Hunter v. U.S.

Decision Date25 June 1980
Docket NumberNo. 79-1870,79-1870
Citation624 F.2d 833
Parties80-2 USTC P 13,362 Sue Ann HUNTER, Marie Joyce Kotsonis, L. Fargo Richardson and The L. F. Richardson Foundation, Appellees, v. The UNITED STATES of America, Appellant.
CourtU.S. Court of Appeals — Eighth Circuit

Wm. S. Estabrook, III, Atty., Tax. Div., Dept. of Justice, Washington, D. C. (argued), Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews and Robert A. Bernstein, Washington, D. C., Ronald S. Reed, Jr., U S. Atty., Kansas City, Mo., on brief, for appellant.

Guy A. Magruder, Jr., Terrell, Van Osdol & Magruder, Kansas City, Mo., for appellee.

Before STEPHENSON and McMILLIAN, Circuit Judges, and VIETOR, * District Judge.

STEPHENSON, Circuit Judge.

The United States appeals from the district court's 1 order granting the plaintiffs-appellees' motion for summary judgment. Judgment was entered in favor of the plaintiffs the sole distributees and beneficiaries under the last will and testament of Lloyd F. Richardson, deceased entitling them to obtain a refund of federal estate taxes which the district court ruled were erroneously assessed against them. On appeal the government argues that the district court erred in holding that proceeds from insurance policies on the decedent's life were not includable in his gross estate under I.R.C. § 2042(2), because decedent did not possess "incidents of ownership" in the policies. We affirm.

I. Facts and Proceedings Below

The parties submitted an extensive stipulation of facts with their cross-motions for summary judgment. The district court presented a detailed summary of the facts from this joint stipulation, see Hunter v. United States, 474 F.Supp. 763, 764-65 (W.D.Mo.1979). We therefore only briefly outline the relevant facts.

Lloyd F. Richardson (Lloyd) purchased eleven insurance policies on his own life from the years 1943 to 1955. From 1944 to 1961, Lloyd transferred the ownership of his policies to his wife Hazle D. Richardson (Hazle). After the transfer of ownership, Hazle changed the beneficiaries of all the policies. She became the primary beneficiary and her children and her estate were named as succeeding beneficiaries.

On March 22, 1961, Hazle properly executed her last will and testament, which named Lloyd as both executor of her estate and trustee of a testamentary trust for the benefit of their children and grandchildren. On August 29, 1970, Hazle died and Lloyd was appointed executor of Hazle's estate by the county probate court, and the appointment lasted until his death on September 18, 1972. At the time of his death, Lloyd had not distributed the assets of the residuary estate to the testamentary trust nor had he assumed the duties of trustee under the terms of the will.

The only assets in the residuary estate other than the life insurance policies were 626 shares of stock in the Richardson Motor Company. Lloyd was president of this corporation which operated an automobile dealership. At the time of Hazle's death, she and her husband were the only shareholders in the corporation. All administration expenses, estate taxes, inheritance taxes and court costs relative to Hazle's estate were paid by the executors from non-probate assets. It is stipulated that there is no evidence that Lloyd exercised or attempted to exercise any incidents of ownership in the life insurance policies after Hazle's death.

After Lloyd's death, the value of the life insurance policies was not included in his gross estate on the federal estate tax return filed by Lloyd's estate. The Internal Revenue Service assessed an additional estate tax on the value of the insurance policies, which it concluded should be included in his gross estate. The estate paid the deficiency and brought this action seeking a refund.

The district court determined that Lloyd's powers both as executor and as designated trustee must be examined to determine if he possessed the requisite incidents of ownership in the insurance policies. The court determined that, for purposes of I.R.C. § 2042(2), Lloyd did not possess incidents of ownership in either capacity. The government appeals, alleging that (1) under the provisions of the will and Missouri law, Lloyd, as executor, possessed the necessary incidents of ownership; and (2) the fiduciary capacity he occupied as trustee included powers sufficient to qualify as incidents of ownership in the policies.

