Annotations- Insurance Policy
1 Page 3
7 Had there
been no assessment prior to Bess's death and, consequently, no lien, the
Government would not even have been entitled to the cash surrender value
as of death. See Commissioner v. Stern [58-2 USTC ¶9594], 357
U. S.
39 (1958).
8 It is true
that in some cases surrender of a tangible evidence of indebtedness or
other obligation required by contract or by state law will not be
required of the Government. However, those cases all seem to involve
items like bank account passbooks, see United States v. Manufacturers
Trust Co. [52-2 USTC ¶9417], 198 F. 2d 366, 369 (2d Cir. 1952); United
States v. Emigrant Industrial Sav. Bank [54-2 USTC ¶9447], 122 F.
Supp. 547, 549 (S. D. N. Y. 1954); cf. Commonwealth Bank v. United
States [40-2 USTC ¶9769], 115 F. 2d 327 (6th Cir. 1940); negotiable
instruments, cf. United States v. Scheuermann, 106 F. Supp. 86
(E. D. Mo. 1952); negotiable warehouse receipts, see United States v.
Caldwell [47-2 USTC ¶9363], 74 F. Supp. 114, 118 (M. D. Tenn.
1947); or corporate stock, see United States v. Scheuermann, supra,
where transfer of the taxpayer's interest to the Government does not
inevitably result in an irrevocable forfeiture of the rights of the
taxpayer or of others interested in the policy, as would be the case if
the taxpayer should eventually be able to satisfy the tax debt or if the
assessment should be found erroneous, and where the obligation is
usually fixed. As noted in a bank account case, "the public policy
favoring facilitation in the collection of taxes [is not] . . .
permitted to outweigh the letter of the arrangement between bank and
depositor where . . . prejudice could result . . .."
United States
v. Emigrant Industrial Sav. Bank, supra, 122 F. Supp. at 550.
9 The
taxpayer, at least, must be notified. Section 3693(a) (§6335(a)).
10 The Third
Circuit's decision in Penn Mutual was specifically reaffirmed in
United States
v. Sullivan, supra, 333 F. 2d at 111, as being unaffected by Bess.
In affirming a judgment of foreclosure against matured endowment
policies held by the insured the First Circuit in Equitable Life
Assur. Soc'y v.
United States
, supra, 331 F. 2d at 34-38, also found its decision in Massachusetts
Mutual unscathed by Bess. The Second Circuit will soon have a
chance to consider the vitality of its decision in Metropolitan Life.
See United States v. Birrell [64-2 USTC ¶9696], 233 F. Supp. 921
(S. D. N. Y. 1964), appeal docketed, No. 29390, Dec. 18, 1964 (2d
Cir.).
[71-1 USTC ¶9115]
United States of America
, Plaintiff v. Cyrus J. Faircloth, Administrator of the Estate of the
Deceased, Jack Allen, Henrietta Clark Allen, and Iowa State Travelers
Mutual Assurance Company, Defendants
U.
S. District Court, So. Dist. Iowa, Central Div., Civil No. 8-2376-C-1,
12/2/70
[Code Secs. 6321 and 6332--Result unchanged by '69 Tax Reform Act]
Surrender of property subject to levy: Life insurance policy:
Deceased taxpayer: Cash surrender value.--The Government was granted
summary judgment in an action to enforce its tax liens against the cash
surrender value of a life insurance policy which the taxpayer owned on
his life. There was evidence that the taxpayer's wife, the beneficiary
of the policy, died simultaneously with her husband, although her body
was never found. The Court also denied the Government's motion for the
balance of the policy until February 6, 1973, when she would be presumed
dead under state law.
Allen
Donielson, United States Attorney, Des Moines, Iowa, Kenneth A. Lazarus,
Department of Justice, Washington, D. C. 20530, for plaintiff. Cyrus J.
Faircloth, pro se, 103 Executive Building, 313 Union St.,
Fayetteville, N. C. Harold Newcomb, 321 Savings & Loan Building, Des
Moines, Iowa, for Iowa State Travelers Mutual Assurance Co., for
defendants.
Memorandum
and Order
STEPHENSON,
Chief Judge:
This matter is
before the Court on a motion for summary judgment filed June 26, 1970,
on behalf of the
United States
. The Court, on September 24, 1970, ordered that the parties file briefs
in support of their various positions in regard to the Government's
motion. The briefs are now on file and this matter is before the Court
for final disposition.
[Facts]
The undisputed
facts as are relevant for purposes of this motion are set forth in the
following paragraphs of this memorandum. Such facts have been
ascertained from the pleadings and papers, including affidavits, now on
file with this Court.
On February 6,
1966, Jack Allen drowned as a result of a boating accident in
Bladden County
,
North Carolina
. At the time of his death, there was in effect an insurance policy (No.
B 398192) written by the Iowa State Travelers Mutual Assurance Company
of Des Moines,
Iowa
, on the life of Mr. Allen in the amount of $6,000.00. Henrietta Clark
Allen, wife of Jack Allen, was named as beneficiary of the policy. There
was no alternate beneficiary. Henrietta Clark Allen, wife of Jack Allen,
is reported to have been with Jack Allen when the boating accident took
place, but this fact has never been confirmed. Although she has not been
heard from since the date of the accident, her body has never been
recovered.
[Income
Tax Deficiencies]
On February
11, 1966, Lester G. Garter, Jr., an attorney at
Fayetteville
, North Caroline, was appointed Administrator of the Estate of Jack
Allen by the Superior Court,
Cumberland County
,
North Carolina
. Mr. Cyrus J. Faircloth was appointed attorney for the administrator.
On April 10, 1967, the
United States
filed its Proof of Claim in the probate proceeding for unpaid taxes due
and owing from Jack Allen. The claim was based on income tax
deficiencies which were assessed individually against Jack Allen and
jointly and severally against Jack Allen and his wife, Henrietta Clark
Allen, in accordance with the Internal Revenue laws, as set forth more
particularly in the following schedule:
Taxable
Amount of Tax and
Date of
Type of Tax Period Interest to 6-17-69 Assessment
Income tax-Jack Allen . 1962 * $4,778.22 (T) 1-28-66
828.31 (T)
Income tax-Jack and Henrietta 1965 3,176.93 (T) 3-10-67
406.19 (I)
Income tax--Jack and Henrietta
Clark Allen ............... 1966 192.86 (T)
24.20 (I)
$9,406.71
* (T) Tax
(I) Interest
Mr. Allen is
individually liable for $5,606.53 of this total based on the 1962 tax
period. Mr. and Mrs. Allen are jointly and severally liable as to the
balance of $3,800.18 based on the 1965 and 1966 tax periods. The daily
accrual rate is $.79 on taxes due for the 1962 taxable period and $.55
for taxes due for the 1965 and 1966 taxable periods.
[Final
Accounting of Estate]
A final
account of the estate was submitted by the Administrator in August,
1967, and the same was thereafter approved and ordered to be recorded
and filed by the Clerk of the
Superior
Court
of
Cumberland
County
on October 5, 1967. Said final account indicated that the estate was
insolvent. After paying funeral expenses, costs of administration and
other debts, various claims were still outstanding against the estate,
including the Government's tax claim previously referred to. The
Administrator did not acquire the proceeds of the life insurance policy
with the Iowa State Travelers Mutual Assurance Company on Allen's life
(policy No. B 398192) for the purpose of distribution or for the purpose
of paying the debts of the estate. He set forth following as his reason
in his final report to the Court:
The
decedent, Jack Allen, was the insured in an Insurance Policy #B398192
issued by Iowa State Traveler's Mutual Association,
P. O. Box 1474
,
Des Moines
,
Iowa
50306
, naming as primary beneficiary to Henrietta Clark Allen, the wife of
the decedent and secondary beneficiary as the estate of the decedent in
the purported sum of $6,000.00. It is believed by the Administrator that
Henrietta Clark Allen was also aboard the ill-fated craft
"Kork" and was drowned simultaneously with the decedent Jack
Allen, deceased, however, the body of Henrietta Clark Allen has not been
recovered from the Cape Fear River, the place of the drowning of the
decedent and the said Henrietta Clark Allen has not been seen or heard
from since the time of the accident in which the decedent, Jack Allen
lost his life. Under the simultaneous and common disaster section of the
General Statutes of North Carolina the Estate of Jack Allen, deceased,
would be entitled to the proceeds of the aforesaid Insurance Policy,
provided, however, the Estate could satisfactorily prove that Henrietta
Clark Allen predeceased him or died in the same common disaster. To date
of this accounting and this final account, the Administrator has been
unable to locate any person who can satisfactorily prove that Henrietta
Clark Allen was aboard said "Kork" or can prove that she is
legally dead. Under the North Carolina Law, the place and situs of the
death of the decedent, Jack Allen, a person is not presumed dead until
the laspe (sic) of a period of seven years or the discovery of the body
of such missing person, which ever event first occurs. Thereby, your
Administrator is unable to secure the funds under and by virtue of the
aforesaid Insurance Policy, for that and in that he cannot give a valid
release to the company and the reasons hereinbefore set out.
[Notice
of Levy]
On September
21, 1967, a notice of levy was served on Robert G. Tangeman, Assistant
Vice President and counsel for Iowa State Travelers Mutual Assurance
Company, requesting that the death benefits payable by reason of death
of the insured be paid to the Internal Revenue Service in satisfaction
of taxes assessed individually against Jack Allen for the 1962 taxable
period and jointly and severally against Jack Allen and Henrietta Allen
for the 1965 and 1966 taxable periods. The notice of levy was not
honored by the company and on October 9, 1967, a final notice and demand
was served on Sidney L. Adams, Secretary for the insurance company. To
date there has been no compliance with the directions of the levy. As a
result, the United States filed this lawsuit seeking to foreclose its
lien upon a portion of the proceeds of the life insurance policy drawn
on the life of Jack Allen ($3,800.18 plus any statutory interest owing, i.
e., that portion of the tax debt for which Jack Allen and his wife,
Henrietta Clark Allen are jointly and severally liable) and seeking to
impose a trust on the balance of the proceeds of the said life insurance
policy; such proceeds to be held in trust by the Iowa State Travelers
Mutual Assurance Company pending further order of this Court.
Subsequently, the United States filed this motion for summary judgment
asserting that it is entitled as a matter of law to foreclosure against
the proceeds of the life insurance policy issued on the life of the
deceased Jack Allen in the sum of $6,000, that sum being the total of
said proceeds.
One fact
question remains unresolved for purposes of this motion for summary
judgment. It is not known whether Henrietta Clark Allen lives. It is
probable that she is dead. But, the question remains unresolved.
Nevertheless, the United States claims that it is entitled not only to
the proceeds of the policy in question necessary to satisfy the tax
liabilities of Henrietta Clark Allen, but also those proceeds not
necessary to satisfy such tax liabilities. The balance is claimed for
the purpose of satisfying the separate tax liability of the insured,
Jack Allen (the 1962 taxes and interest).
[Joint
Liability]
There can be
no question concerning the right of the
United States
to judgment in this case in the amount of $4,082.88. As previously
noted, the joint and several liability of Jack Allen and Henrietta Allen
for the 1965 and 1966 taxable periods is $3,800.18. With interest
computed to November 1, 1970, this rises to $4,082.88 (daily accrual
rate is $.55 as to this portion of the total tax liability). Both
Henrietta and Jack Allen are liable for the amount referred to. Joint
returns were filed for the years 1965 and 1966. Assuming that Jack Allen
survived Henrietta Allen, the only beneficiary named on the policy, the
proceeds, as a part of his estate, are subject to the Government's tax
lien. Section 6321, Internal Revenue Code of 1954, 26 U. S. C. §6321.
Assuming that Henrietta Allen survived Jack Allen, that portion of the
tax liability involved herein which is joint and several would give rise
to a lien which would attach to the proceeds of the life insurance
policy due Henrietta Allen. The liability of a husband and wife on a
joint return is joint and several and deficiencies in tax, civil
penalties and interest can be collected from either spouse. Section
6013(b)(3), Internal Revenue Code of 1954. A federal tax lien attaches
to all property and rights to property, whether real or personal,
belonging to the person liable to pay the tax. Section 6321, Internal
Revenue Code of 1954. Summary judgment will be granted in favor of the
United States
in the amount of $4,082.88, plus statutory interest from November 1,
1970.
[Right
to Balance Due]
As previously
noted, the
United States
claims, in addition to its claim for $4,082.88, a present right to the
balance due on the said insurance policy, i. e., $1,917.12. Two
theories are advanced by plaintiff in support of this contention. First
it is asserted that the
North Carolina
version of the Uniform Simultaneous Death Act would bar the
beneficiaries of the estate of the absent Henrietta Allen and that such
beneficiaries would have no claim to the proceeds of the subject
insurance policy under the Uniform Simultaneous Death Act. Thus, it is
argued that in view of the fact that the United States asserts
substantial tax liabilities against the deceased Jack Allen
individually, the balance due on the proceeds of the life insurance
policy should be payable to the plaintiff in partial satisfaction
thereof.
The State of
North Carolina
has adopted the Uniform Simultaneous Death Act which provides:
Insurance
policies.--Where the insured and the beneficiary in a policy of life or
accident insurance have died and there is no sufficient evidence that
they have died otherwise than simultaneously the proceeds of the policy
shall be distributed as if the insured had survived the beneficiary.
(Section 28-161.4, General Statutes of
North Carolina
)
The answer to
the Government's argument is short. The Uniform Simultaneous Death Act
pertains to a situation where both the insured and the
beneficiary of a life insurance policy have died. There is no positive
proof in this case that Henrietta Clark Allen is dead. The possibility
remains that she might yet present a claim to the policy proceeds in her
own behalf.
[Recovery
of Insurance Benefits]
But, as noted,
the Government urges a second theory in support of its claim to the
remainder of the insurance proceeds. The insurance contract here in
question states that no court action or proceedings shall be commenced
to recover any benefits unless the same shoud be commenced within twelve
months after the cause of action accrues. The subject insurance contract
states that proof of loss must be furnished within sixty days from date
of death. Thus, it is asserted that since Jack Allen died on February 6,
1966, the beneficiary named in the insurance contract or her heirs would
be precluded from recovery of the insurance proceeds in any action
instituted after April 7, 1969.
Failure to
bring suit within the time provided by a policy of insurance may be
excused under certain fact circumstances. See 44 Am. Jur. 2d
Insurance §1915 and cases cited thereunder. There may also be a
waiver of, or an estoppel to insist upon, a limitation of time within
which to bring suit on a contract of insurance under some circumstances.
See 44 Am. Jur 2d Insurance §§ 1916, 1917 and cases cited
thereunder.
The defendant
insurance company here has indicated in its brief filed with the Court
in support of its resistance to this motion for summary judgment that
the argument of the Government in this regard is of ". . . no
apparent significance in this case due to the unusual circumstances
since due to those circumstances defendant has not advanced any of these
contract provisions [the limitation provisions] in defense of liability
nor is it anticipated that any court would accept such a technical
defense in view of said circumstances."
The Court
cannot assume, under the undisputed facts of this case, that Henrietta
Clark Allen would, should she appear and claim the proceeds of the
insurance policy here in question, be barred by limitations imposed by
the contract of insurance. The Government's motion for summary judgment
in regard to the $1,917.12 of remaining proceeds will now be denied. It
has not been shown at the present time that these proceeds are property
or property rights of Jack Allen subject to levy under Section 6332(a)
of the Internal Revenue Code. In short, it has not been shown that this
particular property in the hands of the Iowa State Travelers Assurance
is property which is properly the subject of distraint at this time.
[Balance
Due In Seven Years]
Although there
is no positive proof at this time that Henrietta Clark Allen is dead,
the circumstances indicate a strong possibility that she is and further
that said death was simultaneous with that of her husband, Jack Allen,
under the provisions of the Uniform Simultaneous Death Act adopted by
the State of
North Carolina
. Under the applicable law she will be presumed dead after the lapse of
seven years from the date of her disappearance on February 6, 1966. The
Court therefore finds, that in the absence of a claim to the contrary,
Henrietta Clark Allen will be presumed dead on February 6, 1973; that
said death was simultaneous with that of her husband, Jack Allen; that
the balance of the sum due under the insurance policy in question (No. B
398192) will then be due and payable to the plaintiff,
United States of America
. It is desirable that the parties be spared the expense of further
litigation in this matter. Judgment will therefore be entered in favor
of the plaintiff for the balance of the proceeds of said policy to be
paid to the plaintiff on February 6, 1973, absent any claim filed herein
to the contrary.
[Judgment]
IT IS ORDERED
that the motion for summary judgment filed June 26, 1970 on behalf of
the United States be and is hereby granted in the amount of $4,082.88
plus statutory interest from November 1, 1970, until the date of payment
and the Clerk will enter judgment accordingly in favor of the plaintiff
and against the Iowa State Travelers Mutual Assurance Company.
IT IS FURTHER
ORDERED that said motion for summary judgment for the balance of
$1,917.12 ($6,000-$4,082.88) be and is hereby denied, except as further
ordered herein.
