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WHITELEY v. UNITED STATES

February 28, 1963

Eileen WHITELEY, as Executrix of the Estate of Myrtle G. Watton, Deceased, Plaintiff,
v.
UNITED STATES of America, Defendant



The opinion of the court was delivered by: BEEKS

Myrtle G. Watton died August 22, 1954. Her executrix filed an estate tax return showing a net estate tax payable of $ 49.81 and that amount was paid on May 27, 1955. The District Director of Internal Revenue thereafter assessed an additional tax which, together with interest, amounted to approximately $ 41,000 on the basis that her gross estate should have included the following items:

1. The amount of $ 7,738.82, on deposit with the Equitable Life Assurance Society pursuant to the terms of its Policy No. 10,181,318 and supplemental contract No. 190511, as being subject to a general power of appointment in the decedent and includable in her estate under 26 U.S.C.A. § 2041.

 2. The amount of $ 30,601.27, on deposit with the Equitable Life Assurance Society and Mutual Life Insurance Company of New York under policies and supplemental contracts, as having been transferred by decedent during her life, retaining to herself a life estate, and therefore includable in her gross estate under 26 U.S.C.A. § 2036.

 The tax was paid by the executrix under protest, claim for refund was filed, and not having been granted, this suit followed.

 The case has been fully stipulated. The facts necessary for a decision are found in the admitted facts of the pretrial order and the exhibits which have been presented to the Court as part of the pretrial order.

 From the date of their marriage in July 1912, Myrtle and George Watton resided in the State of Washington and remained married until the death of Mr. Watton in March of 1953, approximately one year and five months before the death of Mrs. Watton in August of 1954.

 On January 27, 1934, George Watton executed his will which remained without revision until his death. In his will Mr. Watton provided that all of his property, with the exception of certain specific legacies, was to be placed in trust, with the income payable to his wife for life and the remainder to their only daughter.

 On that same date, Mrs. Watton executed an agreement wherein she recited that her husband had on that date executed a will in which he left his entire estate in trust with the income payable to her for life and that it was her desire that all of their community property be subject to the terms of that trust. Mrs. Watton, therefore, promised that if Mr. Watton predeceased her leaving a will which in fact created a trust with income payable to her for life, she would immediately transfer to the trustee of such trust all of her interest in their community property. This agreement was signed only by Mrs. Watton.

 At various times during the course of the marriage, Mr. Watton purchased with community funds policies of life insurance upon his life, designating Mrs. Watton as beneficiary. Prior to his death Mr. Watton, pursuant to the terms of the policies, changed the beneficiaries and elected certain modes of settlement under the various settlement options provided. The policies all matured upon the death of Mr. Watton and became payable according to their terms.

 One of the policies, Equitable Policy No. 10,181,318, provided for an annuity to Mrs. Watton. The amount due to her upon Mr. Watton's death would be left on deposit with the insurer, interest payable monthly, and Mrs. Watton would have the right of withdrawing, on interest due dates, the entire amount then on deposit or any part thereof, limited only by the provision that no partial withdrawal could be less than $ 500. The value of the proceeds of this policy at the date of Mrs. Watton's death was $ 7,738.82.

 With slight differences in wording, the settlement options elected by Mr. Watton on all the remaining policies were substantially the same as the option contained in Equitable Policy No. 7,860,282. This policy provided that amounts due to Mrs. Watton upon her husband's death would remain on deposit with the insurer and would be paid to her for life with the remainder to their daughter Eileen Whiteley. At the date of Mrs. Watton's death the proceeds of these remaining policies had a total value of $ 30,601.27.

 On January 26, 1954, nine months after the death of Mr. Watton, Mrs. Watton transferred her one-half interest in the community property of herself and her deceased husband to the trust created by his will retaining only a life interest therein. The value of the interest so transferred by Mrs. Watton was $ 100,799.84. Following the transfer, Mrs. Watton filed a federal gift tax return covering the transfer. In that return she reduced the amount of the gift by the value of the life estate retained by her.


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