Annotations- Insurance Policy 2

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6332 Annotations: Insurance Policy-Post Lien Act- Levy

 

Penalty for Failure to Surrender Property: Insurance policy --Post-Lien Act

[72-1 USTC ¶9453] United States of America , Plaintiff-Appellant v. The Prudential Insurance Company of America , Defendant-Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, Summary Calendar ^*, No. 71-2110, 461 F2d 208, 5/31/72, Aff'g DC decision, 323 F. Supp. 201, 71-1 USTC ¶9254

[Code Sec. 6332(b)]

Levy on life insurance policy: Value: Computation date.--The cash loan value of an insurance policy levied on by the Government was to be determined as of the 90th day after notice of the levy was served on the insurance company. Since the value on that date was zero due to the insured's default, the taxpayer (the insurance company) was obligated to pay over nothing. Code Sec. 6332(b) clearly provided that the levy constituted a demand for the amount of money which the insured could have advanced to him under the terms of the policy 90 days after the notice of levy was served on the insurance company and legislative history did not alter this interpretation.

John L. Briggs, United States Attorney, Jacksonville, Fla., Scott P. Crampton, Assistant Attorney General, Fred B. Ugast, Meyer Rothwacks, Crombie J. D. Garrett, Carolyn R. Just, Department of Justice, Washington , D. C. 20530, for plaintiff-appellant. Hayward M. Ball, Herman Ulmer, Herman Ulmer, Jr., P. O. Box 479 , Jacksonville , Fla. , for defendant-appellee.

Before BROWN, Chief Judge, INGRAHAM and RONEY, Circuit Judges.

RONEY, Circuit Judge:

The United States sued the defendant insurance company for the cash loan value of a life insurance policy to satisfy a tax lien against the owner of the policy, a delinquent taxpayer. Although the policy had a cash loan value on the date the Government served notice of levy, by the time the company was required by law to pay the levy, the policy by its terms had no cash loan value. Non-payment of premium had caused the policy to be automatically converted to term insurance with no cash loan value. Holding that the Government can recover only the policy's cash loan value, if any, at the time required for payment, and that it is not entitled to the amount of the cash loan value of the date of notice of levy, we affirm the judgment that the district court entered against the Government and for the insurance company.

[Levy on Insurance Policy]

This case is controlled by Section 6332(b) of the Internal Revenue Code, which provides a method by which the Government may, by levy, instead of foreclosure, obtain from an insurance company the cash loan value of a delinquent taxpayer's unmatured life insurance contract for the purpose of satisfying, in whole or part, an outstanding tax lien against the insured. ¹ This is not a foreclosure action. Neither the Insured nor the policy beneficiaries have been joined as parties to the suit. The Government's case is bottomed squarely on Section 6332(b), which is the only statutory authority for recovery of the cash loan value by levy.

The facts demonstrate the problem. On July 20, 1955. The Prudential Insurance Company of America issued a modified whole life policy insuring the life or Timothy F. Miese. On November 27, 1968, Miese was indebted to the Government for federal income taxes and notice of levy was served on Prudential. The cash loan value of the policy at that time was $1,827.88. The policy was not then in default nor was there any outstanding indebtedness against it. A copy of the notice of levy was mailed to the Insured. Under the statute, the levy was to be satisfied 90 days after service of the notice. Subsequently, before the end of the 90-day period, a premium payment required by the policy became due on December 20, 1968, but was not paid. On January 20, 1969, the 31-day grace period allowed by the policy came to an end and the policy went into default. The policy contained an automatic nonforfeiture clause under which the policy was automatically extended as paid up term insurance for its face amount of $10,000.00 from the due date of the premium in default until July 31, 2002. The policy contained no other automatic nonforfeiture provisions. It specifically provided that the policy, in its extended form, would not have a cash loan value. Thus when the 90-day period expired on February 24, 1969, and the Government requested Prudential to pay to it the cash loan value of the policy, Prudential declined on the ground that the policy had lapsed for non-payment of premium during the 90-day period and that no cash loan value was payable under the policy.

These facts squarely present the issue of whether the Government was entitled under the law to the cash loan value of the policy on the date of the service of notice of levy, or the value the policy had 90 days thereafter, when payment was required.

Motions for summary judgment were filed by both parties. The district court denied the Government's motion and granted Prudential's motion, dismissing the case. United States v. Prudential Insurance Co. of Amer. [71-1 USTC ¶9254], 323 F. Supp. 201 (D. C. M. D. Fla. 1971). From the district court's dismissal, the Government appealed.

[Statutory Language]

Our decision in favor of the insurance company is based on the clear language of Section 6332(b). The levy under paragraph (1) constitutes a demand for payment of the amount described in paragraph (2). The amount is there described as "the amount which the [taxpayer] . . . could have advanced to him (by the insurance company) . . . on the date prescribed in paragraph (1) for the satisfaction of such levy." (Going back to paragraph (1), it clearly prescribes the date for satisfaction as "90 days after service of notice of levy." Simply stated, the statute thus provides that the levy constitutes a demand for the amount of money which the Insured could have advanced to him under the terms of the policy 90 days after the notice of levy is served on the insurance company. Applying the plain meaning of this statute to the facts of this case: Notice of levy was served on November 27, 1968. Ninety days thereafter was February 25, 1969. The taxpayer could not have had any money advanced to him on that date under the terms of the policy. Since that is the only amount provided in the statute for payment to the Government, it is not entitled to any other amount. To reach different result would require us to either rewrite the statute, or rewrite the policy. Neither of these alternatives is available to us. Had Congress squarely confronted the particular terms of this policy, it might well have made a different provision to enable the Government to recover. But the defendant is entitled to have the statute applied as it was written, not as it could have been or should have been written, nor even as Congress might have intended to write it. Where the words and meaning of a statute of this kind are clear, there is no room for judicial consideration of Congressional intent. Gemsco, Inc. v. Walling, 324 U. S. 244 (1944).

The Government would have us find the statutory language to be ambiguous and reach a contrary result with the aid of legislative history. However, even a study of this history does not convince us that Congress intended to alter in any way the automatic contractual provisions of the policy.

The Law Prior to the 1966 Amendment

Prior to the addition to the Code of Section 6332(b), in order to make any recovery from a life insurance policy of a taxpayer, the Government was required to proceed by a foreclosure suit against the Insured's total rights in the contract. The courts had consistently held that a tax levy, by itself, could not reach the cash loan value or cash surrender value of an insurance policy. This result was based on the ground that the right of the Insured to demand the payment of such values was not included in "the definition of the property possessed and obligations existing at the time" of the levy within the meaning of 26 U. S. C. §6331(a) and (b), the sections of the Code which authorized the Government to collect taxes by levy. United States v. Mitchell [65-2 USTC ¶9581], 349 F. 2d 94 (5th Cir. 1965); United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100 (3rd Cir. 1964). Unless and until the Insured made a demand for all or part of the cash surrender or loan value, there was nothing to which a lien or levy could attach under those sections. United States v. Penn Mutual Life Ins. Co. [42-2 USTC ¶9623], 130 F. 2d 495 (3rd Cir. 1942); United States v. Home Life Ins. Co. [66-1 USTC ¶9190], 355 F. 2d 86 (2nd Cir. 1966).

Foreclosure proceedings created problems for both the Government and the Insured. The Government by such action was not permitted to recover the amount of the cash surrender or cash loan value at the time of its levy but was relegated to the recovery of only the cash surrender value on the date of judgment. The rationale was that the lien and levy did not vitiate the contractual obligations and rights of the insurance company and the Insured pending final judgment. On the other hand, all of the Insured's rights in the contract were terminated if the Government succeeded in its foreclosure action. The Insured might be then uninsurable, advanced age might bring increased premiums on new insurance, or other problems could develop which would impose harsh penalties on beneficiaries and family, beyond those necessary to meet the needs of the Government.

