Hope v. U.S., 81-1521

• Court: U.S. Court of Appeals — Fifth Circuit
• Writing for the Court: Before BROWN, WISDOM and RANDALL; WISDOM
• Citation: Hope v. U.S., 691 F.2d 786 (5th Cir. 1982)
• Decision Date: 18 November 1982
• Docket Number: No. 81-1521,81-1521
• Parties: 82-2 USTC P 13,504 Grover H. HOPE, Executor of the Estate of Beverly J. Hope, Deceased, Plaintiff-Appellee, v. UNITED STATES of America, Internal Revenue Service, Defendant-Appellant.

Page 786

691 F.2d 786

82-2 USTC P 13,504

Grover H. HOPE, Executor of the Estate of Beverly J. Hope Deceased, Plaintiff-Appellee, v. UNITED STATES of America, Internal Revenue Service Defendant-Appellant.

No. 81-1521.

United States Court of Appeals Fifth Circuit.

Nov. 18, 1982.

Ann Belanger Durney, Libero Marinelli, Jr., Attys., Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Ginsberg & Forman, Donald J. Forman, Dallas, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before BROWN, WISDOM and RANDALL, Circuit Judges.

WISDOM, Circuit Judge:

In this estate tax dispute, we are asked to decide whether the proceeds of three term life insurance policies should be included in the estate as gifts in contemplation of death under section 2035 of the Internal Revenue Code of 1954 (26 U.S.C. § 2035). The District Court for the Northern District of Texas tried the case without a jury on stipulated facts, and held that the decedent transferred the insurance policies but that the transfer was not made in contemplation of death. ¹ The estate was granted a refund, and the government appeals. On cross appeal, the estate contends that, although the district court reached the right result, it erred in finding that there was a transfer. We reverse and remand.

I.

At the time of her death in 1970, Beverly J. Hope was the wife of a successful general contractor, Grover H. Hope, and the mother of three children whose ages ranged from ten to fifteen. The success of Grover Hope's company, Chaney and Hope, frequently turned on his ability to obtain performance bonds. Because defaults in the construction business are not uncommon, the decedent and her husband decided to set aside certain assets for the benefit of their children that would be protected from claims by Hope's bonding company in the event of a default on a performance bond. On August 6, 1970, they created a trust for each child, and appointed as trustee Byron A. Whitmarsh, a partner in Chaney and Hope. The trusts were initially funded with $100 transfers from the Hopes. Acting as trustee, Whitmarsh opened checking accounts for the three trusts and deposited each of the $100 transfers.

On May 5, 1970, the decedent executed three applications for term life insurance as a proposed insured, and on August 7 Whitmarsh was designated the proposed owner of the policies. It is a fair inference that Hope contemplated a continuing practice of annually purchasing such policies for the trusts. The insurance company accepted the applications on October 9, 1972, subject to the payment of a $713 premium on each policy. On October 21, Grover Hope withdrew $2100 from the Hopes' joint checking account and deposited $700 in each of the three trust accounts. The next day Whitmarsh, as trustee, paid the premiums. Shortly thereafter, Southwestern Life Insurance Company issued three separate $100,000 renewable term life insurance policies on the decedent's life. ²

On October 28, 1970, Beverly J. Hope was murdered in her home. Thirty-six years old and in excellent health, she had no reason to believe that death was imminent. Upon her death, the trustee collected $300,000 as the proceeds of the insurance policies. The proceeds were not included in the gross estate on the decedent's federal estate tax return. The Commissioner, seeking to include $150,000 as the decedent's community share, asserted a deficiency. The estate paid $67,638.27 in tax and sued for a refund. In granting the refund, the district court found that the transaction was in substance a transfer, but that it was life-motivated, and, consequently, not in contemplation of death. We first review the propriety of the court's determination that a transfer occurred.

II.

At the time in issue, ³ section 2035(a) of the Code provided that:

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 the 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.

At the time of Beverly Hope's death, therefore, inclusion under section 2035 was proper only if (1) there was a transfer, and (2) the transfer was in contemplation of death.

