Hogg v. Commissioner

Thomas E. Hogg, Petitioner, v. Commissioner of Internal Revenue, Respondent Hogg v. Commissioner Docket No. 17903 United States Tax Court 13 T.C. 361; 1949 U.S. Tax Ct. LEXIS 86; September 26, 1949, Promulgated *86 Decision will be entered under Rule 50. During the years of separation the taxpayer paid $ 1,200 monthly for his wife's support and pursuant to an agreement made preliminary to divorce he continued to pay $ 1,200 monthly (plus some extra for a few months) "to provide for the current annual support" of the wife; he transferred to her a furnished home, cash, and other property, and agreed to pay $ 10,000 to her estate and make contingent provision for her mother, if surviving. The wife gave the taxpayer a deed to her interest in all property held by or for him. The record does not conclusively establish whether there was or was not community property. In a petition for divorce the wife alleged that the taxpayer and she had agreed upon a property settlement, and the decree made no reference to property or to support, which latter is not imposed by Texas law on a divorced husband. The monthly payments made under the agreement, held, deductible under section 23 (u), Internal Revenue Code, because incurred under a written instrument made in discharge of a preceding legal obligation of support, within the meaning of section 22 (k). Tuckie G. Hesse, 7 T. C. 700,*87 followed. Milton H. West, Jr., Esq., and Harry R. Jones, Esq., for the petitioner. Allen P. Aiken, Esq., for the respondent. Johnson, Judge. JOHNSON *361 The Commissioner determined deficiencies of $ 11,516.79 and $ 10,882.33 in petitioner's income tax for 1943 and 1944, respectively, by disallowing the deduction of amounts paid monthly to petitioner's wife under an agreement made incident to divorce. Petitioner contends that the obligation was incurred because of the marital relationship and in lieu of alimony or support within the meaning of section 22 (k), Internal Revenue Code, and is hence deductible under section 23 (u). Respondent argues that it was incurred in an agreement for the division of property, and is hence not deductible. FINDINGS OF FACT. Petitioner, a resident of Houston, Texas, filed his income tax returns*88 for 1942, 1943, and 1944 with the collector of internal revenue for the first district of Texas. He is the son of James S. Hogg, who died about 1905 and the brother of W. C. Hogg, Mike Hogg, and Ima Hogg. W. C. Hogg died in 1930; Mike Hogg in 1941. The four children inherited from the father certain tracts of land at West Columbia, Texas, and, except for a few months' employment petitioner has lived on his share of the income from this inheritance and *362 its increment. Prior to 1918 the small amount of income was supplemented by loans from W. C. Hogg, who advanced him an aggregate of about $ 44,000. In 1918 oil in large quantities was struck on the Hogg lands at West Columbia, and on July 1, 1920, the four heirs made an agreement, contributing their one-fourth interests in the property to a partnership to be conducted under the name of Hogg Brothers by W. C. and Mike Hogg as "active partners." The active partners were expressly authorized to expand activities into general investments at their discretion. In fact, W. C. Hogg alone acted as manager. Petitioner never had any voice in the business. He and his sister gave W. C. and Mike Hogg general powers of attorney to *89 act for them "in respect to the individual property," and all agreed not to make any investments, engage in any outside business (except as an employee), or speculate in the market without the consent of the active partners. Any differences between the four were to be settled by the majority, and provision was made "for monthly advances to the respective partners for living expenses" such as would provide "reasonable comforts of life." Under W. C. Hogg's management very large profits were realized and investments were made in other oil properties, real estate, securities, and business undertakings. When W. C. Hogg died on September 12, 1930, the partnership books indicated that one-fourth of the income from the inherited lands had aggregated $ 2,320,727.91 gross and $ 1,922,212.25 net; from partnership investments, $ 204,321.82 gross and $ 39,730.76 net. Petitioner had withdrawn a total of $ 830,902.60 and $ 1,131,040.41 remained to his credit. Of this remainder, he immediately contributed assets of $ 239,750 to a new partnership with his surviving brother and sister, styled Mike Hogg Agent, and liquidation of the old partnership was begun, but it was not finally completed until*90 June 30, 1938. During this period the old partnership received income, but made no investments. By his contribution to Mike Hogg Agent petitioner acquired in that partnership a three-twelfths interest. Mike Hogg was made the active manager to conduct its business "along the lines of those heretofore engaged in by the old partnership," and the agreement contained substantially the same provisions affecting the partners' relations, including general powers of attorney for Mike Hogg to act for the other two. Between September 12, 1930, and June 30, 1938, one-fourth of income from the inherited lands was $ 227,358.06 gross and $ 138,536.94 net; from other properties acquired, $ 79,022.18 gross and a