Docket Nos. 23856 23857 23858.
Ned P. Veatch, Esq., and Hugh W. McCulloch, Esq., for the petitioners. Harold H. Hart, Esq., for the respondent.
1. Upon the facts established, it is held that certain transfers of property by decedent in 1935, 10 years prior to her death, in trust for the benefit of her two sons were not made in contemplation of death within the purview of section 811(c), Internal Revenue Code.
2. Decedent also, in 1935, assigned certain policies of insurance upon her life which were taken out in conjunction with annuity policies retained by decedent and not assigned. Prior to decedent's death the life insurance policies in question were cashed and the proceeds appropriated by the assignees. Held, that the life insurance policies having been reduced to cash and being no longer in existence at the time of decedent's death, their value may not be included in decedent's estate, as no interest of any kind was possessed by decedent at her death or passed by reason of her death within the purview of section 811(c), Internal Revenue Code. Ned P. Veatch, Esq., and Hugh W. McCulloch, Esq., for the petitioners. Harold H. Hart, Esq., for the respondent.
Respondent has determined a deficiency in estate tax in the sum of $103,169.37 against the estate of the decedent, Lillie G. Hutchinson. This deficiency plus interest is also asserted against Florence E. Hutchinson, The First National Bank of Chicago, and Alfred H. Hutchinson, as transferees of the property of that estate. Certain of the facts have been stipulated and are so found. Additional facts are found upon testimony and exhibits introduced upon the hearing.
Two principal issues are presented:
(1) Are the face amounts of six insurance contracts which were assigned by the decedent to her sons prior to her death includible in her estate either as transfers to take effect at her death under which she retained the income for life or as transfers in contemplation of death within section 811(c) of the Internal Revenue Code?
(2) Were two transfers in trust by decedent prior to her death for the benefit of her two sons and their families made in contemplation of death within section 811(c)?
If it be held that the property transferred is includible in the decedent's estate, three related issues arise:
(a) Was the estate of the decedent entitled, under section 812(c), Internal Revenue Code, to a deduction for property previously taxed in the estate of Irving K. Hutchinson, one of the recipients of the transferred property?
(b) Should the face amount of $200,000 of the aforementioned insurance policies or the total premiums of about $180,433 paid for such policies be included in decedent's estate?
(c) Are Florence E. Hutchinson, The First National Bank of Chicago, and Alfred H. Hutchinson liable for the deficiency in estate tax plus interest due from the estate of Lillie G. Hutchinson as transferees and trustees of the estate?
FINDINGS OF FACT.
Lillie G. Hutchinson, hereinafter referred to as the decedent, was born May 17, 1859, and died at the age of approximately 87 on April 27, 1946, a resident of Chicago, Illinois. The estate tax return for her estate was filed on July 18, 1947, with the collector of internal revenue for the first district of Illinois, and the tax shown thereon to be due in the amount of $64,594.29 was paid.
Decedent had two sons, Alfred H. Hutchinson and Irving K. Hutchinson. In 1935, when the transfers in issue occurred, decedent had also twelve living grandchildren ranging in age from 1 to 22 years.
Decedent's husband died in 1931. Her wealth was received entirely from him in the way of gifts and the income arising therefrom. Decedent's husband retired from business in 1916, at which time he made gifts in the amount of $100,000 each to decedent and his two sons. In 1928 decedent's son Alfred took over complete management of his father's financial affairs. In the following year, on February 21, 1929, decedent's husband transferred his entire estate in equal shares to decedent and his two sons. Each transferee received approximately $550,000 from gifts totaling approximately $1,658,000.
On March 18, 1929, shortly after the distribution by her husband of his entire estate, the decedent executed a will by which she created a trust of the residue of her estate, naming her two sons trustees and directing them to maintain the premises occupied by the decedent and her husband as a home so long as he lived, and commencing with her death, to expend so much of the principal and income of the trust as might be necessary to support and maintain her husband and gratify his every want in sickness or in health. Upon the death of her husband, the remainder of the trust estate, as thus constituted, was to be paid over to her two sons in equal shares. A second will was executed by decedent on August 10, 1934, and her last will February 10, 1945, shortly prior to her death. By her last will, after making several bequests of articles of jewelry, she directed that all the rest of her property of every kind be left to her son, Alfred H. Hutchinson.
