Hunter v. United States

• Decision Date: 16 July 1979
• Docket Number: No. 77-0665-CV-W-3.,77-0665-CV-W-3.
• Parties: Sue Ann HUNTER, Marie Joyce Kotsonis, L. Fargo Richardson and L. Fargo Richardson Foundation, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Missouri

474 F. Supp. 763

Sue Ann HUNTER, Marie Joyce Kotsonis, L. Fargo Richardson and L. Fargo Richardson Foundation, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 77-0665-CV-W-3.

United States District Court, W. D. Missouri, W. D.

July 16, 1979.

Guy A. Magruder, Jr., and Richard M. Erickson, Terrell, Van Osdal & Magruder, Kansas City, Mo., for plaintiffs.

Ronald S. Reed, Jr., U.S. Atty. Kansas City, Mo., and James E. Crowe, Jr., Trial Atty., Tax Div., Dept. of Justice, Washington, D.C., for defendant.

ORDER GRANTING SUMMARY JUDGMENT

RUSSELL G. CLARK, District Judge.

This action is before the Court upon stipulated facts and cross motions for summary judgment filed by plaintiffs and defendant. For the reasons stated herein, the plaintiffs' joint motion is granted and the defendant's motion is denied.

Plaintiffs, Sue Ann Hunter, Marie Joyce Kotsonis, L. Fargo Richardson, Jr., and L. F. Richardson Foundation, are the sole distributees and beneficiaries under the last will and testament of Lloyd F. Richardson, deceased. Plaintiffs brought this action for the recovery of federal estate taxes which they allege were erroneously and illegally assessed against, and collected from, the estate of Lloyd F. Richardson. The parties have submitted to the Court an extensive stipulation of facts, the pertinent provisions of which are noted herein, and which clearly indicate that there are no genuine issues of material fact. Accordingly, summary judgment is proper.

FACTUAL BACKGROUND AS STIPULATED BY THE PARTIES

From 1943 through 1955, Lloyd F. Richardson (hereinafter, "Lloyd") purchased eleven life insurance policies on his own life. The beneficiaries of these policies were originally his wife, Hazle Richardson, as primary beneficiary, and their three children as secondary beneficiaries. If they predeceased Lloyd, his estate was named as the alternate beneficiary. From 1944 through 1961, Lloyd systematically transferred the ownership of these policies to his wife Hazle. These transfers were effected procedurally through assignments and through executed "control of policy" provisions. The defendant does not contest the validity of these transfers.

After the transfer of ownership had been accomplished, Hazle executed change of beneficiary forms with respect to all of the policies. Hazle named herself as primary beneficiary and her children and her estate as succeeding beneficiaries. Lloyd's estate was removed as an alternate beneficiary on the policies. At all times following the assignment of the policies to Hazle until her death in 1970, Hazle was the designated owner under the policies.

On March 22, 1961, Hazle properly executed her last will and testament and named Lloyd as executor of her estate and as trustee of a testamentary trust for the benefit of their children and grandchildren. Hazle died on August 29, 1970. Lloyd was appointed executor of her estate by letters testamentary granted by the Probate Court of Vernon County, Missouri, and said appointment continued in full force and effect until Lloyd's 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 pursuant to the will.

From 1923 until his death, Lloyd was involved in an automobile dealership in Nevada, Missouri. During most of those years the business was operated through a corporation named Richardson Motor Company. Lloyd was president and his son was vice-president and general manager. The only two shareholders in the corporation were Lloyd and Hazle. At her death, Hazle owned 1,311 shares of stock and Lloyd owned 1,189 shares. Under the terms of her will, a specific bequest of 685 shares was made and the remainder of the shares were to pass to the residuary trusts created in Article IV of her will. Lloyd was to serve as trustee of these trusts which were for the benefit of their children and grandchildren. In addition to these shares, no other assets were included in the residuary estate other than the life insurance policies.

All administration expenses, estate taxes, inheritance taxes and court costs relative to Hazle's estate were paid by the executor from non-probate assets.