deficit of $ 12,805.27, leaving a total net of $ 125,731.67 from all sources. Petitioner's withdrawals aggregated $ 219,061.58 of income and $ 251,736.97 of assets, and on final liquidation of Hogg Brothers his capital account was $ 158,407.06. The partnerships commingled funds received from various sources, *363 but kept separate accounting records for their properties. To his income tax return for 1938 petitioner attached many pages containing a detailed schedule of the liquidation*91 of the assets of Hogg Brothers apart from those which had been immediately transferred to the partnership of Mike Hogg Agent. On this schedule he disclosed the receipt of assets of a value of $ 1,047,041.39 as his share. These assets consisted principally of notes receivable, $ 452,540.52; unlisted stocks, $ 242,769.72, and accrued interest receivable, $ 234,277.83, together with lesser but substantial amounts of oil royalties, real estate, and cash. None of these assets was contributed to Mike Hogg Agent. On July 10, 1912, petitioner married Marie Willett. Marital difficulties began in 1934, a series of temporary separations ensued, and for his wife's support petitioner began to make deposits to her account. During 1935 and 1936 he deposited $ 1,000 a month, and thereafter $ 1,200 a month until May 1, 1939. On June 18, 1938, petitioner and his wife permanently separated and through attorneys began negotiations with a view toward divorce. From the summer of 1938 until April 1939 the attorneys held twelve or fifteen conferences, at some of which petitioner's wife was present, but not he. These conferences resulted in an agreement that upon divorce petitioner would transfer *92 to his wife the home, its furnishings, two automobiles, a bank account, $ 5,000 cash, repay a loan of $ 2,300 from her, and make specified monthly payments to her and to her mother, if surviving her, for life. Petitioner's property consisted almost entirely of his interest in the inherited oil lands and other income-producing assets held and operated by the successive partnerships. In conducting the negotiations preliminary to divorce, petitioner's counsel had a schedule prepared by an accountant from the partnerships' books. This schedule tended to show that petitioner's only income from community property was the $ 39,730.76 net income from assets acquired by Hogg Brothers and the deficit of $ 12,805.27 from assets acquired by Mike Hogg Agent. In the course of negotiations the wife's counsel failed to question the computation, but the settlement agreed upon was based on the maximum monthly amounts that petitioner would consent to pay. On April 5, 1939, and after the agreement was reached, the wife filed a petition for divorce in the District Court of Bexar County, Texas, alleging that she and petitioner had "agreed upon a settlement of their property rights." No alimony or support*93 was asked, and in granting the divorce by decree entered May 15, 1939, the court made no reference to alimony or property settlement. Pursuant to their agreement petitioner, on May 9, 1939, deeded the home to the wife; on May 17, 1939, he made all the other transfers and payments contemplated and signed a written agreement to pay Marie Willett Hogg $ 1,500 a month until December 1940 and $ 1,200 a month thereafter *364 for life, and upon her death to pay $ 10,000 to her estate, agreeing further, that if her mother should survive her he would pay $ 300 a month to the mother for life and $ 3,000 to the mother's estate. At petitioner's option he could at any time after prescribed notice discharge all these obligations of payment by a lump sum estimated as the cost of an annuity contract providing the preceding periodic payments. These estimates ranged from $ 251,940 at the end of the first year to $ 6,000 at the end of the forty-fifth year. By a second option petitioner could purchase the annuity contracts himself; by a third, he could deliver to the wife bonds producing $ 14,400 a year; by a fourth, he could convey to her real estate of sound value, producing the same amount*94 of income; and by a fifth, he could create a trust to carry out the obligation initially described. The wife's rights to the monthly payments were "nontransferable and nonassignable" unless a payment should become ten days overdue, and: * * * Any person or corporation taking any assignment except as permitted by the terms hereof, or any transfer, pledge, mortgage, conveyance by execution or judicial sale or other attempted right or interest in these properties or in this contract, shall acquire no rights whatever, this instrument being intended to provide for the current annual support of Mrs. Marie Willett Hogg and after her death, of her mother, Mrs. Gus Willett. In the final paragraph the parties recited that the agreement was "executed in settlement of their property rights," and that Marie Willett Hogg had by deed of even date conveyed to petitioner all rights, title, claim, or interest belonging to her in property then in his possession or name or in the name of Hogg Brothers, Mike Hogg Agent, Mike Hogg, Ima Hogg, numerous individuals and corporations named, or any other person or corporation for his account. The mentioned conveyance was formally executed on May 17, 1939, *95 by Marie Willett Hogg. Petitioner has since made the periodic