1939 BTA LEXIS 932 | B.T.A. | 1939
Lead Opinion
The question involved has been previously stated. The applicable statute is section 302 of the Eevenue Act of 1926 as amended by section 803 (a) of the Eevenue Act of 1932 and section 404 of the Eevenue Act of 1934, the material provisions of which are set out in the margin.
Petitioners contend that the amount of $20,030.43 paid by the insurance company to the decedent’s daughter Marcella V. Keller
The controversy in this proceeding concerns two separate and distinct contracts, one a single premium life insurance policy and the other a single premium life annuity. Both policies were written on the regular standard forms and on the basis of the respective mortality table ordinarily used in writing life insurance and annuities, respectively. Each contract contains a proviso to the effect that the agreement and the respective application therefor “constitute the entire contract between the parties.” The application for each contract was made by the decedent on the same day and the contracts were executed on the same day. Petitioners, however, concede that the insurance company would not have issued the life insurance policy to the decedent at her attained age of 75 without issuing a life annuity contract “in conjunction with” the life insurance policy, but contend that this requirement was merely a condition precedent to the issuance of the life insurance policy which was imposed by the insurance company for the purpose of reducing but not entirely eliminating its risk against loss due to premature death, and that such a condition when once complied with does not make the insurance policy when once issued any different than any other insurance policy issued on identically the same kind of form to an applicant who is not required also to purchase an annuity. Petitioners argue that in
Where a writing refers to another document, that other document, or so much of it as is referred to in it, is to be construed as part of the writing. * * * JSven where a writing does not refer to another writing, if such other writing was made as part of the same transaction, the two should be construed together. It is usually said that the two writings together form one contract. Though this is generally true, it is not always accurate, even though the several writings are part of the same bargain. Where one of the writings is a formal document it cannot be incorporated in an ordinary writing. A note and a mortgage to secure it are not strictly one contract, though doubtless each is to be construed in connection with the other in order to determine its meaning. * * *
In the instant proceeding it is our opinion that the two contracts must be construed in connection with each other and that in so doing it is of no great importance whether the things agreed upon by the decedent and the insurance company on December 31, 1934, were embodied in one policy or two. The question in either event remains the same, namely, whether the amount of $20,030.43 paid by the insurance company to the decedent’s daughter was paid to her as “insurance” as petitioners contend or as the result of a transfer in trust or otherwise made by the decedent in contemplation of death and intended to take effect at death as the respondent contends and not as “insurance.”
Even if the decedent and the insurance company had executed all the things they agreed to on December 31, 1934, in one document instead of two, the cases hold that if the agreement sets forth separate features which are clearly severable, each feature must be given its proper application. Equitable, Life Assurance Society of United States v. Deem, 91 Fed. (2d) 569; Connecticut General Life Insurance Co. v. McClellan, 94 Fed. (2d) 445; Downey v. German Alliance Insurance Co., 252 Fed. 701; Legg v. St. John, 296 U. S. 489.
In Legg v. St. John, supra, the question before the Supreme Court was whether Legg, a voluntary bankrupt, or his trustee was the person entitled to certain future monthly disability benefits payable under a contract entered into between Legg and an insurance company before the adjudication. Several years prior to the adjudication Legg took out a life insurance policy under which the company agreed, in consideration for a stated annual premium, to pay a certain amount upon his death. By a supplementary contract issued on the same day and attached to the policy, the company, in consideration for an additional annual premium of a stated amount, agreed to pay
Second. The fact that the disability benefits are provided for in a “Supplementary Contract” issued on the same day as the policy and physically attached thereto does not make them life insurance. The life policy and the contract were executed as distinct instruments. The “Supplementary Contract” was to operate for some purposes as if a part of the life policy. But for all other purposes it is a separate obligation. The hazards covered by the two instruments are obviously different. The beneficiaries differ also. The payment under the life policy was to be made to the wife; the disability benefits are to be paid to Legg himself. A separate and different premium was exacted for the obligations assumed in each instrument. It was provided that forfeiture of the life policy would terminate all rights arising from disability; but the supplementary contract could be terminated by Legg without affecting otherwise his life policy.
