Halliwell v. Commissioner

WALTER S. HALLIWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Halliwell v. Commissioner Docket No. 102470. United States Board of Tax Appeals 44 B.T.A. 740; 1941 BTA LEXIS 1277; June 18, 1941, Promulgated *1277 1. Prior to 1920 petitioner created two trusts for his then wife A and in consideration therefor she released him from all rights to alimony. In 1920 the Court of Chancery of New Jersey granted A a divorce. The decree did not provide for alimony. In 1922 A remarried, and thereafter, under New Jersey law, the court of chancery could make no order providing for alimony. In the years 1934 to 1938, the taxable years, the trusts were irrevocable and the income therefrom was to be paid to A for life, and then to petitioner for life. Petitioner had the power to appoint the corpora by will, and in default of appointment the corpora were to fall into his estate. He did not underwrite the corpora or income of the trusts or make any commitments respecting them. In the taxable years substantial amounts of income from the trusts were distributed to A. Held, that petitioner is not taxable on the income from the trusts which was distributed to A in the taxable years. 2. In 1938 petitioner's then wife B began an action against him for divorce and alimony in the Superior Court of Connecticut. Pending the action, petitioner and B entered into a property settlement under which he was*1278 to transfer to her certain securities and a small amount of cash in full satisfaction of his obligation to support her and their minor child. At the same time she also released him from all rights to share in his estate at his death. The property settlement was approved by the superior court and incorporated into its divorce judgment. In 1938, pursuant to the property settlement and the divorce judgment, petitioner transferred to B the securities and the small amount of cash. The cost of the securities to him was less than the value thereof at the time of transfer. Held, that petitioner realized no taxable gain on the transfer of the securities to B. L. W. Mesta,42 B.T.A. 933. Charles M. Trammell, Jr., Esq., for the petitioner. Henry C. Clark, Esq., for the respondent. HARRON *741 Respondent determined deficiencies in income tax for the years 1934 to 1938, inclusive, as follows: [1934] $19,591.59 [1935] 20,370.16 [1936] 27,836.86 [1937] 25,174.11 [1938] 64,625.68 Total 157,598.40 The questions are (1) whether petitioner is taxable on the income from two trusts which was distributed to his former*1279 wife A in the taxable years, and (2) whether he realized taxable gain on the transfer of certain securities in the taxable year 1938 to his former wife B pursuant to a property settlement and divorce judgment. The facts have been stipulated. FINDINGS OF FACT. Petitioner resides at Carmel, New York. He filed his income tax returns for the years 1934 to 1938, inclusive, the taxable years, with the collector of internal revenue for the second district of New York. The Anna Bush Trusts. On April 8, 1908, petitioner married Anna Bush (hereinafter referred to by that name). On March 7, 1918, petitioner and Anna Bush were living separate and apart. On that date petitioner created a trust (hereinafter referred to as the 1918 trust) by transferring securities and cash to a trustee to be held in accordance with the terms of a trust indenture. The trust indenture recited, inter alia, that petitioner desired "to make definite and permanent provision for the support and maintenance" of Anna Bush. The trust indenture was modified on June 26, 1919, and on June 19, 1924. In the taxable years, under the trust indenture as modified, the trustee was to pay the income to Anna*1280 Bush for her life and after her death to petitioner for his life; after his death or after her death if he predeceased her, the trustee was to transfer the principal to such persons and in such shares as he should appoint by will or to his estate in default of such appointment. In the taxable years the trust was irrevocable. On September 7, 1918, Anna Bush instituted a suit for divorce against petitioner in the Court of Chancery of New Jersey. On June 26, 1919, petitioner created a second trust (hereinafter referred to as the 1919 trust) by transferring securities and cash to a trustee to be held in accordance with the terms of a trust indenture. The trust indenture recited, inter alia, that it was the purpose of *742 the indenture "to settle finally all questions" which had arisen between petitioner and Anna Bush and that the trust was created in consideration of the execution and delivery by Anna Bush to petitioner of a general release of all claims. The trust indenture was modified on June 20, 1924. In the taxable years under the trust indenture as modified the trustee was to pay to Anna