The opinion of the court was delivered by: LEIBELL
This is a suit for a refund of part of the estate tax paid by the executors of Eugene Kruskal, who died July 10, 1944. He left a last will and testament, dated February 25, 1943, which was admitted to probate in the Court of Probate for the District of Roxbury, Connecticut, on August 2, 1944, and letters testamentary were issued to his executors on the same day. The suit is now prosecuted by the Bank of New York, as successor executor of the estate.
It appears that the decedent married Lilly Rexhouse, after he secured a Nevada divorce from his first wife, Helen Hall, on April 6, 1940. Both survived him. His second wife and decedent's daughter, Elizabeth Kruska Allen, were named as the beneficiaries of a trust of the principal of the residuary estate. Decedent's former wife, Helen d'Aubart Hall, received a bequest of cash under the will. The provisions of the will are mentioned as part of the background in this case. They are not involved in this suit for a refund of part of the estate tax.
The executors filed a federal estate tax return in which they advised the Commissioner that in addition to the estate property that they were reporting as subject to a tax (of $ 167,486.36) the deceased left seven life insurance policies,
of a face amount of $ 100,000 which they claimed were not subject to an estate tax on the ground that they were not part of decedent's gross estate. The policies were to provide annual payments to Helen Hall after decedent's death, pursuant to the terms of a separation agreement which was approved, adopted and confirmed by a divorce decree of a Nevada court. Upon an audit of the estate tax return, the Agent included in decedent's gross estate $ 100,414.57, as the value of the policies on decedent's death. A deficiency assessment of $ 30,751.35, plus $ 2,530.88 interest was made by the Commissioner on October 8, 1946. The executors paid the assessment under protest on February 24, 1947, and on August 15, 1947, filed a claim for a refund of the amount paid, which the Commissioner rejected on February 9, 1948. The executors on March 30, 1949, brought this suit to recover the $ 33,382.23 plus interest from February 24, 1947.
The separation agreement, the decree of divorce, and certain provisions of the policies of life insurance are the important documents to be considered in determining whether the value of the policies on the decedent's death should be included in his gross estate subject to a federal estate tax. This case has been submitted mainly on an agreed statement of facts to which the above documents are annexed. The Government presented one witness who testified that the decedent's reversionary interest in the life insurance policies was in excess of 5%. The plaintiff claims that this question has no bearing on the ultimate decision of this case, because the statute provides that 'for the purposes of clause (B) of this paragraph, the term 'incident of ownership' does not include a reversionary interest.' § . Sec. 811(g)(2) of the Internal Revenue Code, 26 U.S.C.A. 811(g)(2). But that provision was later amended1A and the amendment was made retroactive with respect to estates of decedents dying after October 21, 1942 and provided that the term 'incident of ownership' shall include a 'reversionary interest only if (1) at some time after January 10th, 1941, the value of such reversionary interest exceeded 5 per centum of the value of the policy, and (2) the reversionary interest arose by the express terms of the policy or other instrument and not by operation of law.' The amendment also provided that 'As used in this subsection, the term 'reversionary interest' includes the possibility that the policy, or the proceeds of the policy, (A) may return to the decedent or his estate, or (B) may be subject to a power of disposition by him.' The testimony of the Government's witness was therefore relevant and the correctness of the schedules he prepared is not challenged.
Provisions of the Separation Agreement.
The separation agreement entered into by Helen Hall Kruskal and Eugene Kruskal, her husband, on September 26, 1939, contained certain recitals: that the parties were married June 1, 1915; that they had one daughter, who in 1939 was over 21 years of age and married; that the parties to the agreement were living separate and apart; that Mrs. Kruskal had brought suit in the State of Connecticut for a divorce; and that both parties desired 'to adjust all questions of property and support in lieu of obtaining a judicial settlement thereof.'
