Case: RUDOLF A. BERNATSCHKE AND CATHALENE CRANE BERNATSCHKE v. THE UNITED STATES
Abbreviation: Bernatschke v. United States
Decision Date: 1966-07-15
Docket Number: No. 236-63
Citation: 176 Ct. Cl. 1234
Volume: 176
Reporter: United States Court of Claims Reports
Court: United States Court of Claims
Jurisdiction: United States
Parties: RUDOLF A. BERNATSCHKE AND CATHALENE CRANE BERNATSCHKE v. THE UNITED STATES
Judges: Before Cowen, Chief Judge, Laeamoee, Dueeee, Davis, and Collins, Judges.
Pages: 1234–1265

Head Matter:
364 F. 2d 400
RUDOLF A. BERNATSCHKE AND CATHALENE CRANE BERNATSCHKE v. THE UNITED STATES
[No. 236-63.
Decided July 15, 1966]
Willis B. Snell, attorney of record, for plaintiff. Lawrence B. Gould and J. D. Williams, of counsel.
Edna G. Parker, with whom was Assistant Attorney General Mitchell Bogovin, for defendant. Bichard M. Boberts, Lyle M. Turner and Philip B. Miller, of counsel.
Before Cowen, Chief Judge, Laeamoee, Dueeee, Davis, and Collins, Judges.

Opinion:
Pee Cueiam :
This case was referred to Trial Commissioner Herbert N. Maletz with, directions to make .findings of fact and recommendation for conclusions of law. The commissioner has done so in an opinion and report filed on January 20, 1966. On February 19, 1966, defendant filed a notice of intention to except. However, on June 6, 1966, defendant filed a motion to withdraw notice of intention to except to commissioner's report to which, on June 9, 1966, plaintiffs filed a response stating, among other things, that on the basis of plaintiffs' understanding that the case will be submitted to the court on the commissoner's report if defendant's motion is granted, plaintiffs have no objection to the granting of such motion. The case is thus submitted to the court on the trial commissioner's report filed January 20, 1966, without exception by the parties. Since the court agrees with the trial commissioner's opinion, findings and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case without oral argument. Plaintiffs are, therefore, entitled to recover, together with interest as provided by law and judgment is entered for plaintiffs with the amount of recovery to be determined pursuant to Rule 47 (c) (2).
OPINION OP COMMISSIONER
Maletz, Commissioner:
This is a suit for refund of income taxes and assessed interest thereon paid by plaintiff for the years 1956 through 1959 and 1961, together with statutory interest. The sole issue is whether Section 72 or Section 71(a) (1) of the Internal Revenue 'Code of 1954 governs the taxability of the sum of $25,000 received each year by plaintiff under certain annuity contracts for which the consideration was paid by her former husband, Cornelius Crane, pur suant to an Agreement of February 20, 1940 incident to a divorce.
In general, annuity payments are taxable under the rules of Section 72 of the Code, with Section 72(b) providing for the exclusion from gross income of a portion of amounts received as an annuity, based on the ratio of the "investment in the contract" to the "expected return." These rules, however, are not applicable to payments under an annuity contract which are includible in the income of the wife under Section 71; such payments are wholly includible in the wife's gross income. Thus, Section 72 of the Code provides in part (26 U.S.C. (1958 ed.) § 72):
72. Annuities; certain proceeds of endownment and life insurance contracts.
•r *¡» V* »{*
(b) Exclusion ratio — Gross income does not include tliat part of any amount received as an annuity under an annuity contract which bears the same ratio to such amount as the investment in the contract bears to the expected return under the contract. :I: *
(k) Payments in discharge of alimony.—
(l) In general. — This section shall not apply to so much of any payment under an annuity contract (or any interest therein) as is includible in the gross income of the wife under section 71.
Section 71(a) (1) (the portion of Section 71 which is pertinent here) provides (26U.S.O. (1958 ed.) §71) :
§ 71. AUmony and separate maintenance payments.
(a) General rale.—
(1) Decree of divorce or separate maintenance. — If a wife is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such decree in discharge of (or attributable to property transferred, in trust or otherwise, in discharge of) a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under the decree or under a written instrument incident to such divorce or separation.
The substance of Section 71 was first enacted in 1942 to allow the husband to deduct "payments in the nature of or in lieu of alimony or an allowance for support" and to tax such payments to the wife who receives them. H. Rep. No. 2333, 77th Cong., 2d Sess., p. 71 (1942). See also S. Rep. No. 1631, 77th Cong., 2d Sess., p. 83 (1942); 5 Mertens, Law of Federal Income Taxation, § 31A.01, pp. 1-2. In conformity with this legislative purpose, Section 1.71-1 of the Treasury Regulations on Income Tax (1954) specifies that "Section 71 provides rules for treatment in certain cases of payments in the nature of or in lieu of alimony or an allowance for support as between spouses who are divorced or separated. " In addition, Section 7.11-1 (b) (4) of the Regulations states that "Section 71 (a) applies only to payments made because of the family or marital relationship in recognition of the general obligation to support which is made specific by the decree, instrument, or agreement " See also e.g. H. Rep. No. 2333, 77th Cong., 2d Sess., p. 72 (1942).
Against this background, plaintiff contends that all or part of the cost of the annuity contracts was paid by Cornelius Crane for reasons other than his obligation to support plaintiff and hence that the annual payments of $25,000 received pursuant to the contracts were taxable in whole or in part under the rules set forth in Section 72 of the Code. Defendant argues, on the other hand, that the annual payments of $25,000 received by plaintiff constituted periodic payments in discharge of a legal obligation incurred by her former husband because of the marital or family relationship, and not in settlement of any property rights, and thus were wholly includible in her gross income under Section 71 (a) (1) of the Code.
The nub of the problem is thus to determine whether or not plaintiff's former husband, Cornelius Crane, paid the consideration for the annuities by virtue of an obligation to support plaintiff which was imposed on him by their marital relationship. This is a question that depends upon the substance of the transaction and the true intent of the parties, rather than on the labels or formal provisions of the written contract or divorce decree. Taylor v. Campbell, 335 F. 2d 841, 845 (5th Cir. 1964) ; Bardwell v. Commissioner, 318 F. 2d 786, 789 (10th Cir. 1963) ; Soltermann v. United States, 272 F. 2d 387, 390 (9th Cir. 1959) ; Landa v. Commissioner, 211 F. 2d 46, 50 (D.C. Cir. 1954) ; Ann Hairston Ryker, 33 TC 924, 929 (1960) ; Julian Nathan, 19 TC 865, 872 (1953). Parol evidence may be considered in making this determination, particularly since the Agreement here is ambiguous at best, failing, for example, to afford any indication as to how or why the parties determined either the amount which Cornelius Crane would pay or the provisions applicable to the annuities to be purchased. Taylor v. Campbell, supra; Bardwell v. Commissioner, supra; Landa v. Commissioner, supra and 206 F. 2d 431, 432 (D.C. Cir. 1953) ; Scofield v. Greer, 185 F. 2d 551, 552 (5th Cir. 1950). We therefore turn to the facts of the present case as established by the testimony in the record.
