Opinion
Docket No. 18496.
1951-01-18
ESTATE OF WILLIAM E. EDMONDS, WILLIAM E. EDMONDS, JR., AND ARTHUR C. EDMONDS, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Timothy N. Pfeiffer, Esq., and Howard O. Colgan, Jr., Esq., for the petitioners. Pershing W. Burgard, Esq., for the respondent.
Timothy N. Pfeiffer, Esq., and Howard O. Colgan, Jr., Esq., for the petitioners. Pershing W. Burgard, Esq., for the respondent.
Decedent was a member of the New York Stock Exchange and as such participated in the operation and benefits of the Exchange Gratuity Fund. The members were required to pay $15 to the trustees of the Gratuity Fund upon being admitted to membership and to pay a similar amount upon the death of any member. The Exchange was obligated to pay out of the money thus collected, and other accretions thereto, the sum of $20,000 to certain beneficiaries named in the constitution of the Exchange. These beneficiaries could not be changed by decedent. A payment of $20,000 made upon decedent's death to his widow and five children is held to constitute a payment of insurance since the element of shifting the risk of the individual's premature death to the group was present. Because the value of a seat upon the Exchange was determined in part by the insurance benefits attached to possession of the seat, decedent is further held to have retained incidents of ownership in such insurance to give rise to the imposition of the estate tax under section 811(g)(2) of the Internal Revenue Code. Commissioner v. Marjorie F. Treganowan, Executrix, Estate of Max Strauss, 183 Fed.(2d) 288, certiorari denied October 16, 1950, followed.
The Commissioner has determined a deficiency in the estate tax of the estate of William E. Edmonds of $7,254.20. The deficiency is due to the addition to the gross estate shown on the estate tax return of $20,000 designated as ‘Payment out of The Gratuity Fund of the New York Stock Exchange.‘ This adjustment is explained in the deficiency notice, as follows:
The above referred to sum of $20,000.00, paid, upon decedent's death, out of The Gratuity Fund of the New York Stock Exchange by reason by decedent's membership in said organization, is deemed to be includible as a part of decedent's gross estate under the provisions of Section 811(g) of the Internal Revenue Code.
Petitioner by appropriate assignments of error contests the correctness of the Commissioner's determination.
FINDINGS OF FACT.
The facts which were stipulated are so found and the stipulation is incorporated herein by reference.
The petitioner is the estate of William E. Edmonds, and William E. Edmonds, Jr. and Arthur C. Edmonds are the duly appointed, qualified and acting executors of the last will and testament of William E. Edmonds, deceased, who died on May 14, 1946, a resident of the County of Kings, City and State of New York.
The Federal estate tax return was filed with the collector of internal revenue for the first district of New York.
William E. Edmonds, the decedent, was born December 15, 1869. Decedent was elected a member of the New York Stock Exchange (hereinafter referred to as the ‘Exchange‘) March 17, 1918, and was continuously a member in good standing until his death. In connection with his election to membership on the Exchange, the decedent was not required by the Exchange or its governing committee to submit to a medical examination as a condition either to his election to membership or to his continuance as a member on the Exchange.
The decedent's membership on the Exchange is still held by his estate and has not been transferred to a purchaser or other person. The decedent's membership on the Exchange was included in decedent's gross estate for purposes of the Federal estate tax at a value of $50,000 on the optional valuation date and Federal estate tax was paid thereon.
History of Gratuity Plan and Gratuity Fund of New York Stock Exchange.—Provision was first made by an amendment to the constitution of the Exchange adopted on April 3, 1873, for the establishment of a plan providing for the payment by the surviving members of the Exchange of a certain sum to the family of a deceased member. Such plan (inserted as sections 1 to 5 article XXVIII of the then constitution) provided that upon the death of any member of the Exchange, the treasurer of the Exchange should collect the sum of $10 from each of the 1,059 surviving members and the amount so collected (but not more than $10,000) should be paid to the widow and children of the deceased member, or, if he died leaving neither widow nor children, then to his legal heirs, free from all debts, charges, or demands whatever.
The membership on the Exchange was increased from 1,060 to 1,100 members by a constitutional amendment ratified November 12, 1879, and was further increased from 1,100 to 1,375 members by amendment ratified February 7, 1929. The Exchange had 1,375 members on the date of decedent's death and presently has the same number of members. By an amendment adopted April 24, 1930, the sum to be paid by each person upon becoming a member of the Exchange and by each of the surviving members upon the death of a member was increased from $10 to $15 per death and the aggregate amount to be paid to the kin of a deceased member specified in the constitution was increased from $10,000 to $20,000.
