First Nat'l Bank v. Commissioner

*1299 This proceeding involves a deficiency in estate tax in the amount of $2,485.83. The question presented is whether the entire proceeds of certain life insurance policies aggregating $50,249.08 taken out by the decedent, a resident of Tennessee, and made payable to the executor of his estate, are properly includable in his gross estate under the first clause of section 302(g) of the Revenue Act of 1926, or whether $40,000 is to be excluded under the second clause of that section.

FINDINGS OF FACT.

Frederick G. Proutt, domiciled in and a resident of Memphis, Tennessee, died testate on May 27, 1934. The petitioner is the duly qualified executor of his estate.

At the time of the*1075 death of the decedent there were in existence policies of life insurance taken out by him on his own life in the aggregate amount of $85,833.18, of which there were eight policies, aggregating $50,249.08, payable to the executor of his estate.

Under the terms of his last will and testament the decedent directed that all of his debts be paid as soon as practicable after his death and authorized the executor to sell real estate, if necessary, for that purpose. After making several specific bequests, he devised and bequeathed to the First National Bank of Memphis, Tennessee, as trustee, all the rest and residue of his estate, including specifically adll insurance policies payable to his estate, to hold in trust, invest, manage, and pay over as follows:

(b) During the life of my wife, Laura Jane Proutt, the trustee shall pay the entire net income from the trust estate over to her.

(c) Upon the death of my wife, Laura Jane Proutt, and in the event my daughter, Jean Proutt, survives my wife, then the trustee shall pay the entire net income from the trust estate over to my said daughter during her life.

(d) Should the income from the trust estate be insufficient for the support*1076 *1300 and maintenance of my wife, Laura Jane Proutt, and my daughter, Jean Proutt, and her family, during the time said trust estate is held in trust to pay the income to my wife; or should the income from said trust estate be insufficient for the support and maintenance of my daughter, Jean Proutt, and her family, during the time said trust estate is held in trust to pay the income to my daughter, then in either such events, the trustee in its discretion, on the application of either my wife during her life, or on the application of my daughter after the death of my wife, is hereby authorized, empowered and directed to encroach upon the corpus of the estate for such purposes if necessary; and for such purposes of encroachment to sell either real or personal property; and the trustee's discretion with respect to the necessity of such encroachment shall be conclusive.

(e) Upon the death of my daughter, Jean Proutt, or if my wife, Laura Jane Proutt, outlives her, then upon my wife's death, said entire trust estate shall go in equal shares and vest in the then living children of my daughter, Jean Proutt, and in the then living descendants (per stirpes), of such of her children*1077 who may have proviously died, such descendants of any deceased child of hers to take the share that would have been taken by such deceased child, if alive.

In the event none of the children of my daughter, Jean Proutt, are then minors, said estate shall vest absolutely and free of any trust; but in the event any of her children are then minors, then only the equitable title to the corpus of the estate shall vest as above provided, and the trustee shall continue to hold said property in trust, until the youngest of her children reaches the age of 21 years; it being my intention in such event, that the property shall be held in trust under this provision so long as any of the children of my daughter, Jean Proutt, are minors; but the minority of children herein referred to, is the minority of children of Jean Proutt, and the minority of any children of any child of hers shall not work a continuance of the trust.

During such continuation of the trust, the trustee shall have the same powers in the management and handling of the estate, and in the sale, lease or disposition thereof, for the purpose of investments and reinvestment as theretofore; and after payment of all expenses of*1078 administration shall distribute the income to the equitable owners. Upon the termination of the minority of the youngest child of my daughter, Jean Proutt, said equitable owners shall be vested with the legal title to the corpus of the estate, free of any trust.

(f) If at the time of the death of the longest lived of my wife, Laura Jane Proutt, and my daughter, Jean Proutt, that is, if at the time of the death of that one of them that lives the longest, there are no children of my daugher, Jean Proutt, then living, nor decendants of such then living; thereupon, and in such event, said trust estate shall go, and be paid over by my trustee, as follows:

FIRST: Five Thousand ($5000.00) Dollars in cash or securities of the fair value thereof shall go, and be paid over to the Episcopal Orphanage, known as the "Church Home" now located at #750 Jackson Avenue, Memphis, Tennessee.

