LYNNE, Chief Judge.
Fully stipulated by the parties, the critical facts may be tightly compressed. Prior to September 22, 1958, plaintiff, James M. Kidd, Sr., was the owner of four policies of life insurance issued on his life by the Equitable Life Assurance Society of the United States, which, as of that date, had an aggregate value of $35,409.39. On September 22, 1958, plaintiff made written application to Equitable for a “change of ownership” of each of such policies and, contempo
raneously, forwarded a new beneficiary provision
for attachment to each policy. Having approved and acted upon such application, by endorsement on each policy,
dated October 3, 1958, Equitable named plaintiff’s wife as “owner” of each policy and his children as alternative “owners” in the event of his wife’s death before his own.
For the calendar year 1958, plaintiff filed a gift tax return in which he reported a gift to his wife, Mx's. Mabelle Kidd, of the four policies. Subtracted from the total value of such gift was an annual exclusion of $3,000, and a marital deduction of $17,704.70, resulting in a taxable gift in the amount of $14,704.69, upon which plaintiff paid a gift tax of $1,647.-07.
The Commissioner disallowed the marital deduction on the ground that the assignment to the wife constituted the transfer of a tei’minable interest within the purview of Section 2523 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 2523. A deficiency in gift taxes was assessed accordingly, which was paid by plaintiff. Thereafter, plaintiff filed a timely claim for refund, which was disallowed, and this action was timely instituted.
Determination of the ultimate question as to whether the gift by plaintiff to his wife of the four insurance policies quali
fies for the allowance of a marital deduction under Section 2523 of the Internal Revenue Code of 1954 depends upon the Court’s disposition of defendant’s contention that the assignments of the insuranee policies operated to assign to the spouse of the donor a terminable interest in such policies within the meaning of the statute
and the interpretative regulations.
It is conceded, as it must be, that local law is controlling with respect to the nature of the legal interests and property rights created by the assignments in question, while federal law regulates the tax consequences of the interests or rights conveyed. Helvering v. Stuart, 317 U.S. 154, 63 S.Ct. 140, 87 L. Ed. 154 (1942); Morgan v. Commissioner of Internal Revenue, 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585 (1940); Blair v. Commissioner of Internal Revenue, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465 (1937); Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199 (1932); Robertson v. United States, 310 F.2d 199 (5th Cir. 1962); McGehee v. Commissioner of Internal Revenue, 260 F.2d 818 (5th Cir. 1958); Carlson v. Patterson, 190 F.Supp. 452 (N.D.Ala.1961); and Berman v. Patterson, 171 F.Supp. 800 (N.D.Ala.1959).
In this non-diversity action the Court perceived that there lurked an intriguing confliet-of-laws problem in determining a federal matter. Since both Alabama, of which plaintiff, his wife and his children are residents, and New York, both the place of contracting and the place of performance, have significant contacts with the contracts of insurance and their assignments, it was suggested that this Court should regard the choice of law as a federal matter. The Court has been spared an excursion into this unsettled area of the law
by the oral concession of counsel of record that the substantive law of Alabama shall be applied to ad-measure the property rights passing to plaintiff’s wife under the assignments in question, a result at which this Court would undoubtedly have arrived in the exercise of its independent judgment.
Turning to the endorsements of October 3, 1958, it is quite apparent that, by their terms, in the event Mrs. Kidd predeceases her husband without having taken any action with respect to the ownership or the right to the proceeds of such policies, the property rights assigned by plaintiff to his children as alternative owners would be automatically vitalized. Thus, prima facie, the gift is characterized by Section 2523(b) as one of a terminable interest unless it qualifies as an exception to the terminable-interest rule as engrafted by Section 2523(e).
To clarify the competing contentions of the parties hereto the Court casts them in the familiar form of a subject of debate, Resolved: That, under the terms of the endorsements, the power in Mrs. Kidd to appoint the entire interest in each policy
is exercisable by her alone and in all events.
Plaintiff maintains the affirmative, defendant the negative.
Insisting that Mrs. Kidd did not have the power to appoint the interest in such policies,
exercisable by her
alone, defendant seizes upon the limitation on her right to change the ownership of such policies expressly made subject to the insurer’s approval.
