*932 In 1928 petitioner's wife brought suit against him for a limited divorce in the State of Pennsylvania, where they both resided, in which she asked for a suitable allowance for alimony. On December 7, 1928, petitioner modified a certain trust agreement which he had executed in 1918 so as to provide out of the income of the trust a monthly payment of $1,000 to his wife, which payment was to be in full for all claims whatsoever for alimony, alimony pendente lite, maintenance, and support. The wife's suit for limited divorce was subsequently changed to a suit for absolute divorce and May 6, 1929, such absolute divorce was granted. In 1933 petitioner brought suit in equity to set aside the agreement aforesaid, alleging several grounds therefor. Issue was joined in this suit, but prior to its hearing a stipulation of settlement was agreed to between the parties, which was approved by the court. By terms of this settlement, one-half of the corpus of the 1918 trust was awarded to petitioner and one-half to petitioner's former wife and the four adult children of such marriage, and the settlement was to be a complete acquitance of all obligations, one to the other, except the obligations*933 created by the stipulation and agreement. The part of the corpus awarded to the wife was placed in trust, the income from which was to be paid to her for life, with remainder over to the four children. Held, that, following the stipulation of settlement, there was no continuing obligation either by voluntary agreement or under the laws of the State of Pennsylvania that petitioner should maintain and support his divorced wife, and the income of the trust which was set up with the part of the property awarded to her, which was paid to her in the taxable years, is not taxable to petitioner. It was not paid to discharge any obligation of petitioner.
*941 These proceedings have been consolidated. Docket No. 97537 involves a deficiency for the year 1935 of $319.40 and Docket No. 99162 *942 involves a deficiency for the year 1936 of $618.67 and a deficiency for the year 1937 of $473.56. The deficiency for 1935 is due to the following adjustments which the Commissioner made in petitioner's income tax return, filed for that year:
| Net income as disclosed by return | $4,902.33 | |
| Additional income: | ||
| (a) Additional income of William E. Walter Trust taxable to you | $8,429.03 | |
| (b) Income of Caroline S. Walter Trust taxable to you | 3,956.33 | |
| 12,385.36 | ||
| Total | 17,287.69 | |
| Additional deductions: | ||
| (c) Capital loss not claimed | $2,000.00 | |
| (d) Additional trustee's fees | 164.76 | |
| 2,164.76 | ||
| Net income adjusted | 15,122.93 |
*934 The petitioner, by appropriate assignments of error, contests that part of the Commissioner's adjustment shown above by which the Commissioner added to petitioner's income the income of the Caroline S. Walter trust, $3,956.33. Petitioner did not contest the addition to his income for 1935 of "Additional income of William E. Walter Trust taxable to you, $8,429.03." The deficiencies for 1936 and 1937 are due entirely to the addition by the Commissioner to petitioner's net income, as disclosed by his income tax return for each of said years, of certain income of the Caroline S. Walter trust. In each instance the Commissioner explained his adjustment as follows:
The income of the Caroline S. Walter Trust, Girard Trust Company, Trustee, having been established by you to provide income for your former wife in lieu of alimony and other personal claims against you, is held to be taxable to you. Sections 22(a) and 167, Revenue Act of 1936; Article 167 - 1, Regulations 94.
By appropriate assignments of error, the petitioner contests these adjustments made by the Commissioner.
FINDINGS OF FACT.
The petitioner, William E. Walter, resides in Beverly Hills, California. The income*935 tax returns for the period here involved were filed with the collector for the sixth district of California.
The petitioner and his former wife, Caroline S. Walter, were married in the year 1897 and were divorced during the year 1929 under a decree of a Pennsylvania court. Petitioner has since remarried.
In the month of March 1928 William E. Walter withdrew from his home and family and expressed an intention henceforth to live separate and apart from his wife.
*943 In the month of October 1928 the wife, Caroline S. Walter, brought an action for limited divorce in the Court of Common Pleas of Delaware County, Pennsylvania, in which Caroline Walter was the libelant and Walter the respondent, she alleging that she was entitled to apply to the court for suitable alimony and an allowance for counsel fees. Caroline Walter also claimed that she had become entitled to institute proceedings against Walter in the Desertion Court of Delaware County in order to procure suitable support from him.
The alleged grounds for divorce were, inter alia, the statutory grounds of "Cruel and barbarous treatment and indignities to her person."
The original petition for divorce asked*936 for only a divorce a mensa et thoro, and was amended to ask for an absolute divorce. A plea for absolute divorce was granted by the said Court of Common Pleas of Delaware County, Pennsylvania, on May 6, 1929.
