Court Opinion

ID: 4611784
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:49:42.851349+00
Date Added: 2024-06-11T07:54:19.196475
License: Public Domain

ESTATE OF MILDRED K. HYDE, DECEASED, WILLIS O. HYDE, ADMINISTRATOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hyde v. CommissionerDocket No. 95182.United States Board of Tax Appeals42 B.T.A. 738; 1940 BTA LEXIS 957; September 25, 1940, Promulgated *957  1.  In 1930, while an action for divorce was pending, decedent entered into a settlement contract with her husband whereby he agreed that if a decree of divorce should be entered he would, among other things, immediately pay to decedent $100,000 alimony in cash, and pay an additional $100,000 alimony in cash on or before December 31, 1931.  The first alimony payment was made on entry of the decree, but the husband failed to make the second payment on the agreed date.  In lieu of such payment he delivered to decedent a nonnegotiable promissory note in the principal amount of $100,000, payable one year after date, with interest at 5 percent per annum.  Held, that the sum of $3,000 interest paid on the note in 1936 constituted alimony, or a payment in lieu of alimony, and was not taxable income.  2.  Under the settlement agreement of 1930, two corporations, all of whose capital stock was held by decedent's husband, each agreed to pay decedent $15,000 per year in consideration of her covenant not to enter into competition.  Held, the aggregate sum of $30,000 paid to decedent in 1936 under the agreement did not constitute an annuity subject to the provisions of section 22(b)(2), *958  Revenue Act of 1936, nor proceeds of a capital gain, but was taxable as ordinary income.  Raymond C. Cushwa, Esq., for the petitioner.  Gerald W. Brooks, Esq., for the respondent.  HILL *738  This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1936 in the amount of $690.  Petitioner assigns as error the action of respondent in including in taxable income, as interest, the amount of $3,000 received by petitioner's decedent during the taxable year on a certain nonnegotiable promissory note, petitioner's contention being that such amount represented an alimony payment not subject to income tax.  Petitioner further alleges that respondent erred in failing to determine that the amount of $30,000 received by decedent in the year 1936, and included by petitioner in gross income in his return for that year, did not constitute taxable income, and asserts that by reason of the inclusion of that amount in gross income his income tax for 1936 has been overpaid in the amount of $3,494.71.  FINDINGS OF FACT.  Petitioner's decedent, Mildred K. Hyde, was born January 17, 1880, and died February 25, 1937.  She was married*959  to one H. Teller Archibald on or about December 5, 1901.  Archibald died July 23, 1936.  *739  Willis O. Hyde, who was married to decedent in September 1930, subsequent to her divorce from Archibald in June 1930, was duly appointed administrator of the estate of Mildred K. Hyde by the Probate Court of Cook County, Illinois, on March 1, 1937.  About the year 1920, Archibald and the decedent became engaged in the candy business under the name of Fannie May Candy Shops.  Shortly thereafter, a corporation known as the Fannie May Candy Shops, Inc., was organized, which took over the business theretofore conducted by decedent and Archibald.  All of the capital stock of this corporation, except qualifying shares, was issued to Archibald.  Subsequently, but at least three years prior to June 5, 1930, another corporation was organized, under the name of Archibald Candy Corporation, which became the manufacturing unit of the business, and Fannie May Candy Shops, Inc., became the retail outlet for its products.  All of the capital stock of the Archibald Candy Corporation, except qualifying shares, was issued to Archibald.  Both decedent and her husband actively participated in the management*960  of the two corporations from their organization until January 1926, when they separated because of marital difficulties.  Sometime thereafter, but prior to June 5, 1930, the candy companies dispensed with decedent's services.  On September 13, 1928, Archibald filed a suit for divorce from decedent in the Circuit Court for Dade County, Florida.  Decedent made no appearance in the action, service having been had by publication, and on November 9, 1928, the Florida court entered a decree of divorce.  On November 20, 1929, decedent caused to be filed in the Circuit Court for Dade County, Florida, a petition praying that the decree of divorce theretofore entered on November 9, 1928, be set aside for the reason that the court was without jurisdiction.  A demurrer interposed by Archibald was sustained.  Decedent caused her petition to be amended, and again a demurrer thereto was interposed.  On October 10, 1928, decedent filed a bill of complaint against Archibald in the Superior Court of Cook County, Illinois, numbered 485882.  