16 T.C. 1561">*1561 The Commissioner has determined deficiencies1951 U.S. Tax Ct. LEXIS 149">*150 in petitioner's income tax liability plus penalties thereon for the calendar years 1943 and 1944 as follows:

The year 1942 is also involved because of the Current Tax Payment Act of 1943.

The only issue is whether the sum of $ 16,500, received by the petitioner in each of the taxable years from her former husband, under a written agreement, is includible in her gross income under section 22 (k) of the Code as payments received under a written instrument incident to a divorce. Other adjustments made by respondent are not disputed.

Petitioner filed her returns with the collector for the first district of New York.

FINDINGS OF FACT.

The petitioner is a divorced wife of Colonel M. Robert Guggenheim, to whom she was married on May 15, 1928. She now resides in New York. No children were born of the marriage.

16 T.C. 1561">*1562 In 1936 marital difficulties arose between petitioner and her husband. Both retained attorneys. Shortly after November 16, 1936, Colonel Guggenheim received a letter from petitioner's attorneys, stating that petitioner1951 U.S. Tax Ct. LEXIS 149">*151 had consulted them "relative to a severance of marital relations between you." Colonel Guggenheim forwarded this letter to William MacCracken, Jr., his attorney, who answered it by letter dated November 19, 1936, in which MacCracken stated, inter alia:

While I have been aware that there have been occasional disagreements between our clients, Colonel Guggenheim has always assured me that personally he preferred and hoped that their marital relations would continue. As far as I know, it is not his intention to interpose any objection to the securing of a divorce by Mrs. Guggenheim provided she relies upon incompatability as the grounds for her action.

There was a conference in the fall of 1936 between the attorneys for the Guggenheims, and then the matter was temporarily dropped.

Early in May 1937, petitioner and Colonel Guggenheim separated, and thereafter they lived apart. Their attorneys resumed negotiations in regard to a property settlement. They also discussed the possibility of divorce.

Finally both parties agreed to a divorce on the night of August 31, 1937; and the petitioner signed an agreement entitled "SEPARATION AGREEMENT" on August 31, 1937. The pertinent provisions1951 U.S. Tax Ct. LEXIS 149">*152 of the agreement are as follows:

FIFTH: The Husband shall pay to the Wife, for her support and maintenance, the sum of One Thousand Three Hundred Seventy-five Dollars ($ 1,375.00) a month, payable monthly, on the first day of each and every month while the wife remains alive. In the event of the subsequent remarriage of the Wife following either a divorce between the Husband and Wife or the death of the Husband, such payments shall thereafter be reduced to $ 600.00 a month and shall continue at such reduced rate as long as the wife shall live. The obligations of the Husband with respect to the amounts payable by him hereunder shall survive his death, and shall constitute a charge upon his estate.

* * * *

FIFTEENTH: The provisions of this Agreement shall not be construed to prevent either party from suing for an absolute or limited divorce in any Court of competent jurisdiction upon such grounds as they shall elect or as they may be advised, but no decree so obtained by either party shall in any way affect this Agreement or any of the terms, convenants or conditions hereof, this Agreement being absolute, unconditional and irrevocable, and both parties intending to be legally bound1951 U.S. Tax Ct. LEXIS 149">*153 thereby.

* * * *

In addition, each party gave up all rights in the other's real property which arose out of the marriage relation, and petitioner gave up all her rights to support and maintenance other than those which arose under the agreement. Petitioner had to remove her furniture and furnishings from the Guggenheim home at Firenze Farm, Babylon, New York, upon 30 days' notice, which notice could not be given 16 T.C. 1561">*1563 by Colonel Guggenheim before November 15, 1937. Also, after that date the petitioner could not use the name of Firenze in connection with any stable she might maintain, and upon 30 days' notice (which could not be given before that date) she had to remove her horses and personal property from the Firenze Farm stable.

On the following day, September 1, 1937, this agreement was taken to the office of the petitioner's attorney and was presented to Colonel Guggenheim's attorney. MacCracken told petitioner's attorney, William Hall, that in order to make sure the petitioner went out to Reno, the agreement would not become operative until the petitioner secured a divorce, and that the agreement was to be held in escrow until then. Hall then telephoned to the petitioner1951 U.S. Tax Ct. LEXIS 149">*154 and told her of his conversation with MacCracken. Petitioner agreed to this arrangement. Whereupon, Hall signed and delivered two letters; one, addressed to MacCracken, related the terms of the escrow agreement as follows:

We are handing you herewith separation agreement dated August 31, 1937, between Elizabeth Eaton Guggenheim and M. Robert Guggenheim, which has been executed in duplicate by the said Elizabeth Eaton Guggenheim.

