Gorby v. Comm'r of Internal Revenue (In re Estate of Gorby)

• Decision Date: 27 October 1969
• Docket Number: Docket No. 912-67.
• Citation: 53 T.C. 80
• Parties: ESTATE OF MAX J. GORBY, DECEASED, JACK GORBY AND JACK DINNERSTEIN, COEXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

53 T.C. 80

ESTATE OF MAX J. GORBY, DECEASED, JACK GORBY AND JACK DINNERSTEIN, COEXECUTORS, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 912-67.

Tax Court of the United States.

Filed October 27, 1969.

Sidney J. Matzner, for the petitioners.

Erwin L. Stuller, for the respondent.

The decedent was insured under two group life insurance policies. He was issued individual-form certificates, specifying his coverage pursuant to the master insurance policies. A provision in one of the master policies specifically authorized an assignment of the insured's interest, and a provision in the other master policy purporting to prohibit assignment was deleted by endorsement. The certificates failed to conform to the master policies in that they purported to proscribe assignment of the insured's rights. Prior to his death, decedent attempted to assign his rights under both policies. Held: The provisions in the master policies permitted assignments and prevailed over the individual certificates. Further, such assignments were otherwise permissible under applicable California law. Accordingly, the decedent effectively divested himself of all incidents of ownership in both group policies, and the insurance proceeds were therefore not includable in his gross estate. Sec. 2042(2), I.R.C. 1954.

OPINION

RAUM, Judge:

The Commissioner determined a deficiency in the estate tax of the Estate of Max J. Gorby in the amount of $92,120.15. The only issue remaining with respect to that deficiency is whether decedent retained sufficient incidents of ownership in two group term life insurance policies to render them includable in his gross estate pursuant to section 2042(2), I.R.C. 1954. The facts have been stipulated.

The decedent, Max J. Gorby (Gorby), was a resident of California at the time of his death, and the duly appointed executors of his will resided in California when the petition herein was filed.

Gorby was an officer of California Marine Curing & Packing Co. and its affiliate, J. R. Barry & Co. (hereinafter sometimes referred to collectively as Marine), and was also a substantial stockholder in the enterprise. In April 1958, Marine took out a noncontributory, group term life insurance policy with the Union Central Life Insurance Co. of Cincinnati, Ohio (Union). The policy was ‘dated’ April 18, 1958, and declared that it was ‘effective’ as of April 1, 1958. The policy covered Marine's employees, officers, and part-time officers, including decedent, and provided that Marine would pay the monthly premiums on the insurance covering their lives as long as they remained in its employ.

In addition, the policy gave the insured a right of ‘conversion,‘ i.e., upon termination of employment the insured had a right to have issued to his, without producing additional evidence of insurability, a new personal life insurance policy. In order to obtain such policy the employee was required to apply for the new insurance within 31 days following termination, and could obtain a policy under any plan then customarily issued by the company (except term insurance, and without ‘disability or other supplementary benefits'). However, the employee was also required to pay the full premium applicable to the class of risk to which he belonged, the new policy to be issued as of the employee's attained insurance age and for an amount not greater than the amount of his insurance that was discontinued. In effect, the ‘conversion’ privilege gave the employee no greater right to purchase a new policy upon application and payment of premiums therefor than he would have had in the complete absence of any group policy, except that he was not required to furnish evidence of insurability. There was no provision for any carryover of rights under the old group policy to the new individual policy.

Section E4 of the group policy prohibited those insured from assigning their insurance. However, an endorsement on the policy modified section E4 to permit assignment under certain conditions:

The provision of section E4 prohibiting a person whose life is insured from assigning his insurance is subject to the condition that such person may assign his insurance under this Group Policy under the following conditions:

(1) The assignment must be absolute in form and must transfer all rights that accrue and will accrue to the insured employee by virtue of being insured under this Group Policy.

(2) The assignment may be made only to one or more of the following: The insured's spouse, children, parents, brothers, sisters, or the trustee of a trust established for the benefit of one or more of his spouse, children, parents, brothers or sisters.

The endorsement was located on the reverse side of the page on which section E4 was located. It was signed by an officer of Union and dated April 18, 1958, the same date as that on which the policy itself was issued.

