Ballinger v. Commissioner

BESSIE M. BALLINGER, EXECUTRIX OF THE ESTATE OF WALTER F. BALLINGER, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ballinger v. Commissioner Docket No. 32177. United States Board of Tax Appeals 23 B.T.A. 1312; 1931 BTA LEXIS 1729; August 26, 1931, Promulgated *1729 1. Prior to 1918 decedent took out twelve policies of insurance upon his own life, naming as beneficiaries therein persons other than his executor; in eight of these policies decedent reserved the right to change the beneficiary named or to revoke a prior assignment, in three of them the complete insurance policy was not submitted in evidence, and in one decedent reserved the right to the cash surrender value at maturity or upon surrender of the policy. Held, that as to the nine policies in which decedent made reservations, the proceeds should be included in his gross estate, under the rule announced in the Chase National Bank v. United States,278 U.S. 327, and that as to the remaining three policies the determination of the respondent must be approved, since petitioner failed to show that decedent had reserved no benefits under the insurance policies. 2. During the decedent's lifetime the company which employed him took out a group policy of insurance covering its employees and issued a policy thereunder to the petitioner. Held, that the proceeds of such policy should not be included in decedent's gross estate under section 302(g) of the Revenue*1730 Act of 1924 as "policies taken out by the decedent on his own life." Lester B. Johnson, Esq., and John B. Peery, C.P.A., for the petitioner. Frank T. Horner, Esq., and R. Staubly, Esq., for the respondent. MORRIS *1312 This proceeding is for the redetermination of a deficiency in estate tax of $14,463.28. The respondent's computation shows a correct tax liability of $16,909.92, which he reduced by credit for state inheritance tax of $3,169.40, and by a payment of $1,834.98, leaving an "undischarged deficiency" of $11,905.54. The petitioner asserts that the amount of the deficiency in controversy is $11,737.74, and alleges that respondent erred in including in the taxable estate of the decedent, the proceeds of insurance policies payable to and collected by beneficiaries other than the executor of the estate. The proceeding was submitted upon the pleadings, an agreed statement of facts, photostatic copies of certain insurance policies, and briefs. *1313 FINDINGS OF FACT. The petitioner is the executrix of the estate of Walter, F. Ballinger, late a resident of the State of Pennsylvania. The parties submitted an agreed*1731 statement of facts, the pertinent portions of which are as follows: That at the date of decedent's death, December 21, 1924, there was in effect insurance upon the decedent's life, the proceeds of which amounted to $391,152.96, which said insurance or proceeds was paid to and received by specific beneficiaries other than to the insured or his estate; That all of said insurance in excess of $40,000, or $351,152.96, was included in the value of the gross estate by the Commissioner in determining the deficiency set forth in the deficiency notice; That the only question at issue in this appeal is whether the proceeds of certain policies of insurance in the amount of $99,564.01, photostat copies of which said policies, together with any and all endorsements thereon, are submitted herewith in evidence as Exhibits 1 to 13, inclusive, are subject to be included in the gross estate under the provisions of subdivision (g) of Section 302 of the Revenue Act of 1924; That the petitioner hereby waives her assignments of error as to the taxability of the proceeds of all other insurance policies; * * * An analysis of the thirteen exhibits introduced in evidence reveals the following facts: *1732 Policy No. 336,000, issued April 17, 1882, by the Prudential Insurance Company; face amount of policy, $114; "Regular Industrial" type of policy; original policy having been lost or destroyed, a duplicate policy form was procured, which states that this form is evidence of the original policy but does not in any way change or modify the terms and conditions of the original. Policy No. 503,887, issued January 13, 1893, by the New York Life Insurance Company; face amount of policy $1,000; ordinary life type, except that at the end of 20-year "Accumulation Period" insured could elect any one of six benefits; beneficiary - decedent's "executors, administrators or assigns"; beneficiary changed by assignment, May 11, 1921, to "Bessie M. Ballinger, my wife, or in the event of her prior death to my