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FIDELITY-PHILADELPHIA TRUST CO. v. SMITH

June 27, 1956

FIDELITY-PHILADELPHIA TRUST COMPANY and Robert B. Haines, III, Executors of the Will of Mary H. Haines, Plaintiffs,
v.
Francis R. SMITH, Collector of Internal Revenue, Defendant



The opinion of the court was delivered by: KRAFT

Plaintiffs seek to recover from the Collector of Internal Revenue a refund of estate tax deficiency assessed against and paid by the estate of Mary H. Haines, deceased, in the amount of $ 103,280.84 with interest. Detailed factual admissions, stipulations and findings are filed contemporaneously.

In April, 1934 Mrs. Haines, then aged 76, purchased a single premium life insurance policy in the amount of $ 200,000 for a premium of $ 179,358. On the same day she purchased from the same insurance company for a premium of $ 40,642 a non-refundable annuity contract which provided an annual payment of $ 5,026 to her for life, any balance on her death reverting to the company. In October, 1934 Mrs. Haines purchased from the same company another single premium life insurance policy in the amount of $ 100,000 for a premium of $ 90,642. On the same day she also purchased from that company for a premium of $ 19,358 a non-refundable annuity contract which provided an annual payment of $ 2,440.64 to her for life, any balance at her death reverting to the company.

 Both life insurance policies issued by this company designated as equal primary beneficiaries the four named children of Mrs. Haines and designated the Fidelity-Philadelphia Trust Company, as trustee under a trust agreement, as contingent beneficiary of the share of any of the children of Mrs. Haines who predeceased her. Pursuant to her written application for the policies each of these two life policies was issued designating her as the 'Insured' and containing the provision noted in the margin. *fn1"

 Later in October, 1934 Mrs. Haines purchased from a different company a third single life insurance policy in the amount of $ 50,000 for a premium of $ 43,491. On the same day she purchased from that company for a premium of $ 10,509 a non-refundable annuity contract which provided an annual payment of $ 1,295.56 to her for life, any balance at her death reverting to the company. Mrs. Haines' four children were named as beneficiaries of this life policy in which she reserved no right to change the beneficiaries; however, as issued, the policy proceeds were payable to her executors or administrators if her four children predeceased her. Thereafter, by assignment, Mrs. Haines included this life policy in a schedule forming part of the trust agreement between her and Fidelity-Philadelphia Trust Company and thereupon nominated that company, as trustee, to be contingent beneficiary of the policy which was amended so to provide on November 22, 1934. Under the terms of the trust agreement Mrs. Haines had reserved to herself all benefits, privileges and options available to her under this life policy including the rights of dividend receipt, assignment and surrender. She had reserved also the right to change, amend or revoke the trust agreement. On July 6, 1938 Mrs. Haines amended the trust agreement by assigning irrevocably to the trustee for the purposes of the trust all her right, title and interest in this and any other policy under the trust and by irrevocably empowering the trustee to exercise and enjoy all options, benefits, rights and privileges under this and other policies. By the same amendment she further provided that the trust agreement as so amended was thereafter unalterable and irrevocable. After July 6, 1938 neither Mrs. Haines nor her estate had any beneficial or reversionary interest in the trust or any reversionary interest in any of the three life policies.

 In 1935 the four children filed appropriate returns reporting the receipt by each, as gifts from their mother, of a one-fourth interest in each of the life policies. In the same year Mrs. Haines suitably reported gifts of the three life policies to her children and paid gift taxes thereon.

 The insurance companies required that the annuity contracts be purchased as a condition of issuance of the respective life policies. The annuity contracts and the annuity payments made to Mrs. Haines thereunder were not based upon or in any way dependent on the premiums paid by her for the respective life policies. The insurance companies would have issued these annuity contracts to Mrs. Haines or to any other person of her age for the same premiums without purchase of any life policies.

 The deficiency assessment and the denial of the plaintiffs' refund claim were based on the contention that the life insurance policies were an investment rather than life insurance and that the value was taxable in decedent's gross estate under Section 811(c) of the Internal Revenue Code, 26 U.S.C. § 811(c), *fn2" either as transfers intended to take effect in possession or enjoyment at or after death or as a transfer in decedent's lifetime of property, the right to income from which the decedent retained for life.

 The defendant's earlier position, that the value of the three life policies were includible in the decedent's gross estate as transfers intended to take effect in possession or enjoyment at or after her death, appears to have been abandoned by the defendant in his brief and oral argument.

 Determination of whether the value of the life policies are includible in decedent's estate as a transfer in her lifetime of property, the income or right to income from which she retained for life, involves a consideration of the applicability and rationale of the conflicting decisions upon which plaintiffs and defendant rely. Plaintiffs' prime dependence is upon Bohnen v. Harrison, 7 Cir., 199 F.2d 492. *fn3" Defendant is afforded support by Burr v. Commissioner of Internal Revenue, 2 Cir., 156 F.2d 871; *fn4" Conway v. Glenn, 6 Cir., 193 F.2d 965, and Estate of Reynolds v. Commissioner, 45 B.T.A. 44.

 In the Burr case the decedent purchased three life policies and an annuity contract and irrevocably assigned the life policies to his children. The Court said:

 'The two purchases were obviously a single transaction, the annuity premium being part of the consideration for the insurance policies. Unless differentiated because of the subsequent assignment, therefore, the case is squarely within the Supreme Court's decision in Helvering v. Le Gierse, 312 U.S. 531, 61 S. Ct. 646, 85 L. Ed. 996, holding the proceeds of the policies taxable under § 811(c).'

 With this construction of the Le Gierse case I am unable to agree. In Le Gierse, the life policy and annuity contract were similar to those in the instant case. However, that decedent had never assigned the life policy and still owned it at his death. It was payable to his daughter as beneficiary. His estate contended only that the policy proceeds were 'insurance' and, being within the $ 40,000 exemption, were not includible in the estate. No contention appears to have been made by the estate in Le Gierse that the policy proceeds were not taxable as a transfer intended to take effect at death, if the proceeds were not 'insurance.' The basic question before the Supreme Court was whether the policy proceeds constituted an amount "receivable as insurance" within the meaning of § 302(g) of the Revenue Act of 1926. The Supreme Court held that, for purpose of determining whether the proceeds of the life policy were 'insurance' within the meaning of § 302(g) the life insurance policy and the annuity contract must be read together, and that, so read, no essential element of risk existed and, hence, the proceeds were not true 'insurance.' The Supreme Court did not say that the two contracts were for all purposes indivisible or inseparable as the Burr and Conway v. Glenn cases decide. On the contrary the right of policy assignment was expressly recognized *fn5" in Le Gierse, but was deemed immaterial to the question of insurance risk then under consideration.


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