The policy provided that Union would issue individual ‘certificates' setting forth the rights of each person insured and stating that the certificate would not modify Union's liability under the policy.¹ Union issued decedent a form certificate of insurance in the amount of $25,000 with a stated ‘effective date’ of April 1, 1958. The certificate named decedent as the insured and his wife, Fanny Serena L. Gorby (Serena), as the beneficiary. One paragraph in the certificate stated that no assignment by the insured of his insurance would be valid.² However, the introductory clauses on the first page of the certificate declared that the group policy, together with the applications of Marine and those insured under the policy, constituted the entire contract. ³ A similar statement appeared in the policy itself.⁴

Decedent executed Union's form, entitled ‘Absolute Assignment and Change of Beneficiary of Group Insurance.’ The instrument was ‘dated’ April 1, 1958, and names Serena as assignee. It provided in part that decedent—

hereby assigns, transfers, and sets over to the assignee the insurance on his life provided under the said policy, together with all additional insurance that may be provided in the future, and together with all rights, any sum or sums of money, interest, benefits and advantages whatsoever in connection therewith now due or hereafter to become due by virtue thereof.

The document was recorded and signed by a Union official on April 30, 1958. However, the assignment form also provided that Union ‘does not guarantee the validity of any assignment.’ On May 19, 1961, Serena signed a document entitled ‘Change of Beneficiary Agreement’ which purported to change the beneficiaries of the assigned policy to herself if living, or if not, then to her children, Alexander J. Gorby and Michael P. Gorby (the children), equally. The instrument was recorded and initialed by a Union official on May 29, 1961.

On July 24, 1959, Marine took out a second group term life insurance policy with the Manhattan Life Insurance Co. of New York (Manhattan). Like the Union policy, the Manhattan policy gave the insured a right to obtain a new individual policy on termination of his employment. The group policy also provided that Manhattan would issue individual certificates which summarized the significant features of the policy.⁵ Section 16 of the policy proscribed assignment of the individual certificates.⁶ However, just above section 16 on the policy was typed ‘SEE INDORSEMENT.’ The second page of the policy bears an endorsement deleting section 16, as follows:

INDORSEMENT

AT THE REQUEST OF THE POLICYHOLDER SECTION 16 ‘ASSIGNMENT’ SHALL BE AND IS HEREBY DELETED FROM THIS POLICY.

The endorsement was signed by a registrar of Manhattan and was dated July 24, 1959, the date of issue of the policy.

Manhattan issued decedent a certificate of insurance, dated July 24, 1959, in the fact amount of $100,000, which named him as the insured and Serena as the beneficiary. The certificate declared that it was non-assignable. However, the introductory clauses on the first page of the certificate stated that the certificate was only ‘evidence of insurance provided under the Group Policy’:

The insurance evidenced by this Certificate, including the following pages, is provided under and is subject to all of the provisions of the Group Policy.

This Certificate is merely evidence of insurance provided under the Group Policy, which insurance is effective only if the Individual is eligible for insurance and becomes and remains insured in accordance with the provisions, terms, and conditions of the Group Policy.

Similarly, section 11 of the policy provided:

Section 11. CONTRACT.— This Policy and the application of the Policyholder, a copy of which is attached hereto, together with the Individual applications, if any, of Individuals for insurance hereunder, shall constitute the entire contracts between the parties. * * *

On July 31, 1959, decedent signed a document entitled ‘Absolute Assignment of Insurance Under Group Policy.’ It provided in part:

In consideration of love and affection, the undersigned hereby assigns, transfers and sets over the insurance on his life provided under the above numbered group policy, together with an additional insurance that may be provided in the future and together with all rights, all sum or sums of money, interest, benefits and advantages whatsoever in connection therewith now due or hereafter to become due to the undersigned by virtue thereof unto Serena Frieda Gorby * * *

The document also stated that Manhattan ‘assumes no responsibility for the validity or effect of any assignment.’ On September 18, 1959, the assignment form was recorded and signed by a registrar of Manhattan. Shortly thereafter, ⁷ Serena executed Manhattan's form entitled ‘Change of Beneficiary Request’ and changed the beneficiaries of the assigned policy to herself if living, or if not, then to the children, equally.

It appears that Serena was also an officer or part-time officer of Marine, and Manhattan issued to her...