Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Jun 18, 1956
26 T.C. 565 (U.S.T.C. 1956)

Docket No. 52514.



Josiah E. Brill, Esq., for the petitioner. David Karsted, Esq., for the respondent.

Josiah E. Brill, Esq., for the petitioner. David Karsted, Esq., for the respondent.

Pursuant to the provisions of a decree of divorce, petitioner established a trust, under the terms of which the net income is payable to his divorced wife for life, and upon her death, to their adult daughter with a power of appointment in the daughter, and further provisions for the benefit of the daughter's children in the event the power is not exercised. Held, the value of the remainder interest transferred to petitioner's adult daughter is taxable as a gift. Secs. 1000, 1002, I.R.C. 1939. Held, further, the value of the remainder interest is not affected by the remote possibility that the trust principal may be invaded for the support of the divorced wife.

Respondent determined a deficiency in petitioner's gift tax for 1950 in the amount of $21,079.50. The sole issue is whether the value of a remainder interest transferred by petitioner to his adult daughter in a trust, established by him in 1950 pursuant to a decree of divorce, is taxable as a gift.


Petitioner is an individual who in 1950 resided in Minneapolis, Minnesota. He filed a gift tax return for that year with the collector of internal revenue for the district of Minnesota.

Petitioner and Edna A. Wiedemann (referred to hereafter as Edna) were married in 1915. They had two children, Edna J. Vogel (hereinafter referred to as Dovey), born in 1918, and Karoline Wiedemann, born in 1920. Karoline was killed in an accident at the age of 16.

On August 2, 1948, Edna commenced an action of divorce, which was heard before the District Court of the Fourth Judicial District of Minnesota from November 22, 1949, to January 27, 1950. On February 8, the Minnesota District Court found that petitioner, under a cross-complaint filed by him, was entitled to an absolute divorce from Edna but that the latter was to be allowed as alimony and property settlement the homestead and furnishings, $1,000 a month for life or until she remarried, $25,000 for attorneys' fees, $5,000 for suit money, and a lump-sum allowance of $200,000 to be held in trust and the income therefrom to be paid to Edna for life as well as such parts of the principal as the trustees deemed necessary. The trust was to further provide that the unused remainder of the corpus was to be paid to Dovey upon the death of Edna. A memorandum accompanying the court's findings of fact and conclusions of law stated in regard to this trust:

The Court has provided for this trust partly on the basis that it was suggested by the defendant in a brief presented and intended to be helpful. Whether the Court could have provided the terms as broadly as it has, short of a consent, might be questioned, but if the question does arise it can be considered at a future time.

Both counsel for Edna and counsel for petitioner submitted a brief to the court at the conclusion of the divorce trial. Counsel for Edna did not suggest that a trust be set up.

On February 27, 1950, petitioner's attorneys in the divorce proceeding moved the court to amend that portion of the conclusions of law setting up the trust by substituting therefor a different trust arrangement. Under the proposed trust petitioner was to deliver to the trustees his promissory note in the sum of $200,000 dated as of the date of the filing of the final decree. The note was to bear interest at 3 per cent and was to be secured by mortgages on certain lands in Kansas. The trust agreement was to provide that the income from the trust was payable to Edna during her lifetime, and that the trustees in their discretion could withdraw and pay over to Edna principal for her comfort and maintenance. However, such payments from principal were to be made after taking into consideration any other sources of income or other means that Edna might have, and the trustees were to start with the assumption that Edna's current resources were adequate for her needs and that no withdrawals from principal were to be made unless there was a change in circumstances. At Edna's death, all of the remaining principal in the trust was to continue in trust for petitioner's daughter, Dovey, under similar terms. Any remaining principal at Dovey's death was to pass as she should appoint by will, or in default of appointment, to Dovey's surviving child or children. The motion for amended conclusions of law contained a trust agreement to accomplish the result proposed in the motion. During the course of argument on the motion, the district judge informed counsel that he had no control over petitioner's provision for Dovey.

On April 28, 1950, the District Court entered an order amending its conclusions of law to provide that petitioner pay the mortgage on the homestead to be given to Edna and that the monthly alimony payments should not cease upon Edna's remarriage. The order set out, with minor modifications and additions, the identical trust arrangement and agreement suggested in the motion for amendment.

On May 12, 1950, the District Court entered judgment and decree in the case of Edna A. Wiedemann v. Karl T. Wiedemann. The decree provides:

Now, pursuant to said orders and on motion of Messrs. Brill & Brill, attorneys for defendant, it is hereby adjudged and decreed:

1. That the bonds of matrimony heretofore existing between plaintiff and defendant be, and the same are hereby dissolved, and said parties absolutely divorced from each other.

