Earl Warren: Number 395, United States of America versus Molly G. Bess, and Number 410, Molly G. Bess verus United States of America. Mr. Davis.
John F . Davis: Mr. Chief Justice, if the Court please. In the previous references to this Court, to this case, the Court has been informed that the Court of Appeals held for the Government to the extent of saying that we had a right to follow the insurance payments to the extent of the cash surrender value in the hands of the -- that had been in the hands of the deceased. It held against the Government however, by limiting the liability of the beneficiary to this cash surrender value and holding that the reminder of the insurance payments were received free and clear. The Government petitioned from the portion of the judgment against it and Mrs. Bess petitioned from the portion of the judgment which held her liable to the extent of the cash surrender value. Now, up to a certain point the facts in this case are the same as the facts in the Stern case. The nature of the insurance policies is generally the same. There were eight insurance policies involved in this case and as to one of them which was a group insurance policy, there was no cash surrender value, but as to the remaining seven there were substantial cash surrender values. The premiums were paid by the deceased and in this case this is made specific in the stipulation. The insured retained the right to change the beneficiary to assign the policies, the right to draw down cash surrender value or to borrow against it. When the taxpayer died, his estate was insufficient to pay the amount of taxes which had accrued before his death. There is one respect though that this case differs from the Stern case and that is that for two of the three years for which liability is involved, the assessment was made and notice and demand was given to the taxpayer before his death. This is important because it resulted in the attachment of a lien to all of his property and rights and it is the contention of the Governments that this included a lien with respect to his life insurance. But leaving aside for a moment the question of the existence of a lien, our position in this case is precisely the same as it was in the Stern case which has just been argued.
Speaker: Is there any difference --
William J. Brennan, Jr.: (Voice Overlap) how much of the total deficiency has been taken care of by the (Inaudible) taken two of the years?
John F . Davis: Two of the years, I'll have to check the record and then I'll --
William J. Brennan, Jr.: Well, we're there several years involved (Voice Overlap)?
John F . Davis: There are three years involved.
William J. Brennan, Jr.: So this is two of the three years.
John F . Davis: That's right and --
William J. Brennan, Jr.: Well, that's -- don't bother, don't waste your time.
John F . Davis: It -- it's very clear from the -- from the record, there's no question, but it's -- well, I'll -- I'll leave it because there's no --
William J. Brennan, Jr.: All right.
John F . Davis: -- there's no problem about finding it.
Speaker: Is there -- is there any difference as respect to the solvency question or insolvency question?
John F . Davis: No. The -- the situation is the same, so far as we know, the policies were taken -- when the policies were taken out. They were solvent here as presumably in the Stern case and there was no evidence that it was insolvent at any time that any premium was paid. The evidence in both cases is that the estate was insufficient to meet his -- the -- meet the liabilities, the estate that he left, and that is -- that is the insolvency that's involved.
Speaker: So that if federal law applies you have to stand or fall on that, some surrender value or the proceeds go --
John F . Davis: That is right. We can prove no intention to deprive creditors or no voluntary payment by him while he was insolvent. But as I say, leaving to one side the question of a lien, our position in this case is precisely as -- the same as it was in Stern. We believe that there is nothing inherent in life insurance that makes it different from savings deposit of a third party contract under which one buys something for another. The taxpayer in this case retained complete control over the disposition of this property until the time he died and unless the Government can follow this material -- these payments into the hands of the beneficiary, these payments will -- would be taken away from his estate and turned over to the beneficiary. But the existence of the lien in this case provides us with an additional argument for recovery of the United States. Now of course the attachment of a lien depends in the first instance on whether or not there was property or rights in the insured to which the liens could attach.
William J. Brennan, Jr.: When now you -- you say that an additional argument to reach the proceeds or just to reach the (Inaudible)
John F . Davis: To reach both the proceeds.
William J. Brennan, Jr.: To reach both.
John F . Davis: And the -- and the cash surrender value of both. There has to be a property interest in the -- in the insured to which a lien can attach or we got nowhere with the lien theory. If -- if the insured had no -- had no interest in this insurance during his life and at the time the assessment was made, then there was nothing for the lien to attach. But on our theory of the case, the lien attached both to the cash surrender value which he could have drawn down and to his interest in the proceeds which he had a complete right to assign and up until the moment of his death. I think my point is made clear by comparison of two cases decided by the Court of Appeals for the Second Circuit. The first of these cases is the Rowen case to which reference has already been made. And in that case the Court held that the insured did have a property interest in the cash surrender value but that state law prevented there being liability on the part of the beneficiary and that case was decided I think in 1954. Then in 1956, the same court had before it the case of United States against Behrens, and in this case, a lien -- the tax had been assessed before the insured's death. And in that case, the New York Court of Appeals said that the New York law could not defeat a federal lien once it is attached and in that case they held the beneficiary liable to the extent of the cash surrender value on the basis -- on the ground that a lien had attached to that interest of the -- of the insured. A similar holding was made by the Court of Appeals for the Seventh Circuit, in United States against Hoper, and again the Court said that the exemptions or the provisions of the particular state law could not stand up when a lien had attached to the interest of the insured and the property had passed with that lien to the beneficiary. In other words, these courts treat the lien they don't have to go into a question of transferee liability when there is a lien. They say that the property does move from one to the other and it moves subject to the lien.
