Estate of Montgomery v. Commissioner

On May 4, 1964, Lafayette Montgomery created two irrevocable trusts. Montgomery’s grandchildren were the beneficiaries of the trusts, and each of the trusts had one of his sons named as cotrustee with the Trust Company of Georgia. Montgomery purchased a life annuity for $2,200,000 from National Life Insurance Company (National). At the same time, the trustees of the trusts applied for life-insurance policies from National with Montgomery as the proposed insured and the trusts as the beneficiaries of the life-insurance policies. Each of the two life-insurance policies was for $1,000,000. Montgomery paid the premium for the annuity and deposited the premiums for the life insurance with the two trusts, which then paid the life-insurance premiums. National offered this arrangement of annuity and life-insurance policies as a package, and Montgomery was involved in the planning and purchase of the products. Montgomery died on October 31, 1964. When the estate-tax return was filed for Montgomery’s estate (plaintiff), the estate did not include the proceeds of the two life-insurance policies as part of the gross estate. However, the Internal Revenue Service (IRS) (defendant) determined that the proceeds of the life-insurance policies should have been included in the gross estate under § 2039 of the Internal Revenue Code, which stated that a survivor’s interests in commercial annuities were counted as part of the decedent’s gross estate. The estate petitioned the United States Tax Court for a redetermination, and the tax court affirmed the decision of the IRS. The plaintiff appealed.