Opinion
Docket No. 8829.
1946-07-30
ROBERT W. BUDD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
T. G. Thompson, Esq., for the petitioner. Howard Kohn, Esq., for the respondent.
Held, under facts, separation agreement executed by petitioner and his wife, providing for alimony and support of minor child in contemplation of divorce and confirmed by state court in subsequent divorce action, fixed periodic payments in terms of an amount of $200 per month as a sum payable for support of petitioner's minor child, and when said agreement is construed, as it must be, as a whole, of the amounts paid by petitioner to his former wife pursuant to said agreement, the sum of $2,400 per year is not deductible by petitioner under section 23(u) of the Internal Revenue Code. T. G. Thompson, Esq., for the petitioner. Howard Kohn, Esq., for the respondent.
Respondent determined a deficiency in petitioner's income and victory tax liability for the year ended December 31, 1943, in the sum of $1,493.63.
That part of the deficiency thus determined is here at issue which arises by reason of the respondent's determination that $2,400 out of $6,000 deducted by petitioner as alimony payments was not an allowable deduction under the provisions of section 23(u) of the Internal Revenue Code as added by section 120(b) of the Revenue Act of 1942.
Both the years 1942 and 1943 are here involved, even though the deficiency determined is technically only in regard to petitioner's tax liability for 1943. See sec. 6, Current Tax Payment Act of 1943.
FINDINGS OF FACT.
Petitioner is a resident of Shaker Heights, Ohio, and filed his income tax return for the taxable year with the collector of internal revenue for the eighteenth district of Ohio.
On or about September 25, 1941, and incidental to an action for divorce brought against petitioner by his wife, Dorothy B. Budd, in the Court of Common Pleas of Cuyahoga County, Ohio, petitioner and his wife entered into a written ‘Separation Agreement.‘ This agreement, which is incorporated herein by reference, provided that Dorothy B. Budd should have custody of their minor son, Robert Ralph Budd, under certain stated conditions not here material. Its further material provisions are as follows:
THIS AGREEMENT entered into at Cleveland, Ohio, on the 25th day of September, 1941, by and between ROBERT W. BUDD and DOROTHY B. BUDD, of Shaker Heights, Cleveland, Ohio,
WITNESSETH: * * *
WHEREAS, both parties are desirous of adjusting all property rights, rights of support and alimony that may be due from one to the other, and making appropriate provision for the custody, care, education and support of their son, Robert Ralph Budd; * * *
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, to the faithful performance whereof the parties bind themselves and so far as necessary, their administrators, executors and assigns:
(3) It is mutually agreed that upon the execution of this agreement Dorothy B. Budd is to be paid Five Hundred ($500.00) Dollars for emergency expenses incident to the separation of the parties hereto, and commencing October 1, 1941 and so long as Dorothy B. Budd shall remain single and unmarried, in the event a divorce is granted her, and in the interim until said divorce is heard and a decree entered, Robert W. Budd agrees to pay Dorothy B. Budd the sum of Five Hundred ($500.00) Dollars per month for her support and/or alimony, and the support of Robert Ralph Budd until he is ready to enter college to complete his education.
(4) Should a divorce be granted Dorothy B. Budd and she should remarry, it is mutually agreed that the payment to Dorothy B. Budd for the maintenance, care, education and support of Robert Ralph Budd from and after her remarriage shall be Two Hundred ($200.00) Dollars per month until Robert Ralph Budd is ready to enter college.
(5) Should Robert W. Budd desire Robert Ralph Budd to attend a private boarding college preparatory school rather than High School, Robert W. Budd agrees to pay the tuition to such school for his son, and in addition the expense incident to attendance therein, including board, books, laboratory and incidental fees, medical fees and traveling expense incurred by Robert Ralph Budd, to the extent of Fifteen Hundred ($1500.00) Dollars per year, and to pay Dorothy B. Budd the sum of Two Hundred ($200.00) Dollars per month for the maintenance, care and support of Robert Ralph Budd during the time he is not attending said private school, the payments under this paragraph to be in lieu of the payments referred to in paragraph (4) of this agreement or to the extent of the amount so paid under this paragraph (5) from the amount to be paid to Dorothy B. Budd for the maintenance, care, education and support of Robert Ralph Budd when he is ready to enter High School under paragraph (3) of this agreement provided Dorothy B. Budd has not remarried at said time.
