*1041 An agreement by the petitioner to pay his wife a sum of money in full settlement of property rights arising out of the marriage relation, providing for payment in part out of the petitioner's share, as beneficiary, of future income of an estate, held not to constitute an assignment of part of the petitioner's right to the income, but a mere agreement to pay out of income which first became income of the petitioner; and amounts paid by the trustees to his wife, pursuant to the agreement, were properly included in the income of the petitioner.
*1234 This is a proceeding for the redetermination of a deficiency of $12,681.70 in income tax for 1927. The only issue involved is whether the amount of $25,000, paid during 1927 to the petitioner's wife by the trustees of an estate of which petitioner was a beneficiary, pursuant to certain agreements between the petitioner and his wife, was properly included in the gross income of the petitioner. Other *1235 issues raised by the amended petition have been disposed of by stipulation of counsel.
*1042 FINDINGS OF FACT.
1. The petitioner is an individual and a resident of Hailey, Idaho. The petitioner and his wife, Beulah B. McDonald, were married on April 17, 1912. They have two sons, namely, James McDonald, Jr., born September 10, 1913, and Robert Alexander McDonald, born May 12, 1915, both of whom are living.
2. The petitioner's father, James McDonald, died January 13, 1915, a resident of the District of Columbia, leaving a will executed on June 26, 1913, in London, England, and a codicil thereto executed on April 13, 1914, in New York City. The will and codicil were admitted to probate in the Supreme Court of the District of Columbia on January 20, 1915, and the executors named therein were appointed by the court. By the terms of the will and codicil the estate was to be held by Lawrence Maxwell and the Fulton Trust Co., as executors and trustees, and certain annuities were to be paid until the petitioner's oldest surviving child should reach the age of thirty years, at which time the petitioner was to receive one half of the estate and the other half was to be distributed to and divided among the children of petitioner, share and share alike.
3. On May 6, 1922, the*1043 petitioner brought suit in the District of Columbia to have the will declared void on the ground that it violated the rule against perpetuities. The suit was dismissed by the Supreme Court of the District of Columbia and an appeal was taken to the court of appeals. On December 11, 1924, while the suit and the administration of the estate were pending, the petitioner and his wife entered into a written agreement for the purpose of "fixing, settling, and determining their respective property rights." Each party relinquished to the other all claims and demands except those existing under the agreement, and agreed that the separate property of each should be vested in the respective parties free and clear of any obligations arising from the marriage relation. The petitioner agreed, in the event of a decision in the pending suit adjudging him to be the sole heir of the estate of his father, to assign and transfer for the use of his two sons an undivided one-half interest in all of the estate which he might so inherit, and, in present terms, assigned and transferred such interest, in trust for their use and benefit upon terms not here material. In paragraph 5 he further agreed to transfer*1044 to his sons, from his own interest, sums equal to any amounts by which their inheritances might be decreased by reason of the birth in the future of any children of petitioner who would be entitled to share in the estate under the will; and in paragraph 6 he confirmed a previous assignment to his wife of *1236 certain annuities to which he was entitled under the terms of the will. Paragraph 7 provided as follows:
The party of the first part shall and will, in addition to the payments hereinbefore specified, pay to the party of the second part the sum of Four Hundred Thousand Dollars ($400,000) in lawful money of the United States, in full settlement of all claims and demands of every kind or character now existing or which but for this agreement might hereafter arise. The said payment of Four Hundred Thousand Dollars ($400,000) by the party of the first part shall be made to the party of the second part when the party of the first part becomes entitled to his share of the estate of James McDonald, Sr., whether he shall become so entitled thereto pursuant to the provisions of said last will and testament of James McDonald, Sr., deceased, or as his heir at law, or prior thereto*1045 if the said party of the first part so elects. For the purpose of further assuring the payment of said Four Hundred Thousand Dollars ($400,000) to the party of the second part said party of the first part does hereby assign, transfer and set over to the said party of the second part an interest in his share of the property of the estate of James McDonald, Sr., in the amount of Four Hundred Thousand Dollars ($400,000) and directs the trustees named in the will of James McDonald, Sr., or their successors, to pay and deliver to the party of the second part, whenever such payment may be by such trustees lawfully made, the said sum of Four Hundred Thousand Dollars ($400,000), and in the event that the trust provisions of said will shall hereafter finally be declared void or the said party of the first part shall for any other reason succeed to the estate of James McDonald, Sr., then theexecutor of said last will and testament and the court in which the administration of said estate is then pending are, and such executor and such court is hereby authorized, empowered and directed to cause to be distributed and paid to the said party of the second part the said sum of Four Hundred Thousand*1046 Dollars ($400,000).
