UNITED STATES of America, Appellant. v. Cornelius W. SULLIVAN et al.
No. 14091.
United States Court of Appeals Third Circuit.
Argued April 5, 1963. Submitted Oct. 12, 1963. Decided April 10, 1964.
Alexander Black, Buchanan, Ingersoll, Rodewald, Kyle & Buerger, Pittsburgh, Pa. (John M. Reed, Reed & Egler, Pittsburgh, Pa., John H. Filer, Hartford, Conn., on the brief), for appellee Aetna Life Ins. Co.
Gilbert J. Helwig, Pittsburgh, Pa. (J. Tomlinson Fort, Reed, Smith, Shaw & McClay, Pittsburgh, Pa., E. H. McVitty, Toronto, Canada, on the brief), for appellee Manufacturers Life Ins. Co.
Thomas Lewis Jones, White, Jones & Gregg, formerly White & Jones, Pittsburgh, Pa., for General American Life Ins. Co.
K. Martin Worthy, Glenn L. Archer, Jr., Hamel, Morgan, Park & Saunders, Washington, D. C., for Life Insurance Ass‘n of America, amicus curiae.
Before BIGGS, Chief Judge, and McLAUGHLIN, KALODNER, STALEY, HASTIE, GANEY and SMITH, Circuit Judges
BIGGS, Chief Judge.
The United States brought this action under
There is no question that the Commissioner of Internal Revenue can reach the “cash surrender values” of a delinquent taxpayer‘s unmatured insurance policies and can apply the amounts realized to the satisfaction of the deficiency. The issues raised on this appeal concern the fundamental problem of the means by which the foregoing can be accomplished and the interrelated question of the proper measure of the Commissioner‘s recovery.
The facts are not in dispute. On November 4, 1952 the Commissioner made an assessment of income taxes with penalties and interest jointly against the Sullivans for deficiencies for the year 1950. On November 5, 1952 the District Collector received the assessment list from the Commissioner and vainly demanded payment from the Sullivans. A lien against the Sullivans’ “property and rights to property” automatically arose at this time under
Thereafter, between November 8, 1952 and April 6, 1953, and pursuant to
The outstanding tax liability of the Sullivans was partially reduced subsequently pursuant to a determination of the United States Tax Court. In addition, some of the amount due was recovered. A balance of $163,486.54 was still outstanding at the time of commencement of the present action.
On May 21, 1953 the Sullivans purchased an insurance policy from Aetna, No. P 975 434, in the face amount of $10,000. On June 17, 1953 the Sullivans purchased an insurance policy from Manufacturers, No. 1 250 226, in the face amount of $15,000.6 Under each of the policies Mrs. Sullivan was the named insured and Mr. Sullivan was the designated beneficiary. Mrs. Sullivan had the right under the policies to change the beneficiary, to exercise all options, and to take part in for present purposes substantially identical dividend sharing plans.7 Mrs. Sullivan elected under both policies to have dividends accumulated at interest.8
The Aetna policy was of the endowment type. It was to mature at the end of twenty-six years at which time Mrs. Sullivan, then having attained the age of sixty-five, was to receive an income of
It is unquestioned that the policies were substantially identical in all respects material to this appeal. Generally speaking, at any given time and as to each of the policies, the part of the total premiums paid in on the policy which exceeded the insurer‘s accrued policy costs plus, for essential purposes, accumulated dividend amounts represented the cash value of that policy.11 The cash value varied throughout the life of the policy. The cash value less any outstanding policy indebtedness previously incurred by the insured to the insurer constituted the cash surrender value of the policy. The cash surrender value was the amount the insured was entitled to receive on election to cancel the policy in accordance with its terms as detailed hereafter.12
The two policies contained a number of substantially identical provisions authorizing various uses of their respective reserves by the insured, Mrs. Sullivan.13
The second of these provisions gave the insured the right to borrow on the security of the policy at five per cent per annum. The Manufacturers policy specifically stated and the Aetna policy provided in effect that all amounts so loaned and interest thereon were to be a first lien on the policy. Under each of the policies there was no specific obligation to repay the amount borrowed; a failure in this regard simply served to bring about a permanent reduction in the cash surrender value. But if the permanent arrearage came to exceed the cash value of the policy, the obligations of the company under the policy were terminated and the policy was thereby cancelled.