Speaker: If --
Speaker: (Inaudible) in both cases, only to (Voice Overlap) --
John F . Davis: In both cases -- in both cases only to the cash surrender value and that's --
Speaker: If -- if on the other hand contrary to Rowen, it should be decided that even the surrender value doesn't pass, surely in point, falls with it.
John F . Davis: I think that is right. I think that the -- there has to be a property interest for the lien to attach. And if on the other hand we are right --
Speaker: Or to carry forward the lien.
John F . Davis: That's right.
Speaker: There could be a property interest at the time of the --
John F . Davis: And it has to continue --
Speaker: -- at the time of death, it has --
John F . Davis: -- that's right.
Speaker: -- to continue.
John F . Davis: The property interest has to pass over.
Speaker: Yes.
Felix Frankfurter: But do you know whether you've got a lien or not, except retrospective?
John F . Davis: Well, we know in this case that -- well, we know there was a lien on his property --
Felix Frankfurter: I mean --
John F . Davis: -- and rights.
Felix Frankfurter: All right, take Rowen.
John F . Davis: Well we know in that case, the -- the law is quite clear as to when -- how a lien attaches under the tax law and there has to be an assessment and notice and demand and then the lien attaches to his property and rights.
Felix Frankfurter: None of those things took place.
John F . Davis: And those things did not take place in Rowen.
Felix Frankfurter: Yes, they weren't.
John F . Davis: And in Stern, why, it was six years later before they finally managed that.
Felix Frankfurter: So that the lien thing doesn't help you out, does it?
John F . Davis: The lien doesn't help us out in Stern. That is why the distinction, that distinction I have pointed out, an additional ground of recovery in Bess that we didn't have in -- in Stern.
Felix Frankfurter: You're pretty decisive, in fact decisive, a pretty big difference, isn't it? That you can't displace the lien of the Government by any local property law as against a -- retrospectively a lien comes into being and there do you have a property right which displaces a state property right?
John F . Davis: Well, there is a difference of question, I don't know that it -- the differences is as great as Your Honor would imply. I -- it seems to me looking at the question of state law and federal law without the lien that it will be impossible for there to be any equitable even collection of insurance if state law is going to decide the questions of when you can attach liabilities. I think I may have suggested in my argument in the Stern case, if the states can determine this question of liabilities, there is no reason -- as to insurance, there's no question why the -- reason they couldn't impose their own question on liability on decedent's estates, say as to any property, that the widow shall take the property on the death of her husband, free and clear of the death of her husband. And certainly as far as the state lawyer is concerned and outside of the Federal Government's concern there is no reason why a state shouldn't say --
Felix Frankfurter: Well, but surely it must (Inaudible) a reasonable difference between a state law which has been alive all the time and a direction that the state should prevail under the collision at the time of death, so they're not the same things to my view?
John F . Davis: Well that -- that is right but this is a question as to what shall happen at the time of death.
Felix Frankfurter: Yes. But there are antecedent interests created in the --
John F . Davis: But -- yes, but the --
Felix Frankfurter: -- in the beneficiary, the wife.
John F . Davis: The state -- the state laws that are involved by and large provide us generally that when a debtor transfers his property when he's insolvent that a creditor can follow that if it's done without consideration. That's -- that's the general law in Kentucky, it's the general law in New Jersey, it's the general law anywhere. But I speak too broadly but generally it's the general law. Now --
Felix Frankfurter: In New York it's the opposite.
John F . Davis: Pardon?
Felix Frankfurter: In New York it's the opposite.
John F . Davis: [Laughs] Well in New York, in New York they --
Felix Frankfurter: Which means that -- which means that the wife has an inchoate right all along which is like the thing that I suggested about New York law that the contingent remain, the man has a real interest which constitutionally can't be abrogated in New York.
John F . Davis: That -- that is --
Felix Frankfurter: (Inaudible)
John F . Davis: That is true. There is an interest in the insurance, there is vested interest in the insurance in New York and there is also a vested interest in the insurance in New Jersey, which however is subject to divestment.
Hugo L. Black: What is divested interest?
John F . Davis: It's the right to take unless the -- unless the insured go through certain forms to change the beneficiary.
Hugo L. Black: But either state is it the law that when a man takes out an insurance policy that the beneficiary immediately has such rights that he cannot revoke them?
John F . Davis: No. He has the right to revoke it but take -- I think it is largely a matter of language Mr. Justice Black. They say he has a vested right which is subject to divestment.
Felix Frankfurter: But, there's more than that -- it's a little more than language Mr. Davis if I am right in the analogy. For instance, the legislature of New York couldn't terminate that interest with some so-called public reason.
John F . Davis: But I -- I see what you mean and I think -- I think that's right. I think there is a property interest which in the -- in New York and New Jersey.
Felix Frankfurter: It's -- as a matter of fair due process (Voice Overlap) –-
John F . Davis: That is -- that is right it is an existing --
Felix Frankfurter: Well, that's pretty important --
John F . Davis: -- property right.
Felix Frankfurter: -- isn't it?
John F . Davis: Pardon?
Felix Frankfurter: I should think that is important (Voice Overlap).