Plaintiff, who was bom in 1906, is a housewife and has never been gainfully employed. Her father was a naval medical officer who came from a family of well-to-do professional people; her mother also had considerable means in her own right due largely to her skill as an investor. In 1922 plaintiff was married to a naval flyer but the marriage ended in divorce some seven years later. They had one child, a daughter.
In 1929 plaintiff married Cornelius Crane (hereafter referred to as "Cornelius"), the grandson of the founder of the Crane Company (a manufacturer of plumbing equipment and valves) and the only son of R. T. Crane, Jr., the president and controlling stockholder of that company. The Crane family was possessed of great wealth and its members — including Cornelius and plaintiff — lived on a lavish scale in family mansions in Chicago (their primary residence) , Massachusetts and Georgia, and a family apartment at the Ritz in New York. Cornelius, who himself possessed substantial wealth through gifts and inheritance, and also received income from trusts established by his father, was not interested in the family business and at no time in his life held a position for which he received a salary. As a young man he decided he did not want to go to college, but would like to go around the world on a yacht and explore parts of the world which others had not reached. Accordingly, his father bought him a sailing ship which was about 140 feet in length and carried a crew of 26. From this trip he developed an interest in archeology and anthropology, and financed and conducted several expeditions in his vessel to the South Seas. His other interests consisted of hunting, fishing, walking through the woods and reading.
Cornelius' personal budget (as well as that of the entire Crane family) was managed by J. K. Prentice, who had been his father's private secretary, who served as a confidant to the entire family and who stood in place of a father to Cornelius after R. T. Crane, Jr. died. Cornelius had a different attitude toward money than most people. For example, very early in his marriage to plaintiff he became "sick" of Bermuda and suddenly sold for the extraordinarily low price of $25,000 a 26-acre island he owned at the entrance to the harbor in Bermuda, together with a restored house thereon and four boats. He purchased property in Tahiti without ever having seen it. Withal, Cornelius and plaintiff were more alike than different in various respects. Neither had ever been gainfully employed. While Cornelius occupied himself with his interests in archeology and anthropology, plaintiff occupied herself with giving singing concerts (which were artistic successes rather than profitable ventures) and with charitable endeavors. Both were unconcerned with, and uninterested in, finances and property. Thus, until her marriage to Cornelius, plaintiff relied on her mother completely to manage stocks and bonds which her mother and grandmother had given her; after the marriage she turned her investments over to the Crane family to manage. During her marriage to Cornelius, her stock and bond holdings were augmented by gifts from Cornelius and his father, and as of February 1940 had a market value of about $347,000, which produced a yield of about $13,000 in that year.
Throughout his marriage to plaintiff, Cornelius continued his sailing expeditions and was away for extended periods of time; plaintiff did not accompany him on these trips. After February 1936, Cornelius and plaintiff did not live together as man and wife, although he continued to support her and her daughter by her first marriage. By 1939, plaintiff was considering getting a divorce and retained an attorney, but did not pursue the matter further at that time. In the latter part of that year, Cornelius adopted plaintiff's daughter, the adoption being prompted at least in part by his desire to effect a reconciliation with plaintiff. (Plaintiff and Cornelius had no children of their own.) Thereafter, upon the happening of some incident, plaintiff finally reached a firm decision to go ahead with the divorce and filed a divorce action in the Circuit Court of Cook County, Illinois, on February 19, 1940. The divorce was granted on the ground of desertion on February 2B, 1940. Up to the final day of the divorce, Cornelius tried to dissuade plaintiff from going through with it. Plaintiff and Cornelius remained friendly at all times during, before and after the divorce proceedings.
At the time that she finally decided to proceed with the divorce, plaintiff's attorney indicated to her that she had a dower right and that such right was a third of an estate. Plaintiff told her attorney that she wanted a lump-sum settlement and asked him to find out from Cornelius what would be fair. She felt that having been a good wife something was due her and she wanted any settlement in a lump sum so that she would never again have to go back to Cornelius and ask for anything — for household money and things like that in the future; she wanted all ties cut.
Meanwhile, Cornelius discussed the matter with his advisers and stated that he would be willing to make a reasonable property settlement, based on his assets, to take care of plaintiff and that he wanted to be, if anything, liberal in the amount of such settlement. He requested one of his advisers to ascertain the amount of income-producing assets he had under his control and it was determined that they were worth about $2,000,000. Cornelius thereupon indicated to his attorney that if he died without a will, plaintiff would get one-third of that amount. The attorney said that that would probably be right by virtue of her dower rights. Cornelius then stated to his advisers that he and plaintiff had been married for ten years; that he thought he should make a property settlement which substantially represented her dower rights in his assets; and that he would give her $650,-000, approximately one-third of his assets of $2,000,000. After having so decided (and also determining what he would give to plaintiff's daughter whom he had adopted), he told his advisers to work out the details.
J. K. Prentice (who, as previously indicated, managed Cornelius' personal budget) approved of Cornelius' decision to make a liberal settlement for plaintiff, but opposed turning over liquid assets to her since he was afraid she might give them away or that someone might take them from her. Consequently, he felt strongly that the sum to be paid should be so invested that she could not dissipate her principal, and he urged that annuities be used for that purpose. He mentioned the subject to plaintiff; she respected and trusted Prentice and when he recommended annuities to her, she accepted this recommendation and asked Cornelius to take care of buying the annuities for her, insisting, however, that Cornelius be given a contingent right to receive refunds under the annuity contracts in the event of her death. The actual arrangements for the purchase of annuities were handled by Cornelius' advisers who made inquiries of insurance companies to ascertain how much of an annuity for a person of plaintiff's age and description could be bought for $850,-000 and were informed by such insurance companies that approximately $647,000 would buy an exact or round amount of $25,000 per year. The amount of the income to be paid was the result of the determination of the approximate amount of the principal to be paid, not the cause of such amount.
In the discussions Cornelius had with his advisers there was no mention of alimony; Cornelius simply determined that he would give plaintiff part of his assets. Nor did anyone at any time mention alimony in the discussions in which plaintiff participated with her attorney, Cornelius or any of his advisers. During the course of the negotiations, Cornelius told her she would receive a lump sum and plaintiff understood that she would get a "one-time payment."
At the time of the divorce, plaintiff did not transfer any of her property to Cornelius, except for such items as primitive artifacts that had no great intrinsic value. Nor, with the exception of some household items, did Cornelius transfer any property to plaintiff at the time of the divorce other than the amount provided in the Agreement of February 20, 1940.
Following tlie divorce, plaintiff in March 1940 married her present husband, a portrait painter, who has been successful artistically though not financially.
Subsequently, in accordance with the Agreement of February 20, 1940, plaintiff (and her present husband) granted to Cornelius quitclaim deeds and released to him all rights in property Cornelius owned hi Massachusetts and Tahiti. Cornelius fulfilled his obligations under the Agreement by liquidating a substantial portion of his income-producing assets and having one of his advisers in the months following the divorce purchase 13 annuity policies from various insurance companies to provide total annual payments of $25,-000 to plaintiff.
