                         T.C. Memo. 1999-340



                       UNITED STATES TAX COURT



                VIRGINIA M. MARTEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

         DAVID E. LANE AND DONNA P. LANE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 3401-97, 16223-97.    Filed October 12, 1999.



     Woodford G. Rowland, for petitioner in docket No. 3401-97.

     John E. Cassinat, for petitioners in docket No. 16223-97.

     Christian A. Speck, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    By separate notices of deficiency,

respondent determined deficiencies in petitioners' Federal income

taxes as follows:
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              Docket No.         Year         Deficiency

               3401-97           1993          $7,238
                                 1994           9,254

               16223-97          1993           9,160
                                 1994          10,442

These cases have been consolidated for purposes of trial,

briefing, and opinion.

     After concessions,1 the issue for our decision is whether

payments made by petitioner David E. Lane on a life insurance

policy are alimony within the meaning of section 71.2

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.    At the time of the filing

of their petitions, petitioner Virginia M. Marten (Ms. Marten)

and petitioners David E. and Donna P. Lane (Mr. and Mrs. Lane)

resided in Sacramento, California.

     In 1953, Mr. Lane and Ms. Marten married.     During their

marriage, Mr. Lane had a successful real estate appraisal


     1
        Ms. Marten failed to argue in her petition, at trial, and
in her posttrial briefs that the premiums paid by Mr. Lane on her
health insurance policy did not constitute alimony. We therefore
find that Ms. Marten concedes this issue. See Petzoldt v.
Commissioner, 92 T.C. 661, 683 (1989).
     2
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -

business, and Ms. Marten worked in the home.   They had four

children.   When Niklas, their youngest child, was 4½ years old,

he nearly drowned and, as a result, became a quadriplegic.     Until

the end of his life, Niklas required 24-hour care, and Ms. Marten

was his full-time care provider.

     On or about January 16, 1979, Mr. Lane and Ms. Marten

legally separated.   At all times thereafter, they were no longer

members of the same household.

     On September 1, 1982, and after 3 years of separation from

Ms. Marten, Mr. Lane purchased a $750,000 life insurance policy

from Federal Kemper Life Assurance Co. ($750,000 policy) on his

own life.   He named Ms. Marten the owner and beneficiary of the

policy.   The policy provided that the contingent beneficiary was

"In trust for the care of Niklas D. Lane, son, pursuant to

testamentary trust to be established in my will."

     Contemporaneously, a $250,000 life insurance policy

($250,000 policy) was purchased on Ms. Marten's life.   This

policy named Mr. Lane primary beneficiary, and the contingent

beneficiary was "In trust for Niklas D. Lane, son, pursuant to

testamentary trust to be established in my will."   The purpose of

the $250,000 policy was to help care for Niklas if Ms. Marten

predeceased Niklas or Mr. Lane.

     On or about April 20, 1983, Mr. Lane filed for divorce.    On

March 20, 1984, the Sacramento County Superior Court (the
                                - 4 -

Superior Court) dissolved the marriage of Mr. Lane and Ms.

Marten.   On April 11, 1984, in a dissolution proceeding, the

Superior Court entered an order for child support and spousal

support (the support decree).   Under the support decree, Mr. Lane

was required to pay all reasonably incurred health care expenses

for Niklas plus $500 per month (later increased to $2,000 per

month) in child support and $3,000 per month in spousal support.

Mr. Lane was also required to continue paying the premiums on all

existing health and life insurance policies naming Ms. Marten and

Niklas as beneficiaries.

     On January 27, 1987, the Superior Court rendered a Judgment

After Bifurcation as to All Reserved Issues in the dissolution

proceeding (the modified decree).   Among other things, the

modified decree required Mr. Lane to continue paying spousal and

child support as directed in the support decree.   The modified

decree further required Mr. Lane to continue paying the premiums

on all insurance policies naming Ms. Marten and Niklas as

beneficiaries.

     During 1993 and 1994, Mr. Lane made payments on the $750,000

policy totaling $25,841 and $30,576, respectively.   In 1994, Mr.

Lane also made payments on a health insurance policy maintained

for Ms. Marten totaling $2,484.   Mr. Lane deducted these payments

as alimony on his 1993 and 1994 Federal income tax returns.     Ms.
                                - 5 -

Marten did not include these payments as income on her 1993 and

1994 Federal income tax returns.

     Niklas died on June 19, 1995.

                               OPINION

     The sole issue for decision is whether premiums paid by Mr.

