United States v. Penn Mut. Life Ins. Co.

• Decision Date: 24 July 1942
• Docket Number: No. 7930.,7930.
• Citation: 130 F.2d 495
• Parties: UNITED STATES v. PENN MUT. LIFE INS. CO.
• Court: U.S. Court of Appeals — Third Circuit

130 F.2d 495 (1942)

UNITED STATES v. PENN MUT. LIFE INS. CO.

No. 7930.

Circuit Court of Appeals, Third Circuit.

Argued April 23, 1942.

Decided July 24, 1942.

Bernard Chertcoff, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Sp. Asst. to the Atty. Gen., Gerald A. Gleeson, U. S. Atty., and Thomas J. Curtin, Asst. U. S. Atty., on the brief), for appellant.

Robert Dechert, of Philadelphia, Pa., and Frederick H. Nash, of Boston, Mass. (Owen B. Rhoads, and Barnes, Dechert, Price & Smith, of Philadelphia, Pa., on the brief), for appellee.

Before JONES and GOODRICH, Circuit Judges, and LEAHY, District Judge.

JONES, Circuit Judge.

The question presented by this appeal is whether an insurance company, which has issued and delivered a policy of insurance on the life of a patron, is liable under Sec. 3710(b) of the Internal Revenue Code¹ for refusing to turn over the cash surrender value of the policy to the Collector of Internal Revenue upon the latter's demand under Sec. 3710(a) of the Code because of an unpaid tax liability owing by the insured to the United States, the insured never having elected to receive the cash surrender value of the policy and never having surrendered the policy to the company for cancellation.

On April 25, 1918, the Penn Mutual Life Insurance Company (the appellee) issued and delivered to James A. House in Ohio its twenty-payment policy on his life in a principal sum payable to the insured's wife as beneficiary. The policy reserved to the insured the right to change the beneficiary, a right which he exercised on September 26, 1933, by substituting his son and daughter, or the survivor of them, as the beneficiaries, who, at all times thereafter, continued to be such.

In July, 1935, the Insurance Company was notified by the Collector of Internal Revenue that a lien existed in favor of the United States against all property and rights to property belonging to the insured on account of the latter's liability for unpaid taxes due the United States. On November 18, 1935, notice of the Collector's levy and a warrant of distraint² were served on the Insurance Company at its home office in Philadelphia, and on December 14, 1937, final notice of the Collector's demand was likewise served on the Insurance Company. A second notice of levy and warrant of distraint and, likewise, a second final notice and demand were served by the Collector on the Insurance Company in Philadelphia on February 5, 1940.

In the meantime the policy had lapsed because of the insured's failure to pay the quarterly premium due July 9, 1936. Upon the happening of that event and in accordance with the provision in the policy for automatic extended insurance, the then cash surrender value was used by the company to place the policy on an extended insurance basis in a reduced principal sum for a term expiring July 16, 1943. In due course the cash surrender value of the policy will be entirely consumed by the running of the term of the extended insurance under the nonforfeiture provision of the policy.³ The insured never took any action to obtain the cash surrender value of the policy, nor did he ever tender the policy to the company for cancellation. The Insurance Company does not maintain separate funds as respective reserves for individual insurance contracts and the reserve upon the policy in question is a part of the general assets of the company.

The Insurance Company, denying that it had in its possession any determined property or rights to property belonging to the insured, refused to pay the Collector of Internal Revenue any sum as representing the cash surrender value of the policy. The United States thereupon brought the instant suit to recover from the Insurance Company the statutory penalty imposed by Sec. 3710(b) of the Internal Revenue Code. The District Court entered judgment in favor of the Insurance Company, from which the United States took the pending appeal.

According to the specifications of Sec. 3710(a) the establishment of three things is requisite to the enforcement of the right thereby conferred upon the Collector, viz., (1) the existence of property or rights to property in a delinquent taxpayer, (2) the possession of such property or rights to property by the person of whom demand therefor is made by the Collector, and (3) that such property or rights to property are legally subject to distraint.

That an insured is the owner of "property, or rights to property" by virtue of a policy of insurance upon his life will hardly be questioned. See Burnet v. Wells, 289 U.S. 670, 679, 53 S.Ct. 761, 77 L.Ed. 1439; Chase National Bank v. United States, 278 U.S. 327, 334, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388; Cohen v. Samuels, 245 U.S. 50, 53, 38 S.Ct. 36, 62 L.Ed. 143; Burlingham v. Crouse, 228 U.S. 459, 472, 33 S.Ct. 564, 57 L.Ed. 920, 46 L.R.A., N.S., 148; Bassett v. Parsons, 140 Mass. 169, 3 N.E. 547. And it may be assumed for present purposes that such "property, or rights to property" may be the subject matter of a distraint. Cf. United States v. Massachusetts Mut. Life Ins. Co., 1 Cir., 127 F.2d 880, 883; see, also, Kyle v. McGuirk, 3 Cir., 82 F.2d 212, 213. The first and third of the requirements under Sec. 3710(a), as above specified, may, therefore, be considered to be present in this case. But it by no means follows that, because an insured has valuable rights or privileges under an extant life insurance policy, the insurer is in possession of any definite property owing to the insured.

While the policy endures, the insurer is powerless to compel the insured to exercise his option under the policy by accepting the cash surrender value thereof. Van Dyke Co. v. Moll, 241 Mich. 255, 217 N.W. 29, 30, 57 A.L.R. 692, 694. Concurrently, the insurer's liability remains indeterminate. It is only by the voluntary action of the insured or by the terms of the policy, if the insured fails to act, that his rights or privileges under the policy may be accrued and determined. And until that happens, there is no definite amount owing by the insurer to the insured and, hence, no ascertainable property of the insured in the possession of the insurer. Cf. National Bank of Commerce v. Appel Clothing Co., 35 Colo. 149, 83 P. 965, 966, 4 L.R.A.,N.S., 456, 117 Am.St.Rep. 186; Farmers' & Merchants' Bank v. National Life Ins. Co., 161 Ga. 793, 131 S.E. 902, 903, 44 A.L.R. 1184, 1187; Van Dyke Co. v. Moll, loc. cit. supra; Columbia Bank v. Equitable Life Assur. Soc., 79 App.Div. 601, 80 N.Y.S. 428, 433; Boisseau v. Bass' Adm'r, 100 Va. 207, 40 S.E. 647, 649, 57 L.R.A., 380, 93 Am.St.Rep. 956. In the Farmers' & Merchants' Bank case, loc. cit. supra, 161 Ga. 793, 131 S.E. 903, 44 A.L.R. 1184, the court aptly said that "* * * neither the cash surrender value nor the cash loan value of a policy of life insurance * * * can be treated as a debt due the insured by the company, until steps have been taken by the insured to effect the loan or to withdraw in cash the accumulated surplus apportioned to the policy by the company." The appellant argues that the "state decisions involving attempts by ordinary creditors to reach an...