Thieriot v. Commissioner

Estate of Charles H. Thieriot, Frances T. Thieriot, as Executrix, and Charles H. Thieriot, Jr., as Executor, Petitioners, v. Commissioner of Internal Revenue, Respondent Thieriot v. Commissioner Docket No. 8573 United States Tax Court 7 T.C. 769; 1946 U.S. Tax Ct. LEXIS 79; September 19, 1946, Promulgated *79 Decision will be entered for the respondent. 1. Where a certificate of overassessment was issued by the Commissioner, but no final statutory closing agreement was entered into between the Treasury Department and taxpayer, the Commissioner was not estopped from reopening the case within the statutory period and making such adjustments to income as he deemed proper. 2. Decedent took out a policy of insurance on his own life, naming his wife the life beneficiary and death beneficiary if she survived the insured. The life beneficiary had the right to borrow money on the policy, to receive the cash or surrender value, and to change the beneficiary. The policy provided that if the death beneficiary did not survive the insured the proceeds were to be paid to the executors, administrators, and assigns of the insured. This provision was in effect at the decedent's death. Held, the proceeds of insurance in excess of $ 40,000 are includible in decedent's gross estate under section 811 (g) of the Internal Revenue Code. Helvering v. Hallock, 309 U.S. 106; Goldstone v. United States (1945), 325 U.S. 687. Eugene L. Bondy, Esq., for the petitioners. J. Frost Walker, Jr., Esq., for the respondent. Harlan, Judge. HARLAN *769 This proceeding is for the redetermination of a deficiency in the Federal estate tax liability of the estate of Charles H. Thieriot, deceased, in the amount of $ 22,947.49. Petitioners claim an overpayment in the amount of $ 6,821.21. The notice of deficiency was dated March 26, 1945. Three questions are raised by the pleadings: 1. Were the proceeds of a certain policy of life insurance issued on the life of the*81 decedent by the Aetna Life Insurance Co., includible in the gross estate of the decedent, pursuant to the provisions of section 811 (g) of the Internal Revenue Code? 2. Was the value of a certain life insurance policy issued on the life of the decedent by the Aetna Life Insurance Co. includible in the gross estate of the decedent pursuant to the provisions of section 811 (c) of the Internal Revenue Code as a transfer intended to take effect in possession or enjoyment at or after death? 3. Was the Commissioner estopped from asserting the deficiency herein? The case was submitted on a stipulation of facts and documentary evidence admitted at the hearing. *770 FINDINGS OF FACT. Charles H. Thieriot, the decedent herein, and hereinafter referred to as such, a resident of Nassau County, Long Island, New York, died testate at 2:30 o'clock in the morning of January 10, 1941. His will was proved and admitted for administration in the Surrogate's Court of Nassau County on January 22, 1941. He was survived by his wife, Frances T. Thieriot, and two children, Charles H. Thieriot, Jr., and Lucille Thornton Thieriot Walker. The petitioners were appointed executors under the last will and *82 testament of Charles H. Thieriot, deceased, qualified as such, and have since January 22, 1941, been acting as such executors. They filed the said estate tax return for the estate of Charles H. Thieriot with the collector of internal revenue for the first district of New York on April 10, 1942. On January 9, 1922, the Aetna Life Insurance Co. issued insurance policy No. N 308890 upon the life of the decedent in the sum of $ 100,000. All premiums on this policy were paid by the decedent. As originally drawn the policy provided that the sum payable upon the death of the decedent should be paid to Frances T. Thieriot, wife of the insured, if she survived the insured, otherwise to the executors, administrators, or assigns of the insured. The policy provided for two types of beneficiaries, a so-called "death beneficiary" and a "life beneficiary." The death beneficiary was designated to receive all payments due from the insurance company resulting from the death of the insured. The life beneficiary was entitled to all the privileges granted by the policy, effective during the life of the insured. These privileges included the right to borrow money on the policy, to receive the cash or*83 surrender value thereof, and to change the designated beneficiary of the policy. By endorsement dated March 24, 1925, the death beneficiary clause was changed to read as follows: Death Beneficiary: Subject to any assignment hereof, the amount becoming due from the Company under this policy by reason of the death of the insured