<strong><em>24 T.C. 452 (1955)</em></strong>

A lump-sum payment received in settlement of alimony arrearages is considered taxable income under Section 22(k) of the 1939 Code, as it represents the accumulation of periodic alimony payments, not a principal sum.

<strong>Summary</strong>

In 1948, Margaret White received a lump-sum payment of $14,000 from her former husband to settle a suit for unpaid alimony. The divorce decree, issued in 1943, incorporated an agreement for periodic support payments. The Commissioner of Internal Revenue determined the $14,000 was taxable income to White. The U.S. Tax Court held that the payment represented accumulated periodic alimony payments, making it taxable under Section 22(k) of the 1939 Code. The court distinguished this case from situations involving a complete settlement of future alimony obligations through a lump-sum payment, which would not be taxable if the divorce decree did not require payments over a period exceeding ten years.

<strong>Facts</strong>

Margaret White divorced George White in Nevada in 1943. The divorce decree incorporated an agreement for George to pay Margaret $60 weekly, plus an amount equal to one-third of his net income, as alimony. George consistently paid the $60 weekly but did not make any additional payments based on his increased income. In 1948, Margaret sued George in New Jersey for unpaid alimony. The net income of Margaret’s former husband during the years 1944 to 1948, inclusive, was in amounts which entitled petitioner to receive alimony payments in excess of $60 per week. The suit was settled in 1948, with George paying Margaret $14,000, representing both arrears and a modified weekly payment of $85 per week going forward. The agreement and consent decree from the New Jersey court modified the original Nevada decree.

<strong>Procedural History</strong>

The Commissioner of Internal Revenue determined a tax deficiency on Margaret White’s 1948 income, arguing that the $14,000 settlement payment was taxable income. White challenged this determination in the U.S. Tax Court.

<strong>Issue(s)</strong>

Whether the $14,000 lump-sum payment received by Margaret White in 1948 from her former husband, representing unpaid alimony and increased future payments, constitutes taxable income under Section 22(k) of the 1939 Code.

<strong>Holding</strong>

Yes, because the $14,000 payment represented accumulated periodic alimony payments and was therefore taxable income to Margaret White.

<strong>Court’s Reasoning</strong>

The court relied on Section 22(k) of the 1939 Internal Revenue Code, which stated that periodic alimony payments are includible in the recipient’s gross income. The court cited the case of <em>Elsie B. Gale</em> to reject the argument that the $14,000 was a principal sum. The court noted that the $14,000 was satisfaction for an obligation, and that it did not reflect a new or different obligation, but rather an accumulation of payments that should have been made as a part of the existing divorce decree. The court distinguished this case from <em>Frank J. Loverin</em>, where a lump-sum payment settled all future alimony obligations and other claims.

The court stated that "[t]he term ‘principal sum’ as used in section 22 (k) contemplates a fixed and specified sum of money or property payable to the wife in complete or partial discharge of the husband’s obligation to provide for his wife’s support and maintenance, as distinct from ‘periodic’ payments made in connection with an obligation indefinite as to time and amount."

<strong>Practical Implications</strong>

This case clarifies that lump-sum payments representing unpaid, or accrued, alimony are treated differently from payments designed to settle future alimony obligations in their entirety. Attorneys should advise clients that payments representing past due alimony are taxable, even if paid in a lump sum. When structuring divorce settlements, the tax implications of how payments are characterized (e.g., lump sum vs. arrearages) can significantly impact the parties involved. This case underscores the importance of carefully drafting divorce agreements to clearly define the nature of payments to avoid unintended tax consequences, and to ensure payments extend over a period greater than 10 years if the goal is tax exemption. Later cases have cited <em>White</em> for this distinction.