Morton v. United States, Civ. A. No. 3605.

• Decision Date: 03 February 1971
• Docket Number: Civ. A. No. 3605.
• Citation: 322 F. Supp. 1139
• Court: U.S. District Court — Southern District of West Virginia
• Parties: Quin MORTON, Executor of the Estate of D. Holmes Morton, deceased, Plaintiff, v. The UNITED STATES of America, Defendant.

322 F. Supp. 1139

Quin MORTON, Executor of the Estate of D. Holmes Morton, deceased, Plaintiff, v. The UNITED STATES of America, Defendant.

Civ. A. No. 3605.

United States District Court, S. D. West Virginia, Charleston Division.

February 3, 1971.

Thomas N. Chambers, Jackson, Kelly, Holt & O'Farrell, Charleston, W. Va., for plaintiff.

Johnnie M. Walters, H. E. Marmoll, Dept. of Justice, Washington, D. C., and W. Warren Upton, U. S. Atty., Charleston, W. Va., for defendant.

MEMORANDUM OPINION

FIELD, Chief Judge.

This is an action under 28 U.S.C. Section 1346 for the recovery of federal estate taxes and interest allegedly overpaid by the plaintiff amounting in the aggregate to $48,188.74. Briefly stated, the issue to be determined is whether the value of a certain life insurance policy on the life of D. Holmes Morton (hereinafter referred to as the decedent) is includable in the decedent's estate for estate tax purposes.

The decedent died testate a resident of Charleston, West Virginia, on August 17, 1963. The plaintiff herein, Quin Morton, is the son of the decedent and is presently serving as executor of his father's estate, initially having been appointed as co-executor of such estate on August 20, 1963, by the County Court of Kanawha County, West Virginia.

A federal estate tax return was filed with the Internal Revenue Service on October 19, 1964. The estate tax liability shown thereon to be due in the amount of $37,570.21 was paid upon the filing of the return. The value of Northwestern Mutual Life Insurance Policy No. 2414879 (Northwestern Policy), in the face amount of $200,000.00, insuring the life of the decedent, was not included in the gross estate. Upon audit of the estate tax return, the Internal Revenue Service determined tax deficiencies to exist, which deficiencies were paid with interest on or about the dates set forth below:

                                         Estate Tax
                        Date             Deficiency     Interest         Total   
                  January 26, 1966       $14,381.01     $1,000.95    $15,381.96
                  April 11, 1966          44,443.32      3,745.42     48,188.74
                                                                     __________
                                                                     $63,750.70
                

The major portion of the assessed deficiencies is represented by the inclusion in the estate of the proceeds from the aforementioned Northwestern Policy having a value of $208,121.00.

On October 28, 1966, plaintiff filed a claim for refund of federal estate taxes and interest alleged to have been erroneously and illegally collected in the amount of $46,980.24, plus interest. By notice dated December 27, 1966 the Internal Revenue Service District Director allowed the claim to the extent of $199.08 and disallowed the claim to the extent of $46,781.16. In the notice the District Director allowed the claim for deduction of additional attorney's fees and expenses of $9,191.72, but offset the tax refund resulting therefrom, except to the extent of $199.08, by a reduction in the credit for state death taxes paid from $7,766.06 to $5,023.79. The plaintiff's claim for the exclusion from the estate of the proceeds of the Northwestern Policy in the amount of $208,121.00 was denied. Thereupon, the plaintiff, on March 10, 1967, filed this action for recovery of the tax deficiency and interest.

Decedent was the husband of Boydie Cox Morton whose sister, Margaret Cox Jones, was the wife of Claud A. Jones. Mrs. Morton and Mrs. Jones were daughters of Frank Cox. Mr. Cox was interested in providing a measure of financial security for his two daughters and his grandchildren, and to that end he made arrangements for a policy of life insurance to be issued upon each of his sons-in-law. Each of the policies was issued by Northwestern Mutual Life Insurance Company pursuant to applications signed by Morton and Jones. Policy No. 2414246 which insured the life of Claud A. Jones in the face amount of $200,000.00 was issued on May 26, 1932, and the Morton policy hereinbefore described was issued on May 28, 1932. Premium notices were to be sent to Frank Cox and the applications provided that cash dividends should be applied towards reduction of premiums until otherwise directed. The applications further directed that the Automatic Premium Loan provision of each policy should become operative in accordance with its terms. Prior to his death on November 14, 1934, Mr. Cox paid the annual premiums on these policies for the years 1932, 1933 and 1934.

