United States v. Salerno

• Decision Date: 18 October 1963
• Docket Number: Civ. No. 380.
• Citation: 222 F. Supp. 664
• Parties: UNITED STATES of America, Plaintiff, v. Albert SALERNO and the Mutual Life Insurance Company of New York, Defendants.
• Court: U.S. District Court — District of Nevada

222 F. Supp. 664

UNITED STATES of America, Plaintiff, v. Albert SALERNO and the Mutual Life Insurance Company of New York, Defendants.

Civ. No. 380.

United States District Court D. Nevada.

October 18, 1963.

John W. Bonner, U. S. Atty., Las Vegas, Nev., for plaintiff.

Morse & Graves, Las Vegas, Nev., for defendant Mutual Life Ins. Co. of New York.

THOMPSON, District Judge.

This is an action by the United States against Albert Salerno to recover judgment for unpaid income taxes due, and against the Mutual Life Insurance Company of New York to foreclose a lien against the cash surrender value of a life insurance policy written on the life of defendant Albert Salerno, and owned by him. Salerno defaulted, and on October 5, 1962, default judgment was taken against him for the tax deficiency. Mutual Life answered and opposes judgment to the extent that automatic premium loans have reduced the cash surrender value of the policy since the date of attachment of the tax lien.

The stipulated facts disclose that a Notice of Federal Tax Lien was recorded in the office of the County Recorder of Clark County, Nevada on January 30, 1957. On June 18, 1958, a notice of the tax lien was served on Mutual Life at its home office in New York City, New York. On February 11, 1960, the District Director of Internal Revenue served on Mutual Life a Notice of Levy and demand for payment of the cash surrender value of the policy pursuant to 26 U.S.C. §§ 6331, 6332.

Although there is some discrepancy among the figures stated in the Stipulation of Facts and in the briefs on file, it appears that on June 18, 1958, the insurance policy had a net cash value of $979.38; on February 11, 1960 of $660.96; and on August 28, 1962 and presently, of $494.59. On the last date, the policy, by its terms, was converted to reduced, paid-up participating insurance The reduction in cash value resulted from automatic premium loans charged by Mutual Life against the policy, as follows: November 6, 1958, $155.65; October 27, 1959, $155.65; November 9, 1960, $155.65; November 8, 1961, $155.65. In addition, interest on the loans served further to reduce the cash value.

In the insurance policy here involved, defendant Salerno reserved the right to change the beneficiary and all incidents of ownership were vested in him. The policy provides, in part: "At any time that this policy has a cash value, it may be surrendered for such value less any indebtedness to the company". The policy also provides:

"AUTOMATIC PREMIUM LOAN — This provision shall become operative if requested in the application for this Policy, or whenever written request for it is received by the Company at its Home Office before any premium is in default beyond the grace period. It shall become inoperative as to premiums not yet paid upon receipt by the Company at its Home Office of written request to that effect.

"While this provision is operative, each premium for this Policy due and not otherwise paid will be automatically paid by loan on the last day of the grace period, provided the loan value of this Policy is at least as great as the entire premium plus any existing indebtedness to the Company; otherwise the provision `Reduced Paid-up Life Insurance on Lapse' shall apply."

In the application for the policy, Salerno requested the automatic premium loan provision to be operative.

In Orleans Parish v. New York Life Ins. Co., 216 U.S. 517, 30 S.Ct. 385, 54 L.Ed. 597, the Supreme Court held that a "loan" against the cash value is in substance and reality "a payment, not a loan" and "merely a deduction in account from the sum the plaintiffs (insurer) ultimately must pay". We, therefore, are not faced with a problem of priority of conflicting liens.

In its Complaint and Opening Brief, the Government asserts the right to judgment against Mutual Life for $979.38, the cash surrender value when the notice of tax lien was served on Mutual Life on June 18, 1958. In its Memorandum of Contentions of Fact and Law filed December 21, 1962, Mutual Life concedes that if the insured is compelled to surrender the policy, it owes $494.59 under the federal tax lien. In its Supplemental Points and Authorities filed February 26, 1963, Mutual Life reaffirms this position. The Government, in its Reply Brief filed March 6, 1963, claims a judgment against Mutual Life for $660.96, the amount of the cash surrender value as of the date of the levy on Mutual Life, that is, February 11, 1960. The only explanation given for this change of position is the statement that in the Government's brief on appeal of the case of United States v. Wilson, D.C., 191 F.Supp. 69; D.C., 195 F.Supp. 332, the Government had adopted the view "that the lien against the cash surrender value of the insurance policies did not become effective until the date of levy."

