Opinion
Docket No. 13448.
1948-05-28
FRANK J. DUBANE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
E. C. Pommerening, Esq., for the petitioner. Maurice S. Bush, Esq., for the respondent.
DEDUCTIONS— DIVORCE— PERIODIC PAYMENTS— SECTION 23(u).— Periodic payments are deductible by a husband, under section 23(u), where the only written instrument mentioning them does not impose them in discharge of a legal obligation arising out of the marital relationship, but requires them as purchase price for real property being transferred by the wife to the husband. This is so despite inconsistent provisions of an oral agreement under which the obligation might have been imposed because of the marital relationship, since section 22(k) recognizes only an obligation imposed under a written instrument. E. C. Pommerening, Esq., for the petitioner. Maurice S. Bush, Esq., for the respondent.
The Commissioner determined a deficiency of $327.38 in the income tax of the petitioner for the calendar year 1943. The only issue for decision is whether payments of $20 per week were periodic payments of alimony and, therefore, deductible by the petitioner, or whether they were payments of the purchase price of real property and not deductible.
FINDINGS OF FACT.
The petitioner filed his individual income tax return for 1943 with the collector of internal revenue for the first district of Illinois.
The petitioner and his former wife, Clara T. DuBane, were married in 1909. They had one child, a son, Edwin. Clara instituted a divorce proceeding against the petitioner in Illinois on December 12, 1934. She had no assets or means of support at that time. Edwin was then an adult. The petitioner then owned three pieces of real property, a resident of North California Avenue in Chicago, a vacant lot at Skokie, Illinois, and a summer home at Eagle, Wisconsin.
The petitioner and Clara orally agreed on or prior to January 8, 1935, that the petitioner should have the Chicago and Skokie properties, Clara should have the Eagle property, each free of all claims of the other, and the petitioner should pay Clara $20 per week during her life or until she should remarry.
They entered into a written agreement on January 8, 1935, whereby, ‘in consideration‘ of one dollar paid by Frank to Clara, ‘in final settlement of all claims‘ of Clara against Frank ‘for alimony or any statutory rights,‘ and ‘further in consideration of the transfer‘ to Clara of the Chicago, the Skokie, and the Eagle properties, Clara ‘waived and released‘ Frank of the payment of ‘alimony or support money‘ and of all rights in his property and Frank agreed to convey the three properties to Clara. That agreement was shown to the judge and placed in evidence in the divorce proceeding as the property settlement, but Clara testified in the divorce proceeding that she was to have the Eagle property as her part of the settlement.
The judge granted the divorce on January 8, 1935. The decree was entered on February 13, 1935. The court made a finding in the decree that ‘a property settlement in lieu of alimony‘ had been entered into by the parties and decreed, inter alia, ‘that upon conveyance of the real estate by the defendant to the plaintiff as provided in the property settlement entered into by and between the parties hereto, that said conveyances be and they are hereby decreed to be in lieu of alimony and that the defendant (sic) be forever barred from claiming alimony from the defendant herein.‘
The petitioner conveyed the Skokie and Eagle properties to Clara in February 1935. He conveyed the Chicago property to Clara by a deed dated and acknowledged February 15, 1935.
The petitioner and Clara entered into a written agreement on February 18, 1935, the principal part of which was as follows:
WITNESSETH, that whereas Clara T. Du Bane, party of the first part is the owner in fee simple of the following described real estate, to-wit:
(Here were described the Chicago and Skokie properties)
AND WHEREAS, Frank J. Du Bane, party of the second part, desires to purchase the aforesaid parcels of real estate,
NOW THEREFORE, in consideration of the conveyance and transfer of the above described real estate, the receipt of deeds of conveyance thereto being hereby acknowledge by me, I, Frank J. Du Bane, party of the second part, do hereby, for myself, my heirs, executors, administrators and assigneds, agree to pay to Clara T. Du Bane, party of the first part, for and during her life and so long as she remains unmarried, the sum of twenty dollars ($20.00) per week.
Clara conveyed the Chicago property to their son, Edwin, by a deed dated February 18, 1935, and Edwin conveyed it to the petitioner by a deed dated August 10, 1939. Clara also conveyed the Skokie property to Edwin and he transferred it to the petitioner at times not shown in the record. The two properties were transferred to Clara and then to the son because a suit for a large amount was then pending against the petitioner and he did not want these properties in his name where they would be subject to execution on any judgment against him. He had them transferred to his name in 1939 so that he could increase the mortgage on them.
