Frick v. Lewellyn

• Decision Date: 05 June 1924
• Docket Number: 2831.
• Citation: 298 F. 803
• Parties: FRICK et al. v. LEWELLYN.
• Court: U.S. District Court — Western District of Pennsylvania

298 F. 803

FRICK et al. v. LEWELLYN.

No. 2831.

United States District Court, W.D. Pennsylvania.

June 5, 1924

George B. Gordon, of Pittsburgh, Pa., for plaintiffs.

Walter Lyon, U.S. Atty., of Pittsburgh, Pa., for defendant.

THOMSON District Judge.

The executors of the will of Henry C. Frick have brought this action against the collector of internal revenue for the Twenty-Third District of Pennsylvania to recover the sum of $108,657.38, alleged to have been erroneously assessed and collected under the provisions of section 402 (f) of the Revenue Act of 1918 (Comp. St. Ann. Supp. 1919, Sec. 6336 3/4c). The case was tried without a jury, on an agreed statement of facts, and the facts so stipulated are adopted as the court's findings of fact, as fully as if set forth in this opinion.

At the time of testator's death there were outstanding 11 policies of insurance upon his life, 4 of which were payable to his wife, and 7 to his daughter. The aggregate amount of these policies, which was payable to and received by the respective beneficiaries, was $474,629.52. This amount, less $40,000, was included in the gross estate of the decedent which exceeding $10,000,000 in amount, exclusive of the insurance, the tax rate of 25 per cent. became applicable under the statute, and the additional tax assessed to the estate on account of this insurance was $108,657.38, the amount sought to be recovered here. The policies in question were taken out by the decedent at various times, the first in 1874, and the last in 1901, their issuance in this way varying in time from 18 to 44 years before his death.

The policies were of different classes. Some were made payable to Mr. Frick's estate, with no provision for change of beneficiaries, but were subsequently assigned to his wife and daughter, without reservation of power to revoke the assignment. Some were of like character, and were so assigned, with power reserved to revoke the assignment. Some were made payable to Mr. Frick's executors, and subsequently, by arrangement with the company, were made payable to his daughter as beneficiary, without power reserved further to change the beneficiary. In others, the wife and the daughter were named as beneficiaries; the policies containing no power which enabled the insured to change the beneficiary. All the premiums were paid by Mr. Frick, and none of the assignments of the policies so made by him were at any time revoked. The decedent died testate on December 2, 1919; the will providing:

'That all inheritance, legacy, succession or similar duties or taxes * * * shall be paid out of the capital of my residuary estate.'

The tax was levied under title 4 of the Revenue Act of 1918 (Comp St. Ann. Supp. 1919, Secs. 6336 3/4a-6336 3/4k), which went into effect on February 24, 1919. The parts of the act material in the determination of this question are as follows:

In section 401 (Comp. St. Ann. Supp. 1919, Sec. 6336 3/4b):

'A tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 403) is hereby imposed upon the transfer of the net estate of every decedent dying after the passage of this act, whether a resident or nonresident of the United States:

'1 per centum of the amount of the net estate not in excess of $50,000;

'(Here follow the graduated rates and amounts from $50,000 up to $10,000,000);

'25 per centum of the amount by which the net estate exceeds $10,000,000.'

In section 402 (Comp. St. Ann. Supp. 1919, Sec. 6336 3/4c):

'That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated--

'(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate;

'(b) To the extent of any interest therein of the surviving spouse, existing at the time of the decedent's death as dower, curtesy, or by virtue of a statute creating an estate in lieu of dower or curtesy;

'(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this act), except in case of a bona fide sale for a fair consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title;

'(d) To the extent of the interest therein held jointly or as tenants in the entirety by the decedent and any other person, or deposited in banks or other institutions in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have belonged to the decedent;

'(e) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for a fair consideration in money or money's worth; and

'(f) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.' In section 408 (Comp. St. Ann. Supp. 1919, Sec. 6336 3/4i):

'If any part of the gross estate consists of proceeds of policies of insurance upon the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds, in excess of $40,000, of such policies bear to the net estate. If there is more than one such beneficiary, the executor shall be entitled to recover from such beneficiaries in the same ratio.'

Aside from the provision of the will for the payment of the taxes from the residuary estate, and assuming the act valid, and giving to it the interpretation claimed for it by the government, of the total sum of $108,657.38, 89 per cent. thereof would fall on the beneficiaries of the policies, and 11 per cent. on Mr. Frick's estate. In other words, the act undertakes to impose a transfer tax, ascertained by including in the gross estate the amounts which the executors never received, and were not entitled to receive, but which were received by his wife and daughter as insurance upon his life. This tax, by whatever name designated, is a graduated tax, and levied, not upon the value of that which the beneficiaries received, which under the act would have been two per cent., but upon the value of the decedent's total estate, which, as it exceeded $10,000,000, fixed the tax at 25 per cent.

The plaintiffs claim that the tax thus imposed is invalid, and the decision of this question involves the proper construction of the act and the question of its constitutionality. As to the construction of the act:

It is perfectly clear that the taxes in question, under section 401, are imposed upon the value of the net estate of the decedent, and their amount equals the sum of certain percentages of the value of such net estate, varying from 1 per cent., when the amount of the net estate is not in excess of $50,000, to 25 per cent. of the amount by which the net estate exceeds $10,000,000. The value of this net estate is determined in section 403 (Comp. St. Ann. Supp. 1919, Sec. 6336 3/4d); that is, by deducting from the value of the gross estate certain amounts therein designated and specified. The value of the gross estate is determined in section 402; that is, by including the value, at the time of the death, of all property, real or personal, tangible or intangible, wherever situated, to the extent of the interest and property specified in paragraphs (a) to (f), inclusive. Paragraph (a) refers to such interest of the decedent at the time of his death in any property which is subject to the payment of charges and expenses of administration, against his estate, and is subject to distribution as part of his estate; paragraph (b) refers to the inchoate interest of the surviving spouse in any property which becomes complete on the death; paragraph (c) refers to property transferred or trust created in contemplation of death; paragraph (d) to decedent's interest in lands held jointly; paragraph (e) to property passing by will under a general power of appointment, or by deed in contemplation of death; the first part of paragraph (f) refers to insurance policies receivable by the executor, and then comes the provision in said paragraph under which the tax in question is levied, namely:

'And to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.' If these words are given their ordinary meaning and significance, Congress did intend to include in the gross estate life insurance policies which, at the time of death, formed no part of the decedent's estate, and which the executors had no right to collect. This meaning or interpretation of the act is

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