Hall v. Commissioner

EDWARD T. HALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Hall v. Commissioner
Docket No. 81118.
United States Board of Tax Appeals
36 B.T.A. 398; 1937 BTA LEXIS 721;
August 3, 1937, Promulgated

*721 In 1927 petitioner established an irrevocable trust for the benefit of his wife for life, with reversion to him or his estate upon her death, and shortly thereafter obtained an absolute divorce from her. Being the guilty party, the wife, under the laws of Missouri, forfeited all marital rights, including maintenance, support, alimony and dower or other rights in the property of her husband. The trust of 1927 was not created to discharge any legal obligation of petitioner. Held, the income of the trust in 1932 is not taxable to petitioner.

Luther E. Smith, Esq., for the petitioner.
H. F. Noneman, Esq., for the respondent.

HILL

*398 This is a proceeding for the redetermination of a deficiency in income tax for the year 1932 in the amount of $598.93. The sole issue submitted for decision is whether the income in 1932 from a trust, established by petitioner in 1927 for the benefit of his wife, is taxable to him. The facts were stipulated by the parties and in so far as material are set forth below.

FINDINGS OF FACT.

On March 3, 1927, petitioner herein executed an instrument creating an irrevocable trust of approximately $100,000, *722 with the St. Louis Union Trust Co. as trustee, for the benefit of his wife, Jessie G. Hall, for her life. The trust instrument provided that upon the death of the wife, the trust should cease and determine, and all property held by the trustee should be assigned by it to petitioner, his heirs, executors, administrators, or assigns, or to such parties as might have been named by him by will to receive the same, in case of his death prior to the death of his wife.

The trust instrument, in which petitioner was referred to as party of the first part and his wife as party of the second part, further provided as follows:

WHEREAS, First and Second Parties hereto are separated and living apart and are desirous of agreeing upon and of making full and complete settlement *399 and adjustment of all claims of Second Party against First Party for maintenance and support, as well as all dower and other rights or claims of Second Party to or against the property now owned, or which may be hereafter acquired by First Party, and of all claims of Second Party in or to any property, real or personal, now owned jointly by First and Second parties.

* * *

FIRST: The Party of the Second*723 Part hereby relinquishes any and all claims which she may have in and to any and all property real or personal, owned by the Party of the First Part, and all of her right, title and interest in and to any property, real or personal, owned jointly by the Parties of the First and Second Parts, and releases any and all claim by way of dower, or other rights, in and to the property of the Party of the First Part, and in case of divorce or legal separation releases any and all claim for alimony, pendente lite, suit money and attorneys' fees, and for alimony after judgment, and agrees to execute conveyances jointly with the Party of the First Part, conveying all real estate now owned either by the Party of the First Part, or jointly by the Parties of the First and Second Parts, to the Twichell Real Estate Company, a corporation organized under the laws of the State of Missouri, and waives any claim she may have on account of previous assignments or transfers of any stock, formerly standing in her name, to the Party of the First Part, or his assigns.

* * *

THIRD: Party of the First Part further assumes full financial responsibility for the care, maintenance and education of the four*724 children which have been heretofore born to the parties of the First and Second Parts, and will pay to the Party of the Second Part such sums as may be necessary to meet such expenses in behalf of any children living with or under the care and protection, custody or control of the Party of the Second Part.

On the same day, March 3, 1927, petitioner filed suit for divorce in the Circuit Court of St. Louis County, Missouri, against Jessie G. Hall, upon the ground of indignities. No defense to the divorce action was made by Jessie G. Hall, the defendant, and on March 5, 1927, petitioner, as plaintiff in the divorce action, was granted a divorce.

The facts leading to the filing of the divorce suit by Edward T. Hall, the petitioner, are as follows:

The petitioner and his wife were happily married, and in 1927 resided, and long prior thereto had resided, in Webster Groves, St. Louis County, Missouri, with their four children, Edward T. Hall, Jr., then aged 12, Delight Hall, then aged 11, Richard W. Hall, then aged 9, and Priscilla A. Hall, then aged 5 years.

Sometime prior to 1927 petitioner had become interested in helping a young German sculptor, who had recently come to America. *725 He obtained commissions for him and entertained him in his home in Webster Groves and at his summer home in New Mexico. While a guest in petitioner's home, the young man thus befriended and petitioner's wife fell in love, and a clandestine and illicit affair resulted between them, which finally broke up petitioner's home and caused him to file suit for divorce.

*400 Within a week or two after the divorce was granted, petitioner's wife married the man involved and went away with him, leaving the children with their father.

Because of the children, who were of tender years and to protect them, in so far as possible, from the notoriety and scandal which would result from a publication of the true situation, no reference was made in the divorce action to the above facts.