Bush for her life so much of the income which, when added to the income*1281 from the 1918 trust, would equal one-third of the total income from the 1918 trust, the 1919 trust, and a third trust created by petitioner for his own benefit on January 24, 1922, and to pay to petitioner the balance of the income for his life. In the event Anna Bush predeceased petitioner, the trustee was to pay the entire income to him for his life. In the event petitioner predeceased Anna Bush, the trustee was to pay the income which he would have received during her life to such persons and in such shares as he should appoint by his will, or to his estate in default of such appointment. Upon the deaths of petitioner and Anna Bush the trustee was to transfer the principal to such persons and in such shares as he should appoint by his will or to his estate in default of such appointment. In the taxable years the trust was irrevocable. On June 26, 1919, Anna Bush executed and delivered to petitioner a general release in which she released him of all claims, including "all rights to alimony, dower, thirds and all other rights to which" she was entitled by reason of her marriage with petitioner. On May 12, 1920, the Court of Chancery of New Jersey granted Anna Bush a final*1282 decree of absolute divorce from petitioner. On January 10, 1922, Anna Bush married Charles Stevens Mackenzie. In the taxable years income from the 1918 trust and the 1919 trust was paid to Anna Bush as follows: Year 1918 trust 1919 trust Total [1934] $30,174.15 $11,075.63 $41,249.78 [1935] 31,961.06 11,371.67 43,332.73 [1936] 39,808.06 7,664.82 47,472.88 [1937] 36,490.59 7,101.47 43,592.06 [1938] 29,938.01 11,773.94 41,711.95 On her Federal income tax returns for the taxable years Anna Bush reported the income from the 1918 trust and the 1919 trust which was paid to her in those years. The Lillian de Melinowska Property Settlement. On May 31, 1920, petitioner married Lillian de Melinowska (hereinafter referred to by that name). *743 On March 3, 1938, Lillian de Melinowska instituted in the Superior Court of Connecticut an action against petitioner for divorce, custody of a minor child, and alimony. On March 16, 1938, petitioner and Lillian de Melinowska entered into a written agreement that if a decree of divorce were granted, Lillian de Melinowska, subject to the approval of the court, was to be awarded the custody of*1283 their minor child and also a lump sum, consisting of certain securities and cash specified in a schedule attached to the agreement, as alimony, for her support and maintenance, and for the support, maintenance, and education of their minor child. The parties also agreed that, if petitioner died pending the action for divorce, the securities and cash specified in the schedule attached to the agreement were to be delivered to Lillian de Melinowska in lieu of any and all statutory and other rights in and to petitioner's estate. In the schedule attached to the agreement the following securities and cash were specified. Security Shares Amount American Snuff Co. com. at 51 1/4 [180] $9,225.00 American Tobacco com. B at 66 1/4 [545] 36,106.25 American Tobacco com. A at 67 2,875 192,625.00 British American Tobacco ordinary pound shares at 26 4,435 115,310.00 Imperial Tobacco ordinary pound shares at 35 3/8 1,591 56,281.62 MacAndrews & Forbes Co. com. at 29 3/4 [50] 1,487.50 United States Tobacco com. at 32 [92] 2,944.00 Porto Rican American Tobacco Co. com. A at 2 3/8 [38] 90.25 R. J. Reynolds Tobacco Co. com. B at 38 1/2 1,228 47,278.00 J. S. Young Co. com. at 90 [6] 540.00 461,887.62 Cash adjustment 673.38 Total 462,561.00 *1284 On March 16, 1938, Lillian de Melinowska executed a release in which she released petitioner, his executors, administrators, and estate from all of her rights to share in his property at his death. On July 12, 1938, a judgment was entered by the superior court in the action instituted by Lillian de Melinowska against petitioner. The court approved the agreement entered into between petitioner and Lillian de Melinowska and found, inter alia, that petitioner was possessed of property having an approximate value of $1,500,000 and that securities and cash of the approximate value of $462,561 were a reasonable portion of petitioner's property to be assigned to Lillian de Melinowska in accordance with the terms of the agreement. The court ordered that Lillian de Melinowska was divorced from petitioner; that she was to have the custody of their minor child; and that on or before July 16, 1938, petitioner was to transfer to Lillian de Melinowska as alimony, and in full satisfaction of his obligation for the support of their minor child, the securities and cash, or substitutes therefor, of the approximate value of $462,561, specified *744 in the schedule attached to