DOJ Argues Insurance Premium Payments Were Alimony

David Lane and Virginia Marten were married in 1953 and had four children. One of the children 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 the injured child's health care if Lane predeceased him. Lane stated that Medicare and Medical had covered that child's care since 1992. The child 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 .)

The Justice Department argues that the Tax Court correctly held that Lane's payment of life insurance premiums constituted alimony income taxable to Marten and deductible by Lane. The DOJ emphasizes that this case is governed by the versions of section 71 and 215 in effect in 1984 and that under these statutes, Lane's payments of the premiums clearly were alimony taxable to Marten. The Justice Department insists that the life insurance premiums do not qualify as child support and that Marten constructively received Lane's payments of life insurance premiums.

1. JURISDICTION IN THE COURT BELOW.

[1] On February 13, 1997, the Commissioner of Internal Revenue issued a notice of deficiency pursuant to 26 U.S.C. (I.R.C.) section 6212(a) to Virginia M. Marten, determining that she had understated her tax liabilities for the 1993 and 1994 tax years. (Supp. ER 23.) ¹ Ms. Marten filed a timely petition in the United States Tax Court contesting the deficiencies on February 24, 1997. (Doc. 1.) The Tax Court had jurisdiction pursuant to I.R.C. sections 6213(a), 6214(a), and 7442.

2. JURISDICTION IN THE COURT OF APPEALS.

[2] The Tax Court consolidated Ms. Marten's petition with that of David E. Lane and Donna P. Lane on September 29, 1997. (Supp. ER 1.) On June 27, 2000, the Tax Court entered final decisions that disposed of all claims of all parties. (ER 29.) This Court has jurisdiction over an appeal from that decision pursuant to I.R.C. section 7482(a)(1).

3. TIMELINESS OF THE APPEAL.

[3] Ms. Marten filed a notice of appeal in the Tax Court on September 25, 2000. (ER 30.) The notice of appeal was timely pursuant to I.R.C. section 7483 and Fed. R. App. P. 13(a).

STATEMENT OF THE ISSUE

[4] Pursuant to their divorce decree, Ms. Marten's ex-husband, David Lane, purchased a whole life insurance policy on his own life, named her as the owner and irrevocable beneficiary of the policy, and paid premiums on that policy through the 1993 and 1994 tax years. The question presented in this appeal is whether those payments constituted alimony that Ms. Marten would be obligated to report as income, and for which Mr. Lane would be entitled to claim a deduction.

STATEMENT OF THE CASE

[5] In 1993 and 1994, Virginia Marten failed to report in her income the value of premium payments that her ex-husband, David Lane, had made on a whole life insurance policy of which she was the irrevocable beneficiary. Her ex-husband, however, claimed a deduction for the payments in those years as alimony. In order to avoid whipsaw and to protect the Treasury, the Commissioner issued notices of deficiencies to both spouses. Both Ms. Marten and Mr. Lane filed petitions in the Tax Court, which consolidated the cases. The Tax Court held that, under the version of the Internal Revenue Code in effect at the time of the taxpayers' divorce decree, the premium payments constituted alimony that should be included in Ms. Marten's income and that may be claimed as a deduction by Mr. Lane. Ms. Marten has appealed the decision of the Tax Court. The Commissioner has taken a protective appeal from the decision in favor of Mr. Lane, so as to ensure that both taxpayers are treated consistently.

STATEMENT OF FACTS

[6] The facts, as found by the Tax Court or as otherwise reflected in the record below, are as follows:

A. MS. MARTEN'S AND MR. LANE'S DIVORCE, AND THEIR 1984 SUPPORT

[8] Mr. Lane purchased a whole life insurance policy on Ms. Marten's life in the amount of $250,000 on July 1, 1982. The policy named Mr. Lane as the beneficiary, with a testamentary trust for the care of Niklas named as the contingent beneficiary. (Doc. 21, Ex. 28- J.) Mr. Lane purchased this policy to provide for the expense of Niklas's care if Ms. Marten were to predecease him. (Supp. ER 50-51.)

[9] Mr. Lane also purchased a whole life insurance policy on his own life in the amount of $750,000 on September 1, 1982. (ER 31.) The policy named Ms. Marten as the irrevocable beneficiary, with a testamentary trust for the care of Niklas named as the contingent beneficiary. (ER 52.) Ms. Marten had the sole power to designate any change in the named beneficiaries of the policy. (ER 36, 41.) She had the immediate power to assign the policy, and no conditions were placed upon her ability to collect on the policy in the event of Mr. Lane's death. (ER 36, 41.) The policy provided that it would begin to accumulate a cash surrender value after fifteen years. (ER 34.) Mr. Lane testified at trial that the purpose of this policy was both to provide for Niklas's care, and to maintain Ms. Marten's standard of living, upon his death. (Supp. ER 51.) Ms. Marten similarly testified that the proceeds of the policy were intended both to allow her to care for Niklas and to maintain her standard of living. (Supp. ER 53- 56, 67.) Consistent with this belief, Ms. Marten provided in her will that some, but not all, of her estate would be placed in a trust for Niklas's care in the event of her death. (Supp. ER 40, 61-62.) ²

[10] Mr. Lane filed a petition in state court for dissolution of his marriage on April 20, 1983. (Supp. ER 6.) The state court entered an order dissolving the marriage on March 20, 1984. (ER 57; Supp. ER 6-7.) The court entered an order on April 11, 1984, requiring Mr. Lane to pay Ms. Marten, among other things, spousal support and child support. (ER 59; Supp. ER 7.) In particular, the court ordered Mr. Lane to pay: (1) child support in the amount of $500 per month for the care of Niklas; (2) "[a]s additional child support . . ., any reasonably incurred health care expenses for the boy not covered by insurance"; (3) spousal support in the amount of $3,000 per month; (4) the costs related to a Jaguar automobile used by Ms. Marten; and (5) the premiums on all existing insurance policies on which Ms. Marten or their minor children had been named as beneficiaries. (ER 59-60.)

