Opinion
Docket No. 12554.
1950-06-15
ESTATE OF VERNE C. HUNT, DECEASED, MONA S. HUNT, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Arthur Groman, Esq., for the petitioner. H. Arlo Melville, Esq., for the respondent.
Decedent assigned certain insurance policies on his life to his wife with a dominant motive to put them beyond the reach of possible judgment creditors, and an incidental motive to minimize the taxes upon his estate. Held, under the facts, the policies were not transferred in contemplation of death, nor did the decedent retain any incidents of ownership in them. Only that proportion of the proceeds of the policies which the premiums paid after January 10, 1941, bear to the total premiums paid is includible in the gross estate of the decedent. Arthur Groman, Esq., for the petitioner. H. Arlo Melville, Esq., for the respondent.
The respondent determined a deficiency in estate tax in the amount of $43,680.41. The issue presented is whether the proceeds of certain life insurance policies, which were transferred to his wife by the decedent during his lifetime, are includible in his gross estate under either section 811(c) or section 811(g)(2) and (4) of the Internal Revenue Code.
Petitioner filed the Federal estate tax return with the collector for the sixth district of California.
The record in this proceeding consists of a stipulation of facts, testimony, and documentary evidence, from which we make the following findings of fact.
FINDINGS OF FACT.
The facts which have been stipulated are found as stipulated, and the stipulation is incorporated herein by this reference.
Decedent died on December 13, 1943, at the age of 55, as the result of a shooting by a former patient. He was survived by his wife, Mona S. Hunt, whom he had married in 1922, and three children, Verne Carlton Hunt II, Charles David Hunt, and Lois Maurine Hunt. At the time of his death, decedent was a resident of California and had been since July 6, 1930.
Before going to California in 1930, decedent had been head of a section of surgery in the Mayo Clinic at Rochester, Minnesota. He performed about 20,000 operations at the Mayo Clinic and was never involved in a malpractice suit. While employed there, all liability for operations was assumed by the clinic, which insured their doctors against malpractice suits. When decedent left the Mayo Clinic in 1930 to set up practice for himself in California, he and his wife had savings of between $35,000 and $40,000.
The major source of decedent's income after becoming a resident of California was his medical practice, which consisted almost entirely of referred surgery of a most difficult and critical nature. Decedent's income from the practice of surgery amounted to from $25,000 to $100,000 a year. An undisclosed amount of this income was invested in securities. Not only was much of decedent's work done at great risk, but many of his operations were for distinguished and famous persons, such as one of the presidents of Mexico. Accordingly, as early as 1932, he considered it advisable to protect himself against a possible malpractice suit by the purchase of malpractice insurance through Dick Drake, who was his friend as well as his insurance agent. Such insurance policies run for one year. When Drake discontinued writing malpractice insurance in 1935, he recommended that decedent buy such insurance from Medical Protective Association.
Decedent often gave his wife gifts on anniversaries and holidays. Frequently these gifts were very substantial.
While returning from an automobile trip in the summer of 1935, decedent and his wife witnessed the results of an automobile accident in which a number of people had been killed. Thereupon, they resolved that they would draw up wills. Following their return home, decedent consulted Drake, who referred him to a lawyer who drew up the wills. On October 24, 1935, decedent executed a will leaving his estate to his wife and naming Drake as secondary guardian of his children and as secondary executor. His wife executed a will containing similar clauses on November 14, 1935, which named decedent as her heir and also named Drake as secondary guardian and as secondary executor. On November 15, 1935, decedent and his wife both executed wills identical to their previous wills, except that Drake was omitted from each will.
During this same period in the fall of 1935, decedent asked Drake if there was some way in which he could protect his family in the event he was sued for malpractice— specifically, if there was some way in which he could insulate his life insurance policies against their being seized to pay some liability of his. Drake, thereupon, inquired at the offices of the Fidelity Mutual Life Insurance Co. and the Northwestern Mutual Life Insurance Co. and talked to the agents in charge. A tax service was consulted. Upon the basis of the information received, Drake advised decedent that this objective could be accomplished by assigning the life insurance policies to his wife. The insurance companies knew at this time of the existence of the estate tax and were well versed in decisions relating to this tax. Decedent then instructed Drake to secure the forms necessary to make the assignments.