At the time that the plan was instituted in 1873, a constitutional amendment was adopted enjoining the governing committee of the Exchange (now called the board of governors), ‘to increase the surplus revenues of the Exchange as far as possible to rigid economy of expenditures, and by increase of receipts in every legitimate way, for the purpose of accumulating a fund to be styled the 'Gratuity Fund,’‘ to be administered and applied as directed in the constitution of the Exchange.
The fund was to be built up in four ways: (1) from an initial payment of $10 (later changed to $15) by each member of the Exchange and each person who was thereafter admitted to membership; (2) from the allocation to the fund of half of the annual profits of the Exchange in excess of $10,000; (3) from the excess of the amounts collected from surviving members over the amount paid to the kin of the deceased members; and (4) from the accumulation of interest on the invested capital of the fund. The methods of building up the fund have been altered twice by the constitutional amendment. In 1896, the allocation to the fund of half of the annual profits of the Exchange in excess of $10,000 was terminated. In 1915, the accumulation of the income of the fund was terminated and thereafter the net income was credited pro rata to the members of the Exchange in reduction of the amounts payable by them on the deaths of other members.
At all times since the adoption of the plan in 1873, the constitution of the Exchange has contained a provision substantially similar to that added to article XXVIII of the constitution in force in 1873 (providing for the plan) which reads, as follows:
But no alteration of Article XXVIII shall ever be made which shall impair in any essential particular, the obligation of each member to contribute as therein provided to the provision for the families of deceased members.
In the constitutional amendment of 1873, the only provisions with respect to the uses to which the Gratuity Fund was to be put were:
Whenever the number of deaths of members of the Exchange shall exceed fifteen in any one year, it shall be the duty of the Trustees of the Gratuity Fund to pay out of the Fund to the credit of the surviving members, in reduction of their dues for that year, such sums as may be requisite to limit the total payments of each member under this Article to One Hundred and Fifty Dollars in any one year; provided, however, that should the Fund be exhausted, the liability of each member to make payments in excess of One Hundred and Fifty Dollars, shall not thereby be impaired, but on the contrary, shall remain in full force.
Whenever the Gratuity Fund shall amount to One Million Dollars, the Trustees shall divide the annual income among the members, to be credited in reduction of their annual payments under this Article.
The provision for the use of principal to reduce the amount otherwise payable by surviving members in the event that the number of deaths in any one year exceeded 15 was terminated by constitutional amendment in 1896, and it was then provided that only the income of the fund should be used for that purpose. In 1915, it was provided that all net income was to be used as a credit to reduce the amount otherwise payable by surviving members regardless of the amount of the fund or the number of deaths in any one year. No other amendment affecting the use of the fund was made until March 26, 1941, at which time a constitutional amendment was adopted providing for the use of both capital and income of the fund as a credit against amounts otherwise payable by surviving members, regardless of the number of deaths, so long as the value of the fund should remain in excess of $500,000.
The constitution of the Exchange has provided at all times since 1873, that the amounts collected pursuant to the Gratuity Fund article (but not in excess of the amount therein specified) should be paid to the widow and children, or issue of a deceased child or children of the deceased member, or if he died leaving neither widow, child, nor issue of a child, then to his legal heirs or the persons who would, under the laws of the State of New York, take the same by reason of relationship to the deceased member had he owned the same at the time of his death. No member has at any time had the right to name, elect or designate any beneficiary or beneficiaries other than those named above or in any other way to divert the benefits from the persons specified in the constitution. At all times since the adoption of the plan in 1873, the constitution of the Exchange has contained a provision similar to the following:
Nothing herein contained shall be construed as constituting any estate in esse which can be mortgaged or pledged for the payment of any debts; but it shall be construed as the solemn agreement of every member of the Exchange to make a voluntary gift to the family of each deceased member, and of the Exchange, to the best of its ability, to collect and pay over to such family the said voluntary gift.
Amendments to the constitution can be made by submitting the proposed amendment to the board of governors who may either approve or disapprove the proposal. After any proposed amendment is approved by a majority of the board of governors, it is submitted to the membership for vote. If more than 688 of the 1,375 members vote within a period of two weeks or four weeks following the approval of the proposed amendment by the board of governors and if a majority of the members thus voting express a preference for the proposed amendment, it becomes a part of the constitution.