4. After December 11, 1924, and prior to December 21, 1925, the petitioner and his wife were divorced, and she resumed her maiden name of Baulah Martin.
5. On December 21, 1925, the petitioner and his former wife entered into a written agreement providing that, in the event the court of appeals should hold that the petitioner and his two sons living at testator's death are the only legatees and certain contingen t legatees shall take no interest whatever; and, further, if arrangement is made whereby one half of the accumulated income then in the hands of the executors and trustees may be paid over to petitioner, and one half of the income as it accumulates may be paid to petitioner:
1. That all the costs and other expenses incident to the prosecution of said suit in the Supreme Court of the District of Columbia and in the Court of Appeals of said District, including counsel fees of plaintiff, the defendant, Beulah McDonald and guardian ad litem for said minor defendants be first paid out of the entire accumulated income.
2. And out of the accumulated income payable to James McDonald there will be paid to Beulah Martin the sum of One Hundred Fifty*1047 Thousand ($150,000) Dollars, One Hundred Thousand ($100,000) Dollars of which is to be applied as a credit on a contract entered into by and between the parties hereto on the 11th day of December, 1924, under the terms of which said *1237 Beulah Martin is to be paid Four Hundred Thousand ($400,000) Dollars. The other Fifty Thousand ($50,000) Dollars to be in full payment for household furniture, paintings, works of art, etc., heretofore given to the said Beulah Martin by the said James McDonald, said property to be returned to the said James McDonald in the event he cares to exercise the option to re-purchase the same, (this not to include family jewels). In the event said James McDonald does not care to exercise the option to pay Fifty Thousand ($50,000) Dollars for said property, then the said Beulah Martin is to receive the sum of One Hundred Fifty Thousand ($150,000) Dollars to be applied as a credit on the Four Hundred Thousand ($400,000) provided in said contract of December 11, 1924. After the application of the above payment as a credit on said contract, then said Beulah Martin agrees to accept the sum of Twenty-five Thousand ($25,000) Dollars per year direct to the*1048 said Beulah Martin until the balance of said Four Hundred Thousand ($400,000) is liquidated.
3. It is further agreed in the event said decree is entered that said contract of December 11th, 1924, will be novated and reformed by the elimination of all of paragraphs 5, 6 and 7, and the copy of said contract now on file with the Fulton Trust Company of New York will be withdrawn and another contract executed and filed in its stead in accordance with the stipulation herein.
4. The Four Hundred Thousand ($400,000) Dollar settlement provided in paragraph 7 of said contract of December 11th, 1924, includes a note of Two Hundred Thousand ($200,000) Dollars heretofore executed by the said James McDonald and payable to Beulah Martin, said note having been executed so that the annual interest thereon would guarantee the payment of the One Thousand (1,000) Dollars per month referred to in paragraph 6 of said contract. Upon the execution of said settlement as herein outlined, said One Thousand ($1,000) Dollars per month will cease and said note of Two Hundred Thousand (200,000) Dollars will be surrendered by said Beulah Martin to James McDonald.
6. On February 2, 1926, petitioner entered*1049 into a written agreement with said Beulah Martin, which, after reciting the making of the agreement of December 21, 1925, provided as follows:
Further negotiations looking to the settlement of the suit now pending on appeal in the Court of Appeals of the District of Columbia involving the validity of the Will of James McDonald, Sr., referred to in such memorandum of agreement, have shown that "the entire accumulated income" possibly cannot not be applied to the payment of costs and other expenses incident to the prosecution of said suit, but that there can possibly be used for said purposes only the one-half of such entire accumulated income that will be awarded to James McDonald, Jr., as a result it may become necessary to modify and amend paragraphs 1 and 2 of such memorandum of agreement. Accordingly, and in such event, paragraph 1 of such agreement will be modified and amended to read as follows:
That such costs as may be adjudged against James McDonald in the Supreme Court of the District of Columbia and in the Court of Appeals of said District shall be first paid out of the one-half of the said accumulated income to be distributed to the said James McDonald; also the expenses*1050 incurred by the said James McDonald in the prosecution of said suit; and the attorneys' fees incurred by the said James McDonald in the prosecution of the said suit, which shall include Twenty Thousand ($20,000) Dollars to be paid to U. S. Webb, as attorney for Beulah McDonald (now Beulah Martin) the balance of said fee of said Webb to be paid by the said Beulah Martin.
