*210 Decision will be entered for the respondent.
The executor of the estate of a deceased resident of California, pursuant to court order made in conformity with the state statutes (providing that the court might, in its discretion, set apart to the widow property exempt from execution), set apart to decedent's widow the proceeds of certain insurance policies on the life of her husband. The state court also made an order directing the executor to pay the widow, for the benefit of deceased's minor children and herself, the sum of $ 250 per month as a family allowance. After the payment of the widow's allowance and transfer of the insurance proceeds to her, and payment of the costs of administration, the funeral expenses, and some of the monthly payments on the family allowance, no assets remained in the estate out of which unpaid state and Federal income taxes and other debts of the decedent could be paid. Following assessment against the widow, petitioner herein, as a transferee, she paid the Federal income tax of her deceased husband under protest. Held, that under the facts she was liable as a transferee.
*773 OPINION.
The Commissioner, after having made a jeopardy assessment against petitioner, sent her a notice of a deficiency as a transferee of assets of the estate of her deceased husband, for his income tax in the amount of $ 557.31 for the calendar year 1939. The facts are found to be as stipulated.
Petitioner's husband, W. J. Kieferdorf (hereinafter referred to as decedent), a resident of San Francisco, died testate, December 3, 1939. He was survived by his widow and two minor children. The Bank of America National Trust & Savings Association was duly appointed and qualified as executor of his estate on January 3, 1940. On March 15, 1940, the executor filed an income tax return, reporting the income received by decedent during 1939. The tax shown to be due was $ 557.31 and the correctness of this amount is not in issue. No part of the tax was paid by the executor, though due notice and demand was served on it on or about June 1, 1940, and a second notice was served on it on or about July 31, 1940.
On January 25, 1940, petitioner filed a *212 petition in the Superior Court, in accordance with the Probate Code of California, requesting that family allowance in the sum of $ 300 per month be granted for her minor children, who were wholly dependent on the estate, and for herself, she being "partially dependent thereon for support and maintenance." On February 8, 1940, the court entered an order directing that $ 250 per month be paid as a family allowance "during the progress of the settlement of the estate or until further order of the Court." The executor complied with the order thereunder, and on June 5, 1940, paid petitioner $ 1,500, being $ 250 per month from December 3, 1939, to June 3, 1940; and further paid $ 250 per month to August 3, 1940. Because of the exhaustion of the funds of the estate a final payment of the balance of the funds on hand in the amount of $ 90.73 was made on August 9, 1940. The aggregate of the payments made under the order was $ 2,090.73.
On April 5, 1940, petitioner filed another petition in the same court requesting that the property of the estate exempt from execution be set apart for the use and benefit of the family of the decedent. The court set apart for them and the executor paid to*213 petitioner on June 6, 1940, $ 11,914.52 representing the proceeds of six policies of life insurance, the annual premiums on which had been less than $ 500 ($ 470.54) during decedent's life. After this amount was paid over to her there yet remained in the estate approximately $ 590, and liabilities of several thousand dollars.
*774 The assets and receipts of the estate and the disbursements made by the executor were as follows:
| Assets and receipts | Disbursements | ||
| Cash | $ 106.79 | Cost of administration | $ 59.46 |
| Proceeds of Life Insurance | 11,914.52 | Funeral expenses | 629.05 |
| Stocks | 1,870.00 | Family allowance | 2,090.73 |
| Other personal property | 635.00 | Proceeds of insurance set | |
| Dividends | 54.00 | aside as per court order | 11,914.52 |
| Insurance refund | .20 | Loss on sale of stock | 50.00 |
| Profit on sale of automobile | |||
| and stock above appraisal | 163.25 | Total | 14,743.76 |
| Total | 14,743.76 | ||
The executor filed a first and final report covering the period from appointment to September 3, 1940. The report showed income tax due because of income received by the decedent during his lifetime and that such sums had not been paid because of the exhaustion of the funds and assets*214 of the estate by payment of costs of administration, a preferred claim, the setting aside of exempt property, and the payment of a family allowance. The exempt property referred to was the proceeds of the insurance. The report asked that any after-discovered property be distributed subject to charges for unpaid administration costs, income taxes, and other claims.
The executor was discharged and the administration of the estate was closed on or about October 9, 1940. All of the assets of the estate had been disposed of by September 3, 1940, leaving unpaid Federal and state income taxes, and other claims in the amount of $ 5,452.01; also executor's commissions and attorney's fees.
