Opinion
Docket No. 6098.
1948-12-22
WILLIAM BARCLAY HARDING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George R. Sheriff, Esq., and William G. McKnight, Jr., Esq., for the petitioner. Walt Mandry, Esq., for the respondent.
Petitioner and wife agreed to separate, and that he pay her $350,000 cash, plus $5,000 per annum for approximately one year and thereafter one-fourth of his spendable income, as defined, until she should die or remarry, in consideration of her release of rights to support and maintenance of herself and children, dower, and all other marital rights in his property. The agreement specified that it was to be binding regardless of divorce. There is no proof that divorce was then contemplated. The wife obtained a divorce more than one year and eight months later and the decree adopted and ordered compliance with the agreement. The $350,000 was paid at once and the other payments made as agreed until the wife's remarriage about two years later. Held, that the payment of $350,000 to the wife was a transfer for an adequate and full consideration in money or money's worth and was not a gift. George R. Sheriff, Esq., and William G. McKnight, Jr., Esq., for the petitioner. Walt Mandry, Esq., for the respondent.
The Commissioner has determined a deficiency of $47,879.94 in petitioner's gift tax for the year 1941. The deficiency results from the addition to the gifts reported in the return filed by petitioner of ‘Item 1— Transfers to Constance Fox Harding in connection with separation agreement, $353,053.32. ‘ The Commissioner explained his action in the deficiency notice as follows:
It is held that the above transfers, made in 1941 to your wife, Constance Fox Harding, in connection with a separation agreement, were made without a full and adequate consideration in money or money's worth and therefore were gifts within the meaning of Chapter 4 of the Internal Revenue Code.
The petitioner contests this determination of the Commissioner by appropriate assignments of error. At the hearing respondent conceded that $3,053.32 of the amount which he had determined was not a gift. The issue is, therefore, whether petitioner in 1941 made gifts of $350,000 as now contended by respondent.
FINDINGS OF FACT.
The Federal gift tax return for 1931 was filed by the petitioner with the collector of internal revenue for the second district of New York.
The petitioner, born November 16, 1906, and Constance Fox Harding, born March 25, 1908, were married March 30, 1929. Of that marriage there were born three children: Dorothea, born in November 1930; James Horace, born in July 1932; and Timothy Fox, born in October 1934. On April 1, 1941, petitioner and his wife began to live apart, and they have so continued since that time. On October 24, 1941, they entered into an agreement in writing. In pertinent part, after reciting the marriage, the birth of the children, the arising of differences between husband and wife, and the separation on April 1, 1941, their desire to settle and adjust forever all rights of support and maintenance, all property rights, and all other rights, claims or demands arising out of the marriage relationship and concerning the custody of the children, and the fact that each is fully informed regarding the extent of the estate, income, and financial prospects of the other, considers the agreement fair and equitable, and has been fully advised by independent counsel, the agreement provides that in consideration of the premises, mutual covenants, and agreements and the sum of $350,000 paid by the husband to the wife simultaneously with the agreement, they will continue to live separate and apart the rest of their lives; that the wife during her life shall have sole custody of the children, he to assume such custody of minor children if she dies during the minority of any of them (except that he shall have the right at her convenience to communicate with the children and to visit them and have them visit him, and that the husband and wife will consult as to schools and training of the children); that the wife shall pay the expense of support, maintenance, and education of the children while they are with her and the husband shall pay such expenses while they reside with him; that she shall own and he releases to her all tangible personal property in her possession or situated at her house and premises at Holmdel, New Jersey, that he owns, and she releases to him his tangible personal property, in his possession; that she accepts the $350,000 ‘and the provisions made for her benefit in Article Sixth hereof, in lieu of, and as full consideration for the surrender of, all right of the wife for support and maintenance, right of alimony, right to share in any property of the husband and any other rights of the wife against the husband or his property or estate‘; that (in article sixth) he further agrees to pay for her support and maintenance and the support, education, and maintenance of the children in monthly installments commencing November 1, 1941, $5,000 per year until December 31, 1942, and thereafter one-quarter of his spendable income until her death or remarriage, or until his death; that spendable income is defined as all income received by him (except capital gains, and capital losses shall not be computed) over the Federal and state income taxes payable by him on such income, without deduction except personal exemption; that (article seventh) each releases and relinquishes to the other all claims by reason of the marriage with respect to property belonging to the other and any right to share in his or her estate, and the right to dower or curtesy, and the election to take against last will and testament of the other or to secure administration of the estate of the other; that the wife ‘hereby releases the husband from all obligations to support and maintain her, except as herein provided, and agrees that she will not make application to any court for alimony, maintenance, support, counsel fees or for the enforcement of any other right herein released‘; also that ‘there are no representations, warranties, conditions, promises, or undertakings other than those set forth in this agreement, which contains the entire agreement of the parties hereto and shall be binding upon them, their respective heirs, legal representatives and assigns whether the marriage between them continues or whether such marriage be hereafter dissolved by decree of divorce.‘