*1238 Paragraph 2 of said memorandum of agreement so signed and executed as aforesaid is hereby modified and amended to read as follows:
And out of the accumulated income payable to James McDonald there will be paid to Beulah Martin the sum of One Hundred Thousand ($100,000) Dollars, which shall be applied as a credit on a contract entered into by and between the parties hereto on the 11th day of December, 1924, under the terms of which said Beulah Martin is to be paid Four Hundred Thousand ($400,000) Dollars. After the application of the above payment of One Hundred Thousand ($100,000) Dollars as a credit on said contract, then said Beulah Martin agrees to accept the sum of Twenty-five Thousand ($25,000) Dollars per year, without interest, on said contract, until the said total sum of Four Hundred Thousand*1051 ($400,000) Dollars shall have been fully paid, and an order shall be given to the Fulton Trust Company of New York to make to Beulah Martin the said payments of Twenty-five Thousand ($25,000) Dollars per year direct to her until the balance of said sum of Four Hundred Thousand ($40,000) Dollars shall have been fully paid.
Said payments of Twenty-five Thousand ($25,000) Dollars per year shall be made to Beulah Martin for and during the period of twelve years, unless within that period the one-half of the property of said estate should be delivered to said James McDonald, Jr., and in that event the Fulton Trust Company shall at such date pay to Beulah Martin such sum as will complete the total of Four Hundred Thousand ($400,000) Dollars.
Paragraphs 1 and 2 as herein amended and modified shall be construed as substituted for paragraphs 1 and 2 as contained in the original memorandum of agreement, and in all other respects said original memorandum of agreement is reapproved and reaffirmed. Executed in duplicate.
7. On May 3, 1926, the court of appeals entered a decree (*1052 McDonald v. Maxwell, 12 Fed.(2d) 822) as follows:
(1) That upon the death of the testator, James McDonald, the appellant. James McDonald, Jr., took a present vested interest in the undivided one-half of the testator's estate after the payment of debts, specific legacies, annuities, and costs of administration, the corpus thereof to be paid to said James by the executors under the will when his oldest child living at the testator's death shall reach the age of 30 years.
(2) That pending the payment to said James of the principal of his one-half interest in said estate he is entitled to receive, and the said executors and trustees shall pay to him, in addition to the annuity provided for him by the codicil of said will, the cash income upon the said one-half interest accrued thereon to this date and the future cash income thereon from time to time as the same shall accrue hereafter.
(3) That upon the death of the testator, James McDonald, the infant defendants and appellees, James McDonald, 3d, and Robert Alexander McDonald, took a present vested interest in the remaining one-half of the estate of said testator after the payment of debts, specific legacies, *1053 annuities, and costs of administration, the same to be divided between them, share and share alike, such division and distribution to be made when the oldest of said children shall reach the age of 30 years, and otherwise provided by the terms of the will.
8. Pursuant to the decree, there was paid to the petitioner in 1926 by the trustees under the will of James McDonald, Sr., deceased, *1239 a sum in excess of $500,000, representing the "cash income upon the said one-half interest accrued thereon to this date," as provided for in the decree. Out of said $500,000, the petitioner paid to Beulah Martin the $100,000 in cash, as provided for in paragraph 2 of the agreement of December 21, 1925, as modified by paragraph 2 of the agreement of February 2, 1926.
