Annotations- Insurance Policy 1 Page 2

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[Extended Insurance]

With respect to the Mutual Benefit Life policy, however, the problem is more complicated. The government contends for the maximum cash and dividend value of the Mutual Benefit Life policy that accrued on or after receipt of actual notice by the company of the government's tax liens undiminished by any charges made by the company against the "cash surrender fund" after it received such notice. This policy is a straight life insurance contract with the usual non-forfeiture provisions which call for the automatic extension "from the date of default in Premium payments for a sum equal to the amount of the Policy and existing Dividend Additions, if any, less any indebtedness to the Company hereon." This non-forfeiture clause was honored by the company after receipt of notice of the federal tax liens when, on October 6, 1961, the taxpayer failed to pay the premium that was then due. Pursuant to this clause, the accumulated dividends have been exhausted by extending the insurance on the taxpayer and, since October 6, 1961, the available cash surrender value has been reduced by reason of its application in accordance with the provisions of the contract to provide extended insurance for a term that the "Cash Surrender Value will purchase at Net Single Premium rates." The issue then is whether the company can permit the diminution of the "Cash Surrender Value", after actual notice of that lien, so as to impair the cash surrender value of the policy under the government's tax lien by applying against the fund charges for continued term insurance required by the non-forfeiture clause of the policy.

The company contends that the "cash surrender fund" does not become property or right to property ¹ of the taxpayer within the meaning of §3670 until the insured's right to compel the surrender of the cash value is exercised voluntarily or by foreclosure. The contention of the government is that service of notice of its lien upon the insurer operated to impose a duty upon the insurer to retain the property under its lien. It argues that since the company had been served with notice of the lien, ² it should be held accountable for the specific amount of cash surrender value which became fixed as of October 6, 1961, when the taxpayer defaulted in the payment of a premium then due.

I find it unnecessary to re-plow the extensive legal and equitable grounds which the defendant insurer presents in support of its argument that no rights of the taxpayer under the policy can become fixed other by surrender of the policy to it or by court decree, for all of these were thoroughly tilled recently by the Court of Appeals for the Third Circuit sitting en banc in United States v. Sullivan [64-1 USTC ¶9392], 13 A. F. T. R. 2d 1178 (1964), affirming [62-1 USTC ¶9245] 203 F. Supp. 1 (W. D. Pa. 1962). ³ The issues in that case concerned the fundamental problam of the means by which the Commissioner can realize upon a policyholder's rights against an insurance company and the interrelated question of the proper measure of the Commissioner's recovery. It was held in that case that insurers of delinquent taxpayers did not become obligated even by the Commissioner's levy and demand to pay over to the government the cash surrender value of the policies as of that time, and that the levy did not effectuate revocation of the policy's automatic premium loan clauses. ⁴

[Enforcement of Lien]

Either levy upon the insurance policy itself or judicial foreclosure would need to be pursued and perfected before payment could be compelled. It is a generally accepted view that since "the federal tax lien is entirely statutory . . . its scope and effect are to be determined solely by the statute and the decisions interpreting it." MacKenzie v. United States [40-1 USTC ¶9229], 109 F. 2d 540 (9th Cir. 1940). See also In Re Halprin [60-2 USTC ¶9564], 280 F. 2d 407, 409-10 (3d Cir. 1960); Fidelity & Deposit Co. v. New York City Husing Authority [57-1 USTC ¶9410], 241 F. 2d 142, 144 (2d Cir. 1957). The mere attachment of the lien did not affect the nature of the encumbered property; it only attaches to property as it finds it. United States v. Sullivan, supra, 13 A. F. T. R. 2d at 1186; United States v. Aetna Life Ins. Co. [42-1 USTC ¶9266], 46 F. Supp. 30 (D. Conn. 1942). As expressed in Sullivan, supra, 13 A. F. T. R. 2d at 1196 "The policy remained fully operative with premiums becoming due and with options available to the insured in connection with the obligation to pay premiums." ⁵ Congress has provided specific means for enforcing a federal tax lien. Int. Rev. Code of 1954, §7403, 68A Stat. 874, 26 U. S. C. §7403 (1958). Especially where conflicting claims must be reconciled, the Supreme Court would seem to require that such means be employed: "Once a federal lien attaches to the insured's interest, of course, the Government, in a proper action joining the appropriate parties, can enforce the lien in the insured's lifetime and thereby recover the cash surrender value." United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 57, n. 2, 78 S. Ct. 1054, 2 L/Ed. 2d 1135 (1958) (Italics added).

The denial of the power to administratively severely dislocate property relationships created by consensual agreement between the parties, cf. United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 242, 80 S. Ct. 1108, 4 L. Ed. 2d 1192 (1960), does not leave the Commissioner helpless. He may proceed under §7403 to enforce the government's lien. Once such an action is begun he may apply for an appropriate order to safeguard the "cash surrender values." This procedure has much to commend it. In addition to fully protecting the government's rights, it safeguards the interests of the beneficiaries, who as parties to the insurance contract as distinguished from competing lienors, cf. Fidelity & Deposit Co. v. New York City Housing Authority, supra, [57-1 USTC ¶9410] 241 F. 2d 142, may have a stake in the completion of the contract. That is strongly evidenced in this case by continuation of premium payments by Mrs. McWilliams. Cf. Aetna Cas. & Sur. Co. v. Port of New York Authority [60-1 USTC ¶9372], 182 F. Supp. 671 (S. D. N. Y. 1960); First Nat'l Bank v. City of New York [59-2 USTC ¶9639], 177 F. Supp. 175 (S. D. N. Y. 1959). And, it fixes the responsibility of the insurer so that it is not required to risk the uncertainties of several alternative claims such as are asserted here, namely that "cash value" is determined (1) as of the day the insurer receives notice of lien; (2) as of the date of demand; (3) as of the date suit is commenced; or (4) as of the date the policy would have lapsed because of non-payment of premiums.

Regardless of which approach the United States takes, either that its lien attached to the taxpayer's rights in the policy or that it attached to the obligation of the insurance company to honor those rights, the contractual conditions upon those rights and obligations provided for by the consensual arrangement of the parties as embodied in the policy of insurance continued to be operative until the government became the owner of the policy by voluntary assignment or pursuant to a decree in a proceeding to enforce its lien under §7403. The lien did not have the effect of assigning the policy; and notice of the lien did not have the effect of a demand for payment of the cash surrender value.

The argument that commencement of the suit was effective to fix the time when the government's right to demand payment was exercised was rejected by the court in Sullivan as being without merit. I am of the same opinion. The insurance contract obligated the insurer to keep the insurance protection alive whether premiums were paid or not. If some one continued to pay premiums, the "cash value" would be increased; if they were not continued, it would be decreased. The government recognizes that it could have applied for a blanket restraining order barring all parties from taking any steps to affect the status quo of the rights under the policy. That is what it should have done at an earlier time if it wanted the various interests fixed as of that time.

Conclusions

There is no genuine issue as to any material fact. The lien of the United States upon all property or rights to property of John D. McWilliams by virtue of the tax assessments described in the complaint is superior to any rights claimed by Ethel McWilliams and Elizabeth McWilliams in those insurance policies. It is not necessary to appoint a receiver or decree a sale of the insurance policies, for nothing more can be realized by a sale than by their surrender to the insurance companies.

1. The United States is entitled to recover the unpaid balance of the withholding and F. I. C. A. taxes for the third and fourth quarters of 1947 and interest and lien fees thereon against John D. McWilliams.

2. The prayer of the United States for the foreclosure of its lien upon the aforesaid policies should be granted.

3. The United States is entitled to a judgment decreeing that each of the defendant insurance companies, respectively, pay to the United States the value of the respective interests, property and rights to property of John D. McWilliams in and to the aforesaid policies.

4. After the sum representing the value of those interests has been applied against the taxes, penalties and interest assessed against John D. McWilliams, the United States shall be entitled to a judgment against McWilliams for such taxes as thereafter may remain due against him.

5. The defendant insurance companies, Mr. McWilliams, and the United States shall agree by not later than July 30, 1964, upon the value of the interest of Mr. McWilliams in each of said policies as of August 20, 1964.

6. Notice of the respective values agreed upon shall be served upon each of the other parties by the government on or before August 10, 1964. In default of payment of the amounts so determined to the United States on or before August 20, 1964, the lien of the United States may be enforced, and John D. McWilliams and all persons claiming under, by or through him may be forever barred and foreclosed of all equity or interest in and to said policies.

7. Judgment shall be held in abeyance until September 1, 1964.

8. The government is directed to prepare and submit a decree showing the effect, in dollars and cents, of the decision rendered by this court by September 1, 1964.

9. The decree shall provide that payment by the respective insurers of the agreed values shall have the effect of a surrender of the policies to the respective insurance companies, and a cancellation and termination of any and all rights which John D. McWilliams, Ethel McWilliams and Elizabeth McWilliams have therein against the insurance companies.

¹ For a thorough spectrum of relationships dealing with rights to compel payment as "property" to which the federal tax lien may attach see Note, 77 Harv. L. Rev. 1485 (1964).

² Formal notice was served on Connecticut Mutual Life Insurance Company January 29, 1957. There is no statutory provision for service of notice of the existence of a tax lien on the policy of an insured. No issue is raised as to the necessity for, or the adequacy or timeliness of such notice. Cf. Int. Rev. Code of 1954, §6323(c), 68A Stat. 779, 26 U. S. C. §6323(c) (1958), which requires notice only to bind a bona fide purchaser of "securities." And see United States v. Aetna Life Ins. Co. [42-1 USTC ¶9266], 46 F. Supp. 30, 34 (D. Conn. 1942).

³ On the same say, April 10, 1964, the same court decided several other cases on the basis of the same opinion. The other cases are United States v. Wilson [64-1 USTC ¶9396], 13 A. F. T. R. 2d 1197, reversing and remanding, [61-2 USTC ¶9693]195 F. Supp. 332 (D. N. J. 1961); United States v. Kann, affirming per curiam, [62-1 USTC ¶9245] 203 F. Supp. 1 (W. D. Pa. 1962); United States v. Bankers Nat'l Life Ins. Co. [64-1 USTC ¶9394], 13 A. F. T. R. 2d --, reversing and remanding per curiam, [62-1 USTC ¶9752] 198 F. Supp. 727 (D. N. J. 1961).

⁴ In this case, the government seeks to draw a distinction between the automatic premium loans obtained by the insured in Sullivan, the proceeds of which were applied to premium payments, and the automatic operation of the non-forfeiture provision in this case. The reason for the possible difference this might have made to the court in Sullivan, 13 A. F. T. R. 2d at 1183, n. 15, does not exist here. In Sullivan, the non-forfeiture provision provided for an automatic conversion into non-participating extended term insurance. The non-forfeiture provisions in Mutual Benefit Life's policy provides: "The Paid-Up Policy or the Extended Insurance will participate in surplus and will be entitled to Cash Surrender Values equal to the reserve thereon at the time of surrender, less any indebtedness to the Company thereon." (Emphasis added.) The Mutual Benefit Life's policy contract disdains the "premium loan" technique to keep the policy alive.

⁵ Although the quoted portion is found in the dissenting opinion of Judge Hastie he specifically noted his agreement with the majority on this point.

 

[64-1 USTC ¶9393]United States of America, Appellant v. William L. Kann, William L. Kann, Executor of the Estate of Stella H. Kann, deceased, New England Mutual Life Insurance Company, Northwestern Mutual Life Insurance Company, Lincoln National Life Insurance Company, Prudential Insurance Company of America, New York Life Insurance Company, The Equitable Life Assurance Society of the United States, Manufacturers Life Insurance Company, Penn Mutual Life Insurance Company, Guaranty Trust Company, William L. Kann, Stanley Kann and I. A. Diamondstone, Trustees, Pittsburgh Crushed Steel Company, William L. Kann, Jr., Elise K. Goldman, Betty K. Wilson and Robert M. Kann, Additional Defendants

(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 14,092, 333 F2d 146, 4/10/64, Affirming District Court, 62-1 USTC ¶9245, 203 F. Supp. 1

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

One dissent.

J. B. Jones, Jr., J. Kovner, Dept. of Justice, (L. F. Oberdorfer, Ass't Attorney Gen eral, L. A. Jackson, M. A. Mulroney, Dept. of Justice, J. S. Ammerman, G. Diamond, U. S. Attorneys, T. J. Shannon, Ass't U. S. Attorney, Pittsburgh, Pa., on brief), for appellant. A. Black, Pittsburgh, Pa., (Buchanan, Ingersoll, Rodewald, Kyle & Buerger, Pittsburgh, Pa., V. Booth, Boston, Mass., E. M. Jones, E. R. Harnedy, New York Life Insurance Co., New York, N. Y., T. G. Thornbury, Legal National Life Insurance Co., Fort Wayne, Ind., on brief), for New England Mutual Life Insurance Co., New York Life Insurance Co., Lincoln National Life Insurance Co.; T. L. Jones, Pittsburgh, Pa. (R. C. Witt, Pittsburgh, Pa., E. T. O'Neill, S. A. McCarthy, M. F. Denenholz, R. A. Kagan, Equitable Life Assurance Society, New York, N. Y., on brief), for Equitable Life Assurance Society; G. J. Helwig, Pittsburgh, Pa. (J. T. Fort, Pittsburgh, Pa., H. Fisher, Newark, N. J., E. H. McVitty, Toronto, Can., G. M. Swanstrom, Milwaukee, Wis., on brief), for Manufacturers Life Insurance Co., Northwestern Mutual Life Insurance Co., Prudential Insurance Co., appellees. K. M. Worthy, G. L. Archer, Jr., 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.

Opinion of the Court

PER CURIAM:

This appeal presents the same issues as those decided today in United States v. Sullivan [64-1 USTC ¶9392], -- F. 2d --, and United States v. Wilson, Massachusetts Mutual Life Insurance Company, Appellant [64-1 USTC ¶9395], -- F. 2d --, i.e., issues relating to automatic premium loans and policy loans. We resolve these issues here as we did in the cases just cited.

It is unnecessary to set out the facts of the instant appeal for they appear sufficiently in the opinion of the court below, reported at [62-1 USTC ¶9245] 203 F. Supp. 1 (1962), and in the "Tabulation of Information re Life Insurance Policies" which is appended to the Sullivan opinion and which is incorporated in this opinion by reference. It must be borne in mind that those portions of the "Tabulation" which are enclosed by parentheses cannot be found in the records of the respective cases. As with United States v. Sullivan, supra, however, sufficient facts appear of record in the instant case to make possible a final disposition of the present controversey.

For the reasons set forth in the Sullivan and Massachusetts Mutual opinions, the judgment is correct and consequently will be affirmed.

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

 

[65-2 USTC ¶9477]United States of America, Plaintiff v. J. J. Daily, d/b/a J. J. Daily Company; Fern P. Daily; Connecticut Mutual Life Insurance Company, a corporation Defendants

U. S. District Court, West. Dist. Mo. , West. Div., No. 14287-3, 243 FSupp 735, 4/22/65

[1954 Code Sec. 6321]

Lien for taxes: Cash surrender value of life insurance policy: Automatic premium loans.--A lien for taxes did not attach to the automatic premium loans used by the company to pay premiums due on the policies. The automatic premium loans served to reduce the cash surrender value, not to create a creditor-debtor relationship, and the Government could not hold the insurer accountable for the automatic premium loans. Sullivan, (CA-3) 64-1 USTC ¶9392, followed.

