Hughes v. Commissioner , 44 B.T.A. 1196 ( 1941 )

ESTATE OF MARY H. HUGHES, EDNYFED H. WILLIAMS, ADMINISTRATOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hughes v. Commissioner

Docket No. 93139.

United States Board of Tax Appeals

44 B.T.A. 1196; 1941 BTA LEXIS 1213;

August 8, 1941, Promulgated

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">*1213 A contract made in 1928 with an insurance company by the decedent during life, whereby she was to receive an annuity, the fund thereafter to be used and distributed among her descendants in prescribed manner and at prescribed times, held to take effect in possession or enjoyment at or after death, and the value thereof held properly within the gross estate of decedent who died in 1935. Revenue Act of 1932, sec. 803(a).

Francis D. Butler, Esq., for the petitioner.

Frankin F. Korell, Esq., for the respondent.

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STERNHAGEN

">*1196 The Commissioner determined a deficiency of $204,187.30 in estate tax. He included in the value of the gross estate, as a transfer intended to take effect in possession or enjoyment at or after death, an ">*1197 amount representing the value of an annuity contract. The facts are all stipulated and the stipulation in hereby incorporated in the findings of fact.

FINDINGS OF FACT.

Mary H. Hughes died December 15, 1935, at the age of eighty-seven years, four months, twenty-four days. The administrator filed an estate tax return at Chicago, Illinois.

On April 16, 1928, Mary H. Hughes applied to the Sun">*1214 Life Assurance Co. of Canada for an annuity on the life of her son, Frank C. Hughes, born August 4, 1882, of $31,500 payable monthly to Mary H. Hughes and in the event of her death to her executors, administrators, or assigns. She did this for the purpose of securing a good and reasonably safe, clear income for life, and to avoid investing and handling funds. The application was delivered to the company's office at Chicago, accompanied by the single premium of $945,000. It was also accompanied by a letter from Mary H. Hughes, directing:

That the income under the contract is to be paid to me in monthly installments the first of such installments to be due and payable on the Sixteenth day of May, 1928, and to be paid to me monthly thereafter during the remainder of my lifetime.

Should the annuitant, Frank C. Hughes, pre-decease me, then I direct that the proceeds of the said policy are to be left on deposit with the Company under Option No. one of the Alternative Methods of Settlement and the income provided for in said Option No. one should be paid to me in twelve (12) equal monthly payments during the remainder of my lifetime.

At the time of my death the income in monthly">*1215 installments to which I am entitled under the terms of the contract is to be distrubuted in equal portions to my children * * * [or the surviving spouse or surviving children of a deceased child and upon the death of the survivor of the four children and their spouses, the principal sum of $900,000 is to be distributed equally in five annual installments among the granchildren or the issue of a deceased grandchild].

* * *

I direct that this Trust cannot be changed or altered and I hereby specifically renounce the right to cancel or surrender the contract or to borrow against it and I direct that there shall be no change made in the Trust which is hereby established for the benefit of my children, my grandchildren or the heirs of my grandchildren.

I am signing this statement of my instructions to enable the Law Officers to prepare a proper alteration of my application which will be in effect a Trust Agreement and these instructions are to govern only until the final draft of this permanent document has been approved and the Agreement itself properly signed by me as the owner of the Contract. At that time my instructions given herein are to be interpreted under the final Agreement">*1216 which will then be executed and form a permanent Trust.

On May 4, 1928, Mary H. Hughes executed an "Alteration of Application" in which she specified the "Amount of Death Benefit" at $900,000, and reserved the right "to change the beneficiary at any time providing the policy has not been assigned." On May 5, 1928, she executed ">*1198 a second "Alteration of Application", setting forth in detail an endorsement to be made on the policy in lieu of the beneficiary clause previously submitted. On the same day the company delivered a contract to her in Chicago, signed and sealed at its head office in Montreal, canada, dated April 23, 1928, and styled: "No. A 16938: Life Annuity With Principal Sum Payable at Death - Single Premium - With Participation." By its terms the company bound itself to pay, "in accordance with endorsation attached hereto and made part of this contract", $2,625 on May 16, 1928, and on the 16th of each succeeding month during the lifetime of Frank C. Hughes, "(herein called the annuitant)", and upon his death to pay $900,000 or "a sum equal to the premium * * * less the sum of all annuity payments" if the latter amount should exceed $900,000. All annuity">*1217 payments were to be increased by dividends allotted from the company's surplus interest earnings. All payments were to be made in Chicago in United States currency. Under option (1) the owner had the right to direct by written notice that the amount payable be:

(1) Left as a deposit with the Company during the lifetime of the beneficiary or payee bearing interest at the rate of three and one-half per cent. per annum, from the date on which the amount payable becomes due, payable at the end fo each year. At the death of the beneficiary or payee the said deposit with the interest accrued to the date of death shall be payable, unless otherwise directed in the said notice, to the executors or administrators of the beneficiary or payee. The said deposit may be withdrawn at any time by the beneficiary or payee, provided the Company has not been otherwise directed by said notice of election.

Under option (2) the amount due could be made payable in a specified number of equal monthly installments.

Attached as part of the policy were the instructions contained in the "Alteration of Application" executed on May 5, 1928. By them Mary H. Hughes directed that the amount payable on">*1218 the death of the annuitant should be left with the company in accordance with option (1) until the death of the survivor of her four children and their spouses. The annity and dividends or interest, payable monthly, beginning on May 16, 1928, were to be paid "to the owner, Mary H. Hughes" during her life and after her death, to her four children in equal parts. Precise provisions designated the surviving spouse, children, grandchildren, or brothers and sister of a child of Mary H. Hughes as successor recipients of these payments in case of a beneficiary's death. Upon the death of the survivor of the four children and their spouses, the principal then payable was to be divided into as many equal parts "as there are children then serviving of the abovementioned sons and daughter of the owner" and of a deceased son or daughter if he left surviving descendants, for distribution to them in five equal annual installments under option (2). Should all children and grandchildren of the children of Mary H. Hughes predecease ">*1199 the last survivor of her sons and daughter, the amount due was to be paid to the survivor's executors or administrators.

Should the annuitant and all">*1219 of the beneficiaries referred to above predecease the owner, then on receipt of due proof of the death of the owner, the said amount payable shall be paid to the executors or administrators of the owner.

* * *

The provisions hereof shall not be changed or altered in any way whatsoever.

At the written request of the owner, it is hereby agreed and declared that notwithstanding anything to the contrary in policy, the owner shall not have the right to surrender or assign the policy, or to borrow upon the security thereof or to change the beneficiaries or beneficiary thereunder.

When Mary H. Hughes died, the foregoing instrument was in full force and effect without change, and she was survived by the beneficiaries specifically named in it. The names and ages on April 23, 1928, and May 5, 1928, of these beneficiaries and of their issue were as follows:

Name	Age
George A. Hughes	57
Meta S. Hughes (wife of George)	57
Mary Hughes Call (daughter of George)	37
Mary Jane Call (child of Mary)	14
Hughes Call (child of Mary)	12
William V. Hughes	48
Margaret Hughes (wife of William)	47
Elizabeth Hughes Mackey (child of William)	23
Alexander Haggart Hughes (child of William)	20
William Haggart Hughes (child of William)	16
Frank Haggart Hughes (child of William)	15
Frank C. Hughes	46
Helen Hughes Dulaney	43
George Dulaney (husband of Helen)	44

">*1220 None of the above persons has died. The following additional beneficiaries were living at decedent's death:

Born

Alexander Brooks Hughes (son of Alexander Haggart Hughes) May 14, 1934 Bruce Alexander Mackey, Jr. (son of Elizabeth Hughes Mackey) - May 2, 1935

When Mary H. Hughes entered into the contract, being then nearly eighty years of age, the chances shown by the "Actuaries' or Combined Experience Table of Mortality" of a woman of her age surviving this specific number of beneficiaries at their respective ages were four in one thousand billion, and at the age of eighty-seven the changes of survival were three in ten thousand billion.

