Court Opinion

ID: 4592260
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:07:34.223034+00
Date Added: 2024-06-11T07:50:49.725089
License: Public Domain

ESTATE OF ANNA M. KELLER, PIUS P. KELLER AND MARCELLA V. KELLER, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Keller v. CommissionerDocket No. 93221.United States Board of Tax Appeals39 B.T.A. 1047; 1939 BTA LEXIS 932; May 25, 1939, Promulgated *932  While in good health and not in contemplation of death, the decedent, who was 75 years of age, and an insurance company entered into two separate contracts, one a single premium life insurance policy for the face amount of $20,000 and the other a single premium life annuity.  The decedent was not required to take a medical examination and the company would not have issued the insurance policy without the purchase by the decedent of the annuity.  Both contracts were on the regular standard form used by the company in writing life insurance and annuities, respectively.  The decedent died March 28, 1936, after having received two payments on the annuity contract and all payments under the annuity policy ceased.  Upon her death the insurance company paid the face value of the insurance policy together with a post mortem dividend of $30.43 to the beneficiary named in the policy.  Held, the amount of $20,030.43 received by the beneficiary represented "insurance" as that term is used in section 302(g) of the Revenue Act of 1926, as amended, and not being in excess of the exemption of $40,000, should not be included in decedent's gross estate.  Old Colony Trust Co. et al., Executors,37 B.T.A. 435">37 B.T.A. 435;*933  affd., 102 Fed.(2d) 380, distinguished.  Ferdinand P. Weil, Esq., for the petitioners.  Paul E. Waring, Esq., for the respondent.  BLACK *1048  The respondent determined a Federal estate tax deficiency against petitioners in the amount of $3,243.64.  The sole question is whether an amount of $20,030.43 paid by an insurance company to the beneficiary named in an insurance policy, which policy was taken out by the decedent at the age of 75 on the same day that she took out an annuity policy and would not have been issued without the annuity policy, represents "insurance" as that term is used in section 302(g) of the Revenue Act of 1926 as amended and, not being in excess of the specific exemption of $40,000, is therefore not includable in the decedent's gross estate, or whether the amount paid was not insurance within the meaning of section 302(g) but in substance represents a "transfer" made by the decedent under such circumstances as would require the inclusion of the amount in the decedent's gross estate under section 302(c) of the Revenue Act of 1926 as amended.  FINDINGS OF FACT.  Petitioners are the executors of the estate of*934  Anna M. Keller, deceased, and reside in Pittsburgh, Pennsylvania.  The decedent died March 28, 1936, a citizen of the United States and a resident of Pittsburgh.  On December 31, 1934, the decedent at the age of 74 3/4 years, effective at the age of 75, executed a contract with the Equitable Life Assurance Society of the United States, sometimes hereinafter referred to as the insurance company.  On its face the contract was designated "Life Annuity.  Single Premium.  Non-Participating." This contract is numbered 9,652,635 and provides for the payment of a single premium of $3,258.20 to the insurance company in consideration for semiannual annuity income payments of $195.42 by the insurance company to the annuitant during her lifetime.  The contract was on the regular standard form used by the insurance company for writing annuity contracts, and among other things provided that "this agreement, and the application therefor, a copy of which is endorsed hereon or attached hereto, constitute the entire contract between the parties." The application for the contract was made by the decedent on November 28, 1934, and reads in part as follows: Application is hereby made for a LIFE ANNUITY*935  providing for semi-annual payments of $195.42 each, with a single premium of $3,258.20 payable in advance.  On the same day that the annuity contract was executed, December 31, 1934, the decedent also executed a policy or contract with the insurance *1049  company for the face amount of $20,000 which was numbered 9,652,636 and was designated on its face as "Single Premium Life Policy.  Insurance Payable At Death.  Single Premium.  Annual Dividends." The policy was on the regular standard form used by the insurance company for writing life insurance policies, and among other things provided: THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, a mutual company, organized July 26, 1859, HEREBY INSURES THE LIFE OF Anna M. Keller (Herein Called The Insured) AND AGREES TO PAY AT ITS HOME OFFICE IN THE CITY OF NEW YORK Twenty Thousand Dollars (Herein Called The Face Amount) to the Insured's daughter, Marcella V. Keller, beneficiary (with the right fo the insured to change the beneficiary or assign this policy) UPON RECEIPT OF DUE PROOF OF DEATH, PROVIDED THIS POLICY IS THEN IN FORCE AND IS THEN SURRENDERED PROPERLY RELEASED.  This insurance is granted in consideration of*936  the payment in advance to the Society of a single premium of Seventeen thousand nine hundred forty-one and 80/100 Dollars.  The policy was incontestable after it had been in force during the lifetime of the insured for a period of two years from the date of issue.  As to participation in dividends, it provided that at the end of the first and each subsequent policy year any surplus apportioned by the insurance company to this policy as a dividend should at the option of the insured be: 1.  Paid in cash; or 2.  Applied to the purchase of paid-up Additional Insurance, and the Insured may at any time surrender such Additional Insurance and receive the cash value thereof which shall not be less than the original cash Dividend; or 3.  Left to accumulate at 3% interest, compounded annually * * *.  The policy further provided that if the insured did not elect one of the foregoing options within three months after the mailing of a notice requiring such election, the dividend was to be applied as provided under option 2.  Whenever during the lifetime of the insured the reserve on the policy equaled the face amount thereof, the policy was to be regarded as a matured endowment, and*937  upon the surrender of the policy the company agreed to pay the insured "the face amount of insurance hereunder less any indebtedness." The policy also contained provisions relating to assignments, change of beneficiary, policy years, age and self-destruction.  There was a provision captioned "THE CONTRACT" which provided as follows: This policy, and the application therefor, a copy of which is endorsed hereon or securely attached hereto, constitute the entire contract between theparties.  All statements made by the Insured shall, in the absence of fraud, be deemed representations and not warranties, and no statements shall avoid this policy or be used in defense of a claim hereunder unless contained in the written application therefor and a copy of such application is endorsed hereon or attached hereto, when issued.  *1050  The policy contained a "Table of Loan and Cash Surrender Values for each $1,000 of Face Amount" for a period of 20 years, as follows: YearsCash value1 $8142825383648475859686778788 $8889899109091191712924139321493815 $9451695117957189621996620970The loan*938  value of the policy was the cash value thereof less interest to the end of the policy year.  The cash value provided for in the above table represented the full reserve at the end of the respective current policy year, less a surrender charge of not less than 2 percent of the face of the policy during the first 10 years.  The basis of computation of the reserve for which funds were to be held upon the policy was to be computed upon the American Experience Table of Mortality, with interest at 3 percent.  The policy further provided for four different options or modes of settlement at maturity.  The application for the policy was made by the decedent on November 28, 1934, and reads in part as follows: I hereby apply for a policy on my life for $20,000 for the benefit of my daughter, MARCELLA V. KELLER if living at my death, otherwise as stated in policy, with right to change the beneficiary or assign the policy reserved to me * * *.  Based upon the mortality table forming the basis for the annuity rate under contract No. 9,652,635, the expectation of life of a female of the age of 74 3/4 years is 10.5 years.  On the basis of the mortality table used to compute the premium under*939  policy No. 9,652,636, the expectation of life of a female at the age of 75 is 6.3 years.  A physical examination of the insured was not required by the insurance company in connection with the execution or issuance of the single premium life policy No. 9,652,636.  The company accepted in lieu of a medical examination the issuance of the life annuity contract, through which the company reduced but did not entirely eliminate its risk against loss due to premature death.  The insurance company would not have issued the insurance policy to the insured at her attained age of 75 years without issuing a life annuity contract in conjunction with the insurance policy or as a conversion from a group certificate.  The basic rate at age 75 is consistent with the rate chargeable at the younger ages where, provided satisfactory evidence of insurability is furnished, a life insurance policy may be issued in the absence of an annuity contract.  The consideration *1051  charged for the annuity contract would have been the same even if no life insurance had been purchased at the time.  The decedent could have obtained the annuity contract without the insurance policy, in which case the annuity*940  would have been identically the same as provided in the annuity contract which was issued to the decedent on December 31, 1934.  The requirement of the annuity contract as a condition precedent to the issuance of the insurance policy was due to the amount of risk involved, namely, the difference between the consideration and the death benefit.  The total consideration paid by the decedent to the insurance company for the two contracts amounted to 106 percent of the face amount of the insurance policy or $21,200 which was $1,200 in excess of the face amount of the insurance policy.  The name given to the $1,200 by the insurance company is "loading" and is for the purpose of paying commissions to the general agent and the special agent and for premium taxes.  The actual expense exclusive of general overhead expense of the insurance company in issuing the two contracts in question was the amount of $1,475.97, itemized as follows: Insurance policyAnnuity contractTotalCommission$897.09$114.04$1,011.13Expense allowance to general agent89.7116.29106.00Premium tax358.84358.84Total expense1,345.64130.331,475.97The above total*941  charge of 106 percent was later found to be unprofitable, at which time the charge was increased to 110 percent, and still later the issuance of an insurance policy like the one in question was made conditional upon a medical examination.  The insurance company at all times treated the two contracts entered into with the decedent on December 31, 1934, as two separate transactions rather than as one transaction.  The single premium of $17,941.80 received for insurance policy No. 9,652,636 was credited on the insurance company's books to the account "First year insurance premiums, Ordinary", whereas the single premium of $3,258.20 received for annuity contract No. 9,652,635 was credited to the account "First year annuity premiums, Ordinary." The funds so received were merged with the general funds of the insurance company.  The compensation paid with respect to the insurance policy was charged to the account "Commissions on first year insurance premiums, Ordinary", whereas the compensation paid with respect to the annuity contract was charged to the account "Commissions on first year annuity premiums, Ordinary." At December 31, 1934, the insurance company, in determining its *1052 *942  liability with respect to outstanding contracts, included in its annual statement to the Superintendent of Insurance of the State of New York under the heading "Net present value of all the outstanding policies in force on December 31 of current year, as computed on the following tables of mortality and rates of interest, viz: '3.  American Experience Table at 3% on issues of 1895 and after'", the amount of $16,580 as the net present value of the insurance policy.  It also included under the heading "5.  Net present value of annuities (including those in reduction of premiums), viz: Combined Annuity Table (1st modification) at 3 3/4%", the amount of $3,021 as the net present value of the annuity contract.  Similar items were included in the corresponding annual statement at December 31, 1935, in the following respective amounts: Insurance, $16,760; annuity, $2,900.  At the time the notice of decedent's death was received at the home office of the insurance company an entry was included in the cancellation list for policies terminated by death indicating the termination of the insurance policy, and this list was used as the basis for making the various records maintained in the insurance*943  company's office with respect to the status of that policy.  A similar entry with respect to the annuity contract was included in the cancellation list for annuity contracts terminated by death, and the information on this record was similarly used.  At the time of the decedent's death, the death benefit provided by the insurance policy was charged to the account "Death Claims, Ordinary." No benefit at death was provided by the annuity contract, and there was consequently no entry in the books of account at the time of death with respect to that contract.  The single premium charged for insurance policy No. 9,652,636 of $17,941.80 is 20 times the single premium per thousand dollars of whole life insurance at age 75, that is, $897.09.  The single premium of $897.09 is computed from the net premium based on the American Experience Table of Mortality at 3 percent interest with a proper loading for expenses.  The mortality table and loading formula used are consistent with the basis of rates for single premium whole life insurance at all other ages.  