Insurance
page4
United States of America
, Plaintiff v. William Carter Hixson, Jr., and The Travelers
Insurance Company, Defendants
U.
S. District Court, So. Dist. Calif., Central Div., Civ., No. 20633-WM,
3/27/58
[1939 Code Sec. 3670--same as 1954 Code Sec. 6321; 1939 Code Sec.
3672--similar to 1954 Code Sec. 6323]
Property subject to tax liens: Taxpayer's property interests in life
insurance policies: Cash surrender values and current values of future
retirement payments: Order of liquidation of property in satisfaction of
tax liens.--Taxpayer's ownership interests in insurance policies
upon his life were subject to the government's income tax liens. In
satisfying taxpayer's tax liabilities the proceeds from the policies
(cash surrender values and agreed values of retirement income payments)
were to be exhausted before resort was had to community property which
had been previously transferred to taxpayer's wife as her separate
property as a consequence of divorce proceedings. After the tax
liabilities were satisfied, a reasonable allowance for attorneys' fees
incurred by the insurer to protect its interest in the policies was to
be paid.
Laughlin E.
Waters, United States Attorney for the Southern District, Calif., Edward
R. McHale, Assistant United States Attorney, Chief, Tax Division,
Rembert T. Brown, Assistant United States Attorney, Eugene Harpole,
Special Attorney, Internal Revenue Service, 808 Federal Building, Los
Angeles 12, Calif., for plaintiff. William J. Clark, Charles Murstein,
for William Carter Hixson, Jr. Schell, Delamer & Loring, Donald C.
Mitchell, for The Travelers Insurance Co.
Findings
of Fact and Conclusions of Law
MATHES,
District Judge:
The
above-entitled case was tried together with the cases "United
States of America, Plaintiff, v. William Carter Hixson, Jr., Grace D.
Hixson, et al., Defendants, No. 17,410-WM [58-1 USTC ¶9406],"
and "Grace D. Hixson, Plaintiff, v. William Carter Hixson and
United States of America, Defendants; United States of America,
Cross-Complainant, v. Grace D. Hixson and William Carter Hixson,
Cross-Defendants, No. 1047-57 WM," and came on regularly for
hearing before the Court without the intervention of a jury on January
13, 1958, and the hearing continued on the 14th and 16th days of
January. The Honorable William C. Mathes, Judge, presided. Plaintiff was
represented by Laughlin E. Waters, United States Attorney for the
Southern District of California, Edward R. McHale, Assistant United
States Attorney, Chief, Tax Division, and Rembert T. Brown, Assistant
United States Attorney for said District, and Eugene Harpole, Special
Attorney of the Internal Revenue Service, its counsel; the defendant,
William Carter Hixson, Jr., was represented by William J. Clark and
Charles Murstein, his attorneys, and the defendant, The Travelers
Insurance Company, was represented by Schell, Delamer and Loring, and
Donald C. Mitchell, its attorneys. Evidence both oral and documentary
was presented. The Court having heard and considered the evidence and
the arguments of counsel, therefrom makes the following Findings of Fact
pursuant to Rule 52(a), Federal Rules of Civil Procedure:
Findings
of Fact
I. The United
States of America is a corporate and sovereign Body politic.
II. The
commencement of this action was authorized and sanctioned by the
Commissioner of Internal Revenue and directed by the Attorney General of
the
United States
.
III. The
defendant William Carter Hixson, Jr., is a resident of
Los Angeles County
,
California
, within this judicial district and resided therein at the time of the
commencement of this action.
IV. The
defendant The Travelers Insurance Company at all times mentioned in
these findings, has been, and now is, a corporation authorized to do
business in the State of
California
with an office and place of business in the
County
of
Los Angeles
within said State.
V. That an
action (Mumber 17410) was commenced by the plaintiff against William
Carter Hixson and Grace D. Hixson upon the same obligation that is
alleged herein.
VI. That said
action, No. 17410, was commenced on or about October 29, 1954, by the
United States
as plaintiff against William Carter Hixson, Jr. and Grace D. Hixson, as
defendants. Service of the Complaint and Summons in said action was made
upon William Carter Hixson, Jr., on January 26, 1955. Said defendant
failed to appear or plead in said action and his default therein was
entered upon motion of the plaintiff on the 16th day of January, 1958.
VII. On May
28, 1954, the Commissioner of Internal Revenue assessed deficiencies in
income taxes, penalties and interest against the defendant, William
Carter Hixson, Jr., for the years and in the amounts as follows:
"TE Income
Year Tax Penalty Interest Total
1944 .... $ 122.92 $ 61.47 $ 67.86 $ 252.25
1945 .... 5,986.24 2,993.12 2,946.04 11,925.40
1946 .... 4,227.79 2,113.89 1,826.98 8,168.66
1947 .... 5,663.05 2,831.53 2,107.42 10,602.00
$16,000.00 $8,000.00 $6,948.31 $30,948.31
VIII. The
Commissioner's assessment lists carrying said assessments were received
in the office of the District Director of Internal Revenue at
Los Angeles
,
California
, on May 28, 1954.
IX. After
receipt of said Assessment Lists on May 28, 1954, the District Director
of Internal Revenue at
Los Angeles
,
California
served a Notice and Demand for payment upon William Carter Hixson, Jr.,
the taxpayer, but no part of said assessments nor the interest thereon
has been paid.
X. On
September 24, 1954, the District Director of Internal Revenue caused
notices of liens securing payment of said deficiencies by the defendant,
William Carter Hixson, Jr., to the plaintiff to be filed in the office
of the
County
Recorder
of
Los Angeles County
,
California
.
XI. The
defendant, The Travelers Insurance Company, issued policies of life
insurance upon the life of the defendant, William Carter Hixson, Jr., as
follows:
Cash Surrender
Value or
Agreed Value
of Retirement
Face Income Payments
No. of Date of Amount on 6/20/56
Policy Issue of Policy Not Less Than:
1802630 .... 2/28/34 $ 5,000.00 $ 1,652.16
1802631 .... 2/28/34 5,000.00 1,652.16
2185961 .... 7/23/41 10,000.00 16,300.00
2185962 .... 7/24/41 5,000.00 1,803.00
The policies (with the exception of policy No. 2185961) have increased
in cash surrender value or agreed value of retirement income payments
since June 20, 1956.
XII. Said
policies of life insurance are still in effect and the defendant,
William Carter Hixson, Jr., is the insured thereunder and owner of the
cash surrender values or agreed value of retirement income payments of
said policies subject to the terms, conditions and provisions contained
in said policies of insurance and said lien of plaintiff, United States
of America.
XIII. It was
necessary for the defendant, The Travelers Insurance Company, to employ
attorneys to represent it in this action. It has employed the firm of
Schall, Delamer & Loring as its attorneys for that purpose and the
sum of Nine Hundred Ninety Dollars ($990.00) is a reasonable
compensation for the services rendered said defendant by said attorneys
in this action.
From the
foregoing Findings of Fact the Court draws the following:
Conclusions
of Law
I.
Jurisdiction is conferred on this Court by virtue of Title 28 U. S. C.
§§ 1340 and 1345 and 26 U. S. C. §7603.
II. Judgment
in this action shall not be stayed until the entry of judgment in action
No. 17410, entitled "
United States of America
, Plaintiff, v. William Carter Hixson, Jr., and Grace D. Hixson,
Defendants."
III. The
defendant, William Carter Hixson, Jr., is indebted to the plaintiff on
account of unpaid deficiencies in personal income taxes, with assessed
penalties and interest thereon, for the taxable years 1944, 1945, 1946
and 1947 in the aggregate amount of $30,948.31, together with interest
thereon at the rate of 6% per annum from the 28th day of May, 1954,
until paid.
IV. The
Travelers Insurance Company should be allowed attorneys fees in the sum
of $990.00 herein but payment thereof from the proceeds of the life
insurance policies described in Finding of Fact XI above must be
deferred until after the taxes mentioned in Conclusion of Law No. III
have been fully paid to plaintiff.
V. The
interest of the defendant, William Carter Hixson, Jr., in the life
insurance policies described in Finding of Fact XI, above, is that of an
insured and presently consists of his rights to receive the cash
surrender values or agreed value of retirement income payments and to
change the beneficiaries of those policies of life insurance subject to
the terms, conditions and provisions contained in said policies of
insurance and said lien of plaintiff, United States of America.
VI. The
plaintiff, United States of America, has valid and existing federal tax
liens upon the interest of William Carter Hixson, Jr. in the life
insurance policies described in Finding of Fact XI above, which liens
arose on May 28, 1954, the date the taxes secured by those liens were
assessed, by virtue of the provisions of Section 3670 of the Internal
Revenue Code of 1939, and became valid as to all the world when notices
of those liens were filed in the Office of the County Recorder of Los
Angeles County, California, on September 24, 1954, under the provisions
of Section 3672 of the Internal Revenue Code of 1939.
VII. The tax
liens securing payment to the plaintiff of the deficiencies in William
Carter Hixson, Jr.'s 1944, 1945, 1946 and 1947 income taxes are the
first, prior and paramount liens upon the taxpayer's entire interest in
the life insurance policies described in Finding of Fact XI, and the
cash surrender values or agreed value of retirement income payments
thereof at the time of foreclosure of said liens.
VIII. The
plaintiff shall exhaust the proceeds of the life insurance policies
described in Finding of Fact No. XI and apply said proceeds, after the
payment of the costs of this action, toward the satisfaction of William
Carter Hixson, Jr.'s 1944, 1945, 1946 and 1947 income taxes before the
plaintiff resorts to William Carter Hixson, Jr.'s interest in and to the
real property located at 609 North Roxbury Drive in the City of Beverly
Hills, California, (the subject matter of action No. 17410) for that
purpose.
United States of America,
Plaintiff-Appellant v. Home Life Insurance Company, Defendant-Appellee,
and Lowell M. Birrell, Merrie V. Birrell, Petter Birrell, Charlotte,
Birrell and Max Edelman, as Guardian ad Litem of Lowell Birrell,
Jr., Defendants
(CA-2),
U. S. Court of Appeals, 2d Circuit, Docket No. 29390, 355 F2d 86,
1/21/66, Aff'd District Court, 64-2 USTC ¶9696, 233 F. Supp. 921
[1954 Code Secs. 6332 and 7403]
Lien for taxes: Unmatured life insurance policies: Action to enforce
lien.--The cash surrender values of unmatured life insurance
policies could not be recovered by means of a levy upon the policies for
delinquent taxes, but suit was properly brought under Code Sec. 7403 to
foreclose the tax liens on the cash surrender values determined as of
the date of the judgment. District Court affirmed.
Robert M.
Morgenthau, United States Attorney, Arthur M. Handler, Laurence Vogel,
Assistant United States Attorneys, New York, N. Y., for
plaintiff-appellant. Richard R. Lutz, Townley, Updike, Carter &
Rodgers, 220 E. 42nd St., New York, N. Y., for defendant-appellee.
Before MOORE,
SMITH and ANDERSON, Circuit Judges.
SMITH, Circuit
Judge:
This is an
appeal by the United States from a summary judgment in its favor,
claimed to be inadequate in amount, in the United States District Court
for the Southern District of New York, Charles H. Tenney, Judge, [64-2
USTC ¶9696] 233 F. Supp. 921 (S. D. N. Y. 1964), in an action under 26
U. S. C. §7403, to foreclose tax liens against three insurance policies
issued by defendant-appellee Home Life Insurance Company on the life of
Lowell Birrell, co-defendant. We find no error and affirm the judgment.
In 1940
Birrell purchased two life insurance policies. In 1948 the Government's
tax lien was perfected, and notice was published in 1949. In 1958
Birrell acquired from a pension fund an existing endowment-life policy.
In June, 1958 Birrell defaulted on the premiums on the endowment policy,
and in March, 1959 on the other policies. On September 2, 1959 the
Government levied on all property of Birrell in the hands of appellee.
Thereafter, the
United States
brought this action under IRC 1954 Sec. 7403 to foreclose its tax liens,
and obtained summary judgment for the amount of the cash surrender value
of the policies at the date of judgment, but not for the value at the
date of levy.
When Birrell
defaulted on the premiums the policies were converted by non-for-feiture
clauses to paid-up endowment and term insurance, respectively.
The
Government's contention on appeal is that the levy reached the cash
surrender value of the term insurance at the date of the levy, relying
on United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958).
The insurance company argues that the levy did not reach cash surrender
value then, and that consequently the measure of recovery in the lien
foreclosure suit is based upon cash value at the date of judgment in
that suit. The paid-up endowment is not at issue since, unlike the term
insurance policies, its cash value has appreciated, and the government
accepted the company's tender.
In similar
cases the First, Third, Fifth and Ninth Circuits have held for the
insurance companies. Equitable Life Assurance Society v. United
States [64-1 USTC ¶9433] 331 F. 2d 29 (1 Cir. 1964); United
States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100 (3 Cir. 1964) (en
banc, Hastie J., dissenting); United States v. Mitchell [65-2
USTC ¶9581], 349 F. 2d 94 (5 Cir. 1965) (per Moore, J., sitting by
designation); Mutual Life Ins. Co. v. United States [65-1 USTC ¶9279],
343 F. 2d 71 (9 Cir. 1965) (overruling United States v. Salerno
[64-1 USTC ¶9130], 222 F. Supp. 664 (Nev. 1963), criticized in the
District Court here), and see U. S. v. McWilliams [64-2 USTC ¶9619],
234 F. Supp. 117, D. Conn. 1964.
In Sullivan
the order of events was: lien attached; policies purchased; policies
borrowed against; levy; default in payment of premiums; and automatic
premium loans. The insured also had had the right to surrender the
policy for cash surrender value or, in the event of premium default, to
have the policies converted to either extended term or participating
paid up.
As the insured
there elected automatic premium loans, these other choices did not
become available. [The court, 333 F. 2d at 107, note 15, says that if
the non-forfeiture (conversion to term or paid up) provisions had become
operative, somewhat different questions might have been presented.]
The court
observed that the lien attached to the delinquent insured's rights in
the policy and that "the operative status of an insurance policy is
unaffected by the mere attachment of a tax lien." Further, the
court said that until an election is made by insured to surrender the
policy the insurer has no property of the insured which the levy can
reach. The cash surrender value, while subject to a condition precedent,
surrender of the policy, is not property, and the insurer is a mere
obligor to a broadly based chose in action arising out of an executory
contract. While the insured's right to elect is property, and the
lien attaches to it, the same is not true as to the insurer, either as
to levy or to lien.
The
Government's argument in U. S. v. Sullivan, as here, was that
U. S.
v. Bess [58-2 USTC ¶9595], 357
U. S.
51 (1958), required a holding in its favor. Bess held that a tax
lien reaches insured's right to get cash surrender value, but not the
proceeds after the insured's death; and that after death the lien
remains in force, because the proceeds include cash surrender value;
that that value is not wiped out by the maturing of the policy, because
"for this purpose" cash surrender value is a fund held by
insurer for insured. The court in Sullivan observed that Bess
has nothing to do with what property the insurer has of the insured; the
only basis for concluding that Bess would be dispositive was the
statement that cash value was a "fund." As to that the court
in Sullivan concluded that for the purposes of levy, cash value
is not a fund, as long as insured has not surrendered.
As to the
policy loans, the court noted that because of their obligatory nature
they were payments, but that as they were made prior to the lien, the
insurer was not liable as to them. Concerning the automatic premium
loans, the court concluded that they, too, were payments, or
"advances pro tanto" of cash surrender value. They were made
after both lien and levy. The court held that at the time of the levy
insurer had no present obligation as to cash surrender value and hence
it was not subject to levy. Accordingly, it said that the recovery was
to be cash value on the date of judgment in the foreclosure suit.
Finally, the court observed that the Government, if it wishes at the
time of levy to step into the shoes of the insured, should levy on the
policy, and sell it in a tax sale, §6335, IRC 1954, setting cash
surrender value as a minimum bid.
The doctrine
that insurer possesses no property of insured in cash surrender value
prior to surrender was firmly imbedded before Bess: U. S. v. Mass.
Mutual Life Ins. Co. [42-1 USTC ¶9342], 127 F. 2d 880 (1 Cir.,
1942); U. S. v. Metropolitan Life Ins. Co. [42-2 USTC ¶9609],
130 F. 2d 149 (2 Cir., 1942); U. S. v. Penn Mutual Life Ins. Co.
[42-2 USTC ¶9623], 130 F. 2d 495 (3 Cir., 1942). Bess does not
affect them. Equitable (1 Cir., 1964) reaffirmed Mass. Mutual
in the light of Bess; Sullivan (3 Cir., 1964) reaffirmed Penn
Mutual.
In
U. S.
v. Mitchell, supra, the court also observed that cash surrender
value is not property in the insurer's hands and that it only becomes
property when insured performs the condition precedent. The court
recommended, as in Sullivan, that the Government use a distraint
sale of the policy; it also observed that a levy does not reach
after-acquired property. In U. S. v. McWilliams [64-2 USTC ¶9619],
234 F. Supp. 117, D. Conn. 1964, Judge Blumenfeld followed Sullivan.
The levy here
reached the rights of the delinquent insured under the policies. Since
the policies were in default the non-forfeiture provisions had come into
effect, creating a term insurance which itself had cash surrender value.
However, while the insured had the power by demand for that value to
create a duty in the insurer to pay it over, the insurer had no such
duty without demand, and we do not agree that levy alone, while it
reached Birrell's entire bundle of rights and powers under the policies,
operated as an exercise of the power. Under the varying terms of life
policies widely divergent results to insurer, insured and beneficiary
can come from the exercise of different options. U. S. v. Mitchell,
supra at 105,
U. S.
v. Sullivan, supra, at 118. Acceptance of a cash surrender value
of a policy on one in a terminal illness might result in realization of
far less than a sale of all policy rights on foreclosure of the tax
lien. Equitable Life Assurance Society of
U. S.
v.