In tbe instant proceeding we think the agreement between the decedent and the insurance company as evidenced by the two documents, the insurance policy and the annuity contract, shows an intention on the part of the contracting parties to enter into an insurance and annuity contract with clearly severable features as to each, rather than a contract of trusteeship with no separate features. For example, the insurance company agreed to pay Mrs. Keller a life annuity of $390.84. Her life expectancy was 10.5 years when the contract was taken out and if she had lived that expectancy the total payments to her would have been $4,108.82 which apparently would have been a full return except the comparatively small amount for “loading” to her of the premium of $3,258.20 plus the interest earned thereon. But suppose she had lived to be as old as her mother and grandmother, which the evidence shows was 90 years each. That would have meant that the insurance company would have paid her annuities of $390.84 for 15 years which would have been $5,862.60. This would apparently have been considerably more than the total premium of $3,258.20 which she paid for the annuity, plus the interest earned thereon. Of course, regardless of how long Mrs. Keller had lived, the insurance policy of $20,000 payable at death to her designated beneficiary would have remained the same. Attention is called to these features in order to show the clear separability of the two contracts notwithstanding that they were taken out as parts of one transaction. The writings did not take the form of any declaration of trust. No provision was made for any compensation to be paid the insurance company as a trustee. The decedent was referred to in one instrument as “The Insured” and in the other instrument as the “Annuitant.” The only considerations contracted for by the insurance company were the two separately
Notwithstanding these separate features to which we have referred, which we think are severable and should be so treated, the respondent contends that because the insurance company would not have issued the insurance policy without the annuity this fact alone controls and brings the instant proceeding within the rule enunciated in Old Colony Trust Co. et al., Executors, 37 B. T. A. 435; affirmed by the First Circuit on March 2, 1939, 102 Fed. (2d) 380, and followed in Chemical Bank & Trust Co. et al., Executors, 37 B. T. A. 535. Those cases, however, involved an entirely different situation than is involved here in that there was no separate insurance feature present in either of them. In the Old Colony case the contract was designated on its face “life annuity with principal sum payable at death.” In the Chemical Bamh case the contract was designated on its face as “Investment Annuity. Death Befund Payable at Death of Annuitant.” Life insurance was not mentioned in either contract. There was but one consideration paid in each of those cases, whereas the decedent here agreed to pay two separate premiums, one for insurance as such and the other for an annuity as such. The contracting party other than the respective insurance company in each of the cases relied upon by the respondent was referred to throughout those instruments as the “Annuitant” and nowhere therein was he ever referred to as the insured. The annuity in each case was calculated on a basis of Sy2 percent on the principal sum and only this 3% percent was paid to the annuitant plus any excess interest earned and there was no diminution of the principal fund. Even as to the kind of contracts just described, the court in Bodine v. Commissioner, 103 Fed. (2d) 982, held them contracts of insurance and in that respect took issue with In re Thornton's Estate, 186 Minn. 351; 243 N. W. 389, and Ballou v. Fisher, 154 Ore. 548; 61 Pac. (2d) 433. In the Old Colony case the “principal sum” of $40,000 was payable to the annuitant “at any time, provided there is no legal restriction to the contrary” and in the Chemical Bcmh case the “death refund” of $20,000 was payable to the annuitant “at any time prior to the death of the Annuitant * * *.” In the instant proceeding the annuity feature had no cash surrender value, and the decedent after paying her single premium of $3,258.20 could recover not one cent more than her semiannual annuity of $195.42 and these payments ceased with the last payment falling due prior to her death. In the instant proceeding the decedent could have surrendered her insurance policy after it had been in force for one year for its stated cash surrender value of $16,280, which was $3,720 less than its face amount, and the surrender thereof would not have effected her
It is these differences which we think compel us to recognize the separate features of “insurance” and “annuity” that are here involved. The annuity contract issued to the decedent was the same contract that would have been issued to any female person of her age for a single premium of $3,258.20. It was a plain annuity, no more and no less. Likewise the insurance policy was a plain, ordinary policy of insurance. It was no different in its terms from hundreds of insurance policies that are being written by the insurance companies every day. We think effect should be given to these policies in accordance with their plain terms, rather than to hold as the respondent has determined. It is therefore our opinion that at the time of the death of Anna M. Keller she was the owner of a $20,000 insurance policy in the Equitable Life Assurance Society of the United States, of which her daughter, Marcella Y. Keller, was the designated beneficiary and the $20,030.43 in question represents “insurance” as that term is used in section 302 (g) of the Revenue Act of 1926 as amended, and since the amount is not in excess of the $40,000 exemption provided for in the statute, no part thereof is includable in the decedent’s gross estate. Congress can, of course, remove the $40,000 insurance exemption contained in section 302 (g) at any time it sees fit, but as long as the exemption is there we have no cause to deny it under such circumstances as exist in the instant case.
