Kurihara v. Comm'r of Internal Revenue (In re Estate of Kurihara)

• Decision Date: 05 January 1984
• Docket Number: Docket No. 10402–81.
• Parties: ESTATE OF TETSUO KURIHARA, DECEASED, ELEANORE KURIHARA, ADMINISTRATRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

82 T.C. 51

82 T.C. No. 4

ESTATE OF TETSUO KURIHARA, DECEASED, ELEANORE KURIHARA, ADMINISTRATRIX, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10402–81.

United States Tax Court

Filed January 5, 1984.

Decedent established a life insurance trust. The trustee applied for the policy on decedent's life and paid the initial premium with a check of decedent in the exact amount of the premium. Decedent died three months later. Held, the trustee purchased the policy in his capacity as decedent's agent rather than as an independent trustee. Held further, the policy proceeds are includable in decedent's estate under sec. 2035. Estate of Coleman v. Commissioner, 52 T.C. 921 (1969), explained and distinguished. Ronald Dreier, for the petitioner.

Patrick E. Whelan, for the respondent.

OPINION

TANNENWALD, Judge:

Respondent determined a deficiency of $317,513.19 in petitioner's Federal estate tax. The sole issue for decision is whether petitioner's gross estate includes, pursuant to the provisions of section 2035.¹ the proceeds of an insurance policy on decedent's life owned by a trust where decedent gave the trustees the money earmarked for the payment of the initial premium on the policy.

The case was submitted fully stipulated pursuant to Rule 122. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Petitioner is the estate of Tetsua Kurihara (Kurihara) represented by its administratrix, Eleanor Kurihara. At the time she filed the petition, Eleanore Kurihara resided in Bedminster, N.J.

By a trust agreement, dated July 26, 1977, Kurihara, as grantor, and Daniel and Harold Topper (the Toppers), as trustees, agreed to the creation of an irrevocable trust for the benefit of Kurihara's spouse and two children. The trust agreement recited that Kurihara, the “initiator” of life insurance policy number 10010395, issued by the Columbian Mutual Life Insurance Company (Columbian Mutual) on his life, assigned to the trustees all right, title, and interest in such policy.

Also on July 26, 1977, Daniel Topper, as trustee, applied for $1,000,000 of insurance on Kurihara's life. Kurihara signed the application as the proposed insured. The Toppers, as trustees, were named the owners and beneficiaries. The application specifically designated the policy bearing the number 10010395. The application also provided that the policy “shall not take effect * * * unless and until the policy has been issued and delivered and the full first premium * * * has been paid and accepted by the Company during the lifetime and condition of health of the Proposed Insured as stated in the application.” The aforesaid policy (1-year renewable and convertible term) was issued on August 20, 1977, with a “policy date” of August 1, 1977, and with an annual premium of $4,040.

On September 8, 1977, Kurihara drew a check to the order of “Daniel Topper, Trustee” for $4,040.² A notation on the check stated that the funds were for the “premium for Life Ins. No. 10010395 Columbian Mutual Life.” Topper endorsed the check to the order of Columbian Mutual in payment of the initial premium.

Pursuant to the terms of both the insurance policy and the trust agreement, the trustees owned and were the beneficiaries of the policy.³ Kurihara retained no interest in the trust, reserving only the right to add additional life insurance policies on his life to the trust.

Kurihara died in an automobile accident on November 16, 1977, at the age of 43. After Kurihara's death, the trustees received the insurance policy proceeds of $1,000,000 plus interest of $9,374.97. Petitioner did not include any part of the $1,009,374.97 in the gross estate.

Section 2035(a) provides 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, by trust or otherwise, during the 3-year period ending on the date of the decedent's death.” Petitioner contends that Kurihara transferred only $4,040 in cash. Respondent argues that, under the doctrine of substance over form, Kurihara's cash gift should be equated with the payment of the premium and that this premium payment constituted a transfer of the entire policy, with the result that the proceeds thereof should be included in the gross estate.

