*5 Decision will be entered under Rule 50.
1. In 1944 the petitioner made payments to his wife pursuant to separation agreement. Held, on the facts, that the payments were partly in consideration of the release by the wife of rights to support, and partly in consideration of release of other marital rights, therefore that the payments were partly taxable as gifts. Held, further, that the determination of deficiency was not arbitrary.
2. In 1946 petitioner made further transfers for the benefit of his children, who had been provided for under the separation agreement made in 1944. The agreement between petitioner and his former wife for such transfers to the children was made dependent upon the divorce decree being amended, which was done. Held, the transfers to the children were not for full and adequate consideration, because of modifications of the previous agreement for transfers to the children, and did not pass by reason of the amendatory court decree, therefore were taxable as gifts to the children. Amount reduced so far as applicable to provisions for support of petitioner's minor daughter.
*1047 In this case there is involved gift tax for the years 1944 and 1946. Deficiencies were determined, and petitioner claims overpayments, as follows:
| Overpayments | ||
| Deficiencies | claimed | |
| 1944 | $ 64,814.66 | $ 32,057.90 |
| 1946 | 39,848.36 | 160,212.00 |
By amended answer, respondent prays in the alternative that the deficiency for the year 1944 be increased by $ 171,336.45, to a total deficiency of $ 236,151.11 for 1944. The issues presented are (a) whether certain transfers by petitioner to his wife in 1944, pursuant to a separation agreement, are in part allocable to release of marital rights, other than for support, by the wife and taxable; (b) whether petitioner is taxable upon the present worth of certain payments to his children in 1946 under an amended separation agreement. The respondent, in the alternative, contends that if gifts to the children are held to have been made in 1944 and not in 1946, they were additional taxable gifts in 1944.
FINDINGS OF FACT.
All stipulated facts are so found.
The petitioner filed his gift tax returns for the taxable years with the collector of internal revenue for the *7 second district of New York.
*1048 The petitioner, born October 21, 1898, and his wife, Ethel, born April 6, 1898, were married in New York City on March 7, 1922, and they thereafter resided in New York.
Two children were born of the marriage, Jill Rosenthal, born May 14, 1924, and Sue Rosenthal, born June 12, 1930. Both of the children were alive and had not married by the end of the calendar year 1946.
The petitioner's mother, Virginia Rosenthal, was born November 25, 1877, and died November 19, 1944.
The petitioner was a general partner in the New York banking firm of Ladenburg, Thalmann & Co. from 1924 until December 31, 1945, at which time he became a limited partner. The firm was a member of the New York Stock Exchange, Curb Exchange, and Commodity Exchange and did a large writing of new securities. Their capital was invested in private types of business deals. Petitioner had the general duties of a member of such a firm. His drawing salary from that firm was $ 20,000 a year during the period 1931 to 1936 and from 1936 to December 31, 1945, was $ 22,500 a year. His interest in the profits of the firm during the period 1931 through 1945 ranged from 20 to 22 per cent.
*8 The petitioner was also entitled to interest, if and to the extent earned, at the rate of 5 per cent of his capital account with the firm.
The values of the petitioner's assets consisting of cash and securities as of the end of each of the years 1940 through 1944, as shown on the books of Ladenburg, Thalmann & Co. were as follows:
| December 31, 1940 | $ 2,004,518.39 |
| December 31, 1941 | 1,956,560.78 |
| December 31, 1942 | 1,860,280.21 |
| December 31, 1943 | 2,053,012.70 |
| December 31, 1944 | * 1,597,100.14 |
As of the close of business on August 31, 1943, the firm of Ladenburg, Thalmann & Co. had a net worth as shown on its audited financial statement of $ 4,086,457, without including a credit balance of $ 6,090,532.19, representing the amount deposited with the firm by a corporation all the stock of which was owned by members of the firm and their families, and which account the firm was entitled to use in case of need in connection with its business and was subject to the risks of its business. As of August 31, 1943, the firm's assets were $ 19,458,367.75. On May 31, 1944, *9 its assets were $ 21,777,323.79 and its net worth was $ 4,304,780.91, without including $ 6,101,193.28 credit balance in favor of the corporation all the stock of which was owned by members of the firm and their families, which stock could be used by the firm in case of need in connection with its business and subject to the risks of its business.
*1049 The petitioner, from 1935 to 1944, had the income from a trust set up by his mother. The trust corpus was securities of a value of $ 700,000 to $ 800,000. He also owned stock in Cooperstown Corporation, which was included in the above described assets of Ladenburg, Thalmann & Co., at $ 1,100,000.
