Karagheusian v. Commissioner

Estate of Miran Karagheusian, Walter J. Corno, Leila Karagheusian, and Minot A. Crofoot, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent Karagheusian v. Commissioner Docket No. 47159 United States Tax Court 23 T.C. 806; 1955 U.S. Tax Ct. LEXIS 255; January 31, 1955, Filed *255 Decision will be entered under Rule 50. Decedent's wife applied for and received an insurance policy on decedent's life which she transferred in 1928 to a trust, together with certain securities. Both decedent and his wife subsequently made additional transfers of cash or securities to the trust. The income of the trust was to be used first for premiums on the insurance, the excess to be paid to the wife for her life. She had the right to alter, amend, or revoke the trust with the consent of the decedent and their daughter. On decedent's death in 1948 the insurance proceeds were paid to the trust. None of the securities originally contributed were then in the trust. Held: 1. Decedent had no incident of ownership in the policy at his death requiring inclusion of the insurance proceeds in his gross estate. 2. The insurance proceeds are includible only insofar as the trust income used to pay the premiums was attributable to trust assets contributed by decedent. 3. Decedent made no transfer of the policy in contemplation of death or otherwise. 4. The transfers by decedent to the trust are includible at a valuation based on a percentage of the total trust corpus exclusive*256 of the policy and proceeds at the date of decedent's death in proportion to his contributions to the trust corpus. Richard H. Appert, Esq., and Robert W. Martin, Esq., for the petitioners. Maurice E. Stark, Esq., for the respondent. Arundell, Judge. ARUNDELL *806 This proceeding is brought by the Estate of Miran Karagheusian, Walter J. Corno, Leila Karagheusian, and Minot A. Crofoot, Executors, hereinafter referred to as petitioners, to test the correctness of respondent's determination of a deficiency in the estate tax of the decedent in the amount of $ 32,974.81. *807 By amended petition, the petitioners seek a refund of $ 8,547.98. The questions for decision are as follows: 1. Whether and to what extent the proceeds of an insurance policy*257 on the life of decedent, applied for and placed in trust by decedent's wife, are includible in decedent's gross estate under section 811 (g) (2) (A) or (B) of the Internal Revenue Code of 1939. 2. Whether any part of the proceeds of that policy are includible as being derived from transfers in contemplation of death. 3. The proper valuation of certain transfers of cash and securities made to the trust by decedent where the securities were subsequently commingled with other trust assets by the trustee and ultimately sold or exchanged for other assets. Certain other questions raised in the deficiency notice are not contested and will be given effect under the Rule 50 computation. The stipulated facts are so found and incorporated herein by this reference. FINDINGS OF FACT. The petitioners are the duly appointed, qualified, and acting executors of the Estate of Miran Karagheusian, deceased. Decedent, Miran Karagheusian, died October 7, 1948, a resident of the State of New York. The estate tax return was timely filed with the collector of internal revenue for the third district of New York. A few weeks prior to December 22, 1927, the decedent submitted an application to the Equitable*258 Life Assurance Society of the United States, hereinafter referred to as Equitable, for an insurance policy on his life in the amount of $ 100,000. On December 22, 1927, decedent wrote to Equitable enclosing an application dated December 21, 1927, for an insurance policy on his life in the amount of $ 100,000 made by his wife, Zabelle Karagheusian, hereinafter sometimes referred to as Zabelle. In this letter decedent stated that the application by Zabelle was to take the place of the application he had made earlier, which was to be canceled by Equitable. On or about December 23, 1927, life insurance policy No. 4572102 in the face amount of $ 100,000 on the life of the decedent was issued by Equitable to Zabelle in accordance with her application. Under the date of April 2, 1928, Zabelle submitted a second application to Equitable requesting certain changes in the ownership provisions of the aforementioned policy. Pursuant to this application, the previously issued policy was surrendered and a rewritten policy was issued on April 20, 1928, under the same number, 4572102, and as of the same date, December 23, 1927, as the earlier policy. The register date of the rewritten policy *259 was November 18, 1927. The policy as issued in final form pursuant to the second application contained an ownership provision as follows: *808 It is hereby specially provided that the rights of Owner under the terms of this policy are vested in ZABELLE KARAGHEUSIAN, wife of MIRAN KARAGHEUSIAN, only during her lifetime. Upon the death of said ZABELLE KARAGHEUSIAN the said rights of Owner shall vest in LEILA KARAGHEUSIAN, daughter of MIRAN KARAGHEUSIAN, only during her lifetime. Upon the death of said LEILA KARAGHEUSIAN, subsequent to the death of said ZABELLE KARAGHEUSIAN, or if at the death of said ZABELLE KARAGHEUSIAN said LEILA KARAGHEUSIAN be not then living the said rights of Owner shall vest in MIRAN KARAGHEUSIAN, his executors, administrators or assigns. Any said person while vested with the rights of Owner may exercise any benefit