DocketNumber: Docket Nos. 5123-63, 5138-63
Citation Numbers: 45 T.C. 120, 1965 U.S. Tax Ct. LEXIS 21
Judges: Tannenwald,Drennen,Tietjens,Simpson
Filed Date: 10/27/1965
Status: Precedential
Modified Date: 1/13/2023
1. On the facts presented,
2. Where a written agreement made incident to the divorce decree provided: (a) That the wife and three minor children should continue to live in the residence owned in joint survivorship by the husband and wife; (b) that the husband should pay the designated monthly payments due on three mortgage and home improvement loans on said property; and (c) that, in event the wife remarried or when all the children became 21, married, or became self-supporting, the real property should be sold and the net proceeds divided equally between the husband and wife,
*120 Respondent determined deficiencies in the income taxes of the petitioners as follows:
Docket No. | Petitioner | Year | Deficiency |
5123-63 | Neely B. Taylor, Jr | 1960 | $ 60.80 |
1961 | 659.42 | ||
5138-63 | William Eskridge and Betty Jean Eskridge | 1961 | 507.59 |
These cases, consolidated for trial, involve questions relating to dependency exemptions and alimony: (1) Whether, during the year 1961, the petitioner, Neely B. Taylor, Jr., or the petitioners, William Eskridge and Betty Jean Eskridge, furnished more than one-half the support of three minor children born of the former marriage of Neely B. Taylor, Jr., and Betty Jean; and (2) whether certain payments made by Neely B. Taylor, Jr., during the years 1960 and 1961 constituted alimony.
Respondent disallowed the payments deducted by Taylor as alimony in his 1960 return. For 1961, respondent similarly disallowed *23 such payments as deductions to Taylor and also disallowed him dependency *121 exemptions for the three children. Respondent for 1961 included the payments by Taylor as alimony in Betty Jean's income and disallowed her dependency exemptions for the three children. The year 1960 is not before us as far as Betty Jean is concerned.
Respondent concedes that either Taylor or Betty Jean is entitled to the dependency exemptions and that if the payments by Taylor constitute alimony and are therefore includable in Betty Jean's income, they are deductible by Taylor.
FINDINGS OF FACT
The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioner Neely B. Taylor, Jr. (hereinafter sometimes referred to as Taylor), is an individual residing in Louisville, Ky. He filed individual Federal income tax returns for the years 1960 and 1961 with the district director of internal revenue at Louisville, Ky.
Petitioners William Eskridge and Betty Jean Eskridge (hereinafter referred to as Betty Jean) are husband and wife residing in Valley Station, Ky. They filed a joint Federal income tax return for 1961 with the district director of internal revenue at Louisville, *24 Ky.
Prior to August 12, 1960, Betty Jean was the wife of Neely B. Taylor, Jr. Three children were born of this marriage, namely, Robert Neely Taylor, born October 26, 1948, Linda Jean Taylor, born April 19, 1950, and Thomas Wayne Taylor, born November 1, 1952.
Betty Jean and Taylor were divorced on August 12, 1960. Pursuant to an agreement dated June 27, 1960, and incorporated into the divorce decree, Betty Jean was awarded custody of the three children with right of visitation in their father. Taylor was required to pay Betty Jean $ 100 per month for the support and maintenance of the three children, such payments to be reduced by one-third as each child became 21 years of age, married, or became self-supporting. Taylor further agreed to carry Blue Cross and Blue Shield insurance for hospital and medical care of the children.
Taylor and Betty Jean were the owners in "joint survivorship" of the residence of the parties located at 9216 Donerail, Valley Station, Ky. Under the agreement of June 27, 1960 (which was incorporated into the divorce decree), it was agreed that such ownership should continue and that, as "alimony," Betty Jean and the children should continue to live in this *25 residence and that Taylor would pay (1) the balance of the mortgage loan on the residence in the amount of $ 78 per month, inclusive of interest, amortization, taxes, and insurance; (2) the balance of a garage construction loan at the rate of $ 15.21 per month; and (3) the balance of a bank loan for storm windows and doors on said property at the rate of $ 7.87 per month. In the event *122 Betty Jean remarried, or when all the children reached the age of 21, married, or became self-supporting, the real property was to be sold and the net proceeds divided equally between Betty Jean and Taylor.
During the years 1960 and 1961 (from June 27, 1960, to and including June 30, 1961), pursuant to the agreement dated June 27, 1960, Taylor made the required payments on the mortgage loan, garage construction loan, and loan for the storm windows and doors in connection with the residence at 9216 Donerail.