Is petitioner liable, as a transferee, for the income tax of her husband under the abovIe facts? Respondent insists that she is, relying upon the rationale of
The first court order in the administration proceeding, referred to above, was made under
The widow and minor children are entitled to such reasonable allowance out of the estate as shall be necessary for their maintenance according to their circumstances, during the progress of the settlement of the estate, which, in case of an insolvent estate, must not continue longer than one year after granting letters. Such allowance must be paid in preference to all other charges, *775 except funeral charges, expenses of the last illness and expenses of administration, and may, in the discretion of the court or judge granting it, take effect from the death of the decedent.
The insurance proceeds were set apart to petitioner under
*217 In
Is the petitioner, in receipt of the insurance converted into money, liable at law or in equity as transferee? The petitioner argues that there is no such liability because the transfer of insurance proceeds left sufficient assets in the estate to pay the tax, although she received such remaining assets as widow's allowance.
We think the petitioner's contention should not be sustained for two reasons: First, that the estate was rendered insolvent by the transfer of insurance proceeds, and, second, that equity would, in our opinion, be deaf to the petitioner's plea that insolvency was caused only by the subtraction of the widow's allowance from the estate. An ordinary definition of insolvency is, in effect, a preponderance of liabilities *777 over assets. In that sense the estate of petitioner's husband was rendered insolvent on June 6, 1940, when the insurance proceeds were transferred to her. We consider untenable the view that there was solvency*221 on June 6, merely because some money remained in the estate after the transfer of the insurance proceeds. That money was subject to the debts of the estate and particularly subject to an order of the Probate Court entered on February 8, 1940, that $ 250 per month should be paid to the widow. The estate was exhausted on August 9, 1940. Under such circumstances we can no more view the estate as solvent on June 6, 1940, than we could view as solvent some individual whose liabilities exceeded his assets, merely because upon a certain date he had funds sufficient to pay a certain debt, but subject to his other liabilities.
The solvency of an estate must logically be viewed by comparison of all of its assets and liabilities as reflected in the final report and account. Additional claims might have existed against the estate here at hand, after the insurance proceeds were paid out. Indeed, the record shows that at the time of the filing of the executor's final account there were unpaid claims of $ 5,452.01, and income taxes due the State of California. We hold that the estate was rendered insolvent when it made the distribution of insurance proceeds to the petitioner on June 6.
In *222 the second place, and without considering the other liabilities just mentioned, we have no doubt that in a court of equity petitioner would not be heard to say that the transfer to her of the insurance proceeds did not render the estate insolvent, when she herself was taking under a widow's allowance the remainder of the assets (except administration expenses and funeral expenses). It seems clear that equity would intervene, for if we assume the petitioner's right to the widow's allowance free from claims for income tax, it is obvious that the estate was, in effect, cut down to that extent, and that therefore the payment of the insurance money leaves the estate without assets with which to pay the income tax. Equity responds to the plea of inadequacy of legal remedy. 37 C. J. 340;
It should be borne in mind that the petitioner here is no mortgagee, purchaser, or judgment creditor, for protection against whom the United States must file its lien with state or Federal*224 recorders, but merely the recipient, without payment of consideration, of a portion of the estate of the decedent taxpayer, whose assets are subject to the payment of the tax. She received a part of those assets without authority other than the state statute above discussed, leaving the estate unable to pay the tax, she having also received the other assets under a claim here assumed prior to that of the United States. Primary principles of equity forbid that one convey his assets for no consideration, leaving a creditor powerless to collect his due. We hold that the petitioner, having received the results of conversion of the insurance, is liable in equity.
Decision will be entered for the respondent.
Mellott, J., 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
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 *779 amount and the articles themselves are set aside as property untouchable*226 by the creditors of the decedent or by the executor or by the administrator of the estate. * * * Paraphrasing Chief Judge Cardozo's statement in
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
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.
See also
The right of the widow to the exempt property of her husband is superior to the claims of creditors.
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*228 it may do so is not an issue in this proceeding and the discussion of
Reference is made in the opinion of the majority to
The reliance of the majority upon
In
Legal or equitable liability as a transferee is generally to be*232 determined by reference to state and Federal statutes and by applying established common law principles.
Since I am of the opinion the Commissioner has failed to sustain his burden of proof, I respectfully note my dissent.
Footnotes
1.
§ 660↩ . Possession before inventory: Setting aside homestead. The decedent's surviving spouse and minor children are entitled to remain in possession of the homestead, the wearing apparel of the family, the household furniture and other property of the decedent exempt from execution, until the inventory is filed. Thereupon, or at any subsequent time during the administration, the court, on petition therefor, may in its discretion set apart to the surviving spouse, or, in case of his or her death, to the minor child or children of the decedent, all or any part of the property of the decedent exempt from execution, and must set apart to such spouse or to such minor child or children the homestead selected, designated and recorded, if such homestead was selected from the community property, or from the separate property of the person selecting or joining in the selection of the same. [Enacted 1931.]