Court Opinion

ID: 4625684
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:42.017843+00
Date Added: 2024-06-11T07:56:45.101122
License: Public Domain

ESTATE OF JAMES H. LOCKHART, DECEASED, CHARLES LOCKHART, GEORGE D. LOCKHART, JAMES H. LOCKHART, JR. AND JOHN L. WALKER, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lockhart v. CommissionerDocket No. 92375.United States Board of Tax Appeals46 B.T.A. 426; 1942 BTA LEXIS 865; February 25, 1942, Promulgated *865  During the year 1935 original petitioner made gifts of certain insurance policies, some of which were fully paid up and some of which were not paid up.  He included them in his gift tax return at their cash surrender value.  Held, replacement cost is the proper criterion of value of the policies for gift tax purposes.  Guggenheim v. Rasquin,312 U.S. 254">312 U.S. 254; United States v. Ryerson,312 U.S. 260">312 U.S. 260; Houston v. Commissioner, 124 Fed.(2d) 518; Margaret R. Phipps,43 B.T.A. 790">43 B.T.A. 790. J. Merrill Wright, Esq., for the petitioners.  William S. Schmitt, Esq., for the respondent.  VAN FOSSAN *427  Respondent determined a deficiency of $27,909.96 in gift taxes of James H. Lockhart for the calendar year 1935.  Petitioners contend that respondent erred in increasing the value of certain insurance policies which were the subject of gifts during the taxable year.  FINDINGS OF FACT.  The majority of the facts are stipulated.  We hereby adopt as our findings of fact the stipulation of facts, together with certain exhibits which were filed at the hearing.  They may be summarized as follows: *866  Petitioners are the duly appointed executors under the will of James H. Lockhart, deceased, the original petitioner herein, who died testate at Pittsburgh, Pennsylvania, on May 16, 1936.  Present petitioners were substituted as petitioners in this proceeding by an order entered June 25, 1941.  During all times material hereto decedent resided in Pittsburgh, Pennsylvania, and had his principal office at 1502 Union Bank Building, Pittsburgh, Pennsylvania.  He filed his gift tax return for the year 1935 with the collector of internal revenue for the twenty-third district of Pennsylvania.  During the taxable year 1935 decedent made gifts of certain insurance policies which he valued in his gift tax return at $1,835,747.36.  The actual cash surrender value of the policies as returned by the issuing companies was $1,830,583.07.  Respondent increased the valuation of the insurance policies to $1,936,323.78, thereby increasing the valuation of total gifts (other than charitable) from $1,867,421.15, as returned by decedent to $1,967,997.57.  Prior to 1935 the original petitioner had taken out upon his own life various annual premium policies of life insurance, the proceeds of which*867  were payable, upon the original petitioner's death, in a lump sum to his wife or, should she not survive, to his sons, Charles Lockhart, George D. Lockhart, and James H. Lockhart, Jr.  Decedent had retained in those policies certain legal incidents of ownership such as the right to change the beneficiary, the right to surrender for cash, the right to borrow upon the security of the loan or cash surrender render value of the policies, and the right to assign the policies.  On November 12, 1935, he executed a deed of trust assigning these policies to Charles Lockhart, George D. Lockhart, and John L. Walker, as trustees, for the benefit of various individuals.  At the same time he surrendered all legal incidents of ownership which he had reserved to himself in the policies.  Some of the policies were paid up at the time decedent made the gift to the above trustees.  Others were not paid up at that time.  On his return original petitioner valued the paid up policies at $856,848.82.  Those same policies had a cash surrender value as reported by the insurance companies of $854,985.89.  They *428  were valued by Commissioner at $912,707.11.  The policies which were not paid up were*868  returned by the original petitioner at a value of $511,202.96.  They had a cash surrender value as reported by the insurance companies of $509,550.92 and were valued by the Commissioner at $515,533.56.  Prior to 1935 the original petitioner had taken out upon his own life various annual premium policies of life insurance, the proceeds of which were payable in installments upon original petitioner's death to his wife for life, or, if she should not survive, to his sons, Charles Lockhart, George D. Lockhart, and James H. Lockhart, Jr., for a period of twenty years certain.  Prior to 1935 the original petitioner had taken out upon his own life various annual premium policies of life insurance, the proceeds of which were payable in installments to his three sons for a period of twenty years certain.  Prior to 1935 he had also taken out upon his own life an annual premium policy of life insurance, the proceeds of which were payable in a lump sum to his sister-in-law, Pauline Dilworth Edwards.  