ESTATE OF CRANE v. Commissioner

• Decision Date: 06 April 1982
• Docket Number: Docket No. 3716-80.
• Citation: 43 TCM (CCH) 994,1982 TC Memo 174
• Parties: Estate of Harry D. Crane, Deceased, Hattie Scherback, Independent Executrix v. Commissioner.
• Court: U.S. Tax Court

43 TCM (CCH) 994

1982 TC Memo 174

T.C. Memo. 1982-174. Estate of Harry D. Crane, Deceased, Hattie Scherback, Independent Executrix v. Commissioner.

Docket No. 3716-80.

United States Tax Court.

Filed April 6, 1982.

Sam J. Dealey and Jack W. Hawkins, 1000 LTV Building, Dallas, Tex., for the petitioner. Deborah A. Butler, for the respondent.

Memorandum Findings of Fact and Opinion

FEATHERSTON, Judge:

Respondent determined a deficiency in the amount of $59,834.15 in petitioner's Federal estate tax. After concession by both parties, the sole issue for decision is whether, under section 2042(2),¹ one-half of the proceeds of a life insurance policy on the decedent's life is includable in the decedent's gross estate.

Findings of Fact

When she filed her petition, Hattie Crane Scherback (hereinafter Mrs. Crane), executrix of the estate of Harry D. Crane, resided in Duncanville, Texas. At the time of Harry D. Crane's (Mr. Crane or decedent) death on May 9, 1976, Mr. and Mrs. Crane were husband and wife; Mrs. Crane has since remarried. She timely filed for the decedent's estate an estate tax return which was received by the Internal Revenue Service Center, Austin, Texas, on February 4, 1977.

At the time of his death, Mr. Crane had taken a leave of absence from employment with Texas Instruments Co. and was engaged in cattle-raising. Mrs. Crane worked as a real estate broker, dealing in farms and ranches in Texas, Arkansas, Oklahoma, and Louisiana. The markets in both the real estate and cattle businesses were not good in 1976.

At the time of decedent's death, the Cranes had substantial indebtedness. As reported on decedent's estate tax return, real estate was mortgaged at a sum roughly equivalent to its value, and the face amount of decedent's life insurance (excluding that of the Connecticut General Life Insurance Company policy here in issue) roughly equaled the marital community's debts.²

On April 19, 1976, the Cranes, along with their two children, met with Robert Hancock (Mr. Hancock), a life insurance salesman with Connecticut General Life Insurance Company (Connecticut General). This meeting was initiated by Mrs. Crane for the purpose of obtaining additional insurance on Mr. Crane's life. The Cranes and Mr. Hancock discussed the estate tax implications of life insurance and community property and specifically discussed the circumstances in which life insurance proceeds would be excluded from Mr. Crane's estate. The Cranes agreed that Mrs. Crane should be the owner, as her separate property, of any policy that was issued.

At this meeting on April 19, 1976, an application form was filled out (file No. 779241) to obtain a policy insuring Mr. Crane's life for a 1-year term in the amount of $300,000 and additional indemnity of $75,000. The application form designates Mrs. Crane as "primary beneficiary" and as "owner." By a mark in the appropriate box, it is stated that quarterly premium notices were to be sent "to Owner and not to Insured." Further, again by a marked box, the application states that as owner, Mrs. Crane was to have "the right to change the Beneficiary and to exercise all other policy rights." The application was signed by Mr. Crane as "Proposed Insured," by Mrs. Crane as "Applicant if other than Proposed Insured," and by Mr. Hancock as "Witness." Preceding the signatures is the statement —

I (We) have read the above questions and answers and hereby declare that they are complete and true. I (We) agree that this application * * * shall form a part of any policy issued. * * *

As payment on account of the initial premium, a check made payable to Connecticut General in the amount of $750 was drawn on the Cranes' joint checking account at the First National Bank in Clarksville, Texas. The face of the check was altered; in the two places where the printed names of the joint account holders appeared, black marks were used to obliterate Mr. Crane's name, leaving only Mrs. Crane's name legible. The check was signed by Mrs. Crane and was acknowledged by a conditional receipt signed by Mr. Hancock.

On April 22, 1976, a brief telephone call was made from the Crane's residence to the First National Bank in Clarksville regarding a possible change of the joint account on which the insurance premium check was drawn to a separate account in Mrs. Crane's name. Similar brief calls to the bank were made on April 13 and 19, 1976. The signature cards were not changed.