2. That as and for alimony, property settlement, suit money and attorney's fees for plaintiff, the Court makes the following allowances:

A. That plaintiff is given the homestead at 15 Park Lane, Minneapolis, together with the lot adjoining the same, free and clear of any claims on the part of the defendant, and the defendant is required to pay the mortgage encumbrance against said home now or as it comes due, at his option; plaintiff is also given the contents of this home except the personal belongings of the defendant, including certain films of the family; that the defendant shall pay the first half of the real estate taxes on said land for the year 1949 and payable during the year 1950.

B. That plaintiff is entitled to receive, and the defendant shall pay to her, the sum of $1,000.00 per month from date hereof, the remainder of her natural life, and the same shall constitute a claim against the estate of the defendant if he should predecease her, provided further that such monthly alimony payments shall not terminate upon the remarriage of the plaintiff.

C. That plaintiff is hereby awarded the benefits of a Trust to be set up by the defendant, and the defendant is hereby directed to set up such Trust as follows:

The terms of the trust set out in the final decree are identical with the terms of the order amending the conclusions of law. The decree further allows Edna $26,000 for attorneys' fees, $1,000 suit money, and a Cadillac automobile. In compliance with the decree, petitioner, on May 13, 1950, executed the trust agreement, a mortgage deed, and a promissory note in the amount of $200,000.

Petitioner's daughter, Dovey, was 32 years of age when the trust was created, was married and had one child. She receives regular monthly contributions from petitioner in addition to her husband's earnings, and was receiving such support from him in 1950.

When the trust was established Edna was 57 years old. In addition to the income from the trust and the $1,000 a month alimony award, Edna receives over $400 a month from property previously given to her by petitioner. Edna's income from these three sources is approximately $23,000 per year.

In a gift tax return for 1950 petitioner reported the creation of the trust but contended that ‘the transfers to said trust, as created pursuant to the attached Judgment and Decree, do not amount to a transfer without valuable consideration * * *.’ Consequently, petitioner did not report any gifts in the return.

In his notice of deficiency respondent determined that the remainder interest of Edna J. Vogel (Dovey) in the trust established by petitioner was a taxable gift. The actuarial value of the remainder interest in 1950 was $112,620. The value of gifts previously made by petitioner in 1938 is $60,600.


BRUCE, Judge:

The question presented for determination herein is whether the value of a remainder interest transferred by petitioner to his adult daughter in a trust established by him pursuant to a decree of divorce, is taxable as a gift under sections 1000 and 1002 of the Internal Revenue Code of 1939.

SEC. 1000. IMPOSITION OF TAX.(a) For the calendar year 1940 and each calendar year thereafter a tax, computed as provided in section 1001, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift. * * *SEC. 1002. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION.Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.

It has generally been held that property transferred by a taxpayer to discharge his obligation to support his minor children is a transfer for ‘adequate and full consideration in money or money's worth,‘ and is not taxable as a gift. Roland M. Hooker, 10 T.C. 388, affd. 174 F.2d 863. Cf. Commissioner v. Weiser, 113 F.2d 486; D. G. McDonald Trust, 19 T.C. 672, affd. 225 F.2d 621, certiorari denied 350 U.S. 965. However, property transferred to adult children or the value of property beyond that necessary to discharge the obligation to support minor offspring is a taxable gift. Rosenthal v. Commissioner, (C.A. 2, 1953) 205 F.2d 505, reversing 17 T.C. 1047 for other reasons; Roland M. Hooker, supra.

In the present case petitioner created a trust under the terms of which the remainder interest was to pass to his daughter upon the death of the life beneficiary, petitioner's divorced wife. When the trust was established petitioner's daughter was 32 years of age, married, and supported by the earnings of her husband. In addition to her husband's support, she received generous monthly allowances and payments for doctors' bills from petitioner before the creation of the trust and in fact continues to receive generous support from him. Under these circumstances petitioner was certainly under no legal obligation to provide his daughter with a remainder interest in the trust for her maintenance and support. The transfer of the remainder interest in the trust property for the benefit of petitioner's daughter was therefore not made in discharge of a father's duty to support his child and was not a transfer for a consideration in money or money's worth. Accordingly, on these facts, the value of the remainder interest under the trust was a taxable gift. Rosenthal v. Commissioner, supra; Roland M. Hooker, supra.

Petitioner does not dispute the above principles but urges that no taxable gift arises from the creation of the trust because that instrument was a result of a divorce decree adjudging that he establish a trust for the benefit of his estranged wife for life with remainder to his daughter and her children. In support of this contention, petitioner relies primarily on Harris v. Commissioner, 340 U.S. 106 (1950); and McMurtry v. Commissioner, (C.A. 1, 1953) 203 F.2d 659. In the Harris case, a settlement of marital rights between a husband and wife, operative by its terms only on entry of a divorce decision was the Court's holding that the settlement was not founded on a voluntary promise or agreement, but on the command of the divorce court, authorized by State law to decree a just and suitable disposition of the parties' property. Hence the arrangement was deemed to be for ‘an adequate and full consideration in money or money's worth.’ Rosenthal v. Commissioner, supra. See also McMurtry v. Commissioner, supra.

