Docket No. 12979.
Harrison Harkins, Esq., for the petitioner. E. A. Tonjes, Esq., for the respondent.
Property settlement agreement, incorporated into the decree of divorce which petitioner obtained from her husband, provided that petitioner would receive monthly payments during her life. The agreement was binding on heirs, assigns, executors and administrators of the divorced husband. Petitioner survived her husband, and trustees of an inter vivos trust created by the divorced husband made the monthly payments to petitioner in 1942 and 1943. Held, that the payments are includible in petitioner's income. Laughlin's Estate v. Commissioner, 167 Fed.(2d) 828, followed. Harrison Harkins, Esq., for the petitioner. E. A. Tonjes, Esq., for the respondent.
The respondent determined a deficiency in income and victory tax in the amount of $8,506.90 for the year 1943. The year 1942 is involved because of the provisions of the Current Tax Payment Act of 1943. The question is whether $14,815.13, which the petitioner received in 1943, and $13,500, which was received in 1942, constitute taxable income, as respondent has determined.
Petitioner filed her returns for 1942 and 1943 with the collector for the sixth district of California.
FINDINGS OF FACT.
The facts which have been stipulated are found as facts. The stipulations of facts are incorporated herein by this reference.
Petitioner resides in Pasadena, California. She was born on September 20, 1888, and was close to 52 years of age on May 22, 1940.
Prior to November 26, 1938, petitioner was the wife of Frederick C. Fairbanks, hereinafter referred to as Fairbanks. She was granted an absolute divorce from him in Nevada on November 26, 1938. Fairbanks had filed suit for divorce against petitioner, but he was denied the divorce. She has never remarried.
Frederick Fairbanks died on May 22, 1940. His estate was admitted to probate in Marion County, Indiana. Charles W. Fairbanks and Charles A. Clark were appointed executors of the decedent's estate.
On or about November 22, 1938, Fairbanks and petitioner entered into an Agreement Settling Property Rights. The agreement was made binding upon the assigns, executors and administrators of the parties. It recited that the parties were separated and had been living apart for several years and that Fairbanks had filed suit for divorce in Nevada in which petitioner had entered an appearance and that the action was pending, that the parties desired to settle and adjust their respective property rights and to make provision for the support of the wife during the remainder of her life.
The agreement of November 22, 1938, provided, inter alia, the following:
1. Each party released to the other all claims or interests which he or she had or might acquire in the property of the other, real and personal, by reason of inheritance or descent or arising out of their marital relation or otherwise, except as provided in the agreement. Each party, for himself or herself, and for his or her respective heirs, assigns, administrators and personal representatives, agreed to execute at any time all agreements and conveyances which the other party or the heirs or executors thereof should require for the purpose of giving full force and effect to the terms of the agreement. Each party appointed the other his or her attorney to sign, sell, and deliver all necessary and proper releases of community interests or other instruments for transferring or relinquishing all estate, title and interest in community or in other property.
2. It was agreed that Fairbanks would pay petitioner, commencing with December 1, 1938, the sum of $1,250 per month, each month, in advance, until the date of her death, or until she should remarry; and if petitioner should remarry, the monthly payments for her support would be reduced by one-half. The monthly payment of $1,250 was subject to being decreased in the event that Fairbanks' annual net income should fall below the sum of $40,000 and was subject to being increased in the event his net income should be greater than $40,000 in any year, but the maximum monthly payment to petitioner was fixed at $1,500. It was provided that Fairbanks should have the right to apply to the court having jurisdiction over the divorce proceedings to reduce proportionately the sum of $1,250 per month in the event his net annual income should fall below $40,000.
In order to secure the payments for petitioner's support, Fairbanks agreed to deliver to the Indianapolis News Publishing Co. of Indianapolis, Indiana, 750 shares of the stock of that Company, as security for performance of the agreement, and he agreed to direct that Company to make the monthly support payments to petitioner. It was agreed, also, that in the event Fairbanks should sell his interest in the Company, he would substitute other security which would produce at least $1,250 per month. It was agreed, also, that Fairbanks would authorize the Company, if he should default in making the support payments for three successive months, to sell as much of the security as would cure the default.