United States
, supra at 36. Such a sale is a method suggested by the courts as
best carrying out the purpose of the internal revenue laws and best
protective of the rights of insurer and beneficiaries. U. S. v.
Mitchell, supra. However, foreclosure of the lien in this action
does reach all the insured's rights in the policies, no redemption from
the levy having been had, and the right to demand surrender value as of
the date of judgment was then in the United States.
The complex
and difficult problems posed by these cases might well call for
consideration of the subject by the Congress, to provide a fully
considered and articulated system for reaching the values of tax-payer
insureds' interests in life insurance contracts, with protection to the
rights of the other parties to the contracts. Under the general lien and
levy provisions now applicable, we agree with the result reached by the
1st, 3rd, 5th and 9th Circuits and the court below. Judgment affirmed.
Mary Kovacs, Appellant v.
United States of America
, Appellee
(CA-9),
U. S. Court of Appeals, 9th Circuit, No. 19,953, 355 F2d 349, 1/7/66,
Affirming unreported decision of the District Court for the Southern
Division of California
[1954 Code Sec. 6321]
Tax liens: Life insurance policies: Cash surrender values.--On
the authority of the Supreme Court's decision in Bess, 58-2 USTC
¶9595, the Ninth Circuit affirmed the District Court's order granting
the government's motion for summary judgment in an action to foreclose
tax liens upon the cash surrender values of two life insurance policies
owned by the delinquent taxpayer at the time of his death. The Court
rejected the primary beneficiary's contention that the cash surrender
values could not be taken without a finding that the taxpayer's estate
was insolvent or that the government had exhausted its remedies against
the estate.
McGrew Willis,
215 S. La Cienega Blvd.
,
Beverly Hills
,
Calif.
, for appellant. Manuel L. Real, United States Attorney, Loyal E. Keir,
Assistant United States Attorney, Los Angeles, Calif., John B. Jones,
Jr., Acting Assistant Attorney General, Lee A. Jackson, Joseph Kovner,
Anthony Zell Reisman, Department of Justice, Washington, D. C. 20530,
for appellee.
Before
CHAMBERS, HAMLEY and ELY, Circuit Judges.
HAMLEY,
Circuit Judge:
The United
States brought this action to foreclose tax liens upon the cash
surrender value of two life insurance policies owned by the taxpayer,
Ernest Kovacs, at the time of the latter's death on January 13, 1962.
The defendants are Bankers National Life Insurance Company, which issued
the policies, Mary Kovacs, mother of the taxpayer, who is the primary
beneficiary under each policy, and Edith Adams Kovacs, as legal guardian
of Bette Lee Kovacs and Kippie Kovacs, contingent beneficiaries under
the policies.
Mrs. Kovacs
filed a motion to dismiss the action on the ground that Edith Adams
Kovacs, as administratrix of the estate of Ernest Kovacs, is an
indispensable party. This motion was denied, whereupon Mrs. Kovacs filed
an answer in which the indispensable party issue was again raised, and
dismissal was sought on the additional grounds of waiver and estoppel.
Mrs. Kovacs also asked for an adjudication that the proceeds of the
insurance policies are her property and that the
United States
has no right, title, interest or lien thereon; and for an order
requiring Bankers Life to pay such proceeds to Mary Kovacs. The
insurance company and Edith Adams Kovacs, as guardian ad litem
for the children, filed answers disclaiming any interest in the proceeds
of the policies.
The Government
moved for summary judgment granting the relief prayed for in its
complaint. This motion was granted and Mrs. Kovacs then took this
appeal.
We first
summarize the facts essential to the consideration of the several
questions which are presented.
[Insurance
Policies]
In 1951,
Ernest Kovacs purchased two policies of life insurance from Bankers Life
in the face amounts of $30,000 and $20,000. The primary beneficiary
under each policy is Mary Kovacs, and the contingent beneficiaries are
Bette Lee and Kippie Kovacs, children of the taxpayer. Prior to the
death of the taxpayer, the Government filed tax liens against this
insurance and other property in the total amount of $232,861.94. Of this
sum, the Government claimed that $132,838.21 was owing separately from
Kovacs, $90,369.07 was owing jointly from Kovacs and Edith Adams Kovacs,
his wife, and $9,654.66 was owing separately from Edith Adams Kovacs.
Kovacs died on
January 13, 1962, at which time the two policies referred to above had a
combined cash surrender value of $7,402.92. Edith Adams Kovacs was
appointed administratrix of her husband's estate. The Government filed a
claim in the estate for the balances due on the tax liens. The estate
was appraised at $1,966,472.88. There was additional joint tenancy
property having a value of $124,000, and Edith Adams Kovacs was named
beneficiary of another life insurance policy in the face amount of
$500,000.
In July and
September, 1962, the Government entered into certain agreements with
Edith Adams Kovacs as administratrix, and also in her individual
capacity. Under these agreements she purchased from the estate certain
real and personal property free and clear of tax liens. These agreements
provided that the proceeds of these purchases were to be applied not
against the earlier separate tax liability of Ernest Kovacs, but against
the later joint income tax liabilities of Frnest Kovacs and Edith Adams
Kovacs for the years 1958 through 1961. The result was that the
liability of Edith Adams Kovacs in her individual capacity was reduced
and the estate was depleted of monies which would otherwise have been
available for the payment of the earlier separate tax liability of
decedent.
In December,
1962, Mary Kovacs commenced proceedings in the Los Angeles Superior
Court for the removal of Edith Adams Kovacs as administratrix on the
ground that the latter had wrongfully mismanaged, wasted and neglected
the estate. Mary Kovacs contended in that action that the administratrix
has a duty to pay from the assets of the estate whatever is owing for
taxes assessed against the decedent. If payment is made from the estate
the lien which the Government has asserted against the cash surrender
value of the policies in which Mary Kovacs is named beneficiary will be
discharged.
This action
was initially dismissed by the state trial court, but that decision was
reversed on May 19, 1964. In re Kovacs Estate, 227 C. A. 2d 308.
In the further proceedings in the state trial court a judgment was
entered on October 14, 1965, favorable to the administratrix. An appeal
from that judgment is now pending.
We called for
supplemental briefs on the question of whether the disposition of the
appeal now before us should be held in abeyance pending final
determination of the state proceeding. In their respective supplemental
briefs both parties have asked us not to delay disposition of this
appeal. We accede to their request.
[Need
for Insolvency]
Mary Kovacs'
principal contention on this appeal is that the cash surrender value of
the two policies in question, of which she is the primary beneficiary,
may not be taken without a finding that the taxpayer's estate is
insolvent or that the Government has exhausted its remedies against the
estate, or that it would be useless to proceed against the estate.
The claim of
the Government to the cash surrender value of these policies does not
rest upon transferee liability under section 6901(a) of the Internal
Revenue Code of 1954 (Code). Nor is it predicated upon the taxpayer's
insolvency. The Government's claim rests upon tax liens against all the
property of the taxpayer, provided for under sections 6321 and 6322 of
the Code.
This lien
attaches to the cash value of any life insurance policies owned by the
taxpayer, provided he has reserved the right to change beneficiaries or
to receive the cash surrender value at the time the lien arose. It was
held in United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51,
that in such a case, upon the taxpayer's death, the proceeds pass to the
beneficiary burdened with the federal lien in the amount of the cash
value of the policy.
The Government
now seeks to enforce that lien and may do so even though there may be
other property in the estate adequate for all tax purposes. If there is
an element of unfairness here, it is not one which is cognizable in this
lien enforcement suit, but must be dealt with in the pending state
proceedings referred to above.
Appellant
argues that the soundness of the Bess rule should be re-appraised
in light of the facts of the case at bar and the seeming inequity which
will result if the Government is allowed to foreclose its lien. The view
that the insured's property interest in the cash surrender value ends at
his death thus extinguishing any tax liens was flatly rejected by the
Court in Bess. Until the Supreme Court chooses to depart from its
pronouncement, we are obliged, to follow the Bess case and its
rationale.
The estate of
the deceased taxpayer in Bess was insolvent at the time the
Government sought to foreclose its lien. There is no such showing here.
However, there is nothing in the Bess opinion which indicates
that the insolvency of the taxpayer's estate is a condition precedent to
the Government's right to foreclose its tax lien on the cash surrender
value of the insurance policies.
To impose such
a condition would accord the Government a status less than that of a
secured creditor. This would be contrary to the underlying purpose of
section 6321 of the Code. Also, to require the Government to pick out
and foreclose only those liens which will create the least hardship on
third parties, would impose a considerable burden on the revenue
collection process. The hardship resulting from the foreclosure of tax
liens after the death of a taxpayer stems not so much from the
Government's action as from the failure of the taxpayer to discharge his
tax liability.
Appellant
argues that, in any event, no liens attached to the property of Ernest
Kovacs since a lien does not attach under section 6321 until the
delinquent taxpayer "neglects or refuses to pay the same after
demand." The facts indicate that after the assessment of unpaid
taxes was made on January 6, 1961, several payments were made toward the
total liability. Appellant asserts that these payments, three of which
were made by the taxpayer prior to his death and two of which were made
from his estate, prove that there has been no neglect or refusal as
required by section 6321.
All of these
payments, however, have been applied to the taxpayer's liability for the
year 1956. As for the assessment for 1957, there has been no reduction
in that liability by either the taxpayer or the estate, and with regard
to the 1957 liability there has been the requisite neglect and refusal.
Since the assessed liability for the year 1957 is far in excess of the
cash surrender value of the insurance policies, there is no need to
consider further the validity of the Government's liens for the unpaid
taxes of 1956. See Bess v. United States [58-2 USTC ¶9595], 357
U. S.
51, 55.
[Judgment
of Court]
In view of
what is said above, the administratrix of the estate is not an
indispensable party and it was appropriate to decide the case on the
basis of a motion for summary judgment.
Affirmed.
Concurring
Opinion
CHAMBERS,
Circuit Judge, concurring:
I concur in
the foregoing simply because I think my oath requires me to do so. And,
for the same reason, I assume Judge Hamley has written the opinion and
Judge Ely has concurred.
Prima facie,
it looks as if, within the limits of discretion permitted the government
by the relevant statutes, an injustice is being done Mary Kovacs.
The Mutual Life Insurance Company of
New York, Defendant, Appellant v. United States of America, Plaintiff,
Appellee.
(CA-9),
U. S. Court of Appeals, 9th Circuit, No. 19,190, 343 F2d 71, 3/3/65,
Modifying and affirming District Court, 64-1 USTC ¶9130, 222 F. Supp.
664
[1954 Code Sec. 6332]
Surrender of property subject to levy: Insurance policies: Duty of
insurer to pay over cash surrender value.--An insurance company,
upon notice of a tax lien in favor of the Government for unpaid income
taxes owed by the insured, is under no duty to terminate an unmatured
life insurance policy owned by the delinquent taxpayer and to pay over
its cash surrender value to the Government. Under these circumstances,
the insurer is not liable for the penalty under Code Sec. 6332 which
imposes personal liability upon a person to the extent of the value of
property not surrendered upon notice and demand of levy by the
Government. Thus, the insurer's liability under the lien is limited to
the cash surrender value of the policy at the time the lien is
foreclosed.
Gerhard A.
Munch, Michael L. B. Kaplan, Mutual Life Insurance Co., New York, N. Y.,
Morse & Graves, 116 S. Fourth St., Las Vegas, Nev., for
defendant-appellant. Louis F. Oberdorfer, Assistant Attorney General,
Lee A. Jackson, Joseph Kovner, Alec A. Pandaleon, Department of Justice,
Washington, D. C. 20530, John W. Bonner, United States Attorney, Las
Vegas, Nev., for plaintiff-appellee.
Before HAMLIN
and MERRILL, Circuit Judges, and BASTIAN, Circuit Judge, Sitting by
Designation.
[Nature
of Issue]
MERRILL,
Circuit Judge:
This case
presents for our consideration problems resulting from the levy by a
District Director of Internal Revenue upon a life insurance policy of a
delinquent taxpayer, with a demand upon the insurer for payment of the
policy's cash surrender value. The United States has brought this action
for foreclosure of tax lien 1
against the taxpayer, Albert Salerno, a resident of Las Vegas, Nevada,
and against appellant which had, in 1951, issued a policy of insurance
upon Salerno's life.
[Facts]
Notice of Tax
Lien in favor of the Government against all of taxpayer's property was
filed with appellant June 19, 1958. Notice of Levy and Demand was served
upon appellant and demand was made for payment of the policy's cash
surrender value on February 11, 1960. 2
On that date the cash surrender value of the policy was $660.96. In the
fall of 1960, the premium upon the policy falling due and remaining
unpaid by or on behalf of Salerno, appellant, pursuant to the terms of
the policy's provision for "automatic premium loans," resorted
to a "loan" against the policy's cash value for payment of the
premium. The policy's surrender value was accordingly reduced to
$494.59.
This action
was brought in May, 1961, in the District Court for the District of
Nevada for foreclosure of the tax lien and, as to appellant, to recover
the penalty provided by §6332(b) of the Internal Revenue Code of 1954,
26 U. S. C. §6322(b) (1958), 3
for failure to surrender Salerno's property upon Notice of Levy and
Demand. Taxpayer suffered a default judgment.
The District
Court, in decreeing foreclosure, found the value of
Salerno
's property subject to foreclosure to be $494.59. It found that the
value of Salerno's property in the possession of appellant at the time
of Notice of Levy and Demand to be $660.96, and rendered judgment
against appellant in this amount (but not to be cumulative with the lien
recovery), together with interest at the rate of 6 per cent per annum
from February 11, 1960. The opinion of the District Court appears, sub
nom
U. S.
v.
Salerno
[64-1 USTC ¶9130], in 222 F. Supp. 664 (D. C. Nev. 1963).
Before the
District Court the issue presented was whether in an unmatured
policy--one where the insured is still alive--the right to the cash
surrender value constitutes property to which a lien can attach and
which a levy can reach. Relying upon U. S. v. Bess [58-2 USTC ¶9595],
357
U. S.
51 (1958), the District Court ruled that it did. In so holding it
rejected appellant's contentions that Bess was distinguishable
since it dealt with a matured policy; that in an unmatured policy no
lienable right to the cash surrender value exists in the insured until
he has elected to demand it and has surrendered the policy. Appellant
has here renewed its contentions in these respects. We agree with the
District Court that they are without merit. 4
Upon this
appeal the principal dispute is over the liability of appellant in
excess of $494.59, which was the value of the policy at the time of
foreclosure. The principal issue is raised by appellant's contention
that even though the cash surrender value constituted property to which
a tax lien had attached, still appellant's duty to pay over such value
did not arise upon Notice of Levy and Demand; that it was necessary to
resort to foreclosure in order to establish that duty. This precise
issue and the considerations bearing upon it apparently were not
presented to the District Court and were not dealt with in its opinion.
However, they have since been considered by two courts of appeal upon
whose opinions appellant now relies. Equitable Life Assur. Soc'y of
United States v. United States [64-1 USTC ¶9433], 331 F. 2d 29 (1
Cir. 1964); United States v. Sullivan [64-1 USTC ¶9392], 333 F.
2d 100 (3 Cir. 1964).
In those cases
it was held that while the right of the insured in an unmatured policy
to demand the cash surrender value constitutes property to which a lien
attaches (in Bess the lien was held to attach to this right while
the policy was unmatured), it does not constitute a present debt owing
by the insurer and therefore cannot be reached by summary ex parte
action of the United States in making levy and demand for payment upon
the insurer. Consequently it was held that levy and demand upon the
insurer did not, without further proceedings, give rise to an obligation
on the part of the insurance company forthwith to cancel the policy and
make payment to the
United States
of the cash surrender value.
We agree that
a contract the rights of which may, at a party's option, be converted
into cash is not the equivalent of cash nor of a debt owing by the other
party. 5
As it is made clear in both Equitable Life and Sullivan,
those rights may well have a realizable value (at least to the insured
or his beneficiaries) in excess of the surrender or conversion value. Ex
parte destruction of the contract rights in order to realize their
conversion value may under some circumstances be likened to an ex parte
wrecking of seized tangible property in order to secure its junk value.
Notice of Levy and Demand for payment, even if reaching rights of
taxpayer as property in the hands of appellant, does not extinguish
rights nor convert them to cash. No duty thereby arose in the insurer to
terminate the contract and pay over its cash surrender value.
Accordingly we
conclude that no penalty may be assessed against appellant for failure
to pay over the cash surrender value on demand.
Appellant also
contends that the beneficiaries of the policy were possessed of such an
interest as to be indispensable parties. We do not agree. They were not
the owners of the policy, nor were they possessed of any vested rights
in it. Their status as beneficiaries was at the sufferance of the
insured. 6
It is ordered
that judgment be modified by excluding therefrom any judgment for
penalty pursuant to 26
U. S.
C. §6332(b) (1958). As so modified judgment is affirmed.
1
Pursuant to 26 U. S. C. §7403 (1958) which provides, inter olia,
for an action in the District Court "to enforce the lien of the
United States under this title with respect to such tax or liability or
to subject any property of whatever nature, of the delinquent, or of
which he has any right, title, or interest, to the payment of such tax
or liability."
2
Section 6321, Int. Rev. Code of 1954, 26
U. S.
C. §6321 (1958), provides that the tax lien shall attach "upon all
property and rights to property * * * belonging to [the taxpayer]."
