Docket No. 22101.
James I. Johnson, Esq., for the petitioner. Leonard A. Marcussen, Esq., for the respondent.
1. SECTION 22(k)— DECREE OF A GERMAN COURT AND AGREEMENT INCIDENT TO DECREE WITHIN SCOPE OF SECTION 22(k).— Petitioner married an American citizen and resided in the State of Washington. While in Berlin, Germany, in 1936, she obtained a decree which annulled the marriage, but by her election under section 1345 of the German Code, the annulment had the same effect as a divorce for purposes of support. While the suit was pending, the former husband obligated himself by contract to pay petitioner $1,000 per month for life. Held: (1) The German decree property is treated as a decree of divorce under section 22(k). (2) The support contract was incident to the decree. (3) The person who is taxable on the periodic payments under the contract is the petitioner.
2. YEAR OF TAX ON PERIODIC PAYMENTS.— Petitioner's former husband deposited stock in escrow with a bank and directed the bank to pay part of the dividends to the petitioner. He retained title to the stock. Petitioner remarried and the former husband directed the bank to stop payments. The bank continued to receive dividends but held them in escrow pending final judgment of an Illinois court in petitioner's suit on the contract to recover payments. For years prior to 1945, the dividends have not been taxes to anyone. The judgment became final in 1945, and arrearages were paid in 1945 to petitioner. Held, the taxable year of the petitioner in which $36,000 arrearages of section 22(k) periodic payments shall be included in her income is 1945. James I. Johnson, Esq., for the petitioner. Leonard A. Marcussen, Esq., for the respondent.
William E. Evenson, Esq., Harry Henke, Esq., and E. L. Skeel, Esq., amici curiae.
The Commissioner has determined a deficiency in income tax for the year 1945 in the amount of $20,778.33. He now agrees that petitioner is entitled to deduct $22,276 for attorneys' fees and expenses incurred in litigation to recover support payments from petitioner's former husband, which were paid in 1945. There are two issues to be decided: Whether periodic support payments are taxable to petitioner under section 22(k). If the first issue is decided against the petitioner, whether 1945 is her taxable year within which there shall be included arrearages in support payments for 1942, 1943, and 1944 which were impounded during those years pending judgment in a suit brought by petitioner to recover the payments, and which were paid to her in 1945. The decision in the litigation instituted by the petitioner is Reighley v. Continental Illinois National Bank & Trust Co. of Chicago, 390 Ill. 242, 61 N.E.2d 29.
The petitioner filed her return for 1945 with the collector for the first district of California.
FINDINGS OF FACT.
We find as facts the facts which have been stipulated and incorporate the stipulation by this reference.
Issue 1. The petitioner in 1945 was a resident of San Francisco. She reports income on a cash basis.
The petitioner was married to Reginald B. Parsons, an American citizen, a resident of the State of Washington, on August 12, 1935. She was a citizen of Germany at the time of the marriage. The marriage took place in Berlin, Germany. After the marriage, the petitioner and Parsons established their residence in Seattle, Washington, where they lived for about one year. They returned to Berlin in 1936 on a visit. While they were there, Parsons agreed that petitioner had justifiable cause to sue for annulment of the marriage, which petitioner did by filing suit in the Berlin District Court on July 17, 1936. While the suit was pending, Parsons executed a written contract on August 17, 1936, before a notary, obligating himself to pay petitioner $1,000 per month for life regardless of whether she remarried. The Berlin contract is incorporated herein by this reference. Petitioner was a party to the contract. She executed it for the purpose of making ‘an alimony‘ settlement contract with Parsons. The contract was a ‘contract of support.‘ It was to be inoperative if the petitioner failed in her suit to dissolve the marriage. In order to guarantee the support payments, Parsons agreed to deposit enough stock with a Chicago bank to assure petitioner periodic payments of $1,000 per month for life. Parsons carried out this part of the Berlin contract on October 2, 1936. The Berlin District Court on August 20, 1936, entered a decree declaring that the marriage was annulled. The decree, findings of fact and opinion of the Berlin court are incorporated herein by this reference. The marriage was annulled because, the court found, the petitioner had erred with respect to the personal qualities of Parsons; that he had personal defects and knew of them before the marriage; and that the petitioner was a spouse in good faith who would not have married Parsons if she had known of his defects.