the agreement. *1285 The court further ordered that upon delivery of the specified securities and cash petitioner was to be discharged of all obligations for the support of Lillian de Melinowska or for the support of their minor child. On or about July 16, 1938, the specified securities and cash were delivered to Lillian de Melinowska. The cost of the specified securities to petitioner was $160,038.97. At the time of their delivery to Lillian de Melinowska the value of the specified securities was $461,887.62. OPINION. HARRON: The first question is whether petitioner is taxable on the income from the 1918 and 1919 trusts which was distributed to his former wife, Anna Bush, in the taxable years. Such income was reported by Anna Bush on her returns for the taxable years and not by petitioner on his returns for those years. Respondent determined that petitioner is taxable on such income "under the provisions of sections 167 and 22(a) of the existing Revenue Act and in accordance with the principles set forth in the decision of the United States Supreme Court in *1286 ." In his brief respondent contends that petitioner is taxable on the income from the two trusts which was distributed to Anna Bush in the taxable years solely on the ground that in those years petitioner had a continuing obligation to support her. Petitioner contends, on the other hand, that the local law (New Jersey) and the two trusts had given petitioner in the taxable years a full discharge and had left no continuing obligation to support Anna Bush. As we view the situation, petitioner has shown by clear and convincing proof that in the taxable years he had no continuing obligation to support Anna Bush. At the time of the creation of the 1919 trust, Anna Bush executed and delivered to petitioner a general release in which she released him from "all rights to alimony, dower, thirds and all other rights to which" she might be entitled by reason of the marriage. petitioner did not "underwrite the principal or income" from the 1918 and 1919 trusts "or make any commitments, contingent or otherwise, respecting them." Compare *1287 , with ; ; ; certiorari denied, ; . The decree of divorce of the Court of Chancery of New Jersey contained no provision for alimony; and the record does not show that after the decree of divorce any order was made by that court providing for alimony. See New Jersey Stat., Ann., Title 2:50-37; . Under New Jersey law the court of chancery could not make *745 any order providing for alimony after the remarriage of Anna Bush, which took place prior to the taxable years. See New Jersey Stat., Ann., Title 2:50-38; 1; see also ; Murray make any order touching the alimony of such wife except that the court of chancery, upon affd., *1288 ;.The conclusion is inescapable that the New Jersey law and the two trusts had wife by vacating and annulling any and all provisions in any such order or decree, or no continuing obligation to support Anna Bush. ;; William H. Stanley, 41B.T.A. 1233; ; *1289 In his brief respondent does not contend that petitioner is taxable under the doctrine of , on the income from the two trusts which was distributed to Anna Bush in the taxable years. It is clear that the doctrine of the Clifford case is not applicalbe in the present case. The trusts were for the joint lives of Anna Bush and petitioner and were not short term tursts. The trustee of each trust was a bank. While Anna Bush and petitioner had a joint power to substitute a new a trustee of each trust, they could only substitute another bank and not petitioner. Cf. ; . The trustee of each trust hadn full power of investment except that under the 1918 trust the consent of Anna Bush and under the 1919 trust the joint consent of Anna Bush and petitioner was necessary to investment in nonlegal securities. The trusts were irrevocable. Petitioner had no power to withdraw any of the corpora of the trusts. It is true that he did have the power to appoint the corpora of the trusts by will. However the retention of such a power is clearly*1290 not sufficient to bring about the application of the doctrine of the Clifford case. See . Nor does respondent contend in his brief that petitioner is taxable on the trust income in question under section 166 or 167 of the applicable revenue acts. Section 166 is not applicable. Petitioner's reversionary interest in the corpora of the trusts in the event of his failure to appoint such corpora by will was not a power to revest title to the corpora in the grantor under section 166. . It follows that his power to appoint the corpora *746 of the trusts by will was not a power to revest title to the corpora in the grantor under section 166. Section 167 is also not applicable. The trust income in question was required to be paid and was paid to Anna Bush. Accordingly, it