The single consideration of $3,258.20 collected on contract No. 9,652,635 is based on American Annuitants Select Male Table of Mortality*944  at 3 3/4 percent interest, modified for female lives.  The net consideration required to provide the semiannual income of $195.42 according to this table was loaded for expenses.  The term "Ordinary Life" is the designation applied to a life insurance policy under which premiums are payable throughout the entire lifetime of the insured whether annually, semiannually, quarterly, or monthly.  where the premium for a life insurance policy under which the proceeds are payable at the death of the insured, *1053  whenever that may occur, is paid in a single sum at issue, the policy is referred to as a "single premium whole life policy." For the year 1934 and for several years prior to 1938 the insurance company's earnings on its own funds held for investment purposes ranged from 3 1/2 to 4 percent.  The decedent during her lifetime received on policy No. 9,652,635 two semiannual income payments in the year 1935 each in the amount of $195.42, making a total of $390.84, and also received in 1935 a dividend disbursement in connection with policy No. 9,652,636 amounting to $122.60.  Upon the death of the decedent the insurance company also paid the $20,000 face amount of policy No. *945  9,652,636 to Marcella V. Keller, the beneficiary named in the policy, plus a post mortem dividend of $30.43 paid in death claim settlement.  On November 6, 1936, petitioners filed an estate tax return for the estate of the decedent with the collector of internal revenue for the twenty-third district of Pennsylvania.  Under schedule C-2 of the return relating to "Insurance", petitioners made the following report: Item No.DescriptionValue of proceeds at date of death1.Single Premium Life Policy No. 9652,636, issued by The Equitable Life Assurance Society.  Beneficiary Marcella V. Keller, daughter of decedent$20,030.43Total$20,030.43Less amount of insurance receivable by beneficiaries, other than the estate, not in excess of $40,00020,030.43Total Included00.00Under schedule E of the return relating to "Transfers" petitioners reported that there were no transfers includable in the decedent's gross estate.  In a statement attached to the deficiency notice the respondent notified petitioners in part as follows: In its letter of proposed determination the Bureau adhered to its tentative determination and included in the gross estate*946  the full value at the date of death of the insurance policy taken out by the decedent with the Equitable Life Assurance Society, without benefit of any portion of the $40,000.00 exemption.  You are advised that this office is in receipt of information to the effect that the Equitable Life Assurance Society issued life insurance policy No. 9652636 in conjunction with life annuity policy No. 9652635 and that the company would not have issued the ordinary life policy to the decedent at her attained age of 75 years without issuing a life annuity contract.  Accordingly, it appears that the purchase of the two policies amounted in substance to a transfer by trust or otherwise under which the decedent retained for life the enjoyment of or the right to the income from the property.  Accordingly, it is held that the $40,000 exemption is not applicable to the transaction and that the item is includible in the decedent's gross estate under the provisions of section 302(c), as amended, as a transfer made in contemplation of death and intended to take effect at death.  *1054  The principal cause of decedent's death was cerebral hemorrhage of one-half day duration.  A contributory cause*947  was la grippe of 14 days duration.  Up until the time of her last illness the decedent had enjoyed excellent health, had been remarkably free from any illnesses or disabilities, and had been especially active for one of her years.  She enjoyed motoring, taking trips, and attending baseball games.  A short time before her death she spoke about going abroad for that summer, and two days before her death she suggested getting tickets for the opening baseball game.  She was a woman who enjoyed life and never expressed any expectancy of dying, nor mentioned death, and for four or five years prior thereto her blood pressure and general condition had been especially good and in no way indicated the likelihood of a stroke or cerebral hemorrhage.  Her mother and her grandmother were both in their nineties when they died.  The amount of $20,030.43 paid by the insurance company to the beneficiary named in insurance policy No. 9,652,636 is not includable in the decedent's gross estate as a transfer made in contemplation of death or otherwise.  The amount so paid represents "insurance under policies taken out by the decedent upon her own life" as that term is used in section 302(g) of the Revenue*948  Act of 1926, as amended.  OPINION.  BLACK: The question involved has been previously stated.  The applicable statute is section 302 of the Revenue Act of 1926 as amended by section 803(a) of the Revenue Act of 1932 and section 404 of the Revenue Act of 1934, the material provisions of which are set out in the margin. 1*949  Petitioners contend that the amount of $20,030.43 paid by the insurance company to the decedent's daughter Marcella V. Keller *1055  represents "insurance under policies taken out by the decedent upon her own life" as that term is used in subdivision (g) of the applicable statute, and that, since the amount was not in excess of the specific exemption of $40,000 provided for in subdivision (g), no part thereof should be included in the decedent's gross estate.  No other beneficiaries received any amount as insurance under any policy taken out by the decedent upon her own life, and the $20,030.43, if insurance, was the only insurance received by Marcella V. Keller as the beneficiary under a policy taken out by the decedent upon her own life.  On the other hand, the respondent contends that the insurance policy and the annuity contract must be regarded as one single, indivisible contract between the decedent and the insurance company; that as so regarded the two contracts in substance amounted to a "transfer" of $21,200 (the total premiums paid for both contracts) made by the decedent during her lifetime both (1) in contemplation of death, and (2) under such circumstances whereby*950  the decedent retained for her life the enjoyment of or the right to the income from the property transferred; that the value of the transfer upon the decedent's death was the amount of $20,030.43 which was paid by the insurance company to the decedent's daughter; and that the latter amount was therefore includable in the decedent's gross estate under subdivision (c) of the applicable statute referred to above and not under section 302(g) as insurance.  The controversy in this proceeding concerns two separate and distinct contracts, one a single premium life insurance policy and the other a single premium life annuity.  Both policies were written on the regular standard forms and on the basis of the respective mortality table ordinarily used in writing life insurance and annuities, respectively.  