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SAVAGE v. UNITED STATES

August 2, 1963

Joseph F. SAVAGE, Lesley Andrew, and Daniel Creem Savage, as Executors of the Last Will and Testament of Edna Savage Becker, Deceased, Plaintiffs,
v.
The UNITED STATES of America, Defendant



The opinion of the court was delivered by: DOOLING

The plaintiff executors sue for refund of estate tax claimed to have been illegally exacted through the erroneous inclusion in the decedent's taxable estate of the proceeds of certain life insurance decedent had taken out on the life of her first husband, who predeceased her by many years; decedent had, before her husband died, directed the insurer to pay the interest on the insurance proceeds to her for life and thereafter to hold them for her children; the Government, under the 1939 Code, Section 811(c)(1)(B), asserts that the insurance proceeds are includible in decedent's estate as property decedent transferred upon her husband's death to her children retaining for her own lifetime the right to the income from the proceeds. It is concluded that the insurance proceeds are so includible.

The decedent, Edna Savage Becker, in 1924-1925 insured her first husband's life for $ 125,000. She paid the premiums as they fell due; she reserved to herself alone the right to surrender the policy for cash, borrow on it, change the beneficiary and make and alter choices among the Settlement Options contained in the policy. At the time the policy issued in 1924-1925, however, it embodied the only designation of beneficiary and the only choice of Settlement Option that decedent ever made; they were never changed. By that designation she directed that, if she survived her husband, the Company was to retain the proceeds of the policy and pay the interest on the amount so retained to her for life and then pay it, in equal parts, for their lives to those of her children by her first husband who survived her; the several parts of the principal amount of the policy she directed to be paid to the estate of each child at its death. Alternative provisions accelerated the children's interests on the contingency of decedent's having predeceased her husband, provided for issue of a deceased child's taking if any child predeceased decedent, and provided for payment of the principal to decedent's estate if she survived her husband, all her children and all their issue.

Decedent's first husband died on April 18, 1931. That event matured the policy and terminated absolutely the decedent's rights, theretofore existing, to change the beneficiaries or alter the settlement option.

 The decedent and four children of the marriage survived decedent's first husband. The insurance proceeds were, as provided in the designation, 'retained' by the Company and interest on the amount so retained was paid to decedent until her death some twenty-three years later in 1954. Then interest on the retained amount was paid in equal parts to the four children of decedent's first marriage until one died, whereupon part of the principal was paid to that child's estate. The Company still 'retains' the balance of the insurance and pays interest on it to the three surviving children.

 The Commissioner of Internal Revenue included the principal amount of the life policy in decedent's taxable estate on the ground that the income from the 'Monies on deposit' with the insurance company was payable to the decedent during her lifetime and hence the 'Monies on deposit' were within Internal Revenue Code, 1939, Section 811(c)(1)(B). That section requires that the value of the decedent's gross estate shall be determined by including (inter alia) the value at the time of death of all property.

 'To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise --

 '(B) under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (i) the possession or enjoyment of, or the right to the income from, the property, or (ii) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. * * *'

 Plaintiffs, in answer, contended that if the insurance transaction involved was a transfer of an interest in property by the decedent -- and they deny that it was -- then the transfer was so far complete when the last premiums were paid in January 1931 that the transaction comes within the excepting language of Section 811(c) which reads:

 'Subparagraph (B) shall not apply to a transfer made before March 14, 1931. * * *'

 The Government argues that the exception is inapplicable because decedent made no transfer until her husband died on April 18, 1931: until then there was nothing in which meaningful interests in others could be or were created by transfer or otherwise; when decedent's husband died and only then, and by that event, was decedent's transfer of property effected and, since she retained the life income in the property transferred, it remained taxable to her estate under Section 811(c)(1)(B)(i).

 The plaintiffs further contend that the insurance transaction is not a 'transfer' transaction at all: decedent did not at any time have a right to the proceeds of the policies that she could or did transfer; the death of decedent's husband brought the proceeds into existence and irrevocably vested her with only the life interest in them, vested her children with remainder life interests and vested their estates with the principal proceeds; before the husband's death no proceeds nor right to them existed; at and after her husband's death decedent did not own and could not transfer the proceeds or the right to the proceeds. The transaction, plaintiffs say, resembles the exercise of a general power of appointment before March 3, 1931 -- by executing the unchanged 1924-1925 designation -- over unowned property; Section 811(f)(1) includes in gross estate property with respect to which a power is exercised by the decedent

 'by a disposition which is of such a nature that if it were a transfer of property owned by the decedent, such property would be includible in the decedent's gross estate under subsection (c) * * *; but the failure to exercise such a power * * * shall not be deemed an exercise thereof.'

 Since, plaintiffs say, Section 811(f)(1) thus taxes unowned property affected by an exercise of a power only if that exercsie equates with a transfer of owned property taxable under (c) (that is, a transfer after March 3, 1931 of owned property with income reserved for life to the transferor), and since Section 811(f)(1) demands an exercise (and not a non-exercise) of the power to produce its effect on taxability and treats that exercise as the 'disposition' equating with the 'transfer' of subsection (c), it follows that, if any part of Section 811 applies here, it is Section 811(f)(1) and that subsection, making the date of 'exercise' critical, completes the case for non-taxability, for the only 'exercise' here was the designation of 1924-1925, that was the 'disposition' (analogous to a 'transfer' of owned property) and there was no later designation or 'disposition' or 'transfer'. The argument, emphasizing the special nature of insurance contracts in contrast to transfers made in formal trust, accomplishes no more than to shift the focus of analysis from the word 'transfer' in Section 811(c)(1)(B) to the word 'disposition' in Section 811(f)(1). The problem remains, unilluminated by any real sidelight cast by Section 811(f)(1).

 The insurance proceeds here differ mechanically from intrusted funds. The premiums paid aggregated not more than $ 27,072.50 and the cash surrender-and loan-value of the policy when decedent's husband died was of the order of $ 12,690.00. The 'proceeds' of the policy, $ 126,046.25, were not the premium payments in specie nor the policy's cash surrender and loan value with nothing added except the investment earnings of the reserve on the policy computed upon the premium payments less all apportionable costs. The 'proceeds' were the performance of a purely contractual promise to pay upon the death of the insured; the promise, made for a certainly adequate consideration, was aleatory and not the direct exchange equivalent of the premium payments in the same sense that goods bought are the barter equivalents of the price paid for them. Yet decedent's acts and payments, and hers only, produced the promise the day the policy issued, have kept it unconditionally extant and in full force down to date and procured as the performance due to her as promisee the entire series of interest payments and that part of the proceeds that the insurer has paid. Decedent had an insurable interest, she insured it against the contingency that happened, she paid the premiums, she retained all contract rights until the contingency insured against occurred and she gave to the insurer's promise to pay, owed to her, its beneficial direction, retaining until her husband died the right to change the direction and amount of her beneficence. When the contingency insured against occurred, the insurer commenced to discharge its duty to her by initiating performance of the promise that decedent purchased and had controlled since the issuance of the policy. Nothing relevant to the context of ...


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