Carlstrom v. Comm'r of Internal Revenue (In re Estate of Carlstrom), Docket No. 1143-79.

• Decision Date: 28 January 1981
• Docket Number: Docket No. 1143-79.
• Citation: 76 T.C. 142
• Parties: ESTATE of HOWARD F. CARLSTROM, DECEASED, BETTY J. CARLSTROM, EXECUTRIX, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

76 T.C. 142

ESTATE of HOWARD F. CARLSTROM, DECEASED, BETTY J. CARLSTROM, EXECUTRIX, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 1143-79.

United States Tax Court

Filed January 28, 1981.

Wife of decedent applied for an “employer pay all” split-dollar life insurance policy on decedent's life, specifying herself as owner and beneficiary. After the insurance policy became effective, the insurance company sent a policy amendment to the decedent's employer, CFI, making CFI the owner of said policy. At age 49, and within 3 years of the effective date of said policy, decedent died. At the time of his death, the decedent was the owner of 71 percent of the CFI stock. Held under Missouri law the policy amendment was ineffective to transfer ownership of the policy to CFI. Held, further neither the decedent nor CFI possessed incidents of ownership in the policy; therefore, the insurance proceeds payable to the decedent's wife are not includable in the decedent's gross estate under sec. 2042, I.R.C. 1954, or sec. 20.2042-1(c)(6), Estate Tax Regs. Further, assuming arguendo a transfer of the policy to decedent's wife; held such transfer was not made in contemplation of death within the meaning of sec. 2035, I.R.C. 1954. Lon E. Mathews and James C. Moloney for the petitioner.

William E. Bogner for the respondent.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Decedent Howard F. Carlstrom died on March 25, 1975. His widow, Betty J. Carlstrom (hereinafter referred to as Betty), was named executrix of his estate. At the time she filed the petition herein, Betty resided in Chesterfield, Mo. On December 29, 1975, she filed the Federal estate tax return for this estate with the District Director of the Internal Revenue Service in St. Louis, Mo.

On the date of his death and for a period of at least 3 years prior thereto, the deceased was employed as president of Carlstrom Foods, Inc. (hereinafter CFI). On December 1, 1972, at a meeting of the officers of CFI it was approved that CFI would “take care of the premiums” on a life insurance policy for the deceased “in lieu of an increase in salary.” At that time, the deceased owned approximately 20 percent of CFI stock. The other owners of CFI stock were the decedent's mother (31 percent), the decedent's brother (20 percent), and Francis Droesch (28 percent). Betty, with the assistance of Stan Towerman, CLU, an independent insurance agent (hereinafter sometimes referred to as Towerman), motivated the deceased to seek the insurance and the payment of its premiums by CFI.

On December 25, 1972, Betty applied to the Phoenix Mutual Life Insurance Co. of Hartford, Conn. (hereinafter Phoenix), for a $100,000 “employer pay all” split-dollar life insurance policy on the life of the deceased. This application was signed by the deceased, as insured, and Betty, as purchaser. Betty was also the named first owner of the policy and the primary beneficiary. Along with the application, Betty tendered a check drawn on the account of CFI for $600. A “temporary insurance receipt” was made out to Betty but was kept by Stan Towerman in his files. Expert testimony revealed that had the deceased died the very next day, Phoenix would have been obligated to pay the insurance proceeds according to the terms of the application.

By memorandum dated January 11, 1973, Phoenix asked Stan Towerman to provide it with additional information so that the split-dollar amendent could be prepared. This memorandum stated certain assumptions with respect to which Phoenix sought confirmation. Among these was “that the wife, while living, and after her death, the insured, is to have the right to change the bene[ficiary]” of the proceeds not payable to CFI. Towerman responded, inter alia, that only the wife was to have the right to change the beneficiary at all times.

Towerman was notified, via a memorandum from Phoenix dated February 2, 1973, that the application for insurance on the life of decedent was approved and that he would be receiving the policy soon. On February 19, 1973, Towerman delivered the policy to the decedent at the offices of CFI. Accompanying the policy was a request to amend the policy. It provided in pertinent part:

Said Company is hereby requested to amend the application for the above numbered policy so that the owner of said policy shall be as provided in the following Ownership Provision.

OWNERSHIP PROVISION

Subject to the following limitations the owner of this policy shall be Carlstrom Foods, Inc., a Missouri corporation, its successors or assigns.

