Chew's Estate v. Commissioner

McCORD, Circuit Judge. This is an appeal by petitioner for review, and involves deficiencies in estate taxes for the year 1940 in the amount of $2,984.50. Questions presented: Did the sum of $22,539.85 paid to the beneficiary of insurance policies tinder provisions limiting the liability of the company in the event of death by self-destruction within the first two insurance years to an amount equal to premiums paid constitute “insurance” within the meaning of Section 811(g) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev. Code, § 811(g) exempting from inclusion in the gross estate of a decedent amounts up to $40,000 receivable by beneficiaries as “insurance” ? If such amounts do not constitute insurance, are they taxable as a part of the decedent’s gross estate under Section 811(c) of the Internal Revenue Code? The facts necessary for decision and which have been stipulated disclose that on August 14, 1940, two fifteen-year endowment policies were issued to the decedent, William Douglas Chew, Jr., by the New York Life Insurance Company. These policies were described as “15-Year Endowment-Single Premium-Endowment payable in 15 years or at prior death,” and provided for the payment of the principal sums of $21,200 and $10,000 respectively. On these policies, respective premiums of $15,072.35 and $7,109.60 were prepaid. On September 30, 1940, a policy described as a “Twenty Payment Life” policy was issued by the same company to the decedent. This policy provided for the payment of the principal sum of $10,000 upon the death of the decedent. The first of the twenty annual premiums, $357.90, was paid. In all three policies, the mother of the decedent, Mrs. Carrie Cole Chew, was named as the beneficiary. But all three provided that should the beneficiary predecease the insured, the interest of such beneficiary should vest in the insured. All three policies also granted to the insured the right to change the beneficiary and guarantee to him loan and surrender values. In addition, all three policies contained the following suicide clause: “In the event of self-destruction during the first two insurance years, whether the Insured be sane or insane, the insurance under this Policy shall be a sum equal to the premium hereon which has been paid to and received by the Company and no more.” On November 28, 1940, three months after the issuance of the endowment policies and two months after the issuance of the Twenty-Payment Life policy, the insured died under circumstances which indicated self-destruction. The coroner’s records described the cause of death as “suicide by firing pistol into heart.” Settlement was made between the insurance company and the beneficiary under the suicide provisions of the policies and the sums payable to the beneficiary equalling the total of premiums paid, $22,539.85, were left at interest with the company under a certificate of deposit dated February 10, 1941. The insurance company describes the sums paid as refund of premiums in the certificate of deposit, and in recording the payments on its books. The payments were also described as a refund of premiums in Treasury Form 712, which the insurance company filed with the decedent’s estate tax return. Under a judgment of succession entered August 4, 1941, by the First District Court of Caddo Parish, Louisiana, Carrie Cole Chew was named as sole heir of the decedent. In the estate tax return filed on behalf of the decedent’s estate the amounts payable to the beneficiary under the fifteen year endowment and the twenty payment life policies, $22,539.85, were included in the total sum of $32,640.03 reported as amounts paid to beneficiaries as insurance. An exemption from the gross estate was claimed for this amount under Section 811 (g) which exempted from inclusion in the gross estate the first $40,000 receivable by beneficiaries as insurance. The Commissioner determined a deficiency of $2,984.50 against the estate, contending that the $22,-539.85 did not constitute amounts receivable as insurance and that they should be included in the gross estate of the decedent. The Tax Court sustained the Commissioner’s contention. The contract provisions which provide that the company will not be liable for the principal sum in the event of self-destruction within the first two insurance years does not provide an alternative maturity date on which liability of the company to pay a lesser amount of insurance arises. It is an agreement of the contracting parties on the very threshold of the contracts that if within two years, insured brought his life to an end by self-destruction, such act would constitute a risk which the company did not and would not assume. — 78 — In tile event of self-destruction the entire promises in the policies were destroyed and the company became custodian of the naked amount without interest which the insured had paid as premiums, with only the duty to return these sums to insured’s heirs or designated beneficiary. Helvering v. Le Gierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996; Keller v. Commissioner of Internal Revenue, 312 U.S. 543, 61 S.Ct. 651, 85 L.Ed. 1032; Kernochan v. United States, 29 F.Supp. 860, 89 Ct.Cl. 507, certiorari denied 309 U.S. 675, 60 S.Ct. 711, 84 L.Ed. 1019. Within the two year period, here under consideration, if insured’s death was caused by self-destruction then the insurance company did not stand to lose anything. Every element in the contracts providing for insurance in event of death went down with the clause of self-destruction. It appears to us indisputable that payments made under the insurance contracts here did not constitute insurance. Settlement made under the suicide provisions terminated absolutely the company’s liability without touching the insurance, features of the "contract. Insured’s death by suicide within the two years precluded the possibility of death by natural causes. Death by natural causes within the two year period would similarly have prevented the suicide clause from taking effect. The trend of judicial decision now is to give to each provision in an insurance policy the separate effect it was intended to have. Terry v. New York Life Insurance Co., 8 Cir., 104 F.2d 498; Connecticut General Life Insurance Co. v. McClellan, 6 Cir., 94 F.2d 445; Downey v. German Alliance Insurance Co., 4 Cir., 252 F. 701; Pyramid Life Insurance Co. v. Selkirk, 5 Cir., 80 F.2d 553. The policies describe the payments made to the beneficiary as “insurance”. Such designation, however, does not make it insurance. We find that the company recorded this transaction on its books and on the form filed with the estate tax return as refund of premiums. Moreover, our courts have clearly implied in the cases of Helvering v. Le Gierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996; Keller v. Commissioner of Internal Revenue, 1 Cir., 312 U.S. 543, 61 S.Ct. 651, 85 L.Ed. 1032; and Old Colony Trust Co. v. Commissioner of Internal Revenue, 1 Cir., 102 F.2d 380, that payments to qualify as and measure to insurance under Section 811(g) must be in settlement of a contract which has exposed the company to a risk of financial loss. No such risk was incurred by the insurance company here. The amount payable at death was not a sum fixed upon any ratio of premiums paid to the probabilities of the risk insured against, which constitutes “insurance” in the statutory sense. Cf. Helvering v. Le Gierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996; Commissioner of Internal Revenue v. Pan-American Life Ins. Co., 5 Cir., 111 F.2d 366; In re Fidelity Assurance Association, D.C., 42 F.Supp. 973, 982. Payments made to the beneficiary are taxable as a part of the gross estate of the decedent under Section 811(c) of the Internal Revenue Code. Old Colony Trust Co. v. Commissioner of Internal Revenue, 1 Cir., 102 F.2d 380; Reinecke v. Northern Trust Co., 278 U.S. 339, 49 S.Ct. 123, 73 L.Ed. 410, 66 A.L.R. 397; Chase National Bank v. United States, 278 U.S. 327, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388; Kernochan v. United States, 29 F.Supp. 860, 89 Ct.Cl. 507, certiorari denied 309 U.S. 675, 60 S.Ct. 711, 84 L.Ed. 1019. We are of opinion and so hold that the Tax Court in ascertaining that the payments made to the beneficiary did not constitute insurance was correct, and its decree is Affirmed.