Opinion
Docket No. 72589.
1960-04-29
JEROME A. BLATE AND ROSE BLATE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Ben M.Dreyer, Esq., for the petitioners. L. Robert Leisner, Esq., for the respondent.
Ben M.Dreyer, Esq., for the petitioners. L. Robert Leisner, Esq., for the respondent.
Held, periodic payments made by petitioner to his divorced wife were intended for her support and maintenance within the purview of section 71, I.R.C. 1954, and were not in consideration for her transfer of certain property to him; therefore, such payments were deductible by petitioner under section 215, I.R.C. 1954.
Respondent determined deficiencies in petitioners' income taxes for 1954 and 1955 in the amounts of $5,280.88 and $4,335.62, respectively. The sole question remaining for decision is whether certain monthly payments made by Jerome A. Blate to his former wife in each of the years 1954 and 1955 were deductible as alimony from petitioners' gross income pursuant to section 215 and 71, I.R.C. 1954.
FINDINGS OF FACT.
Certain facts have been stipulated and are incorporated herein by reference.
Petitioners are, and were during 1954 and 1955, husband and wife; during those years, they resided in Canton, Ohio, and filed joint income tax returns with the district director of internal revenue at Cleveland, Ohio. Jerome A. Blate will hereinafter be referred to as petitioner.
Petitioner was married to Janet A. Blate on December 19, 1934. They subsequently had three children whose ages were 16, 14, and 10, respectively, as of April 20, 1953. Janet was the daughter of Florence Erlanger Blate and Sidney Erlanger. Sidney Erlanger died in 1941 and Florence Erlanger, his widow, married petitioner's father in 1943.
Erlanger Dry Goods Company (hereinafter referred to as Dry Goods) was a corporation operating retail department stores in Canton, Alliance, and Massilon, Ohio. Erlanger Shoes, Inc., Realty Associates, Inc., Erlanger Home Furnishings, Inc., and Stark Jewelry, Inc.(hereinafter referred to as the lessee corporations), were ‘smaller’ corporations which leased space from Dry Goods and operated departments in the stores owned by Dry Goods. Dry Goods and the lessee corporations will hereinafter be referred to collectively as the Erlanger corporations.
Sidney Erlanger had at one time owned 50 per cent of the outstanding stock of Dry Goods, and another branch of the Erlanger family owned the remaining 50 per cent. Petitioner subsequently acquired, partly by gift and partly by purchase, all of the stock formerly owned by Sidney Erlanger; and thereafter control of Dry Goods continued to be equally divided, one-half of the total outstanding stock being owned by petitioner and the other half by Robert and Bernard Erlanger, second cousins of Janet. Robert and Bernard Erlanger were bothers.
Control of the lessee corporations was similarly divided. Sylvia Blate, wife of petitioner's brother, and Janet each owned 25 per cent of the stock of the lessee corporations; the two remaining 25 per cent interests were owned, respectively, by the wives of Robert and Bernard Erlanger.
Janet also owned two notes dated February 19, 1946, one signed by Erlanger Home Furnishings, Inc., in the face amount of $30,000, and the other signed by Erlanger Shoes, Inc., in the face amount of $8,000. To finance the advances represented by these notes, Janet had borrowed $25,000 from the Irving Trust Company, New York City; as collateral she posted interest income certificate #D 135, 174 G of the Mutual Benefit Life Insurance Company, which certificate was owned by her and had a value of $25,148.23. Petitioner ‘gave’ or ‘lent’ the remaining $13,000 to Janet out of $15,000 which he had borrowed from the Irving Trust Company on additional security owned by him.
On February 6, 1951, petitioner and Janet cosigned a note for $82,000 to the First National Bank of Canton, Ohio. Part of this $82,000 represented a refinancing of their previous loans ($15,000 and $25,000, respectively) from the Irving Trust Company. Janet's interest income certificate #D 135, 174 G was pledged as partial security for the $82,000 loan.
Janet was also contingent beneficiary as to certain payments then being made to her mother, Florence Erlanger Blate, from the proceeds of life insurance policies on the life of Sidney Erlanger; such payments were to be made to Janet after her mother's death. As of April 20, 1953, Janet was 38 years of age and Florence Erlanger Blate was approximately 63 years of age. Petitioner was 41 years of age at that time.