The bill of complaint alleged that the Florida court had no jurisdiction in the action for divorce instituted by Archibald, and that any decree entered therein*961  would be null and void; that 10 years prior to the filing of the bill decedent and Archibald had engaged in the candy business under the name of Fannie May Candy Shops, and that she and Archibald had agreed that she should have an equal interest in the ownership thereof; that thereafter Archibald had caused the business to be incorporated under the name of Fannie May Candy Shops, Inc., and caused the entire capital stock to be issued to himself; that the business had yielded large profits, which Archibald had invested.  The bill prayed for an accounting of decedent's *740  interest in the business and the profits thereof; that Archibald be enjoined from prosecuting the Florida divorce action; and for separate maintenance and support.  On December 3, 1928, decedent amended her bill of complaint above mentioned, alleging that the profits of the Fannie May Candy Shops had been invested by Archibald in various properties and enterprises, including real estate taken in the name of the Archibald Candy Corporation; that Archibald had caused the stock of that corporation to be issued in his name; and that decedent was in equity entitled to a one-half interest in the stock.  Archibald*962  filed an answer denying in substance the allegations of the amended bill of complaint.  On June 4, 1930, decedent filed a bill for divorce against Archibald in the Superior Court of Cook County, Illinois, numbered 518816.  On June 5, 1930, the decedent, Mildred K. Hyde, as party of the first part, entered into an agreement with H. Teller Archibald, as party of the second part, the Fannie May Candy Shops, Inc., as party of the third part, and the Archibald Candy Corporation, as party of the fourth part.  This agreement, after reciting the fact that decedent and Archibald were married on December 5, 1901, and had lived together as husband and wife until January 8, 1926, and after referring to the various legal proceedings above mentioned and the contents of the pleadings filed therein, set forth the following: Whereas, in the event that a decree of divorce shall be entered in the above-mentioned cause, numbered 518816, now pending in the Superior Court of Cook County, the party of the first part and the party of the second part desire to make a settlement and adjustment of all property rights arising out of their marital relation and/or otherwise, and all the parties hereto desire*963  to enter into certain mutual agreements and undertakings hereinafter described * * *.  The instrument then provided that if a decree of divorce should be entered in the action pending in the Superior Court of Cook County, Archibald would thereupon (a) convey to decedent all of his interest in certain real estate and personal property; (b) pay his interest in certain real estate and personal property; (b) pay $100,000 alimony in cash on the entering of the decree; (c) pay an additional $100,000 alimony in cash on or before December 31, 1931, and (d) pay certain attorneys' fees incurred by decedent.  Paragraph 3 of the instrument provided as follows: 3.  The party of the second part agrees that he will cause the parties of the third part and the fourth part to pay, and in the event they do not pay, he agrees for himself and his heirs, executors, administrators and assigns, that he will pay, and the said party of the third part and/or its assigns and the said party of the fourth part and/or its assigns hereby agree that they will each pay or cause to be paid to the party of the first part the sum of Fifteen Thousand ($15,000.00) Dollars per annum, divided into equal installments*964  payable semi-monthly on the first and fifteenth of each month, provided that said party of the first part will execute a release of all claims which she has in *741  and to any of the property and effects belonging to said party of the third part and said party of the fourth part, and so long as the said Mildred R. Archibald, in the territory described as all of the State of Illinois, lying North of the theoretical line drawn East and West on the Southern limits of the City of Springfield, Illinois, shall not engage in or in any manner be interested in, either directly or indirectly for herself or for others, the same or like kind or character of business as that heretofore conducted and now being carried on by said party of the third part, and/or said party of the fourth part and shall not associate herself in any way with any other individual, firm or corporation for the purpose of carrying on a business of the same or like kind or character as that heretofore conducted and now being carried on by said party of the third part and/or said party of the fourth part, and shall not furnish to any individual, firm or corporation any list or lists of customers or information of any*965  kind or nature pertaining to the business of said party of the third part and/or party of the fourth part, and shall not in any manner as an individual, partner, stockholder, director, officer, clerk, principal, agent, employer, employee, trustee, lender of money, or in any other relation or capacity whatsoever, directly or indirectly, aid or assist any individual, firm or corporation, whether by loans, gifts, contributions, donations or otherwise, in carrying