DocketNumber: Docket No. 83863.
Citation Numbers: 42 B.T.A. 329, 1940 BTA LEXIS 1028
Judges: Harron, Mobdock
Filed Date: 6/28/1940
Status: Precedential
Modified Date: 1/12/2023
*1028 The income in the taxable years of an irrevocable funded insurance trust created by petitioner was used in part to pay premiums on policies of insurance on the life of petitioner's husband, and in part was accumulated and added to trust corpus. Upon the death of petitioner's husband, the proceeds from the policies and the accumulated trust income, together with the other trust assets, are to be used to pay the estate and inheritance taxes on petitioner's share of her husband's estate, and the trust assets remaining are to be transferred to petitioner absolutely one year after her husband's death.
*330 Respondent determined deficiencies in income tax of petitioner of $2,157.32 for 1933 and $2,226.87 for 1934, or a total of $4,384.19. *1029 The main question for determination is whether the entire net income of a funded insurance trust, which was created by petitioner for the purposes of paying the annual premiums on three policies of insurance on the life of her husband and of using the proceeds from the collection of the policies after her husband's death to pay the inheritance and estate taxes on her share of his estate, was taxable to petitioner in the taxable years. The facts have been stipulated.
FINDINGS OF FACT.
Petitioner is a resident of Denver, Colorado. She filed her Federal income tax return for each of the taxable years with the collector of internal revenue for the district of Colorado.
By a trust agreement entered into on or about February 27, 1923, between petitioner, as grantor, and the International Trust Co., as trustee, petitioner created an irrevocable funded insurance trust.
Petitioner transferred to the trustee bonds of the par value of $185,000, and caused three policies of insurance on the life of her husband, Lawrence C. Phipps, to be issued to the trustee. The face amounts of the three policies totaled $145,000. Petitioner made the application for each policy, paid the first*1030 annual premium on each policy, and named the trustee as the beneficiary in each policy.
The trustee was to use the income from the trust estate to pay the annual premiums on the three policies. If the income from the trust estate was insufficient to pay the premiums, the trustee was directed to use so much of the corpus of the trust estate as was necessary to pay the premiums in full. If the income from the trust estate was more than sufficient to pay the premiums, the trustee was directed "to accumulate the excess of income and add the same to the corpus of the trust fund or estate, and thereupon to invest and keep the same invested pursuant to the terms hereof as a part of the corpus of said trust fund."
On the death of petitioner's husband, "leaving the grantor surviving him", the trustee was to use the proceeds of the policies "together with such bonds and securities or other property as may then be a part of the trust estate hereby created and the accumulated income, if any, therefrom" to pay:
* * * all inheritance, succession, transmission, estate and transfer taxes or death duties which may be assessed or levied upon or chargeable against or in connection with the distributable*1031 share or portion of the estate of the said Lawrence C. Phipps, or other interest therein, which may be inherited by or *331 devised or bequeathed to the grantor from the general estate of the said Lawrence C. Phipps or under the provisions of his will or otherwise, or for which said grantor as an heir at law or beneficiary of said estate may be liable or required or permitted to pay thereon or in connection therewith, or on the right to receive the same, or as a condition to the receipt thereof * * *.
One year after the date of the death of petitioner's husband the trustee was to transfer to petitioner the trust assets remaining after payment of the taxes on petitioner's share of her husband's estate.
If petitioner predeceased her husband, the trustee was to use the proceeds from the policies, together with the other trust assets, to pay
* * * all inheritance, succession, transmission, estate and transfer taxes and death duties which may be assessed or levied upon or chargeable against or in connection with the distributive shares or portions of the estate of Lawrence C. Phipps, or interests therein which may be inherited by or devised or bequeathed to the beneficiaries*1032 hereof other than the grantor, or for which said beneficiaries, other than said grantor, as heirs at law or beneficiaries of said estate may by law be liable or required or permitted to pay thereon or in connection therewith, or on the right to receive the same or as a condition to the receipt thereof * * *.
The beneficiaries of the trust other than petitioner were six children of petitioner's husband. The trust assets remaining after payment of the taxes on their shares of their father's estate were to be divided into six equal shares, one of which was to be distributed to, or held in trust for, each of the six children as provided in the trust agreement.
Likewise, if petitioner died within the period of one year from the date of her husband's death, the trust assets remaining after payment of the taxes on petitioner's share of her husband's estate were to be divided into six equal shares, one of which was to be distributed to, or held in trust for, each of the six children as provided in the trust agreement.
The trust agreement also provided in part as follows:
* * * The trustee, in the event that the inheritance or estate taxes hereinabove referred to are required by*1033 law to be paid by the beneficiaries hereof entitled to taxable interests in the estate of the said Lawrence C. Phipps, or by the executor, administrator or other personal representative of said estate, shall furnish to, or make available for use by, such beneficiaries, or personal representative, from the trust estate, including the proceeds of said insurance policies, cash funds with which to pay said inheritance or estate taxes as the same become due and payable as provided by law.