At the time the marriage was dissolved, the German Code contained provisions, sections 1345 and 1347, which gave an innocent spouse a right to elect to treat annulment of a marriage as a divorce for the purpose of property settlement and support. Section 1345 provided an exception to sections 1333 and 1343 of the German Code relating to void marriages, and adopted the principle of putative marriage, under which a marriage is regarded as valid until the date it is dissolved. The effect of making an election under section 1345 is that the innocent spouse is in the same position with regard to the right to receive support as it the marriage had been dissolved by divorce. An innocent spouse may make an election under section 1345 by entering into a written contract with the other spouse which provides for support after dissolution of the marriage. If a spouse makes the election under section 1345, a settlement agreement is governed in point of time from the date the marriage is dissolved.
1345: If the nullity of the marriage was known to one of the spouses at the time of the marriage, the other spouse, unless the nullity was also known to him or her, may after the declaration of nullity or dissolution of the marriage demand, that their relationship as to property rights, particularly with respect to the duty of support, be so treated as if the marriage at the time of declaration of nullity or dissolution had been dissolved by divorce, and the spouse to whom the nullity was known, had alone been adjudged guilty.1347: If the spouse, who has the right provided in section 1345, paragraph I, declares to the other spouse, that he will make use of the right, he cannot then avail himself of the effects of the nullity of the marriage; if he declares to the other spouse that he will abide by these effects, the right provided in section 1345, paragraph I, is extinguished.The other spouse may require the spouse, so entitled, to declare within a reasonable given time, whether he will avail himself of the right. In this case the right can be exercised only up to the expiration of the time limited.
1333: A marriage may be avoided by that spouse who, at the time of entering into the marriage, erred as to the identity of the other spouse or such personal qualities of the other spouse, which, if the true facts had been known to him or her and reasonably evaluated by said party in the light of the nature of marriage, would have prevented him or her from entering into the marriage.1343: If a voidable (anfechtbar) marriage is avoided, it shall be regarded as void (nichtig) from the beginning. * * *
The petitioner, by entering into the Berlin contract with Parsons on August 17, 1936, elected to exercise a right she had, as the innocent spouse, under section 1345, to have the annulment of her marriage to Parsons treated as if the dissolution had been by divorce with respect to Parsons' duty to provide her with support after the dissolution. The decree of the Berlin District Court dissolving the marriage of petitioner and Parsons was tantamount to a decree of divorce within the meaning of section 22(k) of the Internal Revenue Code. The Berlin contract was a valid contract and was incident to the decree of dissolution of the marriage. The obligation which Parsons assumed under the Berlin contract to provide periodic payments to petitioner for her support was incurred by him because of the marital relationship.
Issue 2. In execution of the Berlin contract, Parsons on October 2, 1936, deposited 1,200 shares of stock of Bemis Bros. Bag Co., Inc., with the Continental Illinois National Bank and Trust Company of Chicago and directed the bank to collect the dividends on the stock, to pay $1,000 per month out of the dividends to the petitioner during her life, and to pay to him the excess, if any, of the dividends required to guarantee the monthly payments to the petitioner. Parsons executed an instrument entitled ‘Escrow Security Pledge Agreement,‘ which is incorporated herein by this reference, and which is called hereinafter the Chicago contract. The stock was deposited under this contract. The Chicago contract incorporated the Berlin contract.
Parsons retained title to the stock. The Chicago contract provided that:
Parsons herewith deposits with and delivers to the Bank in pledge stock certificates for twelve hundred (1,200) shares of common stock of Bemis Bros. Bag Co., Incorporated, the title of which stock shall at all times remain in said Parsons, subject to the following conditions:
Parsons has the right, with the consent of Mrs. Parsons, to substitute other stocks or securities for those originally deposited with the Bank.