Betty Jean and the three children lived together in the residence at 9216 Donerail throughout the years 1960 and 1961. Betty Jean and William Eskridge were married on July 1, 1961, and lived together in the residence at 9216 Donerail during the remainder of 1961. Taylor made no payments on the loans *26 after July 1, 1961, and the house was later sold.
During the year 1961, Taylor paid Betty Jean $ 1,200 for the support and maintenance of their minor children. He also paid $ 79.20 premiums on Blue Cross and Blue Shield hospital and medical-care insurance for the benefit of the three children.
The total amount spent for the support of the children during the taxable year 1961 was in excess of $ 2,600. Of this amount, Betty Jean contributed more than one-half.
OPINION
On brief, respondent stated that either Taylor or Betty Jean should be allowed the dependency exemption for each of the three minor children. While the evidence as to the total amount furnished for the support of the children and the relative contributions by Taylor and Betty Jean is not complete, we are satisfied on the basis of the record that Betty Jean contributed more than one-half of such support. Accordingly, we hold that she is entitled to the dependency exemption.
The second issue involves the question whether certain payments required to be, and, in fact, made by Taylor during the last 6 months of 1960 and the first 6 months of 1961 on the home mortgage and improvement loans represented alimony deductible by him *27 under the provisions of
At the outset, it should be noted that the fact that the parties described these payments as "alimony" in the separation agreement is not determinative.
Where property is owned under "joint survivorship," as was the case here, neither party can take any action without the other party's consent, e.g., increasing the mortgage, which would impair the value of the other party's equity. Cf.
In the usual situation, where there is coownership of property, such as involved herein, the husband and wife are personally liable on the mortgage loan. Each payment by one party
Even in the absence of personal liability, a right of contribution by one coowner against the other may exist, albeit enforceable only against the latter's interest in the property itself. Tiffany,
Unfortunately, in the present case, none of the documents evidencing any of the loans was placed before us, so we are unable to determine whether Betty Jean had any personal liability to the lenders. The only document submitted was the payment book of the Greater Louisville First Federal Savings & Loan Association; this book merely categorizes Taylor and Betty Jean as borrowers without indicating whether there was any personal liability beyond the property itself, i.e., for any deficiency in the event of sale. Nor is there any evidence indicating that Taylor may not at some time prior to the agreement and decree have waived his right of contribution. Moreover, Betty Jean's ability to realize *31 any benefit in the event of sale was at best speculative. It depended upon whether the proceeds realized were in excess of any then-existing encumbrances and the expenses of sale. Her ultimate receipt of proceeds was so exposed to destruction 2 as to make it impossible to find that she constructively received the payments as they were made. Cf.
In view of the foregoing, we are compelled to hold that the payments by Taylor on the three loans during 1960 and 1961 are not includable in Betty Jean's income and therefore not deductible by him as alimony. 4*33
*125 Finally we note that in a cotenancy, regardless of the form of common ownership, there is a right of occupancy separate and distinct from the ownership of the property itself. Cf.
By virtue of the agreement and decree, Taylor was required to give up his right in this regard and Betty Jean and the children were given
The rental value of the right to occupy premises can, of course, constitute taxable income. Where such value is furnished in discharge of a legal obligation (as is the case where a husband is obliged to furnish living quarters to his former wife under a divorce decree), the person furnishing the same may be entitled to a deduction but that deduction may be offset by an equivalent amount of realization of income.
The record in this case is devoid of any evidence as to the nature or value of Taylor's right of occupancy. Nor do we believe that we can equate any portion of the loan payments to such *34 value without such evidence. This is particularly true where the property is sold at or about the same time for less than the mortgage -- far less, for all the record shows. We therefore do not reach such questions as whether the relinquishment of such right of occupancy constitutes "payment" within the meaning of
Mulroney,
Taylor can only support the deductions of his mortgage and improvement loan payments under
Simpson,
As I understand the majority opinion, *36 it concludes that the mortgage payments do not constitute alimony because of a failure of proof. However, I believe that we have before us a substantive question as to whether the provisions of
The predecessors of
Section 23(u), as well as section 22(k), contemplates the treatment of alimony payments as if the husband and wife were on a cash receipts and disbursements basis, that is, the deduction is allowed the husband only for actual payment within his taxable year and the wife includes in her income for a taxable year under section 22(k) only such periodic payments described therein as are actually received during such taxable year (including, of course, the constructive *127 receipt or payment of amounts unqualifiedly subject to the demand of the wife or husband, as the case may be). [S. Rept. No. 1631, 77th Cong., 2d Sess., p. 569 (1942).]
Yet, it should be emphasized that a constructive payment of alimony was contemplated only when the wife had an unqualified right to demand the payment.
