Commissioner of Internal Revenue v. Clise

• Decision Date: 13 November 1941
• Docket Number: No. 9652.,9652.
• Citation: 122 F.2d 998
• Parties: COMMISSIONER OF INTERNAL REVENUE v. CLISE et al.
• Court: U.S. Court of Appeals — Ninth Circuit

122 F.2d 998 (1941)

COMMISSIONER OF INTERNAL REVENUE v. CLISE et al.

No. 9652.

Circuit Court of Appeals, Ninth Circuit.

October 4, 1941.

Rehearing Denied November 13, 1941.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Joseph M. Jones, and Alexander Tucker, Sp. Assts. to the Atty. Gen., for petitioner.

Warren H. Lewis, K. I. Ghormley, and Wendell W. Black, all of Seattle, Wash., for respondents.

Before GARRECHT, HANEY, and HEALY, Circuit Judges.

GARRECHT, Circuit Judge.

Anna Herr Clise died February 11, 1936, when nearly seventy years of age. In due time an Estate Tax Return on behalf of the decedent's estate was filed with the Collector of Internal Revenue for the District of Washington. Though Mrs. Clise was a woman of considerable wealth, the Estate Tax Return filed in behalf of her estate disclosed no tax liability. The Commissioner of Internal Revenue, however, after consideration of the matters involved, assessed a deficiency in the estate tax in the sum of $7,257.67. Redetermination of the deficiency was sought in the Board of Tax Appeals upon the ground, set forth in detail in the Amended Petition, that the Commissioner erred in fixing the value of the estate. The Board reversed the Commissioner's determination and decided there was no deficiency in estate tax. 41 B.T.A. 820. The Commissioner petitions this court to review that decision.

The following statement of the case is based upon the facts found by the Board.

June 30, 1933, the New York Life Insurance Company issued Anna H. Clise, then 67 years of age, a $2,000 single premium, ordinary life insurance policy, on her own life, with her three children as beneficiaries. The premium paid the company was $1,602.50. Concurrently with the issuance of the life insurance policy the same company issued to decedent for a single premium of $517.50, a straight life annuity contract, agreeing to pay her an annuity of $52.86 during the remainder of her life. The sums $1,602.50 and $517.50 total $2,120, of which $120 probably covered "loading" and commissions, etc. The annuity of $52.86 may then be taken as interest on $2,000 at .02643.

On December 28, 1934, the same insurance company issued to Mrs. Clise a life insurance policy in the face amount of $22,000, for a single premium of $18,130.20, the proceeds of which, $22,038.98, were paid to Anna Clise's eleven grandchildren as beneficiaries. On the same December day, the company issued to her an annuity contract similar to that of June 30, 1933, for a single premium of $5,189.80, the annuity being $492, payable $41 monthly.

The insurance company did not require a physical examination for the life insurance policies issued June 30, 1933, and December 28, 1934, the company accepting the annuity contracts in lieu thereof, but the insurance company would not have issued the life insurance policies, due to the risk involved, without issuing the annuity contracts in conjunction therewith. The decedent could have obtained the annuity contracts for the same premium, however, without the contemporaneous issuance of the life policies.

In December, 1934, there were issued to decedent by various life insurance companies, sixteen single premium joint and survivor non-participating annuity contracts, in varying amounts, each payable to the decedent during her lifetime, as the first annuitant, and to a designated second annuitant upon the death of the first annuitant. These contracts provided that the decedent should not have the right to commute, anticipate, transfer, or assign any right or interest in or under the contract or any payments provided for therein, and gave decedent no rights except to receive the periodic payments. The named successor annuitant in each instance actually survived the decedent.

Although not essential or important to the decision of the question before us, for completeness it should be mentioned that on March 6, 1934, the New York Life Insurance Company issued to decedent for a single premium, a non-participating refund annuity contract. The amount of the annuity was payable to decedent's daughter and two sons, in equal shares, but the decedent reserved the right to change the beneficiaries. On March 14, 1934, the Sun Life Insurance Company of Canada issued a similar policy. The taxpayers conceded before the Board that the value of each of these policies, as of the date of decedent's death, was properly includible in the gross estate and no question as to these amounts is now raised.

The decedent's investments had not at all times been successful; a suit against her husband for an accounting was regarded by her as threatening the safety of her wealth. Upon the advice of her son, she made the purchases of life insurance which deprived her of control over her capital but protected her from such claims as resulted in the suit mentioned.

