Saxton v. Comm'r of Internal Revenue (In re Estate of Saxton), Docket No. 16552.

• Decision Date: 13 April 1949
• Docket Number: Docket No. 16552.
• Citation: 12 T.C. 569
• Parties: ESTATE OF EUGENE F. SAXTON, DECEASED, MARTHA P. SAXTON, INDIVIDUALLY AND AS SOLE EXECUTRIX OF THE LAST WILL AND TESTAMENT OF EUGENE F. SAXTON, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

12 T.C. 569

ESTATE OF EUGENE F. SAXTON, DECEASED, MARTHA P. SAXTON, INDIVIDUALLY AND AS SOLE EXECUTRIX OF THE LAST WILL AND TESTAMENT OF EUGENE F. SAXTON, DECEASED, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 16552.

Tax Court of the United States.

Promulgated April 13, 1949.

1. Decedent's employer, for the purpose, inter alia, of providing additional compensation to decedent and other employees, took out a group life insurance policy providing for the insurance of the lives of certain employees. Pursuant to the master policy issued to the employer, decedent received policies insuring his life for $10,000, upon which decedent paid a part of the premiums and the employer a part. Held, the entire proceeds of the policies are includible in decedent's gross estate. Estate of Judson C. Welliver, 8 T.C. 165, followed.

2. In 1941 decedent's employer, for the purpose of providing additional compensation to decedent and others, voluntarily created a trust to which it transferred certain amounts of money, to be held in trust for 10 years and then distributed to certain named employees, including decedent. On the death of an employee before the expiration of 10 years, his share of the trust corpus was to be immediately paid to the person appointed by the employee's will, and, failing such appointment, to his issue. Upon decedent's death in 1943 without having exercised this power of appointment, his share of the trust corpus was paid to his children. Held, the amount of such payments are not includible in decedent's gross estate under either subsection (c) or (d) of section 811, Internal Revenue Code. Alexander S. Andrews, Esq., for the petitioner.

Rigmor O. Carlsen, Esq., for the respondent.

This case involves the determination of a deficiency of $2,117.48 in estate tax liability.

The first issue is whether the entire proceeds of group life insurance under which decedent was insured are includible in the gross estate or, as petitioner contends, only that part directly paid for by decedent. The second issue is whether there is includible in the gross estate the decedent's share of a trust fund established by the decedent's employer.

The parties have settled two remaining issues by stipulating (1) that the decedent owned $3,516.12 of joint bank accounts totaling $8,016.12, and (2) that the sum of $67.50 paid as brokerage fees in securing a sublease of the decedent's home is a proper deduction from the gross estate.

FINDINGS OF FACT.

Those facts covered by the stipulation of the parties are found by us to be as stipulated.

Petitioner is Martha P. Saxton, representing as executrix the estate of her husband, Eugene F. Saxton, who died a resident of New York at the age of 58 on June 26, 1943. In addition to the widow, the decedent was survived by two adult sons, Mark and Alexander Saxton. The widow was the sole beneficiary under the decedent's last will and testament. The estate ax return was filed with the collector of internal revenue for the second district of New York.

At date of his death, and for many years prior thereto, the decedent was employed by the publishing company of Harper & Brothers as vice president, secretary, and director, and head of the literary department.

In 1942 Harper & Brothers, out of gratitude for the services rendered by its employees, as added compensation and as an added inducement in hiring other employees, entered into an agreement with an insurance company providing for a group insurance policy insuring the lives of the employees. Only an employee was entitled to be insured. The original master policy was issued to the company in 1921, and it has been in effect continuously since then. Pursuant to this term group life insurance contract, the decedent received in 1942 one policy for $500, upon which the decedent paid no premiums. This policy was automatically issued after six months of service. In addition he received a policy in the amount of $9,500, upon which the decedent paid .44063 of the premium and the employer the remaining .55937. The receipt of this policy and the amount thereof were optional on the part of decedent, but the amount of the policy could not exceed a maximum of twice his annual salary, or $10,000. The decedent's policies, totaling $10,000, designated the wife as the sole beneficiary, the right to change the beneficiary being reserved to the employee.

