Suarez v. Comm'r of Internal Revenue

• Decision Date: 06 September 1977
• Docket Number: 6687—73.,Docket Nos. 6141—73
• Citation: 68 T.C. 857
• Parties: VALERIANO SUAREZ, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTROSA GONZALEZ AND CANDIDO GONZALEZ, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

68 T.C. 857

VALERIANO SUAREZ, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENTROSA GONZALEZ AND CANDIDO GONZALEZ, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 6141—73

6687—73.

United States Tax Court

Filed September 6, 1977.

H and W executed a property settlement agreement (which was later incorporated into their divorce decree) providing that H would pay as alimony to W the sum of $60,000 in 59 monthly installments of $500 and 2 final monthly payments of $250. The agreement also provided that the amount of such payments was to be reduced if W remarried. However, such agreement was ambiguous in that 61 monthly payments in the amounts specified would result in a total of only $30,000. Held, the parties intended that $60,000 be paid by H to W in 119 monthly payments of $500 and 2 final monthly payments of $250 for a total of 121 monthly payments; as the payments were intended to be made over a period of more than 10 years, they were periodic payments in the nature of alimony or support, includable in the gross income of W and deductible by H, under secs. 71(a) and 215, I.R.C. 1954. Held, further, the payments were also periodic under the provisions of sec. 1.71—1(d)(3)(i), Income Tax Regs., because they were subject to reduction if W remarried. Michael M. Ushijima, for the petitioner in docket No. 6141—73.

Milford Ardell, for the petitioners in docket No. 6687—73.

Paul G. Topolka, for the respondent.

SIMPSON, Judge:

The Commissioner determined the following deficiencies in the petitioners' Federal income taxes:

+------------------------------------+
                ¦Petitioner      ¦Year  ¦Deficiency  ¦
                +----------------+------+------------¦
                ¦                ¦      ¦            ¦
                +----------------+------+------------¦
                ¦Valeriano Suarez¦1968  ¦$1,183.00   ¦
                +------------------------------------+
                

                                   1969 3,250.00
                                                   1970 2,260.00
                Rosa Gonzalez                      1969 1,232.59
                Rosa Gonzalez and Candido Gonzalez 1970 882.01
                

The sole issue for decision is whether payments made by Valeriano Suarez to his former wife, Rosa Gonzalez, pursuant to a divorce decree were periodic payments in the nature of alimony within the meaning of section 71 of the Internal Revenue Code of 1954.¹

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

The petitioner, Valeriano Suarez, is an individual who resided in Chicago, Ill., at the time of filing his petition in this case. Dr. Suarez timely filed Federal income tax returns for the taxable years 1968, 1969, and 1970 with the Internal Revenue Service Center, Kansas City, Mo.

The petitioners, Rosa (Suarez) Gonzalez and Candido Gonzalez, husband and wife, resided in Chicago, Ill., at the time they filed their petition in this case. Mrs. Gonzalez timely filed a Federal income tax return as a single individual for the taxable year 1969 with the Internal Revenue Service Center, Kansas City, Mo. For the taxable year 1970, Mr. and Mrs. Gonzalez timely filed a joint Federal income tax return with the Internal Revenue Service Center, Kansas City, Mo.

Rosa (Suarez) Gonzalez and Valeriano Suarez were formerly husband and wife. Their marriage was dissolved by a judgment for divorce entered by the Circuit Court of Cook County, Ill., on August 26, 1968. The judgment of divorce incorporated the provisions of a property settlement agreement which had been executed by the parties. Such agreement recited the parties' desire to settle all rights arising out of their marriage, including all property rights, custody and support of their minor children, and alimony for the wife. Pursuant to such agreement, Mrs. Gonzalez was given the use of the parties' jointly owned home and received outright all furniture, household goods, and other personal property contained therein. Dr. Suarez was responsible for making the mortgage payment of $320 per month.² Custody of the couple's four children was given to Mrs. Gonzalez. Dr. Suarez agreed to pay $430 per month for the support of the children, such amount to be reduced by 25 percent as each child reached majority or finished a 4-year college course (whichever took longer), and to pay all of the children's medical expenses. Additionally, Dr. Suarez was obligated to pay his wife's attorney's fees. Each party agreed to waive all rights in the property of the other, whether past, present, or future, including any right to alimony, dower, curtesy, estate, or homestead rights.

With respect to alimony, paragraph 6 of such agreement provided:

6. The wife shall receive $60,000.00 in alimony, payable $500.00 each and every month for 59 months and final 2 payments of $250.00 per month, a total of 61 payments, commencing with the entry of any decree for divorce and continuing until the sum of $60,000.00 shall be paid. If and when the wife shall remarry, within five years from the entry of a decree for divorce, then the total alimony of $60,000.00 shall be reduced by 25%, and if the wife shall marry after five years and before the payment of the $60,000.00, then the remaining balance unpaid at the time said wife shall become married, will be reduced by 50%.

