Frank v. Commissioner , 19 B.T.A. 915 ( 1930 )

JACOB W. FRANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Frank v. Commissioner

Docket No. 38133.

United States Board of Tax Appeals

19 B.T.A. 915; 1930 BTA LEXIS 2300;

May 12, 1930, Promulgated

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The petitioner agreed with his estranged wife that if she would join him in the conveyance of real estate owned by him, and a divorce were obtained by either within one year, $40,000 of the proceeds of the sale, together with a deed in fee simple to other property, should go to her; that in the event no divorce was obtained within the year, the $40,000 and other property should be returned to the petitioner. Held that such payment made to the wife after divorce was a payment by petitioner and not a payment by the purchaser to her in consideration for the release of her inchoate rights to the property sold.

David J. Myers, Esq., and Roy Allen Delong Esq., for the petitioner.

John D. Kiley, Esq., for the respondent.

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LANSDON

The respondent asserted a deficiency in income tax against petitioner for 1923 in the amount of $4,740.53. The single error assigned by the petitioner in his appeal relates to the action of the respondent in holding that a certain payment of $40,000, made to his divorced wife during the year, from the proceeds of the sale of real estate, was taxable to him as income.

FINDINGS OF FACT.

The petitioner is a practicing physician residing in Philadelphia, Pa. From December, 1891, up to June 18, 1923, the petitioner and Florella Elizabeth Frank were husband and wife. About February, 1917, domestic difficulties arose between the petitioner and his said wife which resulted in his instituting, in the Court of Common Pleas for the County of Philadelphia, an action against her for a divorce. This suit was filed on March 7, 1919; and on April 8, following, the wife filed in court an application, which among other things alleged that she, as a result of her treatment at the hands of the libellant [this petitioner], was in poor and destitute circumstances and unable to compensate her counsel and maintain herself while those proceedings were pending; further alleging that the libellant was then in receipt of an income "upwards" of $15,000 per year, and prayed for a rule from said court directing the libellant to pay unto her a sum for counsel fees and alimony pendente lite. On May 9 the court entered a rule in said cause directing the libellant to pay unto the respondent the sum of $35 for counsel fees and alimony of $100 per month. No subsequent action was taken to bring this case to further trial, or to otherwise adjust their domestic difficulties, which, so far as the record shows, remained in this unsettled condition until August 22, 1922, when an agreement was entered into between them as follows:

AGREEMENT made this 22nd day of August, 1922 by and between JACOB W. FRANK, of the First part, and FLORELLA ELIZABETH FRANK, of the Second part, WITNESSETH:

WHEREAS, unhappy differences have arisen between the parties hereto, in consequence whereof the party of the first part has instituted proceedings in divorce against the party of the second part, in C.P. No. 2, March Term, 1919, No. 1284, and the party of the second part has threatened and is about to institute proceedings in divorce against the party of the first part, either of which proceedings may result in a decree of final divorce;

AND WHEREAS, the party of the first part owns premises known as No. 2025 Chestnut Street and assessed as 2019-21-23 Chestnut St. in the City of Philadelphia, which he desires to sell and convey to a purchaser, but is unable to do so, without securing the signature of the party of the second part to the deed of conveyance therefor;

AND WHEREAS, the party of the first part is in possession of certain items of personal property, as set forth in schedule "A" attached hereto, which are claimed by the party of the second part as her property, which claim is denied by the party of the first part;

AND WHEREAS, the party of the second part is unwilling to execute deed for said premises to the purchaser thereof, and thereby divest herself of her inchoate rights in said premises under the Intestate laws of Pennsylvania except upon the terms and conditions hereinafter stated.

