Court Opinion

ID: 4605084
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:35:35.102952+00
Date Added: 2024-06-11T07:53:07.367886
License: Public Domain

ESTATE OF CORA C. REYNOLDS, DORIS R. MAY, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Reynolds v. CommissionerDocket No. 101034.United States Board of Tax Appeals45 B.T.A. 44; 1941 BTA LEXIS 1187; September 5, 1941, Promulgated *1187  1.  Irrevocable trust to which were transferred agreements by an insurance company to make payments upon decedent's death, which were only available to decedent and acquired by her in connection with the purchase of an annuity, the latter being retained by decedent and not transferred to the trust, held, includable in decedent's gross estate under Revenue Act of 1926, section 302(c) as amended.  2.  Fees and expenses of proceeding to account in connection with the trust held not deductible as charge against estate or administration expense.  Edgar Allyn Buttle, Esq., and Alfred B. Van Houten, Esq., for the petitioner.  W. R. Lansford, Esq., for the respondent.  OPPER*44  Respondent determined a deficiency of $12,028.74 in the estate tax of decedent, Cora C. Reynolds.  The two issues raised by the petition and answer are (1) whether the proceeds of two life insurance policies amounting to $60,000, which policies had been conveyed by decedent to a trustee prior to her death, were properly included by respondent in decedent's gross estate, and (2) whether respondent erred in disallowing as a deduction from the gross estate counsel fees*1188  and court costs paid by trustees in an accounting of a trust fund after decedent's death, the trust having been created by decedent and included as part of her gross estate.  By amended answer respondent makes claim for an increased deficiency, in the total amount of $20,028.74, and presents a third issue, namely, whether the proceeds, payable to decedent's daughter as beneficiary, of a third life insurance policy in the sum of $40,000 are includable in the gross estate.  FINDINGS OF FACT.  The evidence in this proceeding consists of a stipulation of facts to which are attached various exhibits and the affidavits of eitht individuals, it being agreed that the respective affiants would testify as therein set forth.  We adopt as our findings the facts as stipulated.  *45  Those facts appearing hereinafter which are not from the stipulation have been found from the affidavits.  Cora C. Reynolds, hereinafter referred to as decedent, died testate on November 3, 1936, a resident of the State of New Jersey.  She was 80 years of age when she died.  The estate tax return was filed with the collector of internal revenue for the district of New Jersey at Newark, New Jersey.  Following*1189  the death of her husband in 1928, from whom she inherited certain investments, and prior thereto with respect to her own property, decedent had managed her own affairs.  Her investments, consisting largely of common stocks, diminished both as to principal and income in 1929 and thereafter; and when market conditions failed to improve materially she became worried over her investments and felt that she was incapable of adequately protecting her estate.  During 1934 and 1935 she discussed this situation with members of her family and others and, finally, in the fall of 1935, she decided to place the management of her estate in the hands of others whom she considered more capable than she to safeguard its principal and earnings.  Her primary reasons for doing this were to obtain relief from the cares and worries of attempting to preserve a dwindling estate and at the same time to secure protection for her funds through diversification and corporate management.  At that time her estate comprised securities worth approximately $300,000.  With the advice and assistance of attorneys, bank officials, and investment representatives associated with Estate Administration, Inc., a plan was formulated*1190  and carried into effect whereby approximately one-third of decedent's securities were liquidated and the proceeds invested in insurance and the other two-thirds were transferred to trustees for management.  Decedent was advised that because of her age she was uninsurable, and that if she desired to invest in insurance it would be necessary for her to purchase an annuity in connection therewith.  Pursuant to an application filed by decedent, the Prudential Insurance Co. on December 10, 1935, issued to her a combination single premium ordinary life and life annuity contract for a single premium of $110,000, which was paid by decedent.  The insurance portion of the contract was issued in three separate policies, as follows: Face amountSingle premium$20,000$19,186.6040,00038,373.2040,00038,373.20100,00095,933.00*46  The annuity, which would pay decedent $981.45 semiannually as long as she lived, was issued for a single premium of $14,067, making the total premiums $110,000.  The three insurance policies were payable to the executors, administrators or assigns of the insured, and contained the usual loan and cash surrender provisions*1191  and a reservation of the right to change the beneficiaries.  They would not have been issued without the annuity.  The securities sold to obtain cash for the payments to the insurance company yielded little, if any, more income than was provided by the annuity.  