Court Opinion

ID: 4483838
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:19.803855+00
Date Added: 2024-06-11T14:53:44.843971
License: Public Domain

Chabot, J., dissenting: The majority conclude that the proceeds of the life insurance policy in question are not includable in the value of decedent’s gross estate. I believe that the policy proceeds are includable in the value of decedent’s gross estate under section 2042(1), and so I respectfully dissent. Section 2042(1) — set out in full in the majority opinion— provides that the value of decedent’s gross estate shall include the value of all property receivable by the executor as insurance under policies on the life of the decedent. There being no question that the proceeds were “insurance under policies on the life of the decedent,” the critical determination is whether the policy proceeds were “receivable by the executor.” In this case, where decedent, “during his lifetime, had the unqualified right to modify or revoke the trust” (see the findings of fact in the majority opinion), the designation of the trustee of the trust as beneficiary of the insurance policy serves the same testamentary purpose as the designation of the executor of decedent’s estate as the beneficiary. If life insurance proceeds are not included in the value of the gross estate under these circumstances, then section 2042(1) is a dead letter. Where a policy owner now designates a decedent’s estate as beneficiary, in the future the policy owner will substitute as beneficiary a trust wholly controlled by decedent. It is a commonplace that the courts should avoid interpreting a statutory provision in such a manner as to deprive it of meaning. This Court and other courts held that proceeds of insurance policies (1) can properly be treated as receivable by the executor even though they are in fact receivable by another,1 (2) can properly be treated as receivable by another even though they are in fact receivable by the executor,2 and (3) can properly be treated as not being “insurance.”3 The courts in all these cases looked to the substance of the situation to give effect to the distinctions drawn by the Congress. The majority opinion, in note 3.thereof, states that there is nothing in the record to indicate that the trust was under a legal obligation to pay taxes, debts, or other charges enforceable against the estate, quoting section 20.2042-l(b)(l), Estate Tax Regs. These regulations merely follow the substance-over-form approach taken by the Morton-Mason line of cases noted above (note 1 of this opinion). The concept of looking to the substance of a situation is not limited to this line of cases or these regulations. The majority’s dismissal of the section 2042(1) consideration concludes with a reference to United States v. First Nat. Bank, 133 F.2d 886 (8th Cir. 1943), and Freedman v. United States, 382 F.2d 742, 744 n. 5 (5th Cir. 1967). In United States v. First Nat. Bank, supra, the court held that where a Mr. Smedal named as beneficiary of life insurance policies a testamentary trust created by his will for the benefit of his wife and daughter, the policy proceeds were not included in the value of Mr. Smedal’s gross estate under section 302(g) of the Revenue Act of 1926 as insurance proceeds “receivable by the executor,” but were included in the value of Mr. Smedal’s gross estate under that section as insurance proceeds “receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.” The following characteristics of the situation in First Nat. Bank indicate why that case is distinguishable from the instant case. (1) Under section 302(g) of the Revenue Act of 1926, a $40,000 exclusion applied to insurance proceeds “receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.” The issue in First Nat. Bank was not whether the insurance policy proceeds were includable in the value of Mr. Smedal’s gross estate. The court there stated, “The narrow question for solution is whether the proceeds of the * * * policies are ‘receivable by the executor’ of decedent’s estate or by ‘other beneficiaries’ within the meaning of sec. 302(g), supra.” 133 F.2d at 887-888. The danger of interpreting section 302(g) of the Revenue Act of 1926 into oblivion did not present itself to the Circuit Court of Appeals. The issue of who is the effective beneficiary of the policy proceeds — an issue quite appropriate when the only insurance policy proceeds included in the value of a decedent’s gross estate under the predecessors of section 2042(1) were those purchased by the decedent on the decedent’s life, and when all such policy proceeds were so included (although some subject to an exclusion) — is not relevant to the issue of whether a decedent has the ability to make a testamentary disposition of the policy proceeds — the focus of section 2042.4  (2) The cases relied upon in First Nat. Bank also do not support the majority in the instant case. All of these cases either are substance-over-form cases (which, I suggest, support inclusion in the value of the gross estate) or are distinguishable for the reasons described in the immediately preceding paragraph. In Helvering v. LeGierse, 312 U.S. 531 (1941), the Supreme Court determined that an arrangement which took the form of a life insurance policy was not in substance “insurance,” and so the proceeds of the arrangement were