This is a civil action brought by the Government to recover, in
equity, from the beneficiary of life insurance policies the amount
of federal income taxes owed by the insured at the time of his
death and for some of which liens had attached to all his property
under § 3670 of the Internal Revenue Code of 1939 before his death.
The insured, a resident of New Jersey, had retained the right to
change the beneficiaries of the policies and, except as to one
policy, the right to draw down or borrow against the cash surrender
values and to assign the policies. He had paid all the premiums,
and none was paid in fraud of his creditors. Some of his federal
income tax liabilities were paid out of the assets of his estate,
but others remained unpaid when his estate was adjudged
because of the tax liens which had attached to
all of the insured's property before his death, the beneficiary is
liable to the extent of the cash surrender values of his policies.
Pp. 357 U. S.
1. Had there been no lien, the beneficiary would not be liable,
because, under New Jersey law, the beneficiary of a life insurance
policy is entitled to its benefits against all creditors except to
the extent of the amount of any premiums paid in fraud of
creditors. Commissioner v. Stern, ante,
p. 357 U. S. 39
357 U. S.
2. Because, prior to the death of the insured, liens had
attached under § 3670 to all of his assets, including the cash
surrender values of his life insurance policies, the beneficiary is
liable to the extent of such cash surrender values. Pp.
357 U. S.
(a) Under New Jersey law, the insured did not possess, prior to
his death, "property" or "rights to property," within the meaning
of §3670, in the proceeds of his life insurance policies; but he
did possess such "property" or "rights to property" in their cash
surrender values; and the federal tax lien attached under § 3670
even if, under state law, his property right represented by the
cash surrender values was not subject to creditors' liens. Pp.
357 U. S.
Page 357 U. S. 52
(b) For the purposes of § 3670, there was a transfer of property
from the insured to the beneficiary, and the lien which had
attached to the cash surrender values before his death followed
that property into the hands of the beneficiary. Pp. 357 U. S.
243 F.2d 675 affirmed.
MR. JUSTICE BRENNAN delivered the opinion of the Court.
The United States filed this civil action in the District Court
for the District of New Jersey to recover, in equity, from the
beneficiary of life insurance policies the amount of federal income
taxes owed by the insured at the time of his death.
Herman Bess died a resident of Monmouth County, New Jersey, on
June 29, 1950. His wife, Molly G. Bess, was the beneficiary of
eight insurance policies on his life from which she received
$63,576.95 in proceeds. The cash surrender value of these policies
at his death was $3,362.53. Seven of the policies were issued to
Mr. Bess from 1934 to 1937, and the eighth, a group policy, in
1950. He retained the right until death to change the beneficiary,
to draw down or borrow against the cash surrender value, and to
assign the policies, except that, under the group insurance policy,
he retained only the right to change the beneficiary. Mr. Bess paid
all premiums, and it is conceded that none was paid in fraud of his
The federal income taxes were owing for the several years from
1945 to 1949. The assets of Mr. Bess' estate were applied to
payment of the amounts owing for 1948 and 1949, but a total of
$8,874.57 remained owing for 1945, 1946, and 1947 when the estate
was adjudged insolvent
Page 357 U. S. 53
by the Monmouth County Court in 1952. The amounts owing were
$4,159.31 for 1945, $3,789.32 for 1946, and $925.94 for 1947.
The District Court held Mrs. Bess liable for the total taxes
owing of $8,874.57. 134 F. Supp. 467. The Court of Appeals for the
Third Circuit reduced the judgment to the amount of the total cash
surrender value of the policies of $3,362.53. 243 F.2d 675. We
granted certiorari on the Government's petition and Mrs. Bess'
cross-petition, 355 U.S. 861, and set the case for argument with
Commissioner v. Stern, ante,
p. 357 U. S. 39
Government seeks in No. 395 the reinstatement of the District
Court's judgment in the full amount of the taxes owing. Mrs. Bess
seeks in No. 410 the reversal of the Court of Appeals judgment in
the amount of the cash surrender value.
