The opinion of the court was delivered by: RYAN
On March 22, 1949 plaintiff instituted this suit against the Collector of Internal Revenue for the Second District of New York to recover $ 14,082.87 with interest, income taxes she alleges were erroneously collected from her for the calendar years 1942 through 1946. Subsequent to the filing of the complaint the defendant died and his executrix was substituted. The suit was timely filed under the provisions of Section 3772(a)(2), Title 26; plaintiff previously duly filed claims for refund; the claims filed for 1942 and 1943 have been disallowed; the claims for 1944, 1945 and 1946 have neither been allowed nor rejected.
The issue as formulated by the pretrial order of November 17, 1952 (P's Ex. 1-A) is whether certain income which plaintiff received constitutes alimony and is therefore taxable to her under Sec. 22(k), I.R.C. The answer depends upon the construction to be given an agreement executed on July 23, 1930, between plaintiff wife and Edgar F. Luckenbach, the father of her former husband, under which these moneys were paid to her. (P's Ex. 2.) By amendment at trial, the pre-trial order raises in the alternative the further issue of whether these payments are taxable under Section 22(a), I.R.C.
The events surrounding the making of this agreement have been stipulated and are incorporated in the findings now made. The testimony of a single witness, Raymond E. Stefferson, an attorney, called by defendant, who represented Edgar F. Luckenbach at the time of the making of the agreement, was received and decision was reserved on objection as to competence and relevance. Although I find no ambiguity in the agreement of July 23, 1930 between plaintiff and her husband's father, I overrule the objection and receive this testimony for such light as it may shed upon the purpose the parties intended this instrument to serve.
Plaintiff was married on November 6, 1916 to Lewis Luckenbach; a boy, the issue of the marriage, was born on June 6, 1920. In January 1930 plaintiff filed suit for divorce in the New York Supreme Court; service was made upon the husband by publication as he was then without the state. On January 27, 1930, plaintiff was duly appointed in this divorce suit as receiver in sequestration of the real and personal property of her husband. New York Civil Practice Act, Sec. 1171-a. She took possession of certain valuable property consisting of land, a house and furnishings at Sands Point, Long Island, known as the Fraser Estate, where she and her husband had resided, and of furniture located in an apartment in New York City which had been occupied by her husband. Plaintiff, as receiver, then placed in storage the furniture and other household effects contained in the house and in the apartment.
Edgar F. Luckenbach, plaintiff's husband's father, claimed ownership of this real and personal property on Long Island by himself, individually, and by various corporations which he controlled. On March 11, 1930 Edgar F. Luckenbach moved in the sequestration proceedings to compel plaintiff to turn back to him, as owner, all the personal property which she, as receiver, had seized at the Sands Point premises. This motion was denied. Thereafter, he brought an action in replevin for recovery of this personal property as well as for that which had been removed from the city apartment against the warehouse company. In this action he joined plaintiff as receiver in sequestration as a party defendant. On July 23, 1930, the date of the making of the agreement here involved, this action was pending. On May 7, 1930, Luckenbach Terminals, Inc., a corporation controlled by Edgar F. Luckenbach, claiming to be the fee owner of the Sands Point realty moved for the return and surrender to it by plaintiff of these premises. This motion was also denied. It appears that in her affidavit submitted in opposition to this motion, plaintiff stated that she believed 'that the said real property, as well as the contents thereof, belong to the defendant (her husband) and to me.' (P's Ex. 17.)
Following this, plaintiff moved to punish Edgar F. Luckenbach and Luckenbach Terminals, Inc., for contempt of the order of sequestration, which authorized her to occupy the Sands Point property, because of its occupancy by Edgar F. Luckenbach and his family. This motion was pending on July 23, 1930.
Plaintiff, as receiver, also commenced an examination of Edgar F. Luckenbach as president of various companies controlled by him, concerning property and moneys of the estate of Lewis Luckenbach, the deceased paternal grandfather of her husband, in which estate she maintained her husband had an interest. In addition, she had begun a lengthy examination of Edgar F. Luckenbach, individually, concerning property of her husband held by Edgar F. Luckenbach both individually and as trustee under the last will of Lewis Luckenbach, Sr., the deceased grandfather. All of these examinations were pending on July 23, 1930, when this bitter family litigation was brought to an end by a series of negotiations between the attorneys for plaintiff and Edgar F. Luckenbach which culminated in the making of instruments which the parties called the 'Agreement of Separation' (P's Ex. 1) and the 'Agreement of Guarantee' (P's Ex. 2).
The 'Agreement of Separation' dated July 23, 1930, was entered into between plaintiff and her husband Lewis Luckenbach to provide for the support and maintenance of plaintiff and her son; simultaneously therewith, plaintiff and Edgar F. Luckenbach executed the 'Agreement of Guarantee'. The terms of these will be considered later. On the same day, a stipulation was signed by plaintiff and her husband terminating the sequestration and contempt proceedings and the examination of Edgar F. Luckenbach in his various capacities, but in no other way affecting the pending divorce action. (P's Ex. 4.) At this time, plaintiff, as receiver and individually, also executed a general release to Edgar F. Luckenbach, individually and as trustee of the will of Lewis Luckenbach, Sr., deceased (P's Ex. 5), and a release, individually and as receiver, to the various companies controlled by Edgar F. Luckenbach (P's Ex. 6). The transcript of the examinations of Edgar F. Luckenbach was surrendered to his attorneys.
