COMMISSIONER OF INTERNAL REVENUE v. STERN, TRANSFEREE.
No. 311.
Argued April 7, 1958.
Decided June 9, 1958.
John F. Davis argued the cause for petitioner. With him on the brief were Solicitor General Rankin, Assistant Attorney General Rice and A. F. Prescott.
Walter E. Barton argued the cause for respondent. With him on the brief were William H. Beck and William B. Martin.
Benj. H. Saunders, K. Martin Worthy and Arthur Peter filed a brief for the Life Insurance Association of America, as amicus curiae, urging affirmance.
Mr. Justice Brennan
delivered the opinion of the Court.
Respondent petitioned the Tax Court for redetermination of the liability assessed against her for her deceased husband’s unpaid income tax deficiencies. The Tax Court held that, as beneficiary of proceeds of her husband’s life insurance exceeding the amount of the deficiencies, the respondent was liable for the full amount of the deficiencies. The Court of Appeals reversed, 242 F. 2d 322, holding that the respondent was not liable even to the extent of the amount of the cash surrender values of the policies, which was less than the amount of the deficiencies. We granted certiorari. 355 U. S. 810.
Dr. Milton J. Stern died a resident of Lexington, Kentucky, on June 12, 1949. Nearly six.years later the Tax Court held that Dr. Stern had been deficient in his income taxes for the years 1944 through 1947 and was liable for the amount, including interest and penalties, of $32,777.51. Because the assets of the estate were insufficient to meet this liability, the Commissioner proceeded under § 311 of the Internal Revenue Code of 1939 against respondent, Dr. Stern’s widow, as the beneficiary of life insurance policies held by him. The proceeds and the cash surrender value of these policies at Dr. Stern’s death totaled $47,282.02 and $27,259.68 respectively.' The right to change the beneficiary and to draw down the cash surrender value of each policy had been retained until death by Dr. Stern. There were no findings that Dr. Stern paid any premiums with intent to defraud his creditors or that he was insolvent at any time prior to this death.
The Court of Appeals rested its decision upon two grounds: (1) that the respondent beneficiary was not a transferee within the meaning of § 311, Tyson v. Commissioner, 212 F. 2d 16; and (2) that in any event Kentucky statutes, Ky. R. S., 1948, §§ 297.140, 297.150, limit the beneficiary’s liability to creditors of the deceased insured to the amount of the premiums paid by the insured in fraud of creditors, and consequently there was no liability since there was no evidence that Dr. Stern paid any premium in fraud of his creditors. Without intimating any view as to the correctness of the first holding of the Court of Appeals we find it unnecessary to decide whether the respondent was a transferee within the meaning of § 311 because we hold that the Kentucky statutes govern the question of the beneficiary's liability and create no liability of the respondent to the Government in the circumstances of this case.
First. Section 311 (a) provides that “The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax . . . imposed upon the taxpayer by this chapter” shall be “assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this chapter . . . The decisions of the Court of Appeals and the Tax Court have been in conflict on the question whether the substantive liability enforced under § 311 is to be determined by state or federal law. Compare, e. g., Rowen v. Commissioner, 215 F. 2d 641, and Botz v. Helvering, 134 F. 2d 538, with United States v. Bess, 243 F. 2d 675, and Stoumen v. Commissioner, 27 T. C. 1014. This Court has expressly left the question open. Phillips v. Commissioner, 283 U. S. 589, 602.