Prior thereto, by deed dated September 28, 1918, petitioner had assigned and transferred to Alfred E. Pfahler and Morris Wolf, of Philadelphia, Pennsylvania, certain securities in trust for the benefit of himself for life, and thereafter 95 percent of the principal thereof was to be distributed equally to petitioner's children living at the time of his death.
By instrument dated December 7, 1928, petitioner modified the trust created by the said deed of September 28, 1918, by providing for the payment of $12,000 per year, in monthly installments, to Caroline S. Walter out of the income of the trust estate, and upon her death $300,000 was to be paid out of the principal in equal parts to the four children of William E. and Caroline S. Walter then living, subject to certain provisions should any of the children not be living.
The trustees under the declaration of trust of December 7, 1928, were authorized, at the election of Caroline S. Walter or any of the four children*937 of said Caroline S. Walter and William E. Walter, to assign and transfer to the Girard Trust Co., Philadelphia, the sum of $300,000 in cash or securities, to be held in trust to pay the said annuity of $12,000 to Caroline S. Walter for life, and upon her death to distribute the principal among the children of Caroline S. and William E. Walter then living or their issue per stirpes, if any were deceased.
The aforesaid instrument dated December 7, 1928, contains, among other things, the following:
* * * From and after the signing of this agreement, Walter agrees to pay to Mrs. Walter the sum of one thousand dollars ($1,000.00) per month (which is a sum substantially less than one-third of his present income) during the life of Mrs. Walter, which payment shall be secured in the manner hereinafter set forth; and which monthly payment shall be in full for all claims whatsoever by Mrs. Walter for alimony, alimony pendente lite, maintenance, support, right *944 of dower in real estate and of all financial and property rights and claims of every kind and character which have heretofore accrued or may hereafter accrue to either of them by reason of their marital relations. * *938 * *
* * *
* * * Mrs. Walter hereby agrees to and does accept the provisions set forth herein in lieu of dower or contingent right of dower or other right of any kind in the real or personal property of Walter and in lieu of her rights under the intestate laws of Pennsylvania or elsewhere, and her rights to take against his will and in lieu of all claims against Walter for alimony, alimony pendente lite, maintenance and support for herself and our daughter, Helen, whom she agrees to support, and all other claims and demands of every kind and nature except the obligation imposed on Walter by the terms hereof and the exhibits hereto attached. * * *
In 1933, the income of the trust in the meantime having greatly decreased, petitioner brought an action in equity in the Court of Common Pleas of Philadelphia, wherein he alleged, among other things, as follows:
1. That the agreement of December 7, 1928, for the support and maintenance of Caroline S. Walter under the laws of Pennsylvania was without consideration and without lawful force and effect.
2. That said agreement for the support and maintenance of Caroline S. Walter, after their absolute divorce, being made and entered*939 into under an agreement between petitioner and Caroline S. Walter to obtain an absolute divorce was against public policy and without lawful consideration and, therefore, illegal and void.
3. That the agreement of March 7, 1932, was also null and void.
4. Complainant, William E. Walter, asked the court in equity to declare the agreement of December 7, 1928, which provided for the maintenance and support of Caroline S. Walter, to be null and void, and also asked that the court declare null and void a supplemental agreement of March 7, 1932.
Issue was joined in the proceeding and, after negotiations between the attorneys for the parties, a stipulation of settlement was entered into, pursuant to which the court entered its decree adopting the stipulation. Under this stipulation and decree the principal of the trust estate was divided as follows:
FIRST: To William E. Walter an equal one-half part thereof, subject to payment of proper costs and counsel fees, which said part he agrees shall be distributed to and/or for the use of
The Trustees of the Philadelphia Yearly Meeting of Friends;
Judith Scott Walter;
The adopted children of William E. Walter, viz., Cornelia Scott*940 Fields Walter, Russell James Fields Walter and Margaret Scott Fields Walter; and
William E. Walter,
in the manner and subject to the provisions set forth in Schedule A hereto attached.
*945 SECOND: An equal one-half part thereof, subject to payment of proper counsel fees, shall be distributed to and/or for the use of
Caroline S. Walter;
David Sargent Walter, Elizabeth Ann Walter Furnas, Henrietta Emley Walter Fricke and Helen Sargent Walter Thomsen, in the manner and subject to the provisions set forth in Schedule B hereto attached.
