Opinion ID: 1479161
Heading Depth: 1
Heading Rank: 1

Heading: Right to Refund.

Text: The governing statute is section 302(g) of the Revenue Act of 1926 (44 Stat. 9, 71, 26 U.S.C.A. § 411(g), which provides that the value of the gross estate for estate tax purposes shall include amounts receivable from insurance to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries [than the executor] as insurance under policies taken out by the decedent upon his own life. The controversy is over the proper construction to be given taken out by the decedent upon his own life. Appellant contends that this expression is ambiguous; that taken out by the decedent means paid for by or for him, and therefore excludes such insurance as is paid for by the beneficiary; that this construction is the one given by the Treasury Regulation (article 25, Regulations 70) [1] at the time of the death of decedent, of administration of his estate and for some years thereafter; that, while this regulation was in force, Congress passed acts covering the same subject-matter and using the identical language above quoted from section 302(g) of the Revenue Act of 1926; that this court must presume Congress thereby approved the construction in the above regulation, and therefore must accept such construction unless it is plainly erroneous; and that such construction is not plainly erroneous. Appellee contends that taken out by the decedent means applied for by him; that the construction in the above regulation is entirely erroneous; and that such regulation was effectively superseded by a later (1934) regulation (article 25, Regulations 80). [2] These opposed contentions present, as the prime issue, the influence of these two Treasury Regulations upon the construction, by this court, of the statutory expression taken out by the decedent as used in the Revenue Act of 1926. It is well first to state generally the rules of law defining the place of such departmental, or executive, interpretations upon the construction of statutes by the courts. The determination of the construction of the meaning of congressional acts is a judicial function. This function and duty is so entirely and purely judicial that it is beyond the power either of the executive (Manhattan General Equipment Co. v. Commissioner, 56 S.Ct. 397, 80 L.Ed. ___, decided February 3, 1936; Louisville & N. R. Co. v. United States, 282 U.S. 740, 757, 51 S.Ct. 297, 75 L.Ed. 672) or of the Congress (Levindale Lead & Zinc Min. Co. v. Coleman, 241 U.S. 432, 439, 36 S.Ct. 644, 60 L.Ed. 1080; Koshkonong v. Burton, 104 U.S. 668, 678, 26 L.Ed. 886) to control. If the statutory meaning is clear, there is no place for rules which aid in ascertaining the meaning of the statute, and neither legislative nor executive construction nor both is of any aid or force. Massachusetts Mutual Life Ins. Co. v. United States, 288 U.S. 269, 273, 53 S. Ct. 337, 77 L.Ed. 739; Louisville & N. R. Co. v. United States, 282 U.S. 740, 757, 51 S.Ct. 297, 75 L.Ed. 672; Iselin v. United States, 270 U.S. 245, 251, 46 S.Ct. 248, 70 L.Ed. 566. However, if the act is ambiguous (Massachusetts Mut. Life Ins. Co. v. United States, 288 U.S. 269, 273, 53 S.Ct. 337, 77 L.Ed. 739; Louisville & N. R. Co. v. United States, 282 U.S. 740, 757, 51 S.Ct. 297, 75 L.Ed. 672; United States v. Missouri Pac. R. Co., 278 U. S. 269, 281, 49 S.Ct. 133, 73 L.Ed. 322; Iselin v. United States, 270 U.S. 245, 251, 46 S.Ct. 248, 70 L.Ed. 566), the courts will, in their search for the proper meaning of the act, give consideration to a later legislative construction (New York, P. & Norfolk R. Co. v. Peninsula Exchange, 240 U.S. 34, 39, 36 S.Ct. 230, 60 L.Ed. 511) or to the construction by an executive for administrative or enforcement purposes (United States v. Hammers, 221 U. S. 220, 225, 226, 228, 229, 31 S.Ct. 593, 55 L.Ed. 710). Instances occur where both the executive department and Congress adopt the same construction. This usually happens where the courts presume a congressional sanction of an executive construction from the situation that Congress repeats the statutory language without substantial change while the executive construction is existent and being applied in the administration of the earlier act. This presumption is based upon the suppositions that the Congress which enacted the later acts knew of the administrative construction and would have clarified the situation as to the later acts had it been dissatisfied with such construction. It is true that most of the decisions recognizing this presumed congressional sanction have been dealing with the construction of the later acts, as to which the situation is somewhat different, since those Acts might be regarded as passed in the light of the then existing executive construction, and therefore as having that construction in mind and adopting it as the meaning for the later acts. However, even that situation does not lessen the natural inference that by such subsequent action Congress gave its approval to the executive construction of the same language in the earlier act concerning which that construction came into being. Massachusetts Mut. Life Ins. Co. v. United States, 288 U.S. 269, 273, 53 S.Ct. 337, 77 L.Ed. 739; Murphy Oil Co. v. Burnet, 287 U.S. 299, 302, 307, 53 S.Ct. 161, 77 L.Ed. 318; Burnet v. Thompson Oil & Gas Co., 283 U.S. 301, 307, 51 S.Ct. 418, 75 L.Ed. 1049; Heiner v. Colonial Trust Co., 275 U.S. 232, 235, 48 S.Ct. 65, 72 L.Ed. 256; Provost v. United States, 269 U.S. 443, 458, 46 S.Ct. 152, 70 L.Ed. 352  being cases involving construction of the earlier act. The weight or force which the courts will, in