Old Colony Trust Co. v. Commissioner

*435 The respondent has determined a deficiency of $45,530.92 in estate tax liability which results in part from including in the value of the gross estate of decedent the amount of $40,000. Petitioners claim that the $40,000 represents payment to beneficiaries pursuant to a life insurance contract and that none of the amount in question is includable in the gross estate by virtue of the provision contained in section 302(g) of the Revenue Act of 1926.

FINDINGS OF FACT.

On August 27, 1928, the Sun Life Assurance Co. of Canada entered into a written agreement with the decedent, Everett Morss, whereby the company agreed to pay to Everett Morss, called the annuitant, the*1038 sum of $1,400 on June 19, 1929, and on the 19th day of June in each year thereafter during the subsequent lifetime of the said annuitant; and further agreed to pay upon proof of death of the annuitant at least $40,000 to his nominees, called the beneficiaries of the annuitant. In consideration of the above agreement, Everett Morss paid to the company $42,000. The written agreement issued by the company is entitled "Life Annuity With Principal Sum Payable at Death - Single Payment - Annual Dividend." The agreement sets forth on its face the following: "Principal sum $40,000"; "Single premium $42,000"; "Yearly annuity $1,400"; Age "63."

The decedent was 63 years of age when he entered into the contract with the company. He died December 27, 1933. Thereafter the Sun Life Assurance Co. of Canada paid to three named beneficiaries, children of the decedent, the sum of $40,994.20. The amount of $994.20 was the accrued annuity for the year 1933 up to the date of death of the annuitant.

The agreement entered into by decedent with the company provides that the policy may be surrendered to the company at any *436 time for an amount equal to the principal sum set forth in the*1039 agreement. The agreement further gives to the annuitant participation in profits by providing that all annuity payments shall be increased by such dividends as may be allotted by the company out of its surplus interest earnings. The agreement also provides a basis for reserves which are based on British Offices Select Life Annuity Tables, with interest at 3 1/2 percent. The agreement provides that no assignment of the policy shall be binding on the company unless in writing and until filed at its head office. The agreement gives the annuitant the right to change the beneficiaries from time to time by filing with the company a written request accompanied by the policy and also provides that the annuitant may surrender, assign, or pledge the policy without the consent of the beneficiary.

The petitioners reported in their Federal estate tax return the receipt of the sum of $40,994.20 and excluded the amount of $40,000 as "Insurance receivable by beneficiaries other than the estate not in excess of $40,000."

The amount of $994.20 is includable in the gross estate.

Respondent added to the value of the gross estate the amount of $40,000, having concluded that the agreement under*1040 which this amount was paid is not a policy of insurance but is an annuity contract and as such is taxable as an asset of the estate.

The petitioners have paid estate, inheritance, legacy, or succession taxes to the Commonwealth of Massachusetts in the amount of $37,930.92.

OPINION.

HARRON: The question involved in this proceeding is whether $40,000 received by beneficiaries of the decedent is taxable as an asset of the estate or whether it is properly excluded from the value of the gross estate as insurance received by beneficiaries under policies taken out by the decedent upon his own life being not in excess of $40,000 so as to be within the exemption allowed by section 302(g) of the Revenue Act of 1926.

Section 302(g) of the Revenue Act of 1926 provides as follows:

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) * * * and to the extent of the excess ofer $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

In order to*1041 properly determine the principal question involved, it is necessary to consider a collateral question, namely, whether the agreement entered into between the decedent and the Sun Life Assurance Co. of Canada on August 27, 1928, was a contract of life *437 insurance so that the $40,000 paid to decedent's survivors by that company was received by them "as insurance under policies taken out by the decedent upon his own life." Petitioners contend that the agreement was in part a contract of life insurance and argue that a contract which provides for the payment of a certain sum of money upon death is, in that respect, a contract of life insurance although the contract contains other provisions having nothing to do with life insurance. They contend that the type of agreement involved in this proceeding was commonly written at the time by numerous insurance companies, the consideration paid for the issue of such contract being customarily apportioned by an actuarial allocation.

The respondent contends that the agreement was not a contract of life insurance so that the proceeds, $40,000, paid to the decedent's survivors were not insurance proceeds and therefore that the entire*1042 amount thereof is properly included in the decedent's gross estate. Respondent contends, in substance, that the contract was in fact an annuity contract although he points out that it is difficult to find a single term which accurately describes the contract. He suggests that the contract has some of the characteristics of a trust.

