Whitev.Comm'r of Internal Revenue

Tax Court of the United States.Jun 22, 1955
24 T.C. 452 (U.S.T.C. 1955)

Docket No. 49341.

1955-06-22

MARGARET O. WHITE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Max Mintz, Esq., for the petitioner. John J. Hopkins, Esq., for the respondent.


Max Mintz, Esq., for the petitioner. John J. Hopkins, Esq., for the respondent.

In 1943, petitioner was granted a divorce in Nevada. The divorce decree incorporated an agreement under which the husband agreed to make periodic support payments, weekly, to petitioner. It was agreed that petitioner's former husband would pay her $60 per week, plus such additional amounts as would together with $60 per week equal one-third of his net income in any calendar year. Petitioner received $60 per week after her divorce but she did not receive any additional payments in proportion to increases in her former husband's net income. In 1948, petitioner filed suit against her former husband in the Chancery Court of New Jersey alleging her former husband's failure to make the required payments under the divorce decree. The net income of petitioner's former husband during the years 1944 to 1948, inclusive, was in amounts which entitled petitioner to receive alimony payments in excess of $60 per week in the total amount of $14,000 for the 5 years. Petitioner's suit was settled in 1948 by agreement of the parties, and the New Jersey court entered a consent decree in accordance with the agreement under which the former husband, in 1948, paid petitioner $14,000. Under the agreement, the parties agreed that future weekly payments to petitioner would be increased from $60 to $85, and petitioner agreed that payments of $85 per week in the future would constitute the full amount of her weekly alimony payments without increase above that amount. The decree of the New Jersey court incorporated that part of the settlement agreement also. The decree of the New Jersey court, in effect, modified the divorce decree of the Nevada court and the agreement which was adopted and incorporated decree of the Nevada court and the agreement which was adopted and incorporated in the Nevada decree. Held, that payment of $14,000 represented additional alimony payments for preceding years, and that it was taxable to petitioner as income in the year of receipt under section 22(k) of the 1939 Code. Elsie B. gale, 13 T.C. 661,affd. 191 F.2d 79, followed; Frank J. Loverin, 10 T.C. 406, distinguished on the facts.

The Commissioner determined a deficiency in income tax for 1948 in the amount of $5,484.66. The only question for decision is whether the amount of $14,000 which petitioner received in 1948 from her former husband as a result of the settlement of a suit filed by petitioner for arrearages in alimony payments due her under a decree of divorce constituted taxable income to petitioner under section 22(k) of the 1939 Code.

FINDINGS OF FACT.

The facts stipulated by the parties are found in accordance with the stipulation which is incorporated herein by this reference together with the annexed exhibits.

The petitioner is a resident of East Orange, New Jersey. She filed her return for 1948 with the collector of internal revenue for the fifth district of New Jersey.

On April 7, 1943, petitioner was divorced from George S. White by a decree of divorce of the District Court of Washoe County, Nevada. The divorce decree is incorporated herein by reference. The divorce decree adopted and incorporated a separation agreement which was entered into on February 15, 1943, which provided, inter alia, that White would pay petitioner a minimum of $60 per week for her support. Under the Nevada divorce decree, White was required to pay petitioner alimony payments of $60 per week, at least. These payments were periodic payments. Under the divorce decree, White paid petitioner $60 per week during the years 1943-1947, inclusive, and during 1948 to and including September 15, 1948. He paid petitioner during the years 1943-1948, inclusive, in each year, the amounts set forth below:

+---------------------------+ ¦Year ¦Amount ¦ +------------------+--------¦ ¦1943 ¦$2,280 ¦ +------------------+--------¦ ¦1944 ¦3,120 ¦ +------------------+--------¦ ¦1945 ¦3,120 ¦ +------------------+--------¦ ¦1946 ¦3,120 ¦ +------------------+--------¦ ¦1947 ¦3,120 ¦ +------------------+--------¦ ¦1/1/48 to 9/15/48 ¦2,220 ¦ +---------------------------+

On May 3, 1948, the petitioner instituted a suit against George S. White in the Chancery Court of the State of New Jersey, in an action entitled ‘Margaret Oliver White, Complainant, vs. George S. White, Defendant.’ The complaint filed in the aforesaid action is incorporated herein by reference.

