Commissioner v. Stern

PETITIONER:Commissioner
RESPONDENT:Stern
LOCATION:Wolverine Tube, Inc.

DOCKET NO.: 311
DECIDED BY: Warren Court (1957-1958)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 357 US 39 (1958)
ARGUED: Apr 07, 1958
DECIDED: Jun 09, 1958

Facts of the case

Question

  • Oral Argument – April 07, 1958 (Part 1)
  • Audio Transcription for Oral Argument – April 07, 1958 (Part 1) in Commissioner v. Stern

    Audio Transcription for Oral Argument – April 07, 1958 (Part 2) in Commissioner v. Stern

    Earl Warren:

    Mr. Openheim, you may proceed.

    Walter E. Barton:

    Mr. Barton.

    Mr. Openheim is in the next case, Your Honor.

    Earl Warren:

    Oh, pardon me.

    Mr. Barton, yes, you may proceed.

    Walter E. Barton:

    Before — Mr. Justice, may it please the Court.

    Before attempting to argue the — to answer the argument of the counsel on the other side, I’d like to call the attention of the Court to our contention that the questions argued by petitioner are not properly before this Court.

    The only question in the Tax Court was whether the petitioner or the respondent rather, was a transferee of the assets of the estate of Milton J. Stern deceased.

    Now, that appears on page 4 of the record which is in the deficiency letter sent to Mrs. Stern, the respondent.

    And then, in the pleadings, in the petition, the answer and the reply the reference is made 25 times I believe it is to the liability of the respondent as transferee of the estate of the decedent.

    And that is what the Tax Court decided.

    If Your Honors will turn to page 16 of the record, it is argued and decided that the petitioner is liable as transferee of the estate of Milton J. Stern, deceased.

    Now, the argument has been addressed to the proposition of whether she is a transferee of the decedent.

    Of course, if these proceeds had been paid to the estate and turned over by the executor to Mrs. Stern, we’ve never would have gone into the Tax Court because necessarily, she would have been a transferee there of assets of the estate.

    Another question which does not — was not contended for in the Tax Court and wasn’t raised there was the question with respect to the cash surrender values of the policies.

    The only question down below was whether or not she was liable for the proceeds of the insurance.

    So on those two issues, we contend that those questions are not properly before the Court.

    I don’t want to take too much time on that.

    I think that is —

    Could I ask you a question?

    Walter E. Barton:

    Yes, Your Honor.

    You mean that on the first aspect of the Government’s case, the Tax Court decided it under a mistake of time.

    Walter E. Barton:

    I don’t think I meant to say that, Your Honor.

    What I said was the question presented to the Tax Court was whether the petitioner was a transferee of the estate of the decedent.

    Never any question presented the Tax Court as to whether she was a transferee of the decedent himself, and of course, there is an immense difference between being a transferee of the decedent and a transferee of the estate of the decedent.

    Yes but the insurance policies were never part of the estate.

    Walter E. Barton:

    The — the insurance proceeds never were paid to the estate and as I said, if they had been and then had been paid over to this widow beneficiary, we never would even gone into the Tax Court.

    But surely, the Tax Court must do understood that the proceeds were payable to her under the policy.

    Walter E. Barton:

    The Tax Court did understand that I — I’m sure the Tax Court understood it but the only issue presented was whether she was a transferee of the estate and that’s what the Tax Court decided in the order.

    Well, isn’t that just a short or long way of saying that she was a transferee, but —

    Walter E. Barton:

    Well — I — that may be the views, Your Honors, but I don’t believe it is.

    I think if we have entirely different questions in the case as to whether it’s a transfer of property in the form of proceeds or cash surrender values from the decedent, then what we would have if the question were whether she was a transferee of the estate of the decedent.

    Hugo L. Black:

    Yes.

    Is there any difference between the transfer of the estate of the deceased, transfer of assets of the estate?

    Walter E. Barton:

    I beg your pardon.

    Hugo L. Black:

    What they said was the transfer of the assets — the transferee of assets (Inaudible).

    I presume they met by that if that’s the policy (Inaudible)

    Walter E. Barton:

    Well, if they had gone in the estates then no question would have ever risen, because necessarily she had been liable if the estate had gotten these assets and turned them over to her.

    Felix Frankfurter:

    Suggestion that should have gone.

    Walter E. Barton:

    I beg your pardon.

    Felix Frankfurter:

    The suggestion is that it should have gone in the estate.

    Walter E. Barton:

    Well, it should have gone to the estate under the way the policy was set up because the policy was payable to the — to the insured’s beneficiary, the widow.