on a business of the same or like kind or character as the business heretofore conducted and now being carried on by said party of the third part and/or said party of the fourth part, and shall not enter the employ of any competitor or of any person, firm or corporation engaged in the same or like kind or character of business as that heretofore conducted and now being carried on by said party of the third part and/or party of the fourth part and shall not be guilty of any act, either directly or indirectly, interfering with the business of said party of the third part and/or said party of the fourth part, its good will, its trade or its customers, or come in competition with the same directly or indirectly in any way, and shall*966  not either in firms or corporations or individually or in any other way either directly or indirectly interfere with the said trade or business of said party of the third part and/or party of the fourth part, and/or do any act prejudicial to the same or any part thereof or interfere in any way with the persons employed therein.  And if the said party of the first part shall adhere to the said conditions heretofore in this paragraph set forth during her entire life, then said moneys shall be paid to said party of the first part during her entire life, such payments to cease upon the death of the party of the first part.  The agreement mentioned also provided (a) for the conveyance by decedent to Archibald of all her interest in certain real property; (b) for the release of all dower rights and homestead interests by each of the spouses to the other; and (c) dismissal of the suit for an accounting brought by decedent in the Superior Court of Cook County, Illinois, as well as dismissal of the petition caused to be filed by her in the Circuit Court for Dade County, Florida.  Archibald failed to pay to decedent the sum of $100,000 alimony on or before December 31, 1931, as provided*967  in the agreement hereinabove referred to, and on January 1, 1932, he delivered to decedent, in lieu of such alimony payment, a certain promissory note reading as follows: One year after date, for value received, I promise to pay to the order of Mildred R. Hyde, the sum of One Hundred Thousand Dollars ($100,000.00), *742  with interest at the rate of 5% per annum.  Said interest shall be payable quarterly * * * upon presentation of this note for the endorsement of such interest payment thereon.  This note is non-negotiable.  In the event, (1) of the bankruptcy, either voluntary or involuntary, of the maker thereof; or (2), an assignment by the maker hereof for the benefit of his creditors; or (3), the conveyance by way of sale, mortgage or otherwise of either the Virginia estate or the Miami Beach, Florida, home of the maker hereof, prior to the maturity of this note, the holder hereof may, at his option, upon giving written notice to the maker hereof * * * declare the principal amount of this note and the interest accrued thereon to be due and payable.  This note is given to further evidence the obligation of the maker hereof to pay the sum of One Hundred Thousand Dollars*968  ($100,000.00) to the payee hereunder according to the terms and provisions of that certain agreement made on the 5th day of June, A.D. 1930, between Mildred R. Archibald, party of the first part, H. Teller Archibald, party of the second part, Fannie May Candy Shops, Inc., a corporation, party of the third part, and Archibald Candy Corporation, a corporation, party of the fourth part, and also to evidence the agreement of the parties hereto to extend the payment of said sum in accordance with the terms and conditions set forth herein.  Thereafter, Archibald made payments to decedent which were applied on the above mentioned note as shown by the following endorsements thereon: Received interest amounting to $250.00, April 1, 1932.  MILDRED R. HYDE by BERNARD K. SHAPIRO Received interest - $3,000.00 - Jan. 8, 1936 MILDRED K. HYDE During the year 1936, decedent, Mildred K. Hyde, received the amount of $15,000 from the Chicago Fannie May Candy Co., and the amount of $15,000 from the Archibald Candy Corporation, same being the annual payments pursuant to the terms of paragraph 3 of the agreement of June 5, 1930, hereinabove referred to.  On June 5, 1930, the board of directors*969  of the Fannie May Candy Shops, Inc., adopted a resolution reading in material part as follows: WHEREAS, Mildred R. Archibald, of Chicago, Illinois, was for a long time associated with this corporation as an officer and/or employee and was actively engaged in the conduct of the business thereof; and WHEREAS, the said Mildred R. Archibald has severed all her connection with this corporation; and WHEREAS, the said Mildred R. Archibald has the reputation of being one of the most competent, accomplished and experienced persons in the conduct of a business similar to the business of this corporation; and WHEREAS, it appears to the best interests of this corporation to induce the said Mildred R. Archibald to abstain from entering into competition or associating herself with any individual, firm or corporation in competition with this corporation; and WHEREAS, said Mildred