3. The agreement provided, also, that:
In the event a decree of divorce be entered in the aforementioned pending suit between the parties hereto, or in any other suit which may be hereafter commenced by either party hereto, this agreement, and each and all of the terms thereof, shall be adopted by specific reference in lieu of any other order the Court in such proceedings may at that time have jurisdiction to make in the distribution of the property of the parties hereto, or in awarding of alimony to the wife.
4. Fairbanks agreed, also, to deed certain real property to his wife, and to give her certain furnishings for her home.
The District Court of Nevada, in its decree granting petitioner an absolute divorce approved, confirmed, and adopted the agreement between Fairbanks and petitioner dated November 22, 1938, and reserved jurisdiction to increase or decrease the amount of the monthly payments provided for by the agreement to the extent provided therein.
Under date of January 16, 1940, Fairbanks created a trust to which he transferred certain property, among which were 749 shares of stock of Indianapolis News Publishing Co. This stock was described in the trust indenture as stock which was held by the secretary-treasurer of the Company to secure the obligations of Fairbanks under the agreement of November 22, 1938, with petitioner. The trust was revocable during Fairbanks' life, but became irrevocable upon his death. Fairbanks remarried after he was divorced from petitioner. Under the trust, the beneficiaries were children and the then wife of Fairbanks, Dorothy Fairbanks. The divorced wife, Helen Scott Fairbanks, petitioner, was not named, specifically, a beneficiary, but reference was made to the obligation to her for which stock was held as security.
The trust will terminate upon the death of the last survivor of the named beneficiaries.
After the death of Fairbanks, petitioner filed a claim with the executors of the estate of Fairbanks in which she asserted her right to continue to receive the monthly payments for her support which had been provided for in the agreement of November 22, 1938, which had been approved and adopted by the District Court of Nevada in its decree of divorce. The claim was against the estate of Frederick C. Fairbanks, deceased.
On July 5, 1941, the executors of the estate entered into an agreement with petitioner which was approved by the Probate Court of Marion County, Indiana. Under this agreement, inter alia, petitioner was to continue to receive monthly payments for her support. These payments were to be made to her by the trustees of the trust which had been created by Fairbanks prior to his death. Under the agreement the maximum amount of any monthly payment was to be $1,500, and in no event should any monthly payment be less than $750. The trustees were to pay petitioner $1,500 per month during the remainder of 1941. After December 31, 1941, the trustees were to determine the amounts of monthly payments according to the following method:
* * * the Trustees shall ascertain the amount of the net income, determined as hereinafter provided, received by them from the said trust during the preceding calendar year. The amount of each monthly payment to be made to the said HELEN SCOTT FAIRBANKS during the then current calendar year shall then be in the same proportion to the said annual net income received by the Trustees for the preceding calendar year as the sum of Twelve Hundred Fifty Dollars ($1,250.00) is to the sum of Forty Thousand Dollars ($40,000.00).
It was agreed that the Publishing Co. stock should continue to be held by the Publishing Co. as security for the monthly payments, and that the Publishing Co. should make payments to petitioner out of the dividends on the stock. Provision was made also for using principal of the trust to defray the payments to petitioner.
Petitioner received $13,500 during the year 1942 and $14,815.13 during the year 1943. She did not report any of these amounts in her income tax returns for 1942 and 1943. The entire sum of $13,500 received in 1942 and $9,350 of the amount which was received in 1943 were paid by the Indianapolis News Publishing Co. out of dividends declared and paid on shares of its stock which it held; and $5,465.13 of the 1943 payments was paid by the trustees of the trust. The trust had gross income of $45,067.87, and a net income of $40,923.68 in 1942, and gross income of $46,015.50, and net income of $39,507.03 in 1943.
The estate of Frederick C. Fairbanks, deceased, deducted $167,460, the commuted value of the payments to be made to petitioner under the Agreement Settling Property Rights, in the estate tax return, but the deduction was disallowed in the final settlement of the estate tax.