The courts have repeatedly recognized that § 311 neither creates nor defines a substantive liability but provides merely a new procedure by which the Government may collect taxes. Phillips v. Commissioner, supra; Hatch v. Morosco Holding Co., 50 F. 2d 138; Liquidators of Exchange National Bank v. United States, 65 F. 2d 316; Harwood v. Eaton, 68 F. 2d 12; Weil v. Commissioner, 91 F. 2d 944; Tooley v. Commissioner, 121 F. 2d 350. Prior to the enactment of § 280 of the Revenue Act of 1926, 44 Stat. 9, 61, the predecessor of § 311, the rights of the Government as creditor, enforceable only by bringing a bill in equity or an action at law, depended upon state statutes or legal theories developed by the courts for the protection of private creditors, as in cases where the debtor had transferred his property to another. Phillips v. Commissioner, supra, at 592, n. 2; cf. Pierce v. United States, 255 U. S. 398; Hospes v. Northwestern Mfg. & Car Co., 48 Minn. 174, 50 N. W. 1117. This procedure proved unduly cumbersome, however, in comparison with the summary administrative remedy allowed against the taxpayer himself, Rev. Stat. § 3187, as amended by the Revenue Act of 1924, 43 Stat. 343. The predecessor section of § 311 was designed “to provide for the enforcement of such liability to the Government by the procedure provided in the act for the enforcement of tax deficiencies.” S. Rep. No. 52, 69th Cong., 1st Sess. 30. “Without in any way changing the extent of such liability of the transferee under existing law, . . . [this section] enforces such liability ... in the same manner as liability for a tax deficiency is enforced; that is, notice by the commissioner to the transferee and opportunity either to pay and sue for refund or else to proceed before the Board of Tax Appeals, with review by the courts. Such a proceeding is in lieu of the present equity proceeding . . . .” H. R. Conf. Rep. No. 356, 69th Cong., 1st Sess. 43-44. Therefore, since § 311 is purely a procedural statute we must look to other sources for definition of the substantive liability. Since no federal statute defines such liability, we are left with a choice between federal decisional law and state law for its definition.
Second. The Government urges that, to further “uniformity of liability,” we reject the applicability of Kentucky law in favor of having the federal courts fashion governing rules. Cf. Clearfield Trust Co. v. United States, 318 U. S. 363. But a federal decisional law in this field displacing state statutes as determinative of liability would be a sharp break with the past. Federal courts, in cases where the Government seeks to collect unpaid taxes from persons other than the defaulting taxpayer, have applied state statutes, Hutton v. Commissioner, 59 F. 2d 66; Weil v. Commissioner, supra; United States v. Goldblatt, 128 F. 2d 576; Botz v. Helvering, supra, and the Government itself has urged reliance upon such statutes in similar cases, G. C. M. 2514, VI-2 Cum. Bull. 99; G. C. M. 3491, VII-1 Cum. Bull. 147. The Congress was aware of the use of state statutes when the enactment of the predecessor section to § 311 was under consideration, for the Congress in disclaiming any intention “to define or change existing liability,” S. Rep. No. 52, 69th Cong., 1st Sess. 30, identified “existing liability” as liability ensuing “[b]y reason of the trust fund doctrine and various State statutory provisions . . . .” H. R. Conf. Rep. No. 356, supra, at 43.
It is true that, in addition to reliance upon state statutes, the Government invoked principles judicially developed for the protection of private creditors, in cases where the debtor had transferred his property to another and been left insolvent. Cf. Pierce v. United States, supra; Hospes v. Northwestern Mfg. & Car Co., supra. In such cases the federal courts applied a “general law” which did not distinguish between federal and state deci-sional law. But the fact remains that the varying definitions of liability under state statutes resulted in an absence of uniformity of liability. Yet Congress, with knowledge that this was “existing law” at the time the predecessor section to § 311 was enacted, has refrained from disturbing the prevailing practice. Uniformity is not always the federal policy. Under § 70 of the Bankruptcy Act, for instance, state law is applied to determine what property of the bankrupt has been transferred in fraud of creditors. 30 Stat. 565, as amended, 11 U. S. C. § 110. What is a good transfer in one jurisdiction might not be so in another.
Since Congress has not manifested a desire for uniformity of liability, we think that the creation of a federal decisional law would be inappropriate in these cases. In diversity cases, the federal courts must now apply state decisional law in defining state-created rights, obligations, and liabilities. Erie R. Co. v. Tompkins, 304 U. S. 64. They would, of course, do so in diversity actions brought by private creditors. Since the federal courts no longer formulate a body of federal decisional law for the larger field of creditors’ rights in diversity cases, any such effort for the small field of actions by the Government as a creditor would be necessarily episodic. That effort is plainly not justified when there exists a flexible body of pertinent state law continuously being adapted to changing circumstances affecting all creditors. Accordingly we hold that, until Congress speaks to the contrary, the existence and extent of liability should be determined by state law.
Third. The Court of Appeals held in this case that under the applicable Kentucky law the beneficiary of a life insurance policy is not liable to the insured’s creditors, at least where, as here, the premiums have not been paid in fraud of creditors, Ky. R. S., 1948, §§ 297.140, 297.150, and that therefore no liability of the respondent exists under state law to any creditor, including the Government. The parties do not contest this construction of local law.
