Peck v. Commissioner

ROBERT BOWMAN PECK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Peck v. Commissioner Docket No. 100604. United States Board of Tax Appeals 45 B.T.A. 729; 1941 BTA LEXIS 1078; November 18, 1941, Promulgated *1078 In 1920 petitioner and his then wife agreed upon a property settlement. Pursuant to his wife's request, petitioner transferred the property in trust, the net income to be paid to the wife during her lifetime for the use and benefit of herself and their two children. Petitioner had no power to amend or revoke the trust except with the consent of his wife, and only a remote possibility that the trust corpus would ever revert to him. In 1925 petitioner was granted an absolute divorce in Paris, France. Held, the property settlement and decree of divorce terminated petitioner's marital obligation, and the children having reached their majority prior to the taxable years, no obligation rested upon petitioner for their support and he is not taxable on the income of the trust. Louis E. Hart, Esq., and John R. Montgomery, Jr., Esq., for the petitioner. John D. Kiley, Esq., for the respondent. ARNOLD *730 This proceeding involves income tax deficiencies for the years 1934 to 1937, invlusive. The deficiencies, including an increased deficiency for 1937 as requested by respondent in an amended answer, are as follows: [1934] $1,323.38 [1935] 1,324.10 [1936] 4,795.27 [1937] 4,167.42 *1079 The issue is whether the income of a certain trust is taxable to petitioner. For 1937 respondent's amended answer raises an additional issue, namely, whether capital gains of $1,403.01 and other income of the trust in the amount of $291.25 constituted taxable income to this petitioner. The case was submitted upon stipulated facts, oral testimony, and exhibits. We adopt the facts as stipulated and make the following findings of fact. FINDINGS OF FACT. Petitioner is now and always has been a citizen of the United States. His income tax returns at all times material hereto were filed with the collector of internal revenue for the first district of Illinois. Prior to 1914 petitioner was married to Florence Reid Peck. Two children were born of this marriage, Katherine Reid Peck on August 26, 1909, and Gordon Reid Peck on November 15, 1911. In August 1914 petitioner and his wife went to London, England, where they resided until August 1918, when they returned to the United States. At or about that time they were separated and thereafter lived apart. On or about October 31, 1918, Florence Reid Peck sued petitioner in the Circuit Court of Cook County, Illinois, for*1080 the separate maintenance and support of herself and children. On January 28, 1919, she brought a further action in said court for alimony pendente lite and expenses pending the outcome of her bill for separate maintenance. On January 31, 1919, Florence Reid Peck was awarded alimony pendente lite of $650 per month and $1,100 expenses. On or before January 12, 1920, petitioner and Florence Reid Peck agreed upon a permanent property settlement. Under the agreement *731 the property was to be transferred directly to a trust company. Florence Reid Peck did not want the property transferred directly to her as she was unfamiliar with and did not want the responsibility of handling the property. She wanted only the income therefrom and desired that the property itself be safeguarded for the children. Pursuant to her request, and on January 12, 1920, during the pendency of the bill for separate maintenance, petitioner and Florence Reid Peck entered into an agreement with each other and with the Illinois Trust & Savings Bank (now Continental Illinois National Bank & Trust Co. of Chicago), as trustee. By the terms of the trust agreement petitioner conveyed certain specified*1081 stocks to the trustee, the net income of which was to be paid to Florence Reid Peck during her natural life for her support and maintenance and for the support and maintenance of the two children. After the death of Florence Reid Peck the trustee was to use so much of the net income as in its judgment was necessary and proper for the support and maintenance of the children until they attained the age of 25 years, the remainder of the net income to be accumulated and added to principal. After Florence Reid Peck's death and after the children attained age 25, the trust estate and accumulated income were to be divided equally between the children. Upon the death of either child before distribution of the trust estate, the issue of the deceased child should take; if no issue, then to the survivor, or issue of survivor. If both children died without issue before distribution, then the corpus and accumulated income went to petitioner, if living, or, if not, to his heirs according to the laws of descent in force in Illinois at the time for making distribution. Florence Reid Peck considered the trust arrangement a permanent property settlement, and she accepted the provisions made for*1082 her support and maintenance as in full satisfaction, release, and discharge of all her claims of every kind and nature. By the indenture she expressly relinquished all her claims for support, separate maintenance, and alimony against petitioner and his estate. The fifth and eighth paragraphs of the trust instrument read as follows: FIFTH: Said party of the