Estate of Madsen v. C.I.R.

• Decision Date: 02 October 1981
• Docket Number: No. 79-7607,79-7607
• Citation: 659 F.2d 897
• Parties: 81-2 USTC P 13,437 ESTATE OF Mattias Arnold MADSEN, Norma V. Madsen, Executrix, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 897

659 F.2d 897

81-2 USTC P 13,437

ESTATE OF Mattias Arnold MADSEN, Norma V. Madsen, Executrix,

Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 79-7607.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 3, 1981.

Decided Oct. 2, 1981.

Steven Soha, Aiken, St. Louis & Siljeg, Seattle, Wash., for petitioner-appellant.

Robert T. Duffy, Washington, D. C. (argued), for respondent-appellee; Gilbert E. Andrews, Washington, D. C., on brief.

Appeal from the United States Tax Court.

Before WRIGHT, FERGUSON and NORRIS, Circuit Judges.

EUGENE A. WRIGHT, Circuit Judge:

I

Mattias Arnold Madsen was lost at sea in 1973. His wife, Norma, received the proceeds of a life insurance policy.

The Madsens were domiciled in Washington. Before buying the policy in 1967 they discussed the estate tax consequences with their insurance agent. All agreed that Norma would own the policy and make premium payments. Though community funds would be used, they determined that no gift tax return had to be filed because Mattias' interest in the payments was under $3,000.

None of the proceeds were included in Mattias' estate. The Commissioner noted an estate tax deficiency, reasoning that, because the policy was community property, one-half of the proceeds should have been included in the estate. The Tax Court agreed.

II

Life insurance proceeds are includable in an estate to the extent that the deceased "possessed at his death any of the incidents of ownership." I.R.C. § 2042(2). "Incidents of ownership" are determined by reference to the policy and state law. Lang v. Commissioner, 304 U.S. 264, 267, 58 S.Ct. 880, 881, 82 L.Ed. 1331 (1938); 26 C.F.R. § 20.2042-1(c)(5).

Section 48.18.440, Revised Code of Washington, provides:

Spouse's Rights in life insurance policy. (1) Every life insurance policy heretofore or hereafter made payable to or for the benefit of the spouse of the insured ... shall, unless contrary to the terms of the policy, inure to the separate use of such spouse ....

As the case comes to us, both the policy and state law appear to support the contention that Mattias had no incidents of ownership at his death.

The Tax Court relied on its decision in Meyer v. Commissioner, 66 T.C. 41 (1976), aff'd without opinion, 566 F.2d 1182 (9th Cir. 1977), which in turn relied upon Schade v. Western Union Life Insurance Co., 125 Wash. 200, 215 P. 521 (1923). Meyer held that § 48.18.440 affects the spouse's interest in the proceeds of a life insurance policy but not the ownership of the policy.

At issue in Schade was the validity of a policy provision reserving to the insured the right to change beneficiaries. The court held the provision valid. Instead of relying on the statutory language giving effect to "the terms of the policy," however, the court stated that "the statute defines the rights of the beneficiary as compared with the rights of creditors in the proceeds and avails of a policy ...." 125 Wash. at 207, 215 P. 521 (emphasis added).

Nevertheless, we are not persuaded that Schade is controlling. It is fairly read as holding only that the statute does not affect the husband's ownership interest as it appears in the policy. ¹

Here, the policy apparently did not give Mattias the right to change beneficiaries or any other incidents of ownership. The statute appears to make the policy Norma's separate property and we are not persuaded that the Washington Supreme Court has held otherwise. ²

III

Because the question is one of state statutory construction and the position of the state court is uncertain, certification is appropriate. See Mutschler v. Peoples National Bank, 607 F.2d 274, 278-79 (9th Cir. 1979); Barnes v. Atlantic & Pacific Life Insurance Co., 514 F.2d 704, 706 (5th Cir. 1975).

Therefore, pursuant to RCW § 2.60.010 et seq., we shall certify the following question to the Washington Supreme Court:

In Washington, is a life insurance policy naming the deceased spouse as the insured and the surviving spouse as beneficiary and owner, though the premiums were paid out of community funds, the separate property of the surviving spouse?

Pursuant to § 2.60.010(4)(a), the parties are ordered to prepare a stipulation of facts and file it with the clerk within twenty (20) days of the date of this opinion.

The parties will also prepare an Excerpt of Record for inclusion in the certified record and file it with the court within twenty (20) days. It should contain the insurance policy.