The agreement which was incorporated in and made part of the Nevada divorce decree provided, in part, in paragraph 10 as follows:

(10)(b) Commencing seven (7) days after the entry of such final decree and continuing until the death of either party, or until the Wife's re-marriage, whichever occurs first, the Husband shall pay the Wife Sixty Dollars ($60.) each week, in advance. Said payments shall be made on Monday of each week, commencing with the Monday following the entry of the decree. In the event of the Wife's remarriage, she agrees to notify the Husband immediately of that fact.

(c) For the calendar year 1944 and for each calendar year thereafter until the death of either party, or the Wife's remarriage, the Husband shall pay the Wife such additional amount, if any, as will, together with said Weekly payments of Sixty Dollars ($60.), equal one-third of the Husband's net income in the calendar year for which the additional amount is paid. Such additional amounts shall be paid within sixty (60) days after the close of the calendar year for which the payment is made. Upon the death of either party, or the Wife's re-marriage, payment shall be made for the portion of the year in which such event occurs.

(d) For the purposes of this agreement, the term ‘net income’ shall mean all salaries, commissions, net gains on the sale or disposition of capital assets, and other income received by the Husband during each calendar year (exclusive of any distribution of capital assets or of undivided profits or surplus accumulated prior to December 31, 1943,) but such net income shall include his share of the distributable but undistributed net earnings for each calendar year, of any corporation or partnership owned or controlled by him, less his payments of alimony to Mrs. Eunice White, taxes, interest, payments of not more than Four Thousand Dollars ($4,000.) per annum on account of his present indebtedness of Seventeen Thousand Nine Hundred Ninety-one Dollars and Sixty-two Cents ($17,991.62) to the corporations owned by him, until said indebtedness shall have been paid; taxes which would have been paid by him on such undistributed earnings, if the same had been distributed, and all carrying charges on the said Short Hills property, exclusive of amortization payments, while it is not occupied by the Husband, or while it is occupied by any other person not paying a reasonable rental therefor. Actual distributions out of such undistributed net earnings, accumulated after January 1, 1944, upon which the Wife's participation therein has been paid, shall not be deemed income to the Husband, nor shall the taxes imposed upon the Husband in relation to such actual distributions be deducted in computing his net income, except to the extent that such taxes are higher than those previously allowed to the Husband as credits against the same net income. The Husband's net income shall not be diminished by losses sustained by him apart from such salaries, commissions and undistributed earnings. All taxes on the above mentioned corporations and partnerships shall be deductible in computing all such corporate and partnership net earnings.

(e) Notwithstanding any other provision of this agreement, the Wife shall not be entitled to receive an additional payment of more than Four Thousand Three Hundred and Eighty Dollars ($4,380.) for any calendar year under Paragraph (c) above, thereby limiting the maximum payments to be made to her by the Husband in any one year to the sum of Seven Thousand Five Hundred Dollars ($7,500.).

In the complaint which petitioner filed on May 3, 1948, in the Chancery Court of New Jersey, petitioner alleged, inter alia, the aforesaid separation agreement and divorce, and asserted lack of compliance therewith. The prayer for relief requested, inter alia, that the petitioner be granted adequate support and maintenance under all the circumstances and also that the petitioner might have such further and other relief as may be adequate and just under all the facts disclosed and alleged therein, under the terms of the Nevada decree.

On May 27, 1948, George S. White, through his attorney, filed his answer to the complaint in the New Jersey Court of Chancery, admitting, inter alia, that he entered into a separation agreement and that there was a Nevada divorce. It was also alleged therein, inter alia, that, to the best of his knowledge and belief, there was substantial compliance with the separation agreement.