Each contract contains a proviso to the effect that the agreement and the respective application therefor "constitute the entire contract between the parties." The application for each contract was made by the decedent on the same day and the contracts were executed on the same day.  Petitioners, however, concede that the insurance company would not have issued the life insurance policy to*951  the decedent at her attained age of 75 without issuing a life annuity contract "in conjunction with" the life insurance policy, but contend that this requirement was merely a condition precedent to the issuance of the life insurance policy which was imposed by the insurance company for the purpose of reducing but not entirely eliminating its risk against loss due to premature death, and that such a condition when once complied with does not make the insurance policy when once issued any different than any other insurance policy issued on identically the same kind of form to an applicant who is not required also to purchase an annuity.  Petitioners argue that insurance *1056  companies have a right to require certain reasonable conditions precedent before they will issue a certain type of policy, but, once this condition precedent is complied with, the contract must be interpreted in accordance with its actual terms.  Williston, in his chapter on general rules for the interpretation or construction of contracts, says at section 628: Where a writing refers to another document, that other document, or so much of it as is referred to in it, is to be construed as part of the writing. *952  * * * Even where a writing does not refer to another writing, if such other writing was made as part of the same transaction, the two should be construed together.  It is usually said that the two writings together form one contract.  Though this is generally true, it is not always accurate, even though the several writings are part of the same bargain.  Where one of the writing is a formal document it cannot be incorporated in an ordinary writing.  A note and a mortgage to secure it are not strictly one contract, though doubtless each is to be construed in connection with the other in order to determine its meaning.  * * * In the instant proceeding it is our opinion that the two contracts must be construed in connection with each other and that in so doing it is of no great importance whether the things agreed upon by the decedent and the insurance company on December 31, 1934, were embodied in one policy or two.  The question in either event remains the same, namely, whether the amount of $20,030.43 paid by the insurance company to the decedent's daughter was paid to her as "insurance" as petitioners contend or as the result of a transfer in trust or otherwise made by the decedent*953  in contemplation of death and intended to take effect at death as the respondent contends and not as "insurance." Even if the decedent and the insurance company had executed all the things they agreed to on December 31, 1934, in one document instead of two, the cases hold that if the agreement sets forth separate features which are clearly severable, each feature must be given its proper application.  ; ; ; . In , the question before the Supreme Court was whether Legg, a voluntary bankrupt, or his trustee was the person entitled to certain future monthly disability benefits payable under a contract entered into between Legg and an insurance company before the adjudication.  Several years prior to the adjudication Legg took out a life insurance policy under which the company agreed, in consideration for a stated annual premium, to pay*954  a certain amount upon his death.  By a supplementary contract issued on the same day and attached to the policy, the company, in consideration for an additional annual premium of a stated amount, agreed to pay *1057  a monthly benefit of $174.52 upon due proof of total and permanent disability, which latter event happened several years before the adjudication.  In holding that the disability benefits were payable to the trustee and not to the bankrupt, Mr. Justice Brandeis in the course of his opinion said: Second. The fact that the disability benefits are provided for in a "Supplementary Contract" issued on the same day as the policy and physically attached thereto does not make them life insurance.  The life policy and the contract were executed as distinct instruments.  The "Supplementary Contract" was to operate for some purposes as if a part of the life policy.  But for all other purposes it is a separate obligation.  The hazards covered by the two instruments are obviously different.  The beneficiaries differ also.  The payment under the life policy was to be made to the wife; the disability benefits are to be paid to Legg himself.  A separate and different premium*955  was exacted for the obligations assumed in each instrument.  It was provided that forfeiture of the life policy would terminate all rights arising from disability; but the supplementary contract could be terminated by Legg without affecting otherwise his life policy.  In the instant proceeding we think the agreement between the decedent and the insurance company as evidenced by the two documents, the insurance policy and the annuity contract, shows an intention on the part of the contracting parties to enter into an insurance and annuity contract with clearly severable features as to each, rather than a contract of trusteeship with no separate features.  For example, the insurance company agreed to pay Mrs. Keller a life annuity of $390.84.  Her life expectancy was 10.5 years when the contract was taken out and if she had lived that expectancy the total payments to her would have been $4,103.82 which apparently would have been a full return except the comparatively small amount for "loading" to her of the premium of $3,258.20 plus the interest earned thereon.  But suppose she had lived to be as old as her mother and grandmother, which the evidence shows was 90 years each.  That would*956  have meant that the insurance company would have paid her annuities of $390.84 for 15 years which would have been $5,862.60.  This would apparently have been considerably more than the total premium of $3,258.20 which she paid for the annuity, plus the interest earned thereon.  Of course, regardless of how long Mrs. Keller had lived, the insurance policy of $20,000 payable at death to her designated beneficiary would have remained the same.  Attention is called to these features in order to show the clear separability of the two contracts notwithstanding that they were taken out as parts of one transaction.  The writings did not take the form of any declaration of trust.  No provision was made for any compensation to be paid the insurance company as a trustee.  The decedent was referred to in one instrument as "The Insured" and in the other instrument as the "Annuitant." The only considerations contracted for by the insurance company were the two separately *1058  stated premiums of $17,941.80 and $3,258.20, respectively.  Each premium was based upon a different mortality table, one appertaining to life insurance and the other to life annuities.  