Allentown Nat'l Bank v. Commissioner

THE ALLENTOWN NATIONAL BANK AND ETHEL HARRISON KIFT, EXECUTORS OF THE ESTATE OF ROBERT L. KIFT, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Allentown Nat'l Bank v. Commissioner Docket No. 86150. United States Board of Tax Appeals 37 B.T.A. 750; 1938 BTA LEXIS 992; April 22, 1938, Promulgated *992 1. Held, that the values of certain insurance policies on his life in which the decedent reserved the right to change the beneficiaries are includable in decedent's gross estate and, further, that the values of certain policies should not be determined on a commutation basis. 2. The amount approved by an orphans' court of Pennsylvania for the use of the widow of decedent held not to be deductible from the gross estate, under section 303(a)(1) of the Revenue Act of 1926, because not shown to have been reasonably required and actually expended for the support of the widow and child or decedent. Thomas m, Wilkins, Esq., and C. L. Turner, C.P.A., for the petitioners. Lewis S. Pendleton, Esq., and Frank T. Horner, Esq., for the respondent. TYSON *750 The petitioners seek redetermination of an estate tax deficiency of $12,794.88. Petitioners allege that the respondentIn determining the value of decedent's gross estate, erred (1) in including therein the proceeds *751 of four life insurance policies, to wit, Prudential Insurance Co. No. 827,018, Mutual Benefit Life Insurance Co. No. 1,355,369, Northwestern Mutual*993 Life Insurance Co. No. 1,794,035, and Northwestern Mutual Life Insurance Co. No. 1,650,402, and, in the alternative, that even if the proceeds of the last three mentioned policies are includable in the gross estate the respondent erred in the amounts of the values determined therefor; (2) in including in the gross estate $7,928.65 as the value of another life insurance policy, New England Mutual Life Insurance Co. No. 552,581, based on the present worth of an interest annuity payable to the beneficiary, plus the present worth of the reversion of the principal based on the life expectancy of the life beneficiary; and (3) in disallowing as a deduction from the gross estate the amount of $500 claimed as an allowance actually paid to the widow of decedent upon authorization of the local orphans' court for support of dependents of decedent during the administration of the estate. Several other errors assigned were waived on brief, as was also the error assigned with regard to Northwestern Mutual Life Insurance Co. policy No 1,650,402. At the hearing four letters from insurance companies were offered in evidence by respondent. Petitioners objected to their being received in evidence. *994 Ruling was reserved. The objection is now hereby sustained and respondent is granted an exception to such ruling. FINDINGS OF FACT. Most of the facts were stipulated and the stipulation and exhibits therewith are incorporated herein by reference. Only such facts are taken therefrom as we deem necessary to set out herein. Petitioners are the duly appointed and acting executors, under his will, of the estate of Robert L. Kift, deceased, who died, testate, on June 25, 1933, while a resident of Bethlehem, Pennsylvania, leaving surviving him his widow, Ethel Harrison Kift, aged 47 years, and a child, Elizabeth Ann Kift, aged 18 years, the child being the only one born to decedent and his wife, Ethel Harrison Kift. Decedent had no other child or children. The executors filed a Federal estate tax return including therein, as part of the gross estate, the amount of $7,928.65 as the value of New England Mutual Life Insurance Co. policy No. 552,581, on the life of decedent, that value being based on an amount of $5,530.23 described as the present worth of an annuity plus an amount of $2,398.42 described as the present worth of a reversion. The values of certain policies on the*995 life of decedent in force at the time of his death were not included in the return by the executors as part of the gross estate, but were so included by respondent in his determination of the deficiency. Those policies, their face *752 amounts, and the value of each as determined by respondent are as follows: Face amount Determined value No. 827,018, Prudential Insurance Co $2,000.00 $2,000.00 No. 1,794,035, Northwestern Mutual Life Insurance Co 100,000.00 98,682.12 No. 1,355,369, Mutual Benefit Life Insurance Co 25,000.00 23,635.80 There were also other policies on his life in force at the time of the death of the decedent, the values of which were included in the gross estate of decedent by the executors in their return. Prudential Insurance Co. policy No. 827,018 was dated March 4, 1907, and "the executors, administrators or assigns of the Insured" were designated as the original beneficiaries therein. The policy provided, inter alia, that "The Insured may at any time * * * change the Beneficiary or Beneficiaries under this Policy, * * *." It also further provided, inter alia, that "If this Policy be continued in force, the Insured*996 may borrow from the Company the amount specified in the following table * * *." The amounts specified in the table are varying, depending upon the year in which the borrowing might occur. The amount which could have been