ESTATE OF KELLER et al. v. COMMISSIONER OF INTERNAL REVENUE

Supreme Court of the United States1941-03-03No. No. 371

312 U.S. 54361 S. Ct. 65185 L. Ed. 10321941 U.S. LEXIS 1265SCDB 1940-112

Summary · law.co

Holding. The Court affirmed the Circuit Court of Appeals' judgment that the estate had not established a sufficient distinction from Le Gierse to warrant different treatment, and therefore the Commissioner's estate tax deficiency assessment stands.

The Estate of Keller purchased two interrelated contracts from an insurance company: an annuity providing annual payments and an insurance policy paying a lump sum upon death. The Commissioner assessed a federal estate tax deficiency based on the value of these contracts. The Board of Tax Appeals reversed the deficiency assessment, but the Circuit Court of Appeals reversed that decision. The case reached the Supreme Court because it conflicted with a companion case, Helvering v. Le Gierse.

The estate argued that this case differed from Le Gierse because the insurance company had found the combined contracts' pricing inadequate and later raised rates, and because some risk existed even without a physical examination. The Court rejected these distinctions, finding that the annuity contract effectively eliminated any genuine insurance risk by removing the need for risk distribution among a group and counteracting the mortality risk nominally assumed in the policy. The Court concluded that any "risk" the Board identified was merely investment or calculation risk, not an authentic insurance risk as defined in Le Gierse.

Summary generated by law.co from the public-domain opinion. The opinion text itself is public domain.

Key issues

Whether an annuity-insurance policy combination involves genuine insurance risk for estate tax purposes
Whether the insurance company's assumption of investment or calculation risk constitutes insurable risk
Whether absence of physical examination indicates presence or absence of insurance risk

Procedural posture

The case proceeded from the Board of Tax Appeals (which reversed the Commissioner's deficiency assessment) to the Circuit Court of Appeals (which reversed the Board), and then to the Supreme Court on the question of whether it was distinguishable from the companion Le Gierse case.

Authorities cited

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Opinion · public domain

majority opinion

Mr. Justice Murphy

delivered the opinion of the Court.

This case is companion to Helvering v. Le Gierse, ante, p. 531. In all material respects the facts are alike except for the differences to be noted. Here the annuity contract provided for annual payments of $390.84 and cost decedent $3,258.20. The “insurance” policy stipulated for payment of $20,000 to decedent’s daughter at de cedent’s death, and the single premium was $17,941.80. Decedent was 74 at the time the contract was executed and died about two years later. Proceeding on the same theory as in the Le Gierse case, the Commissioner assessed a deficiency in the federal estate tax which the Board of Tax Appeals reversed. 39 B. T. A. 1047. The Circuit Court of Appeals in turn reversed the Board of Tax Appeals. 113 F. 2d 833. The case is here because of conflict with the Le Gierse case (110 F. 2d 734).

Petitioners contend that this case is distinguishable from the Le Gierse case because here the insurance company found that the total consideration for the two contracts, which was 106% of the face value of the policy, was inadequate. They point out that the rate for this combination of contracts was later increased to 108% and finally to 110%. Further, they contend that absence of physical examination does not establish absence of risk, and that the Board of Tax Appeals found that there was “some” risk to the insurance company.

We find the distinction insufficient to require a different result.

It is not enough to show that the insurance company assumed “some” risk. A bank assumes a risk when it accepts a depositor’s funds and invests them. The investment may. prove to be an unsafe one, or the bank may have agreed to pay the depositor a higher rate of interest than it can profitably earn on the funds it invests. Indisputably this is a risk. But it is not an insurance risk in the sense explained in the Le Gierse case. That the insurance company subsequently changed the total charge for this particular combination of contracts because it was unprofitable does not establish the existence of an insurance risk. Rather, it illustrates strikingly the interrelation of the two agreements and emphasizes the effort of the company to remove all possible investment risk.

Absence of a physical examination may well be inconclusive as to the existence of an insurance risk. For example, some companies do not require such an examination for group insurance. But there the risk as to one is distributed among the group, an insurance risk squarely within the definition stated in the Le Gierse case. Here the annuity issued with the policy did more than substitute for. a physical examination. It removed the necessity for any risk distribution and completely countervailed a risk otherwise assumed in the “insurance” policy.

The finding by the Board of Tax Appeals that there was some risk necessarily is ambiguous in view of their finding that the company annually earned from 3% to 4 percent on its own investments. It is therefore reasonable to conclude that the “risk” referred to was a risk that the funds might not earn enough to cover profitably the annuity payable to the decedent, or a risk due to a miscalculation of the proper total consideration. In either event it is not a finding of the existence of an insurance risk.

Since the case is not distinguishable from Helvering v. Le Gierse, supra, the judgment of the Circuit Court of Appeals is

Affirmed.

The Chief Justice and AIe. Justice Robeets think the judgment should be reversed for the reasons stated in the opinion of the Circuit Court of Appeals for the Second Circuit in Commissioner v. Le Gierse, 110 F. 2d 734.