The proceeds of two life insurance policies were made payable in
monthly payments to the insured's wife for her lifetime, but, if
she should die before the expiration of 20 years, his daughter was
to receive the payments until the 20 years had elapsed. When he
died, he was survived by his wife and daughter, and each insurance
company determined and set up on its books a sum representing the
amount necessary to fund the 240 monthly payments for the 20 years
and a separate sum representing the amount necessary to fund the
monthly payments to the wife so long as she might live beyond the
240 months.
Held: the decedent's estate was not entitled to a
marital deduction under § 812(e) of the Internal Revenue Code of
1939, even with respect to that portion of the proceeds necessary
to fund the monthly payments to the wife so long as she might live
beyond the 240 months, since the proceeds of each policy
constituted a single "property" and the interest passing to the
wife might "terminate or fail" and another person might "possess or
enjoy [a] part of such property after such termination or failure."
Pp.
364 U. S.
410-416.
275 F.2d 83 affirmed.
MR. CHIEF JUSTICE WHITTAKER delivered the opinion of the
Court.
Petitioners, who are executors of the estate of Albert F. Meyer,
brought this suit to recover an alleged overpayment of federal
estate taxes, and the District Court granted
Page 364 U. S. 411
the relief asked. 166 F. Supp. 629. The Court of Appeals
reversed, 275 F.2d 83, and we granted the executors' petition for
certiorari, 361 U.S. 929, because of a conflict of decisions in the
circuits.
Cf. In re Reilly's Estate, 239 F.2d 797, decided
by the Court of Appeals for the Third Circuit.
Two policies of life insurance are involved, [
Footnote 1] but, since they are in all
material respects identical, we need deal with only one of them.
The policy obligated the insurer to pay a death benefit of
$25,187.50, and that sum was included by the executors in the
federal estate tax return and the tax thereon was paid. The
decedent had selected an optional mode of settlement which provided
for the payment of equal monthly installments to his wife for her
life, with 240 installments guaranteed, and further provided that
if the wife should die before receiving the 240 installments, his
daughter would receive the remainder of them, but if both the wife
and the daughter died before receiving the 240 installments, the
commuted value of those unpaid was to be paid in one sum to the
estate of the last one of them to die.
Of the total proceeds of the policy of $25,187.50, the insurer
determined that $17,956.41 was necessary to fund the 240 monthly
payments to the wife, the daughter, or to the estate of the last
survivor of them, and that the remaining $7,231.09 was necessary to
fund the monthly payments to the wife so long as she might live
beyond the 240 months. Accordingly, the insurer made such entries
on its books.
Thereafter, petitioners, as executors, timely filed a claim for
refund of the amount of the tax paid upon the
Page 364 U. S. 412
$7,231.09 which the insurer had shown upon its books as
necessary to fund the monthly payments to the wife for her
actuarial expectancy beyond the 240 months certain, on the theory
that the insurer's treatment of that sum on its books created a
separate "property" or fund payable to the wife alone, and hence it
qualified for the marital deduction under § 812(e)(1) of the
Internal Revenue Code of 1939. [
Footnote 2] The claim was denied, and this suit was
brought to recover the tax that had been paid on that sum.
Petitioners correctly concede that, if the policy constitutes
but one "property," within the meaning of the statute, [
Footnote 3] it would not qualify for
the marital deduction
Page 364 U. S. 413
because the wife's interest in it would be a "terminable" one,
within the meaning of the statute, inasmuch as the wife may die
before receipt of the 240 guaranteed installments, in which event
the unpaid ones must go to the daughter if then living. They
concede, too, that the $17,956.41, shown on the insurer's books as
necessary to fund the monthly payments for the 240 months certain,
does not qualify for the marital deduction for the same reasons.
But they contend that, although the policy made no provision
therefor, the insurer's bookkeeping entries constituted a real
division of the insurance proceeds into, and created, two
"properties" -- one of $17,956.41 and the other of $7,231.09 -- and
that the latter qualifies for the marital deduction under the
statute because it is payable, if at all, only to the wife --
during her lifetime beyond the 240 months -- and no other person
has any interest in it.
