Woman Argues Insurance Premium Payments Weren't Alimony

David Lane and Virginia Marten were married in 1953 and had four children. One of the children, Niklas, was in an accident and became a quadriplegic. In 1979, the couple separated, and in 1982 Lane purchased a $750,000 life insurance policy on his life, with Marten as the sole owner and beneficiary. The couple's divorce became final in 1984, and Lane was ordered to continue paying the policy premiums. In 1995, Lane asked to be relieved of the policy premium payment obligation, asserting that it was originally intended to pay for Niklas' health care if Lane predeceased him. Lane stated that Medicare and Medical had covered Niklas' care since 1992. Niklas died in 1995, and Lane was relieved of his obligation to pay the policy premiums by a California state court.

The Tax Court determined that the premiums paid by Lane in 1993 and 1994 were alimony to Marten and includable in her income under section 71(a)(1), before amendment by the Deficit Reduction Act of 1984 (DEFRA). The court found that the insurance premium payments discharged an obligation under section 71, because Marten was the owner and beneficiary of her ex-husband's life insurance policy. (For a summary, see Tax Notes, Oct. 18, 1999, p. 326; for the full case, see Doc 1999-33060 (8 original pages) or 1999 TNT 197-8 .)

Marten filed a motion for reconsideration, arguing that if pre- DEFRA section 71 applies, she should prevail based on Wright v. Commissioner, 62 T.C. 377 (1974), affd. 543 F.2d 593 (7th Cir. 1976). Marten also argued that Lane should be estopped from arguing that the premium payments were not for Niklas's support.

On reconsideration, the Tax Court confirmed that the payments made by Lane on the whole life insurance policy were alimony to Marten. The court noted that in the Wright case the insurance at issue was pure term life and not whole life building towards a substantial cash surrender value, as in this case. The policy in this case was immediately assignable by Marten, and the court determined that unlike Wright, Marten had an immediately ascertainable economic interest in the policy, and thus, constructively received the premium payments. The court dismissed the estoppel argument. (For a summary, see Tax Notes, July 3, 2000, p. 62; for the full text, see Doc 2000- 17609 (11 original pages) or 2000 TNT 124-10 .)

Marten argues that the Tax Court erred in failing to apply the DEFRA rules and insists that under the DEFRA Rules the premium payments are not alimony. Marten emphasizes that the purpose of the $750,000 policy was to support her and Lane's disabled son. Marten also notes that the payments were not received in cash by the payee and Lane would have been liable after Niklas' death, either to continue the payments or to make substitute payments. Marten further insists that the premium payments are not income because she did not receive an ascertainable economic benefit under either the pre-DEFRA or post-DEFRA rules. Finally, Marten argues that Lane is judicially estopped from denying that the premium payments are non-deductible child support, terminable upon Niklas' death because he successfully litigated that point in the state court.

A. THE BASIS FOR THE TAX COURT'S JURISDICTION

[1] The Internal Revenue Service (IRS) issued a notice of deficiency to Appellant Virginia M. Marten on February 13, 1997, for the tax years 1993 and 1994. She filed a timely petition with the United States Tax Court on February 24, 1997

B. THE BASIS FOR THE COURT OF APPEALS JURISDICTION

[2] The United States Court of Appeals has exclusive jurisdiction to review decisions of the Tax Court. Internal Revenue Code section 7482(c).

C. FILING DATE OF THE APPEAL

[3] The Tax Court's decision was entered on June 27, 2000 (Ex. 5) /1/. Notice of Appeal was filed on September 25, 2000 (Ex. 6).

D. ASSERTION THAT THE APPEAL IS FROM A FINAL ORDER OR JUDGMENT

II. ISSUES PRESENTED FOR REVIEW

2. Did the Tax Court err in holding the premium payments to be taxable alimony to the wife, considering that the purpose of the policy was to support the disabled son, further considering that the obligation to pay the premiums was subject to reduction upon the son's death, and in fact was eliminated upon the son's death?

3. Did the Tax Court err in holding that the premium payments are taxable as alimony, when it is clear that Appellant received no ascertainable economic benefit?

4. Considering that Lane persuaded the state court that the purpose of the insurance policy was to support his disabled son, is Lane judicially estopped to assert that the amounts should be taxed to his ex-spouse as spousal support?

III. STATEMENT OF THE CASE

[5] The issue is whether the premiums paid on a life insurance policy are taxable alimony income to appellant Virginia Marten. The Internal Revenue Service took a protective position and disallowed the alimony deduction claimed by the taxpayer David E. Lane, the former husband. IRS also asserted that the premium amounts were income to Virginia Marten, the former wife. The respective cases of the former wife (Virginia M. Marten v. Commissioner, Docket No. 3401- 97) and the former husband (David E. and Donna P. Lane, Docket No. 16223-97) were consolidated in the Tax Court.

