Opinion
Docket No. 23468.
1951-01-26
ESTATE OF EMIL M. GOLDBLATT, DECEASED, RUTH A. GOLDBLATT, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Samuel F. Frank, Esq., and Robert A. Berner, C.P.A., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent.
Samuel F. Frank, Esq., and Robert A. Berner, C.P.A., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent.
On July 2, 1943, decedent purchased a single premium combination annuity and life insurance policy for a premium of $15,000, of which decedent's wife paid $3,000. On January 4, 1935, decedent purchased a single premium retirement annuity and life insurance policy for a premium of $30,000. If decedent died prior to the date his annuities were to begin, then certain death benefits were to be paid to his wife upon his death. The policies were not survivorship annuity policies. Prior to his death on January 28,1945, decedent exercised options under both policies whereby his wife was entitled to receive upon his death specified monthly payments for life with 20 years payments guaranteed, instead of the death benefits being paid to her all in one lump sum. Decedent possessed all the incidents of ownership in both policies to the date of his death. Held, the payment of one-fifth of the premium of one of the policies by decedent's wife does not reduce the value of the policy includible in decedent's estate. Held, further, that the value includible in decedent's gross estate on account of each policy is that amount provided in section 81.28, Regulations 105, which reads: ‘In case the proceeds of a policy are made payable to the beneficiary in the form of an annuity for life or for a term of years, there should be listed in the appropriate schedule of the return the one sum payable at death under an option which could have been exercised either by the insured or by the beneficiary, or if no option was granted, the sum used by the insurance company in determining the amount of the annuity.‘
The Commissioner has determined a deficiency of $34,886.22 in estate tax. The adjustments upon which the deficiency is based were explained in the deficiency notice, as follows:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦Tentatively ¦ ¦ +----------------------------------+----------+---------------+---------------¦ ¦Schedule D ¦Returned ¦Determined ¦Determined ¦ +----------------------------------+----------+---------------+---------------¦ ¦Item 25—Annuity policy #1,154,577 ¦$13,198.46¦$20,117.58 ¦$24,876.93 ¦ +----------------------------------+----------+---------------+---------------¦ ¦Item 35—Annuity policy #9,681,2225¦27,568.31 ¦40,440.00 ¦51,402.57 ¦ +-----------------------------------------------------------------------------¦ ¦The proceeds of the annuity policy of the Massachusetts Mutual Life Insurance¦ ¦Company No. 1,154,577 is included in the decedent's gross estate at the value¦ ¦of $24,876.93 and the proceeds of the annuity policy of the Equitable Life ¦ ¦Assurance Society of the United States No. 9,681,225 is included in the gross¦ ¦estate in the amount of $51,402.57. ¦ +-----------------------------------------------------------------------------+
Schedule F Item 44—Interest in partnership $10,558.51 $70,430.78 $65,781.29
It is determined that the value of the decedent's 30 percent interest in the partnership under the name of the New York Progressive Wood Heel Company is $65,781.29 after consideration of all elements and factors of value.
By appropriate assignments of error petitioner contests these adjustments. In addition to contesting these adjustments, petitioner assigns error, as follows:
II. As to said Schedule D., Item 25 of the Return, likewise referring to the inclusion of the proceeds of the said policy in the gross estate, the entire value thereof is erroneously included therein, and said determination erroneously rejects and disallows Petitioner's claim that she paid Eight Thousand ($8,000) Dollars of the single payment insurance premium for purchase of said policy, so that the gross value of the proceeds thereof should have been included in the gross estate in the sum of Six Thousand One Hundred Sixty-five and 59/100 ($6,165.59) Dollars, and no more.
In the stipulation of facts this payment is stated to be in the amount of $3,000.
Inasmuch as the value of the partnership interest, Item 44 in Schedule F, has now been stipulated the adjustment relating thereto is no longer in controversy and the stipulation will be given effect in a recomputation under Rule 50.
FINDINGS OF FACT.
The facts have been stipulated and we adopt them as our findings of fact. They may be summarized as follows:
Petitioner is the duly appointed executrix of the last will and testament of Emil M. Goldblatt, deceased. Emil M. Goldblatt (hereinafter sometimes called decedent) died on January 28, 1945, a resident of New York, New York. An estate tax return on behalf of decedent's estate was filed by petitioner on April 26, 1946, with the collector of internal revenue for the first district of New York.