The obligations of the insurance*957  company, as we have already pointed out, were different as to each separate feature.  In consideration for the single premium of $17,941.80 it agreed to pay the decedent's daughter $20,000 upon receipt of due proof of the death of the decedent.  This feature also provided for a participation in dividends and provisions for loans and a cash surrender value.  The latter began at $16,280 after the policy had been in force for one year and gradually increased to $19,400 over a period of 20 years.  In consideration for the single premium of $3,258.20 the company merely agreed to pay the decedent a semiannual annuity of $195.42 during her lifetime.  The latter had no cash surrender value and all obligations under this feature ended completely upon the death of the decedent.  After a period of one year the insurance feature could be eliminated by the decedent electing to surrender that feature for its cash value without in any way affecting the annuity feature.  It seems to us that the situation is simply this: Even assuming that Mrs. Keller did not want to purchase an annuity (and we have no evidence to that effect) and only did so because she had to do it to secure the life insurance policy*958  which she did want, nevertheless when the purchase was complete she owned two contracts and we have no cause to say that her life insurance policy was not life insurance merely because she had to purchase an annuity policy along with it.  We are cited to no authority which would compel any such holding.  Suppose we look at the insurance policy from the standpoint of the insurance company which wrote the policy rather than from the standpoint of petitioner, who took it out.  The evidence in this proceeding shows that in determining its liability with respect to outstanding contracts the insurance company included in its annual statement to the Superintendent of Insurance of the hState of New York for the year ending December 31, 1934, the insurance policy at a present value of $16,580.  Reserves, of course, had to be carried by the insurance company for this amount to make good its liability under the policy.  Under the provisions of section 203(a)(2) of the Revenue Act of 1934, in determining its net income subject to tax the insurance company is allowed to deduct "An amount equal to 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of*959  the taxable year * * *." Could it be plausibly contended that the insurance company in determining the mean of its reserve funds would not have the right to include the reserves held to insure the payment of this insurance policy?  We think not.  It seems to us that the named reserve of $16,580 would be such reserves as are contemplated by section 203(a)(2).  They are not mere solvency reserves.  They are life *1059  insurance reserves "required by law." cf. ; . Notwithstanding these separate features to which we have referred, which we think are severable and should be so treated, the respondent contends that because the insurance company would not have issued the insurance policy without the annuity this fact alone controls and brings the instant proceeding within the rule enunciated in ; affirmed by the *960  First Circuit on March 2, 1939, , and followed in . Those cases, however, involved an entirely different situation than is involved here in that there was no separate insurance feature present in either of them.  In the Old Colony case the contract was designated on its face "life annuity with principal sum payable at death." In the Chemical Bank case the contract was designated on its face as "Investment Annuity.  Death Refund Payable at Death of Annuitant." Life insurance was not mentioned in either contract.  There was but one consideration paid in each of those cases, whereas the decedent here agreed to pay two separate premiums, one for insurance as such and the other for an annuity as such.  The contracting party other than the respective insurance company in each of the cases relied upon by the respondent was referred to throughout those instruments as the "Annuitant" and nowhere therein was he ever referred to as the insured.  The annuity in each case was calculated on a basis of 3 1/2 percent on the principal sum and only this 3 1/2 percent was paid to the annuitant*961  plus any excess interest earned and there was no diminution of the principal fund.  Even as to the kind of contracts just described, the court in , held them contracts of insurance and in that respect took issue with ; , and ; . In the Old Colony case the "principal sum" of $40,000 was payable to the annuitant "at any time, provided there is no legal restriction to the contrary" and in the Chemical Bank case the "death refund" of $20,000 was payable to the annuitant "at any time prior to the death of the Annuitant * * *." In the instant proceeding the annuity feature had no cash surrender value, and the decedent after paying her single premium of $3,258.20 could recover not one cent more than her semiannual annuity of $195.42 and these payments ceased with the last payment falling due prior to her death.  In the instant proceeding the decedent could have surrendered her insurance policy after it had been in force for one year for its stated cash surrender value*962  of $16,280, which was $3,720 less than its face amount, and the surrender thereof would not have effected her *1060  annuity in any way.  Cash surrender values are common incidents of life insurance policies.  It is these differences which we think compel us to recognize the separate features of "insurance" and "annuity" that are here involved.  The annuity contract issued to the decedent was the same contract that would have been issued to any female person of her age for a single premium of $3,258.20.  It was a plain annuityNo more and no less.  Likewise the insurance policy was a plain, ordinary policy of insurance.  It was no different in its terms from hundreds of insurance policies that are being written by the insurance companies every day.  We think effect should be given to these policies in accordance with their plain terms, rather than to hold as the respondent has determined.  It is therefore our opinion that at the time of the death of Anna M. Keller she was the owner of a $20,000 insurance policy in the Equitable Life Assurance Society of the United States, of which her daughter, Marcella V. Keller, was the designated*963  beneficiary and the $20,030.43 in question represents "insurance" as that term is used in section 302(g) of the Revenue Act of 1926 as amended, and since the amount is not in excess of the $40,000 exemption provided for in the statute, no part thereof is includable in the decedent's gross estate.  Congress can, of course, remove the $40,000 insurance exemption contained in section 302(g) at any time it sees fit, but as long as the exemption is there we have no cause to deny it under such circumstances as exist in the instant case.  Reviewed by the Board.  