1. A husband, creating a trust for the support of his wife, from
whom he was separated, and in settlement of a suit brought by her
for maintenance, transferred to a trustee in Iowa certain premises
and a lease thereon. A stipulated amount of the income was to be
paid monthly to the wife, and the trust was irrevocable. The
husband reserved no interest in the trust estate (other than a life
interest in the excess of income over the amount payable to the
wife), and did not undertake to make good any deficiencies in
payments to the wife. The arrangement was subsequently confirmed by
an Iowa court in a decree of divorce.
Held, a distribution of such trust income to the wife
(in 1933) was includible as income of the husband for the purpose
of the federal income tax. Pp.
309 U. S. 150,
309 U. S.
156.
2. The general rule is that amounts paid to a divorced wife
under a decree for alimony are not regarded as income of the wife,
but as paid in discharge of the general obligation of the husband
to support, which is made specific by the decree.
Douglas v.
Willcuts, 296 U. S. 1. P.
309 U. S.
151.
3. The burden of establishing that the present case was not
within the general rule could be sustained only by clear and
convincing proof, here lacking, that the effect of the Iowa law,
the trust, and the divorce decree was a full and complete discharge
of the obligation of the taxpayer for the support of his wife. P.
309 U. S.
156.
4. Query whether, under the Iowa divorce law, the court retained
power to modify its decree by reallocating the income from the
trust property as between the husband and wife. P.
309 U. S.
155.
103 F.2d 702, reversed.
Certiorari, 308 U.S. 535, to review the reversal of a decision
of the Board of Tax Appeals, 37 B.T.A. 1330, sustaining a
determination of a deficiency in income tax.
Page 309 U. S. 150
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
Petitioner claimed that an amount of $7,128 distributed in 1933
under a so-called alimony trust to respondent's divorced wife
should have been included in respondent's taxable income for that
year. The Board of Tax Appeals agreed, and found a deficiency. 37
B.T.A. 1330. The Circuit Court of Appeals reversed, and judge
dissenting, 103 F.2d 702. We granted certiorari, 308 U.S. 535,
because of the asserted failure of that court correctly to apply
the principle involved in
Douglas v. Willcuts,
296 U. S. 1.
The so-called alimony trust in question was created a few years
before the divorce, while respondent and his wife were separated,
and in settlement of a suit brought by her for separate
maintenance. Certain premises (a hair tonic factory and a long-term
lease thereon) were transferred to a trustee to hold title, collect
rents and after deduction of expenses to pay the wife $600 a month
during her life, and the balance to respondent for his life.
[
Footnote 1] On the death of
either respondent or his wife, the deceased's
Page 309 U. S. 151
share of the income was to be paid to their children. [
Footnote 2] The trust was to continue
at least fifteen years. On the death of both respondent and his
wife, the principal was to be paid over to their children. The
trust was irrevocable. And while respondent covenanted to pay off
certain encumbrances on the trust property, he did not underwrite
in whole or in part the $600 monthly payments to his wife.
In 1925, she filed suit for a divorce in an Iowa court. A
property settlement was agreed upon which included the trust
agreement and, in addition, provided for a transfer to her by
respondent of certain shares of stock and cash. [
Footnote 3] The divorce decree confirmed the
property and alimony settlement. [
Footnote 4]
The general rule is clear.
"Amounts paid to a divorced wife under a decree for alimony are
not regarded as income of the wife, but as paid in discharge of the
general obligation to support, which is made specific by the
decree."
Douglas v. Willcuts, supra, p.
296 U. S. 8. It is
plain that there, the alimony trust, which was approved by the
divorce decree, was merely security for a continuing obligation
Page 309 U. S. 152
of the taxpayer to support his divorced wife. That was made
evident not only by his agreement to make up any deficiencies in
the $15,000 annual sum to be paid her under the trust. It was also
confirmed by the power of the Minnesota divorce court subsequently
to alter and revise its decree and the provisions made therein for
the wife's benefit. Likewise consistent with the use of the alimony
trust as a security device was the provision that, on death of the
divorced wife, the corpus of the trust was to be transferred back
to the taxpayer. Respondent insists that, in the instant case,
there is no continuing obligation to which the income of the
alimony trust is applied, but rather that the property and alimony
settlement approved by the Iowa court effected an absolute
discharge of any duty or obligation on his part to support his
divorced wife. It is true that there is no covenant or guarantee to
make up any deficiency in the monthly payment to his divorced wife,
as there was in the
Douglas case. And unlike that alimony
trust, the instant one, though granting the taxpayer a
participation in the income, irrevocably alienates the corpus.
Other indicia of the use of this alimony trust as a security device
for any continuing obligation of respondent are alleged to be
absent by reason of the lack of power in the Iowa court to modify
the decree confirming the property and alimony settlement.