Plaintiff's standard of living changed markedly after her divorce from Cornelius since she could no longer live in the kind of lavish luxury produced by the Crane family's great wealth. In the tax years here involved, plaintiff has received dividend and interest income from her stocks and bonds (which are now worth about $1,000,000) of from $23,000 to $30,000 a year, which income is over and above the $25,000 each year received under the annuity contracts. The $25,000 annuity is commingled with her dividend income and is used for normal living expenses, taxes, investments, savings, etc.
In summary, the record shows that at no time during the negotiation of the Agreement of February 20,1940 was there any mention of alimony. Plaintiff did not request it and Cornelius did not mention it. Nor was there any attempt to determine the extent or the dollar value of Cornelius' obligation to support plaintiff or to pay alimony. The record shows, rather, that the amount which plaintiff received pursuant to the Agreement was derived solely on the basis of the income-producing property then owned outright by Cornelius and what the parties understood to be plaintiff's intestate share in his estate or "dower" rights; and that such amount was determined without reference to any obligation to support or pay alimony. Thus, it seems evident that the amounts paid by Cornelius for the annuity contracts were not based on the marital obligation to support and were not intended to be payments in discharge of such an obligation but rather were intended to be in the nature of a property settlement under which, plaintiff's inchoate interests in Cornelius' property under Illinois law were extinguished.
In addition to these considerations, other factors present here provide further indication that the annuity payments to plaintiff do not have the usual characteristics of alimony or support. See generally 5 Mertens, Law of Federal Income Taxation, § 31A.02, pp. 20-1. First, the fact that the payments were to continue for the lifetime of the plaintiff, without regard to her remarriage or the death of her ex-husband, tends to show that they were not intended as alimony or in discharge of a marital obligation to support. Soltermann v. United States, 272 F. 2d 387, 390 (9th Cir. 1959) ; Campbell v. Lake, 220 F. 2d 341, 343 (5th Cir. 1955) ; Scofield v. Greer, 185 F. 2d 551, 552 (5th Cir. 1950). See also Anno. 39 ALR 2d 1406 (1955) ; 48 ALR 2d 270 (1956). Cf. Ada M. Dixon, 44 TC 709, 713 (1965). It is relevant, also, that plaintiff received and exercised the right to determine the beneficiary of refunds that might be payable after her death. It would appear that if the annuity payments had been intended as support payments for plaintiff, Cornelius, rather than plaintiff, would have retained and exercised the power to determine the recipient of any part of the sum not needed for that purpose.
In addition, it is customary for support payments to be related to the husband's income and, frequently, to vary if there is a substantial change in such income. See Ann Hairston Ryker, 33 TC 924, 929 (1960) ; Brown v. United States, 121 F. Supp. 106, 107 (N.D. Cal. 1954). The wife is ordi narily entitled to be supported in the same style of living to which she was accustomed during the marriage. See e.g., Walters v. Walters, 341 Ill. App. 561, 94 NE 2d 726 (1950), aff'd 409 Ill. 298, 99 NE 2d 342 (1951) ; Herrick v. Herrick, 319 Ill. 146, 151, 149 NE 820, 823 (1925). The amount of the wife's own income is, obviously, also a factor in determining her need for support. Here the payments were not related in any way to Cornelius' substantial income. The parties agreed on a lump sum based entirely on assets which he owned outright, without reference to the trust income he received, and then fixed the amount of the annual payments on the basis of what annuities the lump sum would buy. There could be no variation, of course, because of changes in Cornelius' income (or because of any property which he might later inherit). Nor was plaintiff's income considered in any way as a factor in determining the amount to be paid. Furthermore, the amount of the annuity payments, even when combined with plaintiff's income from her stocks and bonds, could not possibly allow her to live in a style which would in any way approach that to which she had been accustomed as Cornelius' wife, and the record in fact shows that her standard of living changed markedly after the divorce.
Another factor of significance is whether or not there is a fixed sum the husband is required to pay; the absence of such a fixed sum is considered to indicate that support was intended. Taylor v. Campbell, 335 F. 2d 841, 845 (5th Cir. 1964) ; Bardwell v. Commissioner, 318 F. 2d 786, 789 (10th Cir. 1963) ; Campbell v. Lake, 220 F. 2d 341, 343 (5th Cir. 1955) ; Ann Hairston Ryker, 33 TC 924, 929 (1960). Here the contract itself specifically provides the amount which the husband was required to pay and the record shows that the settlement was determined on the basis of his paying such amount.
In conclusion, the record establishes that Cornelius Crane did not pay the consideration for the annuity contracts because of any marital obligation to support plaintiff and, accordingly, the annuity payments are not taxable under Section 7l. Plaintiffs are entitled to a refund of income tax for the years involved based on the application of the rales of Section 72 to the annuity payments received in each year.
FINDINGS of Fact
1. This is an action arising under the Internal Revenue laws of the United States for refund of income taxes and assessed interest thereon paid by plaintiffs for the calendar years 1956, 1957,1958, 1959 and 1961, together with interest thereon as provided by law.
2. Plaintiffs, Rudolf A. and Cathalene Crane Bernatschke, are now, and have been since prior to 1956, husband and wife, residing in New York City. They filed timely joint federal income tax returns for the calendar years 1956 through 1958 with the District Director of Internal Revenue for the Upper Manhattan District, New York City, and for the calendar years 1959 and 1961 with the District Director of Internal Revenue for the Manhattan District, New York City.
3. Plaintiffs made timely payment of the tax liability shown on the returns referred to in finding 2 by payments on their declarations of estimated tax for such years and by additional payments made with the returns. In addition, plaintiffs paid deficiencies (together with interest thereon) for the year 1956 in September 1961, for the year 1958 on September 13, 1960, and for the year 1959 on December 11, 1961.
4. In their returns for each of the years 1956 through 1961, plaintiffs included in their gross income an amount of $25,-000 received each year by plaintiff Cathalene Crane Bernatschke from certain annuity policies purchased by her former husband, Cornelius Crane.
5. On or about October 12,1959, plaintiffs filed a claim for refund of income tax for the year 1956 and, on or about October 7, 1960, they filed claims for refund of income tax for the years 1957 through 1959. The refund claims were based on the ground that a portion of the $25,000 received in each year by plaintiff Cathalene Crane Bernatschke was ex-cludible from gross income pursuant to Section 72 of the Internal Revenue Code of 1954. On August 25,1961, a notice of disallowance of the claim for 1956 was mailed by certified mail. On October 30, 1961, plaintiffs executed Treasury Form 2297, pursuant to Section 6532(a) (3) of the Internal Revenue Code of 1954, waiving notice of disallowance of the refund claims for the years 1957 through 1959.
6. On March 24, 1963, plaintiffs filed a claim for refund of income tax for the year 1961 which set forth the same grounds and reasons as the claims filed as to 1956 through 1959. On August 21, 1963, plaintiffs filed claims for refund of income tax for the years 1956 through 1959, which claims supplemented those previously filed for those years and set forth the same grounds and reasons as in the prior claims.
7. Plaintiffs filed their petition in this court on August 22, 1963, and filed a supplemental petition on March 12,1964.
8. Plaintiff Cathalene Crane Bernatschke (hereafter referred to as "plaintiff") is a housewife and has never been gainfully employed. She was bom on March 6,1906 in San Francisco, California, the daughter of a naval medical officer. After the death of plaintiff's father, her. mother married a naval captain who subsequently retired as a vice admiral.