R. Archibald has proposed that she will abstain from competition with this corporation and/or in engaging either directly or indirectly *743  in any business similar to that of this corporation * * * upon terms and conditions as set forth in an agreement entered into on the 5th day of June, 1929, [sic]*970  * * * and WHEREAS, the said Mildred R. Archibald asserts certain claims against this corporation, and in consideration of the execution of said agreement agrees to release and waive all her claims against this corporation; Now, THEREFORE, BE IT RESOLVED that this corporation shall enter into and become a party to the above referred to agreement to be entered into on the 5th day of June, 1930, in the City of Chicago, Illinois, * * * On June 5, 1930, the board of directors of the Archibald Candy Corporation adopted a resolution substantially identical with that adopted by the board of directors of the Fannie May Candy Shops, Inc.On June 1, 1932, the Chicago Fannie May Candy Co., a corporation, acquired at public sale the assets of the Fannie May Candy Shops, Inc., and on the same date the board of directors of the Chicago Fannie May Candy Co. adopted a resolution reading in material part as follows: WHEREAS, Fannie May Candy Shops, Inc., the corporation whose assets were acquired by this company on public sale, has heretofore been paying Mildred King Hyde Fifteen Thousand ($15,000.00) Dollars per year as consideration for said Mildred King Hyde refraining from engaging in*971  any candy business, either directly or indirectly, for a period of years; and WHEREAS, it is deemed advisable by the officers and manager of this corporation that until further action by the Board of Directors, this corporation continue to pay to said Mildred King Hyde the said consideration for the said purpose; Now, THEREFORE, BE IT RESOLVED that until further action of this Board of Directors, this corporation pay to said Mildred King Hyde the sum of Fifteen Thousand Dollars ($15,000.00) per year in equal monthly installments, as a consideration for her continuing to refrain from engaging in the candy business either directly or indirectly.  By resolution adopted by the board of directors of June 1, 1932, H. Teller Archibald was retained as general manager of the Chicago Fannie May Candy Co., at a salary of $20,000 per year.  Archibald was not at that time a member of the board of directors of this company.  The Archibald Candy Corporation and Chicago Fannie May Candy Co. deducted, as business expense, from gross income reported in their respective income tax returns the payments of $15,000 made by each of them to Mildred K. Hyde in the calendar year 1936, and such deductions*972  were allowed by the Bureau of Internal Revenue.  An annuity of $30,000 per annum for life, payable to a woman born on January 17, 1880, had a value of $369,142.50 on June 5, 1930.  *744  OPINION.  HILL: The first issue for decision in this case is whether or not the sum of $3,000, which was paid to petitioner's decedent on January 8, 1936, as interest on the alimony note for $100,000 referred to hereinabove, constituted taxable income.  The deficiency determined by respondent results from his addition of the amount of $3,000 to the net income disclosed by petitioner's return.  Petitioner contends in substance that the amount represented alimony or a payment in lieu of alimony, and hence did not constitute taxable income to decedent, citing in support of its position , which affirmed . It is now settled beyond controversy that an amount received by a divorced woman as alimony or in lieu of alimony is not taxable income.  ; *973 ; ; . This doctrine is not questioned here by either party; the issue relates solely to the true character of the payment involved. In the Longyear case, supra, a settlement agreement made in lieu of alimony provided for the payment to the divorced wife of $12,500 out of a special fund; a further sum equal to interest at the rate of 6 percent per annum upon $150,000 from a stated date to the date of the agreement, and a note for $150,000 bearing interest at 6 percent per annum.  We held that the interest payments were a part of the agreement made in lieu of an alimony award, and were not deductible by the husband as interest on an indebtedness.  In affirming our decision, the Court of Appeals for the District of Columbia said: A claim made by petitioner for a deduction of such part of the payments made to Mrs. Longyear as interest paid upon the note held by her can not be sustained.  The note represented alimony secured to her by agreement between herself and her former husband.  The obligation did not lose the character*974  of alimony when incorporated in the note.   * * * Respondent insists that the $3,000 payment in controversy here was merely compensation for the use of money, that is to say, interest paid by Archibald to his divorced wife for use of the $100,000 alimony which he was obligated by their agreement to pay to her on or before December 31, 1931, but which he did not pay when due, and in lieu of which he delivered to her the nonnegotiable promissory note for $100,000, bearing interest at 5 percent per annum, set out in our findings of fact above.  