Under paragraph First of the agreement Mrs. Kruskal was given 'a choice of any or all of the household furnishings, furniture, ornaments etc. in the house at New Milford (Connecticut) and the apartment' theretofore 'occupied by the parties' thereto 'in the City of New York.'
Paragraph Second provided that 'in part consideration of the payment in paragraph 'fourth (a)' ($ 17,500)' Mrs. Kruskal agreed 'to convey to Mr. Kruskal or his designee all her right, title and interest in and to the house and lands at New Milford * * * the value of her interest being fixed and agreed upon as * * * $ 7500'.
By paragraph Third Mrs. Kruskal agreed that she had incurred no debts and would not incur any debts, for which her husband would be liable.
Paragraph Fourth is quoted in full as follows:
'Fourth: For the support and maintenance of Mrs. Kruskal, Mr. Kruskal agrees to pay and Mrs. Kruskal agrees to accept the following amounts and payments:
'(a) Upon the signing of this agreement Seventeen thousand five hundred Dollars ($ 17,500) in cash;
'(b) So long as Mr. Kruskal shall be engaged in active business, meaning thereby that he receives compensation for the services rendered by him to the business, the sum of Eight thousand Dollars ($ 8,000) per annum in equal monthly installments commencing October 1st, 1939. In the event that Mr. Kruskal shall cease to be actively engaged in business, the amount to be paid by Mr. Kruskal during his lifetime to Mrs. Kruskal shall be subject, at the request of Mr. Kruskal, to arbitration, in which arbitration he shall appoint one arbitrator, Mrs. Kruskal one arbitrator and the two arbitrators so selected shall choose a third. The arbitrators shall not, however, in any event, increase the payment to Mrs. Kruskal beyond Eight thousand dollars ($ 8,000) per annum. The payments provided in this paragraph, either of $ 8,000 per annum, or in the event of arbitration, of such amount as shall be determined by the arbitrators, shall be paid during the time both Mr. Kruskal and Mrs. kruskal shall be alive and shall cease upon the death of either.
'(c) To provide for the support and maintenance of Mrs. Kruskal in the event that Mr. Kruskal shall predecease her, Mr. Kruskal agrees to maintain insurance on his life which he now holds, in the amount of One Hundred Thousand Dollars ($ 100,000) and, upon his death, his estate is to be discharged from any obligation for further payments as set forth in subdivision (b) hereof.
'The purpose of this insurance is, however, to secure annual payments during the balance of the life of Mrs. Kruskal to her for her support and she hereby agrees not to assign her interest therein except as in subdivision (d) provided, and to take under the provisions of said policies the payment of said insurance in installments annually during the balance of her life under any one of the optional plans assuring payments for the balance of the beneficiary's life and that in the event that she shall elect a plan whereby a 'certain' amount shall be payable irrespective of when she died, that she will designate as the beneficiary for the balance of such 'certain' payments, her daughter, Elizabeth Kruskal Allen.
'The designation of Mrs. Kruskal as beneficiary under said policies, shall be irrevocable, and Mr. Kruskal agrees to execute the necessary instruments to make such irrevocable designation, except the right to assign to Mr. Kruskal as provided in subdivision (c) of this paragraph.
'(d) In the event that Mr. Kruskal shall procure for the benefit of Mrs. Kruskal a life annuity in the amount of Eight thousand Dollars ($ 8,000) per annum in any insurance company satisfactory to Mrs. Kruskal, Mrs. Kruskal agrees to assign to him all her right, title and interest in the insurance carried for her benefit under subdivision (c) of this paragraph.'
It should be noted here that Mr. Kruskal did not procure any life annuity for Mrs. Kruskal under the sub-paragraph (d), last quoted.
Paragraph Fifth contained provisions which in effect constituted mutual general releases 'saving and excepting the obligations arising out of this agreement'.
Under paragraph Sixth Mr. Kruskal agreed to defend and indemnify Mrs. Kruskal from all actions, claims and demands contracted or to be contracted by him 'without prejudice, however, to his right to enforce the covenants, obligations and ...