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Parties Involved:
Commissioner of Internal Revenue
Appellant
Estate of Joseph Leder, Deceased
Appellee
Jeanne Leder
Appellee

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

ESTATE OF JOSEPH LEDER, Deceased, 

JEANNE LEDER, Executrix, 

Petitioners-Appellees, 

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) 

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11 i L 1i 1) 

lfoitt:J St1,Ht,11~ (mi~, of AtJpeab 

Tenth Cir::uit 

ore El 3 mag 

ROBERT L HOECKER 

Clerk 

v. ) No. 88-1125 

COMMISSIONER OF INTERNAL REVENUE, 

Respondent-Appellant. 

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) 

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ON APPEAL FROM THE DECISION OF·THE 

UNITED STATES TAX COURT 

(Tax Court No. 31194-85) 

John A. Dudeck, Jr. (Williams. Rose, Jr., Asst. Attorney General 

and Gary R. Allen and Robert S. Pomerance, Attorneys, Tax 

Division, Department of Justice, Washington, D.C., with him. on the 

briefs), Attorney, Tax Division, Department of Justice, 

Washington, D.C., for the Respondent-Appellant. 

Steven P. 

Reeves & 

Oklahoma, 

Reeves & 

Oklahoma, 

Cole (Randall D. Mock, of Mock, Schwabe, 

Bryant, a Profepsional Corporation, of 

with him on the brief), of Mock, Schwabe, 

Bryant, a Professional Corporation, of 

for the Petitioners-Appellees. 

Waldo, Elder, 

Oklahoma City, 

Waldo, Elder, 

Oklahoma City, 

Before*ANDERSON and TACHA, Circuit Judges, and WINDER, District· 

Judge. · 

TACHA, Circuit Judge. 

* Honorable David K. Winder, United St~tes District Judge for 

the District of Utah, sitting by designation. 

Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 1 
The Commissioner of Internal Revenue ("Commissioner") appeals 

the decision of the United States Tax Court ( "Tax Court")_ that the 

proceeds from an insurance policy are not includable in the 

insured's gross estate under section 2035(d) of the Internal 

Revenue Code, 26 u.s.c. § 2035(d), where the decedent never 

possessed any of the incidents of ownership in the policy under 

section 2042. We affirm. 

I. 

The parties stipulated to the facts cif this. case. The 

decedent, Joseph Leder, died on May 31, 1983. At the time of his 

death, Joseph Leder was insured under a $1,000,000 policy issued. 

by Tr_ansAmer ica Occidental Life Insurance Company on January 28, 

1981 ("the policy''). Jeanne Leder, th~ decedent's wife, signed 

the policy application as the owner and· the decedent signed as the 

insured. The policy initially_reflected that Jeanne Leder was the 

polfcy owner and sole beneficiary. 

The premiums for the policy, $3,879.08 per month, were paid 

by preauthorized withdrawals from the account of Leader 

Enterprises, the decedent's wholly owned corporation. All of the 

policy premiums were paid less than three years before the 

decedent's death. Leader Enterprises treated the premium payments 

as loans made to the decedent. Neither Leader Enterprises nor the 

decedent received.any consideration from Jeanne-Leder in exchange 

for these premium payments. 

On February 1~, 1983, Jeanne Leder, as the owner of the 

policy, transferred the policy to herself as trustee of an inter 

vivos trust. The trust agreement provided tbat upon receipt of 

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 2 
the trust corpus, the trustee would divide the trust into four 

equal shares for the benefit of Jeanne Leder and the Leders' three 

children. No further assignments of the policy proceeds or 

changes in the beneficiaries of the policy were made. 

Upori the decedent's death the proceeds of the policy, 

$971,526.49, were distributed as provided for in the trust 

agreement. The proceeds were not included in the decedent's gross. 

estate on the federal estate tax return filed for the decedent's 

estate. 

The Commissioner determined that the proceeds of the policy 

were properly includable in the decedent's gross estate under 

section 2035 and sent Jeanne Leder,· the ex~cutrix of Joseph 

Led~r•s e~tate, a notice of deficiency. The estate challenged the 

Commissioner's determination in the Tax Court. 

The Tax Court held that the policy proceeds were not 

includable in the decedent's gross estate under section 2oj5_ 

, 

Section 2035 provides in relevant part: 

SEC. 2035. ADJUSTMENTS FOR GIFTS MADE WITHIN 3 YEARS OF 

DECEDENT'S DEATH. 

(a) Inclusion of Gifts Made by Decedent.~-Except 

as provided in subsection (b), the value of the gross 

estate shall include the value of all property to the 

extent of any interest therein of which the decedent has 

at any time made a transfer, by trust or otherwis~, 

during the 3-year period ending on the date of the 

decedent's death. 