Executors, Administrators or Assigns"; decedent reserved the power to revoke this assignment, and the right to collect any and all dividends under said policy. The back of said policy bears the following stamped endorsements: The loan on this policy having been canceled, the loan endorsement hereon is null and void. NEW YORK LIFE INS. CO. JOHN C. MCCALL, 2nd Vice President. Dated*1733 Jun. 23, 1921 *1314 Policy No. 118935, issued February 10, 1897, by the Penn Mutual Life Insurance Company; face amount of policy, $3,000; 20-year life policy; beneficiary - "Bessie M. Ballinger, wife of the insured if she survive him otherwise to his executors, administrators or assigns"; policy provided that in case of an assignment a duplicate should be furnished the company; portion of policy offered as exhibit contained no provision respecting right to change beneficiary, but the complete insurance contract was not included in photostat submitted as part of record. Policy No. 151193, issued August 14, 1899, by the Penn Mutual Life Insurance Company; face amount of policy, $1,000; 10-year convertible term policy; beneficiary - decedent's "executors, administrators or assigns"; beneficiary changed May 11, 1921, to "my wife, Bessie M. Ballinger if said beneficiary survive me, otherwise to my executors, administrators or assigns"; decedent reserved right to change beneficiary. Policy No. 151194, issued August 14, 1899, by the Penn Mutual Life Insurance Company; face amount of policy $2,000; 10-year convertible term policy; beneficiary - decedent's "executors, administrators*1734 or assigns"; beneficiary changed by assignment August 18, 1899, to decedent's mother, "if she outlive me, otherwise to my executors, administrators or assigns"; beneficiary changed by assignment March 22, 1901, to "my wife, Bessie M. Ballinger, if she outlive me, otherwise to my executors, administrators or assigns"; no reservation of right to revoke assignment; second page of insurance contract showing privileges, benefits, and conditions was not included in photostat. Policy No. 255104, issued June 30, 1905, by the Connecticut Mutual Life Insurance Company; face amount of policy, $5,000; 20-year life policy; beneficiary - "Bessie M. Ballinger, wife of the insured if she survive him, if not, to his executors, administrators, or assigns, * * *"; no reservation of power to change beneficiary; policy provided for a cash surrender value payable to decedent, or paid-up insurance; original or duplicate of all assignments had to be filed with home office. Policy No. 236, issued June 18, 1909, by Girard Life Insurance Company; face amount of policy, $3,000; ordinary life policy; beneficiary - "Bessie Martha Ballinger"; policy gives right to change beneficiary; policy provides for loans, *1735 a cash surrender value, paid-up and/or extended insurance and dividends. Policy No. 237, issued June 18, 1909, by Girard Life Insurance Company; face amount of policy, $2,000; in all other respects same as policy No. 236 above. *1315 Policy No. 9812232, issued October 20, 1910, by the Standard Accident Insurance Company, face amount of policy $5,000, with double indemnity clause and accumulations for each year's renewal; accident policy; in case of death beneficiary - "Bessie M. Ballinger"; the policy provided that "the consent of the beneficiary shall not be requisite to surrender or an assignment of this policy, nor yet to a change of beneficiary." Policy No. E F 2115, issued March 1, 1911, by the Travelers Insurance Company; face amount of policy $10,000, with double indemnity clause, and accumulations for each year's renewal; special accident policy for owners of private automobiles; in case of death, beneficiary - "Bessie M. Ballinger - (the Beneficiary) if surviving, otherwise to the executors, administrators, or assigns of the Insured"; policy provided for a change of beneficiary. Policy No. 360281, issued March 8, 1917, by the Connecticut Mutual Life Insurance*1736 Company; face amount of policy $20,000; ordinary life; beneficiary - "Bessie M. Ballinger, wife of the Insured, if she survive him, if not, to his executors, administrators, or assigns, * * *"; policy gives right to change beneficiary; policy provides for loans, a cash surrender value, paid up and/or extended insurance and dividends. Policy No. 360282, issued April 10, 1917, by the Connecticut Mutual Life Insurance Company; face amount of policy $10,000; in all other respects same as policy No. 360281 above. Group policy No. 1458, issued December 21, 1922, by the Prudential Insurance Company; face amount of policy $5,000; group