NOW, THEREFORE, IT IS AGREED BY AND BETWEEN THE PARTIES HERETO, EACH IN CONSIDERATION OF THE COVENANTS OF THE OTHER, AS FOLLOWS:

1. The party of the second part, for the consideration of $40,000 to be paid her as hereinafter provided, agrees to execute and place in escrow, and has contemporaneously herewith executed and placed in escrow with the Republic Trust Company, of Philadelphia, deed for said premises, one to the prospective purchaser thereof and another with the purchaser's name left blank, said deeds to be held by said Republic Trust Company until the time for making delivery of the deed to the purchaser shall have arrived, and then to deliver same to the party of the first part upon said Republic Trust Company receiving the sum of $40,000, which said sum shall be held by said Republic Trust Company until the termination of said proceedings in divorce; and in the event that a final decree be entered in favor of the party of the second part in the proceeding instituted by her against the party of the first part, or in favor of the party of the first part in the proceeding instituted by him against the party of the second part, then the said sum of $40,000 shall be paid over by the said Republic Trust Company to John R. K. Scott, Esquire, attorney for the party of the second part; or in the event of the discontinuance of said proceedings, and in the event that a final decree divorcing the parties hereto be not entered by the Court within one year from the date hereof, then the said sum of $40,000 together with deed mentioned hereinafter in paragraph two shall be returned to the party of the first part; further that, in any event, said Republic Trust Company shall stand discharged and released from all personal liability in connection with such payment: it being understood, however, that said sum shall be placed in the Saving Fund of said Republic Trust Company of Philadelphia, and that the interest thereon shall be paid over to the party of the second part until the payment of said sum of $40,000 be made to the party of the second part or to the party of the first part as herein provided.

2. It is further agreed that the party of the first part shall make and execute a deed of conveyance in fee simple for the premises 2631 Myrtlewood Street subject to two existing mortgages of $1400 and $550 respectively, said Florella Elizabeth Frank, the party of the second part shall be the Grantee and said deed shall be placed in escrow with the Republic Trust Company of Philadelphia and shall be transferred and delivered by the Republic Trust Company of Philadelphia to the party of the second part at the time and upon the payment by it of the sum of $40,000 to the party of the second part as hereinbefore provided.

3. The party of the first part shall deliver to the party of the second part such items of personal property set off in Exhibit "A."

4. In the event that the prospective purchaser of said property fail to take and settle for same, then the said Republic Trust Company of Philadelphia is hereby authorized to insert in the blank deed the name of any other purchaser secured by the party of the first part, delivery of deed to be made by said Republic Trust Company of Philadelphia to the party of the first part on receiving said sum of $40,000, as hereinbefore provided, which said sum is to be held and disbursed as provided in paragraph one hereof.

IN WITNESS WHEREOF THE PARTIES hereto have hereunto set their hands and seals the day and year first written above.

Witnessed by as to J. W. F.

JACOB W. FRANK [SEAL.]

FLORELLA ELIZABETH FRANK [SEAL.]

We agree to be bound by the terms of the above agreement.

REPUBLIC TRUST COMPANY,

(Signed) JOHN R. MCCREEDY, President. [SEAL.]

Attest:

W. C. POLLOCK, JR., [SEAL.]

Secretary.

To this contract was attached schedule "A," a list of personal belongings claimed by the wife and referred to in the foregoing contract.

Thereafter, on October 14, 1922, the petitioner's wife, Florella Elizabeth Frank, filed an action in the Court of Common Pleas for the County of Philadelphia, against the petitioner, for divorce. (The affidavit annexed to the libel filed in this case shows that it had been executed by the wife on May 9 prior thereto and withheld for reasons not shown.)

Sometime after the signing of the agreement between the petitioner and his wife and before the 18th day of June, 1923, the petitioner paid to the said wife the sum of $2,000 as part of the $40,000, which was to be paid to her in accordance with the terms of said contract.

On May 5, 1923, the petitioner and his wife joined in the execution of a certain deed of conveyance in which, for the recited consideration of $1, they sold and conveyed to Harry J. Hartz the premises referred to as $2025 Chestnut Street" in the agreement hereinbefore set forth; and, in the adjustment of the amount to be ultimately paid to the wife, or returned to him, the petitioner took credit for the $2,000, theretofore paid to her, and the sum of $38,000 was deposited with the Republic Trust Co. to await the outcome of the divorce proceedings then pending. On the 18th of June, 1923, final disposition was made of the wife's action for divorce and, on this date, a decree absolute was entered by the court in her favor divorcing her from the petitioner. On this same day, the Republic Trust Co., by its check, paid to John R. K. Scott, attorney for Florella Elizabeth Frank, $38,000.

