Barnum v. Commissioner

Rowena S. Barnum, Petitioner, v. Commissioner of Internal Revenue, Respondent Barnum v. Commissioner Docket No. 36224 United States Tax Court 19 T.C. 401; 1952 U.S. Tax Ct. LEXIS 23; December 10, 1952, Promulgated *23 Decision will be entered for the respondent. 1. Petitioner during the taxable year received alimony from her husband pursuant to a written agreement entered into 19 years subsequent to their divorce. This was the fourth separation agreement between the parties and was in settlement of a dispute in respect to alimony provided by the decree and prior agreements which were incident to the divorce. Held, the written agreement here was "incident to" the divorce within the meaning of section 22(k) of the Code, therefore, the alimony is taxable income to the petitioner. 2. Petitioner acquired stock in a cooperative apartment corporation in 1929 incident to the leasing of an apartment for her personal residence. On occasion petitioner sublet her apartment for short periods of time. Petitioner in 1939, abandoned the lease but kept the shares of stock. During the taxable year 1943, the corporation lost the apartment building, the principal corporate asset, by foreclosure. Held, based upon the evidence the personal residence of petitioner was not converted or appropriated into a transaction entered into for profit within the meaning of section 23(e) of the Code, and the loss*24 was not an allowable one. William E. Mills, Jr., Esq., for the petitioner. Francis J. Butler, Esq., for the respondent. Black, Judge. BLACK *401 Respondent has determined an income tax deficiency against petitioner for the year 1943 in the amount of $ 284.81. The year 1942 is *402 involved due to the forgiveness feature of the Current Tax Payment Act of 1943. To the determination of the Commissioner, petitioner assigns errors as follows: (a) The Commissioner erred in including in the petitioner's taxable income for the calendar years 1942 and 1943, payments totalling $ 1800. *25 in each year made to the petitioner by her former husband under an agreement made in 1941. (b) The Commissioner erred in denying in full a deduction of at least $ 1,000. for a loss on stock of 14 East 90th Street Corporation acquired by the petitioner in 1927 * at a cost of at least $ 13,000. which became worthless in 1943. FINDINGS OF FACT. Rowena S. Barnum, the petitioner, resides in New York City and she filed her Federal income and victory tax returns with the collector of internal revenue for the third district of New York. Certain facts have been stipulated and are found accordingly. Petitioner and Walter Barnum were married in the State of New York on October 10, 1912. They had one child, Burrall Barnum, born on October 17, 1913, who lived to attain his majority. Facts -- Alimony Issue. Petitioner and Walter Barnum separated in 1918 and entered into an agreement dated June 21, 1918, for the support of petitioner and the support and custody of Burrall*26 Barnum. Under this agreement petitioner received $ 350 per month, more or less, and according to its terms the agreement was to continue for 3 years, or until June 21, 1921. This agreement also divided the household furnishings owned by petitioner and her former husband. On or about October 20, 1921, petitioner and Walter Barnum, then residing in Paris, France, entered into a subsequent agreement. Among the recitals contained in this second separation agreement were: WHEREAS the party of the second part [Rowena Barnum] has brought an action for an absolute divorce against the party of the first part [Walter Barnum] dissolving the said marriage, which action is now pending and undetermined and, * * * * WHEREAS, the parties hereto desire to relieve the Court of the necessity of taking testimony and proof upon the issues of alimony, maintenance and support of the party of the second part by the party of the first part and the custody and support of said child. It is also provided in the second separation agreement that: * * * the parties hereto have agreed to the following, in the event that a decree of divorce dissolving the marriage between the parties hereto shall be entered *27 at any time within one year from the date hereof. *403 This agreement further provided that Rowena Barnum accept the obligations imposed by the agreement "as all alimony" and it also provided: * * * both parties agree that no provisions for alimony or the support of said child shall be inserted in said decree, if and when entered, except as shall be consistent with the provisions herein made. In addition to lump sum payments, this agreement provided for monthly payments "as alimony" of $ 400, to be reduced to $ 100 in the event of remarriage and during the minority of Burrall Barnum. Petitioner and Walter Barnum were divorced in Paris, France, by decree of the Third Chambre, Civil Inferior Court of the Department of the Seine, in an action in which both parties appeared. The decree, dated November 2, 1921, and registered on November 8, 1921, became final on January 10, 1922. The divorce decree did not incorporate or make reference to any separation agreement. Contrary to the second separation agreement, the divorce decree provided for alimony and support as follows: * * * Order Barnum to pay to his wife during her life and as long as she does not marry again, 2,060 francs*28 in monthly alimony, payable the fifteenth of