is hereby made payable to the insured's wife, Frances T. Thieriot, if she survives the insured and is living at the expiration of Forty-eight (48) hours after the death of the insured; otherwise to the children of the insured and the children of any deceased child of the insured who are then living, the children of the insured to share equally with each other and the children of any deceased child of the insured to take per stirpes the share such deceased child of the insured would have taken if living; if none of said beneficiaries is then living, to the executors, administrators or assigns of the insured. No change was made in the death beneficiary clause after March 24, 1925, and the endorsement as of that date was in force upon the death of the insured on January 10, 1941. *771 The life beneficiary clause as originally issued on January 9, 1922, *84 provided that the cash value or loan value should be payable to the life beneficiary, "Frances T. Thieriot, wife of the insured, if living when such value becomes payable, otherwise to the insured." By endorsement dated March 20, 1939, the life beneficiary clause was changed to read as follows: Life Beneficiary: Until the death of Frances T. Thieriot, wife of the insured, said wife shall be the life beneficiary. After the death of said wife and until the death of the survivor of Charles H. Thieriot, Jr., and Lucille Thornton Thieriot Walker, children of the insured, said children, jointly, or the survivor, shall be the life beneficiary. After the death of the last survivor of said wife and said children, the insured shall be the life beneficiary. The life beneficiary clause was not changed after March 20, 1939, and remained in force upon the death of the insured on January 10, 1941. The policy contained the following provision for change of beneficiary: Subject to any assignment hereof, the beneficiary of this policy may be changed as often as desired, and such change shall take effect on receipt at the Home Office of the Company, before the sum insured or any instalment thereof*85 becomes due, of a request signed by the life beneficiary accompanied with the policy for proper endorsement. The endorsements on the policy dated March 24, 1925, and March 20, 1939, respectively, as set out above were made upon the request signed in each case by the life beneficiary and the decedent. The annual premium on the policy was $ 2,653, payable January 9 in each and every year during the life of the insured. The amount paid the beneficiary on decedent's death was $ 97,347. The policy provided that after the payment of three full premiums the company would lend up to the cash value of the policy, but the request for such loan and the required assignment for that purpose could be executed by the life beneficiary alone. The policy also provided for automatic premium loans at the request of the life beneficiary, and "if requested by the life beneficiary" the policy could be surrendered to the company and converted into a paid up policy, payable at the death of the insured. It was further provided that upon request of the life beneficiary the policy might be surrendered by her and the company would pay to her the total cash value. The life beneficiary had the right to prescribe*86 the method of payment of the benefit under the policy and to assign it. If the insured became permanently disabled within the definition of the contract, the benefits provided for such event would be paid to him only on the request duly executed of the life beneficiary. In the estate tax return filed by the executors Aetna Life Insurance policy No. N 308890 was duly reported, but its proceeds in the *772 amount of $ 97,347 were not included in the gross estate of the decedent, the executors claiming that they were exempt. The Commissioner contested the executors' claim and took the position that the proceeds were to be included in the gross estate. After hearing and negotiations between the parties, the internal revenue agent in charge, Brooklyn, New York, sent the following letter, dated April 14, 1944, to the executor: Referring to the hearings had on the protest filed in the above named estate, there is enclosed a statement of the basis upon which it is proposed to adjust the tax liability of this estate. If you will signify acceptance, in writing, of the settlement as proposed, further consideration will be given with a view to a closing of this case on that basis. Form*87 1244, "Acceptance of Proposed Overassessment", is enclosed for your signature in the foregoing connection. The statement enclosed with the letter showed an overassessment of $ 3,047.84. On April 20, 1944, Frances T. Thieriot, as executrix, signed