The Government, however, argues in its brief, “Just as in the situation where a tax lien has attached it is held that state law may not destroy that lien, so here, where a tax liability is imposed by'Congress, the state may not provide exemptions.” We agree that state law may not destroy a tax lien which has attached in the insured’s lifetime. We held today in United States v. Bess, post, p. 51, that a New Jersey statute, similar to the Kentucky statutes, could not defeat the attachment in the insured’s lifetime of a federal tax lien under § 3670 against the cash surrender value of the policy, or prevent enforcement of the lien out of the proceeds received by the beneficiary on the insured’s death. We might also agree that a State may not provide exemptions from a tax liability imposed by Congress. The fallacy in the Government’s argument is in the premise that Congress has imposed a tax liability against the beneficiary. We have concluded that Congress has not seen fit to define that liability and that none exists except such as is imposed by state law. Thus there is no problem here of giving effect to state exemption provisions when federal law imposes such liability. The Government’s substantive rights in this case are precisely those which other creditors would have under Kentucky law. The respondent is not liable to the Government because Kentucky law imposes no liability against respondent in favor of Dr. Stem’s other creditors.
Affirmed.
Section 311 provides:
“(a) Method of CollectioN. — The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this chapter (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):
“(1) Transferees. — The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this chapter.
“(f) Definition of 'Transferee’. — As used in this section, the term ‘transferee’ includes heir, legatee, devisee, and distributee.” 53 Stat. 90, 91.
The Court of Appeals in this case followed its own prior decision in Tyson v. Commissioner, 212 F. 2d 16, in holding that Mrs. Stern as beneficiary was not a “transferee” of any part of the proceeds within the meaning of § 311. Other Courts of Appeals have held that the beneficiary is a transferee only to the extent of the cash surrender value existing at the time of the insured’s death. Rowen v. Commissioner, 215 F. 2d 641; United States v. Bess, 243 F. 2d 675. The Tax Court, on the other hand, has held that the beneficiary is the transferee of the entire proceeds. Stoumen v. Commissioner, 27 T. C. 1014.
The Government argues that since § 311 and § 900 were originally enacted as correlative provisions of the Revenue Act of 1926 a substantive liability is imposed upon the beneficiary for both unpaid income and estate taxes of the decedent. But the 1939 Code “contains no provision in respect to income tax collection comparable to Section 827 (b) of the Code which expressly imposes liability for the estate tax on a 'beneficiary, who receives . . . property included in the gross estate under section [811 (f)].’ ” Rowen v. Commissioner, 215 F. 2d 641, 646.
Kentucky Revised Statutes provided:
“297.140 Lije insurance for benefit of a married woman; premiums paid in fraud of creditors. (1) A policy of insurance on the life of any person expressed to be for the benefit of, or duly assigned, transferred or made payable to, any married woman, or to any person in trust for her, or for her benefit, by whomsoever such transfer may be made, shall inure to her separate use and benefit and that of her children, independently of her husband or his creditors or any other person effecting or transferring the policy or his creditors.
“(2) A married woman may, without consent of her husband, contract, pay for, take out and hold a policy of insurance upon the life or health of her husband or children, or against loss by his or their disablement by accident. The premiums paid on the policy shall be held to have been her separate estate, and the policy shall inure to her separate use and benefit and that of her children, free from any claim of her husband or others.
“(3) If the premium on any policy mentioned in this section is paid by any person with intent to defraud his creditors, an amount equal to the premium so paid, with interest thereon, shall inure to the benefit of the creditors, subject to the statute of limitations.
“297.150 Life insurance for benefit of another; premiums paid in fraud of creditors. (1) When a policy of insurance is effected by any person on his own life or on another life in favor of some person other than himself having an insurable interest therein, the lawful beneficiary thereof, other than the person effecting the insurance or his legal representatives, shall be entitled to its proceeds against the creditors and representatives of the person effecting the same.
“(2) Subject to the statute of limitations, the amount of any premiums for such insurance paid in fraud of creditors, with interest thereon, shall inure to their benefit from the proceeds of the policy, but the company issuing the policy shall be discharged of all liability thereon by payment of its proceeds in accordance with its terms, unless, before such payment, the company received written notice by or in behalf of some creditor, with specification of the amount claimed, claiming to recover for certain premiums paid in fraud of creditors.”
