Docket No. 73991.
12-31-1935
ALBERT C. WHITAKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
W. M. Smith, Esq., for the petitioner. Samuel L. Young, Esq., for the respondent.
W. M. Smith, Esq., for the petitioner.
Samuel L. Young, Esq., for the respondent.
The Commissioner made three adjustments in the income shown upon the petitioner's separate individual income tax return for 1931, and determined a deficiency of $2,356.99. The petitioner assails only the determination that his income should include dividends upon shares held by a trustee under an agreement providing for the petitioner's divorced wife.
FINDINGS OF FACT.
After several years of marital disagreement, petitioner's wife, in 1924, left his home and ceased to live with him. In August 1927 petitioner instituted a divorce proceeding in the Circuit Court of Ohio County, West Virginia, alleging desertion. Before and during the pendency of the divorce proceeding, the petitioner and his wife carried on negotiations for a disposition of their several claims and properties, all of which were in contemplation of divorce.
An agreement was made, dated October 15, 1927, by petitioner, his wife, and the National Bank of West Virginia at Wheeling. This agreement was made in contemplation of divorce. It recites the pendency of the suit for divorce and "the intention of this agreement to adjust and settle all matters pertaining to alimony, suit money, dower rights, property rights, and claims of every kind which might be litigated in the said suit, or in any other legal proceeding", with an exception not here material. The husband agrees to deposit with the bank, as "trustee for Albert C. Whitaker and Jessie Parks Whitaker", 1,200 shares in a corporation of which he was a large shareholder, "which said stock is the property of the husband and has been by him transferred to the name of the trustee for the purposes of this agreement." The trustee should execute to the husband an irrevocable voting proxy, receive the dividends, and pay them over to the wife. Remarriage "after the date of the anticipated decree of divorce" or death of the wife should terminate the agreement, the shares being then immediately returnable to the husband. The wife "agrees to and accepts the conditions and provisions of this trust hereby established, and she also accepts the other provisions of this agreement as fair consideration in lieu of alimony, in lieu of suit money, and in discharge of her dower rights as wife." Each releases and discharges the other from all existing claims or claims "which either of them might make at any future time in the said divorce suit or in any other legal proceeding growing out of their marriage relation", or their business or other relations, with an immaterial exception. The wife is to pay her personal debts and the husband to be reimbursed for any such debts which by legal proceedings he might be required to pay. The wife agrees to convey the residence to the husband for a stipulated amount of cash and notes, the wife having the right to remove certain household furniture and personal property.
The divorce proceeding came on before the court on October 17, 1927, and was uncontested. The court immediately entered its decree of divorce, the decree containing no provision for or reference to alimony or any other claims of either party except that the defendant was required to pay costs.
The Commissioner determined that $10,263 represented dividends from the trust fund which the petitioner had not reported for taxation, and added this amount to the income shown on his return.
OPINION.
STERNHAGEN:
In the notice of deficiency the Commissioner held that the income of the trust was taxable to the petitioner because the trust was formed by the petitioner "to carry out an obligation and to assure that it would be carried out in the future." Without resort to the presumption that the Commissioner's determination is correct, there is ample evidence in the record to sustain it in fact. The agreement between husband and wife was made during their marriage, while the divorce proceeding charging desertion was pending, and two days before the uncontested hearing and entry of the decree. The husband, at the time of the agreement, recognized a marital obligation to the wife, and the agreement expressly recited its purpose to settle such obligation. Otherwise, the divorce court would have been called upon to provide in the decree "concerning the maintenance of the parties, or either of them" (West Virginia Code of 1932, Annotated, §4715). Although the petitioner testified that in the negotiations leading to the agreement he rejected any suggestion of alimony, his entire testimony indicates clearly that what he meant was that he would not obligate himself to pay a fixed amount, but would give his wife the dividends of the 1,200 shares, letting her take the chance of increase or diminution. This obviously did not affect the existence or nature of his obligation, but only the terms of its discharge. In consonance with the husband's obligation, the agreement recites alimony and suit money and the wife expressly accepts the terms "as fair consideration in lieu of alimony." These would have no meaning if the husband were regarded as without a marital obligation for maintenance and support, or as creating a new obligation by the agreement.