Pursuant to this instruction, Drake requested the Los Angeles office of the Fidelity Mutual Life Insurance Co. to obtain from its home office the necessary forms whereby decedent could transfer to his wife the incidents of ownership in a $100,000 face amount insurance policy, number 472605, on his life. This policy had been purchased by the decedent on November 17, 1930, through Drake, after decedent had become a resident of California. His wife was named in this policy as the beneficiary. In connection with this policy, on September 24, 1935, the Los Angeles office of the insurance company wrote to the law department of the home office:
It is the insured (sic) request that the incident of ownership as far as he is concerned should be taken out of this policy, but at the same time the insured and the beneficiary desire that the same Mode of Settlement agreement be effective in the event of the death of the insured. Will you please send out the necessary papers for signature.
We would refer to the recent arrangement that was placed on the Besser policy #418473. The same arrangement is requested under this policy.
On October 8, 1935, the law department of the Fidelity Mutual Life Insurance Co. complied with the request and transmitted an ownership clause for the insured's signature and a mode of settlement agreement for signature by Mona S. Hunt as well as decedent, pointing out the importance of having the latter bear a date subsequent to the former. This letter contained the following paragraph:
You will note that both forms provide that if Mona S. Hunt predecease the insured, all right, title, and interest in the policy shall revert to the insured. Such phraseology appeared in the agreements prepared for policy No. 418473— Besser, and it was requested in your letter that the enclosed forms conform to the forms used in connection with the Besser case. However, may we offer a suggestion? It is frequently the purpose of an insured, in obtaining the endorsement of an Ownership Clause, to divest himself of all incidents of ownership in the policy in order that the proceeds at his death will not be subject to the Federal Estate Tax. We do not know by what motives Dr. Hunt is actuated, but if this is his purpose, the forms should be revised to omit this reversionary feature. Under the wording of Regulation 80, Article 25 of the Treasury Department, and under such decisions as United States v. Norman W. Bingham, Jr. (CCA, 1st), decided March 25, 1935, we believe that the endorsed forms, as prepared, would not prelude (sic) estate taxation at Dr. Hunt's death since such reversionary feature would probably be considered an incident of ownership in the insured.
This letter, or a copy thereof, was given to Drake, who showed it to decedent and discussed the matter with him. Drake then went back to the Los Angeles office of the Fidelity Mutual Life Insurance Co. with decedent's answer to the question raised in this last letter concerning his ‘motive.‘ On October 23, 1935, the Los Angeles office replied to the letter of the home office:
Referring to your letter of October 8th enclosing forms in connection with Mode of Settlement of above numbered policy, Mr. Drake, the agent in this case, after going over your letter, has requested that I advise you he greatly appreciated your letter and he thinks your point is in order. He also asks that the enclosed forms be rewritten eliminating the revisionary features. The new arrangement is to be so worded that if the wife should pre-decease the insured, the policy will go to her estate.
He would like to know if in your opinion, by taking this procedure, first, eliminating all incidents of ownership in the policy, and second, eliminating the reversionary feature, if in the event of the insured's death the proceeds of the policy would be subject to a Federal Estate Tax or California Inheritance Tax.
On November 1, 1935, the law department of the home office sent the forms necessary to effect the assignment to the Los Angeles office. In the accompanying letter, the home office answered the question which had been raised in the letter of October 23:
In accordance with your letter of October 23, we have rewritten the enclosed Request for Ownership Clause and Mode of Settlement Agreement for policy of the above number. If satisfactory, the Request for Ownership Clause should first be signed by the insured in the presence of a witness. Thereafter, the Mode of Settlement Agreement should be signed by Mona S. Hunt as owner, and also by the insured, in the presence of a witness. It is important that the latter agreement bear a date later than the Request for Ownership Clause. Both agreement should then be returned to this Office, with the policy, for proper endorsement thereon.