and delivered Treasury Department Form 1244, accepting the proposed determination and settlement of the Commissioner as indicated in the statement of April 14, 1944. The form, as executed, read as follows: The proposed determination of the following overassessment or overassessments of tax, as indicated in the statement furnished the undersigned under date of April 14, 1944 is hereby accepted as correct: Estate Tax. Estate of Charles H. Thieriot, deceased Amount of overassessment $ 3,047.84 This acceptance contemplates that when executors' commissions and attorneys' fees have been paid in full, the estate will file a claim for refund due to the tentative disallowance at this time of $ 3,526.23 of said commissions and $ 12,000.00 of said attorneys' fees, which were the respective balances remaining unpaid as of January 1st, 1944. The claim for refund to be hereafter filed will also cover appropriate additional deductions for expenses*88 of the estate accountant, including the final accounting, and such other incidental expenses as may be properly chargeable in the administration of the estate. On August 4, 1944, the Treasury Department issued its certificate of overassessment, showing a credit to the estate of $ 3,047.84. On February 23, 1945, petitioner filed a claim for refund in the amount of $ 6,821.21, setting forth reasons for the allowance of the increased claim as follows: The "Acceptance of Proposed Over-Assessment," dated April 20, 1944 -- upon the Estate of Charles H. Thieriot, deceased -- determined the Total Tax due as $ 459,528.89, and recognized an over-payment of $ 3,047.84, which was refunded on August 4, 1944, as stated above; the said "Acceptance", by its terms, contemplated an additional claim for refund based upon the deductible payments, aggregating $ 22,306.15, evidenced by the attached affidavit of S. Clive Greaves, dated February 14th, 1945, made a part hereof -- with the following results: *773 Tax already paid as assessed by Audit Certificate of August 4, [1944] $ 459,528.89 Total net Tax payable as re-assessed under this claim 452,707.68 Refund hereby claimed (with interest to be added) $ 6,821.21 *89 Petitioners' claim for refund was rejected by the Commissioner and the executors were notified of such rejection by letter, as follows: Reference is made to the claim on Form 843 filed on February 27, 1945, for the refund of $ 6,821.21 representing a portion of the Federal estate tax paid in the above-named estate. The claim seeks allowance as additional deductions of $ 3,526.23 for executors' commissions, $ 12,000.00 for attorneys' fees, and $ 6,779.92 for accountants' fees. Upon the merits, the estate is entitled to the deductions claimed. However, the claim opens up the entire case and the question arises as to the includibility for estate tax of policy No. N-308890, issued by the Aetna Life Insurance Company. Upon a consideration of the provisions of said policy it appears that the decedent had a contingent interest which gave him a legal incident of ownership, rendering the policy taxable within the meaning of section 811 (g) of the Internal Revenue Code. The inclusion of the policy at a value of $ 97,347.00 results in a deficiency of estate tax. Under the circumstances, and since there is in fact not an overassessment of estate tax but a deficiency in estate tax, the claim*90 filed on February 27, 1945, for the refund of $ 6,821.21 is rejected in its entirety. OPINION. The petitioners allege in the petition that the respondent is estopped from including in gross estate the proceeds from the Aetna Life Insurance policy in the amount of $ 97,347 because of a claimed settlement agreement entered into in 1944, on the faith of which they distributed assets and changed their position to their detriment. On brief they contend that the respondent erred in asserting the deficiency in question after the executors had agreed to adjust the tax liability of the estate on the basis of an overassessment in the amount of $ 3,047.84 and certain expenses of administration to be paid thereafter, and the Commissioner had issued a certificate of overassessment in the amount of $ 3,047.84, which amount was arrived at by excluding proceeds of insurance in the amount of $ 97,347. We have examined all the facts in the record and we find nothing to warrant an estoppel. The petitioners admit that section 3760 of the Internal Revenue Code specifically provides for a formal method of arriving at a final closing agreement and that such a method was not adopted here. The fact that*91 petitioners chose to regard the certificate of overassessment as a final settlement agreement does not bring it within the terms of the