF FACT.

1. The decedent in 1929 was 63 years old. He was in excellent physical condition. He had no expectation of death from any existing bodily infirmity. He died suddenly and unexpectedly on September 18, 1933, as a result of acute indigestion. He died a resident of New York.

2. On May 22, 1929, decedent established an irrevocable trust to which he transferred certain securities. The trust provided for the payment of the trust income to the decedent during his life, and after his death to his wife and daughter, share and share alike during their joint lifetime, and the whole income to the wife if she should survive the daughter. Upon the death of both the donor and his wife the trust was to terminate and the trust property was to be paid over to the heirs at law and next of kin of the donor. Decedent was survived by his wife and daughter.

3. At the time of creation of the trust the decedent had recently sold his mill supply business, but remained an officer and director in several banks. A will was then in effect, which was replaced by a new will in April 1932, to which a codicil was added in June 1932.

4. At the time of creation of the trust the decedent was very heavily committed in the stock market through purchases on margin. His dominant motive in establishing the trust was to set aside part of his fortune for the benefit of himself and family in the event of disastrous losses in the stock market. Decedent did not transfer the trust property in contemplation of his death.

5. The trust property had a value of $384,335.74 at the date of decedent's death.

6. In 1905 the decedent took out a policy of life insurance on his own life in the face amount of $20,000 in the Mutual Benefit Life Insurance Co. of Newark, New Jersey. In 1910 he took out another policy in the same company. The latter policy was reissued as a 20-payment policy in the face amount of $10,000 on May 23, 1914. For each of the policies the respective application was signed at Cohoes, New York, the residence of decedent. The insurance contract was approved at Newark, New Jersey, at the home offices of the company, which was a New Jersey corporation.

7. Both insurance policies were identical in all material provisions. Page 2 is headed "Non-forfeiture Provisions" and provides, among other things, for the payment to the owner of the policy of its cash surrender value upon the surrender of the policy to the company. It also provides that loans will be made up to the amount of the cash surrender value "upon receipt of the Policy and a Certificate of Loan satisfactory to the Company."

8. The third page of the policies is headed "Special Privileges." It gives the insured the right upon the return of the policy to the company "with the Insured's written request for the appropriate endorsement of the Policy by the Company", to have the beneficiary changed, and to designate one of several alternative methods for payment of the proceeds of the policy to the beneficiary.

9. The original designation of beneficiaries was replaced by the insured for the last time under both policies on October 31, 1922, with identical "requests" which were endorsed by the company and attached to the policies. They provided as follows:

(a) If the insured should die during the life of his wife or his daughter, the company should retain the proceeds of the policies and pay to the wife while living, otherwise to the daughter, interest of 3 percent per annum upon the principal amounts in accordance with one of the "Special Privileges" enumerated in the policy. Upon the death of the survivor of the wife and daughter, the principal amount was to be payable immediately to any living children of the insured's daughter, and if there were no such children living, then to be payable to the executors, administrators, or assigns of the survivor of the insured's wife and daughter.

(b) If both the wife and daughter of the insured should predecease him, the proceeds should be payable upon his death to the children of his daughter, or, if no such children survived the insured, then to the executors, administrators, or assigns of the insured.

(c) The right to change the beneficiary was retained, except that during the lifetime of the insured's wife or daughter it was not to be exercised without their written consent.

(d) The insured relinquished the right to change any of the provisions of this "Request" during the lifetime of his wife or daughter without their written consent, and declared that "all parts of the Special Privileges on the third page of the Policies inconsistent herewith are to be canceled and annulled."

OPINION.

OPPER: Respondent contends, first, that decedent disposed of certain property in contemplation of death. The action involved in this branch of the proceeding is the transfer by trust indenture date May 22, 1929, to the Manufacturers National Bank, of the securities therein described. We are required to determine whether "the impelling cause" for that transfer was decedent's contemplation of his death. United States v. Wells,283 U.S. 102">283 U.S. 102. "Contemplation" is defined as the "act of the mind in considering with attention." Webster's New International Dictionary, 2d ed. By the trust instrument decedent provided for distribution of the income from the trust property during his life and for its further disposition, as well as that of the corpus, thereafter. Within a short time decedent amended the trust instrument to provide for a different treatment of new investments during his lifetime from that to be applied after he had died. He could not have made these arrangements without "considering with attention" the event of his death. This being so, we assume that decedent was contemplating his death and accept respondent's suggestion that the proof of his sound physical condition does not affect this assumption.

It does not follow, however, that decedent's contemplation of death was the impelling cause of the transfer, and we think the evidence indicates the contrary. It is undisputed that his primary purpose was to segregate certain of his investments and to have these kept clear of his stock market operations. To accomplish this he conveyed the property to his trustee, with instructions to pay the income to him as long as he lived. This disposition required some provision for treatment of income and principal upon his death. But that provision was itself rather a result than a cause of the transfer, a fact which seems to us to preclude from consideration as the impelling cause any contemplation of death in which decedent may incidentally have engaged. There was here no reserved power of revocation, no comprehensive plan projected or accomplished contemporaneously for the disposition of the remainder of decedent's considerable estate, no manifestation of his intention to surrender direction of the balance of his investments, no accumulation of income pending his death. The circumstances before us are thus fundamentally at variance with those found to be controlling in Igleheart v. Commissioner, 77 Fed.(2d) 704; Updike v. Commissioner, 88 Fed.(2d) 807; and Commissioner v. Colorado National Bank of Denver, 95 Fed.(2d) 160. We have accordingly found that the transfer was not made in contemplation of death.