It is understood that the deposited stock shall be transferred on the books of Bemis Bros. Bag Co., Incorporated, into the name of a nominee of the Bank, so that the dividends and other income with respect thereto shall be payable to such nominee and thus received by the Bank, but the legal title to said stock shall at all times remain in Parsons, subject only to the pledge hereby made in accordance with this Agreement and the irrevocable assignment of the income to Mrs. Parsons, as herein provided. * * * upon the death of Mrs. Parsons, the Bank shall thereupon redeliver the stock to Parsons if he be then living, or * * * to the person legally entitled thereto * * * .
The Chicago bank, in the above contract, acknowledged receipt of the 1,200 shares of Bemis Bros. Bag Company stock and agreed ‘to hold the same, and disburse the income thereof.‘
The Chicago contract provided that it and the Berlin contract were to be construed according to the laws of the State of Illinois, and that in the event any dispute should arise under the two contracts, it could be determined by state courts in Cook County, Illinois, or by the United States District Court for the Northern District of Illinois.
Following the execution of the Chicago contract, the Chicago bank made payments from dividends to Lily Parsons until sometime in August 1939, when Parsons directed the bank to stop payments because the Berlin and Chicago contracts were invalid and fraudulent. One reason for Parsons' directions to the bank was that in August 1938 Lily married Lloyd Reighley (formerly Reichenheim) whom she had known in Berlin prior to her marriage to Parsons, and to whom she is still married. Upon Lily's marriage to Reighley, Parsons came to believe that he had been defrauded by Lily. When the bank stopped making payments to Lily, she demanded the payments, but the bank refused to make any payments. The bank continued to collect the dividends on the Bemis Bros. Bag Company stock as they were paid, and with respect to the share thereof claimed by the petitioner, the bank held dividends in escrow at the rate of $12,000 per year until the judgment of the Cook County Superior Court became final in 1945, when the bank made payment to the petitioner.
In 1940 the petitioner filed suit in the Superior Court, Cook County, Illinois, case number S6134, against the bank and Parsons to enforce tracts, together with interest. Parsons filed a counterclaim against the bank and the petitioner in which he alleged that: The Berlin contract was wholly without consideration, was induced by fraud and duress, was against public policy, was entered into by mutual mistake of fact, and was null and void.
The litigation was complicated and of long duration, and necessarily involved great time and expense. Each court by which the case was decided held in favor of the petitioner. A decree in her favor was entered by the Superior Court on February 9, 1942, which was thereafter affirmed on May 19, 1944, by the Appellate Court of Illinois (Reighley v. Continental Illinois National Bank & Trust Co. of Chicago, 323 Ill.App. 479, 56 N.E.2d 328), and which was finally affirmed by the Supreme Court of Illinois on May 21, 1945 (Reighley v. Continental Illinois National Bank & Trust Co. of Chicago, 390 Ill. 242, 61 N.E.2d 29). The Illinois courts held that the Berlin contract was not fraudulent, was not void, was not inequitable, was not contrary to public policy, and that it was supported by valuable and sufficient consideration; that the Chicago contract was valid and equitable and was an execution pro tanto of the Berlin contract; that the Berlin contract constituted a settlement of either valid and enforceable legal rights or of rights no without foundation which might have been the subject of bona fide litigation in German courts. The trial court, the Superior Court for Cook County, concluded with respect to section 1345 of the German Civil Code as follows:
* * * the Court finds that under a proper construction of said Section 1345 in connection with other sections of the German law, plaintiff (Mrs. Lily Reighley) had a valid and enforceable right to obtain a court order in Berlin, Germany, immediately after the annulment, requiring the defendant, Reginald B. Parsons, to furnish her with support, provided that in said proceeding she established that the nullity of the marriage was known to Parsons at the time of the marriage and that the same was not known to plaintiff, and, on the basis of the testimony and evidence introduced in this case, it is probable that she could have established those facts.