In 1934 decedent was 75 years of age. At this time she was troubled to some extent by arthritis in her hands and fingers. This, however, had no effect upon her activities, which were varied. She was a woman of remarkable personality and in excellent health, considering her age. Both of her sons were married and maintained homes for their families. The decedent was devoted to her sons, their wives, and their families. It had been her custom, as it had been that of her husband before her, for some years to make gifts of substantial value to her sons and members of their families. Each Christmas she was in the habit of giving $1,000 in cash to each of her sons and cash gifts to their children. Decedent's son Alfred maintained his mother's investments for her and was in the habit of calling upon her and discussing her matters once or twice a week. At this time the decedent's estate had a value in excess of $750,000.
In November and December 1934 the decedent purchased two single premium life insurance policies on her life in the face amount of $100,000 each, one in The Mutual Life Insurance Company of New York and the other in the Equitable Life Assurance Society of the United States. Two annuities were simultaneously purchased, one from each of said companies. The annuities provided for the payment to the decedent during her lifetime of a total of $4,318.60 annually, payable in quarterly installments. Upon decedent's death all payments from said annuities ceased and they had no remaining value.
The aforementioned two policies of life insurance could not have been purchased without the simultaneous purchase of said annuities. But the annuities could have been purchased for the same amounts without purchase of the life policies. However, neither the insurance policies nor annuity contracts carried any provision with respect to or any mention of the other contract procured. The purchase of the aforesaid life insurance policies and annuities was made by decedent upon the advice of her son Alfred as investments for her estate. At the time they were purchased there was a large amount of cash on hand and further accumulations of cash were anticipated due to the approaching maturity dates of bonds owned by decedent.
During 1935 the decedent, while discussing her financial affairs with her son Alfred, inquired in particular about his business affairs and those of her other son. She was always much interested in the condition of the Continental Scale Company which was operated by her two sons, they owning two-thirds of its issued stock. At this time this company had been in financial difficulties due to the depression. Its sales had fallen off greatly and for several years it had made no profit but sustained a loss in each year. Neither of petitioner's sons had for some time drawn a salary from this company because of its acute difficulties, nor had it paid them anything in dividends. On the other hand, its condition had necessitated that the two brothers assist it with large advances from their individual estates, to make some of which had required the sacrifice by them of some of their securities sold on a depressed market. Due to this condition the yearly income of each of the sons, although possessed of a substantial estate, was inadequate for the maintenance of their families in the manner in which they had been accustomed. Each brother had two sons in college and other children expecting shortly to be entered in college.
In response to his mother's request for detailed information about the business, Alfred explained to her the situation existing, upon which she exhibited considerable concern and asked how the situation might be remedied. He suggested that she transfer to Alfred and Irving her two aforementioned life insurance policies, which would then be available to them in meeting the situation.
As a result of this conversation arrangements were made whereby decedent assigned the two aforementioned life insurance policies, having a total face value of $200,000 to her two sons. Before effecting such assignments the Mutual policy was divided into four policies, two having a face value of $5,000 each and two having a face value of $45,000 each, and the Equitable policy was reissued as two $50,000 policies. One $5,000 policy, one $45,000 policy, and one $50,000 policy were assigned to each of the two sons. These assignments were finally effected and the policies endorsed in July and August 1935. Such assignments carried with them, among other things, the right of the assignees to receive the dividends payable thereon and, if they so elected, to receive the cash surrender value. After these assignments were completed, decedent retained no interest whatsoever in any of said life insurance policies.
Later, on December 28, 1935, after visiting their homes and learning that her sons were selling some of their securities at a discount in order to meet their living expenses, decedent established two trusts, one for the benefit of each of her two sons and their families, and transferred to each of said trusts securities having a face value of $100,000, and a then value for gift tax purposes of $105,691.39. Each of the sons was named trustee of the respective trust created for the benefit of him and his family. In each of said trusts the net income of the trust was payable to the son for his life and upon his death the trust was to be administered for the benefit of his wife and children. Each son was given broad powers to manage and invest the trust amounts, and, in his uncontrolled discretion, to invade the trust corpus, if necessary, for his welfare or to terminate such trust at any time and take over the corpus. These transfers in trust were absolute and decedent retained no interest whatsoever in the trusts.
Decedent filed a gift tax return and paid the gift tax thereon for the year 1935, covering both the insurance policies and the securities transferred in trust.
At the beginning of 1935 decedent was possessed of assets having an approximate value of $777,000. Her total transfers during that year, including the insurance policies and the trusts, aggregated approximately $390,000, leaving her in possession of an estate of approximately $387,000, exclusive of her home. In addition she received $4,318.60 annually from the two annuities.
