Nelson v. Commissioner of Internal Revenue

• Citation: 101 F.2d 568
• Decision Date: 23 February 1939
• Docket Number: No. 11264.,11264.
• Parties: NELSON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

101 F.2d 568 (1939)

NELSON v. COMMISSIONER OF INTERNAL REVENUE.

No. 11264.

Circuit Court of Appeals, Eighth Circuit.

February 23, 1939.

Reece A. Gardner, of Kansas City, Mo. (Ryland, Stinson, Mag & Thomson, of Kansas City, Mo., John H. McEvers, of Washington, D. C., and Lawrence R. Brown, of Kansas City, Mo., on the brief), for petitioner.

Louise Foster, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and J. Louis Monarch and Norman D. Keller, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before SANBORN, WOODROUGH, and THOMAS, Circuit Judges.

SANBORN, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals redetermining a deficiency in the federal estate tax due upon the estate of Frank R. McDermand, Jr., deceased, resulting from the failure of the petitioner to include proceeds of certain policies of life insurance in gross estate. 36 B.T.A. 1138.

Frank R. McDermand, Jr., the insured under six policies of life insurance aggregating $200,000 in face value, which were pledged to the Columbian Hog & Cattle Powder Company, a Missouri corporation of which he was president, died July 3, 1931, at the age of thirty years. His wife, Helen McDermand (now Helen H. Nelson), was the beneficiary under each of the policies, and received the proceeds. She paid to the pledgee, from the proceeds of the policies, $18,846.68, the amount of premiums which it had paid with 5% interest, and $25,000 in addition. These payments were made in fulfilment of an agreement which she and her husband had made with the pledgee August 8, 1929 (amended April 26, 1930).¹ In substance, the agreement was that the pledgee should pay all premiums upon these policies until the insured reached the age of forty years or until he died if that event should first occur; that if he died before he was forty years of age, the pledgee should be paid, out of the proceeds of the insurance, all premiums which it had paid, with interest at 5% per annum, and $25,000 in addition; that if the insured lived until he was forty years of age, he and his wife should then pay to the pledgee all premiums paid by it, with interest, and that, upon such payment being made, the pledgee should have no further interest in the policies.

Three of the pledged policies, aggregating $100,000 in face value, had been applied for and issued to the insured several months before the pledge agreement was made. The other three policies were all applied for by, and issued to, the insured during the eight months subsequent to that time. The policies were twenty-payment life policies in the usual form, reserving to the insured the right to change the beneficiary and providing loan and surrender values after three years. They were assignable without the consent of the beneficiary.

The question presented is whether the six policies in suit were "taken out" by the insured, so that that portion of the insurance receivable by the beneficiary in excess of $40,000 was required to be included in gross estate, by virtue of the provisions of § 302(g) of the Revenue Act of 1926 c. 27, 44 Stat. 9, 70, 71; 26 U.S.C. § 411(g), 26 U.S.C.A. § 411(g) and the applicable Treasury Regulations.²

The petitioner contends that when the insured entered into the pledge agreement and secured its fulfilment by delivering the policies to the pledgee, he no longer had any interest in them transferable by death, and that none of the premiums were paid by him either directly or indirectly. The respondent contends that the insured, in effect, borrowed the money with which the premiums were paid, and remained the owner of the policies, and that his death resulted in terminating substantial rights under the policies.

Reduced to its simplest terms, it seems to us that this is a plain case of an insured pledging his policies of insurance as security for the payment of premiums which he would otherwise have to pay himself. Whether the arrangement constituted the insured a debtor of the pledgee in a strict and technical sense, we regard as of no substantial importance. The pledgee contracted that there should be repaid to it by the insured and his wife or from the proceeds of the policies the moneys which it advanced for premiums. It charged these premium payments upon its books to "The Frank R. McDermand, Jr., Insurance Account." If the insured did not contract a debt, he at least assumed an obligation that the amount advanced by the pledgee for premiums should be repaid and that it should retain possession of the policies until it was repaid.

It must be remembered that substance, not form, should control in the application of taxing statutes. United States v. Phellis, 257 U.S. 156, 168, 42 S.Ct. 63, 66 L.Ed. 180; S. A. MacQueen Co. v. Commissioner, 3 Cir., 67 F.2d 857, 858; Lonsdale v. Commissioner, 8 Cir., 32 F.2d 537, 539; Helvering v. Gordon, 8 Cir., 87 F.2d 663, 666; Sanborn v. Commissioner, 8 Cir., 88 F.2d 134, 137.

The insured retained the title to these policies subject to the pledge agreement. The rights of the beneficiary, which were contingent under the terms of the policies, were not enlarged by the pledge agreement. The fact that the insured, by pledging his policies for all or more than they were worth, made it impracticable to surrender them for cash, to secure policy loans, or even to change the beneficiary, is, we think, unimportant in determining whether the proceeds receivable by the beneficiary were to be included in the insured's gross estate. It is, of course, true that any collateral which, to the extent of its full value, is pledged to secure a loan is, as a practical matter, not usable as security for another loan, but it still belongs to the pledgor and remains a part of his estate, subject to the rights of the pledgee.³

So in this case the insured retained title to the policies, with all the incidents of ownership. Not until his death did the rights of the beneficiary become vested. Then for the first time, it became certain that the insured would never change the beneficiary, that he would never surrender the policies for cash, or cancel them, or again pledge them as security for a loan. The termination by death of the legal incidents of ownership, which freed the beneficiary from the possibility of their exercise, was a transfer justifying the inclusion in gross estate of so much of the proceeds of these policies as was receivable by the beneficiary in excess of the statutory exemption. Chase Nat. Bank v. United States, 278 U.S. 327, 335, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388; Walker v. United States, 8 Cir., 83 F.2d 103, 108; Brown v. Commissioner, 6 Cir., 95 F.2d 184, 188; Igleheart v. Commissioner, 5 Cir., 77 F.2d 704, 711.

Moreover, we think that the payment of the premiums upon these policies must be attributed to the insured, who owned and pledged them, and not to the beneficiary or to the pledgee. For that reason, also, the insurance is to be regarded as having been "taken out" by the insured. Lang v. Commissioner, 304 U.S. 264, 268-270, 58 S.Ct. 880, 82 L.Ed. 1331, 118 A.L.R. 319; Bank of America Nat. Trust & Savings Ass'n v. Commissioner, 9 Cir., 90 F.2d 981, 983; Walker v. Commissioner, 8 Cir., 83 F.2d 103, 109; Helvering v. Reybine, 2 Cir., 83 F.2d 215, 216-217; Wilson v. Crooks, D.C., 52 F.2d 692, 695.

The order of the Board is affirmed.

1 "Articles of Agreement, made and entered into this 8th day of August, 1929, by and between Columbian Hog & Cattle Powder Company, a corporation organized and existing under the laws of the State of Missouri, of the first part, and Frank R. McDermand, Jr., and Helen McDermand, his wife, of the second part, all of Kansas City, Missouri, Witnesseth:

"Whereas the recent death of Frank R. McDermand, Sr., has made necessary new management of first party, of which Frank R. McDermand, Jr., is president, as the successor of Frank R. McDermand, Sr.,; and

"Whereas for the next several years the death of the said Frank R. McDermand, Jr., would be a serious...