Parson v. United States

Decision Date22 May 1972
Docket NumberNo. 30726.,30726.
Citation460 F.2d 228
PartiesBeatrice Smither PARSON, Executrix of the Will and Estate of George W. Parson, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Roby Hadden, U. S. Atty., Beaumont, Tex., Jerry A. Wells, Atty., Tax Div., Dept. of Justice, Ft. Worth, Tex., Scott P. Crampton, Asst. Atty. Gen., John Brown, Meyer Rothwacks, Attys., Tax. Div., Dept. of Justice, Washington, D. C., Roby Hadden, U. S. Atty., Tyler, Tex., Johnnie M. Walters, Asst. Atty. Gen., Grant W. Wiprud, Atty., Dept. of Justice, Washington, D. C., for defendant-appellant.

C. B. Wheeler, Wheeler, Watkins, Hubbard, Patton & Peek, Texarkana, Tex., for plaintiff-appellee.

Before AINSWORTH, INGRAHAM and RONEY, Circuit Judges.

INGRAHAM, Circuit Judge:

This is an appeal by the United States from a judgment by the district court sustaining a claim for refund of estate taxes paid by the estate of Dr. George W. Parson. Parson v. United States, 308 F.Supp. 1159 (E.D.Tex., 1970).

The case was submitted on a stipulation of facts which indicated that decedent Parson and his wife were married on April 24, 1926, and resided in Texarkana, Arkansas until January 1945, at which time they moved to Texarkana, Texas. They remained there as residents of Texas until decedent's accidental death on December 17, 1961.

I.

The first issue in this case revolves around an application made by decedent, while living in Texas, for a Lumbermen's Mutual Casualty Company insurance policy. On February 20, 1958, decedent signed an application and was issued a certificate providing for payment of $50,000 upon his accidental death. The first and all subsequent premiums were paid with community funds.

Decedent, on February 20, 1958, executed the following instrument in his application for this accident policy:

"COMPLETE ONLY ONE OF THESE SECTIONS
I. THIRD PARTY OWNERSHIP
If you wish a third party, who has an insurable interest in your life, to own this certificate, complete the following statement:
THIRD PARTY OWNERSHIP—It is agreed by the person to be insured that all right and title to the insurance applied for shall vest in and every incident of ownership thereof may be exercised and enjoyed irrevocably without the consent of any other person by:
Name of Owner (PLEASE PRINT)
/s/ Mrs. Beatrice Smither Parson
(Show Given Name—Example,
Mary Jones—NOT Mrs. Edward F. Jones)
whose insurable interest is Wife (Example, Wife, Son, Daughter, etc.)
II. "REGULAR" BENEFICIARY PROGRAM
If you wish to retain ownership of this certificate state name of person(s) to whom benefits are to be paid in case of Accidental Death.

NAME OF BENEFICIARY RELATIONSHIP (PLEASE PRINT) __________________ _________________ __________________ _________________ (Show Given Name—Example, Mary Jones— NOT Mrs. Edward F. Jones) Signature of Applicant /s/ Geo. W. Parson"

Upon Dr. Parson's death the full proceeds were paid to appellee Beatrice Smither Parson as third party policy owner. The estate tax return excluded these proceeds from decedent's gross estate, but the Internal Revenue Service included one-half in the gross estate under § 2042(2) of the Internal Revenue Code.1

The district court held that the instrument executed by Dr. Parson was sufficient to divest himself of the "incidents of ownership" and to transfer his community interest in the policy to his wife, thus the proceeds were not includable in his gross estate.

The question before us is whether the instrument executed by Dr. Parson operated as an effective assignment or gift of his community interest in the policy.

Under § 2042(2), life insurance proceeds payable to a beneficiary (other than the executor) are includable in the gross estate if the decedent at his death possessed any of the "incidents of ownership" exercisable either alone or in conjunction with any other person. § 20.2042-1 of the Treasury Regulations defines these incidents as follows:

"(2) For purposes of this paragraph, the term `incidents of ownership\' is not limited in its meaning to ownership of the policy in the technical legal sense. Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan or to obtain from the insurer a loan against the surrender value of the policy, etc."