Said signed agreements are delivered to you for the purpose of having them executed by M. Robert Guggenheim. When they are so executed they are to be delivered to Errett G. Smith, Esq., whose address is National Press Building, Washington, D. C., to be held by him as escrow agent for the parties. Mr. Smith, as escrow agent, is to deliver one copy of the contract to us, as attorneys for Elizabeth Eaton Guggenheim, and one copy of the contract to you, as attorney for M. Robert Guggenheim, upon the joint order of yourself and the undersigned.

In the event the joint order is not delivered to Mr. Smith on or before November 15, 1937, the signatures to the contract are to be destroyed by Mr. Smith and both copies returned to the undersigned.

* * * *

The other1951 U.S. Tax Ct. LEXIS 149">*155 was addressed to Colonel Guggenheim and read as follows:

This is to acknowledge receipt of your check in the amount of $ 850.00.

We will deposit said check in our Attorney Account and upon receipt of instruction from yourself of your attorney, Mr. McCracken, we will pay over the same to Mrs. Guggenheim in installments of $ 100.00 per week and send you a verified statement showing the dates and amounts of such payments.

In the event you do not instruct us to commence the payment of the aforesaid installments by September 15th, we will immediately thereafter return to you the proceeds of said check amounting to $ 850.00.

On September 2, 1937, Colonel Guggenheim signed the "SEPARATION AGREEMENT."

Hall wrote MacCracken on September 3, 1937, enclosing authorization for Errett Smith, the escrow agent, to deliver one copy of the separation agreement to MacCracken, as attorney for Colonel Guggenheim, and one to Graham, McMahon, Buell & Knox, as attorneys for petitioner. This letter contained a request to MacCracken that "As soon as the condition is complied with, will you kindly sign, date, and deliver this authorization to Mr. Smith."

16 T.C. 1561">*1564 On September 13, 1937, the petitioner arrived1951 U.S. Tax Ct. LEXIS 149">*156 in Reno, Nevada. After complying with the residence requirement, on October 26, 1937, she brought suit for a divorce on the ground of extreme cruelty. There was no demand made for alimony either in the complaint or during the trial. Petitioner's complaint alleged in Paragraph IV "That there is now no community property belonging to plaintiff and defendant within the jurisdiction of the Court or elsewhere, a settlement thereof having been effected heretofore out of Court." This was found as a fact by the Nevada court. Colonel Guggenheim put in a general appearance, and an attorney represented him at the trial, but no defense was offered. The decree granting the divorce was entered that same day, on October 26, 1937, in the Second Judicial District Court of the State of Nevada. The divorce decree did not make any provision for alimony, and no mention was made of the written agreement.

Immediately after MacCracken received notice that the divorce decree had been entered, he transmitted the joint order of himself and Hall to Smith in conformity with the escrow agreement of September 1, 1937. On October 28, 1937, Smith mailed a copy of the separation agreement to Hall and handed1951 U.S. Tax Ct. LEXIS 149">*157 a copy to MacCracken, together with accompanying letters, thereby completing his function as escrow agent. The written agreement thereupon became operative. Three months afterwards Colonel Guggenheim remarried.

Harry Swanson was petitioner's attorney in the divorce action in Nevada. Hall had had business dealings with him for a number of years and had arranged for his representation of petitioner. Swanson received $ 250 as his fee which was paid to him out of the $ 850 check Hall had received from Colonel Guggenheim on September 1, 1937. Petitioner's expenses in Nevada were paid to her out of the $ 850 check, plus an additional $ 150 advanced by her New York attorneys.

After reviewing petitioner's returns for the years 1942, 1943, and 1944, the respondent held that the amounts received by petitioner each year from her former husband were includible in her income. He also added penalties to the deficiencies for the years 1943 and 1944 under sections 291, 294 (d) (1) (A), and 294 (d) (2) of the Code.

Ultimate Finding of Fact.

