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Estate of John J. Connelly v. United States

decided: February 17, 1977.


Rosenn, Forman and Garth, Circuit Judges.

Author: Forman

Opinion of the Court

FORMAN, Circuit Judge.

This is an appeal by the United States from a judgment of the United States District Court for the District of New Jersey granting the plaintiff, the Estate of John J. Connelly, Sr., a refund of $3,200.00, plus statutory interest, for federal estate tax paid under protest. The matter was submitted as though on cross-motions for summary judgment, on stipulated facts. The District Court concluded that the Commissioner erroneously included in decedent's gross estate the proceeds of a policy of group term life insurance. We affirm. The decedent did not possess any of the incidents of ownership of this insurance policy at the time of his death so as to require inclusion of the proceeds in the decedent's gross estate pursuant to Section 2042 of the Internal Revenue Code of 1954.


At the time of his death, on November 16, 1964, John J. Connelly, Sr. was covered by a non-contributory group term life insurance policy for which his employer paid.*fn1 The terms of the policy provided for the payment of a lump sum of $375.00 immediately upon the employee's death plus a monthly annuity of $248.44 for a period of 50 months.*fn2 The beneficiaries of the policy were irrevocably fixed and were of three classes. Benefit payments went to the surviving spouse of the employee, if living at the time of his death, until they were exhausted or until her death. If there were no surviving spouse, or if a surviving spouse died before receiving all the payments, the payments were made to the next of the classes,*fn3 who, like the spouse, would receive them until their exhaustion or the death of the beneficiary. Because payments terminated if no eligible beneficiaries lived to receive them, there was no assurance that the insurer would make any or all of the payments, and in no event would the payments ever be made to the estate of the insured.

At the time of his death, Connelly was a widower. The only member of the class of beneficiaries next entitled to the proceeds in the absence of a surviving spouse was his son, Robert. Thus, the lump sum payment and monthly annuities accrued to Robert.

The only substantive power Connelly possessed over the proceeds of the policy, at the time of his death, was to elect an optional mode of payment to the beneficiary.*fn4 However, such an election would have required the mutual agreement of Connelly, his employer and the insurance company.*fn5 This option would reduce the monthly payments by a selected percentage and increase the period of time over which the payments would be made. For example, he could arrange to have the monthly payments reduced by one-half and paid for twice as long. Regardless of which settlement option was utilized, the total amount paid to the beneficiary would remain the same. In the event that Connelly elected a settlement option as described and the beneficiary died before the payments were exhausted, the estate of the beneficiary would receive the difference between the amount actually received and the amount which would have been paid during the same period at the higher rate of payment had the option not been elected. Therefore, Connelly could not alter the amount that any beneficiary would receive; he possessed only the power to change the time at which the proceeds would be received. This constituted Connelly's entire power over the proceeds of the policy, which in no way could be exercised for his own economic benefit.


Section 2042(2) of the Internal Revenue Code of 1954 provides that the proceeds from life insurance receivable by any beneficiary other than his executor are includable in the decedent's gross estate, if immediately prior to his death he possessed any incident of ownership, exercisable either alone or in conjunction with any other person.*fn6 Incidents of ownership are not defined by the Code, but Treasury Regulation section 2042-1(c)(2) repeats almost verbatim*fn7 the legislative history of section 2042,*fn8 and provides:

"For purposes of this paragraph, the term 'incidents of ownership ' is not limited in its meaning to ownership of the policy in the technical legal sense. Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. . . . "

Appellant contends that decedent's power to elect optional modes of settlement exercisable in conjunction with his employer and the insurer, and the right to assign this power, constituted incidents of ownership. We do not agree.


In 1937 the Board of Tax Appeals was confronted with this precise argument in Billings v. Commissioner, 35 B.T.A. 1147 (1937), acq. 1937-2 Cum. Bull. 3. Billings involved a large number of life insurance policies, three of which gave the decedent much wider options as to the modes of settlement than those involved here. The Board of Tax Appeals held that "the mere right to say when the proceeds of the insurance policies should be paid to the beneficiary does not amount to a control of ...

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