Section 6331(a), 26
U. S.
C. §6331 (1958), authorizes collection of the tax due 'by levy upon all
property and rights to property * * * belonging to [the taxpayer] or on
which there is a lien * * *." Section 6332(a), 26
U. S.
C. §6332 (1958), provides that "any person in possession of (or
obligated with respect to) property or rights to property subject to
levy upon which a levy has been made shall upon demand * * * surrender
such property or rights (or discharge such obligation) to the Secretary
* * *."
3
Section 6332(b), 26 U. S. C. §6332(b) (1958):
"Any
person who fails or refuses to surrender as required by subsection (a)
any property or rights to property subject to levy, upon demand by the
Secretary or his delegate, shall be liable in his own person and estate
to the United States in a sum equal to the value of the property or
rights not so surrendered, but not exceeding the amount of the taxes for
the collection of which such levy has been made, together with costs and
interest on such sum at the rate of 6 percent per annum from the date of
such levy."
4
Appellant contends in the alternative that such right of the insured, if
it did constitute lienable property, was not possessed by the insurer
and could not be reached by levy upon the insured. This contention we do
not reach since the levy here was ineffective for other reasons. See
footnote 5, infra.
5
The Government has not treated these rights as property other than a
debt. It has made no effort to reduce the "property" (upon
which it has levied) to money by sale but has assumed that the contract
rights were the equivalent of cash, the payment of which could summarily
be demanded. We are not, then, faced with the question (which both Sullivan
and Equitable Life seem to have answered in the negative) whether
there was any property at all belonging to the insured in the
possession of the insurer which could be reached by levy and realized
upon by sale. We decide, and need decide, only that such property, if it
did exist, did not constitute a present debt.
6
"* * * if an action is brought against the insured as the
delinquent taxpayer, the beneficiary need not be joined as a defendant
if under the contract and state law he has novested interest in the
insurance but a mere expectancy. Since the insured in such [a] case can
defeat the beneficiary's expectancy by his own voluntary act, the fact
that he may be required to do so under compulsion of a court decree
cannot increase the beneficiary's interest." Pyle, Liability of
Life Insurance and Annuities for Unpaid Income Taxes of Living Insureds,
Annuitants, and Beneficiaries, 9 Tax L. Rev. 205, 226 (1954).
Appellant
suggests that the insured's wife might have some vested interest as a
citizen of a community property state (
Nevada
), although below it apparently argued that
New York
law applied. In any case, the District Court held that no rights of the
beneficiaries were involved and the appellant has not shown that holding
to be clearly erroneous.
The Equitable Life Assurance Society
of the United States, Defendant, Appellant v. United States of America,
Plaintiff, Appellee
(CA-1),
U. S. Court of Appeals, 1st Circuit, No. 6143, 331 F2d 29, 4/27/64,
Affirming District Court, 63-1 USTC ¶9315, 213 F. Supp. 905
[1954 Code Sec. 7403]
Tax liens: Foreclosure: Endowment policies: Jurisdiction.--The
Court of Appeals affirmed the judgment of the District Court allowing
foreclosure of tax liens on two endowment policies owned by a delinquent
taxpayer who was absent from the court's jurisdiction. In the case of
one policy which had matured prior to the filing of the tax lien, it was
found that such policy represented an obligation obsolutely owing to the
taxpayer and that the government's lien had attached to all the property
rights held by the taxpayer in the policy, including his right to
receive the endowment proceeds. In the case of the second policy, which
had matured after the lien had been filed but prior to the trial court's
judgment, it was found that the court had jurisdiction of the matter
because the absent taxpayer had been adequately brought into the action
by substituted service and that the policy matured as a simple debt
between the insurer and the taxpayer prior to the trial court's
judgment. It was further found that although the taxpayer, as an absent
defendant who had been served by publication, had the right to have the
judgment vacated by appearing within one year after final judgment,
there would be no unfairness in awarding all of the net proceeds of the
policy to the government since, if the taxpayer exercised his right to
have the judgment set aside, he would find only that his interest had
changed hands but that it had not changed in character.
Stuart A.
McCarthy, Associate General Solicitor, Equitable Life Assurance Society
of U. S., New York, N. Y. (James P. Lynch, Jr., Nutter, McClennen &
Fish, 75 Federal St., Boston, Mass., Thomas J. Craig, Jr., Charles W.
Muller, Law Dept. Equitable Life Assurance Society of U. S., New York,
N. Y., on brief) for appellant. Stanton H. Zarrow, Department of
Justice, Washington, D. C. 20530 (John B. Jones, Jr., Acting Assistant
Attorney General, Lee A. Jackson, Joseph Kovner, Department of Justice,
Washington, D. C. 20530, W. Arthur Garrity, Jr., United States Attorney,
Murray H. Falk, Assistant United States Attorney, Boston, Mass., on
brief), for appellee.
Before
WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.
Opinion
of the Court
[Nature of Action]
ALDRICH,
Circuit Judge:
One Brody, a
former resident of Massachusetts, having survived various personal
difficulties with the government due to nonpayment of his income tax, cf.
Brody v. United States, 1 Cir., [57-1 USTC ¶9606] 1957, 243 F. 2d
378, cert. den. 354
U. S.
923, disappeared, possibly to
Switzerland
. He is presumably still alive. He left behind, in addition to this
outstanding obligation, two policies of life insurance on his life
issued by appellant Equitable Life Assurance Society, the proceeds or
value of which the government now seeks to reach, asserting a tax lien
thereon under section 6321 of the Internal Revenue Code of 1954. 1
The policies, so far as appears, are in the hands of Brody's attorney in
Florida
who, not having Brody's permission, has declined to give them up.
Equitable received the statutory notice of the tax lien in January 1959
and due demand for surrender of all "monies and property"
subject thereto in May 1960, but refused any payment, including the
accoumulated dividends, no separate point of which is made on this
appeal, because the policies had not been physically surrendered. This
action to obtain payment under 26 U. S. C. §7403, 2
was instituted in October 1961 against Equitable and Brody in the
district court for the district of Massachusetts. Equitable, a
New York
corporation with its home office in
New York
, is doing business in
Massachusetts
. It is not claimed that Brody was domiciled in that state, but his
returns had been filed there, which may have suggested this selection.
See 28 U. S. C. §1396. Jurisdiction rests on 26
U. S.
C. §1340. Brody not being found within the state, and his address being
unknown, service was made by publication in compliance with the terms of
28
U. S.
C. §1655, infra. No other person was named as a party, or, on
the record, could have any interest in the policies. 3
[Matured
Endowment Policy]
Policy No.
11,653,183 (hereinafter the '183 policy) was issued to Brody in April
1943 in the fact amount of $30,000 on the 15-year endowment plan. This
meant that the policy totally "matured," viz., became payable
to the endowment beneficiary, in April 1958. It would also have become
payable on the insured's death had that occurred prior to the endowment
maturity. The amount payable in either instance was the face amount,
plus any accumulated dividends, less any outstanding indebtedness and
interest thereon. If the policy matured as an endowment the payee was
the insured, whereas in case of death it was a named beneficiary. The
right to change the beneficiary was reserved, and in 1957 Brody
designated the Internal Revenue Service as the (revocable) beneficiary.
Prior to maturity the insured could, from among other policy rights,
elect to surrender the policy, or to borrow against it up to the current
"Loan and Surrender Value" pursuant to a table contained in
the policy. This table recited the dollar amount of the cash surrender
value for each policy year, and stated that the loan value was the same
amount minus a prepaid interest deduction computed to the next
anniversary date. The reason for the difference is that a loan leaves
the policy in force, whereas surrendering it terminates the insurance.
While the policy did not expressly say so, it has been held that
surrendering the policy for its surrender value implies a physical
delivery. Kothe v.
Phoenix
Mut. Life Ins. Co., 1929, 269
Mass.
148. In connection with paying the matured amount the policy expressly
provided for its "surrender." The policy was written on a
single premium basis, which premium was paid when the policy was issued.
Policy No.
10,777,528 (hereinafter the '528 policy) in the face amount of $1,000,
was originally written in a different form, but in 1956 Brody converted
it to an endowment policy maturing January 21, 1962, prepaying all
premiums. 4
The general policy provisions and circumstances, including the naming of
the government as beneficiary, were otherwise similar to the '183
policy. 5
[Jurisdiction]
The foregoing
facts appearing, the government moved for summary judgment. Equitable
resisted on the ground that Brody was an indispensable party,
ineffectively served by publication, and that in his absence it was not
liable on the policies unless they were physically surrendered, from
which it would follow that if it paid now it could be obligated to pay a
second time. The court granted the government's motion and decreed that
the liens were foreclosed. It ordered Equitable to pay the government
the "cash value and proceeds . . . computed as of the day of
payment," which, while perhaps not precise, served to disignate
amounts which the company admits it would have owed had Brody then
surrendered the policies and demanded payment. It further decreed that
upon such payment every obligation of Equitable with respect to the
policies would be discharged as to all persons. In its accompanying
opinion the court stated that Equitable's cases of
United States
v.
Massachusetts
Mut. Life Ins. Co., 1 Cir., [42-1 USTC ¶9342] 1942, 127 F. 2d 880,
hereinafter referred to simply as Mass. Mutual, and
United States
v.
Pennsylvania
Mut. Life Ins. Co., 3 Cir., 1942, [42-2 USTC ¶9623] 130 F. 2d 495,
had been "discredited" by United States v. Bess, 1958,
[58-2 USTC ¶9595] 357
U. S.
51. Equitable appeals.
Equitable's
first contention is that under Mass. Mutual the surrender of the
policies was an absolute requirement, or condition precedent, to any
liability. Mass. Mutual involved an unmatured policy, and we will
defer discussing it until later. 6
The '183 policy had matured even before the government filed notice of
lien, and was absolutely owing except for whatever effect was due the
surrender requirement. Under these circumstances the special
considerations which moved us in Mass. Mutual do not apply. The
provisions for physical surrender of the policy in connection with
obtaining the matured value is a mere housekeeping matter to permit the
company to tidy up its affairs. As the district court pointed out, an
insurance policy is not a negotiable instrument or specialty embodying
the obligation. Cf. Rosenthal v. Maletz, 1948, 322
Mass.
586, 593. If the government was otherwise entitled to reach the
obligation in this action the company could no more avoid this result by
providing for the physical turning over of the policy than could a
savings bank by a rule requiring delivery of the bank book. United
States v. Manufacturers Trust Co., 2 Cir., 1952, [52-2 USTC ¶9417]
198 F. 2d 366;
United States
v. Bowery Sav. Bank, 2 Cir., 1961, [61-2 USTC ¶9728] 297 F. 2d
380. This is not to voice disagreement with the principle that in
matters of substance the government's lien cannot rise above the rights
of the taxpayer. United States v. Winnett, 9 Cir., 1947, [48-1
USTC ¶9115] 165 F. 2d 149.
[Statutory
Provisions]
Considering,
accordingly, the matured obligation represented by the '183 policy as
absolutely owing to the insured, the question is whether it can be
reached in this proceeding. The government says there is no problem. It
concedes that the basic statute, section 7403, supra, fn. 2, made
Brody an indispensable party, Macatee, Inc. v. United States, 5
Cir., 1954, [54-2 USTC ¶9550] 214 F. 2d 717; cf. Shields v. Barrow,
1854, 17 How. 130, 139; State of Washington v. United States, 9
Cir., 1936, 87 F. 2d 421, 427-28; F. R. Civ. P. 19, but asserts that he
was adequately brought in for the purposes of quasi in rem jurisdiction
by substituted service complying with the terms of 28 U. S. C. §1655.
The presently pertinent portions of this statute are the following.
"In
an action in a district court to enforce any lien upon or claim to, or
to remove any incumbrance or lien or could upon the title to, real or
personal property within the district, where any defendant cannot be
served within the State, or does not voluntarily appear, the court may
order the absent defendant to appear or plead by a day certain.
.
. .
"If
an absent defendant does not appear or plead within the time allowed,
the court may proceed as if the absent defendant had been served with
process within the State, but any adjudication shall, as regards the
absent defendant without appearance, affect only the property which is
the subject of the action. . . ."
The
omitted portions are material in connection with the '528 policy, and
will appear infra. The function of this statute, insofar as here
relevant, is to give absent nonresident parties claiming an interest in
property over which the court seeks to exercise jurisdiction due notice
and opportunity to be heard, a fundamental condition not to
jurisdiction, but to its assertion. Cooper v. Reynolds, 1870, 10
Wall. 308; Grannis v. Ordean, 1914, 234
U. S.
385; Pennington v. Fourth National Bank, supra, at 272. Unless
the statute is to be read as wholly inapplicable to liens upon
intangibles its use here seems peculiarly appropriate. Such liens are
clearly given by section 6321 of the 1954 Code, supra, and are
enforceable under 26
U. S.
C. §7403, supra, and there is no other statute which could be
invoked where the defendant is outside the jurisdiction.
In the absence
of any applicable constitutional limitations, 7
we must give the phrase "personal property" in section 1655
the broad meaning necessary to effectuate the scope of these other
provisions. 8
It cannot be determinative that historically the principal use of this
statute was in connection with liens upon tangible property. Cf.
Crichton v. Wingfield, 1922, 258 U. S. 66; Omaha National Bank v.
Federal Reserve Bank, 8 Cir., 1928, 26 F. 2d 884, 887-89; United
States v. Dallas National Bank, 5 Cir., 1945 [46-1 USTC ¶9117] 152
F. 2d 582; see also Blume, Actions Quasi in Rem Under Section 1665,
Title 28, U. S. C., 50 Mich. L. Rev. 1, 20-22 (1951). There are, of
course, limits as to what constitutes intangible property, see, e.
g., United States v. Long Island Drug Co., 2 Cir., 1940, [41-1 USTC
¶9140] 115 F. 2d 983, but in our opinion any chose of sufficient
vitality to support a lien cognizable under section 7403 must equally
qualify as property under section 1655. United States v. Metropolitan
Life Ins. Co., 4 Cir., 1958, [58-2 USTC ¶9630] 256 F. 2d 17. While,
admittedly, the property must be subject to the control of the court, Chase
v. Wetzlar, 1912, 225 U. S. 79; compare Hanson v. Denckla,
1958, 357 U. S. 235, 246-250, it can hardly be said that the statutory
federal lien afforded the district court, upon obtaining in personam
jurisdiction of the obligor, any less dominion and control over the
property herein than that which was held sufficient to permit state
courts to render the judgments examined in such cases as Chicago, R.
I. & Pac. Ry. v. Sturm, 1899, 174 U. S. 710, Harris v. Balk,
1905, 198 U. S. 215, and Biggert v. Straub, 1906, 193 Mass. 77
(garnishment) or Pennington v. Fourth National Bank, supra, and Bragg
v. Gaynor, 1893, 85 Wis. 468 (injunction). But compare
Andrews, Situs of Intangibles in Suits Against Nonresident Claimants, 49
Yale L. J. 241, 248-53, 254-61 (1939) (conflicting claim cases).
[Other
Cases Distinguished]
Special
questions arise with respect to the '528 policy. In
United States
v.
Massachusetts
Mut. Life Ins. Co., (Mass. Mutual), supra, the defendant insurance
company refused to recognize a notice of levy and distraint whereby the
government sought to obtain the cash surrender value of an unmatured
policy on the life of a defaulting taxpayer. 9
The government thereupon brought an action under section 3710(b) of the
Internal Revenue Code of 1939 (now I. R. C. (1954) §6332(b)) for a
"penalty" measured by the value of the "property, or
rights to property, subject to distraint . . ." wrongfully
withheld. The defense was that the policy had not been surrendered by
the insured. We held for the company. In an opinion carefully analyzing
the mutual rights and obligations of the parties under a policy of life
insurance we stated, 127 F. 2d at 883, that since "the insured has
made no application for the cash surrender value and has not surrendered
the policy . . . the insurance company does not now owe the insured the
cash surrender value." Or, as the court said in United States v.
Manufacturers Trust Co., supra, at 368, "the insurance company
did not owe [the surrender value] . . . to the insured unless, and
until, the insured elected to receive it by relinquishing his other
rights under the policy." This was not to say that the government
did not have a lien against the contract. The reverse was there assumed.
But where a contract calls for alternative performances, at the
obligee's choice, until the obligee chooses the obligor owes neither.
See 1 Williston, Contracts, §44 at 148 n. 15 (3d ed. Jaeger 1957); 5
Corbin, Contracts, §1079 at 383-84 (1951); Restatement, Contracts, §325
(comment a) (1932). In fact a selection of the cash surrender value is
more than an ordinary election between two alternative rights. The
insurance obligation was already operative. The company would remain
liable for that obligation unless some positive action, binding on the
insured, could affirmatively terminate it and substitute the alternative
promise which, at least until the contract has finally matured, is
clearly "inconsistent." 10
(United States v. Behrens, 2 Cir., 1956, [56-1 USTC ¶9294] 230
F. 2d 504, 506, cert. den. 351 U. S. 919). Consequently, as the
court correctly pointed out in
United States
v.
Pennsylvania
Mut. Life Ins. Co., 3 Cir., 1942, [42-2 USTC ¶9623] 130 F. 2d 495,
the payment of a "penalty" by the company to the government on
the theory that this selection had been accomplished by the levy must
leave the company still subject to the primary obligation unless one
were to say, which correctly, the court could not, that the ex parte
levy could bind the insured, the one who "possessed" (United
States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 56 infra)
the right to elect it. This was not a taking of money in the bank.
