text:
    CHICAGO TITLE & TRUST CO., as Trustee under Trust No. 49944, Plaintiff-Appellant, v. UNITED STATES FIDELITY & GUARANTY CO., Defendant-Appellee.
    No. 73-1941.
    United States Court of Appeals, Seventh Circuit.
    Argued Nov. 8, 1974.
    Decided Feb. 19, 1975.

      Marvin Glassman, Chicago, 111., for plaintiff-appellant.
    Paul J. Wisner, Chicago, 111., for defendant-appellee.
    Before MARIS  and HASTINGS, Senior Circuit Judges, and TONE, Circuit Judge.

       Senior United States Circuit Judge Albert B. Maris of the United States Court of Appeals for the Third Circuit is sitting by designation.

   TONE, Circuit Judge.

The issue in this diversity case is whether the insured may recover under an Illinois fire insurance contract for the loss of a building that had little or no economic value at the time of the loss. To decide this issue we must return to the area of the law visited last year in Garcy v. Home Ins. Co., 496 F.2d 479 (7th Cir. 1974). The plaintiff insured appeals from an order entering summary judgment for the defendant insurer on the issue of damages and dismissing the remainder of the case as moot.

The building in question, 1312-1316 West 79th Street, Chicago, Illinois, was a three-story masonry structure containing two store premises and four apartments and built about 55 years ago. In 1966 the building was conveyed into a land trust, of which plaintiff is trustee.

In 1970 an action to foreclose the mortgage on the building was commenced in the state court, as was an action by the city alleging numerous building code violations and seeking, inter alia, demolition of the building. In the city’s suit, the court appointed a receiver on an emergency basis to restore heating but, in January 1971, ordered him to vacate the entire premises and not to make any heating repairs. Later the same month the court discharged the receiver. In the foreclosure action, the mortgagee acquired the beneficial interest in the land trust in 1971, Later that year it sold that beneficial interest for $7,000 to one Alex Salb, who took the interest in the name of a nominee to avoid personal liability.

Defendant issued its fire insurance policy on the building in the amount of $50,000 for the term August 24, 1971 to August 24, 1972 under the Illinois Property Insurance Placement Facility, commonly known as the Illinois FAIR Plan. The policy, originally issued in the names of the mortgagee and the receiver, was assigned to the plaintiff trustee and the assignment consented to by defendant on November 11, 1971.

On February 6, 1972 the building suffered the first of two fires. Defendant paid $18,556 for this loss to plaintiff trustee, who turned it over to Alex Salb. The insurance company adjuster’s report on this claim shows that this figure was based on an itemization of damage and an “actual cash value” for the building prior to the fire of $60,435 (total replacement cost of $119,436.40 less 45 percent depreciation and uninsurables). Salb did not spend any part of the insurance proceeds on the building.

On February 29, 1972, at a hearing in the city’s action in the state court, a city building inspector testified that he had inspected the building the previous day and it was “vacant and open.” The court ordered a “D and H [dangerous and hazardous] inspection” and continued the hearing to March 14, 1972. At the continued hearing on that date the inspector testified that the building was still open, vacant, severely damaged, and in a dangerous and hazardous condition. The court ordered Salb’s attorney to board and secure the building.

That very day, however, Salb, instead of boarding and securing the building or spending any of the insurance proceeds he had received to rehabilitate it, assigned his beneficial interest in the land trust to Oddie Banks, who late in March married and became Oddie Banks Wright. She testified in a deposition that the agreed price was $4,400, but that she paid only $400 down and was to pay the balance at the rate of $100 per month beginning 60 days from the date of purchase. All she ever paid, however, was the original $400. No purchase contract has been produced by her.

Oddie Banks Wright’s application to FAIR for an assignment of the policy was not submitted until several weeks after she had purchased the beneficial interest and was never acted upon. Defendant, however, makes no point of this and acknowledges that the policy continued in force after she acquired the beneficial interest.

On April 12, 1972, the state court again ordered that the building be boarded and secured immediately. Yet Oddie Banks Wright’s husband, Oscar Wright, testified by deposition that he had caused certain repairs to be made to the building during the one and one-half month period between the date' of his wife’s purchase of the building and May 1. Although he testified that over $7,000 was spent, no invoice or other corroborating evidence was produced.

On May 1, 1972, eighty-five days after the first fire, the building suffered a second fire. Plaintiff filed this action on Oddie Banks Wright’s behalf to recover $43,795 for the loss resulting from that fire.

After discovery, plaintiff filed a motion in limine asking the court to exclude evidence of the amount paid by Oddie Banks Wright for her interest or of the market value of the building on the ground that “actual cash value,” as defined in a fire insurance policy, means reproduction cost, less depreciation. Plaintiff also moved to strike from defendant’s answer the defenses based on the vacancy and increase-of-hazard clauses of the policy. Judge Will denied both motions by a memorandum opinion and order dated June 7, 1973, Chicago Title & Trust Co. v. United States Fidelity & Guaranty Co., 376 F.Supp. 767 (N.D.Ill.1973), in which he held that plaintiff had no insurable interest, and was therefore not entitled to any damages at all, because the building was “economically useless at the time of the fire.” The motion to strike defenses was denied on the ground that whether they were meritorious depended upon disputed issues of fact.

After additional motions and cross-motions, the details of which are not significant for present purposes, Judge Will entered summary judgment in favor of defendant on the issue of damages and dismissed the remainder of the case as moot, pursuant to a brief memorandum of opinion, which is unpublished.

We agree with the District Court that it would be “grossly inequitable” for plaintiff’s beneficiary to recover in exr cess of $43,000 in insurance proceeds on the facts of this case, and that the law cannot permit such a result. We reach that conclusion, however, by a somewhat different route from that followed by the District Court.

The Authorities

The fire insurance policy in issue insures against loss “to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss,” with certain other limitations not here material.

The decision that appears to establish the definition in Illinois law of “actual cash value” is Smith v. Allemannia Fire Ins. Co., 219 Ill.App. 506 (3d Dist. 1920), which held that the phrase means reproduction cost, less depreciation for age, and not market value. Although the Illinois Supreme Court has never been squarely presented with the issue decided in that case, Smith has been followed as the law of Illinois by this court. Esquire Restaurant, Inc. v. Commonwealth Ins. Co. of New York, 393 F.2d 111 (7th Cir. 1968); Wisconsin Screw Co. v. Fireman’s Fund Ins. Co., 297 F.2d 697 (7th Cir. 1962); Knuppel v. American Ins. Co., 269 F.2d 163 (7th Cir. 1959).

The Smith rule was designed to prevent inequities that may result when there is a disparity between the market value of the real property destroyed and the value of that property to the insured, who in fairness should be put in substantially the same position he was in before the fire. 6 Cooley, Briefs on the Law of Insurance 5089-5090 (2d ed. 1927). Because doctrinaire application of the reproduction-cost rule would sometimes result in windfalls to insureds, the courts of some states have adopted a “broad-evidence rule,” under which the trier of fact is entitled to consider, in arriving at “actual cash value,” all evidence relevant to the value of the property at the time of the loss, including both market value and reproduction value. McAnarney v. Newark Fire Ins. Co., 247 N.Y. 176, 159 N.E. 902 (1928); Messing v. Reliance Ins. Co., 77 N.J.Super. 531, 187 A.2d 49 (1962); National-Ben Franklin Fire Ins. Co. v. Short, 207 Okl. 673, 252 P.2d 495 (1953). The Illinois courts have not yet seen fit to adopt a broad-evidence rule.

Illinois law has not, however, been insensitive to the potential for inequity in the Smith rule. In Lieberman v. Hartford Ins. Co., 6 Ill.App.3d 948, 287 N.E.2d 38 (1st Dist. 1972), the court held that when the owner of a building had entered into a contract for its demolition, and the demolition was in its early stages, he had no “insurable interest” because the building had no economic value. Shortly before the Illinois Appellate Court decided Lieberman, Judge Marovitz held, in Aetna State Bank v. Maryland Casualty Co., 345 F.Supp. 903 (N.D. Ill.1972), that because a building in the process of demolition had no value, the insured had suffered no compensable loss when that building was damaged by fire. The District Court in the case at bar relied upon the Lieberman and Aetna State Bank cases in holding that because the insured building was economically useless at the time it was destroyed by the second fire, the owner had no insurable interest.