The Supreme Court of Illinois at 390 Ill. 242, 61 N.E.2d 29, stated that the ground for the annulment of the marriage, as set forth in the decree of the Berlin District Court, was ground for divorce in Illinois; that the provisions of the Berlin contract and the performance thereof by creating the deposit of securities in a bank in Illinois under the Chicago contract permitted the law of Illinois to govern the construction of the Berlin contract; that under the law of Illinois and the facts as they existed, had they existed into, and, also, a decree by an Illinois court, on the facts, would have been a decree of divorce under Illinois law. The Supreme Court of Illinois stated as follows (61 N.E.2d 34):
* * * If the marriage had been terminated under the Illinois law, on the same grounds the Illinois court could have allowed alimony and support payments, and a contract entered into between such parties, providing for said payments, would have constituted a valid consideration and would be binding upon the parties. VanKoten v. VanKoten, 323 Ill. 323, 154 N.E. 146, 50 A.L.R. 347; * * *
By the judgment of the Superior Court for Cook County the Chicago bank was ordered to pay all past due installments plus interest to Lily, and to comply, in the future, in all respects with the contracts, and to make the payments to her for as long as she should live. The opinions of the Superior Court, the Appellate Court, and the Supreme Court have been received in evidence in this proceeding, and they are incorporated herein by this reference.
While the litigation was pending in Illinois courts, the right of the petitioner to $1,000 per month of the dividends of the deposited stock remained undetermined. In May 1945, the bank paid in one sum the total arrearages dating back to August 1939, plus interest, to the petitioner, which included $12,000 for each of the years 1942, 1943, and 1944, and for 1945 the bank paid the total amount of $12,000 to the petitioner.
None of the $36,000 of dividends which was paid to the petitioner in 1945 has been taxed.
The pleadings present an issue under section 22(k) of the Code only. Section 22(k) deals with alimony payments paid to a divorced wife under ‘a decree of divorce or of separate maintenance.‘ The petitioner contends that the payments she received from the Chicago bank for the years 1942-1945 under the Berlin and Chicago contracts are not ‘alimony‘ payments or payments of a nature which the provisions of section 22(k) make taxable to a wife who ‘is divorced or legally separated from her husband under a decree of divorce or of separate maintenance.‘ The contention of the petitioner is based upon the view that there was no right in the petitioner to receive ‘alimony‘ payments from Parsons.
The issue involves consideration of the right, if any, of the petitioner to receive ‘alimony‘ or support payments from Parsons after the termination of the marriage, under the facts and circumstances which provided grounds for the 1936 decree of the Berlin court in the petitioner's favor. The broad question is whether the payments to the petitioner under the Berlin and Chicago contracts come within the intent and scope of section 22(k). Determination of this question requires consideration of the relation of the Berlin contract to the decree of the Berlin court and of the right, if any, which the petitioner had, under the facts and circumstances which were the basis of the Berlin decree, to receive support payments from Parsons after the termination of the marriage under the provisions of section 1345 of the German Civil Code which provided, in 1936, that an innocent spouse may, after the declaration of nullity or dissolution of the marriage, demand that the marriage relationship, particularly with respect to the duty of support, be so treated as if the marriage at the time of the declaration of nullity had been dissolved by divorce.
If the chief issue is decided adversely to the petitioner, a second question is presented by the pleadings, whether the payments for the years 1942, 1943, and 1944— $36,000— which sum was paid to the petitioner in 1945 under the decision of the Supreme Court of Illinois is taxable to the petitioner in 1945. As an alternative allegation, the petitioner has alleged in her petition that if the first question is decided against her, then the respondent erred in including in her income for 1945 more than $12,000, the total amount of the payments under the contracts for 1945. The allegation in the petition relating to the second issue does not present any question under section 171 of the Code, or other sections such as sections 162, 166, 167 which relate to the taxation of the income of trusts. The facts alleged in the petitioner as supporting the above stated alternative contention are briefly that the petitioner believes that the Chicago bank, since the deposit of securities by Parsons, had income from the securities at all times sufficient to pay the petitioner $1,000 per month at the time each and every payment of $1,000 was due the petitioner under the Berlin contract.
