United States v. Miroff

• Decision Date: 23 November 1965
• Docket Number: No. 15110-15111.,15110-15111.
• Citation: 353 F.2d 481
• Parties: UNITED STATES of America, Plaintiff-Appellant, v. Leo L. MIROFF, Annette Miroff, Husband and Wife and The Central Standard Life Insurance Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

353 F.2d 481 (1965)

UNITED STATES of America, Plaintiff-Appellant, v. Leo L. MIROFF, Annette Miroff, Husband and Wife and The Central Standard Life Insurance Company, Defendants-Appellees.

Nos. 15110-15111.

United States Court of Appeals Seventh Circuit.

November 23, 1965.

Louis F. Oberdorfer, Asst. Atty. Gen., Tax Division, Joseph Kovner, Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., Edward V. Hanrahan, U. S. Atty., Thomas J. Curoe, Asst. U. S. Atty., of counsel, for appellant.

Daniel M. Pierce, Hyman A. Pierce, Chicago, Ill., for Central Standard Life Insurance Co., defendant-appellee.

Before DUFFY, SCHNACKENBERG and KILEY, Circuit Judges.

KILEY, Circuit Judge.

This is an appeal by the Government from summary judgment for defendant-insurer, The Central Standard Life Insurance Company, in the Government's suit for a judgment for unpaid income taxes and to enforce a tax lien¹ against the cash value of the taxpayer-Miroff's life insurance policy.

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

Miroff and his wife were delinquent in payment of 1954 and 1957 income taxes. On September 30, 1955, the Commissioner made an assessment of $3,767.02 against them for the year 1954, demand for payment availed nothing, and on April 2, 1957, notice of lien² was filed with the Recorder of Deeds of Cook County, Illinois. Nothing had been paid on the assessment when on June 2, 1961, Leo Miroff applied for and received a "policy loan" of $1,770.00 against the approximately $1,800.00 cash value of his policy with Central. On September 15, 1961, interest upon the loan added by insurer increased the loan amount to $1,806.00, so that thereafter it equalled the cash value.

Central had not received actual notice of the tax lien when the loan was made. It received notice of levy³ under the lien on September 19, 1961, and ten days later this suit was filed against Central and the Miroffs. The Government prayed that Central be required to pay to it the amount of the cash surrender value of Miroff's policy, "unreduced" by the amount of the policy loan.⁴ Central and the Government both moved for summary judgment and the court, upon an "expressed determination that there was no just reason for delay," Fed.R. Civ.P. 54, entered judgment "only" for Central. In its opinion the district court relied upon United States v. Sullivan, 333 F.2d 100 (3rd Cir. 1964), and Parish of Orleans v. New York Life Ins. Co., 216 U.S. 517, 30 S.Ct. 385, 54 L.Ed. 597 (1910), and held that the "policy loan" was made by Central as debtor, not a creditor, of Miroff, who had "no actual obligation" to return the advance of the cash value of the policy.

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

The Sullivan decision on the "policy loan" issue rested on the ground that Mrs. Sullivan had the right to be granted policy loans to the extent of the cash value, and that she had no obligation to repay the "loans." 333 F.2d at 112. (Emphasis added.) The court applied the general principle stated by Justice Holmes in Parish of Orleans v. New York Life Ins. Co., 216 U.S. 517, 522, 30 S.Ct. 385, 54 L.Ed. 597 (1910), that a "policy loan" created no debt and no personal liability but merely discharged part of insurer's ultimate policy obligation. The court held⁵ that the "policy loans" were partial advances of the cash surrender value. That holding expresses Central's theory here.

The Sullivan case, 333 F.2d at 113-114, approved the district court's view, 203 F.Supp. 1, 12 (D.C.Pa.1962), that the interest paid by the insured merely represented "what it is estimated the sum would have earned if it had not been advanced." We accept that view here, against the Government argument that the interest charge stamped the transaction as a loan to Miroff. As to the Government argument that the "precise terms" of an insurance policy, stating that "policy loans" are loans, indicate the intention of a commercial loan, we agree with the court in Sullivan that "form should not be allowed to prevail over substance." 333 F.2d at 113.

The Government...