Edward J. Meyer, Marion E. Meyer and Alfred M. Saperston, Executors of the Estate of Albert F. Meyer v. United States

275 F.2d 83

• Court: Court of Appeals for the Second Circuit
• Decided: January 11, 1960
• Docket: 302, Docket 25501
• Status: Published

Opinions

LUMBARD, Circuit Judge.

This appeal by the United States from a final judgment of the District Court for the Western District of New York, Justin C. Morgan, J., presents the single question whether an estate is entitled to an estate tax marital deduction, § 812 (e) (1) (A), Internal Revenue Code of 1939, 26 U.S.C.A. § 812(e) (1) (A), for a portion of the proceeds of a policy of life insurance upon the life of the deceased spouse when the whole proceeds are held by the insurer under a settlement option of the policy, the terms of which provide that the surviving spouse shall receive monthly payments for the remainder of her life, but that if she should die before the expiration of twenty years then the decedent’s daughter shall receive the payments until twenty years have elapsed. The district court found that that portion of the total proceeds allocable to the funding of a contingent life annuity from and after twenty years after the decedent’s death qualified for the marital deduction. It was agreed by the parties that in no event would the portion of the proceeds necessary to fund the twenty years of monthly payments certain qualify for the deduction.

We hold that no part of the proceeds so held by the insurer qualifies for the estate tax marital deduction, and accordingly we reverse the decision below.

The relevant facts are stipulated and may be briefly stated. The decedent held two life insurance policies on his own life, the total proceeds of which at his death were $30,207.10. Both policies were payable to his wife, Marion E. Meyer. The decedent elected substantially identical payment options under the policies prior to his death on September 14, 1952.¹ By the terms of the option selected in each policy his surviving wife was assured of monthly payments for the remainder of her life; but by the terms of each it was also agreed that 240 monthly payments would be made in any event and that they would be made to designated beneficiaries in the event that although the decedent’s wife was living at his death, she did not survive to receive them all. In both policies the decedent’s daughter, Shirley A. Meyer, was the person primarily designated to receive the guaranteed payments in the event of the death of her mother in less than twenty years. Both decedent’s wife and daughter survived him.

It was further stipulated and found that upon decedent’s death the insurance companies concerned separately determined as a matter of their business practice the portion of the total proceeds required to fund the twenty years of payments certain, and both determined the sum required to fund the contingent life annuity for Marion Meyer from and after twenty years. The refund sought and recovered by the executors was $2,339.-72, which is the decrease in the estate tax which would result from increasing the marital deduction by $8,238.54, the total amount determined by the two insurers as required to fund the contingent life annuity. Neither insurance contract provided, and the decedent did not request, that there be any segregation of the proceeds of the policy between the amounts computable for the term certain and the amounts computable for funding the contingent life annuity. Both of the policies provide that the policy and the application therefor constitute the entire contract between the parties.

On this appeal appellees rely exclusively on the authority of In re Reilly’s Estate, 3 Cir., 1957, 239 F.2d 797 where it was determined that insurance proceeds held under what are for present purposes substantially identical contracts could be divided into two “properties” as that term is used in § 812(e) (1) (B) (i) and (ii). As a consequence it was held that the amount needed to fund the contingent life annuity qualified for the marital deduction because, although “terminable” within the meaning of the preamble to § 812(e) (1) (B), no “interest” in that separate property passed to any person other than the surviving spouse so that the conditions of § 812(e) (1) (B) (i) and (ii) for disqualification of the gift to the spouse were not fulfilled. No other court of appeals appears to have considered this question.

