Opinion
Docket No. 51443.
1956-10-31
ESTATE OF EDMUND W. MUDGE, LEONARD S. MUDGE AND FIDELITY TRUST COMPANY, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Lee W. Eckels, Esq., and Henry A. Morrow, Jr., Esq., for the petitioners. Roy E. Graham, Esq., for the respondent.
Lee W. Eckels, Esq., and Henry A. Morrow, Jr., Esq., for the petitioners. Roy E. Graham, Esq., for the respondent.
Proceeds of life insurance policies placed in trust by decedent, premiums on which were paid by decedent prior to January 10, 1941, and by the trust thereafter, held, on the facts, not includible in his gross estate as (a) a transfer in contemplation of death, (b) life insurance purchased with premiums paid by decedent, or (c) life insurance with respect to which decedent possessed at his death any of the incidents of ownership, notwithstanding that decedent reserved some power to direct the trust investments.
Respondent determined a deficiency of $698,513.04 in estate tax, only part of which has been placed in issue. The only question remaining is whether the corpus of a life insurance trust is to be included in decedent's gross estate either as a transfer in contemplation of death or as property with respect to which decedent possessed incidents of ownership.
FINDINGS OF FACT.
Some of the facts have been stipulated and are hereby found.
Edmund W. Mudge, herein called decedent, was a resident of Pittsburgh, Pennsylvania, until his death on July 1, 1949. The estate tax return for decedent's estate was timely filed with the collector of internal revenue for the twenty-third collection district of Pennsylvania.
During his lifetime decedent was engaged in many and varied enterprises. He was president of Weirton Steel Company, he was a director and senior vice president of Fidelity Trust Company (the latter being an honorary office), he operated a brokerage firm, Edmund W. Mudge & Co., whose annual business from dealing in pig iron, steel billets, coal, and coke ran into millions of dollars, and he owned controlling interests in other enterprises including the Westmoreland-Connellsville Coal & Coke Company, two blast furnaces, and the Reliance Coke Company. In 1920 he organized, financed, and controlled Mudge Oil Company, a company engaged in drilling for and producing oil, and in 1928 he and two other individuals formed the Mudge-Weir Securities Company to buy and sell securities listed on the New York Stock Exchange. The procedure of the latter company was to borrow money on the securities contributed by the participants, purchase additional securities with the borrowed money, and in turn pledge them to borrow more money.
Decedent's net income (as recomputed from tax assessed) from 1913 through 1928 was as follows:
+---------------------------------+ ¦1913¦$35,695.67 ¦1921¦$65,069.84¦ +----+------------+----+----------¦ ¦1914¦125,122.80 ¦1922¦124,685.40¦ +----+------------+----+----------¦ ¦1915¦156,634.80 ¦1923¦22,684.03 ¦ +----+------------+----+----------¦ ¦1916¦456,262.74 ¦1924¦37,150.59 ¦ +----+------------+----+----------¦ ¦1917¦1,029,271.23¦1925¦67,906.07 ¦ +----+------------+----+----------¦ ¦1918¦183,113.24 ¦1926¦75,750.26 ¦ +----+------------+----+----------¦ ¦1919¦124,229.18 ¦1927¦83,247.91 ¦ +----+------------+----+----------¦ ¦1920¦63,686.86 ¦1928¦107,807.96¦ +---------------------------------+
After the 1929 stock market decline decedent reduced the size of both his office staff and office space. His loan balance at Fidelity Trust Company, which stood at $190,734.45 as of March 1, 1930, was increased by $150,000 during 1930 by his additional borrowing. He also obtained approximately $100,000 from each of his sons and in 1931 borrowed on his life insurance policies to the maximum loan value. Book profits of approximately $6,500,000 on the securities investments of Mudge-Weir were never realized and the participants in that venture, including decedent, put up additional collateral to protect its loans. Subsequently another company took over decedent's interest in Mudge-Weir. In 1931 Mudge Oil Company started operations in the east Texas oil fields, financing the purchase of leases at least in part by borrowing from decedent. At the time Mudge Oil Company was reorganized in 1938 it owed decedent approximately $500,000 which he had advanced to it.
Decedent's net income (as recomputed from tax assessed) from 1929 through 1935 was as follows:
+-------------------------------+ ¦1929¦$38,533.23¦1933¦$90,106.10¦ +----+----------+----+----------¦ ¦1930¦34,323.85 ¦1934¦56,134.88 ¦ +----+----------+----+----------¦ ¦1931¦--0-- ¦1935¦62,428.65 ¦ +----+----------+----+----------¦ ¦1932¦10,680.56 ¦ ¦ ¦ +-------------------------------+
Over a period of years beginning in 1899 decedent purchased 15 life insurance policies on his own life in the face amount of $751,530, part of which was originally payable upon his death to his estate.
On June 15, 1925, decedent created a life insurance trust in favor of his wife, Pauline S. Mudge, and his two sons, Edmund W. Mudge, Jr., and Leonard S. Mudge, with Fidelity Trust Company as trustee. The trust agreement provided that the trust could be revoked upon the written consent of decedent, his wife, and two sons, and that upon revocation, the life insurance policies held in the trust were to be transferred to decedent's wife and two sons. This trust was revoked on September 28, 1931, and, pursuant to the terms of the trust agreement, the life insurance policies held in the trust were assigned to decedent's wife and two sons, and were in turn, in October and November 1931, assigned by decedent's wife and two sons to decedent. Decedent then borrowed on these policies up to the maximum loan value available on each of the policies.
On December 21, 1931, decedent created a life insurance trust in favor of his wife and two sons with Fidelity Trust Company as trustee, assigning to it the same policies. In the trust agreement, decedent expressly reserved the right to revoke the trust. On September 19, 1935, decedent revoked this trust and created a new life insurance trust in favor of his wife and two sons with Fidelity Trust Company as trustee, assigning to the trustee the same insurance policies that had been included under the two prior trust agreements.
Under the terms of the 1935 trust agreement, the income from the trust was to be paid to decedent's wife for her life, and upon her death, each son was to receive one-half of the trust income for life. Upon the death of each son, one-half of the trust corpus was to pass to such persons as each son might appoint by will, provision being made for disposition of the principal in default of exercise of the powers of appointment. The trust agreement expressly provided that the trust was irrevocable. Article III of the trust agreement provided:
There shall be no duty upon the Trustee to pay the premiums becoming due on the insurance policies within the operation of this agreement unless it shall have been furnished with funds for that purpose. However, to prevent insurance policies from lapsing and to raise funds for the payment of the premiums the Trustee shall have authority to borrow upon the said policies, to surrender any one or more of them for cash, to exercise options for the automatic application of loan provisions to the payment of future premiums or for the application of dividends to the reduction of premiums, to convert any of the policies into policies of paid-up extended insurance, and to exercise any other option under the said policies and/or to take any other action in the premises which it deems best for the beneficiaries hereunder.
Article IV of the agreement provided directions for the investment and reinvestment of trust funds, including a provision that:
despite the foregoing directions and restrictions, the Trustee shall have authority to purchase any stocks, bonds, securities and/or other property, real or personal, owned by the Donor at his death and to retain any such securities or other property as proper investments for so long as the Trustee may deem advisable. The Trustee shall have authority to make loans, secured or unsecured, to the Donor's executor, administrator or testamentary trustee. Moreover, if the future course of events should bring about unusual economic conditions, which, in the opinion of the Trustee, make advisable the investment of a substantial part of the trust fund in common or preferred stocks, real estate, investment trust shares, or other forms of property, the price of which and/or the return from which might reasonably be expected to fluctuate with the fluctuation in the general price level, then the Trustee, with the consent of the Donor's wife and sons, or with the consent of such of them as may be living, may invest such portion of the trust fund as shall be agreed upon by them in property of that character without incurring liability for loss through depreciation in the value thereof.
Article VI of the agreement provided that:
The Donor may enlarge the trust fund by causing additional insurance policies to be payable to the Trustee, or by conveying other property, real or personal, to the Trustee either by transfer during his lifetime or by appropriate provision in his last will and testament. In the management of any property thus included in the trust fund, the Trustee shall have the discretionary powers set forth in ARTICLE IV, but, during the lifetime of the Donor, shall follow any instructions he may give. During the Donor's lifetime the income arising from any such property, including any dividends on the insurance policies paid to the Trustee, shall be applied to the payment of the premiums become due on the insurance policies subject to this agreement. In the event the income from such property should be in excess of the amount required for the payment of current premiums, the Trustee may distribute such income just as the income from the whole of the trust fund would be distributable under the provisions of ARTICLE I of this agreement if the Donor's death had occurred.
Of the policies included in the 1935 trust, three were canceled and the cash surrender value obtained by the trustee in 1936 at decedent's instructions. The investment of these proceeds was made by the trustee at decedent's instructions.
On September 19, 1935, the unpaid loans on the policies comprising the 1935 trust totaled $261,751.02. This entire amount was repaid by decedent on December 28, 1935, and Federal gift tax was paid by decedent with respect to the repayment of these loans. The funds used for repaying these loans were borrowed by decedent from Fidelity Trust Company.
Prior to September 19, 1935, all premiums on the policies held by the 1935 trust were paid by decedent. Between September 19, 1935, and January 10, 1941, all premiums on these policies were paid in part from dividends received on the policies and the proceeds of policies surrendered for cash and in part by decedent. After January 10, 1941, decedent paid no further premiums and all premiums were paid by the trustee from the proceeds of loans made by the trustee from Fidelity Trust Company and from dividends received on the policies in the amount of $54,853.33, all of which were applied to the payment of premiums. At decedent's death, unpaid loans made by the trustee from Fidelity Trust Company, all of which loans were made after January 10, 1941, totaled $213,300. The loans were made by the trustee from the banking department of Fidelity Trust Company, the trustee giving interest-bearing notes which were secured by the assignment to the banking department of the policies held in the trust. Interest and the proceeds of the loans were used to pay premiums on the policies and to pay interest accruing on the notes. The loans were repaid by the trustee after decedent's death from the proceeds of the insurance policies.
