*3446 The petitioner entered into an agreement with his wife for her separate maintenance and support, agreeing to pay her a specified sum monthly. As a part of the agreement he deposited securities with a trust company, the income from which was to be paid to the wife and applied on account of the monthly payment for her support, petitioner remaining of the securities so deposited might be provided that the principle of the securities so deposited might be used to pay such deficiency in the payment for support, should the husband default. Held, that the income from the securities so deposited is taxable to the husband.
*800 This proceeding is for a redetermination of a deficiency in income taxes for 1921 amounting to $2,828.39.
*801 FINDINGS OF FACT.
Petitioner is a resident of Rock Island, Ill. In 1921, he had a wife, Lucy A. Welch, and two children, Edgar and Helen Welch, who were born on December 25, 1909, and August 24, 1911, respectively.
On July 12, 1919, petitioner*3447 and his wife entered into a separation agreement which involved the performance of certain acts by the Central Trust & Savings Bank, a banking corporation of Rock Island, Ill., and the bank agreed to perform those acts. Paragraphs first, fourth, fifth, twelfth and thirteenth of the agreement provided as follows:
First: Said husband and wife shall at all times hereafter live separate and apart as if they were sole and unmarried and to reside from time to time at such place or places, as each shall think proper without any interference on the part of the other, and each to be in all respects free from the marital control and authority of the other.
Fourth: The said husband shall during the life of said wife, pay to her the sum of $4,800.00 per year as her separate estate and $3,000.00 per year as an allowance to her for the support and maintenance of the children, Helen and Edgar Welch, while in her custody and control, or until said children shall be placed in schools as hereinafter provided. Said sum of money to be paid to her in monthly installments of $650.00. The first payment to be made on the first day of August, 1919.
Fifth: The payment of the above annuity to the*3448 said wife shall be secured in the following manner: The said husband shall deposit with the Central Trust & Savings Bank, as trustee, United States Government Bonds to the amount of $100,000.00 bearing interest at the rate of 4 1/4 per cent per annum, payable semi annually, which said income therefrom is to be paid by said trustee to said wife in the manner hereinbefore provided, and any deficiency necessary to meet the monthly payments hereinabove provided shall be paid by said husband whenever notified by said trustee, that such deficiency exists (It being expressly agreed that the mailing of such notice addressed to said F. P. Welch at Rock Island, Illinois (unless said F. P. Welch shall designate in writing to said Trustee a different Post office address) shall be taken and deemed good and sufficient service of such notice, and in the event that said husband shall neglect or fail for a period of thirty days, after such notifications, to pay such deficiency, then the said trustee is hereby authorized to sell from time to time said bonds in a sufficient amount to meet such deficiency, or deficiencies as they may occur. It being understood and agreed, however, that the said husband*3449 shall have the right at any time to withdraw the United States Government Bonds hereinabove pledged to secure the payment of the annuity as herein provided, and to substitute in place thereof other securities, such as bonds or notes secured by mortgages upon real estate or other securities all aproved by and satisfactory to said trustee and said wife.
Twelfth: In case of the death of said husband said wife may at her option terminate this agreement, in which event said Trust fund shall be and become a part of the estate of said Frank P. Welch and said wife shall be entitled to and receive from said Estate her full and complete share thereof as allowed by the laws of the State of Illinois; and of such real estate or interest therein belonging to said Frank P. Welch, as may be given her by the Laws of the *802 State wherein such real estate be situate, such option to be exercised by said wife within sixty days after the probate of the will of said husband or the issuing of letters of administration on his estate as the case may be by notice in writing to said Trustee. Failure to terminate this agreement by said wife as in this section provided shall be deemed and taken to*3450 be an election by said wife to accept the provisions of this contract in lieu of all dower right, right of inheritance or any other right or interest in the estate of said Frank P. Welch which she might take under the Laws of the State of Illinois or any other State wherein any of said husbands property might be found and in the event of the death of said wife before said husband, said Trust fund or the part thereof remaining intact shall be and become the property of said children or the survivor of them.
Thirteen: In the event of the death of the said children, the allowance to the said wife for their support and maintenance shall abate and the death of one of said children shall abate said allowance for the support of said children, one half.
