Court Opinion

ID: 4480274
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:11.156378+00
Date Added: 2024-06-11T14:53:48.475793
License: Public Domain

BRuce, J., dissenting: First, let me say that I agree with the conclusions of the majority that the petitioner Betty Jean furnished more than one-half the total support of the three minor children during the taxable year 1961 and accordingly she and the petitioner William Eskridge are entitled to the dependency exemptions claimed by them for such children for the year 1961, and that the petitioner Taylor is not entitled to the dependency exemptions claimed by him for the three children for the year 1961. 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, as alimony, Betty Jean and the children should continue to live in the residence at 9216 Donerail, and that Taylor would pay (1) the balance of the mortgage loan on the residence in the amount of $78 per month, inclusive of taxes and insurance; (2) the balance of the 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. It was further provided that in the event Betty Jean remarried, or when all of 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. Other provisions of the agreement provided that Betty Jean was to own and have title to all the furniture and fixtures located in the house, and certain other personal property was specifically divided or allocated between the parties. The agreement further provided that it was to be “a full, final and complete settlement of any and all claims which either of the parties hereto may have against the other, including alimony and maintenance.” 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 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: I960 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)_ 155. 09 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 ($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. 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 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 section 215(a) of the Internal Revenue Code of 1954, and, with respect to those paid in 1961 (Betty Jean’s taxable year 1960 not being before the Court), includable in the taxable income of Betty Jean, under the provisions of section 71 of the 1954 Code. I agree that the label or characterization the parties place upon their transaction is. not binding on the Court. Piel v. Commissioner, 340 F. 2d 887 (C.A. 2, 1965), affirming a Memorandum Opinion of this Court; Merchants’ L. & T. Co. v. Smietanka, 255 U.S. 509. In my opinion, however, it is not to be entirely ignored, but is to be considered as evidence of the intention and understanding of the parties. Respondent contends that the payments made by Taylor on the mortgage and home improvement 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 Seligmann v. Commissioner, 207 F. 2d 489 (C.A. 7, 1953), reversing a Memorandum Opinion of this Court; Florence H. Griffith, 35 T.C. 882; and Rev. Rul. 58-52,1958-1 C.B. 29, as modified by Rev. Rul. 62-38,1962-1 C.B. 15. The Seligmann and Griffith cases involve the payment of life insurance premiums by the husband and the revenue rulings referred to are based upon an analogy to such type cases. For a general discussion of such cases, see 5 Mertens, Law of Federal Income Taxation, sec. 31A.05. For the most recent of such cases, see Piel v. Commissioner, supra, and Kiesling v. United States, 345 F. 2d 110 (C.A. 3, 1965), in which certiorari has been requested. 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. 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 thé 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 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 so find. 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 present economic benefit which makes this case distinguishable from the life insurance premium cases where all the wife’s rights under the policies of insurance were contingent or qualified. There was nothing contingent about this present benefit secured by the payments in question. 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 James Parks Bradley, 30 T.C. 701, referred to in both the majority and concurring opinions, does not, in my opinion, require a different holding. That case is distinguishable from the present case in many important respects. (1) The stated purpose of the agreement in the Bradley case was to settle the respective property rights of the parties with respect to both their separate and community property. (2) The agreement specifically stated it was “intended as a Property Settlement Agreement and to refer only to property rights.” (3) Title to the residence involved was at all material times vested in the husband. (4) The husband had claimed the fair rental value of the residence and not the payments on the loan as alimony. (5) More important, the payments in question which were made in 1952, 1953, and 1954 were not made on the loan which existed in 1946, the date of the agreement and divorce decree under which the wife was given the right of occupancy; they were made on the last of three substantially increased loans made by the husband in 1947,1948, and 1949, in contravention to the terms of the agreement of May 14,1946. The principal holding of the Court in the Bradley case, with which I agree, was that the stipulated fair rental value of the residence was not deductible as “periodic payments” or alimony. Cf. Pappenheimer v. Allen, 164 F. 2d 428, cited therein. I also agree, on the basis of the facts there presented, that the argument made by the petitioner therein that the payments made by him to reduce the encumbrance on the property were deductible as alimony was lacking in substance. The facts of the Bradley case were substantially different from those in the present case. 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.   Includes a prepayment made on June 30, 1961.