Joss v. Comm'r of Internal Revenue

• Decision Date: 18 May 1971
• Docket Number: Docket No. 4031-69.
• Parties: HERBERT I. JOSS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

56 T.C. 378

HERBERT I. JOSS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4031-69.

United States Tax Court

Filed May 18, 1971.

Jerrold M. Facktor, for the petitioner.

James F. Hanley, Jr., for the respondent.

A former wife received payment from her former husband after her remarriage even though their agreement upon divorce provided such payments would cease upon her marriage. In a later year the former husband sued his former wife for repayment of the funds on the theory of unjust enrichment and recovered a judgment for repayment of all amounts paid after his former wife's remarriage. Petitioner who in April 1964 filed a joint return with his then wife who had received the funds was notified of the receipt of the funds by his then wife in February 1964. Petitioner and the recipient of the funds are now divorced. Petitioner and his then wife claimed dependency exemptions for her three children on their joint return. Held:

1. The payments are includable in the former Wife's income in the year received. James v. United States, 366 U.S. 213 (1961). Martha K. Brown, 50 T.C. 865 (1968), affirmed per curiam415 F.2d 310 (C.A. 4, 1969), distinguished.

2. Petitioner is not entitled to the three dependency exemptions claimed in his income tax return for his then wife's children for failure to prove they paid over one-half of the support of the claimed dependents, and respondent's determination of addition to tax for negligence is sustained for failure of proof by petitioner.

3. Under the provisions of sec. 6013(e), I.R.C. 1954, petitioner is not relieved from tax on the funds received by his former wife with whom he filed a joint return since he knew of her receipt of the funds at the time their joint return was filed.

SCOTT, Judge:

Respondent determined a deficiency in petitioner's income tax for the calendar year 1963 in the amount of $5,266.93 and an addition to tax under section 6653(a), I.R.C. 1954,¹ in the amount of $263.35.

The issues for decision are:

(1) Whether petitioner's former wife received $23,000 of taxable income which she and petitioner failed to include in their joint Federal income tax return for the calendar year 1963.

(2) Whether petitioner and his former wife are entitled to the three dependency exemptions claimed on their joint return for her three children who resided with them during the year 1963.

(3) Whether petitioner is liable for the addition to tax for negligence for the year 1963.

(4) Whether, if the $23,000 received by petitioner's former wife is includable in their income reportable on the the basis of a joint return, petitioner should be relieved from tax on this amount under the provisions of section 6013(e).²

FINDINGS OF FACT

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

Petitioner is an individual who resided in Chicago, Ill., at the time the petition in this case was filed.

During the calendar year 1963 petitioner and his then wife were living together in Chicago. They filed a joint Federal income tax return for the calendar year 1963 with the district director of internal revenue, Chicago, Ill. The date shown on this return on the line provided therefor next to the line provided for the signatures is April 14, 1964.

Petitioner and Gwendolyn Walton (hereinafter referred to as Gwendolyn) were married on November 25, 1962. Subsequent to the year 1963 they were divorced.

Gwendolyn had married Julius Walton (hereinafter referred to as Walton) in 1941 and was divorced from him on May 28, 1959. At the time of the divorce, the three children of Gwendolyn and Walton, Randall, April, and Melinda, were 15, 9, and 8 years old, respectively. Gwendolyn was given custody of the children and they resided with her and petitioner during the taxable year 1963.

During the calendar year 1963 Gwendolyn was receiving from her first husband, Walton, $600 a month for child support and $416.66 as payment on a property settlement.

On May 28, 1960, Gwendolyn married Edward A. Schrader (hereinafter referred to as Schrader). On June 5, 1961, Gwendolyn and Schrader entered into a written separation agreement which, among other things, provided that Schrader was to pay Gwendolyn for her support and maintenance the sum of $23,000 per year until her death or remarriage and that a subsequent divorce was not to affect or impair the provisions of the agreement. On August 25, 1961, Gwendolyn and Schrader were divorced.

Gwendolyn told petitioner that she was receiving $23,000 a year in monthly payments from Schrader, which payments would stop in the event of her remarriage or death. Both petitioner and Gwendolyn knew that it was proper for Gwendolyn to notify Schrader of her marriage to petitioner. During 1963 Schrader paid Gwendolyn $23,000.

