Estate of Headrick v. C.I.R.
| Decision Date | 19 November 1990 |
| Docket Number | No. 90-1150,90-1150 |
| Citation | 918 F.2d 1263 |
| Parties | -6038, 90-2 USTC P 60,049 ESTATE OF Eddie L. HEADRICK, Cleveland Bank and Trust Company and Charles L. Almond, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. . Cause |
| Court | U.S. Court of Appeals — Sixth Circuit |
Robert Lee McMurray (argued), Bell, Painter, McMurray, Cleveland, Tenn., for petitioners-appellees.
Peter K. Scott, I.R.S., Gary R. Allen, Acting Chief, Robert S. Pomerance (argued), John A. Dudeck, Shirley D. Peterson, U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for respondent-appellant.
Before MILBURN, BOGGS and SUHRHEINRICH, Circuit Judges.
The Commissioner of Internal Revenue appeals the decision of the United States Tax Court holding that the proceeds from an insurance policy are not includable in the gross estate of the decedent, Eddie L. Headrick. For the reasons that follow, we affirm.
Eddie L. Headrick was a tax attorney in Cleveland, Tennessee. 1 As part of his personal estate planning, Headrick drafted an irrevocable trust agreement naming himself as the settlor. The trust agreement designated Headrick's wife and their three minor daughters as primary beneficiaries, reserved to Headrick the right to remove any trustee at will and appoint a bank as successor trustee, granted the trust beneficiaries a limited power to withdraw trust property within 30 days of the contribution of such property, and authorized, but did not require the trustee to invest in life insurance policies on Headrick or on the life of a beneficiary and to hold such policies as trust principal.
Headrick selected the Cleveland Bank and Trust Company ("CBT" or "the bank") to act as trustee of the irrevocable trust. On December 18, 1979, Headrick went to CBT and discussed establishing the trust with James C. Brewer, the bank president. Brewer testified that based on this discussion he believed that Headrick intended the trust to function as an "insurance trust for his family." However, Headrick did not condition the establishment of the trust on CBT's commitment to acquire life insurance with the funds contributed to the corpus. During the meeting, the trust agreement was executed by Headrick as trustor and CBT as trustee, and Headrick irrevocably assigned $5,900 to CBT. On the same date, Headrick's wife executed on behalf of herself and her minor children a waiver of the beneficiaries' right to withdraw any portion of the $5,900 contribution to the trust principal.
On December 19, 1979, Brewer completed Part I of an application from Massachusetts Mutual Life Insurance Company for the purpose of obtaining a $375,000 insurance policy on Headrick's life. 2 The application stated that the policy owner and the beneficiary would be CBT as trustee of Headrick's trust. Headrick signed the application as the insured.
On January 8, 1980, Massachusetts Mutual approved the application and issued a $375,000 convertible whole life policy to CBT as trustee under the December 18, 1979 trust agreement. The policy conferred no ownership rights on Headrick. Rather, the policy stated that while Headrick was living, CBT, as owner, could exercise all rights given by the policy, including assigning the policy, changing beneficiaries, changing ownership, and exercising all policy options. CBT paid Massachusetts Mutual a monthly premium of $435.76. On December 30, 1980, Headrick made a second contribution to the trust corpus in the amount of $5,500, and on December 22, 1981, he made a final contribution of $2,000. No beneficiary elected to withdraw any portion of the second and third contributions. The total contributions of $13,400 covered all premium payments made by the trust.
Approximately three months after the trust was established, Headrick joined CBT's board of directors and became a member and chairman of the bank's trust committee. One responsibility of the trust committee was to review and discuss new trust accounts and the investments in those accounts. Headrick's trust agreement was first reviewed by the trust committee on April 30, 1980, and thereafter it was reviewed every three to four months as part of the bank's routine trust administration procedure.
On June 19, 1982, less than three years after execution of the trust agreement, Headrick died in an automobile accident. Upon his death, Massachusetts Mutual paid $378,701.93 in death benefits to CBT as the owner of the policy. The life insurance proceeds were not included in Headrick's gross estate on the estate tax return filed by the executors of his estate. On audit, the Internal Revenue Service (IRS) determined that payment of the proceeds to CBT as trustee constituted a transfer within the meaning of section 2035(a) of the Internal Revenue Code, and was therefore includable in Headrick's estate. The IRS assessed a deficiency in the amount of $98,043.13. The estate paid the deficiency and challenged this determination in the United States Tax Court.
