United States v. Mitchell

• Decision Date: 26 July 1965
• Docket Number: No. 20437.,20437.
• Citation: 349 F.2d 94
• Parties: UNITED STATES of America, Appellant, v. Louis H. MITCHELL et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

349 F.2d 94 (1965)

UNITED STATES of America, Appellant, v. Louis H. MITCHELL et al., Appellees.

No. 20437.

United States Court of Appeals Fifth Circuit.

July 26, 1965.

COPYRIGHT MATERIAL OMITTED

Michael I. Mulroney, Atty., Dept. of Justice, Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Joseph Kovner, Meyer Rothwacks, Attys., Dept. of Justice, Washington, D. C., Vernol R. Jansen, Jr., U. S. Atty., Mobile, Ala., for appellant.

Alex T. Howard, Jr., Robert F. Adams, Mayer W. Perloff, J. Edward Thornton, Mobile, Ala., McCorvey, Turner, Johnstone, Adams & May, Thornton & McGowin, Mobile, Ala., of counsel, for appellees.

Before TUTTLE, Chief Judge, and MOORE^* and BELL, Circuit Judges.

MOORE, Circuit Judge:

The United States of America (the Government) brought this action against Louis H. Mitchell and his wife, Betty K. Mitchell, (and other individual defendants) and against four insurance companies from whom Mitchell had secured life insurance, to collect income taxes assessed against Mitchell for the years 1943 through 1948 and 1951 through 1953, and against Louis H. and Betty K. Mitchell for 1954. In addition, the Government in this action sought to enforce tax liens "against funds in the possession or under the control of" the four insurance companies. The "funds", if any, exist only as a result of the contractual relationships between the insurance companies and Mitchell as expressed in the respective policies. The facts are more fully set forth in Judge Thomas's opinion below, 210 F.Supp. 810 (S.D.Ala.1962). At issue on this appeal is the question of whether the insurance companies were subjected to any liability to the Government as a result of the filing and serving upon them in September and October of 1949 of notices of levy, arising out of the Mitchell tax deficiency. These levies stated that "all property rights to property, moneys, credits and/or bank deposits" in the insurer's possession and belonging to Mitchell were seized and levied upon to pay his taxes. Payment of any amount owing to Mitchell was demanded.

To ascertain to what property rights the Government's levies might have attached, the contractual rights in the policies themselves must be examined. Four companies are involved: Travelers Insurance Co. (Travelers), John Hancock Mutual Life Insurance Co. (John Hancock), Prudential Insurance Co. (Prudential), and New England Mutual Insurance Co. (New England). In each policy, Mitchell's wife was the named beneficiary.

Using the Prudential policy as an example, it was provided in relevant part that:

If this Policy be legally surrendered to the Company * * *, and if all premiums * * * have been paid in full, the Company will pay therefor the sum indicated in the following table, less any indebtedness to the Company on account of this Policy. The Company reserves the right to defer the payment * * for a period not exceeding ninety days after application for such Cash Surrender Value.

Like the others, it provided in addition that

If this policy * * * shall lapse or become forfeited for the nonpayment of any premium * * * and if the Policy be not surrendered for its cash value, the Company upon the legal surrender of this Policy * * * will issue a non-participating Paid-up Life Policy * * * as specified in the following table * *.

Alternatively,

If this Policy, having lapsed or become forfeited as specified in the clause, "Paid-up Life Policy," above, be not surrendered for its Cash Value or for a Paid-up Life Policy, the Company will put in force in lieu of this policy, without any action on the part of the Insured, a nonparticipating Paid-up Term Policy for the Face Amount of Insurance under this Policy, * * * to continue in force for the term indicated in the following table * * *. The Paid-up Term Policy will be delivered on the legal surrender of this policy.

Finally,

If this Policy shall lapse, as above, and a Paid-up Life Policy be issued or a Paid-up Term Policy be put in force in lieu thereof, such * * * Policy may be surrendered at any time for its full reserve value at the time of such surrender. The Company reserves the right to defer the payment of any cash surrender value for a period not exceeding ninety days after application for such cash surrender value.

