In re Estate of Pyle

Ida Pyle purchased a life-insurance policy on her husband’s life and named herself as the beneficiary of the policy proceeds at her husband’s death. While Pyle’s husband was still alive, Pyle transferred her right to receive the policy proceeds back to the insurance company but retained a life estate in the proceeds’ income. Under this arrangement, starting at the husband’s death, the insurance company would pay Pyle interest and dividends on the policy’s proceeds for the remainder of Pyle’s life. At Pyle’s death, the interest payments and eventually the policy proceeds would be paid to Pyle’s children. Pyle’s husband died before Pyle, triggering the income payments. After Pyle died, the federal government (defendant) determined that, under 26 U.S.C. § 2036, Pyle’s retained life estate in the insurance proceeds’ income meant that she had not fully transferred away her right to the proceeds. Therefore, the policy proceeds were still a taxable part of Pyle’s estate (plaintiff). The estate petitioned for a refund of the estate taxes on the proceeds, arguing that Pyle’s original purchase of the policy on her husband was only a contingent right to proceeds and not real property that was subject to estate taxes. The estate also presented evidence that Pyle’s husband had paid some of the policy premiums. The Tax Court ruled that the policy proceeds were a taxable part of Pyle’s estate. The estate appealed to the Third Circuit.