Stern v. Commissioner of Internal Revenue, 12840.

• Decision Date: 26 February 1957
• Docket Number: No. 12840.,12840.
• Citation: 242 F.2d 322
• Parties: Jean F. STERN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

242 F.2d 322 (1957)

Jean F. STERN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 12840.

United States Court of Appeals Sixth Circuit.

February 26, 1957.

Walter E. Barton, Washington, D. C. (William H. Beck and William B. Martin, Lexington, Ky., on the brief), for petitioner.

Kenneth E. Levin, Washington, D. C. (Charles K. Rice, Lee A. Jackson and A. F. Prescott, Washington, D. C., on the brief), for respondent.

Before SIMONS, Chief Judge, and STEPHENS^* and McALLISTER, Circuit Judges.

McALLISTER, Circuit Judge.

Jean F. Stern, petitioner, was the beneficiary of seventeen insurance policies, of the face amount of $60,255, on the life of her husband, Dr. Milton J. Stern, who died June 12, 1949. Dr. Stern, in the contracts of insurance, had reserved the right to change the beneficiary, as well as to draw the cash surrender value of the policies up to the time of his death. However, he never did draw any of the cash surrender values. Petitioner had been named beneficiary in the policies at various times between March 13, 1919 — thirty years before her husband's death — and July 11, 1934 — fifteen years before her husband's death.

Six years after Dr. Stern's death, respondent Commissioner of Internal Revenue, determined that petitioner was subject to the income tax liability of her deceased husband with regard to the proceeds of the life insurance policies on the ground that she was a transferee of such proceeds, and that the Estate of Milton J. Stern, Deceased, had transferred these proceeds to her. The Commissioner, in his answer to Mrs. Stern's petition, set forth that "during the year 1949, the estate of Milton J. Stern, deceased, without consideration, diverted and transferred to petitioner, assets having an aggregate then fair market value of not less than the deficiency in tax, penalties and interest thereon, which are here in dispute," and that "by reason of said transfer, without consideration, from the estate of Milton J. Stern, deceased, to petitioner, said estate of Milton J. Stern, deceased, was, or became, insolvent and unable to pay the deficiencies in tax, penalties and interest thereon, here in dispute." There was no evidence and no finding of insolvency as of any date prior to decedent's death; and there was no evidence or finding that decedent took out or maintained the policies with intent to hinder, delay or defraud his creditors. The Tax Court agreed with the respondent's contention and held that the government could follow the proceeds of the insurance policies into the hands of the beneficiary.

In Tyson v. Commissioner of Internal Revenue, 6 Cir., 212 F.2d 16, 17, the same question was before this court, and the Commissioner contended in similar fashion that the beneficiary of a life insurance policy was a transferee of a deceased taxpayer in respect of the proceeds of life insurance received after the death of the deceased, under Section 311 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 311. However, in that case, we held that the widow who was the beneficiary of a life insurance policy of her husband's life and who received the proceeds thereof after his death was not liable for his unpaid income taxes, as transferee of her husband's assets, and in so holding, said: "The failure of the husband to change the beneficiary from his wife to his estate is not a voluntary transfer of the proceeds of said policy within the meaning and scope of the Federal Transferee Statute, Section 311 (a) (1), (f) of the Internal Revenue Code."

In Rowen v. Commissioner of Internal Revenue, 2 Cir., 215 F.2d 641, 646, the court held that a widow, who in that case was a beneficiary of a life insurance policy of her deceased husband, was not liable as a transferee under Section 311. The court pointed out that Section 311 applied only to a transferee of the property of a taxpayer, and held that the widow was not a transferee with respect to the proceeds of the policies, inasmuch as they had never been the property of the deceased taxpayer. The court distinguished Section 311, which was, by its express terms, limited to the collection of income tax obligations, from Section 811, in which the Estate Tax was imposed upon a beneficiary who had received the proceeds of a life insurance policy "with respect to which the decedent possessed at his death any of the incidents of ownership." The court said that the "failure of Section 311(f) to extend the definition of a transferee to include a `beneficiary' as was done by I.R.C. § 900, for purposes of estate tax collection, we think supports our holding that for purposes of income tax collection a beneficiary was not intended to be classed as a transferee as to the proceeds of a policy." The court declared that while "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 of Internal Revenue, 2 Cir., 215 F.2d 641, 647.

In the instant case, the relevant State law is that of Kentucky, which was the State of domicile of petitioner and her deceased husband. According to the statutes of Kentucky, the lawful beneficiary of a life insurance policy is entitled to the proceeds of the policy as against the representatives or creditors of the insured. Section 655 of Kentucky Revised Statutes 1936, and Section 304.691 of Kentucky Revised Statutes 1953. Such State statute is applicable to the claim of the Federal government. Rowen v. Commissioner of Internal Revenue, supra; United States v. Truax, 5 Cir., 223 F.2d 229. Petitioner, accordingly, is entitled to the proceeds of the insurance policies as against the claim herein asserted by respondent.

The Tax Court, however, in the instant case, stated that it would follow its own prior decisions in spite of numerous reversals of such holdings by the Courts of Appeal, specifically alluding to the decision of this court in Tyson v. Commissioner, supra, as well as the decisions in Rowen v. Commissioner of Internal Revenue, supra, United States v. Truax, supra, and United States v. New, 7 Cir., 217 F.2d 166.

In Stacey Manufacturing Co. v. Commissioner of Internal Revenue, 237 F.2d 605, 606, this court said in a similar instance that "the Tax Court of the United States is not lawfully privileged to disregard and refuse to follow, as the settled law of the circuit, an opinion of the court of appeals for that circuit. If the tax court is not bound on questions of law by decisions of the appropriate circuit having jurisdiction, why should any jurisdiction be vested in circuit courts of appeals to review decisions of the tax court? The district courts of the several circuits also have statutory jurisdiction in tax cases and they are bound to follow the rules of decision pronounced by the United States Court of Appeals having appellate jurisdiction over the particular district court. The tax court is no less bound to do so. The mere fact that it is a court having jurisdiction in tax cases throughout the United States does not establish the tax court as superior in any aspect to the United States District Courts." We here reaffirm our opinion in Tyson v. Commissioner of Internal Revenue, supra.

Respondent Commissioner, however, still insists that the Tax Court's opinion should be here followed, in spite of the fact that this Court has expressly ruled to the contrary in Tyson v. Commissioner of Internal Revenue, supra; but, while so contending, submits that the decision of the Tax Court should also be sustained on what is termed "a lesser position" — that petitioner, if not liable as a transferee of the proceeds of the policies, is nevertheless liable as a transferee of the cash surrender value.

With respect to petitioner's liability as a transferee of the cash surrender value of the policies, we are of the view that petitioner is not so liable.

In the first place, she was not the transferee of the cash surrender value of the policies any more than she was the transferee of the proceeds of the insurance policies. The only person who had any right to receive the cash surrender value was petitioner's husband. After he died, there remained no cash surrender value. Petitioner did not receive the cash surrender value, but received something wholly different in character and in amount — the proceeds from the insurance policies. As an instance, the cash surrender value to Dr. Stern at the time of his death of one of the policies was $297. The value of the proceeds of the policy to Mrs. Stern was $1,000. The cash surrender value was never the property of the widow. The life insurance proceeds were never the property of decedent or of his estate. They were payable to the widow, not as part of decedent's estate, or as a transferee of his estate, but because her husband had entered into a speculative contract with the insurance company, many years before, that it would pay his widow these sums on a certain contingency — his death; and they further depended upon other contingencies that he would pay the premiums at certain stated times. Under the statute, petitioner would be liable for her husband's income taxes only if she had received a transfer of his property at his death. Section 311(a) (1) of the Internal Revenue Code of 1939. She did not receive any transfer of his property...