Izrastzoff v. Commissioner of Internal Revenue

• Citation: 193 F.2d 625
• Decision Date: 08 January 1952
• Docket Number: 35,Dockets 22047,No. 34,22048.,34
• Parties: IZRASTZOFF v. COMMISSIONER OF INTERNAL REVENUE. COMMISSIONER OF INTERNAL REVENUE v. TOPPING et al.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

193 F.2d 625 (1952)

IZRASTZOFF v. COMMISSIONER OF INTERNAL REVENUE.

COMMISSIONER OF INTERNAL REVENUE v. TOPPING et al.

Nos. 34, 35, Dockets 22047, 22048.

United States Court of Appeals, Second Circuit.

Argued December 11, 1951.

Decided January 8, 1952.

William W. Lowell, of New York City, for petitioner Margaret C. Izrastzoff.

Richard D. Harrison, Washington D. C. (Theron Lamar Caudle, Asst. Atty. Gen., and Ellis N. Slack, A. F. Prescott, and George D. Webster, Sp. Assts. to Atty. Gen., on the brief), for Commissioner of Internal Revenue.

Henry Mannix and Francis H. Pinkham, both of New York City, for respondents Daniel Reid Topping et al.

Before CHASE and CLARK, Circuit Judges, and COXE, District Judge.

CLARK, Circuit Judge.

These petitions for review present a narrow issue raised by the amendments of 1942 to the Internal Revenue Code making alimony and separate maintenance payments taxable as income to the divorced wife and deductible from his income by the husband. The question here presented is as to how closely a separation agreement under which the payments were made must be tied to the divorce itself. Here the agreement somewhat preceded the divorce under circumstances hereinafter stated. The controlling statutory words, found in the added § 22(k), 26 U.S.C.A. § 22(k), state that where the "periodic payments" there made "includible in the gross income of such wife" and "not includible" in that of the husband are not provided for in the divorce or separation decree itself,¹ they must be in discharge of a legal obligation incurred by the husband "under a written instrument incident to such divorce." This section is supplemented by other provisions to the effect that currently distributable payments to a beneficiary are deductible by an estate or trust, I.R.C. § 162(b), 26 U.S. C.A. § 162(b), and that a divorced wife as described in § 22(k) is such a beneficiary, I.R.C. § 171(b), 26 U.S.C.A. § 171(b). See Laughlin's Estate v. C. I. R., 9 Cir., 167 F.2d 828. In a reasoned decision by Judge Tietjens, unanimously approved by the entire court, 15 T.C. 573, the agreement here under consideration was found within the statutory terms so that her receipts during the years 1942 and 1943, the first years in which the new amendment became effective, were taxable as income to her and deductible from gross income by the husband's estate. To overturn this decision, the wife has brought her petition for review, opposed here by both her husband's administrators and the Commissioner of Internal Revenue, though the latter has also filed a protective petition — against the event that the wife might be successful — for review of that portion of the decision holding the payments deductible by the estate.

The petitioning wife Margaret Izrastzoff and Daniel G. Reid were married in 1910. She was 26; he was 51 and notably wealthy. They separated on January 19, 1919, after at least three years of increasing disruption of marital bliss. She never saw him afterwards and he died in 1925. The sequence of succeeding events after the informal separation is crucial. On leaving Daniel, Margaret went to live in a New York hotel, where was also living a certain man whom she had met the previous November and who figured as corespondent in Daniel's later action for divorce. Daniel almost immediately hired two detective firms to follow his wife and report on her activities. On February 28, 1919, Margaret instituted a suit for legal separation in the Supreme Court of New York and shortly thereafter counsel for the two parties began negotiations for a financial settlement. These resulted in an agreement, dated March 27, 1919, and executed by the parties during the next nine days, which provided for an initial payment to her of $200,000 and subsequent annual payments for life of $30,000. In early April, Margaret changed hotels, as did her acquaintance; and later in the month both journeyed to San Francisco. Then, on May 12, 1919, Daniel began a suit for divorce in the Supreme Court of New York alleging his wife's adultery on information and belief. Margaret counterclaimed, and in October filed a divorce action of her own later marked off the calendar by stipulation. The first action came to trial in February and March of 1920. Daniel introduced no evidence, and interlocutory judgment of divorce was entered in petitioner's favor on March 22, 1920, and the decree became final three months later. In neither action did petitioner ask for alimony; instead she relied on the agreement. In 1921, Daniel established a trust to secure the payments due her under the agreement. In 1926, after her husband's death, she married the man with whom she had been friendly.

For the resolution of our problem here, we may start with the basic facts, conceded by all, that these are periodic payments received by a divorced wife in discharge of a legal obligation incurred by the husband because of the marital relationship. The estate and the Commissioner then go on to assert that the obligatory written instrument was also "incident to such divorce." But the petitioning wife contends that such cannot be the case unless the parties mutually intended a divorce at the time of its execution and that there was no competent evidence to support a finding of such intent. We conclude otherwise — with the Tax Court.

First, the evidence offered by the estate was entirely competent. The objection of irrelevancy to the testimony of one of Reid's close friends that Reid had stated his intent to effect a divorce is not well taken, nor are the objections on similar grounds to the statements of the detectives hired by Reid in February and March concerning their reports of petitioner's adultery and her aim to establish divorce domicile in California. Whether the March agreement was "incident to" the later divorce is a question of many facets, among which clearly is the contemporary understanding of the very parties to it. That Reid hired detectives and expressed his divorce-mindedness to friends is strong evidence of his intent to press matters to their logical conclusion and hence supports the inference that he, at least, thought of the agreement then in process of negotiation as a part of the ultimate settlement erected on a contemplated legal divorce. Nor is the absence of direct evidence that he received the detectives' reports fatal to the admission of their testimony, for receipt by his counsel is sufficient basis from which to infer Reid's reaction to them, in the light of his almost immediate complaint for divorce on the ground of adultery.

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