The third provision was an optional automatic premium loan clause, revocable at will, which provided in substance that in the event of a default in the payment of premiums, as long as a cash surrender value existed on the policy the company would automatically loan to the insured and apply to premium payment the amount due. The insurance policies prescribed the same terms for these loans as were applicable to general policy loans, i. e., a first lien on the policy to the extent of the loan and an interest charge of five per cent. Mrs. Sullivan elected to have the automatic premium loan provisions of the policies be operative and she did not at any time revoke her elections.14
Finally, a fourth substantially identical clause of significance was contained in the policies. This was a non-forfeiture
The non-forfeiture provision mentioned in the preceding paragraph was never operative in the instant case inasmuch as Mrs. Sullivan elected that the automatic premium loan provision of the policies should become operative in the event of premium default. The clause is nevertheless of some relevance in that Mrs. Sullivan could have revoked the applicability of the automatic premium loan provision at any time.15
Aetna and Manufacturers were never served with notice of lien, nor did they receive actual notice of the Government‘s claim from any source until later served with notice of levy, discussed infra. On July 12, 1955 and on June 24, 1957 Manufacturers granted to Mrs. Sullivan policy loans of the combined principal amount of $714.52. The policy loan amounts were applied to outstanding premiums at the request of Mrs. Sullivan. The automatic premium loan clause of course was in effect at these times, but it had not yet become operative because it made provision for a grace period which had not expired in either instance.
On January 9, 1958 Aetna and Manufacturers were served with an identical “notice of levy” under the purported authority of
On January 23, 1958 Manufacturers was served with a “final demand” which in relevant part provided as follows: “Demand is again made for the amount set forth in the notice of levy, $232,215.64, or for such lesser sum as you may have been indebted to the taxpayer at the time the notice of levy was served. If you comply with this final demand within five days from its service, no action will be taken to enforce the provisions of
The record does not indicate that Aetna was served with any document subsequent to the original notice of levy.
Mrs. Sullivan did not pay premiums on either policy which fell due in 1958 and 1959. Accordingly, pursuant to the automatic premium loan provisions of the
The present action was commenced on October 30, 1958. Prior to judgment and pursuant to a stipulation between the United States and the Sullivans, on January 15, 1960 and January 25, 1960 respectively, Mrs. Sullivan delivered the Aetna policy to Aetna and the Manufacturers policy to Manufacturers and on these same respective dates executed releases to the two companies. The releases, identical in pertinent part, provided that Mrs. Sullivan “agrees that the entire liability of * * * [each of the insurers under its policy] except for the cash value, is hereby discharged and terminated, and the net cash value [i. e., the cash surrender value] shall be determined as of the date of this release and paid to the United States * * *.” The Aetna policy had a cash surrender value of $850.36 at the time of surrender and release. The Manufacturers policy no longer had a cash surrender value at that time.
The court below held that the Government was entitled to be paid the cash surrender value under each policy determined as of the date of surrender and release, January 15, 1960 and January 25, 1960 respectively, and that upon payment of the respective amounts, the insurance companies would be wholly discharged from their policy obligations. Accordingly, judgment was entered against Aetna for $850.36 and six per cent interest from January 15, 1960 and judgment was entered in favor of Manufacturers.
On this appeal the amount in dispute as to Manufacturers is the principal sum and interest deducted from the cash value of its policy on account of the two policy loans and two automatic premium loans effected by it. The controversy in regard to Aetna covers the corresponding amount deducted with respect to its two automatic premium loans.17, 18
The issues raised on the instant facts with regard to policy loans and automatic premium loans will be treated separately inasmuch as distinct considerations are involved. Before specifically discussing these issues in turn, however, it is necessary to consider the tax lien and its relation to the cash surrender value of an unmatured insurance policy.
I THE TAX LIEN AND THE CASH SURRENDER VALUE
The Government‘s lien on Mrs. Sullivan‘s interest in the unmatured insurance policies of Aetna and Manufacturers arose by virtue of
On the basis of the fact that the tax lien established by and perfected pursuant to
It is certainly true that the source of the effective rights of the Government in an unmatured insurance policy of a delinquent taxpayer is directly related to the cash surrender value. Generally, at any point in time the policy is worth in monetary terms to the insured no more than or no less than she can receive by virtue of its cash surrender value. This is the sum the Commissioner could receive if the taxpayer voluntarily assigned her interest in the policy to him and such amount would, of course, constitute the measure of the recovery of the Government when the Commissioner took appropriate steps to the same end by enforcing the lien on the policy by levy upon it as held by the delinquent-insured or by lien foreclosure.