[6] The case was tried in the Tax Court before the Honorable Juan Vasquez. All three parties (both taxpayers and the IRS) assumed that the tax treatment of the payments would be controlled by the new alimony rules contained in the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, sec. 422(a), 98 Stat. 494, 795. Without any briefing on the issue, Judge Vasquez concluded that the tax treatment should be controlled by section 71(a)(1) prior to amendment by DEFRA. On that basis, the Tax Court found against Marten. (Ex. 2, Marten v. Commissioner, T. C. Memo. 1999-340, October 12, 1999.)

[7] On November 5, 1999, Ms. Marten filed a motion for reconsideration arguing that the case should have been decided under post-DEFRA section 71. The IRS supported Marten's position and Lane opposed. Judge Vasquez concluded that he had properly applied pre- DEFRA section 71. (Ex. 3, Tax Court Order, April 20, 2000.)

[8] Ms. Marten filed a motion for further reconsideration, contending that Marten should prevail even if the court applies pre- DEFRA section 71 rules. Ms. Marten argued that the premium payments should not be taxable income to her because she never actually or constructively received them. The IRS supported this contention. Marten also argued that Lane should be judicially estopped from an alimony deduction because he successfully contended to the state court that the premiums were intended for child support purposes. In this respect, the IRS disagreed with Marten. Judge Vasquez ruled against both of Marten's contentions. (Ex. 4, Marten v. Commissioner, T.C. Memo. 2000-185, June 26, 2000.) A decision was entered on June 27, 2000 (Ex. 5) and Marten filed her Notice of Appeal on September 25, 2000 (Ex. 6).

IV. STATEMENT OF FACTS

BACKGROUND: THE INSURANCE POLICY

[9] On August 2, 1953, Lane married Marten. During their marriage, Mr. Lane had a successful real estate appraisal business and Ms. Marten worked in the home.

[10] On May 8, 1977, Niklas David Lane ("Niklas"), the 4 1/2- year-old son of Lane and Marten became a quadriplegic as a result of brain damage he suffered from an accident in which Niklas nearly drowned. Niklas was the youngest of the four children born to Lane and Marten. From that point on, Niklas required 24-hour care and Ms. Marten was his full-time care provider.

[11] On or about January 16, 1979, Lane and Marten were legally separated. From that point on they were no longer members of the same household.

[12] In June 1982, Marten and Lane applied for issuance of two new insurance policies. The issue in this case is the tax treatment of the premiums paid on one of these policies. That policy is Federal Kemper Life Assurance Company Insurance Policy No. 1296769, Policy Date September 1, 1982, in the face amount of $750,000, on the life of Lane, with Marten as the owner and beneficiary ("$750,000 policy"). (Ex. 7, pp. 32-55).

[13] The $750,000 policy was intended to insure Niklas's care in the event of Lane's death. Such care would be provided by Marten if she were alive, and if Marten were not alive, then the insurance proceeds would allow someone else to provide for Niklas, perhaps his siblings.

[14] When these policies were taken out, the parties had been separated for over three years, and the parties understood that they were probably going to get a divorce.

[15] Marten was the owner and primary beneficiary of the $750,000 policy because Niklas was both a minor and disabled.

[16] The $750,000 policy was of a type which would not produce a cash value for the first 15 years, hence there was no cash value during 1993 and 1994. As of September, 1998, the end of the sixteenth policy year, the policy would have a cash value of $3,172.50. Up through 1993 and 1994, the tax years at issue here, it is clear that the taxpayer received no ascertainable benefit from the policy's cash value provisions. (Ex. 7, p. 34).

[17] The policy was assignable, but in theory only, considering that the purpose was to provide for Niklas' support. It is unthinkable that Marten would have assigned the policy given its purpose and her devotion to her son. It is equally clear that the state court would not compel Lane to continue the premium payments after an assignment, given the frustration of purpose. Hence the assignability of the policy did not equate to an ascertainable value for the policy.

[18] David Lane made premium payments on the $750,000 policy of $25,841 during 1993 and $30,576 during 1994.

THE DISSOLUTION PROCEEDING; NIKLAS'S DEATH

[19] On or about April 20, 1983, Lane filed a Petition for Dissolution of Marriage in the Sacramento County Superior Court, Case No. 787544 ("dissolution proceeding"). On March 20, 1984, the Superior Court entered a Final Judgment of Dissolution as to Status Only dissolving the marriage of Lane and Virginia. (Ex. 7, p. 57). Hence, Marten and Lane were married for thirty years.

