Opinion
Docket Nos. 31864 36399.
1954-01-12
ANTOINETTE L. HOLAHAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JAMES T. HOLAHAN AND ESTHER P. HOLAHAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Sidney R. Rubin, Esq., and D. A. Forsyth, Esq., for the petitioners. Thomas R. Charshee, Esq., for the respondent.
Sidney R. Rubin, Esq., and D. A. Forsyth, Esq., for the petitioners. Thomas R. Charshee, Esq., for the respondent.
Held, on the facts, that payments received by petitioner Antoinette during the taxable year 1949 were in discharge of a legal obligation which was incurred by her former husband, petitioner James, under a written instrument incident to their decree of divorce; that such payments were periodic payments taxable to Antoinette in the year in which received, and deductible by James in said year, all within the meaning of sections 22(k) and 23(u), Internal Revenue Code.
These proceedings, consolidated for hearing and opinion, involve deficiencies determined by respondent for the calendar year 1949 in the income tax of the petitioner Antoinette L. Holahan, in the amount of $11,845.48, and in the income tax of James T. Holahan and Esther P. Holahan in the sum of $1,573.48. The issue presented is whether certain payments made by petitioner James T. Holahan to petitioner Antoinette L. Holahan, his former wife, are includible in her income under section 22(k) or 22(a) of the Internal Revenue Code and deductible by him under section 23(u) of the Internal Revenue Code.
FINDINGS OF FACT.
Certain of the facts were stipulated and are so found.
Petitioner Antoinette L. Holahan (hereinafter sometimes referred to as Antoinette), the former wife of James T. Holahan, resides in Rochester, New York. James T. Holahan (hereinafter sometimes referred to as James), and Esther P. Holahan, his present wife, reside in Honeoye Falls, New York. The individual income tax return of Antoinette, and the joint income tax return of James and Esther Holahan, for the year 1949 were filed with the collector for the twenty-eighth district of New York, both returns being on the cash accounting basis.
Antoinette and James were married in 1906. They had 9 children, 5 of whom survived.
On April 7, 1924, James and Antoinette entered into a separation agreement, pursuant to which he agreed to pay for the support and maintenance of herself and her children, the sum of $100 a week, and, in addition, all that he should earn above $5,200 up to $2,800, making a total not to exceed $8,000 annually. Divorce was not discussed or contemplated by either party at the time said agreement was entered into. During each of the years 1924 through 1927, James earned at least $8,000.
On April 3, 1928, Antoinette commenced an action in the Supreme Court, Monroe County, New York, against James for a divorce and for suitable provision for her support and for the support and education of the children. During the pendency of such action, under date of April 7, 1928, James and Antoinette entered into the following agreement:
AGREEMENT, made this 7th day of April, 1928, between James T. Holahan, hereinafter called ‘Mr. Holahan,‘ and Antoinette L. Holahan, his wife, hereinafter called ‘Mrs. Holahan,‘ both of the City of Rochester, County of Monroe and State of New York.
WITNESSETH: The parties hereto are husband and wife and have been living separate and apart since February, 1924. On the 7th day of April, 1924, they entered into a separation contract which is still in full force and effect. Pursuant to the terms of said contract Mr. Holahan on December 30th, 1927, demanded an arbitration for the purpose of obtaining a decrease of the allowances provided in said contract to be paid to Mrs. Holahan on account of the support and maintenance of herself and her five children. On January 14th, 1928, Mrs. Holahan likewise demanded an arbitration pursuant to the terms of said contract for the purpose of obtaining an increase in the aforesaid allowances. Each of the parties thereafter selected arbitrators who are now considering the selection of a third arbitrator to complete the board.
Mrs. Holahan has heretofore instituted an action in the Supreme Court, State of New York, County of Monroe, against Mr. Holahan for an absolute divorce, and asking for the custody and control of the five children of the parties hereto and for a proper provision for the support, maintenance and education of the said five children, and for the support and maintenance of herself.
The parties hereto are desirous of settling the controversy now pending before the board of arbitration as provided in said separation contract, and desire to arrange and fix the amount which Mr. Holahan shall pay to Mrs. Holahan on account of her future support and maintenance, and for the support and maintenance of the children of the parties, and the amount of the counsel fees to be paid, all the same being determined in lieu of Mrs. Holahan's applying to the Court in her divorce action for alimony and counsel fees.