The agreement of July 5, 1941, was one which the parties thereto were obligated to make under the terms of the agreement of November 22, 1938, as an agreement required for the purposes of giving full force and effect to the 1938 agreement, and it was supplemental to the 1938 agreement. It was required in order to provide a method for determining the amounts of the monthly payments after the death of Frederick Fairbanks.
The question in this proceeding is whether payments received by the petitioner in 1942 and 1943 from Indianapolis News Publishing Co. and from the trustees of the inter vivos trust established by petitioner's former husband are taxable to her. The question involves the application of sections 22(k), 171, and 162(b) of the Internal Revenue Code.
The respondent's contentions in this proceeding are in accord with G.C.M. 25999, 1949-1 C.B. 116, and with the conclusions of the United States Circuit Court of Appeals for the Ninth Circuit in Laughlin's Estate v. Commissioner, 167 Fed.(2d) 828.
We come to the conclusion that the question is governed by the rationale of Laughlin's Estate, supra. The facts in this proceeding closely parallel the facts in Laughlin's Estate in which the administrator of the estate sought deduction for the taxable year 1942 under section 162(b) of the Internal Revenue Code of monthly payments which it made in 1942 to the divorced wife of its decedent. In both Laughlin's Estate and this proceeding, the parties were divorced prior to 1942, which is the first year to which the provisions of section 22(k) of the Internal Revenue Code apply; the divorced wives survived their former husbands who died prior to 1942; agreements had been made by the divorced husbands, incident to divorces, that periodic payments would be made during the lives of the divorced wives to them, and the agreements were binding upon the heirs, executors, or administrators of the deceased, divorced husbands.
The conclusion of the Circuit Court of Appeals in Laughlin's Estate was founded upon the premise that periodic payments which were made during 1942 by the administrator of the estate of Homer Laughlin, deceased, to his divorced wife, Ada Laughlin, were the type of payments which are described in section 22(k). The court said, inter alia, ‘that the text of the statute makes no reference to 'alimony’ as such, nor to payments for support and maintenance, but seems to encompass all payments made under a decree of divorce or separation in discharge of a legal obligation imposed under a decree of divorce because of the marital relationship.‘ The court considered the provisions of sections 162(b) and 171(b) of the Code; noted that Ada Laughlin was a beneficiary within the scope of section 162(b) because of the provisions of section 171(b), and concluded that section 162(b) ‘clearly contemplates a deduction by an estate of the periodic payments made to a wife as described in section 22(k).‘
The only logical inference to be drawn from the conclusions of the Circuit Court of Appeals in Laughlin's Estate is that periodic payments of the type described in section 22(k) are taxable to the surviving wife of a deceased, divorced husband, under such facts as were present in that case.
The payments which were to be made to petitioner subsequent to her divorce under the agreement of November 22, 1938, which was adopted by the District Court of Nevada in its decree of November 26, 1938, clearly were the type of payments which are described in section 22(k) of the Code. See Tuckie G. Hesse, 7 T.C. 700; Robert Wood Johnson, 10 T.C. 647; George T. and Ruth L. Brady, 10 T.C. 1192.
The agreement was binding upon ‘the heirs, executors and administrators and assigns‘ of Fairbanks. The stock of the Indianapolis News Publishing Co. was assigned and transferred to the trustee of the inter vivos trust created by Fairbanks, but the stock was subject to the lien imposed upon the stock by the terms of the 1938 agreement which was adopted in the divorce decree. The Publishing Company made payments to petitioner out of the dividends on the stock which was originally pledged to secure the payments.
Petitioner does not deny any of the facts set forth above. Petitioner seeks to avoid the impact of section 22(k) by making the contention, in substance, that the agreement of November 22, 1938, has no bearing upon and is not material to the question to be decided, and has no relation to the payments which the petitioner received in 1942 and 1943. The petitioner's argument revolves about the agreement which was entered into on July 5, 1941, by herself, by the executor and by the administrator of Fairbanks' estate, and by the trustees of the inter vivos trust, in settlement of petitioner's claim against Fairbanks' estate, which claim was predicated upon her right to receive monthly payments under the decree of divorce which adopted the agreement of November 22, 1938. A controversy had arisen over the amount of the monthly payments, after Fairbanks' death, apparently because of the provisions in the 1938 agreement which made the amount of the payments subject to variations in proportion to the decrease below or the increase above Fairbanks' income of $40,000. The District Court of Nevada had reserved jurisdiction to increase or decrease the amount of the monthly payments provided for in the agreement to the extent of the manner provided therein. Petitioner has not acquainted us with the nature of her controversy with the executor and administrator of Fairbanks' estate and so we must supply a reasonable explanation, as stated above.