In other
words, what we held in Mass. Mutual was that the government, by
merely filing a notice of lien, or by an ex parte attempt to obtain the
surrender value by levy, could not exercise the insured's election for
him and make the company's obligation to pay mature as a debt in
"possession." 11
Not presently owing the surrender value, it was not "in possession
of property . . . subject to distraint" in the sense that it could
incur the section 3710(b) penalty for failure to respond. 12
There were
sound practical reasons for this. The surrender value of a life
insurance policy is related to the normal life expectancy of the
insured, usually as of the date the policy was purchased. It constitutes
the minimum worth of the policy. As we pointed out in Mass. Mutual
an insured may be in various degrees of health and have but a short
expectancy, making the actual value of his policy much greater. For poor
health, or other reasons, he may be not reinsurable at any cost. The
government failed in that case precisely for the reason that it could be
permitted neither to exercise the insured's election to surrender the
policy 13
and cut off other rights in a procedure which did not afford him and
other interested parties the opportunity to protect their interests in
the manner provided herein under section 7403 and by section 1655, nor
to expose the insurance company to multiple liability, United States
v. Pennsylvania Mut. Life Ins. Co., supra.
[Bess
Case]
Nor does United
States v. Bess, 1958, [58-2 USTC ¶9595] 357
U. S.
51, dictate a contrary result. In Bess a delinquent taxpayer died
leaving policies of life insurance payable to his widow as beneficiary.
Prior to his death the government had filed a notice of lien with the
insurance company, but had taken no other action. The total cash
surrender values immediately prior to death were relatively small,
considerably less than the tax indebtedness, whereas the net proceeds
payable to the beneficiary at death were substantially larger. The
government attempted to collect the entire tax from the widow. The court
held that pursuant to section 3670 (now I. R. C. (1954) §6321) the
government had a lien upon "all property and rights to
property" of the insured, but restricted the government's recovery
to the amount of the surrender values as of the time of death. While it
is true that the court stated, 357 U. S. at 59, that the "surplus
of the paid premiums accumulated to make up the cash surrender value 14
should be treated for some purposes as though in fact a 'fund' held by
the insurer . . ." this was very carefully not saying it was a
fund. It was not a holding that the surrender value was an open debt,
and particularly it was not a holding that this value became payable to
the government upon its demand. 15
[Insured's
Intersts Protected]
Although the
district court's opinion that the Mass. Mutual line of decisions
has been discredited was unwarranted, nonetheless Equitable's position
is not advanced. In the present case the government does not seek to
proceed summarily against the company, but has brought a plenary action
joining the insured. Had there been personal service on the insured
within the jurisdiction no one would question the court's right to reach
the policy. United States v. Bess, supra at 57 n. 3; United
States v. Fried, 2 Cir., 1962, [63-1 USTC ¶9106] 309 F. 2d 851.
Since the unmatured contract was sufficient to support a lien the
government may equally proceed under section 1655. The insured is
afforded the opportunity to protect his interests, and by the same token
the company is protected against double liability. This right in the
insured is far from a theoretical one. As we have pointed out, for
example, because of an insured's poor health a policy may have a
substantial worth beyond its cash surrender value. A sale of the policy
may be more advantageous than its surrender. Or arranging for a policy
loan in the government's behalf might be sufficient to meet the tax
indebtedness. 16
That the court has scope in affording the insured relief see Schwarz
v. United States, 4 Cir., 1951, [51-2 USTC ¶9444] 191 F. 2d 618.
If the insured
is served only by publication, as in the case at bar, there may be an
additional problem not recognized by the court in United States v.
Metropolitan Life Ins. Co., supra, and not adverted to by the
parties here. We mention it, however, lest our decision be too broadly
construed. Section 1655 provides that when any defendant cannot be
served within the state, or does not voluntarily appear, an order to
appear
". . .
shall be served on the absent defendant personally if practicable,
wherever found. . . . Where personal service is not practicable, the
order shall be published as the court may direct, not less than once a
week for six consecutive weeks.
.
. .
"Any
defendant not so personally notified may, at any time within one year
after final judgment, enter his appearance, and thereupon the court
shall set aside the judgment and permit such defendant to plead on
payment of such costs as the court deems just."
This
means that an absent defendant who fails to appear and who was not
personally served, even though the publication was made can as of right
have the judgment vacated within the year. 17
Perez v. Fernandez, 1911, 220
U. S.
224. 18
The right to have the judgment set aside raises no problem where the
intangible property on which the government has foreclosed was a simple
debt. If the foreclosure was erroneously effected the
defendant-claimant, on his learning of it within the year, will merely
find that his interest has changed hands, but has not changed in
character. If, however, his policy of life insurance has been
surrendered, this is a most material change. If the policy cannot be
ordered reinstated, a defendant may have suffered irretrievable injury.
On the other hand, if the insurance company, an innocent third party,
can be compelled to reinstate the contract, there is an obvious danger
of "selection," to use an insurance term, against it. The most
likely case where reinstatement will be requested, even, perhaps, by
collusion between the other parties, will be where the insuredagainst
loss has occurred. In other words, to foreclose a policy outright where
there is an outstanding right to have the judgment vacated 19
leaves open an avenue of unfairness in one direction or another.
In these
circumstances in the ordinary case where the insured or other parties
having possible interests in the policy are not personally served and
fail to appear, we might feel it inappropriate to foreclose on the
contract to the extent of taking the surrender value directly and
terminating the contract. Different considerations apply to enforcing
the lien against the loan value. In such a case such maximum loan might
be taken as would permit an arrangement under the flexible powers given
to the court by section 7403, to continue the policy in force for the
year available to reopen the judgment. Such questions, however, need not
concern us here, for the '528 policy matured as a simple debt prior to
the decree. The decree, appropriately, spoke as of the date of its
entry. 20
For the government to be awarded all of the net proceeds would
accordingly effect no damaging change of position nor prevent the
restoration of the status quo if Brody should hereafter exercise his
right to have the judgment set aside.
Judgment
will be entered affirming the judgment of the District Court. 21
1
"If any person liable to pay any tax neglects or refuses to pay the
same after demand, the amount . . . shall be a lien in favor of the
United States upon all property and rights to property, whether real or
personal, belonging to such person."
2
Summarizing, subsection (a) "Filing," provides for an action
in the district court "to enforce the lien of the
United States
under this title with respect to such tax or liability or to subject any
property, of whatever nature, of the delinquent, or in which he has any
right, title, or interest, to the payment of such tax or
liability." Subsection (b) "Parties," provides that all
persons "claiming any interest" in the property shall be made
parties. Subsection (c) "Adjudication and Decree," provides
for an adjudication of all matters involved, and permits a sale of the
property by decree of court and distribution in accordance with the
interests of the parties. Subsection (d) "Receivership,"
permits the court to appoint a receiver with power, inter alia, to
enforce the lien.
3
There could be no new beneficiary, nor any assignment which could affect
the company, because the policies required any such change to be made in
writing and filed at the home office. Cases cited by the company which
have disregarded such provisions as between competing claimants for
equitable reasons have not required a company that paid without notice
of conflicting claims to pay twice.
4
It is arguable that any unearned prepaid amounts should be treated
differently, with respect to the lien, from the amounts governed by the
loan and cash surrender provisions of the policy. See Pyle, Liability of
Life Insurance and Annuities for Unpaid Income Taxes of Living Insureds,
Annuitants, and Beneficiaries, 9 Tax L. Rev. 205, 325, 337-38 (1954).
However, the parties have not discussed this point and we need not
pursue it.
5
Apparently dividends on this policy were to be applied to provide
additional paid-up endowment insurance. No explicit disposition or even
any mention of such amounts, if any, appears in the record. We do not
decide to what extent, if at all, the government's lien might
effectively proscribe the application of dividends to this use. See,
generally, Pyle, supra, at 334-35, 340-42.
6
The district court, and the parties, in speaking of the '528 policy
treated it as unmatured, which it was at the date of the institution of
suit. This was the correct approach, because unless the company's
obligations constituted property within the district at that time there
could be no basis for quasi in rem jurisdiction. Crichton v.
Wingfield, 1922, 258
U. S.
66, see Pennington v. Fourth Nataional Bank, 1917, 243
U. S.
269. By amendment to the complaint, if filed and allowed by the court
under F. R. Civ. P. 15(d), (and further publication) the government
could have proceeded on the basis that this policy, also, had become
fully matured, but no such amendment was filed. The parties apparently
wish to treat this as a test case "of concern to . . . the entire
insurance industry."
7
There are none. Cf. Chicago, R. I. & Pac. Ry. v. Sturm, 1899,
174
U. S.
710; Harris v. Balk, 1905, 198
U. S.
215; Biggert v. Straub, 1906, 193
Mass.
77. Compare Hanson v. Denkla, 1957, 357
U. S.
235, 246-50.
8
There is a suggestion in Equitable's brief that there are further
obstacles in that it "is not organized under the laws of
Massachusetts
nor is its principal office here." We could not accept the
proposition that a debt or other incorporeal obligation on which the
obligor can be sued elsewhere can be restricted for the purposes of
section 1655 to the obligor's domicile. See fn. 7, supra; cf.
United States
v. First National City Bank, 2 Cir., 1963, [63-2 USTC ¶9572] 321 F.
2d 14.
9
See I. R. C. (1939) §§ 3670-72, 3690, 3692, 3710(a), now
I.
R. C. (1954) §§ 6321-23, 6331(a), (b), 6334(b), 6332(a).
10
The amount of real insurance at any moment during the life of the policy
is the difference between the cash surrender value and the face amount.
An election to take the cash value prior to maturity is a discharge of
the insurance feature of the contract. We cannot agree with the
oft-quoted statement in In re McKinney, D. C. S. D. N. Y., 1883,
15 Fed. 535, 537, that the surrender value "constitutes . . . [an]
advance to make up the deficiency in later premiums . . . the 'net
reserve' required by law to be kept by the company for the benefit of
the assured. . . ." Actually the surrender value is less than the
reserve which must be maintained against the policy. See Maclean, Life
Insurance 181 (8 ed. 1957). Moreover, it represents matters in addition
to an advance for payment for future premiums, or it would ultimately
decrease as the policy appropaches maturity. The fact is, as is
illustrated by the within policies and, as we might judicially notice,
ordinary life and endowment policies generally, it continuously
increases. Returning to the matter of "inconsistency," it
seems clear that upon death the inconsistency between the cash value and
the insurance feature of the contract disappears. The company then owes
the beneficiary the cash value plus the amount of the true insurance.
Consequently, if we may be premitted to say so, as a matter of analysis
we would wholly agree with the court in United States v. Bess,
1958, [58-2 USTC ¶9595] 357
U. S.
51, infra, that the property of the insured which passes to the
beneficiary on death is the surrender value.
11
Section 3710 of the 1939 Code then under consideration read "in
possession of property . . ." whereas present section 6332 reads
"in possession of (or obligated with respect to) property . .
.." This does not change the concept of a present obligation.
12
It would unnecessarily prolong this opinion to consider to what extent
the government could subject rights in insurance policies to distraint
and sale. As the court said in United States v. Stock Yards Bank,
6 Cir., 1956, [56-1 USTC ¶9418] 231 F. 2d 628, at 631, distraint is a
"blunt instrument" of sometimes doubtful propriety. For
reasons at least indirectly indicated infra, its use in this
field may be questionable. For present purposes we point out that if
there is a levy and sale, as distinguished from the even blunter
assertion of a penalty attempted in Mass. Mutual, the owner of
the policy must be given notice. 26 U. S. C. §6335(b).
13
It is important to note that we were there, and are here, talking in
terms of contractual rights, and surrendering the policy in a
contractual sense as distinguished from mere physical delivery. If
Brody's
Florida
attorney, for example, had complaisantly turned over these policies
without authority it would in our view have affected the present case in
no particular. Equitable, and companies in other cases, do themselves a
disservice, in the sense of beclouding the issues, when they talk in
terms of physical surrender.
14
With the greatest deference, a not strictly accurate characterization.
See fn. 10, supra. The surrender value also represents what might
be termed a savings factor.
15
In Bess the policy had matured. Moreover, all parties were before
the court. Our decision conflicts with neither the holding, the
language, nor the reasoning. The district court's view, on the other
hand, that Mass. Mutual, which was nowhere mentioned, was
discredited by Bess leads to peculiar difficulties. In United
States v. Salerno, D. C. D. Nev., 1963, [64-1 USTC ¶9130] 222 F.
Supp. 664, the court, relying on the opinion below, held that the
government's notice of levy and demand upon the insurance company for
payment found the company with the surrender value in its
"possession" to the extent that it became liable to account to
the government, and assessed a penalty in the equivalent amount for not
paying it over. At the same time the court held that the insurance
contract continued in force. It so happened that the insured did not
die, or the court might have had more forcefully impressed upon it the
inconsistency of holding the company simultaneously on two altrernative
promises.
16
A policy "loan" is not, of course, a true loan as there is no
obligation to repay. Board of Assessors v. New York Life Ins. Co.,
1910, 216
U. S.
517.
17
It is perhaps unnecessary to point out that the reopening protection
thus afforded, on the theory that foreclosure of the lien would itself
tend to result in actual notice, is particularly important where the
property foreclosed is a chose in action and the suit may be brought,
and the newspaper publication made, in a state where the absent
defendant has no other connections. However, it is this very proection
that, from the standpoint of due process, makes it fair to apply section
1655 as broadly as we do.
18
Perez v. Fernandez was decided under a statute which read
"actually personally notified" rather than "personally
notified." Act of March 3, 1875, c. 137, §8, 18 Stat. 472. We have
no reason to believe, however, that a substantive change was intended by
the present codification.
19
We are not, of course, speaking about equitable relief under F. R. Civ.
P. 60.
20
The government's lien had attached to the entire bundle of Brody's
property rights in the contract, including his right to receive the
endowment proceeds. It was this right, which had ripened and bore fruit
at the time foreclosure was decreed, that the gtovernment collected
upon. Cf. United States v. Bess, supra (Government obtains
surrender value at death, not value when lien attached); United
States v. Dallas National Bank, 5 Cir., 1947, [47-2 USTC ¶9405] 164
F. 2d 489.
21
After this opinion was settled we received copies of the Third Circuit
opinions in United States v. Sullivan [64-1 USTC ¶9392] and United
States v. Wilson [64-1 USTC ¶9395], 4/10/64. Examination thereof
does not appear to call for any further elaboration on our part in the
light of our essentially consistent result.
United States of America
, Plaintiff v. Nathan Galvin, Lillian Galvin, Irving M. Galvin,
Eileen Galvin, Elaine G. Kleinberg, Fulton Savings Bank, Isidor Frank,
Dime Savings Bank, and Metropolitan Life Insurance Company, Defendants
U.
S. District Court, East. Dist. N. Y., 61 C. 244, 12/31/63
[1954 Code Secs. 6321 and 7403]
Tax liens: Cash surrender value of insurance policy.--Assessments
were made against the taxpayers for income taxes, penalties and
interest. The Government was entitled to enforce its liens arising as a
result of these assessments against the cash surrender value of a life
insurance policy owned by the taxpayers.
Joseph P.
Hoey, U. S. Attorney,
Brooklyn
, N. Y., for plaintiff. Wingate & Cullen, Brooklyn, N. Y., for
Fulton Savings Bank; Tanner, Friend, Kennon & Post, New York, N. Y.,
for Metropolitan Life Ins. Co.; William A. Anzalone, Brooklyn, N. Y.,
for Dime Savings Bank.
Findings
of Fact and Conclusions of Law
DOOLING, JR.,
District Judge:
The following
are the findings of fact and conclusions of law herein on the issues
made between plaintiff and defendants NATHAN GALVIN, LILLIAN GALVIN and
METROPOLITAN LIFE INSURANCE COMPANY ("Metropolitan") with
respect to plaintiff's right to a judgment against Nathan and Lillian
Galvin for the amount of the taxes in question and with respect to the
establishment and enforcement of plaintiff's alleged tax lien rights to
a certain insurance contract issued by defendant Metropolitan:
I.
Prior Proceedings
1. The present
action has been discontinued as against defendant DIME SAVINGS BANK, and
has been dismissed as against defendant ISIDOR FRANK upon his disclaimer
of all interest in premises
No. 2133 East 29th Street
,
Brooklyn
,
New York
(referred to in paragraphs 17 and 18 of the complaint).
2. On
plaintiff's motion it was by opinion dated October 31, 1961, order dated
November 15, 1961, and decree dated January 15, 1962, granted partial
summary judgment against defendants NATHAN GALVIN, LILLIAN GALVIN,
IRVING GALVIN and EILEEN GALVIN, adjudged to have a valid lien on the
premises No. 2133 East 29th Street, Brooklyn, New York (referred to in
paragraphs 17 and 18 of the complaint) for income taxes and interest
owed by LILLIAN GALVIN in the amount of $40,907.79 and to be entitled to
a sale of the premises subject to a first mortgage held by defendant
FULTON SAVINGS BANK and subject to any valid interests of Elaine C.
Kleinberg and to be entitled to costs against defendants Nathan and
Lillian Galvin; and the decree of January 15, 1962 directed a sale of
the premises as upon foreclosure of plaintiff's lien of $40,907.79. An
appeal was in form taken from the decree under the date of February 20,
1962, and dismissed by the Court of Appeals on August 15, 1962 for lack
of prosecution.
3. Partial
summary judgment was denied as against defendant Elaine G. Kleinberg
because she averred that she had an interest, as assignee of a junior
mortgage, in the premises; however, the decree of January 15, 1962,
provided for the recognition of any valid interest that she had in the
premises and for its transfer to the proceeds of sale.
4. Plaintiff
waived its claim to premises
No. 1784 East 54th Street
,
Brooklyn
,
New York
, referred to in paragraphs 19, 20 and 21 of the complaint.
5. No sale has
been made under the decree of January 15, 1962.
6. In the
present trial plaintiff elected to stand on the motion for partial
summary judgment, the opinion of October 31, 1961, the order of November
15, 1961, and the decree of January 15, 1962, as adjudicating (inter
alia) that defendant LILLIAN GALVIN was indebted to it in respect of
United States income taxes, interest and penalties of the calendar year
1950 in the amount of $40,907.79.
II.
The Tax Indebtedness
7. Defendants
Nathan Galvin and Lillian Galvin are husband and wife and reside at
1784 East 54th Street
,
Brooklyn
,
New York
, in the Eastern District of New York.
8. Defendants
Irving M. Galvin and Eileen Galvin are husband and wife and are
respectively the son and daughter-in-law of the defendants Nathan Galvin
and Lillian Galvin and reside at 2133 East 29th Street, Brooklyn, New
York, in the Eastern District of New York.
9. The
Commissioner of Internal Revenue assessed United States income taxes,
penalties and interest against the defendant NATHAN GALVIN for the
taxable years, on the dates and in the amounts set forth below and
certified the assessment lists on which the said assessments appeared to
the Collector of Internal Revenue at Brooklyn, New York; after receipt
of each of said assessment lists, the said Collector gave the defendant
Nathan Galvin notice of each of said assessments, stating the amount and
demanding payment thereof on the dates set forth below, but payment of
all or a part of each of said assessments has been neglected or refused;
said Collector has filed notices of federal tax liens for said
assessments with the Register of Kings County, New York:
NATHAN
GALVIN
10. The
District Director of Internal Revenue at Brooklyn, New York, assessed
United States income taxes with penalties and interest against the
defendant LILLIAN GALVIN for the taxable years, on the dates and in the
amounts set forth below; the said District Director gave the said
defendant notice of each of said assessments, stating the amount and
demanding payment thereof on the dates set forth below, but payment of
all or a part of each said assessment has been neglected or refused. The
said District Director filed notices of federal tax liens for said
assessments with the Register of Kings County,
Brooklyn
, on the dates set forth below:
LILLIAN
GALVIN
* Paid 3/10/59 per Exhibit 17.
11. Pursuant
to Memorandum Findings of Fact and Opinion entered August 15, 1952, the
Tax Court of the United States on August 20, 1952, made and entered a
Decision wherein it determined deficiencies in United States income
taxes and penalties for the taxable years 1942, 1943, 1944 and 1945
against defendant NATHAN GALVIN as follows:
Year Tax Penalty
1942 .... $ 9,315.74 $ 4,657.87
1943 .... 19,101.11 9,550.56
1944 .... 37,719.24 18,859.62
1945 .... 2,570.83 1,285.42
$68,706.92 $34,353.47
The decision
of the Tax Court became final not earlier than November 20, 1952, under
Section 1140(a) of the Internal Revenue Code of 1939.
12. Pursuant
to written Stipulation signed by defendant LILLIAN GALVIN and Chief
Counsel, Internal Revenue Service, the Tax Court of the United States on
March 19, 1958, made and entered and on March 21, 1958, served a
Decision wherein it determined deficiencies in United States income tax
in the amount of $291.47 and penalties in the amount of $53.93 against
defendant LILLIAN GALVIN for the taxable year 1952. The decision of the
Tax Court became final not earlier than June 19, 1958.
13. The taxes,
penalties and interest assessed against defendant NATHAN GALVIN for the
years 1942, 1943, 1944 and 1945 (as set forth in Finding 9 above) and
the tax, penalties and interest assessed against defendant LILLIAN
GALVIN for the year 1952 (as set forth in Finding 10 above) were
assessed within 60 days after the decisions of the Tax Court (set forth
in Findings 11 and 12 above) became final (Internal Revenue Code, 1939,
§§ 1140(a), 1142, 277; Internal Revenue Code, 1954, §§ 7481(1),
7483, 6503).
14. It is
conceded by defendant NATHAN GALVIN that the amount of $230.95 was
timely assessed against and demanded of him on August 28, 1959, as
United States
income tax due in respect of the taxable year 1958.
15. Apart from
the question of timeliness of suit, defendant NATHAN GALVIN is, after
crediting $15,800 in payments made on account of 1944 liability, and
after crediting $200 in payments made to the interest accrued on $190.48
of 1942 liability, indebted to the plaintiff for the amounts of taxes
and penalties set forth in Findings 9 and 14 above, together with
interest on the tax amounts from the due dates of the returns of tax and
on $15,800 from the due date of the 1944 tax return until the several
dates of payments of the said $15,800 but less $200 paid on account of
interest on the 1942 tax.
16. Defendant
LILLIAN GALVIN is indebted to the plaintiff for the amounts of taxes and
penalties set forth in Finding 10 above, together with interest on the
1952 tax from the due date of the return and on the 1957 tax from August
22, 1958.
III.
The Compromise Offers
17. On June 6,
1955, defendant NATHAN GALVIN made to plaintiff an Offer in Compromise,
dated March 24, 1955, of his liability for the income taxes, penalties
and interest set forth in Finding 9 above and in and by such Offer in
Compromise said defendant expressly waived the benefit of any statute of
limitations applicable to the assessment and/or collection of the
liability sought to be compromised, and agreed to the suspension of the
running of the statutory period of limitations on assessment and/or
collection for the period during which the Offer in Compromise was
pending and for one year thereafter.
18. Plaintiff
received and considered the said Offer in Compromise and on January 26,
1956, plaintiff rejected the Offer in Compromise.
19. The period
during which the Offer in Compromise was pending was the period from
June 6, 1955 to January 26, 1956, amounting to seven months and twenty
days (234 days).
20. More than
one year after the rejection of the Offer in Compromise described in
Findings 17-19 defendant NATHAN GALVIN on or before July 9, 1957, made
to plaintiff a second Offer in Compromise of his liability for the
income taxes, penalties and interest set forth in Finding 9 above and in
and by such Offer in Compromise said defendant expressly waived the
benefit of any statute of limitations applicable to the assessment
and/or collection of the liability sought to be compromised and agreed
to the suspension of the running of the statutory period of limitations
on assessment and/or collection for the period during which the offer
was pending and for one year thereafter. (Various dates of
"making" the offer are possible: April 1, 1957, June 26, 1957
and July 9, 1957.)
21. Plaintiff
received and considered the said second Offer in Compromise and on
October 3, 1957, plaintiff rejected the said second Offer in Compromise.
22. The period
during which the second Offer in Compromise was pending was the period
from at latest July 9, 1957, to October 3, 1957, amounting to two months
and twenty-four days (86 days).
23. The
complaint herein was filed on March 30, 1961, and the summons to
defendants NATHAN GALVIN and LILLIAN GALVIN was issued March 30, 1961;
the summons and complaint were served on defendants NATHAN GALVIN and
LILLIAN GALVIN on April 4, 1961.
24. The
present suit was commenced against NATHAN GALVIN on March 30, 1961,
within eight years ten months and fourteen days (or, within eight years,
three hundred twenty days) after the earliest of the assessment dates
set forth in Finding 9 above.
IV.
The Insurance Value
25. Under date
of January 9, 1935, defendant METROPOLITAN issued to defendant NATHAN
GALVIN on his application a contract of insurance (No. 9,556,569 A) on
his life in the face amount of $25,000 payable to him if living on
January 9, 1986, or, in the event of his earlier death, payable to his
estate as "beneficiary"; the insured reserved the right to
change the beneficiary at any time without the beneficiary's consent.
26. Under date
of January 30, 1936, NATHAN GALVIN designated his wife LILLIAN GALVIN as
beneficiary of the insurance contract and, if she predeceased him,
designated his children, ELAINE GALVIN and IRVING GALVIN, as contingent
beneficiaries; insured reserved the right to change the beneficiary and
contingent beneficiaries without their consent.
27. Under date
of February 15, 1949, defendant NATHAN GALVIN borrowed $4,000 from
defendant METROPOLITAN upon the security of the insurance contract; the
loan continued outstanding until July 9, 1958, and on that date
amounted, with interest, to $6,915.11.
28. Under date
of June 10, 1952, defendant NATHAN GALVIN designated his wife LILLIAN
GALVIN as beneficiary of the insurance contract and did not reserve the
right to change the beneficiary without the consent of the beneficiary
and, in the event LILLIAN GALVIN predeceased insured, he designated
IRVING M. GALVIN and ELAINE S. KLEINBERG, his children, as contingent
beneficiaries and reserved the right to change the contingent
beneficiaries without their consent.
29. Effective
July 9, 1958, the insurance contract "lapsed" by reason of
non-payment of pemiums and the cash value of the contract was applied
pursuant to paragraph 9(c) to continue the insurance in force as paid-up
Term insurance in the amount of $18,085 until August 9, 1965, such
amount being the face amount of the insurance ($25,000) less the amount
of the loan and interest ($6,915.); the cash value of the contract at
the time of lapse was $9,787.50 before application to the loan
indebtedness and $2,872.39 thereafter.
30. The cash
value of Metropolitan contract No. 9,556,569 A at the following dates
was as set forth below
May 19, 1960 ........ $2,413.08
January 21, 1963 .... 1,430.34
October 1963 ........ 1,073.16
31. Under the
terms of the insurance contract defendants NATHAN GALVIN and LILLIAN
GALVIN have the right, upon written request filed with the defendant
METROPOLITAN accompanied by surrender of the contract, to surrender the
paid-up Term Insurance at any time for its then Cash Surrender Value
(that is, its full reserve value at date of surrender); upon such
surrender defendant METROPOLITAN would pay the amount of the Cash
Surrender Value by check made payable to "NATHAN GALVIN and LILLIAN
GALVIN"; if LILLIAN GALVIN died before August 9, 1965 and NATHAN
GALVIN was then living he could surrender the contract and obtain its
Cash Surrender Value at any time upon his own written request without
the consent of the contingent beneficiaries.
32. On April
1, 1953, plaintiff served on defendant METROPOLITAN a Notice of Lien
against defendant NATHAN GALVIN for the taxes and penalties set forth in
Finding 9 above (other than the 1942 tax of $190.48) and a Levy on all
interests of said defendant in the METROPOLITAN'S hands and all amounts
owed by METROPOLITAN to said defendant; before commencement of the
present action warrants of distraint in the same tenor as the Notice of
Levy were served on METROPOLITAN.
33. On August
14, 1960, plaintiff served on defendant METROPOLITAN Notices of Tax Lien
against defendant LILLIAN GALVIN for the taxes and penalties set forth
in Finding 10 above.
Conclusions
of Law
1. Plaintiff
is entitled to judgment against defendant NATHAN GALVIN in the amount of
$87,681.82 with interest to the date of judgment on the following
amounts from the following dates:
Date Amount
March 15, 1943 ...... $ 9,315.74
March 15, 1944 ...... 19,101.11
March 15, 1945 ...... 21,919.24
March 15, 1946 ...... 2,570.83
May 23, 1952 ........ 190.48
August 28, 1959; .... 230.95
and with interest on $15,800 from March 15, 1945, to the various dates
of payment shown in Exhibits 6 and 8, and without interest on the
remaining amount, and with costs.
2. Plaintiff
is entitled to judgment against defendant LILLIAN GALVIN in the amount
of $1,758.73 with interest to the date of judgment on $291.47 from March
15, 1953, and with interest to the date of judgment on $1,413.33 from
March 10, 1959, and without interest on the remaining amount, and with
costs.
3. Plaintiff
is entitled to judgment directing the defendant METROPOLITAN to pay to
it, against delivery to defendant METROPOLITAN of the insurance contract
No. 9,556,569 A, Exhibit 16, the Cash Surrender Value at the date of
such delivery of the said insurance contract, without costs.
4. Plaintiff
is entitled to judgment directing defendants NATHAN and LILLIAN GALVIN
to surrender the insurance contract to plaintiff for delivery to
defendant METROPOLITAN.
Unless within
two weeks of the date of this decision defendants NATHAN GALVIN and
LILLIAN GALVIN (through counsel or jointly in writing) designate which
of the judgment liabilities above provided for they wish to have partly
satisfied from the proceeds of the insurance contract (or the division
between the judgment liabilities they wish to have made), plaintiff may
apply the proceeds to the satisfaction of either of the judgment
liabilities or may divide the proceeds between them.
Settle
judgment, to be approved by the Court and signed by the Clerk as
provided in Rule 58(2) and Local Rule 10, within 45 days on 5 days
notice in accordance with the foregoing; the interest computations
should be incorporated in the judgment; the interest amounts must be
shown separately for each tax amount; the judgment should leave the cost
award blank so that costs can be taxed by the Clerk when he enters the
judgment. Note: The cases discussed by counsel leave no doubt
that the suspension of time to institute a suit for collection of an
assessment is extended in completely literal compliance with the
language of the waiver.
It will be
noted that there are some interest complexities for the Internal Revenue
Service to work out but 40 days should be ample time to do so.
It has been
assumed that a practical solution is the best approach to the
potentially subtle question of the rights of the tax debtors to have the
proceeds of the insurance applied to both their debts on some theoretic
division of the insurance to reflect their different interest in it.
United States of America
, Appellee v. Hattie E. Ball and Opal B. Cooley, Appellants
(CA-4),
U. S. Court of Appeals, 4th Circuit, No. 8920, 326 F2d 898, 1/7/64,
Reversing and remanding District Court, 62-2 USTC ¶9779, 207 F. Supp.
835
[1954 Code Secs. 6212 and 6321]
Lien for taxes: Cash surrender value of life insurance policies:
Taxpayer outside U. S.: Sufficiency of notice.--A deficiency
assessment could be made and a tax lien asserted after a taxpayer left
the United States for an indefinite period; and a taxpayer's interest in
insurance policies on his own life could be subjected to the
satisfaction of a tax lien where the taxpayer had control over the cash
surrender value as well as the right to designate or change
beneficiaries. The validity of the tax lien depended upon satisfaction
of the notice requirements of Code Sec. 6212(a) and the case was
remanded for determination of whether the notice requirements were
satisfied.
LeRoy Katz,
Ritz Bldg., Bluefield, W. Va. (Katz, Katz and Kantor, Ritz Bldg.,
Bluefield, W. Va., on brief), for appellants. Michael A. Mulroney,
Department of Justice, Washington 25, D. C. (Louis F. Oberdorfer,
Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Department of
Justice, Washington 25, D. C., Thomas B. Mason, United States Attorney,
Roanoke, Va., on brief), for appellee.
Before
HAYNSWORTH and BOREMAN, Circuit Judges, and WINTER, District Judge.
WINTER,
District Judge:
When Dr. Lomas
E. Ball (taxpayer) departed from his residence at Big Stone Gap,
Virginia, in February, 1957, went to Mexico on a permit for temporary
sojourn, leaving unpaid income taxes for the year 1954, and remained in
Mexico at least until July 10, 1962, the United States purported to make
an assessment for unpaid income taxes, amounting to $10,381.13 with
penalties, and to perfect a tax lien. The
United States
then instituted this suit to enforce the lien and thus to collect the
assessment, with interest from March 27, 1957. The
United States
sought to enforce the lien against the cash surrender value of certain
life insurance policies insuring the life of the taxpayer, which named
appellants as the revocable primary and contingent beneficiaries. As of
June 29, 1959 the policies had an aggregate cash surrender value and
accumulated dividends in the amount of $11,212.03. From a summary
judgment for the
United States
directing payment to it of the aggregate cash surrender values and
accumulated dividends of the various policies and releasing the insurers
from further liability to the taxpayer or the beneficiaries, this appeal
is taken. The insurers, who were parties defendant in the proceedings
below, have not appealed.
[Factual
Background]
The following
facts were stipulated: The taxpayer left Big Stone Gap on February 5,
1957 and, on February 27, 1957, he flew his private plane to
Mexico
. From that date until the date of stipulation (July 10, 1962), the
taxpayer has remained outside of the
United States
, and his last known address has been Oaxaco, Oax, Corroco,
Areo
,
Mexico
. On March 27, 1957 an assessment, amounting to $10,381.13, was made
against him, based upon his income for the year 1954. Also assessed was
a penalty, in the sum of $4,407.54, which was not sought to be recovered
in this suit. On April 1, 1957 notice and demand for payment of said
assessment were mailed, by certified mail, to the taxpayer, directed to
his last known address, at Big Stone Gap, Virginia. This notice and
demand were sent in compliance with §6303 of the Internal Revenue Act
of 1954, 26 U. S. C. A. §6303, 1
and the notice was received by the taxpayer's secretary, who was
authorized to receive his mail, and who gave a receipt therefor. A
notice of tax lien was filed on April 1, 1957 with the Clerk of the
Circuit Court of Wise County, Virginia, and duly docketed. The purported
assessment has not been paid.
[District
Court Decision]
The lower
court [62-2 USTC ¶9779] granted summary judgment for the
United States
. It cited §6303(a) as the only requirement of law relating to notice,
found that following the tax assessment notice and demand were made on
April 1, 1957, by means of certified mail, and received and receipted
for by the taxpayer's secretary, and concluded that "there was
substantial compliance by the Government with the requirement of the
Internal Revenue Code relating to notice and demand * * *."
The lower
court also cited United States v. Metropolitan Life Insurance Co.
