Morton v. United States

• Decision Date: 10 April 1972
• Docket Number: No. 71-1861.,71-1861.
• Citation: 457 F.2d 750
• Parties: Quin MORTON, Executor of the Estate of D. Holmes Morton, Deceased, Appellee, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

457 F.2d 750 (1972)

Quin MORTON, Executor of the Estate of D. Holmes Morton, Deceased, Appellee, v. UNITED STATES of America, Appellant.

No. 71-1861.

United States Court of Appeals, Fourth Circuit.

Argued January 7, 1972.

Decided April 10, 1972.

Gary R. Allen, Atty., Tax Div., Dept. of Justice (Fred B. Ugast, Acting Asst. Atty. Gen., Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Ernest J. Brown, Thomas L. Stapleton, Attys., Tax Div., Dept. of Justice, and W. Warren Upton, U. S. Atty., on brief), for appellant.

Thomas N. Chambers, Charleston, W. Va. (Lee O. Hill, and Jackson, Kelly, Holt & O' Farrell, Charleston, W. Va., on brief), for appellee.

Before HAYNSWORTH, Chief Judge, and CRAVEN and BUTZNER, Circuit Judges.

CRAVEN, Circuit Judge:

This is an appeal by the United States from a judgment of the District Court for the Southern District of West Virginia granting the plaintiff a refund of federal estate tax paid. The district judge concluded there was an overassessment because the Commissioner erroneously included in the gross estate the proceeds of a policy of life insurance. We affirm. We think that the decedent did not possess any of the incidents of ownership of this insurance policy at the time of his death so as to require inclusion of the proceeds in the decedent's gross estate under Section 2042(2) of the Internal Revenue Code of 1954.

The facts are not disputed and are set out in detail in the lower court's opinion, Morton v. United States, 322 F.Supp. 1139 (S.D.W.Va.1971). Briefly, the policy was taken out in 1932 by the decedent at the instigation of his father-in-law, who wanted to provide financial security for his daughter. The decedent paid none of the premiums on this insurance policy and it is clear that he never considered that he "owned" it.¹ The premiums were paid by his father-in-law, then by a corporation owned by the decedent's wife and her sister, and finally by the decedent's wife until the decedent's death in 1963. The policy was kept in the office safe of another corporation owned by the decedent's wife and her sister.

The provisions of the policy which have a bearing on whether or not the proceeds should be included in the decedent's gross estate have been summarized correctly by the district court as follows:

1. Assignments. No assignment of the policy would be binding upon the Company until filed at its home office, and the Company assumed no responsibility as to the validity or effect of any assignment.

2. Premium loans. The insured and assignees, if any, could request the insurer for a premium loan provided the request was made prior to default and the cash surrender value was sufficient to cover the premium then due.

3. Cash surrender value. Upon receipt of the policy and a full and valid surrender of all claims thereunder, and "without the consent or participation of any Beneficiary not irrevocably designated or any Contingent Beneficiary" the Company would pay the cash surrender value of the policy.

4. Policy loans. At any time after premiums for two full years had been paid and while the policy was in force except as extended-term insurance, without the consent or participation of any beneficiary not irrevocably designated or any contingent beneficiary, a policy loan could be obtained by properly assigning the policy and forwarding it to the Company at its home office. The amount of the policy loans was limited to the amount secured by the cash surrender value of the policy.

5. Dividend options. At the option of the insured, dividends could be (a) withdrawn in cash; (b) applied toward the payment of premiums; (c) applied toward the purchase of a participating paid-up addition to the policy; (d) left to accumulate with interest. Dividends were subject to withdrawal in cash at any time or could be paid with the proceeds of the policy.

6. Endowment option. Whenever the reserve on the policy at the end of a policy year, together with the reserve on the existing dividend additions, should be equal to or in excess of the face amount of the policy, the insured could upon surrender of the policy, as well as a full and valid surrender of all claims thereunder, without consent or participation of any beneficiary not irrevocably designated or any contingent beneficiary, obtain the face amount of the policy.

7. Full paid participating insurance. The insured could obtain full paid participating insurance provided certain specified conditions were met.

8. Paid-up insurance. The insured and assigns, if any, upon written request to the Company, could obtain participating paid-up life insurance instead of automatic extended-term insurance, if such request was made prior to default in premium payment or within the grace period.

9. Beneficiaries. The insured could (1) designate one or more beneficiaries either with or without reservation of the right to revoke such designation; (2) designate one or more contingent beneficiaries; (3) change any beneficiary not irrevocably designated; and (4) change any contingent beneficiary.

10. Method of payment. The insured could designate the method by which the proceeds of the policy would be paid to the beneficiaries.

11. Reinstatement. The insured could have the policy reinstated at any time within five years after default in payment of premiums by paying all premium arrears, with interest, and any indebtedness which might exist, with interest, upon evidence satisfactory to the Company of his insurability.

Morton v. United States, supra at 1143-1144. In 1938 the decedent executed an endorsement of the policy effecting an irrevocable designation of beneficiaries and mode of settlement.² It is the effect of this endorsement upon the other terms of the policy which is determinative of the issue raised.

Section 2042 of the Internal Revenue Code of 1954 provides in relevant part as follows:

§ 2042. Proceeds of life insurance. The value of the gross estate shall include the value of all property.—

(2) Receivable by other beneficiaries.—To the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. . . .

Incidents of ownership are not defined by the Code, but the Regulations provide,

For purposes of this paragraph, the term "incidents of ownership" is not limited in its meaning to ownership of the policy in the technical legal sense. Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. . . .³

Reg. 20.2042-1(c) (2).

It is clear that before the execution of the irrevocable designation of beneficiaries and mode of settlement the policy conferred upon the decedent, as the insured, many, if not all of the powers which Congress had in mind as being incidents of ownership sufficient to cause the proceeds to be included in his gross estate. Ordinarily the possession by the insured of the power to cash the policy in, to elect the endowment option, to get a loan on the policy or to change the beneficiary is sufficient to cause the proceeds to be included in his gross estate. United States v. Rhode Island Hospital Trust Co., 355 F.2d 7 (1st Cir. 1966). However, we think that the irrevocable designation of beneficiaries and mode of settlement, coupled with payment of premiums by persons other than the insured, made it legally impossible for the decedent to exercise other powers purportedly given him as insured by the policy in such a way that any economic benefit would accrue to him or his estate or so that he could subsequently control the transfer of the proceeds of the policy.⁴

The government concedes that the endorsement of April 7, 1938, divested the decedent of the right to change beneficiaries and to select another method of payment. However, it maintains that other provisions of the policy were left unaffected and there remained in the decedent some incidents of ownership.

It is well established that if the insured retains no right to change the beneficiary of a life insurance policy or, as here, gives up that right, the beneficiary stands in the position of a third party beneficiary to the insurance contract with indefeasibly vested rights in the proceeds. Central National Bank of Washington v. Hume, 128 U.S. 195, 206, 9 S.Ct. 41, 32 L.Ed. 370 (1888). See generally 4 Couch on Insurance 2d § 27:56. This is the law of West Virginia. Hechmer v....