Davis' Estate v. Oklahoma Tax Commission

GIBSON, J.

Seymour C. Davis died intestate on August 30, 1948, a resident of Grady county, Oklahoma, and his estate was administered upon with his surviving wife, Maurine Davis, as ad-ministratrix. The sole question in this case is whether or not the proceeds of insurance policies issued upon the life of Seymour C. Davis, one on May 13, 1947, for $50,000, and one on May 21, 1948, for $100,000, were subject to estate tax under the laws of Oklahoma. Two premiums on the first mentioned policy and one premium on the second policy were all paid from community funds of the deceased and his wife. The wife was named beneficiary in each policy. The wife survived her husband and the proceeds of both policies were paid to her by the insurer. Each policy provided that the insured might change the beneficiary at any time. The policies were issued and Mr. Davis died while the Community Property Law of this state was in force and effect. The case was submitted on stipulations and exhibits. The Commission entered its order taxing the entire proceeds of both policies, computing the total tax on the estate in the sum of $7,729.69. The administratrix paid the tax, under protest, and it has been placed in suspense pending determination of the protest. The administratrix appealed from the Commission’s order.

The right to tax the proceeds of the policies is asserted under Tit. 68 O.S. 1941 §989e (A) (6), amended S.L. 1947, Tit. 68, sec. 3, p. 456, which provides that the value of the gross estate used as a basis for determining the value of the net estate shall include:

“Sec 989e * * * (A) * * * (6) To the extent of the excess over Twenty Thousand Dollars ($20,000.00) of the amount receivable directly, in trust, or as annuities, by all other beneficiaries, or under a joint policy by the survivior, of the proceeds of life insurance, by virtue of policies taken out by the decedent upon his own life and in which, at the time of death, the decedent had the right, directly or indirectly, to change the beneficiary or to convert the policy to his own use.”

The administratrix contends that the order of the Commission was ■ erroneous, in that where a husband insures his life, naming his wife as beneficiary, and the premiums are paid from the funds of the community, the proceeds of the policies will be regarded as a gift to the beneficiary, and that the Commission erred in holding the proceeds for taxation to the same extent as if the beneficiary had been some person other than the surviving spouse. The Commission contends that such proceeds become the separate property of the wife because they passed under the terms of the policies after the community had been dissolved by the death of the husband, and that the Community Property Act has nothing to do with the proceeds of these policies because they are governed by the terms of the policies.

Both policies were issued after S. L. 1945, Tit. 32, p. 118, became effective and prior to its repeal in 1949, and the 1945 Act governs as to questions on community property. The 1939 Community Property Act, discussed by the administratrix, is only of historical significance, and compliance therewith evidenced an intent by husband, and wife to communize their property.

The 1945 Act specifically provides that all property acquired by either husband or wife during marriage shall be deemed community property and each spouse shall be vested with an undivided one-half interest therein. This is a case of first impression before this court and when we look to ' other jurisdictions, having community-property laws, we find conflicting decisions.

With reference to community property the Supreme Court of Texas, in Volunteer State Life Ins. Co. v. Hardin, 145 Tex. 245, 197 S.W. 2d 105, 168 A.L.R. 337, said that where there is no intention on the part of' the-husband to defraud his wife the proceeds of the policy on the life of the husband vested upon the death of the insured in the beneficiary named in the policy, even though the policy was taken out by the husband during coverture and the premiums paid out of community funds. It was further held that where the insured reserved the right, in the policy, to change the beneficiary, such beneficiary obtained no vested interest in the proceeds of the policy prior to the death of the insured who might divest the beneficiary of all interest in the proceeds by making a change of beneficiary. Martin v. McAllister, 94 Tex. 567, 63 S.W. 624, and other Texas decisions are cited. The Hardin case did not involve taxation of the proceeds of life insurance policies.

To the contrary the State of Washington holds to the following rule:

“In Washington, insurance or proceeds thereof are not mere expectancies or choses in actions, but are ‘property’, and, if premiums are paid from assets of community, insurance constitutes ‘community property.’ ” Occidental Life Ins. Co. v. Powers, 192 Wash. 475, 74 P. 2d 27.

The same court has held that the interest of the wife in a community estate is not an expectant interest but a present, undivided one-half interest. Marston v. Rue, 92 Wash. 129, 159 P. 111; Schramm v. Steele, 97 Wash. 309, 166 P. 634.