SECOND. Five Thousand ($5000.00) Dollars in cash, or securities of the fair value thereof, shall go, and be paid over to St. Peter's Orphanage Asylum, now located at Poplar and McLean Avenues in Memphis, Tennessee.

THIRD: The entire residue of said trust estate shall go, and be paid over to the University*1079 located on North Parkway in Memphis, Tennessee, known as "Southwestern University," to be used for the purpose of erecting a girls dormitory on the campus of said University in Memphis, Tennessee, such dormitory to be known as "Marjorie Proutt Memorial."

*1301 Frederick G. Proutt was survived by his wife, Laura Jane Proutt, and his daughter, Jean Proutt, both of whom are still living.

The First National Bank of Memphis, Tennessee, acting as executor of the estate of the decedent, collected the proceeds of the eight insurance policies hereinabove referred to, aggregating $50,249.08, and paid the entire amount over to the First National Bank of Memphis, Tennessee, acting as trustee of the testamentary trust created under the terms of his last will and testament. No part of such proceeds was used by the executor to pay debts of the decedent or administration costs of his estate.

In the estate tax return the petitioner claimed that the proceeds of the insurance policies, to the extent of $40,000, were exempt from estate tax under section 302 of the Revenue Act of 1926, as amended. In determining the deficiency the respondent included the entire proceeds of the policies*1080 in the gross estate.

OPINION.

TURNER: The petitioner contends that part of the proceeds of the eight insurance policies here in question, to the extent of $40,000, should be excluded from the gross estate under the second clause of section 302(g) of the Revenue Act of 1926, as amended. ¹ It is argued that under the laws of Tennessee the executor had no right to or interest in the proceeds of the policies which could be used for the purpose of paying the debts of the decedent or costs of administrating his estate; that the entire proceeds of the policies inured to the benefit of the widow and daughter of the decedent; that the proceeds were not "receivable by the executor" within the meaning of the first clause of section 302(g), supra; and that it is therefore entitled to the $40,000 exemption provided for in the last clause of that section as proceeds "receivable by all other beneficiaries." It relies on , and , which it contends decided this same question for the taxpayers.

*1081 The first contention of the respondent is that the Lucky and Jones cases are not controlling here because they involved the construction of section 402 of the Revenue Act of 1921 and section 302 of the Revenue Act of 1924, respectively, whereas the present case involves the interpretation of section 302 of the Rvenue Act of 1926, which latter *1302 act changed the prior acts by eliminating the exemption previously allowed in cases of this kind. Section 402(f) of the revenue Act of 1921 and section 302(g) of the Revenue Act of 1924 are identical with section 302(g) of the Revenue Act of 1926. The change referred to by the respondent involves section 402(a) of the Revenue Act of 1921 and section 302(a) of the Revenue Act of 1924, which were identical and provided as follows:

SEC. 402. That 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 -

(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of*1082 its administration and is subject to distribution as part of his estate.

With respect to the change referred to, the respondent points to the fact that the limitations contained in the above quoted provision (requiring that property, in order to be includable in the decedent's estate, be subject to the payment of charges against his estate, to the expenses of its administration, and to distribution as part of his estate) were eliminated from the corresponding section of the Revenue Act of 1926, which simply provided that the gross estate should include all the property: "[SEC. 302.] (a) to the extent of the interest therein of the decedent at the time of his death."

In support of his contention that this change in the 1926 Act was made for the purpose of eliminating the $40,000 exemption previously allowed in cases of this kind (Lucky and Jones cases) the respondent quotes from the pertinent report of the House Ways and Means Committee as follows (69th Cong., 1st sess., Report No. 1, p. 15):

Section 302. Under existing law the gross estate is determined by including the interest of the decedent at the time of his death in all classes of property which after his death*1083 is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as a part of his estate. In the interest of certainly it is recommended that the limitating language above referred to shall be eliminated in the proposed bill, so that the gross estate shall include the entire interest of the decedent at the time of his death in all the property. [Italics supplied.]