The use of the word alimony necessarily implies a marital obligation, and when received by the wife the amount is not taxable income, Gould v. Gould, 245 U. S. 151; Mary R. Spencer, 20 B. T. A. 58; Maud H. Bush, 33 B. T. A. 628. The wife is entitled to it irrespective of the agreement, Audubon v. Shufeldt, 181 U. S. 575, and its inherent character persists through bankruptcy, where it is neither provable nor dischargeable as a debt. Dunbar v. Dunbar, 190 U. S. 340; Wetmore v. Markoe, 196 U. S. 68; In re Hubbard, 98 Fed. 710; Turner v. Turner, 108 Fed. 785. In Dunbar v. Dunbar, supra , where the maintenance of the wife was provided by a contract and not expressly by the decree, and as here the divorce was granted to the husband upon the uncontested ground of desertion, the Court clearly intimated that the contract could be held as in the nature of a decree. Said the Court:
Had the provisions of this contract, so far as contracting to pay money for the support of his wife is concerned, been embodied in the decree of divorce which the husband obtained from his wife in Ohio on the ground of desertion, the liability of the husband to pay the amount as alimony, notwithstanding his discharge in bankruptcy, cannot be doubted. Audubon v. Shufeldt, 181 U. S. 575. We are not by any means clear that the same principle ought not to govern a contract of this nature when, although the judgment of divorce is silent upon the subject, it is plain that the contract was made with reference to the obligations of the husband to aid in the support of his wife, notwithstanding the decree. The facts appearing in this record do not show a case of any moral delinquency on the part of the wife, and the contract, considering the circumstances, might possibly be held to take the place of an order or judgment of the court for the payment of the amount, as in the nature of a decree for alimony. We do not find it necessary, however, to decide that question in this case, because in any event we think the contract as to the support of the wife is not of such a nature as to be discharged by a discharge in bankruptcy.
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Douglas v. Willcuts, 296 U. S. 1, seems to support rather than detract from what has been said. There the trust was said by the Court to have been "manifestly made in contemplation of" the divorce suit, and was held to have been embodied in the divorce decree. The trust income was held to serve as a means of discharging the husband's duty, and the decree simply placed a sanction on the duty. The crucial holding was that the use of the trust income to discharge the existing marital duty was enough to justify the tax of the trust income to the husband. Here the decree is silent as to the contract and neither provides for nor prohibits alimony, but the circumstances bring both the decree and the agreement into the same focus and it is just as clear that the trust income is used to discharge the marital duty and not merely a contractual duty voluntarily assumed. It is not the sanction of the decree which requires that the trust income be attributed to the husband, but the fact that the income discharges the husband's marital obligation. Indeed it is possible that § 4715 West Virginia Code empowers the divorce court at any time to modify the decree to provide alimony if circumstances so require.
While there is reference in the contract to property rights and other claims which purport to be settled, there is no evidence upon which any segregation or allocation can be made whereby less than the full amount of trust income can be attributed to marital rights.
The petitioner relies on Reginald Brooks, 31 B. T. A. 70; 82 Fed. (2d) 173. While the statement of facts in that opinion is not in sufficient detail for an exact comparison of the trust agreement with that in the instant case, and seems to provide only for property rights with no reference to alimony, we can not approve the general rationale of the opinion so far as it is at variance with what we have said here. Of course, so far as it be in conflict with the reasoning of Douglas v. Willcuts, supra , it would in any event be without force. But that we need not discuss because it is involved in the appeal now pending. This is equally true of the Board's more recent opinions in James H. Hyde, 31 B. T. A. 256; 82 Fed. (2d) 174; and Carl B. Tuttle, 31 B. T. A. 782 (now on review, C. C. A., 6th Cir.).
Reviewed by the Board.
Judgment will be entered for the respondent.
The treatment by the Supreme Court of the United States of Douglas v. Willcuts, 296 U. S. 1, as authority for its per curiam reversals, on December 9, 1935, of Commissioner v. Stokes, 79 Fed. (2d) 256; Blumenthal v. Commissioner, 76 Fed. (2d) 507; and Schweitzer v. Commissioner, 75 Fed. (2d) 702, is a clear indication that the scope of the rule is broader than an alimony trust sanctioned by a divorce decree.