Court Opinion

ID: 4625185
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:56:43.91323+00
Date Added: 2024-06-11T07:59:49.272545
License: Public Domain

HOWARD S. DUDLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Dudley v. CommissionerDocket No. 89436.United States Board of Tax Appeals39 B.T.A. 1170; 1939 BTA LEXIS 922; May 31, 1939, Promulgated 1939 BTA LEXIS 922">*922  Petitioner and his wife agreed in writing on the division and distribution of their community property and the custody, maintenance, and support of their minor children, and settled all property rights and claims each against the other.  Their agreement was ratified, approved, and confirmed by a decree of court granting the wife a divorce.  Thereafter, the husband joined the wife, at her request, in conveying her portion of the community property in trust, all the income of which was payable to the wife, unless she remarried, in which event the trust income was distributable equally among the wife and the children.  Under the agreement and by order of court, petitioner paid $100 a month each for the support and maintenance of his minor children out of his own funds.  During the taxable years all of the trust income was distributed to the wife, who had not remarried.  Held, no part of the trust income was taxable to petitioner.  Dana Latham, Esq., for the petitioner.  B. M. Coon, Esq., for the respondent.  ARNOLD 39 B.T.A. 1170">*1170  This proceeding involves deficiencies of $2,844.59 for 1934 and $118.87 for 1935.  The issue is whether the income of a certain1939 BTA LEXIS 922">*923  trust is taxable as the income of this petitioner.  A written stipulation of facts was filed by the parties, which was briefly supplemented by petitioner's oral testimony.  FINDINGS OF FACT.  Petitioner and Dorothy Foster, residents of California, were married in the State of California on August 25, 1914, and lived together in California as husband and wife until their separation and divorce as hereinafter mentioned.  On September 28, 1928, petitioner and his wife entered into a certain "settlement agreement" which recited that the parties desired "to amicably adjust, settle, and determine by contract their mutual property rights and obligations, as well as their rights to the custody and control of" their minor children and that the parties intended by the agreement to settle for all time their property rights "regardless of whether they may hereafter live together or apart, or be married or divorced * * *." Thereafter the agreement provided for (1) the settlement of the property rights of each in property which they had at that time or might thereafter acquire; (2) the custody of their son and daughter, aged seven and twelve years, respectively; and (3) a release by the wife1939 BTA LEXIS 922">*924  of any interest in her husband's 39 B.T.A. 1170">*1171  separate property and a release by the husband of any rights he might have in his wife's separate property, or in any community property that he had agreed to convey to her or in trust for her and the children.  The property settlement provided for in the agreement required the conveyance of the home, which was recorded in petitioner's name, to the Union Bank & Trust Co. by the husband and wife, the bank to hold the property as trustee for the benefit of the wife.  The house furnishings and certain other items were given to the wife outright and securities, valued at $200,237.50, were to be transferred to the bank and held in trust for the sole benefit of the wife during her natural life or until she remarried.  The parties agreed on the disposition of the trust income and trust corpus in the event the wife died or remarried, but these provisions are inoperative, since she was living and not remarried during the taxable years.  Property subsequently acquired by either party was to be and remain his or her separate property.  Under the agreement, custody of the children was given to the wife, but it was agreed that petitioner should1939 BTA LEXIS 922">*925  have the right to visit them.  The petitioner agreed to pay his wife $200 per month for the support and maintenance of his children during their minority and while they were in his wife's custody.  If the wife remarried the payment for each child's support and maintenance ceased, and when either child was in the exclusive custody of the petitioner the monthly payment for support and maintenance was proportionately reduced.  The third portion of the settlement agreement provided for mutual releases by husband and wife to the other, of all rights which each had in the separate property of the other, and in the community property.  They covenanted and agreed that neither would assert nor prosecute a claim against the other except as such claim was embraced by the settlement agreement.  On or about September 29, 1928, Dorothy Foster Dudley filed a complaint for divorce against the petitioner in the Superior Court of California in and for the County of Los Angeles, alleging desertion.  In the bill of complaint she alleged that the parties had agreed in writing for the division and distribution of the community property and for the maintenance, support, and education of the minor children, 1939 BTA LEXIS 922">*926  and she requested the court to ratify, confirm, and approve the settlement agreement "providing for the division and distribution of the community property." No request was made therein for alimony, or for maintenance and support.  On or about October 13, 1928, an interlocutory decree of divorce was granted Dorothy Foster Dudley.  The decree "ratified, approved 39 B.T.A. 1170">*1172  and confirmed" the settlement agreement, gave the wife custody and control of the minor children, provided for visits by the petitioner and when he should have custody of the children, and ordered petitioner to pay his wife $200 on the first of each month for the support and maintenance of his children during their minority unless the wife remarried, in which event the monthly payments should be discontinued.  