Goodnow v. United States, 264-60.

• Decision Date: 18 July 1962
• Docket Number: No. 264-60.,264-60.
• Citation: 302 F.2d 516
• Parties: David GOODNOW, Thomas W. Goodnow and Lois Goodnow Jay, Executors of the Last Will and Testament of Margery S. Goodnow, Deceased, v. The UNITED STATES.
• Court: U.S. Claims Court

302 F.2d 516 (1962)

David GOODNOW, Thomas W. Goodnow and Lois Goodnow Jay, Executors of the Last Will and Testament of Margery S. Goodnow, Deceased, v. The UNITED STATES.

No. 264-60.

United States Court of Claims.

May 9, 1962.

Rehearing Denied July 18, 1962.

Allen S. Hubbard, New York City, for the plaintiffs. John Westbrook Fager and David R. Tillinghast, New York City, were on the brief.

Earl L. Huntington, Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for defendant. Edward S. Smith and Philip R. Miller, Washington, D. C., were on the brief.

JONES, Chief Judge.

This is an action brought by the executors of decedent Margery S. Goodnow for the refund of an alleged overpayment of Federal estate taxes. It is claimed that the Commissioner of Internal Revenue wrongfully included in decedent's gross estate the value of the corpus of a trust through a misapplication of section 2036 (a) (1) of the Internal Revenue Code of 1954, 26 U.S.C. (I.R.C.1954) § 2036(a) (1) (1958 Ed.) That section provides, as is pertinent:

"§ 2036. Transfers with retained life estate

"(a) General rule. —

"The value of the gross estate shall include the value of all property * * * to the extent of any interest therein of which the decedent has at any time made a transfer * * *, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death —

"(1) the possession or enjoyment of, or the right to the income from, the property, * * *."

On May 28, 1926. David F. Goodnow, decedent's husband, entered into a trust agreement with the Chatham Phenix National Bank and Trust Company whereby a revocable, unfunded life insurance trust was created with the company appointed trustee. Pursuant to this agreement, nine insurance policies on the life of Goodnow, having a total face amount of $200,000, were deposited with the company. The latter was also designated as the beneficiary under each policy. The trust instrument provided in part that, upon the death of Goodnow, the company would receive, hold and invest the insurance proceeds as the corpus of the trust, and pay the income from that corpus to Mrs. Goodnow for life or until her remarriage, with remainders over to the Goodnow children (plaintiffs herein) or their issue.

In addition to granting Goodnow the power to modify, alter, or revoke the agreement in whole or in part, the trust instrument further gave to Goodnow the sole right to exercise any options with respect to the insurance policies included in the trust.

On the same day that the trust instrument was executed, Goodnow also entered into a deposit agreement with the trust company wherein he agreed to make, and the company agreed to receive, certain quarterly deposits for the purpose of paying premiums accruing under the policies in the future. Again on that same day, however, Goodnow received a letter from his wife which authorized him to make the requisite payments to the trust company under the deposit agreement out of her separate funds. She further authorized him to charge her funds with any additional amounts needed to pay premiums during the first year of operation of the deposit agreement, and all charges of the trust company for acting as trustee.

This method of paying the premiums on the policies included in the trust continued until December 9, 1927, when Goodnow advised the trust company that, in the future, the deposits necessary for the payment of premiums would be made directly to the company by his wife. This practice of providing funds to the corporate trustee for the purpose of paying premiums was then subsequently abandoned, and premium payments were thereafter made directly to the insurance companies by Mrs. Goodnow. Thus, it is undisputed that, from the time the trust was established until the death of Goodnow on October 7, 1947, all premiums paid for the purpose of maintaining the policies comprising the trust were paid by Mrs. Goodnow, either directly or indirectly, out of her separate property. It is this fact which gives rise to the dispute here involved.

The original trust instrument was subsequently amended on two occasions. The first amendment, executed on March 8, 1928, modified Goodnow's right to exercise the options as to three of the policies so that they had to be exercised jointly by Goodnow and his wife during their concurrent lifetimes. Again, on February 9, 1929, the instrument was amended so as to provide that the trust income would be payable to Mrs. Goodnow during her lifetime regardless of whether she remarried. She was also appointed cotrustee with the corporate trustee, with certain limitations on her powers which are not here relevant. The remaining provisions of the trust were reaffirmed, and it retained these characteristics until Goodnow's death several years later.

The nine insurance policies originally deposited with the trust company in 1926 had been applied for and procured by Goodnow on his own life at various times between August of 1916 and April of 1926. In 1932, however, Goodnow applied for and obtained two more life insurance policies, having a total face amount of $65,000. These policies were also made payable to the trust company pursuant to the trust agreement of May 28, 1926, as amended. Thus, at the time of Goodnow's death in 1947, the policies comprising the corpus of the trust had a total face value of $265,000.

Upon Goodnow's death, the entire value of the trust corpus (less $65,000 which he had borrowed from a Boston bank and for which ten of the policies had been assigned as security) was included in his gross estate for Federal estate tax purposes. This action was taken pursuant to the requirements of section 811(g) of the Internal Revenue Code of 1939, 26 U.S.C. (I.R.C.1939) § 811(g) (1952 Ed.), on the ground that Goodnow had retained certain incidents of ownership in the policies. The trustees received the net proceeds of the insurance policies and, after reimbursing Goodnow's executors for the proportionate share of estate taxes allocable to the insurance proceeds, credited the principal of the trust with the balance of $156,806.59. This amount subsequently increased in value to $224,035.17 by the time of Mrs. Goodnow's death in December of 1954.

The Commissioner of Internal Revenue determined, after the death of Mrs. Goodnow, that the entire value of the trust corpus as of the time of her death was also includible in her gross estate. It was his position, as set forth in a 90-day letter dated February 24, 1959, that she should be regarded as the real settlor of the insurance trust and, since the trust instrument provided her with a contingent life estate in the income therefrom, she had, in effect, made an inter vivos transfer of property with a retained life interest within the meaning of section 2036(a) (1) of the 1954 Code, supra. The resulting deficiency, plus interest, was consequently assessed and paid by plaintiffs in their capacity as Mrs. Goodnow's executors. A timely claim for refund was filed, rejected, and this suit followed.

The primary issue underlying this dispute is readily apparent and may be simply stated. That is to say, we are called upon to determine if, in the circumstances disclosed above, the corpus of the inter vivos trust is properly includible in Mrs. Goodnow's gross estate as a transfer of property with a retained income interest for life within the meaning of section 2036(a) (1). To justify the inclusion of this property in decedent's estate, it must clearly appear that the two requirements of that section have been complied with. Thus, there must have been a transfer of property by Mrs. Goodnow and a retention for life (either vested or contingent) of the income from that property by her. Simple as the issue is to state, however, the application of these requirements to the facts here involved does present difficulties.

Arguing in support of the Commissioner's determination, defendant reminds us, first of all, that the taxability of a...