insurance policy taken out by the Ballinger Company covering its employees; beneficiary "Bessie M. Ballinger, Wife"; policy provides that "If there be no beneficiary living at the death of said employee [Walter F. Ballinger] the amount of insurance shall be paid to the executors, administrators or assigns of said employee"; policy allowed employee to change beneficiary. OPINION. MORRIS: The issue presented by the pleadings is whether there should be included in decedent's gross estate the proceeds of various insurance policies on decedent's life*1737 in the total amount of $391,152.96, less the statutory exemption of $40,000. By stipulation of counsel the proceeds of thirteen policies, amounting to $99,564.01, remain to be considered, the petitioner having waived its assignment of error in so far as it relates to the proceeds of the other policies. We have, therefore, to determine whether respondent erred in including in decedent's gross estate $99,564.01, representing the proceeds of the said thirteen policies. *1316 Section 302 of the Revenue Act of 1924 provides that the value of a decedent's gross estate "shall be determined by including the value at the time of his death of all property, * * * wherever situated": (g) 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 over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by decedent upon his own life. Section 302 of said act further provides that: (h) Subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment*1738 of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act. The undisputed facts show that the proceeds of the said thirteen policies were received by beneficiaries other than the insured or his estate, thereby bringing the issue within the last portion of section 302(g), hereinabove set forth, which provides for the inclusion in the gross estate of the excess over $40,000 received by all other beneficiaries. As each of the policies herein, except one, group policy No. 1458, was taken out prior to the effective date of the Revenue Act of 1918, the petitioner contends that the Board is governed by the decision of the Supreme Court in Lewellyn v. Frick,268 U.S. 238. Petitioner further contends that to decide this proceeding under the doctrine laid down in Chase National Bank v. United States,278 U.S. 327, would result in an absolute nullification of the Frick decision. The Frick case involved four policies payable to decedent's wife and seven policies payable to his daughter. All of the policies had been taken out*1739 prior to the passage of the Revenue Act of 1918. Some of them were payable to Frick's estate, with no provision for change of beneficiaries, but were subsequently assigned to his wife and daughter, without reservation of power to revoke the assignment. Some were of like character, and were so assigned, with power to revoke the assignment. Some were made payable to Frick's executors, and subsequently, by arrangement with the company, were made payable to his daughter as beneficiary, without power reserved further to change the beneficiary. In others, the wife and the daughter were named as beneficiaries; the policies containing no power which enabled the insured to change the beneficiary. All the premiums were paid by Frick, and none of the assignments of the policies so made by him were at any time revoked. Frick v. Lewellyn,298 Fed. 803, 804. The lower court held that the tax imposed by the 1918 Act on the proceeds of these policies was invalid because that act proposed to *1317 tax as a part of decedent's estate what was in fact no part of his estate, since the proceeds had vested in the beneficiaries prior to the date of decedent's death, and*1740 therefore there was no taxable transfer within the meaning of section 402(f) of the Revenue Act of 1918. In the course of its opinion the District Court discussed the policies as follows (p. 810): It is not debatable, therefore, that those policies in this case which named Mrs. Frick as beneficiary, with no power reserved to change the beneficiary, vested in her absolutely. It is scarcely less clear that those policies made payable to the personal representatives of the insured, but which were afterwards assigned by him, in his lifetime, without reservation in the assignment or policies to revoke the assignment, vested absolutely in his wife and daughter. Nor do I doubt that in those policies which contained no provision on the subject, but in which Mr. Frick by agreement with the company substituted his daughter as beneficiary, reserving no right to further change the beneficiary, the daughter's rights