As in Commissioner v. Stern,
the Government argues that
Mrs. Bess, as beneficiary of her husband's life insurance policies,
is liable for his unpaid federal income taxes. [Footnote 1
] We held today in the Stern
case that recovery of unpaid federal income taxes from a
beneficiary of insurance, in the absence of a lien, can be
sustained only to the extent that state law imposes such liability
in favor of other creditors of the insured. Under New Jersey law,
the beneficiary of a policy of life insurance is entitled to its
proceeds against all creditors except to the extent of the amount
of any premiums for the insurance paid in fraud of creditors.
N.J.Stat.Ann., 1939, § 17:34-29;
Page 357 U. S. 54
Slurszberg v. Prudential Ins. Co.,
15 N.J.Misc. 423,
192 A. 451; Middlesex County Welfare Board v. Motolinsky,
134 N.J.Eq. 323, 35 A.2d 463. If, in the instant case, no lien were
involved, our holding in Commissioner v. Stern
require an affirmance in No. 395 and a reversal in No. 410, since
it is conceded that Mr. Bess did not pay any premiums in fraud of
However, the Government contends that it is also seeking in this
action to enforce, as to the 1945 and 1946 deficiencies, liens
perfected under § 3670 of the Internal Revenue Code of 1939 against
the property of Mr. Bess in his lifetime. Section 3670 provides
"If any person liable to pay any tax neglects or refuses to pay
the same after demand, the amount . . . shall be a lien in favor of
the United States upon all property and rights to property, whether
real or personal, belonging to such person."
53 Stat. 448. On July 30, 1948, and again on August 9, 1948,
before Mr. Bess died, notice and demand were made upon him for
payment of the deficiencies formally consented to by him as owing
for 1945 and 1946. He made periodic payments on the amount owing
for 1945, reducing that amount from $11,514 to $4,713.59 before his
death. This balance was further reduced to $4,159.31 by a payment
of $554.28 from his estate pursuant to an order of the Monmouth
County Court. However, no payment on account of the $3,789.32 owing
for 1946 was made either in his lifetime or after his death.
As to the tax lien theory, Mrs. Bess contends
that the Government did not assert this basis for recovery before
the District Court, and therefore should not be heard to assert
that theory in this Court. But the essential facts pertinent to a
decision on the merits of the tax lien theory were stipulated in
the District Court. Moreover, the issue was fully briefed and
argued both in the
Page 357 U. S. 55
Court of Appeals and in this Court. We therefore see no basis
for any inference of prejudice in the circumstances, and
accordingly proceed to a determination of the question.
Mrs. Bess argues that, in any event, no lien
attached to any property of Mr. Bess, since a lien does not attach
under § 3670 unless and until the delinquent taxpayer "neglects or
refuses to pay the same after demand." She urges that the facts
stipulated as to the payments on account of 1945 taxes made by Mr.
Bess in his lifetime prove that he did not neglect or refuse to pay
taxes after demand. Since, in the view we take of this case, the
liability of Mrs. Bess is limited to the cash surrender value of
$3,362.53, it suffices that whatever may be the case as to the 1945
taxes, the requisite neglect or refusal was plainly established as
to the 1946 delinquency of $3,789.32, for it is admitted that Mr.
Bess neither paid nor attempted to pay anything on account of those
We must now decide whether Mr. Bess possessed in
his lifetime, within the meaning of § 3670, any "property" or
"rights to property" in the insurance policies to which the
perfected lien for the 1946 taxes might attach. Since § 3670
creates no property rights, but merely attaches consequences,
federally defined, to rights created under state law, Fidelity
& Deposit Co. v. New York City Housing Authority,
142, 144, we must look first to Mr. Bess' right in the policies as
defined by state law.
(a) It is not questioned that the rights of the insured are
measured by the policy contract as enforced by New Jersey law.
