Nicolai v. Commissioner

HARRY T. NICOLAI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Nicolai v. Commissioner Docket Nos. 93821, 98188. United States Board of Tax Appeals 42 B.T.A. 899; 1940 BTA LEXIS 935; October 9, 1940, Promulgated *935 1. In anticipation of a divorce, which was obtained in 1927, petitioner and his wife entered into an agreement settling their property rights, under which petitioner transferred in trust for the wife's benefit certain shares of stock of a corporation of which he was the sole owner, agreeing during the life of the wife to continue in ownership of a majority of the stock of the corporation and to cause it to declare and pay dividends annually, "out of available net earnings", sufficient to enable the trustee to make stipulated monthly payments to the wife. Held, that under such agreement the petitioner was under no continuing obligation during the taxable years 1935 and 1936 to contribute to the support of his divorced wife; held, further, that under the laws of the State of Oregon petitioner was fully discharged, during the taxable years, from any obligation, other than that assumed in the agreement and property settlement, to contribute to the support of his former wife; held, further, following Helvering v. Fuller,310 U.S. 69, that the petitioner is not taxable on the trust income distributed to his former wife during 1935 and 1936. 2. In 1928*936 the petitioner and M. C. Woodard owned all the issued shares of stock of a corporation. In 1929 and 1931 each of the shareholders advanced to the corporation on open account $16,250. The corporation was dissolved on June 30, 1934, owning certain assets. At the end of 1935 the petitioner determined that the corporate assets then on hand had a value not to exceed $6,050. He ascertained that the debt owed by the corporation to him was worthless to the extent of $13,225, which amount was charged off his books of account as a worthless debt. In his income tax return for 1935 the amount was claimed as a deduction from gross income and disallowed by the respondent in the determination of the deficiency. Held, that the amount is a legal deduction from the gross income of 1935. George J. Perkins, Esq., for the petitioner. John H. Pigg, Esq., for the respondent. SMITH *900 These proceedings involve deficiencies in petitioner's income tax for the years 1935 and 1936 in the respective amounts of $714.21 and $1,920.99. The questions in issue are (1) whether the petitioner is taxable in 1935 and 1936 on the income of a trust which he had created*937 for the benefit of his wife and their two children, and (2) whether the petitioner is entitled to a bad debt deduction in 1935 on account of advances which he had made to a corporation of which he was one of two stockholders. FINDINGS OF FACT. 1. The petitioner is a resident of Portland, Oregon, where he filed his income tax returns for 1935 and 1936. Income from Trust Fund. 2. The petitioner was married to Bessie DeBevoise (now Bessie O'Gorman), at Portland, Oregon, February 27, 1906. Two children were born of the marriage, a daughter on March 2, 1907, and a son on January 24, 1913. 3. On December 31, 1926, the petitioner and his wife entered into an agreement in writing which reads in material part as follows: THIS AGREEMENT, made and entered into this 31st day of December, 1926, by and between BESSIE NICOLAI, of Portland, Oregon, hereinafter referred to as the first part, and HARRY T. NICOLAI, of Portland, Oregon, hereinafter referred to as the second part, WITNESSETH: WHEREAS, the first party, being the lawful wife of the second part, has commenced suit for divorce against the second party, in the Circuit Court of the State of Oregon for the County of*938 Clatsop, and WHEREAS, in the event the said first party should obtain a decree of divorce in said suit the said parties desire that no property rights or interests shall be determined therein, but prefer to settle and adjust the same between themselves. *901 NOW, THEREFORE, in consideration of the mutual promises and agreements hereinafter set out, it is agreed between the parties hereto as follows: FIRST: This agreement shall be operative and effective only in the event the Court shall grant to the first party a decree of divorce in said above mentioned suit. Should the first party prevail in said suit and obtain a decree of divorce from said second party then this agreement shall be effective immediately that said decree is granted. SECOND: The said second party will transfer and assign absolutely and irrevocably to West Coast National Bank of Portland, Oregon, as trustee, 1350 shares of the capital stock of the Harry T. Nicolai Investment Company, an Oregon corporation, for the benefit of the first party and the two children of the parties hereto upon the terms and conditions set forth in that certain instrument of trust of which a copy is hereto attached, marked*939 Exhibit "A", and hereby made a part of this agreement. THIRD: The second party represents that he is the owner of all of the issued capital stock of said Harry T. Nicolai Investment Company, said stock consisting of five thousand shares of the par value of one hundred dollars per share, and said second party hereby agrees for himself, and for his heirs, executors, administrators and assigns, that he and they will continue in ownership of a majority of said stock and that so long as said corporation is in existence cause it to declare and pay on or before the first day of each calendar month from its available net earnings, dividends sufficient to enable said West Coast National Bank to pay said first party the monthly income provided for her in said Exhibit "A". * * * FIFTH: Except as hereinabove stated, each party hereto hereby relinquishes to the other all rights, title, interest and claim in and to any and all property owned by the other, and the respective transfers, assignments and conveyances above provided for shall stand as full payment, satisfaction and discharge of all rights and claims of every name, nature and description which either party hereto has or may have*940 against the other. 