9. In 1922 plaintiff married Lieutenant Commander Miles Rutherford Browning, a naval flyer. They had one daughter, Cathalene Parker Browning, born on May 15,1923.
10. At the time of her marriage to Browning, plaintiff owned various stocks and bonds of undetermined value received by way of gifts from her mother and grandmother, and a house purchased for her by her mother in which she and Browning lived. Browning did not own any stocks or bonds and lived on his pay as a naval officer and flyer.
11. Plaintiff's father came from a family of comfortably well-to-do professional people, and her mother and grandmother had money and property which they obtained in part from a good investment in a silver mine. Plaintiff's mother, in particular, was skilled in making investments. Both before and during plaintiff's marriage to Browning and thereafter until her marriage to Cornelius Crane, plaintiff relied on her mother completely to manage her investments and plaintiff had nothing to do with handling them.
12. Plaintiff divorced Browning in 1928 or 1929. She had more property than he had and at the time of divorce she gave him their home, which she had owned, and the furnishings therein, but received no property or alimony from him. Plaintiff doesn't believe in alimony and did not ask for any from Browning.
13. On October 15,1929, plaintiff married Cornelius Crane (hereafter referred to as "Cornelius"). Cornelius had not been married previously. He was the grandson of the founder of the Crane Company, a manufacturer of plumbing equipment and valves. Cornelius' father, R. T. Crane, Jr., who died in 1931, was president of the Crane Company and, at the time of his death, the owner of more than 50 per cent of its stock. Cornelius' mother was the daughter of Harlow Higinbotham, president of the first World's Fair in Chicago and one of the first partners of Marshall Field's. Cornelius was an only son, but had one sister.
14. The Crane family was possessed of great wealth, the Crane Company being the basis and source of the family fortune. Prior to his death in 1931, R. T. Crane, Jr.'s worth was estimated at about $90 million which dropped to about $30 million at the time of his death due to a decline in the value of Crane Company stock. The Crane family lived on a lavish scale during the period of plaintiff's marriage to Cornelius, albeit the lavishness of the family's mode of living was reduced somewhat after the death of R. T. Crane, Jr. The family had several homes, among which the members, including plaintiff and Cornelius, divided their time; the family also had a private railroad car for traveling. The family's primary residence was an enormous Tudor mansion in Chicago, occupying almost a whole city 'block on Lake Shore Drive. The family also had an estate, Castle Hill, in Ipswich, Massachusetts, consisting of 3,500 acres with three miles of private beach, a private golf course, and a private harbor. Cornelius' mother had had constructed there an Italianate house but decided it was not appropriate for the New England landscape; she, therefore, had it torn down and replaced with a Georgian mansion, each room of which had been brought from houses and castles in France and England. Cornelius and plaintiff, however, stayed in a separate large, old house on the estate known as the "Cottage." The family also owned a portion of Jekyll Island, Georgia, where it had an Italianate villa with gardens and a greenhouse. In addition, the family maintained a four or five bedroom apartment at the Eitz in New York City. During a portion of the period of his marriage to plaintiff, Cornelius owned Tucker's Island, consisting of 26 acres, at the entrance to the harbor of Bermuda, with a house thereon which had been occupied by the first Governor of Bermuda.
15. Cornelius served as an executor of his father's estate and as a director of the Crane Company, but he was not interested in the family business. At no time in his life did he hold a position for which he received a salary. Cornelius was a man of substantial wealth (see finding 31, infra) which came to him from the family fortune by gifts from his father and by inheritance. Cornelius as a young man decided that he did not want to go to college, but that he would like to go around the world on a yacht and explore parts of the world which others had not reached. Accordingly, in 1928, his father bought him a sailing ship which was designed in Italy and which was about 140 feet in length and carried a crew of 26. After Cornelius decided that his voyage would be more interesting if he had friends along, he took scientists and naturalists with him and developed an interest in archeology and anthropology. He financed and conducted several expeditions in his ship to the South Seas for Harvard University, the New York Museum of Natural History, and the Field Museum in Chicago. On one of his trips, he went farther up the Sepik Eiver in New Guinea than any white man had ever gone before. He later sold his ship, but always had one or more boats after that. His other interests consisted of hunting, fishing, walking through the woods, and reading.
16. Plaintiff was not interested in the foregoing expeditions and did not accompany her husband. She was interested in singing and occasionally went out on concert tours, which were artistic successes but not profitable ventures.
17. Cornelius was used to having other people do virtually everything for him all his life. For example, when he wanted to mail a letter, he would drop it on the floor, knowing someone would pick it up and mail it for him. He delegated to a friend the task of writing a book about his expedition to New Guinea.
18. Cornelius and plaintiff were more alike than different in various respects. Neither had ever been gainfully employed. Both were unconcerned with, and uninterested in, finances and property management. While Cornelius occupied himself with his interests in archeology and anthropology, plaintiff occupied herself with concert tours and charitable endeavors, such as bolstering an old opera singer who had fallen on difficult days.
19. Cornelius left the management of his money and the payment of bills to J. K. Prentice. Prentice had been his father's private secretary; he was an executor of the father's estate, a trustee of the testamentary trusts created by the father, a friend to all the family and the family confidant. He brought up Cornelius, took a paternal interest in him, and managed his personal budget (as well as that of the entire Crane family), and stood in place of a father to Cornelius after R. T. Crane, Jr. died.
20. Plaintiff did not at any time during her marriage to Cornelius hold a position for which she received a salary. She took no part in the operation of the Crane Company.
21. Cornelius had a different attitude toward money than most people. For example, very early in his marriage to plaintiff he became "sick" of Bermuda and suddenly sold for the extraordinarily low price of $25,000 Tucker's Island in Bermuda (see finding 14), together with the house thereon (which had been largely restored), the furnishings (including antiques and other items therein belonging to plaintiff), and four boats including a 50-foot motor launch. He purchased property in Tahiti without even having seen it. On the other hand, he did not like trades people; he resented their desire to be paid and said that it was an honor for them to deal with him. For example, when Cornelius and plaintiff were on their honeymoon, he was annoyed when the chauffeur who drove them from Cherbourg to Paris wished to be paid (including reimbursement for money Cornelius had borrowed from him) and would not pay him, telling plaintiff to do so. On a number of occasions, he invited people to go out to dinner with him and then did not have any money to pay the check. Plaintiff often had to pay for taxis, dinners, theatre tickets, etc. because Cornelius did not have money with him. Plaintiff either had to pay the household bills with her own funds or send them to Prentice for payment because Cornelius refused to pay them. When living in the Crane family home in Chicago, however, plaintiff had nothing to do with the household bills. At no time did plaintiff demand repayment from Cornelius for the funds she expended.
22. At the time of her marriage to Cornelius, plaintiff had certain property of undetermined value, consisting of stocks, bonds, antiques, jewelry, and other personal effects, which she had received by way of gifts from her mother and grandmother. After the marxiage she turned over most of her stocks and bonds to the Crane family to manage, but retained such stocks and bonds in her own name. While Cornelius' father, R. T. Crane, Jr., was alive, she converted some of her stocks and bonds into Crane Company stock. In addition, during her marriage to Cornelius, but only before 1936 or 1937, she received gifts, including Crane Company stock, of undetermined value from Cornelius and, prior to his death, from his father. After the father's death, the Crane family investment counselor, C. C. Jung, managed her stocks and bonds.
