Smith v. Comm'r of Internal Revenue

• Decision Date: 08 December 1953
• Docket Number: Docket No. 42454.
• Citation: 21 T.C. 353
• Parties: LILIAN BOND SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

21 T.C. 353

LILIAN BOND SMITH, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 42454.

Tax Court of the United States.

Promulgated December 8, 1953.

Walter E. Bennett, Esq., for the petitioner.

John J. Burke, Esq., for the respondent.

Petitioner and her husband executed a separation agreement in 1937, providing, inter alia, for monthly support payments to petitioner, and requiring her husband to pay the premiums on a policy of insurance on his life of which petitioner is the primary beneficiary. In 1940, the husband failed to pay the insurance premiums and petitioner instituted an action against him for specific performance of the separation agreement. The litigation was settled by a stipulation of the parties and the entry of a consent judgment by the court in accordance therewith in 1940. The stipulation of the parties and the consent judgment of the court also embraced the support payments. Thereafter, in 1944, petitioner's husband obtained a decree of divorce in which the separation agreement was incorporated. Held, the obligation to make support payments was imposed upon or incurred by the husband by a decree of divorce and the support payments are includible in the petitioner's gross income, as alimony, under section 22(k), Internal Revenue Code. Held, further, the premiums paid on the policy of insurance are not includible in petitioner's gross income, as alimony, under section 22(k), Internal Revenue Code, since petitioner had only a contingent interest in the policy, and it was not for her sole benefit.

The Commissioner has determined deficiencies in income tax for the years 1945 and 1946 in the amounts of $439.85 and $285.73, respectively. Petitioner does not contest part of the deficiency for 1945. Two questions are presented: (1) Whether support payments of $4,800 received by the petitioner in each of the taxable years from her former husband are includible in her gross income under section 22(k), Internal Revenue Code. (2) Whether insurance premiums of $1,200, paid in each of the taxable years on a policy insuring the life of the petitioner's former husband, and under which she is the primary beneficiary, are includible in the petitioner's gross income, as alimony, under section 22(k).

Petitioner filed her income tax returns for the years 1945 and 1946 with the collector for the sixth district of California at Los Angeles.

FINDINGS OF FACT.

The facts which have been stipulated are found as facts; the stipulation and all of the exhibits are incorporated herein by this reference.

Petitioner is a resident of Los Angeles, California. In 1936, the petitioner married Sydney A. Smith. She was employed in the moving picture industry as an actress at the time of the marriage. Sydney Smith, at the time of the marriage, was a life beneficiary, to the extent of one-half of the income, of a trust created by the will of Andrew W. Smith, deceased. The Bank of New York in New York City is the trustee.

Following the marriage, Sydney Smith took out a policy of insurance on his life with the Aetna Life Insurance Company. The policy, number N1-146660, dated October 17, 1936, was in the principal amount of $50,000. The petitioner was named the primary beneficiary, and her mother the secondary beneficiary of the policy. The method of payment of the net proceeds of insurance, as provided by the terms of the ‘Beneficiary Agreement‘ part of the insurance contract, was as follows:

The net sum payable by the Company under this policy by reason of the death of the insured shall be payable as follows:

If Lillian (sic) B. Smith, wife of the insured, survives the insured, said net sum shall be payable in accordance with Mode 4 in monthly installments for a fixed period of Ten (10) years and for as long thereafter as said wife lives. Each installment shall be payable when due to said wife if then living, otherwise to Harriet Bond, mother-in-law of the insured, if period of Ten (10) years certain under Mode 4 shall be payable in one sum to the executors or administrators of the survivor of said wife and said mother-in-law.

If said wife does not survive the insured, but said mother-in-law survives the insured, said net sum shall be payable in accordance with Mode 4 in monthly installments for a fixed period of Ten (10) years and for as long thereafter as said mother-in-law lives. Each installment shall be payable when due to said mother-in-law if then living, otherwise the commuted value of any unpaid installments for the period of Ten (10) years certain under Mode 4 shall be payable in one sum to the executors or administrators of said mother-in-law.