By following the procedure explained above, it is our opinion that the insured will divest himself of all incidents of ownership in his policy of the above number, and that the proceeds of this policy at his death will not be part of his gross estate for the purpose of either the Federal Estate Tax or the California Inheritance Tax, unless all the named beneficiaries should predecease him.
On November 5, 1935, the decedent executed the following assignment of this policy, absolute on its face, to his wife:
The insured hereunder having so requested, it is understood and agreed that Mona S. Hunt, the wife of the insured, her executors, administrators or assigns, shall hereafter be the owner of this policy, and it is hereby agreed with the Company that the said Mona S. Hunt shall hereafter have the right during her life-time, without the consent of the insured and to the exclusion of the insured to receive payment of and to receipt for any dividends which may be payable under the provisions of said policy entitled ‘Participation in Surplus-Dividends‘; to obtain loans on the policy, in accordance with the provisions thereof entitled ‘Loan Provisions‘; to surrender the policy for its cash surrender value or for paid-up insurance, in accordance with the provisions thereof entitled ‘Non-Forfeiture Provisions‘; and to obtain all the other benefits under said policy and to exercise all options, rights, and privileges provided therein or which The Fidelity Mutual Life Insurance Company may consent to grant, anything in said policy to the contrary notwithstanding.
This assignment was endorsed on the policy under the date of November 20, 1935.
Pursuant to the decedent's instruction, Drake also requested the Los Angeles office of the Northwestern Mutual Life Insurance Co. to obtain from its home office the necessary forms whereby the decedent could transfer to his wife the incidents of ownership in two policies of which she was beneficiary— policy number 1553753, face amount $5,000, and policy number 1957432, face amount $30,000. Decedent had purchased these policies before becoming a resident of California in 1930. Also included in the original request was policy number 1780766, face value $10,000. When attention was drawn to the fact that decedent's sister rather than his wife was designated as beneficiary under this policy, the request as to it was withdrawn.
On September 28, 1935, the Los Angeles office wrote to the home office:
Referring to policies # 1553753, 1780766 and 1957432 on the life of Verne Hunt, it is the wish of the insured to set these policies over the the beneficiary under an absolute assignment which would give her all rights and privileges under the contracts, but in the event of her death prior to his all her interest in the policies to revert to him.
On October 8, 1935, the home office transmitted the form necessary to accomplish the purpose described. The accompanying letter contained the following paragraph:
Submissive to the directions given to us, the form provides for transfer of control under an arrangement similar in character to yellow application form 1222, to Mona S. Hunt, wife, with the stipulation that in event of her death before the policies become payable, the power to exercise all rights and privileges shall vest solely in the insured. The objective of this arrangement was not explained to us, but to cover the possibility that it is aimed at gaining exemption from the Federal Estate Tax, we advise that according to our understanding of a recent ruling of the Treasury Department, reversion of control to the insured will be regarded as reserving an incident of ownership in the insured and will subject the proceeds to the Federal Estate Tax.
This letter, or a copy thereof, was given to Drake, who showed it to decedent and discussed it with him. Drake then returned to the Los Angeles office of the Northwestern Mutual Life Insurance Co. with decedent's answer to the question raised in this last letter concerning his ‘objective.‘ On October 23, 1935, the Los Angeles office replied to the letter of the home office?
Referring to your letter of the 8th, relative to policies Nos. 1553753, 1780766 and 1957432, Verne C. Hunt, would advise the form requested is for the sole purpose of exempting the beneficiary from any inheritance or Federal Estate Tax. We have, therefore, been requested to have the form which you sent us revised so that reversion of control to the insured will be omitted. In the event the beneficiary predeceases the insured, it is the desire that the proceeds go to her estate, and she will then set the policies over to the insured by means of a Will. It is desired also that the present option settlement remain effective.
Will you, therefore, kindly prepare a new request, and we would appreciate any suggestions of any better way of handling this matter.
