Hunt v. Comm'r of Internal Revenue (In re Estate of Hunt)

• Decision Date: 15 June 1950
• Docket Number: Docket No. 12554.
• Citation: 14 T.C. 1182
• Parties: ESTATE OF VERNE C. HUNT, DECEASED, MONA S. HUNT, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

14 T.C. 1182

ESTATE OF VERNE C. HUNT, DECEASED, MONA S. HUNT, EXECUTRIX, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 12554.

Tax Court of the United States.

Promulgated June 15, 1950.

Decedent assigned certain insurance policies on his life to his wife with a dominant motive to put them beyond the reach of possible judgment creditors, and an incidental motive to minimize the taxes upon his estate. Held, under the facts, the policies were not transferred in contemplation of death, nor did the decedent retain any incidents of ownership in them. Only that proportion of the proceeds of the policies which the premiums paid after January 10, 1941, bear to the total premiums paid is includible in the gross estate of the decedent. Arthur Groman, Esq., for the petitioner.

H. Arlo Melville, Esq., for the respondent.

The respondent determined a deficiency in estate tax in the amount of $43,680.41. The issue presented is whether the proceeds of certain life insurance policies, which were transferred to his wife by the decedent during his lifetime, are includible in his gross estate under either section 811(c) or section 811(g)(2) and (4) of the Internal Revenue Code.

Petitioner filed the Federal estate tax return with the collector for the sixth district of California.

The record in this proceeding consists of a stipulation of facts, testimony, and documentary evidence, from which we make the following findings of fact.

FINDINGS OF FACT.

The facts which have been stipulated are found as stipulated, and the stipulation is incorporated herein by this reference.

Decedent died on December 13, 1943, at the age of 55, as the result of a shooting by a former patient. He was survived by his wife, Mona S. Hunt, whom he had married in 1922, and three children, Verne Carlton Hunt II, Charles David Hunt, and Lois Maurine Hunt. At the time of his death, decedent was a resident of California and had been since July 6, 1930.

Before going to California in 1930, decedent had been head of a section of surgery in the Mayo Clinic at Rochester, Minnesota. He performed about 20,000 operations at the Mayo Clinic and was never involved in a malpractice suit. While employed there, all liability for operations was assumed by the clinic, which insured their doctors against malpractice suits. When decedent left the Mayo Clinic in 1930 to set up practice for himself in California, he and his wife had savings of between $35,000 and $40,000.

The major source of decedent's income after becoming a resident of California was his medical practice, which consisted almost entirely of referred surgery of a most difficult and critical nature. Decedent's income from the practice of surgery amounted to from $25,000 to $100,000 a year. An undisclosed amount of this income was invested in securities. Not only was much of decedent's work done at great risk, but many of his operations were for distinguished and famous persons, such as one of the presidents of Mexico. Accordingly, as early as 1932, he considered it advisable to protect himself against a possible malpractice suit by the purchase of malpractice insurance through Dick Drake, who was his friend as well as his insurance agent. Such insurance policies run for one year. When Drake discontinued writing malpractice insurance in 1935, he recommended that decedent buy such insurance from Medical Protective Association.

Decedent often gave his wife gifts on anniversaries and holidays. Frequently these gifts were very substantial.

While returning from an automobile trip in the summer of 1935, decedent and his wife witnessed the results of an automobile accident in which a number of people had been killed. Thereupon, they resolved that they would draw up wills. Following their return home, decedent consulted Drake, who referred him to a lawyer who drew up the wills. On October 24, 1935, decedent executed a will leaving his estate to his wife and naming Drake as secondary guardian of his children and as secondary executor. His wife executed a will containing similar clauses on November 14, 1935, which named decedent as her heir and also named Drake as secondary guardian and as secondary executor. On November 15, 1935, decedent and his wife both executed wills identical to their previous wills, except that Drake was omitted from each will.

