Kohlsaat v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 07 September 1939 |
| Docket Number | Docket No. 91723,92169. |
| Citation | 40 BTA 528 |
| Parties | EDWARD C. KOHLSAAT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Harry N. Wyatt, Esq., Richard H. Levin, Esq., and A. J. Pflaum, Esq., for the petitioner.
David Altman, Esq., for the respondent.
These proceedings, consolidated for hearing, are for the redetermination of deficiencies in petitioner's income tax for 1934 and 1935 in the respective amounts of $197.24 and $424.11. The questions in issue are whether the petitioner is entitled to the deduction of interest on a mortgage note and taxes on the real estate securing the mortgage, which were paid by the petitioner's divorced wife with funds furnished to her by the petitioner for that purpose after he had deeded the property to the wife under a separation agreement.
The petitioner is a resident of Chicago, Illinois, and is a practicing attorney.
In 1922 the petitioner purchased certain residential property located at 777 Bryant Avenue, Winnetka, Illinois, paying a part of the purchase price in cash and executing purchase money notes, secured by a first mortgage in the face amount of $25,000, for the balance. The mortgage was refinanced in 1929 when the old notes became due and the new mortgage and notes of the face amount of $22,500 were executed. Petitioner's wife, Mabel G. Kohlsaat, joined with him in executing the new mortgage notes. The wife, however, had no interest in the property other than her dower rights.
On May 24, 1933, petitioner and his wife were divorced by decree of the Circuit Court of Cook County, Illinois, and on that date they executed a separation agreement which was incorporated in the divorce decree. The agreement provided in effect that the petitioner would pay to Mabel G. Kohlsaat $700 a month as alimony and in addition would convey to her the above mentioned real estate located at 777 Bryant Avenue, Winnetka, Illinois, which had been used by them as a family residence; that in addition to the $700 monthly alimony petitioner would pay to his wife $225 a month, until the aggregate amount of $15,000 had been paid, which payments were to be used by the wife in paying the carrying charges against the property, including taxes, special assessments, and interest on the outstanding mortgage amounting at that time to $15,000. The balance of the $225 monthly payments was to be applied in reducing the principal of the mortgage. The agreement reads in material part as follows:
WHEREAS, the parties are desirous of settling and determining their respective property rights and to fix a fair and reasonable provision for the support and maintenance of the said wife;
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter contained, the parties AGREE as follows:
(a) The husband shall pay to the wife the sum of Seven Hundred Dollars ($700.00) per month as alimony, for the support and maintenance of herself until her death or remarriage, and the parties specifically agree that said order and amount is to stand regardless of any future change in the financial condition of either party that may occur hereafter.
(b) The said husband shall transfer and convey to the wife all of his right, title and interest in and to the premises located in the Village of Winnetka, County of Cook and State of Illinois, commonly known as 777 Bryant Avenue and legally described as follows:
* * * * * * *
* * * Said premises are at this time encumbered with a first mortgage lien in the principal amount of Eighteen Thousand Dollars ($18,000.00) and a second mortgage lien in the principal amount of Ten Thousand Dollars ($10,000.00). The said mortgage lien of Ten Thousand Dollars ($10,000.00) is to be cancelled and released. The first mortgage lien in the principal amount of Eighteen Thousand Dollars ($18,000.00) is to be reduced by the sum of Three Thousand Dollars ($3000.00), to a net principal indebtedness of Fifteen Thousand Dollars ($15,000.00). Said husband shall cause the then existing first mortgage of Fifteen Thousand Dollars ($15,000.00) to be modified so as to provide for annual payments of principal to be the sum of One Thousand Dollars ($1000.00) instead of Fifteen Hundred Dollars ($1500.00) per year, and also agrees to cause the annual interest thereon to be reduced from six percent (6%) to five and one-half percent (5½%). Said husband further shall cause the maturity of said indebtedness to be extended under the foregoing terms to the 9th day of August, A. D., 1938.
