Opinion
Docket No. 2607-68.
1969-12-1
BRANTLEY L. WATKINS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Stanley S. Worth and Scott P. Crampton, for the petitioner. Louis F. Nicharot, for the respondent.
Stanley S. Worth and Scott P. Crampton, for the petitioner. Louis F. Nicharot, for the respondent.
A separation agreement provided for periodic payments of $111.46 each week for 525 weeks by the husband to the wife. If the wife should remarry after a divorce a maximum of $25,000 of the aggregate payments was to be forfeited. All the rest of the payments were to be made in all events to wife and if she should die within the 525 weeks to her natural heir, an only son. The wife held title with her husband as a tenant by the entirety to certain valuable property. She also had the right to alimony and support. The agreement provided with prominent particularity that in return for the payments the wife would surrender her property interests and also provided with less prominent generality that the payments were to be in satisfaction of the wife's right to support and any other right arising out of the marriage relationship. The husband deducted all of the periodic payments under secs. 71(a)(2) and 215(a), I.R.C. 1954, and these deductions were disallowed by respondent. Held, a part of such payments (57 percent) was made in satisfaction of wife's property rights and therefore was not deductible, while a part (43 percent) was made for support ‘because of the marital or family relationship’ and therefore was deductible.
Respondent determined deficiencies in the income tax liability of petitioner for the calendar years 1964 and 1965 in the respective amounts of $2,184.56 and $2,771.44.
In his ‘Explanation of Adjustment’ attached to the notice of deficiency, respondent stated as follows:
(a) It is determined that the payment totaling $5,795.22
which you made in the taxable years ended December 31, 1964 and December 31, 1965 to your former wife, Mrs. Elma Watkins, were not alimony payments under section 215 of the Internal Revenue Code. Therefore, your taxable income is increased $5,795.92 as shown above.
Obviously a typographical error. The correct figure is $5,795.92.
The entire amount of the deficiencies determined by respondent results from this adjustment. The payments referred to in respondent's explanation of adjustment were made pursuant to a separation agreement entered into by petitioner and his then-wife Elma Watkins (hereinafter sometimes referred to as Elma), which provided inter alia that petitioner would make a maximum of 525 weekly payments of $111.46 to or in favor of Elma. The sole issue presented to us by the parties is whether the payments made by petitioner were ‘periodic payments * * * made under such agreement because of the marital or family relationship’ within the meaning of sections 71(a)(2) and 215, I.R.C. 1954,
or whether these payments were merely incident to a property settlement between petitioner and Elma.
Hereafter all section references are to the Internal Revenue Code of 1954, unless otherwise indicated.
FINDINGS OF FACT
Some of the facts have been stipulated. We find the facts to be as stipulated and incorporated herein by this reference the stipulation and the exhibits attached thereto.
Petitioner is an individual who resided in Pocomoke City, Md., at the time of the filing of his petition. He filed separate income tax returns for the taxable years 1964 and 1965 with the district director of internal revenue at Baltimore, Md.
Petitioner was married to Elma Watkins on March 22, 1940, when Elma was 18 years of age. At that time, petitioner was in the business of operating a small service station, a truck stop, and six or seven one-room cottages. After their marriage, Elma assisted petitioner in the operation of this business by washing dishes, filling up trucks with gasoline, cooking, and cleaning rooms. A son, Brantley L. Watkins, Jr., was born of the marriage on July 29, 1947.
In 1957 petitioner and Elma acquired title as tenants by the entirety to certain real estate in Pocomoke City, Md., which was occupied by them as a home until the separation hereinafter referred to. As of the time of the separation it had a value of $30,000 subject to a mortgage securing the payment of approximately $8,500. Petitioners also owned two cars in his own name.
In 1950 petitioner constructed a motel and restaurant on real estate located on the outskirts of Pocomoke City. This property was known as Twin Towers. Title thereto was taken in the name of petitioner and Elma as tenants by the entirety. Both petitioner and Elma affixed their signatures on certain notes evidencing several construction loans secured by this property. In the early fifties, Elma devoted a substantial amount of time helping in the operation of Twin Towers and during one period of time, when petitioner was serving in the armed services, she was responsible for the day-to-day operation of the business. After 1955, Elma devoted little time to the operation of the business because she was often in mental hospitals due to illnesses characterized by her as nervous breakdowns. In 1960 the Twin Towers property consisted of a 78-unit motel, a restaurant, a cocktail lounge, and a swimming pool. It had developed into a profitable business enterprise.
