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Higgs' Estate v. Commissioner of Internal Revenue.

decided: September 28, 1950.


Author: Kalodner

Before MARIS, KALODNER and HASTIE, Circuit Judges.

KALODNER, Circuit Judge.

This controversy, one of first impression, concerns the taxability, as part of the decedent's gross estate, of the value of a survivorship annuity payable to the decedent's widow. The annuity in favor of the widow resulted from the exercise, by the decedent during his lifetime, of an option extended to him in a group retirement benefit contract arranged by his employer with a commercial insurance company, the full consideration for which, in this instance, was paid by the employer.

The Tax Court, four judges dissenting, held the value of the survivorship annuity includible in the decedent's estate, and determined the value, on the date of the decedent's death, of the $7,000 survivorship annuity involved to be $33,867.86.*fn1 12 T. C. 280. The executor of the decedent's estate has petitioned for review of this decision with respect to the inclusion of any part of the value of the survivorship annuity.

The facts are not disputed. The decedent, William J. Higgs, died on May 18, 1943, and is survived by his widow, Ella Bolton Higgs. He was an employee of the Socony-Vacuum Oil Company or its predecessors for approximately forty-seven years prior to his retirement on January 1, 1935. The employer had had various systems of pensions and retirement benefits in which the decedent had been a participant, but these were terminated and it entered into an agreement, known as Group Contract No. 103, with the Metropolitan Life Insurance Company on January 1, 1931, pursuant to which the benefits were underwritten and administered by Metropolitan.

The Group Contract gave each employee an option, exercisable prior to the commencement of annuity payments, whereby he might "request the Insurance Company that his Retirement Annuity commence on the normal retirement date for a reduced amount, as determined by the Group Contract, and that it shall be continued after his death, to his designated dependent, should such person survive him." Computations were to be made so that the resulting annuities would be equivalent in value to the annuity to which the employee himself would have been entitled if the option had not been exercised. The exercise of the option made no difference financially to the employer. Benefits under the Group Contract were non-assignable as to the decedent. Further, if an employee who exercised the option referred to continued in his employment past the "normal retirement date" or past forty years of service, and his designated beneficiary predeceased him, the Insurance Company, on his retirement, would pay only the reduced amount of his annuity.

Under the contract of January 1, 1931, the decedent would have reached his "normal retirement date" on January 1, 1938. The contract, however, was amended on January 5, 1934, effective as of January 1, 1934, so that the decedent became eligible to retire immediately. As already stated, he continued in his employment until January 1, 1935. On September 12, 1934, the decedent designated his wife as beneficiary and elected to receive a reduced annuity so that the annuity would be continued to her after his death, should she survive him. He specifically requested that his annuity on retirement be reduced to the extent necessary to provide an annuity of $7,000 for his wife for her life after his death in case she should survive him. The insurance company granted this request. The decedent, therefore, was entitled to receive, and was paid from January 1, 1935, until his death, $18,985.27 annually, and after his death the payments of $7,000 annually were made to his widow. Had he not exercised the option, the decedent would have been entitled to receive an annuity of $21,750 for his life.

The entire cost of the retirement benefits provided for the decedent was borne by his employer, the net amount being $218,353.37. The last payment was made by the employer to the insurance company on January 1, 1934, at which time the annuity for the decedent became fully paid. Thereafter, the annuity contract with respect to the decedent was not subject to change by the employer.

On these facts, the majority of the Tax Court determined that the exercise of the option by the decedent during his lifetime constituted a transfer of property falling within Section 811(c) of the Internal Revenue Code, 26 U.S.C.A. ยง 811(c).*fn2 Noting that the annuity was fully paid by January 1, 1934, it was held that the decedent possessed property in the paid-up annuity, under which he had reached retirement age and had the right to receive $21,750 annually during his life.And it was concluded that the exercise of the option deprived the decedent of money which he otherwise would have received during his life, thus effecting a transfer to his wife of an interest in the annuity. Reliance was had on Commissioner v. Wilder's Estate, 5 Cir., 1941, 118 F.2d 281, certiorari denied 314 U.S. 634, 62 S. Ct. 67, 86 L. Ed. 509; Commissioner v. Clise, 9 Cir., 1941, 122 F.2d 998, certiorari denied 315 U.S. 821, 62 S. Ct. 914, 86 L. Ed. 1218; and Mearkle's Estate v. Commissioner, 3 Cir., 1942, 129 F.2d 386. The Commissioner's argument on this petition for review accords with the view of the majority of the Tax Court.

