Commissioner of Internal Revenue v. Fleming, 11519.

• Decision Date: 08 May 1946
• Docket Number: No. 11519.,11519.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. FLEMING.
• Court: U.S. Court of Appeals — Fifth Circuit

155 F.2d 204 (1946)

COMMISSIONER OF INTERNAL REVENUE v. FLEMING.

No. 11519.

Circuit Court of Appeals, Fifth Circuit.

May 8, 1946.

I. Henry Kutz, J. Louis Monarch, and Melva M. Graney, Sp. Assts. to Atty. Gen., Sewall Key, Acting Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and John T. Rogers, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for Commissioner of Internal Revenue.

Harry C. Weeks and B. L. Bird, both of Fort Worth, Tex., for respondent.

Before HOLMES, McCORD, and WALLER, Circuit Judges.

McCORD, Circuit Judge.

This is an appeal from a decision of the Tax Court denying a claim by the Commissioner of a deficiency in the gift tax of William Fleming for the year 1938. After the original case had been submitted and briefs filed, the Commissioner amended his answer and raised for the first time the question of the liability of respondent for taxes on certain funds used to purchase insurance on the life of his wife wherein his daughter was named beneficiary.

The facts as found by the Tax Court are these: Pursuant to negotiations carried on by taxpayer and applications therefor made by Mrs. Fleming, two single premium annuity and two single premium life insurance contracts were issued on or about January 3, 1938 upon Mrs. Fleming's life. The premiums were paid by check signed by taxpayer and drawn upon community funds in a bank account under taxpayer's name but from which Mrs. Fleming also was authorized, and did, draw funds. Mrs Fleming was not versed in business affairs and taxpayer invariably handled the business activities carried on by the community.

The annuities provided for annual payments of $933.58 and $310.08, respectively, during the lifetime of Mrs. Fleming and the premiums paid therefor were, respectively, $13,644.90 and $4,508.50. Only three payments were made under each contract and each payment was deposited in taxpayer's bank and used for ordinary purposes. The life insurance policies were in the principal sums of $30,000 and $10,000, respectively, and the premiums were $18,155.10 and $6,091.50, respectively. No physical examination was required of Mrs. Fleming and the insurance policies would not have been issued except for the simultaneous purchase of the annuity contracts. Mary, the daughter of taxpayer, was made the primary beneficiary of both policies.

By the terms of both policies the right to change the beneficiary and the mode of settlement were reserved to the insured. The policies also contained the standard provisions regarding the right of the insured to borrow on the policies and surrender them for a cash value. Taxpayer previously had taken out insurance upon his own life for an even larger sum and the premiums on these policies were also paid with community funds; each policy contained the usual provisions as to the insured's powers, and constituted the daughter the primary beneficiary.

The Tax Court further found that taxpayer's chief reason for causing the policies upon Mrs. Fleming's life to be written was his understanding that the $40,000 to be paid thereunder would be exempt from the Federal estate tax. He gave no thought to the powers granted the insured under the terms of the policies and he did not intend by his actions in obtaining the annuities and insurance policies to make a gift to his wife. Mrs. Fleming in fact did not attempt to exercise any of the powers vested in her under the terms of the policies.

The policies and contracts contain no provisions purporting to make them, their proceeds, or any rights therein the separate property of Mrs. Fleming.

The Commissioner contends here that the act of the respondent in taking out the policies of insurance in his wife's name, with the...