Opinion
Docket No. 64896.
1960-02-18
ANN HAIRSTON RYKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Richard F. Alden, Esq., for the petitioner. Eugene F. Reardon, Esq., for the respondent.
Richard F. Alden, Esq., for the petitioner. Eugene F. Reardon, Esq., for the respondent.
A divorce decree allocated community property between the spouses and in addition required the husband to make monthly payments to his wife for a period of 10 years and a month; such payments were to be equal to a percentage of his gross income and liability therefor was to cease upon wife's remarriage or the death of either spouse. Held, on this record, the monthly payments in fact represented alimony taxable to the wife, section 22(k), I.R.C. 1939; the description of these payments in the divorce decree as being ‘part of the consideration for the division of the (community) properties' does not require a different result, where the record as a whole, including other provisions of the decree, justified the classification of these payments as alimony.
Respondent determined a deficiency in petitioner's income tax for the calendar year 1953 in the amount of $2,572.12. The sole question remaining for decision is whether certain payments made to petitioner by her former husband pursuant to a decree of divorce were includible in petitioner's gross income pursuant to section 22(k), I.R.C. 1939.
FINDINGS OF FACT.
Certain facts have been stipulated and are incorporated herein by reference.
Petitioner, an individual residing in Glendale, California, filed her income tax return for 1953 with the district director of internal revenue, Los Angeles, California.
Petitioner and Herbert E. Ryker (hereinafter referred to as Herbert) were married on December 20, 1941, and separated from each other on or about January 10, 1951. There were no children born of the marriage. Substantially all of the property owned by petitioner and Herbert was community property under the laws of California. At the time of their separation, they agreed orally to divide such property equally.
Petitioner had legal representation at all stages of the negotiations and proceedings described below. She employed four different attorneys in succession during this period.
On March 2, 1951, subsequent to the separation, petitioner and Herbert executed a written agreement entitled ‘Property Settlement and Agreement For Alimony.’ The preamble to the agreement recited that petitioner intended to file suit for divorce and that the parties desired ‘to completely and forever settle their property rights in and to their community property, which is all the property that either of them possesses; and to provide for the payment of alimony to the wife.’ Paragraphs 2 and 3 of the agreement provided for the allocation of specified items of community property to petitioner and Herbert, respectively. With certain limited exceptions the agreement did not specify the values attributable to the respective items of property as of the date of the execution. Paragraph 5 of the agreement provided as follows:
Husband agrees to pay to the Wife as alimony twenty-five (25%) per cent of all sums received by way of earnings for his personal services. * * * Said payments are made as alimony and not as part of any settlement of property rights, which settlement of property rights has heretofore been provided for in paragraphs 2. and 3. * * * In the event that the income tax law should be changed in such manner as to not allow the above alimony payments as a deduction to the Husband, then said twenty-five (25%) per cent of his earnings shall be based upon his income after his income taxes. * * *
The alimony payments were payable monthly for a period of 10 years and 1 month after the granting of an interlocutory decree of divorce between the parties, but were to cease immediately upon the death or remarriage of petitioner, or upon the death of Herbert.
It was also provided that
9. Each party hereby certifies to the other that a full disclosure of all assets has been made and that neither party has any property of any nature whatsoever that has not heretofore been disclosed to the other party and incorporated and disposed of in this agreement, and all of said assets are community property.
14. Each party has read the foregoing agreement and has had independent counsel and fully understands the contents thereof and accepts the same. There has been no promise, agreement or undertaking of either of the parties to the other, except as above set forth, relied upon by either as a matter of inducement to enter into this agreement.
Petitioner executed the agreement of March 2, 1951, believing that it was preliminary in nature, that it would be of no legal effect until a decree of divorce was entered, and that the property rights of the parties would be finally settled at the time of the divorce proceedings. In March 1951, after the agreement was executed, petitioner filed suit for divorce in the Superior Court of California, County of Los Angeles. Shortly thereafter, petitioner discovered $4,000 in United States savings bonds, which were in fact her separate property, had been included in the separation agreement as community property. As a result, she began to doubt whether the assets of the community were in fact as they were represented to be by Herbert at the time of the execution of the agreement. At petitioner's request, the Superior Court dismissed her complaint for divorce.
