Glasgow v. Comm'r of Internal Revenue, Docket No. 35921.

• Decision Date: 18 November 1953
• Docket Number: Docket No. 35921.
• Citation: 21 T.C. 211
• Parties: F. EWING GLASGOW, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

21 T.C. 211

F. EWING GLASGOW, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 35921.

Tax Court of the United States.

Promulgated November 18, 1953.

Henry T. Ferriss, Esq., and Alvan J. Goodbar, Esq., for the petitioner.

Ray H. Garrison, Esq., for the respondent.

1. In 1948, the taxable year, and immediately after the granting of a decree of divorce to his wife, petitioner, pursuant to a settlement agreement, paid to her an initial payment of $12,500. The agreement also provided for annual payments of $3,000, to begin in January of 1949, until her death or remarriage. Of the initial payment of $12,500, $3,000 was comparable to and for the same purpose as the annual payments which were to begin in January of 1949; $2,500 was to pay the fees of her attorneys; and the remainder was to cover nursing, medical and surgical services for which she had made herself liable at the time of the divorce, or for which it was anticipated she would become liable in 1948. Held, that, except for $3,000, the initial payment of $12,500 was not a periodic payment within the meaning of section 22(k) of the Internal Revenue Code, and was not therefore, deductible by petitioner, under section 23(u) of the Code, in computing his net income.

2. Contemporaneously with the settlement agreement, petitioner signed a guaranty agreement with a trust company, whereunder he was to deposit securities of a specified market value to guarantee the payments to his divorced wife under the settlement agreement. The various payments under agreement were to be paid by him to the trust company and by it paid to his divorced wife. In the absence of default, the securities were to remain in the petitioner's name and the income therefrom was payable directly to him. Held, that the fees paid by petitioner to the trust company in the taxable year were not expenditures of the character which are deductible under section 23(a)(2) of the Internal Revenue Code.

The respondent determined a deficiency in income tax against the petitioner for the calendar year 1947 of $7,578.76. The question are whether $12,500 paid by petitioner to his divorced wife, upon the procurement by her of a decree of divorce, was deductible from his gross income, under section 23(u) of the Internal Revenue Code, and whether he is entitled to a deduction as a nonbusiness expense, under section 23(a)(2) of the Code, of $125 in fees paid by him to the St. Louis Union Trust Company.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated.

The petitioner is a resident of St. Louis, Missouri. He filed his income tax return for the year 1947 with the collector of internal revenue for the first district of Missouri. The return was made on a cash receipts and disbursement basis.

Petitioner and Marguerite D. Haldeman were married on October 8, 1946, in New York City. They lived together as husband and wife, either in petitioner's home at 5185 Lindell Boulevard, in St. Louis, or at his summer home in Barnstable, Massachusetts, until July 1947, when they separated. After the separation and until December 22, 1947, on which date she procured a decree of divorce from petitioner in the Circuit Court for the City of St. Louis, Marguerite lived at the 5185 Lindell Boulevard address. The petitioner lived elsewhere. Immediately after procuring the divorce decree, Marguerite left St. Louis, and has not lived there since that time. Petitioner and Marguerite had no children.

At the time of the separation, petitioner owned a substantial amount of income-producing securities and was an income beneficiary of a trust estate. On his 1947 income tax return, he reported a gross income of $37,811.79. In 1946, Marguerite had an independent income of approximately $8,000 from some oil properties and a trust fund. She was familiar with petitioner's financial affairs.

After their separation, petitioner and Marguerite both employed counsel, who undertook to negotiate a settlement of their difficulties. Marguerite's position was that, unless petitioner was willing to resume married life with her, she would file a proceeding for divorce. After it appeared that a reconciliation could not be effected, she asked for a lump-sum settlement from the petitioner of $150,000, which petitioner refused. In the alternative, her counsel proposed annual payments to her by petitioner of $10,000 a year. Petitioner also rejected this proposal.

Petitioner was advised by his counsel that in the case of a settlement providing for annual payments to his wife for the period of her life or until her remarriage, the payments made by him to her would be income to Marguerite, and deductible by him in computing his taxable net income.

