Opinion
07-203057.
Decided May 5, 2010.
This is a post judgment of divorce order to show cause by the defendant (hereafter wife) for a money judgment in the sum of $391,507.36.
The parties were married on July 1, 1995 in California. There are no children of the marriage. The parties executed a "stipulation of settlement agreement" in November 2004. The wife signed said stipulation on November 10, 2004 in Australia and the plaintiff (hereafter husband) signed same on November 4, 2004 in New York. Said stipulation was drafted by the husband's New York counsel. The wife was represented by Australian counsel.
The husband commenced the above captioned action on October 30, 2007 seeking a judgment of divorce on the ground of constructive abandonment. He also sought judgment vacating the stipulation on the grounds of fraud and overreaching, as well as monetary damages for breach of contract. Pursuant to a decision and order of the Hon. Timothy Driscoll, dated January 15, 2009, the husband's complaint was dismissed; the wife was granted a conversion divorce; the husband was ordered to comply with the stipulation of settlement; in particular, the husband was ordered to transfer certain real property in England to the wife and to pay her the sum of $115,776.00 Australian dollars (AUS) within 6 months without interest, granting the wife leave to renew her request for interest in the event said sum was not timely paid. The wife was denied counsel fees.
The parties were divorced pursuant to a judgment dated May 1, 2009. Said judgment directs the aforesaid transfer of real property and payment of $115,776.00 AUS. The parties' stipulation of settlement is incorporated and not merged in the judgment of divorce.
The husband appealed and the wife cross appealed. On July 31, 2009, during the pendency of the appeal, the wife filed an order to show cause seeking to hold the husband in contempt for failing to transfer the aforesaid real property and pay her the aforesaid sum. The parties entered into a so-order stipulation dated September 14, 2009 wherein the parties agreed that the deed to the premises in England would be executed and held in escrow pending the decision on appeal. Pursuant to the September 14, 2009 stipulation, the husband consented to the entry of a money judgment against him for $115,776.00 AUS ($92,716.00 US) and the wife agreed to stay execution pending the determination of the appeal. The parties apparently executed an escrow agreement on November 17, 2009 but the Court has not been provided with a copy of said document. It appears that the sum of $92,716.00 was placed in escrow.
By letter dated November 25, 2009, the wife demanded payment from the husband of $423,801.00 AUS ($391,507.36 US) due her on November 10, 2009, pursuant to the November 2004 stipulation of settlement.
On March 23, 2010, the Appellate Division denied the husband's appeal and granted the wife's cross appeal.
On March 26, 2010, the parties' attorneys signed a letter agreement releasing the deed to the premises in England and the sum of $92,716.00 to the wife. Said letter states the following: the wife and her attorney agree that by tendering the payment of $92,716.00, the husband is not waiving his right to file a motion for an order declaring that said payment, as well as the payment of $423,801.00 AUS due November 4, 2009, are subject to withholding tax. The letter further states that if the Court finds in favor of the husband, the withholding tax on both sums shall be deducted from the $423,801.00 AUS payment. In the event either party files an appeal, the contested sum shall be held in escrow and the wife shall be paid the uncontested sum.
The wife now seeks a money judgment against the husband in the sum of $391,507.36 US. She also seeks an award of counsel fees. Her order to show cause does not seek interest on said sum from the date payment was due, nor did she seek interest on the sum of $92,716.00, although the wife claims entitlement to same in her reply papers.
The husband did not file a cross motion, but he opposes the entry of a money judgment in the sum of $391,507.36 US on the ground that as the wife is a non-resident alien, federal law (IRS 1441) mandates that he withhold 30% of said sum and pay same over to the IRS.
The wife does not deny that she is a non-resident alien, nor that maintenance payments made by a United States resident to a non-resident alien are subject to a 30% withholding tax pursuant to IRC 1441 ( see, 1986 CB 220 [tax treaty between US and Australia; Girard Trust Corn Exchange Bank v Commissioner, 194 F2d 708; Housden v CIR, 63 TC 2063; Howkins v Commissioner, 49 TC 689). The wife contends, however, that the payments to her are not maintenance subject to withholding; or in the alternative, if the Court finds that the payments in issue are maintenance, that the payment to her was intended to be net of any withholding taxes.
The stipulation of settlement agreement executed in November 2004, sets forth, in the form of boiler plate, that all the statutory factors relevant to maintenance, were considered by the parties, including tax consequences. Said stipulation further provides as follows in paragraph "4" entitled "Maintenance to the Wife" to wit: "Simultaneously with the execution herein, husband shall give to the wife the sum of $115,176.00 AUS. Within two years from the date of execution of this agreement, Husband agrees to pay wife the additional sum of $115,761.00 AUS. Within five years of the date of executing this agreement, husband agrees to pay wife the additional and final sum of $423,801.00 AUS."