IT IS FURTHER
ORDERED that judgment is entered in favor of plaintiff,
United States of America
, and against Iowa State Travelers Mutual Assurance Company for the
balance of the proceeds of said insurance policy, No. B 398192, payable
on February 6, 1973.
IT IS FURTHER
ORDERED that this cause is closed subject to reopening should a claim be
filed herein in behalf of Henrietta Clark Allen.
[36-1 USTC ¶9121]William J. Kyle,
Acting Collector of Internal Revenue for the First Collection District
of
Pennsylvania
, Defendant-Appellant, v. Margaret A. McGuirk, Plaintiff-Appellee
(CA-3),
United States Circuit Court of Appeals for the Third Circuit, No. 5784.
October Term, 1935, 82 F2d 212, Decided February 13, 1936
Upon appeal from the District Court of the United States, for the
Eastern District of Pennsylvania.Statute of the State of Pennsylvania
providing that no distraint to satisfy creditors of an assured can be
made upon policies of life insurance payable to his wife (whether or not
power to change the beneficiary was retained), did not prevent the
Collector from distraining upon such policies for Federal taxes.
Reversing District Court decision, 10 Fed. Supp. 705.
Before
BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.
Opinion
THOMPSON,
Circuit Judge:
This is an
appeal by Kyle, Acting Collector of Internal Revenue, hereinafter
referred to as the Collector, from a decree of the District Court for
the Eastern District of Pennsylvania. The Collector imposed a lien for
taxes against John J. McGuirk for $3,648.82. McGuirk was the assured in
a standard contract of life insurance of which his wife, the appellee
herein, was beneficiary. The assured had the right to change the
beneficiary, to borrow on the policy and to receive the cash surrender
value. The Collector issued a warrant of distraint directing that a levy
be made on the property rights of McGuirk in the policy. The warrant was
served upon the insurance company which had issued the policy to
McGuirk, to recover the value of the policy. The appellee filed a
petition in the District Court praying that the warrant of distraint be
vacated upon the ground that under the laws of the State of
Pennsylvania
no distraint to satisfy creditors of an assured can be made upon a
policy of insurance payable to the wife of the assured.
The
Pennsylvania Act of June 28, 1923, P. L. 884, upon which the appellee
relies provides:
That
the net amount payable under any policy of life insurance or under any
annuity contract upon the life of any person, heretofore or hereafter
made for the benefit of or assigned to the wife or children or dependent
relative of such person, shall be exempt from all claims of the
creditors of such person arising out of or based upon any obligation
created after the passage of this act, whether or not the right to
change the named beneficiary is reserved by or permitted to such person.
The
District Court held that the Act applied and entered a decree quashing
the warrant of distraint. The Collector appealed. He questions the
jurisdiction of the District Court to enter the decree and contends that
the warrant of distraint was valid and enforceable.
The distraint
is clearly non-enforceable if the state exemption act cited above
applies. We find no authority for applying the act. As was said by the
tenth circuit in Cannon v. Nicholas, opinion filed December 9,
1935:
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.
Our
attention has been directed to the fact that in Bowers v. Reinhard,
78 F. (2d) 776, we applied the state exemption statute.
It may be noted, however, that section 6 of the Bankruptcy Act (11
U. S.
C. A. 24) specifically provides that state exemption laws are applicable
in bankruptcy. The assured in Bowers v. Reinhard, supra, was a
bankrupt, whereas the assured in the instant case is not a bankrupt.
Inasmuch as Congress has provided for the application of state exemption
statutes in bankruptcy proceedings, but has made no such provision
applicable to the revenue laws, we may conclude that there was no
intention to so apply them in the administration of the revenue laws.
The distraint
is likewise non-enforceable if the property rights in the policy belong
to the wife of the assured as beneficiary, for if, by the law of
Pennsylvania
, ownership of the policy is in the wife, the policy may not be
subjected to the payment of the taxes of the assured. We have been
referred to no decisions of the Supreme Court of Pennsylvania which
directly rule the question whether a policy such as the one involved in
the instant case is the property of the assured or of the beneficiary.
The views of the Pennsylvania Supreme Court as declared in Weil,
Appellant, v. Marquis, 256 Pa. 608, were that the beneficiary had an
inchoate right which ripened into a vested interest upon the death of
the assured. In dictum the court indicated that the assured during his
lifetime was the real owner of the policy (see also Irving Bank,
Appellant, v. Alexander, et al., 280 Pa. 466), and that although the
policy was for the benefit of the wife, her rights were contingent upon
her survival of the assured without a change of beneficiary having been
made and without a lapse of the policy for non-payment of premiums. In
the absence of any decisions by the Pennsylvania courts holding to the
contrary, we are of the opinion that the property rights in the policy
are in the assured during his lifetime to an extent sufficient to
subject those rights to distraint by the government for taxes due it by
the assured. Bowers v. Reinhard, supra, is not to the contrary
for our ruling in that case was based solely on the conclusion that the
policy in suit was made for the benefit of the wife.
The District
Court felt constrained, in view of R. S. 933 (28
U. S.
C. A. 746), to quash the warrant of distraint. We think, however,
inasmuch as the Collector had instituted summary proceedings for the
collection of internal revenue, the statute referring to an attachment
of property upon process instituted in a court of the
United States
does not apply. The Collector's process was not instituted in the court
below. He was brought into that court through process instituted against
him by the appellee. The final paragraph of the statute reads:
*
* * Nothing herein contained shall interfere with any priority of the
United States
in the payment of debts.
We
think this indicates that the intention of Congress was that state laws
should not interfere with the expeditious collection of debts due the
United States
.
The decree of
the District Court is reversed.
[42-1 USTC ¶9342]
United States of America
, Plaintiff, Appellant, v. Massachusetts Mutual Life Insurance Company,
Defendant, Appellee
(CA-1),
United States Circuit Court of Appeals for the First Circuit, No. 3731.
October Term, 1941, 127 F2d 880, Decided March 13, 1942
Appeal from the District Court of the
United States
for the District of Massachusetts.
Charges in distraint and seizure case: Cash surrender value of policy
not in possession of insurance company.--An insurance company is not
a person in possession of the insured's property or rights to property
subject to distraint within the meaning of Code Sec. 3710 and is not
subject to the penalty imposed by said section for failure to pay to the
Collector the cash surrender value of a life insurance policy, under the
terms of which the delinquent taxpayer-insured has a right to change the
beneficiary, when the policy has never been surrendered to the insurance
company, the beneficiary has never been changed and the consent of the
beneficiary never obtained. Affirming decision of District Court
reported at 41-1 USTC ¶9425, 38 Fed. Supp. 333.
Bernard
Chercoff, Washington, D. C., (Samuel O. Clark, Jr., and J. Louis
Monarch, both of Washington, D. C., and Edmund J. Brandon and George F.
Garrity, both of Boston, with him on brief) for appellant. Frederick H.
Nash,
Boston
, (Raymond P. Baldwin,
Boston
, with him on brief) for appellee.
Before
MAGRUDER, MAHONEY and WOODBURY, JJ.
Opinion
of the Court
MAHONEY, J.:
The defendant,
Massachusetts Mutual Life Insurance Company, about September 28, 1908
delivered in the State of
Washington
to Edward G. Robinson, Jr., a resident of that state, a twenty payment
policy of life insurance in consideration of a premium there paid to it.
The policy became fully paid up in 1928. The insured had named his wife
beneficiary of the policy but he had reserved to himself the right to
change the beneficiary. No such change has ever been made.
On June 17,
1939, notice of levy on the policy and warrant for distraint were served
on the defendant at
Portland
,
Oregon
. On July 26, 1939 the taxpayer notified the defendant that he was
releasing his right to charge the beneficiary. On August 9, 1939 the
defendant returned the policy to the insured, stating:
"We
cannot endorse this attempted change in benefit under the policy but are
willing to file this letter as an attempted change in benefit.
Obviously, we cannot comply with your directions in view of the
government's lien against this policy."
On November
29, 1939 a second notice of levy and warrant for distraint were served
upon the defendant at its home office at Springfield, Massachusetts,
notifying it that there was due from the insured to the plaintiff as an
unpaid internal revenue tax the sum of $944.33, and further notifying
the defendant that "all property, rights to property, moneys,
credits and/or bank deposits now in your possession and belonging to the
aforesaid E. G. Robinson, and all sums of money owing from you to the
said E. G. Robinson are hereby seized and levied upon for the payment of
the aforesaid tax, together with penalties and interest, and demand is
hereby made upon you for the sum of Nine hundred and forty-four dollars
and thirty-three cents ($944.33) of the amount now owing from you to the
said E. G. Robinson or for such lesser sum as you may be indebted to
him, to be applied to the payment of the said tax liability." On
December 5, 1939 a final notice and demand were served on the defendant
at
Springfield
,
Massachusetts
.
The cash
surrender value of the policy on June 17, 1939 was $945.43; on November
28, 1939, $945.40; and on December 5, 1939, $944.91. The government was
demanding from the defendant the sum of $944.33.
The defendant
refused to pay to the Collector of Internal Revenue the cash surrender
value of the policy and the plaintiff then brought this action is the
United States District Court in Massachusetts under Section 3710 of the
Internal Revenue Code to recover from the defendant the statutory
penalty imposed by subsection (b) of that section. The insured and the
beneficiary are now residents of the State of
Oregon
and the policy is in the possession of the insured.
The defendant
admitted that there was due from it to the insured a dividend on the
policy amounting to $12.68 and that the statutory penalty could be
imposed for this amount. The court below determined that the plaintiff
was not entitled to recover any more than the amount of the dividend and
entered its judgment for the plaintiff in that, sum. The plaintiff has
appealed.
The appeal
presents this question: Is the defendant life insurance company liable
for the statutory penalty under I. R. C. §3710 for failure to pay to
the Collector of Internal Revenue the cash surrender value of a life
insurance policy, under the terms of which the delinquent
taxpayer-insured had a right to change the beneficiary, when the policy
has never been surrendered to the defendant, the beneficiary never
changed and the consent of the beneficiary never obtained? The
applicable sections of the Internal Revenue Code are:
Section
3710(a). Any person in possession of property or rights to property,
subject to distraint * * * shall upon demand by the Collector * * *
surrender such property or rights to such Collector or Deputy * * *
(b)
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
* * *
Section
3690. Authority to Distrain. 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
sub-chapter, of the goods, chattels, or effects, including stocks,
securities, bank accounts, and evidences of debt of the person
delinquent as aforesaid.
Section 3710
provides that a person in possession of property or rights to property
which are subject to distraint must surrender such property and rights
to the Collector upon demand. We must determine whether the defendant
insurance company is "in possession of property or rights to
property subject to distraint", within the meaning of Section
3710(a). If it is, then the defendant is liable for the penalty imposed
by Section 3710(b).
The insurance
company contends that it is not in possession of property of the
taxpayer subject to distraint within the meaning of the statute because
it is under no liability to pay the cash surrender value until the
policy has been surrendered to it and the consent of the revocable
beneficiary has been given or the insured has exercised his right to
make himself beneficiary of the policy. Since none of these conditions
has been observed in the present case, the defendant says that no claim
has arisen against it, with the result that there is no property which
can be distrained. The government argues that the realistic, economic
fact is that the insured has the complete power to obtain the cash
surrender value of the policy from the company merely by naming himself
beneficiary and surrendering the policy. It says that the collection of
taxes is a practical, administrative problem, and the fact that the
insured has failed to comply with the merely formal conditions of making
himself beneficiary and surrendering the policy should not be allowed to
stand in the government's way. An able exposition of this position may
be found in the opinion of the district court in Columbian National
Life Insurance Co. v. Welch, 15 F. Supp. 777 [36-2 USTC ¶9439];
aff'd 88 F. (2d) 333 (C. C. A. 1st, 1937) [37-1 USTC ¶9131] for a
different reason. While the government's argument is not without
considerable merit, we cannot accept it.
The policy
provides:
After
this policy has become paid-up by payment of all required premiums, or
if it becomes paid-up for a reduced amount by operation of law, or if
extended term insurance is taken hereunder, the insurance will have a
cash surrender value available within thirty days of the application
therefor on legal surrender of the policy.
No matter what
state law is applicable to the construction of this insurance contract,
it would appear to be clear that state courts would construe this
contract so as to hold that the insurance company would not be liable to
pay the cash surrender value of the policy until the insured had made
application for it and had surrendered the policy to the company.
Although there is no clear authority on the question, there is also the
possibility that under applicable state law it might be held that the
insurance company would not be liable to pay the cash surrender value so
long as the consent of the revocable beneficiary had not been obtained.
There is no
Washington
case squarely in point. In
Massachusetts
, by statute, written assent by the beneficiary was at one time
specifically required.
Mass.
G. L. (Ter. Ed.) c. 175, §144. This, however, was changed by L. Mass.
(1938) c. 209, §1, but the extraterritorial effect of the amendment may
perhaps be questioned.
At the very
least, however, the insurance company would not be required to pay the
cash surrender value to the insured so long as he had not applied for it
and the policy had not been surrendered. It might be argued that this
latter condition is a merely formal one and that under certain
conditions equity would dispense with its performance. But the
characterization of the condition as formal in character does not
necessarily require the conclusion that this particular contract
formality should be dispensed with in a case where the tax-collecting
powers of the federal government are involved. This is particularly so
when it would appear to be clear that there are reasonable alternative
remedies which the government is free to pursue.
As a matter of
fact the condition requiring "legal surrender" of the policy
is more than a merely formal one. See Martin v. New York Life Ins.
Co., 104 F. (2d) 573, 574 (C. C. A. 7th, 1939); United States v.
Metropolitan Life Ins. Co., 41 F. Supp. 91, 93 (S. D. N. Y., 1941)
[41-2 USTC ¶9642]. The primary obligation of the insurer is to pay the
face value of the policy to the designated beneficiary upon the death of
the insured. The insured has a power, by surrendering the policy
(possibly even without the consent of the beneficiary), to convert this
primary obligation into an obligation to pay him the cash surrender
value. In the present case the insured has made no application for the
cash surrender value and has not surrendered the policy. Until he does
so, or until he exercises his power to revoke the designation of the
beneficiary, the latter has a recognizable property interest in the
policy. See Lehman, J., in Maurice v. Travelers' Ins. Co., 201 N.
Y. Supp. 369, 372, 376 (1923); United States v. Metropolitan Life
Ins. Co., supra; Tyler v. Treasurer, 226 Mass. 306, 308 (1917); Kruger
v. John Hancock Mutual Life Ins. Co., 298 Mass. 124, 126 (1937). The
insured not having exercised the power to surrender the policy and thus
cut out the interest of the beneficiary, the insurance company does not
now owe the insured the cash surrender value. There is no debt presently
owing. A court of equity having jurisdiction over the person of the
insured might in a proper case command the insured to exercise his power
and thus transmute the primary obligation of the insurance company into
an obligation to pay over the cash surrender value. Cf. Maurice v.
Travelers' Ins. Co., supra, at 376-77. But that is not the present
case. The government in the present proceeding, to which neither the
insured nor the beneficiary is a party, cannot make the insured exercise
his power to extinguish the interest of the beneficiary. In Isaac Van
Dyke Co. v. Moll, 241 Mich. 255, 217 N. W. 29 (1928), which held
that a creditor of the insured could not garnishee the cash surrender
value in the hands of the insurance company to the prejudice of a
revocable beneficiary, the court pointed out the hardship that would
result if the creditor could thus reach the cash surrender value and
extinguish the policy at a time when the insured was lying on a sick bed
with dissolution near at hand, the policy in such case being worth a
great deal more than the amount of the cash surrender value. The
government in the case at bar is not in the position of a trustee in
bankruptcy of the insured because under Section 70(a)(3) of the
Bankruptcy Act, 11 U. S. C. Sec. 110(a)(3), the trustee in bankruptcy is
expressly vested by operation of law with all the powers which the
bankrupt might have exercised for his own benefit. Cohen v. Samuels,
245
U. S.
50 (1917).
[Decision]
Accordingly we
hold that under the circumstances present in this case the defendant
insurance company is not a person in possession of the insured's
property or rights to property subject to distraint within the meaning
of Section 3710. United States v. Metropolitan Life Ins. Co., supra;
United States v. Penn Mutual Life Ins. Co., (D. C., E. D. Pa., Oct.
28, 1941 [41-2 USTC ¶9779]); contra: Columbian National Life
Insurance Co. v. Welch, supra. We do not believe that Kyle v.
McGuirk, 82 F. (2d) 212 (C. C. A. 3d, 1936) [36-1 USTC ¶9121], or Cannon
v. Nicholas, 80 F. (2d) 934 (C. C. A. 10th, 1935) [35-2 USTC ¶9672],
are contrary to the position which we take here.
It does not
follow, however, that the insured is not a person in possession
of property subject to distraint. Perhaps he is such a person;
undoubtedly he has a substantial interest in the policy, though not the
sole interest. Cf. Kyle v. McGuirk, supra; Cannon v. Nicholas, supra.