their construction of an act, give to such executive or legislative constructions, has been variously phrased by the Supreme Court. Similarly, there is a variety of expression as to such weight and force where the court conceives the executive construction to be also approved by Congress. In such latter situation, it has been said that the executive construction has the force of law (Hartley v. Commissioner, 295 U.S. 216, 220, 55 S.Ct. 756, 758, 79 L.Ed. 1399; Old Mission Portland Cement Co. v. Helvering, 293 U.S. 289, 294, 55 S.Ct. 158, 79 L.Ed. 367); that it must be accepted (Alaska Steamship Co. v. United States, 290 U.S. 256, 262, 54 S.Ct. 159, 161, 78 L.Ed. 302); that it will not be overturned except for very cogent reasons (Norwegian Nitrogen Products Co. v. United States, 288 U.S. 294, 315, 53 S.Ct. 350, 358, 77 L.Ed. 796); that it would be given great weight, even if we doubted the correctness of the ruling (Costanzo v. Tillinghast, 287 U.S. 341, 345, 53 S.Ct. 152, 154, 77 L.Ed. 350); that it will not be disturbed except for reasons of weight (McCaughn v. Hershey Chocolate Co., 283 U.S. 488, 492, 51 S.Ct. 510, 512, 75 L.Ed. 1183); that were the matter less clear the court should be constrained to follow it (Poe v. Seaborn, 282 U.S. 101, 116, 51 S.Ct. 58, 61, 75 L. Ed. 239); that it will be followed when not plainly erroneous (New York, New Haven & H. R. Co. v. Interstate Commerce Commission, 200 U.S. 361, 402, 26 S.Ct. 272, 281, 50 L.Ed. 515). When the quotations in the above sentence are considered in connection with the issues and situations in which they were severally used, it would seem that a safe statement of this rule of construction is that, where a statutory provision is ambiguous, and the executive department which must apply and enforce it declares a construction (not in itself ambiguous, Burnet v. Chicago Portrait Co., 285 U.S. 1, 16, 20, 52 S.Ct. 275, 76 L.Ed. 587) for administrative purposes, and thereafter Congress re-enacts the provision without substantial change, the courts will accept that construction unless it be plainly erroneous. Obviously, the provision here involved of this act is ambiguous. When the words taken out by decedent upon his own life are attempted to be applied in practical administration to the subject-matter of life insurance, varying situations are found which at once present difficulties as to what the congressional intention was. It must be kept in mind that this is an estate tax upon the proceeds from life insurance. An estate tax is an excise tax upon the privilege of transferring or transmitting property by reason of death and is not a tax on the property itself. [3] It follows that, unless there is such transfer from the decedent  unless there was something which passed from the decedent upon death  there has been no transfer; no privilege of transfer has been exercised; and there is nothing which can be subjected to an excise tax on such privilege. Therefore, where life insurance proceeds are involved, the initial inquiry is as to what, if anything, has passed from the decedent because of his death. Obviously, the proceeds of a life insurance policy pass directly from the insurer to the designated beneficiary without in any sense being transferred by the one whose life is insured (Chase National Bank v. United States, 278 U.S. 327, 334, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388)  this occurs as the result of the insurance contract. However, the insurance contract often provides for some control by the insured  such as powers to change beneficiary, to borrow against the policy, to cancel the policy, or to take the surrender value thereof. Such powers, of course, cease with the death of the insured which matures the policy. The existence of such powers (ceasing at death) are regarded as incidents of ownership which are sufficient to make the proceeds of the policy subject to an estate tax. Chase National Bank v. United States, 278 U.S. 327, 334-338, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388). [4] Being thus within the power of Congress to tax upon death of the insured the proceeds of life insurance policies where such incidents of ownership are accorded him by the policy, the next inquiry is as to the extent to which Congress has provided for such tax. Paragraph (g) of section 302 of this act (26 U.S.C.A. § 411(9) provides for inclusion within the taxable gross income of all proceeds, exceeding $40,000, receivable by beneficiaries (other than the estate) from policies taken out by the decedent upon his own life. Paragraph (h) of the section (26 U.S.C.A. § 411(h) expressly applies the section to powers    made, created, arising, existing, exercised, or relinquished within paragraph (g). From these provisions of the act it would appear that the statute rather broadly covers the situation (as to beneficiaries other than the estate) where the insured has retained any powers which are incidents of ownership or control. This does not, however, entirely solve our problem. The consideration that the premiums were paid by the insured was an element in the Chase National Bank Case in reaching the conclusion that these incidents of ownership in the insured made the proceeds of the policies subject to estate taxation. At page 337 of 278 U.S., 49 S.Ct. 126, 128, 73 L.Ed. 405, 63 A.L.R. 388, the court says: Obviously, the word `transfer' in the statute, or the privilege which may constitutionally be taxed, cannot be taken in such a restricted sense as to refer only to the passing of particular items of property directly from the decedent to the transferee. It must, we think, at