"Mellott: This proceeding involves a deficiency in estate tax in the amount of $11,405.38. The sole question is whether $40,000 paid to decedent's widow by the Prudential Insurance Co. under a policy taken out by the decedent three months before the date of his death should, or should not, under the facts, be included in decedent's gross estate.
"Findings of Fact.
"The decedent died testate March 31, 1936, at Davenport, Iowa. He was survived by his widow, two children born the issue of their marriage and a third born the issue of a prior marriage. The widow was duly appointed and qualified as the executrix of his estate. Within due time she filed an estate tax return and paid the tax shown to be due. Additional tax was subsequently assessed and paid and is not now in controversy.
"The age of the decedent at the time of his death was 71 years, 1 month and 20 days. Prior to his death he was vice-president of the Dewey Portland Cement Co., manager of its plant at Davenport, Iowa, and the owner of a substantial block of its stock. He received a salary of $16,000 per annum and the stock had paid some dividends. The condition of his health had generally been quite good and he had led an active life, supervising the cement plant.
"In January of 1935 the decedent was a patient at Mayo Brothers' clinic in Rochester, Minnesota, and was operated on for stomach trouble. The doctors diagnosed his ailment as carcinoma of the pyloris, and, although his wife knew the nature of his trouble, he apparently did not, the doctors having advised him that it was a growth upon, and an obstruction to, the duodenum.
"After his return from Mayo's in the spring of 1935 the decedent returned to his home in Davenport and again took up his duties at the cement plant. He seemed to be in good health that summer, though he returned to Mayo's for an examination. He expressed himself as feeling that the operation had been a success, showed some improvement in his health, went off the restricted diet, returned to his normal weight, and even indulged in sports such as playing ball with the cement plant employees. He did not discuss with his wife the possibility that he might die within a short time and expected to live to be a much older man.
"During the month of December, 1935, the decedent transferred to his wife a block of stock having a substantial value. On the same date he transferred to her two additional blocks of stock having a substantial value, as trustee for their two children.
"On December 31, 1935, the decedent signed two applications on forms supplied by the Prudential Insurance Co. of America. One was an application for a single premium life insurance policy in the amount of $40,000 and the other was an application for a life annuity, purchase price $9,873.20, payable $1,178.17 annually. At the time these applications were signed the only insurance in force upon his life was a policy in the Aetna Insurance Co. in the amount of $2,000.
"The applications above referred to were transmitted to the Prudential Life Insurance Co. and, under date of January 8, 1936, two policies, or contracts, were issued — one, life insurance policy No. 9143960 in the amount of $40,000, and the other an annuity contract, No. A-12356, the purchase price of which was $9,873.20, which, by its terms, provided for annual payments to him of $1,178.17.
"The insurance policy was on the regular standard form generally used by the insurance company in connection with its life insurance contracts and, among other things, provided:
"The Prudential Life Insurance Co. of America (hereinafter designated as the company) in consideration of the application for this policy, which is hereby made a part of this contract, and copy of which application is attached hereto, and of the payment, in the manner specified, of the premium herein stated, hereby insures the life of the person herein designated as the insured for the amount named herein payable as specified, subject to the provisions printed or written by the company on the following pages which are hereby made a part of this contract.
"In the policy Herbert F. Tyler was designated as the insured, and the policy stated that the amount ($40,000) was payable immediately upon receipt of due proof of the death of the insured during the continuance of the policy to Okley G. Tyler, the wife of the insured. The right to change the beneficiary was reserved and it was provided that if no beneficiary be living at the date of the death of the insured the proceeds should be payable to his executors, administrators or assigns. The receipt of the single premium of $34,126.80/100, payable in one sum on the delivery of the policy, was acknowledged. The policy contained the usual provisions with reference to change of beneficiary, change in mode of settlement or amount of insurance, options for settlement, incontestability after two years, provisions with reference to dividends, loan provisions, and cash surrender value. The table of cash surrender and loan values showed a cash surrender value of $730 per thousand at the end of the first year, the amounts increasing until the cash surrender value at the end of the 19th year was $912.
"No physical examination of the insured was required by the insurance company in connection with the execution or issuance of the single premium policy above referred to. It, however, would not have been issued unless the annuity contract had been purchased simultaneously.
"The Prudential Life Insurance Co. of America did not make a practice of issuing policies of life insurance to persons over sixty-six years of age. The policy was issued to Tyler because of the `exceptional circumstance' that the annuity contract was purchased simultaneously. The company fixed the amount of premium to be charged upon the policy by considering the life expectancy of the insured, his age, the mortality tables, legal reserves, loading charges, probable earnings from interest, anticipated future expenses, and kindred factors, the sum of all producing the premium charge. The fact that an annuity contract was issued at the same time did not affect the amount of the premium charged. The insurance was set up and carried on the books of the company the same as any other life insurance; it was reported as such to the Insurance Commissioners of the various states; and the company set up a reserve for the State of Iowa to cover its issuance as required by the laws of such state. The form and terms of the policy were the same as any similar single premium life policy issued by the company and not accompanied by an annuity contract.
"The amount required...
