Equitable Life Assurance Soc. v. Commissioner , 46 B.T.A. 586 ( 1942 )

THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Equitable Life Assurance Soc. v. Commissioner

Docket No. 106089.

United States Board of Tax Appeals

46 B.T.A. 586; 1942 BTA LEXIS 848;

March 11, 1942, Promulgated

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A decedent procured certain insurance policies upon his own life from the petitioner herein. He retained the right to change the beneficiary named in the policies, but never exercised that right. The respondent determined a deficiency against decedent's estate. Administration on that estate has been concluded, no part of the deficiency has been paid, and no assets remain in the estate for its payment. Respondent proposes to assess that liability, together with interest thereon, against petitioner insurance company. Held, petitioner is not liable for the tax and interest in question as transferee.

Hugh McD. Ritchey, Esq., for the petitioner.

Donald P. Moyers, Esq., for the respondent.

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TYSON

The respondent determined a liability of $3,953.01 against petitioner as trustee and transferee of certain proceeds of insurance upon the life of Byron Webster Beatty, deceased; such liability being the amount of the liability of the estate of Beatty for estate tax which had not been discharged. The petitioner assigns error in this determination.

The proceeding was submitted upon facts stipulated by the parties. We find the facts as so stipulated and such of those facts as are not set forth herein are incorporated by reference.

FINDINGS OF FACT.

The petitioner, the Equitable Life Assurance Society of the United States, is a life insurance company organized and existing under the laws of the State of New York, with its principal office in New York, New York.

Byron Webster Beatty, hereinafter sometimes referred to as Beatty, died, intestate, on September 15, 1935, when he was a resident of Dayton, Ohio, and Helen Beatty, his wife, was appointed, on September 23, 1935, as administratrix of his estate.

On March 14, 1937, a Federal estate tax return was filed on behalf of Beatty's estate, showing a gross estate in the amount of $169,636.81. In the amount of the gross estate as so shown there was included a total amount of $106,319.65 life insurance on certain policies of insurance on Beatty's life. A Federal estate tax liability was reported on the estate tax return and paid, as so reported, in the amount of $4,652.05.

On June 20, 1938, the respondent determined a deficiency of $3,953.01 in Federal estate tax due from the estate of Beatty. The estate appealed from such determination to this Board, as a result of which, under stipulation of the parties, the Board, on June 2, 1939, entered its order that there was a deficiency of $3,953.01 in Federal estate tax due from the estate. The estate of Beatty has been fully administered, all its property distributed, and the administratrix discharged, but no part of the $3,953.01 deficiency in estate tax has been paid, and there remain no assets in the estate with which to pay such deficiency.

In 1935 petitioner issued to Beatty as insurance on his life three "Twenty Payment Life" insurance policies, to wit: One numbered 7,535,701, in the face amount of $49,928; one numbered 7,551,855, in the face amount of $4,895; and one numbered 7,535,702, in the face amount of $27,618.

Insured's wife, Helen Beatty, was named as the beneficiary in each of the three above mentioned policies and Beatty reserved in each the right, as the insured, to change the beneficiary or assign the policies, but he never exercised either of those rights.

Each of the three insurance policies provided for optional modes of settlement in lieu of payment in lump sum of the face amount thereof, as follows:

MODES OF SETTLEMENT AT MATURITY OF POLICY.

The Insured may elect to have the net sum due under this policy upon its maturity applied under one or more of the following optional modes of settlement in lieu of the lump sum provided for on the first page hereof, and in the absence of such an election by the Insured, the beneficiary, after the Insured's death, may so elect. The beneficiary, after the Insured's death, may designate (with the right to change such designation) the person to whom any amount remaining unpaid at the death of the beneficiary shall be paid if there be no such person designated by the Insured and surviving. Such election, designation or request for change shall be in writing and shall not take effect until filed with the Society at its Home Office and endorsed upon the policy or the supplementary contract, if any.

1. DEPOSIT OPTION: Left on deposit with the Society at interest guaranteed at the rate of 3% per annum, with such Excess Interest Dividend as may be declared.

2. INSTALLMENT OPTION: * * *

3. LIFE INCOME OPTION: Converted into a Life Income for TWENTY YEARS (20 Years Certain) CERTAIN and continuing during the remaining lifetime of the beneficiary for a fixed amount annually as shown in the following table.

4. LIFE INCOME OPTION: * * *

(10 Years Certain)

EXCESS INTEREST DIVIDEND: The foregoing Options are based upon an interest earning of 3% per annum; but if in any year the Society declares that funds held under such Options shall receive interest in excess of 3% per annum, * * * the amount of income during the fixed period of Twenty or Ten years under Options 3 and 4 respectively for the year, shall be increased by an Excess Interest Dividend as determined and apportioned by the Society.