    Hugo L. Black:

    Unless the Government’s right — it’s the Government’s right to trust fund.

    Walter E. Barton:

    Well, then —

    Hugo L. Black:

    They — they will transfer his asset, it should (Inaudible)

    Walter E. Barton:

    Well, of course the Government doesn’t even contend they were in his estate.

    They — they only argued that he ought to change the beneficiaries so it did go in his estate the way I understand the argument.

    Hugo L. Black:

    (Inaudible)

    Walter E. Barton:

    Well, the cash surrender values are a different matter of course that — the cash surrender values never either went into the estates, so we’d have the same question there.

    (Inaudible)

    Walter E. Barton:

    It could not levy on it after his death.

    (Inaudible)

    Walter E. Barton:

    It couldn’t levy on it after his death.

    Charles E. Whittaker:

    Suppose that a 90 days of levy and the one appearing on the record 4, is it?

    Walter E. Barton:

    I think I said 4.

    Yes, that’s the —

    Charles E. Whittaker:

    Let’s see.

    Page 4 —

    Walter E. Barton:

    Page 4 in the first paragraph, constituting your liability as transferee of assets to the estate of Milton J. Stern.

    Now, most — assuming the questions are probably before the Court, the Government’s argument principally is predicated on the theory that there’s the same kind of a transfer here as would be involved in the case of a estate tax.

    Walter E. Barton:

    If Your Honors care to turn to page 10 of our brief, we have set out there the sections of the estate tax law, which in our opinion clearly indicate that proceeds of insurance were not the property of the decedent.

    For instance, 811 provides that the gross estates shall include all the value of all property at the time of the decedent’s death.

    Now, in 811 (a), to the extent of the interest therein of the decedent at the time of his death.

    Now, that would be stocks or real estate or something he might own that would go to his heirs or to his executor.

    Now, when you get down to the next sections about life insurance, it doesn’t say anything about the interest of the decedent in the life insurance.

    It says to the extent of the amount receivable by all other beneficiaries as insurance showing that Congress in enacting the legislation never considered that the decedent had an — a property interest in the proceeds of life insurance.

    If that — if the Congress have so considered, it wouldn’t have been necessary to have incorporated these two sections about proceeds going to this executor or proceeds going to any other beneficiary.

    Now, Chief Justice Vinson, when he was on the Court of Appeals in the John Hancock Life Insurance case, wrote an opinion in which he pointed out the distinction I have quoted on page 11 of my brief.

    A paragraph of his opinion in which he shows that the statute has two lines he says.

    One is the interest of the decedent with respect to property which he makes the transfer.

    The other is insurance which goes to the beneficiary and he states that the statute proceeds to impose a lien on the estate property to the extent of the decedent’s interest at the time of transfer or to the extent of the beneficiary’s interest under the insurance contract.

    So it isn’t necessary and this — in the — it’s Chase National Bank case didn’t hold that there was a transfer of life insurance proceeds from the decedent to the beneficiary.

    In that case, the Court said, it was the termination of the power to control of the insured over the policy at the time of his death which rendered the proceeds includable in his gross estate.

    Not because he owns the proceeds and by imperative reasoning not because he own the cash surrender values but because at his death, the power to change a beneficiary terminated and shifted the economic benefit of that policy into the hands of the beneficiary.

    And that the Court said in the Chase National Bank case was the basis for the tax.

    Now, there are other cases where there are properties included in the gross estate which the decedent doesn’t own a property in at the time of his death.

    For instance, transfers in contemplation of death maybe made years before.

    Revocable transfers and interests in joint tenancies or tenancies by the entireties.

    They’re all segregated in the estate tax law, separate and apart from the one section that refers to property in which the decedent has an interest showing that all kinds of properties may be included in the gross estates including life insurance proceeds with respect to which the decedent didn’t own a property interest up to time of his death.

    Now, then the Eight and the Ninth Circuits in two different cases each which I have cited on page 12 of the brief have held that the fact that there is a transfer rendering property includable in the gross estate at the time of death has nothing to do with the transferee liability and in income tax case.

    And in fact, in that case, it was a tenancy by the entirety and joint tenancies and they said there wasn’t any property interest that went to the survivor which constituted property under Section 311 of the Internal Revenue Code.

    Now, the Government in its brief in a petition for certiorari admitted that they couldn’t get certain property and the joint names of the decedent and its widow that is some bonds and some real estate.

    Now, those properties were includable in the gross estate just same as insurance.

    So I don’t see how there can be any distinction between properties of that kind and life insurance.

