DocketNumber： Docket Nos. 25255, 42492.
Citation Numbers： 20 B.T.A. 58, 1930 BTA LEXIS 2209
Judges： Tettssell
Filed Date： 6/13/1930
Status： Precedential
Modified Date： 11/21/2020
*2209 INCOME - PAYMENTS FOR DOWER RIGHTS AND IN LIEU OF ALIMONY BY MEANS OF INCOME FROM TRUST FUND. - Petitioner, pending hearing of her action for divorce, entered into an agreement with her husband whereby a trust fund was created from his estate, the income thereof not in excess of $14,000 per year to be paid her yearly for support of herself and child and for release of her dower rights, the trust to become effective only if and when she secured a decree of divorce. The divorce was granted, this agreement and deed of trust being submitted to the court as the settlement effected by the parties of the question of support and maintenance.
*58 These two proceedings, consolidated for hearing and decision, are appeals from deficiencies of $626.93 and $732.76, determined by respondent for the calendar years 1923 and 1924, respectively, and resulting from his inclusion in petitioner's*2210 income of sums representing income of a trust fund and paid her in those years. The issue is the same in each proceeding, petitioner contending that these amounts do not represent taxable income. The amount received by petitioner from the trust in each of the taxable years is not in dispute.
*59 FINDINGS OF FACT.
Petitioner, on February 4, 1922, was the wife of Lorillard Spencer, and had one child born of that marriage, a boy then about 16 years of age. At this time there was pending in the Superior Court of the State of Rhode Island, a proceeding by petitioner for divorce, and on that date petitioner entered into the following formal written agreement with her husband:
MARY R. SPENCER, Petitioner.
IN SUPERIOR COURT OF STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS IN AND FOR THE COUNTY OF NEWPORT
THIS AGREEMENT made February 4th, 1922, between Lorillard Spencer, of the City, County and State of New York, party of the first part, and Mary R. Spencer, of the City and County of Newport, State of Rhode Island, party of the second part.
WHEREAS the said parties were lawfully inter-married in the City and County of Newport, *2211 State of Rhode Island, on September 19, 1905; and
WHEREAS Lorillard Spencer, Jr., a boy of about sixteen years of age, is the only issue of said marriage; and
WHEREAS the party of the first part is the grandson of Lorillard Spencer who died on January 30, 1888, leaving a Last Will and Testameht, dated January 6, 1886, and duly proved in the office of the Surrogate of the City and County of New York, on May 1, 1888, a copy of which will is hereto annexed; and
WHEREAS the said party of the first part is now entitled to a part of the income of a certain trust fund under Paragraph Ninth of said will and if he outlives his mother, Caroline S. Spencer, will be entitled to the principal of said trust fund; and
WHEREAS an action for an absolute divorce brought by the party of the second part against the party of the first part on the ground of non-support or neglect to provide is now pending in the Superior Court, County of Newport, State of Rhode Island and Providence Plantations, entitled Mary R. Spencer, petitioner, versus Lorillard Spencer, respondent; and
WHEREAS the parties hereto desire to agree between themselves as to the allowances that shall be made to the party of the*2212 second part pending the said action, and further to agree in the event that an absolute divorce is granted in said action upon a definite provision for the separate support of the party of the second part during her life, for the support and custody of Lorillard Spencer, Jr., infant son of the parties hereto, and the payment to be made in full settlement for all counsel fees, etc.,
Now, THEREFORE, the parties hereto, in consideration of the premises and of all lawful covenants hereinafter contained and of the sum of One Dollar ($1.00) by each of the parties hereto to the other paid, the receipt whereof is hereby acknowledged, mutually covenant and agree each with the other, as follows:
FIRST: That the said party of the first part agrees to transfer and convey to the NEW YORK LIFE INSURANCE AND TRUST COMPANY certain securities in trust for the benefit of the party of the second part and Lorillard Spencer, Jr., in the way and manner which is provided for in said deed, a copy of which is *60 hereto annexed, to be executed by said party of the first part contemporaneously with the execution of these presents and to be delivered to the New York Life Insurance and Trust Company*2213 to be held in escrow, subject to the following conditions:
In the event of a final decree for an absolute divorce being entered in this cause, now pending, in favor of the petitioner, within nine months after the date of this instrument, then said deed of trust and securities shall be, within ten days after the entry of any such decree, delivered to the New York life Insurance and Trust Company, with the intent that it shall become of full force and effect from the date of the entry of said final decree, but, if there shall not be a final decree for an absolute divorce entered in favor of the petitioner within said nine months, then said deed of trust and securities shall be delivered by said New York Life Insurance and Trust Company to the party of the first part.