B. THE 1987 MODIFIED DECREE

[11] On January 27, 1987, the state court entered an order captioned "Judgment after Bifurcation as to All Reserved Issues." (ER 62; Supp. ER 7.) The judgment ordered Mr. Lane: (1) to pay to Ms. Marten $2,000 per month as child support for the care of Niklas; (2) to maintain medical insurance for Niklas and to pay any medical bills incurred by Niklas not covered by insurance; (3) to pay to Ms. Marten $3,000 per month as spousal support; (4) to continue to pay costs related to Ms. Marten's automobile; (5) to pay premiums on a health insurance policy for which Ms. Marten had been named the beneficiary; and (6) to maintain Ms. Marten as the beneficiary of the whole life insurance policy on his own life. (ER 62-66.)

C. MS. MARTEN'S AND MR. LANE'S TAX RETURNS

[12] Mr. Lane paid $25,840.52 in premiums on the policy insuring his own life in 1993, and $30,576 in premiums on that policy in 1994. (Supp. ER 10.) He also paid $2,484 in premiums on the health insurance policy for Ms. Marten in 1994. (Ibid.) Mr. Lane claimed deductions for these payments as alimony on the joint returns that he filed for 1993 and 1994 with his new wife, Donna Lane. (Supp. ER 15, 17.) Ms. Marten did not report these payments as income on her returns for those years, however, (Supp. ER 19, 21), despite the fact that the same accountant prepared the returns for both spouses. (Supp. ER 16, 18, 20, 22.)

D. THE 1996 MODIFIED DECREE

[13] In April 1995, Mr. Lane filed a motion in the state court to modify the support decree. (ER 73; Supp. ER 8.) He asked the court to relieve him of his obligation to pay the premiums for the policy on his own life, asserting that the purpose of the policy was to provide for Niklas's care, and that the policy was no longer necessary because Ms. Marten had subsequently obtained Social Security benefits and Medicare and MedCal insurance for Niklas without informing Mr. Lane of that fact. (ER 77-78.) On June 19, 1995, Niklas died. (Supp. ER 8.)

[14] The state court entered an order on January 6, 1996, determining that the purpose of the policy was to provide for Niklas's care, and accordingly terminating Mr. Lane's obligation to pay the premiums on the policy. (ER 84, 94; Supp. ER 9.) Ms. Marten has maintained the policy and has paid the premiums on the policy since that date. (Supp. ER 65.)

E. THE COURSE OF PROCEEDINGS BELOW

[15] The Commissioner issued notices of deficiency to both Ms. Marten and Mr. Lane (along with his new wife, with whom he had filed joint returns) for the 1993 and 1994 tax years. (Supp. ER 23, 30.) Both Ms. Marten and the Lanes filed petitions contesting the deficiencies in the United States Tax Court. (Doc. 1; No. 16223-97, Doc. 1.) The Tax Court consolidated the cases (Supp. ER 1), and held a trial. (Doc. 18.) Both petitioners and the Commissioner filed post- trial briefs. (Doc. 23, 24, 25.)

[16] In his brief, the Commissioner noted that he was merely a stakeholder in the case, since by definition Mr. Lane would be entitled to deduct the premium payments under I.R.C. section 215 only if Ms. Marten were required to report those payments as alimony income under I.R.C. section 71. (Doc. 25.) The Commissioner nonetheless offered his views on the merits of the cases for the court's benefit. The Commissioner supported Mr. Lane's argument that the health insurance premiums were deductible as alimony, noting that Ms. Marten had conceded that issue. The Commissioner, however, supported Ms. Marten's argument that the life insurance premiums were not alimony. He reasoned that Mr. Lane's obligation to pay the premiums would not have terminated upon Ms. Marten's death, a requirement for alimony under the current version of I.R.C. section 71(b)(1)(D).

[17] The Tax Court entered a memorandum opinion on October 12, 1999, determining that the life insurance premium payments were alimony taxable to Ms. Marten and deductible by Mr. Lane. (ER 5.) The court reasoned that the case was governed by the prior version of I.R.C. section 71, as the relevant amendments to that section in the Deficit Reduction Act of 1984 (DEFRA) applied only to divorce instruments executed after 1984, and the initial support decree in the present case was executed in April 1984. (ER 9.) See Pub. L. No. 98-369, section 422(e), 98 Stat. 494, 798 (1984). The court determined that the premium payments satisfied the test for alimony under prior law: they were incurred by Mr. Lane under a divorce decree, they were made in discharge of a legal obligation based on the family relation, and they were made periodically. (ER 10-11.) The court further held that the payments did not qualify as non- deductible child support, since under the law in effect in 1984 a payment must have been expressly designated in a divorce decree as child support to qualify for such treatment. (ER 11-12.) The court also held that Mr. Lane's payment of health insurance premiums constituted alimony income to Ms. Marten, noting that she had conceded the issue. (ER 6.)

