The opinion of the court was delivered by: GALSTON
The plaintiff moves upon the pleadings in the action and on a stipulation of facts for judgment on the pleadings pursuant to Rule 12(c) of the Rules of Civil Procedure, 28 U.S.C.A. following section 723c.
The action is one forthe recovery of a federal gift tax assessment for the calendar year 1934. On or about March 15, 1935 the plaintiff filed with the Collector of Internal Revenue a federal gift tax return and paid a tax in the amount of $52,872.93. In this return there were reported gifts of nine single premium life insurance policies; two of them to M. Robert Guggenheim, having a combined cash surrender value on the date of the gift of $155,915.09; four to Gladys C. Straus, having a combined cash surrender value on the date of the gift of $251,012.26; and three to Harry G. Guggenheim, having a cash surrender value on the date of the gift of $310,417.46.
The complaint alleges that the Commissioner of Internal Revenue determined that the aforesaid policies should have been valued not on their cash surrender value on the date of the gift but on the basis of their cost to the plaintiff.Accordingly he ruled that the values of the policies respectively were $189,901.70, $295,412.30 and $367,124.57, and assessed a deficiency against the plaintiff in the sum of $13,804.69, together with interest thereon in the amount of $1,450.05. These amounts were paid by the plaintiff to the defendant on or about January 25, 1937.
The plaintiff on or about June 30, 1938 filed a claim for refund for these payments, which claim was rejected on October 6, 1938. Plaintiff alleges that the true market value of the policies, when they were irrevocably assigned to the donees, was their cash surrender value.
The answer in effect admits all of the foregoing allegations of the complaint and raises no issue of fact; but alleges that the Commissioner correctly determined the amount of the gifts to be the cost to plaintiff of the contracts of insurance, and denies that the best evidence of the market value is their cash surrender value.
The question is then purely one of law, as to whether the tax should be based on the cash surrender value of the policies or the cost to the plaintiff.
The Revenue Act of 1934 enacted on May 10, 1934, 48 Stat. 680, determines the rights of the parties. It appears that in that act there was no alteration of Sec. 506 of the Revenue Act of 1932, 26 U.S.C.A. § 555. That act provided: "If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift."
That language is sufficiently clear and apparently is in no sense ambiguous of difficult to interpret. Nevertheless, because doubtless of its general terms, the Commissioner of Internal Revenue on October 30, 1933 set forth the following regulation, Article 2(5) of Regulation 79: "5. The irrevocable assignment of a life insurance policy, or the naming of the beneficiary of a policy without retaining any of the legal incidents of ownership therein, constitutes a gift in the amount of the net cash surrender value, if any, plus the prepaid insurance adjusted to the date of the gift."
It must be presumed that when Congress re-enacted in 1934 Sec. 506 of the Revenue Act of 1932, it had knowledge of the foregoing regulation promulgated by the Treasury Department and approved it. McCaughn v. Hershey Chocolate Co., 283 U.S. 488, 51 S. Ct. 510, 75 L. Ed. 1183; National Lead Co. v. U.S., 252 U.S. 140 at page 146, 40 S. Ct. 237, 64 L. Ed. 496.
The plaintiff, in accordance with the foregoing provision of the law and regulation of the Commissioner of Internal Revenue, paid her gift tax as shown by her 1934 gift tax return.
It appears that the Revenue Act of 1935, 49 Stat. 1014, made no changes in Sec. 506 of the Revenue Act of 1932.Nevertheless on February 26, 1936 the departmental regulations were changed, and Article 19(9) of Regulation 79 provided:
"(9) The values of a life insurance contract or of a contract for the payment of an annuity issued by a company regularly engaged in the selling of contracts of that character is established through the sale of the particular contract by the company, or through the sale by the company of comparable contracts. * * *
"Example: A donor owning a life insurance policy on which no further payments are to be made to the company (e.g., a single premium policy or paid up policy) makes a gift of the contract. The value of the gift is the amount which the company would charge for a single premium contract of the ...