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises of the parties hereto, it is agreed between them as follows:
1. Each of the parties hereby agrees to and does hereby discontinue and terminate all proceedings in connection with their applications to arbitrate the amount to be paid Mrs. Holahan under the said separation contract dated April 7th, 1924.
2. The parties hereto agree that the provisions contained in said separation contract dated April 7th 1924, pertaining to the amount to be paid Mrs. Holahan by Mr. Holahan for the support and maintenance of herself and children, shall be modified as follows, as of April 1st, 1928; Mr. Holahan agreed to pay Mrs. Holahan Eight Thousand Dollars ($8,000.00) a year absolutely during the term of her natural life and so long as she shall remain unmarried for the support and maintenance of herself and the education, maintenance and support of her said five children, the same to be paid to her as follows— One Hundred Dollars ($100.00) weekly and Twenty-eight Hundred Dollars ($2800.00) a year annually commencing April 1st, 1929, which payments will be made to her upon demand at or from the office of Thomas Holahan, Rochester, New York, or from whatever office Mr. Holahan may hereafter have or be connected with, and he authorizes and directs his employer to make such payments upon demand, charging the same to his account.
3. Mrs. Holahan agrees that she will not in any action or proceeding apply for an increase of the allowances herein provided for her support and maintenance.
4. Mr. Holahan agrees that he will not in any action or proceeding, or in any manner, apply for a modification of the terms of this agreement or for a decrease of the allowances herein provided, and he further agrees that Mrs. Holahan shall be entitled to all of the earnings of the minor children of the parties thereto. He further agrees that the fact that Mrs. Holahan may be relieved of the burden of the care and maintenance of her said children by reason of their becoming twenty-one years of age or otherwise, shall not be used as a means or basis of procuring a decrease or a reduction of the amount hereinbefore provided to be paid to her.
5. Mr. Holahan consents that in Mrs. Holahan's action for divorce there may be inserted in the decree of divorce, in the event of such decree being granted to Mrs. Holahan, a provision allowing her alimony at the rate of Eight Thousand Dollars ($8,000.00) per year, payable One Hundred Dollars ($100.00) weekly, and Twenty-eight Hundred Dollars ($2800.00) annually, commencing April 1st, 1929, for the support and maintenance of herself and five children of the parties hereto; the provision, however in said decree shall in no way effect (sic) the obligations imposed by the terms of this agreement, excepting that the payment by Mr. Holahan of said Eight Thousand dollars ($8,000.00) annually to Mrs. Holahan shall be in full satisfaction of both this agreement and of said divorce decree.
6. Mr. Holahan acknowledges that he is at present indebted to Mrs. Holahan on account of balance due from past weekly installments provided under said contract of April 7th, 1924, to be paid in the amount of Three Hundred Dollars ($300.00) which sum shall be paid immediately, and that he is further indebted to her on account of quarterly installments past due, up to and including March 31, 1928, in the amount of Nine Hundred Dollars ($900.00) of which sum $450.00 shall be paid July 1, 1928, and $450.00 April 1, 1929.
7. Mr. Holahan further agrees to pay to Wile, Oviatt & Gilman, upon demand by them on account of their services and for counsel fees for Mrs. Holahan in the aforesaid divorce action, the sum of Seven Hundred Fifty Dollars ($750.00).
8. The provisions of this contract shall be binding upon the estates, heirs, executors and administrators of the parties hereto.
On May 19, 1928, the Supreme Court for Monroe County, New York, entered an interlocutory decree, which became final 3 months after entry, awarding Antoinette a divorce from James, awarding custody of their five children to Antoinette and containing the following provision for the support of herself and said children:
ORDERED, ADJUDGED AND DECREED that the defendant, James T. Holahan, pay to the plaintiff, Antoinette L. Holahan, the sum of Eight Thousand Dollars ($8,000.00) per year, payable One Hundred Dollars ($100.00) weekly, and Two Thousand Eight Hundred Dollars ($2,800.00) annually, the first of said annual payments of Two Thousand Eight Hundred Dollars ($2,800.00) to be made on April 1st, 1929 at Rochester, New York, for the support of herself and said children until and after final judgment herein, * * *
In its ‘Findings of Fact and Conclusions of Law in Divorce Action,‘ dated May 14, 1928, on which the above divorce decree was based, the court referred to the agreement of April 7, 1928, and the payment provisions contained in paragraph 5 thereof. The divorce decree itself did not specifically refer to said agreement but in its preliminary recitals did refer to the ‘decision in writing‘ which the court had previously made.