4. In case the divorce was granted and the agreement became effective, Exhibit A provided: (a) That the petitioner should transfer title to and deliver possession of 1,350 shares of the capital stock of the Harry T. Nicolai Investment Co., an Oregon corporation, to the West Coast National Bank of Portland to be held in trust as provided for in the contract. (b) That the transfer of the 1,350 shares should be absolute in form. (c) That the trustee would make no sale of any of said stock without prior consultation with the petitioner and without giving the petitioner a preferential right to purchase any of said shares of stock which the trustee might propose to sell at the same price at which the trustee could sell them to a third person; but that subject to the above limitations the trustee might either hold, maintain, or continue the trust estate as constituted at its inception, or, in its discretion might sell, exchange or otherwise dispose of and invest or reinvest the trust estate or any part thereof as it existed at its inception or as it might thereafter be constituted, subject only to the *902 restrictions imposed upon the investment of savings*941 deposits of savings banks as set forth in section 135 of chapter 207 of the General Laws of Oregon for 1925; that from the net income from the trust estate there should be paid by the trustee to Bessie Nicolai the sum of $1,250 per month during her life unless and until she remarries, in which event the sum of $500 only per month during the remainder of her life. (d) That certain payments shall be made to the daughter and son of the petitioner and Bessie Nicolai and if the income should not be sufficient to make all of the payments referred to in the trust agreement the sums provided to be paid to Bessie Nicolai should first be paid in full from such income. (e) That on the death or remarriage of Bessie Nicolai three-ninths or 450 shares of stock should revert to the petitioner. (f) That when the son becomes 40 years of age he shall be entitled to receive two-ninths or 300 shares of the stock held in trust and in the event the daughter has children, upon the youngest of her children becoming 21 years of age, they shall receive two-ninths or 300 shares of the stock and the remaining two-ninths or 300 shares shall be subject to the testamentary disposition of Bessie Nicolai, *942 provided it be bequeathed to her heirs by blood relationship; that if Bessie Nicolai should die intestate or should fail by her last will to dispose of said 300 shares to her heirs by blood relationship, one-half of said 300 shares should go to the son of the petitioner and the said Bessie Nicolai or in the event of his death before he becomes 40 years of age, to his widow or children, and one-half to the children of the daughter of said parties, or, in the event she should not be survived by children, to the son of said parties; that if Bessie Nicolai should die without having disposed of said stock by will, and if the son of said parties should die leaving neither surviving children nor widow, and should the daughter of said parties die leaving no surviving children, then said 300 shares of said trust stock should be distributed to the petitioner or in accordance with his will. None of the 600 shares of the trust stock was to revert to the petitioner except on the remote possibility that both the children should die without issue surviving prior to the death of their mother and prior to the title to the stock vesting unconditionally in them. No part of the 300 shares subject to*943 the testamentary disposition of Bessie Nicolai was to revert to the petitioner unless both children should die without issue prior to the death of their mother, and she should fail to bequeath the stock to some of her heirs by blood relationship. (g) That the trust should be irrevocable. 5. On January 3, 1927, petitioner's then wife filed a complaint in the Circuit Court of the State of Oregon, for the County of Clatsop, *903 in a proceeding entitled "Bessie Nicolai, Plaintiff, vs. Harry T. Nicolai, Defendant", No. 12269, wherein Bessie Nicolai prayed for a decree of divorce from the petitioner because of "cruel and inhuman treatment" and for the custody of the minor son of Bessie Nicolai and the petitioner. In such complaint Bessie Nicolai alleged in part as follows: That all property rights between plaintiff and defendant have been settled and that the plaintiff asks for no alimony, temporary or permanent, different or beyond the provision made for her in said settlement. 