Old Colony Trust Co. v. Commissioner of Internal Rev.

• Decision Date: 02 March 1939
• Docket Number: No. 3386.,3386.
• Citation: 102 F.2d 380
• Parties: OLD COLONY TRUST CO. et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

102 F.2d 380 (1939)

OLD COLONY TRUST CO. et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 3386.

Circuit Court of Appeals, First Circuit.

March 2, 1939.

Alexander Lincoln, of Boston, Mass. (W. Sidney Felton, Noel Morss, and Herrick, Smith, Donald & Farley, all of Boston, Mass., on the brief), for Old Colony Trust Co. et al.

Warren F. Wattles, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for Commissioner.

Before BINGHAM and WILSON, Circuit Judges, and BREWSTER, District Judge.

BREWSTER, District Judge.

This is a petition for review of a decision of the United States Board of Tax Appeals, determining a deficiency in the estate tax liability of the estate of which the petitioners are executors. The question is whether a sum of money paid to the beneficiaries pursuant to a policy issued by the Sun Life Assurance Company of Canada should be included in the gross estate of the decedent.

The decedent, Everett Morss, died December 27, 1933.

On August 27, 1928, the Assurance Company entered into a written contract with Morss. The contract, therein termed a "policy", provided that in consideration of the payment of a single premium of $42,000 the company would pay to the decedent (therein called "the annuitant") a yearly annuity of $1,400 during his lifetime, and would pay at his death to the beneficiaries named in the policy the greater of two amounts, — first, the principal sum of $40,000 together with a proportionate part of the annuity payment for the fractional period between the date of the last annuity payment and the date of death, or, second, a sum equal to the premium paid for the policy less the sum of all annuity payments which should have been made under it; all annuity payments, including the proportionate payment on the death of the annuitant, to be increased by such dividends as might be allotted by the company out of its surplus interest earnings. The beneficiaries were the decedent's three children, and it was provided "that should any child have predeceased the annuitant, his or her share shall be paid to his or her legal wife or husband, if any, otherwise to the executors, administrators or assigns of the annuitant." In lieu of payment in one sum of the amount payable at death, options were given for alternative methods of settlement by annuity or instalment payments.

The age of the decedent was stated in the policy as sixty-three. The policy was stated to be issued in consideration of the representations and agreements contained in the written application therefor, and it was provided that if the age of the annuitant had been misstated, the amount payable should be such sum as the premium paid would have purchased according to the rate at the true age. The policy contained a provision permitting its surrender to the company at any time for an amount equal to the principal sum, and the company agreed that it would advance to the annuitant, upon proper assignment of the policy, any amount not exceeding the cash value of the policy. There was a provision also permitting the annuitant to change the beneficiaries. The contract was described as "Life Annuity Principal Sum Payable at Death — Single Premium — Annual Dividends."

After the death of the decedent, the Assurance Company in due course paid to his three children the sum of $40,994.20. Of this amount, $40,000 was the principal sum under the policy and $994.20 was accrued annuity.

The petitioners, in their federal estate tax return, reported the receipt of said sum of $40,994.20 as insurance on the life of the decedent, payable to the named beneficiaries, and excluded the amount of $40,000 as "Insurance receivable by beneficiaries other than the estate not in excess of $40,000."

The Commissioner added to the value of the gross estate the amount of $40,000, having concluded that the agreement under which the payment was made was not a policy of insurance but an annuity contract, and as such was taxable to the estate.

The Board of Tax Appeals held that the Commissioner was correct in including that amount in the gross estate.

It was stipulated between the parties in the proceedings before the Board that the following facts should be deemed to be true for the purposes of the appeal.

The consideration paid by the decedent for the issue of the contract was allocated by the Sun Life Assurance Company of Canada on an actuarial basis, a portion of such consideration being treated as an amount paid for a life annuity during the life of the decedent and the other portion of such consideration as an amount paid as a single premium for a paid-up life insurance policy on the life of the decedent. Subject to only minor variations, the amounts so allocated accord with the published premium rates of the Sun Life Assurance Company of Canada for the issue of such life annuity and life insurance contracts respectively, issued in each instance to a male person of the age of the decedent.

Contracts of the type issued by the Sun Life Assurance Company of Canada to the decedent, in August, 1928, were commonly written at that time by the Sun Life Assurance Company of Canada and by numerous other insurance companies. An actuarial allocation of the consideration paid for the issue of such contracts is customarily made by the Sun Life Assurance Company of Canada and by other insurance companies...