second part covenants, promises and agrees to hold said party of the first part, free, clear, harmless and indemnified from all debt and obligations that may be created by said party of the second part, or on her account, or in her behalf; and if said party of the first part shall be obligated to pay, and shall pay any such debts or obligations, then said Trustee, upon written notice thereof by said party of the first part, shall pay to said party of the first part the amount of such indebtedness so paid by him on her account out of the net income from said trust estate, otherwise payable to her by the terms of this agreement. * * * EIGHTH: It is expressly understood and agreed that this trust instrument, or any of the terms or provisions hereof, may be altered, changed, amended, set aside, or revoked, with the consent in*1083 writing of the parties of the first and *732 second part; provided, however, that no change or modification which shall affect the status or rights of said Trustee shall be effective without the written consent of said Trustee. Following the execution of the trust instrument, and on April 24, 1920, the Circuit Court dismissed the bill for separate maintenance, without prejudice, pursuant to the stipulation of counsel. Subsequent to January 12, 1920, the trustee administered the trust in accordance with the terms thereof and paid the income therefrom to Florence Reid Peck. Her income tax returns for the years 1934 to 1937, inclusive, included all income distributed to her under the trust and she paid the income tax due thereon. She has filed claim for refund of any tax she has paid on income which may hereafter be assessed to petitioner, but she does not claim any part of such income should have been assessed against him. In or about 1921 petitioner went to France, where he resided mostly in Paris. In 1929 he returned to this country, but remained only a short time, returning to France in 1930, where he remained until 1937. Florence Reid Peck resided at the Plaza*1084 Hotel in Chicago from 1918 to the spring of 1920. She lived for a year on the North Side and then moved into a house that she bought in Evanston, Illinois. She resided there from 1922 until about 1928. In the latter year she sold the property. She did not consider that petitioner had any interest therein. Florence Reid Peck last saw petitioner on or about Thanksgiving 1919, when he visited his children. She did not know petitioner's whereabouts during any of the years 1920 to 1925, inclusive, nor did she take any steps to notify him of her changes of address, although his brother lived within a few blocks of her home in Evanston. On February 12, 1925, a decree was entered in the Civil Tribunal of the Seine of the First Instance, in Paris, France, which granted petitioner a divorce from Florence Reid Peck. The decree recites that petitioner's then wife resided at the Hotel Plaza, Clark Street and North Avenue, Chicago, that the summons was issued by the bailiff of Paris, who served the writ dated July 25, 1924, which required defendant to appear before the court two months thereafter, that defendant "although regularly notified" failed to appoint a solicitor, and that a decree*1085 of divorce be granted the husband as requested. No provision was made in the decree for alimony. On March 11, 1925, a notice of judgment by default was filed in the Civil Tribunal of the Seine of the First Instance. The Civil Code of France provides in part as follows: ART. 299: The party against whom a divorce has been pronounced loses the right to all the benefits he is entitled to under the marriage contract, or received since the marriage from the other party. * * * *733 ART. 300: The person who has obtained the divorce keeps the benefits of the settlement made on him by the other party, although it had been stipulated that in return for such settlement the other party should make similar settlements and has not done so. ART. 301: If the parties made no settlement on one another, or if those stipulated for do not appear sufficient to provide for the support of the party in whose favor the divorce is granted, the court may grant an alimentary allowance charged upon the property of the other party, which allowance must not exceed a third of the income of the party whose property is charged. This allowance may be withdrawn should it cease to be required. *1086 On March 2, 1926, the petitioner married Yvonne Andree Marie Normand. Two children have been born of said marriage. Petitioner is still married to the said Yvonne Andree Marie Normand. Florence Reid Peck's first notice of the Paris divorce came from a Chicago newspaper account of petitioner's remarriage. She discussed the matter with her attorney but made no effort to set aside the divorce or reopen the proceeding, although she was in Europe in 1928, 1931, and 1932. She did not consider that the property settlement was in any way affected by the Paris divorce decree. The taxable income of the trust created by petitioner on January 12, 1920, consisted of the following items for the years involved: Payable to Florence Reid Peck Year Dividends U.S. Treas. bond Ordinary Capital gains Credit for tax interest income ac- accumlated paid at source on culated tax-free bond divided in- interest come [1934] $11,738.67 $2.20 [1935] 11,592.39 $106.47 $44.12 