Schongalla v. Hickey

• Decision Date: 20 March 1944
• Docket Number: Civ. No. 983.
• Citation: 60 F. Supp. 814
• Parties: SCHONGALLA v. HICKEY, U. S. Collector of Internal Revenue.
• Court: U.S. District Court — Northern District of New York

60 F. Supp. 814

SCHONGALLA v. HICKEY, U. S. Collector of Internal Revenue.

Civ. No. 983.

District Court, N. D. New York.

July 31, 1943.

On Reargument March 20, 1944.

Edward A. Alexander, of New York City (John A. Klett, of New York City, of counsel), for plaintiff.

Ralph L. Emmons, U. S. Atty., of Syracuse, N. Y., Samuel O. Clark, Jr., Asst. Atty. Gen., and Andrew D. Sharpe and Leon F. Cooper, Sp. Assts. to Atty. Gen., for defendant.

BRENNAN, District Judge.

This is an action to recover the sum of $15,594.46, which represents a part of the federal estate taxes levied by reason of the inclusion in the gross estate of the decedent the proceeds of four life insurance policies.

The facts have been stipulated by the attorneys for the respective parties, and the decision rests upon the law applicable thereto.

William Schongalla died on January 12, 1938, at the age of about sixty-four years, leaving him surviving his widow, Anna, his two sons, William Schongalla, Jr., then about nineteen years of age, and Edward Schongalla, then about eighteen years of age. He was also survived by his mother, Minna Schongalla, then about eighty-five years of age.

In addition to life insurance policies aggregating more than $40,000, payable to beneficiaries other than his estate, there was in force at the time of decedent's death four life insurance policies upon his life, the proceeds of which were included in the gross estate of the decedent. An estate tax was levied over the protest of the executor for the recovery of which this action is brought.

Two of the four policies were issued by the Union Central Life Insurance Company on May 20, 1924, in the face amount of $30,000 each. These policies were identical in terms, except that William Schongalla, Jr., son of the decedent, was named as beneficiary in one, and Edward Schongalla another son, was named as beneficiary in the other.

These two policies were of the endowment type. Each provided upon the face thereof that upon the maturity date; to-wit: the 12th day of July, 1959, or, if the insured died prior to such maturity date, then the proceeds of the policy should be paid to the beneficiary, or to the executors, administrators or assigns of such beneficiary. Each policy expressly states upon its face that it is without privilege of change of beneficiary.

It was further provided in agreements attached thereto, signed by the decedent, that in the event of the death of the insured before the policies matured as endowments, then the proceeds should be retained by the insurance company; interest upon the principal sums should be paid in monthly installments to the named beneficiary until he reached the age of twenty-four years, when one-third of the principal sum should be paid to him; an additional one-third should be paid when he attained the age of thirty years, and the final one-third when he attained the age of thirty-five years; interest upon the retained balance to be paid monthly. It was also provided in the agreements "in the event I survive my said son, said net sum shall be paid my executors, administrators or assigns".

The other two policies were issued by the Metropolitan Life Insurance Company. One of them, dated October 20, 1903, was in the principal sum of $3,000, the beneficiary therein being the decedent's mother, Minna Schongalla, "if living, otherwise to the legal representatives of the insured". It appears to be conceded that the words "* * * no change of beneficiary" were endorsed thereon.

The other policy, dated October 10, 1892, was payable upon the death of the insured to "either the executor or administrator, husband or wife, or any relative by blood or lawful beneficiary of the insured". The proceeds of this particular policy at the time of decedent's death amounted to $112.19 and was paid to Minna Schongalla.

The Government contends that the proceeds of all four of the policies are taxable under the provisions of Section 302(c) of the Revenue Act of 1926 as amended, 26 U.S.C.A.Int.Rev.Code, § 811(c), by reason of the fact that the decedent retained or was possessed of an interest in each of the policies, since the proceeds of each of said policies would be received by him should he survive the respective beneficiaries.

Further, the Government contends that said proceeds are taxable under the provisions of Subdivision g, since the same constituted an excess of $40,000 receivable by beneficiaries other than the executor as insurance under policies taken out by the decedent upon his own life, since the deceased retained an interest therein which was terminable only at his death.