Whether a policy of life insurance may create several
"properties" or funds, either terminable or nonterminable or both,
we need not decide, for we think the policy here involved
constituted only one property, and made only so much of its
proceeds payable to the wife as she might live to receive in equal
monthly installments, and made any guaranteed balance payable to
the daughter. Hence, under the terms of the policy, the "interest
passing to the surviving spouse [may] terminate or fail" and a
"person other than [the] surviving spouse . . . may possess or
enjoy [a] part of such property after such termination or failure
of the interest so passing to the surviving spouse;. . . ."
Therefore, the policy and its proceeds -- considered apart from
petitioners' claim that the insurer's bookkeeping division of the
proceeds of the policy into two parts created two "properties" --
are disqualified for the marital deduction by the express
provisions of § 812(e)(1)(B) of the Internal Revenue Code of
1939.
Page 364 U. S. 414
The legislative history of the section further supports and
compels this conclusion. Illustrating applications of the
terminable interest rule, the Senate Committee Report gave an
example that is in no relevant way distinguishable from this case,
[
Footnote 4] and makes it very
clear that the marital deduction is not allowable in the case of an
annuity for the surviving spouse for life if,
"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. . . ."
We think petitioners' argument -- that the insurer's bookkeeping
division of the proceeds of the policy into two parts created two
properties -- cannot withstand the provisions of the policy and the
actual facts respecting the insurer's bookkeeping division of its
proceeds, under the clear terms of the statute and its legislative
history. The policy made no provision for the creation of two
separate properties -- one a property sufficient to provide
payments for 240 months, to the wife while she lived and any
Page 364 U. S. 415
remainder to the daughter, and another property sufficient to
provide an annuity to the wife for the period of her actuarial
expectancy beyond the 240 months -- and no such separate properties
were in fact created. The allocations made were merely actuarial
ones -- mere bookkeeping entries -- made by the insurer on its own
books for its own convenience after the insured, the other party to
the contract, had died. The wife and the daughter were,
respectively, primary and contingent beneficiaries of the policy
alone. Neither of them had any title to, nor right to receive, any
special fund, and indeed none was actually created. The bookkeeping
entries made by the insurer no more created or measured their
rights than the insurer's erasure of those entries -- which it was
free to make at any time -- would destroy their rights. Their
rights derive solely from the policy. It, not the insurer's
bookkeeping entries, created and constitutes the property involved.
Any action by the beneficiaries to enforce their rights against the
insurer would have to be upon the policy, not upon the entries the
insurer had made on its books for its own actuarial information and
convenience. Nor would exhaustion of the sum of those entries
constitute any defense to the insurer against the claim of either
beneficiary for amounts due her under the policy.
The proceeds of the policy were not payable to the wife (or to
her estate or appointee) alone and at all events, but were payable
in monthly installments to her for life, and if any obligation
under the policy remained undischarged at her death it was payable
to the daughter if living or, if not, to the estate of the last of
them to die. It follows that the "interest passing to the surviving
spouse [may] terminate or fail," and that a
"person other than [the] surviving spouse . . . may possess or
enjoy [a] part of such property after such termination or failure
of the interest so passing to the surviving spouse; . . . "
Page 364 U. S. 416
and hence the property is disqualified for the marital deduction
by the express provisions of § 812(e)(1)(B) of the Internal Revenue
Code of 1939.
Affirmed.
[
Footnote 1]
One of the policies was issued by Northwestern Mutual Life
Insurance Company in the amount of $25,187.50, and the other was
issued by John Hancock Mutual Life Insurance Company in the amount
of $5,019.60.
[
Footnote 2]
Section 812(e) provides in relevant part:
"(1) ALLOWANCE OF MARITAL DEDUCTION. --"
"(A) In General. -- An amount equal to the value of any interest
in property which passes or has passed from the decedent to his
surviving spouse, but only to the extent that such interest is
included in determining the value of the gross estate."