[20] On April 11, 1984, the Superior Court entered an interim order for, among other things, child support and spousal support. The order required Lane to make child support payments of $500 per month and spousal support payments of $3,000 per month, and to pay the costs of Marten's automobile. The order also stated: "The Petitioner shall keep in full force and effect with the Respondent and the parties' minor child as beneficiaries the existing health, dental, life, automobile insurance." (Ex. 7, pp. 59-60).

[21] On January 27, 1987, the Superior Court rendered a Judgment After Bifurcation As To All Reserved Issues pursuant to a settlement. (Ex. 7, pp. 62-72). The Judgment contains the following pertinent provisions:

ACCORDINGLY, IT IS HEREBY ORDERED:

[23] On March 29, 1995, Lane filed a motion to modify his support obligations. (Ex. 7, pp. 73-80). Lane said in his declaration, under penalty of perjury: "In the judgment I agreed to pay for some $900,000 in life insurance for Niklas and respondent. Respondent owns a policy in the face amount of $750,000 and I pay the premiums. The insurance was to pay for Niklas's needs if I died. . . ." (Id., p. 78).

[24] Niklas died on June 19, 1995 at age 22.

[25] On or about October 4, 1995, Lane filed a document entitled "Petitioner's Statement of Issues, Facts and Contentions" where he stated (Ex. 7, pp. 102-104):

At the time that petitioner originally filed his motion on

The parties had a long-term marriage of over 26 years. They

2. . . . On December 15, 1995, respondent in her deposition

[29] On December 26, 1996, the state court entered a Judgment After Trial (Support Modification) confirming the earlier Statement of Intended Decision as the judgment of the Court. (Ex. 7, pp. 93- 94).

V. SUMMARY OF ARGUMENT

[30] The Tax Court should have applied the definitions of alimony and child support contained in the Deficit Reduction Act of 1984. Application of those rules is required by the effective date rules in the regulations, and is consistent with the reenactment doctrine and the legislative history. The Tax Court did an improper end run around the regulations.

[31] Under the DEFRA rules, the premium payments are not alimony. The purpose of the insurance policy was to secure the support of a disabled son, which is inconsistent with taxing the payments as alimony. The premium payments were not received by Marten in cash. In addition, the premium payments were not terminable upon Marten's death, or, Lane would have been required to make substitute payments to support his son. Perhaps most importantly, the state court interpreted the judgment as imposing a child support obligation, and further found that the premium payments were terminable upon Niklas's death, making the payments child support as a matter of tax law.

[32] Another critical point is that, under the DEFRA rules or the pre-DEFRA rules, the premium payments are not income because they conferred no ascertainable economic benefit. There was no "constructive receipt." The policy had no cash value, and the assignability feature did not add value or benefit. Lane's obligation to pay the premiums was conditioned on Niklas's survival. Peace of mind is not taxable.

[33] Lane should not be permitted to deny for tax purposes that the payments are non-deductible child support, because he successfully litigated that point in the state court. He should not be allowed an unfair advantage through intentional self- contradiction[.]

VI. STANDARD OF REVIEW

[34] The Court of Appeals reviews the Tax Court's conclusions of law de novo, giving no special deference to the Tax Court's decisions. The same standards are applied as to civil bench trials in the district courts. Estate of Rapp v. Commissioner, 140 F.3d 1211, 1214 (9th Cir. 1998); and Ball, Ball & Brosamer, Inc. v. Commissioner, 964 F.2d 890, 891 (9th Cir. 1992).

VII. ARGUMENT

A. THE TAX COURT ERRED IN FAILING TO APPLY THE DEFRA RULES.

[35] The Deficit Reduction Act of 1984 made important changes to the rules distinguishing alimony from child support. Here, the parties (Marten, Lane and the IRS) had concluded that the new rules applied and they tried and briefed the case on that basis. However, the Tax Court judge decided the case using the old rules. (Ex. 2, pp. 9-11). On reconsideration, the Tax Court affirmed its ruling. (Ex. 3, pp. 13-17).

[36] The Tax Court's ruling does not reflect the governing regulations, nor does it reflect a sound reading of the statute.

