CENTRAL HANOVER BANK AND TRUST COMPANY v. COMMISSIONER OF INTERNAL REVENUE

• Court: U.S. Board of Tax Appeals
• Citation: Cent. Hanover Bank & Trust Co. v. Comm'r, 40 B.T.A. 268 (B.T.A. 1939)
• Decision Date: 25 July 1939
• Docket Number: Docket No. 88451.
• Parties: CENTRAL HANOVER BANK AND TRUST COMPANY, AS EXECUTOR OF THE ESTATE OF EDWARD L. NORTON, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

40 B.T.A. 268 (1939)

CENTRAL HANOVER BANK AND TRUST COMPANY, AS EXECUTOR OF THE ESTATE OF EDWARD L. NORTON, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 88451.

Board of Tax Appeals.

Promulgated July 25, 1939.

Ruth Lewinson, Esq., for the petitioner.

Harold F. Noneman, Esq., for the respondent.

OPINION.

MELLOTT:

The Commissioner determined a deficiency in estate tax in the amount of $1,655.98, all of which is in issue. The sole question is whether or not the sum of $20,000 received by the guardian of decedent's only child is includable in decedent's gross estate. The salient facts, all of which were stipulated, may be summarized.

The petitioner, a corporation having its principal place of business in New York City, is the duly qualified and acting executor under the last will and testament of Edward L. Norton, deceased, who died prior to January 28, 1935. Pauline H. Norton, as general guardian of Edward L. Norton III, the only child of the decedent, who at the time of decedent's death was three years of age, received the sum of $20,000 by check dated September 30, 1935, issued by the trustees of the gratuity fund of the New York Stock Exchange. The Commissioner has included said sum in decedent's gross estate "on the ground that it is insurance taken out by the decedent on his own life and payable to beneficiaries other than the estate within the meaning of section 302 (g) of the Revenue Act of 1926."¹

The constitution of the New York Stock Exchange provides that before one may be admitted to the privileges of membership he shall pay to the trustees of the gratuity fund, consisting of the president and treasurer of the exchange and five others, the sum of $15. By signing the constitution he also "pledges himself to make, upon the death of a member of the Exchange, a voluntary gift to the family of each deceased member in the sum of fifteen dollars, which shall be paid by the member at quarterly periods on the dates on which dues to the exchange are paid." The faith of the exchange is pledged to pay, within one year after the proof of death of any member, out of the moneys so collected, the sum of $20,000 which, in the language of the constitution, "shall be a voluntary gift from the other members of the Exchange, free from all debts, charges or demands whatever"; that the obligation to make payment shall not be construed as a joint liability of the exchange or its members, "the liability of each member, at law or equity, being limited to the payment of fifteen dollars only on the death of any other member, and the liability of the Exchange being limited to the payment of the sum of twenty thousand dollars, or such part as may be collected * * *"; that nothing contained in the agreement shall be construed "as constituting any estate in esse which can be mortgaged or pledged for the payment of any debts"; and that it shall be construed "as the solemn agreement of every member of the Exchange to make a voluntary gift to the family of each deceased member, and of the Exchange, to the best of its ability, to collect and pay over to such family, the said voluntary gift."

The constitution designates the beneficiaries to whom payment of said sum shall be made, other beneficiaries may not be selected or designated by a member, and the payment in issue here was made to and for the benefit of the beneficiary described in the constitution. Other sections provide that a member who shall neglect to make "a contribution to the Gratuity Fund for 45 days after the same shall become payable * * *, after due notice, shall be suspended until payment is made", and if payment is not made within one year after payment is due, the membership of the delinquent may be disposed of by the committee on admissions.

In the year 1934 there were approximately 1,374 members of the exchange, so the amount collected by the treasurer pursuant to bills rendered was in excess of the $20,000 payable by the trustees to the family of any deceased member. Gratuity fund payments made by the members of the exchange pursuant to bills rendered, in excess of the amount payable to the family of a deceased member, were accumulated by the trustees of the gratuity fund in a reserve fund, interest on which was credited pro rata annually to the members of the exchange.