under this policy, and may cancel this Special Provision by written notice filed at the Society's Home Office (which cancellation shall take effect only upon the endorsement of the same on the policy by the Society) and upon such cancellation all interest of any subsequent successive Owner in this policy shall cease and determine. The policy*260 also provided that it could be assigned by an instrument in writing filed at the home office of the insurance company. On or about June 13, 1928, Zabelle entered into a trust agreement with the Bankers Trust Company, a corporation organized under the banking laws of the State of New York. It was stated in the trust instrument that Zabelle desired to establish a trust of certain policies of insurance on the life of her husband and of the proceeds thereof and of certain other property and securities, all of which would be transferred to the Bankers Trust Company as trustee to have and hold subject to the terms of the trust. (The relationship created by this agreement of June 13, 1928, will hereinafter sometimes be referred to as the trust and the Bankers Trust Company will hereinafter sometimes be referred to as the trustee.) Zabelle Karagheusian, on or about June 13, 1928, transferred securities worth $ 190,120 to the trustee. On or about June 14, 1928, she executed and filed with the home office of the insurance company a form of absolute assignment of Equitable policy No. 4572102 to Bankers Trust Company as trustee under the agreement of June 13, 1928. By the terms of the trust*261 instrument, the trustee was directed during the lifetime of the decedent to pay from the income of the trust the premiums on the policies of insurance on decedent's life. To the extent that the trust income was insufficient to pay premiums, Zabelle Karagheusian agreed promptly to furnish cash to the trustee for that purpose. The trustee was also authorized at its sole option and for the purpose of obtaining funds with which to pay the premiums to sell the property or securities subject to the trust, to borrow on the insurance policies, or to exercise options for the automatic application of loan provisions to the payment of premiums. It was further provided that the trust income in excess of the amount needed to pay the insurance premiums was to be paid currently to Zabelle Karagheusian during her lifetime. After Zabelle's death the excess income was to be paid to Leila, the daughter, during her lifetime and after *809 the deaths of both Zabelle and Leila the principal of the trust was to go to decedent if he were still alive, and to a charitable foundation known as the Howard Karagheusian Commemorative Corporation if decedent were dead. The Howard Karagheusian Commemorative*262 Corporation was also the residuary legatee under decedent's will. The trust instrument also vested in the trustee full power of management and control over the insurance policy and certain powers over the other property and securities subject to the trust. The sale or exchange of any property or securities comprising the trust corpus, with the exception of the insurance policy, and the investment or reinvestment of any part or all of the trust corpus, excluding the insurance policy, might be made by the trustee subject to the direction and control of the decedent during his lifetime. Paragraph Twelfth of the trust instrument originally provided as follows: TWELFTH: Notwithstanding anything to the contrary herein contained, the Donor may from time to time during her life, by instrument in writing duly acknowledged and delivered to the Trustee, modify or alter in any manner or revoke in whole or in part this indenture and the trusts then existing and the estates and interests in property hereby created, provided that any such instrument by the Donor have the written consent, also duly acknowledged and lodged with the Trustee, either of the Donor's husband, Miran Karagheusian, or, *263 after his death, of the Donor's daughter, Leila. Upon the death of both husband and daughter, the Donor shall have no power to modify, alter or amend this indenture or the trusts then existing and the estates and interests in property hereby created, except from time to time to direct the payment of some or all of the principal, upon the Donor's death, to some or all of the descendants of Donor's daughter, Leila, as the Donor may desire, or, from time to time to cancel or modify such directions provided the principal be always payable to such descendants or some of them, and/or to the Howard Karagheusian Commemorative Corporation. After the death of the Donor, her daughter, Leila, may, by instrument in writing, duly acknowledged and delivered to the Trustee, modify or alter in any manner or revoke in whole or in part this indenture and the trusts then existing and the estates and interests in property hereby created, provided that any such instrument by the Donor's daughter, Leila, shall have the written consent, also, duly acknowledged and lodged with the Trustee, of the Donor's husband, Miran Karagheusian. After the death of both the Donor and her husband, Miran Karagheusian, *264 the Donor's daughter, Leila, shall have no power to modify, alter or amend this indenture, or the trusts then existing and the estates and interests in property hereby created, except to direct the payment of some or all of the principal upon the death of the Donor's daughter, Leila, to some or all of such daughter's descendants as such daughter may desire or