Heaslet v. Commissioner

JAMES G. HEASLET, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. * Heaslet v. Commissioner Docket No. 108421. United States Board of Tax Appeals 47 B.T.A. 1006; 1942 BTA LEXIS 617; November 10, 1942, Promulgated *617 Prior to the taxable years petitioner established a trust for the benefit of his wife. The trust could be altered or amended by petitioner only with the consent of his wife. In 1937 petitioner and his wife entered into a separation agreement which provided for the payment of $100 per month and the continuation of payment of the trust income to the wife. This agreement was incorporated into a decree for alimony by the Ohio court. Held, petitioner is not taxable upon the trust income, (1) for the period prior to the separation agreement under section 167 of the Revenue Act of 1936, since petitioner's wife had a "substantial adverse interest", and (2) for the taxable periods subsequent to the agreement, since the trust was not used to relieve petitioner of any continuing obligation either under state law or under contractual duty. Helvering v.Fuller,310 U.S. 69. Paul L. Holden, Esq., and Warren E. Hacker, Esq., for the petitioner. Lawrence R. Bloomenthal, Esq., for the respondent. HILL *1006 This proceeding is for the redetermination of income tax deficiencies of $249.70, $230.36, and $231.12 for the calendar*618 years 1937, 1938, and 1939, respectively. The issue to be decided is whether the income of a trust is to be taxed to the petitioner as grantor. FINDINGS OF FACT. Petitioner is an individual, residing at R.F.D. #2, Hudson, Ohio. He filed his income tax returns for the calendar years 1937, 1938, and1939 with the collector of internal revenue at Cleveland, Ohio. On July 28, 1910, petitioner was married to Louise du Charme. Petitioner's net worth was about $350,000 during the World War(1914-1918). Due to a great many losses and shrinkage in investments, this net worth had decreased to about $80,000 in or about1930. Because of his desire to conserve his remaining net worth and to get a trustee who would be able to give better attention to that conservation, petitioner created a trust. On October 28, 1930, petitioner created the trust for the benefit of his wife and his adopted daughter. The Cleveland Trust Co. has been trustee at all times material under this trust agreement. Thetrust agreement provides, inter alia: THE TRUSTEE SHALL HAVE POWER: 1. To sell, lease, transfer or exchange all or any part of said property, * * *to invest and reinvest money coming into*619 its possession in such loans, stocks, *1007 securities or real estate as it may deem proper and suitable, * * * it being my intent that the Trustee shall have unrestricted power to manage all property held by it hereunder as if the absolute owner thereof, subject, however, to the provisions hereinafter made. * * * 4. To make advances or borrow money upon such terms and conditions at anytime or times during my life, for such purposes as to it may seem desirable or proper, upon obtaining my written consent thereto, and after my death, at anytime or times for the improvement, protection or preservation of the TrustEstate. * * * 5. To compromise, compound and adjust claims in favor of or against the Trust Estate, upon such terms and conditions as it may deem best, provided that during my lifetime it shall secure my written approval thereto. * * * During my life the Trustee, whenever practicable, shall secure my written approval to all sales or purchases of securities which it may propose to make. After my decease, the Trustee shall similarly secure the written approval of my wife, LOUISE D. HEASLET, to all such proposed sales and purchases. * * * * * * The Trustee shall*620 allow me the free use and enjoyment of all real estate conveyed to it hereunder during my life, and during such time shall not be required to see to the payment of taxes or maintenance of insurance thereon unless requested so to do in writing I reserve the right at any time during my life, or so long as I am competent to act in the matter, to revoke the settlement hereby evidenced, either in whole or in part, as well as the right to modify in any respect the terms of this settlement, any such revocation or modification to be evidenced by written instrument signed by me and delivered to the Trustee, provided, however, that such revocation or modification shall be consented to in writing by my wife, LOUISE D.HEASLET. * * * According to the trust instrument the net income was to be paid to petitioner's wife during her life. The trustee had the power to invade corpus if necessary to provide for the maintenance and comfort of petitioner's wife, and also for the maintenance and education of the adopted daughter if she were dependent upon the wife. After the wife's death the income was to be paid to petitioner and the trustee had a similar right to invade corpus. After the death of*621 both petitioner and his wife the trust was to be held for the benefit of the adopted daughter. The survivor of the mother and daughter had the right to appoint distributees of the corpus by will. In event no appointment was made the corpus was to be distributed to the