Under both policies the proceeds were initially payable to the executors, administrators or assigns of the respective insureds. Within two months after the issuance of the policies, supplemental designations were executed by Morton and Jones, respectively, revoking the original beneficiary designation and designating the wife, children, sister-in-law, nieces and nephew of each insured as primary beneficiaries, and any children of the insured's children or nieces or nephew were designated as secondary beneficiaries. The supplemental designation was executed by Morton on June 26, 1932 and was made a part of the policy on his life by endorsement dated July 8, 1932. The supplemental designation on the Jones policy was executed by Jones on June 30, 1932 and made a part of the policy on his life by endorsement dated July 15, 1932. These endorsements provided that in the event all the designated beneficiaries predeceased the insured, then in such event, Frank Cox or his executor, administrator or assigns would receive the proceeds of the policy. Each endorsement further provided:

"IN CONSIDERATION OF THE PAYMENT of premiums on said policy by Frank Cox, the power to exercise all the rights and privileges specified in and/or conferred upon the insured by the terms of said policy, including the right to change or revoke the foregoing, shall be vested solely in said Frank Cox during his life time (but not in his executors or administrators) except that no one shall be designated as beneficiary or contingent beneficiary without the consent of either the insured or said Insurance Company."

Each of these supplemental designations were signed by Morton and Jones as the insureds and, additionally, were signed by Frank Cox to indicate his acceptance of the terms and conditions of the supplemental designations.

Upon the death of Mr. Cox in 1934, his residual estate became vested in equal shares in Boydie Cox Morton and Margaret Cox Jones. The bulk of the assets of the estate were held by the Cox Corporation, and this corporation paid the premiums on these two policies for the years 1935 through 1937, charging the payments to the accounts of the two individual stockholders, Mrs. Morton and Mrs. Jones. The Corporation was dissolved in November of 1937 and the assets distributed to those two stockholders.

Subsequent to the death of Frank Cox endorsements were effected on the Jones and Morton policies eliminating Cox, his executors, administrators or assigns as contingent beneficiaries. The endorsement on the Morton policy was dated January 17, 1938 and reads as follows:

"Whereas Frank Cox, father-in-law of the insured is deceased, the provisions of the third paragraph of the supplement, dated June 26, 1932, are revoked and the insured has directed that in event no beneficiary or contingent beneficiary survives the insured, payment shall be made, when due, to the executors, administrators or assigns of the insured.

"The right to change or revoke the foregoing is reserved to the insured."

Shortly thereafter, it was decided that it would be advisable to eliminate the cross-family beneficiary designations in the Jones and Morton policies. Accordingly, a supplement dated April 4, 1938 was executed by D. Holmes Morton with respect to Policy No. 2414879, and this supplement was properly incorporated as a part of the policy by endorsement dated April 7, 1938. By this endorsement Boydie Cox Morton, Quin, Emma Lou and Margaret Morton, wife and children of the insured, were named as primary beneficiaries and any surviving spouse or children of the latter were named as contingent beneficiaries. In this supplemental designation, Morton also designated the manner or method in which payment of the proceeds of the policy should be made. Immediately following the language in this supplemental endorsement designating the primary and contingent beneficiaries and directing the method for the payment of the policy proceeds, the following statement appears: "I HEREBY WAIVE the right to change or revoke the foregoing." The supplemental endorsement also specifically revoked the prior designation of beneficiaries and option settlement which had appeared in prior endorsements. Except for the names of individuals, an identical endorsement was placed on Jones' policy under date of March 25, 1938.

Following the dissolution of the Cox Corporation, the annual premiums on the Morton policy were paid by Boydie Cox Morton commencing with the premium due in May of 1938 and continuing up until the death of the insured in 1963. Similarly, Margaret Cox Jones paid the premiums on the Jones policy from 1938 until the death of Claud A. Jones in August of 1948. The premiums paid on the Morton policy from the date of issuance until Morton's death totalled $220,472.00 net after dividends applied. The premiums paid from the funds of Boydie Cox Morton were drawn on a special account in her name maintained at The Kanawha Valley Bank. This account was used to cover Mrs. Morton's business and investment income and expenses.

Over the years, D. Holmes Morton kept his financial affairs separate and apart from those of his wife and family in a most scrupulous and meticulous manner. He maintained his own personal checking account and a separate ledger book covering his financial affairs. The special account of Boydie Cox Morton was covered by a journal book and ledger sheets which recorded all transactions involving that account and reveal that the source...