Petitioner's wife was without business training and not specially fitted to engage in any business, and she and the man involved, whom she intended to marry, were without means and without prospect of definite income to support themselves. The petitioner's wife begged him for an allowance, and because of his love for her and the fact that she was the mother of his four children, and because he could*726 not see her suffer, the petitioner, in spite of what she had done to him, set up the trust here in question, of his own free will, without coercion of any nature.

The trust agreement was in the form ordinarily used in drafting separation agreements, namely, that the wife waived all right to maintenance, support, alimony, dower, and other marital rights, although, under the facts and the statutes and decisions of Missouri, she had fully and completely forfeited all rights in and to the property of her husband by reason of the marriage.

Under the statutes of Missouri, the guilty party to a divorce proceeding forfeits all rights and claims under and by virtue of the marriage and forfeits all right to dower.

OPINION.

HILL: Respondent has determined that the income in 1932 of the trust involved here is taxable to petitioner on the theory that such income was used to discharge a legal obligation of petitioner. If respondent's premise is correct, then under the law as new settled, his determination must be approved.

Thus, it has been held that where a husband establishes a trust, the income of which is to be paid to his wife in lieu of alimony, the income is taxable to the*727 husband, ; and such is the rule notwithstanding the contemporaneous divorce decree is silent as to alimony, . Also, the income is taxable to the grantor where the trust is established to provide for the support, maintenance, and education of his minor children, ; , or where the income is paid to the wife in settlement of her dower or other statutory interest in the husband's property, , reversing .

*401 In the instant case the parties have stipulated that petitioner's wife, being the guilty party, had under the facts and the statutes of Missouri forfeited all rights and claims under and by virtue of the marriage, including maintenance, support, alimony, dower, and other marital rights, and had fully and completely forfeited all rights in and to the property of her husband by reason of the marriage. It is further stipulated that in such circumstances the courts of Missouri were without*728 jurisdiction to render a decree of alimony in favor of the wife. It must follow, therefore, that the trust involved was not established by petitioner to discharge any legal obligation on his part in respect of alimony, support, or maintenance, or as consideration for the release of his wife's dower or other marital rights in his property. Nor was the trust intended to provide support and maintenance for the children, since they remained in petitioner's care and custody.

Respondent does not defend his action on any of these grounds, but contends that the income of the trust in question is taxable to petitioner solely on the theory that the trust instrument itself was a valid contract between petitioner and his wife and created an obligation upon petitioner, which the income of the trust was used to discharge. Such contention, we think, can not be sustained. Plainly under the facts disclosed here, petitioner was not moved to establish the trust in order to discharge a then existing legal obligation. The parties have stipulated, and we have so found, that petitioner created the trust "because of his love for her (his wife) and the fact that she was the mother of his four children, *729 and because he could not see her suffer." To justify taxation of the income of the trust to the grantor, it must appear that the trust was established to discharge a legal obligation of the grantor. It can not be said under the facts here that the trust instrument itself gives rise to the obligation which the trust income is to satisfy.

Respondent further argues on brief that the trust agreement was predicated not only upon a good consideration, but in addition upon a valuable consideration, in that the wife relinquished any rights she might have had in any property jointly owned by her and petitioner, and agreed to reconvey any such property. This argument, we think, must fail in the light of the stipulated facts. It is not shown that there was any property jointly owned by the spouses. On the contrary, it is stipulated that petitioner's wife and the man involved, whom she intended to marry, were without means and without definite income to support themselves. It was because she was wholly without means that she begged her husband for an allowance. The trust agreement, which contained a clause relinquishing the wife's interest in any jointly owned property, was in the form*730 ordinarily *402 used in drafting separation agreements, and obviously was used by petitioner not for the purpose of effecting a transfer of his wife's interest in property jointly owned by them, but as a part of his plan to protect his young children from the notoriety and scandal which would result from a publication of the true situation.

The divorce decree was granted in 1927. Petitioner's wife married the man involved shortly thereafter. During the taxable year 1932 petitioner was under no legal obligation to contribute to the support of his former wife, or to pay her alimony. The issue presented here, we think, is governed by our decisions in , and .

In the Rea case, the husband created a trust, the income of which was payable to his wife during her life. The wife had instituted divorce proceedings prior to the creation of the trust and an absolute divorce was granted her subsequently. However, no obligation on the part of the husband existed under Pennsylvania law to support his former wife after the divorce, and we held that the income of the trust for 1932*731 was not taxable to him.

In the Blumenthal case, we held that the petitioner's income did not include the income of a trust established by him for his divorced wife, who had since remarried, saying:

But there was no obligation upon the part of the petitioner during the taxable year (1931) to support his former wife, who had married in 1926. * * * His entire obligation to support her had been discharged prior to 1931. He had only a contingent remainder interest in the trust established for her and was not taxable with the income of that trust. Cf. ; ; ; affd. ; .

Respondent's determination on the submitted issue is reversed.

Reviewed by the Board.

Judgment will be entered under Rule 50.

MELLOTT dissents.