Manifestly, the insured could not enjoy the possession of the
proceeds in his lifetime. His right to change the beneficiary, even
to designate his estate to receive the proceeds, gives him no right
to receive the proceeds while he lives. Cf. Rowen v.
215 F.2d 641, 644. It would be anomalous to view
Page 357 U. S. 56
"property" subject to lien proceeds never within the insured's
reach to enjoy, and which are reducible to possession by another
only upon the insured's death when his right to change the
beneficiary comes to an end. We therefore do not believe that Mr.
Bess had "property" or "rights to property" in the proceeds, within
the meaning of § 3670, to which the federal tax lien might attach.
Cannon v. Nicholas,
80 F.2d 934; see United States v.
175 F.2d 196. This conclusion is in harmony with the
decision in Everett v. Judson, 228 U.
, that the cash surrender value of a policy on the
life of a bankrupt is the extent of the property which is vested in
the trustee under § 70a of the Bankruptcy Act.
(b) The cash surrender value of the policy, however, stands on a
different footing. The insured has the right under the policy
contract to compel the insurer to pay him this sum upon surrender
of the policy. This right may be borrowed against, assigned, or
pledged. Slurszberg v. Prudential Ins. Co., supra.
"possessed just prior to his death, a chose in action in the
amount stated (i.e.,
the cash surrender value) which he
could have collected from the insurance companies in accordance
with the terms of the policies."
243 F.2d 675, 678. It is therefore clear that Mr. Bess had
"property" or "rights to property," within the meaning of § 3670,
in the cash surrender value. United States v. Hoper,
F.2d 468; Knox v. Great West Life Assurance Co., 6 Cir., 212
F.2d 784; United States v. Royce Shoe Co., 137 F.
; Smith v. Donnelly, 65 F.
; United States v. Aetna Life Ins.
Co., 46 F. Supp.
But it is contended that, under state law, the insured's
property right represented by the cash surrender value is not
subject to creditors' liens, whether asserted by a private
creditor, Slurszberg v. Prudential Ins. Co., supra,
a state agency, Middlesex County Welfare Board v. Motolinsky,
However, once it has been determined
Page 357 U. S. 57
that state law creates sufficient interests in the insured to
satisfy the requirements of § 3670, state law is inoperative to
prevent the attachment of liens created by federal statutes in
favor of the United States. Such state laws "are not laws for the
United States . . . unless they have been made such by Congress
itself." Fink v. O'Neil, 106 U. S. 272
106 U. S. 276
cf. Commissioner v. Tower, 327 U.
. [Footnote 2
The provisions of the Internal Revenue Act creating liens upon
taxpayer's property for unpaid income taxes, unlike § 6 of the
Bankruptcy Act, 30 Stat. 548, as amended, 11 U.S.C. § 24, do not
specifically provide for recognition of such state laws. The fact
that, in § 3691, Congress provided specific exemptions from
distraint is evidence that Congress did not intend to recognize
further exemptions which would prevent attachment of liens under §
3670. Knox v. Great West Life Assurance Co., supra; United
States v. Heffron,
158 F.2d 657; Shambaugh v.
132 F.2d 345; Smith v. Donnelly, supra.
The transfer of property subsequent to the
attachment of the lien does not affect the lien, for "it is of the
very nature and essence of a lien that, no matter into whose hands
the property goes, it passes cum onere.
. . ."
13 Pet. 464, 38 U. S. 483
see Michigan v. United States, 317 U.
, 317 U. S. 340
The question therefore is whether the cash surrender values with
the lien attached were transferred to Mrs. Bess as beneficiary when
Mr. Bess died.