In January 1964 the fact that Gwendolyn had married petitioner came to Schrader's attention. In February both Gwendolyn and petitioner received a copy of a letter written by Schrader's attorney to the attorney who had represented Gwendolyn in connection with the drafting of the separation agreement between her and Schrader. This letter was dated February 3, 1964, with carbon copies to Gwendolyn at her home address, petitioner at his business address, and Schrader. The body of this letter reads as follows:

In May and June 1961, I believe that you represented Mrs. Gwendolyn E. Schrader, as she then was, in relation to the negotiation and drafting of the separation agreement between her and my client Edward A. Schrader.

Under the terms of the separation agreement, Mr. Schrader was obligated to pay Gwendolyn E. Schrader alimony at the rates set forth in Article Eighth of the agreement, ‘until the death or remarriage of the Wife or the creation of the trust as hereinafter provided, whichever event shall first occur, * * * .’

Mr. Schrader has made the payments called for by the agreement, commencing with the date of the agreement and continuing down to and including the payment due on January 1, 1964.

I have now in my possession a certified copy of a marriage application and record issued from the office of Edward J. Barrett, County Clerk of the County of Cook, recording the fact that Gwendolyn Edith Walton, the name that Mrs. Schrader assumed upon her divorce from Mr. Schrader, was married to Mr. Herbert Joss on November 25, 1962. Accordingly, Mr. Schrader is not obligated to make further payments to Mrs. Joss. In addition, Mrs. Joss is clearly obligated to return to Mr. Schrader the payments made by him to her after November 25, 1962 with appropriate interest. These payments total $26,000.

Since the terms of the separation agreement are clear and the facts established as a matter of record, I trust that it will not be necessary to take any proceedings to enforce this obligation.

On or about April 20, 1964, Schrader sued Gwendolyn in a proceeding in the Circuit Court of Cook County, County Department, Law Division (No. 64-L-6362) for return of all moneys he had paid to her subsequent to her marriage to petitioner. The total sum that Schrader sued to obtain was $26,000, representing payments from November 25, 1962, through January 1, 1964. Schrader secured a judgment against Gwendolyn for $26,000. The basis for Schrader's successful suit was that his obligation to make payments to Gwendolyn under the June 5, 1961, agreement terminated by virtue of Gwendolyn's marriage to petitioner, and that all payments made to her after the date of her marriage to petitioner unjustly enriched her.

During 1963 Gwendolyn maintained a checking account at the Upper Avenue National Bank, Chicago, Ill., under the name of Gwendolyn E. Walton. Gwendolyn deposited the $23,000 she received from Schrader in 1963 in this account and in addition also deposited during 1963 other moneys in the account totaling at least $8,000. Petitioner knew of the existence of this account of Gwendolyn's and occasionally at her request would cash a check for her drawn on this account. However, petitioner did not know any details with respect to the deposits or withdrawals in this account and had no authority over the account. During 1963 all checks drawn on this account were drawn by Gwendolyn.

Petitioner never received any cash from checks drawn on Gwendolyn's account during 1963 or any other direct funds from Gwendolyn. Some of the checks drawn on this account were for household expenses of petitioner, Gwendolyn, and Gwendolyn's three children, and petitioner's two children.

Petitioner on his joint return with Gwendolyn reported wages of $6,537 from Rothschild & Co. and Federal taxes withheld of $441.30. He reported dividends after the $50 exclusion of $55 and capital transactions involving sales of stock held for less than 6 months with a gross selling price of $17,726.57 and sales of stock held for more than 6 months with a gross selling price of $7,367.49. Petitioner and Gwendolyn claimed $600 exemptions on their joint return for themselves and for Gwendolyn's mother, Gwendolyn's three children and petitioner's two children.

During 1963 petitioner and Gwendolyn, together with Gwendolyn's two daughters and petitioner's two children lived in an apartment at 3800 Lakeshore Drive in Chicago. Gwendolyn's son was away at boarding school or at camp during most of the year 1963. Prior to petitioner's marriage to Gwendolyn, she had been living in this apartment. The lease was in her name. The apartment was approximately $300 a month. Gwendolyn paid the rental on the apartment and handled all the bills such as telephone and food bills. Gwendolyn's three children and petitioner's two children went to private schools and petitioner and Gwendolyn employed a maid. Gwendolyn's former husband, Walton, paid the tuition of Gwendolyn's two daughters at their private school and the expenses, except allowance, transportation, and clothes for Gwendolyn's son at boarding school in addition to paying Gwendolyn $600 per month for child support. The maternal grandfather of petition...