The sum of $ 16,500 received by petitioner in each of the years 1943 and 1944 was received in discharge of a legal obligation which, because of the marital1951 U.S. Tax Ct. LEXIS 149">*158 relationship, was imposed upon her former husband under a written instrument incident to divorce.

OPINION.

The question is whether payments aggregating $ 16,500, which the petitioner received in each of the years 1943 and 16 T.C. 1561">*1565 1944 from her former husband under a written agreement, are includible in her gross income under section 22 (k) of the Code ¹ as payments received under a written instrument incident to a divorce. The narrow question is whether a written agreement was incident to a divorce.

The question is essentially one of fact. Petitioner contends that it was only after both parties had signed the separation agreement that she promised to obtain a divorce. She argues that the facts of this proceeding are similar to those in Joseph J. Lerner, 15 T.C. 379, and that that case is controlling. However, after careful consideration of all of the evidence, it has been concluded that the separation agreement was executed in contemplation of the divorce, and that it was incident to the divorce.

1951 U.S. Tax Ct. LEXIS 149">*159 Petitioner and her former husband negotiated with each other for 10 months relative to a property settlement. The topic of divorce was often discussed. In the light of this background and the events that followed, it is difficult to believe petitioner's contention that she signed the separation agreement on August 31, 1937, not planning to secure a divorce; but that after a telephone conversation with her attorney on the following day, in which she was told the agreement was to be held in escrow and would be inoperative until a divorce was secured, she agreed to obtain a divorce. We have carefully examined all of the testimony and the documentary evidence and, after due deliberation, have come to the conclusion and found as a fact that before the petitioner signed the separation agreement on August 31, 1937, both parties contemplated that the petitioner would secure a divorce.

However, even if the petitioner's contention is assumed to be true, it is clear that at the time the agreement became binding as a contract both parties to it contemplated that a divorce would soon follow. The evidence shows that Colonel Guggenheim did not sign the separation agreement until September 2, 1951 U.S. Tax Ct. LEXIS 149">*160 1937. This event took place after the escrow agreement had been made. The escrow agreement had been made admittedly after petitioner agreed to secure a divorce. Thus at the time the separation agreement became a binding contract both parties had agreed to a divorce.

There are additional factors leading to the inescapable conclusion that the separation agreement bore a direct relationship to the divorce, and, therefore, was incident to it. The most important of these is 16 T.C. 1561">*1566 that the agreement was held in escrow, and its operation was contingent upon the securing of a divorce by the petitioner. No agreement can be more incident to a divorce than one which does not operate until the divorce is secured and would not operate unless the divorce was secured. See Tuckie G. Hesse, 7 T.C. 700 (1946).

In addition, the divorce was secured immediately after the execution of the agreement. Only 12 days after the agreement was delivered to Colonel Guggenheim's attorney, petitioner had established a residence in Reno, Nevada, preparatory to commencing her action for divorce. This was on September 13, 1937, two days before the deadline set by 1951 U.S. Tax Ct. LEXIS 149">*161 Colonel Guggenheim for return of his check for $ 850. That is a factor which strongly supports the conclusion that the agreement was made in contemplation of a divorce. Estate of Daniel G. Reid, 15 T.C. 573 (1950); Mahana v. United States (Ct. Cl. 1950), 88 F. Supp. 285">88 F. Supp. 285, certiorari denied, 339 U.S. 978">339 U.S. 978 (1950).

The record in this proceeding is lengthy, but to review the facts further is unnecessary. The facts in the Lerner case, supra, are clearly distinguishable from the facts in the instant proceeding. In the Lerner case, there was no talk of divorce prior to the execution of the separation agreement there involved; there was no escrow agreement; and the divorce action was not begun until more than a year after the separation agreement was executed. The holding in the Lerner case is not applicable in this proceeding.

The facts in our recent decision in Cecil A. Miller, 16 T.C. 1010, are clearly distinguishable from the facts in this proceeding.

The respondent's determination is sustained.

The respondent added penalties to the deficiencies. 1951 U.S. Tax Ct. LEXIS 149">*162 The penalty for the year 1943 was added under section 291 (a) of the Code, and the penalty for 1944 was added under sections 294 (d) (1) (A) and 294 (d) (2). There is no evidence to show that the penalties were not properly added to the deficiencies, and the petitioner has not contested the additions of the penalties. The additions of the penalties are sustained.

Decision will be entered for the respondent.