Following the death of his father, Moritz Rosenthal, in 1934, the petitioner was a contingent remainderman of a trust of the residuary estate of his deceased father, the principal of which amounted to one-third of the residuary estate. The income beneficiary of the entire estate was the petitioner's mother, Virginia Rosenthal. On December 31, 1943, the petitioner was prospectively entitled to receive as such contingent remainderman, if he survived his mother, property of a value of approximately $ 750,000, such amount being the approximate*10 amount which he ultimately received from the trustees under the will of his deceased father. In addition to the interest in the estate of his deceased father, the petitioner had an expectancy of inheriting one-third of his mother's individually owned property, since the petitioner had one brother and one sister. On the death of his mother, the petitioner became the income beneficiary of a trust of one-third of the residuary estate, the corpus of which trust amounted to approximately $ 435,000.
The amount of cash withdrawn by the petitioner and his wife from the firm of Ladenburg, Thalmann & Co. for the years 1935 through 1943 and the first seven months of 1944 was $ 653,365.57.
In the years 1935 through 1944 the petitioner lived at 50 East 77th Street, New York City, in a 16-room duplex apartment. He rented the apartment unfurnished. In the furnishing and decorating of the apartment he spent about $ 40,000 for fixtures and moldings and about $ 100,000 for furniture, draperies, and other furnishings. He had at the apartment six servants and a chauffeur, at an expense of about $ 1,100 a month. Doctors' bills for the family were about $ 10,000 a year, and dental treatment for the*11 children cost $ 800 a year for four years. Petitioner's wife paid some household expenditures. The source of her funds was Ladenburg, Thalmann & Co. She opened an account with Fulton Trust Company with funds she received from the petitioner from Ladenburg, Thalmann & Co. She also had an account at the Hyannis Trust Company at Hyannis Port, Massachusetts. Petitioner acquired for $ 42,500 a house and about 15 acres of land about 1927 on an island at Cape Cod. It had a tennis court, gardens and beach house, five rooms downstairs, six rooms and sleeping porch upstairs, three or four baths, separate servant quarters, separate laundry, and garage. Petitioner had a boat and station wagon there. The servants at the Cape Cod home were the same as those in the New York apartment, except that in the summer time *1050 at the Cape Cod home he had two gardeners and the balance of the year one gardener and a permanent caretaker. In 1936 petitioner bought 350 acres of farm land at Pine Plains, New York, upon which there was situated a rough farm house and farm buildings. In 1937 he built a home for his occupancy there and acquired another 150 acres of land. The home, including furniture*12 and garage, cost about $ 80,000. Petitioner employed three farmers to take care of the farm and a couple of servants for the house. The help at the farm was not the same help used at the apartment in New York. The family lived at the farm at periods during the year and the petitioner lived there at the time of trial. In addition to the station wagon at Hyannis Port, the Cape Cod home, and a town car at the apartment in New York, petitioner owned an airplane, at first a single engine Beachcraft and subsequently a twin engine, which was purchased in the late 1930's for about $ 42,500. Petitioner and a friend who also owned an airplane shared the expense of a commercial pilot, each paying about $ 2,500 a year.
During the years from 1930 to 1944 petitioner was a member of several clubs, the combined annual dues for which were about $ 1,000.
Petitioner and his family took various trips during his married life. In 1927 he, his wife and daughter and nurse were in Europe about 3 1/2 months. Later he took a house for his wife, daughter and nurse at Palm Beach. One year they went to Mexico. For several years he spent four or five weeks of the winter at Phoenix, Arizona. The children*13 attended private schools at a joint cost of about $ 1,000 a year, exclusive of books and equipment.
The cash withdrawn by the petitioner and his wife from Ladenburg, Thalmann & Co. from 1935 to 1944 was used for the purpose of payrolls, living expenses and entertainment. Living expenses were paid from a Title Guaranty & Trust Company account which petitioner set up in 1932 when Ladenburg, Thalmann & Co. were not able to permit checks to be drawn against them. In connection with his business, petitioner met a great many people and much entertainment was necessary. He entertained in every conceivable way, at home, at the country club, at the theater, at Hyannis Port, and at the farm. He paid the rental of an apartment for his wife's parents and helped them with cash and gifts for birthdays, etc.
Petitioner was in the military service from March 1941 until July 1945. His wife and family continued to live in the apartment and there was no essential change in the number of servants or character of service.
About the latter part of 1943, negotiations commenced between attorneys representing the petitioner and his wife with reference to a separation agreement. These negotiations continued*14 until July 1944.
*1051 A great many proposals were made by both sides. The parties had in mind the standard of living of the family. Petitioner's wife retained a firm of accountants to work on the figures and records, as to petitioner's income and family expenditures, which figures had been obtained by the wife's attorneys. At one point the negotiations broke down.