In addition to this determination of decedent's possession of economic benefits, the Commissioner is required to consider whether ownership can be attributed under applicable state law. See Catalano v. United States, 429 F.2d 1058 (5th Cir., 1969); Freedman v. United States, 382 F.2d 742 (5th Cir., 1967). The government urges that under Texas law there is a presumption that property purchased with community funds is community property even though title is taken in the name of one spouse only, citing Magee v. Young, 145 Tex. 485, 198 S.W.2d 883 (1946); Brick & Tile, Inc. v. Parker, 143 Tex. 383, 186 S.W.2d 66 (1945), and Freedman v. United States, supra. The government's contention is that a Texas spouse does not make a gift of his community interest when community funds are used to buy life insurance, record title to which, though taken in the wife's name, is not limited to the use and benefit of her separate estate.

The government bases its argument primarily on Freedman v. United States, supra. There the decedent wife applied for a $50,000 life policy and the husband was named primary beneficiary. Under the terms of the policy all values, rights and privileges would belong to the person who entered his signature as "owner" in the blank space provided.2 The husband signed the application in this space. All premiums were paid with community funds and on the wife's death the husband attempted to exclude all the proceeds, which were paid to him as beneficiary, from her estate. The court, however, held that even though the husband signed the policy as owner, "the decedent did not perform an affirmative act which would clearly reflect an intention to make a gift of her community share." 382 F.2d at 747. The court concluded, therefore, that:

"In the absence of a clause expressly purporting to transfer Mrs. Freedman\'s community interest to her husband\'s separate estate, it must be assumed that she merely agreed for the policy to be owned by Mr. Freedman as the community\'s agent." 382 F.2d at 747.

Unlike the situation in Freedman, here Dr. Parson was forced to make a conscious decision between irrevocably assigning all rights, title and every incident of ownership to Mrs. Parson, or expressly retaining ownership and naming a beneficiary. He chose the former and Mrs. Parson received the proceeds as third party owner. Under the government's theory of the case, the proceeds would be includable in the gross estate under § 2042 either with or without the instrument Dr. Parson executed; in other words, he performed a useless act.

We do not view the decision in Freedman or Texas law as requiring this restrictive result. The court in Freedman recognized that the presumption of community property upon which the government relies is a rebuttable one. Thus, the court below was authorized to view the evidence and determine Dr. Parson's intention in executing the assignment of his interest. In a footnote to the Freedman opinion the court clarified its opinion as follows:

"An instrument of assignment or deed of gift would have satisfied the evidentiary requirements for a gift. See Lamade v. Brownell, M.D.Pa., 1965, 245 F.Supp. 691 where the district court held that the insured, by means of an absolute assignment, had succeeded in divesting himself of all incidents of ownership. If Mrs. Freedman had executed such an instrument, the primary question for the Court would have been whether a wife can make a gift of community property under Texas law." 382 F.2d at 747, n. 10.

Dr. Parson's act in the instant case was as much an assignment or deed of gift as in the Lamade case;3 all right, title, and incidents of ownership were irrevocably vested in the wife. Dr. Parson performed a positive affirmative act which the district court found clearly reflected an intention to make a gift of his community share. It makes no difference, contrary to the government's contention, that Dr. Parson achieved this at the time the policy was applied for. In Prichard v. United States, 397 F.2d 60, 64 (5th Cir., 1968), this court stated that "a husband may unconditionally make his wife the owner and beneficiary of an insurance policy on his life when it is issued, or later if he desires, so as to bar inclusion of it in his estate." See Mercantile Trust Co. Nat'l. Ass'n. v. United States, 312 F.Supp. 108, 111 (E.D., Mo., 1970). Nor does it matter that Mrs. Parson was the one who placed her name in the space designating the person to whom the policy was assigned, or that the instrument did not contain the words "for the use and benefit of her separate estate." A court must look to the realities of the situation and give effect to substance over form. Prichard v. United States, supra.

Here, the district court did not err in its holding that Dr. Parson's intent was clear and that he had performed the "affirmative act" which irrevocably transferred every incident of ownership to Mrs. Parson and effectuated a gift of his community interest to her. We thus affirm the district court's opinion with regard to this Lumbermen's Mutual Casualty Company accident policy.

II.

A second controversy in this case involves the estate tax treatment to be accorded to fourteen life insurance policies, two of which were purchased by Dr. Parson prior to his marriage, but all of which were purchased by him prior to his establishing residence in Texas in 1945—hence, all fourteen policies were acquired while decedent was domiciled in...

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