Opinion
Docket No. 13059.
1948-06-21
TILLIE BLUM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George L. Weisbard, Esq., for the petitioner. Harold H. Hart, Esq., for the respondent.
INCOME— ALIMONY PAYMENTS— 10-YEAR PERIOD— SEC. 22 (k).— The 10-year period described in 22 (k) begins on the date that the legal obligation to pay the principal sum is first imposed upon the husband by the instrument, the decree, or a combination of the two. George L. Weisbard, Esq., for the petitioner. Harold H. Hart, Esq., for the respondent.
The Commissioner determined deficiencies of $5,218.30 and $4,384.21 in income tax for the years 1943 and 1944. The only issue for decision is whether he erred in making annual additions to income under section 22 (k) of the Internal Revenue Code.
FINDINGS OF FACT.
The petitioner filed individual income tax returns for the taxable years with the collector of internal revenue for the first district of Illinois.
The petitioner and Harry Blum were married in 1914. They resided at all times material hereto in Chicago, Illinois.
Harry Blum filed a bill for divorce in the Superior Court of Cook County, Illinois, in 1932. In January 1933 the petitioner filed an answer and a cross-bill praying for separate maintenance. She filed a further amendment on March 1, 1935, in which she asked for a divorce instead of separate maintenance.
The petitioner and Harry Blum entered into a written agreement incident to the action for divorce. The agreement was dated February 27, 1935, and was in part as follows:
FIRST: This agreement is expressly declared by both parties to be effective only in the event that said Superior Court of Cook County, upon due and proper consideration of the cross-bill as finally amended, and the evidence adduced by both parties, shall enter a decree of divorce severing the bonds of matrimony existing between them. In the event that the said court, upon due and proper consideration of the said cross-bill as finally amended, and the evidence adduced by the parties, shall not enter a decree of divorce so severing the bonds of matrimony between them, this agreement shall become and be null and void.
SECOND: The said husband undertakes, promises and agrees to pay to the said wife the sum of One Hundred Twenty Thousand Dollars ($120,000.00) in the manner following: the sum of Seventy-five Hundred Dollars ($7,500.00) on or before March first, A.D. 1936; a like sum of Seventy-five Hundred Dollars ($7,500.00) on or before the first day of March of each and every year thereafter for the next succeeding eight (8) years; with a final payment of Fifty-two Thousand Five Hundred Dollars ($52,500.00) on or before March first, 1945.
The agreement also provided that the husband was to pay interest at the rate of 5 per cent on the $120,000 and any balance thereof remaining unpaid. The payments to the wife were to continue regardless of the death of either party, and regardless of the remarriage of the wife. The husband was to pledge security for the payment of the $120,000. The agreement was to be made a part of the decree of divorce. The agreement contained other provisions in regard to the property of the parties not material hereto.
A divorce was granted to the petitioner in that proceeding upon her amended cross-bill. The decree was entered of record on March 2, 1935. That decree has never been modified.
The decree ordered the parties to carry out their agreement of February 27, 1935, and made that agreement a part of the decree with the same force and effect as if fully set forth therein.
Harry Blum paid the $120,000 to the petitioner, with interest, during the period from 1936 up to March 1, 1945. His payments during the three years here involved were as follows:
+------------------------+ ¦Year¦Principal¦Interest ¦ +----+---------+---------¦ ¦1942¦$13,000 ¦$3,092.80¦ +----+---------+---------¦ ¦1943¦8,000 ¦2,423.67 ¦ +----+---------+---------¦ ¦1944¦12,000 ¦1,760.64 ¦ +------------------------+
The petitioner in her returns for the years here involved reported the following amounts as interest received from Harry Blum:
+---------------+ ¦1942¦$3,097.42 ¦ +----+----------¦ ¦1943¦2,250.94 ¦ +----+----------¦ ¦1944¦1,759.98 ¦ +---------------+
The Commissioner in determining the deficiency held that the following amounts should be included in the petitioner's income under section 22 (k), representing payments made to her by Harry Blum:
+----------------+ ¦1942¦$15,711.94 ¦ +----+-----------¦ ¦1943¦10,423.67 ¦ +----+-----------¦ ¦1944¦13,760.64 ¦ +----------------+
The following is the explanation given for 1942:
During the taxable year you received alimony income in the amount of $16,092.80. Under the provisions of section 22 (k) of the Internal Revenue Code and regulations prescribed thereunder, $15,711.94 of this amount, or that portion of the alimony received not in excess of 10% of the principal sum, is income fully taxable to you. Since alimony income of but $3,097.42 was included by you in income in the return filed, the difference of $12,614.52 has been restored to income. Computation of the foregoing is as follows:
+----------------------------------------------+ ¦Amount of contract ¦$120,000.00¦ +----------------------------------+-----------¦ ¦Interest paid to December 31, 1942¦37,119.35 ¦ +----------------------------------+-----------¦ ¦Principal sum ¦$157,119.35¦ +----------------------------------+-----------¦ ¦10% thereof ¦15,711.94 ¦ +----------------------------------+-----------¦ ¦Amount included in return filed ¦3,097.42 ¦ +----------------------------------+-----------¦ ¦Additional income ¦$12,614.52 ¦ +----------------------------------------------+
The stipulation of the parties is incorporated herein by this reference.
