On Petition for Review of the Decision of the United States Board of Tax Appeals.
Before BIGGS, JONES, and GOODRICH, Circuit Judges.
This case presents an appeal by taxpayer-executors from a decision of the Board of Tax Appeals*fn1 sustaining a determination of deficiency in estate taxes against the estate of Harry L. Mearkle who died February 20, 1936.
The controversy concerns the taxability as part of the decedent's estate, of six joint and survivor annuity contracts which the decedent purchased in 1933, 1934 and 1935. While the terms of the contracts are not identical we think the differences which exist do not substantially affect the determination of the controversy here. In general: all of the contracts are irrevocable; some of them provide for payments to Mr. and Mrs. Mearkle during their joint lives and on the death of either to the survivor; the others are payable to the decedent and upon his death to his wife. The wife survived. None of these contracts were included in the estate tax return. This omission was the basis of the deficiency determination.
The taxpayer makes three points. The first is that the wife's benefit from these annuity contracts was a gift to her at the time the annuities were purchased and, therefore, not the subject of any estate tax at all upon the death of the husband who purchased the policies. The second point is that the basis of valuation is so inaccurate as to be arbitrary. Finally, the taxpayer says that if the value of the contracts is to be included in the decedent's estate such value must be determined according to a Regulation claimed to be applicable at the time of the decedent's death and not by amendments to the Regulations subsequently incorporated.
Were the annuities to be included in the decedent's estate? The executor of the estate admits that he opens argument upon this point with a heavy burden to overcome. The statute involved is § 302(c) of the Revenue Act of 1926 as amended.*fn2 Last year both the Fifth Circuit and the Ninth Circuit held, in cases indistinguishable with the one presented here, that the value of the annuities is to be included in decedent's estate for estate tax purposes. Commissioner of Internal Revenue v. Wilder's Estate, 5 Cir., 1941, 118 F.2d 281, certiorari denied 1941, 314 U.S. 634, 62 S. Ct. 67, 86 L. Ed. ; Commissioner of Internal Revenue v. Clise, 9 Cir., 1941, 122 F.2d 998, certiorari denied 1942, 62 S. Ct. 914, 86 L. Ed. .
Even without the authority of these decisions in the other Circuits we should be constrained to reach the same result. However, the question was so thoroughly discussed in the opinion of the court in the Clise decision that it would smack of pedantry to repeat, so soon thereafter, an analysis of the problems dealt with in that opinion. We agree with that court that the practical effect of such annuity contracts is to reserve to the annuitant the enjoyment of the property transferred and to postpone the fruition of the economic benefits to the second annuitant until after the death of the first,*fn3 and that such transfers are "'too much akin to testamentary dispositions not to be subjected to the same excise.'"
It may be added that discussion from nonjudicial sources is to the same effect. Thus in a paper appearing between the decision of the Clise case by the Board of Tax Appeals, 41 B.T.A. 820, and the publication of the opinion of the Circuit Court of Appeals, the author said: "* * * the general conclusion is inescapable that in commercial annuity contract cases [of the type under consideration here] there is in reality a transfer to a donee postponed until death. * * * The result for tax purposes is exactly the same as if a contract were entered into by which the transferee of money promised to pay the transferor amounts equal to the interest plus portions of the principal and upon his death to continue the payments to a third party until the interest and principal amount paid in were exhausted."*fn4
Upon this branch of the case the decision of the Board of Tax Appeals is correct on both reason and authority.
The further questions raised by petitioners have to do with the valuation of the interest subject to taxation. This problem was not before the courts in the decisions just discussed. The valuation placed by the Commissioner, following the apposite Regulation, is the amount it would have cost to buy for the decedent's widow, on the day of his death, a similar annuity.*fn5 It is now settled by final authority that for gift tax purposes, the value of a paid up life insurance policy is the current cost of such policy at the time of the gift. Guggenheim v. Rasquin, 1941, 312 U.S. 254, 61 S. Ct. 507, 85 L. Ed. 813; United States v. Ryerson, 1941, 312 U.S. 260, 61 S. Ct. 479, 85 L. Ed. 819; followed by this Court in Houston v. Commissioner of Internal Revenue, 3 Cir., 1941, 124 F.2d 518. Conceding, as they must, the force of these decisions, the taxpayers contend that they do not control here. In the gift cases, they say, it is always possible to go out and buy an identical policy on the date of the gift. But in these annuity cases, the death of the first annuitant changes the situation irrevocably. All that it is now possible to do is to purchase an annuity contract like that which is left of the decedent's contract. This, say the petitioners, would subject the purchaser to the loading charge of a second policy, presumably increasing the cost over what a single annuity contract for two lives would cost. Then it is asked what would happen if insurance companies doubled the cost of single premium annuities or refused to issue them at all. To these considerations the petitioners might have added the point that the cost of an annuity to the second annuitant might have increased if reckoned on the date of the first annuitant's death by reason of the former having attained greater life expectancy by the passing of the years.
But all these matters lie in the field of speculation, or at the best, discussion. There is no evidence in the record to show that the method of valuation adopted in the Regulations produces arbitrary results. It may well be that there are several methods of valuation which could be resorted to here, and that more than one of those methods would be reasonable. One is set out in the Regulations. They were compiled in accordance with the statute,*fn6 and the general power to promulgate them, under statutory authority, is too well established to be seriously questioned.*fn7 Quite obviously a Regulation prescribing a method for valuation is not to be stricken down by the taxpayer's preference for a different method. Valuation of life insurance policies when their transfer is subject to gift tax based upon cost at the time of the taxable event has been upheld in the cases already cited. While ...