Parsons v. Commissioner , 44 B.T.A. 1142 ( 1941 )

REGINALD B. PARSONS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Parsons v. Commissioner

Docket No. 97908.

United States Board of Tax Appeals

44 B.T.A. 1142; 1941 BTA LEXIS 1226;

July 31, 1941, Promulgated

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">*1226 1. In contemplation of divorce petitioner executed two trust instruments irrevocable in form and providing for a possibility of reverter in one trust and a reversion is the other. The first trust was for the maintenance and support of his wife and child, the second was for the benefit of the wife. Petitioner and his wife were divorced in Riga, Latvia, and shortly thereafter the wife remarried. By the laws of Latvia a husband's duty to support his wife after divorce ceases upon remarriage of the wife. Held, that only that part of the income of the first trust which was devoted to the support of the petitioner's minor child is taxable to him. The income of the second trust which was paid to his former wife in the taxable years is not taxable to petitioner. Helvering v. Fuller,310 U.S. 69">310 U.S. 69, followed.

2. Petitioner married again and later this marriage was annulled. Prior to the annulment petitioner and his second wife entered into an agreement whereby petitioner agreed to pay her $1,000 a month and to deposit sufficient securities in escrow to accomplish this result. Petitioner deposited the securities in escrow but retained legal title to the securities. ">*1227 Held, that the income paid the wife from the escrowed securities is taxable to petitioner.

3. Petitioner is grantor and life beneficiary of an irrevocable trust and has the power to dispose of the corpus by will. He also has the power to direct the trustee in sales and investments of the securities comprising the trust corpus. Held, that capital gains of the trust in the taxable years are taxable to petitioner under section 22(a) of the Revenue Acts of 1934 and 1936. Helvering v. Clifford,309 U.S. 311">309 U.S. 311, followed.

Charles T. Donworth, Esq., for the petitioner.

B. H. Neblett, Esq., for the respondent.

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HILL

">*1143 Respondent determined deficiencies in petitioner's income taxes as follows: 1935, $2,436.87; 1936, $8,481.57; and 1937, $4,325.85. In his answer to the petition filed in this proceeding respondent asserted an additional deficiency in petitioner's 1935 income tax in the sum of $2,733.92.

The first issue is whether or not petitioner is taxable on the income of two trusts established by him for the benefit of his divorced first wife, one of which trusts was also for the support of petitioner's son. ">*1228 The second issue is whether or not petitioner is taxable on income of securities held in escrow which was paid to his second former wife in the taxable years. The third issue is whether or not capital gains of a trust of which petitioner is grantor and life beneficiary are taxable to him or to the trust.

FINDINGS OF FACT.

Facts were stipulated substantially as follows:

Petitioner's returns for the taxable years were filed with the collector for the district of Washington.

Petitioner and Geneva Stribling, sometimes hereinafter referred to as the first wife, were married at Seattle, Washington, on December 27, 1928. During the two and one-half years following their marriage they lived at New Haven, Connecticut. Thereafter they resided at Larchmont, New York, until March 31, 1933.

On April 1, 1933, they leased a house in Hillsboro, California, for a period of six months, where they then resided. In the fall of 1933 petitioner and his wife went to Europe. Since January or February ">*1144 of that year there had been discussions between them concerning the possibility of a divorce. These discussions culminated in the execution of an agreement at Berlin, Germany, ">*1229 on December 7, 1933, a copy of which can not be located. This agreement contemplated the changing of the beneficiary designated in a trust agreement entered into by the petitioner with the Central Hanover Bank & Trust Co. of New York on February 23, 1932. Petitioner did not see his wife from the time the agreement of December 7, 1933, was executed until shortly after they were divorced on May 8, 1934.

