Detroit Bank & Trust Company v. United States

Citation467 F.2d 964
Decision Date01 September 1972
Docket NumberNo. 71-1790.,71-1790.
PartiesThe DETROIT BANK & TRUST COMPANY, Executor of the Estate of Fred W. Ritter, Deceased, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Michael L. Paup, Washington, D. C., for appellant; Loring W. Post, Gilbert E. Andrews, Meyer Rothwacks, Attys., Tax Div., Dept. of Justice, Washington D. C., Ralph B. Guy, Jr., U. S. Atty., John H. Hausner, Asst. U. S. Atty., Detroit, Mich., on brief.

James F. Kennedy, Jr., Toledo, Ohio, for appellee; Gerald P. Moran, Marshall, Melhorn, Bloch & Belt, Toledo, Ohio, Kurt G. Kersten, Flat Rock, Mich., on brief.

Before EDWARDS and PECK, Circuit Judges, and McALLISTER, Senior Circuit Judge.

EDWARDS, Circuit Judge.

This appeal concerns taxation of the estate of Fred W. Ritter. On April 9, 1964, being then in apparent good health, he entered into a trust agreement with The Detroit Bank and Trust Company as trustee, by which he transferred $9,600 to a trust to acquire $100,000 of insurance on his life, with the beneficiaries of the insurance to be his children. The trust was irreovcable and nominally beyond his control, but it provided for him to continue to make contributions to the trust for the payment of life insurance premiums, and its terms confined the trustees to expending the funds solely for the described purpose. Ritter died about six months later on October 6, 1964.

For purposes of this appeal the parties have stipulated that the money paid to the trust shall be presumed to have been given in contemplation of death, under Section 2035 of the Internal Revenue Code of 1954, 26 U.S.C. ž 2035 (1954). The dispute, however, concerns whether the value, for purposes of estate taxation, should be determined by the value of the payment made to the trust or by the value of the insurance proceeds actually paid to the trustee on the event of Ritter's death?

The District Judge heard this case on stipulated facts and on plaintiff's motion for summary judgment. Following an opinion in the United States District Court for the Eastern District of Michigan, Gorman v. United States, 288 F. Supp. 225 (E.D.Mich. 1968), he held that plaintiff's motion for summary judgment be granted so as to effect taxation on decedent's estate only to the extent of the $9,600 transferred to the irrevocable trust.

The government relies for reversal of this judgment primarily upon Section 2035 of the Internal Revenue Code of 1954, plus the related regulation:

ž 2035. Transactions in contemplation of death
(a) General rule.ÔÇöThe value of the gross estate shall include the value of all property 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, in contemplation of his death.
(b) Application of general rule.ÔÇöIf the decedent within a period of 3 years ending with the date of his death (except in a case of a bona fide sale for an adequate and full consideration in money or money\'s worth) transferred an interest in property, relinquished a power, or exercised or released a general power of appointment, such transfer, relinquishment, exercise, or release shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this section and sections 2038 and 2041 (relating to revocable transfers and powers of appointment); but no such transfer, relinquishment, exercise, or release made before such 3-year period shall be treated as having been made in contemplation of death. Aug. 16, 1954, c. 736, 68A Stat. 381; Oct. 16, 1962, Pub.L. 87-834, ž 18(a) (2) (C), 76 Stat. 1052. 26 U.S.C. ž 2035(a), (b) (1954), as amended.
(e) Valuation. The value of an interest in transferred property includible in a decedent\'s gross estate under this section is the value of the interest as of the applicable valuation date. In this connection, see sections 2031, 2032 and the regulations thereunder. However, if the transferee has made improvements or additions to the property, any resulting enhancement in the value of the property is not considered in ascertaining the value of the gross estate. Similarly, neither income received subsequent to the transfer nor property purchased with such income is considered. 26 C.F.R. ž 20.235-1(e) (1972).

Both sides also argue the meaning and applicability of Section 2042 of the Internal Revenue Code of 1954:

ž 2042. Proceeds of life insurance
The value of the gross estate shall include the value of all propertyÔÇö
(1) Receivable by the executor. ÔÇöTo the extent of the amount receivable by the executor as insurance under policies on the life of the decedent.
(2) Receivable by other beneficiaries.ÔÇöTo the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. * * * 26 U. S.C. ž 2042(1), (2) (1954).

This case again presents the age-old argument in tax cases of form versus substance. Appellee executor claims that decedent never owned the insurance policy and, hence, never transferred it. The executor also claims that the only transfer was the payment by decedent of $9,600 to the trustee and that $9,600 is the greatest sum which possibly can be subject to tax under ž 2035.

The government asks us to look through form to substance. It asserts that decedent transferred "insurance protection" as surely as if he had bought the policy and then assigned it to the trustee. The government concedes that decedent did not retain any "incidents of ownership," within the meaning of ž 2042, but asks us to hold that "the trustee was in substance and reality acting as the decedent's agent in purchasing the policy."

The District Judge relied upon several cases dealing with the same issue: Mercantile Trust Co. v. United States, 312 F.Supp. 108 (E.D.Mo.1970); Estate of Inez Coleman, 52 T.C. 99 (1969); Gorman v. United States, 288 F.Supp. 225 (E.D.Mich.1968). He held:

Here, it is undisputed that the decedent never had any interest in the Travelers life insurance policy but, instead, had transferred to an irrevocable trust the sum of $9,600.00 to pay the initial premium on such a policy.
At the time the Trustee acquired this life insurance policy, with the $9,552.00 paid out of the trust corpus, it acquired all interests in that policy. Thus, in line with the reasoning and holdings of the above cited decisions, we find that the proceeds of the Travelers life insurance policy acquired by the Trustee with the funds supplied by decedent\'s transfer to the trust corpus are not includable in decedent\'s gross estate for federal tax purposes. Nevertheless, if decedent\'s transfer of the $9,600.00 to the trust corpus for acquisition of the life insurance policy was made in contemplation of death, then this sum is includable in decedent\'s estate under 26 U.S.C. ž 2035, since this transfer was in the nature of a gift depleting decedent\'s estate within three years of death.

Subsequent to decision of this case, the government has issued a revenue ruling, Rev.Rul. 71-497, 1971 Int.Rev. Bull. No. 45, at 16, reiterating the government's position as stated above. Also subsequent to decision by the District Judge, the Fifth Circuit handed down a well reasoned opinion which arrives at the result sought herein by appellant United States of America. Bel v. United States, 452 F.2d 683 (5th Cir. 1971), cert. denied, 406 U.S. 919, 92 S.Ct. 1770, 32 L.Ed.2d 118 (1972).

In Bel where the decedent employed a trust essentially identical to that at issue here, the Fifth Circuit held the tax applied. It said:

We recognize, of course, that John Bel never formally possessed any of the incidents of ownership in the accidental death policy. As noted above, however, we conclude that section 2042 and the incidents-of-ownership test are totally irrelevant to a proper application of section 2035. We think our focus should be on the control beam of the word "transfer." The decedent, and the decedent alone, beamed the accidental death policy at his children, for by paying the premium he designated ownership of the policy and created in his children all of the contractual rights to the insurance benefits. These were acts of transfer. The policy was not procured and ownership designated and designed by some goblin or hovering spirit. Without John Bel\'s conception, guidance and payment, the proceeds of the policy in the context of this case would not have been the children\'s. His actions were not ethereally, spiritually, or occultly actuated. Rather, they
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