from time to time to cancel or modify such directions provided the principal be always payable to such descendants or some of them and/or to the Howard Karagheusian Commemorative Corporation. On or about June 4, 1932, that portion of paragraph Twelfth of the trust agreement set out above which provided that any instrument executed by Zabelle altering, amending, or revoking the trust *810 agreement must have the written consent either of the decedent or, after his death, of their daughter Leila, was amended to require the consent of both decedent and Leila or of the survivor. On or about June 15, 1934, the trust agreement was further amended in regard to certain investment powers of the trustee following the death of the decedent. Subsequent to June 13, 1928, both Zabelle and the decedent from time to time made transfers of*265 cash and securities in the total amount of $ 207,552.68 to the trust and no transfers were made to the trust by any other person. The total value of assets other than the insurance policy transferred by the decedent and by Zabelle as the original corpus or as additions to the corpus of the trust was $ 397,672.68. On November 13, 1928, Zabelle, in order to make available the amount necessary to pay the premium on policy No. 4572102, transferred to the trust $ 2,874.27, which was credited to the income account. In addition, Zabelle transferred to the trust in 1931 and 1933 a total of $ 122.32, which was credited to the income account to cover an accrued dividend, payable upon purchase of stock, and accrued interest, payable upon the purchase of United States notes. The total value of assets other than the insurance policy transferred by Zabelle to the original corpus or as additions to the corpus of the trust was $ 294,208.93 or 73.9827 per cent of the total. The assets transferred by the decedent to the trust were all transferred between December 5, 1928, and March 27, 1931, and consisted of cash or securities having a total value as of the respective dates of transfer of $ 103,660.14. *266 Of this amount, $ 103,463.75 constituted additions to corpus and amounted to 26.0173 per cent of the total amount of cash and securities transferred to the trust corpus by decedent and Zabelle. The remaining $ 196.39 was accrued interest on transferred bonds which was credited to the income account. The earnings attributable to principal transferred to the trust by Zabelle were, except in 1928 when she transferred $ 2,874.27 to the trust to complete the amount necessary to pay the premium on the policy, always sufficient to meet all premiums paid on the policy by the trustee. The insurance premiums paid by the trustee were net premiums after application of policy dividends and were reduced progressively from $ 5,535 to $ 3,930 in 1947. No premium was paid in 1948. On October 7, 1948, the date of decedent's death, the trustee held cash and securities in the amount of $ 347,909.70. On decedent's death, the proceeds of the life insurance policy in the amount of $ 101,656 became payable and were subsequently paid to the trustee under the trust agreement of June 13, 1928, as amended. *811 The securities originally transferred to the trust by the decedent were not held by the *267 trust at the time of decedent's death and the proceeds of the securities were not segregated from other assets of the trust. Decedent had a contingent remainder interest in the trust subsequent to January 10, 1941, greater than 5 per cent of the value of the trust. During the years 1926 to 1931, decedent transferred to his wife securities in a total amount of over $ 840,000. During the years from 1924 to 1931, decedent transferred to Zabelle $ 64,000 in cash. The respondent included the transfers made by the decedent to the trust in the gross estate of decedent at a value of $ 107,925 based on his findings of the market value as of October 7, 1948, of the specific securities originally transferred by the decedent. OPINION. More than 20 years prior to decedent's death, his wife, Zabelle, applied for and received an insurance policy in the face amount of $ 100,000 on the life of decedent. Shortly after receiving the policy, she assigned it, along with certain securities, to a trust set up for the express purpose of holding the policy, its proceeds, and other property. The trust agreement as subsequently amended provided for its amendment, alteration, or revocation by Zabelle during*268 her lifetime but only with the consent of both the decedent and his daughter, Leila. The primary question for decision herein is whether the entire proceeds of the policy paid to the trustee subsequent to decedent's death are includible in the gross estate of decedent within the meaning of section 811 (g) (2) (B) of the Internal Revenue Code of 1939. 