270 F.2d 894 | 9th Cir. | 1959
Lead Opinion
Plaintiff seeks recovery of federal estate taxes paid on decedent’s interest in certain life insurance and annuity policies.
Ashby and Mary Stewart were married in 1906 and their marital relationship continued until Mary’s death on February 21, 1951. They were residents of California. At the time of the wife’s death there were 26 insurance and annuity policies on the life of the husband, and seven annuity policies naming the wife as annuitant. The premiums on all of the policies were paid with community property funds.
Two questions are presented: (1) whether one-half of the cash value of the 26 policies on the life of the husband was properly includable in the wife’s gross estate; and (2) whether all, or one-half, of the proceeds of five of the annuity policies in the name of the wife should be included.
Policies on Husband’s Life
The Government contends that under the California law the decedent had a vested ownership interest of one-half of the cash value of the 26 policies on her husband’s life, and that the policies are accordingly includable under Section 811 (a), Int.Rev.Code of 1939
Appellee contends that decedent’s community interest in the insurance policies was merely the right to object to a payment of the proceeds to a third party beneficiary or to secure the proceeds where she was named beneficiary, both of which rights were contingent upon her surviving her husband; and that when she died before her husband these community property rights of protection died with her and were extinguished.
In determining whether one-half of the cash surrender value of these policies was includable in decedent’s gross estate, three questions are presented with respect to each of the 26 policies: (1) Was the policy community property under California law at the time of decedent’s death? (2) If so, what was the nature and extent of the decedent’s interests in the policy under California law? (3) Were these interests of such a nature as to require the inclusion of any amount attributable to them in the decedent’s estate for purposes of the federal tax ?
The question of whether the interest of the wife in her husband’s life insurance policies is includable in her estate for tax purposes is determined by the state law of community property. Poe v. Seaborn, 1930, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239; Lang v. Commissioner, 1938, 304 U.S. 264, 58 S.Ct. 880, 82 L.Ed. 1331. Under California law, where policies are taken upon the husband’s life during coverture and premi-
The respective interests of the husband and wife in community property “are present, existing and equal interests * * Cal.Civ.Code, § 161a. The husband retains possession and control of the community property. Cal.Civ.Code, § 172. “Upon the death of either husband or wife, one-half of the community property belongs to the surviving spouse; the other half is subject to the testamentary disposition of the decedent, and in the absence thereof, goes to the surviving spouse * * * Cal.Prob. Code, § 201.
While life insurance, because of its hybrid nature, is necessarily accorded individualistic treatment in the law generally, this fact has apparently not been regarded by the California courts as requiring that it be treated sui generis for the purposes of the community property laws. We find nothing in California law which indicates that life policies as items of community property are treated by rules other than or different from those pertaining to community property generally. See California Trust Company v. Riddell, D.C.S.D.Cal.1955, 136 F.Supp. 7, and Thurman, Fed.Estate & Gift Taxation of Community Property Life Insurance, 9 Stan.L.Rev. 239, (1957).
In Dixon Lumber Co. v. Peacock, 1933, 217 Cal. 415, 19 P.2d 233, 234, a wife’s interest in insurance policies on her husband’s life purchased with community property funds was held to be a “valuable property right”, the relinquishment of which was valid consideration for an assignment by the husband to her of a mortgage.
The trial court held that all of the policies were community property, and appellee does not contend otherwise. Since all premiums were paid with community funds, this conclusion is clearly correct, unless the wife subsequently released her interest, converting it into separate property of the husband. The determination of the question of taxability depends upon whether the wife so released her interest. Whether the wife released her interest depends not alone upon whether she consented to the designation of beneficiaries, but also upon the incidents of ownership retained by the insured in the respective policies. “(I)t may be said in general that incidents of ownership mean any power over an insurance policy which amounts to substantial ownership of the policy, such as the power to change the beneficiaries of the policy, to surrender the policy for its cash surrender value, to borrow against the policy, etc.”