The aggregate value of the proceeds received at decedent's death from the insurance policies held in the trust (including face amounts of policies, post-mortem dividends, and termination dividends) was $757,087.67. The aggregate amount of premiums paid on the insurance policies held in the trust was $995,629.17, $741,368 of which was paid prior to January 10, 1941, and $254,261.17 of which was paid subsequent to January 10, 1941.
Decedent was 65 years of age at the time the 1935 insurance trust was created. He was in good health all his life, with no record of having had any serious illnesses. He was active in business until his fatal illness in 1949, often going out into the field and examining the oil leases of Mudge Oil Company. The cause of decedent's death was the hemorrhage of a cerebral vessel due to thrombosis. The length of his last illness was 30 days.
Decedent's final will was executed on February 21, 1941, and left the residue of his estate in trust to his wife and two sons. Decedent had executed at least two prior wills, one dated January 28, 1936, and another dated September 1, 1937.
The transfers made by decedent in 1935 to the insurance trust were not made in contemplation of death.
OPINION.
OPPER, Judge:
Respondent has determined that insurance policies placed in a trust by decedent 14 years before his death were transferred in contemplation of death. As in the Estate of Louis Richards, 20 T.C. 904, affirmed per curiam (C.A. 9) 221 F.2d 808, the only direct evidence of decedent's motive for assigning the policies was a desire to protect them from the dangers of his speculative business. He had previously used them as a source of borrowed funds and one of his lawyers testified that ‘(h)e had had a bad experience to borrow on his life insurance and was not going to get in the same position again * * * .’ Such a desire to protect one's principal is a life-motivated purpose as opposed to one involving contemplation of death. Estate of Louis Richards, supra. See also Flick's Estate v. Commissioner, (C.A. 5) 166 F.2d 733, reversing T.C. Memorandum Opinion dated January 30, 1947; Aaron's Estate v. Commissioner, (C.A. 3) 224 F.2d 314, reversing 21 T.C. 377. Where such evidence exists it can overcome the implications arising from the subject matter of the trust, such as life insurance policies, and from the terms of the trust even though these are such as to prohibit any advantage to the beneficiaries during the grantor's lifetime. Estate of Louis Richards, supra.
We have accordingly made the dispositive finding that the transfers in controversy were not gifts in contemplation of death.
Respondent has two other strings to his bow. He says decedent retained such ‘incidents of ownership’ in the trust that it should be included in the gross estate under section 811(g)(2)(B). This position is predicated upon the provision of Article VI of the trust agreement that '(i)n the management of any (added) property * * * the Trustee * * * shall follow any instructions (the decedent) may give.' This seems to us so clearly limited to investment advice and not to include any ‘economic benefits'
that we cannot construe it as, to any extent, an incident of ownership retained by decedent. See Estate of C. Dudley Wilson, 13 T.C. 869, affd. (C.A. 3) 187 F.2d 145. Cf. Estate of Myron Selznick, 15 T.C. 716, affirmed per curiam (C.A. 9) 195 F.2d 735.
Regs. 105, sec. 81.27. Insurance receivable by other beneficiaries.—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, etc. * * *
Finally, it is insisted that some part or all of the proceeds of the policies are subject to inclusion under the so-called payment of premiums test. If a trust is established in contemplation of death, use of its proceeds to pay insurance premiums may, to be sure, be considered as though they had originated with the decedent himself. Estate of Frank A. Vanderlip, 3 T.C. 358, affd. (C.A. 2) 155 F.2d 152, certiorari denied 329 U.S. 728. But here the evidence justifies no other conclusion than the one included in our Findings of Fact to the effect that decedent paid no premiums on these policies after January 10, 1941. ‘(T)here is no ground for saying that the premiums were paid by the insured indirectly.’ Helvering v. Reybine, (C.A. 2) 83 F.2d 215. Under the express language of the statute,
the inclusion in the estate of no part of the insurance proceeds is warranted on this ground.
Revenue Act of 1942.SEC. 404. PROCEEDS OF LIFE INSURANCE.(c) DECEDENTS TO WHICH AMENDMENTS APPLICABLE.— The amendments made by subsection (a) shall be applicable only to estates of decedents dying after the date of the enactment of this Act; but in determining the proportion of the premiums or other consideration paid directly or indirectly by the decedent (but not the total premiums paid) the amount so paid by the decedent on or before January 10, 1941, shall be excluded if at no time after such date the decedent possessed an incident of ownership in the policy.
Decision will be entered under Rule 50.