United States v. Cornelius W. Sullivan

HASTIE, Circuit Judge

(dissenting in part).

In United States v. Bess, 1958, 357 U.S. 51 , 78 S.Ct. 1054 , 2 L.Ed.2d 1135 , the Supreme Court reasoned that the right of an insured to the cash surrender value of an unmatured life insurance policy is a “right of property” to which a federal tax lien under section 3670 of the Internal Revenue Code attaches. While the litigation in that case occurred after the death of the insured, the Court’s reasoning was that the insured “possessed just prior to his death, a chose in action in the amount stated [i. e., the cash surrender value] which he could *122 have collected in accordance with the terms of the policies.” 357 U.S. 56 , 78 S.Ct. 1058 , 2 L.Ed.2d 1135 . The Court explicitly characterized this interest in the unmatured policy as “ ‘property’ or ‘rights to property’, within the meaning of § 3670, in the cash surrender value.” Id.

Moreover, since the policy was not surrendered during the lifetime of the insured, I think the Bess case holds, by necessary implication, that such surrender is not prerequisite to the government’s acquisition of a lien upon the cash surrender value. United States v. Brody, D.Mass.1963, 213 F.Supp. 905 .

In the present case, the government’s general tax lien covered the rights of the insured in the policies in suit, but without particularizing among various alternative rights accorded the insured under the terms of the policies. However, when the United States, acting pursuant to section 6331 of the Internal Revenue Code, served upon the insurer its notice of levy and demand covering “all property, rights of property * * * now in your possession and belonging to the taxpayer (or with respect to which you are obligated) and all * * * obligations owing from you to the taxpayer”, the government made a meaningful demand for whatever amount the insured could then require the insurer to pay him. That amount was the then cash value of the policy. Section 6332 of the Internal Revenue Code required the insurer to honor that demand. Moreover, section 6332 imposes upon the person who fails to comply with such a demand a personal obligation to the United States “in a sum equal to the value of the property or rights not so surrendered”. I do not see how any subsequent use of part of the then cash value of the policy for automatic premium payments could reduce the personal obligation of the insurer under section 6332, as that obligation arose at the time of levy. In this respect, I disagree with the majority. I think this aspect of the problem is properly analyzed and ruled upon in United States v. Salerno, D.Nev.1963, 222 F. Supp. 664 .

On the other hand, I agree with the majority that the policy loans made to the insured for premium payments before service of notice of levy upon the insurer were not precluded by the general lien of the United States upon all property of the taxpayer. ' For the policy remained fully operative with premiums becoming due and with options available' to the insured in connection with the obligation to pay premiums. The government had not indicated to the insurer what right, if any, it would assert, or when, among the complex of alternative rights the insured could claim under the policy. Therefore, the making of a premium loan under the terms of the policy could not reasonably be viewed as action inconsistent with the general tax lien. It was not until the notice of levy was served upon the insurer that the United States made a meaningful assertion of an election to claim the amount to which the insured was then entitled, namely, the cash surrender value.

I would measure the government’s rights against each insurer by the cash surrender value of its policy at the time when notice of levy and demand was served upon it.