10. The foregoing distribution of principal into two equal one-half parts shall be made in kind, and shares of the various securities constituting the trust shall be allocated, share and share alike, between said equal one-half parts as nearly as may be, and when so distributed and allocated such shares shall carry with them to the respective distributees any and all dividends accrued, accruing, and unpaid.
11. The distributions of income made to Caroline S. Walter by the Trustees and/or the Girard Trust Company of Philadelphia up to the date hereof are hereby ratified, approved and confirmed, and it is understood and agreed that*941 the said Caroline S. Walter shall be entitled to receive income at the rate of Ten thousand dollars ($10,000.) per annum out of any cash income coming into the hands of the Trustees and/or the Girard Trust Company prior to the distribution of principal hereinabove provided.
12. The receipts and releases of the above mentioned parties in interest, or their guardians, upon payment and distribution being made in accordance with the above awards and this Agreement shall be a full discharge and acquittance to the said Trustees without further application to or approval by the Court.
13. In consideration of the settlement and distribution herein set forth, the parties signatory hereto do hereby for themselves, and on behalf of parties represented by them, their heirs, executors, administrator, successors and assigns, mutually remise, release, quitclaim, and forever discharge, each and all of the other parties hereto, of and from all claims, demands and causes of action whatsoever, (except the obligations created by this Stipulation and Agreement, and the Decree entered herewith), arising out of any matter, cause or thing occurring prior to the date hereof.
David Sargent Walter, *942 Elizabeth Ann Walter Furnas, Henrietta Emley Walter Fricke, and Helen Sargent Walter Thomsen, who participated with Caroline S. Walter in a division of one-half of the trust corpus, are children of petitioner and Caroline S. Walter and were adults at the time the stipulation of settlement was made in February 1935. Said equal one-half share of principal of the trust which was set apart to Caroline Walter and the four children in the stipulation of settlement was subdivided in Exhibit B as follows: (1) to the four children, adults, one-half thereof was assigned and transferred and paid over absolutely. As to the one-half of the one-half which was to go to Caroline S. Walter, it was provided as follows:
(b) One-half thereof shall be assigned, transferred, delivered and paid over to GIRARD TRUST COMPANY and PAUL J. FURNAS, of Philadelphia, IN TRUST, to invest and reinvest the same, and to pay the net income therefrom, from time to time, to CAROLINE S. WALTER for the term of her life, and upon her *946 death the Trustees shall divide the principal of the trust and shall hold the same in trust as follows: [Here follow directions as to how the income should be distributed*943 to the four children named above. These provisions are not needed here.]
It is the income which was paid to Caroline S. Walter during the taxable years here involved from the so-called Caroline S. Walter trust, of which the Girard Trust Co. and Paul J. Furnas were trustees, set up in 1935 following the stipulation of settlement referred to above, which is the subject of the controversy in these proceedings.
OPINION.
BLACK: It will be observed from the facts which we have stated in our preliminary statement that part of the deficiency for 1935 is due to an addition by the Commissioner to petitioner's income of $8,429.03 paid to Caroline S. Walter in 1935 from the William E. Walter trust which was set up in 1928 prior to a divorce between the parties in 1929. Petitioner does not contest this part of the Commissioner's determination.
The facts show that this William E. Walter trust was terminated by agreement of all the parties approved by the court in 1935 and the corpus of the trust, after the payment of certain costs and expenses, was distributed one-half to William E. Walter and beneficiaries whom he named and the remaining one-half to Caroline S. Walter and the four*944 adult children of Caroline S. Walter and William E. Walter. The part distributed to Caroline S. Walter was placed in trust with the Girard Trust Co. and Paul J. Furnas, as trustees, the income from which was to be paid to her for life, with remainder to her children.
The respondent in his brief states the issue involved in these proceedings to be:
Was the net income of a trust estate, called the Caroline S. Walter Trust, taxable to the petitioner therein during the years, 1935, 1936, and 1937, for the reason that the trust had been created to provide, and was providing, alimony for the petitioner's divorced wife, Caroline S. Walter?
The petitioner opposes the contention of respondent on the ground that there is no language in the revenue act which indicates that the "legal obligation theory" of taxation is applicable where the trustor has irrevocably transferred ownership of both the property and the income therefrom. Petitioner contends that he had no dominion or control over the income received by Caroline S. Walter from the Caroline S. Walter trust and he derived no benefit whatsoever from the payment by the trustee to her of this income, and that it was not to discharge*945 any continuing obligation of petitioner.
