Lang v. Commissioner

Background

Julius C. Lang married in Washington, a community property State, and remained domiciled there until his death in 1929. At death seventeen life insurance policies totaling over $200,000 were in force. Fourteen named his wife as sole beneficiary and three named his children. Some policies were taken out before marriage with initial premiums from his separate property; later premiums, and premiums on policies taken out after marriage, were paid from community funds. The Commissioner of Internal Revenue treated the entire proceeds as part of Lang’s gross estate under the 1926 Revenue Act §302(g); the Board of Tax Appeals affirmed and the lower court certified legal questions about how the Act and Treasury Regulations apply in Washington.

Reasoning

The key question was how much of those policy proceeds should be counted in the decedent’s federal gross estate when premiums came from community funds. The Court applied Treasury Regulations 70 (Arts. 25 and 28), which treat a policy as “taken out by the decedent” only in proportion to the premiums he paid. Accepting the lower court’s view that Washington’s community is a distinct property entity, the Court held that only one-half of proceeds from policies funded by community money is includible when the wife or children are beneficiaries. For a premarriage policy with later community premiums, the Court said include the total proceeds minus one-half of the portion attributable to community-paid premiums.

Real world impact

The ruling limits how much life-insurance proceeds are taxed in estates where community property rules apply, easing estate tax exposure for surviving spouses and heirs. Estate administrators and families in community property States now have clearer guidance under the 1926 Revenue Act and the Treasury Regulations about accounting for premiums paid from community funds.