Estate of Wildenthal v. Commissioner, Docket No. 2492-69.
| Decision Date | 19 May 1970 |
| Docket Number | Docket No. 2492-69. |
| Citation | 29 TCM (CCH) 519,1970 TC Memo 119 |
| Parties | Estate of Bryan Wildenthal, Deceased, E. Tom Curtis, Administrator v. Commissioner. |
| Court | U.S. Tax Court |
Michael L. Cook 12th Floor, Capital Nat'l Bank Bldg., Austin, Tex., for the petitioner. Harold Friedman, for the respondent.
Respondent determined a deficiency of $223.56 in petitioner's estate tax. Petitioner claims an overpayment of estate tax in the amount of $631.20.
The two issues presented for decision are: (1) Whether under Texas law any part of the proceeds of four life insurance policies, owned by the decedent at his death and acquired by him before his marriage, but maintained after marriage with community funds, constitutes his separate property which is includable in his gross estate under section 2042, Internal Revenue Code of 1954;1 and (2) whether under Texas law the community has a claim against the decedent's separate estate for any part of the proceeds of the four life insurance policies.
All of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference and adopted as our findings. The pertinent facts are summarized below.
The petitioner is the Estate of Bryan Wildenthal, Deceased, E. Tom Curtis, Administrator, whose legal residence was Austin, Texas, at the time the petition was filed in this proceeding. The Federal estate tax return was filed with the district director of internal revenue, Austin, Texas.
Included in the estate of the petitioner are the following proceeds of life insurance:
The total proceeds of these two policies amounted to $10,000, against which there was an outstanding loan of $2,339.93. Included in the estate was $3,830, one-half of the remaining balance of $7,660.
The total proceeds of these two policies amounted to $2,660.68, $1,330.34 of which was included in the estate tax return of petitioner.
The four life insurance policies described above were purchased by Bryan Wildenthal on the following dates:
These four life insurance policies were acquired by decedent prior to his marriage to Doris Kellem Wildenthal on March 28, 1928.
Premiums paid on the four life insurance policies were as follows:
1. Southwestern Life Insurance
Company
a. Policy No. 159108T
Prior to March 28, 1928 ... $ 149.90
Subsequent to March 28
1928 ..................... 2,797.21
_________
Total .................. $2,947.11
b. Policy No. 164198T
Prior to March 28, 1928 ... $ 130.50
Subsequent to March 28
1928 ..................... 2,783.54
_________
Total .................. $2,914.04
2. Lincoln National Life Insurance
Company
a. Policy No. 158333
Prior to March 28, 1928 ... $ 191.10
Subsequent to March 28
1928 ..................... 1,459.56
_________
Total .................. $1,650.66
b. Policy No. 158334
Prior to March 28, 1928 ... 191.10
Subsequent to March 28
1928 ..................... 1,459.56
_________
Total .................. $1,650.66
Of the four life insurance policies, the total premiums paid prior to the marriage of Bryan and Doris Wildenthal were $662.60, and the total premiums paid after their marriage were $8,499.87. The total premiums paid after their marriage were paid out of the community estate of Bryan and Doris Kellem Wildenthal.
Doris Kellem Wildenthal was at all times relevant to this case the beneficiary under all four of the life insurance policies and, in fact, received the net proceeds of all of the policies.
The two policies of Southwestern Life Insurance Company were ordinary life insurance policies. The two policies of Lincoln National Life Insurance Company were 20-year pay life contracts.
In his statutory notice of deficiency dated March 3, 1969, respondent included in the gross estate the total net proceeds of each of the policies as constituting the separate property of the decedent. In the statutory notice of deficiency the item "Debts of Decedent," listed as "$00.00" in Schedule D of the Federal estate tax return, is not adjusted.
No claim was ever made against the estate for all or any part of the portion of the premiums on the four life insurance policies paid after March 28, 1928.
On the Federal estate tax return filed by the administrator the insurance proceeds from the contracts were reported as community assets.
Section 2042 of the Code requires the inclusion in the gross estate of a decedent of the proceeds of insurance on the decedent's life, if the decedent possessed at the date of death any of the "incidents of ownership" in the policy.2
In this case we must first determine under Texas law what part of the proceeds of the four life insurance policies belongs in the decedent's separate estate and what part belongs in the community estate. The life insurance policies were issued to the decedent when he was a bachelor, but most of the premiums were paid with community funds. Decedent never attempted to assign the policies.
Texas law with respect to this subject is, at best, confusing and somewhat contradictory. Some of the earlier cases declared that insurance policies were not "property" subject to community interests, other cases treated them as property, and still others tried to have it both ways. See the discussion in Commissioner v. Chase Manhattan Bank 58-2 USTC ¶ 11,818, 259 F. 2d 231, 244-55 (C. A. 5, 1958), certiorari denied 359 U. S. 913 (1959). The Texas legislature attempted to clarify the area by amending the definition of "property" to include "life insurance policies and the effects thereof." Tex. Sess. Laws 1957, c. 404.
Prior to 1957, the cases dealing with life insurance policies issued before marriage had given the wife a community claim in the cash surrender value upon divorce, Berdoll v. Berdoll, 145 S. W. 2d 227 (Tex. Civ. App. 1940), but gave her no claim, absent fraud, in the proceeds at death, Warthan v. Haynes, 155 Tex. 413, 288 S. W. 2d 481 (1956). This treatment was similar to that involving life insurance policies issued during the marriage, according to the policy-versus-proceeds analysis contained in Commissioner v. Chase Manhattan Bank, supra. The wife had a community interest in the policy, but at death the husband effected a transfer which cut off her rights.
Treating life insurance policies issued before marriage like those issued after marriage was contrary to the "inception of title" doctrine which is applicable to real property law in Texas. Creamer v. Briscoe, 101 Tex. 490, 109 S. W. 911 (1908); Colden v. Alexander, 141 Tex. 134, 171 S. W. 2d 328 (1949). By that doctrine separate property does not change its character after marriage, even if community property is used to pay part of its cost. But in Berdoll a part of the cash surrender value proportionate to the premiums paid with community property was treated as community property.
The Supreme Court of Texas has determined that the 1957 legislative amendment changed the law as stated in Warthan v. Haynes, supra, and earlier cases. Where the policy is issued during the existence of the community:
The proceeds at maturity are likewise community in character, except where the named beneficiary is in fact surviving, in which case a gift of the policy rights to such beneficiary is presumed to have been intended and completed by the death of the insured. Brown v. Lec, 371 S. W. 2d 694, 696 (1963).
The cases considering life insurance policies which were issued prior to the existence of the community are in conflict as to the nature and extent of the community interest in the proceeds.
In Stapf v. United States 60-2 USTC ¶ 11,967, 189 F. Supp. 830 (N. D. Tex. 1960), and Parson v. United States 70-1 USTC ¶ 12,657, 308 F. Supp. 1159 (E. D. Tex. 1970), the District Courts held that the community estate was entitled to a...
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