The premium payments by the employee were limited to 60 cents a month for each $1,000 of insurance. Liability for premiums would be suspended during any period wherein the employee was totally disabled. Dividends received from the insurance company operated to reduce the payments of the net premiums paid by the employer, but not the employee.

The employee's insurance policy terminated upon cessation of employment, or upon failure to make the agreed contributions. Termination also occurred with cessation of active work, except when occasioned by sickness, injury, or retirement. However, upon termination, or after 5 years, at the option of the employee, the employee could convert the policy without further evidence of insurability to an individual policy of life insurance in any form, except term insurance or policies containing disability benefits, in an amount not to exceed the lesser of $2,000 or the amount for which the employee was insured. The employee could also elect to have the insurance proceeds paid to the beneficiaries by monthly installments over a period of 10 years. The employee's interest was nonassignable.

After the death of the decedent, the widow received the $10,000. Of this amount, $4,406.30 was reported as an asset of the estate, computed as the portion of the $10,000 for which the decedent directly contributed premium payments by withholdings from his salary.

In addition to the group insurance plan, Harper & Brothers created a 10-year, profit-sharing trust by an instrument dated December 30, 1941, for the exclusive benefit of its employees, in compliance with section 165 of the Internal Revenue Code and sections 13(c) and 16 of the New York Personal Property Law. There were 5 trustees, including the decedent, and 14 beneficiaries, including the decedent. The corpus consisted of $25,000 contributed in 1941 and $5,000 contributed in 1942 by Harper & Brothers. These amounts were set aside by the board of directors of Harper & Brothers as proper compensation earned by the 14 beneficiaries in the light of their duties, responsibilities, and accomplishments for the years in which the contributions were made.¹ The employer was allowed a deduction of these amounts for Federal income tax purposes. Harper & Brothers was under no legal obligation to pay additional compensation to decedent. The trust instrument bears the signature of the decedent as beneficiary, trustee, and as secretary of Harper & Brothers.

The trust instrument provided that under no circumstances would the amount placed in trust revert to the grantor. The grantor could amend the instrument upon the consent of the trustees if within reason, but in no sense could the amounts already granted in trust be diminished. In the event that any beneficiary should reject his interest in the trust the employer retained the right to designate another employee to receive the share.

The duties of the trustees were to invest the corpus, to accumulate the income for the period of the trust, and to pay over the beneficiaries' share upon the termination of the trust term or, under certain circumstances, prior thereto.

The term of the trust was for 10 years, and during that period the employee could not anticipate the fund by assignment or encumbrance.

However, before the expiration of the term, the corpus could be distributed upon the death of any beneficiary, upon the disability of a beneficiary, upon unanimous vote of the trustees with the consent of the employer, or upon the death of the last beneficiary before expiration of the term of the trust.

In the event of death of the employee during the term of the trust, the trustees were to pay over the employee's share according to his testamentary directions. If no directions were made by the employee, then the share would be paid to the decedent's issue, or, in default of issue, then to the wife if living, and, if she were not living, then according to New York laws of intestate distribution. Upon the death of the decedent before the end of the term and in the absence of testamentary direction, the trustees paid the decedent's issue $2,142.85 as the decedent's one-fourteenth interest in the $30,000 corpus. This amount was not included in the gross estate for Federal tax purposes.

None of the benefits created or payments made by the employer as hereinabove set forth were reported by decedent as income for Federal income tax purposes.

Decedent owned 1,213 shares of no par common stock in Harper & Brothers. As a condition of the ownership, the decedent had to offer this stock for sale to Harper & Brothers if he left their employment or if he desired to sell the stock. The decedent received dividends on this stock of $6 a share in 1942 and $8 a share in 1943.

OPINION.

KERN, Judge:

The first issue presented herein is whether that portion of proceeds from life insurance policies which was directly paid for by the employer, pursuant to the terms of a group life insurance agreement covering the employee, is includible in the gross estate of the deceased employee in addition to that portion directly paid for by the employee. This issue was decided in the affirmative in Estate of Judson C. Welliver, 8 T.C. 165. Cf. Estate of Herman D. Brous, 10 T.C. 597.

In the Welliver case it was held that the proceeds of life insurance policies insuring the life of a decedent dying after October 21, 1942, which were payable to a beneficiary other...