Schongalla v. Hickey

• Decision Date: 02 May 1945
• Docket Number: No. 221.,221.
• Citation: 149 F.2d 687
• Parties: SCHONGALLA v. HICKEY, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Second Circuit

149 F.2d 687 (1945)

SCHONGALLA v. HICKEY, Collector of Internal Revenue.

No. 221.

Circuit Court of Appeals, Second Circuit.

May 2, 1945.

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

Samuel O. Clark, Jr. Asst. Atty. Gen., Sewall Key, A. F. Prescott, Leon F. Cooper, and Newton K. Fox, Sp. Assts. to Atty. Gen., and Irving J. Higbee, U. S. Atty., of Syracuse, N. Y., for appellee.

Before SWAN, CHASE, and FRANK, Circuit Judges.

SWAN, Circuit Judge.

Decision of this appeal turns on whether or not the proceeds of four life insurance policies upon the life of William Schongalla, who died January 12, 1938, should be included in his gross estate for estate tax purposes under section 302(g) of the Revenue Act of 1926 as amended, Int.Rev.Code § 811(g), 26 U.S.C.A. Int.Rev.Code, § 811 (g), and the applicable Treasury Regulations, 80 Treas.Reg. Arts. 25, 27. The executrix of the insured paid an additional estate tax based on the inclusion of such proceeds in the estate. Her claim for refund thereof having been disallowed she brought this action and from an adverse judgment has appealed.

In addition to other life insurance policies, aggregating more than $40,000, payable to beneficiaries other than the insured's estate, there were in force at the time of his death the four policies involved in this litigation. Two of them were issued by Union Central Life Insurance Company and it is with respect to them that the main controversy arises. They were dated May 20, 1924 and were identical in terms except that one named as the beneficiary the insured's son William, Jr. and the other his son Edward. These boys were then only five and four years of age, respectively. They both survived their father and were still minors at the date of his death. As originally issued each policy called for the payment of $30,000 to the named beneficiary, his administrators, executors, or assigns, on the endowment date, July 12, 1949, or on receipt of proof of the death of the insured during the continuance of the policy. On the face of the policy was the provision: "This policy is without privilege of change of beneficiary"; and paragraph 28 of the policy read as follows:

"28. Change of Beneficiary. Unless it is stated on the first page hereof that the policy is without privilege of change of beneficiary the insured, without the consent of any beneficiary, may exercise every right and receive every benefit reserved to the insured, or the owner of the policy, or agree with the Company to any change in or amendment to the policy, and shall have the right at any time to change the beneficiary by written notice to the Company at the Home Office, for which a form will be furnished on request."

If there had been no mistake in issuing the policies in this form, it is clear that their proceeds could not have been included in the decedent's gross estate, since he had retained no interest in or control over the insurance the termination of which by his death could operate as an effective transfer. Pennsylvania Co. v. Commissioner, 3 Cir., 79 F.2d 295, certiorari denied Helvering v. Pennsylvania Co., 296 U.S. 651, 56 S.Ct. 310, 80 L.Ed. 463; see Chase Nat. Bank v. United States, 278 U.S. 327, 338, 49 S. Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388. But there was a mistake which the insured and the insurer attempted to correct by attaching to each policy a rider "agreement" dated May 20, 1924 but not accepted by the insurance company until September 8, 1924. This rider, signed by the insured, reads: "I hereby give notice of change of beneficiary and election of settlement option under the above described policy and request payment of the net sum payable under the said policy in the event of the death of the insured as follows: * * *" There follow provisions for retention of the net sum by the company and for the payment at specified times of the interest thereon and the principal thereof to the son. The final paragraphs of the rider read as follows:

"In the event my said son survives me but dies before attaining the age of thirty-five years, the amount due at his death shall be paid to his executors, administrators, or assigns.

"In the event I survive my said son, said net sum shall be paid to my executors, administrators, or assigns.

