decided: April 10, 1964.
UNITED STATES OF AMERICA
ANTHONY J.J.A. WILSON, HEDWIG C. WILSON, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY AND TRAVELERS INSURANCE COMPANY, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, APPELLANT.
Before BIGGS, Chief Judge, and MCLAUGHLIN, KALODNER, STALEY, HASTIE, GANEY and SMITH, Circuit Judges.
BIGGS, Chief Judge.
This action was brought by the United States under Section 7403 of the Internal Revenue Code of 1954,*fn1 to collect for unpaid income taxes by foreclosure of a tax lien on the interest of delinquent taxpayer, Anthony Wilson, in certain unmatured insurance policies. Defendants in the proceeding below were the taxpayer, his wife, the Travelers Insurance Company, and the Massachusetts Muutal Life Insurance Company ("Massachusetts Mutual"). From adverse determinations in the court below, the insurers have appealed on separate questions. The opinion on the appeal of the Travelers Insurance Company is filed concurrently herewith and is reported at 333 F.2d 147 (1964). The instant opinion is concerned solely with the appeal of Massachusetts Mutual. The issue presented is a basic question of law of which no substantial facts are in dispute. A complete recital of the circumstances is therefore unnecessary and for this purpose reference is made to the opinions of the court below reported at 182 F. Supp. 567 (1960), at 191 F. Sup&. 69 (1961), and at 195 F. Supp. 332 (1961).*fn2
The following discussion should be read in conjunction with this court's opinion in United States v. Sullivan, 3 Cir., 333 F.2d 100 (1964), filed concurrently with this opinion, as both cases involve the same basic problem and the reasoning and views adopted in Sullivan substantially control the disposition of the present controversy.
The operative facts of the instant appeal are not disputed. In March 1942 Wilson purchased a life insurance policy from Massachusetts Mutual, No. 1,468,657, in the face amount of $10,000. In September 1946 Wilson purchased a retirement income policy from Massachusetts Mutual, No. 1,615,476, in the face amount of $20,000. Premiums were to be paid for the life of the insured under the life insurance policy and for a period of twenty-five years under the retirement income policy.
It is unquestioned that the policies were substantially identical in all respects material to this appeal. Under each of the policies Wilson was the named insured and his wife was the primary beneficiary. Wilson had the right to change the beneficiary, to exercise all options, and to take part in dividend sharing plans.*fn3 Wilson elected under both policies to have dividends left with the company to accumulate at interest. Outstanding dividends were to be added to the cash value of the policies in the event of surrender of the policies for their cash surrender values,*fn4 discussed infra.
The aspects of the policies germane to the present controversy were those relating to cash value and cash surrender value. Generally speaking, and with regard to each of the policies, at any particular time the total amount paid in on the policy less its accrued cost of maintenance but plus for present purposes the sum accumulated on account of dividends constituted the cash value of the policy. The cash value less any outstanding policy indebtedness to the insurer represented the policy's cash surrender value. The cash surrender value was the amount the insured was entitled to receive when pursuant to and in accordance with the policy provisions set out hereafter, he elected to surrender the policy for cancellation.
Each of the policies provided that it would remain in effect for a grace period of thirty-one days after a premium default. Within sixty-two days of a premium default the insured had the right to choose one of the following substantially identical non-forfeiture options.*fn5 first, to surrender the policy and, with the written assent of the beneficiary, to receive its cash surrender value; second, to take participating paid-up insurance in the amount which the cash surrender value of the policy would purchase; or third, to take participating extended term insurance for such term as the cash surrender value would purchase. In his insurance applications Wilson elected respectively, the extended term insurance option with regard to the life insurance policy and the paid-up insurance option as to the retirement income policy. The policies provided that in the case of conversion to paid-up or extended term insurance, the policies would continue to have a cash surrender value and that this sum would be obtainable as above, i. e., by surrender of the policy and submission of the written assent of the beneficiary.