In full settlement of all claims for support of herself and their son, Reginald Stribling Parsons, born October 22, 1932, petitioner and his then wife executed two trust agreements, hereinafter referred to as trust A and trust B. Trust A provides as follows:

WHEREAS, Parsons and Geneva Parsons have entered into a property and settlement agreement in contemplation of divorce, in Berlin, Germany, on December 7, 1933, which agreement was intended to settle all questions as to property, property rights, alimony, support and maintenance between Parsons and Geneva Parsons and also to make suitable and adequate provisions for the care, support, and comfort of Reginald Stribling Parsons, their child, born in 1932, and

WHEREAS, the said agreement provided, amongst other things, in paragraph">*1230 sixth thereof, that Parsons should change the beneficiary under a certain trust indenture, dated February 23, 1932, between himself as settlor and beneficiary and the Central Hanover Bank & Trust Company of New York, as trustee, so as to provide that all the net income from the said trust should be paid to Geneva Parsons, during her life, for the benefit of herself and Reginald Stribling Parsons, and upon her death the income to be paid to Reginald Stribling Parsons, and

WHEREAS, such change of beneficiary cannot satisfactorily be made,

NOW, THEREFORE, THIS AGREEMENT WITNESSETH, in consideration of the foregoing and of the mutual covenants and agreements herein contained, it is agreed as follows:

1. That this agreement and the provisions herein contained are made in lieu of and in full satisfaction of the agreement to make a change of beneficiary as provided in section sixth of the aforementioned property and settlement agreement between Parsons and Geneva Parsons, and Parsons shall be and hereby is released and discharged from any and all obligations under the said paragraph sixth of said property and settlement agreement and is fully released and discharged from the obligation">*1231 to change or in any wise affect or alter the beneficiary under or the terms of the said trust indenture, dated February 23, 1932 between himself as settlor and beneficiary, and the Central Hanover Bank & Trust Company of New York as trustee,

2. Parsons does hereby transfer assign and set over unto Brehme, as trustee for the purposes hereinafter set forth, all his right title and interest whatever they may be to 750 shares of the common stock of the Bemis Brothers Bag Co., Incorporated, now held by the Continental Illinois (National) Bank & Trust Company of Chicago, Illinois, as trustee under a certain trust indenture dated July 1932. It is understood that the said stock is now held in trust by the said Continental Illinois Bank & Trust Company for a period of thirteen years from the creation thereof but that under the terms of the said trust indenture Parsons can revoke the trust with the consent of Brehme at any time after ">*1145 three years from its date of commencement, and that by this agreement Brehme does give his consent to the revocation of the said trust to the extent of releasing and discharging from the said trust 750 shares of the said Bemis stock as aforesaid">*1232 but no more, and Parsons having the right to revoke the said trust three years after its date of commencement, with the consent of Brehme, and Brehme having given his consent to such revocation Parsons does hereby revoke the said trust to the extent of the said 750 shares to take effect three years from the date of the commencement of the said trust, and at such time the said Bank is hereby authorized and directed to transfer and deliver to Brehme as trustee the said 750 shares of the said Bemis stock now held in trust by the said Bank.

3. The parties hereto agree that the said stock shall be received by Brehme and held in trust by him for the following purposes:

A. To receive rents, profits and income thereof and to pay the net income thereof to Geneva Parsons quarterly-annually for the benefit of Geneva Parsons and Reginald Stribling Parsons, her son, during the lifetime of Geneva Parsons.

B. Upon the death of Geneva Parsons, to pay the entire net income to Reginald Stribling Parsons until he attain the age of thirty years, provided he live so long.

C. Upon Reginald Stribling Parsons attaining the age of thirty years and after the death of Gneva Parsons as aforesaid, ">*1233 to terminate the trust and to turn over the entire principal therof in whatever form it may then be to Reginald Stribling Parsons outright to his own use and as his own absolute forever.

D. In the event that Reginald Stribling Parsons should die without issue before the death of Geneva Parsons, or should die without issue after the death of Geneva Parsons, and before attaining the age of thirty, then upon the death of both Geneva Parsons, and Reginald Stribling Parsons this trust shall terminate and the entire principal shall revert to Parsons or his estate, as the case may be, the same as if he were the owner and holder of the trust property, and as if this trust had never been created.