"Except as hereinbefore provided, no benefit accruing to any beneficiary under this agreement shall be transferable, or subject to commutation or encumbrance, or to legal process."

The appellant contends, as point one, that the rider agreement is not a legally operative part of the policy, because the infant beneficiaries did not, and could not, consent thereto; and, as point two, that even if the rider is legally operative the proceeds of the policy are not includible in the insured's estate because at the time of his death the insured did not possess any incidents of ownership in the policy.

The facts regarding issuance of the policy and the addition of the rider were found by the district judge as follows: The two Union Central Life Insurance policies were purchased by the insured in furtherance and as a part of a comprehensive general insurance trust fund plan then being arranged to meet his requirements. The policies were issued in their original form at the instance of the writing agent of the company, because he realized that the insurance company would not issue a policy containing the language necessary to cover the insured's "trust fund plan", which was known to and well understood by the agent, and it was intended to have settlement option papers covering such plan after the policy was issued and accepted, which, in order to express the full intention of the insured, the company's agent knew would require additional agreements relating to the settlement option to be prepared, signed by the insured, and accepted by the company. This could only be accomplished legally if the right to change the beneficiary had been reserved. The writing agent of the company knew the wishes of the insured and chose the procedure to be followed to give effect thereto; he intended to have the insurance contracts prepared and delivered, and further intended to amend them by making substantial changes therein. The insured had knowledge of the procedure used, for he was a party to it. When the policies were issued and delivered, the insured had the option of accepting or rejecting them. He accepted them. After the issuance of the policies, and in order to conform them to his wishes and insurance plan, the insured attempted to exercise the right given to the owner of the policy (under paragraph 34) to elect a "Settlement Option" by executing the rider agreements already described.¹ The agreements are dated May 20, 1924, and are signed by the insured; they were accepted by the insurance company, by the signature of an assistant secretary, on September 8, 1924. Since the death of the insured, payments of the proceeds of each of the policies have been, and are being, made in accordance with these agreements.

Although the trial court's findings of fact do not expressly state that the reservation of the privilege to change the beneficiary was omitted by mistake from the policies as originally issued, his opinion on reargument says that "The erroneous form of the application may have been the fault of the writing agent." And the mistake is clearly conceded in the letter of Charles B. Knight, General Manager of the insurer, which was received in evidence by stipulation as supplementing the agreed facts.² Such mistake gave the insured the right to obtain reformation of the policy to conform it to the actual contract of insurance. As Mr. Justice Miller said in Williams v. North German Ins. Co., C. C. Iowa, 24 F. 625, 626:

"* * * Where an instrument fails to represent what both parties intended to have it represent, and one party had drawn up the instrument, and the other party merely accepted it, and the fault was on the part of the party drawing up the instrument, it can be reformed. It would be a harsh rule if a person applying to an insurance agent, who is supposed to know the legal value of the language used in such policies, which he is drawing up every day, and who is supposed to know exactly what is desired, if that agent fails to do that which was intended, it would be harsh to say that the instrument shall not be reformed, and that chancery shall not give relief."

In Ulman v. Equitable Life Assurance Soc., 161 App.Div. 708, 146 N.Y.S. 696, appeal dismissed, 213 N.Y. 700, 108 N.E. 1110, the plaintiff intended an endowment policy payable to herself. By mistake of the agent and contrary to her instructions, the policy was made payable to her husband on the condition that he survive until 1921. The court reformed the contract so as to make the plaintiff sole beneficiary, as she had originally intended. In Goldsmith v. Union Mutual Life Ins. Co., 41 Hun 641, 18 Abb.N.C. 325, appeal dismissed 110 N.Y. 628, 17 N.E. 871, the insured brought an action to reform two insurance policies which read "for the sole and separate use and benefit of his wife, Lina Goldsmith; but in case of her previous death, to revert to the insured." The plaintiff asked the court to reform the contracts by inserting a proviso "that in case the said Lina Goldsmith should cease to be the wife of the plaintiff during his lifetime, and the marriage between...