                     T.C. Memo. 1997-32



                UNITED STATES TAX COURT



         ESTATE OF WILLIAM G. STREET, DECEASED,
     ANNE STREET SKIPPER, EXECUTRIX, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 376-95.                        Filed January 21, 1997.



     D, a married resident of Texas, bought certain
life insurance policies that were community property.
He designated his estate as beneficiary of these
policies, compensating his wife for her one-half
interest in the policies, and all the insurance was so
paid at his death. Held, one-half the value of the
policies may not be excluded from D's gross estate for
Federal estate tax purposes.



Emily A. Parker, for petitioner.

Henry C. Griego, for respondent.
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              MEMORANDUM FINDINGS OF FACT AND OPINION

     KÖRNER, Judge:   By notice of deficiency dated October 12,

1994, respondent determined a deficiency in the Federal estate

tax of the Estate of William G. Street, deceased, Anne Street

Skipper, Executrix, in the amount of $157,281.    In the petition

that was filed herein, various of respondent's determinations

were contested, and claim was made for a refund of certain estate

tax payments as being overpayments.    As a result of extensive

stipulations of fact and of settled issues entered into by the

parties, all such disputes have been resolved except one, which

remains for us to decide.   That remaining question is:   where

decedent William G. Street purchased life insurance during his

life which was community property, and thereafter, during his

spouse's life, designated his estate as beneficiary of the

insurance proceeds, was one-half of the proceeds of said

insurance policies excludable from decedent's gross estate as

community property that belonged to decedent's wife?

     By stipulation of the parties, the case was submitted under

Rule 122.   All statutory references are to the Internal Revenue

Code in effect as of the date of decedent's death, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
                               - 3 -

                         FINDINGS OF FACT

     William G. Street (decedent) was married and resided all his

married life in Texas.   Decedent died September 30, 1990; his

will was probated, and his estate has been administered in the

State courts of Texas.   Decedent was survived by his wife, Amma

Elnora Street.   Decedent and Mrs. Street each had children by

prior marriages.   In admitting decedent's will to probate, the

appropriate Texas court, the County Court of Young County, Texas,

appointed both decedent's surviving spouse and decedent's

daughter, Anne Street Skipper, as independent coadministratrices

of decedent's estate.

     During his lifetime and during the marriage, decedent

purchased, as insured and sole owner, four policies of life

insurance on his life, one with U.S. Life Insurance Co. in the

face amount of $300,000, another with U.S. Life Insurance Co. in

the face amount of $113,900, a policy with American General Life

Insurance Co. in the face amount of $600,000, and a policy with

Southwestern Life Insurance Co. in the face amount of $250,544.

Pursuant to later designations by decedent, making his estate the

beneficiary of said policies, the net proceeds of $1,347,882

(after adjusting for outstanding debt and additional insurance)

were paid to decedent's estate.

     On June 3, 1991, after probate and during the course of

administration, Mrs. Street filed a claim, amended on July 12,
                               - 4 -

1993, against the estate in the Texas Probate Court in which she

claimed inter alia that she was entitled to 100 percent of the

insurance proceeds of the four policies mentioned above, both

because she was a 50-percent owner of the policies under Texas

community property law, and because she had been originally

designated as sole beneficiary by decedent, but such designation

had been changed by decedent's actual or constructive fraud.

     On June 14, 1991, Mrs. Street then filed an election in the

probate proceedings in Texas not to take under decedent's will,

but rather to take her share of community property.

     Shortly thereafter, on August 6, 1991, a declaratory

judgment action was brought by Anne Street Skipper

(coadministratrix) and her brother against Mrs. Street in the

Texas District Court, controverting Mrs. Street's claim in the

probate proceeding and asking for a holding as to decedent's

children's rights versus Mrs. Street's rights with respect to

decedent's estate.   In addition to controverting other claims

made by Mrs. Street against decedent's estate, the claim for

declaratory judgment by Anne Street Skipper specifically

contested Mrs. Street's claim to any portion of the life

insurance proceeds, on the grounds that decedent's estate had

specifically been made sole beneficiary, the policies were not

community property but were separate property of decedent, who

was the sole owner thereof, and that the change of beneficiary by
                                - 5 -

decedent was neither an accident nor fraudulent but was

deliberately done as part of decedent's estate planning.

     Decedent's Federal estate tax return was timely filed on

December 30, 1991, signed by Anne Street Skipper,

coadministratrix.   In that return, the estate reported insurance

on decedent's life in the total amount of $1,347,882, but

excluded therefrom $673,941 as representing a one-half community

property share not owned by decedent (but by Mrs. Street).

     After trial to a jury, the Texas District Court entered

judgment in August 1993 pursuant to specific questions that had

been put to the jury and answered by it.   The judgment

specifically held inter alia that Mrs. Street had no valid claim

against the proceeds of the insurance on decedent's life and that

the estate was entitled to 100 percent thereof.   The District

Court also revoked the letters of coadministration previously

issued and issued new letters solely in favor of Anne Street

Skipper.   Finally, the court ruled that Mrs. Street take nothing

from her claims, and substantial attorney fees were awarded

against her.

