Olster v. Comm'r of Internal Revenue
| Decision Date | 13 September 1982 |
| Docket Number | Docket No. 12727-80. |
| Citation | 79 T.C. 456 |
| Court | U.S. Tax Court |
| Parties | DOROTHY OLSTER, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
OPINION TEXT STARTS HERE
Petitioner was divorced from her husband in 1972. Under the final judgment dissolving the marriage, petitioner's ex-husband was obligated to pay petitioner $2,500 per month in alimony for life or until she remarried. During the mid-1970s, petitioner's ex-husband experienced severe financial difficulties and fell into substantial arrears in his alimony payments. On June 10, 1976, petitioner and her ex-husband executed a modification agreement wherein petitioner released him of all past, present, and future alimony obligations. Pursuant to the agreement, petitioner received a number of mortgages and a $25,000 promissory note from her ex-husband. Held, the consideration paid by petitioner's ex-husband was in satisfaction of his past, present, and future alimony obligations. Held, further, where there is a mixture of such obligations and no clear basis for allocating between them, the payments first are considered in satisfaction of unpaid and accrued alimony to the extent of such alimony. Held, further, the total alimony arrearages at the time the modification agreement was entered into were $44,800. Held, further: The fair market value of the property received by petitioner pursuant to the modification agreement was $36,183.24. Thus, this latter amount is includable in petitioner's income for the year in question. Marsha Palmer Niles, for the petitioner.
David M. Kirsch, for the respondent.
By notice of deficiency dated April 11, 1980, respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1976 in the amount of $26,796.62.1 After concessions, we must decide (1) whether certain property petitioner received pursuant to a stipulation for modification of agreement and lump-sum settlement agreement was in full settlement of the ex-husband's past, as well as future, alimony obligations or was solely in settlement of future alimony obligations; (2) if the property was received at least in part for alimony arrearages, whether petitioner is taxable to the extent of the lesser of such arrearages or the fair market value of the property; (3) if the property was received in settlement for alimony arrearages, the amount of such arrearages; and (4) the fair market value of such property received by petitioner in satisfaction of her ex-husband's alimony obligations.
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner was a resident of Miami, Fla., at the time of filing the petition herein. She filed an individual Federal income tax return for the taxable year 1976 with the Office of the Internal Revenue Service, Chamblee, Ga.
Petitioner and her ex-husband were divorced on April 11, 1972.2 The final judgment dissolving the marriage of petitioner and her former husband incorporated by reference a property settlement and custody agreement dated April 6, 1972. The original property settlement and custody agreement provided for permanent alimony in the amount of $2,500 per month for the life of petitioner, or until such time as she remarried, in which event Mr. Olster would be obligated to pay her a lump-sum amount equal to 2 years' alimony ($60,000).
On June 10, 1976, petitioner and her ex-husband executed a document entitled “Stipulation for Modification of Agreements and Lump-Sum Settlement Agreement” (hereinafter the modification agreement) which modified the original settlement agreement executed by petitioner and her ex-husband on April 6, 1972. The modification agreement provided in pertinent part as follows:
NOW THEREFORE , in consideration of the mutual covenants and conditions herein contained, and other good and valuable considerations, it is mutually covenanted and agreed between Evan Olster and Dorothy Olster as follows:
1. The parties agree that paragraph 9 of the agreement of 6 April 1972 be deleted, rendered null and void, and of no further force and effect.
2. In consideration of and for Wife having released the Husband from his obligation to provide future alimony to her pursuant to paragraph 9 of the agreement of 6 April 1972, the Husband agrees to pay as a lump sum settlement of his obligation to pay future alimony pursuant to paragraph 9 of the agreement of 6 April 1972 the following:
A. Husband will forthwith cause the mortgages receivable set forth on Schedule “A” hereof to be assigned to the Wife and the Husband shall personally endorse the mortgages and mortgage notes with recourse so that in the event that any of the mortgages become in default, the Husband shall be personally obligated to pay to the Wife any deficiency which results from said default.
B. The Husband shall execute and deliver to the Wife a promissory note in the sum of $25,000.00 bearing interest at the rate of 6% per annum and payable within one year from date hereof.