On July 2, 1943, decedent purchased from the Massachusetts Mutual Life Insurance Company Policy No. RA 1,154,577, a single premium payment combination annuity and life insurance policy. Of the single cash premium of $15,000 paid for the policy, decedent's wife, Ruth A. Goldblatt, contributed $3,000. Ruth A. Goldblatt was designated as beneficiary, if living at decedent's death, payments to be made to her in monthly installments as set forth in Option C of the policy during her lifetime and for 20 years certain; otherwise, to decedent's children equally and to the survivors or survivor of them. Decedent's wife, who was born on October 15, 1892, was 52 years of age at the date of decedent's death. Upon decedent's death the proceeds of the policy became payable to Rut A. Goldblatt under Option C of the policy and she thereupon became entitled to a monthly life income of $93.55 with 20 years payments guaranteed.
On January 4, 1935, decedent purchased from The Equitable Life Assurance Society of the United States a single premium retirement annuity and life insurance Policy No. 9,681,225 for a consideration of $30,000. Decedent's wife was the designated beneficiary. On February 4, 1935, decedent exercised an option to provide that the amount becoming due to his wife should be paid as a life income with 20 years certain, in equal monthly installments in accordance with Option 3 of the Modes of Settlement set forth in the policy. Upon decedent's death the proceeds became payable to the beneficiary, decedent's wife, and she thereupon became entitled to a monthly life income of $193.30, with 20 years payments guaranteed.
Up to the date of decedent's death, neither of the two policies had been assigned by him and decedent possessed all the incidents of ownership in both policies to the date of his death.
In the estate tax return filed by petitioner Policy No. 1,154,577 was listed as having a value of $13,198.46 and Policy No. 9,681,225 as having a value of $27,566.31, the estate having computed these values by multiplying 12 times the monthly payments by 11.88408, the figure shown in Table A, Column 2, set forth in section 81.10 of Regulations 105.
Upon the date of decedent's death in 1945, neither the Massachusetts Mutual Life Insurance Company nor The Equitable Life Assurance Society of the United States issued policies of the identical type as those previously taken out by decedent. However, each company was selling single life annuity contracts and installment refund contracts upon the basis of the 1937 Standard Annuity Table of Mortality with interest at 2 1/2 per cent and with ages set back one year and a loading of 6 1/2 per cent of the gross premium.
In a letter dated April 25, 1950, from the Massachusetts Mutual Life Insurance Company addressed to the attorney for petitioner, made a part of the stipulation herein, the following statements are made: Re Policy No. RA 1,154,577— Emil M. Goldblatt (deceased) The policyholder, Emil M. Goldblatt, died prior to the maturity of this annuity as an income to himself and in accordance with the settlement provisions contained in the contract any death proceeds would be retained by the Company under the optional methods of settlement providing for a monthly life income of Option ‘C‘ payable to Mrs. Goldblatt, 20 years' payments guaranteed. Naturally, the amount of income to Mrs. Goldblatt would depend upon the amount of death proceeds available as well as her age at the time the annuitant died, if he died prior to maturity of the policy as an annuity to himself. In this case, the death proceeds amounted to $20,117.58 and were sufficient to provide a monthly life income of $93.55 to Mrs. Goldblatt, 20 years' payments guaranteed, under Option ‘C‘. Thus, since the $20,117.58 was the amount used to actually purchase the Option ‘C‘ income, we do not know what other method of valuation should be used. The death proceeds of $19,966.12 is the interpolated cash value as of the date of death of the policyholder to which was added dividend accumulations and interest of $151.46 making a total death value of $20,117.58. The figuring details are as follows:
+------------------------------------+ ¦Tabular cash value 7-2-45¦$20,257.05¦ +-------------------------+----------¦ ¦Tabular cash value 7-2-44¦19,572.00 ¦ +-------------------------+----------¦ ¦Difference ¦685.05 ¦ +------------------------------------+
Insured died 1-28-45 or 210 days after 7-2-44. 210 ---X685.05-394.12+19,572.00=19,966.12 365 Dividend accumulations and interest +151.46 Total death proceeds 20,117.58
In a letter dated April 21, 1950, from The Equitable Life Assurance Society addressed to the attorney for petitioner, made a part of the stipulation herein, the following statements are made:
Re: Policy 9681,225— Emil M. Goldblatt, Dec'd.