The net income of the trust for income tax purposes was $10,084.03 in 1933 and $10,669.95 in 1934. The trustee used $9,164.05 in 1933 and $9,247.70 in 1934 to pay the premiums on the three policies of insurance.
The trustee filed with the collector of internal revenue for the district of Colorado a fiduciary return for each of the taxable years, in *332 which it reported the entire net income of the trust. In the individual returns filed by petitioner for each of the taxable years she did not report any part of the net income of the trust.
Lawrence C. Phipps, husband of petitioner, is living.
OPINION.
HARRON: The main question is whether, in the taxable years, petitioner was taxable*1034 on the entire net income of a funded insurance trust which was created by petitioner for the purposes of paying the annual premiums on three policies of insurance on the life of her husband, and of using the proceeds of the policies after her husband's death to pay the inheritance and estate taxes on her share of his estate.
The facts show that in the taxable years part of the income of the trust was used to pay the premiums on the policies of insurance on the life of petitioner's husband and the excess of the net income of the trust was added to the corpus of the trust.
Respondent determined that in the taxable years the entire net income of the trust was taxable to petitioner. To support his determination respondent relies, both in the deficiency notice and in his brief, on section 167(a)(1) of the Revenue Acts of 1932 and 1934, the pertinent provisions of which are set forth in the margin. 1
*1035 While the excess of net trust income which was added to trust corpus clearly was
*333 While the facts in
In its decision in the
* * * Looking to the practical facts, we find that here the bulk of the income did remain, in contemplation of law, in substance, that of the grantor, used to purchase property for herself. We think it could hardly be argued, in view of the teaching of the
In our opinion, the same reasoning applies here. To be sure, petitioner was under no contractual obligation to pay the premiums on the policies of insurance, which she had taken out on her husband's life and on which she had paid the first annual*1038 premiums. 2 However, the use of the income of the trust to pay the premiums maintained the policies during the life of petitioner's husband, and on his death the trust assets, including the proceeds of the collection of the policies, were to be used to pay the inheritance and estate taxes on petitioner's share of her husband's estate. The reasonable inference is, in the absence of any evidence to the contrary, that the maintenance of the policies through the use of trust income resulted in a substantial economic benefit to petitioner. Moreover, one year after the death of petitioner's husband, the trust assets remaining after the payment of the inheritance and estate taxes *334 on her share of her husband's estate were to be transferred to petitioner absolutely. Through the use of the income of the trust to pay the premiums on the policies of insurance, petitioner enjoyed such a substantial economic benefit that it is both reasonable and just to treat her as the owner of the trust corpus for purposes of income taxation, as was concluded by the court in the
Furthermore, it should be pointed out that the payment of the annual premium on a policy of life insurance ordinarily results in an increase in the surrender value of the policy.3 Here this would mean an increase in the value of the trust corpus and, in substance, would produce the same result as if the trust income had been added directly to the corpus of the trust. It should be pointed out, also, that an insurance company sets aside and accumulates a portion of the annual premiums paid on a policy of insurance as a reserve fund for the policy. 4 "Common sense interpretation" has been stated to be the safest rule to follow in the administration of the income tax laws, ; and, in our opinion, the trust income which was used to pay the premiums on the policies of insurance on the life of petitioner's husband clearly was
Petitioner contends further that the trust income which was used to pay the premiums on the policies of life insurance and the excess of net income which was added to trust corpus were not accumulated
The cases cited by petitioner in support of her contention that the trust income which was used to pay premiums on the policies of life insurance and the excess of net trust income which was added to trust corpus were not accumulated
Therefore, respondent's determination that, in the taxable years, petitioner was taxable on the entire net income of the trust is sustained.
Reviewed by the Board.
MURDOCK dissents.
1. SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
(a) Where any part of the income of a trust -
(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; * * *
* * *
then such part of the income of the trust shall be included in computing the net income of the grantor. ↩
2. Vance, Handbook on the Law of Insurance, 2d ed. (1930), pp. 260, 261. ↩
3. Bogert, Funded Insurance Trusts and the Rule Against Accumulations, 9 Cornell Law Quarterly (1924) 113, 129. ↩
4. Vance, Handbook of the Law of Insurance, 2d ed. (1930), pp. 27, 50, 54. Jarmon, Wills, 6th ed. (1893), vol. I, pp. 311. 314. ↩
5. The Report of the Ways and Means Committee on the Revenue Bill of 1924, 68th Cong., 1st sess., H. Rept. 179, p. 21, with respect to section 219(h) (substantially the same for present purposes as section 167 of the Revenue Acts of 1932 and 1934) states in part as follows: "Trusts have been used to evade taxes by means of provisions allowing the distribution of the income to the grantor or