Garcy Corp. v. Home Ins. Co., supra, 496 F.2d 479, involved one of the several buildings that were the subject of the Aetna State Bank case, in which the bank had sued as the mortgagee of the property. In Garcy the action was brought by the mortgagor. The defendants did not plead collateral estoppel in view, inter alia, of lack of privity. Judge Marovitz had decided Aetna on the basis of a stipulation which recited that all five buildings were in the process of demolition. In fact, the building involved in Garcy was not. At the time of the fire, that building was in use as a warehouse. The plaintiff had hoped to sell it before the wrecking crews reached it and could have halted demolition although, had it done so, it might have been liable for damages on the demolition contract. The building had not been stripped of salvagable material or prepared for demolition. On the basis of these facts, the court distinguished Aetna and Lieberman, viewing them and other cases as turning on the finality of the commitment to demolish or abandon use of the building. The court also discussed Judge Will’s opinion in the case at bar, describing it as holding “that the definition of actual cash value as reproduction cost minus depreciation ‘is limited in application to those buildings which are being economically utilized at the time of their damage and destruction,’ ” and did not disapprove that principle but distinguished the case before it as one in which the building did have economic utility. (496 F.2d at 482.)

It appears from the Lieberman case that the Smith rule is limited by the-policy of the law that requires an insurable interest as a condition to recovery on a contract of insurance. If, at the time of the fire, the building no longer has any economic value, there can be no insurable interest and therefore no recovery of damages.

The Summary Judgment

While, based on the present record, we share the District Court’s skepticism concerning the contention that plaintiff made repairs totaling several thousand dollars, which may have infused some economic value into the building, there is sworn testimony, albeit entirely undocumented, that this occurred, and we do not think it can be said as a matter of law that this testimony was so inherently unbelievable that no genuine issue of fact existed. The same can be said of the claimed obligation to pay, in addition to the $400, a balance of $4,000 at the rate of $100 per month. We are, therefore, unable to affirm a summary judgment for defendant that rests on the premise that there is no genuine issue concerning plaintiff’s expenditures and financial commitments.

The Extent of Plaintiff’s Insurable Interest

Our inability to accept the summary judgment that no damages whatsoever are recoverable does not automatically impel us to the other extreme urged by plaintiff, viz., a judgment in its favor, for the benefit of Oddie Banks Wright, in the amount of $43,795 for the destruction by fire of a building that, to mention only the highlights, (a) had been purchased two years before the fire for $7,000; (b) had been the subject of a demolition suit for 21 months and was at the time of the fire subject to state court orders in that suit to board up and secure; (c) had already suffered, less than three months earlier, a fire for which the then owner had collected $18,-556 on the same policy; (d) had been the subject, between the two fires, of city inspection reports to the state court declaring it to be open, vacant, seriously damaged, and hazardous; and (e) for which the present owner had paid $400 and claimed to have agreed to pay, over a period of time, an additional $4,000, no part of which was ever paid. That an Illinois court would not allow itself to be the instrumentality for the perpetration of such a gross inequity is apparent from the Lieberman case, in which the court invoked the requirement of insurable interest to prevent injustice.

In Lieberman “[t]he destruction of the building was not ‘economically disadvantageous’ to plaintiff; he would have gained no advantage by the continued existence of the structure and suffered no loss by its destruction.” (6 Ill.App.3d at 950, 287 N.E.2d at 40.) The insurable interest requirement, therefore, precluded recovery of any damages. In the case at bar we must predict what an Illinois court would do when the insured building, instead of having no economic value whatsoever, has a value that is nominal or grossly disproportionate to reproduction cost, less depreciation. The law review article cited and relied upon in Lieberman offers some guidance by demonstrating that in some situations courts have applied the requirement of insurable interest, not to bar recovery completely, but to limit the amount of damages to correspond to the insured’s limited interest. B. Harnett and J. Thornton, Insurable Interest in Property: A SocioEconomic Reevaluation of a Legal Concept, 48 Col.L.Rev. 1162, 1175-1178 (1948). That article is also instructive in its statement of the policies underlying the requirement of insurable interest as “ . . . the policy against wagering, the policy against rewarding and thereby tempting the destruction of property, and the policy of confining insurance contracts to indemnity.” Id. at 1165. These policies would be offended by a contract requiring the insurer to pay the amount of reproduction cost, less depreciation, in the event of loss when there is a gross disparity between that amount and the value of the building measured on any rational basis, such as market value, economic utility, or utility for a special purpose of the owner. Such a contract would be predominantly a gambling contract, would reward and thereby tempt the destruction of property, and would not be confined to indemnity. The insured in such a case who has recently purchased the building and spent money to repair it, presumably giving it some economic value, does, however, suffer some economic disadvantage from its destruction. He therefore has an insurable interest to the extent of his investment in the building, and should be entitled to recover to that extent, unless of course the building is irrevocably committed to demolition or is abandoned subsequent to the making of the expenditures.

Plaintiff points out that the co-insurance clause of the policy operates to reduce the recovery for a loss in proportion to the amount by which coverage is less than a given percentage, here 80 per cent, of the “actual cash value” of the property; and that, if “actual cash value” means replacement cost, less depreciation, for premium purposes and something less for loss purposes, an owner who applies for fire insurance on a building that has little or no economic value is faced with a dilemma under the rule we apply. If he takes out insurance in an amount equal to the required percentage of value, defined as replacement cost, less depreciation, he must pay a premium which is high in relation to the amount he can recover in the event of loss; yet if he takes out insurance in a lower amount, he must suffer the co-insurance penalty against any recovery in the event of loss. In Lieberman the court did not consider this problem, yet there the insured had paid a premium for what turned out to be no insurance at all. Development of the law often causes some temporary dislocations calling for adjustments in business practices. Applying the doctrine of insurable interest to limit recovery to the amount of economic loss in cases such as the one at bar may mean that, at least until appropriate changes are made in insurance practices, an owner of a building which has little or no economic value must pay a relatively high premium to be assured that if in fact he does suffer economic loss through damage to, or destruction of, the building, he will be able to recover the full amount of that loss. If a choice must be made between that result and allowing a recovery that bears no relationship to the insured’s economic loss, Lieberman points to the choice that Illinois law would make.

If the evidence shows that the building was not irrevocably committed to demolition or abandoned, plaintiff will be entitled to recover on behalf of Oddie Banks Wright damages equal to the $400 she paid for the building, plus the amount of any genuine liability to the vendor arising out of the purchase contract and any amounts proven to have been expended for repair and rehabilitation, less, of course, the value of the land underlying the building. If the value of the land exceeds the sum of expenditures and liability on the contract, there will be no damages.

Even though the amount that may be recoverable will presumably be less than the jurisdictional amount, diversity jurisdiction is not defeated in view of the possibility at the time the case was filed that a court would hold the Smith rule applicable. St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 288-289, 58 S.Ct. 586, 82 L.Ed. 845 (1938).

Reversed and Remanded.

      . The National Insurance Development Program, of which the FAIR Plan is a part, is a quasi-governmental insurance program, created by statute (12 U.S.C.A. § 1749bbb; IU.Rev. Stat., Ch. 73, § 1065.69 et seq. (1971)) to provide insurance at a reasonable cost for high risk urban properties unable to qualify for or obtain insurance through normal private channels. As the program was developed in Illinois, the FAIR Plan Association issues policies in its own name or has private insurance companies underwrite the policies. Any person having an “insurable interest” in a qualifying property can apply if unable otherwise to obtain insurance, and upon completion of an inspection and approval of the premises, the application is referred to a designated participating insurance company.

      . The assignment was dated March 14, 1972, but was not accepted by the trustee until April 7, 1972, which accounts for the District Court’s statement that Oddie Banks’ purchase occurred on April 7. See Chicago .Title & Trust Co. v. United States Fidelity & Guaranty Co., 376 F.Supp. 767, 769 (N.D.Ill.1973).

      . On September 6, 1972 the state court ordered the building demolished.
      We note that the Wrights made no effort to halt the demolition of the building, even though Oddie Banks Wright remained the beneficiary of the land trust notwithstanding her failure to make any of the $100 monthly payments allegedly contemplated by the purchase agreement. In fact, it appears from the deposition of Oscar Wright that even though he was technically managing the building for his wife, he did not know when the building was demolished, or by wl(pm, or under what circumstances, knowing only that it was “down Christmas.”