John F . Davis: It is important but it is not determinative --
Felix Frankfurter: Well --
John F . Davis: -- because they're -- in these policies, there are all sorts of rights, there's a right to possession, there's the right to -- and we have to appraise these rights and see whether or not there are enough rights in the insured which pass at the time of his death so that there is something to --
Felix Frankfurter: If I may revert to Stern, is it fair to say -- well, if that right was used, would you clearly recognize, say in New York, whether that right tend to displace on the basis of general law taking out of the ruling on his presence, whether -- whether that state law must yield to the general law for which Congress has made no provision. Is that a fair statement?
John F . Davis: I'd say that's -- that's a fair question and my answer is that that it must yield in this -- in this kind of a situation really.
Felix Frankfurter: Well, when you say "must", that's a big word.
John F . Davis: Well, it must -- it must if there has to be an equitable method of collecting --
Felix Frankfurter: Meaning by that that you should --
John F . Davis: -- income taxes.
Felix Frankfurter: -- have one. That you should have one thing in New York, another in Utah or Iowa?
John F . Davis: You -- you may --
Felix Frankfurter: (Voice Overlap)
John F . Davis: You may -- you may certainly when -- when the tax law impinges upon title, but when it comes to be a question of collection the Federal Government should be able to say from whom you can collect title -- collect taxes and questions of bad title.
Felix Frankfurter: I would, I would --
John F . Davis: Uncontrolling.
Felix Frankfurter: Intellectually I stopped you in my mind when you said when the Federal Government comes to collect, as you see it, that point, there's a difference that this is merely a way of cashing or collecting because in the process of collecting you're impinging on something which the State of New York has created with a real substantial value.
John F . Davis: Yes. And I think that's precisely the question that -- which is involved when this Court determines whether or not an estate tax can impinge upon the same thing because --
Felix Frankfurter: Whether it's (Inaudible)
John F . Davis: This would be -- this would be --
Felix Frankfurter: Is that practical?
John F . Davis: Well, yes but this --
Felix Frankfurter: But that is a --
John F . Davis: This isn't a transfer on death that you are talking about, it's a transfer which took place at the time they took out the insurance and therefore the argument was made it was a tax on the insurance.
Felix Frankfurter: But -- but if the estate transferred -- a estate tax on transfer is a general embracing principle that the transfer takes place when the -- when the grantor, the creator of the interest dies, that that's the thread which is cut.
John F . Davis: That's right. I think Mr. Justice Holmes dealt with this problem of the title rather well. He in -- in a case pointed out that I think Carlos against Bowers in 281 that refinements of title with respect to, and he was talking about insurance too, are not -- are not important to the tax law. It is the actual command over the property that is significant. And in a word that's our position here that it isn't the refinements of title as to -- as to this property that that controls whether or not there is a property interest but it was the actual command of the property that is significant. Mrs. Bess seeks to meet our argument with respect to the lien in two ways. First, she asserts that we may not support the District Court's decision on the basis of the lien's theory since we did not argue the lien theory in the District Court. I submit that this attempt to bar the argument as disputable. It is well accepted that a lower party may not attack a judgment below on a new ground. It may on an appeal support a judgment on any ground that is available. We argued the lien theory in the Court of Appeals and we reserve the support of the lien theory in our petition for certiorari. And so I submit that it is proper to present it to this Court. The second argument against the lien theory presented by Mrs. Bess is that no lien attached in this case because the taxpayer did not, and now I quote from the statute, “neglect or refuse to pay his taxes.” And the reason that is said that the taxpayer did not neglect is that we have not proved that the taxpayer was careless or negligent on -- neglectful in failing to pay his taxes. And the tax -- and Mrs. Bess would read that element into the end of the law. I submit that there word "neglect" in the sense of his lien means to fail to perform a duty which is to pay a debt which is required to be paid rather than to fail to pay it under circumstances of negligence or carelessness. I should like to reserve the remainder of my time for replying.
Earl Warren: Mr. Oppenheim.
Morris J. Oppenheim: Mr. Chief Justice may it please the Court. We have in this Bess case two issues, one of which has been argued and which I had hoped would require of the expenditure of only a small account or small amount of time on my part. And they made the transferee question. However I should like to say a few words about the transferee question but I will reserve that until after I have talked with respect to the lien theory. We intend to argue the merits of the lien question, but first we interpose this objection to its being considered by the court at this time. The tax lien theory is an entirely separate clause of action, separate and apart from the transferee liability if one exists. Now, the complaint in the United States District Court did not plea the lien theory, it wasn't presented to the United States District Court for decision. The case was presented to the Court upon a stipulation of facts. The stipulation necessarily was directed towards a presentation of those issues which the pleadings had raised. The lien theory was raised for the first time in the answering brief filed in the Court of Appeals. The same objection was made and it was also argued on the merits. The Court of Appeals in its decision is silent with respect to the lien issue so much for that.
Felix Frankfurter: Before -- are you moving on from there?
Morris J. Oppenheim: Yes.
Felix Frankfurter: I would like to ask you this. Before the stipulation to which you referred had been embodied in the very terms of the stipulation and therefrom from the facts of the allegations and stipulations the Government have said, wherefore we are entitled, wherefore we claim a lien, just a conclusion of that, suppose that, could you assail that with a wherefore -- would the wherefore be subject to a logical attack?
Morris J. Oppenheim: On the merits, yes. But if the stipulation had been framed it might possibly with the view towards the tax lien issue it may probably -- it may possibly have been framed somewhat differently. Let me illustrate.
Felix Frankfurter: I'm sure I understood you. You said that it could be attacked if on the stipulation there is an “a wherefore” clause, you said the wherefore wouldn't follow, did I --
Morris J. Oppenheim: Or perhaps I did --
Felix Frankfurter: You meant (Voice Overlap) --
Morris J. Oppenheim: Perhaps I misunderstand -- misunderstood Your Honor. Do you mean that if the stipulation had --
Felix Frankfurter: Have made the complaint --
Morris J. Oppenheim: -- if the complaint had raised the lien theory --
Felix Frankfurter: Well, I didn't -- I want to be the -- as specific.
Morris J. Oppenheim: Yes.
Felix Frankfurter: The complaint just embodied what is now the stipulation and the Government said wherefore we have a lien and want the execution of it, would that have been all right?
Morris J. Oppenheim: Then I think --
Felix Frankfurter: I mean, would that (Voice Overlap) --
Morris J. Oppenheim: The lien would have been pleaded. The lien issue would have been -- been pleaded.
Felix Frankfurter: Because of the wherefore, because of the antecedent fact justifying the wherefore? And now I'm asking you --
Morris J. Oppenheim: Oh, I -- oh, I am sorry, I -- no. In that case I think no because it seems to me that the lien theory is an affirmative course of action which must be affirmatively pleaded and that was not done in this case.
Felix Frankfurter: Is that the way you escaped from or rather that's the basis on which you say that the document Mr. Davis invoked that a judgment -- a judgment can be supported by anything that supports it.
Morris J. Oppenheim: That is correct Your Honor.
Felix Frankfurter: But he isn't supporting your judgment, is he?
Morris J. Oppenheim: Yes. He has a judgment against Mrs. Bess. The Court of Appeals modified the District Court's judgment by reducing the amount --
Felix Frankfurter: (Voice Overlap)
Morris J. Oppenheim: Yes, Your Honor.
Felix Frankfurter: All right.
Morris J. Oppenheim: That is correct.
Felix Frankfurter: What is -- what is the answer --
Morris J. Oppenheim: It might --
Felix Frankfurter: -- to his claim that he can sustain a judgment on any theory that legally can sustain it.
Morris J. Oppenheim: My answer to that is this. That if this did not create or if this was not the basis for a completely separate cause of action I would have to concede his argument. And this I think is the difference. Now, I should like to move on to the merits of the lien theory. Our first point is this. Section 3670 of the Internal Revenue Code is a section which imposes the lien. It does not impose a lien with respect to tax due, it specifically sets up conditions which we say are conditions precedent or conditions perquisite to the arising of a lien. These conditions are that a tax must be assessed and demand for payment made and this is the material portion of the statute if the taxpayer then neglects or refuses to pay, there shall be a lien. The stipulation of facts in this case sets forth that the taxes for the years 1945 and 1946 were assessed on the very same day pursuant to a waiver signed by the taxpayer on the very same day. The demand for payment was made upon the taxpayer upon the very same day. That is all of these on different dates but simultaneously with respect to both years. The stipulation then sets forth that from that point to the date of his death, Herman Bess, the taxpayer was making periodic payments. The stipulation however as drawn would seem to -- would seem to indicate that these payments were made only with respect to 1945, that no payments seemingly were made with respect to 1946. It is our contention that these periodic payments which were made, were made with respect to one tax liability although this was a liability for more than one year, and that by entering into this course of making periodic payments which must have been I assume we can infer they must have been with a consent of the tax collector not only has the Government failed in its burden of affirmatively establishing that there was neglect or refusal but I believe the stipulation contradicts this and on the contrary establishes that the taxpayer neither neglected nor refused and therefore we say that no lien arose by virtue of these two tax years. And there are only those two years involved of the balance of tax which the Government is seeking to recover is for three years, the year 1947 a comparatively small amount was assessed after Mr. Bess had died. Secondly, with respect to the merits of the lien issue, we say that a life insurance policy is a contract pursuant to which there are many rights that is all of the parties, the insurance company, the insured, and the beneficiary who is named in this policy have contractual rights. Again, Section 3670 of the Internal Revenue Code which imposes the lien imposes this lien upon, I quote, “The property or rights to property of the taxpayer.” Therefore, if a lien did arise in favor of the Government in this case, the lien could only impinge upon the property or rights to property of the taxpayer who is Herman Bess. The law in New Jersey where these people reside is specific and clear. There is a long line of cases and the law is well established in New Jersey to this effect namely that the rights of a beneficiary can only be eliminated by changing the beneficiary pursuant to the terms written into the contract. The courts have gone so far in New Jersey as to hold in the case of Anderson National Bank, it's cited in my brief, a case in which the insured borrowed money from a bank and made an assignment of the insurance policy to the bank as collateral for the loan. Before the loan was paid, the insured died, the question then arose whether the proceeds were to be paid to the beneficiary, the wife of the insured or were to be paid to the bank who held the assignment. In a well considered opinion which was later affirmed by the highest court in New Jersey at that time, the Court of Errors and Appeals. The Court reviewed the preceding authorities and concluded that in New Jersey the courts will enforce the contract, the life insurance contract as it is written and will protect the rights of all parties to do otherwise the Court said would mean to alter or vary the terms of a written contract, an authority which the Court had no power to do.
