Cattier v. Commissioner

*1461 The respondent determined a deficiency in income tax in the amount of $ 8,229.28 against the petitioner for the taxable year 1945. Of the adjustments made by the respondent in determining this deficiency, petitioner alleged that respondent erred in (1) disallowing the deduction *1462 claimed for legal expenses in the amount of $ 1,075, and (2) disallowing the deduction claimed for payments totaling $ 6,000 paid by the petitioner in 1945 to his divorced wife. Counsel for the petitioner informed the Court at the hearing that the petitioner had conceded the issue relating to the deduction claimed for legal fees. The remaining issue for our decision, therefore, concerns the petitioner's right to a deduction, in accordance with sections 23 (u) and 22 (k) of the Internal Revenue Code, for the payments totaling $ 6,000 he made to his divorced wife in *257 the year 1945 pursuant to an agreement incident to their divorce decree.

FINDINGS OF FACT.

Part of the facts were stipulated and they are so found.

Petitioner filed his income tax return for the calendar year 1945 with the collector of internal revenue for the second district of New York.

On December 18, 1940, a decree was entered by the Second Judicial District Court of the State of Nevada, granting petitioner's wife, Ruth Lowery Cattier (hereinafter usually referred to as petitioner's divorced wife), an absolute divorce from petitioner. On October 31, 1940, petitioner and his wife entered into a written separation agreement which was incident to this divorce decree. Pertinent provisions of this agreement are as follows:

EIGHTH: The Husband agrees to pay to the Wife for her support and maintenance so long as she shall live or until she shall marry, the following:

(a) The sum of Five hundred ($ 500.00) Dollars per month payable in advance on the first days of November and December, 1940, and thereafter the minimum sum of Four Hundred ($ 400.00) Dollars per month, payable, in advance, on the first day of each month commencing January 1, 1941;

(b) The Husband agrees to pay to the Wife*258 each year commencing January 1, 1941, thirty-three and one-third (33 1/3%) percent of the Husband's net income of the preceding calendar year up to and including and until the Wife receives Ten thousand ($ 10,000.00) Dollars per annum, which sum shall include the payments hereinabove provided under subdivision (a) of this paragraph.

(c) In addition to the foregoing payments, the Husband agrees to pay to the Wife each year commencing January 1, 1941, twenty (20%) percent of the Husband's net income of the preceding calendar year, over Thirty thousand ($ 30,000) Dollars, until the wife receives Fifteen thousand ($ 15,000) Dollars per annum. In no event, commencing January 1, 1941, is the Husband to make payments under (a), (b), and (c) of less than Forty-eight hundred ($ 4800.00) Dollars per annum, i. e., Four hundred ($ 400.00) Dollars per month payable monthly in advance plus the payment of insurance premiums hereinafter mentioned, nor shall the total payments under (a), (b), and (c) above exceed the sum of Fifteen thousand ($ 15,000.00) Dollars per annum, i. e., Twelve hundred fifty ($ 1250.00) Dollars per month, plus the payment of insurance premiums hereinafter mentioned, except*259 in the event of substantial inflation whereupon payments are to be equitably adjusted as hereinafter provided in paragraph "TENTH" hereof. * * *

* * * *

*1463 TENTH: In the event of any substantial decrease in the purchasing power of the dollar, the maximum payment of Fifteen thousand ($ 15,000.00) Dollars per year, hereinabove provided for in paragraph "EIGHTH" hereof, shall be increased to reflect such decreased purchasing power, and the Wife shall thereafter receive twenty-five (25%) percent of net income (as hereinabove defined) above net income of Fifty-five thousand ($ 55,000) Dollars per year. All additional payments pursuant to this paragraph "TENTH" are to be made in accordance with the provisions of paragraph "EIGHTH" hereof.

Any dispute with respect to the application of this paragraph shall be resolved by arbitration as provided for in paragraph "FIFTEENTH" hereof.

* * * *

THIRTEENTH: The Wife agrees to notify the Husband of her remarriage forthwith upon the consummation thereof.