borrowed by the insured after March 4, 1927, 20 years after the policy was taken out, was $924. On November 21, 1912, by endorsement attached to the policy, the beneficiary therein was changed to Ethel H. Kift, decedent's wife. No reservation to the insured of the right to make another change of beneficiary was contained in the endorsement, and thereafter there was no further change of beneficiary made. Northwestern Mutual Life Insurance Co. policy No. 1,794,035 was dated January 10, 1925, and Ethel H. Kift, wife of decedent, was designated therein as the original beneficiary "with reservation to the Insured of the right of revocation and change of Beneficiary." A later clause in the policy, under the heading "General Provisions", provided in part that "the Insured (1) may designate one or more Beneficiaries if none be named herein, either with or without reservation of the right to revoke such designation; and (2) may designate one or more Contingent Beneficiaries*997 whose interest shall be as expressed in, or by endorsement of the Company on, this Policy; and (3) may change any Beneficiary not irrevocably designated; and (4) may change any Contingent Beneficiary. * * *" On March 11, 1925, an endorsement was made on the policy, by the terms of which Elizabeth A. Kift, daughter of the insured and his wife, Ethel H. Kift, and such children as might thereafter be born of the insured and his wife were named as contingent beneficiaries. *753 No change from the original and primary beneficiary was made. On the same date another endorsement was made on the policy, under the terms of which it was prescribed that Ethel H. Kift, the original and primary beneficiary in the policy, should receive as "settlement of the full proceeds of this policy" payment "in accordance with the provisions of Option A, with privilege of changing to Option C in such number of stipulated monthly installments as she may elect in event she survives the contingent beneficiaries and their lawful surviving children, if any." The endorsement further provided the method of settlement with the contingent beneficiaries in case Ethel H. Kift, the primary beneficiary, predeceased*998 them. The right to surrender and withdraw or commute under the method of settlement was withheld from the primary and contingent beneficiaries. Option A, under which settlement was to be made with the primary beneficiary, provided for the retention by the company of "the whole or any designated part of the net proceeds" of the policy "until the death of the last surviving Beneficiary or Contingent Beneficiary, the Company in the meantime to pay interest thereon monthly at the rate of $2.47 per $1,000. of the amount so retained." Mutual Benefit Life Insurance Co. policy No. 1,355,369 was dated June 29, 1928, and decedent's wife, Ethel H. Kift, was designated therein as beneficiary. The policy provided that on the death of the decedent the proceeds were to be retained by the company and monthly payments of interest thereon at the rate of 3 percent per annum were to be made to the beneficiary during her life, with the right to her, after three months' notice to the company of her election so to do, to withdraw annually from the principal not less than $1,000 and not more than $5,000, such withdrawals to be made in monthly, quarter-annual, semi-annual or annual installments. *999 The policy further provided for contingent beneficiaries. The right of commutation was withheld from the wife and the contingent beneficiaries. The right to change the beneficiary "from time to time" while the policy was in force was reserved to insured and no change of beneficiary was ever made. Rights to the cash surrender and loan values without the consent of any beneficiary were also reserved to the insured. New England Mutual Life Insurance Co. policy No. 552,581, for the face amount of $10,000, was dated March 18, 1926, and decedent's wife, Ethel H. Kift, was named as the original beneficiary therein. On April 21, 1927, the beneficiary was changed to Elizabeth A. Kift, daughter of decedent, with the provision that the company after the death of decedent should retain the proceeds of the policy and pay monthly to the beneficiary during her life interest on the retained proceeds at the rate of 3 percent annually, with the privilege to beneficiary *754 of withdrawing the entire amount, or any part, of the principal remaining after she reached the age of 25 years, and in the event of the death of the beneficiary any amount then in the hands of the company should*1000 be paid in one sum to Ethel H. Kift, wife of decedent, if living; otherwise, to the executors of the insured or the beneficiary last surviving. In the endorsement making the change of beneficiary from the wife to the daughter, the right to make further change was reserved in the insured, but no further change of beneficiary was ever made. On or about July 10, 1933, the widow of decedent filed a petition in the Orphans' Court of Lehigh County, Pennsylvania, asking to have the sum of $500 set aside for her use in accordance with section 12(a) of the Pennsylvania Fiduciaries Act of 1917. The petition was confirmed by the court and the executors paid the widow that amount. This