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March 25, 1954


The opinion of the court was delivered by: Sullivan, District Judge.

Upon the death of Herbert Fried in 1948, his widow, defendant here, became entitled as beneficiary to $12,597.70, the proceeds of a life insurance policy owned by him. Fried had at all times the right to change the beneficiary. It is conceded in the pleadings that Fried owed income taxes in excess of this amount, and that he was insolvent at the time of his death. The estate was unable to make more than a partial payment toward the income tax obligation.

This is an action by the United States to recover the unpaid taxes from the widow to the extent of the proceeds of this insurance policy. The case is now before the court on plaintiff's motion for summary judgment. The facts are not in dispute, and the defendant does not argue that a summary judgment may not be entered.

Defendant states that plaintiff has failed to reveal its source of authority for bringing this action, and points out that this is not a suit under Section 311 of the Internal Revenue Code, Title 26 U.S.C.A. § 311. That section provides that the "liability, at law or in equity, of a transferee of property of a taxpayer" shall be assessed and collected in the same manner as in the case of a deficiency against the original taxpayer. It has been held many times that this section merely gives the United States a streamlined method for the enforcement of a liability which already existed, and which continued to exist independent of the statute: Phillips v. Commissioner of Internal Revenue, 1931, 283 U.S. 589, 51 S.Ct. 608, 75 L.Ed. 1289; United States v. Fisher, D.C. 1944, 57 F. Supp. 410; Pearlman v. Commissioner of Internal Revenue, 3 Cir., 1945, 153 F.2d 560; Mertens, "Law of Federal Income Taxation," Vol. 9, Page 494; "Technical Aspects of Transferee Liability," by John Fager, New York University Tenth Annual Institute on Federal Taxation (1952), Pages 697, 700, 701.

The authorities just cited make it clear that the statutory remedy is not exclusive but cumulative. The government may proceed under Section 311, or it may pursue its equitable remedy of tracing transferred assets of an insolvent debtor. Although the statutory remedy is most frequently used, the government is under no obligation to elect it, and suits on the "trust fund" theory are not uncommon. United States v. Fisher, D.C. 1944, 57 F. Supp. 410.

Under the latter theory, it must be shown that there has been a transfer of assets by the debtor without full consideration, which leaves him unable to satisfy his creditors (Fager, supra, Page 705; Mertens, supra, Pages 494 and 500). Defendant contends that even if there was a transfer here, it is exempt under an Illinois statute relieving the proceeds of life insurance payable to a widow, Ch. 73, § 850, Ill.Rev.Stat., from the claims of creditors in situations in which they would otherwise be subject to such claims, Ch. 59, § 4, Ill.Rev.Stat. It is almost universally held that state statutes of this nature (whether called "exemption" statutes or by some other name) are not applicable to a suit by the United States for income taxes. Smith v. Donnelly, D.C. 1946, 65 F. Supp. 415, 418; United States v. Goddard, D.C. 1952, 111 F. Supp. 607; Muller v. Commissioner of Internal Revenue, 1948, 10 T.C. 678, 680.

Defendant next contends that any remedy available to the Government must be based on the law of Illinois, and that she is not a "transferee" under that law. Without making any finding as to whether the law of Illinois is as set forth by the defendant, it is my opinion that it does not govern in this situation. This appears to be the better view. Muller v. Commissioner of Internal Revenue, supra; Commissioner of Internal Revenue v. Western Union Telegraph Co., 2 Cir., 1944, 141 F.2d 774, 778; Commissioner of Internal Revenue v. Keller, 7 Cir., 1952, 59 F.2d 499, 501; Kieferdorf v. Commissioner of Internal Revenue, 9 Cir., 1944, 142 F.2d 723, 725.

The rationale of these cases is explained in Pearlman v. Commissioner of Internal Revenue, supra:

    "On principle the question seems to us clearly one
  to be answered without reference to state law
  limitations. It would not be disputed that, in
  general, the imposition and collection of federal
  income tax is a federal function. One of the
  questions arising from such an undertaking is the
  determination of when B is to be liable to pay a tax
  assessed against A. The Congress could, no doubt,
  have left this question to be variously determined by
  the laws of

  the respective states if it had so desired. But in
  the absence of a clearly expressed intention to do
  so, we should not infer it, for such variation does
  not fit into a uniformly applied system of federal
  taxation. The administration of its taxing laws is as
  clearly a function of the federal government as the
  making of contracts, and the issuing of checks and
  warrants in payment of its obligations, matters in
  which the Supreme Court has recently held that the
  state law does not control." 153 F.2d at page 562.

In accordance with these authorities, the question of whether or not defendant is a "transferee" will be determined by federal law. The few cases in point seem to require the holding that she is.

The Kieferdorf case, supra, held that an order of a California court distributing insurance proceeds to the widow and leaving the estate insolvent was a transfer of assets to her rendering her liable for decedent's unpaid income taxes. In the Pearlman case, the proceeds of several insurance policies were paid to the widow as beneficiary, and the taxpayer was insolvent at his death. After holding that a state exemption law did not apply, the court said:

    "Once the problem is removed from state statutes
  and decisions there is no question made of the
  liability of this taxpayer as transferee. Indeed it
  is conceded by the taxpayer that without the
  Pennsylvania statute exempting the proceeds of
  insurance policies, there is no defense to
  liability." 153 F.2d at page 562.

The Tax Court has cited the Pearlman and Kieferdorf cases in a line of decisions directly in point. In Muller v. Commissioner of Internal Revenue, 1948, 10 T.C. 678, that Court upheld the determination of the Commissioner that a widow was liable as transferee for the income taxes of her deceased husband. Petitioner received pension payments from the State of New York and was the beneficiary of insurance policies. The opinion is in part as follows:

    "The petitioner contends that the $22,000 which she
  received from the State of New York under its
  employee pension system was exempt from execution
  under section 166 of the insurance laws of the State
  of New York [McK.Consol.Laws, c. 28]. She also argues
  that she was not a `distributee' of either asset. The
  respondent contends that the exemptions relied upon
  were taken away by section 249-kk of the tax law of
  the State of New York [McK. Consol.Laws, c. 60],
  whereas the petitioner replies that the latter
  section took the exemption away only for the purpose
  of the New York inheritance tax. It is unnecessary to
  decide those questions, because it has been held that
  a person in the position of this petitioner is a
  transferee and the Federal Government can follow this
  property of a transferor, including the proceeds of
  life insurance, into the hands of such a person for
  the purpose of collecting taxes lawfully due from the
  transferor, without regard to the limitations of
  state law. Pearlman v. ...

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