We turn now to Kiesling v. United States, decided by the Third Circuit Court of Appeals on June 30, 1965, 349 F.2d 110. In that case the facts were as follows: By the terms of a decree of divorce a husband was required to maintain a $25,000 life insurance policy on his life naming his wife as beneficiary. This policy was to be kept in force during the husband's life and as long as the wife remained unmarried. The husband was obligated to deliver the policy to his wife. In reversing the District Court, which had held that the taxpayer husband was entitled to deduct a certain percentage of the life insurance premiums paid by him because he was under a legal obligation to pay them, and that his wife's interest in the policy was absolute and vested, the Court of Appeals, after reviewing, inter alia, the Seligmann, Smith and Hyde cases supra, held that since the taxpayer retained ownership of the insurance policy, and his wife's interest as beneficiary thereof was contingent and not absolute, the premiums paid by the husband were not deductible under Section 215. The court concluded that the wife's interest in the policy was contingent because "her interest in the policy ceased upon her death or remarriage during the taxpayer's lifetime; her designation as beneficiary was revocable; the policy had not been assigned to her; she had no right to assign it, or to obtain its cash surrender value, or to borrow on it; under the policy's specific provisions she obtained 'no vested interest' in it; and the taxpayer retained the right to 'exercise every right, receive every benefit and enjoy every privilege conferred by the policy.'"
Did taxpayer's former wife in the case at bar realize a taxable economic gain during the years in question? It is obvious that she received neither cash nor property during those years. What she did receive at the time the agreement was executed was the right to have the premiums upon the life insurance on her husband's life paid by him. Through the payment of those premiums she did acquire the right to obtain the cash surrender value of the policy or to borrow upon it at any time she chose, but only during the twenty year period covered by the agreement. However, by exercising that right with respect to the cash surrender value, she would deprive herself of the then still contingent right to the full proceeds of the policy should her husband die during the same period. Were she to avail herself of the right to borrow upon the cash surrender value, her right to the full proceeds of the policy, should he die during the twenty year period of the agreement, would be diminished pro tanto.
The question is presented whether her right in the cash surrender value of the policy was so free of contingency as to require that the premiums which were paid by her husband were constructively income to her, and therefore taxable to her. Unless they were taxable income to her, her husband could not claim deduction of the premium payments from his gross income. Neither the premiums nor the cash surrender value were actually received by her. They were not constructively received by her because her "control of [their] . . . receipt [was] . . . subject to substantial limitations or restrictions." Treas. Reg. on Income Tax (1954 Code), Sec. 1.451-2(a). In addition to the contingencies hereinabove stated there was that inherent in the husband's right to utilize accuring dividends in diminution of premiums due, and to allow the policy to lapse by defaulting in the premium payments, as contemplated by paragraph V of the agreement. Although the wife had the right to demand the cash surrender value of the policy at any time during the twenty year period of the policy, while the husband was still living, by so doing she would have deprived herself of the possibility of receiving the face amount of the policy if he had died thereafter but during that twenty year period. Because of such a necessary consequential loss which the exercise of her right to the cash surrender value would entail, it may not be contended that the annual increase in cash surrender value resultant from the husband's premium payments was a constructive income receipt by her. Tyler v. C.I.R., 3 Cir. 1934, 72 F.2d 950; Cohen v. C.I.R., 39 T.C. 1055, 1063. The inevitable deterrent consequence inhibited her exercise of her right to demand the cash surrender value. Hence, the amount thereof could not be considered a constructive receipt.
The private ruling issued to the taxpayer in the Deputy Commissioner's letter of July 10, 1946 was revoked and supplanted by the public ruling published by the Internal Revenue Service in 1950 (I.T. 4001, 1950-1 Cum. Bull. 27). The latter ruling stated that premiums paid by a husband on a life insurance policy absolutely assigned to his former wife of which she is the irrevocable beneficiary are includible in the gross income of the wife and therefore deductible by the husband; but that where the policy is not assigned to the wife, and she is only the contingent beneficiary thereof, the premiums paid by the husband are neither includible in the gross income of the wife nor deductible by the husband. Mr. Griffith's letter to the Commissioner of Internal Revenue dated July 8, 1946, which elicited the Deputy Commissioner's private ruling of July 10, 1946, failed to state that the insurance policy upon his life would be assigned to his wife, but did recite that her death prior to his, the elapse of twenty years, and her remarriage were obstructive contingencies in the way of her recovery of the face amount of the policy proceeds.
The Commissioner was not required to give the taxpayer direct notice of the revocation of the prior private ruling. Rev. Proc. 62-28, 1962-2, Cum. Bull. 476, 504, 505 Sec. 13 provides as follows:
".01 . . . If a ruling is revoked or modified, the revocation or modification applies to all open years under the statutes . . .
".04 A ruling found to be in error or no longer in accord with the position of the Service may be modified or revoked. Modification or revocation may be effected by a notice to the taxpayer to whom the ruling was issued, or by a Revenue Ruling or other statement published in the Internal Revenue Bulletin."