A separation agreement dated July 26, 1944, was finally executed between petitioner and his wife. In pertinent part it provides that the parties have two children, Jill and Sue, that differences have arisen between them as a result of which they have separated and are living apart; that they desire by the agreement to provide for the separate maintenance of the wife and adequate education, care, support and maintenance of the children and for custody during their minority, and to settle, adjust and compromise all the property, questions and rights between the parties and that the following provisions constitute reasonable adjustment of the problems confronting them. After this preliminary recital the instrument proceeds to provide, by paragraphs, as follows:
1. That petitioner has paid his wife in cash $ 600,000.
*15 2. That he agrees to pay her annually during her life an amount
* * * which, when added to $ 24,000 per annum income before taxes, will result in an income, after deducting all Federal and State income taxes payable on the aggregate of the $ 24,000 and Mr. Rosenthal's annual payment of $ 9,000 per annum more than the income remaining from the $ 24,000 per annum after deducting all Federal and State income taxes payable thereon would have been; the amount to be paid by Mr. Rosenthal to be reduced by the credit hereinafter provided, and such figure of $ 9,000 to be subject to reduction as hereinafter provided.
3. That in the event of petitioner's death before that of his wife, any income to her under the will of his mother will be credited against his obligations under paragraph 2.
4. That he agrees to pay his wife for the benefit of his children $ 10,000 per annum for each child until the child attains the age of 21 or marries, or the wife dies, whichever is earlier; any moneys paid to the wife for either child to be considered payable for the care, maintenance, support and education of the child; and that so long as he makes the annual $ 10,000 payments per child under paragraph*16 4, the $ 9,000 figure in paragraph 2 will be reduced by $ 2,000 per annum per child.
5. That if the wife remarries at any time, payments under paragraph 2 shall terminate.
6. That petitioner agrees to pay to each of the children after such child's attainment of the age of 21 years or marries, whichever is earlier, and during the child's lifetime and until the death of the wife $ 8,000 annually and after the death of the wife $ 6,250 annually.
*1052 7. That if petitioner's mother dies during his lifetime, he agrees forthwith to create trusts for each of the children, then living, in the sum of $ 150,000 each, the trust income to be payable to the child for life and upon her death, the principal payable to her issue, then living, or in default of issue, then as the child may appoint by will.
8. That in the event petitioner's mother dies during his lifetime, he agrees to pay each of his children $ 3,000 annually until the death of the child or petitioner's wife, whichever is earlier, and that until the child attains the age of 21 or marries, the payment will be made by him to the wife for the benefit of the child; this obligation to be in addition to those under paragraphs 4 and*17 6.
9. That petitioner's obligations under paragraphs 4, 6, and 8 are based upon the assumption that such payments will not constitute income to the children, and if they should become taxable income to the children the amount shall be increased so that the payments made by petitioner will yield the children the amounts set forth, over and above Federal and State income taxes thereon; and that petitioner's obligations under paragraphs 4, 6, 7, and 8, to provide for his children, are upon the assumption that no taxes will be payable by his wife in connection therewith, and if such assumption should prove incorrect he agrees to indemnify her.
11. That petitioner agrees to secure his obligations under the agreement by deposit of securities with a named trust company, through which all payments will be remitted.
12, 13, 14, and 15. That simultaneously and with execution of the agreement petitioner has irrevocably transferred to his wife life insurance policies for $ 42,500, $ 6,000, and $ 34,600; has transferred to her all furnishings of the apartment at 50 East 77th Street, New York City, and all insurance policies thereon, and has paid her $ 10,000 as expense of moving into and fixing*18 up a new apartment; and has conveyed to her the real estate owned by him at Hyannis, Massachusetts, with the furnishings and an automobile and all insurance policies thereon, and that he agrees to purchase such real estate from the wife for $ 25,000 in cash at any time upon demand; and that he has also paid the fees and disbursements of her counsel in connection with the preparation of the agreement.
17. The wife agrees to make bequests in her will to the two daughters, either outright or in trust, one-half to each, of the principal payment made to her under paragraph 1 to the extent not theretofore expended by her.
18. That if the Combined Index of Wholesale Commodity Prices published by the U. S. Department of Labor shall be 15 per cent in excess of the average for the year 1943 the wife may at any time request increase in the payments provided for her and the children, to compensate for the resultant increase in cost of living.
*1053 20. That each party releases the other of all claims and rights to dower or curtesy, whether arising out of their marital relationship or otherwise, which she or he now has or may acquire in the property of the other, waives any right to elect*19 against the will of the other, renounces any right to administration upon the estate of the other, and agrees to execute any instrument necessary to assure the other of such release or waiver so that the parties may (except as otherwise provided by the agreement) act regarding their property as if they were single and unmarried.
21. That the wife releases petitioner from all claims and liability for her support, except as in the agreement provided, and each agrees not to incur any further obligations in the name of the other.