The case law which has been developed in respect of the applicability of section 2035 to life insurance has not been a model of clarity, at least insofar as policies taken out within three years of the death of insured are concerned. The results of the cases can be readily synthesized, but the same cannot be said of the language of the opinions. We think it would be helpful to review the case law and to attempt, as Justice Cardozo once remarked, to discharge our responsibility to “gather up the driftwood and leave the waters pure.” See Hicks v. Commissioner, 47 T.C. 71, 74 (1966). In so doing, we may not leave the waters as pure as we would like, but hopefully we will “introduce some certitude in a landscape of shifting sands.” See United States v. Rhode Island Hospital Trust Co., 355 F.2d 7, 10 (1st Cir.1966).

We start our review with our own decision and opinion in Estate of Coleman v. Commissioner, 52 T.C. 921 (1969). In that case, more than three years prior to decedent's death, her children purchased as owners and beneficiaries an insurance policy on her life. The decedent paid all the premiums ($4,821) on the policy, of which $3,373 was paid within three years of death. The parties agreed only $1,686.50 of this latter amount was paid in contemplation of death. Respondent sought to have included in the gross estate, as a gift in contemplation of death, the same proportion of the proceeds of the policy as the $1,686.50 premiums paid in contemplation of death bore to the total premiums paid ($4,821). Petitioner, relying heavily on the abolition of the “premium payment” test when section 2042 was enacted in 1954, contended that only the $1,686.50 should be included. We refused fully to accept petitioner's reliance on section 2042 and its legislative background, although we did view the circumstances surrounding the enactment of that section as a deterrent to the adoption of respondent's position. We nevertheless held for petitioner. See 52 T.C. at 922–923. In so holding, we disagreed with Rev.Rul. 67–463, 1967–2 C.B. 327, which stated that the mere payment of premiums by the decedent within three years of death operated as the transfer of an interest in the proceeds of insurance, even though the incidents of ownership were transferred more than three years prior to death. 52 T.C. at 923. We then went on to state (at 923):

If the decedent had purchased a life insurance policy, initially retaining the ownership in herself, and thereafter assigned it to her children, there clearly would have been a “transfer” of an interest in the policy. If, on the other hand, decedent had given money to her children, and they, entirely on their own volition, had chosen to purchase an insurance policy on her life, it would be equally clear that only the money would have been “transferred.”

The purpose of section 2035 is to prevent the avoidance of estate tax through the use of gifts as a substitute for testamentary disposition of what would otherwise be included in the gross estate. The focus, therefore, must be on what the decedent parted with as a result of her payment of the premiums in contemplation of death. Decedent held no interest whatsoever in the policy or its proceeds. Her children were the sole owners of the policy and only they could deal with rights and benefits flowing therefrom. To be sure, these payments kept the economic substance of that ownership alive. But the decisive point is that what these payments created or maintained was theirs and not hers. In these circumstances, we can see no basis for concluding that there was a constructive transfer of an interest in the policy. The only thing diverted from her estate was the actual money paid. [Citations omitted. Emphasis added.]

Finally, we stated that we agreed with Gorman v. United States, 288 F.Supp. 225 (E.D.Mich.1968), which we described as having decided the “precise issue” involved in Coleman.⁴

We now turn to a tracing of the fate of Coleman and its rationale. As that tracing will show, the decision in Coleman remains unchallenged, although, as often occurs, segments of the rationale have been lifted out of the context of our opinion and rejected as applied to different factual circumstances.

In First National Bank of Midland, Texas v. United States, 423 F.2d 1286 (5th Cir.1970), the Fifth Circuit Court of Appeals held that, where the policies in question were issued to decedent's daughters, as owners and beneficiaries, more than three years prior to death, no part of the proceeds was includable in decedent's gross estate even though he had paid the premium. In so holding, the court relied on Gorman v. United States (also apparently assuming, as we had, see note 4, supra, that the policy in that case had been taken out more than three years prior to death) and on our opinion in Coleman and rejected the application of Rev.Rul. 67–463, supra. 423 F.2d at 1288.

Next in sequence is Rev.Rul. 71–497, 1971–2 C.B. 329, in which respondent revoked Rev.Rul. 67–463 and ruled that no part of the proceeds of a policy taken out and transferred more than three years prior to death would be includable in the gross estate, stating that he would follow First National Bank of Midland but that the amount of the premiums paid by decedent within the three-year period would be so included, citing Coleman and Gorman. ⁵ Respondent ruled, however, that, in the case of an accidental death policy for a one-year term, purchased nine months before death with the decedent's children as owners and beneficiaries, the proceeds were includable in the gross estate when the decedent paid the full...