Before CHASE, Chief Judge, and FRANK and HINCKS, Circuit Judges.
The issues presented on this appeal are whether monthly payments made to a divorced wife in the years 1942, 1943, 1944, 1945 and 1946, by the guarantor of her husband's obligations in a separation agreement, which was incorporated in a decree of divorce, are taxable as income to her either under Section 22(k) or Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. § 22(a, k).
The appellant was granted a decree of divorce from her husband, Lewis Luckenbach, on December 8, 1930, by the New York Supreme Court. The spouses had, on July 23, 1930, executed a written separation agreement which they desired to have, and which was, incorporated into the decree. The provisions of the agreement need not now be stated except that alimony was made payable by the husband to the appellant in monthly installments. His performance of the agreement was to be, and was, guaranteed until July 19, 1933 by two bonds of a surety company.
On the same day the separation agreement was executed, the appellant and Edgar F. Luckenbach, her husband's father, signed what is referred to as the "Agreement of Guarantee" under which the payments here involved were made.It was not to become effective until July 19, 1933, when the surety bonds expired, and was a guarantee of the performance thereafter of Lewis Luckenbach's continuing obligations under the separation agreement.
Nevertheless, Edgar F. Luckenbach did begin in August 1930 to make monthly payments to the appellant which his son had agreed to make. They were made until December 31, 1936, by checks drawn to her order by a corporation he controlled and the payments were charged to him on the corporation's books. From January 1937 to the date of his death on April 26, 1943, they were made by means of the corporation's checks drawn to his order and endorsed by him to the appellant. These checks were charged on the corporation's books to the "Lewis Luckenbach Loan Account." From April 26, 1943, to December 31, 1946, the corporation drew the checks payable to the order of the appellant, as directed by the executor of the estate of Edgar F. Luckenbach, and they were charged on its books to the "Lewis Luckenbach Loan Account" and sent to the appellant with covering letters stating that they were for the payment "of alimony as heretofore arranged."
Lewis Luckenbach himself made none of the payments on which the appellant paid the taxes she is seeking to recover, nor did he reimburse either the corporation, his father or his father's estate for any of them.
After subdivisions (k) of Section 22, I.R.C. and (u) of Section 23, I.R.C., 26 U.S.C.A. §§ 22(k), 23(u ), became effective in 1942, Edgar F. Luckenbach took deductions under (u) in his 1942 income tax return for payments made the appellant in that year but they were disallowed on the ground that they were alimony payments not deductible because not paid by the obligor spouse.
Thereafter the appellant paid the defendant collector income taxes on the payments made to her as above stated for the years 1942 to 1946 inclusive and after timely claims for refund were unsatisfied brought this suit. It was held that the payments were taxable to the appellant under Section 22(k), I.R.C. as periodic payments received subsequent to the divorce decree in discharge of a legal obligation imposed on the husband by a written instrument incident to the decree. Her tax liability under Section 22(a) was left undecided.
The contentions of the appellant are (1) that since none of the payments were made by her former husband and, consequently, no deduction can be taken for them by the payor under subdivision (u) of Section 23 they are not taxable to her under subdivision (k) of Section 22; and (2) that they were not made in discharge of her husband's obligation to pay alimony but to pay the personal obligations of Edgar F. Luckenbach under his agreement with her called the "Agreement of Guarantee."
In order to understand her position in (2), additional facts must be stated.
When the appellant brought her suit for divorce her husband could not be found within the state and service upon him was by publication. Thereafter she was appointed receiver in sequestration by the divorce court and took possession of the home in Sands Point, Long Island, in which she had previously lived with her husband. It was known as the Fraser Estate, and what she took over included the land, buildings, and household furnishings. She also took possession of the furnishings in an apartment in New York City where her husband had been living. She placed all of these furnishings in storage. Edgar F. Luckenbach claimed the Sands Point real estate and personal property was not owned by the appellant's husband but by himself either individually or through corporations he controlled. He moved unsuccessfully in the sequestration proceedings for the return to him of the personal property seized at Sands Point and later a corporation he controlled moved, also unsuccessfully, in those proceedings for the return of the real estate. Then he brought a suit in replevin against the appellant and the storage company to recover possession of all the personal property. While this suit was pending, he moved into the Sands Point house with his family and the appellant commenced proceedings to have him adjudged in contempt of the court which had issued the sequestration order. She also began proceedings for his examination to discover whether he, or any of the corporations he controlled, held money or property derived from the estate of her husband's paternal grandfather in which her husband had an interest; and whether Edgar F. Luckenbach held property as trustee under this grandfather's will in which her husband had an interest.
The replevin suit and these examinations were pending when the separation agreement and the guarantee of the husband's obligations were executed on July 23, 1930. The claims of the appellant against Edgar F. Luckenbach and his corporations were then settled and she gave him and his corporations general releases from all of them.
Since at least part of the benefit Edgar F. Luckenbach obtained by the execution of the guarantee agreement was the settlement and discharge of all the claims made by the appellant against him and corporations he controlled, appellant insists that the payments which were made to her, and on which she has paid income taxes, were made in payment for the releases and not to discharge her ...