SECOND: That the party of the first part, in addition to the provisions of paragraph "First", agrees to suitably support, maintain and educate the said Lorillard Spencer, Jr., and to pay all reasonable expenses except board, lodging and traveling expenses when he is with his mother until he is twenty-one years old or if he should enter College until he leaves or graduates therefrom and in no case beyond the time when*2214 he is twenty-five years of age.
THIRD: That until the said Lorillard Spencer, Jr., arrives at the age of twenty-one years, the party of the first part shall have the society and custody of the said Lorillard Spencer, Jr., during August of each year and also during the last half of his Christmas and Easter vacations, and that the party of the second part shall have such society or custody at all other times; that neither of the said parties shall take the said Lorillard Spencer, Jr., out of the United States of America without the consent in writing of the other; that each of the parties hereto shall have equal control over the education of the said Lorillard Spencer, Jr., and that if the said parties cannot agree upon the manner and place of such education, then each party hereto after five days' notice given by either party, to the other, shall choose one person to represent him or her in deciding the question or questions and if these two cannot agree, then, that they (the persons so chosen) shall within five days thereafter choose a third person whose decision shall be final.
FOURTH: That the party of the first part agrees immediately after the final decree for an absolute*2215 divorce is entered to pay to the party of the second part the sum of Twenty five thousand dollars ($25,000) in full settlement of all liability for counsel and witness fees, costs of the action, and for the care, support, maintenance and education of said Lorillard Spencer, Jr., to and including January 1, 1922, which said sum the said party of the second part hereby agrees to accept and take in full satisfaction of her claim for counsel and witness fees, costs of said action and for the care, custody and education of Lorillard Spencer, Jr., as aforesaid; and that the party of the first part further agrees to pay to the party of the second part One thousand one hundred sixty-six and 66/100 dollars ($1,166.66) per month after the decision for petitioner is obtained beginning January 1, 1922, until final decree is entered in the pending action for divorce, or until nine months have elapsed after the date of this agreement, whichever event shall first occur; and that the aforesaid sums are intended in place of any allowance which might be made by the court and to cover every possible liability of the said party of the first part to the said party of the second part except as provided*2216 for in this agreement.
FIFTH: That the said party of the first part agrees to transfer and convey to the New York Life Insurance and Trust Company an equal one-third interest *61 in the principal of said trust estate created by the will of his grandfather, Lorillard Spencer, in the way and manner, which is provided for in said deed, a copy of which is hereto annexed, to be executed by said party of the first part contemporaneously with the execution of these presents and to be delivered to the New York Life Insurance and Trust Company to be held in escrow, subject to the following conditions:
In the event of a final decree for an absolute divorce being entered in said cause, now pending, in favor of the petitioner, within nine months after the date of this instrument, then said deed of trust shall be, within ten days after the entry of any such decree, delivered to the New York Life Insurance and Trust Company, with the intent that it shall become of full force and effect from the date of the entry of said final decree, but, if there shall not be a final decree for an absolute divorce entered in favor of the petitioner, within said nine months, then said deed of trust shall*2217 be delivered by said New York Life Insurance and Trust Company to the party of the first part.
SIXTH: That the party of the second part will not incur any debt, obligation or liability in the name of the party of the first part for necessities or for any articles, furniture or property of any description purchased by the party of the second part or for any other matter or thing for the use of herself and shall make any and all obligations, indebtedness and contracts including those relating to the purchase of necessities or other articles or property of any description for the use of herself or others in her individual name and upon her own individual responsibility.