      . Defendant alleged that “the building was abandoned and unoccupied for a period in excess of sixty days, in violation of the provisions of the said policy of insurance, rendering the said policy void.” The depositions contain references to a tenant who supposedly occupied one of the shops and “was supposed to pay but . . . never paid rent.” Apparently neither the Wrights nor the public adjuster whose reports they rely on ever saw this person. Nor, apparently, was he observed by the city building inspector, who reported the building vacant.

      . Defendant alleged that plaintiff, through deficient management, permitted the building to fall into a state of disrepair and uninhabitability, such that the various building codes of the City of Chicago were violated, constituting an increase of hazard which served to suspend the policy. Defendant contends that failure of plaintiff to satisfy these conditions of the policy completely exonerates the Company from any liability arising from losses occurring during the vacancy or increased hazard.

      . The issue in First National Bank of Highland Park v. Boston Ins. Co., 17 Ill.2d 147, 160 N.E.2d 802 (1959), cited by plaintiff here, was whether the insured’s interest was limited to the balance due it as vendor under a partly executed contract to sell the property, when the purchaser had the option of returning the land to the vendor in the event of fire. In holding that the insurer could not avail itself of the terms of the land contract, the court stated as follows: “It is true that as between the vendor and the vendees in this case the value of the vendor’s interest under the contract at the time of the fire was $16,-000. The insurers, however, made no attempt to show that the contract price of $19,000 represented the actual value of the insured building. Indeed, they conceded that its value exceeded the aggregate amount of the policies, $46,750.” The court stated its holding as being “that the contract price did not conclusively determine the value of the vendor’s interest for the purpose of determining the amount due upon the insurance policies.” (17 Ill.2d at 151, 160 N.E.2d at 804-805.)

      . The court in Garcy assumed, of course, in its discussion of the opinion of the District Court in the cáse at bar, that there was no genuine issue as to whether the building had any economic value.
      It should be observed also that in one minor respect the statement in Garcy of the facts in the case at bar is inaccurate: the order not to repair the heating system had been issued by the state court rather than the city and had been withdrawn at the time of the fire. That order, it should be added, had been issued over one year before Oddie Banks acquired her interest rather than, as stated in the original opinion of the District Court in the case at bar, one day before. The District Court’s later opinion, which is unpublished, corrects the latter error. It is also to be noted, however, that there, was outstanding at the time of the second fir'é a later state court order to board up the premises.

      . In a sworn statement made one month prior to the filing of the complaint in this action, Mrs. Wright stated that she never went back to the building to look at it after she bought it, which raises doubt as to the extent, if not the existence, of any personal knowledge that would permit her to give evidence as to the repairs. (See Federal Rules of Evidence, Rule 602, Pub.Law 93-595, 93rd Cong., 2d Sess.) She testified, however, “We had a new roof put on, and the plastering and dry walls,” which she said was done by one J. Simons or J. Simon, whose name she could not spell. Her husband testified on deposition that, after his wife acquired the building, “we did roof work. We were starting the electrical work, and started some plumbing work,” and that the amount “spent on those repairs” was “somewheres around seven or $7,500.” No documentation of any kind was ever produced to support the testimony concerning repairs. It will be recalled that on April 12, 1972, at the mid-point of the period during which the repairs were supposedly going on, the state court ordered the building boarded and secured.

      . Concerning the nature of the financial arrangement between Oddie Banks Wright and Alex Salb, we note from the depositions and sworn statements that Salb’s lawyer, Mort Rubenstein, continued, at the request of Salb, to represent the interests of the property owners in Circuit Court even after the assignment; that Oddie Banks Wright contacted Salb immediately upon learning of the May 1st fire, whereupon he arranged for the same public adjuster who had handled the appraisal after the first fire to perform the same task again; that the Wrights apparently were not notified of the impending demolition of the building, since Salb and Rubenstein were presumably handling the case; and that Salb neither attempted to collect the monthly payments allegedly due nor took any action to foreclose the mortgage he allegedly held for the balance of $4,000. On remand the District Court will no doubt explore the genuineness of the original obligation to pay the $4,000 balance.

      . In the case at bar, Oddie Banks Wright never had to make that choice, since the claim asserted on her behalf by the plaintiff trustee is on a policy purchased by one of her predecessors in interest,


source: Caselaw Access Project

author: HASTINGS, Senior Circuit Judge.

license: Public Domain

text:
    UNITED STATES of America and James M. Sinda, Revenue Agent, Internal Revenue Service, Petitioners-Appellees, v. Marvin L. TRATNER, Respondent-Appellant; UNITED STATES of America and James M. Sinda, Revenue Agent, Internal Revenue Service, Petitioners-Cross-Appellants, v. Marvin L. TRATNER, Respondent-Appellee.
    Nos. 74-1166, 74-1167.
    United States Court of Appeals, Seventh Circuit.
    Argued Nov. 14, 1974.
    Decided Feb. 18, 1975.

      Ernest J. Brown, Acting Chief, and William A. Whitledge, Atty., Tax Div., Dept, of Justice, Washington, D. C., James R. Thompson, U. S. Atty., and Gary L. Starkman, Asst. U. S. Atty., Chicago, 111., for United States.
    Wayne B. Giampietro and Elmer Gertz, Chicago, III., for Tratner.
    Before FAIRCHILD, Chief Judge, HASTINGS, Senior Circuit Judge, and SWYGERT, Circuit Judge.
   HASTINGS, Senior Circuit Judge.

The United States and the taxpayer, Marvin L. Tratner, both appeal from the decision of the district court granting in part and denying in part the government’s petition to enforce an Internal Revenue summons brought pursuant to Title 26, U.S.C., Sections 7402(b) and 7602.

On February 18, 1971, taxpayer, an attorney, made a $10,000 cash deposit to his checking account numbered 428 619 1 at the Harris Trust and Savings Bank and on February 22, 1971, he wrote a $10,000 check on that account. The account is an escrow account of the kind commonly maintained by attorneys in order to segregate clients’ funds from their own. The bank reported the cash transaction to the Internal Revenue Service as required by 31 U.S.C. § 1081. Subsequently, Internal Revenue Agent James Sinda was assigned to audit taxpayer’s 1971 tax return as a result of the bank report. Agent Sinda conducted an audit of records provided to him by the taxpayer and was satisfied with all aspects of the audit except the escrow account. Taxpayer showed Sinda the $10,000 check drawn on the escrow account, but he covered the line indicating the name of the payee. Taxpayer refused to provide any further information about the escrow account on the ground that the account was protected by the attorney-client privilege.

On July 5, 1973, Agent Sinda issued taxpayer an Internal Revenue summons requiring production of the following items:

1. All checking accounts including checking account No. 428 619 1
2. Copies of cancelled checks for above cheeking accounts
3. Copies of deposit slips for above checking accounts
4. All savings accounts
5. All information regarding a deposit to checking account No. 428 619 1 in the amount of $10,000 on February 18, 1971 and all information regarding any other deposit made to checking account 428 619 1 during 1971
6. All information regarding a check written on checking account number 428 619 1 in the amount of $10,000 on February 22, 1971 and all information regarding any other check written on account 428 619 1 during 1971
7. Any other records necessary to determine the correct tax liability for 1971

Taxpayer had no savings account and has provided information about his personal checking account. Upon taxpayer’s refusal to provide the remaining materials sought by the summons, the United States instituted this proceeding for enforcement of the summons in the district court. The taxpayer, in his response to the government’s petition, claimed that the escrow account was protected from disclosure by the attorney-client privilege.

The district court, upon the government’s motion, ordered Tratner to show cause why he should not comply with the summons. On October 31, 1973, an evidentiary hearing was held at which Agent Sinda and Tratner testified. Following the hearing, the taxpayer supplied to the district court for in camera inspection all of the files in his possession pertaining to the $10,000 transaction and the identity of the client involved. There is no indication in the record that the district court examined these materials. The materials were never filed in the district court or introduced into evidence. They are not included in the district court record, nor do they appear in the record on appeal. The district court’s order and findings of fact and conclusions of law do not indicate whether the court considered the in camera materials in making its decision.

On December 5, 1973, the court issued its decision. It ordered taxpayer to produce the records required in items 1, 2 and 3 of the summons, that is, the checking account, cancelled checks and deposit slips for the escrow account. The court held that disclosure of these items would not violate the attorney-client privilege. The court declined to enforce the summons as to items 5, 6 and 7 which had requested “all information” regarding all deposits made to and all checks written on the escrow account, including those relating to the $10,000 transaction, as well as any other records necessary to determine the correct tax liability for 1971. The court held that these requests were overbroad.

