DocketNumber： Docket No. 8573
Judges： Harlan
Filed Date： 9/19/1946
Status： Precedential
Modified Date： 11/14/2024
1946 U.S. Tax Ct. LEXIS 79">*79
1. Where a certificate of overassessment was issued by the Commissioner, but no final statutory closing agreement was entered into between the Treasury Department and taxpayer, the Commissioner was not estopped from reopening the case within the statutory period and making such adjustments to income as he deemed proper.
2. Decedent took out a policy of insurance on his own life, naming his wife the life beneficiary and death beneficiary if she survived the insured. The life beneficiary had the right to borrow money on the policy, to receive the cash or surrender value, and to change the beneficiary. The policy provided that if the death beneficiary did not survive the insured the proceeds were to be paid to the executors, administrators, and assigns of the insured. This provision was in effect at the decedent's death.
7 T.C. 769">*769 This proceeding is for the redetermination of a deficiency in the Federal estate tax liability of the estate of Charles H. Thieriot, deceased, in the amount of $ 22,947.49. Petitioners claim an overpayment in the amount of $ 6,821.21.
The notice of deficiency was dated March 26, 1945.
Three questions are raised by the pleadings:
1. Were the proceeds of a certain policy of life insurance issued on the life of the1946 U.S. Tax Ct. LEXIS 79">*81 decedent by the Aetna Life Insurance Co., includible in the gross estate of the decedent, pursuant to the provisions of
2. Was the value of a certain life insurance policy issued on the life of the decedent by the Aetna Life Insurance Co. includible in the gross estate of the decedent pursuant to the provisions of
3. Was the Commissioner estopped from asserting the deficiency herein?
The case was submitted on a stipulation of facts and documentary evidence admitted at the hearing.
7 T.C. 769">*770 FINDINGS OF FACT.
Charles H. Thieriot, the decedent herein, and hereinafter referred to as such, a resident of Nassau County, Long Island, New York, died testate at 2:30 o'clock in the morning of January 10, 1941. His will was proved and admitted for administration in the Surrogate's Court of Nassau County on January 22, 1941. He was survived by his wife, Frances T. Thieriot, and two children, Charles H. Thieriot, Jr., and Lucille Thornton Thieriot Walker.
The petitioners were appointed executors under the last will and 1946 U.S. Tax Ct. LEXIS 79">*82 testament of Charles H. Thieriot, deceased, qualified as such, and have since January 22, 1941, been acting as such executors. They filed the said estate tax return for the estate of Charles H. Thieriot with the collector of internal revenue for the first district of New York on April 10, 1942.
On January 9, 1922, the Aetna Life Insurance Co. issued insurance policy No. N 308890 upon the life of the decedent in the sum of $ 100,000. All premiums on this policy were paid by the decedent.
As originally drawn the policy provided that the sum payable upon the death of the decedent should be paid to Frances T. Thieriot, wife of the insured, if she survived the insured, otherwise to the executors, administrators, or assigns of the insured.
The policy provided for two types of beneficiaries, a so-called "death beneficiary" and a "life beneficiary." The death beneficiary was designated to receive all payments due from the insurance company resulting from the death of the insured. The life beneficiary was entitled to all the privileges granted by the policy, effective during the life of the insured. These privileges included the right to borrow money on the policy, to receive the cash or1946 U.S. Tax Ct. LEXIS 79">*83 surrender value thereof, and to change the designated beneficiary of the policy.
By endorsement dated March 24, 1925, the death beneficiary clause was changed to read as follows:
Death Beneficiary:
Subject to any assignment hereof, the amount becoming due from the Company under this policy by reason of the death of the insured is hereby made payable to the insured's wife, Frances T. Thieriot, if she survives the insured and is living at the expiration of Forty-eight (48) hours after the death of the insured; otherwise to the children of the insured and the children of any deceased child of the insured who are then living, the children of the insured to share equally with each other and the children of any deceased child of the insured to take per stirpes the share such deceased child of the insured would have taken if living; if none of said beneficiaries is then living, to the executors, administrators or assigns of the insured.