[37] The statutory language follows:

(e) Effective Date --

[38] The statutory language sets forth a general proposition ("In general . . .") that the new rules apply to all instruments executed after 1984. The general rule applies to all post-DEFRA instruments, whether original or modified. The statute then sets forth a rule for certain modifications of pre-DEFRA Instruments. This will be elucidated infra. The Tax Court opinion is faulty in two respects. One, it does not give proper effect to the general rule applicable to all post-1985 instruments. Two, it sets up an inappropriate dichotomy between original and modified instruments.

[39] The Tax Court should have applied the statutory language in the light of the Temporary Regulations (still in effect) promulgated in 1984:

(e) Effective dates.

[41] The terms and conditions of the 1987 Judgment After Bifurcation As To All Reserved Issues, as to alimony, (Ex. 7, pp. 62- 71), are materially different than those in the April, 1984 order (Ex. 7, pp. 59-60):

a. As pertinent, the 1984 order requires Lane to make spousal support payments of $3,000 per month, plus the costs of Marten's automobile. Lane was also ordered to keep in full force and effect with Marten and Niklas as beneficiaries the existing health, dental, life, and automobile insurance. The order was to be effective pending trial or until further order of the court. (Ex. 7, pp. 59-60).

b. As pertinent, the 1987 judgment quires Lane to pay $3,000 per month spousal support until further order of the court, death of either party, or remarriage of petitioner Marten. It also provides that the amount of support shall be non-modifiable for two years from November 1, 1986, and then modifiable as of November 1, 1988. Lane was also required to pay the premiums on a major medical policy. He was required to maintain Marten as beneficiary on the $750,000 policy, and to name Niklas as beneficiary on the $250,000 policy. Lane was required to make the lease payments on Marten's Jaguar automobile and to pay off the capitalization price. (Ex. 7, pp. 62- 67, paragraphs 6, 7, 11, 13).

c. Comparing the 1984 and 1987 instruments, there are major changes in at least the following respects. The 1987 judgment contains very significant new provisions as to termination and modifiability of spousal support. It does not require Lane to pay the ongoing costs of Marten's automobile, but it requires Lane to pay off the remaining balance. Lane was relieved of the obligation to pay Marten's automobile insurance in 1987. The 1984 document obliged Lane to maintain health and dental insurance for Marten, and the 1987 document merely required Lane to pay the premiums on a major medical policy that had been converted to Lane. The 1984 document required that Marten and Niklas should be the beneficiaries on the life insurance coverage, while the 1987 instrument stipulated Marten as the beneficiary on the $750,000 policy and Niklas as the beneficiary on the $250,000 policy. Because of these significant changes, the DEFRA rules apply to payments made under the 1987 document.

[42] Regulations have the force and effect of law if they implement the underlying statute in a reasonable manner. National Muffler Dealers Association Inc. v. U.S., 440, U.S. 472, 43 AFTR 2d 79-828, 59 L.Ed. 2d 519, 79-1 USTC paragraph 9265 (1979); Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837, 81 L. Ed. 2d 694 (1984). There is no requirement that they represent the best possible interpretation of the statute; they merely need to represent a reasonable interpretation. Atlantic Mutual Insurance Co. v. Commissioner, 81 AFTR 2d 98-1566, 140 L. Ed. 2d 542, 98-1 USTC paragraph 50341 (1998); Lemishow v. Commissioner, 110 T. C. 346 (1998). The regulations here reasonably implement the effective date rules in the statute.

[43] The temporary regulations under section 71 are binding because they are subject to the reenactment doctrine. Under the "reenactment doctrine", regulations in effect for a long period without substantial change, that are issued in connection with statutes that are unamended or are reenacted without substantial change, are deemed to have received congressional approval and have the effect of law. Cottage Savings Association v. Commissioner, S. Ct. 113 L. Ed. 2d 589, 91-1-USTC paragraph 50187 (1991); In re Craddock, 82 AFTR 2d 98-5439, 98-2 USTC paragraph 50618 (10th Cir. 1998).

[44] The legislative history supports the position in the regulations. "The provision applies generally to decrees and agreements executed after 1984." Conference Committee Report to Accompany H.R. 4170 Deficit Reduction Act of 1984 [Tax Reform Act of 1985] H.R. Rep. No. 861, 98th Cong. 2d Sess. (June 23, 1984), at 1116.

[45] Even if the regulations are not binding, they represent the soundest reading of the statute, and the position reflected in the regulations should be adopted.