Each of the policies also contained an identical, optional provision relating to automatic premium loans. On November 21, 1946 Wilson elected under both policies to have this clause become operative in the event of premium default. The automatic premium loan provision read as follows: "Automatic Premium Loan: If the Automatic Premium Loan provision shall have been elected by the insured and proper notice thereof shall have been filed with the Company at its Home Office prior to the expiration of the grace period of any unpaid premium, the Company will, upon the last day of the said grace period and after first applying dividend accumulations to the payment of such premium, automatically loan the amount required to pay such premium, or the unpaid balance thereof, and charge the same as indebtedness against the policy bearing interest at the rate of five per cent. per annum, payable annually, not in advance, provided that the policy be sufficient security for such loan as hereinafter stipulated. If the policy is not sufficient security for such loan, the Company will, on the same terms, automatically loan the next smaller installment of premium shown by the policy, or the unpaid balance thereof, for which the policy shall be sufficient security, and thereafter the premium on this policy shall be payable in like installments. In no case will the Company loan an amount less than a quarterly installment of premium unless the balance of said installment shall have been paid prior to the expiration of the grace period.
"If this provision is elected it will continue to be operative until revoked by the insured upon receipt of proper notice thereof at the Company's Home Office."
Substantially identical, relevant, interrelated clauses of the policies followed the "Automatic Premium Loan" provision. Those of the life insurance policy read as follows: "Sufficient Security for Loans: The policy will be sufficient security for any * * * Automatic Premium Loan if the amount of the existing indebtedness on the policy plus the amount of the proposed loan, with interest on both amounts at the rate of five per cent. per annum to the due date of the next premium (or to the next anniversary of the policy if no further premium be payable), does not exceed the cash value of the policy and of all paid-up additions thereto on the said due date (or on the said next anniversary).
"Miscellaneous Provisions Applicable to Loans: Overdue interest on any indebtedness hereunder shall be added to the existing indebtedness and bear interest on the same terms.
"The whole or any part of any outstanding indebtedness may be repaid at any time. While any premium loan, made automatically or otherwise, is outstanding, dividends as they become due and payable shall be used to reduce such loan. Failure to repay a loan, or to pay interest thereon, shall not avoid the policy until such time as the total indebtedness thereon, including accruing interest, shall equal or exceed the then cash value of the policy nor until thirty-one days after notice has been mailed by the Company to the last known address of the insured and any assignee of record at the Home Office of the Company."
Wilson at no time revoked his election regarding the operation of the automatic premium loan provision of either policy.
On June 6 and June 12, 1947 and on October 14, 1949, the Commissioner of Internal Revenue made income tax assessments in the total amount of $45,441.24 against Wilson for deficiencies for the years 1944 through 1947. The District Collector received the respective assessment lists on June 6, 1947, on June 16, 1947, and on October 19, 1949, on which dates he vainly demanded payment from Wilson. As a result of each of these several demands and refusals, a tax lien arose under Section 3670 of the Internal Revenue Code of 1939*fn6 against Wilson's "property and rights to property" including his interest in the insurance policies.*fn7 Additionally, after March 15, 1948 and before and on December 13, 1949, notice of lien was filed of public record, for present purposes in assumed compliance with Section 3672, Internal Revenue Code of 1939.*fn8
On February 2, 1950 Massachusetts Mutual was served with a "notice of levy"*fn9 under the purported authority of Sections 3690, 3692 and 3710, Internal Revenue Code of 1939.*fn10 The company seemingly took no action in response to this notice. The document served upon Massachusetts Mutual was apparently never introduced into the record in the proceedings below and its contents will therefore not be considered or set out here. It is sufficient to say at this time that the content of the notice is immaterial to the view hereafter expressed in this opinion. The date of the service of notice of levy does appear in the record as set out at the beginning of this paragraph.
Thereafter, in December, 1950 in respect to the retirement income policy and in June, 1953 with regard to the life insurance policy, Wilson totally defaulted in the payment of premiums. Accordingly, pursuant to the automatic premium loan provisions of the policies and notwithstanding the notice served upon it, Massachusetts Mutual proceeded on appropriate dates apparently until September 12, 1961, the date on which judgment was entered in the court below, to apply accrued dividends to the amounts outstanding on premiums and to effectuate automatic premium loans on the balances.
