John Hancock Mut. Life Ins. Co. v. Helvering, 7904.

• Decision Date: 11 May 1942
• Docket Number: No. 7904.,7904.
• Parties: JOHN HANCOCK MUT. LIFE INS. CO. v. HELVERING, Com'r of Internal Revenue.
• Court: U.S. Court of Appeals — District of Columbia Circuit

128 F.2d 745 (1942)

JOHN HANCOCK MUT. LIFE INS. CO. v. HELVERING, Com'r of Internal Revenue.

No. 7904.

United States Court of Appeals for the District of Columbia.

Decided May 11, 1942.

Mr. David R. Shelton, of Washington, D. C., for petitioner.

Mr. Benjamin M. Brodsky, Special Assistant to the Attorney General, with whom Mr. Samuel O. Clark, Assistant Attorney General, and Mr. J. Louis Monarch, Special Assistant to the Attorney General, were on the brief, for respondent. Messrs. Sewall Key, Special Assistant to the Attorney General, J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Robert L. Williams, Special Attorney, Bureau of Internal Revenue, both of Washington, D. C., also entered appearances for respondent.

Before MILLER, VINSON, and EDGERTON, Associate Justices.

VINSON, Associate Justice.

Petitioner is a corporation engaged in the business of writing life insurance. One Bert Hanna, now deceased, entered into three life insurance contracts with petitioner. He designated certain beneficiaries, but reserved the right to change them in himself. Shortly before his death he chose a certain type of settlement option. This option provided that the amounts of the policies at insured's death be left on deposit with the Company. The Company guaranteed 3½ percent interest, which was to be paid in equivalent monthly amounts to his wife for her life, then to his nephew and two nieces. There were provisions for further contingencies and for disposition of the principal, neither of which is now relevant. The deceased apparently could have subsequently changed the method of settlement, but he did not. The insured had similar policies with four other companies.

The executrix filed an estate tax return which included the amount receivable by all insurance beneficiaries in excess of $40,000. The amount reported has not been disturbed by respondent.

The estate has been insolvent at all times. None of the federal estate tax has been paid. The insurance monies, however, greatly exceed the amount of the tax. Hence it appears that the Government is certain of receiving all the revenue due it. The problem who is now liable remains.

Petitioner was mailed a notice of liability; the proposed assessment was stated at $13,881.43. Six weeks later petitioner was mailed a statement that the amount was $5,002.46.

When a contest resulted, the Board of Tax Appeals held petitioner liable for the $5,002.46, with three members dissenting. Upon reconsideration Honorable Eugene Black, who had written the Board's opinion, wrote a dissent. The final vote holding petitioner liable was apparently 8-7.

Normally the federal estate tax is paid by the executor from the funds of the estate. If for some reason, such as here where the estate is insolvent, the executor does not pay the tax, the statute has further provisions which come into play. The most significant language for this case is that of subsection 315(b).¹

"If

(1) except in the case of a bona fide sale for an adequate * * * consideration * * *,

the decedent makes a transfer, by trust or otherwise, of any property * * * intended to take effect in possession or enjoyment at or after his death, * * * or

(2) if insurance passes under a contract executed by the decedent in favor of a specific beneficiary, and

if in either case the tax in respect thereto is not paid when due, then the transferee, trustee, or beneficiary shall be personally liable for such tax,

and such property,

to the extent of the decedent's interest therein at the time of such transfer, or

to the extent of such beneficiary's interest under such contract of insurance,

shall be subject to a like lien equal to the amount of such tax. * * *" Italics supplied

The imposition of liability appears to follow two lines. First is the case where decedent makes a transfer by trust or otherwise. Second is the case where insurance passes under a contract to a specific beneficiary. These two cases are set-off by "(1)" and "(2)". If the tax has not been paid, it is provided that in either case the transferee, trustee, or beneficiary is personally liable. The statute proceeds to impose a lien on the estate property to the extent of decedent's interest at the time of transfer or to the extent of the beneficiary's interest under the insurance contract. It is clear that an insurance beneficiary is liable. The structure of the subsection is very persuasive that, where insurance is involved, he is the only one who is personally liable.