item was claimed as a deduction by the executors in their return, but was disallowed by the respondent in his deficiency notice. OPINION. TYSON: As shown in our findings of fact, Prudential Insurance Co. policy No. 827,018 contained the following provision: "The Insured may at any time * * * change the Beneficiary or Beneficiaries under this Policy, * * *" On November 21, 1912, the insured exercised the right given in this provision by substituting his wife as beneficiary in lieu of the original beneficiary*1001 named in the policy. In neither the endorsement effectuating this change nor in the original policy was there any provision as to the right to change the beneficiary other than that quoted above. We are of the opinion that, under the quoted provision, the right of the insured to change the beneficiary was not exhausted by its exercise in the instance mentioned and that the right to make such a change remained in him until his death. Consequently the designation of decedent's wife in the change made was not irrevocable and the value of this policy is includable in the gross estate. ; affd., ; . The facts in the instant case distinguish it from the cases of , and , and the cases cited therein in support of the holdings that no right existed to a change in beneficiary after such right had once been exercised. In those two cases the policies provided for the "right of revocation" by the insured, but also further provided*1002 that "When the right of revocation has been reserved, * * * the insured, * * * may designate a new beneficiary, with or without reserving right of revocation, * * *." There were no *755 such provisions with reference to the designation of a new beneficiary in the policy here involved. The right to change the beneficiary in this policy is given in broad, comprehensive terms, without the limitations specifically imposed in the policies, as shown by the quotations therefrom considered in the cited cases. There is a further provision in this policy which leads to the same Conclusion as that reached with regard to the effect of the provision in the policy for a change of beneficiary. The policy provided, inter alia, that the insured could borrow from the insurance company certain specified amounts while the policy was in force. Under this right of the insured to borrow on the policy he reserved an interest therein which was extinguished only by his death and, therefore, for this reason also the value of the policy is includable in the gross estate. Louise C. Moore, .executrix,*1003 ; For the reason that the Prudential policy was taken out in 1907 and the beneficiary therein changed in 1912, both events occurring prior to the passage of the 1918 Revenue Act, petitioners contend that the value of this policy is in no event includable in the gross estate of the decedent, under the decision in . This contention is untenable. In the Frick case, supra, the Court had under consideration section 402(f) of the Revenue Act of 1918, the counterpart of which appears as 302(g) of the Revenue Act of 1926. The 1918 Act did not contain any provision similar to subsection (h) of section 302 of the 1926 Act, 1 which is controlling here. Subsection (h) has been considered by the courts and this Board since the decision in the Frick case, supra, and it has been held that under its provisions the value of an insurance policy payable to a beneficiary other than the insured's estate, if otherwise includable in the gross estate of the insured, should be therein included irrespective of the date on which the policy was*1004 taken out or of the date on which a change in the beneficiary therein was made. ; ; certiorari denied, ; ; *756 ; certiorari denied, ; Louise C. Moore, Executrix, supra; . *1005 As shown in our findings of fact, a general provision of Northwestern Mutual Life Insurance Co. Policy No. 1,794,035 was "with reservation to the Insured of the right of revocation and change of Beneficiary." A later clause provided that "the Insured (1) may designate one or more Beneficiaries if none ben named herein, either with or without reservation of the right to revoke such designation * * *." This later clause was, as to this policy, inoperative, since it applied only when there was no beneficiary named in the policy, and there was a beneficiary, Ethel H. Kift, named in this policy. Under the general provision the insured reserved the right to change the beneficiary and therefore the value of this policy is includable in decedent's gross estate. ; It might also further be said that no change of the original beneficiary in this policy was ever made. Ethel H. Kift was the original beneficiary named therein and remained the primary beneficiary after the endorsements adding contingent beneficiaries to the policy. The only change made by these endorsements with reference to the status*1006 of the original beneficiary was a change as to the method by which she was to receive the proceeds under the policy; that is to say, under the original policy she was to receive the proceeds in one lump sum after the death of the insured, while under the change made by the endorsements she was to receive the proceeds (1) under option A of the policy, or (2) in