On January 26, 1945, decedent's son, Irving K. Hutchinson, died, and the benefits of this two Mutual policies passed to his widow, Florence E. Hutchinson. These were in a total amount of $50,000. His $50,000 Equitable policy passed to the executors of his estate and was included in his gross estate for Federal estate tax purposes, and tax paid thereon. Subsequently, in March and May 1945, all of said policies were surrendered by the then owners, Alfred H. Hutchinson, Florence E. Hutchinson, and the executors of the estate of Irving K. Hutchinson, and the then surrender value of $193,929.98 was paid over to them in accordance with their interest. Of said sum of $193,929.98 the sum of $10,007.98 represented dividend additions to said policies accruing after their assignment.
The total ‘optional‘ valuation of the property held in said trusts as of the date of the death of said decedent was in the amount of $191,024.90, and respondent included that amount in decedent's gross estate, as well as the value of the assigned insurance policies in the amount of $200,000, in determining the deficiency.
At the time of the aforesaid transfers in trust and assignment of the insurance policies mentioned, more than 10 years prior to her death, decedent was leading a very active life. She maintained a home in Chicago at which she gave many entertainments. At times following 1935 she spent periods living at the South Shore Country Club, of which she was a member, or at some hotel, during which periods she gave many luncheons and dinners to which her friends were invited. She was an active member of the Chicago Womens Club, the South Shore Country Club, the LaRabida Jackson Park Sanitarium for Children, The Arche Club, and the Art Institute of Chicago. She was very fond of travel and subsequent to the time here in question made many extended trips. On such trips she usually traveled alone. On those occasions when she was accompanied by someone it was because of her desire for their companionship and in nowise for their physical assistance. She never discussed the question of death or conditions then brought about with members of her family or friends. Her talk was always of things she was planning to do in the way of entertainment for her friends or extended trips to places which she had not yet visited. From November 14 to 18, 1935, decedent's physician put her in the hospital for a complete physical examination. This revealed bronchitis, pulmonary emphysema, and a heart condition, none of which were considered serious. Her blood pressure and blood count were found to be normal. Thereafter she continued actively her habits in entertaining and traveling. In 1935, just prior to the transfers in trust here in question, the decedent made a trip to Hawaii and while there took hula lessons and bought a hula costume, which she exhibited to members of her family and friends at an elaborate luncheon given by her after her return. In December 1935, after the conveyances here in question, she made a trip to Phoenix, Arizona, where she stayed until April 1936, going from there to Pasadena, California, where she stayed for a month. While at Phoenix it was her daily custom to take extended walks and to attend moving picture shows.
During the period from 1930 to 1940 decedent was in good health for a woman of her age and during that time had no serious illness or infirmity. In 1941 diagnosis was made by her physician of diabetes in a mild form which was thereafter controlled by diet and insulin. Her death in 1946 was after a final sudden illness of about one week's duration. Since shortly after 1941 she had been attended by trained nurses and had spent most of her waking time in a rolling chair. She was, however, able to walk and did so, and attended entertainments in which she took active part to within a few days of her death.
The two conveyances in trust by decedent in 1935 for the benefit of her two sons and their families and the assignments by her in that year of the insurance policies hereinbefore mentioned were not made in contemplation of death.
The decedent, more than 10 years prior to her death and at the age of 75, assigned all interest in certain policies of insurance upon her life, and of a face value of $200,000, to her two sons. At about the same time she made a transfer of additional property aggregating $200,000 in face value in trust for the benefit of her sons and their families. It is respondent's contention that these transfers were made in contemplation of death within the purview of section 811(c), Internal Revenue Code. He further contends that if not made in contemplation of death, the transfers of the insurance policies involved were ones intended to take effect in possession or enjoyment at death under which she retained the income during her life.
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—(c) TRANSFER IN CONTEMPLATION OF, OR TAKING EFFECT AT, DEATH.—(1) GENERAL RULE.— To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise—(A) in contemplation of his death; or(B) 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 (i) the possession or enjoyment of, or the right to the income from, the property, or (ii) the right, either alone in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; or(C) intended to take effect in possession or enjoyment at or after his death.
With respect to whether the transfer was in contemplation of death within the cited section it is well established that if the decedent at the time of the transfer had in mind that on her death a certain distribution of her property would be made and anticipated such distribution by making a present gift of the property, such gift would be made in contemplation of death. On the other hand, if the transfer related to purposes of life, such as the recognition of special needs or exigencies of her children, rather than to the distribution of property in anticipation of death, such gift would not be one made in contemplation of death. United States v. Wells, 283 U.S. 102. The purpose of section 811(c) is to reach substitutes for testamentary disposition and thus prevent evasion of the estate tax.
