Opinion
Docket No. 47157.
1955-05-6
ESTATE OF WILLIAM WALKER WYNEKOOP, DECEASED, MARCIA V. WYNEKOOP, ADMINISTRATOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
James A. Sprowl, Esq., and A. E. Hull, Esq., for the petitioner. Andrew Kopperud, Esq., for the respondent.
James A. Sprowl, Esq., and A. E. Hull, Esq., for the petitioner. Andrew Kopperud, Esq., for the respondent.
At the time of his death decedent owned three insurance policies which contained identical language with respect to the rights of his widow thereunder. Respondent determined the surviving spouse does not have the power thereunder to appoint the principal proceeds of the policies to herself, and therefore that the total amount thereof does not qualify for the marital deduction pursuant to section 812(e)(1)(G), 1939 Code. After appropriate demand, the widow filed suit against the company for the principal proceeds of one of the three policies. After a contested, adversary proceeding, the trial court ordered that payment in full be made to the widow. No appeal was taken from this judgment and it was satisfied. Respondent now concedes that the amount of the proceeds of the litigated policy qualifies for the marital deduction. Held, in the absence of authorities to the contrary, the trial court's construction of the terms of one policy is a controlling precedent for the construction of the identical terms of the others, and therefore the widow has the power under the applicable State law to appoint the principal proceeds of the remaining two policies in favor of herself.
Respondent determined a deficiency in estate tax in the amount of $13,451.69 of which $3,078.39 has been paid by petitioner. The issue is whether the amounts of principal proceeds of insurance policies on decedent's life qualify for the marital deduction pursuant to section 812(e)(1)(G) of the Internal Revenue Code of 1939.
FINDINGS OF FACT.
Some of the facts were stipulated by the parties. Those so stipulated are found accordingly and incorporated herein by this reference.
Petitioner is the administrator of the estate of William Walker Wynekoop, who was also known as Walker William Wynekoop. At the time of his death intestate on October 24, 1948, decedent was a resident of Cook County, State of Illinois. The estate tax return involved herein was filed with the then collector of internal revenue for the first district of Chicago, Illinois.
Decedent left surviving him as his sole heirs at law and next of kin three children and his wife, Marcia V. Wynekoop, the administrator herein. Among other items of property, decedent was the owner at the time of his death of 6 insurance policies on his own life of which 3 were issued by The Northwestern Mutual Life Insurance Company. The principal proceeds of these policies payable upon decedent's death were as follows:
+-----------------------------+ ¦Policy No. ¦Death benefit ¦ +------------+----------------¦ ¦3443480 ¦$10,084.20 ¦ +------------+----------------¦ ¦3443480 1/3 ¦10,084.20 ¦ +------------+----------------¦ ¦3411953 ¦8,571.57 ¦ +------------+----------------¦ ¦Total ¦$28,739.97 ¦ +-----------------------------+
These policies in part provide as follows under the general heading, ‘Special Provisions Relating to Settlement When This Policy Becomes Payable’:
1. The Insured shall have the right, with the privilege of change before this Policy becomes payable, to elect payment of the then net proceeds, in whole or in part, under either Option ‘A’, ‘B’, ‘C’ or ‘D’, or under two or more of said options.
1a. If when this Policy becomes payable no such election by the Insured is then in force, the Direct Beneficiary or Beneficiaries may make such election in lieu of payment in one sum and upon such an election by the Direct Beneficiary or Beneficiaries the interest of any Contingent Beneficiary designated by the Insured shall terminate. The Direct Beneficiary or Beneficiaries may then, subject to change, designate a Contingent Beneficiary or Beneficiaries under the election so made.
7. The person then entitled as beneficiary shall upon due surrender of this Policy have the right at any time, provided the designator of such beneficiary shall not have specifically withheld such right, to withdraw any proceeds held by the Company under Option ‘A’; the commuted value, determined as provided in Special Provisions, paragraph ‘6’, of any unpaid installments under Option ‘B’; or any remainder of the fund under option ‘D’. Benefits under Option ‘C’ shall not be subject to commutation and withdrawal.
8. OPTION A: Subject to the limitations contained in Special Provisions, paragraph ‘5’, to have the whole or any designated part of the net proceeds held by the Company, the Company in the meantime to pay interest thereon monthly at the minimum rate of $2.06 per $1000 of the amount so held, the first payment being due one month after date of death of Insured or the date of election if subsequent.
9. OPTION B: To have the whole or any designated part of the net proceeds paid in a specified number of monthly minimum installments as per the Limited Installment Table below, which shall apply pro rata per $1000 of the amount to be so paid, the first installment being payable as of the date of death of Insured or the date of election if subsequent. * * *
Under date of October 4, 1946, decedent submitted a written designation of beneficiaries to Northwestern Mutual in part as follows:
THE COMPANY is requested by the undersigned to revoke all prior designations of beneficiaries and all prior designations, if any, of contingent beneficiaries, further payees in succession and settlement options and to make such revocation and the following designation and election a part of policy No. 3411953, 3443480 and 3443480 1/3.