E. In the event that Reginald Stribling Parsons shall die before the death of Geneva Parsons leaving issue, or shall die after the death of Geneva Parsons and before attaining the age of thirty, and leaving issue, then upon the death of both Geneva Parsons and Reginald Stribling Parsons, then this trust shall terminate and the entire principal held in this trust in whatever form it may then be, shall be turned over and delivered to such issue outright to its own use and as its own absolute">*1234 property forever.

The sum of $3,750 of the amount annually paid petitioner's first wife from the income of trust A was used for the support of petitioner's son. Trust B provides as follows:

WHEREAS Parsons and Geneva Parsons entered into a certain property and settlement agreement on December 7 1933 in Berlin Germany, in contemplation of divorce proceedings and

WHEREAS paragraph seventh thereof made certain provisions for the creation of a trust sufficient to pay Geneva Parsons an income of $6000.00 a year during her lifetime, and

WHEREAS Parsons is the beneficiary under a certain trust agreement entered into in July 1932 with the Continental Illinois National Bank & Trust Co. of Chicago, illinois, which has as its principal amongst other things over 1800 shares of the common stock of the Bemis Bros. Bag Co., Inc., and which trust is revocable on or after three years after the date of its commencement by Parsons with the consent of Brehme.

">*1146 Now THEREFORE, in consideration of the mutual covenants and agreements herein contained and in order to comply with the provisions of the aforesaid paragraph seventh of the said agreement between Parsons and Geneva Parsons, ">*1235 this agreement witnesseth:

1. That 800 shares of common stock of the Bemis Bros. Bag Co. Inc., now held in trust by the said Continental Illinois National Bank & Trust Company shall be set aside and assigned to a trustee to be chosen by Brehme with the consent of Geneva Parsons in trust under the terms and conditions and in the manner hereinafter set forth.

A. The said 800 securities shall be held in trust by the trustee to receive the income, rents, and profits and to pay over therefrom to Geneva Parsons for her own use and benefit the sum of $1500.00 quarterly annually and at the end of each year to pay over to Parsons the balance of the net income earned by the said securities as may be remaining upon the payment of the four $1500.00 quarterly-annual payments as aforesaid.

B. Upon the death of the said Geneva Parsons, the principal of the said trust shall be transferred and become incorporated with the principal of the trust now held by the Continental Illinois Bank & Trust Company for the benefit of Parsons provided the same is still at such time in existence and shall become subject to all the same conditions and terms and provisions of the said trust for Parsons. In">*1236 the event that the said trust is not at such time in existence then this trust shall revert to Parsons and shall become his property and right.

* * *

Trust B further provided for the partial revocation, to the extent of 800 shares of stock of the Bemis Brothers Bag Co., hereinafter referred to as Bemis, of the trust for the benefit of petitioner which was referred to in trust A, in the same manner as provided for in trust A.

These documents were prepared in Chicago and sent to Berlin, where they were executed on April 30, 1934. The stock comprising the corpus of these two trusts was held by the Continental Illinois National Bank & Trust Co. of Chicago as trustee under a certain trust indenture executed by petitioner on July 23, 1932, which was revocable only after three years from date of the execution.

On or about July 23, 1935, petitioner revoked the trust of July 23, 1932, and directed the Continental Bank to place 750 shares of Bemis common stock in trust A and 800 shares thereof in trust B. Karl Brehme, originally named as trustee in the instruments creating trust A and trust B, having died in March 1935, the Continental-Illinois National Bank & Trust Co. of Chicago">*1237 was designated as trustee under the two trusts. On or about July 23, 1935, the trustee received from itself the 750 shares of the Bemis common stock under trust A and the 800 shares of that stock under trust B.

Geneva Parsons established a separate domicile in Riga, Latvia, and on or about May 8, 1934, a decree of divorce was granted her by the Riga District Court of Latvia. The decree provided:

">*1147 decided:

to dissolve the marriage contracted on December 27th 1928 at the Baker Presbyterian Church at Seattle, America, between Reginald Parsons and Geneva Parsons, nee Stribling, independent of guilt, permitting the plaintiff to enter into a new marriage immediately after the decree has become final.