The plaintiff contends that the decedent possessed no incidents of ownership or interests in the policies either prior to or at the time of his death, and, therefore, there could be in his estate no taxable interest within the meaning and scope of either subdivisions of the Revenue Act.

The case has been exhaustingly briefed by the attorneys for both parties upon the theory that the decision involved only the determination of the question as to inclusion in the gross estate of the decedent the proceeds of insurance policies, each payable to a named beneficiary if he should survive the decedent; otherwise to his estate or assigns.

The question is referred to but not decided in Broderick v. Keefe, 1 Cir., 112 F.2d 293, and, as in that case, an examination of the policies themselves should be made in order to determine the interests, if any, of the decedent therein.

On May 9, 1924, the A. R. Hueuser Co., Inc., of which the decedent was president, sole stockholder and a director, applied to the Union Central Life Insurance Company for the issuance of insurance upon the life of decedent in the total amount of $200,000. Two policies were issued in the amounts of $80,000 and $40,000, to be payable to Anna Schongalla, wife of the decedent, as beneficiary; a policy in the amount of $20,000 to be payable to Minna Schongalla, mother of decedent, as beneficiary; a policy in the amount of $30,000 to be payable to Edward R. Schongalla, a son, as beneficiary, and a policy in the amount of $30,000 to be payable to William Schongalla, Jr., a son, as beneficiary.

The application was signed by the corporation, by the decedent as president.

The question of inclusion of the proceeds of the last two mentioned policies in the gross estate of the decedent is to be determined in this action.

The policies purport to be signed by the insurance company at the City of Cincinnati, Ohio, on May 20, 1924, and the stipulated facts and briefs assume that that date was the effective date thereof.

The policies provided in Paragraphs 34, 35, 36 and 37 that the owner of the policy by written notice to the company at its home office may elect to have the sum payable under each policy payable in one of three ways, which are described as "Option 1", in Paragraph 35; "Option 2" in Paragraph 36 and "Option 3" in Paragraph 37. The insurance company agreed to furnish a form of the written notice above referred to upon request.

On May 20, 1924, the date of the issuance of the policies, the decedent, as the insured, indicated on a form furnished by the insurance company a notice of change of beneficiary, and election of settlement option in the event of the death of the insured. This agreement is attached to and became part of each policy, and it is in this agreement that the words "In the event I survive my said sons, said net sum shall be paid to the executors, administrators or assigns" appear, and a further limitation is provided therein to the effect that the benefits accruing to any beneficiary thereunder shall not be transferable, or subject to commutation or incumbrance, or to legal process.

Paragraph 33 of the policies provides that none of the terms thereof shall be modified, save by an agreement in writing, signed by certain officers of the insurance company. The agreements indicate that they were accepted by the insurance company at its home office in Cincinnati, Ohio, on the 8th day of September, 1924, and they bear at least the signature of one of the officers provided for in Paragraph 33.

An examination of the Metropolitan Life Insurance Company policy, dated October 20, 1903, discloses that after the premiums thereon had been paid for three or more years, the company will grant, as the insured or assured may elect, one of the following options: (a) a loan; (b) the cash surrender value; (c) a paid-up policy.

The second Metropolitan Life Insurance Company policy, dated October 10, 1892, was of the so-called "industrial" type. No named beneficiary was designated therein. It provided for a weekly premium payment, and contains a so-called "facility of payment" clause permitting payment by the company of the proceeds of the policy to either the executor or administrator, husband or wife, or any relative by blood or lawful beneficiary of the insured.

In addition, this policy provides that after it had been in force five years, and after the insured shall have reached the age of eighteen years, the insured might make written application upon blanks furnished by the insurance company. The company would then issue a paid-up term policy payable to the estate of the insured.

The Union Central policies above described present an unusual situation. As originally issued, the proceeds thereof could not be included in the gross estate of the decedent for tax purposes. Chase National Bank v. United States, 278 U.S. 327, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388; Treasury Regulations 80, Article 27.

The agreement attached to each policy, accepted almost four months after the policy was originally issued, causes the difficulty here. It is noted that although the agreement is dated the same as the policy, it evidently was actually signed by the decedent after the actual issuance of the policy, inasmuch as it contains the policy number. It may well be that the agreement was post-dated with the idea...