Annotations- Insurance Policy 1 Page 1

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6332 Annotations: Insurance Policy- Levy

Penalty for Failure to Surrender Property: Insurance policy

 

[35-2 USTC ¶9672]Margaret R. Cannon, Appellant, v. Ralph Nicholas, as Collector of Internal Revenue, Appellee H. Brown Cannon, Appellant, v. Ralph Nicholas, as Collector of Internal Revenue, Appellee

(CA-10), United States Circuit Court of Appeals. Tenth Circuit, Nos. 1289, 1290. September Term, 1935, 80 F2d 934, Decided December 9, 1935

Appeal from the District Court of the United States for the District of Colorado.Collector, to insure collection of unpaid income taxes for 1928, may sell or issue a distraint levy against an annuity contract issued to the taxpayer for a single premium, the issuing company agreeing to pay a certain annuity during his life and upon his death to pay his executors the amount of the premium plus a proportion of the current annuity. The contention that because Sec. 3187 R. S. authorizes sale and distraint as to "stocks, securities, bank accounts, and evidences of indebtedness," and because "bank accounts" were brought into the statute in 1926, Congress intended to exempt all intangible property except that listed is held to be without merit. Collector may be enjoined from selling, under a distraint levy, certain insurance policies on Colorado taxpayer's life, under which policies his wife was the beneficiary, where the Collector advertised the entire policies for sale. Under Colorado law the wife had an interest therein which was not liable for her husband's taxes. Affirming District Court's action, 10 Fed. Supp. 718 [reported at ¶9341 herein], in denying petition to quash warrant of distraint against annuity policy, but reversing lower court's action in denying petition to quash warrants for sale of insurance policies.

Dayton Denious (Wilbur F. Denious and Hudson Moore were with him on the brief) for appellants. S. E. Blackham, Special Assistant to the Attorney General (Frank J. Wideman, Assistant Attorney General, Sewall Key, Norman D. Keller, and J. E. Garvey, Special Assistants to the Attorney General, Ivor O. Wingren, Assistant U. S. Attorney, and Thomas J. Morrissey, U. S. Attorney, were with him on the brief) for appellee.

Before PHILLIPS, McDERMOTT, and BRATTON, Circuit Judges.

McDERMOTT, Circuit Judge, delivered the opinion of the court.

To collect income taxes for 1928 due from H. Brown Cannon, the collector seized under warrant of distraint three policies of insurance upon the life of Cannon, and one annuity contract issued to him. The collector then advertised for sale at public auction those policies and the contract, describing them only as

Three life insurance policies issued by the Capitol Life Insurance Company of Denver, Colo., upon the life of H. Brown Cannon as follows: One for the sum of $10,000; one for the sum of $5,000; one for the sum of $2,000; one annuity insurance policy issued by the Travelers Insurance Company of Hartford, Conn., upon the life of H. Brown Cannon for the sum of $25,000.

Before the sale date, these suits were brought to quash the warrant of distraint; the policies were deposited with the court to abide the litigation, and the sale called off. The essential facts were stipulated, and the bills dismissed on their merits.

 

No. 1290

This case involves the annuity contract, and Mr. Cannon is the plaintiff. On September 1, 1928, for a single premium of $25,000, the issuing company agreed to pay to Cannon $1000. a year during his life, and upon his death to pay his executors $25,000 plus a proportion of the current annuity. The cash and loan value of this contract when the levy was made, was $24,375, against which Cannon had borrowed $20,272.34.

There is little room for the argument that this large sum, invested in an annuity, is exempt from taxes; if taxpayers could invest their fortunes in annuities and stand aloof when the tax collector comes around, payment of taxes would be too often a voluntary matter. To collect its revenues, the power of the government over the property of the taxpayer is plenary. State exemption laws, ex proprio vigore, do not apply. Fink v. O'Neil, 106 U. S. 272. Congress has not in the revenue laws, as it did in bankruptcy, recognized state exemption statutes; nor has it exempted either annuity contracts or life insurance policies.

The statutes governing the collection of taxes are broad and comprehensive. By 26 USCA §115, taxes are decreed to be a lien "upon all property and rights to property, whether real or personal" belonging to the taxpayer. By Sec. 116, the collector is authorized to collect by distraint or sale "the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt" of the delinquent. By Sec. 117 the collector is authorized to levy "upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the said lien exists." By Sec. 118 all persons are required on demand of a collector who has or is about to distrain "on any property, or rights of property" to exhibit all books, etc. By Sec. 129 the collector is authorized to "seize and sell any of the property, real or personal (except property exempt from distraint and sale, under section 3178 (26 USCA 116) of the Revised Statutes), or any right or interest therein." By 26 USCA 1268(a) any person in possession of "property, or rights to property, subject to distraint, upon which a levy has been made" is required to surrender such property to the collector.

An ingenious argument is made that because Sec. 116 specifies "stocks, securities, bank accounts, and evidences of debt," and because "bank accounts" were brought into the statute in 1926, Congress intended to exempt all intangible property except those listed. But the doctrine of expressio unius est exclusio alterius, while at times an aid in construction of doubtful language, does not avail here. In the first place, reading the various sections of the statutes devoted to collection of taxes, it is clear that Congress intended to subject all of a taxpayer's property except that specifically exempted to the payment of taxes. Again, the enumeration here follows the word "including" which has various shades of meaning, sometimes of restriction and sometimes of enlargement. ¹ We have no doubt that the word here was used from an excess of caution, that is, to point out certain classes of property which Congress was fearful a collector might overlook. We do not believe, in the light of the sweeping language used throughout these statutes, that Congress intended to limit distraint to tangible property and to the specified classes of intangibles. No reason is apparent why "stocks and securities" should be subject to levy and an annuity contract not. Again, in a true if not a colloquial sense, an annuity contract is an "evidence of debt."

We hold that this annuity contract is subject to taxes and to distraint. The notice of sale given has spent its force, but it is proper to say that the notice given was not specific enough as to the terms of the contract, its surrender value, loans against it, etc., fairly to apprise the public as to what they were invited to bid on. It is possible, as suggested by counsel for appellant, that the full surrender value can be realized without jeopardizing the rights of the government or possibly sacrificing the rights of appellant at a public sale, by compelling the company to pay the balance of the surrender value to the collector under 26 USCA 1268(a).

The order in Number 1290 is affirmed.

No. 1289

The appeal in Number 1289 presents a much more difficult question. That suit is by Mrs. Cannon, the beneficiary in two policies issued on the life of Mr. Cannon, one a twenty-year endowment for $2000, maturing in 1936. By its terms, that sum is to be paid Mrs. Cannon if her husband dies before 1936, otherwise to him. The other is a straight life policy for $10,000 with Mrs. Cannon the beneficiary. Right is reserved in Cannon to revoke and change the beneficiary in both policies. ² The record does not disclose the loan or cash value of the $2000 policy, but it must nearly equal the face, for it matures in a few months. The loan or cash value of the $10,000 policy, now in its ninth year, is nearly $7000.

Mrs. Cannon contends that, under the Colorado decisions, she is the owner of these policies, and that her property cannot be subjected to the payment of her husband's taxes. The Supreme Court of the United States , in the Community Property and other cases, has held that state law determines the ownership of property subject to its jurisdiction, and that a wife's property cannot be taken for her husband's taxes. Poe v. Seaborn, 282 U. S. 101; Hoeper v. Tax Commission, 284 U. S. 206; Helvering v. City Bank Farmers Trust Company, arguendo, [¶9620 herein], -- U. S. -- (decided November 11, 1935).

The Supreme Court has also held, Chase Nat. Bank v. United States, 278 U. S. 327, that many of the legal incidents of ownership are vested in the insured under a policy payable to another upon his death, where the right is reserved in him to revoke the beneficiary, and among those incidents enumerates the power to pledge the policy for a loan and to dispose of the proceeds for his own benefit during his life. Mr. Cannon has the power to borrow substantial sums upon these policies and to use the proceeds for his own benefit, and that without surrendering the right to keep his insurance in force by paying premiums. ³

Since the notice advertised for sale the entire policies, and not whatever interests therein belonged to the taxpayer, our task is to ascertain whether under Colorado law Mrs. Cannon was vested with any of the incidents of ownership.

In Hendrie Mfg. Co. v. Platt, 13 Colo. App. 15, 56 P. 209, creditors undertook to reach the proceeds of several policies on the life of their debtor, after his death and after his beneficiary had received the proceeds. Two of the policies had endowment features. The opinion does not state that the insured reserved the right to change the beneficiary. There was then no Colorado statute exempting insurance money from debts. After an exhaustive review of the cases, it was held that creditors could not reach life insurance money, the court saying that the fund arose from the beneficiary's insurable interest in the life of her husband; that it did not exist until death; that public policy required that widows and children should not be left destitute; that "the moment it is issued, its ownership vests in the beneficiary," "the title thereto had become vested in her," . . . that until the maturity of an endowment policy "her title was as absolute as if the insurance had been upon any other plan."

In National Bank of Commerce v. Appel Clo. Co., 35 Colo. 149, 83 P. 965, a creditor undertook to reach the surrender value of an endowment policy, with right reserved to change the beneficiary, before the maturity of the endowment or the death of the insured. There was no allegation of insolvency, or that the insured was indebted when the policy was issued. Without deciding the rule applicable in such state of the case, the court held that the beneficiary could not be divested of her interest except by the act of the insured, the opinion concluding:

If the latter should be compelled to surrender these policies to the companies issuing them, and accept the value thereof, the rights of the beneficiaries would be destroyed. The insured may have interests in these policies which a court of equity, if their rights only were involved, might have the power to compel them to apply to the payment of their indebtedness; but, however this may be, a court of equity would not be authorized to exercise this power when thereby the vested rights of third persons would be destroyed, unless it should appear that the conditions existed under which a court of equity, at the instance of a creditor, may annul voluntary arrangements entered into between his debtors and third persons.

In Hill v. Capitol Life Ins. Co., 91 Colo. 300, 14 P. (2d) 1006, the fact situation is not pertinent, but the court held that even where the insured reserved the right to change the beneficiary, that the beneficiary had an "interest in the policy" prior to the exercise of the reserved right.

In 1929 a statute was passed which is set out in the margin. The Colorado courts have not yet had occasion to determine whether this statute is one of exemption or one fixing property rights. If the latter, it does not aid here because the policies in question were issued long prior to its enactment, and because it adds nothing to plaintiff's rights under the cited Colorado decisions. The Second Circuit, in a well-reasoned opinion, has held an identical statute to be one of exemption. In re Messinger (C. C. A. 2) 29 F. (2d) 158. As such, it is not applicable to federal taxes.

From these decisions it appears that in Colorado a beneficiary has a property interest in a policy of life insurance. But it does not follow that the insured has no interest therein, for two or more persons may own interests in the same property. The Bankruptcy Act provides (70-a-5) that, unless exempted by state law, Holden v. Stratton, 198 U. S. 212, the surrender value of any policy on the life of a bankrupt "payable to himself, his estate, or personal representatives" passes to the trustee in bankruptcy unless the bankrupt pays such surrender value to the trustee. In 1917 the question arose whether the surrender value of a policy not payable to the insured or his estate, but with a right to change the beneficiary to himself or his estate, passed to the trustee. Although not passing by virtue of this section, the Supreme Court held that the surrender value passed to the trustee because of his power to change the beneficiary to himself or his estate under 70-a-3. The Supreme Court held:

It might indeed be that it would better fulfill the protection of insurance by considering the proviso alone and literally, regarding the policy at the moment of adjudication, and, if it be not payable then in words to the bankrupt--no matter what rights or powers are reserved by him, no matter what its pecuniary facility and value is to him--to consider that he has no property in it. But we think such construction is untenable. The declaration of subdivision 3 is that "powers which he might have exercised for his own benefit" "shall in turn be vested" in the trustee, and there is vested in him as well all property that the bankrupt could transfer or which by judicial process could be subjected to his debts, and especially as to insurance policies which have a cash surrender value payable to himself, his estate or personal representative. It is true the policies in question here are not so payable, but they can be or could have been so payable at his own will and by simple declaration. Under such conditions to hold that there was nothing of property to vest in a trustee would be to make an insurance policy a shelter for valuable assets and, it might be, a refuge for fraud. And our conclusions would be the same if we regarded the proviso alone.

This court has been careful to define the interest of bankrupts in the insurance policies they may possess. In Hiscock v. Mertens, 205 U. S. 202, we gave a bankrupt the benefit of the redemption of a policy from the claims of creditors, though a cash surrender value was not provided by it but was recognized by the insurance company. In Burling-ham v. Crouse, 228 U. S. 459, 473, we said that it "was the purpose of Congress to pass to the trustee that sum which was available to the bankrupt at the time of bankruptcy as a cash asset, otherwise to leave to the insured the benefit of his life insurance." See also Everett v. Judson, Id. 474. Cohen v. Samuels, 245 U. S. 50, 52-53.

While constrained to hold that Mrs. Cannon has an interest in these policies not subject to sale for her husband's taxes, we do not hold that the taxpayer has no interest therein which may not be liable for his taxes. Whether the loan value can be so subjected under 25 USCA 1268(a) or otherwise, leaving to the beneficiary the right to the proceeds upon his death if premiums are paid as provided in the policy, we are not now called upon to decide; nor need we pass upon the question of whether a sale is a proper way to realize upon values in a life insurance policy because the law limits the bidders to those having an insurable interest in the life of the insured. Hesner v. Life Ins. Co., 47 Mo. App. 336; Industrial Loan & Investment Co. v. Missouri State Life Insurance Co., -- Mo. --, 355 S. W. (2d) 1046. The effort to sell the entire policy, including Mrs. Cannon's interest therein as recognized by the Colorado law, should be enjoined.

The order in Number 1289 is reversed.

¹ Montello Salt Co. v. Utah , 221 U. S. 452. Calhoun v. Memphis & P. R. Co. ( U. S. ) 4 Fed. Cas. 1045. Cunningham v. Sizer Steel Corp. (D. C. N. Y.) 1 F. (2d) 337. United States v. Pierce, 147 Fed. 199. Sullivan Machinery Co. v. United States , 168 F. 561. Decorated Metal Mfg. Co. v. United States , 12 Ct. Cust. App. 140. Achelis v. Musgrove, 212 Ala. 47, 101 So. 670. Fraser v. Beniel, 161 Cal. 390, 119 P. 509. Kennedy v. Industrial Accident Commission, 50 Cal. App. 184, 195 P. 267. Jacksonville Terminal Co. v. Blanshard, 77 Fla. 855, 82 So. 300. Wygtt v. City of Louisville , 206 Ky. 432, 267 S. W. 146. In re Goetz, 75 N. Y. S. 750. In re Sheppard's Estate, 179 N. Y. S. 409. People ex rel. Woolworth's Estate v. State Tax Commission, 192 N. Y. S. 772. Cooper v. Stinson, 5 Minn. 522. Nehr v. McCook Co., 11 S. D. 422, 78 N. W. 998. Blank v. Pioneer Mining Co., 93 Wash. 26, 159 P. 1077.

