COMMISSIONER v. LESTER
Legal provision: Internal Revenue Code
Argument of C. Guy Tadlock
Chief Justice Earl Warren: -- Petitioner, versus Jerry Lester.
Mr. C. Guy Tadlock: Mr. Chief Justice, may it please the Court.
This case involves the question of which spouse is liable for tax on child support payments, payments which are paid by the husband to the wife under a separation agreement or a divorce decree.
A conflict has developed among the Circuits as to the interpretation of the language of the statute after the statute had been applied in accordance with the Commissioner's position over a period of about 15 years.
The primary question, therefore, we believe as one of the statutory construction, specifically the meanings -- the meaning of two words in this statute, the words, "payable for."
The controversial language is found in Section 22 (k) which has set forth in petitioner's brief on page 35.
Justice Potter Stewart: 1939 code?
Mr. C. Guy Tadlock: Of the 1939 code.
Justice Potter Stewart: (Inaudible)
Mr. C. Guy Tadlock: The 54 code Your Honor is substantially the -- the same.
The only change makes it conform to a change -- that Congress had in mind that the agreement did not have to particularly attach itself with divorce decree.
It could be a separate maintenance without divorce decree.
Otherwise, it's substantially the same.
Now, there is also a treasure regulation of implementing this Section.
It's found in the petitioner's brief and it starts at page 36.
But it does not cover this point directly, the -- the pointing issue.
In combination with Section 23 (u) which was found on 36, 22 (k) provides as a general rule that the support payments will be taxable to the wife, deductible by the husband.
However, the Section draws a distinction between alimony and child support payments and we're concerned here today with the provisions for child support payments.
The statute assumes from its wording that -- and that this is genially the case that the periodic payments from the husband and the wife will include both alimony and child support.
But it released the tax on and we call the Court's attention to the second sentence of 22 (k) on page 35.
It released that the wife, the tax on that part of the periodic payment which is fixed by the terms of the instrument as being payable for child support.
Now, therefore, the terms of the instrument either divorce decree or the agreement must fix an amount payable for child support.
Now, the Commissioner of Internal Revenue since 1942 has been fought -- has been following a practice, a consistent practice of interpreting the statute to mean that the words "payable for" simply mean that an amount must be set aside by the terms of the instrument as payable for child support allocated or apportioned for child support looking to the purpose of the payment irrespective of how the wife uses the money and how the wife uses the money is the heart of this case, we believe.
Now, in contrast, the Second Circuit, fall out reasonably by the Sixth Circuit takes a much more strict review of the wording of the statute.
In his opinion below, the Second Circuit says that the words payable for have reference to terms and in agreement which must fix an amount that must be used by the wife solely and exclusively for the children without regard or whether she feels that the money should be used for herself, maybe for the best interest of -- of all her children without exercising any discretion at all.
The Second Circuit says she -- she may not have discretion as to the use since she can have no possibility of a beneficial interest in herself.
Justice Charles E. Whittaker: Even to say she may not have of any discretion as between the beneficiaries namely the children or that she may not have any -- any discretion to use the portion of that part for herself?
Mr. C. Guy Tadlock: We think that the -- that the holding of the Second Circuit means both.
But first, it means that she may not spend any of it on herself and the opinion uses this language, even if the expenditure on herself may in the long run be the best for the group, for instance to buy a house or a rug for a home or an automobile.
Now, the Court says that she may have no discretion at all as to the use of this money.
It goes on to say -- even to this extent that the wife may feel that it might be necessary for one period of time to keep the children at home, not giving them free spending money, but she may not do this.
She must give the children the amount of money set aside in the instruments so they may use it.
If she hasn't discretion, then, this does not fit the language according to the opinion of the Second Circuit.
Justice Potter Stewart: Do you think the Second Circuit actually that the money had to be given to the children or -- or simply spend it exclusively on their behalf for their benefit.
Mr. C. Guy Tadlock: Well, of course.
We don't feel that it means that it has to hand it to the children.
But, it -- it uses this -- this language that the wife under this reduction clause in this agreement, might at one time feel that best to keep the children home and not give them free spending money.
It even goes on to indicate in its opinion that the wife should have no control over the money and that even possession is suspect as to whether she has it.
Language that we think is much more stricter than that -- much more strict than that call for about a statute.
Justice Charles E. Whittaker: Mr. Tadlock.
Mr. C. Guy Tadlock: Yes, sir.
Justice Charles E. Whittaker: Is it possible to -- and logical to treat her as a trustee of the part for the children or not?
Mr. C. Guy Tadlock: We think that would depend upon state law of course.
You would have to look to the law of the individual state to decide whether she's a fiduciary to not, whether she's a trustee.
A Congress in -- in the words of the statute would not require that she'll be a trustee.
Congress does not require that -- that a certain amount be used or spent on the children.
It says, that if an amount can be determined from this instrument as payable for child support, then, for tax purposes, we will say that is not income to the wife.
It is deductible to children.
Now, there are some States, Your Honor that require that a wife must act as a trustee.
There are other States to say the wife may use this money as she thinks best to support the children in the manner which they are accustomed and the Court will not make her spend it the way that husband wants her to spend it for instance or somebody else may want to spend it as long as she's supporting the children.
Justice Charles E. Whittaker: That would be the power of a trustee with broad powers, a wide discretion to use the money as the trustee may think best for the beneficiaries.
Mr. C. Guy Tadlock: Yes, sir.
Justice Charles E. Whittaker: But that still wouldn't permit the trustee to appropriate a part of it for her own use.
Mr. C. Guy Tadlock: That's right, Your Honor.
This is true.
And we say that regardless to our position on how she spends the money, even on herself, would be permissible under the statute because if she should use the money improperly, this would be a matter for the husband, for the divorce court, for the State or the public which are always parties do, a domestic relations proceeding to come in and hold her accountable but for tax purposes.
When Congress says, "That if we can find from the terms of this instrument that amount is payable for child support."
And then most significantly, they go to the next sentence and we refer you again to page 35 of the brief, the third sentence of this Section which covers partial payments.
If a husband is -- is making payments for the support of his wife and his children and he makes a -- he defaults on part of the payment and he only pays part of it, Congress says, "That for the purpose of this exception and for the purposes of taxes, we will consider whatever he pays going first to the support of the children."
