Taylor v. Campbell

• Decision Date: 21 September 1964
• Docket Number: No. 20677.,20677.
• Parties: James B. TAYLOR and Tevis Bennett Taylor, Appellants, v. Ellis CAMPBELL, Jr., District Director of Internal Revenue, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

335 F.2d 841 (1964)

James B. TAYLOR and Tevis Bennett Taylor, Appellants, v. Ellis CAMPBELL, Jr., District Director of Internal Revenue, Appellee.

No. 20677.

United States Court of Appeals Fifth Circuit.

August 18, 1964.

Rehearing Denied September 21, 1964.

Ethan B. Stroud, Jack W. Hawkins, Dallas, Tex., for appellants.

C. Moxley Featherston, Dept. of Justice, Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert A. Anderson, Alan D. Pekelner, C. Guy Tadlock, Dept. of Justice, Washington D. C., H. Barefoot Sanders, Jr., U. S. Atty., Joseph McElroy, Jr., Asst. U. S. Atty., Dallas, Tex., for appellee.

Before HUTCHESON and BROWN, Circuit Judges, and CHRISTENBERRY, District Judge.

HUTCHESON, Circuit Judge.

This appeal by taxpayer¹ arises out of a claim for refund in the amount of $3,555.11 plus interest for the taxable years 1957 through 1960. We are required to determine the deductibility under Sections 215² and 71³ of the Internal Revenue Code of 1954 of certain payments made by taxpayer to his ex-wife pursuant to a written agreement and a divorce decree.

The district court found as a matter of fact and law that the payments in issue were made by taxpayer in exchange for the relinquishment of Margaret Taylor's property rights and not for her support. We disagree.

Taxpayer and Margaret Taylor were married in 1930. On November 28, 1950, after a period of marital discord, they entered into what they called a property settlement agreement.⁴ On December 1, 1950, they were divorced. The decree incorporated and approved as full, fair and equitable the property settlement agreement.

The agreement referred to itself as a property settlement agreement and not a support agreement. Under it the wife was to take the household goods, an automobile, her personal effects, and she was given an irrevocable right to receive $200.00 per month until 1954 and thereafter $200.00 per month until she died or remarried. The taxpayer was to receive all other property which included all other cash and all the stock in his name in J. B. Taylor Incorporated, what was then and at the time of the trial a highly successful advertising business.⁵ In issue here are the payments of $200.00 per month paid after 1954 during the tax years 1957 through 1960.

There are two substantial questions presented by this appeal. One, were the contested payments in the nature of or in lieu of alimony or an allowance for support,⁶ or were they as the district court found payments in satisfaction of a claim to community property. Two, if these are payments in the nature of alimony is their payment a legal obligation within the meaning of Section 71(a) (1). There is no doubt but that these were periodic payments and they were incurred because of the family relationship under a written instrument incident to a divorce.⁷

We are of the opinion that the district court was clearly erroneous in his finding of fact and wrong in his finding of law that the disputed payments were in exchange for property rights and not for support. The decisions reflect two categories of payments, those that satisfy an obligation to support and those in satisfaction of property rights, only the former qualify for a deduction under Section 71.⁸ The source of an otherwise deductible payment will not affect its deductibility, since payments may be from property in trust or may be made directly or indirectly from the husband's income or capital.⁹ It is, therefore, clear that payments may be made out of property on hand and in that sense termed a property division and still be alimony within the meaning of Sec. 71, if their purpose is that of support. The issue then is to determine the purpose of the payments from an examination of the agreement and the testimony.

The cases give us guides for determining this purpose. It is clear that the labels attached to an agreement by the parties are not controlling.¹⁰ Nor is the characterization of the agreement in the divorce decree controlling.¹¹ In a tax suit involving such an agreement as we have here parol evidence may be admitted,¹² and, of course, was properly admitted here since the agreement here in issue is so ambiguous. Though clearly stating it is a property settlement, it provides for indeterminate payments and for the husband's assumption of the wife's tax liability on those payments if any should arise. Both of these latter provisions are highly indicative of a support agreement.¹³

All of the testimony introduced to resolve the ambiguity in the agreement indicates that the payments were for support. The taxpayer and the attorney who handled his divorce so testified. The taxpayer, his ex-wife and the attorney testified that to the best of their recollection the value of the property on hand at the time of the divorce, less liabilities was about $5936.00.¹⁴ Margaret Taylor received the equivalent of approximately half of this amount in jewelry, household furnishings and the automobile.