Payments which are made by a husband on behalf of his former wife in accordance with a divorce decree of settlement have been the cause of much litigation. Some of such payments have been held to constitute periodic payments of alimony within the meaning of
The majority opinion indicates that the rules of the life insurance cases do not provide an answer for this case. Although there are factual differences, I believe that the principle laid down in those *39 cases is consistent with the legislative history, is sound, and should be applied to this case. In
Without doubt, the petitioner Betty Jean derives some benefit as a result of the mortgage payments. So long as the petitioner Taylor *128 continued to make the mortgage payments, she could continue to enjoy exclusive possession of the property. If she was personally liable on the mortgage, the requirement that he make the payments *40 relieved her of her obligation to share in that liability. Making additional payments on the mortgages continued to build an equity in the property, but whether, and to what extent, she would share in that equity depended upon many circumstances. If the petitioner Taylor died before the occurrence of the circumstances calling for a sale of the property, she would receive the entire equity; if she died before such sale and before him, she would receive none of the property; but if both he and she lived until the sale, she would receive one-half of the property. In summary, she derived some benefit by reason of the mortgage payments made by him, but the amount of that benefit was very speculative.
In conclusion, I believe that the payments on the mortgages do not constitute periodic payments of alimony within the meaning of
Bruce,
I disagree with the majority's conclusions regarding the second issue, whether certain payments made by the petitioner, Neely B. Taylor, Jr., during the taxable years 1960 and 1961 constituted alimony.
Prior to their divorce on August 12, 1960, Taylor and Betty Jean were the owners in "joint survivorship" of a residence located at 9216 Donerail, Valley Station, Ky. They continued to so own the property after their divorce. Under the agreement dated June 27, 1960, which was incorporated in the divorce decree, it was agreed that,
Betty Jean and the children lived together in the residence at 9216 Donerail throughout the years 1960 and 1961. Betty Jean and William Eskridge were married on July 1, 1961, and lived together in the residence at 9216 Donerail during the remainder of 1961. Taylor made no payments on the loans after July 1, 1961. On opening statement, not otherwise adverted to in the testimony or evidence presented, counsel for Taylor stated the house was *43 later sold and that none of the proceeds from such sale accrued to either Taylor or Betty Jean. Presumably neither respondent nor Betty Jean disagree with this statement, since neither of their counsel mentioned it. There is no evidence as to how much the house sold for.
During the years 1960 and 1961 (from June 27, 1960, to and including June 30, 1961), pursuant to the agreement dated June 27, 1960, Taylor made payments on the mortgage loan, garage construction loan, and loan for the storm windows and doors in connection with the residence at 9216 Donerail, as follows:
1960 | |
Mortgage (6 payments of $ 78 each) | $ 468.00 |
Garage (6 payments of $ 15.21 each) | 91.26 |
Storm doors and windows (6 payments of $ 7.87 each) | 47.22 |
Total | 606.48 |
1961 | |
Mortgage (7 payments of $ 78 each) | 1 $ 546.00 |
Garage (6 payments of $ 15.21 each) | 91.26 |
Storm doors and windows (7 payments of $ 7.87 each) | |
Total | 692.35 |
On his tax return for 1960, Taylor claimed an exemption for each of the three minor children and also a deduction in the amount of $ 276.33 as alimony. The latter amount was arrived at by deducting from the total of the monthly payments made on the three house loans *44 ($ 606.48) one-half of the total interest and taxes paid during the entire year ($ 330.15). The interest and taxes were deducted by Taylor on Schedule B of his return.
*130 On his tax return for 1961, Taylor claimed an exemption for each of the three children and a deduction in the amount of $ 797.56 as alimony. The latter amount was explained in a statement attached as representing $ 707.56 paid on the three house loans plus $ 90 hospital insurance paid for Betty Jean. On brief, Taylor now concedes the $ 90 represented the payment of Blue Cross-Blue Shield insurance premiums for the benefit of the children and is not deductible as alimony. No deduction was claimed on this return for taxes on the real estate or interest on the loans.
On the income tax return for 1961 filed by Betty Jean and her husband, claim was made for an exemption for each of the three children and $ 234 was reported as alimony received by Betty Jean.
The "Short-Form" statements attached to the notices of deficiency do not set forth the bases for the deficiencies determined by respondent. All parties hereto agree, however, that in arriving at the deficiencies respondent disallowed the deductions claimed by petitioner *45 Taylor for payment of alimony in each of the years 1960 and 1961 on the ground that the payments on the jointly owned property do not qualify as alimony for income tax purposes.