During the period when the petitioner received the $60 weekly payments, as more fully set out above, and prior to the settlement of the action instituted in the New Jersey Court of Chancery, the petitioner did not receive any payments pursuant to paragraphs 10(c), (d), and (e) of the February 15, 1943, agreement which was incorporated in the Nevada divorce decree.

In negotiating for an amicable settlement of the suit in the Chancery Court of New Jersey, the petitioner's counsel based petitioner's claim upon the maximum amount of back alimony due the petitioner under paragraphs 10(c), (d), and (e) of the agreement of February 15, 1943, which became part of the Nevada decree.

Pursuant to the definition of ‘net income’ contained in paragraph 10(d) of the agreement, and pursuant to the terms of paragraphs 10(c) and (e) of the agreement, the ‘net income’ of George S. White for the years 1944 to 1948, inclusive, was such that the petitioner was entitled to receive alimony in addition to the payments of $60 per week.

A computation of George S. White's ‘net income’ for the years 1944 to 1947, inclusive, which computation was prepared in March or April of 1948, shows that the petitioner was entitled to receive additional alimony under the 1943 agreement and the Nevada divorce decree as follows:

+--------------------------------------+ ¦ ¦ ¦Additional ¦ +----+---------------------+-----------¦ ¦ ¦Net income as ¦alimony due¦ +----+---------------------+-----------¦ ¦Year¦defined in separation¦Margaret O.¦ +----+---------------------+-----------¦ ¦ ¦agreement ¦White ¦ +----+---------------------+-----------¦ ¦ ¦ ¦ ¦ +----+---------------------+-----------¦ ¦1944¦$10,432.89 ¦$1,397.63 ¦ +----+---------------------+-----------¦ ¦1945¦14,358.62 ¦2,706.21 ¦ +----+---------------------+-----------¦ ¦1946¦21,018.92 ¦4,380.00 ¦ +----+---------------------+-----------¦ ¦1947¦24,858.13 ¦4,380.00 ¦ +----+---------------------+-----------¦ ¦ ¦ ¦$12,863.84 ¦ +----+---------------------+-----------¦ ¦ ¦ ¦ ¦ +--------------------------------------+

A computation of George S. White's ‘net income’ for the year 1948 shows that the petitioner, if the 1943 agreement had remained unchanged, would have been entitled to receive additional alimony in the approximate amount of $2,920 for the period January 1, 1948, to September 15, 1948.

For settlement purposes, and because of the inability to accurately determine as of September 15, 1948, the exact amount of alimony that would be payable to the petitioner under paragraphs 10(c), (d), and (e) of the divorce decree and the agreement for the year 1948, the sum of $1,136.16 was agreed to as the amount of additional alimony that the petitioner would have coming to her for the period January 1, 1948, to September 15, 1948.

On August 23, 1948, the suit in Chancery Court of New Jersey between the petitioner and George S. White was culminated by the entry of a consent decree which incorporated and adopted a settlement agreement executed by the parties to the litigation.

The recital in the consent decree stated, inter alia, that the suit was for the enforcement of the terms of a contract dated February 15, 1943, which contract fixed certain rights and obligations between the parties as to maintenance and support of Margaret O. White; that upon the payment of $14,000 to Margaret O. White, she discharged and released George S. White from the separation agreement, as to accounting, sums due thereunder, and all other money obligations as therein set forth under the contract, except that the weekly payment is to be increased from $60 to $85 per week; and that the parties thereto had full knowledge of the past financial status of the parties and with full knowledge by Margaret O. White that her consent waived any rights to any future maintenance, support, or lump sums of money from George S. White other than as decreed therein, to wit, $14,000 for all sums past due from George S. White and the increased sum of $85 weekly thereafter, in lieu of any future lump sum or accounting.

The consent decree ordered George S. White to pay the petitioner $14,000 on or before September 15, 1948, and to increase the weekly payments thereafter to $85, and upon compliance therewith, he was to be discharged in full of all obligations of the separation agreement.

