*1059 SEPARATION AGREEMENT - TRUST INCOME TAXABLE TO GRANTOR - Pursuant to a separation agreement, petitioner established a trust in 1924 for the financial support of his wife and two minor children. In 1926, the wife obtained a divorce, which thereafter became final. Held, the entire income derived by the trust during the taxable years 1934 to 1937, inclusive, is taxable to petitioner, since he had a continuing obligation to maintain and support his children during those years, which obligation he could neither commute nor discharge by agreement or creation of the trust, and petitioner has failed to show that any amount less than the whole income of the trust was in fact used for the support of the children.
*44 These proceedings, consolidated for hearing, involve deficiencies in petitioner's income tax liability determined by respondent as follows:
| Docket No. | Year | Deficiency |
| 93365 | 1934 | $2,109,79 |
| 95153 | 1935 | 1,751.38 |
| 96554 | 1936 | 4,589.74 |
| Do | 1937 | 2,242.38 |
The sole issue submitted for decision is whether or not respondent*1060 erred in including in petitioner's income for each of the taxable years income received by a trust created by petitioner in 1924 for the financial support of his wife and two minor children. All other issues arising from petitioner's assignments of error were specifically waived in a stipulation of facts filed by the parties at the hearing.
FINDINGS OF FACT.
Petitioner is an individual, residing at Carlsbad, California.
In 1924 petitioner and Olive Judd Ingraham were husband and wife, and resided at New Britain, Connecticut. Two sons were born of the marriage, one in 1917 and one in 1920, named Harold Ingraham, Jr., and Oliver Judd Ingraham, respectively.
On October 28, 1924, petitioner executed an assignment and deed of trust reading in part as follows:
WHEREAS, I, HAROLD INGRAHAM, of Bristol in the County of Hartford and the State of Connecticut, desire to provide for the future welfare and financial support *45 of my wife, OLIVE JUDD INGRAHAM, of the Town of New Britain in said County and State, and of our children, Harold Ingraham, Junior, and Oliver Judd Ingraham, and
WHEREAS, I have delivered with this Assignment and Deed of Trust to the United States*1061 Security Trust Company, a corporation organized under the Laws of the State of Connecticut * * * a stock certificate for Seven Hundred and Sixty-eight (768) shares of the capital stock of The E. Ingraham Company. * * *
NOW THEREFORE, IN CONSIDERATION OF THE PREMISES and of my affection for said Olive Judd Ingraham and for our said children, I, the said Harold Ingraham, do hereby assign and transfer said stock and stock certificate to said the United States Security Trust Company to be held by said United States Security Trust Company IN TRUST for the following purposes:
1. To collect the income from said trust estate and pay the same to Olive Judd Ingraham during her natural life or until the termination of this trust in any other manner as hereinafter provided.
The trust instrument further provided that upon the death of Olive Judd Ingraham the whole of the trust estate should be transferred to such of the children as might then be surviving, share and share alike, the issue of any deceased child to take the share of his parent. In case neither of petitioner's children or their issue survived his wife, she was given a general power of appointment to dispose of the trust*1062 estate, and in case of her failure to exercise such power the trust estate was to be transferred to her next of kin. But it was provided that if at the death of his wife either of their children should be less than 21 years of age the trust should continue until the minor child or children attained the age of 21 years and the income paid to the lawful guardian, or in absence of a lawful guardian the trustee might pay out the income, or so much as the trustee might deem necessary, for the care, maintenance, and support of such child during minority. The surplus, if any, was to be retained by the trustee until the child attained the age of 21 years.
It was provided that the trust might be terminated at any time by a joint notice in writing executed by petitioner and his wife and delivered to the trustee, the trust estate in such event to be transferred as directed in such joint notice.
The trust instrument further recited:
If at any time during the existence of said trust I, the said Harold Ingraham, shall be lawfully compelled to pay any sum or sums for the support of the said Olive Judd Ingraham or of our said children, then the said United States Security Trust Company shall*1063 repay to me, the said Harold Ingraham, any sum or sums which I may be thus compelled to pay out of the income of said trust estate.