The printed provisions of this policy are hereby amended so that the owner shall not have the right to change the beneficiary designation and so that Betty J. Carlstrom, wife of the insured, while living, and after her death, Howard Carlstrom, the insured, shall have the right to change any beneficiary not designated as irrevocable. Notwithstanding this amendment, any assignment, release or surrender of this policy by the owner shall operate to the extent thereof to assign, release or surrender the interest of all beneficiaries or owners as provided in the printed provisions of said policy.

All other “RIGHTS OF OWNER” as defined in said policy may be exercised by the owner without the consent of any other party. *ss

Said Company is hereby requested to amend the application for said policy so that the beneficiary designation of said policy shall be as provided in the following Special Settlement Agreement.

SPECIAL SETTLEMENT AGREEMENT

The amount payable on account of the death of the insured shall be payable to Carlstrom Foods, Inc., a Missouri corporation, its successors or assigns, as irrevocable beneficiary, up to but not in excess of a sum equal to the premiums for this policy which shall have become due and been paid at the time of the insured's death, decreased by any indebtedness against the policy and by any amount paid from the death benefit to a collateral assignee or, if greater, the tabular cash value of the policy (as determined from the TABLE OF NONFORFEITURE AND LOAN VALUES) as of the end of the policy year in which the death of the insured occurs, increased by the value of any dividends or by the reserve under any additional insurance purchased by dividends as of the date of death of the insured, and decreased by any indebtedness against the policy and by any amount paid from the death benefit to a collateral assignee, and the balance, if any, shall be payable to:

Primary: Betty J. Carlstrom, wife of the insured

This amendment was executed on February 19, 1973, by the decedent, as insured and as president of CFI, and by his brother, H. Craig Carlstrom, as vice president of CFI. It was witnessed by Stan Towerman. It was also endorsed by two officers of Phoenix. Betty's signature does not appear on the amendment. In fact, Betty has never seen the amendment nor has she ever authorized or consented to its contents.

The decedent died suddenly at the age of 49 years on March 25, 1975, of a heart attack while on vacation in Jamaica. He was an athletic individual, participating regularly in tennis and swimming. Prior to his death there was nothing to indicate that the decedent was in other than excellent health. In addition to his spouse, he was survived by four sons. At the time of his death, the decedent owned approximately 71 percent of the stock of CFI.

Following the death of the decedent, Phoenix issued one check to CFI in the amount of $9,423.23, representing the total premiums paid by CFI for the policy, and one check to Betty in the amount of $99,611.73, representing the balance payable under the insurance policy in issue. These payments were made on or about May 13, 1975.

In the Federal estate tax return (Form 706) for the estate of the decedent, filed December 29, 1975, the $99,611.73 proceeds of the Phoenix policy paid to Betty were not included in the amount reported as the decedent's gross estate. In his notice of deficiency, respondent determined that this amount ¹ should have properly been included in the decedent's gross estate.

OPINION

Respondent alleges that the life insurance at issue is includable in the decedent's gross estate pursuant to sections 2042² and 20.2042-1(c)(6), Estate Tax Regs., or, in the alternative, pursuant to section 2035.

We will first address ourselves to the question of includability of the life insurance proceeds under section 2042, which provides in pertinent part:

SEC. 2042. PROCEEDS OF LIFE INSURANCE.

The value of the gross estate shall include the value of all property—-

(1) Receivable by the executor.—-To the extent of the amount receivable by the executor as insurance under policies on the life of the decedent.

(2) Receivable by other beneficiaries.—-To 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.* * *

The regulations under section 2042 discuss the effect of insurance policies on the life of a decedent which are owned by a corporation controlled by the decedent. They provide, in relevant part:

Sec. 20.2042-1. Proceeds of life insurance.

(c) Receivable by other beneficiaries *ss

(6) In the case of economic benefits of a life insurance policy on the decedent's life that are reserved to a corporation of which the decedent is the sole or controlling stockholder, the corporation's incidents of ownership will not be attributed to the decedent through his stock ownership to the extent the proceeds of the policy are payable to the corporation.* * * if any part of the proceeds of the policy are not payable to or for the benefit of the corporation, and thus are not taken into account in valuing the decedent's stock holdings in the corporation for purposes of section 2031, any incidents of ownership held by the...