Catalano v. United States

Citation429 F.2d 1058
Decision Date16 December 1969
Docket NumberNo. 27506.,27506.
PartiesMrs. Anna Terranova CATALANO and Mrs. Rosemary Catalano Loup, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Louis C. LaCour, U. S. Atty., Joan Elaine Chauvin, Asst. U. S. Atty., New Orleans, La., Johnnie M. Walters, Asst. Atty. Gen., Michael B. Arkin, Lee A. Jackson, Attys., U. S. Dept. of Justice, Tax Division, Jonathan S. Cohen, Jr., Atty., U. S. Dept. of Justice, Washington, D. C., Peter Winstead, Atty., U. S. Dept. of Justice, Tax Dept., Fort Worth, Tex., for defendant-appellant.

Albert B. Koorie, Benjamin E. Loup, New Orleans, La., for plaintiff-appellee.

Jerome J. Reso, Jr., Solomon S. Goldman, New Orleans, La., Richard E. Gerard, Lake Charles, La., for amicus curiae.

Before RIVES, BELL and DYER, Circuit Judges.

DYER, Circuit Judge:

The United States appeals from a judgment awarding plaintiffs a refund of estate tax deficiencies in the amount of $4,295.76, with interest. The judgment was based on the District Court's determinations that: (1) decedent did not possess incidents of ownership in one-half of the proceeds of a policy of life insurance on his life and this sum should therefore not be included in his estate, and (2) the estate was entitled to deduct real estate taxes for 1959 in the amount of $596.63 from the gross estate because the liability therefor had become an enforceable obligation of the decedent at the time of his death. We agree with the first of these determinations but not with the second. Accordingly, we affirm in part and reverse in part.

The case was tried before the District Judge upon fully stipulated facts, depositions and exhibits. We will deal first with the life insurance issue and then with the question of the real estate tax deduction.

I.

In 1958 William Catalano applied for a life insurance policy in the face amount of $25,000 with the Manhattan Life Insurance Company of New York, and apparently requested that his wife be designated the owner as well as the beneficiary. The policy as issued designated him the owner so he returned it to the company with a written request that his wife be substituted as the owner. The company returned the policy to decedent with the following endorsement:

The owner of this policy is Anna T. Catalano, wife of the Insured. All options, privileges, values and benefits granted by this policy to the Insured or to the Insured\'s estate shall belong to said owner or her executors or administrators, anything in this policy to the contrary notwithstanding.

All premiums were paid with community funds (Louisiana is a community property state). Catalano died intestate in October 1959, a domiciliary of Louisiana, and the insurance company paid the $25,000 proceeds of the policy directly to decedent's wife as beneficiary.

The Commissioner assessed and collected a deficiency based upon his determination that decedent possessed incidents of ownership in one half of the proceeds of the policy because the policy was part of the community of acquest and gains of the marriage. This suit for refund followed.

Under Section 2042 of the Internal Revenue Code of 1954 life insurance proceeds are included in a decedent's gross estate if, at his death, he possessed any "incidents of ownership, exercisable either alone or in conjunction with any other person." It is undisputed in this case that decedent possessed no "economic" incidents of ownership within Treas.Reg. § 20.2042-1(c) (2). Whether he possessed any "legal" incidents of ownership is to be determined with reference to the applicable state law. Lang v. Commissioner of Internal Revenue, 1938, 304 U.S. 264, 58 S.Ct. 880, 82 L.Ed. 1331; Freedman v. United States, 5 Cir. 1967, 382 F.2d 742; Scott v. Commissioner of Internal Revenue, 9 Cir. 1967, 374 F.2d 154; Treas.Reg. § 20.2042-1(c) (5).

It is true, as the government urges, that under Louisiana law all assets acquired during the marriage are presumed to be community property, La.Civ.Code, Art. 2405, and that the presumption is not rebutted by the fact that title to a particular asset is held solely in the name of one spouse. E. g., De Maupassant v. Clayton, 1949, 214 La. 812, 38 So.2d 791; Johnson v. Johnson, 1948, 213 La. 1092, 36 So.2d 396.