Tratner appeals from the court’s order enforcing the summons as to items 1, 2 and 3. The United States cross-appeals from the denial of enforcement of items 5 and 6. No appeal is taken from the denial of enforcement of item 7. The district court stayed its December 5, 1973, order pending appeal to prevent the issue from becoming moot.

THE ATTORNEY-CLIENT PRIVILEGE

The taxpayer’s appeal raises only one issue: whether the attorney-client privilege is, under the facts of this case, a defense to an Internal Revenue summons to produce records of an attorney’s escrow checking account.

The Supreme Court has held that an Internal Revenue summons may be challenged on the ground of attorney-client privilege. Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964). The burden is on the taxpayer to prove that the information requested falls within the attorney-client privilege. United States v. Johnson, 5 Cir., 465 F.2d 793, 795 (1972); Bouschor v. United States, 8 Cir., 316 F.2d 451, 456 (1963).

The circuits are divided on the question of whether the issue of privilege in a federal tax proceeding is to be resolved as a matter of state or federal law. Compare Colton v. United States, 2 Cir., 306 F.2d 633, 636 (1962), cert. denied, 371 U.S. 951, 83 S.Ct. 505, 9 L.Ed.2d 499 (1963), and Falsone v. United States, 5 Cir., 205 F.2d 734, 739 — 742, cert. denied, 346 U.S. 864, 74 S.Ct. 103, 98 L.Ed. 375 (1953) (federal law) with Baird v. Koerner, 9 Cir., 279 F.2d 623, 627-629 (1960) (state law). Other courts, including our own, have found it unnecessary to determine whether state or federal law is to be applied where the result would be the same under either standard. Tillotson v. Boughner, 7 Cir., 350 F.2d 663, 666 (1965); Bouschor v. United States, 8 Cir., 316 F.2d 451, 456 (1963).

Here, as in Tillotson, we need not reach that question since “Illinois, which has no statute with respect to attorney-client privilege, looks to the common law as do the federal authorities.” Tillotson, supra, 350 F.2d at 666.

In Radiant Burners, Inc. v. American Gas Association, 7 Cir., 320 F.2d 314, cert. denied, 375 U.S. 929, 84 S.Ct. 330, 11 L.Ed.2d 262 (1963), this court, sitting en banc, reviewed the common law history of the attorney-client privilege and cited with approval Dean Wigmore’s summary of the factors essential to existence of the privilege:

(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal advisor, (8) except the protection be waived. 8 J. Wigmore, Evidence § 2292 (McNaughton rev. 1961).

The identical test has been adopted in Illinois. In re Estate of Busse, 332 Ill. App. 258, 262, 75 N.E.2d 36, 38 (1947).

The question here is whether the taxpayer has borne his burden of proving the existence of these factors. Taxpayer argued in the district court and on appeal that all transactions in an attorney escrow account are per se privileged. All of taxpayer’s evidence introduced at the hearing, however, concerned the $10,000 transaction and not the account generally. Taxpayer clearly has failed to sustain his burden with respect to the account as a whole. The question remains whether he has proved that the elements required for the privilege were present in the $10,000 transaction so as to protect from disclosure the identity of the client to whom the $10,000 check was written.

Normally, the identity of a client is not considered a privileged communication. United States v. Ponder, 5 Cir., 475 F.2d 37, 39 (1973); Tillotson v. Boughner, 7 Cir., 350 F.2d 663, 666 (1965); Colton v. United States, 2 Cir., 306 F.2d 633, 637 (1962), cert. denied, 371 U.S. 951, 83 S.Ct. 505, 9 L.Ed.2d 499 (1963). But, “[t]o the general rule is an exception, firmly bedded as the rule itself. The privilege may be recognized when so much of the actual communication has already been disclosed that identification of the client amounts to disclosure of a confidential communication. [Citing cases.]” NLRB v. Harvey, 4 Cir., 349 F.2d 900, 905 (1965). See also, Tillotson, supra; Colton, supra; Baird v. Koerner, 9 Cir., 279 F.2d 623 (1960); Comment, Assertion of the Attorney-Client Privilege to Protect the Client’s Identity, 28 U.Chi.L.Rev. 533 (1961).

The identity of the client is only to be privileged if it is a confidential communication which otherwise meets the requirements of the attorney-client privilege. Thus, for example, in Tillotson v. Boughner, 7 Cir., 350 F.2d 663 (1965), this court followed Baird v. Koerner, 9 Cir., 279 F.2d 623 (1960), in holding that an attorney cannot be compelled to divulge the name of a client who employs him to voluntarily mail sums of money to the Internal Revenue Service in payment of undetermined income taxes, unsued upon, and as to which no government audit or investigation is pending. In those cases it was evident that the client had sought legal advice from his attorney and that the substance of confidential communications would be revealed if the client’s name were disclosed. Applying the same test here, we must determine whether the taxpayer has shown that the $10,000 transaction satisfies the requirements of the attorney-client privilege enumerated by Wigmore. The obligation is on the person claiming the privilege to present the underlying facts demonstrating the existence of the privilege. It is not enough for an attorney to testify to his conclusions. “The responsibility of determining whether the privilege exists rests upon the District Judge and not upon the lawyer whose client claims the privilege.” NLRB v. Harvey, 4 Cir., 349 F.2d 900, 907 (1965). Where this evidence may be presented only by revealing the very information sought to be protected by the privilege, an in camera inspection of the evidence may be appropriate. See, for example, United States v. Johnson, 5 Cir., 465 F.2d 793 (1972).

The only witness at the hearing to testify on behalf'of the taxpayer was Tratner himself. He testified that he was an attorney admitted to practice before the courts of the State of Illinois and the United States District Court for the Northern District of Illinois. At two points in the hearing he responded to questions concerning the $10,000 transaction. First, Tratner responded directly to the court’s questions:

Mr. Tratner: Your Honor, I have a file which involves this specific $10,000 transaction. The $10,000 which was used in that transaction would indicate the name of the client. Again, I will offer all of this in camera for the Court to determine.
The Court: My question to your counsel was whether or not, independent of the check, was there any correspondence in the file or indication in the file which would demonstrate the existence of an attorney-client relationship in the expenditure on behalf of the client?
Mr. Tratner: Yes, there is something else. It is a note, because this money was used as a part of a transaction.
The Court: By note, you mean a promissory note, a business note?
Mr. Tratner: That is correct.
The Court: That note indicates the existence of the relationship and the expenditure on behalf of the client as well?
Mr. Tratner: No, we would have to go further in the file. It is there.
The Court: Let me start initially. Do you have anything further that you wish to put in or offer other than the in camera inspection?
Mr. Giampietro: I would, your Hon- or, have testimony by Mr. Tratner.

Later Tratner was questioned by his attorney, Mr. Giampietro:

Q. Now just so it is on the record, did you receive $10,000 on February 18, 1971, from a person who you represented as an attorney at this time?
A. Yes, I did. It was delivered to me, brought up to my office. Not wanting to have $10,000 to carry in to my account, I made the client carry it across the street to the bank and give it to me to deposit.
Q. What, if anything, did you do at that time in regard to the client?
A. I returned a check to the client dated the same day. I made it out to the client for the same amount, as payee for $10,000.
Q. Did this have to do with the matter in which you represented the client as attorney?
A. Subsequently the client endorsed the check, payable to someone else.
Q. Did you have further dealings with that check in regard to the matter in which you represented the person?
A. Yes. He delivered the check to someone else.
Q. This had to do with the matter in which you were representing the person as attorney?
A. Yes.

In addition to this testimony, Tratner submitted to the court for an in camera inspection his file concerning the $10,000 transaction. Although the transcript does not reflect the fact, both parties at oral argument agreed that the judge examined the documents in the file. The file is not available to this court because it was not included in the record.

From the evidence presented in the transcript it cannot be said that Tratner sustained his burden of proving that the $10,000 transaction was part of a relationship in which the client was seeking legal advice. Since the transaction involved a promissory note it might well have been a business transaction not involved with the giving of legal advice. “Attorneys frequently give to their clients business or other advice which, at least insofar as it can be separated from their essentially professional legal services, gives rise to no privilege whatever. [Citing cases.]” Colton v. United States, 2 Cir., 306 F.2d 633, 638 (1962), cert. denied, 371 U.S. 951, 83 S.Ct. 505, 9 L.Ed.2d 499 (1963). See also, In re Estate of Busse, 332 Ill.App. 258, 267, 75 N.E.2d 36, 40 (1947).