F. Russell Millin , United States Attorney, Clifford M. Spottsville, Assistant United States Attorney, Kansas City , Mo. , for plaintiff. Spencer, Fane, Britt & Browne, 1000 Power & Light Bldg., Kansas City, Mo., for Conn. Mutual Life Ins. Co., defendant.

Memorandum and Order Overruling Plaintiff's Motion for Summary Judgment, and Sustaining "Motion of Defendant Connecticut Mutual Life Insurance Company for Entry of Judgment Settling its Liability to Plaintiff".

DUNCAN, District Judge:

Plaintiff instituted this suit under the provisions of §§ 7401, 7403 Internal Revenue Code of 1954, in which it was alleged that the District Director of Internal Revenue at Kansas City, Missouri, made assessments of 1961 excise and withholding taxes, interest and penalties against defendant J. J. Daily, for the year 1961 and the fourth quarter of 1962. The amount, together with interest and penalties was $4,279.05.

It was further alleged in the Complaint that the defendant, Connecticut Mutual Life Insurance Company, issued certain policies of insurance on the life of J. J. Daily, and that under the terms of the policies, Daily had the right to change the beneficiary thereof and could demand and receive the cash surrender value of the two policies.

It was further alleged that the cash surrender value of the combined policies at the time of filing of the liens, was $3,998.04, and that as of the time of the surrender of the policies on March 12, 1962, the cash surrender value and dividends payable on surrender of the policies was $2,130.86.

Plaintiff asks the court to decree that the defendant J. J. Daily has property and rights to property in each of the policies, including the right to receive the cash surrender value of each of the policies, and that the United States have a valid and subsisting prior lien in the sum of $4,279.05 together with interest according to law.

Plaintiff further requested the court to decree that the United States is entitled to enforce its lien against the defendant J. J. Daily by foreclosure upon the cash surrender value of the policies of life insurance upon his life, and "that the Court enter an order directing and requiring the defendant J. J. Daily to deposit forthwith in the custody of the Court, each and all of the policies of life insurance upon his life", and that "the Court further order and require defendant J. J. Daily to forthwith inform the Court of the present whereabouts of any and all of the said policies, of life insurance that are not in his possession, custody or control".

It was also the prayer of the Complaint "that the Court enter the further order directing and requiring that the defendant Connecticut Mutual Life Insurance Company pay and remit to the United States the amount of the cash surrender value of each and all of said policies as determined by the Court".

In its Answer the defendant Connecticut Mutual Life Insurance Company admitted "that on March 12, 1962 a Notice and Levy was served upon it, in which demand was made for the sum of $4,389.13, or for such lesser sum as defendant may be indebted to defendant J. J. Daily, and defendant admits that it failed and refused to pay over any sum, * * *."

It was further alleged in the Answer "that defendant J. J. Daily has not made demand for the cash surrender value of said policies, and therefore no sum is or has been due Daily from this defendant."

On December 9, 1963, the court entered default judgment against defendant J. J. Daily, doing business as J. J. Daily Company and Fern P. Daily, in the principal sum of $4,265.30 plus interest at the rate of 6% per annum (amounting to $553.59 as of December 9, 1963, and continuing to accrue thereafter at the rate of $0.71 per day).

Thereafter, on April 14, 1964, the court entered an order that:

"defendant J. J. Daily is hereby ordered and required to deposit within ten days of the service of this order on him to the custody of the Court, each and all policies of life insurance on his life, or that defendant J. J. Daily is ordered to forthwith inform the Court of the present whereabouts of any and all said policies that are not in his possession, custody and control, * * *."

Pursuant to that order, the defendant did surrender to the Government the insurance policies referred to in the order.

The matter is now before this court for disposition on Stipulation. ¹ (Caption omitted)

The question for determination by this court is whether or not the insurance company is liable under the terms of its policies for the amount of the cash surrender value as of the date of the filing of the levy, or as of the time when the policies were delivered for cancellation.

Each of the policies "was of the low premium type wherein the amount of the premium exceeded the actuarially predicted mortality expense of the company in the early years of the policy, being designed to create certain reserve or non-forfeiture values in each of the policies." Each of the policies contained a provision for the use of such reserve or non-forfeiture values for premium loans. The provision of each policy was:

"If written application be filed at the Home Office of the Company upon its form therefor while this Policy is a premium-paying policy, and if such application remains unrevoked, the amount of any premium falling due after the first policy year following the Date of Expiration of Initial Term Insurance and not otherwise paid as herein provided will be charged as an indebtedness against and secured by this Policy, provided the entire indebtedness hereon including such charge shall not exceed the limit secured by the Cash Value hereof; such indebtedness to bear interest from the due date of such premium, and to be subject to the terms herein provided for policy loans, but without assignment or delivery of this Policy, and any premium so charged will be treated as paid."

It is stipulated that "At all relevant times, insured maintained on file with defendant company applications for premium loans, mentioned in the foregoing paragraph."

Between the time of the filing of the levy on November 17, 1961 and December 28, 1961 and March 7, 1962 and March 12, 1962, when the policies were surrendered to the company, the company, in accordance with the provisions of its policies, had charged as indebtedness against the cash surrender value of the policies, the difference between the value at the time of the levy and the time of the surrender of the policies. This difference was $1,867.18.

It is the Government's contention that after the levy was filed, the company had no right to convert any part of the cash surrender value to the continuation of the life of the policies. This question has been before the courts in numerous cases, and in each instance the ruling of the court has been adverse to the present contention of the Government.

In United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 122, decided April 10, 1964, the Third Circuit had the identical question before it, and in a very exhaustive opinion by Chief Judge Biggs, every conceivable question that could be raised in the case, was raised, discussed and determined. The concluding paragraph of Judge Biggs' opinion states:

"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."

Judge Hastie of that court, in a dissenting opinion, disagreed with the majority opinion and contended that the filing of the lien terminated all further rights of the insurer to apply any part of the cash surrender value to the payment of premiums under the provisions of the policy, and cited United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51. The majority opinion also discussed at considerable length the Bess case and came to the conclusion that the facts in that case were not controlling. I agree with the majority opinion in that respect.

The identical question was also before the District Court in United States v. Salerno [64-1 USTC ¶9130], 222 F. Supp. 665. Judge Thompson, District Judge, stated at 1. c. 671:

"We agree generally with the conclusion of the Courts in United States v. Mitchell, D. C., [62-2 USTC ¶9802] 210 F. Supp. 810, and United States v. Sullivan, D. C. [62-1 USTC ¶9245] 203 F. Supp. 1, and particularly the holdings that the insurance company has the right and power to perform the obligations of the insurance contracts after actual notice of the federal tax lien and even after levy and demand under 26 U. S. C. §§ 6331 and 6332, thus reducing or impairing the property right against which the lien attached, and leaving only the cash value at the time of foreclosure existent as security for the tax liability."

While the opinion in the Sullivan case, and the other cases outside our circuit, are not binding upon this court, they are at least most persuasive. In view of the careful consideration of the identical factual situation in the Sullivan case, we feel constrained to follow it.

Plaintiff's Motion for Summary Judgment is therefore overruled, and the "Motion of defendant Connecticut Mutual Life Insurance Company for entry of judgment settling its liability to plaintiff" is sustained, and judgment is rendered against it in the sum of $1,682.03, with interest from May 8, 1964, when the cause arose. It is so ordered!

¹

"STIPULATION

"It is hereby stipulated and agreed by and between the United States of America, by Clifford M. Spottsville, Assistant United States Attorney, and Connecticut Mutual Life Insurance Company by Howard F. Sachs, its attorney, as follows:

1. This action was authorized and sanctioned by the Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury, and was brought under the direction of the Attorney General of the United States.

2. The District Director of Internal Revenue at Kansas City , Missouri , made assessments of 1961 excise and withholding taxes, interest and penalties against defendant J. J. Daily. Notice was given and demand was made upon J. J. Daily for payment of the amounts of each assessment. Notices of liens were filed in Jackson County, Missouri for each assessment. The date and amount of each assessment, the date of the notice and demand for each assessment, and the date of the filing of the tax liens for each assessment are as follows:

                                    Notice & Notice of

                        Assessment  Demand    Lien

Tape of Tax   Period      Date       Date     Filed  Amount Outstanding

Excise ..    2d Qtr 1961  8/18/61  9/21/61  11/17/61        $ 521.88

Withholding. 2d Qtr. 1961 8/18/61  9/21/61  11/17/61        1,445.28

Withholding. 3d Qtr 1961  11/9/61  11/9/61  12/28/61        1,345.65

                                                           (P) 22,42

      (I)  1.98

Withholding. 4th Qtr 1961 2/9/62  2/9/62    3/7/62            649.06

                                                           (I) 10.82

                                            Total          $3,998.04

P = Penalty

I = Interest

3. On March 12, 1962, at Kansas City , Missouri , the District Director of Internal Revenue served notice of levy on the defendant, Connecticut Mutual Life Insurance Company, for the cash surrender values of insurance policies held by it and belonging to J. J. Daily.

4. On March 12, 1962, the defendant, Connecticut Mutual Life Insurance Company was an insurer of the life of J. J. Dily. Under the terms of the insurance policies, J. J. Daily had a right to change the beneficiary thereof and could demand and receive the cash surrender value of said policy.

5. The face amount of the policies and cash surrender thereof as of the date levy was served upon defendant, Connecticut Mutual Life Insurance Company, are as follows:

                                           March 12, 1962

                                           Cash Surrender

                                                Value and

                                                Dividends

Policy                 Face Amount                Payable

No.                      of Policy           on Surrender

1,463,304 ....          $ 5,000.00               $ 553.70

1.463,305 ....            5,000.00                 384.00

1,607,262 ....           10,000.00                 744.92

1,928,989 ....           10,000.00                 224.12

1,928,990 ....           10,000.00                 224.12

Total ........                                  $2,130.86

 

6. At the date of the levy the Internal Revenue Service did not have in its possession and did not surrender to the defendant, Connecticut Mutual Life Insurance Company, the written policies involved.

7. On the 24th day of April, 1964, pursuant to an order made by the Honorable Richard M. Duncan, United States District Judge on April 14, 1964, there were delivered to Mr. Clifford M. Spottsville, Assistant United States Attorney herein, the Connecticut Mutual Life Insurance policies on the life of J. J. Daily, Nos. 1,463,304; 1,463,305; 1,607,262; 1,928,989; and 1,928,990.

8. On May 8, 1964, the aforesaid life insurance policies were surrendered to defendant, Connecticut Mutual Life Insurance Company. As of the date of May 8, 1964, the net cash surrender value of these policies were as follows:

                        Net Cash Surrender

                       Value and Dividends

Policy                             payable

No.                           on Surrender

1,463,304 ....                    $ 641.46

1,463,305 ....                      326.08

1,607,262 ....                      714.49

1,928,989 ....                         -0-

1,928,990 ....                         -0-

Total ........                   $1,682.03

 

9. Each of the policies was of the low premium type wherein the amount of the premium exceeded the actuarially predicted mortality expense of the company in the early years of the policy, being designed to create certain reserve or nonforfeiture values in each of the policies.

10. Each of the policies issued by defendant, Connecticut Mutual Life Insurance Company, contains a provision for the use of such reserve or non-forfeiture values for premium loans. Such provision is as follows:

If written application be filed at the Home Office of the Company upon its form therefor while this Policy is a premium-paying policy, and if such application remains unrevoked, the amount of any premium falling due after the first policy year following the Date of Expiration of Initial Term Insurance and not otherwise paid as herein provided will be charged as an indebtedness against and secured by this Policy, provided the entire indebtedness hereon including such charge shall not exceed the limit secured by the Cash Value hereof; such indebtedness to bear interest from the due date of such premium, and to be subject to the terms herein provided for policy loans, but without assignment or delivery of this Policy, and any premium so charged will be treated as paid.

11. At all relevant times, insured maintained on file with defendant company applications for premium loans, mentioned in the foregoing paragraph.

12. The reduction in cash surrender value between the date of the levy by the Internal Revenue Service upon defendant, Connecticut Mutual Life Insurance Company, and the date of the surrender of said policies to Connecticut Mutual Life Insurance Company was due to the automatic premium loans made pursuant to the above-mentioned provision.

IT IS STIPULATED AND AGREED that all the facts set out and described herein above are admitted into evidence without further testimony therein.

Dated on the 22nd day of December, 1964, at Kansas City , Missouri .

 

[65-2 USTC ¶9753] United States of America , Plaintiff-Appellant v. Leo L. Miroff, Annette Miroff, Husband and Wife and The Central Standard Life Insurance Company, Defendants-Appellees

(CA-7), U. S. Court of Appeals, 7th Circuit, Nos. 15110, 15111, 353 F2d 481, 11/23/65, Affirming unreported District Court opinion

[1954 Code Secs. 6321-6323]

Lien for taxes: Cash surrender value of life insurance policy: Policy loan without actual notice of lien against insured.--An income tax lien against an insured could not be enforced against an insurance company for the amount of the cash surrender value of an insurance policy, unreduced by the amount of a policy loan which the company had made to the insured without actual notice of the lien. The loan had been made for the full cash value of the unmatured policy. C. Sullivan, 64-1 USTC ¶9392, 333 Fed. (2d) 100, followed.

Edward V. Hanrahan, United States Attorney, John Peter Lulinski, Assistant United States Attorney, Chicago, Ill., John B. Jones, Jr., Lee A. Jackson, Joseph Kovner, Department of Justice, Washington, D. C. 20530, for plaintiff-appellant. Hyman A. Pierce, Daniel M. Pierce, 211 W. Wacker Dr. , Chicago , Ill. , for defendants-appellees.

Before DUFFY, SCHNACKENBERG and KILEY, Circuit Judges.

KILEY, Circuit Judge:

This is an appeal by the Government from summary judgment for defendant-insurer, The Central Standard Life Insurance Company, in the Government's suit for a judgment for unpaid income taxes and to enforce a tax lien ¹ against the cash value of the taxpayer-Miroff's life insurance policy.

Since the facts are not disputed, the issue for us is one of law: whether an income tax lien may be enforced against an insurer, who had, without actual notice of the previously recorded lien, made a "policy loan" to its assured, the delinquent taxpayer, of the full cash value of the unmatured policy. We think the district court did not err in deciding the issue against the Government.

Miroff and his wife were delinquent in payment of 1954 and 1957 income taxes. On September 30, 1955, the Commissioner made an assessment of $3,767.02 against them for the year 1954, demand for payment availed nothing, and on April 2, 1957, notice of lien ² was filed with the Recorder of Deeds of Cook County, Illinois. Nothing had been paid on the assessment when on June 2, 1961, Leo Miroff applied for and received a "policy loan" of $1,770.00 against the approximately $1,800.00 cash value of his policy with Central. On September 15, 1961, interest upon the loan added by insurer increased the loan amount to $1,806.00, so that thereafter it equalled the cash value.

[Actual Notice Not Received]

Central had not received actual notice of the tax lien when the loan was made. It received notice of levy ³ under the lien on September 19, 1961, and ten days later this suit was filed against Central and the Miroffs. The Government prayed that Central be required to pay to it the amount of the cash surrender value of Miroff's policy, "unreduced" by the amount of the policy loan. ⁴ Central and the Government both moved for summary judgment and the court, upon an "expressed determination that there [was] no just reason for delay," FED. R. CIV. P. 54, entered judgment "only" for Central. In its opinion the district court relied upon United States v. Sullivan [64-1 USTC ¶9392] 333 F. 2d 100 (3rd Cir. 1964) and Parish of Orleans v. New York Life Ins. Co., 216 U. S. 517 (1910), and held that the "policy loan" was made by Central as debtor, not a creditor, of Miroff who had "no actual obligation" to return the advance of the cash value of the policy.

