Opinion
Docket Nos. 1749-69, 5135-69.
Filed June 29, 1971.
1. Pursuant to an Indiana divorce decree and a "Separation Agreement" incorporated therein petitioner received from her former husband five payments aggregating $25,000 over a 4-year period as well as 20 weekly payments aggregating $1,000 for the first 20 weeks following the divorce. Both sets of payments were labeled "alimony." Held, the payments aggregating $25,000 were in fact in respect of a division of property jointly held during the marriage and were therefore not includable in petitioner's gross income under sec. 71(a)(1), I.R.C. 1954. Held, further, the payments of $50 per week aggregating $1,000 were includable in petitioner's gross income under sec. 71(a)(1), I.R.C. 1954, as "periodic payments * * * in discharge of * * * a legal obligation * * * [arising out] of the marital or family relationship."
2. Held, deduction for legal expenses claimed under sec. 212(1), I.R.C. 1954, denied because petitioner failed to carry burden of proving what portion, if any, of legal expenses incurred in the divorce proceedings were attributable to the collection of amounts includable in her gross income under sec. 71, I.R.C. 1954.
Joel Yonover, for the petitioners.
William L. Ringuette, for the respondent.
The Commissioner determined deficiencies in the petitioners' income tax as follows:
Addition to Petitioner Year Deficiency tax, sec. 6653 (a), I.R.C. 1954 Enid P. Mirsky ................... 1964 $3,726.84 { 1965 1,240.74 $62.04 Marvin Mirsky and Enid Mirsky ....{ 1966 1,453.19 72.66 { 1967 618.02 30.90 After concessions by the petitioners three issues remain for decision: (1) Whether payments received by petitioner Enid P. Mirsky from her former husband Philip L. Pollak pursuant to a divorce decree and separation agreement are includable in her gross income under section 71(a)(1), I.R.C. 1954; (2) whether legal fees paid by petitioner Enid P. Mirsky in connection with divorce proceedings involving her and her former husband are deductible under section 212, I.R.C. 1954; and (3) whether the petitioners are liable for section 6653(a), I.R.C. 1954, additions to tax for 1965, 1966, and 1967.FINDINGS OF FACT
The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.
At the time of filing of the petitions herein the petitioners, Marvin and Enid P. Mirsky, resided at 5518 South Kenwood Avenue, Chicago, Ill.
Enid P. Mirsky (petitioner) filed a separate individual income tax return for the calendar year 1964 with the district director of internal revenue, Indianapolis, Ind. During the years 1965, 1966, and 1967 petitioner was married to Marvin Mirsky, and they filed joint income tax returns for the calendar years 1965, 1966, and 1967, with the district director of internal revenue, Chicago, Ill.
Petitioner, whose maiden name was Moise, was previously married to Philip L. Pollak (Pollak) on February 17, 1952, in Gary, Ind. They had two children, Michael and Mitchell Pollak. Petitioner and Pollak were husband and wife until January 14, 1964, when petitioner was granted an absolute divorce by a decree of Lake Superior Court, Gary, Ind.
Prior to her marriage to Pollak petitioner was employed as an advertising copywriter at "Goldblatts" in Chicago, Ill., and she continued to work there for some 6 months after the marriage. At the time of the marriage she had savings in excess of $1,000. Prior to the marriage Pollak's resources were "just a little bit more than $500," and after purchasing a $500 engagement ring for her he had "no money at all."
On February 8, 1952, prior to their marriage, petitioner and Pollak purchased a residence at 1104 Rush Street in Gary (the "Rush Street Property"), where they resided after they were married. The purchase price was $20,000, and a downpayment of $8,000 was required. Petitioner contributed $1,000 toward the down payment, and both her parents and Pollak's parents each contributed $3,500. Pollak obtained a bank loan for the remaining $12,000, secured by Veterans' Administration Form Mortgage on the property. Since petitioner and Pollak were not married at the time of the purchase, title was taken originally in Pollak's name alone; however, on February 23, 1952, after the marriage, title was placed in the names of "Philip L. Pollak and Enid P. Pollak, husband and wife." The effect of this change was to establish a tenancy by the entirety in the spouses.
