Opinion ID: 430887
Heading Depth: 2
Heading Rank: 2

Heading: Life Insurance Premiums

Text: 45 The separation stipulation and judgment provided that Phyllis would transfer in trust to two attorneys several life insurance policies on the life of Sperling which she owned. Sperling agreed to pay the premiums on these policies and was prohibited from borrowing against the cash value of all of the policies except one. The stipulation and judgment provided that Phyllis would remain the beneficiary as long as she remained unmarried and any of the children remained under 21 years of age or had not completed their educations; if she did remarry, those children under 21 or those who had not completed their educations would become the beneficiaries in equal parts. Finally, the stipulation and judgment called for complete ownership to vest in Sperling if Phyllis remarried and all of the children attained the age of 21 and completed their educations. With the exception of the limited borrowing privilege noted above, neither Sperling nor Phyllis had any right to control the policies while they remained in trust. Phyllis remarried in June 1975 and was replaced as beneficiary of the policies by the children as co-beneficiaries on July 28, 1975. 7 Sperling became the owner of the policies on September 30, 1981 when all of the children reached the age of 21 and completed their educations and when Sperling's alimony obligations terminated. 46 Sperling's claim that he was entitled to deductions for premiums paid on the policies was rejected by the tax court on the basis of Stevens v. Commissioner, 439 F.2d 69 (2d Cir.1971). He maintains that the tax court's reliance on Stevens was misplaced and that Stevens actually supports his position. 47 Stevens held that in order for premium payments on a straight life policy to be income to the wife (and therefore deductible from gross income by the husband) there must be (a) absolute ownership of the policy by the wife; and (b) an irrevocable designation of the wife as beneficiary. Stevens, 439 F.2d at 71-72. See Piel v. Commissioner, 340 F.2d 887, 890 (2d Cir.1965) (ownership of the policies is necessary to support a deduction); Hyde v. Commissioner, 301 F.2d 279 (2d Cir.1962); Weil v. Commissioner, 240 F.2d 584 (2d Cir.), cert. denied, 353 U.S. 958, 77 S.Ct. 864, 1 L.Ed.2d 909 (1957). See also Rev.Rul. 70-218, 1970-1 C.B. 19; J. Chommie, Federal Income Taxation 492 (2d ed. 1973) (it is now settled that the statute does not embrace premiums paid on life insurance policies unless the policy is assigned to the wife and she is the irrevocable beneficiary). This latter condition is fulfilled where the wife's interest in the policy terminates if she predeceases the husband and the children are designated as irrevocable contingent beneficiaries. Stevens, 439 F.2d at 72. 48 Constructive receipt by the wife of the premium payments, the theory on which such payments by the husband are included in the wife's gross income, demands exacting standards. Id. at 71. Any lesser guideposts would require the wife to include her former husband's premium payments on her behalf in her gross income even though she is not the owner of the insurance policy in the traditional sense. The policy in this area is to preclude alimony income to the wife where the benefit conferred upon her is insubstantial. Conversely, the husband should be allowed an alimony deduction for premiums paid where he retains no interest in the policy and the wife receives substantial benefits from the payments. 49 Neither prong of the two-point test enumerated in Stevens was satisfied here. First, Phyllis was not the absolute owner of the policies. Rather, the policies were transferred by her to the trustees pursuant to the separation stipulation and judgment. Sperling eventually became the owner of the policies. Phyllis enjoyed none of the normal rights associated with ownership of a whole life policy, such as the power to change the beneficiary, to borrow against the policy or to surrender it for cash. 50 Second, there was no irrevocable designation of Phyllis as beneficiary and the children as contingent beneficiaries. The separation stipulation and judgment provided that Sperling would become the owner of the policies if Phyllis remarried and after the children turned 21 and completed their educations. This actually occurred. Furthermore, Stevens indicated that for section 71(a) to be applicable, the wife's coverage as beneficiary under the policy must be co-extensive with the period that she is to receive alimony. Id. at 72-73. This was not the case here. According to the separation stipulation and judgment, alimony payments were to continue until Phyllis remarried and the children turned 21 or became self-sufficient. Phyllis remarried in 1975 but continued to receive reduced alimony payments because the children had neither completed their educations nor turned 21. Nonetheless, Phyllis was removed as the beneficiary in 1975. 51 Sperling asserts that he conferred an economic benefit on Phyllis in that the premium payments helped guarantee that Phyllis would receive the alimony due her if he died before his obligations to her ended. In other words, he maintains that the policies should be considered term insurance on his obligations. He argues that this security constituted an economic benefit to Phyllis. We note that some courts have found such benefits to be de minimis and have refused to find constructive receipt by the wife of the premium payments for term insurance. See Wright v. Commissioner, 62 T.C. 377, 398-99 (1974), aff'd, 543 F.2d 593, 600-01 (7th Cir.1976); Brodersen v. Commissioner, 57 T.C. 412, 417-18 (1971). See also 5 J. Mertens, Law of Federal Income Taxation Sec. 31A.05, at 52 (1975) (Where an insurance policy is merely security for alimony payments to the wife no deduction is allowable to the husband for premium payments made by him.); A. Parker, Stanley & Kilcullen's Federal Income Tax Law Sec. 71, at 34 (6th ed. 1974) (if the policy constitutes, essentially, security for the husband's obligation and [the wife] is only the contingent beneficiary, ... then premiums are not alimony to her and, therefore, not deductible to the husband). In Stevens, we indicated that term insurance premiums could be deducted where there were no contingencies which might operate to thwart the wife's receipt of the economic benefit the premium payments conferred, that is, the protection, during a limited term, of the wife's right to receive alimony over the full alimony period. 439 F.2d at 72-73. But see Baker v. Commissioner, 205 F.2d 369, 370 (2d Cir.1953) (premiums paid on life insurance policy which was security for alimony payments conferred too remote an interest to the wife and were not constructively received by her). Utilizing this standard, it is clear that this criterion was not met. Phyllis continued to receive alimony payments, albeit reduced, after she remarried. However, she was replaced as the beneficiary of the policies shortly after her remarriage. 8 The duration of the term policy thus was not co-extensive with the alimony obligation. Stevens precludes deductibility by the husband where such contingencies exist. 52 Finally, Sperling's argument that he conferred an economic benefit on Phyllis because he made premium payments which she otherwise would have made to keep the policies in force is meritless. Phyllis was under no legal obligation to keep the policies from being cancelled for non-payment of premiums. 53 Affirmed.