Baer v. Commissioner of Internal Revenue

• Decision Date: 07 May 1952
• Docket Number: No. 14507.,14507.
• Citation: 196 F.2d 646
• Parties: BAER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

196 F.2d 646 (1952)

BAER v. COMMISSIONER OF INTERNAL REVENUE.

No. 14507.

United States Court of Appeals Eighth Circuit.

May 7, 1952.

Owen T. Armstrong, St. Louis, Mo. (Abraham Lowenhaupt, Ray Eder and Lowenhaupt, Waite, Chasnoff & Stolar, all of St. Louis, Mo., on the brief), for petitioner.

Harry Marselli, Sp. Asst. to Atty. Gen. (Ellis N. Slack, Acting Asst. Atty. Gen., and Lee A. Jackson and Louise Foster, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before GARDNER, Chief Judge, and WOODROUGH and THOMAS, Circuit Judges.

GARDNER, Chief Judge.

This matter is before us on petition to review a decision of the Tax Court which sustained a finding of deficiency in petitioner's income tax return for the year 1947 in the amount of $78,633.12. The deficiency resulted from disallowance of deductions from taxpayer's income of an item of $35,000 paid by taxpayer to his divorced wife pursuant to a property settlement, and an item of $20,000 paid to her attorney for legal fees in connection with the divorce proceedings, and an item of $16,500 paid to his own attorneys for legal fees in connection with the divorce proceedings. The findings of the Tax Court are not challenged and may be summarized as follows:

Petitioner, a resident of St. Louis, Missouri, was married to Mary E. Baer July 27, 1936. They had one child, Mary Ann Baer, who in 1946 was about nine years old. On December 14, 1946, Mrs. Baer filed suit for divorce and asked for alimony, custody and support of the minor child, and other relief. In that proceeding she alleged that her husband had property of several millions of dollars. While the suit for divorce was pending, on July 10, 1947, the parties executed an agreement settling their property rights and on the same date decree of divorce in favor of Mrs. Baer was entered. The agreement was incident to the divorce proceeding and divorce decree. It made provision for settlement of all the property rights of the parties, the details of which need not be here recited. It provided that in discharge of the legal obligations imposed upon petitioner because of the marital relationship he would pay his wife immediately after the entry of decree of divorce the lump sum of $35,000 to enable her to purchase and pay for a certain named property as a home for herself and daughter, and that he would pay her attorney the sum of $20,000 in full of any claim which might be made upon him for compensation for her attorney on account of services rendered to her, including all services in connection with the divorce suit and the suit involving stock claimed by her; that upon the entry of the decree of divorce he would on the first day of each month for five months pay her $2,916.66, and thereafter so long as both parties should live, irrespective of her remarriage, the sum of $1458.33, and that in the event of his death prior to that of Mary E. Baer, his representatives would pay to a responsible insurance company the sum necessary to provide for her $1,250 monthly for the rest of her life, and that immediately after the entry of the decree of divorce petitioner would deliver to Mary E. Baer the stock certificate for 5,000 shares of the stock of Stix, Baer and Fuller, and she would dismiss the suit involving said stock, he to keep the right to vote the stock, and she to restrict her right to sell or otherwise dispose of it.

The divorce decree was entered on July 10, 1947, and recited the appearance of the parties by attorneys; that plaintiff was found the innocent and injured party and entitled to relief, and that divorce was granted. The custody of the child was awarded in accordance with stipulation of the parties. The decree contained no reference to alimony, property, or settlement thereof.

On July 10, 1947, following the entry of the decree of divorce, and pursuant to the agreement, petitioner paid Mary E. Baer $35,000, and paid her attorneys $20,000.

The court found that, "Petitioner had two attorneys in the matter of the divorce and property settlement. To one of them he paid $10,000 of which about 90 per cent was received for services rendered in connection with the form and amount of alimony to be paid to the wife. To the other attorney he paid $8,787.60 of which about 80 per cent was paid for services in the negotiation of the form and amount of alimony."

