Commissioner of Internal Revenue v. Treganowan

• Decision Date: 06 June 1950
• Docket Number: Docket 21583.,No. 211,211
• Citation: 183 F.2d 288
• Parties: COMMISSIONER OF INTERNAL REVENUE v. TREGANOWAN.
• Court: U.S. Court of Appeals — Second Circuit

183 F.2d 288 (1950)

COMMISSIONER OF INTERNAL REVENUE v. TREGANOWAN.

No. 211, Docket 21583.

United States Court of Appeals Second Circuit.

Argued May 1, 1950.

Decided June 6, 1950.

Writ of Certiorari Denied October 16, 1950.

Carlton Fox, Special Assistant to Attorney General, and C. Oliphant, Washington, D. C. (Theron Lamar Caudle, Assistant Attorney General, and Ellis N. Slack and Robert N. Anderson, Special Assistants to Attorney General, on the brief), for petitioner.

Timothy N. Pfeiffer, of New York City (Milbank, Tweed, Hope & Hadley, Weston Vernon, Jr., Howard O. Colgan, Jr., Rebecca M. Cutler, and Robert L. Woodford, all of New York City, on the brief), for respondent.

Before L. HAND, Chief Judge, and CHASE and CLARK, Circuit Judges.

Writ of Certiorari Denied October 16, 1950. See 71 S.Ct. 82.

CLARK, Circuit Judge.

The Commissioner of Internal Revenue here seeks review of a decision of the Tax Court, 13 T.C. 159, two judges dissenting, which expunged a deficiency he had assessed against the taxpayer executrix on the ground of her failure to include the proceeds of life insurance in the gross estate of her decedent for the computation of the estate tax. The governing statute is Int.Rev.Code, § 811(g)(2), as amended in 1942, 26 U.S.C.A. § 811(g)(2), which makes includible in the gross estate the "proceeds of life insurance" to the extent of the amount receivable by beneficiaries "as insurance under policies upon the life of the decedent (A) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance, or (B) with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person." The sum in question, claimed by the Commissioner but denied by the Tax Court majority to be the proceeds of insurance, is $20,000 paid to the decedent's widow on his death by the "Trustees of the Gratuity Fund" of the New York Stock Exchange.

From 1925 until his death in 1944, decedent was a member of the New York Stock Exchange. Since 1873 the Exchange has had a plan providing for the payment by the surviving members of a certain sum to the families of deceased members. The constitution of the Exchange sets up for this purpose a Gratuity Fund and provides that before any one may be elected to membership in the Exchange he must make a contribution to the Gratuity Fund of $15. By the constitution the member 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." The constitution also pledges the faith of the Exchange to pay, out of these assessments, $20,000, or so much thereof as may have been collected, to the persons named in the next section of the document. The persons there named were the widow and children of the member or issue of a deceased child or children, or if he died leaving neither widow, child, nor issue of a child, then to his legal heirs or the persons who would, under the laws of New York, take the same by reason of relationship to him had he owned the same at the time of his death. No member has at any time had the right to name, select, or designate any beneficiary or beneficiaries other than those named above, nor may the proceeds be assigned or pledged for the payment of any debt.

Although the constitution provides that the beneficiaries of a deceased member are to receive the full $20,000 only if that amount is collected, practically it is certain that the full amount will be paid. Under Art. X, § 5, of the constitution of the Exchange, members are subject to loss of their seats for failure to meet any assessment, including the contribution due on decease of a member. When the assessments against all 1374 living members are met, the Exchange has actually received $610 more than is necessary to cover the payment of $20,000; thus default of more than forty members would be required before the benefit would be decreased, and in fact the full amount has invariably been paid. Moreover, the Fund itself has reached such an amount that the Exchange in 1941 took steps for its reduction by the device of foregoing such contributions.