The government argues that if the insured is in possession of property
subject to distraint, then so is the insurer. Ordinarily one would think
that if an obligee of a chose in action is in possession of property
subject to distraint then the obligor would be in possession of such
property within the meaning of the revenue statute. However, when an
obligation of the peculiar nature here involved is subject to conditions
precedent which have not been performed, we can see no inconsistency in
saying that the obligor is not in possession of property subject to
distraint while the obligee is in possession of such property, because
the obligor is in no position to perform the conditions but the obligee
is in such a position.
Moreover,
there are practical reasons supporting this result. There is the
distinct, possibility that the insurance company might be subjected to
double liability. While this issue is one which is not entirely free
from doubt, still state courts might later hold, upon death of the
insured, that an insurance company would be liable to pay the proceeds
of the policy to the beneficiary even though the government had
distrained the cash surrender value of the policy in the hands of the
insurance company, if the conditions precedent to the obligation to pay
over the cash surrender value had not been observed. There is no square
authority on this point, however. We cannot say with confidence that
there would be no danger of a double liability if the government should
prevail in the case at bar. If we undertook to hold that the
beneficiary's interest would be effectively extinguished, this would not
bind the beneficiary, who is not a party before us. Congress could not
have intended that the cash surrender value of a life insurance policy
could be distrained in this way when it would expose insurance companies
to risks of double liability in state actions. The result we have
reached here does not impose any great burden on the government in the
performance of its administrative duties because there would appear to
be reasonable alternative remedies which the government is free to
pursue.
In view of our
treatment of the case we need not pass on the effectiveness of the
attempted release of the power to change the beneficiary.
The
judgment of the District Court is affirmed
[42-2 USTC ¶9609]
United States
, Appellant, v. Metropolitan Life Insurance Company, Appellee, and Frank
P. Nistle, Defendant
(CA-2),
United States Circuit Court of Appeals for the Second Circuit, No. 297.
October Term, 1941, 130 F2d 149, Argued May 22, 1942. Decided July 15,
1942
Appeal by the plaintiff from a summary judgment of the District Court
for the Southern District of New York.
Charges in distraint and seizure cases: Interest in insurance
policies.--Taxpayer was the insured in two policies issued by the
life insurance company on which he had the right to change beneficiaries
and also the option to elect to take the cash surrender value upon
surrender of the respective policies. The Government is seeking to
collect a balance of $5,000 due for deficiencies in income taxes
assessed against taxpayer for the years 1926 and 1932, and served notice
on the insurance company of taxpayer's indebtedness and levied on all of
his property in its possession and all sums of money owed to him. The
Court holds that the insurance company does not have
"possession" of any "property" belonging to taxpayer
which can be surrendered in payment of his tax liability. Affirming
District Court decision reported at 41-2 USTC ¶9642, 41 Fed. Supp. 91.
Jerome H.
Doran for the appellant. Frederick H. Nash for the appellee.
Before L.
HAND, AUGUSTUS N. HAND and CHASE, Circuit Judges.
L. HAND,
Circuit Judge:
[The
Facts]
The plaintiff
appeals from a summary judgment dismissing its complaint upon the
following state of facts. The defendant, Nistle, became indebted to the
plaintiff for deficiencies in income taxes assessed against him for the
years 1926 and 1932. Part of these he paid but there remained due more
than $5,000, none of which the plaintiff has been able to collect.
Nistle had taken out two life insurance policies in the defendant
company, one of which--for $1,000--was payable to "the legal
representatives of the insured," and gave the insured the option of
taking the cash surrender value upon surrender of the policy. The second
policy was for $30,000 and the original beneficiary was "L.
Mable" (sic) "Nistle, wife"; it was taken out in 1923 and
in May, 1935 the beneficiary was changed so that the wife became
entitled to receive one-third of the proceeds and a daughter two-thirds.
This policy also gave the insured the option of taking the cash
surrender value upon surrender of the policy. In both policies the
insured reserved the power to change the beneficiaries. On November 25,
1936 the plaintiff served notice on the insurance company in
Pennsylvania
that Nistle owed $8,187.72 in taxes, and that it thereby levied upon all
his property then in its possession and all sums of money owed by it to
him; and it repeated this demand on December 4, 1937. This action was
commenced on May 20, 1940, by the personal service of a summons and
complaint upon the insurance company; and upon Nistle on May 31, 1940 in
Pennsylvania
(the last having been authorized by an order of the District Court for
the Southern District of New York). The policies are not in the
possession of the insurance company, and the plaintiff has of course not
offered to surrender them. The plaintiff asserts that its notices to the
insurance company constituted a valid levy under §3692, and that the
company's refusal to pay was a refusal to "surrender" Nistle's
"property" in its "possession," which made it liable
for the cash surrender value under §3710(b).
[Distress
Authorized by Sec. 3690 Different from Common Law]
The distress
authorized by §3690 is different from anything known to the common-law,
both because it authorizes a sale of the property seized, and because it
extends to other personalty than chattels. The first of these
modifications appeared as early as 1791 in §23 of Chapter XV of the
laws of that year (1 St. L. p. 204) which provided for the
"distress and sale of goods of the person or persons refusing or
neglecting to pay" certain excises imposed by that act. This was
repeated in §28 of the Revenue Act of 1864 (13 St. L. p. 233), the
phrase there being: "it shall be lawful for the collector * * * to
collect the said duties or taxes * * * by distraint and sale of the
goods, chattels or effects of the persons delinquent as aforesaid."
The procedure then prescribed was in substance like the present, except
that nothing was said about a levy. In 1866 Congress made the second
modification by including in the leviable property "stocks,
securities and evidences of debt"; and a levy was required to be
made "upon all property and rights to property * * * belonging
to" the taxpayer. The provision for a levy became §3188 of the
Revised Statutes without change and remains unchanged at the present
time (§3692). In 1924 (§1016 of the Laws of 1924; 43 St. L. 343) the
words "bank accounts," were interpolated between
"securities" and "evidences of debt," and that too
has remained unchanged (§3690). Section 3710 was not passed until 1926
when it was added in its present form (§1114(e) and (f) of the Laws of
1926; 44 St. L. 117).
Thus it
appears that between 1866 and 1926 if the taxpayer's chattels were in
the possession of a third person who refused to surrender them, the
collector had no means of enforcing a surrender and could not make
delivery in performance of his contract of sale. This put the Treasury
at a disadvantage in such cases, because all that the collector could do
was to sell the taxpayer's bare title, which was likely to fetch a much
lower price than the chattels if delivered. Section 3710 was apparently
passed to remedy this; it imposed a direct duty upon the recalcitrant
holder to surrender them, and authorized an action against him for their
value if he refused. It is true that this action was called a
"penalty," but it was really not that, for title would
undoubtedly pass upon payment, so that the holder would suffer no loss.
But the action would at once determine the validity of the taxpayer's
title and dispense with the need of any sale by liquidating the value of
the chattels. It seems very probable that the words "rights to
property," introduced in 1866 at the same time that choses in
action were first made leviable, were meant to cover them as
distinguished from chattels described as "property"; at least
it is hard to understand what else could have been intended. Certainly
the same phrase when used in §3710(a) means what it does in §3692,
especially since it has a function, when understood to refer to choses
in action. That function is to cover cases in which third persons, such
as trustees or the like, are in possession of documents--notes, bonds,
etc.--which belong to the taxpayer; perhaps it also covers cases in
which the chose in action is not embodied in any document, even though
that strains the meaning of the word "possession" a little.
The collector is entitled to a "surrender"--which will include
an assignment when that is necessary--in order to realize the full value
of the chose in action upon a sale. The remedy runs pari passu
with that given in the case of chattels.
That is not
enough, however, for the plaintiff's position here; Nistle has the
policies and he is the holder of the obligation, i. e., the right
to demand their cash surrender value. To succeed, the plaintiff must
maintain that the insurer--the promisor--is in "possession"
either of Nistle's "property," or of his "right to
property." The second can be at once eliminated--indeed the
plaintiff does not urge it--obviously it would be nonsense to say that a
promisor is in "possession" of a "right to property"
against himself, or that by performing he "surrenders" that
right. But the plaintiff does argue that the promisor has
"possession" of the promisee's "property" and that
by performance--payment--he "surrenders" it. Obviously that is
legally a solecism; the promisee has no interest in a penny of the
promisor's property; the promisor may even perform through a third
person, whom he induces to advance the money to the promisee on the
promisor's credit. The promisee can do nothing but compel performance,
and performance is not fastened upon any part of the promisor's
property. However, such an argument is not final; people use language
loosely--even in statutes--and it would not be too great a strain on the
word "property" to make it serve for the promisor's
performance if the setting required. The setting not only does not do
so, but it strongly tends the other way. In the first place, as we have
seen, it is probable that the words "rights to property" in §3692
were used to describe choses in action in contract with
"property" which stood for chattels, and it is certain that
whatever meaning they have in §3692, they have in §3710(a). More
significantly, so to construe them would introduce an inharmonious
exception into the whole scheme of the statute. If the
United States
can sue a taxpayer's debtor whenever he refuses to pay the collector, §3710(a)
changed the proceeding pro tanto from a sale under a distress to
a garnishment; the
United States
was substituted for the taxpayer as promisee. Even that would not be
conclusive, if the intent were plain, or if the interpretation were
necessary to give any effect to the change. It is not; on the contrary
in what is probably its chief application, i. e., to chattels, §3710(a)
accords with a distress and is ancillary to it; as we have seen, it
serves to reduce the taxpayer's goods to the collector's possession so
that he can make delivery. And also, in so far as it expressly touches
choses in action at all (assuming that "rights to property"
does touch them), it can have no other function. True, a disputed chose
in action will not bring as good a price as an undisputed one; but
neither will a chattel delivered at a sale if the title is doubtful. Yet
certainly the section gives no evidence of any purpose to allow the
United States
to mend in the district court all infirmities of title in the taxpayer's
property. The diction, the setting and the purpose of the section unite
to deny the plaintiff's interpretation of the word "property."
The cases on
which the plaintiff relies do not stand in the way of this conclusion.
In Cannon v. Nicholas, 80 Fed. (2d) 934 (C. C. A. 10) [35-2 USTC
¶9672], and Kyle v. McGuirk, 82 Fed. (2d) 212 (C. C. A. 3) [36-1
USTC ¶9121], the taxpayer moved to dissolve the warrant of distraint
and the court considered the merits of the claim. Possibly it need not
have done so on the ground that the collector was entitled to sell out
whatever rights the taxpayer had; but certainly it was permissible to
consider whether any rights whatever would pass upon the sale, and the
point before us was not raised. In
United States
v. Long Island Drug Company, 115 Fed. (2d) 983 [41-1 USTC ¶9140],
the only question which we considered was whether the levy could reach
future earnings; again the point was apparently not raised. The same was
true in Commonwealth Bank v. United States, 115 Fed. (2d) 327 (C.
C. A. 6) [40-2 USTC ¶9769]. On the other hand the First Circuit, though
by a course of reasoning different from ours, held that in the same
situation the insurer was not in "possession" of any property
belonging to the taxpayer.
United States
v.
Massachusetts
Mut. Life Ins. Co., 127 Fed. (2d) 880 [42-1 USTC ¶9342]. Judge
Hincks held the same in United States v. Aetna Life Insurance Co.,
January, 1942 [42-1 USTC ¶9266]. The other decisions cited did not
discuss the question.
Judgment
affirmed.
[37-1 USTC ¶9131]The Columbian
National Life Insurance Company, Plaintiff, Appellant, v. W. M. Welch,
Collector, Defendant, Appellee
(CA-1),
United States Circuit Court of Appeals for the First Circuit, No. 3206.
October Term, 1936, 88 F2d 333, Decided February 12, 1937
Appeal from the District Court of the United States for the District of
Massachusetts.Plaintiff was not entitled to an injunction against
distraint proceedings brought to enforce collection of income taxes from
one of its policyholders by levying on a paid-up policy issued by
plaintiff on the life of the taxpayer. There are no allegations which
remove the case from the provisions of Sec. 3224 of the Revised
Statutes. Affirming District Court decision, 15 Fed. Supp. 777.
Before
BINGHAM, WILSON, and MORTON, JJ.
Opinion
of the Court
PER CURIAM:
We perceive no
ground for this suit. The bill contains no allegation of threatened or
irreparable injury to the plaintiff by seizure of its property for the
debt of another (see Lion Coal Co. v. Anderson, 62 Fed. (2d) 325,
328 (C. C. A. 10)), and nothing is alleged which takes the case out of
provisions of Revised Statutes, section 3224 (26 U. S. C. A. sec 1543)
that no suit for the purpose of restraining the assessment or collection
of any tax shall be maintained in any court.
The
"Notice of Levy" served upon the plaintiff by the Collector
stated that all rights of property belonging to the taxpayer, House, and
"all sums of money owing from you to the said James Arthur
House are hereby seized and levied upon for the payment of the aforesaid
tax . . . and demand is hereby made upon you for the sum of . . .
$1,049.35 of the amount now owing from you to the said James
Arthur House or for such lesser sum as you may be indebted to him,
to be applied in payment of the said tax liability." The warrant of
distraint states the amount of tax due and directs the Collector to levy
upon by distraint and to sell so much of the goods, chattels, effects or
other property or rights to property including stocks, securities,
evidences of debt of the person liable on which a lien exists for
the tax or taxes, etc. (Italics supplid.)
No stated
amount is demanded nor is any property of the taxpayer or of the
plaintiff specified as that affected by the distraint and subject to
seizure. In
United States
v. Bank of
Shelby
, 68 Fed. (2d) 538 (C. C. A. 5) the Collector claimed a bank deposit
standing in the name of the taxpayer and served a warrant of distraint
upon the bank. The bank, asserting a right of set-off, refused to pay
the Collector on the warrant. The Collector then brought an action at
law to determine the rights of the parties. In
United States
v. Bank of
United States
, 5 Fed. Supp. 942, the same situation was dealt with in the same
way. This appears to be the proper procedure. The plaintiff has an
adequate remedy in its right to defend any action at law that may be
brought against it. See, too, United States v. Western Union
Telegraph Co., 50 Fed. (2d) 102.
The judgment
of the District Court is affirmed with costs.
[42-2 USTC ¶9623]
United States of America
, Appellant, v. The Penn Mutual Life Insurance Company
(CA-3),
United States Circuit Court of Appeals for the Third Circuit, No. 7930.
October Term, 1941, 130 F2d 495, Filed July 24, 1942
Appeal from the District Court of the
United States
for the Eastern District of Pennsylvania.
Surrender of property subject to distraint: Cash value of life
insurance policy.--In an action by the Collector of Internal Revenue
to collect a statutory penalty under Sec. 3710(b), I. R. C., arising out
of refusal by insurer to turn over the cash surrender value of an
insurance policy in satisfaction of an unpaid tax liability owing by the
insured to the United States, the Court holds that the property or
rights to property owned by an insured in a policy of insurance are not
in the possession of the insurance company so long as nothing has
occurred to accrue the insurer's contractual liability, so that the
company had nothing belonging to the insured in its possession which it
could deliver to satisfy his unpaid taxes. Affirming District Court
decision reported at 41-2 USTC ¶9779.
Bernard
Chertcoff
,
Washington
, D. C., for appellant. Robert Dechert,
Philadelphia
,
Pa.
, and Frederick H. Nash,
Boston
,
Mass.
, for appellee.
Before JONES
and GOODRICH, Circuit Judges, and LEAHY, District Judge.
Opinion
JONES, Circuit
Judge:
The question
presented by this appeal is whether an insurance company, which has
issued and delivered a policy of insurance on the life of a patron, is
liable under Sec. 3710(b) of the Internal Revenue Code 1 for refusing
to turn over the cash surrender value of the policy to the Collector of
Internal Revenue upon the latter's demand under Sec. 3710(a) of the Code
because of an unpaid tax liability owing by the insured to the United
States, the insured never having elected to receive the cash surrender
value of the policy and never having surrendered the policy to the
company for cancellation.
[The
Facts]
On April 25,
1918, The Penn Mutual Life Insurance Company (the appellee) issued and
delivered to James A. House in
Ohio
its twenty-payment policy on his life in a principal sum payable to the
insured's wife as beneficiary. The policy reserved to the insured the
right to change the beneficiary, a right which he exercised on September
26, 1933, by substituting his son and daughter, or the survivor of them,
as the beneficiaries, who, at all times thereafter, continued to be
such.
In July 1935
the Insurance Company was notified by the Collector of Internal Revenue
that a lien existed in favor of the
United States
against all property and rights to property belonging to the insured on
account of the latter's liability for unpaid taxes due the
United States
. On November 18, 1935, notice of the Collector's levy and a warrant of
distraint 2 were served
on the Insurance Company at its home office in Philadelphia, and on
December 14, 1937, final notice of the Collector's demand was likewise
served on the Insurance Company. A second notice of levy and warrant of
distraint and, likewise, a second final notice and demand were served by
the Collector on the Insurance Company in
Philadelphia
on February 5, 1940.
