*52 Decision will be entered under Rule 50.
In 1944 a decree of divorce granted in 1940 was modified by the court so as to award to petitioner an increase in her alimony for the years 1941, 1942, and 1943 in a sum specified in the amended decree. Held, the sum so received by petitioner in 1944 as increased alimony for prior years represented "periodic" payments within the meaning of
*662 Respondent has determined a deficiency in income tax for the calendar year 1944 in the amount of $ 14,133.74. The petitioner by appropriate assignment of error raises*54 the following issues:
(1) Whether the amount of $ 19,000 received by the petitioner in 1944 from her former husband as a result of the modification of a prior decree of divorce, constituted taxable income to the petitioner under
(2) Whether the petitioner is entitled to deduct, under
The facts stipulated by the parties are hereby found and incorporated in our findings of fact.
FINDINGS OF FACT.
The petitioner, Elsie B. Gale, is an individual residing in New York, New York. Her income tax return for the calendar year 1944 was filed with the collector of internal revenue for the third district of New York.
On May 6, 1940, in the State of New York, the petitioner and her then husband, Clarence A. Wimpfheimer, entered into a separation agreement which provided that the petitioner was to receive for her support and maintenance until her death or remarriage the amount of $ 666.67 per month. This agreement also specified that if in any year her husband's net income*55 was more than $ 28,000 the wife might apply to the Supreme Court of the State of New York for such increase in her alimony as to that court might seem just and proper. The separation agreement accorded the husband a similar privilege to seek a reduction in alimony should his income fall below $ 24,000. Wimpfheimer was to furnish petitioner in each year with a copy of his Federal income tax return after it had been filed by him. The agreement further provided that if the parties should be divorced the agreement was to remain in full force and effect and was not to be merged in any decree handed down. This agreement was executed by the parties incident to and in contemplation of a divorce.
In August 1940 the petitioner instituted an action for divorce against Wimpfheimer in the Supreme Court of the State of New York, New York County. An interlocutory judgment of divorce in favor of the petitioner was entered on November 25, 1940. As the interlocutory judgment failed to provide for the payment of alimony to the wife in accordance with the provisions of the separation agreement, *663 petitioner filed a motion in the Supreme Court of the State of New York, New York County, to*56 modify the report of the official referee and the interlocutory decree. From an adverse decision on this motion, the petitioner appealed to the Appellate Division, First Department, which reversed the order of the lower court and modified the decree to provide for the payment of alimony to the wife in the amount of $ 666.67 per month.
As a result of negotiations carried on between petitioner and her husband in 1941, the latter paid to petitioner additional alimony for 1940 in the sum of $ 2,000 and counsel fees of $ 400. The parties attempted, without success, to reach an understanding concerning the question of increased alimony for 1941 and 1942. Thereupon, and in August 1943 petitioner instituted a special proceeding in the Supreme Court of the State of New York against her former husband to secure an increase in alimony in accordance with the provisions of the separation agreement, which specified that she might apply for such increase whenever the husband's net income in any one year exceeded $ 28,000. Upon the defendant's motion, this action was dismissed by the court for lack of jurisdiction.
In October 1943 the petitioner made application to the Supreme Court of the State*57 of New York for an amendment and modification of the final judgment of divorce by increasing the alimony payment therein provided and praying that such increase be made retroactive to January 1, 1941. On June 19, 1944, the court entered an order granting the modification of the decree sought by the petitioner, increasing the amount of the alimony payable to her from and after July 1, 1944, to $ 1,500 per month. In addition, the court ordered:
Ordered, that for the period extending from January 1, 1941, to December 31, 1941, defendant pay to the plaintiff for her support the sum of $ 12,000., less the sum of $ 8,000. already paid for said period, leaving a balance due for said period of $ 4,000., payable as hereinafter provided, and it is further
Ordered, that for the period extending from January 1, 1942, to December 31, 1942, defendant pay to the plaintiff for her support the sum of $ 13,000., less the sum of $ 8,000. already paid for said period, leaving a balance due for said period of $ 5,000., payable as hereinafter provided, and it is further.
Ordered, that for the period extending from January 1, 1943, to December 31, 1943, defendant pay to the plaintiff for her support the*58 sum of $ 18,000., less the sum of $ 8,000., already paid for said period, leaving a balance due for said period of $ 10,000., payable as hereinafter provided, and it is further
Ordered, that for the period extending from January 1, 1944, to June 30, 1944, defendant pay to the plaintiff for her support the sum of $ 9,000., less the sum of $ 4,000. already paid for said period, leaving a balance due for said period of $ 5,000., payable as hereinafter provided, and it is further
* * * *
Ordered, that the defendant pay to the plaintiff, in addition to the regular monthly payments of $ 1,500. each hereinabove provided, the aggregate of the increased amounts which the defendant is directed to pay hereunder for the period extending from January 1, 1941, to June 30, 1944, amounting to the sum *664 of $ 24,000., in six (6) equal monthly installments of $ 4,000. each, commencing July 1, 1944, * * *
The taxability of the $ 19,000 representing additional alimony awarded to petitioner for the period January 1, 1941, to December 31, 1943, and received by petitioner in 1944, is here in issue.
During the calendar year 1944 the petitioner received from her former husband, in accordance with the*59 terms of the order of the Supreme Court of the State of New York, dated June 19, 1944, payments in the aggregate amount of $ 37,000. In her income tax return for 1944 the petitioner included in gross income the sum of $ 18,000 received from her former husband under the provisions of the court order, but did not include in her return the $ 19,000 which applied to the years 1941, 1942, and 1943.