Speaker: (Inaudible)
Morris J. Oppenheim: Yes, Your Honor. The right to change the beneficiary had been reserved. The right to cash surrender the policy had been reserved and of course the right to assign the policy had been reserved until the assignment occurred. Now, the Court goes further into the -- into an analysis of the insurance policy and points out that the policy itself imposes obligations as well as granting rights, namely the insurance contract imposes an obligation upon the insurance company to pay the beneficiary a fixed amount of money upon the death of the insured, and although the insured has the right to change this beneficiary, in the absence of such a change the insurance company is not relieved of its obligation under the contract, and must pay the beneficiary. Now, that being the case and since neither Section 3670 nor any other section of the Internal Revenue Code defines what is the property or rights to property, to which this lien if one exists, to which this lien attaches, it is our view that we must resort to the law of the state to determine what is the property or the rights to property of the taxpayer, we contend and we urge upon this Court, that in New Jersey the rights to property of Herman Bess the insured were a mere option terminable at his death. That when he died, his option to surrender the policy for cash or to change the beneficiary terminated, that the obligation of the insurance company to pay did not arise at that moment, but arose when the policy was taken out, when the premiums were paid and when the beneficiary was originally designated. We say then that if the Government had a lien upon the property or rights to property of Herman Bess, this lien was nothing more than a right during Herman Bess' life time, to cease or to compel Herman Bess to obtain this cash surrender value. As a matter of fact there had been a number of cases in which the Government had sought to collect the cash surrender value during the insured's life time. Until --
Felix Frankfurter: For what -- on what basis?
Morris J. Oppenheim: On the basis that there was a property right which it could seize.
Felix Frankfurter: Yes. Well he must -- there must have been some indebtedness incurred.
Morris J. Oppenheim: Yes, for income taxes.
Felix Frankfurter: Yes.
Morris J. Oppenheim: I'm sorry, in an income tax case.
Felix Frankfurter: Yes.
Morris J. Oppenheim: For unpaid income taxes.
Felix Frankfurter: An obligation, an assessment not paid by him, and he got this outstanding power before him that --
Morris J. Oppenheim: Correct.
Felix Frankfurter: The change of beneficiary.
Morris J. Oppenheim: Correct.
Felix Frankfurter: And they say you make us the beneficiary, so that's in your control.
Morris J. Oppenheim: Something to that effect.
Felix Frankfurter: Is that (Inaudible)
Morris J. Oppenheim: Until quite recently there was no court in this country which had decided and there were several raised, brought all the way up to the Court of Appeals. There was no court in this country which held that if there was no jurisdiction of the person of the insured, such as would give the Court the right to compel him to surrender the policy. No court held until recently that the Government could under such circumstances reach the cash surrender value. There was a recent decision, United States against Metropolitan Life Insurance Company cited in the brief, in which the Court decided that its judgment directed against the insurance company, to pay the cash surrender value had the effect of cancelling the company's obligation to pay the beneficiary. Now, if the Government had a lien in this case, I concede that it might have enforced its lien by restraint and by seizure and in a proper action recovering the cash surrender value. However it did not proceed in that fashion. And it had lost any right to proceed after the death of the insured since. The obligation of the insurance company came into affect, one which nobody can relieve. I would like now to revert to the transferee question. It has been rather thoroughly discussed. But it seems to me that I should like to point out briefly some elements which apply to the Bess case, possibly to the Stern case which was argued before. The question basically is whether a transfer was made at such a time and under such circumstances that a creditor can reach the property transferred, and there seems to be no consensus, no one opinion as to when transfer occurs in connection with life insurance policies. This Court as long ago as 1888 in Central National Bank against Hume, decided that the transfer occurred when the premiums were paid. I realize that the facts stated in the opinion are not clear and possibly there may not have been a right on the part of the insured to recapture the cash surrender value. This is not clear, and I don't know whether that was the case, but nevertheless in that case the Court decided that the transfer occurred when the premiums were paid. The New Jersey statute follows the holding of the Hume case, and I might point out counsel has called the New Jersey statute an exemption statute and I respectfully submit that the New Jersey statute is not an exemption statute, but rather a statute for marshalling the proceeds properly according to law between the beneficiary and any other party, a creditor of the insured, who might under the circumstances of that case be entitled to recover. And I say this because the New Jersey statute provide specifically that whether the beneficiary is a stranger, or the wife of the insured, that a creditor can recover from the proceeds to the extent that the insured paid premiums (Inaudible) of creditors. Now this statute was enacted shortly after, within a few years after the decision in this Court in the Hume case. In fact within one year after a court in New Jersey criticized and refused to follow the Hume case, and probably as a result of the court's failure to follow the Hume case. Now I would -- some courts have held that the transfer occurs when a beneficiary is changed, in those cases and I believe that Rowen was one of them. The beneficiary at one time was the estate, the executors of the insured, and when the change, when the beneficiary was changed from the executors of the insured to the insured's wife, that was the occasion when some courts say the transfer of the policy occurred. With the exception of the decision in the Bess case by the Third Circuit, I don't think there are any other decisions, at least I don't know of any other decisions, which hold that a transfer occurs at death. And I'd like for a moment --
Speaker: Do you think the Hume case says in effect that all you can get back is the amount of the premiums paid (Inaudible) of creditors?
Morris J. Oppenheim: That's correct.
