*304 Decision will be entered under Rule 50.
In 1941 petitioner, in contemplation of a divorce proceeding, transferred certain securities in trust for life to his wife, with remainder to his four children, and also transferred certain other property directly to his wife. The transfers to his wife were made in settlement of his obligation to support her. Later the settlement was embodied in a divorce decree by a Nevada court by which petitioner was granted a divorce from his wife. In a gift tax return petitioner included the value of the remainder interest which he gave to his four children, but did not include as a taxable gift the value of the property settlement which he had made upon his wife in lieu of alimony and in discharge of his obligation to support her. The Commissioner, in his determination of the deficiency, has included this latter interest as a taxable gift. Held, following Herbert Jones, 1 T.C. 1207">1 T. C. 1207, and Edmund C. Converse, 5 T. C. 1014, that such conveyance by petitioner to his wife was made without donative intent in an arm's length transaction settling her right to maintenance and support from*305 petitioner and is not subject to gift tax.
*159 The Commissioner has determined a deficiency of $ 49,860.57 in petitioner's gift tax for the calendar year 1941. The deficiency is based upon a determination by the Commissioner that petitioner is taxable upon property transferred as a gift in 1941 of the value of $ 506,931.14, instead of $ 142,857.01 as reported by petitioner on his gift tax return. The chief item of increase in the amount reported by petitioner was explained in the deficiency notice as follows:
It is held that the transfer in trust under date of February 25, 1941, constituted a completed gift for the beneficiaries of said trust, and that no deduction is allowable therefrom*306 for the value of the interest transferred for the use and benefit of Marjorie King Mitchell.
Respondent has filed an amended answer in which he claims an increased deficiency based on the inclusion, as a taxable gift, of additional *160 property of the value of $ 36,635.80 transferred to the wife in 1941. Petitioner not only contests the original deficiency and the increased deficiency, but claims an overpayment of $ 4,189.75 in gift tax for the calendar year 1941.
FINDINGS OF FACT.
Many of the facts have been stipulated and the stipulation of facts is incorporated herein by reference.
Petitioner is an individual who resides in Chicago, Illinois. The return for the period here involved was filed with the collector for the first district of Illinois. The petitioner and his former wife, Marjorie King Mitchell, sometimes hereinafter referred to as Marjorie, were married in Chicago, Illinois, in 1924, and thereafter they moved to Santa Barbara, California. In the fall of 1940 they separated, and he informed her that he proposed to get a divorce and remarry. She continued living in their home in Santa Barbara and he returned to Chicago. At the time of the separation she was *307 36 years old and he 42, and there were 4 children of the marriage, the oldest 15 and the youngest 4 years old.
In October 1940 petitioner consulted an attorney in Chicago with respect to reaching a settlement with his wife and obtaining a divorce. His attorney advised him that it was his obligation to support his wife and that the settlement of that obligation would have to be the subject of negotiations with her. She retained counsel in Chicago to attempt a settlement of the question of alimony and support in connection with the separation and divorce of the petitioner and herself. From the middle of October 1940 until the first week in February 1941, her attorneys carried on negotiations with his attorney for the settlement of his obligation to support her. Her father, Garfield King of Chicago, actively participated, attended all meetings of the attorneys, and was insistent that his daughter secure her rights. Her attorneys obtained a full statement of petitioner's assets for the purpose of determining what property, securities, and life insurance he had. They also obtained copies of his income tax returns for three years in order to determine what his income had been.
At the*308 beginning of the negotiations Marjorie's father insisted that she was entitled to 75 percent of everything that petitioner had. Her attorneys later demanded that she be given the family home in Santa Barbara, an insurance policy on petitioner's life, and 60 percent of all of his other property outright. The petitioner rejected these proposals. Negotiations were continued and finally it was agreed (a) that the petitioner would transfer the Santa Barbara house, certain household goods, and the $ 25,000 insurance *161 policy, which had a cash surrender value of $ 6,135.80, to her outright, and (b) that he would transfer 50 percent of his other property, consisting solely of securities, to trustees under a trust agreement which would provide for payment of the trust income to her for life and for distribution of the trust corpus to their 4 children upon her death or when all of the children had attained the age of 25 years, whichever event should occur last. In arriving at the settlement, consideration was given by Marjorie's attorneys to the amount of income she would need to live as she had been living, the amount of petitioner's income, the amount of principal it would take*309 in a trust to produce the amount of income which Marjorie needed, and the probable amount of annual income that would be produced by the property placed in trust under the terms of the settlement.
