SCOTUS Reports

Tag: Controlling Shareholder

  • Estate of Levin v. Commissioner, 92 T.C. 88 (1989): When a Post-Mortem Annuity is Included in the Decedent’s Gross Estate

    Estate of Levin v. Commissioner, 92 T. C. 88 (1989)

    A post-mortem annuity provided by an employer to a decedent’s surviving spouse is includable in the decedent’s gross estate under section 2038 if the decedent controlled the employer and could amend or terminate the annuity plan.

    Summary

    In Estate of Levin, the Tax Court ruled that a post-mortem annuity payable by Marstan Industries to the decedent’s widow was includable in the decedent’s gross estate under section 2038. The decedent, Stanton A. Levin, was a controlling shareholder of Marstan and had the power to alter or terminate the annuity plan. The court held that the annuity was property transferred by the decedent during his lifetime, and his control over the plan’s amendment or termination meant that he retained the power to change the transfer, thus including it in his estate. The court rejected the argument that the annuity was a gift subject to gift tax, as the decedent retained control over the transfer. This decision highlights the importance of considering the decedent’s control over corporate decisions in estate planning involving employer-provided benefits.

    Facts

    Stanton A. Levin, aged 64, died while employed by Marstan Industries, a corporation he controlled. Marstan adopted a plan to provide a post-mortem annuity to surviving spouses of eligible officers, including Levin. At the time of his death, Levin had served Marstan for 34 years and was the only officer eligible under the plan. The plan required 30 years of service and an age of 64, with payments contingent on the officer’s death during employment. Levin’s widow, aged 63, began receiving $34,000 annually in monthly installments upon his death. The commuted value of the annuity was $344,343. 16, which was not included in Levin’s estate, nor was gift tax paid on it.

    Procedural History

    The Commissioner of Internal Revenue determined estate and gift tax deficiencies against Levin’s estate, asserting that the annuity should be included in the gross estate under sections 2035 or 2038, or alternatively, that it constituted a taxable gift under section 2511. The estate challenged these determinations in the Tax Court. After concessions, the court focused on the applicability of sections 2035, 2038, and 2511.

    Issue(s)

    1. Whether the commuted value of the post-mortem annuity is includable in the decedent’s gross estate under section 2038.
    2. Whether the post-mortem annuity constituted an inter vivos gift subject to gift taxation under section 2511.

    Holding

    1. Yes, because the decedent had a property interest in the annuity, transferred it during his lifetime, and retained the power to alter, amend, revoke, or terminate the transfer through his control over Marstan’s board.
    2. No, because the decedent retained control over the annuity, preventing it from being a completed gift.

    Court’s Reasoning

    The court found that the annuity was property in which Levin had an interest, as it was deferred compensation for his services at Marstan. Levin’s continued employment was considered acceptance of Marstan’s offer, and the annuity was thus a transfer of property. The court applied section 2038, noting that Levin’s control over Marstan’s board gave him the power to amend or terminate the plan, satisfying the requirement that he retained the power to change the transfer. The court distinguished this case from Estate of DiMarco, where the decedent had no such control. On the gift tax issue, the court held that no gift occurred because Levin retained control over the annuity by being able to terminate his employment, divorce his spouse, or agree to terminate the plan. The court emphasized the importance of the decedent’s control in determining estate tax inclusion and gift tax liability.

    Practical Implications

    This decision underscores the significance of a decedent’s control over corporate decisions in estate planning, particularly when employer-provided benefits are involved. Attorneys should advise clients to consider the tax implications of retaining control over such plans, as it can lead to inclusion in the gross estate under section 2038. The ruling suggests that similar cases involving controlling shareholders and employer-provided annuities will likely result in estate tax inclusion. Legal practitioners must also be aware that retaining control over a transfer prevents it from being considered a completed gift, thus avoiding gift tax liability. This case has influenced subsequent cases dealing with estate and gift tax treatment of employee benefits, emphasizing the need to analyze the decedent’s power over the plan’s terms and termination.

