Clark's Estate, Matter of, 9001

• Decision Date: 14 July 1960
• Docket Number: No. 9001,9001
• Citation: Clark's Estate, Matter of, 354 P.2d 112, 10 Utah 2d 427 (Utah 1960)
• Parties: d 427 In the Matter of the ESTATE of Frank Roundy CLARK, Deceased. STATE TAX COMMISSION of Utah, Appellant, v. Leah E. CLARK, Executrix of the Estate of Frank Roundy Clark, Respondent.
• Court: Utah Supreme Court

Page 112

354 P.2d 112

10 Utah 2d 427

In the Matter of the ESTATE of Frank Roundy CLARKDeceasedSTATE TAX COMMISSION of Utah, Appellant, v.Leah E. CLARK, Executrix of the Estate of Frank Roundy Clark, Respondent.

No. 9001.

Supreme Court of Utah.

July 14, 1960.

E. R. Callister, Jr., Atty. Gen., John G. Marshall, Gordon A. Madsen, Asst. Attys.Gen., Ben E. Rawlings, David E. West, Tax Commission, Salt Lake City, for appellant.

Rich, Elton & Mangum, Salt Lake City, for respondent.

WILL L. HOYT, District Judge.

This case involves the question of taxability, under Utah's inheritance tax statute, of moneys received by a beneficiary under a death benefit clause of a retirement plan group annuity contract.

For a number of years prior, and up to the time of, his death, Frank Roundy Clark was an employee of Utah Oil Refining Company.That company had arranged with Equitable Life Assurance Society for the oil company's employees to be covered by a retirement plan group annuity contract.It provided that specified premiums should be paid, one-half by the employer and one-half by the employee, and that, upon retirement under specified conditions, the employee would be entitled to receive a lifetime annuity.The contract also recited:

'If an employee dies before his retirement date while annuities purchased with his purchase payments are in force, the Equitable, upon receipt of due proof of such death, will pay in a single sum to the beneficiary a death benefit equal to the accumulation of the employee's purchase payments with interest, computed in accordance with the contract.No death benefits will be allowed by the Equitable with respect to the employer's purchase payments.The Equitable reserves the right to change the interest rate in accordance with the terms of the contract.'

The contract further provided that the employee had the right to designate the beneficiary under the death benefit clause and to change such designation at any time; also that if the employee died after retirement, without receiving annuity payments equal to the amount of his contributions to the retirement fund, the insurer would pay the difference in a lump sum to the beneficiary named in the death benefit clause.The contract also provided that if the employee's employment terminated before his retirement date he had the option to receive an annuity in the amount purchased by his payments or at his option to withdraw the amount of his payments with interest.A certificate was issued to each employee setting forth the rights and obligations of the employee under the group contract.

Frank Roundy Clark died leaving a will in which his wife, Leah E. Clark, was named executrix.She was also named as Clark's beneficiary under the death benefit clause of the group annuity contract above mentioned, and received as such beneficiary under that contract $10,890.70.She did not include this in her inheritance tax report in Clark's estate.The Tax Commission refused to accept settlement of inheritance tax without the inclusion of the proceeds received by the widow under the group annuity contract in the inheritance tax inventory.The executrix thereupon filed a petition praying for a determination by the court that the moneys received under the annuity contract did not constitute any part of the estate taxable under the inheritance tax statutes.After a hearing the court decided against the contention of the Tax Commission and this appeal is brought from that adjudication.The Tax Commission is referred to herein as the appellant and the executrix as the respondent.

The following provisions of the inheritance tax statutes, Chapter 12 of Title 59 of Utah Code Annotated 1953, require examination in connection with the questions herein involved:

'59-12-2.A tax equal to the sum of the following percentages of the market value of the net estate shall be imposed upon the transfer of the net estate of every decedent, whether a resident or nonresident of this state * * *.'

'59-12-3.The value of the gross estate of a decedent shall be determined by including the value * * * of all property, real or personal, within the jurisdiction of this state, and any interest therein, whether tangible or intangible, which shall pass to any person, in trust or otherwise, by testamentary disposition or by law of inheritance or succession of this or any other state or country, or by deed, grant, bargain, sale or gift made in contemplation of the death of the grantor, vendor or donor, or intended to take effect in possession or enjoyment at or after his death. * * *'

59-12-7 provides how the net estate is to be determined and what deductions are to be allowed from the gross estate.

