Kahn v. United States, Civ. A. No. 15738

• Court: U.S. District Court — Northern District of Georgia
• Citation: Kahn v. United States, 349 F.Supp. 806 (N.D. Ga. 1972)
• Decision Date: 31 August 1972
• Docket Number: 15739.,Civ. A. No. 15738
• Parties: Max E. KAHN and J. M. Hertz, as Executors of the Estate of Max Jerald Kahn, Deceased, v. The UNITED STATES of America. Max E. KAHN, as Administrator of the Estate of Gail O. Kahn, Deceased, v. The UNITED STATES of America.

349 F. Supp. 806

Max E. KAHN and J. M. Hertz, as Executors of the Estate of Max Jerald Kahn, Deceased, v. The UNITED STATES of America.

Max E. KAHN, as Administrator of the Estate of Gail O. Kahn, Deceased, v. The UNITED STATES of America.

Civ. A. Nos. 15738, 15739.

United States District Court, N. D. Georgia, Atlanta Division.

August 31, 1972.

Sutherland, Asbill & Brennan, Michael J. Egan, Jr., R. Kent Frazier, John B. Miller, Jr., Atlanta, Ga., for plaintiffs.

Scott P. Crampton, Asst. Atty. Gen., Jerome Fink and Lawrence R. Jones, Jr., Attys., Dept. of Justice, Washington, D. C., John W. Stokes, Jr., U. S. Atty., Atlanta, Ga., for defendant.

OPINION

EDENFIELD, District Judge.

These consolidated cases, which were tried before the court sitting without a jury, involve a close question of federal estate tax law which has been the subject of much recent litigation. Convinced that a young married couple in excellent health facing a bright and secure future contemplated everything but the angel of death and his tax law counterpart, the court will order the Government to refund to their estate money it has erroneously collected.

The facts, both as stipulated and as found by the court, are that in 1962 Meyer Balser, an insurance broker, suggested to Max E. Kahn, head of Empire Distributors, Inc. "Empire", that Empire take out a group insurance policy for key personnel covering accidental death, dismemberment, and disability. Balser did not approach any other officers or employees of Empire about this matter. Mr. Kahn thought the suggestion was in the best interests of Empire and he, alone, made the decision to accept it on behalf of the company. Balser placed the insurance with the Insurance Company of North America "INA" and the policy was taken out jointly by Empire and two other corporations controlled by Empire's stockholders. Coverage was offered in varying amounts to all employees of the three corporations and their spouses, other than warehouse personnel, and a total of 62 persons were eventually covered. All premiums due under the INA policy were paid by the three corporate employers and no contributions were made by any employee or spouse.

Among the persons eligible for coverage under the INA policy were Max Jerald Kahn "Jerry" and his wife Gail O. Kahn "Gail". Jerry, the eldest son of Max E. Kahn, was being groomed by his father to take over the family businesses. He was a vice-president of Empire and worked in the sales division. At the time the INA policy was taken out by Empire and the other corporations, Jerry was 26 years old, Gail was 25, and both were in excellent health. Jerry was a sports enthusiast but he did not engage in any hazardous activities, and Gail spent most of her time at home with their two children. A third child was born to them in August, 1963. At the time, Jerry owned several policies of insurance covering his life which had a total face amount exceeding $193,000 and which named Gail as primary beneficiary. Gail owned no life insurance at the time, but in April 1963 she purchased a policy in the face amount of $10,000 which named Jerry as primary beneficiary. In 1959, when Jerry purchased a home, his family attorney advised him to execute a will and later mailed Jerry a draft will for his consideration. Nevertheless, Jerry had not executed a will at the time the INA policy took effect and did not get around to doing so until May 1963. Gail never executed a will.

After Empire and the other corporations had taken out the INA policy, Balser distributed some forms to a number of Empire employees who were eligible for coverage. Each form was entitled "Certificate of Insurance" and consisted of a description of the coverage and an application for coverage under the terms of the master policy. The employee merely had to fill in his name, address, place and date of birth, occupation, amount of insurance and method of settlement desired, beneficiary, and beneficiary's relationship, date of application, and signature. The name of the policyholder (Empire), the number of the policy, and a policy aggregate limit for a particular type of accident were already inserted on each form when the employee received it.