On October 28, 1924, coincidental with the execution of the deed of trust above mentioned, petitioner and his wife entered into an agreement which recited that the parties thereto had intermarried on the 8th day of December 1915; that differences had arisen between them *46 and a separation had actually taken place; that the parties had for a long time past and then were living separate and apart from each other; that the issue of such marriage, Harold Ingraham, Jr., aged seven years, and Oliver Judd Ingraham, aged four years, were living with their mother at her special desire, and it was agreed that they should continue to live with her; and that the parties had adjusted their property affairs and made arrangements satisfactory to both for the support of the wife and children. The agreement then recited that in consideration of the covenants thereafter contained on the part of his wife, Harold Ingraham agreed to set up the trust hereinabove referred to, upon the terms and conditions before stated. The dividends received from the stock which*1064 constituted the corpus of the trust estate were to be applied, first, in payment of the expenses of the trust and compensation of the trustee, and the remainder paid to petitioner's wife, Olive Judd Ingraham.
The agreement contained the following additional provisions:
Fifth. If, in violation of the agreement hereinafter written, wherein and whereby the said Olive Judd Ingraham agrees to protect her said husband from any and all claims by third persons or by municipal authorities for her support or the support of said children, her said husband shall be lawfully compelled to pay at any time any sum or sums for the support his wife or children, he shall be entitled to demand and receive from the said trustee full repayment therefor, and the sum or sums so paid to him shall be deducted from the income ofsaid stock.
In consideration of the covenants on the part of his wife, petitioner released and discharged the property of his wife from any and all claims to the statutory share of a surviving husband, or any other rights of survivorship. The instrument then continued as follows:
Seventh. In Consideration whereof the said Olive Judd Ingraham doth hereby in like manner release*1065 and discharge the property of her said husband from any and all claims to the statutory share of a surviving wife * * * or any other rights of survivorship, * * * and doth agree to save and protect him and his estate from any and all claims by persons or municipal authorities for her support or for the support of her said children during their minority.
Eighth. The parties hereto may cancel and terminate this contract and the trust created in accordance with this contract at any time by their contract executed in writing.
At or about the time the deed of trust above mentioned was executed, petitioner delivered the shares of stock described therein to the trustee, and at all times since the trustee has held such shares in trust and paid all the income therefrom in accordance with the terms of the trust instrument.
At or about the same time, petitioner also transferred, assigned, and conveyed to his wife their residence at New Britain, Connecticut, together with furniture and furnishings, and the family automobile.
*47 On October 25, 1926, Olive Judd Ingraham instituted an action for divorce in the Superior Court of Hartford County, Connecticut. Thereafter, on the*1066 first Tuesday of December 1926, the action was tried and a judgment for divorce was made and duly entered. Such judgment contained no provision for alimony or for the support of the wife and children, nor did it make any reference to any property settlement or agreement entered into by the parties, and did not mention the trust created by Harold Ingraham, petitioner herein, on October 28, 1924. Such judgment or decree thereafter became final, and has never been modified, altered, set aside, or reversed. At all times since her marriage to petitioner, Olive Judd Ingraham has resided in the State of Connecticut.
Olive Judd Ingraham received income from the aforementioned trust during the years involved herein as follows: Year 1934, $13,824; year 1935, $12,906; year 1936, $19,818; year 1937, $12,906.
OPINION.
HILL: Petitioner assigned herein a number of errors, giving rise to corresponding issues, but all of such issues, save one, were specifically waived by the parties in a stipulation filed at the hearing. The single issue submitted for decision, which is common to all of the consolidated proceedings, is whether or not petitioner is subject to tax on income derived in the*1067 taxable years by the trust established by him in 1924 for the support of his wife and children.
The rule announced in , has been interpreted and applied in many cases under varying facts. It is now settled law that the grantor of an alimony trust is not taxable upon income where state law and the trust agreement constitute "pro tanto a full discharge from his duty to support his divorced wife and leave no continuing obligation, contingent or otherwise." , affirming . In such circumstances, the trust income is to be treated the same as income accruing from property transferred by a debtor to a creditor in full satisfaction of his obligation. .
If either local law or the trust agreement imposes a continuing obligation to support, even though contingent, the trust income is taxable to the grantor. , reversing *1068 , which reversed . Cf. ; affirmed on this point, .
