*966 1. Where certain insurance polices were transferred under a trust agreement which provided that the proceeds therefrom, payable to the trustee, should be held and invested by the trustee and the net income from such investment be paid to grantor's wife during her life, and upon her death to his son, until he should reach the age of 35 and then the principal be paid to him, and which further provided that the trustee was authorized, if in its judgment it would be for the best interests of the beneficiaries, to apply the principal and accumulated income a debts or taxes, payable from grantor's estate, held, the $40,000 exemption of section 302:g), Revenue Act of 1926, is applicable.
2. Decedent paid a portion of premiums on a group insurance policy. His estate is taxable on that portion of the proceeds attributable to such premiums.
3. Certain real estate had been owned originally by decedent's wife and conveyed to them as tenants by the entirety. It is not includable in decedent's gross estate.
4. A claim of a trust company, representing decedent's liability as endorser of two collateral notes, allowed as a deduction from gross estate.
*872 This proceeding was brought to redetermine a deficiency in the estate tax of the estate of Louis E. Flye, deceased, in the sum of $4,081.19.
Petitioner alleges that the respondent committed the following errors:
:1) Determined that the proceeds of certain insurance policies taken out by the decedent on his own life were includable in the gross estate.
:2) Included in the gross estate the value of certain real estate held by the decedent and his wife as tenants by the entirety.
:3) Dissallowed various deductions taken by the executor in schedule I of his return. There remains in controversy only a claim of the Randolph Trust Co. amounting to $4,469.53 against the decedent as endorser on two notes uncollectible from their makers.
FINDINGS OF FACT.
Certain facts were stipulated substantially as follows:
In schedule C of its estate tax return the petitioner listed certain policies of insurance on the life of the decedent as "payable to Old Colony Trust Company, Trustee u/ind. dated 11/4/27", and deducted therefrom $40,000 as exempt under section 302: *968 g). The respondent disallowed this deduction. These policies were as follows:
| The Penn Mutual Life Insurance Co. | |
| No. 522749 | $3,217.11 |
| No. 637511 | 3,692.23 |
| Mutual Life Insurance Co. of New York. | |
| No. 2052735 | 3,716.83 |
| No. 2259626 | 4,222.71 |
| No. 2456497 | 12,522.81 |
| No. 2673464 | 6,159.65 |
| New England Mutual Life Insurance Co. | |
| No. 409810 | 11,801.21 |
| No. 409811 | 5,901.60 |
| Union Mutual Life Insurance Co. | |
| No. 233111 | 5,619.80 |
| No. 233112 | 2,770.12 |
| No. 233113 | 2,770.12 |
| John Hancock Mutual Life Insurance Co. | |
| No. 429865 | 2,572.16 |
On November 4, 1927, the decedent and the Old Colony Trust Co., as trustee, entered into a trust agreement which provided that the trustee should hold, manage, and invest the proceeds of one or more *873 policies of insurance upon the grantor's life, payable to the trustee, and pay the net income therefrom to the grantor's wife, Annie L. Flye, during her life and upon her death, to his son, Thorndike Flye, until he should reach the age of 35 and then pay the principal to him.
Paragraph 6 of the agreement is as follows:
The Trustee is authorized, if in its judgment it would be for the best interests of the*969 beneficiaries of this trust:
:a) To purchase and retain as an investment for the trust estate any securities or other property, real or personal, belonging to the estate of the Donor;
:b) To make loans or advances to the Donor's executor or administrator on such terms as it deems desirable, and to purchase and hold any mortgage upon real estate belonging to the Donor or the wife of the Donor or both of them;
:c) To use and apply the principal and accumulated income of the trust estate to such extent as it may deem necessary for the payment of any debt of the Donor or for taxes, however denominated, which may be or become due or be payable from the estate of the Donor; such payments may be made by the Trustee to the creditor or official authorized to receive and receipt for such debts or taxes upon a certificate from the Donor's executor or administrator to the effect that such debt or tax is due and payable, and the Trustee shall be in no way bound to inquire into the legality or amount of any debt or tax so certified to it by such executor or administrator.
The proceeds of these policies were paid to the Old Colony Trust Co. as such trustee. The petitioner also listed in*970 schedule C a certain policy on the life of the decedent as respondent included this policy in the gross estate. This policy was as follows:
| Travelers Insurance Co. | |
| Group certificate #6G-3752 | $3,000.00 |
On this policy premiums aggregating $422.15 were paid, of which the decedent paid $191.50 and the J. S. Cushing Co., the corporation to which the policy was issued, paid $230.65. The proceeds of this policy, in the amount of $3,000, were paid to Annie L. Flye on April 6, 1933.