George S. White complied with the New Jersey decree by making payment to the petitioner of $14,000 on September 15, 1948, and by increasing the petitioner's weekly payments from $60 to $85 per week.

The sum of $14,000 which was received by the petitioner on September 15, 1948, pursuant to the aforesaid consent decree, consisted of accrued alimony in the amount of $12,863.84 based upon George S. White's income for the years 1944 to 1947, inclusive, and current alimony in the amount of $1,136.16 based upon an estimate of George S. White's income for the period January 1, 1948, to September 15, 1948.

OPINION.

HARRON, Judge:

The question is whether the sum of $14,000, which petitioner received in 1948, representing increased alimony for prior years, which petitioner received from her former husband as a result of the settlement of her suit in the New Jersey Chancery Court constituted ‘periodic payments' within the meaning of section 22(k) of the 1939 Code.

Upon due consideration of the undisputed facts and of the arguments advanced by petitioner, it is concluded and held that the $14,000 represented merely the aggregate of various amounts of ‘periodic’ alimony payments, or arrearages in periodic alimony payments, which were due petitioner under the 1943 agreement and the Nevada divorce decree for prior years, and, in part, for 1948. The sum of $14,000 was due and owing to petitioner by her former husband under the terms of the 1943 agreement or under the obligation imposed by the Nevada decree of divorce.

The question presented is controlled by Elsie B. Gale, 13 T.C. 661, affd. 191 F.2d 79. See also Lily R. Reighley, 17 T.C. 344; Estate of Sarah L. Narischkine, 14 T.C. 1128, affd. 189 F.2d 257; Jane C. Grant, 18 T.C. 1013, affd. 209 F.2d 430; and Antoinette L. Holahan, 21 T.C. 451.

As we did in Elsie B. Gale, supra, we here reject as unsound upon all of the facts, petitioner's contention that the total sum of $14,000 applicable to prior years was a ‘principal sum’ payable in installments of less than 10 years. What was stated (at p. 666) in the Gale case applies here:

The term ‘principal sum’ as used in section 22(k) contemplates a fixed and specified sum of money or property payable to the wife in complete or partial discharge of the husband's obligation to provide for his wife's support and maintenance, as distinct from ‘periodic’ payments made in connection with an obligation indefinite as to time and amount. Not every sum specified in dollars in a divorce decree is to be regarded as a ‘principal sum’ within the meaning of the statute. To so regard it would mean that every additional sum awarded to increase a wife's alimony for a definite year would make that amount a principal sum, however insignificant it might be. The fact that Congress provided that principal sum would not be taxed to the wife unless the discharge of this obligation extended over ten years makes clear that minor adjustments such as are present here were not to be regarded as principal sums, payable in installments. In the instant case, the award of.$19,000 represented no new or different obligation of the husband, nor was it imposed in respect to any right of the wife arising from the divorce other than the right she acquired under the original decree and separation agreement to adequate ‘periodic’ payments of alimony. In short, the.$19,000 represented merely the aggregate of various amounts of ‘periodic’ alimony determined by the court to be owing by the husband for prior years under the terms of the separation agreement or the obligation imposed by the original decree of divorce.

The petitioner herein, as in Elsie B. Gale, supra, acquired her rights under the separation agreement and decree of divorce. It was these rights which she sought to enforce in her suit in Chancery Court of New Jersey. It is therefore apparent that the sum of $14,000 represents satisfaction of those rights.

