Estate of Skifter v. CIR

• Decision Date: 19 October 1972
• Docket Number: No. 72,Docket 72-1445.,72
• Citation: 468 F.2d 699
• Parties: ESTATE of Hector R. SKIFTER, Deceased, Janet Skifter Kelley and the Chase Manhattan Bank (National Association), Executors, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.
• Court: U.S. Court of Appeals — Second Circuit

468 F.2d 699 (1972) ESTATE of Hector R. SKIFTER, Deceased, Janet Skifter Kelley and the Chase Manhattan Bank (National Association), Executors, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.

No. 72, Docket 72-1445.

United States Court of Appeals, Second Circuit.

Argued September 15, 1972.

Decided October 19, 1972.

Archibald H. Cashion, New York City (George J. Noumair and Whitman & Ransom, New York City, on the brief), for appellees.

Elmer J. Kelsey, Department of Justice, Washington, D.C. (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks and William S. Estabrook, III, Attys., Department of Justice, Washington, D.C., on the brief), for appellant.

Before FRIENDLY, Chief Judge, and LUMBARD and FEINBERG, Circuit Judges.

LUMBARD, Circuit Judge:

The Commissioner of Internal Revenue appeals from a decision of the Tax Court holding that proceeds of nine insurance policies on decedent's life were not includible in decedent's estate. The Tax Court, 56 T.C. 1190, held incorrect the Commissioner's inclusion of these proceeds in decedent's gross estate and his assessment of a deficiency thereon.

In 1961 Hector Skifter, the decedent, assigned all his interest in nine insurance policies on his life to his wife Naomi, effectively making her the owner of those policies. Skifter retained no interest in the policies and retained no power over them. Several months later, Naomi died and left a will directing that her residuary estate, which included the nine insurance policies, be placed in trust. She directed that the income was to be paid to their daughter, Janet, for life and, upon Janet's death, there were provisions for the distribution of corpus and income to other persons.

Naomi appointed Skifter as trustee and authorized him, in his absolute discretion, at any time and from time to time, to pay over the whole or any part of the principal of the trust to the current income beneficiary whether or not this would result in the termination of the trust. It was explicitly provided that, in making these payments, the trustee could disregard any rules of trust law that may require impartiality between income beneficiaries and remaindermen. In addition, Skifter, as trustee, was given broad powers of management and control over the trust, including the powers to sell and mortgage the property and invest and reinvest the proceeds.

In 1964 Skifter died and a successor trustee was named. Contending that, under the terms of the trust established under Naomi's will, Skifter possessed at his death "incidents of ownership" so as to require that the proceeds of the insurance be included in his estate under § 2042(2) of the Internal Revenue Code, the Commissioner assessed a deficiency against the estate. From the Tax Court's holding in favor of the estate, the Commissioner appeals.

Section 2042(2) of the Internal Revenue Code provides, in pertinent part, as follows:

The value of the gross estate shall include the value of all property to the extent of the amount receivable by all . . . 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.

The essential issue before this Court is whether the broad fiduciary powers that were granted to Skifter under Naomi's will constitute "incidents of ownership" within the meaning of § 2042(2). We hold that they do not, and thus affirm the decision of the Tax Court.

In enacting the predecessor of § 2042(2), the Senate and House Committee Reports of the Seventy-seventh Congress acknowledged that, while the new provision introduced the term "incidents of ownership," it failed to suggest a definition of it. The Reports then went on to list the sort of powers and interest that the Congress was concerned with:

Examples of such incidents are the right of the insured or his estate to the economic benefits of the insurance, the power to change the beneficiary, the power to surrender or cancel the policy, the power to assign it, the power to revoke an assignment, the power to pledge the policy for a loan, or the power to obtain from the insurer a loan against the surrender value of the policy.

See 1942-2 Cum.Bull., pp. 491, 677. The Treasury relied on this legislative history in promulgating its regulations on § 2042(2). Reg. § 20.2042-1(c)(2) states:

For purposes of this paragraph, the term "incidents of ownership" is not limited in its meaning to ownership of the policy in the technical legal sense. Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it 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. . . .

It seems significant to us that the reference point in the regulation for "incidents of ownership" is "the right . . . to the economic benefits of the policy," since there was no way in which Skifter could have exercised his powers to derive for himself any economic benefits from these insurance policies.

The predecessor of § 2042 provided that, if the decedent continued to pay the premiums on the policy, even if he had divested himself of all interest therein, the proceeds therefrom would be included in his estate at death. In reenacting this predecessor provision as § 2042 of the Internal Revenue Code of 1954, Congress eliminated this premium test. In explaining this change, the Senate Finance Committee stated:

No other property is subject to estate tax where the decedent initially purchased it and then long before his death gave away all rights to the property and to discriminate against life insurance in this regard is not justified.

S.Rep.No. 1622, 83rd Cong.2d Sess., p. 124, U.S.Code Cong. & Admin.News 1954, p. 4757. The inference from this statement is very strong that it was the intent of Congress that § 2042 should operate to give insurance policies estate tax treatment that roughly parallels the treatment that is given to other types of property by § 2036 (transfers with retained life estate), § 2037 (transfers taking effect at death), § 2038 (revocable transfers), and § 2041 (powers of appointment).

This inference is supported by the fact that § 2042(2) explicitly provides that "incident of ownership" includes a reversionary interest, and then proceeds to treat such reversionary interests in a manner closely paralleling the treatment that § 2037 gives to reversionary interests in other property. This provision was added when Congress enacted § 2042 into the 1954 Code. The Senate Finance Committee explained this addition as follows:

The House and your committee\'s bill retains the present rule including life-insurance proceeds in the decedent\'s estate if the policy is owned by him or payable to his executor, but the premium test has been removed. To place life-insurance policies in an analogous position to other property, however, it is necessary to make the 5-percent reversionary interest rule, applicable to other property, also applicable to life insurance.

S.Rep. No. 1622, 83d Cong., 2d Sess., p. 124, U.S.Code Cong. & Admin. News 1954, p. 4757.

Although this legislative history is hardly conclusive on the matter, we feel that there is sufficient support to justify our conclusion that Congress intended § 2042 to parallel the statutory scheme governing the interests and powers that will cause other types of property to be included in a decedent's estate. This conclusion is reinforced by the types of interests and powers that Congress indicated were exemplary of what it meant to be included within the scope of "incidents of ownership." The interests there listed are interests that would cause other types of property to be included in a decedent's estate under § 2036 or § 2037; and the powers that Congress discussed are also powers that would result in the property being included in the decedent's estate under § 2038 or § 2041. Therefore, in ruling on the Commissioner's contention that the fiduciary power here involved is an "incident of ownership," a question that has not been considered under § 2042, we feel that we should look to the experience under the statutory scheme governing the application of the estate tax to other types of property. Indeed, the Commissioner, in making his contentions before us, relies on numerous analogies to decisions under these other statutory provisions.

The core of the controversy here centers on the decedent's power, as trustee, to prefer the current income beneficiary over the remainderman and all later income beneficiaries through payment of the entire trust corpus. He did not have the power to alter or revoke the trust for his own benefit and he could not name new, additional, or alternative beneficiaries. In this regard, Reg. § 20.2042-1(c)(4) provides:

A decedent is considered to have an "incident of ownership" in an insurance policy on his life held in trust if, under the terms of the policy, the decedent (either alone or in conjunction with another person or persons) has the power (as trustee or otherwise) to change the beneficial ownership in the policy or its proceeds, or the time or manner of enjoyment thereof, even though the decedent has no beneficial interest in the trust.

The Commissioner contends that this...