OPINION.
MURDOCK, Judge:
Section 22 (k) of the code provides that, 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 martial relationship, is imposed upon or incurred by the husband under such decree or under a written instrument incident to such divorce, shall be included in the gross income of the wife and not in the gross income of the husband. It further provides that installment payments discharging a part of an obligation, the principal sum of which is, in terms of money, specified in the decree or instrument, shall not be considered periodic payments for the purpose 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 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 * * * .‘
The only question for decision is whether the 10-year period described in the exception quoted above begins to run from March 2, 1935, when the decree was entered, or from February 27, 1935, the date of the agreement. Both sides recognize that the terminal date was March 1, 1945. Thus, there was a period of more than 10 years if it began to run on the earlier date, but there was not a period of more than 10 years if it began to run on the later date. The question is new. The Commissioner stated that there is pending in this Court a companion case against the husband in which the Commissioner is contending that the same income is taxable to him. Obviously, the income is taxable to either the husband or to the wife, and the Commissioner is taking these precautions so that he may collect the tax from the one from whom it is lawfully due.
The Commissioner now concedes, contrary to the explanation which he gave in the notice of deficiency for the 1942 adjustment, that the principal sum of $120,000 was specified in the written instrument of February 27, 1935. The petitioner contends that the period within which the principal sum of $120,000 was to be paid did not begin to run until the decree was entered on March 2, 1935. The Commissioner now contends that the period began with the date of the agreement, February 27, 1935, or else began on February 28, when, he says, the judge signed the decree. The court records do not show when the decree was signed. The Commissioner called as a witness the attorney for the husband at the time the divorce was granted. He testified to a recollection that he saw the judge sign the decree in his chambers on February 28, 1935, at a time when the clerk was not present.
The parties disagree as to the admissibility of that evidence, but that question and, if the evidence was admissible, the further question of whether the testimony overtaxes our credulity, can be passed as immaterial for reasons which will later appear. Cf. Stein v. Meyers, 253 Ill. 199; 97 N.E. 295. The instrument, that is the agreement of February 27, 1935, expressly provided that it would be effective only in the event that the court ‘shall enter a decree of divorce.‘ Thus, the obligation to pay the principal sum of $120,000 was not imposed upon or incurred by the husband under the written instrument alone, but only under that agreement in conjunction with the entered decree. The parties did not choose to have their agreement become effective upon the signing of a decree by the judge, but chose instead to have it effective only upon the entry of a decree. The entry not only officially records, but announces and publicizes the fact that a divorce has been granted. The entry of the decree is usually the final act in the series of court proceedings and the entry includes a date. It is not surprising that the parties to the agreement of February 27, 1935, chose that event, rather than some other less definite one, as the event upon which, and as the date at which, their agreement should become effective.
The records of the clerk of the court show that an order was entered on March 1, 1935, permitting Tillie Blum to amend her supplemental cross-bill and directing that the answer of Harry Blum theretofore filed should stand as an answer to the supplemental cross-bill as amended. That record also shows that the decree of divorce was entered on March 2, 1935.
The words ‘date of such decree or instrument‘ refer to a decree or to an instrument under which the legal obligation to pay the principal sum was imposed upon the husband. Common sense requires the conclusion that the date which Congress intended was the effective date, the date when the legal obligation was actually imposed for the first time. Here the obligation was imposed by a combination of the instrument and the entered decree which made it effective for the first time. Thus the date of the beginning of the period was March 2, 1935. The period intended is that from the time when the obligation was imposed to the last day upon which it could be properly discharged. If the principal sum ‘may be or is to be paid‘ within that period and the period is more than 10 years then the payments are taxable to the wife, rather than to the husband. That is not the situation here and these payments are installment payments and they are not taxable to the wife.
The petitioner makes no argument against the inclusion in her income of the stipulated amount of the interest received in each year.
Decision will be entered under Rule 50.