Opinion
Docket No. 13191.
1948-04-30
ROLAND KEITH YOUNG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
J. Everett Blum, Esq., for the petitioner. Earl C. Crouter, Esq., for the respondent.
Alimony payments were allowed to the former wife of the petitioner for a fixed period by a divorce decree, but the amount of each payment was not fixed and the total amount to be paid was not fixed. The amounts of the monthly payments which the husband was to pay were dependent upon his future annual net income, and the divorce decree set forth only the method for computing the amounts of the future payments and the maximum amount of monthly payments. Held, that the alimony payments were not ‘installment payments,‘ but were ‘periodic payments‘ under section 22(k), Internal Revenue Code, and, therefore, were deductible by petitioner under section 23(u). J. Everett Blum, Esq., for the petitioner. Earl C. Crouter, Esq., for the respondent.
Respondent determined a deficiency in petitioner's income and victory tax for 1943 in the amount of $2,233.02. Petitioner does not contest certain adjustments made by the respondent. The only question is whether respondent erred in disallowing deductions for 1942 and 1943 which petitioner claims under section 23(u) of the Internal Revenue Code, as added by section 120(a) of the 1942 Revenue Act.
Petitioner filed his returns for the years in question with the collector for the sixth district of California.
This proceeding was submitted under a stipulation of facts and joint exhibits.
FINDINGS OF FACT.
The facts which have been stipulated are found as stipulated. The stipulation and all the exhibits are incorporated herein by this reference.
Petitioner's residence is in Beverly Hills, California.
Prior to divorce in California in 1941, petitioner was married to Marjorie Kummer Young. They became separated, and in February 1940 they decided to get a divorce.
On February 20, 1940, petitioner and Marjorie K. Young entered into a written agreement under which they settled all of the property rights between them, and all claims in respect of property and support. This agreement provided, inter alia, that petitioner would make certain payments to Marjorie Young, directly, and to a trustee for her benefit, to insure her future support.
On October 21, 1940, an interlocutory judgment of divorce was granted to Marjorie Young in the Superior Court in Los Angeles County, and on October 22, 1941, a final judgment of divorce was granted to her in the same court.
The final judgment of divorce ordered petition to pay for the support and maintenance of Marjorie Young certain sums of money as specified in the judgment. The judgment incorporated and adopted the provisions for payments by petitioner for his former wife's support which were part of the written agreement of February 20, 1940.
Under the agreement of February 20, 1940, petitioner paid $20,000 to a trustee under a trust for the benefit of Marjorie Young to provide for her future support. He made further monthly payments under the agreement, part to the trustee and part to Marjorie Young, direct. Under the divorce decree, he continued to make monthly payments, part to Marjorie Young and part to the trustee, as he was directed to do under the divorce decree.
Petitioner made the total monthly payments for the support of Marjorie Young which he was ordered to make by the divorce decree.
Under the divorce decree, petitioner was required to make total monthly payments for Marjorie Young's support for the limited period of fifty months; i.e., for November and December of 1940, and for the twelve months of the four succeeding years, 1941, 1942, 1943, and 1944. Thereafter, no further payments were required. The amounts to be paid during a year depended upon the amount of the net income of petitioner for the preceding year. If the net income of petitioner in a preceding year amounted to $50,000, he was required to pay for support and maintenance $12,000, in monthly payments of $1,000. If, in any one or more of the four calendar years beginning with the year 1940, his net income should fall below $50,000, the payments to be made by him in the next succeeding year were to be that portion of $12,000 which would be represented ‘by the fraction thereof of which the net income for the preceding year is the numerator and the sum of $50,000 is the denominator.‘ The amount to be paid for the last year, 1944, was to be determined under a particular provision which is set forth in the margin.
The obligation of petitioner to make the payments required by the divorce decree was to terminate in the event of the death of either party.
Decision will be entered under Rule 50. If in the calendar year 1944 the net income of the Second Party falls below Fifty Thousand Dollars ($50,000,000), and if the Second Party shall have paid for that year the moneys required hereby to be paid for such year, then the Trustee, out of the corpus of the trust, shall reimburse the Second Party in a sum which shall be the difference between the amount paid for that year and an amount which is that portion of Twelve Thousand Dollars ($12,000.00) represented by the fraction thereof of which the net income for that year is the numerator and Fifty Thousand Dollars ($50,000.00) is the denominator.
