*677 Where a note is given by a husband to his wife to induce her to dismiss her pending suit for divorce and return with her children and resume marital relations with him, interest paid thereon to the wife is properly deducted from the husband's gross income as interest paid on indebtedness.
*580 This proceeding involves a redetermination of asserted income tax deficiencies for the calendar years 1927, 1928, and 1929. The Commissioner disallowed a deduction of $6,000 for each of the years in question which petitioner claims was interest paid on indebtedness. The facts were stipulated, and, so far as we deem them material, are as follows.
FINDINGS OF FACT.
R. Fred Vogel and Edna R. Vogel were married June 6, 1917. They remainded husband and wife until his death July 8, 1930. Petitioner appears here as executor of the estate of R. Fred Vogel. February 13, 1923, Edna R. Vogel sued her husband for divorce in the *581 Superior Court of Los Angeles County, California, charging cruelty and habitual intemperance, As an inducement to get his wife*678 to withdraw her suit for divorce and resume marital relations with him, he offered to convey to her certain real estate and to execute and deliver to her his promissory note in the sum of $100,000, payable 10 years after date, with interest at the rate of 6 percent per annum, payable monthly. His offer was accpted. The divorce action was dismissed. Marital relations were resumed. The note was made payable to Edna R. Vogel or order, and was dated June 4, 1924. It contained the following language in addition to that usually found in promissory notes:
This note is made and is accepted by the payee upon the agreement and understanding that the same is not negotiable, and she shall not make any transfer or incumbrance of the same. Furthermore, that the obligation evidenced by this note shall not be enforceable by any transferee of pledgee.
Contemporaneously with the execution of the note, R. Fred Vogel executed the following instrument:
Los Angeles, California,
June 4, 1924.
Referring to the facts that I have this day made and delivered my deed in favor of my wife, Edna R. Vogel, conveying to her, as her sole and separate property Lot 15, Block "H", Westminster Place, *679 as per map recorded in Book 9, Page 61, of Maps, Records of Los Angeles County, California, and have this day made and delivered to her my promissory note in her favor, payable ten years from this date, for the principal sum of One hundred thousand dollars ($100,000.00), together with interest at the rate of six per cent (6%) per annum;
I hereby declare and acknowledge the consideration for said deed and said note was the promise of my wife to cause her counsel to cooperate with my counsel in procuring, as quickly as practicable, a dismissal, without costs to either party, of the action against me for divorce commenced by my wife and now pending in the Superior Court of said county, also her promise to return with our children as quickly as practicable to my home and in good faith resume marital relations with me; also declare that my wife has not made any other promise as an inducement for the giving of either such deed or such note.
[Signed] R. FRED VOGEL.
January 31, 1927, Edna R. Vogel instituted an action for separate maintenance against her husband in the same court in which she had filed her action for divorce, charging cruelty and intemperance on the part of her husband. *680 She alleged the filing of the divorce proceedings on the grounds stated; that her husband offered to convey to her certain real estate and to execute and deliver to her the note for $100,000 if she would dismiss her action for divorce and resume marital relations with him; that, relying on her husband's *582 assurance that he would cease the use of intoxicating liquors and conduct himself in a proper and becoming manner, and believing he would fulfill such assurances, she dismissed her suit for divorce and with her children returned to her husband's home on or about June 4, 1924, and thereafter resumed marital relations with him.
March 10, 1927, R. Fred Vogel filed his answer to the separate maintenance action, in which he set up a prior property settlement with his wife, alleged the execution and delivery to her of the deed to the property and the $100,000 promissory note in question given at the time of the dismissal of her suit for divorce and resumption of their marital relations, and asserted that by reason thereof his wife was not entitled to maintenance and support.
Upon conclusion of the trial of the separate maintenance action, the court made the following finding*681 in its decree with reference to the note:
That it is true that about the 11th day of February, 1924, as set forth in the complaint filed herein, plaintiff did institute an action for divorce, but it is not true that defendant only persuaded plaintiff to dismiss said suit and return to live with him upon the execution of a promissory note for $100,000.00 and the conveyance of the Manhattan Street property to her as set forth in the answer to said complaint, but the Court finds that the execution of said promissory note of $100,000.00 and the conveyance of said Manhattan Street property was made upon considerations and under conditions set forth in the complaint of plaintiff on file herein.