No other action or special proceeding was ever brought by either of the parties relative to alimony or for the purpose of fixing their property rights.

At the time Geneva S. Parsons obtained her divorce she intended to marry a German citizen and within a few days after the entry of the divorce decree she married Benno Wolff-Limper, a wealthy manufacturer of Braunschweig, Germany, to whom she is still married.

At the time of her marriage to petitioner in 1928 Geneva">*1238 S. Parsons had no property and neither of them acquired any property during the period of their marriage other than a substantial sum which petitioner inherited from his maternal grandfather during that period.

Petitioner and Lily Schulze, hereinafter sometimes referred to as petitioner's second wife, were married at Berlin, Germany, on August 12, 1935, and thereafter resided at Seattle, Washington, for approximately one year. During that period they acquired no property. On August 17, 1936, petitioner and Lily S. Parsons entered into an agreement at Berlin, Germany, in contemplation of an annulment proceeding which Lily Parsons was about to commence in the District Court of Berlin, Germany. Under this agreement petitioner agreed to pay Lily Parsons the sum of $1,000 per month for life and to deposit in escrow with the Continental-Illinois National Bank & Trust Co. of Chicago stocks in such an amount that the income derived therefrom would provide these monthly payments. The agreement further provided:

II.

* * *

5) A deterioration of the circumstances as to possessions and income of Mr. Parsons does not entitle him to ask of Mrs. Parsons that the monthly rental of one">*1239 thousand Dollars payable to Mrs. Parsons should be reduced, as long as this rental can be paid out of the escrow account established to safeguard the claims of Mrs. Parsons. If, however, the income from this account reduces to such a degree that it brings in less than one thousand Dollars, and if, at the same time, the circumstances as to possessions and income of Mr. Parsons have deteriorated so pronouncedly that he is no more in a position to earn a suitable living for himself, then Mr. Parsons is not obligated to make up the difference from his other possessions or income.

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VII.

1) In order to judge the question whether the actual conditions named in II, last paragraph (5), III B, 2 and IV, 2 of this contract, are a fact, or in order ">*1148 to judge similar questions arising during the carrying out of this contract, both parties submit to the opinion of an expert, without thereby submitting to a court of arbitration. This expert is to be nominated by the President of the National Chamber of Commerce in Washington, D.C.; if possible, he should be a banking expert. Each of the two parties has the right to appoint an own expert on his or her part as an assistant">*1240 to the nominated expert, so that the three experts together will have to make the decision; in this case the expert nominated by the above named president will have the deciding vote upon differences of opinion.

* * *

The dividends received from the stock so deposited have been used to pay Lily Parsons the sum of $1,000 per month and the balance thereof has been paid to the petitioner. The title to the stock has at all times been vested in the petitioner and is still vested in him.

On August 20, 1936, the trial was had in the annulment proceeding instituted by Lily Parsons and a decree of annulment was granted under paragraph 606, section 3, of the German Civil Law Court Procedure, decreeing that the marriage between the parties was null and void. On October 2, 1936, petitioner executed an escrow pledge agreement with the Continental-Illinois National Bank & Trust Co. of Chicago under which he deposited the 1,200 shares of Bemis common stock. The escrow pledge agreement contains the following provisions:

WHEREAS, REGINALD B. PARSONS AND MRS. LILY PARSONS (nee Schulze), then husband and wife, did on the 17th day of August, 1936, enter into a certain property agreement * ">*1241 * * and

WHEREAS, in said agreement Mr. Parsons obligated himself to make certain payments to Mrs. Parsons in United States dollars, and to secure said payments it was agreed that Mr. Parsons should deposit with the Continental Illinois National Bank and Trust Company, of Chicago, Illinois, stocks for the purpose of guaranteeing the payment of the income payments specified in said agreement,