In the case of this policy, the amount payable as a death benefit, if taken in a single sum, was $40,440.00. The contract provides that the death benefit may be left with the company and the company will pay 3% per annum interest on the funds remaining here; or it may be paid out in instalments of a specified amount until the principal is exhausted; or it may be paid out in instalments as long as the primary beneficiary lives.
This contract is being paid under the last method described above, sometimes referred to as the life income option in lieu of a single sum in the policy. We never did sell any such income policy, these optional methods of payment are available only with respect to amounts payable by reason of the death of the insured or annuitant, in lieu of the single sum death benefit. The optional method of payment which provides for instalments for life takes into consideration the age of the beneficiary when the payments commence, but these payments are the actuarial equivalent of the single sum death benefit which would have been paid in one sum had not the instalment payment been elected.
In the first deficiency notice issued by respondent on April 15, 1949, the value of Policy No. 1,154,577 was determined to be $20,117.58, and that of Policy No. 9,681,225 to be $40,440, said figures being based upon the figures submitted by each insurance company on Form 712 of the Treasury Department. In a subsequent deficiency notice issued by respondent on April 25, 1949, Policy No. 1,154,577 was determined to have a value of $24,876.93, and Policy No. 9,681,225 to have a value of $51,402.57. How these latter values were arrived at is not explained in the deficiency notice.
OPINION.
BLACK, Judge:
In this proceeding the questions for our decision are as follows:
1. Where decedent possessed all the incidents of ownership in both policies to the date of his death, does the fact that decedent's wife paid $3,000 or one-fifth of the premium of Policy No. 1,154,577 reduce the value of this policy for estate tax purposes?
2. Did respondent correctly determine, in his second deficiency notice, for estate tax purposes, the value of Policy No. RA 1,154,577 taken out by decedent with the Massachusetts Mutual Life Insurance Company and of Policy No. 9,681,225 taken out by decedent with The Equitable Life Assurance Society as of the date of decedent's death?
3. If question number 2 is answered in the negative, then what is the proper value of these policies for estate tax purposes?
In determining the value of the gross estate of a decedent, there must be included therein the proceeds of life insurance in accordance with section 811(g) of the Internal Revenue Code. It is stipulated that the two policies taken out by decedent were single premium payment annuity and life insurance policies and the inclusion of these policies in decedent's gross estate is conceded; however, the value at which they are to be included is in dispute.
SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, whereever situated, except real property situated outside of the United States—(g) PROCEEDS OF LIFE INSURANCE.—(2) RECEIVABLE BY OTHER BENEFICIARIES.— To the extent of the amount receivable by all other beneficiaries as insurance under policies upon the life of the decedent (A) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance, or (B) with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. For the purposes of clause (A) of this paragraph, if the decedent transferred, by assignments or otherwise, a policy of insurance, the amount paid directly or indirectly by the decedent shall be reduced by an amount which bears the same ratio to the amount paid directly or indirectly by the decedent as the consideration in money or money's worth received by the decedent for the transfer bears to the value of the policy at the time of the transfer. For the purposes of clause (B) of this paragraph, the term ‘incident of ownership‘ does not include a reversionary interest.
First of all, petitioner contends that because decedent's wife paid $3,000 or one-fifth of the premium of Policy No. RA 1,154,577 the value of this policy must be reduced by one-fifth for estate tax purposes because decedent's wife attained a vested interest in one-fifth of this policy from its inception. Petitioner cites De Lappe v. Commissioner, 113 Fed.(2d) 48, in support of its contention; however, De Lappe v. Commissioner was a case arising under the community property laws of Louisiana and no community property law is involved in the instant proceeding.
At the time of decedent's death section 811(g), Internal Revenue Code, provided that there shall be included in the gross estate of the decedent the value of the proceeds of life insurance receivable by beneficiaries other than the executor:
* * * To the extent of the amount receivable by all other beneficiaries as insurance under policies upon the life of the decedent (A) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance, or (B) with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. * * *
It is stipulated that: ‘ * * * decedent possessed all the incidents of ownership in both policies to the date of his death.‘ In view of this stipulation and the provisions of the Code existent at the date of decedent's death, the entire value of the policy is includible in decedent's gross estate notwithstanding that the law at the date of purchase of the policies was otherwise. Estate of Frederick Bodell, 47 B.T.A. 62, affd., 138 Fed. (2d) 553, certiorari denied, 321 U.S. 778; United States v. Jacobs, 306 U.S. 363; Gwinn v. Commissioner, 287 U.S. 224. See also first point in Estate of Judson C. Welliver, 8 T.C. 165, and Estate of William E. Edmonds, 16 T.C. 110.
