Docket No. 19780.
Charles J. Nager, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
Held, that attorneys' fees paid or incurred by the petitioner during the taxable years in connection with securing settlement with her husband incident to separation and divorce are deductible as nonbusiness expenses within the meaning of section 23(a)(2), in so far as they resulted in the production or collection of income taxable to the petitioner under the provisions of section 22(k) of the Internal Revenue Code. Charles J. Nager, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
This proceeding involves deficiencies in income tax for the calendar years 1943 and 1944 in the amounts of $4,037 and $1,559.81, respectively.
The sole question presented is whether petitioner is entitled to deduct, as nontrade or nonbusiness expenses under section 23(a)(2), attorneys' fees of $7,500 and $3,000 paid by her in 1943 and 1944, respectively, in securing a fair and equitable financial settlement from her then husband incident to their separation and the drawing of an instrument embodying the terms of the settlement and separation. The respondent disallowed the entire payments on the ground that they were personal expenses.
Other minor adjustments made by respondent in the petitioner's tax liability for the years in issue are not in question. The facts stipulated are hereby found and are incorporated in our findings of fact.
FINDINGS OF FACT.
The petitioner, Barbara B. LeMond, formerly Barbara Brewster Bloomingdale, now resides in Hollywood, California. Her income tax returns for the calendar years 1943 and 1944 were filed with the collector of internal revenue for the third district of New York.
Petitioner and Alfred S. Bloomingdale were married on November 23, 1941, in Fort Lee, New Jersey, and thereafter maintained their marital domicile in New York, New York. Early in 1943 petitioner and her husband decided to separate, the latter moved out and established separate living quarters for himself. Thereafter both parties retained counsel. It was agreed that the separation should be final, and negotiations for a financial settlement for the petitioner were conducted by the attorneys. It was decided that after a financial settlement had been agreed upon a separation agreement would be drawn and executed by the parties. Petitioner's then attorney proposed a tentative settlement, which did not meet with her approval. In June 1943, after several months of negotiations, petitioner's original attorney withdrew from the case at the request of petitioner. Thereupon, the petitioner retained a new law firm to obtain a fair and equitable financial settlement from Bloomingdale and to negotiate and prepare a separation agreement. On July 27, 1943, a separation agreement was duly executed by the petitioner and Bloomingdale.
Under the agreement of July 27, 1943, petitioner's husband agreed to pay her the sum of $22,500 upon the execution of the agreement and $600 per month thereafter. It further provided that in the event either party obtained a decree of absolute divorce prior to June 30, 1944, the petitioner would have the option within one month after such divorce to elect to receive, instead of the monthly payments of $600, an additional sum of $213,000, payable in the following specified installments:
(a) A first instalment of $45,000 in cash within seven days after the receipt by the Husband of the notice of election provided for in this paragraph. * * *
(b) Thereafter a second instalment of $18,000 to be paid in four equal quarterly payments on January 15th, April 15th, July 15th and October 15th and commencing on January 15th of the year following next after the year of payment of the first instalment provided for in subdivision (a) hereof.
(c) Ten further instalments of $15,000 per year for the next ten years thereafter, in equal quarterly instalments on January 15th, April 15th, July 15th and October 15th of each of said ten years * * *
In the event that the tax law is amended so that the payments to be made in accordance with subdivisions (b) and (c) hereof are no longer taxable to the Wife and/or deductible from the gross income of the Husband, or in the event of the death of the Wife, at any time after the exercise of the option provided for by this paragraph, the aforesaid principal amount shall be reduced so that the instalment payments under subdivisions (b) and (c) hereof during the last six year period, or that portion of said period remaining after the occurrence of either of the said last mentioned events, shall be at the rate of $10,000 per year payable in equal quarterly instalments on the quarterly dates aforesaid; * * *
Thereafter, petitioner filed suit for divorce in Nevada and on September 25, 1943, a final decree was obtained by the petitioner in the District Court, Second Judicial District, County of Washoe, State of Nevada. The separation agreement of July 27, 1943, was approved and adopted by the Nevada decree. Attorneys' fees incurred in connection with this action were not claimed as deductions by the petitioner in her Federal tax returns and are not involved in this proceeding.
On October 2, 1943, petitioner notified her husband that she elected to receive in lieu of the monthly payments of $600 the alternative amount of $213,000, payable in installments.
Pursuant to the agreement of July 27, 1943, petitioner received from her husband during 1943 the following amounts:
+---------------------------------------------------+ ¦Payment upon execution of agreement ¦$22,500¦ +-------------------------------------------+-------¦ ¦Monthly payments August, September, October¦1,800 ¦ +-------------------------------------------+-------¦ ¦First installment after election ¦45,000 ¦ +-------------------------------------------+-------¦ ¦Total ¦69,300 ¦ +---------------------------------------------------+
During the year 1943 petitioner paid her attorneys the sum of $7,500, and in the year 1944 the sum of $3,000, a total of $10,500, representing payment for conducting the negotiations resulting in the aforesaid financial settlement and in the execution of the separation agreement.
