Hagy v. Kelly, 7010.

• Decision Date: 26 September 1944
• Docket Number: No. 7010.,7010.
• Parties: HAGY v. KELLY, State Tax Com'r. In re HAGY'S ESTATE.
• Court: New Jersey Prerogative Court

39 A.2d 386

HAGY

v. KELLY, State Tax Com'r.In re HAGY'S ESTATE.

No. 7010.

Prerogative Court of New Jersey.

Sept. 26, 1944.

Proceeding in the matter of the transfer inheritance tax in the estate of Clayton L. Hagy, Jr., deceased, wherein Ethel W. McK. Hagy, executrix of the last will and testament of said deceased, appeals from a tax levied by William D. Kelly, State Tax Commissioner.

Assessment remanded for correction.

1. The decedent in conjunction with his wife purchased ten annuity contracts yielding an annual income of $11,400, for which they paid ten single capital premiums totaling $192,449.77. The decedent supplied sixth-two per cent and his wife contributed thirty-eight per cent of the cost of the contracts. All of the annuities were made payable to the husband during his life and to the widow after his death. Held: That the annuities to which the widow succeeded to the extent that they were gifts from her husband are taxable as transfers made by the decedent, intended to take effect in possession and enjoyment at and after the decedent's death.

2. In determining the value of the annuities, the American Experience Table of Mortality, with interest at the rate of five per cent per annum, should be used. R.S. 54:36-2 N.J.S.A. 54:36-2.

3. The consideration paid by the donee must be deducted from the appraisal since the transfer may be taxed only to the extent that it is a gift of a testamentary character.

Grover C. Richman, of Camden, for petitioner.

Walter D. Van Riper, Atty. Gen., and William A. Moore, of Trenton, Special Counsel, for respondent.

JAYNE, Vice Ordinary.

Discordant opinions concerning the validity of an inheritance tax assessment have occasioned this appeal. R.S. 54:33-2, N.J.S.A. 54:33-2; R.S. 54:34-13, N.J.S.A. 54:34-13.

One Clayton L. Hagy, Jr., a resident of Atlantic County, died testate on May 17, 1942, at the age of 67 years. His widow, Ethel W. McK. Hagy, survived him, and she is the executrix and sole beneficiary of his last will and testament executed on April 6, 1938.

Within the period from February, 1935, to January, 1936, the decedent, in conjunction with his wife, purchased ten annuity contracts in which they collectively invested ten single capital premiums totaling $192,449.77. Of this amount, the decedent supplied $119,879.26, and his wife is said to have contributed the balance, $72,570.51. Both were designated as the annuitants in each contract, under terms which required the annuity forthcoming from each agreement to be paid to Clayton L. Hagy, Jr., ‘if living, otherwise to’ Ethel W. McK. Hagy. The aggregate investment yields an annual income of $11,400.

The Tax Commissioner, in appraising the gross estate of the decedent for inheritance tax purposes, included as an asset the difference between that portion of the purchase price of the annuity contracts contributed by the wife and the cost, as of the date of decedent's death, of annuity contracts which would provide Mrs. Hagy (then 61 years of age) with an equal annuity for the remainder of her life. Such cost, according to figures obtained from the same companies, would have been $191,670.87. The sum of $119,100.36 by which the replacement cost exceeded the $72,570.51 originally invested by the wife was added to the decedent's gross estate as a transfer, made without adequate consideration and intended by the decedent to take effect at his death.

The initial question projected by this appeal is whether the participation of the decedent in the purchase of the annuity agreements effectively operated to design and ultimately accomplish the equivalent of a testamentary disposition of some measure of his property to his wife. R.S. 54:34-1, subd. c, N.J.S.A. 54:34-1, subd. c.

The origin of annuities of some type is discoverable in the distant past. 2 Encyc. Brit. (14th Ed.) 1-5; 2 Encyc.Am. 1-3; 2 Encyc. Social Sciences, 69-71. The following references are historically informative: 1 Walford, The Insurance Cyc. 97-171; Kopf, The Early History of the Annuity; O'Donnell, History of Life Ins. The issuance of annuity contracts by incorporated companies supervened, but the traditional type of annuity did not capture wide public favor. A multiformity of such contracts consequently evolved, including the ‘refund annuity’ with which Vice Ordinary Buchanan and our appellate courts were concerned in Central Hanover Bank & Trust Co. v. Martin, 129 N.J.Eq. 186, 18 A.2d 45, affirmed 127 N.J.L. 468, 23 A.2d 284, affirmed 129 N.J.L. 127, 28 A.2d 174, affirmed sub nom. Central Hanover Bank & Trust Co. v. Kelly, 319 U.S. 94, 63 S.Ct. 945, 87 L.Ed. 1282. Another class is available, such as the issuance of a single premium whole life insurance policy but only in conjunction with a single premium immediate life annuity, a type which recently occupied my attention in Bank of New York v. Kelly, 135 N.J.Eq. 418, 38 A.2d 899. The contracts involved in the present appeal are denominated more precisely as ‘survivorship annuities' or ‘longer life annuities.’ See 39 Mich.Law Review 856. It is of incidental interest to observe that in the field of litigation, annuity contracts have required and received more judicial consideration since the enactment of gift and inheritance tax legislation.

