Martin v. Comm'r of Internal Revenue

• Citation: 73 T.C. 255
• Decision Date: 13 November 1979
• Docket Number: Docket No. 11367-77.
• Parties: WILLIAM A. MARTIN and CAROL C. MARTIN, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

73 T.C. 255

WILLIAM A. MARTIN and CAROL C. MARTIN, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 11367-77.

United States Tax Court

Filed November 13, 1979.

In anticipation of divorce, H and W entered into a property settlement agreement that was incorporated in the divorce decree. The agreement provided for payments of alimony for 10 years and 1 month, and H agreed, in a separate paragraph of the settlement agreement, to pay an aggregate amount of $25,000 as “additional alimony” over a period of 2 years. Payment of this lump sum was to be made in two installments of $12,500 each, and $7,500 of each such installment was for the purpose of paying W's attorneys' fees. Held: H is not entitled to an alimony deduction for the $12,500 annual installments under secs. 215, 71(a)(1) and (c), I.R.C. 1954, because the payments are not “in the nature of alimony or an allowance for support,” as is required for deductibility of installment payments payable over less than 10 years. Sec. 1.71-1(d)(3)(i)(b ), Income Tax Regs. Payments of W's attorneys' fees for services in respect of the divorce are held not to be a part of W's support, and the remaining $5,000 component of each installment was not shown to be in the nature of an allowance for support. Asher B. Lans, for the petitioners.

Henry B. Miller, for the respondent.

OPINION

RAUM, Judge:

The Commissioner determined deficiencies in income tax against the petitioners of $7,056.53 for 1972 and $6,771.84 for 1973. At issue is petitioners' right to alimony deductions under section 215, I.R.C. 1954, for two payments made to the former wife of William Martin, Lila W. Martin. The case was submitted on a stipulation of facts.

Petitioner William Martin was married to Lila W. Martin in 1947. The couple experienced marital difficulties, and they ceased to live together in 1969. In anticipation of divorce, they entered into an agreement entitled “property settlement agreement” on May 15, 1972. By this agreement, they undertook to settle their obligations as to property rights, alimony, child support, and child custody. On the same day, the Circuit Court for the 17th Judicial Circuit in and for Broward County, Fla., entered a final judgment of dissolution of marriage in divorce proceedings between William Martin and Lila W. Martin. The property settlement agreement was specifically incorporated in the judgment, and the parties were expressly directed to comply with its terms. Also attached to the judgment, but not incorporated therein, was a letter from Ray H. Pearson, Esq., which undertook to clarify the terms of paragraph 10 of the property settlement agreement.

The property settlement agreement contains provisions for education of minor children of the marriage, health insurance for Lila W. Martin and all minor children, and life insurance on the life of William Martin for the benefit of Lila W. Martin and the minor children of the marriage. The agreement also provided that Lila W. Martin was to receive title to a house in Florida, subject to a mortgage to be obtained by William Martin; the proceeds of the mortgage were to be used to repair and furnish the house. Permission was also granted to Lila W. Martin to remove various items of personal property from William Martin's home in Virginia.

Two provisions of the property settlement agreement purport to provide for alimony. Paragraph seven of the agreement provides:

7. The Husband shall pay or cause to be paid to the Wife as alimony the total sum of Three Hundred Ninety Three Thousand, Two Hundred Fifty and no/100 ($393,250.00) Dollars, to be paid to her at the rate of Three Thousand, Two Hundred Fifty and no/100 ($3,250,00) Dollars a month and shall be paid monthly over a period of ten (10) years and one (1) month, beginning on June 1, 1972 and monthly thereafter. Said monthly payments shall be fully taxable to the Wife and deductible to the Husband for income tax purposes. Wife agrees to pay from the monies provided for herein all expenses of the minor children except as is otherwise provided in this Agreement. Wife shall thereafter have the right to claim the minor children as dependents for all purposes including Federal Income Tax returns.

Paragraph 10 of the agreement states:

10. The Husband shall pay to the Wife as additional alimony the sum of Twenty-Five Thousand and no/100 ($25,000.00) Dollars. One half of said alimony is to be paid to the Wife as soon as practicable but in any event prior to December 31, 1972. The other half of said sum of alimony shall be paid to the Wife prior to the end of 1973. These sums are in addition to the monthly payments provided for in paragraph 7 herein.

