Hogg v. Comm'r of Internal Revenue

• Decision Date: 26 September 1949
• Docket Number: Docket No. 17903.
• Citation: 13 T.C. 361
• Parties: THOMAS E. HOGG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

13 T.C. 361

THOMAS E. HOGG, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 17903.

Tax Court of the United States.

Promulgated September 26, 1949.

During the years of separation the taxpayer paid $1,200 monthly for his wife's support and pursuant to an agreement made preliminary to divorce he continued to pay $1,200 monthly (plus some extra for a few months) ‘to provide for the current annual support‘ of the wife; he transferred to her a furnished home, cash, and other property, and agreed to pay $10,000 to her estate and make contingent provision for her mother, if surviving. The wife gave the taxpayer a deed to her interest in all property held by or for him. The record does not conclusively establish whether there was or was not community property. In a petition for divorce the wife alleged that the taxpayer and she had agreed upon a property settlement, and the decree made no reference to property or to support, which latter is not imposed by Texas law on a divorced husband. The monthly payments made under the agreement, held, deductible under section 23 (u), Internal Revenue Code, because incurred under a written instrument made in discharge of a preceding legal obligation of support, within the meaning of section 22 (k). Tuckie G. Hesse, 7 T.C. 700 followed. Milton H. West, Jr., Esq., and Harry R. Jones, Esq., for the petitioner.

Allen P. Aiken, Esq., for the respondent.

The Commissioner determined deficiencies of $11,516.79 and $10,882.33 in petitioner's income tax for 1943 and 1944, respectively, by disallowing the deduction of amounts paid monthly to petitioner's wife under an agreement made incident to divorce. Petitioner contends that the obligation was incurred because of the marital relationship and in lieu of alimony or support within the meaning of section 22 (k), Internal Revenue Code, and is hence deductible under section 23 (u). Respondent argues that it was incurred in an agreement for the division of property, and is hence not deductible.

FINDINGS OF FACT.

Petitioner, a resident of Houston, Texas, filed his income tax returns for 1942, 1943, and 1944 with the collector of internal revenue for the first district of Texas. He is the son of James S. Hogg, who died about 1905 and the brother of W. C. Hogg, Mike Hogg, and Ima Hogg. W. C. Hogg died in 1930; Mike Hogg in 1941. The four children inherited from the father certain tracts of land at West Columbia, Texas, and, except for a few months' employment petitioner has lived on his share of the income from this inheritance and its increment. Prior to 1918 the small amount of income was supplemented by loans from W. C. Hogg, who advanced him an aggregate of about $44,000.

In 1918 oil in large quantities was struck on the Hogg lands at West Columbia and on July 1, 1920, the four heirs made an agreement, contributing their one-fourth interests in the property to a partnership to be conducted under the name of Hogg Brothers by W. C. and Mike Hogg as ‘active partners.‘ The active partners were expressly authorized to expand activities into general investments at their discretion. In fact, W. C. Hogg alone acted as manager. Petitioner never had any voice in the business. He and his sister gave W. C. and Mike Hogg general powers of attorney to act for them ‘in respect to the individual property,‘ and all agreed not to make any investments, engage in any outside business (except as an employee), or speculate in the market without the consent of the active partners. Any differences between the four were to be settled by the majority, and provision was made ‘for monthly advances to the respective partners for living expenses‘ such as would provide ‘reasonable comforts of life.‘