6. On January 10, 1927, the court entered its decree in the proceeding referred to above, the pertinent portions of which read as follows: This cause came on to be heard on January 10, 1927, * *944 * * and the Court having considered the pleadings in this case and having heard the testimony deduced in behalf of the plaintiff, and the defendant having declined to offer testimony; And the Court having heretofore made and entered its Findings of Fact and Conclusion of Law herein, and being fully advised in the premises, it is now, therefore, ORDERED, ADJUDGED AND DECREED that the bonds of matrimony and marital status heretofore existing between plaintiff and defendant be and the same are hereby dissolved at the suit of the plaintiff; and IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the plaintiff have and is hereby granted the custody of Theodore Nicolai, age fourteen years, minor son of plaintiff and defendant, provided, however, that said minor son may visit the defendant at all reasonable times and share his time with the defendant. 7. Pursuant to the terms of the agreement of December 31, 1926, petitioner, on January 31, 1927, caused to be deposited in the West Coast National Bank of Portland, 1,350 shares of capital stock of the Harry T. Nicolai Investment Co. in trust, to be by said bank, its successors and assigns held and managed and the income accruing from*945 such stock to be disbursed and the stock finally distributed as provided in Exhibit A made a part of the agreement of December 31, 1926. 8. The son at the time of the granting of the divorce was attending school at Santa Barbara, California. After the granting of the divorce by the court on January 10, 1927, Bessie Nicolai went to Santa Barbara, California, and she and her son lived together for a period of a few months. After six months from the date of the granting of the divorce Bessie Nicolai returned to Portland, Oregon, and some time during the year 1927 married J. Sherman O'Gorman, with whom she has lived ever since. 9. Since the date of her remarriage neither of the petitioner's children has lived with their mother, but on their return to Portland they have always lived with the petitioner and have been supported by him. *904 10. After the marriage of Bessie Nicolai to J. Sherman O'Gorman in 1927 the petitioner, as authorized by the trust agreement, withdrew 450 shares of the stock from the trust, added 50 shares thereto, and placed the 500 shares in another trust for the benefit of his daughter and son. 11. Subsequent to the creation of the trust, *946 and prior to the year 1935, the West Coast National Bank of Portland was absorbed and taken over by the United States National Bank of Portland and during the years 1935 and 1936 the trust was administered by the latter bank. 12. The income of the trust fund created by the petitioner for the benefit of his divorced wife, for a number of years prior to 1935, was insufficient to pay her the full amount of $500 per month. The income of the trust fund for 1935 was $2,475, consisting entirely of dividends upon 900 shares of the stock of the Harry T. Nicolai Investment Co. Of this amount $2,431.60 was paid to Bessie O'Gorman and the balance, $33.40, was taken by the trustee as a fee for administering the trust. In the determination of the deficiency for 1935 the respondent has included in the petitioner's gross income the full amount of $2,475. 13. The income of the trust fund for 1936 was $9,945, of which amount $9,735.30 was paid to Bessie O'Gorman and the balance, $209.70, to the trustee as its fee. The respondent has included in the petitioner's gross income for 1935 the $9,735.30 paid to Bessie O'Gorman. 14. The decree of the Circuit Court of the State of Oregon, County*947 of Clatsop, dated January 10, 1927, granting Bessie Nicolai a divorce from the petitioner, did not require the petitioner to pay any sum or make any provision for the maintenance of Bessie Nicolai. 15. The settlement agreement between the petitioner and Bessie Nicolai, his former wife, was a complete and final lump settlement or settlement in gross, as permitted by the Oregon statutes, and the transfer by the petitioner of the 1,350 shares of capital stock of the Harry T. Nicolai Investment Co. to the West Coast National Bank of Portland, as trustee, pursuant to the terms of the settlement agreement, constituted and was a complete and final gross settlement between the petitioner and his former wife (now Bessie O'Gorman), and forever released and discharged the petitioner of and from any further or additional obligations to his former wife for maintenance or otherwise. Bad Debt Deduction. 16. The Kiddy Kage Co., an Oregon corporation, formed on or about February 1, 1928, had an authorized capital stock of $50,000, divided into 500 shares of a par value of $100 each. The petitioner *905 subscribed for 300 shares of the stock and M. C. Woodard for 150 shares. The*948 petitioner's $30,000 stock subscription was paid for in cash to the extent of $15,000 and by his assigning to the corporation a patent of the declared value of $15,000. Woodard's stock subscription was paid in cash. Only 450 shares of stock were ever issued. 