Prichard v. United States, 23931.

• Decision Date: 20 June 1968
• Docket Number: No. 23931.,23931.
• Citation: 397 F.2d 60
• Parties: Mrs. Frankie Lou Smith PRICHARD, Independent Executrix of the Estate of Houston Smith, Jr., Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

397 F.2d 60 (1968)

Mrs. Frankie Lou Smith PRICHARD, Independent Executrix of the Estate of Houston Smith, Jr., Appellant, v. UNITED STATES of America, Appellee.

No. 23931.

United States Court of Appeals Fifth Circuit.

June 20, 1968.

George E. Ray, Dallas, Tex., for appellant.

Melvin M. Diggs, U. S. Atty., Fort Worth, Tex., Mitchell Rogovin, Asst. Atty. Gen., Tax Div., Richard C. Pugh, Act. Asst. Atty. Gen., Meyer Rothwacks, Lee A. Jackson, Gilbert E. Andrews, Jeanine Jacobs, Attys., Dept. of Justice, Washington, D. C., for appellee.

Before BELL, GODBOLD and DYER, Circuit Judges.

GODBOLD, Circuit Judge:

This is an appeal from a judgment that appellant executrix is not entitled to refund of an alleged overpayment of estate tax on the estate of Houston Smith, 255 F.Supp. 552 (N.D.Texas 1966).¹ The case concerns application of § 2042 of the Internal Revenue Code, 26 U.S.C.A. § 2042. The district court found for the government under sub-sections (1) and (2) of § 2042. We affirm on the basis of sub-section (2), which requires inclusion in the gross estate of proceeds from insurance payable to beneficiaries other than the estate if the decedent possessed at the time of his death any incidents of ownership in the insurance. This makes unnecessary any discussion of sub-section (1).

The decedent, a building contractor, was a resident of Texas, a community property state. He approached Great Southern Life Insurance Company for permanent mortgage financing on a shopping center which he proposed to construct in Texas. Great Southern stated as one of its conditions for making the loan that Smith secure from it $250,000 of insurance on his life to be assigned as additional collateral. Immediately Smith applied for such a policy, on the application showing Great Southern as the proposed beneficiary and owner. The local Great Southern agent wrote on the application that the insurance was to be assigned to the company if the loan, then pending for approval, was approved. The company notified Smith it did not wish to be named beneficiary and owner, that an absolute assignment to it would be required. Mrs. Smith then was named beneficiary and owner.

Great Southern issued a commitment letter in a form usual in this type of transaction, committing the company to make a loan of $575,000 to Mr. and Mrs. Smith, secured by mortgage on the real estate and improvements of the shopping center.² It contained a specific condition requiring that the $250,000 of insurance be absolutely assigned as additional collateral. Smith paid Great Southern a "standby fee" of $5,750 for the commitment. Using the commitment to show that permanent financing had been arranged, Smith obtained interim financing from a bank for construction of the center.

Great Southern issued its policy on November 4, 1957 showing as beneficiary the wife if living, otherwise the surviving children of Smith by his said wife. The policy was ordinary life, with endowment at age 90. Smith was age 42 at issue. As part of the policy when issued there was attached a supplemental provision stating:

The application for this policy having been made by Houston Smith, Jr., insured, it is understood and agreed that the applicant having designated Frankie Lou Smith — wife — as the beneficiary to control this policy, it is understood and agreed that Frankie Lou Smith — wife — is the sole owner of this policy and shall have the power to exercise all of the privileges, benefits, rights and options granted to the insured in the policy.

The policy was delivered to either Mr. or Mrs. Smith, the record is not clear which.

On November 6 Great Southern wired its local loan representative that the leases to shopping center tenants had been approved, the loan approved, and the life insurance issued. Promptly thereafter construction of the center began. It was built larger than originally planned. Great Southern agreed to increase its commitment to $615,000 and issued a second commitment letter, making no charges except those necessitated by the new amount and containing a condition that the described $250,000 policy be absolutely assigned as collateral.

Under the terms of the policy any assignment of it had to be by Mrs. Smith as owner. (By other policy terms the right to make policy loans and the right to surrender the policy for its cash value also were in her as owner.)

The Great Southern loan to the husband-wife community was closed July 7, 1958 when the center was complete. Necessary papers had been prepared by Great Southern; they included an absolute assignment of the insurance policy, prepared for the signatures of Mr. and Mrs. Smith, which was signed by them at the closing and delivered to Great Southern. Under the terms of the assignment Great Southern was given a lien upon the policy and the proceeds.³ The rights of the beneficiary were expressly made subordinate to Great Southern's rights under the assignment.

On July 15 Smith sent the original policy to Great Southern, which as assignee was entitled to possession of it. In June, 1959, Great Southern returned the policy to Smith with a form letter saying that it need no longer be held in the company's possession, that the existence of the absolute assignment had been noted on the policy and would be released when the secured indebtedness was retired.

Smith was killed in an automobile accident on July 2, 1960. The unpaid balance on the indebtedness at this time was $565,929.84. At the request of Mrs. Smith the company agreed to release to her $150,000 of the proceeds of the policy rather than applying all to the secured indebtedness as the company was entitled. The company stated it was doing this "in order that it may be of some assistance to you in meeting the taxes that will be assessed against the Estate of your husband." The other $100,000 was applied against the debt.

Appellant timely filed an estimated tax return. No portion of the $250,000 policy proceeds was included in the gross estate, but the entire amount of the unpaid indebtedness on the loan at the time of Smith's death was listed as a mortgage debt due Great Southern and was sought to be deducted under § 2053(a) (4). On examination the commissioner included in the estate $125,000, one-half of the policy proceeds, and allowed deduction of one-half the outstanding balance on the mortgage loan.

Appellant paid the tax and sued for refund. From that unsuccessful suit comes this appeal.

The statute makes no attempt to define incidents of ownership. The regulations provide:

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.

Treas.Reg. § 20.2042(1) (c). See generally Lowndes & Kramer, Federal Estate and Gift Taxation §§ 13.6-13.8 (2d ed. 1962). This court, in Commissioner of Internal Revenue v. Chase Manhattan Bank, 259 F.2d 231 (5th Cir. 1958), refers to incidents of ownership as the whole bundle of the rights in a policy except the right to the proceeds, including

"the economic benefits of the insurance, the cash surrender value, the power to change the beneficiary, the power to surrender or cancel the policy, the power to assign the policy or revoke an assignment, the power to pledge the policy for a loan, the power to obtain from the insurer a loan against the surrender value of the policy."

259 F.2d at 246, quoting from Benjamin & Pigman, Federal Estate and Gift Taxation of Louisiana Life Insurance, 28 Tul.L.Rev. 243, 247 (1954).

Section 2042(2) does not require that the decedent must have...