Since appellee concedes that the wife’s interest in the portion of the total proceeds necessary to fund the payments for twenty years certain is disqualified, the sole question is whether, as the Third Circuit held, the proceeds may be separated into two separate properties. Section 812(e) (1) (A) and (B) distinguish between property and an interest in property, and the Senate Committee Report, S.Rcp. 1013 (part 2), 80th Cong., 2d Sess. (1948), U.S.Code Cong.Service 1948, p. 1225, expressly comments upon the distinction:

“The terms ‘interest’ and ‘property,’ as used in section 812(e) have separate and distinct meanings. The term ‘property’ is used in a comprehensive sense and includes all objects or rights which are susceptible of ownership. The term ‘interest’ refers to the extent of ownership * * * by the surviving spouse or other person, of particular property. For example, if the surviving spouse is specifically devised an estate for her life in a farm, the ‘interest’ passing to her is the life estate, and the ‘property’ in which such interest exists is the farm. •x- •» ThuS) jn case 0f a kg. quest, devise, or transfer of an interest which may be satisfied out of, or with the proceeds of, any property of the decedent’s general estate or of a trust, the interest so bequeathed, devised, or transferred is an interest in any and all of such property. * * * ”

“As previously stated, it is necessary for the purposes of section 812 (e) (1) to distinguish between an interest in property and the property in which such interest is an interest. Thus if the decedent devises Blackacre to his wife for life with remainder to X, then X has an interest in the property (Blackacre) in which the surviving spouse has an interest. If the principal value of Blackacre was a coal mine which may be expected to be exhausted during the surviving spouse’s life, nevertheless both the surviving spouse and X have an interest in the property, which is Blackacre. * * In the case of a trust or fund, the income beneficiaries and the persons who may receive any part of the corpus have an interest in the property represented by the assets of the trust or fund as of the date of the decedent’s death.”

Although we think these examples speak clearly to the instant case to define the insurance proceeds as a single fund in which the wife has been granted a life estate with a remainder in the daughter, it is at least arguable on the basis of this alone that, as the Third Circuit found, the proceeds may be divided and the wife’s interest treated as twofold: a life estate in one property, the payments certain, and a contingent life annuity in the other. But such doubt as we might otherwise entertain on this question is resolved by another portion of the same report in which in a specific example the present situation is expressly dealt with. After dealing at length with the provisions of (B) the Report states:

“The same principles apply in the ease of insurance proceeds and annuity contracts, as illustrated by the following examples:

“Example (1). The entire proceeds of an insurance policy on the life of the decedent are payable to the surviving spouse and the value of such proceeds is included in determining the value of the gross estate.

A marital deduction is allowed with respect to the value of the proceeds because no person other than the surviving spouse has an interest in the proceeds. The result will be the same whether such proceeds are payable in a lump sum; are payable in installments to the surviving spouse, her heirs, or assigns, for a term; or are payable to the surviving spouse for her life with no refund of the undistributed proceeds or with such a refund to her estate. * *" (Emphasis added.)

This example makes it plain that “proceeds” is identical with “property” at least in the situation treated by it, since the spouse’s “interest” is referred to as an interest in the “proceeds” and not in a portion of them; and all possible doubt on this score is resolved by the specific example of a refundable life annuity in the entire proceeds given to the wife, in which instance it is clearly stated that the wife’s interest will qualify if the refund is to be made to her estate.

The next subsequent example deals with annuities, and, if that is possible, even more clearly defines the contract creating the annuity as a single property:

“Example (2). The decedent during his lifetime purchased an annuity contract under which the annuity was payable during his life and then to his spouse during her life if she survived him. The value of the interest of decedent’s surviving spouse in such contract at the death of the decedent is included in determining the value of his gross estate. A marital deduction is allowed with respect to the value of such interest so passing to the decedent’s surviving spouse inasmuch as no other person has an interest in the contract. If upon the death of the surviving spouse the annuity payments were to continue for a term to her estate, or the undistributed portion thereof was to be paid to her estate, the deduction is nevertheless allowable with respect to such entire interest. If, however, upon the death of the surviving spouse, the payments are to continue to another person (not through her estate) or the undistributed fund is to be paid to such other person, no marital deduction is allowable inasmuch as an interest passed from the decedent to such other person.” (Emphasis added.)