As stated above, petitioner, under the divorce decree, was to pay certain amounts for his former wife's support, and, whatever the amount should be, part was to be paid to the trustee of the trust which was established in 1940 with $20,000 and part was to be paid directly to Marjorie. The establishment of the trust and payments to the trustee constituted a plan to insure the future support of the wife, within certain limitations. Under this plan, Marjorie would receive a decreasing proportionate part of each monthly payment, each year, and the trustee would receive an increasing proportionate amount.
During the years 1940 through 1944 petitioner was engaged in the motion picture and radio broadcasting business as a free-lance actor; that is, as an action without contract to any one employer for any fixed term of years. During the years 1941, 1942, 1943, and 1944 the amount of his net income was less than $50,000, and it fluctuated from a high amount of about $48,000 in 1941 to a low point of about $2,600 in 1942, as is shown in a subsequent schedule. The total amounts paid for each of these years for the support of Marjorie Young varied correspondingly according to the method for determining the payments for each year under the divorce decree. Petitioner made payments as shown in the following schedule, which shows also the net income of petitioner:
+-------------------------------------+ ¦ ¦Petitioner's¦Total sum paid ¦ +-----+------------+------------------¦ ¦ ¦net income ¦under divorce ¦ +-----+------------+------------------¦ ¦ ¦ ¦decree ¦ +-----+------------+------------------¦ ¦1940 ¦(*) ¦(2 mos.) $2,000.00¦ +-----+------------+------------------¦ ¦1941 ¦$48,167.11 ¦* 12,000.00 ¦ +-----+------------+------------------¦ ¦1942 ¦2,653.32 ¦10,608.96 ¦ +-----+------------+------------------¦ ¦1943 ¦40,313.85 ¦1,587.96 ¦ +-----+------------+------------------¦ ¦1944 ¦3,554.68 ¦2 9,675.36 ¦ +-----+------------+------------------¦ ¦Total¦ ¦2 35,872.28 ¦ +-------------------------------------+
FN* The record does not show the 1940 net income, but it appears to have been at least $50,000, according to total payments made for 1941.FN2. The total sum of $9,675.36 paid for 1944 was computed on the basis of the net income of petitioner for 1943. However, because petitioner's 1944 net income was less than $50,000. he was entitled to be reimbursed a fractional amount according to the special provision which is set forth in footnote No. 1, supra. Computed under that provision, petitioner was entitled to reimbursement of $8,822.24, on account, for the 1944 payments, as overpayment. The parties have so stipulated. Therefore, the 1944 payment actually was only $853.12, after the adjustment; and the total payments were $27,050.04.
During the period of fifty months, in accordance with the terms of the decree, petitioner paid to his former wife the total amount of $35,872.28, exclusive of any adjustment on account of the 1944 payments. After the adjustment of the 1944 payments, the total net amount which was paid by petitioner was $27,050.04.
Neither the decree of divorce nor the terms of the agreement of February 20, 1940, which were incorporated in and adopted under the decree, obligated petitioner to pay to his former wife any total, fixed sum over the fifty-month period. Rather, the payments were left indefinite in amount, excepting as to the maximum amount for a year, dependent upon the annual earnings of the petitioner; and his future annual earnings could not be determined as of the date of final decree, October 22, 1941. The divorce decree provided only a method for computing the amounts to be paid by petitioner in each one of the future years, and the maximum to be paid in any year and for any month if petitioner's net income should be $50,000.
The payments which petitioner made pursuant to the divorce decree were alimony payments, and they were periodic payments.
Petitioner deducted $10,608.96 on his Federal income tax return for 1942 and $1,587.96 on his return for 1943, as deductions for alimony payments under section 23(u) of the Internal Revenue Code. Respondent disallowed the deductions in each year on the ground that ‘such amounts do not constitute proper deductions within the meaning of section 22(k) of the Internal Revenue Code.‘
OPINION.
HARRON, Judge:
The question whether petitioner is entitled to deduction for alimony payments under section 23(u) of the Internal Revenue Code requires consideration of the provisions of section 22(k). If the payments which are involved here are includible in the gross income of the former wife of petitioner under section 22(k), petitioner is entitled to deductions for the payments under section 23(u).