Because certain marital difficulties had arisen between petitioner and Elma, they ceased living together as husband and wife in August 1960, and voluntarily separated on or about September 20, 1960. At that time, petitioner moved from their home in Pocomoke City to the Twin Towers motel, where he resided until the time the petition was filed in this case.
At or about the time of their separation petitioner and Elma had conversations with regard to a final settlement of all questions between them involving finances and property rights. It was agreed between them that Elma would receive the home cleared of the mortgage, the furniture in the home, the Cadillac car, and $50,000 in cash, and that Elma would surrender all of her interest in the Twin Towers property to petitioner. Petitioner asked Elma if he could pay the $50,000 to her over a 10-year period in weekly payments since he did not have cash in this amount available, and Elma consented.
There was no discussion between them as to any ‘alimony’ or ‘support,‘ as such, or the amount thereof, to which Elma might be entitled, and no discussion as to what part of the payments was to be in satisfaction of Elma's rights to support and alimony and what part was to be in consideration for the surrender of her property rights.
Petitioner and Elma had each employed an attorney and after the conversations above referred to the attorneys were instructed to draw up a written agreement consistent with the oral agreement of petitioner and Elma.
This written contract as finally agreed to by the parties and their attorneys was as follows:
Petitioner and Elma both testified at the trial of the instant case, and each testified that the other's attorney prepared the original draft of the agreement. Neither petitioner nor his wife testified as to what exactly either said during the conversations with regard to the specific consideration for the payments here involved. Obviously Elma's testimony as to what she ‘understood’ the contract provided is not helpful.
THIS AGREEMENT AND POWER OF ATTORNEY, made and executed in duplicate, this 21st day of September, in the year nineteen hundred sixty, by and between Brantley L. Watkins, party of the first part, and Elma Watkins, his wife, party of the second part, both of Pocomoke City, Worcester County, Maryland,
WITNESSETH:
WHEREAS, for a period of more than nineteen years and until the month of August, 1959, the party of the first part and the party of the second part lived together as husband and wife, at which said time, and because of irreconcilable differences, they separated and have since continued to live apart, even though sometimes residing in the same residence; and
WHEREAS, the party of the first part is the owner of certain personal property consisting of one 1959 Cadillac automobile and one 1960 Chevrolet Station Wagon, and certain real estate located in the First and Second Election Districts of Worcester County, Maryland, with the nature and value of which said property the said party of the first part is fully advised; and
WHEREAS, the part of the second part is the owner of no personal property except certain clothes, jewelry and personal accessories which have from time to time been given to the party of the second part by the party of the first part, the nature and value of which said property the part of the first part is fully advised. The party of the second part is the owner of no real property; and
WHEREAS, the parties of the first and second part, together, are the owners of certain real estate, to wit: Certain property located on highway 13 leading from Pocomoke City to the Virginia Line, which said property is improved by a restaurant and motel known as ‘Twin Towers' and certain property known as 1505 Market Street in Pocomoke City, Worcester County, Maryland, and being the property whereat the party of the second part presently resides, and are also the owners, together, of certain household furnishings, chattels located in the property known as ‘Twin Towers' and miscellaneous personal effects, as to the nature and value of which both parties are fully advised; and
WHEREAS, the parties, because of incompatibility, disagreements and friction are unable to live together, except at the sacrifice of their mutual comfort, health and happiness, and accordingly intent and contemplate that their present separation shall be permanent, in connection with which separation it is the intention and the desire of the parties that there be a complete, final and effective decision and settlement of their respective rights and holdings and the relinquishment of all rights, interests and claims which the one party might otherwise have upon the property of the other; and
WHEREAS, the party of the first part has issue by the party of the second part one child only, that is to say, Brantley Lee Watkins, Jr., who was born on the 29th day of July, 1947, and for whose custody and support it is the desire of the parties of the first and second parts to herein provide.
NOW, therefore, in consideration of the sum of one dollar each to the other in hand paid, and to accomplish the ends sought, both parties with full knowledge of the extent, value and character of the properties owned by them separately and jointly, and of their respective income, obligations and needs, do fully and voluntarily agree as follows:
FIRST
The party of the second part may at all times hereafter live separate and apart from the said party of the first part as if she were unmarried and in all respects free from control and authority of the said party of the first part, and may live at such place or places and may be engaged in any business or businesses as she may think fit. The said party of the first part shall not in any manner annoy, molest, disturb, or otherwise interfere with the party of the second part, nor require or by legal proceedings endeavor to compel the party of the second part to cohabit with him or to enforce any restitution of conjugal rights.
SECOND
The party of the second part, nor any person on her behalf, shall not at any time hereafter molest or disturb the party of the first part or be legal proceedings or otherwise endeavor to compel the party of the first part to cohabit with the party of the second part or seek to enforce any restitution of conjugal rights. The party of the second part does hereby release the party of the first part of all claims for her support and maintenance, alimony, including alimony pendente litem and permanent alimony, that might arise out of any proceedings for divorce that might hereafter be brought by either of the parties against the other; it is the distinct understanding, however, that the effectiveness of this agreement is not conditioned upon the successful maintenance of a divorce action by either of the parties hereto but is to be and remain in full force and effect from and after the date hereof.
THIRD
The party of the second part shall at all times hereafter have the legal custody and guardianship of the said Brantley Lee Watkins, Jr., providing, however, that the party of the first part shall have the free and unrestricted privilege of visiting the said Brantley Lee Watkins, Jr., at any time or place as he shall see fit, and the said party of the first part shall have the further right to have and allow the said Brantley Lee Watkins, Jr. to visit the party of the first part as the place of residence of the said party of the first part, on weekends or during holidays or vacations when the said Brantley Lee Watkins, Jr., is not in school or at such other time or times as will not interfere with the health, happiness and schooling of the said Brantley Lee Watkins, Jr.; and further provided, however, that the said Brantley Lee Watkins, Jr., shall not be enrolled in any junior high school or high school located outside of Worcester County, Maryland, without the consent of the party of the first part until such time as the said Brantley Lee Watkins shall complete his high school education. It is specifically agreed that the party of the first part shall furnish full support for the said Brantley Lee Watkins, Jr., including all board, clothing, accessories, medical expenses, expenses of education (primary, secondary and advanced, including vocational training, business school, college, graduate study or other such courses of advanced education as the said Brantley Lee Watkins, Jr., may choose), and that the party of the first part will furnish the said Brantley Lee Watkins, Jr., with such an allowance of money for entertainment, social activities and incidentals as may be in keeping with the station in life of the said Brantley Lee Watkins, Jr.
FOURTH
In full, final and complete settlement of all of the rights of the party of the second part of any character whatsoever in and to the property owned by the party of the first part and the party of the second part as tenants by the entireties, as well as any and all other or hereafter have against the party of the first part with respect to any rights arising out of the marriage relationship, the party of the first part has paid and promises to pay to the party of the second part the full and complete sum of fifty eight thousand five hundred sixteen dollars and sixty five cents ($58,516.65) payable in five hundred twenty five (525) equal consecutive weekly installments of one hundred eleven dollars and forty six cents ($111.46) each. The first of said installments has this day been paid to the party of the second part by the party of the first part, receipt whereof is hereby acknowledged. From each of said weekly payments the party of the first part shall retain the sum of sixteen dollars and twenty two cents ($16.11) which said last mentioned amount shall be applied by the party of the first part in payment of the balance due under a certain mortgage to Citizens National Bank in Pocomoke City from the parties of the first and second part dated May 4, 1957, and recorded among the land records of said Worcester County in Liber F.W.H. No. 100, folios 37, et seq.
All weekly payments herein provided to be made by the party of the first part to the party of the second part may be made by check mailed to the party of the second part on or before the due date addressed to the last address that the party of the second part may have theretofore given in writing to the party of the first part. In the event of default in any of the said weekly payments on the part of the party of the first part when any such weekly payments shall have been in default for a period of four weeks, then the entire balance of the said fifty eight thousand five hundred sixteen dollars and sixty five cents ($58,516.65) shall become immediately due and demandable and the said party of the first part hereby authorized and empowers any attorney of record to confess judgment in any court in the State of Maryland or elsewhere against the party of the first part for the balance of the aforesaid fifty eight thousand five hundred sixteen dollars and sixty five cents ($58,516.65) with interest and costs of suit and five per centum collection charges. It is specially understood and agreed that if the party of the first part should die before the aforesaid weekly installments are all paid then the balance payable shall be a claim against and a lien upon the estate of the said party of the first part. It is further specifically understood and agreed that should the party of the second part die before the said weekly installments are all paid then the remaining weekly installments shall be in no way any part of the estate of the said party of the second part, nor shall the party of the second part have any power to will or bequeath the said balance payable, but the same shall be paid as they mature unto the said Brantley Lee Watkins, Jr., child of the said parties of the first and second parts.
FIFTH
The party of the second part shall retain as her property all of her personal jewelry, wearing apparel and personal ornaments. The party of the second part shall also retain the 1959 Cadillac automobile that she is now using, and the party of the first part agrees that the title to the said 1959 Cadillac automobile shall be transferred unto the party of the second part, all costs of said transfer to be paid by the said party of the first part.
SIXTH
The party of the second part shall have as her property all of the silverware, dishes, glassware, linens, rugs, drapes, furniture, pictures and furnishings now in the home at 1505 Market Street in Pocomoke City, Worcester County, Maryland.
SEVENTH
It is specifically understood and agreed that the property hereinafter described in this paragraph, with the improvements thereon, shall belong absolutely to the party of the second part, as he sole, individual and separate property and estate, and the party of the first part agrees and binds himself to execute unto the party of the second part, upon demand, a warranty deed in the form commonly in use in Worcester County, Maryland, conveying a fee simply estate in and to all that lot or parcel of land lying and being situate in the First Election District of Worcester County, Maryland, formerly outside of but now within the corporate limits of Pocomoke City, designated as all of Lot No. 5 in Block ‘B’ on plat designated as ‘Plat of Subdivision Surveyed and Partially Monumented for Garland D. Bull, Robley P. Small and Raymond C. Dryden’, made by W. Balard Miles, Registered Surveyor, dated April 15, 1947, which said plat is duly recorded among the land records of Worcester County, Maryland, in Plat Book J.E.B. No. 1, at folio 59, and being all and the same property which was conveyed unto the said parties of the first and second parts, as tenants by the entireties, by deed from Robert L. Collins and Hazel D. Collins, his wife, dated May 4, 1957, and recorded among the land records of said Worcester County in Liber F.W.H. No. 100, folios 37, et seq. The aforesaid property is subject to the hereinbefore mentioned mortgage to Citizens National Bank in Pocomoke City, dated May 4, 1957, and recorded among the land records of said Worcester County in Liber F.W.H. No. 94, folios 483, et seq., the balance due on said mortgage to be paid by the party of the first part as hereinbefore set forth in paragraph fourth.
EIGHTH
All other property, rights, claims and choses in action belonging to the party of the first part or to the community estate of the parties of the first and second parts, whether real or personal, of whatever nature, and wheresoever situated, whether or not herein specifically mentioned, shall belong absolutely to the party of the first part, as his sole, individual, and separate property and estate, and the party of the second part agrees and binds herself to execute, acknowledge and deliver unto the party of the first part, upon demand, deeds in the form commonly in use in Worcester County, Maryland, covering her interest in all real property owned by the party of the first part and the party of the second part and bills of sale or other conveyances of title to such personalty. All deeds, bills of sale or other necessary expenses, including such legal fees as may be necessary to put the aforesaid property in the name of the party of the first part are to be at the sole expense of the party of the first part. The principal items of property to be held by and conveyed to the party of the first part are enumerated below:
A. All cash on hand, in the office and in bank
B. All accounts and bills receivable
C. All property, assets and good-will of the restaurant and motel presently owned by the parties of the first and second parts and operated by the party of the first and second parts and operated by the party of the first part, which said property is located near Pocomoke City, Worcester County, Maryland, on U.S. Route 13 leading from Pocomoke City to the Virginia Line and known as ‘Twin Towers'.
NINTH
The party of the first part hereby expressly assumes and agrees to pay any and all indebtedness, including all notes, bonds or other obligations wherein or whereby the party of the second part is obligated, together with the party of the first part, whether the same has matured or not, and covenants and agrees to indemnify and save harmless the party of the second part of and from any loss which the party of the second part may sustain by reason of the failure of the party of the first part to pay the said obligations hereby assumed by him to be paid. It is further agreed and understood that the obligation of the party of the first part to so indemnify and save harmless the said party of the second part as aforesaid shall continue in effect and be binding upon the heirs, executors and administrators of the party of the first part upon his death if the party of the second part shall survive him, anything in this agreement to the contrary notwithstanding.
TENTH
It is agreed and understood that the party of the first part shall not hereafter be obligated on any bills contracted by the party of the second part.
