LINCOLN ROCHESTER TRUST COMPANY v. Commissioner, Docket No. 3340-66
| Decision Date | 12 January 1970 |
| Docket Number | Docket No. 3340-66 |
| Citation | 1970 TC Memo 7,29 TCM (CCH) 11 |
| Parties | Estate of William C. Chapin, by Lincoln Rochester Trust Company, Executor v. Commissioner. |
| Court | U.S. Tax Court |
Julian M. Fitch, 910 Union Trust Bldg., Rochester, N. Y., for the petitioner. Ferdinand J. Lotz, III, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $35,384.51 in the estate taxes of the Estate of William C. Chapin. Petitioner agreed to all of respondent's adjustments except the inclusion in the decedent's estate of $208,528.67 as proceeds from an insurance policy on the life of the decedent.
Three issues are left for our determination. First, we must decide whether a premium payment covering the first year of the above policy was made by the decedent in contemplation of death. Second, we must decide whether the funds used for a premium payment covering the second year of the above policy should be attributed to the decedent. (If we resolve this question in the affirmative, we must also decide whether this payment was made in contemplation of death.) Finally, if we dispose of either issue one or the parenthetical in issue two in the affirmative, we must then decide whether the amount to be included in the decedent's gross estate under section 20351 should be the insurance proceeds brought about by the decedent's death or an amount equal to the premium payments referred to above.
Most of the facts are stipulated, and the stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner is the Lincoln Rochester Trust Company (sometimes hereinafter Lincoln) a banking corporation organized under the laws of the State of New York and having its principal office in Rochester, N. Y. Lincoln is the executor of the Estate of William C. Chapin and filed the estate tax return with the district director of internal revenue at Buffalo, N. Y.
The decedent, William C. Chapin (hereinafter sometimes William) was born on December 15, 1911. He married Janette K. Chapin (hereinafter sometimes Janette) on October 31, 1936, and a daughter and two sons were born of the marriage during 1938, 1941 and 1947, respectively. William and Janette were residents of Rochester at the time of his death.
On May 22, 1962, William died of multiple injuries sustained in the crash of a commercial airplane. The Massachusetts Mutual Life Insurance Company (hereinafter Massachusetts) paid Janette $208,528.27 as the proceeds from the policy in question on William's life. The Commissioner held that these proceeds were includable in William's gross estate under one or more of sections 2033, 2035, 2042 or 2043.
William J. Lee (hereinafter Lee) was for many years a personal friend of the decedent. Lee was an insurance representative for Massachusetts. On two occasions during the early and middle nineteen-fifties, Lee had sold William life insurance policies with an aggregate face amount of $53,000.
For a period of about 1½ years prior to March 21, 1961 — the date on which the insurance policy in question was signed — Lee and William discussed the possibility of adding to William's life insurance coverage. Their discussions were oriented to determining the type of coverage best suited to the then needs of the decedent and his wife.
On several occasions during their many discussions, Lee and William addressed themselves to the question of who would take out the policy. William eventually decided that his wife, Janette, should do so. Lee testified that William's reasons for this decision were twofold: (a) to minimize his estate tax; and (b) to protect Janette during her lifetime by making her the owner of a flexible policy. William had rejected the idea of having the corporation, over which he presided as president, purchase the insurance on his life because he felt the corporation (hereinafter referred to as Vanilla) needed to accumulate its available funds for the expansion of business.