In schedule D:1) of its return, among other real estate jointly held by the decedent and his wife, the petitioner listed a parcel of land on the west side of South Franklin Street in Holbrook, Massachusetts, giving the value thereof with the buildings thereon as $7,100, but included no part of such value in the total of schedule D:1). The respondent increased the amount of schedule D:1) by including therein $7,100 on account of such real estate. That amount was the fair value of the real estate at the date of the death of the decedent. This real estate had been owned by Eugene Snell, who was the father of the decedent's wife. Snell died in 1926 owning the said parcel. By will dated*971 May 19, 1925, he bequeathed it to Annie L. Flye. The decedent owned the land abutting on this parcel on the west and south. The decedent's wife conveyed to him the land which had been devised to her by her father, by deed dated October 1, 1927, and acknowledged *874 and recorded October 10, 1927. Thereafter, the decedent, by deed dated and recorded January 17, 1929, conveyed the land so conveyed to him by his wife, together with his adjoining land, to one Madeleine C. Hourihan. Madeleine C. Hourihan, by deed dated and recorded January 17, 1929, conveyed all the land so conveyed to her to the decedent and his wife as tenants by the entirety.
In schedule I of its return, the petitioner listed the liability of the decedent as trustee under the will of Everett Jones to the Jones estate in the amount of $75,000. The respondent disallowed that item. The decedent, at the time of his death, was trustee under the will of Everett Jones, deceased, late of Brookline, Massachusetts, and at that time there were pending before the probate court certain accounts of the decedent for allowance. Objection having been made to the allowance of the accounts, contested hearings were had*972 thereon. The probate court, by decree dated June 24, 1938, has adjudged that the decedent repay to the estate of Everett Jones as of May 31, 1931, the amount of $39,684.79. No appeal from this decree was taken by the executors of the will of Louis E. Flye. The date for taking such an appeal has expired. An appeal was taken by the Maryland Casualty Co., the surety on the bond of Louis E. Flye as trustee under the will of Everett Jones.
In schedule I the petitioner listed the liability of the decedent as endorser on a note of Charles W. Sharp, $1,302.70. The respondent disallowed such item. The note was overdue and unpaid at the date of the death of the decedent. On September 13, 1933, the Trust Co. sold the collateral held on the note for $698 and applied $49.52 thereof to the payment of interest due to date and the remaining $648.48 on account of principal, leaving an unpaid balance on the note of $654.22.
The petitioner included in schedule I the liability of the decedent as endorser on a mortgage note of Charles H. Hemenway, $3,500. The respondent disallowed that item. At the date of death of the decedent such note was overdue and unpaid.
The estate of the decedent*973 was represented insolvent and commissioners in insolvency were duly appointed by the probate court for the County of Norfolk. The Randolph Trust Co. filed its claim with the commissioners on both of the notes above mentioned. The claims were allowed in the respective amounts of $694.58 and $3,774.95. Exclusive of interest subsequent to the date of death of the decedent, these allowed claims amount to $654.22 and $3,502.04, respectively.
The petitioner included in schedule I certain items listed in schedule A annexed to the petition and aggregating $752.33. The respondent *875 disallowed each of these deductions. The items therein set forth represent amounts justly due and owing by the decedent at the time of his death for the services and materials therein set forth.
The record discloses the following additional facts:
Louis E. Flye, an attorney and resident of Holbrook, Massachusetts, died on April 5, 1933. The petitioner is the duly appointed executor of his will.
The trustee has made no payment to the petitioner from the trust of November 4, 1927, and it has never contemplated making any such payment. At all times during the administration of the estate*974 of Louis E. Flye, deceased, there have been claims against such estate in excess of the amount of assets on hand.
Mrs. Flye transferred to her husband the property on South Franklin Street, Holbrook, Massachusetts, devised to her by her father, Eugene Snell, with the intention of his putting it in their joint names. The delay in completing that procedure was caused by a plan, not accomplished, to sell a portion of the adjoining land, the title to which was in the decedent's name, and also by the illness and death of Mrs. Flye's mother, by his wife's serious operation, and by the press of the decedent's professional business. From October 1, 1928, until the date of his death, the decedent paid all taxes and repair charges on the South Franklin Street property out of money belonging to Mrs. Flye.
The loans to Sharp and Hemenway which resulted in the claims of $654.22 and $3,502.04, respectively, as allowed by the probate court of Norfolk County, were made by the bank at the decedent's request and entirely on his endorsement. Sharp died leaving no known estate. Hemenway was a straw man in the transaction. The mortgage note was executed in order to obtain money for the Snell*975 estate. The property constituting the alleged security for the note had a value of $500 at the time of the decedent's death. Foreclosure proceedings thereon have never been begun.
All rights to appeals from the decree of the probate court for Norfolk County, Massachusetts, entered into June 24, 1938, as heretofore mentioned, have been waived and that decree is now in full force and effect.
OPINION.
