Rev. Rul. 58-451

Advice has been requested as to the interpretation of the phrase `incident to such divorce or separation,' which appears in section 22(k) of the Internal Revenue Code of 1939; that is, whether (1) the written instrument must have been made in contemplation of divorce or legal separation in order for it to be `incident' to the divorce or legal separation later obtained, and (2) whether `incident to such divorce' means `incident to such divorce decree ' or rather `incident to such status of divorce.'

Section 22(k) of the 1939 Code provides that where a wife is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, and periodic payments received by her subsequent to such decree are imposed under such decree or `under a written instrument incident to such divorce or separation ,' the payments shall be included in the gross income of the wife. Section 23(u) of the Code, under these circumstances, allows the husband to deduct these payments from his gross income.

Several United States Courts of Appeals have rejected the notion that the written instrument must have been drawn in contemplation of divorce or legal separation. An analysis of those cases supports this proposition.

In the Second Circuit (where many of the cases have arisen), the court, in dictum, at first took the position that the payments must be made under a decree in order for the section to apply. Interpreting the phrase `incident to such divorce,' the court said, `Clearly, the use of `such' * * * has reference to the prior language, namely a separation resulting `under a decree' * * *. Thus the periodic payments may be deducted only if made under a decree of divorce or separate maintenance .' (Italics supplied.) Harold S. Smith v. Commissioner , 168 Fed.(2d) 446 at 447. This is the strictest position to be found and it was not followed by the later decisions of the Second Circuit. No Court of Appeals has demanded that the payments be made under a decree in order to meet the requirements of sections 22(k) and 23(u) of the 1939 Code.

The Second Circuit cases clearly rejected the `contemplation of divorce' theory. In Joseph J. Lerner v. Commissioner , 195 Fed.(2d) 296, the court stated that the statute merely required the existence of the obligation to pay at the time the decree occurs; that it is enough if the payments take the place of alimony. In Commissioner v. Florence B. Moses , 214 Fed.(2d) 912, certiorari denied, 348 U.S. 913, where the wife clearly intended there should be no divorce subsequent to the separation agreement, the court pointed out that the mere fact that she realized divorce was a possibility was sufficient. The court noted that the separation agreement was by its terms to survive divorce and the divorce followed quickly upon the separation agreement (six months late). The court quoted the Lerner decision, supra , to the effect that the payments were to take the place of alimony. In Margaret C. Izrastzoff v. Commissioner , 193 Fed.(2d) 625, the court accepted as proper evidence proof that the parties contemplated divorce at the time of the separation agreement; but, the court specifically noted that the agreement could still be `incident to' regardless of proof or absence of proof that it was `in contemplation' of divorce. Most recently, in Harold Holt v. Commissioner , 226 Fed.(2d) 757, certiorari denied, 350 U.S. 982, the court held that it is of no consequence that neither party intends divorce at the time of the separation agreement.

The Third Circuit has taken a similar position. In George J. Feinberg v. Commissioner , 198 Fed.(2d) 260, the court specifically stated that it would not look to see what the parties contemplated. It looked rather to the fact that the separation agreement payments were to survive divorce and were to cease upon remarriage, thus clearly indicating they were in the nature of or in lieu of alimony.

The Ninth Circuit has taken a similar position, citing Lerner, supra , and Feinberg, supra , with approval, in Commissioner v. Cecil A. Miller , 199 Fed.(2d) 597. The court noted therein that the separation instrument was to survive divorce and that the divorce followed quickly (eight days), and then stated, at page 600:

To require, in addition to all this, proof that the parties mutually planned a divorce and that the instrument was an integral part of their plan, would, we think, be to import something into the statute that Congress did not require. We think that the instrument became `incident to' the divorce in the sense of the statute at least when, in conformity with its terms, it was filed with and approved by the court granting the divorce.

The second problem is whether `incident to such divorce' means `incident to such divorce decree ' or rather `incident to such status of divorce.' It is the position of the Internal Revenue Service that status rather than decree was intended. Raoul Walsh v. Commissioner , 21 T.C. 1063; acquiescence C.B. 1954-2, 6. This is in accord with the interpretation of the same language in the Internal Revenue Code of 1954 as set forth in section 1.71-1(b)(1)(i) of the Income Tax Regulations.

Accordingly, it is held that periodic payments may be within section 22(k) of the 1939 Code if they are made under a written instrument incident to the status of divorce or separate maintenance. It is not necessary that the written instrument be shown to be `in contemplation of divorce or legal separation.'