SEVENTH: That the party of the second part has released and hereby releases all her claims against the party of the first part for maintenance and support except as provided in this agreement and all her dower and right of dower in any real estate of which the party of the first part is now seized or which he may hereafter acquire and all rights, present and future, which she now has or may hereafter have or acquire of, in and to the estate real or personal of the party of the first part under any statutes or statute*2218 of distribution or otherwise or any right of administration, as widow or otherwise, of or upon the estate of the party of the first part in the event of his death; and the party of the second part further covenants and agrees to execute and acknowledge releases of dower, copies of which are hereto annexed, to be executed by said party of the second part contemporaneously with the execution of these presents and to be delivered to the New York Life Insurance and Trust Company to be held in escrow, subject to the following conditions:
In the event of a final decree for an absolute divorce being entered in this cause now pending, in favor of the petitioner, within nine months after the date of this instrument, then said releases of dower shall be, within ten days after the entry of any such decree, delivered to the party of the first part with the intent that it shall be of full force and effect from the date of the entry of said final decree, but, if there shall not be a final decree for an absolute divorce entered in favor of the petitioner within said nine months, then said releases of dower shall be delivered by the said New York Life Insurance and Trust Company to the party of*2219 the second part, and said party of the second part further agrees at any time hereafter, whenever required by the party of the first part, to execute further releases of dower and right of dower in any real estate of which the party of the first part is now seized or which he may hereafter acquire.
EIGHTH: That in the event of a final decree for an absolute divorce being entered in the cause now pending in favor of the petitioner within nine (9) months after the date of this instrument, then the party of the first part will release all his claim and right of curtesy in and to any real estate of which *62 the party of the second part is now seized or which she may hereafter acquire and any and all rights present and future, which he now has, or may hereafter acquire of, in and to the estate real and personal of the party of the second part under any statutes or statute of distribution or otherwise of or any right of administration as husband or otherwise of or upon the estate of the party of the second part in the event of her death.
NINTH: That each of the parties will execute, acknowledge and deliver any and all other deeds of conveyance, releases and other instruments*2220 in writing and under seal which may be required by the other party to effectuate and carry out this agreement or any clause thereof to its true and full intent, meaning and purpose.
TENTH: That each party hereby waives any claim, right or demand which he or she has or may have against the other, except as provided in this agreement.
ELEVENTH: That this agreement shall be binding upon the heirs, executors, administrators and assigns of the parties hereto.
On the same date the deed of trust provided for by the foregoing agreement was executed and conveyance made by petitioner's husband to the New York Life Insurance & Trust Co. of the assets provided to be held thereunder, together with releases of his curtesy rights and the necessary agreement executed by the New York Life Insurance & Trust Co. providing that this deed of trust, together with the property covered thereby, should be held in escrow pending the entry of the final decree of divorce, and if and when such a decree were entered, the deed of trust would thereupon become effective and the property would from that time forward be held under its provisions. Petitioner, in accordance with the provisions of the agreement*2221 above set out, executed and delivered in escrow to the New York Life Insurance & Trust Co. the releases of her dower interest in certain real estate belonging to her husband in New York City and on Long Island and a release of any and all claims or rights she might have in respect to real estate owned or which might later be acquired by him to be held and delivered to her husband if and when a final decree of divorce was entered.
On March 2 petitioner and her husband entered into an agreement extending the period of nine months provided in the formal contract of February 4, 1922, to a date not more than 30 days following the earliest date at which a final decree of divorce could become effective in case the law of the State of Rhode Island should be changed by its legislature to require a longer period to elapse than the one required under existing law, and providing for the payment in such case of the $25,000 agreed upno for costs and counsel fees, in installments, this change being not material to the question here in issue.
Thereafter, on the 6th day of March, 1922, an interlocutory decree of divorce was entered, the order of the court being as follows:
*63 FIRST: *2222 That a decision for the petitioner for divorce from the bond of marriage be and the same hereby is rendered on the ground of neglect and refusal for the period of more than one year next before the filing of the petition on the part of the respondent to provide necessaries for the subsistence of the wife, said respondent being of sufficient ability to make such provision.
SECOND: That the respondent shall have the society and custody of Lorillard Spencer, Jr., the child of the parties, during August of each year and also during the last half of the Christmas and Easter vacations, and that the petitioner shall have such society and custody at all other times; that neither of the parties shall take said Lorillard Spencer, Jr., out of the United States of America without the consent in writing of the other; that each of the parties shall have equal control over the education of the said Lorillard Spencer, Jr., and that if the said parties cannot agree upon the manner and place of such education, then each party after five days' notice given by either party to the other shall choose one person to represent him or her in deciding the question or questions, and if these two cannot agree, *2223 then the persons so chosen shall within five days thereafter choose a third person whose decision shall be final.