During the calendar year 1944 the petitioner paid attorneys' fees of $ 4,000 to the firm of Ernst, Gale, Bernays, Falk & Eisner, New York, New York, for legal services rendered in connection with her application, instituted in October 1943, to the Supreme Court of the State of New York for an increase in the amount of the alimony payments provided for in the final decree of divorce.
OPINION.
*61 The first question presented herein is whether the amount of $ 19,000, representing increased alimony for prior years which was received by the petitioner in 1944 from her former husband as a result *665 of the modification of a prior decree of divorce, constituted "periodic" or "installment" payments of alimony within the meaning of
It is clear that the monthly payments of $ 666.67 received by the petitioner in 1941, 1942, and 1943 were "periodic" payments within the meaning of
Under the separation agreement, the petitioner possessed the right to secure additional alimony in any subsequent year in which the husband's net income exceeded $ 28,000 per annum. It was apparent from the start that under the agreement the negotiation and payment of adjusted alimony for any year would have to be made the following year and that the amount of the settlement would be determined as a specified sum *62 owed by the husband in respect to the prior year.
Moreover, there existed in the court from and after the date of its granting the decree of absolute divorce the power to require, if necessary to provide satisfactorily for the support of the petitioner, increased payments of alimony, irrespective of the provisions of the separation agreement.
It is true that petitioner failed in her effort to enforce the separation agreement in the Supreme Court of New York (see
In the amended decree, the court increased the total alimony for each of the years 1941, 1942, and 1943 in varying amounts and directed petitioner's husband to pay within a 6-month period the full sum necessary to discharge this liability. Petitioner urges that this sum, *666 which totaled $ 19,000 and was specified in the decree, constituted a "principal sum" payable in installments. With this view we can not agree. The term "principal sum" as used in
In our opinion, the respondent should be sustained in his treatment of the $ 19,000 as periodic income taxable to petitioner in 1944.
The remaining issue concerns the petitioner's right to deduct, under
*67
Petitioner's contention is that the $ 4,000 expended by her for legal expense in 1944 resulted in the collection and production of income in the form of increased alimony under
*68 The legislative intent underlying the enactment of
The existing law allows taxpayers to deduct expenses incurred in connection with a trade or business. Due partly to the inadequacy of the statute and partly to court decisions, nontrade or nonbusiness expenses are not deductible, although nontrade or nonbusiness income is fully subject to tax. The bill corrects this inequity by allowing all of the ordinary and necessary expenses paid or incurred for the production or collection of income or for the management, conservation or maintenance of property held for the production of income. Thus, whether or not the expense is in connection with the taxpayer's trade or business, if it is expended in the pursuit of income or in connection with property held for the production of income, it is allowable.
*668 The above language indicates that Congress intended to broaden existing law and thereafter permit the deduction of ordinary and necessary expense incurred in pursuit of income subject to Federal tax, whether or not*69 the expense was incurred in connection with the taxpayer's trade or business. From our examination of the legislative history of
Nor does the following language of Regulations 111, section 29.23 (a)-15, promulgated by the Commissioner pursuant to
Sec. 29.23 (a)-15. Nontrade or Nonbusiness Expenses. -- (a) In general. -- Subject to the qualifications and limitations in chapter 1 and particularly in section 24, an expense may be deducted under
(1) it has been paid or incurred by the taxpayer during the taxable year (i) for the production or collection of income which, if and when realized, will be required to be included in income for Federal income tax purposes, or (ii) for the management, conservation, or maintenance of property held for the production of such income; and
*70 (2) it is an ordinary and necessary expense for either or both of the purposes stated in (1) above. [Italics supplied.]
In our opinion, the only reasonable conclusion that may be drawn from the expressed intention of Congress in incorporating
In the instant case, we have held that the $ 19,000 received by the petitioner in 1944 as increased alimony for prior years constituted periodic payments of alimony and was includible in her income for that year under the provisions of
In the instant case, the petitioner was clearly entitled to increased payments of alimony for 1941, 1942, and 1943, and during those years she attempted without success to reach a satisfactory understanding *669 with her husband. There is no reason to believe that the petitioner could have obtained the additional alimony to which she was entitled by any means other than retaining counsel and instituting suit to obtain a modification of the prior decree of divorce. Therefore, in our opinion, the legal expense incurred and paid by petitioner incident to the action was "necessary" for the production and collection of income within the meaning of the statute. We believe that it was also "ordinary." Petitioner's recourse to the courts certainly was not a unique procedure, but, on the contrary, was the appropriate means of securing additional alimony, and oftentimes it is the only possible means.
Therefore, it is our conclusion that the $ 4,000 paid by the petitioner in 1944 as attorneys' fees in connection with securing increased alimony constitutes ordinary and necessary expense incurred for the production or collection of income within the meaning of
Under the facts of the instant case, it is unnecessary to discuss at length respondent's argument that the lawyers' fees in question were personal and family expenses within the meaning of section 24 (a) (1). The cases relied on by the Commissioner on brief and in
To permit a recomputation of the petitioner's tax liability in accordance with our opinion herein,
Decision will be entered under Rule 50.
*670 Murdock, J., dissenting:
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 * * * received subsequent to such decree 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 * * *. 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↩ * * *. [Italics supplied.]
2.
SEC. 23 . DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:
(a) Expenses. --
* * * *
(2) Nontrade or nonbusiness expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.↩
3. SEC. 24. ITEMS NOT DEDUCTIBLE.
(a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of --
(1) Personal, living, or family expenses, except extraordinary medical expenses deductible under
section 23 (x)↩ .