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If one of the foregoing Options be elected, this policy must be surrendered upon its maturity and a supplementary contract issued for the purpose of carrying out said Option.

On or about November 5, 1935, Helen Beatty, the beneficiary under the three above mentioned policies, filed with the petitioner a written request: (1) To apply $40,000 of the proceeds of the three policies as set forth in option 3 of the "Modes of Settlement At Maturity Of Policy" provided for in such policies; (2) to apply $35,000 of the proceeds of the policies on the payment of a single premium 20-year endowment policy on her own life; and (3) to pay the balance of the proceeds to her in cash. Upon receipt of the request of Helen Beatty the petitioner, in accordance with its practice and custom, issued to her its income bond dated December 2, 1935, evidencing its obligations under insurance policy No. 7,535,701 pursuant to her election of option 3 in that policy's "Modes of Settlement At Maturity Of Policy." The bond provided for monthly payments of $162.40 for 20 years certain and during her remaining lifetime to the primary beneficiary in the bond, Helen Beatty (who was also the beneficiary in the policy), and if she died within the 20 years, for monthly payments of like amounts to certain contingent beneficiaries as theretofore requested in writing by Helen Beatty.

The application of $40,000 of the proceeds of policy No. 7,535,701 under the life income 20-year certain plan covered by option 3 produced monthly payments of $162.40 commencing as of October 30, 1935, but by reason of the withdrawal of $1,500 such monthly payments were reduced, as of March 30, 1941, to $151.79, which latter monthly payment is the present amount payable on the bond of petitioner issued under option 3.

Pursuant to the request of Helen Beatty, the balance of the proceeds of the three policies left, after the application of the $40,000, and the cash payment above mentioned, to wit: $2,487 on policy No. 7,535,701; $27,618 on policy No. 7,535,702; and $4,895 on policy No. 7,551,855, were applied to the purchase of a single premium 20-year policy by Helen Beatty on her own life. Thereafter, that policy on the life of Helen Beatty was divided into other policies of similar form, all of which were, on or about October 13, 1939, surrendered by the insured, Helen Beatty, to petitioner for their cash surrender values plus additional dividend items, all of which were paid by petitioner.

By a notice of transferee liability addressed to petitioner, dated October 9, 1940, the respondent asserted a liability against the petitioner in the amount of $3,953.01, plus interest as provided by law, based upon a determination by respondent that the petitioner was liable for said amount as trustee and transferee of the estate of Byron Webster Beatty, deceased.

OPINION.

TYSON: Respondent contends: (1) That petitioner is liable at law as trustee and/or transferee of the estate of Byron Webster Beatty for the deficiency of $3,953.01 in Federal estate tax on that estate, together with interest thereon; or (2) that petitioner is so liable as a transferee of the transferee (Helen Beatty, beneficiary in the insurance policies). These contentions are based upon the application of section 315 of the Revenue Act of 1926, as amended by section 803(c) of the Revenue Act of 1932, and of section 316 of the Revenue Act of 1926, the material parts of those sections being printed in the margin. ¹

Petitioner contends: (1) That no assets of the estate of Byron Webster Beatty have been transferred in trust or otherwise to it; and (2) that petitioner is not trustee or transferee of the estate of Byron Webster Beatty or transferee of a transferee, but owes money under the terms of its written contract; its relationship to Helen Beatty and the contingent beneficiaries under its income bond and under its contracts of insurance being that of debtor and creditor.

The parties are in agreement, on brief, that the only amount with regard to which there is presented the question of whether petitioner received such amount as trustee, transferee, or transferee of a transferee is $40,000, part of the proceeds of policy No. 7,535,701 which was received, or retained, by petitioner through election by Helen Beatty, beneficiary therein, under option 3 in that policy; so our inquiry as to whether or not petitioner received any amounts whatsoever as trustee, transferee or transferee of a transferee, so as to render it liable for the amount here involved, is narrowed to the inquiry of whether or not it so received the $40,000 of the proceeds of policy No. 7,535,701.

Did petitioner receive and hold the $40,000 proceeds from policy No. 7,535,701 as trustee? We think it is so obvious that it did not so receive and hold such amount as to require but little consideration of the question. The $40,000 was received by petitioner through the surrender of the fixed, determined and accrued right thereto of Helen Beatty, beneficiary in the policy, in exchange for petitioner's obligations incurred to Helen Beatty and the contingent beneficiaries as evidenced by its bond. This bond, executed in compliance with Helen Beatty's election under "Modes of Settlement At Maturity Of Policy" in policy No. 7,535,701, to convert the proceeds of the insurance policy under option 3 into a life income for 20 years certain and continuing thereafter during her life, with contingent beneficiaries should she die within the 20 years, did not, in our opinion, create the status of a trustee for petitioner herein, but created merely the relation of debtor and creditor as between petitioner and those parties. Cf. , and authorities therein cited.

