Source: https://supreme.justia.com/cases/federal/us/310/80/
Timestamp: 2019-04-21 14:32:22+00:00

Document:
A separation agreement providing for the support of a wife embraced a trust agreement whereby the husband contributed to the corpus securities and cash, including corporate bonds the payment of the principal and interest of which he guaranteed. The trust could be amended by the husband and wife jointly, and the husband retained a limited power of substitution in respect of certain bank stock which was part of the corpus. Otherwise the trust was irrevocable, and the husband retained no right to either the corpus or the income. A specified amount of the trust income was to be paid to each of three children; the remainder to the wife, and, upon her death, the corpus was to be held for the children. The separation agreement also obligated the husband to pay to the wife annually a certain additional sum for the support of herself and the children, subject to reduction upon application to a court of competent jurisdiction. The arrangement was approved by a decree of divorce in New York.
1. The portion of the trust income which was received from the guaranteed bonds was taxable income of the husband, under the Revenue Act of 1928. P. 310 U. S. 84.
By the husband's guarantee of payment of the principal and interest of the bonds, a personal obligation, though contingent, continued to exist pro tanto, and the rule of Douglas v. Willcuts, 296 U. S. 1, is applicable.
2. Other trust income also was taxable to the husband for the reason that he did not sustain the burden of showing by clear and convincing proof that the New York court lacked power after the divorce to add to his personal obligations in any eventuality. Helvering v. Fitch, 309 U. S. 149. P. 310 U. S. 85.
Certiorari, 309 U.S. 644, to review a judgment reversing a decision of the Board of Tax Appeals, 36 B.T.A. 563, assessing a deficiency in income tax.
This case involves the question of the taxability to the grantor under the Revenue Act of 1928, 45 Stat. 791, of income from a so-called alimony trust which is payable to his divorced wife. We granted certiorari, 309 U.S. 644, because of the probable conflict of the decision below with Douglas v. Willcuts, 296 U. S. 1, and Helvering v. Fitch, 309 U. S. 149.
(1) it could be amended by respondent and his wife; [Footnote 3] and (2) respondent retained a limited power of substitution as respects certain bank stock which was part of the corpus. The trustee agreed to use "reasonable efforts to consult" with respondent with respect to "the character of the investments" though it was not bound to follow his advice. Respondent retained no right to either the corpus or the income, or any part thereof, except as indicated above. The net income was to be paid as follows: $5,000 a year to each of three children; the remaining amount to the wife during her life for her maintenance and support, and in her sole discretion for the support, maintenance and education of the children. On death of the wife, the corpus was to be held for the children.
The separation agreement incorporated the trust agreement by reference; stated that the wife's income from the trust and from other property received from the husband would aggregate $30,000 a year; provided that respondent would pay his wife an additional $35,000 each year during her life so that her aggregate net income for the maintenance and support of herself and the children would approximate $65,000 a year, and would further pay any "extraordinary medical or surgical expenses" incurred by the wife or on behalf of the children until they attained the age of twenty-five years; stated that in the event that respondent's ability to pay the above $35,000 became impaired, he might apply to any court of competent jurisdiction for a reduction of his obligation to not less than $10,000 a year; made other property settlements; provided for care and custody of the children; released dower, etc.
have said, incorporated the trust agreement) "providing for the support and maintenance of the plaintiff," and in addition directed respondent to pay her $35,000 a year for the rest of her life. From June 4, 1929, to December 31, 1929, the trustee received $16,191.34 as dividends and interest from the trust property. It distributed $5,200 to the wife and $2,083.33 to each of the three children, leaving an undistributed balance for that period of about $4,700. Respondent did not include any of that income in his return for 1929. The Commissioner determined a deficiency. The Board of Tax Appeals held that only the amounts actually distributed to respondent's wife and minor children were taxable to him. 36 B.T.A. 563. The Circuit Court of Appeals reversed, holding that respondent, though taxable on income payable to his minor children, was not taxable on income payable to the wife. 105 F.2d 900.
Here, as in the Circuit Court of Appeals, it was urged by the petitioner that this alimony trust was merely security for respondent's continuing obligation to support his wife, and therefore that the trust income payable to her was taxable to him under the rule of Douglas v. Willcuts, supra. In support of that position, it was urged, inter alia, that, under New York law, respondent's obligation was not discharged, since the New York court retained the power to modify the decree, and that the promise by respondent to pay the wife $35,000 (or in no event less than $10,000) a year converted the trust into at least partial security for the total allowance to her. In either of such events, the rule of Douglas v. Willcuts, supra, would apply. See Helvering v. Fitch, supra. The Circuit Court of Appeals, however, decided these two questions adversely to petitioner. But there is one matter not touched on by that court which we think is determinative of one phase of the case.
of the principal and interest on the 6% bonds had been made. Thus, in effect, if not in form, the trust agreement was security for his continuing obligation which would be discharged at least pro tanto as income from those bonds was received by the trustee. Hence the case in substance is the same as those where pursuant to contract or arrangement an obligation is discharged by another for the taxpayer's benefit; see Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine Railroad, 279 U. S. 732, or where the taxpayer creates a trust, the income of which is applied to the discharge of his debt. See Helvering v. Blumenthal, 296 U.S. 552. Here, as there, the taxpayer received a benefit by the payments. The catalogue of benefits is not depleted when primary obligations are discharged. For these reasons, that portion of the trust income which was received from the guaranteed bonds was clearly taxable to respondent.
Apparently, however, a portion of that income was received from other trust property. But we think that was also taxable to respondent, though for another reason.
inclined to disturb that finding. But it is not. Here, respondent is seeking to escape one of the normal incidents of the federal income tax. For that purpose, he invokes the aid of New York law. In Helvering v. Fitch, supra, we stated that, where the divorced husband desires to avoid the general rule expressed in Douglas v. Willcuts, supra, he carries a distinct burden of establishing not by mere inference and conjecture, but by "clear and convincing proof" that local law and the alimony trust have given him a full discharge. We do not think that respondent has sustained that burden.
"such contracts be not only free from taint of actual fraud or coercion, but also fair and reasonably sufficient, having regard to the station in life and circumstances of the parties."
the provision in the separate agreement, approved by the decree, is for support and maintenance (Kunker v. Kunker and Holahan v. Holahan, supra), but not where it is in settlement of claims of ownership to specified property. Goldfish v. Goldfish and Schnitzer v. Buerger, supra. The provisions of the separation agreement and the trust agreement here in question specifically relate to and were designed to afford support and maintenance for the wife. Unlike the purpose of the trust agreement in Schnitzer v. Buerger, supra, the purpose here apparently was not to compose any controversies over the securities. We need not decide whether the court retained the power to require respondent to make additional payments to the wife in case, say, all the securities in trust turned out to be worthless. All we do hold is that respondent has not shown by "clear and convincing proof" that the court lacks the power to add to his personal obligations in any such circumstances.
MR. JUSTICE REED concurs in the result for the reasons stated in the dissent in Helvering v. Fuller, ante, p. 310 U. S. 76.
THE CHIEF JUSTICE, MR. JUSTICE McREYNOLDS, and MR. JUSTICE ROBERTS are of the opinion that the judgment of the Circuit Court of Appeals should be affirmed.
No extension of the time of payment of principal or interest on these bonds was to be made without the consent of the wife and without the extension of the guarantee of respondent or his personal representative.
Except on discontinuance or dismissal of the divorce action.
It was so amended three times, but in respects not material here.

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