*105 Decisions will be entered under Rule 50.
Held, that $ 10,720 which Harold W. Ross paid his divorced wife, Jane C. Grant, in 1946 was an amount which represented arrearages in alimony payments which Ross had agreed to make to his wife under a separation agreement entered into by the parties April 1, 1929. Held, further, the separation agreement was incident to the divorce which followed soon afterward and the payments which Ross was to make to his divorced wife were "periodic" payments within the meaning of the applicable statute. Under such state of facts the $ 10,720 in question was taxable income to Grant under section 22 (k), I. R. C., and was deductible by Ross under section 23 (u), I. R. C.
*1014 These cases have been consolidated.
In Docket No. 36116, Jane C. Grant, petitioner, a deficiency of $ 7,227.70 for the year 1946 has been determined. The deficiency is due to four adjustments which the Commissioner made to the net income as disclosed by the petitioner's return. These adjustments were:
| (a) Salary income | $ 8,576.92 |
| (b) Contributions | 500.00 |
| (c) Medical expenses | 285.12 |
| (d) Alimony | 10,720.00 |
Adjustments (a), (b), and (c) are not contested. Adjustment (d) which is contested by an appropriate assignment of error is explained in the deficiency notice as follows:
(d) It is held that the amount of $ 10,720.00 received by you from your former husband, Mr. Harold W. Ross, in the year 1946, constitutes taxable income within the purview of Section 22 (k) of the Internal Revenue Code.
In Docket No. 36148, Estate of Harold W. Ross, deceased, petitioner, a deficiency of $ 7,312.73 for the year 1946 has been determined. The deficiency is due to two adjustments which the Commissioner made to the net income as disclosed by the return of Harold W. Ross. These adjustments were:
| (a) Alimony | $ 10,720.00 |
| (b) Attorney's fees | 1,500.00 |
*107 The petitioner does not assign error as to adjustment (b). Adjustment (a) which is contested by an appropriate assignment of error is explained in the deficiency notice as follows:
(a) It is held that you are not entitled to a deduction in the amount of $ 10,720.00, in the taxable year 1946, under sections 22 (k) and 23 (u) of the Internal Revenue Code, covering payments of alimony.
FINDINGS OF FACT.
The facts in these proceedings have been stipulated and are found as stipulated. They may be summarized as follows:
*1015 Petitioner Jane C. Grant (hereafter referred to as Grant) resides in New York City. Her return for the period here involved was filed with the collector for the first district of New York.
Petitioners Julius B. Baer and Milton Greenstein are the duly qualified and acting executors under the last will and testament of Harold W. Ross (hereinafter referred to as Ross), whose address at his death on December 6, 1951, was Wire Mill Road, Stamford, Connecticut. The return for the period here involved was filed by Ross with the collector in Hartford, Connecticut.
Grant and Ross were married in the city of New York on March 27, 1920. On August 6, 1928, Grant and*108 Ross permanently separated. On April 1, 1929, Grant and Ross entered into a separation agreement. The separation agreement required Ross to transfer to Grant 340 shares of common stock of F-R Publishing Company and provided that, if in any year the dividends on these shares were less than $ 10,000, Ross would pay the difference to Grant. Ross' obligation to make such payments was to continue during the joint lives of the parties. The separation agreement also provided that Ross should pay premiums and otherwise maintain for the benefit of Grant as irrevocable beneficiary on a policy in the Aetna Life Insurance Co., insuring the life of Ross for $ 50,000. Grant agreed that if she survived Ross she would accept the proceeds of the policy in full satisfaction of her rights against Ross' estate under the separation agreement or otherwise. The separation agreement contains no reference to any divorce proceedings instituted by either party and its operation was not dependent on whether either party obtained a divorce.
On April 1, 1929, Ross executed an indenture of trust with R. Hawley Truax as trustee for the benefit of Grant as required by the separation agreement. Pursuant to *109 this indenture of trust, Ross transferred to the trustee 75 shares of the common stock of F-R Publishing Company to be held during the lifetime of Grant, or until she received the full proceeds of the above-mentioned life insurance policy. The trustee was required to pay to Grant out of the corpus of the trust any amounts required to be paid by Ross under the terms of the separation agreement and which Ross failed to pay.
On or about May 6, 1929, which was 35 days after the signing of the separation agreement, Grant instituted an action for a judgment of absolute divorce from Ross in the Supreme Court of the State of New York for the County of Westchester. On June 15, 1929, an interlocutory judgment of divorce in favor of Grant was entered in the action. The judgment contains no reference to the separation agreement and makes no provision for alimony or other payments to Grant. The judgment of divorce by its terms and according to law became final on or about September 20, 1929. In several of the years between 1929 and 1945, both inclusive, Ross failed to pay or cause to be paid *1016 to Grant all the sums required under the terms of the separation agreement.
On May 13, 1946, *110 Grant and Ross entered into an agreement which provides in part as follows:
WHEREAS, * * * the parties desire to supersede as of January 1, 1946, said separation settlement agreement of April 1, 1929,
NOW, THEREFORE, in consideration of the mutual promises herein provided for and set forth and for other good and valuable considerations, the parties hereto covenant and agree as follows:
1. This agreement is in lieu of and supersedes as of January 1, 1946 all other previous agreements between the parties, and Grant shall have no claim or claims of any kind upon Ross and Ross shall have no further obligations to Grant to make any payments or disbursements to or for her use or benefit except as herein expressly provided.