In addition to providing for the transfers mentioned above, the agreement contained mutual provisions under which each party relinquished, released, and waived to the other party all rights of dower, homestead, inheritance, descent, and distribution which each party might have as husband or widower, or as wife or widow, as the case may be, by reason of the marital relations existing between them. The agreement also provided that in the event of a divorce the transfers under the agreement should be in full satisfaction of all rights of alimony and support. This provision reads as follows:
10. It is further mutually covenanted and agreed between the parties hereto that, in the event that either party should hereafter sue the other and obtain a decree of divorce or for separate maintenance, the provisions for payments to be made by the party of the first part and for the division of property and settlement of property rights, as hereinbefore set out, and the covenants and agreements herein*310 contained, shall be in lieu and in full of any and all rights or claims of either party against the other for alimony and support (including support for the children), either temporary or permanent, and in lieu of all dower, homestead or other rights or interests or claims on the part of either party, whether before or after the death of either or the other of the parties, or whether by way of inheritance, survivorship, or otherwise, against the other party, or his or her estate, or in, to or against the property of the other party * * *.
The opening recitals of the agreement contained the following statement with respect to the desire of the parties to provide for the separate maintenance of the wife and to settle all rights in the property of each other:
Whereas, the parties hereto desire to make arrangements for the separate maintenance of the party of the second part, and desire to settle now and forever all rights of property, dower rights, homestead rights, and all other property rights, including all rights of each party in and to any and all community property and claims growing out of the marriage relation existing between them which *162 either of them has or may have*311 against the other, and all rights which either of them has or may hereafter have in the property, of every kind and nature, real, personal and mixed, now owned by the other, or which may be hereafter acquired by the other * * *.
The recital concluded by stating that the parties, in consideration of the settlement, desired to discharge the petitioner's liability for support:
* * * and in consideration of the settlement effected by the terms hereof to release party of the first part from any and all further liability and obligation to contribute to the support of the party of the second part * * *.
On February 5, 1941, the only real estate owned by the petitioner was the family home in Santa Barbara, California. The paragraphs in the agreement about the relinquishment of all rights of dower, homestead, etc., by both petitioner and his former wife were included by the attorneys in order to make certain that, after having settled the question of alimony and support, their entire interests in each other's property were completely cut off
On February 11, 1941, Marjorie granted a power of attorney to an attorney at law of Reno, Nevada, authorizing him to enter her appearance in any action*312 for divorce that might be brought against her in Nevada by petitioner, to accept service of any and all papers in such action, to file an answer or any other pleading, motion or demurrer, to consent to the setting of the action for trial and participating in the trial thereof, and to take every step necessary for the protection of her interest, and ratifying and confirming all that he might do in the premises.
On February 27, 1941, pursuant to the agreement of February 5, 1941, petitioner entered into a trust agreement in writing with the Northern Trust Co., an Illinois corporation, and Garfield King of Chicago, Illinois, as trustees. The trust agreement provided that the uncome of the trust estate should be paid to Marjorie for life and after her death to the surviving issue of her and the petitioner, per stirpes. It also provided that the trust should terminate when all their surviving children should attain the age of 25 years, or upon the death of the last survivor of the 4 children before attaining the age of 25 years, or upon the death of Marjorie, whichever event should occur last; that, upon the termination of the trust, the principal of the trust estate should be transferred*313 to the issue then surviving, per stirpes; and that, in case of a complete failure of issue during Marjorie's lifetime, the trust should terminate and the entire trust estate be transferred to her. Exhibit A to the trust agreement listed the securities to be placed in the trust.
On various dates from March 12 to March 20, 1941, petitioner transferred securities having an aggregate fair market value of $ 506,931.14 *163 to the Northern Trust Co. as trustee. In March 1941, pursuant to the agreement of February 5, 1941, petitioner transferred to his former wife his interest in other property, as follows:
| Household furniture and fixtures | $ 8,000.00 |
| California improved real estate | 22,500.00 |
| Insurance on petitioner's life | 6,135.80 |
| Total | 36,635.80 |
The value of the remainder interest in the property transferred in trust was $ 180,462.41 and the value of Marjorie's life interest in the trust property at the time of the transfer was $ 326,468.73. The fair market value of all property owned by petitioner before the transfers was $ 1,050,498.08.
On March 13, 1942, petitioner filed a gift tax return for the calendar year 1941, in which the remainder interest in the securities*314 transferred in trust under the agreement of February 27, 1941, was reported as a taxable gift. The total tax of $ 17,784.61 shown on line 8 of the return was paid on March 13, 1942. A 30-day letter issued by the Bureau of Internal Revenue indicated an overassessment of $ 2,979.02 in gift tax against the petitioner for the calendar year 1941. In a subsequent conference with representatives of the Bureau it was tentatively agreed that the amount of the overassessment was $ 4,189.75. The amount of the computed overassessment was based upon a redetermination of the value of the property transferred in trust and upon the correction of an error made by petitioner in computing the tax in the return. In computing the tentative overassessment the Bureau did not include as a gift the value of Marjorie's life interest in the trust or of the other property transferred outright to her.