the event of her surviving the contingent beneficiaries and their lawful surviving children, if any, she was to have the privilege of receiving the proceeds of the policy under option C, which provided for the payment of the proceeds in a number of stipulated monthly installments. There never having been a change made in the original beneficiary, the express right given in the policy to change the beneficiary had never been exercised by the insured prior to his death and the right remained in him at the time of that event. Consequently, for this reason also the designation of decedent's wife as the original and primary beneficiary in the policy was not irrevocable. In Mutual Benefit Life Insurance Co. policy No. 1,355,369 the right to change the beneficiary was reserved and never exercised by the decedent. Also in New England*1007 policy No. 552,581, where the original beneficiary was changed, the endorsement effecting the change reserved the right in the decedent to make a further change of beneficiary, and no further change was ever made. Consequently, the right to change the beneficiary in both these policies remained in *757 the decedent at the time of his death and the designations of the beneficiaries therein were not irrevocable. The values of these two policies are includable in decedent's gross estate. This seems to be tacitly conceded by petitioners, since their main contention on brief as to them is to the effect that, if includable in the gross estate, the value of the policies should be the "commuted value of the periodic payments of principal and/or interest provided for in the policies." The same contention, in the alternative, is also made by petitioners with regard to Northwestern Mutual policy No. 1,794,035. We do not agree with this contention. The proof shows no proper basis upon which a commuted value of either of these three policies could be determined. To the contrary, in each policy it was directed that the insurance company should retain the amount which would otherwise*1008 have been payable as a lump sum to the beneficiary, and pay the beneficiary interest on such amount at certain percentage rates. These facts bring the method of proper ascertainment of the value of the amounts receivable by the beneficiaries under these policies squarely within the rule announced in , which rule is to the effect that such amounts under similar facts are not to be properly arrived at by commutation, as contended here by petitioners. There is no proof as to the method used by respondent in determining the values of the two of these policies which were not included in the gross estate by the executors in their return; nor is it shown in the record that such values were erroneous. Neither is there any error shown in the value of New England policy No. 552,581 as set out in the return of the executors and considered in respondent's determination as being correct. Consequently, the determination of respondent as to all three of these policies is approved. Petitioners claim as a deduction $500 paid the widow of decedent under the provisions of section 12(a) 2 of the Pennsylvania Fiduciaries Act of 1917. *1009 The deduction was disallowed by the respondent. The applicable Revenue Act of 1926, section 303(a)(1), provides for the deduction of "* * * amounts reasonably required and actually expended for the support during the settlement of the estate of those *758 dependent upon the decedent, as are allowed by the laws of the jurisdiction, * * * under which the estate is being administered, * * *" There is no evidence that the $500 was either "reasonably required" or "actually expended" for the support of the widow and child of decedent, and, notwithstanding that under the order of the Pennsylvania court in pursuance of the Pennsylvania statute the $500 was paid the widow for her use, we approve its disallowance as a deduction by the respondent. ; ; affd., . *1010 Decision will be entered under Rule 50. Footnotes 1. SEC. 302. 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 - * * * (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 the decedent upon his own life. (h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act. ↩ 2. SEC. 471. Appraisers; exemption to widow and children. The widow, if any, or if there be no widow, or if she has forfeited her rights, then the children forming part of the family of any decedent dying, testate or intestate, within this commonwealth, or dying outside of this commonwealth, but whose estate is settled in this commonwealth, may retain or claim either real or personal property, or the proceeds of either real or personal property, belonging to said estate, to the value of five hundred dollars; and the property so retained or claimed shall not be sold, but suffered to remain for the use of the widow or children. It shall be the duty of the executor or administrator of such decedent to have the said property, if personal, appraised and set apart to said widow or children by the appraisers appointed to appraise the other personal estate of the decedent; or, if real, then by two appraisers to be appointed by the orphans' court, who may be the same persons appointed to appraise the personal estate. * * * ↩