During these discussions, William apprised Lee of the fact that he (William) was indebted to the Lincoln Rochester Trust Company. William had borrowed the money constituting this indebtedness to invest in what William considered to be a speculative investment. The schedule below establishes the total amount borrowed by William and the dates on which the loans constituting this amount were obtained from Lincoln:
Date Amount
November 27, 1959 ................ $ 10,000
February 16, 1960 ................ 10,000
March 14, 1960 ................... 30,000
May 25, 1960 ..................... 17,000
August 16, 1960 .................. 25,000
August 26, 1960 .................. 15,000
December 14, 1960 ................ 59,000
April 12, 1962 ................... 26,000
________
Total .......................... $192,000
The following shares of Eastman Kodak Company common stock, all of which were registered in William's name, were pledged as collateral for the loans set forth above:
Value Per
Share as
Stipulated
by Total
Date Pledged Shares Parties Value
August 16, 1960 ..... 455 $121 $ 55,367
December 14, 1960 ... 2,000 113 226,250
October 9, 1961 ..... 300 101 30,431
April 12, 1962 ...... 400 110 44,325
The estate tax return for William's estate listed as a debt of the decedent demand loans owed to Lincoln aggregating $189,768.86 plus interest. Of the 4,806 shares of Eastman Kodak common stock included in William's estate, approximately 3,100 shares secured this debt at the time of William's death.
The discussions between William and Lee culminated in Janette's applying for a life insurance policy on the life of her husband in the principal amount of $200,000. The application was executed by Janette on March 21, 1961. On March 22, 1961, Massachusetts issued to Janette insurance policy No. 3615006 on the life of her husband. As owner and beneficiary of the policy, Janette was entitled to assign it, change the beneficiary, and borrow from the insurer at five percent interest using the policy as security.
The policy issued to Janette can be described as a normal or convertible life insurance policy with a higher rate of cash reserve value developing in the early years and leveling off to an ordinary rate in the later years. The following is a projection of the cash values of the policy commencing with the end of the first year when the insured was age 49:
Year Value Year Value
1 ......... $ 3,438 11 $55,568
2 ......... 9,294 12 60,518
3 ......... 15,162 13 65,428
4 ......... 20,240 14 70,288
5 ......... 25,320 15 75,098
6 ......... 30,398 16 79,850
7 ......... 35,470 17 84,533
8 ......... 40,528 18 89,160
9 ......... 45,568 19 93,710
10 ........ 50,582 20 98,184
The policy also provided for income payments to the beneficiary beginning at age 65 of the insured and in the amount of $498 per month for 10 years certain.
The annual premium on the policy was $7,834. William paid the first premium with funds which he borrowed from Massachusetts against the security of his other insurance policies. He did not file a gift tax return for 1961.
The second premium was paid by Janette on March 22, 1962, two months before William's tragic death, by borrowing against the cash surrender value of the policy here in issue. Though the cash surrender value at the beginning of the second policy year was only $3,438, by company practice the owner of a policy such as the one in issue is allowed to borrow at the beginning of a policy year an amount equal to 95 percent of the cash surrender value which would be established by payment of the premium for which the loan is being made. This practice merely recognizes the fact that, given an insurance policy with a cash surrender value intact from the previous year, an owner is always free to pay the succeeding year's premium with his own funds and immediately thereafter borrow an amount equal to such premium from the cash surrender value thus established. Hence, in the case at bar, Janette was able to pay the second year's premium of $7,834 by borrowing against $9,294, the value placed on the cash surrender privilege at the end of the policy's second year.
William would have paid the second premium had the necessary cash been available to him. Moreover, other than the cash surrender value of the policy, Janette had no means of her own at the time this second premium payment was made. Hence, the decision to borrow against the policy was in the nature of a temporary expedient brought on by William's unfavorable cash position.
Janette understood that William had urged her to take out the policy in order to provide her with means of her own while he was alive and to provide additional means in the event of his death.
Janette amended the policy on May 22, 1961. By this amendment, she made her three children equal owners and beneficiaries in the event she predeceased William and they, or any of them, survived her. Janette's estate was named owner and beneficiary in the event they all predeceased William.
As a consequence of Janette's applying for the insurance on William's life, William, then age 49, underwent two physical examinations conducted by two doctors designated by Massachusetts. Prior to this time William had not been to a physician for about three years. William was at the time of his death a very athletic person. He was an excellent amateur golfer with little or no handicap, and had won several trophies in...
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