dissenting: The humanitarian policy of the states toward the widow and children of a decedent is variously expressed. Thus (e. g.) in Tennessee there is a statute specifically providing that life insurance inures'to the benefit of the widow and children and is not subject to the debts of the husband. This tribunal held, in Estate of Frederick G. Proutt, 41 B. T. A. 1299, that the proceeds of life insurance payable to the executor of decedent were includible in gross estate within the purview of section 302 (g) of the Revenue Act of 1926 as amended. The Circuit Court of Appeals for the Sixth Circuit reversed, pointing out that the executor acted “as a mere conduit to pass [the proceeds] to statutory beneficiaries free from claims against the estate.” Proutt v. Commissioner, 125 Fed. (2d) 591. Cf. Webster v. Commissioner, 120 Fed. (2d) 514, involving proceeds of insurance under the laws of Florida. See also In re Macneal's Estate, 22 N. Y. S. (2d) 293, in which it is stated.
It has been the observation of the writer of this opinion, in his experience of many years, that the beneficent purpose of the statute has been repeatedly demonstrated, particularly when the decedent was survived by a wife and minor children. The prompt payment of the pecuniary exemption and the allocation of the exempt articles to the widow has tided over many families in the period of distress after the passing of its chief support. * * * The pecuniary amount and the articles themselves are set aside as property untouchable by the creditors of the decedent or by the executor or by the administrator of the estate. * * * Paraphrasing Chief Judge Cardozo’s statement in Surace v. Danna, 248 N. Y. 18, 21, 161 N. E. 315: Provision for the comfort and needs of the family, not payment of their “ancient debts, is the theme of the statute, and its animating motive.”
Similar statutes and rules of law exist in most of the states. In the state of the domicile of petitioner and her husband the statute cited by the majority in the footnote provides that the court “may” set apart to the surviving spouse or to the minor child or children of the decedent “all or any part of the property of the decedent exempt from execution.” The majority hold that in the case of insurance proceeds the California statute fails to create any vested interest in the wife as against the estate of the husband, pointing out that whether the court shall set them apart to the wife is discretionary with it. While that seems to be the language of the statute, its construction by the California courts has consistently been as indicated in the following quotation from Mahoney v. National Surety Co., 264 Pac. 304, 305:
The requirement upon the court to set aside exempt property upon application of the widow, duly made and noticed, is mandatory, and the court is without jurisdiction to make an order denying it. Estate of Ballentine, 45 Cal. 696; County of Los Angeles v. State, 64 Cal. App. p. 296 et seq., 222 Pac. 153.
See also Estate of Ehler, 115 Cal. App. 403; 1 Pac. (2d) 546; Holmes v. Marshall, 145 Cal. 777; 79 Pac. 534; Estate of Pillsbury, 175 Cal. 454; 166 Pac. 11.
The right of the widow to the exempt property of her husband is superior to the claims of creditors. In re Still, 117 Cal. 509; 49 Pac. 463; Estate of Levy, 141 Cal. 646; 75 Pac. 301.
I agree with the conclusion of the majority that the California law can not create exemptions from execution or attachment for the collection of Federal taxes. Whether it may do so is not an issue in this proceeding and the discussion of section 3691 of the Internal Revenue Code is not apposite. The reference in the probate code to the property which is to be set apart to the widow and minor children is merely a convenient method of describing or enumerating the property to be so dealt with. For the purpose of this case the statute is in essense the same as the Tennessee, Florida and New York statutes to which reference has been made. In other words, the statute, as construed by the California courts, requires the. Probate Court to set apart to the widow and minor children of a decedent the proceeds of any life insurance on the husband’s life where the annual premiums were not in excess of $500 per annum, and the amount received by the executor is not subject to the payment of decedent’s debts.
Reference is made in the opinion of the majority to Jessie Smith, Executrix, 24 B. T. A. 807, in which it was held that the priority given Federal taxes by section 3466 of the Revised Statutes of the United States did not confer priority over a widow’s allowance, set apart to her by a state Probate Court. It was there pointed out that, since the statutory allowance is not a debt and since the payment thereof is not the payment of a debt, the Government’s claim for priority could not be allowed. The rationale of the cited case is equally applicable to the insurance money.