The 1966 Amendment

Mindful of these problems in the foreclosure procedure, Congress enacted Section 6332(b) by Section 104(b) of the Federal Tax Lien Act of 1966. See: House Committee Report at H. Rep. No. 1884, 89th Cong., 2d Sess. (1966-2 Cum. Bull. 825); S. Rep. No. 1708, 89th Cong., 2d Sess. (1966-2 Cum. Bull. 888).

Section 6332(b) provided special rules for a levy on insurance companies with respect to the life insurance of delinquent taxpayers. It allowed the Government to obtain the cash loan value of an Insured's policy without either instituting foreclosure proceedings or surrendering the policy. By proceeding under Section 6332(b) the Government would, in effect, be "exercis[ing] . . . the right of the person against whom the tax is assessed to the advance of such [cash loan value]." It left the taxpayer all other rights in the policy, including the right to maintain the policy in force, subject to the debt. Thus, there evolved a very simplified procedure for satisfying tax delinquencies of persons with life insurance contracts to the extent of the cash loan value, advantageous both to the Government, which did not have to see the asset dwindle in amount during foreclosure proceedings with no benefit to the Insured, and to the Insured and his family, who could retain the benefits of the insurance.

The Levy

The Government contends that the notice of levy served on the insurance company constituted an exercise of the taxpayer's right to demand and receive payment of the cash loan value, and that this cash loan value was effectively seized on the date of the levy. It virtually argues that the demand created an obligation on the part of the insurance company subject to levy under Section 6331(a) and (b). ² Even if there were merit to the argument that Section 6332 is not a complete code on the subject of the collection by the Government of the cash loan value of insurance policies, and that it must be read in conjunction with Section 6331, the Government overlooks the fact that the obligation of the insurance company subject to levy was not to pay the cash loan value on the date of the levy but to pay the amount specifically limited by Section 6332. That section provides that the demand is "for the amount described in paragraph (2)," which paragraph clearly delineates the amount as that which the Insured could obtain from the company 90 days after the notice of levy. The obligation on the part of the insurance company could be no greater. ³ The Government levy could seize no more than the amount which the Insured could require by such a demand under the policy.

The Policy

Upon default in premium payment for 31 days, the Prudential policy by its terms was converted from modified whole life to paid-up term insurance effective on the due date of the premium. ⁴ There was no choice in the policy. The conversion was automatic.

Although Section 6332(b)(2) does not permit the cash loan value to be reduced by any advance to the Insured after notice of levy, the statute contemplates a reduction for advances "made automatically to maintain such contract in force under an agreement entered into before such [insurance company] had such notice or knowledge." Thus Congress recognized the continued viability of automatic provisions of the contract and the right of the insurance company to be protected thereby. The Government argues that this can be used only to keep the whole-life insurance contract in force. However, there is but one contract, complete in itself, and the automatic provisions take effect without action on the part of either party to the insurance agreement.

Although the Government makes strong arguments to the contrary, there appears no authority or reason to believe that Congress intended to permit the Government a better position under the policy than that to which the taxpayer was entitled by the specific terms of the policy.

[Conclusion]

The district court did not err in holding that (1) Section 6332(b) requires that the amount of the cash loan value of a life insurance contract required to be paid to the Treasury by the insurance company be computed as of the date 90 days after the date of the service of notice of levy, (2) the automatic continuation of the policy as paid-up term insurance constituted an advance made automatically to maintain in force the contract which was entered into before Prudential had notice or knowledge of the tax lien with respect to which the levy was made, and (3) on the 90th day, by reason of the automatic extension of insurance clause which came into operation during the 90-day period, the policy had no cash loan value, and that therefore, there was no amount payable to the Treasury by Prudential pursuant to the service upon Prudential of the notice of levy under Section 6332(b) of the Code.

AFFIRMED.

^* Rule 18, 5th Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty Co. of New York, et al., 5th Cir. 1970, 431 F. 2d 409, Part I.

¹ 26 U. S. C. A. Section 6332(b) provides:

"(b) Special rule for life insurance and endowment contracts.--

(1) In general.--A levy on an organization with respect to a life insurance or endowment contract issued by such organization shall, without necessity for the surrender of the contract document, constitute a demand by the Secretary or his delegate for payment of the amount described in paragraph (2) and the exercise of the right of the person against whom the tax is assessed to the advance of such amount. Such organization shall pay over such amount 90 days after service of notice of levy. Such notice shall include a certification by the Secretary or his delegate that a copy of such notice has been mailed to the person against whom the tax is assessed at his last known address.

(2) Satisfaction of levy.--Such levy shall be deemed to be satisfied if such organization pays over to the Secretary or his delegate the amount which the person against whom the tax is assessed could have had advanced to him by such organization on the date prescribed in paragraph (1) for the satisfaction of such levy, increased by the amount of any advance (including contractual interest thereon) made to such person on or after the date such organization had actual notice or knowledge (within the meaning of Section 6323(i)(1)) of the existence of the lien with respect to which such levy is made, other than an advance (including contractual interest thereon) made automatically to maintain such contract in force under an agreement entered into before such organization had such notice or knowledge.

(3) Enforcement proceedings.--The satisfaction of a levy under paragraph (2) shall be without prejudice to any civil action for the enforcement of any lien imposed by this title with respect to such contract."

² 26 U. S. C. A. Section 6331 provides:

"LEVY AND RESTRAINT

"(a) Authority of Secretary or delegate.--If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. Levy may be made upon the accrued salary or wages of any officer, employee, or elected official, of the United States, the District of Columbia, or any agency or instrumentality of the United States or the District of Columbia, by serving a notice of levy on the employer (as defined in section 3401(d)) of such officer, employee, or elected official. If the Secretary or his delegate makes a finding that the collection of such tax is in jeopardy, notice and demand for immediate payment of such tax may be made by the Secretary or his delegate and, upon failure or refusal to pay such tax, collection thereof by levy shall be lawful without regard to the 10-day period provided in this section.

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

³ The time for computation of the amount was acknowledged by the insurance company on December 6, 1968, when it wrote the United States Treasury Department as follows:

"Notice of Levy concerning the above taxpayer and policy was served on us November 27, 1968. The net cash loan value of this policy 90 days from said date, provided it is kept in force by the payment of any premiums falling due, will be $1,866.17."

⁴ The non-forfeiture provisions provide in pertinent part:

"Extended Insurance. In event of default in payment of premium for more than thirty-one days, the face amount of insurance, reduced by an amount equal to any existing indebtedness on this Policy and increased by the amount of any existing paid-up dividend additions on this Policy, will be automatically continued from the due date of the premium in default as paid-up term insurance for such term as the present value, as of the due date of the premium in default, of the extended insurance in accordance with the Table of Loan and Non-forfeiture Values, less any existing indebtedness on this Policy, plus the ten present value of any existing paid-up dividend additions together with any other dividend credits existing on this Policy, will provide at net single premium term insurance rates at the attained age of the Insured. The extended insurance shall not include any additional benefit in event of death by accidental means."

[Dissenting Opinion]

BROWN, Chief Judge, dissenting:

The Court concludes that the tax collecting power of the Federal Government has been effectively thwarted by a private contractual arrangement between a taxpayer and his insurance company. Primarily because of the opinion's carefully reasoned and articulate analysis of the problem, that result is admittedly very persuasive. Nevertheless, I am convinced that it is not the result which Congress intended and which a proper construction of §6332(b) should entail.

