The opinion of the court was delivered by: RYAN
This suit commenced in October, 1948, against the Collector of Internal Revenue for the Second District of New York, since deceased, and continued against the administratrix of his estate, is to recover an additional assessment of $ 11,293.04 levied on plaintiff's 1944 income.
Plaintiff in his return for the calendar year 1944 deducted as alimony $ 11,000 paid by him to his former wife, Alice L. Newton under an agreement made in 1930. (P.'s Ex. 6; 'A' annexed to the complaint).
On February 18, 1948, following the receipt of a deficiency notice from the Collector dated January 15, 1948 (P's Ex. 7; 'B' annexed to the complaint), plaintiff paid $ 13,089.91, of which $ 11,293.04 was attributable to the disallowance of the $ 11,000, alimony deduction. Plaintiff, on March 25, 1948, filed a claim for refund (P.' § Ex. 9; 'D' annexed to the complaint), and subsequently commenced this action.
The question for determination is whether this payment of $ 11,000 by plaintiff to his former wife should have been allowed by the Commissioner of Internal Revenue as an item of alimony deductible under 26 U.S.C.A.,SEC. 23(u), as defined by 26 U.S.C.A.,SEC. 22(k).
The answer turns upon the construction to be given an agreement executed by plaintiff and his former wife on September 22, 1930. The following facts leading up to the making of this agreement have been stipulated. (P.'s Ex. 2). No testimony was offered on trial.
Plaintiff and Alice L. Newton were married in August, 1917. In anticipation of divorce and following the service upon plaintiff of an order of non-conciliation issued by the Civil Tribunal of the First Instance of the Department of Seine, France (where the parties were domiciled at the time), the parties on July 23, 1924 entered into a 'Trust Agreement' providing for the support of the wife and their two minor children (P.'s Ex. 2-A; 'E' annexed to the complaint), which I shall refer to below as the 'Trust Agreement of 1924.' Five days later, on July 28, 1924, the French court issued its decree granting a divorce 'between the spouses Newton, with all legal consequences at the request and in favor of the wife,' (P.'s Ex. 2-B; 'F' annexed to the complaint). There was no provision in the decree for alimony and no reference made in it to the trust agreement of 1924. Custody of the children was awarded by the decree to Alice L. Newton. The jurisdiction of the court granting the divorce is not questioned in this suit.
Alice L. Newton remarried on August 25, 1926 and became Alice Newton Heath. Two years later -- four years after the divorce -- on May 18, 1928, she and plaintiff entered into a second agreement, designated by them as the 'Property Agreement' (P.'s Ex. 2-E; 'G' annexed to the complaint) 'amending the trust agreement of July 23, 1924' (P.'s Ex. 2), and providing for the payment of an annual sum to Alice Newton Heath in addition to what she was receiving under the trust agreement of 1924. This second agreement I shall refer to as the 'Property Agreement of 1928.'
Finally, on September 22, 1930 plaintiff and his former wife executed a third agreement, (this, too, was designated by them as a 'Property Agreement'), 'amending the trust agreement of July 23, 1924' (P.'s Ex. 2), but revoking the property agreement of 1928 and providing for the payment of an annual sum to Alice Newton Heath in addition to the income payable to her under the trust agreement of 1924, (P.'s Ex. 2-F; 'H' annexed to the complaint); this I shall refer to as the 'Property Agreement of 1930.' It was under its terms that payment was made by plaintiff to his former wife of $ 11,000 which was deducted by him as alimony in his 1944 return, the disallowance of which gives rise to this suit.
Although the deductibility of this payment must be determined by the interpretation to be given this last agreement of 1930, analysis of the agreements preceding it is essential to an understanding of what the parties covenanted to do under its terms.
The Trust Agreement of 1924:
The purpose of this agreement made between plaintiff, as first party, certain named trustees, as second party, and Alice L. Newton, as third party, as recited in its preamble was 'to make provision for the support of the Third Party and of the children of the said First and Third Parties.' At the date of its making, the parties were living in Paris, France, separate and apart. It is undisputed that it was made in anticipation of divorce.
A trust fund was created by the agreement to accomplish its expressed purpose. The principal of the trust consisted of $ 400,000 of Plaintiff's capital contribution to the partnership of Hallgarten & Company; so invested it returned an income of 6% per annum. The trust agreement was expressly subject to the partnership agreement whereby plaintiff was obligated to make additional contribution in the event that the corpus of the trust became depleted.
It provided that Alice Newton until her death or remarriage was to be paid the interest and income on the trust fund of $ 400,000 or a total of $ 24,000 annually. It further provided that upon her remarriage the corpus of the trust was to be divided into three funds, each to constitute a separate trust, consisting of one-fourth, one-fourth, and one-half of the corpus, each to be continued to be held by the trustees for the benefit of the two children and Alice Newton respectively, until their death. Each child was to paid the income from her respective one-fourth part, not exceeding $ 5,000, and the balance of the income from such part in excess of this was to be paid to Alice Newton. She was to receive this surplus in addition to the income payable to her from her one-half part, until her death, at which time it was provided that the trust in her favor was to terminate and the corpus of her trust paid over to the two children.
Reduced to figures and calculated on a 6% return, upon her remarriage in 1926, the 'Trust Agreement of 1924' provided that Alice Newton was to receive annually $ 14,000 for herself and $ 5,000 for each child, the custody of whom she retained.
It was further provided in Paragraph Eleventh that the agreement was to be construed in accordance with the laws of the State of New York and the rights and remedies of the parties determined as though they ...