But at least in regard to the effective scope of attachment of a tax lien, the lien can only attach to “property and rights to property” as it finds them. See and compare Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 1285, 4 L.Ed.2d 1365 (1960); United States v. Durham Lumber Co., 363 U.S. 522, 80 S.Ct. 1282, 4 L.Ed.2d 1371 (1960); United States v. A & P Bakery Supply & Equip. Co., 3 Am.Fed.Tax R.2d 579 (S.D.Fla. 1959). To put the matter in its most fundamental perspective, it is unquestioned that the operative status of an insurance policy is unaffected by the mere attachment of a tax lien to a delinquent-insured‘s interest therein. Additionally, it is not controverted that the insured‘s basic right under the present type of policy is other than to have the insurer perform a certain specified obligation on the policy‘s maturation. The insured also has a number of other rights under this kind of policy, some of which have been indicated previously and all of which can be collectively termed a “bundle of rights.” One of the insured‘s specific rights is entirely inconsistent with the basic right. This encompasses the discretionary power to elect to cancel the policy and receive its cash surrender value. See United States v. Massachusetts Mut. Life Ins. Co., 127 F.2d 880, 883 (1 Cir. 1942). Until such an election is made, it seems apparent under any standard that the insurer holds neither “property” nor “rights to property” to which a tax lien could attach but is simply the obligor to a broad-
This court‘s decision in United States v. Penn Mut. Life Ins. Co., 130 F.2d 495 (3 Cir. 1942) supports the position that the insured under an unmatured insurance policy of the present nature simply has a power of election with respect to the cash surrender value, that a lien can attach to the insured‘s policy rights including this power of election since the lien reaches intangible as well as tangible property, but that there is nothing held by the insurer before election, either tangible or intangible, to which the lien can additionally attach. See United States v. Massachusetts Mut. Life Ins. Co., supra; United States v. Mitchell, 210 F.Supp. 810 (S.D.Ala. 1962).
The Government, however, asserts that the Supreme Court‘s decision in United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958) compels a contrary interpretation. But the Bess case involved a clearly distinguishable situation, one in which a delinquent taxpayer who was the insured in various life insurance policies, died and the Government on the basis of a pre-existing tax lien on the taxpayer‘s interest in the policies, sought to impose liability on the beneficiary in the policies’ proceeds. Since the policies concerned had matured,
The instant question certainly was not directly before the Supreme Court in Bess since, as previously mentioned, the insurance policies in question in that case had matured. And from the above discussion it appears clear that the Court did not even imply in Bess that the tax lien attached to any specific property held by the insurers. Indeed, what relevant implication the Bess decision does contain for the case at bar, supports our present holding. We therefore fail to see any merit in the Government‘s position. We will now turn to a consideration of the specific issue presented in regard to policy loans.
II POLICY LOANS
The Government claims a right of recovery against Manufacturers regarding the company‘s two policy loans on the basis of the theory that the transactions in question created a creditor-debtor relationship between Manufacturers and Mrs. Sullivan and that Mrs. Sullivan‘s policy interest served as security for satisfaction of the obligation. If such a relationship was legally created, in view of the fact that the Government had a perfected lien on this same interest at the time of the transactions, and notwithstanding Manufacturers’ lack of actual notice of the Commissioner‘s claim at the critical times, it follows on the basis of priority of lien that no right of setoff for policy loans and interest thereon was allowable as against the Government. See Knox v. Great West Life Assur. Co., 109 F.Supp. 207 (E.D.Mich. 1952), aff‘d, 212 F.2d 784 (6 Cir. 1954); United States v. Royce Shoe Co., 137 F.Supp. 786 (D.N.H. 1956).
We are of the opinion, however, that the proper characterization of the status of Manufacturers with regard to the policy loan transactions both legally and functionally was that of debtor rather than that of creditor. Under the policy Mrs. Sullivan not only had the right to elect to cancel the policy and receive its cash surrender value but she also had the right to be granted policy loans to the extent of the cash value. At the time of the two policy loan requests, therefore, Manufacturers became specifically obligated to Mrs. Sullivan to the extent of the amounts demanded. And as to the particular sums themselves, Mrs. Sullivan was in no way bound or required to repay them, a failure in this regard simply serving to bring about a permanent reduction in the cash surrender value. In this most fundamental sense, therefore, the policy loan disbursements were compulsory advances pro tanto of the cash surrender value.25
The general rule that policy loans do not serve to create a creditor-debtor relationship but only suffice to discharge part of the insurer‘s ultimate policy obligation, was definitively and clearly established by Mr. Justice Holmes in Board of Assessors of the Parish of Orleans v. New York Life Ins. Co., 216 U.S. 517, 30 S.Ct. 385, 54 L.Ed. 597 (1910), a case
This general principle is seemingly uncontrovertible. Additionally, the present circumstance exemplifies a situation in which the application of the rule is particularly justified on policy grounds. In this regard we quote the following from the opinion of the court below, 203 F.Supp. at 13: “Evidence produced in the Kann case [a companion case properly consolidated and tried with the instant case, see note 2 supra] indicates that six of the seven defendant companies alone made 1,408,051 policy loans amounting to $455,298,956 during the year 1960. Insurance companies have no means of maintaining accurate up-to-date records of policyholders’ residence addresses and obviously have no means of knowing where the policy itself is located. A requirement that lien records of more than 3000 counties be searched in every instance in which a policyholder seeks to obtain a loan or the entire cash surrender value of a policy would pose tremendous problems.