* * *

(a) Parsons hereby gives to the Bank irrevocable instructions that, from the dividends and other income that said bank shall receive from said stock, said Bank shall remit to Mrs. Parsons, on the first day of each and every month, beginning on the 1st day of November, 1936, and continuing on the first day of each succeeding month during the period of her natural life, the sum of One Thousand Dollars ($1,000.00) net. Said monthly payments shall be remitted to Mrs. Parsons at such address as she may from time to time furnish to the Bank for the purpose, and all expenses in connection with the transmission of said funds shall be paid out of the income of said stock in the hands of the Bank, with the exception of such taxes and other charges as may be attributed to and collectible under">*1242 the laws or administrative regulations of the place of residence of Mrs. Parsons;

* * *

7. In the event of the death of Parsons, the Bank shall continue to hold the deposited securities, and to make the payments to Mrs. Parsons, as herein provided, during the term of her natural life, and, upon her death, the Bank shall redeliver said stock to Parsons, if living, or to the persons legally entitled thereto if he be deceased at such time.

8, It is understood that the deposited stock shall be transferred on the books of the Bemis Bros. Bag Co., Incorporated into the name of a nominee of the Bank, so that the dividends and other income with respect thereto shall be payable ">*1149 to such nominee and thus received by the Bank, but the legal title to said stock shall at all times remain in Parsons, subject only to the pledge hereby made in accordance with this Agreement and the irrevocable assignment of the income to Mrs. Parsons, as herein provided. In the event that Mrs. Parsons shall at any time release the Bank from all obligations hereunder and waive any further claim to the income from the deposited stock, the Bank shall redeliver said stock to Parsons and this Agreement">*1243 shall be terminated. Likewise, upon the death of Mrs. Parsons, the Bank shall thereupon redeliver the stock to Parsons if he be then living, or, if he be dead, to the personally [sic ] legally entitled thereto, and this agreement shall terminate.

* * *

The decree of annulment did not purport in any manner to divide the property to either of the parties or to approve or ratify the agreement or property settlement and did not make any reference to the subject of the property rights whatsoever.

On August 25, 1938, Lily Parsons married Lloyd Frederic Reighley (formerly Ludwig Frederich Reichenheim), a German citizen, with whom she is now living at San Francisco, California. During the year 1938 petitioner also married again and at the present time is the father of twin daughters, born August 1, 1939.

Under date of February 23, 1932, petitioner executed a certain trust agreement, sometimes hereinafter referred to as the 1932 trust, with Central Hanover Bank & Trust Co. of New York City, in which it was provided that the trustee should pay to petitioner the net income of the trust during his life. The agreement further provided:

* * *

FIRST:

Upon the death of the">*1244 Settlor the trust shall terminate and the property then comprised in the trust shall be conveyed, assigned and/or paid over, freed and discharged of any trust, to such persons and in such amounts or proportions as the Settlor shall by valid last will and testament in writing appoint to receive the same, and in default of such appointment and insofar as such appointment shall not extend, said property shall be conveyed, assigned and/or paid over in equal shares to any children of the Settlor surviving at the time of the termination of the trust and any issue then surviving of any child or children of the Settlor who shall have theretofore died, the issue of each such deceased child to take per stirpes and not per capita the share which such deceased child would have taken if then alive. For the purposes of this instrument any child of the Settlor born alive after the termination of the trust shall be deemed to be a child of the Settlor surviving at the time of the termination of the trust, and if any child of the Settlor shall die prior to the termination of the trust leaving issue in being but unborn at the time of the termination of the trust, such issue being born alive">*1245 after the termination of the trust, then such issue shall be deemed to be issue surviving at the time of the termination of the trust of such deceased child. If there shall be no child or children of the Settlor and no issue of any deceased child of the Settlor surviving at the time of the termination of the trust, the property comprised in the trust shall be conveyed, assigned, transferred and/or paid over, freed and discharged of any trust, to such persons and in such amounts or proportions as would have received the same had such property comprised a part of the personal estate of the Settlor at the time of his death and had he died ">*1150 intestate and a resident of the State of New York immediately after the termination of the trust.