Operation of Gratuity Fund During Period Following Decedent's Election to Membership.— Upon learning of the death of a member of the Exchange, it is the practice of the trustees of the Gratuity Fund to set up on their books a liability in the amount of the payment to be made to the family of the deceased member and thereafter to make payment out of the fund of the sum of $20,000 to such family upon receipt of papers in proper form evidencing the right of such payees to receive payment under the provisions of the constitution. At the same time the trustees set up on their books an account receivable of $20,610 (representing the aggregate of all amounts payable by the surviving 1,374 members of the Exchange, each of whom is required by provisions of the constitution to pay $15). In accordance with the provisions of section 2 of article XVI of the constitution, the treasurer of the Exchange, after the close of each quarter, bills each member of the Exchange $15 in respect of each death of a member which has occurred during such quarter, the aggregate of such amount in respect of each death constituting an account receivable of $20,610. The treasurer of the Exchange sets up an account receivable for the amounts billed to the members, and a corresponding liability to the Gratuity Fund. During each quarter an amount equal to the sums collected by the treasurer is paid over to the trustees of the Gratuity Fund in reduction of the liability placed upon the Exchange's books, as above mentioned. The amounts so received by the trustees of the Gratuity Fund are credited against the receivable set up on their books.
During the period from March 17, 1918, the date of decedent's election to membership in the Exchange, to January 1, 1941, the trustees of the Gratuity Fund, at the close of each fiscal or calendar year, paid over to the treasurer of the Exchange the annual net income received as interest on the Gratuity Fund which, in turn, was credited pro rata to the members of the Exchange as of the first day of the succeeding fiscal or calendar year and applied in reduction of the amounts payable by each member in respect of the deaths of other members.
During the period from January 1, 1941 through October 1, 1946, the trustees of the Gratuity Fund, pursuant to section 7 of article XVI of the constitution, paid to the treasurer of the Exchange at the close of each quarterly period the aggregate of all amounts payable by members of the Exchange under the Gratuity Fund provisions of the constitution in respect of deaths occurring during such quarter and the treasurer of the Exchange credited such amounts proportionately against the amounts so payable by each member in respect of deaths of members occurring during such quarter.
Amounts Contributed or Contributable by and Credited to Decedent from Election to Membership to Date of Death.— During the period from March 17, 1918, the date of decedent's election to membership on the Exchange, through January 10, 1941, the gross amounts payable by decedent in respect of deaths of other members of the Exchange in accordance with article XVI of the constitution amounted to $4,365. During the same period the amounts credited to the decedent amounted to $1,539.07. The net amount payable or $2,825.93 was paid by decedent. During the period from January 11, 1941 through May 14, 1946, the date of decedent's death, the gross amounts payable by decedent in respect of deaths of other members of the Exchange in accordance with article XVI of the constitution amounted to $1,215. During the same period the amounts credited to the decedent amounted to $1,215.
Amounts Contributable or Contributed by and Credited to Decedent's Estate from Decedent's Death Through October 1, 1949.— During the period from May 14, 1946, through October 1, 1946, the gross amounts payable by decedent's estate in respect of deaths of other members of the Exchange in accordance with section 2 of article XVI and section 7 of article X of the constitution amounted to $105. During the same period the amounts credited to decedent's estate amounted to $105.
During the period from October 1, 1946, through October 1, 1949, the gross amounts payable by decedent's estate in respect of deaths of other members of the Exchange in accordance with section 2 of article XVI and section 7 of article X of the constitution amounted to $990. During the same period the amounts credited to decedent's estate amounted to $45. The net amount payable, or $945, was paid by decedent's estate.
Payments to Decedent's Widow and Children.— The trustees of the Gratuity Fund pursuant to the provisions of sections 3 and 4 of article XVI of the constitution paid $10,000 to decedent's widow, Susan M. Edmonds, on July 10, 1946, and $2,000 to each of decedent's five children on March 11, 1947.
General Findings.— It is characteristic of life insurance plans to require that any unpaid premiums be deducted from the amount payable by reason of the insured's death. There is no plan of life insurance in existence today which requires the insured's estate to continue to pay some amount to the insurer for any period after the death of the insured.
OPINION.
BLACK, Judge:
As has already been stated in our preliminary statement the Commissioner has determined the deficiency in estate tax here involved by adding to the gross estate reported on the return, $20,000 which was paid to the widow and five children of decedent upon his death by the New York Stock Exchange. The Commissioner has done this on the ground that the $20,000 in question was insurance within the meaning of section 811(g)(2) of the Internal Revenue Code.
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, wherever situated, except real property situated outside of the United States—(g) PROCEEDS OF LIFE INSURANCE.— (As amended by section 404(a) of the Revenue Act of 1942.)(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 along or in conjunction with any other person. For the purposes of clause (A) of this paragraph, if the decedent transferred, by assignment 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.
Petitioner contests the correctness of respondent's determination upon the following grounds:
1. The amount received by decedent's widow and children pursuant to article XVI of the constitution of the New York Stock Exchange was not receivable as insurance under a policy upon the life of the decedent.
