The opinion of the court was delivered by: GODDARD
This is a suit by the Commercial National Bank and Trust Company, as executor of the will of Sidney R. Kent, to recover estate taxes claimed to have been illegally collected, with interest thereon. The sole issue here is the includability, as part of the decedent's taxable estate, of the $ 10,000 proceeds of a group life insurance policy. The government concedes that certain refunds on other over assessments are owing to the plaintiff.
On February 6, 1928, the Travelers Insurance Company issued a group life insurance policy to the Fox Film Corporation [subsequently Twentieth Century-Fox Film Corporation]. The decedent, Kent, was first employed by Fox on March 28, 1932, and on April 19, 1932, he was elected president of the corporation, the position he held at the time of his death on March 19, 1942. At the time of his employment, Kent was issued a certificate of insurance under the group policy, and his policy was in force at the date of his death.
The group policy was issued to Fox for a term of one year, renewable from year to year. It provided death and total disability benefits, and individual certificates were issued to the employees covered. All corporate employees, save certain excepted groups, were covered. The coverage of an employee would terminate with the end of his employment, with the provision that, in the event of such termination of employment, with employee could convert without further evidence of insurability to a policy in the same face amount, upon payment of the premium. Fox paid the full amount of the premiums on the group policy, yearly. The employees had the right to change the beneficiary.
Those employees entitled to coverage were insured after six months service with the company. The amount of coverage under the group plan was in proportion to the length of service with the corporation and the position of responsibility held. When an employee because of greater length of service, or promotion to a higher position, fell within a higher class entitled to a policy with a larger face amount, he became entitled to that increase in coverage, but the policies provided that 'no increase in the amount of insurance of any Employee shall become effective when he is not actually at work'.
Kent was in Class VI, the highest class of coverage which included elected officers and department heads, and thus had a policy in the amount of $ 10,000. Initially, he designated his wife as beneficiary, but in 1939 he changed it by designating the plaintiff herein, and his wife, and one Elmer R. Short, as co-trustees under a trust indenture executed by Kent.
The individual certificates issued to the employees contained a statement from Kent. It read:
'As an expression of appreciation of your loyalty and cooperation in advancing the interests of the corporation, I have pleasure in presenting to you this certificate of insurance, the cost of which is borne by the corporation, in the belief that it will give a sense of protection and comfort to you and your dependents.
'It goes to you as an expression of goodwill, with the hope that your association with the corporation will continue to be productive of mutual benefit and satisfaction.'
The government asserts two grounds of includability. First, that it is taxable under Section 811(g) of the Internal Revenue Code, on the ground that the premiums were paid indirectly by the decedent. Second, that it is taxable under Section 811(c) of the Code, as a transfer in contemplation of death.
The applicable statute and regulations relating to the first ground of taxability are found in the margin, as they provided at the time of decedent's death.
The decedent had well over $ 40,000 of insurance, and the parties are agreed that to find this group insurance taxable in the estate, the basic question is whether the premium payments were made indirectly by the decedent. There is no question but that the power to change beneficiaries is a legal incident of ownership, thereby meeting the second requirement of includability. Cf. Chase National Bank of City of New York v. United States, 278 U.S. 327, 49 S. Ct. 126, 73 L. Ed. 405.
The decisions in the Tax Court are not wholly consistent. It has been held in a line of decisions that the proceeds of group life insurance policies applied for and paid by the employer, with the right in the employee to change the beneficiary, are not includable in the decedent employee's estate. Ballinger v. C. I. R., 1931, 23 B.T.A. 1312; Dobrzensky v. Com'r, 1936, 34 B.T.A. 305; Estate of Hahn, 1938, 38 B.T.A. 3; Estate of Shields, 1 T.C.M. 585, (1943).
The Hahn case, supra, should be distinguished on its facts, since that involved a closely held corporation which took out the insurance on its officers and principal shareholders to avoid embarrassing demands for dividends by the families of those officers who died; the right to change beneficiaries was restricted within a specified class; and the policies were retained in the possession of the corporation.
The keystone of this line of cases is the Ballinger decision, which was based upon a literal interpretation of the statutory provision, 'taken out by the decedent upon his own life'. It held that since the employer corporation applied for the insurance, it was not 'taken out by the ...