Schwager v. Comm'r of Internal Revenue

• Decision Date: 04 August 1975
• Docket Number: Docket No. 1320-72.
• Citation: 64 T.C. 781
• Parties: ELEANOR M. SCHWAGER, TRANSFEREE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

64 T.C. 781

ELEANOR M. SCHWAGER, TRANSFEREE, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1320-72.

United States Tax Court

Filed August 4, 1975.

Robert M. Naiman and Joel S. Siegel, for the petitioner.

Paul G. Topolka, for the respondent.

1. Decedent's Federal estate tax return was filed Nov. 27, 1968, and initially accepted by the classifying officer in the District Director's office. The estate was sent an Estate Tax Closing Letter on Feb. 7, 1969. On June 2, 1970, an estate tax examiner contracted petitioner's counsel regarding an examination of the estate's return. This was the first contact with petitioner regarding an examination of the return. Held, (1) Rev. Proc. 68-28, 1968-2 C.B. 912, is not applicable because the case was not closed after examination; (2) the alleged failure to follow the reopening provisions did not curtail respondent's right to issue a statutory notice of transferee liability; and (3) the Estate Tax Closing Letter did not estop respondent from asserting transferee liability under these circumstances.

2. In 1957, New York Life Insurance issued a whole life (split-dollar) policy insuring the life of the decedent. His employer was named the owner of the policy. Upon death, the proceeds were paid to decedent's surviving spouse as beneficiary after deducting the cash surrender value and the outstanding policy loan. An amount equivalent to the cash surrender value less the policy loan was paid to decedent's employer. Pursuant to the terms of the policy, the employer could not change the beneficiary without the decedent's written consent. The policy also restricted the owner's rights regarding the assignment of the policy or interest therein. Held, the decedent possessed incidents of ownership in the policy exercisable in conjunction with his employer and, therefore, the proceeds of the policy are includable in the decedent's gross estate under sec. 2042(2), I.R.C. 1954.

GOFFE, Judge:

The Commissioner determined transferee liability against the petitioner for an estate tax deficiency of $2,176.98 in the estate of David G. Schwager, transferor.

Certain concessions have been made by the parties and will be given effect in the Rule 155 computation. Two issues, one procedural and one substantive, remain for our decision. We must decide whether or not the issuance of an Estate Tax Closing Letter on February 7, 1969, precluded the Commissioner from ‘reopening’ the case and determining a deficiency against the estate of David G. Schwager and whether or not the decedent retained any significant incidents of ownership in an insurance policy on his life requiring the proceeds of the policy to be included in his gross estate for estate tax purposes.

FINDINGS OF FACT

Most of the facts have been stipulated by the parties. The stipulation of facts and the exhibits attached thereto are incorporated by this reference.

Eleanor M. Schwager (hereinafter referred to as petitioner) resided in Chicago, Ill., at the time she filed her petition in this proceeding.

Petitioner's husband, David G. Schwager, died on August 27, 1967. Petitioner was appointed executrix of his estate.¹

In 1950, the petitioner's husband began working as an estimator for Davis & Kreeger Co., a sole proprietorship performing redecorating and painting services. The company was owned by petitioner's brother, Robert Zolla.

In 1957, the decedent, then 43 years of age, proposed that Davis & Kreeger Co. take some steps to ensure his financial security since the company did not have any pension plan then in force. In response to this request, the company applied for a policy of insurance on his life. On February 1, 1957, New York Life Insurance Co. issued its policy on the decedent's life. The applicant and owner of record was Davis & Kreeger Co. It was a split-dollar policy. Thus, there were two beneficiaries. There were two parts to the policy representing the amount to be paid and to whom it was to be paid. The record owner, Davis & Kreeger Co., was to receive the tabular cash value from part A. The balance, part B, was to be paid to the individual beneficiary— the decedent's wife (petitioner herein). In the event of her death prior to the insured's death, the contingent beneficiary was the decedent's son, Richard M. Shcwager.

On February 1, 1957, the issue date of the policy, an amendment was added thereto. The pertinent language of the amendment reads as follows:

MODIFICATION OF OWNER'S RIGHTS AND ASSIGNMENT PROVISIONS

In accordance with the applicant's written request, and notwithstanding anything in this policy to the contrary, part ‘B’ of the beneficiary designation under this policy may not be changed without the written consent of David G. Schwager and the assignment provisions of this policy are hereby modified to provide that the interest of any beneficiary named in part ‘B’ of the beneficiary designation under this policy shall not be subordinate to the interest of any assignee, may not be assigned by the owner, and any assignment of the policy or of any interest therein shall be deemed not to constitute a change of beneficiary thereof. In all other respects, the ownership of policy provision on page 2 of this policy will apply.