(b) Exceptions.--Subsection (a) shall not apply--

(2) to any .gift to a donee made during a 

calendar year if the decedent was not required by 

section 6019 (other than by reason of section 

6019(2)) to file any gift tax return for such year 

with respect to gifts to such donee. 

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 3 
Paragraph (2) shall not apply to any transfer with 

respect to a life insurance policy. 

(d) Decedents Dying After 1981.--

(1) In general.--Except as otherwise provided 

in this subsection, subsection (a) shall not apply 

to the estate of a decedent dying after December 

31, 1981. 

(2) Exceptions for certain transfers.--

Paragraph (1) of this subsection and paragraph (2) 

of subsection (b) shall not apply to a transfer of 

an interest in-property which is included in -the 

value of the gross estate under section 2036, 2037, 

2038, or 2042 or would have been included under any 

of such sections if such interest had been retained 

by the decedent. 

26 u.s.c. § 2035. 

Section 2035(a) g~nerally requires thab the value of any 

property or interest. transferred by the decedent within three 

years of death for less than full and adequate consideration be 

included in the decedent's gross estate (the "three year 

inclusionary rule"). The Economic Recovery Tax Act of 1981, Pub. 

L. No. 97-34, § 424, 95 Stat. 172, 317 [hereinafter ERTA], added 

section 2035(d), which applies to the estates of decedents dyi~g 

after 1981. Construing section 2035 as a whole, the Tax Court 

found that for decedents dying after 1981, subsection (d)(l) 

nullifies the three year inclusionary rule of subsection (a), 

except for those transfers described in subsection (d)(2). 

Section 2035(d)(2) specifically references transfers under section 

2042, which provides in relevant part: 

SEC. 2042. PROCEEDS OF LIFE INSURANCE. 

The value of the gross estate shall include the 

value of all property--

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 4 
(1) Receivable by the executor.--To the 

extent of the amount receivable by the executor as 

insurance under policies on the life of the 

decedent. 

(2) Receivable by other beneficiaries.--To 

the extent of the·amount receivable by all other 

beneficiaries as insurance-under policies on· the 

life of the decedent 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 purposes 

of the preceding sentence, the term "incident of 

ownership'' includes a reversionary - interest 

(whether arising by the express terms of the policy 

or_ other instrument or by operation of law) only if 

the value of such reversionary interest exceeded 5 

percent of the value of the policy immediately 

before the death of the decedent. As used in this 

paragraph, the term "reversionary interest" 

includes a possibility that the policy, or the 

proceeds of the policy, may return to the decedent 

or his estate~ or may be subject to a power of 

disposition by him. 

26 u.s.c. §. 2042 (emphasis added). 

Critically, under section 2042 the-decedent's payment of 

premiums is irrelevant in determining whether the decedent 

retained any "incidents of ownership'' in the policy proceeds.· See 

First Nat'l Bank v. United States, 488 F.2d 575, 578 (9th Cir. 

1973); Bel~ United States, 452 F.2d 683, 689 (5th Cir. 1971), 

cert. denied, 406 U.S. 919 (1972); Estate of Headrick v. 

Commissioner, 93 T.C •. 3317, 3320-21 (1989). Congress intended to 

eliminate the premium payment test used in the 1939 Code when it 

adopted section 2042. See First Nat'l Bank, 488 F.2d at 578. 

Both the House and Senate committee_ reports stated that section 

2042 "revises existing law so that payment of premiums is no 

longer a factor in determining the taxability under this section 

of insura.nce proceeds." Id. (emphasis in First Nat'l Bank) 

(quoting H.R. Rep. No. 1337, 83d Cong., 2d Sess. A316, reprinted 

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 5 
in 1954 U.S. Code Cong. & Admin .. News 4459; citing s. Rep. No. 

1622, 83d Cong., 2d Sess •. 4.72 (1954)). 

The Tax Court examined section 2042 and determined that the 

decedent never possessed any rights to the insurance policy that 

would constitute "incidents of ·ownership." Because the policy 

proceeds were not includable under section 2042, the Tax·Court 

concluded that the section 2035(d)(2) exception did not apply, and 

thus under the general rule of section 2035(d)(l) the proceeds 

from the insurance policy were not includable in the decedent's 

gross estate. In so holding the Tax Court emphasized that it did 

not reach the issue of the includability of the policy proceeds 

under the ''constructive transfer" caselaw doctrine developed und~r 

section 2035(a) because section 2035(d)(l) overrides section 

2035(af. 1 

II. 