After about 6 months of marriage to Pollak petitioner terminated her employment at Goldblatts. Her earnings during this period were contributed to the family resources. Thereafter during her marriage to Pollak, she did not engage in compensable employment, but she did work periodically in various businesses successively conducted by her husband.
During approximately the first 8 years of petitioner's marriage to Pollak she managed all the household finances including mortgage payments on the Rush Street Property. For at least part of this time, petitioner and Pollak maintained a joint savings account to which petitioner deposited their savings from Pollak's income.
On or about May 17, 1956, petitioner and Pollak sold the Rush Street Property for $24,800. They received a total of $14,483.35 from the sale. Including the downpayment and mortgage payments (exclusive of interest payments) they had paid a total of $9,980.99 on the property by the time of the sale. The purchasers assumed the balance of Pollak's Veterans Administration mortgage, which had been paid down to $10,019.01, and other costs and liabilities associated with the property and the sale.
Then, on or about May 24, 1956, petitioner and Pollak purchased another residence at 6824 Forest Avenue, Gary, Ind. (the Forest Avenue Property) for $42,000. The Forest Avenue Property was taken in the names of "Philip L. Pollak and Enid Pollak, husband and wife." The downpayment on the Forest Street Property was $27,000, which consisted of the proceeds from the sale of the Rush Street Property and funds in petitioner's and Pollak's joint savings account. They arranged a loan for the $15,000 balance and gave a mortgage on the property as security for the loan. During the time they lived at the Forest Avenue residence petitioner and Pollak made improvements on the property in the amount of approximately $5,000.
In October, 1963, petitioner instituted divorce proceedings against Pollak in Lake Superior Court, Gary, Ind. In her complaint, she asked "the court to grant her a divorce and that she have the custody of the parties' minor children and that she be granted alimony in a sum to be determined by the court."
Just prior to the time they were divorced, petitioner and Pollak were engaged in protracted negotiations through their attorneys concerning principally the division of their marital property. During these negotiations the petitioner maintained that she "was only asking for * * * [her] own property." At one point during the negotiations Pollak offered the petitioner the Forest Avenue Property in settlement for her interests in their marital property, but the petitioner refused this offer because she thought that she could not afford the cost of maintenance. In making the offer Pollak appeared to be motivated at least in part by the thought that the property would be difficult to sell. After reaching an impasse in respect of the property, Pollak finally offered to pay petitioner $25,000, and she accepted. That amount was to be paid over a period of several years. As originally drafted, however, the agreement included two contingency provisions to which the petitioner objected. One contingency provided that the payments to the petitioner would cease upon her remarriage, and the other contingency provided that the payments would also cease on the death of either the petitioner or Pollak. The petitioner objected to the two contingencies because she considered that under the agreement she was merely to receive her own property. After further negotiations the contingency relating to petitioner's remarriage was deleted from the agreement, but the other contingency relating to the death of either petitioner or Pollak was not. Petitioner came to regard this latter provision as unimportant because she believed if either she or Pollak died their two sons would ultimately receive all of the marital property. Another concern which petitioner expressed during these negotiations was that she did not wish to pay any tax on the property she received as a consequence of the divorce.
Petitioner and Pollak entered into a "Separation Agreement" on January 14, 1964, in contemplation of the divorce that was granted the same day, as hereinafter set forth. At about this time petitioner was advised by her attorney that she would not be required to pay any tax on the property she received pursuant to this agreement. The separation agreement provided in part as follows:
WHEREAS, the parties hereto desire to settle their respective rights as to property, both real and personal, now in their name or possession, and to assist the Court in establishing custody and support matters affecting the welfare of the minor children of the parties, as well as to assist the Court in establishing the amount and method of payment of alimony by the Husband to the Wife;
* * * * * * *
ARTICLE II: PROPERTY SETTLEMENT
* * * * * * *
1. Each of the parties hereto shall become the sole owner of their respective clothing, jewelry and personal effects.
2. The Wife shall execute and deliver to the Husband a quit claim deed for the interest of the Wife in the residence of the parties at 6824 Forest Avenue, Gary, Indiana; * * * and in return for such quit claim deed the Husband will:
a. deliver bill of sale to the Wife covering all of the household furniture now located at the above residence, together with all books, paintings and art objects now located at said residence, all of which shall then become the sole property of the Wife,
b. grant the Wife rent-free use of the residence of the parties at the above address until June 1, 1964 (after which time and date the Wife will vacate the premises), provided, however, that the Wife shall take care of the operation and maintenance expenses of the residence, including such items as fuel and utilities,
c. pay to the Wife's attorney the sum of Seven Hundred Fifty Dollars ($750.00), and
d. pay the premium for maintaining a standard certificate of Blue Cross and Blue Shield insurance coverage on the Wife up to June 1, 1964.