23. That the agreement may be altered, amended, or revoked at any time by a written consent of both parties, but that no oral alteration, amendment or revocation of the agreement shall be binding upon either, provided that no payment agreed to under paragraphs 6, 7, and 8 shall be altered, amended, or revoked without the written consent of the child affected if of the age of 21.
24. That the agreement is not and shall not be construed as an agreement of divorce, and that each party is at liberty to institute or not to institute divorce proceedings or to assert any defense therein, and that in the event of an action for divorce the agreement shall constitute a*20 stipulation therein for support and maintenance of the wife and custody, support, maintenance, and education of the children, the agreement to become a part of the decree or considered incident to the divorce; and each agrees not to take any action in such proceeding which would change this agreement.
25. That all obligations of the parties shall survive their death and be binding upon their respective estates.
In 1944 the petitioner made the payments of cash and other property required by the terms of said agreement of July 26, 1944.
On September 18, 1944, the Second Judicial District Court of the State of Nevada, in an action instituted by petitioner's wife against him, entered its judgment and decree and divorce in her favor granting her a final and absolute divorce from him on the grounds of his extreme cruelty, mental in character, and decreeing that the property rights of the parties and the future support and maintenance of the wife and the care, custody, maintenance and education of the children are adjudged and decreed as provided by the agreement of July 26, 1944, which is expressly made a part of the decree and approved and adopted in full by the court; that neither party*21 shall have any right, claim, or interest against the person, property or estate of the other growing out of or by virtue of the marriage, except in accordance with the agreement of July 26, 1944.
*1054 The decree recites that the case came on for trial without a jury, that the plaintiff, petitioner's wife, appeared in person and by counsel, that the defendant did not appear but was represented by counsel who consented to trial, and that plaintiff testified and introduced other testimony but no evidence was introduced on behalf of defendant.
At the time of the execution of the agreement in 1944, a commercial annuity for a woman of 46 years in the amount of $ 24,624 would have cost approximately $ 600,000 and an annuity of $ 40,000 would have cost her approximately $ 974,720.
Petitioner filed a gift tax return for the year 1944, stating $ 150,000 as the amount to be treated as gifts under the payments and transfers under the agreement with his wife in connection with separation and divorce; and showing a gift tax of $ 32,057.90.
The notice of deficiency determined that $ 423,417.90 represented the taxable gifts growing out of the payments and transfers by petitioner to his wife*22 pursuant to the agreement of July 26, 1944, but the parties now stipulate, and we find, that the amount is $ 393,698.43 based, under the Combined Experience Table of Mortality and American Remarriage Table, with interest at 4 per cent, upon the present worth as of July 26, 1944, of the following transfers:
(a) $ 600,000 in cash referred to in paragraph "First" of the agreement of July 26, 1944.
(b) $ 36,469.27 representing the commuted value of paid-up life insurance policies referred to in paragraph "Twelfth" of said agreement.
(c) $ 45,000, representing the value of real estate at Hyannis, Massachusetts, referred to in paragraph "Fourteenth" of said agreement.
In 1945 petitioner consulted attorneys who endeavored to amend the agreement of July 26, 1944, through negotiation, in order to translate the annual payments to the children into one funded payment, in so far as that was possible, and to translate what they thought was the equitable equivalent of the annual payments into one lump sum payment. Accountants were employed, with the knowledge of counsel for the wife. The provisions for the payment of the two sums of $ 150,000 each in trust had ripened by the death of petitioner's*23 mother; and the elder child had become 21 years of age. Figures and calculations were made by an accountant. He used the Actuary's or Combined Experience Table of Mortality with interest at 4 per cent; also the Combined Annuity Mortality Table with interest at 3 1/2 per cent, which he considered more commercial. The accountant computed the present value as of October 1, 1945, of the petitioner's obligation to make payments to the children under paragraphs 4, 6, and 8 of the original agreement, under the Actuary's or Combined Experience Table of Mortality with interest at 4 per cent to be $ 357,000 and under the Combined Annuity Mortality Table with interest at 3 1/2 per cent to be $ 453,000. These figures did not include $ 300,000 required to be *1055 made to the children, $ 150,000 each, under the agreement of 1944, which had already ripened by the death of their grandmother. The negotiations culminated in an agreement executed March 15, 1946, amending the separation agreement of July 26, 1944.
