Coleman v. Comm'r of Internal Revenue (In re Estate of Coleman) , Docket No. 4333-68.

• Decision Date: 09 September 1969
• Docket Number: Docket No. 4333-68.
• Citation: 52 T.C. 921
• Parties: ESTATE OF INEZ G. COLEMAN, DECEASED, D. C. COLEMAN, JR., EXECUTOR, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

52 T.C. 921

ESTATE OF INEZ G. COLEMAN, DECEASED, D. C. COLEMAN, JR., EXECUTOR, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4333-68.

Tax Court of the United States.

Filed September 9, 1969.

Sydney S. Traum, for the petitioner.

Glen W. Gilson II, for the respondent.

1. Decedent's three children purchased and at all times owned a life insurance policy on her life. Decedent paid all the premiums, a portion of which were concededly in contemplation of death. Held, no portion of the proceeds of the insurance is includable in her estate under sec. 2035, I.R.C. 1954, the amount includable being limited to the premiums paid in contemplation of death.

2. Decedent, as lessor of a lease, expiring in 2057, received a security deposit which was returnable only upon the expiration of the lease and then only if the lessee had performed all of the numerous obligations under the lease. Held, the potential obligation to refund the amount of the deposit did not constitute an allowable deduction under sec. 2053, I.R.C. 1954.

OPINION

TANNENWALD, Judge:

Respondent has asserted a deficiency against petitioner of $20,334.75 in estate tax. The issues for decision are (1) whether the amount to be included in decedent's gross estate under section 2035¹ should be a prorata portion of the proceeds of insurance on decedent's life or the amount of the premiums conceded to have been paid by the decedent in contemplation of death and (2) whether a potential obligation of the decedent, as lessor, to refund a $36,000 security deposit under a lease constitutes a deductible claim under section 2053.

All of the facts have been stipulated and are found accordingly.

The decedent, Inez G. Coleman, died on July 9, 1964. D. C. Coleman, Jr., received letters testamentary as executor on July 24, 1964, and was a legal resident of Miami, Fla., at the time of the filing of the petition herein. The Federal estate tax return was filed with the district director of internal revenue, Jacksonville, Fla.

Includability of Life Insurance Proceeds

On June 23, 1961, decedent's three children purchased as record owners and beneficiaries an insurance policy on her life.² The children owned the policy; the decedent never possessed or transferred any of the record incidents of ownership. Decedent paid all the premiums, totaling $4,821. Of the total premiums, $3,373 was paid within 3 years of her death. The parties agree that only.$1,686.50 of this latter amount was paid in contemplation of her death. Upon decedent's death, her children received a total of $25,905.94 in proceeds as beneficiaries of the policies.

The petitioner contends that only.$1,686.50, the money amount of the premiums paid in contemplation of death, should be included in the gross estate. The respondent contends that the amount to be included in the gross estate is that part of the total proceeds which bears the same proportion to the total proceeds as the premiums paid in contemplation of death bear to the total premiums paid. The issue thus joined is one of first impression in this Court.

At the outset, it is important to note that we are not here concerned with the unquestioned power of Congress to impose an estate tax on the proceeds of life insurance based upon the amount of premiums paid by the decedent. United States v. Manufacturers Nat. Bank, 363 U.S. 193 (1960). Nor are we concerned with whether the decedent made any transfer at all. Compare Chase Nat. Bank v. United States, 278 U.S. 327 (1929). Rather, the question before us is what did the decedent transfer.

We also underscore the fact that respondent's position is premised upon the applicability of section 2035³ and not upon section 2042. See sec. 20.2042-1(a)(2), Estate Tax Regs. The latter section is clearly inapplicable, since includability of the proceeds of life insurance under its provisions depends upon the retention of incidents of ownership by the decedent— an element which respondent concedes is nonexistent in this case.

Petitioner argues that when Congress abolished the ‘premium payment’ test by the enactment of section 2042 in 1954, it necessarily precluded the inclusion of any portion of the proceeds of life insurance based upon the amount paid. Heavy reliance is placed upon the explanation of the legislative committees that ‘This section revises existing law so that the payment of premiums is no longer a factor in determining the taxability under this section of insurance proceeds.’ See H. Rept. No. 1337, 83d Cong., 2d Sess., p. A316 (1954); S. Rept. No. 1622, 83d Cong., 2d Sess., p. 472 (1954). We are unable to agree fully with petitioner's argument. The quoted sentence is limited by the phrase ‘under this section.’ It is therefore not automatically determinative of congressional intent. Nevertheless, it is clear from the legislative history that Congress sought to inter the ‘premium payment’ test with the ashes of the 1939 Code as an independent generating force for the includability of insurance proceeds. Under these circumstances, we hesitate to adopt an expansive construction of section 2035 in the area of life insurance, which would permit that test to rise phoenixlike from the language of that section.

Section 2035, by its terms, applies only to a ‘transfer’ of an interest in property by a decedent. In Rev. Rul. 67-463, 1967-2 C.B. 327, respondent decreed that the mere payment of premiums operated as transfer of an interest in the proceeds of insurance— in this case, by the decedent to her children. We disagree.

If the decedent had purchased a life insurance policy, initially retaining the ownership in herself, and thereafter assigned it to her children, there clearly would have been a ‘transfer’ of an interest in the policy. E.g., Vanderlip v. Commissioner, 155 F.2d 152 (C.A. 2, 1946); Estate of Arthur H. Hull, 38 T.C. 512, 525, 530 (1962), reversed on other grounds 325 F.2d 367 (C.A. 3, 1963). Cf. Liebman v. Hassett, 148 F.2d 247 (C.A. 1, 1945). If, on the other hand, decedent had given money to her children, and they, entirely on their own volition, had chosen to purchase an insurance policy on her life, it would be equally clear that only the money would have been ‘transferred.’ Cf. Humphrey's Estate v. Commissioner, 162 F.2d 1 (C.A. 5, 1947), affirming a Memorandum Opinion of this Court.

The purpose of section 2035 is to prevent the avoidance of estate tax through the use of gifts as a substitute for testamentary disposition of what would otherwise be included in the gross estate. Milliken v. United States, 283 U.S. 15 (1931); see Liebman v. Hassett, 148 F.2d at 251. The focus, therefore, must be on what the decedent parted with as a result of her payment of the premiums in contemplation of death. Decedent held no interest whatsoever in the policy or its proceeds. Her children were the sole owners of the policy and only they could deal with rights and benefits flowing therefrom. To be sure, these payments kept the economic substance of that ownership alive. But the decisive point is that what these payments created or maintained was theirs and not hers. In these circumstances, we can see no basis for concluding that there was a constructive transfer of an interest in the policy. The only thing diverted from her estate was the actual money paid.

The question whether the payment of premiums can be equated with a transfer of the proceeds of an insurance policy has previously been considered in another context. In Goodnow v. United States, 302 F.2d 516 (Ct. Cl. 1962), the decedent was the income beneficiary for life of a trust of the proceeds of insurance on the life of her deceased husband. At no time did the decedent have any of the incidents of ownership in the policies or any power to change the terms of the governing trust instrument. She had, however, paid all the premiums. Upon her death, the Commissioner of Internal Revenue sought to include the principal of the trust (i.e., the insurance proceeds) in her gross estate under section 2036(a)(1), contending that, by the payment of premiums, she had in effect made an inter vivos transfer of property with a retained life interest. The Court of Claims rejected this contention and held that the payment of premiums did not constitute a transfer of the insurance proceeds. The same rationale was applied in Estate of Ida Jarvis Pyle, 36 T.C. 1017 (1961), affd. 313 F.2d 328 (C.A. 3, 1963), and Estate of Miran Karagheusian, 23 T.C. 806 (1955), reversed on another ground 233 F.2d 197 (C.A. 2, 1956). In the latter case, we stated:

The facts show that the insurance policy was applied for by Zabelle (decedent's wife), issued to her, and transferred by her to the trustee. Decedent, never having owned the policy, could not and did not make any transfer of it in contemplation of death or otherwise.

See 23 T.C.at 814. See also National City Bank of Cleveland v. United States, 371 F.2d 13, 16 (C.A. 6, 1966).

The precise issue herein has been decided by two U.S. District Courts. In Gorman v. United States, 288 F.Supp. 225 (E.D. Mich. 1968), Judge Kaess, in an exhaustive opinion which analyzes in detail and fully distinguishes the principal cases relied upon by respondent herein, upheld the taxpayer. In First National Bank of Midland v. United States, an unreported case (W.D. Tex. 1968, 69-1 U.S.T.C.par. 12,574, 1969 P.-H.Fed.Tax Serv.par. 147,310), the position of the Government was sustained exclusively on the authority of Rev. Rul. 67-463, supra.

We agree with Gorman v. United States, supra, and hold that the frontiers of section 2035 should not be extended to include the proceeds of life insurance simply because a decedent paid the premiums. Only the dollar amount of the premiums paid in contemplation of death is includable in the gross estate of the decedent herein.

The Security Deposit

In 1958, decedent, as lessor, leased certain property for a 99-year term expiring December 31, 2057. Upon the execution of the lease, she...