Estate of Karagheusian v. Comm'r of Internal Revenue

• Citation: 23 T.C. 806
• Decision Date: 31 January 1955
• Docket Number: Docket No. 47159.
• Parties: ESTATE OF MIRAN KARAGHEUSIAN, WALTER J. CORNO, LEILA KARAGHEUSIAN, AND MINOT A. CROFOOT, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

23 T.C. 806

ESTATE OF MIRAN KARAGHEUSIAN, WALTER J. CORNO, LEILA KARAGHEUSIAN, AND MINOT A. CROFOOT, EXECUTORS, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 47159.

Tax Court of the United States.

Filed January 31, 1955.

Richard H. Appert, Esq., and Robert W. Martin, Esq., for the petitioners.

Maurice E. Stark, Esq., for the respondent.

Decedent's wife applied for and received an insurance policy on decedent's life which she transferred in 1928 to a trust, together with certain securities. Both decedent and his wife subsequently made additional transfers of cash or securities to the trust. The income of the trust was to be used first for premiums on the insurance, the excess to be paid to the wife for her life. She had the right to alter, amend, or revoke the trust with the consent of the decedent and their daughter. On decedent's death in 1948 the insurance proceeds were paid to the trust. None of the securities originally contributed were then in the trust. Held:

1. Decedent had no incident of ownership in the policy at his death requiring inclusion of the insurance proceeds in his gross estate.

2. The insurance proceeds are includible only insofar as the trust income used to pay the premiums was attributable to trust assets contributed by decedent.

3. Decedent made no transfer of the policy in contemplation of death or otherwise.

4. The transfers by decedent to the trust are includible at a valuation based on a percentage of the total trust corpus exclusive of the policy and proceeds at the date of decedent's death in proportion to his contributions to the trust corpus.

This proceeding is brought by the Estate of Miran Karagheusian, Walter J. Corno, Leila Karagheusian, and Minot A. Crofoot, Executors, hereinafter referred to as petitioners, to test the correctness of respondent's determination of a deficiency in the estate tax of the decedent in the amount of $32,974.81.

By amended petition, the petitioners seek a refund of $8,547.98. The questions for decision are as follows:

1. Whether and to what extent the proceeds of an insurance policy on the life of decedent, applied for and placed in trust by decedent's wife, are includible in decedent's gross estate under section 811(g)(2)(A) or (B) of the Internal Revenue Code of 1939.

2. Whether any part of the proceeds of that policy are includible as being derived from transfers in contemplation of death.

3. The proper valuation of certain transfers of cash and securities made to the trust by decedent where the securities were subsequently commingled with other trust assets by the trustee and ultimately sold or exchanged for other assets.

Certain other questions raised in the deficiency notice are not contested and will be given effect under the Rule 50 computation. The stipulated facts are so found and incorporated herein by this reference.

FINDINGS OF FACT.

The petitioners are the duly appointed, qualified, and acting executors of the Estate of Miran Karagheusian, deceased. Decedent, Miran Karagheusian, died October 7, 1948, a resident of the State of New York.

The estate tax return was timely filed with the collector of internal revenue for the third district of New York.

A few weeks prior to December 22, 1927, the decedent submitted an application to the Equitable Life Assurance Society of the United States, hereinafter referred to as Equitable, for an insurance policy on his life in the amount of $100,000. On December 22, 1927, decedent wrote to Equitable enclosing an application dated December 21, 1927, for an insurance policy on his life in the amount of $100,000 made by his wife, Zabelle Karagheusian, hereinafter sometimes referred to as Zabelle. In this letter decedent stated that the application by Zabelle was to take the place of the application he had made earlier, which was to be canceled by Equitable.

On or about December 23, 1927, life insurance policy No. 4572102 in the face amount of $100,000 on the life of the decedent was issued by Equitable to Zabelle in accordance with her application.

Under the date of April 2, 1928, Zabelle submitted a second application to Equitable requesting certain changes in the ownership provisions of the aforementioned policy. Pursuant to this application, the previously issued policy was surrendered and a rewritten policy was issued on April 20, 1928, under the same number, 4572102, and as of the same date, December 23, 1927, as the earlier policy. The register date of the rewritten policy was November 18, 1927.