[Congressional Intent Controlling]

Initially we should remember that the derivation of statutory meaning is not an abstract lexicographical exercise, no matter how clear and unambiguous the written manifestation of the legislature's collective will. ¹ "Examples are legion where literalness in statutory language is out of harmony * * * with an Act taken as an organic whole." Oestereich v. Selective Service System, 1968, 393 U. S. 233, 238, 89 S. Ct. 414, --, 21 L. Ed. 2d 402, 406. What might otherwise be a perfectly reasonable, common-sense interpretation of superficially plain language must be rejected when adopting it would frustrate or defeat the obvious Congressional purpose which the statute was designed to effectuate. Perry v. Commerce Loan Co., 1966, 383 U. S. 392, 399-400, 86 S. Ct. 852, --, 15 L. Ed. 2d 827, 833; Markham v. Cabell, 1945, 326 U. S. 404, 409, 66 S. Ct. 193, --, 90 L. Ed. 165, 168. Here the consequence of a literal reading is to nullify the law.

If the Court's interpretation is correct there appear to be at least three situations in which the Government will be unable to collect from the insurance company because of intervening events arising during the 90-day grace period following service of the notice of levy, two of which are wholly within Taxpayer's control: (i) when the policyholder dies, (ii) when he assigns the policy to someone else, and (iii) when he purposefully allows the policy to lapse knowing that from the viewpoint of his beneficiaries substantially the same protection is available through paid up or extended insurance. In none of these events will he be entitled to the advance of all or any portion of the policy's cash loan value on the 90th day. This result is particularly anomalous because one of the purposes served by the 90-day period is to provide taxpayers with an opportunity "to continue the policy in force by transferring it to either a beneficiary or someone else who pays the subsequent premiums and interest on policy loans, including those loans resulting from the Government levy." S. Rep. 1708, 89th Cong., 2d Sess. (1966-2 Cum. Bul. at 888). It hardly seems plausible to suppose that Congress has also provided a taxpayer with a gratuitous 90-day option to defeat the Government's lien altogether by means of a unilateral action wholly within his own control. "No rule of construction necessitates our acceptance of an interpretation resulting in patently absurd consequences." United States v. Brown, 1948, 333 U. S. 18, 27, 68 S. Ct. 376, --, 92 L. Ed. 442, 449.

[Abundant Ambiguity]

Moreover, even if we are somehow compelled to discover ambiguity in §6332(b) in order to avert the disaster of a literalistic construction, I believe we can find an abundance of it. Paragraph (2) provides: "Such levy shall be deemed to be satisfied if such organization pays over to the Secretary or his delegate the amount which the person against whom the tax is assessed could have had advanced to him by such organization on the date prescribed in paragraph (1) for the satisfaction of such levy." The problem is, what does the italicized language modify? If the statute is syntactically flawless, as the Court assumes, the reference is to the word "amount," so that the sentence means "the amount which * * * could have [been] advanced * * * on the date prescribed in paragraph (1)." However, if this language refers to the word "pays" and merely reaffirms the time for the satisfaction of the levy, the sentence should read as follows: "Such levy shall be deemed to be satisfied if such organization, on the date prescribed in paragraph (1) for the satisfaction of such levy, pays over to the Secretary or his delegate the amount which the person against whom the tax is assessed could have had advanced to him by such organization."

Given these two alternatives we should adopt the second one, since paragraph (1) states that a levy constitutes "the exercise of the right of the person against whom the tax is assessed to the advance of such amount," while §6331(b) provides that "a levy shall extend * * * to property possessed and obligations existing at the time thereof" (emphasis added). If the Court's interpretation were correct, this language--as applied to a levy under §6332(b)--must be construed to mean "* * * to property possessed and obligations existing 90 days after service of the notice of levy." Apart from the inconsistency resulting from the implicit assumption that Congress has prescribed two fundamentally different kinds of levies--those immediately operative and those having only prospective effect--it is almost inconceivable to suggest that here the Government has exercised a nonexistent obligation. Since the service of the notice of levy amounted to an exercise of the taxpayer's right to payment of the cash loan value under the terms of the policy, the value on the date of service should be controlling, notwithstanding the fact that the insurance company's obligation to pay that amount is generally to be deferred for 90 days. ²

Even if the Court is correct in asserting that the Government's levy extends only to that amount which the taxpayer could have had advanced to him on the 90th day, there is no reason to conclude that he was entitled to nothing. The policy surely had some economic value. Cf. Commissioner v. Chase Manhattan Bank, 5 Cir., 1958 [58-2 USTC ¶11,818], 259 F. 2d 231, cert. denied, 1959, 359 U. S. 913, 79 S. Ct. 589, 3 L. Ed. 2d 575. This would also included the policy's entire cash loan value at that time if he had reinstated the original whole life policy by paying the overdue premium. The fact that the premium was not actually paid is irrelevant.

[Conclusion]

In any event the question here is simply whether a taxpayer--by volitional, unilateral acts--may successfully avoid satisfaction of a pre-existing Federal income tax liability by exchanging a particular property interest which has already been appropriated for the use of the United States Treasury for another kind of property interest having substantial, if not equivalent, value, but not realizable except on the contingency of death. I would hold that he may not.

¹ "There is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes. Often these words are sufficient in and of themselves to determine the purpose of the legislation. In such cases we have followed their plain meaning. * * * Frequently, however, even when the plain meaning did not produce absurd results but merely an unreasonable one 'plainly at variance with the policy of the legislation as a whole' this Court has followed that purpose, rather than the literal words." United States v. American Trucking Associations, 1940, 310 U. S. 534, 543, 60 S. Ct. 1059, --, 84 L. Ed. 1345, 1350-51 (footnotes omitted).

² The legislative history of §6332(b) clearly states that "where the Government levies on the cash loan values of the contract, the insurance company generally must pay this cash loan value over to the Government 90 days after the levy." S. Rep. 1708, supra, 1966-2 Cum. Bul. at 888. Moreover, Temporary Treas. Reg. §400.3-1(b)(1)(ii) provides that "no event during the 90-day period subsequent to the date of service of the notice of levy shall release the cash loan value from the effect of the levy. For example, the termination of the policy by the taxpayer or by the death of the insured during such 90-day period shall not release the levy."

Of course, the regulation is invalid if it is inconsistent with the terms of the statute. But under the circumstances here it should be controlling. Bingler v. Johnson, 1969, [69-1 USTC ¶9348] 394 U. S. 741, 750, 89 S. Ct. 1439, --, 22 L. Ed. 2d 695, 703-04; Commissioner v. South Texas Lumber Co., 1948, [48-1 USTC ¶5922] 333 U. S. 496, 501, 68 S. Ct. 695, --, 92 L. Ed. 831, 836.

 

[76-1 USTC ¶9273] United States of America , Plaintiff v. Equitable Life Assurance Co. of the United States , Defendant

U. S. District Court, So. Dist. N. Y., 75 Civ. 2198, 2/26/76

[Code Sec. 6332(b)]

Levy on life insurance policy: Value: Computation date.--The cash loan value of an insurance policy levied on by the Government was to be determined as of the 90th day after notice of the levy was served on the insurance company. Since the value on that date was zero due to the insured's default, the taxpayer (the insurance company) was obligated to pay over nothing. Code Sec. 6332(b) clearly provided that the levy constituted a demand for the amount of money which the insured could have advanced to him under the terms of the policy 90 days after the notice of levy was served on the insurance company and legislative history did not alter this interpretation.