No change was made in the death beneficiary clause after March 24, 1925, and the endorsement as of that date was in force upon the death of the insured on January 10, 1941.
7 T.C. 769">*771 The life beneficiary clause as originally issued on January 9, 1922, 1946 U.S. Tax Ct. LEXIS 79">*84 provided that the cash value or loan value should be payable to the life beneficiary, "Frances T. Thieriot, wife of the insured, if living when such value becomes payable, otherwise to the insured."
By endorsement dated March 20, 1939, the life beneficiary clause was changed to read as follows:
Life Beneficiary:
Until the death of Frances T. Thieriot, wife of the insured, said wife shall be the life beneficiary.
After the death of said wife and until the death of the survivor of Charles H. Thieriot, Jr., and Lucille Thornton Thieriot Walker, children of the insured, said children, jointly, or the survivor, shall be the life beneficiary.
After the death of the last survivor of said wife and said children, the insured shall be the life beneficiary.
The life beneficiary clause was not changed after March 20, 1939, and remained in force upon the death of the insured on January 10, 1941.
The policy contained the following provision for change of beneficiary:
Subject to any assignment hereof, the beneficiary of this policy may be changed as often as desired, and such change shall take effect on receipt at the Home Office of the Company, before the sum insured or any instalment thereof1946 U.S. Tax Ct. LEXIS 79">*85 becomes due, of a request signed by the life beneficiary accompanied with the policy for proper endorsement.
The endorsements on the policy dated March 24, 1925, and March 20, 1939, respectively, as set out above were made upon the request signed in each case by the life beneficiary and the decedent.
The annual premium on the policy was $ 2,653, payable January 9 in each and every year during the life of the insured. The amount paid the beneficiary on decedent's death was $ 97,347.
The policy provided that after the payment of three full premiums the company would lend up to the cash value of the policy, but the request for such loan and the required assignment for that purpose could be executed by the life beneficiary alone.
The policy also provided for automatic premium loans at the request of the life beneficiary, and "if requested by the life beneficiary" the policy could be surrendered to the company and converted into a paid up policy, payable at the death of the insured. It was further provided that upon request of the life beneficiary the policy might be surrendered by her and the company would pay to her the total cash value. The life beneficiary had the right to prescribe1946 U.S. Tax Ct. LEXIS 79">*86 the method of payment of the benefit under the policy and to assign it. If the insured became permanently disabled within the definition of the contract, the benefits provided for such event would be paid to him only on the request duly executed of the life beneficiary.
In the estate tax return filed by the executors Aetna Life Insurance policy No. N 308890 was duly reported, but its proceeds in the 7 T.C. 769">*772 amount of $ 97,347 were not included in the gross estate of the decedent, the executors claiming that they were exempt. The Commissioner contested the executors' claim and took the position that the proceeds were to be included in the gross estate. After hearing and negotiations between the parties, the internal revenue agent in charge, Brooklyn, New York, sent the following letter, dated April 14, 1944, to the executor:
Referring to the hearings had on the protest filed in the above named estate, there is enclosed a statement of the basis upon which it is proposed to adjust the tax liability of this estate. If you will signify acceptance, in writing, of the settlement as proposed, further consideration will be given with a view to a closing of this case on that basis. Form1946 U.S. Tax Ct. LEXIS 79">*87 1244, "Acceptance of Proposed Overassessment", is enclosed for your signature in the foregoing connection.
The statement enclosed with the letter showed an overassessment of $ 3,047.84.
On April 20, 1944, Frances T. Thieriot, as executrix, signed and delivered Treasury Department Form 1244, accepting the proposed determination and settlement of the Commissioner as indicated in the statement of April 14, 1944. The form, as executed, read as follows:
The proposed determination of the following overassessment or overassessments of tax, as indicated in the statement furnished the undersigned under date of April 14, 1944 is hereby accepted as correct: Estate Tax. Estate of Charles H. Thieriot, deceased Amount of overassessment $ 3,047.84
This acceptance contemplates that when executors' commissions and attorneys' fees have been paid in full, the estate will file a claim for refund due to the tentative disallowance at this time of $ 3,526.23 of said commissions and $ 12,000.00 of said attorneys' fees, which were the respective balances remaining unpaid as of January 1st, 1944. The claim for refund to be hereafter filed will also cover appropriate additional deductions for expenses1946 U.S. Tax Ct. LEXIS 79">*88 of the estate accountant, including the final accounting, and such other incidental expenses as may be properly chargeable in the administration of the estate.
