Before DUFFY, Chief Judge, and MAJOR and SCHNACKENBERG, Circuit Judges.
This is a petition to review a decision of the Tax Court, entered January 12, 1955, sustaining respondent's determination of deficiencies in petitioners' income tax returns for the years 1948 and 1949.
We think the contested issues are properly stated in respondent's brief. They are as follows:
"1. Whether the Tax Court erred in holding that payments made in 1948 and 1949 by taxpayer to his former wife for the benefit of his children who had attained their majority, in accordance with the terms of a written instrument incident to a divorce, were not taxable to the wife, and hence not deductible by taxpayer within the meaning of Sections 22(k) and 23(u) of the Internal Revenue Code of 1939.
"2. Whether the Tax Court erred in holding that life insurance premiums paid by taxpayer in 1948 and 1949, in conformity with the separation agreement, were not deductible by taxpayer under Section 23(u) of the Internal Revenue Code of 1939."
Leon Mandel was married to Edna Horn Mandel in 1924, and of such marriage two children were born, a daughter, Noel, on February 8, 1927, and a son, Leon III, on July 31, 1928. Leon Mandel and Edna Horn Mandel separated in August, 1932. On November 29 of that year they entered into an agreement incident to divorce proceedings, which culminated in a decree entered December 29, 1932, by the Circuit Court of Cook County, Illinois, dissolving their marriage. On April 9, 1938, Leon Mandel married his present wife, Carolina Panerai Mandel, and on January 27, 1946, his former wife, Edna Horn Mandel, married her present husband, George E. Seligmann. (Carolina Panerai Mandel is named as a petitioner only because she and her husband filed joint tax returns for the years in controversy and no further reference need be made to her. Leon Mandel is referred to as the petitioner or taxpayer; Edna Horn Mandel Seligmann is referred to as Edna.) Noel was married on January 17, 1948, and became twenty-one years of age on February 8, 1948; Leon III became twenty-one years of age on July 31, 1949, and thereafter neither of the children resided or made their home with their mother, Edna.
During the taxable years of 1948 and 1949, petitioner paid to Edna, as specified in the separation agreement, amounts which were paid by her in equal parts, either directly or by deposit in their bank accounts, to the two children for the months after they reached their majority. Petitioner in his income tax returns for the years in controversy claimed such payments as deductions, which respondent denied. It is this denial which forms the basis for the first contested issue.
Petitioner, also for the years in controversy, paid certain insurance premiums in accordance with the terms of the separation agreement. In his income tax returns for those years, he also claimed these payments as deductions, which were denied by respondent. It is this denial which forms the basis for the second contested issue.
If petitioner is entitled under the first contested issue to the deductions claimed, it is by reason of Section 23(u) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23, which provides for deductions from gross income:
"In the case of a husband described in section 22(k), amounts includible under section 22(k) in the gross income of his wife, payment of which is made within the husband's taxable year. * * *"
As petitioner concedes in his brief:
"The deductibility of the payments here in question by the husband, Leon Mandel, therefore, depends on whether the payments are such as are includible in the gross income of his divorced wife, Edna Horn Seligmann, under section 22(k) of the Code."
The material portions of Section 22(k), 26 U.S.C.A. § 22, are as follows:
"In the case of a wife who is divorced or legally separated from her husband under a decree of divorce * * *, periodic payments * * * received subsequent to such decree in discharge of * * * a legal obligation which, because of the marital or family relationship, is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce * * * shall be includible in the gross income of such wife * * *. This subsection shall not apply to that part of any such periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of such husband. * * *"
On the second contested issue, petitioner contends that respondent is estopped from asserting a deficiency based upon the payment by him of insurance premiums because of a decision of the Tax Court which held that such payments made during previous years under the separation agreement and for the same purpose were deductible by petitioner.
A decision of the questions presented requires a consideration and to some extent an interpretation of relevant provisions of the separation agreement. Prior to such consideration, however, it appears important to take note of two previous decisions of this court.
The agreement, by section 1, obligated petitioner to pay Edna $18,000 per annum, in monthly installments of $1,500, for the support and maintenance of herself and the two children. It was at one time contended by petitioner that he was entitled to deduct such payments in their entirety, on the theory that the agreement did not designate any part of such payments as support for the children. The Commissioner's refusal to allow such deduction was sustained by the Tax Court, which decision was affirmed by this court. Mandel v. Commissioner, 7 Cir., 185 F.2d 50. In doing so we held at page 52 that "* * * the agreement as a whole sufficiently earmarked and designated $10,000 of each annual payment for the support of the children", and that the children being minors, said amount was not includible in the gross income of Edna and, therefore, was not deductible by the husband under 23(u). It followed from that decision that of the payments which petitioner was required to make annually, $8,000 was for the support of Edna, which she was required to include in her gross income under 22(k), and for which petitioner was entitled to a deduction under 23(u). The income tax rights and liabilities of the two parties were thus determined, subject to alteration by the happening of contingencies which followed in the separation agreement, to which we shall subsequently refer.
This court in Seligmann v. Commissioner, 7 Cir., 207 F.2d 489, considered another provision of the same agreement and decided that insurance premiums paid by the husband were not includible in Edna's gross income. In doing so, we reversed the decision of the Tax Court. We note that the Tax Court concedes the correctness of this holding, which it has since followed. Petitioner claims the right to deduct for the years here involved the insurance premiums held not includible in Edna's gross income for the years there involved.
By the agreement Edna was awarded custody of the children, and petitioner, in addition to the obligation previously shown, agreed to pay certain designated amounts not here involved for hospital, dental and medical expenses. The material provisions of the agreement relative to the first contested issue are found in section 3, the paragraphs of which we shall for convenience designate alphabetically:
"(a) In consideration of the payments made by the husband to the wife, she agrees to provide a home for the children with her and agrees to provide reasonable and proper maintenance and support for the ...