The petitioner received in 1945 from the bank arrearages in the monthly payments for a period beginning in 1939 and ending in May 1945 in the total principal amount of $68,202, exclusive of interest. The payment of the above total sum was made pursuant to the judgment of the Illinois Superior Court which became final in 1945, when it was affirmed by the Supreme Court of Illinois. The respondent has determined that $41,000 of the foregoing amount is taxable to the petitioner under section 22(k), representing the arrearages in the payments for 1942, 1943, 1944, and the first 5 months of 1945, because the provisions of section 22(k) are applicable only to years beginning after December 31, 1941.
Issue 1. The support payments in question were received under the terms of a written instrument in which Parsons obligated himself to make the payments. There can be no doubt that he so obligated himself ‘because of the marital or family relationship.‘ Sec. 22(k). Whatever doubt might have existed about that point has been decided by the courts of Illinois which held that the Berlin contract was not procured by fraud, duress, or misrepresentation, that it was not illegal or against public policy, and that it was valid. Also, the Berlin contract was clearly incident to the proceedings under which the marriage was terminated. It was executed at the time the petitioner's suit was pending in the Berlin court, and it provided that the parties believed with certainty that the ‘suit for cancellation of the marriage‘ would be decided in petitioner's favor. The condition which must be met under section 22(k) that a written agreement to pay alimony or support payments must be part of an integral plan of the parties to obtain a divorce is met in this proceeding. See Cox v. Commissioner, 176 F.2d 226, affirming 10 T.C. 955; George T. Brady, 10 T.C. 1192; Robert Wood Johnson, 10 T.C. 647; Thomas E. Hogg, 13 T.C. 361; Jessie L. Fry, 13 T.C. 658; Bertram G. Zilmer, 16 T.C. 365. It was clearly provided in the Berlin agreement that if, for any reason, the petition of the then Mrs. Parsons to have the marriage terminated should not be granted and the marriage should continue, the agreements made in the Berlin contract would not control and the parties reserved the right to make other ‘special agreements.‘
The problem in this proceeding presents a novel and unusual combination of factors and circumstances under section 22(k) of the Code. We have heretofore expressed the view that issues under section 22(k) should be viewed realistically, George T. Brady, supra, p. 1198, and that we are to be guided by the intent of the Congress in enacting the provision, which was to ‘produce uniformity in the treatment of amounts paid in the nature of or in lieu of alimony regardless of the variance in the laws of an obligation to pay alimony.‘ Tuckie G. Hesse, 7 T.C. 700, 704; Thomas E. Hogg, supra.
The petitioner became legally separated from her husband by court decree. Cf. Frank J. Kalchthaler, 7 T.C. 625, 627. Her complaint set forth grounds for the dissolution of the marriage which brought her cause of action, under the then existing German law, within section 1333 of the German Civil Code, rather than under section 1564, relating to actions for divorce. In connection with the pending suit for dissolution of the marriage, the petitioner and Parsons, each represented by attorneys who must be presumed to have known the pertinent German law, entered into a contract which recited, inter alia, that the then Mrs. Parsons intended to make an ‘alimony‘ contract with her husband; that both parties considered that she was ‘justified‘ in filing suit for ‘cancellation of the marriage‘; and that ‘Mrs. Parsons is entitled in any case to procure dissolution of the marriage by court order.‘ The parties in the contract, referred to it as a ‘contract of support,‘ and stated that it was entered into because Mrs. Parsons was entitled to have the marriage dissolved. The petitioner was successful in her suit, and the Berlin court entered a decree in her favor. She was then entitled to make formal ‘demand‘ upon Parsons, under section 1345 of the German Civil Code, ‘that their relationship * * * with respect to the duty of support, be so treated as if the marriage at the time of declaration of nullity or dissolution had been dissolved by divorce, and the spouse to whom the nullity was known had alone been adjudged guilty,‘ because Parsons, in effect, had agreed in the Berlin contract that the petitioner was innocent of knowledge of the nullity at the time of the marriage.