And then the balances go to the wife.
And Congress there was not trying to directly use.
The -- the wife may receive this money and under the very nature of things, have to spend a little bit on herself.
Congress was not trying to police the agreements as it went along.
He was trying to fix the tax at a certain point.
Now, the difference in the statutory interpretation between the Commissioner's position and the Commission of the Second Circuit revolves around the reduction clause.
A reduction clause that is -- has been in all of the reported cases.
Now, the taxpayer here agrees to pay his wife a certain percentage of his income for her support and the support of three children.
He doesn't say that X dollars is set aside to support the children.
He does say this.
He says that, "The payments to the wife will be reduced one-sixth upon the death, the marriage or the emancipation of any of the three children."
Now, anyone of these events if it should occur would terminate his obligations to support the children.
If the children -- child dies, if child becomes emancipated or marries, then his obligation under the law of California ceases.
Now, prior to that time, prior to the ceasing of his obligations and support, we think that it's fairly obvious that 316 are one-half.
He has set aside and here, marked as payable for the child support.
Now, there are numerous cases, 25 and the tax court, Sixth Circuit Court to Courts of Appeal decisions which hold that -- that a reduction clause which is based upon an event that will -- that will terminate the obligations to support the children satisfies the agreement -- satisfied the statute and the reason for that is that you can calculate with precision the exact amount that it has been paid for child support.
The reduction clause in the instant case we feel is the most important and the heart of the case, but taxpayer on brief at least makes a factual argument and we would state very briefly, if the Court's permission, a few of the other facts, particularly those relied on by the taxpayer.
Because the payments are based upon a percentage of his income, there was a maximum fixed for each year.
All payments were to -- to cease if the wife remarried, and the parties agreed to pay the taxes assessable against each of them.
In 1942, and we think this -- this history is most important, in 1942 following the so-called alimony trust cases, the decision is handed down by this Court, Congress passed this Section of the code.
It wanted to change the law, but it made a distinction between alimony and child support payments.
Now, prior to 1942, the decision of this Court had held that payments made by a husband to his wife for her alimony or the setting up of a trust with the income to go to the wife would be considered as a general rule as income to him not deductible and not income to her.
And now of course, the exception was that if there was an alterable agreement and a decree and a particular State according to state law that fix that obligation, it couldn't be changed and it satisfies obligation, then, the general rule had been accepted and the husband then could deduct the amount.
So, Congress changed the law.
They had to switch the basic law as decided by this Court.
It made a distinction between alimony.
And in doing so, it provided this that -- that if the -- the husband could not deduct the portion of the expense, if the agreement that he had entered into or if the divorce decree had terms in it but set aside and it uses a portion of this amount as fixed and as payable for the support of children, then Congress out of the sentence that we had in mind, which we think is most significant.
The sentence it says, "If there was a partial payment, we will consider it for tax purposes as going towards the support of the children."
The committee reports show a concern of Congress for inconsistencies created by the alimony trust cases and for the hardship on the husband.
The -- the committee reports do not indicate any particular concern with support payments.
It started out by having in the words of the statute specifically designated that changed that to fix and it used terms support payments going to the children or attributable to the support of the children.
And we feel that none of these terms, none of these reports or remarks indicate that Congress was trying to say that it had to be used for this purpose.
There was no disapproval of the Commissioner's position in 1954 when the -- these sections were reenacted in the code and substantially the same form into the same effect.
At that time, there were more than a dozen cases in which this very issue had been decided, in which reduction clauses had been interpreted by the tax court, in which the use, argument had been raised by taxpayers and rejected by the tax court and by three of the Circuits.
It maybe that Congress, if there's any -- any significance may have been aware of this consistent administrative practice.
The Congress of Ninth -- or the Commissioner on 1946 in the Budd case, the first case that -- that came on this regard interpret the statute as requiring this on the part of the Internal Revenue Service.
That you examine the instrument as a whole to try to ascertain if there were provisions therein which fix an amount to be payable one part for alimony, another part for child support without regard to use.
And this was upheld by the courts until just recently three decisions, the Second Circuit and followed recently by the Sixth Circuit in which the -- they held that the reduction clause was insufficiently marking that there had to be terms in the instrument which fixing amount and they use the words, "to be use solely and exclusively for the support of children without the wife having any possibility of a beneficial interest or using her discretion in any manner in which the money -- in any manner the money was spent."
It goes on to say that it's not what she receives.
This is the Sixth Circuit in the Ash case following while not, what she receives but what she uses.
Then, we have two more cases cited in our brief, the Metcalf case in the first, the Eisinger case in the Ninth where they continue the general rule of the Commissioner, and that the courts in saying that they feel that it is not the use -- it's not the control, but for tax purposes what they have in mind is, "Can you find out definitely terms in the agreement which set aside an amount for payable to child support.
And they affirmed again their belief that a reduction clause, the reduction clause which reduces the amount when the obligation support ends meets this situation.
Justice John M. Harlan: Does the record how the wife treated these amounts in her income tax returns?
Mr. C. Guy Tadlock: She did not treat his income -- well, I -- sorry, the record does not show this.
Justice John M. Harlan: It does not show this?
Mr. C. Guy Tadlock: It does not show this, Your Honor.
Now, we -- we might say that it's the wife is a resident of California.
This is the Ninth Circuit.
The Ninth Circuit holds this is not income to the wife under this situation.
The husband is now resident of New York.
The Second Circuit holds that it is income for wife and not deductible by him.
This was one of the reasons for the petition and we assume probably one of the reasons for granting a petition.
It's this possible in the inconsistency of the -- of the treatments throughout the Circuits.
Justice Charles E. Whittaker: Mr. Tadlock, is it material on what the parties to the contract intended as to who should pay the taxes or not?
Mr. C. Guy Tadlock: We think the intention is important if you confine it within the four corners of the agreement, but only within the agreement.
The Congress said -- excuse me.
Justice Charles E. Whittaker: What do you say about subparagraph D on page 11 of the record which provides that after the first three years, the wife has to get only such sum as after she has paid the taxes leaves to $15,600 a year?
Mr. C. Guy Tadlock: We think that there is no significance to that at all Your Honor for this reason.