23. Jung was retained in 1934 or 1935 to advise the executors of the R. T. Crane, Jr. estate and he helped them resolve extremely serious investment problems. Pie was employed by Sheridan, Farwell and Morrison, Inc., a firm of investment counselors in Chicago, becoming vice president in 1936 and by 1940 executive vice president and general manager. He first met Cornelius in 1935 or 1936, in connection with his work for the Crane estate, and thereafter became financial adviser to tbe entire Crane family (including plaintiff until her divorce from Cornelius). He worked closely with Cornelius, seeing him frequently, and remained his investment counselor until Cornelius' death; however, he had no contact with plaintiff after her divorce from Cornelius.
24. Throughout his marriage to plaintiff, Cornelius continued his sailing expeditions and was away for extended periods of time; plaintiff did not accompany him on these trips. After February 1936, Cornelius and plaintiff did not live together as man and wife, although they occasionally lived imder the same roof. There was, however, no decree of separation or separation agreement between them. Cornelius continued to support plaintiff and her daughter as he had before, the bills usually being paid by Prentice.
25. By 1938, plaintiff considered divorcing Cornelius and asked R. M. Ashcraft, who was her attorney as well as Cornelius', to represent her in the divorce. He told her that he could not and, at some time thereafter, she retained George Townley, an attorney in New York City, to represent her. However, plaintiff did not pursue her plans for a divorce at that time.
26. On November 22, 1939, Cornelius adopted plaintiff's daughter by her first marriage, who thereupon took the name of Cathalene Parker Crane. Plaintiff and Cornelius had no children of their own and for a long time Cornelius had promised to adopt plaintiff1's daughter and to make her some sort of gift of property. The adoption was finally prompted, in part, by Cornelius' desire to effect a reconciliation with plaintiff and forestall a divorce.
27. Upon the happening of some incident, plaintiff finally reached a firm decision to go ahead with the divorce and contacted Townley, her New York attorney, who associated an attorney in Chicago. Plaintiff filed the divorce action on February 19, 1940, and the divorce was granted, on the ground of desertion, by a decree of the Circuit Court of Cook County, Illinois, on February 23, 1940. On February 20, 1940, Cornelius and plaintiff entered into an Agreement which was to become effective in the event that plaintiff obtained a divorce.
28. Up to the final day of the divorce, Cornelius called plaintiff frequently and tried to dissuade her from going through with it.
29. Plaintiff, being extremely nervous and upset and in a state of emotional turmoil, left all the arrangements for the divorce and the negotiations for the Agreement of February 20, 1940 to her attorneys. She participated in the negotiations only in the sense of telling her attorneys what she wanted and what she did not want. At the time that she finally decided to proceed with the divorce, plaintiff told her attorney that she wanted a lump sum and told him to find out from Cornelius what would be fair. Her attorney told her she had what was calied a dower right and that such right was a third of an estate. She felt that having been his wife, and a good wife, something was due her and she wanted any settlement in a lump sum so that she would never again have to go back to Cornelius or Prentice and ask for anything — for household money and things like that in the future; she wanted all ties cut. Plaintiff did not participate in any meetings between her attorney and Cornelius and his representatives. Iiowever, during the course of the negotiations, Cornelius told her that she would receive a lump-sum payment.
30. As of February 10, 1940, plaintiff owned stocks and bonds having a market value of $347,'753. In addition, she had an automobile and personal effects, including jewelry, of undetermined value. Stocks and bonds, such as those she owned on such date, produced income in the form of dividends and interest in the total amount of $10,939.85 in 1939 and $13,611.45 in 1940.
31. As of February 1, 1940, Cornelius owned in his own name income-producing assets, consisting of stocks and bonds, with a market value of $1,977,647. He also received income from trusts established by his father. In addition, he had non-income producing property consisting of a pex*-sonal bank account; a yacht; a boat; an automobile; various personal effects; real estate in Tahiti; a fee simple title to Choate Island and Dean's Island in Essex, Massachusetts; and a remainder interest in Castle Hill, Castle Neck and Heard Lot, Ipswich, Massachusetts.
32. In connection with the determination of what settlement he should make with plaintiff at the time of the divorce, Cornelius consulted with and was advised by Ashcraft (his attorney), Jung and Prentice, discussing with them what would constitute a proper and reasonable property settlement for her in the event the divorce was granted. He stated that he was hopeful that there would be no divorce but that if there was, he would be willing to make a reasonable property settlement, based on his assets, to take care of her and that he wanted to be, if anything, liberal in the amount of settlement. Jung was requested to and did determine the value of Cornelius' income-producing assets which Cornelius had under his control, and such value was determined as being approximately $2,000,000. Cornelius then inquired of his attorney, Ashcraft, as to whether it was correct that if he died without a will, plaintiff would get one-third of that amount. Ashcraft said that would probably be right by virtue of her dower rights. Cornelius then stated to his advisers that he and plaintiff had been married for ten years and that he thought he should make a property settlement which substantially represented her dower rights in his assets. In addition, he indicated he wanted to make a filial disposition of his obligation to plaintiff's daughter, whom he had recently adopted. He stated to his advisers that he would give plaintiff the round figure of $650,000 from his present assets, which was roughly equal to a third of his assets of $2,000,000, and that this would be in settlement of any claims then and forever that plaintiff would have against him. He also stated that he wanted an additional settlement to be made for her daughter so as to bring the total amount of settlement for both up to 40 percent of his assets, or approximately $800,000. He told his advisers to work out the details.
33. Prentice approved of Cornelius' decision to make a liberal settlement with plaintiff, but he expressed a firm conviction that she should not be given negotiable principal outright (in addition to what she had received by way of gift), since be feared that she might give it away or that someone might take it from her. Prentice accordingly suggested translating the amount of principal which had been determined (i.e., $650,000) into terms of an annuity and giving her the principal in that form, so that no one could take it away from her. Ashcraft approved this basis of settlement.
34. At the time Prentice made this suggestion neither Cornelius nor his advisers knew or discussed what annuity income would be produced by $650,000. Therefore, they then made inquiries of insurance companies to ascertain how much of an annuity for a person of plaintiff's age and description could be bought for $650,000 and were informed by such insurance companies that approximately $647,000 would buy an "exact" or "round" amount of $25,000 per year. Cornelius decided that he would give the amount required to produce such "exact" or "round" annual annuity payment. The amount of the income to be paid was the result of the determination of the approximate amount of principal to be paid, not the cause of such amount. In the discussions which Cornelius had with his advisers, there was no mention of alimony; Cornelius simply determined that he would give plaintiff part of his assets.