By order dated August 29, 1933, the Supreme Court of Monroe County, New York, modified the aforesaid divorce decree to provide as follows:
ORDERED, that the Interlocutory Judgment of Divorce heretofore granted in the above-entitled action and entered in the Monroe County Clerk's Office on the 19th day of May 1928, be and the same hereby is modified so as to provide that the defendant shall be obligated to pay to the plaintiff, the sum of Fifty Dollars ($50.00) a week as alimony for the support and maintenance of herself and family, instead of the sum of Eight Thousand Dollars ($8,000.00) per year, as provided in said Interlocutory Judgment. This modification shall be effective as of November 23, 1931. * * *
Pursuant to the terms of said divorce decree as modified by order dated August 29, 1933, James paid Antoinette $50 per week from the effective date of the modification to the end of the year 1948. Antoinette reported these sums as alimony in her returns for the years 1942 through 1948 and there is no dispute with respect to them.
On May 20, 1947, Antoinette commenced an action in the Supreme Court, Monroe County, New York, against James for the difference between the $50 per week provided for in the aforesaid divorce decree as modified and the amount provided for in the separation agreement dated April 7, 1924, as modified by the agreement dated April 7, 1928.
On December 1, 1947, the Supreme Court of Monroe County, New York (Justice Gilbert), rendered its decision holding that the plaintiff therein, Antoinette L. Holahan, was entitled to summary judgment for the relief demanded in her complaint. In so holding it referred to the provisions in the agreement of April 7, 1928, providing that similar provisions for support and maintenance might be incorporated in the divorce decree, but that such provisions in the divorce decree should in no way affect the obligations imposed by the agreement and held, among other things, that the alteration by the court of the provisions of the divorce decree did not of itself alter the contractual obligations, nor did the mere acceptance by the plaintiff of payments by defendant under the order of modification spell out an abandonment by plaintiff of her rights under the contract, and that plaintiff was only seeking to enforce a provision contained in the agreement of April 7, 1928. Judgment dated December 17, 1947, was entered in favor of the plaintiff, Antoinette L. Holahan, in the total sum of $124,784, representing the payments in default under the contract of April 7, 1928, interest thereon, and costs. On appeal this judgment was affirmed by the Appellate Division of the Supreme Court of the State of New York on July 8, 1948, and by the Court of Appeals of the State of New York on January 6, 1949.
On January 13, 1937, James filed a petition in bankruptcy and a schedule wherein Antoinette was listed as an unsecured creditor with respect to her claims for sums owing her under the agreement of April 7, 1928, over and above the amounts paid her under the divorce decree as modified. On September 7, 1937, he was granted a discharge in bankruptcy ‘excepting such debts as are by law excepted from the operation of a discharge in bankruptcy. ‘ Subsequent to the entry of the judgment of December 17, 1947, the defendant therein sought leave to file an amended answer setting up his discharge in bankruptcy as a defense to the plaintiff's claim. The Supreme Court of Monroe County (Justice Cribb), on March 6, 1948, held the discharge in bankruptcy insufficient in law as a defense and denied the motion, stating: ‘Our courts have consistently held that obligations for support and maintenance embodied in separation agreements between husband and wife are within the purview of section 17 of the Bankruptcy Act and are not dischargable in bankruptcy. * * * The fact that defendant in 1933 secured an order modifying the judgment of divorce by reducing to $50.00 per week the amount to be paid by him for support and maintenance neither impaired the agreement upon which the present action is based, nor altered its character and purpose.‘ In the summer of 1948, James also filed an action in the District Court of the United States for the Western District of New York for an injunction restraining Antoinette from enforcing the summary judgment which she had obtained on the ground that the obligations under the separation agreement of April 7, 1928, were discharged in bankruptcy. In an unreported opinion dated September 1, 1948, Judge Knight of that court granted Antoinette's motion to dismiss the complaint, stating, among other things, ‘The separation agreement of April 7, 1928, between plaintiff and defendant, was therefore in full force and effect when plaintiff applied for discharge in bankruptcy. He was then bound to pay alimony, imposed 'by order of Court.’ * * * He was also bound under his own contract to pay 'for maintenance or support of wife or child.' Neither obligation was dischargable in bankruptcy.‘
On January 12, 1949, Antoinette and James entered into the following agreement:
Agreement made this 12th day of January, 1949, by and between ANTOINETTE L. HOLAHAN, residing at No. 128 Barrington Street, in the City of Rochester, Monroe County, New York, party of the first part, and JAMES T. HOLAHAN, residing on the Pond Road, in the Town of Mendon, County of Monroe and State of New York, party of the second part,
WITNESSETH:
WHEREAS, the parties hereto were formerly husband and wife, and have heretofore been divorced, and
WHEREAS, the parties hereto have been in disagreement concerning the amount of money due to the party of the first part from the party of the second part under a contract under a contract (sic) dated April 7, 1928, which said contract provided for the payment of the sum of Eight thousand dollars ($8,000.00) per year for the support and maintenance of the party of the first part and support and maintenance of the then minor children of the parties hereto, and
WHEREAS, the party of the first part has heretofore (sic) commenced an action against the party of the second part upon said contract, and has obtained a judgment against the party of the second part, which said judgment was recently affirmed by the Court of Appeals of the State of New York, and said judgment is in approximately the sum of One hundred twenty-five thousand dollars ($125,000.00), and
WHEREAS, the party of the second part is now paying weekly alimony under the divorce decree as modified in the amount of Fifty dollars ($50.00) per week to the party of the first part, and
WHEREAS, there is now pending in the Supreme Court of the State of New York a proceeding brought by the party of the first part to remodify the said divorce decree so as to increase the amount payable under said divorce decree,
WHEREAS, there is now pending an appeal to the United States Court of Appeals for the Second Circuit, from an order dismissing the complaint of the party of the second part in an action brought by him in the United States District Court involving the question of the discharge of the claim of the party of the first part in the bankruptcy proceedings of the party of the party of the second part, and
WHEREAS, the parties hereto are desirous of settling all their differences and of ending all future litigation herein,
Now, therefore, it is mutually agreed as follows:
The party of the second part will pay to the party of the first part the sum of One hundred thousand dollars ($100,000.00) in cash, in full settlement of all claims under said contract dated April 7, 1928, and said judgment, and in full settlement of all matters pending between the parties, and in addition thereto, hereby agrees to pay to the party of the first part weekly, each and every week during the term of her natural life, the sum of Seventy-five dollars ($75.00) per week, the said sum of Seventy-five dollars ($75.00) to be paid in full satisfaction of any and all claims for support, maintenance or otherwise of the said party of the first part.
The said sum of One hundred thousand dollars ($100,000.00) shall be paid as follows, to wit:
Five thousand dollars ($5,000.00) in cash upon signing of this agreement, receipt of which is hereby acknowledged, and the further sum of Twenty-five hundred dollars ($2500.00), on or before the 25th day of January, 1949, and the remaining balance of the said One hundred thousand dollars ($100,000.00) on or before the 25th day of February, 1949.
Party of the second part agrees to pay the said sum of Seventy-five dollars ($75.00) per week commencing on the 20th day of January, 1949, and regularly each week thereafter.
It is further expressly agreed that in the event party of the second part, for whatever reason, does not pay the full sum of One hundred thousand dollars ($100,000.00) as herein provided, then, and in that event, any part of said sum paid by the said party of the second part shall be applied on account as part payment of the said judgment, and the remaining amount of said judgment shall be due and payable in full, together with interest thereon, as if this agreement had not been entered into, and the party of the first part may proceed with whatever remedies she may elect for the enforcement of said judgment.
It is further expressly agreed between the parties hereto that unless the full sum of One hundred thousand dollars ($100,000.00) as herein provided for is paid to the party of the first part by the party of the second part, all the rights and remedies of the party of the first part under the said contract dated April 7, 1928, shall be unaffected and remain as heretofore.
It is further expressly agreed that concurrently with the signing of this agreement, the attorneys for the parties will stipulate a reasonable extension of the time of the party of the second part to file the record and brief in the said appeal pending in the said United States Court of Appeals, Second Circuit, and nothing in this agreement shall in any event interfere with the right of the said party of the second part to prosecute said appeal, providing, however, that if the said sum of One hundred thousand dollars ($100,000.00) is paid as herein provided, then, and in the event, the parties agree to stipulate a discontinuance of said appeal, without costs.
It is further expressly agreed that pending the payments herein provided for, no further proceedings of any kind shall be taken by the party of the first part, her attorney, or agents, looking towards the collection of said judgment, excepting the entry of the order and judgment of affirmance to the Court of Appeals, it being expressly understood and agreed that the injunction order contained in the order in supplementary proceedings hereinbefore served upon the party of the second part and any other restraining order shall remain in full force and effect.