    As a matter of fact, life insurance is — policy is a contract where the insured pays a premium in consideration for the payment of proceeds to his beneficiary.

    As soon as that policy is signed, the insurance company is liable for the full amount if the insured dies the next day which demonstrates, we think that when the insurance company pays the proceeds, the insurance company pays its own money and it doesn’t pay anything that belongs to the insured.

    Now, as Justice Harlan this morning pointed out all five Circuit Courts of Appeals which are passive on this question have held that there’s no transfer of proceeds and there’s been no Circuit Court of Appeals that’s held of the contrary.

    When you say proceeds, you mean death benefit.

    Walter E. Barton:

    Well, that’s the proceeds of insurance within the meaning of the transferee section of the income tax law, Section 311.

    Now, I like just to make one statement before proceeding a little further, I understood the counsel to say that the record showed that the insured paid the premiums up to the day of his death.

    Walter E. Barton:

    The record doesn’t show in any respect who paid the premiums or how long.

    It shows that these policies were taken out in getting about 1910 up to about 1935.

    And the widow, the respondent here was made beneficiary in 1919, after they married and she’s made beneficiary in the last policy in 1935.

    He died in 1939.

    There’s no change in beneficiary between 1949.

    There’s no — no change in beneficiary from the time these — from 1935 up to the day of his death.

    Now, these tax years are 1944 to 1947.

    The Court of Appeals below made the statement that there’s no evidence of insolvency before death.

    There’s no evidence that he took out these policies or maintained them to defraud, defeat the creditors.

    And I would say further there’s no evidence whatever in the case as to whether the insured paid any premium from these policies during the taxable years 1944 to 1947, or after that — after the date of his death.

    And as to all of that, the Government has a burden of proof under Section 1119 (a) because the Government has a burden of proving transferee liability and the burden is not on the taxpayer.

    Hugo L. Black:

    What was the cash surrender value on the day of his death?

    Walter E. Barton:

    Well, the cash surrender value, it’s been in the record.

    Let’s say there are — I think about $27,000.

    Hugo L. Black:

    What was the payment of (Inaudible).

    Walter E. Barton:

    I think there are about (Inaudible) $47,000.

    The cash surrender value is $27,000 and the proceeds are $47,000.

    Now, that’s on page 13 of the record.

    Felix Frankfurter:

    Now, is there any evidence in the record of 174 the tax (Inaudible) that he paid the premiums during the years when his estate is depleted?

    Walter E. Barton:

    There’s no evidence, Your Honor.

    Felix Frankfurter:

    Or why — or through the premiums, he pleaded as a estate or surrendered (Inaudible).

    Walter E. Barton:

    Your Honor, there is no evidence whatsoever.

    As I stated, there was a — this case went to the Tax Court on a stipulation principally and there was no evidence, no statement made in the stipulation as to who paid the premiums or how long the period.

    Felix Frankfurter:

    You mean for all we know, she might have paid them?

    Walter E. Barton:

    For all you know, she might have paid them or for all we know, he may have paid them all in a lump sum in the beginning as far as the evidence goes.

    Now, the Tax Court said in the opinion they assumed that he paid the premiums because we stipulated, he took out the policies but there’s no evidence, one way or the other as to who paid the premiums and I say the burden is on the Government under a case of this kind and the Government never produced any evidence with —

    Felix Frankfurter:

    Mr. Davis said that we may dispose of the case on the assumption of trying to put out the policy if he was not himself — on the same basis of the two — although the evidence in the record doesn’t disclose it.

    That he paid the premiums (Inaudible) the right of the policy —

    Walter E. Barton:

    Well, the Tax Court assumed that he paid the premiums.

    I don’t believe they said up to the date of his death.

    Felix Frankfurter:

    Well, the assumption that she might have paid them is not to be entertained.

    Walter E. Barton:

    Well, I don’t like to say, I don’t like to admit something that isn’t in the records, Your Honor, because —

    Felix Frankfurter:

    But if it’s in the record that he pays them —

    Walter E. Barton:

    It isn’t in the record he paid them.

    Felix Frankfurter:

    It’s not.

    But they made that assumption.

    Walter E. Barton:

    The Tax Court said that it was stipulated that Dr. Stern took out the policies.

    Therefore, we assume he paid the premiums.

    That’s what the Tax Court said.

    Hugo L. Black:

    Suppose that instead of insurance $40,000 worth of personal property has been turned over to a custodian.

    Then he understands that the payment back if the man wanted to pay at the time of his death, $27,000 surrendered over.