statute, nor does it preclude the Commissioner from reopening the case within the statutory period and making such adjustments to income as he may deem proper. After the issuance of the certificate of overassessment the way was open for the petitioners to negotiate a final closing agreement *774 with the Commissioner, as provided in section 3760 of the Internal Revenue Code, 1 before further distribution of the assets of the estate. Their failure to do so does not bind the Commissioner in the performance of his duties nor estop him from redetermining the tax liability of the estate. *92 The Commissioner included in the gross estate the proceeds from policy No. N 308890 paid at the decedent's death in the amount of $ 97,347, on the ground that it was taxable within the meaning of section 811 (g) of the Internal Revenue Code. He now contends that it was also properly includible under the provisions of section 811 (c)2 as a transfer intended to take effect in possession and enjoyment at or after death. *93 The petitioners contend that, under the rule in force at the time of the decedent's death, January 10, 1941, the test of whether the proceeds of a policy of insurance taken out by the decedent on his own life, but payable to another, were includible in the gross estate of the decedent, was whether the insured at the time of his death possessed any "legal incidents of ownership" in the policy. He argues that the surviving wife was from the inception of the contract its sole and unrestricted owner; that the decedent at the time of his death possessed none of the incidents of ownership in the policy and, therefore, *775 the proceeds from the policy are not includible in the gross estate either under section 811 (c) or section 811 (g) of the Internal Revenue Code. The language of section 811 (g) is very broad. If strictly construed the section would include in the gross estate the proceeds of all insurance in excess of $ 40,000 payable to beneficiaries other than the decedent's representatives whenever the policy was "taken out by the decedent upon his own life." But Treasury regulations and the courts have never construed this sentence literally, cf. Chase National Bank v. United States, 116 Fed. (2d) 625-627,*94 and, while no change was made in the statute from its appearance in the Revenue Act of 1918 as section 402 (f) (subsequently changed to 302 (g) -- section 811 (g), Internal Revenue Code) until the Revenue Act of 1942, numerous amendments were made to the regulations occasioned by court decisions. The issue here is whether the proceeds from the insurance policy on decedent's life, payable to the beneficiary at decedent's death, minus the statutory exemption of $ 40,000, are properly includible in the gross estate. The parties agree that they are so includible if the decedent possessed at the time of his death any "legal incidents of ownership" in the policy, but they are not in agreement as to what constituted "legal incidents of ownership" on January 10, 1941, when decedent died. The petitioner argues that the "legal incidents of ownership" are to be determined from Regulations 80, 1937 Ed., articles 25 and 27, as amended by T. D. 4729, March 18, 1937, C. B. 1937-1, pp. 284-288, which remained unchanged from that date to January 10, 1941, when it was again amended by T. D. 5032, C. B. 1941-1, p. 427. The respondent argues that*95 Regulations 105, approved February 18, 1942, which includes the pertinent provisions of T. D. 5032, is applicable here. The statute, as construed by the regulations, requires the inclusion in the gross estate of the decedent of the proceeds of any insurance in excess of $ 40,000 receivable by beneficiaries other than the decedent's representatives if the decedent possessed at the time of his death any of the legal incidents of ownership. Prior to March 18, 1937, Regulations 80 (1934 Ed.), article 25, provided in part as follows: * * * Insurance is considered to be taken out by the decedent in all cases, whether or not he makes the application, if he pays the premiums either directly or indirectly, or they are paid by a person other than the beneficiary, or decedent possesses any of the legal incidents of ownership in the policy. Legal incidents of ownership in the policy include, for example: The right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value*96 of the policy, etc. *776 The decedent possesses a legal incident of ownership if the rights of the beneficiaries to receive the proceeds are conditioned upon the beneficiaries surviving the decedent. Following the decisions of the Supreme Court in Helvering v. St. Louis Union Trust Co., 296 U.S. 39, and Bingham v. United States, 