Gale v. Comm'r of Internal Revenue, Docket No. 19583.
| Decision Date | 28 October 1949 |
| Docket Number | Docket No. 19583. |
| Parties | ELSIE B. GALE, FORMERLY ELSIE B. WIMPFHEIMER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In 1944 a decree of divorce granted in 1940 was modified by the court so as to award to petitioner an increase in her alimony for the years 1941, 1942, and 1943 in a sum specified in the amended decree. Held, the sum so received by petitioner in 1944 as increased alimony for prior years represented ‘periodic‘ payments within the meaning of section 22(k) of the Internal Revenue Code; held, further, that the $4,000 expended by petitioner for attorneys' fees in 1944 in securing an increase in her alimony allowance is deductible as ordinary and necessary expense incurred for the production of collection of income within the meaning of section 23(a)(2) of the Internal Revenue Code. Thomas N. Tarleau, Esq., and Sandow Holman, Esq., for the petitioner.
John J. Madden, Esq., for the respondent.
Respondent has determined a deficiency in income tax for the calendar year 1944 in the amount of $14,133.74. The petitioner by appropriate assignment of error raises the following issues:
(1) Whether the amount of $19,000 received by the petitioner in 1944 from her former husband as a result of the modification of a prior decree of divorce, constituted taxable income to the petitioner under section 22(k) of the Internal Revenue Code.
(2) Whether the petitioner is entitled to deduct, under section 23(a)(2) of the Internal Revenue Code, attorneys' fees in the amount of $4,000 which were expended by her in 1944 in securing the amendment of the prior divorce decree.
The facts stipulated by the parties are hereby found and incorporated in our findings of fact.
The petitioner, Elsie B. Gale, is an individual residing in New York, New York. Her income tax return for the calendar year 1944 was filed with the collector of internal revenue for the third district of New York.
On May 6, 1940, in the State of New York, the petitioner and her then husband, Clarence A. Wimpfheimer, entered into a separation agreement which provided that the petitioner was to receive for her support and maintenance until her death or remarriage the amount of $666.67 per month. This agreement also specified that if in any year her husband's net income was more than $28,000 the wife might apply to the Supreme Court of the State of New York for such increase in her alimony as to that court might seem just and proper. The separation agreement accorded the husband a similar privilege to seek a reduction in alimony should his income fall below $24,000. Wimpfheimer was to furnish petitioner in each year with a copy of his Federal income tax return after it had been filed by him. The agreement further provided that if the parties should be divorced the agreement was to remain in full force and effect and was not to be merged in any decree handed down. This agreement was executed by the parties incident to and in contemplation of a divorce.
In August 1940 the petitioner instituted an action for divorce against Wimpfheimer in the Supreme Court of the State of New York, New York County. An interlocutory judgment of divorce in favor of the petitioner was entered on November 25, 1940. As the interlocutory judgment failed to provide for the payment of alimony to the wife in accordance with the provisions of the separation agreement, petitioner filed a motion in the Supreme Court of the State of New York, New York County, to modify the report of the official referee and the interlocutory decree. From an adverse decision on this motion, the petitioner appealed to the Appellate Division, First Department, which reversed the order of the lower court and modified the decree to provide for the payment of alimony to the wife in the amount of $666.67 per month.
As a result of negotiations carried on between petitioner and her husband in 1941, the latter paid to petitioner additional alimony for 1940 in the sum of $2,000 and counsel fees of $400. The parties attempted, without success, to reach an understanding concerning the question of increased alimony for 1941 and 1942. Thereupon, and in August 1943 petitioner instituted a special proceeding in the Supreme Court of the State of New York against her former husband to secure an increase in alimony in accordance with the provisions of the separation agreement, which specified that she might apply for such increase whenever the husband's net income in any one year exceeded $28,000. Upon the defendant's motion, this action was dismissed by the court for lack of jurisdiction.