The amending agreement after reciting the death of petitioner's mother on November 19, 1944, and the arrival at age 21 of the elder child provided, in pertinent part, for the elimination*24 of paragraphs 4 and 6 of the agreement of July 26, 1944; for the elimination of paragraph 7 and the substitution of the agreement by petitioner to create, on April 1, 1946, a trust for each of his children in the amount of $ 312,500, and to pay the gift tax thereon; for the elimination of paragraph 8 and the substitution of an agreement by petitioner to pay each child, during her life, $ 3,000 per annum ($ 2,250 in 1946 beginning April 1, 1946) until death of their mother, and thereafter $ 1,500 per annum for life, payment for the minor, until the age of 21, to be for her but to her mother, for the care, maintenance, support and education of the child; for the payment by petitioner on April 1, 1946, to his daughters their share of the income earned and allocable to the trusts provided in paragraph 7 of the July 26, 1944, agreement, $ 5,021.33 to Jill, the elder daughter, and $ 5,021.33 to the mother for the benefit of Sue, the younger daughter, to be applied to her care, maintenance, support and education; for the elimination of paragraph 17 and substituting agreement by the petitioner's former wife to bequeath to her two daughters, either outright or in trust, one-fourth of her net*25 estate at death, after taxes; for the addition of agreements, in pertinent part, as follows: That if petitioner should die before the former wife his estate should have an option, exercisable within three years after qualification of his representatives, to elect, in lieu of making further payments under paragraph 2 of the agreement, to buy the former wife an annuity contract providing payment to her annually for life an amount equal to the estimated yearly amount payable to her under paragraph 2 (of the amended agreement) after crediting income received by her under the will of his mother, taking into account tax conditions and condition of the mother's estate, or a lump sum equivalent to such payments; the delivery of such annuity contract, or lump payment, to discharge the estate from obligation under paragraph 2; that the same agreement should apply to petitioner's obligations under paragraph 8, as amended; that petitioner may provide by will for payment to the former wife, or to each child, or for trusts in their favor, and if he so provides, such payments shall offset pro tanto amounts due from him under this agreement, except for increased taxes resulting, in case of the*26 children; that the divorce decree of September 18, 1944, be deemed to refer to the separation agreement as amended; that either party could apply to the divorce court for amendment of decree accordingly; that the agreement should be effective *1056 only on such amendment of the decree; and that otherwise the separation agreement should remain in force.
On March 29, 1946, the divorce court entered an amended judgment and decree reciting that it is pursuant to the stipulation of the parties filed on March 29, 1946, together with the agreement of March 15, 1946, and ordering and decreeing that the decree of September 18, 1944, be modified to provide, in pertinent part and in effect, that the property rights of the plaintiff and defendant, the future support and maintenance of the plaintiff, and the care, custody, maintenance, and education of the children are adjudged and decreed and provided for in accordance with the agreement of July 26, 1944, and the amendment of March 15, 1946, which is made part of the decree and approved and adopted by the court, the judgment and decree of September 18, 1944, in all other respects to remain as originally recited.
In 1946 the petitioner made*27 the payments and transfers referred to in the agreement dated March 15, 1946.
Subsequent to March 15, 1946, the surname of the wife and daughters of the petitioner was changed from Rosenthal to Rayner by an order of the City Court of the City of New York.
For the years 1944 to 1950, inclusive, the trustee under the trust for Sue Rosenthal reported the income of that trust as taxable to the petitioner and petitioner included it in his gross income on his returns. He did not report as taxable gifts for 1944 any amount in respect of the two daughters. Petitioner filed original and supplemental gift tax returns for the year 1946. On the original return he reported $ 625,000, plus $ 5,000 paid to Jill Rayner, the elder daughter, paid under the separation agreement and amendment thereof to the two children; and reciting gift tax of $ 150,734.15. On the supplemental return he reported, in addition to the amounts shown on the original return, $ 5,021.33 paid to Ethel Rayner for the account of Sue Rayner, minor, and $ 5,021.33 paid to Jill Rayner; and recites a balance due of $ 1,848.70 and interest after payment of $ 150,734.15 on March 13, 1947.
The deficiency notice herein as to gift*28 tax for the year 1946 deducts from the $ 200,060.36 total tax liability for 1946 as computed, $ 160,212, consisting of gift tax assessed, as follows: $ 150,734.15, $ 1,848.70, and $ 7,629.15. Petitioner asks finding of overpayment of $ 32,657.90 for 1944 and $ 160,212 for 1946.
The notice of deficiency as to 1946 determined that $ 45,215.91 and $ 45,979.10 (totaling $ 91,195.01), representing present worth of annual payments required to be made to Jill and Sue, respectively, pursuant to the amended agreement of March 15, 1946, are taxable gifts for 1946. From the total there is deducted $ 1,500 because of payments reported and taxable gifts are increased by $ 89,695.01.
*1057 The value of petitioner's wife's marital rights, other than for support, at the time of divorce was $ 250,000.
OPINION.