According to the wife, said payments were intended to pay off the mortgage on real property in Australia transferred to her, and are part and parcel of the parties' property settlement. She provides the Court with a copy of the initial draft of the stipulation of settlement agreement which under paragraph "4" entitled "Maintenance to the Wife'" obligated the husband to pay the mortgage on the real property in Australia for five years commencing April 16, 2004. Said draft provided specifically that said obligation terminated upon the death of the wife, but contains no provision with regard to the death of the husband during the period of five years following the execution of the agreement.
The maintenance provisions of the stipulation of settlement agreement executed by the parties in November 2004 has been set forth in full herein above. Notwithstanding the language of the initial draft of the stipulation of settlement, there is no provision with regard to the death of either party or the remarriage of the wife; nor is there a provision stating that the payment is tax deductible by the husband. Despite the boiler plate language that the parties were advised with regard to tax consequences relating to maintenance, there is no provision in the stipulation providing for the withholding of any portion of said payments by the husband for remittance to the IRS. The Court further notes that the agreement does not provide for insurance on the husband's life to secure the aforesaid payments to the wife in the event of his death within the five years after the execution of the agreement.
Pursuant to IRC 71 and 215, maintenance is deductible by a payor and is taxable income to a payee even when a settlement agreement does not provide for the termination of the payments upon the death of either party, as long as the governing state law so provides. The agreement in issue herein, by its terms, is governed by the laws of the State of New York. Pursuant to DRL 236B(1)(a), a court award of maintenance, by definition, terminates upon the death of either party. Parties, may however, by contract, provide that the obligation to pay maintenance continues after the death of the payor ( see Matter of Riconda, 90 NY2d 733; Cohen v Cronin, 39 NY2d 42). There appear to be no reported cases relating to the enforcement of a contractual obligation to pay maintenance to the estate of a spouse or former spouse after the death of the payee, however, there is no rational that would preclude parties from entering into such an agreement. An agreement that provides for the continuation of payments, denominated as maintenance, after the demise of the payor or the payee, would be enforceable by a court, ( see, Matter of Riconda, supra; Cohen v Cronin, supra; John G v Lois G, 11 Misc 3d 1060[A]), however, pursuant to IRC 71 and 215, said payments would not be tax deductible by the payor or taxable to the payee.
Where as here, the agreement provides for the payment of three lump sums denominated as maintenance over a period of five years, but does not provide a source of payment such as life insurance in the event of the husband's demise within said five years, and does not explicitly state that said payments are enforceable after the death of the payor and or payee, the Court must determine the intent of the parties from the four corners of the agreement, and upon finding intent ambiguous, must direct a hearing on the issue ( see, Matter of Riconda, supra).
In the case at bar, the wife contends that the three payments in issue were part of the parties' property distribution and were mislabeled as maintenance; that the parties never intended that the three payments to her by the husband totaling approximately $577,000.00 US would be tax deductible by him or taxable to her, or that the obligation would terminate upon the death of either party. The Court notes that the husband paid the first of said three payments to the wife simultaneously with the execution of the stipulation of settlement agreement in November 2004, yet the husband did not withhold 30% from said payment. Nor has the husband stated that he deducted said first payment, nor the second payment, paid into escrow in November 2009, as a maintenance payment on any tax return.
The issue of whether the parties intended the last two required payments in issue to be maintenance taxable to the wife cannot be determined without a hearing.
The wife is awarded a money judgment against the husband in the sum of $246,240.36 ($391,507.36 less withholding taxes of 30% thereof pursuant to IRC 1441[$117,452.20] and less withholding taxes of 30% of $92,716.00 [$27,814.80], with interest thereon from entry of judgment at the statutory rate. In the event the husband sells the real property located at 122 Hewlett Avenue Point Lookout, New York prior to the disposition of the issues herein, the sum of $145,267.00 ($117,452.20 plus $27,814.80) shall be held in escrow by the husband's attorney from the sale proceeds pending such disposition.
The parties shall appear for a hearing on the issue of whether the parties intended the last two required payments in issue to be maintenance taxable to the wife and on the wife's request for counsel fees on August 24, 2010 at 9:30 a.m. As the wife will be traveling from Australia for the hearing, there will be no adjournments except with leave of court upon a showing of extraordinary unforseen circumstances. This constitutes the decision and order of the Court.