The question to be decided comes under section 22(k), and it is whether the payments which petitioner made in the taxable years 1942 and 1943 were ‘periodic payments,‘ as petitioner contends, or ‘installment payments discharging a part of an obligation the principal sum of which is, in terms of money or property, specified in the decree,‘ as respondent contends. The dispute between the parties to this proceeding involves a portion of section 22(k), which is set forth below.
Section 22(k) makes ‘periodic payments‘ received from a husband subsequent to a decree of divorce, in discharge of his legal obligation under the decree, includible in the wife's gross income, but certain installment payments are not to be considered ‘periodic payments‘ within the meaning of that term, as used, if they are in discharge of the husband's obligation to pay a principal sum which is specified in the decree. The payments of a husband to a former wife must be, inter alia, ‘period payments‘ under section 22(k) in order to be deductible from his gross income under section 23(u).
(k) ALIMONY, ETC., INCOME.— In the case of a wife who is divorced * * * from her husband under a decree of divorce * * * , periodic payments * * * received subsequent to such decree in discharge of * * * a legal obligation which, because of the marital * * * relationship is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce * * * shall be includible in the gross income of such wife * * * . 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 payments 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 * * * . [Italics added.]
Petitioner contends that the divorce decree, by its terms, did not obligate petitioner to pay his former wife a definite sum of money over the prescribed period of fifty months. He points out that it would not have been possible at the time the decree was entered to compute a lump sum or total sum from the provisions in the decree relating to the future payments because the future payments were dependent upon his future net income, and neither the future gross nor the future net income was fixed. He was not working under any contract when the decree was entered; his gross income was not fixed in any respect.
Respondent argues that the payments here involved were installment payments of a lump sum, rather than periodic payments, and that they were not alimony payments.
The payments in question were alimony payments. There is no doubt whatsoever on this point; the divorce decree designates them as payments ‘for support and maintenance of‘ Marjorie K. Young.
The payments come within section 22(k): (a) They were received by a wife who was divorced under a decree of divorce; (b) they were in discharge of a legal obligation which, because of the marital relation, was imposed upon the husband under such decree (and was incurred by him under a written agreement incident to the divorce); and (c) they were received subsequent to the divorce.
It is our conclusion that the payments were periodic payments as that term is used in section 22(k). We find from all of the evidence that petitioner's contentions are correct. The divorce decree allowed to the former wife periodic (monthly) payments for a fixed period without designation of the total amount to be paid. Such payments are considered to be ‘periodical payments‘ as distinguished from ‘a lump sum payable in installments.‘ See Nelson, Divorce and Annulment (2d Ed.), sec. 14.23, vol. 2, pp. 30, 31.
The petitioner desired that the future support of his then wife should be insured, within certain limitations, and, to that end, he obtained her agreement that she would create a trust fund, making herself the beneficiary, into which he would pay $20,000 upon the creation of the trust, and to which he would make monthly payments thereafter, the amounts of which were not fixed but were made dependent upon the amount of his future net income. All of this was agreed to prior to the divorce, under the agreement of February 20, 1940. Their plan was that petitioner would pay some sum, not fixed, monthly to Marjorie Young, and some other sum, not fixed, to her trustee. They agreed that the maximum total of the monthly payments would be $1,000. This plan of monthly payments was adopted by the court and set forth in the divorce decree. There were two payees— Marjorie Young and the trustee; and in each year the respective proportion to be paid to each payee of the total monthly payment was to change; i.e., Marjorie Young was to receive directly a decreasing proportionate part of each monthly payment, and the trustee was to receive an increasing proportionate amount. Thus there were three factors to be considered plus the factor of changes in the future annual net income of petitioner. The provisions in the divorce decree did no more than prescribe a maximum total monthly payment, based upon an annual net income of $50,000, and a method for computing monthly payments on the basis of any annual net income below $50,000. These provisions did not fix any total sum as a fixed sum to be paid over the fixed period of fifty months. Therefore, the payments in question were not payments ‘discharging part of an obligation the principal sum of which is, in terms of money or property, specified in the decree.‘ It follows that the payments were not ‘installment payments,‘ but were ‘periodic payments‘ under section 22(k).
Petitioner is entitled to deductions under section 23(u) for the periodic payments which he made in 1942 and 1943.
The facts distinguish this proceeding from J. B. Steinel, 10 T.C. 409, where it was held that alimony payments were ‘installment payments‘ under section 22(k), because the husband ‘had an obligation, in the ordinary sense of that word, the principal sum of which was specified in the decree of divorce.‘