*1419 In contemplation of divorce petitioner created a trust in favor of his wife and son. The wife obtained a decree of divorce in the State of New York. The decree did not incorporate the trust. Held, that petitioner failed to sustain the burden of showing that the divorce court did not retain such right to revise its decree as would constitute a continuing contingent obligation on petitioner (
*1030 Respondent determined the following deficiencies in income tax of*1420 petitioner:
| 1934 | $885.29 |
| 1935 | 702.44 |
| 1936 | 843.61 |
| 1937 | 896.70 |
The sole issue presented is whether or not petitioner is taxable on the income of a trust established by petitioner for the benefit of his son and former wife. Most of the facts were stipulated. Additional facts were adduced from evidence presented at the hearing.
FINDINGS OF FACT.
Petitioner is an individual who resides at Essex, Connecticut.
On October 28, 1933, petitioner and his wife, Sarah G. Baker, were citizens of the State of New York and resided at Great Neck, Nassau County, New York. They had one child, a son, Henry Martyn Baker, Jr., who was born on October 28, 1927.
On October 28, 1933, petitioner executed a trust agreement, with the Fifth Avenue Bank of New York as trustee, in favor of his wife and son. The following provisions of that agreement are material:
WHEREAS, the Grantor [petitioner] desires to create a trust fund for the use, support and benefit of the persons hereinafter mentioned,
Now, THEREFORE, * * * the Grantor does hereby grant, assign and transfer to the Trustee, its successors and assigns, the property set forth in Schedule A, hereto attached, together*1421 with all the rights, privileges and appurtenances thereto belonging, IN TRUST, however, to hold, manage, invest and reinvest the same, to collect and receive the interest, income and profits therefrom, and after deducting all proper charges and expenses to pay three-fourths (3/4) of the net income therefrom monthly as the same accrues to SARAH G. BAKER, wife of the Grantor, during the term of her natural life, or in the event that she remarries at any time hereafter, then until she remarries, and from and after her remarriage, in the event that she does so, to pay to her one-half (1/2) of the net income at the times hereinbefore specified during her lifetime and to use and apply the remaining one-fourth (1/4) of said net income, and in the event of the remarriage of said SARAH G. BAKER, one-half (1/2) of said net income for the support, maintenance and education of HENRY MARTYN BAKER, JR., son of the Grantor, until he arrives at the age of twenty-one (21) years and upon said HENRY MARTYN BAKER, JR., arriving at the age of twenty-one (21) years to pay over to him said one-fourth or one-half of said net income, as the case may be, until he arrives at the age of thirty-five (35) years, *1422 and upon said HENRY MARTYN BAKER, JR., arriving at the age of thirty-five (35) years to pay over to him one-fourth or one-half of the principal of said trust fund as it exists at that time, depending on whether he is at that time receiving one-fourth or one-half of the income from said trust fund.
In the event of the death of said SARAH G. BAKER prior to said HENRY MARTYN BAKER, JR., arriving at the age of twenty-one (21) years, the Trustee shall use and apply the entire net income, or so much thereof as may be necessary, for the support, maintenance and education of said HENRY MARTYN BAKER, JR., *1031 and shall accumulate the balance during his minority; and from and after said HENRY MARTYN BAKER, JR., arriving at the age of twenty-one (21) years in the event of the death of siad SARAH G. BAKER the Trustee shall pay over to said HENRY MARTYN BAKER, JR., the entire net income monthly as it accrues, The Trustee shall also, upon said HENRY MARTYN BAKER, JR., arriving at the age of twenty-one (21) years, pay over to him all accumulation of income which shall have been accumulated from his part of said trust fund. In the event that a guardian is appointed for said HENRY MARTYN*1423 BAKER, JR., the Trustee shall in its discretion pay over the net income to which he is entitled to said guardian monthly at it accrues.