Speaker: That's what you --
Morris J. Oppenheim: That's correct --
Speaker: That's where you mean --
Morris J. Oppenheim: -- and I -- yes. Now I also want to point out perhaps I should have adverted this before when I talked of the Hume case. In the Hume case the insurance policies were taken out when the insured was insolvent and he paid the premiums when he was insolvent. The Court in its decision held that the imputation of fraud from payments or diversions of property by a debtor when he was insolvent is not a general imputation but that it depends upon the facts and circumstances of each particular case and in that case this Court enunciated a doctrine which was possibly an extension namely this Court in that case said that public policy recognizes that there is a positive legal as well as moral obligation upon married men to provide for his wife and children and that this can be extended to permit even an insolvent, these are my words, even an insolvent debtor to provide or divert a reasonable portion of his property for the purpose of protecting his wife and children, maintaining the man protecting them in the event of his untimely death. Now there has been some question about a transfer of cash surrender value. And I would just -- I would like to point out that cash surrender value is not a debt, there is no relationship of credit-debtor between the insured and the insurance company until such a time as the insured turns the policy in for surrender. It is not a custody account. The insurance company is not holding the insurer's money. The so-called reserve which the insurance company sets up is its own money taken under a claim of right and if the insurance company itself became insolvent these funds would be subject to payment of the insurance company's debts.
William J. Brennan, Jr.: How is that different from the savings bank passbook?
Morris J. Oppenheim: The savings bank passbook?
William J. Brennan, Jr.: A passbook.
Morris J. Oppenheim: It differs in these respects. The passbook creates a relationship of debtor-creditor. If the holder of the book --
William J. Brennan, Jr.: And if -- you can't realize without surrendering the passbook on a --
Morris J. Oppenheim: Correct. But if the holder of the book dies the fund becomes property of his estate which his executor can collect. The earnings on that money belongs to the -- that of the interest belongs to and is taxable for income tax to the depositor. If a transfer is made at death --
William J. Brennan, Jr.: Well, you don't mean the earnings that whatever the fixed rate is that the --
Morris J. Oppenheim: Well, what I mean is this --
William J. Brennan, Jr.: (Voice Overlap)
Morris J. Oppenheim: What I mean is this that if it be considered that the insurance company holds a cash surrender value for the benefit of each insurer, the earnings which the insurance company receives from that fund is not taxable for income tax to the insured. There is no -- even though there are accretions this fund grows in a sense. That growth, that accretion is not properly, is not considered even by the Internal Revenue Code to be taxable income to the insured at any time until he surrenders policy and then collects more than he paid for.
Charles E. Whittaker: Mr. Oppenheim, may I ask you (Inaudible), does the policy itself so far represent the property as that a -- an assignment, than delivery of it would impose upon the person who did it, the donor, a gift tax liability?
Morris J. Oppenheim: Your Honor, if -- if the insured possess the incidence of ownership that is the right to control --
Charles E. Whittaker: And all elements of property.
Morris J. Oppenheim: Yes. And he makes an assignment --
Charles E. Whittaker: And to (Inaudible) --
Morris J. Oppenheim: -- fortuitously and delivers it, this is subject to a gift tax.
Charles E. Whittaker: All right. Now then what -- how would you measure the value, the fair amount of -- a gift -- gift taxes would be imposed at fair market value, would it not? Now then that would be fair market value as of the day he in light made this inter vivos gift, wouldn't it?
Morris J. Oppenheim: That's correct.
Charles E. Whittaker: And would that be represented by the cash value?
Morris J. Oppenheim: Not in every case Your Honor.
Charles E. Whittaker: What else?
Morris J. Oppenheim: There -- there are several decisions and in my opinion they reflect the best that the Court can do under the circumstances. In some cases it has held that the interpolated terminal reserve which is fairly close to cash surrender value but a different sum is the value. In some case as for example where there was a single premium policy acquired and delivered by gift within a short time, it was the cost. Now it is impossible to determine the exact value of a life insurance policy at any time because to illustrate if we take the case of a man on his deathbed, certainly that life insurance policy even if it's only one year old its worth more than cash surrender value. And any speculator would pay more.
Charles E. Whittaker: But the measure of its value for any tax purpose would be both fair market value at that time, would it not?
Morris J. Oppenheim: That is correct.
Charles E. Whittaker: However you determine it.
Morris J. Oppenheim: That is correct. But I also point out to Your Honor that there are obligations, in other words the insured's right is not a single sole right but is subservient to other rights. It's subservient to the right of the beneficiary, it is subservient to the obligation of the insurance company itself to make a payment of the proceeds under certain circumstances. I have sort of lost myself. My time is practically up and I -- if I went on now I wouldn't know where I am, I'd [Laughter].
Earl Warren: Mr. Smith -- Mr. Davis has it.
John F . Davis: Mr. Chief Justice, if the Court please.
Felix Frankfurter: You're under no such difficulty, isn't it? [Laughter]
John F . Davis: Mr. Justice Brennan asked the, how much of the liability in this case was covered by the lien. The taxes assessed for three years 1945, 1946, 1947 the lien attaches to the years 1945 and 1946 if we are correct. And of the total amount, the total amount of the three years was $9000 and $7900 of that would be in the two years to which the lien would attach. All those figures are given on pages four and five of the record.
