United States v. Truax, 15356.

• Decision Date: 02 June 1955
• Docket Number: No. 15356.,15356.
• Citation: 223 F.2d 229
• Parties: UNITED STATES of America, Appellant, v. Dorothy B. TRUAX, Individually and as Administratrix of the Estate of Layton E. Truax, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

223 F.2d 229 (1955)

UNITED STATES of America, Appellant, v. Dorothy B. TRUAX, Individually and as Administratrix of the Estate of Layton E. Truax, Appellee.

No. 15356.

United States Court of Appeals Fifth Circuit.

June 2, 1955.

John J. Kelley, Jr., Ellis N. Slack, A. F. Prescott, Sp. Assts. to Atty. Gen., H. Brian Holland, Asst. Atty. Gen., William C. Calhoun, U. S. Atty., Augusta, Ga., for appellant.

Green B. Everett, Reidsville, Ga., T. Ross Sharpe, Lyons, Ga., Sharpe & Layne, Lyons, Ga., for appellee.

Before HUTCHESON, Chief Judge, and TUTTLE and JONES, Circuit Judges.

TUTTLE, Circuit Judge.

The sole question here is whether appellee, the named beneficiary and the recipient of the proceeds of an insurance policy on the life of her deceased husband, is liable as a transferee for the husband's unpaid income taxes in an amount exceeding the cash surrender value of the policy, where the husband died insolvent.

The facts in the record are undisputed. Appellee is the widow and administratrix of Layton E. Truax, who died insolvent on May 11, 1949, owing back income taxes for years ending August 31, 1946, and August 31, 1947, in the amount of $3,485.43 and interest. Appellee received $10,072.13 as beneficiary of a life insurance policy issued to decedent on June 1, 1946. Decedent had paid the premiums on the policy, which provided that he was entitled to borrow against or receive the cash surrender value and to change the beneficiary of the policy. The record here does not show that decedent was insolvent at any time prior to his death. The cash surrender value of the policy at the time of his death was $411.77. The District Court held appellee liable for that amount with interest from the date appellee received the insurance proceeds, and the Government appealed, contending that appellee is liable for the entire amount of the unpaid taxes, under § 311 of the Internal Revenue Code of 1939, 26 U.S.C. § 311 (1952 Ed.), which provides:

"§ 311. Transferred assets. — (a) Method of collection. —

"The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this chapter (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):

"(1) Transferees. The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this chapter.

* * * * * *

"(f) Definition of `transferee\'. As used in this section, the term `transferee\' includes heir, legatee, devisee, and distributee."

This case turns upon the question whether the "liability, at law or in equity" of a transferee referred to in § 311(a) (1) is determined by state law, or may be determined as a matter of federal law from the abstract meanings of those statutory words, there being no federal statute defining that liability more precisely.¹ This question was reserved in Phillips v. Commissioner, 283 U.S. 589, 602, 51 S.Ct. 608, 75 L.Ed. 1289. This circuit and several others early held that the substantive liability of a transferee depends on state law. Liquidators of Exchange Nat. Bank v. United States, 5 Cir., 65 F.2d 316; Harwood v. Eaton, 2 Cir., 68 F.2d 12; Hatch v. Morosco Holding Co., 2 Cir., 50 F.2d 138, certiorari denied sub nom. Irving Trust Co. v. United States, 284 U.S. 668, 52 S.Ct. 42, 76 L.Ed. 565; Wire Wheel Corporation v. Commissioner, 16 B.T.A. 737, affirmed, 2 Cir., 46 F.2d 1013; Weil v. Commissioner, 2 Cir., 91 F.2d 944; Botz v. Helvering, 8 Cir., 134 F.2d 538; Irvine v. Helvering, 8 Cir., 99 F.2d 265; Tooley v. Commissioner, 9 Cir., 121 F.2d 350. Commissioner of Internal Revenue v. Western Union Telegraph Co., 2 Cir., 141 F.2d 774, held that the question of who is a transferee of property is a matter of federal law, but liability of such a person is to be determined by state law.

