Collection Of Delinquent Income Taxes From Life Insurance

<div class="Section1"><br /> <br /> A government tax lien survives an insured’s death. Consequently, if a tax lien has attached to the cash surrender value during the insured’s life, the taxes can be collected from the proceeds to the extent of the cash surrender value at death. If life insurance proceeds are exempt from the claims of the insured’s creditors under applicable <em>state</em> law, however, the insured’s unpaid taxes cannot be collected from that portion of the proceeds that exceeds the cash surrender value.<a href="#_ftn1" name="_ftnref1">¹</a> If the tax assessment was not made until after the insured’s death, the beneficiary is not liable for any of the insured’s back taxes provided the proceeds are exempt from claims of the insured’s creditors under state law.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A different situation exists where the beneficiary is a surviving spouse who has filed joint returns with the insured. When joint returns have been filed, the surviving spouse generally is liable for the back taxes in his or her own right.<a href="#_ftn3" name="_ftnref3">³</a> Thus, the entire proceeds received by a surviving spouse may be subject to a lien for the unpaid taxes.<br /> <br /> In one case, in which a wife who was the beneficiary of a policy insuring her husband’s life had been indicted but not yet convicted of his murder at the time the IRS served a levy on the policy proceeds, the court found that, under applicable state law, the wife had a property interest in the proceeds and thus the insurance company acted properly in paying the proceeds to the IRS in response to the levy.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> In another case, a surviving spouse used the proceeds of a policy insuring the deceased spouse to purchase annuities for the benefit of their children. The court ruled that the IRS was able to reach the funds, in payment of the couple’s delinquent income taxes, after the annuity purchase.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> In another case, a wife received two death benefit checks from policies insuring her husband’s life, placed the checks in a safe deposit box, and then attempted to renounce her interest in the death proceeds under state law after the IRS seized the checks for payment of taxes. A federal district court granted the government’s motion for summary judgment, ruling that the wife had accepted the proceeds, and that they were subject to the IRS lien.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     <em>U.S. v. Bess</em>, 357 U.S. 51 (1958).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Commissioner v. Stern</em>, 357 U.S. 39 (1958).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     IRC § 6013(d)(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     <em>State Farm v. Howell</em>, 96-1 USTC ¶ 50092 (8th Cir. 1996).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.     <em>Flake v. U.S.</em>, 95-2 USTC ¶ 50588 (D. Ariz. 1995).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.     <em>Federated Life Ins. Co. v. Simmons</em>, 97-2 USTC ¶ 50490 (N.D. Ga. 1997).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes.<br /> <br /> The law is well settled that state exemption laws cannot immunize the cash values of a taxpayer’s life insurance from federal tax collection. Moreover, the government can enforce its tax lien despite a gratuitous assignment of the policy with intent to avoid tax collection.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Under a summary levy procedure, the IRS may reach the loan value of a policy subject to a tax lien, but the policy may be kept in force.<a href="#_ftn2" name="_ftnref2">²</a> The insurance company pays over the present loan value of the policy or, if less, the balance of the tax liability. The company also must pay the IRS the amount of any policy loans (other than automatic premium loans) made after the company had notice of the lien. The company is not liable, however, for policy loans made before it had notice of the lien, or for automatic premium loans made after it had notice if the automatic premium loan agreement was entered into before it had notice.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The IRC says the tax levy is satisfied if the insurer pays over “the amount which the person against whom the tax is assessed could have had advanced” to that person by the insurer on the date prescribed by law for the satisfaction of the levy (plus any amounts advanced by the insurer after knowledge of the lien other than under a preexisting automatic premium loan provision in the policy).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The IRS can reach funds in an annuity contract under the same summary levy procedure mentioned above.<a href="#_ftn5" name="_ftnref5">⁵</a> Further, the IRS also can reach insurance commission payments with a tax lien. For example, where several life insurance agents assigned their commissions to another agent and that agent, in turn, assigned the funds to an irrevocable trust, the IRS was able to reach the commissions to satisfy a tax lien against several of the agents.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     <em>Knox v. Great West Life Assurance Co.</em>, 212 F.2d 784 (6th Cir. 1954); <em>U.S. v. Heffron</em>, 158 F.2d 657 (9th Cir. 1947).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 6321.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     IRC § 6323(b)(9).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     IRC § 6332(b).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.     IRC § 6321; <em>see Prudential Ins. Co. v. Allen</em>, 98-1 USTC ¶ 50365 (S.D. Ind. 1998).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.     <em>American Trust v. American Community Mut. Ins. Co.</em>, 98-1 USTC ¶ 50369 (6th Cir. 1998).<br /> <br /> </div>