In all of these policies original petitioner retained various incidents of ownership, such as the right to change the beneficiary, the right to surrender for cash, the right to borrow upon the security*869  of the loan or the cash surrender value, and the right to assign the policies.  On November 12, 1935, the original petitioner executed a declaration of gift assigning these policies to the respective beneficiaries thereof.  At the same time he surrendered all incidents of ownership which had been reserved by him.  All of the policies the proceeds of which were payable in installments to petitioner's three sons were paid up policies.  They were included in original petitioner's gift tax return at a value of $104,769.66, which was the same as the cash surrender value as reported by the insurance companies.  They were valued by the Commissioner at $143,108.93.  The remainder of the policies which were assigned to the beneficiaries thereof were not paid up.  Those policies the proceeds of which were payable in installments to petitioner's wife were included in the gift tax return at a value of $229,741.24.  They had a cash surrender value as reported by the insurance companies of $228,091.92 and were valued by Commissioner at $230,838.46.  The policy the proceeds of which were payable to petitioner's sister-in-law was included in the return at a value of $111,457.59, which was the*870  same as the cash surrender value as reported by the insurance companies.  Commissioner valued the policy at $111,866.75.  Prior to 1935 the original petitioner had taken out upon the lives of each of his three sons certain annual payment policies of life insurance wherein in each policy the insured's mother, if living, was named beneficiary.  Otherwise, certain individuals were designated as beneficiaries.  *429  The original petitioner retained various incidents of ownership in these policies.  On April 13, 1935, the policies upon the life of James H. Lockhart, Jr., were modified so as to vest all incidents of ownership in the insured.  On December 16, 1935, policies upon the life of George D. Lockhart and upon the life of Charles Lockhart were also modified so as to vest all incidents of ownership in the insured.  One of these policies was paid up and was included in the gift tax return at a value of $5,184.30, the same as the cash surrender value as reported by the insurance company.  It was valued by the Commissioner at $5,702.70.  The remaining policies were not paid up and were returned by the original petitioner at a value of $16,542.79, which was the same as the cash*871  surrender value reported by the insurance company.  They were valued by the Commissioner at $16,566.27.  All of the life insurance policies which were made the subject of gift by James H. Lockhart during 1935 were of the type requiring the annual payment of premiums either during the life of the insured or for a stated number of years.  Original petitioner had from the dates of issuance of each of the policies paid all of the premiums as and when due.  None of the policies were single premium policies.  James H. Lockhart, the original petitioner, was born on September 25, 1863, and was more than 72 years of age on November 12, 1935, the date of transfer as gifts of the various life insurance policies as mentioned above.  Insurance policies of the kind, type, and class which were assigned by James H. Lockhart in 1935 could not have been purchased by him after he reached the age of 70 years and 6 months, which would have been on March 25, 1934.  OPINION.  VAN FOSSAN: The question for determination is the value for purposes of section 506 of the Revenue Act of 1932, relating to gift tax, of the insurance policies which James H. Lockhart transferred in 1935.  The cited section*872  reads: "If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift." Petitioner included the policies in his gift tax return at the cash surrender value, according to his computation.  Respondent valued the policies in accordance with article 19(9) of Regulations 79, thereby increasing the valuation.  In , the Supreme Court rejected cash surrender value as a measure of value of a single premium policy.  Cost was used as the measure of value in that case.  In , and , decided the same day as the Guggenheim case the Court adopted replacement cost as the proper criterion of value of single premium *430  insurance policies for gift tax purposes.  The doctrine of those cases was expanded by the Circuit Court of Appeals for the Third Circuit in , to cover a gift of 20-payment life policies which were fully paid up.  Finally, in *873 , this Board applied the rationale of the Supreme Court cases and held with respect to policies which are not paid up at the time of the gift that the cost of duplicating the policies is the proper criterion of value. Petitioner has not contested the accuracy of respondent's computation under article 19(9) of Regulations 79 (1936 Edition).  It appearing that such computations are in accordance with rules of valuation laid down in the above cited cases, the action of the respondent is affirmed.  Decision will be entered for the respondent.