And, finally, the court: * * * ORDERED, ADJUDGED AND DECREED that neither the making of this decree nor anything herein contained shall in any manner modify, restrict, or prejudice the provisions, or any of them, of said agreement hereinbefore mentioned, dated September 28th, 1928, entered into and executed by the parties hereto and hereinabove approved, which said agreement and all of its provisions shall1939 BTA LEXIS 922">*927  remain in full force and effect.  Under date of November 28, 1928, Private Trust #606 was executed by the Union Bank & Trust Co. of Los Angeles, as trustee, and by petitioner and Dorothy Dudley as trustors.  This trust was created at the request of petitioner's wife upon the suggestion of her attorneys.  The property placed in the trust was the wife's portion of the community property as fixed and determined in the settlement agreement and approved by the decree of court, in and by which petitioner was divested of all interest, present and future.  The trust instrument was drawn by the trustee bank and carried out the terms of the settlement agreement.  By its terms the whole title, both legal and equitable, was vested in the trustee, who was authorized to handle, manage, operate, and dispose of the trust estate under the terms of the trust in the same manner as an owner might do.  The interests of the beneficiaries, the wife and the two minor children, were expressly declared to be personal property only, consisting of the right to enforce the due performance of the turst.  The entire net income was payable to the wife until her death or remarriage.  The wife and the children had1939 BTA LEXIS 922">*928  the right to occupy the home for one year and, thereafter, it was discretionary with the trustee whether they should continue to occupy the property or it should be sold and another residence acquired for the family at a cost not to exceed $60,000.  If the real property was sold any excess from the proceeds of the sale over the cost of providing a new residence, not in excess of $60,000, was to become a part of the trust corpus.  In the event of the remarriage of Dorothy Dudley the net income of the trust was to be divided equally among the wife and two children.  Additional provisions were contained in the trust for the distribution of the trust income and the trust corpus to the wife and the children, or their representatives in the event of the death of the wife, or the death of either or both of the children with or without issue.  No part of the trust income 39 B.T.A. 1170">*1173  or the trust corpus could come to the petitioner unless death intervened in such a manner as to make him the heir at law of his minor children.  While petitioner and his wife both lived they could, by mutual agreement, revoke or change the trust, the beneficiaries, or any of the trust provisions, but the trust1939 BTA LEXIS 922">*929  has never been amended and was in full force and effect during the taxable years.  The term of the trust was limited in any event by the lives of the three named beneficiaries.  On or about October 15, 1929, a final judgment of divorce was granted Dorothy Foster Dudley.  In this decree the court ordered that any provision for alimony or custody and support of children contained in the interlocutory decree "is hereby made binding on the parties affected thereby the same as if herein set forth in full, and that wherein said interlocutory decree relates to the property of the parties hereto, said property be and the same is hereby assigned in accordane with the terms thereof * * *." During 1934 and 1935 the net income of Private Trust #606 was $12,558.15 and $9,937.30, respectively.  This net income was paid by the trustee to Dorothy Foster Dudley, and no portion thereof was paid to the petitioner.  During, prior, and subsequent to 1934 and 1935 petitioner paid Dorothy Foster Dudley $100 per month for the support and maintenance of each of his two children.  In determining his taxable income for 1934 and 1935 petitioner has claimed no deduction on account of these monthly payments1939 BTA LEXIS 922">*930  for the maintenance and support of his minor children, but he has deducted the credit for dependents allowed by law.  None of the income of Private Trust #606 was included in petitioner's income tax returns for 1934 and 1935.  At the date of petitioner's marriage, August 25, 1914, his net worth was approximately $51,958.45; at July 29, 1927, his net worth was approximately $577,773.37; at August 25 and September 28, 1928, his net worth was approximately $662,238.39.  The value of the community property at September 28, 1928, was $610,279.94.  The fair market value as of September 28, 1928, of the residence and contents transferred to Private Trust #606 was $125,000.  The securities transferred to Private Trust #606 had a fair market value on September 28, 1928, of $200,237.50.  OPINION.  ARNOLD: We are asked by the respondent to apply the principle, announced in , to a situation involving a trust created by the husband and wife, where the property conveyed to the trust was the wife's portion of the community property.  The principle of the Douglas case, which taxed the income 39 B.T.A. 1170">*1174  of a trust to the grantor, where1939 BTA LEXIS 922">*931  the trust income was paid to his wife in lieu of alimony, has been extended by subsequent decisions to trusts created to pay the settlor's debts, , and to trusts for the maintenance, support, and education of the settlor's children, ; ; . The foregoing authorities, and numerous other cases involving trust income, have established the proposition that "where the income of the trust is to be used in discharge of any legal obligation which the settlor would otherwise have to satisfy, the settlor is taxable with such income to the same extent as if it were personally received." . After carefully examining the documentary evidence and the California statutes it is our opinion that the property placed in trust was the wife's portion of the community property, the amount of which was fixed and determined by the parties in their settlement agreement and therefore her separate property.  