² The third policy covered by the notice is for $5000 and the beneficiary is Cannon's son. That policy is not in suit, but it was deposited with the clerk, apparently to abide the result of this suit.

³ The policies are not in the record, but it does appear that reserves have accumulated thereon, and such policies ordinarily if not uniformly grant an option to borrow the accumulated reserve without surrendering the policy. While the record is not clear, it may be that Mr. Cannon, in order to borrow on the policy, must either change the beneficiary to his estate, or procure the consent of the beneficiary. But it is conceded that, by changing the beneficiary, he may borrow the stated sum upon the sole security of the policy and without consent of the beneficiary.

⁴ If a policy of insurance, whether heretofore or hereafter issued, is effected by any person on his own life or on another life, in favor of a person other than himself, or, except in cases of transfer with intent to defraud creditors, if a policy of life insurance is assigned or in any way made payable to any such person, the lawful beneficiary or assignee thereof, other than the insured or the person so effecting such insurance, or his executors or administrators, shall be entitled to its proceeds and avails against the creditors and representatives of the insured and of the person effecting the same, whether or not the right to change the beneficiary is reserved or permitted, and whether or not the policy is made payable to the person whose life is insured if the beneficiary or assignee shall predecease such person; Provided, that, subject to the statute of limitations, the amount of any premiums for said insurance paid with intent to defraud creditors, with interest thereon, shall inure to their benefit from the proceeds of the policy; but the company issuing the policy shall be discharged of all liability thereon by payment of its proceeds in accordance with its terms, unless before such payment the company shall have written notice, by or in behalf of a creditor, of a claim to recover for transfer made or premiums paid with intent to defraud creditors, with specifications of the amount claimed." Ch. 113, Laws of Colo. 1929.

 

 

 

[64-1 USTC ¶9392]United States of America, Appellant v. Cornelius W. Sullivan, Alias Neil Sullivan, Joe Bennett, John Thomas, J. Morrison Thomas, John R. Thomas, Mary E. Sullivan, alias Elizabeth J. Sullivan, Aetna Life Insurance Company, General American Life Insurance Company, Metropolitan Life Insurance Company, The Manufacturers Life Insurance Company and The Prudential Insurance Company of America

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 14,091, 333 F2d 100, 4/10/64, Affirming District Court, 62-1 USTC ¶9245, 203 F. Supp. 1

Lien for taxes: Unmatured life insurance policies: Policy loans: Automatic premium loans.--A lien for taxes did not attach to the amount of loans against the policy, made by the insurance company to the tax-delinquent insured while the policies were unmatured, or to automatic premium loans used by the company to pay premiums due on the policies. The insured under an unmatured policy simply may elect to take the cash surrender value and have the policy cancelled, and while a tax lien can attach to this power of election, there is nothing held by the insured before the election to which this lien can attach. Policy loans and automatic premium loans serve to reduce the cash surrender value, not to create a creditor-debtor relationship, and the Government cannot hold the insurer accountable for the policy loan amounts or the automatic premium loans.

Property subject to levy: Refusal to surrender: Penalty.--Statutory levy against the insurance companies was not available to the Commissioner, because to authorize him to acquire the cash surrender value without receiving an assignment of the policies or without judicial foreclosure would authorize him to alter an existing contractual arrangement.

One dissent.

J. B. Jones, Jr., J. Kovner, Department of Justice, (L. F. Oberdorfer, Assistant Attorney General, L. A. Jackson, M. A. Mulroney, Department of Justice, J. S. Ammerman, G. Diamond, U. S. Attorneys, T. J. Shannon, Assistant U. S., Attorney, on brief), for appellant. A. Black, Pittsburgh, Pa. (J. M. Reed, Pittsburgh, Pa., J. H. Filer, Aetna Life Insurance Co., on brief), for Aetna Life Insurance Co.; G. J. Helwig, Pittsburgh, Pa. (J. T. Fort, Pittsburgh, Pa., E. H. McVitty, Toronto, Can., on brief), for Manufacturers Life Insurance Co., appellees. K. M. Worthy, G. L. Archer, Jr., Washington, D. C. for Life Insurance Ass'n of America, amicus curie.

Before BIGGS, Chief Judge, MCLAUGHLIN, KALONDER, STALEY, HASTIE, GANEY and SMITH, Circuit Judges.

Opinion of the Court

By BIGGS, Chief Judge:

The United States brought this action under Section 7403 of the Internal Revenue Code of 1954, ¹ to foreclose a tax lien on unmatured insurance policies. Defendants in the proceeding below in addition to the delinquent taxpayers, Cornelius W. Sullivan and his wife, Mary E. Sullivan, were the Aetna Life Insurance Company [" Aetna "], and the Manufacturers Life Insurance Company ["Manufacturers"]. ² From adverse determinations in the court below, reported at [62-1 USTC ¶9245] 203 F. Supp. 1 (1962), the Government has appealed.

There is no question that the Commissioner of Internal Revenue can reach the "cash surrender values" of a delinquent taxpayer's unmatured insurance policies and can apply the amounts realized to the satisfaction of the deficiency. The issues raised on this appeal concern the fundamental problem of the means by which the foregoing can be accomplished and the interrelated question of the proper measure of the Commissioner's recovery.

The facts are not in dispute. On November 4, 1952 the Commissioner made an assessment of income taxes with penalties and interest jointly against the Sullivans for deficiencies for the year 1950. On November 5, 1952 the District Collector received the assessment list from the Commissioner and vainly demanded payment from the Sullivans. A lien against the Sullivans' "property and rights to property" automatically arose at this time under Section 3670 of the Internal Revenue Code of 1939. ³

Thereafter, between November 8, 1952 and April 6, 1953, and pursuant to Section 3672 of the Internal Revenue Code of 1939, ⁴ notice of lien was filed of public record in various counties. ⁵

The outstanding tax liability of the Sullivans was partially reduced subsequently pursuant to a determination of the United States Tax Court. In addition, some of the amount due was recovered. A balance of $163,486.54 was still outstanding at the time of commencements of the present action.

On May 21, 1953 the Sullivans purchased an insurance policy from Aetna , No. P 975 434, in the face amount of $10,000. On June 17, 1953 the Sullivans purchased an insurance policy from Manufacturers, No. 1 250 226, in the face amount of $15,000. ⁶ Under each of the policies Mrs. Sullivan was the named insured and Mr. Sullivan was the designated beneficiary. Mrs. Sullivan had the right under the policies to change the beneficiary, to exercise all options, and to take part in for present purposes substantially identical dividend sharing plans. ⁷ Mrs. Sullivan elected under both policies to have dividends accumulated at interest. ⁸

The Aetna policy was of the endowment type. It was to mature at the end of twenty-six years at which time Mrs. Sullivan, then having attained the age of sixty-five, was to receive an income of $100.00 a month for life. ⁹ In the event of Mrs. Sullivan's death before the policy's maturity, the proceeds of the policy were to be paid in one lump sum to the beneficiary, Mr. Sullivan. ¹⁰ The Manufacturers policy was a "whole life policy" with its face amount, $15,000.00, payable to the beneficiary, Mr. Sullivan, on the death of Mrs. Sullivan.

It is unquestioned that the policies were substantially identical in all respects material to this appeal. Generally speaking, at any given time and as to each of the policies, the part of the total premiums paid in on the policy which exceeded the insurer's accrued policy costs plus, for essential purposes, accumulated dividend amounts represented the cash value of that policy. ¹¹ The cash value varied throughout the life of the policy. The cash value less any outstanding policy indebtedness previously incurred by the insured to the insurer constituted the cash surrender value of the policy. The cash surrender value was the amount the insured was entitled to receive on election to cancel the policy in accordance with its terms as detailed hereafter. ¹²

The two policies contained a number of substantially identical provisions authorizing various uses of their respective reserves by the insured, Mrs. Sullivan. ¹³ The first of these gave the insured the right to elect to cancel the policy and to receive in settlement its cash surrender value. A condition precedent to the right to recover the cash surrender value was surrender of the policy to the company for discharge. Mrs. Sullivan never took any action to obtain the cash surrender value of either policy other than that implicit in the policy loan transactions with Manufacturers discussed infra.

The second of these provisions gave the insured the right to borrow on the security of the policy at five per cent per annum. The Manufacturers policy specifically stated and the Aetna policy provided in effect that all amounts so loaned and interest thereon were to be a first lien on the policy. Under each of the policies there was no specific obligation to repay the amount borrowed; a failure in this regard simply served to bring about a permanent reduction in the cash surrender value. But if the permanent arrearage came to exceed the cash value of the policy, the obligations of the company under the policy were terminated and the policy was thereby cancelled.

The third provision was an optional automatic premium loan clause, revocable at will, which provided in substance that in the event of a default in the payment of premiums, as long as a cash surrender value existed on the policy the company would automatically loan to the insured and apply to premium payment the amount due. The insurance policies prescribed the same terms for these loans as were applicable to general policy loans, i.e., a first lien on the policy to the extent of the loan and an interest charge of five per cent. Mrs. Sullivan elected to have the automatic premium loan provisions of the policies be operative and she did not at any time revoke her elections. ¹⁴

Finally, a fourth substantially identical clause of significance was contained in the policies. This was a nonforfeiture provision which in substance provided that in the event of default in payment of premiums and at the election of the insured, each policy could be continued to the extent of its cash surrender value as either participating paid-up insurance or non-participating extended term insurance. In the absence of an election on the part of the insured, there was to be an automatic conversion into non-participating extended term insurance.

The non-forfeiture provision mentioned in the preceding paragraph was never operative in the instant case inasmuch as Mrs. Sullivan elected that the automatic premium loan provision of the policies should become operative in the event of premium default. The clause is nevertheless of some relevance in that Mrs. Sullivan could have revoked the applicability of the automatic premium loan provision at any time. ¹⁵

Aetna and Manufacturers were never served with notice of lien, nor did they receive actual notice of the Government's claim from any source until later served with notice of levy, discussed infra. On July 12, 1955 and on June 24, 1957 Manufacturers granted to Mrs. Sullivan policy loans of the combined principal amount of $714.52. The policy loan amounts were applied to outstanding premiums at the request of Mrs. Sullivan. The automatic premium loan clause of course was in effect at these times, but it had not yet become operative because it made provision for a grace period which had not expired in either instance.

On January 9, 1958 Aetna and Manufacturers were served with an identical "notice of levy" under the purported authority of Sections 6331 and 6332 of the Internal Revenue Code of 1954. ¹⁶ The notice in pertinent part stated: "You are further notified that demand has been made upon the taxpayer for the amount set forth herein, and that such amount is still due, owing, and unpaid from this taxpayer, and that the lien provided for by Section 6321, Internal Revenue Code of 1954 [the current lien provision, corresponding in substance to Section 3670, Internal Revenue Code of 1939, see note 19 infra], now exists upon all property or rights to property belonging to the aforesaid taxpayer. Accordingly, you are further notified that all property, rights to property, moneys, credits and bank deposits now in your possession and belonging to this taxpayer (or with respect to which you are obligated) and all sums of money or other obligations owing from you to this taxpayer are hereby levied upon and seized for satisfaction of the aforesaid tax, together with all additions provided by law, and demand is hereby made upon you for the amount necessary to satisfy the liability set forth herein, or for such lesser sum as you may be indebted to him, to be applied as a payment on his tax liability."

On January 23, 1958 Manufacturers was served with a "final demand" which in relevant part provided as follows: "Demand is again made for the amount set forth in the notice of levy, $232,215.64, or for such lesser sum as you may have been indebted to the taxpayer at the time the notice of levy was served. If you comply with this final demand within five days from its service, no action will be taken to enforce the provisions of Section 6332 of the Internal Revenue Code. If, however, this demand is not complied with within five days from the date of its service, it will be deemed to be finally refused by you and proceedings may be instituted by the United States as authorized by the statute quoted above." In response to this demand, on January 29, 1957 Manufacturers paid the sum of $196.41 to the Government on account of accumulated dividends. It apparently took no other action in response to the notices served upon it.

The record does not indicate that Aetna was served with any documents subsequent to the original notice of levy.

Mrs. Sullivan did not pay premiums on either policy which fell due in 1958 and 1959. Accordingly, pursuant to the automatic premium loan provisions of the policies and notwithstanding the above-mentioned notices served on them, the insurers proceeded in those years to effect automatic premium loans on the respective policies. The automatic premium loans brought about by Manufacturers encompassed a principal amount of $888.90, and those of Aetna totalled $1319.80.

The present action was commenced on October 30, 1958. Prior to judgment and pursuant to a stipulation between the United States and the Sullivans, on January 15, 1960 and January 25, 1960 respectively, Mrs. Sullivan delivered the Aetna policy to Aetna and the Manufacturers policy to Manufacturers and on these same respective dates executed releases to the two companies. The releases, identical in pertinent part, provided that Mrs. Sullivan "agrees that the entire liability of . . . [each of the insurers under its policy] except for the cash value, is hereby discharged and terminated, and the net cash value [i.e., the cash surrender value] shall be determined as of the date of this release and paid to the United States . . ." The Aetna policy had a cash surrender value of $850.36 at the time of surrender and release. The Manufacturers policy no longer had a cash surrender value at that time.

The court below held that the Government was entitled to be paid the cash surrender value under each policy determined as of the date of surrender and release, January 15, 1960 and January 25, 1960 respectively, and that upon payment of the respective amounts, the insurance companies would be wholly discharged from their policy obligations. Accordingly, judgment was entered against Aetna for $850.36 and six per cent interest from January 15, 1960 and judgment was entered in favor of Manufacturers.

On this appeal the amount in dispute as to Manufacturers is the principal sum and interest deducted from the cash value of its policy on account of the two policy loans and two automatic premium loans effected by it. The controversy in regard to Aetna covers the corresponding amount deducted with respect to its two automatic premium loans. ^{17, 18}

The issues raised on the instant facts with regard to policy loans and automatic premium loans will be treated separately inasmuch as distinct considerations are involved. Before specifically discussing these issues in turn, however, it is necessary to consider the tax lien and its relation to the cash surrender value of an unmatured insurance policy.

I. The Tax Lien and the Cash Surrender Value

The Government's lien on Mrs. Sullivan's interest in the unmatured insurance policies of Aetna and Manufacturers arose by virtue of Section 3670 of the Internal Revenue Code of 1939. ¹⁹ Section 3670 provides as follows: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest . . .) 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." ²⁰ By virtue of Section 3671 of the Internal Revenue Code of 1939, the lien attached to Mrs. Sullivan's property interests generally as of the time when the assessment list was received by the District Collector on November 5, 1962 ²¹ and specifically attached to her continuing interest in the insurance policies of Aetna and Manufacturers at and from the time of their issuance on May 21, 1953 and June 17, 1953 respectively. See Glass City Bank v. United States, 326 U. S. 265 (1945).