Thus considered both as a dedication of the entire proceeds to the creation of a refundable life annuity with the refund in someone other than the wife’s estate, or considered as the dedication of the proceeds to the purchase of a refundable life annuity, the present case falls squarely within unambiguous examples given by the responsible Senate Committee.

Even if we assume that had the contract provided for the segregation of the-separate funds they could then have been considered separate properties, it is stipulated here and the contracts reveal that, no such segregation was provided for. In a similar situation we have rejected1 the view that what might have been accomplished at the outset, but was not,, ought nevertheless to be regarded as having been done. See Hoffenberg v. Commissioner, 2 Cir., 1955, 223 F.2d 470, affirming 1954, 22 T.C. 1185.

We do not agree with the Third Circuit that the example given in the Report of a gift to the decedent’s wife and" daughter as tenants in common of the-decedent’s interest in a patent, as to-which it is clearly stated that the wife’s, interest qualifies for the estate tax marital deduction, is in any way inconsistent with the view that the patent is a single-property, or that, conversely, the example may be said to support the view that the patent, by virtue of the gift, became - two separate properties. The Report expressly states that the interest given-to the wife qualifies because it does not come within § 812(e) (1) (B) (ii) although it is a terminable interest under-(i) . The reason it does not come within-(ii) is we think that the daughter’s possession and enjoyment of her interest in. the single property take place at once, and not “after” the termination of the-wife’s terminable interest, and not because there were two properties created.

We are similarly unpersuaded by resort to the analogy of § 812(e) (1) (G),.. which creates an exception from the terminable interest rule when, inter alia, the surviving spouse is given a power of appointment over the residue of the proceeds. While it is true, as the Third1’ Circuit noted, that Regulation 105, § 81.- - 47(a) (d) (2) contemplates the division of insurance proceeds into separate funds held by the insurer, it cannot be said that the Regulation contemplates that the resulting funds may be considered to be separate properties. It is perfectly consistent with the Regulation that it applies to an instance, such as that of a tenancy in common between the surviving spouse and another, in which although two interests are thus created in the single property, the wife’s interest, because of § 812(e) (1) (G), is not disqualified. For example, if the surviving spouse received a life estate in one-half the proceeds with a power to appoint the remainder, and another person received one-half outright, the wife’s interest would qualify if the life estate and the power met the requirements of § 812 (e) (1) (G), while without (G) it may be assumed that it would not.

Moreover, even if the Regulation might be said to be in some manner inconsistent with the view we have taken, we would not accord it great weight. It interprets and gives effect to a special exception to the terminable interest rule for powers of appointment over the proceeds of life insurance and annuity contracts. It would be hazardous, in the face of the convincing evidence for the contrary result, to reason in the present case from a policy concerning powers of appointment, especially because the statute in part (G) conditions the granting of the exception for powers of appointment on the fulfillment of special requirements not otherwise present. Thus, inter alia, payments to the surviving spouse under the option must commence not later than thirteen months after the decedent’s death, a limitation conspicuously lacking here.

Reversed.

1 . The options elected respectively provided:

[1] “10. Option C: To have the whole or any designated part of the net proceeds paid in either 120, 180 or 240 stipulated monthly minimum installments of the amount stated in the Continuous Installment Table corresponding to the sex and the age of the then beneficiary on the date of payment of the first of such installments, provided that if such beneficiary shall survive to receive the number of stipulated installments selected, payments of like amount and frequency shall continue during the lifetime of the beneficiary. The table shall apply pro rata per $1000 of the amount to be so paid, the first installment being payable as of date of death of Insured or tbe date of election if subsequent. If there be two more beneficiaries tbe amount payable, unless otherwise directed by the designator, shall be divided into a corresponding number of equal parts and the installments to each beneficiary will be similarly determined according to age and sex by the Continuous Installment Table. Payment under this option shall be subject to satisfactory proof of the age of the beneficiary thereunder. * * * * *

[2] “Option 3 — Life Income. Equal payments for a stipulated number of years and thereafter as long as the payee shall live, the amount of such payments to be upon the age at nearest birthday of the payee at the date of maturity of the' policy.”