On August 4, 1944, the Treasury Department issued its certificate of overassessment, showing a credit to the estate of $ 3,047.84. On February 23, 1945, petitioner filed a claim for refund in the amount of $ 6,821.21, setting forth reasons for the allowance of the increased claim as follows:
The "Acceptance of Proposed Over-Assessment," dated April 20, 1944 -- upon the Estate of Charles H. Thieriot, deceased -- determined the Total Tax due as $ 459,528.89, and recognized an over-payment of $ 3,047.84, which was refunded on August 4, 1944, as stated above; the said "Acceptance", by its terms, contemplated an additional claim for refund based upon the deductible payments, aggregating $ 22,306.15, evidenced by the attached affidavit of S. Clive Greaves, dated February 14th, 1945, made a part hereof -- with the following results: 7 T.C. 769">*773
| Tax already paid as assessed by Audit Certificate of August 4, | |
| 1944 | $ 459,528.89 |
| Total net Tax payable as re-assessed under this claim | 452,707.68 |
| Refund hereby claimed (with interest to be added) | $ 6,821.21 |
1946 U.S. Tax Ct. LEXIS 79">*89 Petitioners' claim for refund was rejected by the Commissioner and the executors were notified of such rejection by letter, as follows:
Reference is made to the claim on Form 843 filed on February 27, 1945, for the refund of $ 6,821.21 representing a portion of the Federal estate tax paid in the above-named estate.
The claim seeks allowance as additional deductions of $ 3,526.23 for executors' commissions, $ 12,000.00 for attorneys' fees, and $ 6,779.92 for accountants' fees.
Upon the merits, the estate is entitled to the deductions claimed. However, the claim opens up the entire case and the question arises as to the includibility for estate tax of policy No. N-308890, issued by the Aetna Life Insurance Company. Upon a consideration of the provisions of said policy it appears that the decedent had a contingent interest which gave him a legal incident of ownership, rendering the policy taxable within the meaning of
Under the circumstances, and since there is in fact not an overassessment of estate tax but a deficiency in estate tax, the claim1946 U.S. Tax Ct. LEXIS 79">*90 filed on February 27, 1945, for the refund of $ 6,821.21 is rejected in its entirety.
OPINION.
The petitioners allege in the petition that the respondent is estopped from including in gross estate the proceeds from the Aetna Life Insurance policy in the amount of $ 97,347 because of a claimed settlement agreement entered into in 1944, on the faith of which they distributed assets and changed their position to their detriment. On brief they contend that the respondent erred in asserting the deficiency in question after the executors had agreed to adjust the tax liability of the estate on the basis of an overassessment in the amount of $ 3,047.84 and certain expenses of administration to be paid thereafter, and the Commissioner had issued a certificate of overassessment in the amount of $ 3,047.84, which amount was arrived at by excluding proceeds of insurance in the amount of $ 97,347. We have examined all the facts in the record and we find nothing to warrant an estoppel. The petitioners admit that
The language of
The issue here is whether the proceeds from the insurance policy on decedent's life, payable to the beneficiary at decedent's death, minus the statutory exemption of $ 40,000, are properly includible in the gross estate. The parties agree that they are so includible if the decedent possessed at the time of his death any "legal incidents of ownership" in the policy, but they are not in agreement as to what constituted "legal incidents of ownership" on January 10, 1941, when decedent died.