Janet's approximate personal income for the years noted was as follows:
+------------+ ¦1946¦$5,600 ¦ +----+-------¦ ¦1947¦8,000 ¦ +----+-------¦ ¦1948¦9,600 ¦ +----+-------¦ ¦1949¦9,600 ¦ +----+-------¦ ¦1950¦7,800 ¦ +----+-------¦ ¦1951¦6,200 ¦ +----+-------¦ ¦1952¦5,200 ¦ +------------+
This income was primarily attributable to dividends and interest which Janet received on her stock and notes of the lessee corporations. It also included annual director's fees of about $500 which Janet received from the lessee corporations and about $80 per month which she received on her interest income certificate.
About 4 to 6 weeks prior to April 20, 1953, Janet asked for and insisted upon a divorce because she wanted to marry another man, William Edwards. Petitioner did not want a divorce and ‘begged’ Janet not to go through divorce proceedings. He suggested speaking to Edwards' commanding officer at a nearby Army post with a view to having Edwards transferred in any way along such lines, she ‘would crawl on her hands and knees' to Edwards. Thereafter, petitioner and Janet entered into discussions with respect to the terms of a separation agreement.
As between petitioner and Janet, petitioner was the active participant in the business of the Erlanger corporations. In order to protect his position in that business and avoid upsetting the effective ‘fifty-fifty’ division of control, petitioner asked Janet to convey to him her 25 per cent interests in the respective lessee corporations. Janet was amenable to this request. In addition to her desire to obtain petitioner's consent to a divorce, she was persuaded by his suggestion that conveyance of her 25 per cent interests to him would help protect the business and preserve its family ‘heritage’ for their children until such time as the children were ready to ‘take over.’ Furthermore, Janet was aware of her own lack of business ability and was accustomed to rely completely on petitioner in the handling of family business affairs. Petitioner did not need Janet's stock to provide for the day-to-day support of the children, as he had substantial income from salaries and other investments.
For similar reasons, Janet agreed to convey to petitioner the notes which she held from Erlanger Shoes, inc., and Erlanger Home Furnishings, Inc., and petitioner agreed to procure the release of Janet's interest income certificate by discharging their $82,000 joint obligation to the First National Bank of Canton.
Petitioner agreed to take custody of the children because Janet felt that her contemplated marriage to Edwards militated against her taking custody at that time. Petitioner's active participation in the business of the Erlanger corporations, and the prospect that the would some day enter that business, also motivated the vesting of custody in petitioner.
It was further agreed during the discussions that petitioner would pay Janet approximately $100 per week as ‘alimony,‘ and that, in addition, petitioner would ‘take care of any unusual medical expenses' incurred by Janet.
Petitioner and Janet agreed upon the selection of an independent attorney to draft a separation agreement. Each had a private conference with the attorney thus selected, and the attorney thereafter dictated the language of the agreement in the presence of both petitioner and Janet.
On April 20, 1953, petitioner, as ‘First Party, and Janet, as ‘Second Party,’ executed the separation agreement described below, for the stated purpose
of adjusting and settling between themselves all matters concerning the care, support and maintenance of Second Party, the disposition of property and the settlement of marital rights relating thereto, and the care and custody of their three minor children * * *
In separate paragraphs of the agreement, petitioner agreed to:
1. Pay the amount of $675 to Janet within 30 days.
2. Pay the amount of $433 per month to Janet ‘for her maintenance and support’ until the occurrence of any one of the following contingencies:
(a) Janet's death.
(b) Petitioner's death, except to the extent that paragraph 6, below, provided for the continuance of such payments after his death.
(c) The beginning of payments to Janet as contingent beneficiary under the insurance policies on the life of Sidney Erlanger, deceased.
3. Pay to or for Janet's account ‘such additional reasonable amounts as may be required to pay for extraordinary medical and dental services rendered to’ Janet.
4. Pay all debts and accounts by Janet as of April 20, 1953.
5. Pay the amount required to release all debts and obligations against Janet's interest income certificate #D 135, 174 G in the amount of $25,000 ‘which is, and will remain, the sole property of’ Janet.
6. Within 90 days, obtain a life insurance policy or policies in the amount of $25,000, or provide other property in that amount, for the purpose of continuing the aforementioned monthly payments ‘for a reasonable period of time’ after petitioner's death, ‘should that event occur while he is still obligated to make said monthly payments.’
