1950 U.S. Tax Ct. LEXIS 83">*83
Petitioner and his wife separated in 1934. At that time there was no discussion of the possibility of a divorce. His wife instituted negotiations in 1935 with reference to a separation agreement providing for her support. During the negotiations culminating in the separation agreement no discussion was had between petitioner and his wife nor between their counsel with reference to the procurement of a divorce. A separation agreement was duly executed on October 20, 1936, providing for payments of $ 30,000 a year for the wife's support. On November 20, 1937, the wife procured a divorce. The terms of the separation agreement were not incorporated in the divorce decree and the decree made no provision for alimony payments. Petitioner paid his wife in accordance with the separation agreement the amount of $ 30,000 in each of the years 1942, 1943, and 1944.
15 T.C. 379">*379 The respondent determined deficiencies in petitioner's income and victory tax for the year 1943 in the amount of $ 37,438.57 and in his income tax for the year 1944 in the amount of $ 28,878.62. The deficiencies result primarily from the disallowance by the respondent of the amount of $ 30,000 claimed by petitioner in his returns for each of the 15 T.C. 379">*380 years 1942, 1943, and 1944, as deductions for alimony. This was explained by the respondent in his statement attached to the deficiency notice with respect to the taxable 1950 U.S. Tax Ct. LEXIS 83">*85 year 1942, as follows:
(d) Alimony $ 30,000.00
The alimony payments in the above amount are being disallowed as deduction in accordance with the provisions of
A similar statement was given in the statement attached to the deficiency notice with respect to the taxable years 1943 and 1944. The year 1942 is involved due to the forgiveness feature of the Current Tax Payment Act of 1943.
The only issue presented is whether the petitioner may, under
FINDINGS OF FACT.
The facts which were stipulated are so found.
The petitioner is an individual with residence in Golden Beach, Florida. His income tax returns for the calendar years 1942, 1943, and 1944 were filed with the collector of internal revenue for the third district of New York. The petitioner kept his books and made his federal income tax returns, including his returns for the taxable years 1942, 1943, and 1944, on 1950 U.S. Tax Ct. LEXIS 83">*86 the cash basis.
The petitioner and his wife, Edith A. Lerner (sometimes hereinafter referred to as Edith) were married in the State of New York on October 14, 1913, and thereafter resided in New York as husband and wife until August 1934, when, while at Cannes, France, they separated by mutual unwritten agreement without court decree and did not thereafter live together as husband and wife. At the time of the separation they had no discussion with reference to a divorce.
On or about December 1935, an attorney, who was a mutual friend of both petitioner and his wife, endeavored to bring about a reconciliation between them. These attempts proved fruitless and the attorney agreed to represent Edith in his professional capacity in negotiations with petitioner looking toward a financial settlement.
On October 20, 1936, petitioner and his wife entered into a separation agreement whereby petitioner undertook to pay her $ 30,000 tax free, annually. The separation agreement provided in part as follows:
The party of the first part hereby agrees that he will pay to the party of the second part during the rest of her natural life for her sole support and maintenance and not to include the support1950 U.S. Tax Ct. LEXIS 83">*87 and maintenance of the children, the sum of Thirty Thousand and 00/100 ($ 30,000.00) Dollars per annum payable in equal 15 T.C. 379">*381 monthly installments of Two Thousand Five Hundred ($ 2,500.00) Dollars in advance, on the first day of each and every month, beginning September 1st 1936; said payments are to be remitted by check by mail, addressed to the party of the second part at #470 Park Ave. in the Borough of Manhattan, City, County and State of New York or any other address, which the party of the second part shall from time to time designate. Payments hereinabove provided for shall be free and clear from any tax or imposts, state or federal of any kind that may be a charge against such income or payments by virtue of any law now in existence or which may hereafter be enacted, it being the intention of the parties hereto that the said payments to the party of the second part shall be met and free from any income or other tax.
