Northern Trust Co. v. Comm'r of Internal Revenue (In re Estate of Morton)

• Decision Date: 22 March 1949
• Docket Number: Docket No. 15477.
• Citation: 12 T.C. 380
• Parties: ESTATE OF MABEL E. MORTON, DECEASED, THE NORTHERN TRUST CO., EXECUTOR, (THE NORTHERN TRUST CO., TRUSTEE UNDER THE WILL OF MABEL E. MORTON, DECEASED), PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

12 T.C. 380

ESTATE OF MABEL E. MORTON, DECEASED, THE NORTHERN TRUST CO., EXECUTOR, (THE NORTHERN TRUST CO., TRUSTEE UNDER THE WILL OF MABEL E. MORTON, DECEASED), PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 15477.

Tax Court of the United States.

Promulgated March 22, 1949.

Decedent, as beneficiary of three insurance policies on the life of her husband, became entitled to proceeds thereof upon his death in 1934. Instead of taking the lump sum proceeds, she selected one of the optional modes of settlement available to the beneficiary under the policies whereby interest and so much of the proceeds as she requested would be paid to her during her lifetime, and upon her death the balance would be paid to her children. Decedent never requested any part of the principal proceeds. Held, the proceeds are includible in decedent's gross estate as a transfer of property under section 811, Internal Revenue Code. Preston Boyden, Esq., for the petitioner.

Charles E. Leist, Esq., for the respondent.

OPINION

KERN, Judge:

Respondent determined a deficiency of $8,098.73 in estate tax, only part of which is in question.

The sole adjustment contested by petitioner is respondent's inclusion as part of the decedent's gross estate, under section 811(c), (d) or (f) of the Internal Revenue Code, of the sum of $25,178.68 representing proceeds of policies of insurance on the life of decedent's husband which were payable to decedent, as sole beneficiary under the policies, upon the death of her husband in 1934, but which decedent chose to have held by the insurer, paying interest and so much of the principal amount as she might request to her during her lifetime and the remainder after her death to her children and grandchildren, as more fully outlined in a so-called supplementary contract issued to her by the insurer in 1934. It is petitioner's contention that, by decedent's action in not reducing the principal sum to physical possession and by electing the method of settlement that she did, these proceeds were never part of her estate and therefore not includible for estate tax purposes.

Substantially all of the facts have been stipulated, and the stipulated facts are hereby found accordingly. Summarized, the salient facts are these:

Mabel E. Morton, the decedent, died on March 9, 1944, a resident of Chicago, Illinois. Her will was admitted to probate by the Probate Court of Cook County, -and letters testamentary were granted to the Northern Trust Co. on March 24, 1944; and on the same date it was appointed executor thereof. The company was also trustee under the trust created by decedent's will. An estate tax return was filed on June 7, 1945, with the collector for the first district of Illinois.

On the date of death of decedent's husband, June 16, 1934, decedent, as beneficiary of three policies issued by the Mutual Life Insurance Co. of New York on the life of her husband, became entitled to the amounts due under the policies, aggregating $25,131.56. Decedent, however, did not desire to have this sum turned over to her, but rather wished to exercise one of the modes of settlement provided in the policies which were available to the beneficiary entitled to the lump sums payable thereunder. She sought to exercise the first mode of settlement, which provided, in effect, for the payment of interest on the principal amount during the lifetime of the beneficiary of the policies, and by the payment upon the death of the beneficiary of the principal sum, together with accrued interest for the year then current, unless otherwise directed in the notice of election, to the beneficiary's executors, administrators, or assigns.

On or about July 25, 1934, decedent executed a form of the insurance company for election of a mode of settlement, indicating her election of the first option, which required the payment of interest to herself, reserved to her the privilege of withdrawing all or any part of the principal proceeds of the policies, and provided that upon her death the balance of the proceeds should become payable to her two daughters, with provision in case of their predecease. The election could be made only ‘by the person entitled‘ to the lump sum proceeds of the life insurance policies.

In view of her decision to have the proceeds of the three policies settled in accordance with the first optional mode of settlement, the insurance company, in August 1934, issued to her a supplementary contract, numbered S.N. 8639, which provided: (1) That the interest should be paid to decedent; (2) that the decedent retained the right at any time to withdraw the principal sum, or any part thereof; and (3) if the decedent should die during the continuance of the mode of settlement selected by her and if either or both of her daughters should be living at the time such settlement terminated, the then remaining principal sum should be divided into such number of equal parts as would equal the number of daughters who survived, plus the number of daughters who might have predeceased decedent and have left a child, or children, living at the death of the decedent, and thereupon the shares were to be distributed to those entitled to receive them.

During her lifetime decedent received the monthly interest payments, but she did not withdraw any part of the...