Opinion
Docket No. 14176.
1948-06-28
GEORGE T. BRADY AND RUTH L. BRADY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Wilbur Langdon Powers, Esq., for the petitioners. Leo C. Duersten, Esq., for the respondent.
Held, the obligation under a certain agreement was incident to divorce as provided in section 22(k), I.R.C., and the payments made thereunder during 1942 and 1943 are deductible by petitioner under the provisions of section 23(u), I.R.C. Wilbur Langdon Powers, Esq., for the petitioners. Leo C. Duersten, Esq., for the respondent.
The respondent determined a deficiency of $2,081.27 in the petitioner's income and Victory taxes for the year 1943.
The single issue is whether or not payments made by petitioner George T. Brady to his divorced wife pursuant to an agreement with her dated October 30, 1937, are deductible under the provisions of section 23(u) of the Internal Revenue Code. The question may be further resolved by stating it thus: Was the agreement of October 30, 1937, providing for periodic payments to the petitioner's wife, executed incident to divorce?
FINDINGS OF FACT.
Certain facts were stipulated. The portions thereof material to the issue are as follows:
The petitioners, individuals residing in Waltham, Massachusetts, filed their 1942 and 1943 individual income tax returns on the cash basis with the collector of internal revenue for the District of Massachusetts. (Hereinafter George T. Brady will be called the petitioner.)
On May 15, 1928, petitioner and Hazel Bell Brady were married at Newton, Massachusetts. An action for divorce was commenced by Hazel Bell Brady against petitioner on November 24, 1936, in the Supreme Court, County of New York, State of New York. On January 18, 1937, an order was entered by that court directing the petitioner to pay to Hazel Bell Brady the sum of $200 per month for the maintenance and support of herself and of the minor son of the plaintiff and defendant. On June 16, 1937, the action for divorce in the Supreme Court, County of New York, State of New York, was dismissed by the court for failure to prosecute.
On October 30, 1937, the petitioner and Hazel Bell Brady entered into an agreement providing, in part, as follows:
WHEREAS, in consequence of disputes and unhappy differences, the parties have separated, and are now and since prior to November, 1936, have been living separate and apart, and since their separation have agreed to live separate and apart during their natural lives, and
WHEREAS, heretofore, when both parties were residents of the State of New York, the Wife instituted action in the Supreme Court, New York County, State of New York, against the Husband for an absolute divorce, and such proceeding is still pending, and
WHEREAS, as part of such proceedings an Order was entered requiring the Husband to pay to the Wife each month for her support and the support, maintenance and education of the child the sum of Two hundred Dollars ($200.00) per month and it is the desire of the parties to settle by the present Agreement certain arrears in payments thereunder and to provide by agreement as to future payments in lieu of the payments called for by such Order, and
WHEREAS, the parties are desirous of settling their property rights and the question of the custody of said child, and the Husband is desirous of making provision for the maintenance and support of the Wife and for the maintenance, support, and education of the said child, the welfare of the child being the primary concern of the parties;
NOW, THEREFORE, in consideration of the premises and the mutual promises and undertakings herein contained, and for other good and valuable considerations, the parties agree:
1.— The parties may and shall at all times hereafter live and continue to live separate and apart. Each shall be free from interference, authority and control, direct or indirect, by the other, as fully as if he or she were sole and unmarried. Each may reside at such place or places as he or she may select. Each may, for his or her separate use and benefit, conduct, carry on, and engage in any business, profession or employment which to him or her may seem advisable.
6.— The Wife shall support and maintain herself, and shall in all respects care for, educate, maintain and support the child properly and in such manner as to afford the said child the best care, education and maintenance and support consistent with the payments made by the Husband in accordance with the terms of this Agreement. In consideration thereof, the Husband shall make the following payments to the Wife:
(a) The Sum of One Hundred and seventy-five Dollars ($175.00) per month to and including the month of July, 1938; thereafter during such part of the lifetime of the Wife as the child remains with the Wife a monthly payment bearing the same proportion of One hundred and seventy-five Dollars ($175.00) as the then prevailing retail cost of living index in the area where the Wife then resides bears to the same index figure prevailing as of July 1, 1937; and during any period when the child shall not be living with the Wife a monthly payment equal to thirty percent (30%) of the Husband's then income after deduction of the insurance premiums actually paid by the Husband with respect of the policies referred to in Schedule A hereto attached, always provided, however, that when monthly payments payable to the Wife for the support and maintenance of the Wife and child when added to the monthly cost of insurance premiums shall exceed sixty percent. (60%) of the Husband's current income the monthly payment shall be decreased to such figure as, when said insurance premiums are added thereto, shall equal sixty percent. (60%) of the Husband's current income. In the event of reduction of payments below the monthly payments above specified for the support and maintenance of the Wife and the child by reason of application of the percentage limitation, the obligation of the Husband to pay on a percentage basis shall continue until all deficiencies shall have been made good.