"(B) Life Estate or Other Terminable Interest. -- Where, upon
the lapse of time, upon the occurrence of an event or contingency,
or upon the failure of an event or contingency to occur, such
interest passing to the surviving spouse will terminate or fail, no
deduction shall be allowed with respect to such interest -- "
"(i) if an interest in such property passes or has passed (for
less than an adequate and full consideration in money or money's
worth) from the decedent to any person other than such surviving
spouse (or the estate of such spouse); and"
"(ii) if by reason of such passing such person (or his heirs or
assigns) may possess or enjoy any part of such property after such
termination or failure of the interest so passing to the surviving
spouse; . . ."
[
Footnote 3]
"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, that is, to the estate or the quality and quantum of
ownership by the surviving spouse or other person, of particular
property."
S.Rep. No. 1013, Part 2, 80th Cong., 2d Sess., p. 4.
[
Footnote 4]
"
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 the 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.) S.Rep. No. 1013, Part 2, 80th Cong., 2d Sess.,
pp. 12-13.
MR. JUSTICE DOUGLAS, with whom MR. JUSTICE CLARK and MR. JUSTICE
BRENNAN concur, dissenting.
The decedent had two life insurance policies in two separate
companies; and each provided for the payment of the proceeds in 20
annual instalments by monthly payments to decedent's wife, Marion
E. Meyer, if living, and thereafter during her lifetime. If the
wife was not living at decedent's death, the instalments were to be
paid to a daughter. If the wife died after decedent and before
payment in full of the instalments, any remaining instalments were
to be payable to the daughter. If the wife lived beyond the 20
years, she would be entitled to like monthly payments for her life.
Decedent was survived by his wife and daughter, the wife being then
42 years old.
The insurance companies calculated the sums necessary to provide
the designated monthly payments for 20 years: $17,956.41 in the
case of one policy and $4,012.24 in the case of the other. They
then computed the amount necessary to provide a monthly income to
the wife in the event she lived beyond the 20-year period:
$7,231.09 for one policy; $1,007.36 for the other.
Neither of the policies provided (and decedent did not request)
that there be any segregation of the proceeds between the amounts
computable for the term certain and for funding of the contingent
life annuity. [
Footnote 2/1] The
amounts required to provide monthly payments for 20 years --
$17,956.41 and $4,012.24 -- were not claimed as
Page 364 U. S. 417
marital deductions. This controversy concerns only the amount
needed to fund the contingent life annuities of the wife --
$7,231.09 plus $1,007.36, or $8,238.45, which the executors claim
as a marital deduction.
Concededly the amount necessary to make the 20-year payments
does not qualify as a marital deduction because it may "terminate
or fail" within the meaning of the Code, [
Footnote 2/2] the daughter being entitled to any
remaining payments during that term should the wife die before it
terminates. The daughter, however, has no interest in the annuities
payable beyond the 20-year period. And it seems to me that the
wife's "interest" in that part of the insurance contracts does not
"terminate or fail" within the meaning of § 812(e)(1)(B). [
Footnote 2/3]
If the decedent had taken out one group of policies to pay
instalments for 20 years to his wife or, if she died within that
period, to his daughter, and another group of
Page 364 U. S. 418
policies to pay instalments to his wife for life if she lived
more than 20 years, the former would be nondeductible, but the
latter would qualify for the marital deduction. [
Footnote 2/4] Does then the continuation of the two
types of insurance in one policy change the result? The Government
maintains that it does because, in its view, the entire insurance
proceeds of each policy are a single "property" as that term is
used in the statute, and the Court so holds. Yet, with all
deference, that conclusion is wide of the mark.
The Senate Report states that terminable interests include all
interests that are subject to contingencies and conditions.
[
Footnote 2/5] Yet these
contingencies and conditions are not all-inclusive. They do not
include the death of the transferee. And, as I shall show,
contingencies of the kind we have here are not included.
The Court, with all deference, errs in making its decision turn
on whether the wife's interest after the 20-year term is a separate
"property" within the meaning of the statute. The ruling of the
Court is on a statutory provision that does not exist. Under the
statute, the question is not whether "property" is terminable; it
is whether an "interest" is terminable. The statute indeed draws a
marked distinction between "property" and "interest." [
Footnote 2/6]
Page 364 U. S. 419
Section 812(e)(1)(A) speaks not of "property," but of any
"interest" in property. Section 812(e)(1)(B) speaks only of an
"interest passing to the surviving spouse" that will "terminate or
fail." The statute at these points is concerned with "interest" in
property -- not with "property." Yet the Court, disregarding the
statutory scheme, looks only to "property," and, finding but one
insurance policy, denies the deduction.
