Solomon Fried, Plaintiff-appellee, v. New York Life Insurance Company, Defendant-appellee, Andunited States of America, Defendant-appellant, 241 F.2d 504 (2d Cir. 1957)

Solomon Fried, born Dec. 16, 1898, took out five policies of life insurance on his life with New York Life Insurance Company between June 8, 1922 and February 8, 1930, naming his wife to be the beneficiary thereof upon his death. The total face amount of these policies is $25,000. Fried reserved the right to change the beneficiary. The policies were Twenty-Payment Life policies, and at all times material here were in full force and effect.

Fried also paid twenty additional annual premiums under each policy contract in excess of the premiums required to insure his life, in return for which the insurance company contracted to pay Fried, if he should become totally and presumably permanently disabled before age 60, a total of $250 each month that such disability continued. Each policy further provided that Fried during his lifetime, and without the consent of the beneficiary named by him to receive the policy proceeds upon his death, could receive every benefit, exercise every right, and enjoy every privilege conferred upon the insured.

In December, 1951, the Bureau of Internal Revenue assessed income tax deficiencies against Fried in the sum of $263,174.69, representing alleged deficiencies for the years 1944, 1945, 1946, 1947, 1948 and 1949.

New York Life Insurance Company was promptly served that month with a notice of an income tax lien. In January, 1952, a copy of the lien was filed, warrants of distraint were issued, and levy was made upon the company. In March, 1952, a final notice and demand was served upon it.

On November 2, 1953, Fried became totally and presumably permanently disabled. The insurance company admitted its contract liability to pay him $250 each month from that date forward as long as he remained so disabled, but declined to make payment because of the government's levy. Fried sued. New York Life sought to have the United States joined as a necessary party because of the levy. This was done and Fried's suit was then removed to the U. S. District Court. In the meantime the insurance company also declined to turn over any of these monthly payments to the government and the United States sued it under 26 U.S.C.A. § 3710 for non-compliance with the levy, notice and demand. Fried was then joined as a defendant in this second suit; the two suits were consolidated; New York Life paid into court the disability benefit payments that had by then accrued; Fried and the United States each moved for summary judgment. Fried's motion was granted and the government appeals.

The sole question before us is whether the income tax lien attaches to these monthly disability benefit payments. The Court below held that it did not. We hold otherwise, reverse the judgment below, and direct that judgment be entered for the United States.

It is admitted that Fried had a contractual right to these sums each month which the insurance company could not defeat. Therefore (unless prevented by some limitation upon it) the government by proper levy could require that these sums be applied upon Fried's delinquent taxes. The sufficiency of the undertakings of the government to prevent these payments from coming into the possession of Fried and to be so applied upon his delinquent taxes is not questioned.

The Court below held that a limitation upon the power of the United States to enforce its lien does exist and that the government is prevented from reaching these monthly avails of these insurance contracts because under a New York statute these sums are not "liable to execution for the purpose of satisfying any debt or liability of the insured."¹  It is well settled law, however, that State exemption statutes are ineffective against a Federal statutory lien for federal taxes.

Kieferdorf v. Commissioner of Internal Revenue, 9 Cir., 1944, 142 F.2d 723, 725, certiorari denied, 1944, 323 U.S. 733, 65 S. Ct. 69, 89 L. Ed. 588; Kyle v. McGuirk, 3 Cir., 1936, 82 F.2d 212, 213; Shambaugh v. Scofield, 5 Cir., 1942, 132 F.2d 345; Cannon v. Nicholas, 10 Cir., 1935, 80 F.2d 934, 935; Jones v. Kemp, 10 Cir., 1944, 144 F.2d 478, 480.

The New York Court of Appeals agrees that New York may not interfere with the power of Congress to levy, and then to collect, federal taxes on income. In re Rosenberg's Will, 1935, 269 N.Y. 247, 199 N.E. 206, 105 A.L.R. 1238, certiorari denied Rosenberg v. U. S., 298 U.S. 669, 56 S. Ct. 834, 80 L. Ed. 1392.

A similar New York statute expressing the same state policy of protecting a disabled person's disability benefit payments from creditors' levies²  was held ineffective against the federal tax lien in United States v. Ocean Accident & Guarantee Corporation, Ltd., D.C.S.D.N. Y.1948, 76 F. Supp. 277.

If Congress had provided in the Internal Revenue Code for such an exemption, or if Congress had adopted as exemptions under the Code the exemptions set forth under State law, the holdings relied upon by the court below in Fink v. O'Neil, 106 U.S. 272, 1 S. Ct. 325, 27 L. Ed. 196 and in Custer v. McCutcheon, 283 U.S. 514, 51 S. Ct. 530, 75 L. Ed. 1239, might have been applicable, but no such provisions appear.³ 

In fact the language of the House Ways and Means and Senate Finance Committees contained in their respective Committee Reports to their respective Houses of Congress with reference to Section 6334(c) of the I.R.C. of 1954 demonstrate that no such provisions were even contemplated when the 1954 Code was under consideration.⁴ 

Finally it is argued upon appeal that these regularly recurring sums due and payable month after month to this living delinquent taxpayer as long as he lives, sums that will cease being payable upon his death, are similar to the "proceeds" of a life insurance policy due and payable to a beneficiary after the death of an insured delinquent taxpayer, and that our holding in Rowen v. Commissioner of Internal Revenue, 2 Cir., 215 F.2d 641, requires us to affirm the decision below. We find this contention difficult to comprehend. In Rowen, 215 F.2d 641 at page 649, we stated that the New York statute applicable to our decision in that case was not an exemption statute but a statute declaratory of a substantive right. In support of that rationale we compared the provision of the applicable statute there with the provision of the statute applicable here, and we there pointed out that the statute involved here is an express exemption provision. We also clearly indicated that the Kieferdorf case would be followed by us whenever an express exemption provision should be before us. And also see United State v. Truax, 5 Cir., 1955, 223 F.2d 229, 231. We find no substance whatever to this contention.

Reversed, and it is ordered that judgment be entered for the United States below.