The district court in holding that no part of the value of the insurance policies was includable in the wife’s estate stated that the wife’s interest was merely “a right of protection” which “did not enure to the benefit of anyone on her death since her death extinguished this right” and that “(b)oth before and after her death he had the right to take the cash surrender value of these policies without her consent, because he had the management and control of the community property.” We are unable to agree that the wife’s interest in the policies amounted to no more than “a right of protection”. It is conceivable that under state law a thing could be termed “community property” and yet the wife’s real interests in the thing be so insubstantial that nothing attributable to them could be included in her estate for federal tax purposes. Cf. Talcott v. United States, 9 Cir., 1928, 23 F.2d 897. The able trial judge used just such a rationale. His conclusion, however, overlooks the fact that if the husband took the cash surrender value before the wife’s death, it would remain community property in which she had a one-half interest, but if he took the cash surrender value after
In California Trust Company v. Rid-dell, supra, holding that the decedent’s wife had an interest in her husband’s life insurance policies, which should have been included in her gross estate, the court said in part: “She has such an interest in community property that it is possible for her to will away her portion thereof and thus, at her death, cause a division of the community estate. Probate Code, § 202. The fact that the policies in question were retained by the husband and that he had a right to change beneficiaries at will does not mean he could deprive the wife of her community interest therein without her consent.” 136 F.Supp. at page 9.
The trial judge, in his opinion, (158 F.Supp. 25) refers to two cases where the point here involved is considered, i. e., California Trust Company v. Riddell, supra, and Waechter v. United States, D.C.W.D.Wash.1951, 98 F.Supp. 960, affirmed 9 Cir., 1952, 195 F.2d 963. The judge was more persuaded by the reasoning in the Waechter case and by the fact that the decision was upheld by the Court of Appeals.
Prior to the Waechter case the Supreme Court of Washington in In re Knight’s Estate, 1948, 31 Wash.2d 813, 199 P.2d 89, had held that no part of the cash surrender value of insurance policies on the life of a husband, the premiums for which were paid out of community property, is includable in the estate of the wife when she predeceases her husband, under the Washington inheritance tax statutes. The trial court in the Waechter case relied upon the Knight case as binding in the interpretation of Washington law. Since the decision of the trial court in this case, however, the Supreme Court of Washington has expressly overruled In re Knight’s Estate, saying in part: “* * * (W)e are constrained to hold that our decision in In re Knight’s Estate, supra, was incorrect in holding that the cash surrender value of a life insurance policy is not property ‘which passes by will or by the statute of inheritance.’ In our opinion, the state in this case is taxing the receipt by Mrs. Leuthold’s legatees, pursuant to her will, of her one-half interest in the cash values of these policies * * * and that, under the provisions of RCW 83.04.010, it is entitled to do so.” In re Leuthold’s Estate, 1958, 52 Wash.2d 299, 324 P.2d 1103, 1109.
It should be noted also that both the Washington and California statutes impose an inheritance tax upon the property which passes either by will or by the statutes of inheritance. Section 811(a) includes in the gross estate for federal estate tax purposes property “to the extent of the interest therein of the decedent at the time of his death.” An inheritance tax is an “excise or impost laid upon the privilege of receiving property by inheritance.” In re Knight’s Estate, supra. [31 Wash.2d 813, 199 P.2d 91] An estate tax is levied upon the privilege of transfer of property at death. “It does not tax the interest to which the legatees and devisees succeed on death, but the interest which ceased by reason of death; what is imposed is an excise upon the transfer of an estate upon death of the owner.” Commissioner of Internal Revenue v. Clise, 9 Cir., 1941, 122 F.2d 998, 1001, and cases cited therein.
With respect to seven
In thirteen policies,
Both the Ettlinger case and the Mayr case, however, were concerned with the right to the proceeds of the policies after the death of the insured. Here we are concerned with the rights in the policies themselves during the existence of the community. It is important to recognize this distinction in determining what rights were retained by the wife in the community assets.
It was in view of these rules that the court in Mayr v. Arana said: “There was not a gift of the proceeds of the policy to (the husband’s mother) since the decedent (husband) could have given one-half of the proceeds to his mother without his wife’s consent, but in consideration of the wife’s consenting to the policy whereby she became the primary beneficiary of the entire amount named in the policy she released her community interest, in the event of her death prior to her mother-in-law’s, to (her mother-in-law).” 284 P.2d at page 25. It may well be true that had the husband predeceased the wife in the instant case, her consent to the designation of the beneficiaries would have precluded her from contesting such designation after the death of her husband, but such a rule should not be extended to the present situation. Where the husband retains both the right to obtain the cash value and the right to change beneficiaries, the wife cannot be held to have intended by her endorsement to surrender her community interest in the policies.
Moreover, where the insured designates a beneficiary but retains the right to change the designation, the interest of the beneficiaries prior to the death of the insured is that of a “mere expectancy of an incompleted gift.” In re Castagnola’s Estate, 1924, 68 Cal.App. 732, 230 P.188, 190. Or, as stated in Travelers’ Ins. Co. of Hartford, Conn. v. Fancher, 1933, 219 Cal. 351, 26 P.2d 482, 483, “the designation of a beneficiary in a policy of life insurance initiates in favor of the beneficiary an inchoate gift of the proceeds of the policy, which, if not revoked by the insured prior to his death, vests in the beneficiary at the time of his death.” Thus, the wife’s endorsement of the designation of beneficiaries was at most an assent to an incompleted gift, which was still incompleted at the time of her death. It was not a transfer to her husband. We hold therefore that the wife’s interest in these 13 policies is includable in the wife’s gross estate for tax purposes.