Petitioner and his wife had each engaged the services of attorneys, who actively represented them in the matter of negotiating the separation agreement. The petitioner wished a separation, formalized by an agreement. She did not, at the time she consulted attorneys, know whether she wished a separation or not. The wife's brother was an attorney and worked with her attorney in reaching the settlement. ‘There was a certain amount of difference in point of view which at some times amounted to a little bitterness which crept in because (the parties) had a considerable difference of opinion as to what the basis of settlement should be.‘ Petitioner recognized that he had an obligation, but felt he would like to settle it for a minimum amount because he was in the security business and was familiar with handling money, and felt that should it turn out in the long run that the settlement was too small and ‘they‘ ran out of money the obligation would still be there and that the money was better in his hands than it would be if it were in the hands of a woman who was unfamiliar with the handling of money. Therefore, his effort was to reach a settlement which he felt was sufficient, but not more than that. He would not go higher than $350,000 because he was afraid cash in his wife's hands might be a target for somebody, might disappear, and he would still have the obligation to support the children. Petitioner first offered $250,000. The wife's first offer was $700,000, she and her counsel considering the $250,000 to be grossly inadequate. She kept partial records of the items of support of herself and the children prior to the separation agreement, and a part of the costs so recorded was used in the negotiations. She and her attorney took the view that the settlement must provide her and the children with $20,000 to $25,000 a year for support. Her counsel asked for a statement of the petitioner's assets, which was submitted to him. The statement showed petitioner to have net worth as of October 1, 1941, of $1,198,107.29. The wife owned securities valued at $68,761.33, and the residence, which, with improvements, cost $65,000. Prior to that time the petitioner had made gifts to the children of a value of $70,170.53. After the separation the wife had control of that account, but has never withdrawn any of it. The wife's counsel, after examining petitioner's balance sheet, and especially in view of the large proportion of the petitioner's worth which was represented by his interest in an investment banking firm, concluded that he could not comply with her request for $700,000. Negotiations continued between the attorneys, with definite resistance from the petitioner's counsel. At one time ‘negotiations seemed to be broken off because (they) were so far apart.‘ At that point her demands were for about $500,000. At one time during the negotiations petitioner was preparing for a trip to South America, to be gone some time. The wife's counsel considered the situation unsatisfactory and negotiations were reopened. Petitioner refused to pay any more than $350,000 as a lump sum cash payment. Following further discussions, the petitioner finally agreed, in order to meet objections of the wife's attorney, to pay her $5,000 per year, or one-fourth of his spendable income, until the time of her death or remarriage, in addition to the cash payment of $350,000. This extra provision was in addition to and for the same purpose as the $350,000 payment. These were the amounts finally agreed upon, though her counsel did not feel that the agreement would provide the income needed to maintain her and the children and felt that she would have to reduce her standard of living materially. The basis of the offers and counteroffers was his financial condition and what was considered her needs for the support of herself and children. The intention was that the $350,000 apply to support the wife and children.
Upon the signing of the agreement, petitioner paid his wife $350,000 in cash, and thereafter he made payments of $526.67 monthly from December 1941 to September 1943, both inclusive. The wife remarried in September 1943 and these monthly payments then stopped. The $526.67 included $110 a month for a man to take care of some horses on her place in New Jersey, a matter having nothing to do with the separation agreement.
On June 28, 1943, Constance obtained a divorce from petitioner in Nevada. The decree, after awarding plaintiff a divorce, further recited as follows:
II. That the property rights of the plaintiff and the defendant, and all matters pertaining to the support and maintenance of the plaintiff, and all matters concerning the care, custody, control, support, maintenance and education of the minor children, be, and the same hereby are settled and decreed in accordance with the terms and provisions of that certain agreement in writing, duly made, executed and entered into for such purpose by and between WILLIAM BARCLAY HARDING and CONSTANCE FOX HARDING, of date the 24th day of October, 1941, a full, true and correct copy of which said written agreement has been admitted in evidence in this action, and marked and designated as Plaintiff's Exhibit ‘A‘, and the terms and provisions of said agreement are hereby ratified, confirmed, approved and fully adopted by this Court in all respects, and with the same force and effect as if said agreement were annexed hereto and set out in full in haec verba as a part hereof; that the custody of said minor children, DOROTHEA HARDING, JAMES HORACE HARDING and TIMOTHY FOX HARDING, be, and the same is hereby awarded and committed to the plaintiff, as provided in said agreement; that the plaintiff and the defendant be, and they hereby are, directed and ordered to comply with all the terms and conditions of said agreement, in accordance with the terms and provisions of said agreement of October 24, 1941, Plaintiff's Exhibit ‘A‘ herein.