[46] The Tax Court's position conflicts with the IRS's position as expressed in Publication 504, Divorced or Separated Individuals:

Instruments Executed After 1984. The following rules for

[47] Likewise, Publication 504 states:

Instruments Executed Before 1985. The following rules for

[48] The reading of the effective date rules in the regulations and Publication 504 is consistent with the expectations of ordinary taxpayers. Ordinary taxpayers and their advisors would expect the deductibility of payments made under a substantive document executed after 1984 to be governed by current law. Taxpayers divorced before 1985 who are currently revising their support arrangements would not be intuitively aware that their revision is perhaps governed by pre- 1985 law, absent an express provision to the contrary. Such an interpretation would undercut the Congressional desire to make the alimony rules more objective. See General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, Prepared by the Staff of the Joint Committee on Taxation (December 31, 1984), 714. It also creates a trap for unwary taxpayers and their advisors. In short, the position reflected in the regulations and Publication 504 is sound and it should be applied here.

B. UNDER THE DEFRA RULES THE PREMIUM PAYMENTS ARE NOT ALIMONY.

[50] These questions were critical to the state court's decision to terminate Lane's obligation to pay premiums, and they are critical to the resolution of this case. The state court obviously considered extrinsic evidence, and the Tax Court was required to do so as well. Where a divorce decree or separation agreement does not fix the amount of alimony and child support, parol evidence is admissible for determining the nature of the payments. Bardwell v. Commissioner, 318 F. 2d 786, 63-2 USTC paragraph 955811, (10th Cir. 1963), affg. 38 T.C. 84 (1962). Parol evidence was admissible where a marital termination agreement was inconsistent and/or ambiguous as to the terms of "family support" payments and, in particular, whether the payments would terminate upon the payee's death, or would terminate upon a child-related contingency. Wells v. Commissioner, T.C. Memo. 1998-2, 75 CCH TCM 1507 (1998).

[51] The facts and circumstances show that the obligation to pay the premiums on the $750,000 policy is inextricably related to the support of Niklas (to use Lane's terminology). Two policies were taken out at the same time, a $250,000 policy on Marten's life, and a $750,000 policy on Lane's life. Each policy contained contingent beneficiary language which reflected the parties' intent that the proceeds be used to support Niklas. The parties' son, Niklas, required 24-hour care, which Marten was going to provide. The policies were taken out when the parties had been separated for several years, and when Lane had no desire to support Marten or to accumulate assets for her benefit. The policies would have no cash value for fifteen years, and the premiums would grow rapidly after a few years.

On three occasions, Lane described the purpose of this policy to

[53] Hence, the purpose of the policy was to support Niklas, the severely disabled son of Marten and Lane. To require Marten to pay tax on the premiums as alimony would be totally inconsistent with the parties' intentions.

2. THE PREMIUM PAYMENTS DO NOT CONSTITUTE ALIMONY BECAUSE

[55] Section 71 of the Internal Revenue Code sets forth four requirements for classifying a payment as alimony: (1) the payment is received by or on behalf of a spouse under a divorce or separation instrument; (2) the instrument does not designate the payments as not includible in gross income and not allowable as a deduction under section 215; (3) the spouses are legally separated and not members of the same household when the payments are made; and (4) there is no liability to make the payment for any period after the death of the payee spouse, and there is no liability to make any payment as a substitute for such payments after the payee spouse's death.

[56] The payments in question are not alimony because Lane cannot show that the first and fourth elements are satisfied.

[57] As to the first element, an alimony payment must be made with cash. Section 71(b)(1). There is no legal basis for categorizing as alimony the payment of premiums on a life insurance policy, with no cash value, that is intended as support for a disabled child of the payor and payee. (This argument is made in detail in section C. below.)

[58] As to the fourth element, the judgment does not state that the payments would cease on Marten's death, nor does it require substitute payments. This is a significant indicator of the party's intent, showing that the parties understood that the duration to pay the premiums was related to the larger question of Niklas' care, rather than to Marten's lifespan. The parent's duty of support is a legal duty, not a contractual duty. An agreement to provide child support is "law imposed" and is "made under the power of the court to order child support." Cal. Fam. Code section 3585. The parties understood this when they failed to state that the obligation to pay premiums would cease upon Marten's death.

[59] There is no reason under California law why Marten's death would affect Lane's obligation to support Niklas. Indeed, the practical impact of Marten's death would be to increase Lane's responsibility for Niklas because of the loss of the 24-hour, seven- day care being provided by Marten, Niklas' mother. An obligation to pay child support survives the death of the custodial parent. In re Marriage of Gregory, 230 C.A. 3d 112, 281 C.R. 188 (1991).

[60] Given the nature of the payments, for the support of Niklas, it is virtually certain that Lane would have to make substitute payments, to support his son, even after Marten's death, because his son's needs would be all the more acute.