3. All of the property standing in the name of the Husband or Wife other than as specified in this Article, upon the granting of the divorce shall be and become the sole and absolute property of each of the respective parties, free of any statutory, dower or inchoate interest that each of them may have had in the property of the other.
ARTICLE III: ALIMONY
The parties hereto each mutually agree that the provisions set forth in this Article as to the amount and method of payment of alimony are fair and equitable and shall be submitted to the Court for its approval and its determination of how much alimony shall be decreed and how the same shall be payable, if a divorce is granted. It is understood and agreed that the amounts hereinafter set forth payable by the Husband to the Wife are in full settlement and discharge of the Husband's legal obligation for the maintenance and support of the Wife which arose out of the marital relationship between said parties and are and shall be deemed by the parties hereto to be alimony.
1. The Husband shall pay as alimony to the Wife the following amounts:
a. $5,000.00 upon the divorce being granted.
b. $50 per week until June 1, 1964.
c. $7,500.00 on June 1, 1964.
d. $5,000.00 on January 1, 1965.
e. $5,000.00 on January 1, 1966.
f. $2,500.00 on January 1, 1967.
2. Said amounts shall not bear interest and the Husband shall have the right to prepay any or all of the said amounts in whole or in part at any time.
3. Notwithstanding the foregoing provisions of this Article, the obligations of the Husband as set forth in this Article shall terminate immediately upon the occurrence of the first of the following events: the death of the husband or the death of the Wife.
ARTICLE IV: MINOR CHILDREN
[This article made provision for custody of the two children and related matters, including provision for support payments by Pollak in the amount of $50 per week for the children.]
The petitioner was granted a divorce from Pollak on January 14, 1964. The judgment of the court in the divorce proceeding incorporated and approved the separation agreement and provided in part as follows:
3. That plaintiff and defendant heretofore executed a certain "Separation Agreement" dated the 14th day of January, 1963 (hereinafter referred to as the "Agreement") * * *. The Court, after due consideration of the provisions of the Agreement, finds that such Agreement has been entered into fairly without fraud, duress or undue influence, and its provisions are equitable and said agreement is hereby approved.
IT IS THEREFORE CONSIDERED, ORDERED, ADJUDGED AND DECREED, by the Court:
1. That the bonds of matrimony heretofore existing between plaintiff and defendant be and they are hereby dissolved and the plaintiff be and she hereby is granted an absolute divorce from the defendant.
2. The Separation Agreement * * * is hereby approved in open Court and made a part of this decree. The performance of the terms and conditions set forth in Article II of said Agreement entitled "Property settlement", be and they are hereby determined to be in complete settlement and discharge of the property rights of and between the plaintiff and the defendant and the Court now orders the parties to perform their respective obligations under Article II of said Agreement, subject to the continuing jurisdiction and further orders of this Court for the purpose of enforcing such obligations set forth in said Article.
3. The Court hereby expressly approves the provisions of the Agreement set forth in Article III thereof entitled "Alimony", pertaining to the payment of alimony by the defendant to the plaintiff and the amounts set forth in said Article III of said Agreement payable by the defendant to the plaintiff are in full settlement and discharge of the defendant's legal obligation for the maintenance and support of the plaintiff which arose out of the marital relationship between said parties; and the obligations set forth in Article III of said Agreement shall terminate immediately upon the occurrence of the first of the following events: the death of the defendant or the death of the plaintiff; and the Court now orders that those provisions set forth in Article III of said Agreement be performed and the Court retains jurisdiction for the enforcement of the obligations of alimony by the defendant as set forth in Article III of said Agreement.
In connection with her divorce from Pollak petitioner incurred legal expenses of $1,750. Pursuant to article II of the separation agreement (as incorporated into the divorce decree) Pollak paid $750 of these legal expenses. On the day the divorce was granted (January 14, 1964) the remaining $1,000 in legal expenses was paid from the $5,000 payment which petitioner received from Pollak on that date under article III of the separation agreement.