THIRD: That until entry of final decree herein the respondent shall pay to the petitioner such sums for her maintenance and support, and allowances, as are provided to be paid prior to the entry of such final decree in accordance with the provisions of a certain agreement entered into between the parties dated February 4, 1922, subsequent to the filing of the petition in this cause, and an agreement supplemental thereto dated March 2, 1922, and shall also pay for the suitable support, maintenance, education and other expenses of the said Lorillard Spencer, Jr., as provided in said agreement.
FOURTH: That upon entry of final decree herein the right of said parties is hereby reserved to have a decree for permanent alimony, allowances for the support of said Lorillard Spencer, Jr., and for counsel fees and other allowances, entered therein in accordance with the further provisions of said agreement of February 4, 1922, and the other instruments referred to therein, and also a certain escrow agreement dated said 4th day of February, 1922, entered into between said parties*2224 and the New York Life Insurance and Trust Company.
On September 8, 1922, a final decree of divorce was entered into providing as follows:
WHEREAS, after the trial of the above entitled petition decision granting the same was rendered upon the sixth day of March, A.D. 1922, now therefore six months having elapsed and no reason appearing why decree should not be entered, it is
ORDERED, ADJUDGED AND DECREED.
as follows:
FIRST: That the prayer of said petition be and the same is hereby granted, and that the bond of matrimony now existing between the said Mary R. Spencer and the said Lorillard Spencer, be and the same is hereby dissolved upon the ground of neglect and refusal for the period of more than one year before the filing of the petition on the part of the respondent to provide necessaries for the subsistence of the wife, said respondent being of sufficient ability to make such provision.
SECOND: That until Lorillard Spencer, Jr., the only child of said parties, arrives at the age of twenty-one years the respondent shall have the society *64 and custody of said Lorillard Spencer, Jr., during August of each year and also during the last half of his Christmas*2225 and Easter vacations, and that the petitioner shall have such society and custody at all other times; that neither of the parties shall take said Lorillard Spencer, Jr., out of the United States of America without the consent in writing of the other; that each of the parties shall have equal control over the education of the said Lorillard Spencer, Jr., and that if the said parties can not agree upon the manner and place of such education, then each party after five days' notice given by either party to the other shall choose one person to represent him or her in deciding the question or questions, and if these two cannot agree then the persons so chosen shall within five days thereafter choose a third person whose decision shall be final.
THIRD: That the respondent shall suitably support, maintain and educate the said Lorillard Spencer, Jr., and shall pay all his reasonable expenses, except board, lodging and traveling expenses when he is with his mother, until he is twenty-one years old, or, if he should enter College, until he leaves or graduates therefrom, but in no case beyond the time when he is twenty-five years of age.
FOURTH: That the respondent shall forthwith make*2226 to the petitioner the payment provided for in the paragraph numbered Fourth of a certain agreement dated the 4th day of February, 1922, between the said Lorillard Spencer and the said Mary R. Spencer, for the care, support, maintenance and education of said Lorillard Spencer, Jr., to and including January 1, 1922, and in full settlement of all liability for counsel and witness fees and costs of this action.
FIFTH: That forthwith upon the entry of this decree the deed of trust and securities described or referred to in paragraph numbered First of said agreement of February 4, 1922, and the deed of trust described or referred to in the paragraph numbered Fifth of said agreement of February 4, 1922, shall be delivered to the New York Life Insurance and Trust Company by itself to be held by it as trustee as provided in said deeds of trust respectively; and that the releases of dower and of curtesy and all other instruments provided for in said agreement shall likewise be delivered as stipulated in said agreement of February 4, 1922.
SIXTH: That nothing herein contained shall be construed as merging in this decree said agreement between the parties dated February 4, 1922, or any of*2227 the other instruments referred to therein; or the escrow agreement dated February 4, 1922, entered into between said parties and the New York Life Insurance and Trust Company, all the rights and remedies of the parties hereto in and under said agreements and other instruments being expressly reserved.