[61] California Family Code section 3910(a) which provides: "The father and mother have an equal responsibility to maintain, to the extent of their ability, a child of whatever age who is incapacitated from earning a living and without sufficient means." The duty to support a child who is not incapacitated generally ends at age 18. Cal. Fam. Code section 3901.

[62] In short, had Marten passed away before Lane, there is no reason to believe that under California law, Lane would not be required either to continue to pay the premiums on the policy intended for his son's support, or he would be required to make equivalent payments to support his son.

[63] Lane's support duty would not be diminished by his own death. Under California law, a parent's duty to support a child survives the parent's death and is a charge on the estate, Newman v. Burwell 216 C. 608, 15 P.2d 511 (1932). Also see Taylor v. George, 34 C.2d 552, 556, 212 P.2d 505 (1949), recognizing that the father's obligation to support his child, fixed by divorce decree or property settlement agreement, did not cease upon the father's death, but survived as a charge against his estate.

[64] In sum, the premium payments do not terminate on Marten's death. Lane's duty to support his son would have continued after Marten's death and even his own. Hence the fourth element is not satisfied and the payments are not alimony.

3. THE PREMIUM PAYMENTS ARE NOT ALIMONY BECAUSE THE STATE

[66] The judgment does not explicitly describe the obligation to pay the premiums on the $750,000 policy as child support. However, the state court filled this important gap by concluding that the intent of the policy (and thus the premium payments) was to support Niklas. Hence, the premium payments were "payable for the support of children of the payor-spouse" under Section 71(c)(1). In addition, the state court found that Lane no longer had to pay the premiums after his disabled son, Niklas, passed away. (The judgment does not specify when Lane's obligation to pay terminates.) Thus, the state court found that the premium obligation was subject to termination upon Niklas's death, a child-related contingency within the meaning of section 71(c)(2)(a)-(b). The obligation to pay the premiums was in fact terminated after Niklas' death, in response to Lane's motion to terminate.

[67] Mr. Lane argued repeatedly that the premiums were intended for the support of Niklas and were no longer necessary. The judge concluded that the payments were originally required to support Niklas, and thus should be discontinued after his death. Hence, in substance, the obligation to make the premium payments was subject to a contingency relating to Niklas's continued life, as described in IRC section 71(c)(2).

[68] The fact that the 1996 statement of decision and judgment are after the tax years in question does not preclude them from being controlling. Mahana v. United States, 115 Ct. Cl. 716, 38 AFTR 1446, 88 F. Supp. 285, 50-1 USTC paragraph 9164 (1950), cert. den. 3339 US 978, 94 L Ed 1383 (1950): Where a bona fide dispute arises between the parties as to the alimony payments called for by an agreement entered into incident to a divorce decree, the later agreement merely clarifies the rights of the parties under the original agreement.

C. THE PREMIUM PAYMENTS ARE NOT INCOME TO MARTEN BECAUSE SHE DID

[70] It is essential to note that the Brodersen opinion does not focus on who was the owner or what was the purpose of the life insurance policy, but rather on what the wife received in exchange for the premium payments. To determine whether Marten must treat the premium payments as alimony requires an analysis of what benefits she received.

[71] This is because there is no requirement to recognize income unless there is at least constructive, if not actual, receipt. Wright v. Commissioner, 62 T.C. 377 (1974), aff'd 543 F.2d 593 (7th Cir. 1976). In Wright, the issue involved whether premium payments on a term life insurance policy owned by the wife constituted alimony under former section 71. The parties conceded that premium payments were incurred by the husband under a written instrument incident to divorce, were made in discharge of a legal obligation based on the marital or family relation, and were periodic. However, the Court recognized that the payments had to have also been constructively received by the wife in order to be alimony. Id. at 396; see also Sperling v. Commissioner, 726 F.2d 948, 953 (2d Cir. 1984) aff'g T.C. Memo. 1982-681. The Court recognized that actual receipt of money by the wife was not necessary, but it was necessary that the payments "confer on the wife a presently ascertainable economic benefit . . ." Wright, 62 T.C. at 396-97; see also Greenway v. Commissioner, T.C. Memo 1980-97 (holding that a payment at death under a term policy is insufficient to confer a present economic benefit on the former spouse).

[72] Similarly, the policy in Brodersen was a term life insurance policy under which the wife could not recover any economic benefit unless the former husband died. In both Wright and Brodersen the husbands argued that since the term policy could be converted to a whole life policy, it did confer some additional economic benefit to the wife. Wright, 62 T.C. at 399. The court rejected the argument in both cases on the grounds there was no proof that the wife in either case was aware of the possible conversion benefit. Wright, 62 T.C. at 399 and Brodersen, 57 T.C. at 418.