On the basis of the fact that the tax lien established by and perfected pursuant to Sections 3670, 3671 and 3672, Internal Revenue Code of 1939, covered Mrs. Sullivan's interest in the two policies, the Government seemingly asserts that, subject only to the concededly subsisting automatic premium loan provisions of the policies, the tax lien was specifically attached to the respective cash surrender values themselves as held by the insurers. This argument is fundamentally premised on the hypothesis that the cash surrender value of a typical unmatured insurance policy as held by the insurer, itself constitutes "property" or "rights to property" within the meaning of Section 3670 to which the federal tax lien attaches. We find no merit in this premise in view of the nature of the relationship which exists between insurer and insured as generally recognized.

It is certainly true that the source of the effective rights of the Government in an unmatured insurance policy of a delinquent taxpayer is directly related to the cash surrender value. Generally, at any point in time the policy is worth in monetary terms to the insured no more than or no less than she can receive by virtue of its cash surrender value. This is the sum the Commissioner could receive if the taxpayer voluntarily assigned her interest in the policy to him and such amount would, of course, constitute the measure of the recovery of the Government when the Commissioner took appropriate steps to the same end by enforcing the lien on the policy by levy upon it as held by the delinquent-insured or by lien foreclosure.

But at least in regard to the effective scope of attachment of a tax lien, the lien can only attach to "property and rights to property" as it finds them. See and compare Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960); United States v. A & P Bakery Supply & Equip. Co., 3 Am. Fed. Tax R. 2d 579 (S. D. Fla. 1959). To put the matter in its most fundamental perspective, it is unquestioned that the operative status of an insurance policy is unaffected by the mere attachment of a tax lien to a delinquent-insured's interest therein. Additionally, it is not controverted that the insured's basic right under the present type of policy is other than to have the insurer perform a certain specified obligation on the policy's maturation. The insured also has a number of other rights under this kind of policy, some of which have been indicated previously and all of which can be collectively temed a "bundle of rights." One of the insured's specific rights is entirely inconsistent with the basic right. This encompasses the discretionary power to elect to cancel the policy and receive its cash surrender value. See United States v. Massachusetts Mut. Life Ins. Co. [42-1 USTC ¶9342], 127 F. 2d 880, 883 (1 Cir. 1942). Until such an election is made, it seems apparent under any standard that the insurer holds neither "property" nor "rights to property" to which a tax lien could attach but is simply the obligor to a broadly based chose in action arising out of a substantially executory contract. See United States v. Manufacturers Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366, 368 (2 Cir. 1952); United States v. Massachusetts Mut. Life Ins. Co., supra. See also Burnet v. Wells [3 USTC ¶1008] 289 U. S. 670, 679-80 (1933).

This court's decision in United States v. Penn Mut. Life Ins. Co. [42-2 USTC ¶9623], 130 F. 2d 495 (3 Cir. 1942) supports the position that the insured under an unmatured insurance policy of the present nature simply has a power of election with respect to the cash surrender value, that a lien can attach to the insured's policy rights including this power of election since the lien reaches intangible as well as tangible property, but that there is nothing held by the insurer before election, either tangible or intangible, to which the lien can additionally attach. See United States v. Massachusetts Mut. Life Ins. Co., supra; United States v. Mitchell [62-2 USTC ¶9802], 210 F. Supp. 810 (S. D. Ala. 1962).

The Government, however, asserts that the Supreme Court's decision in United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958) compels a contrary interpretation. But the Bess case involved a clearly distinguishable situation, one in which a delinquent taxpayer who was the insured in various life insurance policies, died and the Government on the basis of a pre-existing tax lien on the taxpayer's interest in the policies, sought to impose liability on the beneficiary in the policies' proceeds. Since the policies concerned had matured, no specific question was presented in that case as to the effective relationship between the contracting parties during the executory phase of the policies' existence. ²² Inasmuch as the deceased taxpayer's right in regard to the cash surrender values had been covered by a pre-existing tax lien, the significance of which is discussed infra, it would have been neither realistic nor in accordance with sound policy for the Government to have been held to be foreclosed from recovery merely because of the death of the delinquent taxpayer. See United States v. Behrens, [56-1 USTC ¶9294], 230 F. 2d 504, 507 (2 Cir.), cert. denied, 351 U. S. 919 (1956). See also Chase Nat'l Bank v. United States [1 USTC ¶346], 278 U. S. 327, 334-39 (1929). Accordingly, as we read the opinion and to the extent pertinent here, the Supreme Court recognized that the taxpayer's right to receive the cash surrender values was "property" or "rights to property" to which the tax lien had attached, and it held that the lien was not extinguished by the taxpayer's death but survived to the extent of the cash surrender values existing at that time because although the reserve on a particular policy was legally property solely of the insurer, ²³ "the surplus of the paid premiums accumulated to make up the cash surrender value should [nevertheless] be treated for some purposes as though in fact a 'fund' held by the insurer for the benefit of the insured." Id. at 59. (Italics added.) ²⁴ See United States v. Pilley, 60-2 U. S. Tax Cas. ¶9794 (W. D .Tenn. 1960); Flax v. United States [60-1 USTC ¶9175], 179 F. Supp. 408 (D. N. J. 1959).

The instant question certainly was not directly before the Supreme Court in Bess since, as previously mentioned, the insurance policies in question in that case had matured. And from the above discussion it appears clear that the Court did not even imply in Bess that the tax lien attached to any specific property held by the insurers. Indeed, what relevant implication the Bess decision does contain for the case at bar, supports our present holding. We therefore fail to see any merit in the Government's position. We will now turn to a consideration of the specific issue presented in regard to policy loans.

II. Policy Loans

The Government claims a right of recovery against Manufacturers regarding the company's two policy loans on the basis of the theory that the transactions in question created a creditor-debtor relationship between Manufacturers and Mrs. Sullivan and that Mrs. Sullivan's policy interest served as security for satisfaction of the obligation. If such a relationship was legally created, in view of the fact that the Government had a perfected lien on this same interest at the time of the transactions, and notwithstanding Manufacturers' lack of actual notice of the Commissioner's claim at the critical times, it follows on the basis of priority of lien that no right of setoff for policy loans and interest theeon was allowable as against the Government. See Knox v. Great West Life Assur. Co. [53-1 USTC ¶9247], 109 F. Supp. 207 (E. D. Mich. 1952), aff'd, [54-1 USTC ¶9373] 212 F. 2d 784 (6 Cir. 1954); United States v. Royce Shoe Co., 137 F. Supp. 786 (D. N. H. 1956).

We are of the opinion, however, that the proper characterization of the status of Manufacturers with regard to the policy loan transactions both legally and functionally was that of debtor rather than that of creditor. Under the policy Mrs. Sullivan not only had the right to elect to cancel the policy and receive its cash surrender value but she also had the right to be granted policy loans to the extent of the cash value. At the time of the two policy loan requests, therefore, Manufacturers became specifically obligated to Mrs. Sullivan to the extent of the amounts demanded. And as to the particular sums themselves, Mrs. Sullivan was in no way bound or required to repay them, a failure in this regard simply serving to bring about a permanent reduction in the cash surrender value. In this most fundamental sense, therefore, the policy loan disbursements were compulsory advances pro tanto of the cash surrender value. ²⁵

The general rule that policy loans do not serve to create a creditor-debtor relationship but only suffice to discharge part of the insurer's ultimate policy obligation, was definitively and clearly established by Mr. Justice Holmes in Board of Assessors of the Partish of Orleans v. New York Life Ins. Co., 216 U. S. 517 (1910), a case which has been cited and relied upon by the Supreme Court, the lower federal courts, and the courts of many states. Mr. Justice Holmes stated: "The so-called liability of the policyholder never exists as a personal liability, it never is a debt, but is merely a deduction in account from the sum that the . . . [insurer] ultimately must pay. . . . In substance it is extinct from the beginning, because . . . it is a payment, not a loan." Id. at 522. See Williams v. Union Cent. Life Ins. Co., 291 U. S. 170 (1934); Schwartz v. Seldon, 153 F. 2d 334 (2 Cir. 1945); First Nat'l Bank v. State Life Ins. Co., 80 F. 2d 499 (5 Cir. 1935); Lee v. Equitable Life Assur. Soc'y, 56 F. Supp. 362 (E. D. Mo. 1944); In re Hirsch, 4 F. Supp. 708 (S. D. N. Y. 1933); In re Schwartz' Estate, 369 Pa. 574, 87 A. 2d 270 (1952). Cf. Carpenter v. Commissioner [63-2 USTC ¶9689], 322 F. 2d 733 (3 Cir. 1963), cert. denied, -- U. S. -- (1964).

This general principle is seemingly uncontrovertible. Additionally, the present circumstance exemplifies a situation in which the application of the rule is particularly justified on policy grounds. In this regard we quote the following from the opinion of the court below, 203 F. Supp. at 13: "Evidence produced in the Kann case [a companion case properly consolidated and tried with the instant case, see note 2 supra] indicates that six of the seven defendant companies alone made 1,408,051 policy loans amounting to $455,298,956 during the year 1960. Insurance companies have no means of maintaining accurate up-to-date records of policyholders' residence addresses and obviously have no means of knowing where the policy itself is located. A requirement that lien records of more than 3000 counties be searched in every instance in which a policyholder seeks to obtain a loan or the entire cash surrender value of a policy would pose tremendous problems.

"A survey made by one of the companies involved indicates that to make a search of lien records would cost approximately six dollars per search. The vast number of applications for loans and surrender values of policies are emergency in nature and as presently administered they represent a quick, certain way to secure funds urgently needed. Many companies pride themselves on twenty-four hour service; this would be extended if searches of the lien records of 3000 counties were required in every case. To conduct a search in any one county would require from three to five days. The inconvenience, delay and expense that would result to the millions of policyholders who apply for policy loans or cash values each year greatly exceed any interests the Government might possibly have in sustaining its position."

The only arguable basis for adoption of the Government's approach, as also stated by the court below, 203 F. Supp. at 12, "is the form of the transactions, i.e., loans are carried as assets on the companies' books, interest is charged and so reflected on the companies' books, a Pennsylvania statute expressly permits policy loans to be used as an investment for insurance company capital and reserves, and policy loans are listed as assets of the companies in their reports filed with the insurance authorities of the states." The court went on to state: "However, none of these factors compel a departure from this well-settled concept.

"On the contrary, the testimony in this case indicates that the accounting procedures are necessary to meet the solvency requirements of state law, that reserves must be computed upon the basis of certain specific actuarial assumptions which relate to the gross amount of insurance outstanding, age of the individuals, etc., that it is accordingly more convenient to treat advances as a separate item, that there is no obligation of repayment and that the interest charged merely represents what it is estimated the sum would have earned if it had not been advanced."

Wholly apart from the fundamental canon that form should not be allowed to prevail over substance, there is no valid basis for essential disagreement with these expressions of the court below. We therefore hold that Manufacturers granted the two policy loans in the capacity of debtor and that the respective amounts were partial advances of the cash surrender value. Accordingly, the Government cannot prevail over Manufacturers as to these sums on the basis of priority of lien.

The Government has not set forth any other theory, nor can we conceive of any additional, reasonably arguable basis for holding Manufacturers accountable for the policy loan amounts inasmuch as these transactions were effectively consummated prior to the company's receipt of actual notice of the tax lien. ²⁶ It therefore follows that this part of the Government's appeal fails.

III Automatic Premium Loans

The most difficult aspect of the case at bar concerns the issue posed with regard to automatic premium loans. It is a question different in kind from that presented by policy loans where the operative status of the insurance contract was not in issue but simply the problem of when, as to sums validly coming due under the policy, a duty arises on the part of the insurer to act in a manner consistent with safeguarding the Government's interest. And in this regard we have held merely that no issue of duty and therefore accountability can arise as to transactions effectively consummated by the insurer prior to its reception of actual notice of the Commissioner's claim.

Actual notice in itself, however, does not provide any sort of basic test necessarily also applicable to and determinative of the instant question inasmuch as what is involved here is the effective status of the policies in light of the tax lien. Stated in a way which poses the problem, the lien on any debts brought about by the functioning of the automatic premium loan clauses is subject to those provisions' further operational requirement that such amounts be applied to premium payment. ²⁷

The Government concedes the essence of the foregoing, that the mere attachment of the tax lien to Mrs. Sullivan's interest in the two policies could not effect per se the intrinsic operation of the policies and their automatic premium loan provisions, that the insurance contracts, including those clauses, remain in force until some legally effective step is taken against their operation by the Commissioner, and that until such time the insurers without risk on their part are entitled to effectuate automatic premium loans in accordance with the terms of their policies.

One such step, according to the Government, which suffices to render ineffective the automatic premium loan provisions of the policies, is the service of notice of levy upon the insurers. Specifically, the Government contends that notice of levy "is a formal notice to the insurer that the automatic premium loan provision is revoked" ²⁸ and constitutes a valid "demand under the terms of the contract for the cash surrender value." ²⁹

Aetna and Manufacturers argue in substance, on the other hand, that the automatic premium loan provisions of the policies cannot be rendered inoperative and the cash surrender values cannot be demanded validly by levy upon the insurers in the absence of a voluntary assignment of the policy by the delinquent-insured to the Commissioner, that the appropriate remedy of the Government is either levy on the insurance policy itself as held by the insured or judicial foreclosure, and accordingly that it is only at the time when either of these two remedies is pursued and perfected that the insured's interest in the policies can be effectively reached.

The Government does not dispute the availability of the two remedies emphasized by the insurers. The disagreement between the parties is limited to the question of whether the Commissioner has the additional right to proceed directly against the insurers.

We have already indicated our view that policy loans are in substance advances pro tanto of the cash surrender value. This same conclusion applies just as readily regarding the characterization of automatic premium loans. It necessarily follows that no issue concerning priority of lien is involved in the instant problem. Rather the ultimate question posed is whether Aetna and Manufacturers are liable for the statutory "penalty" prescribed by Section 6332, Internal Revenue Code of 1954, set out infra, in the circumstance at bar. ³⁰ Since it is clear, however, that Section 6332 cannot be given a meaning apart from the statutory levy scheme in general, the fundamental issue presented is whether the levy provisions of the Code are of avail to the Commissioner as against insurers with regard to unmatured insurance policies of the present nature.

The basic levy provision of the Internal Revenue Code of 1954, Section 6331, in pertinent part provides as follows: "(a) Authority of Secretary or delegate.--If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. . . . (b) Seizure and sale of property.--The term 'levy' as used in this title includes the power of distraint and seizure by any means. In any case in which the Secretary or his delegate may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible)."

Section 6332, Internal Revenue Code of 1954, as previously indicated, is the provision of particular relevance in the case at bar. It provides in pertinent part as follows: "(a) Requirement.--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 of the Secretary or his delegate, surrender such property or rights (or discharge such obligation) to the Secretary or his delegate, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process. (b) Penalty for violation.--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."

Preliminarily, it is necessary to emphasize that the instant issue relates to a general question of statutory construction, i. e., whether the Commissioner is empowered to exercise the contractual rights and powers of a delinquent-insured under an unmatured insurance policy, ³¹ in particular, the right to demand the cash surrender value and the right to revoke the applicability of the automatic premium loan provision. In terms of the Code and in view of the nature of the issue presented, it is not possible to distinguish between these two rights, both of which it has been asserted the Commissioner validly exercised in the case at bar. The basic question posed is the same with regard to each: whether or not the Commissioner is unilaterally empowered to alter an existing tripartite contractual arrangement of the present nature, the two asserted rights simply representing respectively, the power to cancel the insurance contract in whole, as is discussed infra, and the power to cancel one particular clause.

Levy is a summary, non-judicial process, a method of self-help authorized by statute which provides the Commissioner with a prompt and convenient method for satisfying delinquent tax claims. See Bull v. United States [35-1 USTC ¶9346], 295 U. S. 247, 259-60 (1935). See also New Hampshire Fire Ins. Co. v. Scanlon [60-1 USTC ¶9423], 362 U. S. 404, 407-08 (1960). Statutory levy is substantially broader in scope than anything known to the common law, and it is applicable to intangible as well as to tangible property. See Glass City Bank v. United States, supra. When validly invoked, it effects a seizure of the delinquent's property tantamount to a transferal of ownership. See United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118, 121 (4 Cir. 1955). The very nature and breadth of this somewhat drastic administrative process gives continued emphasis to its raison d'etre and serves to underscore the fundamental truth that "taxes are the life-blood of government, and their prompt and certain availability an imperious need." Bull v. United States, supra, at 259.

It does not follow, however, that statutory levy was available to the Commissioner as against Aetna and Manufacturers in the circumstance at bar since no present obligation existed on the part of the insurers and the contractual arrangements in question were tripartite in nature. The levy provisions of the Code are essentially procedural and remedial in the sense that they provide the Commissioner with an optional alternative, when practicable, to the more cumbersome judicial foreclosure procedure supplied by Section 7403, Internal Revenue Code of 1954, set out in note 1 supra, for the enforcement of tax liens. Statutory levy, as indicated above, grants to the Commissioner an extremely broad power with regard to collection of delinquencies. But implicit in the statute is the principle that the Commissioner acts pursuant to the collection process in the capacity of lienor as distinguished from owner. Moreover, nowhere in the Code is there a provision granting to the Commissioner power over property interests of delinquents comparable to that given the trustee in bankruptcy with respect to conversion of life insurance into a matured obligation. See 11 U. S. C. A. §110(a)(3) and (5), ³² Cohen v. Samuels, 245 U. S. 50 (1917); Plumb, Federal Tax Collection and Lien Problems, 13 Tax L. Rev. 247, 255 n. 61 (1958). Finally, we can find no statutory warrant for a conclusion that the Commissioner in the course of the collection process is vested with broad powers characteristic of a court-appointed receiver.

Additionally and more fundamentally, it appears obvious that if the Commissioner could with validity unilaterally acquire the cash surrender value of a delinquent-insured's policy by means of levy upon the insurer in the present type of circumstance, the necessary result of such action would be the termination of the policy and, with one clear exception noted below, all interests therein in just as conclusive a manner as if the insured himself or herself had been the demanding and receiving party. ³³ The application of the remedy of levy and distraint against insurers with respect to unmatured insurance contracts would be unique, therefore, in that such action would result in a fait accompli, the insurance contracts and the interests therein being extinguished. ³⁴

In our view, to interpret the statute as admitting of such a consequence would be to impute to statutory levy a substantive significance which never was contemplated by Congress and which indeed is rejected by strong implication in the statute itself. Section 6337 of the Internal Revenue Code of 1954, set out below, ³⁵ grants to the owner of seized property a right of redemption with respect to such property, which right is exercisable over certain defined periods of time. This provision seems to be of significance in two interrelated respects regarding the instant question. First and foremost, it strongly tends to indicate that the remedy of levy and distraint was not meant to be applied against assets in such a manner as to destroy them by that very action. Second, it manifestly makes relevant considerations of fairness to the insured, albeit possibly delinquent, taxpayer. Whatever other rights and remedies a purported delinquent may have against the Government in a particular circumstance, he is entitled to this additional one. A right of redemption would be of no utility in the present circumstance and would therefore be illusory. Moreover, the instant situation represents the very type of case in which such a right would be of most critical import and practical utility inasmuch as the value of an insurance policy of the present nature is not strictly defined by its monetary worth. ³⁶

Finally, in view of the nature of the problem at issue it is not readily apparent how a decision in favor of the Government in the case at bar could be realistically distinguished in terms of the statute from a situation in which an innocent (i. e., nondelinquent third party is concerned as insurance beneficiary. And the parties to this appeal have tacitly assumed that the delinquent status of the beneficiary, Mr. Sullivan, under the instant policies was immaterial to the present question. Insurance involves complex intangible interests with the rights of beneficiaries inseparably interwoven with those of delinquent-insureds for the purpose at hand, ³⁷ a fact which brings into play not only the question of fairness to the beneficiaries but also the matter of the traditional and great interest of the states in the area of insurance. The Commissioner, as previously indicated, clearly has available to him in the situation at bar two other remedies, one which is of a summary nature and both of which would better safeguard the interest of beneficiaries than would the proposed procedure. ³⁸ With this in mind, we find it extremely difficult to ascribed to Congress an intention to grant to the Commissioner this additional, discretionary power. Innocent third parties should be entitled to no less than the fullest protection consistent with the realities of tax administration and enforcement.

We are mindful of the consideration that legislation in aid of collection of Government revenues should be liberally construed and applied. There is obviously an imperative public interest in favor of the prompt collection of delinquencies. But manifestly it cannot be validly considered an overriding policy in any particular situation unless Congress has so demonstrated its intention. With regard to the present issue, the levy provisions on their face do not authorize the Commissioner to exercise the taxpayer's rights, nor do we think, for the sum of the foregoing considerations, that this power can be reasonably implied. ³⁹

We cannot believe that it was the intention of Congress as manifested in the present levy provisions of the Code that the Commissioner be authorized to exercise the insured's rights in this delicate area, thereby sanctioning the disregard in practice of other more appropriate and substantially equivalent enforcement procedures which would better safeguard the rights of interested parties. Compare Meyer v. United States [64-1 USTC ¶9111], -- U. S. -- (1963). Accordingly, we hold that the steps taken against Aetna and Manufacturers in the instant case were not legally effective to exercise Mrs. Sullivan's policy rights and that therefore until some other legally cognizable step was taken by the Government to avail itself of these powers, the insurers were under the duty to effectuate automatic premium loans in accordance with the terms of their policies and were not legally entitled to "surrender" to the Commissioner the policies' cash surrender values. It follows that Aetna and Manufacturers cannot be held liable for the statutory "penalty" prescribed by Section 6332.

The Government argues finally regarding automatic premium loans and the cash surrender values that the date Aetna and Manufacturers were served with its complaint in the instant case is determinative of its rights. The action below was commenced on October 30, 1958 and both insurers were served with summons and complaint on November 5, 1958. Each of the insurers effected one of its two previously mentioned automatic premium loans subsequent to this time but prior to the dates of execution of the releases set out supra.

In our view commencement of suit and service of process in themselves were no more effective than notice of levy in serving as a revocation of the automatic premium loan provision of the policies and a demand for the cash surrender value. No sound legal basis has been advanced for a conclusion that the relationship between the parties to the insurance contract could be altered effectively by this means. Commencement of suit and service of process are of legal significance but only in that they serve to confer jurisdiction in the cause on the issuing court. ⁴⁰ On this basis it may well be that the Government thereafter could have properly availed itself of the court's processes and by this means would have been able to take effective steps against the insurers before the time when the automatic premium loan provisions of the policies became operative. Suffice it to say that no such steps were attempted in the instant case and that therefore no question is presented here in that regard. The Government's contention concerning the legal significance of commencement of suit and service of process is without merit.

We have considered the other points raised and are of the view that none requires discussion.

The Government was entitled to the cash surrender values of the Aetna and Manufacturers policies determined as of the dates of their surrender and release, and interest thereon from those times. The Government did not have the right to recover from the insurers the amounts of the policy loans and automatic premium loans with interest which were effected after recordation of lien and service of notice of levy respectively. ⁴¹

The judgment will be affirmed.

¹ Section 7403 is entitled "Action to enforce lien or to subject property to payment of tax" and provides as follows:

"(a) Filing.--In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary or his delegate, may direct a civil action to be filed in a district court of the United States 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.

"(b) Parties.--All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.

"(c) Adjudication and decree.--The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States.

"(d) Receivership.--In any such proceeding, at the instance of the United States, the court may appoint a receiver to enforce the lien, or, upon certification by the Secretary or his delegate during the pendency of such proceedings that it is in the public interest, may appoint a receiver with all the powers of a receiver in equity."

² Various other parties were also originally involved in the proceeding but they need not be mentioned here. The case at bar was tried to the court without a jury. It was properly consolidated and tried with United States v. Kann, which is also on appeal to this court, the opinion on which is filed concurrently herewith and is reported at [64-1 USTC ¶9393] -- F. 2d -- (1964).

³ Section 3670 provides as follows:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) 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."

⁴ Section 3672 provides in pertinent part: "(a) Invalidity of lien without notice. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

"(1) Under State or Territorial laws. In the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory; . . ."

The corresponding provision of the 1954 Code, Section 6323, is identical in relevant respect.

⁵ The view we adopt in this case is such that it is not necessary to detail the facts relating to the several recordations of tax lien by the Government nor to consider the validity of the filings in the abstract. For present purposes it can be assumed that the steps taken by the Government in this regard were such as to constitute compliance with the terms of Section 3672.

⁶ It is immaterial to the points raised on this appeal that the policies designated were taken out subsequent to rather than prior to creation of the tax lien.

It is not clear from the record whether Mr. Sullivan or Mrs. Sullivan supplied the money for purchasing the policies. The point is irrelevant, however, in our view of the case.

⁷ The Aetna plan was representative and provided as follows: "This policy shall be entitled to share in the divisible surplus of the participating business of the Company at the end of each policy year while it is in force up to the date of maturity.

"Dividends shall be determined by the Company and shall be

"(1) Paid in cash, or

"(2) Applied to the payment of any premium or premiums, except that if the policy is paid up the dividend shall be paid in cash, or

"(3) Applied to the purchase of participating paid-up additions to the policy, payable at the date of maturity or at the prior death of the insured, or

"(4) Left with the Company to accumulate at a rate of interest not less than two per cent. compounded annually, but no interest shall accrue after default in payment of any premium and no premium shall be considered paid by reason of dividends so remaining with the Company. Accumulated dividends with interest, but less any indebtedness secured thereby under this policy, may be withdrawn on demand at any time, unless previously applied in accordance with the provisions of Section 8 [the nonforfeiture provision discussed infra]. Accumulated dividends with interest earned during the continuance of this policy shall be payable at the date of maturity or at the prior death of the insured if not previously withdrawn

"Any paid-up additions or accumulated dividends available at the date of maturity may be applied to increase the monthly income specified on the first page hereof in the same proportion as such paid-up additions or accumulated dividends bear to the cash value on said date.

"Under the second option and upon default in premium payment, no premium shall be construed as being paid by reason of any unpaid dividend, but any unpaid portion of the dividend shall become payable in cash, unless cash values are available according to Table A, in which event such dividend shall be applied as provided in Section 8 of this policy.

"The second of the above four options shall be used if no other option has been elected in writing.

"In the settlement of a death claim hereunder there shall be paid a dividend for that portion of the policy year in which death occurs for which premiums have been paid."

⁸ Accumulated dividends are of significance on this appeal not per se but rather as a component part of the cash surrender value at pertinent times. Either in the case at bar or in the four other tax lien-insurance cases decided this day, see note 41 infra, no question was posed to the court below nor has been asserted before this court relating to the possibility of the existence of an independent right of recovery for dividends as such. The amount distinctively involved the details concerning which need not be set out, is minimal and perhaps it was for this reason that the issue was not introduced into already complicated proceedings. In any event the problem will not be considered sua sponte by this court inasmuch as its proper consideration would require at the outset an interpretation of each, individual insurance contract involved in the various cases. See Rule 24(2)(b) of the rules of this court. See also Stouper v. Jones, 284 F. 2d 240 (D. C. Cir. 1960); Hazeltine Research, Inc. v. Avco Mfg. Corp., 227 F. 2d 137 (7 Cir. 1955), cert. denied, 350 U. S. 987 (1956).

⁹ The policy provided for payment for one hundred and twenty months certain.

¹⁰ During the non-maturity phase of the Aetna policy's existence, therefore, Mr. Sullivan's status under the policy was essentially comparable to that of a beneficiary under a typical life insurance policy.

¹¹ In United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 58 n. 3 (1958), the Supreme Court quoted the following passage from Krueger and Waggoner, The Life Insurance Policy Contract (1953 ed.), 194, the substance of which is of pertinence here: "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 durig 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 pro-rata 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." (Italics omitted.)

¹² The cash value and cash surrender value have also been respectively termed tabular cash value, gross cash value, gross cash surrender value, and net cash value and net cash surrender value. In our view such characterizations are misleading in a context where the status and rights of a party dehors the insurance contract are in issue; they needlessly tend to confuse and to misdirect the basic inquiry which is necessarily focused upon the effective relationship between insured and insurer with regard to the policy reserve to which relationship the impressions conveyed by such terms as net and gross are somewhat confusing and substantially redundant. The more fundamental terminology of cash value and cash surrender value is therefore preferred initially and will be utilized here.

¹³ The Manufacturers policy was representative:

"5. CASH VALUES, PAID-UP INSURANCE, EXTENDED TERM INSURANCE. The cash value referred to throughout this policy shall be determined in accordance with the Method of Computation of Non-forfeiture Benefits stated on the last page hereof.

"(1) Upon surrender of this policy with a discharge therefor after it has a cash value, the Company will pay the cash value at the date of surrender less all indebtedness, but if the date of surrender is within sixty days after a premium due date, the cash value shall be calculated as if the said premium had not yet fallen due.

"The Company may defer the payment of a cash value under the terms of this provision for a period of six months from the date of receipt of the application for such cash value.

"(2) Upon receipt of a written request after this policy has a cash value and within sixty days after the due date of any premium in default, the Company will grant one of the following options, calculated as if the said premium had not yet fallen due:

"(a) The Company will continue this policy as participating paid-up insurance payable in one sum, free from any existing indebtedness, for a reduced amount determined in accordance with the Method of Computation of Nonforfeiture Benefits and will endorse the policy accordingly; or

"(b) The Company will continue this policy as non-participating extended term insurance, free from any existing indebtedness and without the right to loans. The amount of the extended term insurance shall be the sum insured shown on the first page hereof less all indebtedness. The period for which such extended term insurance will run shall be determined in accordance with the Method of Computation of Non-forfeiture Benefits.