We recognize that, on the record before us, Tratner has failed to sustain his burden of proof. Nevertheless, we believe that under the circumstances of this case, the taxpayer should be given the opportunity to include in the record the in camera materials and any other evidence which would reveal the underlining factual circumstances which he claims demonstrate the existence of the attorney-client privilege. If the government continues to seek the accounts, cancelled checks and deposit slips for transactions in the escrow account other than the $10,000 deposit and check, Tratner should also be permitted to introduce evidence in support of any privileges protecting these items.

Although it may be thought somewhat unusual to give the taxpayer a second chance to make his case, there is precedent for such a disposition. In United States v. Johnson, 5 Cir., 465 F.2d 793 (1972), a case with similar facts, the district court had conducted an in camera inspection of the attorney’s files before making a determination of whether the attorney-client privilege was a defense to enforcement of an Internal Revenue summons. There, too, the record did not include the documents considered in camera. Despite the government’s contention on appeal that the attorney’s claim of privilege should be rejected for failure to carry his burden of proof, the court remanded the case for a redetermination of the privilege question. In order to assure that the redetermination would be subject to appellate review, the court directed that the record should include at least a general description of the materials held privileged. In United States v. Kovel, 2 Cir., 296 F.2d 918 (1961), the Second Circuit, on somewhat different facts, also chose to remand where the record lacked the evidence needed to determine the existence of the attorney-client privilege although the court acknowledged that the burden was on the person asserting the privilege to produce evidence supporting his claim.

We, therefore, vacate the judgment of the district court concerning items 1, 2 and 3 and remand for a redetermination of the privilege issue. On remand, the district court should make findings of fact and conclusions of law on the issue of whether the attorney-client privilege attaches to any transactions in the escrow account. Without revealing the information claimed to be privileged, the district court should state in general terms why the evidence does or does not satisfy the requirements for the privilege. With respect to the $10,000 transaction, there should be findings as to (1) whether it was integrally related to the giving of legal advice; (2) whether it was a business dealing or merely an attempt at concealment so unrelated to the giving of legal services as not to be protected by the attorney-client privilege; and (3) whether it was, in any event, a sham transaction. If, on remand, Trainer submits in camera materials for consideration by the district court they should be made a part of the record.

OVERBREADTH

The only issue raised by the government’s appeal is whether the district court erred in declining to enforce the summons for items 5 and 6 <on the grounds of overbreadth. Items 5 and 6 sought all information regarding all deposits to and all checks written on the attorney escrow account during 1971.

The court may have concluded that these items were overbroad because they requested a substantial amount of information likely to be protected by the attorney-client privilege. These items are subject to the interpretation that they would have required the taxpayer to produce the complete file on every client who was in any way connected with any 1971 transaction in the taxpayer’s attorney escrow account. In order to prevent the taxpayer from having the burden of asserting and proving the existence of the attorney-client privilege as to every document in each of these files, it is appropriate for a court to require the Internal Revenue Service to state with greater specificity the information sought. For example, in United States v. Dickinson, 308 F.Supp. 900 (D.Ariz. 1969), aff’d, 9 Cir., 421 F.2d 702 (1970), the Internal Revenue Service had issued an attorney a summons to produce “all books and records reflecting [his] accounts receivable.” The court said that the Internal Revenue Service did not have license to examine all of the attorney’s files. The court found the summons “somewhat ambiguous and subject to an overly broad interpretation” and ordered that the summons be limited to a schedule listing the clients and the amounts owed in order to protect the clients’ confidential communications. Id., 308 F.Supp. at 901.

In the instant case, the attorney for the government stated at oral argument that items 5 and 6 were not over-broad because all the government was seeking was verification that the $10,000 transaction was only an “in and out” transaction and did not represent taxable income to Tratner. Prior to the issuance of the summons Tratner had never been asked to produce information concerning any transactions in the escrow account other than the $10,000 transaction. Had the government limited its summons to the information necessary to verify that single transaction it would not have been subject to challenge for overbreadth, although, of course, the taxpayer would still have been able to raise and attempt to prove his claims of privilege with respect to that information as well. The district court was not in error in holding that items 5 and 6 were overbroad.

In light of the foregoing, the judgment of the district court with respect to items 5 and 6 is affirmed. The judgment with respect to items 1, 2 and 3 is vacated and remanded for further proceedings not inconsistent with this opinion.

Affirmed in part; vacated in part, remanded.

      . But see the treatment of privilege in Rule 501 of the Federal Rules of Evidence which have not yet taken effect. Pub.L. No. 93-595 (January 2, 1975).


author: JAMES M. CARTER, Circuit Judge:

text:
    The PEOPLE OF the TERRITORY OF GUAM, Plaintiff-Appellee, v. Thomas PALOMO, Defendant-Appellant.
    No. 74-2253.
    United States Court of Appeals, Ninth Circuit.
    Jan. 6, 1975.
    As Amended Feb. 21, 1975.

      Howard G. Trapp, of Trapp, Gayle, Teker, Weeks & Friedman, Agana, Guam, for defendant-appellant.
    Harold. J. Haefer, Asst. Atty. Gen., Agana, Guam, for plaintiff-appellee.
    Before KOELSCH and CARTER, Circuit Judges, and ZIRPOLI, District Judge.

       Hon. Alfonso J. Zirpoli, United States District Judge, Northern District of California, sitting by designation.

   OPINION

JAMES M. CARTER, Circuit Judge:

The defendant was convicted by a jury of attempted robbery, was sentenced, and appeals.

The appeal presents three issues:

(1) Was defendant’s motion to stay proceedings under 28 U.S.C.A. § 1867, filed the day of trial, and his oral motion for inspection of juror questionnaires, properly denied?

(2) Was the juror Garrido able to read, write and understand the English language sufficiently to fill out her juror questionnaire form?

(3) Did the indictment charge an offense so that the motion in arrest of judgment was properly denied? We affirm.

I

Defendant moved on the day of trial to stay the proceedings under 28 U.S.C. § 1867. No motion was made earlier by the defendant to inspect or secure access to the jury records.

Defendant’s motion .to stay proceedings was “on the ground of a substantial failure to comply with the provisions of 28 U.S.C. § 1865(b) in selecting the petit jury.” The motion was apparently pursuant to 28 U.S.C. § 1867(a). No sworn statement of facts was filed as required by 28 U.S.C. § 1867(d).

At the argument on the motion it appeared that defense counsel desired to see and use on voir dire juror questionnaires to establish that the jurors, under 28 U.S.C. § 1865, were “unable to read, write, and understand the English language with a degree of proficiency sufficient to fill out satisfactorily the juror qualification forms.”

During the argument, defense counsel made an oral motion for inspection of the juror questionnaires.

Defense counsel, in his argument, conceded he had known of possible disqualification of jurors for failure to understand the English language long before (and more than seven days before) the motion as provided in 28 U.S.C. § 1867(a).

Thereafter, the court permitted defense counsel to use the questionnaires of two jurors — Saicon and Garrido. The court then changed its ruling and held untimely an oral motion for inspection. The court denied further use of the juror questionnaires.

Section 1867(a), 28 U.S.C., provides:

“In criminal cases, before the voir dire examination begins, or within seven days after the defendant discovered or could have discovered, by the exercise of diligence, the grounds therefor, whichever is earlier, the defendant may move to dismiss the indictment or stay the proceedings against him on the ground of substantial failure to comply with the provisions of this title in selecting the grand or petit jury.” The trial court’s rulings were correct.

The Oral Motion For Inspection

Although 28 U.S.G. § 1867(a) does not control the time for such a motion, the motion here was clearly untimely under the procedures used in trial courts for the processing and trial of cases. The decision in such a situation rests in the sound discretion of the court.

The court was not required to consider his oral motion. But the denial of the motion was not error. The case had been set for trial long before. The morning of trial the jurors and witnesses were present and the case was ready to proceed. The denial of the motion to inspect as untimely was not an abuse of discretion.

Secondly, the defendant did not accompany his written motion for a stay with the sworn statement of facts.

The Motion Under 28 U.S.C..

§ 1867(a)

First, the defendant’s motion was made more than seven days after the discovery of the purported grounds for the motion, the time limit set forth in the section.

Section 1867(d), 28 U.S.C., provides:

“Upon motion filed under subsection (a) of this section, containing a sworn statement of facts which, if true, would constitute a substantial failure to comply with the provisions of this title, the moving party shall be entitled to present in support of such motion . . . any relevant records and papers not public or otherwise available used by the jury commissioner or clerk, and any other relevant evidence. . . . ” (Emphasis supplied).