is held that petitioner is not taxable on the income from the two trusts which was distributed to his former wife, Anna Bush, in the taxable years. The second question is whether petitioner realized taxable gain on the transfer of certain specified securities*1291 to his former wife, Lillian de Melinowska, in the taxable year 1938, pursuant to their property settlement in contemplation of divorce and to the divorce judgment of the Superior Court of Connecticut. On his income tax return for the taxable year 1938 petitioner did not report any taxable gain on such transfer of securities. Respondent determined that petitioner realized taxable gain on such transfer of securities in the amount of the difference ($301,848.65) between the cost of such securities to petitioner ($160,038.97) and the value thereof at the time of the transfer ($461,887.62) and that 50 percent of the gain realized, or $150,924.33, was includable in petitioner's gross income, since the securities had been held for over two years. Respondent contends in his brief that the property settlement and the divorce judgment created a money obligation, in the amount of $462,561, from petitioner to Lillian de Melinowska; that this money obligation was discharged by petitioner's transferring to her securities having a value of $461,887.62 and cash in the amount of $673.38; and that thus petitioner realized taxable gain on the transfer of the securities in the amount of the difference*1292 between the cost of the securities to him and the value thereof at the time of transfer. In support of this contention respondent cites, among other cases, ; ; affd., ; ; affd., per curiam,; certioraridenied, ; Twin Ports Bridge co.,. Petitioner contends in his brief that the property settlement and the divorce judgment did not create a money obligation in the amount of $462,561 from him to Lillian de Melinowska and that the Board's decision in , is controlling on the second question. Our decision on the second question is controlled by , which differs in no material respect from the case presently before us. In the Mesta case the taxpayer's wife commenced an action for divorce against him in Pennsylvania. During the pendency of the action the taxpayer and his wife entered into an agreement under which*1293 the taxpayer agreed, inter alia, to transfer to his wife *747 5,200 shares of stock of the Mesta Machine Co. and certain other personal property and his wife agreed to surrender all of her rights to support and maintenance and to share in his property at his death. In the taxable year he transferred the 5,200 shares of stock and the other personal property to his wife, and she released him from all of her rights to support and maintenance and to share in his property at his death. The 5,200 shares of stock had a cost to the taxpayer of $7,574.56 and a fair market value of $156,975 at the time of transfer. The decree of divorce did not award any alimony and did not mention the agreement entered into between taxpayer and his wife. Respondent contended that the taxpayer realized taxable gain on the transfer of the 5,200 shares of stock to his wife in the amount of the difference between their cost to the taxpayer and their fair market value at the time of transfer. The Board held that the taxpayer did not realize taxable gain on the transfer of the 5,200 shares of stock. Its decision was based on two grounds. The first ground was that it was impossible to determine the*1294 fair market value of the rights received by the taxpayer on the transfer of the 5,200 shares of stock, i.e., the wife's rights to support and maintenance and to share in his property at his death; and that thus it was impossible to compute the amount realized by the taxpayer on the transfer of the 5,200 shares of stock under section 111(b) of the Revenue Act of 1934. The second ground was that the transaction was merely a "division of property" between the taxpayer and his wife and that it was unreasonable and unjustifiable under general law or under the revenue act to hold that a taxpayer had realized taxable gain by thus giving up a substantial portion of his property. In the present case, petitioner's former wife, Lillian de Melinowska, in the taxable year 1938 commenced an action against him for divorce and alimony in the Superior Court of Connecticut. Under Connecticut law the Superior Court may provide for alimony by assigning to the wife "a part of the estate of her husband." 