Equitable Life Assurance Soc. v. Commissioner

The Equitable Life Assurance Society of the United States, Petitioner, v. Commissioner of Internal Revenue, Respondent

Equitable Life Assurance Soc. v. Commissioner

Docket No. 31470

United States Tax Court

19 T.C. 264; 1952 U.S. Tax Ct. LEXIS 42;

November 19, 1952, Promulgated

---

Decision will be entered for the petitioner.

On the date of a decedent's death, petitioner-insurer held insurance proceeds which were includible in the decedent's gross estate under section 811 (g) of the Internal Revenue Code. The decedent had made provision that the proceeds of the insurance should be paid to the beneficiaries in installments on the happening of certain contingencies. Held, that petitioner-insurer is not a transferee or trustee within the meaning of section 827 (b) of the Internal Revenue Code.

Stuart McCarthy, Esq., for the petitioner.

Francis J. Butler, Esq., for the respondent.

Hill, Judge. Murdock, Turner, Opper, and Bruce, JJ., dissent.

---

HILL

The respondent determined that the petitioner was liable for estate tax of the estate of Avis A. Roudabush in the amount of $ 5,240.72 as a transferee and trustee of the property of this estate.

Two issues were raised by the pleadings. One of these concerned the running of the statutory period of time within which any part of the deficiency could be assessed against the transferee. Petitioner has made no argument with respect to this issue and accordingly we consider it to have been abandoned. The only issue raised for decision, therefore, concerns the question whether the petitioner is a transferee or trustee under the provisions of section 827 (b) of the Internal Revenue Code.

FINDINGS OF FACT.

The facts were stipulated and they are so found. Only those necessary for an understanding of the case are presented herein.

Petitioner is a mutual life insurance corporation organized under the laws of the State of New York, and has its principal place of business in New York. During the course of its business it insured the life of one Avis A. Roudabush. Avis A. Roudabush died on or about March 13, 1945, and an estate tax return was filed with the collector of internal revenue for the district of Virginia on July 1, 1946, by the administrator of his estate.

On January 13, 1947, the respondent issued a statutory notice of deficiency to the decedent's estate in which it was determined there was a deficiency in Federal estate tax in the amount of $ 15,724.76. The estate petitioned this Court for a redetermination of its liability for the deficiency, and on November 29, 1949, this Court entered a decision that there was a deficiency in estate tax due from the estate of Avis A. Roudabush in the amount of $ 15,724.76, pursuant to a stipulation of the parties in Docket No. 13497. Only $ 50 of such deficiency has been paid. All of the assets of the estate have been distributed and there remains in the estate no assets with which to pay the balance of the deficiency.

Respondent determined that the amount of $ 5,240.72 constitutes petitioner's liability as transferee and trustee of the property of the decedent's estate. Notice of liability was mailed to petitioner on or about September 6, 1950.

The policies issued by the petitioner on the life of the decedent and the net amount thereof included in his gross estate for Federal estate tax purposes are shown by the following schedule:

	Policy	Policy
	#2324,584	#2419,313
	issued in	issued in
	1918	1919
Face amount	$ 2,000.00	$ 5,000.00
Less certain loans or advances obtained by the decedent
on security of the policies	988.03	2,759.25
Net amount remaining under policies at the date of
decedent's death and reported as part of decedent's
gross estate	$ 1,011.97	$ 2,240.75

	Policy
	#2419,314
	issued in	Total
	1919
Face amount	$ 5,000.00	$ 12,000.00
Less certain loans or advances obtained by the decedent
on security of the policies	2,759.00	6,506.28
Net amount remaining under policies at the date of
decedent's death and reported as part of decedent's
gross estate	$ 2,241.00	$ 5,493.72

There were certain optional settlement provisions contained in the three policies. Decedent had elected to avail himself of these provisions and, accordingly, pursuant to his request, there were attached to and made a part of these policies certain settlement agreements designated certain beneficiaries and setting forth the manner in which, and the persons to whom, the amounts payable under the policies by reason of his death were to be paid by the petitioner.