The court decreed:
That the above entitled plaintiff is the absolute and unconditional owner, and entitled to possession as her sole and separate property, of that certain note referred to in said complaint, heretofore executed by said defendant in favor of said plaintiff in the sum of $100,000, dated June 4, 1924, and that said note represents an unconditional and legal obligation of said defendant to said plaintiff, and that said plaintiff is entitled to the payment of principal and interest*682 on said note, as provided for therein, without reference to the payments hereinafter provided to be made by said defendant to said plaintiff.
and further:
That hereafter, without regard to plaintiff's property as aforesaid, or any other property she may hereafter acquire, said defendant pay to said plaintiff, on the first day of each and every month during the remainder of his natural life, or until any earlier termination of the marriage between the parties hereto, beginning as of April 1st, 1928, the sum of $700.00 for her permanent maintenance and support, and that said defendant, or in case of his death his executors, or administrators, shall pay beginning as of April 1st, 1928, to said plaintiff until the younger of said children shall attain his majority, the additional sum of $300.00 a month for the maintenance and support of her aforesaid two children referred to in said complaint, provided, however, that if by defendant's will, or by a trust created by him, ample provision *583 in not less than the foregoing amount is made for the said children's support during their minority, such allowance shall terminate on defendant's death.
* * *
That the defendant is*683 further required to pay, for the plaintiff's maintenance and support, the additional sum of Twelve Thousand ($12,000.00) Dollars, one-fourth thereof to be paid on the signing of this decree, one-fourth thereof on the 1st day of May, 1928, one-fourth thereof on the 1st day of June, 1928; and one-fourth thereof on the 1st day of July, 1928.
R. Fred Vogel paid his wife for each of the calendar years 1927, 1928, and 1929 the sum of $6,000 "as interest" on the note, which amounts were deducted from gross income by the taxpayer for the respective years as interest paid on indebtedness. The Commissioner did not allow the deduction in making his computation of deficiencies on the grounds that they were personal, living, or family expenses.
It was agreed between the parties that if the sums of $6,000 paid as interest for each of the years in question were allowed as deductions the deficiencies and overassessments of income taxes of R. Fred Vogel for each of the said years would be as follows:
| 1927, deficiency | $905.10 |
| 1928, deficiency | 115.27 |
| 1929, overassessment | 17.49 |
The question for our determination is whether or not these sums so paid as interest are properly*684 deductible.
OPINION.
ARNOLD: The year 1927 is controlled by the Revenue Act of 1926, and the years 1928 and 1929 by the Revenue Act of 1928. However, the provisions applicable are the same in both acts. Petitioner, in claiming the deductions, insists the amounts in question fall within section 214(a)(2) of the Revenue Act of 1926, and section 23(b) of the Revenue Act of 1928: "All interest paid or accrued within the taxable year on indebtedness."
Respondent, in denying the deductions, claims the payments in question fall within section 215(a)(1) of the Revenue Act of 1926, and section 24(a)(1) of the Revenue Act of 1928:
(a) General rule. - In computing net income to deduction shall in any case be allowed in respect of -
(1) Personal, living, or family expenses.
There was a rift in the marriage relations. Edna R. Vogel sued her husband for divorce on February 13, 1923. As an inducement to get his wife to dismiss her divorce proceeding and return to him and resume marital relations, he offered to convey to her certain real *584 estate and execute and deliver to her the note for $100,000 with interest at the rate of 6 percent per annum payable monthly. She*685 accepted his offer. She dismissed her divorce action and returned to his home with her children and resumed marital relations with him on the assurance he would demean himself in a proper manner. He made the deed and delivered the note to her upon those conditions. There was no impediment in the law preventing them from contracting with each other the same as strangers. (Civil Code of California, sec. 158.) Agreements to renew conjugal relations and restore peace and harmony in family affairs are certainly not contrary to public policy.
The dismissal of her divorce action and resumption of marital relations with her husband was a valid consideration for the execution of the note; ; ; . See also cited cases in .
