Opinion
Docket Nos. 109354 110479.
1943-06-18
Edward S. Bentley, Esq., for the petitioner. Clay C. Holmes, Esq., for the respondent.
1. Income of a trust made by a former husband for the benefit of his wife and minor children in contemplation of divorce which was not embodied in the Nevada divorce decree, held within the taxable income of the wife except to the extent shown by the evidence to have been used for the support and maintenance of the minor children in discharge of the former husband's parental duty.
2. Under section 3801, Internal Revenue Code, the deficiency of the beneficiary of the trust is not barred by the statute of limitations, since it was determined within one year after the decision of the Board of Tax Appeals holding that the trust income payable to her was not taxable to the grantor of the trust.
3. The deficiency upon the income properly within the petitioner's taxable income held not barred from her return more than an amount of 25 percent of the gross income shown thereon and therefore the five year provision of section 275(c) is applicable, even though she referred to such omitted income in a rider attached to her return. Edward S. Bentley, Esq., for the petitioner. Clay C. Holmes, Esq., for the respondent.
The Commissioner determined deficiencies in petitioner's individual income tax as follows:
+--------------+ ¦1933¦$919.82 ¦ +----+---------¦ ¦1935¦2,476.37 ¦ +----+---------¦ ¦1936¦2,170.67 ¦ +----+---------¦ ¦1937¦1,783.36 ¦ +----+---------¦ ¦1938¦1,395.34 ¦ +----+---------¦ ¦1939¦894.80 ¦ +--------------+
He determined (1) that petitioner's income includes income from trusts created by her former husband, in excess of amounts used for the support of minor children; (2) that the trust income attributable to petitioner may not be reduced by any part of general household expenses as the father's support and maintenance of the children; and (3) that the deficiencies for 1933, 1935, and 1936 are not barred by the statute of limitations. A stipulation covers most of the facts.
FINDINGS OF FACT.
1.— During the taxable years the petitioner resided in New York City. Her income tax returns were filed for 1933 and 1938 in the third district, and for 1935, 1936, 1937, and 1939 in the second district, of New York. Prior to December 14, 1931, she was the wife of Francis V. duPont. They had three children, Coleman, born June 23, 1918, Eleuthere, born May 21, 1921; and Phoebe, born June 14, 1927. In contemplation of divorce, duPont established two trusts with the Empire Trust Co. of New York as trustee, one dated July 3, 1931, and the other dated October 6, 1931.
The income from both trusts was payable quarterly to the petitioner during her life. Upon her death, the principal of each trust was to be divided into as many equal shares as there were children then surviving and children who had died leaving issue. The settlor retained no power of revocation but had the right to remove the trustee and appoint a successor, and the provisions of the second trust were binding upon the ‘corporate successor.‘ Upon the death of the wife and during the minority of the children, the principal and income of the trusts were payable to the settlor, upon demand, as guardian of the remaindermen during their several minorities. The trust instruments were to be construed under the laws of New York and the trust corpus was stated to be located in New York. The petitioner released and discharged the settlor from all claims for the support and maintenance of herself and of the children when living with her and in and to any part of his property.
Under date of October 20, 1931, the petitioner and duPont made an agreement in respect of the custody, support, and maintenance of the children. It provided that the father as their natural guardian should have the legal custody of the children and should ‘provide for their education and * * * suitably for their support and maintenance, except clothing, when they are living with him‘ and that the mother should provide ‘out of the income from the two trust funds ‘ suitable clothing and proper medical attention for the children, except emergency medical attention, and suitable maintenance and support for the children when living with her.
The petitioner brought suit for divorce in the Second Judicial District Court of Nevada in and for the County of Washoe, and decree of divorce was entered December 14, 1931, which approved the two trust agreements of July 3, 1931, and October 6, 1931, settling the property rights of the parties.