2 The Superior Court thus may assign to the wife for alimony a specific part of her husband's property. See *1295 . Such an assignment "operates as a division or partition, between the husband and wife, of his property." See . During the pendency of the action, petitioner and Lillian de Melinowska entered into an agreement providing in effect that, subject to the approval of the Superior Court, a part of his estate, consisting of certain specified securities and a small amount of *748 cash, was to be assigned to her as alimony and for the support of theie minor child and was to be received by her in full satisfaction of all her claims for her own support and for the support of their minor child. The parties also provided in the agreement that, if any of the specified securities were sold or exchanged between the date of the execution of the agreement and the date of the entry of the judgment of divorce, the proceeds from such sales or exchanges were to take the place of the securities sold or exchanged. At the time when the agreement was entered into, Lillian de Melinowska also executed a release in which she released petitioner from all her rights to share in his estate at his death. In*1296 its judgment of divorce the superior court approved the agreement. The court ordered that petitioner was to transfer to Lillian de Melinowska as alimony and for the support of their minor child the specified securities (or the proceeds from the sale or exchange thereof) and the cash agreed upon by the parties and that upon such transfer "of the foregoing securities and cash" he was to be discharged of all obligations to support Lillian de Melinowska or their minor child. It is true that in the agreement the parties referred to the specified securities and cash as having a then value of $462,561 and that in the judgment the Superior Court referred to the specified securities and cash as having an approximate value of $462,561. These references to the value of the specified securities and cash did not convert petitioner's obligation into a money obligation or indebtedness in the amount of $462,561. His obligation was to transfer specified securities (or the proceeds thereof in the event of sale or exchange) and a small amount of cash ($673.38). See *1297 That in the present case the agreement was approved and incorporated by the Connecticut court in its judgment while in the Mesta case the agreement was not mentioned by the Pennsylvania court in its decree, does not present, in our opinion, any material difference between the factual situations in the two cases. Both grounds for the decision in the Mesta case apply with equal force in the present case. In the present case, it is also impossible to evaluate the rights received by petitioner, i.e., the rights of Lillian de Melinowska to her own support and to the support of their minor child and to share in petitioner's property at his death, and thus to compute the amount realized*1298 by him on the transfer of the specified securities and the small amount of cash under section 111(b) of the Revenue Act of 1938. 3 See . And in *749 the present case the assignment of a part of petitioner's estate to Lillian de Melinowska also operated as a "division or partition, between the husband and wife, of his property." See ; . ;;;Twin Ports Bridge Co., supra, which are relied on by respondent in his brief, are distinguishable. In each of those cases the transfer of property discharged a money obligation or indebtedness, and not an obligation in kind. See *1299 . Cf. . , and other cases cited by respondent are not in point. Accordingly it is held that petitioner did not realize taxable gain on the transfer of the specified securities to his former wife, Lillian de Melinowska, in the taxable year 1938, pursuant to the property settlement and to the judgment of the Superior Court of Connecticut. Reviewed by the Board. Decision will be entered for the petitioner. OPPER dissents. Footnotes 1. 2:50-38 Remarriage of former wife; no order touching alimony; vacation of prior order. If after the decree of divorce the wife shall remarry, the court of chancery shall not make any order touching the alimony of such wife except that the court of chancery shall not application of the former husband, on notice and upon proof of the marriage after the decree of divorce, must modify any order or decree touching the alimony of the former wife by vacating and annulling any ansd all provisions in any such order or decree, or both, directing the payment of money for the support of the former wife. ↩ 2. General Statutes of Connecticut, 1930 Revision - "Sec. 5182. Alimony and change of name.↩ The superior court may assign to any woman divorced by such court a part of the estate of her husband and, in addition thereto or in lieu thereof, may order alimony to be paid from the husband's income, may change her name and may order alimony pendente lite to be paid to the wife in any complaint or crossbill for divorce pending in said court. * * *" 3. SEC. 111. DETERMINATION OF AMOUNT OF, AND RECOGNITION OF, GAIN OR LOSS. * * * (b) AMOUNT REALIZED. - The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. ↩