Court Opinion

ID: 9419104
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:45:57.160293+00
Date Added: 2024-06-11T16:41:49.437622
License: Public Domain

Mr. Justice Reed,
dissenting:
The opinion of the Court in this case is made to turn upon the question whether the law of the taxpayer’s residence withdraws divorce settlements from the continuing supervision and subsequent modification of the courts. Two trusts, both irrevocable, in words precisely the same, drawn for the purpose of providing maintenance for a former wife, recognized or approved by divorce decrees identical in form, are to have different tax results upon the settlor. If income taxes are predominantly important, prospective divorces must locate in the *77states where the finality of the settlement is clearly established. Compare Douglas v. Willcuts,1 Helvering v. Fitch2 and Helvering v. Leonard3 with this case. The reason given to support such a conclusion is that the liability of the settlor for taxes on trust income is based on the possibility that the settlor may be called upon for additional sums in the future. If the obligation continues, the tax liability continues. If the obligation is ended, the tax liability is ended. In Douglas v. Willcuts continued liability existed. It does not seem to me, however, that this continuing liability was the real basis for the Douglas decision. The basis for that decision was the prior appropriation, by the creation of the trust, of future income to meet an obligation of the taxpayer. The following excerpts from pages eight and nine show the foundation for the conclusion:
“Within the limits prescribed by the statute (and there is no suggestion that the provision here went beyond those limits) the court had full authority to make an allowance to the wife out of her husband’s property and to set up a trust to give effect to that allowance.”
“Upon the preexisting duty of the husband the decree placed a particular and adequate sanction, and imposed upon petitioner the obligation to devote the income in question, through the medium of the trust, to the use of his divorced wife.”
“The creation of a trust by the taxpayer as the channel for the application of the income to the discharge of his obligation leaves the nature of the transaction unaltered. ... In the present case, the net income of the *78trust fund, which was paid to th© wife under the decree, stands substantially on the same footing as though he had received the income personally and had been required by the decree to make the payment directly.”
The Fitch case was the first to rely explicitly upon the finality of the settlement. It pushed the-idea to the point that the burden was upon the settlor to demonstrate the clear finality of the local settlement. This Court there refused to draw its own conclusion as to what the local law was, even though numerous state cases touched upon the subject. In Helvering v. Leonard, this Court continues to apply the finality rule. It interprets the .local law and finds that while “mere property settlements . . . may not be modified” the state judicial reserve power may be exercised where “the provision in the separate agreement, approved by the decree” is for support and maintenance. We are now at the point'where the taxability of the settlor depends not only on the “clear and convincing proof” of the finality of the decree but the ability to produce that proof depends upon the skill of the draftsman of the settlement. Fine distinctions are necessary in reasoning but most undesirable in a national tax system.
It is no answer to the problem to say that if the stock had been transferred outright' to the wife the husband would not be liable for the tax. If the stock had been kept by the husband and dividends paid as alimony, he would have been liable.4 Either analogy might be logically followed in the trust situation but the choice of taxability of trust income was made in Douglas v. Willcuts. That case determines the “general rule.” 5
It may be assumed that the original obligation of the husband to support a divorced wife depends upon state law and to that extent that the state law is applicable to *79the determination of liability under the federal income tax act. But that necessary reliance upon local law need be carried no farther than the determination of obligation to support. Once that is determined the applicability of the theory of constructive receipt of income to discharge the obligation would come into play and would be nationwide in extent.
The obligation to support exists prior to the divorce decree. It is ended in Nevada only upon getting the court’s approval to an arrangement which permits the creation of a fund to meet from year to year the obligation from which the Nevada law then and only then releases the settlor husband.6 It is by the court’s approval that the continuing obligation is discharged. Granting that a lump sum payment would terminate both the marital and the tax liability, the creation of a trust, approved by the court, for continuous payments in lieu of alimony seems to bring the trust income much closer to alimony than to the situation of a final settlement by lump sum payment.
This is particularly true in this present case where the settlement agreement shows that the husband retained voting power over the stock placed in trust. 60,380 shares of Class A Common Stock of the Fuller Brush Company, the only class of voting stock, was placed in the trust. An equal amount was retained by the taxpayer. The aggregate was a majority of the total of voting stock outstanding. This power, retained to the settlor, is of weight in determining that the present trust is more nearly akin to an agreement to pay alimony than it is to a satisfaction of an obligation by an unrestricted transfer.
The judgment should be reversed.

 296 U. S. 1.

 309 U. S. 149.

 Post, p. 80.

 Gould v. Gould, 245 U. S. 151.

 Helvering v. Fitch, 309 U. S. 149, 156.

 Nevada Compiled Laws, 1929, §§ 9463 and 9465.