It is not disputed that when Miroff elected to receive the "loan" the cash value was an asset of taxpayer. United States v. Hoper [57-1 USTC ¶9508], 242 F. 2d 468, 470 (7th Cir. 1957); cf. United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100, 110 (3rd Cir. 1964). In Sullivan, the court first decided that the tax lien could not attach to the cash value of taxpayer's unmatured policy until an election was made to cancel the policy and receive the cash value. The court then discussed the theory of the Government there, same as its theory here, that the "policy loan" transaction rendered Mrs. Sullivan the debtor and the insurer the creditor for the amount of the loans, with Mrs. Sullivan's policy interest serving as security for the "debt." The court in Sullivan decided that the insurer in the transaction, and not the insured, was the debtor, both legally and functionally.

The Sullivan decision on the "policy loan" issue rested on the ground that Mrs. Sullivan had the right to be granted policy loans to the extent of the cash value, and that she had no obligation to repay the "loans." 333 F. 2d at 112. (Emphasis added.) The court applied the general principle stated by Justice Holmes in Parish of Orleans v. New York Life Ins. Co., 216 U. S. 517, 522 (1910), that a "policy loan" created no debt and no personal liability but merely discharged part of insurer's ultimate policy obligation. The court held ⁵ that the "policy loans" were partial advances of the cash surrender value. That holding expresses Central's theory here.

The Sullivan case, 333 F. 2d at 113-14, approved the district court's view [62-1 USTC ¶9245], 203 F. Supp. 1, 12 (D. C. Pa. 1962), that the interest paid by the insured merely represented "what it is estimated the sum would have earned if it had not been advanced." We accept that view here, against the Government argument that the interest charge stamped the transaction as a loan to Miroff. As to the Government argument that the "precise terms" of an insurance policy, stating that "policy loans" are loans, indicate the intention of a commercial loan, we agree with the court in Sullivan that "form should not be allowed to prevail over substance." 333 F. 2d at 113.

The Government argues that this court held, in Federal Life Ins. Co. v. Kemp, 257 Fed. 265, 269 (7th Cir. 1919), that indebtedness created by premium loans made on the security of the policy alone "remained as liens on the policy," which could not be offset until termination of the policy. This is to say that the "policy loan" transaction gave Central a lien, which in this case would be junior in priority to the tax lien. A similar argument was made in the Sullivan case, and rejected. 333 F. 2d at 112. The Kemp case is inapposite, for there the court was concerned with premium loans on a policy on which there had been a default in premium payments, and held that, as between the insurer and the policy beneficiaries, the total of such "indebtedness" had to be deducted from the "surrender value" at the time of settlement. A distinguishing factor is that the premium loan in Kemp actually paid one-half of the first ten year cash premiums--the insurer was paying from its own funds 50% of the premiums essential to keep the policy in force. Miroff's "policy loan," however, was paid out of the cash surrender value, not Central's own funds, and not from funds essential to keep the policy in force or for which repayment by Miroff himself was required. Yet it is the cash surrender value which the Government seeks to recover from Central. Kemp does not compel a result contrary to that we have reached, for that case recognizes that whatever "property" the insurer holds for the insured may be depleted in fact by loans made to the insured during the executory period of the insurance contract.

We hold that an income tax lien may not be enforced against an insurer who had, without actual notice of the previously recorded lien, made a policy loan to its assured, the delinquent taxpayer, of the full cash value of the unmatured policy.

In its brief on appeal the Government also argued that it was entitled at least to the approximately $36.00 which was credited by Central as "interest" prior to actual notice of the tax lien, this amount having exhausted Miroff's cash surrender value under the policy. This point was not raised by the Government in the court below, by pleading, brief or oral argument. In accordance with the established principle that appellate review is ordinarily restricted to questions and issues made and considered and decided in the lower court, we do not reach this minor contention on the facts of this case. 14 CYCLOPEDIA OF FEDERAL PROCEDURE §67.09 (3rd ed. 1965).

For the foregoing reasons, the judgment of the district court is affirmed.

¹ Int. Rev. Code of 1954, §6321.

² Int. Rev. Code of 1954, §6323. A second assessment for the year 1957 was made against Leo L. Miroff individually on May 30, 1958.

³ Int. Rev. Code of 1954, §§ 6331-32.

⁴ The Miroffs could not be found and were served by publication under 28 U. S. C. §1655.

⁵ 333 F. 2d at 114. Judge Hastie dissented in part but agreed that policy loans made before service of notice of levy upon the insurer were not precluded by the tax lien. 333 F. 2d at 121, 122.

 

58-2 USTC ¶9630]United States of America , Appellant v. Metropolitan Life Insurance Company, a corporation, and The Guardian Life Insurance Company of America , a corporation, Appellees

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 7465, 256 F2d 17, 6/10/58

[1939 Code Secs. 3678 and 3710--similar to 1954 Code Secs. 7403 and 6332, respectively]

Tax lien against cash surrender value of life insurance policy: Insured beyond jurisdiction of court.--A lien for taxes owed by a delinquent taxpayer attached before he fled the country. The court, therefore, had jurisdiction to foreclose the lien against the cash surrender value of policies on his life.

Louise Foster, Department of Justice (Charles K. Rice, Assistant Attorney General, Lee A. Jackson, Department of Justice, and Albert M. Morgan, United States Attorney, on brief), for appellant. Howard Caplan (Stewart McReynolds, George E. Walton, Charles M. Preseon, Daniel J. Reidy, Agnes S. Hunt, and Stotler, McReynolds & Caplan, on brief), for appellees.

Before SOBELOFF, Chief Judge, and SOPER and HAYNSWORTH, Circuit Judges.

On Rehearing

PER CURIAM:

The lien was perfected by the Commissioner's demand on the insured before he absconded from the jurisdiction of the District Court. Notice of lien was filed with the Clerk of the County Court at Parkersburg , West Virginia , before he absconded. Secs. 3670, 3672, I. R. C. 1939 (26 U. S. C. A.). The lien then attached to the cash surrender value, which we regard as a fund held by the insurance company for the insured. United States v. Behrens, 230 Fed. (2d) 504 (2 Cir., 1956) [56-1 USTC ¶9294]; United States v. Hoper, 242 Fed. (2d) 468 (7 Cir., 1957) [57-1 USTC ¶9508]; United States v. Bess, 266 W. 4381 (S. Ct., 1958) [58-2 USTC ¶9595].

The court proceedings [57-1 USTC ¶9569] to foreclose the lien were, as was said in the court's opinion [58-1 USTC ¶9230], in the nature of a garnishment. A lien would be worthless if, after being perfected, it could be vitiated by the insured's leaving the jurisdiction. Although he left, the res remained behind, and the Government's rights therein had already attached. As this Court held in United States v. City of Greenville, 118 Fed. (2d) 963 (1941) [41-1 USTC ¶9381], "After the lien provided by the statute attaches, the property has in a sense two owners, the taxpayer, and to the extent of the lien, the United States."

The jurisdictional objection is not well taken. In the case relied on by the appellee, Stockbridge v. Phoenix Mutual Life, 193 F. 558 (D. Conn., 1912), there was no lien, and therefore no sufficient res to support jurisdiction, while here the contrary is true.

We adhere to the views previously expressed.

 

[58-1 USTC ¶9230]United States of America, Appellant v. Metropolitan Life Insurance Company, a corporation, and The Guardian Life Insurance Company of America, a corporation, Appellees

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 7465, 256 F2d 17, 1/14/58, Reversing and remanding District Court, 57-1 USTC ¶9569, 147 F. Supp. 902

[1939 Code Secs. 3710 and 3678--similar to 1954 Code Secs. 6332 and 7403, respectively]

Tax lien against cash surrender value of life insurance policy: Insured beyond jurisdiction of court.--The insured has a property right in life insurance policies which have a cash surrender value and under which he retains the right to change the beneficiary. The value of this property right in the cash surrender value. The insured's property right is subject to a lien for taxes, and the insurance company is fixed with notice of the lien when notice is served upon it. The Government has the right to demand the cash surrender value of the policy to the extent necessary to satisfy the lien. A court has jurisdiction to condemn the interest of the insured under the policy, even though it does not have jurisdiction over his person. A decree directing the insurance company to pay the cash surrender value to the Government will protect the company from further liability under the policy.

Louise Foster, (Charles K. Rice, Assistant Attorney General, Lee A. Jackson, Department of Justice, Albert M. Morgan, United States Attorney, on brief), for appellant. Howard Caplan (Stewart McReynolds, Stotler, McReynolds & Caplan, on brief), for appellee.

Before PARKER, Chief Judge, and SOPER and HAYNSWORTH, Circuit Judges.

PARKER, Chief Judge:

This is an appeal by the United States from a judgment dismissing, as against two insurance companies, an action to foreclose a tax lien on the cash surrender value of two insurance policies issued to a taxpayer, who had been convicted of tax frauds and had fled from the country. The District Court held [57-1 USTC ¶9569] that, in the absence of an election by the insured to take the cash surrender value of the policies, he had no property therein to which a lien for taxes could attach, and that, as he had not made such election and had not been personally served with summons in the action so that he could be subjected to an order of court requiring him to make the election, the court was without power to grant relief. The facts are stated in detail in the opinion of the District Judge and need not be repeated here. Those necessary to an understanding of the case are as follows:

Insured, Dr. Milton Alfred Gilmore, is a citizen of West Virginia . On January 16, 1953 he was convicted by a jury of wilfully and knowingly attempting to evade federal income taxes; but, before sentence could be pronounced in the case, he fled into Canada , where he still is. Insured owed income taxes for the years 1942 through 1948, in addition to payroll withholding taxes, which were properly assessed but remained unpaid notwithstanding proper notices and demands made by the Collector of Internal Revenue upon insured and his wife, to whom he had transferred large amounts of cash. Insured held life insurance policies in the Metropolitan Life Insurance Company and the Guardian Life Insurance Company, which had substantial cash surrender values at the time of the institution of this action. Both policies were payable at insured's death to his wife as beneficiary and to his daughter as contingent beneficiary, but each policy reserved to him the right to change the beneficiary at any time.

This action was instituted to enforce the liens of the unpaid federal taxes against insured's interest in the two policies as well as against other property which he owned; and his wife and daughter were named as parties to the action along with insured and the two insurance companies. It was conceded that notice of the tax liens had been served upon the insurance companies in New York as well as in West Virginia . Personal service of process could not be had upon insured or his wife or daughter, but process was served upon them by publication, and was regularly served upon the insurance companies. Judgment was entered enforcing the liens against certain real estate in West Virginia but dismissing the action in so far as it sought to enforce liens against insured's interest in the policies. Only the right of the United States to enforce tax liens against the policies is involved in this appeal.

Three questions are presented by the appeal: (1) Did the insured have a property interest in the insurance policies? (2) If so, was a tax lien in favor of the United States perfected on such interest? (3) Can the tax lien be foreclosed in this action and the interest of insured in the policies be subjected to the satisfaction of the lien? We think that all of these questions should be answered in the affirmative.

1. The Property Interest of Insured in the Policies

We think there can be no question but that insured had a property interest in the policies. Both policies had a cash surrender value which was withdrawable at any time and, while the policies were payable at the death of insured to his wife and daughter as beneficiaries, he had reserved the right to change the beneficiaries at any time. He had complete power over the policies, therefore, and could have availed himself of the cash surrender value by surrendering the policies as easily as he could have cashed in a certificate of deposit in a bank by surrendering the certificate. To say that he had no property in the policies because he had not elected to take the cash surrender value and surrender them is as lacking in reality as to say that the holder of a certificate of deposit in a bank has no property therein because he has not elected to cash and surrender it and can receive nothing thereon until he elects to do so. It has been held that the insured has a property interest in a policy which has no cash surrender value but only a borrowing privilege. United States v. Trout, 46 Fed. Supp. 484, 485 [42-1 USTC ¶9372]. A fortiori, such property interest exists where there is a cash surrender value and the insured has reserved complete control, not only over this, but also over who may take the proceeds of the policies as beneficiary upon his death.

Very much in point are the cases of Rowen v. Com'r, 2 Cir. 215 Fed. (2d) 641 [54-2 USTC ¶9581]; United States v. Behrens, 2 Cir. 230 Fed. (2d) 504 [56-1 USTC ¶9294]; United States v. Hoper, 7 Cir. 242 Fed. (2d) 468 [57-1 USTC ¶9508]; and United States v. Bess, 3 Cir. 243 Fed. (2d) 675 [57-1 USTC ¶9528]. In these cases it was held that a tax lien could be enforced against the proceeds of a policy to the extent of its cash surrender value, even though insured had died and the proceeds of the policy were payable to named beneficiaries. Dealing with this subjection of the cash surrender value to the liens in United States v. Behrens, supra, Judge Learned Hand said:

"The obligation of an insurer in a policy of life insurance is made up of a number of promises, of which one is to pay to the beneficiary the amount of the insurance--the 'proceeds'--and another is to pay the 'surrender value' to the insured upon his demand. The performances of these promises are not only separate, but inconsistent with each other: the payment of the 'surrender value' cancels the promise to pay the 'proceeds' and the promise to pay the 'proceeds' assumes that the insured has not demanded and received the 'surrender value.' * * *

"However, in Rowen v. Commissioner of Internal Revenue, supra, 215 Fed. (2d) at page 647, we held that "it is not realistic to view his' the insured's 'death as wiping out these values. Under the policies, his death was merely a condition upon which the surrender values no longer payable to the decedent became merged in the greater values which the insurers were obligated to pay the beneficiaries.' There can be no doubt that the courts have spoken of the 'surrender value' as though it were in fact a fund which the insurer held as a custodian for the insured. This way of looking at the situation was long ago stated by Judge Addison Brown with his customary clarity, and the Supreme Court has twice quoted what he said with approval. We shall not requote it in full; it is enough to excerpt the following passages. 'Though this excess of premiums paid is legally the sole property of the company, still in practical effect, though not in law, it is the moneys of the assured deposited with the company in advance to make up the deficiency in later premiums * * *. So long as the policy remains in force the company has not practically any beneficial interest in it, except as its custodian, with the obligation to maintain it unimpaired and suitably invested for the benefit of the insured. This is the practical, though not the legal, relation of the company to this fund.' This language obviously treats the surplus of the paid premiums that makes up the 'surrender value,' as a 'fund' held for the insured, and, if it were such, the lien would follow it into the 'proceeds.'"

This is in accord with the holding of the Supreme Court in Burnet v. Wells, 289 U. S. 670, 679 [3 USTC ¶1108], where Mr. Justice Cardozo, speaking for the court, said:

"A policy of life insurance is a contract susceptible of ownership like any other chose in action. It 'is not an assurance for a single year with a privilege of renewal from year to year by paying the annual premium.' It is 'an entire contract of assurance for life, subject to discontinuance and forfeiture for nonpayment of any of the stipulated premiums.' N. Y. Life Insurance Co. v. Statham, 93 U. S. 24, 30; Vance on Insurance, pp. 260, 262 and cases there cited. One who takes out a policy on his own life, after application in his own name accepted by the company, becomes in so doing a party to a contract, though the benefit of the insurance are to accrue to some one else. Mutual Life Ins. Co. v. Hurni Packing Co., 263 U. S. 167, 177; Vance on Insurance, pp. 90, 91 and 108. The rights and interests thereby generated do not inhere solely in those who are to receive the proceeds. They inhere also in the insured who in cooperation with the insurer has brought the contract into being. * * * The contracts remain his, or his at least in part, though the fruits when they are gathered are to go to some one else."