became vested at once. And, finally, I am of opinion that in the three policies in which the assured reserved a right to revoke the assignments to his wife and daughter, but never did so, the rights of the assignees were vested and absolute; that those rights vested immediately*1741 under the assignment, subject to a limitation, not a conditional estate, vesting at the time of death, but an estate which vested at once, subject to be divested by the happening of an uncertain future event. As that event did not occur, there was no divestiture. Upon appeal, the Supreme Court, in Lewellyn v. Frick,268 U.S. 238, affirmed the District Court's decree under the rule that "laws are not to be considered as applying to cases which arose before their passage unless that intention be clearly declared," Shwab v. Doyle,258 U.S. 529, 534, and other cited authorities. In the instant proceeding all the policies in question were taken out on decedent's life prior to the effective date of the taxing statute, and all except one, group policy No. 1458, were taken out prior to the effective date of the 1918 Act. These policies were of different classes; eleven of them specifically named decedent's wife as beneficary, if surviving, otherwise to decedent's executors, administrators or assigns; one, the standard accident policy, named decedent's wife as beneficiary in case of death, but contained no survivorship clause; and one, the first*1742 in point of time, made no reference whatever to a beneficiary. In nine of the policies decedent had the right to change the beneficiary named or revoke a prior assignment without the consent of the beneficiary; in one of the other four policies no beneficiary was named; one provided for assignments; one contained successive assignments, but reserved no power to revoke the last assignment; and the fourth was made payable to decedent's wife, if she survived him, without power reserved to change the beneficiary. The policies herein are, in our opinion, analogous in so far as the transactions occurring between the insurance companies and the *1318 insured are concerned, with the policies and the transactions with respect thereto which the District Court considered in the Frick case. It would seem, therefore, that the decision in the latter case should be controlling here, and we would so hold if it were not for the fact that since the Frick decision was handed down this principle of the tax law has been before the Supreme Court in other cases, and while the Frick case has not been specifically overruled, that decision must certainly be limited in its application*1743 in view of the language contained in these later decisions. In Chase National Bank v. United States, supra, relied on by respondent, the decedent procured, after the effective date of the Revenue Act of 1921, three insurance policies on his life, each naming his wife as beneficiary, and each reserving to himself the right to change the beneficiary. The proceeds of said policies less the $40,000 exemption were included in decedent's gross estate by the Commissioner of Internal Revenue, and the estate paid the tax thereon under protest. A claim for refund was denied, and the executor brought suit in the Court of Claims to recover the tax as illegally assessed. The Court of Claims certified two questions to the Supreme Court, namely, (1) whether the tax imposed by the final clause of section 402(f) of the Revenue Act of 1921, on life insurance policies payable in terms to beneficiaries "other than the decedent or his estate," is a direct tax on property and void because not apportioned; and (2) whether the tax imposed bears such an unreasonable relation to the subject matter of the tax as to render it void. *1744 After stating that "similar questions were mooted by counsel, but not decided in Lewellyn v. Frick,268 U.S. 238," the court answered both questions in the negative, and held that the termination of decedent's control over the disposition of the proceeds at death, brought about a completion of the shifting of the economic benefits of property which is the real subject of the tax just as effectively as would an actual exercise of the power. The Board followed the rule enunciated in the Frick case in Charles L. Harris, Administrator,5 B.T.A. 41; Martha B. Phelps, Executrix,6 B.T.A. 648; and Mercantile Trust Co.,13 B.T.A. 85, proceedings which arose under the Revenue Act of 1921. In Edwin S. Rauh, Executor,19 B.T.A. 993, a proceeding arising under the 1921 Act, we distinguished that case from the three aforementioned cases, because their "findings of fact do