Other than being handicapped by blindness, the decedent was in good health until September, 1935, when symptoms of disease appeared which progressed until her death from cancer. A firm and active belief in her professed religion led her to state, during her lifetime, that her blindness was nonexistent and that death was merely a manifestation of error, which she would not recognize as a possible fact. In the circumstances, the Board found that "The purchase of the foregoing annuities was not made in contemplation of death."

The parties pose two questions for answer:

I. Whether the proceeds of each of the two life insurance policies, issued June 30, 1933, and December 28, 1934, respectively, were to be regarded as "insurance" for the purposes of estate tax under § 302(g) of the Revenue Act of 1926, 26 U.S.C.A. Int. Rev.Code, § 811(g), and not includible in the gross estate, or subject to the provisions of § 302(c) of said Act, as amended, and not exempt?

II. Whether the value at decedent's death of the sixteen joint and survivor annuity contracts was required to be included in the decedent's gross estate as transfers "in contemplation of or intended to take effect in possession or enjoyment at or after" the donor's death, or were the rights of the second annuitants simply gifts inter vivos?

The statutes necessary to intelligent consideration of the problems involved are set forth in a marginal note.¹

Respecting the first question, the Commissioner contends, "The combined effect of the simultaneous issuance of the single-premium life insurance policies and annuity contracts was to eliminate the risk inherent in life insurance, thus precluding exclusion of the funds as insurance." No argument is made, but attention is drawn to what is termed an "identical issue" confronting the Supreme Court at the time of filing of the Commissioner's brief here. The respondent concurred in this suggestion. The Supreme Court handed down its opinion in Helvering v. LeGierse, 312 U.S. 531, 61 S.Ct. 646, 649, 85 L.Ed. 996, on March 3, 1941, deciding the question adversely to the taxpayer. There, as here, an "insurance" policy was issued to the decedent, on the decedent's life, contemporaneously with an annuity contract; the insured was of an advanced age and no physical examination was required; the "insurance" policy was of the single premium type, as was the annuity contract; the "insurance" policy would not have been issued without the contemporaneous issuance of an annuity contract. The Supreme Court said:

"We think the fair import of subsection (g) is that the amounts must be received as the result of a transaction which involved an actual `insurance risk' at the time the transaction was executed. Historically and commonly insurance involves risk-shifting and risk-distributing. * * * That these elements of risk-shifting and risk-distributing are essential to a life insurance contract is agreed by courts and commentators. Citations. Accordingly, it is logical to assume that when Congress used the words `receivable as insurance' in § 302(g), it contemplated amounts received pursuant to a transaction possessing these features. Cases cited.

* * * * *

"The two contracts must be considered together. To say they are distinct transactions is to ignore actuality, for it is conceded on all sides and was found as a fact by the Board of Tax Appeals that the `insurance' policy would not have been issued without the annuity contract. * * *

"Considered together, the contracts wholly fail to spell out any element of insurance risk. * * *"

The Supreme Court then held the proceeds were taxable under § 302(c), "as a transfer to take effect in possession or enjoyment at or after death."

Accordingly, so far as the first question is concerned, the decision of the Board of Tax Appeals is reversed. See, also, Keller's Estate v. Commissioner, 312 U.S. 543, 61 S.Ct. 651, 85 L.Ed. 1032, affirming 3 Cir., 113 F.2d 833.

On the second question, the Commissioner argues, "The value at the decedent's death of the joint and survivor annuity contracts should be included in the gross estate of the decedent." He urges "that these simultaneous transactions constituted in the aggregate a substitute for a testamentary disposition, * * *" within the purview of § 302(c).

The Federal Estate Tax is levied upon the privilege of transmission of property at death. Saltonstall v. Saltonstall, 276 U.S. 260, 270, 48 S.Ct. 225, 72 L.Ed. 565. It is "death duties," as distinguished from a legacy or succession tax. It does not tax the interest to which the legatees and devisees succeed on death, but the interest which ceased by reason of death; what is imposed is an excise upon the transfer of an estate upon death of the owner. Nichols v. Coolidge, 274 U.S. 531, 537, 47 S.Ct. 710, 71 L.Ed. 1184, 52 A.L.R. 1081; Young Men's Christian Ass'n v. Davis, 264 U.S. 47, 50, 44 S.Ct. 291, 68 L.Ed. 558; Edwards v. Slocum, 264 U.S. 61, 62, 44 S.Ct. 293, 68 L.Ed. 564; Knowlton v. Moore, 178 U.S. 41, 47, 49, 20 S.Ct. 747, 44 L.Ed. 969. The Supreme Court, in Reinecke v. Northern Trust Co., 278 U.S. 339, 347, ...