(b) In the event the (sic) subsequent to the date of this Agreement the parties hereto are divorced and in the further event of remarriage of the Wife, the obligation of the Husband to make payments to the Wife shall cease and in lieu thereof the Husband shall be obligated to pay over to the Wife for the support and maintenance of the child thirty-five percent. (35%) of the current income of the Husband with respect to each period of time that the child shall remain with the Wife during the child's minority.
13.— The provisions of this Agreement shall not be construed to prevent either party from suing for an absolute or limited divorce in any competent jurisdiction upon such grounds as he or she shall elect or as he or she may be advised; but no decree so obtained by either party shall in any way affect this Agreement or any of the terms, covenants or conditions thereof, this Agreement being absolute, unconditional, and irrevocable and both parties intending to be legally bound thereby.
Other provisions related to the custody of the child, the disposition of property and default under the agreement.
On May 18, 1938, Hazel Bell Brady commenced a libel for divorce against the petitioner in the Probate Court of Essex County, Commonwealth of Massachusetts. The libel contains the following prayer:
WHEREFORE your libellant prays that a divorce from the bond of matrimony between your libellant and the said libellee be decreed; that the care and custody of said minor child be given to your libellant; that an allowance be decreed to your libellant for the support of herself and said minor child, in order to secure a suitable support and maintenance to your libellant and to such child as may be committed to her care and custody. Your libellant further says that in November 1936 she brought an action of divorce against the said George Todd Brady in the Supreme Court for the State of New York and County of New York, which was dismissed on June 16, 1937 for failure to prosecute. A certified copy of the divorce complaint and summons and court records covering the divorce action in New York is attached hereto and made part of this libel. No petitions for Annulment, Separate Support, Desertion, or Custody have ever been filed in any other libel.
On July 28, 1938, a decree from the bond of matrimony nisi was decreed by the Probate Court of Essex County, Commonwealth of Massachusetts. The decree of divorce became absolute on January 30, 1939. In his notice of deficiency the respondent disallowed the amounts of $1,650 and $1,906.25 claimed as deductions on the petitioner's 1942 and 1943 income tax returns. The amounts herein referred to were paid by the petitioner to Hazel Bell Brady.
The record discloses the following additional facts:
At the time that the agreement of October 30, 1937, was drafted and executed, counsel for Hazel B. Brady assumed and believed that her New York action for divorce was still pending, although in fact it had been dismissed on June 16, 1937.
On October 26, 1937, Leland Powers, an attorney, of counsel for Hazel Bell Brady, wrote the petitioner as follows:
In August Grier Bartol, Esq. forwarded me separation agreements which I have gone over with Mrs. Brady. I understand these agreements are in form satisfactory to you, and I enclose them herewith, signed by her. You should sign them on page 10, have your signature witnessed, and then acknowledge before a Notary Public. You will notice that I have made the effective date October 30th, so unless inconvenient it would be better if you signed and executed before rather than after that date. After execution, you will kindly return one of the agreements to me.
Mrs. Brady has talked with me about securing a divorce and it is my expectation that in a few weeks she will file a libel in Massachusetts.
In reply to that letter the petitioner wrote to Powers as follows:
Dear Mr. Powers:
Enclosed is signed & executed separation agreement.
I am returning this against the advice of my counsel who claim that Mrs. Brady probably will no longer desire a divorce. However, I wish one absolutely and it cannot be too soon and were I not of the opinion that you were honest in saying that she intends to file libel soon I would not be returning these papers.
Have I not mortgaged my future sufficiently? Don't you think it is about time that (I) had a bit of a break? After all, I have been trying to secure this for over five years. Mr. Powers, I'm trying to do what I believe best for both parties and especially that youngster. Won't you please cooperate in hastening the actual proceedings.
Best personal regards,
Very truly yours,
(Signed) GEORGE T. BRADY
The petitioner stated to Powers in Boston that under no circumstances would he sign the agreement of October 30, 1937, unless a divorce were started.
The delay in filing the libel for divorce after the execution of the agreement of October 30, 1937, was caused by the failure of the plaintiff's attorney promptly to locate and prepare evidence sufficient for establishing the grounds for the libel; by the fact that the attorney was extremely busy during the period of the delay; and by the necessity of securing the facts and records from New York, which were received in the latter part of April 1938.
In this trial of the libel action in the Probate Court of Essex County of Massachusetts, the court called attention to the prayer for alimony and asked counsel for the plaintiff to discuss it. Counsel replied that the parties had entered into an agreement covering the matter of alimony and support of the child. At the time, counsel was holding in his hand page 7 of the 7-page agreement of October 30, 1937. The judge did not read the agreement. It is customary for parties to a divorce proceeding in that jurisdiction to draw up a separate agreement covering a property settlement and thereupon to eliminate alimony provisions from the decree of the court. Massachusetts courts generally refuse to incorporate lengthy alimony or property agreements in their decrees of divorce.
