Freedman v. United States

Decision Date07 September 1967
Docket NumberNo. 22767.,22767.
PartiesMortimer FREEDMAN, Independent Executor under the Last Will and Testament of Margaret Freeman, Appellant, v. UNITED STATES of America, Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

J. Manuel Hoppenstein, Jerome L. Prager, Dallas, Tex., for appellant.

R. L. Dillard, Jr., Durwood D. Crawford, Gerald C. Galbraith, Dallas, Tex., for Southland Life Ins. Co., amicus curiae in support of appellant.

Melvin M. Diggs, U. S. Atty., Dallas, Tex., John B. Jones, Jr., Acting Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, Edward I. Heilbronner, Donald Williamson, Attys., Dept. of Justice, Washington, D. C., R. L. Dillard, Jr., Hermine Dalkowitz Tobolowsky, Dallas, Tex., Richard M. Roberts, Acting Asst. Atty. Gen., Washington, D. C., Martha Joe Stroud, Asst. U. S. Atty., of counsel, for appellee.

Hermine Dalkowitz Tobolowsky, Dallas, Tex., for Business & Professional Women's Club of Dallas, Inc., amicus curiae.

Before THORNBERRY and COLEMAN, Circuit Judges, and YOUNG, District Judge.

THORNBERRY, Circuit Judge.

This appeal is from a judgment of the district court denying appellant's claim for refund of estate tax in the amount of $7,081.21, plus interest.1 The tax in question resulted from inclusion in the gross estate of Margaret Freedman, appellant's deceased wife, of one-half of the value of a $50,000 insurance policy on the decedent's life. A consideration of the applicable estate-tax provision (Int.Rev.Code of 1954, § 2042)2 and of Texas community-property law persuaded the court below that the decedent owned one-half of the policy at the time of her death and that the estate tax was properly imposed. We affirm.

I.

In 1954, Margaret Freedman applied for a $50,000 policy of life insurance, naming appellant Mortimer Freedman as primary beneficiary. Under the terms of the policy, all values, rights and privileges would belong to the person who entered his signature as "owner" in the appropriate blank space. Mortimer Freedman signed the application in this space.3 The policy was issued in 1954, and all annual premiums due thereunder were paid with community-property funds. Mrs. Freedman died on May 7, 1959.

There were two other life insurance policies on decedent's life and payable to her husband as beneficiary, but on neither of the applications was a signature entered in the blank space provided for "Signature of Owner." Under the terms of the policies, the proposed insured would control the values, rights and privileges in the absence of a signature in this space.

Mr. Freedman, as independent executor under his wife's will, included half of the proceeds from each of the two policies just described in her gross estate but did not include any of the proceeds from the policy which designated him as owner. After the estate tax return together with payment had been filed, the Commissioner of Internal Revenue mailed a notice of deficiency. Appellant paid the sum demanded and then on April 23, 1963 filed a timely claim for refund in the amount of $7,081.21, plus interest. The Commissioner disallowed the claim in full on the theory that the value of the insurance policy which appellant had not included in his wife's gross estate at all should have been included to the extent of $25,417.15 (being one-half of the proceeds).

In sustaining the Commissioner's disallowance of the claim for refund, the district court entered findings of fact and conclusions of law which should be summarized. With respect to the policy which appellant signed as owner, the court found that the decedent, in her individual and separate right, did not expressly reserve the right to change the beneficiary, cancel, surrender or borrow on the policy, or retain any other incidents of ownership. Further, it found that she acquiesced in the use of community funds in payment of premiums and that she fully intended the proceeds to be payable to her husband on her death.4

While the decedent did not reserve the incidents of ownership in her separate right, the court nevertheless concluded that she did not make an inter vivos gift to her husband as his separate property of her community half interest in the policy. Therefore, the policy was community property at her death and the incidents of ownership were owned in the name of the husband as agent for the community and trustee for his wife.

II.

In 1954, Congress eliminated the so-called "payment of premiums" test for determining the includability of life insurance proceeds in the gross estate of an insured and embodied an "incidents of ownership" test in Section 2042. Under this section, life insurance proceeds payable to a beneficiary other than the executor of the decedent's estate5 are not includable unless the decedent possessed any of the incidents of ownership at death. The Treasury regulations characterize these incidents as economic benefits such as the power to change the beneficiary, to surrender, cancel or assign the policy, to pledge the policy for a loan, or to obtain a loan against the surrender value. After examining the policy to determine whether the decedent possessed any economic benefits, the Commissioner, according to the regulations, must take the additional step of considering whether ownership can be attributed to the decedent under applicable state law.6 If the decedent owned any portion of the policy at death, then an estate tax must result.

The policy in question gave the power to exercise the incidents of ownership to the person who signed as owner or, in the absence of such a signature, to the insured. Since appellant signed as owner, he contends that his wife, the decedent, could not have exercised any of the incidents of ownership and therefore that none of the proceeds should be included in her gross estate. Whether the fact that Mrs. Freedman could not control the policy in her separate right makes inescapable the conclusion that her estate should not be liable for a tax on the transfer of any property rights in the policy depends upon the impact of state property rules.