United States v. Beatty, 465 F.2d 1376 (9 Cir. 1972), relied on by defendant, does not control this case. That case involved subsection (f) of 28 U.S.C. § 1867, which provides in part:

“(f) The contents of records or papers used by the jury commissioner or clerk in connection with the jury selection process shall not be disclosed, except pursuant to the district court plan or as may be necessary in the preparation or presentation of a motion under subsection (a), (b), or (e) of this section, until after the master jury wheel has been emptied and refilled and all persons selected to serve as jurors before the master wheel was emptied have completed such service. The parties in a case shall be allowed to inspect, reproduce, and copy such records or papers at all reasonable times during the preparation and pendency of such a motion [under subsections (a), (b) or (c)].”

Beatty moved for such inspection and the motion was denied; hence the reversal in Beatty, supra.

The statutory scheme is plain. The defendant, under subsection (f) of 28 U.S.C. § 1867, is entitled to inspect and copy the jury record. Beatty, supra.

The defendant needs this information in order to make his motion to stay or dismiss under subsection (a), 28 U.S.C. § 1867, and to support his motion by the sworn statement of facts or affidavit required by subsection (d).

To the extent that United States v. Guzmon, 468 F.2d 1245 (2 Cir. 1972), aff’g, 337 F.Supp. 140 (S.D.N.Y.1972), United States v. Deardorff, 343 F.Supp. 1033 (S.D.N.Y.1971), and United States v. Grey, 355 F.Supp. 529 (D.C.W.Okl. 1973) hold that a defendant is not entitled to discovery under subsection (f) of 28 U.S.C. § 1867 for the purpose of making and supporting his motion under subsection (d), we disagree with these cases.

After the opinion was filed in this case, the Supreme Court decided that an applicant is entitled to discovery under § 1867(f). Test v. United States, 420 U.S. 28, 95 S.Ct. 749, 42 L.Ed.2d 786 (43 U.S.L.W. 4207, 1975). Although noting that § 1867(f) “does limit inspection to ‘reasonable times’ ”, the Court found it unnecessary to consider the timeliness of the application because the issue had not been raised by the petitioner in that case. Id. at 30, 95 S.Ct. at 750 (43 U.S.L.W. at 4208 n. 4).

II

There is no merit to defendant’s contention concerning the qualifications of juror Garrido to serve. The record does not show her unqualified under 28 U.S.C. § 1865(b)(2). She understood and answered questions in English. She had filled out her questionnaire in English although she omitted answering the question “What is the extent of your education?” Her husband helped her answer some of the questions. Counsel asked “Did you have trouble understanding the questions?” Answer: “Yes, I don’t finish high school.” The court interrupted with its ruling in note [2], supra. Since neither the written motion to stay nor the oral motion to inspect were proper under the statute, there was no error.

The court denied a challenge for cause. This was not error. There is nothing in the record to show that the defense was later prevented from interrogating jurors (without the use of the juror questionnaires) on their ability to understand English.

Ill

The indictment, although by no means an example of good pleading, stated an offense under Guam Penal Code § 211, and the motion in arrest of judgment was properly denied.

Section 211, Guam Penal Code, reads: “Robbery is the felonious taking of personal property in the possession of another, from his person or immediate presence, and against his will, accomplished by means of force or fear.”

The indictment reads:

“On or about the 15th day of October, 1973, in the Territory of Guam, Thomas Palomo did commit the offense of attempted robbery, and that the said Thomas Palomo did knowingly and feloniously attempt to take the personal property in the possession of another, [to-wit: in the possession of the Istimewa Restaurant, Tammuning, Guam] in the presence of, and against the will of the manager [of said restaurant] by means of force or fear, to-wit ... in violation of ..” [Brackets inserted].

The motion for arrest of judgment must be based on the record, to-wit: the indictment, the plea, the verdict and the sentence. It cannot be based on the evidence, as suggested by the Government. United States v. Sisson, 399 U.S. 267, 280-282, 90 S.Ct. 2117, 26 L.Ed.2d 608 (1970); Wright, Federal Practice and Procedure, § 571, at 545.

We cannot sustain the indictment on the grounds suggested by Guam — on “the facts of the case,” “the reporter’s transcript,” or “the extant circumstances.”

However, the words shown in brackets above can be disregarded as surplusage. The indictment thus read contains the statutory elements of the offense. It advised the defendant of the charge, and in no way prejudiced his ability to conduct his defense. See United States v. Kartman, 417 F.2d 893, 894 (9 Cir. 1969); Himmelfarb v. United States, 175 F.2d 924, 936-937 (9 Cir. 1949), cert. den., 338 U.S. 860, 70 S.Ct. 103, 94 L.Ed. 527.

No showing of any prejudice has been made and the error, if any, was harmless.

The judgment is affirmed.

      . Defense counsel stated “It has been my feeling on a number of occasions that I have had jurys [in Guam] on the civil and criminal cases, that I felt did not understand the Court’s instructions or the argument of either counsel and I think there is a large problem involved.
      THE COURT: When you mentioned something at the beginning of your statement that you had been aware for some time as to the non-qualification of some of the jurors—
      MR. TRAPP: I have held a personal opinion for some time and before the indictment was filed, Your Honor, and I can’t think of the specific instances, but I have felt in a number of jury cases, not necessarily all of them . that the jury, because of a language problem has not understood the instructions.
      * >H * * # *
      MR. TRAPP: . . . What I wish to look into is not whether the forms are filled out correctly but whether the jurors are able to read, write and understand the English language with a degree of proficiency to fill out the jury qualification forms. I have looked at the Island Court ones. ... I have seen a number of these which were not filled out by the person who signed them, and I think that the selection process gets about the same kind of cross-section as in the District Court.
      THE COURT: When did you first discover it for the qualifications?
      MR. TRAPP: I have not discovered it, it’s based on a suspicion trying jury cases in Guam for thirteen and a half years.
      THE COURT: The Court will deny your motion. You have not presented anything to the Court which would bar it or on the grounds that it is a substantial motion.
      MR. TRAPP: I am not asking the Court to rule on the motion at this time. I am only asking the Court to rule, I am moving the Court orally to allow me to inspect the jury records and to voir dire the jury on that point and rule on the stay of proceedings if it develops that my suspicions have been substantiated by the evidence of the jury giving its voir dire testimony under oath.
      THE COURT: What is the ground of substantial failure to the Court?
      MR. TRAPP: My ground is that the Court has selected jurors who are unable to read, write, and understand the English language and without satisfactorily filling out the jury qualification form. I can’t take a deposition in a criminal case, or the deposition of the jurors that I can present it to the Court, or discovery the qualifications of the jurors without looking at the records and without asking a few pertinent questions of the jurors, based on the records during the voir dire.

        My motion right now, actually is to inspect the records, although I have filed the motion to stay the proceedings. I am strictly speaking bringing it on for consideration at that time. It is premature, but the U. S. v. Beatty does allow a so-called fishing expedition to determine whether the jurors are qualified or not. That is the only way we can find out.
      THE COURT: The Court will deny the motion.” (Emphasis added).

      . “THE COURT: This has to do with the voir dire examination that you are conducting of the veniremen. The Court, having taken a closer look at the provisions of the statute, feels that the motion to be provided with all of the questionnaires of each and every individual juror on the jury panel, having been granted by the Court, the Court will now reverse itself and deny the defendant this right. I think what the defendant should have done, that is the defendant, through his counsel, is in preparing your motion to challenge or stay the proceedings on the ground that some of the jurors are not qualified, you should have presented some grounds, as you could have obtained the grounds for disqualifications if you had filed an earlier motion to have the records made available to you to go through all of the records. Based on whatever your discovery was, you could present the motion to stay the proceedings, but you had not made any motion prior to this morning to have all of the records available to you. The Court feels that it is very untimely at this time when all of the jurors are present, to have made your oral motion that the questionnaires be made available that you can proceed with your questioning of each and every juror on the panel at this stage of the proceedings.”


author: GOLDBERG, Circuit Judge:

text:
    Catherine Myers ROSE, Individually and as Trustee of Eleanor Catherine Rose, Gregory Warren Rose and Victor Ray Rose, Testamentary Trusts, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
    No. 73-3952.
    United States Court of Appeals, Fifth Circuit.
    April 11, 1975.