In construing the foregoing it is deemed advisable to also consider Sec. 59-12-5 which provides as follows:

'59-12-5.Whenever property is held in the joint names of two or more persons or as tenants by the entirety, with right of survivorship, or is deposited in banks or other institutions or depositories in the joint names of two or more persons and payable to the survivor or survivors upon the death of one of such persons, the right of the survivor or survivors to the immediate ownership or possession and enjoyment of such property, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money's worth, shall be deemed a transfer taxable under the provision of this chapter * * *'

It should be noted that the term 'inheritance tax' is misleading, and that this court has heretofore held that the tax provided for in the Utah statute is a tax on the right to transmit property rather than a tax on the right to inherit property or to receive it by devise or bequest.In other words, it is an 'estate tax.'State Tax Commission v. Backman, 88 Utah 424, 55 P.2d 171;Walker Bank & Trust Co. v. State Tax Commission, 100 Utah 307, 144 P.2d 1030.It should further be noted that Utah has no statute which specifically taxes or specifically exempts proceeds paid to a beneficiary under a death benefit provision of an annuity contract or a life insurance policy.Also that Utah has no statute giving to a wife or other beneficiary of a life insurance policy or annuity contract an immediate vested interest in the policy or contract.Some states have such statutes with respect to life insurance policies wherein a life is designated as beneficiary (SeeBailey v. Wood, 202 Mass. 549, 89 N.E. 147, 25 L.R.A.,N.S., 722.)Courts in states having such statutes have held that proceeds of insurance paid to a wife are not to be considered as 'property passing by gift intended to take effect in possession or enjoyment at or after death,' the reason given being that the beneficiary takes an immediate vested interest in the policy upon being designated beneficiary.SeeTyler v. Treasurer & Receiver General, 226 Mass. 306, 115 N.E. 300, L.R.A.1917D, 633.Some insurance companies also have, or in earlier years have had, provisions in their charters or by-laws which have had similar effect in policies issued by them.SeeCentral National Bank v. Hume, 128 U.S. 195, 9 S.Ct. 41, 32 L.Ed. 370.Utah has a statute, Sec. 78-23-1(8) which exempts from execution 'All moneys, benefits, privileges or immunities accruing or in any manner growing out of any life insurance, if the annual premiums paid do not exceed $500.'But exemption from execution for payment of debts does not exempt from payment of estate taxes.

Counsel for respondent contend that the payment received by the beneficiary herein was in the nature of proceeds of life insurance and 'passed to her by the terms of the policy and not by the laws of intestacy or wills' and are therefore not subject to the tax sought to be imposed.Counsel assert that the ruling of this court in In re Fenner's Estate, 2 Utah 2d 134, 270 P.2d 449, establishes that proceeds of life insurance are not taxable under the inheritance tax law.They rely upon the following statement from the opinion in that case: 2 Utah 2d at page 136, 270 P.2d at page 450.

'The proceeds of a policy of life insurance payable to a specific beneficiary or assignee have generally been held not to be subject to state taxes on the death of the insured, in the absence of a statute expressly providing to the contrary, for the reason that the proceeds of such a policy pass by the terms of the insurance contract, and not by the will of the insured or the intestate laws, and the rights of the beneficiary or assignee arise at the time when the policy is issued or the assignment is made rather than upon the death of the insured.'

The quoted statement was evidently taken from a statement in similar language found in 150 A.L.R. 1288 in the annotation appended to Gragg v. Commissioner of Corporations and Taxation, 315 Mass. 704, 54 N.E.2d 169.The first so-called reason 'that the property passes by the terms of the insurance contract and not by the will of the insured or by the intestate laws' is clearly insufficient under a statute such as ours making taxable property which passes by grant or gift to take effect upon death of the grantor or donor.The second stated reason that 'the rights of the beneficiary or assignee arise at the time when the policy is issued or the assignment is made' is definitely not correct in the case of a beneficiary where the insured has retained up to the time of his death the right to change the beneficiary or to make the insurance payable to his estate.The quoted statement as found in the Fenner case was not necessary to the decision of that case and must be considered dicta.That case was an action brought to determine whether the estate of Cora E. Fenner could be charged with so-called inheritance tax upon certain funds paid under certain insurance policies upon the life of her husband, Walter E. Fenner, who...