Mandel v. Commissioner , 23 T.C. 81 ( 1954 )

Leon Mandel and Carolina Panerai Mandel, His Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent

Mandel v. Commissioner

Docket No. 40567

United States Tax Court

23 T.C. 81; 1954 U.S. Tax Ct. LEXIS 68;

October 18, 1954, Filed

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">*68 Decision will be entered under Rule 50.

1. In 1948 and 1949, petitioner, Leon Mandel, made payments to his divorced wife exclusively for the support of his son and daughter. In the separation agreement pursuant to which the payments were made, petitioner undertook to provide an income for the children throughout their lives. He had the option of making such payments directly to them if they were married, or if, after reaching 21, they maintained their own homes. His daughter married and established a home prior to reaching her 21st birthday, in 1948. His son lived separate and apart from his mother after he became 21 in 1949. Held, payments by petitioner to his divorced wife for his children, after they became 21 years of age, are not deductible by him as alimony payments under section 23 (u) of the Internal Revenue Code of 1939.

2. Also in 1948 and 1949, petitioner, Leon Mandel, paid premiums on two insurance policies pursuant to the separation agreement. His divorced wife was entitled to receive the income from the policies only if she survived him. Held, the premiums are not deductible by petitioner under section 23 (u) of the Internal Revenue Code of 1939.

Harry B. Sutter, Esq., and C. Ives Waldo, Jr., Esq., for the petitioners.

Edward L. Newberger, Esq., for the respondent.

Rice, Judge.

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RICE

">*82 This proceeding involves deficiencies in income tax of $ 9,527.79 for the year 1948 and of $ 8,153.48 for the year 1949 determined against Leon Mandel (hereinafter referred to as the petitioner) and Carolina Panerai Mandel, his wife. On August 4, 1952, petitioners consented to the assessment and collection of $ 6,962.07 of the total deficiencies asserted for the 2 years.

The issues to be determined are: (1) Whether the amounts of $ 4,583.31 and $ 7,083.31 paid by petitioner in 1948 and 1949, respectively, to his former wife, Edna Horn (Mandel) Seligmann, pursuant to an agreement incident to a divorce from her, for the support of his children after they">*70 reached the age of 21, are includible in her income under section 22 (k) of the Internal Revenue Code of 1939 and deductible by him under section 23 (u); ¹ and (2) whether insurance ">*83 premiums in the amount of $ 1,655 and $ 1,650, paid by petitioner in 1948 and 1949, respectively, on policies held in trust pursuant to an agreement incident to a divorce, are deductible under section 23 (u).

">*71 The parties have stipulated that, in determining the deficiencies herein, respondent erroneously deducted the sum of the net short-term capital gain and 50 per cent of the net long-term capital gain from net income adjusted to arrive at ordinary net income, when in fact only 50 per cent of the net long-term gain should have been deducted.

Some of the facts were stipulated.

FINDINGS OF FACT.

The stipulated facts are so found and are incorporated herein by this reference.

Petitioner and Carolina Panerai Mandel were residents of Chicago, Illinois, during 1948 and 1949 and filed their joint income tax returns for such years with the collector of internal revenue for the first district of Illinois.

Petitioner was married to Edna Horn Mandel (hereinafter referred to as Edna) on April 30, 1924. Of such marriage, a daughter, Noel, was born on February 8, 1927, and a son, Leon, III, on July 31, 1928.

Petitioner and Edna separated some time in August 1932. On November 29, 1932, they entered into an "Agreement" incident to divorce proceedings which culminated in a decree, entered on December 29, 1932, by the Circuit Court of Cook County, Illinois, dissolving their marriage.

The agreement gave">*72 Edna custody of the two children and provided that petitioner was to pay to her the sum of $ 18,000 annually for the support and maintenance of herself and the children. Petitioner also agreed to pay up to $ 4,000 per year for medical and dental services, education, and clothing for the two children until they reached the age of 25 or were married. Ten thousand dollars of the total amount paid each year was specifically for the support of the children. ²

">*84 The agreement also provided:

1) * * *

All sums payable by the husband to the wife hereunder may be recoverable by the wife by suit from time to time as they become due, together with her reasonable attorney's fees and expenses incurred in that behalf.

* * * *

3) In consideration of the payments made by the husband to the wife, she agrees to provide a home for the children with her ">*73 and agrees to provide reasonable and proper maintenance and support for the children, and upon the same scale as she may be living.

