Opinion
No. 212.
July 19, 1943.
Petition to Review an Order of the United States Tax Court.
Petition by Helen Vogel Stern against Commissioner of Internal Revenue to review an order of United States Tax Court in determining deficiencies in her income taxes for the years 1936 and 1937 in the respective amounts of $398.59 and $155.91, respectively.
Affirmed.
The taxpayer, a resident of New York City, married Allison L.S. Stern, on January 11, 1923, and two children were born of the marriage. The husband and wife separated in December, 1926, and never lived together afterwards. On or about December 23, 1927, they entered into a written separation agreement providing for payment by the husband to the taxpayer of $18,000 per year in monthly instalments of $1500 each for the support and maintenance of herself and the children and also for the education of the children. The agreement also contained the provision that in the event of a divorce and the remarriage of the taxpayer the payments should be reduced to $1,000 per month to be used solely for the support, maintenance and education of the children, and as each child attained majority or died that his or her payments should be reduced by $500 per month. Controversies between the taxpayer and her husband did not cease with the execution of the agreement of separation and they subsequently instituted numerous law suits because of their differences.
On February 8, 1930, the taxpayer brought two actions in the New York Supreme Court against another woman, Ruth Erlanger Nathan, one for alienation of affections, and the other for criminal conversation, claiming $2,000,000 damages in each action.
Payments under the separation agreement were made to the taxpayer until February, 1932. On March 4, 1932, and May 27, 1932, she brought two actions against her husband in the New York Courts to recover the amount of instalments due under the separation agreement on the 15th days of February, March, April and May, 1932, which had not been paid. The husband filed answers alleging breaches by the taxpayer that rendered the agreement void and also counterclaiming for sums expended by him because of the taxpayer's refusal to discharge her obligations under the agreement.
On June 15, 1932, the husband brought a suit for divorce in the New Jersey Court of Chancery on the ground of extreme cruelty. On June 22, 1932, he also brought a suit in the Court of Chancery to have the separation agreement rescinded and to compel the taxpayer to discontinue her actions thereon and to enjoin her from attempting to enforce its provisions in the future. This suit to rescind the separation agreement was dismissed by the Court of Chancery on December 6, 1932, and its decision was affirmed on appeal. In the meantime the taxpayer had herself begun a suit against her husband in the Court of Chancery to recover unpaid instalments under the separation agreement and a decree pro confesso was entered against him therein on June 1, 1933. On July 16, 1932, she filed her answer in the New Jersey divorce suit brought by her husband in which she denied the acts of cruelty and charged him with adultery.
Such being the situation the actions by the taxpayer against the co-respondent, Ruth Erlanger Nathan, for alienation of affections and criminal conversation (which had been consolidated) came to trial. During the trial, which resulted in sensational newspaper publicity, negotiations were begun between counsel for the various parties looking toward a settlement of the controversy. The brothers of Ruth Erlanger Nathan were concerned over the publicity the case was receiving in the newspapers. They were distressed about it and expressed a desire to protect their sister and their family from exposure to it. As a result a contract was executed between the taxpayer and her husband providing that the original agreement of separation should remain in effect until the delivery by the husband and the acceptance by City Bank-Farmers Trust Company of an indenture of trust which was to take the place of the agreement of separation with regard to the support and maintenance of the taxpayer and her children. The contract provided that the husband should pay to the wife $100,000 and $27,000 to her counsel, and that $400,000 should be placed in trust with the City Bank-Farmers Trust Company to provide for the support and maintenance of the taxpayer and for the support, maintenance and education of the children. It was also provided in the contract that the delivery of the instrument of trust and the above payments should constitute a complete and full acquittance by the husband of any present or future obligation to provide for his wife or children, that she should make no claim for alimony against him or his property, and that in the event of an absolute divorce either party could incorporate in the decree any provisions of the contract so far as they might be lawful. Finally, it was provided in the contract that there were "no agreements, representations or understandings of any kind or nature whatsoever touching upon the subject-matter hereof, other than those herein specifically contained or referred to."
When the contract for the settlement had been made, the husband executed the indenture of trust for the support and maintenance of the taxpayer and the support, maintenance and education of the children, and the brothers of Ruth Erlanger Nathan delivered their several checks aggregating $502,000 to her attorneys, Chadbourne, Stanchfield Levy, and the taxpayer's husband added his check drawn to their order for $50,000. The attorneys then drew checks for $400,000 to the City Bank-Farmers Trust Company as trustee in order to set up the trust, paid $100,000 to the taxpayer, $27,000 to her counsel, and retained the balance, namely, $25,000, on account of their fees in the matter. It was a part of the arrangement that the taxpayer should file a cross-bill for divorce on grounds of desertion in her husband's suit for divorce. She did this and the New Jersey Court of Chancery granted her a decree therefor and made an order affirming the agreement of settlement and providing that upon acceptance of the trust indenture there should be no further liability on the part of the husband for support of the wife or children.
The New Jersey decree of divorce became final on January 17, 1934. The City Bank-Farmers Trust Company accepted the trust and received the checks from Chadbourne, Stanchfield Levy, constituting the corpus, on January 18, 1934. Allison L.S. Stern married Ruth Erlanger Nathan about a week later. The net income of the trust currently distributable to the taxpayer was $13,162.86 in 1936, and $12,108 in 1937. These two sums the Commissioner included in her income and made deficiency assessments against her accordingly. The Tax Court affirmed the Commissioner. We think its decision was right because the foregoing items of income were properly assessed against the taxpayer rather than against her husband who furnished no part of the capital that made up the corpus of the trust.
