Pearce v. Commissioner

315 U.S. 543, 62 S. Ct. 754, 86 L. Ed. 1016, 1942 U.S. LEXIS 850, 28 A.F.T.R. (P-H) 1001

• Court: Supreme Court of the United States
• Decided: March 9, 1942
• Docket: 306
• Status: Published

Opinions

Mr. Justice Douglas

delivered the opinion of the Court.

Petitioner and her husband separated in 1913. There was an agreement providing for monthly payments by the ■ husband for her support. That agreement was amended in 1916 so as to provide monthly payments to her of $500 for life. Her husband, however, was given an option to terminate the arrangement by purchasing an annuity contract from a life insurance company which would pay petitioner $500 a month for the rest of her life. In 1917 petitioner obtained an absolute divorce in Texas, her husband entering a personal appearance. Neither alimony nor a property settlement was mentioned in the divorce decree. There were no children. Several months after the divorce, Mr. Pearce purchased an annuity from an insurance company for petitioner’s benefit. The annuity provided for a payment of $500 per month during her life.

Neither petitioner nor Mr. Pearce included the $6,000 received by her under the annuity contract in their federal income tax returns for 1935 and 1936. The Commissioner sent deficiency notices to both of them. Each appealed to the Board of Tax Appeals. At the hearing the Commissioner contended that the payments were income of petitioner. The Board upheld that contention. 42 B. T. A. 91. The Circuit Court of Appeals affirmed the judgment of the Board, one judge dissenting. 120 F. 2d 228. We granted the petition for certiorari because of the manner in which that court applied the rule of Helvering v. Fitch, 309 U. S. 149, and Helvering v. Leonard, 310 U. S. 80, in case the ex-wife rather than the husband was sought to be taxed on alleged alimony payments.

The Circuit Court of Appeals reached the conclusion that petitioner was liable by the following line of reasoning. The determination of the Commissioner that the monthly payments were income of petitioner was presumptively correct; the burden to show error rested on petitioner. Welch v. Helvering, 290 U. S. 111, 115. Error might be shown by submitting “clear and convincing proof” (Helvering v. Fitch, supra, p. 156) that the payments were made pursuant to a continuing obligation of her former husband to provide for her support, so as to make the rule of Douglas v. Willcuts, 296 U. S. 1, applicable. The burden of establishing error is not sustained by a divorced wife merely by showing that an obligation of her former husband might have continued despite the divorce. Since it is doubtful and uncertain under Texas law whether petitioner’s former husband was discharged of his marital obligation by the settlement in question, petitioner failed to show that the presumptively correct determination that she was liable was erroneous.

We do not think that that was a correct application of the rule of the Fitch and Leonard cases. Those cases hold that the income is taxable to the former husband, not only where it is clear that payments to his ex-wife were made pursuant to a continuing liability created by his contract or by local law, but also where his undertaking or local law makes that question doubtful or uncertain. Those cases, like Douglas v. Willcuts, supra, involved situations where the divorced husband was sought to be taxed on payments to his ex-wife. But the rule which they express supplies the criteria for determining, in absence of a different statutory formula, whether payments received by the ex-wife are properly taxable to her or to her divorced husband. If the Commissioner proceeds against the ex-wife, she sustains her burden of rebutting his presumptively correct determination merely by showing doubts and uncertainties as to whether the payments were made pursuant to her former husband’s continuing obligation to support her. If the Commissioner proceeds against her former husband, he sustains his burden by submitting clear and convincing proof that the payments were not made pursuant to any such continuing obligation. Helvering v. Fuller, 310 U. S. 69. The other course would make the liability of the divorced wife or the divorced husband wholly dependent on the election of the Commissioner to proceed against one rather than the other where, for example, local law was uncertain. But the rule of Douglas v. Willcuts, supra, rests on a more substantial basis. Its roots are in local law and the undertakings of the husband. It calls for the use of the same criteria whether the husband or the wife is sought to be taxed.

We think, however, that petitioner has not maintained her burden in this case. Her former husband was not under a continuing contractual obligation to contribute to her support. Eor, the agreement made in 1916 provided for the termination of his personal obligation to make payments to her in the event that he purchased the designated annuity. And so far as Texas law is concerned, she has not maintained her burden. Her showing as to Texas law is illustrated by the following.