Poe, Collector, etc., v. Seaborn, 282 U. S. 101, 51 S. Ct. 58; Hopkins, Collector, etc., v. Bacon, 282 U.S. 122; Bender, Collector, etc., v. Pfaff, 282 U.S. 127, construing the laws of several community property states, hold that, in the named states, the wife has a vested interest in the community income as distinguished from an expectancy, and the wife was permitted to file- a separate return tinder the Revenue Act of the United States. As above stated, the 1945 Act provides that in Oklahoma each spouse shall be vested with an undivided one-half interest in the community property.

In re Coffey’s Estate (1938) 195 Wash. 379, 81 P. 2d 283, held that wife’s interest in community property is not a contingent or expectant interest but a present, undivided one-half interest, and the separate character of the separate interest of a spouse in community property continues as long as it can be clearly traced and identified. It is further held:

“Where premiums on insured’s life policies were paid with community funds, insured’s wife had undivided one-half interest in policies, insured’s one-half interest could alone be included- in his gross estate for purpose of computing inheritance tax, and statutory exemption was applicable to that portion.”

The Coffey case dealt with the inheritance tax laws of the State of Washington. In the case of Lang, Executor, v. Commissioner of Internal Revenue, 304 U.S. 264, 58 S. Ct. 880, 82 L. Ed 1331, the United States Supreme Court held that only one-half of the proceeds of a life insurance policy of a decedent domiciled in the State of Washington, in favor of his wife, where premiums were paid out of marital community funds, is to be reckoned (less the permitted exemption) as a part of- his gross estate for the purposes of the Federal estate tax. It was further held that the operation of the Federal estate tax law may depend on local law.

The Commission places great reliance upon the case of Newman v. Commissioner of Internal Revenue, 76 Fed. 2d 449. Therein it was held that the entire proceeds, in excess of the exemption, of policies on the life of a Louisiana resident, which gave insured the right to change beneficiary, were a part of the insured’s gross estate, for estate tax purposes, notwithstanding that the wife was the named beneficiary and that premiums on the policies were paid out of the income of the community of insured and his wife. The decision was by the Circuit Court of Appeals, Fifth Circuit, in 1935.

In 1940, and following the opinion in Lang v. Commissioner, supra, the same Fifth Circuit decided the case of DeLappe v. Commissioner of Internal Revenue, 113 Fed. 2d 48, wherein the court said that the case, of Newman v. Commissioner, supra, so far as it was in conflict with Lang v. Commissioner, supra, was impliedly overruled and was no longer authority. The writer of the opinion in the Newman case dissented.

In the DeLappe case it was- held:

“Under Louisiana law, a wife has a present vested interest in one-half of the community property and not a mere expectancy, and upon death of the husband she does not take by inheritance but in her own right as owner.

“Under Louisiana law, a husband is the head of the community and he may dispose of community property without the consent of the wife, but in doing so he acts as agent for the community and not by right of ownership of the whole.”

In the opinion it is stated:

“* * * In computing estate taxes on the proceeds of life insurance the question to be decided is whether the decedent paid all or only part of the premiums. It is unimportant whether the beneficiary receives the proceeds as separate property or as community property. In either case, if the premiums have been paid out of community funds, the wife has paid one-half of the cost of the insurance and the decedent has paid the other half. In this case the interest of decedent in the policies at the time of his death was only one-half.”

Following the decision in the De-Lappe case, and citing it with approval, the Supreme Court of Texas decided Blackmon, etc., v. Hansen, 140 Tex. 536, 169 S.W. 2d 962, in which .the factual situation was parallel to that in the instant case. Therein it was held:

“Where community funds were used to pay premiums ■ on deceased husband’s life policies, taken out after his marriage, under which wife was sole beneficiary, only one-half of proceeds collected under policies, less $40,000 allowed as an exemption, were subject to inheritance taxes as part of husband’s gross estate. Vernon’s Ann. Civ. St. art. 7117.”

The weight of authority in states having community property laws sustains the rule- announced in Blackmon v. Hansen and in Re Coffey’s Estate, supra. The order and judgment of the Tax' Commission is vacated and the cause is remanded for further proceedings not inconsistent with this opinion.

Reversed.

WELCH, DAVISON, JOHNSON, O’NEAL, and BINGAMAN, JJ., concur. HALLEY, V.C.J., and CORN, J., dissent.