     The judgment of the Texas District Court was appealed by

Mrs. Street to the Texas Court of Appeals, and an opinion thereon

was rendered in 1994.    Street v. Skipper, 887 S.W.2d 78 (Tex.

App. 1994).    In sum, the Court of Appeals affirmed the District

Court on all counts.    With specific reference to the proceeds of
                               - 6 -

life insurance on decedent's life, the court pointed out that

under Texas statutory law, Tex. Ins. Code Ann. Art. 3.49-3 (West

1981), the sole owner of life insurance that was community

property could name someone other than his spouse (including his

estate) as beneficiary of the policy, and that such a designation

would be legally effective without the joinder or consent of the

spouse if it is determined that such designation was fair and was

made in the absence of fraud, either actual or constructive, on

the wife.   Street v. Skipper, 887 S.W.2d at 80-81.   In the case

before the court, the Texas Court of Appeals affirmed that there

was no fraud involved, either actual or constructive, in the

designation of the decedent's estate as insurance beneficiary.

The court pointed out that Mrs. Street, as surviving spouse of

decedent, in fact received more than one-half of decedent's total

estate, being more than the one-half community property interest

she might otherwise be entitled to receive.   The Court of Appeals

concluded in id. at 81:

     Therefore, although William Street gave his wife's
     share of the community property proceeds of the life
     insurance policies to his estate, he also bequeathed
     her certain portions of his share of the community
     estate that aptly made up the difference. Appellant
     still received more than half of the community estate
     despite the gift to William Street's estate, and we
     cannot find that such disposition was unfair to her.
     The gift of the community funds to his estate was not
     capricious, excessive, or arbitrary as is evident by
     the resulting split of the community property. * * *
                               - 7 -

     Mrs. Street filed an Application for Writ of Error to the

Supreme Court of Texas from the Court of Appeals, but that

application was denied by the Supreme Court, which also over-

ruled Mrs. Street's motion for rehearing of the application in

February 1995.   On the case presented, the judgment of the Texas

court has become final.

     In the notice of deficiency herein, respondent determined

that the exclusion of one-half the life insurance proceeds, as

reported by the estate, was improper, and that the full amount of

$1,347,882 was includable in decedent's gross estate under

section 2042.

     In the case now before us, petitioner urges that 50 percent

of the life insurance proceeds was excludable from the gross

estate of decedent, that portion allegedly being the community

property of Mrs. Street, who was the survivor.

                              OPINION

     In the State court actions mentioned above in our findings

of fact, Anne Street Skipper, decedent's executrix, prevailed

over the claims of Amma Elnora Street and secured a judgment that

decedent's estate was entitled to 100 percent of the life

insurance proceeds, as decedent had designated during his

lifetime.   Despite that victory, Anne Street Skipper, executrix,

claims here that only one-half of the insurance proceeds should

be reported in decedent's gross estate for Federal estate tax
                                - 8 -

purposes because of Mrs. Street's alleged one-half community

property interest.

     The problem presented here involves the application of both

State and Federal law, and we treat them in that order.

Generally State law determines the ownership of property, Poe v.

Seaborn, 282 U.S. 101 (1930), which means here that Texas

property law determines the ownership of the insurance policies

and proceeds therefrom on decedent's life.   On the other hand,

such property rights, once determined under State law, will be

taxable as the Code provides, and that is a Federal matter,

Morgan v. Commissioner, 309 U.S. 78 (1940); Broday v. United

States, 455 F.2d 1097 (5th Cir. 1972).

     In determining the binding or persuasive effect of State

court decrees on Federal courts, interpreting the application of

State law, the Supreme Court has acknowledged that where State

law governs the ownership of property (as here), the State's

highest court is the best authority on its own law; the opinion

of a lower State court will not be binding on a Federal court,

but the ruling of such State court is not to be disregarded by a

Federal court unless it is considered that the State's highest

court would decide otherwise.   If there is no decision by the

State's highest court, the Federal court must do the best it can

to discern what such State's highest court would decide.
                               - 9 -

Commissioner v. Estate of Bosch, 387 U.S. 456 (1967); Estate of

Rowan v. Commissioner, 54 T.C. 633 (1970).

     In the present situation, Anne Street Skipper, then

coadministratrix, sued in the Texas State courts to recover all

the insurance proceeds that her late father had designated to be

payable to his estate.   In a fully contested jury trial, she won

a complete victory.   The Texas Court of Appeals affirmed, as we

have related above, and the Supreme Court of Texas refused to

entertain a writ of error.   We think it is now clear, as

elucidated in the opinion of the Texas Court of Appeals, quoted

in our findings, that although life insurance policies purchased

with community funds during life may be community property in

Texas, the insured-owner of such policies has the right to

designate someone other than his spouse as the sole beneficiary,

and, if so, upon death the insurance proceeds are removed from

the regime of community property, and the surviving wife may take

nothing under those policies, so long as it is clear that there

is no fraud upon the wife.