In the event of the divorce of the wife from the husband, and her subsequent remarriage to a person other than the husband, the monthly payments by the husband to her shall be reduced to Eight Hundred Thirty-three Dollars and Thirty-three Cents ($ 833.33) per month, exclusive of payments which the husband shall make for the medical and dental services, costs of education, clothing and transportation of the children, as hereinabove provided. In consideration of these payments, the wife shall continue to provide a home for the children with her and agrees to provide reasonable maintenance and support for the children, as aforesaid.

In the event a child shall marry, or, after reaching twenty-one (21) years of age, shall live separate and apart from the wife, then the husband shall have the right in his discretion to pay to such child upon the happening of either of these events, the sum of Four Hundred Sixteen Dollars and Sixty-six Cents ($ 416.66) per month, or any portion thereof, from time to time, and thereafter the payments by the husband to the wife">*74 shall be reduced by the amount which the husband pays to such child, but only up to Four Hundred Sixteen Dollars and Sixty-six Cents ($ 416.66) per month and after the wife's death, the husband agrees to pay to each child, for and during the life of such child, the sum of Four Hundred Sixteen Dollars and Sixty-six Cents ($ 416.66) per month; and if such child shall have an income from any estate, gift, trust or from any inheritance, then the amount of such income received by such child therefrom, (up to the sum of Four Hundred Sixteen Dollars and Sixty-six Cents ($ 416.66) per month) may be deducted from the payments made to such child by the husband.

In the event that the wife shall remarry and in the event thereafter a child after reaching the age of sixteen (16) years, shall live separate and apart from the wife, then until such child shall marry or reach the age of twenty-one (21) years, the husband shall have the right in his discretion to pay to such child the sum of Two Hundred Eight Dollars and Thirty-three Cents ($ 208.33) per month or any portion thereof, from time to time until such child shall marry or shall reach the age of twenty-one (21) years, and the payments by the">*75 husband to the wife hereunder shall be reduced by the amount which the husband pays to such child, but only up to said sum of Two Hundred Eight Dollars and Thirty-three Cents ($ 208.33) per month.

In the event that at any time hereafter, income shall be paid to the wife out of and from any inheritance, gift, trust or estate established or created for the benefit and use of either child, then the amount received by the wife for the use of the child from the income of such estate, gift, trust or inheritance (established or created for the benefit of such child) shall be deductible from the amount to be paid to the wife by the husband, but only to the extent of Four Hundred Sixteen Dollars and Sixty-six Cents ($ 416.66) per month for each child for whom such income is so received by the wife for the use of such child.

">*85 In the event of the death of a child, the monthly payments to the wife shall be reduced Four Hundred Sixteen Dollars and Sixty-six Cents ($ 416.66) for each such child so dying.

On April 9, 1938, petitioner married Carolina Panerai Mandel; and, on January 27, 1946, Edna married George E. Seligmann.

Petitioner's daughter, Noel, was married on January 17, 1948, and">*76 thereafter maintained her own home separate and apart from her mother.

During each of the years 1948 and 1949, petitioner paid to Edna the sum of $ 9,999.96 in equal monthly installments of $ 833.33 each. No part of such payments was for her support or maintenance. From February to September 1, 1948, Edna deposited the amounts received from petitioner in her own bank account and then gave her personal checks in the total amount of $ 2,376 to Noel. She also paid bills, bought clothes, and gave cash to Noel in that year of not less than $ 699.31. From September 1948 through May 1949, Edna directed that one-half of the monthly checks received from petitioner be deposited directly into the individual bank accounts of Noel and Leon, III. In June, July, and August 1949, she gave Noel her personal checks for one-half of the amount received from petitioner; and, from September through December of that year, again directed that one-half of the checks received from petitioner be deposited directly in Noel's bank account.

Edna gave her personal checks to Leon, III, for one-half of the amount received from petitioner in the months of June, July, and August 1949. From September through December">*77 of that year, she directed that one-half of the amount received from petitioner each month be deposited directly to Leon, III's, bank account.

Leon, III, was either in Massachusetts after July 31, 1949, his birthday, or maintained his own apartment in New York City where he lived from September until approximately the end of the year.