On or about December 31, 1935, the beneficiary of one of the $40,000 policies was changed to Doris R. May, daughter of decedent.  Thereafter no change with respect to that policy was made.  The other two policies, aggregating $60,000, were transferred to the Central Hanover Bank & Trust Co. as trustee, pursuant to a trust agreement executed on December 31, 1935.  These policies were physically delivered to and made payable to the trustee.  Article I of the trust agreement provided: Upon the death of the Grantor, the Trustee shall collect the proceeds of the pollcies of insurance assigned to or made payable to the Trustee as beneficiary, or otherwise, and thereafter continue to hold the trust estate upon the following trust * * *.  Then follows a direction to the trustee to invest and reinvest the trust fund, collect all income therefrom, and distribute the net income as therein specified.  Commencing with decedent's*1192  death, two-thirds of the net income was to be paid to her daughter, Beatrix, for life and the other third to her son, John, for life.  If either the daughter or the son should predecease decedent, or, if they both survived her, then, upon the death of either after decedent's death, his or her share of the income was to be paid to his or her issue or, in default of issue, the entire net income was payable to the surviving son or daughter.  Upon the death of the survivor of the son and daughter, or if they should both predecease decedent then upon the latter's death, twothirds of the trust corpus was to be delivered to the daughter's issue and one-third to the son's issue.  In default of issue of either, the entire corpus was payable to the issue of the other, and in default of issue of both, the corpus was to be paid to decedent's issue or, in default thereof, to her distributees.  Article I (h) of the agreement provided: Any dividends which may, prior to the death of the Grantor, be received by the Trustees with respect to any policy of insurance which may be a part of the trust estate shall be payable to such persons, and in such proportions, as the income from the trust estate*1193  would at that time have been payable if the Grantor had then been deceased.  *47  The trustee was granted broad powers of management of the trust fund, among which appears the following: To continue to hold upon the trust hereby created any or all of the property herewith or hereafter conveyed to the Trustee.  Nevertheless, in case it shall seem to the Trustee advisable to do so, the Trustee may from time to time sell or dispose of all or any part of the same or of any other property which may at any time constitute the trust estate.  The Trustee may invest and from time to time reinvest the proceeds of sale of any of the trust property or any cash held in trust * * *.  The indenture also provided: The Trustee shall not be responsible for inability to enforce collection of the proceeds of any insurance policy held in trust.  Nevertheless, the Trustee shall take such measures and proceedings to enforce collection of proceeds as it may deem advisable * * *.  The trustee was granted the right to resign in the following language: The Trustee may resign from the trust hereby created by mailing to the Grantor written notice of such resignation addressed to the Grantor * *1194  * * or, in case the Grantor be deceased, by mailing to the then life beneficiary or beneficiaries * * * like written notices * * *.  Such resignation shall be effective and all duties of the resigning trustee except the duty to account shall cease on the thirtieth day after the mailing of such notice as aforesaid.  No provision was made in the agreement for the appointment of a successor trustee in the event the right to resign was exercised.  On January 25, 1936, decedent executed another trust instrument, pursuant to the plan adopted for the management of her estate, whereby she transferred certain securities to the Central Hanover Bank & Trust Co. and to her daughters, Doris R. May and Beatrix Reynolds, as trustees, to pay the net income therefrom to decedent during her lifetime, with remainders over as to both income and principal.  Decedent reserved the power to alter, amend, or revoke this trust at any time during her life.  Decedent's daughter Beatrix died on June 12, 1936, as a result of which decedent amended the trust instrument in one particular on August 22, 1936.  Upon decedent's death the Central Hanover Bank & Trust Co. and Doris R. May, surviving trustees of the*1195  securities trust created by decedent on January 25, 1936, sought legal advice as to their duty to account.  Being advised that an accounting was their duty, they instituted proceedings in the Court of Chancery of New Jersey.  The decree of the court, dated July 6, 1937, approved the account and directed the trustees to pay from the trust funds counsel fees and court costs amounting to $1,081.51, which sum was paid by the trustees.  Decedent's executrix, as such, did not appear and was not a party to those proceedings.  The corpus of the trust was included in decedent's *48  gross estate on the Federal estate tax return and a tax paid thereon.  The trust funds passing under the trust indenture were diminished by reason of the payment by the trustees of the sum of $1,081.51.  