The taxpayer contends, nevertheless, that the decedent, at the time of his election, had only an option to choose between two annuity retirement plans under the Group Contract executed by the employer and the insurance company; that his choice of the lesser annuity for himself with a survivorship annuity of $7,000 for his wife could not operate as a transfer of property, but constituted merely the relinquishment of his right to select the larger annuity for himself; and that only by means of exercising the option did the decedent receive any property interest in a specific retirement annuity. Like the dissenting judges of the Tax Court, the taxpayer rejects the proposition that the decedent constructively received the full annuity and then returned a part of it to the insurance company in consideration for an annuity to his wife. It is noted, too, that the exercise of the option by the decedent resulted in no change in the amount of the employer's contribution, or in the insurance company's obligation to pay the full value of the retirement benefits as provided in the contract. Reliance is had upon Brown v. Routzahn, 6 Cir., 1933, 63 F.2d 914, certiorari denied 290 U.S. 641, 54 S. Ct. 60, 78 L. Ed. 557; and Commissioner v. Pierce, 2 Cir., 1944, 146 F.2d 388. The taxpayer further asserts that the detailed provisions of the Revenue Act of 1942 covering benefits under pension plans show that Congress did not intend to impose an estate tax in the instant situation.

It is a fact of paramount significance to this litigation that subsequent to the decision of the Tax Court herein, Section 811 (c) of the Internal Revenue Code was materially amended, and such amendment, insofar as pertinent hereto, is applicable to this decedent's estate. Public Law 378, October 25, 1949, Section 7, c. 720, 63 Stat. 891, 894.*fn3 Accordingly, the Commissioner seeks to reach the result obtained by the Tax Court through the application of what is now Section 811(c)(1)(B) of the Code, that is, the reservation of a life interest in the property transferred. He concedes, and properly, that no reversionary interest is involved so as to bring this case within Section 811(c)(1)(C), that is, a transfer intended to take effect at death, as that Section is extenuated by Section 811 (c)(2).

In order to fix the relation to this controversy of the 1949 amendment to Section 811(c), it is necessary to consider first the status of the law at the time the Tax Court reached its conclusion, March 2, 1949. The Supreme Court had already (January 17, 1949) promulgated its determination in Commissioner v. Estate of Church, 335 U.S. 632');">335 U. S. 632, 69 S. Ct. 322, 337, 93 L. Ed. 288 330. that May v. Heiner, 1930, 281 U.S. 238, 50 S. Ct. 286, 74 L. Ed. 826, 67 A.L.R. 1244, was no longer properly interpretive of the clause in Section 811(c) relating to transfers intended to take effect in possession or enjoyment at or after death, and that henceforth the philosophy of Helvering v. Hallock, 1940, 309 U.S. 106, 60 S. Ct. 444, 84 L. Ed. 604, 125 A.L.R. 1368, should prevail. Consequently, with May v. Heiner out of the way, if indeed the decedent here had effected a transfer of property through the exercise of his option to provide an annuity to his wife, she surviving him, the value of the property transferred would be includible in his gross estate under Section 811 (c) as one intended to take effect in enjoyment at his death. And it would have been a useless gesture to determine whether, under the circumstances, the decedent had reserved to himself a life interest in the property transferred. See Estate of Pruyn v. Commissioner, 1949, 12 T.C. 754, 757.

In instances involving the purchase of a joint and last survivor annuity, which supplied the analogy on which the Tax Court based its conclusion in this case, the Courts have hitherto managed to rely not only on that provision of Section 811(c) relating to the reservation of life interests, but as well upon that relating to the necessity of survivorship. This was accomplished through Helvering v. Hallock, supra, albeit without benefit of the Church pronouncement. See Commissioner v. Wilder's Estate, supra; Commissioner v. Clise, supra, especially, 122 F.2d at page 1004; and Mearkle's Estate v. Commissioner, supra, expressly approving of the Clise opinion. Since, as already pointed out, the Tax Court had the benefit of the Church decision, and the 1949 amendment had not yet come into being, it understandably brought the instant transfer, if it were that, within Section 811(c) relying principally upon the alternative holding in the Clise case based on Helvering v. Hallock.

The 1949 amendment, however, was the direct result*fn4 of the Supreme Court's holding in the Church case and its companion, In re Estate of Spiegel v. Commissioner, 1949, 335 U.S. 701, 69 S. Ct. 301, 337, 93 L. Ed. 330, 310. The unmistakable language of the new Section 811(c)(2) decrees that transfers made prior to October 8, 1949,*fn5 intended to take effect in possession or enjoyment at or after the decedent's death shall not fall ...

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