This happy state of financial stability came about because of quite generous support of the fund in the past. In its early period the fund was built up in four ways: (1) from an initial payment of $10 by each member of the Exchange and a similar payment — later increased to $15 — from each person thereafter admitted to membership; (2) from allocation to it of half the annual profits of the Exchange in excess of $10,000; (3) from the excess of the amounts collected from surviving members over the amount paid to the kin of deceased members; and (4) from the accumulation of interest on the invested capital. In 1896 the allocation to the fund of half of the annual profits in excess of $10,000 was terminated. In 1915 the accumulation of the income was terminated and thereafter the net income was credited pro rata to the members of the Exchange in reduction of the amounts payable by them on the deaths of other members. On March 26, 1941, a constitutional amendment was adopted providing for the use of both capital and income of the fund as a credit against amounts otherwise payable by surviving members so long as the value of the fund should remain in excess of $500,000. See Franklin v. Dick, 262 App.Div. 299, 28 N.Y.S.2d 426, affirmed 287 N.Y. 656, 39 N.E.2d 282, which discusses the operation of the fund and sustains the validity of the 1941 amendment. The credits from the surplus in the fund, which had built up to almost $2,000,000, were enough to cover all the assessments from January 1, 1941, until beyond the time when decedent's executrix sold his seat. Hence no direct payments of assessments were made by him, or by his executrix, during this period.

"Insurance" is not defined by statute, and Treasury interpretation of the term has never gone beyond a statement that § 811 (g) is applicable to "insurance of every description, including death benefits paid by fraternal beneficial societies operating under the lodge system." Treas.Reg. 105, § 81.25, 26 C.F.R. 81.25. In deciding whether the $20,000 paid to decedent's widow is insurance within the statutory meaning, the Tax Court looked, rather naturally, to the test announced in the leading case of Helvering v. Le Gierse, 312 U.S. 531, 539, 61 S.Ct. 646, 649, 85 L.Ed. 996, that "historically and commonly insurance involves risk-shifting and risk-distributing." The Tax Court concluded that the Exchange's plan does not shift the risk of premature death, and that the plan is not insurance. With this conclusion we cannot agree.

In the Le Gierse case the Court, resolving a conflict in the lower courts, denied the benefit of the $40,000 exemption then allowed for the proceeds of life insurance to the receipts upon death under an ingenious transaction whereby an uninsurable prospect did obtain a policy of life insurance. The device was the purchase by the uninsurable risk (in the particular instance a woman of 80) of both a life insurance and a life annuity contract upon the payment of single premiums for each, sufficient together to avoid all loss by the insurer; for the nature of these contracts is such that, whatever the time of death, any loss upon one will be necessarily offset by the gain on the other. The Court therefore held that when the two contracts were put together there was no "insurance risk." The holding really highlights the situation here where the payment is actually conditioned upon death, whenever occurring, in the true terms of insurance. "From an insurance standpoint there is no risk unless there is uncertainty or, to use a better term, fortuitousness. It may be uncertain whether the risk will materialize in any particular case. Even death may be considered fortuitous, because the time of its occurrence is beyond control." 8 Ency.Soc.Sc. 95. That fortuitousness, whether we speak of death generally or premature death, as the Tax Court wished to emphasize, seems perfectly embodied here to fit both branches of the Supreme Court's test. As a critical commentator on the decision below well states it: "Risk shifting emphasizes the individual aspect of insurance: the effecting of a contract between the insurer and insured each of whom gamble on the time the latter will die. Risk distribution, on the other hand, emphasizes the broader, social aspect of insurance as a method of dispelling the danger of a potential loss by spreading its cost throughout a group. By diffusing the risks through a mass of separate risk shifting contracts, the insurer casts his lot with the law of averages. The process of risk distribution, therefore, is the very essence of insurance." Note, The New York Stock Exchange Gratuity Fund: Insurance That Isn't Insurance, 59 Yale L.J. 780, 784.

Here the risk of loss from premature death is effectively shifted from the individual to the group of other members of the Exchange. If the individual member dies prematurely, the amount paid to his kin will exceed the amount of assessments which he himself has paid in, the difference representing the loss caused by his premature death which the group has had to bear. Had he not been a member of the plan, he would have saved the amount of assessments against him before his death, but his beneficiaries would be $20,000 poorer. Thus they would have borne this loss which, through the Exchange plan, he has shifted to the group. And manifestly this plan provides a distribution of the risk, for because of the plan the risk of premature death is borne by the 1373 other members of the Exchange, rather than by the individual.

The Tax Court stressed such matters as the lack of adjustment of premiums to health or age or living habits of the...