Pursuant to article II of the separation agreement, petitioner on or about January 14, 1964, conveyed her interest in the Forest Avenue Property to Pollak. On or about the same date and also pursuant to article II of the separation agreement, Pollak transferred to petitioner all the household furniture, books, paintings and art objects located in the Forest Avenue property. These items were originally purchased for approximately $6,000, but had diminished in value from the time of purchase. Petitioner subsequently sold some of these items and realized only 15 to 20 percent of their original cost.
On or about May 19, 1965, Pollak sold the Forest Avenue Property for $36,000. He received a total of $26,188.77 from the sale. Including downpayment and mortgage payments (exclusive of interest payments) but not including improvements, a total of $33,326.30 had been paid on the property by the time of the sale. The purchasers assumed the balance of petitioner's and Pollak's mortgage on the property, which had been paid down to $8,673.70, and other costs and liabilities associated with the property and the sale.
All of the other conditions and provisions of the separation agreement, as incorporated into the judgment of the court in the divorce proceedings, have also been satisfied and complied with by both petitioner and Pollak, including article III under which petitioner was paid $13,500 in 1964, $5,000 in 1965, $5,000 in 1966, and $2,500 in 1967.
Although petitioner in her 1964 income tax return disclosed the so-called alimony payments received by her under article III of the separation agreement, she claimed that such payments were in consideration for her one-half interest in property; and she reported no income in any manner in respect of the payments made to her by Pollak pursuant to article III of the separation agreement as income on her 1964, 1965, 1966, or 1967 tax returns. To her 1964 individual tax return petitioner attached a statement that these payments were considered by her to be "payment[s] in exchange for the * * * [petitioner's] one-half interest in the residence and personal property [belonging to petitioner and Pollak] because the substance of said payments is that they are not in the nature of alimony but rather payments for property originally belonging to the * * * [petitioner]." She also declared in this statement that "if the payments to be received exceed the basis of the property surrendered, taxpayer will report gain." The 1965, 1966, and 1967 tax returns which petitioner filed jointly with Marvin Mirsky each contained a statement that the petitioner "received additional payment[s] in * * * [that year] which she deems non-taxable pursuant to the facts and circumstances set forth on the statement attached to her 1964 Federal income tax return."
In his deficiency notices the Commissioner determined that the amounts received by petitioner under the "Alimony" provisions of the separation agreement were includable in her gross income under section 71, I.R.C. 1954. The Commissioner further determined that additions to tax should be assessed against the petitioner and Marvin Mirsky under section 6653(a), I.R.C. 1954, for underpayment of tax in 1965, 1966, and 1967 "due to negligence or intentional disregard of rules and regulations." In an amendment to her petition, petitioner alleged in the alternative that if the Commissioner did not err in charging her with additional income of $13,500 for 1964 in respect of the so-called alimony payments then he erred in failing to allow her a deduction of $1,000 paid by her as legal fees which she incurred allegedly in the production of such payments.
OPINION
1. The principal question for decision is whether payments received by petitioner Enid P. Mirsky from her former husband pursuant to article III of the separation agreement and corresponding provisions of the divorce decree are includable in her gross income under section 71, I.R.C. 1954. The Government contends that such payments, described as "alimony" in the agreement and decree, were "in discharge of * * * a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband" within the meaning of section 71(a)(1). Petitioner, on the other hand, argues that the payments, although labeled "alimony" in the agreement and decree, were in fact intended as compensation for her property rights and therefore not within the contemplation of section 71(a)(1). If the payments may properly be classified as consideration paid to the wife for her property rights, there is no dispute that they are not covered by section 71(a). So much is in any event clear not only under section 1.71-1(c)(4), Income Tax Regs., which provides that section 71(a) does not apply to payments which are attributable to an interest in property which "originally belonged to the wife," but also under a well established line of cases recognizing that payments made in fulfillment of either a division of property or a property settlement (related to a divorce or separation) are capital in nature and are not includable in the wife's gross income under section 71. See Ann Hairston Ryker, 33 T.C. 924, 929; Wilma Thompson, 50 T.C. 522, 525; Brantley L. Watkins, 53 T.C. 349; Lewis B. Jackson, Jr., 54 T.C. 125, 129; Ernest H. Mills, 54 T.C. 608, 615, affirmed 442 F.2d 1149 (C.A. 10).
SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS.
(a) GENERAL RULE. —
(1) DECREE OF DIVORCE OR SEPARATE MAINTENANCE. — If a wife is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after 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 on or incurred by the husband under the decree or under a written instrument incident to such divorce or separation.
* * * * * * *
(c) PRINCIPAL SUM PAID IN INSTALLMENTS. —
(1) GENERAL RULE. — For purposes of subsection (a), installment payments discharging a part of an obligation the principal sum of which is, either in terms of money or property, specified in the decree, instrument, or agreement shall not be treated as periodic payments.
(2) WHERE PERIOD FOR PAYMENT IS MORE THAN 10 YEARS. — If, by the terms of the decree, instrument, or agreement, the principal sum referred to in paragraph (1) is to be paid or may be paid over a period ending more than 10 years from the date of such decree, instrument, or agreement, then (notwithstanding paragraph (1)) the installment payments shall be treated as periodic payments for purposes of subsection (a), but (in the case of any one taxable year of the wife) only to the extent of 10 percent of the principal sum. For purposes of the preceding sentence, the part of any principal sum which is allocable to a period after the taxable year of the wife in which it is received shall be treated as an installment payment for the taxable year in which it is received.
The payments in controversy fall into two categories: the larger payments aggregating $25,000 ($12,500 in 1964, $5,000 in 1965, $5,000 in 1966, and $2,500 in 1967) and the payments of $50 a week for the period January 14-June 1, 1964, aggregating $1,000. We consider the $25,000 payments first, and hold, on the record before us, that they were not intended as alimony, as that term is commonly understood, or in discharge of support or similar obligations contemplated by section 71(a)(1), but were rather compensation for petitioner's property rights.
The solution of the problem before us is not advanced by a consideration of sec. 71(c), dealing with a "Principal Sum Paid in Installments." Of course, if sec. 71(c)(1) is applicable, then petitioner is entitled to prevail. In its effort to establish that sec. 71(c)(1) is inapplicable the Government relies upon sec. 1.71-1(d)(3)(i), Income Tax Regs., which in substance provides that where the payments are to be paid over a period of 10 years or less, they may be considered periodic payments under sec. 71(a) only if two conditions are met:
(a) Such payments are subject to any one or more of the contingencies of death of either spouse, remarriage of the wife, or change in the economic status of either spouse, and
(b) Such payments are in the nature of alimony or an allowance for support. While it is true that the first condition is satisfied here (since the payments were to cease upon the death of either spouse), the second condition raises the identical question to be answered in this case upon a consideration of sec. 71(a) itself, namely, whether the payments were in fact alimony or support rather than compensation for petitioner's property. Accordingly, sec. 171-1(d)(3)(i) of the regulations does not present anything additional to be taken into account in dealing with the matter before us.
In our view of the record the payments aggregating $25,000 were intended to compensate petitioner for her interest in the Forest Avenue Property. Under Indiana law, the original conveyance of that property to petitioner and Pollak as "husband and wife" created a tenancy by the entirety. Dotson v. Faulkenburg, 186 Ind. 417, 419, 116 N.E. 577, 578; Simons v. Bollinger, 154 Ind. 83, 85-87, 56 N.E. 23, 34-25; Brown v. Brown, 133 Ind. 476, 477, 32 N.E. 1128, 33 N.E. 615; Richards v. Richards, 60 Ind. App. 34, 38, 110 N.E. 103, 104 (Ind.App.), and cases cited therein; cf. Ind. Ann. Stat. (Burns), secs. 56-111 and 56-112. Such a tenancy vests in each spouse a present interest in the property so held. See Note, "Selected Tax Aspects of Divorce and Property Settlements," 41 Ind. L. J. 732, 747. "The property belongs as much to the wife as to the husband and she has a joint right with him to its use and enjoyment during the existence of the marriage." Yarde v. Yarde, 117 Ind. App. 277, 278-279, 71 N.E.2d 625 (Ind.App.), and cases cited therein. The petitioner and Pollak continued to be tenants by the entirety in the Forest Avenue Property up until the time of the separation agreement and divorce.
