Haag v. Commissioner

William M. Haag, Petitioner, v. Commissioner of Internal Revenue, Respondent Haag v. Commissioner Docket No. 27424 United States Tax Court 17 T.C. 55; 1951 U.S. Tax Ct. LEXIS 125; July 19, 1951, Promulgated *125 Decision will be entered for the respondent. An agreement between petitioner and his wife, incident to a decree of divorce, provided for a payment of $ 2,244.73 which sum, it was agreed, was equal to one-third of the value of all property and assets of the husband. The agreement further provided for payments of $ 46.14 per week to the wife in lieu of alimony to be paid to her during the joint lives of the parties. Held, the installment payments on the gross sum of $ 2,244.73 were payments of alimony, but were not "periodic payments" within section 22 (k) of the Internal Revenue Code and are not deductible by petitioner under section 23 (u). The Commissioner has not questioned the deductibility of the $ 46.14 weekly payments to the wife. Theodore Rubovits, Esq., for the petitioner. Paul Levin, Esq., for the respondent. Black, Judge. BLACK *55 A deficiency in petitioner's income tax was determined in the amount of $ 1,086.51 for the calendar year 1945. Petitioner has agreed to the correctness of two adjustments made by respondent which increased his net income for the taxable year. The only issue here relates to certain of petitioner's alimony payments made*126 during the taxable year pursuant to a divorce decree and claimed as a deduction by petitioner under the provisions of section 23 (u) of the Internal Revenue Code. In petitioner's income tax return for the year 1945, there was claimed a deduction in the amount of $ 1,513.85 which represented the total payments of petitioner to his former wife. The respondent has disallowed $ 1,144.73 of the deduction claimed, and as stated in his brief respondent's contentions are: *56 I Petitioner's payments totaling $ 1,144.73 to his former wife pursuant to an agreement incident to a divorce, which payments were in settlement of their respective rights of property, dower rights and homestead rights, are not includible in the gross income of his former wife under section 22 (k) and therefore the petitioner is not entitled to any deduction under section 23 (u) with respect to those payments. II Petitioner's payments totaling $ 1,144.73 to his former wife pursuant to a property settlement incident to a divorce do not constitute "periodic payments" within the meaning of section 22 (k) and therefore, such payments are not taxable to the former wife under section 22 (k) and are not deductible by*127 petitioner under section 23 (u). FINDINGS OF FACT. The petitioner, a resident of Chicago, Illinois, filed his Federal income tax return for the calendar year 1945 with the collector of internal revenue for the first district of Illinois at Chicago. On November 1, 1945, petitioner and his wife, Elizabeth Linn Haag, entered into a written agreement which became incident to their divorce granted by the Superior Court of Cook County, Illinois, on November 13, 1945. Subsequent to the decree, petitioner made payments to his wife pursuant to the terms of the agreement amounting to $ 1,513.85 during the remainder of 1945, and this amount was deducted as alimony on petitioner's 1945 income tax return. The respondent disallowed $ 1,144.73 of that deduction as representing part payment of the sum of $ 2,244.73 set forth in paragraph 1 of the agreement. The agreement is incorporated herein by reference and the relevant portions of it are as follows: * * * * WHEREAS, the parties hereto are desirous of settling now and forever any and all claims for alimony that First Party might have against Second Party, and all of their respective rights of property, dower rights, and homestead rights, and *128 * * * * WHEREAS, both of the parties hereto consider that, under the circumstances, a sum equal to one-third (1/3) of all property and assets now owned by Second Party should be transferred and conveyed to the First Party by Second Party, and in addition thereto that Second Party should hereafter pay to First Party in lieu of alimony a sum equal to one-third (1/3) of the Adjusted Gross Income (as hereinafter defined) of said Second Party during the joint lives of both of the parties hereto, regardless of any re-marriage by either party hereto; * * * * 1. Second Party agrees to pay to the First Party the sum of $ 2,244.73 in the following manner: $ 1,044.73 upon the entry of a decree of divorce in the cause hereinabove mentioned, and $ 100.00 per month for 12 months succeeding, without interest, except that after maturity each respective payment which may be past *57 due shall bear interest at the rate of seven percent (7%) per annum, to be evidenced by twelve (12) promissory notes of the Second Party payable to First Party. The payments provided in this paragraph shall aggregate a sum equal to one-third (1/3) of the value of all property and assets of said Second Party. 2. Upon*129 the entering of a Decree of Divorce in said cause, Second Party agrees to pay to First Party, in lieu of alimony, the sum of $ 46.14 per week, said sum being one-third of one fifty-second (1/52) of the amount of the Adjusted Gross Income of Said Second Party for the last preceding year, as determined in manner hereinafter set forth, such weekly payments, adjusted from year to year as hereinafter provided, to continue during the joint lives of the parties hereto, irrespective of the re-marriage of either party. * * * * 4. Upon the execution of this Agreement it is considered by the parties hereto that Second Party now has the right to deduct from his income all payments in lieu of alimony, made to the First Party pursuant to this Agreement under the existing laws and regulations of the United States of America, pertaining to individual income taxes, but should it be determined at any time or times in the future that Second Party is not so permitted to deduct such payments, in whole or in part, from the amount of his income so to be reported for income tax purposes, or if, under any future law or regulation of the United States of America, such deduction, in whole or in part, is prohibited, *130 it is agreed between the parties that a proportionate