The existence of the three insurance policies was noted on schedule D of the estate tax return, but no part of their face value of $100,000 was included in the gross estate because, as stated on the return with respect to the two which had been assigned to the trust, "all incidents of ownership and control * * * had passed from decedent by the terms of said trust"; and the third, in the amount of $40,000, *1196  payable to decedent's daughter Doris R. May, was claimed to be exempt under the provisions of section 302(g), allowing an exemption of $40,000 for insurance payable to beneficiaries other than the estate.  The sum of $1,081.51 referred to above was claimed as a deduction among the miscellaneous administration expenses.  In the notice of deficiency respondent disallowed miscellaneous administration expenses of $1,131.51 on the ground that they were "charged to and paid by the trustee and no part thereof is applicable to the estate subject to probate proceedings." He also included the value of the two policies had in trust and by amended answer has included the value of the third policy on the ground that the entire transaction constituted an investment by decedent rather than the procurement of insurance upon her life; that all three policies are therefore includable as transfers intended to take effect in possession or enjoyment at or after decedent's death; and that, since they were not insurance as that word is used in section 302(g), there is no permissible exemption of $40,000.  OPINION.  OPPER: Irrespective of the situation which existed prior to 1931, 1 there can be no*1197  question that as of 1934, when this combined insurance and annuity contract came into being, and thereafter, when the trust of the "insurance" policies was created, the Congressional policy of taxing transfers of property in which the decedent had retained any interest during his lifetime had become firmly and unmistakably established. 2 Nor can there be doubt that for purposes *49  of the Federal estate tax a contract with an insurance company possessing the characteristics of the one here in controversy is to be considered a single inseparable arrangement in which insurance and annuity features are inextricably connected; that it was "an agreement which was entire in character, by which the [insurance] company promised him a small but sure income from the money by way of annuity, and the payment * * * at his death, and that the money was so paid at his death in fulfillment of the promise." ; affd., , on authority of  (decided the same day).  *1198  The only question then that remains on the present issue is whether creation of an irrevocable trust and assignment to it of the portion of that contract promising to pay the stipulated sum at death is sufficient ground for excluding the value of that promise from decedent's taxable estate.  We are of the opinion that it is not.  It is true that in , the decedent had retained, in the insurance feature of her contract, rights with respect to nomination of beneficiaries, and for borrowing upon and surrendering the policy, sometimes referred to as "property rights." But if such interests were important to the decision in the Le Gierse case, it must have been because they were comparable to those powers in other property situations generally described by reference to the right to alter, revoke, or terminate.  There is in section 302(d) 3 a provision unquestionably devised to cover that relationship to transferred property.  Nevertheless, in passing from the question whether decedent's contract in the Le Gierse case was insurance to the consideration of its taxability in the view that it was not, the Supreme Court relied not*1199  upon section 302, subdivision (d), but upon subdivision (c), saying: * * * The only remaining question is whether they [the payments to the beneficiaries] are taxable.  *50  We hold that they are taxable under section 302(c) of the Revenue Act of 1926, as amended, as a transfer to take effect in possession or enjoyment at or after death.  See  * * *.  In the latter case, from which*1200  we have quoted above, the Court of Appeals, following the portion of the opinion already set out, went on: * * * As that was the real transaction between Mr. Tyler and the [insurance] company he must be held to have made a transfer of that amount intended to take effect at his death and his estate was taxable in respect to the money paid to the widow at his death pursuant to the transfer made by him.  We have here a situation in which a trustee has been interposed between the ultimate beneficiaries and the decedent.  The fiduciary, however, does no more than represent and act for the ultimate beneficiaries.  It obtains the legal title, but the equitable rights rest at all times in the persons for whose benefit the trust was in fact created, those, of course, for whom the decedent intended the enjoyment of the insurance company's payment of the principal sum.  True, the trust was irrevocable.  But the effect of the arrangement was and could have been no different than if decedent had specified the beneficiaries in the policy, and renounced any rights of alteration, pledge or surrender.  