The Civil Code of California, section 1605, defines "consideration" as:
Any benefit conferred, or agreed to be conferred, upon the promisor, by another person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time*686 of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promise.
The execution of the note and the return and resumption of marital relations by the wife did not relieve the husband from his duty to maintain and support his wife. No conclusions can be reached nor any inference be drawn from the stipulated facts that at the time of the giving of the note by R. Fred Vogel to Edna R. Vogel it was in any way concerned with alimony or support and maintenance for Edna R, Vogel. On the same day the note was given, the maker, in the written instrument set forth in the stipulation of facts, declared and acknowledged that the consideration for the deed and note was the promise of his wife to cause her counsel to cooperate with his in procuring an early dismissal of the divorce proceeding and her promise to return with their children to his home and in good faith resume the marital relations with him and that she made no other promise or inducements for the giving of either the deed or the note.
Upon her return and the resumption of marital relations, R. Fred Vogel was as much under obligation to maintain and support his wife as if the note*687 had never been given. This conclusion is likewise justified by the court proceedings in the separate maintenance action. There the wife, in her complaint, alleged her husband offered to make the deed and execute the note and cease the use of intoxicating liquors if she would dismiss her divorce action and resume marital relations with him, and, relying upon such promises, she dismissed *585 her suit for divorce and with her children returned to her husband's home and resumed marital relations with him.
Her husband, in answering the separate maintenance suit, denied his wife was entitled to any maintenance or support, relying on the execution and delivery of the deed and note to her as relieving him from that obligation. The court decreed the note was executed upon considerations and under conditions set forth in the complaint; that it was the sole and separate property of Edna R. Vogel and she was the unconditional owner of it; that it represented an unconditional and legal obligation of R. Fred Vogel; and that Edna R. Vogel was entitled to the payment of principal and interest as provided in the note. The decree then awarded specific sums for support and maintenance*688 of the wife, "Without regard to plaintiff's property as aforesaid."
The provisions in the note that it should not be assigned or transferred and that it should not be enforceable by any transferee did not affect its validity or enforceability in the hands of the payee, Edna R. Vogel. It represented an indebtedness due from R. Fred Vogel to his wife and was based on a good and valuable consideration.
By the terms of the note, should default be made in the payment of the monthly installments of interest when due, payee could sue and recover, and, should default in payment of interest continue for one year, the whole sum of principal and interest, at the option of the payee, became immediately due and payable and suit could then be maintained to recover both principal and interest due.
Having determined that the note was a valid subsisting obligation of R. Fred Vogel and that it was enforceable in the hands of Edna R. Vogel, and it being admitted that the sums in question were paid by R. Fred Vogel to Edna R. Vogel "as interest" on the note within the taxable years, it follows under the applicable statute that such sums are properly deductible.
*689 In the case of , cited and relied upon by the respondent, later affirmed in , what appears to be interest on a $150,000 note given in settlement of a claim for maintenance and support was held not deductible. However, in that case the note was part of an agreement which was founded on the legal duty of the husband to support his wife and children, and in which the interest was part of the sum to be paid for such maintenance and support. The note and agreement were construed together. The Board there held, in speaking of the deductibility of the amounts paid as interest, that the payments were intended by the parties to be in lieu of alimony, and that, as alimony is not founded in contract but grows out of an obligation imposed by law upon the husband, the interest payments were payable *586 as part of the agreement made in lieu of an alimony award and, therefore, were not deductible as interest on an indebtedness. Likewise, in affirming the Board, the Circuit Court of Appeals said: "The obligation did not lose the character of alimony when incorporated in the note."
We have an entirely different*690 situation here. The note here represents a contractual obligation that does not grow out of any legal duty of the husband to support his wife. There, the note was given in a proceeding where the family relation was severed and in settlement and release of any and all claims and demands of the wife imposed by law against the husband for alimony, maintenance and support, temporary and permanent. Here, the note was given to restore the family relation and dismiss the divorce proceedings. Here, after giving the note, the obligations of the husband to maintain and support his wife continued unaffected. There, that obligation ceased.
We, therefore, hold that petitioner is entitled to deduct $6,000 from his gross income for each of the years 1927, 1928, and 1929 as interest paid on indebtedness.
Decision will be entered under Rule 50.