Tilles v. Commissioner of Internal Revenue

• Decision Date: 04 September 1940
• Docket Number: No. 11490.,11490.
• Citation: 113 F.2d 907
• Parties: TILLES v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

113 F.2d 907 (1940)

TILLES v. COMMISSIONER OF INTERNAL REVENUE.

No. 11490.

Circuit Court of Appeals, Eighth Circuit.

July 24, 1940.

Rehearing Denied September 4, 1940.

George T. Priest, of St. Louis, Mo. (Robert E. Moloney and Boyle & Priest, all of St. Louis, Mo., on the brief), for petitioner.

Robert N. Anderson, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before GARDNER and WOODROUGH, Circuit Judges, and MOORE, District Judge.

MOORE, District Judge.

This case is before us on petition for review of a decision of the United States Board of Tax Appeals determining a deficiency in income taxes against the petitioner for the year 1931.

Prior to the year 1908 the petitioner had been married to Corinne L. Tilles, and at the April, 1908, Term of the Circuit Court of the City of St. Louis, Missouri, Mrs. Tilles sued petitioner for divorce, but later dismissed her suit, resumed marital relations with petitioner and accompanied him on a trip to Europe.

Petitioner thereafter filed suit for divorce against Corinne L. Tilles in the Circuit Court of the City of St. Louis, Missouri, at the June, 1909, Term of the court, and on the 10th day of June, 1909, petitioner was granted an absolute divorce.

Prior to the entry of said decree of divorce petitioner entered into an agreement with said Corinne L. Tilles, the terms and conditions of said agreement being reflected in the following letter from Mr. Tilles to his wife:

"St. Louis, Mo., May 12, 1909.

"Mrs. Corinne Tilles,

"In view of the fact that I have instituted a suit for divorce against you, and in order to avoid any adjudication by the Court of alimony in said case, in the event the Court should hold on the trial that I am entitled to such divorce, and in order to discharge my duty in the matter of providing you with means of support and proper maintenance: I hereby state that if the Court shall decree upon the hearing and trial of said cause, that I am entitled to such divorce, then I will in lieu and stead of permitting any judgment or decree for alimony against me, pay and secure to you the sum of Four Hundred Dollars ($400.00) per month, during your natural life, and in the event that your mother should survive you, then to her the sum of One Hundred Dollars ($100.00) per month, during her natural life. That to secure these payments, I will pledge stock in The New Memphis Jockey Club of par value of $25,000 and also in the Douglas Park Jockey Club, of the par value of $50,000; and also stock in the Detroit Racing Association, of the par value of $40,000; and also stock in the Latonia Agricultural Association, of the par value of $12,500; upon the express condition, however, that I shall have the option at any time during my life, of paying $100,000 in cash to you, and being thereby released from any and all obligations and undertakings herein and hereby mentioned and set forth, or in case of my failure to exercise such option, and in case of my death leaving you surviving, then my executor shall pay to you the sum of $100,000.00 and shall thereby be released, and my estate and my heirs and representatives be released from any and all covenants herein proposed, undertaken or assumed.

"I hereby expressly reserve the right, at any time during the existence of this agreement herein proposed, to sell any or all of the stock herein described or which may be pledged to secure such agreement, upon condition, that I shall substitute for such stocks, and pledge in the same manner, other stock, bonds or securities of equivalent value to that to be withdrawn.

"I make this proposition and agreement solely in consideration of my marital duty, and to adjust any matter of alimony, and prevent the consideration of said matter of alimony by the Court in which my suit is pending, in case it should hold I am entitled to a decree for divorce.

"This 12th day of May, 1909.

"(Signed) C. A. Tilles. "Accepted "(Signed) Mrs. C. A. Tilles."

The day following the divorce decree the securities mentioned in the pre-divorce agreement were deposited with the Mississippi Valley Trust Company, of St. Louis, with a letter of instruction and a copy of the agreement. The letter of instruction to the Mississippi Valley Trust Company was as follows:

"Mississippi Valley Trust Co. St. Louis, Mo.

