Hesse v. Comm'r of Internal Revenue , Docket Nos. 8380-71
| Decision Date | 07 August 1973 |
| Docket Number | 788-72.,Docket Nos. 8380-71 |
| Citation | 60 T.C. 685 |
| Parties | MARION R. HESSE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTSTANLEY H. HESSE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Patrick W. Kittredge, for the petitioner in docket No. 8380-71.
William G. O'Neill, for the petitioner in docket No. 788-72.
Stephen Cadden, for the respondent.
W commenced an action seeking a limited divorce and claiming support. H wanted an absolute divorce but lacked the grounds to secure one. H agreed to pay $500,000 in installments to W. and she thereupon secured an absolute divorce. Held, the payments to W were periodic payments in lieu of alimony or support under sec. 71(a), I.R.C. 1954. Held, further, legal expenses incurred by W in obtaining such payments are deductible under sec. 212(1), I.R.C. 1954.
The respondent determined the following deficiencies in the petitioners' Federal income taxes:
Because of concessions, the primary issue remaining for decision is whether payments made by Stanley H. Hesse to his former wife, Marion R. Hesse, pursuant to a written agreement incident to a divorce, were periodic payments made in discharge of a legal obligation incurred by Mr. Hesse because of the marital or family relationship. If so, we must decide the subsidiary issue of whether legal fees incurred by Marion R. Hesse in obtaining such payments were ordinary and necessary expenses incurred for the production or collection of income.
Some of the facts have been stipulated, and those facts are so found.
The petitioner, Stanley H. Hesse, is an individual who resided in Boca Raton, Fla., at the time his petition was filed in this case. He filed his Federal income tax return for the year 1967 with the district director of internal revenue, Jacksonville, Fla., and he filed his Federal income tax return for the year 1968 with the Internal Revenue Service Center, Chamblee, Ga. Neither of such returns was a joint return with Marion R. Hesse. Mr. Hesse keeps his accounts on the cash receipts and disbursements method.
The petitioner, Marion R. Hess, resided in Bethlehem, Pa., at the time her petitioner was filed in this case. She filed her Federal income tax returns for the years 1967, 1968, and 1969 with the district director of internal revenue, Philadelphia, Pa. Mrs. Hesse keeps her accounts on the case receipts and disbursements method.
The Hesses were married on January 1, 1944, and in the early part of 1966, Mr. Hesse separated from his wife with the intent of obtaining a divorce so that he could remarry.
At the time of the separation, Mr. Hesse was wealthy by virtue of gifts from his parents of at least 25,000 shares of stock in Harcourt, Brace and World, Inc. (Harcourt, Brace). During the period 1965 through 1967, the market price of the stock increased from $44 per share to $121 per share, and the value of Mr. Hesse's stock ranged from $1.5 to $3 million during the period. However, Mr. Hesse's wealth was not reflected in his income, as the stock in Harcourt, Brace paid low dividends, never in excess of $1 per share in any one year. Nor was Mr. Hesse's earned income large; for example, in 1966, he reported total earned income of $10,120.04.
The earnings of Mrs. Hesse during the course of her marriage were minimal. However, from 1951 onward, she received at least $119,000 in cash or stock as gifts from her parents, as distributions from trusts set up under the wills of her parents (both of whom were deceased by February 1959), and as gifts from the parents of Mr. Hesse. Thus, at the time of the separation, Mrs. Hesse owned stock in her father's two companies, which she had purchased for $48,000, and other investments having a fair market value in excess of $39,000, and she had contributed regularly to the petitioners' joint checking account, paid off $10,000 of the mortgage principal on the petitioners' residence, and financed a business venture in which she lost $3,000. Mrs. Hesse was also part owner of a commercial property in Allentown, Pa., which she and her husband purchased as tenants by the entirety; Mrs. Hesse had contributed $15,000 toward the purchase price, and Mr. Hesse had contributed $18,000.
On March 24, 1966, Mr. Hesse filed a complaint for divorce a vinculo matrimonii (divorce a.v.m.) with the Court of Common Pleas of Northampton County, Pa. Under Pennsylvania law, a divorce a.v.m., often referred to as an absolute divorce, severs the marital relationship between husband and wife. It thereby enables the parties to remarry— which Mr. Hesse desired to do— and, except as may be provided by private agreement, terminates the husband's obligation to support his wife. Mr. Hesse's position with respect to a settlement at that time was that the assets owned by his wife were sufficient to provide for her support, and the only asset that he suggested giving her was his interest in the jointly held commercial property in Allentown.