By statute in Texas, alimony may be awarded during the pendency of a suit for a divorce “until a final decree shall be made in the case.” 13 Vernon’s Civil Stats., Art. 4637. “This statute is exclusive in its very nature, and no alimony can be decreed by any court in this state except under its express terms.” Martin v. Martin, 17 S. W. 2d 789, 791-792. It has been broadly stated in Phillips v. Phillips, 203 S. W. 77, 79 that, “In this state the legal duty of the husband to support his wife ceases upon the severance of the marital bonds, nor has a court the power to decree that a husband or his property may be subjected to such support after divorce. Permanent alimony is not provided for by Texas statute.” And see Pape v. Pape, 13 Tex. Civ. App. 99, 35 S. W. 479; Boyd v. Boyd, 22 Tex. Civ. App. 200, 54 S. W. 380. It is, however, provided by statute that the divorce court shall order “a division of the estate of the parties in such a way as the court shall deem just and right, having due regard to the rights of each party and their children, if any.” 13 Vernon’s Civil Stats., Art. 4638. That power extends not only to community property but to the separate property of the husband. Ex parte Scott, 133 Tex. 1, 123 S. W. 2d 306; Clark v. Clark, 35 S. W. 2d 189; Berg v. Berg, 115 S. W. 2d 1171; Keton v. Clark, 67 S. W. 2d 437. At times the divorce' court has made such a division of the estate as apparently to impose on the husband a personal obligation to make stated payments to his wife. Wiley v. Wiley, 33 Tex. 358. Furthermore, a divorce decree which does not settle the rights of the parties to community property may not preclude a subsequent suit by the wife to establish her rights in it. See Gray v. Thomas, 83 Tex. 246, 18 S. W, 721. And the decree may be corrected to conform to the intention of the parties. Keller v. Keller, 135 Tex. 260, 141 S. W. 2d 308. The power of the court to modify a property settlement previously approved, so as to give the wife an interest in property not covered by the earlier decree, has been denied in absence of fraud or mistake. Cannon v. Cannon, 43 S. W. 2d 134. Petitioner challenges the reliability of the latter case because on appeal the case was dismissed for want of jurisdiction (121 Tex. 634), which meant either disagreement with the reasoning but approval of the result, or lack of jurisdiction. 3 Vernon’s Civil Stats., Art. 1728. And see Republic Ins. Co. v. School Dist., 133 Tex. 545, 125 S. W. 2d 270.

We need not, however, endeavor to resolve that doubt. Nor need we speculate as to the power of the court at some future time to order a division of property in this case, and as an incident thereto to impose on petitioner’s husband a personal obligation, as was apparently done by the divorce decree in Wiley v. Wiley, supra. See 6 Tex. L. Rev. 344 discussing Helm v. Helm, 291 S. W. 648. For even though petitioner established that the divorce court retained that broad power, not specifically reserved, and even though we assume that the power to make a division of property is the equivalent of a power to provide permanent alimony, she has not maintained her burden of rebutting the presumptively correct determination of the Commissioner that the income from this annuity contract was taxable to her. In order to maintain that burden, she would have to show that it was at least doubtful and uncertain whether the Texas court, as an incident of its power to require the husband to support his wife, retained control over this annuity contract or the income from it. That at least is the result unless we are to broaden the base on which the Fitch, Fuller, and Leonard cases rest.

Those cases involved so-called alimony trusts. In each, the trust was irrevocable. In each, the husband had an obligation to support his wife.

In the Fitch case, the trust provided that the wife was to receive, during her life, $600 a month from the income of the trust property; the husband, the balance. We held that the husband had not shown by “clear and convincing proof” 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. 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 pre-existing duty of the husband a particular and specified sanction.” 309 U. S. at p. 156. And in speaking of the alimony trust involved in Douglas v. Willcuts, supra, we stated (pp. 151-152):

“It is plain that there the alimony trust, which was approved by the divorce decree, was merely security for a continuing obligation 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.”

In the Leonard case, income from the trust was to be paid to the wife for her life, which together with income from other property was estimated at $30,000 a year. A separation agreement provided that the husband would pay his wife an additional $35,000 each year during her life, so that her aggregate net income for the maintenance of herself and her children would be $65,000 a year. The separation agreement also provided that, in the event the husband’s ability to make the annual payment of $35,000 became impaired, he might apply to a court for a reduction of his obligation of not less than $10,000 a year. We held that the husband had not sustained his burden of showing that “local law and the alimony trust” gave him “a full discharge” from his obligation to support his wife. 310 U. S., p. 86. The trust and the undertaking in the separation agreement were integral parts of an arrangement by which the “maintenance and support” of the wife “were secured.” p. 85. We noted that it was not clear, under New York law, whether or not such a settlement could be remade by the court, though there was some authority which indicated that the divorce court’s reserved power might be exercised “where the provision in the separate agreement, approved by the decree, is for support and maintenance.” pp. 86-87. In view of that fact and the nature of the settlement, we concluded that the husband had not shown that the trust was not mere security for his continuing obligation to support his wife.