On December 8, 1930, a decree of divorce approving and incorporating the 'Agreement of Separation' was granted plaintiff by the Supreme Court of New York. The decree made no reference to the 'Agreement of Guarantee'; all proceedings against Edgar F. Luckenbach had been terminated; he was in no way a party to the divorce action or to any ancillary proceedings then pending.
Although the 'Agreement of Guarantee' was by its terms not to become enforcable until July 19, 1933 -- the date of the expiration of bonds guaranteeing performance by the husband of the terms of the 'Agreement of Separation' -- monthly payments to plaintiff under the 'Guarantee' commenced to be made by Edgar F. Luckenbach in August 1930. From that date until April 29, 1943, when Edgar F. Luckenbach died, payments to plaintiff under this 'guarantee' were made either directly by Edgar F. Luckenbach or through the medium of the Luckenbach Steamship Co., Inc. Up to December 31, 1936 such payments as were made directly to plaintiff by company check were charged on the company books to the account of Edgar F. Luckenbach. However, beginning with January 1937 and up to the time of his death all payments were made by company check drawn to the order of Edgar F. Luckenbach and endorsed by him to plaintiff; these payments were charged on the company books to an account entitled 'Lewis Luckenbach Loan Account.' Subsequent to April 26, 1943 and through December 31, 1946 (the last date which concerns us) payment was made by check of the Luckenbach Steamship Company drawn to the order of plaintiff, at the direction of the executor of the estate of Edgar F. Luckenbach and charged to the 'Lewis Luckenbach Loan Account.' (P's Ex. 10.) A specimen of the letters signed by the Treasurer of the Steamship Company covering the remittance of these checks states that these amounts are 'to make the above payments to you of alimony as heretofore arranged.' (P's Ex. 9-a.) From July 23, 1930 to August 15, 1936 Lewis Luckenbach was employed by Luckenbach Steamship Company, but none of the payments were deducted from his salary.
In his personal income tax returns for the years 1941, 1942 and 1943 Edgar F. Luckenbach did not report as income the amounts which had been paid by check of the Luckenbach Steamship Company, endorsed by him to plaintiff and charged to the above 'Loan Account.' (P's Exs. 11, 11-a, 11-b.) Upon a determination by the Bureau of Internal Revenue that the additions to the 'Loan Account' constituted taxable income to Edgar F. Luckenbach he was obliged to pay a deficiency assessment. It was found by the Collector respecting the 1941 return that these withdrawals made from the company were 'in order to pay alimony to his son's former wife * * * taxpayer guaranteed these payments * * *.' (P's Ex. 8.) Following the passage of Sections 22(k) and 23(u), I.R.C. in 1942, Edgar F. Luckenbach in his 1942 return deducted the payments made by him that year through company check to plaintiff, under Section 23(u). This deduction was disallowed on the ground that a deduction under this Section may be claimed only by an obligor spouse and 'is not allowed to any other persons who may pay the alimony obligation of such obligor spouse.' (P's Ex. 8-a.)
On March 15, 1943, plaintiff paid to the Collector of Internal Revenue for the Second District of New York income tax of $ 3,015,16 on the payments received by her in 1942 from Edgar F. Luckenbach pursuant to the 'Agreement of Guarantee'; in 1944, she paid a tax of $ 1,793.22 on the payments made to her by Edgar F. Luckenbach's estate in 1943; in 1945 she paid a tax of $ 4,651.28 on the payments made by the Edgar F. Luckenbach estate in 1944; in 1946 she paid a tax of $ 1,891.49 for the 1945 payments; and in 1947 a tax of $ 2,731.72 on the 1946 payments. It is to recover these amounts that the instant suit was brought.
The Separation Agreement of July 23, 1930 (P's Ex. 1)
This agreement provides for monthly payments by her husband, Lewis Luckenbach, to plaintiff for the support of herself and her son, custody of whom she was granted, and for the paying and keeping in effect by Lewis Luckenbach of certain insurance on his life for the sole benefit of plaintiff. Simultaneously, with the execution of this agreement, the husband obligation himself to deliver a surety company bond guaranteeing performance of the covenants of the agreement. On her part, plaintiff acknowledges receipt of the sum of $ 3,000 from her husband 'in extinguishment of any and all claims on the part of the wife to any of the household furniture and furnishings now contained in the former home of the parties hereto in Sands Point, Long Island, New York, or elsewhere.' (Para. 1(e). She agrees to accept timely appearance of her husband as defendant in the pending divorce action and to incorporate the separation agreement in any decree of divorce or separation she may obtain, waiving any further provision for alimony. It is ...