* * * *
7. Ross agrees upon the execution of this instrument to pay to Jane Grant the sum of Ten thousand seven hundred and twenty ($ 10,720) Dollars, the amount due and owing to her up to January 1, 1946 pursuant to the separation settlement agreement dated April 1, 1929 and also to pay her attorney the sum of $ 1,500.
On the execution of the agreement of May 13, 1946, Ross paid to Grant the sum of $ 10,720. Thereafter Ross neither paid nor caused to be paid any additional*111 sums to Grant; he did, however, continue to pay the premiums on the life insurance policy referred to in the agreements of April 1, 1929 and May 13, 1946.
Neither Grant nor Ross at any time instituted any proceeding to amend the final decree of divorce to incorporate the provisions of the agreement of May 13, 1946.
During the years 1947 to 1951, both inclusive, Grant received as dividends on the shares of F-R Publishing Company transferred to her under the provisions of article I of the separation agreement of April 1, 1929, the following amounts:
| Year | Amount |
| 1947 | $ 8,262 |
| 1948 | 8,262 |
| 1949 | 8,667 |
| 1950 | 9,630 |
| 1951 | 9,630 |
Ultimate Findings of Fact.
The separation agreement executed by Ross and his divorced wife, Grant, in April 1929 was incident to a divorce. The payments required of Ross under this separation agreement constituted periodic payments. The payments required of Ross under this separation agreement were in discharge of a legal obligation incurred by the husband because of the marital relationship. The amount of $ 10,720 paid in 1946 pursuant to this separation agreement constituted arrearages of periodic alimony.
*1017 OPINION.
As has been disclosed*112 in our preliminary statement, the Commissioner has determined that the $ 10,720 which Grant received in 1946 from her husband, Harold W. Ross, constituted taxable income to her under the provisions of section 22 (k) of the Code. Notwithstanding the foregoing determination, the Commissioner has also determined that as to Harold W. Ross the $ 10,720 payment made by him to Grant in 1946 was not deductible under section 23 (u) of the Code. The Commissioner concedes that one or the other of his determinations is wrong and that both of them cannot stand. The applicable sections of the Code are printed in the margin. 1
*113 Petitioner Grant states the issue in her case as follows:
The sole issue is the taxability, under § 22 (k) of the Internal Revenue Code, of a lump sum of $ 10,720 received in 1946 by petitioner Jane C. Grant from Harold W. Ross, from whom she had been divorced seventeen years previously.
In support of her contention that the issue should be decided in her favor she urges:
I. The $ 10,720 received by Grant from Ross in 1946 was not a "periodic" payment.II. The $ 10,720 received by Grant from Ross in 1946 was not made under the divorce decree or under a written instrument incident to such divorce.Petitioner, the estate of Harold W. Ross, deceased, states the issue in its case as follows:
Did the aggregate amount of $ 10,720 which was paid by Ross in 1946 to his divorced wife Grant under a written instrument constitute periodic payments in discharge of a legal obligation which, because of the marital relationship, was incurred by Ross under a written instrument incident to a divorce?
Petitioner, the estate of Ross, contends that under the facts which have been stipulated this question must be answered in the affirmative.
We shall first take up the question as to whether the*114 payment in 1946 of $ 10,720 by Ross to his divorced wife Grant was made pursuant *1018 to a written instrument incident to divorce within the meaning of section 22 (k). Concededly, the payment was not made in pursuance of the decree of divorce because the decree of divorce made no mention of alimony. Of course, if the separation agreement executed by Ross and Grant in April 1929 was not "incident" to a divorce, then the payments made by Ross under the provisions of such agreement are not deductible by him under section 23 (u) and are not taxable to Grant under 22 (k), even though periodically made. An agreement may be incident to a divorce though no reference to the divorce is incorporated therein.
In Bertram G. Zilmer, 16 T. C. 365, a separation agreement was held to be incident to divorce where divorce was not mentioned in the agreement on the advice of counsel that it might cause a charge of collusion. It is well to note in that case that an action for divorce was not started until a year and one-half after the agreement. Here the action for divorce was started after a period of 35 days following the separation agreement. It is now well*115 settled that an agreement may be incident to a divorce even though the decree is silent on the subject of alimony and fails to incorporate specifically the separation agreement or even to refer to it. Izrastzoff v. Commissioner, 193 F. 2d 625, affirming 15 T.C. 573">15 T. C. 573; Jessie L. Fry, 13 T. C. 658; George T. Brady, 1192">10 T. C. 1192; Robert Wood Johnson, 10 T.C. 647">10 T. C. 647; Tuckie G. Hesse, 7 T.C. 700">7 T. C. 700. It is equally well settled, we think, that a mutually coexistent intent for divorce upon execution of the agreement is not a requirement for inclusion by the wife and deduction by the husband under Code section 22 (k) and section 23 (u). In Izrastzoff v. Commissioner, supra, the court states:
* * * Legislative emphasis upon a mutually coexistent intent for divorce is not to be assumed in the absence of an expressed requirement, particularly in view of the well understood danger that an appearance of collusion between the parties might prevent divorce in many jurisdictions. Such*116 legislative history as is available stresses only the manifest fairness of charge to the wife and deduction by the husband of payments not only for alimony, but also for separate maintenance provisions "in the nature of or in lieu of alimony or an allowance for support." * * *
We hold that the separation agreement executed by Ross and Grant in April 1929, followed by the institution of an action for divorce 35 days thereafter, was incident to a divorce. Cf. Mahana v. United States, 88 F. Supp. 285">88 F. Supp. 285.