Paul, Federal Estate and Gift Taxation, 1946 Supplement, sections 10.34, 1037.
We, therefore, hold that the full value of both policies purchased by decedent is includible in his gross estate and we have now only to decide whether respondent's determination of value in his second deficiency notice was in error and, if so, then what is the proper value of the policies.
At the time of decedent's death neither company issued policies of the identical type as those taken out by decedent and, therefore, petitioner claims that in accordance with sections 81.10(i)(2) and (3) the values of the policies includible in decedent's estate are $13,198.46 for the Massachusetts policy and $27,566.31 for the Equitable policy, these figures being arrived at by multiplying 12 times the monthly payments by 11.88408, the figure shown in Table A, Column 2 set forth in section 81.10 of Regulations 105.
Regulations 105.SEC. 81.10 Valuation of property.— * * *(i) Annuities, life, remainder, and reversionary interests.— * * *(2) The value of an annuity contract issued by a company regularly engaged in the selling of contracts of that character is established through the sale by that company of comparable contracts.(3) All other future payments are to be discounted upon the basis of compound interest at the rate of 4 per cent a year. If the time of payment or of payments is dependent upon the continuation of, or upon the termination of a life or of lives, the Actuaries' or Combined Experience Table of Mortality, as extended, and established actuarial principles are to be used in the computation of the present worth. For the purpose of the computation the age of a person is to be taken as the age of that person at his nearest birthday. Table A, a part of this section, gives factors applicable to a case in which only one life is involved. * * *
Respondent, in his second deficiency notice, determined the values of the two policies to be $24,876.93 and $51,402.57. It is argued by respondent that petitioner is not entitled to use the table in section 81.10 of Regulations 105 because the policies taken out by decedent were issued by an insurance company and the value of the annuity must be determined in accordance with subsection 81.10(i)(2) of Regulations 105, and not by subsection 81.10(i)(3).
The statement of respondent's counsel at the trial of this proceeding shows that this is the replacement value determined by respondent.
It is clear to us that neither the valuation contended for by petitioner nor that determined by the Commissioner in his second deficiency notice is correct. For reasons which we shall presently state, section 81.10 of Regulations 105 urged both by petitioner and respondent is not at all applicable here. Respondent, in arguing that the value of the contracts at decedent's death is the amount for which comparable contracts could have been purchased from the issuing company under the annuity table and interest rate then used by it in computing premiums, strongly relies upon Estate of Judson C. Welliver, supra, (second issue in that case). That case is not in point. The contracts involved in that case (second issue) were survivorship annuity contracts with no death benefits provided in the contracts. That fact is shown by the following statement included in our findings of fact in that case wherein we said: ‘Each contract provided for the payment of $100 annually to Judson C. Welliver during his life and after his death to his wife, Jane H. Welliver, for life.‘ Under these facts we held that section 81.10(i)(2), Regulations 105 was applicable and that the cost of comparable contracts at the date of decedent's death was the value at which such survivorship annuity contracts should be included in decedent's estate.
In the instant case, the contracts are not survivorship annuity contracts at all; they are single premium retirement annuities on the life of Emil M. Goldblatt, with certain death benefits payable to his widow if he should die prior to receiving any retirement annuities. For example, the Massachusetts Mutual Life Insurance Company contract provides for an annuity of $150 a month to Emil M. Goldblatt to begin on the ‘2nd day of July 1948.‘ If he should die prior to that date, the following death benefit was payable:
DEATH BENEFIT
Upon receipt of proof of the annuitant's death before the due date of the first retirement income payment, the Company will, provided this contract is then in force, pay in one sum to the beneficiary herein, unless otherwise provided, an amount equal to the cash surrender value hereunder on the date of the annuitant's death or an amount equal to the single premium paid for this contract, whichever is the greater. In either case said amount will be increased by any outstanding dividend accumulations hereunder.
