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MATTER ESTATE SAMUEL D. MASON (10/25/68)

SURROGATE'S COURT OF NEW YORK, BROOME COUNTY 1968.NY.43271 <http://www.versuslaw.com>; 295 N.Y.S.2d 261; 58 Misc. 2d 301 October 25, 1968 IN THE MATTER OF THE ESTATE OF SAMUEL D. MASON, DECEASED Edward H. Best and Herbert H. Ray for State Tax Commission, appellant. Chernin & Gold (James B. Gitlitz of counsel), for Philip M. Piaker and another, as executors, respondents. John M. Keane, S. Author: Keane


John M. Keane, S.

Author: Keane

 Subdivision (a) of section 958 of the Tax Law grants a credit against the New York estate tax for certain personal exemptions set forth at subdivision (b) of section 958. Among the exemptions at paragraph (4) of subdivision (b) of section 958 are the proceeds of insurance on the life of a decedent includible in the New York gross estate receivable by beneficiaries other than a surviving spouse. Where the proceeds of life insurance are involved, is an exemption always an exemption? That is the problem before the court. One is reminded of the colloquy between Humpty Dumpty and Alice when he said,

"'When I use a word,' Humpty Dumpty said in rather a scornful tone, 'it means just what I choose it to mean -- neither more nor less.'

'The question is,' said Alice, 'whether you can make words mean different things.'

'The question is,' said Humpty Dumpty, 'which is to be master -- that's all.'"

The facts here are not in dispute. On February 27, 1964 Samuel D. Mason transferred certain policies of insurance on his life with a face value of $80,000 to trustees under a trust agreement for the benefit of his former wife and their daughter. Less than two months later, on April 10, 1964, he died. The proceeds of these policies were not includible in the Federal estate tax return under section 2042 of the Internal Revenue Code because the decedent prior to his death had parted with all incidents of ownership in the policies. However, the proceeds were included in the Federal estate tax return as transfers in contemplation of death under section 2035 of the Internal Revenue Code.

On August 31, 1967, an order was made in this court fixing the estate tax. An exemption for life insurance proceeds was granted for the $80,000 payable to the trustees. The State Tax Commission has appealed from that order on the ground that the exemption was erroneously allowed.

Stripped of all legal verbiage, the position of the State Tax Commission is simple and clear. It contends that, unless proceeds of life insurance are includible in Schedule "D" of the estate tax return, they are not entitled to the exemptions granted to proceeds of life insurance payable to a named beneficiary.

Conversely, the executors' position is equally simple. Proceeds of life insurance payable to a named beneficiary are life insurance proceeds and, therefore, eligible for the exemption. There is no area for compromise. There is no middle ground. Either one or the other position must prevail.

Perhaps an historical review of the origin and development of the concept of granting the exemption for proceeds of life insurance would be helpful in reaching a determination of the question before the court. Since the present article 26 of the New York Tax Law provides for conformity with the Federal law relating to estate taxes, the history of exemption for proceeds of life insurance payable to a person other than the fiduciary under Federal law should be examined. Historically, this is relevant even though Federal law wisely eliminated the exemption in the 1942 Revenue Act.

Prior to 1918 proceeds of life insurance payable to a named beneficiary were not subjected to a Federal estate tax, primarily on the concept that they did not pass through the estate. Looking at matters realistically in 1918, Congress made such proceeds payable to a named beneficiary subject to estate tax but as a sweetener there was allowed an exemption of $40,000. Although the provision consisted of only a few sentences, it was productive of much litigation between taxpayers and the revenue authorities.

Finally, in 1942, Congress eliminated the exemption for proceeds of life insurance payable to named beneficiaries but cushioned the impact from the loss of this exemption by raising the over-all exemption for the additional Federal estate tax from $40,000 to $60,000. Thus, since 1942, there has been no exemption as such for proceeds of life insurance payable to a named beneficiary under the Federal estate tax laws. Prior to September 1, 1930, New York did not impose any transfer tax upon proceeds of life insurance payable to named beneficiaries. Accordingly, there was no problem of exemptions. The Commission to Investigate Defects in the Laws of Estates (usually called the Foley Commission) recommended, among other things, that New York change from a transfer or inheritance tax to an estate tax. As a result, chapter 710 of the Laws of 1930 was enacted effective September 1, 1930.

The new law included the proceeds of life insurance payable to a named beneficiary in the gross estate of a decedent at subdivision 9 of section 249-r of the Tax Law. The section was keyed to the revenue acts of the United States in two respects. The amount of insurance includible in the New York gross estate was that which was required to be included under the United States revenue acts taxing estates. Secondly, the exemption allowed was in the amount of the "exemption allowed in computing the net estate under such Revenue Act of the United States," which amount at that time was $100,000 under the basic estate tax law of the 1926 revenue act.

The next year in 1931 the Legislature by chapter 136 eliminated the language found in section 249-r about exclusion from the gross estate based on the federal exemption and replaced it with a new subdivision c in section 249-q of ...


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