Petitioner is not a beneficiary, and there are beneficiaries. The Government argues, in spite of this, that petitioner is liable. It argues that the two lines of tax imposition are not water-tight compartments, that the terms "transferee" and "trustee" must be included with "beneficiary" even in the case of insurance, and that all three words should be interpreted broadly so as to mean, in effect, anyone is liable for collection purposes who may hold, control, or be a conduit of the estate property, whatever its type. The Government stresses the transferee category as embracing petitioner. Incidentally the Government suggests that petitioner is a trustee.

To decide if petitioner is a transferee, it will be helpful to consider the possible types of transferees. (1) Most transferees receive estate bounty from decedent. Section 316 of this statute, for example, while setting out the procedure for collecting from a transferee defines that term as including heir, legatee, devisee, and distributee.² (2) A transferee might include one who represents the recipient of bounty. In this class would be a trustee. But the statute names a trustee specifically, and names him while talking about transfers and transferees. Possibly there are fiduciaries representing the recipients of bounty other than trustees who are embraced by the term transferee. (3) Another possible transferee would be one who conditionally holds a part of the estate, not for his own benefit, nor to represent another. This transferee would be something like the holder of property in escrow. (4) Lastly a transferee might be anyone, not classified above, to whom the decedent by his action or by law transferred something for some purpose.

Petitioner's only chance of being a transferee is under (2) or (4), but has anything been transferred to petitioner? Petitioner argues that it received no asset from decedent's estate and that it gave a quid pro quo. Insofar as this argument attempts to put petitioner within the exception of bona fide sales, we reject it, but insofar as it tends to show no transfer we now consider it.

We do not propose to discuss exhaustively the nature of insurance in determining whether something was transferred to petitioner. Only one case has been called to our attention which discusses this issue.³ That the case is not on all fours is recognized by the Government's brief which refers to the reasoning of the opinion as establishing the existence of a transfer in the instant type of case. Nonetheless the opinion of the Board, now repudiated by its author, and the Government here rely heavily upon the appellate court's decision in that case. It is true that the reasoning in a broad way lends support to the Government's position. The conclusion is that upon the insured's death there is a transfer of the policy proceeds to the company. The dissenting opinion is vigorous in its attack upon this result. It in turn takes the position that although the insured pays premiums, nothing is transferred to the insurance company when an insured dies; in fact, at his death the assets of the insurance company are not increased, rather its duties as a debtor begin. These were the views expressed by the Appellate Division while affirming the Surrogate in a 3-2 decision. The New York Court of Appeals affirmed the order without opinion. A state statute rather than the instant federal statute was being applied. There were several significant differences between that case and this: the one "in possession" of the estate property in the state statute may have a different meaning from the "transferee" in the federal Act; the executor had paid the tax; he was proceeding against the insurance companies; the beneficiaries were parties to the proceedings. With such a case the nearest analogy, the instant case is essentially one of first impression even as to the reasoning on whether anything was transferred.

Insurance cannot be completely analogized to other estate property in any satisfying manner. There is no res that goes from decedent to his estate and on to his devisee or legatee. True, as long as the insured pays his premiums (and the company has no contractual right to enforce this consideration from the insured) part of the money usually builds up an "equity" that may be accumulated, cashed, or diverted into paid up protection, and when the insured dies this "equity" may in a sense be transferred to his beneficiaries who have an important "claim" against the company. We do not see how it is transferred to the insurance company in any fashion. Even in the hands of the beneficiary there are many factors to the size of this claim other than the number of dollars the insured actually put into the "estate". That's insurance for you. Likewise, the size of the optional settlement may be contingent upon the longevity of the beneficiary. This insurance equity is not like an estate of realty, securities, or jewelry. There is much difference between the insurance rights left for X and the willing of a lot to Y. While Y is transferred what decedent had, X receives something much different than decedent ever, or could have, had. And the insurance company receives nothing from decedent at his death. We believe that the insurance company is not a transferee because nothing is transferred to it.

If some type of thing could be found that in some way went to petitioner, we would remain convinced that petitioner is not a transferee within...