1951 U.S. Tax Ct. LEXIS 97">*97
1.
2. Year of Tax on Periodic Payments. -- Petitioner's former husband deposited stock in escrow with a bank and directed the bank to pay part of the dividends to the petitioner. He retained title to the stock. Petitioner remarried and the former husband directed the bank to stop payments. The bank continued to receive dividends but held them in escrow pending final judgment1951 U.S. Tax Ct. LEXIS 97">*98 of an Illinois court in petitioner's suit on the contract to recover payments. For years prior to 1945, the dividends have not been taxed to anyone. The judgment became final in 1945, and arrearages were paid in 1945 to petitioner.
17 T.C. 344">*345 The Commissioner has determined a deficiency in income tax for the year 1945 in the amount of $ 20,778.33. He now agrees that petitioner is entitled to deduct $ 22,276 for attorneys' fees and expenses incurred in litigation to recover support payments from petitioner's former husband, which were paid in 1945. There are two issues to be decided: Whether periodic support payments are taxable to petitioner under
The petitioner filed her return for 1945 with the collector for the first district of California.
FINDINGS OF FACT.
We find as facts the facts which have been stipulated and incorporate1951 U.S. Tax Ct. LEXIS 97">*102 the stipulation by this reference.
The petitioner was married to Reginald B. Parsons, an American citizen, a resident of the State of Washington, on August 12, 1935. She was a citizen of Germany at the time of the marriage. The marriage took place in Berlin, Germany. After the marriage, the petitioner and Parsons established their residence in Seattle, Washington, where they lived for about one year. They returned to Berlin in 1936 on a visit. While they were there, Parsons agreed that petitioner had justifiable cause to sue for annulment of the marriage, which petitioner did by filing suit in the Berlin District Court on July 17, 1936. While the suit was pending, Parsons executed a written contract on August 17, 1936, before a notary, obligating himself to pay petitioner 17 T.C. 344">*346 $ 1,000 per month for life regardless of whether she remarried. The Berlin contract is incorporated herein by this reference. Petitioner was a party to the contract. She executed it for the purpose of making "an alimony" settlement contract with Parsons. The contract was a "contract of support." 1951 U.S. Tax Ct. LEXIS 97">*103 It was to be inoperative if the petitioner failed in her suit to dissolve the marriage. In order to guarantee the support payments, Parsons agreed to deposit enough stock with a Chicago bank to assure petitioner periodic payments of $ 1,000 per month for life. Parsons carried out this part of the Berlin contract on October 2, 1936. The Berlin District Court on August 20, 1936, entered a decree declaring that the marriage was annulled. The decree, findings of fact and opinion of the Berlin court are incorporated herein by this reference. The marriage was annulled because, the court found, the petitioner had erred with respect to the personal qualities of Parsons; that he had personal defects and knew of them before the marriage; and that the petitioner was a spouse in good faith who would not have married Parsons if she had known of his defects.
At the time the marriage was dissolved, the German Code contained provisions, sections 1345 and 1347, 11951 U.S. Tax Ct. LEXIS 97">*105 which gave an innocent spouse a right to elect to treat annulment of a marriage as a divorce for the purpose of property settlement and support. Section 1345 provided an exception to sections 1333 and 1343 2 of the German Code relating1951 U.S. Tax Ct. LEXIS 97">*104 to void marriages, and adopted the principle of putative marriage, under which a marriage is regarded as valid until the date it is dissolved. The effect of making an election under section 1345 is that the innocent spouse is in the same position with regard to the right to receive support as if the marriage had been dissolved by divorce. An innocent spouse may make an election under section 1345 by entering 17 T.C. 344">*347 into a written contract with the other spouse which provides for support after dissolution of the marriage. If a spouse makes the election under section 1345, a settlement agreement is governed in point of time from the date the marriage is dissolved.
The petitioner, by entering into the Berlin contract with Parsons on August 17, 1936, elected to exercise a right she had, as the innocent spouse, under section 1345, to have the annulment of her marriage to Parsons treated as if the dissolution had been by divorce with respect to Parsons' duty to provide her with support after the dissolution. The decree of the Berlin District Court dissolving the marriage of petitioner and Parsons was tantamount to a decree of divorce within the meaning of
Parsons retained title to the stock. The Chicago contract provided that:
Parsons herewith deposits with and delivers to the Bank in pledge stock certificates for twelve hundred (1,200) shares of common stock of Bemis Bros. 1951 U.S. Tax Ct. LEXIS 97">*107 Bag Co., Incorporated, the title of which stock shall at all times remain in said Parsons, subject to the following conditions:
* * * *
Parsons has the right, with the consent of Mrs. Parsons, to substitute other stocks or securities for those originally deposited with the Bank.