35. At no time did anyone mention alimony in the discussions in which plaintiff participated with her attorney, Cornelius or any of his advisers. Cornelius told her that she would receive a lump sum over which she would have unrestricted control, and plaintiff understood that she would get a "one-time payment." However, at or after the time Cornelius told her this, and before the written Agreement was executed, she met with Cornelius and Prentice. Prentice asked her what she would do with the money she was to receive; she said she would put it in the bank, but Prentice expressed fear that she would give the money away and lose it all. She asked him to advise her as to what would be a good safe investment, and he said that he would let her know. He later advised her that insurance annuities would be the safest form of investment for the money she was to repeive, stating that she would get back her money little by little; that it would always be there and could not be dissipated; and that in that way she would have something that would always be safe in today's world. She agreed to follow this suggestion to invest the money in annuities, and she asked Cornelius to obtain them for her. The actual arrangements for the purchase of the annuities were handled by one of Cornelius' advisers.
36. Plaintiff and Cornelius remained friendly at all times during, before and after the divorce proceedings. For many years Cornelius was executor of plaintiff's will and continued in that capacity after plaintiff's subsequent remarriage and until his death in 1962. As previously indicated (finding 28), up until the day of the divorce Cornelius wanted to avoid it and to have a reconciliation. Plaintiff knew and trusted Ashcraft, Jung and Prentice. She was also satisfied with the manner in which her attorneys represented her. They asked her whether she was willing to have the money invested in annuities and she responded in the affirmative. She relied on her attorneys in the negotiations and signed the papers which they asked her to sign.
37. The Agreement of February 20, 1940 was drafted by Ashcraft. It is set out in full in the Appendix hereto.
38. The provisions of the paragraph designated "First" in such Agreement providing a contingent right to Cornelius to receive a part or all of any refund which might be due under the annuity contracts upon plaintiff's death were included at the direction of plaintiff because she was grateful to Cornelius, had money of her own, and thought the inclusion of such provisions would be a "nice gesture." Cornelius was surprised when he heard of this; he did not want such provisions included, but finally agreed and said that he would give any money he might receive to plaintiff's daughter.
39. The provisions of the paragraph designated "Second" in such Agreement, which provided for the purchase of annuities for the benefit of plaintiff's daughter, were not demanded or requested by plaintiff.
40. At the time of her divorce from Cornelius, plaintiff did not transfer any of her stocks and bonds to him and made no transfers of property to him, except for some articles (such as feathered capes from Hawaii and primitive artifacts) that had no great intrinsic value. Except possibly for some household items, Cornelius did not transfer any property to plaintiff at the time of the divorce other than that provided in the Agreement of February 20,1940.
41. On February 23, 1940, Cornelius and plaintiff were divorced. The decree made no provision as to child support, property or alimony inconsistent with the Agreement. The decree discharged Cornelius of any obligation to pay alimony or support to plaintiff; it freed the property of each from any claim of the other; and it retained jurisdiction in the court solely for the purpose of making orders for child support.
42. On March 23, 1940, plaintiff married her present husband, Rudolf A. Bernatschke, a portrait painter, whose success was and is artistic rather than financial.
43. Subsequently, plaintiff received from either Ashcraft or Prentice two quitclaim deeds in favor of Cornelius which she and her husband were asked to sign. They executed a deed on June 13, 1940 granting to Cornelius "All the right, title or interest" which they or either of them might have "in any and all parcels of real estate and improvements thereon, riparian rights and rights of way, owned by" Cornelius, and released "all rights of Dower and Homestead and other interests," in such premises which were listed as follows: (1) Castle Hill and Castle Neck in Ipswich, Massachusetts; (2) Heard Lot in Ipswich; (3) Choate Island in Essex, Massachusetts; and (4) Dean's Island in Essex. Also on June 13, 1940, plaintiff and her husband executed a quitclaim deed which granted to Cornelius "All the right, title or interest" which they or either of them might have "in any and all parcels of real estate and improvements thereon, riparian rights, and rights of way," owned by Cornelius in the island of Tahiti, French Oceania, and released "all rights of Homestead and other interests in said premises." Plaintiff executed these quitclaim deeds in accordance with Paragraphs Fifth (b) and Sixth of the Agreement of February 20,1940.
44. Cornelius fulfilled his obligation under the Agreement of February 20, 1940 by liquidating a substantial portion of his income-producing assets and having one of his advisers in the months following the divorce purchase for the total amount of $645,492.24 thirteen, annuity policies from various insurance companies to provide total annual payments of $25,000 for plaintiff. Plaintiff has received $25,000 per year under the annuity policies in each year since 1940 and her daughter has received $5,000 per year. Such policies contained the beneficiary provisions specified in Paragraph First of the Agreement of February 20,1940.
45. Plaintiff's standard of living changed markedly after her divorce from Cornelius, since she could no longer afford to live in the kind of luxury produced by the Crane family's great wealth.
46. Cornelius died on July 9,1962, at the age of 57. Ash-craft, Prentice and Townley are also deceased.
47. In the years here involved plaintiff has received dividends and interest income from her stocks and bonds, ranging from about $23,000 to $30,000 each year, which income is over and above the $25,000 each year received under the annuity contracts. At the present time, her stocks and bonds are worth approximately $1,000,000. Plaintiff does not segregate the funds she receives; thus, the $25,000 which she receives each year is, together with her dividend income, deposited in various types of bank accounts and used for normal living expenses, taxes, investments and savings.
48. The parties have stipulated that if the amount of $25,000 received by plaintiff Cathalene Crane Bernatschke under the annuity contracts purchased hi 1940 is not includi-ble in plaintiff's gross income mider Section 71, but is instead taxable under the rules of Section 72 of the Internal Bevenue Code of 1954, then the sum of $7,199.05 (rather than $25,000) was properly includible in plaintiff's gross income in each of the years involved.
49. The parties have also entered into a stipulation, approved by the commissioner, limiting the trial to the issues of law and fact relating to the rights of plaintiffs to recover, reserving the determination of the amount of recovery, if any, for further proceedings.
Ultimate FINDINGS
50. At no time during the negotiation of the Agreement of February 20,1940 was there any mention of alimony. Plain tiff did not request it and Cornelius did not mention it. Nor was there any attempt to determine the extent or dollar value of Cornelius' obligation to support plaintiff or to pay alimony. The amount which plaintiff received pursuant to the Agreement was derived solely on the basis of (i) the income-producing property then owned outright by Cornelius, and (ii) what the parties understood to be plaintiff's intestate share in his estate or "dower" rights; such amount was determined without reference to any obligation to support or pay alimony. The parties did not intend that any part of such amount should be paid by way of alimony or as support for plaintiff. To the extent that the written Agreement indicates that any portion of the cost of the annuities represented alimony or a payment in discharge of any obligation of Cornelius to support plaintiff, it is contrary to the intent of the parties thereto.
51. Plaintiff understood from Cornelius that she would receive a lump-sum payment. Subsequently, but before the execution of the Agreement of February 20, 1940, plaintiff agreed to the recommendation of Prentice to invest such amount in annuity contracts. The annuities were purchased by Cornelius' advisers at the request of plaintiff.
52. The cost of the annuity contracts paid by Cornelius pursuant to the Agreement of February 20, 1940 was not based on the marital obligation to support but rather was based on a settlement in the nature of a property settlement under which plaintiff's inchoate interests in Cornelius' property under Illinois law were extinguished.