[58-2 USTC ¶9630], 256 F. 2d 17 (4 Cir. 1958), which held that a
taxpayer had a property interest in insurance policies on his life
where, as in the case at bar, he retained control over the cash
surrender value and possessed the right to designate or change the
beneficiaries, and that this property interest could be subjected to the
satisfaction of a tax lien, 26 U. S. C. A. §6321. The lower court
pointed out that in the Metropolitan case the notice of lien was
filed with the Clerk of the County Court at
Parkersburg
,
West Virginia
before the taxpayer absconded. Deeming the only issue to be decided was
the question of whether the deficiency assessment could be made and the
tax lien asserted after the taxpayer had left the
United States
, the lower court held that the taxpayer's departure for
Mexico
for an indefinite period was no bar to the Government's right to
judgment, and granted summary judgment.
With this
holding of the lower court, we agree. The notice sections of the
Internal Revenue Code, 26
U. S.
C. A. §§ 6303(a) and 6212(a), which we discuss more fully hereafter,
both permit notice to be sent to the taxpayer's "last known
address." This we deem to be evidence of Congressional intent that
the Government's right to collect taxes due and owing to the
United States
may not be defeated by the flight of a taxpayer before or after a
deficiency assessment is made. Although unnecessary to the result we
reach, we express this view because in the further proceedings that we
direct be taken the issue may be important. The "death" cases
cited by appellants, Commissioner of Internal Revenue v. Stern
[58-2 USTC ¶9594], 357
U. S.
39 (1958), and United States v. Bess [58-2 USTC ¶9595], 357
U. S.
51 (1958), do not indicate a different conclusion on this issue. The Bess
case decides, and the Stern case intimates, that the death of a
taxpayer prior to the assessment of a tax deficiency against him renders
the assessment ineffective to reach the cash surrender value of an
insurance policy on his life where state law does not preserve any right
in a creditor after the insured's death. Obviously, a deficiency which
subsequently ripens to a lien cannot apply to property of which the
taxpayer was divested by reason of his death before the assertion of a
contrary interest by the
United States
, unless state law preserves the right of the
United States
and other creditors to pursue the property.
[Sufficiency
of Notice]
To place our
holding in regard to the lower court's decision as to the sufficiency of
notice in its proper perspective, we must consider two of the
alternative means of collection of unpaid income taxes provided for by
the Internal Revenue Code 1954. In the usual case, §6212(a) of the
Code, 26
U. S.
C. A. §6212(a), requires the Government, as a first step, to send a
notice of deficiency to the taxpayer, by registered mail. 2
Thereafter, the Government may make an assessment of unpaid tax (26
U. S.
C. A. §6201), provided that the assessment is made within the period of
time after the notice of deficiency prescribed by 26
U. S.
C. A. §6213. Once the assessment has been made, §6303(a) of the Code,
26 U. S. C. A. §6303(a), 3
requires notice and demand for payment of the tax as a condition
precedent to the taking of additional steps to enforce its collection
and payment.
Thus, in the
usual case the Code contemplates the giving of two notices by the
Government, first, the notice required by §6212(a) of a deficiency, and
the notice required by §6303(a) of assessment and demand for payment.
The notice of deficiency is specified to be by registered mail (26
U. S.
C. A. §6212(a)), while no such restriction is applicable to the notice
of assessment and demand for payment (26
U. S.
C. A. §6303(a)).
In recognition
that during the time required to carry out the usual method of making a
deficiency assessment taxpayers may in certain instances defeat
collection of the tax, the Code also provides for an accelerated
procedure, i.e., a jeopardy assessment. The jeopardy assessment
is authorized by §6861 of the Code, 26 U. S. C. A. §6861, 4
but the jeopardy assessment, if made before any notice of a deficiency,
must, by §6861(b), be followed by the notice required by §6212(a), 9
Mertens, Law of Federal Income Taxation, §49.146. As has been shown,
notice under §6212(a) must be by registered mail. Stated otherwise,
even though a jeopardy assessment is made, two notices to the taxpayer
are still required, one of which must be by registered mail. The failure
to send notice by registered mail in compliance with §6212(a) is fatal
to a jeopardy assessment, during the period that §6212(a) permitted
only notice by registered mail, 9 Mertens, Law of Federal Income
Taxation, §§ 49.133, 49.146. Contra, Cohen v. United States
[62-1 USTC ¶9202], 297 F. 2d 760, 773 (9 Cir. 1962) (dictum).
It seems clear
in this case that the taxpayer was proceeded against by the jeopardy
assessment route. The validity of the tax lien to serve as a basis for
the judgment granted here depends upon whether the notice requirements
of §6212(a) were met, because 26
U. S.
C. A. §§ 6321 and 6322, which create tax liens, require, inter
alia, a valid assessment. It has been stipulated that a notice
pursuant to §6303 was sent by certified mail, but that notice is not
made part of the record, and any other notice which may have been sent
in compliance with §6212(a) is not made part of the record or referred
to therein.
The full text
of the pertinent portions of the stipulation is set forth in the margin.
5
Appellee contends (1) that the stipulation, by asserting that the
assessment remains "due and owing" necessarily admits its
validity, so that no issue of the validity of notice is presented to
this Court, but, in any event, (2) that appellants failed to raise any
question as to the validity of notice in the lower court so that that
issue is foreclosed here.
We reject both
of appellee's contentions. The stipulation nowhere expressly reflects an
agreement that the assessment was valid; nor do we construe the
stipulation to have this effect impliedly. At most, we read the
stipulation to mean that the assessment has not been paid and that a
notice in compliance with §6303 was mailed by certified mail. Indeed,
not until after argument, when appellee filed a supplemental memorandum,
did appellee ever suggest that the stipulation had any other effect.
Prior to then appellee was content to assert that §6212 related solely
to Tax Court jurisdiction, and appellee failed to recognize the possible
effect of §6212 on the validity of the assessment.
Appellee's
second contention is equally lacking in merit. Appellee sought and
obtained summary judgment. It was incumbent on appellee to show that
there was no "genuine dispute as to any material fact" and
that appellee was entitled "to a judgment as a matter of law,"
Fed. Rules of Civil Procedure, Rule 56. From what we have said, the
validity of the lien was dependent upon the validity of the assessment
which in turn depended upon the validity of the notice of deficiency.
The complaint failed to allege the giving of notice of deficiency; the
answer did not admit the fact; nor did the stipulation or affidavit
establish it. Appellee thus failed in this regard to meet its burden,
unless it be held that appellants have waived this possible defense.
The complaint
impliedly, but not specifically, alleged jurisdiction in the lower
court. In their second defense, appellants impliedly denied jurisdiction
because they alleged that they were without knowledge or information
sufficient to form a belief as to the truth of all of the allegations of
the complaint except the allegation that the appellee is "a
corporation sovereign and body politic." From the pleadings any
issue about the validity of notice of deficiency, if present at all, was
obscure. The opinion of the lower court does not disclose that the
possible effect of a failure to send a notice of deficiency by
registered mail, as required by §6212(a), was argued and decided.
Notwithstanding, it cannot be said that this contention has been waived
on appeal, because §6213(a), 26 U. S. C. A. §6213(a), provides that
"Except as otherwise provided in section 6861 no assessment of a
deficiency in respect of any tax * * * and no levy or proceeding in
court for its collection shall be made, begun, or prosecuted until such
notice has been mailed to the taxpayer * * *." 6
(Italics supplied) Indeed, §6213(a) even authorizes the granting of an
injunction, inter alia, prohibiting the beginning of a court
proceeding for collection during the prohibited period. We conclude,
therefore, that the failure of appellee, at least when seeking summary
judgment, to establish affirmatively the absence of dispute as to notice
in compliance with §6212(a) was a defect jurisdictional in nature, and
not capable of cure by appellants' failure to raise and present it
squarely to the lower court.
[Judgment
of the Court]
From what has
been said, it follows that the judgment of the lower court must be
vacated and the case remanded to the lower court for further
proceedings, by renewal of the motion for summary judgment or by trial,
for a determination of whether the notice requirements of §6212(a) were
met by appellee.
Reversed
and Remanded.
1
"§6303. Notice and demand for tax
(a) General
Rule.--Where it is not otherwise provided by this title, the Secretary
or his delegate shall, as soon as practicable, and within 60 days, after
the making of an assessment of a tax pursuant to section 6203, give
notice to each person liable for the unpaid tax, stating the amount and
demanding payment thereof. Such notice shall be left at the dwelling or
usual place of business of such person, or shall be sent by mail to such
person's last known address."
2
"§6212. Notice of deficiency
(a) In
general.--If the Secretary or his delegate determines that there is a
deficiency in respect of any tax imposed by subtitles A or B, he is
authorized to send notice of such deficiency to the taxpayer by
registered mall."
§6212(a) was
amended by Pub. L. 85-866, §89(b) to provide that the notice it
requires may be sent by certified mail, as will as by registered mail.
The amendment was not effective until September 2, 1958, and the parties
here concede that the amendment is inapplicable to this case.
3
See footnote 1, supra.
4
"§6861. Jeopardy assessments of income, estate, and gift taxes
(a) Authority
for making.--If the Secretary or his delegate believes that the
assessment or collection of a deficiency, as defined in section 6211,
will be jeopardized by delay, he shall, notwithstanding the provisions
of section 6213(a), immediately assess such deficiency (together with
all interest, additional amounts, and additions to the tax provided for
by law), and notice and demand shall be made by the Secretary or his
delegate for the payment thereof.
(b) Deficiency
letters.--If the jeopardy assessment is made before any notice in
respect of the tax to which the jeopardy assessment relates has been
mailed under section 6212(a), then the Secretary or his delegate shall
mail a notice under such subsection within 60 days after the making of
the assessment."
5
"3. On March 27, 1957, a federal income tax assessment in the sum
of $10,381.13 was made against the income of Lomas E. Ball for the year
1954.
"4. On
April 1, 1957, notice and demand for said assessment were made by means
of certified mail, addressed to Loman E. Ball at Big Stone Gap,
Virginia
, his last known address, in accordance with Section 6303, Internal
Revenue Code of 1954.
"5.
Notice of tax lien was filed on April 1, 1957 at 11:00 A. M. with the
Clerk of the Circuit Court of Wise County, Virginia, the same being
docketed in Judgment Lien Docket 30, page 130.
"6. Said
assessment, with interest thereon, as allowed by law, remains due and
owing to the
United States of America
."
6
As been shown, §6861 makes no contrary provision in regard to notice of
deficiency. While §6861 makes a contrary provision for assessment, it
makes no such provision for court proceedings for collection.
William B. Smith, Plaintiff v. Hank P.
Smith, Defendant
U.
S. District Court, Dist. of Columbia, Civil Action No. 3314-50, 2/11/63
[1954 Code Sec. 6321]
Lien for taxes: Life insurance: Cash surrender value.--A lien for
taxes attached to the cash surrender value of two insurance policies on
the life of the delinquent taxpayer, although the policies were in the
physical possession of his wife, who claimed that she had paid the
premiums, where the insured procured the policies, he had the sole power
to change the beneficiary, he alone could make a loan against the
policies, and only be had the power to cash them.
Henry Lincoln
Johnson, Jr.,
626 Third St., N. W.
,
Washington
1, D. C., for plaintiff. David C. Acheson,
United States
Attorney,
Washington
1, D. C., for U. S. Leland T. Johnson, Munsey Bldg.,
Washington
,
D.C.
, for Metropolitan Life Insurance Co., Garnishee.
Memorandum
WALSH,
District Judge:
This matter is
before the court on motions of the
United States of America
for judgment of condemnation of two policies of life insurance, seeking
to obtain the cash surrender value of said policies to satisfy in part
the judgment entered herein against plaintiff on June 26, 1961. The
United States
is the plaintiff in intervention, and Amanda Smith, plaintiff's wife, is
a party-plaintiff. The facts are as follows:
On June 11,
1952, a notice of a Federal tax lien for an assessment of back Federal
income taxes against the plaintiff, William B. Smith, was filed in the
United States District Court for the
District of Columbia
, No. 27214. As a result thereof the
United States of America
became the plaintiff in intervention herein, and subsequently on June
26, 1961, judgment was entered against the plaintiff in favor of the
United States
, the effect of which was to reduce to judgment the Federal tax lien No.
27218. Thereafter, on February 15, 1962, the United States caused an
attachment to issue for $1,603.54, which amount is presently in the
possession of the Metropolitan Life Insurance Company, garnishee, and
represents the cash surrender value and terminal dividend as of February
15, 1962, of Metropolitan Life Insurance Company Policy Number 01 055
716-SC, issued to the plaintiff, William B. Smith, on policy date June
21, 1951.
Also, on or
about July 6, 1962, the United States caused an attachment to issue for
$580.51, which amount is presently in the hands of the garnishee, North
Carolina Mutual Life Insurance Company, and represents the cash
surrender value of North Carolina Mutual Life Insurance Company Policy
Number 33390, issued to plaintiff under the name of John Willie Smith on
policy date July 31, 1920.
Plaintiff in
intervention,
United States of America
, seeks judgment of condemnation on both of said policies, claiming that
William B. Smith has a property interest in them which is subject to
Federal tax lien No. 27214, reduced to a judgment herein.
[Property
Interest in Insurance Policies]
Plaintiff,
however, disclaims any property interest in the policies; and his wife
Amanda maintains that if there be a property interest in the policies,
it belongs to her, as she secured these policies upon the life of her
husband, has physical possession of them, and has paid the premiums
thereon with her own funds. Further, she asserts that any proceeds or
property interest is not subject to garnishment proceedings.
Metropolitan
maintains that while its policy remains in effect, the company possesses
no property interest belonging to the taxpayer or anyone else; but
should the court find otherwise, the court should then order the policy
surrendered before it is required to pay any funds. The North Carolina
Mutual Life Insurance Company did not file any responsive pleading to
the motion of the
United States
, but did answer the interrogatories propounded by the government and
which were secured to the notice of attachment served on it, on or about
July 6, 1962.
Basically, the
question before the court is whether or not these policies represent
property interests which are attachable to satisfy a Federal tax lien
reduced to judgment; and if so, who is the legal owner of said property
interests with respect to the two policies, the plaintiff, William B.
Smith, or his wife, Amanda.
[Cash
Surrender Value]
The contention
that there are no property rights (cash surrender value) in said
policies or that they are not subject to a federal tax lien is quite
erroneous.
The cash
surrender value of a policy of life insurance is a "property
right" or "right to property" within the meaning of
section 6321 of the Internal Revenue Code of 1954 (26 USC 6321), United
States v. Bess [58-2 USTC ¶9595], 357 U. S. 51. In Bess
certain policies of life insurance belonging to Mr. Bess were attached
by the
United States
under former section 3670 of the Internal Revenue Code of 1939. The
court in finding an attachable property interest in the policies
commented:
"Thus
Mr. Bess 'possessed just prior to his death, a chose in action in the
amount stated [i. e., the cash surrender value] which he could have
collected from the insurance companies in accordance with the terms of
the policies.' [57-1 USTC ¶9528] 243 F. 2d 675, 678. It is therefore
clear that Mr. Bess had 'property' or 'rights of property', within the
meaning of §3670, in the cash surrender value." p. 56.
Further, in
disposing of the idea that under state law (
New Jersey
), the property right represented by the cash surrender value was not
subject to a creditor's lien, the court stated:
".
. . state law is inoperative to prevent the attachment of liens created
by federal statutes in favor of the
United States
. ..... The fact that in §3691 Congress provided specific exemptions
from distraint is evidence that Congress did not intend to recognize
further exemptions which should prevent attachment of liens under §3670."
p. 57.
See
also, United States v. Metropolitan Life Insurance Company, 4th
Circ., [58-2 USTC ¶9630] 256 F. 2d 17, where the United States, as
here, sought to condemn certain policies of insurance to satisfy a tax
lien, and the court in sustaining the government's position stated:
"The
interest of the insured in the policies has been brought under the
jurisdiction of the court in what is essentially a garnishment
proceeding in so far as it relates to his interest in the policies and
the promises for his benefit therein contained. 5 Am. Jur. §657. The
court can unquestionably condemn the interest of the insured under the
policies to the satisfaction of the lien and can direct that such
interest be paid by the insurance companies to the United States, the
holder of the lien." p. 24.
[Surrender
of Policy]
With respect
to Metropolitan's concern over the surrender of the policy, the court in
United States v. Metropolitan Life Insurance Co., supra, stated:
".
. . but the surrender is for the protection of the companies and they
will be as well protected by the judgment of the court as by the
surrender of the policies, ..... Of course, surrender of the policies
should be ordered if the policies are available for surrender." pp.
24, 25.
Therefore,
although surrender of the policies is not necessary to the government's
success or failure, or the insurance company's protection, when possible
it is a convenience which should be adhered to. In this case, Amanda
Smith, who is before the court as a party plaintiff, has physical
possession of the policies in question, and should the court direct,
could produce the same.
[Ownership
of Property Interest]
However, while
the policies in question have a property interest (cash surrender value)
which is attachable to satisfy a federal tax lien reduced to judgment,
and said judgment is not barred by any local statute (D. C. Code), it is
axiomatic that the government may not attach one individual's property
to satisfy a lien or judgment against another, even thought they may be
man and wife.
In the instant
case, the insured, William B. Smith, disclaims any interest in the
policies; while his wife maintians she is the sole owner of any property
interest they may have. In support of her position she relies on United
States v. Burgo, 3rd Circ., [49-1 USTC ¶9307] 175 F. 2d 1961, where
the District Court's findings that certain policies, were the sole and
exclusive possession of the taxpayer's wife, and that the taxpayer never
had possession of the policies or any property therein, were affirmed as
not clearly erroneous, and the court stated:
".
