Bank Of New York v. Kelly

• Decision Date: 15 August 1944
• Docket Number: No. 7101.,7101.
• Citation: 38 A.2d 899
• Parties: BANK OF NEW YORK v. KELLY, State Tax Com'r. In re PARISH'S ESTATE.
• Court: New Jersey Prerogative Court

38 A.2d 899

BANK OF NEW YORK

v.KELLY, State Tax Com'r.

In re PARISH'S ESTATE.

No. 7101.

Prerogative Court of New Jersey.

Aug. 15, 1944.

Proceeding in the matter of the transfer inheritance tax in the estate of Wainwright Parish, deceased, upon appeal by Bank of New York, as executor of the last will of Wainwright Parish, deceased, from assessment of tax on inter vivos transfer, opposed by William D. Kelly, State Tax Commissioner.

Decree advised in accordance with opinion.

1. Where a life insurance policy is issued simultaneously, and procurable only in conjunction with an annuity contract, the proceeds of the life insurance policy are not, under such circumstances, exempted from taxation under our transfer inheritance tax statute. R.S. 54:34-4, subd. f; N.J.S.A. 54:34-4, subd. f.

2. This result is a recognition of the principle, in matters of taxation, that substance is to be exalted over form.

3. One may resort to any legal method available to him to avoid or diminish his tax liability. However, the refinements or technicalities of contracts and conveyances are not the true diagnostics of the taxability of a transfer.

4. Our transfer inheritance tax statute envelops all transfers which among incidental objects are in reality substitutes for testamentary dispositions.

William Byrd, of New York City, for petitioner.

Walter D. Van Riper, Atty. Gen., and William A. Moore, Special Counsel, of Trenton, for respondent.

JAYNE, Vice Ordinary.

This appeal occasions an investigation of the legal and factual propriety of a transfer inheritance tax assessment on an inter vivos transfer. The pertinent legal principles are exemplified by the extended procession of our reported decisions. The factual environment of the present controversy is exhibited by the stipulation incorporated in the transcript of the proceedings before the Tax Commissioner.

One Wainwright Parish, a resident of Gladstone, Morris County, New Jersey, died testate on October 1, 1941, at the age of seventy-four years. He had pursued the profession of an architect and resolved to retire and enjoy his remaining years on a farm. In 1928 he married Mrs. Eleanor B. Hewitt, a widow, and became the stepfather of her two sons, to whom he became affectionately attached. During the period of the economic depression, he appreciated the dependency of his wife and himself upon the constancy of his capital resources. Amid the prevailing evidences of desperate liquidation and the noticeable evaporation of market values, he experienced some anxiety concerning his own finances. He was presumably affluent at the time of his retirement. I note that at death his net estate, exclusive of the proceeds of the life insurance policy, approximated $450,000.

The prospect to poverty is always more alarming to the conservative rich than to the improvident poor. He had arrived at the age of sixty-nine years in 1935, and he had evidently become aware of a plan, then often advocated by investment consultants, which was represented to furnish a ‘hedge’ against apprehended future losses. His meditations upon the advisability of adopting the plan assuredly encompassed his conceptions of the probabilities and apprehended possibilities of the future. It seems reasonable to infer that among his thoughts was that of the security of his wife and step-children if the financial crisis should continue with its irreparable consequences. He resolved to safeguard for himself and those naturally entitled to his bounty a material portion of his assets by means of the ‘hedge.’

Such was the state of his mind when, on December 27, 1935, he purchased from the Travelers Insurance Company of Hartford, Connecticut, for a consideration of $27,576, an annuity contract by the terms of which the company agreed to pay to him on June 6, 1936, the sum of $735.31 and a like sum semi-annually thereafter during the continuance of his life. Simultaneously and indeed, only in conjunction with the annuity contract, the decedent acquired for a single premium of $82,424 from the same company a policy ostensibly insuring his life in the sum of $100,000 payable to his executors, administrators or assigns.

On December 30, 1935, the decedent assigned the life insurance policy to the Bank of New York in trust. The trust indenture directed the trustee to hold and manage the policy and to hold, manage, invest and re-invest the proceeds and avails of the policy when collected, and to pay the net income therefrom to the decedent's widow and the corpus, upon her death, to her children, the stepchildren of the decedent.

Upon the discovery by the Tax Commissioner that the so-called life policy in fact was simultaneously and conjointly issued with the annuity contract, an additional assessment was levied upon the proceeds of the life insurance policy. It is to this latter assessment that the present appeal is addressed.

It is stipulated that the insurance policy would not have been issued without the annuity contract. In combination, the one obviously neutralizes the risk customarily inherent in the other. The total sum passing from the insured to the Insurance Company was $110,000, of which $10,000, or ten per cent, was undoubtedly allocated to what are known as ‘loading charges.’ In return, the decedent became entitled to receive an annuity during his lifetime of $1,470.63, or an income of slightly less than one and one-half percent on his outlay. Upon his death, his estate, pursuant to the terms of the insurance policy as issued, would become entitled to receive the $100,000. The transaction had the substantive elements and practical effects of an investment.

In recognition of the decisions of the United States Supreme Court in Helvering v. Le Gierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996, and Keller v. Commissioner, 312 U.S. 543, 61 S.Ct. 651, 85 L.Ed. 1032, it is acknowledged that the proceeds of the life insurance policy issued in such circumstances in conjunction with the annuity contract are not exempted from taxation by virtue of the provisions of R.S. 54:34-4, subd. f; N.J.S.A. 54:34-4, subd. f. See, also, Old Colony Trust Co. v. Commissioner, 1 Cir., 102 F.2d 380, and affirmance of judgment per stipulation in Tyler v. Helvering, 312 U.S. 657, 6U S.Ct. 729, 85 L.Ed. 1105.

If for purposes relating to transfer inheritance taxation, the transaction here implicated is examined with circumspection, it is easy to perceive the kernel within the shell. The two contracts constitute a single inseparable project in which insurance and annuity are combined. Cf. Commissioner of Internal Revenue v. Clise, 9 Cir., 122 F.2d 998, 1001. The decedent transferred $110,000 of his assets to the insurance company and thereby obtained the contractual obligation of the company (1) to pay to him the...