GRAFF III v. Commissioner, Docket No. 2515-78.

• Decision Date: 04 August 1982
• Docket Number: Docket No. 2515-78.
• Citation: 44 TCM (CCH) 701,1982 TC Memo 447
• Parties: Walter A. Graff III v. Commissioner.
• Court: U.S. Tax Court

44 TCM (CCH) 701

1982 TC Memo 447

T.C. Memo. 1982-447.

Walter A. Graff III v. Commissioner.

Docket No. 2515-78.

United States Tax Court.

Filed August 4, 1982.

David L. Moore, for the petitioner. Jan Pierce, for the respondent.

Memorandum Findings of Fact and Opinion

IRWIN, Judge:

Respondent determined deficiencies in petitioner's Federal income tax of $605 and $1,042 for the taxable years 1974 and 1975, respectively. Due to a concession, the sole issue presented for our decision is whether certain payments made by petitioner to his former spouse were support payments or whether the transfers were in satisfaction of the property rights of the former spouse.

Findings of Fact

Some of the facts have been stipulated and are so found. These facts together with the exhibits attached thereto are incorporated herein by this reference.

Petitioner Walter A. Graff, III, resided in Ashland, Oregon, at the time he filed his petition herein. His Federal income tax returns for 1974 and 1975 were filed with the Internal Revenue Service Center in Ogden, Utah.

Petitioner and Ann Cramer (formerly Ann Darland) were married on July 23, 1960. On April 22, 1961 the only child of this marriage was born. Petitioner and Cramer were divorced on August 28, 1973. During the marriage, the wife did not work outside the home except during the final year of the marriage.

In 1964 or 1965 petitioner and Cramer purchased a home in Stockton, California. Although petitioner supplied the funds for purchase, the home was jointly owned by petitioner and Cramer. In 1966 or 1967 they sold the Stockton residence and reinvested the proceeds of that sale in a home in Medford, Oregon. Husband and wife were joint owners of the Medford property.

During 1969 or 1970 petitioner acquired an interest in Hunter's Tavern. In order to purchase the tavern business, a bank loan was secured. The bank required that petitioner's wife, along with petitioner, sign the necessary promissory note.

In 1970 or 1971 petitioner sought to acquire an interest in C & W Broadcasters, Inc. In connection with this acquisition a loan was secured by petitioner. Both husband and wife signed a promissory note in order to acquire the borrowed funds.

Petitioner also acquired some commercial realty in Stockton in the mid-1960's. Petitioner and his former wife were listed as co-owners of the property.

Ann Cramer was employed outside the marital home only during the last year of the 13-year marriage. The funds she earned in that year were not used for the acquisition of any of the interests enumerated above. She did not inherit any property during the marriage. The assets described above were acquired from funds supplied by petitioner. Petitioner obtained the moneys through his work and from family trust funds.

Petitioner and Cramer, each represented by an attorney, negotiated the terms of their marriage dissolution. Cramer specifically requested a property settlement. The request was rejected by petitioner and judicial proceedings were necessary to resolve the issue.

On June 28, 1973 a Decree of Dissolution of Marriage was entered by Judge Loren L. Sawyer of the Circuit Court of the State of Oregon for Jackson County thereby ending the marriage of petitioner and Ann Cramer as of August 28, 1973. In addition the court decree contained the following relevant provisions:

IT IS FURTHER ORDERED, ADJUDGED, DETERMINED AND DECREED that respondent be and she hereby is, awarded the custody of VERONICA LYNN GRAFF, born April 22, 1961 with the right of the petitioner to have visitation at reasonable times and places, and

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that petitioner pay to the clerk of the court on behalf of the respondent the sum of $200 per month in support of the minor child of the parties until said child attains her majority or sooner becomes emancipated, and

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that petitioner pay all the reasonable dental and medical expenses incurred on behalf of said minor child during her minority, together with any tuition charges required for education, and

IT IS FURTHER ORDERED that the child support payments shall be made on the 5th day of each month, the first payment to commence on July 5, 1973 and on the 5th day of each month thereafter, and

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the respondent be, and she hereby is awarded all of the household furniture and furnishings of the parties now in her possession and located at 2020 Hybiscus, Medford, Oregon, together with all jewelry in her possession, and Datsun automobile, and

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the respondent be and she hereby is awarded the following real property located at 2020 Hybiscus, Medford, Oregon, described as follows:

Lot 3, Block 16, Blossom Hill Terrace No. 4

SUBJECT TO the note and mortgage against said real property which note and mortgage respondent shall pay and hold petitioner harmless from any liability thereon.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that respondent be awarded the sum of $34,000 for her portion of the property owned by the parties, which sum is to be paid at the monthly rate of $208.34, the first monthly payment to be made on July 28, 1973 and a like monthly payment on the 28th day of each month thereafter. There shall be no interest for the first year. Interest shall accrue at 8 percent per annum on the unpaid balance on and after June 28, 1974. Interest shall be paid monthly commencing with July 28, 1974 in addition to the payment on principal. In the event petitioner should fail to make the monthly payments as required herein, the entire balance shall become due if such default is not cured or paid within 45 days from the due date of such monthly payment.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that petitioner be, and he hereby is, awarded the following described real and personal property of the parties not herein awarded to respondent.

1. All interest of the parties in Hunter's Tavern, a co-partnership.

2. All interest of any kind in C & W Broadcaster's Inc., including real property.

3. Business building located at 2309 North California, Stockton, California.

4. All household furniture and furnishings and personal effects now in possession of petitioner.

5. All marketable securities.

6. All notes receivable.

7. All accounts receivable.

8. All office furniture and equipment.

9. All interest in two trusts, one wherein Northern Trust Company, Chicago, Illinois is trustee and Walter A. Graff, Jr., is trustee.

Some confusion over the terms of the decree of dissolution arose. After some correspondence among Judge Sawyer, petitioner's matrimonial attorney and Cramer's attorney, Judge Sawyer, in an attempt to clarify provisions of the decree, sent a letter, dated July 13, 1973, to the two attorneys. The relevant portions of the letter provide:

I apologize for confusion on the payment of $2,500 (i.e., $208.34 times 12). Apparently this matter was not spelled out clearly when I rendered my decision from the Bench. Parenthetical phrase added.

It was my determination that the $2,500 payment should be made in monthly installments. I felt with the monthly payment from the trust account plus the child support payment that this would give the petitioner an adequate monthly income to provide for her and the child, along with her working.

* * *

If Mr. Deatherage will make the changes I have indicated my secretary will forward the decree to me in Nevada and I will sign it so that the matter can be resolved between the parties as quickly as possible.

Mr. Deatherage was the matrimonial attorney of petitioner, Walter A. Graff, III. A formal charge of the decree was not effected.

Payments made by petitioner to his former spouse pursuant to the decree of marriage were posted on ledger cards in the office of the Clerk of the Circuit Court of Jackson County. These records indicate that the decreed monthly payments of $208.34 were for a property settlement.

On his 1974 and 1975 tax returns petitioner deducted the monthly payments of $208.34 he made to his former spouse. Thus, in each of the years in issue he claimed a $2,500 alimony deduction.

In his notice of deficiency dated December 5, 1977 respondent disallowed petitioner's alimony deductions.

Opinion

Section 215¹ allows a husband a deduction for alimony payments that are taxable to the wife and paid her during the husband's taxable year. Section 71(a) includes in the wife's income periodic payments received in discharge of a legal obligation which, because of the marital relationship, is incurred by the husband.

Section 71(a) applies only to payments made in recognition of the marital obligation to support, which is made specific by the decree, instrument or agreement. Section 1.71-1(b)(4), Income Tax Regs. Payments which effect a property division or which satisfy property rights are capital in nature and hence are not includable in the wife's gross income or deductible by the husband. Schottenstein v. Commissioner Dec. 37,504, 75 T.C. 451, 456 (1980), Gammill v. Commissioner Dec. 36,795, 73 T.C. 921, 926 (1980), on appeal (10th Cir., June 3, 1980); Wright v. Commissioner Dec. 32,656, 62 T.C. 377, 389 (1974), affd. 76-2 USTC ¶ 9736 543 F. 2d 593 (7th Cir. 1976).

The payments in question herein were incurred by petitioner pursuant to a decree of dissolution of marriage issued by the Jackson County Circuit Court on July 13, 1973. The disputed payments total $2,500 per year ($208.34 per month). The parties do not dispute the periodic nature of the payments.² Nor is there any disagreement that the obligation to make the payments was imposed by the divorce decree. Rather, the parties focus their attentions on whether the payments satisfy a legal obligation imposed because of the marital relationship or whether the payments represent a property settlement.

Petitioner argues that any property claims which his former wife may have had were extinguished by the...