In 1935 the purchase of annuity contracts was advocated with the representation that, like life insurance, the proceeds would probably be exempted from inheritance taxation. That supposition was found to be erroneous. Central Hanover Bank & Trust Co. v. Martin, supra; Bank of New York v. Kelly, supra. In the federal jurisdiction: Helvering v. Le Gierse, 312 U.S. 531, 61 S.Ct. 646, 86 L.Ed. 996; Keller v. Commissioner, 312 U.S. 543, 61 S.Ct. 651, 85 L.Ed. 1032. From the viewpoint of risk, the difference between a life insurance policy and an annuity contract is diametric.

The notion that a commercial annuity contract would be exempted from transfer inheritance taxation by force of the decisions in such cases as In re Kelloggs' Estate, 123 N.J.Eq. 322, 197 A. 263; In re Honeyman's Estate, 98 N.J.Eq. 638, 129 A. 393, affirmed sub nom. Bugbee v. Board of Home Missions, etc., 4 N.J.Misc. 99, 131 A. 924, affirmed 103 N.J.L. 173, 134 A. 915, and Fidelity Union Trust Co. v. Thayer-Martin, 118 N.J.L. 277, 192 A. 74, affirmed 119 N.J.L. 425, 197 A. 40, has also been dispelled. Central Hanover Bank & Trust Co. v. Martin, supra.

In the present appeal, the petitioner trains attention on the following circumstances: (a) that both the decedent and his wife contributed materially to the cost of the annuity; (b) that the cost of such an annuity for the life of the decedent was, in each instance, greater than the amount contributed thereto by him; (c) that the annuities were not joint in the sense that they were payable currently to both and then to the survivor of them; (d) that the decedent did not reserve any power to cancel or alter the contracts or control the payment of a refund or the designation of a future beneficiary; and (e) that the decedent did not live to receive the annuities during the full period of his estimated life expectancy. It is asserted that in such circumstances the benefits derived from the annuities by the surviving widow accrued to her as a result of a contractual arrangement, to which she was a party and for which she paid a valuable consideration.

In the solution of these controversial issues of taxation, it is ordinarily an efficient policy to reorganize and endeavor to envisage the evident and inferential circumstances accompanying and surrounding the particular transaction. If my impression of the facts motivating the purchase of the annuities implicated in the present appeal is spurious, the responsibility must rest upon the litigant who suffers from the paucity of the proof. It is difficult to harvest rich crops from an ungenerous soil.

The time was 1935. An economic depression had descended upon us. The scene, a conference between Mr. and Mrs. Hagy. They, like others, were doubtless experiencing a feeling of uneasiness and perhaps anxiety concerning the stability and perchance the gradual evaporation of their financial resources. Like others in similar circumstances, they sought and contemplated available protective measures. It is not plausible to infer that Mr. Hagy divulged to his wife that he had gleaned knowledge of a plan by which they could place their financial house upon a rock and despite the eventual adversities that might beat upon it, it would shelter them for the duration of their lives? Yes, an annuity contract would accomplish the purpose. Likely he remarked, ‘For a present investment of $192,449.77, of which I shall furnish approximately sixth-two percent, which is a very substantial portion of my estate, and you supply thirty-eight percent, an annual income of $11,400. can be obtained for the remainder of my life.’ Perhaps Mrs. Hagy justifiably inquired, ‘You are older than I, and as much as I abhor the thought, what is to happen to me if I survive you?’ Doubtless he replied, ‘I have anticipated that. I have bargained with that in contemplation. You will receive an annuity for the duration of your life.’ ‘When will I receive it?’ she asked. ‘Not before but immediately after my death,’ he explained. ‘But in what amount?’ ‘Precisely the same sum,’ was his answer. Her curiousity necessitated one more question. ‘Why is it that although I contribute only about thirty-eight percent of the investment, I am entitled at your death to receive an annuity equal to yours?’ The answer to that question is dispositive, I think, of the first point of the present appeal. While the dialogue which I have written is imaginary, it is not fanciful to infer from the established and acknowledged facts that some such colloquy occurred.

The difficulty which the appellant encounters reposes in the inability in the present case to demonstrate that the consideration which she supplied was wholly allocable to the amounts payable to...