As said by Mr. Justice Holmes in Grigsby v. Russell, 222 U. S. 149, 156, "Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property."

In cases arising under state statutes, where the question is whether there is an indebtedness owing the insured by the company, the majority holding is that the interest of the insured under the policies is not subject to attachment or garnishment. See note 37 A. L. R. 2d 271 et seq. In cases arising under the bankruptcy act, however, where the question is whether the insured has a property interest which vests in the trustee in bankruptcy, it has generally been held that he does have such interest if he has reserved the right to change the beneficiary and the policy has a cash surrender value. Notes 68 A. L. R. 1216 and 1232, 103 A. L. R. 240, 169 A. L. R. 1381 and 1386. This has been expressly decided by the Supreme Court of the United States . Burlingham v. Crouse, 228 U. S. 459, 473; Cohen v. Samuels, 245 U. S. 50, 52-53. In the case last cited, the court adverted to the provision of the bankruptcy act as to the vesting in the trustee of policies payable to the insured, his estate or his personal representative, and said:

"It is true the policies in question here are not so payable, but they can be or could have been so payable at his own will and by simple declaration. Under such conditions to hold that there was nothing of property to vest in a trustee would be to make an insurance policy a shelter for valuable assets and, it might be, a refuge for fraud."

The fact that the insured has a property interest in a policy having a cash surrender value and subject to change of beneficiary by him has been recognized in a number of cases in which creditors have resorted to equitable remedies or to supplementary proceedings, which are equitable in their nature, to reach the interest of the insured. See Foley v. Equitable Life Assur. Soc., 290 N. Y. 424, 49 N. E. 2d 511; Rubenstein v. Rubenstein, 105 N. Y. S. 2d 24; Anthracite Ins. Co. v. Sears, 109 Mass. 383; Biggert v. Straub, 193 Mass. 77, 78 N. E. 770, 118 Am. St. Rep. 449; notes 37 A. L. R. 2d 291 et seq. And it has been held that the rights of the insured under such a policy are property rights which pass to an assignee under a general assignment for the benefit of creditors. Blinn v. Dane, 207 Mass. 159, 93 N. E. 601, 20 Ann. Cas. 1184 and note.

2. The Perfecting of the Tax Lien

We think that there can, likewise, be no question but that a tax lien was perfected by the United States upon the insured's interest in the insurance policies. When Dr. Gilmore fled to Canada he left unpaid the taxes here asserted by the government which became liens upon all his property, including his interest in these policies, when the assessment list was received by the Director of Internal Revenue. Sections 3670 and 3671 of the Internal Revenue Code of 1939, which are the statutes here applicable, provide:

"Sec. 3670. Property Subject to Lien. If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." (26 USC 1952 ed. sec. 3670).

"Sec. 3671. Period of Lien. Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time." (26 USC 1952 ed. sec. 3671).

In the following cases it has been squarely held that, where the provisions of the taxing statute are followed, a tax lien is perfected upon the cash surrender value of a policy of insurance issued to taxpayer upon his life. Kyle v. McGuirk, 3 Cir., 82 Fed. (2d) 212 [36-1 USTC ¶9121]; Cannon v. Nicholas, 10 Cir., 80 Fed. (2d) 934 [35-2 USTC ¶9672]; United States v. Royce Shoe Co. , D. N. H., 137 Fed. Supp. 786 [55-2 USTC ¶9770]; Knox v. Great West. Life Assur. Co. , E. D. Mich., 109 Fed. Supp. 207 [53-1 USTC ¶9247], aff. 6 Cir., 212 Fed. (2d) 784 [54-1 USTC ¶9373]; United States v. Ison, S. D. N. Y., 67 Fed. Supp. 40 [46-1 USTC ¶9269]; Smith v. Donnelly, E. D. La. , 65 Fed. Supp. 415 [46-1 USTC ¶9247]; United States v. Prudential Ins. Co., E. D. Pa., 54 Fed. Supp. 664 [44-1 USTC ¶9216].

There is no question here of the rights of third parties as assignees. Notices were duly given the insurance companies of the tax liens here sought to be enforced; and there is no contention that anything had been paid under the policies or that they had been assigned to anyone prior to the giving of the notices or the institution of the action. The property rights of the insured in the policies were held thereafter subject to the liens of the government, and the insurance companies were charged with notice of such liens and were bound to take them into account before making any payments to the insured under the terms of the policies. See United States v. Eiland, 4 Cir., 223 Fed. (2d) 118 [55-1 USTC ¶9487].

It is said, relying upon such cases as United States v. Metropolitan Life Ins. Co., 2 Cir., 130 Fed. (2d) 149 [42-2 USTC ¶9609], and United States v. Penn Mut. Life Ins. Co., 3 Cir., 130 Fed. (2d) 495 [42-2 USTC ¶9623], that unless the insured has exercised his option to take the cash surrender value under the policy, there is nothing to which the lien provided for by statute can attach. As pointed out above, however, insured unquestionably has a property right under the policies, the value of which is measured as a practical matter by the cash surrender value, and we do not think that the right of the government to reach such property for taxes can be defeated by the fact that the insured has not made an election under the policies. This is the effect of the decisions, heretofore cited of Rowen v. Com'r, supra, 215 Fed. (2d) 641 [54-2 USTC ¶9581]; United States v. Behrens, supra, 2 Cir., 230 Fed. (2d) 504 [56-1 USTC ¶9294]; United States v. Hoper, supra, 7 Cir., 247 Fed. (2d) 468 [57-1 USTC ¶9508]; and United States v. Bess, supra, 3 Cir., 243 Fed. (2d) 265 [57-1 USTC ¶9528].

The promises of the companies with relation to the cash surrender values amount to promises to pay these to the insured on his demand; and where his rights under the policies are subjected to tax liens, the right to demand the cash surrender value is vested in the government to the extent necessary to satisfy the liens. As said by this court in United States v. Eiland, supra, which dealt with a lien created by statutory attachment and garnishment on an ordinary debt, 223 Fed. (2d) 118, 121 [55-1 USTC ¶9487]:

"A creditor ordinarily perfects a lien upon a debt by attachment and garnishment with service of notice thereof upon the debtor. See Miller v. United States, 11 Wall, 268, 297, 20 L. Ed. 135; Kennedy v. Brent, 6 Cranch 187, 3 L. Ed. 194; Rickman v. Rickman, 180 Mich. 224, 146 N. W. 609, Ann. Cas. 1915c, 1237, 1248; Strawberry Growers' Selling Co. v. Lewellyn, 158 La. 303, 103 So. 823, 39 A. L. R. 1502; 4 Am. Jur. p. 896; 5 Am. Jur. p. 94; 7 C. J. S., Attachment, sec. 224, page 403. When this has been properly done, the effect thereof is to give to the attaching creditor a lien upon the indebtedness for the amount necessary to satisfy the judgment rendered in the proceedings in his favor. The effect of the federal taxing statutes to which we have referred is to create a statutory attachment and garnishment in which the service of notice provided by statute takes the place of the court process in the ordinary garnishment proceeding. There is no necessity for adjudicating the amount of the tax under the statutory proceeding, United States v. Morris & Essex R. Co., 2 Cir., 135 Fed. (2d) 711 [43-1 USTC ¶9432], certiorari denied, Morris & Essex R. Co. v. Delaware, L. & W. R. Co., 320 U. S. 754, 64 S. Ct. 61, 88 L. Ed. 449; and, consequently, the service of such notice results in what is virtually a transfer to the government of the indebtedness, or the amount thereof necessary to pay the tax, so that payment to the government pursuant to the levy and notice is a complete defense to the debtor against any action brought against him on account of the debt."

When the insured's interest in the policies is subjected to the tax lien under this proceeding, this amounts to a seizure of such interest by the United States (United States v. Miller, 11 Wall, 268, 297); and the United States, by virtue of such seizure, may exercise any right which the insured might have exercised under the policies, including the election to take the cash surrender value.

3. The Sufficiency of the Proceeding

We think it clear that the proceeding here, which was instituted under 26 USC 7403, was sufficient to foreclose the tax lien asserted on the policies and to protect the interest of the insurance companies. Not only were the insured and the companies made parties to the proceeding, but the beneficiaries under the policies were also made parties. As the insured was not present within the state, it was proper that he be served by publication so that the court might foreclose the tax lien upon his property. 28 USC 1655. ^* And as the insurance companies were present doing business within the state, it was clearly proper that the suit be brought there to reach insured's interest in the policies. Harris v. Balk, 198 U. S. 215. There is no reason why the court should not determine the value of the insured's interest under the policies and direct that this be paid upon the tax liens asserted by the government, nor why this will not fully protect the companies with respect to their obligations under the policies in the same way that a debtor garnishee is protected in any garnishment proceeding. The statute under which the proceeding was instituted is as follows:

"(a) Filing.--In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary or his delegate, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability.

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

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

The action taken by the United States in asserting the lien and instituting this action for its foreclosure amounted, as heretofore stated, to a seizure of the insured's property in the policies; and the court was vested with full power to enter judgment with respect thereto. That the insurance companies are fully protected by judgment rendered in the proceeding and that the proceeding may be brought against them wherever they are doing business, see Harris v. Balk, 198 U. S. 215.

It is argued that, although cash surrender value of the policies might be subjected to the tax lien if service of process could be made personally upon the insured and he could be required to elect to receive the cash surrender value, this may not be done in an action in rem, where the insured cannot be subjected to an in personam judgment or required to make such election. We see no reason for such distinction. The interest of the insured in the policies has been brought under the jurisdiction of the court in what is essentially a garnishment proceeding in so far as it relates to his interest in the policies and the promises for his benefit therein contained. 5 Am. Jur. sec. 657. The court can unquestionably condemn the interest of the insured under the policies to the satisfaction of the lien and can direct that such interest be paid by the insurance companies to the United States , the holder of the lien. This interest is the cash surrender value of the policies. It is argued, however, that the court may not do this, because the policies must be surrendered as a condition to obtaining the cash surrender value; but the surrender is for the protection of the companies and they will be as well protected by the judgment of the court as by the surrender of the policies, since the policies are not negotiable. See Foley v. Equitable Life Assur. Society, 290 N. Y. 424, 49 N. E. 2d 511, 514; Rubenstein v. Rubenstein, 105 N. Y. S. 2d 24; United States v. Manufacturers' Trust Co., 2 Cir., 198 Fed. (2d) 366, 369 [52-2 USTC ¶9417]; Harris v. Balk, supra. Of course, surrender of the policies should be ordered if the policies are available for surrender. When, however, they are unavailable available for surrender, because the owner has absconded to a foreign country and is beyond the reach of personal process, and when the interest of the insurer will be protected by the judgment of the court, the insurer should be required to pay the cash surrender value in the proceeding under the statute.

To sum up, we think that the insured unquestionably had a property interest in the policies in question; that the value of this property interest was the cash surrender value of the policies; that this property interest was subjected to the lien for taxes when the assessment list was placed in the hands of the Director of Internal Revenue; that the insurance companies were fixed with notice of the lien when notices were served upon them; that the proceeding instituted under 26 USC 7403 was a proper proceeding to foreclose the lien; that the government as holder of the lien can elect in the proceeding to take the cash surrender value of the policies; and that a decree of the court directing that the cash surrender value of the policies be paid to the United States will protect the insurance companies from further liability under the policies. As said by Judge Harrison in United States v. Trout, supra, we "see no reason to uphold a taxpayer who admits he has an interest in property but flauntingly says it is beyond the reach of the government." To which we may add that the court is not so impotent that it cannot apply to the satisfaction of tax liens property interests of a taxpayer held by corporations within its jurisdiction.

The judgment appealed from should be reversed and the case remanded to the District Court for further proceedings.

Reversed and Remanded.

^* That section is as follows:

"In an action in a district court to enforce any lien upon or claim to, or to remove any incumbrance or lien or cloud upon the title to, real or personal property within the district, where any defendant cannot be served within the State, or does not voluntarily appear, the court may order the absent defendant to appear or plead by a day certain.

"Such order shall be served on the absent defendant personally if practicable, wherever found, and also upon the person or persons in possession or charge of such property, if any. Where personal service is not practicable, the order shall be published as the court may direct, not less than once a week for six consecutive weeks.

"If an absent defendant does not appear or plead within the time allowed, the court may proceed as if the absent defendant had been served with process within the State, but any adjudication shall, as regards the absent defendant without appearance, affect only the property which is the subject of the action. When a part of the property is within another district, but within the same state, such action may be brought in either district.

"Any defendant not so personally notified may, at any time within one year after final judgment, enter his appearance, and thereupon the court shall set aside the judgment and permit such defendant to plead on payment of such costs as the court deems just."

 

[60-1 USTC ¶9278] United States of America , Plaintiff v. Israel M. Bosk, Lincoln National Life Insurance Company, Mutual Life Insurance Company of New York , Josephine Bosk, Richard M. Karp, Daniel Golden, Defendants

U. S. District Court, So. Dist. Fla., Miami Div., Civil Number 9479-M, 180 FSupp 869, 2/4/60

[1939 Code Sec. 276(c)--similar to 1954 Code Sec. 6502(a)]

Collection after assessment: Limitations period: Waiver: Compromise offer.--A written compromise offer in which the taxpayer agreed to the suspension of the statute of limitations on collection of tax after assessment was a valid waiver, though not signed by the Commissioner. The Commissioner's letter rejecting the offer, considered in connection with the offer, showed that the Commissioner agreed to the waiver.

[1939 Code Secs. 3670 and 3710--similar to 1954 Code Secs. 6321 and 6332; 1954 Code Sec. 7403]

Lien for taxes: Insurance cash surrender value: Foreclosure.--A lien for taxes attaches to the cash surrender value of insurance policies on the taxpayer's life before the death of the taxpayer, and may be foreclosed even though the insured taxpayer has not exercised his election to take the cash surrender value. The proceeding to foreclose was sufficient where the taxpayer, the insurance companies, and the beneficiaries were within the jurisdiction of the court

E. Coleman Madsen, United States Attorney, Box 1070, Miami, Fla., and George Elias, Jr., Tax Division, Department of Justice, Washington, D. C., for plaintiff. Claude Peper Law Offices 37 North East First Avenue , Miami , Fla. , for Israel M. Bosk. Dixon, DeJarnette, Bradford, Williams McKay & Kimbrell, Ainsley Building, Miami, Fla., for Lincoln National Life Insurance Company. Scott, McCarthy, Preston, Steel & Gilleland, First National Bank Building, Miami, Fla., for Mutual Life Insurance Company of New York. Edward F. Mitchell, George E. Patterson, Jr., and James A. Dickson, Miami , Fla. , for defendant.

Findings of Fact and Conclusions of Law

WYCHE, District Judge:

This case came on for hearing before the Court without a jury on January 18, 1960. Plaintiff , United States , was represented by E. Coleman Madsen, Esq., United States Attorney, and George Elias, Jr., Esq., Tax Division, Department of Justice. The defendants were represented by Edward F. Mitchell, Esq., George E. Patterson, Jr., Esq., and James A Dickson, Esq., all of Miami , Florida .