It says, "The taxes assessable against her based upon the amount paid, the taxes assessable against her."
The parties did not try to fix the instant of the tax in this agreement.
They could not do so.
Congress did so by the words of the statute.
But if you find terms in an instrument that indicates that an amount is paid for child support, that fixes the instant of the tax.
But the language here after payment of all income taxes assessable upon the wife with respect to the amounts thus paid, now, it could easily mean that she would be taxable on the alimony and not taxable upon the child support payments.
Justice Charles E. Whittaker: Well then, I'd like to know with that construction how would you compute the amount the husband just to pay in that year?
Mr. C. Guy Tadlock: That the amount to be paid would be 20% of his income.
Justice Charles E. Whittaker: But not in excess of $15,600 after taxes.
Mr. C. Guy Tadlock: After the wife has paid the taxes, assessable to her.
Justice Charles E. Whittaker: Alright, now, if that's -- if that is the only issue -- excuse me.
Justice Charles E. Whittaker: Would you say that that's what she's to have left after she has paid the taxes assessable to her?
Mr. C. Guy Tadlock: Yes, on the alimony.
Justice Charles E. Whittaker: And -- the $15,600 --
Mr. C. Guy Tadlock: Which will be 50 -- 50%.
Justice Charles E. Whittaker: The 15000 -- well, in this case, it's 20%.
Mr. C. Guy Tadlock: Well, but 50% of the payment is for alimony.
Justice Charles E. Whittaker: Yes.
Mr. C. Guy Tadlock: 50% is for child support, 316.
So it will be easier to calculate the amount of her tax and then to deduct that.
Justice Charles E. Whittaker: Now then, this -- this will help me.
Is this $15,600 in your view her money or is that her money and the children's money?
Mr. C. Guy Tadlock: It is her money and the children's money to be used as she determines to support the children in a manner in which they are accustomed.
Now, she doesn't get 15,600.
She gets 20% of his gross income provided, it will no exceed to 15,600 after she pays the tax on the amount assessable to her.
And of course, our point is that the amount assessable to her is the alimony.
They are not paid for her support and -- and not the 50%.
Justice Potter Stewart: Mr. Tadlock, I understand your argument that it would be must at most unfortunate to have a rule that -- if two divorced spouses live in different Circuits to have a rule that would be in internally inconsistent.
But it seems to me that the rule for which you contend has just those dangerous in it.
As I understand it, you say that the Commissioner and subsequently the Court should look at the agreement as a whole and draw their own conclusions as to really what's intended.
Now, certainly, I suppose there are agreements as maybe one of them are reasonable minds could differ as to what was intended applying that rule.
Whereas, if you apply a very strict rule such as that which is evolved in the Second Circuit, there's -- there is it seems to be, much less likelihood if that rule is universally applicable -- applicable, much less likelihood of the conflicts that you told us about.
Mr. C. Guy Tadlock: We have two comments on that --
Justice Potter Stewart: (Voice Overlap)
Mr. C. Guy Tadlock: -- Mr. Justice Stewart on that.
One is, that there are some things more important than certainty we believe.
Here, the interpretation --
Justice Potter Stewart: This area certainly is about the most important thing.
Mr. C. Guy Tadlock: Well, sir --
Justice Potter Stewart: And on lawyers interrupting their agreements will know where they stand.
Mr. C. Guy Tadlock: And there would be a little opportunity or -- or very few instance in which they would be an amount for child support.
The tax would always be on the wife and the children on the amount of money.
Here, the parties may carry out the congressional intent of dividing -- and these things between alimony and child support.
We think that -- that the Second Circuit's view would be a more inconsistent and that you would have to go to state law every time to find out the wife's obligation whether she had to spend the money for the children or not and just -- what are relationship would be.
Of course, this may -- I -- I have no doubt this would probably foreclosed the situation.
But, we don't think that Congress intended that.
And then, a second part of the answer if I may, "If we now come to the point as the Commissioner has and as the Court have, except the Second and Sixth Circuit, that if you can tell with precision how much is paid for child support, if you use a reduction clause in which the event terminates the obligation of the husband and wife support the children, then you will have no difficulty."
Everybody can understand it.
I say that because in the Weil case, the payment ceased if the children died or at least the majority, only if the wife remarried which she may never do, which means that she could have received money long after her obligations support had ceased.
In the -- in the Hershon case, the payments only terminated if the wife remarried.
But those -- but the Commissioner has agreed not to press those charges if it's understood that it's now the rule is this, if the event ceases -- terminates the support of the children, then you can tell exactly how much is meant.
Justice Potter Stewart: So, is it your position that wherever there's a reduction clause, it's quite a part from my variations that there maybe a non-reduction clause, is that wherever there's a reduction clause, that part of it would be attributable for the -- for the children?
Mr. C. Guy Tadlock: Only if the reduction clause --
Justice Potter Stewart: Is that the Commissioner's position now?
Mr. C. Guy Tadlock: The -- the Commissioner's position would be that if you examine the instrument to hold and find terms that will fix an amount and if a reduction clause will do this.
Now, the Commissioner has held that reduction clauses do not do this when the wife wants to show use.
The courts have held that all reduction clauses do not fit the situation, and we agree with that, for instance, the one that the reduction would be only if the wife remarries, this continuously may never come in to being.
The Commissioner does not -- does not pursue this.
But if you can tell that the obligation for this would be out that the reduction will occur when the obligation support the child ceases, then you can tell exactly how much.
We feel that there -- Your Honors that there's nothing in the development of the law and the legislative history in the wording of the statute that requires this strict and rigid interpretation of the Second Circuit.
Then, the interpretation which says, "The amount must be used solely and exclusively for the support of the children.
The wife may have no discretion in its use.
She may not spend what she thinks is best in the long run, for the group as a whole."
These are the words that they used.
She may not spend this.
And we feel that that requirement is not called for by the statutes.
It's not called for by the history of the development of the law in this field and that if you can find from looking at the whole instrument, terms that fixed in amount payable to child support, you fix the incident of the tax thereby and you satisfy the statute.
May it please the Court.
Chief Justice Earl Warren: Mr. Mandel.
Argument of Louis Mandel
Mr. Louis Mandel: Mr. Chief Justice, if it pleases the Court.
