Appeal from the United States Tax Court, Washington, D.C. Tax Court No. 12150-82.
Before: SEITZ, WEIS, and ROSENN, Circuit Judges.
This appeal presents two questions related to federal estate taxes.*fn1 The primary question is whether the decedent, Willard F. Rockwell, possessed incidents of ownership in eight life insurance policies on his life at the time of his death. The tax court held that he did and that the insurance policies were includable in his gross estate for tax purposes. The second question concerns gifts made by the decedent several years before his death: is the appreciation on the gifts in the hands of the donees includable in the decedent's gross estate for tax purposes? The tax court held that the appreciation on the gifts, even though the gifts themselves were excludable from the gross estate, was taxable and we affirm. As for the primary question, we conclude that the tax court erred and that the eight life insurance policies are not includable in the decedent's gross estate.
All facts relevant to this appeal have been stipulated by the parties.
In 1928 Rockwell purchased eight insurance policies on his life issued by the Northwestern Mutual Life Insurance Company. Six months later, using a form provided by Northwestern Mutual, he assigned his right, title, and interest in each of the policies to his wife, Clara T. Rockwell (Clara), for her "exclusive use and benefit." He retained, however, the right to veto any designation of a person who did not have any insurable interest in his life as a beneficiary or an assignee. Rockwell's assignment reads, in pertinent part:
THE POWER TO EXERCISE ALL RIGHTS AND PRIVILEGES conferred upon the insured by the terms of said policies shall be vested solely in the said assignee, her executors, administrators, or assigns, and not in the insured, except that without the written consent of the insured no one shall be designated as beneficiary or contingent beneficiary who has not an insurable interest in his life, nor shall the said policies be assigned to any one (other than The Northwestern Mutual Life Insurance Company as security for a policy loan) who has not such insurable interest.
Shortly after, Clara executed a trust agreement, to which Rockwell consented, designating the Union Trust Company (now the Mellon Bank, a co-executor of Rockwell's estate and a petitioner in this appeal) as a corporate trustee beneficiary of the eight life insurance policies. She assigned the policies to Union Trust as trustee, with her and Rockwell's children named as beneficiaries. The trust agreement allowed the trustee to assign the trust property, which included the insurance policies, without limitation, so long as the assignments were "for the sole benefit of the beneficiaries." Clara waived the right to change the beneficiaries, but reserved the right to revoke the trust in whole or part during Rockwell's life. IN effect, this meant she had the power to change beneficiaries. She restated the trust agreement in 1957 to include the issue of four of the five Rockwell children as beneficiaries, and amended the agreement in 1962 to include the issue of the fifth child. She deposited bonds in the trust to pay the premiums on the policies.
Clara died in 1965, with the trust agreement in full force. The Commissioner of Internal Revenue (Commissioner) concedes that with her death, the designation of beneficiaries to the policies became irrevocable, Rockwell's power to veto a change of beneficiaries having thereby become a nullity. At issue in this appeal is Rockwell's retained power to veto the assignment of the policies by the trust to a person lacking an insurable interest in his life.
As to the other issue, Rockwell made fifty-eight gifts of corporate stock in 1977. The gifts were each worth $3,016, and the first $3,000 of each gift is excludable by statute from Rockwell's estate. The executors of his estate (taxpayer) contend that the amount that each gift appreciated before Rockwell's death, or $508 a gift, is also excludable.
Rockwell died in 1978 at the age of 90. He was incompetent for the last nine months of his life, but his son, Willard Rockwell, Jr. (a co-executor of Rockwell's estate and a petitioner in this appeal) had a general power of attorney granted by Rockwell in 1947. The trustee never attempted to assign the policies.
The taxpayer excluded the proceeds of the policies and the appreciation of $508 on each of the 58 excludable gifts of stock from its estate tax return. The Commissioner assessed a deficiency, finding that some $270,000 for the policies and some $30,000 for the appreciation of the gifts should be included in Rockwell's gross estate. The taxpayer sued in tax court, which held that Rockwell's power to veto assignment of the policies to persons lacking an insurable interest was an incident of ownership and that appreciation on excludable gifts was not excludable from the gross estate. The parties stipulate that the alleged estate tax deficiency on the excluded items is approximately $76,000.
The Supreme Court first applied an incidents of ownership test to life insurance in Chase National Bank v. United States, 278 U.S. 327, 335, 73 L. Ed. 405, 49 S. Ct. 126 (1929). In finding that a decedent's retained power to revoke a policy on his life or change its beneficiary justified including the policy in the decedent's gross estate, the Court noted that "until the moment of death the decedent retained a legal interest in the policies which gave him the power of disposition of them and their proceeds as completely as if he were himself the beneficiary of them." 278 U.S. at 334.*fn2 The purpose of an incidents of ownership test is to prevent the decedent from enjoying the effective ownership of property until death, ...