1 *269 Respondent's basic position is that the provision in the trust instrument that decedent must consent to any amendment, alteration, or revocation of the trust vested in decedent an incident of ownership in the policy requiring the inclusion of the full proceeds in his gross estate. We think the respondent is in error on this point. By the terms of the statute, the incident of ownership must be with respect to the life insurance policy. In the case before us, the policy *812 was assigned to the trustee. The second paragraph of the trust instrument provided as follows: SECOND: Upon the actual assignment or making payable of the policies to the Trustee, the Trustee is thereupon invested with all right, title and interest in and to the policies, and is authorized to exercise and enjoy all options, rights and privileges therein and beneficial interests thereunder, as fully and effectually as the Donor might have done. The insurance companies are hereby authorized and directed to recognize the Trustee as fully entitled to all options, rights, privileges and interests under the policies and any receipts, releases and other instruments executed by the Trustee in connection with *270 said policies shall be binding and conclusive upon the insurance companies and upon all persons and corporations interested in the trust. Without regard to the nature of decedent's powers, then, they clearly extended only to the trust and not to the policy as required by the statute. In this respect, the case differs from Estate of Myron Selznick, 15 T. C. 716, affirmed per curiam 195 F. 2d 735, and Godfrey v. Smyth, 87 F. Supp. 982, affirmed per curiam 180 F. 2d 220. In both of those cases the decedent had specific powers over the policies themselves. 2 Moreover, the cases cited by respondent dealt with situations wherein the policy was originally owned by a decedent whose estate was taxed by reason of some string of ownership retained by him. See Estate of Myron Selznick, supra,Godfrey v. Smyth, supra. *271 Here, the policy was applied for by decedent's wife and issued to her. At no time was decedent an owner of the policy. Respondent argues, alternatively, that if the proceeds of the policy are not includible in decedent's gross estate under the incidents of ownership test, they are includible in full under section 811 (g) (2) (A) 3 of the Internal Revenue Code of 1939 as the proceeds of insurance, the premiums of which were paid indirectly by the decedent. His first theory in support of that contention is that since the decedent's contributions to the trust, all of which were made between 1928 and 1931, exceeded the total premiums paid by the trustee during the life of the policy from 1928 to 1948, we should attribute all of the premiums to the assets contributed to the trust by decedent and the income attributable to those assets without regard to the assets contributed by Zabelle and the income therefrom. Respondent cites no authority for this position and we find it without merit. *272 *813 The petitioners assert, on the other hand, that none of the premiums paid by the trustee are attributable to decedent. They stress the fact that the assets contributed to the trust by Zabelle produced sufficient income to meet all of the premiums except in 1928 when she made up a deficiency of $ 2,874.27 in the amount available for payment of the premium then due. Petitioners ask us to assume, therefore, that decedent's transfers to the trust were intended by decedent to increase the income to the life beneficiaries of the trust and not to increase the earnings available for insurance premiums. Such an assumption is clearly unwarranted. At the times of the transfers to the trust by decedent, he could not have foreseen nor predicted with any degree of certainty what the income of the trust would be for the balance of his life. Changing economic conditions might have reduced the trust income to a nominal amount leaving premiums unpaid and causing the lapse of the policy. Under such circumstances, the only reasonable inference is that the contributions to the trust by decedent were intended to further the general purposes of the trust, including the maintenance of the*273 insurance policy. Moreover, there is nothing to indicate that the trustee in administering the trust made any attempt to segregate the income according to the donor of the income-producing asset. The securities originally transferred to the trust were sold from time to time without regard to the donor and the proceeds were invested in other income-producing securities. The trustee's first duty as enumerated in the trust instrument was to pay the premiums on the policy from the income of the trust insofar as that was possible and this the trustee did without regard to the origin of the income. We think, therefore, that it is reasonable to consider the premium for each year allocable between decedent and Zabelle in proportion to their respective contributions to the trust corpus as of that year. 4 In the ratio that the premium payments, so attributed to decedent, bear to the total premiums paid, the proceeds of the policy are includible in the gross estate of decedent under section 811 (g) (2) (A). *274 We think there is no merit in respondent's alternative theory that the entire proceeds of the insurance policy are includible in decedent's gross estate under the payment-of-premiums test even though a portion of the trust income used to pay the premiums is attributed to assets transferred to the trust by Zabelle. Respondent contends that since decedent transferred large amounts of cash and securities to Zabelle before and after the creation of the trust, those transfers to Zabelle were intended by decedent to be used for the purchase of the insurance on his life and that premiums paid from such transfers or the income therefrom would be indirectly paid by the decedent. Not *814 only does the record fail to disclose any support for a finding of such an intention on the part of the decedent, but the evidence indicates the absence of any such intent. We note that the transfers from decedent to his wife began several years before the creation of the trust and amounted to several times