HARRIS v. COMMISSIONER OF INTERNAL REVENUE.
No. 14.
Supreme Court of the United States
Argued October 16, 1950.—Decided November 27, 1950.
340 U.S. 106
Lee A. Jackson argued the cause for respondent. With him on the brief were Solicitor General Perlman, Assistant Attorney General Caudle, Ellis N. Slack and I. Henry Kutz.
The federal estate tax and the federal gift tax, as held in a line of cases ending with Commissioner v. Wemyss, 324 U. S. 303, and Merrill v. Fahs, 324 U. S. 308, are construed in pari materia, since the purpose of the gift tax is to complement the estate tax by preventing tax-free depletion of the transferor‘s estate during his lifetime. Both the gift tax1 and the estate tax2 exclude transfers
The present case raises the question whether Wemyss and Merrill require the imposition of the gift tax in the type of post-nuptial settlement of property rights involved here.
Petitioner divorced her husband, Reginald Wright, in Nevada in 1943. Both she and her husband had substantial property interests. They reached an understanding as respects the unscrambling of those interests, the settlement of all litigated claims to the separate properties, the assumption of obligations, and the transfer of properties.
Wright received from petitioner the creation of a trust for his lifetime of the income from her remainder interest in a then-existing trust; an assumption by her of an indebtedness of his of $47,650; and her promise to pay him $416.66 a month for ten years.
Petitioner received from Wright 21/90 of certain real property in controversy; a discontinuance of a partition
If the parties had without more gone ahead and voluntarily unravelled their business interests on the basis of this compromise, there would be no question that the gift tax would be payable. For there would have been a “promise or agreement” that effected a relinquishment of mаrital rights in property. It therefore would fall under the ban of the provision of the estate tax5 which by judicial construction has been incorporated into the gift tax statute.
But the parties did not simply undertake a voluntary contractual division of their property interests. They were faced with the fact that Nevada law not only authorized but instructed the divorce court to decree a just and equitable disposition of both the community and the separate property of the parties.6 The agreement recited that it was executed in order to effect a settlement of the respective property rights of the parties “in the event a divorce
If the agreement had stopped there and were in fact submitted to the court, it is clear that the gift tax would not be applicable. That arrangement would not be a “promise or agreement” in the statutory sense. It would be wholly conditional upon the entry of the decree; the divorce court might or might not accept the provisions of the arrangement as the measure of the respective obligations; it might indeed add to or subtract from them. The decree, not the arrangement submitted to the court, would fix the rights and obligations of the parties. Thаt was the theory of Commissioner v. Maresi, 156 F. 2d 929, and we think it sound.
Even the Commissioner concedes that that result would be correct in case the property settlement was litigated in the divorce action. That was what happened in Commissioner v. Converse, 163 F. 2d 131, where the divorce court decreed a lump-sum award in lieu of monthly payments provided by the separation agreement. Yet without the decree there would be no enforceable, existing agreement whether the settlement was litigated or unlitigated. Both require the approval of the court before an obligation arises. The happenstance that the divorce court might approve the entire settlement, or modify it in unsubstantial details, or work out material changes seems to us unimportant. In each case it is the decree that creates the rights and the duties; and a decree is not a “promise or agreement” in any sense—popular or statutory.
We, however, think that the gift tax statute is concerned with the source of rights, not with the manner in which rights at some distant time may be enforced. Remedies for enforcement will vary from state to state. It is “the transfer”7 of the property with which the gift tax statute is concerned, not the sanctions which the law supplies to enforce transfers. If “the transfer” of marital rights in property is effected by the parties, it is pursuant to a “promise or agreement” in the meaning of the statute. If “the transfer” is effected by court decree, no “promise or agreеment” of the parties is the operative fact. In no realistic sense is a court decree a
If, as we hold, the case is free from any “promise or agreement” concerning marital rights in property, it presents no remaining problems of difficulty. The Treasury Regulations8 recognize as tax free “a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm‘s length, and free from any donative intent).” This transaction is not “in the ordinary course of business” in any conventional sense. Few transactions between husband and wife ever would be; and those under the aegis of a divorce court are not. But if two partners on dissolution of the firm entered into a transaction of this character or if chancery did it for them, there would seem to be no doubt that the unscrambling of the business interests would satisfy the spirit of the Regulations. No reason is apparent why husband and wife should be under a heavier handicap absent a statute which brings all marital рroperty settlements under the gift tax.