The parties further agree to stipulate a discontinuance of the proceeding now pending in the Supreme Court of the State of New York for a remodification of the divorce decree granted to the party of the first part herein.
It is further expressly agreed that all Sheriff's fees herein in excess of the sum of Five hundred dollars ($500.00) which may be due to the Sheriff of Monroe County on the execution heretofore issued by the party of the first part, shall be paid by the party of the second part.
This agreement shall be binding upon the parties hereto, and their respective estates, heirs, administrators and assigns.
IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seals the day and year first above written.
(s) Antoinette L. Holahan (L.S.) (s) James T. Holahan (L.S.)
Pursuant to this agreement Antoinette, in 1949, received the net amount of $28,125, plus $75 per week or a total of $32,025.
On her income tax return for 1949, the petitioner Antoinette L. Holahan claimed that no part of the amount received by her from her divorced husband in 1949 constituted income to her within the meaning of section 22(k) of the Internal Revenue Code and accordingly no part thereof was included in income on this return. In determining the deficiency in the income tax of Antoinette respondent added to her net income the sum of $32,025 and explained the adjustment as follows:
(a) Back alimony payments received in the taxable year in the net amount of $28,125.00 and current payments in the amount of $3,900.00 are held to be incident to a court decree and includible in your taxable income under the provisions of 22(k) of the Internal Revenue Code.
On his income tax return for 1949 the petitioner James T. Holahan claimed a deduction in the amount of $33,850
as alimony paid to Mrs. Antoinette Holahan. In determining the deficiency in the income tax of James, respondent disallowed the deduction so claimed and explained the adjustment as follows:
The discrepancy between this amount and the $32,025 stipulated as received by Antoinette from James in 1949 has not been explained. Accordingly the amount stipulated should be used in any computations to be made under Rule 50.
(a) It is held that the deduction of $33,850.00 claimed in your return for alimony paid to your former wife does not represent periodic payments in discharge of a legal obligation imposed upon you under a decree of divorce or of legal separation or under a written instrument incident to a divorce or separation within the meaning of Section 22(k) of the Internal Revenue Code. Accordingly, no part of the amount in question is allowable as a deduction under the provisions of Section 23(u) of the Code.
OPINION.
BRUCE, Judge:
The principal issue to be determined in these proceedings is whether certain payments totaling $32,025 made by James T. Holahan, the petitioner in Docket No. 36399, to his former wife, Antoinette L. Holahan, the petitioner in Docket No. 31864, in 1949 are includible in her income under section 22(k) of the Internal Revenue Code
and are deductible by him under section 23)u).
SEC. 22. GROSS INCOME.(k) ALIMONY, ETC., INCOME.— In the case of 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. This subsection shall not apply to that part of any such periodic payment which the terms of the decree or written instrument fix, In terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of such husband. In case any such periodic payment is less than the amount specified in the decree or written instrument for the purpose of applying the preceding sentence, such payment, to the extent of such sum payable for such support, shall be considered a payment for such support. 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. For the purposes of the preceding sentence, the portion of a payment of the principal sum which is allocable to a period after the taxable year of the wife in which it is received shall be considered an installment payment for the taxable year in which it is received. (In cases where such periodic payments are attributable to property of an estate or property held in trust, see section 171(b).
By amended pleadings filed in Docket No. 31864, respondent has also alleged, as an alternative issue, that the net amount of $28,125 received by Antoinette in 1949 was taxable income to her under section 22(a), as damages received for breach of contract. Insofar as sections 22(k) and 23(u) are concerned the respondent has taken diametrically opposite positions in his determinations of the deficiencies involved in these proceedings. On brief, he concedes that one or the other of these determinations in this regard is wrong, but strongly urges that the determination with respect to Antoinette is the correct one.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(u) ALIMONY, ETC., PAYMENTS.— In the case of a husband described in section 22(k), amounts includible under section 22(k) in the gross income of his wife, payment of which is made within the husband's taxable year. If the amount of any such payment is, under section 22(k) or section 171, stated to be not includible in such husband's gross income, no deduction shall be allowed with respect to such payment under this subsection.
Determination of the principal issue depends in turn upon the question whether the net aggregate sum of $28,125 and the $75 weekly payments (totaling $3,900) constitute periodic payments in discharge of a legal obligation which, because of the marital relationship, was incurred by James under a written instrument incident to a divorce.
