Long v. Commissioner , 35 B.T.A. 479 ( 1937 )

PEARL A. LONG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Long v. Commissioner

Docket No. 75899.

United States Board of Tax Appeals

35 B.T.A. 479; 1937 BTA LEXIS 869;

February 12, 1937, Promulgated

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The worthless obligation of the taxpayer's divorced husband to pay her a fixed amount for maintenance, held, not deductible by her as a bad debt.

Chandler P. Ward, Esq., for the petitioner.

Frank M. Thompson, Esq., for the respondent.

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ARUNDELL

The Commissioner determined a deficiency of $3,286.17 in petitioner's income tax for 1931, in part by disallowing as a bad debt deduction the amount of an obligation for alimony and maintenance of her divorced husband remaining unpaid at his death.

FINDINGS OF FACT.

Petitioner, a resident of Hermosa Beach, California, was formerly the wife of Marcus A. Marshall, who died April 24, 1931. On January 10, 1929, during the pendency of a proceeding for divorce from Marshall, petitioner and he entered into an agreement for the settlement of all property rights and claims between them, including the maintenance of their two minor daughters. Their property was held in community. By the terms of the agreement, Marshall undertook, inter alia, to convey certain real estate to petitioner and to discharge encumbrances against it, aggregating $9,324.01, within a period of five years; to transfer to her certain personal property; to create a fund of $100,000, on or before five years from the date of the agreement, payable to petitioner for the maintenance of herself and the children, and to pay petitioner $500 a month for such maintenance until the fund should be established.

On February 15, 1929, the California Superior Court entered an interlocutory judgment of divorce, which incorporated the above agreement and directed that Marshall deposit with a trust company 500 shares of stock in the Marshall Corporation to guarantee his establishment of the fund of $100,000. A final judgment of divorce, which by reference incorporated the terms of the agreement, was entered February 17, 1930.

Pursuant to the agreement, Marshall transferred the real estate and personalty, and regularly paid petitioner $500 a month from February 1929 until October 1930. In October he paid $200; in November, $150; and in December, $150; thereafter he paid nothing, and at the date of his death, in 1931, there remained due and unpaid a total of $2,500. He deposited 500 shares of Marshall Corporation stock, belonging to his mother, with the escrow agent, which still holds it, but he did not establish the fund of $100,000, and did not pay off any part of the encumbrances on the real estate.

Marshall's estate consisted of insurance proceeds and personalty of an aggregate value of $3,571. Petitioner filed a claim of $112,450 against the estate, and other creditors' claims, aggregating $28,739.09, were duly presented to the administrator c.t.a. The estate has not been closed and none of the claims have been paid in whole or in part, because of controversies over the insurance proceeds.

The 500 shares of Marshall corporation stock were without value in 1931. In 1931 the amounts which Marshall had agreed to pay were known by the petitioner to be uncollectible.

OPINION.

ARUNDELL: This proceeding raises the issue of petitioner's right to deduct as a worthless debt the $112,450 agreed by her former husband to be paid in settlement of her marital claims, which remained unpaid at the time of his death, insolvent, in 1931. The Commissioner disallowed the claim for the deduction.

We think the Commissioner was right. In a long line of cases we have held that a taxpayer on a cash basis may not take a deduction for income items, such as interest, rent, and attorney fees, which have never been included in income. ; ; ; ; ; . The petitioner argues that the rule of the above cases does not apply here for the reason that items of the kind here involved are not included in income when received. "Neither alimony nor an allowance based on a separation agreement is taxable income." Art. 83, Regulations 74; ; . This is an ingenious argument made in an effort to stretch the rule of those cases on a fine spun technicality. Its weakness is that it is founded on a reading into the cases of something that is not there. Those cases simply say that where there is an income item that has not been reported as income no bad debt deduction may be taken when it proves uncollectible. The cases do not say that a nonincome item is subject to a different rule. Support is sought for the premise of petitioner's argument in . In that case it was directly stated that the notes for which a deduction was claimed and allowed "did not constitute income." The notes did, however, represent capital of the taxpayer. The taxing statute, as has often been said, is concerned with realized gains and losses. This, it seems to us, is the proper test to be applied in these cases. The taxpayer was not out of pocket anything as the result of the promisor's failure to comply with his agreement. There was no realization either as a gain or loss at any time. There was no outlay of cash or property by the petitioner in the taxable year, or any other year, by which to measure a loss. She merely failed to receive something promised, which is vastly different from the loss of something once reduced to possession.

Reviewed by the Board.

Decision will be entered for the respondent.

MURDOCK and LEECH concur only in the result.

STERNHAGEN, MELLOTT, TYSON, and DISNEY dissent.