Before I get into the discussion of -- of -- outside of the case, I'd like to point of two very important points.
Number one, that we don't share the -- the contention of the petitioner that under the Weil case, the wife has no discretion about spending the money on the children.
She has a discretion, but it has to be spent on the children.
She can spend it only on the children anyway in her -- in her discretion because she has the custody of the children.
And also, I want to point out that under the Ninth Circuit ruling in the Eisinger case, their position is not correct there either.
Because even in the Ninth Circuit in California, this very case would be adjudicated the same way the Second Circuit adjudicated for that simple reason --
Justice William J. Brennan: And what (Inaudible)
Mr. Louis Mandel: -- for that reason.
In the Eisinger case, there -- the whole payment was a $125 a week.
And if she remarried, it was reduced to $62.50 a week.
The Court in the Eisinger case held as in the Budd case that when she remarried, the $62.50 was the amount that was set aside for the children.
Now, in the case before the Court now, that very point was avoided because if she remarries, there is nothing left for the children, although the custody remains with the -- with the wife, they were afraid possibly there might be an adjudication or might be stretching the statutes somewhere along the line to the point where they would not treat these alimonies so everything ceases the moment she remarries so that this alimony.
In other words, the Budd case had $500 a week -- a $500 a month that was reduced to $200 a month in case she remarried.
And they held that $200 a month was for the children.
Again, the same principle in this case, nothing is left when she remarries.
So we're not -- in -- in contradiction to the Eisinger case in the -- in the Ninth Circuit, now I'll go on with more of these cases but I'd like to get back to my case.
Justice Charles E. Whittaker: Well, how do you square that argument Mr. -- how do you square that argument Mr. Mandel?
With the provision here that upon marriage, et cetera, of a child, one-sixth of the payment ends.
Mr. Louis Mandel: I can square that by the simple intent of the whole agreement.
The intent of the whole agreement was to state within Section 22 (k) as I will expand my whole -- my whole case when I -- when I -- and the only -- the only reason they -- they recognized and the law doesn't prohibit that and the history of the statute when Congress will prove my point too.
That the -- the exchange between the people that take care of this situation didn't prohibit any change in the payment.
For instance, if she went to Florida and lived there, there was no cold or there was no -- no need for schooling or supposing they had decided that during college years of the children that so much would be paid increased to decreased or part of the money were to be spent and given to the child for college.
All of these didn't prohibit -- these changes were not prohibited at all as long as you didn't allocate and then fix them for the children in the overall agreement.
In other words, we could change if it's cold, heavy winter, we could have more money if college -- kids -- the child that was to go to college, we could provide conditions under which they would increase or decrease because it was built on the family need the whole overall.
And when we examined the whole thing in light of the -- of the history of the statute, when the practice of the statute, I think all this would become very clear.
I think, when we -- the first thing I -- I must say that -- and to start my -- my argument, I -- if this statute, I -- I will cover it in five points.
First, we'll discuss the statute.
If this -- if one approaches this statute with sincerity and simplicity and doesn't want to read anything into it, they must come away with the meaning that Congress intended.
And that this disagreement before the Court was in -- within the purview of the statute.
Using -- using the language of Judge Hand in -- in talking about the statute, he said, "The statute is plain language patently chosen with care."
Now, if you'll approach the statute from that point of view with simplicity and sincerity, it does not show any complications until you come to the word fix.
When you come to the word fix, then again if you lose your simplicity and sincerity, you can get confuse very much about it.
But what Congress meant was to fix the amount for the support of the -- of the children.
Now, fix means fix.
In other words, if you want to give $500 amount to -- to the wife, you gave a $500, you said a $100 was for the support of the children, that would fix it.
Congress did not mean when they created the statute to create a track for the taxpayer that he could fall and to be ruined financially for the rest of his life.
It did not mean for -- for the taxpayer to get into a separation agreement where any agent who is so inclined would examine it with a microscope, and using the -- the words of the -- of the Weil case, say comes through the agreement with such care to find a word or sentence that it could hang on the word fixed and then brought and fixed from its original intention.
This was not the intention of the statute and it becomes much more apparent when you go into the history and the purposes of the statute.
Chief Justice Earl Warren: Mr. Mandel, would you tell me how this might become a trap for -- for the husband?
Mr. Louis Mandel: Yes, I would.
You're under the impression you're going within -- within the purview of 22 (k).
And you draw such a separation agreement because the statute permits you to give an amount, a whole amount to the wife for everything with -- and it shall be alimony, it doesn't prohibit.
That is the history of the statute and I'll point out later intended.
So, if -- if an agent could go through an agreement and find some little thing that is so contrary to the whole intention, and then say this means fixed when it's not fixed, and brought it from its original intention fixed as fixed a $100 for the support of the child, $200 for the support of the child.
Not a case where you reduce a payment and you say that's for the support of the child.
So, therefore, if -- it opens broadness there that any -- any agent could go in there and find the sentence or word that he can say this fixes it.
And then use that as a means and then the taxpayer finds himself in the situation as again, I will show in the history of the tax of the purpose of this statute that he has -- he's in the big surtax bracket and he hasn't got enough money to pay the taxes.
If this Court will permit me to get into the history of the statute and how it came about, I think a lot of these answer will -- will come out.
The history of the statute and the purposes was three-fold.
They were aid to relieve a tax burden the existed for such families that were separated and divorced.
And now had greater expenses and they had before and yet they didn't have the advantage of the family tax bracket.
In other words, since we're separate living apart under the tax rule, they had a single status even though they were married and even had more expense because the two families will be having more -- two homes instead of one before.
Two, it was created for the purpose of the maximum that the recipient of the money shall pay the taxes.
In other words, the principle was that the husband was just a conduit for which -- through which the -- the wife got his money that is if he earned it, but she got all the money so the principle that the recipient of the money should pay the taxes, that was another reason for which it was created, the record will show.
And the third reason it was created, because of the surtax situation.
In other words, they conceive the situation whereby some allowance or some agreement where the husband would give so much away that his surtax brackets were so high that if that amount were not deductible from him and the tax on it was payable by the wife, that he wouldn't have enough money to pay the taxes on the whole amount.
If that part of it payable to wife -- to the wife were not charged to the wife.