If neither said wife nor said mother-in-law survives the insured, said net sum shall be payable in one sum to the executors or administrators of the insured.

The insured, Sydney Smith, reserved certain rights in the insurance policy, as follows:

During the life of the insured, the right to receive all cash values, loans and other benefits accruing hereunder, to exercise all options and privileges described herein and to agree with the company to any change in, amendment to, or cancellation of this policy shall vest alone in the life owner (hereinafter so called) designated as follows: the insured. Provided that said life owner shall not have the right to make any change in the beneficiary during the life time of his wife, Lillian (sic) Bond Smith, without her written consent.

The insurance policy was not assigned to petitioner at any time.

On or about March 27, 1937, petitioner and Sydney Smith became separated, and thereafter they lived separate and apart from each other. On March 27, 1937, petitioner and Sydney executed a separation agreement, and in July 1937, the executed a supplemental agreement which modified part of the original agreement. The separation agreement, as amended, in so far as material here, contained the following provisions: The parties agreed to an immediate separation, and to live apart. For the purpose of settling their property rights and to make provision for the support of Lillian Smith, it was agreed that: (a) All property owned by the parties on March 27, 1937, would be the separate property of the party owning and possessing the same, and that all property acquired by the parties in the future would be the separate property of the person acquiring the same. (b) Each party renounced and released his and her interest in the estate of the other, including the right to inherit from each other as the husband or wife. (c) Sydney agreed to pay Lillian $400 per month for her support and maintenance beginning on April 1, 1937, and continuing for her life, or until her lawful remarriage. (d) Sydney agreed to keep the life insurance policy numbered N1-146660 in effect and to pay the premiums due thereon, for as long as Lilian lived, or until her remarriage in the event Sydney and Lilian should become divorced.

The provisions of paragraph three of the agreement, as amended, dealing with the obligations of Sydney, the party of the first part, to make support payments to Lilian, the part of the second part, and to keep the life insurance policy in effect are as follows:

Said party of the first part promises and agrees to pay to the said party of the second part for her support and maintenance during each separation the sum of Four Hundred Dollars ($400.00) per month. Such payments shall be made on the first day of each calendar month, commencing April 1, 1937, and shall continue until the death of the party of the second part, or until her remarriage, if the parties hereto are at any time divorced and the said party of the second part does remarry subsequent to any such divorce.

The party of the first part agrees to keep in effect that certain life insurance policy numbered N1-146660 and pay and discharge the premiums due thereon. In said life insurance policy the party of the second part is named as beneficiary. However, there shall be no obligation or liability on the part of the party of the first part to so keep said policy in effect or so pay and discharge said premiums in the event of the death of the party of the second part or in the event of her remarriage if the parties hereto are at any time hereafter divorced.

In the event that the parties hereto are at any time hereafter divorced and in the event that subsequent to said divorce the party of the second part remarries, she hereby waives and relinquishes any and all rights that she now has or may at any time have had as beneficiary under the terms of said policy.

The agreement provides further, in paragraph seven,

That neither this agreement nor anything herein contained shall prejudice the right of either party to institute an action for divorce and any decree that may be entered in any such action shall not vary or change the terms of this agreement to any extent whatsoever.

Under paragraph three of the original separation agreement, executed on March 27, 1937, Sydney agreed to pay the petitioner $400 a month for her support, commencing on April 1, 1937, and continuing thereafter for her life or until her lawful remarriage, provided however, that if Sydney's gross income for any month should fall below $1,700, he was to pay the petitioner 25 per cent of his gross income for that month in lieu of the $400. Below the signatures of the parties on the original agreement, Sydney wrote an addenda in long hand whereby he stated that he agreed to keep in force the Aetna policy of insurance on his life, of which petitioner is the primary beneficiary, ‘during such a time as (she) lives and until such a time that she shall remarry after which time I am at liberty to cancel same.‘

Paragraph three of the original separation agreement was amended in July 1937 in two respects. The provision for reducing the support payments of $400 a month, in the event Sydney's gross income should fall below $1,700 a month, was deleted; and there was added a provision requiring Sydney to...