Pursuant to Washington Rules App.Proc. 16.16(e)(1), the court will designate appellant Madsen as the party to file the first brief in the Washington Supreme Court after the question is certified.

NORRIS, Circuit Judge, dissenting:

The sole question presented by this appeal is whether the Tax Court erred in holding that the proceeds of a life insurance policy naming the decedent's wife as beneficiary should be included in the decedent's estate for tax purposes. The Tax Court's decision is based upon § 2042(2) of the 1954 Internal Revenue Code which provides that the proceeds of a life insurance policy are included in a decedent's estate if the decedent had "incidents of ownership" in the policy at the time of death. ¹ In deciding whether the decedent had any incidents of ownership in the policy, both the terms of the policy and state law must be considered. Lang v. Commissioner, 304 U.S. 264, 267, 58 S.Ct. 880, 881, 82 L.Ed. 1331 (1938); Treas.Reg. § 20.2042-1(c)(5) (1960).

Under Washington law, a life insurance policy becomes a community asset if the policy's premiums are paid from community funds. Francis v. Francis, 89 Wash.2d 511, 573 P.2d 369 (1978). The life insurance policy at issue was acquired during marriage and its premiums were paid with community moneys. Hence, the Tax Court reasoned that the decedent's estate should be increased by half the value of the proceeds of the life insurance policy for tax purposes because the decedent owned half of the policy as community property at the time of death. The only theory advanced by appellant on appeal and before the Tax Court is that the insurance policy was not community property because the decedent made a gift of his community interest in the policy to his wife.

There is a strong presumption under Washington law that property acquired during marriage is community property. A party claiming that such property is actually separate property must prove that assertion by "clear, definite and convincing" evidence. Kern v. United States, 491 F.2d 436, 439 (9th Cir. 1974). Thus, for the appellant to prevail, she must show by clear, definite and convincing evidence that her husband intended to make a gift of his community interest in the policy. The Tax Court's determination that no gift was intended is a finding of fact that will not be disturbed on appeal unless clearly erroneous. See Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960).

The facts of this case are virtually identical to the facts of Estate of Meyer v. Commissioner, 66 T.C. 41 (1976), aff'd without opinion, 566 F.2d 1182 (9th Cir. 1977), the case cited here by the Tax Court as precedent for its decision. The Tax Court in Meyer found insufficient evidence to prove clearly, definitely and convincingly that the husband decedent had intended to make a gift of his community half of the policy to his wife. The court noted that there was no discussion of the effect of the marital relationship between the insured and the owner, that there was no policy endorsement describing the policy as the sole or separate property of the wife, and, most important, that there was no testimony indicating that the husband had intended to make a gift. Id. at 44.

In the case before us, although there is evidence that appellant and the decedent were aware of the estate tax consequences and community property considerations involved in the acquisition of the policy, there is no evidence that the decedent actually intended to give his share of the policy to his wife, the appellant. ²

Even though Meyer is indistinguishable from the case before us, the majority has determined that Wash.Rev.Code § 48.18.440 ³ (hereinafter § 48.18.440) may act to convert the policy into the wife's separate property and has therefore certified the question to the Washington Supreme Court for an advisory opinion interpreting the statute. In so doing, the majority simply ignores appellant's sole theory in this litigation. As appellant's brief states:

The sole issue for decision in this case is whether the insurance policy was the community property of decedent and Norma (appellant) at the date of his death and, therefore, includable in his estate to the extent of one-half of the proceeds thereof. Resolution of this issue is based upon the determination of whether decedent effectively made a gift to Norma of his one-half community property interest in the policy.

Appellant's Opening Brief, p. 5.

While appellant's papers mention the existence of § 48.18.440 in passing, at no point does appellant quote from the statute or claim that the statute is of any relevance to the federal estate tax question before us. The Commissioner's brief does not even mention the statute. Hence, the majority certifies to the Washington Supreme Court a point of law that has been neither briefed nor argued by either party.

I submit that had the issue been briefed, it would have become evident that the Washington Supreme Court has already clearly interpreted § 48.18.440 in a way that makes it irrelevant to the case before us. In Schade v. Western Union Life Insurance Company, 125 Wash. 200, 215 P. 521 (1923), In re Towey's Estate, 22 Wash.2d 212, 155 P.2d 273 (1945) and Francis v. Francis, 89 Wash.2d 511, 573 P.2d 369 (1978), the Washington Supreme Court interpreted § 48.18.440 as giving the spouse-beneficiary an ownership interest solely in the proceeds of a life insurance policy as distinguished...