the amount placed in trust by Zabelle. In his answer to the amended petition, respondent for the first time asserted that the life insurance proceeds are includible in full on the ground that they*275 were derived from a transfer in contemplation of death. Section 811 (c) (1) (A) of the Internal Revenue Code of 1939 provides for the inclusion of property "To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise -- (A) in contemplation of his death * * *." Respondent contends on brief that the burden of proof as to this issue is on petitioner. In support of that contention he suggests that the contemplation-of-death theory is merely an alternative contention and not a new matter affirmatively pleaded by respondent. The authorities are clearly opposed to this view and plainly state that the burden of proving contemplation of death in such circumstances is on the respondent. Estate of Nathalie Koussevitsky, 5 T. C. 650; Constance McCormick, 38 B. T. A. 308; Security-First National Bank of Los Angeles, Executor, 36 B. T. A. 633. Respondent has not met that burden of proof. The facts show that the insurance policy was applied for*276 by Zabelle, issued to her, and transferred by her to the trustee. Decedent, never having owned the policy, could not and did not make any transfer of it in contemplation of death or otherwise. The cases of Estate of Paul Garrett, 8 T. C. 492, and Estate of Charles I. Aaron, 21 T. C. 377, cited by respondent, involve situations where the decedent owned insurance policies and transferred them in trust. Those cases, therefore, are not in point. An additional issue is raised as to the valuation for estate tax purposes of the transfers of cash and securities to the trust by decedent. Petitioners do not contest their includibility under section 811(d) of the Internal Revenue Code of 1939 as transfers, the enjoyment of which was subject at the date of decedent's death to change through the exercise of a power by the decedent in conjunction with another person to alter, amend, or revoke. Respondent has included them at a value of $ 107,925, based on his findings of the market value at the date of decedent's death of the specific securities originally transferred to the trust by decedent. Petitioners attack this method of valuation*277 and we agree that it is unreasonable. None of the securities transferred by decedent remained in the trust at his death, nor was any effort ever made by the trustee to segregate those assets from the assets contributed by Zabelle. The *815 commingled assets representing the trust corpus were apparently sold and exchanged for other assets over the years as the exigencies of the economic situation required. The assets in the trust at the time of decedent's death were in effect substituted for the assets originally contributed by decedent and Zabelle. We are not dealing here with transfers made in contemplation of death or transfers where there is a complete, definitive disposition of the property at the time of the transfer. The basis of the inclusion of the transfers in trust in the instant case rests on the fact that at the date of decedent's death there remained in him a power, in conjunction with another person, to alter, amend, or revoke the trust. This power which the decedent had was not a power over the property that he originally transferred but a power over the property that was in the trust at the time of his death. A similar question was before us in the case *278 of the Estate of Daniel Guggenheim, 40 B. T. A. 181, wherein it was held that the value of the property in the trust at the time of decedent's death was the value which was to be included in determining the amount of his gross estate even though a part of the property transferred was then represented by substituted assets. The above-cited case was affirmed and modified in part in Guggenheim v. Helvering, 117 F. 2d 469, but not on this point. The record before us discloses that decedent contributed 26.073 per cent of the total amount of cash and securities transferred to the trust corpus by decedent and Zabelle. We agree with petitioners, for the reasons stated above, that there should be included in decedent's gross estate 26.073 per cent of the cash and securities in the trust on the date of decedent's death. Decision will be entered under Rule 50. Footnotes 1. SEC. 811. GROSS ESTATE. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States -- * * * * (g) Proceeds of Life Insurance. -- * * * * (2) Receivable by other beneficiaries. -- To the extent of the amount receivable by all other beneficiaries as insurance under policies upon the life of the decedent * * * (B) with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person.↩ 2. A more recent case, Estate of Louis Goldstein v. United States, 122 F. Supp. 677, decided by the Court of Claims July 13, 1954, and not called to our attention by either party, is distinguishable on the same ground, since the consent of the decedent therein was required for changes of beneficiary or other changes or amendments of the policy↩ during his lifetime. 3. (g) Proceeds of Life Insurance. -- * * * * (2) Receivable by other beneficiaries. -- To the extent of the amount receivable by all other beneficiaries as insurance under policies upon the life of the decedent (A) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance * * *↩ 4. The detailed data from which this computation may be made appears in the stipulation of facts submitted by the parties.↩