The Iowa statute provides:
"When a divorce is decreed, the court may make such order in
relation to the children, property, parties, and the maintenance of
the parties as shall be right. Subsequent changes may be made by it
in these respects when circumstances render them expedient.
[
Footnote 5]"
Admittedly the court under that statute has the power to modify
provisions in the original decree for the continued
Page 309 U. S. 153
support and maintenance of the wife. [
Footnote 6] And it likewise seems well settled by a
long line of Iowa cases that, where the original decree makes no
provision for alimony, there is no power subsequently to modify the
decree so as to provide it. [
Footnote 7] And, respondent contends, where alimony is
allowed in a lump sum or a property settlement is ratified by the
decree, the court retains no power to modify.
Spain v. Spain, 177 Iowa, 249, 158 N.W. 529, and
McCoy v. McCoy, 191 Iowa, 973, 183 N.W. 377, on which
respondent and the Circuit Court of Appeals place reliance, are not
in point, since those divorce decrees, unlike the instant one, made
no provision for alimony. In
Spain v. Spain, supra, the
Supreme Court of Iowa specifically reserved the question of the
power to modify a divorce decree involving a property settlement.
As to that, it said (pp. 260-261):
"As to an award in gross or a division of the property based
upon an equitable apportionment of the property of either of the
parties at the time the divorce is granted, we have no occasion to
speak, for that matter is not in the case."
Likewise,
Barish v. Barish, 190 Iowa 493, 180 N.W. 724,
cited below and urged here in support of respondent's contention,
is of little aid, for, in spite of a strong concurring opinion that
the court had no power to modify an allowance of "gross" or
"permanent" alimony, the majority applied the statute and concluded
(p. 501):
"Whatever the extent of the power of the court may be to make
such increase, it is always slow to exercise such
Page 309 U. S. 154
power, except in the presence of extraordinary circumstances
such as are not present here."
To be sure, there is the following strong statement in
Kraft
v. Kraft, 193 Iowa, 602, 607, 187 N.W. 449, 451:
"We are inclined to the view that, where alimony is allowed in a
lump sum as permanent alimony, or there is a division of the real
property of the parties, as permanent alimony, the statute does not
authorize a change therein, except for such reasons which would
justify the setting aside or changing a decree in any other case;
that the party awarded permanent alimony is not entitled to
permanent alimony and support both. . . ."
And in
Carr v. Carr, 185 Iowa, 1205 at 1211, 171 N.W.
785 at 787, that court stated:
"Alimony is allowed in lieu of dower and the prior duty of
support, and a review of the decree awarding or refusing same can
be had only for such fraud or mistake as would authorize the
setting aside or modification of any other decree."
In that case, the divorce decree required the husband,
inter
alia, to convey certain real estate to a trustee for the
exclusive benefit of the wife to be held in trust for five years,
during which time the income was to be paid over to the wife and,
at the end thereof, the trustee, on demand, was to convey the
property to her. Meanwhile, the trustee had the power to sell the
property at not less than $100 an acre. Shortly before the
expiration of the five-year period, the divorced husband filed a
cross-petition in the divorce suit asking for a modification of the
trust in order to protect his former wife from her own extravagance
and her inexperience in business affairs. Apparently the relief
asked was not based on the Iowa statute giving the court power to
make subsequent changes in the divorce decree "when circumstances
render them expedient." For the court stated that the modification
of the decree was sought on the grounds (1) that the donor of the
trust was entitled to have it carried out
Page 309 U. S. 155
in accordance with its terms and the real purpose for which it
was created, and (2) that, in the alternative, he was entitled to
have a guardian of the property appointed.
However that may be, much of the weight which respondent accords
Kraft v. Kraft and
Carr v. Carr, supra, seems to
have been dissipated by
McNary v. McNary, 206 Iowa 942,
221 N.W. 580. In that case, the Supreme Court of Iowa had squarely
before it the question of whether or not, under the foregoing
statute, a decree of permanent alimony awarding personal and real
property to the wife could be altered. The court, after stating
that it knew of no case where such a decree had been subsequently
modified, added (p. 946): "This question is not argued by the
parties, and we find it unnecessary to make a pronouncement
thereon." And, significantly, it proceeded to apply the statute,
and, finding that its conditions had not been satisfied, it denied
the relief asked by the divorced husband.