296 U.S. 211, Regulations 80 was amended by T. D. 4729 (approved March 18, 1937), which deleted the phrase "The decedent possesses a legal incident of ownership if the rights of the beneficiaries to receive the proceeds are conditioned upon the beneficiaries surviving the decedent." Thereafter the only criterion provided in the regulations as to whether insurance was taken out by the decedent and the proceeds were includible in the gross estate was the "legal incidents of ownership," which included "for example the right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the*97 surrender value of the policy, etc." No further amendment was made to the regulations construing section 811 (g) until January 10, 1941. On January 29, 1940, the Supreme Court decided Helvering v. Hallock, 309 U.S. 106. This case repudiated the basis of the decision in Helvering v. St. Louis Union Trust Co., supra, and related cases, and established the principle that if in an inter vivos transfer of property there is a provision for a reversion to the grantor in the event the grantee predeceases him, the value of the property is includible in the gross estate of the decedent grantor. On March 4, 1940, the Court of Claims decided Bailey v. United States, 31 Fed. Supp. 778; certiorari to the Supreme Court dismissed September 27, 1940. This case involved policies of life insurance assigned by the insured so as to make his wife and son life owners, and the survivor unconditionally entitled to the proceeds upon the death of the insured, provided the beneficiaries survived the insured, but if the insured survived both, he became the life owner of the policies and the proceeds *98 of insurance were payable to his representatives. The Court of Claims held, on the authority of Helvering v. Hallock, supra, that the proceeds in excess of $ 40,000 were includible in the gross estate. On December 23, 1940, the Circuit Court of Appeals for the Second Circuit, in Chase National Bank v. United States, supra, held, on authority of Helvering v. Hallock, supra, that, where the proceeds of a life insurance policy and of paid up additional insurance, purchased with dividends, were payable to the insured's wife if she survived the insured, otherwise to the insured's estate, and the power to revoke the policy or change the beneficiary was not expressly retained by the insured, the death of the insured terminated the possibility of reverter in the insured in the event that *777 the wife predeceased him and fixed the right to the proceeds unalterably in the wife, hence the proceeds were includible in insured's gross estate subject to estate tax. Thereafter on January 10, 1941, the Treasury Department, in T. D. 5032, supra, amended its*99 Regulations 80 to conform to these decisions. Article 27 was amended to read: Art. 27. Insurance receivable by other beneficiaries. -- The amount in excess of $ 40,000 of the aggregate proceeds of all insurance on the decedent's life not receivable by or for the benefit of his estate must be included in his gross estate as follows: (1) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) after January 10, 1941, the date of Treasury Decision 5032, and (2) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) on or before January 10, 1941, and with respect to which the decedent possessed any of the legal incidents of ownership at any time after such date or, in the case of a decedent dying on or before such date, at the time of his death. Legal incidents of ownership in the policy include, for example, the right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, *100 etc. The insured possesses a legal incident of ownership if his death is necessary to terminate his interest in the insurance, as, for example, if the proceeds would become payable to his estate, or payable as he might direct, should the beneficiary predecease him. These amendments were carried into Regulations 105. It is clear that the amendment of Regulations 80, article 27, by T. D. 5032 was for the purpose of conforming its construction of section 811 (g) to the decisions of the courts, Helvering v. Hallock, supra;Bailey v. United States, supra; and Chase National Bank v. United States, supra, after the former regulations had fallen with the cases on which they were based. Certainly the regulations do not have any higher dignity than the decisions of the courts on which they are bottomed, and when such decisions fall or are overruled, the regulations founded thereon cease to be authoritative as a construction of the statute. We think that, as stated in the Hallock, Bailey, and Chase National Bank cases, the decedent possessed a legal incident*101 of ownership if, as here, his death was necessary to terminate his interest in the insurance, "as, for example, if the proceeds would become payable to his estate, or payable as he might direct, should the beneficiary predecease him," regardless of when Regulations 80 were amended. Cf. Hock v. Commissioner, 152 Fed. (2d) 574. Petitioners rely on a memorandum opinion of this Court. 