The petitioner received income from the two trusts as follows:
+----------------------------------------------------------------+ ¦Interest¦ ¦ ¦ ¦ ¦ ¦ +--------+------------+-----------+--------+----------+----------¦ ¦Year ¦Dividends ¦On New York¦On U.S. ¦Other ¦ ¦ +--------+------------+-----------+--------+----------+----------¦ ¦ ¦ ¦and other ¦Treasury¦income ¦Total ¦ +--------+------------+-----------+--------+----------+----------¦ ¦ ¦ ¦state bonds¦bonds ¦ ¦ ¦ +--------+------------+-----------+--------+----------+----------¦ ¦1933 ¦* $18,289.06¦ ¦$516.52 ¦ ¦$18,805.58¦ +--------+------------+-----------+--------+----------+----------¦ ¦1935 ¦23,188.07 ¦ ¦781.28 ¦ ¦23,969.35 ¦ +--------+------------+-----------+--------+----------+----------¦ ¦1936 ¦ ¦$459.44 ¦549.09 ¦$20,955.82¦21,964.35 ¦ +--------+------------+-----------+--------+----------+----------¦ ¦1937 ¦ ¦9,090.94 ¦ ¦17,826.48 ¦26,917.42 ¦ +--------+------------+-----------+--------+----------+----------¦ ¦1938 ¦ ¦9,963.71 ¦ ¦14,576.69 ¦24,540.40 ¦ +--------+------------+-----------+--------+----------+----------¦ ¦1939 ¦ ¦11,846.16 ¦ ¦13,909.69 ¦25,755.85 ¦ +----------------------------------------------------------------+ FN* Dividends of $12,609.85 were received in 1933 from the trust of October 6, 1931.
On June 12, 1936, the petitioner and duPont made an ‘Agreement of Compromise,‘ reciting that the net income from the trust had substantially diminished; that the petitioner claimed that duPont had orally agreed that $30,000 a year should be paid to her; and that if the trust income were less in any year he would make good the deficiency; that he denied such oral agreement; that as a result of such dispute the petitioner had instituted a suit on November 15, 1935, in the Nevada court for a modification of the decree of December 14, 1931, so as to conform to the terms of the oral agreement; and that the parties desired to settle and compromise the dispute. It was agreed that the suit be discontinued without costs; that the petitioner should receive during her life ‘at least the net sum of $12,500 in each and every semi-annual period‘ (January 1 to June 30, and July 1 to December 31); that duPont would pay semiannually the difference or deficiency, if any, between $12,500 and the total net amount paid to petitioner by the trustee; that if the petitioner in any semiannual period received more than $12,500 as beneficiary of the trusts, she would, if duPont was not in default, repay to him without interest any deficiencies theretofore paid to her by him; if no deficiencies had been paid, or if paid but repaid, then petitioner could retain any excess ‘as her own, with the obligation however on her part to apply the same against any deficiency payments which (duPont) may have to make thereafter under the terms hereof‘; the agreement should be construed according to the laws of New York and, generally, it ratified and confirmed each of the trust agreements and the custody agreement. Pursuant to the agreement, duPont paid to petitioner certain deficiencies and she reimbursed him therefor and applied excess income to deficiencies as follows:
+------------------------------------------------------------------+ ¦ ¦Excess or ¦Paid by ¦Paid by ¦Balance of¦ +----------------------+------------+--------+----------+----------¦ ¦6-Month period ended--¦(deficiency)¦duPont ¦petitioner¦excess ¦ +----------------------+------------+--------+----------+----------¦ ¦7-1-36 ¦ ¦($857.77) ¦$857.77 ¦ ¦ ¦ +----------------------+-+----------+--------+----------+----------¦ ¦12-31-36 ¦ ¦(1,057.99)¦1,057.99¦ ¦ ¦ +----------------------+-+----------+--------+----------+----------¦ ¦7-1-37 ¦ ¦1,291.40 ¦ ¦$1,291.40 ¦ ¦ +----------------------+-+----------+--------+----------+----------¦ ¦12-31-37 ¦ ¦1,397.66 ¦ ¦624.36 ¦$773.30 ¦ +----------------------+-+----------+--------+----------+----------¦ ¦7-1-38 ¦ ¦155.36 ¦ ¦ ¦928.66 ¦ +----------------------+-+----------+--------+----------+----------¦ ¦12-31-38 ¦ ¦38.39 ¦ ¦ ¦967.05 ¦ +----------------------+-+----------+--------+----------+----------¦ ¦7-1-39 ¦ ¦(711.48) ¦ ¦ ¦255.57 ¦ +----------------------+-+----------+--------+----------+----------¦ ¦12-31-39 ¦ ¦1,467.33 ¦ ¦ ¦1,722.90 ¦ +----------------------+-+----------+--------+----------+----------¦ ¦7-1-40 ¦)¦ ¦ ¦ ¦ ¦ +----------------------+-+----------+--------+----------+----------¦ ¦12-31-40 ¦)¦(1,084.09)¦ ¦ ¦638.81 ¦ +----------------------+-+----------+--------+----------+----------¦ ¦7-1-41 ¦)¦ ¦ ¦ ¦ ¦ +----------------------+-+----------+--------+----------+----------¦ ¦12-31-41 ¦)¦(231.26) ¦ ¦ ¦407.55 ¦ +------------------------------------------------------------------+