2. Even though the amount received by decedent's widow and children pursuant to article XVI of the constitution of the New York Stock Exchange be viewed as insurance, decedent did not possess at his death any incidents of ownership with respect thereto.
3. Even though the amount received by decedent's widow and children pursuant to article XVI of the constitution of the New York Stock Exchange be viewed as insurance, no portion thereof is includible in decedent's gross estate under the payment of premiums test of section 811(g) by reason of the fact that decedent made no contribution thereunder and possessed no incidents of ownership therein subsequent to January 10, 1941.
All three of these contentions of petitioner have been answered adversely by the Second Circuit's recent decision in Commissioner v. Marjorie F. Treganowan, Executrix, Estate of Max Strauss, 183 Fed.(2d) 288, certiorari denied October 16, 1950, reversing our decision in 13 T.C. 159. The instant case was tried and the briefs were filed prior to the decision of the Second Circuit reversing us in the Strauss case.
Petitioner in its brief relies heavily upon our decision in Estate of Max Strauss, supra. The Commissioner in his brief concedes that the facts in that case and that if we are to follow our decision of the Strauss case the decision here must be for the petitioner. Respondent, however, argues that our decision in the Strauss case was wrong and should not be followed. In support of his position he cites and discusses many cases dealing with different phases of insurance. We deem it unnecessary to discuss these cases. Our own opinion in the Strauss case discussed quite fully what we understood was life insurance and if that case is to be followed here, there would be no need of any additional discussion on that subject. On the other hand, if we are to follow the Second Circuit in its reversal of the Strauss case, there is still no point in much additional discussion.
So the question we face here is whether we will stand by our decision in the Strauss case and respectfully decline to follow the Second Circuit's decision, or whether we will accept it as laying down the correct law and follow it in the instant case. It, of course, goes without saying that the reversal by the Second Circuit of our decision in the Strauss case makes the law for that case. Inasmuch, however, as the Tax Court must endeavor to make its decision uniform for all taxpayers within the United States, we cannot discharge that duty by following a circuit court's decision in a subsequent case by a different taxpayer if we think it is wrong, even though it would go to the same circuit in which we were reversed, and even though the facts are the same as the case in which we were reversed. If we did so, it would only result in confusion and unequal treatment of taxpayers merely because they live in different circuits. Therefore, when, as here, we have been reversed we must examine carefully the reversal to see whether or not we will follow the court in its reversal, not only in cases which lie within the jurisdiction of that particular circuit, but all other circuits as well. This we have done in the instant case. We have carefully read and considered the majority opinion of the Second Circuit in the Strauss case and have decided to follow it and no longer follow our own decision in Estate of Max Strauss, supra. This means that petitioner's point No. 1 stated above is not sustained; we hold that the $20,000 in question was insurance. The fact that decedent's estate continued its membership in the Exchange after decedent's death and continued to pay assessments does not change the character of the $20,000 insurance which was paid upon decedent's death. Petitioner has cited no authority and has advanced no sound reason why this difference in the facts of the instant case from those present in the Strauss case should make any difference in the decision of the two cases. We hold that it does not make any difference.
There is one other difference in the instant case from the Strauss case. It is not a difference in the facts because, as we have already noted, the only difference in the facts is the one which we have noted above. The difference to which we now refer is this: At the hearing two experts eminent in the insurance field testified and their qualifications to testify as experts were well established. One testified in behalf of the petitioner and the other on behalf of the respondent. Neither purported to add anything to the facts because the facts were stipulated. What they did in their testimony was to give their opinions based on the stipulated facts as to whether the $20,000 in question was or was not insurance. Petitioner's expert witness gave as his opinion that the $20,000 was not insurance; respondent's witness gave as his opinion that the $20,000 was insurance. Both witnesses gave in considerable detail the reasons upon which they based their conclusions. Thus we have, as we often do, differences in opinion between well-qualified experts. We do not think there would be any profit in discussing the pros and cons of their differences. As we have already stated, since the hearings in this case took place and the expert testimony was received the Second Circuit Court's decision in the Strauss case has come down and the Supreme Court has denied certiorari. As we have already stated, after careful consideration, we have decided to follow the Second Circuit's decision in that case and to no longer follow our own decision in Estate of Max Strauss, supra. There is nothing in the expert testimony which would cause us to change that conclusion.
In view of the fact that the notice of deficiency does not give effect to petitioner's payment to the collector of internal revenue for the first district of New York of the further sum of $416.87 in respect of the Federal estate tax liability of the estate,
Decision will be entered under Rule 50.
Reviewed by the Court.