357 U.S. 51 (1958), 395, United States v. Bess

Docket Nº:No. 395
Citation:357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135
Party Name:United States v. Bess
Case Date:June 09, 1958
Court:United States Supreme Court
 
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357 U.S. 51 (1958)

78 S.Ct. 1054, 2 L.Ed.2d 1135

United States

v.

Bess

No. 395

United States Supreme Court

June 9, 1958

Argued April 7, 1958

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Syllabus

This is a civil action brought by the Government to recover, in equity, from the beneficiary of life insurance policies the amount of federal income taxes owed by the insured at the time of his death and for some of which liens had attached to all his property under § 3670 of the Internal Revenue Code of 1939 before his death. The insured, a resident of New Jersey, had retained the right to change the beneficiaries of the policies and, except as to one policy, the right to draw down or borrow against the cash surrender values and to assign the policies. He had paid all the premiums, and none was paid in fraud of his creditors. Some of his federal income tax liabilities were paid out of the assets of his estate, but others remained unpaid when his estate was adjudged insolvent.

Held: because of the tax liens which had attached to all of the insured's property before his death, the beneficiary is liable to the extent of the cash surrender values of his policies. Pp. 52-59.

1. Had there been no lien, the beneficiary would not be liable, because, under New Jersey law, the beneficiary of a life insurance policy is entitled to its benefits against all creditors except to the extent of the amount of any premiums paid in fraud of creditors. Commissioner v. Stern, ante, p. 39. Pp. 53-54

2. Because, prior to the death of the insured, liens had attached under § 3670 to all of his assets, including the cash surrender values of his life insurance policies, the beneficiary is liable to the extent of such cash surrender values. Pp. 54-59.

(a) Under New Jersey law, the insured did not possess, prior to his death, "property" or "rights to property," within the meaning of §3670, in the proceeds of his life insurance policies; but he did possess such "property" or "rights to property" in their cash surrender values; and the federal tax lien attached under § 3670 even if, under state law, his property right represented by the cash surrender values was not subject to creditors' liens. Pp. 55-57.

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(b) For the purposes of § 3670, there was a transfer of property from the insured to the beneficiary, and the lien which had attached to the cash surrender values before his death followed that property into the hands of the beneficiary. Pp. 57-59.

243 F.2d 675 affirmed.

BRENNAN, J., lead opinion

MR. JUSTICE BRENNAN delivered the opinion of the Court.

The United States filed this civil action in the District Court for the District of New Jersey to recover, in equity, from the beneficiary of life insurance policies the amount of federal income taxes owed by the insured at the time of his death.

Herman Bess died a resident of Monmouth County, New Jersey, on June 29, 1950. His wife, Molly G. Bess, was the beneficiary of eight insurance policies on his life from which she received $63,576.95 in proceeds. The cash surrender value of these policies at his death was $3,362.53. Seven of the policies were issued to Mr. Bess from 1934 to 1937, and the eighth, a group policy, in 1950. He retained the right until death to change the beneficiary, to draw down or borrow against the cash surrender value, and to assign the policies, except that, under the group insurance policy, he retained only the right to change the beneficiary. Mr. Bess paid all premiums, and it is conceded that none was paid in fraud of his creditors.

The federal income taxes were owing for the several years from 1945 to 1949. The assets of Mr. Bess' estate were applied to payment of the amounts owing for 1948 and 1949, but a total of $8,874.57 remained owing for 1945, 1946, and 1947 when the estate was adjudged insolvent

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by the Monmouth County Court in 1952. The amounts owing were $4,159.31 for 1945, $3,789.32 for 1946, and $925.94 for 1947.

The District Court held Mrs. Bess liable for the total taxes owing of $8,874.57. 134 F.Supp. 467. The Court of Appeals for the Third Circuit reduced the judgment to the amount of the total cash surrender value of the policies of $3,362.53. 243 F.2d 675. We granted certiorari on the Government's petition and Mrs. Bess' cross-petition, 355 U.S. 861, and set the case for argument with Commissioner v. Stern, ante, p. 39. The Government seeks in No. 395 the reinstatement of the District Court's judgment in the full amount of the taxes owing. Mrs. Bess seeks in No. 410 the reversal of the Court of Appeals judgment in the amount of the cash surrender value.