The present controversy is focused upon the question of whether Massachusetts Mutual was legally entitled as against the Commissioner to act as indicated.*fn11 The court below ruled that the time the tax lien first attached to Wilson's property interests, i. e., the date of the initial vain demand for payment from Wilson, June 6, 1947, it also attached to the then existing cash surrender values, if any, of the policies as held by Massachusetts Mutual and that thereafter the value of the Government's interest could be enhanced but not effectively diminished. Accordingly, judgment was entered in favor of the United States and against Massachusetts Mutual for $15,343.60 with regard to the retirement income policy and for $3,352.28 in respect to the life insurance policy. These sums encompassed the values of the policies determined as of June 6, 1947 and subsequent additions thereto by way of dividends and premiums embracing as part of the latter, notwithstanding the fact that no setoff was allowed, increments brought about by premiums paid by means of automatic premium loans.*fn12
On appeal the Government has changed its position to some degree.It has abandoned the position which was upheld by the trial court, that the date the tax lien attached to Wilson's policy interests was determinative of its rights regarding automatic premium loans, now conceding that such attachment could not in itself have rendered inoperative the automatic premium loan provisions of the policies. It contends, however, that the date of service of notice of levy upon Massachusetts Mutual was controlling for this purpose on the hypothesis, to quote its brief, that notice of levy "is a formal notice to the insurer that the automatic premium loan provision is revoked and a demand under the terms of the contract for the cash surrender value."*fn13 Massachusetts Mutual argues that service of notice of levy does not have the legal effects postulated and that the Government is entitled only to the cash surrender values of the policies determined as of the time of the judgment below.
The questions raised on this appeal have been for the most part decided by this court's opinion in United States v. Sullivan, supra, and reference is made to that decision for an over-all perspective regarding the present problem. To summarize briefly the pertinent aspects of the Sullivan case, it involved a fore-closure action by the United States on a delinquent taxpayer's interest in substantially similar unmatured insurance policies. Notice of levy had been served upon two insurers and subsequently the companies had proceeded to effect automatic premium loans in accordance with the terms of their policies. In that case, however, unlike the present one, prior to judgment in the proceeding below and pursuant to stipulation, the policies in question were voluntarily surrendered, and releases were executed to the insurers. The essential issues raised in Sullivan were nevertheless identical to those posed here. This court in Sullivan rejected the contentions that as against the insurers the Government's recovery with respect to the values of typical unmatured insurance policies was determined as of the date of the attachment of the tax lien to the delinquent-insured's policy interests and that the service of notice of levy on the companies constituted a valid demand for the cash surrender values and acted as an effective revocation of the operation of the automatic premium loan clauses. Additionally, we rejected the claim that service of process after commencement of suit had these latter effects. We therefore affirmed the judgment of the court below granting recovery of the cash surrender values of the policies determined as of the date of their surrender and release, and interest measured from those times.
In light of our rulings in Sullivan, it is clear in the present case that the determination of the court below was erroneous and that the position of the Government on this appeal is ill-founded. The bases for these conclusions are set out in detail in the Sullivan opinion and will not be reiterated here. The Sullivan decision, however, is not directly dispositive of the appeal at bar inasmuch as a release was never executed in the instant case.
The essential basis of the Sullivan opinion was such, however, that it is nonetheless controlling here. Manifest in the decision was the view that but for the surrender and release of the policies the Government would have been entitled to recover the policies' cash surrender values determined as of the time of an appropriate order of court. This is evident because, as a practical matter, all of the other reasonably conceivable basis of recovery were there squarely eliminated. And, more fundamentally, the whole rationale of Sullivan was that during the executory phase of the policies' existence, the Commissioner was not empowered by statutory levy to exercise unilaterally either the delinquent's right to cancel the contracts and receive the cash surrender values or his right to revoke the operation of the automatic premium loan provisions, and that absent relinquishment or transferal of these powers or levy upon the insurance contract, only judicial action could effectively alter and extinguish the tripartite contractual relationship.
In the instant case the court below had jurisdiction in the cause and judgment was entered on September 12, 1961. This judgment while erroneous in amount, nevertheless, on the basis of the above reasoning, served to determine the policies' cash surrender values as of that time and to fix the measure of the Government's recovery.*fn14 Accordingly, the Government is entitled to the policies' cash surrender values so determined plus interest from the same date.
The policies' cash surrender values, however, as of September 12, 1961 do not appear from the record, though they are seemingly included in the "Tabulation of Information re Life Insurance Policies" set out as an appendix to the opinion in United States v. Sullivan, supra, 333 F.2d p. 123, and incorporated in this opinion by reference.*fn15 A new trial must therefore be granted to ascertain the proper award due the Government. This amount could be determined from the "Tabulation," with appropriate interest.
We have considered the other points raised by the parties and are of the view that further discussion is not required.
The judgment against Massachusetts Mutual Life Insurance Company will be vacated and a new trial will be ordered.
HASTIE, J., dissents for the reasons stated in his dissenting opinion in United States v. Sullivan, 333 F.2d 121.