Thomas J. Cahill, United States Attorney, William Roche Bronner, Assistant United States Attorney, New York, N. Y., for plaintiff. Michael W. Brody, Robert L. Rose, Robert J. Miller, Werner Weinstock, 1285 Avenue of the Americas, New York, N. Y., for defendant.

Opinion

GRIESA, District Judge:

This is a tax collection action brought pursuant to Sections 6332(c)(1) and 7401 of the Internal Revenue Code of 1954, as amended, 26 U. S. C. §§ 6332(c)(1), 7401. The Government claims that Equitable failed to honor a levy pursuant to Section 6332(b) of the Code, 26 U. S. C. §6332(b), upon the interest of a taxpayer in his life insurance policy.

The Government moves for judgment on the pleadings. Equitable moves to dismiss the complaint for failure to state a valid claim. It is agreed that the sole issue to be determined by the court is one of law, and that there are no factual issues to be tried.

The Government's motion is denied. Equitable's motion is granted and the complaint is dismissed.

A taxpayer by the name of John C. Hill was the owner of an insurance policy issued by Equitable. Hill had tax deficiencies assessed against him on September 18, 1970 and October 1, 1971. On September 20, 1972 the Government served a notice of levy on Equitable with respect to Hill's interest in his insurance policy. Hill was notified of this levy. As of the date of the levy, the cash loan value of the policy was $1,585.44--an amount less than Hill's tax deficiencies.

Under the relevant statute Equitable had 90 days--i. e., until December 20, 1972--before it was required to satisfy the levy. An insurance premium owed by Hill came due on October 12, 1972. Hill did not pay the premium. Under the terms of the policy, there was a 31-day grace period, at the expiration of which the policy was automatically converted into term insurance with no cash loan value. This conversion occurred on November 12, 1972--well before the expiration of the 90-day period for satisfaction of the levy.

Equitable declined to make payment to the Government pursuant to the tax levy, asserting that there was no cash loan value as of the date payment was due.

This case depends on the interpretation of Section 6332(b) of the Internal Revenue Code. The Government contends that it is entitled to recover the cash loan value of the policy as it existed on the date of the notice of levy. Equitable contends that the Government may recover only to the extent of the cash loan value, if any, which exists on the date of payment--i. e., 90 days after the service of notice of levy.

Section 6332(b) provides in pertinent part:

"(b) Special rule for life insurance and endowment contracts.--

(1) In general.--A levy on an organization with respect to a life insurance or endowment contract issued by such organization shall, without necessity for the surrender of the contract document, constitute a demand by the Secretary or his delegate for payment of the amount described in paragraph (2) and the exercise of the right of the person against whom the tax is assessed to the advance of such amount. Such organization shall pay over such amount 90 days after service of notice of levy. Such notice shall include a certification by the Secretary or his delegate that a copy of such notice has been mailed to the person against whom the tax is assessed at his last known address.

"(2) Satisfaction of levy.--Such levy shall be deemed to be satisfied if such organization pays over to the Secretary or his delegate the amount which the person against whom the tax is assessed could have had advanced to him by such organization on the date prescribed in paragraph (1) for the satisfaction of such levy, increased by the amount of any advance (including contractual interest thereon) made to such person on or after the date such organization had actual notice or knowledge (within the meaning of section 6323(i)(1)) of the existence of the lien with respect to which such levy is made, other than an advance (including contractual interest thereon) made automatically to maintain such contract in force under an agreement entered into before such organization had such notice or knowledge."

Under paragraph (1), a levy on an insurance company constitutes a demand for payment "of the amount described in paragraph (2)", and also constitutes "the exercise of the right of the person against whom the tax is assessed to the advance of such amount". Paragraph (1) requires that payment of "such amount" shall be made 90 days after service of notice of levy. Paragraph (2) defines the amount which the insurance company must pay. This is stated to be "the amount which the person against whom the tax is assessed could have had advanced to him by such organization on the date prescribed in paragraph (1) for the satisfaction of such levy".

Equitable properly contends that the reference in paragraph (2) to "the date prescribed by paragraph (1)"--i. e., 90 days after service of notice of levy--is an essential part of the definition of the amount to be paid, fixing it specifically as the value of the insured's interest as it exists at the date when payment is due. I reject the contention of the Government that the definition of the amount can somehow be read to exclude the reference to the time of payment.

Congress could have made the definition in paragraph (2) relate to the date of service of notice of levy. But it did not do so. Congress has stated in plain language that the time for measurement of the amount due should coincide with the time of actual payment.

The precise question presented in the present case has been decided by the Fifth Circuit in United States v. Prudential Insurance Co. of America [72-1 USTC ¶9453], 461 F. 2d 208 (5th Cir. 1972). The majority held against the Government, as I am doing here. Chief Judge Brown dissented.

I realize that the result of my ruling in the present case is anomalous in some respects. The success of the Government's levy is made to depend on whether the taxpayer pays a premium during the 90-day period. Moreover, the legislative history indicates that the purpose of the 90-day period was to give the taxpayer time to meet his tax liability by other means than by having the cash value of his insurance policy seized. S. Rep. No. 1708, 89th Cong., 2d Sess. (1966-2 Cum. Bul. 888-9). But even with this purpose in mind, Congress, if it had seen fit to do so, could have fixed the amount to be paid as the value existing at the time of the levy. But, for reasons best knwon to the Congress, it did not word the statute in this manner.

I decline to rule contrary to the Fifth Circuit decision and contrary to the language of the statute.

The Clerk is directed to enter judgment dismissing the complaint.

So ordered.

 

[78-1 USTC ¶9178] United States of America , Plaintiff v. Equitable Life Assurance Co. of the United States , Defendant

U. S. District Court, So. Dist. New York , 75 Civ. 2198, 442 FSupp 500, 12/30/77

[Code Sec. 6332(b)--result unchanged by 1976 Tax Reform Act]

Levy: Surrender of subject property: Life insurance policy: Value: Computation date: Option to surrender.--An insurance company did not wrongfully fail to honor a levy upon the interest of an insured in his life insurance policy. As of the date surrender was due--90 days after the date of levy--the policy was valueless to the insured because of his default on a premium payment. Nor was the government entitled to the benefit of his option to surrender the policy for its net cash value within three months from the date of default. That period expired after the due date of the surrender.

Robert B. Fiske, Esq., United States Attorney, New York , N. Y. 10007, for plaintiff. Werner Weinstock, 1285 Avenue of the Americas , New York , New York , 10007 , for defendant.

Opinion upon Reconsideration

I.

GRIESA, District Judge:

This is a tax collection action brought pursuant to Sections 6332(c)(1) and 7401 of the Internal Revenue Code of 1954, as amended, 26 U. S. C. §§ 6332(c)(1), 7401. The Government claims that Equitable failed to honor a levy pursuant to Section 6332(b) of the Code, 26 U. S. C. §6332(b), upon the interest of a taxpayer in his life insurance policy.

The Government moves for judgment on stipulated facts. Equitable moves to dismiss the complaint for failure to state a valid claim. It is agreed that the sole issue to be determined by the court is one of law, and that there are no factual issues to be tried.

On February 25, 1976 I issued an opinion denying the Government's motion, granting Equitable's motion, and dismissing the complaint. On March 24, 1976 I granted the Government's motion to reopen the case and reconsider the motions.

Upon reconsideration, I adhere to my original ruling and dismiss the action.

[Facts]

A taxpayer by the name of John C. Hill was the owner of an insurance policy issued by Equitable. Hill had tax deficiencies assessed against him on September 18, 1970 and October 1, 1971. On September 20, 1972 the Government served a notice of levy on Equitable with respect to Hill's interest in his insurance policy. Hill was notified of this levy. As of the date of the levy, the cash loan value of the policy was $1,475.00--an amount less than Hill's tax deficiencies.