SEVENTH: That, except as to the payments and other provisions provided for in this decree and in the interlocutory decree in said cause and in the agreements and deeds of trust referred to herein, the respondent shall not be required to make any payment as alimony or for any other matter connected with this cause or for the maintenance of the petitioner or their said minor son.
Upon the entry of the final decree of divorce, delivery was made as provided, of the several conveyances and releases held in escrow, and since that date petitioner has received the payments agreed upon and provided for by the deed of trust. The amounts by which respondent has increased petitioner's income for each of the taxable years here in issue were amounts received by her from the trust. During each of said years petitioner's son, Lorillard Spencer, Jr., was a minor and for neither of said years did*2228 petitioner claim any amount in her return as a credit for his support.
*65 OPINION.
TRUSSELL: Petitioner contends that the amounts received in each year by her from the trust did not represent income taxable to her, but amounts received in return for her release of dower rights in her husband's real estate and allowances for the maintenance and support of herself and minor son, or in other words, in lieu of the alimony which, in the absence of the agreement under which the trust was created, the court by its decree in the divorce action then pending would have had to provide for.
Respondent insists that these amounts do not represent alimony, as no alimony was provided for by the divorce decree, as the parties had arranged the matter between them and petitioner was already, by the provisions of the deed of trust, amply provided for; that the deed of trust was executed under an agreement made between the parties and not in compliance with the order of the court, and as petitioner is admittedly the beneficiary of a trust, receiving payments of the income thereof, sections 219 of the Revenue Acts of 1921 and 1924 apply and require that these amounts be taxed as income*2229 to her.
The facts are not in dispute. Petitioner had filed an action for divorce and alimony against her husband, who was a man of means. She had one child, a minor. If successful in her suit, the court would, by its decree, require the payment by her husband of alimony, which in its broad meaning is an allowance to the wife out of her husband's estate for the support of herself and children. . "Alimony generally means an allowance to a wife for the support of herself and children out of her husband's estate, either during the pendency of a libel for divorce or at its termination in favor of the petitioner." ; . In this case the court quoted with approval from , that: "Alimony is not considered to be the separate property of the wife, but merely that part of the husband's estate allowed her for her present subsistence and livelihood."
Pending the hearing of the divorce action petitioner and her husband entered into an agreement whereby an amount of $14,000 a year, determined as a reasonable*2230 allowance, was provided to be paid through creation of a trust on certain property belonging to the husband, with directions to the trustee to pay an amount of the yearly income not in excess of $14,000 to petitioner. The creation of the trust and the payments arranged for thereby were made wholly dependent upon petitioner being successful in her action for divorce, and, to carry out the agreement, the deed of trust was deposited in escrow to take effect upon the entering of a final decree of divorce. *66 All of the arrangements contemplated by the agreement and the conveyances and releases made thereunder were submitted to the court and taken cognizance of by it in the entering of a final decree, by the provision therein that no payments were to be made by petitioner's husband for maintenance and support of herself and child other than those agreed upon and provided for by the contract and deed of trust.
Respondent admits that under the rule laid down in , if the payments made petitioner were in satisfaction of an award of alimony by the court they would not represent income taxable to her, but insists that these amounts*2231 were not so paid, but were sums received by her as beneficiary of a trust created for her benefit, and that on finding such fact we can not go further and consider the purpose for which the trust was created, but are forced to then apply sections 219 referred to avove, and that these require that such sums be taxed as income to her.
We can not agree with respondent's theory, for several reasons. In the first place, we can not consider the execution of the agreement of February 4, 1922, and the creation of the trust under its provisions as things which preceded and were separate from the divorce action and that the decree of the court made no provision for the support of petitioner. The agreement of February 4, 1922, is clearly shown to have been an incident of the divorce action, made during the time when it was pending, liquidating a yearly amount which the court had been asked and would otherwise have been required to determine, and providing for its periodic payment. The creation of the trust was merely the carrying out of the agreement which, together with the various conveyances executed thereunder, are shown to have been submitted to and approved by the court. We can not*2232 consider it as an agreement distinct from the divorce decree when by its terms the trust was to have effect only in case the divorce was granted, and when the decree entered by the court specifically recognized the agreement as providing the maintenance which the court had been asked to decree as alimony. The interlocutory decree provides:
Upon entry of final decree herein, the right of said parties is hereby reserved to have a decree for permanent alimony, allowance for the support of said Lorillard Spencer, Jr. * * * entered therein in accordance with the further provisions of said Agreement of February 4, 1922, and the other instruments referred to therein * * *.
and the final decree orders and directs that:
SEVENTH: That, except as to the layments and other provisions provided for in this decree and in the interlocutory decree in said cause and in the agreements and deeds of trust referred to herein, the respondent shall not be required to make any payment as alimony or for any other matter connected with this cause or for the maintenance of the petitioner or their said minor son.