In a unanimous reviewed decision, the Tax Court held that the proceeds were not includable in Headrick's gross estate. Following its decision in Estate of Leder v. Commissioner, 89 T.C. 235 (1987), aff'd, 893 F.2d 237 (10th Cir.1989), the Tax Court held that Headrick never possessed any "incidents of ownership" in the policy on his life under section 2042, and therefore the proceeds were not includable in his gross estate under sections 2035(d)(1) and (2). The court found that CBT did not act as Headrick's agent in acquiring the policy, and the court rejected applying the constructive transfer theory to the determination of ownership under section 2042. The court reasoned that the cases applying the constructive transfer theory were decided under versions of section 2035 prior to its amendment by the Economic Recovery Tax Act of 1981 ("ERTA"). This timely appeal followed.
The principal issue on appeal is whether the proceeds from the life insurance policy purchased by the trustee are includable in Headrick's gross estate.
A decision of the Tax Court is reviewed "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. Sec. 7482. Because the issue on appeal is a conclusion of law, the Tax Court's decision will be reviewed de novo. Walter v. Commissioner, 753 F.2d 35, 38 (6th Cir.1985).
The issue before us has been addressed by the Tenth Circuit in Estate of Leder v. Commissioner, 893 F.2d 237 (10th Cir.1989). The Tax Court relied on Leder in rendering its decision in this case, and we find the Tenth Circuit's reasoning to be persuasive. Before discussing the Leder decision, a brief overview of the relevant provisions of the Internal Revenue Code (I.R.C.) is in order.
Section 2035 provides in relevant part:
(a) Inclusion of gifts made by decedent.--Except as provided in subsection (b), the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, during the 3-year period ending on the date of the decedent's death.
* * * * * *
(d) Decedents dying after 1981.--
(1) In general.--Except as otherwise provided in this subsection, subsection (a) shall not apply to the estate of a decedent dying after December 31, 1981.
(2) Exceptions for certain transfers.--Paragraph (1) of this subsection ... shall not apply to a transfer of an interest in property which is included in the value of the gross estate under section ... 2042 or would have been included under ... [section 2042] if such interest had been retained by the decedent.
26 U.S.C. Sec. 2035. "Section 2035(a) generally requires that the value of any property or interest transferred by the decedent within three years of death for less than full and adequate consideration be included in the decedent's gross estate...." Leder, 893 F.2d at 239. Section 2035(d) was added by the Economic Recovery Tax Act of 1981 (ERTA), and it applies to the estates of decedents dying after 1981. Id. "[S]ubsection (d)(1) nullifies the three year inclusionary rule of subsection (a), except for those transfers described in subsection (d)(2)." Id.
Subsection (d)(2) specifically cross references section 2042, which provides in relevant part:
The value of the gross estate shall include the value of all property--
. . . . .
(2) Receivable by other beneficiaries.--To the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent 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. * * *
26 U.S.C. Sec. 2042. "Section 2042 includes in the decedent's estate the proceeds of life insurance policies on the life of the decedent where the decedent at the time of his death possessed any of the incidents of ownership in the policies." Leder, 893 F.2d at 241.
In Leder, the Tenth Circuit framed the issue on appeal as "whether the term 'transfer' in section 2035(d)(2) includes so- called 'constructive transfers' ... or if section 2035(d)(2)'s cross reference to section 2042 implicitly limits the term's scope." Id. at 240. "The constructive transfer doctrine developed under section 2035(a) prior to the passage of the ERTA and the addition of subsection (d) to section 2035." Id. "The typical example of a constructive transfer is where the decedent purchases a life insurance policy on himself or herself, pays all the premiums, and designates his or her children or spouse as the owners and beneficiaries." Id. Under section 2035(a), courts have construed such transactions as transfers "because the decedent 'beamed' the policy proceeds to the children or spouse by paying the policy premiums and creating in the children or spouse all of the contractual rights to the...
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