While it seems logical that decedent, despite her good health, would consider testamentary disposition of her property at her advanced age of 75 years, it is well established that age alone is not controlling in determining the motive for the transfer. Estate of Oliver Johnson, 10 T.C. 680. Respondent contends that decedent had such a substitute disposition of her property in mind. He argues that this is shown by the fact that the transfers in question follow generally the pattern of a will prepared by decedent in 1929, prior to the death of her husband. This was not the will in existence at the time of decedent's death and we find only a superficial resemblance between such will and the pattern of the transfers. It is true that under that will, made by the decedent in 1929, her sons were made trustees and also beneficiaries under the trusts created. However, the primary object of the 1929 will and the trusts provided for by it was to assure the safety and comfort of decedent's husband who had previously divided his entire estate between decedent and his two sons.
The primary issue, whether the transfers by decedent in 1935 were made in contemplation of death, is decided by our finding upon this question of fact that such transfers were not of this character. We think our conclusion is fully justified by the record, which is voluminous and contains the testimony of many of decedent's relatives, friends, and associates, in addition to that of her person physician. This record clearly establishes that decedent, at the time these transfers were made, was in exceptionally good health for a woman of her age. She was active both mentally and physically and her mind was occupied constantly with things about her in her daily life.
Of the large number of witnesses testifying, and who knew the decedent intimately, none had ever heard the decedent discuss the question of her death or the disposition of her estate. All of these witnesses agreed that decedent's life and thoughts appeared to be always with things of the present.
In addition to the evidence of record as to decedent's life and her activities before and following the transfers, there is shown to have been a definite reason for the transfers connected in no way with decedent's death. The transfers followed a conversation with one of sons who handled her business affairs for her, in which it was revealed that the business operated by the two sons and in which they were largely interested was in a serious financial condition and that for some time they had received nothing from it either by way of salary or dividends and had been forced to advance to it very substantial amounts from their private estates. On hearing of this condition decedent stated that it was a condition which she could relieve without burden to herself, and she took immediate steps to effect the transfers here in question. On suggesting that she transfer the insurance policies, her son advised her that such a gift for credit purposes of himself and his brother would be equivalent to a transfer of cash. We cannot see in this situation a dominating motive associated with decedent's death. Her motive appears to have been one concerned with the immediate present— the relief of her sons from existing financial difficulties.
The second issue presented, upon the inclusion at face value of certain policies of insurance on decedent's life assigned by her in 1935, presents another question and one upon which we are able to find no decision by this or any other court upon facts comparable to those here involved.
The policies involved were single premium policies upon decedent's life. They were issued in conjunction with annuities purchased by her. They were policies which would not have been issued except in connection with the purchase of such annuities. Although the annuities alone could have been purchased by the decedent for identically the same amount paid for them in conjunction with the issuance of the life policies, the life insurance policies would not have been issued except in conjunction with the annuity contracts. These life policies were assigned by decedent to her two sons, she retaining no interest whatsoever. These policies were retained by the assignees as their property and 10 years later and prior to the death of the decedent were cashed in by their owners for their cash surrender value, which included dividends which had accrued thereon for the 10 years following the assignment. At the time of decedent's death the policies were no longer in existence. No income or benefit of any character was then owing either to the decedent or to the assignees of such insurance and none was paid by the insurers. All obligations under said policies had been fully satisfied by payment of the cash surrender values and accumulated dividends prior to decedent's death.
In Helvering v. Le Gierse, 312 U.S. 531, the Supreme Court held that a single premium life insurance policy purchased in connection with an annuity contract was an investment and not ‘insurance‘ within the meaning of section 302(g) of the Revenue Act of 1926, as amended (sec. 811(g) of the Internal Revenue Code prior to 1942), and that the sums payable thereunder to a specific beneficiary named therein were accordingly taxable to the estate of the decedent under section 302(c) of said Act (sec. 811(c) of the Internal Revenue Code). See also Tyler v. Helvering, 312 U.S. 657, and Keller v. Commissioner, 312 U.S. 543, decided the same day. In those cases the life insurance policies were still held by the insured decedents at the time of their respective deaths, and had not, as in the instant case, been assigned or canceled for their cash surrender value. Subsequent to the decision in the Le Gierse case, and in reliance upon it, we and a number of the circuit courts of appeals have held with respect to similar contracts that the benefits payable upon the death of the insured were includible in the decedent's gross estate for estate tax purposes under section 811(c) of the Internal Revenue Code, notwithstanding there had been an irrevocable assignment of such insurance contract prior to the death of the insured. Estate of Cora C. Reynolds, 45 B.T.A 44. Burr v. Commissioner, (C.A. 2) 157 F.2d 871, certiorari denied 329 U.S. 785; Conway v. Glenn, (C.A. 6) 193 F.2d 965. In a more recent decision, however, the Court of Appeals for the Seventh Circuit in Edwin J. Bohnen, Executor, et al. v. Carter H. Harrison, Collector, 199 F.2d 492, decided October 20, 1952, affirmed a United States district court decision, In re Bohnen, 100 F. Supp. 118, and held that policies of insurance, similar to those here involved, which had been transferred by the decedent and which were held by the assignees at decedent's death, were not includible in the decedent's estate under section 811(c). The Supreme Court, on May 4, 1953, affirmed the decision of the Seventh Circuit per curiam by an equally divided court. Petition for rehearing was denied June 8, 1953.