Under the relevant statute Equitable had 90 days--i. e., until December 20, 1972--before it was required to satisfy the levy. An insurance premium owed by Hill came due on October 12, 1972. Hill did not pay the premium on that date or at any subsequent time. Under the terms of the policy, there was a 31-day grace period, at the expiration of which the policy lapsed. The policy thus lapsed on November 12, 1972.

The policy included a provision, "Options on Lapse," which had the effect that within three months of the date of default, October 12, 1972, Hill could elect to surrender the policy for its net cash value or convert the value of the policy into paid-up life insurance or the equivalent value in extended term insurance. In the absence of any action by the insured, at the end of the three-month option period, January 12, 1973, conversion to term insurance would be automatic. Hill took no action to expressly exercise any option.

By a letter dated December 18, 1972, the Government advised Equitable that the notice of levy to attach the "cash loan value" of Hill's policy had not been satisfied and requested payment of "any remittance that may be due."

Equitable declined to make payment to the Government pursuant to the tax levy, asserting that there was no cash loan value as of the date payment was due.

[New Theory]

II. When the motions were originally submitted, the Government's sole argument was that the critical date for determining what should be paid under the levy was the date of the notice of levy. Equitable contended that the relevant date was when the Government demanded payment. For reasons which will be reiterated shortly, I agreed with Equitable's position.

On the motion for reconsideration, the Government advances a new theory. The Government urges that it is entitled to take advantage of the option of the insured to surrender the policy for its net cash value.

[Underlying Statute]

III. This case depends on the interpretation of Section 6332(b) of the Internal Revenue Code. The Government's first contention is that it is entitled to recover the cash loan value of the policy as it existed on the date of the notice of levy. Equitable contends that the Government may recover only to the extent of the cash loan value, if any, which exists on the date of payment--i. e., 90 days after the service of notice of levy.

Section 6332(b) provides in pertinent part:

"(b) Special rule for life insurance and endowment contracts.--

(1) In general.--A levy on an organization with respect to a life insurance or endowment contract issued by such organization shall, without necessity for the surrender of the contract document, constitute a demand by the Secretary or his delegate for payment of the amount described in paragraph (2) and the exercise of the right of the person against whom the tax is assessed to the advance of such amount. Such organization shall pay over such amount 90 days after service of notice of levy. Such notice shall include a certification by the Secretary or his delegate that a copy of such notice has been mailed to the person against whom the tax is assessed at his last known address.

(2) Satisfaction of levy.--Suth levy shall be deemed to be satisfied if such organization pays over to the Secretary or his delegate the amount which the person against whom the tax is assessed could have had advanced to him by such organization on the date prescribed in paragraph (1) for the satisfaction of such levy, increased by the amount of any advance (including contractual interest thereon) made to such person on or after the date such organization had actual notice or knowledge (within the meaning of section 6323(i)(1)) of the existence of the lien with respect to which such levy is made, other than an advance (including contractual interest thereon) made automatically to maintain such contract in force under an agreement entered into before such organization had such notice or knowledge."

Under Paragraph (1), a levy on an insurance company constitutes a demand for payment "of the amount described in paragraph (2)", and also constitutes "the exercise of the right of the person against whom the tax is assessed to the advance of such amount". Paragraph (1) requires that payment of "such amount" shall be made 90 days after service of notice of levy. Paragraph (2) defines the amount which the insurance company must pay. This is stated to be "the amount which the person against whom the tax is assessed could have had advanced to him by such organization on the date prescribed in paragraph (1) for the satisfaction of such levy".

Equitable properly contends that the reference in paragraph (2) to "the date prescribed by paragraph (1)"--i.e., 90 days after service of notice of levy--is an essential part of the definition of the amount to be paid, fixing it specifically as the value of the insured's interest as it exists at the date when payment is due. I reject the contention of the Government that the definition of the amount can somehow be read to exclude the reference to the time of payment.

Congress could have made the definition in paragraph (2) relate to the date of service of notice of levy. But it did not do so. Congress has stated in plain language that the time for measurement of the amount due should coincide with the time of actual payment.

The precise question presented in the present case has been decided by the Fifth Circuit in United States v. Prudential Insurance Co. of America [72-1 USTC ¶9453], 461 F. 2d 208 (5th Cir. 1972). The majority held against the Government, as I am doing here. Chief Judge Brown dissented.

I realize that the result of my ruling in the present case is anomalous in some respects. The success of the Government's levy may depend on whether the taxpayer pays a premium during the 90-day period. Moreover, the legislative history indicates that the purpose of the 90-day period was to give the taxpayer time to meet his tax liability by other means than by having the cash value of his insurance policy seized. S. Rep. No. 1708, 89th Cong., 2d Sess. (1966-2 Cum. Bul. 888-9). But even with this purpose in mind, Congress, if it had seen fit to do so, could have fixed the amount to be paid as the value existing at the time of the levy. But, for reasons best known to the Congress, it did not word the statute in this manner.

I decline to rule contrary to the Fifth Circuit decision and contrary to the language of the statute.

[Alternative Argument]

IV. I now come to the Government's alternative argument--that it is entitled to the benefit of the insured's option to surrender the policy for its net cash value within three months from the date of default.

The three-month option period following Hill's default did not expire until January 12, 1973. The 90-day period for Equitable to satisfy the tax levy expired December 20, 1972, and the Govrnment's letter demanding payment was dated December 18, 1972. Thus, as of the time when Equitable was obligated to satisfy the levy. Hill still had an option to surrender the policy for its net cash value.

It should be noted that the Government's letter of December 18, 1972 demanding payment referred solely to cash loan value and not to net cash value upon surrender. Thus the Government did not seek to "exercise" any option available to Hill and did not request the net cash value pursuant to the surrender option.

In any event, I hold that, under Section 6332(b), the Government is not entitled to obtain the net cash surrender value of the policy. Paragraph 2 of that statute defines the amount to be paid pursuant to the levy as "the amount which the person against whom the tax is assessed could have had advanced to him by such organization" (emphasis added). Paragraph 1 of the statute also refers to "the right of the person against whom the tax is assessed to the advance of such amount" (emphasis added). The meaning appears clear. The statute speaks of advances, which is another term for loans.

Indeed, the Government concedes (undated memorandum, filed May 17, 1976, p. 5), that the statute in fact refers to cash loan value rather than cash surrender value. Moreover, the Treasury Regulations interpret the statute as referring to cash loan value. Treas. Reg. §§ 301.6332-1, 2 (1972).

However, the Government proposes that cash surrender value should be equated with cash loan value for the purpose of applying the statute. The Government notes that the two values are usually equal, or close to being equal, in dollar amounts, if there are no outstanding loans or interest due on such loans. In the present case, immediately following Hill's default, the cash loan value and the cash surrender value were indeed equal.

This, however, does not solve the problem. The effect of borrowing on a policy is far different from the effect of surrendering a policy for its net cash value. If an insured borrows on a policy, he obviously has the right to repay, leaving his insurance in full force and effect. On the other hand, the surrender of a policy for its net cash value terminates the policy. If the insured seeks further insurance, there must be a new application and new determination of insurability. United States v. Mitchell [65-2 USTC ¶9581], 349 F. 2d 94, 105 (5th Cir. 1965).

The majority opinion in United States v. Prudential Insurance Co. of America , supra at 211, specifically noted that the purpose of Section 6332(b) was to allow the Government to obtain cash loan value, which would allow the taxpayer to maintain his policy in force, subject to the debt.

