LOCATION: United States District Court for the Northern District of Illinois, Eastern Division
DOCKET NO.: 130
DECIDED BY: Warren Court (1957-1958)
LOWER COURT: United States Court of Appeals for the Third Circuit
CITATION: 356 US 274 (1958)
ARGUED: Jan 30, 1958
DECIDED: Apr 28, 1958
Facts of the case
Media for Fidelity-Philadelphia Trust Company v. Smith
Audio Transcription for Oral Argument - January 30, 1958 in Fidelity-Philadelphia Trust Company v. Smith
Number 130, Fidelity-Philadelphia Trust Company and Robert B. Haines, III, Executors of the Will of Mary H. Haines, Deceased versus Francis R. Smith, Collector of Internal Revenue.
Robert T. McCracken:
If the Court please.
This case comes here from -- on certiorari in the Court of Appeals for the Third Circuit which reversed the District Court, the Eastern District of Pennsylvania and it brings before the Court a question which has been before several Courts of Appeals, and undoubtedly that's the reason that this Court granted certiorari, they have not all agreed upon the inclusion of an insurance policy in a testator's estate.
The facts of the case are these, this old lady, Mrs. Robert Haines, a resident of Philadelphia at the age of -- in somewhere in the 70s, in 1934 was persuaded to make an investment or rather three investments totalling $350,000 in the face value of insurance.
The beneficiaries of which were her four children.
At her age, she could not have obtained this policy without a medical examination, had she not taken out at the same time annuities from the same companies which issued the insurance policies payable to her and non-refundable at her death.
The mathematics of the transaction were such as carefully worked out for the insurance company that the company couldn't lose.
She paid not quite the face value of the policy for the policy but a considerable sum for the annuity which added to the premium that she had for the policy, exceeded the face value of the policy by a substantial amount.
A similar case came before this Court some 17 years ago, 1941, called Helvering against Le Gierse, and in that case, the sole question presented was, was this insurance of such a nature that it could be deducted to the extent of $40,000 from -- there's a taxable state.
Your Honors, will recall that up to a certain time, the insurance made out to beneficiaries other than the estate was deductible up to the extent of $40,000.
This Court -- that was the only question presented in that case so stated.
This Court decided that it was not insurance and Your Honors so decided because you said there was no risk for the very reason that I have just stated, the company saw to it that it got enough money that the time that these two premiums were paid, so that no matter what happens, whether this woman died the day after she took out the policy and they paid the face value of the policy which was more than the face value of the premium on the policy but considerably less than the agreed regular premiums or whether she lived for 20 years.
And the surrender value, the cruel value grew all the time on the policy.
The company just couldn't lose and that additional amount which ran above the face value of the policy was of course to take care of the so-called loaning charges, the agent's commission, the expenses of the -- of the underwriting and the profit of the company.
Now that's what, Your Honors, decided in that case and that's all that was decided and so stated.
Other cases have since arisen including this one in which what you said there has been taken and reached out to control a situation that was not before you then.
What you said there was this is not insurance, it is a form of investment using the insurance policy as a medium of investment and as such form of investment, it is subject only to the risks that the ordinary investment is.
Every case has been decided since has repeated that statement and has stated it to be the law and there's no doubt about it being the law that this is not insurance, yet anything but nomenclature.
His insurance went out of the case of these series of cases when, Your Honors, decided the Le Gierse case.
Now, let us take that position totally and I'll go on, what happened in this case was that this old lady, as soon as she took out the insurance policies, assigned them towards her four children, absolutely, irrevocably and they were -- they took possession.
And that time on, they received the dividends of the policy which are not large as Your Honors know but there are dividends paid on policies.
They also enjoyed the annual accretion of value in the -- the surrender value which is made up in part of dividends.
She had nothing whatever to do with that.
She couldn't have touched the policies.
They could've taken those policies out in any year up to the time of her death and surrendered them, and gotten the surrender value, and invested it, and according to a recent case which the tax court has decided from which no appeal was taken and which that exactly happened, the tax court said, why of course this isn't taxable, there's nothing to tax.
These people have -- have converted this asset and there's nothing to tax.
They may have spent it to any event.
That was the reasoning of the tax court.
Now she could have -- they could have done that but they didn't do it.