With respect to two annuity policies,
Four annuity policies had matured at the time of the wife’s death,
The wife did sign the fourth of the annuity contracts, issued by John
In any event, the wife’s endorsement did not in our opinion constitute a surrender of her interest in the policy. Such a holding would mean that the payments coming to the husband under this contract would be his separate property rather than community property. We cannot presume that the wife so intended. Nor does the Ettlinger case
In fact the language of the Mayr
We find accordingly that a substantial interest passed from the wife to the husband upon the wife’s death with respect to all of the policies. Since we can find no warrant in California law for treating life insurance as a community asset differently from other kinds of property, we hold that at the time of the wife’s death she had present, existing and equal interests with her husband in the policies; that these interests amounted to ownership of one-half of whatever value the policies had at the time of her death, and that such an amount must be included in her gross estate.
Annuity Policies Issued to Wife
The trial court found that the husband had relinquished his community property rights in two policies,
The judgment is affirmed with respect to the policies issued to the decedent and reversed with respect to the policies issued to her husband and remanded for recomputation of the tax in conformity with this opinion.
Judge DENMAN did not participate in this opinion.
. No question has been raised on appeal with respect to two of the annuity policies, winch the district court found to be separate property of the wife.
. Section 811(a) Int.Rev.Code of 1939 provides: “The value of the gross estate of the decedent shall be determined by including the value at the time of Ms death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States — (a) to the extent of the interest therein of the decedent at the time of Ms death; * * 26 U.S.C.A. § 811.
. Lowndes and Kramer, Federal Estate and Gift Taxes, p. 275. See also Commissioner of Internal Revenue v. Chase Manhattan. Bank, 5 Cir., 1958, 259 F.2d 231, 245-246.
. Accord: Thompson v. Calvert, Tex.Civ. App.1957, 301 S.W.2d 496; Estate of Louisa Morris Carroll v. Commissioner of Internal Revenue, 1933, 29 B.T.A. 11 (Louisiana residents). See also Commissioner of Internal Revenue v. Chase Manhattan Bank, 5 Cir., 1958, 259 F.2d 231.
It is important to note that In re Leu-thold’s Estate was decided May 2, 1958, subsequent to the opinion of the trial court in this ease.
. The distinction between the California Inheritance tax law and federal estate tax law was set forth by the California Superior Court for the County of San Diego in a recent unreported decision in Estate of Mendenhall, No. 56225. While the court held that the California in
. Pacific Mutual Life Insurance Company Policy No. 336749, (Ex. J); Aetna Life Insurance Company Policy No. 530811 (Ex. L) ; Mutual Benefit Life Insurance Company Policies No. 838189 and 838190 (Ex. R) ; West Coast Life Insurance Company Policy No. 97457, (Ex. S); and Aetna Life Insurance Company Policies No. 778050 and 778051 (Ex. T).
. Equitable Life Assurance Society Policies No. 2,370,306; 1,926,371; 1,926,372; 2,249,133; 2.387,397; 2,3S7,396; 2,387,-398; 2,796,071 (Ex. H) ; Travelers Insurance Company Policies No. 409014 and 409015 (Ex. I); Massachusetts Mutual Life Insurance Company Policy No. .459078 (Ex. K), and Equitable Life Assurance Society Policies No. 9,577,484, and 9,577,482 (Ex. M).
. In Commissioner of Internal Revenue v. Chase Manhattan Bank, 5 Cir., 1958, 259 F.2d 231, the court said that “there is a discoverable touchstone for applying orthodox community principles to insurance. The touchstone is the distinction between policy-rights and proceeds-rights.” 259 F.2d at page 245. See also Thurman, Federal Estate and Gift Taxation of Community Property Insurance, 9 Stan.L.Rev. 239 (1957).
. Mutual Life Insurance Company of New York Policies No. 225197 and 225198 (Ex. N).
. New York Life Insurance Company Policy No. 123,101 (Ex. O); New York Life Insurance Company Policies No. 123,837 and 123,838 (Ex. P) and Hancock Mutual Life Insurance Company Policy No. 020895 (Ex. Q).
. Tlie three New York Life Insurance Company contracts.