In the
meantime the policy had lapsed because of the insured's failure to pay
the quarterly premium due July 9, 1936. Upon the happening of that event
and in accordance with the provision in the policy for automatic
extended insurance, the then cash surrender value was used by the
company to place the policy on an extended insurance basis in a reduced
principal sum for a term expiring July 16, 1943. In due course the cash
surrender value of the policy will be entirely consumed by the running
of the term of the extended insurance under the nonforfeiture provision
of the policy. 3 The insured
never took any action to obtain the cash surrender value of the policy,
nor did he ever tender the policy to the company for cancellation. The
Insurance Company does not maintain separate funds as respective
reserves for individual insurance contracts and the reserve upon the
policy in question is a part of the general assets of the company.
The Insurance
Company, denying that it had in its possession any determined property
or rights to property belonging to the insured, refused to pay the
Collector of Internal Revenue any sum as representing the cash surrender
value of the policy. The United States thereupon brought the instant
suit to recover from the Insurance Company the statutory penalty imposed
by Sec. 3710(b) of the Internal Revenue Code. The District Court entered
judgment in favor of the Insurance Company, from which the
United States
took the pending appeal.
According to
the specifications of Sec. 3710(a) the establishment of three things is
requisite to the enforcement of the right thereby conferred upon the
Collector, viz., (1) the existence of property or rights to property in
a delinquent taxpayer, (2) the possession of such property or rights to
property by the person of whom demand therefor is made by the Collector,
and (3) that such property or rights to property are legally subject to
distraint.
[The
Insurer as Holder of Property of Insured]
That an
insured is the owner of "property or rights to property" by
virtue of a policy of insurance upon his life will hardly be questioned.
See Burnet v. Wells, 289 U. S. 670, 679 [3 USTC ¶1108]; Chase
National Bank of City of N. Y. v. United States, 278 U. S. 327, 334
[1 USTC ¶346]; Cohen v. Samuels, 245 U. S. 50, 53; Burlingham
v. Crouse, 228 U. S. 459, 472; Bassett v. Parsons, 140 Mass.
169, 3 N. E. 547. And it may be assumed for present purposes that such
"property or rights to property" may be the subject matter of
a distraint. Cf.
United States
v.
Massachusetts
Mut. Life Ins. Co., 127 F. (2d) 880, 883 (C. C. A. 1) [42-1 USTC ¶9342];
see also Kyle v. McGuirk, 82 F. (2d) 212, 213 (C. C. A. 3) [36-1
USTC ¶9121]. The first and third of the requirements under Sec.
3710(a), as above specified, may, therefore, be considered to be present
in this case. But it by no means follows that, because an insured has
valuable rights or privileges under an extant life insurance policy, the
insurer is in possession of any definite property owing to the insured.
While the
policy endures, the insurer is powerless to compel the insured to
exercise his option under the policy by accepting the cash surrender
value thereof. Van Dyke Co. v. Moll, 241
Mich.
255, 217 N. W. 29, 30, 57 A. L. R. 692, 694. Concurrently, the insurer's
liability remains indeterminate. It is only by the voluntary action of
the insured or by the terms of the policy, if the insured fails to act,
that his rights or privileges under the policy may be accrued and
determined. And until that happens, there is no definite amount owing by
the insurer to the insured and, hence, no ascertainable property of the
insured in the possession of the insurer. Cf. National Bank of
Commerce v. Appel Clothing Co., 35 Colo. 149, 83 Pac. 965, 966; Farmers'
& Merchants' Bank v. National Life Ins. Co., 161 Ga. 793, 131 S.
E. 902, 903, 44 A. L. R. 1184, 1187; Van Dyke Co. v. Moll, loc. cit.
supra; Columbia Bank v. Equitable Life Assur. Soc., 79 App. Div.
601, 80 N. Y. Supp. 428, 433; Boisseau v. Bass' Adm'r, 100
Va.
207, 40 S. E. 647, 649. In the Farmers & Merchants' Bank
case, loc. cit. supra, the court aptly said that "* * *
neither the cash surrender value nor the cash loan value of a policy of
life insurance * * * can be treated as a debt due the insured by the
company, until steps have been taken by the insured to effect the loan
or to withdraw in cash the accumulated surplus apportioned to the policy
by the company." The appellant argues that the "state
decisions involving attempts by ordinary creditors to reach an insured's
interest in a policy are without significance" as they turn upon
local statutes. None the less in ascertaining the applicability of the
local statute it was necessary for the state court in each instance to
determine the nature of the respective interests of the parties to a
policy of life insurance and, to that extent, the state decisions are
persuasive on the question as to whether any property or rights to
property of the insured under an extant life policy are in the
possession of the insurer. In
United States
v.
Massachusetts
Mut. Life Ins. Co., loc. cit. supra, the Court of Appeals for the
First Circuit held that until the insured elected to accept the cash
surrender value of his policy the insurance company was not in
possession of any property or rights to property of the insured within
the meaning of Sec. 3710. With that conclusion we fully agree.
Acting
independently, the insurer is incapable during the terms of the policy
of rendering determinate the amount of its obligation to the insured
thereunder. How, then, can the insurer discharge its liability under an
extant policy by paying to the Collector of Internal Revenue, pursuant
to Sec. 3710, a sum which is assumed to be the property of the insured
who has not exercised his rights in respect of the policy? The statute
attempts no provision, over and above the terms of the policy, for the
determination of or the manner of discharging the insurer's contractual
liability. And while it cannot possibly be of any pecuniary interest to
the insurer whether it discharges its liability under the policy by
paying the insured, the beneficiary, or the Collector of Internal
Revenue by virtue of a distraint, the result in a case such as the
present would be to require the insurance company to pay doubly when the
policy binds it to pay singly. What the Collector seeks to recover from
the insurer is not the latter's liability to the insured under the
policy but the statutory penalty prescribed by Sec. 3710(b), for which
the insurer would be liable out of its own property or estate. To be
sure, the Collector would measure the penalty by what happened to be the
cash surrender value of the policy at the time of the demand, but the
payment by the insurance company would be none the less in discharge of
a penalty assessable against it and not in payment of its liability
under the policy either to the insured or to the beneficiary. And though
the penalty be paid, the policy would still continue in force until the
expiration of the term of the extended insurance and, upon the insured's
death within that period, would become a liability on the part of the
company in favor of the beneficiary for the face amount of the extended
insurance. We do not believe that such a result is within the fair
intendment of Congress as expressed in Sec. 3710.
The case of Columbian
Nat'l Life Ins. Co. v. Welch, 15 Fed. Supp. 777, 779 (D. Mass.)
[36-2 USTC ¶9439], which the appellant cites, lends support to its
present contention. But, while the decision in that case was affirmed
(88 Fed. (2d) 333, 334, C. C. A. 1 [37-1 USTC ¶9131]) on grounds other
than the point here material, it must now be taken to have been
overruled in such regard by the later decision of the Court of Appeals
for the First Circuit in United States v. Mass. Mut. Life Ins. Co.,
supra, with which we are in accord. Neither are the cases, which the
appellant also cites, of distraints upon bank deposits in point. In each
of those instances a definite sum was presently owing the delinquent
taxpayer.
We therefore
hold that the property or rights to property owned by an insured in a
policy of insurance are not in the possession of the insurance company
so long as nothing has occurred to accrue the insurer's contractual
liability. How Congress might render definite an insured's pecuniary
interest under a life insurance policy so that the insurer's discharge
from its contractual liability would follow from its paying the
insured's accrued interest in the policy to the Collector of Internal
Revenue on account of a tax delinquency of the insured is neither for us
to discuss nor consider. 4 It is
sufficient for present puposes that Congress did not act to that end in
Sec. 3710 of the Internal Revenue Code. The "property, or rights to
property," contemplated by Sec. 3710 are only such as where the
holder's payment or transfer thereof to the Collector of Internal
Revenue will operate to discharge the holder's liability to the owner.
The judgment
of the District Court is affirmed.
1 Subsections
(a) and (b) of Sec. 3710 of the Internal Revenue Code (26 U. S. C. A.
Int. Rev. Code §3710) are as follows:
"§3710. Surrender
of property subject to distraint.
"(a) Requirement.
Any person in possession of property, or rights to property, subject to
distraint, * * * shall, upon demand by the collector * * *, surrender
such property or rights to such collector * * *, 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."
2 The
Collector's authority to distrain is derived from Sec. 3690 of the
Internal Revenue Code (26 U. S. C. A. Int. Rev. Code §3690), which
provides as follows:
"§3690. Authority
to distrain.
"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."
3 The cash
surrender value of the policy was $793.15 in July 1935 when notice of
the lien was first given but had shrunk to $386.74 on July 11, 1940,
when the summons in the instant action was served.
Also see United
States v. W. A. Trout et al. (D. C. S. D. Cal.), decided February
19, 1942 [42-1 USTC ¶9372], where the government reached the insured's
interest in a policy, for the enforcement of its lien, by suit in equity
against the parties interested in the policy.
[42-1 USTC ¶9266]
United States of America
v. Aetna Life Insurance Company of
Hartford
,
Connecticut
, a Corporation, and Frank P. Nistle.
District
Court of the United States, District of Connecticut., No. 74 Civil., 46
FSupp 30, 01/08/42
Distraint on life insurance policy.--Distraint against insurance
policy is denied in an action against the insurance company. The right
of the taxpayer-insured in the policy was not a property right subject
to distraint under Code Sec. 3710, and, furthermore, that right was
never in the possession of the insurance company.
Samuel O.
Clark, Jr., Assistant Attorney General, Andrew D. Sharpe and F.A.
Michels, Special Assistants to the Attorney General, all of Washington,
D.C., and Robert P. Butler, U.S. Attorney, and Valentine J. Sacco,
Assistant U.S. Attorney, both of Hartford, Conn., for plaintiff. Day,
Barry & Howard (by Cyril Coleman), all of
Hartford
,
Conn.
, for defendant.
Finding
of Facts
HINCKS, D.J.:
1. The
taxpayer, one Frank P. Nistle of
Pennsylvania
, on or about March 4, 1920, entered into a policy of life insurance
having substantial endowment features with the defendant, The Aetna Life
Insurance Company of
Hartford
,
Connecticut
. Under the terms of the policy, power was reserved to the taxpayer to
elect to receive in lieu of the specified endowment benefits the stated
cash value of the policy; also to change the beneficiary designated to
receive the death benefit upon his written request "accompanied
with the policy for proper endorsement." Ever since April 5, 1935,
taxpayer's wife had been duly named as death beneficiary under the
policy if living at the date of his death; otherwise his daughter.
2. Prior to
April 1, 1937, the Commissioner of Internal Revenue had made additional
income-tax assessments against the taxpayer for the years 1926 and 1932
aggregating upwards of $10,000., and no part of said assessments has
been paid.
3. On April 1,
1937, the Government notified the defendant, The Aetna Life Insurance
Company, that there was owing from the taxpayer to the Government an
internal revenue tax amounting to $8,187.72, and that all property and
rights to property then in its possession belonging to the taxpayer were
"thereby seized and levied upon for the payment of said taxes and
interest," and made demand upon the Company for the payment of said
tax, and demand was made for the payment of said sum or for such lesser
sum as the Company was indebted to the taxpayer. The demand was
reiterated on December 9, 1937. These demands were refused by the
Company, although on April 1, 1937, the policy had a net cash value of
$3,605.22.
4. Thereafter
on December 28, 1938, the Government brought this action under Section
3710 of the Internal Revenue Code. Said action, as also the earlier
demand and purported levy upon the defendant, were seasonably made.
5. The
taxpayer, Frank P. Nistle, alleged by the Government to be a resident of
Pennsylvania, was named as a co-defendant and served not otherwise than
by registered mail and publication pursuant to order of court
purportedly under 28 U.S.C.A. 118. No appearance has been entered in
behalf of the said Nistle.
Opinion
As the case
stands, the only defendant within the jurisdiction of the court is the
Insurance Company. The mere naming of the insured, the taxpayer, as a
defendant and the purported service upon him by registered mail and
publication were wholly nugatory. As the complaint expressly states, the
action is brought under Section 3710, Int. Rev. Code, 26 U.S.C.A., and
as such is one to enforce a penalty against the defendant Insurance
Company. Section 57 of the Judicial Code, 28 U.S.C.A. 118, goes no
further than to authorize substituted service on non-resident defendants
in actions brought to enforce liens upon, or to assert claims to,
"real or personal property within the district where such suit is
brought."
[Distraint
on Insurance Policy]
The central
issue of the case is whether or not the taxpayer--the insured--has
property or a right of property which at the time of the Government's
demand was in the possession of the Insurance Company. And this issue
depends at least in part upon the question whether the defendant's wife
as beneficiary under the policy has a property interest therein. And so
it is that the court is asked to make an adjudication herein,
ascertaining the rights of the taxpayer and his wife, although they are
not parties subject to the jurisdiction of the court. As a result an
adjudication against the Insurance Company herein based upon a finding
that at the critical date it was in possession of property rights of the
insured, although enforceable against the Insurance Company, will not be
available to it as a bar to any action which the insured or the
beneficiary may later bring against it in some other court which might
quite possibly upon another record reach a decision upon the fundamental
issues in conflict with that embodied in an adjudication here.
In my view
such a possibility does not absolutely preclude the maintenance of an
action such as this against the insurance company alone: the Venue Act
occasionally makes it impossible for a federal court--even in a case in
which jurisdiction over the subject-matter is confined to a federal
court--to have all the parties necessary for a final determination of
the entire controversy before it. In such cases there is no alternative
but to let the controversy develop step by step even though a party, as
the Insurance Company here, is thereby subjected to the hazard of paying
twice. Nevertheless, there is manifest throughout the Federal Rules of
Civil Procedure a prevailing policy that an entire controversy shall be
dealt with in a single action, thus reducing to a minimum the hazard of
double recoveries and a circuity and multiplicity of actions. And Rule
19 of the Rules of Civil Procedure attempts to give some definition to
the distinction between indispensable parties and necessary parties.
[Parties
Defendant]
Under Rule 19,
I think the taxpayer-insured and his beneficiary may not properly be
classified as indispensable parties; such a classification indeed might
possibly completely frustrate the Government's remedy under the Act. I
hold, however, that in this case the relationships of the taxpayer and
his beneficiary to the subject-matter of controversy are such that they
"ought to be parties if complete relief is to be accorded between
those already parties," within the meaning of Rule 19(b). For
surely the position of the Insurance Company is one of such hazard that
it can have complete relief only if they are joined. Under this rule, to
be sure, "the court in its discretion may proceed in the action
without making such persons parties." And doubtless, it would
constitute an abuse of discretion if the court should refuse to proceed
in a case in which the Government was powerless under the limitations of
the Venue Act to bring all the necessary parties into the jurisdiction
of any federal court. But this is not such a case. For Rule 19(c)
provides as follows:
In
any pleading in which relief is asked, the pleader shall set forth the
names, if known to him, of persons who ought to be parties if complete
relief is to be accorded between those already parties, but who are not
joined, and shall state why they are omitted.
With
this requirement the Government has not complied. For aught that appears
it would have been entirely feasible for the Government to bring all the
parties before a federal court in
Pennsylvania
having jurisdiction over the insured and his beneficiary as well as the
Insurance Company. Consequently, in my view, the case is a proper one
for dismissal for a lack of necessary parties under the discretion
recognized in Rule 19(b). However, since the parties have united in
submitting on the merits, I proceed on that basis.
I incline to
the view that the taxpayer's rights as the insured under the policy here
involved constitute "property" within the meaning of Section
3670 of the Internal Revenue Code, which imposes a sweeping lien for
unpaid taxes upon "all property and rights to property" of the
taxpayer. To be sure, the taxpayer's rights as the insured under the
policy are only the rights of an obligee under an executory and
conditional contract and in certain aspects are intertwined with
somewhat analogous rights in the third-party beneficiary. A conditional
right so intangible and complex we do not generally view as
"property"; nor indeed as a mere chose in action. Nevertheless
I assume, at least for all present purposes, that it is a form of
"property" within the sweeping language of Section 3670.
But we must
bear in mind that the rights and privileges of the insured are not
commensurate with the correlative duties and obligations of the
defendant insurer. This is so because the contract creates a whole
bundle of enforceable rights which are scattered amongst the insured,
the insurer, the beneficiary, and assignees, if any; and the duties and
obligations of the insurer, which perhaps in a sense may be viewed as
commensurate with the aggregate of all the outstanding rights and
privileges in others, not only are subject to many conditions--some
within the control of the insured and others not--but also flow to
others than the insured.
[Cash
Surrender Value]
In such a
situation, the cash value of the policy in dollars is no true measure of
the value of the power of the insured to demand the cash surrender value
of his policy and his right thereafter, upon a physical surrender
of the policy, to receive the cash value thereof. As was observed in U.S.
v. Massachusetts Mutual Life Ins. Co., 38 Fed. Supp. 333 [41-1 USTC
¶9425], the actual value of the policy may exceed its cash surrender
value. With equal truth it may be said that the right of the insured
therein may be less than the cash surrender value. For even if we could
assume that the stated cash value of the policy measures the obligation
of the insurer, as observed above this obligation flows to the
beneficiary as well as the insured. For instance, the beneficiary may
have paid the premiums under the policy and hence have an equitable
interest therein which if, timely asserted, would nullify the right of
the insured either to receive the entire cash value or to assign. Neary
v. Metropolitan Life Ins. Co., 92
Conn.