With further reference to the $40,000 exemption allowed in the Lucky and Jones cases, it is the contention of the respondent that the above mentioned limitations contained in section 402(a) of the Revenue Act of 1921 were read into section 402(f) of that act by this Board in the Lucky case, and that the same limitations contained in section 302(a) of the Revenue Act of 1924 were likewise read into section 302(g) of that act by the Circuit Court of Appeals in the Jones case. In other words, the respondent contends that the test applied by this Board and the Circuit Court in determining *1303 whether the insurance was receivable by the executor, was whether such insurance was subject to the debts of the estate and was to be distributed*1084 by the executor as part of the estate, which limiting language was borrowed from sections 402(a), supra, and 302(a), supra. Therefore, argues the respondent, since these limitations have been eliminated from section 302(a) of the Revenue Act of 1926, this act no longer requires that property of the decedent, in order to be includable in his estate, be subject to his debts and be distributed as part of the estate, and such limitations no longer apply in the construction of section 302(g) of the Revenue Act of 1926. He contends that the committee report above quoted shows that Congress intended that under the 1926 Act all the property of the decedent, including the entire proceeds of insurance policies payable to his executor or estate, should be included in his gross estate irrespective of whether the law of his domicile subjected such proceeds to the debts of his estate and regardless of how the executor ultimately distributed such proceeds.

The second contention of the respondent is that the Lucky and Jones cases are distinguishable from the present case. The distinction pointed out is that in those two cases the proceeds from the insurance policies passed directly*1085 to the widow and children of the decedent under the laws of distribution of Tennessee, whereas in the present case the proceeds of the insurance policies passed under and in accordance with the provisions of the decedent's will. More specifically, he points out that in the Lucky case the decedent provided in his will that "my life insurance shall not pass under this will but under the statutes of this state", and that in the Jones case the proceeds of the insurance policies were likewise distributed under and in accordance with the statutes of the State of Tennessee. Therefore, argues the respondent, it can not be successfully contended that the above mentioned laws of Tennessee have any bearing on the question presented in the present case.

We have then a direct conflict in the views of the parties as to the applicability of the Lucky and Jones cases and the question resulting from that conflict is whether by operation of the Tennessee statute it may be held on the facts here that the proceeds of the insurance policies were receivable by "other beneficiaries", the decedent's widow and daughter, and were not therefore receivable by the executor of the decedent's*1086 estate within the meaning of section 302(g), supra. By the terms of the insurance contracts themselves the proceeds of the policies were payable to decedent's executor. Section 8456 of the 1932 Tennessee Code provides, however, as follows:

Any life insurance effected by a husband on his own life shall, in case of his death, inure to the benefit of his widow and children; and the money *1304 thence arising shall be divided between them according to the statutes of distribution, without being in any manner subject to the debts of the husband.

In ; , the Supreme Court of Tennessee attributed two purposes to the provision of the code just quoted. The first, designated as the primary purpose, was to exempt life insurance from the claims of creditors, and the second, described as the secondary purpose, was to provide for its disposition. The husband still has the power, however, to dispose of the insurance during his lifetime or by will, and with respect to the secondary purpose the statute does not become operative where by use of apt words an intention to dispose of the proceeds of such insurance*1087 by will is clearly indicated. ; . In that case the court said:

These sections of the Code [4030 and 4231] being section 3 of chapter 216 of the Acts of 1845-46, have been construed by this court in numerous cases wherein creditors have sought to have satisfaction of their claims out of the proceeds of life insurance, and it has been consistently held that the act in no wise limited the authority of the husband to control policies of insurance upon his life where the same are payable to his estate - such insurance is the property of the husband and subject to his disposition either during his lifetime or by will. ; ; .