The first question for determination is whether the Commissioner erred in treating as taxable gifts payments made in 1944 to his wife, under a separation agreement, above amounts paid in discharge of his obligation to support her. Both parties rely on E. T. 19 (1946-2 C. B. 166) which, in pertinent substance, states that with respect to transfers made pursuant*29 to legal separation agreements it is the position of the Bureau that for gift tax purposes the release of support rights may constitute a consideration in money or money's worth, and that accordingly to the extent that a transfer does not exceed reasonable value of support rights of a wife it is to be treated as made for such consideration; but that if a portion of a transfer is allocable to the release by the wife of her property or inheritance rights it is not to be considered as made for such consideration. E. T. 19 goes on to provide, in effect, that the establishment of a reasonable allocation is one for administrative determination by the Bureau, in the absence of such reasonable allocation by the parties. The difference between the parties here is whether, as the petitioner argues, all payments made under the agreement of 1944 were made under the obligation to support the wife, or whether and to what extent, if any, they were made because of release of marital rights other than the wife's support. The parties appear to be in agreement that any amounts transferred to the wife other than for support rights were without consideration and taxable as gifts. Though the separation*30 agreement was made a part of a later divorce decree, the petitioner does not contend that, under Harris v. Commissioner, 340 U.S. 106">340 U.S. 106, (though he relies on the Harris case on the issue as to the transfers in 1946) the transfers were effectuated by the decree of divorce and not the agreement, and for that reason were not gifts, this apparently for the reason that the effectiveness of the separation agreement was not made dependent upon the decree but, on the contrary, the agreement left either party free to institute or not institute divorce proceedings. We therefore do not on this issue have the prime question decided in the Harris case.
The petitioner's position is, in substance, that the separation agreement was the result of long negotiations between attorneys for petitioner and wife, in which the sole object was to arrive at a fair amount for her support, considering the way and manner of living theretofore followed by the family, so that no part of the amounts involved in the transfers was intended to be or can be allocated to release of other marital rights. The respondent, on the contrary, argues that, as the *1058 separation*31 agreement specifically recites, the transfers were made in order not only to provide for separate maintenance of the wife and the education, care, support, and maintenance of the children, but "to settle, adjust and compromise all their property, questions and rights" and "problems confronting them," and that among the mutual covenants recited to be the consideration for the agreement is the release by each party of all claims, rights of dower or curtesy, and the waiver of right to elect against the will of the other, as well as the release by the wife of "all claims and liabilities for her support." Payments or transfers by the petitioner for the release of such marital rights, the respondent argues, were an integral part of the consideration for the agreement, and under the Harris case, and others, do not constitute adequate and full consideration in money or money's worth and are, therefore, taxable gifts under section 1002 of the Internal Revenue Code. He further says that E. T. 19 specifically provides that reasonable allocation between support rights and marital rights is a matter of administrative determination for him, that such allocation has been made, and that the *32 petitioner, also relying and necessarily relying on E. T. 19 because it is the only source of elimination of amounts paid for support rights from taxable gifts, is in no position to contest the allocation made by him.
We have given careful consideration to all of the evidence adduced on the point. The separation agreement specifically provides, on its face, for the settlement of rights other than the support of the wife and, in particular, that all claims and rights of dower or curtesy and to elect against the will of the other party are released. In the face of such language, the burden of the petitioner to show that only release of support rights was in fact the consideration for the transfers, is obviously, in logic, no easy one. After careful analysis of all the evidence adduced, we think it has not been met. It would indeed be strange if the above provisions as to release of dower, curtesy and right to elect against will were inserted in an agreement directed only to the release of the wife's right to support. Moreover, though testimony of attorneys involved in the separation matter stressed the effort during negotiations to arrive at a figure providing for the wife a way*33 of life consonant with that the family had led, we think such evidence by no means is sufficient to overcome the fact that in the final analysis and meeting of the minds, the other provisions as to release of marital rights were incorporated in the agreement. That the husband might have limited his wife's marital rights by change of domicile is not controlling. He had not done so, and such rights did enter into the settlement. In fact, one of the attorneys testified that he thought she, the wife, had to surrender her right to make any claim against the will "in consideration of it," referring to the $ 600,000 payments. It seems unnecessary to reiterate here the evidence on this point; suffice it *1059 to say that on consideration thereof we conclude and hold that some portion of the payments made should be allocated to release of marital rights other than the right of the wife to support. Therefore, it only remains to determine the extent thereof. The gist of the petitioner's contention appears to be that the manner of living of the family had been so lavish and expensive that the transfers and payments to the wife would no more than afford her continuance of such a way*34 of life. We think the evidence does not justify such conclusion. Mere withdrawals of money by the wife does not demonstrate that they were spent on current living expenses; and previous family expenses included the children, separately provided for in the agreement. Moreover, the agreement provided for the transfer or payment to the wife of various items, only three of which were considered by the Commissioner as allocated to payment for release of marital rights other than support. In other words, the agreement provided that the wife received not only the three items ($ 600,000 in cash, life insurance policies of commuted value of $ 36,469.27, and the Hyannis real estate valued at $ 45,000, the only items upon which the allocation by the Commissioner to marital rights other than support was based), but also the right to certain payments, which produced for her from 1945 to 1948 an average of approximately $ 21,000 annually, also furnishings of the family apartment, which had cost about $ 100,000, $ 10,000 cash for moving, the furnishings of the home at Hyannis, her attorney's fees in the matter of the agreement, an automobile, and insurance policies upon all the furnishings and*35 upon the automobile. It is clear, we think, that all of these matters contributed to the maintenance of the wife's way of life and should be considered in determining the allocation between support rights and other marital rights. All entered into the consideration for the agreement.