488. And possession of the policy by one other than the
insured--certainly a lawful possession thereof--will restrict the right
of the insured to receive the cash value or to assign. Indeed, under the
law of
Connecticut
, quite apart from any equitable interest, the beneficiary has what the
court has called a right which is "vested, although qualified in
that it is subject to be defeated by an exercise of the right
reserved" to the insured to change the beneficiary. Allen v.
Home National Bank, 120
Conn.
306, 311. And if it be urged that in this case the rights must be
determined under the law of
Pennsylvania
, the result is substantially the same. U.S. v. Penn Mutual Life Ins.
Co., Kirkpatrick, J., U.S. District Court, Eastern District of
Pennsylvania, Civil Action 990 [41-2 USTC ¶9779]. (Opinion apparently
not published).
Indeed, for
aught that appears the insured may at some time prior to the
Government's demand have made an irrevocable gift of all or part of his
interest in the policy to the beneficiary, his wife, the result being
that the part or all of the equitable and conditional interest in the
cash surrender value now belongs to her. There is nothing in the proofs
here--and nothing in the complaint except an unsupported allegation made
"upon information and belief"--to negative her equitable
interest, nor her legal conditional interest, in the policy. Perhaps if
the Government had brought this action in
Pennsylvania
where the insured and the beneficiary might have been joined as
defendants, it would have been relieved of the duty to negative the
existence of an outstanding equitable interest in the policy. But the
possibility that such an interest may be outstanding illustrates the
danger of injustice which may result if the action is allowed to go
forward here in the absence of necessary parties without whom all the
rights involved in the entire controversy cannot finally be determined.
All things
considered, on this phase of the case I agree with Judge Clancy in U.S.
v. Metropolitan Life Ins. Co., 41 Fed. Supp. 91 [41-2 USTC ¶9642],
that the value of the beneficiary's interest depends in part upon the
personal exercise by the insured (rather than by his creditors including
the
United States
) of powers reserved to him under the policy, and that likewise
the value of the insured's interest must be affected by the same
condition. And I hold here, as Judge Sweeney held in U.S. v.
Massachusetts Mutual Life, 38 Fed. Supp. 333 [41-1 USTC ¶9425],
that the Government has failed to prove that the taxpayer's interest in
the policy has a value which equals or exceeds its stated cash value.
Whether by actuarial or opinion evidence, or otherwise, the actual value
of the taxpayer's interest is susceptible of proof, it is not now
necessary to determine. Cf. Cannon v. Nicholas, 80 Fed. (2nd)
934, 939 [35-2 USTC ¶9672]. But proof of such value is an essential
element of the Government's case under Section 3710 of the Code, and for
lack of such proof the case falls.
[Policy
Not Distrainable]
But on other
grounds also I hold the Government's case does not fall within Section
3710. For this section, as was observed in the opinion in In re
Rosenberg's Will, 269 N.Y. 247, 199 N.E. 206, is not in pari
materia with the lien statute, Section 3670. For Section 3710 is
confined to cases involving only taxpayer's property which is "subject
to distraint."
Under the
common law, the process of distraint was a summary, non-judicial, remedy
which was confined to the right to seize chattels and hold them in
pledge for the underlying obligation of the owner; the process included
no power of sale. Bouvier (1914 Ed.) Vol. I, pg. 892; Pollock &
Maitland, History of English Law, Vol. 2, pg. 576. By the first Excise
Tax Law which Congress enacted, 1 Stat. 204, the remedy, though still
confined to "goods," was made available to the United States
for the collection of taxes and extended to include a power of sale. By
the Revenue Act of 1866, 14 Stat. 107, the remedy with a concomitant
power of sale as an instrument for the collection of taxes was
continued as to "goods, chattels, or effects" (which I
think involved no enlargement of the remedy) and was indeed enlarged
to include "stocks, securities and evidences of debt." The
enlargement, it will be observed, related only to species of personal
property, the existence of which in each case was characterized by
documentary evidence. "Bank accounts" were included within the
scope of the remedy by the Revenue Act of 1924 (Sec. 1016). One would
surmise that this last enlargement was made because Congress recognized
that in the phrase of the earlier acts "evidences of debt"
covered only such debts as indeed had documentary evidence which was
susceptible of seizure, like notes, and did not cover a debt such as a
bank account which often lacked specific documentary evidence. But the
mere fact that Congress has expanded the remedy to include a few
specified forms of personal property which lack corporeal existence and
to include real estate (Int. Rev. Code, Sec. 3700) scarcely warrants the
inference that Congress intended that all forms of incorporeal property
not susceptible of physical seizure should be subject to distraint. Cf. British
Mutoscope Co. v. Homer, (1901) 1
Ch.
671.
[Distraint
on Intangibles]
Thus the
historical approach leads to the conclusion that personal
property subject to distraint under the authority of what is now Section
3690 of the Internal Revenue Code is limited to corporeal property
except as otherwise provided in that same section.
This
construction is confirmed by internal evidence from within the Internal
Revenue Code. Sec. 3670 uses broad language: it subjects to lien
"all property and rights to property, whether real or personal,
belonging to" the taxpayer. If we construe this sweeping language
to include incorporeal personal property, the more limited language of
Section 3690 strongly suggests a conscious intent to include within the
remedy of distraint only corporeal property except as otherwise
specified therein.
Moreover
Section 3692 is the only provision of the Code governing a levy on
personal property. And the levy (on personal property) authorized is
limited to cases "of neglect and refusal under Section
3690." Thus this section recognizes that the (comparatively)
narrow class of personal property subject to distraint under Section
3690 may also be subject to lien under Section 3670. But Section 3692
does not broadly subject "all property," which under
3670 is subject to lien, also to levy. Indeed, although chattels and the
simple choses in action specified in Section 3690 are left to the rough
and ready process of executive distraint, it seems altogether plausible
that Congress intended that the enforcement of liens upon complex and
intangible rights, such as those of the obligee under an executory,
conditional contract, should be accomplished only through the judicial
process provided in Section 3678.
Moreover
Section 3693 sketches in considerable detail the "Proceedings on
Distraint." But this section is expressly limited to cases of
distraint made "as provided in 3690." Surely, if it had
been intended that every kind of property subject to lien under the
broad langauge of Section 3670 were also subject to distraint, the rules
for proceedings on distraint would not have been expressly limited to
cases arising under the narrower language of Section 3690. For if
detailed rules of procedure were necessary to govern the distraint and
sale of tangibles, they were even more necessary in dealing with such
impalpable and complex quantities as incorporeal rights. And it will be
noticed that the substance of the rules in Section 3693, though well
adapted to deal with tangibles, (chattels, or documentary evidence of
choses in action) having a definite physical situs, are scarcely
appropriate for transactions in incorporeal rights. Indeed, it is
perhaps significant that nothing in the Code teaches how a
"levy" may be made on property not susceptible of physical
seizure.
Blacklock
v. U.S., 208
U.S.
75, is not inconsistent with these views. There it was held only that
nothing in the Act of 1868, 15 Stat. 167, which afforded judicial
process for the enforcement of a tax lien on real estate, superseded the
right of distraint thereon expressly provided in the Act of 1866, 14
Stat. 108 (Section 30 of the Act of 1864, as amended). To be sure, the
court quotes a fragment of the Act of 1866, 14 Stat. at 107 (Section 28
of the Act, of 1864, as amended) which appears to authorize a levy
on all the property of a delinquent taxpayer. But even so, the
only sale authorized under this section is that of the taxpayer's
"goods, chattels, or effects, including stocks, securities and
evidences of debt." I doubt whether every kind of incorporeal right
could lawfully be sold on distraint under this provision: certainly the Blacklock
case does not so hold. And in any event, in respect of personal property
the broad power of levy (whatever that may mean) under the Act of
1866 is now limited, as we have seen, by Section 3692 of the Code to
cases falling within the authority of Section 3690.
And also
Section 3710 of the Code under which this very action has been brought
contains additional features which not only tend to confirm my
construction of the phrase "property subject to distraint,"
but also constitute essential elements of the Government's case which
have not been satisfied by the proofs. It is concerned only with that
property of the taxpayer which is in the "possession" of
another. The concept of possession is ill adapted to the right of an
obligee under an executory, conditional contract. But even if by some
fiction, and without statutory aid in defining the fiction, the right
can be said to be in the "possession" of any one, under the
proofs here the only reasonable inference is that the right has been
throughout in the possession of the obligee--the taxpayer. And if,
wholly without warrant in law, we should treat the right of the insured
as merged in the policy itself, which is only a fragment of the evidence
necessary to prove his right, the case falls for lack of proof that the
policy is in the possession of the defendant insurer.
[Levy
as Prerequisite to Distraint]
Moreover,
under Section 3710, a levy is a prerequisite to the action. I have
already observed upon the ineptness of a "levy" in connection
with rights such as are here involved. And what proof is there of a
"levy"? We have the admitted allegations of the complaint
reciting a notice on April 1, 1937, to the defendant that all the
taxpayer's rights in the defendant's possession were "thereby
seized and levied upon." But I can find no statute which says that
a mere notice shall constitute a "levy." Under Section 3672 it
was provided that a lien for taxes should become effective as against a
mortgagee, etc., upon filing a specified "notice." One would
expect that if Congress for purposes of Section 3710 had intended that a
bare notice served on the defendant "in possession" should be
sufficient, it would have required a notice rather than a
"levy." The complaint also alleges a demand on December 9,
1937 that the defendant surrender "the deposits, money, credits,
property, and rights of property" belonging to the taxpayer in the
defendant's possession on April 1, 1937. But there was no proof of any
such deposits, moneys or credits. And even if it could be held that the
defendant then had possession of some property right of the taxpayer, by
what authority can a mere demand for its surrender be deemed the
equivalent of a levy? In this connection it may be noted that earlier
statutes had drawn a distinction between a "demand" and a
"levy". Indeed, the very statute quoted in the Blacklock
case (208
U.S.
82), 14 Stat. at 107, provided that "the collector, after
demand, may levy".
[Surrender
by Insurance Company Impossible]
Again, Section
3710 contemplates a "surrender" by the defendant. But how
could the defendant "surrender" the right of the taxpayer as
obligee under the policy even if through some fiction it were deemed to
have "possession" of that right? It had possession neither of
physical property of the taxpayer nor of muniments of title evidencing
his incorporeal right. A manual surrender was impossible. And the
defendant was wholly without authority to make a written
"surrender" of another's rights.
Conclusions
of Law
I come,
therefore, to the following conclusions on the merits.
1. The only
property right of the taxpayer-insured involved in the case was his
intangible right as obligee of the executory, conditional contract
embodied in the policy of life insurance in evidence.
2. That the
value of this right as of April 1, 1937 (or as of any other date) was
not proved.
3. That said
right of the taxpayer was not a property right subject to distraint,
within the meaning of Section 3710.
4. That
neither the notice of April 1, 1937 nor the demand of December 9, 1937
constituted a levy upon said right, within the meaning of said statute.
5. That said
right was never in the possession of the defendant within the meaning of
said statute.
6. The
defendant is entitled to judgment.
Let the clerk
enter judgment accordingly.
[41-1 USTC ¶9173]
United States of America
, Plaintiff, v. Metropolitan Life Insurance Company, Defendant.
In
the District Court of the
United States
for the Eastern District of Pennsylvania., Civil Action No. 973., 36
FSupp 399, Filed January 6, 1941.
Sur Motion to Dismiss.
Surrender of property subject to distraint: Value of insurance
policy.--The defendant insurance company had issued a policy of
insurance to the delinquent taxpayer who had the right to change the
beneficiary and the right to the cash surrender value. The Court holds
that the defendant is liable for the statutory penalty for failure to
surrender the property of the delinquent taxpayer and denies defendant's
motion to dismiss based on the allegation that the delinquent taxpayer
is an indispensable party. There are only two defenses to an action such
as this: (1) no property or rights to property of the taxpayer in the
defendant's possession, and (2) such property or rights are subject to
attachment or execution under judicial process.
Gerald A.
Gleason, U.S. Attorney, and Thomas J. Curtin, Assistant U.S. Attorney,
for plaintiff. Owen B. Rhoads, of Dechert, Smith, and Clark, 1320
Packard
Building
,
Philadelphia
,
Pa.
, for defendant.
[The
Facts]
KALODNER, J.:
The United
States of America brought suit under Section 3710(b), 1 26 U.S.C.A.
(Internal Revenue Code) to obtain personal judgment against the
defendant, the Metropolitan Life Insurance Company, as a penalty for
failure to surrender to the Collector of Internal Revenue property or
rights to property belonging to one Sall, a delinquent taxpayer, which
property was subject to distraint and was in the hands of defendant at
the time the Collector made his notice and demand. The property in
question was the value of a certain policy of insurance issued by the
defendant on the life of Sall. The complaint alleged that Sall owes to
the
United States of America
the sum of $1,408.10 for unpaid taxes.
The defendant
filed a motion to dismiss under the provisions of Rule 12(c) of the
Rules of Civil Procedure. The motion to dismiss is premised on the
contention of the defendant that Sall is an indispensable party to the
suit, since he has certain "rights" under the policy which can
only be exercised by him, viz., the right to change his beneficiary and
the right to a cash surrender value of the policy.
[Defendant's
Contention]
Defendant
bases its contention on the rule of law that "where the
non-resident defendant is an indispensable party the court cannot
proceed to adjudicate the case in his absence and the suit must
therefore be dismissed": Waternian v. Canal-Louisiana Bank &
Trust Co., 215 U.S. 33; Shields v. Barrow, 58 U.S. 130; Wyoga
Gas & Oil Corp. v. Schrack, 27 F. Supp. 35. Sall is a resident
of
Los Angeles
,
California
.
[Opinion]
The motion to
dismiss is without merit and must be denied. The statute authorizing the
Internal Revenue Collector to collect Federal income tax by distraint
from a person who has property or rights to property of taxpayers in his
hands is designed to protect the right of the sovereign in the
collection of his taxes: Karno-Smith Co. v. Maloney, 28 F. Supp.
907, 910, 912 [39-2 USTC ¶9668]. Section 3710 extends to the government
the power to reach property rights of the recalcitrant taxpayer although
such property or property rights are in the possession of a third
person. It is well established that the only defenses available in an
action to enforce the statutory liabilities pursuant to Section
3710(a)(b) are those expressly permitted by the statute itself, namely,
where there is no property or rights to property of the taxpayer in the
possession of the defendant, or such property or property right is, at
the time of demand, subject to an attachment or execution under judicial
process. See Kyle v. McGuirk, 82 F.2d 212 [36-1 USTC ¶9121]; United
States v. Long Island Drug Co., 29 F. Supp. 737 [39-2 USTC ¶9713]; Columbian
National Life Insurance Co. v. Welch, 15 F. Supp. 777 [36-2 USTC ¶9439]
(affirmed 88 F.2d 333) [37-1 USTC ¶9131]; and Karno-Smith Co. v.
Maloney, supra. See also
United States
v. First Capital National Bank, 13 F. Supp. 380 [36-1 USTC ¶9093]
(affirmed 89 F.2d 116) [37-1 USTC ¶9201]; United States v. American
Exchange Irving Trust Co., 43 F.2d 829 [2 USTC ¶577].
Section
3710(b) is entirely a penal statute directed against persons who refuse
to surrender property to the Collector as required by Section 3710(a),
and accordingly no other parties are necessary to the suit.
In the instant
case it is argued that the proceeds of the policy cannot be reached by
the action unless the policy itself is surrendered. That contention was
rejected in the Columbian National Life Insurance Co. v. Welch
case, above cited.
For the
reasons stated, the motion to dismiss is denied.
1 §3710.
Surrender of property subject to distraint
"(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."
[42-1 USTC ¶9342]
United States of America
, Plaintiff, Appellant, v. Massachusetts Mutual Life Insurance Company,
Defendant, Appellee
(CA-1),
United States Circuit Court of Appeals for the First Circuit, No. 3731.
October Term, 1941, 127 F2d 880, Decided March 13, 1942
Appeal from the District Court of the
United States
for the District of Massachusetts.
Charges in distraint and seizure case: Cash surrender value of policy
not in possession of insurance company.--An insurance company is not
a person in possession of the insured's property or rights to property
subject to distraint within the meaning of Code Sec. 3710 and is not
subject to the penalty imposed by said section for failure to pay to the
Collector the cash surrender value of a life insurance policy, under the
terms of which the delinquent taxpayer-insured has a right to change the
beneficiary, when the policy has never been surrendered to the insurance
company, the beneficiary has never been changed and the consent of the
beneficiary never obtained. Affirming decision of District Court
reported at 41-1 USTC ¶9425, 38 Fed. Supp. 333.
Bernard
Chercoff, Washington, D. C., (Samuel O. Clark, Jr., and J. Louis
Monarch, both of Washington, D. C., and Edmund J. Brandon and George F.