The letter attached to the divorce decree explains the purpose of this “additional alimony.” The letter was dated May 15, 1972, and reads in relevant part:

By the terms of paragraph 10 of the Property Settlement Agreement entered into by and between Lila W. Martin and William A. Martin on May 15, 1972 the sum of $25,000.00 was provided to Mrs. Martin as an additional sum of alimony.

The purpose of this letter is to clarify the fact that the Husband had agreed to pay an additional sum of $10,000.00 by the terms of this paragraph and the additional $15,000.00 represents the complete and full obligation of the Husband to pay legal fees to the Wife's attorney, Mr. Linwood Cabot.

Of the $25,000.00, $12,500.00 is to be paid as soon as practicable but in any event prior to December 31, 1972. Of this first payment $5,000.00 shall belong solely to the Wife and $7,500.00 shall be paid over to the Wife's attorney, Mr. Linwood Cabot. The same division of funds shall be made of the second payment to be made prior to the end of 1973.

By this letter agreement the Husband, William A. Martin, with approval of his counsel agrees that if any of said alimony sums for attorney's fees is not deductible to the Wife then the Husband will indemnify her and pay such additional tax obligation on the $15,000.00 as may be necessary. Mrs. Martin agrees to permit Mr. Martin or his then counsel to contest or question any ruling of the Internal Revenue Service regarding this $15,000.00 prior to her payment of any tax thereon.

The letter was signed by Mr. Martin's then attorney, Ray H. Pearson, and contains the signature of William Martin under the caption “Approved and agreed to.”

The property settlement agreement also made reference to Lila Martin's attorneys' fees and costs in two paragraphs. These paragraphs provided the following:

13. The Wife agrees to pay her own attorney fees and will indemnify the Husband from any claims for legal fees throughout this litigation.

14. Further, Husband agrees to pay to Wife's attorney all the necessary Court costs and expenses which were advanced or incurred on behalf of the Wife by her Attorney throughout his representation of the Wife.

In 1972 and 1973, pursuant to the property settlement agreement, petitioner paid Lila W. Martin total sums of $35,200 and $51,687.29, respectively; of these amounts, $12,500 was paid each year pursuant to paragraph 10 of the property settlement agreement. Petitioners William A. Martin and Carol C. Martin, who were husband and wife at the end of calendar years 1972 and 1973, filed joint income tax returns for such years with the District Director of Internal Revenue, Richmond, Va. Deductions for alimony were claimed for these years in the amounts of $35,200 and $51,687.29, respectively. The Commissioner disallowed $12,500 of the claimed deductions for alimony for each year. The notice of deficiency asserted that the $12,500 payments were not alimony but were “amounts payable in discharge of a fixed sum to be paid within a definite period of less than ten years.” The notice thus stated that the payments were not deductible because of failure to “qualify as periodic as defined in section 215.” Petitioners thereafter timely filed a petition with this Court. At the time of the filing of the petition, William Martin was a resident of Arlington, Va., and Carol C. Martin was a resident of Miami, Fla.

Under the provisions of section 215, I.R.C. 1954,¹ a husband is allowed a deduction for alimony if the payment is includable in the gross income of his former spouse. Pursuant to section 71(a), payments are included in the former spouse's income if they are “periodic payments” received under a divorce decree to discharge the husband's legal obligations arising from the marital relationship.² And section 71(c)(1) provides that payments generally will not qualify as periodic if they are made to discharge a principal sum specified in the separation agreement. However, even if a principal sum is specified in the divorce decree, section 71(c)(2) provides that payments to discharge that sum may be periodic if the principal sum is payable in installments for a period greater than 10 years.³

The determination of whether or not a payment qualifies as periodic has been a thorny issue for courts since the time the alimony provisions were first included in the tax laws by the Revenue Act of 1942.⁴ The legislative history contains no definition of “periodic.” However, it is clear that periodic alimony payments must be for the purpose of support of the divorced spouse; payments to effect a division of the property of the spouses were not intended to be deductible.⁵ It is also clear that the statutory term does not include installment payments of a principal sum specified in the divorce decree, unless the payments extend over more than 10 years.⁶ Initially, this Court took a limited view of the alimony deduction, and held that payments were not periodic and thus were nondeductible if the divorce decree specified a principal sum to be paid (or if such a sum could be calculated from the decree) and payment was for a period of less than 10 years. ⁷ However, in a number of cases, the courts of appeal held that even if a principal sum was specified in the divorce decree, installment...