Prior to the enactment of Section 6332(b) it was held in a series of cases that the seizure of cash surrender value in an insurance policy for satisfaction of federal income tax required the institution of a forfeiture proceeding in court, not merely an administrative levy. Mutual Life Insurance Co. of New York v. United States [65-1 USTC ¶9279], 343 F. 2d 71 (9th Cir. 1965); United States v. Sullivan [64-1 USTC ¶9392], 333 F. 2d 100 (3rd Cir. 1964); United States v. Equitable Life Assurance Society of the United States [64-1 USTC ¶9433], 331 F. 2d 29 (1st Cir. 1965). Congress, in passing Section 6332(b), quite obviously was not overruling these cases, but was providing for the administrative levy solely as to the cash loan value.

V. The Clerk is directed to enter judgment dismissing the complaint.

So ordered.

[78-2 USTC ¶9749] United States of America , Plaintiff-Appellant v. Equitable Life Assurance Company of the United States , Defendant-Appellee

(CA-2), U. S. Court of Appeals, 2nd Circuit, 78-6039, 9/18/78, Affirming District Court decision, 78-1 USTC ¶9178, 442 F. Supp. 500

[Code Sec. 6332(b)--result unchanged by the '73 Tax Reform Act]

Levy: Surrender of subject property: Life insurance policy: Value: Computation date: Option to surrender.--The Second Circuit affirmed a District Court holding that an insurance company did not wrongfully fail to honor a levy upon the interest of an insured in his life insurance policy. As of the date surrender was due--90 days after the date of levy--the policy was valueless to the insured because of his default on a premium payment. Nor was the government entitled to the benefit of his option to surrender the policy for its net cash value within three months from the date of default. That period expired after the due date of the surrender.

Robert B. Fiske, Jr., United States Attorney, New York , New York 10007 , for plaintiff-appellant. Werner Weinstock, 1285 Avenue of the Americas , New York , New York 10019 , for defendant-appellee.

Before FEINBERG, MANSFIELD and SMITH, Circuit Judges.

This cause came on to be heard on the transcript of record from the United States District Court for the Southern District of New York, and was argued by counsel.

On Consideration Whereof, it is now hereby ordered, adjudged, and decreed that the judgment of said District Court be and it hereby is affirmed substantially for the reasons stated by Judge Griesa in his opinion dated December 30, 1977 and by the United States Court of Appeals for the 5th Circuit in United States v. Prudential Ins. Co. of America, 461 F. 2d 208 (1972). The argument that the government could reach the cash loan value of the policy ninety days after the levy by exercising Option (a) of the contract was not dealt with by the district judge, presumably because the argument was only tangentially suggested in the affidavit supporting plaintiff's motion for relief from judgment. See Joint Appendix A35. This argument is without merit because it would ascribe to the government full ownership rights under 26 U. S. C. §6332(b), which Congress did not intend it to have. In addition, exercise of such ownership right would drastically reduce the amount of insurance coverage, a result also not intended to Congress.

 

[89-1 USTC ¶9362] United States of America , Plaintiff-Appellee v. Metropolitan Life Insurance, Defendant-Appellant

(CA-11), U.S. Court of Appeals, 11th Circuit, 88-7603, 6/8/89, 874 F2d 1497, Affirming the District Court, 89-1 USTC ¶9344 , 691 F.Supp. 1339

[Code Secs. 6331 and 6332 ]

Collection: Levy and distraint: Surrender of property: Penalty for failure to surrender property: Levying on life insurance and endowment contracts: Reasonable cause: Annuity contracts.--The cash surrender value of an annuity contract constituted property of a delinquent taxpayer in the possession of the issuing insurance company which is subject to administrative levy. The taxpayer's right under state law to withdraw the full value of the annuity was sufficient to obligate the insurance company to surrender the funds subject to the taxpayer's withdrawal right to the IRS upon receipt of the notice of levy. The insurance company was held liable for the penalty imposed on a custodian who refused to honor a levy because its refusal to surrender the cash surrender value of the annuity was without reasonable cause.

J.B. Sessions III, United States Attorney, Edward Vulevich, Jr., Assistant United States Attorney, Mobile, Ala. 36602, Gary R. Allen, William S. Rose, Jr., William S. Estabrook III, Stuart E. Horwich, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. Alan C. Christian, Johnstone, Adams, Bailey, Gordon & Harris, 104 St. Francis St. , Mobile , Ala. 36633 , for defendant-appellant.

Before TJOFLAT and JOHNSON, Circuit Judges, and ESCHBACH ^*, Senior Circuit Judge.

JOHNSON, Circuit Judge:

This appeal arises from the grant of summary judgment in favor of the government and against an insurance company in the amount of $20,898.79 under 26 U.S.C.A. §6332(c)(1) , representing the unelected cash withdrawal value of an annuity contract owned by a delinquent taxpayer, and $10,449.40 under 26 U.S.C.A. §6332(c)(2) , representing a 50% penalty for failing to honor the government's tax levy on the annuity contract without reasonable cause. We affirm.

I. FACTS

On December 22, 1975, Fitzhugh Lee Jackson submitted an application to purchase an annuity contract from appellant Metropolitan Life Insurance Company. The insurance company accepted the application, and between 1975 and 1984 Jackson made contributions to the annuity totaling $13,500. On February 2, 1979, the IRS assessed a deficiency against Jackson for unpaid taxes from the years 1970 to 1974. As of March 6, 1984, Jackson still owed the government $155,717.72 from the deficiency assessed. On that day, the IRS served the insurance company with notice of levy pursuant to 26 U.S.C.A. §6332(a) requiring the insurance company to transfer to the government all property the company held that was owned by Jackson or in which Jackson had property rights. The insurance company responded to the notice of levy on April 6, 1984, stating that it was obligated with respect to an annuity contract owned by Jackson but that the annuity contract was not property in its custody subject to levy within the meaning of section 6332(a) .

The government filed suit against the insurance company on June 26, 1987, claiming that the insurance company had wrongfully failed to respond to the levy and seeking to impose liability on the insurance company under section 6332(c)(1) for the cash withdrawal value of the annuity. The government also sought imposition of a 50% penalty against the insurance company under section 6332(c)(2) for refusing to comply with the levy without reasonable cause. Both parties agreed there were no disputed issues of material fact, and the case was submitted to the district court on cross-motions for summary judgment. On June 28, 1988, the district court granted the government's motion for summary judgment and denied the insurance company's motion. This appeal followed.

II. DISCUSSION

The IRS can levy against a delinquent taxpayer's property or rights to property in the custody of a third party to satisfy a deficiency assessed against the taxpayer. 26 U.S.C.A. §633(a). ¹ Once the third party receives notice of the tax levy, it is obligated to surrender the property to the IRS. 26 U.S.C.A. §6332(a) . ² The third party can avoid this obligation in one of two ways. First, it can show that it is not in possession of any of the taxpayer's property or rights to property. Second, it can show that at the time it received notice of the levy the property was already subject to attachment or execution under judicial process. See generally United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 722, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985). If the third party refuses to surrender property subject to levy, the third party is liable personally for the full value of the property. 26 U.S.C.A. §6332(c)(1) . ³ If the third party refuses to surrender the property without reasonable cause, the third party may be subject to an additional penalty of 50% of the value of the property. 26 U.S.C.A. §6332(c)(2) . ⁴

The district court in this case held that under section 6331 the IRS could levy on the taxpayer's interest in an annuity contract issued by the insurance company. The district court held that the insurance company was obligated to deliver the cash withdrawal value of the annuity to the IRS under section 6332(a) . Because the insurance company failed to comply with the levy, the district court assessed liability against the insurance company for the value of the annuity under section 6332(c)(1) . The district court further found that the insurance company's denial was without reasonable cause, and imposed a 50% penalty against the company under section 6332(c)(2) .