The policy as issued in final form pursuant to the second application contained an ownership provision as follows:

It is hereby specially provided that the rights of Owner under the terms of this policy are vested in ZABELLE KARAGHEUSIAN, wife of MIRAN KARAGHEUSIAN, only during her lifetime. Upon the death of said ZABELLE KARAGHEUSIAN the said rights of Owner shall vest in LEILA KARAGHEUSIAN, daughter of MIRAN KARAGHEUSIAN, only during her lifetime. Upon the death of said LEILA KARAGHEUSIAN, subsequent to the death of said ZABELLE KARAGHEUSIAN, or if at the death of said ZABELLE KARAGHEUSIAN said LEILA KARAGHEUSIAN be not then living the said rights of Owner shall vest in MIRAN KARAGHEUSIAN, his executors, administrators or assigns. Any said person while vested with the rights of Owner may exercise any benefit under this policy, and may cancel this Special Provision by written notice filed at the Society's Home Office (which cancellation shall take effect only upon the endorsement of the same on the policy by the Society) and upon such cancellation all interest of any subsequent successive Owner in this policy shall cease and determine.

The policy also provided that it could be assigned by an instrument in writing filed at the home office of the insurance company.

On or about June 13, 1928, Zabelle entered into a trust agreement with the Bankers Trust Company, a corporation organized under the banking laws of the State of New York. It was stated in the trust instrument that Zabelle desired to establish a trust of certain policies of insurance on the life of her husband and of the proceeds thereof and of certain other property and securities, all of which would be transferred to the Bankers Trust Company as trustee to have and hold subject to the terms of the trust. (The relationship created by this agreement of June 13, 1928, will hereinafter sometimes be referred to as the trust and the Bankers Trust Company will hereinafter sometimes be referred to as the trustee.)

Zabelle Karagheusian, on or about June 13, 1928, transferred securities worth. $190,120 to the trustee. On or about June 14, 1928, she executed and filed with the home office of the insurance company a form of absolute assignment of Equitable policy No. 4572102 to Bankers Trust Company as trustee under the agreement of June 13, 1928.

By the terms of the trust instrument, the trustee was directed during the lifetime of the decedent to pay from the income of the trust the premiums on the policies of insurance on decedent's life. To the extent that the trust income was insufficient to pay premiums, Zabelle Karagheusian agreed promptly to furnish cash to the trustee for that purpose. The trustee was also authorized at its sole option and for the purpose of obtaining funds with which to pay the premiums to sell the property or securities subject to the trust, to borrow on the insurance policies, or to exercise options for the automatic application of loan provisions to the payment of premiums. It was further provided that the trust income in excess of the amount needed to pay the insurance premiums was to be paid currently to Zabelle Karagheusian during her lifetime. After Zabelle's death the excess income was to be paid to Leila, the daughter, during her lifetime and after the deaths of both Zabelle and Leila the principal of the trust was to go to decedent if he were still alive, and to a charitable foundation known as the Howard Karagheusian Commemorative Corporation if decedent were dead. The Howard Karagheusian Commemorative Corporation was also the residuary legatee under decedent's will.

The trust instrument also vested in the trustee full power of management and control over the insurance policy and certain powers over the other property and securities subject to the trust. The sale or exchange of any property or securities comprising the trust corpus, with the exception of the insurance policy, and the investment or reinvestment of any part or all of the trust corpus, excluding the insurance policy, might be made by the trustee subject to the direction and control of the decedent during his lifetime.

Paragraph Twelfth of the trust instrument originally provided as follows:

TWELFTH: Notwithstanding anything to the contrary herein contained, the Donor may from time to time during her life, by instrument in writing duly acknowledged and delivered to the Trustee, modify or alter in any manner or revoke in whole or in part this indenture and the trusts then existing and the estates and interests in property hereby created, provided that any such instrument by the Donor have the written consent, also duly acknowledged and lodged with the Trustee, either of the Donor's husband, Miran Karagheusian, or, after his death, of the Donor's daughter, Leila. Upon the death of both husband and daughter, the Donor shall have no power to modify, alter or amend this indenture or the trusts then existing and the estates and interests in property hereby created, except from time to time to direct the payment of some or all of the principal, upon the Donor's death, to some or all of the descendants of Donor's daughter, Leila, as the Donor may desire, or, from time to time to cancel or modify such directions provided the principal be always payable to such descendants or some of them, and/or to the Howard Karagheusian Commemorative Corporation.

After the death of the Donor, her daughter, Leila, may, by...