The necessary forms were then received from the home office, and on November 15, 1935, decedent executed the following assignment of the insurance policies to his wife:
I, VERNE C. HUNT, the insured under policies 1553753 and 1957432 issued by the Northwestern Mutual Life Insurance Company hereby request and direct that if no beneficiary or contingent beneficiary survives the insured, the proceeds of said policies shall be payable when due to the executors, administrators, or assigns of Mona S. Hunt, wife and beneficiary.
DURING THE LIFETIME of the insured, the power to exercise all rights and privileges specified in and/or conferred upon him by the terms of said policies, shall be vested solely in said Mona S. Hunt, her executors, administrators or assigns. This assignment was endorsed on the policies under the date of December 16, 1935, in the following form:
By request of the insured, it is directed that if no beneficiary or contingent beneficiary survives the insured, the proceeds of this policy shall be payable when due to the executors, administrators or assigns of Mona S. Hunt, the beneficiary.
During the lifetime of the insured, the power to exercise all rights and privileges specified in and/or conferred upon him by the terms of this policy, shall be vested solely in said Mona S. Hunt, her executors, administrators or assigns.
All policy provisions inconsistent with this endorsement are suspended.
A single premium ten-year endowment life insurance policy was issued by the New England Mutual Life Insurance Co. on November 15, 1935, on the life of decedent. The single premium payment amount to $8,375. On November 15, 1935, the day of issue, this policy was assigned to Mona S. Hunt. This policy was surrendered for its cash value in 1940 and is not one of the insurance contracts involved in this proceeding.
On December 18, 1935, the Los Angeles office of the Fidelity Mutual Life Insurance Co. transmitted to its home office decedent's request for the forms necessary to transfer to his wife the incidents of ownership in policy number 496023, face amount $10,000, and on January 7, 1936, decedent executed the following assignment to his wife, which was endorsed on the policy under the date of January 15, 1936:
The insured hereunder having so requested, it is understood and agreed that Mona S. Hunt, wife of the insured, if living, otherwise to (sic) her executors or administrators, shall hereafter be the owner of this policy and that the said Mona S. Hunt, if living, otherwise her executors or administrators, shall hereafter have the right without the consent of the insured and to the exclusion of the insured to receive payment of and to receipt for any dividends which may be payable under the provisions of the policy entitled ‘Participation in Surplus-Dividends‘; to obtain loans on the policy, in accordance with the provisions thereof entitled ‘Loan Provisions‘; to surrender the policy for its cash value or for paid-up insurance in accordance with the provisions thereof entitled ‘Non-Forfeiture Provisions‘; and to obtain all the other benefits under the policy and to exercise all options, rights and privileges provided therein or which the Fidelity Mutual Life Insurance Company may consent to grant, anything in said policy to the contrary notwithstanding.
Decedent was in good health at the time he assigned these insurance policies on his life to his wife. She made no change in the designation of either the beneficiary or the contingent beneficiaries under the assigned policies. Their cash surrender value at the time the transfers were effected is stipulated to be $12,778.10. Decedent retained the ownership of other policies on his life in the face amount of $40,000. He did not file a timely Federal gift tax return covering the assignments when they were made, but on November 27, 1940, he filed a delinquent return, setting forth the assignment of the policies to his wife. In this return, he gave as his motive for the transfers ‘love and affection.‘ No tax was due. He explained the delinquency in an affidavit attached to the return in which he attested that:
During 1935, upon advice of an insurance counsellor, I assigned certain life insurance policies to my wife, Mona S. Hunt. I was not advised and I did not know that the assignment constituted a gift taxable under the Gift Tax Law. It was only recently, while discussing life insurance policies, cash surrender values and assignments with an accountant, that I learned a Gift Tax Return should have been filed. The forms were immediately prepared and are filed herewith.
Decedent did not assign the four insurance policies in question in contemplation of death. The dominant motive which impelled the decedent to make inter vivos gifts of the insurance policies to his wife, was to protect his family by putting these assets beyond the reach of judgment creditors in the event of judgment against him in any malpractice suit.