Now, these are the three reasons in the history of it shows, may I point to three parts of the congressional record where this very problem was -- was discussed and confronted and this very purpose.
It turns to page 8 of our brief.
It has -- page 6 of our brief.
It has the report of the Senate Committee and that -- may I read it.
It reads as follows.
"If however, the periodic payments and the trust income are more conceived by the wife for the support and maintenance of herself and of minor children of the husband without such a specific designation of the portion for the support of such children, then the whole of such amount is includible in the income of the wife as provided in Section 22 (k) and in Section 171."
Now, further down, we also have another portion which -- which came out in the hearings on this question and it's in the footnote.
"If however, that amount paid the wife includes support of children, but no amount is specified for the support of the children, the entire amount goes into the income of the wife."
This is part of -- of the Senate's record and this is a part -- this is a very question that they discussed at that point and part of the free reasons for enacting the statute.
Now, that's the reason for the statute and the reason for not complicating the word fix that's there, as Judge Hand said it's a simple word.
Now, let us turn to the agreement that's before the Court.
The agreement before the Court intends to stay within the purview of this statute and I will list the things it did and the intentions manifested in the agreement for -- for that purpose.
Number one, it pays as high as 50%, it starts out as paying as high as 50% of the gross income of the husband.
The record clearly shows that his expenses, his taxes on -- on file in this case run over 40% of his income.
Now, 50 and 40 that means he had left less than 9% for his state and federal taxes.
If he will burden on any part of the wife's 50%, he never could made his taxes, he had nothing left for himself.
So, the very intention in the payments at the beginning indicates that.
Number two, there's a paragraph that refers to taxes in the agreement and it says for -- up to the point of this agreement, they shall file a joint return.
After this agreement, they shall file separate returns each reporting their own income.
Now, the -- the intention was the very intention put together with number one was that she was to report the money that she -- she got and he was to report the money he was left with.
Three, it provides that she pay the taxes on that money.
And my worthy opponent is a little - is torturing that section of payment of taxes as that was brought out by Judge Whittaker by trying to say -- Justice Whittaker by trying to say that $15,600 that she was to get after payment of taxes, he wants to now to say she was going to get not $15,600 but she was going to get $7800 tax free and $7800 after she paid the taxes.
Now, the agreement doesn't indicate anything like that.
Chief Justice Earl Warren: Did Mr. Tadlock said about that?
Mr. Louis Mandel: He -- he indicated and say -- he indicated that the $15,600 was to be broken up if that's his contention, half of it was -- was child support which should be charged, the wife had no tax to pay.
So a $7800, you break up to $7800 as child support, as $7800 will remain as her alimony in which he would pay the taxes.
He refers to that tax clause that she would only pay on taxes that would leave us $7800 and not $15,600.
That -- that's what I understood him to -- to say from his brief and so forth.
Now, one other important thing they did.
This agreement -- this agreement takes care of -- of the custody of the children permanently and a many other things.
But, they were so concerned in -- in drawing of this agreement that rather than -- than confront the problem that anything might be -- in this agreement might be treated differently than alimony, they treated the whole sum to the wife payable as alimony.
In other words, when the marital obligation cease, when the wife was married again, it all disappeared.
And although a lot of other things are taking care of, the child -- the children are left -- there's no provision for their support because rather than do that, rather than to take a chance of putting any amount that they would finally later on agree or -- or litigate about, they avoided that whole issue in order not to have that question tortured at all as for that the whole thing would go out as -- as alimonies.
Justice Potter Stewart: How old were the children at that time of the separation?
Mr. Louis Mandel: I believe they were 11 --
Justice Potter Stewart: It's his children or?
Mr. Louis Mandel: -- 11 -- 13 or around that, 11 or 13.
So there was no question.
Now, there's another point also that -- that there is a maximum payment here in this agreement that the wife gets.
She gets $15,600 ultimate maximum payment and a 15 -- and she gets a maximum payment at the beginning which rounds as high as 50%.
Justice William J. Brennan: (Inaudible)
Mr. Louis Mandel: That's right, that's now.
Now, if the children had died in the common disaster, a day after this agreement, this maximum would remain the same.
This $15,600 would remain the same.
This 50% payment would remain the same.
It's only the payments to her that was never reduction.
In other words, they try to avoid as much possible the word "fix" in other -- in order to get away from it.
So, the only thing they were left with and the whole agreement was that they're realizing that the -- that the times, the needs and the circumstances a method of -- of reducing the payments one-sixth at a certain point.
Now -- now also, the part of it again, there's another point which in itself is not important but in the attempt of the overall agreement is important.
Chief Justice Earl Warren: What --
Unknown Speaker: (Inaudible)
Chief Justice Earl Warren: Go ahead, go ahead sir.
What would you -- what did you say her income would be if the children were -- were killed the day after the agreement?
Mr. Louis Mandel: Her maximum income would be 50 -- would be $50,000, the day after her maximum would still remain $50,000.
The payments that he had to make the percentage payments would be reduced.
But the maximum remained constant.
In other words, that was never --
Chief Justice Earl Warren: Do you mean the maximum of $15,000?
Mr. Louis Mandel: Of $50,000, the first year.
Chief Justice Earl Warren: $50,000.
Mr. Louis Mandel: Later on, after the third year, remained to $15,600.
Chief Justice Earl Warren: Yes.
Mr. Louis Mandel: And if the children would all -- all in a common disaster on the third year, she would still get $15,600 if he earned enough on 20% to give a $15,000 whatever it was to the percentage he was entitled to get to give a $15,600.
That wasn't changed.
There is one further important point which in itself is not important.
But it -- it goes to the word "fixed."
And it also -- and it encompasses the question that's presented from the Weil case.
Although, the -- the children are in the custody of the wife, when they're away from her, even though the agreement provides that they have spent 30 -- 30 days a year with the father in New York, there is never a change in the payments that go to hers.
She gets the same thing.
There's never a reduction, nothing changes ever.
She gets the same money.
So, nothing here is fixed for the support of the children and of course, the admission by everyone that she has free use of the money, I mean no one except you -- you bring to the court and say she's not taking care of the children, she has complete discretion as to how she'd use it whether she buy a house or -- or she wanted to go to Las Vegas or whatever she wanted to do.
