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United States v. Wilson

decided: April 10, 1964.


Author: Biggs

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 ...

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