Respondent points to the fact that the settlement agreement between Archibald and his wife contained no provision for the payments of any interest and that the payment of interest was made *745  pursuant to a subsequent agreement embodied in the note, and on this ground he attempts to distinguish the present proceeding from Respondent's position, we think, is untenable.  The distinction urged is unimportant here.  The parties have stipulated, and we have found the fact to be, that Archibald's note was delivered to decedent*975 in lieu of the alimony payment. The interest provided for to the extent paid was, therefore, a payment in lieu of alimony, and, aside from the affirmative stipulation of the parties, this appears to be true.  By the original settlement agreement Archibald was obligated to pay his divorced wife $100,000 alimony not later than December 31, 1931.  If he had made such payment on that date, he would have complied with his agreement, but the payment of that amount one year later, as provided in the note, would not have been the equivalent in value of $100,000 paid on the original due date, if paid without interest.  Obviously, the present worth at December 31, 1931, of a promise to pay $100,000 one year after that date was less than $100,000.  The diminution in value was exactly equivalent to the fair value of the use of that sum of money for the period payment was deferred.  Archibald agreed to pay interest at 5 percent per annum, which may be assumed to have been a fair rate.  It follows that the interest and principal of the note, if and when subsequently paid, could not in any event have exceeded in total value the amount of the alimony provided for in the settlement agreement. *976  The interest paid on January 8, 1936, in the amount of $3,000 was less than the amount of interest due at the stipulated rate.  Such amount was a payment in lieu of alimony, and did not constitute taxable income to petitioner's decedent.  Respondent's action on this issue is reversed.  The second issue arises from petitioner's allegation that respondent erred in failing to determine that the amount of $30,000 which decedent received in 1936 from the Chicago Fannie May Candy Co. and the Archibald Candy Corporation constituted alimony payments and not taxable income.  The amount was included in gross income reported in decedent's tax return for 1936, and by reason thereof petitioner contends that its tax for that year has been overpaid in the amount of $3,494.71.  In the alternative, petitioner contends that under section 22(b)(2) of the Revenue Act of 1936 the annuity of $30,000 received by decedent in 1936 was not taxable in its entirety, but only to the extent of 3 percent of the excess over cost.  Petitioner also argues that the transaction amounted in effect to an exchange in 1930 by decedent of her interest in the stock of the two candy companies for an annuity, and, if any*977  profit was realized from such exchange, it was *746  taxable in the year 1930.  Petitioner further contends in the alternative that the annuity received in 1936 should be treated as proceeds of a capital gain and under section 117(a) of the applicable statute only 60 percent thereof may be included in gross income.  On brief petitioner argues that the payments made under the contract of June 5, 1930, were in part consideration for the release by decedent of claims against the candy companies, and in part consideration for her agreement not to compete.  We are urged to adopt this construction on the ground that any other interpretation of the contract would render it void as contrary to public policy, and that if possible it should receive such interpretation as would render it valid.  For purposes of the present proceeding, we need not attempt to decide whether or not the contract was valid.  Income dervied from an executed contract, even if void and unenforceable, is neverthless subject to tax.  . See also *978 . The evidence we think wholly fails to sustain petitioner's principal contention that the $30,000 received by decedent in 1936 did not represent payments made solely in consideration of her agreement not to enter into competition with Archibald's candy corporations.  It is shown that decedent had been trained in retail merchandising, particularly in the food lines; she was of an aggressive business type; she had been active in the management of the candy companies from the inception of the business; after rupture of relations between herself and Archibald the business of the candy companies began to suffer very materially, and Archibald, in connection with the negotiation and preparation of the settlement agreement between himself and his wife, particularly desired to prevent her entering into competition with the candy companies subsequent to divorce.  This appears to have been the motivating cause for the inclusion in the agreement of the provisions of paragraph 3 set out hereinabove.  Other facts appearing in the record lead to the same conclusion.  