Decision will be entered for the petitioners.HARRON HARRON, concurring: The provisions of section 302(g) of the Revenue Act of 1926 as amended provide that there shall not be included in the value of the gross estate of a decedent any amount not in excess of $40,000 receivable by beneficiaries "as insurance under policies taken out by the decedent upon his own life." The Equitable Life Assurance Society of the United States issued a single premium life policy on the life of Anna M. Keller on December 31, 1934, in the face amount of $20,000 in consideration of a premium of $17,941.80.  After the death of the*964  insured, the insurance company paid to the beneficiary of the insured the face amount of the policy plus a post mortem dividend.  There can be no question whatever that the insurance company entered into a contract to pay a certain sum upon the death of an insured person in excess of the premium paid and fulfilled that contract.  The question comes to this Board upon facts relating to a completed bona fide contract.  Strictly speaking, we are not concerned with matters of concern only to the insurance company such as whether it waived some *1061  of its usual procedures preliminary to executing the contract, such as physical examination of the insured.  Nor is it material in this case that the insurance company executed a life insurance contract in conjunction with an annuity contract.  Insurance companies sell many types of insurance which combine life insurance with other benefits such as annuity payments.  Such policies have various names, such as endowment policies.  In the instance before us, the insurance company executed two policies, one an annuity policy.  To the insurance company, there were two contracts having separate terms and separate benefits.  Upon the death*965  of the insured the annuity contract terminated and nothing passed under this contract to decedent's beneficiary.  May we go outside the terms of executed contracts fully performed and decide the question as though the parties had executed a different contract or contracts?  I believe we may not do so, at least where the contracts are bona fide.  Further, it may not be said that the question, as decided by the majority opinion, has been decided upon a superficial consideration of labels attached to contracts.  The insurance company issued a standard insurance policy upon the life of the decedent and set up upon its books a contract of life insurance.  It treated this contract separately from the annuity contract executed at the same time and there is no basis in fact for stating that one contract lost its identity in the other any more than could be said if an individual executed two separate contracts of insurance upon his own life on the same date and paid separate premiums for each just because the moneys paid merged with other funds of the insurance company.  Perhaps the risk of the insurance company was lessened by the purchase of the annuity policy at the same time, but it does*966  not follow that every element of risk was eliminated.  As a matter of fact, the decedent died before expiration of the expectation of life which she had under American Experience Mortality Tables.  The insurance company took the risk that the insured might not survive her full life expectancy, as an insurer does under every life insurance contract.  The facts do not, in my opinion, afford a basis upon which could be made a finding of fact or a conclusion on a mixed question of law and fact that the single premium life policy, No. 9,652.636, was not insurance on the life of decedent.  Unless such finding can be made, we are not justified in holding that the proceeds of that policy do not come within the statutory exclusion allowed by section 302(g).  In , the facts were substantially and materially different from the facts in this proceeding.  The contract involved there had none of the characteristics of a life insurance contract, other than that an amount was payable on the death of the annuitant to his beneficiaries.  The total premium paid for that policy exceeded the face amount of the policy. *967  There *1062  the insurance company did not waive any of its usual procedures preliminary to issuing life insurance for the plain reason that it was not writing a life insurance policy.  The premium paid was not computed as is a premium for life insurance.  The death of the annuitant was not the sole contingency for payment of the face amount of the policy.  That case is clearly a different case from the present one and there is no inconsistency between our holding there and our holding here.  As a matter of fact, the holding advocated by the dissenting opinion can be reached only by a substitution for the terms of the contracts executed of terms that are composed by the dissent and that are not the terms adopted by the parties to the contracts before us.  The doctrine of construction of contracts advocated by the dissent is not properly applied here as the dissent would have it applied.  For the above reasons, I concur in the majority opinion.  DISNEYDISNEY, dissenting: The problem here is whether subsection 302(g) of the Revenue Act of 1926 shall be so construed as to vitiate and nulify subsection (c) in this proceeding.  The majority opinion has so construed*968  it, erroneously, in my opinion.  The gist of the reason for such construction by the majority opinion is the fact that the deceased received from an insurance company a form denominated a "Single Premium Life Policy.  Insurance Payable At Death." The contention is, in effect, that because therein the words "insurance" and "insured" were used, that they must be construed in the usual acceptation of the terms, regardless of other language used, and that therefore the situation falls under subsection 302(g), rather than under subsection(c).  Faced by the fact of the issuance of the so-called life insurance policy simultaneously with and "in conjunction with" an annuity policy, without which the "insurance" would not have been written, the majority opinion in words agrees that the two policies must be construed in connection with each other, but in fact in the next breath insists upon a separation, upon the theory that although the two policies formed one contract, the insurance policy feature and the annuity feature were divisible elements, that the whole transaction was not an entire, but a severable or divisible contract, and that the annuity policy was a mere condition precedent to*969  the insurance policy.  This is, I think, basic error.  That two such policies issued together do form one contract is almost, if not quite, elementary - and as above stated, this is not denied in the majority opinion.  See ; ; . Moreover, language in a contract or deed is primarily and ordinarily to be construed *1063  as a term or covenant thereof and not as a condition precedent.  ; ; . In the face of this general principle of construction, there is no justification, I think, for holding that the annuity feature was a condition precedent, rather than an indivisible part of a contract.  