In June 1951, Herbert filed a complaint for divorce in the Superior Court and requested that the agreement of March 2, 1951, be approved and incorporated in the interlocutory decree of divorce. Petitioner filed a cross complaint, and a ‘Secondary Amended and Supplemental Cross-Complaint for Separate Maintenance’ which prayed that the agreement of March 2, 1951, be declared null and void, that petitioner be awarded all of the community property, and that Herbert be required to pay petitioner ‘a reasonable sum for her support and maintenance, and for attorney's fees and costs herein.’ Petitioner alleged, among other things, that, contrary to her belief at the time of execution, the agreement of March 2, 1951, did not effectuate an equal division of community property, but that the property allocated therein to Herbert was worth $113,576.18 whereas the property allocated to her was worth $76,120.57. There were also included schedules purporting to show the reasonable values attributable to items of community property then in the possession of petitioner and Herbert, respectively.
Hearings on the complaint and cross complaint were commenced on April 21, 1952, at which time petitioner sought an audit of the community property to enable her to ascertain the extent of such assets. During the proceedings, petitioner, Herbert, and their respective counsel attempted to work out a settlement of their differences in private conference. At one point in the negotiations, petitioner had a dispute with her counsel with respect to the only remaining item to be settled that appeared to be seriously in controversy, and counsel proffered his resignation. The trial judge, however, advised petitioner to rely upon her counsel to protect her rights to an equitable division of the community property, and petitioner agreed to do so. Thereafter, in open court, counsel for petitioner and counsel for Herbert stipulated to a settlement of the rights of the parties with the understanding that the stipulations were to be incorporated in the divorce decree. The stipulations provided for certain revisions in the allocation of items of community property provided in the agreement of March 2, 1951. With respect to the alimony payments provided in the agreement of March 2,1951, the parties stipulated as follows:
The defendant shall receive as alimony or support and maintenance twenty-five per cent of all the sums received by way of earnings as set forth in paragraph 5 of the property settlement agreement, comprising pages 3 and 4 therein. The only change in connection with that is that the twenty-five per cent shall be in consideration of the division of property and shall not be subject to modification by the Court.
To clarify the purpose of these payments, the trial judge questioned counsel as follows:
THE COURT: The portion of the agreement to the effect that the payments of alimony are not the settlement of property rights is withdrawn by mutual consent, and it is expressly agreed that it is a part of the settlement of property rights and is not alimony and is not subject to revision by the Court, is that correct?
MR. LANDAU (counsel for Herbert): The only think I want to be sure of, your Honor, is this: that it is not a part of the property settlement in that respect that it is property settlement; it's in consideration of the property settlement. What we are trying to do is this
THE COURT: In lieu of any other award of community property?
MR.LANDAU: Yes, that is right.
THE COURT: Very well. It will be so understood and so worded in the decree.
MR.LANDAU: The purpose being that he may still take it off as a deduction on his income tax, but he cannot have it modified because of it being part of the community property.
Pursuant to the stipulations of counsel, Herbert's complaint for divorce was dismissed. Petitioner's cross complaint for a decree of separate maintenance was amended by interlineation to pray for a decree of divorce, and the cross complaint was consequently heard as a default proceeding. On April 28, 1952, petitioner was granted an interlocutory decree of divorce on the ground of extreme cruelty.
Paragraphs 2 and 3 of the decree allocated the specific items of community property between petitioner and Herbert; paragraph 3(f) awarded to Herber ‘(a) ny salary due from Hughes Aircraft Company and from Lockheed Aircraft Corporation, subject, however, to the provisions hereinafter contained concerning the payment of support and maintenance to cross-complainant.
The provisions ‘concerning the payment of support and maintenance’ were contained in paragraph 6 of the decree, as follows:
6. In lieu of additional community property and as a part of the consideration for the division of the properties as specified in this decree, cross-defendant is ordered and directed to pay to cross-complainant for her support and maintenance, a sum equivalent for 25% of all moneys received as salary, commissions, fees, bonuses or otherwise, by way of earnings for cross-defendant's personal services. * * *
All payments * * * shall continue for a period of ten (10) years and one (1) month from the 24th day of April 1952, provided that the cross-complainant shall not have remarried within said time, and provided further that both cross-complainant and cross-defendant are still living. In be event of the decease of either of said two parties, or the remarriage of cross-complainant during the said ten-year and one-month period, whichever event happens first, the payments as directed in this paragraph shall thereupon cease.
The payments as directed herein shall not be subject to modification, either by decree of court of otherwise, and cross-complainant shall not be entitled to receive any support maintenance or alimony payments from cross-defendant except as expressly directed herein. Should the Federal Income Tax laws by changed so as not to allow the above-mentioned payments as a deduction to cross-defendant, then the said 25% of the cross-defendant's earnings shall be based upon his earnings after payment of income taxes. * * *
On May 4, 1953, petitioner's marriage to Herbert was terminated by the entry of a final decree of divorce.