In his income tax return for 1947 petitioner reported income of $100,519.57 as salary from Stix, Baer and Fuller Company, and $9,223.55 income from a trust. His dividends from Stix, Baer and Fuller Company were in excess of $135,000. In 1947 petitioner was and still is president of Stix, Baer and Fuller Company and then owned and now owns a substantial amount of stock in that company.

Petitioner and his wife and their attorneys were negotiating from about September, 1946, until July 10, 1947, relative to the marital rights and obligations of petitioner and his wife. At first a reconciliation was attempted but appeared hopeless and thereafter most of the negotiations were directed to the financial aspects of the matter. Mrs. Baer initially asked for one-sixth of petitioner's gross estate which she estimated to amount to from $6,000,000 to $8,000,000. Most of petitioner's property consisted of securities, a substantial portion thereof being represented by stock of Stix, Baer and Fuller Company. Petitioner resisted his wife's efforts to obtain a gross settlement because he was extremely concerned about the possibility of breaking up his solid block of stock in Stix, Baer and Fuller Company as it might affect his control and future in the business.

During the negotiations leading up to the property settlement there were discussions of the wife's demand for alimony, the dispute and replevin action as to the 5,000 shares of Stix, Baer and Fuller stock standing in the name of Mrs. Baer, a dispute as to some insurance which had been taken out on taxpayer's life by his wife and was being paid for out of the proceeds of a trust which he had created, problems as to the custody and support of the minor child, and attorney's fees for the wife. The attorneys for petitioner prepared documents in connection with those matters and represented petitioner in the divorce proceeding.

Based on these facts as found by the Tax Court the court considered the question whether the Commissioner erred in denying deduction of (1) $35,000 paid petitioner's wife for the purchase of a home, (2) the $20,000 paid to her attorney, and (3) the amount paid by the petitioner to his own attorneys.

As to the item of $35,000 paid to petitioner's wife for the purchase of a home, and the item of $20,000 paid to her attorney, the court expressed the view that these payments were not periodic payments of alimony deductible from gross income within the meaning of Section 23(u) of the Internal Revenue Code, 26 U.S.C.A. § 23(u), and hence, were not deductible from petitioner's income for income tax purposes. At to the item paid petitioner's attorneys in the divorce proceedings, the court held that this payment involved personal relationships as distinguished from business relationships, and hence, was not deductible under the provisions of Section 23(a) (2) of the Internal Revenue Code, for income tax purposes.

In this court petitioner renews his contentions, (1) that the amounts $35,000 and $20,000 paid by petitioner to Mrs. Baer and her attorney respectively, pursuant to the settlement agreement, were among periodic payments of alimony deductible from petitioner's gross income under Section 23(u) of the Internal Revenue Code; (2) that $16,500, representing that part of the aggregate amount of $18,787.60 in legal fees which is allocable to services in connection with the financial matters in controversy was deductible under Section 23 (a)(u) of the Internal Revenue Code.

Section 22(k) of the Internal Revenue Code, so far as here material, provides that in case a wife is divorced or legally separated from her husband under a decree of divorce or separation, "periodic payments (whether or not made at regular intervals) received subsequent to such decree 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." The agreement entered into between petitioner and his wife for the settlement of all property rights growing out of their marital relationships and her rights to his personal property, sets out in separate paragraphs the amounts which petitioner agreed to pay in discharge of these obligations. In paragraph 2(a) of the agreement it is provided that petitioner shall pay to his wife "immediately after the entry of such decree of divorce, a lump sum of Thirty-five Thousand Dollars ($35,000.00), so that she may be able to purchase and pay for the property known as 600 West Polo Drive, Clayton, Missouri, * * *." It is earnestly contended that this payment was a "periodic" payment of alimony and hence deductible from petitioner's gross income. First, it is noted that it was payable and actually paid in a lump sum for a specifically designated purpose, and while it is contended that it was the purpose of petitioner's counsel to classify this as a periodic payment, it is notable that counsel for Mrs. Baer insisted that the words "a lump sum" be inserted in this provision for the payment of $35,000, indicating that he was not in accord with the purpose of counsel for petitioner to make this payment part of a single unified plan for discharging petitioner's obligation of support. This lump sum payment had none of the characteristics of a periodic payment. The agreement provided for other payments to be made monthly. These certainly are...