In her income tax return for 1943 petitioner computed the total amount of alimony receivable, as a result of her election, to be $183,000. Of this amount, she reported $18,300 as taxable alimony, and $10,800 as net taxable alimony, the difference of $7,500 representing a deduction claimed for legal expenses incurred in connection with securing the alimony receipts.
In her income tax return for 1944 petitioner reported taxable alimony in the amount of $18,000 and claimed a deduction of $3,400 for legal and accounting expense paid in connection with alimony receipts.
Of the sums paid by petitioner for legal fees in 1943 and 1944 in the respective amounts of $7,500 and $3,000, 80 per cent paid in each year, viz., $6,000 and $2,400, constituted deductible nonbusiness expense in connection with the production and collection of income.
The sole issue presented herein is whether the petitioner is entitled to deduct as nonbusiness expense under section 23(a)(2) of the Internal Revenue Code the sums of $7,500 and $3,000 expended by her in 1943 and 1944, respectively, for attorneys' fees in securing a financial settlement with her husband incident to their separation and divorce.
In our opinion, the issue in respect to the deductibility of such expense under section 23(a:(2) is clearly controlled by our decision in Elsie B. Gale, 13 T.C. 661, decided this day, wherein we held that legal expense paid or incurred in connection with the production or collection of alimony includible in the gross income of a wife under section 22(k) constitutes ordinary and necessary expense for the production or collection of income within the meaning of section 23(a)(2).
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 * * * received subsequent to such decree 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 * * *. Installment payments discharging a part of an obligation the principal sum of which is, in terms of money or property, specified in the decree or instrument shall not be considered periodic payments for the purposes of this subsection; except that an installment payment shall be considered a periodic payment for the purpose of this subsection if such principal sum, by terms of the decree or instrument, may be or is to be paid within a period ending more than 10 years from the date of such decree of instrument, but only to the extent that such installment payment for the taxable year is received during such taxable year, the aggregate of such installment payments) does not exceed 10 per centum of such principal sum. * * *
In the instant case, we are confronted with an additional consideration not presented in Elsie B. Gale, supra. The evidence shows that the petitioner in 1943 received substantial amounts of alimony pursuant to the separation agreement which were not includible in her gross income for that year under the provisions of section 22(k).
Upon the execution of the separation agreement of July 27, 1943, petitioner received a cash settlement of $22,500 which clearly constituted an ‘installment‘ payment under section 22(k) and was, therefore, not taxable to the petitioner nor deductible by her husband. It appears that the petitioner received monthly payments of $600 on the first of August, September, and October of 1943, totaling $1,800 of which $1,200 was not taxable to the petitioner under section 22(k) for the reason that such payments were not made ‘subsequent to the decree.‘ Within a few days after the petitioner's election on October 2, 1943, to receive the specified installments in lieu of the monthly payments of $600, she received the first installment of $45,000. It thus appears that in 1943 petitioner received alimony payments totaling $69,300.
The total amount of alimony to which the petitioner was entitled under the separation agreement was $237,300, consisting of $22,500 paid upon execution of the separation agreement, three monthly payments of $600, totaling $1,800, and $213,000, which latter sum the petitioner elected on October 2, 1943, to receive in specified installments in lieu of further monthly payments. Of this amount, only the $600 monthly payment made on October 1, 1943, subsequent to the decree of divorce, and the $213,000, which represented installment payments payable within a period of more than 10 years from the date of the decree, were taxable to the petitioner as periodic payments under section 22(k). However, not more than 10 per cent of the sum of $213,000, 2 or $21,300, may be taxed to the petitioner in any one taxable year. Inasmuch as the petitioner actually received alimony in the amount of $69,300 in the year 1943 and was required to include only $21,900 of that amount in her gross income, it is clear that she received $47,400 in 1943 which was not subject to Federal tax and yet was secured as a result of the financial settlement negotiated by her attorneys, whose fees she seeks to deduct herein. Therefore, the legal expenses claimed by the petitioner in each of the years 1943 and 1944 should be allocated on the basis of the proportion of the total nontaxable alimony to the total amount of alimony received or receivable by the petitioner pursuant to the separation agreement. As the taxable alimony constitutes approximately 80 per cent of the total alimony received or receivable by petitioner, that percentage of the deduction claimed for legal fees in each year should, in our judgment, be allowed.
It should be noted that the parties herein have stipulated that no part of the legal expenses in question was incurred in connection with the petitioner's securing the Nevada divorce decree. Moreover, the record indicates that the petitioner and her husband had actually separated by the mutual agreement prior to negotiation of the separation agreement of July 27, 1943, and that the attorneys to whom the fees in question were paid were solely concerned with the financial aspects of the separation, rather than with the settlement of the personal or marital difficulties of the petitioner and her husband. Therefore, it is our opinion that no part of the legal expenses herein constituted personal family expenses and that no allocation of the legal fees in that respect is necessary.
Reviewed by the Court.
Decision will be entered under Rule 50.