A table in the policy indicated for each of the first twenty years of the policy the values per $1,000 of face amount of cash surrender value, loan value, paid-up life policy, and the amount of automatic extended insurance. If the policy continued in force beyond twenty years, another table was available from the insurer. At the time of the notices of levy, the policies had the following cash surrender values: Travelers — $1,043.10; John Hancock — $428.10; Prudential — $170.52;¹ New England — $2,768.53.

The history of the policies subsequent to the entry of the tax judgment against Mitchell in 1951 discloses that at varying times thereafter, Mitchell defaulted on the premium payments. Pursuant to the policy provisions, extended term insurance was furnished as follows: Travelers — face amount of $13,630 from May 7, 1952 (cash surrender value then of $1,205.16) to May 17, 1959; John Hancock — from August 23, 1957 to June 26, 1962;² Prudential — face amount of $2,796.69 from September 25, 1955 (cash surrender value then of $282.94) to October 25, 1961. The New England policy provided for paid-up insurance at a reduced face amount in case of default. The defaults commenced on November 1, 1951, and the policy matured on February 1, 1959, with a maturity value of $4,859.97.

To the Government's claim that the insurance companies were liable for the cash surrender value of the policies at the time of the levy, they responded that the cash surrender value was not payable without written election by Mitchell and surrender of the policy.

The Government and the insurance companies stipulated the issues to be decided by the court:

1. Does the government have any right to enforce a levy against the policies in the absence of an election by the insured owner of the policy to take its cash surrender value, accompanied by a surrender of the policy, and in the absence of a court order requiring them (the insurance companies) to turn over this money to the government?

2. In the event the government has this right, at what date does the cash surrender value to which the government is entitled become effective, namely, the date of the levy, the date of the decree in this court, or some intervening date?

The trial court concluded that the Government had no such right and was entitled only to the amounts available under the policies at the time of the judgment — 1963. At that time, all but the New England policy were entirely defunct; thus, the Government took nothing. As for New England, however, the Government was entitled to the maturity value of $4,850, which exceeded the 1949 cash surrender value of $2,768. Judgment was also entered against the Mitchells on all assessments. The Government appeals, asking that judgment be reversed against Travelers, John Hancock and Prudential "for the amount of the cash surrender value of each policy as of the date of the levy, plus statutory interest," and that the judgment against New England be modified to the same effect. All insurers but New England oppose the appeal.

This action began in the complaint as a lien case, and seems to have shifted in the stipulation to a levy case. The first step, therefore, must be to place the statutory framework for both approaches firmly in mind. Section 3670 of the Internal Revenue Code of 1939 (now § 6321 of the Internal Revenue Code of 1954)³ provides essentially 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. (Emphasis added.)

The lien which thus arises upon assessment attaches to the taxpayer's property upon demand and refusal to pay, and under section 3678 (§ 7403), a civil action could be brought to enforce such a lien, whether or not distraint proceedings have been commenced.

The distraint proceedings referred to constitute a wholly independent collection procedure. Under it

If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand * * * it shall be lawful * * * to collect such taxes, by distraint and sale * * * of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid. Section 3690 (see § 6331(a), (b))

In case of neglect or refusal under section 3690, the collector may levy * * * upon all property and rights to property, except such as are exempt by the preceding section § 3691 (§ 6334) belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due * * *. Section 3692 (see § 6331(a), (b)). (Emphasis added.)

When such distraint is to be made, notice shall be given to the owner or possessor of "the goods and effects distrained," and notice of sale shall be published forthwith; such sale must be within 10 to 20 days. Section 3693(a), (b), (c) (§ 6335). At such a sale, the Government may set a minimum price at which it may purchase the property if no bids are higher. Section 3695(a) (§ 6335(e)). However, "the goods, chattels, or effects so distrained shall be restored to the owner or possessor, if, prior to the sale, payment of the amount due is made * * *." Section 3696 (§ 6337(a)). Finally,

Any person in possession of property, or rights to property, subject to distraint, upon which a levy has been made, shall, upon demand by the collector * * * making such levy, surrender such property or rights to such collector * * *. Section 3710(a) (§ 6332(a)) (Emphasis added.)

And,

Any person who fails or refuses to so surrender any of such property or rights shall be

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