"Except as otherwise provided, such paid-up insurance or extended term insurance shall be subject to the same terms and conditions as the original policy.

"Any paid-up policy or any policy continued as extended term insurance may be surrendered within thirty days after any policy anniversary, and the Company will pay a cash value determined in accordance with the Method of Computation of Non-forfeiture Benefits.

"If option (2)(a) has not been chosen, option (2)(b) shall become effective automatically upon the expiry of the days of grace allowed for payment of the premium in default unless the Insured has requested that the Automatic Premium Loan provision be operative.

"6. LOANS. After this policy has a cash value, the Company will loan, upon the sole security of this policy, an amount not greater than the cash value less all indebtedness. The loan will be granted upon completion of the Company's loan agreement and the policy will be returned to the borrower after endorsement.

"No loan will be granted while this policy is being continued as extended term insurance.

"The Company may defer the granting of a loan (other than a loan to pay premiums on one of its policies) under the terms of this provision for a period of six months from the date of receipt of the application for such loan.

"7. AUTOMATIC PREMIUM LOANS. This policy shall not lapse for non-payment of any premium so long as the cash value exceeds all indebtedness. The Company will, without further request, loan the whole of any premium and continue this insurance in force for the period until the next premium due date if, at the end of such period the cash value would exceed the indebtedness. If, at the end of such period the indebtedness would exceed the cash value, the Company will loan a proportion of the premium and continue this insurance in force for the same proportion of the period. Such proportion shall be determined by dividing the cash value immediately prior to the due date of the premium in default less the indebtedness by the sum of such cash value so adjusted and the amount by which the indebtedness would exceed the cash value at the end of the current premium period if the whole of the premium had been loaned. If prior to the expiration of such proportionate period, the premium in default be not paid in full, all liability of the Company on this policy shall thereupon terminate.

"This provision shall become operative if requested in the application for the policy or elsewhere in writing and will be discontinued on the written request of the Insured.

"8. LOAN CONDITIONS. Interest at the rate of five per cent. per annum compounded annually will be charged on all loans made under the preceding provisions. All amounts so loaned, and interest thereon shall be a first lien on this policy in the Company's favour in priority to the claim of any assignee or any other person. If at any time the total indebtedness shall exceed the cash value, all liability of the Company on this policy shall terminate, but unless this policy lapses because a premium in default is not paid, this policy shall not terminate until thirty-one days after notice shall have been mailed to the last known address of the Insured (and of the assignee, if any).

"Wherever the word indebtedness is used in this policy it shall include interest accrued to date."

¹⁴ In respect to one policy, it is clear that the election was made by Mrs. Sullivan in the insurance application. As regards the other policy, her election is evidenced by a stamp on its last page.

¹⁵ If the non-forfeiture clauses by their terms had become operative in the instant case, somewhat different questions might have been presented on this appeal.

¹⁶ Section 6331 provides as follows: "(a) Authority of Secretary or delegate.--If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. . . .

"(b) Seizure and sale of property.--The term 'levy' as used in this title includes the power of distraint and seizure by any means. In any case in which the Secretary or his delegate may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible).

"(c) Successive seizures.--Whenever any property or right to property upon which levy has been made by virtue of subsection (a) is not sufficient to satisfy the claim of the United States for which levy is made, the Secretary or his delegate may, thereafter, and as often as may be necessary, proceed to levy in like manner upon any other property liable to levy of the person against whom such claim exists, until the amount due from him, together with all expenses is fully paid."

Section 6332 provides in pertinent part as follows: "(a) Requirement.--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 of the Secretary or his delegate, surrender such property or rights (or discharge such obligation) to the Secretary or his delegate, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

"(b) Penalty for violation.--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. . . ."

¹⁷ Aetna had effected two automatic premium loans on its policy prior to receiving notice of levy. The Government does not contest these transactions.

¹⁸ While the Government claims the entireamounts indicates above, the actual mechanics of the policies' operation makes it clear that it cannot even be arguably said that the Commissioner is "out of pocket" these whole sums but only that portion of the respective amounts effectively dissipated by application to the insurers' cost of the policies' maintenance. Any possible relevance and legal significance of this fact is rendered moot by the views adotped in the opinion.

¹⁹ The corresponding section in the present Code, Section 6321, Internal Revenue Code of 1954, is identical to the old provision in all relevant respects.

²⁰ What qualifies as 'property and rights to property" is, of course, to be determined by state law. See United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960). It is unquestioned that Pennsylvania law is applicable to the case at bar. Under that law Mrs. Sullivan clearly had a sufficient interest under the policies to have satisfied the requirements of the statute. See United States v. Penn. Mut. Life Ins. Co. [42-2 USTC ¶9623], 130 F. 2d 495 (3 Cir. 1942); Kyle v. McGuirk [36-1 USTC ¶9121], 82 F. 2d 212 (3 Cir. 1936). See generally United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55-7 (1958).

²¹ Compare Section 6322, Internal Revenue Code of 1954.

²² The recent decision of the Supreme Court in Meyer v. United States [64-1 USTC ¶9111], -- U. S. -- (1963), is similarly distinguishable with regard to the instant question.

²³ The Court quoted approvingly the following statement of Judge Addison Brown in In re McKinney, 15 Fed. 535, 537 (S. D. N. Y. 1883): "[T]his excess of premiums paid [i.e., the cash surrender value] is legally the sole property of the [insurance] company . . .." 357 U. S. at 59. While the above quote was continued to include a statement to the effect that as a practical matter, this amount is property of the policy owner, this consideration, of course, has no bearing on the question of the effective scope of attachment of the tax lien.

²⁴ The different conceptual problem which confronted the Court in the Bess case was the contention "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." 357 U. S. at 58. The majority resolved this question in narrow fashion, as indicated above, by holding that "for some purposes," the cash surrender value was to be treated as a fund held by the insurer for the benefit of the insured. Two Justices found the contention meritorious and dissented on this point.

²⁵ The policy loan amounts were, of course, never actually physially transmitted to Mrs. Sullivan since they were applied, pursuant to her request, to outstanding premiums. This factual refinement is not of any substantive significance insofar as concerns the question of the proper legal chracterization of Manufacturers' status as grantor of the loans. And while it points up the fact that Manufacturers was not only the effector of the loans but also was the recipient of the respective amounts, this circumstance in no way serves to dictate a result contrary to that reached in the opinion. An issue is posed in this regard only as to that portion of the loaned amounts dissipated against the Government by application to the insurer's cost of the policy's maintenance. And with respect to these sums Manufacturers is clearly safeguarded from liability on the present facts. See Section 6323(c), Internal Revenue Code of 1954, and the corresponding provision in the 1939 Code, Section 3672(b). The Government does not contend otherwise.

²⁶ See generally United States v. Eiland [55-1 USTC ¶9487], 223 F. 2d 118, 121-22 (4 Cir. 1955); United States v. Polan Indus., Inc. [61-2 USTC ¶9598], 196 F. Supp. 333, 338 (S. D. W. Va. 1961); United States v. Jacobs [57-2 USTC ¶9918], 155 F. Supp. 182, 189-90 (D. N. J. 1957); Plumb, Federal Tax Collection and Lien Problems, 13 Tax L. Rev. 247, 309-10 (1958).

²⁷ In United States v. Mitchell [62-2 USTC ¶9802], 210 F. Supp. 810, 815 (S. D. Ala. 1962), the court stated: "The United States could not rewrite the policies of the defendant insurance companies by giving notice of a tax lien to such companies. . . . [I]t was the duty of the insurance companies to make use of the cash surrender value of . . . [their respective] policies in accordance with the . . . premium loan provisions of such policies, even after actual notice of the Government's lien."

²⁸ Brief for Appellant, p. 43.

²⁹ Ibid.

³⁰ Of course a lien is merely a charge against specified "property" which by itself in no way creates liability as to one who diminishes the value of the "property" subject to the lien. For the Government to prevail, if at all, on the issue at bar, some appropriate theory of liability must be found to be applicable as against the insurers. In this regard liability could conceivably be based either upon Section 6332 or possibly on common-law principles. As a practical matter, however, the views we adopt with respect to the statutory question are such as to dispose also of any tenable argument as to the possibility of common-law liability.

While technically, the present action is simply one of lien foreclosure, nevertheless inasmuch as the operative facts are clear, a fundamental question of law is presented, and the parties have fully argued this issue in substance, we deem it appropriate to decide the question.

³¹ There is no legislative history of pertinence to this particular question.

³² Section 110 is entitled "Title to property" and provides in pertinent part as follows:

"(a) The trustee of the estate of a bankrupt and his successor or successors, if any, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this title, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located . . . (3) powers which he might have exercised for his own benefit, but not those which he might have exercised solely for some other person; . . . (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered . . .."

³³ The one exception, of course, would be that to the extent that a beneficiary's rights under an insurance policy were vested rather than amounting to a mere expectancy, his or her interest could not be legally affected by the levy procedure as such, the Commission's recovery in any event being limited to the amount which constituted the value of the delinquent's rights. This, however, suggests the possibility of double liability on the part of insurers. Compare note 37 infra, and accompanying text.

³⁴ The Government's only argument to the contrary is the extremely weak one that "as a practical matter, levy [upon the insurer] does not require the immediate cancellation of the insurance policy." Brief for Appellant, p. 47. (Italics added.) Of course, it is conceivable that the parties to insurance contracts so terminated could enter into some kind of a novation, identical in substance to the terms of the old policies. This, however, assumes a willingness on the part of the insurers which cannot necessarily be gainsaid but which nevertheless may not be present in particular circumstances. In the absence of such a willingness of the insurers, irreparable harm could result to the interested parties.

³⁵ Section 6337, which represents no substantial change from prior law, is entitled "Redemption of property" and provides as follows:

"(a) Before sale.--Any person whose property has been levied upon shall have the right to pay the amount due, together with the expenses of the proceeding, if any, to the Secretary or his delegate at any time prior to the sale thereof, and upon such payment the Secretary or his delegate shall restore such property to him, and all further proceedings in connection with the levy on such property shall cease from the time of such payment.

"(b) Redemption of real estate after sale.--

"(1) Period.--The owners of any real property sold as provided in section 6335, their heirs, executors, or administrators, or any person having any interest therein, or a lien thereon, or any person in their behalf, shall be permitted to redeem the property sold, or any particular tract of such property, at any time within 1 year after the sale thereof.

"(2) Price.--Such property or tract of property shall be permitted to be redeemed upon payment to the purchaser, or in case he cannot be found in the county in which the property to be redeemed is situated, then to the Secretary or his delegate, for the use of the purchaser, his heirs, or assigns, the amount paid by such purchaser and interest thereon at the rate of 20 percent per annum.

"(c) Record.--When any lands sold are redeemed as provided in this section, the Secretary or his delegate shall cause entry of the fact to be made upon the record mentioned in section 6340, and such entry shall be evidence of such redemption."

³⁶ In this regard it is significant that even the Bankruptcy Act, see note 32 supra, and accompanying text, makes some provision for the protection of insured-bankrupts. A proviso to Section 110(a)(5), 11 U. S. C. A., reads as follows: "And provided further, That when any bankrupt, who is a natural person, shall have any insurance policy which has a cash surrender value payable to himself, his estate, or personal represenatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sum so ascertained and stated, and continue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings, otherwise the policy shall pass to the trustee as assets;"

³⁷ Even the effective legal relationship which exists between the interests of insured and beneficiary is sometimes difficult of ascertainment. As was said by the Sixth Circuit in United States v. Stock Yards Bank [56-1 USTC ¶9418], 231 F. 2d 628, 631 (1956), "distraint is a rough and ready remedy. This short cut form of self-help developed by the common law has been available to the government in pursuit of delinquent taxpayers since the eighteenth century. . . . Where the value and nature of the taxpayer's property rights are not in question, distraint is no doubt a useful tool in the effective enforcement of the Internal Revenue laws. But it is a blunt instrument, illadapted to carve out property interests where their nature and extent are unclear." See generally Bull v. United States [35-1 USTC ¶9346], 295 U. S. 247, 259-60 (1935); United States v. Aetna Life Ins. Co. [42-1 USTC ¶9266], 46 F. Supp. 30, 37 (D. Conn. 1942). See also New Hampshire Fire Ins. Co. v. Scanlon [60-1 USTC ¶9423], 362 U. S. 404 (1960).

³⁸ For example, if, subsequent to levy upon a policy held by a delinquent, a tax sale was conducted in accordance with Section 6335, Internal Revene Code of 1954, the Commissioner could set a minimum bid representing the cash surrender value of the policy, which certainly the beneficiary would be entitled and would have the opportunity to accept. By this means his or her interest would be more effectively safeguarded than by the disputed remedy, with minimal inconvenience to the Commissioner.

Section 6335 in pertinent part provides:

"§6335. Sale of seized property

"(a) Notice of seizure.--As soon as practicable after seizure of property, notice in writing shall be given by the Secretary or his delegate to the owner of the property (or, in the case of personal property, the possessor thereof), or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district the notice may be mailed to his last known address. Such notice shall specify the sum demanded and shall contain, in the case of personal property, an account of the property seized and, in the case of real property, a description with reasonable certainty of the property seized.

"(b) Notice of sale.--The Secretary or his delegate shall as soon as practicable after the seizure of the property give notice to the owner, in the same manner as that prescribed in subsection (a), and shall cause a notification to be published in some newspaper within the county wherein such seizure is made, or, if there be no newspaper published in such county, shall post such notice at the post office nearest the place where the seizure is made, and in not less than two other public places. Such notice shall specify the property to be sold, and the time, place, manner, and conditions of the sale thereof. . . .

"(c) Sale of indivisible property.--If any, property liable to levy is not divisible, so as to enable the Secretary or his delegate by sale of a part thereof to raise the whole amount of the tax and expenses, the whole of such property shall be sold.

"(d) Time and place of sale.--The time of shall shall not be less than 10 days nor more than 40 days from the time of giving public notice under subsection (b). The place of sale shall be within the county in which the property is seized, except by special order of the Secretary or his delegate.

"(e) Manner and conditions of sale.--

"(1) Minimum price.--Before the sale the Secretary or his delegate shall determine a minimum price for which the property shall be sold, and if no person offers for such property at the sale the amount of the minimum price, the property shall be declared to be purchased at such price for the United States; otherwise the property shall be declared to be sold to the highest bidder. In determining the minimum price, the Secretary or his delegate shall take into account the expense of making the levy and sale."

Of course, if the Commissioner elected to proceed by judicial foreclosure under Section 7403, Internal Revenue Code of 1954, set out in note 1 supra, the beneficiary would properly be made a party to the proceeding.