The premium of $945,000 for the contract was computed by the company on the basis of the "British Offices Select Life Annuity Table" for a man forty-six years of age, reflecting interest at 3 1/2 percent and expenses of 5 percent, and was composed of $498,672 for annuity benefit and $446,328 for assurance benefit. This division of the total premium ">*1200 was reflected on the company's records and tax returns. In states which do not impose a tax on premiums received for annuities, the company reports as a premium subject to">*1221 tax only the assurance portion of such premiums as that collected from Mary H. Hughes. In states where taxes are levied on annuity premiums and a credit against taxable income is allowed for annuity premiums refunded, the surrender value of policies similar to that of Mary H. Hughes is split into assurance and annuity portions, and a credit is claimed by the company on account of any refund which may be made of the value of the annuity. At the time of Mary H. Hughes' death the value, according to calculations based on the "British Offices Select Life Annuity Tables", of the annuity benefit under the contract was $401,346, and the value of the assurance benefit was $498,654; a total of $900,000.

The present worth of the right to receive $900,000 at the end of the year of death of the survivor of seven persons aged 51, 52, 54, 55, 56, 65, and 65 years respectively, is $286,200. The present worth of the right to receive an income of $36,000 from $900,000 at the end of each year survived by at least one of such persons is $602,355.60. The present worth of $900,000 due at the death of the survivor of seven persons aged 51, 52, 53, 55, 56, 65, and 65 years, respectively, is $284,382. ">*1222 The present worth of the right to receive an income of $36,000 from $900,000 at the end of each year survived by at least one of such persons is $604,246.32.

OPINION.

STERNHAGEN: The decedent died in 1935, and the question is whether her estate was subject to the Revenue Act of 1932, section 803(a), which was a modification of section 302(c) of the Revenue Act of 1926. In 1928, at a cost of $945,000, she had made a contract with the insurance company by which she received the company's promise to pay her $2,625 a month for her life and, after her death, to dispose of $900,000 in a prescribed manner among her children, grandchildren, and great-grandchildren. None of the descendants had possession or enjoyment of any part of the find or its income during the decedent's lifetime, although they did have a vested right in a future expectancy. The practical effect upon them of her contract necessarily came after her death. If, instead of making her contract with the insurance company, she had in 1928 given $945,000 to the children, or someone representing them, and had taken their promise not to use it during her lifetime except to pay her $31,500 a year until she died, this would">*1223 certainly have been a gift to take effect in possession or enjoyment at or after her death, even though ownership of the fund vested in the children at once, ; affd., .

But this plain understanding has become involved in refinements so ">*1201 that the language has lost its simple meaning. It is said that because the contract was made in 1928 the children acquired their rights then, that the rights were irrevocably vested during the decedent's life, that her death added nothing to those rights, and, since this was the extant legal conception when the decedent made her transfer, it is the only conception which may be recognized in taxing her estate. The answer is that, although she created rights, the possession or enjoyment of the property did not take effect before she died. There is no need to give serious consideration to the negligible right which she retained to receive back the fund on the infinitesimal chance that she would survive her descendants. Such a remote possibility may properly be disregarded.

">*1224 , supports the petitioner's contention that the rights which were transferred by the creation of the 1928 contract were vested at the time, and that nothing may be regarded as taking effect in possession or enjoyment at or after the decedent's death. That decision was immediately devitalized as to the future by Congressional enactment. The resolution of March 3, 1931, provided that a transfer whereby the transferor retained the income from the property for the rest of his life was to be regarded as a taxable transfer, notwithstanding that it effected a vesting of title during his lifetime. But the resolution, which was embodied in the statute by section 803(a) of the Revenue Act of 1932, was confined to later transfers, the Supreme Court holding that it was not intended to have retroactive application to transfers made during life prior to its enactment, even though the transferor died afterwards, .

More recently, however, the application of the estate tax has been held by the Supreme Court to be affected not so much by the common law refinements of conveyancing as by the practical">*1225 effect of the transfer. In , the Court, having in mind "the controlling purposes of the estate tax law", reiterated the broad principle announced in , in the following language:

Nothing is to be gainted by multiplying words in respect of the various niceties of the art of conveyancing or the law of contingent and vested remainders. It is perfectly plain that the death of the grantor was the indispensable and intended event which brought the larger estate into being for the grantee and effected its transmission from the dead to the living, thus satisfying the terms of the taxing act and justifying the tax imposed.