VAN FOSSAN: In the first issue the petitioner contends that, since there was no obligation on the part of the executor (or any one administering the estate) to apply to debts, taxes, and expenses of the estate the proceeds of the 12 insurance policies which form the corpus of the trust of November 4, 1927, the second clause of section 302(g) *876 of the Revenue Act of 1926 1 applies and the exemption of $40,000 is allowable.
*976 The respondent argues that the responsibility to pay the debts, taxes, and expenses of the decedent's estate was imposed by paragraph 6 of the trust agreement and the fact that the trustee could refuse to make such payments if, in its judgment it would be for the best interests of the beneficiary so to do, is immaterial.
Article 26 of Regulations 70 is in part as follows:
ART. 26. Insurance in favor of the estate. - The provision requiring the inclusion in the gross estate of all insurance receivable by the executor without any deduction, applies to policies made payable to the decedent's estate or his executor or administrator, and all insurance which is in fact receivable by, or for the benefit of, the estate. It includes insurance taken out to provide funds to meet the estate tax, and any other taxes or charges which are enforceable against the estate. The manner in which the policy is drawn is immaterial so long as there is an obligation, legally binding upon the beneficiary, to use the proceeds in payment of such taxes or charges. * * *
This language, which we think correctly interprets the intent of the statute :see *977 ) is plain in its meaning. The proceeds of an insurance policy are includable in the gross estate so long as there is an obligation, legally binding upon the beneficiary, to use them in payment of taxes or other charges enforceable against the estate. In the case at bar, there is no obligation binding on the beneficiaries, or the trustee representing the beneficiaries, to pay such debts of the estate. On the contrary, the trust agreement authorizes and permits but does not direct or require the trustee best interests of the beneficiaries and accumulated income of the trust estate to such extent as it may deem necessary for the payment of any debt of the Donor or for taxes.
In the exercise of its discretion - and undoubtedly for the beneficiaries' best interests which it was the duty of the trustee to conserve and protect - the trustee made no payment to the executor of the estate nor did it ever intend to do so. There is no obligation" which would or could compel the trustee to pay such debts and charges against the estate. Therefore, this petitioner does not come within the inclusive provisions of the regulations*978 and the $40,000 exemption applies.
In , cited and relied upon by the respondent, the situation is quite different. There, under *877 the will of decedent the proceeds of the insurance policies were subject to the payment of the charges against the decedent's estate and the expenses of administration. The evidence there disclosed that the insurance proceeds were mingled with other assets of the estate and a large part of the commingled funds paid out to satisfy debts and demands. We held that the respondent correctly had held the insurance proceeds to be a part of the gross estate and taxable under section 302.
The proceeds from the Travelers Insurance Co. group policy present a different problem. There the premiums were paid by both the decedent and the corporation to which the policy was issued. Article 25 of Regulations 70 provides in part as follows:
The term "insurance" refers to life insurance of every description, including death benefits paid by fraternal beneficial societies, operating under the lodge system. Insurance is deemed to be taken out by the decedent in all cases where he pays all the premiums, *979 either directly or indirectly, whether or not he makes the application. On the other hand, the insurance is not deemed to be taken out by the decedent, even though the application is made by him, where all the premiums are actually paid by the beneficiary. Where a portion of the premiums were paid by the beneficiary and the remaining portion by the decedent the insurance will be deemed to have been taken out by the latter in the proportion that the premiums paid by him bear to the total of premiums paid.
In Helvering v. Reybine, 83 Fed.:2d) 215, article 25 was held applicable to the facts of that case. The decedent had paid 62 percent of the total premiums on the $30,000 ConnecticutMutual policy and 61.96 percent of the total premiums on the $50,000 policy issue by the same company. The court held that the insured's estate was liable to pay an estate tax on only that portion of the proceeds attributable to premiums paid directly by the insured. Walker v.United States, 83 Fed.:2d) 103. Cf. Nelson v. Commissioner, 101 Fed.:2d) 568.
The respondent relies on Igleheart v. Commissioner, 77 Fed.:2d) 704, affirming *980 , but in that case the decedent purchased the interest of his employer in the policies by the payment of their cash surrender value and paid all subsequent premiums. Thus, the entire proceeds of the policies were acquired by the decedent through expenditures made by him. Here the decedent paid 19150/42215 of the premiums and his estate is taxable with that proportion of the proceeds.
The second issue involves the taxability of the property owned by the decedent and his wife as tenants by the entirety. Under section 302:e) of the Revenue Act of 1926, 2 property owned by husband and *878 wife as tenants by the entirety is properly included in the gross estate of the deceased spouse, provided no part of such property originally belonged to the survivor. . The petitioner contends that it is obviously a fact that the South Franklin Street property to her under the will of her father Eugene Snell; that she conveyed it to her husband pursuant to their plan to place the title thereto in their joint names; that for various reasons the consummation of that plan was delayed for months and that it*981 was ultimately accomplished by companion deeds of January 17, 1929, to and from Madeleine C. Hourihan.
