## Facts

- In December 1950, Caroline Swanson transferred stock (about $3,000 per trust) to W. Clarke Swanson as trustee to begin three trusts for his children: W. Clarke Swanson, Jr., Gerock H. Swanson, and Carol Ann Swanson.
- Swanson later transferred additional stock he owned to the trusts, worth slightly over $30,000 for each trust, so that Swanson’s contributions represented about 91% of the value of each trust.
- Formal trust instruments for the irrevocable trusts were executed on January 3, 1955, with Swanson serving as trustee.
- Each trust instrument stated that it was subject to amendment or interpretation by the trust “maker,” but that no amendment or interpretation could vest any right to trust property, income, or corpus in the maker (other than in a fiduciary capacity for the beneficiary).
- Swanson issued written interpretations affecting administration, including one addressing the trustee’s discretion to make payments to the beneficiary and another authorizing the trustee to borrow funds for trust purposes.
- Swanson resigned as trustee and executed an amendment appointing a successor trustee (Swanco Trust Company).
- A family arrangement involved a purported partnership (commonly described as the Swanson family partnership) through which life-insurance policies on the lives of family members were held and later moved among related parties, including the trusts.
- Life-insurance policies connected to the family arrangement were transferred to, or ended up held by, the trusts in transactions the Commissioner treated as transfers for valuable consideration.
- After an insured’s death, the trusts received death-benefit proceeds and claimed the general exclusion from gross income for life-insurance proceeds under I.R.C. § 101(a)(1).
- The Commissioner determined that the “transfer for value” rule in I.R.C. § 101(a)(2) applied, limiting the exclusion to the statutory amount (consideration plus later premiums and other amounts paid by the transferee), and asserted income-tax deficiencies; the trustee petitioned the Tax Court.

## Issues

1. Whether the acquisition of the life-insurance policies by the trusts constituted a “transfer for a valuable consideration” within I.R.C. § 101(a)(2).
2. Whether the trusts could avoid the transfer-for-value limitation under the I.R.C. § 101(a)(2)(B) exception for transfers “to a partner of the insured” or “to a partnership in which the insured is a partner,” including whether the claimed family partnership relationship qualified for federal income-tax purposes.
3. If the transfer-for-value rule applied, how much of the death-benefit proceeds the trusts were permitted to exclude (i.e., the amount measured by consideration and post-transfer premium payments).

## Decision

- The Tax Court held that the transactions by which the trusts acquired the policies involved valuable consideration, triggering the transfer-for-value rule in I.R.C. § 101(a)(2).
- The Tax Court held that the petitioners failed to bring the transfers within the I.R.C. § 101(a)(2)(B) partnership/partner exception based on the facts surrounding the family partnership arrangement and the policy transfers.
- The Tax Court sustained the Commissioner’s determination that the trusts had to include in gross income the portion of the death proceeds exceeding the amount excludable under § 101(a)(2) (consideration paid plus premiums and other amounts paid by the transferee after the transfer).

## Legal Principles

- I.R.C. § 101(a)(1) generally excludes life-insurance death benefits from gross income, but I.R.C. § 101(a)(2) limits that exclusion when a policy (or an interest in it) has been transferred for valuable consideration.
- When § 101(a)(2) applies, the excludable amount is generally limited to the sum of (i) consideration paid for the transfer and (ii) premiums and other amounts subsequently paid by the transferee; the remaining proceeds are taxable.
- The I.R.C. § 101(a)(2)(B) exception for transfers to a partner of the insured or to a partnership in which the insured is a partner requires facts showing the statutory relationship and a qualifying transfer; a family label or paper arrangement, without supporting operational facts, does not by itself establish the exception.
- In related-party settings involving trusts and family entities, the court evaluates what the parties actually did (including how assets and obligations were shifted) in deciding whether § 101(a)(2) applies and whether an exception is available.

## Conclusion

In *W. Clarke Swanson, Jr., 1950 Trust*, the Tax Court treated the trusts’ acquisition of family-held life-insurance policies as transfers for valuable consideration under § 101(a)(2) and rejected the claimed § 101(a)(2)(B) partnership-based exception, requiring the trusts to include in income the portion of death-benefit proceeds exceeding the statutory allowance for consideration and post-transfer premium payments.


W. Clarke Swanson, Jr., 1950 Trust, 33 T.C.M. (CCH) 296 (1974)