From the Hallock case it must be inferred that the divesting of legal title in 1928 when the contract was made is not the determinant of the time when the transfer became effective in possession or enjoyment. Specifically, the Hallock decision overruled only , and ">*1226 , but the reasoning leads to the belief that , may no longer be followed. May v. Heiner treated the vesting of title in another during life while retaining the income thereof until death as sufficient to prevent the inclusion of the property in the gross estate, an interpretation whereby the actual possession or enjoyment of the property is subordinate to the bare legal title. It is hard to see how this interpretation can survive the Hallock case. Cf. . The effect of , was no more than to reaffirm the doctrine of , in respect of any inter vivos transfer of title which occurred before the adoption of the resolution of March 3, 1931; and without , it has no remaning force.

The inclusion of the value of the present contract in the decedent's gross estate is supported by ">*1227 . The Supreme Court, holding that an alleged insurance policy was, in truth, an annuity contract not affected by the $40,000 insurance exemption of section 302(g), held further that the sums payable to beneficiaries were taxable under section 302(c) - the section which is in controversy here - as transfers to take effect in possession or enjoyment at or after death.

In view of the reasoning upon which we think this decision must rest, we have refrained from discussion of the elaborate arguments of counsel. If our view of the construction of the language of the statute in the light of the recent opinions of the courts is disapproved, it would seem to follow that the Commissioner's determination must be reversed; for the earlier decisions clearly pointed to the exclusion from the gross estate of property of which the decedent had before March 3, 1931, made a complete inter vivos transfer, reserving to himself only the income during his life.

Reviewed by the Board.

Decision will be entered under Rule 50.

LEECH

LEECH, dissenting: In May v. Heiner,281 U.S. 238">281 U.S. 238, the Supreme Court">*1228 held that retention by the grantor of the income for life of an irrevocable trust does not justify the inclusion of the corpus of the trust in the estate of the grantor for estate tax purposes. In Hassett v. Welch,303 U.S. 303">303 U.S. 303, the same Court held that the Joint Resolution of Congress adopted March 3, 1931, which negatived that holding, could not be retroactively applied. Those cases have been leading authorities for many years in a matter of general importance.

The facts in the present case are admittedly identical with those in , as supplemented by Upon the authority of , the majority holds that those cases are no longer law. This is the first pronouncement to that effect. Since the decision in the Hallock case, the courts ">*1203 and the Board, in at least four cases, have held just the opposite. (C.C.A., 2d Cir.); ">*1229 (C.C.A., 3d Cir.); (U.S. Dist Ct., S. Dist. N.Y.); and .

The attitude of the Circuit Court of Appeals for the Third Circuit is interesting on the point. In the Kellogg case, supra, an estate tax was proposed under section 302(c) of the Revenue Act of 1926, as amended by section 803 of the Revenue Act of 1932. The question was whether or not the value of the corpus of a trust irrevocably created on March 2, 1926, to which all its property had been transferred before October 1, 1929, was includable in the gross estate of the deceasedgrantor for estate tax purposes. The grantor had retained the income of the trust for life and, upon the remote contingency that all the remainder beneficiaries predeceased the survivor of the grantor and his wife, the corpus was then to go to the surviving next of kin of the grantor.

The majority opinion here, as does the court in the Kellogg case, disregards the "remote possibility" of the grantor receiving back the corpus. However, it purceeds">*1230 to tax the value of the corpus of the present trust to the grantor under the literal wording of section 302(c) of the Revenue Act of 1926, as amended by section 803(a) of the Revenue Act of 1932, which is the identical section considered in both the foregoing cases.

This position, it seems to me, was exactly the argument made by the petitioner in the Kellogg case under his second point there. The Third Circuit, in holding against the Government in that case, unanimously said:

The petitioner further contends that even if he is in error in urging that the corpus of the trust is includible in the grantor's estate under the principles of Helvering v. Hallock, none the less the transfer was a substitute for the testamentary disposition of the grantor and, in the words of the statute, was "intended to take effect in possession or enjoyment at or after his death." In short the petitioner relies on the exact language of the statute. His difficulty in sustaining this contention arises also with May v. Heiner and becomes insurmountable, so far as this court is concerned, when we contemplate the decision in ">*1231 . If the words of the statute just quoted are to receive the meaning contended for by the petitioner, they must receive it from the Supreme Court.[Emphasis supplied.]

In the face of these authorities, it would seem that the Board of Tax Appeals should certainly be no less hesitant than the Third Circuit Court of Appeals. See also (C.C.A., 2d Cir). I think the Board should follow , and

ARUNDELL, SMITH, and BLACK agree with this dissent.