If no disposition is made of property held in tenancy by the entirety when a husband and wife are divorced, the effect of the divorce under Indiana law is to make the husband and wife tenants in common of the property previously held by the entirety. Ind. Stat. Ann. (Burns) sec. 3-1218; Smith v. Smith, 131 Ind. App. 38, 52, 169 N.E.2d 130, 137 (Ind.App.). Therefore, had petitioner and Pollak not disposed of the Forest Avenue Property under the separation agreement as they did, petitioner would have been vested with the interest of a tenant in common at the time of the divorce. We think it was for this property interest that petitioner received the payments aggregating $25,000 under the "alimony" provisions of the separation agreement.
This conclusion is supported by the fact that petitioner — aside from being vested with the property rights of a tenant by the entirety — had made substantial contributions to the purchase of the Forest Avenue Property. Petitioner and her parents accounted for $4,500 of the $8,000 downpayment on the Rush Street Property which petitioner and Pollak purchased when they were first married in February, 1952. In addition, during the first 6 months of her marriage to Pollak she earned a salary of approximately $1,000 that was part of their family resources out of which mortgage payments on the Rush Street Property were made. In all, petitioner and Pollak made mortgage payments of $9,980.99, exclusive of interest. When the Rush Street Property was finally sold petitioner and Pollak realized a gain of $4,800, part of which was attributable to petitioner's individual investment. The total liquid proceeds from the sale of the Rush Street Property along with petitioner's and Pollak's savings were then used in the purchase of the Forest Avenue Property.
We think it highly unlikely that petitioner would have given up her rights in the Forest Avenue Property merely for the household furnishings provided for her under article II of the separation agreement, as contended by the Government. Her negotiations leading up to the execution of the agreement plainly established the contrary, and we are fully convinced by her testimony that the payments aggregating $25,000 called for by article III of the agreement, although labeled as alimony, were in fact intended to be in settlement of her entirety interest in the Forest Avenue Property. "Where the wife has property of her own, such provisions appearing in a separation agreement or divorce decree are often regarded as persuasive that payments to the wife represent a property settlement rather than support payments." Wilma Thompson, 50 T.C. 522, 526. Such is peculiarly the situation here. During the negotiations prior to the separation agreement Pollak offered the Forest Avenue Property to the petitioner in settlement of their marital property but petitioner refused. And the impasse was finally broken when petitioner agreed to accept the $25,000 instead. We think it highly unlikely that she would have accepted instead second-hand household furnishings of far less value.
We recognize, of course, that the Court in Wilma Thompson, found that such was not the situation in that case by reason of other factors there involved.
On her 1964 tax return petitioner recognized that she was taxable on gain realized from disposition of her interest in the Forest Avenue Property. Certainly she is required to report any such gain under United States v. Davis, 370 U.S. 65, 68-71. No issue has been raised as to gain realized by petitioner, and we accordingly do not deal with it here.
The Commissioner, however, argues that the language in the separation agreement and divorce decree characterizing the payments as "alimony" should be determinative of the facts before us. He relies on Commissioner v. Danielson, 378 F.2d 771 (C.A. 3), certiorari denied 389 U.S. 858, reversing 44 T.C. 549, which held that "a party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc." 378 F.2d at 775. Failing his argument based on Danielson, the Commissioner contends that the petitioner should at least be required to meet the standard of proof ("strong proof") approved in several other circuits and recently applied by this Court in J. Leonard Schmitz, 51 T.C. 306, 315-318. Both Danielson and Schmitz were cases involving the question of what proof is required of a taxpayer seeking to establish that no portion of an amount received in connection with the sale of a business was for a covenant not to compete although the contract for the sale provided part of the amount so received by the taxpayer was for such a covenant. As the Commissioner recognizes on brief, this Court in Edith M. Gerlach, 55 T.C. 156, acq. 1971-1 C.B. 2, rejected the application of both Danielson and Schmitz to cases involving divorce decrees, stating ( 55 T.C. at 169): "The factual situation in those cases [ Danielson and Schmitz] is so different from the factual situation surrounding the entry of a decree of divorce by a judge of a court, that we do not consider those cases to control the determination of the instant case." We decline the Commissioner's invitation to reconsider Gerlach, which was decided so recently.