*67 Paragraph "Sixth" of the final decree, which is relied upon by respondent as*2233 showing that no alimony was decreed and that the court left to the parties that question, is nothing more than a reservation to the parties of their rights under the agreements referred to, in view of the specific approval and acceptance by the court of a settlement agreed upon on the question of maintenance and support of petitioner and her son.
We can not agree with respondent's contention that sections 219 of the Revenue Acts of 1921 and 1924 make taxable to the beneficiary of a trust as income all amounts representing income of the trust paid thereunder to her, and that the purpose of the creation of the trust may not be looked to, as the requirements of those sections are satisfied when it is merely found that a trust exists and there are payments periodically of its income to such beneficiary. Were such the case, any taxpayer could convey his property in trust, the income to be distributed to his creditors in settlement of his debts, and thus, while his debts were being paid, escape tax upon his income while devoting it in this way to his own purposes, and his creditors would be taxed with receipt of income as beneficiaries of a trust, when in fact they had received merely*2234 payment of debts which might represent no income whatsoever. In the present case there rested upon petitioner's husband the obligation to provide maintenance and support for her and for his minor son. Suit was pending for divorce and to enforce this obligation and the parties thereupon agreed upon an amount of $14,000 per year for that purpose and provided the means for its payment from the husband's estate by creation of a trust with provision that the income thereof to the extent of $14,000 per year be paid petitioner, the whole agreement being conditioned upon petitioner's obtaining the decree of divorce.
It is true that this trust was one created for the benefit of petitioner and she was the beneficiary in the sense that $14,000 of the income of the trust fund was paid her in each year, but it must be remembered that these payments were made in discharge of the obligation of the husband; the trust being created merely to carry out his continuing obligation and to guarantee that the obligation would be performed. Petitioner had no interest in the corpus of the trust, all that she could receive being the yearly payments during her life and these being reduced to $7,000 per*2235 year in case of her remarriage. All of the income from the trust estate over and above the amounts required to be paid petitioner were to be paid her husband.
We can not see that , relied upon by respondent is in point. That case deals with a tax liability of a *68 donee of the income from a trust created, and construes the provision of the Act excluding "gifts" from taxable income, the court holding that Congress in its use of that term contemplated the corpus as distinguished from the income. The case before us is not one of a gift. The right of a wife to require support for herself and children and her dower interest are rights in her husband's estate. As the court said in , of the wife's right to support which would be represented on divorce by a decree for alimony:
Permanent alimony is regarded rather as a portion of the husband's estate to which the wife is equitably entitled, than as strictly a debt; alimony from time to time may be regarded as a portion of his current income or earnings * * *.
We can see no distinction, in so far as petitioner's tax liability*2236 is concerned, in whether the payments made her represented alimony specifically awarded by the court, or amounts agreed upon by her husband in lieu of alimony. Assuredly, the character of the payment, so far as this petitioner is concerned, is not changed by the fact that instead of having the amount set by the court and a decree requiring it to be paid entered, the parties agreed upon the amount, contracted for the payments, arranged the mode of payment, and submitted the agreement to the court.
An examination of the agreement of February 4, 1922, leaves us in no doubt that by the provision made for payments of income of the trust to petitioner, it was understood that these payments were for the support of petitioner and her minor son, or in lieu of the allowance which the court would otherwise have decreed as alimony, and also included a consideration for the release of petitioner's dower rights in her husband's real estate; and an examination of the decrees entered leaves us in no doubt that the court so understood the agreement. To the extent that the payments received in the taxable years by petitioner represent sums in lieu of alimony, we hold they do not represent income*2237 to petitioner. ; . In so far as they may represent payments in lieu of dower rights, the same conclusion must be reached. ; ; .