Respondent contends further that "A transfer with respect to which the decedent reserves the income from the property transferred for life is a transfer that takes effect in possession or enjoyment at or after death." On this point we think the Supreme Court has held to the contrary. May v. Heiner,281 U.S. 238">281 U.S. 238; Burnet v. Northern Trust Co.,283 U.S. 782">283 U.S. 782; Morsman v. Burnet,283 U.S. 783">283 U.S. 783; Mc,Cormick v. Burnet,283 U.S. 784">283 U.S. 784. And, the disputed transfer having taken place in 1929, the provisions of the Joint Resolution of March 3, 1931, and of section 803(a) of the Revenue Act of 1932 do not bear upon the question, since they "apply only to transfers with reservation of life income made subsequent to the dates of their adoption respectively." Hassett v. Welch,302 U.S. 674">302 U.S. 674.

No contention is advanced that the corpus of the trust property, decreased by the value of the wife's life estate, was transferred at decedent's death by virtue of the terms of the trust instrument and its reference to decedent's "heirs at law and next of kin." See Doctor v. Hughes,225 N.Y. 305">225 N.Y. 305; 122 N.E. 221">122 N.E. 221; Livingston v. Ward,247 N.Y. 97">247 N.Y. 97; 159 N.E. 875">159 N.E. 875; Berlenbach v. Chemical Bank & Trust Co.,260 N.Y. 539">260 N.Y. 539; 184 N.E. 83">184 N.E. 83; Restatement of the Law of Trusts, § 127; Security-First National Bank of Los Angeles, Executor,35 B.T.A. 815">35 B.T.A. 815. Nor does the record disclose any facts upon which an appropriate determination of value could be predicated. We accordingly refrain from discussion of this question, and, for the reasons stated, conclude that the trust property is not subject to inclusion in decedent's gross estate.

The supposed justification for including the proceeds of the two insurance policies in gross estate is, according to respondent's brief, that decedent possessed "attributes of ownership" consisting of the right to change beneficiaries, to obtain the surrender value, and to borrow upon the security, of the policies. In each of these respects we think the conclusion must be otherwise.

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. David A. Reed et al., Executors,24 B.T.A. 166">24 B.T.A. 166; Estate of John T. H. Mitchell,37 B.T.A. 1">37 B.T.A. 1; Chase National Bank v. United States,278 U.S. 327">278 U.S. 327. Respondent has himself so construed the law. "The statute requires the inclusion in the gross estate of the decedent of the proceeds of any policy * * * not receivable by or for the benefit of decedent's estate * * * regardless of when the policy was * * * issued, if the decedent possessed at the time of his death any of the legal incidents of ownership." (Italics supplied.) Regulations 80, art. 27. That this qualification is intentional and restrictive appears from the elimination, at the time of its adoption, of a previous provision reading: "However, irrespective of the retention of such legal incidents of ownership, all insurance * * * must be included in the gross estate (1) of any decedent dying after the enactment of the Revenue Act of 1924 where * * * the beneficiary receiving the proceeds was named, after the enactment of the Revenue Act of 1918 * * *." (Italics supplied. ) T.D. 4296, Aug. 6, 1930, IX-2 C.B. 427.

After his final designation of beneficiaries, decedent had, throughout the remainder of his life, no further power in that respect. His authority to alter the designation so made was explicitly limited "during the lifetime of Annie M. Boswell and Helen R. Boswell [the wife and daughter], or either of them" by the requirement that "such right is not to be exercised without their written consent." This provision was tantamount to a surrender of control during the lifetime of decedent's wife and daughter, they being beneficiaries under the policies. David A. Reed et al., Executors, supra;Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339. Since both survived him, decedent had no such power at the time of his death. "The decedent's death merely terminated the possible contingency of the beneficiary predeceasing the insured." Estate of John T. H. Mitchell, supra.

Nor was there at death any remnant of the privilege of surrender for cash. The policies provide, in this respect that "* * * the owner shall have the following options: 1. To surrender the Policy to the Company * * * for its cash surrender value * * *." Some significance may be attached to the use of the word "owner" rather than "insured" in defining the person so privileged. Pennsylvania Co. etc. v. Commissioner, 79 Fed.(2d) 295; certiorari denied, 296 U.S. 651">296 U.S. 651. But, in any event, absence of the power to change beneficiaries in itself deprives an insured of authority in his own right to obtain the surrender value. Levy's Estate v. Commissioner, 65 Fed.(2d) 412; Walker v. United States, 83 Fed.(2d) 103, 110. True, the cases last cited construe the policies in litigation according to the law of the State of New York; but we think that law is also applicable here. These policies show that they were obtained through "James Q. Barcus, Genl. Agt., * * * Albany, N.Y." and that decedent at the time of application was a resident of New York. He died a resident of that state. Under these circumstances, the New York law is applicable. Louise C. Moore, Executrix,33 B.T.A. 108">33 B.T.A. 108, 112. Even, however, if it be contended that New Jersey authority should be followed on the ground that the insurer was incorporated there and that the policies appear to have been approved at its home office in Newark, no different result would be justified. See Landrum v. Knowles,22 N.J.Eq. 594; Sullivan v. Maroney,77 N.J.Eq. 565; 78 Atl. 150.

What has been said as to a surrender of the policies applies with equal force to their use as security for a loan. Each policy provides: "The Company * * * will loan up to the limit secured by its Cash Surrender Value upon receipt of the Policy and a satisfactory Certificate of Loan." It must be apparent that the "Cash Surrender Value" could not be pledged by one not entitled to receive it, and that no "Certificate of Loan" could be "satisfactory" which was not executed by the real persons in interest. "The rule which forbids the surrender for cash, in violation of the beneficiary's interest, equally forbids the insured from obtaining a loan without consent of the beneficiary." Levy's Estate v. Commissioner, supra, 415.

We are accordingly unable to sustain respondent's determination that the two life insurance policies should be included in decedent's gross estate.

Decision will be entered for the petitioners.