Miller
v.
Comm'r of Internal Revenue

Tax Court of the United States.May 14, 1951
16 T.C. 1010 (U.S.T.C. 1951)
16 T.C. 1010T.C.

Docket Nos. 23268 24478.

1951-05-14

CECIL A. MILLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

George Bouchard, Esq., for the petitioner. William B. Flynn, Jr., Esq., for the respondent.


George Bouchard, Esq., for the petitioner. William B. Flynn, Jr., Esq., for the respondent.

INCOME— AGREEMENT INCIDENT TO DIVORCE— SECTION 22(k).— Where all but some relatively unimportant provisions of a property settlement had been agreed upon during the time when the wife had no intention of obtaining a divorce, the agreement is not ‘incident to‘ a divorce within the meaning of section 22(k), I.R.C., merely because the wife, prior to the actual signing of the agreement, decided that she would try to obtain a divorce and her husband learned of her change of mind in regard to the divorce but was given no promise or assurance that she would proceed to obtain a divorce.

The Commissioner determined a deficiency in income tax of $1,207 for 1945 and one of $995.60 for 1946. The only issue for decision is whether payments of $6,300 received by the petitioner in each year are taxable to her under section 22(k) of the Internal Revenue Code.

FINDINGS OF FACT.

The petitioner filed her individual income tax returns for the taxable years with the collector of internal revenue for the sixth district of California.

The petitioner has a son, born in 1911, a child of her first husband who died in 1913. She was married for the second time in 1921 and became the fifth wife of Jared H. Miller, 20 years her senior. They lived together for about 15 years. No children were born of their marriage.

The petitioner discovered in March 1936 that Miller was being intimate with another woman in Rochester, Minnesota. The Millers resided in Fontana, California, where they had lived for a number of years. He confessed and they agreed that they would try to continue to live together and he would try to forget the other woman.

Miller had inherited from his fourth wife an undivided interest in some mining property in Michigan. He left Fontana on July 24, 1936, for a visit to the mining properties, after which he planned to return to Fontana in September 1936. He and the petitioner corresponded during his absence. Miller wrote to the petitioner late in September 1936 informing her that he would not return to her and advising her to seek the advice of a lawyer in order to obtain a property settlement. Neither mentioned divorce to the other. She wrote to Miller in an effort to persuade him to return but never received another letter from him and thereafter they communicated only through attorneys.

The petitioner sought the advice of an attorney in October 1936. She told him that she did not want a divorce but wanted a property settlement. Miller had been giving her an allowance of $400 a month and continued those payments until the property settlement became effective. The attorney for the petitioner, and another Los Angeles attorney, acting for Miller, agreed, prior to March 1937, upon all terms of a property settlement satisfactory to their clients, except as to the division of over 400 articles or groups of articles such as silver, furniture, draperies, pictures, jewelry, clothing, and other household furnishings and personal belongings, the division of which, by listing on two schedules to be attached to the settlement agreement, was not completed until May 1937. The delay in reaching an agreement in regard to those personal items was due principally to the fact that Miller's attorney had to confer with him by mail.

Neighbors and friends of the petitioner kept asking her when her husband was going to return and this caused her to become increasingly embarrassed as time passed because she did not like to disclose that he had abandoned her. She told her attorney in late April 1937 that she had decided to seek a divorce. Her attorney told the attorney representing Miller of her change of mind and the latter passed on the news to Miller in late April 1937.

All terms of the property settlement had been agreed upon and the written instrument of settlement with complete schedules attached had been drawn up by the latter part of May 1937, but the attorneys for the two spouses learned that Miller intended to come to Los Angeles in the near future and they decided to have the agreement signed when he got there. The agreement recites that it was entered into on June 15, 1937, and it was signed on that day. It recited that the parties were desirous of settling all of their property rights. Real and personal property owned by Miller was mentioned in the agreement, and it also stated that the petitioner had no property other than the personal property described in the schedule, and cash. Miller agreed to give to the petitioner a life interest in the property at Fontana, which they had occupied as a residence, to be used by her and the members of her immediate family as a home. He was to pay the taxes and other charges incident to ownership and protection of the property and the petitioner was to pay all expenses for the ordinary care and upkeep of the property. Miller was to pay the petitioner $6,300 a year as long as she lived. Total payments of $3,650 were to be made for 1937. Provisions were made for the continuation of payments by Miller's estate if he predeceased the petitioner, and for payments to the petitioner's son and mother in case they survived the petitioner. More than 400 articles were listed in two schedules attached to the agreement, Miller was to have those listed in Schedule A and the petitioner was to have those listed in Schedule B. The agreement was to be in complete settlement of all property rights between the parties. They both agreed to perform whatever acts were necessary to carry it out. One paragraph of the agreement was as follows:

This agreement shall not alter the relations of the parties hereto except with regard to their property rights; provided, however, that in the event that either party hereto shall obtain a divorce from the other, this agreement may be submitted to the court in which said divorce is obtained for approval.

The agreement did not contain any provision, other than the above quoted one, referring to the subject of divorce. No suggestion was ever made to the petitioner or her attorney that the property settlement agreement was contingent in any way upon her obtaining a divorce. There was no understanding or agreement between the petitioner and her husband at the time they entered into the property settlement agreement that it was contingent in any way upon her obtaining a divorce.

The attorney for the petitioner advised her to file her complaint for divorce while Miller was in California to sign the settlement agreement and could be served, thus avoiding delay in the final decree of divorce. She acted on that advice and filed her complaint for divorce in the Superior Court of California on June 23, 1937. A summons in that proceeding was served upon Miller in Los Angeles on that same day. Miller did not contest the divorce and an interlocutory judgement of divorce by default was entered on August 24, 1937. It recited that the property settlement agreement dated June 15, 1937, had been filed as an exhibit in the proceeding and was ‘approved.‘ A final judgment of divorce was entered on August 25, 1938, on a printed form on which only names and dates had been typed. The words printed on that form included the following: ‘that wherein said interlocutory decree relates to the property of the parties hereto, said property be and the same is hereby assigned in accordance with the terms thereof to the parties declared therein to be entitled thereto.‘

The petitioner and Miller entered into a supplemental property agreement on April 19, 1938, whereby the residence property at Fontana was to be conveyed to the petitioner absolutely and nine pieces of personal property theretofore awarded to the petitioner were to be surrendered by her to Miller. Otherwise, the terms of the original agreement were to remain in full force and effect. The supplemental agreement was never shown to the court in the divorce proceeding.

Miller, at times not shown, paid the fee of the petitioner's attorney for his services to her in connection with the settlement agreement and also paid his separate fee for his services in securing the divorce for her.

The petitioner reported as her only income for 1945 and 1946 the annual payments of $6,300 received from Miller under the agreement of June 15, 1937. She reported no tax due and attached a statement showing the source of the funds and claiming that they were not taxable to her under section 22(k). The Commissioner, in determining the deficiencies, held that the payments were taxable to the petitioner under section 22(k).

OPINION

MURDOCK, Judge:

The settlement agreement in the present case was entered into in 1937. Section 22(k) became a part of the Internal Revenue Code in 1942. Thus, the petitioner and her husband did not have the new provisions of the law in mind at the time they entered into their agreement. It is not claimed that the decree of divorce imposed any obligation on Miller to make periodic payments to the petitioner. Section 22(k) provides that periodic payments received by a divorced wife, subsequent to the decree of divorce in discharge of a legal obligation which, because of the marital or family relationship is imposed upon or incurred by a husband under a written instrument incident to the divorce, shall be includible in the gross income of the wife. The only difference between the parties is whether the written instrument under which the periodic payments were paid was ‘incident to‘ the divorce later obtained by the petitioner.