* * *

THIRD: The Settlor may at any time and from time to time during his life direct the Trustee, by instrument in writing signed by the Settlor and filed with the Trustee, to sell or otherwise dispose of any or all securities or other property then comprised in the trust and the Trustee shall be obligated to comply with any and all such directions, but the Trustee shall not thereby incur any liability or responsibility whatever. Before">*1246 making any investments or reinvestments in the trust during the life of the Settlor the Trustee shall consult with the Settlor and/or with such other party as may have been last designated as a consultant in a letter or other writing signed by the Settlor and filed with the Trustee.

FOURTH: * * *

(e) Any and all income including dividends declared but unpaid, which has accrued on any securities at the time of the delivery thereof by the Settlor to the Trustee, whether such delivery be made on the execution and delivery of this instrument or at some later date, shall be deemed to constitute income of the trust and treated accordingly.

* * *

(g) The Trustee is authorized to make any distribution hereunder in kind or in cash or partly in kind and partly in cash and the determination of the Trustee as to the fairness and equality of such distribution shall be final and conclusive upon all parties in interest.

This trust is now and at all times since February 23, 1932, has been in full force and effect. During that period the net income which has been received by petitioner has consisted solely of interest on bonds and dividends upon stocks comprising the corpus of the trust">*1247 and no capital gains have been distributed to him by the trustee, but have been from time to time added to the principal of the trust.

Petitioner and the Central Hanover Bank & Trust Co. have at all times since the creation of this trust construed the trust agreement as creating an irrevocable trust under which the petitioner was not entitled to any capital gains accruing to the trust. The capital gains have at all times been added to the principal of the trust.

The Commissioner of Internal Revenue did not treat as taxable income to the petitioner the capital gains received by the trustee under the provisions of the trust indenture during the calendar years 1932, 1933, and 1934, but during that period taxed the income to the trust.

We adopt as findings of fact all of the facts stipulated and in addition thereto we find on evidence adduced that the laws of Latvia which are pertinent to our consideration here are as set forth infra in the margin of our opinion under marginal reference numbered 1.

OPINION.

HILL: The first issue is whether or not petitioner is taxable on the entire income of trusts A and B. Petitioner contends that these trusts were established in">*1248 complete discharge of all obligations which he owed his first wife. He maintains that the Latvian laws and the trusts have given him a complete discharge from all duty to support ">*1151 his first wife. Respondent argues that petitioner had a continuing obligation under the laws of Latvia to support his wife. He contends also that the trust agreements constitute continuing obligations to support petitioner's first wife. He maintains that in any event petitioner has not shown by "clear and convincing proof" that the law of Latvia gave him a complete discharge of duty to support his former wife.

It is apparent that disposition of this issue must be controlled by one of two Supreme Court cases, , or . The former case laid down the rule that the taxpayer must give clear and convincing proof that the local law and the trust instrument gave the taxpayer a complete discharge of all obligation to support his divorced wife. In the latter case the Supreme Court applied the doctrine of ">*1249 , and held that the taxpayer had shown that local law and the trust instrument imposed no obligation upon him to support his former wife.

The local law applicable with respect to this issue is that of Latvia. The pertinent statutes are sections 41, 49, 50, 56, 60, 63, 67, and 76 of Lettlands Book of Civil Laws. ¹

">*1250 ">*1152 The doctrine of , imposes upon petitioner the burden of proving that both the law of Latvia and the trust instruments gave petitioner a complete discharge of the duty to support his first wife. It appears on the facts here that the obligation, if any, of petitioner to support his first wife ceased upon her remarriage within a few days after the divorce in so far as such obligation may have existed by reason of the laws of Latvia. Sec. 60, Lettlands Book of Civil Laws, supra. Thus, if petitioner had an obligation to support his first wife in any of the taxable years, the obligation must have arisen from contract.

The controlling agreements are trusts A and B. Each of these trusts refers to a prior property agreement and the creation of each trust discharges an obligation of petitioner to perform a duty imposed by the property agreement. The income of the trusts, however, discharges no duty of petitioner to support his first wife. The trusts themselves are irrevocable and contain no guaranty of income. The trusts, therefore, are not mere security devices for the payment of obligations. See ">*1251 .

