Converse v. Commissioner

5 T.C. 1014, 1945 U.S. Tax Ct. LEXIS 49

• Court: United States Tax Court
• Decided: October 31, 1945
• Docket: Docket No. 4872
• Status: Published

Opinions

OPINION.

Murdock, Judge-.

The Commissioner determined deficiencies in gift tax of this petitioner for the calendar years 1941 and 1942 in the amounts of $110,595.13 and $1,215.00. The deficiency for 1942 resulted entirely from the adjustment of total net gifts for preceding years and that in turn resulted entirely from the changes made for 1941. The petitioner alleges that the Commissioner erred in determining that a gift of $625,000 was made to the petitioner’s former wife and a gift of $47,464.24 was made to his daughter in 1941. The parties filed a lengthy stipulation of facts.

The petitioner is an individual, residing in Nevada. He filed gift tax returns for the years 1941 and 1942 with the collector of internal revenue for the second district of New York.

The petitioner was married in 1928 to Velma R. Converse. They had one child, a daughter, Melissa, born in 1938. The petitioner and his wife separated, and on March 17, 1941, they entered into an agreement whereby the petitioner was to pay his wife $1,250 a month during her life for her support and he was also to set up a trust fund of $100,000 for the benefit of Melissa. The petitioner set up the trust for his daughter on April 17, 1941, and placed therein $100,000 in cash.

Velma obtained a divorce from the petitioner in March 1941 in Nevada. She and the petitioner were présent in person and were represented by counsel at that time. The divorce has remained in full force and effect. Velma, in her complaint, alleged that the parties Rad entered into the agreement on March 17,1941, in settlement of all property rights and for the custody and support of the child, which agreement, she alleged, was fair and for the best interests of all concerned. The petitioner contested this allegation and contended for a lump sum settlement. The parties agreed upon a settlement in the amount of $625,000, and the court decreed that the petitioner pay his wife $625,000 in cash in lieu of the monthly payments provided in the separation agreement and that upon payment of the $625.000 the petitioner should be fully discharged of all property rights and claims for the support and maintenance of Velma. It further decreed that in other respects the agreement of March 17, 1941, was ratified, adopted, and approved and should be complied with. The petitioner then paid Velma $625,000 in 1941 in accordance with the decree of the court.

Evidence was introduced to show that the settlement whereby the petitioner established the trust for his daughter and paid his wife $625,000 was arrived at after negotiations between the parties in which counsel for the parties were endeavoring to obtain a settlement for the best interests of their separate clients.

The Court held in Herbert Jones, 1 T. C. 1207, that a husband residing in Nevada who paid his wife a lump sum in settlement of her claims against him was not liable for gift tax on the amount, where it appeared that it was incident to a divorce obtained in Nevada. The case of Commissioner v. Bristol, 121 Fed. (2d) 129, reversing Bennet B. Bristol, 42 B. T. A. 263, was discussed and distinguished on the ground that it involved a prenuptial agreement. A petition for review addressed to the Circuit Court of Appeals for the Seventh Circuit in the Jones case was dismissed on August 23, 1943. The Commissioner does not contend that the Jones case is distinguishable from the present case, but argues that it is no longer the law, since the error therein was pointed out by the subsequent decisions of the Supreme Court in Commissioner v. Wemyss, 324 U. S. 303, and Merrill v. Fahs, 324 U. S. 308. This Court, in the Wemyss case, pointed out the difference between that case and the Jones case. The two Supreme Court cases just mentioned, as well as the Bristol case, all dealt with ante-nuptial agreements. The Supreme Court did not deal with the question which was in the Jones case and did not indicate its views on that question. We follow the Jones case and hold that the Commissioner erred by increasing the petitioner’s taxable gifts for 1941 by the amount of $625,000 which he paid to his wife. Cf. Commissioner v. Mesta, 123 Fed. (2d) 986; certiorari denied, 316 U. S. 695; rehearing: denied, 317 U. S. 704.

The Commissioner has also increased the taxable gifts reported by the petitioner by $47,464.24, which he says represents that portion of $100,000 not required for the support of Melissa during her minority. He thus concedes that the remainder of the $100,000 was transferred for an adequate consideration in money or money’s worth represented by a discharge of the petitioner’s obligation to support his minor daughter. The only contention of the petitioner with respect to this adjustment is that the establishment of the trust for Melissa was but an inseparable part of the settlement agreement which he made with his wife, so that what he transferred in 1941 was either all gift or no gift at all. There is little or no evidence on this point or to show whether or not there was any bargaining in connection with the establishment of the trust. The petitioner may have done more for his infant daughter than the minimum required by the law. We are unable to find from the evidence that the Commissioner erred in holding that the petitioner made a gift to the trust in the amount determined by him.

Reviewed by the Court.

Decision will l)e entered under Bule 50.