    Otherwise, he was (Inaudible), would there be any difference from your position — turned over to the widow (Voice Overlap)

    Walter E. Barton:

    (Voice Overlap) — If he turned this property over to the widow with the rights to revoke it —

    Hugo L. Black:

    No, it’s just — sure.

    Turned it over to a custodian $40,000 (Inaudible) and with the understanding that it goes to the widow because he doesn’t take anything back from — before he died.

    But then after the very moment of his death, he can get in fact, $27,000 there.

    Walter E. Barton:

    Well Your Honor —

    Hugo L. Black:

    Is there any difference so far as the legal question that you’re arguing?

    Walter E. Barton:

    I — I don’t believe it would and here’s the case that I’m sorry I didn’t find until after a brief was filed, a decision of this Court in Jones versus Clinton.

    Quite an old case but I think it’s sound, 101 U.S. 225.

    Hugo L. Black:

    225?

    Walter E. Barton:

    That’s right, 101 U.S.225.

    Now, the bankrupt made a voluntary assignment of all of these assets.

    Now, prior to the assignment, I don’t know how long before but prior to that time and I don’t believe there’s any evidence, while the evidence was, he was solvent when he did it.

    He gave a deed to his wife of certain real estate and also included in this deed, certain life insurance policies but he kept in the deed a power to revoke it and take it back or a power to appoint it.

    Now, the question was whether when he made the assignment of all of his assets to the assignee.

    That included his power of revocation of that assignment to his wife.

    This Court held it did not.

    This Court said that power is not an interest in property which can be transferred to another or sold on execution or devised by will.

    The grantor could indeed escape the power either by deed or will, but he could not best power in any other person.

    William O. Douglas:

    That would be (Inaudible)

    Walter E. Barton:

    Well, that would be, yes, because — yes Your Honor, the bank —

    William O. Douglas:

    The Congress (Inaudible)

    Walter E. Barton:

    The bankruptcy law today provides that shall — the bankrupt shall have title to all of the trustees, title to all property and that there shall be included all of the bankrupt’s powers which he can exercise for his own benefit.

    So, that would be carried to the present time.

    Felix Frankfurter:

    Mr. Barton, may I assume Justice Black’s question in a more practical if I may say so or more concrete aspect in Massachusetts and in one or two other states that you are (Inaudible).

    In Massachusetts, one of the key — no, one of the important source of insurance writing is through the savings bank.

    They are authorized and have been for now what, 30 odd years or more.

    Writing insurance on the theory that insurance is nothing but a form of savings.

    Walter E. Barton:

    Well, Your Honor —

    Felix Frankfurter:

    And it has the basis of it in the vast amount as you probably know, a very great deal of insurance is written through the savings bank of Massachusetts.

    Walter E. Barton:

    Well, I —

    Felix Frankfurter:

    Now, that’s between another form of the general question that Justice Black asked, as in this to be treated like money in the borrowing savings bank or whatever savings bank here.

    Walter E. Barton:

    Well, the reason, Your Honor is of course, I don’t know what kind of a policy it would have in the savings bank, but the —

    Felix Frankfurter:

    (Voice Overlap)

    Walter E. Barton:

    The —

    Felix Frankfurter:

    — you’ll have somebody, your beneficiary will file the revocation.

    Walter E. Barton:

    The insured on a level premium payment plan as the counsel this morning stated pays more in the early years in the cost of mortality.

    The laws of the state require a solvency reserve, which is the excess over the level premium over the — over the cost mortality and then with the accumulation of interest.

    Now, the cash surrender value might be equivalent to the reserve or maybe like deduct the cancelation charge, but the fact that there is a reserve doesn’t mean that the insured owns that reserve fund.

    Now, if the insured wants to borrow money from the insurance company, it comes out of the reserve.

    He’s got to pay an — he got to pay an interest on that.

    Now, if that were his own money, he wouldn’t have paid any interest on it.

    And the reserve fund under the law and investment of the insurance company, accumulates interests.

    Who pays an income tax without interest?

    It isn’t the insured causing interest that goes into that reserve fund belongs to the insurance company.

    Felix Frankfurter:

    Well, the fund of course, there’s no trust fund in any sense of a reach in which part of it is mine but that’s no more — that’s equally true or untrue of a savings bank account and any of the savings bank.

    Nobody owns an adequate cost —

    Walter E. Barton:

    That’s right.

    Felix Frankfurter:

    — the actual money in the vault.

    Walter E. Barton:

    Now, the insured has a right to recover the cash surrender value of his policy if he surrenders his policy.

    Hugo L. Black:

    But that’s his, isn’t it?

    Walter E. Barton:

    I beg your pardon.