On the joint income tax return filed by petitioners herein for 1948 and 1949, a deduction of $ 9,999.96 was claimed each year for "alimony paid to Edna Horn Seligmann." Respondent's notice of deficiency for each year stated:

The deduction of $ 9,999.96 claimed in your return as "alimony paid to Edna Horn Mandel Seligman" has been disallowed for the reason that this amount does not represent alimony within the meaning of sections 23 (u) and 22 (k) of the Internal Revenue Code, and therefore it is not deductible by you. This amount was paid to Mrs. Seligman pursuant to the agreements of November 19, 1932 and November 29, 1932 for the support and maintenance of your two children, Noel Mandel and Leon Mandel III. These children attained their majority in 1948 and 1949 respectively. It has not been established that these payments in 1948 and 1949 or any">*78 amount thereof are taxable to Mrs. Seligman under the provisions of section 22 (k) of the Internal Revenue Code and consequently they are not deductible by you.

">*86 Pursuant to the agreement of 1932, petitioner deposited with a trustee two ordinary life insurance policies on his life in the aggregate amount of $ 100,000. The trustee became the irrevocable beneficiary under the policies; and, in the event of petitioner's death, was to dispose of the proceeds as follows:

The principal was to be held, and only income therefrom paid to Edna. If she remarried, then one-third of the income was to be paid to her and one-third to each of the two children. After Edna's death the principal was to be paid to the two children or their heirs. The policies were to be returned to the petitioner if he survived Edna, his children, and their heirs.

Petitioner paid premiums on the policies in the amount of $ 1,655 in 1948 and $ 1,650 in 1949.

In his deficiency notice, respondent permitted petitioner to deduct such sums. However, by amended answer, he now asserts that the premium payments are not deductible under section 23 (u).

In a prior Memorandum Opinion, we held that premiums paid by petitioner">*79 on these policies in 1942 and 1943 were deductible by him. Memorandum Opinion, Docket No. 16280, entered May 6, 1949, affirmed on another issue Mandel v. Commissioner, 185 F.2d 50 (C. A. 7, 1950). Also, in a prior Memorandum Opinion, we held that the premiums paid for those years constituted taxable income to Edna. Memorandum Opinion, Docket No. 36043, entered November 28, 1952. Our decision therein was reversed on appeal, Seligmann v. Commissioner, 207 F.2d 489 (C. A. 7, 1953).

OPINION.

The first issue raised herein is whether payments to petitioner's divorced wife for the support and maintenance of his two children, which were not taxable to the wife when the children were minors, became taxable to her and, hence, deductible to petitioner when the children reached their majority. The answer to the question presented must be found in the terms of the agreement pursuant to which the payments in issue were made.

The petitioner argues that the sums paid to Edna for the support of Noel and Leon, III, after they reached their majority, qualify in all respects with the requirements of section 22 (k) of the Internal">*80 Revenue Code of 1939; most important of which are that they were periodic payments made in discharge of a legal obligation which arose from the marital or family relationship, imposed by a written instrument incident to divorce.

We have set forth verbatim, in our findings, the third section of the agreement signed by petitioner and Edna on November 29, 1932. ">*87 It is apparent that their agreement went far beyond the provisions of an ordinary separation agreement. Petitioner not only undertook to provide support and maintenance for his wife until she remarried, and for his minor children until they reached their majority; he undertook to provide the children with a substantial monthly income for the rest of their lives. The petitioner, however, reserved options as to the specific manner in which payments for the children might be made. Generally, they were to be made to Edna, but if the children married or if, after becoming 21 years of age, they maintained residences separate and apart from Edna, then petitioner could make the payments directly to them. The agreement also provided that even after a child's 16th birthday, if he or she were married or lived apart from Edna, ">*81 one-half of the amount for such child's support might be paid directly by petitioner to that child.

During the years in question, petitioner made all payments to Edna. However, none were for her support and maintenance since she had remarried in 1946. They were exclusively for the children. We think that, under the terms of the agreement, that part of the payments made to Edna, after Noel and Leon, III, became 21 years of age, were made to her only as a conduit through which petitioner paid monthly sums to his two children. Noel married prior to reaching her 21st birthday; she thereafter maintained her own home, separate and apart from her mother; and Edna in fact either paid to or for her sums equivalent to the amount received for her from petitioner, or caused one-half of petitioner's monthly checks to be deposited directly in Noel's bank account.