[18] Ms. Marten filed a motion for reconsideration. (Doc. 29.) She argued that a regulation adopted by the Commissioner, Temp. Treas. Reg. section 1.71-1T, established that this case was governed by the current version of Section 71, since Mr. Lane's support obligations were altered in a modified decree executed in 1987, after the relevant amendments to the Code. In his responsive filing, the Commissioner supported Ms. Marten's position. (Doc. 38.) Like Ms. Marten, the Commissioner reasoned that the temporary regulation provided for new law to apply in all cases where a divorce decree is modified after 1984. (Id.) For his part, Mr. Lane argued in his responsive filing that Ms. Marten's motion for reconsideration improperly raised a new legal theory, and that the plain language of the statute provided that the previous versions of Sections 71 and 215 would apply to this case. (Doc. 33.)

[19] The Tax Court entered an order on April 20, 2000, granting Ms. Marten's motion for reconsideration, but reiterating its holding that the prior version of Section 71 governed the case. (ER 13.) The court interpreted the temporary regulation to provide for new law to apply only in cases where a post-1984 divorce decree substitutes for a temporary agreement executed on or before December 31, 1984, or where the modified decree explicitly provides that new law would apply. (ER 17.) The court reasoned that a broader interpretation of the regulation would conflict with the effective date provision of DEFRA, Pub. L. No. 98-369, section 422(e), 98 Stat. 494, 798 (1984). (Ibid.) The court determined that in this case, a 1984 divorce decree was modified by a 1987 divorce decree, and thus both DEFRA and the regulation dictated that the prior version of Section 71 would govern this case. (Ibid.)

[20] Ms. Marten filed a second motion for reconsideration. (Doc. 46.) She argued that she did not receive alimony by virtue of Mr. Lane's payment of premiums on his life insurance policy, because she received no economic benefit from that policy. She also argued that Mr. Lane was judicially estopped from denying that the payments constituted child support, given that he took the position in the state court in 1995 that the policy was intended to provide for Niklas's care.

[21] In his response, the Commissioner argued that Ms. Marten's motion should be denied as untimely. (Doc. 49.) The Commissioner also argued, however, that if the court considered the motion on its merits, the motion should be granted. The Commissioner reasoned that Ms. Marten did not gain any ascertainable economic benefit from the policy, since it had no cash surrender value during the tax years at issue in this case. With respect to Ms. Marten's second argument, the Commissioner argued that Mr. Lane was not judicially estopped, since the standard for determining whether a payment qualifies as child support for federal tax law purposes is not identical to the standard under state law. (Id.) For his part, in his response, Mr. Lane argued that Ms. Marten's motion improperly raised new issues on reconsideration, and that the insurance premiums were alimony to Ms. Marten because she obtained an ascertainable economic benefit from the policy. (Doc. 50.)

[22] The Tax Court entered an order denying the second motion for reconsideration on June 26, 2000. (ER 18.) The court held that Ms. Marten did not demonstrate the "unusual circumstances or substantial error" that would be required to excuse her failure to raise the arguments before her motion for reconsideration. (ER 22.) For the "sake of completeness," however, the court addressed the merits of her motion. (Ibid.) The court held that Ms. Marten gained an ascertainable economic benefit from the policy, since she was the owner and the irrevocable beneficiary of the policy, and the policy was assignable by her. (ER 25-26.) The court also held that Mr. Lane was not judicially estopped, since under the prior version of Section 71 a payment qualifies as child support only if it is explicitly fixed as such in a divorce decree, even if the parties to the decree in fact intended the payment to provide for a child's care. (ER 27- 28.)

[23] The court entered decisions consistent with its orders on June 27, 2000. (ER 29.) Ms. Marten now appeals from the decision entered against her. (ER 30.) The Commissioner has filed a protective appeal from the decision in favor of Mr. Lane. This Court has denied the Commissioner's motion to consolidate the two appeals, but has calendared the two appeals together for argument and decision.

SUMMARY OF ARGUMENT

[24] 1. The Commissioner's only interest in Ms. Marten's and Mr. Lane's cases is that of a stakeholder, as there will necessarily be a deficiency in tax from one of the two parties. Under Section 71 of the Internal Revenue Code, a spouse who receives payments of alimony under a divorce or separation decree must include those payments in his or her income. Under Section 215 of the Code, the paying spouse may claim a deduction for those payments if, and only if, they qualify as alimony that must be reported as income to the payee spouse. Together, these two provisions guarantee that the parties to a divorce or separation decree may not "whipsaw" the public fisc by treating payments under the decree inconsistently on their respective returns. In cases where such a whipsaw occurs, the standard practice of the Commissioner is to issue notices of deficiency to both spouses, and to adopt the position of a stakeholder. This is such a case. There is no dispute that there is a deficiency in tax from either Ms. Marten or her ex-husband, Mr. Lane. The Commissioner's only interest in these cases is to ensure that the two taxpayers are treated consistently, and that a deficiency be determined against one, and only one, of the parties. The Commissioner accordingly asks this Court either to affirm both the decision against Ms. Marten and the decision in favor of Mr. Lane, or to reverse both decisions.

[25] 2. Despite the Commissioner's position as a stakeholder, we will offer our views on the merits of these cases for the assistance of the Court. We took the position in the Tax Court that Mr. Lane's payment of life insurance premiums was not alimony. We have concluded upon further reflection, however, that the Tax Court correctly held that those payments were alimony taxable to Ms. Marten and deductible by Mr. Lane. This case is governed by the version of Section 71 in effect prior to the Deficit Reduction Act of 1984, because Ms. Marten's and Mr. Lane's divorce decree was executed before the effective date of the statute, and the subsequent modification of the decree did not specify that the new law would apply. Under the previous version of Section 71, the payment of the life insurance premiums constitutes alimony, as Mr. Lane's obligation to make those payments arose from the divorce decree, the payments were made in discharge of a family obligation, and the payments were made periodically.