not includable in the value of the gross estate under section 302(g) of the Revenue Act of 1926.5 The decisions in Proutt’s Estate v. Commissioner, 125 F.2d 591 (6th Cir. 1942), and Boston Safe Deposit & T. Co. v. Commissioner, 100 F.2d 266 (1st Cir. 1938), involved the same determination of which clause of section 302(g) of the Revenue Act of 1926, applied, as was made in First Nat. Bank. The decisions in Webster v. Commissioner, 120 F.2d 514 (5th Cir. 1941), Commissioner v. Jones, 62 F.2d 496 (6th Cir. 1932), and Lucky v. Commissioner, 2 B.T.A. 1268 (1925), were likewise involved with that determination, but also involved the effects of State statutes providing that under certain circumstances life insurance policy proceeds could not be reached by the decedent’s creditors. No such statute is involved in the instant case. (3) The insurance policy in the instant case was taken out by Mrs. Margrave. In First Nat. Bank, the policies were taken out by Mr. Smedal, the decedent in that case, who “intended that his wife and daughter should be the beneficiaries, and not the executor.” 133 F.2d at 888. The rationale of First Nat. Bank and the cases cited by it with respect to the legislative intent underlying section 302(g) of the Revenue Act of 1926 — a rationale which is based on decedents’ motives — is not in conflict with inclusion under section 2042(1) in the instant case, when that rationale is recast in light of the present state of the law of Federal estate taxation and the context of the facts found in the instant case. The other case cited by the majority on the section 2042(1) point, Freedman v. United States, supra, is similarly unresponsive to the problem presented by the instant case. In Freedman, 382 F.2d at 744 n. 5, the court stated: Since Mr. Freedman was the executor, this case might appear to fall within sec. 2042(1), which makes life insurance proceeds includable in the gross estate to the extent that they are “receivable by the executor.” However, the proceeds were not received by Mr. Freedman in his capacity as executor but rather as named beneficiary. I have no difficulty with the court’s proposition that policy proceeds receivable by the executor may not be “receivable by the executor” within the meaning of section 2042(1) if they are receivable by the executor in a capacity other than that of executor. It does not follow, however, that policy proceeds not receivable by the executor are never “receivable by the executor” within the meaning of section 2042(1). That proposition is inconsistent with the Morton-Mason line of decisions (note 1 of this opinion) and section 20.2042-l(b)(l), Estate Tax Regs. There is no dispute that, if Mrs. Margrave had designated the executor of decedent’s estate as the beneficiary, then the proceeds would be included in the value of the gross estate in the instant case. This is so even though decedent appears to have had no ownership interest in the policy and even though the proceeds (as distinguished from the policy itself) were not in existence while decedent lived. The common sense of the situation is that it is property which decedent can dispose of in a testamentary manner. I submit that the substance of what occurred in the instant case is not different from the substance of the above hypothetical. Here, too, decedent was enabled to dispose of the proceeds of the policy in a testamentary manner, because of his “unqualified right to modify or revoke the trust.” True, that right could be exercised only during lifetime, but such is equally the case with a will or testament. True, Mrs. Margrave could defeat decedent’s disposition by changing the beneficiary, but such is equally the case with a designation of the executor as the beneficiary — a designation that would produce an inclusion in the gross estate. I would hold that the life insurance policy proceeds receivable by the Robert B. Margrave Revocable Trust, under the circumstances of the instant case, are to be treated as proceeds receivable by the executor, and therefore that these proceeds are includable in the value of decedent’s gross estate. Simpson, J., agrees with this dissenting opinion.  E.g., Bintliff v. United States, 462 F.2d 403 (5th Cir. 1972); Estate of Matthews v. Commissioner, 3 T.C. 525 (1944); Estate of Mason v. Commissioner, 43 B.T.A. 813 (1941); Morton v. Commissioner, 23 B.T.A. 236 (1931).   Proutt’s Estate v. Commissioner, 125 F.2d 591 (6th Cir. 1942), revg. 41 B.T.A. 1299 (1940); Commissioner v. Jones, 62 F.2d 496 (6th Cir. 1932), affg. 20 B.T.A. 441 (1930); Lucky v. Commissioner, 2 B.T.A. 1268 (1925).   Helvering v. LeGierse, 312 U.S. 531 (1941).   The Revenue Act of 1942, section 404, amended sec. 811(g), I.R.C. 1939 — a predecessor of sec. 2042 — by replacing the “purchased by decedent on the life of decedent” test with a triple-pronged “testamentary disposition” test: policy proceeds (1) receivable by the executor or the estate, (2) purchased by premiums paid for by decedent, or (3) in which decedent at death had incidents of ownership, are includable in the value of decedent’s gross estate. See S. Rept. 77-1631, pp. 234-235, 1942-2 C.B. 504,676-677.    5The Supreme Court held in LeGierse that the amounts were, however, includable under sec. 302(c), Revenue Act of 1926, as a transfer to take effect in possession or enjoyment at or after death.