We are of the opinion that the contract made by the decedent was not a contract of life insurance. This seems evident from reading the contract. Further, there is no evidence that decedent applied for life insurance or submitted to the usual physical examination. The company appears to have been unconcerned with the element of life expectancy or physical condition, even though decedent was 63 years of age at the time he made the contract. The single payment in the amount of $42,000 does not appear to have been a "premium" for life insurance. It was not consideration given for an agreement to indemnify against the loss of life nor does the amount of the payment appear to have been proportioned to any life insurance risk. Cf. *1043 People, ex rel. Metropolitan Life Insurance Co. v. Knapp,184 N.Y.S. 345; affd., 132 N.E. 916; Commonwealth v. Metropolitan Insurance Co.,254 Pa. 510; 98 Atl. 1072; Ritter v. New York Mutual Life Insurance Co.,169 U.S. 139.

Decedent paid a single sum of $42,000 to the company. The company agreed to several matters: To pay "the annuitant" the amount of $1,400, annually, for life, to be increased by such dividends as may be allotted by the company out of its surplus interest earnings; to pay to the annuitant or his assigns the principal sum of the contract, $40,000, at any time upon surrender of the contract; to pay to the beneficiaries of the annuitant at least the principal sum of $40,000 upon proof of death of the annuitant or a sum equal to the premium paid, $42,000, less the sum of all annuity payments made *438 under the policy. It is noted that the amount of the annuity agreed to be paid, $1,400, is 3 1/3 percent of the amount paid, $42,000. Thus it appears that the company guaranteed to the annuitant a return of 3 1/3 percent on the total amount paid to the company and a*1044 return of at least the principal amount of $40,000 either to the annuitant or his assigns during his life, on surrender of the "policy", or to his beneficiaries upon his death. It further appears that the death of the annuitant operated to terminate the contract rather than cause an insurer's obligation to become payable. The company had an obligation at all times to pay the principal sum set forth in the contract conditioned only on the surrender thereof. Death of the annuitant was not the sole contingency for payment of the principal sum. The contract was described on its face as a "Life Annuity With Principal Sum Payable at Death."

An annuity contract is defined as an "agreement to pay a specified sum to the annuitant annually during life" in consideration of a single payment, which is not a "premium." 3 Corpus Juris Secundum 1375; Commonwealth v. Metropolitan Life Insurance Co., supra; Carroll v. Equitable Life Assurance Society of United States,9 Fed.Supp. 223; Rishel v. Pacific Mutual Life Insurance Co., 78 Fed.(2d) 881. We believe the contract under consideration is an annuity contract within the definition set forth above. *1045 The term "annuitant" is used throughout. Neither the terms "life insurance" or "insurance" or "insured" appear anywhere in the contract.

Counsel for petitioners argues that the contract was in part a contract of insurance. He would have us consider how reserves against the principal sum were set up. This factor appears to be immaterial because the method of handling reserves would not be wholly determinative of the question whether the contract was an insurance contract. It is true that the company set up reserves against the liability it assumed. It undertook some risk when it guaranteed payments of annuity and repayment of at least the principal sum of $40,000. But we think this was purely an investment risk related only to management in investing the fund. There is no evidence from examination of the contract that the company assumed any of the risks of life insurance. As stated before, the agreement to pay the principal sum of $40,000 was not contingent upon death but only upon demand and surrender of the contract. We do not believe that the provision made in the contract to pay the principal sum to the annuitant's beneficiaries upon his death, in the event he*1046 did not make any demand for payment during his life to himself or his assignees, injected any aspect of life insurance into the contract. The provision was no more than one for disposition of a fund reserved to the annuitant under a contract that guaranteed payment of a principal sum, the consideration for which was the payment of a single sum. Cf. Guaranty Trust*439 Co. of New York, Executor,16 B.T.A. 314; Ballou v. Fisher,61 Pac.(2d) 423. The decedent paid $42,000 to the company. Of this amount at least $40,000 and so much more of the amount paid as was not received in annuity payments "remained virtually at his disposal, use and control as long as he lived and passed at his death to the beneficiaries he named." Cf. In re Thornton's Estate,243 N.W. 389, 391. Such contracts are not insurance policies. In re Thornton's Estate, supra.

The petitioners deny tax liability upon the amount of $40,000 paid pursuant to the contract under consideration upon the assertion that section 302(g), Revenue Act of 1926, exempts the receipt of that payment from taxation. The exemption referred to is one of*1047 legislative grace and the wording of the statute must be carefully considered. Congress has used clear terms in describing the nature of the asset it relieves from estate taxation and has stated it to be $40,000 "of the amount receivable by * * * beneficiaries as insurance under policies taken out by the decedent upon his own life." (Italics supplied.) The decedent, in this proceeding, did not take out a policy of insurance on his own life when he executed the annuity contract here involved. Therefore the payment of $40,000 thereunder to the beneficiaries he designated was not, in our opinion, received by them as insurance. We therefore hold that respondent is correct in including the amount of $40,000 in the gross estate.

The petitioners are entitled to credits for amounts paid for estate, inheritance, or succession taxes to any state upon proof of payment. In computing the correct tax liability under Rule 50 consideration should be given to allowable credits under section 301(b).

Decision will be entered under Rule 50.