The Court having considered the pleadings, evidence and testimony of the parties, and being fully advised in the premises, now finds the facts and states its conclusions of law as follows:

Findings of Fact

1. This action was properly authorized by the Commissioner of Internal Revenue and was brought under the direction of the Attorney General of the United States .

2. The defendant, Israel M. Bosk, (hereinafter referred to as Bosk), at the time of this suit, was a resident of Miami Beach , Florida . Each of the defendants, Lincoln National Life Insurance Company (hereinafter referred to as Lincoln ) and Mutual Life Insurance Company of New York (hereinafter referred to as Mutual) is authorized to do business within the state of Florida .

[Deficiencies Assessed]

3. Bosk owed income taxes, penalties and interest for the years 1944 and 1945 in the amounts of $5,264.50 and $5,184.33, respectively, which were properly and timely assessed on September 17, 1947, and upon which proper notice and demand for payment thereof were made by the Collector of Internal Revenue.

4. Commencing with the month of April, 1948, to and including the month of May, 1951, Bosk made monthly installment payments on his 1944 tax liability in the total amount of $1,758.78. Notwithstanding the proper notice and demand for payment, no part of the balance of $3,505.72 for 1944 and no part of the liability of 1945 in the amount of $5,184.33, or a total amount of $8,690.05 had been paid.

5. Within six years from the date of assessments, Bosk filed on June 9, 1952, Treasury Form 900, Tax Collection Waiver, with the Commissioner of Internal Revenue, extending the period during which collection of the balance of the 1944 income tax, penalty and interest assessment could be made, either by a proceeding in Court or by distraint to and including December 31, 1957 and for the year 1945 to and including December 31, 1958.

[Compromise Offers]

6. On August 15, 1952, Bosk filed Treasury Form 656, Offer in Compromise, whereby he offered to settle his entire outstanding liability for the years 1944 and 1945 for $1,000, which amount was subsequently raised to $2,000.

7. According to the terms of said offer of August 14, 1952, the taxpayer, in making the offer, as a part consideration thereof expressly waives:

"The benefit or any statute of limitations applicable to the assessment and/or collection of the liability sought to be compromised, and agrees to the suspension of the running of the statutory period of limitations on assessment and/or collection for the period during which this offer is pending and for one year thereafter."

8. On October 7, 1954, Bosk was notified by the Commissioner this following careful consideration of the offer to compromise the unpaid taxes, penalties and interest liabilities for the years 1944 and 1945, the offer was rejected.

9. Thereafter, Bosk filed Treasury Form 656-C, Offer in Compromise, dated January 15, 1957, and received by the Commissioner on February 26, 1957, whereby he again offered to compromise his liability for the years 1944 and 1945 for the amount of $2,000 to be paid in monthly installments.

10. According to the terms of this second offer, the taxpayer, in partial consideration for making the offer, expressly waived:

"The benefit of any statute of limitations applicable to the assessment and/or collection of the liability sought to be compromised, and agrees to the suspension of the running of the statutory period of limitations on assessments and/or collection for the period during which this offer is pending, or the period during which any installment remains unpaid, and for one year thereafter."

11. On July 18, 1957, Bosk withdrew the offer filed February 26, 1957, which had been submitted to compromise the liability for the years 1944 and 1945.

[Taxpayer's Life Insurance]

12. The defendants, Lincoln and Mutual, are the insurers of certain policies of insurance issued to and upon the life of Bosk, and upon which policies Bosk had retained the right at all times to change the beneficiaries thereof.

13. The policies, cash surrender values, and net value thereof are as follows:

                        Cash Surrender

Policies          Date      Value      Indebtedness       Net Value

Lincoln

:       

1067601 .......   9/17/59  $ 971.60      $553.25          $ 418.35

J1067602 .......  9/17/59    971.60       553.25            418.35

J1110444* ......  3/28/59  1,568.90       933.80            635.10

Mutual:

763 80 30-S ....  1/18/60  1,414.44       698.19            716.25

763 80 31-S ....  1/18/60  1,414.44       322.23          1,092.21

776 17 50 ......  1/18/60  1,288.10       391.63            896.47

* In addition, this policy has a current dividend of $52.70 and the cash value of additions is $49.15.

14. Notice of tax liens were served by the United States upon Lincoln on February 24, 1958, and upon Mutual on February 10, 1958.

15. Prior to February 24, 1958, Lincoln received a letter from Bosk requesting a change of beneficiaries upon all policies to Jo Golden Bosk as primary beneficiary and Richard M. Karp as contingent beneficiary. Lincoln forwarded to Bosk its standard forms for effectuating a change of beneficiaries but such forms have never been returned to Lincoln . Subsequent to September 2, 1958 a similar letter of request was received by Lincoln , but no standard forms for change of beneficiary were received.

16. This action was filed on September 28, 1959.

Opinion

This suit was instituted by the plaintiff to obtain a judgment for unpaid income taxes, penalties and interest against defendant Israel M. Bosk for the years 1944 and 1945, and to enforce its tax liens against the cash surrender value of six insurance policies on the life of defendant, Israel M. Bosk, in partial satisfaction of his outstanding tax liabilities for said years. The facts stated in detail in the Findings of Fact need not be repeated here. Those necessary to any understanding of the case are as follows:

Defendant-taxpayer Bosk owed income taxes, penalties and interest for the years 1944 and 1945, which were properly and timely assessed on September 17, 1947. During the period of April, 1948, through May, 1951, Bosk paid monthly installments in partial satisfaction of his 1944 liability. The balance of the 1944 liability and the entire liability for 1945, in the total amount of $8,690.05, remained unpaid notwithstanding proper notices and demands therefor made by the Collector of Internal Revenue upon Bosk.

[Waivers of Limitations Periods]

On June 9, 1952, Bosk filed Treasury Form 900, Tax Collection Waiver, with the Commissioner of Internal Revenue, extending the period during which collection of the balance of the 1944 liability could be made, either by distraint or a proceeding in court, to December 31, 1957, and for the year 1945 to December 31, 1958. Because of Bosk's asserted inability to pay, on August 14, 1952, he filed an offer to compromise his entire outstanding liability for the years 1944 and 1945. By the terms of the offer, he waived the benefit of the statute of limitations applicable to collections, and agreed to the suspension of the running of the statutory period of limitations on collection for the period during which the offer was pending and for one year thereafter. This offer was rejected on October 7, 1954. Thereafter, Bosk, on February 26, 1957, again offered to compromise his liability for the years 1944 and 1945 for a specified amount to be paid in monthly installments. By the terms of the offer, he again agreed to a waiver and extension of the limitations period on collection for the period the offer was outstanding and for one year thereafter. Prior to final action on this offer, Bosk, on July 18, 1957, withdrew his offer of February 26, 1957.

[Liens Against Insurance Policies]

Defendant Bosk holds life insurance policies in the defendants, Lincoln National Life Insurance Company (hereinafter referred to as Lincoln) and the Mutual Life Insurance Company of New York (hereinafter referred to as Mutual), which policies are in his possession. Notices of tax liens were served by plaintiff upon Lincoln on February 24, 1958, and upon Mutual on February 10, 1958. These policies had substantial cash surrender values at the time of the institution of this action. All the policies were payable at Bosk's death to his wife as beneficiary but each policy reserved to him the right to change the beneficiary at any time. Prior and subsequent to February 24, 1958, Lincoln received letters from Bosk requesting that the beneficiaries on all policies be his wife as primary beneficiary, and Richard M. Karp, rather than Daniel Golden, as contingent beneficiary. Pursuant thereto, Lincoln forwarded to Bosk its standard forms for effectuating a change of beneficiaries, but no such completed forms were returned to Lincoln.

This action was instituted on September 28, 1959, to obtain a judgment for the unpaid tax liabilities owed by Bosk for the years 1944 and 1945, and to enforce the liens of the unpaid federal taxes against Bosk's interest in the six insurance policies; and Bosk's wife and other potential beneficiaries are named as parties to the action along with Bosk and the two insurance companies. It is conceded that the insurance companies are authorized to do business in the State of Florida . Personal service of process was had on all defendants and all parties are within the jurisdiction of this Court.

The two basic questions presented in this action are: (1) Whether this suit for collection of unpaid taxes, penalties and interest for the years 1944 and 1945 is timely? (2) If so, can the Government have its liens for unpaid taxes for those years satisfied, as much as possible, out of the cash surrender values of the policies taken out by Bosk on his life? Both questions should be answered in the affirmative.

[Timeliness of Suit]

With regard to the timeliness of this action, under the provisions of the Internal Revenue Code, an action for collection of unpaid liabilities must be commenced within six years following assessment, unless the statute of limitations has been extended by an agreement in writing prior to the expiration of the preceding period. Such period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. Sec. 276(c), Internal Revenue Code of 1936 (26 U. S. C. 1952 ed., Sec. 276(c)). That such extension agreements have been made as required and this action timely commenced is clearly shown. A brief chronology is as follows: The assessments for 1944 and 1945 were made on September 17, 1947. Within six years thereafter, on June 9, 1952, Bosk filed tax collection waivers extending the limitations period on collection for the years 1944 and 1945 to and including December 31, 1957, and December 31, 1958, respectively. On August 14, 1952, within the extended statutory periods, Bosk filed an offer to compromise his liabilities for 1944 and 1945, wherein he waived the statute of limitations on collections and agreed to the suspension of the running of the statutory period during the time the offer was pending and for one year thereafter. The offer was rejected on October 7, 1954, approximately 253/4 months later. The statute of limitations for collection on each year's liability was thus extended by 373/4 months (253/4 plus 12). Following submission of the second offer in compromise on February 26, 1957, and its withdrawal approximately 43/4 months later, on July 15, 1957, the statutory period for collection was extended for another 163/4 months (43/4 plus 12). Thus, within the originally extended statutory periods for collection of the 1944 and 1945 liabilities up to December 31, 1957 and 1958, respectively, the submission of the offers suspended the running of the statute of limitations and the limitations period for each year's liability was extended for 541/2 months (i. e., 373/4 months on the first offer, plus 163/4 months on the second offer), or a total of four years, six and one-half months. Consequently the statutory period for commencing a suit for collection for the year 1944 was extended from December 31, 1957, to July 15, 1962; and for the year 1945 from December 31, 1958, to July 15, 1963. This action then, was timely instituted on September 28, 1959.

[Form of Waivers]

Bosk however, contends that the waiver contained in the first offer was ineffectual because it was executed only by himself and not by the Commissioner and, consequently, the extension was not "agreed upon in writing by the Commissioner and the taxpayer," as required by the Internal Revenue Code. He further asserts that in any event the waivers contained in the offers are inoperative since the first was rejected and the second withdrawn. In rejecting similar contentions in Shambaugh v. Scofield, 132 F. 2d 345 [42-2 USTC ¶9826], the Court of Appeals for the Fifth Circuit held (p. 347):

"The statute does not require that the 'agreement shall be embodied in one writing" nor evidenced alone by the formal extension agreement tendered by the taxpayer nor does it prescribe the time within which the Commissioner's assent thereto must be evidenced. No particular formula of words is necessary. The sole requirement is that the agreement be 'in writing'. Any writing, formal or informal, if made for the purpose of evidencing the Commissioner's approval, and from which his approval may be gathered by reasonable inference, is sufficient. The statutory provision requiring a written agreement is for administrative purposes,--not to convert into a contract what is essentially a voluntary unilateral waiver of a defense by the taxpayer. In construing such waivers, the intention of the parties is an important factor.

"The taxpayers intended, and all parties understood, that the waivers were submitted in aid, and as a part of, the taxpayer's efforts to effect a compromise adjustment of the tax, and that the purpose of the waivers was to suspend the running of the statute while the offers were under consideration. It was certainly not contemplated that while the taxpayers negotiated to better their position the statute should continue to run, so that even though the compromise offers were rejected collection of the tax would be barred by limitation.

"The compromise offers were considered on the merits and were rejected by letters signed by the Commissioner, stating in effect that 'careful consideration has been given the offer and supporting data.' These rejection letters relate to, and are to be considered in connection with, the offers which contained the waivers. They constitute presumptive proof of the Commissioner's agreement to the waivers, unless overcome by countervailing evidence, which is here lacking. * * *"

Here, the offer of August 14, 1952, was certainly considered on the merits and rejected by the Commissioner, stating, "careful consideration has been given to your offer * * *." The rejection letter of October 7, 1954, related to, and is to be considered in connection with, the offer containing the waiver. It was not contemplated that while Bosk negotiated to better his position the statute should continue to run, "so that even though the compromise offers were rejected collection of the tax would be barred by limitation." Shambaugh v. Scofield, supra. It follows that this action was timely in every respect.

[Enforcement of Liens]

Resisting the plaintiff's attempt to enforce its tax liens against the cash surrender value of insurance policies on the life of Bosk, in partial satisfaction of his outstanding tax liabilities, defendants Lincoln and Mutual urge that until Bosk elects to claim the cash surrender value, there is nothing upon which the Government can enforce its liens with regard to the policies. This contention, however, is patently without merit. It is well settled that where valid liens for taxes attach to the cash surrender value of life insurance policies before the death of the taxpayer, the Government is entitled to have its lien satisfied to the full extent of the cash surrender value. United States v. Bess, 357 U. S. 51 [58-2 USTC ¶9595]; United States v. Behrens, 230 F. 2d 504 (C. A. 2d) [56-1 USTC ¶9294]; United States v. Metropolitan Life Insurance Co., 256 F. 2d 17 (C. A. 4th) [58-2 USTC ¶9630]; Smith v. Donnelly, 65 F. Supp. 415 ( E. D. La. ) [46-1 USTC ¶9247]; United States v. Prudential Ins. Co., 54 F. Supp. 664 (E. D. Pa.) [44-1 USTC ¶9216]; United States v. Trout, 46 F. Supp. 484 (S. D. Calif.) [42-1 USTC ¶9372]. In a suit to foreclose a tax lien against a taxpayer, in which the insurance company and the beneficiaries have been joined, the court can order the taxpayer to produce the policies in court and cause distribution of the cash surrender value to be made in partial or full satisfaction of the lien, as the case may be. United States v. Metropolitan Life Ins. Co., supra; United States v. Trout, supra.

[Nonexercise of Cash Surrender Value Option]

Although conceding that the plaintiff obtains a lien for the amount of its taxes up to the amount of the cash surrender value at the date the liens attach, Lincoln and Mutual contend that the Government cannot obtain the cash surrender values of the policies until the policies have matured as claims upon the death of Bosk. Reliance for this position is placed on United States v. Bess, supra. That decision makes it clear that such a contention is untenable. In that case the Supreme Court allowed recovery of the cash surrender value of the policies from the beneficiary after the death of the insured, but on which the liens had attached prior to his death. The Court was explicit, however, in stating that where the insured had "property" or "rights to property" within the meaning of Section 3670 of the Internal Revenue Code, liens thereon may be attached. And where a lien comes into operation under Section 3670, it is my opinion that the Government, in a proper action joining the appropriate parties, can enforce the lien during the insured's lifetime thereby recovering the cash surrender value. That this is so was foreshadowed by dictum in United States v. Bess (p. 57, fn. 2), and squarely decided in United States v. Metropolitan Life Ins. Co., supra. In the latter case the District Court entered judgment enforcing liens against certain realty but dismissed the action insofar as it sought to enforce liens against the taxpayer's interest in the cash surrender values of insurance policies taken out on his life. The taxpayer, a fugitive from justice, had absconded to Canada with his wife and daughter, the beneficiaries under the policies, and had the policies in his possession. On appeal, the late Chief Judge Parker of the Court of Appeals for the Fourth Circuit wrote a comprehensive and learned opinion on the very question at issue herein. Having disposed of the fact that the cash surrender value of life insurance policies constituted property and that the Government's liens thereon were perfected, matters not here disputed, the court turned its attention to the alleged necessity of the insured's exercising his option of claiming the cash surrender value of the policies before the Government could enforce its liens thereon. With regard to this question, Judge Parker held (pp. 22-23):

"It is said, relying upon such cases as United States v. Metropolitan Life Ins. Co., 2 Cir., 130 F. 2d 149 [42-2 USTC ¶9609], and United States v. Penn Must. Life Ins. Co., 3 Cir., 130 F. 2d 495 [42-2 USTC ¶9623], 142 A. L. R. 888, that unless the insured has exercised his option to take cash surrender value under the policy, there is nothing to which the lien provided for by statute can attach. As pointed out above, however, insured unquestionably has a property right under the policies, the value of which is measured as a practical matter by the cash surrender value, and we do not think the right of the government to reach such property for taxes can be defeated by the fact that the insured has not made an election under the policies. This is the effect of the decisions, heretofore cited of Rowen v. Com'r, supra, 2 Cir., 215 F. 2d 641 [54-2 USTC ¶9581]; United States v. Behrens, supra, 2 Cir., 230 F. 2d 504 [56-1 USTC ¶9294]; United States v. Hoper, supra, 7 Cir., 247 F. 2d 468 [57-1 USTC ¶9508]; and United States v. Bess, supra, 3 Cir., 243 F. 2d 675 [57-1 USTC ¶9528].

"The promises of the companies with relation to the cash surrender values amount to promises to pay these to the insured on his demand; and where his rights under the policies are subjected to tax liens, the right to demand the cash surrender value is vested in the government to the extent necessary to satisfy the liens. * * *

* * *

"When the insured's interest in the policies is subjected to the tax lien under this proceeding, this amounts to a seizure of such interest by the United States (United States v. Miller, 11 Wall. 268, 297, 20 L. Ed. 135); and the United States by virtue of such seizure, may exercise any right which the insured might have exercised under the policies, including the election to take the cash surrender value. (Italics added.)"

[Foreclosure Procedure]

On the question of the sufficiency of the proceedings to foreclose the tax liens under Section 7403, Internal Revenue Code of 1954 (26 U. S. C. 1958 ed., Sec. 7403), the section under which the present action was instituted, on the cash surrender values of the policies, it was further stated (pp. 23-25):

"We think it clear that the proceeding here, which was instituted under 26 U. S. C. §7403, was sufficient to foreclose the tax lien asserted on the policies and to protect the interest of the insurance companies. Not only were the insured and the companies made parties to the proceeding, but the beneficiaries under the policies were also made parties. As the insured was not present within the state, it was proper that he be served by publication so that the court might foreclose the tax lien upon his property. 28 U. S. C. §1655. And as the insurance companies were present doing business within the state, it was clearly proper that the suit be brought there to reach insured's interest in the policies. Harris v. Balk, 198 U. S. 215, 25 S. Ct. 625, 49 L. Ed. 1023. There is no reason why the court should not determine the value of the insured's interest under the policies and direct that this be paid upon the tax liens asserted by the government, nor why this will not fully protect the companies with respect to their obligations under the policies in the same way that a debtor garnishee is protected in any garnishment proceeding. * * *

* * *

"The court can unquestionably condemn the interest of the insured under the policies to the satisfaction of the lien and can direct that such interest be paid by the insurance companies to the United States , the holder of the lien. This interest is the cash surrender value of the policies. It is argued, however, that the court may not do this, because the policies must be surrendered as a condition to obtaining the cash surrender value; but the surrender is for the protection of the companies and they will be as well protected by the judgment of the court as by the surrender of the policies, since the policies are not negotiable. See Foley v. Equitable Life Assur. Society, 290 N. Y. 424, 49 N. E. 2d 511, 514; Rubenstein v. Rubenstein, Sup., 105 N. Y. S. 2D 24; United States v. Manufacturer's Trust Co., 2 Cir., 198 F. 2d 366, 369 [52-2 USTC ¶9417]; Harris v. Balk, supra. Of course, surrender of the policies should be ordered if the policies are available for surrender. When, however, they are unavailable for surrender, because the owner has absconded to a foreign country and is beyond the reach of personal process, and when the interest of the insurer will be protected by the judgment of the court, the insurer should be required to pay the cash surrender value in the proceeding under the statute. (Italics added.)"

The above quoted matter most persuasively and soundly disposes of the questions involved in the Government's favor. It is clear that if the Government can foreclose on cash surrender values of insurance policies when neither the insured nor the policies are within the jurisdiction of the court, then a fortiori, the Government can certainly foreclose its liens when the insured, taxpayer, is within the jurisdiction of the court. As stated by Judge Parker, in United States v. Metropolitan Life Insurance Co., p. 25, "the court is not so impotent that it cannot apply to the satisfaction of tax liens property interests of a taxpayer held by corporations [insurance companies] within its jurisdiction."

Accordingly, the Court holds that it has jurisdiction over this controversy and the parties thereto; that this action was timely instituted; that the defendant, Israel M. Bosk is indebted to the plaintiff in the amount of $8,690.05, plus interest thereon according to law; that Federal tax liens have attached to the present cash surrender value of the life insurance policies which are the subject matter of this action; that the defendants, Lincoln National Life Insurance Company and Mutual Life Insurance Company, are directed to pay over to plaintiff the present cash surrender values of the said life insurance policies, and other properties therein of defendant, Israel M. Bosk, in partial satisfaction of plaintiff's claim; that defendant, Israel M. Bosk, is hereby directed to surrender to defendants, Lincoln National Life Insurance Company and Mutual Life Insurance Company, the original of the aforesaid policies; and that upon application of the cash surrender values of said policies, the plaintiff is entitled to a deficiency judgment against defendant, Israel M. Bosk, for the remaining unsatisfied portion of said defendant's tax liability and interest thereon as provided by law, if any, in the amount remaining unsatisfied. Ordered accordingly.

 

[65-1 USTC ¶9279]The Mutual Life Insurance Company of New York, Defendant, Appellant v. United States of America, Plaintiff, Appellee.

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 19,190, 343 F2d 71, 3/3/65, Modifying and affirming District Court, 64-1 USTC ¶9130, 222 F. Supp. 664

[1954 Code Sec. 6332]

Surrender of property subject to levy: Insurance policies: Duty of insurer to pay over cash surrender value.--An insurance company, upon notice of a tax lien in favor of the Government for unpaid income taxes owed by the insured, is under no duty to terminate an unmatured life insurance policy owned by the delinquent taxpayer and to pay over its cash surrender value to the Government. Under these circumstances, the insurer is not liable for the penalty under Code Sec. 6332 which imposes personal liability upon a person to the extent of the value of property not surrendered upon notice and demand of levy by the Government. Thus, the insurer's liability under the lien is limited to the cash surrender value of the policy at the time the lien is foreclosed.

Gerhard A. Munch, Michael L. B. Kaplan, Mutual Life Insurance Co., New York, N. Y., Morse & Graves, 116 S. Fourth St., Las Vegas, Nev., for defendant-appellant. Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Alec A. Pandaleon, Department of Justice, Washington, D. C. 20530, John W. Bonner, United States Attorney, Las Vegas, Nev., for plaintiff-appellee.

Before HAMLIN and MERRILL, Circuit Judges, and BASTIAN, Circuit Judge, Sitting by Designation.

[Nature of Issue]

MERRILL, Circuit Judge:

This case presents for our consideration problems resulting from the levy by a District Director of Internal Revenue upon a life insurance policy of a delinquent taxpayer, with a demand upon the insurer for payment of the policy's cash surrender value. The United States has brought this action for foreclosure of tax lien ¹ against the taxpayer, Albert Salerno, a resident of Las Vegas, Nevada, and against appellant which had, in 1951, issued a policy of insurance upon Salerno's life.

[Facts]

Notice of Tax Lien in favor of the Government against all of taxpayer's property was filed with appellant June 19, 1958. Notice of Levy and Demand was served upon appellant and demand was made for payment of the policy's cash surrender value on February 11, 1960. ² On that date the cash surrender value of the policy was $660.96. In the fall of 1960, the premium upon the policy falling due and remaining unpaid by or on behalf of Salerno, appellant, pursuant to the terms of the policy's provision for "automatic premium loans," resorted to a "loan" against the policy's cash value for payment of the premium. The policy's surrender value was accordingly reduced to $494.59.

This action was brought in May, 1961, in the District Court for the District of Nevada for foreclosure of the tax lien and, as to appellant, to recover the penalty provided by §6332(b) of the Internal Revenue Code of 1954, 26 U. S. C. §6322(b) (1958), ³ for failure to surrender Salerno's property upon Notice of Levy and Demand. Taxpayer suffered a default judgment.

The District Court, in decreeing foreclosure, found the value of Salerno 's property subject to foreclosure to be $494.59. It found that the value of Salerno's property in the possession of appellant at the time of Notice of Levy and Demand to be $660.96, and rendered judgment against appellant in this amount (but not to be cumulative with the lien recovery), together with interest at the rate of 6 per cent per annum from February 11, 1960. The opinion of the District Court appears, sub nom U. S. v. Salerno [64-1 USTC ¶9130], in 222 F. Supp. 664 (D. C. Nev. 1963).

Before the District Court the issue presented was whether in an unmatured policy--one where the insured is still alive--the right to the cash surrender value constitutes property to which a lien can attach and which a levy can reach. Relying upon U. S. v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958), the District Court ruled that it did. In so holding it rejected appellant's contentions that Bess was distinguishable since it dealt with a matured policy; that in an unmatured policy no lienable right to the cash surrender value exists in the insured until he has elected to demand it and has surrendered the policy. Appellant has here renewed its contentions in these respects. We agree with the District Court that they are without merit. ⁴

Upon this appeal the principal dispute is over the liability of appellant in excess of $494.59, which was the value of the policy at the time of foreclosure. The principal issue is raised by appellant's contention that even though the cash surrender value constituted property to which a tax lien had attached, still appellant's duty to pay over such value did not arise upon Notice of Levy and Demand; that it was necessary to resort to foreclosure in order to establish that duty. This precise issue and the considerations bearing upon it apparently were not presented to the District Court and were not dealt with in its opinion. However, they have since been considered by two courts of appeal upon whose opinions appellant now relies. Equitable Life Assur. Soc'y of United States v. United States [64-1 USTC ¶9433], 331 F. 2d 29 (1 Cir. 1964); United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100 (3 Cir. 1964).

In those cases it was held that while the right of the insured in an unmatured policy to demand the cash surrender value constitutes property to which a lien attaches (in Bess the lien was held to attach to this right while the policy was unmatured), it does not constitute a present debt owing by the insurer and therefore cannot be reached by summary ex parte action of the United States in making levy and demand for payment upon the insurer. Consequently it was held that levy and demand upon the insurer did not, without further proceedings, give rise to an obligation on the part of the insurance company forthwith to cancel the policy and make payment to the United States of the cash surrender value.

We agree that a contract the rights of which may, at a party's option, be converted into cash is not the equivalent of cash nor of a debt owing by the other party. ⁵ As it is made clear in both Equitable Life and Sullivan, those rights may well have a realizable value (at least to the insured or his beneficiaries) in excess of the surrender or conversion value. Ex parte destruction of the contract rights in order to realize their conversion value may under some circumstances be likened to an ex parte wrecking of seized tangible property in order to secure its junk value. Notice of Levy and Demand for payment, even if reaching rights of taxpayer as property in the hands of appellant, does not extinguish rights nor convert them to cash. No duty thereby arose in the insurer to terminate the contract and pay over its cash surrender value.

Accordingly we conclude that no penalty may be assessed against appellant for failure to pay over the cash surrender value on demand.

Appellant also contends that the beneficiaries of the policy were possessed of such an interest as to be indispensable parties. We do not agree. They were not the owners of the policy, nor were they possessed of any vested rights in it. Their status as beneficiaries was at the sufferance of the insured. ⁶

It is ordered that judgment be modified by excluding therefrom any judgment for penalty pursuant to 26 U. S. C. §6332(b) (1958). As so modified judgment is affirmed.

¹ Pursuant to 26 U. S. C. §7403 (1958) which provides, inter olia, for an action in the District Court "to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property of whatever nature, of the delinquent, or of which he has any right, title, or interest, to the payment of such tax or liability."

² Section 6321, Int. Rev. Code of 1954, 26 U. S. C. §6321 (1958), provides that the tax lien shall attach "upon all property and rights to property * * * belonging to [the taxpayer]." Section 6331(a), 26 U. S. C. §6331 (1958), authorizes collection of the tax due 'by levy upon all property and rights to property * * * belonging to [the taxpayer] or on which there is a lien * * *." Section 6332(a), 26 U. S. C. §6332 (1958), provides that "any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall upon demand * * * surrender such property or rights (or discharge such obligation) to the Secretary * * *."

³ Section 6332(b), 26 U. S. C. §6332(b) (1958):

"Any person who fails or refuses to surrender as required by subsection (a) any property or rights to property subject to levy, upon demand by the Secretary or his delegate, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of the taxes for the collection of which such levy has been made, together with costs and interest on such sum at the rate of 6 percent per annum from the date of such levy."

⁴ Appellant contends in the alternative that such right of the insured, if it did constitute lienable property, was not possessed by the insurer and could not be reached by levy upon the insured. This contention we do not reach since the levy here was ineffective for other reasons. See footnote 5, infra.

⁵ The Government has not treated these rights as property other than a debt. It has made no effort to reduce the "property" (upon which it has levied) to money by sale but has assumed that the contract rights were the equivalent of cash, the payment of which could summarily be demanded. We are not, then, faced with the question (which both Sullivan and Equitable Life seem to have answered in the negative) whether there was any property at all belonging to the insured in the possession of the insurer which could be reached by levy and realized upon by sale. We decide, and need decide, only that such property, if it did exist, did not constitute a present debt.

⁶ "* * * if an action is brought against the insured as the delinquent taxpayer, the beneficiary need not be joined as a defendant if under the contract and state law he has novested interest in the insurance but a mere expectancy. Since the insured in such [a] case can defeat the beneficiary's expectancy by his own voluntary act, the fact that he may be required to do so under compulsion of a court decree cannot increase the beneficiary's interest." Pyle, Liability of Life Insurance and Annuities for Unpaid Income Taxes of Living Insureds, Annuitants, and Beneficiaries, 9 Tax L. Rev. 205, 226 (1954).

Appellant suggests that the insured's wife might have some vested interest as a citizen of a community property state ( Nevada ), although below it apparently argued that New York law applied. In any case, the District Court held that no rights of the beneficiaries were involved and the appellant has not shown that holding to be clearly erroneous.

 

[65-2 USTC ¶9581] United States of America , Appellant v. Louis H. Mitchell, et al., Appellees

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 20437, 349 F2d 94, 7/26/65, Affirming the District Court, 62-2 USTC ¶9802, 210 F. Supp. 810

[1954 Code Secs. 6331 and 6332]

Tax levy: Life insurance policies: Effect prior to foreclosure judgment.--A federal tax lien attaches only to the rights that a delinquent taxpayer has under a life insurance policy, and those rights may be levied upon the sold at a distraint sale. But, if prior to the date of judgment of foreclosure on the lien, the insured has elected to have the cash surrender value of the policy used for automatically extended insurance, automatic premium loans, or policy loans, the levy in most circumstances will not reach the cash surrender value.

