Opinion
Docket No. 9449.
1947-05-22
ESTATE OF JOHN L. WALKER (DECEASED), RUBY SOELLNER WALKER, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
J. Merrill Wright, Esq., and J. Stanton Carson, Esq., for the petitioner. Homer F. Benson, Esq., for the respondent.
The decedent took out policies of insurance on his own life under which he could direct that the proceeds should be paid in the face amount of the policies or in periodic installments to the beneficiary. He elected to have the proceeds paid to his wife, the beneficiary, in monthly installments for life. However, up to the time of his death he reserved the right to change the beneficiaries and the method of payment of the proceeds. The lump sum which could have been payable under the policies at decedent's death was not in excess of what it would have cost to purchase an annuity contract similar to the one transferred to the wife under the policies. Upon the question of the value of the insurance to be included in the gross estate it is held that the value of the insurance is the one sum payable at death under an option which could have been exercised by the decedent. J. Merrill Wright, Esq., and J. Stanton Carson, Esq., for the petitioner. Homer F. Benson, Esq., for the respondent.
Respondent determined a deficiency in estate tax in the amount of $8,654.15. It is conceded that two life insurance policies are includible in the gross estate. The only question in issue is the value of the two policies for estate tax purposes.
The estate tax return was filed with the collector at Pittsburgh, Pennsylvania.
FINDINGS OF FACT.
The facts have been stipulated, and the stipulation is incorporated herein by reference and adopted as part of our findings of fact.
The decedent, John L. Walker, died testate on April 30, 1944, a resident of Pittsburgh. Petitioner is the duly qualified executrix under the will of the decedent. The decedent was survived by his wife, Ruby Soellner Walker, and by two daughters. The decedent took out two policies of insurance on his own life, on October 25 and November 19, 1941, in the respective face amounts of $50,000 and $30,000, the policies being issued by the John Hancock Mutual Life Insurance Co. The two policies were identical in terms except for the differences in the face amounts thereof. Each policy required the payment of premiums for ten years.
Ruby Walker, wife of the insured, originally was named the beneficiary of each policy, with the right reserved to the insured to change the beneficiary. On January 24, 1942, the decedent named Ruby S. Walker and his daughters, Helen W. Empfield and Mary W. Rogers, and the children of the daughters, the beneficiaries of the policies. Up to the time of his death, the decedent retained the right to change the beneficiaries of the policies, but he did not exercise such right, and those named above remained the beneficiaries of each policy.
The policies provided that, in lieu of a lump sum payment of the face amount of each policy upon the death of the insured, the insured might elect to have payment made in accordance with optional methods of settlement. Under these optional methods of settlement the proceeds of the policies could be (1) left on deposit with the insurance company, or (2) the beneficiary could receive equal payments for a stipulated number of years for each $1,000 of the net sum payable, or (3) the beneficiary could receive equal payments for ten years and thereafter as long as the payee lives for each $1,000 of the net sum payable.
The decedent, under a written notice, elected to have the two policies settled under option 3. Although he retained the right to change the election of settlement of the policies up to the time of his death, he did not make any change in his election. The decedent made his election under a ‘Nomination of Beneficiary and Election of Settlement Option‘ dated January 24, 1942, which instrument provided as follows:
The insured directs that the aggregate amount payable under such of said policies as shall be in force at his death, provided his said wife is living, shall be paid in accordance with Option Three (3) of the settlement options of said policies and the provisions of said policies relating thereto, by one hundred and twenty (120) monthly instalments to his said wife, and thereafter during her lifetime.
If, however, said wife is not living at the death of the insured, or in the event of her death thereafter and before payment in full of said one hundred and twenty (120) monthly instalments, the amount payable, or the commuted amount of any of said one hundred and twenty (120) monthly instalments then remaining unpaid, shall be paid in one sum to said daughters, share and share alike; provided, however, that if either of said daughters shall not be then living, the share in the amount payable to which such deceased daughter would have been entitled, if living, shall be paid in one sum to the surviving children of such deceased daughter, if any there be, share and share alike, otherwise to the insured's other said daughter, if living, otherwise to the surviving children of such other said daughter, share and share alike.