The insurance company argues that annuity contracts are not property in the hands of the company subject to levy under section 6331 . In cases prior to the 1966 amendments to the Internal Revenue Code of 1954, a delinquent taxpayer's interest in an ummatured life insurance policy or endowment contract was not considered property subject to levy under the statutory predecessor of section 6331 . See, e.g., United States v. Penn Mut. Life Ins. Co. [42-2 USTC ¶9623 ] 130 F.2d 495 (3d Cir. 1942); United States v. Metropolitan Life Ins.Co. [42-2 USTC ¶9609 ], 130 F.2d 149 (2d Cir. 1942); United States v. Massachusetts Mut. Life Ins. Co. [42-1 USTC ¶9342 ], 127 F.2d 880 (1st Cir. 1942). The Supreme Court in United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958), held that although a taxpayer does not have a property right in the death proceeds of a life insurance policy, the taxpayer does have a property right in the cash surrender value of such a policy. Subsequent lower court decisions limited the effect of Bess by holding that although the taxpayer has property rights in the cash surrender value of an unmatured life insurance policy or endowment contract, the insurance company does not possess any of the taxpayer's property subject to levy. See United States v. Mitchell [65-2 USTC ¶9581 ], 349 F.2d 94 (5th Cir. 1965); Mutual Life Ins. Co. v. United States [65-1 USTC ¶9279 ], 343 F.2d 71 (9th Cir. 1965). In response, Congress passed Section 104 of the Federal Tax Lien Act of 1966, Pub. L. No. 89-719, 80 Stat. 1125, codified in part at 26 U.S.C.A. §6332(b) , which expressly permits the government to levy against an insurance company for the cash loan value of life insurance policies and endowment contracts owned by delinquent taxpayers.

The insurance company in this case argues that annuity contracts should be treated the same as life insurance policies and endowment contracts, and that under the logic of the decisions prior to 1966 the IRS cannot levy against an insurance company for the cash loan value or the cash surrender value of unmatured annuity contracts. The insurance company then argues that to the extent section 6332(b) changed that pre-1966 case law by allowing the IRS to levy against an insurance company for the cash loan value of insurance contracts and endowment cntracts, section 6332(b) should be read as applying to only life insurance policies and endowment contracts because the statute identifies only those two types of contracts. The insurance company alternatively argues that even if section 6332(b) applies to annuity contracts, that section does not apply in this case because the taxpayer's annuity has no cash loan value. Thus, the insurance company argues that it is not in possession of any property of the taxpayer subject to levy within the meaning of section 6332(a) .

The Supreme Court's decision in United States v. National Bank of Commerce [85-2 USTC ¶9482 ] 472 U.S. 713, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985), makes this argument untenable. A court assessing a levy on a taxpayer's intangible interest in property held by third parties must determine first the nature of the taxpayer's interest in the property. This is a question of state law. Id. at 724 n. 8, 105 S.Ct. at 2926 n. 8. Once the court has determined that a delinquent taxpayer has rights to the property, federal law determines whether the custodian of the property is obligated to surrender the property to the IRS. Id.; see generally United States v. Bell Credit Union [88-2 USTC ¶9564 ], 860 F.2d 365 (10th Cir. 1988). The parties agree that under state law the taxpayer had the right to withdraw the full value of the annuity. The issue is whether this right is sufficient to obligate the insurance company under section 6332(a) to surrender the funds subject to the withdrawal right to the IRS upon receipt of the notice of levy. We hold that it is.

Congress intended the IRS to be able "to reach every interest in property a taxpayer might have." National Bank of Commerce, 472 U.S. at 720, 105 S.Ct. at 2924. In National Bank of Commerce, the Court held that because the taxpayer had the right to withdraw funds from a joint bank account under state law, the IRS could levy on the entire amount contained in the account, even though the taxpayer did not have any kind of property right in funds deposited by the two other joint account holders. Under the logic of that holding, the taxpayer's right in this case to withdraw the cash value of the annuity is a right to funds in possession of the insurance company within the meaning of section 6332 . Id. at 724 n. 8, 105 S.Ct. at 2926 n. 8 ("[W]e agree with the Government that as a matter of federal law, the state-law right to withdraw money from a joint bank account is a 'right to property' adequate to justify the use of the provisional levy procedure"). Section 6332(a) therefore obligated the insurance company to surrender the funds subject to the taxpayer's withdrawal right to the IRS upon receipt of the notice of levy.

Under section 6332(b) , the IRS can levy against only the cash loan value of a life insurance policy or endowment contract. This allows the IRS to extract the full liquid value of the insurance contract while avoiding the expense of foreclosure under 26 U.S.C.A. §7403 and allowing the taxpayer to retain the insurance elements of the policy. See generally S.Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 1966 U.S. Code Cong. & Admin.News 3722, 3739. Section 6332(b) does not apply in this case, however, because that section by its express language applies to only life insurance policies and endowment contracts. We hold that the district court was correct in entering judgment against the insurance company for the cash withdrawal value of the annuity under section 6332(c)(1) .

The district court also imposed a 50% penalty against the insurance company under section 6332(c)(2) for refusing to comply with the levy without reasonable grounds. The decision in National Bank of Commerce made it clear that third parties maintaining accounts in which taxpayers have the right to withdraw funds are in possession of property subject to levy. ⁵ The real controversy in National Bank of Commerce was whether that right alone, without necessarily a right to the funds themselves, was sufficient. The Court held that it was. Although section 6332(b) creates an exception for life insurance policies and endowment contracts, that exception does not apply in this case because annuities are neither insurance policies nor endowment contracts.

The insurance company in essence argues that sections 6332(a) and (c) do not apply because annuities should be treated the same as insurance contracts under the pre-1966 case law, and that section 6332(b) does not apply because annuities are neither insurance policies nor endowment contracts. There is no justification in logic or in the case law to treat annuity contracts in such a unique manner. Each case cited by the insurance company was decided prior to 1966 and involved unmatured life insurance policies. Annuity contracts simply were not involved in these decisions, and Congress modified the decisions in the Federal Tax Lien Act of 1966. National Bank of Commerce made clear that funds in possession of a third party subject to withdrawal by the taxpayer constitute property in custody of the third party. Once the insurance company in this case received notice of the levy from the IRS, it was obligated under section 6332(a) to surrender to the IRS the funds subject to the taxpayer's withdrawal right. In this case, then, the insurance company did not have reasonable cause to deny that it was obligated to surrender the cash withdrawal value of the annuity to the IRS upon receipt of the notice of levy. See generally State Bank of Fraser v. United States [88-2 USTC ¶9592 ], 861 F.2d 954 (6th Cir.1988) (penalty imposed because no unsettled area of law existed to provide reasonable ground for refusal to comply with levy); United States v. Bell Credit Union, 860 F.2d at 372 ("Reasonable cause for failing to honor the levies, I.R.C. §6332(c)(2) , 'should not be read to include a clearly erroneous view of the law, stubbornly adhered to after investigation should have disclosed the error.' ") (quoting United States v. Sterling Nat. Bank & Trust Co. [74-1 USTC ¶9336 ], 494 F.2d 919, 925 (2d Cir.1974) (Friendly, J., dissenting)). We hold that the district court did not err in imposing the 50% penalty on the insurance company.

III. CONCLUSION

We AFFIRM the grant of summary judgment against the insurance company under 26 U.S.C.A. §§6332(c)(1) and 6332(c)(2) .

^* Honorable Jesse E. Eschbach, Senior U.S. Circuit Judge for the Seventh Circuit, sitting by designation.

