1934 BTA LEXIS 1167 | B.T.A. | 1934
Lead Opinion
opinion.
Petitioner, a resident of New York City, assails respondent’s determination of a deficiency of $2,433.80 in income tax for 1930, raising two issues — first, whether he is taxable on the income of an irrevocable trust established during the pendency of divorce proceedings and intended as a settlement of the property rights as between himself and his wife, arising from the marriage relationship ; and, second, whether he is entitled to receive, tax-free, a part, representing return of capital, of the income received by him in 1930 as a beneficiary of a testamentary trust.
With' respect to the second issue the facts are that under the will of his grandmother, who died in 1890, petitioner was made beneficiary of a testamentary trust, receiving for life the income of the trust property, which, upon his death, was to go to his children or, in event of failure of issue, to his sisters or their children. This trust is still in existence. On March 1, 1913, when petitioner was 41 and had a life expectancy of 27 years, the trust corpus had a value of not less than $482,599.37, and the annuity value of the income was $288,045.79. From that date to and including December 31, 1930, petitioner received from the trust payments totaling $498,-091.20, of which $36,162.06 was paid him in 1930. Tn his return petitioner reported $33,932.22 of the payments so received (the difference of $2,229.84 consisting of certain nontaxable items), but now contends that a part of the trust -income (the petition claims $10,-668.36) represented a return of capital — that is, a recovery of the
As to. the first issue respondent maintains that because this trust was created as a means of settlement of the property rights of the parties arising from the marital relation and perhaps to provide . payments in lieu of alimony, the income from it was applied to the discharge of petitioner’s obligations and therefore must be treated as his income. He relies upon Gould v. Gould, 245 U.S. 151; Frank P. Welch, 12 B.T.A. 800; Mary R. Spencer, 20 B.T.A. 58, and calls attention to article 281 of his Begulations 74, : ruling that alimony or allowances paid under a separation agreement are not deductible from income of the taxpayer making the payments.
We disagree with his view. The cited portion-of the regulations we need not discuss, for- we are concerned here not with deductions from income, but with what constitutes income.. The fundamental inquiry is whether this petitioner made a valid transfer of certain of his property to an irrevocable trust and, if he did, whether the income thereafter arising from that property belonged to him.
That petitioner did make a valid and irrevocable disposition and divested himself of the property forming the corpus of the trust seems indisputable. The -trustee took over the title, possession, and control of the securities and continued to hold and deal with them in its discretion. Petitioner had- no power to change the investments or otherwise administer the trust, or to modify or revoke it. True, the property was to revert to his residuary estate upon the termination of the trust when both Brooks and his divorced wife should be dead, and was then to be disposed of by his will, but. by the indenture he had divested himself for the rest of his -life of all the incidents of ownership save the right to receive such revenues from the property as there might be in excess- of $12,000 a year, -and to receive the whole income in the event Mrs. Brooks predeceased him. Consequently, petitioner having transferred the property, it would seem to follow that the income thereafter arising therefrom, except- as to the excess over the stated amount, would not belong to him.
But respondent contends -that petitioner’s motive in establishing the trust was such that, despite his transfer of the property from which the income arose, that income is taxable to him., He points out that by creating this trust Brooks has arranged for his divorced wife to receive sums in discharge of- her claims arising from the
We are not prepared to say that the reasons and intentions motivating the creation of a trust are immaterial,
This result is in accord with our decision in S. A. Lynch, 23 B.T.A. 435. The opinion in that case distinguishes it from Frank P. Welch, supra, and Gould v. Gould, supra, and those comments are applicable here (cf. also Frank Turner, 28 B.T.A. 91; and John M. Longyear, Jr., 28 B.T.A. 1086, where, as in the Welch case, the securities were deposited as collateral to assure payments previously agreed to). Nor is the decision in Mary R. Spencer, supra, in point, for that case involved quite a different question, namely, the tax-ability of the beneficiary of a trust upon payments received thereunder in lieu of either alimony or dower rights. Here, we do not have before us the question of the taxability of the trust income so far as concerns the fiduciary or Mrs. Brooks and we do not decide upon whom that tax, if any, should fall. We point out, however, that this question is readily determinable under section 161, in conjunction with its exceptions in section 166 and 167, Revenue Act of 1928; see Margaret A. Holmes, 27 B.T.A. 660; Helvering v. Butterworth, 290 U.S. 365.
Petitioner’s second contention is that he should be permitted to receive tax-free, prorated over the period of his life expectancy from March 1,1913, the value as of that date of his right to receive income from the Higgins trust, and that the amount received from the trust in 1930, and included in his income, should be reduced accordingly. This same contention, made in connection with his demand for refund of taxes paid in prior years upon income received by him from this trust, was decided recently against him by the Court of Claims; see Brooks v. United States, 6 Fed. Supp. 844. With the decision in that case we are in accord, and see no necessity for here enlarging upon the discussion set forth in the opinion of the court.
Judgment will be entered under Rule 50.
An assignment of income does not relieve.the assignor of the tax thereon, but if property or property rights are assigned the income subsequently arising therefrom is hot taxable to the assignor, for the reason that the property no longer belongs to him, and, therefore, the income from such property belongs, not to him, but to the new owner. William Ernest Seatree, 25 B.T.A. 396; affd. (App.D.C.), 72 Fed. (2d) 67. Leonard Marshall Wright, 26 B.T.A. 21; Emily Gale Lowery, 27 B.T.A. 137.
See Stoddard v. Eaton, 22 Fed. (2d) 184 ; Anderson v. Wilson, 289 U.S. 20; Burnet v. Wells, 289 U.S. 670.
Lucy A. Blumenthal, 30 B.T.A. 591.