In October 1943 the petitioner made application to the Supreme Court and the state of New York for an amendment and modification of the final judgment of divorce by increasing the alimony payment therein provided and praying that such increase be made retroactive to January 1, 1941. On June 19, 1944, the court entered an order granting the modification of the decree sought by the petitioner, increasing the amount of the alimony payable to her from and after July 1, 1944, to $1,500 per month. In addition, the court ordered:
ORDERED, that for the period extending from January 1, 1941, to December 31, 1941, defendant pay to the plaintiff for her support the sum of $12,000., less the sum of $8,000. already paid for said period, leaving a balance due for said period of $4,000., payable as hereinafter provided, and it is further
ORDERED, that for the period extending from January 1, 1942, to December 31, 1942, defendant pay to the plaintiff for her support the sum of $13,000, less the sum of $8,000. already paid for said period, leaving a balance due for said period of $5,000., payable as hereinafter provided, and it is further
ORDERED, that for the period extending from January 1, 1943, to December 31, 1943, defendant pay to the plaintiff for her support the sum of $18,000., less the sum of $8,000., already paid for said period, leaving a balance due for said period of $10,000., payable as hereinafter provided, and it is further
ORDERED, that for the period extending from January 1, 1944, to June 30, 1944, defendant pay to the plaintiff for her support the sum of $9,000., less the sum of $4,000. already paid for said period, leaving a balance due for said period of $5,000., payable as hereinafter provided, and it is further
* * *
ORDERED, that the defendant pay to the plaintiff, in addition to the regular monthly payments of $1,500. each hereinabove provided, the aggregate of the increased amounts which the defendant is directed in pay hereunder for the period extending from January 1, 1941, to June 30, 1944, amounting to the sum of $24,000., in six (6) equal monthly installments of $4,000. each, commencing July 1, 1944, * * *
The taxability of the $19,000 representing additional alimony awarded to petitioner for the period January 1, 1941, to December 31, 1943, and received by petitioner in 1944, is here in issue.
During the calendar year 1944 the petitioner received from her former husband, in accordance with the terms of the order of the Supreme Court of the State of New York, dated June 19, 1944, payments in the aggregate amount of $37,000. In her income tax return for 1944 the petitioner included in gross income the sum of $18,000 received from her former husband under the provisions of the court order, but did not include in her return the $19,000 which applied to the years 1941, 1942, and 1943.
During the calendar year 1944 the petitioner paid attorney's fees of $4,000 to the firm of Ernst, Gale, Bernays, Falk & Eisner, New York, New York, for legal services rendered in connection with her application, instituted in October 1943, to the Supreme Court of the State of New York for an increase in the amount of the alimony payments provided for in the final decree of divorce.
Section 22(k) of the Internal Revenue Code1 provides that periodic payments received by a wife under a decree of divorce or of separate maintenance, subsequent to the decree and in discharge of a legal obligation which stems from the marital or family relationship, and which is imposed upon the husband under the decree or written instrument incident to the divorce or separation, shall be includible in the gross income of the wife. This section further provides that installment payments discharging part of an obligation the principal sum of which is, in terms of money or property, specified in the decree or instrument shall not be considered periodic payments except where the principal sum may be or is to be paid within a period of more than ten years from the date of the decree or instrument.
The first question presented herein is whether the amount of $19,000, representing increased alimony for prior years which was received by the petitioner in 1944 from her former husband as a result of the modification of a prior decree of divorce, constituted ‘periodic‘ or ‘installment‘ payments of alimony within the meaning of section 22(k).
It is clear that the monthly payments of $666.67 received by the petitioner in 1941, 1942, and 1943 were ‘periodic‘ payments within the meaning of section 22(k). This is true regardless of whether they were made under the separation agreement or under the 1940 decree of divorce, as neither instrument specified a principal sum representing an obligation of the husband for the support and maintenance of the petitioner.
Under the separation agreement, the petitioner possessed the right to secure additional alimony in any subsequent year in which the husband's net income exceeded $28,000 per annum. It was apparent from the start that under the agreement the negotiation and payment of adjusted alimony for any year would have to be made the following year and that the amount of the settlement would be determined as a specified sum owed by the husband in respect to the prior year.
Moreover, there existed in the...
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