Wolitzer v. Comm'r of Internal Revenue (In re Estate of Dimen) , Docket No. 1985-76.

• Citation: 72 T.C. 198
• Decision Date: 24 April 1979
• Docket Number: Docket No. 1985-76.
• Parties: ESTATE of ALFRED DIMEN, PHILIP WOLITZER, EXECUTOR, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

72 T.C. 198

ESTATE of ALFRED DIMEN, PHILIP WOLITZER, EXECUTOR, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 1985-76.

United States Tax Court

Filed April 24, 1979.

Decedent was sole shareholder of a corporation which owned a split dollar life insurance policy on decedent's life. The proceeds were payable to the corporation to the extent of cash surrender value with the remaining portion payable to decedent's daughter. Held, the corporation, and thus decedent, possessed sufficient incidents of ownership in the policy, within the meaning of sec. 20.2042-1(c)(6), Estate Tax Regs., to cause the proceeds of the policy to be included in decedent's gross estate. Seymour Goldberg, for the petitioner.

Paul E. Vignone, for the respondent.

WILBUR, Judge:

Respondent determined a deficiency in the amount of $19,914.43 in the estate tax of the Estate of Alfred Dimen. This deficiency was based on the omission from the gross estate of decedent Alfred Dimen of life insurance proceeds in the amount of $66,867.56, under section 2042(2).¹

Other issues having been settled, we are asked to decide only one question:

Whether Bay Shore, decedent's solely owned corporation, possessed any section 2042(2) incidents of ownership in a life insurance policy on decedent's life sufficient to warrant the inclusion of the proceeds, payable to decedent's daughter, in decedent's gross estate.

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Petitioner is the Estate of Alfred Dimen. Philip Wolitzer, the executor of the estate, resided in Brooklyn, N. Y., at the time the petition was filed in this case. A timely Federal estate tax return (Form 706) was filed with the Internal Revenue Service Center, Mineola, N. Y., Brooklyn District, with payments in the amount of $37,263.28.

Alfred Dimen (decedent), died on March 14, 1972, at the age of 60 years. In 1964, decedent was sole shareholder, as well as president and director, of Accurate Flooring Co., Inc. (Accurate), a New York corporation. On or about June 19, 1964, Accurate² acquired a life insurance policy from Mutual Benefit Life Insurance Co. (Mutual Benefit) on the life of decedent. The policy provided coverage of $65,000, the proceeds being payable at decedent's death as follows: “to the owner (Accurate) an amount equal to the cash surrender value * * *; the remainder of the proceeds to Muriel Dimen, Daughter of the proposed insured, if living.”³

On or about July 29, 1964, Accurate entered into an agreement (supplemental agreement), with Muriel Dimen, daughter of decedent, in connection with the policy on decedent's life.⁴ The supplemental agreement provided:

(3) By the terms of this letter you (Muriel Dimen) have an interest in the maintenance of the insurance and its payment as a death claim, even though we (Accurate) are the sole owner of the policy. Accordingly, although we possess the rights to change the beneficiary and elect settlement options, we will arrange with the insurance company (Mutual Benefit) to change from time to time, in accordance with your wishes and only with your written concurrence, both the beneficiary of the portion of the proceeds not payable to us and the manner of payment to such beneficiary. We further agree that we will not exercise any of the remaining policy rights or options, or any other incident of ownership of the policy, without your written concurrence or before we give you a reasonable opportunity to become the owner of the policy by the payment to us of the cash surrender value at that time. We will file a copy of this letter, executed by us, with said insurance company as evidence of the foregoing limitations on our policy rights.

The supplemental agreement also provided:

Either you or we may cancel this arrangement on thirty days' written notice to the other. If we give the notice, you will have the option to purchase the policy from us at any time within the thirty-day period upon payment to us of the then cash value of the policy. * * *

The life insurance policy on decedent's life provided for change of beneficiary and election of settlement options before maturity as follows:

From time to time, upon request satisfactory to the Company (Mutual Benefit) received at its home office before maturity,

(a) the beneficiary may be changed; and

(b) the Company will agree to apply at maturity under any one of the settlement options, as provided in and subject to all of the applicable provisions of this policy, all or any designated part of the proceeds payable at maturity to a beneficiary who is a natural person taking in his or her own right.

When such a request to change the beneficiary or to apply proceeds under such a settlement option is so received, * * * the earlier designation * * * will then be automatically canceled.