2.20 [1936] 19,876.23 4.02 2.20 [1937] 17,126.22 $8.04 291.25 1,403.01 1.70 In the notice of deficiency from which this appeal was*1087 taken the respondent determined that petitioner was taxable on the income of the trust as follows: 1934, $11,738.67; 1935, $11,742.98; 1936, $19,880.25; 1937, $17,126.22. The respondent has allowed petitioner a credit in each year for the tax paid at source on tax-free bond interest by the trust. Respondent's amended answer seeks an increased deficiency for 1937 (from $3,743.86 to $4,167.42) for the reason that petitioner's 1937 income was understated by $291.25 and $1,403.01 as set forth in the preceding paragraph. OPINION. ARNOLD: In support of his determination that the income of the trust is taxable to petitioner respondent cites , and . He contends that the trust income paid to Florence Reid Peck discharged petitioner's continuing *734 legal obligation to support her; that no full and complete discharge from said obligation resulted from the French decree of divorce; that said decree was rendered under circumstances amounting to fraud, because petitioner supplied the court with an erroneous address for his former wife and the court was without jurisdiction*1088 to render a valid decree. Petitioner distinguishes , and , and asserts that the rule applicable here is set forth in , and . He contends that a permanent property settlement was effected with Florence Reid Peck; that the trust was created at her request and was not created for the purpose of discharging his marital obligations; that the French court properly acquired jurisdiction of the parties under French law, found the wife at fault, and gave petitioner a divorce; that the party at fault under French law is not entitled to alimony and no alimony was decreed. Petitioner further contends that the French decree is not subject to collateral or direct attack either in France or Illinois under the circumstances existing in this proceeding. In the Fitch case, supra, the Supreme Court laid down the rule that a taxpayer must show by clear and convincing proof that local law and the trust indenture have given him a full and complete discharge of all obligation to support his divorced*1089 wife, if he is to be relieved of the burden of the tax. The difference between the Fuller and the Fitch case, supra, is that the proof was clear and convincing in the former but not in the latter. Likewise in , the proof was not clear and convincing that the grantor of the trust had secured an absolute discharge from his prior obligations by the divorce decree and the trust instrument. The operation of the rule is illustrated by our decision in , wherein we considered the taxpayer's proof for years subsequent to the taxable year considered by the Supreme Court. We found the proof as to the later years to be clear and convincing and we held that the local law and the trust indenture had given the taxpayer a full and complete discharge. Here, we have found as a fact that the property instead of being transferred directly to the wife was at her request transferred to a trustee. Had the property been transferred to the wife, as contemplated, there is no doubt but that she, and not the petitioner, would be taxable on the income. These circumstances indicate that the property*1090 settlement was intended by the spouses to be a full and complete discharge of the petitioner's marital obligation. Any question as to petitioner's legal duty to support his children would seem to be resolved by their respective ages during the taxable years. In our opinion any legal obligation to support them terminated *735 prior to the taxable years when the children reached their majority. ; affirmed on other grounds, . We shall consider next respondent's contention that the French divorce decree is invalid. An examination of the applicable sections of the French Code in the light of the testimony of a French practitioner, versed in the French law, who testified at length regarding the laws of France relating to methods of obtaining jurisdiction and the finality of a French decree of divorce, convinces us that the decree is valid. The testimony is that even if an erroneous address for Florence Reid Peck had been intentionally given by petitioner, the divorce would be voidable and not void, and the defendant would have had to take affirmative action to set aside the decree. No such action*1091 was ever taken by Florence Reid Peck, although she consulted her attorney after hearing of petitioner's remarriage. Thereafter, she was in Europe at least three times prior to the taxable years and made no effort to question the decree. The time within which Florence Reid Peck could have taken afirmative action after knowledge of the divorce expired long prior to the taxable years. Furthermore, the decree shows on its face that petitioner furnished his former wife's place of address at the time he left this country for France. Florence Reid Peck testified that she did not know where petitioner resided during the years 1920 to 1925, inclusive, and there is no reason to suppose from this record that petitioner was any better informed as to where she resided. Lacking knowledge of any change of address, petitioner gave Florence Reid Peck's last known place of address. No intention to deceive the court can be inferred from such action. The