Under W. C. Hogg's management very large profits were realized and investments were made in other oil properties, real estate, securities, and business undertakings. When W. C. Hogg died on September 12, 1930, the partnership books indicated that one-fourth of the income from the inherited lands had aggregated $2,320,727.91 gross and $1,922,212.25 net; from partnership investments, $204,321.82 gross and $39,730.76 net. Petitioner had withdrawn a total of $830,902.60 and $1,131,040.41 remained to his credit. Of this remainder, he immediately contributed assets of $239,750 to a new partnership with his surviving brother and sister, styled Mike Hogg Agent, and liquidation of the old partnership was begun, but it was not finally completed until June 30, 1938. During this period the old partnership received income, but made no investments. By his contribution to Mike Hogg Agent petitioner acquired in that partnership a three-twelfths interest. Mike Hogg was made the active manager to conduct its business ‘along the lines of those heretofore engaged in by the old partnership,‘ and the agreement contained substantially the same provisions affecting the partners' relations, including general powers of attorney for Mike Hogg to act for the other two. Between September 12, 1930, and June 30, 1938, one-fourth of income from the inherited lands was $227,358.06 gross and $138,536.94 net; from other properties acquired, $79,022.18 gross and a deficit of $12,805.27, leaving a total net of $125,731.67 from all sources. Petitioner's withdrawal aggregated $219,061.58 of income and $251,736.97 of assets, and on final liquidation of Hogg Brothers his capital account was $158,407.06. The partnership commingled funds received from various sources, but kept separate accounting records for their properties. To his income tax return for 1938 petitioner attached many pages containing a detailed schedule of the liquidation of the assets of Hogg Brothers apart from those which had been immediately transferred to the partnership of Mike Hogg Agent. On this schedule he disclosed the receipt of assets of a value of $1,047,041.39 as his share. These assets consisted principally of notes receivable, $452,540.52; unlisted stocks, $242,769.72, and accrued interest receivable, $234,277.83, together with lesser but substantial amounts of oil royalties, real estate, and cash. None of these assets was contributed to Mike Hogg Agent.

On July 10, 1912, petitioner married Marie Willett. Marital difficulties began in 1934, a series of temporary separations ensued, and for his wife's support petitioner began to make deposits to her account. During 1935 and 1936 he deposited $1,000 a month, and thereafter $1,200 a month until May 1, 1939. On June 18, 1938, petitioner and his wife permanently separated and through attorneys began negotiations with a view toward divorce. From the summer of 1938 until April 1939 the attorneys held twelve or fifteen conferences, at some of which petitioner's wife was present, but not he. These conferences resulted in an agreement that upon divorce petitioner would transfer to his wife the home, its furnishings, two automobiles, a bank account, $5,000 cash, repay a loan of $2,300 from her, and make specified monthly payments to her and to her mother, if surviving her, for life. Petitioner's property consisted almost entirely of his interest in the inherited oil lands and other income-producing assets held and operated by the successive partnerships. In conducting the negotiations preliminary to divorce, petitioner's counsel had a schedule prepared by an accountant from the partnership's books. This schedule tended to show that petitioner's only income from community property was the $39,730.76 net income from assets acquired by Hogg Brothers and the deficit of $12,805.27 from assets acquired by Mike Hogg Agent. In the course of negotiations the wife's counsel failed to question the computation, but the settlement agreed upon was based on the maximum monthly amounts that petitioner would consent to pay.

On April 5, 1939, and after the agreement was reached, the wife filed a petition for divorce in the District Court of Bexar County, Texas, alleging that she and petitioner had ‘agreed upon a settlement of their property rights. ‘ No alimony or support was asked, and in granting the divorce by decree entered May 15, 1939, the court made no reference to alimony or property settlement. Pursuant to their agreement petitioner, on May 9, 1939, deeded the home to the wife; on May 17, 1939, he made all the other transfers and payments contemplated and signed a written agreement to pay Marie Willett Hogg $1,500 a month until December 1940 and $1,200 a month thereafter for life, and upon her death to pay $10,000 to her estate, agreeing further, that if her mother should survive her he would pay $300 a month to the mother for life and $3,000 to the mother's estate. At petitioner's option he could at any time after prescribed notice discharge all these obligations of payment by a lump sum estimated as the cost of an annuity contract providing the preceding periodic payments. These estimates ranged from $251,940 at the end of the first year to $6,000 at the end of the forty-fifth year. By a second option petitioner could purchase the annuity contracts himself; by a third, he could deliver to the wife bonds producing $14,400 a year; by a fourth, he could convey to her real estate of sound value, producing the same amount of income; and by a fifth, he could create a trust to carry out the obligation initially described. The wife's rights to the monthly payments were ‘nontransferable and nonassignable‘ unless a payment should become ten days overdue, and;

* * * Any person or corporation taking any assignment except as permitted by the terms hereof, or any transfer, pledge, mortgage, conveyance by execution or judicial sale or other attempted right or interest in those properties or in this contract, shall acquire no rights whatever, this instrument being intended to provide for the current annual support of Mrs. Marie Willett Hogg and after her death, of her mother, Mrs. Gus Willett.

In the final paragraph the parties recited that the agreement was ‘executed in...