In the Fuller case, it was clear, under Nevada law, that the court retained no control over the divorce decree which approved the trust settlement. Since there was no such reserved power, and since the trust contained no contractual undertaking by the husband for support of the wife, we concluded that his obligation to support had been pro tanto discharged. We held, however, that the husband was taxable on a $40 weekly payment which he had agreed to make to his wife. But that fact did not make him taxable on income from the trust also, since the provision for weekly payments and the trust “were not so interrelated or interdependent as to make the trust a security for the weekly payments.” p. 73. We also noted (p. 76) that, 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,” under the rule of Helvering v. Clifford, 309 U. S. 331.

Thus, a property settlement made for the purpose of maintaining or supporting the wife may be treated for income tax purposes as mere security for the husband’s continuing obligation, dependent on such considerations as whether it contains, or is interrelated with, contractual obligations of the husband for her support; whether the court has a reserved power to alter or modify it; or whether the husband retains any substantial interest in the property conveyed. Where the settlement carries some of the earmarks of a security device, then the power of the court to add to the husband’s personal obligations may be especially significant. See Helvering v. Leonard, supra. But where, as here, the settlement appears to be absolute and outright, and on its face vests in the wife the indicia of complete ownership, it will be treated as that which it purports to be, in absence of evidence that it was only a security device for the husband’s continuing obligation to support. There may be difficulty in placing a particular case on one side of the line rather than the other. But as stated by Mr. Justice Holmes in Irwin v. Gavit, 268 U. S. 161, 168, “That is the question in pretty much everything worth arguing in the law.” And see Harrison v. Schaffner, 312 U. S. 579, 583.

As we have said, petitioner has made no showing whatsoever that the Texas court retained the power to reallocate the income from this annuity contract or to control it in any way as an incident of its power to require the husband to support the wife. She has not shown that the divorce court imposed any personal obligation on the husband in respect to the settlement in question. And she is not aided by those cases which enforce agreements of the husband to make periodic payments to the wife. See Johnson v. Johnson, 14 S. W. 2d 805. There is no such agreement here. Proof that the Texas court might add to the husband’s personal obligations as an incident to a future property settlement is no substitute for proof that the court had the power to remake this property settlement after it was consummated. Hence there is no ground for concluding that this settlement, which is absolute on its face, is mere security for an obligation of a husband to support his wife.

“The correct ground for refusing to tax such income to the husband is merely that it is the lump sum which discharges him and not the future income received by the wife.” Paul, Eive Years with Douglas v. Willcuts, 53 Harv. L. Rev. 1, 17, note 44. We noted in Helvering v. Fuller, supra, p. 74, that outright transfers of property to the wife, though providing for her maintenance and support, were no different from cases “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.” We do not think that it would be proper to extend the rule of Douglas v. Willcuts, supra, to such a situation. The possibility that the divorce court might add to the husband’s personal obligation does not alter the result. As in the Fuller case, the transfer of property to the wife might result only in a partial discharge of the husband’s obligation. If the husband undertook, or was directed, to make other payments, he might be taxable on them. But the fact that he is taxable on a part of the payments received by the wife does not necessarily make him taxable qn all. Helvering v. Fuller, supra, p. 73. Hence the statement in Helvering v. Fitch, supra, 309 U. S. at p. 156, that it must be clear “that local law and the alimony trust have given the divorced husband a full discharge and leave no continuing obligation however contingent” is to be read in light of the fact that the alimony trust in that case was deemed to be a mere security device for the husband’s continuing obligation to support. For the husband was relieved from payment of the tax on income from the property settlement in the Fuller case though he had a continuing obligation to pay the wife $40 a week.

If the rule of Douglas v. Willcuts, supra, is not to be extended to this type of case, then, on the showing which has been made, the husband would have sustained his burden in case the Commissioner had proceeded against him. Cf. Mitchell v. Commissioner, 38 B. T. A. 1336. Clearly, then, the wife may not escape.

Such cases as Helvering v. Horst, 311 U. S. 112, Helvering v. Eubank, 311 U. S. 122, and Harrison v. Schaffner, supra, are not opposed to this result. Those cases dealt with situations where the taxpayer had made assignments of income from property. He was held taxable on the income assigned by reason of the principle “that the power to dispose of income is the equivalent of ownership of it and that the exercise of the power to procure its payment to another, whether to pay a debt or to make a gift, is within the reach” of the federal income tax law. Harrison v. Schaffner, supra, p. 580. But in those cases the donor or grantor had “parted with no substantial interest in property other than the specified payments of income.” Id. p. 583. Here he has parted with the corpus. And “the tax is upon income as to which, in the general application of the revenue acts, the tax liability attaches to ownership.” Blair v. Commissioner, 300 U. S. 5, 12. Finally, there is no barrier under the income tax laws to taxing the holder of an annuity on the income received, however his interest in the fund which produces the income may be described. Cf. Irwin v. Gavit, supra.

Affirmed.