each month. Say that in case his wife marries again this alimony will be reduced to 515 francs a month, to cease to be due when the child becomes of age. * * * [As translated.] On January 26, 1922, petitioner and Walter Barnum entered into a third agreement providing in part as follows: WHEREAS the party of the 1st part [Walter Barnum] desires to fully recognize the said decree of divorce and to render more effective the provisions thereof on the subject of alimony and the custody and education of * * * Burrall Barnum. * * * * FIRST: The party of the first part [Walter Barnum] agrees to pay to the party of the second part [Rowena Barnum] as alimony on or before the 15th day of each and every month, so long as the said party of the second part remains single, a sum in francs, (unless the party of the second part shall prefer payment in other currency), equivalent in value to Four Hundred Dollars ($ 400) in the currency of the United States of America at the time of each monthly payment; and in the event of the re-marriage of the party of the second part and during the minority of the said Burrall Barnum, a sum in francs (unless the party*29 of the second part shall prefer payment in other currency), equivalent in value to One Hundred Dollars ($ 100) in the currency of the United States of America at the time of each monthly payment. * * * * FOURTH: This agreement shall not be interpreted as in derogation of the decree of divorce dissolving the marriage herein in any way whatsoever but in substantiation and in confirmation of the same. Petitioner has never remarried and alimony payments were made each month to petitioner as required by the third agreement through the year 1935; Walter Barnum failed to make full payments of alimony during 1936, 1937, 1938, 1939, and 1940. *404 Petitioner instituted an action against Walter Barnum on December 23, 1940, in the Supreme Court of the State of New York to recover $ 10,100 in arrears due her under the agreement of January 26, 1922. In his answer Walter Barnum defended the action on the grounds, among others, that the divorce decree provided for the payment of alimony in French francs, that he had paid in dollars an amount in excess of that required in the decree, that the agreement of January 26, 1922, was invalid for lack of consideration, and that the law of France prohibited*30 the divorce court from raising the amount of alimony set forth in the decree. The answer of Walter S. Barnum also contained a counterclaim for money paid under mistake of fact, in that the declining value of the French franc made his payments in United States currency greater than that which he was required to pay under the French decree. Both parties moved for summary judgment in the action in the determination of which the Supreme Court of the State of New York, in an order dated April 15, 1941, granted Rowena S. Barnum partial summary judgment for $ 3,100. A summary judgment was granted for only part of the relief sought with cause of action continued for trial as to the balance of petitioner's claim. Walter Barnum appealed from the partial summary judgment. While the appeal was pending, petitioner and Walter Barnum entered into a fourth agreement dated May 29, 1941, in settlement of all their differences. This agreement provided for payments of $ 150 per month to petitioner, and it is these payments of $ 1,800 each year that are in controversy here. The fourth agreement provided in substance as follows: (1) this agreement settles all claims of the parties, (2) petitioner*31 releases Walter Barnum "from any liability whatsoever to her under a certain decree by the Third Chambre of the Civil Inferior Court of the Department of the Seine in Paris, France, dated on or about November 2nd, 1921," (3) this agreement settles the suit between the parties and satisfies the judgment thereof, (4) Walter Barnum agrees to pay the sum of $ 3,000 to petitioner, in addition to payments provided in paragraph five of the agreement (5) during the life of petitioner Walter Barnum promised to pay $ 150 each month for her support, with security being made to assure payment, and (6) additional promises were made in respect to certain life insurance policies. This fourth agreement under which petitioner received the payments at issue was "incident to" the decree of divorce within the meaning of section 22 (k) and the payments constitute alimony income taxable to petitioner. Facts -- Loss Issue. In 1929, petitioner acquired 130 shares of stock of 14 East 90th Street Corporation for the sum of $ 13,000, and with the purchase *405 of stock she was entitled to a proprietary lease of apartment 2-E in the apartment building owned by the corporation. The acquisition of the*32 stock was necessary to the acquiring of the proprietary lease of the apartment. The corporation operated as what is commonly called a cooperative apartment. Petitioner retained apartment 2-E and the proprietary lease thereto until in or about September 1939, paying regularly maintenance charges of $ 130 per month. During part of this period, petitioner sublet apartment 2-E, containing her own furniture, on at least three different occasions for periods of about three to six months. On her income tax returns petitioner reported gross rents and expenses of the sublet apartment as follows: Year Gross rents Expenses [1937] $ 1,475 $ 1,644.64 [1938] 1,050 1,685.14 [800] 