. . since defendant Rose Burgo had possession of the policies here in
question at all times it is quite clear that defendant Joseph Burgo was
never at any time in a position to defeat her right to the policies by
changing the beneficiary."
The facts of
the instant case, however, differ substantially from those of the Burgo
case. Here the insured has actually changed the beneficiary of the North
Carolina Mutual Policy from his wife to his grandson in 1961, and
borrowed against that policy in 1947. With respect to the Metropolitan
Policy, he changed the contingent beneficiary in April, 1962.
Further, in
the interrogatories propounded to the insurance companies by the
United States
, each responded in the affirmative to the following questions:
"3.
If you do possess or if you do have in your possession an insurance
policy issued to the plaintiff, has the plaintiff:
a.
Reserved the right to change the beneficiary?
b.
Has the plaintiff the privilege of obtaining a loan against the
policy?"
Also, each
company stated that the respective policy was issued to the
plaintiff. The North Carolina Mutual policy, however, was issued in
the name of John Willie Smith, a name used by the plaintiff until 1922.
While the
insured, William B. Smith, did not have actual physical possession of
the policies, it is clear that he did procure each of the policies, that
he has the sole power to change the beneficiary, that only he could make
a loan against them, and that he also has the sole power to cash them
in. Mere physical possession of the policies by his wife is not
sufficient to defeat these rights. Certainly, if the policies were lost,
he alone could require a duplicate to issue. It is also clear to the
court that there has been no legal assignment of either policy under the
respective contracts so as to be binding upon the insurers.
The Court,
therefore, in looking to the legal ownership of the property interests
in these policies, and based solely upon the evidence before the court,
finds that legal title to the policies, and therefore to the proceeds of
the cash surrender value of each, lies with the plaintiff, William B.
Smith, during his life time; and if, as in this case, a Federal tax lien
attaches before his death, said lien cannot be defeated by another's
allegation of physical possession of them and the payment of certain
premiums, absent proof of formal assignment as required by the contracts
themselves. Here there is no such proof.
Accordingly,
the Court finds that the plaintiff, William B. Smith, has a property
interest in said policies, and that the policies are subject to
condemnation to satisfy a Federal tax lien which has been reduced to
judgment.
The
government's motions for condemnation of the two policies is therefore
granted, and Amanda Smith, party-plaintiff herein, will be directed to
surrender each policy to the respective garnishee, and the order of the
court shall so recite.
Counsel for
the government is directed to prepare the appropriate orders.
United States of America
, Plaintiff-Appellee v. Solomon Fried and Ilene Fried,
Defendants-Appellants, and New York Life Insurance Company, Defendant
(CA-2),
U. S. Court of Appeals, 2nd Circuit, Docket No. 26982, 309 F2d 851,
11/20/62, Affirming District Court decision, 60-1 USTC ¶9427
[1954 Code Sec. 7403]
Government's lien against cash surrender value of insurance policies:
Payment of premiums by beneficiary.--The District Courts judgment is
affirmed to the effect that the Government is entitled to a lien for
unpaid taxes against the cash surrender value of policies issued to a
taxpayer where each policy reserved to the insured the right to change
the beneficiary and to withdraw the cash surrender value. The fact that
the beneficiary, taxpayer's wife, claimed that she had paid the premiums
for the policies and that the insured had no financial or other economic
interest in the policies raised "no genuine issue as to any
material fact," since the beneficiary, showed no state (New York)
holding that mere payment of premiums by a beneficiary, without more,
acts to vest title to the policy in the beneficiary.
Stanton H.
Zarrow, Department of Justice, Washington 25, D. C. (Louis F.
Oberdorfer, Assistant Attorney General, Meyer Rothwacks, Department of
Justice, Washington 25, D. C., Joseph P. Hoey, United States Attorney,
Brooklyn, N. Y., on brief), for plaintiff-appellee. Vincent J. Crowe, 70
Pine,
New York
, N. Y. (Siegal & Crowe, 70 Pine,
New York
, N. Y., on brief), for defendants-appellants.
Before
LUMBARD, Chief Judge, WATERMAN and MARSHALL, Circuit Judges.
PER CURIAM:
This is an
appeal by Solomon and Ilene Fried from a judgment of the United States
District Court for the Eastern District of New York, Bruchhausen, J.,
granting the Government's motion for summary judgment. Solomon Fried is
the insured on eight insurance policies issued by the New York Life
Insurance Company. Each of the policies designates his wife, Ilene
Fried, as the beneficiary and each reserves to Solomon Fried the right
to change the beneficiary and the right to withdraw the cash surrender
value. In 1955 the Government, alleging income tax deficiencies against
Fried, brought an action in the United States District Court for the
Eastern District of New York to reduce the taxpayer's liability to
judgment and to enforce its lien against the cash surrender value of the
eight policies. See United States v. Bess [58-2 USTC ¶9595], 357
U. S.
51. Judge Bruchhausen entered a judgment for the Government in the
amount of the tax due; he also ruled that Ilene Fried, as beneficiary,
was an indispensable party in any action to foreclose against the
policies and gave the Government a reasonable time to join her as a
party defendant. United States v. Fried [60-1 USTC ¶9427], 183
F. Supp. 371 (E. D. N. Y. 1960). After Mrs. Fried had been properly
joined as a defendant, Judge Bruchhausen granted the Government's motion
for summary judgment and directed the New York Life Insurance Company,
also a defendant, to pay to the Government the cash surrender value of
the policies.
Mrs. Fried's
answer to the complaint claimed that she had "paid the premiums for
the life insurance policies referred to in the complaint and as such is
the true owner of said policies, and defendant Solomon Fried has no
financial or other economic interest in said policies." We think
that the District Court was correct in ruling that this pleading raised
"no genuine issue as to any material fact." Rule 56(c),
Federal Rules of Civil Procedure. Appellant has pointed to no
New York
holding that mere payment of premiums by a beneficiary, without more,
acts to vest title to the policy in the beneficiary, particularly when
the insured retains the right to change the beneficiary and to withdraw
the cash surrender value. Such cases as there are, although they are not
directly in point, would seem to be to the contrary. See McCaffry v.
Metropolitan Life Insurance Co., 14 N. Y. S. 2d 192, 198 (Sup.
Ct.
1939), aff'd, 25 N. Y. S. 2d 926 (App. Div. 1941), aff'd,
287 N. Y. 704 (1942); Baley v. Prudential Insurance Co., 147
Misc. 488, 263 N. Y. S. 244 (Sup.
Ct.
1933); Nix v. Donovan, 18 N. Y. S. 435 (
City Ct.
1892).
Affirmed.
United States of America
, Plaintiff-Appellee v. Anthony J. J. A. Wilson, Defendant-Appellant
(CA-3),
U. S. Court of Appeals, 3rd Circuit, No. 13,857, 304 F2d 530, 6/8/62,
Affirming District Court, 60-1 USTC ¶9400, 182 F. Supp. 567
[1939 Code Secs. 276(c)--similar to 1954 Code Sec. 6502]
Collection after assessment: Statute of limitations: Waiver: Offer in
compromise.--Where the taxpayer, in making an offer in compromise,
agreed to suspend the statute of limitations on collection of a
deficiency "for the period during which this offer is pending, or
the period during which any installment remains unpaid and for one year
thereafter," the statute began running again when the Commissioner
advised the taxpayer, after default in the installments, that the
compromise arrangements were terminated and not earlier when the
Commissioner accepted the offer.
Michael A.
Mulroney, Department of Justice,
Washington
25, D. C., for plaintiff-appellee. Felix Rospond, Raymond Commerce
Bldg.,
Newark
2, N. J., for defendant-appellant.
Before
MCLAUGHLIN, STALEY and GANEY, Circuit Judges.
Opinion
of the Court
PER CURIAM:
The decisive
question on this appeal is whether defendant's action to collect an
unpaid balance of income taxes was started prior to the expiration of
the statute of limitations for such suit. In essence it is urged that on
May 11, 1954 when plaintiff accepted defendant's amended offer of
settlement, a definite contract came into being between the parties.
Defendant agreed to pay in accordance with the terms of the settlement
and plaintiff agreed to accept such payment. That, says appellant,
marked the end of the offer and brought into being the agreement which
was breached by the defendant failing to make any settlement payments
after his first. Under the terms of the agreement, the statute of
limitations was to be suspended "* * * for the period during which
this offer is pending, or the period during which any installment
remains unpaid, and for 1 year thereafter." On April 18, 1956 the
Treasury Department advised the taxpayer that because of his failure to
make payments in accordance with the terms of his offer "The
arrangements looking to the compromise of your tax liability are
therefore terminated."
By the
taxpayer's computation the statute resumed running May 11, 1954 and
expired in July 1957. Under the Government contention, the statute
remained suspended until its letter of April 18, 1956 which extended the
statute to July 3, 1959. This suit against the taxpayer was commenced
May 26, 1959 well within the critical date according to the Government
calculation.
It seems to us
that while appellant presents a persuasive argument on the construction
of the phrase "period during which this offer is pending", he
is completely stymied by the clearly expressed further suspension of the
statute called for in the alternative part of the waiver of the statute.
Under it the statute of limitations is suspended for "* * * the
period during which any installment remains unpaid and for 1 year
thereafter." Though the taxpayer had failed to take care of the
settlement installments following his initial payment, he never
attempted to repudiate his agreement that the statute of limitations be
suspended during that period and for a year thereafter. And the
Government did not terminate what it described as "The arrangements
looking to the compromise of your tax liability * * *" until its
letter of April 18, 1956.
We are
satisfied therefore that the statute of limitations did not bar this
suit against the taxpayer. In view of this there is no need of our
passing upon the other point raised of whether the defendant was
estopped from asserting the statute of limitations defense.
The judgment
of the district court will be affirmed.
United States of America, Appellant v.
Metropolitan Life Insurance Company, a corporation, and The Guardian
Life Insurance Company of America, a corporation, Appellees
(CA-4),
U. S. Court of Appeals, 4th Circuit, No. 7465, 256 F2d 17, 6/10/58
[1939 Code Secs. 3678 and 3710--similar to 1954 Code Secs. 7403 and
6332, respectively]
Tax lien against cash surrender value of life insurance policy:
Insured beyond jurisdiction of court.--A lien for taxes owed by a
delinquent taxpayer attached before he fled the country. The court,
therefore, had jurisdiction to foreclose the lien against the cash
surrender value of policies on his life.
Louise Foster,
Department of Justice (Charles K. Rice, Assistant Attorney General, Lee
A. Jackson, Department of Justice, and Albert M. Morgan, United States
Attorney, on brief), for appellant. Howard Caplan (Stewart McReynolds,
George E. Walton, Charles M. Preseon, Daniel J. Reidy, Agnes S. Hunt,
and Stotler, McReynolds & Caplan, on brief), for appellees.
Before
SOBELOFF, Chief Judge, and SOPER and HAYNSWORTH, Circuit Judges.
On
Rehearing
PER CURIAM:
The lien was
perfected by the Commissioner's demand on the insured before he
absconded from the jurisdiction of the District Court. Notice of lien
was filed with the Clerk of the County Court at
Parkersburg
,
West Virginia
, before he absconded. Secs. 3670, 3672, I. R. C. 1939 (26
U. S.
C. A.). The lien then attached to the cash surrender value, which we
regard as a fund held by the insurance company for the insured.
United States
v. Behrens, 230 Fed. (2d) 504 (2 Cir., 1956) [56-1 USTC ¶9294];
United States v. Hoper, 242 Fed. (2d) 468 (7 Cir., 1957) [57-1
USTC ¶9508]; United States v. Bess, 266 W. 4381 (S. Ct., 1958)
[58-2 USTC ¶9595].
The court
proceedings [57-1 USTC ¶9569] to foreclose the lien were, as was said
in the court's opinion [58-1 USTC ¶9230], in the nature of a
garnishment. A lien would be worthless if, after being perfected, it
could be vitiated by the insured's leaving the jurisdiction. Although he
left, the res remained behind, and the Government's rights
therein had already attached. As this Court held in United States v.
City of Greenville, 118 Fed. (2d) 963 (1941) [41-1 USTC ¶9381],
"After the lien provided by the statute attaches, the property has
in a sense two owners, the taxpayer, and to the extent of the lien, the
United States."
The
jurisdictional objection is not well taken. In the case relied on by the
appellee, Stockbridge v. Phoenix Mutual Life, 193 F. 558 (D.
Conn., 1912), there was no lien, and therefore no sufficient res
to support jurisdiction, while here the contrary is true.
We adhere to
the views previously expressed.
LaClaire E. Knox, Appellant v. Great
West Life Assurance Company, a Canadian Corporation, Appellee, and Jacob
Morris Knox and
United States of America
, Interpleaded Defendants-Appellees
(CA-6),
In the United States Court of Appeals for the Sixth Circuit., No.
11,928, 212 F2d 784, April 14, 1954
Liens for taxes: Insurance cash surrender value: State exemption
laws: Priority: Constitutionality of Code Sec. 3671.--The
Government's lien for taxes owing by the assured arose prior to the
dates on which he made his wife irrevocable beneficiary on one policy
and assignee of the other. The Tax Court held that the Government's lien
on the cash surrender value of the policies was prior to that of the
plaintiff-beneficiary. Priority of the Government's lien was not
affected by a
Michigan
statute exempting from levy any insurance policy of a husband insuring
his life for benefit of his wife, since state exemption laws are
ineffective against liens of the
United States
for federal taxes. There was no merit to the contention that Code Sec.
3671 was unconstitutional, and provisions for judicial review of Federal
tax assessments satisfy the requirements of due process.
Affirming the decision of the District Court, 109 Fed. Supp. 207,
reported at 53-1 USTC ¶9247.
Frederick
Yates,
Detroit
,
Mich.
, for appellant. William H. Granse, Phillip Nusholtz, Donald W. Loria,
Fred W. Kaess, Detroit, Mich., for appellees.
Before
MCALLISTER and MILLER, Circuit Judges, and FORD, District Judge.
Order
MCALLISTER,
District Judge:
This case was
heard upon the transcript of record, the briefs of the parties, and the
arguments of counsel in open court. The contention that Title 26 U. S.
C. A., Section 3671, is unconstitutional, is without merit. The claim of
the
United States
is based upon its tax lien created and existing under Title 26 U. S. C.
A., Sections 3670 and 3671. A federal tax lien may take effect without
assessment, notice, or recordation. See Detroit Bank v. United
States, 317
U. S.
329, 337 [43-1 USTC ¶9224]. Here, the lien, under the above statutory
provisions, arose at the time the assessment list was received by the
Collector; and notice and demand for payment were issued to the taxpayer
prior to the time that appellant's claimed interest in the fund in
question was acquired; and such a lien is valid and takes priority over
claims and liens arising subsequent thereto. Citizens State Bank of
Barstow
v. Vidal, 114 Fed. (2d) 380 (C. C. A. 10)[40-2 USTC ¶9603].
Exemptions provided by state laws are ineffective against the statutory
liens of the
United States
for federal taxes.
United States
v. Heffron, et al., 158 Fed. (2d) 657 (C. C. A. 9) [47-1 USTC ¶9194].
The provisions for judicial review of federal tax assessments satisfy
the requirements of due process of law. Phillips v. Commissioner,
283
U. S.
589, 597 [2 USTC ¶743].
In accordance
with the foregoing, and for the reasons set forth in the opinion of
Judge Thornton, the judgment of the district court is affirmed.
United States of America
, Petitioner v. Molly G. Bess Molly G. Bess, Petitioner v.
United States of America
Supreme
Court of the United States, Nos. 395, 410, 357 US 51, 78 SCt 1054,
6/9/58, Affirming CA-3, 57-1 USTC ¶9528, 243 F. 2d 675
On writs of certiorari to the United States Court of Appeals for the
Third Circuit.
[1939 Code Secs. 311 and 3670--similar to 1954 Code Secs. 6901 and 6321,
respectively]
Transferee liability of insurance beneficiary: Attachment of lien to
cash surrender value.--Under applicable
New Jersey
law, the beneficiary of life insurance proceeds is not liable for taxes
owed by the insured, in the absence of a lien. Under the state law, the
insured has no "property" in the proceeds to which a federal
tax lien can attach. However, he does have "property" in the
cash surrender value. Where an insured refused to pay taxes on demand, a
lien attached to the cash surrender value. This cash surrender value
with the lien attached was transferred to the beneficiary--it did not
disappear on the insured's death. Consequently, the lien followed the
property into the beneficiary's hands.
Two
Justices concur in part and dissent in part; three Justices concur and
would also affirm on the basis of the dissenting opinion in Stern,
58-2 USTC ¶9594.
J. Lee Rankin,
Solicitor General, Charles K. Rice, Assistant Attorney General, John F.
Davis, Assistant to the Solicitor General, and A. F. Prescott and
Kenneth E. Levin, Attorneys for the Department of Justice, Washington,
D. C., for the United States. Morris J. Oppenheim, 601 Bangs Ave.,
Asbury Park, N. J., and Daniel Oppenheim, 17 Academy St., Newark, N. J.,
for taxpayer.
JUSTICE
BRENNAN delivered the opinion of the Court:
The
United States
filed this civil action in the District Court for the District of New
Jersey to recover, in equity, from the beneficiary of life insurance
policies the amount of federal income taxes owed by the insured at the
time of his death.
Herman Bess
died a resident of
Monmouth County
,
New Jersey
, on June 29, 1950. His wife, Molly G. Bess, was the beneficiary of
eight insurance policies on his life from which she received $63,576.95
in proceeds. The cash surrender value of these policies at his death was
$3,362.53. Seven of the policies were issued to Mr. Bess from 1934 to
1937 and the eighth, a group policy, in 1950. He retained the right
until death to change the beneficiary, to draw down or borrow against
the cash surrender value and to assign the policies, except that under
the group insurance policy he retained only the right to change the
beneficiary. Mr. Bess paid all premiums and it is conceded that none was
paid in fraud of his creditors.