Mr. Crane was killed accidentally on May 9, 1976, by a gunshot wound in the heart, prior to the actual issuance of the insurance policy. Connecticut General paid $310,000 pursuant to the contract rights acquired by reason of the insurance application; no part of these proceeds was included as part of the gross estate as reported in decedent's estate tax return. Respondent determined that one-half of the value of the proceeds is includable in decedent's gross estate under section 2042.³

Opinion

Under section 2042,⁴ the value of a decedent's gross estate includes the proceeds of insurance policies on the decedent's life which are receivable by beneficiaries other than the decedent's executor⁵ if, at the time of his death, the decedent possessed any "incidents of ownership in the policy, exercisable either alone or in conjunction with any other person." Where, however, the decedent did not possess any such incidents of ownership at the time of his death, and the executor is not the beneficiary, then no part of the proceeds is includable in the decedent's gross estate under section 2042. Sec. 20.2042-1(c), Estate Tax Regs.

The term "incidents of ownership" is not limited to ownership in a technical legal sense. In general terms, it refers to the right of the insured or his estate to the economic benefits of the policy. As explained in section 20.2042-1(c)(2), Estate Tax Regs., the term includes —

the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc.

A decedent possesses the "incidents of ownership" of a policy not only if, under the terms of the policy, he has these policy rights at his death but also if he is deemed to possess any incidents of ownership in the policy, in whole or in part, under the State law as applied to the policy. Sec. 20.2042-1(c)(5), Estate Tax Regs.⁶

Under Texas community property law, life insurance, like other property,⁷ purchased with community funds is presumed to belong to the community even though title is taken in the name of one spouse only. Freedman v. United States 67-2 USTC ¶ 12,487, 382 F. 2d 742, 746 (5th Cir. 1967); Brown v. Lee, 371 S.W. 2d 694, 696 (1963); see Magee v. Young, 145 Tex. 485, 198 S.W. 2d 883 (1946). This presumption may be rebutted, however, by showing that the decedent performed an affirmative act evidencing his intent to transfer "every incident of ownership" to his spouse, thus "effectuating a gift of his community interest to her." Parson v. United States 72-1 USTC ¶ 12,847, 460 F. 2d 228, 232 (5th Cir. 1972); Bintliff v. United States 72-2 USTC ¶ 12,858, 462 F. 2d 403, 406 (5th Cir. 1972); see Freedman v. United States, supra at 745.

Essentially, the controversy in this case is factual. The issue is whether there is sufficient evidence to rebut the presumption that the policy was community property. This issue turns on whether the evidence shows that Mr. Crane intended to, and did, give his community interest in the policy to his wife, thus divesting himself of every incident of ownership. We hold that the evidence is sufficient to establish such a gift and divesture so that the value of the proceeds is not includable in Mr. Crane's gross estate.

The Fifth Circuit has evaluated alleged gifts of life insurance under Texas law in two signal cases, Freedman v. United States, supra, and Parson v. United States, supra. The opposite results reached in those two cases turned on the factual issue of donative intent. In Freedman, the decedent-wife applied for a $50,000 life insurance policy on her life, naming her husband, the then statutory manager of the community, as beneficiary. Mrs. Freedman signed the application as "proposed insured," and Mr. Freedman signed as "owner." As owner, he was entitled to "all of the policy's benefits, values, rights and privileges," which otherwise would belong to the proposed insured. Freedman v. United States, supra at 743, fn. 3.⁸ The premiums were paid with community funds (382 F. 2d at 744). At Mrs. Freedman's death, her husband attempted to exclude from her gross estate the proceeds paid to him as beneficiary.

The court acknowledged that Mrs. Freedman's act of signing as proposed insured and agreeing to the policy's terms "arguably reflected an intention to make a gift of any interest she might have to the person designated as owner." Freedman v. United States, supra at 747. The court, however, considered that this alone constituted insufficient evidence of donative intent because the decedent failed to "perform an affirmative act which would clearly reflect an intention to make a gift of her community share" (382 F. 2d at 747). Her "acquiescence" in her husband's signing as owner and "noninterference" with his control did not meet the evidentiary burden (382 F. 2d at 747). Moss v. Gibbs, 370 S.W. 2d 452 (1963). Thus, the court concluded that "it must be assumed that she merely agreed for the policy to be owned by Mr. Freedman as the community's managing agent." Freedman v. United States, supra at 747. As we read the opinion, Mr. Freedman's position as the community's managing agent under Texas law influenced the court of appeals in reaching its decision (382 F. 2d at 746-747, fns. 8, 9, and 10).

In Parson v. United States 72-1 USTC ¶ 12,847, 460 F. 2d 228 (5th Cir. 1972), an assumption that the surviving spouse, the widow, became owner of the policy on behalf of the...