Hayutin v. C. I. R.
| Decision Date | 17 January 1975 |
| Docket Number | No. 73-1756,73-1756 |
| Parties | 75-1 USTC P 9108 Irving J. HAYUTIN and Sima B. Hayutin, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee (three cases).* *Hayutin (three cases), 73-1757, 1765, 1767, 1768; Estate of Shaw (four cases), 73-1758, 1762, 1770, 1772; Northwest Water Corp. (three cases), 73-1759, 1763, 1771; S and H Builders, Inc. (three cases), 73-1760, 1761, 1773;& Harrison (two cases), 73-1766, 1774 & 1775, v. Commissioner of Internal Revenue. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Stanley L. Drexler, Denver, Colo., for petitioners-appellants and cross-appellee in all cases except Nos. 73-1774 and 73-1775.
Martin P. Miller, Littleton, Colo., for petitioner-appellant and cross-appellee in Nos. 73-1774 and 73-1775.
Carleton D. Powell, Tax Div., Dept. of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks and Michael L. Paup, Tax Div., Washington, D.C., on the brief), for respondent-appellee and cross-appellant in all cases.
Before HILL and SETH, Circuit Judges, and SMITH, * District Judge.
This action involves seventeen appeals from decisions of the United States Tax Court, redetermining federal income tax deficiencies for the years 1954 through 1963. The appellants are: Irving J. and Sima B. Hayutin; Arthur B. and Sylvia C. Hayutin; Estate of Eugene E. Shaw, Deceased, Irving J. Hayutin, Special Administrator; Northwest Water Corporation; S & H Builders, Inc.; Sylvia C. Harrison (formerly Sylvia C. Hayutin); and Nelda B. Isbell (formerly Nelda B. Shaw). Additionally, the appellee Commissioner of Internal Revenue has filed two protective cross-appeals.
Some of the issues are identical and relate to the tax liabilities of several appellants. Others concern the tax liability of only a single appellant. Because of this, and because of the complex nature of the action, pertinent facts will be recited as they relate to particular issues rather than individual appellants.
Sylvia and Arthur Hayutin were married in 1945, while Arthur was serving in the U.S. Army. At the time of their marriage, Arthur's assets were minimal. He had $1,000 in bonds and a small amount of cash, but owned no automobile, no real estate, and no securities. Sylvia, who had been employed as a social worker, had saved approximately $3,000 from her earnings and from parental gifts. All of this money was placed in the couple's joint checking account. Additionally a $5,000 bond, a wedding gift from Sylvia's parents, was cashed and placed in the joint account.
The Hayutins moved to Denver, Colorado, when Arthur was released from the Army. He attended law school and Sylvia continued to work, placing her earnings in their joint account. Additionally, while Arthur was attending law school Sylvia's parents gave her $60 per month to be used in paying rent. Sylvia terminated her employment during her first pregnancy, and thereafter performed all the duties of a housewife.
During the years 1945-60, Sylvia and the children received over $12,000 in gifts from Sylvia's parents. These funds were spent on living expenses or were put in bank accounts or trusts for the children. With the exception of $1500 used by Arthur to purchase a partnership interest in his brother's law practice, and $2000 used by him in an unsuccessful business venture, Sylvia did not invest any of the money she received from earnings or parental gifts in business ventures in which Arthur had an interest.
Sylvia and Arthur separated in April, 1961, and Sylvia subsequently instituted divorce proceedings. The divorce was granted that October. Thereafter, Arthur agreed to pay Sylvia $500 per month in temporary alimony and she agreed to support herself and the children from these funds.
At the time of the divorce Sylvia had no legal interest in Arthur's business assets. She did have an interest in certain family household goods, an interest in the Sylvia C. Hayutin trust in which she was the beneficiary, and a one-half interest in two family residences.
After mesne negotiations (reflecting an intent to provide to some extent support for Sylvia and the children), Sylvia and Arthur in May, 1962, entered into a property settlement agreement. This 'Stipulation And Agreement' recited that it was binding 'with respect to the matter of custody of minor children, child support, permanent alimony, attorney's fees and expenses' and provided for a lump sum settlement to Sylvia of $198,000.
