In compliance with a separation agreement approved by a decree
of divorce in Nevada, the husband created an irrevocable trust of
shares of stock to continue for ten years, during which period all
trust income was to be used for the maintenance and support of the
wife, or, in case of her prior decease, then for the
Page 310 U. S. 70
children or, in case of their prior decease, then for the heirs
of the wife or as she should provide in her will. At the expiration
of the ten-year period, the trust property was to be transferred to
her outright. The husband retained "exclusive voting power" of the
shares during the term of the trust. Power to sell the stock vested
jointly in him, the wife, and the corporate trustee, and could be
exercised only in case all three agreed in writing. Those three had
the power to invest and reinvest the proceeds and to disburse,
withhold, and accumulate the principal of the trust at their
discretion, such power over the income being vested in the wife and
corporate trustee.
Held:
1. The question whether the husband is taxable on the trust
income under the Revenue Acts of 1928 and 1932 is not affected by
the fact that an independent undertaking on his part to make
certain weekly payments to his wife, not secured by the trust, was
contained in the same instrument with the trust agreement. P.
310 U. S.
73.
2. The provisions of the Revenue Acts of 1928, § 24(a)(1), and
1932, § 24, and Treasury regulations concerning the
nondeductibility of "family expenses" and of "alimony" imply the
necessity for an examination of the local law to determine the
marital status and the obligations which have survived a divorce.
P.
310 U. S.
74.
3. Under the law of Nevada, the decree and the trust agreement,
no power of modification having been reserved, operated to
discharge,
pro tanto, the husband's duty of support, and
under the Revenue Acts,
supra, he was not taxable on the
trust income. P.
310 U. S.
75.
4. Whether the trust agreement left the husband sufficient
interest in or control over the shares to make him the owner of the
corpus for the purposes of the federal income tax is a question not
raised or passed upon in this case. P.
310 U. S.
76.
105 F.2d 903 affirmed.
Certiorari, 309 U.S. 644, to review the reversal of a decision
of the Board of Tax Appeals, 37 B.T.A. 1333, sustaining a
determination of a deficiency in income tax.
Page 310 U. S. 71
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
This case raises the question of the circumstances under which
income paid to the taxpayer's divorced wife under a trust, the
provisions of which have been approved in the divorce decree, is
taxable to him. We granted certiorari because of the asserted
misapplication by the Circuit Court of Appeals of the rule of
Douglas v. Willcuts, 296 U. S. 1, to
these facts. 309 U.S. 644.
On July 25, 1930, respondent and his wife, residing in
Connecticut, entered into an agreement in contemplation of divorce
which provided,
inter alia, for the creation by him of a
trust of 60,380 shares of Class A common stock of the Fuller Brush
Co. The trust was irrevocable, and was to continue for ten years.
During that period, all trust income was to be used for the
maintenance and support of the wife, or, in case of her prior
decease, then for the children; or, in case of their prior decease,
then for the heirs of the wife or as she should provide in her
will. At the expiration of the ten-year period, the trust property
was to be transferred to her outright. The agreement provided for
other property settlements, for control and custody of the
children, and for waiver by respondent and his wife of all claims
against each other arising out of the marital relation. It also
contained an agreement on the part of respondent to pay the wife
$40 per week for five years, and, if at the end of that period his
annual net income exceeded by the amount of the weekly payments the
sum of $60,000, to continue those weekly payments for an additional
five years or for such portion thereof as his annual net income
exceeded the above sum.
Page 310 U. S. 72
The wife repaired to Reno, Nevada, and obtained a divorce decree
on November 12, 1930, which
"ordered, adjudged, and decreed that said agreement entered into
between the plaintiff and the defendant on or about the
twenty-fifth day of July, 1930, be and the same hereby is
approved."
On December 22, 1930, respondent created the trust provided for
in the agreement. [
Footnote 1]
The corporate trustee thereunder received from the Fuller Brush Co.
all the dividends and income from the trusteed shares during 1931,
1932, and 1933, and disbursed them all for the benefit of the
divorced wife. On the failure of respondent to include those
amounts in his tax returns for the years in question, the
Commissioner assessed deficiencies. The decisions of the Board of
Tax Appeals, 37 B.T.A. 1333, sustaining the action of the
Commissioner were reversed by the Circuit Court of Appeals. 105
F.2d 903.