Our next inquiry is, was the $ 10,720 received by Grant from Ross in 1946 "periodic payments (whether or not made at regular intervals)" within the meaning of section 22 (k), I. R. C.? Respondent contends that under the stipulated facts that question must be answered in the negative. If respondent is correct in that contention, *1019 then our decision must be that the $ 10,720 in question is not taxable to Grant under section 22 (k), and is not deductible by Ross under section 23 (u). We think the question as to whether the $ 10,720 payment here in question was a periodic payment within the meaning of the statute depends largely upon whether the*117 original payments to be made by Ross to Grant under the separation agreement of April 1929 were periodic payments within the meaning of the statute. We think they were.
The separation agreement required Ross to transfer to his divorced wife certain specified securities. If the dividends on these securities failed to yield $ 10,000 in any one year, Ross agreed to make good the difference between the actual dividend yield and $ 10,000, annually. The payments required were "periodic payments" covered by section 22 (k) as they were conditioned on specified objective standards. In Mahana v. United States, supra, the Court of Claims ruled on the specific point holding that income paid by a husband to make up a deficit in the required annual yield of certain trusts was taxable to the divorced wife under section 22 (k) as periodic payments. It is clear that the payment of $ 10,720 by Ross to Grant in 1946 constituted accrued arrearages of periodic alimony which Ross owed to Grant and meets the requirements of the statute.
In 1946, because of a change in circumstances, both parties having remarried, Grant, in an agreement dated May 13, 1946, released*118 Ross of all future alimony payments. It was specifically stipulated in that agreement that Ross was not to be released from any liability as to arrearages of alimony then due and owing. The first paragraph released Ross of any further obligations except as expressly provided in paragraph 7. This latter paragraph provides:
7. Ross agrees upon the execution of this instrument to pay to Jane Grant the sum of Ten thousand seven hundred and twenty ($ 10,720.) Dollars, the amount due and owing to her up to January 1, 1946 pursuant to the separation settlement agreement dated April 1, 1929 * * *.
The sum of $ 10,720 was agreed upon by both parties as the correct arrearage figure after a computation of all the accumulated arrearages under the 1929 agreement. The amount constitutes the total arrearage of the difference between the dividend yield and $ 10,000 annually over several years up to 1946, in the exact sum, no more, no less. It is obvious that under this 1946 agreement Ross did not resume nor assume any obligation of which he had been previously relieved. Nor can the payments be considered a "lump sum settlement" as no new liability was created by such agreement. The sum of *119 $ 10,720 paid by Ross in 1946 to his former wife pursuant to the separation agreement constituted the aggregate of the required periodic payments. Since arrears constitute periodic payments if paid when due, receipts of *1020 such arrearages in a lump sum are regarded as receipt of periodic payment. Elsie B. Gale, 13 T. C. 661, affd. (C. A. 2) 191 F.2d 79">191 F. 2d 79; Estate of Sarah L. Narischkine, 1128">14 T. C. 1128, affd. (C. A. 2) 189 F.2d 257">189 F. 2d 257. In Estate of Sarah L. Narischkine, supra, we said:
Petitioners on brief have not argued the point of whether the arrearages constituted a "principal sum" or "periodic" payment. Had the deceased wife received the arrearages prior to her death, they would have constituted taxable income to her if characterized as periodic payments, but would not have been taxed to her if characterized as a lump or principal sum payment. Sec. 22 (k), I. R. C. To dispel any doubts about the grounds for petitioners' claim, we sustain the respondent's position that arrearages retain their original character. Since the*120 arrears here would have constituted periodic payments had they been paid when due, the receipt of such arrears, even though in a lump or aggregate sum, must be regarded as the receipt of a periodic payment. * * * Furthermore, our own decision in Elsie B. Gale, 13 T. C. 661, * * * treated increased alimony payments for prior years as periodic payments, even though the entire amount was paid in the taxable year. [Emphasis added.]
We think it is clear that under the rationale of the Narischkine and Gale cases, both supra, the payment made by Ross to Grant of $ 10,720 in 1946 was a "periodic" payment within the meaning of the statute. We so hold.
What we have decided above means that the $ 10,720 in question is taxable income to petitioner Grant under the provisions of section 22 (k), I. R. C., and it represents a deductible item to petitioner, estate of Harold W. Ross, under section 23 (u), I. R. C.
Decisions will be entered under Rule 50.
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. * * *
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 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.