The parties have stipulated that there is no evidence in the Probate Court files or in the files or records of any of the issuing life insurance companies that Lloyd, in any capacity, exercised or attempted to exercise any incidents of ownership under any of the policies following the date of Hazle's death.

Upon Lloyd's death, the proceeds of the eleven policies amounting to $148,622.59 were paid to the named beneficiaries. The value of these insurance policies was not included in the gross estate on the federal estate tax return filed by Lloyd's estate. After an audit of the federal estate tax return filed by Lloyd's estate, the Internal Revenue Service assessed additional estate taxes against his estate in the amount of $152,751.46 plus interest. This additional amount resulted in part from the determination by the IRS that the value of the insurance policies was to be included in Lloyd's gross estate for federal estate tax purposes. This deficiency was paid by the estate and this civil action resulted seeking recovery of part of the additional taxes paid.¹

Upon the stipulated facts, the Court finds that no genuine issue as to any material fact remains to be litigated and the Court makes the following conclusions of law.

CONCLUSIONS OF LAW

The federal estate tax is a tax imposed upon the privilege of transferring property at one's death. In addition, the federal tax laws impose taxes upon other types of transfers which possess some of the aspects of a testamentary transfer which would otherwise be resorted to in order to escape taxes levied solely on testamentary transfers. Estate of Connelly v. United States, 551 F.2d 545, 551 (3rd Cir. 1977). A prime example of a transfer which possesses some of the aspects of a testamentary transfer is the traditional life insurance policy which contractually provides for the payment of the proceeds to some third person upon the death of the insured.

Within the federal tax scheme, 26 U.S.C. § 2042 provides that with respect to life insurance proceeds receivable by beneficiaries other than the insured or his estate, the proceeds are includable in the decedent's estate for federal estate tax purposes if at death the insured possessed any "incidents of ownership" in the insurance. Therefore, if the decedent-insured did not at his death possess any incidents of ownership over the policies on his life and the beneficiaries of the proceeds are recipients other than the decedent's estate, then under § 2042 the value of the proceeds would not be includable in the insured's estate for tax purposes. It is precisely this goal that Hazle and Lloyd Richardson attempted to achieve. Lloyd, as owner of the policies on his life, assigned complete ownership and control over the policies to his wife, Hazle. The beneficiaries of the proceeds were persons other than Lloyd or his estate. Thus, the sole issue presented by this action is whether the decedent Lloyd Richardson possessed any incidents of ownership over the subject life insurance policies at the time of his death while serving in a fiduciary capacity as executor and potential trustee of his wife's estate. It is the opinion of this Court that the decedent did not possess the requisite incidents of ownership concerning these policies to justify including their value in his estate under the provisions of § 2042.

The applicable portion of § 2042 provides that the value of the gross estate of the decedent shall include the value of all property:

(2) Receivable by other beneficiaries.—To 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 defined in the statute, but its meaning is explained in the applicable regulation, 26 C.F.R. § 20.2042-1(c)(2) which states:

(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. Did the policies pass to the estate of Hazle?

Initially, plaintiffs argue that the addendums to the policies were ineffectual as an assignment of the policies to Hazle's estate as successor owner of the policies, that nowhere in the will was there any mention of the policies, and that the residuary clause did not operate to effect an assignment of the policies. Thus plaintiffs conclude that Lloyd did not acquire incidents of ownership in the policies as executor of her estate because the policies did not "pass" to the estate under the will. Plaintiffs argue that there is no authority in Missouri, or apparently elsewhere, that specifically holds that a general residuary clause carries with it incidents of ownership of insurance policies on another's life which are owned by the testator, although this proposition was apparently assumed in Estate of Walter Dawson, 57 T.C. 837 (1972).

Whether or not the notations on the assignment forms were sufficient to effect an assignment to Hazle's estate need not be answered, for it is clear that under Missouri probate law, the contracts of insurance and their attendant cash surrender values passed to the probate estate of Hazle Richardson. Mo.Rev.Stat. § 473.260...