payments required by the agreement. In their income tax returns for 1919-1938, inclusive, petitioner and his wife reported as community net income amounts which, as reduced by losses in five years, aggregated $ 523,820.97. In each year the royalties and bonuses which petitioner received from his separately owned properties were included in community income on the returns, but were excluded by the Commissioner, who treated them as petitioner's separate income. On their 1939 returns petitioner and his former wife each reported one-half of their total income up to May 5, 1939, the date of their divorce, and they reported separate income thereafter. In an attached note the wife mentioned, but did not include in gross income, $ 15,500 received from her divorced husband as "allowances under a separation agreement accepted in lieu of partition of community property." *365 For the years 1942, 1943, and 1944, petitioner paid his former wife $ 1,200 a month as required by the agreement of May 17, 1939, and deducted $ 14,400 on account thereof from gross income of each year. The Commissioner disallowed the deductions. As*96 a precautionary measure he also determined deficiencies for the same years against Marie Willett Hogg by including the payments in her income. OPINION. Petitioner seeks to deduct the $ 14,400 paid to his wife under the agreement, invoking section 23 (u), Internal Revenue Code, which authorizes the husband to deduct amounts includible under section 22 (k) in the gross income of the wife. Section 22 (k) provides: (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 * * * 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 or separation shall be includible in the gross income of such wife. * * * Petitioner's wife was granted a divorce on May 15, 1939, by a decree which made no reference to alimony or support. Texas law fails to impose the duty of support on a divorced husband, but merely authorizes the court which renders the divorce decree to make a proper division *97 of the spouses' property. See arts. 4637-8, Vernon's Texas Civil Statutes; Pearce v. Commissioner, 315 U.S. 543; Ernestine Mitchell, 38 B. T. A. 1336; Martin v. Martin, 17 S. W. (2d) 789; Phillips v. Phillips, 203 S. W. 77. In some instances, however, a Texas court has worded the divorce decree to direct the husband to make specified monthly payments for the wife's support in settlement of the wife's property rights. Keton v. Clark, 67 S. W. (2d) 437; Scott v. Fort Worth Bank, 125 S. W. (2d) 356. Recognizing the effect of the Texas statute, petitioner argues that the lack of a support obligation imposed by law after divorce is not detrimental to his contention, because, in adding sections 22 (k) and 23 (u) as amendments to the code by section 120 of the Revenue Act of 1942, Congress avowed an intent, expressed in House Report No. 2333, 77th Cong., 1st sess., to treat alimony or an allowance for support as income of the receiving spouse and to relieve the other spouse from tax thereon: *98 * * * In addition, the amended sections will produce uniformity in the treatment of amounts paid in the nature of or in lieu of alimony regardless of variance in the laws of different States concerning the existence and continuance of an obligation to pay alimony. *366 Petitioner cites Tuckie G. Hesse, 7 T. C. 700, as an instance in which this Court has already held a husband's payments to a divorced wife pursuant to agreement to be "in the nature of alimony" and "in lieu of alimony" for the purposes of section 22 (k), even though Pennsylvania law, under which the divorce was granted, and the decree itself made no provision for alimony. The Court based its decision on the view that the husband made the enforceable agreement to pay the amounts in controversy: * * * in connection with a contemplated divorce, and * * * to take care of the lack of any provision under law which would require the payment of alimony to petitioner if she sued for and obtained an absolute divorce. The evidence here indicates that petitioner's payments were made pursuant to an enforceable agreement; that the agreement's terms were fully understood before the wife petitioned*99 for divorce, and were incorporated in written contracts or deeds immediately after the decree was granted. By the payments petitioner discharged a legal obligation incurred by him incident to the divorce. Cf. Frank K. DuBane, 10 T. C. 992; Benjamin B. Cox, 10 T. C. 955; Robert Wood Johnson, 10 T. C. 647. But to deduct the payments, he must show further that the obligation was incurred "because of the marital or family relationship," section 22 (k). He argues that the parties intended the payments to be "simply a provision for support," and hence the discharge of a marital obligation in the nature of alimony, and to support that view, introduced the testimony of William B. Ferguson, an attorney employed by the Hogg family enterprises, who represented him in negotiations with the wife's attorney. Ferguson stated that the discussions "revolved primarily around how much that monthly payment would be," and agreement was reached on $ 1,200 because petitioner had given his wife that amount for the past few years and would give no more. Petitioner contends, further, that the agreement must have*100 been intended for support because there was not any community