Opinion
Docket No. 67540.
1959-09-9
JERRY LESTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Louis Mandel, Esq., and Leonard J. Lefkort, Esq., for the petitioner. John A. Dunkel, Esq., for the respondent.
Louis Mandel, Esq., and Leonard J. Lefkort, Esq., for the petitioner. John A. Dunkel, Esq., for the respondent.
ALIMONY— DEDUCTION— CHILD SUPPORT— SECS. 23(u) AND 22(k).— Periodic payments made by a divorced husband to his wife not only for her support and maintenance but specifically to include support and maintenance of their three minor children, held not deductible by the husband to the extent that the agreement and decree indicated that they were for the support and maintenance of the minor children.
The Commissioner determined deficiencies in income tax of $7,572.39 for 1951 and $13,761.72 for 1952. The sole issue is whether the Commissioner was correct in determining that a part of payments made by the petitioner to his former wife was for the support of their children and not deductible under section 23(u) of the Internal Revenue Code of 1939.
FINDINGS OF FACT.
The petitioner, herein called Jerry, filed his income tax returns for 1951 and 1952 with the district director of internal revenue, Upper Manhattan, New York.
Jerry and his wife, Ardell, entered into a property settlement agreement on April 16, 1951. The agreement recited that they were married on August 24, 1934, in Los Angeles, California; they had three children, Judy age 13, Joan age 11, and Jay age 9; and Jerry and Ardell were separated and living apart.
Paragraph (d) of the agreement was as follows:
(d) The parties desire by this agreement to settle for all times their respective property rights, interests, duties and obligations with respect to each other, and to arrange by agreement for the making of periodic payments to the wife as and for the maintenance and support for her and the aforesaid children of the parties, in discharge of the husband's legal obligations arising out of, or in connection with the marital and family relationship between the parties, whether or not a divorce or decree of separation may hereafter be granted in favor of either of the parties hereto against the other.
The agreement recited that a suit for separate maintenance by Ardell was pending against Jerry in the Superior Court of the State of California.
It was agreed ‘that the welfare and best interests of the minor children of the parties hereto are of paramount concern and interest to the parties,‘ both the husband and wife were fit and proper persons to ‘have the care, custody and control of the children’ but such care, custody, and control would be given to the wife, subject to the petitioner's reasonable right of visitation and the right to have the children stay with him for 30 days during the summer vacation.
Paragraph 11 of the agreement is, in part, as follows:
11. The husband agrees to pay the wife for the support and maintenance of herself and the children of the parties, namely, JUDY LESTER, JOAN LESTER and JAY LESTER, the following amounts commencing with the effective date of this agreement (as said term is hereinafter defined in subdivision (j) of the Article 11);
(a) For the period ending December 31, 1951, a sum equal to 50% of the husband's gross income commencing with the effective date of this agreement, but not in excess of a total sum of $50,000.
(b) For the calendar year immediately following the period set forth in subdivision (a) hereof, a sum equal to 25% of the husband's annual gross income during said period of one year, but not in excess of a total sum of $45,000.
(c) For the calendar year immediately following the period set forth in subdivision (b) hereof, a sum equal to 25% of the husband's annual gross income during said period of one year, but not in excess of a total sum of $45,000.
(d) For each year immediately following the period set forth in subdivision (c) hereof, a sum equal to 20% of the husband's annual gross income during each such year, but not in excess of that sum each year which, after the payment of all income taxes assessable upon the wife with respect to the amounts thus paid to the wife shall equal $15,600.
(f) In addition to the payments above provided the husband agrees to pay for any extraordinary and unusual medical and dental expenses and fees incurred with respect to any of the children of the parties so long as they are minors and are not emancipated.
(i) All payments herein specified shall cease upon the death of the husband or the wife or upon the remarriage of the wife, whichever shall first occur. It is expressly agreed that the wife shall not have any claim against the estate of the husband, should he predecease her, for any sums payable hereunder, except such sums as may have been due and payable to her pursuant to the terms hereof prior to his death. In the event that any of the children of the parties hereto shall marry, become emancipated, or die, then the payments herein specified shall on the happening of each such event be reduced in a sum equal to one-sixth of the payments which would thereafter otherwise accrue and be payable in accordance with the terms and provisions hereof.