. Ettlinger v. Connecticut General Life Ins. Co., 9 Cir., 1949, 175 F.2d 870.
. Mayr v. Arana, 1955, 133 Cal.App.2d 471, 284 P.2d 21.
. If the replacement value of the Hancock policy is not includable under § 811(e) (1) (B) (i), then it is includable under § 811(a), since the wife’s signature on the settlement agreement did not, in our opinion, evidence a surrender of her community interest in the policy.
. This is a logical result, since it is clear that upon the death of a husband, with a wife surviving, only one-half of the proceeds of his life insurance, purchased with community funds, is includable in his estate. Lang v. Commissioner, 1938, 304 U.S. 264, 58 S.Ct. 880, 82 L.Ed. 1331.
. Fidelity Mutual Life Insurance Company Policies No. 521822 and 521823 (Ex. C).
. John Hancock Mutual Life Insurance Company Policies No. 0128280 and 0128263 (Ex. D); Aetna Life Insurance Company Policies No. AP 1849 and AP 1850 (Ex. E); and Equitable Life Assurance Society Policy No. 9685846 (Ex. F).
Rehearing
On Petition by Appellee for Rehearing
Before POPE, Circuit Judge, and JAMESON, District Judge.
Appellee has filed a petition for rehearing and has requested that action thereon be deferred until Estate of Mendenhall, decided by the Superior Court of the State of California, in and for the County of San Diego, has been reviewed by the appellate court. In our opinion we stated that the outcome of any appeal in the Mendenhall case would not affect our decision. Is that conclusion justified?
Pursuant to § 811(a) Internal Revenue Code of 1939, 26 U.S.C.A. § 811(a), the value of the gross estate of the decedent for federal estate tax purposes is determined by including the value of all property (except real property outside of the United States) “to the extent of the interest therein of the decedent at the time of his death * * Testamentary disposition is not required, and the tax is not imposed upon the right of receiving property by inheritance. On the other hand, the state inheritance tax of California is imposed “either on the transmission or the exercise of the legal power of transmission of property by will or descent, or on the legal privilege of taking property by will or descent.”
The Mendenhall decision emphasizes many times the distinction between the federal estate tax and state inheritance tax. The basis for holding that the wife’s interest in her husband’s insurance policies was not subject to inheritance tax was summarized as follows; “It is the Court’s view that no interest in the cash surrender value of the insurance policies involved in this case passed by will or inheritance; that a tax imposed on Mrs. Mendenhall’s legatees, based on the assumption that something of value passed to them, is completely unjustified; that the interest therein received by Mr. Mendenhall was by reason of the contract of insurance. The Court does not deny that Mr. Mendenhall’s position has been improved. The Court does, however, deny that the California inheritance tax statute covers such an interest as he has received, and whether it does or does not should be the prime issue in this case. * * * >>
Judge Thomas, in his opinion in the Mendenhall case, found the reasoning of Chief Justice Hill in his dissenting opinion in the Leuthold case
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“The Knight case did not hold that a wife had no community interest in the cash surrender value of life insurance policies. It held, and I believe properly, that the interest, whatever its character, did not pass by will or by the statute of inheritance, but that it passed to her husband by the contract of insurance; and there was nothing in our inheritance tax law that made such a transfer of interest taxable.”
Appellee’s petition for rehearing relies strongly upon the opinion of the trial judge in the Waechter case,
We find nothing in the Mendenhall decision or other California cases to justify a conclusion that the decedent did not have a property interest in her husband’s insurance policies at the time of her death. This interest was taxable as a transfer to her husband. In other words, there was a transfer to the husband within the meaning of Section 810 of the Internal Revenue Code of 1939, 26 U.S.C.A. §§ 810, even though it was not effected by will or inheritance.
We see no reason accordingly for deferring action on appellee’s petition for rehearing pending appellate review of Estate of Mendenhall. The petition for rehearing is denied.
. See article dealing with inheritance and gift taxes in 26 Cal.Jur.2d at page 691, quoted in the Mendenhall decision.
. In re Leuthold’s Estate, 1958, 52 Wash.2d 299, 324 P.2d 1103, 1111.
. In re Knight’s Estate, 1948, 31 Wash.2d 813, 199 P.2d 89.
. Waechter v. United States, D.C.W.D. Wash.1951, 98 F.Supp. 960.
. Both the Mendenhall opinion and the dissenting opinion in the Leuthold ease expressly recognize that the husband’s “position has been improved”, without calling the change in position a “transfer”. Both of these opinions, however, were concerned with a transfer by will or inheritance.