The citation by the majority of *970 , is on its face inapplicable, for it states (referring to the "supplementary contract" unsuccessfully sought to be incorporated into the principal contract): "But for all other purposes it is a separate obligation." This refers to other language of the decision which specifically points out that the supplementary contract was, as to the feature at issue, covered by language of the policy that: "No other provision of said policy shall be held or deemed to be a part hereof." Other citations as to cases involving "separate features which are clearly severable" are of course not in point here where the annuity feature was, on the contrary, clearly inseparable.  That it is indivisible, inseparable from the life insurance feature, is demonstrated by the most effective of facts - that the life insurance feature would not have been written without the annuity feature.  The company joined the two features.  We can not with good logic treat them otherwise.  It is impossible for me to discern how these two features can be severable, as the majority sever them.  The annuity feature is no condition precedent, but a term, provision, or part of what*971  the majority must perforce and does conclude is to be interpreted as a single contract.  The doctrine of conditions means just what it says, that is, it entails a condition, a state of affairs or a fact upon which the existence of the contract depends, but an attempt to make one contract depend upon another contract as a condition precedent is merely to admit that the contracts form one, that additional provisions are agreed upon, and are to be construed together.  One is not separate and a condition of the other, but each loses identity in the completed agreement.  Thus, we see that there is no condition precedent entailed here, but a mere question of the proper interpretation of two terms of a contract, which under the ever prevalent rule must be considered as a whole to ascertain the intent of the parties.  ; . But if we read the contract as a whole, how can it be said that the insurance feature is independent when it depended completely upon the inclusion of the annuity feature without which the insurance company would not enter into a contract? *972  Had the consideration or the annuity failed, such as by dishonoring of a check, can there be any doubt that the insurance company would have immediately contended that the contract was an integer, indivisible and inseparable, and that *1064  they could not be held to the insurance feature alone?  Yet to answer the query in the affirmative is to admit that this contract as a whole was not insurance, but was a hybrid, not to be construed merely as an insurance policy - which is what the majority opinion does by the expedient of separating the "insurance" policy and regarding it only.  If joint construction of the two policies, as a whole, is required, however, obviously what has been said by us in , and upon the affirmation thereof by the Circuit Court, , and in the authorities there cited, applies fully, and we have before us nothing different in essence and fact from the annuity with payment at death, involved therein, and involved in *973 , for when the essential nature of the different situations is examined, the controlling fact in each is seen to be that an amount of money was placed with an insurance company with income reserved to the decedent and without the feature of true and usual insurance risk carried by the insurance company - for which reason such contracts were found not to be applicable to subsection (g). Cooley on Insurance, vol. I, p. 80, says: From what has been said it is evident that the primary requisite essential to the existence of every contract of insurance is the presence of a risk of loss. The insurer, in return for a consideration paid to him by the insured, assumes this risk, and wherever such risk exists and is assumed by one of the parties to the contract, whatever form a contract may take, it is in fact a contract of insurance.  Risk is essentially the subject of the contract.  If there be no risk there can be no contract, and until the risk commences the contract does not attach.  (*974 .) * * * The risk which is essential to a contract of insurance must not be so great as to be prohibitory of the enterprise in which it is encountered.  There must, in order that there may be successful insurance, be a sufficiently large number exposed to the same risk to make it practicable and advantageous to distribute the loss falling upon a few.  As indemnity against loss is at the foundation of insurance, the business must be regarded as a system of distributing losses upon the many who are exposed to the common hazard.  (.) Out of the co-existence of many risks arises the law of average, which underlies theh whole business of insurance.  This is true, whether the insurance is on property or on lives.  Life insurance especially is founded on the law of averages.  The average rate of mortality is the basis on which it rests, and by spreading their risks over a large number of cases the companies calculate on the average with reasonable certainty and safety.  (*975 .) , says: The definition of a contract of insurance imports the assumption of a risk by the insurer and the payment of a consideration therefor by insured.  The above clearly states the essential nature of life insurance.  A contract which, instead of the insurance company assuming the risk *1065  of death of the insured, provides that the insured himself carries that risk, is patently violative of the above essential principle of insurance.  Yet here that situation is plainly found.  The applicant was not insurable because of age - so completely not insurable that a physical examination was immaterial and was not required.  The facts found recite "* * * provided satisfactory evidence of insurability is furnished a life insurance policy may be issued in the absence of an annuity contract." [Italics supplied.] In that situation the applicant in effect said: "I will carry the risk.  I will pay you, the insurance company, a sum of money over and above the single premium for the 'insurance policy,' sufficient that*976  you, provided only that you invest the money paid you at your usual rates of return, will at all times have the funds with which to pay me an 'annuity' and upon my death pay my beneficiary a certain sum." It can not be denied, I think, that the applicant was carrying the risk, for the annuity contract was required "due to the amount of risk involved, namely, the difference between the consideration and the death benefit." The applicant plainly supplied the money to absorb the risk, the difference between $17,941.80 single premium, and $20,000 death benefit, when she paid $21,200.  The $195.42 payable semiannually was less than 2 percent upon the $21,000, and the company took not the slightest risk, except the risk that it might conceivably not earn so much as 2 percent upon the $21,200 - but that is patently an investment risk, and not the risk of having the "insured" die before paying in enough premiums to make the company safe.  That is the insurance risk, which an insurance company assumes for the insured and can carry more safely than can he, because of the broad spread over many people.  