      V. Ray Rose, Donald A. Meyer, Jacqueline McPherson, New Orleans, La., for plaintiff-appellant.
    Scott P. Crampton, Asst. Atty. Gen., Tax Div., Dept, of Justice, Meyer Rothwacks, Chief, Appellate Section, Fleming T. deGraffenried, Carolyn R. Just, Jonathan S. Cohen, Attys., Tax Div., Dept, of Justice, Washington, D. C., Gerald J. Gallinghouse, U. S. Atty., Robert N. Ha-bans, Jr., Asst. U. S. Atty., New Orleans, La., for defendant-appellee.
    Before THORNBERRY, GOLDBERG and GODBOLD, Circuit Judges.
   GOLDBERG, Circuit Judge:

Catherine Myers Rose, plaintiff below, brought this tax refund suit in the district court to secure a refund of $5,265.07 in estate taxes which she paid under protest as representative of her decedent husband’s estate. The district court entered summary judgment for the Government, and Rose appeals.

The dispute centers about the necessity to include in the decedent’s gross estate the value of three life insurance policies held by the decedent as sole trustee of three trusts established by his brother for the benefit of the decedent’s children. The Commissioner maintains that at the time of the decedent’s death he possessed incidents of ownership in the policies, rendering the policy proceeds includable in his gross estate under 26 U.S.C. § 2042(2). Appellant Rose contends that the decedent trustee possessed no such incidents of ownership, so that taxation is inappropriate. Finding the issues resolved in favor of the Government by our opinion in Estate of Lump-kin v. Commissioner, 5 Cir. 1973, 474 F.2d 1092, we affirm.

I

In October, 1954, Lester H. Rose, the brother of decedent Warren A. Rose, created three separate irrevocable trusts and funded each with an initial $100.00. Each of the decedent’s three children was made the sole beneficiary of one of the trusts, and the decedent was appointed trustee of each trust. Each trust was to terminate when its beneficiary reached age 25, but the trustee was empowered to release trust income in his discretion after the beneficiary reached age 18. The trust instruments delegated broad administrative powers to the trustee to manage and invest the trust property.

In May, 1955, the decedent applied, as trustee of each of the three trusts, for three separate life insurance policies on his own life. The decedent, as trustee of each of the respective trusts, was made owner and beneficiary of each policy. So far as the record discloses, all premiurns on each of the three policies were paid out of the income or corpus of the respective trusts. Under the terms of each of the insurance contracts, the decedent-trustee retained the power to convert the policies on a specified date from whole life insurance either to limited payment life insurance or to endowment insurance. The decedent was also empowered to withdraw dividend accumulations or surrender any dividend additions for their cash value (provided that such accumulations or additions were not required as security for a loan), or to obtain loans on the policy from the insurer, up to the amount of the cash surrender value plus dividend additions and dividend accumulations. If interest due the insurer on such loans were allowed to accumulate in excess of the remaining available loan value, the policy would terminate. No provision in the trust instruments prohibited the decedent from exercising these powers provided in the insurance policies. On the contrary, as the district court found, the decedent-trustee possessed the right and power to alter the time and manner of enjoyment of the policy proceeds through his authority to withdraw dividends, obtain loans, or cancel or convert the policies.

The decedent died in October, 1966.

II

Section 2042(2) of the Estate Tax Code provides in pertinent part that,

The value of the gross estate shall include the value of all property—
(2) To the extent of the amount receivable ... as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person.

The sole question here is whether the decedent possessed “any of the incidents of ownership” in the insurance policies on his life which he held as trustee. We conclude that he did.

In Estate of Lumpkin v. Commissioner, 5 Cir. 1973, 474 F.2d 1092, the employer of the decedent covered a number of its employees, the decedent included, under a group term life insurance policy. According to its terms, decedent Lump-kin’s dependents were entitled to death benefits consisting of a modest lump sum, followed by a series of monthly payments (equal to half the decedent’s monthly wages) which were to continue over a period determined by Lumpkin’s tenure with his employer. The payments were to go to the decedent’s wife; or if she were not living, then to his dependent children; or if no children survived, then to his parents. Decedent Lumpkin had no power to change the beneficiaries under the policy. The policy did, however, provide a settlement option which would to some extent defer a surviving wife’s receipts. Under this option, however, any amounts which the decedent’s wife would have received during her life under the standard settlement provision but which were not paid to her during her life under the elected option, would be paid to her estate upon her death. With the agreement of the employer and insurer, the decedent was permitted to design further alternative settlement patterns, so long as they did not alter the share of the proceeds due any policy-designated beneficiary. Thus, decedent Lumpkin could not change or prefer beneficiaries under the insurance plan, but he could affect the timing of benefits which any beneficiary or his estate would be entitled to. “In short the right to elect optional modes of settlement gave Lumpkin a degree of control over the time when the proceeds of the policy would be enjoyed and nothing more.” 474 F.2d at 1095.

The question addressed and resolved by this court in Lumpkin was whether the decedent’s right to alter the time of enjoyment of the insurance proceeds constituted an “incident of ownership” within the meaning of § 2042(2). In resolving this question, we recognized — as has the Second Circuit — that “by enacting § 2042 Congress intended to give life insurance policies estate tax treatment roughly equivalent to that accorded other types of property under related sections of the Code,” e. g., §§ 2036 (transfers with retained life estate); 2037 (transfers taking effect at death); 2038 (revocable transfers); 2041 (powers of appointment). 474 F.2d at 1095. Judging from the meager legislative history and reading these enumerated provisions in pari materia, we concluded that “by using the ‘incidents of ownership’ term Congress was attempting to tax the value of life insurance proceeds over’which the insured at death still possessed a substantial degree of control.” 474 F.2d at 1095. Drawing then from cases decided under the predecessors of kindred §§ 2036 and 2038, we concluded that “because the control it affords is substantial, ... a right to alter the time of enjoyment such as that conferred upon Lumpkin by the optional modes of settlement provision in this case is an ‘incident of ownership’ under § 2042.” 474 F.2d at 1097.

Appellant Rose does not seriously argue here, nor could we be persuaded, that the kind of control exercisable by her husband before his death was significantly different from the type of the control open to the decedent in Lumpkin, except that the decedent Rose held his powers in a fiduciary capacity. Appellant Rose does argue, however, that a trustee stands in a significantly different position of control as compared with an individual.

We think that the decedent’s trustee status does not take this case out of Lumpkin. In Lober v. United States, 1953, 346 U.S. 335, 74 S.Ct. 98, 98 L.Ed. 15, the decedent had created three irrevocable trusts, each vesting an estate in one of his three children, and by designating himself as trustee, he retained the fiduciary power to bestow the trust principal and income at any time before each beneficiary attained the age at which release was mandatory, 25 years for trust principal, 21 for income. The Supreme Court included the value of the trust property in the decedent’s estate under the forerunner to present § 2038, ruling that,

“A donor who keeps so strong a hold over the actual and immediate enjoyment of what he puts beyond his own power to retake has not divested himself of that degree of control which [the statute] requires in order to avoid the tax.”

346 U.S. at 337, 74 S.Ct. at 100, 98 L.Ed. at 18, quoting Commissioner v. Holmes, 1946, 326 U.S. 480, 487, 66 S.Ct. 257, 260, 90 L.Ed. 228, 233. More recently, in United States v. O’Malley, 1966, 383 U.S. 627, 86 S.Ct. 1123, 16 L.Ed.2d 145, a case substantially parallel to Lober, the Supreme Court included the value of trust income in a settlor’s gross estate under the predecessor of § 2036, where the settlor retained a strictly fiduciary control over the disposition trust income. In our opinion in Lumpkin, we relied on Lober and O’Malley to demonstrate the nature of power over the time and manner of enjoyment of property which the Congress intended to reach under § 2042(2). These cases signify clearly to us that fiduciary restraints over the exercise of the decedent’s control do not automatically deprive it of the substantiality required for inclusion under § 2042(2).

Appellant Rose urges, however, that a trustee stands in a different position of control as compared with an individual because a trustee under the applicable state law could not derive any economic benefit from his control. In this way Appellant Rose seeks to apply an “economic benefit” gloss on Lumpkin’s “substantial control” approach. Even were we now inclined to regard the prospect of a decedent’s economic benefit as a necessary component of “any of the incidents of ownership” under § 2042(2), however, Lumpkin would prohibit our so holding. For in Lumpkin we specifically held that the nature of the decedent’s powers over the insurance rendered the insurance proceeds includable under § 2042(2), despite the fact that “Lumpkin could not benefit himself or his estate.” 474 F.2d at 1095.