1,231.23 In 1939, the cooperative apartment corporation offered petitioner a 5-year lease at $ 150 per month. Petitioner was unwilling to pay this amount of rent and, as a consequence, petitioner moved from the apartment and whatever rights she might have had under any proprietary lease she abandoned. Thereafter, petitioner made no further payments to the corporation and received no payments from it, though petitioner did retain her 130 shares of corporate stock. During 1939, the corporation *33 was in financial difficulties. The apartment building was subject to a mortgage of about $ 1,300,000, extended on September 23, 1940, so as to be payable April 25, 1942. In 1943, the mortgage was foreclosed and the property was sold to the mortgagee. On January 17, 1944, the stockholders resolved to dissolve the corporation. The corporation was financially unable to dissolve but on December 28, 1944, it was adjudicated bankrupt. Petitioner's certificate for shares of stock in the corporation reads as follows: Number [37] Shares [130] FULL PAID AND NON-ASSESSABLE Authorized Capital Stock, $ 1,540,000 Shares, $ 100 Each 14 EAST 90TH STREET CORPORATION Incorporated under the laws of New York THIS IS TO CERTIFY that Mrs. Rowena S. Barnum is the owner of One Hundred and thirty Shares of the Capital Stock of 14 EAST 90th STREET CORPORATION, transferable (subject to certain restrictions hereinafter mentioned) on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. The Charter of the Corporation, as amended, contains and provides rigid restrictions against the sale or transfer of shares of stock to*34 any person at any *406 time except as in such Charter permitted. The said Charter also provides that the Corporation shall at all times have a lien upon the shares of the stock owned by each stockholder, for all indebtedness and obligations owing and to be owing by such stockholder to the Corporation, arising under the provisions of any "proprietary" lease issued by the Corporation to accompany such shares of stock. The restrictions and lien hereinabove referred to are provided for and set forth in Paragraphs "Fifteenth" and "Sixteenth" of said Charter, respectively, copies of which said Paragraphs are printed on the back hereof and made a part hereof with the same force and effect as if herein at length fully set forth, and this Certificate and the shares represented thereby are issued and shall be held subject to all of the provisions of said Charter and the amendments thereto. This Certificate is issued with a "proprietary" lease of apartment or space designated as Apartment 2-E, in the building owned by this Corporation and known as 14 East 90th Street, Borough of Manhattan, New York City. "If a stockholder shall be indebted to the Corporation, the directors may refuse*35 to consent to a transfer of his stock until such indebtedness is paid, provided a copy of this section is written or printed upon the certificate of stock." -- Section 66 of Stock Corporation Law. OPINION. Two issues are presented here for our decision. The first issue involves section 22 (k) of the Code, 1*36 and specifically whether the written agreement pursuant to which petitioner received alimony was "incident to" the divorce acquired by petitioner 19 years prior to the agreement. The question is a two-fold one. First, just what is the proper construction to be applied to the statutory term "written instrument incident to such divorce," and second, how is this term to be applied to the fact situation presented. During the past 5 years the phrase, "incident to" has frequently received our attention, as well as that of other courts. 2 *37 *407 In their respective briefs petitioner relies in particular upon Commissioner v. Walsh, 183 F. 2d 803, and respondent in particular relies upon Smith v. Commissioner, 192 F. 2d 841. In our Findings of Fact we have described the four separation agreements entered into by petitioner and her former husband Walter Barnum. We need not discuss here the provisions contained in each agreement; however, it is appropriate to consider how each agreement appears to fit into the circumstances and how they may be related to the decree of divorce. The decree of divorce according to the translation in evidence contained no reference to any separation agreement, notwithstanding the written agreement may be "incident to" the "divorce or separation," Jane C. Grant, 18 T. C. 1013. Petitioner and Walter Barnum were divorced in 1922; the "written agreement" here in question was dated May 29, 1941, or 19 years subsequent to the divorce. Were these the only facts, the written agreement would hardly seem "incident to the divorce or separation." However, we have other facts before us. There was*38 the second agreement entered into by the parties on October 20, 1921, which recites that an action of divorce was pending and also that the payments provided for were to be made only in the event of divorce. The second agreement in English provided for alimony in terms of dollars, the decree in French provided for alimony in terms of francs. Except for the amounts of alimony payments, the terms of the divorce decree were to the same effect as the second agreement. Because of the inconsistency, the parties entered into another agreement, their third, on January 27, 1922. This was 2 weeks after the decree became final and 4 months subsequent to the second agreement. The