In addition, we note that the onus placed upon a taxpayer under Danielson or Schmitzl to clarify or explain a separation agreement or divorce decree would work against the congressional objective that there be national uniformity in the taxation of such payments arising out of a marital relationship irrespective of technical differences in legal terminology between the laws of the various States. S. Rept. No. 1631, 77th Cong., 2d Sess., p. 83, H. Rept. No. 2333, 77th Cong., 2d Sess., p. 72.
Prior to 1942, alimony payments were neither includable in the wife's income nor deductible by the husband. By adding secs. 22(k) and 23(u) to the Internal Revenue Code of 1939, secs. 120(a) and (b) of the Revenue Act of 1942, 56 Stat. 816-817, made these payments taxable to the wife and deductible by the husband. Both the House and Senate Committees at that time expressed the intention that these "amended sections will produce uniformity in treatment of amounts paid in the nature of or in lieu of alimony regardless of variance in the laws of different states concerning the existence and continuance of an obligation to pay alimony." (Emphasis supplied.) S. Rept. No. 1631, 77th Cong., 2d Sess., p. 83; H. Rept. No. 2333, 77th Cong., 2d Sess., p. 72. See Bardwell v. Commissioner, 318 F.2d 786, 789 (C.A. 10), affirming 38 T.C. 84; Taylor v. Campbell, 335 F.2d 841, 845-846 (C.A. 5); Blanche Curtis Newbury, 46 T.C. 690, 695; William M. Joslin, Sr., 52 T.C. 231, 236, affirmed 424 F.2d 1223 (C.A. 7); 5 Mertens, Federal Income Taxation, sec. 31A.02 (ch. 31A, pp. 20, 23) (Malone, et al., rev. ed. 1969). Sec. 71(a)(1), I.R.C. 1954, is in all material respects identical to sec. 22(k), I.R.C. 1939.
It was undoubtedly to achieve such uniformity that the courts have held in an impressive line of cases that the labels attached to payments made in connection with divorces or separations are not controlling. Mills v. Commissioner, 442 F.2d 1149, 1151 (C.A. 10), affirming 54 T.C. 608, 618; Taylor v. Campbell, 335 F.2d 841, 845 (C.A. 5); Bardwell v. Commissioner, 318 F.2d 786, 789 (C.A. 10), affirming 38 T.C. 84; Ann Hairston Ryker, 33 T.C. 924, 929; Blanche Curtis Newbury, 46 T.C. 690, 694; Wilma Thompson, 50 T.C. 522, 525; William M. Joslin, Sr., 52 T.C. 231, 236; Lewis B. Jackson, Jr., 54 T.C. 125, 129-130; Edith M. Gerlach, 55 T.C. 156, 167, acq. 1971-1 C.B. 2. Such an attitude has especial application to the facts before us because "alimony," as the term is used under Indiana law, is a multifaceted concept which can embrace payments in division or in settlement of property rights as well as payments for support. Sec. 3-1217 — 3-1218, Ind. Ann. Stat. (Burns). Compare Shula v. Shula, 235 Ind. 210, 214-215, 132 N.E.2d 612, 614, with McDaniel v. McDaniel, 245 Ind. 551, 558-559, 201 N.E.2d 215, 218-219. Note, "Alimony in Indiana: Traditional Concepts v. Benefit to Society," 29 Ind. L.J. 461-471.
