Schultz v. Commissioner of Internal Revenue, Docket No. 81060.

• Decision Date: 13 July 1938
• Docket Number: Docket No. 81060.
• Parties: HARIOT REYNOLDS SCHULTZ, ET AL., EXECUTRICES OF THE ESTATE OF MARIE B. REYNOLDS, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

38 B.T.A. 59 (1938)

HARIOT REYNOLDS SCHULTZ, ET AL., EXECUTRICES OF THE ESTATE OF MARIE B. REYNOLDS, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 81060.

Board of Tax Appeals.

Promulgated July 13, 1938.

John A. Selby, Esq., for the petitioners.

John W. Smith, Esq., for the respondent.

This proceeding involves a deficiency in estate tax determined by the respondent in the amount of $36,782.79. The only issue presented is whether the respondent erred in including in the decedent's gross estate the sum of $300,000 representing his determined value of two annuity contracts.

FINDINGS OF FACT.

The decedent, Marie B. Reynolds, died on March 5, 1933. She was a citizen of the United States and a resident of the State of New York. The petitioners are the duly appointed executrices of her last will and testament.

On March 8, 1928, decedent and her daughter, Martha Reynolds Knight, each filed application with the Sun Life Assurance Co. of Canada, sometimes referred to as Sun Life, through its office in Jersey City, New Jersey, for the issuance of an annuity contract which would provide for the payment of an annuity to Marie B. Reynolds, if living, otherwise to Martha Reynolds Knight, and for the payment of a death benefit upon the death of the survivor of Marie B. Reynolds and Martha Reynolds Knight "to children of Martha R. Knight, equally, otherwise to Hariot R. Schultz, if living, otherwise to her children if any, equally, otherwise to estate of Marie B. Reynolds." The amount of the death benefit applied for was $150,000 and the premium payable to Sun Life $157,500. June 8, 1928, was fixed as the date of the first annuity payment. The application stated that Martha Reynolds Knight was married and that her age at her nearest birthday was 30 years. As to the decedent, the application stated that she was a widow and that her age at her nearest birthday was 60. The answer "No" was given to the question, "Is the right reserved to change the beneficiary at any time providing the policy has not been assigned?"

In accordance with the above applications and in consideration of the payment of the premium in the sum of $157,500, which amount was paid by the decedent, the Sun Life on March 10, 1928, issued a "Joint Life and Last Survivor Annuity with Principal Sum Payable at Death of Survivor" contract. Under the terms of the contract the company agreed to pay to the decedent, or in the event of her death, to Martha Reynolds Knight, the sum of $1,312.50 on June 8, 1928, "if either of the said annuitants be then alive and a like quarter-yearly payment on the eighth days of September, December, March, and June, in each year thereafter, during the subsequent joint lifetime of the said annuitants and during the lifetime of the survivor * * *." The company also agreed to pay on the receipt of proof of death of the survivor of the annuitants the sum of $150,000, or a sum equal to the premium less the annuity payments already made, whichever was the greater, "to the then surviving lawful children, if any, of the said Martha Reynolds Knight share and share alike, otherwise to Hariot Reynolds Schultz, daughter of the said Marie B. Reynolds, or in the event of her prior death, then to the then surviving lawful children, if any, of the said Hariot Reynolds Schultz share and share alike, otherwise to the executors, administrators or assigns of the said Marie B. Reynolds."

Under the title "Participation in Profits" the contract provided that all annuity payments, including the proportionate payment on the death of the survivor of the annuitants should be increased by such dividends as might be allotted by the company out of its surplus interest earnings. It was also provided that all amounts payable or receivable under the contract should be paid at the office of the Sun Life in Jersey City and in the lawful currency of the United States.

In lieu of the payment in one sum of the amount payable at the death of the survivor of the annuitants, the contract prescribed alternative methods of settlement which might by election be substituted for the lump sum payment. By the terms of that provision of the contract the election might be made by the "annuitants," "owner", the "beneficiary", or "payee" after the death of the survivor of the annuitants. Under the provisions mentioned the proper party might elect to leave the sum payable at death on deposit with Sun Life during the lifetime of the beneficiary or payee, bearing interest at the rate of 3½ percent per annum, or elect to convert the payment into a specified number of equal monthly installments. Under the monthly installment option, any installments not paid prior to the death of the beneficiary or payee were to be payable, unless otherwise provided, to the executors or administrators of the said beneficiary or payee.

The printed provisions of the contract contained in part the following "Privileges and Conditions":

II. — CASH VALUE. — This policy may be surrendered to the Company at any time, provided there is no legal restriction to the contrary, for an amount equal to the principal sum as set forth on the first page hereof.

The Company shall have the right to defer the payment of any surrender value of this policy for a period not exceeding ninety days from the date of the application therefor.

III. — LOANS. — The Company will advance to the annuitants upon proper assignment of this policy and on the sole security thereof, any amount not exceeding the cash value of the policy, as provided for in Privilege II above. The rate of interest shall be six per cent. per annum. This privilege is subject to the condition that there is no legal restriction to the contrary and that any indebtedness to the Company on this policy shall be deducted from the said loan. The Company may also collect interest in advance to the end of the current policy year, subject to a proper discount allowance. Failure to pay any such loan or the interest thereon shall not void the policy unless the total indebtedness shall equal or exceed such loan value at the time of such failure, nor until one month after notice shall have been mailed by the Company to the last known address of the annuitants and of the assignee, if any. The Company shall have the right to defer the granting of a loan hereon (except for the purpose of paying premiums on policies in the Company) for a period not exceeding ninety days from the date of the application therefor.

* * * * * * *

V. — DEDUCTION OF INDEBTEDNESS. — In any settlement hereunder any sum due to the Company in connection with this policy shall be deducted from the amount payable under this policy.

VI. — BASIS OF RESERVES. — The reserves under this policy are based upon the British Offices Select Life Annuity Tables, O__ (am) __and O__ (af)__, with interest at three and one-half per cent.

The contract contained no provision reserving to the decedent, or anyone, the right to change the beneficiaries.

Also on March 10, 1928, the decedent, with Hariot Reynolds Schultz, another daughter,...