Arthur agreed to transfer to Sylvia his one-half interest in one residence, his interest in a $5,000 note, and his interest in miscellaneous household goods in Sylvia's possession. The value of the first two items was recited to be $35,000. The remaining $163,000 was to be paid in monthly installments over an 18 year period, beginning June 1, 1962. Sylvia agreed to transfer to Arthur her one-half interest in the second residence, her interest in the income from the Sylvia C. Hayutin trust and in certain stock held therein, and her interest in miscellaneous household goods in Arthur's possession.
The agreement further provided, inter alia, that Sylvia would waive all claims to alimony and that she would support and maintain the children. Additionally, she was to be maintained as the primary beneficiary on Arthur's life insurance policies to secure payments due under the agreement. Finally, the agreement provided that Arthur could prepay, in any amount, the $163,000.
Pursuant to the agreement Arthur made seven $700 payments to Sylvia in 1962. On his 1962 federal income tax return he deducted over.$19,000 as alimony. Sylvia, on her 1962 federal income tax return, reported only the $2,500 temporary alimony she received from Arthur prior to the settlement agreement.
The Internal Revenue Service (IRS) assessed deficiencies against Sylvia for unreported taxable alimony, and against Arthur, disallowing his alimony deduction on the grounds he had not established the payments constituted deductible alimony.
Both Sylvia and Arthur petitioned the United States Tax Court for a redetermination of deficiencies. In essence, Sylvia contended the property settlement agreement was a division of property between co-owners and therefore not includible in her gross income. Arthur, on the other hand, contended his payments under the settlement agreement constituted an obligation incurred by reason of the marital relationship and was therefore deductible from his gross income.
The Tax Court determined that the installment payments were not made to acquire Sylvia's interest in Arthur's property because, under Colorado law, her interests did not rise to the level of property rights. However, it found Sylvia did have actual ownership rights in some items of property, the value of which was unclear, thus requiring each payment to be allocated between support and property rights.
Finding the preliminary agreement between Arthur and Sylvia, which provided for $500 per month in temporary alimony, as convincing evidence of the amount they considered essential for her support, the Tax Court held (1) $500 of each of the seven $700 payments made in 1962 was for support and was deductible by Arthur and taxable to Sylvia; and (2) the remaining $200 of each of those payments was made to acquire Sylvia's property rights and was neither deductible by Arthur nor taxable to Sylvia.
On appeal, Sylvia contends the total amount of each payment is a non-taxable division of property and Arthur contends the total amount of each payment constituted deductible support.
Title 26 U.S.C. 215 1 permits a husband to deduct from his gross income amounts which he has paid to his wife during the taxable year if such amounts are includible in her gross income under 26 U.S.C. 71. 2
However, 71(c)(1) provides that installment payments, the principal sum of which is specified in terms of money or property in the agreement, shall not be treated as periodic payments.
Pointing to the lump sum provision in the settlement agreement, Sylvia contends Arthur's payments are not periodic and therefore not entitled to 71 treatment. This position ignores 71(c)(2), which provides that if the principal sum is to be paid over a period more than ten years, payments will be considered periodic under 71(a) (), notwithstanding 71(c) (1).
Nevertheless, Sylvia argues that because the agreement contains a prepayment option the principal sum could be paid within ten years, and therefore Arthur's payments are not periodic. This interpretation of 71(c)(2) is too restrictive. By its own language, it applies to payments that may be paid over more than a ten year period. Moreover, the prepayment option is only a contingency which is of no consequence unless it occurs. 3 Since Arthur's payments may be made over a period exceeding ten years they are periodic under 71(c)(2).
In addition to being periodic the payments must, to come within 71, arise out of a family or marital relationship in recognition of the general liability to support a wife or family, and must not be made as an exchange for the wife's property rights. 26 U.S.C. 71(a)(1). See also McCombs v. CIR,397 F.2d 4 (10th Cir. 1968). Determination of this question depends upon applicable state law and the facts and circumstances surrounding the agreement. United States v. Davis, 370 U.S. 65, 82 S.Ct. 1190, 8 L.Ed.2d 335 (1962); Collins v. CIR, 412 F.2d 211 (10th Cir. 1969).
This Court answered the question in Pulliam v. CIR, 329 F.2d 97 (10th Cir. 1964), cert. den'd, 379 U.S. 836, 85 S.Ct. 72, 13 L.Ed.2d 44, where we said: ...
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