Did petitioner receive and hold the $40,000 proceeds from policy No. 7,535,701 as such a transferee of Byron Webster Beatty, or his estate, as would render petitioner liable, under the applicable statutes, for the tax here sought to be imposed? We are of the opinion that it did not.

At the time of his death the insured had not elected option 3 provided for in the policy as a mode of settlement by the insurer of its liability at maturity of the policy on the death of the insured. Thus, at the time of the insured's death the beneficiary, Helen Beatty, had the fixed and determined right to be paid a lump sum in the face amount of the policy at the death of the insured and the insurance company was absolutely liable to her at that time in such lump sum. At that time the insurance company had no semblance of a right to retain in its possession the $40,000 for any purpose whatsoever. Such right of the insurance company arose for the first time when Helen Beatty, the beneficiary in the policy, then having the fixed and determined right to payment of the proceeds thereof in a lump sum, exercised another right vested in her, under the provisions of the policy, by giving written directions taht the $40,000 lump sum be applied as a payment by her to the insurance company for a supplemental contract between that company and her, as evidenced by that company's bond.

It is thus clear that the $40,000 of the proceeds of policy No. 7,535,701 was not received by petitioner insurance company by reason of a transfer to it by either Byron Webster Beatty or his estate, which primarily owed the tax here sought to be recovered from petitioner as transferee. It is equally clear that the $40,000 was received by the insurance company from Helen Beatty in exchange for its obligation, evidenced by its bond, to pay ber monthly payments for 20 years certain and continuing throughout her lifetime, or, to pay certain amounts to contingent beneficiaries named by her.

The remaining question is whether the petitioner insurance company is such a transferee of a transferee (Helen Beatty, beneficiary in policy No. 7,535,701) of the $40,000 as would render it liable under the statutes relating to such liability.

Helen Beatty was the specific beneficiary under the policy executed by decedent and as such she was the transferee of the $40,000 as provided in section 315(b), supra, cf. ; and while the $40,000 was received by petitioner by transfer from such transferee and in a literal sense petitioner was thus a transferee of a transferee, we are of the opinion that petitioner was not such a transferee of a transferee as would render it liable under the statutes applicable to a transferee's liability; and for the reason that, as a consideration for the receipt or retention by it of the $40,000 petitioner undertook a supplemental obligation as evidenced by its bond for monthly payments to the beneficiaries named therein. We are of the opinion that the obligation thus incurred by petitioner under its bond constituted a full and adequate consideration for the $40,000 received or retained by petitioner insurance company, and hold that petitioner is not such a transferee of a transferee as would render it liable under the statutes applicable to transferee's liability.

The sole authority relied upon by respondent to sustain his contentions is That case is not controlling here, for it is clearly distinguishable on its facts. There the entire lump sum of the proceeds of the policies involved, immediately upon the death of the insured and at his direction, came into the ownership and possession of the insurance companies, which were to make certain periodic payments of such proceeds to the beneficiaries as directed by the insured, and thus, in effect, the insurance companies received the proceeds by transfer directly from the insured. Here the petitioner insurance company received the $40,000 solely by transfer from a person other than the insured, which person had the absolute right at the time of the transfer, as beneficiary under the policy, to do as she chose with the $40,000. She chose to transfer the $40,000 to the petitioner insurance company in exchange for the latter's bond.

We hold that the respondent erred in his determination.

Decision will be entered for the petitioner.

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Footnotes

• 1. SEC. 315. (b). If (1) except in the case of a bona fide sale for an adequate and full consideration in money or money's worth, the decedent makes a transfer, by trust or otherwise, of any property in contemplation of or intended to take effect in possession or enjoyment at or after his death, or makes 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 (A) the possession or enjoyment of, or the right to the income from, the property, or (B) 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, or (2) if insurance passes under a contract executed by the decedent in favor of a specific beneficiary, and if in either case the tax in respect thereto is not paid when due, then the transferee, trustee, or beneficiary shall be personally liable for such tax, and such property, to the extent of the decedent's interest therein at the time of such transfer, or to the extent of such beneficiary's interest under such contract of insurance, shall be subject to a like lien equal to the amount of such tax. Any part of such property sold by such transferee or trustee to a bona fide purchaser for an adequate and full consideration in money or money's worth shall be divested of the lien and a like lien shall then attach to all the property of such transferee or trustee, except any part sold to a bona fide purchaser for an adequate and full consideration in money or money's worth.

  SEC. 316. (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):

  (1) The liability, at law or in equity, of a transferee of property of a decedent or donor, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed by this title or by any prior estate tax Act or by any gift tax Act.

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  Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.

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  (e) As used in this section, the term "transferee" includes heir, legatee, devisee, and distributee. ↩