The Direct Beneficiary of Beneficiaries, share and share alike, the survivors or survivor, shall be Marcia V. Wynekoop, wife.
The Contingent Beneficiaries shall be Walker E. and Robert C. Wynekoop and Marcia W. Ayars, children, share and share alike, the survivors or survivor; * * *
The proceeds of each policy and the commuted value of the Supplementary Term Insurance Benefit thereto attached, if any, shall contribute a proportionate amount of any payment of proceeds.
Settlement with the direct beneficiary shall be made in accordance with the provisions of Option A, with the privilege of changing settlement to Option B in 240 monthly installments. Settlement with the contingent beneficiaries shall, subject to the limitations contained in said policies, be made under Option A, with the privilege of surrender and withdrawal.
Any and all payments to the lawful surviving children of a deceased Contingent Beneficiary shall be made in one sum. In event of the death of a Contingent Beneficiary while receiving settlement as herein provided, the remainder interest of such Contingent Beneficiary in possession shall be paid in one sum.
The foregoing shall be made without the privilege of surrender or commutation except as therein expressly stipulated.
Also in October 1946, petitioner changed the beneficiary provisions of his other three life insurance policies (taken out with companies other than Northwestern Mutual) to provide generally under the circumstances here present as follows: The principal proceeds of each policy to be retained by the company without right of withdrawal by the widow; interest thereon to be paid regularly to the widow (along with a monthly installment payment of $50 in the case on one policy); and upon her death the proceeds to be divided equally among the children.
The above provisions were in effect at decedent's death. In the estate tax return, petitioner included the principal proceeds of all six policies as parts of the gross estate in Schedule D thereof. It also listed the total proceeds as property interests passing to the surviving spouse in Schedule M of the return and included that amount as part of the marital deduction claimed in Schedule O.
On February 5, 1953, after the deficiency notice had been issued in the instant case, the widow notified Northwestern Mutual in writing that, pursuant to the terms and conditions of policy number 3411953, she elected to withdraw the proceeds of that policy then held by the company under Option A, and she demanded that it pay that amount to her. The company refused on the ground that her only election under the policy was to change to Option B for 240 monthly installments. Thereafter on February 24, 1953, the widow filed a complaint against Northwestern Mutual in the Circuit Court of Cook County, No. 53C2483, in which she prayed for a judgment against the company in the amount of $8,500 together with interest. The complaint was subsequently amended to add decedent's children and grandchildren as parties defendant, and later to add a prayer for a declaratory judgment that plaintiff is entitled to the entire proceeds of the policy and that none of the defendants has any right, title, or interest therein.
Northwestern Mutual and the guardian ad litem of the minor grandchildren filed answers to the complaint as amended, and subsequently trial was held before Judge Harry M. Fisher on November 17, 1954. The proceeding was contested by Northwestern Mutual and was an adversary one between the company and the widow. The guardian ad litem, however, submitted the rights and interests of the grandchildren to the consideration and protection of the court. The court thereafter found for plaintiff and, on December 8, 1954, entered its order in which it adjudged in part as follows:
THEREFORE, it is considered by the Court that the plaintiff, Marcia V. Wynekoop, do have and recover of and from the defendant, The Northwestern Mutual Life Insurance Company, her said damages of $8,581.17, in form as aforesaid by the Court assessed, together with her costs and charges in this behalf expended, and have execution therefor; and
IT IS FURTHER ADJUDGED that plaintiff is entitled to receive the entire proceeds of Life Insurance Policy No. 3411953, issued by The Northwestern Mutual Life Insurance Company, upon the life of Walker W. Wynekoop; and that none of the defendants has any right, title or interest therein.
No appeal was taken from the above judgment which was satisfied by the company on December 9, 1954. Although no demand has been made by the widow upon Northwestern Mutual for the principal proceeds of the other two policies with that company, the attorney for Northwestern Mutual has informally advised her attorneys that it will not pay her the proceeds of those policies except on order of a court of competent jurisdiction.
The widow has the power to appoint the principal proceeds of policies numbered 3443480 and 3443480 1/3 in favor of herself.
OPINION.
FISHER, Judge:
Respondent determined that none of the proceeds of six insurance policies on decedent's life qualify for the marital deduction pursuant to section 812(e)(1) (G), Internal Revenue Code of 1939, since the proceeds were to be held by the companies (with interest or installments payable monthly to the widow) with no power in the surviving spouse to appoint all such proceeds to herself. Petitioner assigned as error respondent's determination with respect only to three policies issued by The Northwestern Mutual Life Insurance Company. Respondent, however, now concedes that the amount of the proceeds of policy number 3411953 paid to the widow following the Cook County litigation does qualify for the marital deduction. Accordingly, we are herein concerned only with the remaining two policies issued by Northwestern Mutual.
