Parson v. United States, Civ. A. No. 1145.

Citation308 F. Supp. 1159
Decision Date26 January 1970
Docket NumberCiv. A. No. 1145.
PartiesBeatrice Smither PARSON, Executrix of the Will and Estate of George W. Parson, Deceased, Plaintiff, v. The UNITED STATES of America, Defendant.
CourtUnited States District Courts. 5th Circuit. United States District Court of Eastern District Texas

C. B. Wheeler, Wheeler, Watkins, Hubbard, Patton & Peek, Texarkana, Tex., for plaintiff.

Roby Hadden, U. S. Atty., Tyler, Tex., for defendant.

MEMORANDUM OPINION

FISHER, Chief Judge.

This is an action brought by the wife as executrix of the estate of Dr. George Parson to recover federal estate taxes which the estate has paid to the government.

Dr. George Parson died by accidental drowning on December 17, 1961, while a resident of Texarkana, Texas. At the time of his death, Dr. Parson had numerous insurance policies which are the subject of this suit for refund of taxes.

The first controversy arises as to any accident insurance policy which covered loss of limbs, etc., but which also covered for loss of life of Dr. Parson. This policy was issued on or about February 20, 1958, more than three years prior to the doctor's death. At the time this policy was issued, the doctor executed an assignment of the incidents of ownership of the policy to his wife. Payment of the $50,000 indemnity clause of the policy was made to the doctor's wife as beneficiary and owner of the policy. The doctor's estate tax return disclosed the payment of this policy as the separate property of the doctor's wife, no part of which was includable in decedent's gross estate. Upon audit the Internal Revenue Service assessed estate taxes due on one-half of the proceeds received by the doctor's wife under the policy on the basis that all premiums on the policy had been paid with community funds (stipulated) and that the purported assignment by the doctor in February 1958 was not effective to make the policy the separate property of the wife. Alternatively, the Internal Revenue Service contends that one-half of the proceeds should be includable in the doctor's estate on the basis that the transfer of the policy occurred each year upon the payment of the annual premiums, the last one being in May 1961, and the transfer was therefore within three years of the doctor's death and was made in contemplation of death within Section 2035 of the IRS Code.

The primary controversy in regard to the accident policy concerns the effect of the assignment which the doctor executed. The assignment provides as follows:

"Third Party Ownership — It is agreed by the person to be insured that all right and title to the insurance applied for shall vest in and every incident of ownership thereof may be exercised and enjoyed irrevocably without the consent of any other person by: Name of Owner Mrs. Beatrice Smither Parson, whose insurable interest is wife."

The question is whether this assignment was sufficient to divest the doctor of the "incidents of ownership" of the policy as contemplated by Section 2042 of the 1954 IRS Code under which Section the Internal Revenue Service determined that one-half of the proceeds of the policy were includable in Doctor Parson's estate. Section 2042 requires that a decedent include in his gross estate proceeds of life insurance policies on which the decedent exercised either alone or in conjunction with any other person the incidents of ownership.1

Section 20.2042-1 of the Treasury Regulations on Estate Tax describes what is meant by "incidents of ownership:"

". . . the term incidents of ownership is not limited in its meaning to ownership of the policy in its 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 right to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, etc."

While the test for includability is whether the decedent possessed the "incidents of ownership," this rule must be applied in the context of the state property law. Section 20.2042-1(5) of the Treasury Regulations provides in this regard as follows:

"As an additional step in determining whether or not a decedent possessed any incidents of ownership in a policy or any part of a policy, regard must be given to the effect of the state or other applicable law upon the terms of the policy."

The government argues that the law as applied to Texas community property is that a husband may possess "incidents of ownership" in an insurance policy, notwithstanding the fact that the legal title or "ownership" of the policy stands in the name of his spouse. The government contends that in such a case the wife holds title to the policy as agent for the community estate and the husband still possesses a community interest in the policy which constitutes sufficient "incidents of ownership" to require inclusion of one-half the proceeds in his estate upon his death.

The government's theory that there was not an effective assignment is primarily based on Freedman v. U. S. (5th Cir. 1967) 382 F.2d 742, in which the wife took out insurance on her life with the husband named as beneficiary. Her husband was expressly made the "owner" of the policy and signed the application as such. All premiums were paid with community funds. Upon the wife's death, the husband attempted to exclude all of the proceeds from her estate. The Court noted that under Texas law property purchased with community funds is presumed to belong to the community absent an effective gift of the property. The Court held that even though the husband signed as "owner" the decedent wife did not perform an affirmative act which would clearly reflect an intention to make a gift of her community interest and therefore one-half of the proceeds were includable in the wife's estate.

The taxpayer argues, and we agree, that this case is distinguishable from the Freedman case. The Court in Freedman noted that the decedent had not performed an affirmative act evidencing the intent of a gift and indicated that "an instrument of assignment or deed of gift would have satisfied the evidentiary requirements of a gift." We hold that in this case Doctor Parson performed the "affirmative act" contemplated by the Court in Freedman when Doctor Parson executed the assignment to his wife which irrevocably transferred every incident of ownership to his wife. The effect of the assignment in this case could have no other meaning or intent than to transfer Doctor Parson's community interest in the policy to his wife. Accordingly, we hold that the assignment was sufficient to effectuate a gift of Doctor Parson's community interest and none of the proceeds of the accident policy were includable in Doctor Parson's estate under Section 2042.

The government alternatively contends that even if the assignment was effective to transfer the incidents of ownership, still one-half of the proceeds must be included in Doctor Parson's estate. The government's theory is that under the type of accidental death policy with which we are concerned, each time a premium payment was made the decedent was purchasing insurance for one year only. Under this theory one-half of the proceeds would be includable in the decedent's estate as a transfer under Section 2035 which requires that the decedent's estate...

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3 cases
  • Parson v. United States
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • 22 d1 Maio d1 1972
    ...by the district court sustaining a claim for refund of estate taxes paid by the estate of Dr. George W. Parson. Parson v. United States, 308 F.Supp. 1159 (E.D.Tex., 1970). The case was submitted on a stipulation of facts which indicated that decedent Parson and his wife were married on Apri......
  • Estate of Wildenthal v. Commissioner, Docket No. 2492-69.
    • United States
    • U.S. Tax Court
    • 19 d2 Maio d2 1970
    ...Stapf v. United States 60-2 USTC ¶ 11,967, 189 F. Supp. 830 (N. D. Tex. 1960), and Parson v. United States 70-1 USTC ¶ 12,657, 308 F. Supp. 1159 (E. D. Tex. 1970), the District Courts held that the community estate was entitled to a share of the proceeds proportionate to the community contr......
  • Bintliff v. United States, Civ. A. No. 1279.
    • United States
    • U.S. District Court — Eastern District of Texas
    • 7 d3 Julho d3 1971
    ...and therefore one-half of the proceeds were includible in the wife's estate. A similar issue was before this Court in Parson v. United States, 308 F.Supp. 1159 (1970). In Parson, we distinguished Freedman on the basis that Doctor Parson had assigned to his wife all right and title to the in......

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