Opinion
Docket No. 43632.
1954-05-11
CLAY W. PREWETT, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
R. E. McGannon, Esq. , for the petitioner. Marvin E. Hagen, Esq. , for the respondent.
The interlocutory and final decrees of divorce granted petitioner's former wife incorporated by reference a property settlement agreement which provided that petitioner pay her $270 a month alimony for a period of 2 years. The payments were to be reduced in event of a material reduction in the petitioner's earning capacity and were to cease upon the remarriage of the wife. Under his employment at the time the agreement was made the petitioner received a salary of $450 a month plus all his living expenses of an undisclosed amount. Subsequently his salary was increased to $500 per month and he was required to bear a portion of his living expenses of an undisclosed sum. Thereupon with the consent of the wife, who did not remarry during the 2-year period, the petitioner reduced his payments to her to $200 a month. In the absence of evidence as to the amounts of his living expenses prior to and after the increase in his salary, held, that petitioner has not shown that there was a material reduction in his earning capacity within the contemplation of the settlement agreement and the divorce decrees. Held, further, that the contingency in the settlement agreement and the decrees as to the wife's remarriage, no remarriage having occurred, did not render petitioner's payments to her deductible under section 23(u) of the Internal Revenue Code. Baker v. Commissioner, 205 F. 2d 369, not followed. R. E. McGannon, Esq., for the petitioner. Marvin E. Hagen, Esq., for the respondent.
The respondent has determined that there is a deficiency in income tax for 1947 in the amount of $744.42. The only issue presented is the correctness of the respondent's action in determining that a payment of $3,240 made by petitioner to his divorced wife in 1947 was not an allowable deduction.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
The petitioner filed his Federal income tax return for 1947 with the collector of internal revenue for the first district of Illinois. This return was filed on the cash receipts and disbursements basis.
The petitioner was married to Frances M. Prewett on November 25, 1931. On October 30, 1946, petitioner and his wife entered into a written agreement, entitled ‘Property Settlement Agreement,’ to adjust their property in contemplation of a divorce. This agreement provided, in part, as follows:
I
That the wife shall receive Two Hundred Seventy ($270.00) Dollars per month alimony for a period of two (2) years commencing upon the date of the Interlocutory Decree.
That in the event she should be married prior to the aforesaid term, the payment of alimony shall cease upon the date of the re-marriage.
It is further understood, that the aforesaid alimony payment is based upon the husband's present earning capacity of Four Hundred Fifty ($450.00) Dollars per month, in the employee [ sic] of the California Maine Corporation of San Francisco, and the Pacific Gas Corporation, and the event that there is a material reduction in his earning capacity, that the aforesaid alimony shall be reduced in accordance with his reduced income.
* * * * * * *
VI
The wife hereby waives, abandons and relinquishes all rights which she has, or which she might hereinafter have, to claim or receive from her husband any separate maintenance, alimony, support, except as hereinbefore stated. The wife further hereby abandons and relinquishes all rights as surviving widow given her by law in any community property or in a separate estate of her husband, and all rights of inheritance of and from the husband, including the right to apply for or to have issued to her, or to her nominee, Letters of Administration upon his estate, and also all family allowance and homestead rights or claims thereto.
At the time the property settlement agreement was entered into the petitioner was employed by the Pacific Gas Corporation as a sales engineer at a salary of $450 per month. The petitioner had lived in California for 25 years prior to being employed by the Pacific Gas Corporation and had purchased a home in North Hollywood, California. He was making payments on a mortgage on the house. Petitioner's job required him to travel continuously over an area comprising 35 States. As a consequence of this traveling, he was reimbursed for his living expenses while he was on the road. The result was that petitioner was receiving a salary of $450 per month plus all of his living expenses.
Shortly after the agreement was signed the petitioner's former wife filed a petition for divorce from the petitioner in the Superior Court of the State of California in and for the City and County of Los Angeles. On December 10, 1946, she was granted an interlocutory decree of divorce and the aforementioned property settlement agreement of October 30, 1946, was incorporated in the decree by reference. On December 15, 1947, a final divorce was granted to her by the same court and the provisions of the property settlement agreement were also incorporated in the final decree by reference.
In the latter part of 1947 petitioner was required by his employer to maintain a residence in Chicago. Petitioner was not paid living expenses in Chicago but was reimbursed with respect to such expenses at such times as he was working out of Chicago. Upon his transfer he also received a $50 raise in his monthly salary. Petitioner did not travel as frequently after his transfer to Chicago. As a result of having to maintain a home in Chicago, petitioner's earnings after payment of living expenses were less than they were when he entered into the property settlement agreement. He consulted his attorney in Los Angeles and was advised to reduce the payments to his former wife by $70 per month. Beginning early in 1948 and with her consent, he decreased his payments from $270 to $200 per month. Petitioner discontinued making payments after the twenty-second payment had been made.
During the calandar year 1947 petitioner paid to his former wife, Frances M. Prewett, $270 per month, or a total sum of $3,240, pursuant to the property settlement agreement and the interlocutory judgment of divorce.
The petitioner's former wife had not remarried at the end of 1947.