Consideration has been given to petitioner's argument with respect to the agreement of July 5, 1941, under which petitioner's claims for the monthly payments provided for by the 1938 agreement for the rest of her life were settled. But we are unable to agree that the 1941 agreement should be construed to be wholly apart from the 1938 agreement. Petitioner's argument presents a technical question which we believe is irrelevant and immaterial. The July 5, 1941, agreement refers, throughout, to the 1938 agreement, and clearly carries out the substance of the 1938 agreement. The 1941 agreement served to clarify the matter of how the survivors of Fairbanks, those who were bound to follow the 1938 agreement, as the heirs, assigns, executor and administrator of Fairbanks' estate and who were bound to continue making the payments to petitioner for the remainder of her life, should proceed. The 1941 agreement clarified the matter of the amount of the payments to be made under the 1938 agreement, the petitioner having survived Fairbanks. For example, it was provided in the 1938 agreement that petitioner would receive monthly payments in the amount of $1,250, subject to increase or decrease depending upon whether Fairbanks' income increased above $40,000 or fell below that amount. The July 5, 1941, agreement, referring to the 1938 agreement, provided that petitioner would receive $1,500 per month during the balance of 1941, and that thereafter the monthly payments could not exceed $1,500, and that after December 31, 1941, the trustees of the inter vivos trust should ascertain the amount of the trust income for each preceding calendar year, and fix the amount of monthly payments in the same proportion to the net income of the trust for the preceding calendar year as the proportion of $1,250 is to $40,000.
The answer to petitioner's argument is that the 1938 and the 1941 agreements are to be read together. It was provided in the 1938 agreement that each party bound his ‘heirs, assigns, administrators and personal representatives ‘ to execute, at any time all agreements required for the purpose of giving full effect to the agreement. Our conclusion is that the 1941 agreement supplemented the 1938 agreement, and made provision for carrying out the chief provision thereof, i.e., the making of payments to petitioner for the remainder of her life. It did not alter the substance of the 1938 agreement. On the contrary, it provided for the continued carrying out of that agreement by those who were by its terms obligated to continue to make monthly payments to petitioner under Fairbanks' agreement that she would receive payments for life.
Since the 1938 agreement was incident to the divorce of petitioner from Fairbanks, and since the payments provided for by the 1938 agreement were precisely the type described in section 22(k) of the Code, the payments received by petitioner in 1942 and 1943 were not rendered any different merely because those who were bound to carry out the provisions of the 1938 agreement after the death of Fairbanks agreed upon the method of carrying out that obligation. The obligation which the trustees met in 1942 and 1943 in making the payments to petitioner which are in dispute here, were in discharge of a legal obligation imposed by the decree of divorce of the District Court of Nevada because of the marital relationship of Fairbanks with petitioner.
It is held that the amounts in question which were received by petitioner in 1942 and 1943 are includible in her taxable income under section 171 of the Code, and the respondent's determination is sustained. Cf. Estate of Sarah L. Narischkine, 14 T.C.
Petitioner has made other contentions. All of them have been considered, but we believe it is unnecessary to discuss each one in view of the above holding. Petitioner has advanced an argument that the provisions of section 22(k) are unconstitutional. However, the petition did not raise that question, and no facts were alleged in the petition which, if proved, would rebut the presumption of constitutionality. See Heald v. District of Columbia, 259 U.S. 114, 123; United States v. Butler, 297 U.S. 1, 67. We do not, therefore, decide the question of constitutionality.
Under the holding made under the issue presented, certain adjustments must be made under Rule 50.
Reviewed by the Court.
Decision will be entered for the respondent.