It is now settled in Texas that if life insurance is purchased by a spouse during the marriage and is paid for with community funds, the "policy rights" or incidents of ownership and the "proceeds rights" or rights to receive the proceeds in the future constitute community property. Brown v. Lee, Tex.1963, 371 S.W. 2d 694; see Davis v. Prudential Insurance Company of America, 5th Cir. 1964, 331 F.2d 346. It is fundamental that property purchased with community funds is likewise community property; and any uncertainty as to whether the meaning of "property" encompasses "life insurance and the effects thereof" was resolved affirmatively by the Texas Legislature in 1957.7 Since the community funds of Mr. and Mrs. Freedman were used to pay the premiums due under the policy in question, it follows that the policy was owned by the marital community unless it was the subject of a gift from the community to the separate estate of Mr. Freedman.

If the policy belonged to the community at the time of Mrs. Freedman's death, then there is no doubt that an estate tax based upon the inclusion of one-half of the proceeds in the gross estate was proper. The operation of the estate tax on a decedent's community interest in a life insurance policy was explained with remarkable clarity by Judge Wisdom in Commissioner of Internal Revenue v. Chase Manhattan Bank, 5th Cir. 1958, 259 F.2d 231, 255. In that case the husband created an insurance trust consisting of policies on his life, which were paid for with community funds. The Court held that on his death his estate transferred one-half of the proceeds to the trust and the surviving wife transferred the other half. The wife incurred a gift tax; the decedent's gross estate, an estate tax:

In a community property state where insurance on the husband\'s life is purchased with community funds, payable revocably to a third person beneficiary, the husband\'s right to change the beneficiary and all other control over the property are held as agent of the community. The bundle of rights in the policy is owned by the community. Something happens to this bundle when the insured dies, thereby terminating his control over the property and bringing the community to an end. What happens is, that the community\'s property interests in the policy-rights are transformed into the beneficiary\'s rights to the proceeds. It is a shift in control and a shift of beneficial interest. This is the transfer that is taxed.

As to the policy in the instant case, we believe that the community owned the bundle of rights or incidents of ownership at Mrs. Freedman's death and that the transfer of her interest in this property to the beneficiary was subject to tax.

III.

Appellant contends, however, that the community did not own the policy because decedent made an inter vivos gift of her community interest to her husband as his separate property. He bases this argument on the fact that he signed the application as owner and, under its express terms, had exclusive authority to exercise the incidents of ownership. He strengthens the implication of this circumstance by pointing to the two unsigned policies which his wife controlled as proposed insured and which he included in her gross estate to the extent of one-half of the proceeds. In other words, appellant asserts that he and Mrs. Freedman clearly intended the policies to be treated differently — the policy bearing his signature as owner to be his separate property and the two unsigned policies to belong to the community.

Property purchased with community funds is presumed to belong to the community even if title is taken in the name of one spouse only. Magee v. Young, 1946, 145 Tex. 485, 198 S.W.2d 883; Brick & Tile, Inc. v. Parker, 1945, 143 Tex. 383, 186 S.W.2d 66. To rebut this presumption, appellant must present evidence to show that the unnamed spouse intended to give her...

To continue reading

Request your trial
24 cases
  • United States Nat'l Bank v. Comm'r of Internal Revenue (In re Estate of Margrave)
    • United States
    • U.S. Tax Court
    • October 10, 1978
  • United States v. Gordon
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • February 5, 1969
    ... ... 26 U.S.C.A. § 2036 ...          8 Tex.Rev.Civ.Stat.Ann. art. 23, subd. 1 (1959) provides as follows: ...         "1. `Property' includes real and personal property, and life insurance policies and the effects thereof." ...         See Freedman v. United States, 5 Cir. 1967, 382 F.2d 742, wherein the above amendment to Article 23(1) was construed in an estate tax context ...          9 See, e. g., Warthan v. Haynes, 1956, 155 Tex. 413, 288 S.W.2d 481; Volunteer Life Ins. Co. v. Hardin, 1946, 145 Tex. 245, 197 S.W.2d 105, 168 ... ...
  • Ray v. United States
    • United States
    • U.S. District Court — Southern District of Texas
    • November 6, 1974
    ... ... See, e. g., Freedman v. United States, 382 F. 2d 742 (5th Cir. 1967); Duncan v. United States, 247 F.2d 845 (5th Cir. 1957); Gleich v. Bongio, 128 Tex. 606, 99 S.W.2d 881, 883 (1937); Baize v. Baize, 460 S.W.2d 255 (Tex.Civ.App. — Eastland 1970, no writ). However, Texas courts have not uniformly traced the source of ... ...
  • Catalano v. United States
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • December 16, 1969
    ... ... § 20.2042-1(c) (2). Whether he possessed any "legal" incidents of ownership is to be determined with reference to the applicable state law. Lang v. Commissioner of Internal Revenue, 1938, 304 U.S. 264, 58 S.Ct. 880, 82 L.Ed. 1331; Freedman v. United States, 5 Cir. 1967, 382 F.2d 742; Scott v. Commissioner of Internal Revenue, 9 Cir. 1967, 374 F.2d 154; Treas.Reg. § 20.2042-1(c) (5) ...         It is true, as the government urges, that under Louisiana law all assets acquired during the marriage are presumed to be community ... ...
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT