Opposition Brief — Detroit Bank & Trust Co. v. United States

In the Supreme Court of the United States

OctToBER TERM, 1972

No. 72-827

THE Derroir BANK & Trust Company, EXEcuTorR or

THE ESTATE oF FRED W. Ritter, DECEASED, PETITIONER

Va

UNITED STATES oF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the district court (Pet. App. 15-20) is

unofficially reported at 27 A.F.T.R. 2d 71-1838. The

opinion of the court of appeals (Pet. App. 21-30) is re-

ported at 467 F. 2d 964.

JURISDICTION

The judgment of the court of appeals (Pet. App.

31-32) was entered on September 1, 1972, and after the

denial of a petition for rehearing (Pet. App. 33), be-

came final on October 16, 1972. The petition for a writ

of certiorari was filed on December 6, 1972. The juris-

(1)

PPP

diction of this Court is invoked under 28 U.S.C.

1254(1).

The decedent, within six months of his death, estab-

lished a life insurance trust and provided the trustee

with funds which the trustee was required to use in the

purchase of insurance on the decedent's life for the

primary benefit of his children. The funds were con-

cededly transferred in contemplation of death. The

question is whether the decedent in substance trans-

ferred the policy itself so that the proceeds of the

policy, and not merely the sum transferred to purchase

it, are includible in his gross estate under Section 2035

of the Internal Revenue Code of 1954 (relating to

transactions in contemplation of death).

The pertinent provisions of Section 2035 of the

Internal Revenue Code of 1954 and Sections 20.2035-1

and 20.2042-1 of the Treasury Regulations on Estate

Tax (1954 Code) are set forth in the Appendix, infra,

pp. 8-9.

The decedent died on October 6, 1964, about six

months after creating and funding the life insurance

trust here in issue. Under the terms of the trust instru-

ment, the trustee was obligated to purchase an insur-

ance policy upon the life of the decedent with funds to

be provided by the decedent. At the time he entered

into this agreement, the decedent transferred $9,600 to

the trustee for payment of the first year’s premium on

a $100,000 ordinary life policy insuring the decedent's

life. Upon the decedent's death, the trustee collected

the $100,000 face amount payable under the policy.

(Pet. App. 15-16, 21-22.)

The decedent's executor did not include the insur-

ance proceeds in his gross estate in the federal estate

tax return, but the Commissioner determined that they

were includible under Section 2035 of the Code (re-

lating to transactions in contemplation of death). The

estate paid the resulting deficiency and then instituted

the present refund suit. At trial, the estate conceded

for purposes of a motion for partial summary judg-

ment that the decedent had transferred the $9,600 to the

trustee in contemplation of death. The district court

held that only the $9,600 was includible in the decedent's

estate. It reasoned that since the decedent had never

possessed the incidents of ownership in the policy, he

could not have transferred it in contemplation of death.

The court of appeals reversed. The court reasoned that

the purpose of Section 2035 is to prevent evasion of the

estate tax, and held that the trustee here was the

decedent's agent for purchase of the insurance and that

the trust device was a substitute for testamentary dis-

position. Since the decedent had in effect transferred

insurance protection, the court held that the date-of-

death value of the gift—the matured value of the

policy—was includible in his estate. One judge dis-

sented. (Pet. App. 16-20, 22-30.)

ARGUMENT

The decision below is correct. There is neither a

4

conflict of appellate court decisions nor other warrant

for further review.

1. The instant petition presents the issue identical

to that presented in the petition for certiorari filed in

Bel v. United States (No. 71-1129, October Term, 1971),

certiorari denied, 406 U.S. 919, reported below, 452

F. 2d 683 (C.A. 5). Both this case and Bel involve

the application of Section 2035 of the Internal Revenue

Code of 1954 to a decedent’s indirect transfer of an

insurance policy on his life. As we pointed out in our

opposition in Bel, the mere fact that a decedent uses a

third party to effect the transfer of an insurance policy

does not change the basic nature of his transfer. Both

here and in Bel, all policy rights and insurance pro-

tection derived from the decedent. The decedent

executed a trust which compelled the trustee to pur-

chase insurance upon the decedent’s life. He then trans-

ferred the funds necessary to allow the purchase of

insurance and thus to complete the transfer of insur-

ance protection. The court of appeals properly charac-

terized decedent as the real principal in this transfer.

(Pet. App. 29.) This characterization was necessary to

effectuate the statutory purpose of taking the estate

tax profit out of inter vivos gifts which are motivated

by the same considerations that lead to testamentary

dispositions of property. United States v. Wells, 283

U.S. 102; Milliken v. United States, 283 U.S. 15.

2. Having correctly determined the nature of the

property that the decedent transferred through the

*The same issue is also involved in First National Bank of

Oregon v. United States, 30 AF. T. R 2d, par. 147,705 (Ore.), on

appeal (C.A. 9), in which the district court held for the Govern-

ment on the authority of Bel.

medium of the insurance trust, the court of appeals

proceeded to apply the valuation principles which

have long governed inclusions in a decedent’s estate

under Section 2035. Those valuation principles dictate

inclusion of the property transferred at its date-of-

death value. Treasury Regulations on Estate Tax

(1954 Code), §§ 20.2035-1(e) and 20.2042-1(a)(2),

Appendix, infra, p. 9. In the case of life insurance,

that value is its matured proceed value. Bel v. United

States, supra; Sloan’s Estate v. Commissioner, 168 F.

2d 470 (C.A. 2) ; Slifka v. Johnson, 161 F. 2d 467 (C. A.

2), certiorari denied, 332 U.S. 758; Thomas v. Graham,

158 F. 2d 561 (C.A. 5); Vanderlip v. Commissioner,

155 F. 2d 152 (C.A. 2), certiorari denied, 329 U.S. 728;

see Chase Nat. Bank v. United States, 278 U.S. 327, 337.

3. There is no conflict of decisions requiring reso-

lution by this Court. The decision below, contrary to

petitioner's assertion (Pet. 5-6), does not conflict with

First National Bank of Midland, Teras v. United

States, 423 F. 2d 1286 (C.A.5). In Midland, the insur-

ance policies were issued to the decedent's children well

outside the three-year period covered by Section 2005.“

Consequently, the only asset there diverted within the

* Although the question at issue here was not dealt with in the

opinions, the results which the courts reached in Gorman v. United

States, 288 F. Supp. 225 (E.D. Mich.), and Estate of Chapin v.

Commissioner, 29 T. C. M. II. appear to be in conflict with the de-

cision here. Conflict with these trial court decisions, however, would

not provide a basis for review by this Couit. Other trial court

decisions cited (Pet. 6-7) by the petitioner are inapposite. The

court in Mercantile Trust Company National Ass’n. v. United

States, 312 F. Supp. 108 (ED. Mo.), concluded that the transfers

there involved had not been made in contemplation of death.

6

period covered by Section 2035 was the value of premi-

ums paid by the decedent. See also Estate of Coleman

v. Commissioner, 52 T.C. 921, which is essentially simi-

lar to Midland. Here on the other hand, there was a

transfer of insurance protection which occurred within

six months of the decedent’s death.

4. Finally, the holding below, contrary to petitioner’s

assertion (Pet. 11-12), in no way contravenes any Con-

gressional policy expressed in Section 2042 of the

Internal Revenue Code of 1954. That section, which

governs the includibility of insurance proceeds when

the decedent possesses at the date of his death in-

cidents of ownership“ in insurance policies, was not

intended to preclude the taxation of insurance proceeds

on any other appropriate basis or to restrict the sweep

of Section 2035. Bel v. United States, supra; Treasury

Regulations on Estate Tax (1954 Code), § 20.2042-1

(a) (2). Section 2035 applies to transfers of any kind

of property in contemplation of death. The decedent

here set in motion a chain of events which could only

result in his chosen donees receiving $100,000 in life

insurance protection. Upon his death, that protection

matured and the face amount of the policy became

available to or for the benefit of those donees. in these

circumstances the decedent’s executor can hardly com-

piain if the courts now impose the tax on the basis

of the whole chain of events rather than merely one of

its links.

Nance v. United States, 21 A.F.T.R. 2d 1702 (D. Ariz.), was

reversed on appeal, 430 F. 2d 662 (C.A. 9), though on other

grounds than those here involved.

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CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

Erwin N. GRSwor p,

Solicitor General.

Soorr P. Crampton,

Assistant Attorney General.

LoRNͥ W. Post,

MicHaret L. Par,

Attorneys.

APPENDIX

Internal Revenue Code of 1954 (26 U.S.C.):

SEC. 2035. TRANSACTIONS IN CONTEM-

PLATION OF DEATH.

(a) [as amended by Sec. 18(a), Revenue Act of

1962, P. L. 87-834, 76 Stat. 960] General Rule.—

The value of the gross estate shall include the |

value of all property to the extent of any interest

therein of which the decedent has at any time

made a transfer (except in case of a bona fide sale

for an adequate and full consideration in money

or money’s worth), by trust or otherwise, in con-

templation of his death. |

(b) Application of General Rule—If the dece- |

dent within a period of 3 years ending with the

date of his death (except in case of a bona fide

sale for an adequate and full consideration in |

money or money’s worth) transferred an interest

in property, relinquished a power, or exercised

or released a general power of appointment, such

transfer, relinquishment, exercise, or release shall,

unless shown to the contrary, be deemed to have

been made in contemplation of death within the

meaning of this section and sections 2038 and 2041

(relating to revocable transfers and powers of

appointment); but no such transfer, relinquish-

ment, exercise, or release made before such 3-year

period shall be treated as having been made in

contemplation of death.

8

9

Treasury Regulations on Estate Tax (1954 Code) (26

C. F. R.):

§ 20.2035-1 Transactions in contemplation of

death.

* * * * *

(e) Valuation. The value of an interest in

transferred property includible in a decedent’s

gross estate under this section is the value of the

interest as of the applicable valuation date. In

this connection, see sections 2031, 2032, and the

regulations thereunder. However, if the trans-

feree has made improvements or additions to the

property, any resulting enhancement in the value

of the property is not considered in ascertaining

the value of the gross estate. Similarly, neither

income received subsequent to the transfer nor

property purchased with such income is con-

sidered.

§ 20.2042-1 Proceeds of life insurance.

(a) In general. * * *

(2) Proceeds of life insurance which are not

includible in the gross estate under section 2042

may, depending upon the facts of the particular

case, be includible under some other section of

part III of subchapter A of chapter 11. For

example, if the decedent possessed incidents of

ownership in an insurance policy on his life but

gratuitously transferred all rights in the policy in

contemplation of death, the proceeds would be

includible under section 2035. * * .

* * * > *

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