Page 310 U. S. 73
I. There can be no doubt but that respondent is taxable on the
$40 weekly payment to the wife. That is a continuing personal
obligation falling within the rule of
Douglas v. Willcuts,
supra, as a result of which those payments are taxable to him,
not to the wife.
Gould v. Gould, 245 U.
S. 151. But that fact does not make the income from the
trust also taxable to him. Although the provisions for the weekly
payments and for the trust agreement were embodied in the same
separation agreement, they were not so interrelated or
interdependent as to make the trust a security for the weekly
payments. Functionally, they were as independent of each other as
were the other property settlements from either of them.
II. Petitioner does not challenge the conclusion of the Circuit
Court of Appeals that, so far as the trust agreement is concerned,
the Nevada court retained no power to alter or modify the divorce
decree. It seems to be admitted that, under Nevada law, the wife's
allowance, once made, is final,
Sweeney v. Sweeney, 42
Nev. 431, 179 P. 638, unless the decree itself expressly reserves
the power to modify it,
Lewis v. Lewis, 53 Nev. 398, 2
P.2d 131, or unless the decree approves a settlement which in turn
provides for a modification.
Aseltine v. Second Judicial
District Court, 57 Nev. 269, 62 P.2d 701. Here, no such power
was reserved in the decree or in the trust agreement approved by
the decree. Nor did respondent underwrite the principal or income
from the trust or any part thereof, or make any commitments,
contingent or otherwise, respecting them, beyond his promise to
transfer the securities to a trustee. But petitioner argues that
the rule of
Douglas v. Willcuts, supra, should nonetheless
apply, since the decree recognized the husband's preexisting duty
to support, and defined that duty as coextensive with what the
parties had themselves arranged, and since the husband simply
carved out future income from property
Page 310 U. S. 74
which he then owned, and devoted it in advance to the discharge
of his obligation.
We take a different view. If respondent had not placed the
shares of stock in trust, but had transferred them outright to his
wife as part of the property settlement, there seems to be no doubt
that income subsequently accrued and paid thereon would be taxable
to the wife, not to him. Under the present statutory scheme, that
case would be no different from one where any debtor, voluntarily
or under the compulsion of a court decree, transfers securities, a
farm, an office building, or the like, to his creditor in whole or
partial payment of his debt. Certainly it could not be claimed that
income thereafter accruing from the transferred property must be
included in the debtor's income tax return. If the debtor retained
no right or interest in and to the property, he would cease to be
the owner for purposes of the federal revenue acts.
See
Helvering v. Clifford, 309 U. S. 331. To
hold that a different result necessarily obtains where the transfer
is made or the trust is created as part of a property settlement
attendant on a divorce would be to hold that, for purposes of the
federal income tax, the marital obligation of the husband to
support his wife cannot be discharged. But whether or not it can be
depends on state law. For other purposes, local law determines the
status of the parties and their property after a decree dissolving
the matrimonial bonds.
See Barrett v. Failing,
111 U. S. 523.
And, while the federal income tax is to be given a uniform
construction of national application, Congress frequently has made
it dependent on state law.
See Thomas v. Perkins,
301 U. S. 655,
301 U. S. 659,
and cases cited. In the instant situation, an inquiry into state
law seems inescapable. For the provisions in the revenue acts
[
Footnote 2]
Page 310 U. S. 75
and regulations [
Footnote 3]
concerning the nondeductibility of "family expenses" and of
"alimony" do not illuminate the problem beyond implying the
necessity for an examination of local law to determine the marital
status and the obligations which have survived a divorce. The
Nevada cases tell us that, under such a decree as was entered here,
the obligation to support was
pro tanto discharged and
ended. And the trust agreement contains no contractual undertaking
by respondent, contingent or otherwise, for support of the wife.
Hence, we can only conclude that respondent's personal obligation
is not a continuing one, but has been discharged
pro
tanto. To hold that it was not would be to find substantial
differences between this irrevocable trust and an outright transfer
of the shares to the wife where, in terms of local divorce law, we
can see only attenuated ones. This is not to imply that Congress
lacks authority to design a different statutory scheme applying
uniform standards for the taxation of income of the so-called
alimony trusts. A somewhat comparable statute taxing to the grantor
income from a trust applied to the payment of premiums upon
insurance policies on his life was upheld in
Burnet v.