Speaker: Are you going to say anything about Judge Hand's strictures on Rowen at least I interpret them as strictures in Rowen and the Behrens case.
John F . Davis: I wasn't quite sure whether I understood which way Judge Hand's views is when he said that he and Judge Medina didn't -- wouldn't necessarily go along.
Speaker: I thought it was very clear, what he was saying.
John F . Davis: I -- I couldn't really tell which way -- which way his mind was going on that and so --
Speaker: (Voice Overlap) -- perhaps you're right.
John F . Davis: I wasn't going to refer to it. I do want to go back for just a minute to this question of the state law as it applies to the interest which a beneficiary has in insurance while the insured is still alive. And I want to point out that in these two cases which have been argued before the Court today, the law of Kentucky where the insurance which govern the law, the insurance policies in the Stern case, holds very clearly that there is no vested right. Whereas the law in New Jersey like the law in New York says that there is a right subject to divestment. But in practical effect as far as the rights of beneficiaries go, I can find no difference in what will actually happen in those two, in those two states. As a matter of refinements of title if you please rather than, rather than of substance insofar as any question before this Court present time is concerned. And I think it would in a rather extraordinary thing if the determination of liability should be determined to be different in these two states because of the way they describe the interest of the beneficiary in these life insurance policies.
Felix Frankfurter: Makes a lot of difference, the people of different states, so it can't be just a matter of nicety or --
John F . Davis: It makes a difference --
Felix Frankfurter: They then say nicety.
John F . Davis: It -- it makes a difference to the people of the states if the decisions are determined on that basis, but I --
Felix Frankfurter: As I say -- what I'm saying is that there must be an intrinsic difference because the outcomes of different people are different in different states. Now, what you say are the same actuality, and therefore not in concept (Inaudible)
John F . Davis: Well, if -- if Your Honor please, I do not know unless this Court draws the distinction in this case and makes a difference in the tax liability. I do not know of any other difference in the actual operative facts on insurance in Kentucky and New Jersey, they state the law in a different way but I don't know of any difference and what money would actually be received by beneficiaries, under different circumstances.
Felix Frankfurter: But perhaps -- but what can happen to the beneficiaries as of New Jersey and the (Inaudible) the statement says New York law, the state -- of New York law.
John F . Davis: Yes.
Felix Frankfurter: The -- the difference which you say is an immaterial difference in result which each get to say, that isn't true as to what may happen to that people in the -- beneficiaries under the policy if a creditor and once they can go after, the other he can.
John F . Davis: Well up to the present time there is no difference because the states take care of it through their -- through their exemption statutes, the laws as to insurance.
Felix Frankfurter: Well, that's a different problem. That's (Voice Overlap) --
John F . Davis: And so unless --
Felix Frankfurter: That's because the legislature have seen fit to correct or mitigate or call it what you will the local common law.
John F . Davis: Well I may not have made myself entire clear, and I may not be accurate, but insofar as I could search the laws of insurance in these two states, unless this Court in these case draws this difference as to when they are liable for the income taxes of the insured, the -- the law is actually the same in the two cases.
Felix Frankfurter: Then it -- then you don't have to --
John F . Davis: I think they --
Felix Frankfurter: -- go back to our Lady Elizabeth, if that's so. Then you can say, well then why don't you argue, doesn't make any difference what you're on though, because the state law is the same. Legislatively obtained or common lawly obtained.
John F . Davis: Well again I wasn't precise enough. I meant to say that the law with respect to whether or not there was a vested interest in the circumstances under which this property right can be terminated or they can become definite are the same. I'm not speaking now of the rights of creditors. I'm speaking of the title, the refinements of title arguments.
Speaker: Mr. Davis, was there any effort to get Congress to legislate an isse?
John F . Davis: No, there has been no effort to my knowledge. The matter has been in litigation at the present time.
Hugo L. Black: If -- if state law does not apply, what do you say to the argument that Congress has legislated in connection with a lot of matters about insurance, by this inference, prior to some time that he had collect -- the government can collect state tax and so forth but it doesn't seem fit to adapt this common law idea that you found in here.
John F . Davis: Well, it maybe -- it maybe dangerous to speculate on why Congress hasn't acted in matters.
Hugo L. Black: Again, what do you say to the argument that -- that they haven't -- that they have argued on many other things that -- maybe as -- but not be the part of wisdom to incorporate this --
John F . Davis: Well, when --
Hugo L. Black: -- common law doctrine.
John F . Davis: When for example the Congress acts in bankruptcy law with respect to the trustee taking the insurance, what they're doing is to ameliorate a situation which would exist without it, I mean, they're saying that the insured or his beneficiary can maintain the insurance by making voluntary payments. They're trying to -- they're recognizing that this is an asset of the bankrupt, which the trustee can get, but then they are ameliorating this -- the situation so as to protect them. Now with respect to the -- with respect to the life insurance, the specific inclusion of life insurance in the estate tax. Here we had a situation where wealthy people were putting large amounts of their property into estates and Congress just want to make it absolutely clear, that with respect to insurance, if the insured retained the instance of ownership that he wouldn't escaped the estate tax. I mean it was -- it wasn't that -- I'm not sure that it would have been necessary, I'm not sure that property by itself wouldn't covered it, powers that are involved, but it was -- Congress did act with it specifically in mind. Here, until we -- until get this problem of transferee liability we don't have any direct impingement of insurance on income tax as far as collections goes, I mean it's a by-law, it's a by-pass. We -- we deal specifically with what is income and when you can reach it, but there has been no occasion until this matter of transferee liability has been really determined for them to create affirmatively with the rights of collection.