    Hugo L. Black:

    That’s his because I’ve always thought of my —

    Walter E. Barton:

    Well, Your Honor, (Voice Overlap) I believe that Your Honor is incorrect in that.

    Now, I have cited —

    Hugo L. Black:

    Well, I can get it today if I happen to have a policy that has —

    Walter E. Barton:

    Yes, but you don’t own that until you surrender your policy.

    Hugo L. Black:

    I — I don’t know — I don’t have the money in my hand but if the company is any good, I’ve got the right to give right away.

    Walter E. Barton:

    Yes, but you can’t get it except to surrender your policy and terminate your contract insurance.

    Hugo L. Black:

    That’s right.

    Walter E. Barton:

    That’s right.

    But that does not mean that you own that cash surrender value.

    You’ve got to surrender for the cash surrender value policy.

    Hugo L. Black:

    Well, (Inaudible) equivalent of the cash surrender value.

    Walter E. Barton:

    Yes, well, that is — that is true perhaps, Your honor, but then the question gets around to the proposition of whether the cash surrender value passes to the beneficiary at the time of the decedent’s death.

    Hugo L. Black:

    (Inaudible) — whatever maybe — whatever the cash surrender value (Inaudible) in Dr. Stern’s lifetime, have looked to that pay the efficiency of an income tax with parole.

    Walter E. Barton:

    Well, if they had made an assessment, then a lien automatically would have attached to all of his property and I would say an insurance policy is a property.

    Now, first in this case, this tax wasn’t assessed until almost six years after he died —

    William J. Brennan, Jr.:

    The deficiency?

    Walter E. Barton:

    The deficiency.

    Hugo L. Black:

    But require tax which he owed (Voice Overlap) —

    Walter E. Barton:

    It — yes, it’s approved before his death.

    There isn’t any doubt about that.

    Now then, we — we have in our brief contended, there is no transfer of the cash surrender value or the proceeds.

    I don’t believe the Government contends very seriously about the proceeds.

    The question there is the beneficiary, a transferee of property of a taxpayer.

    Now, they argue that by analogy, you can go to the transferee section under estate tax law.

    Well, the transferee section in the estate tax and the income tax law both originated in 1926.

    They read exactly the same way except in income tax, it said that the property of the taxpayer and the other said property of the decedent.

    Walter E. Barton:

    Now, in 1918, was the first time that life insurance is brought into the estate tax.

    And in the same law, they made the beneficiary of the policy personally liable for the tax to the extent of the proceeds produced the estate tax.

    Now, that was 1918.

    In 1926, the transferee provision in both sections of the law were put into effect, and it was not until 1942 that Congress amended the estate tax section and brought in a beneficiary of an insurance policy although that beneficiary had been liable all these years from 1918 and of course in 1926 where the transferee section was first enacted They amended the law and made the beneficiary subject to the summary process of assessment, but that amendment did not make the beneficiary viable for the tax.

    The beneficiary is already liable under the former section and here under 827 (b), the beneficiary is liable.

    So, we say and as the Court of Appeals in the Rowen case in New York said, the fact that Congress didn’t changed the law in the income tax showed that Congress didn’t intend to produce the same result that they did in the estate tax when they did amend the law.

    Now, then if we should be wrong —

    Hugo L. Black:

    That argument — that argument does depend on whether she is a transferee or not, does it?

    But you’re saying there is that Congress is taking hold of this thing and legislate it but they didn’t choose to pose a liability under the (Inaudible)

    Walter E. Barton:

    Well, the liability of the beneficiary of life insurance was already existent in the case of the estate taxes, it had been from 1918.

    So, all Congress did in 1942 was not to make the beneficiary liable but to bring the beneficiary under that summary procedure.

    Hugo L. Black:

    Well then is your case based entirely on whether — it was (Inaudible) then entirely on whether we agree with you that she’s not a transferee?

    Walter E. Barton:

    Well, if you should hold that she is a transferee then we’ve got to find out what is the transferee liability.

    And there, we say, you have to look at estate law.

    Now, the only Court that’s held that state law doesn’t apply is in the Bess case which is going to be argued right away and I don’t want to go into that too much, but that New Jersey law was almost word for word like the Kentucky law and the Third Circuit in the Bess case said that if you look to the state law of New Jersey.

    The widow beneficiary is not liable for the tax of the decedent but the Court in the Bess case says you don’t look to state law, you look to general law, but I don’t know where you look for the general law.

    That’s what the Court said up in the Rowen case.

    The Third Circuit didn’t point out any law you looked to but we say that you got to look the state law under the Kentucky law.

    There’s no liability.