Reduced to its simplest terms, therefore, the question here is whether a decedent retaining*1201  for life the benefit of property transferred to an insurance company, may escape the provisions of section 302(c) by reason of the irrevocability of the transfer, or through a procedure comparable to the renunciation of any power to alter or revoke by change of beneficiaries or surrender or pledge of the policy.  We do not think that, consistent with the unmistakable mandate of the statute and with the cases prohibiting consideration of artificial or technical devices of conveyancing, this is a permissible result.  . By a transfer of her property to the insurance company decedent obtained its agreement to return a roughly equivalent value in two interrelated stipulations.  Payments tantamount to the income from the whole fund deposited were to go to her during her life.  And upon her death, whenever that occurred, a fixed principal sum was to be paid to decedent's estate or designees.  By parting with the latter while retaining the right to receive the income for her life, petitioner effectively designated those who would succeed to the property upon her death.  She did so, perhaps, in a manner so final as to be beyond her power*1202  of recall.  But it remains to be decided whether that arrangement for succession, accompanied as it was by retention of benefits during her lifetime, suffices to relieve decedent's estate of liability for tax upon the value of the principal.  We do not think that it does, "even *51  though ownership of the fund vested in the children at once." . If it were possible for a decedent by means of anticipatory arrangements, however skillfully devised, to sever life interest from remainder and to dispose irrevocably of the latter while retaining the former until her death, the purpose of the amendment to section 302(c) accomplished by the Revenue Act of 1932, section 803, could be completely stultified.  Here the contract with the insurance company was one indivisible transaction.  ;The right to receive the income in the form of annuity payments was inseparable from the arrangements made with respect to disposition of the principal in the form of insurance payments. *1203  It was with a part of that indivisible contract - that relating to the remainder payable at her death - with which decedent dealt when she assigned the insurance aspect to the trust.  It was with respect to the balance, the life interest, that she acted when she retained for her remaining life the right to receive the annuity payments.  Viewing the action taken as a whole, the effect must be that decedent made a transfer - or a series of transfers - of her property "intended to take effect in possession or enjoyment at or after his death" and "under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the * * * enjoyment of, or the right to the income from, the property." . The correctness of this view may be supported by reference to one or two examples.  Suppose that decedent had transferred to the trust her entire contract with the insurance company and had provided that through the annuities she was to be paid the income until her death and that the remainder, consisting of the*1204  payment of the principal sum at her death, was to go to the designated beneficiaries.  Can it be doubted that such a trust would come within the express description of the statute?  Again, suppose that in , decedent had transferred to a trust that part of her contract with the insurance company which stipulated for payment of the principal, retaining the right to receive the income payments for her life.  Would a different result have been reached there merely because the decedent had created a trustee to stand in the place of the individual remaindermen? 4 To our mind the result required in the present situation is equally clear.  It was accordingly proper for respondent to include as part of decedent's taxable estate the principal *52  amount payable by the insurance company upon her death to the trust erected by her for the enjoyment of her beneficiaries.  Petitioner now concedes that an additional insurance policy payable*1205  specifically to decedent's daughter is governed by the principle of  The proceeds of that policy were also properly included without benefit of the statutory exemption.  The final question is whether fees and expenses of a proceeding to account for another trust may be deducted either as a charge against the estate or as an expense of administration.  On the former ground, they are precluded since the proceedings followed decedent's death, and compliance with the requirement that the debt exist at the date of death consequently fails.  And they must also be disallowed as an administration expense.  . Decision will be entered under Rule 50.Footnotes1. Cf. ; , with . ↩2. Revenue Act of 1932 - SEC. 803.  FUTURE INTERESTS.  (a) Section 302(c) of the Revenue Act of 1926, as amended by the Joint Resolution of March 3, 1931, is amended to read as follows: "(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth.  Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title." ↩3. SEC. 302.  [Rev. Act of 1926.] 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 - * * * (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth.  * * * ↩4. In the Hughes↩ case, of course, the transfer having occurred prior to 1931, a more difficult question was presented, since the provisions of section 302(c) had not at tnat time been changed.