CONCLUSION OF LAW
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are entitled to recover, together with interest as provided by law, and judgment is entered to that effect. The amount of recovery will be determined pursuant to Rule 47(c) (2).
In accordance with the opinion of the court and a stipulation of the parties, it was ordered on September 16,1966, that judgment be entered for the plaintiffs for $44,312.27.
APPENDIX
THIS AGREEMENT made and entered into in the City of Chicago, County of Cook, and State of Illinois, this 20th day of February, A.D. 1940, by and between CATHALENE CRANE and CORNELIUS CRANE, both of Chicago, Illinois,
WITNESSETH:
WHEREAS, the parties hereto were legally married to each other on the 15th day of October, A.D. 1929, in the City of Newark, New Jersey, and lived together as man and wife until about the 1st day of February, A.D. 1936, since which time they have lived separate and apart; and
WHEREAS, there were no children born of said marriage but CATHALENE PARKER BROWNING, the daughter of CATHALENE CRANE 'by a former marriage, was legally adopted by the parties hereto, and by the decree of adoption became and now is known as CATHALENE PARKER CRANE; and
WHEREAS, on the 19th day of February, A.D. 1940, CATHALENE CRANE instituted an action against CORNELIUS CRANE in the Circuit Court of Cook County, Illinois, praying among other things that a decree of divorce be entered in favor of CATHALENE CRANE and for such other relief as equity might require, which cause is now pending in said court as Case No. 40 C 1680, entitled "CATHA-LENE CRANE, PLAINTIFF, vs. CORNELIUS CRANE, DEFENDANT," and
WHEREAS, each of the parties hereto is seized and possessed of separate property and estate, and CORNELIUS CRANE has made a full and complete disclosure to CATHALENE CRANE of his assets and property, and each of the parties is fully apprised of the financial position of the other, and of the properties owned by each, and of the income received by each; and
WHEREAS, in the event that the Court should hold that said CATHALENE CRANE is entitled to a divorce, then the parties hereto are desirous of making a complete adjustment and final settlement of all property rights and the respective interests of each of the parties in the properties of the other by virtue of their marital relation, and of releasing to the other all interest in the other's property, and CORNELIUS CRANE being desirous, by means of the undertakings on his part herein contained, of satisfying and discharging his obligation to pay alimony to CATHALENE CRANE, and being further desirous of providing for his minor daughter by adoption, CATHALENE PARKER CRANE,
Now, THEREFORE, in the event that the Court should hold that said CATHALENE CRANE is entitled to a divorce, and in consideration of the premises and of the undertakings hereinafter set forth, it is hereby covenanted and agreed by and between the parties hereto as follows:
FIRST: CORNELIUS CRANE hereby agrees, within sixty days from the date hereof, in lieu of alimony, to deposit with one or more life insurance companies in the United States, acceptable to CATHALENE CRANE, a sum or sums of money sufficient to purchase annuity contracts which shall yield the sum of Twenty-five Thousand Dollars ($25,000.00) per year payable to CATHALENE CRANE during her lifetime, which sum of money is estimated to be approximately Six Hundred Forty-seven Thousand Dollars ($647,000.00); such annuities may be payable quarterly or semiannually, at the election of the said CORNELIUS CRANE; which annuity contracts shall provide in substance that there shall be no power to revoke the annuities therein provided, nor any power to change the beneficiaries without the consent of both parties hereto; and such annuity contracts shall provide in substance that upon the death of CATHALENE CRANE any refund that may be due under the terms of said policies shall thereupon be divided equally between CATHALENE PARKER CRANE and CORNELIUS CRANE, and in the event of the prior decease of CATHALENE PARKER CRANE leaving lawful issue her surviving, then the share which CATHALENE PARKER CRANE would have been entitled to receive had she been living shall be distributed to such lawful issue, per stirpes and not per capita, and if CATHALENE PARKER CRANE shall leave no lawful issue her then surviving, then to CORNELIUS CRANE if living and if not living then to his estate. Likewise, in the event of the prior decease of CORNELIUS CRANE, the share which he would have been entitled to receive if living shall be distributed to CATHALENE PARKER CRANE if living and if not living then to her then living lawful issue per stirpes or, if no lawful issue, then to the estate of CORNELIUS CRANE.
SECOND: The said CORNELIUS CRANE further agrees, on or before May 31, 1941, to deposit with one or more life insurance companies in the United States, acceptable to CATHALENE CRANE, a sum or sums of money sufficient to purchase annuity contracts which shall yield the sum of Five Thousand Dollars ($5,000.00) per year, payable to CATHALENE PARKER CRANE during her lifetime, which sum of money is estimated to be approximately One Hundred Forty-five Thousand Dollars ($145,000.00); such annuities may, at the election of CORNELIUS CRANE, be payable monthly, quarterly or semiannually; which annuity contracts shall provide in substance that there shall be no power to revoke the annuities therein provided, nor any power to change the beneficiaries without the consent of both parties hereto; such annuity contracts shall provide further that upon the death of the said CATHALENE PARKER CRANE any refund which may be due under said contracts shall be paid per stirpes to the lawful issue of the said CATHALENE PARKER CRANE, if any, otherwise to CATHALENE CRANE, her mother, if living, or CORNELIUS CRANE, her father by adoption, if the said CATHALENE CRANE be not living, and if CORNELIUS CRANE shall not then be living to his estate.
THIRD: CORNELIUS CRANE will pay to GEORGE T. TOWNLEY, of 220 East 42nd Street, New York, New York, counsel for CATHALENE CRANE, the sum of Twelve Thousand Five Hundred Dollars ($12,500.00), in full settlement of any and all attorney's and solicitor's fees in connection with this settlement and said divorce proceedings.
FOURTH: CORNELIUS CRANE further undertakes and agrees to waive, release, quitclaim, relinquish, sell, assign and convey to CATHALENE CRANE, and by these presents does hereby waive, release, quitclaim, relinquish, sell, assign and convey to CATHALENE CRANE, all rights of dower, as well as all rights and claims as husband, widower or otherwise, by reason of the marital relation of the parties hereto, that he now has or may hereafter acquire under any present or future law of the State of Illinois, and of any other State of the United States of America, and of any foreign country, in and to any and all property and estate of the said CATHALENE CRANE, whether now owned or hereafter acquired by her, both real, personal and mixed, including any such right or claim of dower in and to real estate, the legal or equitable title to which is now held by the said CATHALENE CRANE, and he hereby covenants with the said CATHALENE CRANE, her heirs, executors, administrators and assigns, that neither he nor any other person for him shall at any time hereafter 'bring or prosecute any such claim or demand against the said CATHALENE CRANE, her heirs, executors, administrators or assigns, or against her or their lands or tenements or other properties, but that he and they shall forever after be excluded and barred from all such actions, claims and demands.
FIFTH: CATHALENE CRANE hereby agrees:
(a) To accept and receive the payments provided for herein, to be made by CORNELIUS CRANE, in lieu of all claims of alimony which she may by virtue of said decree have against him, in full and complete settlement, satisfaction, discharge and release of all right, title and interest, present, future, contingent or inchoate, that she might have or claim to have, or hereafter can, shall or may have, by virtue of the marriage between the parties, or otherwise, in or to any of the estate or property of any kind or nature that may now or hereafter belong to the said CORNELIUS CRANE, or that may now or hereafter be possessed or acquired by him.