3 If this opinion is authority for the legal propositions submitted by petitioner, it is obvious that those propositions have since been repudiated *778 in principle by Hock v. Commissioner (1945), supra;Goldstone v. United States (1945), 325 U.S. 687; Liebman v. Hassett (1945), 148 Fed. (2d) 247; and Schongalla v. Hickey, 149 Fed. (2d) 687. Petitioners argue that under the terms of the*102 contract the wife was the absolute owner of the policy, with power to change the beneficiary, surrender or cancel the policy, assign it, pledge it for a loan, or obtain a loan against the surrender value; that she made certain changes as indicated in our findings of fact to the end that she changed the "possibility of reversion" to contingent remainder; and that technically the decedent had no "possibility of reversion which was cut off by his death." While it is true that the decedent's wife, as life beneficiary, made certain changes by endorsement on the policy in both the death and the life beneficiaries which extended to her son and daughter, she did not change the provision for reversion to the insured. She only postponed the reversion until after the death of the survivor. We think the observation made by the lower court in Goldstone v. United States, 52 Fed. Supp. 704, in a somewhat similar situation, is pertinent. "The plaintiffs have placed too much importance on the word 'reverter' * * * if any interest therein could come to him by reason of any contingency, then it comes squarely within the doctrine of Helvering v. Hallock."*103 It is plain that, while the life beneficiary had the power to erase the decedent's reversionary interest, she did not exercise it. In Goldstone v. United States, 325 U.S. 687, the Supreme Court said: * * * Whatever the likelihood of the exercise of this power, it is a fact that the wife did not change the beneficiaries or surrender the contracts so as to destroy decedent's reversionary interest. The string that the decedent retained over the proceeds of the contract until the moment of his death was no less real or significant, because of the wife's unused power to sever it at any time. Moreover, the fact that the life beneficiary had absolute control over the policy and could surrender it and take the cash value is not controlling. Since the power to surrender was not in fact exercised before the death of the insured, the death of the insured was the intended event which cut the string by which the proceeds of the policy might be brought back to the insured and brought them into the possession and enjoyment of the beneficiary. We hold that the proceeds of insurance receivable by the beneficiary, to the extent of the excess over $ 40,000, are *104 includible in the gross estate of the decedent. Helvering v. Hallock, supra; Goldstone v. United States, supra; Hock v. Commissioner, supra;Schongalla v. Hickey, supra;Chase National Bank v. United States, supra. Decision will be entered for the respondent. Footnotes 1. SEC. 3760. CLOSING AGREEMENTS. (a) Authorization. -- The Commissioner (or any officer or employee of the Bureau of Internal Revenue, including the field service, authorized in writing by the Commissioner) is authorized to enter into an agreement in writing with any person relating to the liability of such person (or of the person or estate for which he acts) in respect of any internal revenue tax for any taxable period. (b) Finality. -- If such agreement is approved by the Secretary, the Under Secretary, or an Assistant Secretary, within such time as may be stated in such agreement, or later agreed to, such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact -- (1) The case shall not be reopened as to the matters agreed upon or the agreement modified, by any officer, employee, or agent of the United States, and (2) In any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith shall not be annulled, modified, set aside, or disregarded.↩ 2. SEC. 811. [I. R. C.] GROSS ESTATE. * * * * (c) Transfers in Contemplation of, or Taking Effect at Death. -- To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * * * * * * (g) Proceeds of Life Insurance. -- To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess $ 40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.↩ 3. Estate of James W. Henry↩ (Docket No. 109513), entered Jan. 16, 1943.