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February 25, 1935

KYLE, Acting Collector of Internal Revenue

The opinion of the court was delivered by: DICKINSON

Sur Motion for Rehearing.

Leave was given to file briefs. These have now been submitted and the cause ripe for a ruling.

 We do not discuss questions of procedure because, as before observed, counsel for defendant have very graciously, and at the same time sensibly, waived all procedural questions to which this cause may be open and meet the substantive question of law raised. This includes the proposition that the United States is not answerable to suit without its consent. The case as argued at bar is one against the insurance company. Is the debt which it admits owing to the taxpayer or is it the property of the wife? This makes of the question, as before stated, a question of property rights. An insurance policy was issued by an insurance company on the life of a husband in which the wife was named as a beneficiary, with power in the insured to change the beneficiary named. The policy has what is called a surrender or cancellation value. This is, the insurance company recognizes and would pay the wife except for the fact that what is called a distraint has been made upon it by the revenue representative of the government for a tax due by the husband. There is no claim on the part of the defendant that he could levy upon the property of one person for a tax obligation owing by another. The real question thus becomes whether the cancellation value of this insurance policy is the property of the wife or of the husband.

 The quite elaborate and very satisfactory brief submitted by the learned United States attorney and his associates, the assistants to the Attorney General, in effect concedes that if the wife has a property interest in the surrender value of the policy in question, her property cannot be applied to the collection of a tax claim against the husband.

 The argument addressed to us is made to lead us to the conclusion that this surrender value is the property not of the wife but of the husband, and that the Pennsylvania Act of June 28, 1923 (40 PS Pa. § 517), and each of those which preceded it, is in form and effect nothing more than the allowance of an exemption to the husband of property of this description from levy and sale. There goes with this, of course, the assumed corollary that an exemption law of the state would not affect the United States unless allowed by its laws. An illustration of this latter proposition is to be found in the Bankruptcy Laws (11 USCA). They allow to a bankrupt the like exemptions allowed under the state laws. The exemptions are accordingly allowed, not because allowed by the state, but because allowed by the laws of the United States.

 The cause as ruled was ruled upon the propositions: First, that a property right is the creation of law and is created by the law of the state; and, second, that the courts of the United States recognize as property what is declared by the laws of the state to be property. The third proposition, that the surrender value of the policy is the property of the wife and not of the husband, is the proposition which is reargued. The statement "that the tax lien is a sweeping lien upon all property, both real and personal, and all right to property belonging to the delinquent taxpayer," for which counsel stands, is conceded but seems to beg the question of whether the property here is that of the taxpayer. The question moreover is narrowed, as we view it, to that of whether it is property of the wife under the law of Pennsylvania.

 It may be further conceded arguendo for the purpose of presenting the point being made that if under the law of Pennsylvania it is the property of the taxpayer exempted by the laws of Pennsylvania from levy and sale under execution process, this exemption, as before stated, would not prevail against the United States unless the exemption laws of the state had been adopted by the United States. The question, as before several times states, is: Whose property? When any money is payable under a contract of insurance to a designated person, it is clear that the person so designated is the owner of the money payable. The only distinction made is whether the money is the property of the named beneficiary where and when the insured has the right to make another and different designation. The Pennsylvania acts of assembly, as we read them, were passed to settle that question so far as affects the law of Pennsylvania. It does settle it so far as the enactment can do so by providing that insurance moneys payable to the wife as beneficiary are her property whether there is or is not the power in the insured to change the beneficiary, subject of course to the power to change.

 This, we thought, and still adhere to the view, makes the fund in question the property of the wife. It is not the property of the husband merely exempted from levy and sale.

 We owe to the industry of counsel citations of numerous authorities. These must be read in the light of applicable principles or they may be misleading. Bankruptcy rulings are of no help to us for obvious reasons. A property right in anything is essentially that a claimant's title to property is recognized and enforced by law. What Law? Under our system it is the law of the state. The law of the United States may, however, override this. An insolvent debtor pays his debt to a creditor who knows that the payment will work a preference. Under the state law the money paid is the property of the creditor payee. If, however, within four months a petition in bankruptcy is filed the money paid is under the Bankruptcy Law not the property of the creditor but of the trustee in bankruptcy. A like result may be worked by a state law. A debtor conveys property in fraud of his creditors. The property right passes to the grantee. The law, however, intervenes to say that as respects execution creditors the property is not that of the grantee but of the grantor. Moreover, the question in the bankruptcy cases is usually not over the title of the wife but over the title of the trustee. Title to so-called exempted property does not vest in the trustee. Hence the question of exemption.

 Such was the case of In re Lang (C.C.A.) 24 F.2d 254.

 By the same token succession tax cases have no application. A father, anticipating his death and the distribution of his estate, makes a gift of their expectant shares to his children. The property given becomes under the state law the property of the donees. The donor, however, dies within two years. Under the law of the United States the succession tax is measured by what his estate would have been had the gift not been made. In other words, for tax purposes, the property transferred is property of which the donor died possessed. The question is in tax cases not a question of title but what measures the tax.

 The case of Industrial Trust Co. v. United States (Greene Estate v. United States) 9 F. Supp. 817, decided by the Court of Claims February 4, 1935, illustrates this. The opening sentence in the report of the case is that the question determined was "the net estate of decedent for the purpose of estate tax." The opinion of Judge Littleton makes this clear. The question of whether property is taxable, or whether it measures a tax, is wholly different from the question of ownership.

 Whether a wife beneficiary in an insurance policy has a property right in it when the husband has the power of revocation, we will not discuss, standing upon the ...

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