¹ That section provides: "If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax . . . by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payemnt of such tax." (emphasis added)

² That section provides: "Except as otherwise provided in subsection (b), any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process." (emphasis added)

³ That section provides: "Any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary, 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. . . ."

⁴ That section provides: "In addition to the personal liability imposed by paragraph (1), if any person required to surrender property or rights to property fails or refuses to surrender such property or rights to property without reasonable cause, such person shall be liable for a penalty equal to 50 percent of the amount recoverable under paragraph (1)."

⁵ Although the opinion in National Bank of Commerce issued June 26, 1985, and the IRS served its notice of levy on the bank on March 6, 1984, this suit was filed June 26, 1987, so the insurance company had two years in which to comply with the levy.

[98-2 USTC ¶50,520] General American Life Insurance v. Richard W. Reed, Carolyn B. Reed, and Internal Revenue Service, Defendants

U.S. District Court, West. Dist. Pa., Civ. 97-1399, 5/12/98

[Code Secs. 6321 , 6332 and 7402 ]

Liens and levies: Insurance companies: Failure to surrender property: Interpleader action: Jurisdiction: Attorneys' fees: Notice.--An insurance company that held an individual's life insurance policy upon which the IRS had filed a tax lien was entitled to recover attorneys' fees incurred in the preparation, filing, and prosecution of its interpleader action. As a disinterested stakeholder, the company was limited under Reg. §§301.6321-1 and 301.6332-1(c) from relinquishing the policy to the IRS since the individual had transferred the policy to his wife several months before the insurance company received notice of the lien. The liability issue constituted a reasonable basis for the awarding of reasonable and necessary attorneys' fees.

William Weiler, Jones, Gregg, Creehan & Gerace, 3000 Grant Bldg., Pittsburgh , Pa. 15219 , for plaintiff. Michael C. Colville, Assistant United States Attorney, Pittsburgh, Pa. 15219, Gerald A. Role, Department of Justice, Washington, D.C. 20530, for defendants.

ORDER

CAIAZZA, Magistrate Judge:

The Plaintiff, General American Life Insurance Co., Inc. (General American), filed a Petition for Counsel Fees and Costs for the instant interpleader action. (Doc. No. 15.) The Plaintiff's Motion is granted for reasonable fees in compliance with the following rationale.

Facts

1. The Internal Revenue Service (IRS) filed a tax lien in the Court of Common Pleas of Allegheny County, Pennsylvania on July 23, 1993 against the Defendant Richard W. Reed (R.W. Reed).

2. At that time, R.W. Reed owned a $100,000 benefit whole life insurance policy (the policy) with General American; Defendant Carolyn B. Reed (C.B. Reed) was the designated beneficiary.

3. On June 16, 1996, R.W. Reed transferred his entire ownership interest of his policy to his wife, C.B. Reed.

4. On October 16, 1996, the IRS served the first of three notices upon General American for the cash surrender value of the policy.

5. General American filed this interpleader action in July 1997.

Issue

Whether a disinterested insurance company stakeholder, such as General American, is entitled to recover reasonable counsel fees and costs related to an interpleader action where it is unclear as to what General American's liability will be to the parties who have a property interest in the policy if General American surrenders the cash value of a whole life insurance policy to the IRS.

Treasury Regulations

The United States Treasury Regulations place several requirements on the possessors of properties which are encumbered by a tax lien. However, there are also exceptions and limitations on the possessor's liability when competing interests exist.

Title 26 of the Code of Federal Regulations Section 301.6321-1 states that if anyone

liable to pay any tax [does not do so] after demand, the amount . . . shall be a lien in favor of the United States upon all property . . . belonging to such person. . . . The lien attaches to all property and rights to property belonging to such person at any time during the period of the lien. . . .

26 C.F.R. §301.6321-1 (emphasis added).

It is clear that, without more, General American would be required to relinquish the properly encumbered property to the IRS because the policy was property or a right to property which belonged to R.W. Reed during a portion of the lien's existence. This payment requirement would obviate the need for an interpleader action and therefore would preclude related counsel fees. However, additional federal regulations limit General American's ability to relinquish this property to the IRS. Title 26 of the Code of Federal Regulations Section 301.6321-1 states that:

even though a notice of a lien . . . is filed . . ., the lien is not valid [for] a life insurance . . . contract, against an . . . insurer . . . [b]efore the insuring organization has actual notice or knowledge. . . .

26 C.F.R. §301.6323(b)-1(i).

This code section is a limitation on General American's ability to relinquish the policy to the IRS. Here, the ownership interest of the policy was transferred from R.W. Reed to C.B. Reed on June 16, 1996, but General American did not receive notice until October 16, 1996. Under this provision, the lien may be invalid as to the policy because General American received no tice of the lien after R.W. Reed's entire ownership interest was transferred to C.B. Reed.

A further limitation on General American's ability to surrender the policy to the IRS is found in Title 26 of the Code of Federal Regulations Section 301.6332-1(c), which states that:

(2) . . . Any person who surrenders to the Internal Revenue Service property or rights to property not properly subject to levy in which the delinquent taxpayer has no apparent interest is not relieved of liability to a third party who has an interest in the property. However, if the delinquent taxpayer has an apparent interest in property or rights to property, a person who makes a good faith determination that such property or rights to property in his or her possession has been levied upon by the Internal Revenue Service and who surrenders the property to the United States in response to the levy is relieved of liability to a third party who has an interest in the property or rights to property, even if it is subsequently determined that the property was not properly subject to levy.

26 C.F.R. §301.6332-1(c) (emphasis added).

Analysis

In summary, the relevant Treasury Regulations state as follows:

1. Section 301.6321-1 requires that a federal tax lien in favor of the United States shall be a lien upon all property or property rights belonging to R.W. Reed; however,

2. Section 301.6332-1(c)(2) does not require General American to surrender R.W. Reed's property to the IRS if C.B. Reed has an interest in the property; and,

3. Nothing requires General American to seek administrative relief; and,

4. Section 301.6323(b)(1) states that a lien is invalid as to a specific insurance contract until General American has notice or knowledge of the lien--here, General American did not receive notice until after R.W. Reed transferred ownership to C.B. Reed; and,

5. Section 301.6332-1(c)(2) does not definitely exonerate General American from liability once it surrenders the policy to the IRS if C.B. Reed has a property interest in the policy.

Accordingly, because there is a question as to whom General American is liable, there is a reasonable basis upon which to support General American's interpleader action. As a result General American is entitled to attorney fees because

federal courts may award reasonable costs and attorneys' fees . . . in an interpleader action. . . . [based on] . . . the sound discretion of the trial court. . . . because [the stakeholder's] involvement . . . usually results not from any transgression or chicanery on their behalf but because they are the innocent target in a dispute. . . .

In re OEM Industrial Corp., AEG Westinghouse Transp. Sys., Inc., v. OEM Industrial Corp., et al., 135 B.R. 247, 249 (W.D. Pa. 1991) (internal citations and quotations omitted) (emphasis added) ; see Massachusetts Mutual Life Ins. Co. v. Central Penn National Bank, et al., 372 F.Supp. 1027 (W.D. Pa. 1974) (citing 3A Moore 's Federal Practice at 22.16(2) (it is within the discretion of the court to award reasonable attorney fees to a stockholder)).

Conclusion

Therefore, this court finds that General American's Motion for Counsel Fees and Costs is granted; however, the fees and costs will be limited to those which are reasonable and necessary to the preparation, filing and prosecution of this interpleader action. OEM Industrial, 135 B.R. at 251. ¹

¹ Because the Plaintiff has not specified the amount of its fees and costs, the court cannot determine whether they are reasonable.