Lerner v. Comm'r of Internal Revenue, Docket No. 21623.

• Decision Date: 29 September 1950
• Docket Number: Docket No. 21623.
• Citation: 15 T.C. 379
• Parties: JOSEPH J. LERNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

15 T.C. 379

JOSEPH J. LERNER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 21623.

Tax Court of the United States.

Promulgated September 29, 1950.

Petitioner and his wife separated in 1934. At that time there was no discussion of the possibility of a divorce. His wife instituted negotiations in 1935 with reference to a separation agreement providing for her support. During the negotiations culminating in the separation agreement no discussion was had between petitioner and his wife nor between their counsel with reference to the procurement of a divorce. A separation agreement was executed on October 20, 1936, providing for payments of $30,000 a year for the wife's support. On November 20, 1937, the wife procured a divorce. The terms of the separation agreement were not incorporated in the divorce decree and the decree made no provision for alimony payments. Petitioner paid his wife in accordance with the separation agreement the amount of $30,000 in each of the years 1942, 1943, and 1944. Held, the petitioner's payments in question were not made in discharge of a legal obligation imposed upon or incurred by him under a divorce decree or under a written instrument incident to such decree as provided in section 22(k) of the Internal Revenue Code, and the payments made by petitioner under the separation agreement in the years involved are not deductible under section 23(u) of the Internal Revenue Code. I. Herman Sher, Esq., and Martin A. Roeder, Esq., for the petitioner.

Sheldon V. Ekman, Esq., for the respondent.

The respondent determined deficiencies in petitioner's income and victory tax for the year 1943 in the amount of $37,438.57 and in his income tax for the year 1944 in the amount of $28,878.62. The deficiencies result primarily from the disallowance by the respondent of the amount of $30,000 claimed by petitioner in his returns for each of the years 1942, 1943, and 1944, as deductions for alimony. This was explained by the respondent in his statement attached to the deficiency notice with respect to the taxable year 1942, as follows:

(d) Alimony . . . $30,000.00

The alimony payments in the above amount are being disallowed as deduction in accordance with the provision of Section 23(u) of the Internal Revenue Code.

A similar statement was given in the statement attached to the deficiency notice with respect to the taxable years 1943 and 1944. The year 1942 is involved due to the forgiveness feature of the Current Tax Payment Act of 1943.

The only issue presented is whether the petitioner may, under section 23(u) and in connection with section 22(k) of the Internal Revenue Code, deduct from gross income the amount of $30,000 paid to his former wife during each of the taxable years pursuant to the terms of a separation agreement entered into on October 20, 1936.

FINDINGS OF FACT.

The facts which were stipulated are so found.

The petitioner is an individual with residence in Golden Beach, Florida. His income tax returns for the calendar years 1942, 1943, and 1944 were filed with the collector of internal revenue for the third district of New York. The petitioner kept his books and made his federal income tax returns, including his returns for the taxable years 1942, 1943, and 1944, on the cash basis.

The petitioner and his wife, Edith A. Lerner (sometimes hereinafter referred to as Edith) were married in the State of New York on October 14, 1913, and thereafter resided in New York as husband and wife until August 1934, when, while at Cannes, France, they separated by mutual unwritten agreement without court decree and did not thereafter live together as husband and wife. At the time of the separation they had no discussion with reference to a divorce.

On or about December 1935, an attorney, who was a mutual friend of both petitioner and his wife, endeavored to bring about a reconciliation between them. These attempts proved fruitless and the attorney agreed to represent Edith in his professional capacity in negotiations with petitioner looking toward a financial settlement.