Garrity, both of Boston, with him on brief) for appellant. Frederick H.
Nash,
Boston
, (Raymond P. Baldwin,
Boston
, with him on brief) for appellee.
Before
MAGRUDER, MAHONEY and WOODBURY, JJ.
Opinion
of the Court
MAHONEY, J.:
The defendant,
Massachusetts Mutual Life Insurance Company, about September 28, 1908
delivered in the State of
Washington
to Edward G. Robinson, Jr., a resident of that state, a twenty payment
policy of life insurance in consideration of a premium there paid to it.
The policy became fully paid up in 1928. The insured had named his wife
beneficiary of the policy but he had reserved to himself the right to
change the beneficiary. No such change has ever been made.
On June 17,
1939, notice of levy on the policy and warrant for distraint were served
on the defendant at
Portland
,
Oregon
. On July 26, 1939 the taxpayer notified the defendant that he was
releasing his right to charge the beneficiary. On August 9, 1939 the
defendant returned the policy to the insured, stating:
"We
cannot endorse this attempted change in benefit under the policy but are
willing to file this letter as an attempted change in benefit.
Obviously, we cannot comply with your directions in view of the
government's lien against this policy."
On November
29, 1939 a second notice of levy and warrant for distraint were served
upon the defendant at its home office at Springfield, Massachusetts,
notifying it that there was due from the insured to the plaintiff as an
unpaid internal revenue tax the sum of $944.33, and further notifying
the defendant that "all property, rights to property, moneys,
credits and/or bank deposits now in your possession and belonging to the
aforesaid E. G. Robinson, and all sums of money owing from you to the
said E. G. Robinson are hereby seized and levied upon for the payment of
the aforesaid tax, together with penalties and interest, and demand is
hereby made upon you for the sum of Nine hundred and forty-four dollars
and thirty-three cents ($944.33) of the amount now owing from you to the
said E. G. Robinson or for such lesser sum as you may be indebted to
him, to be applied to the payment of the said tax liability." On
December 5, 1939 a final notice and demand were served on the defendant
at
Springfield
,
Massachusetts
.
The cash
surrender value of the policy on June 17, 1939 was $945.43; on November
28, 1939, $945.40; and on December 5, 1939, $944.91. The government was
demanding from the defendant the sum of $944.33.
The defendant
refused to pay to the Collector of Internal Revenue the cash surrender
value of the policy and the plaintiff then brought this action is the
United States District Court in Massachusetts under Section 3710 of the
Internal Revenue Code to recover from the defendant the statutory
penalty imposed by subsection (b) of that section. The insured and the
beneficiary are now residents of the State of
Oregon
and the policy is in the possession of the insured.
The defendant
admitted that there was due from it to the insured a dividend on the
policy amounting to $12.68 and that the statutory penalty could be
imposed for this amount. The court below determined that the plaintiff
was not entitled to recover any more than the amount of the dividend and
entered its judgment for the plaintiff in that, sum. The plaintiff has
appealed.
The appeal
presents this question: Is the defendant life insurance company liable
for the statutory penalty under I. R. C. §3710 for failure to pay to
the Collector of Internal Revenue the cash surrender value of a life
insurance policy, under the terms of which the delinquent
taxpayer-insured had a right to change the beneficiary, when the policy
has never been surrendered to the defendant, the beneficiary never
changed and the consent of the beneficiary never obtained? The
applicable sections of the Internal Revenue Code are:
Section
3710(a). Any person in possession of property or rights to property,
subject to distraint * * * shall upon demand by the Collector * * *
surrender such property or rights to such Collector or Deputy * * *
(b)
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
* * *
Section
3690. Authority to Distrain. 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
sub-chapter, of the goods, chattels, or effects, including stocks,
securities, bank accounts, and evidences of debt of the person
delinquent as aforesaid.
Section 3710
provides that a person in possession of property or rights to property
which are subject to distraint must surrender such property and rights
to the Collector upon demand. We must determine whether the defendant
insurance company is "in possession of property or rights to
property subject to distraint", within the meaning of Section
3710(a). If it is, then the defendant is liable for the penalty imposed
by Section 3710(b).
The insurance
company contends that it is not in possession of property of the
taxpayer subject to distraint within the meaning of the statute because
it is under no liability to pay the cash surrender value until the
policy has been surrendered to it and the consent of the revocable
beneficiary has been given or the insured has exercised his right to
make himself beneficiary of the policy. Since none of these conditions
has been observed in the present case, the defendant says that no claim
has arisen against it, with the result that there is no property which
can be distrained. The government argues that the realistic, economic
fact is that the insured has the complete power to obtain the cash
surrender value of the policy from the company merely by naming himself
beneficiary and surrendering the policy. It says that the collection of
taxes is a practical, administrative problem, and the fact that the
insured has failed to comply with the merely formal conditions of making
himself beneficiary and surrendering the policy should not be allowed to
stand in the government's way. An able exposition of this position may
be found in the opinion of the district court in Columbian National
Life Insurance Co. v. Welch, 15 F. Supp. 777 [36-2 USTC ¶9439];
aff'd 88 F. (2d) 333 (C. C. A. 1st, 1937) [37-1 USTC ¶9131] for a
different reason. While the government's argument is not without
considerable merit, we cannot accept it.
The policy
provides:
After
this policy has become paid-up by payment of all required premiums, or
if it becomes paid-up for a reduced amount by operation of law, or if
extended term insurance is taken hereunder, the insurance will have a
cash surrender value available within thirty days of the application
therefor on legal surrender of the policy.
No matter what
state law is applicable to the construction of this insurance contract,
it would appear to be clear that state courts would construe this
contract so as to hold that the insurance company would not be liable to
pay the cash surrender value of the policy until the insured had made
application for it and had surrendered the policy to the company.
Although there is no clear authority on the question, there is also the
possibility that under applicable state law it might be held that the
insurance company would not be liable to pay the cash surrender value so
long as the consent of the revocable beneficiary had not been obtained.
There is no
Washington
case squarely in point. In
Massachusetts
, by statute, written assent by the beneficiary was at one time
specifically required.
Mass.
G. L. (Ter. Ed.) c. 175, §144. This, however, was changed by L. Mass.
(1938) c. 209, §1, but the extraterritorial effect of the amendment may
perhaps be questioned.
At the very
least, however, the insurance company would not be required to pay the
cash surrender value to the insured so long as he had not applied for it
and the policy had not been surrendered. It might be argued that this
latter condition is a merely formal one and that under certain
conditions equity would dispense with its performance. But the
characterization of the condition as formal in character does not
necessarily require the conclusion that this particular contract
formality should be dispensed with in a case where the tax-collecting
powers of the federal government are involved. This is particularly so
when it would appear to be clear that there are reasonable alternative
remedies which the government is free to pursue.
As a matter of
fact the condition requiring "legal surrender" of the policy
is more than a merely formal one. See Martin v. New York Life Ins.
Co., 104 F. (2d) 573, 574 (C. C. A. 7th, 1939); United States v.
Metropolitan Life Ins. Co., 41 F. Supp. 91, 93 (S. D. N. Y., 1941)
[41-2 USTC ¶9642]. The primary obligation of the insurer is to pay the
face value of the policy to the designated beneficiary upon the death of
the insured. The insured has a power, by surrendering the policy
(possibly even without the consent of the beneficiary), to convert this
primary obligation into an obligation to pay him the cash surrender
value. In the present case the insured has made no application for the
cash surrender value and has not surrendered the policy. Until he does
so, or until he exercises his power to revoke the designation of the
beneficiary, the latter has a recognizable property interest in the
policy. See Lehman, J., in Maurice v. Travelers' Ins. Co., 201 N.
Y. Supp. 369, 372, 376 (1923); United States v. Metropolitan Life
Ins. Co., supra; Tyler v. Treasurer, 226 Mass. 306, 308 (1917); Kruger
v. John Hancock Mutual Life Ins. Co., 298 Mass. 124, 126 (1937). The
insured not having exercised the power to surrender the policy and thus
cut out the interest of the beneficiary, the insurance company does not
now owe the insured the cash surrender value. There is no debt presently
owing. A court of equity having jurisdiction over the person of the
insured might in a proper case command the insured to exercise his power
and thus transmute the primary obligation of the insurance company into
an obligation to pay over the cash surrender value. Cf. Maurice v.
Travelers' Ins. Co., supra, at 376-77. But that is not the present
case. The government in the present proceeding, to which neither the
insured nor the beneficiary is a party, cannot make the insured exercise
his power to extinguish the interest of the beneficiary. In Isaac Van
Dyke Co. v. Moll, 241 Mich. 255, 217 N. W. 29 (1928), which held
that a creditor of the insured could not garnishee the cash surrender
value in the hands of the insurance company to the prejudice of a
revocable beneficiary, the court pointed out the hardship that would
result if the creditor could thus reach the cash surrender value and
extinguish the policy at a time when the insured was lying on a sick bed
with dissolution near at hand, the policy in such case being worth a
great deal more than the amount of the cash surrender value. The
government in the case at bar is not in the position of a trustee in
bankruptcy of the insured because under Section 70(a)(3) of the
Bankruptcy Act, 11 U. S. C. Sec. 110(a)(3), the trustee in bankruptcy is
expressly vested by operation of law with all the powers which the
bankrupt might have exercised for his own benefit. Cohen v. Samuels,
245
U. S.
50 (1917).
[Decision]
Accordingly we
hold that under the circumstances present in this case the defendant
insurance company is not a person in possession of the insured's
property or rights to property subject to distraint within the meaning
of Section 3710. United States v. Metropolitan Life Ins. Co., supra;
United States v. Penn Mutual Life Ins. Co., (D. C., E. D. Pa., Oct.
28, 1941 [41-2 USTC ¶9779]); contra: Columbian National Life
Insurance Co. v. Welch, supra. We do not believe that Kyle v.
McGuirk, 82 F. (2d) 212 (C. C. A. 3d, 1936) [36-1 USTC ¶9121], or Cannon
v. Nicholas, 80 F. (2d) 934 (C. C. A. 10th, 1935) [35-2 USTC ¶9672],
are contrary to the position which we take here.
It does not
follow, however, that the insured is not a person in possession
of property subject to distraint. Perhaps he is such a person;
undoubtedly he has a substantial interest in the policy, though not the
sole interest. Cf. Kyle v. McGuirk, supra; Cannon v. Nicholas, supra.
The government argues that if the insured is in possession of property
subject to distraint, then so is the insurer. Ordinarily one would think
that if an obligee of a chose in action is in possession of property
subject to distraint then the obligor would be in possession of such
property within the meaning of the revenue statute. However, when an
obligation of the peculiar nature here involved is subject to conditions
precedent which have not been performed, we can see no inconsistency in
saying that the obligor is not in possession of property subject to
distraint while the obligee is in possession of such property, because
the obligor is in no position to perform the conditions but the obligee
is in such a position.
Moreover,
there are practical reasons supporting this result. There is the
distinct, possibility that the insurance company might be subjected to
double liability. While this issue is one which is not entirely free
from doubt, still state courts might later hold, upon death of the
insured, that an insurance company would be liable to pay the proceeds
of the policy to the beneficiary even though the government had
distrained the cash surrender value of the policy in the hands of the
insurance company, if the conditions precedent to the obligation to pay
over the cash surrender value had not been observed. There is no square
authority on this point, however. We cannot say with confidence that
there would be no danger of a double liability if the government should
prevail in the case at bar. If we undertook to hold that the
beneficiary's interest would be effectively extinguished, this would not
bind the beneficiary, who is not a party before us. Congress could not
have intended that the cash surrender value of a life insurance policy
could be distrained in this way when it would expose insurance companies
to risks of double liability in state actions. The result we have
reached here does not impose any great burden on the government in the
performance of its administrative duties because there would appear to
be reasonable alternative remedies which the government is free to
pursue.
In view of our
treatment of the case we need not pass on the effectiveness of the
attempted release of the power to change the beneficiary.
The
judgment of the District Court is affirmed
[42-1 USTC ¶9372]United States of
America, a corporate body politic, Plaintiff, v. W. A. Trout, also known
as William A. Trout, Mary A. Trout, Betty J. Trout, Doris M. Trout, now
known as Doris M. Grunigen, Forest J. Grunigen and New York Life
Insurance Company, a corporation, defendants
In
the District Court of the United States, Southern District of
California, Central Division, No. 1870-BH (Consolidated with Nos.
1375-BH, 1674-BH, 1733-BH), 46 FSupp 484, Filed February 19, 1942
Lien for taxes: Insurance policies subject to lien.--Delinquent
taxpayer had an interest in an endowment insurance policy and three life
policies, and they are subject to a lien for income taxes and interest
for 1926-1930. It is held: (1) There was no evidence to justify claim of
defendant's wife that a payment made to her husband entitled her to an
interest in one of the policies, and no merit is found in contention in
behalf of defendant-insured that he had no interest in the three life
insurance policies which is subject to seizure for payment of his tax
liability, "because the policies had no cash surrender value, only
a borrowing privilege." (2) Petitions of the insurance company
whereby it was enabled to deposit the proceeds of two endowment policies
in court were interpleaders. Insurance company is not liable for
interest on taxes assessed against the insured. (3) The insured had no
interest in one of the endowment policies, in consequence of a bona fide
assignment of the policy to two other persons.
Dana Latham,
Richard Lund and Henry T. Moore (Latham & Watkins), for Forest J.
Grunigen, Doris M. Grunigen, William A. Trout, Mary A. Trout, and Betty
Jane Trout. Shirley E. Meserve and Leo E. Anderson (Meserve, Mumper
& Hughes), for New York Life Insurance Co. Wm. Fleet Palmer, U. S.
Attorney, E. H. Mitchell, Assistant U. S. Attorney, and Eugene Harpole,
Special Attorney, Bureau of Internal Revenue, for plaintiff.
Memorandum
Opinion
HARRISON,
District Judge:
The above
entitled actions have been duly consolidated and have been so tried.
Instead of setting forth a lengthy statement of the facts and the
reasone for my conclusions, I believe that the facts are thoroughly
understood by all the parties and that, due to the large amount of money
tied up in the hands of the United States District Clerk, an expeditious
disposition of the case will be preferred by all parties, hence I shall
content myself by stating my conclusions.
I find that
the defendant W. A. Trout had no right, title or interest in and to the
first endowment policy. I further find that the same had been duly
assigned to Doris M. Grunigen and Forest J. Grunigen and that they are
entitled to the proceeds of said policy, less costs and attorneys fees
hereinafter provided. The Government's evidence merely raised a
suspicion of juggling.
Relative to
the second endowment policy, I find the defendant W. A. Trout had an
interest therein at the time of the perfection of the Government's lien
and that the Government is entitled to 9,874.82/53,774.16 of the sum of
$48,017.00, less costs and attorneys' fees as hereinafter provided.
There is no evidence justifying the conclusion that the payment of
$3,038.00 made by check of Mrs. Trout entitles her to an interest in the
proceeds of this policy. I hold it was a voluntary payment on her part.
In fact, her attempt to claim such an interest demonstrates, in my mind,
the length some people will go in avoiding their obligations to their
government.
[Life
Insurance Policies Are Property of Insured]
The three life
policies are admittedly the property of the debtor taxpayer and the
Government is entitled to a judgment directing the interest of W. A.
Trout thereby sold and the proceeds applied to the tax claims of the
Government. I am not impressed with the contention of counsel that the
"insured taxpayer has no interest in these three policies which is
subject to seizure for payment of his tax liability", because the
same has no cash surrender value, only a borrowing privilege. To so hold
would in effect be an admission that the Government is impotent to
enforce its rights and would open the way for a recalcitrant taxpayer
(such as we have in this case), to cover up, through insurance
contracts, such as are herein involved. I see no reason to uphold a
taxpayer who admits he has an interest in property but flauntingly says
in is beyond reach of the Government. A court of equity should not lend
its hand to enable a taxpayer to avoid his obligations to his
government. I direct that the decree provide for the surrender of said
policies to a receiver to be hereafter appointed as provided in 26 USCA
§3678.
[Certain
Costs in Connection with Interplea Allowed Insurance Company]
I hold that
the New York Life Insurance Company should not be held liable for
interest. The insurance company was caught in a position wherein it
could not help itself and to penalize it under such circumstances would
be, in my opinion, very unjust. I consider its petitions whereby it
finally was enabled to deposit the proceeds of the two endowment
policies in court as interpleaders and therefore is entitled to
reasonable attorneys fees and costs incurred in filing and presenting
the said petition in interpleader. I fix the attorneys' fees at $375.00
in each of the two policies. I do not consider it entitled to any
attorneys' fees or costs incurred prior to the filing of said petitions.
The Government
is directed to expeditiously prepare and submit proposed findings and
decree.