The respondent narrows the controversy to an issue of fact when he states that decedent as a part of a plan of eventually vesting title in themselves, as tenants by the entirety, even though she testified otherwise.
The record shows clearly that the original intention of the decedent and his wife was to hold the property as tenants by the entirety, and we have found such to be a fact. The respondent's position is supported by no contradicting testimony but solely by his argument that inference would lead to his conclusion. However, the petitioner's*982 explanation of the delay in completing the joint ownership plan is reasonable, and, we think, entirely in harmony with the status of the parties and the circumstances surrounding the transaction. The decedent was a busy lawyer, with a large and exacting practice. He may have deferred attention to his own family affairs for an unusually long time, but intervening events, such as his attempt to sell adjoining property owned by him, the illness and death of his mother-in-law, and his wife's serious operation, furnish prima facie extenuating circumstances.
At most, the decedent could be charged only with procrastination. The record does not disclose the slightest suggestion that the deeds of January 17, 1929, were executed as the result of a sudden and independent notion to hold the property jointly. The fact that, until the decedent's death, the taxes and cost of repairs were paid from Mrs. Flye's own money is in itself strongly persuasive that it was the original and continuing purpose to shift the title to the decedent and his wife as tenants by the entirety. The agreed value of the South Franklin Street property, or $7,100, is not includable in the decedent's gross estate.
*983 The third issue presents the deductibility of a claim of the Randolph Trust Co. representing the decedent's liability on two notes by reason of his endorsement thereof, as authorized by section 805 of *879 the Revenue Act of 1932. 3 Both notes were endorsed under similar circumstances. The makers were ultimately irresponsible, but the financial condition of Sharp at the time he executed the note is not shown. Hemenway acted as a secured by collateral as well as by the decedent's endorsement. At the time of the decedent's death both notes were overdue and unpaid. The Randolph Trust Co. filed its claim with the commissioners in insolvency and such claim, covering both liabilities, was allowed. The respondent contends that the decedent's endorsement was not made for an adequate and full consideration in money or money's worth and argues that, due to the financial irresponsibility of the makers, such endorsement was the equivalent of making a gift. He relies on Commissioner v. Porter, 92 Fed.:2d) 426, in which the court made the following comments:
* * * The purpose of the phrase under discussion was, in our opinion, to prevent a man from diminishing his taxable*984 estate by creating obligations not meant correspondingly to increase it but intended as gifts or a means of distributing it after his death. See Latty v. Commissioner, 62 F.:2d) 952 :C.C.A. 6). Thus, if a guarantor reserve no recourse over against the principal in the transaction, the guaranty would be in substance a gift; * * *
However, we quote further from that opinion:
* * * But the present record does not disclose a transaction of that character. There is no evidence that the decedent surrendered his right of subrogation to the pledged collateral or his right to seek reimbursement from other property of his son-in-law should the guaranty be called. It is true that in October, 1931, when the guaranty was increased by $30,000, the collateral was $50,000 short of the loans, and that, as stipulated, the right of subrogation at the guarantor's death and at all times since was valueless. But the stipulation does not say that when the guaranty was given, the son-in-law was insolvent or that the guarantor had no reasonable expectation of*985 reimbursement if he should be called upon to pay. So far as appears, it was an ordinary business transaction by which an accommodation guarantor, if required to pay would acquire rights equal in value to the obligations he had assumed. The Board rightly held the claim deductible.
The decision in the Porter case is directly applicable to the case at bar. There is nothing in the stipulation or in the record which shows that either Sharp or Hemenway was insolvent at the time the decedent endorsed their notes. If the decedent had been held primarily responsible for the payment of the notes and had paid them at the demand *880 of the payee, he might have had recourse to the collateral to reimburse him, at least in part.
The respondent also cites Latty v. Commissioner, 62 Fed.:2d) 952, and Glaser v. Commissioner, 69 Fed.:2d) 254. In both of those cases, however, the claims were based on the decedent's promises to make future provisions for beneficiaries, the fulfillment of which would have resulted in gifts. Here the decedent had already obligated himself to pay the trust company the amount secured from it in cash by the maker of the note. The statute*986 does not require that the consideration on which the claim is based should have been received by the decedent. Commissioner v. Porter, supra, and cases there cited; .
The claim of the Randolph Trust Co. based on both the Sharp and Hemenway payments, is properly deductible from the decedent's gross estate.
Decision will be entered under Rule 50.
Footnotes
1. 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 -
* * *
: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. ↩
2. :e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money's worth: * * * ↩
3. SEC. 805. DEDUCTIONS.
Section 303:a):1) of the Revenue Act of 1926, as amended, is amended to read as follows:
* * * ↩