ELEVENTH
The party of the first part does hereby covenant and agree that he, his heirs, personal representatives and assigns, will not at any time, claim or receive any right or benefit as husband, widower, heir, next of kin, successor or otherwise in any of the property, real, personal or mixed, of the said party of the second part, now owned by her or which hereafter may be owned by or acquired by her; and the party of the first part further covenants and agrees that he will execute such deeds or papers as and from time to time hereafter may be necessary or convenient to enable her, her heirs, executors, administrators or assigns, to deal with her said property as if unmarried, and that the said property shall be held by her entirely free from any rights of him, the party of the first part, during the life of the party of the second part or after her death, with full power to the party of the second part to convey, lease, assign, charge, devise, bequeath or otherwise dispose of the same as if unmarried (except as the same may be limited by provisions of this agreement hereinbefore or hereinafter set forth), and to effectuate said covenants and agreements the said party of the first part does hereby irrevocably constitute and appoint the party of the second part to be his true, sufficient and lawful attorney for his and in his stead to execute and acknowledge according to law, all deeds and/or other papers necessary, convenient or desirable to the conveyance, assignment, charging and all other uses and dispositions of the said estate of the party of the second part, real, personal and mixed.
TWELFTH
The party of the second part hereby covenants and agrees that she, her heirs, personal representatives, or assigns, will not at any time, claim or receive right or benefit as wife, widow, heir, next of kin, successor or otherwise (except as herein provided in the event of default by the party of the first part or in the event of death of the party of the first part before satisfaction by him of the obligation herein assumed) in any of the property of the party of the first part now owned by him or which hereafter may be owned or acquired by him; and the party of the second part further covenants and agrees that she will execute such deeds or papers as from time to time hereafter may be necessary or convenient to enable the party of the first part, his heirs, executors, administrators or assigns, to deal with his said property as if unmarried, and that the said property of the party of the first part shall be held by him entirely free from any rights of the party of the second part during his lifetime or after his death, with full power by him to convey, lease, assign, charge, devise, bequeath or otherwise dispose of the same as if unmarried, and to effectuate said covenants and agreements the said party of the second part does hereby irrevocably constitute and appoint the said part of the first part to be her true, sufficient and lawful attorney, for her and in her name and stead to execute and acknowledge according to law, all deeds or other papers necessary, convenient and desirable to the conveyance, assignment, charging and all other uses and dispositions of the estate of the party of the first part, real, personal and mixed.
THIRTEENTH
The party of the first part agrees to pay one-half of the legal expenses incurred by the party of the second part in connection with this separation agreement.
FOURTEENTH
It is expressly understood and agreed that with the exception of the right of either party to prosecute his or her suit for complete divorce this settlement and agreement is and forever after shall be a bar to any suit at law or otherwise for anything growing out of the marriage relation of the parties as well as the property rights of the one against the other (though in no way intending to bar or limit any suit which may be brought for the enforcement of this agreement).
FIFTEENTH
It is expressly understood and agreed that in the event the party of the second part shall seek to obtain a complete divorce from the party of the first part the party of the first part shall not be required to pay any counsel fee on behalf of the party of the second part exceeding one hundred fifty ($150.00) but the party of the first part hereby obligates himself to pay counsel fees to the extent of one hundred fifty dollars ($150.00) and court costs in the event the part of the second part shall seek a final and complete divorce.
SIXTEENTH
It is specifically understood and agreed that neither party hereto by the execution hereof, waives or condones any cause for divorce which he or she may now have or hereafter have against the other party hereto and nothing in this agreement shall constitute a bar to any action for divorce by either party against the other party regardless of whether the cause for divorce existed at the time of, or arose prior to or subsequently to the execution hereof.
SEVENTEENTH
The party of the second part expressly agrees that in the event either of the parties hereto shall obtain a final divorce, if the party of the second part shall remarry before the full balance of the sum of fifty eight thousand five hundred sixteen dollars and sixty five cents ($58,516.65) is paid unto her then the party of the second part shall forfeit the balance of the aforesaid sum payable under this agreement or a sum of weekly payments in the aggregate of twenty five thousand dollars ($25,000), whichever amount shall be the lesser, provided, however, that in the event the party of the second part shall remarry she shall in no way forfeit any of the other rights accruing to her under this agreement, nor shall any of the other duties of the party of the first part as hereinbefore set forth be construed to have been released or waived, and in the event of the remarriage of the party of the second part the party of the first part expressly agrees to pay any balance at such time due under the aforesaid mortgage to Citizens National Bank In Pocomoke City dated May 4, 1957, and recorded among the land records of said Worcester County in Liber F.W.H. No. 100, folios 37, et seq., and to secure a release of said mortgage, regardless of the number of weekly payments or the aggregate sum thereof which the party of the first part may have theretofore paid unto the party of the second part.