Contrary to the situation involved in true insurance, it was in nowise affected by an early*977  death of the applicant, for the $20,000, and the money above that amount, was already paid in, ever present in amount sufficient to pay the $20,000 and the annuity income agreed upon, dependent only upon rate of earning exceeding the small percentage required for the annuity payments.  The very base and plinth of the whole theory of life insurance denies that life insurance risk is entailed therein.  (The dividends which might be paid are immaterial, since they would be paid only upon earnings after reservation of a percentage greater than that required to pay the annuity income, and initial expenses, such as commissions paid, are immaterial, for they are no part of the risk assumed for the insured by the company.  The same applies to the fact of surrender value in the "insurance" feature, for the amount remaining for protection of the annuity is decreased only proportionately with the decrease in liability thereon, since the same basis of mortality table applies to both features.  The annuity contract, standing alone, involved risk, but when made one with the "insurance" *1066  feature - which is what the company insisted upon - its risk was mathematically absorbed by the moneys*978  paid in under the name of single premium.) The Ratio decidendi of , and the cases correlated therein was the lack in the contracts considered of the essential element of life insurance risk, as above set forth, and the lack of such expressions as "insurance" or "insured", though mentioned, was not the crucial point.  Terms do not control and a phrase can not contradict reality.  . "The nature of the contract must be determined from its contents and not by its terminology." . It seems to me that therein lies the basic error in the majority opinion, for because of the existence of the expressions "insurance" and "insured" in one part of the indivisible contract involved, the majority believe that we should find that insurance is involved.  It is true that reliance is placed in a sound principle of a statutory interpretation, to wit, the use of words in their ordinary sense.  The majority opinion therefore says, in effect, that section 302(g), because of reference to "insurance", involves*979  any policy which bears the name of insurance.  That principle of statutory construction however is patently subject to the other, just above expressed, that terms alone do not control, and the facts must be examined.  Moreover, another principle of construction, coordinate if not more important, seems to be neglected by the majority opinion - the principle that legislative intent must be ascertained.  No examination of that question appears in the majority opinion, yet in the interpretation of section 302(g) in , we find the following: * * * It seems to us that the provisions of subdivision (g) relied upon by the Commissioner are to be interpreted in the light of the purpose to be effected in excluding from the gross estate insurance in the amount of $40,000 receivable by beneficiaries other than the estate * * *.  It seems obvious that the purpose of Congress in exempting $40,000 of life insurance payable to beneficiaries other than the estate was the same as the public policy involved in the statutes of many states exempting insurance in general for the wife or family; in other words, that Congress recognized a beneficent*980  public policy in providing that insurance should form an estate for dependents and that by insurance, therefore, one could build up such an estate. Equally obvious, however, such public policy was not necessary in the case of one who did not need to build up an estate but already had funds with which he could not only pay for a single premium life insurance policy, but could, if not insurable because of age or physical condition, pay in such an additional amount of money in a combination of life *1067  insurance and annuity that the company would deal with him because it was financially safe, he having paid "the amount of the risk involved, namely, the difference between the consideration and the death benefit." Yet under the majority opinion the benefit of section 302(g) is extended to him and his estate escapes estate tax because he for a consideration costing more than insurance had obtained as a part of a contract the Form of a life insurance policy, a contract which the company would not enter, requiring a different and broader agreement.  the insurance company added a feature which the majority will not add.  I can not bring myself to believe that one subsection*981  of this section of the revenue law should here be interpreted so as to render ineffective the other, but feel rather that the two subsections should be harmonized if possible and that we should arrive at a conclusion that subsection (g) is applicable only if subsection (c) is not violated in the facts, and not apply it merely because we find the word "insurance" in a contract which is, and was intended by the parties, as investment, as a contract of transfer of property with retention of income for life, of the very nature forbidden by subsection (c).  Insurance does not have such effect.  The contract here involved does, and I conclude that it is not insurance, but is a transparent device to use, in order to escape estate tax, the expression "insurance", though it is a part, and a part only, of a contract which, in the cases above cited, has been refused recognition as basis for exemption.  It is apparent that in this contract, as stated in , "the obligations of the company were such that the investment feature predominates and gives character to the contract." *982  That the revenue act distinguishes between policies involving mere investment and those entailing insurance is shown in . Therein was considered "reserves required by law", as deductions, in part, from gross income under section 203(a)(2) of the Revenue Act of 1928, and it was held that such reserves must directly pertain to life insurance, and do not include "survivorship investment funds" accumulated from premiums on 20-payment life policies, to be paid to surviving policyholders; and the Court stresses the fact that under the latter feature of the policy "the company's liabilities on account of the investment funds are independent of these attributable to life insurance risks." In other words, investment risks are not within the category of life insurance for the purpose of the revenue act, even though covered by a policy labeled one of insurance.  Such a contract, involving survivorship investment funds, is called insurance, ordinarily known as tontine insurance.  The Court relied upon its previous decision to the *1068  same general effect in *983 . Commenting upon , Paul and Mertens, Law of Federal Income Taxation, § 36.11 (supplement) says: "A broad definition of the term life insurance was rejected by the Court in reversing the lower court * * *." Both cases are noticed by the Circuit Court in TURNER, MELLOTT, HILL, and OPPER agree with this dissent.  Footnotes1. SEC. 302.  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, except real property situated outside the United States - * * * (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.  * * * (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life. ↩