[26] Ms. Marten contends that the life insurance premiums constitutes child support, which would not be includible in her income under Section 71 or deductible by Mr. Lane under Section 215. A payment qualifies as child support under the prior version of Section 71 only if the divorce decree specifically fixes the payment as a sum payable for the support of minor children. Although Ms. Marten contends that she and Mr. Lane intended that the life insurance policy provide for their son's care in the event of Mr. Lane's death, nothing in the language of the divorce decree itself specifically required her to spend the proceeds of the policy for her son. Thus, she may not exclude the premium payments on that policy from her income as child support.

[27] Ms. Marten also reiterates the argument that she raised on reconsideration that she need not report the premium payments in her income because she did not directly receive those payments. The Tax Court did not abuse its discretion by declining to consider that argument. A spouse need not directly receive a payment for that payment to qualify as alimony under Section 71, so long as he gains a presently ascertainable economic benefit from the payment. Ms. Marten was the owner and the irrevocable beneficiary of the whole life insurance policy on Mr. Lane's life, and no conditions were placed on her receipt of the proceeds of the policy in the event of his death. Although the policy had not yet accumulated a cash surrender value during the tax years at issue here, Ms. Marten nonetheless gained an economic benefit from the policy, as it was freely assignable by her. The Tax Court thus correctly held that Mr. Lane's payment of premiums on the policy constituted alimony income to Ms. Marten.

[28] The decisions of the Tax Court against Ms. Marten and in favor of Mr. Lane are correct and should be affirmed. In the event that the decision in Ms. Marten's case is reversed, however, the decision in favor of Mr. Lane should also be reversed.

ARGUMENT

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[30] The version of Section 215 of the Internal Revenue Code that was in effect at the time of Ms. Marten's and Mr. Lane's divorce decree permitted a husband to deduct "amounts includible under section 71 in the gross income of his wife." Section 71(a)(1) of the Code required a wife who was "divorced or legally separated from her husband" to include in her income periodic payments received pursuant to "a decree of divorce or of separate maintenance." The versions of Sections 71 and 215 in effect for years following 1984 similarly provide that a payor spouse may deduct a payment as alimony only to the extent that the payment is includible in the income of the payee spouse.

[31] Despite these provisions, Ms. Marten and Mr. Lane took inconsistent positions with respect to these payments on their 1993 and 1994 returns; Ms. Marten failed to report the payments as income, but Mr. Lane nonetheless claimed deductions for the payments. In order to prevent a whipsaw to the Treasury, the Commissioner followed his standard practice, which is to issue notices of deficiency to both spouses, placing the burden on each taxpayer to justify the inconsistency. See, e.g., Sherbo v. Commissioner, 255 F.3d 650, 655 (8th Cir. 2001); Preston v. Commissioner, 209 F.3d 1281, 1285-86 (11th Cir. 2000). Both spouses filed petitions contesting the deficiencies, and the Tax Court entered a decision against Ms. Marten and in favor of Mr. Lane.

[32] Given the inconsistent treatment on their respective returns, by definition, there must be a deficiency in tax with respect to one, and only one, of the spouses. If this Court affirms the decision against Ms. Marten, then by necessity the decision in favor of Mr. Lane should also be affirmed. If this Court reverses the decision against Ms. Marten, however, Mr. Lane's payments cannot qualify as deductible alimony under Section 215, and the decision in his favor must also be reversed. The posture of the Commissioner is therefore that of a stakeholder; our primary interest is to ensure that the payments are treated consistently by the two taxpayers.

[33] For the assistance of the Court, however, we will offer our views of the merits of these appeals. Cf. White v. Commissioner, 770 F.2d 685, 687 (7th Cir. 1985) (noting that the Commissioner had offered his views of the merits of case similarly arising under sections 71 and 215, despite the fact that his position was "that of a stakeholder"). We took the position below that Mr. Lane's payment of the life insurance premiums was not alimony. As we shall explain, however, we have concluded upon further reflection that the Tax Court correctly determined that the payment of those premiums was alimony includible in Ms. Marten's income under Section 71 and deductible by Mr. Lane under Section 215.

II

[35] As discussed below, Ms. Marten did not raise her argument that she gained no economic benefit from Mr. Lane's payment of insurance policy premiums until she filed her second motion for reconsideration. (Doc. 46.) The Tax Court held that Ms. Marten had not demonstrated the circumstances that would justify the granting of a motion for reconsideration. (ER 19.) This Court may reverse the Tax Court's denial of a motion of reconsideration, where the issue had not been raised previously, "only if there are shown to be extraordinary circumstances." Devore v. Commissioner, 963 F.2d 280, 281 (9th Cir. 1992) (internal quotation marks omitted).

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A. THIS CASE IS GOVERNED BY THE VERSION OF SECTIONS 71 AND 215

[37] Over time, Congress became concerned that this definition of alimony was overly subjective and dependent upon differences in state laws. Congress thus sought to create a uniform federal standard for the definition of alimony, in order to simplify the administration of tax for both the Government and affected taxpayers. See H.R. Rep. No. 98-432, pt. 2 at 1495 (1984), reprinted in 1984 U.S.C.C.A.N. 697, 1137. Accordingly, in the Deficit Reduction Act of 1984 (DEFRA), Congress amended the definition of alimony in Section 71 to provide for a new four-part test. See Pub. L. No. 98-369, section 422(a), 98 Stat. 494, 796 (1984). A payment in cash now qualifies as alimony if it (1) is received by (or on behalf of) a spouse under a divorce or separation instrument; (2) the instrument does not specify that the payment will not be treated as alimony; (3) the spouses are not members of the same household; and (4) the paying spouse would have no liability to make the payment for any period after the death of the receiving spouse. I.R.C. section 71(b)(1).

[38] In order to avoid disturbing settled expectations, Congress did not make the amendment to Section 71 retroactive, but instead provided that the revised test would apply only to new instruments executed after 1984, or to modifications of instruments executed before that date if the modification expressly declares that new law would apply. DEFRA, section 422(e), 98 Stat. at 798; see Kitch v. Commissioner, 104 T.C. 1, 5-6 (1995), aff'd, 103 F.3d 104 (10th Cir. 1997). The Secretary of the Treasury has promulgated a regulation reiterating this test. Temp. Treas. Reg. section 1.71- 1T(e), Q&A 26.

[39] In the present case, Ms. Marten and Mr. Lane are parties to an April 1984 divorce decree. (ER 59.) That decree was modified in January 1987 to increase the amount of Mr. Lane's obligation to pay child support to Ms. Marten. (ER 62.) The decree was modified a second time January 1996 to terminate Mr. Lane's obligation to pay premiums on the policy on his own life. (ER 84.) Neither modification specified that the tax consequences of the payments under the decrees would be governed by new law. Thus, since DEFRA provided that its amendments would apply to a modified decree only if the modification expressly so provides, this case is governed by the prior version of Sections 71 and 215. See Stroud v. Commissioner, 66 T.C.M. (CCH) 158, 161 (1993).

[40] Ms. Marten argues (Br. at 12) that, under the regulation, the new law applies to any modified divorce or separation instrument, without regard to whether the instrument specifies that new law would apply. She refers to a provision in the regulation to the effect that a post-1984 divorce DECREE will be treated as having been executed before 1985 if it incorporates without change a pre-1985 divorce or separation INSTRUMENT. Temp. Treas. Reg. section 1.71-1T(e), Q&A 26. She interprets that provision to imply that new law will govern any post-1984 decree that modifies any prior decree or instrument.

[41] This argument misconstrues both the statute and the regulation. As discussed above, both Section 422(e)(2) of DEFRA and the second paragraph of the Treasury Regulation provide that new law will apply to a modified instrument if the modification expressly so provides. Under Ms. Marten's reasoning, these provisions would become entirely superfluous, as any modification to a divorce instrument would cause new law to apply, without regard to whether the modified instrument so provides. This Court should avoid any interpretation of a statute that would render part of a statute redundant or superfluous. See Burrey v. Pacific Gas & Elec. Co., 159 F.3d 388, 394 (9th Cir. 1998). ³

[42] The better interpretation is that Section 422(e) means what its plain language says; the DEFRA amendments apply to divorce instruments executed after 1984, section 422(e)(1), and to modifications of earlier instruments if the modification expressly so provides, section 422(e)(2). By negative implication, the statute is most logically read to specify that prior law will apply in all other cases. See Longview Fibre Co. v. Rasmussen, 980 F.2d 1307, 1312-13 (9th Cir. 1992) (applying principle of expressio unius est exclusio alterius).

[43] The regulation does not contradict this interpretation. It sets forth the same rule as the statute, providing in its first paragraph that a divorce or separation instrument executed after 1984 will be governed by new law, and providing in its second paragraph that a modification of an earlier instrument will be governed by new law if it expressly so provides. Temp. Treas. Reg. section 1.71- 1T(e), Q&A 26. The remainder of the first paragraph of the regulation deals with the specific problem of a post-1984 divorce decree that substitutes for a pre-1985 instrument; the decree is treated as executed before 1985 if it incorporates the prior instrument without change, but is treated as executed after 1984 if it changes any terms of the prior instrument. This distinction is appropriate; if a state court in entering a divorce decree merely ratifies a prior written agreement of the parties, than for all practical purposes a spouse's payment of alimony may be deemed to be made pursuant to that prior agreement. In contrast, if the state court imposes new obligations on the parties in its divorce decree, the judicial decree is in no sense merely a modification of a previous non-judicial agreement of the parties, but is instead a newly executed instrument. In such a case, the spouse's payment of alimony must be deemed to be made pursuant to the decree, not the overridden agreement.

[44] In this case, the parties are subject to a 1984 judicial decree that has been modified by judicial decrees in 1987 and 1996. This case does not involve a judicial decree that ratifies or rejects a previously executed separation instrument. As the Tax Court correctly determined, there is thus no need to consider the particular question addressed in the regulation of the effective date of an instrument that is executed prior to, but judicially ratified after, the change in the governing law. Instead, this case is governed by the explicit dictate of the statute and the regulation; new law applies to a subsequent modification of a decree only if the modification expressly so provides. Since neither modified decree makes such a provision, this case is governed by the prior version of Section 71.

[45] This reading provides the most logical interpretation of the statute and the regulation. At the very least, this reading represents a reasonable interpretation of these provisions. Given this Court's obligation to defer to the Commissioner's reasonable interpretations of the Code, see Walt Disney, Inc. v. Commissioner, 4 F.3d 735, 740 (9th Cir. 1993), and of his own regulations, see Harbor Bancorp v. Commissioner, 115 F.3d 722, 727 (9th Cir. 1997), this Court should interpret the statute and regulation to apply the previous version of Section 71 where alimony is paid pursuant to a pre-1985 divorce decree, if the subsequent modification to that decree does not specify that new law will apply.

[46] We acknowledge that we took a different position before the Tax Court, and that we have determined for the first time on appeal that prior law should apply to this case. While this Court ordinarily would not defer to a litigating position advanced for the first time on appeal, see Ashoff v. City of Ukiah, 130 F.3d 409, 410- 11 (9th Cir. 1997), we suggest that under, the circumstances of this case, the Commissioner's interpretation of his own regulation is nonetheless entitled to deference. As discussed above, the Commissioner's role in this case is merely that of a stakeholder, and we are offering our views on the merits only for the assistance of the Court. Thus, despite the fact that our position is offered for the first time in this brief, there should be no reason to doubt that this interpretation reflects "the agency's fair and considered judgment on the matter in question." Auer v. Robbins, 519 U.S. 452, 461-62 (1997); see also Klem v. County of Santa Clara, 208 F.3d 1085, 1089 (9th Cir. 2000). ⁴

[47] In sum, the 1984 amendments to Sections 71 and 215 apply to divorce or separation instruments executed after 1984, and to modifications of earlier instruments if the modification specifically so provides. In the case of a post-1984 divorce decree that does not incorporate without change a pre-1984 written separation agreement, the regulations deem any alimony to be paid as arising under the decree and not under the earlier instrument; consequently, the regulations specify that new law will apply in such a case. Temp. Treas. Reg. section 1.71-1T(e), Q&A 26. Since none of these circumstances applies in this case, Ms. Marten's and Mr. Lane's tax liabilities are determined under the prior versions of Sections 71 and 215.

B. UNDER THE PRIOR VERSION OF SECTIONS 71 AND 215, MR. LANE'S

[49] In any event, the Tax Court correctly determined that, under prior law, the premium payments were alimony. As discussed above, before 1985, in order for a payment to qualify as alimony, it must have been (1) incurred by the husband under a decree of divorce or separation, or a written instrument incident to such divorce or separation; (2) made in discharge of a legal obligation based on the marital or family relation; and (3) made periodically. I.R.C. of 1954, section 71(a)(1) (26 U.S.C. 1982 ed.). In this case, there is no dispute that Mr. Lane was obligated under the divorce decree to pay the premiums on the life insurance policy (ER 60), that the payment was in discharge of his obligation to Ms. Marten based on their marriage (ibid.), or that he paid the premiums periodically (ER 52).

[50] We note that, if this case were governed by the current versions of Sections 71 and 215, we would agree with Ms. Marten's argument (Br. at 19) that the premiums payments would not be alimony, because Mr. Lane's obligation to pay the premiums would not terminate in the event of her death, as required by I.R.C. section 71(b)(1)(D). The insurance policy designated a trust in favor of Niklas Lane as a contingent beneficiary in the event of Ms. Marten's death. Furthermore, Ms. Marten had the absolute right under the policy to change the designations of the beneficiaries. Therefore, no provision under the policy or under the divorce decree established Ms. Marten's survival as a condition of Mr. Lane's obligation to maintain the policy. Before the Tax Court, Mr. Lane argued that his obligation would have terminated at Ms. Marten's death, because she never established the testamentary trust that was contemplated to be the contingent beneficiary under the policy. (Doc. 24.) Ms. Marten's failure to do so is irrelevant, however; in order to qualify as alimony under the current version of Section 71(b)(1)(D), the divorce instrument or decree itself must specifically provide that there is no liability to make payments after the death of the payee spouse. See Temp. Treas. Reg. section 1.71-1T(b), Q&A 11. ⁵

C. THE LIFE INSURANCE PREMIUMS DO NOT QUALIFY AS CHILD SUPPORT

[51] Under both the prior and the current versions of Sections 71 and 215, a payment that is designated as child support does not qualify as alimony that would be taxable to the receiving spouse or deductible by the paying spouse. See I.R.C. section 71(c)(1); I.R.C. of 1954 section 71(b) (26 U.S.C. 1982 ed.). Ms. Marten argues (Br. at 21) that she and Mr. Lane intended that the life insurance policy be established for the benefit of their son Niklas, and that consequently the premiums on that policy do not constitute alimony taxable to her.

[52] This argument is inaccurate, because nothing in the parties' divorce decree specifically designated the life insurance policy as child support. Absent such a designation, the premium payments on that policy cannot qualify as child support under either version of Section 71. The former version of Section 71(b) specifies that a payment will not be treated as alimony if "the terms of the decree, instrument, or agreement fix [the payment], in terms of an amount of money or a part of the payment, as a sum which is payable for the support of minor children of the husband." The plain language of the statute encompasses only payments that are specifically designated as child support in the instrument, and not any other payment, even if the parties subjectively intended the payment to be for the benefit of a child:

This language [of former Section 71(b)] leaves no room for

[53] The 1984 amendments to Sections 71 and 215 modified the rule announced in Lester, but that modification would not change the result in this case. Under the new version of Section 71(c), the divorce instrument still must specifically fix a payment as child support in order for the payee spouse to avoid taxation on that payment. Contrary to the result in Lester, however, a payment now may be treated as child support even if the instrument does not so describe that payment, if the instrument provides that the obligation to make the payment will be terminated or reduced "upon the happening of a contingency specified in the instrument relating to a child," or a time clearly associated with such a contingency. I.R.C. section 71(c)(2). Since the divorce decree in this case neither fixed Mr. Lane's obligation to maintain the life insurance policy as child support, nor specifically provided that his obligation would change in the event of any contingency relating to a child, it follows that this obligation does not qualify as child support under either the prior or the current versions of Section 71.

