Before SWAN, Chief Judge, and L. HAND and CLARK, Circuit Judges.
This case raises again the troublesome problem as to what is "a written instrument incident to" divorce, by virtue of which payments made pursuant to it become taxable as income to the divorced wife as payee and deductible from the gross income of the husband as payor. I.R.C. §§ 22(k), 23(u), 26 U.S.C.A. §§ 22(k), 23(u).*fn1 Here we are asked to decide whether or not a separation settlement agreement providing for periodic payments by petitioner to his estranged wife was "incident to" a divorce between the parties decreed one year later.
From the facts it appears that petitioner and his wife, Edith A. Lerner, were married in 1913 and separated by mutual consent in August, 1934. Following their separation, petitioner paid her from $25,000 to $30,000 a year for support until October 20, 1936, when they entered into a specific written agreement binding him to annual payments of $30,000. The agreement stated in its Eighth Article: "It is the intent of the parties hereto and of the essence of this agreement that the obligations of the party of the first part [husband] under this agreement shall continue during the natural life of the party of the second part [wife] and shall not in any wise or manner be affected by any decree of divorce that may at any time in the future be obtained by either party as against the other, or by any subsequent remarriage of either of the parties hereto or by the death of the party of the first part."
Both husband and wife testified before the Tax Court; but the evidence as to their contemporaneous attitude toward a divorce is conflicting and unclear, as we should expect, based as it is upon recollection of a state of mind of some fifteen years past.
At any rate a year later, on October 27, 1937, Edith instituted an action for divorce on grounds of adultery and for "such other and further relief as to the Court may seem just and proper" in the New York Supreme Court for Westchester County. The matter was referred to a referee "authorized and empowered to fix the amount of alimony herein," who held hearings in November. During these the following colloquy occurred between the referee and the husband:
"Q. I understand that while you have been separated from your wife there was a separation agreement? A. Yes, sir.
"Q. A written agreement? A. Yes, sir.
"Q. And that still exists? A. Yes.
"Q. You are paying her? A. Yes, sir.
"Q. Therefore, there will be no alimony fixed now. The separation agreement will survive the divorce decree? A. That's right.
"Q. Your wife wants that separation agreement to continue? A. Yes.
"Q. The agreement survives the divorce? A. Yes.
"Referee: All right, I will recommend the interlocutory decree be granted ...