Gillette v. Commissioner , 46 B.T.A. 573 ( 1942 )

HALBERT P. GILLETTE AND WINIFRED GILLETTE, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

HALBERT P. GILLETTE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Gillette v. Commissioner

Docket Nos. 104368, 104369.

United States Board of Tax Appeals

46 B.T.A. 573; 1942 BTA LEXIS 846;

March 11, 1942, Promulgated

---

">*846 Under a property settlement agreement, made in lieu of alimony, which provided for the creation of a trust with all the trust income payable to petitioner's former wife for life, petitioner guaranteed the trust income up to $3,000 per annum, agreeing to make cash payments to the trustee to supplement the trust income if it fell below that amount. Subsequent to executing the agreement petitioner obtained a Nevada divorce from his wife in 1919. The divorce decree did not award alimony to the wife and it did not refer to the property settlement. In the taxable year 1936 the trust income exceeded $3,000, and in 1937 it was less than $3,000. Petitioner was under a continuing legal obligation to provide his former wife with an annual income of $3,000 for life. Held, that petitioner is taxable on the trust income to the extent that it was used to discharge his obligation, and, as his obligation was limited to $3,000 per year, petitioner is taxable only upon $3,000 of the trust income in 1936, and upon all of the trust income in 1937.

A. Calder Mackay, Esq., for the petitioners.

E. A. Tonjes, Esq., for the respondent.

---

HARRON

">*573 In these">*847 proceedings, which were consolidated for hearing, respondent determined deficiencies in income tax of $1,030.67 for 1936 in Docket No. 104368, and of $124.59 for 1937 in Docket No. 104369. The ">*574 main question is whether, in the taxable years, all or any part of the net income of a trust was taxable to Halbert P. Gillette. The facts have been stipulated.

FINDINGS OF FACT.

Halbert P. Gillette and Winifred Gillette were husband and wife in 1936 and 1937 and are now so related. In the taxable years they resided in San Marino, California. For the year 1936 they filed a joint return. For the year 1937 Halbert P. Gillette filed a separate return. Both returns were filed with the collector of internal revenue for the sixth district of California.

In 1918 Halbert P. Gillette, hereinafter called the petitioner, was married to Julia S. Gillette, but they were separated and living apart. In November they desired to settle all property questions and questions of alimony and support. Petitioner was living in Chicago and Julia S. Gillette, hereinafter called Julia, was living in Philadelphia. On November 18, 1918, they entered into an agreement disposing of certain properties">*848 and providing an annual income of at least $3,000 a year for Julia for the duration of her life. The parties agreed to enter into a joint declaration of trust and to convey certain property to a trust company of Philadelphia, the name of which was the Provident Trust Co. of Philadelphia in the taxable years. A trust was created pursuant to the terms of the property settlement agreement. Each party conveyed some of his separately owned property to the trustee and all of the trust corpus consisted of securities. The net trust income was payable to Julia for life. In the taxable years the only securities yielding income were 250 shares of preferred stock of the Gillette Publishing Co. which petitioner conveyed to the trustee out of his separate property. From that stock the trustee received $7,035.94 in dividends in 1936, consisting of cash dividends of $2,160.94 and a noninterest bearing note in the amount of $4,875. All of this income was distributable to the distributee in 1936, although the trustee retained the note and still holds it. In 1937 the trustee received cash dividends in the amount of $1,618 on the above stock.

Under the agreement of November 18, 1918, petitioner">*849 guaranteed an annual income of $3,000 per year for life to Julia, agreeing to make up any deficiencies in the trust income, up to $3,000, by making cash payments to the trustee to supplement the trust income. The agreement provided that petitioner

* * * shall pay to the said Trustee on the first days of January, April, July and October of each and every year during the life of * * * [Julia S. Gillette] such sums of money as may be necessary, added to the receipts under the said trust, less the expenses thereof, to enable the said Trustee to pay to * * * [Julia S. Gillette] for the preceding three months, the sum of Seven hundred and fifty dollars ( $750); it being the spirit and principal purpose of this agreement to provide a fixed income for * * * [Julia S. Gillette] of Three thousand dollars ($3,000) per year throughout the remainder of her life.