The payments made by the petitioner to Clara, pursuant to their agreement incident to divorce, amounted to $640 during 1942 and to $1,060 during 1943. The petitioner deducted those amounts on his returns for those years. The Commissioner, in determining the deficiencies, disallowed those deductions and explained that the payments were for the purchase of real estate as shown in the contract dated February 18, 1935, and were not deductible under section 23(u) of the Internal Revenue Code. He also made another adjustment, which, the parties agree, is wholly dependent upon the correctness of the first one.
Clara reported the payments of $640 and $1,060 as income in her returns for 1942 and 1943.
Clara lived in the Eagle property and the petitioner in the Chicago property following the divorce. The petitioner had his business in Chicago and needed the home there to enable him to earn income.
OPINION.
MURDOCK, Judge:
Section 23(u) provides that amounts includible in the income of a divorced wife under section 22(k) may be deducted by the husband. The pertinent part of section 22(k) defining the income of the wife is as follows:
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.
The following is from Regulations 111, section 29.22(k)-1:
Section 22(k) applies only where the legal obligation being discharged arises out of the family or marital relationship in recognition of the general obligation to support, which is made specific by the instrument or decree.
Both the petitioner and Clara testified in this case without equivocation that they had agreed orally before the divorce that Clara was to have $20 per week and the Eagle property, no more and no less. Although their written agreements of January 8 and February 18, 1935, are a rather odd and complicated way of effectuating such a simple oral agreement, nevertheless, they do bring about that same result. If the oral agreement had been put in writing, shown to the judge in the divorce proceeding, and directly carried out, there would be no doubt that the $20 payments would later have become taxable, under the new provisions of sections 23(u) and 22(k), to the wife and not to the petitioner. But they did not do that. The petitioner also had a desire to make himself execution proof, the wife was willing to cooperate, and, apparently, an attorney provided the documentary complications intended to accomplish both purposes at one time, i.e., to transfer the Eagle property to Clara and give her $20 per week and to protect the petitioner's remaining property from execution. Provisions were included in the written agreements inconsistent with the forthright oral agreement. All three properties were transferred to the wife and for the stated purpose of a property settlement in consideration of her release of alimony. The judge, in granting the divorce, did not know more than that. He did not know that she was to retransfer two of them immediately to the petitioner's nominee or that Clara was then to receive $20 per week. No obligation to pay Clara $20 per week was imposed upon the petitioner under the decree of divorce.
The next question is whether a legal obligation arising out of the marital relationship was made specific in and imposed by a written instrument incident to the divorce. That, we think was a condition intended by Congress upon which it allowed the husband the deduction. The obligation to pay the $20 was imposed in writing only by the agreement of February 18, 1935. The Commissioner argues that that agreement was not ‘incident to such divorce‘ because it was entered into after the divorce had been granted. He would be right had there been no prior agreement (cf. Benjamin B. Cox, 10 T.C. 955), but there was a prior oral agreement that Clara was to have only the Eagle property and was to receive $20 per week. It can not properly be said, under such circumstances, that the agreement of February 18 which gave her the $20 per week was not incident to the divorce, i.e., dependent upon the divorce. But did the written agreement make specific and impose the obligation as one arising out of the marital relationship? No. It imposed it as an obligation to pay a purchase price for real property theretofore in the name of the wife under a deed executed pursuant to the written agreement of January 8, inspected, approved, and relied upon by the judge in the divorce proceeding. The petitioner seeks relief, a deduction, under a special statutory provision whereby he would not have to pay tax on some income earned by him. He must bring himself squarely within that provision to succeed. He has not done that. Although this may be rather narrow and technical, nevertheless, the letter of the law has not been met and provisions granting deductions are not to be liberally construed in favor of taxpayers. New Colonial Ice Co. v. Helvering, 292 U.S. 435; Helvering v. Inter-Mountain Life Insurance Co., 294 U.S. 686. The result might be different had Congress chosen to recognize oral agreements or had the petitioner put his oral agreement in writing in a forthright manner. He has only his own cupidity and the methods of his lawyer which he adopted, to blame.
Decision will be entered for the respondent.