We are now advised that since submission of the case on October 16, 1950, petitioner has died, and that it will
Reversed.
MR. JUSTICE FRANKFURTER, joined by MR. JUSTICE BLACK, MR. JUSTICE BURTON, and MR. JUSTICE MINTON, dissenting.
Section 503 of the Revenue Act of 1932 imposes a gift tax on property “transferred for less than an adequate and full consideration in money or money‘s worth.” 47 Stat. 247, now
The case before us concerns not an antenuptial agreement, but what the Tax Court called a “property settlement agreement,” contracted in anticipation of divorce. Each spouse transferred property of substantial value to the other and each agreed “to release completely the property of the other from all claims arising out of their marriage.” 10 T. C. 741, 743.
Unless we are now to say that a settlement of property in winding up, as it were, a marriage, smacks more of a business arrangement than an antenuptial agreement and therefore satisfies the requirement of “an adequate and full consideration in money or money‘s worth” which we found wanting in Merrill v. Fahs, and unless we are further to overrule Merrill v. Fahs insofar as it joined the gift tax and the estate tax of the Revenue Act of 1932, so as to infuse into the gift tax the explicitness of the estate tax in precluding the surrender of marital rights from being deemed to any extent a consideration “in money or money‘s worth,” we must hold that a settlement of рroperty surrendering marital rights in anticipation of divorce is not made for “an adequate and full consideration in money or money‘s worth.”
The same year that it enacted the gift tax Congress amended the estate tax by adding to the provision that “adequate and full consideration” was prerequisite to deduction of “claims against the estate” the phrase, “when founded upon a promise or agreement.” Revenue Act of 1932, § 805, 47 Stat. 280, now
1. I would adhere to the views we expressed in the Wemyss and Merrill decisions as to the meaning to be given to the requirement of “adequate and full consideration” in the enforcement of the gift tax “in order to narrow the scope of tax exemptions.” 324 U. S. at 312. Nor would I depart from the conclusion there reached that the relinquishment of marital rights is not to be deemed “money or money‘s worth” because that definition in the estate tax of 1932 is by implication to be read into the gift tax passed in the same year.
2. But was the transfer of the property here in controversy “founded uрon a promise or agreement“? The answer requires recital of the governing facts of the case. Taxpayer separated from her husband in August, 1942, and shortly thereafter brought suit in Nevada for divorce. One week prior to entry of the divorce decree, she and her husband entered into an agreement “for the purpose of settling the respective property rights of the parties hereto and of removing the subject matter thereof from the field of litigation.” After providing for the transfers of property and the release of claims, the agreemеnt recited,
“This agreement shall be submitted to the court for its approval, but nevertheless the covenants in this agreement shall survive any decree of divorce which may be entered. It is of the essence of this agreement that the settlement herein provided for shall not become operative in any manner nor shall any of the Recitals or covenants herein become binding upon either party unless a decree of absolute divorce between the parties shall be entered in the pending Nevada action. The settlement herein pro-
vided shall become immediately effective and operative in the event of and upon the entry of a decree of divorce between said parties in said pending Nevada action. The parties hereto, however, shall proceed as expeditiously as possible to carry into effect the covenants herein, which it is provided are to be performed by either of the parties prior to the entry of the decree as aforesaid.”