Not every agreement which is followed by a divorce is ‘incident to‘ the divorce within the meaning and intent of section 22(k). It is now pretty well recognized as a result of numerous decisions that a written instrument to be ‘incident to‘ a divorce must be part of an integral plan of the two spouses which includes the obtaining of a divorce, the agreement under which the periodic payments are made, as one court has expressed it, must be a ‘part of the package of divorce,‘ Cox v. Commissioner, 176 F.2d 226, affirming to 10 T.C. 955. The chief difficulty has been to determine from the facts in each individual case whether the necessary connection between the two exists. That connection is rather obvious where a divorce action had been commenced and the parties thought it was still pending at the time they signed the agreement. George T. Brady, 10 T.C. 1192. Sometimes for other reasons it may appear that the spouses entered into their agreement with a mutual understanding that it was to be followed promptly by a suit for divorce as a part of their entire plan. All of the surrounding circumstances convinced the court in the case of Estate of Daniel G. Reed, 15 T.C. 573, that both parties in making the property settlement were doing so with an implied understanding that it would be followed by a divorce and that it was not something which they would have done had they not intended a divorce to follow. The fact that the two steps are a part of a single plan is clear where there is an express agreement or promise that one spouse is to sue for a divorce promptly following the agreement calling for the periodic payments. Robert Wood Johnson, 10 T.C. 647; Bertram G. Zilmer, 16 T.C. 365. However, an agreement providing for periodic payments can not be said to be incident to a divorce later obtained where it was separate from the divorce and was arrived at for its own benefits even though shortly thereafter one spouse sued for divorce. Joseph J. Lerner, 15 T.C. 379. The fact that one spouse may be considering the possibility of a divorce is not enough to make the agreement ‘incident to‘ a divorce later obtained.

The present case is similar in a number of respects to the Lerner case. The petitioner and her husband had never discussed divorce and she had no intention of obtaining a divorce at the time they started through their attorneys, to negotiate to property settlement. Furthermore, before the petitioner changed her mind and disclosed that fact to her attorney, the attorneys, with the approval of their clients, had agreed upon those terms of the property settlement under which the periodic payments here in question were made. If that situation had continued until they had signed the property agreement, this case would be indistinguishable from the Lerner case.

The difference is that while they were trying to divide up a lot of relatively small personal articles and before they signed the agreement, the petitioner told her attorney that she had changed her mind and wanted to obtain a divorce. She did not intent that information to be used in connection with the property settlement. Her attorney told Miller's attorney of her mental attitude and Miller learned of it. But it was merely information and not a promise or condition connected with the property settlement. However, Miller appeared as a witness for the Commissioner and testified that he had heard that Mrs. Miller was thinking of getting a divorce and he told his counsel to advise counsel for the petitioner that under no circumstances would he sign any agreement for her support unless it was understood that she would obtain a divorce. He testified, further, that he would not have come to California and signed the agreement without a verbal understanding with the attorney for the petitioner that she was going to obtain a divorce. Miller's attorney testified, as a witness for the Commissioner, that the property settlement was predicated upon the understanding that the petitioner would file a divorce suit. Neither Miller nor his attorney ever talked to the petitioner about a divorce and there is no reason to disbelieve her testimony to the effect that she never promised or agreed to obtain a divorce as a condition to the property settlement. Miller and his attorney did not deny that they had agreed upon all provisions of the property settlement, except the items on schedules A and B, months before the subject of divorce was ever mentioned. The attorney who represented the petitioner in the property settlement and later in the divorce never dealt directly with Miller in regard to the property settlement agreement. He denied that he had given any assurance to Miller's attorney prior to the signing of the property settlement agreement that the petitioner would obtain a divorce. He said he had never been asked to give any assurance and had never had any discussion with Miller's attorney indicating that the property settlement was in any way connected with the divorce. He testified without equivocation that the property settlement agreement was entered into without any understanding or obligation that the petitioner would proceed with a divorce action. The Court feels that Miller and his attorney are mistaken and have testified more strongly for the Commissioner than the actual situation up to June 15, 1937, justifies.

Although the petitioner had told her attorney that she had decided to obtain a divorce, and although Miller knew that, nevertheless, she was free to make a new decision that she would not obtain a divorce. The property settlement was still separate in the mind of the petitioner from any action which she might subsequently take in regard to any divorce. She had sought the property settlement for its own benefits when she had no thought of divorce. She sought it because she wanted a settlement of her property rights and funds on which to live. Miller was aware of that but, at the time he signed the agreement, was hoping that his wife would seek and obtain a divorce, yet he had merely his hope to rely upon. It had not been a foregone conclusion from the beginning that the wife would obtain a divorce, as was true in some of the cases cited above, and there was no mutual understanding between them on which he could rely or from which the petitioner might feel any obligation, moral or otherwise, impelling her to seek a divorce. In short, the property agreement in this case was not a part of an integral plan, which plan included an honest attempt on the part of the petitioner to obtain a divorce. It was not a part of the package of the divorce which was later obtained.

Decisions will be entered for the petitioner.