On December 8, 1943, in a notice of deficiency, the Commissioner determined a deficiency of $ 49,860.57 based upon the inclusion of the wife's life interest in petitioner's taxable gifts. On January 4, 1944, petitioner filed a claim for a refund of an overassessment of $ 4,189.75.
After the petition was filed*315 in this Court contesting the deficiency determined by respondent, the Commissioner filed an amended answer asking for an increased deficiency in the amount heretofore stated.
OPINION.
The Commissioner in his determination of the deficiency in petitioner's gift tax for the calendar year 1941 increased the value of some of the securities which petitioner had reported in his gift tax return. Also, the Commissioner added to the value of the gift as reported by petitioner the value of the life interest which petitioner had conveyed in trust for his former wife, Marjorie K. Mitchell. *164 By an amended answer he seeks to include in the taxable gifts made by petitioner to his former wife the value of the household furniture and fixtures and the California improved real estate and the cash surrender value of a life insurance policy transferred outright by petitioner to his former wife. The values of all these properties, including the value of the wife's life estate in the securities transferred in trust and the value of the remainder interest of petitioner's four children, have been agreed upon by the parties in the stipulation which has been filed. There is, therefore, no issue*316 before us as to values. Petitioner concedes he is taxable on the gift of the remainder interest of his four children and there is, therefore, no issue on that score.
The only issue we have to decide is whether taxable gifts were made by petitioner when, pursuant to a settlement agreement which was expressly approved in the decree of divorce and merged into the decree, he created a life interest in a trust for the benefit of his former wife and transferred other property to her outright in order to obtain the discharge of his obligation to support her. The applicable statute and regulations are printed in the margin. 1
*317 Petitioner, in support of his contention that the life interest in certain securities which he transferred in trust for the benefit of his wife and the property which he transferred to her outright in the divorce settlement were not gifts with any donative intent, but were a settlement arrived at in an arm's length transaction after much negotiation, cites and relies upon ; , and . We think these cases support petitioner's contention. That petitioner received a thing of real and substantial value when by reason of the transfers in question he was relieved of any further legal obligation to support his wife is apparent from the nature of the obligation. The duty of a husband to provide his wife with support and maintenance is not dependent upon contract or the ownership of property. It is a public duty owed to the state, as well as the wife, *165 with criminal sanctions frequently imposed by statute for violation. By obtaining the discharge of this legal obligation, the petitioner*318 was relieved of making continuing cash expenditures for years to come. This, in our opinion, constitutes consideration in money or money's worth within the meaning of the statute printed in the margin and in no sense represents a gift.
Petitioner argues correctly, we think, that it would be an error to hold that payments made as directed by a court of competent jurisdiction for the support of the wife and without agreement constituted taxable gifts, and, since this is so, transfers agreed upon to avoid litigation but expressly approved and directed to be made by judicial order should not be considered taxable gifts. Petitioner further argues that, since the courts every day are determining the amounts to be paid in support money, it is also correct to say that the obligation to support is a thing which is reducible to a money value and in the great majority of cases is more likely to be correctly valued as a result of negotiations by the interested parties than by judicial determination. We think these arguments are sound.
In the instant case counsel who represented petitioner's wife in the negotiations for settlement testified at the hearing. His testimony was to the effect that, *319 in reaching a figure as to what part of his property petitioner should transfer for the benefit of his wife in discharge of his legal obligation to support her, the attorneys took into consideration the amount she would need to live as she had been living, the amount of petitioner's income, the principal it would take in trust to produce the income which she needed, and the probable annual income that would be produced by the property placed in trust under the terms of settlement. It seems to us that it would be altogether unwarranted to hold that transfers made in such a settlement represent gifts with a donative intent.
Respondent in his brief does not discuss , and He does discuss , and contends that that case was wrongly decided and should no longer be followed by this Court in view of the Supreme Court's later decisions in , and . In ,*320 we discussed these Supreme Court cases and pointed out why we did not think they were controlling in cases such as we had there and in the Herbert Jones case. We think it is unnecessary to repeat what we said in the Converse case in distinguishing Merrill v. Fahs and Wemyss v. Commissioner. It is sufficient to say that we think the same distinction applies here. Consequently, we decide the issue involved in favor of petitioner.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 1002 [I. R. C.]. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION.
Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.
Sec. 86.8 [Regulations 108]. Transfers for a consideration in money or money's worth↩. -- Transfers reached by the statute are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration in money or money's worth to the extent that the value of the property transferred by the donor exceeds the value of the consideration given therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth. A consideration not reducible to a money value, as love and affection, promise or marriage, etc., is to be wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift.