The opinion of the court was delivered by: LA Buy, District Judge.
The complaint herein is brought by taxpayers, husband and wife,
to recover overpayment of income tax for the years 1946, 1947,
1948 and 1949. It is alleged that on January 6, 1945, the
plaintiff wife and her former husband executed an agreement
providing for a lump sum property settlement and alimony, which
agreement was incorporated by reference in a decree of divorce
entered February 8, 1945; that moneys received by the wife
thereunder were reported in her returns for 1946 and 1947, and in
1948 were reported in the joint return of plaintiffs; that for
the year 1949 no report of such income was made and upon
assessment of a deficiency against the taxpayers on that ground
the additional assessment was paid by the plaintiffs.
Both plaintiffs and defendant have filed cross motions for
summary judgment. There is no dispute as to the facts set forth
above nor is there any disagreement as to the express terms of
the settlement agreement executed January 6, 1945.
The applicable section of the 1939 Internal Revenue Code is §
22(k), 26 U.S.C.A. § 22(k), and provides, in its pertinent part,
"* * * Installment payments discharging a part of
an obligation the principal sum of which is, in terms
of money or property, specified in the decree or
instrument shall not be considered periodic payments
for the purposes of this subsection; except that an
installment payment shall be considered a periodic
payment for the purposes of this subsection if such
principal sum, by the terms of the decree or
instrument, may be or is to be paid within a period
ending more than 10 years from the date of such
decree or instrument, * * *."
Under this section periodic payments constitute income to the
wife whereas installment payments do not unless they may be
spread over a period of more than ten years; if the final payment
is made within ten years, the payments are not considered
Determination of the tax liability in the instant case depends
upon an interpretation and construction of the contract entered
into between the plaintiff wife and her former husband on January
At the outset, there is no serious dispute as to the date when
the obligation to make payment of the $87,000 lump sum settlement
arises. The taxpayers have suggested that the date of the divorce
decree entered February 8, 1945 should be the governing date for
the commencement of the ten year period, but also submits that
even if the governing date was January 6, 1945 the last payment
was due within the ten year period. Under the statutory provision
the governing date is the date of the instrument or the decree.
The terms of the settlement agreement provided that it was
"binding upon the signing of same" and was to be offered for
approval in the suit for divorce and incorporated in the decree.
The obligation to make payment arises from and rests upon the
contract which provides that such obligation is immediately
incurred upon the signing of the instrument and is therefore
effective January 6, 1945. See Blum v. Commissioner, 7 Cir.,
1951, 187 F.2d 177.
The provisions of the settlement agreement recite that the
parties considered it to their best interests to settle between
themselves their respective rights of property growing out of the
"3. The Husband agrees to pay to the wife and she
agrees to accept, as a lump sum property settlement
and alimony in gross in full of her right, title and
interest of every kind, nature, character and
description whatsoever, in and to the property,
income or estate which the Husband now owns, or may
hereafter acquire, the sum of Eighty-seven Thousand
Dollars ($87,000.00), payable in periodic payments
during a period ending more than ten (10) years, as
follows: Seven Hundred Twenty-five Dollars ($725.00)
on the 15th day of January, 1945, and a like amount
on the 15th day of each and every month thereafter
until said Eighty-seven Thousand Dollars ($87,000.00)
had been paid in full."
The agreement contained other provisions which are immaterial to
the question presented by the motions for summary judgment.
If the fixed schedule of payments set forth in the agreement is
mathematically computed, the last payment was due on December 15,
1954, or a period of nine years and twenty-one days after January
6, 1945. Therefore, the total sum of $87,000 was not payable
"during a period ending more than ten (10) years."
The two clauses are irreconcilable. Resort must be had to other
principles of contract interpretation. Where two clauses
conflict, it is the duty of the court to determine which of the
two clauses most clearly expresses the chief object and purpose
of the contract. In such instances, a helpful rule, frequently
applied in resolving apparent inconsistencies is that where a
clause is general and broadly inclusive in character and another
clause is more limited and specific in its coverage, the latter
should generally be held to operate as a modification and pro
tanto nullification of the former. In the instant case the
settlemen agreement required the payment of $87,000 in order to
effect the settlement agreement required the pay the parties.
This was the purpose and objective of the parties. A clause which
requires something to be done to effect the purpose of the
contract is entitled to greater consideration than one which does
not. The use of the general phrase "during a period ending more
than ten (10) years", which is ambiguous and uncertain, must
yield to the more specific designation of scheduled payments.
Under the terms of the contract the amounts and dates of payment
are fixed and when carried through mathematically the payment of
the total sum of $87,000 is completed on December 15, 1954.
The court is of the opinion that performance of the obligation
under the contract was completed on December 15, 1954, and the
final payment, therefore, was due and owing in a period of less
than ten years. The plaintiffs are ...