In the event of the death of the said HENRY MARTYN BAKER, JR., prior to his arriving at the age of thirty-five (35) years, leaving lawful issue him surviving, the Trustee shall pay over one-fourth (1/4) or one-half (1/2) of the principal of said trust fund, depending upon whether he is at the time of his death receiving one-fourth or one-half of the income thereof, to his lawful issue, share and share alike. In the event, however, of the death of said HENRY MARTYN BAKER, JR., prior to his arriving at the age of thirty-five (35) years without leaving lawful issue him surviving, then and in that event, the Trustee shall pay over to me, if living, or to my estate if I am not living, one-fourth (1/4) or one-half (1/2) of the principal of said trust fund, depending on whether said HENRY MARTYN BAKER, JR., was at the time of his death receiving the income on one-fourth (1/4) or one-half (1/2) thereof, said amount thus paid over to be added to my estate and to be distributed as a part of my residuary estate in accordance with the terms of my Last Will*1424 and Testament, and in the event that I leave no Last Will and Testament, then to be divided in accordance with the statutes of descent and distribution of the state in which I am domiciled at the time of my death.
Upon the death of said SARAH G. BAKER the Trustee shall dispose of and distribute the principal of that part of the trust fund upon which she has been receiving the income in the same manner and to the same persons as I have hereinbefore directed it to distribute that part of the trust fund upon which HENRY MARTYN BAKER, JR., is receiving the income, namely, to him if he is alive and has arrived at the age of thirty-five (35) years; to his issue if he dies prior to arriving at the age of thirty-five (35) years; and in the event that he is not living at the time of distribution and leaves no issue him surviving, then to the Grantor, if living, and if the Grantor is not living, then to his estate to be distributed as a part of his residuary estate in accordance with the terms of his Last Will and Testment, and if he leaves no Last Will and Testament, then in accordance with the statutes of descent and distribution of the state in which the Grantor is domiciled at the time*1425 of his death.
* * *
This trust shall be irrevocable except under the following conditions:
(a) The Grantor and ,SARAH G. BAKER may revoke this trust in whole or in part at any time during the minority of HENRY MARTYN BAKER, JR., by jointly executing and delivering to the Trustee a duly acknowledged certificate of revocation.
(b) After HENRY MARTYN BAKER, JR., arrives at the age of twenty-one (21) years, the Grantor, SARAH G. BAKER and HENRY MARTYN BAKER, JR., may revoke this trust in whole or in part at any time by jointly executing and delivering to the Trustee a duly acknowledged certificate of revocation.
The fair market value of the securities conveyed to the Fifty Avenue Bank of New York, as trustee, pursuant to the terms of the trust agreement, was $164,923.66 as of October 28, 1933.
*1032 On the date the trust agreement was executed petitioner was living apart from his wife. At that time petitioner's property consisted of stocks, bonds, and mortgages valued at approximately $430,000. The bulk of this property had been received by petitioner from a bequest a short time before the execution of the trust agreement. Petitioner earned about $11,000 a year*1426 and had been contributing approximately $5,000 a year for the support of his mother and sister.
By an instrument dated October 28, 1933, petitioner's wife waived all rights of election to take against the last will and testament of petitioner and all rights which she had or might have in petitioner's property other than that comprising the corpus of the trust created on October 28, 1933. The wife also waived all right to maintenance and support by petitioner and agreed to support herself and the son of petitioner without calling upon petitioner for funds other than those provided for in the trust agreement.
On the same date petitioner executed an instrument providing that his wife should have the sole and unrestricted custody of their son, subject to such rights of visitation by petitioner as might be mutually agreed upon by petitioner and his wife.
On November 29, 1933, Sarah G. Baker commenced an action against petitioner in the Supreme Court of the State of New York, Nassau County, praying for a judgment of absolute divorce.
In February 1934 the Supreme Court of the State of New York, Nassau County, duly made and entered an interlocutory judgment of divorce in favor*1427 of Sarah G. Baker and against petitioner. This decision contained findings of fact and conclusions of law of which the following are material:
FINDINGS OF FACT
* * *
NINTH: That the sole issue of the said marriage is a son, Henry Martyn Baker, Jr., and the plaintiff and the defendant have agreed that the plaintiff shall have the sole custody of said son, subject to the right of visitation by the defendant at such times and places as may be mutually agreed by the parties.
TENTH: That the defendant has provided for the support and maintenance of the plaintiff and that no further provision need be made at this time.