[54] Ms. Marten argues (Br. at 28) that Mr. Lane should be judicially estopped from denying that the life insurance policy was for the support of Niklas, given his representation to that effect before the state court in 1995. The doctrine of judicial estoppel precludes a party from taking a position in a judicial proceeding that is inconsistent with a position previously asserted before, and accepted by, a court. See Helfand v. Gerson, 105 F.3d 530, 534 (9th Cir. 1997). There is no inconsistency between Mr. Lane's position in the state court and his position in this litigation. Before the state court, Mr. Lane represented that the insurance policy was intended to be for Niklas's benefit. (ER 78.) Mr. Lane need not contradict that representation in this proceeding. Without regard to the subjective intent of the parties, the premium payments do not qualify as child support if they are not specifically fixed as such in the divorce decree. See Lester. Because his position in this case is not necessarily inconsistent with his position before the state court, Mr. Lane therefore is not estopped from asserting that the payments are alimony for the purposes of federal tax law. See Yanez v. United States, 989 F.2d 323, 326 (9th Cir. 1993).

D. MS. MARTEN CONSTRUCTIVELY RECEIVED MR. LANE'S PAYMENTS OF

[56] The Tax Court determined that Ms. Marten had not justified her failure to raise her argument prior to her second motion for reconsideration. (ER 22.) On appeal, Ms. Marten cannot demonstrate the extraordinary circumstances that would be necessary to reverse this determination. Contrary to her argument, it is well established that a payment of life insurance premiums by one spouse may qualify as alimony to the other spouse, if she is the owner and irrevocable beneficiary of the policy.

[57] It is a fundamental principle of tax law that a taxpayer must include in his income an amount paid to a third party for his benefit. See, e.g., Old Colony Trust v. Commissioner, 279 U.S. 716 (1929). Thus, provided that a taxpayer has control over the disposition of the proceeds of an insurance policy, he realizes income upon the payment by another party of the premiums on that policy, whether the premiums are paid by an employer for the benefit of an employee or, as in this case, by one spouse as alimony for the benefit of the other spouse. See Hyde v. Commissioner, 301 F.2d 279, 282-83 (2d Cir. 1962).

[58] In order for the payment of premiums to constitute income to the spouse, he must have sufficient control over the insurance policy that the benefit conferred by the payment would have a "present ascertainable value" to him. See Cosman v. United States, 440 F.2d 1017, 1021 (Ct. Cl. 1971). Thus, the spouse must be both the owner and the irrevocable beneficiary of the policy for the payment of premiums on that policy to constitute income to him. See Sperling v. Commissioner, 726 F.2d 948, 954 (2d Cir. 1984); Stevens v. Commissioner, 439 F.2d 69, 71-72 (2d Cir. 1971); Rev. Rul 70-218, 1970-1 C.B. 19. The latter condition is fulfilled even if the spouse's interest in the policy would terminate upon his death, so long as his children are designated as irrevocable contingent beneficiaries. See Stevens, 439 F.2d at 72.

[59] In contrast, if the spouse has only contingent rights in the insurance policy, then he does not realize income from the payment of premiums on that policy. Thus, the Tax Court held that a wife does not realize income from the payment of premiums on a decreasing-term policy, where the proceeds of the policy would have been identical to the amount of the husband's remaining obligation to pay alimony; since the wife functionally received only security for a right that she already enjoyed under the divorce instrument, the court reasoned, she did not gain any additional ascertainable benefit from the policy. Brodersen v. Commissioner, 57 T.C. 412, 417-18 (1971). The court noted, however, that the result would have been different if she had been aware of her right to convert the policy to whole life, which would have provided her with additional economic benefits. Id. at 418.

[60] Similarly, the Seventh Circuit has held that a wife's interest in a policy was too contingent for her to gain any presently ascertainable benefit from the payment of premiums on the policy, where she was merely a contingent beneficiary on the policy, and her rights would have been defeated upon her death, her remarriage, or her attainment of the age of 65 before the husband's death; in that case, the court reasoned, the only present benefit that the wife obtained was the peace of mind of the possibility of collecting the proceeds on the policy. Seligmann v. Commissioner, 207 F.2d 489, 494- 95 (7th Cir. 1953). In that case, again, the court noted that the result would be different if the wife had held additional rights in the policy, such as the right to borrow against it or to surrender it for cash value. Id. at 494.

[61] In sum, in order for an insurance policy to confer a presently ascertainable economic benefit on a spouse so that the payment of premiums on the policy constitutes income to that spouse, he must possess rights as an owner an beneficiary in the policy that are not contingent. See Wright v. Commissioner, 62 T.C. 377, 397 (1974), aff'd, 543 F.2d 593 (7th Cir. 1976). That principle has been applied to determine that a wife did not realize income from the payment of premiums on a term life policy, where she possessed no rights in the policy other than her right to collect its proceeds, and where that contingent right would be defeated if her husband did not die before a date certain, or if she died or remarried before her husband's death. See Wright, 543 F.2d at 600.

[62] In this case, Ms. Marten is the absolute owner and the irrevocable beneficiary of the policy on Mr. Lane's life, with her child designated as an irrevocable contingent beneficiary. (ER 52.) As the owner of the policy, Ms. Marten possesses ascertainable rights, including the right to borrow against the policy, to alienate her interest in it, and to exchange the policy for its cash surrender value. (ER 34, 36, 41.) The policy is a whole life insurance policy (ER 32), and thus her rights in the policy are not subject to the same contingency as in the term life policy in Wright, namely the contingency of the insured dying within the term specified in the policy. ⁶ There are no other conditions placed by the policy on her rights; unlike Seligmann, her rights in the policy are absolute and not subject to a condition such as her remaining unmarried. In addition, unlike Brodersen, the policy does not merely provide security to ensure her receipt of the rights provided under the divorce decree, but instead provides her with additional, ascertainable rights.

