Gorman v. United States

• Decision Date: 25 July 1968
• Docket Number: Civ. No. 26769.
• Citation: 288 F. Supp. 225
• Parties: Kathleen M. GORMAN, as Executrix of the Estate of James P. Cleary, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Michigan

288 F. Supp. 225

Kathleen M. GORMAN, as Executrix of the Estate of James P. Cleary, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 26769.

United States District Court E. D. Michigan, S. D.

July 25, 1968.

Cross, Wrock, Miller, Vieson & Kelley, Detroit, Mich., for plaintiff.

Lawrence Gubow, U. S. Atty., Detroit, Mich., for defendant.

OPINION GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

KAESS, District Judge.

This is an action brought by the executrix of the decedent James P. Cleary 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 a life insurance policy through a misapplication of Section 2035 of Internal Revenue Code of 1954, 26 U.S.C. (I.R.C.1954) § 2035. That section provides:

"§ 2035. Transactions in contemplation of death

(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 (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, in contemplation of his death.

(b) Application of general rule.— If the decedent within a period of 3 years ending with the date of his death (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) transferred an interest in property, relinquished a power, or exercised or released a general power of appointment, such transfer, relinquishment, exercise, or release shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this section and sections 2038 and 2041 (relating to revocable transfers and powers of appointment); but no such transfer, relinquishment, exercise, or release made before such 3-year period shall be treated as having been made in contemplation of death."

The plaintiff moves for summary judgment and for the purpose of this motion has set forth a stipulation of facts, a copy of which is attached to this opinion (see Exhibit A). Since the payment of the premium is in question, the court, for the purpose of this motion, will assume the premium to have been paid by the deceased.

The government asserts that the procurement of the insurance policy by the decedent for his wife was a "transfer" of the policy within the meaning of Section 2035 of the Internal Revenue Code of 1954, and the total proceeds from the policy, as a result of payment of the premium, is includable in the estate of the decedent. The government relies upon Revenue Ruling 67-463, Internal Revenue Bulletin 1967-52, 15 as authority for its position (see attached Exhibit B). Under this ruling, the portion of death proceeds which is attributable to the premiums paid by the insured is includable in his gross estate under Section 2035. This ruling is startling in that it completely ignores the legislative history and intent relating to the elimination of the premium payment test from the Code.

The announced position of the Service in that an amount of the insurance proceeds which bears the same ratio to the total proceeds as the premium paid in the last three years bears to the total premium paid on the policy should be included in the decedent's gross estate pursuant to Section 2035(a) is not a new view among District Directors.¹ And applying this rule, the $50,000 proceeds would be included in the decedent's gross estate. At one time this position had widespread acceptance.² However, at present it is severely criticized and it is generally felt, and properly so, that the Service is attemping to administratively adopt in part the "premium payment test" which was deleted from the Revenue Laws by the enactment of the 1954 Code.

In order to come to this conclusion, it is necessary to brief by review the estate tax treatment of life insurance prior to the enactment of the 1954 Code. The estate tax provision specifically applicable to life insurance proceeds³ provided for the inclusion of life insurance proceeds in the gross estate of the insured if:

(a) The proceeds were payable to the insured's personal representative.

(b) The insured possessed at his death any incidents of ownership, exercisable either alone or in conjunction with any other person.

(c) The insured paid the premiums directly or indirectly (if the sole basis of the inclusion of the life insurance proceeds in the insured's gross estate was the payment of premiums and he had not paid all the premiums, then only that portion of the proceeds was includable that corresponds to the portion of the premium he had paid.⁴

However, Section 2042 of the 1954 Code, the estate tax provision now specifically applicable to life insurance, eliminates the premium payment test as a ground for inclusion and brings into the category of incidents of ownership of the policy a reversionary interest in the insured, whether arising by the express terms of the policy or other instrument, or by operation of law, if the value of the reversionary interest exceeds 5 per cent of the value of the policy immediately before the insured's death. The majority of the House Ways and Means Committee justified the elimination of the premium payment test upon the ground that this put life insurance on the same footing as other property, since other property is not taxed to a decedent's estate, if he completely parted with the property during his life, merely because he paid the consideration for it.⁵ And the position of Congress was reaffirmed in 1957 when it rejected a Treasury attempt to introduce a modified form of premium payment test in the 1954 Code.⁶

However, as the regulations promulgated under Section 2042 specifically indicate, the proceeds of life insurance policies may under certain circumstances be included in a decedent's gross estate under other sections of the Code. Regulations Section 20.2042-1(a) (2) provides in part as follows:

"(2) Proceeds of life insurance which are not includible in the gross estate under section 2042 may, depending on the facts of the particular case, be includible under some other section of Part III of Subchapter A of Chapter 11. For example, if the decedent possessed incidents of ownership in an insurance policy on his life but gratuitously transferred all rights in the policy in contemplation of death, the proceeds would be includible under section 2035. * * *"

With the legislative history of Section 2042 in mind, we may now turn to a consideration of Section 2035 of the 1954 Code, which has been said may be used as a vehicle to reinstate in part the premium payment test which as indicated above was specifically rejected by Congress when the 1954 Code was enacted.⁷ This section provides in part as follows:

"(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 (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, in contemplation of his death."

The specific interpretative issue is what is the value of the property transferred by the decedent for purposes of the above quoted section when he pays in contemplation of death directly or indirectly premiums on a life insurance policy.

Once it is determined that an interest in property has been transferred in contemplation of death, the amount included in the decedent's gross estate is the value of the interest transferred as of the applicable valuation date.⁸ Since transfers in contemplation of death are to be valued at a time subsequent to the actual transfer, situations arise where specific property or money is transferred in contemplation of death but the donee disposes of the property prior to the donor's death. If the transfer is made within 3 years of the transferor's death, the question arises whether the amount included in the decedent's gross estate should be the fair market value, as of the applicable valuation date, of the specific property transferred or whether the fair market value of the proceeds from the property transferred which are retained by the transferee at the transferor's death. However, if the transferee has made improvements or additions to the property, any resulting enhancement in the value of the property is not considered in ascertaining the value of the gross estate. Similarly, neither income received subsequent to the transfer nor property purchased with such income is considered.

Thus, the question of how much is included in a decedent's gross estate resulting from the payment of insurance premiums in contemplation of death is merely one phase of the broader question raised above. This categorization of the question relating to insurance proceeds appears to be in accord with Congress' general approach towards this type of property. As indicated earlier, Congress indicated at the time the 1954 Code was enacted, that it intended life insurance to be treated like other property.

The Service's position, as set forth in the Ruling, is not supported in law. An analysis of the cases relied upon are clearly distinguishable from that upon which the Service would hope they hold.

In The Chase National Bank of City of New York v. U. S., 278 U.S. 327, 49 S.Ct. 126, 73 L.Ed. 405 (1929), the opinion of the court did not demonstrate that transfer occurs with the payment of each premium, in fact it was not even considered by the court. The question before the court was whether the federal estate tax imposed on insurance policies owned by the decedent, but payable to his wife, was a direct tax on property and therefore violative of the apportionment provision of the federal constitution, the taxpayer's argument being that it was a tax on property because the beneficiary's interest in the policies was not transferred...