* * * *
It is understood that the deposited stock shall be transferred on the books of Bemis Bros. Bag Co., Incorporated, into the name of a nominee of the Bank, so that the dividends and other income with respect thereto shall be payable to such nominee and thus received by the Bank, but the legal title to said stock shall at all times remain in Parsons, subject only to the pledge hereby made in accordance with this Agreement and the irrevocable assignment of the income to Mrs. Parsons, as herein provided. * * * upon the death of Mrs. Parsons, the Bank shall thereupon redeliver the stock to Parsons if he be then living, or * * * to the person legally entitled thereto * * *.
17 T.C. 344">*348 The Chicago bank, in the above contract, acknowledged receipt of the 1,200 shares of Bemis Bros. Bag Company stock and agreed "to hold the same, and disburse the income thereof."
The Chicago contract provided that it and the1951 U.S. Tax Ct. LEXIS 97">*108 Berlin contract were to be construed according to the laws of the State of Illinois, and that in the event any dispute should arise under the two contracts, it could be determined by state courts in Cook County, Illinois, or by the United States District Court for the Northern District of Illinois.
Following the execution of the Chicago contract, the Chicago bank made payments from dividends to Lily Parsons until sometime in August 1939, when Parsons directed the bank to stop payments because the Berlin and Chicago contracts were invalid and fraudulent. One reason for Parsons' directions to the bank was that in August 1938 Lily married Lloyd Reighley (formerly Reichenheim) whom she had known in Berlin prior to her marriage to Parsons, and to whom she is still married. Upon Lily's marriage to Reighley, Parsons came to believe that he had been defrauded by Lily. When the bank stopped making payments to Lily, she demanded the payments, but the bank refused to make any payments. The bank continued to collect the dividends on the Bemis Bros. Bag Company stock as they were paid, and with respect to the share thereof claimed by the petitioner, the bank held dividends in escrow at the1951 U.S. Tax Ct. LEXIS 97">*109 rate of $ 12,000 per year until the judgment of the Cook County Superior Court became final in 1945, when the bank made payment to the petitioner.
In 1940 the petitioner filed suit in the Superior Court, Cook County, Illinois, case number S6134, against the bank and Parsons to enforce payment of the monies due her under the Berlin and Chicago contracts, together with interest. Parsons filed a counterclaim against the bank and the petitioner in which he alleged that: The Berlin contract was wholly without consideration, was induced by fraud and duress, was against public policy, was entered into by mutual mistake of fact, and was null and void.
The litigation was complicated and of long duration, and necessarily involved great time and expense. Each court by which the case was decided held in favor of the petitioner. A decree in her favor was entered by the Superior Court on February 9, 1942, which was thereafter affirmed on May 19, 1944, by the Appellate Court of Illinois (
* * * the Court finds that under a proper construction of said Section 1345 in connection with other sections of the German law, plaintiff [Mrs. Lily Reighley] had a valid and enforceable right to obtain a court order in Berlin, Germany, immediately after the annulment, requiring the defendant, Reginald B. Parsons, to furnish her with support, provided1951 U.S. Tax Ct. LEXIS 97">*111 that in said proceeding she established that the nullity of the marriage was known to Parsons at the time of the marriage and that the same was not known to plaintiff, and, on the basis of the testimony and evidence introduced in this case, it is probable that she could have established those facts.
The Supreme Court of Illinois at 390 Ill. 242,
* * * If the marriage had been1951 U.S. Tax Ct. LEXIS 97">*112 terminated under the Illinois law, on the same grounds the Illinois court could have allowed alimony and support payments, and a contract entered into between such parties, providing for said payments, would have constituted a valid consideration and would be binding upon the parties.
By the judgment of the Superior Court for Cook County the Chicago bank was ordered to pay all past due installments plus interest to Lily, and to comply, in the future, in all respects with the contracts, and to make the payments to her for as long as she should live. The opinions of the Superior Court, the Appellate Court, and the Supreme Court have been received in evidence in this proceeding, and they are incorporated herein by this reference.
While the litigation was pending in the Illinois courts, the right of the petitioner to $ 1,000 per month of the dividends of the deposited stock remained undetermined. In May 1945, the bank paid in one sum the total arrearages dating back to August 1939, plus interest, to the petitioner, which included $ 12,000 for each of the1951 U.S. Tax Ct. LEXIS 97">*113 years 1942, 17 T.C. 344">*350 1943, and 1944, and for 1945 the bank paid the total amount of $ 12,000 to the petitioner.
None of the $ 36,000 of dividends which was paid to the petitioner in 1945 has been taxed.
OPINION.