Moreover, we remain unpersuaded that Lumpkin’s “substantial control” approach is inappropriate here. It is undisputed that “the term ‘incidents of ownership’ is not limited in its meaning to ownership of the policy in the technical legal sense.” Reg. § 20.2042-l(c)(2). While the Regulations state that “[generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy,” they also provide in part that:

A decedent is considered to have an “incident of ownership” in an insurance policy on his life held in trust if, under the terms of the policy, the decedent (either alone or in conjunction with another person or persons) has the power (as trustee or otherwise) to change the beneficial ownership in the policy or its proceeds, or the time or manner of enjoyment thereof, even though the decedent has no beneficial interest in the trust.

Reg. § 20.2042-l(c)(4). This Regulation establishes the precise point which Appellant Rose would contradict here.

The Second Circuit has concluded that Reg. § 20.2042-l(c)(4) “must be read to apply [only] to ‘reservations of powers by the transferor as trustee.’ ” Estate of Skifter v. Commissioner, 1972, 468 F.2d 699, 705 (emphasis added). In so holding, the Skifter court relied primarily upon the observation that Lober, O’Malley, and their judicial descendants applying the “substantial control” approach all “dealt with powers retained by the transferor or settlor of a trust.” 468 F.2d at 703. But we indicated our disagreement with Skifter’s reading of § 2042 in Lumpkin, 474 F.2d at 1097, and we adhere to that position now. Under § 2036 Congress specifically levied the estate tax upon interests retained by a decedent in connection with an incomplete transfer; and § 2038 is similar in effect. Under § 2042, however, Congress applied the tax to insurance over which a decedent possessed any incidents of ownership. The difference in statutory language is significant. Lober and O’Malley quite naturally involved retained interests because they arose under statutes designed to reach only interests so held. But nothing in those cases suggests that the substantiality of the control possessed by the decedents there depended upon whether the decedents’ interests were retained in connection with an incomplete transfer rather than derived in some other fashion. We agree with the Second Circuit that § 2042 “roughly parallels” its cousin sections of the Estate Tax Code in regard to the substantiality of the decedent’s control which is prerequisite to includability in decedent’s gross estate. But we cannot ignore Congress’ conspicuous variety in statutory idiom, so as to make the tax treatment of insurance identical with the taxation of other interests: § 2042 was not drawn in terms to catch only retained incidents of ownership, and we find no basis to infer such a design. Here, where the decedent-trustee’s rights to alter the time and manner of enjoyment of the insurance proceeds were procured by the decedent-trustee himself, we have no difficulty in concluding under Lumpkin and Reg. § 20.-2042-l(c)(4) that the value of the insurance proceeds was properly included in his gross estate under § 2042(2).

Congress through § 2042 has given discrete statutory treatment to policies of insurance. Sections 2036, 2037, 2038, 2041, and 2042 may be consanguineous, but each has an individual personality with genetic variations. These provisions developed from a common design to tax testamentary harvests, and they reach common sorts of decedent controls. As the caselaw cross-pollinations — or pari materia interpretations — establish: Rose the insured and possessor of incidents of ownership, is Rose, even though garlanded by leaves of trusteeship. Each section is not identical, however. Life insurance is a specie of its own, it occupies a special place in the tax field, and we cannot simply graft terms from one provision onto another. Whether the insurance sheaves found in the decedent’s hands are selected stalks from once-larger bundles, or whether they represent all that the taxpayer ever cultivated from the seed he had, the Congressional direction is to tax whatever is possessed at the end of the season.

The judgment of the district court is affirmed.

      . See Skitter v. Commissioner, 2 Cir. 1972, 468 F.2d 699, 702.

      . See H.R.Rep.No.2333, 77th Cong., 2d Sess. 163 (1942); S.Rep.No.1631, 77th Cong., 2d Sess. 235 (1942):
      Examples of . incidents of [ownership] are the right of the insured or his estate to the economic benefits of the insurance, the power to change the beneficiary, the power to surrender or cancel the policy, the power to assign it, the power to revoke an assignment, the power to pledge the policy for a loan, or the power to obtain from the insurer a loan against the surrender value of the policy.
      H.R.Rep.No.2333, 77th Cong., 2d Sess. 163 (1942); S.Rep.No.1631, 77th Cong., 2d Sess. 235 (1942).

      . Accord, United States v. Rhode Island Hosp. Trust Co., 1 Cir. 1966, 355 F.2d 7, 10.

      . United States v. O’Malley, 1966, 383 U.S. 627, 86 S.Ct. 1123, 16 L.Ed.2d 145; Lober v. United States, 1953, 346 U.S. 335, 74 S.Ct. 98, 98 L.Ed.2d 15.

      . Internal Revenue Code of 1939, § 811(d)(2): The value of the gross estate of the decedent shall be determined by including the value at the time of his death all property .
      To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth.

      . Internal Revenue Code of 1939, § 811(c)(l)(B)(ii):
      The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property .
      To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise—
      under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death . . . the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom .

      . But see Estate of Fruehauf v. Commissioner, 6 Cir. 1970, 427 F.2d 80.

      . See also Estate of James H. Lumpkin, Jr 1971, 56 T.C. 815, 823.

      . Id. (emphasis added). Compare the legislative history recited in note 2 supra, with Reg. § 20.2042-1 (c)(2). The legislative history demonstrates that Congress did not intend to limit includability under § 2042(2) to cases in which the decedent could secure economic benefits from his powers over the insurance. Accord, United States v. Rhode Island Hosp. Trust Co., 1 Cir. 1966, 355 F.2d 7, 10-11.

      . Section 2036 provides:
      The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—
      (1) the possession or enjoyment of, or the right to the income from, the property, or
      (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

      . See Lumpkin, 474 F.2d at 1095-97; Skiñer, 468 F.2d at 703-05.
      Section 2038 provides in pertinent part:
      (a) . The value of the gross estate shall include the value of all property—
      (1) [Transfers After June 22, 1936] To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of decedent’s death.
      (2) [Transfers on or Before June 22, 1936] To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through . the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death. Except in the case of transfers made after June 22, 1936, no interest of the decedent of which he has made a transfer shall be included in the gross estate under paragraph (1) unless it is includible under this paragraph.
      Clearly the statute is not limited in terms to inclusion of retained interests. Some reference to the history of this section, however, illustrates the sensitivity of Congress and the courts to the precise language differences in question here, and demonstrates the parallelism in application between §§ 2036 and 2038. See generally Skifter, 468 F.2d at 704-05. Significantly enough, Lober was decided under Internal Revenue Code of 1939, § 811(d)(2), reproduced in note 5 supra, the analogue of present § 2038(a)(2). Eighteen years earlier, in White v. Poor, 1935, 296 U.S. 98, 56 S.Ct. 66, 80 L.Ed. 80, the Supreme Court held the forerunner of § 811(d)(2) not to include a power not reserved in the original declaration of trust. The language emphasized in the recitation of § 2038(a)(1) above— which, of course, was not brought into Lober —was introduced in response to White v. Poor, and “appears never to have been applied to a power other than one that the decedent created at the time of transfer in someone else and that the latter devolved upon him before his death. In essence, the language has been applied strictly to change the result in White v. Poor.” Skifter, 468 F.2d at 704.

      . See note 11 supra.

      . The Skitter panel justified its determination to accord little weight to the differences in statutory language ultimately on the “apparent intent of Congress that § 2042 was not to operate in such a manner as to discriminate against life insurance, with regard to estate tax treatment, as compared with other types of property.” 468 F.2d at 704. This perception of Congressional objective was derived largely from an examination of legislative history specifically directed to: (a) elimination of estate taxation of insurance on which the decedent had paid the premiums but had “long since” given up all present incidents of ownership; and (b) the treatment of insurance under the 5% reversionary interest rule. We find this evidence of Congress’ aim less convincing than its plain choice of statutory terminology.

      . Aside from the inconsistencies in approach between Skitter and Lumpkin (which of course controls here) the fact that decedent Rose procured the subject insurance policies himself distinguishes the matter at bar from the situation in Skitter. In Skitter the insurance policies held by the decedent in trust had belonged to his wife, and the decedent’s incidents of ownership only devolved upon him by operation of his wife’s testamentary trust. At the time of Skifter’s wife’s death, Skifter had neither a beneficial interest, nor incidents of ownership, nor any fiduciary relationship to the insurance proceeds.