Watkins v. Comm'r of Internal Revenue , Docket No. 2607-68.

• Decision Date: 01 December 1969
• Docket Number: Docket No. 2607-68.
• Citation: 53 T.C. 349
• Parties: BRANTLEY L. WATKINS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

53 T.C. 349

BRANTLEY L. WATKINS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2607-68.

Tax Court of the United States.

Filed December 1, 1969.

Stanley S. Worth and Scott P. Crampton, for the petitioner.

Louis F. Nicharot, for the respondent.

A separation agreement provided for periodic payments of $111.46 each week for 525 weeks by the husband to the wife. If the wife should remarry after a divorce a maximum of $25,000 of the aggregate payments was to be forfeited. All the rest of the payments were to be made in all events to wife and if she should die within the 525 weeks to her natural heir, an only son. The wife held title with her husband as a tenant by the entirety to certain valuable property. She also had the right to alimony and support. The agreement provided with prominent particularity that in return for the payments the wife would surrender her property interests and also provided with less prominent generality that the payments were to be in satisfaction of the wife's right to support and any other right arising out of the marriage relationship. The husband deducted all of the periodic payments under secs. 71(a)(2) and 215(a), I.R.C. 1954, and these deductions were disallowed by respondent. Held, a part of such payments (57 percent) was made in satisfaction of wife's property rights and therefore was not deductible, while a part (43 percent) was made for support ‘because of the marital or family relationship’ and therefore was deductible.

Respondent determined deficiencies in the income tax liability of petitioner for the calendar years 1964 and 1965 in the respective amounts of $2,184.56 and $2,771.44.

In his ‘Explanation of Adjustment’ attached to the notice of deficiency, respondent stated as follows:

(a) It is determined that the payment totaling $5,795.22¹ which you made in the taxable years ended December 31, 1964 and December 31, 1965 to your former wife, Mrs. Elma Watkins, were not alimony payments under section 215 of the Internal Revenue Code. Therefore, your taxable income is increased $5,795.92 as shown above.

The entire amount of the deficiencies determined by respondent results from this adjustment. The payments referred to in respondent's explanation of adjustment were made pursuant to a separation agreement entered into by petitioner and his then-wife Elma Watkins (hereinafter sometimes referred to as Elma), which provided inter alia that petitioner would make a maximum of 525 weekly payments of $111.46 to or in favor of Elma. The sole issue presented to us by the parties is whether the payments made by petitioner were ‘periodic payments * * * made under such agreement because of the marital or family relationship’ within the meaning of sections 71(a)(2) and 215, I.R.C. 1954, ² or whether these payments were merely incident to a property settlement between petitioner and Elma.

FINDINGS OF FACT

Some of the facts have been stipulated. We find the facts to be as stipulated and incorporated herein by this reference the stipulation and the exhibits attached thereto.

Petitioner is an individual who resided in Pocomoke City, Md., at the time of the filing of his petition. He filed separate income tax returns for the taxable years 1964 and 1965 with the district director of internal revenue at Baltimore, Md.

Petitioner was married to Elma Watkins on March 22, 1940, when Elma was 18 years of age. At that time, petitioner was in the business of operating a small service station, a truck stop, and six or seven one-room cottages. After their marriage, Elma assisted petitioner in the operation of this business by washing dishes, filling up trucks with gasoline, cooking, and cleaning rooms. A son, Brantley L. Watkins, Jr., was born of the marriage on July 29, 1947.

In 1957 petitioner and Elma acquired title as tenants by the entirety to certain real estate in Pocomoke City, Md., which was occupied by them as a home until the separation hereinafter referred to. As of the time of the separation it had a value of $30,000 subject to a mortgage securing the payment of approximately $8,500. Petitioners also owned two cars in his own name.

