1948 U.S. Tax Ct. LEXIS 186">*186 Decision will be entered under Rule 50.
Income -- Alimony Payments -- Periodic v. Installment -- Principal Sum -- §§ 22 (k), 23 (u). -- Payments consisting of a percentage of the husband's annual net income for five years were "periodic" and not taxable to the husband. There is in such case no principal sum.
10 T.C. 834">*834 The Commissioner determined a deficiency of $ 2,508.58 in income tax for the calendar year 1943. The only issue for decision is whether the Commissioner erred in failing to allow deductions for 1942 and 1943 for amounts which the petitioner paid to his divorced wife.
FINDINGS OF FACT.
The petitioner filed his individual return for 1943 with the collector of internal revenue for the first district of Illinois.
The petitioner and Grace, his wife, entered into a written agreement on May 8, 1942, under which the petitioner agreed to pay to Grace for a period of five years beginning May 8, 1942, 33 1/3 per cent of the first $ 12,000 and 25 per cent of the excess, if any, of his annual net income over $ 12,000. He was to pay $ 46.15 each week1948 U.S. Tax Ct. LEXIS 186">*187 and to make up the difference as soon as practicable after the end of each year. "Net income" was defined in the instrument. A suit for divorce was pending at that time and the agreement was incident to the divorce.
The petitioner at that time was employed by Metal Specialties Manufacturing Co., of which he was president and from which he was receiving an annual salary of $ 12,000, plus a bonus of 6 per cent of the net profits of the company. The prospects of the company at that 10 T.C. 834">*835 time were good, and indicated that the petitioner would receive a substantial bonus, at least as long as war production continued.
The provision in regard to payment of a percentage of the petitioner's salary to Grace for five years was inserted in the agreement of May 8 at her insistence, because she wanted to participate in the bonus which she expected he would receive from his employer. The petitioner had been receiving a salary of at least $ 12,000 a year for several years prior to 1942. He owned one-third of the stock of the company. Most of the stock of the company was owned by members of his family.
The petitioner and Grace were divorced on June 9, 1942. The decree of divorce recited1948 U.S. Tax Ct. LEXIS 186">*188 that the parties had theretofore entered into an agreement settling their property rights and making provision for the support and maintenance of the wife, and the court was not asked to pass upon that agreement.
The petitioner made payments after the decree of divorce during 1942, in the total amount of $ 2,792.20, and payments of $ 3,554.92 during 1943, under the agreement of May 8, 1942. He deducted those amounts on his income tax returns for 1942 and 1943, but the deductions were disallowed, with the explanation that they were not allowable under section 23 (u) of the Internal Revenue Code.
The stipulation is incorporated herein by this reference.
OPINION.
Section 23 (u) of the Internal Revenue Code, enacted after the date of the present agreement, allows a husband a deduction of amounts includible under section 22 (k) in the gross income of his wife, payment of which was made within the husband's taxable year. Section 22 (k) provides that there shall be included in the gross income of a wife who is divorced from her husband under a decree of divorce "periodic payments (whether or not made at regular intervals) received subsequent to such decree in discharge of * * * a legal1948 U.S. Tax Ct. LEXIS 186">*189 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 * * *." It further provides that: "Installment payments discharging a part of an obligation, the principal sum of which is, in terms of money or property, specified in the decree or instrument shall not be considered periodic payments for the purposes of this subsection; except that an installment payment shall be considered a periodic payment for the purposes of this subsection if such principal sum, by terms of the decree or instrument, may be or is to be paid within a period ending more than 10 years from the date of such decree or instrument * * *."
10 T.C. 834">*836 It is conceded that the payments were made under the agreement, the agreement was incident to the divorce, the payments were made subsequent to the decree, and they were made in discharge of a legal obligation which, because of the marital relationship, was imposed upon the petitioner under the written instrument. The only difference between the parties is that the petitioner contends the payments made by him to Grace during the taxable years1948 U.S. Tax Ct. LEXIS 186">*190 were "periodic payments," whereas the Commissioner contends that they were "installment payments" within the meaning of section 22 (k). The problem is difficult and little help has been found.
The Commissioner argues that there must be uncertainty as to the total amount to be paid and indefiniteness as to the length of the period during which the payments are to be made, in order that the payments may be classified as "periodic" and, conversely, the two requisites of "installment payments" are certainty as to the amount and definiteness as to the period. Those "requisites" are not found in the statute, the regulations, or the legislative history of the provisions. He also argues that a lump or principal sum is specified wherever the total amount to be paid under the decree or instrument can be calculated by a formula. That argument would carry him too far. If a husband were required to pay $ 200 per month for life the total amount could be calculated by the use of a formula involving mortality tables, yet such payments would clearly be periodic and not installment payments. The total payments to be made in the present case could not be as satisfactorily calculated in advance1948 U.S. Tax Ct. LEXIS 186">*191 because there was no means of determining what the "net income" of this petitioner might be. The Commissioner argues, however, that a lump sum is specified in this case because at the end of five years the exact amount to be paid will be known. That argument also carries too far, because eventually all uncertainties in every case will be resolved by the passing of time. No aid by analogy develops from consideration of the provision of 22 (k) making even lump sums payable in ten or more years taxable to the wife.
The agreement of the parties in this case fixed no principal sum and it was impossible to know in advance how much the petitioner would have to pay his wife. She was not content to receive a lump sum, but wanted to share in his earnings. These payments do not come within the description of installment payments contained in section 22 (k). All other payments are to be considered as periodic payments and taxable to the wife rather than to the husband. The period of five years fixed by the agreement is not sufficient, in view of the uncertainty as to the amount, to make these payments taxable to the husband under sections 22 (k) and 23 (u). Cf. Roland Keith Young, 10 T.C. 724.
1948 U.S. Tax Ct. LEXIS 186">*192 Decision will be entered under Rule 50.