third agreement in English clarified the question of what amount of alimony was to be paid monthly and in what currency, and it was provided therein that the agreement was "in substantiation and in confirmation" of the decree and was for the purpose of rendering "more effective the provisions thereof on the subject of alimony." The third agreement was, we think, under these facts "incident to" the divorce of petitioner and Walter Barnum. During the period from 1922 through 1935, Barnum performed his obligations *39 under the third agreement. Thereafter, he failed to make the full payments required by this agreement and in 1940, petitioner brought an action in the Supreme Court of New York to recover the arrearages. She obtained summary judgment in the amount of $ 3,100 plus interest. While the husband's appeal was pending, the parties executed the agreement here under dispute. This agreement provided for the payment in installments of the sum of $ 3,000 (approximately the amount of the judgment) and for a monthly payment of $ 150. This *408 fourth agreement under which the payments in question were made is an agreement in lieu of the third one which, as we have explained, was "incident to" the divorce. Accordingly, we believe the fourth agreement should be held to be "incident to" the divorce. Moreover, this fourth agreement constituted a compromise of a dispute over obligations arising from a divorce decree. Based upon the facts presented here and considering the recent opinions of this and the courts of appeal, we conclude that the agreement here under dispute is "incident to" petitioner's Paris divorce Accordingly, the payments received by petitioner during 1942 and 1943 under this*40 agreement constitute alimony income taxable to petitioner as provided by section 22 (k) of the Code. The second issue presented in this proceeding is whether petitioner is entitled under section 23 (e) to a deduction based upon her stock in a cooperative apartment corporation becoming worthless during the taxable year. Petitioner in 1929 paid $ 13,000 for her stock which consisted of 130 shares in a cooperative apartment corporation and during 1944 or prior thereto the stock became worthless. There seems to be no doubt about these facts and we are inclined to agree with petitioner's contention that her shares of corporate stock became worthless during the year 1943. However, we do not have to decide in which year the loss occurred for it is our conclusion that the loss was not of the type contemplated by section 23 (e) of the Code. 3 *41 That the petitioner acquired shares of stock in the cooperative apartment development was incidental, a formality. Essentially, the transaction in 1929 was one of acquiring by petitioner a personal residence for herself. It is this primary purpose of petitioner that we are concerned with in determining her income tax liability. Initially, this transaction of petitioner was one involving a personal residence and not a transaction entered into for profit. Subsequently, during part of each of the years 1937, 1938, and 1939 petitioner rented her apartment, including her furniture. Such rentals, however, did not convert residential property into property being held for rental purposes but were merely incidental to the primary purpose of having a personal residence and keeping the expenses at a minimum. In E. F. Fenimore Johnson, 19 T. C. 93, we held, among other things, that: *409 The receipt of a small amount of rental income from certain portions of the residential property prior to sale was insufficient to constitute a transaction appropriating the premises to property used in a trade or business or to constitute a transaction entered into for*42 profit within the purview of section 23 (e) of the Internal Revenue Code. * * * Likewise, the incidental and occasional renting of her apartment during prior years does not constitute an appropriation or conversion by petitioner of her residence into property used in a trade or business or into a transaction entered into for profit within the purview of section 23 (e) (1) or (2) of the Code. We think that the entire transaction is essentially one involving the personal residence of petitioner and the loss incurred in connection therewith is not deductible under section 23 (e) of the Code. Decision will be entered for the respondent. Footnotes *. It was stated at the hearing that this should be 1929.↩ 1. 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 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. * * * [Italics added.] 2. Florence B. Moses, 18 T. C. 1020; Jane C. Grant, 18 T. C. 1013; Lily R. Reighley, 17 T. C. 344, 351; Elizabeth E. Guggenheim, 16 T. C. 1561; George J. Feinberg, 16 T. C. 1485, revd. (C. A. 3, Aug. 13, 1952) 198 F. 2d 260; Cecil A. Miller, 16 T. C. 1010, revd. (C. A. 9, Oct. 28, 1952) 199 F. 2d 597; Dorothy Briggs Smith, 16 T. C. 639, affd. (C. A. 1, 1951) 192 F. 2d 841; Bertram G. Zilmer, 16 T. C. 365; Joseph J. Lerner, 15 T. C. 379, revd. (C. A. 2, March 17, 1952) 195 F. 2d 296; Jessie L. Fry, 13 T. C. 658; Muriel Dodge Neeman, 13 T. C. 397; Commissioner v. Murray (C. A. 2, 1949), 174 F. 2d 816; Miriam Cooper Walsh, 11 T. C. 1093, affd. 183 F. 2d 803; George T. Brady, 10 T. C. 1192; Benjamin B. Cox, 10 T. C. 955, affd. 176 F. 2d 226; Robert Wood Johnson, 10 T. C. 647↩. 3. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or * * * *↩