## Facts

- A life insurance policy on D. Holmes Morton’s life was issued in 1932 at the request of his father-in-law to provide security for Morton’s wife.
- Morton paid none of the premiums; they were paid successively by the father-in-law, a corporation owned by Morton’s wife and her sister, and then by Morton’s wife until Morton’s death in 1963.
- The policy was kept in a safe controlled by a corporation owned by Morton’s wife and her sister.
- The policy form granted the “insured” various contractual powers, including borrowing against the policy, surrendering for cash value, electing dividend options, and converting to paid-up insurance.
- In 1938, Morton executed an endorsement irrevocably designating his wife and children as beneficiaries.
- After Morton’s death, the Commissioner included the policy proceeds in Morton’s gross estate under I.R.C. § 2042(2), asserting Morton retained “incidents of ownership.”
- The estate paid the assessed tax and sued for a refund; the district court ordered a refund, finding the proceeds were erroneously included.

## Issues

1. Whether, at death, the decedent possessed any “incidents of ownership” in the life insurance policy causing the proceeds to be included in the gross estate under I.R.C. § 2042(2).
2. Whether standard policy powers nominally held by the insured constitute incidents of ownership when beneficiaries are irrevocably designated and practical control and premium payments rest with others.
3. Whether § 2042(2)’s “in conjunction with any other person” language applies where any realistic control over the policy’s economic benefits lies with the beneficiaries rather than the decedent.

## Decision

- The Fourth Circuit affirmed the judgment granting the estate a refund.
- The court held the decedent did not possess any incidents of ownership in the policy at the time of death within the meaning of § 2042(2).
- The policy proceeds were therefore not includible in the decedent’s gross estate.

## Legal Principles

- Under I.R.C. § 2042(2), insurance proceeds are includible in the gross estate only if the decedent possessed, at death, incidents of ownership—i.e., substantive rights to control or enjoy the policy’s economic benefits.
- An irrevocable designation of beneficiaries can eliminate the decedent’s ability to redirect economic benefits and can negate incidents of ownership for estate-tax inclusion purposes.
- Boilerplate policy provisions granting powers to the “insured” are not dispositive when surrounding facts show the decedent lacked practical and legally meaningful ability to exercise those powers for personal or estate benefit.
- The “in conjunction with any other person” clause does not require inclusion where the decedent’s participation is not a realistic source of control over the policy’s economic benefits and effective control rests with others.

## Conclusion

The court concluded that, given the irrevocable beneficiary designation and the policy’s funding and control by the wife’s family, the decedent held no exercisable incidents of ownership at death, so the life insurance proceeds were excluded from the gross estate under § 2042(2).


Morton v. United States, 457 F.2d 750 (4th Cir. 1972)