If, at the death of the survivor of the insured and his said wife, neither of said daughters nor any children of said daughters shall be living, the amount payable, or the commuted amount of any of said one hundred and twenty (120) monthly instalments then remaining unpaid, shall be paid in one sum to the executors or administrators of the survivor of the insured and his said wife.
Under the policies, a method of settlement elected prior to the death of the insured shall not be varied by the payee.
Ruby Walker was 53 years of age at the date of the death of the decedent. Her life expectancy at that age was 18.16 years according to the Actuaries' or Combined Experience Table of Mortality.
Under option 3 of the policies Ruby Walker will receive $351.28 per month, under the combined policies, for ten years and thereafter for as long as she lives, or $4,215.36 per year.
The one sum payable at death under each policy was $50,706.14 and $30,420.60, respectively, total, $81,126.74. At the death of the decedent the face amount of the policies which was payable was, of course, $80,000. The total additional amount of $1,126.74 represented accumulated post mortem dividends and interest.
The cost at the date of the decedent's death of a contract under which annuity payments would be paid such as the payments which will be paid under the two policies above described would have been not less than $81,126.74. The John Hancock Insurance Co. applied the total sum of $81,126.74 as a simple premium representing the purchase of the installment benefits to be received by the beneficiary of the policies.
The John Hancock Insurance Co. advised its agent in Pittsburgh by letter dated December 6, 1944, as follows:
The combined value of these policies, as of April 30, 1944, as given in Form 712, namely, $81,126.74, represents the annuity value of the net proceeds based on ten years certain and a life income thereafter for a female age 53 and was computed under the 1937 Standard Annuity Table at a guaranteed interest rate of 2 1/2% per annum.
Petitioner, the executrix of the estate, reported, in the estate tax return, the two policies of insurance in question at a value of $54,599. Such total value was based upon the Actuaries' or Combined Experience Table of Mortality with an assumed interest rate of 4 per cent.
In determining the deficiency in estate tax, the respondent determined that the value of the two policies to be included in the gross estate was $81,126.74.
The petitioner is entitled to credits for the payment of state inheritance tax, having filed evidence of payment of said tax as required by section 81.9 of Regulations 105. The parties are agreed that giving effect to such credits will reduce the deficiency in estate tax to $6,671.02.
The value at the date of the decedent's death of the proceeds of life insurance receivable by other beneficiaries (with respect to the two life insurance policies here in question), was $81,126.74.
OPINION.
HARRON, Judge:
The parties are agreed that the proceeds of the two life insurance policies involved are includible in the gross estate, but they differ on the amount to be included in the gross estate.
The question arises under section 811(g)(2) of the Internal Revenue Code, the pertinent part of which is set forth in the margin.
The problem is to determine the value which is to be included in the gross estate for insurance proceeds receivable by beneficiaries other than the executrix of the estate.
SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States—(g) PROCEEDS OF LIFE INSURANCE.—(2) RECEIVABLE BY OTHER BENEFICIARIES.— To the extent of the amount receivable by all other beneficiaries as insurance under policies upon the life of the decedent * * *
Respondent determined that the value to be included in the gross estate is $81,126.74. In so doing he followed the provisions of section 81.28 of Regulations 105, which was in effect at the time of the decedent's death, and which provides in part as follows:
SEC. 81.28 VALUATION OF INSURANCE.— The amount to be returned if the policy is payable to or for the benefit of the estate is the amount receivable. If the proceeds of a policy are payable to a beneficiary other than the estate, and not to or for the benefit of the estate, the amount to be listed in the appropriate schedule of the return is the full amount receivable. (For taxable portion see section 81.27.) In case the proceeds of a policy are made payable to the beneficiary in the form of an annuity for life or for a term of years, there should be listed in the appropriate schedule of the return the one sum payable at death under an option which could have been exercised either by the insured or by the beneficiary, or if no option was granted, the sum used by the insurance company in determining the amount of the annuity.
