Before CHASE, Chief Judge, and HINCKS and HARLAN, Circuit Judges.
This petition for review of a Tax Court decision, 18 T.C. 874, raises the question whether the receipt by named beneficiaries (the petitioners herein) of the proceeds of certain life insurance policies subjected them to liability enforceable against them as transferees under I.R.C. § 311, 26 U.S.C.A. § 311.
The facts of the case are as follows. Louis Halle of New York City, hereinafter referred to as the decedent, on and before January 20, 1930, took out four policies of life insurance upon his own life all of which were in force at the time of his death on January 4, 1949. The face amount of the policies was, in the aggregate, $42,000; at the time of the decedent's death on January 4, 1949, the policies had, in the aggregate, a cash surrender value of $3,109.80. In effecting the policies the decedent named his wife as the beneficiary thereof, but reserved the right at all times to change the respective beneficiaries thereof. The reserved right to change the beneficiary was subsequently exercised only by substituting his son and daughter as beneficiaries as to part of the insurance effected. At his death, the wife and these children were under designation as the beneficiaries of all the policies, none of which had ever been made payable to the decedent or to his estate. At death, the decedent was grossly insolvent: his assets were of negligible value and he was subject to a tax liability of $401,507.56 for federal income taxes for the years 1929 to 1938, inclusive, plus subsequently accrued interest and penalties. There was no evidence and no finding of insolvency as of any date prior to the decedent's death: indeed, as to the years prior to 1939 the Tax Court expressly found that the Commissioner had failed to prove insolvency. And there was no evidence or finding that the decedent took out or maintained the policies with intent to hinder, delay or defraud his creditors, or that the premiums thereon were paid by the decedent rather than by his beneficiaries. Upon the decedent's death the face amounts of the policies were paid to the beneficiaries designated therein, the petitioners before us, who then and at all times relevant were citizens of New York.
The Tax Court sustained the Commissioner in assessing against the petitioners, to the extent of the entire proceeds of the policies which they had received on the decedent's death, the decedent's income taxes for the years 1929 to 1938 and subsequently accrued interest and penalties thereon. The mere facts that the petitioners received the proceeds of the policies "upon the death" of the decedent, who died insolvent as above stated and who prior thereto "had a right to change the beneficiaries under the policies," were held by the Tax Court to "contain the elements essential to transferee liability as provided for under section 311 of the Code." 18 T.C. 874, 881.
In Phillips v. Commissioner, 283 U.S. 589, 51 S. Ct. 608, 610, 75 L.Ed 1289, it was held that the statutory provision, which is now Section 311 of the Internal Revenue Code, "provides the United States with a new remedy for enforcing the existing 'liability, at law or in equity.' The quoted words were employed in the statute to describe the kind of liability to which the new remedy is to be applied and to define the extent of such liability." It is thus authoritatively established that the statute created no substantive rights or liabilities: the only liabilities to be enforced thereunder are those existing at law or in equity when the enforcement proceeding is begun.The statute is merely an extension, as against a transferee, of the summary collection procedures theretofore available against the transferor-taxpayer.
In determining the validity of a collection sought under Section 311, it is necessary to remember that two questions are involved, viz., (1) is the respondent against whom the collection is attempted a "transferee" within the meaning of Section 311(a) (1) and Section 311(f); and (2) is the respondent, if a transferee, under a "liability, at law or in equity," for the debts - including unpaid income taxes - due and owing from his transferor?We suggest that this feature of the Section, which is so obvious from its language, is important to bear in mind. For we have noted more than one judicial opinion which discusses the question of a transferee's liability as though only one question was involved, instead of two, with the result that necessary distinctions as to the applicable law became blurred.