lineal descendants of the daughter and, if none, to certain named individuals. Only one withdrawal of about $6,000 was made and this with the consent of petitioner's wife. Both petitioner and his wife executed wills adopting the mode of distribution provided in the trust agreement. Although the wills were drawn at about the same time, petitioner's wife did not executor will until April 1, 1932. Petitioner had executed his will on October 28, 1930. *1008 During all the years prior to and after the execution of the trust petitioner paid all the household expenditures. In addition to paying for the utilities, petitioner gave his wife the following sums for other household expenses and also for personal expenses: [1929] $1,519 [1930] 5,050 [1931] 6,465 [1932] 3,830 [1933] $2,225 [1934] 2,555 [1935] 2,952 [1936] 1,376 Petitioner earned as salary the following amounts: [1929] $10,600 [1930] 16,700 [1931] 13,200 [1932] Unknown [1933] $10,920 [1934] 12,000 [1934] 12,000 [1935] 12,000 [1936] 12,000 *622 In 1936, while petitioner was on a business trip to California, he received a telephone call from his adopted daughter revealing that, because of the conduct of his wife, the daughter had left home and was living elsewhere. After petitioner returned from California he attempted to reconcile the daughter and his wife but was unable to do so. On or about July 13, 1936, petitioner separated from his wife and at all times material has lived separate and apart from her. On September 21, 1936, petitioner's wife filed a petition for alimony in the Court of Common Pleas in Cuyahoga County, Ohio. In addition to her allegation of ill treatment, petitioner's wife alleged as follows: Plaintiff further says that the said defendant has been grossly negligent in his duty towards her in that he has failed, refused and neglected to support her ever since March, 1936, although the said defendant is capable of and does earn considerable sums by virtue of his profitable occupation. On September 1, 1937, petitioner and his wife executed a separation agreement effective as of June 24, 1937. This agreement provided in part: THIS AGREEMENT made at Cleveland, Ohio, as of the 24th day of June, *623 1937, by and between JAMES G. HEASLET, residing in Hudson, Ohio, as FIRST PARTY, and his wife, LOUISE HEASLET, residing at 15100 Shaker Boulevard, Shaker Heights, Ohio, as SECOND PARTY, WITNESSETH: * * * 1. The parties hereto agree that the First Party shall have the custody, care and control and shall be solely responsible for the support, education and discipline of their said adopted daughter, Mary Jane; 2. That the residence now owned by the party of the Second Part at 15100 Shaker Boulevard, Shaker Heights, Ohio, shall be sold for not less than Twenty-five Thousand Dollars ($25,000.00) and the net proceeds of such sale shall be deposited with The Cleveland Trust Company and added to the assets of the trust * * *; 3. That in addition to the income now or hereafter derived form the said trust fund created by said agreement with The Cleveland Trust Company by Party *1009 of the First Part, * * * Party of the First Part agrees during his life to pay to Party of the Second Part the sum of One Hundred Dollars ($100.00) per month during her life and as long as she remains unmarried * * *; 4. That except as herein provided, each of the parties hereto releases and*624 discharges the other from any right, title or interest in and to the property of the other, whether real or personal, legal or equitable, * * * * * * In the event that either party shall hereafter obtain a divorce from the other, the provisions of this agreement shall be in respect to the care, custody, control, education and support of their said adopted child, Mary Jane, and in respect to all rights of property and in respect to alimony and support, binding upon the parties * * *. The trial court approved the separation agreement and incorporated it by reference in an order which was issued September 7, 1937. Petitioner and his wife also executed a supplemental agreement to the original trust agreement. By this agreement, the distribution of the corpus was to be made to the issue of the daughter or her lineal descendants. Thus, the power to appoint corpus which had been given to the survivor was no longer in effect. During the taxable years petitioner paid the sum of $100 per month as alimony in accordance with the separation agreement. Petitioner has made no attempt to reduce his income taxes because of the payment of this $100 per month. The trustee under the trust*625 paid and distributed to petitioner's wife the sums of $2,389.16, $2,491.38, and $2,373.72 in the years 1937, 1938, and 1939, respectively. These sums do not represent income from any of the separate property of petitioner's wife but only income from the property placed in trust by the petitioner. She returned those amounts in her Federal income tax returns for the respective years. Petitioner did not return as part of his income any of the sums distributed by the trustee. In the year 1937 the trustee distributed $1,878.52 in the period January 1 to September 7, and the sum of $510.64 from September 7 to the end of the year. Petitioner