H. Rept. No. 2333, 77th Cong., 1st Sess., p. 72; 1942-2 C.B. 372, 427.This section adds new subsections to sections 22 and 23, * * * in order to provide in certain cases a new income tax treatment for payments in the nature of or in lieu of alimony or an allowance for support as between divorced or legally separated spouses. These amendments are intended to treat such payments as income to the spouse actually receiving or actually entitled to receive them * * * . In addition, the amended sections will produce uniformity in the 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 added.)
In applying the provisions of section 22(k) of the Internal Revenue Code, a reasonable view of the facts before us is that the petitioner effectively exercised her right under section 1345. (See section 1347 of the German Civil Code set forth in the Findings of Fact.) She did so by executing the Berlin contract which was incident to the decree which dissolved the marriage. The contract by its declarations and provisions clearly shows that it was her intent to demand that their relationship with respect to the duty of support be treated as if the marriage had been dissolved by divorce. The actions of Parsons in executing the Chicago contract, in depositing securities with the Chicago bank, and in giving it irrevocable instructions to pay the dividends of the stock to the petitioner in compliance with the Berlin contract show that he understood not only that the petitioner had made such demand but also that she had not elected to relinquish the right afforded by section 1345.
Under the circumstances present in this proceeding, we reach the conclusion that under the German law as it existed in 1936, for the purpose of applying the provisions of section 22(k), the decree of the Berlin court must be treated as a decree of divorce within the meaning and intent of section 22(k), and that the support payments in question (and it is clear that they are support payments) are ‘in the nature of or in lieu of alimony.‘ The contention of the petitioner that the legal distinction between a void ab initio marriage and a marriage which is terminated from the time of divorce is controlling cannot be approved for the purpose of this proceeding in view of the provisions of sections 1345 and 1347 of the German Civil Code. We agree with the view of the Supreme Court of Illinois in Reighley v. Continental Illinois National Bank & Trust Co. of Chicago, 61 N.E.2d 29, 34, that, ‘To say the marriage never existed is merely fiction, as the parties sustained a relation for approximately one year that in this state would be the status of marriage.‘ We are aided in our considerations of the issue under section 22(k) by the view of the Illinois Supreme Court that the ground upon which there was dissolution of the marriage in Germany is a cause under Illinois law which operates to make the termination of the marriage effective from the time of its dissolution and to give the innocent party a right to receive alimony. Reighley v. Continental Illinois National Bank & Trust Co. of Chicago, supra. In many states and territories of the United States, notwithstanding the legal differences between an annulment of a marriage and a divorce, the effect of a decree of annulment for the reason which existed in the petitioner's case will operate as in a divorce, from the time of the decree, and because of that permanent alimony may be granted. Under the doctrine of putative marriage, the marital relationship is considered as having been valid up to the time the decree dissolving the marriage was entered. The German Civil Code provisions which were in effect in 1936 adopted this doctrine under sections 1345 and 1347, so that if a wife who was innocent of the nullity at the time of the marriage elects to invoke section 1345, the husband who had not acted in good faith is obligated to pay alimony to her. Also, it is a rule of conflict of laws that the effect of a decree nullifying a marriage from the date of the decree is the same as that of a decree of divorce, and that in a case where it is necessary to resort to a rule of conflict of laws, the rules to be applied are those which relate to divorce rather than the rules which relate to annulment. See Restatement of Conflict of Laws (1934), section 115, comment (c), and section 136(a). See also, 1 Beale, Conflict of Laws (1936), section 115.2, where it is stated that if the nullity of a marriage dates from the entry of the decree, the ‘annulment is identical in effect with divorce.‘
See, also: Keezer, Marriage and Divorce, 3d ed., par. 1195, p. 1160, 1161; Grounds for absolute divorce; Alimony. In Illinois, the ground upon which the Berlin court dissolved the marriage is ground for divorce. Revised Statutes of Illinois, Ch. 40, par. 1.See also: Remington's Revised Stats., sec. 982 (Washington 1932, the state of domicile of petitioner and Parsons in 1936).