As above indicated, the Commissioner allocated on the basis, using commuted values, of the three items. He arrived at $ 423,417.90 as the amount of taxable gifts, based upon the total value of $ 681,469.27 for the three items, but it is now stipulated and found that the amount is $ 393,698.43 instead of $ 423,417.90. The petitioner urges that, assuming that any amount can be allocated to the marital rights other than support, such an amount is arbitrary and excessive and should not be upheld on any ground of presumptive correctness. He cites Helvering v. Taylor, 293 U.S. 507">293 U.S. 507. Obviously the determination was not arbitrary. George G. McMurtry, 16 T. C. 168 (181). It was based on commuted values, and on only a part of the items passing to the wife. Petitioner also cites Hemphill Schools v. Commissioner, 137 F. 2d 961,*36 and says that if the Court finds any gift in this case it must make a finding as to the amount thereof on all of the evidence. This we have done, without relying on presumption of correctness. Again, we think we need not detail the evidence considered in arriving *1060 at our conclusion. We do not agree with the respondent if he means to contend that the provisions of E. T. 19 make his allocation such a matter of administrative determination as to be beyond modification here. We must view it in the light of the facts. As above stated, we are convinced that the payments and transfers were, in part, in consideration of marital rights other than support, but under the facts we do not think such other marital rights should be given the value ascribed by the Commissioner. Under all of the evidence, and applying the general doctrine announced in Cohan v. Commissioner, 39 F. 2d 540, we hold that the value to be ascribed to marital rights other than for the wife's support is $ 250,000, and to that extent we hold that the transfers to the wife constitute taxable gifts.
The next question before us involves gift tax liability for the year 1946. *37 It arises because in the deficiency notice for that year the Commissioner added $ 89,695.01 to the amount of reported taxable gifts. The petitioner contends that he erred in paying gift tax on the $ 630,000 paid by him to his daughters in 1946, and reported, and asks for finding of overpayment.
Petitioner's contention is that there were no taxable gifts in 1946 because the agreement of March 15, 1946, providing for them was (a) made for an adequate and full consideration, and (b) was effective only on the entry of the decree of March 29, 1946, amending the previous decree of court, therefore under Harris v. Commissioner, supra, there was no gift; to which the respondent, in substance, replies that the petitioner properly paid gift tax in 1946 on the $ 630,000 going to the daughters and that there were in fact additional gifts in 1946, since after the death of petitioner's mother on November 19, 1944, the previous contingent obligation under the agreement of July 26, 1944, became absolute, and the previous agreement was a mere promise to make a payment at a future and unascertainable time, contingent upon the death of petitioner's mother therefore*38 not constituting gift, also, with reference to the petitioner's idea that there were no gifts because the agreement of March 15, 1946, was made dependent upon the decree of court, that the decree in 1946 was merely amendatory and the principle announced in the Harris case does not apply.
In our view, there was no such consideration as to eliminate the transfers by the petitioner in 1946 to the daughters from the category of taxable gifts. The petitioner argues that there was "adequate and full" consideration. Though section 1002 of the Internal Revenue Code treats as gifts transfers "for less than an adequate and full consideration in money or money's worth" and provides that if property is transferred for less than such consideration the amount by which the value of the property exceeds the value of consideration shall be deemed gift, petitioner does not suggest that there was some consideration *1061 but less than full and adequate. On the contrary, he specifically argues on brief that it would be erroneous to assert that the difference between the value of the rights acquired by the children in 1946, and those then given up, constituted a gift in 1946, and that no taxable*39 gift is involved in 1946. We are therefore not called upon to make any allocation in that regard. In our opinion, it is not shown that the transfers by the petitioner in 1946 were made for adequate and full consideration in money or money's worth. Recently in Estate of John M. Goetchius, 17 T. C. 495, we examined this question as to estate tax and noted that the phrase involved here is to receive identical construction for purposes of estate and gift tax under Merrill v. Fahs, 326 U.S. 308">326 U.S. 308. We held there that under a relinquishment of certain antecedent rights in exchange for annuity contracts in which the decedent was annuitant, the decedent did not receive adequate and full consideration in money or money's worth for his transfer. The situation in principle is not different here. We can not find under the record before us that adequate and full consideration in money or money's worth passed to the petitioner, by virtue of modification of the previous separation agreement and provision for the children made in 1944.