In the Leonard case, the Supreme Court referred to the fact that the taxpayer there was seeking to escape one of the normal incidents of the Federal income tax, and for that purpose invoked the aid of state *48 law. The Court then pointed out that in , it was stated that if the grantor of a trust seeks to avoid the general rule expressed in Douglas v. Willcuts, "he carries a distinct burden of establishing not by mere inference and conjecture but by 'clear and convincing proof' that local law and the alimony trust have given him a full discharge." And because the taxpayer had failed to show by "clear and convincing proof" that the state courts lacked power to add to his personal obligation in the event that the income of the trust should be insufficient to support his wife, the Court held the nonguaranteed income taxable to him.
In the present proceedings petitioner asserts that the separation and trust agreements of 1924 and the decree entered*1069 pursuant to the divorce action instituted by his wife in 1926 constituted a complete and final discharge from his obligation to support his wife. He also cites certain decisions of the Connecticut courts to show that, after entry of the divorce decree under the circumstances of this case, it was beyond the power of those courts to add to his personal obligations. On the other hand, respondent contends that the question has never been directly decided by the Connecticut courts, and argues that contrary conclusions should be drawn from the decisions cited by petitioner. We think petitioner has wholly failed to establish by "clear and convincing proof" within the rule of the Leonard case, supra, that local law and the trust created by him for the support of his wife and children gave him a final discharge.
At all events, a portion and possibly all of the trust income in controversy is taxable to petitioner on another ground. In 1937, the latest taxable year before us, one of petitioner's children was 20 years of age, and one was 17. In the earliest taxable year one was 17 and the other 14 years of age. Therefore, during all of the taxable years here involved, petitioner's*1070 children were minors, and he had a continuing obligation to support them, whether the trust agreement and divorce decree did or did not free him from further liability to contribute to the support of his former wife.
And to the extent that the income from the trust discharged petitioner's obligation to maintain and support the children, it is taxable to him. ; . And see ; affd., .
Neither the divorce decree, separation agreement, or other contract, nor the establishment of a trust for such purpose, could relieve petitioner of his parental obligation to support his children. This principle is so universally recognized that citation of authorities is unnecessary. In , referred to supra, while the Circuit Court of Appeals held thuat the income paid to the *49 wife was not taxable to the grantor of the trust and on this point was reversed by the Supreme Court; the Circuit Court also held (which holding was not affected by*1071 the decision of the Supreme Court) that the trust income payable to the grantor's minor children was taxable to him, saying: "Pro tanto the trust was created in performance of Leonard's paternal duty of support, which he could neither commute nor discharge."
In the petitions filed in these proceedings, it is alleged that during each of the taxable years petitioner's two minor children were supported by their mother from the income of the trust. This allegation was admitted in the answer of respondent in respect of the year 1934 and formally denied in respect of the other taxable years, but we think petitioner is not in a position to base any defense upon such denial. Petitioner argues that the record here does not disclose any continuing liability on his part for the support of his children; that so far as shown they may not have been supported out of the income of the trust at all or may have died prior to the taxable years, in which event petitioner's liability for their support would have ceased. It seems to us quite obvious that if the children were supported by their mother during each of the taxable years from the trust income, they could not have been deceased.
*1072 However, if petitioner's paternal duty to support was in fact terminated for any reason prior to the taxable years, petitioner carries the distinct burden of establishing such fact "by clear and convincing proof." But petitioner urges that in any event only the income required to support the children is taxable to him, and there is no proof of what portion of the trust income, if any, was so used. Here again the rule of burden of proof operates to defeat petitioner's contention. So far as we are informed by the record, the entire amount of the income derived from the trust in each of the taxable years may have been used for the education, maintenance, and support of the children. Certainly respondent has determined that the whole of the income is taxable to petitioner, and the burden is upon petitioner to show that such determination is erroneous. ; ; .
For the reasons indicated above, we hold that so much of the trust income as was used during the taxable years*1073 for the support and maintenance of the minor children is taxable to petitioner under authority of the Blumenthal decision and authorities therein cited. The remainder, if any, of the trust income in controversy we hold is taxable to petitioner under the rule stated in the Leonard case, supra.
Decision will be entered for respondent.