Phipps v. Commissioner

MARGARET R. PHIPPS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Phipps v. Commissioner Docket No. 96471. United States Board of Tax Appeals 43 B.T.A. 790; 1941 BTA LEXIS 1453; February 28, 1941, Promulgated *1453 In 1937 petitioner irrevocably assigned as gifts a single premium endowment insurance policy issued to her on her own life and two annual premium ordinary life insurance policies also issued to her on her own life. At the date of gift only the first annual premiums had been paid on the two ordinary life policies, and such policies had no cash surrender value until three years' full premiums had been paid. Held, that the proper criterion for the valuation of the three policies for gift tax purposes was the cost of duplicating the policies at the date of gift rather than the cash surrender value of the policies at such date. Guggenheim v. rasquin,312 U.S. 254; United States v. Ryerson,312 U.S. 260; Powers v. Commissioner,312 U.S. 259. David A. Reed, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent. HARRON *790 Respondent determined a deficiency of $288.90 in gift tax for the year 1937. The parties have stipulated that if the main question is decided in favor of respondent the correct amount of the deficiency in gift tax for the taxable year is $117.85. *1454 The main question is whether the proper criterion for the valuation of three policies of life insurance irrevocably assigned by petitioner as gifts in the taxable year is the cost of duplicating the policies at the date of gift or the cash surrender value of the policies on that date. The facts have been stipulated. FINDINGS OF FACT. Petitioner resides at Denver, Colorado, and filed her gift tax return for the year 1937 with the collector of internal revenue for the district of Colorado. On September 29, 1936, the New York Life Insurance Co. issued to petitioner a single premium, 15-year endowment insurance policy upon her own life in the face amount of $100,000. Petitioner paid a single premium of $72,746. The face amount was to be paid to petitioner on September 29, 1951, if she was then living, or to Allan R. and Gerald H. Phipps, "sons of the insured share and share alike, or to the survivor", if she died before that date. Petitioner reserved the right to change the beneficiaries. On October 30, 1936, the New York Life Insurance Co. also issued to petitioner two annual premium, ordinary life insurance policies upon her own life, one in the face amount of $50,000*1455 and one in the face amount of $25,000. The annual premium was $2,228.50 on the $50,000 policy, and $1,114.25 on the $25,000 policy. In advance of the issuance of the policies, petitioner paid the premiums on both *791 policies for one year. The face amount of each policy was to be paid to "Allan R. and Gerald H. Phipps, sons of the insured, share and share alike, or to the survivor." In each policy petitioner reserved the right to change the beneficiaries. By its terms each policy had no guaranteed cash surrender value until the annual premiums for three years had been paid. When the annual premiums for three years had been paid, each policy had a guaranteed cash surrender value of $45 per $1,000 of insurance. On March 9, 1937, petitioner irrevocably assigned as gifts the three policies of insurance "and all dividend, benefit and advantage to be had and derived therefrom" to her two sons, Allan R. Phipps and Gerald H. Phipps "share alike, or to the survivor." Under the assignment petitioner expressly gave to the assignees full authority to surrender the policies for their cash surrender value or to sell the policies. As of March 9, 1937, the date of gift, the cash*1456 surrender value of each policy and the cost of purchasing a policy similar to each policy were as follows: Policy Cash surrender value Cost of similar policy $100,000 single premium endowment policy $62,820.55 $73,739,00 $50,000 annual premium ordinary life policy 0.00 1,830.13 $25,000 annual premium ordinary life policy 0.00 915.06 OPINION. HARRON: The main question is whether for gift tax purposes the proper criterion for the valuation of the three policies irrevocably assigned by petitioner as gifts in the taxable year was the cost of duplicating the policies at the date of gift or the cash surrender value of the policies at such date. The question arises under section 506 of the Revenue Act of 1932, which provides that for gift tax purposes the amount of a gift made in property is "the value thereof at the date of the gift." On her gift tax return for the taxable year each policy was returned by petitioner at a value which was more than the cash surrender value of the policy at the date of gift but less than the cost of purchasing a similar policy at such date. In the statement attached to the deficiency notice respondent determined that the*1457 value of each policy was the cost of purchasing a similar policy at the date of gift. Respondent made his determination in accordance with article 19(9) of Regulations 79 (1936 Ed.). 