There is nothing in the record besides the agreement's categorization of itself to indicate that the wife had any greater property right than that for which she was compensated by provisions of the agreement other than those providing for the disputed payments. We think the district court's findings based as they were only on the statements in the agreement of its nature and the reassertion of this categorization in the divorce decree were clearly erroneous and against the truth and right of the case. The payments in dispute were for the support of taxpayer's ex-wife.¹⁵

Appellee contends that these payments are not deductible since they are not in discharge of a legal obligation to support. Note 3, supra. Appellee bases this conclusion on the grounds that there is no legal obligation to pay permanent alimony in Texas,¹⁶ and that the payments here if for support would be considered permanent alimony by Texas courts. We could agree with appellee only if we could find that the intent of the drafters of Section 71 and its predecessor was to exclude from the coverage of this statute all payments which a Texas court would consider permanent alimony while otherwise providing for a nation wide deduction for identical payments. There is nothing in the statute or its legislative history that indicates that this is the proper interpretation. The Senate Finance Committee said concerning Sections 22(k) and 23(u), provisions of the 1939 Code similar to Sections 71 and 215 of the 1954 Code, that

"These amendments are intended to treat such payments as income to the spouse actually receiving or actually entitled to receive them and to relieve the other spouse from the tax burden upon whatever part of the amount of such payment is under present law includable in his gross income. In addition, the amended sections will produce uniformity in the treatment of amounts paid in the nature of or in lieu of alimony regardless of variance in the laws of different states concerning the existence or continuance of an obligation to pay alimony."¹⁷

The report of the House Ways and Means committee used substantially identical language in referring to the scope of the statutes.¹⁸

The decisions have given full expression to this statement of purpose. They reflect that the unenforceability of an agreement under state law does not prevent the deduction of payments made pursuant to such an agreement. In Brown v. United States, 121 F.Supp. 106 (N.D.Calif.1954), the government asserted that though contested payments met all the requirements for deduction under the statute they could not be enforceable alimony payments under California law since the payments would continue after the divorced wife's remarriage, and there is no obligation to pay alimony after the wife's remarriage in California. The court, relying on the House Report noted above, held that the state's characterization of these agreements did not prevent their deductibility. In Tuckie G. Hesse, 7 T.C. 700 (1946) it was urged that otherwise deductible payments were not deductible since the law of Pennsylvania did not require or allow the payment of alimony to a spouse who had received an absolute divorce. Relying on the House and Senate Reports cited above, the court held that the payments "were made to take care of the lack of any provision under law which would require the payment of alimony to petitioner" and that they were deductible.¹⁹ Similarly in Charles Campbell, 15 T.C. 355 (1950) the possibility that a separation agreement was void under New York law did not prevent the allowance of a deduction for payments made under the agreement. Our decision of Scofield v. Greer, 5 Cir., 185 F.2d 551 (1950), which involved a Texas agreement very similar to the one here, supports these cases since the argument against deduction that is here being made was there advanced. It was rejected in silence.

This is not a case in which a spouse is seeking to deduct voluntary gratuitous payments.²⁰ The payments here were hammered out by attorneys representing the husband and wife as an indispensable preliminary to the divorce proceedings. The vagaries of Texas marital law cannot operate to defeat the obvious intent of the statute that it be uniformly applied. The payments here satisfy the statutory requirements for deductibility.

The judgment is reversed and the cause is remanded for further and not inconsistent proceedings.

1 Taxpayer's present wife, Tevis Bennett Taylor, is a named party here only because she filed a joint return with her husband. This opinion will refer to James B. Taylor as taxpayer.

2 Alimony, etc., payments.

"(a) General rule. — In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year. No deduction shall be allowed under the preceding sentence with respect to any payment if, by reason of section 71(d) or 682, the amount thereof is not...