Justice Charles E. Whittaker: But substantially, in the interest of the wife and the children that the wife paid the taxes on her percentage of the husband's income, wouldn't it?
Mr. Louis Mandel: That's right.
Justice Charles E. Whittaker: Just being geared to a percentage of his income and she would be a lot better off if she could get the half of his income as her tax rates, then she would be if she got a half of -- of his earnings after he'd paid the taxes at his much higher rates, is that right?
Justice Potter Stewart: He's geared to his gross income, is that (Voice Overlap) --
Mr. Louis Mandel: If that's right, the whole -- the whole structure is built so the -- the family unit would have the best advantage of the gross income so that they will take advantage of this divided income so that he is not left with -- with the whole gross amount.
The whole gross amount in charge with a -- with a surtax that would do no one any good, as a single man.
Justice Charles E. Whittaker: She -- she and the children get substantially more money to put in their pockets under your construction?
Mr. Louis Mandel: Oh, yes.
It's the whole intention of the agreement.
I -- I failed to mention that.
The whole purpose of the overall agreement must to accomplish that which the Court permitted in the history of the statute permitted them to do, to take whatever his earnings up divided as well as they could among the people in their own judgment where the tax would bring them into lower brackets.
Justice Potter Stewart: Now, there's a gross saving in taxes under your theory but it is -- is Mr. Justice Whittaker correct in saying that there's a saving this, a tax savings to her.
Mr. Louis Mandel: Well -- well, he might be correct on this if -- if we selfishly tear this away and she has no more interest in the overall picture of the man and -- and he's ability to earn and his desire to earn and to destroy all that because the more he earns, the more she gets tax free, and the worst all he is.
He may as well point of a certain point and go.
Justice Potter Stewart: Well, that is a more settled argument.
But assuming that he continues to have sufficient income to meet his obligations under this agreement, it's correct, isn't it that she comes out ahead tax (Voice Overlap) --
Mr. Louis Mandel: Oh, if -- if -- that's right, oh yes.
If -- if the purpose of the agreements are lost and that -- and she can -- she can escape this but she -- the purpose indicates, yes.
She's -- shes' better off.
Justice Charles E. Whittaker: (Inaudible) she comes out ahead in the exact percentage of the difference between his tax rate and hers.His tax rate if it was all taxed to him, they would be 66%.
But I've heard 33% lasts.
She, therefore, has comes out of 43% more money, don't she?
Mr. Louis Mandel: Well, I -- I can only reduce it to the simple formula.
I think you're right that the simple formula that anyone can get $7800 as this would finally reduce that itself in -- in the third year to tax free money, they are certainly better off no matter what his bracket is because they are no more burden whether it's 20 or 50 or 80.
If you can interpret this agreement, where she ends up on that $15,600 that you mentioned before, where she can get that tax-free, of course she's better off no matter what his percentage is.
She already gets half of the money she gets tax-free.
Now, I mentioned -- I think I mentioned the -- I said a little while ago that under the -- the rulings urged by the Commissioner in the Budd case and the Eisinger case and the Metcalf case and the Fischer case, under all these cases, all these cases eventually end up where the amount which is allocated for the support of the children is what is left to be paid by the husband after the wife remarries.
This is the general overall result.
And if we were to apply the same principle as it is applied in the Budd and the Fischer and the Metcalf, without going into details because I can give you the details of each one of them, the Budd 500, 200 is left after -- after she remarries, 200 held.
Eisinger case, 125, 6250 left after she remarries, 62 they held fixed.
The Fischer case, 125 left after remarried, a 125, it was held.
The Metcalf case, a 100 -- 125 left after she remarried, 125 was held for the support of the children.
In our case, we went along the very line that the Commissioner has urged.
We have nothing left that she remarries.
She remarries the day after a week after this agreement.
No money is paid under this agreement.
Justice Charles E. Whittaker: But isn't it true Mr. Mandel though that the language in the instrument at upon the death emancipation of the marriage of the child, the payment shall be reduced one-sixth means something.
Now, what does it mean?
Mr. Louis Mandel: Well, I -- I cannot say.
I -- I -- all I can say in all sincerity, it means this that they wanted a way to cut down the -- the payments.
They wanted some method time.
They wanted some method to cut down.
They chose this as the best method to cut it down.
Justice John M. Harlan: She gets the sixth (Inaudible)
Mr. Louis Mandel: That's right, that's right.
Justice Charles E. Whittaker: Well, does that then mean that there is a sixth for each child and three-sixth for the wife?
Mr. Louis Mandel: I cannot urge that because the agreement did not intend that it would be that way.
She's not obligated to spend it that way.
It was never their intention all through it, not they would have said so somewhere along the line of 60s for their support of the child.
It only finds its way and I have to get back again or repeat myself to the very thing that I urged at the very beginning that we -- we can't have a law or -- it was not the intention of Congress to create a law that -- that you can go through -- go to an instrument with a -- with a fine tone and a microscope and then later, will find something to hang -- hang on and say, "Now, you can't talk to any reductions at all.
The moment you reduce the payments, you're in trouble."
Justice Potter Stewart: The point is that this evidences contemplation of the parties that as the children grew up or perhaps unfortunately died, the wife would perhaps need to live in a smaller house or in an apartment and that her needs would be less.
But if they term fixed in the statute requires much more definitive and it's evidence (Voice Overlap) --
Mr. Louis Mandel: That's right.
It was intended to be simple.
We're now urging it and pressing in to a different form.
Justice Potter Stewart: That the -- that the word "fixed" has a meaning (Voice Overlap) --
Mr. Louis Mandel: It's very definite.
You can't -- if I reduce something, you know, I said -- if its winter time, you get $20 less or you go to live with your -- you know, you can't call that fixed it, if all through the agreement you're trying to avoid that very thing.
Justice Potter Stewart: Yes.
Chief Justice Earl Warren: The agreement does say, does it not, that this is to satisfy his legal obligations for support of the wife and the children of the marriage?
Mr. Louis Mandel: Yes, but the statute was enacted for that very purpose and as I told it the history in the Senate and the hearings for that very purpose that he could do that.
That very question came up in the Senate.
Could he do that?
And yes, they said this is exactly what happens.
