508 N.Y.S.2d at 24-25 (a money "judgment may be granted . . . where the grantee has disposed of the wrongfully conveyed property or depreciated it"). Defendants implicitly concede that if Bessie is liable for the joint tax assessments then Theodore is liable for the decrease in value of the E. 66th Street property resulting from the imposition of the $ 200,000 mortgage. Theodore is therefore liable for any depreciation in the value of the property attributable to the $ 200,000 mortgage.
The government further claims a lien on the appreciation in Theodore's Remsen coop attributable to the $ 200,000 used for improvements. It has not shown either that the E. 66th Street property was conveyed with the purpose of allowing Theodore to take out a mortgage for improvements on a coop (that he did not then own) or that Theodore knowingly participated in the fraud. The government has therefore failed to show it is entitled to summary judgment as to the appreciation on the Remsen coop attributable to the expenditure of the $ 200,000.
D. $ 45.000 down payment on Remsen coop
The government also seeks to hold Theodore liable for the $ 45,000 check he received from Bessie and used as a down payment for the Remsen coop and also to subject the equity in the coop attributable to such $ 45,000 to its tax liens for Irving's tax debts.
As noted above, the $ 45,000 check was signed by Bessie Bock on an account under that name. The government's handwriting expert says that the signature belongs to Bessie Bushlow.
The government argues that since Bessie had no income of her own, the money must have come from Irving. The government's lien on Irving's property did not attach until the taxes were assessed, 26 U.S.C. § 6321. See United States v. General Motors Corp., 929 F.2d 249 (6th Cir. 1991) (tax liens cannot attach to previously assigned property). The earliest dated assessment mentioned in the complaint is December 5, 1983 for taxes owed for 1982. But the government's evidence shows that the account from which the $ 45,000 was drawn contained a balance of $ 43,000 as of November 30, 1983.
The government argues in a footnote that the transfer from Irving to Theodore of the $ 45,000 was fraudulent but does not allege any fraud on the part of Bessie or provide further evidence of when or if the transfer from Irving to Bessie occurred.
Questions of fact therefore exist as to whether, if Bessie received the $ 45,000 from Irving, that transfer occurred before the government's lien attached or was fraudulent, or whether the transfer from Bessie to Theodore was fraudulent.
Since there are such issues of fact, summary judgment is not appropriate as to whether the government can undo Bessie's transfer to Theodore and whether it is entitled to the appreciation on Theodore's coop attributable to the $ 45,000.
E. Irving's life insurance policy
Finally defendants have counterclaimed against the government for the levy of $ 175,000 in life insurance proceeds from Irving's policy designating Bessie as beneficiary, and the government seeks summary judgment dismissing that counterclaim.
The government says that it has levied these funds to satisfy the tax debts owed by Irving individually, not those jointly owed by Bessie and Irving.
It is not disputed that Irving made payments on the insurance policy in 1987, after all tax assessments and thus after a federal tax lien attached to all of his property. 26 U.S.C. § 6321. State law determines the nature of the property to which the lien attached. United States v. Bess, 357 U.S. 51, 78 S. Ct. 1054, 2 L. Ed. 2d 1135 (1958). In Bess the Court found that under New Jersey law the taxpayer's interest in his life insurance policy while alive was limited to the cash surrender value, and that the IRS lien therefore attached only to that amount. In the absence of a lien the government could collect on life insurance policies only to the extent that other creditors may do so under state law. Id. 357 U.S. at 53, 78 S. Ct. at 1056 (citing Commissioner v. Stern, 357 U.S. 39, 78 S. Ct. 1047, 2 L. Ed. 2d 1126 (1958)).
The government may therefore collect on its liens for Irving's tax liabilities on any interest that he had in the policy during his lifetime. Because Irving's interest in the policy was limited to the cash surrender value at his death, which the record shows was $ 2520.82, the lien attached to that amount. United States v. Behrens, 230 F.2d 504 (2d Cir.) (absent fraud government may collect from transferee based on tax lien), cert. denied, 351 U.S. 919, 76 S. Ct. 709, 100 L. Ed. 1451 (1956).
Under New York Law a creditor may collect from life insurance proceeds only "the amount of premiums or other consideration paid with actual intent to defraud creditors as provided in [N.Y. Debt. & Cred. Law §§ 270 et seq.] together with interest on such amount." N.Y. Ins. Law § 3212. Absent actual fraud life insurance proceeds are exempt from collection, and proof of constructive fraud is insufficient for a creditor to overcome the exemption. Hubbard v. Millard, 156 A.D.2d 233, 235, 548 N.Y.S.2d 495, 497 (1st Dep't 1989).
Although it may do so at trial, the government has failed to show on this motion for summary judgment that Irving actually intended to defraud the government when he paid the premiums on his life insurance policy.
Assuming that the government demonstrates actual fraud, the court determines that only the premiums and not the actual proceeds paid on the policy are subject to collection. Hubbard, 156 A.D.2d at 235, 548 N.Y.S.2d at 497. See also Bess, 357 U.S. at 56-59, 78 S. Ct. at 1058-59 (IRS lien limited to cash surrender value of policy). The government's exhibits show that the premiums paid by Irving amounted to $ 15,884.63.
The government has failed to justify an entitlement to the entire proceeds of the insurance policy based on Irving's tax liabilities. The government cites United States v. Behrens, 130 F. Supp. 93 (E.D.N.Y. 1955), aff'd, 230 F.2d 504 (2d Cir. 1956), in support of its position but it misstates the holding of that case. The court in Behrens addressed only "whether a Government lien . . . for taxes assessed against a decedent attaches to the cash surrender value of life insurance policies, taken out by" the taxpayer (emphasis added).
The government has not addressed any right it has to levy on the $ 175,000 based on its liens on Bessie's property for her tax liabilities. See Bess, 357 U.S. at 57-57, 78 S. Ct. at 1058 (once it is determined under state law that the decedent had an interest "state law is inoperative to prevent the attachment of liens created by federal statutes in favor of the United States"); Glass City Bank v. United States, 326 U.S. 265, 66 S. Ct. 108, 90 L. Ed. 56 (1945) (tax liens attach to property acquired any time before liens expire).
Proceedings before the magistrate judge show that defendants' compliance with discovery has been less than adequate. The government asks this court to order an accounting of Bessie and Theodore's assets. This court refers the case to Magistrate Judge Ross for further pretrial discovery. Should defendants fail to comply, the magistrate judge should consider appropriate sanctions.
In summary, the court holds that (a) defendant Bessie Bushlow is liable for taxes owed on tax returns filed jointly with her husband for 1973 and 1974; (b) the 1977 transfer of the E. 66th property was constructively fraudulent and may be set aside; (c) Theodore is liable for the depreciation in the value of the E. 66th property attributable to the $ 200,000 mortgage; (d) the IRS's right to collect on the proceeds from Irving's life insurance policy based on his tax liabilities is limited to the amount Irving paid in premiums.
The government may have partial summary judgment to the extent above indicated and its motion for summary judgment is otherwise denied. Defendants' cross-motion for summary judgment is denied except to the extent indicated.
The case is referred to Magistrate Judge Ross for further discovery.
Dated: Brooklyn, New York
September 8, 1993
Eugene H. Nickerson, U.S.D.J.
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