* * *
CONCLUSIONS OF LAW
FIRST: That the plaintiff is entitled to an interlocutory judgment which shall provide that unless the Court shall otherwise order in the meantime, there shall be entered in this action three months from the date of the filing of this decision and the entry of the interlocutory judgment herein, a final judgment in favor of the plaintiff, SARAH G. BAKER, and against the defendant, HENRY MARTYN BAKER, dissolving the marriage relation heretofore existing between the parties hereto, because of the adultery of the defendant, as prayed for*1428 in the complaint.
*1033 SECOND: That the plaintiff is entitled to the sole and exclusive custody of the issue of the marriage, Henry Martyn Baker, Jr.
On June 4, 1934, the Supreme Court of the State of New York, Nassau County, duly made and entered a final judgment of divorce in favor of Sarah G. Baker and against petitioner.
On or about April 9, 1934, the Fifth Avenue Bank of New York, trustee named in the said agreement, filed with the Commissioner of Internal Revenue at Washington, D.C., an information gift tax return, and on or about March 5, 1935, petitioner filed a gift tax return on Treasury Department Form No. 709, in both of which returns it was claimed that the trust was supported by good and valuable consideration and was not subject to a gift tax.
On September 9, 1935, the Commissioner of Internal Revenue proposed a deficiency in the petitioner's Federal gift tax for the calendar year 1933.
On October 5, 1935, the Commissioner of Internal Revenue determined a deficiency in petitioner's gift tax liability for the calendar year 1933. This deficiency was based upon the value of the transfer of the trust to the son.
On or about November 13, 1935, petitioner*1429 paid the amount of gift tax so determined and assessed in the sum of $351.37, together with interest thereon of $33.50, or a total of $384.87.
Petitioner's wife never applied to the court for modification of the trust agreement or for any additional funds for maintenance or support. Neither the Supreme Court of the State of New York nor any other court or judge of any jurisdiction has made an order, decree, judgment, or direction in any way changing the terms of the final judgment of divorce entered in favor of Sarah G. Baker and against petitioner.
OPINION.
VAN FOSSAN: The single issue for our determination is whether the income from the trust created by petitioner for his wife and child is taxable to him for the years 1934, 1935, 1936, and 1937. No issue was made or proof adduced as to the specific amounts of money involved in the various payments herein referred to. It is assumed the parties are in agreement as to the segregation and application thereof.
Petitioner contends that the trust was a lump sum settlement of all claims of petitioner's wife for maintenance and support and no obligation of petitioner was satisfied or discharged by payment of the income of the*1430 trust. He asserts that he realized no income from the payment of trust income to his wife, since he was relieved from all obligation to support her upon dissolution of their marriage. He urges that the assumption by his wife of the duty to support their son relieved him of that burden, so that the income of the trust which was payable for *1034 maintenance and support of the son was not includible in his income, under the doctrine of . He further contends that, since he paid a gift tax upon that portion of the trust attributable to the support of his son, the present position of respondent is not tenable.
Respondent argues that petitioner has not sustained the burden of showing, by clear and convincing proof, that he was discharged from all obligation to support his wife after the divorce. He maintains that the income of the trust used for the education, maintenance, and support of the son is includible in petitioner's gross income, since it discharged petitioner's obligation. Finally, he contends that the possibility of reverter which petitioner retained is sufficient to bring the accumulated income of the trust within*1431 the purview of section 167(a)(1) of the Revenue Acts of 1934 and 1936.
Petitioner has cited many cases in his attempt to distinguish this proceeding from . In that case the Supreme Court had before it an "alimony trust" which had been approved and incorporated in a New York divorce decree. The husband who had created the trust guaranteed principal and interest of certain bonds which formed approximately two-thirds of the trust corpus. The court decided in favor of the Commissioner on two grounds - that the guaranty of the bonds constituted a continuing obligation of the taxpayer which was discharged pro tanto by payment of interest on those bonds to the trustee, and that the taxpayer had not "shown by 'clear and convincing' proof that the [divorce] court lacks the power to add to his personal obligations in any such circumstances."