Curiously enough, when the courts of appeals first applied § 311 to beneficiaries of insurance policies, they applied federal law to determine transferee liability. Pearlman v. Commissioner, 3 Cir., 153 F.2d 560, noted with disapproval on this point, 94 U.Pa.L.Rev. 434; Kieferdorf v. Commissioner, 9 Cir., 142 F.2d 723, certiorari denied 323 U.S. 733, 65 S.Ct. 69, 89 L.Ed. 588. Following the language of these cases, the Tax Court and several District Courts held that a beneficiary in a case like the present one was as a matter of federal substantive law liable for the insured's delinquent income taxes to the extent of the entire proceeds. Aura Grim Bales, 22 T.C. 355; Sadie D. Leary, 18 T.C. 139; Christine D. Muller, 10 T.C. 678; Marjorie U. Sullivan, T.C.M., CCH Dec. 17,436(M); Eleanor Neely, T.C.M., CCH Dec. 17,135(M); United States v. Goddard, D.C.W.D.N.Y., 111 F.Supp. 607. Actually, the Pearlman and Kieferdorf cases do not go that far. In Pearlman, the insured had changed the beneficiary from his estate to his wife while he was insolvent, and more importantly, the tax deficiency was less than the cash surrender value of the policies. In Kieferdorf, the policies were payable to the insured's insolvent estate, and were paid by the estate to the widow as property exempt from execution. The widow was held liable as a transferee, the exemption statute being held not applicable to the Government.

The most recent cases have come back into line with our holding in Liquidators of Exchange Nat. Bank v. United States, supra, and hold that the liability of the beneficiary is determined by state law. Tyson v. Commissioner, 6 Cir., 212 F.2d 16; United States v. New, 7 Cir., 217 F.2d 166; Rowen v. Commissioner, 2 Cir., 215 F.2d 641, 644. The Rowen case is the best reasoned of these and is regarded as the leading case. The Second Circuit pointed out there that § 311 creates a summary method of collection of delinquent taxes from transferees when two elements are present: (1) a liability in law or equity; and (2) a "`transferee of property of a taxpayer'". The court held first, that the proceeds of the insurance were never property of the taxpayer; and secondly, although the cash surrender value had been, the applicable state law created no liability on the part of the transferee. The result was that the Government collected none of the insured's delinquent taxes which amounted to more than $400,000.

"Granted that the appellants are transferees as to the cash surrender values of the policies, are they under `liability, at law or in equity\' for their decedent\'s unpaid income taxes? In determining this question we hold that the local state law governs. For neither by Section 311 nor by any other federal statute is the liability of such a transferee defined. Granted that Congress by specific legislation might have pre-empted the field, it has not chosen to do so. As a result, when Congress extended its general tax-collection procedure to the `liability\' of a transferee it necessarily must have intended that the existence of liability should be determined by State law. Other than the State law, there is no source to which we may look for pertinent authority." Rowen v. Commissioner, 2 Cir., 215 F.2d 641, 647.

We are in complete agreement with this holding and the reasoning quoted; and in the only other case in which we passed on the question, we so held. Liquidators of Exchange Nat. Bank v. United States, 5 Cir., 65 F.2d 316. In United States v. Gilmore, 5 Cir., 222 F.2d 167, we found that the payment by the administratrix of estate taxes from regular estate assets gave rise to liability of the beneficiary of the decedent's life insurance by virtue of an express federal statutory duty of contribution, which the Government can compel the administratrix to enforce for its benefit. 26 U.S.C. (1952 Ed.) § 826(c). Our majority opinion there was of course consistent with our present opinion that in the absence of a federal statutory liability, the only source of liability is state law; and Judge Hutcheson's dissenting opinion very forcefully took that position. 222 F.2d 171. We think it is quite significant also that the Government has indicated that in regard to the New and Rowen cases, supra, applications by the Government for certiorari have not been authorized by the Justice Department nor does the Justice Department contemplate taking the cases to the Supreme Court. 5 CCH Federal Tax Reporter (1955) 51,511-512. We observe also that the holding in Rowen that state law is applicable and that the beneficiary is not liable for the entire proceeds of the insurance has met with approval in the legal periodicals. 55 Columbia L.Rev. 98; 103 U.Pa.L.Rev. 431; 41 Va.L.Rev. 266. We take no exception to the statement in the Government's brief of the principles determining the applicability of state law to federal tax matters. We agree with that statement and think that it gives support to our reasoning:

"Whether or not the incidence is to be determined under federal or state law is controlled by the intention of Congress. * * * Among the tests As set forth in Doll v. Commissioner, 5 Cir., 149 F.2d 239, 242 * * * developed in determining that intention are that state law does control `unless the language or necessary implication\' of the statutory revenue provision so sic requires Helvering v. Stuart, 317 U. S. 154, 161, 63 S.Ct. 140, 87 L.Ed. 154; United States v. Pelzer, 312 U.S. 399, 402, 61 S.Ct. 659, 85 L.Ed. 913; whether, as to such provision, a uniform application of a nationwide scheme of taxation would be interfered with if state law were the

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