The rationale of the Harris case and those decisions which follow it is not, however, applicable here. As the Court of Appeals for the Second Circuit stated in Rosenthal v. Commissioner, supra:

The rationale of both the Harris and Converse decisions rests basically on the divorce court's power, if not duty, to settle property rights as between the parties, either by adopting their own agreement as in the Harris case, or by having the matter litigated as in the Converse case. We do not find this rationale applicable to a decree ordering payments to adult offspring of the parties or to minors beyond their needs for support— the only payments with which we are now concerned, since that part of the taxpayer's undertakings necessary for the support of his children during their minority is concededly not taxable. * * * since such a decree provision depends for its validity wholly upon the consent of the party to be charged with the obligation and thus cannot be the product of litigation in the divorce court, we do not consider the rationale of the Harris decision applicable to the present case. We therefore conclude that the arrangements here made for the taxpayer's daughters beyond their support during minority do not obtain exemption from the federal gift tax by simply receiving the court's imprimatur. * * *

Under the laws of Minnesota the divorce court has jurisdiction to make orders concerning the care, custody, and maintenance of minor children. Minn. Stat. secs. 518.16, 518.17 (1949). However, a Minnesota court has no power to make provision for the support and maintenance of adult children. Sivertsen v. Sivertsen, 198 Minn. 207, 269 N.W. 413 (1936; Lieder v. Straub, 230 Minn. 460, 42 N.W.2d 11 (1950). Payments to a child after majority are made, if at all, voluntarily by the divorced parent. Baker v. Baker, 224 Minn. 117, 28 N.W.2d 164 (1947). Thus, in the instant case the Minnesota court that ordered petitioner divorced from his wife had no power whatever to require petitioner to support his adult daughter. The district judge in the divorce proceeding recognized this lack of jurisdiction when he stated in a memorandum accompanying the findings of fact and conclusions of law that the trust was provided partly on the basis that it was suggested by petitioner. Moreover, the terms of the trust eventually incorporated into the divorce decree were virtually identical with the language of the instrument submitted by petitioner to the divorce court in a motion for amended conclusions of law. Petitioner's attorney at the divorce proceeding was well aware that petitioner was under no obligation to support his daughter, for in the course of argument on the motions for amended findings the district judge informed counsel for both parties that the court had no control over petitioner with regard to any provision he might wish to make for his daughter. There is no showing that petitioner's wife insisted upon the insertion in the trust of the provision for the benefit of the daughter, and, even if the idea therefor originated with the trial judge, as petitioner appears to suggest, it is evident from the court's remarks that if objected to by petitioner, the court would not have required it. Since it does not appear that petitioner objected we must conclude that he consented to the inclusion. Accordingly, we must hold that the trust arrangement made by petitioner for his adult daughter is not exempt from gift tax. Rosenthal v. Commissioner, supra; Roland M. Hooker, supra.

Petitioner's willingness to have the provision included may have been prompted by the desire to avoid the possibility of the court placing no restriction upon the wife's disposition of the remainder of the trust property on her death. Also, as there is some evidence in the record that petitioner was tax conscious, he may have been influenced by the thought that he was not only providing for his daughter's future, but that property passing to his daughter inter vivos might later escape estate tax.

Petitioner's further argument that the value of the remainder interest cannot be established because of the life beneficiary's power of invasion is equally untenable. Petitioner's ex-wife is receiving an income of approximately $23,000 a year for life by virtue of alimony payments, income from the trust, and receipts from property previously given her by petitioner. Under the terms of the trust, no invasion of trust corpus can be made unless there is a change in circumstances, and the trustees are to assume that her current income is adequate. Since the divorce decree provides that remarriage shall not terminate the alimony payments, the possibility that the principal of the trust will be invaded for the wife's benefit is too remote to have any measurable effect upon the actuarial value of the remainder interest. The parties have stipulated that if respondent used the proper table, the mathematical computation of the value of the remainder is correct. We hold that respondent correctly applied Regulations 108, section 86.19(f), in determining that the value of the remainder interest was $112,620.

Finally, we find no merit in petitioner's argument that the value of the remainder interest is not taxable as a gift because under Minnesota law the divorce court may modify or change the provisions of the decree for alimony. Since the court granting the divorce had no authority or control over the provisions for the benefit of petitioner's adult daughter in the first instance, it has no authority to change the same, and petitioner himself retained no power to revoke, modify, or change the provisions of the trust relating to his daughter and her children. Burnet v. Guggenheim, 288 U.S. 280; Estate of Sanford v. Commissioner, 308 U.S. 39; and Commissioner v. Walston, 168 F.2d 211, cited by petitioner, are therefore not in point.

The parties having stipulated the value of gifts made by petitioner in 1938, a recomputation will be necessary.

Decision will be entered under Rule 50.