See: Alaska Compiled Laws, sec. 56-5-13 (1949); Conn. Gen. Stat., sec. 7341 (1949); Hawaii Revised Laws, sec. 12204 (1945); Iowa Code, sec. 598.24 (1946); New Hampshire Code, chap. 339, sec. 16 (1942); New Jersey Revised Stat., sec. 2:50-37 (Supp. 1938); New Mexico Stat. Ann. sec. 65-109 (1941); Oregon Compiled Laws Ann., sec. 9-914 (1940); Virginia Code, sec. 5.111 (1942).
We cannot say, in this proceeding, that the obligation incurred by Parsons under the Berlin contract to make support payments to the petitioner for life was not a legal obligation because of the marital relationships, or that the petitioner did not have the right to receive the support payments, and to claim that the effect of the decree dissolving the marriage was the same as though the proceeding had been for divorce, as it could have been under the law of Illinois which law the parties agreed could be followed in the construction of the Berlin contract in case a dispute arose. Reighley v. Continental Illinois National Bank & Trust Co. of Chicago, supra, p. 34. Nor can we say that the payments by Parsons were made gratuitously.
It has been noted by this Court before that the decree dissolving a marriage ‘need not incorporate or refer to alimony or maintenance provisions made by a prior or coincident agreement in order for such agreement to come within the purview of section 22(k), * * * .‘ Floyd W. Jefferson, 13 T.C. 1092, 1097; Tuckie G. Hesse, supra; Robert Wood Johnson, supra; and George T. Brady, supra. Also, we have held that section 22(k) may properly be applied, in order to carry out the intent of the Congress in enacting the statute, where the payments to a wife are in the nature of or in lieu of alimony even though under the law of a particular state alimony is not allowed. Tuckie G. Hess, supra, and Thomas E. Hogg, supra, pp. 366, 367, 368. Here, as in the Hogg case, the parties had reached an agreement in connection with a suit for dissolution of the marriage where the wife relinquished a present right to proceed formally under section 1345 of the German Civil Code in exchange for Parsons' contractual agreement to provide future support.
It is concluded that the monthly payments of Parsons to the petitioner were received by her in discharge of a legal obligation which was incurred by Parsons because of the martial relation and under a written instrument which was incident to a decree which comes within the scope of section 22(k), and that, therefore, the payments are taxable to the petitioner. Under this holding the petitioner does not dispute liability for tax on $12,000 monthly payments for 1945 which she received in 1945.
Issue 2. The petitioner contends that the arrearages in the payments amounting to $36,000 for the three years 1942-1944, inclusive, should not be taxed in the year of receipt— 1945. The argument of the petitioner appears to be derived from section 29.22(k)-1(a) of Regulations 111, p. 82, which provides that under section 22(k) periodic payments are includible in the wife's income ‘only for the taxable year in which received by her,‘ but if the payments are made by an estate or trust, then the taxable year of the wife in which the periodic payments are to be included in gross income shall be determined ‘according to the rules as to income of estates and trusts provided in sections 162, 164, and 171(b).‘
Sec. 29.22(k)-1. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS—INCOME TO FORMER WIFE— (A) In General.—Periodic payments are includible in the wife's income under section 22(k) only for the taxable year in which received by her. As to such amounts, the wife is to be treated as if she makes her income tax returns on the cash receipts and disbursements basis, regardless of whether she normally makes such returns on the accrual basis. However, if the periodic payments described in section 22(k) are to be made by an estate or trust, such periodic payments are to be included in the wife's taxable year in which they are includible according to the rules as to income of estates and trusts provided in sections 162, 164, and 171(b), whether or not such payments are made out of the income of such estates or trusts.