At the time the separation agreement was signed there was no discussion of divorce between petitioner and Edith. Edith never discussed the question of divorce with her attorney before the separation agreement was signed, except when he explained to her the1950 U.S. Tax Ct. LEXIS 83">*88 provisions of paragraph "Eighth" thereof, which paragraph was placed in the agreement by her attorney and he discussed it with her after the paper had been drawn up by him. This paragraph states as follows:
Eighth: It is the intent of the parties hereto and of the essence of this agreement that the obligations of the party of the first part under this agreement, shall continue during the natural life of the party of the second part and shall not in any wise or manner be affected by any decree of divorce that may at any time in the future be obtained by either party as against the other, or by any subsequent remarriage of either of the parties hereto or by the death of the party of the first part.
Edith's attorney never discussed the question of divorce with petitioner or his counsel prior to the time the separation agreement was executed. During the period after the separation and up to the execution of the separation agreement, the petitioner had paid to his wife, without specific agreement, between $ 25,000 and $ 30,000 annually for her support and maintenance.
Beginning September 1, 1936, and including the calendar years 1942, 1943, and 1944, petitioner paid to Edith the amount1950 U.S. Tax Ct. LEXIS 83">*89 of $ 2,500 per month for the purposes set forth in the separation agreement of October 20, 1936, and in each of the calendar years 1942, 1943, and 1944, petitioner paid to her the aggregate amount of $ 30,000. No part of any of these payments, including the payments made in the calendar years 1942, 1943, and 1944, represents an amount which, under
By a summons and complaint verified October 27, 1937, Edith instituted an action against the petitioner in the Supreme Court of the State of New York, County of Westchester, demanding an absolute divorce 15 T.C. 379">*382 from the petitioner and "such other and further relief as to the Court may seem just and proper." An order of that court was entered in said action on November 17, 1937, referring the proceeding to the Honorable Joseph Morschauser, official referee, to hear and determine the issues therein. This order of reference reads, 1950 U.S. Tax Ct. LEXIS 83">*90 in part, as follows:
ORDERED that said Official Referee examine the defendant in reference to the amount of alimony to be paid to the plaintiff and in reference to the amount of money to be paid to the plaintiff for the support and maintenance of the issue of said marriage and said Official Referee is hereby authorized and empowered to fix the amount of the alimony herein and the amount of money to be paid by the defendant for the support and maintenance of the issue of said marriage with the same force and effect as if the same was determined and fixed at a Regular Term of this Court and that the same be provided for in the judgment herein, * * *.
The aforesaid action by Edith A. Lerner for absolute divorce was duly brought on to be heard and was heard before the official referee at the courthouse in the City of Poughkeepsie, New York, on November 18, 1937. Edith A. Lerner appeared in person and by her attorney, and the petitioner appeared in person and by his attorney. The official referee took proof of the allegations stated in the complaint of Edith A. Lerner and interrogated Joseph A. Lerner, the petitioner herein, who offered no defense to the allegations of that complaint1950 U.S. Tax Ct. LEXIS 83">*91 and stated that he did not wish to contest the action for absolute divorce. In this interrogation of the petitioner by the official referee, certain questions were propounded by the latter and answered by the petitioner herein, as shown by the official minutes of the hearing which are on file in the Office of the Clerk of Westchester County and form a part of the official record of the action for divorce, as follows: Q. I understand that while you have been separated from your wife there was a separation agreement? A. Yes, sir. Q. A written agreement? A. Yes, sir. Q. And that still exists? A. Yes. Q. You are paying her? A. Yes, sir. Q. Therefore, there will be no alimony fixed now. The separation agreement will survive the divorce decree? A. That's right. Q. Your wife wants that separation agreement to continue? A. Yes. Q. You are willing that the care, custody and education of the children be with the mother? A. Yes, sir. Q. The agreement survives the divorce? A. Yes. Referee: Alright, I will recommend the interlocutory decree be granted and sign the decree.