Reviewed by the Board.
Decision will he entered for the petitioners.
Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, 'wherever situated, except real property situated outside the United States—
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(c) To the extent of any interest therein, of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, 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 (1) the possession or enjoyment of, or the right to the income from, the property, or (2) 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; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.
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(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.
Concurrence Opinion
concurring: The provisions of section 302 (g) of the Revenue Act of 1926 as amended provide that there shall not be included in the value of the gross estate of a decedent any amount not in excess of $40,000 receivable by beneficiaries “as insurance under policies taken out by the decedent upon his own life.” The Equitable Life Assurance Society of the United States issued a single premium life policy on the life of Anna M. Keller on December 31,1934, in the face amount of $20,000 in consideration of a premium of $11,941.80. After the death of the insured, the insurance company paid to the beneficiary of the insured the face amount of the policy plus a post mortem dividend. There can be no question whatever that the insurance company entered into a contract to pay a certain sum upon the death of an insured person in excess of the premium paid and fulfilled that contract. The question comes to this Board upon facts relating to a completed bona fide contract. Strictly speaking, we are not concerned with matters of concern only to the insurance company such as whether it waived some
In Old Colony Trust Co. et al., Executors, 37 B. T. A. 435, the facts were substantially and materially different from the facts in this proceeding. The contract involved there had none of the characteristics of a life insurance contract, other than that an amount was payable on the death of the annuitant to his beneficiaries, The total premium paid for that policy exceeded the face amount of the policy. There
Dissenting Opinion
dissenting: The problem here is whether subsection 302 (g) of the Kevenue Act of 1926 shall be so construed as to vitiate and nullify subsection (c) in this proceeding. The majority opinion has so construed it, erroneously, in my opinion. The gist of the reason for such construction by the majority opinion is the fact that the deceased received from an insurance company a form denominated a “Single Premium Life Policy. Insurance Payable At Death.” The contention is, in effect, that because therein the words “insurance” and “insured” were used, that they must be construed in the usual acceptation of the terms, regardless of other language used, and that therefore the situation falls under subsection 302 (g), rather than under subsection (c). Faced by the fact of the issuance of the so-called life insurance policy simultaneously with and “in conjunction with” an annuity policy, without which the “insurance” would not have been written, the majority opinion in words agrees that the two policies must be construed in connection with each other, but in fact in the next breath insists upon a separation, upon the theory that although the two policies formed one contract, the insurance policy feature and the annuity feature were divisible elements, that the whole transaction was not an entire, but a severable or divisible contract, and that the annuity policy was a mere condition precedent to the insurance policy.