Findings
of Fact and Conclusions of Law (March 19, 1942)
The above
entitled cases, after having been consolidated for the purposes of
trial, came on for trial before the Court, sitting without a jury, at
Los Angeles
,
California
, on December 11, 1941. Forest J. Grunigen and Doris M. Grunigen, the
plaintiffs in actions Nos. 1375-BH and 1733-BH, and defendants in
actions Nos. 1674-BH and 1870-BH, William A. Trout and Mary A. Trout,
defendants in actions Nos. 1674-BH and 1870-BH, and Betty Jane Trout, a
defendant in actions Nos. 1674-BH and 1870-BH, appeared by Latham &
Watkins, Dana Latham, Richard Lund and Henry T. Moore, their attorneys;
New York Life Insurance Company, a party defendant in each of said
actions, appeared by Meserve, Mumper & Hughes, Shirley E. Meserve
and Leo E. Anderson, its attorneys; and the United States of America,
the plaintiff in actions Nos. 1674-BH and 1870-BH, appeared by Wm. Fleet
Palmer, United States Attorney for the Southern District of California,
E. H. Mitchell, Assistant United States Attorney for said District, and
Eugene Harpole, Special Attorney for the Bureau of Internal Revenue, its
attorneys. Evidence, both oral and documentary, was introduced, a
written stipulation of facts filed and the matter thereafter submitted
to the Court for decision upon briefs. The Court, having considered the
evidence and arguments of counsel, makes the following Findings of Fact
and Conclusions of Law.
[Findings of
fact deleted--The substance of such fundings appears in the Memorandum
Opinion above and in the Conclusions of Law below.]
From the
foregoing Findings of Fact, the Court draws the following Conclusions of
Law.
1. That the
defendant, W. A. Trout, is indebted to the United States for 1926, 1927,
1929 and 1930 income taxes and interest up to July 29, 1938 as follows:
Year Tax Interest Total
1926 ....... $ 2,267.72 $ 1,547.27 $ 3,814.99
1927 ....... 3,605.64 2,243.79 5,849.43
1929 ....... 33,551.85 16,853.14 50,404.99
1930 ....... 574.79 254.23 829.02
Total ...... $40,000.00 $20,898.43 $60,898.43
together with interest on the above as provided by law.
2. That the
United States of America acquired tax liens as provided by Sections
3670, 3671 and 3672 of the Internal Revenue Code upon all property and
rights to property belonging to the defendant, W. A. Trout, as of August
3, 1938, the date upon which the Commissioner's July, 1938 assessment
list No. 5 was received in the office of the Collector of Internal
Revenue at Los Angeles, California, covering the income taxes of said W.
A. Trout for the taxable years of 1926, 1927, 1929 and 1930 together
with interest thereon, all as set forth in paragraph 1 above of these
Conclusions.
3. That the
defendant, W. A. Trout, has an interest in New York Life Insurance
policies Nos. 8,962,334, 9,547,920 and 9,547,921 and has had such an
interest at all times since the issuance of said policies and that the
plaintiff, United States of America, is entitled to a decree in action
No. 1870-BH directing that said W. A. Trout surrender said policies of
life insurance to a receiver to be hereafter appointed by the Court, as
provided by Section 3678 of the Internal Revenue Code, and that said W.
A. Trout's interest in said policies be sold by said receiver and the
proceeds of said sale applied to the payment of said income taxes and
interest due the United States from said W. A. Trout for the years 1926,
1927, 1929 and 1930.
4. That since
December 12, 1936 W. A. Trout has had no right, title or interest in or
to the policy of insurance No. 12,780,070 described in paragraph 12 of
the foregoing Findings of Fact, and W. A. Trout has no right, title, or
interest in or to the proceeds of said policy of insurance in the amount
of $54,927.46 now on deposit with the Clerk of this Court and the United
States of America has no interest in said policy or said proceeds.
Forest J. Grunigen and Doris M. Grunigen jointly have the entire right,
title and interest in said policy of insurance and the proceeds thereof
and are the owners thereof and have been said owners at all times since
December 12, 1936. Forest J. Grunigen and Doris M. Grunigen are entitled
to judgment in action No. 1674-BH that the United States of America take
nothing by its complaint, and directing the Clerk of this Court to pay
to them, upon the delivery to said Clerk for and on behalf of the New
York Life Insurance Company of the policy of insurance No. 12,780,070,
the sum of $54,927.46 on deposit with the Clerk of this Court to the
credit of said action less the sum of $375.00 and the costs of suit
incurred by the New York Life Insurance Company in actions Nos. 1375-BH
and 1674-BH subsequent to November 7, 1941.
5. That on
August 3, 1938 W. A. Trout had no interest in policy No. 12,953,339
heretofore described in paragraph 17 of the foregoing Findings of Fact
but on the date of the trial of those proceedings said W. A. Trout had
an interest in said policy to the extent of 987482/5377416 of the value
thereof, and Forest J. Grunigen has the remaining right, title and
interest in and to said policy. Judgment should be entered in action No.
1870-BH directing the Clerk of this Court to deduct from the sum of
$48,017.00 on deposit with the said Clerk to the credit of said action
the sum of $375.00 and the costs of suit incurred by the New York Life
Insurance Company in actions Nos. 1733-BH and 1870-BH subsequent to
November 7, 1941, and to pay 987472/5377416 of the balance remaining to
the United States of America, and, upon delivery to said Clerk for and
on behalf of the New York Life Insurance Company the policy of insurance
No. 12,953,339, to pay the remainder of said fund to Forest J. Grunigen.
Mary A. Trout
has no interest in the proceeds of said policy No. 12,953,339.
6. The New
York Life Insurance Company by paying to the Clerk of this Court to the
credit of actions Nos. 1375-BH and 1674-BH the sum of $54,927.46 has
discharged itself of all liability under its policy of insurance No.
12,780,070, and by paying to the Clerk of this Court to the credit of
action Nos. 1733-BH and 1870-BH the sum of $47,017.00 has discharged
itself of all liability under its policy of insurance No. 12,953,339.
7. The New
York Life Insurance Company is entitled to a judgment in action No.
1674-BH directing the Clerk of this Court to pay to it out of the fund
now on deposit with said Clerk to the credit of said action the sum of
$375.00 for attorney fees and its costs of suit incurred in actions Nos.
1375-BH and 1674-BH subsequent to November 7, 1941, and directing said
Clerk to deliver to it upon obtaining possession of the same the policy
of insurance No. 12,780,070. The New York Life Insurance Company is
entitled to a judgment in action No. 1870-BH directing the Clerk of this
Court to pay to it out of the fund now on deposit with said Clerk to the
credit of said action the sum of $375.00 for attorney fees and its costs
of suit incurred in actions Nos. 1733-BH and 1870-BH subsequent to
November 7, 1941, and directing said Clerk to deliver to it upon
obtaining possession of the same the policy of insurance No. 12,953,339.
Except as
otherwise in this paragraph hereinabove provided the parties to actions
Nos. 1733-BH and 1870-BH shall each bear his, her or its own costs of
suit.
8. That the
total amount for which defendant New York Life Insurance Company is
liable on, under or by virtue of policy No. 12,780,070 is the sum of
$54,927.46, which sum has heretofore been deposited into the registry of
this Court and that the total amount for which said company is liable
on, under or by virtue of policy No. 12,953,339, is the sum of
$48,017.00, which said sum has heretofore been deposited into the
registry of this Court and that said sums should be interplead between
the respective claimants thereto in accordance with these Findings of
Fact and Conclusions of Law and that plaintiff and defendants other than
said New York Life Insurance Company, and each of them, their heirs,
representatives, agents and assigns and those claiming under them,
should be permanently enjoined from instituting or taking any further
steps or proceedings against said New York Life Insurance Company in any
suit or proceeding against said company in any Court whatsoever on
account of the proceeds of said policies of insurance; that defendants,
or any of them, who now have possession of said policies of insurance
numbered 12,780,070 and 12,953,339, should be ordered and decreed to
deliver up and surrender said policies to the Clerk of this Court for
delivery to said New York Life Insurance Company upon the final
determination of this cause and that said policies, and each of them,
should be decreed to be cancelled and said New York Life Insurance
Company relieved from any further liability thereunder.
WHEREFORE, the
Court directs that appropriate judgments be entered in actions Nos.
1375-BH, 1674-BH, 1733-BH and 1870-BH in conformity with these Findings
and Conclusions.
[58-1 USTC ¶9315]
United States of America
, Plaintiff v. The Equitable Life Assurance Society of the
United States
and Mary Sue Hurt
Campbell
, Individually and as Executrix of the Estate of G. Edward Campbell,
Defendants
U.
S. District Court, Northeast. Div., East. Dist. Tenn., Civ. Action No.
1144, 2/21/58
[1939 Code Secs. 3710 and 3678--similar to 1954 Code Secs. 6332 and
7403, respectively]
Tax lien: Cash surrender value of insurance policies: Bank's first
lien.--The court found that a bank had a first lien on the 1952 cash
surrender value of four life insurance policies which the insured had
pledged as collateral security for a loan made in 1948. The
United States
had an equitable tax lien on the 1952 cash surrender value of the
policies in excess of the bank's lien. The insurance company was ordered
to pay the Government its share of the cash surrender value of the
policies.
John C.
Crawford, Jr., United States Attorney, John F. Dugger, Assistant United
States Attorney, 201 Federal Building, Knoxville, Tenn., for plaintiff.
Simmonds, Bowman & Herndon, Johnson City, Tenn., Gore, Gore &
McIntyre, Central Building, Bristol, Tenn., for defendants.
Judgment
DARR, District
Judge:
This case came
on to be heard on December 12, 1957, before the Honorable L. R. Darr,
United States District Judge, upon the pleadings in the case, and
particularly upon the motion of the defendant, Mary Sue Hurt Campbell,
for summary judgment.
It was the
contention of the Government that it had a lien upon the cash surrender
values of the following life insurance policies issued upon the life of
Dr. G. Edward Campbell by The Equitable Life Assurance Society of the
United States
, numbered as follows:
Policy No. .... 7,769,440
Policy No. .... NM 10,404,835
Policy No. .... 11,029,497
Policy No. .... 11,029,515
The Government insisted that its lien became effective on February 4,
1952, when the assessment for back income taxes was made against Dr. G.
Edward Campbell.
It appeared
from the record that on September 21, 1948, Dr. G. Edward Campbell
borrowed from the Hamilton National Bank of Johnson City, Tennessee, the
sum of $40,000.00 evidenced by a note for like amount due sixty days
after date and that his then wife, now his widow, Mrs. Mary Sue Hurt
Campbell, signed the note as an accommodation maker. It further appeared
that the four insurance policies in question were pledged as collateral
security to said note and that on the same date Dr. Campbell executed
valid assignments of his interest in these policies to the said Hamilton
National Bank of
Johnson City
,
Tennessee
, and that The Equitable Life Assurance Society was duly notified of the
assignments.
It further
appeared that his note was curtailed from time to time and had been
reduced to $15,000.00 as of the date of the Government's assessment,
to-wit: February 4, 1952.
It further
appeared that the cash surrender value of the four insurance policies on
February 4, 1952, was $19,193.13.
The record
also shows that Dr. G. Edward Campbell died January 18, 1953.
The record
also shows that Mrs. Christine Campbell Frambach, the only surviving
child of Dr. G. Edward Campbell, is a contingent beneficiary under the
policies of Life Insurance here in issue, and has been made a party
defendant to this cause.
In view of
this state of facts, the Court is of opinion and holds that the Hamilton
National Bank had a first lien on the cash surrender value of these
insurance policies by reason of the assignments of the insured, Dr. G.
Edward Campbell, to the Hamilton National Bank, and that the United
States of America had an equitable lien on the cash surrender value of
the policies as of said date for the amount in excess of the Bank's
lien, to-wit: $4,193.13, and for this reason the motion of the
defendant, Mary Sue Hurt Campbell, for summary judgment is denied.
Thereupon,
counsel for the
United States of America
at the suggestion of the Court, made an oral motion for summary judgment
in favor of the plaintiff, which motion was not resisted by counsel for
Mrs. Mary Sue Hurt Campbell. Upon consideration of said motion, the
Court sustained the same to the extent of the difference between the
obligation owing to the Hamilton National Bank on February 4, 1952, and
the cash surrender value of the four insurance policies on said date
amounting to $4,193.13.
It is,
therefore, ORDERED and ADJUDGED, that the United States of America have
and recover of the defendant, Mary Sue Hurt Campbell, the sum of FOUR
THOUSAND ONE HUNDRED NINETY-THREE DOLLARS and THIRTEEN CENTS
($4,193.13), and a lien for this amount is hereby fixed and declared
upon the four insurance policies herein described, and The Equitable
Life Assurance Society of the United States is hereby directed to pay
said amount into this Court, and when this is done the remainder of the
proceeds of said policies which was impounded in this proceeding, is
released and The Equitable Life Assurance Society of the United States
is privileged to disburse the same in accordance with its original
contractual obligations with the insured, Dr. G. Edward Campbell, and
his wife and principal beneficiary, Mrs. Mary Sue Hurt Campbell.
In the event
the defendant, Mary Sue Hurt Campbell should satisfy the amount of the
judgment herein awarded from other funds, then the lien hereby fixed
upon the proceeds of the insurance policies will be satisfied, and The
Equitable Life Assurance Society of the United States will be at liberty
to disburse the entire amount of the balance due under said policies in
accordance with the provisions of its contract with Mrs. Mary Sue Hurt
Campbell.
Mrs. Mary Sue
Hurt Campbell is hereby taxed with the costs of this proceeding.
[42-1 USTC ¶9372]United States of
America, a corporate body politic, Plaintiff, v. W. A. Trout, also known
as William A. Trout, Mary A. Trout, Betty J. Trout, Doris M. Trout, now
known as Doris M. Grunigen, Forest J. Grunigen and New York Life
Insurance Company, a corporation, defendants
In
the District Court of the United States, Southern District of
California, Central Division, No. 1870-BH (Consolidated with Nos.
1375-BH, 1674-BH, 1733-BH), 46 FSupp 484, Filed February 19, 1942
Lien for taxes: Insurance policies subject to lien.--Delinquent
taxpayer had an interest in an endowment insurance policy and three life
policies, and they are subject to a lien for income taxes and interest
for 1926-1930. It is held: (1) There was no evidence to justify claim of
defendant's wife that a payment made to her husband entitled her to an
interest in one of the policies, and no merit is found in contention in
behalf of defendant-insured that he had no interest in the three life
insurance policies which is subject to seizure for payment of his tax
liability, "because the policies had no cash surrender value, only
a borrowing privilege." (2) Petitions of the insurance company
whereby it was enabled to deposit the proceeds of two endowment policies
in court were interpleaders. Insurance company is not liable for
interest on taxes assessed against the insured. (3) The insured had no
interest in one of the endowment policies, in consequence of a bona fide
assignment of the policy to two other persons.
Dana Latham,
Richard Lund and Henry T. Moore (Latham & Watkins), for Forest J.
Grunigen, Doris M. Grunigen, William A. Trout, Mary A. Trout, and Betty
Jane Trout. Shirley E. Meserve and Leo E. Anderson (Meserve, Mumper
& Hughes), for New York Life Insurance Co. Wm. Fleet Palmer, U. S.
Attorney, E. H. Mitchell, Assistant U. S. Attorney, and Eugene Harpole,
Special Attorney, Bureau of Internal Revenue, for plaintiff.
Memorandum
Opinion
HARRISON,
District Judge:
The above
entitled actions have been duly consolidated and have been so tried.
Instead of setting forth a lengthy statement of the facts and the
reasone for my conclusions, I believe that the facts are thoroughly
understood by all the parties and that, due to the large amount of money
tied up in the hands of the United States District Clerk, an expeditious
disposition of the case will be preferred by all parties, hence I shall
content myself by stating my conclusions.
I find that
the defendant W. A. Trout had no right, title or interest in and to the
first endowment policy. I further find that the same had been duly
assigned to Doris M. Grunigen and Forest J. Grunigen and that they are
entitled to the proceeds of said policy, less costs and attorneys fees
hereinafter provided. The Government's evidence merely raised a
suspicion of juggling.
Relative to
the second endowment policy, I find the defendant W. A. Trout had an
interest therein at the time of the perfection of the Government's lien
and that the Government is entitled to 9,874.82/53,774.16 of the sum of
$48,017.00, less costs and attorneys' fees as hereinafter provided.
There is no evidence justifying the conclusion that the payment of
$3,038.00 made by check of Mrs. Trout entitles her to an interest in the
proceeds of this policy. I hold it was a voluntary payment on her part.
In fact, her attempt to claim such an interest demonstrates, in my mind,
the length some people will go in avoiding their obligations to their
government.
[Life
Insurance Policies Are Property of Insured]
The three life
policies are admittedly the property of the debtor taxpayer and the
Government is entitled to a judgment directing the interest of W. A.
Trout thereby sold and the proceeds applied to the tax claims of the
Government. I am not impressed with the contention of counsel that the
"insured taxpayer has no interest in these three policies which is
subject to seizure for payment of his tax liability", because the
same has no cash surrender value, only a borrowing privilege. To so hold
would in effect be an admission that the Government is impotent to
enforce its rights and would open the way for a recalcitrant taxpayer
(such as we have in this case), to cover up, through insurance
contracts, such as are herein involved. I see no reason to uphold a
taxpayer who admits he has an interest in property but flauntingly says
in is beyond reach of the Government. A court of equity should not lend
its hand to enable a taxpayer to avoid his obligations to his
government. I direct that the decree provide for the surrender of said
policies to a receiver to be hereafter appointed as provided in 26 USCA
§3678.
[Certain
Costs in Connection with Interplea Allowed Insurance Company]
I hold that
the New York Life Insurance Company should not be held liable for
interest. The insurance company was caught in a position wherein it
could not help itself and to penalize it under such circumstances would
be, in my opinion, very unjust. I consider its petitions whereby it
finally was enabled to deposit the proceeds of the two endowment
policies in court as interpleaders and therefore is entitled to
reasonable attorneys fees and costs incurred in filing and presenting
the said petition in interpleader. I fix the attorneys' fees at $375.00
in each of the two policies. I do not consider it entitled to any
attorneys' fees or costs incurred prior to the filing of said petitions.
The Government
is directed to expeditiously prepare and submit proposed findings and
decree.
Findings
of Fact and Conclusions of Law (March 19, 1942)
The above
entitled cases, after having been consolidated for the purposes of
trial, came on for trial before the Court, sitting without a jury, at
Los Angeles
,
California
, on December 11, 1941. Forest J. Grunigen and Doris M. Grunigen, the
plaintiffs in actions Nos. 1375-BH and 1733-BH, and defendants in
actions Nos. 1674-BH and 1870-BH, William A. Trout and Mary A. Trout,
defendants in actions Nos. 1674-BH and 1870-BH, and Betty Jane Trout, a
defendant in actions Nos. 1674-BH and 1870-BH, appeared by Latham &
Watkins, Dana Latham, Richard Lund and Henry T. Moore, their attorneys;
New York Life Insurance Company, a party defendant in each of said
actions, appeared by Meserve, Mumper & Hughes, Shirley E. Meserve
and Leo E. Anderson, its attorneys; and the United States of America,
the plaintiff in actions Nos. 1674-BH and 1870-BH, appeared by Wm. Fleet
Palmer, United States Attorney for the Southern District of California,
E. H. Mitchell, Assistant United States Attorney for said District, and
Eugene Harpole, Special Attorney for the Bureau of Internal Revenue, its
attorneys. Evidence, both oral and documentary, was introduced, a
written stipulation of facts filed and the matter thereafter submitted
to the Court for decision upon briefs. The Court, having considered the
evidence and arguments of counsel, makes the following Findings of Fact
and Conclusions of Law.
[Findings of
fact deleted--The substance of such fundings appears in the Memorandum
Opinion above and in the Conclusions of Law below.]
From the
foregoing Findings of Fact, the Court draws the following Conclusions of
Law.
1. That the
defendant, W. A. Trout, is indebted to the United States for 1926, 1927,
1929 and 1930 income taxes and interest up to July 29, 1938 as follows:
Year Tax Interest Total
1926 ....... $ 2,267.72 $ 1,547.27 $ 3,814.99
1927 ....... 3,605.64 2,243.79 5,849.43
1929 ....... 33,551.85 16,853.14 50,404.99
1930 ....... 574.79 254.23 829.02
Total ...... $40,000.00 $20,898.43 $60,898.43
together with interest on the above as provided by law.
2. That the
United States of America acquired tax liens as provided by Sections
3670, 3671 and 3672 of the Internal Revenue Code upon all property and
rights to property belonging to the defendant, W. A. Trout, as of August
3, 1938, the date upon which the Commissioner's July, 1938 assessment
list No. 5 was received in the office of the Collector of Internal
Revenue at Los Angeles, California, covering the income taxes of said W.
A. Trout for the taxable years of 1926, 1927, 1929 and 1930 together
with interest thereon, all as set forth in paragraph 1 above of these
Conclusions.
3. That the
defendant, W. A. Trout, has an interest in New York Life Insurance
policies Nos. 8,962,334, 9,547,920 and 9,547,921 and has had such an
interest at all times since the issuance of said policies and that the
plaintiff, United States of America, is entitled to a decree in action
No. 1870-BH directing that said W. A. Trout surrender said policies of
life insurance to a receiver to be hereafter appointed by the Court, as
provided by Section 3678 of the Internal Revenue Code, and that said W.
A. Trout's interest in said policies be sold by said receiver and the
proceeds of said sale applied to the payment of said income taxes and
interest due the United States from said W. A. Trout for the years 1926,
1927, 1929 and 1930.
4. That since
December 12, 1936 W. A. Trout has had no right, title or interest in or
to the policy of insurance No. 12,780,070 described in paragraph 12 of
the foregoing Findings of Fact, and W. A. Trout has no right, title, or
interest in or to the proceeds of said policy of insurance in the amount
of $54,927.46 now on deposit with the Clerk of this Court and the United
States of America has no interest in said policy or said proceeds.
Forest J. Grunigen and Doris M. Grunigen jointly have the entire right,
title and interest in said policy of insurance and the proceeds thereof
and are the owners thereof and have been said owners at all times since
December 12, 1936. Forest J. Grunigen and Doris M. Grunigen are entitled
to judgment in action No. 1674-BH that the United States of America take
nothing by its complaint, and directing the Clerk of this Court to pay
to them, upon the delivery to said Clerk for and on behalf of the New
York Life Insurance Company of the policy of insurance No. 12,780,070,
the sum of $54,927.46 on deposit with the Clerk of this Court to the
credit of said action less the sum of $375.00 and the costs of suit
incurred by the New York Life Insurance Company in actions Nos. 1375-BH
and 1674-BH subsequent to November 7, 1941.
5. That on
August 3, 1938 W. A. Trout had no interest in policy No. 12,953,339
heretofore described in paragraph 17 of the foregoing Findings of Fact
but on the date of the trial of those proceedings said W. A. Trout had
an interest in said policy to the extent of 987482/5377416 of the value
thereof, and Forest J. Grunigen has the remaining right, title and
interest in and to said policy. Judgment should be entered in action No.
1870-BH directing the Clerk of this Court to deduct from the sum of
$48,017.00 on deposit with the said Clerk to the credit of said action
the sum of $375.00 and the costs of suit incurred by the New York Life
Insurance Company in actions Nos. 1733-BH and 1870-BH subsequent to
November 7, 1941, and to pay 987472/5377416 of the balance remaining to
the United States of America, and, upon delivery to said Clerk for and
on behalf of the New York Life Insurance Company the policy of insurance
No. 12,953,339, to pay the remainder of said fund to Forest J. Grunigen.
Mary A. Trout
has no interest in the proceeds of said policy No. 12,953,339.
6. The New
York Life Insurance Company by paying to the Clerk of this Court to the
credit of actions Nos. 1375-BH and 1674-BH the sum of $54,927.46 has
discharged itself of all liability under its policy of insurance No.
12,780,070, and by paying to the Clerk of this Court to the credit of
action Nos. 1733-BH and 1870-BH the sum of $47,017.00 has discharged
itself of all liability under its policy of insurance No. 12,953,339.
7. The New
York Life Insurance Company is entitled to a judgment in action No.
1674-BH directing the Clerk of this Court to pay to it out of the fund
now on deposit with said Clerk to the credit of said action the sum of
$375.00 for attorney fees and its costs of suit incurred in actions Nos.
1375-BH and 1674-BH subsequent to November 7, 1941, and directing said
Clerk to deliver to it upon obtaining possession of the same the policy
of insurance No. 12,780,070. The New York Life Insurance Company is
entitled to a judgment in action No. 1870-BH directing the Clerk of this
Court to pay to it out of the fund now on deposit with said Clerk to the
credit of said action the sum of $375.00 for attorney fees and its costs
of suit incurred in actions Nos. 1733-BH and 1870-BH subsequent to
November 7, 1941, and directing said Clerk to deliver to it upon
obtaining possession of the same the policy of insurance No. 12,953,339.
Except as
otherwise in this paragraph hereinabove provided the parties to actions
Nos. 1733-BH and 1870-BH shall each bear his, her or its own costs of
suit.
8. That the
total amount for which defendant New York Life Insurance Company is
liable on, under or by virtue of policy No. 12,780,070 is the sum of
$54,927.46, which sum has heretofore been deposited into the registry of
this Court and that the total amount for which said company is liable
on, under or by virtue of policy No. 12,953,339, is the sum of
$48,017.00, which said sum has heretofore been deposited into the
registry of this Court and that said sums should be interplead between
the respective claimants thereto in accordance with these Findings of
Fact and Conclusions of Law and that plaintiff and defendants other than
said New York Life Insurance Company, and each of them, their heirs,
representatives, agents and assigns and those claiming under them,
should be permanently enjoined from instituting or taking any further
steps or proceedings against said New York Life Insurance Company in any
suit or proceeding against said company in any Court whatsoever on
account of the proceeds of said policies of insurance; that defendants,
or any of them, who now have possession of said policies of insurance
numbered 12,780,070 and 12,953,339, should be ordered and decreed to
deliver up and surrender said policies to the Clerk of this Court for
delivery to said New York Life Insurance Company upon the final
determination of this cause and that said policies, and each of them,
should be decreed to be cancelled and said New York Life Insurance
Company relieved from any further liability thereunder.
WHEREFORE, the
Court directs that appropriate judgments be entered in actions Nos.
1375-BH, 1674-BH, 1733-BH and 1870-BH in conformity with these Findings
and Conclusions.
[90-1 USTC ¶50,014] Philip Shane,
Plaintiff v.
United States of America
, Defendant
U.S.
District Court, Dist. Ida., Civ. 89-1085, 11/17/89
[Code Secs.
6332 , 7421 and 7422 ]
Refunds and credits: Administrative claim: Levy and distraint:
Injunction: Life insurance policy.--The IRS's motion to dismiss a
taxpayer's suit in federal court for lack of subject matter jurisdiction
was granted where the taxpayer failed to file an administrative claim
that is a prerequisite for a refund and where the suit was filed for the
purpose of restraining the assessment or collection of tax, contrary to
the express prohibition of the Anti-Injunction Act. The IRS correctly
levied upon the taxpayer's life insurance policy and followed all
statutorily required procedures in obtaining funds from the taxpayer's
life insurance company for the purpose of collecting his delinquent
taxes.
ORDER GRANTING MOTION TO DISMISS
RYAN, District
Judge:
Mr. Shane
filed this pro se complaint essentially alleging that the levy
upon his life insurance policy in satisfaction of his unpaid federal
income taxes was "unlawful, invalid and void and a denial of
procedural due process." Currently before the court is the
United States
' Motion to Dismiss or, in the Alternative, for Summary Judgment.
The court has
thoroughly reviewed the pleadings herein and the applicable statutes and
case law, and the court has determined that this case should be
dismissed for lack of subject matter jurisdiction pursuant to Rule
12(b)(1) of the Federal Rules of Civil Procedure. For the most part, the
court will limit its analysis to this issue.
In support of
its motion to dismiss, the
United States
has submitted Certificates of Assessment and Payments for Philip Shane
for the tax years at issue: 1981, 1982 and 1983. See Memorandum in
Support of the
United States
' Motion to Dismiss or, in the Alternative, for Summary Judgment,
Exhibit A. While Mr. Shane questions the validity of the collection
procedures followed by the Internal Revenue Service (IRS) and considers
the certificates of assessment to merely be "hearsay," he does
not submit any countervailing proof for the court to find such taxes
were not due, nor does he establish that a claim for refund was properly
filed pursuant to 26 U.S.C. §7422(a) . Tax assessments
enjoy a presumption of correctness--the burden is on the taxpayer to
overcome this presumption by persuading the court that the assessment is
incorrect. See e.g., U.S. v. Dixon [87-2 USTC ¶9485 ],
672 F.Supp. 503, 507 (M.D. Ala. 1987).
Given that the
United States
has demonstrated that taxes were owing at the time of the levy, pursuant
to 26 U.S.C.§6331(a) the IRS has the power to collect delinquent taxes
"by levy upon all property and rights to property." The term
"levy" is defined in Section 6331(b) as
including "the power of distraint and seizure by any means."
Mr. Shane alleges that the statutes do not contemplate a levy upon life
insurance. However, life insurance may be levied upon pursuant to 26
U.S.C.§6332(b), which specifically provides that the insuring
organization do the following:
[S]hall pay
over such amount 90 days after service of notice of levy. Such notice
shall include a certification by the Secretary that a copy of such
notice has been mailed to the person against whom the tax is assessed at
his last known address.
26
U.S.C.S. §6332(b) (Law. Co-op.
1989).
As early as
March 8, 1988, Mr. Shane acknowledges that he had notice of IRS
collection efforts. See Complaint and Demand for Jury Trial, Exhibit B.
Then, on August 10, 1988, the IRS sent a copy of a Notice of Levy to the
plaintiff, Mr. Shane, indicating that payment of taxes in the amount of
$13,043.50 were being sought from Beneficial Life Insurance Company. See
Complaint and Demand for Jury Trial, Exhibit A. In so doing, the IRS
complied with the notice provisions of 26 U.S.C. §6332(b) and §6331(d) . On November 23,
1988, Beneficial Life Insurance Company properly forwarded loan proceeds
from the plaintiff's policy to the IRS in the amount $10,524.19. See
Complaint and Demand for Jury Trial, Exhibits C and F. Thus, from the
pleadings themselves, it appears that the IRS followed all statutorily
required procedures in obtaining funds from the plaintiff's life
insurance company for the purpose of collecting delinquent taxes from
the plaintiff for the years 1981, 1982, and 1983.
This court
lacks subject matter jurisdiction over this action for two independent
reasons.
First, to the
extent that the plaintiff seeks a refund of the funds levied upon and
collected from his insurance company, his complaint should be dismissed
pursuant to 26 U.S.C. §7422(a) , which provides:
No
suit or proceeding shall be maintained in any court for the recovery of
any internal revenue tax alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessive or in
any manner wrongfully collected, until a claim for refund or credit has
been duly filed with the Secretary, according to the provisions of law
in that regard, and the regulations of the Secretary established in
pursuance thereof.
26
U.S.C.S. §7422(a) (Law Co-op.
1989).
Put simply,
before a taxpayer may sue to recover federal income taxes, he must file
a claim for a refund or credit with the IRS. 26 U.S.C. §7422(a)
. The Treasury Regulations provide that: "The claim must
set forth in detail each ground upon which a credit or refund is claimed
and facts sufficient to apprise the Commissioner of the exact basis
thereof." 26 C.F.R. §301.6402-2(b) (1988). It
has been said that strict compliance with the requirements of both the
jurisdictional statute and the accompanying treasury regulation is
needed for many of the same reasons that underlie the requirement in
other contexts that litigants exhaust administrative remedies before
proceeding to federal court, including the need for agency efficiency
and judicial economy. See Krasnow v. United States [81-1
USTC ¶9360 ], 508 F.Supp. 1099, 1102-03 (S.D.N.Y. 1981); McKart
v.
United States
, 395
U.S.
185, 193-95 (1969). In this case, there has been no showing that the
plaintiff has exhausted his administrative remedies.
Secondly, to
the extent the plaintiff seeks to challenge further collection actions
on the balance remaining due to the IRS, this court also lacks
jurisdiction. As provided in the Anti-Injunction Act, 26 U.S.C. §7421(a) , "no suit
for the purpose of restraining the assessment or collection of any tax
shall be maintained in any court by any person, whether or not such
person is the person against whom such tax was assessed." Plaintiff
cannot avoid the ramifications of the Anti-Injunction Act merely by
alleging a wrongful levy. Indeed, under 26 U.S.C. §7426
a party may bring an action against the United States in the
district court for wrongful levy, but only if that "person .
. . claims an interest in or lien on such property," and that
person is not "the person against whom is assessed the tax
out of which such levy arose." 26 U.S.C.S. §7426(a)
(Law. Co-op. 1989).
In sum, to the
extent the plaintiff seeks to have this court find that taxes were
erroneously or illegally assessed, thereby entitling him to a refund or
credit for the moneys levied upon by the IRS, this court lacks
jurisdiction because plaintiff failed to file an administrative claim
pursuant to 26 U.S.C. §7422(a)
. And, to the extent the plaintiff seeks to have this court
declare assessments invalid and enjoin the IRS from further collection
of taxes owed for 1981, 1982 and 1983, this court lacks jurisdiction
pursuant to the Anti-Injunction Act of Section 7421 .
Alternatively,
even if this court had subject matter jurisdiction, dismissal of this
case would still be warranted. Given the presumption of validity for the
taxes assessed in the years 1981, 1982 and 1983, and given the
appropriateness of a levy on life insurance for the purpose of
collecting delinquent taxes as well as the procedures followed by the
IRS in this case, the court finds that plaintiff fails to state a claim
on which relief may be granted. Therefore, dismissal of this case is
equally appropriate pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure.
Based on the
foregoing and the court being fully advised in the premises,
IT IS HEREBY
ORDERED that the defendant's motion to dismiss should be, and is hereby,
GRANTED.
IT IS FURTHER
ORDERED that the plaintiff's complaint should be, and is hereby,
DISMISSED.