Hugo L. Black: Do you have to invoke your common law doctrine in order to sustain your rights and tax the -- put the tax on the amount equal to the cash surrender value?
John F . Davis: You would except where the lien -- where there was a lien.
Hugo L. Black: No, I mean in your case where you have a lien.
John F . Davis: If you have no lien, why then you'd have to have some common law theory.
Hugo L. Black: Where you have the lien, you have one of those, do you know not?
John F . Davis: We -- yes. In the Bess case, you don't need to have the transferee liability, the Statute of Elizabeth or any fraudulent conveyance rule, we can just go on the lien.
Hugo L. Black: I think it's occurred to me as I've heard the argument is, neither side is arguing the question, maybe it's therefore not worthy of consideration. The reading of Hume case, I see that they went somewhat on the general idea of protection of the rights of beneficiaries by the -- someone has included enough to buy the policy. I recall that Congress has been doing that over a number of years and bears connection and your argument -- your position may be correct if adopted. But to some extent, (Inaudible) for beneficiaries of a right without Congress having done so specifically, would it not?
John F . Davis: Well, I think Congress has exempted it rather than giving it, the Hume case --
Hugo L. Black: Whatever it's done, it's been in that direction.
John F . Davis: But when they have exempted it as they did in the bankruptcy sense for example, they've taken affirmative action to protect this right. Now the Hume case is of course --
Hugo L. Black: But you're asking us to take affirmative action.
John F . Davis: No. I'm saying in the absence --
Hugo L. Black: Under the law (Voice Overlap) --
John F . Davis: -- of affirmative action by Congress to carve this property right out of its other rights, that it's up to Congress to decide. I -- I think that there is a real public interest in protecting the rights of widows and orphans. But I think its for Congress to determine if they want to exempt what I would -- what I am arguing would be the otherwise applicable law to exempt the rights of widows and orphans from this situation.
Hugo L. Black: I mean --
John F . Davis: They have acted to exempt it in other cases and they could in this if they desired to.
Hugo L. Black: Has the common law doctrine you urge here we apply ever been applied in connection with insurance policies, life insurance policies?
John F . Davis: The right to follow --
Hugo L. Black: Yes, as you are doing -- as you ask us to do here.
John F . Davis: You mean in private debts, and just a creditor following it against the --
Hugo L. Black: In anyway so as to reduce the amount that the beneficiaries would get from private life insurance policies.
John F . Davis: I know of no case where a private creditor has been able to collect from the debtor, but I take it this is because the state laws are very explicit in protecting insurance from this situation. Now the Hume case, may I say is a case of a private creditor going after transferee of his debtor, and I think the case is not directly in point in this case because there is no indication that in this case there were any other rights of ownership retained by the insured, as far as I know, this was a policy where it was made out and finally vested with no right of changing the beneficiary, no right to drop it, so that it was given at the time the insurance policy was taken out and the premiums paid.
Felix Frankfurter: Mr. Davis, am I right or wrong in having the impression not knowledge that if this -- if this same situation arose with the bankruptcy field, the -- following the assets of the creditor -- or in that to the debtor into the common creditor pocket, cash could not apply (Inaudible) Congress by a statute of (Inaudible), is that right?
John F . Davis: Well, I don't know that that's so.
Felix Frankfurter: Weren't this -- this Statute of Elizabeth would as a matter of course have enabled the trustee to get a hold of an insurance policy like this in bankruptcy?
John F . Davis: Well I suppose the trustee in bankruptcy would have the same rights as a creditor would have in following it to a transferee liability.
Felix Frankfurter: What I want to know is whether under the Bankruptcy Act except insofar as Congress has specifically dealt with it, would a New York trustee be able to get after the insurance?
John F . Davis: Well --
Felix Frankfurter: And I should think there is -- there is a -- if the answer is no and I don't know, I'm asking you, there's also a public interest there, isn't there?
John F . Davis: Yes. I think a trustee -- I think a trustee in New York would not be able to follow assets into the hands of a transferee, I don't think that even under the bankruptcy law as it stands it could, I think that what he can do is to vest the rights of a living insured, he can take possession of those as a power which he has a right. But even then --
Felix Frankfurter: As a matter of common law?
John F . Davis: But even then Congress has said that they shall recognize the state exemptions, so that whether our state exemptions with the -- he is -- Congress has again made specific provision to protect the beneficiaries in this case. And really the heart of my argument is, if Congress wants to protect beneficiaries in these cases, if it feels there is a public policy, Congress can do so.
Felix Frankfurter: And in order to protect them however you have to engraft how far into tax law (Inaudible) That's true isn't it?
John F . Davis: In order to protect them we have to --
Felix Frankfurter: In order -- in order to enable the Government, to go to this insurance money, you have to engraft upon the present procedural provision of the tax law, the Statute of Elizabeth.
John F . Davis: Or the -- or as I state the trust fund doctrine, yes, that's - that is true.
Felix Frankfurter: All right.
John F . Davis: Unless there's a lien.
Felix Frankfurter: Correct. You haven't surrendered anything.