During all of the taxable years the petitioner continuously maintained in New York City, as a home for herself and the three children, an apartment consisting, in addition to maid's quarters, of a living room, dining room, and three bedrooms. She also rented a house in the country during the summer months. The daughter resided continuously with petitioner, except for about half of her vacation periods, which were spent with her father; the younger boy attended boarding school and college and spent about eight or nine weeks of his vacation periods with the petitioner; the older boy attended boarding school and college and subsequently entered business and spent about seven or eight weeks of his vacation periods wit; the petitioner; both boys also spent some week ends during the school year with petitioner.
The following shows the amounts paid by petitioner out of the income of the trusts during the taxable years for the three children, during their minority, for clothes, doctors, dentists, cash allowances, dancing, skating, riding, music lessons, and travel, and the amounts paid by her for general household expenses, including rent, servants, laundry, drugs, telephone, gas and electric service, food, insurance, repairs, storage, and cleaning:
+----------------------------+ ¦Year¦Paid out for ¦Household¦ +----+-------------+---------¦ ¦ ¦children ¦expenses ¦ +----+-------------+---------¦ ¦ ¦ ¦ ¦ +----+-------------+---------¦ ¦1933¦$3,634.83 ¦$8,115.02¦ +----+-------------+---------¦ ¦1935¦3,905.07 ¦11,131.08¦ +----+-------------+---------¦ ¦1936¦4,170.28 ¦11,057.50¦ +----+-------------+---------¦ ¦1937¦4,382.16 ¦11,319.43¦ +----+-------------+---------¦ ¦1938¦4,348.52 ¦10,211.10¦ +----+-------------+---------¦ ¦1939¦4,048.71 ¦11,535.07¦ +----+-------------+---------¦ ¦ ¦ ¦ ¦ +----------------------------+
On November 11, 1938, the petitioner married Orthur C. Ketcham, who thereafter shared the household with petitioner and the children.
2.— The petitioner's income tax return for 1933 was filed on March 14, 1934. An amended return was filed on March 20, 1934, similar to the original return except that a schedule was attached stating that the taxpayer had received during 1933 certain amounts from two trusts established by duPont and that:
These amounts, being alimony, are not taxable to me but are taxable to the said Francis V. duPont. I am mentioning them in this return so that I may not be deemed to be concealing anything in regard to moneys received by me during the taxable year.
On or about July 2, 1936, following an examination of the return of Francis V. duPont for 1933, the Commissioner of Internal Revenue determined, among other items, that $12,609.85 dividends received by the trustee under the trust of October 6, 1931, was within his gross income. DuPont appealed from such determination to the United States Board of Tax Appeals, Docket No. 86754. The case was submitted on a stipulation of facts and on June 12, 1940, the Board entered its findings of fact and opinion holding that duPont's income did not include the trust income for 1933, except as it was actually used for the support and maintenance of the three children in the stipulated amount of $1,282.66. On March 1, 1939, duPont paid the deficiency of $19,830.02, which was based in part on the inclusion in his gross income of the $12,609.85 income. On July 10, 1940, the Board entered its decision that there was an overpayment of $5,144.84 in 1933 income tax, which amount had been paid after the mailing of the notice of deficiency. On August 30, 1940, the overpayment was scheduled for refund to duPont. No petition for review was filed. The present petitioner was not a party to and did not participate in such proceeding.