³⁹ The considerations set out in the opinion, we think, serve to distinguish in substance the present circumstance from an ordinary indebtedness with regard to the appropriateness of levy. We therefore distinguish the bank-deposit cases. Compare United States v. Manufacturers Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366, 368 (2 Cir. 1952). We do not mean to imply that it is our belief that an unmatured insurance policy is or is necessarily comparable in any respect to a negotiable instrument. Our conclusion to the effect that the Commissioner is not empowered to proceed by levy directly against insurers in the present circumstance is rested entirely upon other considerations. The foregoing distinction is relevant to a question unnecessary to resolve in the instant case, i.e., that regarding the proper delimitation of jurisdiction in Section 7403 actions. See note 40 infra.

⁴⁰ See and compare the following cases with respect to the kind of final order to be entered: United States v. Roark, 57-2 U. S. Tax Cas. ¶9883 (W. D. Mo. 1957), per curiam, judgment ordered to be vacated and new judgment directed to be entered in accordance with parties' stipulation, 263 F. 2d 840 (8 Cir. 1959); United States v. Ison [46-1 USTC ¶9269], 67 F. Supp. 40 (S. D. N. Y. 1946); Smith v. Donnelly [46-1 USTC ¶9247], 65 F. Supp. 415 (E. D. La. 1946). See also United States v. Trout [42-1 USTC ¶9372], 46 F. Supp. 484 (S. D. Cal. 1942).

Inasmuch as no question is raised in the instant case regarding proper jurisdiction over the parties in the foreclosure action below, the issue of the mode of service of process on the insured which would suffice to vest a court with power to deal effectively with the insurer's obligation, is not before us. We do not view our present opinion as being dispositive of this question. See note 39 supra. It is one thing to reason that the Commissioner is not empowered to act effectively against insurers in the present situation, quite another to conclude that a court in a proper circumstances with jurisdiction over the insurer, is similarly limited. See also compare United States v. Brody [63-1 USTC ¶9315], 213 F. Supp. 905 (D. Mass. 1963).

⁴¹ Attached as an appendix to this opinion is a "Tabulation of Information re Life Insurance Policies," [Not reproduced herein] the contents of which are pertinent not only to this case but to the four other tax lien-insurance cases set out below, the opinions in which are filed concurrently with the opinion in this case. The statements contained in the "Tabulation" were prepared by counsel for the parties and are in effect a stipulation. The items found in the respective records of the five cases.

The four other cases are as follows: United States v. Kann [64-1 USTC ¶9393], at our No. 14,092; United States v. Wilson, Massachusetts Mutual Life Insurance Company, Appellant [64-1 USTC ¶9395], at our No. 13,858; United States v. Wilson, Travelers Insurance Company, Appellant [64-1 USTC ¶9396], at our No. 13,859; and United States v. Bankers National Life Insurance Company [64-1 USTC ¶9394], at our No. 13,957.

The "Tabulation" was prepared and submitted at the direction of this court. It was not before either of the courts below. This court, of course, cannot supplement the record and use as a basis for its decision any factual material which was not before the courts below at the times of the trials. We believe, however, that we have decided the five cases on operative facts in the respective records.

The "Tabulation" is attached for such aid as it may afford the Supreme Court should certiorari be granted and if certiorari be not granted, the items contained in the "Tabulation" may be stipulated into the respective records upon the new trials in the court below of the cases required to be sent back for further proceedings. The "Tabulation" attached to the opinion in this case shall be deemed to be an appendix to each of the opinions in the other four cases. In case of variances between the dates as set out in the opinions of this court and the dates as listed in the "Tabulation," the former are, of course, to be considered determinative for the purpose of our adjudications. But what we have said is not intended to prohibit the United States District Court for the District of New Jersey upon remand of the two cases designated hereinafter, from determining any actual pertinent date or dates and making necessary findings of fact in respect thereto. The two cases are United States v. Wilson, Massachusetts Mutual Life Insurance Company, Appellant, supra, and United States v. Bankers National Life Insurance Company, supra. We have found but one significant discrepancy as will appear on examination of the last paragraph in note 15 in our opinion in United States v. Wilson, Massachusetts Mutual Life Insurance Company, Appellant, supra.

[Dissenting Opinion]

HASTIE, Circuit Judge, dissenting in part.

In United States v. Bess, 1958, [58-2 USTC ¶9595] 357 U. S. 51, the Supreme Court reasoned that the right of an insured to the cash surrender value of an unmatured life insurance policy is a "right of property" to which a federal tax lien under section 3670 of the Internal Revenue Code attaches. While the litigation in that case occurred after the death of the insured, the Court's reasoning was that the insured "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 in accordance with the terms of the policies." 357 U. S. 56. The Court explicitly characterized this interest in the unmatured policy as `property' or 'rights to property', within the meaning of §3670, in which cash surrender." Id.

Moreover, since the policy was not surrendered during the lifetime of the insured, I think the Bess case holds, by necessary implication, that such surrender is not prerequisite to the government's acquisition of a lien upon the cash surrender value. United States v. Brody, D. Mass. 1963 [63-1 USTC ¶9315], 213 F. Supp. 905.

In the present case, the government's general tax lien covered the rights of the insured in the policies in suit, but without particularizing amount various alternative rights accorded the insured under the terms of the policies. However, when the United States, acting pursuant to section 6331 of the Internal Revenue Code, served upon the insurer its notice of levy and demand covering "all property, rights of property . . . now in your possession and belonging to the taxpayer (or with respect to which you are obligated) and all . . . obligations owing from you to the taxpayer", the government made a meaningful demand for whatever amount the insured could then require the insurer to pay him. That amount was the then cash value of the policy. Section 6332 of the Internal Revenue Code required the insurer to honor that demand. Moreover, section 6332 imposes upon the person who fails to comply with such a demand a personal obligation to the United States "in a sum equal to the value of the property or rights not so surrendered". I do not see how any subsequent use of part of the then cash value of the policy for automatic premium payments could reduce the personal obligation of the insurer under section 6332, as that obligation arose at the time of levy. In this respect, I disagree with the majority. I think this aspect of the problem is properly analyzed and ruled upon in United States v. Salerno, D. Nev. 1963, [64-1 USTC ¶9130] 222 F. Supp. 664.

On the other hand, I agree with the majority that the policy loans made to the insured for premium payments before service of notice of levy upon the insurer were not precluded by the general lien of the United States upon all property of the taxpayer. For the policy remained fully operative with premiums becoming due and with options available to the insured in connection with the obligation to pay premiums. The government had not indicated to the insurer what right, if any, it would assert, or when, among the complex of alternative rights the insured could claim under the policy. Therefore, the making of a premium loan under the terms of the policy could not reasonably be viewed as action inconsistent with the general tax lien. It was not until the notice of levy was served upon the insurer that the United States made a meaningful assertion of an election to claim the amount to which the insured was then entitled, namely, the cash surrender value.

[64-1 USTC ¶9394]United States of America v. Bankers National Life Insurance Company, Norma F. Van Etten, Lillian Vickers and Bruce Vickers, also known as Boris Victorov, Bankers National Life Insurance Company, Appellant

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 13,957, 333 F2d 145, 4/10/64, Vacating and remanding District Court, 61-2 USTC ¶9752, 198 F. Supp. 727

Lien for taxes: Unmatured life insurance policies: Loans.--For the reasons set forth in Sullivan, 64-1 USTC ¶9392, the Commissioner could not recover the amount of policy loans and automatic premium loans made by the insurance company to the insured while the policies remained unmatured and before the insured demanded the cash surrender value.

One dissent.

J. B. Jones, Jr., J. Kovner, Dep't of Justice, (L. F. Oberdorfer, Ass't Attorney General, L. A. Jackson, M. A. Mulroney, Dep't of Justice, D. M. Satz, Jr., U. S. Attorney, Newark, N. J., on brief), for appellee. R. H. McGlynn, Newark, N. J. (McGlynn, Stein & McGlynn, Newark, N. J., on brief), for appellant.

Before BIGGS, Chief Judge, and MCLAUGHLIN, KALODNER, STALEY, HASTIE, GANEY and SMITH, Circuit Judges.

Opinion of the Court

PER CURIAM:

This appeal presents an issue identical with one of those decided today in United States v. Sullivan [64-1 USTC ¶9392], -- F. 2d --, and United States v. Wilson, Massachusetts Mutual Life Insurance Company, Appellant [64-1 USTC ¶9395], -- F. 2d --. It is unnecessary to set out the facts relating to the instant appeal for they appear sufficiently in the opinion of the court below, reported at [61-2 USTC ¶9752] 198 F. Supp. 727 (1961), and in the "Tabulation of Information re Life Insurance Policies" which is appended to the Sullivan opinion and which is incorporated in this opinion by reference. It must be borne in mind that those portions of the "Tabulation" which are enclosed by parentheses cannot be found in the records of this and the other four cases. Sufficient facts appear of record in the instant case, however, to make possible a disposition of the controversy in the view we take of it.

The issue presented involves automatic premium loans of the same kind as were involved in the Sullivan and the Massachusetts Mutual cases, supra. We hold here as we did in the two cases cited that the United States was not entitled to recover for automatic premium loans effected before the entry of judgment in the proceedings in the court below. Consequently, judgment has been entered for the United States in an amount in excess of that to which it was entitled.

For the reasons set forth in the Sullivan and Massachusetts Mutual opinions, the judgment will be vacated and a new trial will be ordered.

Judge Hastie dissents for the reasons stated in his dissenting opinion in United States v. Sullivan, No. 14091, filed today.

 

[64-1 USTC ¶9395]United States of America v. Anthony J. J. A. Wilson, Hedwing C. Wilson, Massachusetts Mutual Life Insurance Company and Travelers Insurance Company, Massachusetts Mutual Life Insurance Company, Appellant

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 13,858, 333 F2d 137, 4/10/64, Vacating and remanding District Court, 61-2 USTC ¶9693, 195 F. Supp. 332

Tax liens: Effective date: Attachment against insurance policies.--Federal income tax liens against a delinquent taxpayer's life and retirement income insurance policies were effective with respect to the policies' cash surrender values as of the date that the trial court entered judgment for the Government on the liens and not as of the date of notice of levy to the insurer. Thus, the insurer did not improperly diminish the Government's interest in the cash surrender value in the policies by abiding by the insured's previous election to have the cash surrender value of the policies used to provide loans for the payment of defaulted premiums. This was so because the Commissioner was not empowered by statutory levy to exercise unilaterally either the delinquent's right to cancel the policies and receive the cash surrender values or his right to revoke the operation of the automatic premium loan provisions. Sullivan, 64-1 USTC ¶9392, followed.

J. B. Jones, Jr., J. Kovner, Dep't of Justice, (L. F. Oberdorfer, Assistant Attorney General, L. A. Jackson, M. A. Mulroney, Dep't of Justice, D. M. Satz, Jr., U. S. Attorney, Newark, N. J., on brief) for appellee. A. P. Quinn, Jr., Massachusetts Mutual Life Ins. Co., Springfield, Mass. (J. P. Nugent, Jersey City, N. J., on brief), for Massachusetts Mutual Life Ins. Co., appellant.

Before BIGGS, Chief Judge, MCLAUGHLIN, KALODNER, STALEY, HASTIE, GANEY and SMITH, Circuit Judges.

Opinion of the Court

[Basis of Appeal]

BIGGS, Chief Judge:

This action was brought by the United States under Section 7403 of the Internal Revenue Code of 1954, ¹ to collect for unpaid income taxes by foreclosure of a tax lien on the interest of delinquent taxpayer, Anthony Wilson, in certain unmatured insurance policies. Defendants in the proceeding below were the taxpayer, his wife, the Travelers Insurance Company, and the Massachusetts Mutual Life Insurance Company ("Massachusetts Mutual"). From adverse determinations in the court below, the insurers have appealed on separate questions. The opinion on the appeal of the Travelers Insurance Company is filed concurrently herewith and is reported at -- F. 2d -- (1964). The instant opinion is concerned solely with the appeal of Massachusetts Mutual. The issue presented is a basic question of law of which no substantial facts are in dispute. A complete recital of the circumstances is therefore unnecessary and for this purpose reference is made to the opinions of the court below reported at [60-1 USTC ¶9400] 182 F. Supp. 567 (1960), at [61-1 USTC ¶9268] 191 F. Supp. 69 (1961), and at [61-2 USTC ¶9693] 195 F. Supp. 332 (1961). ²

The following discussion should be read in conjunction with this court's opinion in United States v. Sullivan [64-1 USTC ¶9392] -- F. 2d -- (1964), filed concurrently with this opinion, as both cases involve the same basic problem and the reasoning and views adopted in Sullivan substantially control the disposition of the present controversy.

[Facts]

The operative facts of the instant appeal are not disputed. In March 1942 Wilson purchased a life insurance policy from Massachusetts Mutual, No. 1,468,657, in the face amount of $10,000. In September 1946 Wilson purchased a retirement income policy from Massachusetts Mutual, No. 1,615,476, in the face amount of $20,000. Premiums were to be paid for the life of the insured under the life insurance policy and for a period of twenty-five years under the retirement income policy.

It is unquestioned that the policies were substantially identical in all respects material to this appeal. Under each of the policies Wilson was the named insured and his wife was the primary beneficiary. Wilson had the right to change the beneficiary, to exercise all options, and to take part in dividend sharing plans. ³ Wilson elected under both policies to have dividends left with the company to accumulate at interest. Outstanding dividends were to be added to the cash value of the policies in the event of surrender of the policies for their cash surrender values, ⁴ discussed infra.

The aspects of the policies germane to the present controversy were those relating to cash value and cash surrender value. Generally speaking, and with regard to each of the policies, at any particular time the total amount paid in on the policy less its accrued cost of maintenance but plus for present purposes the sum accumulated on account of dividends constituted the cash value of the policy. The cash value less any outstanding policy indebtedness to the insurer represented the policy's cash surrender value. The cash surrender value was the amount the insured was entitled to receive when pursuant to and in accordance with the policy provisions set out hereafter, he elected to surrender the policy for cancellation.

Each of the policies provided that it would remain in effect for a grace period of thirty-one days after a premium default. Within sixty-two days of a premium default the insured had the right to choose one of the following substantially identical non-forfeiture options; ⁵ first, to surrender the policy and, with the written assent of the beneficiary, to receive its cash surrender value; second, to take participating paid-up insurance in the amount which the cash surrender value of the policy would purchase; or third, to take participating extended term insurance for such term as the cash surrender value would purchase. In his insurance applications Wilson elected respectively, the extended term insurance option with regard to the life insurance policy and the paid-up insurance option as to the retirement income policy. The policies provided that in the case of conversion to paid-up or extended term insurance, the policies would continue to have a cash surrender value and that this sum would be obtainable as above, i.e., by surrender of the policy and submission of the written assent of the beneficiary.