On December 22, 1947, a settlement was agreed upon and a written agreement covering the terms thereof was executed by the petitioner and Marguerite. The agreement recited that Marguerite, as party of the second part, intended to institute forthwith a proceeding for divorce and that the parties desired to effect a settlement of their property rights, in the event a divorce decree should be granted to her. The agreement was to be valid and effective only in the event that the divorce decree should be granted and the decree contained no provisions for attorneys' fees or alimony. Paragraph Second was as follows:

SECOND: In the event that such decree of divorce be granted to said second party, the said first party agrees thereafter to pay to second party, periodically, the following sums of money, namely, the sum of $12,500.00 immediately after the granting of such decree, and in addition the sum of $3,000.00 per annum, beginning on the 15th day of January in 1949 and continuing thereafter on the 15th day of January in each year, until the death or remarriage of said second party. Upon the happening of either of such events the obligations of first party hereunder shall cease and no further payments shall thereafter be due. Such payments will be made by first party in full discharge of his duty to support second party, and in lieu of any alimony or suit money judgment in said divorce decree, and in consideration thereof said second party relinquishes and surrenders her claim to support from first party growing out of their marital relations; As security for performance on his part, petitioner agreed to deposit securities, which at all times would have a fair market value of at least $50,000, with the St. Louis Union Trust Company. It was stated in the agreement that the securities to be deposited immediately had a present market value of $53,100. The securities were to be held by the trust company under the terms of a guaranty agreement to be executed contemporaneously between the petitioner and the trust company.

With respect to the initial payment of $12,500, which was to be paid under paragraph Second above, immediately after the granting of the divorce decree, paragraph Fourth provided as follows:

FOURTH: Upon the signing of this agreement by both parties hereto, and before or at the time of the filing of said petitioner for divorce, said first party will deposit with said Trust Company the sum of $12,500.00 in cash and the securities above listed, to be held pending the divorce suit. If such divorce decree be not granted to second party within ten days thereafter said cash and said securities shall be immediately returned to first party by said Trust Company, free from any claims hereunder. If such divorce decree be granted to second party within said time the said Trust Company shall, out of the said cash deposited with it by first party, pay to second party the sum of $10,000.00, and upon her order and instructions, the sum of $2,500.00 to Leahy & Leahy, her attorneys for their legal services to said second party, and said Trust Company shall thereafter hOld said securities under the terms of said Guaranty Agreement;

The agreement further provided that the payments of $3,000 a year, beginning on January 15, 1949, should be effected by the depositing of the said amount by petitioner with the trust company each January, so as to enable the trust company to make payment to Marguerite on or before the fifteenth day of such month.

Conditioned upon the granting of the divorce decree, the parties also agreed that they would ‘release, waive and surrender all dower and marital rights whether conferred by statute or otherwise, in the property of the other. ‘ Finally, it was provided that the settlement agreement was not to be filed in court, and there was to be no publicity other than a statement to be made in the proposed court proceeding that a property settlement had been agreed to.

The guaranty agreement between petitioner and the St. Louis Union Trust Company was also executed on December 22, 1947. It recited the deposit by petitioner with the trust company of the sum of $12,500 in cash and the securities specified, which securities were to be retained by the trust company as a fund to guarantee the payment thereafter by petitioner of the $3,000 a year to Marguerite, until her death or remarriage. In the event petitioner should fail to deposit with the trust company the annual payment of $3,000 within 10 days after the fifteenth day of January in any year, the trust company was to mail written demand therefor, and if within an additional 10 days the payment was not made, the trust company was authorized to enter suit for the said sum, and upon request of Marguerite, to sell a sufficient amount of the securities to pay to her the amount then due. If the securities on deposit should drop below $50,000 in market value, the trust company was to make written demand for additional securities, and in the event of failure to respond on the part of petitioner, to file suit for performance of the request.

With respect to the $12,500 in cash deposited at the time the guaranty agreement was signed, it was provided that if Marguerite did procure a decree of...