Notice of deficiency in her 1933 income tax was mailed to petitioner on September 9, 1941, determining that the petitioner's income included $11,327.19 income of the October 6, 1931, trust, being $12,609.85 less the stipulated amount of $1,282.66 expended for the maintenance of the children.
3.— The petitioner filed an income tax return for 1935 on March 1=, 1936, and for 1936 and 1937 on March 15, 1937, and 1938, respectively, in which she did not include in gross income any income from the trusts. She reported gross income as follows: 1935, $4,760; 1936, $4,968; and 1937, $5,367.65. In a schedule attached to each return it was stated that she had received stated amounts from trusts created by duPont, and that such payments were in lieu of alimony and not taxable to her but to him.
On January 31, 1941, she filed three consents to the extension of time for assessment for 1935, 1936, and 1937, respectively, to June 30, 1942. The notice of deficiency for 1935, 1936, and 1937, was mailed on January 16, 1942.
OPINION.
STERNHAGEN, Judge:
1.— In the deficiency notices the ‘explanation‘ is that the income received by the petitioner from the Francis V. duPont trusts in excess of the amount expended for the maintenance of the children is taxable to her. So much of the trust income as was expended for the children is admitted by the Commissioner not to be within this petitioner's income, and is therefore not in controversy. The amount for each year is shown in the schedule of the findings.
The trusts were established in 1931 in contemplation of divorce. The 1933 income of the second trust had been determined by the Commissioner to be taxable to the husband, but the Board of Tax Appeals, in a proper proceeding brought by Francis V. duPont, Docket No. 86754, held that, since the divorce decree of the Nevada court freed him from all obligation for support of the wife, the trust income was not properly taxable to the husband. Cf. Helvering v. Fuller, 310 U.S. 69; Eleanor B. Burton, 1 T.C. 1198. So much of the 1933 income of the second trust (and, by the same reasoning, the first trust too) as was for the support of the wife is not within the gross income of the divorced husband. This does not cover the part of the trust income which is or may be used for the discharge of the husband's parental duty to support and provide for his minor children. Such part remains within his gross income. Helvering v. Stuart, 317 U.S. 154; Seymour H. Knox, 1 T.C. 575; Walter L. Ferris, 1 T.C. 992.
The petitioner is to be regarded as the ordinary beneficiary of a distributable income trust, the income of which is pro tanto taxable to her. Revenue Act of 1932, sec. 162(b). Such part, however, as is or may be used for the support of the husband's minor children and therefore serves to fulfill his parental duty is taxable to him by ‘the rule of attribution laid down in Douglas v. Willcuts.‘ Helvering v. Stuart, supra. The taxpayer here can avoid the deficiency only to the extent that she proves the amount which is not attributable to her but to the discharge of the father's obligation to the children. The evidence shows a schedule of the amounts actually used in each year for the support of the children and of the amounts used for expenses of the general household. The amounts of household expenses are not identified, either specifically or by allocation, as to the portion assignable to the children. It has not been established or attempted to be established (cf. Ingraham v. Commissioner, 119 Fed.(2d) 223) how much of the annual amounts of household expenses is in fact in discharge of the father's obligation; hence, on the evidence, no amount of the household expenses may be excluded from petitioner's income, however reasonable it might be to suppose that part of the household cost is in support of the children.