We review the Tax Court's decision "in the same manner and to 

the same extent as decisions of the district courts in civil 

actions tried without a jury." 26 u.s.c. § 7482. Consequently, 

we review the Tax Court's determinations of law de nova. See In 

te Ruti-Sweetwater, Inc., 836 F.2d 1263, 1266 (10th Cir. 1988). 

The proper ~pplication of section 2035 to the estat~ of a decedent 

dying after December 31, 1981, is a statutory construction 

question of first impression. The principal issue on appeal is 

1 The Tax Court in two subsequent cases has continued to adhere· 

to its interpretation that I.R.C. section 2035(d)(l) nullifies 

section 2035(a) except for the transfers referenced in section 

2035(d)(2). See Estate of Headrick v. Commissioner, 93 T~C. 3317 

(1989); Estate of Chapmanv. CommissToner, 56 T_.C.M. (CCH) 1461 

(1989). 

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 6 
whether the term ''transfer" in section 2035(d)(2) includes socalled "constructive transfers" as described in Bel, 452· F.2d at 

691-92, or if section 2035(d)(2) 's cross reference to section·2042 

implicitly limits the term's scope. The Tax Court. held that the 

subsection (d).(2) cross reference did limit "transfer." The 

Commissioner cont.ends on appeal, however, that Congress did not 

intend subsections (d)(l) and (d)(2) to exclude "constructive 

transfers" from the decedent's gross estate for estate tax 

purposes. 

The constructive transfer doctrine developed under section 

2035(a) prior to the passage of the ERTA and the addition of 

subsection (d) to section 2035. Under section 2035(a), a 

'"transfer' is not limited to the passing of property directly 

from the donor to the ·transferee, but encompasses a donation 

'procured through expenditures by the decedent with the purpose, 

effected at his death; of having it pass to another.'" Bel, 452 

F.2d at 691. The typical example of a constructive transfer is 

where the decedent purchases a life insurance policy on himself or 

herself, pays all the premiums, and designates his or her children 

or spouse as the owne~s and beneficiaries. In these situations 

courts construing section 2?35(a) view the decedent's actions as 

acts of transfer, because the decedent "beamed" the policy 

proceeds.to the children or spouse by paying the policy premiums 

and creating in the children or spouse all of the contractual 

rights to the insurance benefits. Bel, 452 F.2d at 691; see also 

First Nat'l Bank, 488 F.2d at 576-77; Detroit Bank~ Trust Co.~ 

United States, 467 F.2d 964, 967-68 (6th Cir. 1972), cert. denied, 

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 7 
410 U.S.- 929 (1973); Estate of Kurihara v. Commissioner, 82 T.C. 

5 1 , 6 0 - 61 ('l 9 8 4 ) • 

We decline the Commissioner's invitation to create a judicial 

gloss on the express language of section 2035(d) by incorporating 

into section 2035(d)(2) the Bel constructive transfe~ doctrine. 

Sectio_n 2035 ( d) ( 2) expressly refers to section 2042, a fact which, 

viewed in light of the Bel opinion, compels us to reject 

application of the constructive transfer doctrine to section 

·2 0 3 5 ( d ) ( 2 ) • 

In Bel, 452 F.2d 683, upon which the Commissioner relies 

heavily, the decedent purchased a life insurance policy on himself 

and paid the premiums out of community funds. Th·e decedent 

desi~nated his three children as owners and beneficiaries o~ the 

policy proceeds. The executors of the decedent's estate did•not 

include on the estate tax return the policy proceeds in the 

decedent's gross estate, and the Commissioner assessed a 

deficiency. The estate argued that because Congress specifically 

rejected a premium payment test for determining whether insurance 

policy proceeds are included in the decedent's gross estate under 

section 2042, a premium payment test should not be used to 

determine a "transfer" includable iri the decedent's gross estate 

under section 2035(a). See Bel, 452 F.2d at 688-690. The Bel 

court d~sagreed, finding that the scope of tranefers includable in 

the decedent's gross estate under sections 2042 and ~035(a) were 

not equivalent: 

In arguing that this court should affirm the lower 

court's ruling that no part of the insurance proceeds is 

includable in the decedent's gro~s estatei the taxpayers 

would have us appl~ a section of the Code dealing with 

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 8 
lemons (section 2042), to one pertaining to oranges 

(section 2035 [a]). Section 2042, which deals strictly 

with life insurance, provides, "inter alia, that a 

decedent's gross estate shall include the value of the 

proceeds of life insurance policies ·on which the 

decedent possessed at his death any of the incidents of 

ownership. However, section 2035[a] provides that all 

property which is transferred in contemplation of death 

is includable in a decedent's gross estate. We do not 

think that [sections 2042 and 2035(a)] were designed or 

conceived to be read in pari materia. They came into 

being at different times, their respective targets were 

diverse, and we perceive no philosophical confluence to 

twin them. 