On this state of the Iowa authorities, we can only speculate as
to the power of the Iowa court to modify alimony awarded in a lump
sum or a property settlement ratified by a divorce decree. To be
sure,
Kraft v. Kraft, supra, involved some features common
to the instant case, since the wife was to receive the income of
$4,000 to be placed in trust by the husband or, until he placed it
in trust, 5 percent on that amount. But the refusal to modify that
decree was not placed squarely, or even largely, on the lack of
power to do so, but on other circumstances. Furthermore, the
uncertainty created by
McNary v. McNary, supra, makes
perhaps for even greater uncertainty where an alimony trust of the
kind here involved is concerned. At least respondent has not
established a necessary identity in treatment of transfers of
personal or real property, on the one hand, and allowance
Page 309 U. S. 156
of income out of this kind of alimony trust, on the other. Even
on the authority of
Kraft v. Kraft, supra, respondent has
not clearly shown that, in Iowa divorce law, the court has lost all
jurisdiction to alter or revise the amount of income payable to the
wife from an enterprise which has been placed in trust. For all
that we know, it might retain the power to reallocate the income
from that property even though it lacked the power to add to or
subtract from the corpus or to tap other sources of income.
[
Footnote 8] If it did have
such power, then it could be said that a decree approving an
alimony trust of the kind here involved merely placed upon the
preexisting duty of the husband a particular and specified
sanction. In that event, the case would be little different from
one where the husband was directed to make specified payments to
the divorced wife. And we see no reason why the rule of
Douglas
v. Willcuts, supra, should not then apply.
Enough has been said to show that respondent has not sustained
the burden of establishing that his case falls outside the general
rule expressed in
Douglas v. Willcuts, supra. If we were
to conclude that this case is an exception to that rule, we would
be acting largely on conjecture as to Iowa law. That we cannot do.
For, if such a result is to obtain, it must be bottomed on clear
and convincing proof, and not on mere inferences and vague
conjectures, that local law and the alimony trust have given the
divorced husband a full discharge, and leave no continuing
obligation, however contingent. Only in that event can income to
the wife from an alimony trust be treated under the revenue acts
the same as income accruing from property after a debtor has
transferred that property to his creditor in full satisfaction
of
Page 309 U. S. 157
his obligation -- unless, of course, Congress decides
otherwise.
The judgment of the Circuit Court of Appeals is
Reversed.
MR. JUSTICE REED concurs in the result.
MR. JUSTICE McREYNOLDS is of the opinion that the judgment below
should be affirmed.
[
Footnote 1]
Respondent and his wife separated in 1917. In 1919, respondent
purchased a home for his wife, furnished it for her, and gave her
an automobile. In the same year, F. W. Fitch Co. was incorporated,
and acquired the assets of a predecessor partnership in exchange
for 2,000 of its shares. Of these shares, 1860 were issued to
respondent and 10 to his wife. She was also an officer and director
of the company, with a monthly salary of $300.
When the separate maintenance suit was settled in 1923,
respondent leased certain premises, owned by him, to the F. W.
Fitch Co. for 99 years at an annual rental of $12,000. These
premises and that lease were transferred to the trustee. Upon
creation of the trust, the wife ceased to be an officer and
director of F. W. Fitch Co., and received no further salary from
it.
[
Footnote 2]
No question of minor children is here involved, the youngest of
the four children having become of age in 1927.
[
Footnote 3]
600 shares of stock of F. W. Fitch Co. and $23,500.
[
Footnote 4]
"It is, Therefore, Ordered, Adjudged and Decreed, that the
plaintiff, Lettie S. Fitch, be, and she is hereby, divorced from
the defendant, Fred W. Fitch, absolutely; . . . that the trust
agreement which is referred to in the defendant's answer as having
been entered into between these parties on or about the 23rd day of
April, 1923, . . . be, and the same is hereby ratified and
confirmed by the court, and that the property and alimony
settlement made by the parties be, and it is hereby, confirmed by
the court."
[
Footnote 5]
ยง 10481, Iowa Code.
[
Footnote 6]
See Corl v. Corl, 217 Iowa 812, 253 N.W. 125;
Junger v. Junger, 215 Iowa 636, 246 N.W. 659;
Boquette
v. Boquette, 215 Iowa 990, 247 N.W. 255;
Toney v.
Toney, 213 Iowa 398, 239 N.W. 21;
Morrison v.
Morrison, 208 Iowa 1384, 227 N.W. 330.
[
Footnote 7]
Spain v. Spain, 177 Iowa 249, 158 N.W. 529;
McCoy
v. McCoy, 191 Iowa 973, 183 N.W. 377;
Handsaker v.
Handsaker, 223 Iowa 462, 272 N.W. 609;
Duvall v.
Duvall, 215 Iowa 24, 244 N.W. 718;
Doekson v.
Doekson, 202 Iowa 489, 210 N.W. 545.
[
Footnote 8]
Cf. Shaw v. Shaw, 59 Ill.App. 268.