2. THE TAX COURT ERRONEOUSLY CONCLUDED THAT MARTEN WAS IN

[74] The Tax Court used its prior opinion in Wright v. Commissioner, supra, as its primary reference point. (Ex. 4, pp. 22- 26). There, the husband was required to maintain a 10-year renewable term life insurance policy on his own life naming his wife the owner and beneficiary. The husband was required to maintain the policy until his wife remarried, reached age 65, or died. Id., at 383-384. The wife was perceived as having such limited rights under the term policy that she could not be said to have constructively received an economic benefit from the premium payments. The court focussed on the contingent nature of the wife's rights in the policy: she lost her rights to the policy proceeds if she predeceased her husband, attained age 65, or remarried. The court concluded that mere peace of mind from the term policy did not constitute a taxable gain. (Ex. 4, pp. 24-25).

[75] The Tax Court found the instant case to be distinguishable from Wright in several respects, but Marten submits that the court's distinctions do not justify its result:

1. The court noted that the Wright case involved a pure term policy, while the policy here is a hybrid policy which has no cash value for the first 15 years, then builds a cash surrender value beginning with the 16th year. We submit that the court paid too little attention to the simple fact that there was no cash value during the years in question, and that it was a matter of speculation, during those tax years, whether the policy would ever have a cash value. In other words, there were no presently ascertainable economic benefits during 1993 and 1994, although there might have been such benefits several years down the road.

2. The court noted that the policy here was immediately assignable by the wife. However, the court did not attempt to elaborate on how this assignability would translate into an economic benefit, for the obvious reason that there was no economic benefit. It was unthinkable that Marten would have assigned the policy, given the purpose of the policy and Marten's devotion to her son. To whom would Marten assign the policy? Surely, the state court would not compel Lane to continue the premium payments after an assignment, given that the policy was intended for Niklas's support. In short, assignability did not contribute to an ascertainable economic benefit.

3. The Tax Court noted that Marten was entitled to the policy proceeds even if she remarried or attained the age of 65. Maybe so, but here, the court overlooks the most obvious condition attached to Lane's obligations to make premiums, which was Niklas's survival. Insurance premiums are not taxable alimony if there is any contingency under which the wife may lose economic benefits of the policy. E.g., Seligmann v. Commissioner, supra; Wright v. Commissioner, supra. Here, the policy was intended for the support of Niklas, and the obligation to pay premiums was conditioned on his survival. In fact, within just about a year of the second of the two tax years at bar, the obligation to pay premiums was eliminated due to Niklas's death. Niklas's tragic death and the ensuing elimination of Lane's obligation to pay premiums makes it abundantly clear that Marten received no economic benefit during the years at bar.

[76] The Tax Court suggested that the proof of its position was that, at the time of trial. the policy in question was in its 17th year and had a cash surrender value of $10,500. (Ex. 4, p. 24, paragraph 2) First, there was no attempt by the parties to prove the actual cash value as of the time of trial, and, other than the projections in the original policy, there is no support for the court's observation. Second, the court overlooked the fact that Lane's obligation to pay premiums ended by early 1996. Hence, the cash value in 1998, at the time of trial, would have been attributable to payments by Marten beginning in 1996, and no thanks" to Lane's payments during 1993 and 1994.

[77] Marten's situation is very similar to that of the taxpayer in Seligmann, supra, 207 F.2d. 377, at 386: "In any event, whatever right she had or acquired was dependent upon so many contingencies that its value could not be measured during the taxable year. And it was a matter of rank speculation or conjecture as to whether petitioner would ever realize any economic gain."

[78] In sum, there is no question of whether Marten could have converted the policy on Lane's life to receive some cash value. She could not. The policy conferred no cash or loan value for the first 15 years and it was effectively a term policy up to 1997. Since Lane was relieved of the obligation to make the premium payments after Niklas passed away in 1995, the policy never bestowed any additional value or valuable rights to Marten, other than possibly her peace of mind and "peace of mind does not constitute a taxable economic gain." Wright, 62 T.C. at 398 (citation omitted). The fact that the policy was assignable did not constitute an economic benefit. There is no reason to believe that the assignment feature had an ascertainable value, especially under the unique circumstances of this case. Since Lane did not die during the period he paid the premiums on the policy, Marten received no economic benefit from the premium payments, and thus they are not income to her.

[79] How little can a taxpayer receive, and yet have to pay tens of thousands of dollars in taxes, interest and penalties?