452 F.2d at 690 (emphasis in original). 

Like the taxpayer's argument in Bel, the Commissioner's 

interpretation of section.2035--that the constructive transfer 

doctrine of section 2035(a) applies to 2035(d), and specifically 

section 2035(d)(2)--would have us mixing lemons and oranges. 

Section 2035(d)(2) specifically cross ref~rences .section 2042. 

The only inference we can draw from this express cross reference 

is that Congress, in enacting subsection (d), meant to construe 

sections 2035(d)(2) and 2042 in pari materia. "It.is a well 

established law of statutory construction that, absent ambiguity 

or irrational result, the literal language of a statute controls." 

Edwards v. Valdez, 789 F.2d 1477, 1481 (10th Cir. 1986) (citations 

omitted). In Bel terms, section 2035(d)(2), like section 2042, is 

~ lemon; se~tion 2035(a) remains an orange. The fundamental 

rationale behind the Bel court's invocation of the constructive 

transfer doctrine -- that section 2042 and its rejection of a 

premium payments test are not limitations on section 2035(a) --

thus becomes inapplicable to section 2035(d)(2), which, as applied 

to the disputed insurance proceeds in this case, is by its very 

tetms expressly limited to transfers under section 2042. To apply 

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 9 
the constructive transfer doctrine in the manner requested by the 

Commissioner would be to resurrect under section 2042 the premium 

payment test ''phoenix-like from the language of section 2035," 

First Nat'l Bank, 488 F.2d at 578, in contravention of the express 

language of section 2035(d)(2) and tqe undisputed intent of 

section 2042, see discussion of sections. 2035(d) and 2042, supra, 

Part I at 4-6. 

Having concluded that section 2035(d)(2) transfers are 

defined through the cross referenced sections, we turn to section 

2042 to·determine its application to the facts of this case. 

Section 2042 includes in the decedent's estate the proceeds of 

life insurance policies on the l.ife of the decedent where the 

decedent at the time of his death possessed· any of the incidents 

of ownership in the policies. Treasury Regulation section 

20.i042-l(c) states that: 

(2) For purposes of this paragraph, the term 

•" incidents of ownership''. · is not limited in its meaning 

to ownership of the policy in the technical legal sense. 

Generally speaking, the term has reference to the right 

of the insured or his estate to the economic benefits of 

the policy. Thus, it includes the power to change the 

beneficiary, to surrender or cancel tbe policy, to 

assign the policy, to revoke an assignment, to pledge 

the policy for a loan, or to obtain from the insurer a 

loan against the surrender value of the policy, etc. 

Treas. Reg. § 20.2042-l(c}(2) (as amended 1979). 

Under the section 2042 definition of "incidents of owneiship" 

the decedent Joseph Leder never held any ownership, economic, or 

other contractual rights in the policy. Jeanne Leder was the 

owner of the policy from the time of application for the policy 

until the policy was transferred to the trust for the benefit of 

herself and the Leder's four children. The policy states that 

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 10 
"the owner will be entitled to the rights granted by this policy," 

and that only ''[t]he owrier may change the beneficiary." Jeanne 

Leder, first in her own right and later as trustee, enjoyed the 

legal and shared the equitable rights granted under the policy 

with her three children. Nor did the decedent hold a reversionary 

.interest in the policy proceeds. The policy states that "[i]f the 

owner ••• dies before the Insured, the rights of the owner 

belong to the executor or administrator of the owner." Finally, 

the payment of the policy premiums by the decedent's wh?lly owned 

corporation does not render the policy proceeds includable in the 

decedent's gross eitate, because payment of premiums is·not an 

incident of ownership under section 2042. See discussion of 

section 2042, supra, Part I at 5-6. 

On these facts we find that the policy proceeds are not 

ineluctable in the decedent's estate under section 2042. Because 

the decedent did not transfer an interest in the policy proceeds 

under section 2042, and none of the'other exceptions listed in 

section 2035(d}(2} apply, we hold that the general rule of section 

2035(d}(l} governs. Section 2035(d}(l) excludes the policy 

proceeds from the decedent's gross estate. 

III. 

We hold that the constructive transfer doctrine is 

inapplicable to section 2035(d)(2} because of Congress's cross 

reference to section 2042. In addition, we determine that 

applying the constructive transfer doctrine to a transaction 

governed by serition 2042 would contravene Congress's intent in 

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Appellate Case: 88-1125 Document: 010110195442 Date Filed: 12/28/1989 Page: 11 
enacting section 2042 by effectively resurrecting the premium 

payment test. The judgment of the Tax Court is AFFIRMED. 

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