“A survey made by one of the companies involved indicates that to make a search of lien records would cost approximately six dollars per search. The vast number of applications for loans and surrender values of policies are emergency in nature and as presently administered they represent a quick, certain way to secure funds urgently needed. Many companies pride themselves on twenty-four hour service; this would be extended if searches of the lien records of 3000 counties were required in every case. To conduct a search in any one county would require from three to five days. The inconvenience, delay and expense that would result to the millions of policyholders who apply for policy loans or cash values each year greatly exceed any interests the Government might possibly have in sustaining its position.”
The only arguable basis for adoption of the Government‘s approach, as also stated by the court below, 203 F.Supp. at 12, “is the form of the transactions, i. e., loans are carried as assets on the companies’ books, interest is charged and so reflected on the companies’ books, a Pennsylvania statute expressly permits policy loans to be used as an investment for insurance company capital and reserves, and policy loans are listed as assets of the companies in their reports filed with the insurance authorities of the states.” The court went on to state: “However, none of these factors compel a departure from this well-settled concept.
“On the contrary, the testimony in this case indicates that the accounting procedures are necessary to meet the solvency requirements of state law, that reserves must be computed upon the basis of certain specific actuarial assumptions which relate to the gross amount of insurance outstanding, age of the individuals, etc., that it is accordingly more convenient to treat advances as a separate item, that there is no obligation of repayment and that the interest charged merely represents what it is estimated the sum would have earned if it had not been advanced.”
Wholly apart from the fundamental canon that form should not be allowed to prevail over substance, there
The Government has not set out any other theory, nor can we conceive of any additional, reasonably arguable basis for holding Manufacturers accountable for the policy loan amounts inasmuch as these transactions were effectively consummated prior to the company‘s receipt of actual notice of the tax lien.26 It therefore follows that this part of the Government‘s appeal fails.
III AUTOMATIC PREMIUM LOANS
The most difficult aspect of the case at bar concerns the issue posed with regard to automatic premium loans. It is a question different in kind from that presented by policy loans where the operative status of the insurance contract was not in issue but simply the problem of when, as to sums validly coming due under the policy, a duty arises on the part of the insurer to act in a manner consistent with safeguarding the Government‘s interest. And in this regard we have held merely that no issue of duty and therefore accountability can arise as to transactions effectively consummated by the insurer prior to its reception of actual notice of the Commissioner‘s claim.
Actual notice in itself, however, does not provide any sort of basic test necessarily also applicable to and determinative of the instant question inasmuch as what is involved here is the effective status of the policies in light of the tax lien. Stated in a way which poses the problem, the lien on any debts brought about by the functioning of the automatic premium loan clauses is subject to those provisions’ further operational requirement that such amounts be applied to premium payment.27
The Government concedes the essence of the foregoing, that the mere attachment of the tax lien to Mrs. Sullivan‘s interest in the two policies could not effect per se the intrinsic operation of the policies and their automatic premium loan provisions, that the insurance contracts, including those clauses, remain in force until some legally effective step is taken against their operation by the Commissioner, and that until such time the insurers without risk on their part are entitled to effectuate automatic premium loans in accordance with the terms of their policies.
One such step, according to the Government, which suffices to render ineffective the automatic premium loan provisions of the policies, is the service of notice of levy upon the insurers. Specifically, the Government contends that notice of levy “is a formal notice to the insurer that the automatic premium loan provision is revoked”28 and constitutes a valid “demand under the terms of the contract for the cash surrender value.”29
Aetna and Manufacturers argue in substance, on the other hand, that the automatic premium loan provisions of the policies cannot be rendered inoperative and the cash surrender values cannot be demanded validly by levy upon the in-
The Government does not dispute the availability of the two remedies emphasized by the insurers. The disagreement between the parties is limited to the question of whether the Commissioner has the additional right to proceed directly against the insurers.
We have already indicated our view that policy loans are in substance advances pro tanto of the cash surrender value. This same conclusion applies just as readily regarding the characterization of automatic premium loans. It necessarily follows that no issue concerning priority of lien is involved in the instant problem. Rather the ultimate question posed is whether Aetna and Manufacturers are liable for the statutory “penalty” prescribed by
The basic levy provision of the
Preliminarily, it is necessary to emphasize that the instant issue relates to a general question of statutory construction, i. e., whether the Commissioner is empowered to exercise the contractual rights and powers of a delinquent-insured under an unmatured insurance policy,31 in particular, the right to demand the cash surrender value and the right to revoke the applicability of the automatic premium loan provision. In terms of the Code and in view of the nature of the issue presented, it is not possible to distinguish between these two rights, both of which it has been asserted the Commissioner validly exercised in the case at bar. The basic question posed is the same with regard to each: whether or not the Commissioner is unilaterally empowered to alter an existing tripartite contractual arrangement of the present nature, the two asserted rights simply representing respectively, the power to cancel the insurance contract in whole, as is discussed infra, and the power to cancel one particular clause.