EIGHTEENTH
The party of the first part and the party of the second part hereby agree that this agreement shall not be altered or terminated by either party hereto except by written instrument duly signed and executed by both of the parties hereto.
The separation agreement was executed and acknowledged by petitioner and Elma before separate notaries public. Before executing the agreement, both petitioner and Elma submitted it to their respective attorneys.
In late 1964 or early 1965 petitioner filed a bill of complaint in the Circuit Court for Worcester County, Md., seeking a divorce from Elma because of their long separation and the impossibility of their reconciliation. Elma answered, admitting all of the matters and facts alleged in the bill of complaint. On April 6, 1965, the Circuit Court granted an absolute divorce to petitioner. The decree of divorce included the following:
IT IS further ADJUDGED, ORDERED and DECREED that the provisions set forth in a Separation Agreement dated September 21, 1960, a copy of which is filed in these proceedings, between the parties as to their property rights, alimony, support, custody are hereby ratified and made a part of this Decree as if herein fully set forth.
Until the time of the trial of the instant case, petitioner has made timely payments to Elma and has otherwise complied with all of the provisions of the separation agreement, except that petitioner has, for the most part, retained custody of his son with the apparent consent of his former wife. Petitioner deducted the payments made to Elma pursuant to the separation agreement from his gross income on his tax returns for the taxable years 1960 through 1965. Those deductions were not disallowed by respondent which were taken in the returns for 1960 through 1963.
Elma did not file timely income tax returns in the ordinary course for the taxable years 1960 through 1964. Those returns were filled out on her behalf by employees of the Internal Revenue Service sometime in 1965, and were assigned by Elma. Included in Elma's taxable income in the 1964 return were payments which Elma received from petitioner in 1964 which were characterized as alimony.
Elma's 1965 income tax return was prepared and signed by John Goettie, C.P.A., under date of April 12, 1966, and was signed by Elma on April 14, 1966. In her 1965 return, Elma alleged that the amounts she received from petitioner were payments for surrender of property rights and were not includable in her taxable income. At the same time, Elma filed a claim for refund of income tax for 1964 with respect to tax which she paid on amounts she received from petitioner. This claim was disallowed, and, under date of February 8, 1968, John Goettie executed a ‘Waiver of Statutory Notification of Claim Disallowance’ (Treasury Form 2297) on Elma's behalf.
Of the periodic payments made by petitioner during the taxable years 33516/58516, or 57 percent, were in return for a surrender of his wife's property interest pursuant to a property settlement, and 2500/58516, or 43 percent thereof, were made by petitioner in satisfaction of his wife's right to support and alimony ‘because of the marital or family relationship.’
OPINION
KERN, Judge:
The question before us is whether the payments made by petitioner to his wife during the taxable years pursuant to the separation agreement set out in our findings were alimony or support payments ‘because of the marital or family relationship’ and thus deductible under section 71(a)(2) and 215(a) set out in the margin
or were payments made in satisfaction of his wife's property rights and therefore nondeductible capital expenditures. See Wilma Thompson, 50 T.C. 522, 525. The solution depends on the facts of the case and is not governed by the labels put upon such payments by an agreement or decree. Ann Hairston Ryker, 33 T.C. 924.
SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS.(a) GENERAL RULE.—(2) WRITTEN SEPARATION AGREEMENT.— If a wife is separated from her husband and there is a written separation agreement executed after the date of the enactment of this title, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such agreement is executed which are made under such agreement and because of the marital or family relationship (or which are attributable to property transferred, in trust or otherwise, under such agreement and because of such relationship). This paragraph shall not apply if the husband and wife make a single return jointly.SEC. 215. ALIMONY, ETC., PAYMENTS(a) GENERAL RULE.— In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year. No deduction shall be allowed under the preceding sentence with respect to any payment if, by reason of section 71(d) or 682, the amount thereof is not includible in the husband's gross income.