In the event the Wife remarries, the Husband agrees to pay to the Wife the sum of Six thousand ($ 6,000) Dollars in equal quarterly instalments of Fifteen hundred ($ 1500.00) Dollars, the*260 first instalment to be paid within thirty (30) days from the receipt by him from the Wife of notice of her remarriage, and from and after such marriage the Husband shall not thereafter be liable for the monthly payments provided for in paragraph "EIGHTH" hereof or to maintain the insurance policies referred to in paragraph "TWELFTH" hereof, and the Husband, after such remarriage, shall not be liable for her support or for any of the payments (other than payment of the sum of Six thousand ($ 6,000) Dollars above referred to) as herein provided. In the event the Wife remarries, the Wife shall, upon the request of the Husband, execute such documents, if any, as may be deemed necessary or advisable to accomplish a change of beneficiary of the policies of insurance referred to in paragraph "TWELFTH" hereof.

During the period from October 31, 1940, until his divorced wife's remarriage on February 11, 1945, petitioner made the payments to her as required by paragraph "EIGHTH" of the separation agreement, supra. Petitioner then paid her the sum of $ 6,000 pursuant to paragraph "THIRTEENTH" of such separation agreement. Petitioner claimed a deduction for this amount on his 1945*261 income tax return, which deduction respondent disallowed in determining petitioner's 1945 income tax deficiency.

OPINION.

The petition contains allegations that the respondent erred (1) in disallowing the deduction claimed by petitioner for legal expenses in the amount of $ 1,075, and (2) in disallowing any deduction for the payment of an amount of $ 6,000 made by the petitioner in 1945 to his divorced wife. Petitioner introduced no evidence, and made no argument on brief, with respect to the disallowance of the deduction for legal expenses, and counsel for petitioner informed the Court at the hearing that petitioner conceded this issue. Accordingly, we hold that the respondent did not err in disallowing the deduction claimed by the petitioner for legal expenses in the amount of $ 1,075.

The sole remaining issue for our decision concerns the petitioner's right to a deduction for certain payments totaling $ 6,000 which he *1464 made to his divorced wife in the year 1945 pursuant to paragraph "THIRTEENTH" (set out in our Findings of Fact above) of an agreement which was incident to the divorce decree granted to his wife in the year 1940.

Section 23 (u) of the Internal Revenue*262 Code¹ allows a divorced husband to deduct those payments he makes to his divorced wife which are includible in her gross income under section 22 (k) of the Code. The latter section reads as follows:

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 (whether or not made at regular intervals) received subsequent to such decree in discharge of, or attributable to property transferred (in trust or otherwise) 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, and such amounts received as are attributable to property so transferred shall not be includible in the gross income of such husband. This subsection shall not apply to that part of any such periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable*263 for the support of minor children of such husband. In case any such periodic payment is less than the amount specified in the decree or written instrument, for the purpose of applying the preceding sentence, such payment, to the extent of such sum payable for such support, shall be considered a payment for such support. 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 payment for the purposes of this subsection; except that an installment payment shall be considered a periodic payment for the purposes of this subsection if such principal sum, by the 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 or instrument, but only to the extent that such installment payment for the taxable year of the wife (or if more than one such installment payment for such taxable year is received during such taxable year, the aggregate of such installment payments) does not exceed 10 per centum of such principal sum. For the purposes of the preceding sentence, the portion of a payment*264 of the principal sum which is allocable to a period after the taxable year of the wife in which it is received shall be considered an installment payment for the taxable year in which it is received. (In cases where such periodic payments are attributable to property of an estate or property held in trust, see section 171 (b)).

Included in section 22 (k) above is the provision that of the payments received by the wife from the husband, only those payments which are periodic must be included in her gross income. The Code *1465 does not specifically define the term "periodic payment." Accordingly, it must be given its commonly accepted meaning. See our discussion of the term's *265 meaning and its use by Congress in Ralph Norton, 16 T. C. 1216, and Arthur B. Baer, 16 T. C. 1418. Ordinarily, installment payments would probably be considered periodic payments; however, section 22 (k) specifically provides that installment payments of a principal sum named in the decree of divorce or separate maintenance, or an agreement incident thereto, are not to be considered periodic payments for the purpose of that section, except where the decree or agreement incident thereto provides that the husband is to make payment of the installments in such manner that the payment of the principal sum is to, or may, extend over a period in excess of 10 years. Where such a provision is contained in the decree or agreement incident thereto, there shall be included in the wife's gross income only that portion of the amount of any installment payment or payments made in the taxable year which is not in excess of 10 per cent of the principal sum.