D. LANE IS JUDICIALLY ESTOPPED TO DENY THAT THE PREMIUM PAYMENTS

[81] The doctrine of judicial estoppel prevents a party from taking a position in a legal proceeding which is inconsistent with a position the party took in an earlier proceeding. The doctrine operates to prevent a party from abusing the process through cynical gamesmanship, and from using intentional self-contradiction to gain an unfair advantage. E.g., Warda v. Commissioner, 15 F.3d 533, 73 AFTR 2d 94-2324, 94-1 USTC paragraph 60154 (6th Cir. 1994), cert den 513 US 808, 130 L Ed 2d 14 (1994); Unum Corp. v. United States, 886 F. Supp. 150, 76 AFTR 2d 95-5340, 95-2 USTC paragraph 150524 (DC ME, 1995). In re Cassidy, 892 F.2d 637, 65 AFTR 2d 90-525, 90-1 USTC paragraph 50023 (7th Cir. 1990), reh den 1990 US App LEXIS 1592 (7th Cir. 1990), cert den 498 US 812, 112 L Ed 2d 24 (1990).

[82] The Seventh Circuit has defined the elements of judicial estoppel as follows: (1) The position taken by the party to be estopped in the later proceeding must be inconsistent with one asserted unequivocally by the party the earlier proceeding; (2) The party to be estopped must have been successful in asserting the earlier position which in inconsistent with its position in the later proceeding; (3) The facts at issue must be the same in both cases. Levinson v. United States, 969 F.2d 260, 70 AFTR 2d 90-5303, 92-2 USTC paragraph 50463, (7th Cir. 1992) cert den 506 US 989, 121 L Ed 2d 441 (1992). One court has observed, about judicial estoppel, that the party must, in effect, have "made a bargain" with the court or administrative body of the first proceeding by making certain representations in order to get a particular benefit. Unum Corp v. United States, supra.

[83] The Tax Court has jurisdiction to apply the judicial estoppel doctrine. Reynolds v. Commissioner, 861 F.2d 469, 63 AFTR 2d 89-385, 88-2 USTC paragraph 9591 (6th Cir. 1988); revg TC Memo 1987- 261, PH TCM paragraph 87261, 53 CCH TCM 887 (1987); Huddleston v. Commissioner, 100 T.C. 17 (1993).

[84] Lane represented to the state court a simple proposition: "The insurance was to pay for Niklas' needs if I died." (Ex. 7, p. 78). He reiterated this position on at least two other occasions. Lane succeeded in persuading the state court judge of the "inextricable relationship" between Niklas's care and the $750,000 policy. The Superior Court's statement of decision includes the following: "At the time of the judgment in 1987, it was agreed that husband would pay . . . $750,000 in insurance to the wife (for Niklas' support)." (Ex . 7, p. 82) and "The purpose of the insurance was to provide for Niklas. Niklas had died the previous month." (Ex. 7, p. 84).

[85] Now, in the tax case, where it is advantageous for Lane to explain away his clear cut expression of intent, he describes his statement "as partially correct" (Tr. 37-38) and as "partially true." (Tr. 40.) Are there hints of "cynical gamesmanship" How about intentional self-contradiction to gain an unfair advantage?"

[86] Lane did not contend in the state court, either, "The purpose of this policy was to provide for Virginia's support" or "There were two equal purposes for this policy, one, to support our son, Niklas, and two, to support Virginia." Had Lane so contended, the results may have been substantially different. In contending that the sole or dominant purpose of the policy was to support Niklas, Lane essentially made a deal with the judicial system. He reaps the benefits of the state court victory inasmuch as his obligation to pay the premiums on the $750,000 policy was terminated. However, in this case, and in this court, he must accept the consequences of his deal. The premium payments were to support his child, the obligation to pay the premiums was terminable on the death of his child, and the premium payments are not deductible to Lane and are not includible in Marten's income.

VIII. CONCLUSION

[87] It follows that the court should determine that Marten does not realize additional income for the tax years 1993 and 1994 by virtue of the insurance premiums paid by Lane on the $750,000 insurance policy.

DATED: 8/8/01

[88] I declare that I am employed in San Rafael, California, County of Marin, where my business address is 1120 Nye Street, Suite 300, San Rafael, CA 94901. I am over the age of eighteen years and not a party to the within action.

[89] I served the within:

REPLACEMENT BRIEF OF APPELLANT

[90] By placing a true copy thereof, enclosed in a sealed envelope with postage thereon fully prepaid, in the United States mail at San Rafael, California, addressed as follows:

Joel McElvain

Durel A. Damos