Beneficiary: In monthly installments 240 stipulated as provided in Option ‘C‘ herein to Ruth A. Goldblatt, the annuitant's wife, if living, as said installments respectively become payable, otherwise to Jacob, Aaron, and Beatrice H. Goldblatt, the annuitant's children, equally and to the survivors or survivor of them if living (in accordance with the optional methods of settlement).
If any beneficiary shall die before the annuitant, the interest of such beneficiary will vest in the annuitant unless otherwise provided.
Emil M. Goldblatt died prior to the date when he would have been entitled to an annuity under the contract and, therefore, the death benefit provided in the contract became payable to his widow, Ruth. The fact that prior to his death decedent, in the exercise of an option provided in the policy, directed that the death benefit payable to his wife should be paid to her in the form of an annuity rather than all in one lump sum did not change in the least the character of such payment from that of insurance into that of a survivorship annuity. A clear demonstration of the correctness of the above statement is that if Emil Goldblatt had lived until July 1, 1948, he would have received an annuity of $150 a month for life. If the contract had been a survivorship annuity as in the Welliver case, supra, upon Emil's death his wife, Ruth, would have received an annuity of $150 a month for life. She received no such annuity. What she did receive was $93.55 a month for life which, as we have already pointed out, was simply the payment of the death benefit which she was entitled to receive at Emil's death in the form of an annuity for life. The letters from the insurance companies incorporated in the findings of fact above make this perfectly plain.
What is said of the Massachusetts Mutual Life Insurance Company contract can also be said of The Equitable Life Assurance Society contract, except as to amounts. They were essentially the same sort of contracts, each being, as stated in the stipulation of facts, ‘a single premium payment combination annuity and life insurance policy.‘ The fact that the contracts involved here were included by the Commissioner in decedent's gross estate as life insurance and nothing else is shown by the fact that the only section of the statute upon which the respondent relies in his brief is section 811(g) I.R.C. which relates to the proceeds of life insurance and nothing else. Emil's contract for an annuity never ripened into an actual annuity and the only thing that went over to his wife upon his death was the life insurance part of the policies. Nothing else was payable to any one upon Emil's death, except the life insurance benefit.
In the valuation of life insurance policies, the following is the applicable section of Regulations 105:
Sec. 81.28 Valuation of insurance.— The amount to be returned if the policy is payable to or for the benefit of the estate is the amount receivable. If the proceeds of a policy are payable to a beneficiary other than the estate, and not to or for the benefit of the estate, the amount to be listed in the appropriate schedule of the return is the full amount receivable. (For taxable portion see section 81.27.) In case the proceeds of a policy are made payable to the beneficiary in the form of an annuity for life or for a term of years, there should be listed in the appropriate schedule of the return the one sum payable at death under an option which could have been exercised either by the insured or by the beneficiary, or if no option was granted, the sum used by the insurance company in determining the amount of the annuity.
The part of the regulation underscored above, it seems to us, exactly fits the situation which we have here. The letter of the insurance companies which are in the record show the total amount of death proceeds which would have been payable upon decedent's death to his widow if the option had not been exercised by Emil to direct that the payments should be made to her in the form of annuities, and not in one lump sum payment. In the case of the Massachusetts Mutual Life Insurance Company, the total amount of the death proceeds would have been $20,117.58, and in the case of The Equitable Life Assurance Society the amount payable as a death benefit, if taken in a single sum, was $40,440. It was these figures which the Commissioner determined in his original deficiency notice. Why he departed from these figures and adopted others in a deficiency notice mailed 10 days later is not made clear in the latter deficiency notice. Apparently, he used some figures which he determined represented the cost of a comparable single premium payment combination annuity and life insurance policy at the date of decedent's death, relying upon section 81.10(i)(2) relating to the valuation of annuity policies. How he arrived at his figures of comparable cost, the record does not disclose. But be that as it may, for the reasons we have already stated, what was includible in decedent's estate was the value of the insurance benefits provided in the policy for that was all that was payable upon decedent's death, and section 81.28, Regulations 105, is the applicable regulation. The valuation figures which the Commissioner used in his original deficiency notice dated April 15, 1949, were, in our view, in exact accord with section 81.28 of Regulations 105 and we see no warrant in law for the increase which he made in his second deficiency notice dated April 25, 1949.
We hold that there should be included in decedent's gross estate $20,117.58 on account of the Massachusetts Mutual Life Insurance Company policy and $40,440 on account of The Equitable Life Assurance Society policy.
Decision will be entered under Rule 50.