testimony further shows that under French law the service of papers incident to a divorce proceeding on a nonresident party is made by the public prosecutor through regular diplomatic channels. The decree recites that Florence Reid Peck was*1092 regularly notified and the signatures of various French officials are duly authenticated. We can find no basis under these circumstances for imputing fraud to the petitioner. Respondent concedes that petitioner had his "domicile" in France at the time of the divorce. The testimony shows that under French law the "domicile" of the wife follows the husband. That being true, the jurisdiction of the French court over the spouses would seem to be unquestionable where the prescribed procedure was followed in the service of papers on the absentee spouse. We are of the opinion, therefore, that the French decree of divorce was valid, and, unless it is subject to collateral or direct attack in Illinois, effect must be given thereto. And certainly, if effect is given to the provisions *736 of the French Civil Code, set forth in our findings, the divorced wife has lost the right to all the benefits of the marriage contract and petitioner's legal obligation to support had terminated prior to the taxable years. The testimony shows that in the absence of fraud any direct attack in the French courts would be prohibited upon the decree becoming final, which occurred long prior to the*1093 taxable years. The Illinois courts follow the rule announced by the Supreme Court of the United States in , that recitals as to jurisdiction in the judgment record of a foreign judgment are not conclusive, but may be controverted by extraneous evidence. ; , and cases therein cited. But where the court acquired jurisdiction and entered a final order or decree, from which no appeal was taken, the decree can not be collaterally attacked. ; ; ; . Even though the judgment is erroneous, it has been held immune from collateral attack. ; . And in , the Circuit Court of Appeals held that the inquiry must be confined to jurisdictional infirmities, and the judgment can not be impeached for mere irregularities. While the cited authorities dealt with foreign*1094 judgments as between the states, or as between a state court and a Federal court, the rule is in our opinion equally applicable to the decree of a French court. Here, as we have pointed out, the French court acquired jurisdiction. The alleged fraud on the court has not been established and the French decree was valid. Under such circumstances we believe the French decree would be recognized by the Illinois courts as terminating petitioner's obligation to support his divorced wife. This is particularly true in view of the fact that Florence Reid Peck has made no effort to set the decree aside, has accepted the benefits of the decree, and has bought and sold property in her own right without recognizing any interest therein of the petitioner. Thus, whether the "local law" be considered the law of France or the law of Illinois, we are of the opinion that petitioner has established that by the terms of the trust and the decree of divorce he has a full and complete discharge from his legal obligation to support. No point is made by either party that the trust indenture reserved the right to alter, change, amend, set aside, or revoke the trust with the consent in writing of the petitioner*1095 and Florence Reid Peck. Apparently, it was considered that the adverse interest of Florence Reid Peck was substantial enough to take the case outside the provisions of sections 166 and 167 of the Revenue Acts of 1934 and 1936. We direct attention thereto not for the purpose of raising the question, but to point out that it was not presented by the parties nor *737 decided by us. The same situation exists with respect to the possibility of a reversion to petitioner; apparently the possibility was considered too remote under the decided cases to raise the question. One other paragraph of the trust indenture deserves comment. By the terms of the fifth paragraph of the trust agreement petitioner was promised by Florence Reid Peck that she would hold him free, clear, harmless, and indemnified from all her debts and obligations, and it was agreed that if he paid any such debts or obligations for her the trustee should reimburse petitioner from the trust income for the indebtedness so paid. We can not help but feel that this paragraph, plus the testimony of Florence Reid Peck that all property rights were settled between her and petitioner in 1920 and that the conveyance was*1096 made to a trustee for her benefit and at her request, establishes that petitioner had paid and satisfied his obligation to support Florence Reid Peck. Certainly as between themselves this was true and recognized by each. Every act of the spouses subsequent to January 12, 1920, is consistent with the theory that the trust income belonged to Florence Reid Peck and that petitioner had no interest therein, control thereof, or benefit therefrom. In this view of the principal issue, respondent's affirmative allegation that capital gains and other trust income is taxable to petitioner must likewise fail. No income of the trust can be taxed to him where he retained no interest in the corpus or the income therefrom. Decision will be entered for the petitioner.