Page 357 U. S. 58
It is argued that the right to receive the cash surrender value
expires with the death of the insured, and that, thus, no property
of his passes to the beneficiary. The contention is that the
beneficiary receives the proceeds of the policies as performance by
the insurance company of a separate promise to pay upon the death
of the insured. It is said to follow that
"there is no logical escape from holding that the 'surrender
value' comes to an end on the insured's death, if we dispose of the
controversy in accordance with the ordinary rules governing
United States v. Behrens,
230 F.2d 504, 506-507. This
is to say that the cash surrender value is no part of the proceeds,
but represents merely the right of the insured to cancel the
policy, and thereupon receive back from the insurer the amount
accumulated from premiums paid in the past and held to cover the
risk to be incurred in the future. [Footnote 3
] Therefore it is said that the property
represented by the cash surrender value disappears on the
Page 357 U. S. 59
insured's death, and no lien can survive in any part of the
But the courts have long recognized that the surplus of the paid
premiums accumulated to make up the cash surrender value should be
treated for some purposes as though in fact a "fund" held by the
insurer for the benefit of the insured. Judge Addison Brown stated
in In re McKinney,
15 F. 535, 537:
"Though this excess of premiums paid is legally the sole
property of the company, still, in practical effect, though not in
law, it is moneys of the assured deposited with the company in
advance to make up the deficiency in later premiums. . . . So long
as the policy remains in force, the company has not, practically,
any beneficial interest in it except as its custodian, with the
obligation to maintain it unimpaired and suitably invested for the
benefit of the insured. This is the practical, though not the
legal, relation of the company to this fund."
This view was approved in Hiscock v. Mertens,
205 U. S. 202
205 U. S. 211
and Burlingham v. Crouse, 228 U.
, 228 U. S. 469
See also United States v. Behrens, supra,
230 F.2d at 507.
Thus, in economic reality, the insurer pays the beneficiary the
insured's "fund," plus another amount sufficient to perform the
insurer's promise to pay the proceeds on the insured's death.
Rowen v. Commissioner, supra,
215 F.2d at 647. Therefore
we hold that, for purposes of § 3670, there was a transfer of
property from the insured to Mrs. Bess, and that the lien attached
to the property before his death followed the property into her
THE CHIEF JUSTICE, MR. JUSTICE BLACK, and MR. JUSTICE WHITTAKER
concur in the opinion of the Court insofar as it holds that the
United States had a valid lien
Page 357 U. S. 60
against the cash surrender value of the insurance policies
involved here which was enforceable against the beneficiary, Mrs.
Bess. They would also affirm the judgment of the Court of Appeals
on the basis of the dissenting opinion of MR. JUSTICE BLACK in
Commissioner v. Stern, ante,
p. 357 U. S.
*Together with No. 410, Bess v. United States,
certiorari to the same Court.
The proceeding against Mrs. Bess was not by the summary method
authorized by § 311 of the Internal Revenue Code of 1939, but by
the alternative method of a proceeding in equity in the District
Court, Leighton v. United States, 289 U.
. The courts below erred in applying § 311 in this
case. As we held in Commissioner v. Stern, ante,
357 U. S. 39
, § 311
is a purely procedural statute, and has no bearing upon the
liability of Mrs. Bess.
Once a federal tax lien attaches to the insured's interest, of
course, the Government, in a proper action joining the appropriate
parties, can enforce the lien in the insured's lifetime, and
thereby recover the cash surrender value. Knox v. Great West
Life Assurance Co.,
212 F.2d 784; Kyle v. McGuirk,
F.2d 212; Smith v. Donnelly, 65 F.
. See also Cannon v. Nicholas,
80 F.2d 934;
United States v. Royce Shoe Co., 137 F.
. Compare United States v. Metropolitan Life Ins.
130 F.2d 149; United States v.
Gilmore, 147 F.
"In the level premium system of life insurance, the net level
premium must be higher than the monetary value of the annual risk
during the early police years, and the excess must be accumulated
with interest to provide funds for payment of claims after the age
is reached where the value of the annual risk exceeds the net level
premium in the annual premium being paid. It is the necessary
accumulation of these funds that makes possible nonforfeiture
benefits. On surrender of a policy, the insurer, being relieved of
the obligation to provide death benefits during future years where
the annual value of the risk exceeds the annual net level premium,
no longer needs to retain the surrendering policyholder's
contributions to the funds previously accumulated for such purpose.