In accordance with the terms and conditions of the option settlement agreements, portions of the proceeds of the insurance policies, aggregating $ 2,493.88, were to be paid by the petitioner to the insured's daughter, Susan Roudabush Sheets, upon her attainment of age 30. She reached the age of 30 on October 30, 1945, and petitioner thereupon paid her the sum of $ 2,493.88, plus interest. Of the remainder of the proceeds of the policies the sum of $ 252.99 is to become payable to the insured's daughter, Nancy Jeanette Roudabush McDaniel, upon her reaching the age of 30 years, apparently November 28, 1955. If Nancy Jeanette Roudabush McDaniel dies prior to the attainment of the age of 30, this sum is to be paid to her surviving children, if any, and if there is none, then to certain other contingent beneficiaries. An additional sum of $ 252.99 is to be paid on the death of Nancy Jeanette Roudabush McDaniel to her surviving children, if any, and a further sum of $ 2,493.86 is to be paid on the death of Susan Roudabush Sheets to her surviving children, if any. If there are no surviving children of either of these two daughters then other named contingent beneficiaries are to receive the sums specified. During the period of deferment of the payment of proceeds of the policies, interest at the rate determined in accordance with the option settlement agreements is payable to Susan Roudabush Sheets and Nancy Jeanette Roudabush McDaniel.

None of the proceeds of the policies on the life of the decedent have ever been segregated by the petitioner, but all such proceeds have been commingled with its general assets.

OPINION.

The issue before us, as framed by the parties, is whether under section 827 (b) of the Internal Revenue Code the petitioner-insurer is liable for any part of unpaid estate tax as an alleged "transferee or trustee" of life insurance proceeds includible in decedent's gross estate under section 811 (g) of the Internal Revenue Code.

Section 827 reads as follows:

SEC. 827. LIEN FOR TAX.

(b) Liability of Transferee, Etc. -- If the tax herein imposed is not paid when due, then the spouse, transferee, trustee, surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent's death, property included in the gross estate under section 811 (b), (c), (d), (e), (f), or (g), to the extent of the value, at the time of the decedent's death, of such property, shall be personally liable for such tax. Any part of such property sold by such spouse, transferee, trustee, surviving tenant, person in possession of property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, to a bona fide purchaser for an adequate and full consideration in money or money's worth shall be divested of the lien provided in section 827 (a) and a like lien shall then attach to all the property of such spouse, transferee, trustee, surviving tenant, person in possession, or beneficiary, except any part sold to a bona fide purchaser for an adequate and full consideration in money or money's worth.

It is obvious, of course, that the above section does not specifically refer to the liability of an insurer holding life insurance proceeds. Nor does the section contain any all-inclusive or general classification into which the petitioner might fall. Instead, it sets out six specific persons who may be liable under the section. Accordingly, petitioner is liable under this section only if it comes within one of these classifications. We can exclude the classifications of spouse, surviving tenant, and person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment. Nor do we perceive any basis upon which the petitioner here could be held to be a beneficiary. The question remains whether the petitioner is, as the respondent maintains, a transferee or trustee under this section.

We believe that the respondent's position is predicated on an interpretation of the scope of these terms as employed in section 827 (b) which is clearly erroneous. Viewed categorically, the two terms, trustee and transferee, are subject to multiple and varied interpretations, but when such terms are employed in a technical provision of statutory law they take on a more definite and restrictive meaning supplied by the context of the particular section of which they are a part. In a single sentence of section 827 (b) it is provided that there may be liable six classifications of persons who hold property includible in the estate under six specific subsections of section 811 of the Code. We believe that the authors of this provision, desirous that the holders of the property under each of these subsections should be liable, studiously chose a classification applicable to each of such subsections and included them in section 827 (b) in the same order as the related property interests appear in subsections (b) through (g), inclusive, of section 811. This will be more apparent from an examination of each of the classifications. The first one mentioned is "spouse", which corresponds with the first of the subsections, 811 (b), which provides for the inclusion in the gross estate of dower or curtesy interests. The next two classifications, that of transferee and trustee, are applicable both to section 811 (c), which refers to transfers by trust or otherwise, in contemplation of death, etc., and to section 811 (d), which refers to transfers by the decedent by trust or otherwise where enjoyment thereof was subject at the date of his death to any change through the exercise of a power by the decedent, etc. The fourth classification, that of surviving tenant, corresponds and relates to section 811 (e), joint interests. The fifth classification, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, corresponds and relates to section 811 (f), powers of appointment. The final classification, beneficiary, corresponds and relates to section 811 (g), which requires inclusion in the gross estate of proceeds of life insurance.