Michael I. Mulroney, Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Department of Justice, Washington, D. C. 20530, Vernol R. Jansen, Jr., United States Attorney, Mobile, Ala., for appellant. Alex T. Howard, Jr., Robert F. Adams, 9th Floor, Merchants National Bank Bldg., P. O. Box 1070, Mobile, Ala., Mayer W. Perloff, Van Antwerp Bldg., Mobile, Ala., J. Edward Thorton, 713 Merchants National Bank Bldg., P. O. Box 23, Mobile, Ala., for appellee.

Before TUTTLE, Chief Judge, MOORE ^* and BELL, Circuit Judges.

[Nature of Action]

MOORE, Circuit Judge:

The United States of America (the Government) brought this action against Louis H. Mitchell and his wife, Betty K. Mitchell, (and other individual defendants) and against four insurance companies from whom Mitchell had secured life insurance, to collect income taxes assessed against Mitchell for the years 1943 through 1948 and 1951 through 1953, and against Louis H. and Betty K. Mitchell for 1954. In addition, the Government in this action sought to enforce tax liens "against funds in the possession or under the control of" the four insurance companies. The "funds", if any, exist only as a result of the contractual relationships between the insurance companies and Mitchell as expressed in the respective policies. The facts are more fully set forth in Judge Thomas's opinion below, [62-2 USTC ¶9802] 210 F. Supp. 810 (S. D. Ala. 1962). At issue on this appeal is the question of whether the insurance companies were subjected to any liability to the Government as a result of the filing and serving upon them in September and October of 1949 of notices of levy, arising out of the Mitchell tax deficiency. These leview stated that "all property rights to property, money, credits and/or bank deposits" in the insurer's possession and belonging to Mitchell were seized and levied upon to pay his taxes. Payment of any amount owing to Mitchell was demanded.

[Policy Provisions]

To ascertain to what property rights the Government's levies might have attached, the contractual rights in the policies themselves must be examined. Four companies are involved: Travelers Insurance Co. (Travelers), John Hancock Mutual Life Insurance Co. (John Hancock), Prudential Insurance Co. (Prudential), and New England Mutual Insurance Co. ( New England ). In each policy, Mitchell's wife was the named beneficiary.

Using the Prudential policy as an example, it was provided in relevant part that:

If this Policy be legally surrendered to the Company . . ., and if all premiums . . . have been paid in full, the Company will pay therefor the sum indicated in the following table, less any indebtedness to the Company on account of this Policy. The Company reserves the right to defer the payment . . . for a period not exceeding ninety days after application for such Cash Surrender Value.

Like the others, it provided in addition that

If this policy . . . shall lapse or become forfeited for the non-payment of any premium . . . and if the Policy be not surrendered for its cash value, the Company upon the legal surrender of this Policy . . . will issue a non-participating Paid-up Life Policy . . . as specified in the following table . . ..

Alternatively,

If this Policy, having lapsed or become forfeited as specified in the clause, "Paid-up Life Policy," above, be not surrendered for its Cash Value or for a Paid-up Life Policy, the Company will put in force in lieu of this policy, without any action on the part of the Insured, a non-participating Paid-up Term Policy for the Face Amount of Insurance under this Policy, . . . to continue in force for the term indicated in the following table . . .. The Paid-up Term Policy will be delivered on the legal surrender of this policy.

Finally,

If this Policy shall lapse, as above, and a Paid-up Life Policy be issued or a Paid-up Term Policy be put in force in lieu thereof, such . . . Policy may be surrendered at any time for its full reserve value at the time of such surrender. The Company reserves the right to defer the payment of any cash surrender value for a period not exceeding ninety days after application for such cash surrender value.

A table in the policy indicated for each of the first twenty years of the policy the values per $1,000 of face amount of cash surrender value, loan value, paid-up life policy, and the amount of automatic extended insurance. If the policy continued in force beyond twenty years, another table was available from the insurer. At the time of the notices of levy, the policies had the following cash surrender values: Travelers--$1,043.10; John Hancock--$428.10; Prudential--$170.52; ¹ New England--$2,768.53.

[Extended Insurance Granted]

The history of the policies subsequent to the entry of a tax judgment against Mitchell in 1951 discloses that at varying times thereafter, Mitchell defaulted on the premium payments. Pursuant to the policy provisions, extended term insurance was furnished as follows: Travelers-face amount of $13,630 from May 7, 1952 (cash surrender value then of $1,205.16) to May 17, 1959; John Hancock-from August 23, 1957 to June 26, 1962; ² Prudential-face amount of $2,796.69 from September 25, 1955 (cash surrender value then of $282.94) to October 25, 1961. The New England policy provided for paid-up insurance at a reduced face amount in case of default. The defaults commenced on November 1, 1951, and the policy matured on February 1, 1959, with a maturity value of $4,859.97.

To the Government's claim that the insurance companies were liable for the cash surrender value of the policies at the time of the levy, they responded that the cash surrender value was not payable without written election by Mitchell and surrender of the policy.

[Stipulated Issues]

The Government and the insurance companies stipulated the issues to be decided by the court:

1. Does the government have any right to enforce a levy against the policies in the absence of an election by the insured owner of the policy to take its cash surrender value, accompanied by a surrender of the policy, and in the absence of a court order requiring them (the insurance companies) to turn over this money to the government?

2. In the event the government has this right, at what date does the cash surrender value to which the government is entitled become effective, namely, the date of the levy, the date of the decree in this court, or some intervening date?

The trial court concluded that the Government had no such right and was entitled only to the amounts available under the policies at the time of the judgment--1963. At that time, all but the New England policy were entirely defunct; thus, the Government took nothing. As for New England , however, the Government was entitled to the maturity value of $4,850, which exceeded the 1949 cash surrender value of $2,768. Judgment was also entered against the Mitchells on all assessments. The Government appeals, asking that judgment be reversed against Travelers, John Hancock and Prudential "for the amount of the cash surrender value of each policy as of the date of the levy, plus statutory interest," and that the judgment against New England be modified to the same effect. All insurers but New England oppose the appeal.

[Lien v. Levy]

This action began in the complaint as a lien case, and seems to have shifted in the stipulation to a levy case. The first step, therefore, must be to place the statutory framework for both approaches firmly in mind. Section 3670 of the Internal Revenue Code of 1939 (now §6321 of the Internal Revenue Code of 1954 ³ provides essentially that

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal belonging to such person. (Italics added.)

The lien which thus arises upon assessment attaches to the taxpayer's property upon demand and refusal to pay, and under section 3678 (§7403), a civil action could be brought to enforce such a lien, whether or not distraint proceedings have been commenced.

The distraint proceedings referred to constitute a wholly independent collection procedure. Under it

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 . . . to collect such taxes, by distraint and sale . . . of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid. Section 3690 (see §6331(a), (b).)

In case of neglect or refusal under section 3690, and collector may levy . . . upon all property and rights to property, except such as are exempt by the preceding section [§3691 (§6334)] belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due . . .. Section 3692 (see §6331(a), (b)). (Italics added.)

When such distraint is to be made, notice shall be given to the owner or possessor of "the goods and effects distrained," and notice of sale shall be published forthwith; such sale must be within 10 to 20 days. Section 3693(a), (b), (c) (§6335). At such a sale, the Government may set a minimum price at which it may purchase the property if no bids are higher. Section 3695(a) (§6335(e)). However, "the goods, chattels, or effects so distrained shall be restored to the owner or possessor, if, prior to the sale, payment of the amount due is made . . .." Section 3696 (§6337(a)). Finally,

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 . . . making such levy, surrender such property or rights to such collector . . . Section 3710(a) (§6332(a)) (Italics added.)

And,

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 . . . for the collection of which such levy has been made, together with costs and interest from the date of such levy. Section 3710(b) (§6332(b)) (Italics added.)

Thus the levy and distraint approach may be followed without regard to whether an action to enforce a lien has been brought. However, since levy presupposes a refusal to pay an assessed deficiency, in all levy cases a lien will already have arisen and attached, although it may subsequently have been released or the property subject to it discharged under sections 3673-74 (§6325). See generally Plumb, Federal Tax Collection and Lien Problems, 13 Tax L. Rev. 247, 459 (1958). This is the procedural structure.

[Government's Arguments]

The Government's argument has three steps. First, it claims that the cash surrender value of a life insurance policy "is a definite sum of money, readily calculable, which the insured can borrow against, sell, assign, or pledge." That the cash surrender value is readily calculable, no one disputes. But that is not the same as saying that the cash surrender value "is a fund in the hands of the insurer belonging to the insured." The difference stems from the nature of the entity referred to as the cash surrender value. Often, "in analyzing insurance tax cases, federal courts have evidenced a complete disregard for the realities of the insurance investment and have hinged their decisions on the form of the life insurance contract." Swihart, Federal Taxation of Life Insurance Wealth, 37 Ind. L. J. 167, 194 (1962). Here, however, it is the Government that is insufficiently mindful of the realities.

Most whole life level premium insurance policies provide, as do those here, that the insured can borrow against the cash surrender value, ⁴ or that in the event of nonpayment of premiums the cash surrender value will be used for premium loans or for automatically extended term, or reduced face value paid-up, insurance. To the extent that loans are made, or extended insurance purchased, the insurer's obligation to pay the cash surrender value is diminished.

The cash surrender value cannot be considered a fund held by the insurer but belonging to the insured. Rather, it is an artificial measure of one of the many obligations--alternative and cumulative--of the insurer to the insured. The amount available at any one time to the insured, on surrender of the policy and election to take the cash surrender value, depends on the age of the policy, the amount of outstanding loans against the policy, and the amount used for extended insurance. Only fortuitously and perhaps never will the cash surrender value equal the investment component of the insured's premium payments.

Therefore, the exact uses to which the insurer is obliged to put the accumulating reserve depend upon the particular options being exercised and the point in the life of the policy and the insured. As a result of the insured's action or inaction, the insurer's obligation to pay the cash surrender value may be diminished by a number of means. The total obligation will be diminished only when the amount of other uses exceeds its incremental growth--by premium or by interest. If nothing is done by way of loan or default, however, the increment will always exceed the amount used to cover insurance costs.

[Bess Case]

The Government argues that the Supreme Court's decision in United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958), "flatly holds that the federal tax lien attaches to the cash surrender value at the time the lien arises."

Both the lien and the levy approach require for their operation "property or rights to property" belonging to the taxpayer. The existence of property or rights to property is determined by reference to state law, since the Code "creates no property rights but merely attaches consequences, federally defined, to rights created under state law. . . ." United States v. Bess, supra, 357 U. S. at 55; see Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233, 236 (1963). See generally Note, Property Subject to the Federal Tax Lien, 77 Harv. L. Rev. 1485 (1964). All the parties apparently assume that Mitchell's property rights under this insurance policy are the same as those Mr. Bess had under his policy. We too will assume this to be so. ⁵

Even so, there is some ambiguity as to exactly what property or property rights Bess had. The Court stated at one point that "Mr. Bess had 'property' or 'rights to property' within the meaning of §3670, in the cash surrender value." 357 U. S. at 56. But the Court also referred to "the insured's property right represented by the cash surrender value . . ." Ibid. (Italics added.) Unfortunately, the posture of the case did not require close attention to the precise nature of the property rights in question, and required no attention at all to whether the insurer possessed "property" belonging to Bess. ⁶

Subsequent to assessment of a deficiency, but in the absence of a levy, Bess had died. His wife, as the beneficiary, received the entire proceeds of the policy. The Government sued her under section 311 (§6901) to recover the amount of Bess's taxes due; she was sued as a "transferee" of the taxpayer's property. The District Court found her to be sued and awarded the Government $8,874.00. Mrs. Bess had received $63,576 on the policy, the cash surrender value as of death being $3,362. On appeal, the Third Circuit held that Mrs. Bess was a transferee only to the extent of Bess's property rights under the policy, which was the cash surrender value. The Supreme Court affirmed, but on an entirely different ground, namely, that a lien attached to Bess's property rights under the policy (the cash surrender value) and to the extent that the amount paid to Mrs. Bess represented that value, the lien was enforcible against her. Rejecting the contention that the insured's rights with respect to the cash surrender value expired on his death, the Court likened it to a fund, the amount of which then existing was a severable part of the total proceeds going to the beneficiary. ⁷ In Bess, therefore, it did not particularly matter whether the lien was seen as attaching to an identifiable fund called the cash surrender value, or to Bess's right to demand such an amount. Because Bess's death had finalized matters in its implacable way, the Supreme Court did not have to consider the dynamics of the situation prior to death. In Bess, the future was quite irrelevant.

Here, however, at the time the Government insists that its rights were established, the future was quite relevant to Mitchell, the insurers and the beneficiaries. The cash surrender value and other policy rights and obligations were still subject to change for many reasons. In the more complicated situation before us, it is more helpful to say that the lien attached to Mitchell's rights to property, one of which was his right to collect a cash surrender value `from the insurance companies in accordance with the terms of the policies'." 357 U. S. at 56.

[Rights Reached by Levy]

The Government's third proposition is that since, the property, i.e., as it assumes, the cash surrender value, can be reached by the lien, therefore "the cash surrender value of an insurance policy can be reached by levy," and the insured's request and surrender of the policy are not necessary to the effectiveness of the levy. We may assume that property subject to the tax lien is also subject to levy. See Pyle, Liability of Life Insurance and Annuities for Unpaid Income Taxes of Living Insureds, Annuitants, and Beneficiaries, 9 Tax L. Rev. 205, 227-28 (1954). But see United States v. Metropolitan Life Ins. Co. [42-2 USTC ¶9609], 130 F. 2d 149, 151 (2d Cir. 1942); United States v. Aetna Life Ins. Co. [42-1 USTC ¶9266], 46 F. Supp. 30, 36 (D. Conn. 1942). The Code literally says so, although the phraseology of some of the levy and distraint provisions seems inapropos to certain intangible property rights. We also accept for the moment the Government's argument that a levy operates to reduce personal property of the tax debtor to the possession of the Government, see Freeman v. Mayer [58-1 USTC ¶9351], 253 F. 2d 295, 298 (3d Cir. 1958) (accounts receivable); Rosenblum v. United States [62-1 USTC ¶9384], 300 F. 2d 843 (1st Cir. 1962), or, because of the inaptness of possessory concepts to intangible rights, at least as an assignment of the taxpayer's claim, see In re Cherry Valley Homes, Inc. [58-2 USTC ¶9581], 255 F. 2d 706, 707 (3d Cir.), cert. denied, sub nom. Dubois v. United States, 358 U. S. 864 (1958) (liquidated debt).