Under the laws of the State of Pennsylvania alimony is not generally payable in the case of an absolute divorce. That subject was *947 fully discussed in the recent case of . In that case, the court said, among other things:
* * * Provision for alimony on absolute divorce was made in but two cases: first, where the husband divorces the wife for "cruel and barbarous treatment or indignities to his person", 1895 P.L. 308; second, where the divorced spouse, husband or wife, is insane, 1905 P.L. 212. As a consequence the courts were without power to decree alimony in any other circumstance to one freed from the bonds of matrimony. * * *
No such circumstances as named above exist in the instant case, However, while it is true that under the laws of the State of Pennsylvania it is clear, except under very limited circumstances, that there is no continuing obligation on the part of a former husband to support and maintain his divorced wife, nevertheless, it is an obligation which he may validly assume by contract. *946 , affirming ; , affirming on this point, ; , affirming .
It will be assumed that the trust settlement which petitioner fixed upon his wife by agreement in 1928 at the time a suit for limited divorce was pending, by which she was to be paid $1,000 a month during the period of her natural life in lieu of alimony, etc., and which was subsequently amended by agreement to provide $833.33 per month after income of the trust fell off greatly, comes within the ambit of the above cited cases. Evidently petitioner concedes that this is true, because he does not assign any error attacking the action of the Commissioner in including in his income for 1935 the amount which Caroline S. Walter received from the 1928 William E. Walter trust. The facts show, however, that in 1933 the petitioner brought a suit in equity to set aside this 1928 trust agreement and to return the trust corpus to petitioner. The pleadings in this equity suit*947 are in the record and are quite voluminous and need not be set out here. Suffice it to say that a complete agreement of settlement was reached in this suit in February 1935. By the terms of the agreement, which were approved by the court, certain income of the William E. Walter trust accumulated prior to the date of distribution of corpus was to be paid over to Caroline S. Walter. We presume that this is the $8,429.03 which the Commissioner has added to petitioner's income in 1935 from the William E. Walter trust and which he does not contest.
The corpus, after the payment of certain charges not here involved, was divided one-half to William E. Walter and the beneficiaries whom he named and one-half to Caroline S. Walter and the four adult children of petitioner and Caroline S. Walter. The part which *948 went to Caroline S. Walter was placed in trust, the income to be paid to her for life, with remainder to her four children.
We agree with petitioner that he has no interest in this income and that none of it is taxable to him. The Supreme Court of the United States recently decided three cases dealing with the general subject which we have under discussion. These*948 were ; ; and . The facts of the instant case are not on all fours with any of those cases, but we think Helvering v. Fuller comes nearest to the situation we have in the instant case. In the Fuller case, the Supreme Court held that the income from the trust in question was not taxable to the husband, who was the settlor of the trust. Among other things the Court said, in that connection:
* * * If respondent had not placed the shares of stock in trust but had transferred them outright to his wife as part of the property settlement, there seems to be no doubt that income subsequently accrued and paid thereon would be taxable to the wife, not to him. Under the present statutory scheme that case would be no different from one where any debtor, voluntarily or under the compulsion of a court decree, transfers securities, a farm, an office building, or the like, to his creditor in whole or partial payment of his debt. Certainly it could not be claimed that income thereafter accruing from the transferred property must*949 be included in the debtor's income tax return. If the debtor retained no right or interest in and to the property, he would cease to be the owner for purposes of the federal revenue acts. See . * * *
The Court concluded:
For the reasons we have stated, it seems clear that local law and the trust have given the respondent pro tanto a full discharge from his duty to support his divorced wife and leave no continuing obligation, contingent or otherwise. Hence under , income to the wife from this trust is to be treated the same as income accruing from property after a debtor has transferred that property to his creditor in full satisfaction of his obligation.
In the instant case the parties, after a suit had been brought in equity by petitioner to set aside the trust agreement of 1928, had a complete settlement agreement. Petitioner retained no interest whatever in the one-half of the trust corpus which was awarded to Caroline S. Walter and the four children. They in turn had no interest whatever in the one-half which was awarded to petitioner. After the consummation*950 of this agreement there was no continuing obligation whatsoever, either by contract or state law, on the part of petitioner to support and maintain his divorced wife. Thereafter the payments which the Caroline S. Walter trust paid to her in each of the taxable years were not paid to her to discharge any legal obligation which petitioner owed to Caroline S. Walter, and such income is therefore not taxable to him. On this issue, petitioner is sustained. Cf. .
Decision will be entered under Rule 50.