*212 Decision will be entered for the respondent in Docket No. 44333.
Decision will be entered for the petitioner in Docket No. 47743.
Divorce -- Periodic Payments -- Secs. 22 (k) and 23 (u), I. R. C. -- A divorced wife received payments on a note made by her former husband pursuant to a written agreement executed by the parties incident to the divorce. Held, the payments were in consideration for the wife's release and transfer of her community property interest in certain stocks and were not in the nature of support payments or in lieu of alimony. Thomas E. Hogg, 13 T. C. 361, distinguished.
*275 FINDINGS OF FACT AND OPINION.
*213 The Commissioner determined the following deficiencies in income tax:
| Docket No. | Year | Deficiency |
| 47743 | 1948 | $ 1,135.88 |
| 47743 | 1949 | 970.69 |
| 47743 | 1950 | 496.00 |
| 47743 | 1951 | 78.00 |
| 44333 | 1949 | 1,092.88 |
At the hearing it was conceded by the Commissioner that no deficiency is due for 1948.
The only issue for decision is whether certain amounts paid by John Sidney Thompson to his former wife, Corinne Pope Thompson, pursuant to a settlement agreement incident to divorce, are deductible by John and taxable to Corinne under sections 22 (k) and 23 (u), Internal Revenue Code.
FINDINGS OF FACT.
The stipulated facts are so found and the stipulation and attached exhibits are adopted by reference.
John Sidney Thompson and Charlotte Thompson were husband and wife during the year 1949 and were residents of Dallas, Texas. They filed a joint income tax return on the community property basis with the collector of internal revenue, Dallas, Texas, for the taxable year 1949.
*276 Corinne Pope Thompson was a resident of Dallas, Texas, and filed her individual income tax returns with the collector of internal revenue at Dallas, Texas, for the years 1949, 1950, and 1951.
John and Corinne*214 were married on December 17, 1926, and continued to live together as husband and wife until November 1946. They became permanently separated in July 1947. No children were born of the marriage.
On December 11, 1947, John and Corinne, in contemplation and intendment that divorce proceedings would be instituted for the purpose of dissolving their marriage relation, entered into an agreement upon and settlement of their respective community property rights. Thereafter, on December 23, 1947, Corinne filed a suit for divorce against John and on December 30, 1947, John filed a suit for divorce against Corinne. The cases were consolidated and a final divorce decree was entered January 29, 1948, in the 101st Judicial District Court in Dallas County, Texas, the decree itself incorporating verbatim the settlement agreement executed December 11, 1947.
Several months after the divorce decree was entered, John married his present wife, Charlotte Thompson.
In the preamble of the December 11, 1947, settlement agreement it was provided in part as follows:
WHEREAS, the parties hereto at this time are husband and wife, but they have been separated and have not lived together or cohabited as husband*215 and wife for a period of more than three months preceding the execution of this agreement, * * *
WHEREAS, it is anticipated, contemplated and intended that said separation of the parties is permanent * * * and that divorce proceedings on the part of one or the other, for the purpose of dissolving said marriage relation, will be instituted in the near future; and
WHEREAS, over the period of the married life of the parties hereto, substantial community property has been acquired in which the parties have their respective community rights, and which rights it is necessary to agree upon and settle and adjudicate; and,
WHEREAS, a large portion of said community property consists of capital stock in corporations in which the said J. Sidney Thompson has a substantial or majority interest, or in which his interest is such that the salaries and earnings from such businesses accruing and expected to accrue to him are such that the value of the community interest in said corporations and companies is calculable and valued upon a reasonable cash market value, or could be calculable and valued upon a reasonable cash market value, to such an extent that such value is far in excess of the actual*216 book value thereof, unless distress or forced sale of such capital stock or portions thereof should be had; and