17. Petitioner and Woodard each made loans to the corporation on open account. Each loaned the same amount. In 1929 each loaned to the corporation $2,500. The corporation also borrowed money from the West Coast National Bank of Portland. On July 10, 1929, the two stockholders signed a "Guarantee Agreement" which was deposited with the bank and under which the stockholders guaranteed loans by the bank to the corporation in the aggregate amount of $30,000. The total loans by the bank to the corporation aggregated $27,000. The West Coast National Bank of Portland was taken over by the United States National Bank of Portland in or about April 1930, and the successor bank required a new guaranty agreement which was likewise executed by the two stockholders. The last loan made by the bank to the corporation was on September 7, 1929, in the amount of $1,000. In the early part of 1931 the bank called the loans. The corporation*949 not being in funds for the payment thereof, each stockholder advanced to the corporation on open account $13,750 and the aggregate loans of $27,000, together with interest, were paid off. 18. The Kiddy Kage Co. was engaged in the manufacture and sale of collapsible baby pens or corrals. It operated at a loss during each year from the date of its organization to the date of dissolution. The corporation was dissolved on June 30, 1934. Its only creditors were the two stockholders. At that time it had on hand some equipment and an amount of baby pens and material for the manufacture of them. There was some assembling of baby pens after the date of dissolution and some sales from time to time. 19. At the end of 1935 the petitioner and Woodard determined that the remaining assets of the corporation had a liquidating value of not to exceed $6,050, and that each would be unable to recover from the liquidators $13,225 of the loans made by each. The petitioner accordingly charged off in 1935 on his books of account $13,225 of the debt owed to him by the Kiddy Kage Co. as uncollectible and deducted the same from the gross income in his income tax return. The deduction was disallowed*950 by the respondent. 20. The Kiddy Kage Co. was finally liquidated in 1938, the petitioner recovering $1,832.64 of his claim against the company in 1936, 1937, and 1938. The balance of the debt of $1,192.36 was charged off as worthless and uncollectible in 1938. *906 21. The bad debt charged off by the petitioner in 1935 in the amount of $13,225 was ascertained in 1935 by the petitioner to be worthless to the extent of the amount charged off. OPINION. SMITH: The first question for our consideration is whether the petitioner is liable for income tax for 1935 in respect of the $2,475 income for 1935 of the trust which he created with the West Coast National Bank on or about January 31, 1927, under his agreement with Bessie Nicolai on December 31, 1926, and on $9,735.30 of the income of the trust for 1936, which is the amount paid over by the trustee in 1936 to the beneficiary of the fund, Bessie O'Gorman. The respondent contends that the petitioner is liable for income tax upon the income of the fund under the provisions of section 167 of the Revenue Acts of 1934 and 1936. The material part of that section in each act provides as follows: (a) Where any part of*951 the income of a trust - (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or * * * then such part of the income of the trust shall be included in computing the net income of the grantor. The respondent also relies upon article 167-1 of Regulations 86 and 94, promulgated under the provisions of the Revenue Acts of 1934 and 1936, as amended by Treasury Decision 4860, Cumulative Bulletin 1938-2, p. 184, reading in part: * * * If, for example, trust income is applied in satisfaction of the grantor's legal obligation whether to pay a debt, to support dependents, to pay alimony, to furnish maintenance and support, or otherwise, such income is in all cases taxable to the grantor. In his deficiency notice in Docket No. 93821 the respondent explains his reason for including in gross income of the petitioner for 1935 the $2,475 as follows: *952 * * * In Court Decision 1158 [Helvering v. Brooks (C.C.A.,2d Cir. 1936), 82 Fed.(2d) 173], cited in Cumulative Bulletin XV-2, page 242, it is held that where the taxpayer on June 4, 1930, created an irrevocable trust for the benefit of his wife who was suing for divorce, the trust instrument providing for payment to the wife during her life of a certain amount a year out of the trust income in settlement of their marital property rights, and the decree of divorce entered on June 5, contained no provision as to alimony or property rights, the trust income was used to discharge the legal obligation of the husband and hence was taxable to him. Accordingly, this trust income has been added to the income reported on your return. *907 Since these proceedings were heard the Supreme Court has handed down opinions in Helvering v. Fitch,309 U.S. 149; Helvering v. Fuller,310 U.S. 69; and Helvering v. Leonard,310 U.S. 80. These cases elucidate the legal principle enunciated in *953 Douglas v. Willcuts,296 U.S. 1. In the Fitch case, the first to be decided, it was held that the income from a trust which the taxpayer had created for the benefit of his divorced wife was taxable to him under the doctrine of Douglas v. Willcuts, supra, in the absence of "clear and convincing proof, * * * that the local law [Oregon] and the alimony trust have given the divorced husband a full discharge and leave no continuing obligation however contingent." The facts in Helvering v. Fuller, supra, in so far as the legal principle is concerned, are very similar to the facts in the proceedings at bar. Fuller transferred 60,380 shares of class A common stock of the Fuller Brush Co. on the books of the corporation from