As long as he doesn't fix it or specific about the amount, he can give her a lonesome of money for all purposes and his charge as alimony.
Chief Justice Earl Warren: Well, I -- I suppose we start with the premise that this agreement was for the support to -- to discharge his liability for support both the wife and the children, isn't that right?
Mr. Louis Mandel: Well, she -- she might not -- yes, she might not claim -- if he gave us a efficiency she might -- this might protect him against that, yes.
Chief Justice Earl Warren: Well, I was saying of this particular language, it says, "to settle for all times their respective property rights interest, duties and obligations with respect to the each other and to arrange by agreement for making a periodic payments through the wife as and for.
The maintenance and support for her and the aforesaid children of the parties in this charge of the husband's legal obligations arising out of or in connection with the marital and family relationship between the parties."
Now, that's certainly kind --
Mr. Louis Mandel: That's right and I say to you --
Chief Justice Earl Warren: -- that -- that it is paid -- that there is money in there for the support of the children to satisfy his legal obligation, isn't it?
Mr. Louis Mandel: I -- I guess I agree with that but I urge that the statute gave that right to the -- to this right to go into an agreement, the history of the statute gave them that right to do it that way.
Chief Justice Earl Warren: Well, now my point -- my point was simply this, now this doesn't bear on whether you're right or whether the Government is right.
But, if there is money in -- in these payments to take care of the children, then, the only question is whether we can find out from this agreement what part of that money is for the children's support.
If we can find out, then he's liable for that portion of it.
If we cannot find out, then she is liable for it, isn't -- isn't that the position (Voice Overlap) --
Mr. Louis Mandel: No.
I respectively submit that this is not so --
Chief Justice Earl Warren: Alright.
Mr. Louis Mandel: -- because it is contrary to the intention of -- the statute was created.
The history shows it was intended to do that very thing to give the wife money for both purposes chargeable to her.
And if we search the statute and say, "Well, that means he did he give her" of course he did.
But, it said he could give her and that it is chargeable to her and if we tried them to search with the strength of the very -- the purpose in the history of the statute.
Justice Felix Frankfurter: But suppose you take -- suppose you take the Chief Justice's starting point that if we can find out from the agreement that money was designed for the children, suppose you accept that as a starting point, can we find out from this agreement what moneys were designed for the children?
Mr. Louis Mandel: I don't think so because unless you go very hard and say that -- no, I don't think you can.
Justice Felix Frankfurter: But if your answer is no, then you -- then you meet the Chief -- even the Chief Justice's test or inquiry rather.
The Chief Justice asks you if we can find out from the agreement, I take it that that question means, does the agreement set aside some ascertainable amount?
And if it does set aside an ascertainable amount, that would be fixed, wouldn't it, even ascertainable amount the same thing as fixed?
But does this agreement, can you gather from this agreement an ascertainable amount which has to go to the children Wiley Niley?
Mr. Louis Mandel: I don't think so.
Justice Felix Frankfurter: Well --
Mr. Louis Mandel: My reading with it -- I don't think so.
I know you can ascertain that the reduction but you cannot say ascertaining amount that's got to go for the support of the children.
Justice Felix Frankfurter: By reading the document --
Mr. Louis Mandel: One-sixth, yes.
Justice Felix Frankfurter: -- reading the document, can you from the document extract what -- what and why must allocate to the children?
Mr. Louis Mandel: Not a single thing there because she's not obligated, and I can't see anything there.
No, I must -- and my answer must be no.
Chief Justice Earl Warren: Very well.
Mr. Louis Mandel: There's one other thing I just want to say about the California lore about this -- this contract is under the California lore.
I don't see what does has to do with taxes in 22 (k) and the rights under 22 (k).
Chief Justice Earl Warren: Mr. Tadlock.
Rebuttal of C. Guy Tadlock
Mr. C. Guy Tadlock: Mr. Chief Justice, please the Court.
If the payments per child support in -- in agreement or divorce decree are to this effect, so much money payable for support of the wife and the children then it does not meet the test of the statute, this is in the regulation, this is clear.
But if parties go all --
Justice Potter Stewart: This is all deductible to -- for the husband and all the income to the wife.
That's clear, isn't it?
Mr. C. Guy Tadlock: That's right.
So that in this agreement for instance and in the agreement, if you have just the first part that we read, I hereby agree to pay my wife 20% of my gross income for her support and support for the children, then that ends it because the -- the Congress want to make a distinction but they went on then with the sentence.
But if the terms of the agreement fix an amount as payable for and what happened here, then, the husband went on or somebody went on and they agreed to sign it to reduction clause.
They didn't have to do this but they did, a reduction clause.
If one of the children die, remarries or becomes emancipated and the things will be reduced by one-sixth, there were three children, this earmarked set aside a portion an amount of the payment as for the support of the children.
Now, the question we submit is statutory construction of the words payable for.
Does it require that there must be terms in there that fixed an obligation on the wife to use it for or is it enough to -- to interpret this words, give them their normal, their common meaning as we think that Congress intended and that is if you can find that they are payable for, for the purpose of taxes, they're trying to fix the tax here.
The husband doesn't have to go on and do this as he did.
Justice Potter Stewart: I -- I didn't hear earlier what you did with the -- let's say fact on this -- on this agreement that upon the wife remarries even -- even within a short time after this agreement, all the payment cease.
Mr. C. Guy Tadlock: This is a termination clause.
Justice Potter Stewart: Yes.
Mr. C. Guy Tadlock: We're concerned with what happens while there are payments.
But it's a termination clause.
Under the law of California, under this agreement, he immediately assumes his obligations to support the children.
We're concerned with up to the point.
Now, the payment all sees when the wife remarries then that terminates the agreement, and no payments are made.
Justice William J. Brennan: They -- they cease because of the agreement.
Mr. C. Guy Tadlock: That's right, sir.
Justice William J. Brennan: It doesn't terminate the agreement.
That's a term of the agreement they cease under the agreement.
Mr. C. Guy Tadlock: Terminates the payments.
Payments are terminated as of that moment --
Justice William J. Brennan: By reason of the agreement.
Mr. C. Guy Tadlock: Yes, sir.
And the husband -- the husband assumes his obligations to support the children in the California law something that he cannot escape, something that he recognizes in his agreement.