While it is true that the settlement agreement of July 5, 1930, to*979  which each of the candy companies were parties, formerly required decedent to execute a release of all claims which she had "in and to any of the property and effects belonging to" such companies, in addition to her agreement not to compete, there is no evidence in the record to indicate the character or extent of her claims, if any.  In decedent's action against Archibald for an accounting, she apparently claimed only an equitable ownership of one-half of the capital stock of each company, which was not a claim "to any of the property and effects belonging to" the corporations.  That the annual payments by the candy companies were in fact to be made exclusively as consideration for decedent's agreement not *747  to compete, is clearly indicated by the testimony of the witness, Roemer, who was secretary of each of the corporations mentioned, and also Archibald's personal attorney, representing him in the negotiation of the settlement agreement.  He testified that the candy companies each agreed to pay Mrs. Archibald $15,000 annually "to keep her out of business;" that since the contract related also to other matters, it was desired that the entire controversy be cleared up, *980  and to that end it was provided "that whatever consideration ran from one to the other, released all of the claims that each might have against the other." The witness further stated that the release by decedent of any claim she might have, had nothing to do with the payments to be made by the corporations.  We may here point out that one-half of the $30,000 received by decedent in the taxable year 1936 was paid by the Chicago Fannie May Candy Co., which corporation was not a party to the settlement agreement.  This corporation on June 1, 1932, acquired at public sale the assets of the Fannie May Candy Shops, Inc., and it is not shown that it assumed any of the liabilities of the latter company.  The resolution adopted by the board of directors of the Chicago Fannie May Candy Co. authorizing the payment of $15,000 per annum to decedent, affirmatively stated that it was in consideration of her agreement to refrain "from engaging in any candy business, either directly or indirectly, for a period of years." In respect of the sum of $15,000 paid in 1936 by the Chicago Fannie May Candy Co., we think there can be no doubt that it was solely consideration for decedent's agreement not*981  to enter into competition.  In respect of the like sum paid by the Archibald Candy Corporation, we can reach no other conclusion, from a careful consideration of the whole record, than that it was also exclusively for the same purpose.  We so hold.  This brings us to a discussion of the alternative contentions of the petitioner.  The first such contention is that under section 22(b)(2) of the Revenue Act of 1936, the annuity of $30,000 received by petitioner in 1936 is not taxable in its entirety, but only to the extent of the excess over 3 percent of the cost basis.  The cited statute provides, so far as material here, that there shall be excluded from gross income amounts received as an annuity under an annuity or endowment contract to the extent of the excess of the amount received in the taxable year over an amount equal to 3 percent of the aggregate premiums or consideration paid for such annuity.  Petitioner argues that the cost basis of the annuity involved was its value at the time of acquisition, which the parties have stipulated to be $369,142.50, and that only the excess over 3 percent thereof, or $18,925.72, is taxable as income received in 1936.  The cogency *748 *982  of petitioner's argument depends upon the assumption that decedent did in fact purchase an annuity in 1930.  In ; affirmed per curiam on opinion below (C.C.A., 2d Cir.), , the court said: The exemption as to annuities in the income tax statutes does not cover cases where an annuity is not in reality purchased, even though the transaction may be somewhat analogous to the purchase of an annuity.  , * * * In the present case decedent, by her agreement not to enter into competition with the candy companies, can not be said to have purchased an annuity any more so than if the contract had provided on similar terms for the payment to her of compensation for personal services.  Such compensation, even though somewhat analogous to an annuity, as in the case of bonuses or pensions, is nevertheless taxable income.  Petitioner's argument that decedent purchased an annuity is bottomed on the premise that she exchanged therefor in 1930 her interest in the stock of the two candy*983  corporations.  This contention is disposed of by the conclusion we reach hereinabove that the amount of $30,000 received by decedent in 1936 represented payments to her solely in consideration of her agreement not to compete.  The same conclusion also disposes of the contention that any gain from the transaction was taxable in 1930.  The remaining alternative contention of petitioner that the $30,000 received by decedent in 1936 should be treated as proceeds of a capital gain can not be sustained.  Consideration received under an agreement not to compete is taxable as ordinary income, and is in no sense capital gain.  ; affd., ; ; ; affd., . Decision of no deficiency and no overpayment of tax will be entered.