The reliance of the majority upon Loe M. Randolph Peyton, 44 B. T. A. 1246, does not seem to be sound. Of course if a solvent estate is distributed to a decedent’s heirs or legatees they are liable as transferees. If the insurance money belonged to decedent’s widow and children — and under the laws of California as construed by its courts I think that it did — then the executor acted as a mere conduit to pass it on to them and the amount was never “distributed” to them in the sense that the word is used in the cited case and in the probate code. Cf. Hart v. Taber, 161 Cal. 20; 118 Pac. 252; Saddlemire v. Stockton Savings Loan Soc., 144 Cal. 650; 79 Pac. 381; Williams v. Williams, 170 Cal. 625; 151 Pac. 10. Moreover it is open to question if the estate was ever solvent, even under the definition adopted by the majority. Apparently it was not unless the insurance was a part of decedent’s gross estate; for the proved debts and claims (including the family allowance) exceeded the assets if the insurance money is excluded.
Section 3691 of the Internal Revenue Code, mentioned in the opinion of the majority, is relied upon by neither party. It exempts from distraint and sale, if belonging to the head of the family, certain enumerated property. Petitioner is not claiming that the insurance money is exempt to her or that it could not be subjected to.distraint in the event she should neglect or refuse to pay any taxes for which she is liable. (See sec. 3690, Internal Revenue Code.) The issue is the much narrower one: Is she liable, at law or in equity, as a transferee because the insurance money was set apart to her?
In Tooley v. Commissioner, 121 Fed. (2d) 350, 356, the Circuit Court of Appeals for the Ninth Circuit discussed at length the powers and duties of an executor and the powers of Superior Courts of California, acting in probate, especially as they impinged upon the question there in issue — whether a surviving co-tenant in a joint tenancy is a transferee within the provisions of section 311 of the Internal Revenue Code. The court said:
Section 311 does not impose a tax on a transfer from the taxpayer to the transferee of taxpayer’s property or any tax at all on the transferee. It merely provides a “new remedy for enforcing the existing ‘liability, at law or in equity’ ” for collecting the tax due from the transferor. Phillips v. Commissioner, 283 U. S. 589-594, 51 S. Ct. 608, 610, 75 L. Ed. 1289; Phillips-Jones Carp. v. Parmley, 302 U. S. 233, 235, 58 S. Ct. 197, 82 R. Ed. 221. As was stated in the Conference Report on the bill for the Act of 1926, originally creating the remedy, “for procedural purposes the transferee is treated as a taxpayer would be treated.” Id., Phillips v. Commissioner, 283 U. S. footnote, page 594, 51 S. Ct. page 610, 75 L. Ed. 1289.
Legal or equitable liability as a transferee is generally to be determined by reference to state and Federal statutes and by applying established common law principles. A. H. Graves, 12 B. T. A. 124; Harwood v. Eaton, 68 Fed. (2d) 12. Respondent, although he has the burden of proof, points to no state statute indicating that the setting apart to petitioner of the insurance money or the payment of the family allowance was in fraud of creditors and none has been found. Indeed, it is reasonable to assume that the court would not have approved the “First and Final Account” of the executor if any unlawful preference had been made; for it shows upon its face that certain sums were due to the State of California and to' the United States as income taxes because of income received by the decedent during his lifetime and that the taxes had “not been paid because of the exhaustion of the funds and assets of said estate.” Apparently the majority find only that petitioner is liable “in equity” for the tax of her husband. This seems to be predicated upon the theory that a conveyance of the estate property was made to her “without payment of consideration,” that she “received the results of conversion of the insurance,” and that the estate was left “without assets with which to pay the income tax.” The first two assumptions are unproved, if not contrary to the stipulated facts, and the last, standing alone, is not sufficient to make her liable as a transferee.
Since I am of the opinion the Commissioner has failed to sustain his burden of proof, I respectfully note my dissent.
Van Foss AN, /., agrees with this dissent.