Brodersen v. Comm'r of Internal Revenue , Docket No. 3471-70.

• Decision Date: 20 December 1971
• Docket Number: Docket No. 3471-70.
• Citation: 57 T.C. 412
• Parties: WILLIAM H. BRODERSEN, JR., AND CLARICE M. BRODERSEN, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

57 T.C. 412

WILLIAM H. BRODERSEN, JR., AND CLARICE M. BRODERSEN, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 3471-70.

United States Tax Court

Filed December 20, 1971.

John L. Palmer and Thomas P. Guszkowski, for the petitioners.

Robert F. Brunn, for the respondent.

Pursuant to a property settlement, incident to a divorce decree, petitioner acquired a decreasing-term life insurance policy on his life to secure the payment of alimony, naming his wife owner-beneficiary. The wife's ownership of the term policy conferred no economic benefit on her and merely afforded her additional protection to insure payment of the amounts due her. Held, on the facts presented, since the wife received no economic benefit from the policy, the premiums paid on the insurance policy are not deductible under sec. 215, I.R.C. 1954.

STERRETT, Judge:

The respondent determined a deficiency in the Federal income tax of the petitioners of $216.45 for the taxable year ended December 31, 1966.

The only issue for decision is whether a premium paid by petitioner for insurance on his life, purchased pursuant to a divorce decree and naming his former wife as owner-beneficiary, is deductible under section 215 IRC 1954. ¹

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

William H. Brodersen, Jr. (hereinafter referred to as petitioner), and Clarice M. Brodersen are husband and wife and their legal residence was Milwaukee, Wis., as of the date their petition was filed with the Tax Court. Their joint Federal income tax return for the calendar year 1966 was filed with the district director of internal revenue, at Milwaukee, Wis.

Petitioner and his former wife, Barbara Brodersen, now Barbara Warder (hereinafter referred to as Barbara), were divorced on August 6, 1965, in the Circuit Court of Waukesha County, State of Wisconsin. The judgment approved a stipulation between petitioner and Barbara as to a property settlement in lieu of alimony. The stipulation provided in part:

E. That Defendant (petitioner here) pay to the Plaintiff (Barbara) One Hundred Thirty Seven Thousand Dollars ($137,000.00) in the following manner:

(1) Upon the rendition of this judgment, Five Thousand Dollars ($5,000.00).

(2) Five Hundred Dollars ($500.00) per month payable by the 5th of each month commencing in the month following rendition of this judgment for one hundred thirty nine (139) consecutive months with a final payment on the one hundred fortieth (140th) month of Two Thousand Five Hundred Dollars ($2,500.00).

(3) Ten (10) payments of Six Thousand Dollars ($6,000.00) each, the first one payable on June 5, 1966 and the remaining nine (9) payments on June 5th during the succeeding nine (9) years.

Barbara, through her attorney, Donald Peterson (hereinafter referred to as Peterson), insisted that the required payments be secured in the event petitioner died before payment had been completed. The selection of an insurance policy as the means of furnishing the necessary security was made by petitioner and his attorney, Martin Browning (hereinafter referred to as Browning), who made the determination that it was the most economical method. With respect to the matter of insurance the property stipulation noted the following:

L. As soon as practicable after rendition of such judgment, the Plaintiff shall be awarded and Defendant shall be divested of all right, title and interest and the incidents of ownership in and to a policy or policies of declining term life insurance on the life of Defendant aggregating initially the face sum of One Hundred Twenty Five Thousand Dollars ($125,000.00) covering a term of not less than twelve years on which the Defendant shall pay the premiums without extension and shall be entitled to all dividends. Defendant shall cause the insurance company to send duplicate receipts of premium payments to Plaintiff at the address specified by her.