least include the transfer of property procured through expenditures by the decedent with the purpose, effected at his death, of having it pass to another. Section 402(c) [Revenue Act 1921] taxes transfers made in contemplation of death. It would not, we assume, be seriously argued that its provisions could be evaded by the purchase by a decedent from a third person of property, a savings bank book, for example, and its delivery by the seller directly to the intended beneficiary on the purchaser's death, or that the measure of the tax would be the cost and not the value or proceeds at the time of death. It is of some significance also that by the local law applicable to the insurer and the insured in this case, a beneficiary's rights in the policy and its proceeds are deemed to be the proceeds of the premiums expended by the insured and as such recoverable in full by one having an equitable claim attaching to the premiums. Holmes v. Gilman, 138 N.Y. 369, 34 N.E. 205, 20 L.R.A. 566, 34 Am.St.Rep. 463. (Italics added.) Also the departmental regulations have always recognized that the source of the premiums has a vital bearing on the construction of the language now in question. The earliest regulation brought to our attention is article 25 of Regulations 68. [5] In that regulation, in article 25 of Regulations 70, and in article 25 of Regulations 80, the effect of the payment of premium by the beneficiary appears, although with varying force. Thus it appears that, while it is not directly determined in the Chase National Bank Case that payment of premium by the beneficiary controls, yet it is decidedly intimated; that such payment has been recognized as controlling by the department for years until the regulation (article 25 of Regulations 80) promulgated in 1934; and that it is given an influence there even in that regulation. In this uncertain condition this court is faced at least with an ambiguity as to whether payment of premium by the beneficiary should exclude the resulting proceeds from the effect of this statute. In our search to solve this uncertainty, we think the rule of construction urged by appellant is pertinent. In applying this rule, we find an ambiguity of meaning in this respect; that the department has consistently and continuously recognized the effect of payment by the beneficiary; that the Congress has re-enacted this identical language while such departmental construction thereof was being applied in administration; that the Supreme Court has strongly intimated that the source of premiums was an element in the subjection of life insurance proceeds to such character of tax. Obviously, we cannot in such situation say (nor would we do so independently thereof) that Regulations 70 is so plainly erroneous as a construction of the act that we should reject it. On the contrary, we deem it a rational, plausible meaning. This meaning should prevail unless Regulations 80 can be regarded as superseding and controlling. It is to be expected that, as experience is acquired through administration of a statutory provision, the executive regulations will develop  will be broadened, particularized, and changed. Such has been the history of the regulations as to this statutory provision, as shown by the above three successive regulations. In such development it is natural that the executive will, at times, reverse itself. All such interpretative regulations applicable should be considered by the courts when construing a statute. But, if the courts consider themselves bound to follow executive constructions approved by congressional re-enactment unless such constructions are plainly erroneous, it must follow that they should consider the executive similarly bound and regard such subsequent construction by the executive from that standpoint. Therefore such subsequent construction does not prevent application of the above rule of statutory construction, but is valuable mainly as bearing upon the plainly erroneous character of the earlier approved construction. In Bliss v. Commissioner (C.C.A.) 68 F.(2d) 890, 893, the Second Circuit held that the subsequent change by the Commissioner did not prevent application of the above rule of construction, and in Mayes v. Paul Jones & Co. (C.C.A.) 270 F. 121, 129, 130, the Sixth Circuit denied any power in the executive to change, by subsequent regulation, where Congress had adopted a long-continued prior departmental construction. Here, Regulations 80 is, in part, a reversal or at least a limitation of Regulations 70. Where Regulations 70 excluded from taxation the proportion of the insurance proceeds paid for by the beneficiary, Regulations 80 does so only if no incidents of ownership in the policy remained in the insured during lifetime. In 70 (as in the earlier Regulations 68), the criterion is payment of premium. In 80, it is incidents of ownership. Considering the language of the statutory provision, it would seem the standard of construction laid down in Regulations 70 is more consonant therewith than that of 80 in those respects where the two are in conflict. At least it is clear that Regulations 80 has not revealed a standard which shows Regulations 70 to be clearly erroneous. The result is that the later regulation cannot, under the situation here, be held to replace or change the effect of the earlier regulation; that the redetermined assessment was excessive to the extent that it included that proportion of the proceeds from the four Union Central policies purchased by the premiums paid by appellant; and that such proportion of the proceeds are not within the intendment of section 302.