A California court on April 27, 1951, entered an interlocutory judgment of divorce between Jerry and Ardell, which ratified, confirmed, and approved the agreement of April 16, 1951, and set forth the substance of the provisions of the above-quoted paragraph 11. It ordered the petitioner to commence making the payments provided in the agreement 1 day after the entry of the decree. It also provided that the petitioner and Ardell were to remain husband and wife until the entry of the final judgment of divorce 1 year after the entry of the interlocutory judgment. A final judgment of divorce was entered November 5, 1952, in the action in the California court. The petitioner made periodic payments totaling $23,000 in 1951 and $39,500 in 1952, pursuant to the agreement of April 16, 1951. Ardell resided in California during 1951 and 1952.
Jerry deducted the full amounts of the payments for each year. The Commissioner in determining the deficiency for each year disallowed one-half of each deduction and explained:
It is held that $11,500.00 of the $23,000.00 claimed as alimony payments for the taxable year 1951 and $19,750.00 of the $39,500.00 claimed as alimony payments for the taxable year 1952 do not constitute deductions allowable under the provisions of section 23(u) of the 1939 Internal Revenue Code and the corresponding sections of the regulations.
OPINION.
MURDOCK, Judge:
The issue for decision is whether Jerry is entitled to a deduction under section 23(u) but the answer must be sought in section 22(k) of the Internal Revenue Code of 1939. Section 23(u), as applicable to the taxable years 1951 and 1952, provides that a husband may deduct amounts which are includible in the income of his wife under section 22(k) if paid within his taxable year. Section 22(k), as applicable to the taxable years, provides insofar as material hereto, that a wife who is divorced from her husband under a decree of divorce shall include in her gross income periodic payments received subsequent to such decree 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. It further provides that the 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 for the support of minor children of such husband.’
The intention of Congress in enacting these provisions was to allow the husband to deduct alimony payments and to require the wife to report alimony payments as income. Congress did not intend to allow the husband deductions for amounts supplied by him to be expended in support of his minor children. Section 24(a)(1) expressly provides that no deduction shall be allowed in any case in respect of ‘(p)ersonal, living, or family expenses, except extraordinary medical expenses deductible under section 23(x).’ The obligation to support his minor children is imposed upon the husband by law and cannot be escaped by him through any agreement with his wife, whether incident to divorce or otherwise. However, Congress provided that the part of any periodic payment made by a husband to the wife which would not be taxable to the wife would only be such ‘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 for the support of minor children of such husband.’ If it is clear from the terms of the decree or written instrument that some part of the total payments to the wife is intended to be used for the support of the children, then it seems only proper to examine the instrument as a whole in an effort to determine whether it can be fairly said that an amount of money or a portion of the payment is fixed therein as a sum which is payable for the support of the minor children.
Payments made by a husband to his divorced wife, to the extent that they are to be used to discharge his obligation to support their minor children, do not represent earnings of the wife or profit of any kind to her and are not her income in any true sense. The Tax Court, with these thoughts in mind, has felt that payments, made by the husband to the mother of his children, which are obviously intended to include both alimony for the wife and support for the minor child or children should not be regarded as entirely alimony for the purpose of section 22(k), if the terms of the agreement or decree contain a reasonable indication of how the total payment is to be divided. Such an intended division may be indicated by the amount or portion of the total payment which is to be discontinued when the obligation to support a minor terminates. The Tax Court has endeavored, in prior opinions, to interpret section 22(k) in accordance with the intention of Congress not to tax as income to the wife funds supplied by the husband to be used by the wife in fulfilling his legal obligation to support their minor children. Robert W. Budd, 7 T.C. 413, affd. 177 F.2d 198 (C.A. 6); Warren Leslie, Jr., 10 T.C. 807; George R. Joslyn, 23 T.C. 126, affirmed in part and reversed in part 230 F.2d 871 (C.A. 7); Mark B. Deitsch, 26 T.C. 751, reversed on facts 249 F.2d 534 (C.A. 6); Truman W. Morsman, 27 T.C. 520; Russell W. Boettiger, 31 T.C. 477; Arthur G. B. Metcalf, 31 T.C. 596, on appeal; Mandel v. Commissioner, 185 F.2d 50 (C.A. 7), affirming a Memorandum Opinion of this Court.