The judgment for divorce ordered Dr. Suarez to pay to Mrs. Gonzalez ‘as and for alimony and child support the sum of nine hundred and thirty dollars and 00/100 ($930.00) per month, as provided for in the above agreement.’ He was also ordered to perform all other provisions of the agreement.

At the time of the divorce, Mrs. Gonzalez expected to receive the principal amount of $60,000 unless she remarried within 5 years from the date of the divorce decree, or prior to the payment of $60,000. She also expected that payments were to be made at the rate of $500 per month and 2 final payments of $250 per month, commencing with the entry of the divorce decree and continuing until the sum of $60,000 was paid. She failed to recognize that the total amount of the specified payments was only $30,000.

Dr. Suarez made cash payments to Mrs. Gonzalez of $2,000 in 1968 and $6,000 in 1969. On January 9, 1970, Rosa (Suarez) Gonzalez married Candido Gonzalez. In 1970, Dr. Suarez made cash payments to his former wife of $355 monthly for a total of $4,260. Dr. Suarez made no alimony payments to Mrs. Gonzalez after September 1973. She never took any action in the Illinois courts to object to the reduction in her alimony payments in 1970 or to their discontinuance in 1973.

In his notices of deficiency, the Commissioner took alternative positions in order to insure consistent treatment of the payments in question. In the notice to Dr. Suarez, it was determined that the payments to his former wife were nondeductible payments made as part of a property settlement. In his notices of deficiency to Mr. and Mrs. Gonzales, the Commissioner determined that the payments to Mrs. Gonzalez in 1969 and 1970 were periodic payments of alimony taxable to her under section 71(a).

OPINION

Section 215 permits a husband to deduct payments made during his taxable year which are includable under section 71 in the gross income of his former wife. Section 71(a)(1) includes in a wife's gross income periodic payments received in discharge of a legal obligation which, because of the marital or family relationship, is imposed on her former husband under a decree of divorce. Under section 71(c), installment payments of a principal sum which is specified in the decree shall not be treated as periodic payments unless the principal sum is to be paid or may be paid over a period ending more than 10 years from the date of the decree. The issue in this case is whether the payments were ‘periodic’ within the meaning of section 71(a)(1) and (c). Although he issued protective notices of deficiency, the Commissioner's principal concern is that the payments be treated consistently, and on brief, he argued that the payments were includable in Mrs. Gonzalez' gross income and therefore deductible by Dr. Suarez.

Mr. and Mrs. Gonzalez contend that inasmuch as the agreement specifies a principal sum to be paid in installments over a period of 61 months, which is less than 10 years, the payments cannot be considered periodic under the provisions of section 71(a)(1). They take the position that the terms of the agreement are clear, that such terms must be followed by this Court, and that if the agreement is to be modified, the modification must be done by the Illinois courts. However, simple multiplication reveals that the principal sum of $60,000 cannot be satisfied by 59 payments of $500 and 2 final payments of $250. Such a payment schedule yields a total of only $30,000, and Mr. and Mrs. Gonzalez have offered no explanation as to how the remaining $30,000 was to be paid. Thus, the terms of the agreement are not clear; rather, the agreement is ambiguous on its face, and to determine the tax treatment of the payments made under such agreement, we must interpret it. Bardwell v. Commissioner, 318 F.2d 786, 790 (10th Cir. 1963), affg. 38 T.C. 84 (1962); Thorsness v. United States, 260 F.2d 341, 344 (7th Cir. 1958).

In interpreting the provisions of a property settlement agreement, it is the intention of the parties we must ascertain.³ Thorsness v. United States, 260 F.2d at 344; Lehman v. United States, 139 F.Supp. 10, 12 (N.D. Ill. 1956), affd. 239 F.2d 139 (7th Cir. 1956); Martindell v. Lake Shore National Bank, 15 Ill.2d 272, 154 N.E.2d 683, 689 (1958); United States Trust Co. of New York v. Jones, 414 Ill. 265, 111 N.E.2d 144, 147 (1953); LaSalle National Ins. Co. v. Executive Auto Leasing Co., 121 Ill.App.2d 430, 257 N.E.2d 508, 512 (Ct.App. 1970). Moreover, where the agreement is ambiguous, we may look to extrinsic evidence to ascertain the parties' intent. Bardwell v. Commissioner, 318 F.2d at 790; Thorsness v. United States, supra; Weiland Tool & Mfg. Co. v. Whitney, 44 Ill.2d 105, 251 N.E.2d 242, 247 (1969). Having considered the provisions of ...