The petitioner relies upon the case of Frank J. Loverin, 10 T.C. 406, as support for the proposition that the sum of $14,000 constitutes a lump-sum payment such as to exclude it from the taxable income of the petitioner within the meaning of section 22(k). In the Loverin case, the taxpayer was divorced from his wife in the State of New York in 1940. The divorce decree provided that the taxpayer pay his wife $60 per week for support and maintenance. His wife had filed suit against the taxpayer alleging conversion of household goods which belonged to her. She sought a judgment of $3,000. This suit was pending on January 2, 1942. On January 2, 1942, the taxpayer and his former wife entered into an agreement, conditioned upon her remarriage, wherein the taxpayer was to pay her $8,500, together with $1,500 for attorney's fees, and wherein she agreed, among other things, to accept the settlement in lieu of any and all further payments of alimony or her maintenance and support, to dismiss the lawsuit alleging conversion of her goods, to sign the necessary papers to obtain an order vacating that part of the divorce decree obligating him to pay her $60 weekly for her support and maintenance, to release her right of dower or share in his estate, and to waive the right of election to take against his last will and testament. The taxpayer paid his former wife $10,000 and paid his own attorney $1,000. On January 13, 1942, the divorce decree was modified by annulling the provision for payments of $60 per week for support and maintenance. The taxpayer claimed a deduction for the $11,000 under section 23(u) of the 1939 Code.

This Court, after eliminating the $1,000 and $1,500 payments to attorneys as having no basis for a deduction under 23(u), confined its attention to the $8,500 balance. It was pointed out that section 22(k), in general, provided that periodic payments of alimony made pursuant to and subsequent to a divorce decree or a written instrument incident to a divorce, shall be taxable income to the divorced wife. It was further pointed out that lump-sum payments or installment payments of a specific principal sum were not ‘periodic payments' within section 22(k), unless under the terms of the decree or instrument, the installments were to be paid over a period of more than 10 years.

This Court, assuming under the facts in this matter that the 1942 agreement was incident to the divorce, stated that as the divorce decree had been modified to eliminate any support payments thereunder as of the beginning of 1942, the sum paid by the taxpayer and received by the wife was pursuant to the agreement entered into in 1942. This agreement contemplated neither periodic payments nor installment payments during a period exceeding 10 years. It dealt only with a single, lump-sum payment and, as such, was not taxable income within section 22(k) nor a deduction within section 23(u).

Frank L. Loverin, supra, stands for the proposition that where a divorce decree is amended so that it no longer provides for alimony, and a separate agreement is entered into providing for a lump-sum payment of any and all future alimony, and also providing for the settlement of other claims or contingencies, the settlement agreement must stand on its own and not be confused with the divorce decree. As the agreement did not provide for periodic payments nor installment payments of a specified sum over a period of more than 10 years, the payment does not fall within the purview of section 22(k).

In the instant proceeding there is a Nevada divorce decree, and the incorporation therein of a separation agreement which provided for certain payments of alimony. A suit was commenced by the petitioner requesting, inter alia, compliance with the separation agreement and relief under the Nevada divorce decree. The decree entered in said suit required the payment of $14,000 in satisfaction of arrearages under the agreement.

The distinction between Frank J. Loverin, supra, and the instant proceeding is obvious. In Frank J. Loverin, supra, the payment was a lump sum in full payment of all future alimony and other claims of the former wife against the former husband. The agreement providing for such payments, as of the taxable year 1942, was the only instrument under which the taxpayer could possibly claim he was paying alimony as the divorce decree had been modified on or about January 13, 1942, to eliminate alimony payments. The Loverin case is clearly distinguishable upon its facts from this proceeding.

The payment in the instant proceeding was not a payment in full settlement of future alimony but was in settlement of accrued alimony, which, as previously discussed, retains its ‘periodic’ characteristics for the purposes of section 22(k). The payment of $14,000 was in settlement of alimony arrearages for the years 1944 to 1947, inclusive, in the amount of $12,863.84, and for increased alimony due for the period January 1, 1948, to September 15, 1948, in the estimated amount of $1,136.16, which full amount constitutes taxable alimony income under the provisions of section 22(k) of the Internal Revenue Code.

A question of the severability of the agreement of 1948, referred to in our Findings of Fact, similar to that considered by the Court of Appeals in Grant v. Commissioner, 209 F.2d 430, was not presented by the parties in this case and there are not sufficient facts in the record herein upon which such an issue could properly be decided.

The respondent's determination is sustained.

Decision will be entered for the respondent.