The petitioner's argument under this issue not only is not clear but is elusive. The petitioner has not contended in this proceeding that Parsons created a trust; no question on the point is presented by the pleadings. If that is what the petitioner intended to suggest in the argument presented under this issue, we may not consider such question because it was not pleaded. John Gerber Co., 44 B.T.A. 26, 31; Maltine Co., 5 T.C. 1265, 1275; Maurice P. O'Meara, 8 T.C. 622, 628. It should be noted, nevertheless, that Parsons retained title to the stock deposited with the bank under the escrow agreement. In Reginald B. Parsons, 44 B.T.A. 1142, 1159, this Court concluded with respect to the same agreement that Parsons made only an irrevocable assignment of part of his income from dividends of the deposited stock. There is no evidence in this proceeding that the bank regarded the escrow agreement as creating a trust, or that it filed fiduciary income tax returns reporting dividends on the deposited stock. The bank, under the escrow agreement, was an agent of Parsons which was to collect dividends and pay $1,000 per month from them to the petitioner. The bank was a conduit through which the payments passed from Parsons to the petitioner. We must reject the suggestion on brief that $12,000 in the 3 years 1942-1944 was taxable in those years to the bank, and we emphasize that the theory behind the suggestion is far from clear.
On the other hand, the provisions of the regulation which the petitioner cites, section 29.22(k)-1 of Regulations 111, are clear. First, the statutory plan of taxing ‘alimony‘ payments embraced by sections 22(k) and 23(u) should be recalled and reference made to the regulation under section 23(u), section 29.23(u)-1. Under the statutory provisions the year of the wife in which the periodic payments must be included and the year of the husband in which he may take deduction for the payments is the year of the actual payment, even though either or both the wife and the husband report income on an accrual basis. However, if the periodic payments are made by an estate or trust, the year of the wife in which the periodic payments shall be included, shall be (referring now to section 162(b), for example) the year in which the payments are ‘to be distributed currently‘ by the fiduciary, whether distributed or not. Therefore, the year of the wife for the inclusion of periodic payments to be paid to her by a trust will be the year in which she constructively receives the payments, and this is an exception to the rule that the year of tax shall be the year of actual payment and receipt.
In this proceeding the exception to the general rule under section 22(k) relating to the year of the tax to the wife does not apply because, first, 1945 was the year of payment and receipt; and second, we do not determine that the periodic payments were made by a trust. But, arguendo, if there had been a trust, the petitioner would encounter the obstacle which the pending Illinois litigation presented to any claim of constructive receipt of the payments in any of the years 1942-1944. In each of those years, the petitioner's right to receive the periodic payments was contested by Parsons in his counterclaim that the Berlin contract was invalid, and until that question was finally, judicially determined, petitioner's right to receive the periodic payments was undetermined. Such was the status of her claim throughout the years 1942-1944. She did not receive constructively any of the payments in those years. North American Oil Consolidated v. Burnet, 286 U.S. 417. During those years, $12,000 of dividends was at least held in escrow in each year, or was impounded, pending decision of the conflicting claims of Parsons and the petitioner.
It is held that the arrearages for 1942-1944 amounting to $36,000 are includible in petitioner's income for 1945. The result reached here is no different from that reached in Elsie B. Gale, 13 T.C. 661 (Issue 1), affd. (C.A. 2, 1951) 191 F.2d 79, and Estate of Sarah L. Narischkine, 14 T.C. 1128, affd. (C.A. 2, 1951) 189 F.2d 257, where the year of the wife for including arrearages in periodic payments was the year when payment in one sum was made. The result reached in this proceeding is not as harsh as at first it may seem because the petitioner is entitled to deduction in 1945 of $22,276, nonbusiness expense, for attorneys' fees and the costs of the litigation through which the petitioner's right to receive the payments was established.
Reviewed by the Court.
Decision will be entered under Rule 50.