The pleadings present an issue under
The issue involves consideration of the right, if any, of the petitioner to receive "alimony" or support payments from Parsons after the termination of the marriage, under the facts and circumstances which provided grounds for the 1936 decree of the Berlin court in the petitioner's favor. 1951 U.S. Tax Ct. LEXIS 97">*114 The broad question is whether the payments to the petitioner under the Berlin and Chicago contracts come within the intent and scope of
If the chief issue is decided adversely to the petitioner, a second question is presented by the pleadings, whether the payments for the years 1942, 1943, and 1944 -- $ 36,000 -- which sum was paid to the petitioner in 1945 under the decision of the Supreme Court of Illinois is taxable to the petitioner in 1945. As an alternative allegation, 1951 U.S. Tax Ct. LEXIS 97">*115 the petitioner has alleged in her petition that if the first question is decided against her, then the respondent erred in including in her income for 1945 more than $ 12,000, the total amount of the payments under the contracts for 1945. The allegation in the petition relating to the second issue does not present any question under
The petitioner received in 1945 from the bank arrearages in the monthly payments for a period beginning in 1939 and ending in May 1945 in the total principal amount of $ 68,202, exclusive of interest. The payment of the above total sum was made pursuant to the judgment of the Illinois Superior Court which became final in 1945, when1951 U.S. Tax Ct. LEXIS 97">*116 it was affirmed by the Supreme Court of Illinois. The respondent has determined that $ 41,000 of the foregoing amount is taxable to the petitioner under
The problem in this proceeding presents a novel and unusual combination of factors and circumstances under
The petitioner became legally separated 3 from her husband by court decree. Cf.
1951 U.S. Tax Ct. LEXIS 97">*120 In applying the provisions of
Under the circumstances present in this proceeding, we reach the conclusion that under the German law as it existed in 1936, for the purpose of applying the provisions of
1951 U.S. Tax Ct. LEXIS 97">*124 We cannot say, in this proceeding, that the obligation incurred by Parsons under the Berlin contract to make support payments to the petitioner for life was not a legal obligation because of the marital relationships, or that the petitioner did not have the right to receive the support payments, and to claim that the effect of the decree dissolving the marriage was the same as though the proceeding had been for divorce, as it could have been under the law of Illinois which law the parties agreed could be followed in the construction of the Berlin contract in case a dispute arose.
It has been noted by this Court before that the decree dissolving a marriage "need not incorporate or refer to alimony or maintenance provisions made by a prior or coincident agreement in order for such agreement to come within the purview of
It is concluded that the monthly payments of Parsons to the petitioner were received by her in discharge of a legal obligation which 17 T.C. 344">*355 was incurred by Parsons because of the marital relation and under a written instrument which was incident to a decree which comes within the scope of
1951 U.S. Tax Ct. LEXIS 97">*127 The petitioner's argument under this issue not only is not clear but is elusive. The petitioner has not contended in this proceeding that Parsons created a trust; no question on the point is presented by the pleadings. If that is what the petitioner intended to suggest in the argument presented under this issue, we may not consider such question because it was not pleaded.
On the other hand, the provisions of the regulation which the petitioner cites,
In this proceeding the exception to the general rule under
It is held that the arrearages for 1942-1944 amounting to $ 36,000 are includible in petitioner's income for 1945. The result reached here is no different from that reached in
1. 1345: If the nullity of the marriage was known to one of the spouses at the time of the marriage, the other spouse, unless the nullity was also known to him or her, may after the declaration of nullity or dissolution of the marriage demand, that their relationship as to property rights, particularly with respect to the duty of support, be so treated as if the marriage at the time of declaration of nullity or dissolution had been dissolved by divorce, and the spouse to whom the nullity was known, had alone been adjudged guilty.
* * * *
1347: If the spouse, who has the right provided in section 1345, paragraph I, declares to the other spouse, that he will make use of the right, he cannot then avail himself of the effects of the nullity of the marriage; if he declares to the other spouse that he will abide by these effects, the right provided in section 1345, paragraph I, is extinguished.
The other spouse may require the spouse, so entitled, to declare within a reasonable given time, whether he will avail himself of the right. In this case the right can be exercised only up to the expiration of the time limited.↩
2. 1333: A marriage may be avoided by that spouse who, at the time of entering into the marriage, erred as to the identity of the other spouse or such personal qualities of the other spouse, which, if the true facts had been known to him or her and reasonably evaluated by said party in the light of the nature of marriage, would have prevented him or her from entering into the marriage.
1343: If a voidable (anfechtbar) marriage is avoided, it shall be regarded as void (nichtig) from the beginning. * * *↩
3. H. Rept. No. 2333, 77th Cong., 1st Sess., p. 72; This section adds new subsections to
4. See, also: Keezer, Marriage and Divorce, 3d ed., par. 1195, p. 1160, 1161; Grounds for absolute divorce; Alimony. In Illinois, the ground upon which the Berlin court dissolved the marriage is ground for divorce. Revised Statutes of Illinois, Ch. 40, par. 1.
See, also: Remington's Revised Stats., sec. 982 (Washington 1932, the state of domicile of petitioner and Parsons in 1936).↩
5. See: Alaska Compiled Laws, sec. 56-5-13 (1949);
6.
* * * *
Periodic payments are includible in the wife's income under