(6) It is mutually agreed that when Robert Ralph Budd, the son of the parties hereto, is ready to enter college to complete his education, Robert W. Budd shall deliver to Dorothy B. Budd, if at said time she still has the legal custody of Robert Ralph Budd in accordance with the provisions of this agreement and the order of the Common Pleas Court of Cuyahoga County, Ohio, in the event a divorce is granted her, an Education Insurance Policy No. 1,026,533 in the ‘New England Mutual Life Insurance Company‘ in the amount of Ten Thousand ($10,000.00) Dollars which Robert W. Budd now holds by virtue of insurance upon his own life made for such provision, * * * . It is further mutually agreed that if Dorothy B. Budd has remained single and unmarried when Robert Ralph Budd is ready to enter college or an institution of higher learning to complete his education but does not complete his education so that the provisions of said policy and the payments thereunder for his education and support are not payable by said insurance policy, the payments to Dorothy B. Budd of Five Hundred ($500.00) Dollars per month for her support and/or alimony, and the support of Robert Ralph Budd, as provided in Paragraph (3) of this agreement, shall continue until Robert Ralph Budd becomes twenty-one (21) years of age, or Dorothy B. Budd remarries. Should Dorothy B. Budd remarry at or about the time Robert Ralph Budd is ready to enter college and should Robert Ralph Budd not go to college or an institution of higher learning to complete his education, it is mutually agreed that the payment to Dorothy B. Budd for the maintenance, care and support of Robert Ralph Budd until he becomes twenty-one (21) years of age shall be Two Hundred ($200.00) per month. Upon the execution of the necessary endorsement required by New England Mutual Life Insurance Company to carry out the provisions of this agreement, the delivery of said policy thereafter to Dorothy B. Budd as provided here, and upon the payment by Robert W. Budd of the premiums due on said policy so that it will always remain in full force and effect, it is mutually agreed that Robert W. Budd shall be relieved from all further payments to Dorothy B. Budd for the maintenance, care, education and support of Robert Ralph Budd while he is in attendance at College or an institution of higher learning during his minority, the provision for the expense of which education has been made by said insurance policy. * * *
(8) After Robert Ralph Budd attains his majority and becomes (twenty-one (21) years of age or in the event of the death of Robert Ralph Budd, the minor child of the parties hereto, Robert W. Budd agrees to pay Dorothy B. Budd for her support and/or alimony the sum of Three Hundred ($300.00) Dollars per month as long as she remains single and is unmarried.
(14) It is further understood and agreed that in the event Dorothy B. Budd shall secure a decree of divorce against Robert W. Budd, then and in that event the journal entry in said action shall reflect the foregoing agreement and shall contain such provisions as to make the same effective.
Petitioner and his wife were divorced by decree of court entered December 31, 1941. This decree contained a provision, material here, as follows:
And it appearing to the Court that the parties hereto on September 25, 1941, entered into an executed an agreement by and between themselves concerning alimony and the custody, care, education and support of their minor child, rights in and to each other's property, and their mutual rights and duties in other respects, and it further appearing to the Court that the terms and provisions of said agreement are just and reasonable, it is therefore, ordered, adjudged and decreed that the said agreement of September 25, 1941, be, and it is, hereby approved and confirmed, and that the mutual rights and obligations of the parties hereto are and shall be as fixed and determined by the terms and provisions of said agreement until the further order of the Court.
