Old Colony Trust Co. v. Commissioner of Internal Revenue

• Decision Date: 02 March 1938
• Docket Number: Docket No. 82769.
• Citation: 37 BTA 435
• Court: U.S. Board of Tax Appeals
• Parties: OLD COLONY TRUST COMPANY AND EVERETT MORSS, JR., EXECUTORS OF THE WILL OF EVERETT MORSS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

37 B.T.A. 435 (1938)

OLD COLONY TRUST COMPANY AND EVERETT MORSS, JR., EXECUTORS OF THE WILL OF EVERETT MORSS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 82769.

Board of Tax Appeals.

Promulgated March 2, 1938.

W. S. Felton, Esq., for the petitioners.

H. F. Noneman, Esq., for the respondent.

The respondent has determined a deficiency of $45,530.92 in estate tax liability which results in part from including in the value of the gross estate of decedent the amount of $40,000. Petitioners claim that the $40,000 represents payment to beneficiaries pursuant to a life insurance contract and that none of the amount in question is includable in the gross estate by virtue of the provision contained in section 302 (g) of the Revenue Act of 1926.

FINDINGS OF FACT.

On August 27, 1928, the Sun Life Assurance Co. of Canada entered into a written agreement with the decedent, Everett Morss, whereby the company agreed to pay to Everett Morss, called the annuitant, the sum of $1,400 on June 19, 1929, and on the 19th day of June in each year thereafter during the subsequent lifetime of the said annuitant; and further agreed to pay upon proof of death of the annuitant at least $40,000 to his nominees, called the beneficiaries of the annuitant. In consideration of the above agreement, Everett Morss paid to the company $42,000. The written agreement issued by the company is entitled "Life Annuity With Principal Sum Payable at Death — Single Payment — Annual Dividend." The agreement sets forth on its face the following: "Principal sum $40,000"; "Single premium $42,000"; "Yearly annuity $1,400"; Age "63."

The decedent was 63 years of age when he entered into the contract with the company. He died December 27, 1933. Thereafter the Sun Life Assurance Co. of Canada paid to three named beneficiaries, children of the decedent, the sum of $40,994.20. The amount of $994.20 was the accrued annuity for the year 1933 up to the date of death of the annuitant.

The agreement entered into by decedent with the company provides that the policy may be surrendered to the company at any time for an amount equal to the principal sum set forth in the agreement. The agreement further gives to the annuitant participation in profits by providing that all annuity payments shall be increased by such dividends as may be allotted by the company out of its surplus interest earnings. The agreement also provides a basis for reserves which are based on British Offices Select Life Annuity Tables, with interest at 3½ percent. The agreement provides that no assignment of the policy shall be binding on the company unless in writing and until filed at its head office. The agreement gives the annuitant the right to change the beneficiaries from time to time by filing with the company a written request accompanied by the policy and also provides that the annuitant may surrender, assign, or pledge the policy without the consent of the beneficiary.

The petitioners reported in their Federal estate tax return the receipt of the sum of $40,994.20 and excluded the amount of $40,000 as "Insurance receivable by beneficiaries other than the estate not in excess of $40,000."

The amount of $994.20 is includable in the gross estate.

Respondent added to the value of the gross estate the amount of $40,000, having concluded that the agreement under which this amount was paid is not a policy of insurance but is an annuity contract and as such is taxable as an asset of the estate.

The petitioners have paid estate, inheritance, legacy, or succession taxes to the Commonwealth of Massachusetts in the amount of $37,930.92.

OPINION.

HARRON:

The question involved in this proceeding is whether $40,000 received by beneficiaries of the decedent is taxable as an asset of the estate or whether it is properly excluded from the value of the gross estate as insurance received by beneficiaries under policies taken out by the decedent upon his own life being not in excess of $40,000 so as to be within the exemption allowed by section 302 (g) of the Revenue Act of 1926.

Section 302 (g) of the Revenue Act of 1926 provides as follows:

SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated —

* * * * * * *

(g) * * * and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

In order to properly determine the principal question involved, it is necessary to consider a collateral question, namely, whether the agreement entered into between the decedent and the Sun Life Assurance Co. of Canada on August 27, 1928, was a contract of life insurance so that the $40,000 paid to decedent's survivors by that company was received by them "as insurance under policies taken out by the decedent upon his own life." Petitioners contend that the agreement was in part a contract of life insurance and argue that a contract which provides for the payment of a certain sum of money upon death is, in that respect, a contract of life insurance although the contract contains other provisions having nothing to do with life insurance. They contend that the type of agreement involved in this proceeding was commonly written at the time by numerous insurance companies, the consideration paid for the issue of such contract being customarily apportioned by an actuarial allocation.

The respondent contends that the agreement was not a contract of life insurance so that the proceeds, $40,000, paid to the decedent's survivors were not insurance proceeds and therefore that the entire amount thereof is properly included in the decedent's gross estate. Respondent contends, in substance, that the contract was in fact an annuity contract although he points out that it is difficult to find a single term which accurately describes the contract. He suggests that the contract has some of the characteristics of a trust.

We are of the opinion that the contract made by the decedent was not a contract of life insurance. This seems evident from reading the contract. Further, there is no evidence that decedent applied for life insurance or submitted to the usual physical examination. The company appears to have been unconcerned with the element of life expectancy or physical condition, even though decedent was 63 years of age at the time he made the contract. The single payment in the...