15 T.C. 379">*383 Under date of November 20, 1937, the official referee rendered his findings of fact and conclusions of law, 1950 U.S. Tax Ct. LEXIS 83">*92 which contained no mention of or reference to alimony, support or maintenance of Edith A. Lerner, nor do they mention or refer to the separation agreement of October 20, 1936. Under date of November 20, 1937, a decree of absolute divorce was granted against the petitioner to Edith. This decree of divorce was entered in the office of the Clerk of the County of Westchester, State of New York, on December 2, 1937, and became final 3 months thereafter. The decree of divorce contains no mention of or reference to alimony, support or maintenance of Edith, nor does it mention or refer to the separation agreement of October 20, 1936.
The petitioner deducted from his gross income for each of the years 1942, 1943, and 1944, the amount of $ 30,000 which he paid to Edith in those years as required by the separation agreement which the respondent disallowed.
The written separation agreement of October 20, 1936, providing for periodic payments of $ 30,000 per annum to Edith was not executed incident to the divorce decree granted her by the Supreme Court of the State of New York, nor was it made a part of such divorce decree by reference.
OPINION.
The petitioner contends that he is entitled, 1950 U.S. Tax Ct. LEXIS 83">*93 under
1950 U.S. Tax Ct. LEXIS 83">*94 15 T.C. 379">*384 Petitioner contends first that the payments in question made by him to his wife during the taxable years come within the provisions of
We shall first consider whether the decree of divorce adopted by reference the alimony provisions of the separation agreement. An incorporation by reference is the method of making one document become part of another by referring to it in such a manner as to adopt it. Black, Law Dictionary. The facts show that neither the findings of fact and conclusions of law of the official referee nor the divorce decree incorporated the separation1950 U.S. Tax Ct. LEXIS 83">*95 agreement by reference or mentioned the alimony payments provided for therein. The testimony with reference to the separation agreement taken before the referee established only the existence thereof providing for the payments to Edith which survived the divorce and that no alimony was required to be fixed. We do not think that such a reference to the separation agreement at the hearing before the referee has the effect of incorporating the separation agreement in the divorce decree.
Petitioner argues in support of contention (b) above that since he was the unsuccessful defendant in the divorce action in New York and by reason of the divorce decree he was under the law of New York legally obligated to support his former wife which he fulfilled by making the payments provided in the separation agreement, and hence these payments were in discharge of a legal obligation imposed upon or incurred by him under the decree. He cites in support of this contention section 1170 of the New York Civil Practice Act;
* * * In New York spouses who have already separated may by agreement fix the alimony which the husband must pay in discharge of his marital obligations, and, the contract will be conclusive upon them, and invulnerable except to those attacks to which any contract is vulnerable. Nevertheless, it is only a contract, and as such it is enforceable only by those sanctions which are available to the promisees in all contracts. On the other hand, if its terms are incorporated in a matrimonial decree, they may be enforced by the much more drastic sanctions which such decrees carry, and they become "legal obligations * * * under such a decree" -- that is a decree in "a decree of divorce or of separate maintenance." * * *
Petitioner's obligation for the payments herein was not a legal obligation under the divorce decree but arose under the separation agreement and as pointed out in
Petitioner's second contention is that the petitioner's obligation to pay alimony to Edith was "imposed upon or incurred by" him "under a written instrument incident to" the divorce. In support of this contention he maintains that the separation agreement was "incident to" the petitioner's divorce by reason of (a) the facts and circumstances under which it was executed and (b) by its incorporation into the divorce proceeding by the referee. In affirming
We do not think that under the facts and circumstances herein the separation agreement was "part of the package" of a divorce. The facts show that at the time the petitioner and his wife separated in 1934, there was no discussion about the possibility of a divorce. After their separation petitioner and Edith did not see each other, except for an accidental meeting at the bedside of one of their children who was ill. 1950 U.S. Tax Ct. LEXIS 83">*100 After approximately two years of separation Edith retained counsel who commenced negotiations with counsel for petitioner with respect to formal provisions for Edith's support which culminated in the separation agreement. During the negotiations which led up to the separation agreement, petitioner and his wife did not meet and all negotiations were carried on by counsel. Edith's counsel testified that at the time the separation agreement was entered into he had not been retained for the purpose of instituting an action for divorce, nor had divorce been discussed with his client, with petitioner or with petitioner's counsel. The evidence also shows that the action for divorce was not instituted until a year after the separation agreement was entered into. It is no doubt true that after petitioner and his wife had been separated for two years that the possibility of divorce had occurred to them, but the possibility of divorce at some unspecified time is a far different thing from the anticipation of divorce by both parties at the time of the execution of the separation agreement which the statute requires in order that the payments under the separation agreement be considered "incident" 1950 U.S. Tax Ct. LEXIS 83">*101 thereto.