While the affirmance by an equally divided court is, as between the parties, a conclusive determination and adjudication of the matter adjudged in that case, the principles of law involved not having been agreed upon by a majority of the Supreme Court prevents the case from being decisive of the instant case. Hertz v. Woodman, 218 U.S. 205, 213-214. Accordingly there remains a conflict between the decided cases as to whether an assigned single premium life insurance policy taken out in combination with an annuity contract, both of which were in effect at the time of decedent's death, is includible in the decedent's gross estate for Federal estate tax purposes. However, in view of the additional facts present in the instant case and not present in any of the above-mentioned cases involving insurance-annuity combinations, it is not necessary to rest our conclusion in this case on either of those cases.
The right to surrender the policies for their cash surrender value was present in each of the life insurance contracts involved in the Le Gierse, Tyler, Keller, Reynolds, Burr, Conway, and Bohnen cases and such right had been irrevocably assigned in each of the latter four cases. Such right had not, however, been exercised in any of such cases. In the instant case not only had the decedent made an irrevocable assignment of all her rights and interests in and to the life insurance policies involved, but, prior to the death of the decedent, the owners thereof had cashed the policies for their cash surrender values, including the dividends which had accumulated thereunder during the 10 years following the assignments. There was accordingly no income or benefit of any character, arising out of said policies, payable either to decedent's estate or to her assignees at the time of her death.
In this connection it may also be noted that one of her sons, Irving, having predeceased his mother, the $50,000 Equitable policy previously assigned to him and which passed to the executors of his estate upon his death, was included in his gross estate and an estate tax paid thereon.
The cancellation and surrender of the policies involved herein prior to the death of the decedent distinguishes this case from the facts of each of the cases involving insurance-annuity combinations mentioned above. Indeed, such a distinction appears to have been anticipated in certain of those cases. In Helvering v. Le Gierse, supra, the Supreme Court said:
Considered together, the contracts wholly fail to spell out any element of insurance risk. It is true that the ‘insurance‘ contract looks like an insurance policy, contains all the usual provisions of one, and could have been assigned or surrendered without the annuity. Certainly the mere presence of the customary provisions does not create risk, and the fact that the policy could have been assigned is immaterial since no matter who held the policy and the annuity, the two contracts, relating to the life of the one to whom they were originally issued, still counteracted each other. It may well be true that if enough people of decedent's age wanted such a policy it would be issued without the annuity, or that if the instant policy had been surrendered a risk would have arisen. In either event the essential relation between the two parties would be different from what it is here. * * *
And in Burr v. Commissioner, supra, the Court of Appeals for the Second Circuit said:
Had the sons actually cashed the insurance policies, the contracts would have been separated and the insurance company would then have had to make annuity payments out of income and capital from the annuity premium. See Meisenholder, Taxation of Annuity Contracts under Estate and Inheritance Taxes, 39 Mich.L.Rev. 856, 884; 42 Col.L.Rev. 162, 165. But they chose not to surrender them; and the unexercised power to do so did not change the factual realities of the transaction. While the power was unexercised, the investment was analogous to a simple annuity with principal payable at death, a transfer which— even when irrevocable— is taxable under Sec. 811(c). * * *
Here the power was exercised prior to the decedent's death and the benefits were received by the owners of those policies. The policies no longer existed at decedent's death and nothing then passed to the assignees to which an estate tax could attach. Cf. Goldstone v. United States, 326 U.S. 687.
We hold that under the facts here existing no amount may be included in the decedent's estate representing the value of the policies assigned by her and surrendered and cashed in by the assignees prior to her death.
The decision being for the petitioners on both the primary issues makes it unnecessary to pass upon the secondary issues (a), (b), and (c).
It has been stipulated that certain allowable expenses of administration not yet reflected in the computation of the estate tax will be determined and allowed on final recomputation.
Reviewed by the Court.
Decision will be entered under Rule 50.