Since December 3, 1941, the agreement above set forth has continued in effect without any modification. Custody of the minor child was given to petitioner's former wife. During the calendar year 1942, pursuant to provisions of the agreement, petitioner made periodic payments aggregating $6,000 to her during the calendar year 1943.
Petitioner's former wife did not remarry during the year 1942, nor during the year 1943. His son is now about 12 years of age and not yet ready to enter college, or high school, or a private preparatory school instead of a high school.
In his income tax returns for each of the taxable years, 1942 and 1943,
petitioner claimed a deduction of $6,000 each year as alimony paid to Dorothy B. Budd.
See footnote 1, supra.
Of the $6,000 paid to Dorothy B. Budd during each of the taxable years 1942 and 1943, $2,400 each year represented an amount fixed by the terms of the separation agreement approved and confirmed in the divorce decree, in terms of an amount of $200 per month, as a sum payable for the support of their minor son, Robert Ralph Budd.
OPINION.
KERN, Judge:
The narrow issue presented by this proceeding is whether the $2,400 disallowed as a deduction by respondent is a ‘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 petitioner within the meaning of section 22(k) of the Internal Revenue Code, which, together with Regulations 111, section 29.22(k)-1(d), are set out in the margin.
SEC. 22. GROSS INCOME.(k) ALIMONY, ETC., INCOME.— In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments (whether or not made at regular intervals) received subsequent to such decree in discharge of, or attributable to property transferred (in trust or otherwise) 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 or separation shall be includible in the gross income of such wife, and such amounts received as are attributable to property so transferred shall not be includible in the gross income of such husband. 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. * * *SEC. 29.22(k)-1. (d) Payments for support of minor children.— Section 22(k) does not apply to that part of any periodic payment which, by the terms of the decree or the written instrument under section 22(k), is specifically designated as a sum payable for the support of minor children of the husband. The statute prescribes the treatment in cases where an amount or portion is so fixed but the amount of any periodic payment is less than the amount of the periodic payment specified to be made. In such cases, to the extent of the amount which would be payable for the support of such children out of the originally specified periodic payment, such periodic payment is considered a payment for such support. For example, if the husband is by terms of the decree required to pay $200 a month to his divorced wife, $100 of which is designated by the decree to be for the support of their minor children, and the husband pays only $150 to his wife, $100 is nevertheless considered to be a payment by the husband for the support of the children. If, however, the periodic payments are received by the wife for the support and maintenance of herself and of minor children of the husband without such specific designation of the portion for the support of such children, then the whole of such amounts is includible in the income of the wife as provided in section 22(k). Except in cases of a designated amount or portion for the support of the husband's minor children, periodic payments described in section 22(k) received by the wife for herself and any other person or persons are includible in whole in the wife's income, whether or not the amount or portion for such other person or persons is designated.
If paragraph (3) of the separation agreement, which we have set out in our findings, stood by itself, we would have no hesitancy in deciding that there was no periodic payment fixed thereby, ‘in terms of an amount of money or a portion of the payment, as a sum which is payable for the support‘ of a minor child of petitioner, and therefore we would conclude that the full amount of the payment made to petitioner's wife in the taxable years (the sum of $6,000) would be deductible from petitioner's gross income pursuant to the provisions of section 23(u) of the Internal Revenue Code.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions; * * *(u) ALIMONY, ETC., PAYMENTS.— 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. * * *
However, section (3) of the separation agreement is only one of many paragraphs contained therein. Any adequate consideration of the problem here presented requires a construction of the agreement as a whole, and the reading of such paragraph in the light of all the other paragraphs thereof. When the separation agreement which is here before us for consideration is so read, it seems to us apparent that, of the $6,000 paid by petitioner to a former wife during the taxable years pursuant to that agreement, the sum of $2,400 represented an amount fixed by the terms of the agreement, in the terms of an amount of $200 per month, as a sum payable for the support of petitioner's minor child, and we have so found.
On the issue presented we decide in favor of the respondent.
Decision will be entered under Rule 50.