Relying principally on this Court's decision in Bel v. United States, 5 Cir. 1971, 452 F.2d 683, cert. denied, 1972, 406 U.S. 919, 92 S.Ct. 1770, 32 L.Ed.2d 118, the district court concluded that Beverly Hope transferred the policies on her life to the children's trusts. In dismissing the estate's contention that the decedent never owned the policies to begin with, the court responded favorably to the government's age-old argument that the substance, rather than the form of the transaction, should govern: "Even though the trustee actually made the purchases of the policies, in substance the decedent and her husband directly controlled the acquisition of these policies and in effect transferred them to the trusts.... Decedent made a transfer of the right to receive the proceeds of the life insurance policies." The court quoted language from Bel that it found "directly controlling":

We perceive little seriousness in the argument that a decedent should be permitted to evade the provisions of 2035 by funneling property to various beneficiaries through a third-party conduit.... We think our focus should be on the control beam of the word 'transfer'.... Had the decedent, within three years of his death, procured the policy in his own name and immediately thereafter assigned all ownership rights to his children, there is no question but that the policy proceeds would have been included in his estate. In our opinion the decedent's mode of execution is functionally indistinguishable.

452 F.2d at 691-692.

We think the district court was mistaken when it concluded that Bel compels a finding that a transfer occurred. Not only is the language the district court relied upon unnecessary to Bel 's result, but also the facts this Court confronted there are distinguishable from those we now face. In Bel, the decedent annually purchased an accidental death policy on his own life. Although his children solely owned the policies from their inception, the decedent executed the original insurance application himself and paid, with community funds, all of the premiums. The question whether the decedent transferred a policy was addressed only briefly, the Court holding that even though he never formally owned the policy, he purchased it for his children and thus there was a transfer. "The decedent, and the decedent alone, beamed the accidental death policy at his children, for by paying the premiums he designated ownership of the policy and created in his children all of the contractual rights to the insurance benefits." 452 F.2d at 691.

Bel holds that there is no practical difference between, on the one hand, purchasing a policy in one's own name and then transferring it, and on the other, purchasing the policy in someone else's name. These two acts, identical in practice, should therefore have the same tax consequences. There can be a practical difference, however, between buying insurance for someone and giving that person money, even if the money is eventually used to purchase insurance. Unlike Mr. Bel, Beverly Hope bought no policies and paid no premiums; she only gave cash, in trust, to her children. The government argues that the district court was correct in holding that the decedent and her husband provided the funds to the trustee, and that in substance it was the decedent who procured the policies and transferred them to the trust. We cannot accept this contention. Although Beverly Hope did fill out the initial application form for the insurance policies, the court could not conclude from this alone that, in the language of Bel, she "beamed the proceeds at her children". Such a conclusion would require a factual determination that the trustee, Byron A. Whitmarsh, had no discretion to invest the trust assets, but was in fact controlled by the decedent, acting as the decedent's agent when he paid the premiums. Nowhere, however, was it stipulated that the grantor controlled the trustee, or that the trustee's powers were confined. On the contrary, the trust agreement is irrevocable and vests broad powers in the trustee, particularly with regard to investments. ⁴ Consequently, we hold that the district court erred when it decided, as a matter of law, that a transfer occurred for purposes of section 2035. We therefore reverse its holding and remand the case to the district court for further factfinding on the question whether the trustee acted as the grantor's agent when he purchased the policies.

The government's reliance on Detroit Bank & Trust Company v. United States, 6 Cir. 1972, 467 F.2d 964, cert. denied, 1973, 410 U.S. 929, 93 S.Ct. 1364, 35 L.Ed.2d 590, is misplaced. In that case, the decedent entered into a trust agreement with the bank as trustee, and transferred $9600 to the trust to acquire $100,000 of insurance on his life. The trust was irrevocable and nominally beyond his control, but it provided for him to continue to make contributions to the trust for the payment of premiums, and its terms limited the trustee's power by requiring it to expend the funds solely for this purpose. Faced with a factual finding that the trustee had no discretionary investment powers of its own and that it was controlled by the grantor, the court held, citing Bel, that a transfer had been made. ⁵ Because no finding has been made in this case that an agency relationship existed between the decedent and trustee, we view Detroit Bank & Trust as inapposite.

III.

At the relevant time, section 2035 required the inclusion in the gross estate of property transferred "in contemplation of death". Subsec...