Schultz v. Commissioner

HARIOT REYNOLDS SCHULTZ, ET AL., EXECUTRICES OF THE ESTATE OF MARIE B. REYNOLDS, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Schultz v. Commissioner Docket No. 81060. United States Board of Tax Appeals 38 B.T.A. 59; 1938 BTA LEXIS 918; July 13, 1938, Promulgated *918 The decedent, with her daughter, as joint annuitant, entered into a single premium annuity contract with the Sun Life Assurance Co. which provided for the payment of an annuity to the decedent, if living, otherwise to her daughter, and for the payment of a principal sum upon the death of the survivor to children of the daughter, equally, otherwise to S, another daughter of the decedent, if living, otherwise to her children if any, equally, otherwise to the estate of the decedent. The decedent paid the premium and reserved no right to change the beneficiaries. The contract provided that the contract might be surrendered to the company at any time, provided there was "no legal restriction to the contrary", for an amount equal to the principal sum and that the company would advance to the annuitants "upon proper assignment" of the policy any amount not exceeding the cash surrender value. The decedent was survived by her daughter, who is now receiving annuity payments under the contract. Held, (1) that the contract does not represent a transfer intended to take effect in possession or enjoyment at or after the death of the decedent and its commuted value may not be included in*919 her estate under section 302 of the Revenue Act of 1926; and (2) that the decedent reserved no power, alone or in conjunction with any person, to alter, amend or revoke the contract, and its commuted value may not be included in her gross estate under section 302(d) of the Revenue Act of 1926. John A. Selby, Esq., for the petitioners. John W. Smith, Esq., for the respondent. TURNER *59 This proceeding involves a deficiency in estate tax determined by the respondent in the amount of $36,782.79. The only issue presented *60 is whether the respondent erred in including in the decedent's gross estate the sum of $300,000 representing his determined value of two annuity contracts. FINDINGS OF FACT. The decedent, Marie B. Reynolds, died on March 5, 1933. She was a citizen of the United States and a resident of the State of New York. The petitioners are the duly appointed executrices of her last will and testament. On March 8, 1928, decedent and her daughter, Martha Reynolds Knight, each filed application with the Sun Life Assurance Co. of Canada, sometimes referred to as Sun Life, through its office in Jersey City, New Jersey, for*920 the issuance of an annuity contract which would provide for the payment of an annuity to Marie B. Reynolds, if living, otherwise to Martha Reynolds Knight, and for the payment of a death benefit upon the death of the survivor of Marie B. Reynolds and Martha Reynolds Knight "to children of Martha R. Knight, equally, otherwise to Hariot R. Schultz, if living, otherwise to her children if any, equally, otherwise to estate of Marie B. Reynolds." The amount of the death benefit applied for was $150,000 and the premium payable to Sun Life $157,500. June 8, 1928, was fixed as the date of the first annuity payment. The application stated that Martha Reynolds Knight was married and that her age at her nearest birthday was 30 years. As to the decedent, the application stated that she was a widow and that her age at her nearest birthday was 60. The answer "No" was given to the question, "Is the right reserved to change the beneficiary at any time providing the policy has not been assigned?" In accordance with the above applications and in consideration of the payment of the premium in the sum of $157,500, which amount was paid by the decedent, the Sun Life on March 10, 1928, issued a "Joint*921 Life and Last Survivor Annuity with Principal Sum Payable at Death of Survivor" contract. Under the terms of the contract the company agreed to pay to the decedent, or in the event of her death, to Martha Reynolds Knight, the sum of $1,312.50 on June 8, 1928, "if either of the said annuitants be then alive and a like quarteryearly payment on the eighth days of September, December, March, and June, in each year thereafter, during the subsequint joint lifetime of the said annuitants and during the lifetime of the survivor * * *." The company also agreed to pay on the receipt of proof of death of the survivor of the annuitants the sum of $150,000, or a sum equal to the premium less the annuity payments already made, whichever was the greater, "to the then surviving lawful children, if any, of the said Martha Reynolds Knight share and share alike, otherwise to Hariot Reynolds Schultz, daughter of the said Marie B. Reynolds, *61 or in the event of her prior death, then to the then surviving lawful children, if any, of the said Hariot Reynolds Schultz share and share alike, otherwise to the executors, administrators or assigns of the said Marie B. Reynolds." Under the title "Participation*922 in Profits" the contract provided that all annuity payments, including the proportionate payment on the death of the survivor of the annuitants should be increased by such dividends as might be allotted by the company out of its surplus interest earnings. It was also provided that all amounts payable or receivable under the contract should be paid at the office of the Sun Life in Jersey City and in the lawful currency of the United States. In lieu of the payment in one sum of the amount payable at the death of the survivor of the annuitants, the contract prescribed alternative methods of settlement which might by election be substituted for the lump sum payment. By the terms of that provision of the contract the election might be made by the "annuitants," "owner", the "beneficiary", or "payee" after the death of the survivor of the annuitants. Under the provisions mentioned the proper party might elect to leave the sum payable at death on deposit with Sun Life during the lifetime of the beneficiary or payee, bearing interest at the rate of 3 1/2 percent per annum, or elect to convert the payment into a specified number of equal monthly installments. Under the monthly installment*923 option, any installments not paid prior to the death of the beneficiary or payee were to be payable, unless otherwise provided, to the executors or administrators of the said beneficiary or payee. The printed provisions of the contract contained in part the following "Privileges and Conditions": II. - CASH VALUE. - This policy may be surrendered to the Company at any time, provided there is no legal restriction to the contrary, for an amount equal to the principal sum as set forth on the first page hereof. The Company shall have the right to defer the payment of any surrender value of this policy for a period not exceeding ninety days from the date of the application therefor. III. - LOANS. - The Company will advance to the annuitants upon proper assignment of this policy and on the sole security thereof, any amount not exceeding the cash value of the policy, as provided for in Privilege 11 above. The rate of interest shall be six per cent. per annum. This privilege is subject to the condition that there is no legal restriction to the contrary and that any indebtedness to