In Shula v. Shula, 235 Ind. 210, 214-215, 132 N.E.2d 612, 614 (1956), the Supreme Court of Indiana (Achor, J.) said: "Alimony is awarded in Indiana for the purpose of making a present and complete settlement of the property rights of the parties. It does not include future support for the wife, nor is it intended as a medium for providing financial compensation for injured sensitivities during marriage. The primary factor in fixing the alimony is the existing property of the parties. However, other facts which the court may consider are the source of the property, the income of the parties and the nature of the abuse inflicted upon the wife — particularly if that abuse affected the earning capacity of the wife and would have been the basis for an action in damages except for the fact of the marriage." (Emphasis supplied.) See Note, "Selected Tax Aspects of Divorce and Property Settlements," 41 Ind. L.J. 732, 746. Shula itself was subsequently explained in McDaniel v. McDaniel, 245 Ind. 551, 558-559, 201 N.E.2d 215, 218-219 (filed Sept. 15, 1964, subsequent to the divorce in issue here). In McDaniel the Supreme Court of Indiana (Achor, C.J.) said that "it is the basic concept of alimony that such payment be made in lieu of a wife's right to the continued support of her husband" 245 Ind. 551, 558, 201 N.E.2d 215, 218. (Emphasis supplied.) Despite this difference in language from Shula, Indiana courts have regarded McDaniel as merely "affirm[ing]" Shula. Sidebottom v. Sidebottom, 140 Ind. App. 657, 662, 225 N.E.2d 772, 775 (Ind.App.). The Supreme Court of Indiana noted in McDaniel that "a wife [is not] entitled to alimony as a method of future support where substantial alimony in lieu of such support is awarded out of the estate of the husband, as in the Shula case." 245 Ind. 551, 559, 201 N.E.2d 215, 218-219. Therefore, where substantial provisions are made for a wife in a property settlement ("alimony in lieu of * * * support"), the wife may not be entitled to that type of alimony which is "a method of future support." See Shula v. Shula, 235 Ind. at 216, 132 N.E.2d at 615; Temme v. Temme, 103 Ind. App. 569, 574-577, 9 N.E.2d 111, 113-114 (Ind.App.). Indiana case law subsequent to McDaniel continues to regard provisions for the wife in the property settlement as affecting the amount of support alimony a divorce court may grant in its discretion. Dunbar v. Dunbar, ___ Ind. App. ___, 251 N.E.2d 468, 472 (Ind.App.); Chaleff v. Chaleff, ___ Ind. App. ___, 246 N.E.2d 768, 769-770 (Ind.App.); Sidebottom v. Sidebottom, 140 Ind. App. 657, 661-662, 225 N.E.2d 772, 775, 776 (Ind.App.).
We have previously considered the concept of "alimony" under Indiana law in Wilma Thompson, 50 T.C. 522, 527. Because the taxpayer-wife in Wilma Thompson owned no property of her own at the time of the divorce, we accordingly held that sums received by her pursuant to a divorce decree could not be in satisfaction of property rights and were instead taxable periodic payments. In Wilma Thompson we were not faced with a situation where a wife did hold rights in property at the time of the divorce. Therefore, we relied principally on McDaniel and the concept of alimony presented therein ("support"). We did note, however, that had the taxpayer-wife owned property at the time of the divorce, the situation might have been different ( Wilma Thompson, 50 T.C. at 526), and that the concept of alimony in McDaniel was not inconsistent with the concept in Shula ("property settlement") under Indiana law. Wilma Thompson, 50 T.C. at 527, fn. 8.
The situation is otherwise as to the payments of $50 per week made by Pollak to petitioner also pursuant to article III of the separation agreement for the 20-week period from January 14, 1964, until June 1, 1964. These payments have the characteristics of support or alimony. They were made to petitioner during the same period of time she was granted rent-free use of the family residence. They were small in amount and payable weekly. Moreover, the petitioner and Pollak had agreed to a settlement of $25,000 for her interest in the Forest Avenue Property. When these weekly payments of $50 are taken into account (in the aggregate amount of $1,000 for the 20-week period) total payments made to petitioner under article III of the separation agreement amounted to $26,000. Though the matter is not completely free from doubt, we think these payments were not part of petitioner's and Pollak's division of their marital property. The burden of proof is upon the petitioner, and insofar as she has not explained these payments the Commissioner's determination is approved as to them.
2. Section 212(1), I.R.C. 1954, and section 1.262-1(b)(7), Income Tax Regs., allow a deduction for all ordinary and necessary expenses incurred for the production of income, including legal expenses paid in connection with the collection of amounts includable in gross income under section 71. We have found that $1,000 of the $13,500 petitioner received in 1964 is includable in her gross income. But petitioner has not carried her burden of proof as to what portion, if any, of legal expenses incurred by her in the divorce proceeding was attributable to the $1,000 and we therefore find no error in the Commissioner's disallowance of the deduction claimed.
3. Because we have decided the payments made by Pollak to petitioner in 1965, 1966, and 1967 were not "periodic payments" or in the nature of alimony or support, but rather represented part of the payment for her interest in the Forest Avenue Property, we need not reach the issues related to the Commissioner's determination of the section 6653(a) addition to tax which concerned only those years.
Decision will be entered under Rule 50.