The cases of
As regards petitioner's contention (b) above, it is clear from all the facts and circumstances, without an enumeration of all of them, that the provisions of the letter of May 20 for the support and maintenance of his then wife were "incident to" the divorce. The letter itself so shows on its face, where it states: "* * * I now confirm, as I promised you on our trip that I would, that if the divorce is granted, I am bound to1950 U.S. Tax Ct. LEXIS 83">*102 pay * * *" the periodic amounts of at least $ 6,000 per annum or a larger amount if it should for any reason be required.
As we have already stated, we are unable to make a finding that the 15 T.C. 379">*387 written agreement entered into by petitioner and his wife Edith on October 20, 1936, was "incident" to a divorce contemplated by them. We conclude, therefore, that under the facts and circumstances herein the separation agreement was not "incident to" the divorce within the meaning of
Petitioner further argues that the separation agreement was "incident to" the petitioner's divorce by reason of an incorporation into the divorce proceedings by the referee of a reference to it as has been set out in our findings of fact. The testimony with respect to the separation agreement before the referee only established that there was brought to his attention the existence of a written separation agreement which provided for suitable payments to petitioner's wife for her support and maintenance and which survived the divorce. We do not think that the reference to the separation agreement before the official referee has the effect of making the separation agreement "incident to" 1950 U.S. Tax Ct. LEXIS 83">*103 the divorce within the meaning of
We hold, therefore, that the payments herein by petitioner during the taxable years were not in discharge of a legal obligation which was imposed upon or incurred by petitioner under the decree of divorce or under a written instrument incident to such divorce within the meaning of
Harron,
It may be a factor in the conclusion of the majority of the Court that the petitioner agreed in the agreement of October 20, 1936, that the support payments which he would pay to Mrs. Lerner would be free and clear from any state or Federal tax in existence or enacted thereafter. This element should not, in my opinion, weigh in either direction. It is simply a contractual provision which calls for some1950 U.S. Tax Ct. LEXIS 83">*105 adjustment in the amounts of the payments in the event Mrs. Lerner is taxable upon them. The intention of the Congress in enacting
The Committee Reports show that the Congress intended that
The proceeding of
The majority view places considerable stress upon dicta of the court in
For1950 U.S. Tax Ct. LEXIS 83">*107 the above reasons stated, I respectfully dissent.
1.
In computing net income there shall be allowed as deductions:
* * * *
(u) Alimony, Etc., Payments. -- In the case of a husband described in
2.
* * * *
(k) Alimony, Etc., Income. -- In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments (whether or not made at regular intervals) received subsequent to such decree in discharge of, or attributable to property transferred (in trust or otherwise) in discharge of, a legal obligation which, because of marital or family relationship, is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce or separation shall be includible in the gross income of such wife, and such amounts received as are attributable to property so transferred shall not be includible in the gross income of such husband. This subsection shall not apply to that part of any such periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of such husband. In case any such periodic payment is less than the amount specified in the decree or written instrument, for the purpose of applying the preceding sentence, such payment, to the extent of such sum payable for such support, shall be considered a payment for such support. * * *↩
