ARUNDELL

Payments made by petitioner according to a settlement agreement incident to divorce from his ex-wife were installments on a principal sum specified in the agreement and not deductible under section 23(u), Internal Revenue Code. Don O. Russell, Esq., for the petitioner. Mark Townsend, Esq., for the respondent.

This proceeding involves deficiencies in income taxes for the years 1948 and 1949 in the amounts of $631.19 and $477.69, respectively, and penalties for the year 1948 under the provisions of section 294(d)(1)(A) of the Internal Revenue Code in the amount of $155.43, and under section 294(d)(2) in the amount of $93.26. The deficiencies arise because of the disallowance of deductions taken by petitioner. The deductions consisted of payments which the petitioner made to his former wife under an agreement incident to their divorce.

The penalties are not contested if the respondent is upheld.

The parties have stipulated all the facts and the stipulation is incorporated by this reference. The facts necessary for decision are set forth below.

FINDINGS OF FACT.

The petitioner, S. Brad Hunt, resides in St. Louis, Missouri, and he filed his individual income tax returns for the calendar years 1948 and 1949 with the collector of internal revenue for the first district of Missouri.

On May 26, 1944, the petitioner and his wife, Frances C. Hunt, entered into an agreement pertaining to the adjustment of their marital rights and obligations, conditioned upon the awarding of a decree of divorce to Frances Hunt. The agreement made certain property adjustments and, so far as is here material, provided as follows:

(8) Fully recognizing his legal and moral obligation to make provision for the care, support and maintenance of the Party of the Second Part so long as she shall live, the Party of the First Part hereby agrees for himself, his heirs, executors, administrators and assigns, that he will pay to the Party of the Second Part the sum of Fifteen Thousand Dollars ($15,000.00), together with interest thereon at the rate of three percent (3%) per annum, payable monthly, in cash, as follows:

One Hundred Fifty Dollars ($150.00) on the first day of the month following the entry of a valid decree of divorce in favor of the Party of the Second Part, and on the first day of each and every month thereafter, until said sum of Fifteen Thousand Dollars ($15,000.00), together with interest thereon, and on any unpaid monthly balance thereof, at the rate of three percent (3%) per annum, payable monthly, shall be fully paid.

* * * * * * *

(9) The Party of the First Part further agrees that if at any time before the said amount of Fifteen Thousand Dollars ($15,000.00) and interest as herein provided shall have been paid in full, Party of the Second Part shall, by reason of accident, illness or other unusual demand, have need for an amount greater than the One Hundred Fifty Dollars ($150.00) per month herein agreed to be paid, he will secure and pay over to Party of the Second Part, or for her account, such sum as she may need, not to exceed One Thousand Dollars ($1,000.00) in any one year, which sum so paid shall be considered an advance payment on said Fifteen Thousand Dollars ($15,000.00) and interest.

And Party of the First Part further agrees that during the lifetime of both of the parties hereto, and after the full amount of said Fifteen Thousand Dollars ($15,000.00) and interest shall have been paid, upon submission to Party of the First Part of credible evidence that the total income of Party of the Second Part from her stock in the American Life & Accident Insurance Company and her other investments is insufficient to provide her an income of Two Hundred Dollars ($200.00) per month, he will pay to Party of the Second Part such additional sum as may be necessary to provide her with an annual income of Twenty-four Hundred Dollars ($2400.00) per year.

To guarantee and secure the monthly payments under paragraph (8), petitioner agreed to deposit in escrow 300 shares of the capital stock of the American Life & Accident Insurance Company, of which he was president, with authority in the escrow agent to sell, mortgage, or pledge the stock to continue the payments in the event of the petitioner's default. He further agreed that if he ceased to be president of the insurance company before full payment of the $15,000, he would create a trust sufficient to pay $150 monthly to his wife until the full amount of $15,000 is paid, or purchase an annuity that would yield $150 monthly until the $15,000 is paid. Finally, he agreed to deposit life insurance policies on his life in the principal amount of $10,000 with an escrow agent to guarantee the payment of the $15,000 settlement.

On the same day that the above agreement was signed, Frances Hunt filed an action for divorce from the petitioner, and a decree of divorce was entered by the Circuit Court of the City of St. Louis, Missouri, on June 12, 1944.

The payment of $150 a month provided in the agreement above completely amortizes in less than 10 years the $15,000 payment provided for in paragraph (8) of the agreement, together with all interest on the unpaid balance at the rate of 3 per cent per annum. The monthly payment of $150 constitutes payment of both principal and interest.

Under the agreement, payments of $150 per month were made to Frances C. Hunt by the petitioner in accordance with the provisions of paragraph (8) of the agreement—$1,800 being paid in each of the years 1948 and 1949.