In reporting income for 1923 the petitioner excluded the sum of $40,000 paid to his wife upon the termination of their divorce proceedings, but the respondent in auditing such return determined that this amount was received by him from the sale of real estate in that year and added it to his taxable income.

OPINION.

LANSDON: In light of the circumstances affecting the affairs of the petitioner and his wife at the time they entered into this contract of August 22, 1922, it is obvious that the thought uppermost in their minds at this time was the solution of their domestic difficulties. They had been man and wife more than thirty years and had accumulated some valuable property which was in the husband's name. They had been living separately more than five years, and, from the charges made in support of their respective suits for divorce, it would seem that any reconciliation between them was quite improbable. The petitioner had filed a suit for divorce with which, in light of the fact that the wife later prevailed in showing herself to be the aggrieved party, we must assume he could not go forward. He was, however, being required under a rule of the court rendered in his case to pay to his wife alimony at the rate of $100 per month pending the outcome of the suit. Had the wife pressed the petitioner's suit to a trial, at this time and under countercharges, such as she later sustained in her own action, she would have been successful in obtaining a divorce from "bed and board" as provided for in section 9154, Pennsylvania Statutes (1920), she might have been awarded further and additional alimony up to an amount not exceeding one-third of petitioner's entire annual income. It would seem, therefore, in these circumstances, that the advantage in dictating a settlement of their difficulties, if any, was entirely in the wife. She could bring the petitioner's case to trial if she saw fit, or continue their present status and draw the alimony then in effect. If the petitioner decided to dismiss his suit she could file her own, as she evidently had prepared to do, since her libel filed in October following the contract of August 22 had been sworn to by her in May previous. It was under these conditions that the petitioner and his wife met in August and executed the contract set forth in our findings.

The petitioner contends that, since this contract specifically states that the wife, who is the second party, is unwilling to execute the deed and thereby "divest herself of her inchoate rights" to the premise to be conveyed, except upon the terms and conditions thereinafter stated, such statements conclusively show that the consent of the wife to sign the deed was obtained only upon condition the she later be paid the sum of $40,000 out of the proceeds of the sale, and that such money when paid to her must be treated as a payment direct from the purchaser and not from the husband. The difficulty with this construction of the transaction lies in the fact that it ignores the two separate controlling conditions of the contract. The first of these has to do with the general agreement for a settlement and is the inducement for the signing of the deed. This condition in no way concerns itself with the ultimate disposition of the money, but provides for the simultaneous execution of the deeds with the contract so that the property can be sold and the money can be held in the bank pending the fulfillment of the second condition. It also impounds a second deed to the Myrtlewood Street property, which is to be held subject to the same condition; and provides for the immediate delivery to the wife of the personal property listed in schedule "A" attached to the contract. This condition is fully met when the deeds and contract are signed and placed in the bank, and the property described in schedule "A" delivered to the wife.

The second condition in this contract is entirely separate and distinct from the first and has to do with a division of property between the parties in case a divorce is obtained within a year. If no divorce is obtained between the parties within the year, then both the deed to the Myrtlewood Street property and the money are to be returned to the petitioner.

The record indicates that in carrying out these transactions by the parties neither of the conditions in the contract referred to were adhered to in the strictest sense. There is no showing of the execution or putting in escrow of any deeds as provided for in the contract. The actual conveyance of the property, when sold, was by a deed executed May 5, 1923, and $2,000 of the money received by the wife was paid to her in advance by the petitioner and not through the bank or her attorney as stipulated. These departures from the strict terms of the contract tend to confirm our conclusions that the prime object of the parties, in its execution, was to arrive at some definite understanding through which they might be divorced from each other and at the same time have a fair division of their property between them. Having concluded the terms, they were more informal in carrying them into effect. The payment in question was a part of the proceeds of property sold by the petitioner and the income from such sale was a part of his gross income for the year received. Nor can the payment to the wife be treated as deductible. . The action of the respondent is sustained.

Decision will be entered for the respondent.