Trust A does not lack substance and petitioner has no such control over its corpus which might bring it within the scope of . The fact that there is a possibility of reverter does not give petitioner such power over the trust as to make him taxable as its virtual owner. Petitioner at no time had the power to revest the corpus of trust A in himself, and section 166 of the Revenue Acts of 1934 and 1936 is therefore not applicable. Sections 167(a)(1) and (2) of the Revenue Acts of 1934 and 1936 do not apply for the reason that no income could be accumulated for or distributed to petitioner under this trust.

Trust A, however, was created "for the benefit of [Geneva Parsons] and Reginald Stribling Parsons." The parties have stipulated that the sum of $3,750 annually may be deemed to have been devoted to the support of the son from the income of trust A. This sum was annually paid in discharge of petitioner's obligation to support his minor child and must be taxed as income of petitioner in each of the taxable years. ">*1252 . We hold that the income of trust A in excess of $3,750 in each of the taxable years is not taxable to petitioner.

Trust B differs from trust A in that under its terms petitioner's first wife receives a stipulated sum annually out of income of the trust and upon the death of the first wife the corpus was to be transferred to a trust of which petitioner was the beneficiary, or if that trust were not existent, was to revert to petitioner.

The income of this trust does not discharge a legal obligation of petitioner and can not be taxed to him under the doctrine of See So far as the legal obligation theory is concerned, trust B stands on the same footing as trust A.

The fact that the corpus of trust B will revert to petitioner or be transferred to a trust in his favor is no reason for the application of This was a trust for a lifetime with a beneficiary who was no longer a member of the "intimate" family group. Petitioner exercised no control over the corpus">*1253 and was not trustee. Although respondent has suggested the applicability of sections 166 and 167 of the Revenue Acts of 1934 and 1936, the facts that petitioner had no power to revest corpus of trust B at any time and that no part of the $6,000 income could be accumulated for his benefit or distributed to him are sufficient to deny application of those sections. Accordingly, we hold that petitioner is not taxable on that part of the income of trust B which was paid in the taxable years to the woman who had been petitioner's first wife.

The second issue is whether or not the sum of $1,000 a month paid to petitioner's second wife from income on certain securities deposited in escrow by petitioner is taxable to petitioner. Petitioner contends that the legal effect of the annulment of his second marriage was a judicial declaration that no marriage had ever existed and that therefore he was never under any obligation to support his second wife. He maintains that the payments under the escrow agreement were gratuitous and for that reason were not taxable to him.

Adopting, for the sake of argument, petitioner's premise that the payments were gratuitous, still we are of the opinion">*1254 that they were includable in his gross income. Petitioner retained legal title to the securities and merely made an irrevocable assignment of a portion of his income. He directed the distribution of the fruit while retaining ownership of the bearing tree. The situation is not unlike that which would arise if petitioner had paid the amounts to the former wife from income on securities not in escrow. The cases of ; , and , clearly govern this matter and require that the amounts be taxed to petitioner. We hold that the monthly payments to the second wife from the escrowed securities are taxable to petitioner.

As a further basis for our holding on this issue we note that by the contract entered into between petitioner and his second wife prior to the annulment petitioner assumed an obligation to pay her $1,000 a month. The contract is referred to in the escrow agreement and the $1,000 monthly income from the securities in escrow was clearly paid in discharge of the obligation assumed by petitioner in the agreement made prior">*1255 to the annulment. Each payment of income from ">*1154 the escrowed securities to the wife discharged pro tanto the obligation of petitioner to pay her $1,000 a month and the payments are taxable to petitioner under the general principles enunciated in . This is true in spite of the provision in the contract made prior to the annulment which would allow petitioner to escape personal liability in the event he were in such reduced circumstances that he could no longer earn a suitable living for himself.

The final issue is whether or not capital gains realized upon sale of securities of the 1932 trust of which petitioner is the sole beneficiary are taxable to petitioner. Petitioner contends that under New York law capital gains must be added to corpus and therefore can not be taxed to him, the life beneficiary. Respondent argues that these capital gains are taxable to petitioner under section 22(a) of the Revenue Acts of 1934 and 1936.

