The theory of the assessment is that Connelly possessed "incidents of ownership" within the meaning of IRC § 2042, 26 U.S.C. § 2042.
Claim for refund was duly filed, and IRS informed the executrix that it would be denied. This suit followed, jurisdiction being under 28 U.S.C. § 1346(a)(1).
The matter was submitted as though on cross-motions for summary judgment, on stipulated facts. The court encountered some obstacles to resolution on the submissions, and by Letter Opinion and Order dated February 28, 1975, and supplemental Memorandum dated April 10, 1975 additional materials were requested and supplied. The present disposition is on the basis of the full submissions as though cross-motions had been formally refiled.
Connelly died in Jersey City, New Jersey, on November 16, 1964. By the provisions of the group term life contract to be discussed, his son, Robert, became entitled to the single sum of $375 and to a monthly annuity of $24844 for a period of 50 months. The aggregate of these amounts comes to $12,797.
In general, under the terms of the contract, benefit payments went to the surviving spouse, if any. If there were no surviving spouse, or if a surviving spouse did not live long enough to receive all the payments called for, the payments were made, in order, to other "preference relatives", being minor children first and decedent's parents next. If there were none of these, payments were to go to other "dependent" relatives who met contract requirements.
Connelly was a widower at death, and hence left no surviving spouse. The payments to Robert accrued because he was the only member of the class next entitled in the absence of a surviving spouse.
Also, it should be noted that at death Connelly was retired from employment; hence he could not, at that time, quit his job and terminate group term coverage or convert it, as is sometimes possible under arrangements of this kind.
The amount and number of the monthly payments were determined by a formula, not necessary to detail, which fixed those elements without regard to the identity, number, age or other characteristics of beneficiaries. The sum and substance of the provisions was for the payment of a fixed term annuity. But if no eligible beneficiaries lived to receive all the payments, they ended.
Connelly could not pick and choose beneficiaries, or cut off beneficiaries. He could not name his estate, or creditors, as beneficiaries.
The only thing Connelly could do, and he could only do it if he had a surviving spouse, was to elect to have the monthly payments, otherwise to be made to his widow, reduced by a selected percentage, to which there were contract limitations. Thus, for example, if the payments were otherwise to be $240 a month for 50 months, he could arrange for the payments to be at $160 a month. In that event, the other $80 a month had to be set aside at interest (guaranteed to be at least 2.5%) for the widow.
If the widow lived out the 50 months, the sum set aside, assuming interest credited monthly, would have come to an aggregate value of $4,211.14 by the court's calculations using standard financial formulae. This sum would then be applied to continue the payments of $160 as long as the balance so set aside held out. This would cover 27 additional payments plus a small balance of about $16., assuming interest at 2.5% as calculated by a standard direct amortization formula.
If Connelly had a surviving spouse (which he did not) and did not arrange to reduce the amount of each monthly payment and correspondingly increase their number, his surviving spouse could do the same thing. This is because the contract says so, and would not depend on Connelly's transferring anything.
If this limited modification were made (whether by Connelly or his surviving spouse), it would in no way modify the aggregate benefits that the widow would receive.
Thus, under the terms of the contract, if she lived only 25 months, the $80 a month set aside for her over that time ($2,050.81 with accumulated interest at 2.5% per year compounded monthly) was hers; it did not pass to the next class of beneficiary. Under these facts, the next beneficiary would receive the remaining 25 payments at $240 a month. Neither Connelly nor the next beneficiary could change that.
Conversely, if she lived for 60 months, all of the 50 payments would have been made; $160 per month to the widow and $80 per month into her account, and 10 months or $1,600, of the account would have been paid to her. Under this set of facts, nothing would be payable to the next class of beneficiaries. Whatever the balance in the widow's account was then, it would be paid to her estate. Neither Connelly nor his widow could change that.
At the time of Connelly's death, the law of New Jersey did not allow an insured under a group term life policy to make assignments. The present law, NJSA 17B:24-4 does. This statute is a reenactment by revision of NJSA 17:34-32.3, enacted as NJPL 1969, c. 97, repealed (as part of the revision) by NJPL 1971, c. 144, effective January 1, 1972.
What has been said about changing the amount and stretching out the number, of the payments, whether done by Connelly or the beneficiary, applies, under the contract, only to a surviving spouse. This kind of arrangement was not allowed where the beneficiary was in another class, such as a son or a parent.
Since this was a group term life contract, there were no loan values, and no surrender values. Its terms did not allow for change in beneficiary, and Connelly could not convert to individual insurance.