Petitioner remarried in August 1943. After the separation the former wife continued to live in the residence at Holmdel, New Jersey, which she owned, but she did not live there at the time of hearing. She still owns the property, but petitioner now lives in it, has an option to buy it, and is considering buying it.
Petitioner's net income as reported in Federal tax returns, exclusive of fully tax exempt interest income and capital gains and losses, was: 1938, $35,551.81; 1939, $42,872.03; 1940, $87,147.28; and 1941, $11,165.41. The principal items in such income were dividends, interest, and partnership income.
At the time of separation of petitioner and his wife, the yearly cost of support and maintenance of the wife and children was approximately as follows: The wife, $12,300; Dorothea, $5,050; James, $4,650; and Timothy, $5,800. The children's expenses have increased with their age. They have, since the separation agreement, occasionally visited the petitioner, never more than about a month at a time; otherwise, they have lived with their mother.
In the payment of $350,000 by petitioner to his wife, no gift was made or intended. The transfer was for release of support of the petitioner's wife and three children, as well as for mutual releases of each spouse of any claim against the property or the estate of the other. The transfer was the result of an arm's length transaction, was later made a part of the court's decree in a divorce proceeding, and was made for a full and adequate consideration in money or money's worth.
OPINION.
BLACK, Judge:
The question we have to decide is whether $350000 paid by petitioner in 1941 to his wife Constance pursuant to a separation agreement signed on October 24, 1941, which agreement was made a part of the decree of divorce June 28, 1943, was a taxable gift. Respondent has determined that it was and has determined a deficiency of $47,879.94 in petitioner's gift tax for the year 1941.
Pertinent provisions of the statutes and the regulations are printed in the margin.
SEC. 1000 (Internal Revenue Code). IMPOSITION OF TAX.(a) For the calendar year 1940 and each claendar year thereafter a tax, computed as provided in section 1001, shall be imposed upon the transfer during such calendar year by an individual, resident or nonresident, of property by gift. Gift taxes for the calendar years 1932-1939, inclusive, shall not be affected by the provisions of this chapter, but shall remain subject to the applicable provisions of the Revenue Act of 1932, except as such provisions are modified by legislation enacted subsequent to the Revenue Act of 1932.SEC. 1002. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION.Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.SEC. 86.8 (Regulations 108). Transfers FOR A CONSIDERATION IN MONEY OF MONEY'S WORTH.— Transfers reached by the statute are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration in money or money's worth to the extent that the value of the property transferred by the donor exceeds the value of the consideration given therefor. However, 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), will be considered as made for an adequate and full consideration in money or money's worth. A consideration not reducible to a money value, as love and affection, promise of marriage, etc., is to be wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift.
Petitioner contends that the $350,000 which he paid to his wife in 1941 under the circumstances narrated in our findings of fact was not a gift and was for a full and adequate consideration in money or money's worth. In support of his contention he cites Herbert Jones, 1 T.C. 1207; petition for review dismissed (C.C.A.-7, May 1, 1944); Edmund C. Converse, 5 T.C. 1014; aff'd., 163 Fed.(2d) 131; Clarence B. Mitchell, 6 T.C. 159; appeal dismissed (C.C.A.-7, Oct. 7, 1946); and Albert v. Moore, 10 T.C. 393. We think these cases support petitioner. See also Edward B. McLean, 11 T.C. 543, and Norman Taurog, 11 T.C. 1016.
The Commissioner, on his part, relies upon Merrill v. Fahs, 324 U.S. 308; Commissioner v. Wemyss, 324 U.S. 303; and E.T. 19, 1946-2 C.B. 166. The contentions made by the Commissioner based upon the authorities cited by him have been discussed in Norman Taurog, supra, and a decision adverse to the contentions of the Commissioner was reached. We think that discussion is equally applicable here and it is unnecessary to repeat it. We hold that the payment of $350,000 by petitioner in 1941 to his wife in pursuance of the separation agreement, which agreement was subsequently made a part of the divorce decree of the Nevada court, did not represent a gift by petitioner to his wife, but was a transfer for an adequate and full consideration in money or money's worth.
Reviewed by the Court.
Decision will be entered for the petitioner.