OPINION.
VAN FOSSAN, Judge:
The sole issue before us is whether or not the agreement of October 30, 1937, providing for the payment of $200 per month to the petitioner's divorced wife was executed incident to divorce pursuant to the provisions of section 22(k), Internal Revenue Code.
The authority for allowing the deductions claimed is found in section 23(u) of the code.
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 is 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 portion of the payment, as a sum which is payable for the support of minor children or such husband. * * *
SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(u) ALIMONY, ETC., PAYMENTS.— In the case of a husband described in section 22(k), amounts includible under section 22(k) in the gross income of his wife, payment of which is made within the husband's taxable year. * * *
The petitioner contends that the agreement was made in connection with and incident to a contemplated divorce. The respondent argues that the agreement shows that the intent and purpose of the petitioner and his former wife were to create ‘an unconditional mutual exchange of various marital rights and interests‘; that the agreement was neither conditioned nor contingent upon a decree of divorce; that the obtaining of such decree was not contemplated by the parties; and that hence the agreement was not incident to the divorce.
We have considered the construction and application of section 22(k) recently in Robert Wood Johnson, 10 T.C. 647. See also Tuckie G. Hesse, 7 T.C. 700. The facts in the Johnson case are strikingly similar to those in the case at bar. In 1926 Johnson and his wife separated. At that time he asked her to obtain a divorce and offered to pay her a specified sum for the support and maintenance of herself and of their minor son. She refused. He made further efforts in 1927 and 1928. In the latter year he offered a larger sum on the basis of which negotiations were concluded in 1929. In 1929 he obligated himself in writing to pay $30,000 annually to his wife for the support of herself and their minor son and also established a trust fund to supplement that payment by the calculated revenue of $20,000 per year. The terms were established on the wife's verbal assurance that she would procure a divorce. She did so and, pursuant to his agreement, Johnson paid to her $30,000 in each of the years 1942 and 1943.
In the Johnson case, from the moment of separation in 1926 the petitioner sought a divorce. So in this case the evidence shows that the petitioner desired a divorce for at least five years prior to October 1937, long before the alleged cause of action arose. The petitioner's statements, together with the testimony of his former wife's attorney, show clearly that a divorce proceeding was contemplated at the time of executing the agreement of October 30, 1937. There is no conflict of evidence on this point, as in the Johnson case. In fact, the petitioner refused emphatically to sign the agreement unless the divorce were started. He relied on the statement of his wife's attorney that such action would be taken.
The respondent bases his argument chiefly on the fact that there was no direct reference in the court decree to the agreement, nor did the agreement specifically require the procurement of a divorce. The same situation existed in the Johnson case. There we said:
It is true the written instrument did not mention that it was conditioned upon Elizabeth's bringing an action for divorce. However, both Elizabeth's and petitioner's attorneys believed that if the agreement had been so conditioned it would have been voidable and also would have constituted collusion for divorce under New Jersey law. * * *
So here, the charge of collusion was to be avoided. The prohibition against collusion, as set forth in 17 Am.Jur.Sec. 14, is as follows:
The rule is well established that any agreement, whether between husband and wife or between either and a third person, intended to facilitate or promote the procurement of a divorce, is contrary to public policy and void.
The rule must be borne in mind when we consider the relationship between agreements and divorce proceedings.
Situations arising under the provisions of section 22(k) bid fair to be many and varied. They must be viewed and treated realistically. The section was enacted in order to tax alimony and other similar payments to the divorced wife. We have no doubt that the contractual payments were in the nature of alimony, were duly made by the petitioner, and are properly taxable to Hazel B. Brady.
The delay in filing the libel action in Massachusetts has been adequately explained by the attorney for the petitioner's former wife. The forum was shifted from New York to Massachusetts for undisclosed reasons. However, the divorce itself is the vital factor in our problem, not the jurisdiction in which prior actions may have been begun. The pendency of the New York suit was so unimportant that Hazel's attorney did not know that it had been dismissed. In fact, his own records showed otherwise.
The conduct and statements of the petitioner and counsel for Hazel, the sequence of events, and the significance of the terms of the agreement itself, all lead us to the conclusion that the agreement was executed incident to the divorce granted by the Probate Court of Essex County, Massachusetts, and hence, the payments made thereunder by the petitioner to his former wife are deductible under the provisions of section 23(u).
The facts in Benjamin B. Cox, 10 T.C. 955; Frederick S. Dauwalter, 9 T.C. 580; and Robert L. Daine, 9 T.C. 47, are quite different from those in the case at bar. Therefore, those cases are distinguishable and our decisions therein are not applicable here.
Decision will be entered under Rule 50.