During the calendar year 1953,petitioner received $9,730.31 from Herbert representing 25 per cent of his income, pursuant to the interlocutory and final decrees of divorce. Of this amount, $5,708.31 was received prior to entry of the final decree and $4,028.97 was received after entry of the final decree. Respondent concedes that the $5,708.31 received prior to entry of the final decree is not includible in petitioner's income.
OPINION.
RAUM, Judge:
The question for decision is whether the monthly payments are ‘periodic payments * * * in discharge of * * * a legal obligation which, because of the marital or family relationship, is imposed upon or incurred by * * * (the) husband under such decree (of divorce) or under a written instrument incident to such divorce.’ Sec. 22(k), I.R.C. 1939.
Pursuant to these provisions, payments commonly known as alimony are includible in the wife's gross income and are deductible by the husband from his gross income by reason of by companion provisions in section 23(u). Petitioner contends that the controverted payments do not constitute alimony but ‘represent the settlement of marital property rights,‘ that they were ‘in lieu of community property rights foregone by petitioner in the community property corpus and represent payments in settlement of petitioner's immediate receipt, at the time of the decree, of less than the share of the community property to which she was entitled.’
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 internals) 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. * * * Installment payments discharging a part of an obligation the principal sum of which is, in terms of money or property, specified in the decree of 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. * * *
Whether the payments in fact represent alimony or are in consideration of petitioner's interest in the community property is a question that turns upon the facts, and not upon any labels that may or may not have been placed upon them. Cf. Thomas E. Hogg, 13 T.C. 361; Floyd H. Brown, 16 T.C. 623; Julia Nathan, 19 T.C. 865; John Sidney Thompson, 22 T.C. 275, 282. After examining the facts in the present record, we think that petitioner has failed to show that the payments in controversy were not alimony.
To be sure, the divorce decree refers to these payments as being ‘(i)n lieu of additional community property and as part of the consideration for the division of the properties.’ But an examination of the record as a whole, particularly the circumstances leading up to the entry of this decree, as well as other language in the decree itself, persuades us that the payments were merely for the support of petitioner, in the nature of alimony, that they did not in fact relate to the division of the community property, and that the descriptive language of the decree, quoted above, was included for a reason that was entirely consistent with the true characterization of payments as alimony.
Unlike Campbell, Jr. v. Lake, 220 F.2d 341 (C.A. 5), relied upon by petitioner, there was no principal amount which the husband was required to pay, a factor stressed by the court in that case at page 343. The monthly payments here were keyed to the husband's income which the parties knew would fluctuate. And the use of a 10-year-and-1-month period was clearly intended to insure treatment of the payments as ‘periodic’ within the meaning of section 22(k), even if the obligation might otherwise be thought to relate to a principal sum. Further, the provision for cessation of payments in the event of petitioner's marriage or the death of either party added contingencies that are characteristic of alimony. In the aggregate these provisions strongly point in the direction of recognizing these payments as ‘periodic payments.’ Moreover, while not conclusive, the true intention of the parties is further evidenced by the provision common to both the separation agreement and the decree that the husband was to pay petitioner 25 per cent of his income before taxes, but that this obligation was to be reduced to 25 per cent of his income after taxes in the event that the Federal income tax laws were changed so as not to allow deduction for the payments.
The separation agreement specifically referred to the payments as ‘alimony,’ and there is nothing in the record to suggest any reason why petitioner would have been willing to give up rights to alimony which her husband had already contracted to pay. To the contrary, a reason does affirmatively appear on this record for merely changing the designation of these rights without affecting their essential character. The evidence shows that by describing these rights as relating to the community property the parties intended to foreclose the State court from thereafter modifying the support provision. Cf. Kohl v. Kohl 66 Ca.App.2d 535, 152 P.2d 494. The substitution of another label in no way altered the basic characteristic of these payments as alimony, and indeed the decree itself stated that petitioner should ‘not be entitled to receive any support maintenance or alimony payments except as expressly directed herein’ (emphasis supplied), thereby recognizing that the controverted payments were in fact support maintenance or alimony.'
Basic to petitioner's contention that the controverted payments actually represented part consideration for her interest in the community property is her assertion that the community property was otherwise divided unequally to her disadvantage by the divorce decree. We cannot accept that premise on this record. While she gave some such testimony it was extremely weak and unconvincing. These payments have all the earmarks of ordinary alimony. We hold that they are covered by section 22(k).
Decision will be entered under Rule 50.