Respondent contends that under the terms of the policies the widow has only a terminable interest in the proceeds of the policies which does not qualify for the marital deduction. Although he concedes in his brief that the amount of the proceeds of policy number 3411953 qualifies for the marital deduction ‘because the (circuit court) hearing was an adversary proceeding and because the surviving spouse has received the proceeds,‘ he argues that the decision of the State trial court is not controlling in the instant case with respect to the two policies involved herein which were not at issue in that litigation. We disagree with respondent for the reasons indicated below.
Whether the widow acquired more than a terminable interest in the principal proceeds of the policies in issue must be determined from all the facts and circumstances as they would be interpreted under Illinois law. Cf. Estate of Irvin C. Nelson, 24 T.C. 30 (1955); Helvering v. Stuart, 317 U.S. 154 (1942). In the instant case, those facts and circumstances were considered by the Circuit Court of Cook County, Illinois, in a contested, adversary proceeding between the widow and the insurance company with respect to a policy containing pertinent language identical to that contained in the policies in issue, and that court ordered that the principal proceeds of the policy be paid over to the widow. This judgment was satisfied. Independently of how we might interpret the rights of the widow under the policies before us, we believe that we are obliged to accept the interpretation of the local court as a controlling precedent in the application of Illinois law to the facts at hand.
In Commissioner v. Morris, (C.A. 2, 1937) 90 F.2d 962, reversing in part 33 B.T.A. 241, the taxpayer created five trusts of which he and another were trustee. His wife was the beneficiary of one trust and each of his four children was the beneficiary of one of the others. The Board of Tax Appeals found that, according to the terms of the trust agreements under the applicable State law, the trust incomes could be accumulated until the termination of the trust, and it therefore held that the incomes were taxable to the grantor pursuant to the terms of the pertinent revenue provision then in effect. Thereafter, the accumulation provision of one of the five trust agreements was held to be void by the New York Court of Appeals, infra. The Court of Appeals for the Second Circuit based its reversal of the Board of Tax Appeals on this decision of the New York court and stated in part as follows (p. 963):
Speaking first as to the grievance of the taxpayer based on the Board's inclusion of the ordinary trust income, it is necessary to state that one of these New York trust was construed in Morris v. Morris, 272 N.Y. 110, 5 N.E. (2d) 56, by the New York Court of Appeals which held that the provision for accumulation of such income for the benefit of the settlor was void under article 2, Sec. 16, of the New York Personal Property Law (Consol. Laws, c. 41) and was to be stricken out leaving the income distributable to the beneficiary by the terms of the trust. That construction is binding, of course, upon us and is to be applied here to each of the other trusts. Since the trusts must now be construed in accordance with the above decision of the New York court, the statute upon which the Board relied has become inapplicable and to that extent its decision must be reversed.
In the instant case, there were three policies under each of which the rights of the widow depend upon the interpretation or construction of identical contractual language. The Illinois court construed one of the policies as giving the widow the right to draw down the principal proceeds, and that judgment was satisfied and appealed. In the absence of authorities to the contrary, we are not convinced that the interpretation of these provisions by the Circuit Court of Cook County was other than in accord with the law of the State of Illinois. Accordingly, in the language of the Court of Appeals in the Morris case, supra, ‘that construction * * * is to be applied here to each of the other (policies).’ We therefore hold that the surviving spouse has the power to appoint the principal proceeds of the two policies in favor of herself, and that the total amount of those proceeds qualifies for the marital deduction pursuant to section 812(e)(1)(G) of the 1939 Code.
We do not deem it material under the peculiar facts of the instant case that the authority for our determination of applicable State law is a judgment of a trial court rather than a decision of an appellate court. See Freuler v. Helvering, 291 U.S. 35 (1934); Blair v. Commissioner, 300 U.S. 5 (1937); and Sharp v. Commissioner, 303 U.S. 624 (1938), a Memorandum Decision reversing 91 F.2d 802; wherein judgments of trial courts were held determinative of local law for tax purposes. The fact that the insurance company attorneys have advised that it will not pay over the proceeds of the remaining two policies to the widow except on order of a court of competent jurisdiction is also immaterial. It appears to be altogether appropriate for Northwestern Mutual under the circumstances here present to require a court order in order to protect itself against possible future claims by contingent beneficiaries under the policies.
The petition filed herein also assigns as error respondent's determination with respect to the valuation of, and the extent of the widow's interest in, certain realty included in decedent's gross estate. This issue has now been settled by stipulation of the parties and will be reflected in the decision.
Decision will be entered under Rule 50.