Certain securities were substituted for Government bonds in compliance with the provisions of the fifth paragraph of this agreement. During 1921 the bank received interest on the securities of certain corporations and governments, which securities had been substituted for Government bonds. Such interest was credited by the bank to petitioner's account. The dates upon which such amounts of interest were received by the bank and the*3451 dates, respectively, upon which they were transferred by the bank to the credit of the personal account of petitioner are set out as follows:
| Dates and amounts received | Dates such amounts were | |
| transferred | ||
| Waltham Watch Co | Jan. 31, $150.00; Aug. 1, | Feb. 1 and Aug. 2. |
| $ 150.00 | ||
| B. & O. Railroad Co | Jan. 3, $150.00; July 1, | Jan. 4 and July 9. |
| $ 150.00 | ||
| Amer. Tel. & Tel. Co | Apr. 1, $150.00; Sept. 30, | Apr. 1 and Oct. 6. |
| $ 150.00 | ||
| Bishop of Peoria | Jan. 31, $50.00; Aug. 1, | Feb. 1 and Aug. 2. |
| $ 50.00 | ||
| Kingdom of Sweden | June 15, $660.00; Dec. 14, | June 18 and Dec. 15. |
| $ 660.00 | ||
| Dominion of Canada | Jan. 31, $687.50; Aug. 1, | Feb. 3 and Aug. 2. |
| $ 687.50 | ||
| Swiss Federation | Jan. 31, $550.00; Aug., | Feb. 1 and Aug. 2. |
| $ 550.00 |
The total of such amounts of interest so received by the bank and transferred by it to petitioner during 1921 is $4,795. The bank did not make any remittance to petitioner's wife under the said agreement between the date of the agreement, July 12, 1919, and May 1, 1926. Petitioner made monthly payments of $650 to his wife during 1921 in compliance with the provisions of the agreement.
The Commissioner, in*3452 his deficiency letter, included $4,745 in petitioner's net income for 1921 as interest received from the corporations and governments above referred to. At the hearing the Commissioner moved to increase the alleged deficiency by increasing the said amount of $4,745 to $4,795.
As a part of the financial arrangements resulting from the separation of petitioner and his wife, the petitioner, on July 12, 1919, gave *803 to Edgar Welch, his son, $100,000 par value of the bonds of St. Anthony's Hospital, payable to bearer.
At the same time and as a part of the same arrangement, petitioner gave certain mortgage notes aggregating $100,000 to his daughter, Helen Welch. One of these was for $29,500, originally made by Frank Nelson and later assumed by G. A. McClintock.
Interest upon these bonds and notes was collected by petitioner and invested for his children.
On or about August 4, 1921, the $100,000 par value of the bonds of St. Anthony's Hospital, owned by Edgar Welch, and the $100,000 face value of mortgage notes owned by Helen Welch were transferred to the petitioner in exchange for 1086 and 1104 shares in the Frank P. Welch trust issued to Edgar D. Welch and Helen*3453 M. Welch, respectively. The Frank P. Welch trust had been created prior to 1921 by a declaration of trust, with petitioner and J. M. Welch as trustees. This organization handled trust accounts and invested and reinvested in securities. The stock issued to the children was transferred from stock then owned by petitioner.
Two payments of interest of $3,000 each were made on the St. Anthony's Hospital bonds during 1921. One such payment was made prior to August 4, 1921, and the other subsequent to that date. In computing the deficiency the respondent has included both of these payments as income to the petitioner. Interest of $1,770 was collected on the Nelson (McClintock) note prior to August 4, 1921. In computing the deficiency the respondent has included this amount as income to petitioner.
Separate income-tax returns were filed on behalf of Edgar D. Welch and Helen M. Welch.
OPINION.
PHILLIPS: Petitioner entered into an agreement with his wife for her separate maintenance and support under which certain payments were to be made to her monthly. To secure these payments securities were deposited with a trust company which became a party to the agreement between petitioner*3454 and his wife. It is the contention of the petitioner that the income from the securities deposited with the trust company is not his, but is income from a trust fund taxable either to the trustee or his wife. With this we can not agree. Under the agreement the petitioner was to make monthly payments to his wife whether or not the income from the trust fund was sufficient to make these payments. This represents a personal obligation on his part. Whether the amounts received from the trust company were paid directly to the wife or were paid to the petitioner seems immaterial. Such payments were either received by the petitioner *804 or were so used as to pay his obligation and in either event constituted income to him. If this agreement can be said to give rise to any trust such as is contemplated by the Revenue Act, the petitioner was the beneficiary thereunder so far as the receipt of income is concerned, for the income was to be applied in payment of his indebtedness.
The situation is to be distinguished from one where a trust fund is set up for the benefit of the wife and the husband has no interest in the income from the fund. The agreement which we are here considering*3455 was no more than one for maintenance and support, with collateral deposited as security for the payment. We are accordingly of the opinion that the interest received from the bonds held under the agreement between petitioner and his wife and the bank constitutes income to the petitioner.
The evidence with respect to the gifts by petitioner to his children, while not as satisfactory as might be desired, is sufficient to establish that such gifts were made as set out in the findings of fact and that the property so given remained the property of the children until August 4, 1921. The Commissioner has included as income to the petitioner $4,770 which was received from the securities while they belonged to the children. To this extent his determination was erroneous.
Decision will be entered under Rule 50.