This Court is not adjudicating a guardian's account. This is a controversy involving the personal income tax of this petitioner, and the Commissioner's determination of deficiency as to her is, in this proceeding, presumed to be correct. In this posture of the case, this Court does not determine definitively the husband's tax liability or his marital liability or his relation to the income of the trust; nor does it determine what part of the trust income is allotted to the petitioner and what part to the children. Cf. Shaw v. Bryant, 90 Hun 374. It determines only, upon the evidence, whether the deficiency determined as to this petitioner is incorrect. Therefore, while it appears that the amounts of $3,634.83 for 1933 and the scheduled amounts for other years in the same column were in fact used for support of the children, it does not appear what part, if any, of the household expenses of $8,115.02 and of the other amounts in the same column were for the support of the children. Some part of these amounts was used for the petitioner and is within her taxable income and therefore, in the absence of evidence upon which a segregation could be made, the amounts must all be included in her income. Cf. Marjorie Lipe Stacy, 43 B.T.A. 91.
The assurance in the 1936 agreement, in compromise of the later dispute, that the income from the trust would not be less than $25,000 a year or that duPont would make up the difference, does not serve to make the income from the trust any less her taxable income. It was not like the guaranty in Helvering v. Leonard, 310 U.S. 80. That case involved the husband's tax. The guaranty had been made before the husband's marital obligation was discharged and the guaranty was an incident of the obligation. (Cf. Dixon v. Commissioner, 109 Fed.(2d) 984; Weir v. Commissioner, 109 Fed(2d) 996; Halbert P. Gillette, 46 B.T.A. 573.) The present petitioner's status in respect of the trust income was the same after the 1936 guaranty as it was before— that of an ordinary beneficiary— to which was added the assurance that the settlor of the trust would make up deficiencies up to the $25,000 minimum. The guarantee did not transform her from an income beneficiary to the recipient of support in satisfaction of her husband's obligation. The trust income is as much within her gross income after the guaranty as it was before. Cf. Bush v. Commissioner, 133 Fed.(2d) 1005; Calvin H. Sugg, 1 T.C. 431.
On the principal issue, this Court holds that petitioner's taxable income of the respective years includes the trust income, except the amounts for the support of the children, which are attributable not to her but to their father. These excepted amounts are:
+---------------+ ¦1933¦$3,634.83 ¦ +----+----------¦ ¦1935¦3,905.07 ¦ +----+----------¦ ¦1936¦4,170.28 ¦ +----+----------¦ ¦1937¦4,382.16 ¦ +----+----------¦ ¦1938¦4,348.52 ¦ +----+----------¦ ¦1939¦4,048.71 ¦ +---------------+
2.— The petitioner contends that the 1933 deficiency is beyond the statute of limitations and is not saved by section 820, Revenue Act of 1938 (sec. 3801, Internal Revenue Code). As to Francis V. duPont, petitioner is, and was in 1933, a ‘related taxpayer‘ (sec. 820(a)(3)), since he was the grantor and she was a beneficiary of the trust. Cf. Eleanor B. Burton, supra. The income of the trust which is taxable to petitioner was erroneously omitted from her gross income and therefore, she being a related taxpayer, her income is properly to be adjusted as the result of the Board's determination requiring the exclusion of the trust income from duPont's gross income (sec. 820(b)(3)). The decision in duPont's case became final (sec. 820(a)(1)(B)) on October 10, 1940, which was the last date on which a petition in court for review could have been filed; and the one year for the ‘adjustment‘ assessment (sec. 820(c)) would have expired on October 9, 1941. The notice of deficiency was mailed September 9, 1941, and was therefore in time. The deficiency for 1933 is not beyond the statute therefore in time. The deficiency for 1933 is not beyond the statute of limitations and may be assessed.
3.— The petitioner contends that the deficiencies for 1935 and 1936 were barred by the three-year limitation period of section 275(a). In this, she is incorrect. From her returns for those years, which were filed on March 15 of the succeeding years, she omitted an amount which was more than 25 percent of the amount shown as gross income. The five-year period of section 275(c) was therefore applicable. Estate of C. P. Hale, 1 T.C. 121; Anna Eliza Masterson, 1 T.C. 315; W. F. Trimble & Sons Co., 1 T.C. 482. She consented in writing to an extension to June 30, 1942. The deficiency notice was mailed before that date, on January 16, 1942. The deficiencies for 1935 and 1936 are not barred by the statute of limitations.
Decision will be entered under Rule 50.