On October 20, 1936, petitioner and his wife entered into a separation agreement whereby petitioner undertook to pay her $30,000 tax free, annually. The separation agreement provided in part as follows:

The party of the first part hereby agrees that he will pay to the party of the second part during the rest of her natural life for her sole support and maintenance and not to include the support and maintenance of the children, the sum of Thirty Thousand and 00/100 ($30,000.00) Dollars per annum payable in equal monthly installments of Two Thousand Five Hundred ($2,500.00) Dollars in advance, on the first day of each and every month, beginning September 1st 1936; said payments are to be remitted by check by mail, addressed to the party of the second part at #470 Park Ave. in the Borough of Manhattan, City, County and State of New York or any other address, which the part of the second part shall from time to time designate. Payments hereinabove provided for shall be free and clear from any tax or imposts, state or federal of any kind that may be a charge against such income or payments by virtue of any law now in existence or which may hereafter be enacted, it being the intention of the parties hereto that the said payments to the party of the second part shall be met and free from any income or other tax.

At the time the separation agreement was signed there was no discussion of divorce between petitioner and Edith. Edith never discussed the question of divorce with her attorney before the separation agreement was signed there was no discussion of divorce between petitioner and Edith. Edith never discussed the question of divorce with her attorney before the separation agreement was signed, except when he explained to her the provisions of paragraph ‘Eighth‘ thereof, which paragraph was placed in the agreement by her attorney and he discussed it with her after the paper had been drawn up by him. This paragraph states as follows:

Eighth: It is the intent of the parties hereto and of the essence of this agreement that the obligations of the party of the first part under this agreement, shall continue during the natural life of the party of the second part and shall not in any wise or manner be affected by any decree of divorce that may at any time in the future be obtained by either party as against the other, or by any subsequent remarriage of either of the parties hereto or by the death of the party of the first part.

Edith's attorney never discussed the question of divorce with petitioner or his counsel prior to the time the separation agreement was executed. During the period after the separation and up to the execution of the separation agreement, the petitioner had paid to his wife, without specific agreement, between $25,000 and $30,000 annually for her support and maintenance.

Beginning September 1, 1936, and including the calendar years 1942, 1943, and 1944, petitioner paid to Edith the amount of $2,500 per month for the purposes set forth in the separation agreement of October 20, 1936, and in each of the calendar years 1942, 1943, and 1944, petitioner paid to her the aggregate amount of $30,000. No part of any of these payments, including the payments made in the calendar years 1942, 1943, and 1944, represents an amount which, under section 22(k) or section 171 of the Internal Revenue Code, is stated to be not includible in the petitioner's gross income. No part of the aforesaid payments of $30,000 made by petitioner to Edith in each of the years 1942, 1943, and 1944, represents a sum payable by him for the support of his minor children.

By a summons and complaint verified October 27, 1937, Edith instituted an action against the petitioner in the Supreme Court of the State of New York, County of Westchester, demanding an absolute divorce from the petitioner and ‘such other and further relief as to the Court may seem just and proper.‘ An order of that court was entered in said action on November 17, 1937, referring the proceeding to the Honorable Joseph Morschauser, official referee, to hear and determine the issues therein. This order of reference reads, in part, as follows:

ORDERED that said Official Referee examine the defendant in reference to the amount of alimony to be paid to the plaintiff and in reference to the amount of money to be paid to the plaintiff for the support and maintenance of the issue of said marriage and said Official Referee is hereby authorized and empowered to fix the amount of the alimony herein and the amount of money to be paid by the defendant for the support and maintenance of the issue of said marriage with the same force and effect as if the same was determined and fixed at a Regular Term of this Court and that the same be provided for in the judgment herein, * * *

The aforesaid action by Edith A. Lerner for absolute divorce was duly brought on to be heard and was heard before the official referee at the courthouse in the City of Poughkeepsie, New York, on November 18, 1937. Edith A. Lerner appeared in person and by her attorney, and the petitioner appeared in person and by his attorney. The official referee took proof of the allegations stated in the complaint of Edith A. Lerner and interrogated Joseph A. Lerner, the petitioner herein, who offered no defense to the allegations of that complaint and stated that he did not wish to contest the action for absolute divorce. In this interrogation of the petitioner by the official referee, certain questions were propounded by the latter and answered by the petitioner herein, as shown by the official minutes of the hearing which are on file in the Office of the Clerk of Westchester County and form a part of the official record of the action for divorce, as follows:

Q. I understand that while you have been separated from your wife there was a separation agreement?

A. Yes. sir.

Q. A written agreement?

A...