Justice John M. Harlan: What would be the Government's position that the agreement is provided that in the event if a child died, the payments to the wife or her support and the support of the children will be reduced in such amount as the two lawyers loss a third chosen by mutual selection your read upon.
Mr. C. Guy Tadlock: Will not fit the statute because the statute says you must be determined from the terms of the --
Justice John M. Harlan: But this agreement do anything -- does this thing do anything more than to indicate a arbitrary amount by which is not to be reduced.
Mr. C. Guy Tadlock: That's right sir and that's what -- that's the importance, that's the point.
Justice Charles E. Whittaker: You say that's enough.
Mr. C. Guy Tadlock: That's the point.
It says one-sixth then you can tell exactly how much.
And one further point, the payments are based upon the gross income of the -- of the husband and of course, if the wife does not have to pay the tax upon 50%, this is a great advantage to her and the children, every year, every time the payment is made.
Justice Felix Frankfurter: Does -- does the case get down to this, the Government contends that in view of the fact that there is a reduction clause and a define the percentage of reduction from that the inferences to be drawn that during the lifetime of the children that proportion was to be allocated to them.
That's the case.
Mr. C. Guy Tadlock: That's the case, Your Honor.
Justice Felix Frankfurter: And you think they -- and you think that's the fairest construction of the document?
Mr. C. Guy Tadlock: We certainly do.
And the statute, if the reduction clause in this we think is the -- is the final thing.
If the reduction clause is based upon the event that -- that terminates our obligation, not on the event that may not come into being but an event that terminates the obligation.
Justice Felix Frankfurter: Rather than -- rather than -- you don't make it just as plausible or just as fair to say but certainly, the wife has the obligation -- she has the custody, she has certain obligations.
Presumably, if you have to support, if you have to feed in any family one mouth or two mouths of less, and close them, there is some differences in -- in the incidence that -- or the burdens on the available performance.
Mr. C. Guy Tadlock: Right, sir.
Justice Felix Frankfurter: But, isn't it a jump to say that because of the calculation of what the reduction, the amount of reduction should be, that money is set aside so that the mother can't use it in a different way.
Mr. C. Guy Tadlock: I certainly agree.
Justice Felix Frankfurter: That's a crude way -- the reduction is a crude guessing of outsiders of what she is entitled to make a very specific disposition of.
Mr. C. Guy Tadlock: That's right, sir.
Justice Felix Frankfurter: Isn't that true?
Mr. C. Guy Tadlock: Absolutely.
And as to -- and as to certainty, who would determine what is a child support payment?
Who would --
Justice Felix Frankfurter: It could easily be fixed if you wanted --
Mr. C. Guy Tadlock: Yes.
Justice Felix Frankfurter: -- to make it certain.
If you wanted to restrict the wife so that you shouldn't spend unduly on her clothes, and by -- and stint the children's clothes which is a conceivable thing about women, it could be easily done.
It doesn't require great ingenuity -- it doesn't require great (Inaudible) to think of that nor great ingenuity to praise it.
Mr. C. Guy Tadlock: And the most difficult thing would be who would determine if an item was for child support or whether this is for the good of the group.
And we think this goes to certainly who would -- who could decide on what was an item, excuse me.
Justice Felix Frankfurter: But fix -- the word fix.
Justice Charles E. Whittaker: Mr -- Mr --
Justice Felix Frankfurter: -- the word fix carried within a -- swish her tail, isn't appeared for the comment that fixed implies fixity?
I mean, the word fix is --
Mr. C. Guy Tadlock: It implies --
Justice Felix Frankfurter: The thought fixing is --
Mr. C. Guy Tadlock: Facet.
Justice Felix Frankfurter: -- is not this crude calculation that the Government consists on or must rely on namely, we'll make a guess that if a child dies, he only had one-sixth for the respondent.
Would you call that an ordinary use of language or you call that a fixed amount?
Mr. C. Guy Tadlock: A settled amount, an amount.
Justice Felix Frankfurter: The statute is fixed.
Mr. C. Guy Tadlock: Fixed an amount which is payable for child support, not to fix the amount which is to be used.
Justice Felix Frankfurter: No, no, no.
But the fixed -- the definiteness comes in to be when the child dies not when the use of the money is (Voice Overlap) --
Mr. C. Guy Tadlock: That's right sir.
That's right, sir.
Justice Charles E. Whittaker: Mr. Tadlock, I'd like to asked you one more question please.
Do you agree with Mr. Mandel's understanding of what -- how you interpreted this paragraph D on record 11 namely that of the $15,600 remaining, $7800 goes to the wife and $7800 for the children?
Mr. C. Guy Tadlock: I'm not sure of his -- of his position on that.
Justice Charles E. Whittaker: That's what he understood your argument to be.
Is that -- is that your argument?
Mr. C. Guy Tadlock: Well, that is not our argument, Your Honor.
Here's a maximum amount based upon 20% of her income.
And when the payment is made for the purpose of determining her tax, she would take half of whatever is paid, and determine the tax of her rate and the other half would not be income to her and could be deductible by the husband.
It could be income to the husband.
Justice Charles E. Whittaker: Let's note this language just a minute.
That's paragraph D.
She is to get 20% but not an excess of that sum each year which after the payment of all income taxes assessable upon the wife, you emphasize those words assessable upon the wife but let's also emphasize the following with respect to the amounts thus paid to the wife shall equal $16,500.
Now, you construe that to mean that there is a division between the wife and the children?
Mr. C. Guy Tadlock: Yes, sir.
Justice Charles E. Whittaker: Well, how much for the wife and how much for the children?
Mr. C. Guy Tadlock: According to the other provision in the agreement, $3600 -- $3600 or one half payment.
Justice Charles E. Whittaker: Well then, that's -- that's exactly Mr. Mandel's understanding of your argument that $7800 then goes to her and $7800 for the children.
Mr. C. Guy Tadlock: For the purposes of taxation.
For the purposes of satisfying the statute, for the purpose of construing what Congress meant by the statute.
Did Congress mean this must go to her and be used by her?
Or did it mean that you had to find terms that would fix it as payable for that purpose to be decided by the husband the divorce court or whoever is interested in deciding it but not Congress and not the Commissioner.
May it please the Court.