9. The Fulton Trust Co. and Joseph S. Graydon, as trustees under the will of James McDonald, deceased, for the year 1927 filed a Form 1041 fiduciary return, in which the following was reported:
| Profit from sale of stocks and bonds | $6,856.12 |
| Interest & miscellaneous income | 23,544.98 |
| Dividends | 181,104.60 |
| 211,505.70 | |
| Deductions: Taxes, Trustees' Commissions | 31,914.23 |
| Net income | 179,591.47 |
*1054 The return indicated the following distribution:
| Dividends | Balance | |
| James McDonald, Hailey, Idaho | $90,552.30 | ($4,184.62) |
| Fulton Trust Co. of New York, trustee, | 90,552.30 | (4,184.63) |
| for James McDonald 3d and Robert Alexander | ||
| McDonald, 149 Broadway, New York City | ||
| Fulton Trust Co. of New York and Joseph | 6,856.12 | |
| S. Graydon, Trustees (profits from sale) |
The trustees filed a Form 1040 return upon which they reported the $6,856.12 profit from sale of corpus, and paid a tax thereon. They also filed another Form 1040 under the style "Fulton Trust Company of New York, Trustee for James McDonald 3d and Robert Alexander McDonald," in which they reported and paid tax on the $90,552.30 dividends, less the $4,184.63 one half of the loss, accruing to James McDonald 3d and Robert Alexander McDonald. The trustees filed no Form 1040 return on behalf of the petitioner, nor did they pay any tax on the $90,552.30 dividends, less $4,184.63 (half of the loss), accruing on the half of the current income distributable to the petitioner.
The petitioner, in filing his income tax return for the year 1927, reported as dividends the sum of $90,552.30, and deducted the*1055 $4,184.63 loss. Among "Other Deductions" the petitioner deducted the following: "Division of Income, former wife Beulah Martin, $25,000", representing that sum which the trustees, pursuant to the provisions of paragraph 2 of the December 21, 1925, and February 2, 1926, agreements above set forth, paid out of the $90,552.30 to Beulah Martin in that year. The respondent, in arriving at the petitioner's taxable net income for the year 1927, as reflected in the notice of deficiency, disallowed the $25,000 deduction theretofore taken by the petitioner on his return.
*1240 OPINION.
STERNHAGEN: The sole issue presented for decision is whether the amount of $25,000 paid to the petitioner's wife in 1927 by the trustees of his father's estate, pursuant to the agreements set forth in the findings of fact, was income of the petitioner. The petitioner says it was not, contending that under the will he was the owner of alienable property in the nature of an equitable estate for years, that the agreements with his wife constituted an irrevocable assignment of an undivided interest in that estate, and that amounts paid to her under such an assignment are not income to him.
*1056 The nature of petitioner's interest in the estate is defined by the decree of the Court of Appeals of the District of Columbia, namely, a present vested interest in an undivided one half of the residuary estate, entitling the petitioner to receive one half of the cash income during the life of the trust, and one half of the corpus upon its termination when his oldest child living at the testator's death reached the age of 30 years. McDonald v. Maxwell, 12 Fed.(2d) 822. His interest in the income - his right to the income - was an equitable estate for years and present property, alienable at common law like any other, in the absence of restraint on alienation. Commissioner v. Field, 42 Fed.(2d) 822; Edith R. Wood,27 B.T.A. 1308; District of Columbia Code, secs. 1, 1017, 1030, 1032, 1036, 1640; Lisner v. Hughes,49 App.D.C. 40. It does not appear that the will imposed any restraint on alienation.
If the agreements in question had the effect of divesting the petitioner absolutely and irrevocably of an undivided part of his equitable estate in the income, the petitioner should prevail. *1057 Commissioner v. Field, 42 Fed.(2d) 822; O'Malley-Keyes v. Eaton, 24 Fed.(2d) 820; Young v. Gnichtel, 28 Fed.(2d) 789; Edith H. Blaney,13 B.T.A. 1315; Grace Scripps Clark,16 B.T.A. 453. This is on the well settled principle that, while an assignment of income does not relieve the assignor of the tax thereon, an assignment of property or property rights does relieve the assignor of the tax on income subsequently arising therefrom, since both the property and the income no longer belong to him. William Ernest Seatree,25 B.T.A. 396; Hazel T. Power,23 B.T.A. 428; aff'd., 61 Fed.(2d) 625; certiorari denied, 288 U.S. 612; Bishop v. Commissioner, 54 Fed.(2d) 298.