The relationship between each classification to each of the above subsections, (b) through (g), inclusive, of section 811, is clearly defined. The transferee and trustee referred to in section 827 (b) are the trustee and transferee to whom the decedent during his lifetime made the transfers set out in section 811 (c) and (d), and in order for a person to be held liable under section 827 (b) as a transferee or trustee it must be made to appear that he is the transferee or trustee specifically designated in section 811 (c) and (d). The respondent herein does not argue or suggest that the insurance proceeds are includible in the gross estate by virtue of subsections (c) and (d) of section 811 or that the petitioner herein is a trustee or transferee within the meaning of these two subsections.

To proceed with our analysis of the provisions in question it also appears clear to us that the authors of the section intended the last classification, that of beneficiary, to be the person liable for the insurance proceeds includible in the gross estate under section 811 (g). Certainly, if it were intended that insurers, as such, were to be liable for any insurance proceeds which they held, the last classification would have been made sufficiently broad to include any such insurance company.

We interpret section 827 (b) to mean that only beneficiaries may be liable under this section for life insurance proceeds includible in the gross estate. Our interpretation in this respect appears to be fully in accord with the legislative intent of Congress when, by section 411 of the Revenue Act of 1942, the section was amended to read as it now appears. Prior to the amendment, section 827 (b) read as follows:

(b) Upon Property of Transferee. -- If (1) except in the case of a bona fide sale for an adequate and full consideration in money or money's worth, the decedent makes a transfer, by trust or otherwise, of any property in contemplation of or intended to take effect in possession or enjoyment at or after his death, or makes 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 (A) the possession or enjoyment of, or the right to the income from, the property, or (B) 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, or (2) if insurance passes under a contract executed by the decedent in favor of a specific beneficiary, and if in either case the tax in respect thereto is not paid when due, then the transferee, trustee, or beneficiary shall be personally liable for such tax, and such property, to the extent of the decedent's interest therein at the time of such transfer, or to the extent of such beneficiary's interest under such contract of insurance, shall be subject to a like lien equal to the amount of such tax. Any part of such property sold by such transferee or trustee to a bona fide purchaser for an adequate and full consideration in money or money's worth shall be divested of the lien and a like lien shall then attach to all the property of such transferee or trustee, except any part sold to a bona fide purchaser for an adequate and full consideration in money or money's worth.

In both the Senate Finance Committee and House Ways and Means Committee Reports, attention was called to the fact that section 827 (b), prior to amendment, referred only to transfers in contemplation of death or intended to take effect in possession or enjoyment at or after death, and life insurance in favor of a specific beneficiary. The reports went on to state that all the assets referred to in section 811 are to be treated equally for purposes of inclusion in the gross estate and by virtue of the amendment the holders or recipients of all such assets were accordingly placed in the same plane of personal liability for the tax. ^{*56 Our construction of section 827 (b) is also in accordance with the construction placed on the predecessor section by the Court of Appeals for the District of Columbia in John Hancock Mutual Life Insurance Co. v. Helvering, 128 F.2d 745">128 F. 2d 745, reversing 42 B. T. A. 809. The predecessor section there involved was section 315 of the Revenue Act of 1926. Referring to that provision, the judge stated:}

* * * The most significant language for this case is that of subsection 315 (b).