3. In consideration of and for the lump sum settlement of future alimony payments under paragraph 9 of the agreement of 6 April 1972 as hereinabove provided in paragraph 2, the Wife hereby agrees to remise, release, and forever discharge the Husband from any obligation to pay to her any past due alimony presently due her under paragraph 9 of the agreement of 6 April 1972, as of the date of this agreement. *ss
7. In connection with the promissory note which the Husband will deliver to the Wife by reason of paragraph 2 hereinabove, the parties agree that the the [[[sic] payment of that promissory note will be secured by a mortgage on the following described property:
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¦The North quarter of Section 13, Township¦
+-----------------------------------------¦
¦55 South, Range 38 located in Dade County¦
+-----------------------------------------¦
¦Florida. ¦
+-----------------------------------------+
which said mortgage will be inferior only to mortgages, liens, encumbrances and conditions of record. Husband owns the fee simple title to said property as trustee and will cause a mortgage in due form to be executed and delivered to the satisfaction of the Wife's attorneys.
It is further provided, that the mortgage referred to in this paragraph shall also be security for any default with respect to the mortgages receivable being assigned in connection with paragraph 2A hereof. However, upon the default of a mortgage under paragraph 2A, the Husband shall first have the right to substitute any such defaulted mortgage receivable with another mortgage or mortgages of equal value to the then principal balance of any such defaulted mortgage or mortgages, subject to the Wife's right of reasonable rejection of any proposed mortgage or mortgages for such substitution.
By reason of the fact that the mortgage referred to in this paragraph is unliquidated [and] at the present time open-ended, and may change from time to time, it shall never be security for an indebtedness hereunder of more than $50,000.
While the mortgage referred to in this paragraph is for the benefit of the Wife, the parties agree that the nominal mortgagee thereunder shall be James F. Pollack, as Trustee, and the parties through the execution of this agreement authorize the said James F. Pollack to hold the mortgage as trustee and to satisfy the mortgage of record when the sums it secures at any time have been paid in full. It is further provided that the mortgage on the land which is legally described in this paragraph to be given by the Husband hereunder shall be non-assignable without the written consent of the Husband, unless default first occurs in any of the mortgages referred to in Schedule “A” attached hereto.
As of June 10, 1976, Evan Olster was substantially in arrears in his alimony payments.3 His delinquency was symptomatic of the dire financial straits in which he found himself during the mid-1970s. A registered real estate agent since 1965,4 Mr. Olster's difficulties were traceable to the real estate recession prevailing during those years. Although he never declared bankruptcy, it was a distinct possibility during his period of financial hardship.
In correspondence immediately prior to the execution of the modification agreement, the parties were concerned with a number of areas. These included the potential bankruptcy of Evan Olster, the protection of the children, cross-proposals for drafting, and the taxable effects of the agreement. The Olsters intended Mr. Olster's obligation to his wife to survive his potential bankruptcy.
Pursuant to paragraph 2A of the modification agreement, Mr. Olster transferred mortgages with a face value of $87,243.18 to petitioner. The individual mortgages transferred were as follows:
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¦ ¦ ¦Priority ¦Interest ¦Approximate ¦
+-----------+-----------------------------+----------+----------+-------------¦
¦Mortgagor ¦Property ¦of lien ¦rate ¦face value ¦
+-----------+-----------------------------+----------+----------+-------------¦
¦Eason ¦7753 N.W. 10th Ave., Miami, ¦First ¦7% ¦$22,827.93 ¦
¦ ¦Fla. ¦ ¦ ¦ ¦
+-----------+-----------------------------+----------+----------+-------------¦
¦King ¦5601 Pembroke Road, ¦First ¦8% ¦5,921.35 ¦
¦ ¦Hollywood, Fla. ¦ ¦ ¦ ¦
+-----------+-----------------------------+----------+----------+-------------¦
¦Smith ¦1159 N.W. 77th St., Miami, ¦First ¦9% ¦11,072.37 ¦
¦ ¦Fla. ¦ ¦ ¦ ¦...To continue reading
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