The payments involved were made immediately pursuant to the agreement entered into between Antoinette and James on January 12, 1949. Antoinette contends that this agreement, made some 20 years after the decree of divorce was entered, was a new agreement, complete unto itself, superseded all previous agreements, and was not ‘incident to‘ such divorce. We do not agree.
The situation herein is substantially similar to that which existed in the case of Dorothy Briggs Smith, 16 T.C. 639. In that case, after suit for divorce had been instituted the parties entered into an agreement including monthly payments for the support of the wife and children. This agreement was made a part of the final decree of divorce. Subsequently the husband filed a motion for reduction of the payments and, before decision thereon, the parties entered into another agreement providing for yearly payments to the wife, less than had been provided by the earlier agreement, in lieu of all marital obligations of the husband and including all obligations to make payments required under the earlier agreement. In holding the later agreement incident to the divorce we there said:
The payment in question was made under the provision of the 1944 agreement. But that agreement cannot be considered in vacuo. The circumstances surrounding its execution must be examined, and the reasons for its adoption scrutinized. From such a study we have concluded that the 1944 agreement was a revision of the 1937 agreement, which admittedly was incident to the divorce, and thus it was incident to the final decree.
See also Rowena S. Barnum, 19 T.C. 401.
Our study of the circumstances surrounding the execution of the 1949 agreement herein leads up to a similar conclusion. Antoinette and James had entered into a separation agreement in 1924 providing for her support and maintenance and that of their children. Divorce was not discussed or contemplated at that time and this agreement was not incident to divorce. In 1928 Antoinette instituted an action for divorce and while pending, on April 7, 1928, the parties entered into an agreement containing provisions for the support and maintenance of Antoinette and the children similar in amounts to those provided by the 1924 agreement except that certain conditional payments were made absolute. Both parties agreed they would not thereafter apply for any modification of the allowances therein provided. Included in this agreement was also a provision whereby James consented that, in the event a divorce was granted to Mrs. Holahan in the pending action, a provision might be inserted therein allowing her alimony, the rate specified being the same as theretofore set out in the agreement, and further providing that such provision in the decree ‘shall in no way effect (sic) the obligations imposed by the terms of this agreement, ‘ except that payment of the specified amount annually should be in full satisfaction of both the agreement and the decree.
The Supreme Court for Monroe County, New York, took note of the agreement of April 7, 1928, in its findings on which the divorce decree was based. The divorce decree itself, entered May 29, 1928, did not specifically mention the agreement of April 7, 1928, but in its preliminary recitals referred to the court's findings previously made which had referred to the agreement, and, it incorporated therein a provision for payment for the support of the divorced wife and children in amounts exactly as provided in the agreement. In view of these facts it is not necessary that we attempt any final definition of ‘incident to,‘ a phrase which courts have found difficulty in clarifying. Izrastzoff v. Commissioner, 193 F.2d 625, 628, affirming 15 T.C. 573. The evidence clearly establishes that the agreement of April 7, 1928, was ‘incident to‘ the divorce. Cf.F. Ewing Glasgow, 21 T.C. No. 25 (Nov. 18, 1953); Rowena S. Barnum, supra; Jane C. Grant, 18 T.C. 1013 (on appeal C.A. 2); Jesse L. Fry, 13 T.C. 658; Robert Wood Johnson, 10 T.C. 647; George T. Brady, 10 T.C. 1192.
Petitioner Antoinette's argument that the 1928 agreement was not incident to the divorce because it merely modified the 1924 agreement which was not incident to the divorce decree is without merit. In Muriel Dodge Neeman, 13 T.C. 397, affd. 200 F.2d 560, certiorari denied 345 U.S. 956, we held that where, incident to a divorce, parties amend an old agreement, not incident to divorce, the whole agreement, as amended, is incident to a divorce within section 22(k) of the Internal Revenue Code.