However, as the District Court correctly stated, in Louisiana a life insurance policy is a contract sui generis, governed by rules peculiar to itself. It is the outgrowth of judicial precedent and not of legislation, and, as such, it is not governed by the articles of the Louisiana Civil Code as to ownership of the policy itself or as to ownership of the proceeds. Sizeler v. Sizeler, 1930, 170 La. 128, 127 So. 388. Even though it is a community property state, Louisiana long ago established the clear precedent under its jurisprudence

That a policy of insurance, issued at the instance of the husband, upon his own life, in favor of his wife, inures to her separate benefit from the date of its issuance, and that the interest so acquired by the wife is not then or thereafter affected by the fact that the premiums are paid by the husband from the funds of the community. * * *

Succession of Desforges, 1914, 135 La. 49, 64 So. 978, 981; accord Lambert v. Penn Mutual Life Insurance Company, 1898, 50 La.Ann. 1027, 24 So. 16; Putnam v. New York Life Insurance Company, 1890, 42 La.Ann. 739, 7 So. 602; Pilcher v. New York Life Insurance Company, 1881, 33 La.Ann. 322.

The government asks us to disavow these precedents on the basis that they are old and that in more recent cases Louisiana has recognized that life insurance policies acquired during marriage are subject to the general rules and presumptions governing community property in Louisiana. We reject the government's argument and find that the nearly century old rule — that life insurance policies acquired during marriage in which the wife is irrevocably named the beneficiary inure to her separate estate — is alive and well in Louisiana. The three cases relied on by government are all distinguishable from the older cases and from the instant case. Messersmith v. Messersmith, 1956, 229 La. 495, 86 So.2d 169, involved a policy in which the insured himself was the beneficiary. Berry v. Franklin State Bank & Trust Company, 1937, 186 La. 623, 173 So. 126, and Pollock v. Pollock, 1928, 164 La. 1077, 115 So. 275, are inapposite because they involved policies in which the beneficiary could be changed. Furthermore, the doctrine of the older cases (Desforges, Lambert, Putnam and Pilcher, supra) was recently reaffirmed in Scott v. Scott, La.Ct.App.1965, 179 So.2d 656. In discussing the rights of a beneficiary under a life insurance policy where no right is reserved to change the beneficiary, Scott pointed out that under Louisiana law the insured's possession, vel non, of the right to change the beneficiary of a life insurance policy determines whether the insured possesses any other policy-rights; and the insured's irrevocable designation of a beneficiary vests the policy-rights, as well as the proceeds-rights, in the beneficiary. Id. at 657. In the instant case, once the wife was named the owner of the policy, all power to change the beneficiary by decedent was extinguished. Therefore, as far as the decedent was concerned, his wife was the irrevocable beneficiary and, as a matter of Louisiana law, the policy-rights and proceeds-rights became part of her separate estate. Succession of Desforges, supra.

Nevertheless, the government urges that Freedman v. United States, 5 Cir. 1967, 382 F.2d 742, is controlling. There, the decedent insured her life and named her husband the beneficiary. He signed as the owner. We held that the policy was owned by the marital community and that one-half its value was includable in the wife's gross estate. We noted that under Texas law property purchased with community funds is presumed to belong to the community even though title is in the name of one spouse only. To rebut the presumption Texas requires a showing that the unnamed spouse intended a gift of her community interest. We said there was no affirmative act which would clearly reflect such an intention, and 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 that he should own the policy as the community's agent.

If there were no controlling Louisiana law we might well find Freedman persuasive. But Freedman dealt with the law of Texas and we cannot accept the government's sweeping conclusion that the same rules of community property are followed in Texas and Louisiana. The Louisiana jurisprudence is well settled that life insurance policies on the life of the husband unconditionally owned by the wife or in which she is the irrevocable beneficiary are, as a matter of law, deemed part of her separate estate. They therefore are not within the Louisiana presumption that all property acquired during the marriage is community property. Moreover, LSA-R.S. 22:1521 provides that donations inter vivos of life insurance policies and the naming of beneficiaries therein are not governed by any other provisions of Louisiana law relative to the form of donations inter vivos. Thus, no formal act is necessary to complete the gift and it is not necessary for us to find a specific, affirmative act of donative intent as it was when we were considering Texas law in Freedman.1See, e. g., Sizeler v. Sizeler, supra.

We hold that where a husband takes out a policy of insurance on his life and either irrevocably names his wife the beneficiary or makes her the owner of the policy, he retains no interest in the proceeds of the policy under Louisiana law and, therefore, no "incidents of ownership" within Int.Rev. Code, § 2042.

II.

At his death the decedent owned certain real property in Orleans Parish, Louisiana. The Commissioner disallowed a deduction of...

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