(b) To waive, release, quitclaim, relinquish, sell, assign and convey, and by these presents does hereby waive, release, quitclaim, relinquish, sell, assign and convey to the said CORNELIUS CRANE, his heirs, executors, administrators and assigns, all rights of dower, as well as all rights and claims as wife, widow, or otherwise, by reason of the marital relation of the parties hereto, that she now has or may here after acquire under any present or future law of tire State of Illinois, and of any other State of the United States of America, and of any foreign country, in and to any and all property and estate of the said CORNELIUS CRANE, whether now owned or hereafter acquired by him, both real, personal and mixed, including any such right or claim of dower in and to any real estate, the legal or equitable title to which is now held by the said CORNELIUS CRANE, and hereby covenants with the said CORNELIUS CRANE, his heirs, executors, administrators and assigns, that neither she nor any other person for her shall at any time hereafter bring or prosecute any such claim or demand against the said CORNELIUS CRANE, his heirs, executors, administrators or assigns, or against his or their lands or tenements or other properties, but that she and they shall forever after be excluded and barred from all such actions, claims and demands.
SIXTH: Each of the parties hereto agrees with the other to execute any and all documents at any time hereafter which may be necessary to effect the undertakings herein contained.
SEVENTH: This agreement shall be binding upon and shall inure to the benefit of the heirs, executors, administrators, trustees and assigns of the respective parties hereto.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written.
[S] Cathalene Crane, (Seal.)
[S] Cornelius Crane, (Seal.)
The opinion, findings of fact and recommended conclusion of law are submitted under tbe order of reference and Rule B7 (a),
Plaintiff Cathnlene Crane Bernatschke's present husband, Rudolf A. Bernatschke, is a party to the proceedings because joint returns were filed for the tax years In question. All references hereafter to plaintiff will refer to Cathalene Crane Bernatschke.
The Agreement recites that plaintiff had instituted a divorce action against Cornelius Crane; that each of the parties was possessed of separate property and estate; that each of the parties was fully appraised of the financial position of the other; that the parties were "desirous of making a complete adjustment and final settlement of all property rights and the respective interests of each of the parties in the properties of the other by virtue of their marital relation, and of releasing to the other all interest in the other's property"; and that Cornelius Crane was desirous of "satisfying and discharging his obligation to pay alimony to [plaintiff].." The Agreement provides that in the event plaintiff was found by the court entitled to a divorce, Cornelius Crane agreed "in lieu of alimony, to deposit with one or more life insurance companies a sum or sums of money sufficient to purchase annuity contracts which shall yield the sum of $25,000 per year payable to [plaintiff] during her lifetime, which sum of money is estimated to be approximately $647,000. " The Agreement states that the annuity contracts were to provide in substance that there was to be no power to revoke the annuities therein provided, nor any power to change the beneficiaries without the consent of both parties; that upon the death of plaintiff, any refund due under the policies was to be divided equally between the daughter of plaintiff (who had been adopted by Cornelius Crane) and Cornelius Crane; and that in the event of the prior decease of Cornelius Crane, any refund was to be distributed to plaintiff's daughter. The Agreement provides that plaintiff agreed to accept the payments "in lieu of all claims of alimony which she may by virtue of said decree have against him." It also provides that Cornelius Crane "does hereby waive, release, quitclaim, relinquish, sell, assign and convey" to plaintiff "all rights of dower, as well as all rights and claims as husband, widower or otherwise" in and to "all property and estate" of plaintiff, "both real, personal and mixed". In addition, plaintiff gave, in the same language, a release and conveyance to Cornelius Crane of "all rights of dower, as well as all rights and claims as wife, widow, or otherwise."
The parties have stipulated that if the annuity amount of $25,000 received by plaintiff is taxable under Section 72 rather than under Section 71, then the sum of $7,199.05 (rather than $25,000) was properly includible in her gross Income for each of the years in issue.
The provision was enacted as a portion of Section 22(k) of the Internal Revenue Code of 1939, by Section 120(a) of the Revenue Act of 1942, 56 Stat. 816. When the Internal Revenue Code of 1954 was enacted, the language of Section 22 (k) was "restated for purposes of clarity", but no substantive change was made. H. Rep. No. 1337, 83d Cong., 2d Sess., pp. A-20 — A-21 (1954). See also S. Rep. No. 1662, 83d Cong., 2d Sess., p. 170 (1954).
Though the 1942 Act was adopted some two years after plaintiff's divorce from Cornelius Crane, the Act made these provisions' applicable, in general, to amounts received in taxable years beginning after December 81, 1941, regardless of the date of the divorce or written instrument. See Section 120(g) of the Revenue Act of 1942, 56 Stat. 818 ; Mahana v. United States, 115 Ct. Cl. 716, 88 F. Supp. 285 (1950), cert. den. 339 U.S. 978 (1950).
Under Chapter 3, Section 11 of the Illinois Code, effective January 1, 1940 (Ill. Rev. Stat. 1941, Ch. 3, § 162), the surviving spouse of a resident intestate decedent was entitled to one-third of his real and personal property when there was also a surviving descendant of the decedent; under Chapter -3, Section 14, a lawfully adopted child was deemed a descendant for this purpose (Ill. Rev. Stat. 1941, Ch. 3, § 165).
It is not necessary that there be an exact, mathematical division of property in order for a divorce agreement to constitute a property settlement. In Scott v. Unites States, 225 F. Supp. 257 (D. Oreg. 1963), it was held that payments received by the wife were pursuant to a property settlement and not taxable under Section 71, even though neither the wife nor the husband knew what property stood in their individual names and what property stood in their joint names.
Even under the somewhat unusual facts of the present case, it would be unrealistic to regard the transaction here as a gift. "Property transferred pursuant to a negotiated settlement in return for the release of admittedly valuable [inchoate marital] rights is not a gift in any sense of the term." United States v. Davis, 370 U.S. 65, 69, fn. 6 (1962).
The concept of "alimony" and "support" under Section 71 is not governed by "the laws of different States concerning the existence and continuance of an obligation to pay alimony." H. Rep. 2333, 77th Cong., 2d Sess., p. 72 (1942). See also e.g., Taylor v. Campbell, 335 F. 2d 841, 845-46 (5th Cir. 1964) ; Bardwell v. Commissioner, 318 F. 2d 786, 789 (10th Cir. 1963).
In view of this conclusion, it is unnecessary to pass upon plaintiff's alternative contention that she in substance purchased the annuities with her own money, with Cornelius acting, in effect, as her agent for that purpose.
No claim for refund was filed for the year 1960 and plaintiffs seek no recovery for tliat year.
Plaintiff recovered some of tlie furnishings in the house that belonged to her, such as Irish linen sheets; as to those not recovered, she never at any time requested Cornelius to pay her for such items.
Cornelius was one of the trustees of these trusts, but bad no control over them from the standpoint of being able to use the principal for his own benefit; he had a right, however, to receive principal from the trusts contingent upon the act of others.