The evidence shows that1939 BTA LEXIS 922">*932  petitioner and his wife entered into the settlement agreement to settle for all time their property rights, regardless of whether thereafter they lived together or apart, were married or divorced.  Their community property had a value at the time of the division of over $610,000 and it was agreed between them that over $325,000 thereof should be placed in trust for the sole benefit of the wife during her lifetime.  If she remarried she agreed to divide the trust income equally with her children.  No provision was made for any of the trust income to come to the petitioner, or for the payment and discharge of any obligation that he would otherwise have had to satisfy.  In California a wife has no right of dower in her husband's estate, section 173, Civil Code of California, but she is authorized to enter into any engagement or transaction, respecting property, with her husband or any other person, section 158, idem. Where the wife secures a divorce for an offense of the husband: * * * the court may compel him to provide for the maintenance of the children of the marriage, and to make such suitable allowance to the wife for her support, during her life, or for a shorter period, 1939 BTA LEXIS 922">*933  as the court may deem just, having regard to the circumstances of the parties respectively; and the court may, from time to time, modify its orders in these respects.  [Sec. 139, idem.] In case of a dissolution of the marriage, the community property is equally divided between the parties, if the decree is rendered on any other ground than that of adultery or extreme cruelty, sec. 146, idem.The division of the community property made in the settlement agreement received the approval of the court in its interlocutory 39 B.T.A. 1170">*1175  decree, and was subsequently made permanent in the decree dissolving the marriage.  Despite the authority granted the court by section 139 of the Code, to compel petitioner to provide for the wife's support, there is no provision in the decree giving the wife any allowance for support, or for alimony, or in lieu of alimony.  The court's failure to provide for the wife, in the same decree in which it ordered petitioner to provide for the support of his children, is deeply significant.  The inference is inescapable that the court considered the prior settlement was just, and that the division of the community property between husband and wife discharged1939 BTA LEXIS 922">*934  his marital obligation of support.  The presence of petitioner as one of the trustors is easily explained.  The real property and the securities were in his name.  The wife desired and, according to petitioner's uncontradicted testimony requested, that her portion of the community property be placed in trust.  By joining in the conveyance of her portion of the community property to the trustee, the parties eliminated a separate transfer which would have otherwise been necessary if petitioner had conveyed directly to his wife.  If, as respondent contends, the petitioner had been creating a trust to discharge his legal obligations, he would have undoubtedly provided that a portion of the trust income should be used for the maintenance and support of his minor children.  In many respects the situation here is analogous to that existing in . In that case the husband and wife were residents of the community property state of Texas.  They executed a trust agreement by which they conveyed certain property to a bank, as trustee, for the benefit of themselves and their two minor children.  The express purposes of the trust were to pay off1939 BTA LEXIS 922">*935  the debts and obligations of the settlors, to create a trust fund for the settlors' use for a period of 20 years, and to create a trust fund for the use and benefit of their children.  By a supplemental agreement the parties agreed that the trust instrument settled all community differences and property rights of the parties.  Thereafter, the wife was granted a divorce and custody of the children.  The divorce decree ratified the trust agreement and the supplemental agreement, and awarded to the wife, as her separate estate, the properties that were to be distributed to her, her heirs, or devisees upon her death.  In holding that the trust income was not taxable in toto to the husband, we pointed out that the payments received from the trust by the wife were not payments in lieu of alimony and were not made in satisfaction of any legal obligation of the husband.  We stated that the payments were, at least in part, distributions "of income from her own separate properties which, under the trust agreement and the decree of the court, remained in the trust 39 B.T.A. 1170">*1176  with properties belonging to the petitioner [husband]." (P. 1341.) In this proceeding we are convinced that it1939 BTA LEXIS 922">*936  was the wife's separate property that was placed in Private Trust #606, and obviously the income therefrom would belong to her unless she provided for some other distribution.  In any event the petitioner had no continuing obligation to support and maintain his wife after the property settlement and the decree of the court.  The legal obligation to support his children was satisfied by payments from his personal income as distinguished from the income of Private Trust #606.  We have carefully examined the facts herein in the light of the numerous authorities cited by both parties hereto, but in our opinion the Mitchell case, supra, is closer factually to the instant proceeding than any other we have examined or that has been brought to our attention.  The decision of the court in , is in point, but that case did not involve a community property state.  In the case of , and in the cases cited by the respondent, as following the rule there announced, the property placed in trust was the taxpayer's property, and there was a determination that the trust1939 BTA LEXIS 922">*937  income was used to satisfy and discharge an obligation of the settlor.  In our opinion no obligation of this petitioner was satisfied by the income of Private Trust #606.  The respondent's determination is disapproved.  Reviewed by the Board.  Decision will be entered under Rule 50.