Subsequent to the execution of the agreement of April 7, 1928, and the entry of the decree of May 19, 1928, James procured a modification of said decree on August 29, 1933, reducing the amount of payments for the support of Antoinette and the children from $8,000 per year as provided in the original decree to $50 a week and paid the $50 weekly from the effective date of said modification to the end of 1948. On May 20, 1947, Antoinette filed an action against James to recover the difference between the $50 weekly so paid and the amount provided for under the April 7, 1928, agreement. Judgment in her favor in the total sum of $124,784 was entered December 17, 1947. Various efforts were made by James to have this judgment set aside and canceled, including a motion for leave to file an amended answer setting up a discharge in bankruptcy, obtained by him in 1937, as a defense to any obligations under the 1928 agreement, which motion was denied by the Supreme Court for Monroe County, New York, and appeals to the Appellate Division of the Supreme Court and the Court of Appeals of the State of New York, both of which affirmed the action of the Supreme Court for Monroe County. He also instituted an action in the District Court of the United States for the Western District if New York to enjoin enforcement of the judgment on the basis of the aforesaid discharge in bankruptcy. Said district court dismissed the complaint on motion of Antoinette and James appealed therefrom to the United States Court of Appeals for the Second Circuit. Pending such appeal and also pending disposition of a motion by Antoinette to have the Supreme Court for Monroe County remodify its decree so as to increase the amount payable under the divorce decree, Antoinette and James entered into the agreement of January 12, 1949, for the purpose of ‘settling all their differences and of ending all future litigation ‘ therein mentioned.
We think it clear from all the facts that the agreement of January 12, 1949, resulting from differences between the parties which arose in connection with the divorce decree and an earlier agreement which was incident to the divorce, was also incident to the divorce. Rowena S. Barnum, supra, Dorothy Briggs Smith, supra. The authorities relied upon by petitioner Antoinette are all distinguishable on their facts. In Frederick S. Dauwalter, 9 T.C. 580, no provision for alimony having been made in the original divorce decree, the court which granted the divorce was without power under the state statutes subsequently to provide for alimony, and, the later agreement was a voluntary promise by the husband. In Commissioner v. Murray, 174 F.2d 816, affirming in part and reversing in part a Memorandum Opinion of this Court dated June 14, 1948, the later agreement was also an entirely voluntary promise by the husband. In Miriam C. Walsh, 11 T.C. 1093, affd. 183 F.2d 803, neither the original nor any later agreement was mentioned in the divorce decree. The decision therein turned upon the question whether the written agreement in question must be ‘incident to‘ the divorce decree itself or the status of divorce, a question which we have found it unnecessary to discuss in this case in view of the clear showing that the agreement of April 7, 1928, was incident to the divorce decree. And in Benjamin B. Cox, 10 T.C. 995, affd. 176 F.2d 226, there was never a legal obligation for support imposed by or incurred under a divorce decree, and there was no written instrument imposing such an obligation prior to the divorce. That case also involved an obligation voluntarily assumed after it had been fully cut off. The instant proceeding is concerned with an agreement which modifies a continuing obligation imposed by a decree of divorce as well as being pursuant to a written instrument incident to such divorce.
Having found that the agreements of April 7, 1928, and January 12, 1949, were both incident to the divorce, the question remains whether the payments received in 1949 constituted ‘periodic payments‘ within the meaning of section 22(k) of the Internal Revenue Code.
Section 22(k) requires a divorced wife to include in her gross income ‘periodic payments (whether or not made at regular intervals) received subsequent to such decree * * * .‘ Excepted from this requirement are installment payments of an obligation the principal sum of which is specified in the decree or instrument unless such principal sum is payable within a period of not more than 10 years.
The $75 weekly payments, totaling $3,900, received by Antoinette in 1949 clearly constituted periodic payments within the meaning of the statute and having found that the agreement under which they were paid was incident to the decree, they are includible in the gross income of Antoinette and deductible by James in the taxable year 1949.
With respect to the $28,125 received by Antoinette from James during the year 1949, this represented a partial payment of a $100,000 sum which James agreed to pay under the agreement of January 12, 1949. This $100,000 sum was arrived at between the parties in settlement of the $124,784, which the state court had found James owed Antoinette in arrearages and interest thereon under the April 7, 1928, agreement.
In Estate of Sarah L. Narischkine, 14 T.C. 1128, affd. (C.A. 2) 189 F.2d 257, we held that arrearages retain their original character, stating:
Since the arrears here would have constituted periodic payments had they been paid when due, the receipt of such arrears, even though in a lump or aggregate sum, must be regarded as the receipt of a periodic payment.
See also Jane C. Grant, supra (on appeal C.A. 2), and Elsie B. Gale, 13 T.C. 661, affd. (C.A. 2) 191 F.2d 79. The fact that the sum here involved is less than the total sum of the arrearages does not deprive it of this character. Accordingly, under the rationale of the Narischkine, Grant, and Gale cases, supra, we think it is clear that the $28,125 paid by James to Antoinette in 1949 was a ‘periodic payment‘ within the meaning of section 22(k).