During this same period in the fall of 1935, decedent asked Drake if there was some way in which he could protect his family in the event he was sued for malpractice— specifically, if there was some way in which he could insulate his life insurance policies against their being seized to pay some liability of his. Drake, thereupon, inquired at the offices of the Fidelity Mutual Life Insurance Co. and the Northwestern Mutual Life Insurance Co. and talked to the agents in charge. A tax service was consulted. Upon the basis of the information received, Drake advised decedent that this objective could be accomplished by assigning the life insurance policies to his wife. The insurance companies knew at this time of the existence of the estate tax and were well versed in decisions relating to this tax. Decedent then instructed Drake to secure the forms necessary to make the assignments.

Pursuant to this instruction, Drake requested the Los Angeles office of the Fidelity Mutual Life Insurance Co. to obtain from its home office the necessary forms whereby decedent could transfer to his wife the incidents of ownership in a $100,000 face amount insurance policy, number 472605, on his life. This policy had been purchased by the decedent on November 17, 1930, through Drake, after decedent had become a resident of California. His wife was named in this policy as the beneficiary. In connection with this policy, on September 24, 1935, the Los Angeles office of the insurance company wrote to the law department of the home office:

It is the insured (sic) request that the incident of ownership as far as he is concerned should be taken out of this policy, but at the same time the insured and the beneficiary desire that the same Mode of Settlement agreement be effective in the event of the death of the insured. Will you please send out the necessary papers for signature.

We would refer to the recent arrangement that was placed on the Besser policy #418473. The same arrangement is requested under this policy.

On October 8, 1935, the law department of the Fidelity Mutual Life Insurance Co. complied with the request and transmitted an ownership clause for the insured's signature and a mode of settlement agreement for signature by Mona S. Hunt as well as decedent, pointing out the importance of having the latter bear a date subsequent to the former. This letter contained the following paragraph:

You will note that both forms provide that if Mona S. Hunt predecease the insured, all right, title, and interest in the policy shall revert to the insured. Such phraseology appeared in the agreements prepared for policy No. 418473— Besser, and it was requested in your letter that the enclosed forms conform to the forms used in connection with the Besser case. However, may we offer a suggestion? It is frequently the purpose of an insured, in obtaining the endorsement of an Ownership Clause, to divest himself of all incidents of ownership in the policy in order that the proceeds at his death will not be subject to the Federal Estate Tax. We do not know by what motives Dr. Hunt is actuated, but if this is his purpose, the forms should be revised to omit this reversionary feature. Under the wording of Regulation 80, Article 25 of the Treasury Department, and under such decisions as United States v. Norman W. Bingham, Jr. (CCA, 1st), decided March 25, 1935, we believe that the endorsed forms, as prepared, would not prelude (sic) estate taxation at Dr. Hunt's death since such reversionary feature would probably be considered an incident of ownership in the insured.

This letter, or a copy thereof, was given to Drake, who showed it to decedent and discussed the matter with him. Drake then went back to the Los Angeles office of the Fidelity Mutual Life Insurance Co. with decedent's answer to the question raised in this last letter concerning his ‘motive.‘ On October 23, 1935, the Los Angeles office replied to the letter of the home office:

Referring to your letter of October 8th enclosing forms in connection with Mode of Settlement of above numbered policy, Mr. Drake, the agent in this case, after going over your letter, has requested that I advise you he greatly appreciated your letter and he thinks your point is in order. He also asks that the enclosed forms be rewritten eliminating the revisionary features. The new arrangement is to be so worded that if the wife should pre-decease the insured, the policy will go to her estate.

He would like to know if in your opinion, by taking this procedure, first, eliminating all incidents of ownership in the policy, and second, eliminating the reversionary feature, if in the event of the insured's death the proceeds of the policy would be subject to a Federal Estate Tax or California Inheritance Tax.

On November 1, 1935, the law department of the home office sent the forms necessary to effect the assignment to the Los Angeles office. In the accompanying letter, the home office answered the question which had been raised in the letter of October 23:

In accordance with your letter of October 23, we have rewritten the enclosed Request for Ownership Clause and Mode of Settlement Agreement for policy of the above number. If satisfactory, the Request for Ownership Clause should first be signed by the insured in the presence of a witness. Thereafter, the Mode of Settlement Agreement should be signed by Mona S. Hunt as owner, and also by the insured, in the presence of a witness. It is important that the latter agreement bear a date later than the Request for Ownership Clause. Both agreement should then be returned to this Office, with...