‘In consideration of the agreements as set forth above to be performed’ by petitioner, Janet agreed:
1. To convey to petitioner as his sole property the following items of personal property, the values of which were stipulated in this case but were not set forth in the separation agreement:
+------------------------------------------------------------------+ ¦Item ¦Value ¦ +----------------------------------------------------------+-------¦ ¦ ¦ ¦ +----------------------------------------------------------+-------¦ ¦25 shares of Erlanger Shoes, Inc. 1 ¦$23,385¦ +----------------------------------------------------------+-------¦ ¦10 shares of Realty Associates, Inc. 1 ¦22,790 ¦ +----------------------------------------------------------+-------¦ ¦15 shares of Erlanger Home Furnishings, Inc. 1 ¦15,280 ¦ +----------------------------------------------------------+-------¦ ¦Note from Erlanger Home Furnishings, Inc. ¦30,000 ¦ +----------------------------------------------------------+-------¦ ¦Note from Erlanger Shoes, Inc. ¦8,000 ¦ +------------------------------------------------------------------¦ ¦Cash surrender value of Lincoln National Life Insurance Company ¦ +------------------------------------------------------------------¦ ¦policy “upon which premium payments of regularly required”¦ ¦ +----------------------------------------------------------+-------¦ ¦Titles to one 1950 Cadillac and one 1950 Oldsmobile ¦3,500 ¦ +----------------------------------------------------------+-------¦ ¦3 shares of Stark's Jewelery, Inc. 1 ¦2,039 ¦ +----------------------------------------------------------+-------¦ ¦Total ¦104,994¦ +------------------------------------------------------------------+
2. Not to incur any debts or liability on the credit of, or on behalf of, petitioner; and, in the event of an action for divorce instituted by either party, not to ‘ask or apply for any allowance for counsel fees or any alimony, either temporary or permanent, but the sums paid and agreed to be paid to her in this agreement shall be in full satisfaction of all such claims and demands.’
It was further provided that Janet would have the right to select from the household goods owned by the parties ‘such items as she may desire.’ This right was to exist for a period of 6 months after April 20, 1953, and the items selected were to become and remain her sole property. Each party was to retain as his own property all other property, including clothing and personal effects, then owned by him.
The care, custody, and control of the three minor children were vested in petitioner, and he agreed to maintain and support them and and to provide for their welfare and education. Janet retained certain rights of visitation.
All other claims and rights accruing from the marriage were released and relinquished by each party to the other, and the parties agreed that the separation agreement might be embodied in any subsequent decree of divorce.
On April 23, 1953, Janet was granted a divorce from petitioner in the Civil Court of Bravos District, State of Chihuahua, Republic of Mexico, and immediately thereafter she married Edwards.
Petitioner married Rose Blate, his present wife, on July 14, 1953.
Petitioner and Janet performed their respective obligations pursuant to the separation agreement. Janet conveyed to petitioner the items of property set forth in the agreement, and selected the household items she desired for her own use; in some instances, petitioner purchased household items for Janet, with her consent, rather than disrupt the existing household.
Petitioner paid the First National Bank of Canton the amount of $19,040 to procure the release of Janet's interest income certificate, and paid the balance of the $82,000 loan ($62,960) by ‘cashing in’ certain collateral owned by himself and by making a new loan signed only by himself in the amount of $37,803.07. The interest income certificate was delivered to Janet and she was discharged from all liability for the loan. Petitioner also paid a $10,000 debt to Dry Goods, representing previous purchase for himself, Janet, and the children, and he procured Janet's release as cosignatory with himself on an insurance loan in the approximate amount of $48,000. Petitioner did not discharge any debts on Janet's account for which he would not also have been liable.
Petitioner has paid $433 monthly to Janet since execution of the separation agreement. In order to provide for continuation of the monthly payments for ‘a reasonable period’ after his death, petitioner procured and still maintains an insurance policy on his life in the amount of $25,000, at a cost of $343.75 per year. Petitioner and respondent agreed orally at the trial that the monthly payments would extend over a period of more than 10 years from April 20, 1953.