The policy provided not only for change of beneficiary and election of settlement options, but also for change of ownership before maturity; assignment; loans made on sole security of the policy; and surrender for cash before maturity.

In 1969, decedent was the sole shareholder, in addition to being president and director, of Bay Shore Flooring & Supply Corp. (Bay Shore), a New York corporation. Additionally, as of 1969, decedent's holdings in Accurate had decreased and he was then a 75-percent shareholder rather than the sole shareholder. On April 11, 1969, Accurate relinquished to and vested in Bay Shore all right and title and every incident of ownership in the insurance policy.

The absolute assignment was signed by Matthew Savettiere as secretary for Accurate. Muriel Dimen also signed the absolute assignment following the statement: “I, Muriel V. Dimen, hereby consent to the foregoing assignment.” The assignment was pursuant to provisions of the policy that state:

From time to time, upon return of this policy for indorsement with a request satisfactory to the Company received at his home office before maturity, the owner may, without the consent of any beneficiary or any contingent owner, change ownership, contingent ownership, or both. (Emphasis added.)

As of February 28, 1972, 2 weeks before decedent's death, Bay Shore had borrowed $14,083 against the insurance policy. The cash surrender value of the insurance policy at that time was $17,101.24.⁵ The loan was made pursuant to the following provisions: “A loan will be made on the sole security of this policy, upon receipt at its home office of a request satisfactory to the Company (Mutual Benefit).”

The amount of the insurance policy proceeds payable of Bay Shore ($3,307.50) were included in the valuation of Bay Shore as owned by decedent, and were therefore reflected in the gross estate as reported on the return pursuant to section 20.2042-1(c)(6), Income Tax Regs. This amount is not in dispute.

Decedent died on March 14, 1972. On April 21, 1972, Muriel Dimen Schein (formerly Muriel Dimen) filed a proof of death claim with Mutual Benefit for the full amount of the proceeds of the policy in excess of the cash surrender value.

On or about May 31,1972, Mutual Benefit's assistant secretary prepared an Internal Revenue Service Life Insurance Statement (Form 712) attaching a copy of the supplemental agreement and the policy settlement request.

On Schedule D of decedent's Federal estate tax return, the life insurance policy on decedent was reported as being owned by Bay Shore and Muriel (Dimen) Schein, and the total proceeds of $70,175.06 were excluded from decedent's gross estate. Respondent in his notice of deficiency dated December 12, 1975, determined that the amount received by the decedent's daughter, Muriel Dimen, was includable in decedent's gross estate.

OPINION

This case concerns the appropriate treatment, for estate tax purposes, of a split dollar life insurance policy. The term split dollar insurance covers various policy arrangements under which the employer-corporation and the employee share the cost of the policy premiums. Some part of the policy proceeds, generally to the extent that they exceed the cash surrender value at the date of decedent's death, are payable to a beneficiary designated by the insured. See Genshaft v. Commissioner, 64 T.C. 282 (1975); Schwager v. Commissioner, 64 T.C. 781 (1975).⁶

Petitioner contends that ownership of the split dollar life insurance policy was divided between Bay Shore and Muriel Dimen, based on the designated payment of proceeds in the supplemental agreement, and hence decedent had no incidents of ownership attributable to him through Bay Shore in the “death benefits portion” of the policy. Petitioner contends that Muriel Dimen's rights in the death benefits portion of the policy were equivalent to those of an irrevocably designated beneficiary, and points out that under the terms of the supplemental agreement, Bay Shore was bound to carry out Muriel Dimen's requests and directions with regard to the death benefits portion of the policy. ⁷

Respondent, on the other hand, argues that Bay Shore retained the incidents of ownership in the life insurance policy as a whole, despite the supplemental agreement, including the right to surrender or cancel the policy; the right to assign the policy; the right to change the beneficiary, as exercisable in conjunction with Muriel Dimen; and the right to borrow money against the policy. Since Bay Shore was decedent's solely owned corporation, respondent concludes that all incidents of ownership retained by Bay Shore at the date of decedent's death are attributable to the decedent under section 2042(2) as provided in section 20.2042-1(c)(2) and section 20.2042-1(c)(6), Estate Tax Regs.⁸

We agree with respondent. In looking not only at the written documents but also at the transactions that occurred, we find that Bay Shore (and thus decedent) did possess incidents of ownership in the policy.

In pertinent part, section 2042(2) requires the proceeds...