has at all times material supported his adopted daughter and she has not received any distribution of income or principal from the trust nor has she received any support or maintenance from petitioner's wife. Petitioner at all times prior to his separation from her had supported his wife. OPINION. HILL: The sole issue in this proceeding is whether or not the income of a trust created by petitioner should be taxed to him. The question involves two different periods of time, inasmuch as there was a change of facts at the time petitioner and*626 his wife executed the separation agreement. For the period prior to September 1937 respondent relies upon section 22(a) and section 167 of the Revenue *1010 Act of 1936. For the remainder of the taxable years he relies upon the doctrine of . In regard to the period before the separation agreement we see no basis in fact for respondent's reliance upon section 167 of the Revenue Act of 1936, since petitioner could make no alteration or revocation in the trust instrument without his wife's consent. She was a life beneficiary and had a substantial interest adverse to that of petitioner. Cf. (on appeal, C.C.A., 7th Cir.); . Nor is the income of the trust for the period prior to the separation agreement to be taxed to petitioner under section 22(a) and the doctrine of . This was not a trust for a short term and therefore petitioner must have retained the basic elements of control and enjoyment to make the income taxable to him under the latter contention. These elements of control*627 are lacking. Under the agreement the trustee was to distribute the income quarterly as it accrued to petitioner's wife during her lifetime. No discretion as to the distribution was left in the corporate trustee and hence no control over income whatsoever was left in petitioner. Cf. . Petitioner's control over investments was limited to "the trustee, whenever practicable, shall secure my [petitioner's] written approval to all sales or purchases of securities which it may propose to make." The lack of approval did not affect any transaction which the trustee executed without consent of the petitioner. Petitioner had parted with the corpus and the probability of his ever regaining it under the trust instrument was very remote. Cf. . The only benefit which petitioner could get under the trust agreement was the distribution of income during his lifetime, but only after the death of his wife. Under such facts the income is not to be taxed to the grantor under the broad provisions of section 22(a). *628 . There remains the further question of whether or not the income of the trust is to be taxed to petitioner for the taxable periods after the separation. Respondent contends that under the doctrine of , the income was used to satisfy petitioner's obligation to support his wife. The trust here in question was created long prior to the separation of petitioner and his wife. However, an existing trust can just as well be an "alimony trust" as one established upon the separation. ; affd., ; certiorari denied, . By the terms of the existing trust the income was to be paid to the wife during her life. The only right to alter, amend, or revoke granted to petitioner by the trust instrument was limited to that action *1011 taken with the consent of petitioner's wife. We have already held that she had a "substantial adverse interest" prior to the separation and certainly the adversity became even greater after separation. It is common knowledge that in divorce proceedings*629 courts do take into consideration the financial position of both parties in decreeing alimony. In the suit for alimony brought by petitioner's wife the court considered the wife's financial status and no doubt if there had been no trust the decree would have provided for more than $100 per month. The trust is not security for the continuing obligation to pay $100 per month but is separate and distinct. See . Therefore, the separation agreement did not transform the existing trust into what is commonly known as an "alimony trust", and as a result petitioner is not taxable upon its income for any of the taxable years. But even if we were to hold otherwise, the income would not be taxable to petitioner. The law of Ohio is clear that an agreement incorporated into a divorce decree becomes final and binding and the court has no power to thereafter change such decree. , and cases cited therein. This rule also applies to decrees for alimony alone. Jones v. Jones,*630 . This is true unless the decree retains jurisdiction over the allowance of further alimony. ; . The agreement provided only for payment of $100 per month and the continuing payment of the trust income. The amount $100 could not be changed even in the event there was no trust income. Petitioner was under no obligation to supplement the trust income except by the continuing payment of $100 per month. Cf. . In such a situation the income of the trust does not relieve petitioner from any obligation of support under state law or from any obligation created by agreement. Cf. . Decision will be entered under Rule 50. Footnotes *. Prior to October 22, 1942, this report was approved for promulgation. ↩