Subsequent to the taxable years in question, all the Erlanger corporations were sold to the May Company, a large department store chain. As of September 21, 1959, custody of two of the children, still minors, had been transferred to Janet, and petitioner was providing for their support pursuant to an order of the Common Pleas Court of Stark County, Ohio.
On their joint returns for 1954 and 1955, petitioner and his present wife deducted the amount of $5,200 as ‘alimony’ paid to Janet each year. On their joint returns for 1954 and 1955, Janet and Edwards reported the amount of $5,196 as ‘alimony’ received from petitioner each year. On April 4, 1957,Janet and Edwards filed an amended joint return for 1955, claiming a refund on the ground that ‘the amount of $5,000 received from Jerome A. Blate, purporting to be an alimony payment,‘ was in fact ‘a settlement between Jerome A. Blate and Janet Edwards (formerly Janet Blate).’
In his deficiency notice, respondent disallowed the deductions claimed by petitioner for ‘alimony’ paid to Janet in 1954 and 1955.
OPINION.
RAUM, Judge:
The question for decision is whether the monthly payments to Janet are ‘periodic payments * * * in discharge of * * * a legal obligation which, because of the marital or family relationship, is * * * incurred by the husband * * * under a written instrument incident to * * * divorce or separation.’ Sec. 71(a)(1), I.R.C. 1954. It so, they are deductible by petitioner by reason of the companion provisions in section 215.
These items represented Janet's 25 per cent stock interests in the lessee corporations.
SEC. 215. ALIMONY, ETC., PAYMENTS.(a) GENERAL RULE.— In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year. * * * 2. See:SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS.(c) PRINCIPAL SUM PAID IN INSTALLMENTS.—(1) GENERAL RULE.— For purposes of subsection (a), installment payments discharging a part of an obligation the principal sum of which is, either in terms of money or property, specified in the decree, instrument, or agreement shall not be treated as periodic payments.(2) WHERE PERIOD FOR PAYMENT IS MORE THAN 10 YEARS.— If, by the terms of the decree, instrument, or agreement, the principal sum referred to in paragraph (1) is to be paid or may be paid over a period ending more than 10 years from the date of such decree, instrument, or agreement, then (notwithstanding paragraph (1)) the installment payments shall be treated as periodic payments for purposes of subsection (a), but (in the case of any one taxable year of the wife) only to the extent of 10 percent of the principal sum. * * *
The payments in question were clearly ‘periodic’ insofar as they were payable monthly, would extend over a period of more than 10 years,
and were subject to contingencies including the death of either spouse or the beginning of payments to Janet from the proceeds of her father's life insurance policies. It is equally clear that the written separation agreement of April 20, 1953, under which petitioner incurred a legal obligation to make the payments, was ‘incident’ to the divorce granted Janet on April 23, 1953.
The decisive issue, then, with respect to proper characterization of the payments, is whether they were incurred by petitioner ‘because of the marital or family relationship,‘ or whether, as contended by respondent, they were incurred solely as consideration for the items of property which Janet conveyed to petitioner. Several factors point to the former conclusion.
The negotiations of the parties preliminary to execution of the separation agreement do not indicate that petitioner intended to purchase these assets from Janet, or that Janet expected payment therefor. To the contrary, Janet's own testimony on direct examination by respondent shows that her willingness to convey the property was motivated primarily by nonmonetary considerations. In addition to her obvious desire to obtain petitioner's consent to separation and divorce, Janet wanted to preserve the family ‘heritage’ of the Erlanger business for the children whom she expected would enter the business some day. She recognized her own lack of business ability and was persuaded that the business would best be protected for the children if her stock were controlled by petitioner in whom custody of the children was to be vested, and on whom Janet was accustomed to rely in the handling of family business affairs. It does not appear from the record that Janet ever demanded payment for the conveyance of her interests in the lessee corporations, or that the monthly payments in question were discussed in connection with Janet's agreement to transfer these interests.