On March 18, 1937, Mona S. Hunt borrowed $10,000 on Fidelity Mutual Life Insurance Co. policy number 472605. During 1937 Mona S. Hunt invested $10,000 in the construction of a home which had a total cost of $71,400. Mona S. Hunt held title to this home as joint tenant with decedent.
Death benefits paid and apportionment of premiums on the four policies in question were as follows:
+----+ ¦¦¦¦¦¦ +----+
Total Total premiums paid premiums between Death paid Jan.10, Total 1941 benefits prior to and date premiums paid Jan. 10, of death paid 1941 (a) Fidelity Mutual Life Insurance policy #472605 $101,380.12 $32,306.00 $8,910.00 $41,216.00 (b) Same—policy #496023 10,400.38 3,091.80 927.60 4,019.40 (c) Northwestern Mutual Life 5,041.40 1,685.60 305.44 1,991.04 Insurance policy # 1553753 (d) Same—policy #1957432 30,270.30 9,375.72 2,250.01 11,625.73
The transfers made by decedent of each of the four insurance policies involved herein were absolute and irrevocable. Decedent retained no incidents of ownership in any of these policies and exercised no dominion or control over them.
The premiums due on the four insurance contracts between January 10, 1941, and the date of the decedent's death were paid with funds held as community property by decedent and his wife, no part of which was received as compensation for personal services actually rendered by decedent's wife or derived originally from such compensation or from separate property of the wife.
OPINION.
HARRON, Judge:
The first question is whether inter vivos transfers of four contracts of life insurance by the decedent to his wife were transfers of property made in contemplation of death within the meaning of section 811(c) of the Internal Revenue Code. Respondent contends that the entire proceeds of each of the four contracts of life insurance are includible in the decedent's estate under section 811(c) as gifts made in contemplation of death. We do not believe, however, that respondent is correct in this contention.
The contemplation of death provision of section 811(c) of the Internal Revenue Code is designed to ‘reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax.‘ In order for a transfer to have been in contemplation of death, the dominant motive or impelling cause for it must have been testamentary in nature. United States v. Wells, 283 U.S. 102; City Bank Farmers Trust Co. v. McGowan, 323 U.S. 594; Allen v. Trust Co. of Georgia, 326 U.S. 630. Whether or not an inter vivos transfer of property was made in contemplation of death is primarily a fact question.
Under this question, there are four assignments of life insurance to be considered. The evidence shows that in each instance the gift of an insurance contract by the decedent to his wife was dictated by two motives— one, a desire associated with life, was to put the property beyond the reach of a possible judgment against him for malpractice; the other, associated with death, was his wish to minimize the taxes against his estate. In such a situation, United States v. Wells, supra, laid down the rule that the inclusion of the property within the donor's testamentary estate depends upon which of the two motives predominates. We are persuaded by the facts and circumstances of this case that the dominant motive which impelled decedent to make an inter vivos transfer of certain insurance policies to his wife was not testamentary in nature, that decedent was motivated primarily by the desire to put the properties beyond the reach of a possible judgment creditor and thus protect his family.
At the time each one of the transfers was made, decedent was 47 years old and in good health. He was an eminent physician whose medical practice consisted almost entirely of referred surgery of a most difficult and critical nature. While decedent was employed at the Mayo Clinic, all liability for operations was assumed by the clinic. When he set up practice for himself, he took out malpractice insurance and one-year policies were in effect in 1932, 1933, and 1934. At the end of 1934, Drake, his insurance agent, stopped writing such insurance, and decedent became concerned about protection for his family and the problems of obtaining adequate security from malpractice insurance, if he could continue to get such insurance. He was fearful that he might some day be sued for malpractice and desired to put certain insurance policies on his life beyond the reach of possible creditors. This is a motive associated with the things of life rather than death. See Cronin's Estate v. Commissioner, 164 Fed.(2d) 561, reversing 7 T.C. 1403; Estate of Wilbur B. Ruthrauff, 9 T.C. 418.
His insurance agent advised that decedent's objective could be accomplished by making an assignment to his wife. The insurance companies were informed of decedent's desire to transfer ownership of the policies to his wife. They then volunteered the information that by eliminating a possibility of reverter, the proceeds from the policies at decedent's death would not be subject to the Federal estate tax.