1 In her petition petitioner alleges that *792 the value of each policy was the cash surrender value at the date of gift and that therefore she is entitled to a refund of gift taxes paid. The Supreme Court has held recently that for gift tax purposes the proper criterion for the valuation of single premium life insurance policies irrevocably assigned as gifts is the cost of duplicating the policies, rather than the cash surrender value of the policies, at the dates of the gifts, Guggenheim v. Rasquin,312 U.S. 254; United States v. Ryerson,312 U.S. 260; Powers v. Commissioner,312 U.S. 259; even where there has been a lapse of some years between the issuance and the assignment of the policies, *1458 United States v. Ryerson, supra. In Guggenheim v. Rasquin, supra, the rationale of these decisions is set forth in part as follows: * * * But the owner of a fully paid life insurance policy has more than the mere right to surrender it; he has the right to retain it for its investment virtues and to receive the face amount of the policy upon the insured's death. * * * All of the economic benefits of a policy must be taken into consideration in determining its value for gift tax purposes. To single out one and to disregard the others is in effect to substitute a different property interest for the one which was the subject of the gift. * * * Presumptively the value of these policies at the date of the gift was the amount which the insured had expended to acquire them. Cost is cogent evidence of value. And here it is the only suggested criterion which reflects the value to the owner of the entire bundle of rights in a single-premium policy - the right to retain it as well as the right to surrender it. In our opinion the proper criterion for the valuation of each of the three policies for gift tax purposes is the cost of duplicating each policy at*1459 the date of gift rather than the cash surrender value of each policy at such date. With respect to the single premium endowment policy, the three decisions of the Supreme Court are directly controlling. (No contention is made that the single premium endowment policy is not a policy of life insurance, and we think there can be no doubt on that point. See Estate of William G. Thompson,41 B.T.A. 901, 906.) And with respect to the two annual premium ordinary life policies, the rationale of the three decisions of the Supreme Court compels the conclusion that the proper criterion for valuation is the cost of duplicating the policies at the date of gift, even though petitioner had paid only the first annual premiums on the policies. As in the case of the single premium policy, the assignees had "more than the mere right to surrender" the policies; they had the right to retain the policies for their "investment virtues" and to receive the face amounts of the policies upon the insured's death. Cf. Guggenheim v. Rasquin, supra.Under the policies, the assignees might enjoy these rights from the date of gift, March 9, 1937, until the expiration of the grace period*1460 for the payment of the next annual premiums, November 30, 1937, without the payment of any additional premiums, and thereafter they might continue to *793 enjoy these rights by the payment of the annual premiums as they came due. That cash surrender value at the date of gift is not the proper criterion for the valuation of the policies is shown graphically by the fact that the policies had no cash surrender value at the date of gift and would have none until the payment of three years' full premiums. 2 Cost of duplicating the policies at the date of gift is "cogent evidence of value", and, in the absence of more cogent evidence of value, cost "is the only suggested criterion which reflects the value" to the assignees of their "entire bundle of rights" in the two annual premium ordinary life policies. Cf. Guggenheim v. Rasquin, supra; United States v. Ryerson, supra.Therefore, respondent's determination that the value of the three policies at the date of gift was the cost of duplicating the policies at such date is sustained. Guggenheim v. Rasquin, supra; *1461 United States v. Ryerson, supra;Powers v. Commissioner, supra. Respondent concedes that he made an error in the original computation of the deficiency. The parties have stipulated that if the Board's decision is in favor of respondent on the main question, the correct amount of the deficiency is $117.85. Decision will be entered that there is a deficiency of $117.85. Footnotes 1. Art 19(9) Life insurance * * * contracts.↩ - The value of a life insurance contract * * * is established through the sale of the particular contract by the company, or through the sale by the company of comparable contracts. 2. In Guggenheim v. Rasquin, 110 Fed.(2d) 371; affd., 312 U.S. 254, the Circuit Court of Appeals, Second Circuit, made the following observation: "* * * With policies on an annual premium basis, it is the general practice not to allow cash surrender value for the first two years. * * * It would hardly be urged, however, that a life insurance policy was worthless until the third year, or that the gift of a policy less than three years old was not subject to gift tax on the ground that the property given had no value. Yet that would be the result if cash surrender value were the determining factor under the gift tax law." ↩