">*575 In consideration for petitioner's agreements, Julia released him "from any and all further claim or demand against first party for alimony, support, or for any other cause or on any other account whatsoever as of January 1, 1919." Julia agreed to receive the trust income, as guaranteed by petitioner up to $3,000, ">*850 in lieu of alimony and support.

The trust was an irrevocable trust. The remaindermen were persons other than petitioner, to whom none of the trust corpus or income could revert, disposition being by Julia's testamentary devise in the event none of her children or grandchildren or others survived her. Petitioner retained the right to vote the stock of the Gillette Publishing Co., but that right lapsed upon his default of his obligation to make any of the contingent payments of income to the trustee up to $3,000.

In 1936 and 1937 petitioner did not make any payments to the trustee to make up any deficiencies in trust income.

In its income tax return for 1936 the Gillette Publishing Co. took a credit for the dividends paid by it in that year in notes.

After the property settlement agreement was executed and the trust was created, petitioner brought suit for divorce against Julia in Nevada. On January 2, 1919, the district court for Washoe County granted petitioner an absolute divorce. The decree did not refer in any way to the agreement or the trust, heretofore mentioned; nor did it make any disposition of the properties of the parties, nor did it make any provision for">*851 the payment of alimony to Julia. The decree was silent on all such matters. The court directed petitioner to pay to Julia $50 a month for the support of one child, Edward, commencing on January 1, 1919.

In determining the deficiency for 1936 the respondent added to taxable income $7,035.94, the entire trust income for 1936; and in determining the deficiency for 1937 he added to taxable income $1,618, the entire trust income for that year.

Petitioner's obligation to provide income to his former wife for the duration of her life arose out of the agreement of November 18, 1918, and it was a contractual obligation to provide her with income up to but not exceeding $3,000 per annum. Petitioner is taxable on $3,000 of the trust income in the year 1936, and on $1,618 of the trust income in the year 1937.

OPINION.

HARRON: Respondent included in petitioner's taxable income the entire trust income in the taxable years. The main questions are whether any of the trust income is taxable to petitioner, and, if so, how much thereof is taxable to him.

">*576 Before turning to the main question the following is pointed out: After the property settlement agreement was executed">*852 petitioner obtained a divorce from his then wife in Nevada. The decree did not make any provision for support or alimony for the divorced wife and it did not reserve to the court any power to modify the decree. Under Nevada law the decree was final and, as it did not award alimony to the wife, she was foreclosed from ever obtaining any award for alimony. Sweeney v. Sweeney,42 Nev. 431">42 Nev. 431; 179 P. 638, and petitioner was not obligated under the divorce decree to continue to provide support for his former wife. If petitioner had not guaranteed, in the property settlement agreement, an annual income of $3,000 a year to his former wife, by virtue of his guarantee to make up any deficiency in the trust income up to $3,000, none of the trust income in question would be taxable to petitioner in the taxable years under the rule of Helvering v. Fuller,310 U.S. 69">310 U.S. 69. But the situation here is different from that of the Fuller case. This case, rather, comes within the rule of Helvering v. Leonard,310 U.S. 80">310 U.S. 80, as is shown hereinafter.

Petitioner is taxable upon the trust income ¹ which was used to discharge">*853 his obligation, assumed by him under the property settlement agreement. He executed a property settlement agreement, in lieu of alimony, the express purpose of which, inter alia, was to provide the former wife with an annual income of $3,000 for life. A trust was created by petitioner and his former wife for her support. Petitioner's obligation to provide her with an annuity was assumed by him under a contract, under which his former wife released petitioner from all claims which she had for "alimony, support, or for any other cause." Petitioner acquired, in effect, the interest of his former wife in his property in consideration of his agreement to pay her $3,000 a year during her lifetime. The trust was in the nature of collateral security to insure such payment. If the trust income was not sufficient to yield to the beneficiary such annual income, petitioner was obligated to pay to the trustee any deficiency so that she would receive the stipulated amount. The trust income was to be used to satisfy his legal obligation arising from the property settlement agreement. The fact that petitioner later obtained an absolute divorce from the former wife, without any provision">*854 for alimony or support, does not in any way wipe out petitioner's continuing legal obligation which he assumed under the agreement. Petitioner's obligation was in the form of a guarantee that the stipulated amount would be paid to his former wife, and that guarantee was a continuing obligation. It reached into the taxable years. So far as petitioner's guarantee was concerned, the ">*577 divorce decree and the establishment of the trust "permitted his preexisting unconditional duty to be transformed into a limited contingent one." 310 U.S. 80">Helvering v. Leonard, supra.Petitioner's obligation was discharged as income was received by the trustee, and he received benefit by the payments of the trust income to his former wife. The trust income which served to discharge petitioner's guarantee constituted income to the petitioner and he is taxable on such income. Alsop v. Commissioner, 92 Fed.(2d) 148; certiorari denied, 302 U.S. 767">302 U.S. 767; Glendinning v. Commissioner, 97 Fed.(2d) 51; ">*855 Weir v. Commissioner, 109 Fed.(2d) 996; certiorari denied, 310 U.S. 637">310 U.S. 637; 310 U.S. 80">Helvering v. Leonard, supra; Paul, Five Years with Douglas v. Willcuts, 53 Harvard Law Review 1.