The Tax Court held that insurance was includible in the gross estate of the decedent because he had retained incidents of ownership in insurance policies, and accordingly, the respondent's determination of a deficiency in estate tax of approximately $44,000 was sustained. Appeal was taken by petitioner to the Court of Appeals for the Third Circuit. Thereafter, the parties filed a stipulation that the cause should be remanded to the Tax Court with directions to the Tax Court to vacate its decision that there was a deficiency in estate tax of $44,026.45, and to enter a new decision in the petitioner's favor, that there was an overpayment of estate tax of $35,169.71.
As would any prudent man, decedent considered the tax consequences and decided to eliminate the possibility of reverter from the proposed assignments. But the desire to avoid estate taxes was incidental to decedent's dominant motive to put the policies beyond the reach of creditors; it was conceived after information had been volunteered by the insurance companies as a normal service to their policy holders and after decedent had already decided to make the transfers in accordance with his primary motive, which was associated with life.
Upon all of the evidence, it is held that none of the transfers of the four life insurance contracts by the decedent to his wife was made in contemplation of death within the meaning of section 811(c).
The second question is whether decedent possessed at his death any incidents of ownership in any of the four contracts of life insurance within the meaning of section 811(g).
Petitioner concedes that some, but not all, of the proceeds from the four life insurance policies involved are includible in decedent's gross estate. Under Regulations 105, section 81.27,
the proceeds from the policies are includible only in the proportion that the premiums paid after January 10, 1941, bear to the total premiums paid if the decedent retained no incidents of ownership in the policies after the transfers. See, also, section 811(g)(2), as amended by section 404(a) of the Revenue Act of 1942. Respondent, however, contends that the entire proceeds of the insurance policies in question are includible in decedent's estate under section 811(g) because decedent did retain some incidents of ownership in the policies.
SEC. 81.27. Insurance receivable by other beneficiaries—(b) In case of decedent dying after October 21, 1942, and on or before December 31, 1947. The regulations prescribed under this paragraph (except as otherwise indicated in this section) are applicable only in the case of decedents who died after October 21, 1942, and on or before December 31, 1947. In such cases, the regulations prescribed under paragraph (a) with respect to estates of decedents dying after December 31, 1947, are also applicable (except to the extent inconsistent with this paragraph). For the purposes of this paragraph, premiums or other consideration paid with property held as community property by the insured and spouse under the law of any State, Territory, or possession of the United States, or any foreign country, shall be considered to have been paid by the insured, except such part thereof as may be shown to have been received as compensation for personal services actually rendered by the decedent's spouse or derived originally from such compensation or from separate property of such spouse. With respect to the meaning of property derived originally from such compensation or from separate property of the decedent's spouse, see section 81.23. Section 811(g)(4) provides that the term ‘incidents of ownership‘ includes incidents of ownership possessed by the decedent as manager of the community where the insurance policy is property held as community property by the decedent and spouse.The pertinent portions of paragraph (a) are as follows:In such cases, the amount of the aggregate proceeds of all insurance on the life of the decedent not receivable by or for the benefit of his estate must also be included in his gross estate, as follows:(1) Such insurance (not includible under (2) of this paragraph) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in the proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance, and(2) Such insurance with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any person.For the purposes of (1) of this paragraph, 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. For the purpose of the preceding sentence a reversionary interest is an incident of ownership.
But respondent can not point to possession by decedent of any incidents of ownership. The assignments of the four policies were absolute and irrevocable. After each assignment, the contract assigned was the sole and separate property of decedent's wife; no policy was part of the property of the community. Complete dominion and control over the four policies were in Mona S. Hunt. Decedent retained no rights under and exercised no powers over any of the four life insurance contracts and received no economic benefits from any of them after their transfer.
It is held that only that proportion of the proceeds of the policies which the premiums paid after January 10, 1941, bear to the total premiums paid is includible in the gross estate of decedent.
Decision will be entered under Rule 50.