[Automatic Premium Loan Provision]

Each of the policies also contained an identical, optional provision relating to automatic premium loans. On November 21, 1946 Wilson elected under both policies to have this clause become operative in the event of premium default. The automatic premium loan provision read as follows: "Automatic Premium Loan: If the Automatic Premium Loan provision shall have been elected by the insured and proper notice thereof shall have been filed with the Company at its Home Office prior to the expiration of the grace period of any unpaid premium, the Company will, upon the last day of the said grace period and after first applying dividend accumulations to the payment of such premium, automatically loan the amount required to pay such premium, or the unpaid balance thereof, and charge the same as indebtedness against the policy bearing interest at the rate of five per cent per annum, payable annually, not in advance, provided that the policy be sufficient security for such loan as hereinafter stipulated. If the policy is not sufficient security for such loan, the Company will, on the same terms, automatically loan the next smaller installment of premium shown by the policy, or the unpaid balance thereof, for which the policy shall be sufficient security, and thereafter the premium on this policy shall be payable in like installments. In no case will the Company loan an amount less than a quarterly installment of premium unless the balance of said installment shall have been paid prior to the expiration of the grace period.

"If this provision is elected it will continue to be operative until revoked by the insured upon receipt of proper notice thereof at the Company's Home Office."

Substantially identical, relevant, interrelated clauses of the policies followed the "Automatic Premium Loan" provision. Those of the life insurance policy read as follows: "Sufficient Security for Loans: The policy will be sufficient security for any . . . Automatic Premium Loan if the amount of the existing indebtedness on the policy plus the amount of the proposed loan, with interest on both amounts at the rate of five per cent per annum to the due date of the next premium (or to the next anniversary of the policy if no further premium be payable), does not exceed the cash value of the policy and of all paid-up additions thereto on the said due date (or on the said next anniversary).

"Miscellaneous Provisions Applicable to Loans: Overdue interest on any indebtedness hereunder shall be added to the existing indebtedness and bear interest on the same terms.

"The whole or any part of any outstanding indebtedness may be repaid at any time. While any premium loan, made automatically or otherwise, is outstanding, dividends as they become due and payable shall be used to reduce such loan. Failure to repay a loan, or to pay interest thereon, shall not avoid the policy until such time as the total indebtedness thereon, including accruing interest, shall equal or exceed the then cash value of the policy nor until thirty-one days after notice has been mailed by the Company to the last known address of the insured and any assignee of record at the Home Office of the Company."

Wilson at no time revoked his election regarding the operation of the automatic premium loan provision of either policy.

[Levy]

On June 6 and June 12, 1947 and on October 14, 1949, the Commissioner of Internal Revenue made income tax assessments in the total amount of $45,441.24 against Wilson for deficiencies for the years 1944 through 1947. The District Collector received the respective assessment lists on June 6, 1947, on June 16, 1947, and on October 19, 1949, on which dates he vainly demanded payment from Wilson. As a result of each of these several demands and refusals, a tax lien arose under Section 3670 of the Internal Revenue Code of 1939 ⁶ against Wilson's "property and rights to property" including his interest in the insurance policies. ⁷ Additionally, after March 15, 1948 and before and on December 13, 1949, notice of lien was filed of public record, for present purposes in assumed compliance with Section 3672, Internal Revenue Code of 1939. ⁸

On February 2, 1950 Massachusetts Mutual was served with a "notice of levy" ⁹ under the purported authority of Sections 3690, 3692 and 3710, Internal Revenue Code of 1939. ¹⁰ The company seemingly took no action in response to this notice. The document served upon Massachusetts Mutual was apparently never introduced into the record in the proceedings below and its contents will therefore not be considered or set out here. It is sufficient to say at this time that the content of the notice is immaterial to the view hereafter expressed in this opinion. The date of the service of notice of levy does appear in the record as set out at the beginning of this paragraph.

Thereafter, in December, 1950 in respect to the retirement income policy and in June, 1953 with regard to the life insurance policy, Wilson totally defaulted in the payment of premiums. Accordingly, pursuant to the automatic premium loan provisions of the policies and notwithstanding the notice served upon it, Massachusetts Mutual proceeded on appropriate dates apparently until September 12, 1961, the date on which judgment was entered in the court below, to apply accrued dividends to the amounts outstanding on premiums and to effectuate automatic premium loans on the balances.

[Attachment of Tax Lien]

The present controversy is focused upon the question of whether Massachusetts Mutual was legally entitled as against the Commissioner to act as indicated. ¹¹ The court below ruled that the time the tax lien first attached to Wilson's property interests, i. e., the date of the initial vain demand for payment from Wilson, June 6, 1947, it also attached to the then existing cash surrender values, if any, of the policies as held by Massachusetts Mutual and that thereafter the value of the Government's interest could be enhanced but not effectively diminished. Accordingly, judgment was entered in favor of the United States and against Massachusetts Mutual for $15,343.60 with regard to the retirement income policy and for $3,352.28 in respect to the life insurance policy. These sums encompassed the values of the policies determined as of June 6, 1947 and subsequent additions thereto by way of dividends and premiums embracing as part of the latter, notwithstanding the fact that no setoff was allowed, increments brought about by premiums paid by means of automatic premium loans. ¹²

On appeal the Government has changed its position to some degree. It has abandoned the position which was upheld by the trial court, that the date the tax lien attached to Wilson's policy interests was determinative of its rights regarding automatic premium loans, now conceding that such attachment could not in itself have rendered inoperative the automatic premium loan provisions of the policies. It contends, however, that the date of service of notice of levy upon Massachusetts Mutual was controlling for this purpose on the hypothesis, to quote its brief, that notice of levy "is a formal notice to the insurer that the automatic premium loan provision is revoked and a demand under the terms of the contract for the cash surrender value." ¹³ Massachusetts Mutual argues that service of notice of levy does not have the legal effects postulated and that the Government is entitled only to the cash surrender values of the policies determined as of the time of the judgment below.

[Sullivan Case as Precedent]

The questions raised on this appeal have been for the most part decided by this court's opinion in United States v. Sullivan, supra, and reference is made to that decision for an over-all perspective regarding the present problem. To summarize briefly the pertinent aspects of the Sullivan case, it involved a foreclosure action by the United States on a delinquent taxpayer's interest in substantially similar unmatured insurance policies. Notice of levy had been served upon two insurers and subsequently the companies had proceeded to effect automatic premium loans in accordance with the terms of their policies. In that case, however, unlike the present one, prior to judgment in the proceeding below and pursuant to stipulation, the policies in question were voluntarily surrendered, and releases were executed to the insurers. The essential issues raised in Sullivan were nevertheless identical to those posed here. This court in Sullivan rejected the contentions that as against the insurers the Government's recovery with respect to the values of typical unmatured insurance policies was determined as of the date of the attachment of the tax lien to the delinquent-insured's policy interests and that the service of notice of levy on the companies constituted a valid demand for the cash surrender values and acted as an effective revocation of the operation of the automatic premium loan clauses. Additionally, we rejected the claim that service of process after commencement of suit had these latter effects. We therefore affirmed the judgment of the court below granting recovery of the cash surrender values of the policies determined as of the date of their surrender and release, and interest measured from those times.

In light of our rulings in Sullivan, it is clear in the present case that the determination of the court below was erroneous and that the position of the Government on this appeal is ill-founded. The bases for these conclusions are set out in detail in the Sullivan opinion and will not be reiterated here. The Sullivan decision, however, is not directly dispositive of the appeal at bar inasmuch as a release was never executed in the instant case.

The essential basis of the Sullivan opinion was such, however, that it is nonetheless controlling here. Manifest in the decision was the view that but for the surrender and release of the policies the Government would have been entitled to recover the policies' cash surrender values determined as of the time of an appropriate order of court. This is evident because, as a practical matter, all of the other reasonably conceivable bases of recovery were there squarely eliminated. And, more fundamentally, the whole rationale of Sullivan was that during the executory phase of the policies' existence, the Commissioner was not empowered by statutory levy to exercise unilaterally either the delinquent's right to cancel the contracts and receive the cash surrender values or his right to revoke the operation of the automatic premium loan provisions, and that absent relinquishment or transferal of these powers or levy upon the insurance contract, only judicial action could effectively alter and extinguish the tripartite contractual relationship.

[Judgment Date Controlling]

In the instant case the court below had jurisdiction in the cause and judgment was entered on September 12, 1961. This judgment while erroneous in amount, nevertheless, on the basis of the above reasoning, served to determine the policies' cash surrender values as of that time and to fix the measure of the Government's recovery. ¹⁴ Accordingly, the Government is entitled to the policies' cash surrender values so determined plus interest from the same date.

The policies' cash surrender values, however, as of September 12, 1961 do not appear from the record, though they are seemingly included in the "Tabulation of Information re Life Insurance Policies" set out as an appendix to the opinion in United States v. Sullivan, supra, and incorporated in this opinion by reference. ¹⁵ A new trial must therefore be granted to ascertain the proper award due the Government. This amount could be determined from the "Tabulation," with appropriate interest.

We have considered the other points raised by the parties and are of the view that further discussion is not required.

The judgment against Massachusetts Mutual Life Insurance Company will be vacated and a new trial will be ordered.

Judge HASTIE dissents for the reasons stated in his dissenting opinion in United States v. Sullivan, No. 14,091, filed today.

¹ Section 7403 is entitled "Action to enforce lien or to subject property to payment of tax" and provides as follows:

"(a) Filing.--In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary or his delegate, may direct a civil action to be filed in a district court of the United States 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.

"(b) Parties.--All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.

"(c) Adjudication and decree.--The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States.

"(d) Receivership.--In any such proceeding, at the instance of the United States, the court may appoint a receiver to enforce the lien, or, upon certification by the Secretary or his delegate during the pendency of such proceedings that it is in the public interest, may appoint a receiver with all the powers of a receiver in equity."

² An appeal by Wilson from the judgment below contesting his tax liability on the ground of statute of limitations has previously been decided adversely to the taxpayer by this court at 304 F. 2d 530 (1962) (per curiam).

³ The dividend provision of the life insurance policy was representative: "Upon payment of the premium for the full second policy year, and at the end of the second and each subsequent policy year, this policy while in force will be credited with such share of the surplus funds of the Company as may be apportioned hereto by the directors, such apportioned shares being designated herein as dividends. At the option of the insured, except while this policy is in force as extended term insurance or while any premium loan, made automatically or otherwise, is outstanding, dividends will be (1) paid in cash, or (2) applied in reduction of premiums, or (3) used to purchase participating paid-up additions, payable with the sum insured, or (4) held by the Company to accumulate subject to withdrawal on demand. Paid-up additions will have a cash surrender value (full reserve), but the Company may, at its option, defer the granting of such surrender value for a period not exceeding ninety days from the date of the application therefor. Dividend accumulatins will be credited at the end of each policy year with interest at such rate, not less than two and one-half per cent., as may be determined by the directors. Outstanding dividend accumulations will be added to the cash value of the policy in the event of surrender or to the amount payable under the policy if it becomes a claim by death or matures as an endowment. If no election is made prior to any anniversary, the dividend due on that anniversary will be held by the Company to accumulate."

⁴ As we have said in the equally applicable discussion in United States v. Sullivan, supra, at note 8, no question is validly posed on appeal concerning the possibility of a distinct right of recovery on the part of the Government for dividends because no such issue was raised either during the proceedings below or before this court. We call attention to what we have stated in this regard in note 8 of the Sullivan opinion.

⁵ For present purposes the pertinent provisions of the life insurance policy are representative: "Options in Case of Default: After two full years' premiums have been paid on this policy, the insured, within sixty-two days after the due date of the first premium in default, may elect by writing filed with the Company at its Home Office:

"Cash Surrender Value: (a) To surrender the policy and, with the written assent of the person to whom it is made payable, receive the value of the policy and of any paid-up additions in cash, but the Company may, at its option, defer the payment of such cash value for a period not exceeding ninety days from the date of the application therefor, or

"Participating Paid-Up Insurance: (b) To take participating paid-up insurance, payable at the same time and on the same conditions as in this policy, of such an amount as the cash value of the policy and of any paid-up additions at the date of default, less any indebtedness hereon, will purchase as a net single premium at the attained age of the insured at the date of default, according to the American Experience Table of Mortality with interest at the rate of three per cent. per annum, or

"Participating Extended Term Insurance: (c) To have the insurance continued in force as participating extended term insurance, beginning on the date to which premiums have been paid, for its face amount, plus any paid-up additions and less any indebtedness to the Company hereon. The term for which this policy will be continued as extended insurance is such as the cash value of the policy and of any paid-up additions, less any indebtedness, will purchase as a net single premium at the attained age of the insured, on the date to which premiums have been paid, according to the American Experience Table of Mortality with interest at the rate of three per cent. per annum. No provision herein shall operate to continue this policy in force beyond the term for which it was originally written. Dividends to the credit of this policy at the time of lapse or any dividends which may be apportioned hereto while this policy is continued as extended term insurance shall not be applied to continue this policy in force beyond the term of extension, but shall be paid in cash.

"If no election is made, reduced paid-up insurance shall be automatically binding upon the Company."

⁶ Section 3670 provides as follows:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) 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."

⁷ What qualifies as "property" or "rights to property" is, of course, to be determined by state law. See United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960). It is unquestioned that the law of New Jersey is applicable to the case at bar. Wilson clearly had a sufficient interest in the policies under that law to have satisfied the requirements of the statute. See United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55-7 (1958). See also note 20 cited to the text in United States v. Sullivan, supra.

⁸ Section 3672 in pertinent part provides: "(a) Invalidity of lien without notice. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

"(1) Under State or Territorial laws. In the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory; . . ."

As to our assumption on the validity of the filing, see the equally applicable discussion in note 5 cited to the text in United States v. Sullivan, supra.

⁹ In the tabulation of events and dates attached as an appendix to our opinion in United States v. Sullivan, supra, and made a part of the opinion in the instant case by reference as stated in note 15 infra and as indicated in Sullivan, dates of service of two subsequent notices of levy against Massachusetts Mutual are designated. Insofar as we can ascertain, these dates are not in the record. These facts are unnecessary, however, for our decision.

¹⁰ Section 3690 is entitled "Authority to distrain" and provides as follows: "If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the said taxes, with such interest and other additional amounts as are required by law, by distraint and sale, in the manner provided in this subchapter, of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid."

Section 3692 is entitled "Levy" and provides as follows: "In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property, except such as are exempt by the proceeding section, belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due, with interest and penalty for nonpayment, and also of such further sum as shall be sufficient for the fees, costs, and expenses of such levy."

Section 3710 is entitled "surrender of property subject to distraint" and provides in pertinent part as follows:

"(a) Requirement. Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector or deputy collector making such levy, surrender such property or rights to such collector or deputy, unless such property or right is, at the time of such demand, subject to an attachment or execution under any judicial process.

"(b) Penalty for violation. Any person who fails or refuses to so surrender any of such property or rights 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 (including penalties and interest) for the collection of which such levy has been made, together with costs and interest from the date of such levy."

The above-quoted sections are for present purposes substantially identical to the corresponding provisions of the 1954 Code, Sections 6331 and 6332, set out and discussed in United States v. Sullivan, supra.