(d) The said husband is to pay to the said wife, in addition to the said Seven Hundred Dollars ($700.00) above provided for, the sum of Two Hundred Twenty-five Dollars ($225.00) per month until the aggregate net sum of Fifteen Thousand Dollars ($15,000.00) has been paid to the wife under the provisions of this paragraph; that the said monthly payments of Two Hundred Twenty-five Dollars ($225.00) are to be used by the wife and applied by her to pay the carrying charges against said premises, namely, general taxes, special assessments and interest on the first mortgage indebtedness, the balance of said monthly payments to be applied towards reduction of the principal of said first mortgage indebtedness against said premises. The said wife shall make such payments as hereinabove agreed, and shall within thirty (30) days after the due date thereof produce for the inspection of the husband proper receipts evidencing the fact of such payments. In the event said premises shall be rented by the wife and thereafter the tenant vacates or defaults in payment of rent, then in such event the sum of One Hundred Forty Dollars ($140.00) per month, out of the Two Hundred Twenty-five Dollar ($225.00) monthly payments, is not to be credited against the aggregate sum of Fifteen Thousand Dollars ($15,000.00) to be paid by the husband to the wife as provided in this paragraph, so long as such premises are not producing any revenue. Provided, however, that the husband shall have the right at all times to pass upon the desirability of any prospective tenant for said premises before such tenant is accepted by the wife. In the event the above described property is sold by the wife before the husband shall have paid to her the sum of Fifteen Thousand Dollars ($15,000.00) under the terms of this paragraph, and the amount realized from such sale shall be less than the sum of Twenty-five Thousand Dollars ($25,000.00) net to the wife, then in such event the payments thereafter to be made by the husband shall continue until such time as the aggregate of the amount realized from such sale, taken together with the monthly payments by the defendant of Two Hundred Twenty-five Dollars ($225.00), shall equal the total sum of Twenty-five Thousand Dollars ($25,000.00), but in no event shall the obligations of the husband under this paragraph exceed the sum of Fifteen Thousand Dollars ($15,000.00). In the event said premises are sold by the wife and the amount realized therefrom, taken together with the monthly payments theretofore made to her by the husband under this paragraph, exceeds the sum of Twenty-five Thousand Dollars ($25,000.00), then in such event the wife agrees to pay to and reimburse the husband the excess over the sum of Twenty-five Thousand Dollars ($25,000.00) thus realized, limited, however, to the amount of the contributions made by the husband under this paragraph, and future payments under this paragraph shall not be required of the husband.
In accordance with the above agreement the Winnetka property was conveyed by warranty deed to Mabel G. Kohlsaat's attorney, Frank E. Cantwell, as her nominee, soon after the divorce decree was entered. The deed was executed by the petitioner and his wife jointly and provided that the conveyance was made "subject to the existing first mortgage" in the amount of $15,000.
Thereafter, and during 1934 and 1935, petitioner made the payments to his wife called for in the separation agreement. Likewise, in accordance with the agreement his wife paid the interest on the mortgage note in the amounts of $825 in 1934 and $756.25 in 1935. She also paid taxes on the property of $975.52 in 1934, being the taxes assessed for 1931 and 1932, and $1,263.31 in 1935, being the 1933 taxes in the amount of $605.25 and the 1934 taxes in the amount of $658.06.
In making his income tax returns for 1934 and 1935 petitioner deducted all of the above amounts of interest and taxes paid on the Winnetka property during those years.
The respondent in his determination of the deficiencies herein allowed the deduction of the taxes for 1931 and 1932 which were paid in 1934 but disallowed the deduction of the interest paid in 1934 and 1935, as well as the taxes paid in 1935.
At the hearing before the Board the respondent asked for an increase in the 1934 deficiency based upon the disallowance of the deduction of the 1931 and 1932 taxes paid in that year.
The respondent's contentions are that the interest and the taxes paid on the Winnetka property in 1934 and 1935 after the property had been conveyed to petitioner's wife were paid by the wife out of her own funds; that the monthly payments of $225 which petitioner made to his wife under the separation agreement were in discharge of petitioner's marital obligations, and under the decisions of the Supreme Court in Gould v. Gould, 245 U. S. 151, and Douglas v. Willcuts, 296 U. S. 1, no part of such amounts is deductible from petitioner's gross income.
The petitioner does not contend that all of the $225 monthly payments is deductible, but only such portions as were used to pay the interest and taxes on the Winnetka property. He strenuously argues that the interest and taxes were his personal obligations on which he was primarily liable; that these obligations were paid by him and are therefore deductible by him.
Section 23 of the Revenue Act of 1934 provides in...
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