On March 21, 1966, Mrs. Hesse contacted an attorney in Bethlehem, Pa., with regard to her husband's intention of filing a complaint for divorce, and on March 25, 1966, after such complaint was served, she met with such attorney. At that time, the position of Mrs. Hesse was that Mr. Hesse had used the family bank account for his business and put all the money he made back into the business; it was her money that took care of the home.
Thereafter, the parties, through their attorneys, entered into a period of extensive negotiations with respect to the rights and obligations each had against, or owed to, the other. Initially, the petitioners entered into a voluntary agreement concerning the support of their three children. According to the terms of such agreement, Mr. Hesse paid Mrs. Hesse a total of $75 per week. At the same time, the petitioners agreed that Mrs. Hesse would retain $25 per week from the rental income of the Allentown commercial property as support.
In an attempt to secure a negotiated settlement, the attorney, on behalf of Mr. Hesse, first offered to pay $50,000 in cash to Mrs. Hesse. Such offer was refused by the attorney for Mrs. Hesse, who indicated that he would recommend settlement for $150,000 in stock or cash. At that time, Mrs. Hesse demanded $200,000. On April 25, 1966, she entered into a contingent fee agreement with her attorney, in which she was to pay him 10 percent of the value of any assets received in a settlement arising from the divorce action. By August 1966, the demands of Mrs. Hesse increased, and her position with respect to a settlement was to accept no less than $500,000. She justified her demand for this amount by pointing to certain statements made by Mr. Hesse in which he stated that he would give one-half million dollars to be rid of his wife. It was the position of Mrs. Hesse that if her demands were not accepted by her husband, her attorney was to institute an action for divorce a mensa et thoro (divorce a.m.e.t.). Under Pennsylvania law, a divorce a.m.e.t., often referred to as a limited divorce or a legal separation, permits the wife to obtain permanent alimony and, because it does not dissolve the marriage, prevents remarriage by either party. Thus, if such a divorce were granted, Mr. Hesse would be unable to remarry.
Mr. Hesse was informed on August 30, 1966, of the $500,000 demand by his wife. He rejected the demand, claiming that to raise such money, he would have to sell some of the Harcourt, Brace stock and that he could not sell such stock without the authorization of his parents, which they refused to give. On September 1, 1966, the attorney for Mrs. Hesse was informed of the rejection of her demand.
On November 28, 1966, Mrs. Hesse filed a complaint for divorce a.m.e.t. with the Court of Common Pleas of Northampton County, and in it she requested support to the extent of one-third of the annual income derived from her husband's estate and labor. Mr. Hesse was advised by counsel that he had little or no grounds for obtaining a divorce a.v.m. from Mrs. Hesse, and that she had enough evidence to support an action either for divorce a.v.m. or divorce a.m.e.t. Mr. Hesse was further advised that because of his extensive wealth, his wife would very likely be able to obtain an order for support amounting to between $25,000 and $40,000 per year. It was the opinion of counsel that in determining the scope of Mr. Hesse's responsibility to provide support for his wife, the court would not look merely at the relatively low income derived from his Harcourt, Brace stock, but rather would determine the income that could be earned if the value of such stock was invested in income-producing property. In the light of this advice, the position of Mr. Hesse changed, and by March 1967, he was willing to pay either for the support of his wife or to agree to a cash settlement of approximately $300,000. However, Mr. Hesse still maintained that he was the wronged party, and he still felt that the demands of Mrs. Hesse were excessive in light of the needs and other incomes of both parties.
The attorneys continued to negotiate. Counsel for Mr. Hesse, who had earlier offered a settlement involving $6,000 per year as support, guaranteed by a collateral deposit of $300,000 worth of stock, increased the offer, in April 1967, to $7,200 per year, guaranteed by a collateral deposit of $350,000 worth of stock. Both offers were made to ensure the annual payments incurred by Mr. Hesse were commensurate with his actual income. On the other hand, counsel for Mrs. Hesse made it clear that his client still demanded $500,000, but that for the...
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