¹¹ With respect to the amount in dispute, reference is made to the equally pertinent discussion in United States v. Sullivan, supra, at note 18 and accompanying text.

¹² We have pointed out the import of such an award in United States v. Sullivan, supra, at note 18.

¹³ Brief for Appellee, p. 40.

¹⁴ The "order entering judgment" of the court below provided in pertinent part as follows:

It is further Ordered that the Federal tax lien hereinbefore referred to be and is foreclosed against the cash surrender value accrued upon each of the three aforementioned insurance policies;

"And it is further Ordered that defendant Massachusetts Mutual Life Insurance Company pay to the plaintiff, the United States of America, the sum of fifteen thousand three hundred forty-three dollars and sixty cents ($15,343.60) representing the gross cash surrender value of policy number 1,615,476, accrued to August, 1961; and also pay to the plaintiff the sum of three thousand three hundred fifty-two dollars and twenty-eight cents ($3,352.28), representing the gross cash surrender value of policy number 1,468,657, accrued to August, 1961;"

* * *

"Ordered that the defendants Anthony J. J. A. Wilson and Hedwig C. Wilson execute and deliver to the respective insurers any and all documents including the surrender of the policies, requisite to effectuate the relinquishment and discharge of all right, title and interest of each and both of said defendants Wilson in and to the said insurance policies, the gross cash surrender value accruing upon each thereof and the proceeds of the same, as by the terms of the respective policies each insurer is entitled to receive as conditions precedent to the payment of the cash surrender value of the said policies, said acts to be performed by the defendants Wilson within thirty (30) days from the date of the entry of this Order, and

"It is further Ordered that upon the failure, neglect, or refusal of Anthony J. J. A. Wilson and Hedwig C. Wilson to perform the aforesaid act or acts necessary to effectuate the payment of the gross cash surrender value by the insurance carriers to the plaintiff within thirty (30) days from the date of entry of this Order, then and in that event it is the Order of this Court that Anthony J. J. A. Wilson and Hedwig C. Wilson shall execute and deliver to the insurance carriers within the same thirty-day period the requisite document or documents designating the plaintiff, the United States of America, as beneficiary of the aforementioned insurance policies; and be it

"Further Ordered that in the event that Anthony J. J. A. Wilson and Hedwig C. Wilson refuse, fail or neglect to comply with the provisions of this Order directing them to either execute and deliver the requisite documents as required by the insurance carriers as conditions precedent to the payment of the gross cash surrender value of the policies within thirty (30) days of the date of entry of this Order, or alternatively, to execute and deliver within the same period of time the requisite document or documents designating the plaintiff, the United States of America, as beneficiary of the insurance policies, then and in that event this Order shall stand as a judgment directing the defendants Massachusetts Mutual Life Insurance Company and the Travelers Insurance Company, to pay to the plaintiff the gross cash surrender value accrued upon each of said policies from the 6th of June, 1947, to date of payment, without any deductions for loans or for any other transaction or transactions by and between the insurers, the insured and the beneficiary, and for compliance with this Order the insurers shall be held without fault or liability to Anthony J. J. A. Wilson, Hedwig C. Wilson, their heirs, assigns or estates; all without costs."

¹⁵ The "Tabulation of Information re Life Insurance Policies" is incorporated in the opinion in this case as an appendix by reference to the opinion in the Sullivan case. The "Tabulation," we think, should be made part of the record in this case on remand. It represents what is in effect a stipulation, prepared by the parties by the direction of this court. It contains, we believe, information which may be vital to a decision in this case as well as in the other cases involving the present problem on appeal at our Nos. 13,957, 14,091 and 14,092, if it should be concluded by the Supreme Court on subsequent review that some other theory or theories of law than those we have applied should govern the disposition of these cases. Certainly if this case or one or more of the other cases should go to the Supreme Court on certiorari, the data contained in the "Tabulation" should be made available. Those facts stipulated in the "Tabulation" which are enclosed by parentheses are not presently in the records of the respective cases. These facts can be made available upon remand simply by stipulation of the parties. This court, of course, cannot receive evidence.

It will be noted on examination of the "Tabulation" that September 1, 1961 is specified as the date of judgment in the court below. The record on its face indicates that the "order entering judgment" was filed on September 11, 1961 and judgment was entered on September 12, 1961. These are therefore the dates which must be considered determinative for purposes of our adjudication. But as we have indicated in note 41 cited to the text in the Sullivan opinion, what we have said is not intended to preclude the court below on remand from inquiring into the possibility of inaccuracy of the dates as presently listed or of making any other pertinent findings.

 

 

 

 

[64-2 USTC ¶9619]United States of America v. John D. McWilliams, Ethel McWilliams, Elizabeth McWilliams, Connecticut General Life Insurance Company, Mutual Benefit Life Insurance Company, and Connecticut Mutual Life Insurance Company

U. S. District Court, Dist. Conn., Civil Action No. 8151, 234 FSupp 117, 6/30/64

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Lien for taxes: Life insurance policies: Ownership: Automatic premium loans.--In the absence of a binding contract between the insured and the beneficiary whereby the beneficiary agrees to pay the premiums in return for the proceeds when due, a beneficiary who pays premiums and maintains possession of the policy does not require any legal right to the proceeds, and a lien for taxes owed by the insured attaches to the policies. However, the lien for taxes did not attach to loans against the policies used by the insurance company to pay premiums due on the policies after notice of lien has been served. C. W. Sullivan, (CA-3 64-1 USTC ¶9392, followed.

F. Owen Eagan, Assistant United States Attorney, 450 Main St., Hartford, Conn., for plaintiff. Thompson, Weir & Barclay, 205 Church St., New Haven, Conn., for John D., Ethel, & Elizabeth McWilliams; John Fassett, Frank E. Callahan, Wiggin & Dana, 205 Church St., New Haven, Conn., for Connecticut General Life Ins. Co., and Connecticut Mutual Life Ins. Co.; Edward Hennessey, III, Bruce W. Manternach, Robinson & Cole, 750 Main St., Hartford, Conn., for Mutual Benefit Life Ins. Co., defendants.

Ruling on Motion for Summary Judgment

BLUMENFELD, District Judge:

This action is brought by the United States of obtain judgment against the defendant John McWilliams, the taxpayer, for certain outstanding and unpaid assessments of federal tax liabilities and to foreclose tax liens arising from these assessments against certain policies of life insurance issued and outstanding on the life of the taxpayer. Joined as parties defendant are Ethel McWilliams, the taxpayer's wife, who is named as beneficiary of all three policies; his daughter, Elizabeth, who is named as contingent beneficiary in one of them; and the insurance companies who issued the policies.

Notices of the federal tax liens were filed in 1948 with the Town Clerk of Norwich, Connecticut, where the taxpayer lived. The tax claims were filed and allowed In the Matter of John D. McWilliams, Bankruptcy No. 24460; but the proceeding terminated on February 20, 1952, without producing any payment on those claims owing to insufficient assets. Next, the government served formal notices of its tax liens against the taxpayer's property upon the Connecticut Mutual Life Insurance Company on January 29, 1957, upon the Mutual Benefit Life Insurance Company on January 29, 1957, and upon the Connecticut General Life Insurance Company on February 18, 1957.

The Connecticut General Life and the Connecticut Mutual Life policies had been assigned by John D. McWilliams to his wife on November 14, 1956, in consideration of love and affection. This was after the government's liens were filed, but before the insurance companies received actual notice of those liens. The Mutual Benefit Life policy was never assigned and record ownership remains in the taxpayer.

After a motion for summary judgment was filed by the government and briefs and arguments by the parties were presented, the government requested, and all of the parties agreed, that the decision of the court on the motion should be postponed pending the decisions on appeal of several cases cited by the parties in their briefs which had reached conflicting results on issues similar to those presented here. Those cases have been decided. Supplemental briefs have been filed. Further arguments have been heard.

The taxpayer does not contest the validity or amount of the government's claims against him. The issues presented concern the effectiveness of the government's liens as against Mrs. McWilliams, and the appropriate method for their enforcement.

Attachment of the Liens--Mrs. McWilliams' Interest

Section 3670 of the Internal Revenue Code of 1939, 53 Stat. 448 (now Int. Rev. Code of 1954, §6321), provides that if a person fails after demand to pay a tax due the United States, the amount of the tax "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." (Italics added.) The lien "arise[s]" at the time the tax assessment is made, and "continue[s]" until the liability for the amount so assessed is either satisfied or becomes unenforceable by reason of lapse of time. Int. Rev. Code of 1939, §3671, 53 Stat. 449 (now Int. Rev. Code of 1954, §6322). From the moment of assessment, the lien is, in the words of §3670, upon all of the taxpayer's property or rights to property. "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265, 267, 66 S. Ct. 108, 90 L. Ed. 56 (1945). The lien covers all property existing at the time of assessment and all acquired after assessment. Glass City Bank v. United States, supra, 326 U. S. at 267. Its attachment and enforcement is unaffected by state exemption statutes. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 57, 78 S. Ct. 1054, 2 L. Ed. 2d 1135 (1958); Knox v. Great West Life Assur. Co. [54-1 USTC ¶9373], 212 F. 2d 784 (6th Cir. 1954).

It is not questioned that the policies are "property" or "rights to property" to which the lien attaches. Thus if the policies were owned by the taxpayer when the assessment was made, the assignments of two of the policies to Mrs. McWilliams on November 14, 1956, subsequent to the dates of assessments and hence subsequent to the government's liens, are of no aid to her establishing her ownership of the policies as against the government. "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 . . .' [cases omitted]." United States v. Bess, supra, 357 U. S. at 57; United States v. Hoper [57-1 USTC ¶9508], 242 F. 2d 468 (7th Cir. 1957); United States v. Behrens [56-1 USTC ¶9294], 230 F. 2d 504 (2d Cir.), cert. denied, 351 U. S. 919 (1956).

[Ownership of Insurance Policies]

But, Mrs. McWilliams contends that when the liens arose she, rather than the taxpayer, was and continues to be the owner of such property rights as there are in the three insurance policies. In order to raise an issue as to the material fact of ownership, Mrs. McWilliams relies on affidavits and her statements in her deposition that she was the beneficiary of the policies and in constant possession of the policies from the date of their issuance and that she made substantial, though undetermined, contributions toward the payment of premiums before the liens arose, as well as some $3,000 since that date. Assuming that this was indeed the case, as I must for purposes of summary judgment, the question is whether this is sufficient in law to constitute ownership of the policies when the taxpayer enjoyed, at the dates on which the government liens arose, the right to change the named beneficiary, to borrow against the cash surrender values, to surrender each policy for cancellation in return for payment of surrender value plus any available dividends and the right to exercise other options under each of the policies.

This question is to be determined by state law. In determining whether a taxpayer has "property" or "rights to property" to which the government's lien can attach, "both federal and state courts must look to state law." Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-13, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960). Since Connecticut is unquestionably the locus of the contract, the court will look to the law of that state. See United States v. Fried [63-1 USTC ¶9106], 309 F. 2d 851 (2d Cir. 1962); United States v. Burgo [49-1 USTC ¶9307], 175 F. 2d 196 (3d Cir. 1949).

Connecticut recognizes the interest of a beneficiary of a life insurance policy as being vested though subject to defeasance by the owner where the latter retains his right to change the named beneficiary and does so in accordance with the terms of the policy. O'Connell v. Brady, 136 Conn. 475, 72 A. 2d 493 (1950); Allen v. Home Nat'l Bank, 120 Conn. 306, 180 Atl. 498 (1935); Neary v. Metropolitan Life Ins. Co., 92 Conn. 488, 103 Atl. 661 (1918). The beneficiary, however, has no legal right to compel the insurance company to strictly follow its agreed procedure with regard to the method of changing the beneficiary. Shaw v. John Hancock Mutual Life Ins. Co., 120 Conn. 633, 643, 182 Atl. 472 (1936). In the absence of a binding contract between the insured and the beneficiary whereby the latter agrees to pay the premiums in return for the proceeds when due, a beneficiary who pays premiums and maintains possession of the policy does not acquire thereby any legal right to the proceeds. See Bachrach v. Herrup, 128 Conn. 74, 20 A. 2d 395 (1941). The payment of premiums does not necessarily give rise to an implied contract to pay the proceeds to the named beneficiary. Masonic Mutual Benefit Ass'n v. Tolles, 70 Conn. 537, 40 Atl. 448 (1898). See also United States v. Fried [63-1 USTC ¶9106], 309 F. 2d 851 (2d Cir. 1962) (applying New York law). Here, the interrogatories reveal that Mrs. McWilliams did not regard those payments of premiums she made as having been given as consideration for any contractual obligation on the part of her husband not to change the name of the beneficiary, and there is no indication that her possession of the policies was for the purpose of preventing the insured from changing the beneficiary. Compare United States v. Burgo [49-1 USTC ¶9307], 175 F. 2d 196 (3d Cir. 1949). If the payments of premiums may be regarded as giving rise to an equitable lien against the surrender value of the policies in favor of the beneficiary, see Bachrach v. Herrup, supra, 128 Conn. 74, such an equitable lien cannot defeat a federal tax lien. United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957).

The insured applied for these policies himself and was the sole record owner of all three policies at all times prior to the perfection of the government's liens. Compare United States v. Burgo, supra, 175 F. 2d 196. There is no Connecticut authority that would give the beneficiary ownership rights in the policy. At the time the tax lien arose the policies were owned by the taxpayer, and Mrs. McWilliams' possession of them amounted to nothing more than her holding of them in custody for her husband. To whatever extent the policies constituted "property" or "rights to property" they "belong[ed]" to the taxpayer.

Enforcement of the Liens

There are three policies. The Connecticut Mutual Life policy is a fully paid up endowment policy maturing on August 1, 1966, for a face value of $1000, with a present cash surrender value plus accumulated dividends close to its face amount, all of which the government wants to obtain.

The Connecticut General Life policy, which is described as an "Insurance to Age 65-Monthly Income Contract," matured as an income payment contract on January 22, 1957. Prior to that time, the insured had several options, but since the company did not receive actual notice of the government's liens until February 18, 1957, the government concedes that it is bound by the option actually selected and exercised by the insured. It provides for monthly payments of $50 for a guaranteed period of 100 months and thereafter for the lifetime of the taxpayer, insured. The government concedes that it cannot now recover the cash value represented by the 2 monthly $50 payments actually paid to Mrs. McWilliams because they were paid before the company was in receipt of actual notice of the government's liens. After notice was received, the company withheld all payments under the policy. The government's former contention that, upon foreclosure of its liens, Connecticut General Life should be ordered to pay over to the government in one sum the commuted value of the entire contract--both the value of the guaranteed payments and the actuarial value of the contingent life payments--irrespective of any terms in the contract which limit commutation to the guaranteed payments only has been abandoned. It now seeks only an order directing that all right, title and interest in the contract be assigned to the government and that all accumulated and future payments thereunder be paid by Connecticut General Life to the government toward satisfaction of the tax liability underlying its lien.