This is, I think, basic error. That two such policies issued together do form one contract is almost, if not quite, elementary — and as above stated, this is not denied in the majority opinion. See Urwan v. Northwestern Life Insurance Co., 103 N. W. 1102; Schreiber v. German-American Mail Insurance Co., 45 N. W. 708; Timlin v. Equitable Life Assurance Society of United States, 124 N. W. 253. Moreover, language in a contract or deed is primarily and ordinarily to be con
In the face of this general principle of construction, there is no justification, I think, for holding that the annuity feature was a condition precedent, rather than an indivisible part of a contract. The citation by the majority of Legg v. St. John, 296 U. S. 489, is on its face inapplicable, for it states (referring to the “supplementary contract” unsuccessfully sought to be incorporated into the principal contract) : “But for all other purposes it is a separate obligation.” This refers to other language of the decision which specifically points out that the supplementary contract was, as to the feature at issue, covered by language of the policy that: “hTo other provision of said policy shall be held or deemed to be a part hereof.” Other citations as to cases involving “separate features which are clearly severable” are of course not in point here where the annuity feature was, on the contrary, clearly inseparable. That it is indivisible, inseparable from the life insurance feature, is demonstrated by the most effective of facts — that the life insurance feature would not have been written without the annuity feature. The company joined the two features. We can not with good logic treat them otherwise. It is impossible for me to discern how these two features can be severable, as the majority sever them. The annuity feature is no condition precedent, but a term, provision, or part of what the majority must perforce and does conclude is to be interpreted as a single contract. The doctrine of conditions means just what it says, that is, it entails a condition, a state of affairs or a fact upon which the existence of the contract depends, but an attempt to make one contract depend upon another contract as a condition precedent is merely to admit that the contracts form one, that additional provisions are agreed upon, and are to be construed together. One is not separate and a condition of the other, but each loses identity in the completed agreement. Thus, we see that there is no condition precedent entailed here, but a mere question of the proper interpretation of two terms of a contract, which under the ever prevalent rule must be considered as a whole to ascertain the intent of the parties. Welch v. Union Central Life Insurance Co., 78 N. W. 853; Mutual Life Insuranee Co. v. New, 51 So. 61. But if we read the contract as a whole, how can it be said that the insurance feature is independent when it depended completely upon the inclusion of the annuity feature without which the insurance company would not enter into a contract? Had the consideration or the annuity failed, such as by dishonoring of a check, can there be any doubt that the insurance company would have immediately contended that the contract was an integer, indivisible and inseparable, and that
Cooley on Insurance, vol. I, p. 80, says:
Prom what has been said it is evident that the primary requisite essential to the existence of every contract of insurance is the presence of a risJc of loss. The insurer, in return for a consideration paid to him by the insured, assumes this risk, and wherever such risk exists and is assumed by one of the parties to the contract, whatever form a contract may take, it is in fact a contract of insurance. Risk is essentially the subject of the contract. If there be no risk there can be no contract, and until the risk commences the contract does not attach. (Hart v. Delaware Ins. Co., 11 Fed. Cas. 683.)
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The risk which is essential to a contract of insurance must not be so great as to be prohibitory of the enterprise in which it is encountered. There must, in order that there may be successful insurance, be a sufficiently large number exposed to the same risk to make it practicable and advantageous to distribute the loss falling upon a few. As indemnity against loss is at the foundation of insurance, the business must be regarded as a system of distributing losses upon the many who are exposed to the common hazard. (Nye v. Grand Lodge A. O. U. W., 9 Ind. App. 131, 36 N. E. 429.) Out of the co-existence of many risks arises the law of average, which underlies the whole business of insurance. This is true, whether the insurance is on property or on lives. Life insurance especially is founded on the law of averages. The average rate of mortality is the basis on which it rests, and by spreading their risks over a large number of cases the companies calculate on the average with reasonable certainty and safety. (New York Life Ins. Co. v. Statham, 93 U. S. 24, 23 L. Ed. 789.)
Curry v. Washington National Insurance Co., 194 S. E. 825, says:
The definition of a contract of insurance imports the assumption of a risk by the insurer and the payment of a consideration therefor by insured.