The federal
income taxes were owing for the several years from 1945 to 1949. The
assets of Mr. Bess' estate were applied to payment of the amounts owing
for 1948 and 1949, but a total of $8,874.57 remained owing for 1945,
1946 and 1947 when the estate was adjudged insolvent by the
Monmouth County Court
in 1952. The amounts owing were $4,159.31 for 1945, $3,789.32 for 1946,
and $925.94 for 1947.
The District
Court held Mrs. Bess liable for the total taxes owing of $8,874.57. 134
Fed. Supp. 467 [55-2 USTC ¶9673]. The Court of Appeals for the Third
Circuit reduced the judgment to the amount of the total cash surrender
value of the policies of $3,362.53. 243 Fed. (2d) 675 [57-1 USTC ¶9528].
We granted certiorari on the Government's petition and Mrs. Bess'
cross-petition, 355
U. S.
861, and set the case for argument with Commissioner v. Stern, ante,
p. -- [58-2 USTC ¶9594]. The Government seeks in No. 395 the
reinstatement of the District Court's judgment in the full amount of the
taxes owing. Mrs. Bess seeks in No. 410 the reversal of the Court of
Appeals judgment in the amount of the cash surrender value.
[State
Law Determines Liability]
I. As in Commissioner
v. Stern, the Government argues that Mrs. Bess, as beneficiary of
her husband's life-insurance policies, is liable for his unpaid federal
income taxes. 1
We held today in the Stern case that recovery of unpaid federal
income taxes from a beneficiary of insurance, in the absence of a lien,
can be sustained only to the extent that state law imposes such
liability in favor of other creditors of the insured. Under
New Jersey
law the beneficiary of a policy of life insurance is entitled to its
proceeds against all creditors except to the extent of the amount of any
premiums for the insurance paid in fraud of creditors. N. J. Stat. Ann.,
1937, §17:34-29; Slurszberg v. Prudential Ins. Co., 15 N. J.
Misc. 423, 192 A. 451; Middlesex County Welfare Board v. Motolinsky,
134 N. J. Eq. 323, 35 A. 2d 463. If in the instant case no lien were
involved, our holding in Commissioner v. Stern would require an
affirmance in No. 395 and a reversal in No. 410, since it is conceded
that Mr. Bess did not pay any premiums in fraud of his creditors.
[Existence
of Tax Lien]
II. However,
the Government contends that it is also seeking in this action to
enforce, as to the 1945 and 1946 deficiencies, liens perfected under §3670
of the Internal Revenue Code of 1939 against the property of Mr. Bess in
his lifetime. Section 3670 provides that "If any person liable to
pay any tax neglects or refuses to pay the same after demand, the amount
. . . shall be a lien in favor of the
United States
upon all property and rights to property, whether real or personal,
belonging to such person." 53 Stat. 448. On July 30, 1948, and
again on August 9, 1948, before Mr. Bess died, notice and demand were
made upon him for payment of the deficiencies formally consented to by
him as owing for 1945 and 1946. He made periodic payments on the amount
owing for 1945, reducing that amount from $11,514 to $4,713.59 before
his death. This balance was further reduced to $4,159.31 by a payment of
$554.28 from his estate pursuant to an order of the Monmouth County
Court. However, no payment on account of the $3,789.32 owing for 1946
was made either in his lifetime or after his death.
First.
As to the tax lien theory, Mrs. Bess contends that the Government did
not assert this basis for recovery before the District Court and
therefore should not be heard to assert that theory in this Court. But
the essential facts pertinent to a decision on the merits of the tax
lien theory were stipulated in the District Court. Moreover, the issue
was fully briefed and argued both in the Court of Appeals and in this
Court. We therefore see no basis for any inference of prejudice in the
circumstances, and accordingly proceed to a determination of the
question.
Second.
Mrs. Bess argues that in any event no lien attached to any property of
Mr. Bess since a lien does not attach under §3670 unless and until the
delinquent taxpayer "neglects or refuses to pay the same after
demand." She urges that the facts stipulated as to the payments on
account of 1945 taxes made by Mr. Bess in his lifetime proves that he
did not neglect or refuse to pay taxes after demand. Since, in the view
we take of this case, the liability of Mrs. Bess is limited to the cash
surrender value of $3,362.53, it suffices that whatever may be the case
as to the 1945 taxes the requisite neglect or refusal was plainly
established as to the 1946 delinquency of $3,789.32, for it is admitted
that Mr. Bess neither paid nor attempted to pay anything on account of
those taxes.
[Insured's
Property in Policy]
Third.
We must now decide whether Mr. Bess possessed in his lifetime, within
the meaning of §3670, any "property" or "rights to
property" in the insurance policies to which the perfected lien for
the 1946 taxes might attach. Since §3670 creates no property rights but
merely attaches consequences, federally defined, to rights created under
state law, Fidelity & Deposit Co. v.
New York City
Housing Authority, 241 Fed. (2d) 142, 144 [57-1 USTC ¶9410], we
must look first to Mr. Bess' right in the policies as defined by state
law.
(a) It is not
questioned that the rights of the insured are measured by the policy
contract as enforced by
New Jersey
law. Manifestly the insured could not enjoy the possession of the
proceeds in his lifetime. His right to change the beneficiary, even to
designate his estate to receive the proceeds, gives him no right to
receive the proceeds while he lives. Cf. Rowen v. Commissioner,
215 Fed. (2d) 641, 644 [54-2 USTC ¶9581]. It would be anomalous to view
as "property" subject to lien proceeds never within the
insured's reach to enjoy, and which are reducible to possession by
another only upon the insured's death when his right to change the
beneficiary comes to an end. We therefore do not believe that Mr. Bess
had "property" or "rights to property" in the
proceeds, within the meaning of §3670, to which the federal tax lien
might attach. Cannon v. Nicholas, 80 Fed. (2d) 934 [35-2 USTC ¶9672];
see United States v. Burgo, 175 Fed. (2d) 196 [49-1 USTC ¶9307].
This conclusion is in harmony with the decision in Everett v. Judson,
228 U. S. 474, that the cash surrender value of a policy on the life of
a bankrupt is the extent of the property which is vested in the trustee
under §70a of the Bankruptcy Act.
(b) The cash
surrender value of the policy, however, stands on a different footing.
The insured has the right under the policy contract to compel the
insurer to pay him this sum upon surrender of the policy. This right may
be borrowed against, assigned or pledged. Slurszberg v. Prudential
Ins. Co., supra. Thus Mr. Bess "possessed just prior to his
death, a chose in action in the amount stated [i. e., the cash
surrender value] which he could have collected from the insurance
companies in accordance with the terms of the policies." 243 Fed.
(2d) 675, 678 [57-1 USTC ¶9528]. It is therefore clear that Mr. Bess
had "property" or "rights to property," within the
meaning of §3670, in the cash surrender value.
United States
v. Hoper, 242 Fed. (2d) 468 [57-1 USTC ¶9508]; Knox v. Great
West Life Assurance Co., 212 Fed. (2d) 784;
United States
v. Royce Shoe Co., 137 Fed. Supp. 786 [55-2 USTC ¶9770]; Smith
v. Donnelly, 65 Fed. Supp. 415 [46-1 USTC ¶9247]; United States
v. Aetna Life Ins. Co., 46 Fed. Supp. 30 [42-1 USTC ¶9266].
But it is
contended that under state law the insured's property right represented
by the cash surrender value is not subject to creditors' liens, whether
asserted by a private creditor, Slurszberg v. Prudential Ins. Co.,
supra, or by a state agency, Middlesex County Welfare Board v.
Motolinsky, supra. However, once it has been determined that state
law creates sufficient interests in the insured to satisfy the
requirements of §3670, state law is inoperative to prevent the
attachment of liens created by federal statutes in favor of the
United States
. Such state laws "are not laws for the
United States
. . . unless they have been made such by Congress itself." Fink
v. O'Neil, 106
U. S.
272, 276; cf. Commissioner v. Tower, 327
U. S.
280 [46-1 USTC ¶9189]. 2
The provisions of the Internal Revenue Act creating liens upon
taxpayer's property for unpaid income taxes, unlike §6 of the
Bankruptcy Act, 30 Stat. 548, as amended, 11 U. S. C. §24, do not
specifically provide for recognition of such state laws. The fact that
in §3691 Congress provided specific exemptions from distraint is
evidence that Congress did not intend to recognize further exemptions
which would prevent attachment of liens under §3670. Knox v. Great
West Life Assurance Co., supra; United States v. Heffron, 158 Fed.
(2d) 657 [47-1 USTC ¶9194]; Shambaugh v. Scofield, 132 Fed. (2d)
345 [42-2 USTC ¶9826]; Smith v. Donnelly, supra.
Fourth.
The transfer of property subsequent to the attachment of the lien does
not affect the lien, for "it is of the very nature and essence of a
lien, that no matter into whose hands the property goes, it passes cum
onere . . ." Burton v. Smith, 13 Pet. 464, 483; see Michigan
v. United States, 317 U. S. 338, 340 [43-1 USTC ¶9225]. The
question therefore is whether the cash surrender values with the lien
attached were transferred to Mrs. Bess as beneficiary when Mr. Bess
died.
It is argued
that the right to receive the cash surrender value expires with the
death of the insured and that thus no property of his passes to the
beneficiary. The contention is that the beneficiary receives the
proceeds of the policies as performance by the insurance company of a
separate promise to pay upon the death of the insured. It is said to
follow that "there is no logical escape from holding that the
'surrender value' comes to an end on the insured's death, if we dispose
of the controversy in accordance with the ordinary rules governing
contracts."
United States
v. Behrens, 230 Fed. (2d) 504, 506-507 [56-1 USTC ¶9294]. This
is to say that the cash surrender value is no part of the proceeds, but
represents merely the right of the insured to cancel the policy and
thereupon receive back from the insurer the amount accumulated from
premiums paid in the past and held to cover the risk to be incurred in
the future. 3
Therefore it is said that the property represented by the cash surrender
value disappears on the insured's death and no lien can survive in any
part of the proceeds.
But the courts
have long recognized that the surplus of the paid premiums accumulated
to make up the cash surrender value should be treated for some purposes
as though in fact a "fund" held by the insurer for the benefit
of the insured. Judge Addison Brown stated in In re McKinney, 15
Fed. 535,537:
"Though
this excess of premiums paid is legally the sole property of the
company, still in practical effect, though not in law, it is moneys of
the assured deposited with the company in advance to make up the
deficiency in later premiums . . .. So long as the policy remains in
force the company has not practically any beneficial interest in it,
except as its custodian, with the obligation to maintain it unimpaired
and suitably invested for the benefit of the insured. This is the
practical, though not the legal, relation of the company to this
fund."
This
view was approved in Hiscock v. Mertens, 205
U. S.
202, 211, and Burlingham v. Crouse, 228
U. S.
459, 469. See also
United States
v. Behrens, supra, at 507.
Thus in economic reality the insurer pays the beneficiary the insured's
"fund," plus another amount sufficient to perform the
insurer's promise to pay the proceeds on the insured's death. Rowen
v. Commissioner, supra, at 647. Therefore we hold that, for purposes
of §3670, there was a transfer of property from the insured to Mrs.
Bess, and that the lien attached to the property before his death
followed the property into her hands. Affirmed.
THE CHIEF
JUSTICE, JUSTICE BLACK and JUSTICE WHITTAKER concur in the opinion of
the Court insofar as it holds that the United States had a valid lien
against the cash surrender value of the insurance polices involved here
which was enforceable against the beneficiary, Mrs. Bess. They would
also affirm the judgment of the Court of Appeals on the basis of the
dissenting opinion of JUSTICE BLACK in Commissioner v. Stern, ante,
p. -- [58-2 USTC ¶9594].
1
The proceeding against Mrs. Bess was not by the summary method
authorized by §311 of the Internal Revenue Code of 1939 but by the
alternative method of a proceeding in equity in the District Court, Leighton
v. United States, 289 U. S. 506 [3 USTC ¶1107]. The courts below
erred in applying §311 in this case. As we held in Commissioner v.
Stern, ante, §311 is a purely procedural statute and has no bearing
upon the liability of Mrs. Bess.
2
Once a federal tax lien attaches to the insured's interest, of course,
the Government, in a proper action joining the appropriate parties, can
enforce the lien in the insured's lifetime and thereby recover the cash
surrender value. Knox v. Great West Life Assurance Co., 212 Fed.
(2d) 784; Kyle v. McGuirk, 82 Fed. (2d) 212 [36-1 USTC ¶9121]; Smith
v. Donnelly, 65 Fed. Supp. 415 [46-1 USTC ¶9247]. See also Cannon
v. Nicholas, 80 Fed. (2d) 934 [35-2 USTC ¶9672]; United States
v. Royce Shoe Co., 137 Fed. Supp. 786 [55-2 USTC ¶9770]. Compare
United States
v. Metropolitan Life Ins. Co., 130 Fed. (2d) 149 [42-2 USTC ¶9609];
United States v. Gilmore, 147 Fed. Supp. 902 [57-1 USTC ¶9569].
3
"In the level premium system of life insurance the net level
premium must be higher than the monetary value of the annual risk during
the early policy years, and the excess must be accumulated with interest
to provide funds for payment of claims after the age is reached where
the value of the annual risk exceeds the net level premium in the annual
premium being paid. It is the necessary accumulation of these funds that
makes possible nonforfeiture benefits. On surrender of a policy the
insurer, being relieved of the obligation to provide death benefits
during future years where the annual value of the risk exceeds the
annual net level premium, no longer needs to retain the surrendering
policyholder's contributions to the funds previously accumulated for
such purpose. Since the surrendering policyholder made a contribution to
these funds during the period from date of issue to date of surrender,
he is equitably entitled to a return equal to the prorata
share of the funds actually accumulated from premiums paid by his
group of policyholders and no longer needed to assure solvency of
the company for the protection of continuing policyholders."
Krueger and Waggoner, The Life Insurance Policy Contract (1953 ed.),
194. (Footnote omitted; Italics added.)
[Concurring
and Dissenting Opinion]
JUSTICE
HARLAN, whom JUSTICE BURTON joins, concurring in part and dissenting in
part.
Insofar as the
Government's action here rests on a theory of liability in equity for
debts of another person, I agree with the Court that Mrs. Bess'
liability is to be determined by reference to state law and that
consequently the Government cannot prevail on this basis since state law
here imposes no liability. I think, however, that the Government fares
no better by asserting a right to the cash surrender values of the
policies by virtue of the statutory lien created by §3670 of the
Internal Revenue Code of 1939.
[Cash
Surrender Value Nonexistent After Death]
In my view the
correct analysis of the surrender-value issue has been given in a Second
Circuit case, United States v. Behrens, 230 Fed. (2d) 504 [56-1
USTC ¶9294], which also involved the enforcement of federal tax liens
asserted under §3670. There Judge Learned Hand, although he felt
constrained to apply the principles of an earlier Second Circuit case, Rowen
v. Commissioner, *
215 Fed. (2d) 641 [54-2 USTC ¶9581], and thereby held for the
Government, observed in speaking for himself and Judge Medina:
"Considered
strictly upon the basis of the legal rights created, the lien on the
'surrender values' came to an end with Behrens's death. The obligation
of an insurer in a policy of life insurance is made up of a number of
promises, of which one is to pay to the beneficiary the amount of the
insurance--the 'proceeds'--and another is to pay the 'surrender value'
to the insured upon his demand. The performances of these promises are
not only separate, but inconsistent with each other: the payment of the
'surrender value' cancels the promise to pay the 'proceeds' and the
promise to pay the 'proceeds' assumes that the insured has not demanded
and received the 'surrender value.' The premiums when paid become the
property of the insurer and the insured has no interest in them,
although it is true that in
New York
, as in most states, a life insurance company's finances are regulated
by statute in much detail in order to protect policyholders. . . . It
follows from what we have said that there is no logical escape from
holding that the 'surrender value' comes to an end on the insured's
death, if we dispose of the controversy in accordance with the ordinary
rules governing contracts." 230 Fed. (2d), at 506-507.
Agreeing with
this reasoning, I believe that although the cash surrender values of
life insurance policies were here properly considered property of a
taxpayer to which federal tax liens attached during the taxpayer's life,
these values cannot be deemed to exist after the taxpayer's death. It
follows that the lien terminated at the time of death. The
"fund" theory of surrender values referred to in the cases
cited in the Court's opinion has in my view no application when it comes
to determining the specific reach of a lien under §3670. Accordingly, I
would affirm the judgment of the Court of Appeals insofar as it denied
the Government relief with respect to the proceeds of these policies
above their surrender values, and reverse it insofar as it held the
petitioner-respondent Bess liable to the extent of the surrender values.
*
In the Rowen case, when a member of the Court of Appeals for the
Second Circuit, I subscribed to a holding that one in the position of
the petitioner in Commissioner v. Stern, ante, p. -- [58-2 USTC
¶9594], should be deemed a ". . . transferee of property of a
taxpayer . . ." within the meaning of §311(a) of the Internal
Revenue Code of 1939 insofar as cash surrender values of life insurance
policies were concerned. Further reflection however has led me to ques
tion the analysis in the Rowen decision on this score. In any
event I do not view that decision, which was concerned with the
interpretation to be accorded §311, as necessarily having application
to a case involving a federal tax lien.
