Estate of Mattias Arnold Madsen, Norma v. Madsen v. Commissioner of Internal Revenue

I

Mattias Arnold Madsen was lost at sea in 1973. His wife, Norma, received the proceeds of a life insurance policy.

The Madsens were domiciled in Washington. Before buying the policy in 1967 they discussed the estate tax consequences with their insurance agent. All agreed that Norma would own the policy and make premium payments. Though community funds would be used, they determined that no gift tax return had to be filed because Mattias’ interest in the payments was under $3,000.

None of the proceeds were included in Mattias’ estate. The Commissioner noted an estate tax deficiency, reasoning that, because the policy was community property, one-half of the proceeds should have been included in the estate. The Tax Court agreed.

II

Life insurance proceeds are includable in an estate to the extent that the deceased “possessed at his death any of the incidents of ownership.” I.R.C. § 2042(2). “Incidents of ownership” are determined by reference to the policy and state law. Lang v. Commissioner, 304 U.S. 264, 267 , 58 S.Ct. 880, 881 , 82 L.Ed. 1331 (1938); 26 C.F.R. § 20.2042-1 (c)(5).

Section 48.18.440, Revised Code of Washington, provides:

As the case comes to us, both the…

dissenting:

The sole question presented by this appeal is whether the Tax Court erred in holding that the proceeds of a life insurance policy naming the decedent’s wife as beneficiary should be included in the decedent’s estate for tax purposes. The Tax Court’s decision is based upon § 2042(2) of the 1954 Internal Revenue Code which provides that the proceeds of a life insurance policy are included in a decedent’s estate if the decedent had “incidents of ownership” in the policy at the time of death. 1 In deciding whether the decedent had any incidents of ownership in the policy, both the terms of the policy and state law must be considered. Lang v. Commissioner, 304 U.S. 264, 267 , 58 S.Ct. 880, 881 , 82 L.Ed. 1331 (1938); Treas. Reg. § 20.2042-1 (c)(5) (1960).

Under Washington law, a life insurance policy becomes a community asset if the policy’s premiums are paid from community funds. Francis v. Francis, 89 Wash.2d 511 , 573 P.2d 369 (1978). The life insurance policy at issue was acquired during marriage and its premiums were paid with community moneys. Hence, the Tax Court reasoned that the decedent’s estate should be increased by half the value of the proceeds of the life…

659 F.2d 897 81-2 USTC P 13,437 ESTATE OF Mattias Arnold MADSEN, Norma V. Madsen, Executrix, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. No. 79-7607. United States Court of Appeals, Ninth Circuit. Argued and Submitted June 3, 1981. Decided Oct. 2, 1981. Steven Soha, Aiken, St. Louis & Siljeg, Seattle, Wash., for petitioner-appellant. Robert T. Duffy, Washington, D. C. (argued), for respondent-appellee; Gilbert E. Andrews, Washington, D. C., on brief. Appeal from the United States Tax Court. Before WRIGHT, FERGUSON and NORRIS, Circuit Judges. EUGENE A. WRIGHT, Circuit Judge: 1 * Mattias Arnold Madsen was lost at sea in 1973. His wife, Norma, received the proceeds of a life insurance policy. 2 The Madsens were domiciled in Washington. Before buying the policy in 1967 they discussed the estate tax consequences with their insurance agent. All agreed that Norma would own the policy and make premium payments. Though community funds would be used, they determined that no gift tax return had to be filed because Mattias' interest in the payments was under $3,000. 3 None of the proceeds were included in Mattias' estate. The Commissioner noted an…