I would hold that the payments made by Taylor during the period July 27, 1960, to and including June 30, 1961, on the loans made in connection with the residence at 9216 Donerail were alimony payments deductible by Taylor in his respective taxable years, under the provisions of
I agree that the label or characterization the parties place upon their transaction is not
Respondent contends that the payments made by Taylor on the mortgage and home improvement *46 loans were not payments in the nature of alimony and, accordingly, are not includable in the taxable income of Betty Jean or deductible by Taylor. In support of his contention, respondent relies upon
The
In general, the life insurance premium cases hold that where, under a divorce decree or written agreement incident thereto, a husband is required to pay premiums on life insurance policies assigned absolutely to his former wife and with respect to which she is the irrevocable beneficiary, such premiums are deductible by the husband. *47 Where, however, the policy has not been assigned but the husband has retained ownership thereof and the wife's entitlement to the proceeds is contingent upon her surviving the husband, the premiums paid thereon by the husband are not includable in the taxable income of the wife or deductible as alimony by the husband.
In my opinion neither the life insurance premium cases nor the revenue rulings referred to are determinative of the issue presented herein. Apparently the majority of the Court are of the same view (see fn. 2 of the majority opinion), although much of the discussion in their opinion relates to the equities of the husband and wife in the property owned by them in joint survivorship.
The provisions of the agreement of June 27, 1960, requiring the petitioner Taylor to make the payments on the mortgage and home improvement loans immediately follow the provision that Betty Jean and the children are to continue to live in the residence of the parties located at 9216 Donerail. Both provisions are contained in the same paragraph of the agreement designated as "alimony." I think it clear from the provisions of the agreement that the payments on the loans were intended to assure *48 the use and occupancy of the residence by the wife so long as she remained unmarried and until the children became of age or became self-supporting. If such payments had not been made it is reasonable to assume the mortgage would have been foreclosed and Betty Jean would have been compelled to secure residence elsewhere for herself and the children. In effect the loan payments in question were equivalent to what would have been reasonable rental paid by the husband on a similar residence for the use and occupancy of the wife and children. While there was no specific testimony as to the rental value of the residence, there was testimony that it was a three-bedroom house located in Valley Station, which is a suburb of Louisville. The mortgage loan placed on the house in 1958 was $ 10,550, and, considering the well-known policy of lending institutions, it is reasonably certain the loan did not represent the full value. Also, although the total cost of the garage and the storm door and window improvements is not shown, they unquestionably added to the value of the property. In my opinion the fair rental value was not less than the total amount of the monthly payments, and I would *49 so find.
*132 The right of possession given the wife under the terms of the agreement and divorce decree was a substantial present benefit which was secured and made possible by the loan payments. It is this
In my opinion the payments made by the husband on the mortgage and home improvement loans during the period June 27, 1960, to and including June 30, 1961, were payments in the nature of alimony and as such are deductible by Taylor and includable in the gross income of his former wife, Betty Jean. I would so hold.
The case of
The principal holding of the Court in the
My conclusion that the entire amount of the loan payments is deductible as alimony would, of course, require an adjustment with respect to petitioner Taylor's claimed deductions for interest and taxes for the year 1960. He would not be entitled to a double deduction.
For the reasons discussed above, I respectfully dissent from the holding of the majority on the second issue.
1. Unless otherwise stated, all statutory references are to the Internal Revenue Code of 1954, as amended.↩
2. There is a statement in the record that the original mortgage was for the full value of the house. This, coupled with the statement that there were no net proceeds on the ultimate sale, indicates that neither Taylor nor Betty Jean ever had any equity. Obviously, if the unpaid balance of the mortgage had been substantially less than the value of the property the mortgage payments would have meaningfully increased Betty Jean's equity.↩
3. In view of our ultimate decision in this case, we do not reach the questions as to the effect, if any, of the existence of a prepayment clause in the mortgage or of the fact that the remaining term of the mortgage may be more or less than 10 years. See
4. On brief, respondent urged that this case is controlled by decisions involving the treatment of premiums paid by a former husband on insurance on his life in which the former wife has an interest, citing
1. H. Rept. No. 2333, 77th Cong., 1st Sess., p. 409 (1942).↩
1. Includes a prepayment made on June 30, 1961.↩
Gerard Piel and Eleanor Jackson Piel v. Commissioner of ... , 340 F.2d 887 ( 1965 )
Katharine T. Hyde v. Commissioner of Internal Revenue , 301 F.2d 279 ( 1962 )
Leon Mandel and Carolina Panerai Mandel v. Commissioner of ... , 229 F.2d 382 ( 1956 )
Seligmann v. Commissioner of Internal Revenue , 207 F.2d 489 ( 1953 )
Pappenheimer v. Allen , 164 F.2d 428 ( 1947 )
Lilly v. Smith , 96 F.2d 341 ( 1938 )
Merchants' Loan & Trust Co. v. Smietanka , 41 S. Ct. 386 ( 1921 )