property to divide, and he devotes the major part of his evidence and brief to efforts at establishing the separate character of all his assets at the time of the divorce. This evidence is not conclusive. The two schedules prepared by Ferguson from partnership books purport to show only petitioner's shares of income from the inherited oil lands and from other assets separately, and by charging aggregate withdrawals over the years against net community income, Ferguson arrived at a very small figure remaining. Petitioner asserts that even this figure was absorbed by losses. These income schedules were the only figures considered during divorce negotiations, but petitioner introduced at the hearing an accountant's computation, recently prepared from partnership books, which indicates a deficit in community *367 property as of May 31, 1939. In this computation no effort was made to trace any specific asset and all petitioner's withdrawals were charged against income credited to the community. Respondent stresses that by the agreement petitioner's wife acquired in addition to the annuity, a furnished home, two automobiles, *101 over $ 5,000 cash, a claim of $ 10,000 for her estate, a contingent annuity for her mother, and a $ 3,000 claim for the mother's estate. The listed items, he argues, were not for support, but were consideration passed in a property settlement that also included the monthly payments. He points to the wife's allegation in her divorce petition that petitioner and she had "agreed upon a settlement of their property rights"; to the implementing contract for the monthly payments, which recited that it was "executed in settlement of their property rights"; and, as confirming this character, to the wife's separate and simultaneous deed to petitioner of all her claims to or rights, title, or interest in property in his name or possession or held for his account by the two partnerships, his brother and sister, and numerous named corporations and individuals. After a careful study of the record and the parties' contentions we are convinced that the parties' counsel were conscious of the necessity for making a property settlement and that the agreement reached and carried out divested the wife of all interest in any community or separate property of petitioner except that which was conveyed*102 to her pursuant to the agreement's terms. But it seems obvious that there was no calculation of the amount of property to which she might be entitled and that such amount was not a factor considered in arriving at the settlement terms. When the negotiations began the wife had a claim to support which was legally enforceable and which petitioner had been discharging for some time by the payment of $ 1,200 a month. As we construe the negotiations and the resulting agreement, the primary consideration in the parties' minds was not community property division, but petitioner's willingness to continue the monthly payments which he had been making for support. It is of material significance in this connection that the wife's right to these payments was "nontransferable and nonassignable" and was put beyond execution and judicial sale, "being intended to provide for the current annual support of Mrs. Marie Willett Hogg." As the parties had reached this agreement before the petition for divorce was even filed, the wife obviously relinquished a present legal right to support in exchange for a future contractual right to support. And the husband incurred this contractual obligation because*103 of the marital relationship and "to take care of the lack of any provision under law which would require the payment of alimony." Tuckie G. Hesse, supra. Here, as in the Hesse case, state law imposed no duty of support *368 on the husband after divorce, but sections 22 (k) and 23 (u) were added to the code to produce uniformity in the tax treatment of amounts paid in lieu of alimony regardless of variance in state laws "concerning the existence and continuance of an obligation to pay alimony." H. Rept. No. 2333, supra. We are of opinion, therefore, that the monthly payments here in controversy were received by the wife in discharge of a legal obligation which was incurred by petitioner because of the marital relationship and under a written instrument incident to the divorce. Such payments are deductible by him under section 23 (u). In so holding, we do not disregard or deny effect to the whole agreement as resulting also in a property settlement. The transfer of the furnished home, the automobiles, the cash, the undertaking to pay $ 10,000 to the wife's estate, and the contingent benefits for the wife's mother may properly be deemed *104 the consideration paid for the wife's transfer of any interest which she might have had in property held in the husband's name or possession or for him. But none of these items is here in controversy. And, while the contract does not make an express distinction between such items and the obligation for monthly payments, we feel that the continuation of petitioner's prior support plan by means of such payments and the avowed intent to provide by them support for the wife are cogent reasons for the conclusion that the parties definitely had support in mind in formulating that provision of the agreement. Decision will be entered under Rule 50.