Respondent contends that the payments required by paragraph "THIRTEENTH" of the agreement incident to the divorce (this paragraph is set out in our findings of fact above) are not*266 deductible by the petitioner under section 23 (u) because they were not periodic payments in accordance with section 22 (k). Accordingly, it is the periodic nature of the payments in question which we must decide.

There was introduced in evidence by the petitioner not only the separation agreement dated October 31, 1940, which the parties have stipulated was incident to the divorce decree, but also another earlier agreement dated January 26, 1940. The first agreement in order of time, dated January 26, 1940, was not incident to the divorce decree. The second agreement, dated October 31, 1940, was not in addition to nor an amendment of the first agreement; on the contrary, this second agreement was expressly in lieu of, and superseded, the first. The language contained in paragraphs "EIGHTH" and "THIRTEENTH" of the second agreement in so far as they are pertinent to the issues herein presented contain no ambiguities. Accordingly, in our determination of the issue presented, there is no reason for us to consider, nor purpose in a discussion of, the first agreement.

Paragraph "EIGHTH" of the agreement incident to the divorce decree provides for the payment by the petitioner*267 for his divorced wife's support and maintenance "so long as she shall live or until she shall marry" a minimum amount of $ 400 per month, with adjustments geared to petitioner's yearly earnings and a ceiling on such payments of $ 1,250 monthly (except in times of serious inflation). ² In a separate paragraph, "THIRTEENTH," there is contained a *1466 provision that in the event of the divorced wife's remarriage petitioner was to pay to her the sum of $ 6,000 in equal quarterly installments of $ 1,500, with the first installment to be paid within 30 days after she notified him of her remarriage. Paragraph "THIRTEENTH" also contains the provision that after the divorced wife's remarriage petitioner was not thereafter to be liable for the monthly payments provided for in paragraph "EIGHTH," nor was he to be liable for her support or for any other payments except the payment of the sum of $ 6,000.

In accordance*268 with these provisions of the agreement, when the petitioner's divorced wife remarried in 1945, the petitioner ceased to make the payments required by paragraph "EIGHTH" and paid over to her the $ 6,000 in accordance with paragraph "THIRTEENTH." We believe the payments required in paragraph "THIRTEENTH" were not, as petitioner contends, merely the terminal payments of a series of payments for support and maintenance of the divorced wife. The agreement plainly states that his liability to pay for her support and maintenance ceased upon her remarriage. The requirement that he was to pay her $ 6,000 was contained in a separate paragraph from that which required the payments for her support and maintenance, and was a fixed amount payable in four installments, whereas the support payments provided for in paragraph "EIGHTH" were made monthly and varied from $ 400 to $ 1,250, depending upon petitioner's yearly income. We believe that the requirement that petitioner pay his wife $ 6,000 upon her remarriage was the provision for the payment of the principal sum payable on the happening of a certain contingency, her remarriage. There was nothing indefinite as to the amount, *269 it being clearly stated that she was to receive $ 6,000, nor was there anything indefinite as to the time of payment, the first installment being due within 30 days after he was notified of his divorced wife's remarriage and the remaining installments being due quarterly thereafter. Cf., William M. Haag, 17 T. C. 55; Ralph Norton, supra, and Arthur B. Baer, supra.

Having established that the payment in the amount of $ 6,000 in installments by the petitioner was the payment of a principal sum of $ 6,000 fixed by an agreement incident to the divorce decree, we further believe that no part of the installment payments of such principal sum is deductible by the petitioner because such principal sum was not to be paid over a period in excess of 10 years. On the contrary, paragraph "THIRTEENTH," with which the petitioner complied, specifically provided that the total sum of $ 6,000 was to be paid in four equal installments, the first installment being due within 30 days after he was notified of his divorced wife's remarriage and *1467 the other installments being due quarterly thereafter, *270 in all a period of less than a year.

For the reasons above enumerated, we believe and hold that the payments made by the petitioner in accordance with paragraph "THIRTEENTH" of the agreement incident to the divorce decree were not periodic payments in accordance with section 22 (k) of the Code. Accordingly, we hold that such payments were not deductible by the petitioner in the taxable year 1945.

Decision will be entered for the respondent.