In his notice of deficiency respondent included the amount of the capital gains from the sale of securities of this trust in petitioner's gross income for the years 1936 and 1937. In">*1256 his answer to petitioner's petition in this proceeding, respondent made claim for an additional deficiency for the year 1935 based upon the inclusion of capital gains of this trust for that year in petitioner's gross income. Petitioner's reply pleaded the statute of limitations as a bar to the increased deficiency for 1935. We hold that sections 272(e) and 277 of the Revenue Act of 1934 ² permit respondent to request an additional deficiency and give us jurisdiction to determine such deficiency, even though asserted after the time within which the statutory period might have expired if the statute of limitations had not been suspended by section 277.

">*1257 We are of the opinion that the capital gains of the 1932 trust are taxable to petitioner under section 22(a) of the Revenue Acts of 1934 and 1936. Petitioner must be regarded as in substance the owner of the trust corpus. While it seems apparent that the trust is irrevocable, petitioner is entitled to the entire income and has the right to dispose of the corpus by will. In addition, he may direct the trustee to sell ">*1155 or otherwise dispose of the securities comprising the corpus of the trust and cause the trustee to consult with him or his nominee before investments or reinvestments should be made. These rights are substantial and, we believe, sufficient to cause the income to be taxable to petitioner under

The fact that the trust is for petitioner's lifetime does not change the result. . On our theory of this issue it becomes unnecessary to consider the question of whether New York law and the trust instrument require the capital gains to be added to corpus. We hold that the capital gains of the 1932 trust are taxable to petitioner in each of the taxable years.

">*1258 Decision will be entered under Rule 50.

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Footnotes

• 1. 41. The court can declare a divorce only in cases provided by law.

  Note: Marriages sanctioned by Bolshevik institutions in Lettland remain in force. After the establishment of a marriage bureau at the domicile of the couple such cases of divorce must be registered anew. Proof of the legal divorce must be submitted by copy of the decree or by witnesses. In doubtful cases divorce may only be effective by order of the court.

  * * *

  49. Couples have the right to a divorce in case cohabitation becomes intolerable. In such cases divorce may be granted independent from the guilt of the man.

  In case only one party causes the intolerant conditions, only the other party has a right to sue. If both parties are at fault or neither one, each party can sue for divorce.

  50. Uninterrupted separation for three years is ground for divorce.

  * * *

  56. Parental authority over the children belongs to the one who was left with the children. Each one of the parents has the duty to support the children who have been assigned to the other parent and must contribute to their support as circumstances permit.

  * * *

  60. After divorce the wife has the right, if without means, to demand support. The same right has the man if without means and the wife has sufficient means.

  * * *

  The duty for support of the spouse lapses if he enters a new marriage.

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  63. Complaints about annulment of marriage or for divorce (except those mentioned in Art. 80) and for separation are adjudicated by the civil court by procedure founded upon the general promulgations for civil process with the exception of the following:

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  67. Demand for custody by the plaintiff of the children or the right for retaining the family name in a case for annulment, for divorce or for separation, must be part of the complaint.

  Other demands, especially for alimony, are not permitted to be part either of the complaint or of the cross-complaint.

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  76. In case the marriage has been declared as annulled, divorced or as separation of the spouses, the verdict must point out who has the custody of the children.

  The decision also relates to matters under Art. 80.

  In case of divorce on the ground of guilt of either or both spouses the verdict must refer to it. ↩

• 2. SEC. 272. PROCEDURE IN GENERAL.

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  (e) INCREASE OF DEFICIENCY AFTER NOTICE MAILED. - The Board shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any penalty, additional amount or addition to the tax should be assessed - if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing.

  SEC. 277. SUSPENSION OF RUNNING OF STATUTE.

  The running of the statute of limitations provided in section 275 or 276 on the making of assessments and the beginning of distraint or a proceeding in court for collection, in respect of any deficiency, shall (after the mailing of a notice under section 272(a)) be suspended for the period during which the Commissioner prohibited from making the assessment or beginning distraint or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Board, until the decision of the Board becomes final), and for sixty days thereafter. ↩