"If

(1) except in the case of a bona fide sale for an adequate * * * consideration * * *,

the decedent makes a transfer, by trust, or otherwise, of any property * * * intended to take effect in possession or enjoyment at or after his death, * * * or

(2) if insurance passes under a contract executed by the decedent in favor of a specific beneficiary, and

if in either case the tax in respect thereto is not paid when due, then the transferee, trustee or beneficiary shall be personally liable for such tax, and such property,

to the extent of the decedent's interest therein at the time of such transfer, or

to the extent of such beneficiary's interest under such contract of insurance, shall be subject to a like lien equal to the amount of such tax. * * *" (Italics supplied)

The imposition of liability appears to follow two lines. First is the case where decedent makes a transfer by trust or otherwise. Second is the case where insurance passes under a contract to a specific beneficiary. These two cases are set-off by "(1)" and "(2)". If the tax has not been paid, it is provided that in either case the transferee, or beneficiary is personally liable. The statute proceeds to impose a lien on the estate property to the extent of decedent's interest at the time of transfer or to the extent of the beneficiary's interest under the insurance contract. It is clear that an insurance beneficiary is liable. The structure of the subsection is very persuasive that, where insurance is involved, he is the only one who is personally liable.

* * * *

It is to be noted that the opinion in the John Hancock Mutual Life Insurance Co. case, supra, was decided May 11, 1942, and the Revenue Act of 1942 was enacted October 21, 1942. It certainly appears likely to us, therefore, that when Congress considered the amendment in question it was aware of the existence and the importance of the decision in John Hancock Mutual Life Insurance Co. case, yet there is no indication that Congress intended to broaden the scope of this section to cover insurance companies.

For the foregoing reasons we conclude and hold that the petitioner is not liable as a transferee or trustee within the meaning of section 827 (b) of the Code and since our holding here appears to be in conflict with our holding in the case of John Hancock Mutual Life Insurance Co., 42 B. T. A. 809, we will not hereafter follow the latter.

While section 900 (e) of the Code provides that the term "transferee" as used in that section includes heir, legatee, devisee, distributee and any person who is personally liable under section 827 (b), section 900 of the Code other than by virtue of its being a transferee within the meaning of section 827 (b) of the Code. Accordingly, we need give no further consideration to section 900 other than to note that there is a distinction between the term "transferee" as used in the two sections of the Code as evidenced by our foregoing discussion of the issue presented herein and the distinction should be kept in mind lest confusion results.

Decision will be entered for the petitioner.

---

Footnotes

• 1. The reports of the Senate Finance Committee and the House Ways and Means Committee are identical with respect to the proposed amendment to section 827 (b) of the Code. The following comment appears at page 168 of the House Report and page 241 of the Senate Report:

  SECTION 411. LIABILITY OF CERTAIN TRANSFEREES

  This section, which is identical with section 411 of the House bill, clarifies and amends provisions of the Internal Revenue Code relating to the estate tax lien and transferee liability. Section 827 (a) of the Code imposes a lien upon the gross estate of the decedent. The following subsection provides for a like lien upon assets received by certain persons. The latter provision is unnecessary and it is therefore eliminated. Subsection (b), as amended, contains a cross reference to the lien imposed by subsection (a), which continues to be applicable.

  Section 827 (b), as it now appears in the Code, in imposing personal liability for the tax refers only to transfers in contemplation of death or intended to take effect in possession or enjoyment at or after death, and life insurance in favor of a specific beneficiary. However, all the assets referred to in section 811 are treated equally for purposes of inclusion in the gross estate and the holders or recipients of all such assets are accordingly placed on the same plane of personal liability for the tax.

  This section also makes more specific the definition of "transferee" in section 900 (e) of the Internal Revenue Code↩, which, however, is not all-inclusive.

• 2. Note that definition of "transferee" is not limited to the persons named. See footnote 1, supra↩.