"Gentlemen:

"I herewith deliver to you a copy of a contract made by me and which, as you will see, I have proposed to secure by the pledge of certain collaterals therein mentioned, and which collaterals I now deliver to you to hold for the purposes of securing the performance by me of the terms and provisions of said contract. The stock herein put in your custody for the aforesaid purposes consists of, —

"Stock in the New Memphis Jockey Club of the par value of Twenty-five Thousand Dollars ($25,000.);

"Stock in the Douglas Park Jockey Club of the par value of Fifty Thousand Dollars ($50,000.);

"Stock in the Detroit Racing Association of the par value of Forty Thousand Dollars ($40,000.), and

"Stock in the Latonia Agricultural Association of the par value of Twelve Thousand Five Hundred Dollars, which is to be retained in your custody for the purposes above stated, and subject to my right to withdraw and substitute other stock, bonds or securities therefor, as provided in said contract, and also subject to the further right of a withdrawal of any and all of said pledges upon any written direction to you assented to in writing by Mrs. Corinne L. Tilles.

"Dated this 11th day of June, 1909.

"Yours Respectfully "(Signed) C. A. Tilles."

Within one week after the decree of divorce was granted petitioner, Mrs. Corinne L. Tilles remarried.

The record shows that Mr. Tilles withdrew the original securities from time to time, substituting others of equal value, and in several instances replacing depreciated securities with securities of greater value.

Petitioner has continued to pay his former wife the $4,800 annually, as provided in their agreement.

Upon the receipt of the $4,800 in 1931 the petitioner's former wife included the sum as taxable income in her federal income tax returns for that year and paid the tax thereon.

Until the year 1925 the petitioner, in his annual tax returns, deducted such payments as representing the payment of interest on a contractual obligation. The respondent, however, ruled in 1928, with respect to the years 1922 to 1925, that the income from the securities held by the Mississippi Valley Trust Company under the agreement of May 12, 1909, was neither includable in petitioner's gross income, nor deductible therefrom for tax purposes. But in determining the deficiency for the year 1931 involved in this proceeding, the respondent reversed the prior ruling and included the $4,800 made in that year in petitioner's taxable income. The Board of Tax Appeals sustained this determination, and thereupon petitioner filed his petition for review.

Petitioner contends that the payments to his wife, made by him, constituted no part of his income, and therefore he was not chargeable with them as income; or, else they were payments of deductible interest, at the rate of 4.8 per cent per annum, on a debt, or contractual obligation, for a valuable consideration and not in discharge of a marital obligation created in favor of petitioner's wife and against the petitioner, in the sum of $100,000, which principal petitioner bound his estate to pay absolutely upon his death, or optionally by petitioner before his death.

If either of petitioner's alternative contentions are correct, then the item of $4,800 would not constitute taxable income to the petitioner.

Petitioner testified that:

"Mrs. Tilles brought suit for divorce in the spring of 1908, without any notice or notifying me at all she filed suit in 1908, and at that time she owned some stocks and bonds and securities that were in my possession. I was going to allow her to secure the divorce. I was going abroad, and wouldn't contest it. I made arrangements at that time, in 1908, with her attorney, that I would give her the stipulated price, amounting to $4800.00 a year, and she would turn over the securities to me that she had. With that understanding I went to Europe. Before I sailed for Europe she joined me in my hotel, and she said: `I am going to Europe with you. I have dismissed my suit'. That was the first I knew that she had dismissed the suit. We went to Europe together but it wasn't satisfactory, and when we returned to St. Louis later and she wanted to get a divorce she was told that she had no grounds, because she had condoned whatever ground she may have had. So when she couldn't get the divorce, I decided to get it. I drew up another agreement, which I copied from the agreement that was originally entered into by her attorney in 1908. She had sued me for divorce in lieu of alimony. I put in the words, `I am about to sue you for divorce in lieu of alimony, and I will do so and so', which I realize was a mistake. There wasn't any alimony in it at all. There couldn't be any alimony."

"Agreement of May 12, 1909, Exhibit `B' to the stipulation of facts filed, is the agreement I referred to that I wrote up. I copied it from the 1908 agreement. I did not consult any lawyer in drawing it up" * * * "And I subsequently obtained a divorce. I deposited the securities mentioned in this agreement of May 12, 1909, with the Mississippi Valley Trust Company. I changed them from time to time. Some of them had depreciated in value very much, and I substituted others in place of them. * * * I paid her $4800.00 every year since 1909. * * * After I obtained a divorce from Mrs. Tilles, she remarried within a week. * * *"

The testimony of the former Mrs. Tilles was as follows:

"That in the year 1908, at the City of St. Louis, Missouri, shortly after she had filed suit for divorce against the said C. A. Tilles, she entered into a written...