amount of the total income tax paid by Second Party for any year in which such deduction shall not be allowed, shall be deducted from the total of the payments to be made hereunder by Second Party to First Party in the succeeding year. In other words, if Second Party shall, in any year, be required to pay income tax on an amount of income which shall include, in whole or in part, the payments made hereunder to First Party in lieu of alimony, said payments to First Party aggregating one-third (1/3) of said Second Party's Adjusted Gross Income, * * * * * * * 7. The provisions of Paragraphs 4 and 5 hereof shall not be applicable to Paragraph 1 hereof, it being understood and agreed that all income tax adjustments and allowances pertaining to the sum provided to be paid First Party under the provisions of Paragraph 1 hereof, have been made between the parties hereto, prior to signing this agreement. In accordance with paragraph 1 of the written agreement between petitioner and his former wife, petitioner paid $ 1,044.73 upon entry of the decree of divorce in November 1945 and the additional sum of $ 100 in December 1945. In addition*131 petitioner paid during the taxable year 1945 to his wife alimony of $ 369.12 (apparently eight weekly payments of $ 46.14) under the provisions of paragraph 2 of their agreement. In the deficiency notice respondent disallowed as a deduction that portion of alimony paid by petitioner under paragraph 1 of the agreement. OPINION. Respondent disallowed as a deduction the payments made by petitioner to his former wife under paragraph 1 of their agreement. Petitioner claims the payments are deductible under section *58 23 (u) of the Internal Revenue Code which allows a deduction by the husband of alimony includible under section 22 (k) in the gross income of the wife. Section 22 (k) provides: 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 in 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*132 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. * * * 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 or instrument, but only to the extent that such installment payment for the taxable year of the wife (or if more than one such installment payment for such taxable year is received during such taxable year, the aggregate of such installment payments) does not exceed 10 per centum of such principal sum. * * * Petitioner in his brief has stated two contentions of law, his first being that the payments*133 made pursuant to paragraph 1 of the agreement are in fact alimony. With this contention we agree for the term "alimony" embraces alimony in gross just as it embraces periodic payments of alimony. Likewise, the term "alimony" includes payments in settlement of property rights just as the term includes payments for support and maintenance of the former wife 1 17 Amer. Juris. 464 et seq.; 27 C. J. S. 965 et seq. Petitioner's second contention is that his payments under the agreement are not severable, that the payments under paragraph 1 must be included with payments under paragraph 2, and, as such, both payments are in their entirety "periodic payments." The issue in this proceeding involves the definition of "periodic payments" as defined by section 22 (k) of the Code, and also an interpretation of the agreement incident to petitioner's divorce, particularly paragraph 1 of the agreement. We have decided recently two cases involving*134 the definition of "periodic payments," Ralph Norton, 16 T. C. 1216, and Arthur B. Baer, 16 T. C. 1418, and that phrase from section 22 (k), as we understand it, was defined in detail *59 in those cases. Like the petitioner herein, the taxpayers in Ralph Norton and Arthur B. Baer, both supra, had entered into agreements incident to their divorces. In certain respects those agreements were not unlike the agreement entered into by petitioner herein. In both those cases this Court interpreted the agreements, determining that they were severable, i. e., that alimony paid under one portion of the agreement was "periodic payments" and alimony paid under another portion of the agreement was not "periodic payments." Section 22 (k) of the Code distinguishes between "periodic payments" and "installment payments," the former being includible in the gross income of the wife while the latter is to be included therein only if, among other limitations, paid within a period of more than 10 years. The petitioner's payments of alimony under paragraph 1 of the agreement, we think, are not "periodic payments," but installment*135 payments of a gross sum. Our conclusion involves an interpretation of the agreement between petitioner and his former wife. Alimony payments are provided for under paragraph 1 and paragraph 2 of the agreement. Paragraph 2 provides for the payment of alimony at the rate of one-third of petitioner's adjusted gross income for the last preceding year, and provides the payments are to be in "lieu of alimony." The payments under paragraph 2 were not disallowed by respondent as they were "periodic payments." No such provisions as in "lieu of alimony" were contained in paragraph 1 in which petitioner agreed to pay his former wife the gross sum of $ 2,244.73 in installments. Petitioner furnished his former wife with a net worth statement, made under oath, which was attached to the agreement. The gross sum of $ 2,244.73 was so fixed by means of a computation, taking one-third of all property and assets owned by petitioner. We think the agreement itself is quite clear, and that interpretation of it falls within the ambit of Ralph Norton and Arthur B. Baer, both supra. We are unable to see the soundness of petitioner's contention that the payments provided in paragraphs 1 and*136 2 of the agreement should be interpreted together as one obligation and should be treated in the entirety as "periodic payments." As the payments of alimony made by petitioner under paragraph 1 of the agreement were not "periodic payments" within the purview of section 22 (k), the respondent did not err in disallowing the deduction claimed by petitioner under section 23 (u). Decision will be entered for the respondent. Footnotes 1. It is to be noted, however, that not all alimony may be deducted under section 23 (u)↩.