In his income tax return for 1947 petitioner claimed a deduction for alimony payments in the amount of $3,240. In the notice of deficiency respondent disallowed the claimed deduction on the ground that the payments in controversy constituted nondeductible installment payments of alimony.
In determining the deficiency the respondent allowed petitioner a standard deduction of $500. The parties have stipulated that in lieu of the standard deduction allowed by respondent petitioner is entitled to deductions for traveling expenses, interest, and contributions in the total amount of $500.
OPINION.
WITHEY, Judge:
The petitioner seeks to deduct under section 23(u) of the Internal Revenue Code the $270 monthly payments paid to his former wife during 1947. The issue is whether the payments were periodic payments, as the petitioner contends, or were installment payments discharging a part of an obligation the principal sum of which is, in terms of money or property, specified in the decree of divorce or an instrument incident thereto within the meaning of section 22(k) of the Code, as the respondent contends.
In support of his position the petitioner first contends that under the terms of the property settlement agreement and the decrees of divorce incorporating it therein, the obligation to make alimony payments was not specified in a principal sum because if his earning capacity should be reduced, the alimony payments would be reduced accordingly.
The respondent maintains that the payments were installment payments on a principal sum, the principal sum being determined by simple arithmetic, $270 times 24, or $6,480, to be paid within a period of less than 10 years from the date of the divorce decree.
The payments in question were alimony payments; they were received by a former wife who was divorced; they were in discharge of a legal obligation imposed on the husband under the decrees of divorce; and were paid subsequent to the divorce.
The theory of petitioner's claim as to reduction in earning capacity is that the ‘earning capacity’ referred to in the property settlement between him and his wife, and by reference thereto in the divorce decrees, refers to and means net earnings after payment by the husband of his unreimbursed living expenses. His testimony in this case, given its most advantageous meaning in favor of the petitioner, is, we think, insufficient foundation upon which to conclude that the petitioner is correct in his claim here. Basing his claim, as he does, upon the proposition above mentioned, he shows us but the following: That his salary in Hollywood, California, was $450 per month; that his salary after his transfer to Chicago was $500 per month; that all of his living expenses in North Hollywood were reimbursed to him; that in Chicago he did very little work away from that city and, therefore, was forced to maintain living quarters there and to pay the major proportion of his living expenses; and that with her consent he reduced the amount of the alimony payments to his former wife. He concludes that the net result of a comparison of net income to him between the 2 localities amounts to a lessened net income after payment of unreimbursed living expenses from and after his transfer to Chicago. Upon the basis of this conclusion on the part of petitioner, he asks us to find that conclusion as a fact. This we are unable to do. The burden of proof is upon petitioner. He has failed utterly to furnish as sufficient proof from which we may determine whether or not the conclusion reached by him is correct. His failure in this respect lies in the fact that although he bases his contention heavily upon his comparative unreimbursed living expenses in North Hollywood and Chicago, he has failed to indicate what those expenses consisted of and the amount of the same. In effect, therefore, he asks that we make our determination of fact in that respect by completely accepting and adopting the conclusion of petitioner and his former wife that his net income was reduced after his transfer to Chicago. We, of course, are unable to adopt that conclusion. We indicated in J. B. Steinel, 10 T. C. 409, that ‘the word ‘obligation’ is used in section 22(k) in its general sense and includes obligations subject to contingencies where those contingencies have not arisen and have not avoided the obligation during the taxable year.' See also Estate of Frank P. Orsatti, 12 T. C. 188, and James M. Fidler, 20 T. C. 1081. It is true these cases indicate that where a contingency has arisen which, under the terms of the agreement or decree, requires a reduction in payments which in turn has the effect of eliminating from those documents any fixed or determinable amount of alimony, the payments thereby become periodic payments deductible by the payor, but proof of the happening of such a contingency is nevertheless necessary in order for petitioner to here prevail. The mere showing of a reduction in the payments called for by the decrees and settlement agreement is insufficient unless we are also shown that that reduction was the result of the occurrence of a contingency referred to in either the decrees or settlement agreement. We are shown here that the payments were reduced by consent of petitioner's former wife, but for failure of petitioner to indicate to us the compractive cost of his unreimbursed living expenses referred to above we are not shown that the agreed-to reduction in payments was based upon any contingency referred to in the settlement agreement or decrees.
As an alternative contention, the petitioner urges that his obligation to make alimony payments was not specified in a principal sum because under the settlement agreement and decrees the alimony payments would terminate upon the remarriage of his former wife. In support of his position he relies upon Baker v. Commissioner, 205 F. 2d 369. There the Court of Appeals for the Second Circuit reversed our holding at 17 T. C. 1610 and held that the contingency of remarriage rendered impossible the ascertainment of a principal sum specified in the decree, and as a consequence concluded that the payments were periodic, rather than installment, and were deductible. The petitioner recognizes that in James M. Fidler, supra, we considered the holding of the Court of Appeals in the Baker case but declined to follow it. However, he requests that we revoke our action there and follow the decision of the Court of Appeals. After carefully considering the matter we are of the opinion that the position we took in the Fidler case is proper and we find nothing in the instant case to warrant a departure therefrom. The contention of the petitioner is denied.
Decision will be entered for the respondent.