These varying claims present questions of the proper construction and application of the lien and levy provisions of the Internal Revenue Code as applied to the cash surrender value of life insurance policies.

Since the decision of the Supreme Court in United States v. Snyder, 149 U. S. 210, 13 S.Ct. 846, 37 L.Ed. 705, sustaining the validity and enforceability of an unrecorded federal tax lien against a subsequent bona fide purchaser for value, the secret lien enjoyed by the tax collector upon "all property and rights to property" owned by a delinquent taxpayer has been the source of extensive litigation. Congress afforded partial relief by enacting 26 U.S.C. § 6323 declaring the lien invalid as to any mortgagee, pledgee, purchaser or judgment creditor unless recorded, and requiring notice or knowledge at the time of such transactions with respect to certain intangibles within a restricted definition of a "security". The net result was to continue the secret lien in effect in its application to a variety of intangible property rights not encompassed within "security" as defined. For example: United States v. Eiland, 4 Cir., 223 F.2d 118, a debt; Bank of Nevada v. United States, 9 Cir., 251 F.2d 820, bank account; Glass City Bank, etc. v. United States, 326 U.S. 265, 66 S.Ct. 108, 90 L.Ed. 56, fee for services as court receiver; Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365, amounts due under a construction contract; Beeghly v. Wilson, D.C., 152 F.Supp. 726, renewal commissions of an insurance agent; Sims v. United States, 359 U.S. 108, 79 S.Ct. 641, 3 L.Ed.2d 667, salaries.

The statute declares (26 U.S.C. § 6322) that "the lien imposed by section 6321 shall arise at the time the assessment is made." Accordingly, controlling authority holds that a perfected, choate lien attaches against all the delinquent taxpayer's property and rights to property at the time of assessment of the tax deficiency (United States v. Durham Lumber Co., 363 U.S. 522, 80 S.Ct. 1282, 4 L.Ed.2d 1371; Bank of Nevada v. United States, supra).

Many of the problems thought to exist regarding life insurance policies were set at rest by the decision of the Supreme Court in United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135, holding (1) an owner's right to demand and receive the cash surrender value of a life insurance policy is "property and rights to property" to which a federal tax lien attaches under the provisions of 26 U.S.C. § 6321; (2) no state exemption statutes can exempt this property right from attachment of tax liens created by federal statute; (3) the transfer of property subsequent to the attachment of the lien does not affect the lien. Describing the character of the "property and rights to property" represented by the cash surrender value, the Supreme Court said:

"The cash surrender value of the policy, however, stands on a different footing. The insured has the right under the policy contract to compel the insurer to pay him this sum upon surrender of the policy. This right may be borrowed against, assigned or pledged. Slurszberg v. Prudential Ins. Co., supra 15 N. J.Misc. 423, 192 A. 451. Thus Mr. Bess `possessed just prior to his death, a chose in action which he could have collected from the insurance companies in accordance with the terms of the policies.' 243 F.2d 675, 678. It is therefore clear that Mr. Bess had `property' or `rights to property,' within the meaning of § 3670, in the cash surrender value. United States v. Hoper 7 Cir. 242 F.2d 468; Knox v. Great West Life Assurance Co. 6 Cir., 212 F. 2d 784; United States v. Royce Shoe Co. D.C., 137 F.Supp. 786; Smith v. Donnelly D.C., 65 F.Supp. 415; United States v. Aetna Life Ins. Co. D.C., 46 F.Supp. 30." (Italics added)

Here Mutual Life argues, consistently with the insurance industry's contentions in other cases, that the owner's right to demand the cash value is not a clear, unconditional chose in action, but is expressly conditional upon (a) election by the owner to demand the cash value, and (b) physical surrender of the policy. With these contentions we do not agree. They have been effectively answered by the courts in United States v. Brody, D.C., 213 F.Supp. 905 (life insurance policy); Commonwealth Bank v. United States, 6 Cir., 115 F.2d 327 (bank passbook); United States v. Manufacturers Trust Co., 2 Cir., 198 F. 2d 366 (bank passbook); United States v. Emigrant Industrial Savings Bank, D.C., 122 F.Supp. 547 (bank passbook). Any interception by legal process of a contract obligation ipso facto requires the obligation to be discharged otherwise than in accordance with the terms of the contract. The chose in action described by the Bess case, supra, is the right of the policy owner to demand the cash value. This is the right against which the federal tax lien attached on the date the assessment was made.

In the instant case, we are faced with the fairly narrow question of the power to enforce a federal tax lien against the cash value of life insurance where the only intervening transactions were so-called automatic premium loans. Yet the logical extension of the...