In 1950 petitioner constructed a motel and restaurant on real estate located on the outskirts of Pocomoke City. This property was known as Twin Towers. Title thereto was taken in the name of petitioner and Elma as tenants by the entirety. Both petitioner and Elma affixed their signatures on certain notes evidencing several construction loans secured by this property. In the early fifties, Elma devoted a substantial amount of time helping in the operation of Twin Towers and during one period of time, when petitioner was serving in the armed services, she was responsible for the day-to-day operation of the business. After 1955, Elma devoted little time to the operation of the business because she was often in mental hospitals due to illnesses characterized by her as nervous breakdowns. In 1960 the Twin Towers property consisted of a 78-unit motel, a restaurant, a cocktail lounge, and a swimming pool. It had developed into a profitable business enterprise.

Because certain marital difficulties had arisen between petitioner and Elma, they ceased living together as husband and wife in August 1960, and voluntarily separated on or about September 20, 1960. At that time, petitioner moved from their home in Pocomoke City to the Twin Towers motel, where he resided until the time the petition was filed in this case.

At or about the time of their separation petitioner and Elma had conversations with regard to a final settlement of all questions between them involving finances and property rights. It was agreed between them that Elma would receive the home cleared of the mortgage, the furniture in the home, the Cadillac car, and $50,000 in cash, and that Elma would surrender all of her interest in the Twin Towers property to petitioner. Petitioner asked Elma if he could pay the $50,000 to her over a 10-year period in weekly payments since he did not have cash in this amount available, and Elma consented.

There was no discussion between them as to any ‘alimony’ or ‘support,‘ as such, or the amount thereof, to which Elma might be entitled, and no discussion as to what part of the payments was to be in satisfaction of Elma's rights to support and alimony and what part was to be in consideration for the surrender of her property rights.

Petitioner and Elma had each employed an attorney and after the conversations above referred to the attorneys were instructed to draw up a written agreement consistent with the oral agreement of petitioner and Elma.³ This written contract as finally agreed to by the parties and their attorneys was as follows:

THIS AGREEMENT AND POWER OF ATTORNEY, made and executed in duplicate, this 21st day of September, in the year nineteen hundred sixty, by and between Brantley L. Watkins, party of the first part, and Elma Watkins, his wife, party of the second part, both of Pocomoke City, Worcester County, Maryland,

WITNESSETH:

WHEREAS, for a period of more than nineteen years and until the month of August, 1959, the party of the first part and the party of the second part lived together as husband and wife, at which said time, and because of irreconcilable differences, they separated and have since continued to live apart, even though sometimes residing in the same residence; and

WHEREAS, the party of the first part is the owner of certain personal property consisting of one 1959 Cadillac automobile and one 1960 Chevrolet Station Wagon, and certain real estate located in the First and Second Election Districts of Worcester County, Maryland, with the nature and value of which said property the said party of the first part is fully advised; and

WHEREAS, the part of the second part is the owner of no personal property except certain clothes, jewelry and personal accessories which have from time to time been given to the party of the second part by the party of the first part, the nature and value of which said property the part of the first part is fully advised. The party of the second part is the owner of no real property; and WHEREAS, the parties of the first and second part, together, are the owners of certain real estate, to wit: Certain property located on highway 13 leading from Pocomoke City to the Virginia Line, which said property is improved by a restaurant and motel known as ‘Twin Towers' and certain property known as 1505 Market Street in Pocomoke City, Worcester County, Maryland, and being the property whereat the party of the second part presently resides, and are also the owners, together, of certain household furnishings, chattels located in the property known as ‘Twin Towers' and miscellaneous personal effects, as to the nature and value of which both parties are fully advised; and

WHEREAS, the parties, because of incompatibility, disagreements and friction are unable to live together, except at the sacrifice of their mutual comfort, health and happiness, and accordingly intent and contemplate that their present separation shall be permanent, in connection with which separation it is the intention and the desire of the parties that there be a complete, final and effective decision and settlement of their respective rights and holdings and the relinquishment of all rights, interests and claims which the one party might otherwise have upon the property of the other; and

WHEREAS, the party of the first part has issue by the party of the second part one child only, that is to say, Brantley Lee Watkins, Jr., who was born on the 29th day of July, 1947, and for whose custody and support it is the desire of the parties of the first and second parts to herein provide.

NOW, therefore, in consideration of the sum of one dollar each to the other in hand paid, and to accomplish the ends sought, both parties with full knowledge of the extent, value and character of the properties owned by them separately and...