U.S. Court of Customs and Patent Appeals U.S. Court of International Trade U.S. Court of Claims, Court of Federal Claims U.S. Court of Military Appeals, renamed as Court of Appeals for the Armed Forces U.S. Court of Military Review U.S. Court of Veterans Appeals U.S. Customs Court U.S. Court of Appeals, Federal Circuit U.S. Tax Court Temporary Emergency U.S. Court of Appeals U.S. Court for China U.S. Consular Courts U.S. Commerce Court Territorial Supreme Court Territorial Appellate Court Territorial Trial Court Emergency Court of Appeals Supreme Court of the District of Columbia Bankruptcy Court U.S. Court of Appeals, First Circuit U.S. Court of Appeals, Second Circuit U.S. Court of Appeals, Third Circuit U.S. Court of Appeals, Fourth Circuit U.S. Court of Appeals, Fifth Circuit U.S. Court of Appeals, Sixth Circuit U.S. Court of Appeals, Seventh Circuit U.S. Court of Appeals, Eighth Circuit U.S. Court of Appeals, Ninth Circuit U.S. Court of Appeals, Tenth Circuit U.S. Court of Appeals, Eleventh Circuit U.S. Court of Appeals, District of Columbia Circuit (includes the Court of Appeals for the District of Columbia but not the District of Columbia Court of Appeals, which has local jurisdiction) Alabama Middle U.S. District Court Alabama Northern U.S. District Court Alabama Southern U.S. District Court Alaska U.S. District Court Arizona U.S. District Court Arkansas Eastern U.S. District Court Arkansas Western U.S. District Court California Central U.S. District Court California Eastern U.S. District Court California Northern U.S. District Court California Southern U.S. District Court Colorado U.S. District Court Connecticut U.S. District Court Delaware U.S. District Court District Of Columbia U.S. District Court Florida Middle U.S. District Court Florida Northern U.S. District Court Florida Southern U.S. District Court Georgia Middle U.S. District Court Georgia Northern U.S. District Court Georgia Southern U.S. District Court Guam U.S. District Court Hawaii U.S. District Court Idaho U.S. District Court Illinois Central U.S. District Court Illinois Northern U.S. District Court Illinois Southern U.S. District Court Indiana Northern U.S. District Court Indiana Southern U.S. District Court Iowa Northern U.S. District Court Iowa Southern U.S. District Court Kansas U.S. District Court Kentucky Eastern U.S. District Court Kentucky Western U.S. District Court Louisiana Eastern U.S. District Court Louisiana Middle U.S. District Court Louisiana Western U.S. District Court Maine U.S. District Court Maryland U.S. District Court Massachusetts U.S. District Court Michigan Eastern U.S. District Court Michigan Western U.S. District Court Minnesota U.S. District Court Mississippi Northern U.S. District Court Mississippi Southern U.S. District Court Missouri Eastern U.S. District Court Missouri Western U.S. District Court Montana U.S. District Court Nebraska U.S. District Court Nevada U.S. District Court New Hampshire U.S. District Court New Jersey U.S. District Court New Mexico U.S. District Court New York Eastern U.S. District Court New York Northern U.S. District Court New York Southern U.S. District Court New York Western U.S. District Court North Carolina Eastern U.S. District Court North Carolina Middle U.S. District Court North Carolina Western U.S. District Court North Dakota U.S. District Court Northern Mariana Islands U.S. District Court Ohio Northern U.S. District Court Ohio Southern U.S. District Court Oklahoma Eastern U.S. District Court Oklahoma Northern U.S. District Court Oklahoma Western U.S. District Court Oregon U.S. District Court Pennsylvania Eastern U.S. District Court Pennsylvania Middle U.S. District Court Pennsylvania Western U.S. District Court Puerto Rico U.S. District Court Rhode Island U.S. District Court South Carolina U.S. District Court South Dakota U.S. District Court Tennessee Eastern U.S. District Court Tennessee Middle U.S. District Court Tennessee Western U.S. District Court Texas Eastern U.S. District Court Texas Northern U.S. District Court Texas Southern U.S. District Court Texas Western U.S. District Court Utah U.S. District Court Vermont U.S. District Court Virgin Islands U.S. District Court Virginia Eastern U.S. District Court