Petitioner Antoinette further contends however, in the alternative, that she is not taxable on support payments which were owing to her prior to 1942 when section 22(k) became applicable,
since she would not have been taxable on such payments had they been made when due.
Section 120(g), Revenue Act of 1942, provides:SEC. 120. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS.(g) TAXABLE YEARS TO WHICH AMENDMENTS APPLICABLE.— The amendments made by this section shall be applicable only with respect to taxable years beginning after December 31, 1941; except that if the first taxable year beginning after December 31, 1941, of the husband does not begin on the same day as the first taxable year beginning after December 31, 1941, of the wife, such amendments shall first become applicable in the case of the husband on the first day of the wife's first taxable year beginning after December 31, 1941, regardless of the taxable year of the husband in which such day falls.
It is to be noted, however, that Antoinette was on the case accounting basis. Moreover, section 22(k) provides that ‘periodic payments * * * received subsequent to such decree * * * shall be includible in the gross income of such wife, * * * .‘ (Emphasis supplied.) See also section 29.22(k)-1 of Regulations 111 which, with certain exceptions not here material, provides:
Periodic payments are includible in the wife's income under section 22(k) only for the taxable year in which received by her. As to such amounts, the wife is to be treated as if she makes her income tax returns on the case receipts and disbursements basis, regardless of whether she normally makes such returns on the accrual basis. * * *
In Lily R. Reighley, 17 T.C. 344, 356, in discussing the statutory plan of taxing ‘alimony‘ payments embraced by sections 22(k) and 23(u), it was pointed out that:
Under the statutory provisions the year of the wife in which the periodic payments must be included and the year of the husband in which he may take deductions for the payments is the year of the actual payment, even though either or both the wife and the husband report income on an accrual basis. * * *
The legislative history of the statute supports this interpretation:
Section 23(u), as well as section 22(k), contemplates the treatment of alimony payments as if the husband and wife were on a cash receipts and disbursement basis, that is, the deduction is allowed the husband only for actual payment within his taxable year and the wife includes in her income for a taxable year under section 22(k), only such periodic payments described therein as are actually received during such taxable year (including of course, the constructive receipt of payment of amounts unqualifiedly subject to the demand of the wife or husband, as the case may be). * * * S. Rept. No. 1631, 77th Cong., 2d Sess. (1942-2 C.B. 504, 569).
In Jane C. Grant, Elsie B. Gale, and Estate of Sarah N. Narischkine, all supra, the sums involved included arrearages covering periods both prior and subsequent to 1942. While the opinions in each of these cases did not discuss the precise contention presented herein, the facts so clearly encompassed the question it is to be presumed it was taken into consideration. We there held that the alimony payments for prior years were periodic payments, even though the entire amounts were paid in the taxable year, and that they constituted taxable income to the wives in the year received under the provisions of section 22(k) of the Internal Revenue Code. Our attention has not been called to any authority holding to the contrary.
Accordingly, we hold that the sum involved herein is to be included in Antoinette's gross income in 1949, the year in which she actually received it.
On brief, Antoinette also challenges the constitutionality of section 22(k) of the Internal Revenue Code. Since, however, it was not specifically pleaded, the question of the constitutionality of the statute will not be considered by this Court. Muriel Dodge Neeman, supra.
One other contention of petitioner Antoinette is to be noted. She contends that a portion of the sum in issue must be excluded from her income on the ground that it represents consideration for her surrender of future support rights under the 1928 agreement. The terms of the 1949 agreement do not bear this out. According to its recitals it was in settlement of all differences between the parties stemming from the divorce and the arrearages under the 1928 agreement. There is accordingly no basis for this contention.
We conclude that respondent did not err in his determination respecting the taxability of the income received by petitioner Antoinette L. Holahan during the year 1949, but that he did err with respect to the deduction of said sums by petitioners James T. and Esther P. Holahan.
Petitioner Antoinette also alleged respondent erred in failing to give her credit for $5,867.42 alleged to have been paid by her on her declaration of estimated tax for the taxable year. The parties stipulated for allowance of such payments under Rule 50. It is also to be noted there is a discrepancy between the amount stipulated as received by Antoinette in 1949, to wit $32,025, and the amount of $33,850 claimed by James as a deduction for alimony paid to her in that year. There is no explanation in the record of this discrepancy. The amount stipulated should therefore be used in a computation under Rule 50.
Decisions will be entered under Rule 50.