The petitioner deducted the sum of $1,800 as alimony on his income tax returns for each of the years 1948 and 1949. The deductions were disallowed by the Commissioner.

OPINION.

ARUNDELL, Judge:

The question involved in this case is whether the petitioner may deduct, under the provisions of section 23(u)

of the Internal Revenue Code, the payments which he made to his ex-wife in satisfaction of the terms of a property settlement. It is conceded that the settlement agreement was incident to the divorce of the parties and that the payments made thereunder were in discharge of petitioner's legal obligations arising out of his marital relationship.

Whether or not the payments made by the petitioner are deductible under section 23(u) is answered by the provisions of correlative section 22(k)

of the Code which specifies the instances in which ‘periodic payments' to a divorced wife shall be reported as income by her. It is the statutory scheme that the husband can deduct under section 23(u) only the payments which his former wife must include in her gross income under the requirements of section 22(k).

While the provisions of section 22(k) require a wife divorced or legally separated from her husband to report as income the ‘periodic payments' she receives from her husband, the statute qualifies this requirement in providing that ‘installment payments' discharging a part of an obligation to a former spouse, the principal sum of which is, in terms of money or property, specified in a settlement agreement shall not be considered periodic payments, except where such installments extend over a period of more than 10 years from the date of the agreement.

Petitioner concedes that the payments made by him under paragraph (8) of the agreement on the sum of $15,000 would be ‘installment payments' in satisfaction of a principal sum if that were the only provision of the agreement. However, paragraph (9) contains ad additional provision to become effective after the $15,000 has been paid. Under this provision, the petitioner guarantees his ex-wife an income of $2,400 annually for the remainder of their joint lives. He has committed himself to make up the difference between her income from other sources and this sum as long as both are living.

The petitioner might never have to make any payments under paragraph (9), but he argues that the contingency of payment up to $200 a month under this provision exists, and that contingency makes uncertain and indefinite the amount that he may eventually have to pay under the agreement. And the respondent concedes that if the payments which have been disallowed had been made under paragraph (9) instead of under paragraph (8), the petitioner could deduct them under the provisions of section 23(u) because they would qualify as periodic payments of an indefinite amount.

The question here is whether the payment provisions of paragraphs (8) and (9) must be considered as a single, unitary plan for discharging petitioner's obligations to his wife, or whether the two formulae for determining the payments for which the petitioner has obligated himself are to be considered separately and perhaps accorded different tax treatment.

We think that the question here is analogous to that in Edward Bartsch, 18 T. C. 65, affirmed per curiam (C. A. 2), 203 F. 2d 715, where the parties provided for a series of continuing monthly payments to the wife, so long as she lived or until her remarriage, and also a series of payments in satisfaction of a lump sum which, under the agreement, would be paid off in less than 10 years.

In the above case, the petitioner made the same argument as made here, that is, that the agreement provided a single and over-all plan for providing for his ex-spouse. We said:

The answer to this argument is that the parties themselves drew the agreement in such a way that it was not ‘unified’ as suggested on brief. They themselves provided * * * for a continuing series of monthly payments for Sarah's support and maintenance, payments obviously ‘periodic’ within section 22(k). Then * * * they specified a lump sum obligation of $45,000 payable as there set out. The plan of payment may have been a single plan, but we do not think that requires us to press the payments under both paragraphs in the same mold when the parties themselves have differentiated them. We see nothing inconsistent in treating the monthly payments under the first paragraph as ‘periodic’ and those under the second paragraph as ‘installments.’ The first are deductible and respondent has so treated them. The second are not deductible and respondent was correct in his disallowance.

We think this observation is all the more pertinent where the payments in issue were made under a provision of the settlement agreement which, by itself, would unquestionably not have permitted petitioner to claim a deduction, while in the Bartsch case the payments were at least simultaneously made under two different formulae, one of which permitted a deduction and one of which did not.

Similarly, in other cases where a settlement of marital obligations provided for periodic payments which qualified for deduction under section 23(u) and for installment payments which did not qualify for deduction, we have held that the different provisions should be treated as separate and independent provisions and taxed or deducted according to the terms of the particular provision. William M. Haag, 17 T. C. 55; Jean Cattier, 17 T. C. 1461; James M. Fidler, 20 T. C. 1081, on appeal (C. A. 9).

Following the reasoning of these cases and of the Bartsch case, supra, we conclude the provisions of paragraphs (8) and (9) of the agreement should be considered as separate provisions for the support and maintenance of the petitioner's ex-wife and that the payments which were made by the petitioner in 1948 and 1949 under the provisions of paragraph (8) were installment payments of a specified principal sum, payable over a period of less than 10 years, and are not deductible under section 23(u) of the Internal Revenue Code.

Decision will be entered under Rule 50.