Petitioner chose the insurer, the particular type of policy, and the agent through whom the policy was acquired. In so doing, he obtained the appropriate application, but it was signed by Barbara as applicant. The application, in the section entitled ‘remarks,‘ filled out by the agent, Charles Kleinschmidt, stated:

Prepare provision that applicant owner's approval is required to change or cancel this policy. Applicant is to have all rights and benefits and her estate is to be beneficiary, owner if she predeceases insured. Insured is required to purchase this policy to indemnify wife for amount stipulated as divorce settlement. * * *

Though Peterson investigated various types of term policies, neither he nor Barbara participated in the selection of the insurer, the type of policy, or the agent. They had no part in choosing the terms of the policy as this also was done solely by petitioner. Neither Barbara nor her attorney ever had possession of, or ever saw, the policy before or during the year in issue, and neither considered the annual premium part of the funds required to be paid in order to divide the property of the former spouses.

Pursuant to his obligation, petitioner obtained term life insurance Policy No. 28 827 401 on his life from the Prudential Insurance Co. of America. It was a 15-year decreasing-term policy issued on August 18, 1965. The gross annual premium was $555. The policy named Barbara as beneficiary with her estate as contingent beneficiary. The application, included within the policy, noted that the ownership of the policy rested with the applicant unless otherwise indicated, and any dividends payable would be applied against the annual premium. A rider attached to the policy sometime after its original issuance stated:

The policy is hereby amended at issue to provide that, subject to such limitations as may be hereinafter set forth, all legal incidents of ownership and control of the policy shall belong to the following Owner:

Barbara A. Brodersen, wife of the Insured, the estate of said wife,

and such Owner shall be entitled, during the lifetime of the Insured, without the consent and to the exclusion of any Beneficiary, to any benefit payable and any value obtainable under the policy and to the exercise of any rights and privileges conferred by the policy or allowed by the Company.

The policy contained a conversion privilege, which, though never exercised, permitted the owner to convert it from a decreasing-term policy to permanent whole life insurance; limited however to a minimum coverage of $2,000 and a maximum of ‘80% of the amount which would have been payable under the present policy if death had occurred immediately prior to the conversion date.’ Barbara was unaware of the right of conversion, and even if she discovered such provision and desired to convert the policy, written consent of the petitioner was required by the issuing company. In addition, such conversion would result in an increase in premium unless substantially less than maximum coverage was selected. The stipulation contained no provision relating to convertibility or petitioner's obligation to pay an increased premium due to Barbara's conversion of the policy. Once converted the policy would contain provisions for dividend rights, cash surrender value, and loan value.

Petitioner, with the consent of Barbara, has twice had the amount of the insurance coverage reduced to an amount lower than the automatic decline built into the policy. Each such reduction resulted in a reduction of the premium payment required to be paid by petitioner to keep the term policy in force.

Petitioner paid a premium of $555 during 1966 and deducted it on his joint Federal income tax return for the year ended December 31, 1966. Barbara initially recognized the premium as income on her 1966 return, but subsequently filed a claim for refund denying such amount as income, which claim is still pending before respondent.

OPINION

Petitioner and Barbara were divorced on August 6, 1965. The judgement approved and adopted a property settlement denoted as a stipulation, which had been entered into by the parties in lieu of alimony. The stipulation contained a provision requiring petitioner to transfer to Barbara a $125,000 decreasing-term insurance policy, while at the same time paying the annual premiums. The sole question for our determination is whether the $555 premium paid in 1966 is deductible by petitioner under section 215, which states in part:

SEC. 215. ALIMONY, ETC., PAYMENTS.

(a) GENERAL RULE.— In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year.

It is evident from the above language that petitioner's right to deduct the premium payment hinges upon the includability of such payment in Barbara's income within the purview of section 71. Section 71(a) includes in the gross income of a divorced wife (1) periodic payments (2) received by her (3) in discharge of the husband's legal obligation (4) incurred under a divorce decree or settlement agreement incident to such decree.² The question of deductibility in the instant case then turns on whether Barbara constructively received income by reason of the payment by the petitioner of the insurance premium.

Our research into the question of the appropriate tax treatment to be accorded a payment, pursuant to a property settlement, by a former husband of insurance premiums on his life reveals two distinct strains of cases reaching opposing results due to two separate factual conclusions deemed controlling. First, there are two cases which find governing the fact that the policy was acquired for security purposes. For example it has been said: ‘It is well established that premiums paid by a former husband on a policy of insurance which merely provides...