The stipulation of additional facts received April 9, 1975 (and which stimulated the court's supplemental Memorandum of April 10, 1975) asserted that Connelly, at death, had two rights he could have exercised: one, a right to alter the amount and number of monthly payments, and, two, the right to "assign" that right (Stip., par. 5). It was also stipulated that these rights obtained regardless of whether the beneficiary was the surviving spouse or the "qualifying preference relative" (i.e., minor children or parents). Stip., par. 7.
The court's inspection of the policy contract showed these "facts" not to be correct, and this matter was raised in the supplemental Memorandum of April 10, 1975. The United States subsequently conceded, by letter and by its further brief, that these stipulated "facts" are wrong.
Ascertainment of "facts" like these are matters of interpretation of the contract, to be determined by the court; the parties are free to argue for any interpretation they feel they can legitimately support; but they cannot stipulate them to be otherwise than the plain language of the contract discloses. See U.S. v. Felin, 334 U.S. 624, 92 L. Ed. 1614, 68 S. Ct. 1238 (1948).
This erroneous "stipulation" is a matter of concern to the court because the United States was fully aware of the contract terms by reason of the litigation of the same issue (under somewhat different circumstances) in Lumpkin, to be discussed later. It had previously dredged out and submitted, at the court's request, the briefs on both sides in both the Tax Court and in the Court of Appeals (Fifth Circuit) in Lumpkin, and it is extremely difficult to understand how this mistaken "stipulation" of facts that were not true could have been made.
Taking the most aggressive and advantageous stance for one's position is a natural one for any party, given the nature of the adversary process. But counsel for a party, especially the United States, have a higher duty to the court, and a duty to the taxpayer (whose adversary means are far from equal in most cases) to be candid and fair.
The "facts" in regard to what could be done under the contract have been determined by the court by thorough inspection of the contract itself, and what has been outlined above supersedes any stipulation to the contrary.
In view of these clarifications, the United States now rests its position on one item. This is a provision, in the contract, to the effect that
"An election other than that specified above may be arranged during the lifetime of a covered individual with respect to monthly installments becoming payable to the covered individual's preference relatives if the covered individual, the employer by whom employed and the Society mutually agree thereon."
There is also another provision, applicable after death, which reads:
"An election other than that specified above may be arranged if the employer by whom the covered individual was last employed, the spouse and the Society mutually agree thereon."
This description of the policy provisions and their highly restrictive nature may seem to be peculiar in light of their difference from commonly known terms of both individual and group life insurance contracts. The reason for this is that this life insurance contract was part of a Survivor Benefit Plan adopted by the employer for the survivors of its employees and retired employees. The plan is entirely voluntary on the part of the employer, is paid for entirely by the employer, and it is subject to the right of the employer, acting unilaterally, to amend, suspend or terminate the plan in whole or in part as to all employees or any class or group of employees.
The cost of the plan (actually provided by a group of affiliated employers and successors) is chargeable to the particular employer, with provision that the benefits be payable by that employer unless insured under a contract of insurance.
The purpose of the plan is expressly stated to be "to provide benefits over and beyond those payable by law to qualifying survivors of deceased employees, ex-employees and annuitants of this Company and its participating affiliates."
Before the enactment of the social security law, benefits for survivors of employees and retirees were provided by enlightened employers through various means. One of the earlier plans is described in Dimock v. Corwin, 19 F. Supp. 56, 59 (1937), involving much the same problem as here in respect to an annuity system rather than an insurance policy (the appellate opinions in Dimock did not involve that question but two independent and separate matters).
In any event, the statement of purpose of the plan, taken together with the provisions for integrating the plan benefits with social security benefits, makes it clear that the plan, as well as the insurance which the employer obtained to provide the payments, is designed to supplement government social security benefits. In periods during which the survivor is not yet eligible for social security (i.e., due to age), the full amount of the benefits comes from the insurance payments. When the survivor begins to draw social security benefits, the plan provides the difference between the social security benefits and the level of 37.5% of monthly normal earnings at the time of retirement.
The plan involved here was adopted to be effective July 1, 1947, and was amended effective April 27, 1950 and July 1, 1950. An insert on the front cover of the plan booklet, edition of July 1, 1950, stated that:
"Effective April 20, 1955, Standard Oil Company (N.J.), as permitted by Part VII (b) of the Plan, arranged to provide through a group life insurance policy most of the benefits to which survivors and annuitants are eligible under the Plan . . . . Any Plan benefits not included under the insurance policy will continue to be payable directly by the Company."