     The Texas courts so held in this matter, and we think this

is a correct exposition of Texas law, and we shall follow it.

Decedent, in designating his estate as a beneficiary of the life

insurance that had been acquired with community funds, removed

the wife's interest in the insurance at death from the regime of

community property.   He avoided a fraud by making ample other
                                - 10 -

provision for his wife, Mrs. Street, and the trial and appellate

courts specifically found that the arrangement was fair to her.

The Texas courts have held, and we are satisfied, that decedent's

surviving widow, Mrs. Street, had no community or other interest

in the insurance proceeds on decedent's life, after decedent made

his change of beneficiary designation and died.

     We need not linger on whether the highest court of the

relevant State (Texas here) has definitely spoken on the issue at

hand.     In the State court litigation, the trial court, pursuant

to jury findings, ruled in favor of decedent's estate as sole

beneficiary of decedent's life insurance.       The Texas Court of

Appeals affirmed this result, specifically pointing out that

under Texas law, decedent had the right to dispose of the

proceeds of the community property insurance on his life as long

as it was done in a manner not unfair to his wife, and that it

was so done in this case; an attempt to secure a writ of error in

this matter from the Texas Supreme Court was refused.       We find no

rulings of the highest court of Texas that are adverse to the

result in Street v. Skipper, supra, and we accept this as the

correct statement of the law of Texas; Commissioner v. Estate of

Bosch, supra.

        In addition, as to this issue of the proper party to receive

decedent's life insurance, it is the same issue before this Court

as it was before the Texas courts.       Those courts have answered
                               - 11 -

the question in final fashion, in favor of Anne Street Skipper

and her father's estate.    It is the law of the case on this

issue.   The principle is recognized in Texas:   where a

determination has already been made on a prior appeal to a court

of last resort, it will govern the case throughout all its

subsequent stages.    Transport Ins. Co. v. Employees Cas. Co., 470

S.W.2d 757 (Tex. App. 1971, writ refd. n.r.e.).    The principle is

equally applicable in Federal courts.    White v. Higgins, 116 F.2d

312, 317 (1st Cir. 1940).

     So much for the matter of ownership of the property under

State law.    We turn now to the Federal estate tax aspects of the

case.    The estate tax is not a tax on property but rather is an

excise tax, levied on the right to transmit property at death.

The amount to be taxed is valued by the property actually

transferred, as opposed to that owned by the decedent before

death, or the interest held by the legatee after death.     New York

Trust Co. v. Eisner, 256 U.S. 345 (1921); Knowlton v. Moore, 178

U.S. 41 (1900); Estate of Bright v. United States, 658 F.2d 999

(5th Cir. 1981) (a Texas case).    As the Court of Appeals pointed

out in Walter v. United States, 341 F.2d 182, 185 (6th Cir.

1965), the tax is imposed on the right to transfer property by

the decedent, and is measured by what is passed rather than by

what is received.    This adds significance to the provisions of

section 2042(1), which provides that for Federal estate tax
                             - 12 -

purposes the gross estate includes the value of all property

receivable by the executor as insurance under policies on the

life of the decedent (not on the policies themselves).

     In the present case, when decedent, as the owner and insured

of certain life insurance policies that were community property,

designated his estate as the beneficiary thereof, and also made

other transfers of property to his wife in a manner that was fair

to her and compensated her for the loss of insurance rights,

decedent was successful under Texas law in withdrawing said

insurance proceeds from the regime of community property and in

eliminating his wife's interest therein when he died.    That being

so, the entire proceeds of the insurance are includable in

decedent's gross estate under section 2042(1).    In this

connection, it is of no help to petitioner to cite or rely on

section 20.2042-1(b)(2), Estate Tax Regs.1   This regulation

presupposes that under controlling local law, one-half of the

proceeds of community property life insurance belongs to the

spouse and not to decedent, so that only one-half of such

proceeds is includable in the taxable estate.    But as we have

already seen, supra, decedent's wife here was divested of her


     1
        The cited regulation provides: "If the proceeds of an
insurance policy made payable to the decedent's estate are
community assets under the local community property law and, as a
result one-half of the proceeds belongs to the decedent's spouse,
then only one-half of the proceeds is considered to be receivable
by or for the benefit of decedent's estate".
                              - 13 -

community property right to a share of the life insurance

proceeds, and the Texas courts have so held.     She therefore had

no interest to be excluded from decedent's gross estate under

section 2042.   On this issue therefore, we hold for respondent.

     To give effect to the other concessions and agreements that

the parties have entered into with respect to other issues in

this case,

                                    Decision will be entered

                               under Rule 155.