WHEREAS, it is desired by the parties that the value of such property and capital stock be maintained in a businesslike manner without same being affected or depreciated by reason of misunderstandings, disagreements or litigation between the parties hereto, and it is understood and agreed that J. Sidney Thompson, by reason of his business experience and ability, is more able to maintain such values as they presently exist than same could be maintained by Corrine P. Thompson, and that therefore, division of community rights of the parties and of their respective interests in their community property could be *277 more advantageously had and effected by corporate stocks being allotted to J. Sidney Thompson, and one-half of the value thereof distributed and paid over to Corrine P. Thompson by J. Sidney Thompson over a period of years, and which plan of distribution of the presently existing property so calculable as to value, would be more advantageous to Corinne P. Thompson in that she would receive her distributive share of her interest in said community property over*217 a period of years rather than in one lump sum; * * *
The agreement provided that John should assign, deliver, set over, and convey, free and clear of any and all rights, claims, titles, or interests on his part, to Corinne the homestead located in the city of Dallas, Texas, and all household goods, furnishings, and personal property situated therein, a certain 1947 Oldsmobile sedan, and one share of stock in Lakewood Country Club. He was obligated to pay the sum of $ 15,000, $ 5,000 of which was to be due at the date of entry of the decree of divorce and the balance of $ 10,000 to be paid on or before July 1, 1948, with certain shares of corporate stock to be placed as security for such payment. The agreement provided that John would pay all current bills to December 1, 1947, and all taxes upon automobiles or real estate referred to in the agreement for the year 1947 and attorney fees for Corinne and to hold her free and harmless and discharged of any and all expenses, liabilities, or charges for income taxes of any kind or character.
Under the agreement, Corinne was to release any claims in any cash surrender values of any life insurance upon the life of John and was to assign *218 to him any interest she had in a membership in the Dallas Athletic Club and in another certain 1947 Oldsmobile sedan. She was obligated to release to John any and all rights she may have had in the capital stock of four named corporations in which the Thompsons owned the controlling interests.
After providing for her release to John of any and all rights in the four corporations, the agreement provides as follows:
(4) J. Sidney Thompson agrees and obligates himself, upon the said assignment and release of Corinne P. Thompson's interest in said stocks to him, and in order to vest in her, her distributive share of the calculable reasonable cash market value thereof, and in order to maintain said value thereof, and in order to have an orderly businesslike and wasteless distribution thereof, to execute and deliver to Corinne P. Thompson simultaneously with the granting of any divorce, note or notes in the principal sum or sums of One Hundred and Thirty-eight Thousand Dollars ($ 138,000.00), with the following terms, conditions and provisions:
(a) payable to Corinne P. Thompson in the amount of Five Hundred Dollars ($ 500.00) per month, beginning the 1st day of the month following the *219 entry of divorce decree and approval by the Court, and Five Hundred Dollars ($ 500.00) per month on the 1st day of each month thereafter until the said entire amount shall have, by such means, been distributed and delivered to her in full, same to be delivered to her at Dallas, Texas, or deposited to her account in Dallas, Texas, at such bank or banks as she may designate from time to time by written notice to J. Sidney Thompson, provided, however, that if, prior to the delivery of said amount in full, (a) J. Sidney Thompson shall die, J. Sidney *278 Thompson, his heirs, executors, administrators and assigns shall be relieved of the obligation of delivery of further distributive shares to Corinne P. Thompson by the payment and delivery to her at such time, of one-third of the remaining portion of said One Hundred and Thirty-eight Thousand Dollars ($ 138,000.00) not theretofore delivered and paid over to her; or (b) shall by any means, direct or indirect, except by final adjudication and distribution of assets through lawful bankruptcy proceedings, liquidate or cause to be liquidated, said businesses and corporations in which he is presently interested, to wit, Irby-Thompson Company, *220 Inc., the Frontex Company, Inc., and the Woolen Uniform Company, Inc., or (c) in the event he shall dispose of his stock interests therein, or (d) in the event said three corporations should be liquidated and disposed of to other companies or corporations, or (e) in any manner closed, settled, or wound up, so that in the event of the occurrence of any of the contingencies or happenings referred to in these sub-paragraphs (b), (c), (d), and (e), the sale price or the value of any things or properties received shall be in a sum in excess of Two Hundred and Seventy-six Thousand Dollars ($ 276,000.00), the said J. Sidney Thompson shall thereupon deliver and distribute to Corinne P. Thompson, one-third of that amount of One Hundred and Thirty-eight Thousand Dollars ($ 138,000.00) then undelivered and undistributed as above referred to, and in addition thereto, shall deliver and distribute to Corinne P. Thompson, one-half of any excess in property, money, or things of value received by J. Sidney Thompson over and above the sum of Two Hundred and Seventy-six Thousand Dollars ($ 276,000.00); and provided further that in the event such monthly distributions are not made by J. Sidney Thompson*221 to Corinne P. Thompson within fifteen days after the due date thereof, Corinne P. Thompson may at her option cause this agreement and the portion thereof referring to the stocks above named and the said $ 138,000.00 to be cancelled, set aside and held for naught, and to be revested with any and all of her interest therein by reason of her community rights and titles therein, as they exist at and prior to the execution of this agreement, and approval of same by a Court of competent jurisdiction; and in such event, the moneys theretofore paid will be considered and agreed to be considered and deemed for such purpose only, liquidated damages by reason of such default in the obligations and agreements of J. Sidney Thompson, or, in the alternative, and in such event of such continuing fifteen day default, Corinne P. Thompson is given the option of declaring the undelivered portion of the said $ 138,000.00 due and deliverable to her or payable to her in whole, and to enforce her rights in such connection by any lawful means or proceedings available to her, and to be entitled to enforce and collect, in addition thereto, reasonable expenses of collection and enforcement of rights, including, *222 but not by way of exclusion, reasonable attorneys' fees, J. Sidney Thompson obligates himself, his heirs, executors, administrators and assigns, to carry out and perform the obligations assumed by him in this paragraph, as well as in any other paragraph, portion, or condition of this entire agreement.
It is agreed, however, that if at any time it be shown by verification that the total salaries paid to J. Sidney Thompson by the above named corporations and the total net profits from the operations, allocable to stock of which J. Sidney Thompson is the legal or equitable owner, whether declared in dividends or not, shall be less than Twenty Thousand Dollars ($ 20,000.00) for the next preceding fiscal year, then, and in that event, the distribution of Five Hundred Dollars ($ 500.00) per month by J. Sidney Thompson to Corinne P. Thompson for the ensuing year shall be reduced in the same percentage that such totals *279 have been reduced below Twenty Thousand Dollars ($ 20,000.00), but if any reduction be so made it shall be restored for the next year ensuing after such totals shall have again equaled or exceeded Twenty Thousand Dollars ($ 20,000.00).
At the time of making the agreement*223 Corinne had little knowledge of the items, condition, or value of the community property and relied upon John's representations and statements with respect thereto. The divorce decree generally followed the settlement agreement except that with respect to any portion of the $ 138,000 that may have been delivered and paid over to Corinne,
such portion so paid shall not, in the event of default, be deemed a forfeiture or as liquidated damages, but that as to any portion of said One Hundred Thirty-eight Thousand Dollars ($ 138,000.00) not delivered and paid over to Corinne P. Thompson by J. Sidney Thompson, Corinne P. Thompson shall be entitled only to recover such unpaid amounts, after giving credit for any amounts so paid and delivered, but in the event of default on the part of J. Sidney Thompson according to the terms of said agreement, Corinne P. Thompson shall be entitled to all her legal remedies for the recovery of the unpaid portion thereof, together with all costs of collection and reasonable attorneys' fees.