Wells, 289 U. S. 670. But
the reach of Congressional power is one thing, an interpretation of
a federal revenue act based on local divorce law quite another.
For the reasons we have stated, it seems clear that local law
and the trust have given the respondent
pro tanto a full
discharge from his duty to support his divorced wife, and leave no
continuing obligation, contingent or otherwise. Hence, under
Helvering v. Fitch, 309 U. S. 149,
income to the wife from this trust is to be treated the same as
income accruing from property after a debtor
Page 310 U. S. 76
has transferred that property to his creditor in full
satisfaction of his obligation. [
Footnote 4]
III. One other observation is pertinent. Though the divorce
decree extinguishes the husband's preexisting duty to support the
wife, and though no provision of the trust agreement places such
obligation on him, that agreement may nevertheless leave him with
sufficient interest in or control over the trust as to make him the
owner of the corpus for purposes of the federal income tax.
Helvering v. Clifford, supra.
As we have seen, respondent did retain considerable control over
the trusteed shares. But that was not the basis for the assessment
of the deficiency by the Commissioner. It was not passed upon by
the Board of Tax Appeals or the Circuit Court of Appeals. It was
not included in the petition for certiorari among the errors to be
urged or the reasons for granting the writ. Nor did petitioner
brief or argue the point here. Hence, we do not pass on the
applicability of the rule of
Helvering v. Clifford, supra,
to these facts.
Cf. Helvering v. Wood, 309 U.
S. 344.
Affirmed.
[
Footnote 1]
The trust agreement provided that he was to transfer the $60,380
shares of stock on the books of the company from himself personally
to himself as trustee and then to deliver the certificate for such
shares to the corporate trustee. Thus, was done. Also, in
accordance with the provisions of the trust, respondent executed a
dividend order against the shares directing the Fuller Brush Co. to
pay all dividends to the corporate trustee. Respondent was the
founder of the company, and, during the years in question, was its
president. It had outstanding only one class of voting stock,
viz., Class A common. The amount outstanding during these
years varied between 172,000 and 186,000 shares. Respondent owned
60,380 shares, which, together with the 60,380 shares under the
trust, constituted more than a majority of that class of stock. By
terms of the trust, respondent retained "exclusive voting power" of
the trusteed shares during the term of the trust. If he died before
its termination, the voting power would pass to the wife. During
that period, power to sell the stock was vested jointly in him, the
wife, and the corporate trustee, and could be exercised only in
case all three agreed in writing. In case of such a sale, those
three had the power to invest and reinvest the proceeds. They also
were given the power to disburse, withhold, and accumulate the
principal of the trust at their sole discretion, such power over
the income being vested in the wife and the corporate trustee.
[
Footnote 2]
Revenue Act of 1928, 45 Stat. 791, § 24(a)(1). The same
provision appears in § 24(a)(1) of the 1932 Act, 47 Stat. 169.
[
Footnote 3]
Treasury Reg. 74, Arts. 83, 281, promulgated under the 1928 Act.
The same provisions appear in Treasury Reg. 77, Arts. 83, 281,
promulgated under the 1932 Act.
[
Footnote 4]
See Paul, Five Years with
Douglas v. Willcuts,
53 Harv.L.Rev. 1.
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 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
divorcees must locate in the
Page 310 U. S. 77
states where the finality of the settlement is clearly
established.
Compare Douglas v. Willcuts, [
Footnote 2/1]
Helvering v. Fitch,
[
Footnote 2/2] and
Helvering v.
Leonard [
Footnote 2/3] 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
Page 310 U. S. 78
trust fund, which was paid to the 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. [
Footnote 2/4] 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." [
Footnote 2/5]
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
Page 310 U. S. 79
the 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. [
Footnote 2/6] 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.
[
Footnote 2/1]
296 U. S. 296 U.S.
1.
[
Footnote 2/2]
309 U. S. 309 U.S.
149.
[
Footnote 2/3]
Post, p.
310 U. S. 80.
[
Footnote 2/4]
Gould v. Gould, 245 U. S. 151.
[
Footnote 2/5]
Helvering v. Fitch, 309 U. S. 149.
[
Footnote 2/6]
Nevada Compiled Laws, 1929, §§ 9463 and 9465.