The sum of $81,126.74 which respondent included in the gross estate was the one sum payable under the policies on the date of decedent's death. But it also happens to be the same as the sum which it would cost to purchase contracts paying like annuities.
Petitioner contends that the value determined under the regulation is arbitrary and excessive and that, as applied here, the regulation is invalid. Petitioner contends that the value to be included in the gross estate is $54,599, the commuted value of the future monthly annuity payments computed under the Actuaries' of Combined Experience Table of Mortality set forth in section 81.10(i) of Regulations 105.
The question, in the last analysis, is whether the value which has been determined by the respondent is unreasonable and excessive.
The John Hancock Mutual Life Insurance Co., which issued the two policies, was regularly engaged in selling life insurance annuity contracts of the kind here involved. The charge of the John Hancock Mutual Life Insurance Co., and the resulting cost to a purchaser of an annuity comparable to the one transferred to decedent's wife through the medium of the two life insurance policies, was at least equal to the $81,126.74 lump sum payable under the policies. This is conceded by petitioner. If a similar annuity had been purchased on the date of the decedent's death from the insurance company for the wife, it would have cost not less that $81,126.74. In this instance the application of section 81.28 of the regulations has resulted in a valuation of the insurance proceeds not in excess of the replacement cost for an annuity comparable to the one transferred to the wife-beneficiary. On the facts before us, we find no reason for disturbing the determination made by the respondent under the applicable regulation.
It is not settled that for estate tax purposes a valuation of annuity contracts based upon replacement cost at the date of death is proper and reasonable. Estate of Judson C. Welliver, 8 T.C. 165; Mearkle's Estate v. Commissioner, 129 Fed.(2d) 386, affirming 45 B.T.A. 894. See also Guggenheim v. Rasquin, 312 U.S. 254; United States v. Ryerson, 312 U.S. 260, involving valuation for gift tax purposes. Also, it was held in Mearkle's Estate that a method of valuation adopted by a regulation which results in a valuation which is not in excess of replacement cost must be sustained.
The applicable regulation has been in effect continuously since 1934. Since that time Congress has made extensive changes in section 811(g) of the Internal Revenue Code, relating to the proceeds of life insurance, but has left untouched the method of valuation prescribed by the regulation. Hence, the administrative construction of section 811(g) as set forth in section 81.28 of Regulations 105, and as previously set forth in article 28 of Regulations 80, must be deemed to have received legislative approval. Helvering v. Reynolds Tobacco Co., 306 U.S. 110.
We think the question is controlled by the rationale of Estate of Judson C. Welliver, supra, and Mearkle's Estate, supra. Although those cases involved joint and survivorship annuities, the subject of the controversy was the same as it is here, namely, the value of the annuity benefits to the wife-beneficiary on the date of the decedent's death. Replacement cost was held to be the proper measure of value in the cited cases, and it likewise is to be so considered in this case.
Petitioner relies on Estate of Archibald M. Chisholm, 37 B.T.A. 167, and the method of valuation approved in that case. However, the Chisholm case is not applicable here. At the time of Chisholm's death, article 28 of Regulations 70 was in effect, and we held that the annuity payments were to be valued in accordance with the provisions of that regulation. Respondent has since changed his regulation to make the lump sum payable on the date of death, under an option which could be exercised by the insured, the controlling measure of value. The changed regulation was in effect at the time of decedent's death.
It should be observed that the tables set forth in section 81.10(i) and relied upon by petitioner are not made applicable by the present regulations to the valuation of ordinary life insurance annuities. If the method of valuation adopted by respondent in section 81.28 is not controlling, a valuation based upon replacement cost would be approved. See Mearkle's Estate v. Commissioner, supra.
The determination of the respondent that the value to be included in the gross estate is $81,126.74 is sustained.
Decision will be entered for the respondent.