not show that the insured reserved the right to change the beneficiaries * * *," and held that the rule announced in *1745 Chase National Bank, supra, and in Reinecke v. Northern Trust Co.,278 U.S. 339, was controlling. See also our opinions in Louis M. Weiller et al.,18 B.T.A. 1121; William A. Cushman et al., Executors,19 B.T.A. 1012; Max Dann*1319 et al., Executors,20 B.T.A. 42; Fannie C. Richardson et al., Trustees,20 B.T.A. 728; Helena Liebes, Executrix,20 B.T.A. 731; Max W. Feuerbacher et al., Executors,22 B.T.A. 734; Marmaduke B. Morton, Administrator,23 B.T.A. 236; and H. T. Cook et al., Executors,23 B.T.A. 335; the Court of Claims decision in John L. Mimnaugh, Jr., Executor,66 Ct.Cls. 441; and the Circuit Court's opinions in Means v. United States, 39 Fed.(2d) 748, and Heiner v. Grandin, 44 Fed.(2d) 141. Considering this proceeding in the light of the foregoing review of cited cases, we are of the opinion that, where the decedent reserved the right to change the named beneficiary, or to revoke a prior assignment, the proceeds of life insurance*1746 policies taken out by him upon his own life should be included in his gross estate. Chase National Bankv. United States, and Reinecke v. Northern Trust Co., supra. Applying this rule to the present case, we hold that the proceeds of the nine policies containing reservations in favor of the decedent, except group policy No. 1458, which is hereinafter more fully considered, should be included in his gross estate. The remaining policies to be considered are the Prudential policy, No. 336000; the Penn Mutual policies, Nos. 118935 and 151194; the Connecticut Mutual policy, No. 255104; and group policy No. 1458. The proceeds of the Prudential and Penn Mutual policies should be included in decedent's gross estate, since there has been no showing that decedent had irrevocably parted with all the benefits accruing under the insurance contract in favor of his beneficiary. In a similar situation in Lillian T. Latty, Executrix,23 B.T.A. 1249, we said: For all that appears, the policies were subject to decedent's right until his death to change the beneficiary; and under such circumstances, the amount thereof in excess of $40,000 is by section 302(g) properly*1747 included in the gross estate. H. T. Cook et al., Executors,23 B.T.A. 335. The record in this proceeding, in so far as it relates to these three policies, is incomplete, because the Prudential policy is a duplicate to replace the lost or destroyed original, and therefore shows none of the conditions, benefits, or privileges under which the policy was issued, while the photostats of the Penn Mutual policies fail to reveal the complete contract, since the privileges, benefits, and conditions of the policies, as set out on the second pages thereof, were entirely omitted from the exhibits submitted. Being unable to determine whether decedent reserved to himself certain of the rights and benefits commonly retained by the insured under contracts of insurance, we must approve the determination of the respondent. The proceeds of the Connecticut Mutual policy, No. 255104, should be included in decedent's gross estate under section 302(g), since the decedent specifically reserved to himself the proceeds of the cash *1320 surrender value of this policy at maturity or upon surrender during his lifetime. A power in the decedent to surrender and cancel a policy is*1748 one of the "legal incidents of ownership" referred to by the Supreme Court in the Chase case, supra, and upon the termination of the power by death the beneficiary is freed from the possibility of being cut off by decedent and a transfer within the reach of the taxing power of the Government is thereby effected. With respect to the group policy, it appears that the insurance was taken out by the Ballinger Company for its employees, and was not taken out by decedent upon his own life. The statute covers amounts received "by the executor as insurance under policies taken out by decedent upon his own life," and the excess over $40,000 received by all other beneficiaries from insurance "taken out by decedent upon his own life." Since the statute fails to provide for the inclusion of the proceeds of insurance policies taken out by others on the decedent's life, it would seem that Congress did not intend to include such proceeds in computing a decedent's gross estate. As to the group policy, therefore, we hold that the proceeds should be excluded from decedent's gross estate, because such policy was not taken out by decedent upon his own life. Decision will be entered*1749 under Rule 50.