The burden of proof is on petitioner. So far as the record discloses respondent has made only one determination of deficiency in this matter, i.e., the determination against petitioner, which is presumed to be correct. See Welch v. Helvering, 290 U.S. 111. Petitioner points to positions taken by respondent's agents vis-a-vis petitioner's wife which it is alleged are inconsistent with the determination against petitioner, e.g., the denial of her claim for refund, but which are not supported by an presumption of correctness. Nothing in the record suggests these putative inconsistent positions taken by respondent's agents, in the ambiguous situation forming the background of the separation agreement, were arbitrary and not reasonable steps taken to protect the fisc. In our opinion they do not obliterate the presumption of correctness attaching to the determination of the deficiency in petitioner's tax or shift the burden of proof from petitioner. See Nat Harrison Associates, Inc., 42 T.C. 601, 617; Leon R. Meyer, 46 T.C. 65, 82, reversed on another issue 383 F.2d 883 (C.A. 8).
We are unable to agree with petitioner's contention that the payments made by petitioner to his wife pursuant to the separation agreement were entirely for her support and thus were ‘made * * * because of the marital or family relationship.’ However, in our opinion, petitioner has proved that a part of such payments was made for that purpose. Relying on the facts established by the record, a careful scrutiny of the agreement, a consideration of what petitioner and his wife testified to and what they failed to testify to, and bearing in mind that the burden of proof is on petitioner, it is our opinion that the greater part of the periodic payments made by petitioner were intended to be and were in payment of the wife's interests in certain property which petitioner wished to acquire. To a large amount these payments were to continue despite the divorce and remarriage of the wife and were to continue to be made to the wife's son and natural heir after her death— both circumstances being ‘ * * * persuasive that payments to the wife represent a property settlement rather than support payments.’ See Wilma Thompson, supra at 526. On the other hand we are also convinced that a part of the periodic payments made by petitioner were intended to be and were in payment of the wife's right to support. Obviously the wife had such rights to support, just as she had property rights. While the property rights are more prominently featured in the agreement than the support rights, the agreement did provide that the payments were to be in satisfaction of such rights. Significantly a part of the payments was to end upon the remarriage of the wife, indicating that the consideration for such part of the payments was the satisfaction of the wife's right to support.
Thus we have a situation similar to that present in Soltermann v. United States, 272 F.2d 387, in which (p. 390) ‘the payments * * * were in part in settlement of property interests of the ex-wife and in part in settlement of the obligation to support’ and thus a segregation between them is necessary. Fortunately there are present in this case factual criteria not available to Judge Magruder in the Soltermann case by which a segregation can be made. This circumstance makes it unnecessary for us to dispose of this case by a draconic application of the burden-of-proof approach with an ‘either-or’ result. Article Seventeenth of the separation agreement provides that if the wife ‘should remarry before the full balance of the sum of fifty-eight thousand five-hundred sixteen dollars and sixty-five cents ($58,516.65) is paid unto her then the (wife) shall forfeit the balance of the aforesaid sum payable under this Agreement or a sum of weekly payments in the aggregate of twenty-five thousand dollars ($25,000) whichever amount shall be the lesser’ but with the further proviso that the weekly payments of $16.22 due under the mortgage covering the home property transferred to the wife and included in the $111.46 weekly payments to be made by petitioner should continue to be made regardless of the wife's remarriage. Thus of the weekly payments called for by the agreement in the total aggregate amount of $58,516.65, the sum of $33,516.65 was payable in all events to or for the benefit of the wife or to her natural heir upon her death while a maximum amount of $25,000 of these payments was subject to forfeiture upon her remarriage subsequent to any divorce.
Under the facts disclosed by the record before us
and provisions of the separation agreement, it is our opinion that 33516/58516 of the periodic payments were made by petitioner in return for a surrender of his wife's property rights pursuant to a property settlement and that 25000/58516 of the periodic payments were made by petitioner ‘because of the marital or family relationship’ in satisfaction of her rights to support and alimony. Accordingly, we conclude that 43 percent of the periodic payments were deductible by petitioner as made under the agreement ‘because of the marital or family relationship’ and that 57 percent of the periodic payments were made in satisfaction of the wife's property rights as part of a property settlement and therefore not deductible.
The record does not contain clear and detailed testimony by either petitioner or his wife, or any testimony by attorneys representing them with regard to how much of the periodic payments was intended to be in satisfaction of the wife's support rights and how much in satisfaction of her property rights.
Decision will be entered under Rule 50.