In a subsequent agreement entered into August 6, 1948, the original settlement agreement was incorporated by reference and ratified, approved, and confirmed except *224 as specifically modified in material parts as follows:
2. J. Sidney Thompson agrees, simultaneously with the execution of this instrument, to pay to Corinne P. Thompson the sum of Seven Hundred Fifty Dollars ($ 750.00), being Three Hundred Seventy Five Dollars ($ 375.00) monthly payment as of July 1, 1948, and Three Hundred Seventy-Five Dollars ($ 375.00) as of August 1, 1948, and to continue to pay the sum of Three Hundred Seventy Five Dollars ($ 375.00) per month to Corinne P. Thompson on the first day of each month hereafter during the year 1948 and on the first day of January, 1949, same being in lieu of the Five Hundred Dollars ($ 500.00) per month so due on the first days of such months during the year 1948, the terms of the agreement referred to.
3. J. Sidney Thompson agrees that, if his earnings, salaries, bonus or dividends of any kind or character earned, or accruing to his account during the remainder of the year 1948, viz., from and after July 1, 1948, equal or exceed the sum of Twelve Thousand Five Hundred Dollars ($ 12,500.00), he will pay to Corinne P. Thompson, beginning the first day of February, 1949, and continuing during the year 1949, the sum of Five Hundred Dollars*225 ($ 500.00) per month on the first day of each month; and will also pay, or cause to be paid to her, the difference between Three Hundred Seventy Five Dollars ($ 375.00) per month and Five Hundred Dollars ($ 500.00) per month for the last six months of 1948 and for the month of January, 1949, same being to the extent herein provided, an alteration and modification of the Five Hundred Dollars ($ 500.00) per month to be paid, as referred to and provided in the agreement of December 11, 1947.
4. Thereafter, and during each year that J. Sidney Thompson's said earnings equal or exceed Twenty Thousand Dollars ($ 20,000.00), the said Five Hundred Dollars ($ 500.00) per month will be continued as provided in said original agreement of December 11, 1947.
*280 The remaining portion of the August 6, 1948, agreement related principally to substitution of securities for those originally posted securing payment of the $ 10,000 in cash as originally provided.
In a January 14, 1950, letter signed by J. S. Thompson and presumably directed to Corinne Pope Thompson it is stated in part as follows:
(2) At this time I agree to pay you one hundred sixty-seven and 69/100 ($ 167.69) Dollars, which *226 represents the underpayment to you based on my net income for 1949. I also agree to pay to you at this time three hundred and seventy-five dollars. * * *
(3) The $ 375.00 is for the month of January 1950. I am to pay you not later than the 10th of each month hereafter the sum of thirty percent (30%) of my net earnings for the preceding month, provided that if my net earnings for January 1950 are in an amount of which 30% is more or less than $ 375.00 I will pay you the difference between $ 375.00 and the 30% for January 1950 on not later than March 10, 1950, and if less, adjustment will be made in payment made not later than March 10, 1950.
The other agreements between us stay in full force and effect. * * *
It is further understood that in no event shall the 30% agreed on exceed the amounts set out in the original agreement for being the maximum amount of six thousand dollars per year.
During the years 1949, 1950, and 1951, John paid to Corinne the sums of $ 5,100, $ 2,850.63, and $ 425, respectively, under the terms of the above settlement agreements. In their joint return for the year 1949, John and Charlotte deducted the amount of $ 5,100 paid in that year from their gross*227 community income. This deduction was claimed on page 3 of the return and explained as "Separate maintenance payments to former wife, Corinne Pope Thompson, Dallas, Texas."
In disallowing the $ 5,100 deduction the respondent stated in the notice of deficiency:
(a) As in the prior year, it is held that the amount deducted as separate maintenance payments to former wife, Corinne Pope Thompson, is not deductible for income tax purposes as alimony since it is the amount of payments on a note which was a part of a property settlement with Corinne Pope Thompson.
Corinne did not include in gross income as reported for the years 1949, 1950, and 1951 the sums she received in those years from John. Reference was made in her returns, however, to certain moneys received from him which were not considered by her to be income due to the explanation that such receipts were "in the form of installment distributions to her of her share of community property as set forth in judgment of property settlement" in the divorce proceedings.
The Commissioner examined the 1949, 1950, and 1951 returns of Corinne and issued his notices of deficiency to her for the years 1949, 1950, and 1951 with the explanation*228 that the respective sums received by her "pursuant to a decree of divorce constitute income taxable to you."
In their joint return for 1950, John and Charlotte claimed as a community deduction the sum of $ 2,850.63, the item being described *281 on page 3 of the return as "separate maintenance payments to former wife, Corinne Pope Thompson, Dallas, Texas," as the explanation had been for 1949. In their 1951 joint return John and Charlotte computed their tax by use of the standard deduction in lieu of itemizing deductions on page 3 of Form 1040 as in the 2 previous years. Otherwise their 1951 return made no reference to the sum of $ 425 paid Corinne under the settlement agreement.
For a year or so preceding the divorce, John had been earning commissions from the corporations referred to in the settlement agreement somewhat in excess of $ 50,000 annually. His adjusted gross income reported for the year 1949 was just above $ 16,000.
OPINION.
Petitioners in these consolidated proceedings take opposing positions. Corinne contends that the payments made to her by John pursuant to the agreement were in consideration for the transfer to John of her vested interest in the community*229 property and as such were not includible in her income pursuant to section 22 (k). 1*230 John argues that the payments were "in the nature of alimony" or "in lieu of alimony" and hence deductible by him under section 23 (u). 2 The Commissioner, in effect, is neutral. He has filed no briefs and stands on his determinations as set forth in our findings of fact.
We agree with Corinne. The most convincing evidence in the record is the written agreement itself. In terms it is an out-and-out division or settlement of the property interests of the parties. Nowhere does it speak or refer to support, maintenance, or alimony or a waiver of such rights by Corinne. She had little knowledge of the items comprising the community property or their value and in that respect relied upon the representations made by John. The main items to which the payments in controversy were related were the stocks in four corporations which*231 the community controlled. From *282 those corporations John was receiving approximately $ 52,000 a year in commissions. The agreement makes specific reference to those stocks and the desirability, from the standpoint of maintaining their value, of transferring them to John who was the member of the community possessing business experience. Further, the agreement recites that the value of the stocks is "calculable" and that "one half of the value thereof" should be "distributed and paid over to Corinne." The value of that one-half interest in the stocks was fixed in the agreement, presumably on the basis of representations made by John, at $ 138,000, and a note in that amount was given to Corinne. It is payments made on that note which are here in issue. We think the payments received by Corinne were plainly in consideration of her property interest in the stocks and were not in lieu of alimony or in the nature of alimony.
We recognize that the written agreement is not in and of itself necessarily determinative of the issue and that evidence extraneous of the agreement must be examined in order to arrive at the proper answer. This was done in Thomas E. Hogg, 13 T. C. 361,*232 Floyd H. Brown, 16 T. C. 623, and Julia Nathan, 19 T.C. 865">19 T. C. 865, all relied on by John, in each of which the Court concluded that the payments there involved were really for support or in lieu of alimony rather than consideration for the transfer of property, and were either deductible by the husband or taxable to the wife.
We think those cases are distinguishable on their facts and for the following reasons:
In Hogg the Court said that there was no calculation of the amount of property to which the wife might be entitled and that such amount was not a factor in arriving at the settlement terms. Furthermore, the husband there had been paying the wife $ 1,200 per month as support pending the agreement and the Court construed the settlement negotiations as having as their primary consideration not community property division but the husband's willingness to continue those monthly payments.