  • Estate of Levy v. Commissioner, 70 T.C. 873 (1978): Inclusion of Life Insurance Proceeds in Gross Estate for Controlling Shareholders

    Estate of Milton L. Levy, Deceased, John Levy, Co-Executor, Jeffrey R. Levy, Co-Executor, Iris Levy, Co-Executrix, Petitioner v. Commissioner of Internal Revenue, Respondent, 70 T. C. 873 (1978); 1978 U. S. Tax Ct. LEXIS 63

    Life insurance proceeds payable to a decedent’s beneficiary are includable in the decedent’s gross estate if the decedent was a controlling shareholder of the corporation owning the policy.

    Summary

    The Estate of Milton L. Levy contested the inclusion of life insurance proceeds in the decedent’s gross estate, arguing that the controlling shareholder rule should not apply since decedent owned only 80. 4% of the voting stock of Levy Bros. The Tax Court upheld the validity of the regulation extending the rule to controlling shareholders, not just sole shareholders, and held that the proceeds payable to decedent’s widow were includable in the estate. The court reasoned that a controlling shareholder has significant power over corporate actions affecting the disposition of insurance proceeds, justifying the attribution of corporate incidents of ownership to the decedent.

    Facts

    At the time of his death, Milton L. Levy owned 80. 4% of the voting stock and 100% of the nonvoting stock of Levy Bros. The corporation owned two life insurance policies on Levy’s life, with proceeds payable to his widow, Iris Levy. Levy did not possess any direct incidents of ownership in the policies, but the corporation held rights such as changing the beneficiary of the cash value, assignment, borrowing, and modification of the policies. The Commissioner included the proceeds payable to the widow in Levy’s gross estate, asserting that Levy’s controlling interest in the corporation attributed its incidents of ownership to him.

    Procedural History

    The Commissioner determined a deficiency in the estate’s federal estate tax, asserting that the insurance proceeds were includable in the gross estate under Section 2042 of the Internal Revenue Code. The estate filed a petition with the U. S. Tax Court challenging the deficiency. The Tax Court upheld the Commissioner’s determination and entered a decision for the respondent.

    Issue(s)

    1. Whether Section 20. 2042-1(c)(6) of the Estate Tax Regulations, extending the attribution of corporate incidents of ownership to controlling shareholders, is valid.
    2. Whether the proceeds of life insurance policies owned by Levy Bros. and payable to decedent’s widow are includable in decedent’s estate under Section 2042 of the Internal Revenue Code.

    Holding

    1. Yes, because the regulation is a reasonable interpretation of the statute and consistent with its legislative history.
    2. Yes, because decedent’s controlling interest in the corporation attributed its incidents of ownership to him, justifying the inclusion of the proceeds payable to his widow in his gross estate.

    Court’s Reasoning

    The court upheld the validity of the 1974 amendment to the regulations, which extended the attribution of corporate incidents of ownership to controlling shareholders. The court reasoned that this was a reasonable interpretation of Section 2042, consistent with its legislative history and purpose. The court emphasized that a controlling shareholder has the power to influence corporate actions affecting the disposition of insurance proceeds, just as a sole shareholder would. The court rejected the estate’s argument that the attribution should be limited to sole shareholders, stating that Congress did not intend to distinguish between a sole shareholder and one owning nearly all of the stock. The court also noted that the decedent’s indirect control through his stock ownership allowed him to affect the exercise of the corporation’s incidents of ownership, even if he did not hold a formal position in the company. The court concluded that the legislative history of Section 2042 supported the inclusion of proceeds in the gross estate when a decedent, as a controlling shareholder, could indirectly exercise control over the policy.

    Practical Implications

    This decision expands the scope of estate tax liability for life insurance proceeds, requiring attorneys to consider a client’s indirect control over corporate-owned policies when planning estates. Practitioners should advise clients who are controlling shareholders of corporations owning life insurance policies on their lives to be aware that proceeds payable to beneficiaries other than the corporation may be included in their gross estate. This ruling may encourage the use of alternative estate planning strategies, such as cross-purchase agreements or the purchase of life insurance by a trust, to avoid unintended estate tax consequences. The decision also underscores the importance of understanding the interplay between corporate governance and estate planning, as a decedent’s ability to influence corporate decisions can have significant tax implications. Subsequent cases have applied this ruling to various scenarios involving controlling shareholders and corporate-owned life insurance, solidifying its impact on estate tax law.