Petitioner contends that the present proceeding differs materially from the Leonard case in that here the state court did not incorporate the trust agreement in its decree of divorce. We do not believe that to be a valid distinction. Section 1170 of the New York Civil Practice Act 1*1432 provides that a court, in an action for divorce *1035 brought by the wife, may amend its final judgment by inserting in it such directions as justice requires for the custody, care, education, and maintenance of the children of the marriage or for the support of the wife. It has been held that the "effect of the statute [section 1170] is to write a reservation into every final judgment of divorce." ; . Thus the court retained as much power to revise its decree as did the divorce court in Furthermore, the interlocutory decree of divorce rendered in favor of petitioner's wife stated that "the defendant hs provided for the support and maintenance of the plaintiff and that no further provision need be made at this time." Although this is not an incorporation of the trust agreement in the divorce decree such as was present in the Leonard case the reference inferentially indicates approval of the agreement by the court. We believe the final clause of the quoted provision is significant.
*1433 The same arguments with regard to lack of power in the state court to change the trust instrument or the obligations of the taxpayer husband were made in , as petitioner has urged here. Those contentions were not sufficient to persuade the Supreme Court in the Leonard case and do not convince us. We hold that the income from the trust payable to petitioner's former wife for her maintenance and support was income to petitioner in the taxable years.
In his notice of deficiency respondent included in petitioner's gross income for the taxable years the trust income which was used for the maintenance and support of his minor son. Respondent's action in this respect was clearly correct. ; .
Upon brief counsel for respondent argued that any income accumulated under terms of the trust is taxable to petitioner under section 167(a)(1) of the Revenue Acts of 1934 and 1936. He contends that petitioner failed to divest himself of every right which might enable him to have the income of the trust distributed to him at some*1434 future date. He relies on ; ; and ; affd., . We think, however, that this case more closely resembles , and , and , in which we held that mere possibility of reverter was not sufficient to make accumulation of income taxable to the grantor under section 167(a)(1). The possibility that the present trust might revert to petitioner is too remote for us to hold that its income is or may be held or accumulated for petitioner.
, is not contra. There the taxpayer created trusts the income of which was to be accumulated *1036 while he lived or until his wife died. If she should predecease him he was to receive the income for the rest of his life. The taxpayer and his wife were given the right to terminate the trust during his lifetime by joint action. The court held that the accumulations*1435 were within the scope of section 167. That case may be distinguished from the one before us, however, in that there the wife was not a substantial adverse interest, whereas here, by virtue of the divorce, the wife's interest was substantially adverse. Furthermore, in the case before us the possibility that the trust corpus might revert to petitioner is much more remote. The facts in , are like those in the Altmaier case and may be similarly distinguished.
We can not concern ourselves in the instant case with the fact that respondent determined a gift tax liability as to the son's interest and collected a tax thereon. We are here considering solely petitioner's income tax liability.
We hold that petitioner is taxable in each of the years before us on the trust income paid to the wife and upon that part of the trust income which was paid for the maintenance and support of the son. The amounts accumulated under the terms of the trust are not includible in petitioner's gross income for the taxable years.
Decision will be entered under Rule 50.
Footnotes
1. § 1170. Custody and maintenance of children, and support of plaintiff in action for divorce or separation. Where an action for divorce or separation is brought by either husband or wife, the court, except as otherwise expressly prescribed by statute, must give, either in the final judgment, or by one or more orders, made from time to time before final judgment, such directions as justice requires, between the parties, for the custody, care, education, and maintenance of any of the children of the marriage, and where the action is brought by the wife, for the support of the plaintiff. The court, by order, upon the application of either party to the action, or any other person or party having the care, custody and control of said child or children pursuant to said final judgment or order, after due notice to the other, to be given in such manner as the court shall prescribe, at any time after final judgment, may annul, vary or modify such directions, or in case no such direction or directions shall have been made, amend it by inserting such direction or directions as justice requires for the custody, care, education and maintenance of any such child or children or for the support of the plaintiff↩ in such final judgment or order or orders. But no such application shall be made by a defendant, or any other person or party having the care, custody and control of said infant or infants, unless leave to make the same shall have been previously granted by the court by order made upon or without notice as the court in its discretion may deem proper after presentation to the court of satisfactory proof that justice requires that such an application sould be entertained.