himself, personally, to himself as trustee; he retained personally an equal number of shares of the same class of stock. He delivered the certificate for the shares which had been transferred on the books to himself as trustee to a corporate trustee, together with a dividend order directing the corporation to pay the dividends to the corporate trustee and to be used for the maintenance and support of*954 his wife, from whom a divorce was contemplated or, in case of her death, for her children. The trust was to continue for 10 years; at the expiration of the 10 years the stock was to be transferred to the wife outright. Fuller retained the right to vote the stock. In addition, he agreed to pay his wife $40 per week for a fixed period. During the trust period power to sell the stock was vested in Fuller, his wife, and the corporate trustee and could only be exercised in case the three agreed in writing. A divorce was granted in the State of Nevada; the settlement agreement was approved by the court, but the court retained no power to alter the decree or the settlement agreement. The husband was held liable for income tax upon the income of the trust fund to the extent of the $40 per week guaranteed but not upon the balance. The Supreme Court said: * * * If respondent had not placed the shares of stock in trust but had transferred them outright to his wife as part of the property settlement, there seems to be no doubt that income subsequently accrued and paid thereon would be taxable to the wife, not to him. Under the present statutory scheme that case would be no different*955 from one where any debtor, voluntarily or under the compulsion of a court decree, transfers securities, a farm, an office building, or the like, to his creditor in whole or partial payment of his debt. Certainly it could not be claimed that income thereafter accruing from the transferred property must be included in the debtor's income tax return. If the debtor retained no right or interest in and to the property, he would cease to be the owner for purposes of the federal revenue acts. * * * *908 In Helvering v. Leonard, supra, the grantor of a so-called alimony trust, the husband, was held taxable on the trust income where the trust agreement imposed upon him a continuing obligation, although a contingent one, to support his wife, and where it was not shown by clear and convincing proof that the local law (New York) gave him a full discharge from such obligation. In its opinion the Court said: The trust agreement contains an express personal obligation of respondent in the form of a guarantee of payment of the principal and interest on $400,000 of the 6% bonds which were part of the trust corpus. *956 To be sure, that personal obligation was contingent. But we do not deem that to be material. We recently stated in Helvering v. Fitch, supra, p. , that under this statutory scheme escape from the rule of Douglas v. Willcuts, supra, may be had only on "clear and convincing proof" that "local law and the alimony trust have given the divorced husband a full discharge and leave no continuing obligation however contingent." Whatever may be the correct view on the other aspects of the case, the guarantee was such a continuing obligation. The fact that the wife or other beneficiaries looked primarily to the trust and only secondarily to respondent for payment of $24,000 annually, the fact that respondent's obligation might be enforceable by the trustee, the fact that respondent might never have to make good on his promise are beside the point. The existence of wholly contingent obligations, whether contractual or otherwise, is adequate to support the results reached in Douglas v. Willcuts, supra.* * * * * * * * * In *957 Helvering v. Fitch, supra, we stated that where the divorced husband desires to avoid the general rule expressed in Douglas v. Willcuts, supra, he carries a distinct burden of establishing not by mere inference and conjecture but by "clear and convincing proof" that local law and the alimony trust have given him a full discharge. We do not think that respondent has sustained that burden. The respondent submits that the trust income here in controversy was used to pay a legal obligation of the petitioner and is therefore taxable to petitioner, the grantor, under the rule of Douglas v. Willcuts, supra, in which it was held that the income of a trust created by the taxpayer providing for annual payments out of income to his wife in lieu of alimony, and any other interest in his property or estate, was taxable to the husband, the grantor, under the provisions of the Revenue Acts of 1926 and 1928. In that case the trust agreement was executed three days before the wife was granted a decree of absolute divorce in a District Court of the State of Minnesota, and the provisions of the trust agreement were approved by the court*958 and incorporated in the decree. In holding that the trust income was used to pay a legal obligation of the taxpayer, the Supreme Court stated in part: * * * The creation of a trust by the taxpayer as the channel for the application of the income to the discharge of his obligation leaves the nature of the transaction unaltered. Burnet v. Wells, supra. In the present case, the net income of the trust fund, which was paid to the wife under the decree, stands substantially on the same footing as though he had received the income personally and had been required by the decree to make the payment directly. *909 The legal principle enunciated in Douglas v. Willcuts, supra, has been applied by the courts and by the Board in many cases which have come before them. In the light of the recent decisions of the Supreme Court it would appear that the principle has been misapplied in some cases. As elucidated by the Supreme Court, it appears clear that where a husband in contemplation of divorce makes an absolute transfer to his wife of securities in full settlement of all of his marital obligations, the income from the securities thereafter received by*959 his divorced wife is taxable to her. This is under the general principle that each individual is liable to income tax upon his own income. The situation is not different where the husband creates an irrevocable trust and transfers to a trustee securities the income of which is to be paid to the wife for life, with remainders over. It is only where the divorced husband has a continuing obligation to support the wife, either by virtue of local law or by the terms of the trust agreement, that the divorced husband is liable to income tax in respect of the income. Apparently the United States Circuit Court of Appeals for the Sixth Circuit, in Commissioner v. Tuttle, 89 Fed.(2d) 112, properly interpreted the decision of the Supreme Court in Douglas v. Willcuts, supra.Referring to that case it said: * * * The settlement there provided for a specified payment in money through the trustee to the wife. Payment was secured by the transfer of securities in trust. The transfer was but for security, however, since deficiencies were to be made up by the settlor and excess income was to be paid to him. Finality was not achieved by the agreement. *960 Here the transfer, so far as it operates, is absolute. There is no guaranty of return, no obligation to make up deficiency, no reservation of excess income, no right retained to change or substitute securities. The wife definitely and finally accepted the income from a certain amount of property, whatever it might prove to be, in settlement of her claims to dower and other rights. There remained no continuing obligation on the part of the respondent for support and maintenance, no debt to be paid out of his income, either actually or constructively. Upon the creation of the trust the trustor's obligations to his wife under both the contract and the decree were fully and finally liquidated. We first consider the question whether under the laws of Oregon the petitioner had any obligation for the support of his wife after the divorce. The respondent argues that, since Bessie Nicolai in her complaint for divorce pleaded: "That all property rights between plaintiff and defendant have been settled and that the plaintiff asks for no alimony, temporary or permanent, different or beyond the provision made for her in said settlement", and that the divorce decree stated that the court*961 had "considered the pleadings in this case", the property settlement agreement between the petitioner and Bessie Nicolai was incorporated as a part of the decree. We think it manifest that there is no basis for this contention. The whole purpose of the agreement between the petitioner and Bessie Nicolai *910 was to settle their property rights without the intervention of the court. Although under the laws of Oregon the court could have granted alimony, it did not do so. No alimony was asked, no alimony was granted. The decree was a decree of absolute divorce, without any reference being made to alimony or any property settlement between the spouses. The decree of the court severed the bonds of matrimony. Thereafter plaintiff and defendant were in the same legal position as though no marriage had ever existed between them. It is true that under the laws of the State of Oregon the divorced wife was not permitted to remarry within a period of six months, but that provision had nothing to do with the effectiveness of the decree. Section 6-915, Oregon Code 1930, provides: * * * At any time after a decree is given, the court or judge thereof, upon the motion of either*962 party, shall have the power to set aside, alter or modify so much of the decree [of divorce] as may provide for the appointment of trustees for the care and custody of minor children, or the nurture and/or education thereof, or the maintenance of either party to the suit; * * * In the decree granted by the court there was no part of the decree which provided for the appointment of trustees for the care of minor children or the nurture or education thereof, or the maintenance of either party to the suit. In Saurman v. Saurman,131 Or. 117; 282 Pac. 111, it was held that, where an absolute divorce was granted and nothing was said in the decree about alimony, the court had no authority thereafter to amend its decree and grant alimony. Section 1-907, Oregon Code 1930, so far as pertinent, reads: * * * and [the court] may also, in its discretion, and upon such terms as may be just, at any time within one year after notice thereof, relieve a party from a judgment, order, or other proceeding taken against him through his mistake, inadvertence, surprise, or excusable neglect. If no application for a modification of a judgment is made within*963 the term of one year upon the ground stated, the decree becomes absolute and the court has no further jurisdiction to modify the decree. Clearly one year after the date of the decree of divorce (January 10, 1927), the decree of divorce entered in favor of Bessie Nicolai was not subject to any attack. The years before us in these proceedings are the years 1935 and 1936. During those years both of the children of the petitioner and Bessie Nicolai were over the age of 21 years. Clearly, under the laws of Oregon petitioner was under no legal obligation to support his children after they became of age, absent any evidence that the children were incapable of support. We think it plain that the decree of divorce granted to Bessie Nicolai on January 10, 1927, was not subject to any modification by reason of any obligation of the petitioner to support his adult children. *911 We conclude that the petitioner was absolutely discharged of all obligations to support his former wife, now Bessie O'Gorman, by the decree of divorce entered January 10, 1927. We consider the question whether the agreement entered into between the petitioner and his then wife on December 31, 1926, or*964 the indenture of trust to the West Coast National Bank executed January 31, 1927, imposed upon the petitioner a continuing obligation to support his divorced wife during the years 1935 and 1936, who was during those years the wife of J. Sherman O'Gorman. The petitioner fully performed the agreement which he made with his wife. The shares of stock of the Harry T. Nicolai Investment Co. were placed in trust with the West Coast National Bank, as provided in the agreement. The only income the former wife was to receive under the trust agreement was income from the trust fund not to exceed $500 per month after her remarriage. If the income of the trust fund was not sufficient to enable the trustee to pay out of the income, minus the trustee's fee, $500 per month the petitioner was under no obligation to make up the deficit. His only obligation was to "continue ownership of a majority of the stock of the corporation" and to "cause it to declare and pay on or before the first day of each calendar month from its available net earnings dividends sufficient to enable said West Coast National Bank to pay said first party the monthly income provided for her." These were not obligations on*965 the part of the petitioner to contribute to the support of his divorced wife. When the Supreme Court in Helvering v. Fitch, supra, referred to a "continuing obligation however contingent" on the part of a divorced husband, the Court was speaking of an obligation to contribute to the support of the wife. We do not think that the language of the Court had reference to such obligations as the petitioner had in this case. The Board is of the opinion that the decision of the Supreme Court in Helvering v. Fuller, supra, is controlling in these proceedings, and in accordance therewith we hold that the petitioner is not taxable upon the above stated amounts of trust income which the respondent has added to the petitioner's net income for the years 1934 and 1935. The second question for consideration is whether the petitioner is entitled to deduct from gross income of 1935 a bad debt charged off in the amount of $13,225. The respondent disallowed the deduction upon the ground stated in his deficiency notice as follows: It appears from the information at hand that the advances made by the stockholders represented an additional investment by*966 them in connection with their holdings in stock of the Kiddy Kage Company. For this reason the loss, if any, was sustained not later than June 30, 1934, the date on which the corporation was dissolved. From the above information it appears that the loss, if any, should have been determined and allowed not later than the year 1934 when dissolution was effected and stockholders were entitled to have a valuation of the assets *912 made. The deduction has, therefore, been eliminated as not sufficiently substantiated as of the year 1935. Section 23(k) of the Revenue Act of 1934 provides: In computing net income there shall be allowed as deductions: * * * (k) BAD DEBTS. - Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. The $13,225 in question in this issue was claimed in the petitioner's income tax return for 1935 as a bad debt deduction, not as a loss. The*967 respondent disallowed the deduction in the determination of the deficiency and the petition alleges error on the part of the respondent in so doing. It is the theory of the respondent that the advances made by the petitioner and Woodard to the Kiddy Kage Co. constituted additional investments in the shares of stock of that corporation. The evidence shows, however, that this was not the case. Both the petitioner and Woodard paid to the corporation par value of the shares subscribed for by them. The petitioner was not obligated to pay and did not pay to the corporation any additional amount for the stock subscribed for by him. The question as to whether the petitioner sustained a loss upon his investment in the stock of the corporation is not before us. The only question is whether the petitioner is entitled to deduct as a bad debt $13,225 of his loans to the corporation. In Spring City Foundry Co. v. Commissioner,292 U.S. 182, the Supreme Court said: Petitioner also claims the right of deduction under section 234(a)(4) of the Revenue Act of 1918 providing for the deduction of "losses sustained during the taxable year and not compensated for by insurance*968 or otherwise." We agree with the decision below that this subdivision and the following subdivision (5) relating to debts are mutually exclusive. We so assumed, without deciding the point, in Lewellyn v. Electric Reduction Co.,275 U.S. 243, 246, * * * We think that the respondent erred in treating the claimed bad debt deduction as a loss on an investment in the stock of the corporation. It is manifestly true that a stockholder of a corporation may also be a creditor of the corporation. In Daniel Gimbel,36 B.T.A. 539, we held that where a stockholder of a corporation, pursuant to prior endorsements and guaranties of the corporation's notes and obligations, pays the corporation's obligations and thus becomes its creditor and the debt is immediately ascertained to be worthless and charged off, the stockholder is entitled to take credit for the bad debt. *913 We conclude that the petitioner was a creditor of the Kiddy Kage Co. to the extent of his advances of open account to that corporation. As such creditor he was entitled to receive the full amount of his advances before there was any distribution of assets to stockholders. *969 The dissolution of the corporation did not make his claim to recover on his advances worthless. Under the laws of the State of Oregon a corporation is continued in existence for a period of five years after the date of dissolution for the purpose of winding up its affairs. G. M. Standifer Construction Corporation v. Commissioner, 78 Fed.(2d) 285; Nibley-Mimnaugh Lumber Co.,37 B.T.A. 617. Manifestly, if the assets of the corporation had been sufficient to return to the petitioner his claim against it for advances, he would not be entitled to deduct from the gross income of any taxable year any portion of the amount of his advances as a bad debt. The evidence does not show the financial standing of the Kiddy Kage Co. at the beginning of 1935. It had on hand certain assets. During the year 1935 it sold a portion of those assets and there appeared to be a prospect that it could sell its remaining assets for a considerable amount. By the end of 1935 negotiations for the sale of these assets had fallen through. As the result of an appraisal the petitioner and Woodard determined that the fair market value of the remaining assets was not in*970 excess of $6,050 and that $13,225 of the petitioner's claim as a creditor of the corporation was worthless. This amount was charged off the petitioner's books of account in 1935 and claimed as a deduction in his income tax return. The evidence before us does not show that the debt was worthless either in whole or in part prior to 1935. It does show that the debt was worthless to the extent of $13,225 at the end of 1935. We conclude that the petitioner is entitled to the deduction from the gross income of 1935 of the $13,225 here in question. Reviewed by the Board. Decisions will be entered under Rule 50. VAN FOSSAN dissents. DISNEY DISNEY, dissenting: In my opinion, the husband, in entering into the agreement with his wife, placed upon himself a contingent obligation such as to render him taxable upon the income involved, under the thought of Helvering v. Leonard,310 U.S. 80. In the Leonard case the husband agreed that "on notice of any fault in the payment of any interest on or principal of them [the bonds placed in trust]", he would substitute cash or securities equal to the principal and cash sufficient to cover interest. *971 Herein he agreed that he would remain the owner of a majority of the stock of the corporation, the *914 stock of which he placed in trust, and would cause it to declare dividends immediately "out of available net earnings" sufficient to make the payments to the wife. Obviously, he did retain an obligation; equally obviously, it was contingent upon the fact of "available net earnings" determined by the corporation. Yet, if he had received notice, as in the Leonard case from the wife, that the corporation, though having available net earnings, had failed to declare and pay dividends sufficient to pay her the amount agreed upon, their agreement would have compelled him, if in fact the necessary dividends had not been declared from available net earnings, to make good to the wife the default, to the extent of such net earnings. It is entirely conceivable that through neglect or intent he might have failed to cause the corporation to pay the necessary dividends. For example, the corporation might have used its "available net earnings" to accumulate funds, or might have paid them out on redeeming preferred stock, when it was not necessary so to do, thus leaving itself unable*972 to pay dividends sufficient to meet the payments to the wife. If this contingency occurred, either through the neglect or intent of the husband, or because he had not, in compliance with his agreement, retained such control over the corporation as to be able to compel it to carry out the terms of his agreement, obviously the wife would have recourse against him to the extent of the "available net earnings", and the amounts payable, for the simple reason that he had violated his agreement. Such liability on his part is, in my opinion, a good example of the continuing obligation mentioned in the Leonard case. The petitioner had the burden of showing himself freed therefrom. Helvering v. Fitch,309 U.S. 149. I do not think that such showing was made by the petitioner. I, therefore, respectfully dissent. OPPER agrees with this dissent.