It is likewise decided by our cases that, notwithstanding the absolute control and authority of the husband over policies of insurance on his life made payable to his estate, the proceeds of the same do not pass by will in the absence of the use of apt words*1088 used therein clearly indicative of such intention, but goes to those entitled, by virtue of the provisions of the statute referred to. ; .

In both the Lucky and Jones cases the disposition of the proceeds of the insurance policies under consideration was effected by operation of the statute and not by the will of the deceased husband. In the Lucky case the husband had specifically directed that the insurance should pass under the statutes of the State of Tennessee, and our conclusion was stated as follows:

Under the statutes of Tennessee and decisions referred to, we are of the opinion that the insurance here involved did not at any time become a part of the gross estate of the decedent receivable by the executor within the meaning of section 402(f) but was receivable by the widow and children, or next of kin, in the same manner as if they had been specifically designated as beneficiaries therein.

In its opinion in the Jones case, the court said:

Likewise it is held that the insurance is not an asset of the estate, and while*1089 the executor may collect if he merely acts as a conduit to pass it on to the statutory beneficiaries who take a vested interest at the insured's death free from any claims against his estate.

*1305 It is thus apparent that it was the accomplishment of the secondary purpose of the statute, namely, the disposition of the proceeds of the insurance policies to the statutory beneficiaries, that resulted in the conclusion that the insurance was receivable in the Lucky and Jones cases by "other beneficiaries" and not "by the executor" within the meaning of the Federal estate tax statute.

In the instant case the decedent by specific language in his will included the insurance policies in question in the residue of his estate and devised and bequeathed the said residue to the First National Bank of Memphis, as trustee, to hold during the term of and upon the trusts thereinafter set forth. The facts were stipulated and show that the insurance was received by the petitioner as executor and distributed by it in accordance with the terms of the will as a part of the residue of the decedent's estate. While it is true that the decedent's wife and daughter are beneficiaries*1090 of the testamentary trust to which the residue of the estate was bequeathed, their interests are limited interests and not the interests they would have received as "statutory beneficiaries." Furthermore, the interests were not received by operation of the Tennessee statute, but through distribution of the decedent's estate under his will. The Lucky and Jones cases are not in point.

It has been argued, however, that, even though the decedent did dispose of the insurance by will, the provision of the Tennessee Code which exempts life insurance from the claims of creditors is none the less operative and the proceeds of such insurance, not being subject to the debts of the estate, can not be classified as "receivable by the executor" within the meaning of section 302(g), supra, but must fall within the classification of policies receivable by "other beneficiaries." As we have pointed out, it was the accomplishment of the secondary purpose of the Tennessee statute, namely, the disposition of the insurance to the "statutory beneficiaries", which resulted in the conclusion in the Lucky and Jones cases that the insurance was receivable by "other beneficiaries" and*1091 not "by the executor." In the instant case the insurance was in fact received "by the executor" and by it distributed according to the terms of the will to the legatees named therein. In so doing, petitioner was functioning in its capacity as executor, the decedent's representative, and not merely as a conduit for "statutory beneficiaries." We find nothing in the accomplishment of the primary purpose of the Tennessee statute, namely, the exemption of the proceeds of the insurance policies from the claims of creditors, to justify the conclusion that the insurance here under consideration was not "receivable by the executor" within the meaning of section 302(g), supra. First National Bank & Trust Co. of Minneapolis v.United States (U.S. Dist. Ct., Dist. of Minnesota, 4th Div., May 4, 1939), cited by petitioner, is not in point. *1306 As we read the facts, the trust was not a testamentary trust but had been created prior to the decedent's death. The trust and not the executor was the named beneficiary in the policies and none of the proceeds of the policies came into the hands of the executor for any purpose. Cf. *1092 , and .

The contention of the petitioner is rejected and it becomes unnecessary to consider the broad contention of the respodent that, since the change in the estate tax statute effected by the enactment of section 302(a) of the Revenue Act of 1926, the conclusion reached in the Lucky and Jones cases is no longer tenable even in cases indistinguishable as to facts.

Reviewed by the Board.

Decision will be entered under Rule 50.

ARUNDELL dissents.