Levy is a summary, non-judicial process, a method of self-help authorized by statute which provides the Commissioner with a prompt and convenient method for satisfying delinquent tax claims. See Bull v. United States, 295 U.S. 247, 259-260, 55 S.Ct. 695, 79 L.Ed. 1421 (1935). See also New Hampshire Fire Ins. Co. v. Scanlon, 362 U.S. 404, 407-408, 80 S.Ct. 243, 4 L.Ed.2d 826 (1960). Statutory levy is substantially broader in scope than anything known to the common law, and it is applicable to intangible as well as to tangible property. See Glass City Bank of Jeanette, Pa. v. United States, supra. When validly invoked, it effects a seizure of the delinquent‘s property tantamount to a transferal of ownership. See United States v. Eiland, 223 F.2d 118, 121 (4 Cir. 1955). The very nature and breadth of this somewhat drastic administrative process gives continued emphasis to its raison d‘être and serves to underscore the fundamental truth that “taxes are the lifeblood of government, and their prompt and certain availability an imperious need.” Bull v. United States, supra, 295 U.S. at 259, 55 S.Ct. at 699, 79 L.Ed. 1421.
It does not follow, however, that statutory levy was available to the Commissioner as against Aetna and Manufacturers in the circumstance at bar since no present obligation existed on the part of the insurers and the contractual arrangements in question were tripartite in nature. The levy provisions of the Code are essentially procedural and remedial in the sense that they provide the Commissioner with an optional alternative, when practicable, to the more cumbersome judicial foreclosure procedure supplied by
Additionally and more fundamentally, it appears obvious that if the Commissioner could with validity unilaterally acquire the cash surrender value of a delinquent-insured‘s policy by means of levy upon the insurer in the present type of circumstance, the necessary result of such action would be the termination of the policy and, with one clear exception noted below, all interests therein in just as conclusive a manner as if the insured himself or herself had been the demanding and receiving party.33 The application of the remedy of levy and distraint against insurers with respect to unmatured insurance contracts would be unique, therefore, in that such action would result in a fait accompli, the insurance contracts and the interests therein being extinguished.34
In our view, to interpret the statute as admitting of such a consequence would be to impute to statutory levy a substantive significance which never was contemplated by Congress and which indeed is rejected by strong implication in the statute itself.
Finally, in view of the nature of the problem at issue it is not readily apparent how a decision in favor of the Government in the case at bar could be realistically distinguished in terms of the statute from a situation in which an innocent (i. e., nondelinquent) third party is concerned as insurance beneficiary. And the parties to this appeal have tacitly assumed that the delinquent status of the beneficiary, Mr. Sullivan, under the instant policies was immaterial to the present question. Insurance involves complex intangible interests with the rights of beneficiaries inseparably interwoven with those of delinquent-insureds for the purpose at hand,37 a fact which
We are mindful of the consideration that legislation in aid of collection of Government revenues should be liberally construed and applied. There is obviously an imperative public interest in favor of the prompt collection of delinquencies. But manifestly it cannot be validly considered an overriding policy in any particular situation unless Congress has so demonstrated its intention. With regard to the present issue, the levy provisions on their face do not authorize the Commissioner to exercise the taxpayer‘s rights, nor do we think, for the sum
We cannot believe that it was the intention of Congress as manifested in the present levy provisions of the Code that the Commissioner be authorized to exercise the insured‘s rights in this delicate area, thereby sanctioning the disregard in practice of other more appropriate and substantially equivalent enforcement procedures which would better safeguard the rights of interested parties. Compare Meyer v. United States, 375 U.S. 233, 84 S.Ct. 318, 11 L.Ed.2d 293 (1963). Accordingly, we hold that the steps taken against Aetna and Manufacturers in the instant case were not legally effective to exercise Mrs. Sullivan‘s policy rights and that therefore until some other legally cognizable step was taken by the Government to avail itself of these powers, the insurers were under the duty to effectuate automatic premium loans in accordance with the terms of their policies and were not legally entitled to “surrender” to the Commissioner the policies’ cash surrender values. It follows that Aetna and Manufacturers cannot be held liable for the statutory “penalty” prescribed by
The Government argues finally regarding automatic premium loans and the cash surrender values that the date Aetna and Manufacturers were served with its complaint in the instant case is determinative of its rights. The action below was commenced on October 30, 1958 and both insurers were served with summons and complaint on November 5, 1958. Each of the insurers effected one of its two previously mentioned automatic premium loans subsequent to this time but prior to the dates of execution of the releases set out supra.
In our view commencement of suit and service of process in themselves were no more effective than notice of levy in serving as a revocation of the automatic premium loan provision of the policies and a demand for the cash surrender value. No sound legal basis has been advanced for a conclusion that the relationship between the parties to the insurance contract could be altered effectively by this means. Commencement of suit and service of process are of legal significance but only in that they serve to confer jurisdiction in the cause on the issuing court.40 On this basis it may well be that the Government thereafter could
We have considered the other points raised and are of the view that none requires discussion.
The Government was entitled to the cash surrender values of the Aetna and Manufacturers policies determined as of the dates of their surrender and release, and interest thereon from those times. The Government did not have the right to recover from the insurers the amounts of the policy loans and automatic premium loans with interest which were effected after recordation of lien and service of notice of levy respectively.41
The judgment will be affirmed.
HASTIE, Circuit Judge (dissenting in part).
In United States v. Bess, 1958, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135, the Supreme Court reasoned that the right of an insured to the cash surrender value of an unmatured life insurance policy is a “right of property” to which a federal tax lien under section 3670 of the Internal Revenue Code attaches. While the litigation in that case occurred after the death of the insured, the Court‘s reasoning was that the insured “possessed just prior to his death, a chose in action in the amount stated [i. e., the cash surrender value] which he could
Moreover, since the policy was not surrendered during the lifetime of the insured, I think the Bess case holds, by necessary implication, that such surrender is not prerequisite to the government‘s acquisition of a lien upon the cash surrender value. United States v. Brody, D.Mass. 1963, 213 F.Supp. 905.
In the present case, the government‘s general tax lien covered the rights of the insured in the policies in suit, but without particularizing among various alternative rights accorded the insured under the terms of the policies. However, when the United States, acting pursuant to
On the other hand, I agree with the majority that the policy loans made to the insured for premium payments before service of notice of levy upon the insurer were not precluded by the general lien of the United States upon all property of the taxpayer. For the policy remained fully operative with premiums becoming due and with options available to the insured in connection with the obligation to pay premiums. The government had not indicated to the insurer what right, if any, it would assert, or when, among the complex of alternative rights the insured could claim under the policy. Therefore, the making of a premium loan under the terms of the policy could not reasonably be viewed as action inconsistent with the general tax lien. It was not until the notice of levy was served upon the insurer that the United States made a meaningful assertion of an election to claim the amount to which the insured was then entitled, namely, the cash surrender value.
I would measure the government‘s rights against each insurer by the cash surrender value of its policy at the time when notice of levy and demand was served upon it.
Notes
“(a) Filing. In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary or his delegate, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability.
“(b) Parties. All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.
“(c) Adjudication and decree. The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States.
“(d) Receivership. In any such proceeding, at the instance of the United States, the court may appoint a receiver to enforce the lien, or, upon certification by the Secretary or his delegate during the pendency of such proceedings that it is in the public interest, may appoint a receiver with all the powers of a receiver in equity.”
“(a) Invalidity of lien without notice. Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector—
“(1) Under State or Territorial laws. In the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory; * * *”
The corresponding provision of the
“Dividends shall be determined by the Company and shall be
“(1) Paid in cash, or
“(2) Applied to the payment of any premium or premiums, except that if the policy is paid up the dividend shall be paid in cash, or
“(3) Applied to the purchase of participating paid-up additions to the policy, payable at the date of maturity or at the prior death of the insured, or
“(4) Left with the Company to accumulate at a rate of interest not less than two per cent. compounded annually, but no interest shall accrue after default in payment of any premium and no premium shall be considered paid by reason of dividends so remaining with the Company. Accumulated dividends with interest, but less any indebtedness secured thereby under this policy, may be withdrawn on demand at any time, unless previously applied in accordance with the provisions of Section 8 [the non-forfeiture provision discussed infra]. Accumulated dividends with interest earned during the continuance of this policy shall be payable at the date of maturity or at the prior death of the insured if not previously withdrawn.
“Any paid-up additions or accumulated dividends available at the date of maturity may be applied to increase the monthly income specified on the first page hereof in the same proportion as such paid-up additions or accumulated dividends bear to the cash value on said date.
“Under the second option and upon default in premium payment, no premium shall be construed as being paid by reason of any unpaid dividend, but any unpaid portion of the dividend shall become payable in cash, unless cash values are available according to Table A, in which event such dividend shall be applied as provided in Section 8 of this policy.
“The second of the above four options shall be used if no other option has been elected in writing.
“In the settlement of a death claim hereunder there shall be paid a dividend for that portion of the policy year in which death occurs for which premiums have been paid.”
“5. CASH VALUES, PAID-UP INSURANCE, EXTENDED TERM INSURANCE. The cash value referred to throughout this policy shall be determined in accordance with the Method of Computation of Non-forfeiture Benefits stated on the last page hereof.
“(1) Upon surrender of this policy with a discharge therefor after it has a cash value, the Company will pay the cash value at the date of surrender less all indebtedness, but if the date of surrender is within sixty days after a premium due date, the cash value shall be
“The Company may defer the payment of a cash value under the terms of this provision for a period of six months from the date of receipt of the application for such cash value.
“(2) Upon receipt of a written request after this policy has a cash value and within sixty days after the due date of any premium in default, the Company will grant one of the following options, calculated as if the said premium had not yet fallen due:
“(a) The Company will continue this policy as participating paid-up insurance payable in one sum, free from any existing indebtedness, for a reduced amount determined in accordance with the Method of Computation of Non-forfeiture Benefits and will endorse the policy accordingly; or
“(b) The Company will continue this policy as non-participating extended term insurance, free from any existing indebtedness and without the right to loans. The amount of the extended term insurance shall be the sum insured shown on the first page hereof less all indebtedness. The period for which such extended term insurance will run shall be determined in accordance with the Method of Computation of Non-forfeiture Benefits.
“Except as otherwise provided, such paid-up insurance or extended term insurance shall be subject to the same terms and conditions as the original policy.
“Any paid-up policy or any policy continued as extended term insurance may be surrendered within thirty days after any policy anniversary, and the Company will pay a cash value determined in accordance with the Method of Computation of Non-forfeiture Benefits.
“If option (2) (a) has not been chosen, option (2) (b) shall become effective automatically upon the expiry of the days of grace allowed for payment of the premium in default unless the Insured has requested that the Automatic Premium Loan provision be operative.
“6. LOANS. After this policy has a cash value, the Company will loan, upon the sole security of this policy, an amount not greater than the cash value less all indebtedness. The loan will be granted upon completion of the Company‘s loan agreement and the policy will be returned to the borrower after endorsement.
“No loan will be granted while this policy is being continued as extended term insurance.
“The Company may defer the granting of a loan (other than a loan to pay premiums on one of its policies) under the terms of this provision for a period of six months from the date of receipt of the application for such loan.
“7. AUTOMATIC PREMIUM LOANS. This policy shall not lapse for non-payment of any premium so long as the cash value exceeds all indebtedness. The Company will, without further request, loan the whole of any premium and continue this insurance in force for the period until the next premium due date if, at the end of such period the cash value would exceed the indebtedness. If at the end of such period the indebtedness would exceed the cash value, the Company will loan a proportion of the premium and continue this insurance in force for the same proportion of the period. Such proportion shall be determined by dividing the cash value immediately prior to the due date of the premium in default less the indebtedness by the sum of such cash value so adjusted and the amount by which the indebtedness would exceed the cash value at the end of the current premium period if the whole of the premium had been loaned. If prior to the expiration of such proportionate period, the premium in default be not paid in full, all liability of the Company on this policy shall thereupon terminate.
“‘This provision shall become operative if requested in the application for the policy or elsewhere in writing and will be discontinued on the written request of the Insured.
“8. LOAN CONDITIONS. Interest at the rate of five per cent. per annum compounded annually will be charged on all loans made under the preceding provisions. All amounts so loaned, and interest thereon shall be a first lien on this policy in the Company‘s favour in priority to the claim of any assignee or any other person. If at any time the total indebtedness shall exceed the cash value, all liability of the Company on this policy shall terminate, but unless this policy lapses because a premium in default is not paid, this policy shall not terminate until thirty-one days after notice shall have been mailed to the last known address of the Insured (and of the assignee, if any).
“Wherever the word indebtedness is used in this policy it shall include interest accrued to date.”
“(b) Seizure and sale of property.—The term ‘levy’ as used in this title includes the power of distraint and seizure by any means. In any case in which the Secretary or his delegate may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible).
“(c) Successive seizures. Whenever any property or right to property upon which levy has been made by virtue of subsection (a) is not sufficient to satisfy the claim of the United States for which levy is made, the Secretary or his delegate may, thereafter, and as often as may be necessary, proceed to levy in like manner upon any other property liable to levy of the person against whom such claim exists, until the amount due from him, together with all expenses, is fully paid.”
Section 6332 provides in pertinent part as follows: “(a) Requirement.—Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary or his delegate, surrender such property or rights (or discharge such obligation) to the Secretary or his delegate, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.
“(b) Penalty for violation. Any person who fails or refuses to surrender as required by subsection (a) any property or rights to property, subject to levy, upon demand by the Secretary or his delegate, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes for the collection of which such levy has been made, together with costs and interest on such sum at the rate of 6 percent per annum from the date of such levy. * * *”
While technically, the present action is simply one of lien foreclosure, nevertheless inasmuch as the operative facts are clear, a fundamental question of law is presented, and the parties have fully argued this issue in substance, we deem it appropriate to decide the question.
“(a) The trustee of the estate of a bankrupt and his successor or successors, if any, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this title, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located. * * * (3) powers which he might have exercised for his own benefit, but not those which he might have exercised solely for some other person; * * * (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered * * *.”
“(a) Before sale. —Any person whose property has been levied upon shall have the right to pay the amount due, together with the expenses of the proceeding, if any, to the Secretary or his delegate at any time prior to the sale thereof, and upon such payment the Secretary or his delegate shall restore such property to him, and all further proceedings in connection with the levy on such property shall cease from the time of such payment.