Moreover, the express terms of the separation agreement support the view that the monthly payments were intended to provide for Janet's ‘support and maintenance.’ This phrase is used in the preamble to describe a distinct objective of the parties in entering into the separation agreement, the other objections being ‘the disposition of property and the settlement of marital rights relating thereto,‘ and provision for ‘the care and custody of their three minor children.’ The paragraph of the agreement providing for the monthly payments to Janet expressly states that such payments are ‘for her maintenance and support,‘ without reference to the settlement of property rights. And the support objective is further recognized by petitioner's agreements to pay ‘additional reasonable amounts' for extraordinary medical and dental services thereafter rendered to Janet, and to provide for continuation of the monthly payments ‘for a reasonable period of time’ after his death. Another consideration in this regard is Janet's agreement not to ask for ‘counsel fees or any alimony in the event of an action for divorce, expressly acknowledging that the sums paid and agreed to be paid to her in this agreement shall be in full satisfaction of all such claims and demands.’ Cf. Ann Hairston Ryker, 33 T.C. 924.
Respondent concedes that Janet had ‘an undoubted right to alimony or support payments,‘ but contends that ‘she was willing to forego’ this right in order to obtain a divorce. This contention is directly contrary to the above-quoted language of the agreement. Janet did not ‘forgo’ her right to alimony but received ‘full satisfaction’ thereof by the monthly payments provided for in the separation agreement.
Nor do we see any basis for respondent's contention that the agreement was drafted pursuant to petitioner's instructions ‘so as to give the impression’ that the payments were intended for Janet's support. The facts show that the agreement was drafted by an independent attorney upon whose selection both petitioner and Janet agreed, and that the terms of the agreement were dictated by the attorney in the presence of both parties after a private conference with each. There is no proof that the attorney was unfairly influenced by petitioner to the prejudice of Janet, or that the agreement did not accurately reflect the intentions of the parties.
According to the terms of the separation agreement, the monthly payments were to cease on the death of Florence Erlanger Blate, when Janet's contingent interest in the proceeds of her father's life insurance would become vested. Respondent has shown that the life expectancy of Florence Erlanger Blate was 19.6 years as of April 20, 1953, and that the payments of $433 per month, if continued for 19.6 years, would amount to approximately $101,920. From the fact that the figure of $101,920 corresponds approximately to the value of the assets transferred to petitioner ($104,994), respondent asks us to infer that the monthly payments ‘were based on an actuarial determination as to the value’ of those assets. We think this inference is unjustified. The record is barren of any proof that the parties, or their attorney, made the actuarial determination to which respondent refers. The agreement itself does not fix the value of the assets transferred, and there is no indication that the parties considered the obligation to make monthly payments as the value equivalent of those assets. Df. John Sidney Thompson, 22 T.C. 275; Campbell v. P. G. Lake, 220 F.2d 341 (C.A. 5). In this respect, the present case is analogous to Thomas E. Hogg, 13 T.C. 361, where, as stated in John Sidney Thompson, supra at 282, ‘there was no calculation of the amount of property to which the wife might be entitled and * * * such amount was not a factor in arriving at the settlement terms.’ Had such a calculation been made in the present case, we would have expected Janet to have referred to it in her testimony, but she did not.
The most reasonable inference from the terms of the agreement is that the parties intended to provide for Janet's support until such time as she began receiving the payments from the proceeds of her father's life insurance. Respondent states on brief that Janet ‘was not concerned with alimony or support’ because she was possessed of independent means and was planning to marry Edwards immediately after her divorce from petitioner. The evidence, however, is to the contrary. Janet's income from dividends and interest on her stock and notes ceased upon her conveyance thereof to petitioner, as did her income from director's fees. During 1954 and 1955, her only income consisted of the $80 per month which she received on her interest income certificate and the monthly payments which she received from petitioner. There was some testimony that at the time of trial, September 21, 1959, Janet was being ‘subsidized’ by a trust fund established by her mother; but the amount of this subsidization, or the date when the trust fund was established, is not disclosed in the record. No trust income was reported by Janet and Edwards on their joint returns for 1954 and 1955. It also appears that Edwards was not a reliable source of support. The gross income reported by Janet and Edwards on their aforementioned joint returns was $5,952.21 in 1954 and $6,216.87 in 1955, inclusive of the $5,196 which they reported as ‘alimony’ in each of those years.
For these reasons, we think the payments in question were incurred by petitioner ‘because of the marital or family relationship’ in recognition of his general obligation to provide for Janet's support; therefore, they constituted alimony within the purview of section 71. Petitioner correctly deducted these payments pursuant to section 215.
Decision will be entered under Rule 50.