the Company on this policy shall be deducted from the said loan. The Company may also collect interest*924 in advance to the end of the current policy year, subject to a proper discount allowance. Failure to pay any such loan or the interest thereon shall not void the policy unless the total indebtedness shall equal or exceed such loan value at the time of such failure, nor until one month after notice shall have been mailed by the Company to the last known address of the annuitants and of the assignee, if any. The Company shall have the right to defer the granting of a loan hereon (except for the *62 purpose of paying premiums on policies in the Company) for a period not exceeding ninety days from the date of the application therefor. * * * V. - DEDUCTION OF INDEBTEDNESS. - In any settlement hereunder any sum due to the Company in connection with this policy shall be deducted from the amount payable under this policy. VI. - BASIS OF RESERVES. - The reserves under this policy are based upon the British Offices Select Life Annuity Tables, O--(am)--and O--(af)--, with interest at three and one-half per cent. The contract contained no provision reserving to the decedent, or anyone, the right to change the beneficiaries. Also on March 10, 1928, the decedent, with Hariot*925 Reynolds Schultz, another daughter As joint annuitant, entered into a second contract with Sun Life similar in all essential respects to the contract previously described. The premium, principal sum, and annuity payments were the same. Martha Reynolds Knight and, in the event of her death, her children were to be beneficiaries under the contract, provided Hariot Reynolds Schultz died without issue. Hariot Reynolds Schultz was married and was 23 years of age at her nearest birthday. The decedent was survived by her two daughters, Martha Reynolds Knight and Hariot Reynolds Schultz, and since her death they have received annuity payments under the two contracts. On March 8 and 10, 1928, the decedent was in good health and was not apprehensive of death within the immediate or reasonably distant future and the policies did not represent transfers made in contemplation of death. The decedent's estate tax return filed by the petitioners in January 1934 did not include in the decedent's gross estate any amounts representative of the two annuity contracts. The respondent has determined that $300,000 is the value of her property rights in the two contracts and has included that*926 sum in her gross estate. OPINION. TURNER: In his notice of deficiency the respondent stated that the addition to the gross estate of the decedent in respect of the two contracts described in our findings of fact was made under the provisions of section 302(c) of the Revenue Act of 1926, 1 as amended by *63 section 803 of the Revenue Act of 1932. The case was submitted and originally briefed by both parties solely on the question of applicability of section 302(c). Subsequently, however, counsel for the parties were requested to consider the question as to whether or not the value of the two contracts at the decedent's death was includable in the gross estate under section 302(d) of the Revenue Act of 1926 2 by reason of certain of the provisions of the contracts designated as "Privileges and Conditions", which provided for the surrender of the contracts for amounts equal to the principal sum stated and for loans thereon not exceeding such principal sums. *927 In the supplemental brief filed for the petitioners, it was contended that the contracts here are controlled by decisions in insurance cases wherein it has been held that in the absence of the reservation of a right to change the beneficiary, the insured, or owner, may not surrender the insurance contract for cash or obtain loans thereon without the consent of the beneficiary, or beneficiaries, even though the contract contains provision for loans and the surrender of the policy for cash, citing ; ; affirmed on this point, ; ; ; and . The respondent in his supplemental brief still contended for the application of section 302(c), supra, and made no claim that section 302(d), supra, was applicable. The contracts herein, with the exception that they contain no reservation of the right to change the beneficiaries, are the same in all essential respects as*928 the contract considered by us in , and we there held that the contract under consideration was not a life insurance contract but an annuity contract. See also . It does not follow therefore that the decisions relied upon by the petitioners in respect of insurance policies are applicable to the contracts before us and that annuity contracts which contain loan and cash surrender privileges are not revocable within the meaning of section 302(d), supra, even though the right to change the beneficiary is not reserved. Since these contracts may not be classified as insurance contracts, the answer to the question of revocability is to be found in the terms of the contracts themselves in the same manner as the revocability of grants to trusts or other *64 transfers are determined in applying the provision of the statute under consideration. While the contracts do make provision for their surrender for an amount equal to the principal sum and for loans to the annuitants in similar amounts, they also provide that the surrender for cash*929 may be made "providing there is no legal restriction to the contrary" and that the loans may be made to the annuitants "upon proper assignment" of the contracts. The contracts contain no provision, or provisions, which specifically reserve to the decedent, alone or in conjunction with any specified individual or individuals, the right to revoke, alter, or amend the terms of the contracts. As we read the clauses mentioned, they were intended to bind Sun Life to pay the principal sum or to make the loans thereon, provided all of the parties having interests under the policies should agree to such surrender or to loans to the annuitants, rather than that they were intended as a reservation in the grantor of the right, alone or in conjunction with some person, to surrender the contracts for the principal sums designated or to procure loans to the extent of the cash surrender value. A right to revoke which requires consent of all the beneficiaries is not such a right of revocation as will bring the contracts within the terms of section 302(d), supra. *930 . In view of the above, we do not consider it necessary to consider the fact that the rights of minors or unborn children might be involved. As to the applicability of section 302(c), supra, there is no showing or claim that the payment of the "premiums" was made in contemplation of death and it is well settled that a transfer, by trust or otherwise, made prior to March 3, 1931, whereby the grantor has retained for life or any period only the right to income from the property transferred, is not a transfer intended to take effect in possession or enjoyment at or after death. ; ; ; and . Decision will be entered for the petitioners. 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 - * * * (c) 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. * * * ↩ 2. (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent relinquished conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * * ↩