Virginia Western U.S. District Court Washington Eastern U.S. District Court Washington Western U.S. District Court West Virginia Northern U.S. District Court West Virginia Southern U.S. District Court Wisconsin Eastern U.S. District Court Wisconsin Western U.S. District Court Wyoming U.S. District Court Louisiana U.S. District Court Washington U.S. District Court West Virginia U.S. District Court Illinois Eastern U.S. District Court South Carolina Eastern U.S. District Court South Carolina Western U.S. District Court Alabama U.S. District Court U.S. District Court for the Canal Zone Georgia U.S. District Court Illinois U.S. District Court Indiana U.S. District Court Iowa U.S. District Court Michigan U.S. District Court Mississippi U.S. District Court Missouri U.S. District Court New Jersey Eastern U.S. District Court (East Jersey U.S. District Court) New Jersey Western U.S. District Court (West Jersey U.S. District Court) New York U.S. District Court North Carolina U.S. District Court Ohio U.S. District Court Pennsylvania U.S. District Court Tennessee U.S. District Court Texas U.S. District Court Virginia U.S. District Court Norfolk U.S. District Court Wisconsin U.S. District Court Kentucky U.S. Distrcrict Court New Jersey U.S. District Court California U.S. District Court Florida U.S. District Court Arkansas U.S. District Court District of Orleans U.S. District Court State Supreme Court State Appellate Court State Trial Court Eastern Circuit (of the United States) Middle Circuit (of the United States) Southern Circuit (of the United States) Alabama U.S. Circuit Court for (all) District(s) of Alabama Arkansas U.S. Circuit Court for (all) District(s) of Arkansas California U.S. Circuit for (all) District(s) of California Connecticut U.S. Circuit for the District of Connecticut Delaware U.S. Circuit for the District of Delaware Florida U.S. Circuit for (all) District(s) of Florida Georgia U.S. Circuit for (all) District(s) of Georgia Illinois U.S. Circuit for (all) District(s) of Illinois Indiana U.S. Circuit for (all) District(s) of Indiana Iowa U.S. Circuit for (all) District(s) of Iowa Kansas U.S. Circuit for the District of Kansas Kentucky U.S. Circuit for (all) District(s) of Kentucky Louisiana U.S. Circuit for (all) District(s) of Louisiana Maine U.S. Circuit for the District of Maine Maryland U.S. Circuit for the District of Maryland Massachusetts U.S. Circuit for the District of Massachusetts Michigan U.S. Circuit for (all) District(s) of Michigan Minnesota U.S. Circuit for the District of Minnesota Mississippi U.S. Circuit for (all) District(s) of Mississippi Missouri U.S. Circuit for (all) District(s) of Missouri Nevada U.S. Circuit for the District of Nevada New Hampshire U.S. Circuit for the District of New Hampshire New Jersey U.S. Circuit for (all) District(s) of New Jersey New York U.S. Circuit for (all) District(s) of New York North Carolina U.S. Circuit for (all) District(s) of North Carolina Ohio U.S. Circuit for (all) District(s) of Ohio Oregon U.S. Circuit for the District of Oregon Pennsylvania U.S. Circuit for (all) District(s) of Pennsylvania Rhode Island U.S. Circuit for the District of Rhode Island South Carolina U.S. Circuit for the District of South Carolina Tennessee U.S. Circuit for (all) District(s) of Tennessee Texas U.S. Circuit for (all) District(s) of Texas Vermont U.S. Circuit for the District of Vermont Virginia U.S. Circuit for (all) District(s) of Virginia West Virginia U.S. Circuit for (all) District(s) of West Virginia Wisconsin U.S. Circuit for (all) District(s) of Wisconsin Wyoming U.S. Circuit for the District of Wyoming Circuit Court of the District of Columbia Nebraska U.S. Circuit for the District of Nebraska Colorado U.S. Circuit for the District of Colorado Washington U.S. Circuit for (all) District(s) of Washington Idaho U.S. Circuit Court for (all) District(s) of Idaho Montana U.S. Circuit Court for (all) District(s) of Montana Utah U.S. Circuit Court for (all) District(s) of Utah South Dakota U.S. Circuit Court for (all) District(s) of South Dakota North Dakota U.S. Circuit Court for (all) District(s) of North Dakota Oklahoma U.S. Circuit Court for (all) District(s) of Oklahoma Court of Private Land Claims