Leon, III, lived separate and apart from Edna after his 21st birthday; and, even prior thereto and always thereafter, she paid to him or caused to be deposited in his bank account the amounts received from petitioner for him.

Petitioner, obviously, could have paid the sums in question directly to his children. Every condition was ">*82 present under which he could have exercised the option available to him. It is inconceivable to us that Congress could have intended that petitioner, by failure to exercise his option of making payments directly to the children, but instead to Edna, could impose tax liability on her at his discretion.

Moreover, we cannot believe Congress ever intended that payments to children throughout their lives, such as those here in question, even though provided for in a written agreement incident to divorce, should be taxable to the wife. Its purpose in adding sections 22 (k) and 23 (u) to the Internal Revenue Code of 1939 was to correct an inequitable situation, which it felt existed under then applicable law. Its intent ">*88 was expressed by the clear and direct language of the Report of the Committee on Ways and Means, ³ page 46:

5. Alimony and Separate Maintenance Payments.

The existing law does not tax alimony payments to the wife who receives them, nor does it allow the husband to take any deduction on account of alimony payments made by him. He is fully taxable on his entire net income even though a large portion of his income goes to his wife as alimony or as separate maintenance">*83 payments. The increased surtax rates would intensify this hardship and in many cases the husband would not have sufficient income left after paying alimony to meet his income tax obligations.

The bill would correct this situation by taxing alimony and separate maintenance payments to the wife receiving them, and by relieving the husband from tax upon that portion of such payments which constitutes income to him under the present law. * * * Moreover, the portion of such payments going to the support of minor children of the husband does not constitute income to the wife nor a deduction to the husband. * * *

In support of his position, petitioner relies on Feinberg v. Commissioner, 198 F.2d 260 (C. A. 3, 1952); Robert Lehman, 17 T.C. 652 (1951); and Robert Wood Johnson, 10 T.C. 647 (1948). All of those cases are clearly distinguishable on their facts from the one here">*84 before us. In the Lehman case, we considered the question of the deductibility by the divorced husband of payments to his mother-in-law, pursuant to terms of an agreement between him and his former wife, that such payments were "for and in behalf" of the wife. We permitted the deduction there, saying, at page 653: "If the payments had been to a landlord, a grocer, or the like, there would be no question of them being taxable to [the wife]." Clearly, the payments here were not "for and in behalf" of Edna, but were specifically "for and in behalf" of Noel and Leon, III.

The Johnson case concerned only the question of whether unsegregated payments to the wife for the support of herself and her minor son were made pursuant to an agreement incident to the divorce. We concluded on the whole record that the payments were made pursuant to a written instrument executed as an incident to the divorce. In the final sentences of our Opinion, we stated, pages 654, 655:

It is true that the periodic payments here involved were for the support and maintenance of both petitioner's wife and their minor son. However, as we have found, there was no designation of the part of such periodic">*85 payments which was to be payable for the support of the minor child, Dora H. Moitoret, 7 T.C. 640; Robert W. Budd, 7 T.C. 413; affirmed without opinion, C. C. A., 6th Cir., June 10, 1947. Moreover, prior to the tax years before us, petitioner's son had attained his majority. * * * [Emphasis added.]

That language does not support the petitioner's claim herein. The question of whether a part of the payments made to the wife after the son reached his majority would be taxable to her was not presented, ">*89 and we do not consider that part of our Opinion quoted above as so holding.

The Feinberg case reversed this Court's holding that the payments there in question were not made pursuant to an agreement incident to a divorce. At the end of the Court of Appeals' opinion is found this statement, page 263:

There remains to be determined the question as to whether the entire amounts of the payments were properly deducted. * * * The Tax Court found that of the weekly payments of $ 75, $ 12.50 was allocated for the support of each of taxpayer's two children. Section 22 (k) provides that it does not apply to any">*86 periodic payment fixed "as a sum which is payable for the support of minor children of (the) husband." It is clear from the record that one of the taxpayer's children was a minor during at least a part of the period under consideration. Since the payments allocable to him after his twenty-first birthday would be deductible and those made before age twenty-one would not, it will be necessary for the Tax Court to determine the exact date of his birth. Robert Wood Johnson, supra.