Plainly there may be more than one "interest" in a single
"property." A deduction is not denied merely because the surviving
spouse and someone else each have an "interest" in the same
"property." S.Rep. No. 1013, 80th Cong., 2d Sess., Pt. 2, p. 8. The
Senate Committee gave several examples:
". . . if the decedent by his will devises Blackacre to his wife
and son as tenants in common, the marital deduction is allowed,
since the surviving spouse's interest is not a terminable interest.
[
Footnote 2/7]"
There seems to me to be a like separation of interests in the
present case. These insurance policies created, of course, no fund
or
res. The sum of $21,968.65 representing the wife's
terminable interest and the $8,238.45 representing her other
interest were, of course, no more segregated in the insurance
companies' assets than a customer's checking account is segregated
in a commercial bank. Yet that seems immaterial. Each represented a
chose in action. The wife or daughter, as the case might be, could
sue for the one during the 20-year period . Only the wife could
enforce the claim here in question.
That the proceeds of one life insurance policy may create two or
more "interests" for purposes of the estate tax is implicit in the
Senate Report. Thus, one example of a marital deduction that is
given is an annuity payable
Page 364 U. S. 420
to the decedent during his life and to his spouse during her
life if she survived him.
"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 the 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."
Id., pp. 12-13.
The last sentence of the foregoing quotation, on which the Court
relies, describes with accuracy the terminable "interest" of the
wife in that part of the annuity payable during the 20-year period
after the death of the decedent. It has no relevancy to the
"interest" with which we are here concerned,
viz., the
instalments payable after that 20-year period.
My conclusion is that, where the "interest" that accrues to the
surviving spouse is, as here, shared with no one else, and is
subject to no termination except her own death, it qualifies for a
marital deduction under this statute, even though another
"interest" of hers in the same annuity contract would not
qualify.
[
Footnote 2/1]
It was said, however, on oral argument the insurance companies
maintained for their own records separate accounts as to the
20-year monthly income provisions and the contingent life annuity
of the wife, without any segregation of funds.
[
Footnote 2/2]
Section 812(e), I.R.C.1939, as added by Revenue Act of 1948, §
361, 62 Stat. 110, 117, provides in relevant part:
"(1) ALLOWANCE OF MARITAL DEDUCTION. --"
"(A) In General. -- An amount equal to the value of any interest
in property which passes or has passed from the decedent to his
surviving spouse, but only to the extent that such interest is
included in determining the value of the gross estate."
"(B) Life Estate or Other Terminable Interest. -- Where, upon
the lapse of time, upon the occurrence of an event or contingency,
or upon the failure of an event or contingency to occur, such
interest passing to the surviving spouse will terminate or fail, no
deduction shall be allowed with respect to such interest --"
"(i) if an interest in such property passes or has passed (for
less than an adequate and full consideration in money or money's
worth) from the decedent to any person other than such surviving
spouse (or the estate of such spouse); and"
"(ii) if by reason of such passing such person (or his heirs or
assigns) may possess or enjoy any part of such property after such
termination or failure of the interest so passing to the surviving
spouse; . . ."
[
Footnote 2/3]
See 364
U.S. 410fn2/2|>note 2,
supra.
[
Footnote 2/4]
The Court of Appeals, in
In re Reilly's Estate, supra,
correctly noted that the purpose of the marital deduction under
this Act was "to make more nearly uniform the tax treatment of
married persons in community property and non-community property
states."
Id., 239 F.2d at 799. The assets not taxable in
the estate of the first spouse to die may be taxed at the death of
the survivor. In other words, the property in the marital community
is subject to the tax only once in the estate of either.
[
Footnote 2/5]
S.Rep. No. 1013, 80th Cong., 2d Sess., Pt. 2, p. 7.
[
Footnote 2/6]
"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, that is, to the estate or the quality and quantum of
ownership by the surviving spouse or other person, of particular
property."
S.Rep.,
supra, Pt. 2, p. 4.
[
Footnote 2/7]
Id. at 8.