Since the surrendering policyholder made a contribution to these
funds during the period from date of issue to date of surrender, he
entitled to a return equal to the pro
of the funds actually accumulated from premiums
paid by his group of policyholders
and no longer needed to
assure solvency of the company for the protection of continuing
Krueger and Waggoner, The Life Insurance Policy Contract (1953
ed.) 194. (Footnote omitted; emphasis added.)
MR. JUSTICE HARLAN, whom MR. JUSTICE BURTON joins, concurring in
part and dissenting in part.
Insofar as the Government's action here rests on a theory of
liability in equity for debts of another person, I agree with the
Court that Mrs. Bess' liability is to be determined by reference to
state law, and that, consequently, the Government cannot prevail on
this basis, since state law here imposes no liability. I think,
however, that the Government fares no better by asserting a right
to the cash surrender values of the policies by virtue of the
statutory lien created by § 3670 of the Internal Revenue Code of
In my view, the correct analysis of the surrender value issue
has been given in a Second Circuit case, United States v.
230 F.2d 504, which also involved the enforcement of
federal tax liens asserted under § 3670. There, Judge Learned Hand,
although he felt constrained to apply the principles of an earlier
Second Circuit case, Rowen v. Commissioner,
* 215 F.2d 641,
644, and thereby held
Page 357 U. S. 61
for the Government, observed in speaking for himself and Judge
"Considered strictly upon the basis of the legal rights created,
the lien on the 'surrender values' came to an end with Behrens'
death. The obligation of an insurer in a policy of life insurance
is made up of a number of promises, of which one is to pay to the
beneficiary the amount of the insurance -- the 'proceeds' -- and
another is to pay the 'surrender value' to the insured upon his
demand. The performances of these promises are not only separate
but inconsistent with each other: the payment of the 'surrender
value' cancels the promise to pay the 'proceeds,' and the promise
to pay the 'proceeds' assumes that the insured has not demanded and
received the 'surrender value.' The premiums, when paid, become the
property of the insurer, and the insured has no interest in them,
although it is true that, in New York, as in most states, a life
insurance company's finances are regulated by statute in much
detail in order to protect policyholders. . . . It follows from
what we have said that there is no logical escape from holding that
the 'surrender value' comes to an end on the insured's death, if we
dispose of the controversy in accordance with the ordinary rules
230 F.2d at 506-507.
Agreeing with this reasoning, I believe that, although the cash
surrender values of life insurance policies were here properly
considered property of a taxpayer to which federal tax liens
attached during the taxpayer's life, these values cannot be deemed
to exist after the taxpayer's death. It follows that the lien
terminated at the time of death. The "fund" theory of surrender
values referred to in the cases cited in the Court's opinion has,
in my view, no application when it comes to determining the
Page 357 U. S. 62
specific reach of a lien under § 3670. Accordingly, I would
affirm the judgment of the Court of Appeals insofar as it denied
the Government relief with respect to the proceeds of these
policies above their surrender values, and reverse it insofar as it
held the petitioner-respondent Bess liable to the extent of the
* In the Rowen
case, when a member of the Court of
Appeals for the Second Circuit, I subscribed to a holding that one
in the position of the petitioner in Commissioner v. Stern,
p. 357 U. S. 39
should be deemed a ". . . transferee of property of a taxpayer . .
. " within the meaning of § 311(a) of the Internal Revenue Code of
1939 insofar as cash surrender values of life insurance policies
were concerned. Further reflection, however, has led me to question
the analysis in the Rowen
decision on this score. In any
event, I do not view that decision, which was concerned with the
interpretation to be accorded § 311, as necessarily having
application to a case involving a federal tax lien.