“(b) Redemption of real estate after sale.—
“(1) Period. —The owners of any real property sold as provided in section 6335, their heirs, executors, or administrators, or any person having any interest therein, or a lien thereon, or any person in their behalf, shall be permitted to redeem the property sold, or any particular tract of such property, at any time within 1 year after the sale thereof.
“(2) Price. —Such property or tract of property shall be permitted to be redeemed upon payment to the purchaser, or in case he cannot be found in the county in which the property to be redeemed is situated, then to the Secretary or his delegate, for the use of the purchaser, his heirs, or assigns, the amount paid by such purchaser and interest thereon at the rate of 20 percent per annum.
“(c) Record. —When any lands sold are redeemed as provided in this section, the Secretary or his delegate shall cause entry of the fact to be made upon the record mentioned in section 6340, and such entry shall be evidence of such redemption.”
Ҥ 6335. Sale of seized property
“(a) Notice of seizure. —As soon as practicable after seizure of property, notice in writing shall be given by the Secretary or his delegate to the owner of the property (or, in the case of personal property, the possessor thereof), or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address. Such notice shall specify the sum demanded and shall contain, in the case of personal property, an account of the property seized and, in the case of real property, a description with reasonable certainty of the property seized.
“(b) Notice of sale. —The Secretary or his delegate shall as soon as practicable after the seizure of the property give notice to the owner, in the same manner as that prescribed in subsection (a), and shall cause a notification to be published in some newspaper within the county wherein such seizure is made, or, if there be no newspaper published in such county, shall post such notice at the post office nearest the place where the seizure is made, and in not less than two other public places. Such notice shall specify the property to be sold, and the time, place, manner, and conditions of the sale thereof. * * *
“(c) Sale of indivisible property. —If any property liable to levy is not divisible, so as to enable the Secretary or his delegate by sale of a part thereof to raise the whole amount of the tax and expenses, the whole of such property shall be sold.
“(d) Time and place of sale. —The time of sale shall not be less than 10 days nor more than 40 days from the time of giving public notice under subsection (b). The place of sale shall be within the county in which the property is seized, except by special order of the Secretary or his delegate.
“(e) Manner and conditions of sale. —
“(1) Minimum price. —Before the sale the Secretary or his delegate shall determine a minimum price for which the property shall be sold, and if no person offers for such property at the sale the amount of the minimum price, the property shall be declared to be purchased at such price for the United States; otherwise the property shall be declared to be sold to the highest bidder. In determining the minimum price, the Secretary or his delegate shall take into account the expense of making the levy and sale.”
Of course, if the Commissioner elected to proceed by judicial foreclosure under
Inasmuch as no question is raised in the instant case regarding proper jurisdiction over the parties in the foreclosure action below, the issue of the mode of service of process on the insured which would suffice to vest a court with power to deal effectively with the insurer‘s obligation, is not before us. We do not view our present opinion as being dispositive of this question. See note 39 supra. It is one thing to reason that the Commissioner is not empowered to act effectively against insurers in the present situation, quite another to conclude that a court in a proper circumstance with jurisdiction over the insurer, is similarly limited. See and compare United States v. Brody, 213 F.Supp. 905 (D.Mass. 1963).
The four other cases are as follows: United States v. Kann, at our No. 14,092; United States v. Wilson, Massachusetts Mutual Life Insurance Company, Appellant, at our No. 13,858; United States v. Wilson, Travelers Insurance Company, Appellant, at our No. 13,859; and United States v. Bankers National Life Insurance Company, at our No. 13,957.
The “Tabulation” was prepared and submitted at the direction of this court. It was not before either of the courts below. This court, of course, cannot supplement the record and use as a basis for its decision any factual material which was not before the courts below at the times of the trials. We believe, however, that we have decided the five cases on operative facts in the respective records.
The “Tabulation” is attached for such aid as it may afford the Supreme Court should certiorari be granted and if certiorari be not granted, the items contained in the “Tabulation” may be stipulated into the respective records upon the new trials in the court below of the cases required to be sent back for further proceedings. The “Tabulation” attached to the opinion in this case shall be deemed to be an appendix to each of the opinions in the other four cases. In case of variances between the dates as set out in the opinions of this court and the dates as listed in the “Tabulation,” the former are, of course, to be considered determinative for the purpose of our adjudications. But what we have said is not intended to prohibit the United States District Court for the District of New Jersey upon remand of the two cases designated hereinafter, from determining any actual pertinent date or dates and making necessary findings of fact in respect thereto. The two cases are United States v. Wilson, Massachusetts Mutual Life Insurance Company, Appellant, supra, and United States v. Wilson, Bankers National Life Insurance Company, supra. We have found but one significant discrepancy as will appear on examination of the last paragraph in note 15 in our opinion in United States v. Wilson, Massachusetts Mutual Life Insurance Company, Appellant, supra.