Rev. Rul. 71-463

Advice has been requested regarding the extent to which the value of the proceeds of a policy of insurance on the life of a decedent is includible in his gross estate, for Federal estate tax purposes, under the circumstances described below.

At the time of his death the decedent was president of a closely held corporation that he had founded and been associated with for most of his working life. There was one class of corporate stock and he owned 75 percent of it. The bylaws of the corporation provided that a majority vote elected each officer and director.

The company was incorporated under the laws of State X as an investment holding company. In addition to owning a portfolio of valuable stocks and bonds, the company was the owner and beneficiary of a policy of insurance on the life of the decedent. On the decedent's death the proceeds were paid to the company. The policy reserved to the owner the right to change the beneficiary, to assign the policy, to cancel or surrender the policy, to pledge the policy for a loan, and to withdraw its cash surrender value.

Under the laws of State X (and the bylaws of the corporation) a majority of a corporation's stockholders may cause a dissolution of the corporation at any time, contrary to the wishes of the minority shareholders, so long as they act in good faith.

Section 2042 of the Internal Revenue Code of 1954 provides that the value of the gross estate shall include the value of all property to the extent of the amount receivable as insurance under policies on the life of the decedent by (1) the executor, and (2) all other beneficiaries, with respect to which the decedent possessed at his death any of the incidents of ownership in the policies, exercisable either alone or in conjunction with any other person.

Section 20.2042-1(c)(2) of the Federal Estate Tax Regulations provides as follows: "The term 'incidents of ownership' is not limited in its meaning to ownership of the policy in the technical legal sense. Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. Similarly, the term includes a power to change the beneficiary reserved to a corporation of which the decedent is sole stockholder." (Emphasis added.)

The purpose of the italicized portion of the quoted regulation is to point out that where a corporation had incidents of ownership in an insurance policy, the insured decedent had the power to exercise such incidents if he was the owner of the corporation. While the 100 percent ownership situation provides the clearest example of a circumstance under which an insured decedent had the power to exercise incidents of ownership in a policy of insurance owned by his company, it is not the only situation in which a decedent's ownership of stock will include control of incidents of ownership possessed by a corporation. To the contrary, the regulation is applicable in circumstances where the insured decedent, or his estate, could exercise voting control of the corporation despite the combined votes of all of the other stockholders.

In the present case the decedent owned sufficient stock under the by-laws of the corporation and state law to cause the dissolution of the corporation. Thus he had the power to effectuate a cancellation or distribution of the insurance policy. Furthermore, through his stock ownership the decedent was able to continue himself as president, and elect the other officers and all of the members of the Board of Directors. Thus, he had the power to cancel or surrender the policy, and exercise the other incidents of ownership as if he were the named owner of the policy but without the necessity of acquiring the policy itself.

Accordingly, it is held (1) that the amount of the insurance is includible in his gross estate pursuant to section 2042 of the Code; and (2) that since the amount receivable as insurance is includible in the value of his gross estate under section 2042 of the Code, the insurance should not be reflected in the value of decedent's 75% interest in the corporation for inclusion under section 2033 or any other section of the Code.