The petitioner argues that the "legal incidents of ownership" are to be determined from Regulations 80, 1937 Ed., articles 25 and 27, as amended by
The statute, as construed by the regulations, requires the inclusion in the gross estate of the decedent of the proceeds of any insurance in excess of $ 40,000 receivable by beneficiaries other than the decedent's representatives if the decedent possessed at the time of his death any of the legal incidents of ownership. Prior to March 18, 1937, Regulations 80 (1934 Ed.), article 25, provided in part as follows:
* * * Insurance is considered to be taken out by the decedent in all cases, whether or not he makes the application, if he pays the premiums either directly or indirectly, or they are paid by a person other than the beneficiary, or decedent possesses any of the legal incidents of ownership in the policy. Legal incidents of ownership in the policy include, for example: The right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value1946 U.S. Tax Ct. LEXIS 79">*96 of the policy, etc. 7 T.C. 769">*776 The decedent possesses a legal incident of ownership if the rights of the beneficiaries to receive the proceeds are conditioned upon the beneficiaries surviving the decedent.
Following the decisions of the Supreme Court in
On January 29, 1940, the Supreme Court decided
Art. 27. (1) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) after January 10, 1941, the date of (2) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) on or before January 10, 1941, and with respect to which the decedent possessed any of the legal incidents of ownership at any time after such date or, in the case of a decedent dying on or before such date, at the time of his death.
Legal incidents of ownership in the policy include, for example, the right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, 1946 U.S. Tax Ct. LEXIS 79">*100 etc. The insured possesses a legal incident of ownership if his death is necessary to terminate his interest in the insurance, as, for example, if the proceeds would become payable to his estate, or payable as he might direct, should the beneficiary predecease him.
These amendments were carried into Regulations 105.
It is clear that the amendment of Regulations 80, article 27, by
Petitioners rely on a memorandum opinion of this Court. 7 T.C. 769">*778 in principle by
Petitioners argue that under the terms of the1946 U.S. Tax Ct. LEXIS 79">*102 contract the wife was the absolute owner of the policy, with power to change the beneficiary, surrender or cancel the policy, assign it, pledge it for a loan, or obtain a loan against the surrender value; that she made certain changes as indicated in our findings of fact to the end that she changed the "possibility of reversion" to contingent remainder; and that technically the decedent had no "possibility of reversion which was cut off by his death." While it is true that the decedent's wife, as life beneficiary, made certain changes by endorsement on the policy in both the death and the life beneficiaries which extended to her son and daughter, she did not change the provision for reversion to the insured. She only postponed the reversion until after the death of the survivor. We think the observation made by the lower court in
* * * Whatever the likelihood of the exercise of this power, it is a fact that the wife did not change the beneficiaries or surrender the contracts so as to destroy decedent's reversionary interest. The string that the decedent retained over the proceeds of the contract until the moment of his death was no less real or significant, because of the wife's unused power to sever it at any time.
Moreover, the fact that the life beneficiary had absolute control over the policy and could surrender it and take the cash value is not controlling. Since the power to surrender was not in fact exercised before the death of the insured, the death of the insured was the intended event which cut the string by which the proceeds of the policy might be brought back to the insured and brought them into the possession and enjoyment of the beneficiary.
We hold that the proceeds of insurance receivable by the beneficiary, to the extent of the excess over $ 40,000, are 1946 U.S. Tax Ct. LEXIS 79">*104 includible in the gross estate of the decedent.
1.
(a) Authorization. -- The Commissioner (or any officer or employee of the Bureau of Internal Revenue, including the field service, authorized in writing by the Commissioner) is authorized to enter into an agreement in writing with any person relating to the liability of such person (or of the person or estate for which he acts) in respect of any internal revenue tax for any taxable period.
(b) Finality. -- If such agreement is approved by the Secretary, the Under Secretary, or an Assistant Secretary, within such time as may be stated in such agreement, or later agreed to, such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact --
(1) The case shall not be reopened as to the matters agreed upon or the agreement modified, by any officer, employee, or agent of the United States, and
(2) In any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith shall not be annulled, modified, set aside, or disregarded.↩
2.
* * * *
(c) Transfers in Contemplation of, or Taking Effect at Death. -- To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * *
* * * *
(g) Proceeds of Life Insurance. -- 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 $ 40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.↩
3.