<strong><em>23 T.C. 576 (1954)</em></strong>

When a divorce decree specifies a portion of alimony payments for child support, that portion is not deductible by the payor, even if the funds are initially under the payee’s control.

<strong>Summary</strong>

In *Gantz v. Commissioner*, the U.S. Tax Court addressed whether alimony payments made by a divorced husband were fully deductible or if a portion was non-deductible child support. The divorce decree specified payments to the wife but stated that upon certain events, the payments would be allocated between the wife and child. The court held that, despite the wife’s control of the funds, the decree’s allocation indicated that part of the payments constituted child support. The court determined that 60% of the payments in 1948 and 1949 were for child support and were, therefore, non-deductible by the husband. The key issue centered on the interpretation of the divorce decree and its implications under the Internal Revenue Code.

<strong>Facts</strong>

Saxe Perry Gantz divorced his wife, Ruth, in 1946. The divorce decree incorporated a separation agreement. The agreement stipulated that Gantz pay a sum equivalent to one-third of his base pay to Ruth for her support and the support of their minor child, Pamela. The agreement specified a minimum and maximum monthly payment. The agreement also stated that if certain events occurred, a percentage division of the payment would occur between the wife and child. The decree was amended in 1953 to clarify that the percentage division was only to be applied after a change of status occurred. During 1948 and 1949, Gantz made payments to Ruth and claimed alimony deductions on his tax returns. The Commissioner of Internal Revenue determined that a portion of these payments constituted child support, disallowing a portion of the deductions claimed by Gantz.

<strong>Procedural History</strong>

The Commissioner of Internal Revenue determined deficiencies in Gantz’s income tax for 1948 and 1949, disallowing a portion of the claimed alimony deductions. Gantz petitioned the U.S. Tax Court to challenge the Commissioner’s decision. The Tax Court upheld the Commissioner’s determination.

<strong>Issue(s)</strong>

1. Whether the divorce decree’s provisions regarding payment allocation indicated a designation of a portion of the payment for the support of a minor child, thereby precluding the deduction of those payments as alimony under the Internal Revenue Code.

<strong>Holding</strong>

1. Yes, because the divorce decree specified that a percentage of the payments would be allocated for child support upon the happening of a specified event.

<strong>Court's Reasoning</strong>

The court relied on the Internal Revenue Code of 1939, Section 22(k), which defines alimony. The court noted that the statute explicitly states that payments designated for child support are not includible in the husband’s gross income. The court examined the separation agreement and the divorce decree, emphasizing the provision for a percentage division of payments upon certain events. The court reasoned that this division indicated an allocation of a portion of the payment to child support from the outset. The court cited the cases of *Warren Leslie, Jr., 10 T.C. 807 (1948)*, and *Robert W. Budd, 7 T.C. 413 (1946)*, in which the Tax Court had ruled that such allocations, even if conditional, preclude deduction of those funds as alimony. The 1953 amended decree did not eliminate the initial percentage division. The court determined that the amended decree was not relevant to the determination.

<strong>Practical Implications</strong>

This case emphasizes that the language of a divorce decree is critical in determining the tax consequences of alimony payments. When drafting divorce decrees, attorneys must clearly distinguish payments for spousal support from those intended for child support. Any provision that designates funds, whether directly or indirectly, for child support will likely result in those payments being non-deductible by the payor. This case also highlights the importance of considering the substance over the form. Even if the payee has control of the funds, the allocation dictates the tax implications. Subsequent cases, such as those involving the interpretation of divorce decrees and separation agreements, should be examined under a similar rubric. Businesses, particularly those providing financial planning or legal services related to family law, must understand the importance of correctly characterizing payments for tax purposes, to avoid unexpected tax liabilities.