In Brown the main item of the community property consisted mainly of drilling equipment which it was not feasible to divide. Furthermore, the community was heavily burdened by debt which the husband undertook to discharge, and the*233 wife received other community property which the Court thought could properly be deemed consideration for the transfer of her interest in the community property. The $ 500 monthly payments involved were therefore considered by the Court, not to be for property rights, but as consideration for the wife's waiver of support rights.
In Nathan no community property was involved, it was doubtful the wife had any interest in the husband's business, and the Court *283 concluded that it affirmatively appeared that the payments involved, part of which were for the support of children, were designed primarily for the wife's support.
Another case relied on by John is Scofield v. Greer, (C. A. 5) 185 F. 2d 551, affirming 89 F. Supp. 75">89 F. Supp. 75. There the monthly payments in question were to cease upon the wife's remarriage and "were in addition to her share of the community property."
We do not think the facts which formed the basis for the holdings in the above cited cases are present here. An attempt was made to supply them by John's oral testimony. He testified that during the settlement negotiations he had "Corinne's support*234 in mind"; that he estimated she would need $ 6,000 per year "to live on as she had been living and take care of doctor bills and things of that nature"; that he had a life expectancy of 23 years and that the $ 138,000 face amount of his note was arrived at by multiplying $ 6,000 by 23. We are not impressed by this testimony and do not believe that what John "had in mind" played an important part in the negotiations. Corinne was the only other witness. She testified that she had never heard anything about the $ 6,000 per year figure; that John had never said anything to her about furnishing her support and that she considered the $ 138,000 to represent her share of the value of the community stocks and that that figure had been stated to her by John.
There was also testimony by John that he estimated his net worth at about the time of the settlement agreement to be about $ 66,000. This testimony was not corroborated. It was simply an estimate of his own net worth and we do not see how it can be taken as in any way diminishing the effect of the recitations in the agreement that the value of one-half the stocks was calculated at $ 138,000. The latter figure is further substantiated*235 by that portion of the agreement which contains provisions as to what should happen if John should dispose of his stocks or if the businesses should be terminated prior to the time the $ 138,000 obligation was discharged. It was there provided what should happen in the event that "the sale price or the value of any things or properties received shall be in a sum in excess of Two Hundred and Seventy-six Thousand Dollars ($ 276,000.00) * * *." This certainly indicates to us that it was thought the value of the stocks was at least $ 276,000 -- one-half of which, of course, is $ 138,000, the figure John agreed to pay Corinne.
From the foregoing it appears to us that the values of the community property were calculated and that those values, rather than what Corinne might need or be satisfied with in the form of support or alimony formed the basis of the settlement agreement. John's thoughts about support, even if we accept his testimony in that regard, were not disclosed to Corinne, and so far as she was concerned, *284 her interest in the transaction was to receive her fair share of the value of the community property. We find no facts of record from which we can infer that the*236 parties intended the payments to be made under the agreement to be anything other than consideration for Corinne's community property.
After carefully considering all the facts of record, we conclude that the transaction amounted to a sale or transfer of Corinne's one-half interest in the stocks for $ 138,000 and that the sums paid to her were in consideration of her community interest therein and did not represent payments for support or in lieu of alimony. Accordingly, the amounts in controversy were not deductible by John and should not be included in Corinne's income.
In concluding, it is pointed out that no question as to whether Corinne realized income taxable as capital gain has been raised in this proceeding and none is decided. See Jessie Lee Edwards, 22 T.C. 65">22 T. C. 65.
Decision will be entered for the respondent in Docket No. 44333.
Decision will be entered for the petitioner in Docket No. 47743.
Footnotes
1. SEC. 22.GROSS INCOME.
(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 the 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. * * *↩
2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(u) Alimony, Etc., Payments. -- In the case of a husband described in section 22 (k), amounts includible under section 22 (k) in the gross income of his wife, payment of which is made within the husband's taxable year. If the amount of any such payment is, under section 22 (k)↩ or section 171, stated to be not includible in such husband's gross income, no deduction shall be allowed with respect to such payment under this subsection.