The petition alleges that since the decedent had no interest in the gratuity fund of the exchange, exercised no control over it during his lifetime, and had no power to designate the beneficiary upon his death, the $20,000 payment was a gift from the members of the exchange to the decedent's next of kin and therefore not includable in his gross estate. (No brief was filed by petitioner.) The respondent contends, as set out above, that the amount is includable in decedent's gross estate as insurance taken out by the decedent on his own life and payable to beneficiaries other than the estate.

It is apparent from a reading of the constitution of the exchange that a studious effort was made to avoid setting up the gratuity fund in such a way that either the exchange itself or its members could be construed to be engaged in the business of life insurance. Thus the amount to be paid is several times characterized as "a voluntary gift" or "contribution", the fund is designated as a "gratuity", the members agree "to contribute to the provision for the families of deceased members", the exchange agrees "to collect and pay over to such family the said voluntary gift", and it is provided that the obligation shall never be construed to be a joint liability of the exchange and its members or a liability of the exchange to do more than pay over the amount "after it shall have been collected from the members, and not otherwise." Other facts and circumstances tending to support the view that the amount in question was not paid "as insurance under policies taken out by the decedent upon his own life" are, that no policy was ever issued, the deceased made no application for insurance there is nothing to indicate that an insurance or investment risk was undertaken by the exchange or its members, the amount of the individual contribution was not determined by reference to tables of experience and mortality customarily used in insurance, no definite sum was agreed to be paid unless collected, the member could not designate the beneficiary, no medical examination or personal history statement was required, and neither the member nor the beneficiary had any property right in the fund until collection, subsequent to the death of the member, was made. Reasoning somewhat along this line, the Supreme Court of California, in Swift v. San Francisco Stock & Exchange Board, 67 Cal. 567; 8 Pac. 94, held that the exchange board was not engaged in the business of insurance even though its constitution required the member to file with its secretary a medical certificate attesting his fitness to be a participant in what was designated by the constitution as the "Life insurance fund." Cf. Old Colony Trust Co. et al., Executors, 37 B. T. A. 435; affd., 102 Fed. (2d) 380; Donald v. Chicago, B. & Q. Ry., 93 Iowa, 284; 61 N. W. 971; Ballou v. Gile, 50 Wis. 614; 7 N. W. 561; Smith's Administrator v. Hatke, 115 Va. 230; 78 S. E. 584.

But even though the exchange did not issue a policy of insurance it did make a "promise or agreement with its members whereby, upon the decease of a member, * * * money or other benefit, charity, relief or aid is to be paid, provided or rendered * * * derived from voluntary donations or from admission fees, dues or assessments." The quotation is from section 201 of the New York Insurance Law, which concludes that any corporation, association or society so doing "shall be deemed to be engaged in the business of life insurance upon the co-operative or assessment plan * * *." If the contract is to be construed and interpreted under the laws of New York, Liverpool & Great Western Steam Co. v. Phenix Insurance Co., 129 U. S. 397; Mutual Life Insurance Co. of New York v. Cohen, 179 U. S. 262; Louise C. Moore, Executrix, 33 B. T. A. 108; cf. Lyeth v. Hoey, 305 U. S. 188, the following cases tend to support the view that the exchange may have been "engaged in the business of life insurance upon the co-operative or assessment plan" within the purview of the New York statute. Commonwealth v. Wetherbee, 105 Mass. 149, 160; Sauerbrunn v. Hartford Life Ins. Co., 220 N. Y. 363; 115 N. E. 1001; Evans v. Supreme Council of Royal Arcanum, 223 N. Y. 497; 120 N. E. 93; Massey v. Mutual Relief Society of Rochester, 102 N. Y. 523; 7 N. E. 619; Alden v. Supreme Tent of the Knights of...