While arid literalism lends ostensible support to this argument, it ignores the reality of the manner in which the gifts were effectuated. Actually, by the endorsements of October 3, 1958, new contracts were entered into between Equitable and Mrs. Kidd. Thereby she became effectively invested with the entire parcel of powers and rights with respect to such policies theretofore residing in her donor.
Although the power to direct a change of ownership is significant and does require the approval of the insurer, the provision requiring approval is solely for the benefit of the company and only the company can take advantage of it.
The experience of trial courts in interpleader actions justifies the understandable desire
of the insurer to retain some measure of control over the identity of a new owner to avoid entering into a contract with a fictitious person or a purported trustee without any trust agreement.
Resorting to the ownership provisions of the policies, it clearly appears that Mrs. Kidd, as owner, enjoys the contractual rights to name and change beneficiaries, to borrow on and pledge the policies for a loan, and to assign the policies without requiring the consent of any beneficiary or successor-owner referred to therein.
Her control of each policy is as absolute as was that of her donor.
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LYNNE, Chief Judge.
Fully stipulated by the parties, the critical facts may be tightly compressed. Prior to September 22, 1958, plaintiff, James M. Kidd, Sr., was the owner of four policies of life insurance issued on his life by the Equitable Life Assurance Society of the United States, which, as of that date, had an aggregate value of $35,409.39. On September 22, 1958, plaintiff made written application to Equitable for a “change of ownership” of each of such policies and, contempo
raneously, forwarded a new beneficiary provision
for attachment to each policy. Having approved and acted upon such application, by endorsement on each policy,
dated October 3, 1958, Equitable named plaintiff’s wife as “owner” of each policy and his children as alternative “owners” in the event of his wife’s death before his own.
For the calendar year 1958, plaintiff filed a gift tax return in which he reported a gift to his wife, Mx's. Mabelle Kidd, of the four policies. Subtracted from the total value of such gift was an annual exclusion of $3,000, and a marital deduction of $17,704.70, resulting in a taxable gift in the amount of $14,704.69, upon which plaintiff paid a gift tax of $1,647.-07.
The Commissioner disallowed the marital deduction on the ground that the assignment to the wife constituted the transfer of a tei’minable interest within the purview of Section 2523 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 2523. A deficiency in gift taxes was assessed accordingly, which was paid by plaintiff. Thereafter, plaintiff filed a timely claim for refund, which was disallowed, and this action was timely instituted.
Determination of the ultimate question as to whether the gift by plaintiff to his wife of the four insurance policies quali
fies for the allowance of a marital deduction under Section 2523 of the Internal Revenue Code of 1954 depends upon the Court’s disposition of defendant’s contention that the assignments of the insuranee policies operated to assign to the spouse of the donor a terminable interest in such policies within the meaning of the statute
and the interpretative regulations.
It is conceded, as it must be, that local law is controlling with respect to the nature of the legal interests and property rights created by the assignments in question, while federal law regulates the tax consequences of the interests or rights conveyed. Helvering v. Stuart, 317 U.S. 154, 63 S.Ct. 140, 87 L. Ed. 154 (1942); Morgan v. Commissioner of Internal Revenue, 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585 (1940); Blair v. Commissioner of Internal Revenue, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465 (1937); Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199 (1932); Robertson v. United States, 310 F.2d 199 (5th Cir. 1962); McGehee v. Commissioner of Internal Revenue, 260 F.2d 818 (5th Cir. 1958); Carlson v. Patterson, 190 F.Supp. 452 (N.D.Ala.1961); and Berman v. Patterson, 171 F.Supp. 800 (N.D.Ala.1959).
In this non-diversity action the Court perceived that there lurked an intriguing confliet-of-laws problem in determining a federal matter. Since both Alabama, of which plaintiff, his wife and his children are residents, and New York, both the place of contracting and the place of performance, have significant contacts with the contracts of insurance and their assignments, it was suggested that this Court should regard the choice of law as a federal matter. The Court has been spared an excursion into this unsettled area of the law
by the oral concession of counsel of record that the substantive law of Alabama shall be applied to ad-measure the property rights passing to plaintiff’s wife under the assignments in question, a result at which this Court would undoubtedly have arrived in the exercise of its independent judgment.