Mr. Balser, who was a close friend of Gail's family and knew both Gail and Jerry from their youth, personally delivered the INA forms to Jerry. He told Jerry that Jerry should make Gail the owner of the certificate and beneficiary under the policy covering Jerry and that Gail should make Jerry the owner of the certificate and beneficiary under the policy covering her. Balser did not give Jerry any reason for his recommendation, nor did Jerry ask for one. Jerry merely said something to the effect, "Meyer, I'll leave it all up to you." Balser had never had a serious discussion with Jerry about estate planning, although he did at one time compile a life insurance analysis for him, and he made no mention of either estate planning or estate taxes to Jerry on this occasion or thereafter. Mr. Balser had no discussion with Gail about the INA forms, and he never discussed estate planning or estate taxes with her. Although as an insurance agent Mr. Balser did discuss estate planning with his clients insofar as it related to their insurance programs, he did so only when it was appropriate to the client's age and estate, and he felt since Jerry and Gail were young and their estate relatively modest there was no need to discuss estate planning with them. Neither Jerry nor Gail asked Mr. Balser about the estate tax effect of his recommendation concerning the INA forms.

On November 6, 1962, Jerry applied for insurance in the principal sum of $100,000 covering accidental loss of life, limb, or sight as well as permanent total disability as defined in the master policy, and Gail applied for insurance in the principal sum of $50,000 covering accidental loss of life, limb, or sight. Both Jerry and Gail left blank spaces next to the words "beneficiary" and "relationship" on the application portion of the INA forms, although otherwise they completed the application forms in full. On November 18, coverage under the INA master policy commenced. Since the previous group policy covering the employees of Empire and the other two corporations had expired November 18, 1962, the three corporations had purchased interim coverage under the INA policy from November 18 to December 1, 1962 which was evidenced by a separate rider. On November 28, 1962 Jerry and Gail executed INA forms entitled "Beneficiary Designation." Jerry designated Gail as owner of the certificate of insurance for which he had applied and beneficiary under the policy, and Gail designated Jerry as owner of the certificate for which she had applied and beneficiary under the policy. INA acknowledged receipt of these forms that same day. On December 1, 1962 the INA policy became fully effective.

On December 29, 1963, while they were visiting Jacksonville, Florida on a pleasure trip, Jerry and Gail Kahn died simultaneously in a fire at the Hotel Roosevelt. The proceeds under the INA policy were paid in equal shares to the contingent beneficiaries, their three children.

Timely estate tax returns were filed on behalf of the two estates by the legal representatives and the two INA certificates of insurance were disclosed on those returns as having no ascertainable value at the time of death. Following an audit, the Commissioner of Internal Revenue assessed a deficiency of $13,995.67 plus interest of $2,436.78 against Jerry's estate on the theory that the proceeds of the policy covering Gail were includable in Jerry's estate as owner-beneficiary and increased its value by $50,000, and assessed a deficiency against Gail's estate in the amount of $27,917.75 plus interest of $4,890.19 on the theory that the proceeds of the policy covering Jerry were includable in Gail's estate as owner-beneficiary and increased its value by $100,000. The deficiency assessments were paid, and the timely claims for refund filed by the representatives of the two estates were disallowed by the District Director of Internal Revenue in Atlanta. The representatives brought suit in this court pursuant to 28 U.S.C. § 1346(a)(1) (1970).

The Government does not seek to support the deficiency assessments on the grounds asserted by the Commissioner. Instead, the Government contends that the $100,000 INA certificate of insurance covering Jerry was transferred by him to Gail in contemplation of death within the meaning of Section 2035 of the Internal Revenue Code of 1954 and that the $50,000 INA certificate covering Gail was similarly transferred by her to Jerry. Under this theory, the $100,000 proceeds payable by reason of Jerry's death were includable in Jerry's estate rather than Gail's and the $50,000 proceeds payable by reason of Gail's death were includable in Gail's estate rather than Jerry's. Plaintiffs contend that there were no transfers of anything in these cases, but that even if the certificates were transferred they were not transferred in contemplation of death within the meaning of Int.Rev.Code of 1954, § 2035.

Section 2035 provides as follows:

"(a) General Rule.—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 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.

"(b) Application of General Rule. —If the decedent within a period of three years ending with the date of his death (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) transferred an interest in property, relinquished a power, or exercised or released a general power of appointment, such transfer, relinquishment, exercise, or release shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the

...