I

As in Commissioner v. Stern, the Government argues that Mrs. Bess, as beneficiary of her husband's life insurance policies, is liable for his unpaid federal income taxes.1 We held today in the Stern case that recovery of unpaid federal income taxes from a beneficiary of insurance, in the absence of a lien, can be sustained only to the extent that state law imposes such liability in favor of other creditors of the insured. Under New Jersey law, the beneficiary of a policy of life insurance is entitled to its proceeds against all creditors except to the extent of the amount of any premiums for the insurance paid in fraud of creditors. N.J.Stat.Ann., 1939, § 17:34-29;

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Slurszberg v. Prudential Ins. Co., 15 N.J.Misc. 423, 192 A. 451; Middlesex County Welfare Board v. Motolinsky, 134 N.J.Eq. 323, 35 A.2d 463. If, in the instant case, no lien were involved, our holding in Commissioner v. Stern would require an affirmance in No. 395 and a reversal in No. 410, since it is conceded that Mr. Bess did not pay any premiums in fraud of his creditors.

[78 S.Ct. 1057] II

However, the Government contends that it is also seeking in this action to enforce, as to the 1945 and 1946 deficiencies, liens perfected under § 3670 of the Internal Revenue Code of 1939 against the property of Mr. Bess in his lifetime. Section 3670 provides 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.

53 Stat. 448. On July 30, 1948, and again on August 9, 1948, before Mr. Bess died, notice and demand were made upon him for payment of the deficiencies formally consented to by him as owing for 1945 and 1946. He made periodic payments on the amount owing for 1945, reducing that amount from $11,514 to $4,713.59 before his death. This balance was further reduced to $4,159.31 by a payment of $554.28 from his estate pursuant to an order of the Monmouth County Court. However, no payment on account of the $3,789.32 owing for 1946 was made either in his lifetime or after his death.

First. As to the tax lien theory, Mrs. Bess contends that the Government did not assert this basis for recovery before the District Court, and therefore should not be heard to assert that theory in this Court. But the essential facts pertinent to a decision on the merits of the tax lien theory were stipulated in the District Court. Moreover, the issue was fully briefed and argued both in the

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Court of Appeals and in this Court. We therefore see no basis for any inference of prejudice in the circumstances, and accordingly proceed to a determination of the question.

Second. Mrs. Bess argues that, in any event, no lien attached to any property of Mr. Bess, since a lien does not attach under § 3670 unless and until the delinquent taxpayer "neglects or refuses to pay the same after demand." She urges that the facts stipulated as to the payments on account of 1945 taxes made by Mr. Bess in his lifetime prove that he did not neglect or refuse to pay taxes after demand. Since, in the view we take of this case, the liability of Mrs. Bess is limited to the cash surrender value of $3,362.53, it suffices that whatever may be the case as to the 1945 taxes, the requisite neglect or refusal was plainly established as to the 1946 delinquency of $3,789.32, for it is admitted that Mr. Bess neither paid nor attempted to pay anything on account of those taxes.

Third. We must now decide whether Mr. Bess possessed in his lifetime, within the meaning of § 3670, any "property" or "rights to property" in the insurance policies to which the perfected lien for the 1946 taxes might attach. Since § 3670 creates no property rights, but merely attaches consequences, federally defined, to rights created under state law, Fidelity & Deposit Co. v. New York City Housing Authority, 241 F.2d 142, 144, we must look first to Mr. Bess' right in the policies as defined by state law.

(a) It is not questioned that the rights of the insured are measured by the policy contract as enforced by New Jersey law. Manifestly, the insured could not enjoy the possession of the proceeds in his lifetime. His...

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