In addition to relying on the reasoning of the district court, appellees contend that Lloyd's powers as potential trustee are irrelevant and should not be considered because (1) at the time of his death Lloyd was not yet trustee of the residuary trust, and he did not possess the powers to become trustee; and (2) the policies would not have passed under Hazle's will to Lloyd as trustee.

II. Incidents of Ownership under I.R.C. § 2042(2)

Like the district court in the instant case, we find it appropriate to consider Lloyd's capacity as executor and his capacity as potential trustee separately to determine if he possessed incidents of ownership in either capacity which would require inclusion of the value of the policies in his gross estate under I.R.C. § 2042(2).

I.R.C. § 2042(2) provides in relevant part that for estate tax purposes the gross estate of the decedent shall include the value of all property "(t)o the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person."

The term "incidents of ownership" is not specifically defined in either the statute or regulations, although its meaning is discussed in some detail in Treas.Reg. (26 C.F.R.) § 20.2042-1(c)(2):

For purposes of this paragraph, the term "incidents of ownership" is not limited in its meaning to ownership of the policy in the technical legal sense. Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc.

A. Powers as Executor

The government argues that as executor Lloyd possessed the power to enjoy economic benefits of the policies, and therefore possessed incidents of ownership. See Treas.Reg. § 20.2042-1(c)(2), supra. The relevant provision of the will states that the executor of Hazle's estate

shall have and may exercise, as executor or substitute or successor executor, the same broad powers I confer on my husband in his capacity as trustee, in Section 5 of Article IV hereof, if or to the extent the conferring upon and exercising of such powers shall be appropriate to executorship and will be permitted by or will not be violative of applicable law; and each of them shall have the power also to sell any of the assets of my estate, in each instance at the property's value as shown in the inventory and appraisement of my estate filed in the Probate Court, and without the Probate Court's prior authorization or subsequent approval, or at such lesser price as the Probate Court may approve, and in either case to any person or persons whomsoever, including my spouse (even though he as executor may be dealing with himself in his individual and independent capacity) and children, in order to raise funds needed to pay death taxes and court costs and expenses of administration, or for any other proper purpose.

This provision, the government contends, gave Lloyd as executor the power to sell the policies at or below their full value to any person, including himself in his individual capacity. This capacity to "self deal," the argument continues, gives Lloyd the right to obtain economic benefits in the policies from his powers as executor.

The district court held that Missouri statutes and case law prohibit an executor from self dealing despite permissive language in the will, subject to only one exception: upon the consent of all the distributees. Hunter v. United States, supra, 474 F.Supp. at 768. See Mo.Rev.Stat. §§ 473.457(3), .477. See also Earney v. Clay, 516 S.W.2d 59 (Mo.App.1974).

We agree with the district court that "(a)lthough the ultimate question of 'incidents of ownership' is one of federal tax law, the decision may turn on state law. Landorf v. United States, 408 F.2d 461, 466, 187 Ct.Cl. 99 (1969)." Hunter v. United States, supra, 474 F.Supp. at 768. The above issue being governed by state law, the opinion of the local federal district judge that Missouri law prohibits self dealing except with the written consent of the distributees is entitled to great weight. American Motorists Insurance Co. v. Samson, 596 F.2d 804, 807-08 (8th Cir. 1979).

Even if the district court's interpretation of state law regarding this matter is accepted, 2 the government argues that the necessity of obtaining the consent of the distributees is irrelevant because section 2042(2) extends to any incident of ownership "exercisable alone or in conjunction with any other person." The district court responded that

(t)his argument fails in that the phrase "exercisable either alone or in conjunction with any other person" refers to the joint possession of incidents of ownership. That phrase contemplates the situation of joint ownership of a policy where the incidents of ownership are shared and does not refer to a situation where a single individual requires the consent of others before he is given the incidents of ownership. See, Commissioner of Int. Rev. v. Karagheusian's Estate, 233 F.2d 197 (2nd Cir. 1956).

Hunter v. United States, supra, 474 F.Supp. at 768-69.

It is our view that this distinction made by the district court might lead to the "sanction (of) tax...

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