Lane on the $750,000 policy were alimony.   If the payments are

alimony, Ms. Marten must include the payments in her gross

income, and Mr. Lane is entitled to deduct these payments.   See

secs. 61(a)(8), 215(a).   However, if the payments are not

alimony, Ms. Marten need not include the payments in income, and

Mr. Lane cannot deduct them.

     The parties argue that our analysis should focus on section

71(b) as amended by the Deficit Reduction Act of 1984, Pub. L.

98-369, sec. 422, 99 Stat. 494, 795 (the DRA ‘84).   The DRA ‘84,

however, is applicable only to divorce instruments executed after

December 31, 1984, or modified after December 31, 1984, where the

modified instrument states that the amended version of section 71

will apply.   See Deficit Reduction Act of 1984, supra at 798.     In

the present case, the support decree was entered on April 11,

1984, and the modified decree--entered January 27, 1987–-did not

provide that the amended version of section 71 was applicable.

We, therefore, must apply former section 71 in determining

whether the premium payments constitute alimony.
                              - 6 -

     Former section 71(a)(1) provided:

     If a wife is divorced or legally separated from her
     husband under a decree of divorce * * *, the wife’s
     gross income includes periodic payments * * * received
     after such decree in discharge of * * * a legal
     obligation which, because of the marital or family
     relationship, is imposed on or incurred by the husband
     under the decree or under a written instrument incident
     to such divorce or separation.

Section 215 generally allows a husband a deduction for payments

made to his wife which are includable in his wife’s gross income

under section 71.

     To qualify as alimony under the applicable version of

section 71(a)(1), the payments must be (1) imposed or incurred by

the husband under a decree of divorce or separation or a written

instrument incident to such divorce or separation, (2) the

payments must be made in discharge of a legal obligation based on

the marital or family relation, and (3) the payments must qualify

as periodic payments.

     Mr. Lane’s premium payments were periodic and pursuant to

the support decree and modified decree.   Life insurance premiums

qualify as payments discharging an imposed obligation within

section 71(a) when (1) the former wife is named as the

beneficiary and (2) she is the owner of the policy with the

former husband retaining no incidents of ownership.   See Hyde v.

Commissioner, 301 F.2d 279, 281 (2d Cir. 1962), affg. 36 T.C. 507

(1961); Stewart v. Commissioner, 9 T.C. 195, 197, 198 (1947);
                               - 7 -

Ellis v. Commissioner, T.C. Memo. 1973-152.    In the present case,

Ms. Marten was the primary beneficiary and the named owner of the

$750,000 policy.   Ms. Marten had sole power to change the

beneficiary on the policy.   Thus, the premium payments were paid

by Mr. Lane in discharge of a legal obligation because of the

marital or family relationship.    We conclude that the premium

payments satisfy all of the elements of section 71(a) and

constitute alimony.   Ms. Marten must include the premium payments

in income, and Mr. Lane is entitled to deduct the premium

payments.

     Ms. Marten argues that the $750,000 policy was intended to

provide for Niklas’ support and thus cannot be alimony.

According to former section 71(b), payments fixed as support for

minor children were not alimony.    In Commissioner v. Lester, 366

U.S. 299, 301 (1961), the U.S. Supreme Court held that in order

for a divorce decree to “fix” an amount as child support under

former section 71(b) the decree must expressly specify or fix the

amount of each payment which is for child support.    The Court

held that absent such an express allocation, the entire payment

is alimony and taxable to the wife.    See Commissioner v. Lester,

supra.3


     3
        Although Congress modified the result in Commissioner v.
Lester, 366 U.S. 299 (1961), by the amendments to sec. 71
                                                   (continued...)
                                 - 8 -

         The support decree and modified decree fail to state

expressly that the premiums on the $750,000 policy were for child

support.     Although it appears that at least part of the premium

payments was to ensure Niklas’ continued care, under Lester, “the

allocations to child support made * * * [within the divorce

instrument] must be ‘specifically designated’ and not left to

determination by inference or conjecture.”          Id. at 306.   Pursuant

to Lester, we must conclude that the premium payments are taxable

to Ms. Marten as alimony.        To the extent not herein discussed,

we have considered all other arguments made by the parties and

find them to be meritless or moot.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent in docket No.

                                         3401-97.

                                              Decision will be entered

                                         for petitioners in docket No.

                                         16223-97.




     3
      (...continued)
provided in the Deficit Reduction Act of 1984, Pub. L. 98-369,
sec. 422, 99 Stat. 494, 795, the amendments apply to divorce
instruments executed after Dec. 31, 1984; therefore, Lester is
applicable to the present case.