After a hearing at which both parties were represented, the court granted the divorce. It fоund that certain transfers from the wife to the husband were “in discharge of a legal obligation which, because of the marital relationship has been imposed” on her; and concluded that “the agreement and trust agreements forming a part thereof, made and entered into between plaintiff and defendant under date of February 27th, 1943 is entitled to be approved.” The divorce decree “approved” the agreement, directed performance of two of its paragraphs, and declared,
“Notwithstanding the approval of said agreement and the trust agreements forming a part thereof by the Court herein, It is ordered that said agreement and said trust agreements forming a part thereof shall survive this decree.
“It is further ordered, adjudged and decreed that the decree herein entered is absolute and final in all respects and the Court herein divests itself of all power to amend or modify the same in the future without the consent of both of the parties hereto.”
The parties executed the provisions of the decree and the agreement, and the Commissioner assessed the tax in question on the amount by whiсh the value of the property transferred by the wife to her husband exceeded the value of the property transferred by him to her.
The fact that the undertakings defined by this agreement would come into force only on the occurrence of a condition, to wit, the entering of a decree of divorce, is apparently regarded as decisive of taxability. But does this make any real difference? The terms of that decree might be different from the terms of the agreement; but “nevertheless the covenants in this agreement shall survive any decree of divorce which may be entered.” If the divorce court had disapproved the agreement and had not decreed the transfer of any property of the wife to her husband, it is difficult to see how transfers which she made, solеly because of the compulsion of the agreement, would be effected by court decree and for that reason not subject to tax. The condition on which an agreement comes into force does not supplant the agreement any more than a deed in escrow ceases to be a deed when it comes out of escrow. In the Wemyss and Merrill cases, would the gifts have been any the less founded upon an agreement if, as a condition to the antenuptial arrangements in those cases,
Judge Learned Hand‘s treatment of this matter is so hard-headed and convincing that it would be idle to paraphrase his views.
“In some jurisdictions contracts, made in anticipation of a divorсe, are held to persist ex proprio vigore after the divorce decree has incorporated their terms, and has added its sanctions to those available in contract. That, for example, is the law of New York, where the contract remains obligatory even after the court has modified the allowances which it originally adopted; and where the promises will be thereafter enforced by execution and the like. Perhaps, that is also the law of Nevada, which the parties provided should govern ‘all matters affecting the interpreta-
cases refusing to pеrmit a suit on the contract did the decree or the agreement direct survival. See Hough v. Hough, 26 Cal. 2d 605, 160 P. 2d 15; McWilliams v. McWilliams, 110 Colo. 173, 132 P. 2d 966; Hertz v. Hertz, 136 Minn. 188, 161 N. W. 402; Corbin v. Mathews, 129 N. J. Eq. 549, 19 A. 2d 633; Mendelson v. Mendelson, 123 Ohio St. 11, 173 N. E. 615. See Lindey, Separation Agreements and Ante-Nuptial Contracts, 389–395; Note, Control of Post-Divorce Level of Support by Prior Agreement, 63 Harv. L. Rev. 337. Schacht v. Schacht, 295 N. Y. 439, 68 N. E. 2d 433, relied on by petitioner, held only that a determination by the divorce court of the fairness of a separation agreement was res judicata in a subsequent suit to set the agreement aside for fraud. The issue does not appear to have been determined in Nevada, where the agreement here involved was made and the divorce entered.
tion of this agreement or the rights of the parties.’ Be that as it may, in the case at bar, the Nevada decree having declared that the agreement was ‘entitled to be approved,’ that included the provision that its ‘covenants’ should ‘survive’ as well as any of its other stipulations. Thus the payments made under it were ‘founded’ as much upon the ‘promise or agreement’ as upon the decree; indeed, they were ‘founded’ upon both; the parties chose to submit themselves to two sanctions—contempt under the divorce court and execution under the contract. The payments were therefore subject to the gift tax.” 178 F. 2d 861, 865.
I would affirm the judgment.