McKelvy v. Commissioner

*1206 Respondent determined a deficiency of $46,063.86 in estate taxes, by adding to gross estate the value of insurance policies for the benefit of decedent's sons, and by diminishing the deduction of an insurance policy for charitable purposes.

*1207 FINDINGS OF FACT.

Petitioners are the executors of the estate of Ella K. McKelvy, deceased, who died testate on March 26, 1931, a resident of Pittsburgh, *1016 Pennsylvania.

On May 24, 1917, decedent took out three continuous installment life insurance policies on her own life with the Mutual Life Insurance Co. of New York. By the terms of the policies, all of which were similar, decedent agreed to pay and did pay until her death annual premiums of $1,483.90, $1,512, and $1,607.30, respectively, on the three, and the insurance company undertook to pay upon her death to her three sons a monthly income of $100 each for 20 years certain and a monthly income of like amount throughout the remaining life of each. Each policy was issued "without right reserved to the insured to change the beneficiary", and each provided that if the orginal beneficiary predeceased the insured or died before all the income payments for the 20 years certain had become payable, the amounts as due should be payable per stirpes to the surviving issue of the beneficiary, or, on failure of issue, to the surviving beneficiaries of the other two policies, or, if none survived, then to the "executors or administrators of the last survivor of said Original Beneficiary, the issue of said Original beneficiary, and said sons."

Each policy also provided that "After three*1017 full years' premiums shall have been duly paid, the owner, not later than three months after any default in payment of premium", might elect to surrender the policy for its cash value, or have it continued in force as nonparticipating term insurance, or surrender it for nonparticipating paid-up life insurance payable in one sum at the death of the insured. Each contained a further provision that:

At any time while this policy is in force, provided at least three full years' premiums shall have been paid and no premium is in default, the Company will advance * * * an amount which, with interest thereon to the end of the current policy-year, shall be equal to, or at the option of the owner less than, the cash value at the end of said year: * * * Failure to repay any such advance or to pay interest shall not avoid this Policy unless the total indebtedness hereon to the Company shall equal or exceed to cash value at the time of such failure * * *.

Decedent was 55 years of age at the time the policies were taken out, and the three sons, the original beneficiaries, were respectively 25, 23, and 16 years of age. Under each policy the total amount of income payments to be made for 20*1018 years from the date of death was $24,000, the commuted value of which was $18,388.80.

At the date of decedent's death her three sons were surviving. On March 26, 1931, by supplemental contracts, the insurance company agreed to pay them the income as required by the policies, or, *1208 in case of the beneficiary's death before 20 years, to pay the unpaid remainder to his issue per stirpes, or, on failure of issue, to the other beneficiaries or survivor.

In computing the value of the gross estate, respondent included $64,266.62 representing the aggregate values of the three policies as of March 26, 1931.

2. On October 25, 1919, the Reliance Life Insurance Co. of Pittsburgh, Pennsylvania, issued a policy on decedent's life in the amount of $30,000 for an annual premium of $2,049.30. Decedent's age was then 58 years. Originally the beneficiaries named in the policy were the "insured's executors, administrators or assigns", but on May 12, 1920, the policy was endorsed as follows:

At the request of the insured, the beneficiaries under this policy are hereby changed to the East Liberty Presbyterian Church, Pittsburgh, Pa., two-sixth; Western College for Women, . *1019 oxford, Ohio, one sixth; Presbyterian Hospital, Pittsburgh, Pa., one-sixth; Eye and Ear Hospital, Pittsburgh, Pa., one-sixth; Young Women's Christian Association, Spahr & Alder Streets, Pittsburgh, Pa., one-sixth.

The insurance company paid the several beneficiaries the face value of the policy shortly after decedent's death.

The face amount of this policy was included in petitioners' estate tax return as a part of the gross estate, and was deducted as a charitable bequest. Respondent, having included in gross estate $215,608.42 as the value of life insurance payable to beneficiaries other than the executors, disallowed this deduction to the extent of $4,694.68 by "prorating the $40,000 statutory exemption among the beneficiaries, which resulted in the reduction of the insurance going to charity from $30,000 to $25,305.32 * * *."

OPINION.

STERNHAGEN: 1. The petitioners assail the inclusion in gross estate of $64,266.62, the commuted value of the amount receivable under three policies of insurance, of which decedent's three sons were irrevocably the respective beneficiaries. The respondent's determination rests upon the view that decedent had until death a power to surrender*1020 and cancel the policies and to pledge them as collateral for loans. , clearly supports the inclusion if the assumed powers of the decedent existed. See also , and . In each policy, by a provision called "Options on Surrender or Lapse", it is provided that the "owner" may after three years' premiums have been paid surrender the policy for cash or convert it into a different form of insurance, and by a provision called "Loans" it is *1209 provided that the "owner" may borrow an amount not greater than the policy's cash surrender value upon proper assignment. The present controversy turns upon the meaning of the word "owner", petitioner contending that it means only the beneficiary and respondent that it means the insured.

In support of their position petitioners cite ; ; *1021 ; ; Smith v.Metropolitan Life Insurance Co., 34 Pa.Sup.Ct. 72; and , in all of which it was held that the insured was without right to receive or direct the disposition of the proceeds, when payable, of policies under which the insured had no right to change the beneficiary. This was on the ground that the beneficiary had a vested interest in the proceeds. The recognition, however, of such a vested interest falls short of establishing that the beneficiary is for that reason the "owner" of the policy, a proposition essentially different and requiring no consideration in the cases thus cited. The district court in , found no inconsistency in the insured's lack of right to change the beneficiary and the recognition of his right to borrow on the policy. In Schuberth v. Prudential Insurance Co., 86 Pa.Sup.Ct. 80, the court recognized that where the policy expressly provided that the insured could borrow, such a right was not in conflict with a vested interest in the beneficiary. *1022 In the policies now before us the provision which denies to the beneficiary "the right either to assign or to commute income payments unless such right was given to such beneficiary by the insured" clearly indicates that it is the insured and not the beneficiary who as "owner" may surrender and borrow. Had the beneficiary such right prior to the insured's death he would thus be enabled to defeat the very purpose of his own protection which may be regarded as underlying the existence of the policy.

The right to surrender and to borrow on the policies we hold to be a substantial one, which rested with decedent until her death and is sufficient to bring the commuted value of the amount receivable by the beneficiaries within the decedent's gross estate as the respondent has determined.

2. Among policies of life insurance payable to beneficiaries other than the executors of the estate aggregating $255,608.42 was one for $30,000 payable to charitable corporations. This amount petitioners deducted in full, regarding it as unaffected by the $40,000 limitation of section 302(g), Revenue Act of 1926. The respondent first included the amount of this policy within the total to be affected*1023 by the $40,000 limitation, thus reducing the amount includible as insurance to $215,608.42. Petitioners claim that notwithstanding *1210 this the estate is entitled to the full deduction of $30,000 as a charitable bequest, and this the respondent has denied by reducing such amount to 21560842/25560842 of $30,000. Charitable bequests are deductible by virtue of section 303(a)(3), which limits such deduction to "the value of the transferred property required to be included in the gross estate." It can not be said, in view of the $40,000 insurance exemption, that all this policy, any more than any other policy, was included in the gross estate. The principle by which the respondent's determination is supported has already been discussed in another but analogous situation, , wherein the apportionment method has been approved. The determination is sustained.

Judgment will be entered for the respondent.