We address ourselves to the first question. Section 311*fn1 is captioned "Transferred Assets" and provides a summary procedure for the enforcement of "the liability, at law or in equity, of a transferee of property of a taxpayer, * * *."*fn2 Thus by its reference to the "assets" and to the "property of a taxpayer" the section is directed against those to whom assets or property which belonged to the decedent and which, but for transfer, could have been distrained in his hands, have been transferred to another. Perhaps without the additional definition contained in Section 311(f) "transferees" might have been limited to those who received property of a taxpayer directly from him. But by Paragraph (f) the definition of a transferee was broadened so that it "includes heir, legatee, devisee, and distributee", thus clearly importing an intent that the new remedy provided by the Section extends to assets which once belonged to a taxpayer and passed on his death either directly or indirectly through his estate to one included in the broadened definition. But in every case the remedy is limited to "property of a taxpayer"; that is to say, to property belonging to him in his lifetime.*fn3
In determining whether there has been such a transfer as will bring assets once belonging to a taxpayer within the reach of the remedy we must look to the federal tax law which created and defined the remedy. If under that law an asset is deemed to belong, or to have belonged, to a taxpayer in his lifetime, its transfer leaves it still within the possible reach of the Government for the summary collection of federal income taxes - as we held in Commissioner of Internal Revenue v. Western Union Tel. Co., 2 Cir., 141 F.2d 774.Otherwise, as to property which never belonged to the taxpayer, and hence did not become subject-matter of a transfer within the purview of Section 311.
Were the beneficiaries of the policies here involved "transferees" with respect to the proceeds of the policies ? We think not. In no sense were the proceeds ever property of the decedent-taxpayer. Under the policy contracts the decedent never had a right to receive the proceeds. And since at his death the policies were not payable to his estate, the proceeds of the polici beneficiaries did not take as legatees or distributees of his estate. The opinion below contains no discussion which explains or supports its holding that the proceeds of the policies had ever constituted property of the decedent. Its holding that the petitioners are liable as transferees is tersely stated to rest on its own earlier decision in Christine D. Muller, 10 T.C. 678, and the cases of Pearlman v. Commissioner, 3 Cir., 153 F.2d 560, and Kieferdorf v. Commissioner, 9 Cir., 142 F.2d 723, certiorari denied 323 U.S. 733, 65 S. Ct. 69, 89 L. Ed. 588, cited therein.
In the Muller case it appeared that a taxpayer had died leaving unpaid income taxes. At his death he was the insured under several life insurance policies in which his wife was named as beneficiary: as such, she had received the proceeds of the policies. The court said: "The petitioner gave no consideration for the assets of the decedent which she received." That was of course so. But because "the distribution of these assets to her rendered the estate insolvent" the widow was held to be liable as a transferee of the assets distributed to her. With this, we cannot agree. What the widow received had never been property of the decedent-taxpayer. The proceeds which she received was property of the insurance companies which came to her as a third party beneficiary, - not as a "distributee" or "transferee" within the purview of Section 311.
Nor did the Pearlman decision in 153 F.2d 560, necessarily support the Muller decision, as the Tax Court seems to have thought.For the Pearlman opinion, if read against the facts of the case as found in the underlying decision of the Tax Court, 4 T.C. 34, went no further than to hold that the beneficiaries of the policies there under discussion were transferees as to the cash surrender value of the policies ."*fn4
The Kieferdorf case, supra, which the Tax Court also cited in its Muller opinion, was one in which the insurance policies on the life of an insolvent decedent taxpayer were upon his death payable not, as here, to his widow and children, but to his estate . Of course the proceeds of such policies upon the death of the decedent vested in his estate and we fully agree that in that situation that the order of the Probate Judge transferring the proceeds to the widow as exempt property under California law operated as a transfer of assets of the estate with the result that the widow became a "distributee" and hence a transferee under Section 311. But that holding does not control the situation existing either in the Muller case or the instant case in which the insurance proceeds never became an asset of decedent's estate.
The appellee cites further Neely v. Commissioner (1949 P-H T.C. Memorandum Decisions, par. 49,188), and Sullivan v. Commissioner (1950 P-H T.C. Memorandum Decisions, par. 50,000). The Neely case follows Muller without discussion. The Sullivan case calls particular attention to Regulations 111, Sec. 29-311-1.*fn5 The Regulation invoked follows verbatim the corresponding paragraph from Treasury Regulations 94 for the Act of 1936 which was sustained in the Kieferdorf case, supra. We agree with Kieferdorf [142 F.2d 725] that this regulation provided a "very broad interpretation" of the word "distributee" as used in Section 311. But it does not follow that even as interpreted the word is broad enough to include one as a transferee who received an asset which never belonged to the taxpayer. Without citation of authority or exposition of principle, the Tax Court assumed that the proceeds had been an asset of the decedent. Only the Tax Court assumed that the proceeds had been an asset of the decedent. Only the Tax Court, not Kieferdorf, pushed the interpretation to such lengths. Kieferdorf called attention to I.R.C. § 3797(b) which provides: "The terms 'includes' and 'including' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined." And so, ...