This brings us to the question as to the effect of the provision in the amendatory agreement of*40 March 15, 1946, that it should be effective only if the decree of court was amended. In the Harris case, relied on in this respect by petitioner, the transfers involved were to the wife herself and not to children, and the court held that the transfer from husband to wife was not gift because it was not effected by the parties pursuant to "promise or agreement" concerning marital rights in property, but by court decree. Here we have not an original court decree as in that case but one providing, in accord with the agreement of the parties on March 15, 1946, an amendment of a previous decree, with reference to the separation agreement of July 26, 1944. The earlier agreement was not dependent upon any court decree as was the agreement in the Harris case and our question is whether there is a difference here. We think there is. Here there is no question (under this issue) whether marital rights passed by promise or agreement, or by decree, but only one involving gifts of a father to children, one of them an adult. The petitioner actually made the gifts in trust, of $ 312,500, to each of his children in 1946 and in addition gave one of the children $ 5,000; and this he reported, *41 now contending that he did so erroneously. He had earlier agreed to make gifts to the children, after his mother's death, but only to the extent of $ 150,000 each. In 1946 he agreed to make and did make a transfer of $ 625,000 to them in trust. So far as concerns Jill, the child who was in 1946 of age, he seems clearly to have made the transfer voluntarily, without regard for any court decree, because the court decree did not affect her. She was not a party to the action, *1062 and under paragraph 23 of the 1944 separation agreement her consent was necessary for any change in provisions after she became of age -- as she had done in 1945. So far as concerns either child, we think the logic of the Harris case is not applicable. In this case the court was merely, and in accordance with agreement between the parties, amending a previous decree, which had not effected or affected the original transfers for the benefit of the children. In the Harris case the transfers were between the parties to the divorce, with questions as to marital rights. Here merely the children are on this point involved -- or one of them who in 1946 was not of full age, and only by way of amendment*42 of an earlier decree which had not been the basis for transfers. Though it is true that it is provided in the agreement in 1946 that it shall become effective only on the decree being amended, in our opinion the children did not acquire their rights by the decree, but by the agreement of 1946 and the transfers made. Edmund C. Converse, 5 T. C. 1014, affd. 163 F. 2d 131; Roland M. Hooker, 10 T. C. 388, affd. 174 F. 2d 863. We conclude and hold that gift tax in 1946 was not prevented on the grounds of adequacy of consideration or requirement that the agreement depended upon the amendment of the former decree, and therefore that the petitioner did not err in returning and paying gift tax upon the $ 630,000, and that gift tax is payable thereon and upon the amounts (additional to the $ 630,000) transferred to the children in 1946.
As above seen, the Commissioner had added $ 91,195.01 (less $ 1,500 payments reported) to the petitioner's taxable gifts as reported. The petitioner points out, and the respondent concedes on brief, that to the extent that these figures include*43 the present worth of payments to be made by petitioner to his minor daughter, Sue, during her minority they do not represent taxable gifts, he being under duty to support her. The respondent therefore, on brief, agrees that the figure $ 89,695.01 may be reduced by $ 35,756 which is stipulated to be the value, as of March 15, 1946 and March 29, 1946, of $ 8,000 per annum during Sue's minority. The petitioner, however, points out that the amount provided by the agreement was $ 10,000 and not $ 8,000 per annum, and contends that the respondent is in error in his argument on brief that there should be a reduction from $ 10,000 to $ 8,000 per annum merely because so long as the $ 10,000 payments were made for the child the petitioner should pay $ 2,000 per annum less to his wife. We agree with the petitioner. The reduction was in the wife's payments, not those of the child. We hold that the amount by which the $ 91,195.01 is to be reduced is the value during Sue's minority, of $ 10,000 per annum.
It is to be noted that the petitioner does not contend that the alleged gifts involved in the 1946 transactions were made and taxable in 1944 *1063 or invoke to that effect Estate of Ira C. Copley, 15 T. C. 17,*44 but depends wholly on contentions above discussed that there was, in 1946, adequate and full consideration and that, under Harris v. Commissioner, supra, the transfers depended upon the amendatory decree of court, therefore were not gifts. The respondent, in the alternative, contends that if gifts were not taxable in 1946, they were taxable in 1944 and asks increased deficiency accordingly for that year. Considering our conclusion above set forth, it is unnecessary to examine such alternative contention.
Decision will be entered under Rule 50.
Footnotes
*. After a payment of $ 400,000 out of such assets in connection with the marital agreement of July 26, 1944.↩