Turning to the endorsements of October 3, 1958, it is quite apparent that, by their terms, in the event Mrs. Kidd predeceases her husband without having taken any action with respect to the ownership or the right to the proceeds of such policies, the property rights assigned by plaintiff to his children as alternative owners would be automatically vitalized. Thus, prima facie, the gift is characterized by Section 2523(b) as one of a terminable interest unless it qualifies as an exception to the terminable-interest rule as engrafted by Section 2523(e).
To clarify the competing contentions of the parties hereto the Court casts them in the familiar form of a subject of debate, Resolved: That, under the terms of the endorsements, the power in Mrs. Kidd to appoint the entire interest in each policy
is exercisable by her alone and in all events.
Plaintiff maintains the affirmative, defendant the negative.
Insisting that Mrs. Kidd did not have the power to appoint the interest in such policies,
exercisable by her
alone, defendant seizes upon the limitation on her right to change the ownership of such policies expressly made subject to the insurer’s approval.
While arid literalism lends ostensible support to this argument, it ignores the reality of the manner in which the gifts were effectuated. Actually, by the endorsements of October 3, 1958, new contracts were entered into between Equitable and Mrs. Kidd. Thereby she became effectively invested with the entire parcel of powers and rights with respect to such policies theretofore residing in her donor.
Although the power to direct a change of ownership is significant and does require the approval of the insurer, the provision requiring approval is solely for the benefit of the company and only the company can take advantage of it.
The experience of trial courts in interpleader actions justifies the understandable desire
of the insurer to retain some measure of control over the identity of a new owner to avoid entering into a contract with a fictitious person or a purported trustee without any trust agreement.
Resorting to the ownership provisions of the policies, it clearly appears that Mrs. Kidd, as owner, enjoys the contractual rights to name and change beneficiaries, to borrow on and pledge the policies for a loan, and to assign the policies without requiring the consent of any beneficiary or successor-owner referred to therein.
Her control of each policy is as absolute as was that of her donor.
Notwithstanding the bundle of contractual rights to which the Court has alluded, defendant asserts the proposition that the law interdicts the arbitrary exercise by Mrs. Kidd of such rights and requires of her the exercise of good faith with regard to the rights of the alternative owners. Hence, the argument runs, such a requirement imposes a limitation on her power of appointment which reduces it to less than is needed to meet the
“in all events” test.
In the construction of assignments of life insurance policies, as with all written instruments, the cardinal rule is to ascertain and give effect to the intention of the parties. This is true regardless of technical rules of construction. To this end, the courts endeavor to give the same construction and effect as the parties themselves apparently gave it.
After canvassing the pertinent Alabama authorities this Court observed in Carlson v. Patterson, D.C., 190 P.Supp. 452 (1961), that “Implicit in the opinions of the Supreme Court of Alabama * * is recognition of the widely accepted proposition that an absolute power of disposition, including the power to make an inter vivos gift of all or a part of the corpus, may be given by a testator to a life tenant under a will, where such intention is clearly expressed.”
This Court has no difficulty in concluding that plaintiff intended to give to his wife absolute ownership and complete dominion over the policies of insurance, including an absolute power of disposition by gift or otherwise, entirely adequate to meet the
“in all event” test.
Remaining for consideration is a point which was not discussed by counsel in briefs but which this Court conceives to be relevant to the inquiry as to whether the power of appointment is exercisable by Mrs. Kidd in all events. Under Alabama law an assignment of a policy of life insurance by the insured to one without an insurable interest in his life is void as against public policy. As to whether or not a second or subassignee would be affected with the same disability, there is some confusion in the reported cases.
However, for the purpose
of this opinion and as a forecast which might or might not survive the year, it is assumed that an assignment of these policies of insurance to a person who has no insurable interest in the life of the insured would be unenforceable by such person as against public policy. But this rule of local law does not operate as a restriction on the exercise of Mrs. Kidd’s power to consume property or to appoint her interest therein. It merely operates to delimit the class of persons to whom a meaningful assignment might be made.
For the foregoing reasons, the Court is of the opinion that the Commissioner erred in disallowing the claimed marital deduction and that plaintiff is accordingly entitled to a refund of the gift tax deficiency erroneously assessed and collected, together with interest as allowed by law.