The cases above cited are controlling in the matter of petitioner's liability for income tax on the income of the trust which discharged his continuing obligation to his former wife. However, in all of the cases in which the question has been considered, the income of the particular trust was not in excess on the amount of the annual income guaranteed by a husband who created an alimony trust for a wife, later divorced. In this case, because the trust income in 1936 exceeded the guaranteed amount of $3,000, a question of first impression arises. See Paul, Studies in Federal Taxation, Third Series, pp. 272, 273. Is petitioner taxable on all of the trust income in the amount of $7,035.94, or only upon such income as discharged his obligation, ">*856 $3,000? The Supreme Court in the Leonard case has indicated clearly that the reason for taxing income from such a trust to the husband at all is the very reason why the amount of the income taxable to him is limited to the amount which he has guaranteed. It was said in the Leonard case that:

* * * the case in substance is the same as those where pursuant to contract or arrangement an obligation is discharged by another for the taxpayer's benefit; * * * or where the taxpayer creates a trust, the income of which is applied to the discharge of his debt.

The petitioner had a contingent obligation to pay $3,000 a year to a trustee for his wife's benefit, which was much the same as being liable for a "debt." He has received "income" to the extent that his liability has been discharged, but anything paid to the wife from the trust income above $3,000 was not paid in discharge of petitioner's obligation. Accordingly, petitioner is taxable upon not more than $3,000 of the trust income in the year 1936.

The 1936 the dividends on the Gillette Publishing Co. stock consisted of $2,160.94 in cash and a note for $4,875. Petitioner urges that the guarantee to the wife of annual">*857 income of $3,000 was discharged to the extent of the cash dividends only. The trustee distributed only the cash dividends and retained the note. There is no evidence whatever as to the value of the note and it must be assumed that its value ">*578 was equal to the face amount less discount, at least. Pinellas Ice & Cold Storage Co. v. Commissioner,287 U.S. 462">287 U.S. 462. The trustee was required to distribute currently all dividends, after the trustee's expenses, to the former wife. Dividends may be paid in cash or in notes or in other property. It was the general intent that the trustee should distribute all dividends, without any restrictions as to the form of the dividends. Consequently, all of the trust income in 1936 was distributable income. It is held that the amount of the trust income in 1936 which served to discharge petitioner's guarantee was $3,000, and he is taxable on that amount in 1936. In 1937 the trust income was $1,618. Respondent properly included that amount in petitioner's taxable income.

There is a remaining question. In his brief, petitioner claims that Winifred Gillette, petitioner, is not liable for any deficiency, under">*858 the joint return, for 1936 in Docket No. 104368, the deficiency resulting from Halbert P. Gillette's income. That question must be answered contrary to petitioner's contention on authority of George W. Schoenhut,45 B.T.A. 812">45 B.T.A. 812, which states that Ella T. Flaherty, Executrix,35 B.T.A. 1131">35 B.T.A. 1131, will not be followed hereafter by the Board.

Reviewed by the Board.

Decision will be entered under Rule 50 in Docket No. 104368 (1936). Decision will be entered for the respondent in Docket No. 104369 (1937).

---

Footnotes

• 1. None of the trust income was derived from any property of the former wife which she conveyed to the trustee. All of the trust income was derived from stocks conveyed to the trustee by petitioner. ↩