Here it is clearly indicated in the agreement of the parties and in the decree that a part of the payments from this husband to this wife was intended to be used by her for the support of their minor children. The agreement of April 16, 1951, sets forth the intention of the parties that the periodic payments to the wife are ‘for the maintenance and support of her and the aforesaid children of the parties, in discharge of the husband's legal obligations arising out of, or in connection with the marital and family relationship between the parties.’ It also states ‘that the welfare and best interests of the minor children of the parties hereto’ are of paramount concern and interest to the parties. Ardell did not have unrestricted use of the entire amount of the payments which she received from Jerry. They were not all available for her own use and benefit. She could be held accountable through court action for failure to use a proper portion of the funds received in each year for the adequate support of the minor children. The agreement and the decree must be examined to determine whether any sum or portion of the whole was fixed therein for the support of the minor children. The Commissioner in his determination has held that one-sixth of the payments received in each year was fixed by the agreement and the decree for the support of each minor child.
Paragraph 11 of the agreement begins with these words: ‘The husband agrees to pay the wife for the support and maintenance of herself and the children of the parties, namely JUDY LESTER, JOAN LESTER and JAY LESTER, the following amounts * * * .’ Another provision of that paragraph is: ‘In addition to the payments above provided the husband agrees to pay for extraordinary and unusual medical and dental expenses and fees incurred with respect to any of the children of the parties so long as they are minors and are not emancipated.’ The agreement does not state specifically that so many dollars or a certain portion of each periodic payment was for the support and maintenance of one or more of the three minor children. However, section 11 contains this provision: ‘In the event that any of the children of the parties hereto shall marry, become emancipated, or die, then the payments herein specified shall on the happening of each such event be reduced in a sum equal to one-sixth of the payments which would thereafter otherwise accrue and be payable in accordance with the terms and provisions hereof.’ A reasonable inference may fairly be drawn from reading this instrument as a whole that at least one-sixth of each payment was intended and fixed by the parties in the agreement to be used in the discharge of Jerry's obligation to support one of his minor children during its minority. That is in accordance with the Commissioner's determination which Jerry had the burden to disprove. He did not testify. It is a fair and just result between the husband and wife, and the Court feels that it is the proper result under the law and facts of this case.
The Court of Appeals for the Second Circuit in the case of Weil v. Commissioner, 240 F.2d 584, reversing the Tax Court, a case strongly relied upon by the petitioner, said:
Accordingly, if sums are to be considered ‘payable for the support of minor children,‘ their use must be restricted to that purpose, and the wife must have no independent beneficial interest therein. This cannot be the case if the terms of the instrument contemplate a continuance of the payments to the wife after she has ceased to support the children. * * *
Payments to the wife in that case were to continue without reduction, even though the necessity to support the children terminated, unless the wife remarried. It seems obvious from the opinion that the Court of Appeals placed considerable reliance on those provisions. The Court of Appeals for the Ninth Circuit in Eisinger v. Commissioner, 250 F.2d 303, affirming a Tax Court Memorandum Opinion, said of the Weil case:
We agree with it, in its application of law to the facts of that case, but do not find the legal position there taken applicable herein, nor do we agree with the generality of some of its language.
One of the distinctions made in the Eisinger case between that case and the Weil case was ‘that payments to the wife should not be revised, even though one or both children died, or became of age, or because either failed to longer live with their mother,‘ whereas in the Eisinger case the payments to the wife were to be reduced by a specified amount as each child reached majority or died. The same distinction exists between the present case and the Weil case, the present case being like the Eisinger case rather than like the Weil case. Ardell lived in California during 1951 and 1952, and, if she were contesting the inclusion of these payments in her income, the Tax Court would undoubtedly hold that one-half of the payments should not be included in her income. The Court of Appeals for the Ninth Circuit would apparently affirm. Cf. Eisinger v. Commissioner, supra. See also the opinion of the Court of Appeals for the Sixth Circuit in Robert W. Budd, supra. Henrietta S. Seltzer, 22 T.C. 203, is also distinguishable since there the record does not show that the payments may not continue to the wife after the obligation to support minor children terminates. The entire payments which Jerry was making to Ardell were not to be continued uninterrupted in case support of the minor children became no longer necessary, but, on the contrary, were to be reduced by one-sixth for each child. Each case must be decided on its own facts and, on the facts here presented, it is not clear that the Court of Appeals for the Second Circuit, to which this case would probably go on appeal, might not decide, as we do, to sustain the determination of the Commissioner.
Decision will be entered for the Commissioner.