It may be that payments to a wife, originally designated as being for the support of a minor child, which she is entitled to and does continue to receive after the child becomes of age, are taxable to her under section 22 (k). Cf. Beulah Weil, 22 T.C. 612. Certainly, the Feinberg case holds no more than that. And, it is obviously distinguishable from the case here because Edna had no undisputed right to receive the amounts in question, and they were not for her benefit.

The second issue, raised by the respondent's amended answer, is whether insurance premiums paid by petitioner in 1948 and 1949 are deductible by him under section 23 (u).

Petitioner">*87 argues that the premiums paid are deductible on two grounds: (1) As a matter of law, and (2) that the prior decision of this Court, in Leon Mandel, supra, operates as a collateral estoppel to respondent here.

It is clear that under Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591 (1948), our prior Mandel decision does not operate as a collateral estoppel to prevent our consideration of the question presented. In the Sunnen case, the Supreme Court held that a change or development of the controlling legal principles, on which an earlier case was decided, precludes its operating as a collateral estoppel in a subsequent case involving the same issue. Since our decision, the Court of Appeals for the Seventh Circuit reversed a decision of this Court, wherein we held that the insurance premiums paid by petitioner, in 1942 and 1943 on the same policies as here, were taxable to Edna under section 22 (k). Seligmann v. Commissioner, supra.We have followed the rationale of the Court of Appeals in the Seligmann case in Beulah Weil, supra;Raoul Walsh, 21 T.C. 1063 (1954);">*88 and Lilian Bond Smith, 21 T.C. 353 (1953), on appeal C. A. 9, May 24, 1954, wherein we have recently considered this same issue. Obviously, this is a ">*90 significant change in controlling law, for deductions of payments by the husband under section 23 (u) are by statute made expressly dependent on the taxability thereof to the wife under section 22 (k).

In the Seligmann case, we held the premium payments in 1942 and 1943 taxable to Edna, principally on the ground that the policies were not deposited with the trustee as security for petitioner's payment of alimony. The Court of Appeals said that the grounds for our decision were too narrow, and based its reversal on the more fundamental issue of whether Edna actually realized taxable economic gain from the premium payments during the years there in question.

In the light of our decisions in Beulah Weil, supra;Raoul Walsh, supra; and Lilian Bond Smith, supra, we are satisfied that the Court of Appeals was right and that we were wrong in the prior Mandel and Seligmann cases decided by us.

In the">*89 Smith case, we said, pages 363, 364:

The petitioner did not make the premium payments in question and she did not actually or constructively receive the sums paid as premiums. Furthermore, she did not realize any economic gain during the taxable years from the premium payments. For example, any increase in the cash surrender or the loan value of the policy resulting from the premium payments inured to the benefit of the owner of the policy and not to the petitioner.

It is clear from the terms of the policy, and from the provisions of the separation agreement that the petitioner's rights under the policy are contingent on her death or remarriage. Under the terms of the policy, the petitioner or her estate is entitled to receive the proceeds only in the event the petitioner survives the insured. * * *

In this case, Edna had no right to receive any part of the principal amount of the policies -- only the income therefrom -- and that, only if she survived the petitioner. The premiums are not taxable to Edna under section 22 (k) and are therefore not deductible by petitioner under section 23 (u).

Decision will be entered under Rule 50.

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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. This subsection shall not apply to that part of any such periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of such husband. In case any such periodic payment is less than the amount specified in the decree or written instrument, for the purpose of applying the preceding sentence, such payment, to the extent of such sum payable for such support, shall be considered a payment for such support. 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 the 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, but only to the extent that such installment payment for the taxable year of the wife (or if more than one such installment payment for such taxable year is received during such taxable year, the aggregate of such installment payments) does not exceed 10 per centum of such principal sum. For the purposes of the preceding sentence, the portion of a payment of the principal sum which is allocable to a period after the taxable year of the wife in which it is received shall be considered an installment payment for the taxable year in which it is received. (In cases where such periodic payments are attributable to property of an estate or property held in trust, see section 171 (b).)

  SEC. 23. DEDUCTIONS FROM GROSS INCOME.

  (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 such 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.

• 2. Mandel v. Commissioner, 185 F.2d 50↩ (C. A. 7, 1950), affirming Memorandum Opinion of this Court, Docket No. 16280, entered May 6, 1949.

• 3. H. Rept. No. 2333, 77th Cong., 2d Sess. (1942).↩