Abraham L. Bienstock, of New York City, for petitioner. Helen Vogel Stern.
Samuel O. Clark, Jr., Asst. Atty. Gen. (Sewall Key, Helen R. Carloss, and Ray A. Brown, Sp. Assts. to Atty. Gen., of counsel), for Commissioner of Internal Revenue.
Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
The record shows that the $50,000 advanced by the taxpayer's husband in connection with the settlement was disbursed to her personally but that all the other money, including the $400,000 placed in trust, was put up by the Erlanger brothers who furnished it in order to get rid of the actions brought by the taxpayer against their sister. The question is whether sums of money which were not the product of the husband's earnings or a part of his estate, but were wholly furnished by third parties, should be treated as his for income tax purposes merely because they were a means of relieving him from future payments of alimony.
The gross income of a taxpayer which, after permitted deductions, is subject to income taxes is defined (26 U.S.C.A. Int. Rev.Code, § 22) as including "gains, profits, and income derived from salaries, wages, or compensation for personal service * * * or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, * * * growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever." No part of the corpus of the trust here was derived from the earnings, property or business of the taxpayer's husband and because of this alone we think she must fail in her appeal.
It is argued, however, on behalf of the Commissioner that there was an actual or constructive receipt by Allison L.S. Stern of the advances made by the Erlangers and that these advances became his before they were applied to the trust, but the Tax Court found otherwise. It is true that if the Erlangers had given the moneys to him and he had set up a trust out of them a different case might have been made for treating the income as his. There was, however, no gift to him. What the Erlangers wanted was to have the taxpayer drop her law suits against their sister and thereby to get the latter out of her trouble and to have their family spared further publicity. To accomplish this they were willing to pay, and did pay, large sums. They paid it to set up a trust for the taxpayer and not to make a gift to Stern and Stern at no time had the funds they advanced within his control.
Douglas v. Willcuts, 296 U.S. 1, 56 S.Ct. 59, 80 L.Ed. 3, 101 A.L.R. 391; Old Colony Trust Company v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918, and United States v. Boston Maine Railroad, 279 U.S. 732, 49 S.Ct. 505, 73 L.Ed. 929, relied on by the taxpayer, are not in point. In the first of these cases income payable to a wife (in lieu of alimony) out of a trust created from the property of her husband was held to be taxable against the latter. The income involved in United States v. Boston Maine Railroad, 279 U.S. 732, 49 S.Ct. 505, 73 L.Ed. 929, was additional rent payable by a lessee under a covenant to pay income taxes upon rent due to the lessor, and as such was income from the lessor's property. The decision in Old Colony Trust Company v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918, involved the same principle.
The result of subjecting Allison L.S. Stern to taxes upon the income from the trust would be not only to tax his income, which had not been diminished by any contribution made to the trust, but to require him to pay further taxes on income from a trust that was neither derived from his labor nor his property. Moreover, though the settlement was approved by the Court of Chancery and adjudged a bar to future claims for alimony, the decree might still be reopened by the Court of Chancery to readjust the provisions therein for payment of alimony. Parmly v. Parmly, 125 N.J. Eq. 545, 5 A.2d 789. While it is true that under the New Jersey decisions the agreement and decree were not a final discharge of all claims for alimony, and if the husband had furnished the money for the trust, the evidence might have supported a finding that the trust was only a security device to insure the payment of alimony, yet even on that hypothesis there would appear to be no reason for taxing the husband on income wholly derived from the contributions of third parties.
It is further argued that the income of the trust must be regarded as that of the husband because in the contract between himself and the taxpayer it was provided that he should be the grantor and he was described as such in the trust indenture. It is contended that, under such circumstances, the admission of evidence to show that the corpus of the trust was not derived from the husband violated the parol evidence rule. But the parol evidence rule only excludes proof varying a written instrument, where the issues are between the parties to it, and does not affect the right of the Commissioner, who was not a party, to go behind the written contract in order to discover the true facts. Tex-Penn Oil Co. v. Commissioner, 3 Cir., 83 F.2d 518, affirmed 300 U.S. 481, 57 S.Ct. 569, 81 L.Ed. 755; United States v. Board, D.C. Ky., 14 F.2d 459, 460.
But even if it be thought that it makes no difference that the corpus of the trust was derived from the Erlangers, and not from the property of the husband, and that the determining factor is the power retained by the New Jersey Court of Chancery to deal with further claims for alimony, yet under Pearce v. Commissioner, 315 U.S. 543, 549, 552, 62 S.Ct. 754, 757, 86 L.Ed. 1016, it must be regarded as "at least doubtful and uncertain whether the [New Jersey] court, as an incident of its power to require the husband to support his wife, retained control over this [settlement] or the income from it." Therefore, under that most recent utterance of the Supreme Court, the beneficiary is taxable because she has made no showing that the New Jersey divorce court could readjust the trust settlement itself, as was possible with the trust before the court in Douglas v. Willcuts, 296 U.S. 1, 5, 56 S.Ct. 59, 80 L. Ed. 3, 101 A.L.R. 391, because of the provisions of the Minnesota statute.
Order affirmed.