No contention is made by the petitioner that he assigned any part of his interest in the corpus of the estate, and it is necessary to consider only whether the agreements divested him of part of his interest in the income.
In our opinion, the agreements do not disclose any transfer of the right to receive income. The first agreement of December 11, 1924, *1058 *1241 as well as the subsequent modifications, was primarily an agreement of the petitioner to pay his wife the fixed sum of $400,000 in full settlement of any claims on his property which she might have by reason of the marriage relation. When the promise was made the petitioner was assured of part of the estate, either as heir or under the will. The amount was payable only when he became "entitled to his share of the estate", with the right to pay prior thereto if he so elected. To assure payment he in present terms assigned to his wife "an interest in his share of the property of the estate" in the amount of $400,000. Clearly, the latter provision was not an absolute and irrevocable assignment. If petitioner had elected to pay the full amount from his individual funds prior to settlement of the suit, or if he had paid out of property received from the trustees, the assignment would have become inoperative. Furthermore, the assignment is of part of petitioner's share of the property, and this might be construed to include his share of the corpus rather than of the income.
However this may be, we believe the petitioner's rights must be determined in the light of the*1059 1925 and 1926 agreements. Those agreements were made on the condition, among others, that the court of appeals should adjudge the petitioner to be entitled to one half the accumulated and future income and that an arrangement should be made whereby petitioner should be paid his share of the then accumulated income and his share of the future income. The conditions happened and the agreements became operative. They provided for payment out of the accumulated income of $100,000, to be credited on the obligation of $400,000; "that said Beulah Martin agree to accept the sum of * * * $25,000 per year, without interest, on said contract [of December 11, 1924] until the said total sum of * * * $400,000 shall have been fully paid"; and that the payments of $25,000 per year shall be made for a period of 12 years, but in the event one half of the property or corpus of the estate should be delivered to petitioner within that period, a sum equal to the unpaid balance should be paid to her by the trustee. By express terms these agreements eliminated from the contract of the parties the provision of the December 11, 1924, agreement, assigning an interest in petitioner's "share of the property*1060 of the estate" to assure payment of the $400,000. There are no substituted words of assignment. In our opinion, the petitioner merely promised to make payments to his wife out of distributions to be received by him from the estate. With respect to the payment of $100,000, this was to be paid "out of the accumulated income payable to James McDonald." No direction was given the trustees to make this payment. They paid over $500,000 to petitioner, and he in turn paid the $100,000 to his wife. With respect to the payments of $25,000 per *1242 year, with which we are primarily concerned, there is no specific designation of the source, but it is clear that the parties intended that they should be made out of the petitioner's share of the future income, or, if the trust should terminate within 12 years, that the unpaid balance be paid out of either income or corpus. The entire agreement discloses an intention to make the payments out of income (or property, if the trust terminated before 12 years), which first became income of the petitioner. There is nothing which indicates that petitioner made any transfer or assignment of his right to income. We perceive no material difference*1061 between the agreement and that involved in Marion Stone Burt Lansill,17 B.T.A. 413; affd., 58 Fed.(2d) 572. As in that case, the order to the trustees to make the payment direct to petitioner's wife, if it was in fact given, was but a convenient method of payment.
The petitioner urges that the assignment in Commissioner v. Field, supra, is almost identical with the agreements here in question. That case is obviously inapplicable. It involved a deed assigning a two-thirds interest "in all the income of [part] of the residuary estate * * * intending hereby to convey to and vest in [the assignee] an undivided two-thirds interest in all the net income adjudicated to belong to [the assignor]." In that case, as well as other authorities relied upon, the assignment was held to effect a complete divestiture of the property interest of the assignor and the income therefrom. This is not the effect of the instruments in question. We hold that the amount of $25,000 paid by the trustees in 1927 to petitioner's wife was properly included in the income of the petitioner. *1062 Ormsby McKnight Mitchel,1 B.T.A. 143, 149; Mitchell v. Bowers, 9 Fed.(2d) 414; aff'd., 15 Fed.(2d) 287; certiorari denied, 273 U.S. 759; Hazel T. Power,23 B.T.A. 428; aff'd., 61 Fed.(2d) 625; certiorari denied, 288 U.S. 612, and authorities cited.
Judgment will be entered under Rule 50.