[63] Ms. Marten argues (Br. at 26) that her right to obtain the proceeds of the policy was subject to the condition of Niklas's survival. This argument is simply factually incorrect. Nothing in the policy established such a condition; instead, she was the primary beneficiary of the policy, and the trust in favor of Niklas was designated only as the contingent beneficiary. (ER 52.) To the extent that Ms. Marten argues that the state court terminated Mr. Lane's obligation to pay premiums after Niklas's death, her argument is irrelevant. The relevant question, as discussed above, is whether her ownership interest in the policy itself was subject to such a contingency that she did not gain an ascertainable benefit from Mr. Lane's payment of premiums on the policy. The question is not whether her right to continue to gain the benefit of Mr. Lane's payment of premiums on a policy that she owns was subject to limitation, as she would continue to own the policy even after his obligation to pay the premiums would have ended. ⁷

[64] Ms. Marten also argues (Br. at 25) that she gained no real benefit from the policy, because it had not yet built a cash surrender value in the years in question, and that she would never have alienated her interest in a policy that was intended for her child's care. This argument is also misplaced. The policy was, and is guaranteed, eventually to build a cash surrender value. In addition, as the policy is whole life, it is also guaranteed, at some date in the future, to pay its proceeds upon Mr. Lane's death. The Tax Court's factual determination (ER 25) that Ms. Marten obtained an ascertainable economic benefit from the policy is supported by the fact that she has continued to pay its premiums since 1996, after Niklas died and after the state court terminated Mr. Lane's obligation to maintain the policy. (Supp. ER 65.) The Tax Court therefore did not err by concluding that Ms. Marten had failed to demonstrate the extraordinary circumstances necessary to justify the granting of a motion for reconsideration.

CONCLUSION

[65] For the foregoing reasons, the Commissioner requests only that this Court enter a judgment in this appeal that will be consistent with its judgment in the Commissioner's protective appeal against Mr. and Mrs. Lane. For the assistance of the Court, we have expressed our view that the decision of the Tax Court is correct and should be affirmed.

Respectfully submitted,

[66] Pursuant to Ninth Circuit Rule 28-2.6, counsel for the appellee respectfully state that a case currently pending before this Court, Commissioner of Internal Revenue v. David E. Lane and Donna P. Lane (9th Cir. No. 00-71238), arises from the same consolidated case before the Tax Court, and involves the same factual and legal circumstances as does this case.

STATUTORY AND REGULATORY ADDENDUM

[67] It is hereby certified that service of the foregoing appellee's brief has been made on counsel for the appellant, and on counsel for the appellees in Commissioner of Internal Revenue v. David E. Lane and Donna P. Lane (9th Cir. No. 00-71238), on this 4th day of September, 2001, by mailing two copies thereof, properly addressed to them as follows:

Woodford G. Rowland, Esquire

² Mr. Lane also purchased a life insurance policy on his own life in the amount of $150,000, and designated his three oldest children as beneficiaries. (Doc. 20, Ex. 8-J.) He later redesignated Niklas as the beneficiary. (ER 65-66.)

³ Ms. Marten relies (Br. at 14) on the legislative history of DEFRA to support her interpretation of the statute and the regulation. That history merely reiterates the general rule that the 1984 amendments apply to instruments executed after that year, and does nothing to contradict the rule prescribed in the statute that new law will apply to a modified instrument only if it so specifies. See H.R. Conf. Rep. No. 98-861 at 1117 (1984), reprinted in 1984-3 C.B. (vol 2.) 1, 1117.

⁴ We also acknowledge, as Ms. Marten notes (Br. at 14-15), that IRS Publication 504 sets forth a different interpretation of the effective date of the 1984 amendments to Sections 71 and 215. We have determined that the publication is in error, and future versions of that publication will be corrected. Informal publications are merely guides for taxpayers, and do not estop the Government from correcting an inaccurate interpretation of the law. See Gehl Co. v. Commissioner, 795 F.2d 1324, 1333 (7th Cir. 1986); Manocchio v. Commissioner, 710 F.2d 1400, 1403 (9th Cir. 1983). Under the circumstances of this case, in which the Commissioner does not have a financial interest, the inaccuracy of the publication should not prevent this Court from deferring to the Commissioner's interpretation of his own regulation under Auer.

⁵ Ms. Marten also argues (Br. at 19) that the payments would not be alimony under current law because she did not receive a cash payment, as required by I.R.C. section 71(b)(1). This argument is inaccurate. Mr. Lane's payments, by check, to the insurer on behalf of Ms. Marten satisfy the requirement of a cash payment. See Temp. Treas. Reg. section 1.71-1T(b) Q&A 5; id., Q&A 6.

⁶ If this case were governed by the current version of Section 71, Ms. Marten would be deemed to be in receipt of income from the payment of premiums on a policy of which she is the owner, without regard to whether the policy is whole life or term life. See Temp. Treas. Reg. section 1.71-1T(b), Q&A 6.

⁷ We took the position before the Tax Court (Doc. 49) that Ms. Marten's second motion for reconsideration should be denied in that it was untimely, but that, on the merits, the termination of Mr. Lane's obligation to pay premiums demonstrated that Ms. Marten gained no economic benefit. We have determined that this position is incorrect, since, as discussed above, the relevant question is whether the spouse gains any benefit from the ownership of the policy itself. Ms. Marten's right to alienate her interest in, or to borrow against the policy, coupled with her continued payment of the premiums on the policy, demonstrates that the policy is of value to her.