I further request that said policy be written with the following designation of beneficiary.

‘A’ Davis & Kreeger Co., to the extent of an amount equal to the tabular cash value as of the date to which premiums have fallen due and been paid at the time of the insured's death, determined in accordance with the table of cash, loan and non-forfeiture values herein, less any indebtedness, provided, however, that if any premiums for this policy are waived in accordance with its waiver of premium benefit provisions, the interest of Davis & Kreeger Co. as beneficiary hereunder shall be decreased by the amount of the increase in the tabular cash value during the period for which premiums were waived: and

‘B’ Eleanor M. Schwager, wife of the insured; or, if she shall die before the insured, Richard M. Schwager, son of the insured to the extent of any death benefit proceeds remaining after payment to Davis & Kreeger Co., of its share of such proceeds as stipulated in ‘A’ above. Notwithstanding anything in this policy to the contrary, part ‘B’ of this designation of beneficiary may not be changed without the written consent of the insured.

The annual premium for this policy was paid in each instance by Davis & Kreeger Co. except for the premiums due in 1966 and 1967. These were paid by means of the automatic premium loan provisions of the policy.

After the death of the petitioner's husband and after payment of the outstanding loans and credit for certain adjustments and dividends, there remained $19,307.94 available for distribution. The proceeds were distributed by the New York Life Insurance Co. as follows:

+-----------------------------------------------------------------------------+
                ¦(1)¦Tabular cash value                                   ¦$4,900.00¦         ¦
                +---+-----------------------------------------------------+---------+---------¦
                ¦   ¦Less: Indebtedness to New York Life Insurance Co.    ¦1,050.63 ¦         ¦
                +---+-----------------------------------------------------+---------+---------¦
                ¦   ¦Interest on indebtedness                             ¦25.17    ¦         ¦
                +---+-----------------------------------------------------+---------+---------¦
                ¦   ¦                                                     ¦         ¦         ¦
                +---+-----------------------------------------------------+---------+---------¦
                ¦   ¦Davis & Kreeger Co. Net tabular cash value           ¦         ¦$3,824.20¦
                ¦   ¦(beneficiary—part A)                                 ¦         ¦         ¦
                +---+-----------------------------------------------------+---------+---------¦
                ¦(2)¦Eleanor M. Schwager—remainder of face amount         ¦         ¦15,483.74¦
                ¦   ¦(beneficiary—part B)                                 ¦         ¦         ¦
                +---------------------------------------------------------+---------+---------¦
                ¦Total proceeds paid out                                  ¦         ¦19,307.94¦
                +-----------------------------------------------------------------------------+
                

Petitioner, as the executrix of her husband's estate, timely filed a Federal Estate Tax Return (Form 706) with the District Director of Internal Revenue at Chicago, Ill., on November 27, 1968.

The return, in Schedule D, listed sever insurance policies on the life of the decedent, all of which named petitioner as beneficiary. These policies had a total declared value of $27,161.84. Schedule D disclosed the existence of insurance on the decedent's life not included in the return as part of the gross estate in this manner:

The following policy on the decedent's life is not included herein as part of the gross estate because all incidents of ownership were vested in Davis & Kreeger Co., the decedent's employer:

New York Life Insurance Co. #25938006, face amount $20,000 Beneficiaries: Davis & Kreeger Co., employer, and Eleanor M. Schwager, wife.

Approximately 3 weeks after filing the estate tax return, the petitioner sent a letter dated December 16, 1968, to the Internal Revenue Service office at which the return had been filed. The letter, received December 20, 1968, was for the purpose of amending the previously filed estate tax return. In it petitioner disclosed that two previously estimated expenses were then known. The result of the amendment was to increase the net taxable estate. This caused an increase of $57.80 in tax due— from $11,529.66 to $11,587.46. Interest of 29 cents was added by petitioner bringing to $58.09 the amount sent to the District Director.

The return was accepted as filed by a classifying officer and forwarded to the audit service branch for the issuance of an Estate Tax Closing Letter (Form L-154).

In February 1969, the estate received the Estate Tax Closing Letter which showed a net estate tax of $11,529.66....