The Government is not content with the proposition that levy vests the Government with the insured's rights with respect to the policies. In addition, it claims that the language of the notice of levy quoted above "was the clearest notice to the insurers, in full accord with the provisions of the insurance contract requiring notice of assignment and demand for the cash surrender value, that the Government was the owner or assignee of all the rights of the insured and that it demanded the cash surrender value." However, not only were Mitchell's rights to be paid the cash surrender value conditioned on a written election and surrender of the policy, but any assignment also had to be in writing and indorsed on the policy. Were we to decide that mere levy vested the Government with Mitchell's rights then we might be more inclined to let notice of levy serve not only as the required notice of assignment, but also as a written election to take the cash surrender value--even though the Government might be able to realize more by letting the policy mature or by foreclosing its lien at a later date. Still, that would leave the question of surrender of the policy, an act said to have as its sole purpose the protection of the insurer against further claims. Cf. Royal Arcanum v. Behrend, 247 U. S. 394, 401 (1918). ⁸

Under the Government's view of the effect of a mere notice of levy, all rights of the insured and the beneficiaries would be irretrievably lost. The policy would be terminated and not open to reinstatement. The insured might no longer be insurable, and his death in the interim after levy would no longer leave that cushion that had been built up and counted on. See Equitable Life Assur. Soc'y v. United States [64-1 USTC ¶9433], 331 F. 2d 29, 36, 37 (1st Cir. 1964). The beneficiary or someone else may have been paying the premiums, yet their interests would be extinguished, cf. United States v. Fried [63-1 USTC ¶9106], 309 F. 2d 851 (2d Cir. 1962); Duke v. United States [64-2 USTC ¶9786], 343 F. 2d 294 (D. C. Cir. 1964). Such a drastic alteration of rights and obligations can come about, under the Government's argument, with no notice required to be given to the beneficiaries. ⁹ Yet it may be that under the applicable state law, the beneficiaries' consent is normally required before the cash surrender value may be taken, cf. Rowen v. Commissioner [54-2 USTC ¶9581], 215 F. 2d 641, 648 (2d Cir. 1954). Also, the right of redemption provided by section 3696 (§6337(a)) would be of little value if the levy itself had the effect of terminating the policy, which would seem to be the result of freezing the cash surrender value. See United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100, 117-18 (3d Cir. 1964), 18 Vand. L. Rev. 805 (1965). A bankruptcy trustee's title is not so pervasive as that. See section 70(a), Bankruptcy Act, 11 U. S. C. A. §110(a).

The Government tries to ameliorate these consequences by saying that "the levy does not require an immediate cancellation of the insurance policy." It is true that the insurer reserves the right to defer payment of the cash surrender value for 90 days after demand for it, but the policies, including the insurers' liability upon the death of the insured, would still by their terms seem to terminate with the demand. Moreover, if other provisions of the policy were not to apply to the Government, it is not clear why the 90-day provision would stand in any better position. The Government suggests that the insurer could protect itself by seeking an adjudication of the competing rights in the policy and that "so long as it keeps the fund intact, it can hold the cash surrender value until the rights to it are adjudicated." See also Rev. Rul. 56-48, 1956-1 Cum. Bull. 561. But the cash surrender value is not like the unpaid wages of city employees involved in Hoye v. United States [60-1 USTC ¶9365], 277 F. 2d 116 (9th Cir. 1960). Compare Sims v. United States [59-1 USTC ¶9338], 359 U. S. 108 (1959). At some points in time, the cash surrender value might have to be used by the insurer to cover the costs of insurance for this period during which the Government suggests the policy is still viable. And, preservation of the cash surrender value will not always be great comfort to others than the insurer who are interested in the policy; insurance is their concern, not surrender.

[Surrender of Policies Not Required]

We recognize that technical surrender is not a prerequisite to the existence of a lien against the insured's right to the cash surrender value, see United States v. Bess, supra; United States v. Sullivan, supra, 333 F. 2d at 122 (Hastie, J., dissenting). But that is not our problem here. We also recognize that in United States v. Metropolitan Life Ins. Co. [58-2 USTC ¶9630], 256 F. 2d 17 (4th Cir. 1958), surrender was held unnecessary to the Government's enforcement of its lien on the insured's right to take the cash surrender value. In that case the Government sued under the same section initially relied on here. The insured, the insurers and the beneficiaries were all parties. Judge Parker held that that action to enforce the lien amounted to an election of the taxpayer-insured's right to take the cash surrender value. Surrender of the policies would be desirable, but if the insured was beyond the court's jurisdiction, as he was there, "the interest of the insurer will be protected by the judgment of the court." 256 F. 2d at 25. While the opinion does not indicate the precise time at which the cash surrender value was to be determined, the reference to payment under court order suggests that the election is not complete until the judgment of foreclosure is obtained. This conclusion is sound for only then will all parties be protected. See United States v. Wilson [64-1 USTC ¶9396], 333 F. 2d 137, 143-45 (3d Cir. 1964); United States v. McWilliams [64-2 USTC ¶9619], 234 F. Supp. 117, 123-24 (D. Conn. 1964).

[Action for Penalties]

According to its complaint, the Government began this action under Int. Rev. Code of 1954 §7403, to enforce its lien. Under Metropolitan Life, then, it would be entitled to exactly what the District Court awarded--the value available to the taxpayer as of the judgment. On appeal, however, the Government has treated the action as one against the insurers under Int. Rev. Code of 1954 §6332 to recover penalties for their failure to surrender property belonging to Mitchell. Although the actions are quite distinct, procedurally and substantively, it makes little difference here and we shall consider both theories. See United States v. Sullivan, supra, 333 F. 2d at 115 n. 30.

Persons are liable for the penalty for failing to surrender property only when they possess property to surrender. The possessor of tangible property may be readily identified because of the physical nature of such possession. Intangible property, however, is just a theoretical bundle of rights and obligations. We share Judge Learned Hand's view that is is solecistic to talk of a promisor as "possessing" and able to "surrender" his promisee's property, which consists solely of his promise. United States v. Metropolitan Life Ins. Co. [42-2 USTC ¶9609], 130 F. 2d 149, 151 (2d Cir. 1942). Mitchell's rights to property consisted of an aggregation of intangible rights and possibilities: to change beneficiaries, to assign the policy, to borrow against the policy, and to terminate the policy and take the cash surrender value, to name a few. Each insurer had corresponding alternative and overlapping obligations to Mitchell and the beneficiaries. Crystallization of the obligations of each was contingent upon certain specified conditions.

[Insurers Contingently Obligated]

But merely because the insurers were contingently obliged to Mitchell, they cannot be said to have held "property" belonging to him. For this reason, the Government is incorrect in dismissing a series of cases decided twenty or so years ago, all under section 3710(b) for failure to surrender property, reaching results with which we agree. See United States v. Massachusetts Mut. Life Ins. Co. [42-1 USTC ¶9342], 127 F. 2d 880, 883 (1st Cir. 1942); United States v. Penn Mut. Life Ins. Co. [42-2 USTC ¶9623], 130 F. 2d 495, 498 (3d Cir. 1942); United States v. Aetna Life Ins Co., supra; cf. United States v. Metropolitan Life Ins. Co., supra. ¹⁰

The insurer does not "possess" the cash surrender value until an election by the person having the right to do so has been made to take it. That was never done here. In any case, a levy, unlike a lien, see Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945), does not apply to after-acquired property; therefore a new levy would seem necessary to reach the cash surrender value when it is eventually demanded. See generally Pyle, supra, 9 Tax L. Rev. at 325, 329-30, 340-42. Moreover, it is doubtful whether even a timely levy could reach loan values and nonforfeiture options because they are all the result of the insured's election to use funds only for a specific purpose. See id. at 330-32.

[Distraint Sale ]

In any case, we are not convinced that mere notice of levy, without a subsequent distraint sale, is sufficient to vest the Government with the insured's rights under the policy, see United States v. Sullivan, supra, 333 F. 2d at 115-20; compare §70(a), Bankruptcy Act, 11 U. S. C. A. §110(a), even if it is enough where the property in question is only a specific sum of money, see Sims v. United States, supra; Hoye v. United States, supra; or the right to only such a sum, cf. United States v. Hubbell [63-2 USTC ¶9724], 323 F. 2d 197 (5th Cir. 1963). Hubbell held only that a federal tax lien attached to a taxpayer's right of action; the Government's lien was held prior to other claims against the judgment that had ultimately been recovered. More was involved here than just Mitchell's right to take the cash surrender value. Under the policy he had a number of rights, some alternative, some cumulative. The owner of the policy or assignee of any rights could exercise those rights only in accordance with the policy provisions, and the total value of the combination of rights might well exceed the then cash surrender value. We think it better to require that the policy or the policy rights be sold to recover their maximum value, as was done with the annuity contract in Cannon v. Nicholas [35-2 USTC ¶9672], 80 F. 2d 934 (10th Cir. 1935). If bids do not meet the Government's upset price, then the Government may purchase the property rights and exercise them to the same extent that the insured could have. Even if the insured's only interest in the policy is the right to borrow against it, that right can be sold. See United States v. Trout [42-1 USTC ¶9372], 46 F. Supp. 484 (S. D. Cal. 1942).

[Cash Surrender Value Not Due upon Notice of Levy]

But whether the Government obtains the insured's right by sale, or even merely by levy, we conclude further that in the absence of a court order the particular rights available to the insured can be exercised by the Government only in accordance with the terms of the policy. We therefore reject the idea that notice of levy obliges the insurer to pay the cash surrender to the Government, just as we have rejected the idea that the tax lien attaches to the cash surrender value itself rather than to the insured's right to obtain the cash surrender value. The only decision to the contrary is United States v. Salerno [64-1 USTC ¶9130], 222 F. Supp. 664 (D. Nev. 1963), which relied essentially on dicta in United States v. Brody [63-1 USTC ¶9315], 213 F. Supp. 905 (D. Mass. 1963), which were discredited on appeal in Equitable Life Assur. Soc'y v. United States , supra, 331 F. 2d at 37. Furthermore, on appeal to the Ninth Circuit, Salerno was limited to a holding that "the right of the insured in an unmatured policy to demand the cash surrender value constitutes property to which a lien attaches. . . ." Mutual Life Ins. Co. v. United States [65-1 USTC ¶9279], 343 F. 2d 71, 73-74 (9th Cir. 1965); however, "levy and demand upon the insurer did not, without further proceedings, give rise to an obligation on the part of the insurance company forthwith to cancel the policy and make payment to the United States of the cash surrender value." Id. at 74.

To summarize, the federal tax lien arises and attaches to the taxpayer's rights under the policy. Those same rights may be levied upon and sold at a distraint sale. Enforcement of the lien can reach the cash surrender value as of the date of judgment of foreclosure. Prior to an election by the taxpayer to take the cash surrender value, the levy can reach only taxpayer's rights to make various elections. After purchasing those rights, the Government may make the elections as provided in the policy. Otherwise, it is entitled only to the proceeds of the distraint sale. If the taxpayer has made an effective election to take the cash surrender value but has not yet been paid, a levy can reach that value, which the insurer should be deemed to possess. For failing to surrender the cash surrender value to the Government in such circumstances, the insurer would be subject to the statutory penalty. In most circumstances, a levy will not reach the cash surrender value when the insured has elected, before or after the levy, to have it used for certain of the limited purposes specified in the policy, such as automatically extended insurance, automatic premium loans, or policy loans. See Comment, Effect of Federal Tax Lien on Cash Value of a Life Insurance Policy, 10 S. Dak. L. Rev. 154 (1965).

Therefore, if this action is treated as one to enforce its lien the Government received all to which it was entitled--the value available to the insured as of judgment. If the action is treated as one to recover the penalty for failing to surrender property the Government was entitled to nothing, since the insurers possessed none of Mitchell's property when the levy was made. As the only company which could complain about the difference-- New England --has not appealed, the judgment must stand.

Judgment AFFIRMED.

^* Of the Second Circuit, sitting by designation.

¹ The cash value of the policy was $1,723.25 but had to be offset by an outstanding loan and interest totalling $1,553.23.

² The record does not indicate the face value or the cash surrender value in 1957.

³ All references hereafter will be to Int. Rev. Code of 1939, followed by parenthetical references to the corresponding provisions of Int. Rev. Code of 1954.

⁴ In the typical whole-life level premium life insurance policy, the annual premium is used for three purposes: current insurance protection, costs and a profit to the insurer, and as the principal of an investment on which interest accrues until maturity. Prior to maturity, the total investment represents the capital so contributed plus interest, and the right to pass on at death the face value of the policy or, before death, to recover the cash surrender value of the policy. The proceeds at maturity represent the investment and interest and the pure insurance gain or loss. During the life of the policy, then, there is a "reserve" made up of the investment and interest. After payment of premiums terminates, the costs of insurance are covered from this reserve, which continues to accrue interest. Eventually, the reserve will equal the face value of the policy. Should the insured live even longer, the added incremental growth in the reserve would be gain to the insurer. See Vickrey, Agenda for Progressive Taxation, 407, 410-11 (1947). The "cash value" of the policy is an abstract amount somewhat less than the "reserve" as of the time of election to take the cash surrender value. See Rietz, The Nonforfeiture Provision, in The Life Insurance Policy Contract, 192, 193-198 (Krueger & Waggoner eds. 1953). We will use only two terms with reference to the cash surrender value. "Cash value" refers approximately to the accumulated reserve under the policy. "Cash surrender value" means the amount of the cash value available to the insured upon termination of the policy. If there is no policy indebtedness, the two will be equivalent. See United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100, 105 n. 12 (3d Cir. 1964).

⁵ In doing so, we avoid a hornet's nest of open questions which, on the record before us, we are ill-equipped to decide properly. In Bess, the Court gave no indication why New Jersey law should govern whether Bess had property rights under the policy. Presumably, it was influenced by the fact that Bess died a resident of New Jersey , where the beneficiary, his widow, was still resident, and the Government had sued in the New Jersey Federal District Court . Nor has any enlightenment come from other decisions. See, e.g., Commissioner v. Stern [58-2 USTC ¶9594], 357 U. S. 39 (1958); United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237 (1960); Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960); Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233, 236 (1963). Most likely the point has not yet been raised, perhaps because only the law of one state has ever had a substantial basis for being applicable. That is not so here. For example, Travelers home office is in Hartford , Conn. , and policy provides that the policy proceeds would be payable there. Mitchell was born in Alabama and lived in St. Louis , Mo. , where he executed the policy. The same holds for the policy with Prudential, whose home office is Newark , N. J., where the proceeds are payable. The record does not indicate where Mitchell resided when he obtained policies from New England and John Hancock, whose home offices are in Boston , Mass. In 1949, when the liens arose and levy was made, Mitchell apparently was still in St. Louis , because the Missouri office of the Internal Revenue Service was handling the matter. Subsequently he moved to Birmingham , Ala. The main beneficiary, his wife, apparently resided with him at all times. We do not know where the other contingent beneficiaries resided nor where the other levies were made. The Government sued in the Southern District of Alabama. On these facts, then, we might consider at the very least the law of Missouri , Connecticut , New Jersey , Massachusetts , and Alabama . As a starting point in resolving this problem, one might see Hill, State Procedural Law in Federal Nondiversity Litigation, 69 Harv. L. Rev. 66, 90-91, 96-99 (1955); Note, Applicability of State Conflicts Rules When Issues of State Law Arise in Federal Question Cases, 68 Harv. L. Rev. 1212, 1216-17, 1227-29 (1955); cf. Texas v. New Jersey , 379 U. S. 674 (1965). See generally Restatement (Second), Conflict of Laws §§ 332b, 346h (Tent. Draft No. 6, 1960); id. §379 (Tent. Draft No. 9, 1964).

⁶ Even less can the recent decision in United States v. Atlas Life Ins. Co. [65-1 USTC ¶9407], -- U. S. -- (1965) be taken as an authoritative consideration of the nature of the cash surrender value for the purposes of tax lien and levy. There the Court was concerned with taxation of the income of life insurance companies under Int. Rev. Code of 1954 §§ 801-820.