The above clearly states the essential nature of life insurance. A contract which, instead of the insurance company assuming the risk
The ratio decidendi of Old Colony Trust Co. et al., Executors, supra, and the cases correlated therein was the lack in the contracts considered of the essential element of life insurance risk, as above set forth, and the lack of such expressions as “insurance” or “insured”, though mentioned, was not the crucial point. Terms do not control and a phrase can not contradict reality. Stearns Co. v. United States, 291 U. S. 54. “The nature of the contract must be determined from its contents and not by its terminology.” Physicians' Defense Co. v. O'Brien, 111 N. W. 396.
It seems to me that therein lies the basic error in the majority opinion, for because of the existence of the expressions “insurance” and “insured” in one part of the indivisible contract involved, the majority believe that we should find that insurance is involved. It is true that reliance is placed in a sound principle of a statutory interpretation, to wit, the use of words in their ordinary sense. The majority opinion therefore says, in effect, that section 302 (g), because of reference to “insurance”, involves any policy which bears the name of insurance. That principle of statutory construction however is patently subject to the other, just above expressed, that terms alone do not control, and the facts must be examined. Moreover, another principle of construction, coordinate if not more important, seems to be neglected by the majority opinion — the principle that legislative intent must be ascertained. No examination of that question appears in the majority opinion, yet in the interpretation of section 302 (g) in Commissioner v. Jones, 62 Fed. (2d) 496, we find the following:
* * * It seems to us that the provisions of subdivision (g) relied upon by the Commissioner are to he interpreted in the light of the purpose to be effected in excluding from the gross estate insurance in the amount of $40,000 receivable by beneficiaries other than the estate * * *.
It seems obvious that the purpose of Congress in exempting $40,000 of life insurance payable to beneficiaries other than the estate was the same as the public policy involved in the statutes of many states exempting insurance in general for the wife or family; iii other words, that Congress recognized a beneficent public policy in providing that insurance should form an estate for dependents and that by insurance, therefore, one could build up such an estate. Equally obvious, however, such public policy was not necessary in the case of one who did not need to build up an estate but already had funds with which he could not only pay for a single premium life insurance policy, but could, if not insurable became of age or physical condition, pay in such an additional amount of money in a combination of life
I can hot bring myself to believe that one subsection of this section of the revenue law should here be interpreted so as to render ineffective the other, but feel rather that the two subsections should be harmonized if possible and that we should arrive at a conclusion that subsection (g) is applicable only if subsection (c) is not violated in the facts, and not apply it merely because we find the word “insurance” in a contract which is, and was intended by the parties, as investment, as a contract of transfer of property with retention of income for life, of the very nature forbidden by subsection (c). Insurance does not have such effect. The contract here involved does, and I conclude that it is not insurance, but is a transparent device to use, in order to escape estate tax, the expression “insurance”, though it is a part, and a part only, of a contract which, in the cases above cited, has been refused recognition as basis for exemption. It is apparent that in this contract, as stated in Old Colony Trust Co. et al., Executors, supra, “the obligations of the company were such that the investment feature predominates and gives character to the contract.”
That the revenue act distinguishes between policies involving mere investment and those entailing insurance is shown in Helvering v. Illinois Life Insurance Co., 299 U. S. 88. Therein was considered “reserves required by law”, as deductions, in part, from gross income under section 203 (a) (2) of the Revenue Act of 1928, and it was held that such reserves must directly pertain to life insurance, and do not include “survivorship investment funds” accumulated from premiums on 20-payment life policies, to be paid to surviving policyholders; and the Court stresses the fact that under the latter feature of the policy “the company’s liabilities on account of the investment funds are independent of these attributable to life insurance risks.” In other words, investment risks are not within the category of life insurance for the purpose of the revenue act, even though covered by a policy labeled one of insurance. Such a contract, involving sur-vivorship investment funds, is called insurance, ordinarily known as tontine insurance. The Court relied upon its previous decision to the
