Matthew LUXTON, et al., Plaintiffs-╜Appellants, v. UNITED STATES of America, Third Party Defendant-Appellee., United States Court of Appeals, Eighth Circuit., 340 F.3d 659, No. 02-2464., Aug. 22, 2003., Submitted: March 14, 2003
Matthew LUXTON, et al., Plaintiffs-╜Appellants, v. UNITED STATES of America, Third Party Defendant-Appellee.
United States Court of Appeals, Eighth Circuit.
340 F.3d 659
Aug. 22, 2003.
Submitted: March 14, 2003.
Filed: Aug. 22, 2003.
Walter A. Pickhardt, argued, Minne╜apolis, Minnesota (Mary Cullen Yeager and Deborah J. Mackay, on the brief), for appellant.
Andrea R. Tebbets, argued, Washington, D.C. (Eileen J. O'Connor and Richard Far╜ber, on the brief), for appellee.
Before HANSEN,* Chief Judge, JOHN R. GIBSON and LOKEN, Circuit Judges,
* The Honorable David R. Hansen stepped down as Chief Judge at the close of business on March 31, 2003. The Honorable James B. Loken became Chief Judge on April 1, 2003.
LOKEN, Chief Judge.
Following Beverly Luxton's death, her three children as named beneficiaries com╜menced this action against State Farm Life Insurance Company to recover the proceeds of three life insurance policies. State Farm interpleaded the United States because, some years before her death, Luxton had executed Collateral Assign╜ments providing that the Internal Revenue Service as assignee may claim the policy proceeds to pay Luxton's outstanding tax liabilities. State Farm paid the proceeds into court and was dismissed from the case. After a trial, the district court 1 upheld the Collateral Assignments and awarded the policy proceeds to the IRS. The named beneficiaries appeal. We af╜firm.
1. The HONORABLE DAVID S. DOTY, United States District Judge for the District of Minnesota.
In February and March 1994, the IRS assessed Luxton $793,301.39 for unpaid federal employment and unemployment taxes, penalties, and interest. At that time, Luxton's assets included three life insurance policies in which State Farm agreed to pay a total of $327,000 upon Luxton's death. Each policy granted Lux╜ton the right to change beneficiaries, to demand the policy's cash surrender value, and to assign the policy by a writing filed with State Farm. The policies' Assignment clause provided that "[a]n assignment may limit the interest of any beneficiary."
When the substantial unpaid taxes were assessed, Luxton was undergoing exten╜sive cancer treatments and was having difficulty meeting her medical and living expenses. In September 1994, after dis╜cussions with IRS agent Lloyd Fritsvold, Luxton submitted to the IRS a written offer of compromise in which she offered to pay "327,000 upon my death" in return for reducing her tax liability to that amount. The IRS rejected the offer be╜cause, although Luxton was not expected to live more than three years, the offer did not include a fixed date for payment.
After further discussions with Agent Fritsvold and Luxton's State Farm agent, Luxton executed the Collateral Assign╜ments here at issue. The Collateral As╜signments are standard-form State Farm documents with handwritten entries identi╜fying the IRS as assignee, the policy num╜ber, and Luxton as the person whose life was insured. State Farm recorded the Collateral Assignments in its policy files and forwarded them to the IRS where Agent Fritsvold noted them on an IRS Form 2276 Collateral Deposit Record.
When it received the Collateral Assign╜ments, the IRS did not compromise or otherwise reduce Luxton's outstanding tax liability. Indeed, five months after the Collateral Assignments were executed, the IRS filed notices of its tax liens against Luxton's property for the entire amount of her tax liabilities. However, consistent with an informal understanding between Agent Fritsvold and Luxton, the IRS made no further collection efforts prior to Luxton's death. In addition, in 1995 the IRS allowed $17,000 of proceeds from the sale of Luxton's residence to be used to prepay premiums on the life policies; in late 1997 the IRS allowed Luxton to bor╜row $5,000 of accumulated policy dividends to pay medical expenses; and in 1999 the IRS authorized the use of policy dividends to pay premiums.
Though Luxton survived her cancer longer than initially expected, she died in September 1999. Shortly before her death, she named her son Matthew benefi╜ciary on two of the policies. The other two plaintiffs, Luxton's daughters, became the named beneficiaries of the third policy in 1994.
In United States v. Bess, 357 U.S. 51, 55-57, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958), the Supreme Court held that a federal tax lien entitles the IRS to recover only the cash surrender value of a life insurance policy, not the policy proceeds, because a federal tax lien is limited to the taxpayer's "property and rights to proper╜ty," 26 U.S.C. (IRC) ╖ 6321, and under state law a policyholder has no interest in life insurance proceeds before her death. Consistent with Bess, IRC ╖ 6332(b) now permits the IRS to levy on a life insurance policy only to the extent of its cash sur╜render value. Therefore, the beneficiaries argue, it would "frustrate the intent of Congress" to permit the government to re╜cover more than the cash surrender value of the policies in this case. We disagree.
The government's claim to the policy proceeds is based on its rights under the Collateral Assignments, not on its tax liens. Nothing in Bess or ╖ 6332(b) sug╜gests that those authorities limit the IRS to enforcing its tax liens. Therefore, the primary issue in this case is whether the Collateral Assignments entitle the govern╜ment to recover the policy proceeds under Minnesota law. 2 In addition, the beneficia╜ries argue that the Internal Revenue Code did not authorize the IRS to accept the Collateral Assignments and to collect the policy proceeds (in effect, that Agent Fritsvold's arrangement with Luxton was ultra vires).
2. The parties agree that state law defines the extent of the government's rights under those instruments. Cf. Meyer v. United States, 375 U.S. 233, 236, 84 S.Ct. 318, 11 L.Ed.2d 293 (1963).
A. The Effect of the Assignments under Minnesota Law
The district court held that Luxton made a valid assignment of the policy pro╜ceeds to the IRS which "limit[ed] the in╜terest of the beneficiaries to the amount remaining after payment of the existing liabilities to the IRS." We review the court's interpretation of state law de novo. See Jeanes v. Allied Life Ins. Co., 300 F.3d 938, 940 (8th Cir.2002) (standard of re╜view).
Assignments of insurance policies as collateral securing the policyholder's debts to the assignee are not uncommon. See Meyer, 375 U.S. at 235, 11 L.Ed.2d 293; All Am. Life Ins. Co. v. Billingsley, 122 F.3d 643, 650 (8th Cir.1997); Graves & Christensen, McGill's Legal Aspects of Life Insurance 210-12 (2d ed.1997). Un╜like an absolute assignment, which perma╜nently transfers all rights in the policy to the assignee, a collateral assignment trans╜fers only those rights necessary to secure the assignor's debt and extinguishes the named beneficiary's interest only to the extent of the assignor's debt to the assign╜ee. See Westchester Enters., Inc. v. Swartout (In re Swartout), 123 B.R. 794, 799-800 (Bankr.S.D.Ohio 1991); Succes╜sion of Goudeau, 480 So.2d 806, 808 (La. App.1985).
The Supreme Court of Minneso╜ta has long acknowledged that a life insur╜ance policy may be assigned as collateral without the consent of the beneficiary, if the policy reserves that right to the in╜sured. See Janesville State Bank v. Aetna Life Ins. Co., 200 Minn. 312, 274 N.W. 232, 233 (1937); Hale v. Life Indem. & Inv. Co. , 65 Minn. 548, 68 N.W. 182, 185-86 (1896). Here, the policies issued to Lux╜ton contained a provision allowing assign╜ments, and she signed Collateral Assignments that assigned specific policyholder rights to the IRS, including "[t]he sole right to collect from the insurer the net proceeds of the policy," and "[t]he sole right to surrender the Policy and receive the surrendered value thereof at any time." The beneficiaries argue that the Collateral Assignments are nonetheless defeated by the policy provision that, upon Luxton's death, the proceeds will be paid "to the primary beneficiaries living when payment is made." We disagree. The policies expressly authorized assignments that "limit the interest of any beneficiary." Though the Collateral Assignments re╜served Luxton's "right to designate and change the beneficiary," they provided that "any designation or change of benefi╜ciary ... shall be made subject to this assignment and to the rights of the As╜signee hereunder."
The beneficiaries further argue that payment of the policy proceeds to the IRS would violate MINN. STAT. ╖ 61A.12, which provides that, "[w]hen any insurance is effected in favor of another, the beneficiary shall be entitled to its pro╜ceeds against the creditors and represen╜tatives of the [policyholder]." Again, we disagree. The purpose of this statute is to exempt a debtor's life insurance policies from the reach of her creditors. See Mur╜phy v. Casey, 150 Minn. 107, 184 N.W. 783, 784 (1921). The beneficiaries cite no case in which ╖ 61A.12 or a similar statute has been held to preclude an assignee's claim, as opposed to an ordinary creditor's claim. The few courts that considered the ques╜tion have held that identical laws in other States did not bar the insured from limit╜ing or defeating the beneficiary's interest by assignment. See Kash's Ex'r v. Kash, 260 Ky. 508, 86 S.W.2d 273, 276 (1935); Ferris v. Phoenix Mut. Life Ins. Co., 241 A.D. 570, 272 N.Y.S. 781, 783-84 (App.Div. 1934), aff'd, 266 N.Y. 527, 195 N.E. 184 (1935). We conclude that the Supreme Court of Minnesota would follow this con╜sistent authority. That Court decided Janesville over forty years after the enact╜ment of ╖ 61A.12 and did not even men╜tion the statute.
B. The IRS's Authority to Accept the Assignments
The Internal Revenue Code pro╜vides that the IRS may compromise a federal tax liability. The statute and im╜plementing Treasury Regulations specify in detail the documentary record that must be compiled and the agency approval that must be obtained for a compromise agree╜ment to be valid. See 26 U.S.C. ╖ 7122 (1994); 26 C.F.R. ╖ 301.7122-1(d)(3) (1995). This statutory procedure is "the exclusive method by which tax cases could be compromised." Botany Worsted Mills v. United States, 278 U.S. 282, 288-89, 49 S.Ct. 129, 73 L.Ed. 379 (1929). In this case, the IRS rejected Luxton's formal offer-in-compromise, and Agent Fritsvold then proceeded to fashion an informal un╜derstanding with her. The beneficiaries argue that, even if collateral assignments of policy proceeds are valid under Minne╜sota law, the IRS is only authorized to accept collateral for a tax liability as part of a formal offer-in-compromise.
In this case, the IRS did not compro╜mise Luxton's tax liability, that is, agree to reduce her tax liability in exchange for partial payment or other consideration. See BLACK'S LAW DICTIONARY 281 (7th ed.1999). Indeed, after receiving the Collateral Assignments, the IRS filed no╜tices of tax liens for the full amount, con╜firming that Luxton's tax liability had not been compromised. Rather than formally compromise, Agent Fritsvold did what many prudent creditors would have done under the circumstances, accepting an as╜signment of the right to insurance policy proceeds that exceeded Luxton's available assets, paying premiums to keep the policies in force, and deferring more aggres╜sive collection actions. Luxton benefitted from the arrangement, at least to the ex╜tent she was permitted to borrow against the policies to pay medical expenses. The beneficiaries were not harmed because the IRS could have effectively cancelled the policies by foreclosing on their cash sur╜render values before Luxton's death.
Thus, the beneficiaries' contention boils down to the unsupported assertion that the IRS has no authority to take informal ac╜tions of this land to enhance its prospect of collecting unpaid taxes, interest, and pen╜alties. It is counterintuitive to posit that Congress would arm the IRS with a pow╜erful tax lien and other formidable collec╜tion tools, but would deny the agency the authority to employ other devices common╜ly used by creditors to improve their posi╜tion, such as securing interests in collater╜al by means other than a lien. And in fact, the Internal Revenue Code refutes the beneficiaries' contention, expressly autho╜rizing the agency to employ "such other reasonable devices or methods as may be necessary or helpful in securing a complete and proper collection of the tax." IRC ╖ 6302(b). Likewise, Part 5.6.1 of the In╜ternal Revenue Manual confirms that revenue agents are authorized to accept collat╜eral security from taxpayers when that is in the best interests of the government, and to record the receipt of such collateral on IRS Form 2276, as Agent Fritsvold did in this case.
For the foregoing reasons, we conclude that under Minnesota law the Collateral Assignments granted the IRS an interest in the policy proceeds superior to that of the named beneficiaries. Accordingly, the judgment of the district court is affirmed.