Helvering v. Leonard

have said incorporated the trust agreement) “providing for the support and maintenance of the plaintiff/’ and in addition directed respondent to pay her $35,000 a year for the rest of her life. From June 4, 1929 to December 31, 1929, the trustee received $16,191.34 as dividends and interest from the trust property. It distributed $5200 to the wife and $2083.33 to each of three children, leaving an undistributed balance for that period of about $4700. Respondent did not include any of that income in his return for 1929. The Commissioner determined a deficiency. The Board of Tax Appeals held that only the amounts actually distributed to respondent’s wife and minor children were taxable to him. 36 B. T. A. 563 . The Circuit Court of Appeals reversed, holding that respondent, though taxable on income payable to his minor children, was not taxable on income payable to the wife. 105 F. 2d 900 .

Here, as in the Circuit Court of Appeals, it was urged by the petitioner that this alimony trust was merely security for respondent’s continuing obligation to support his wife and, therefore, that the trust income payable to her was taxable to him under the rule of Douglas v. Willcuts, supra. In support of that position it was urged, inter alia, that under New York law respondent’s obligation was not discharged since the New York court retained the power to modify the decree; and that the promise by respondent to pay the wife $35,000 (or in no event less than $10,000) a year converted the trust into at least partial security for the total allowance to her. In either of such events the rule of Douglas v. Willcuts, supra, would apply. See Helvering v. Fitch, supra. The Circuit Court of Appeals, however, decided these two questions adversely to petitioner. But there is one matter not touched on by that court which we think is determinative of one phase of the case.

The trust agreement contains an express personal obligation of respondent in the form of a guarantee of payment of the principal and interest on $400,000 of the 6% bonds which were part of the trust corpus. To be sure, that personal obligation was contingent. But we do not deem that to be material. We recently stated in Helvering v. Fitch, supra, p. 156 , that under this statutory scheme escape from the rule of Douglas v. Willcuts, supra, may be had only on “clear and convincing proof” that “local law and the alimony trust have given the divorced husband a full discharge and leave no continuing obligation however contingent.” Whatever may be the correct view on the other aspects of the case, the guarantee was such a continuing obligation. The fact that the wife or other beneficiaries looked primarily to the trust and only secondarily to respondent for payment of $24,000 annually, the fact that respondent’s obligation might be enforceable by the trustee, the fact that respondent might never have to make good on his promise are beside the point. The existence of wholly contingent obligations, whether contractual or otherwise, is adequate to support the results reached in Douglas v. Willcuts, supra. For in that case it was manifest that at the time of the creation and approval of the trust the divorce court might never exercise its reserved power to revise or alter the decree and the husband might never have- to make good on his promise to make up deficiencies in the estimated trust income. Likewise in the instant case, it cannot be said that the divorce decree and the alimony trust gave respondent an absolute discharge from his prior obligation. So far as the guarantee alone is concerned, they permitted his preexisting unconditional duty to be transformed into a limited contingent one. But nonetheless they placed a specific and adequate sanction on that duty, so that respondent’s personal obligation would not be fully discharged at least until complete payment

of the principal and interest on the 6% bonds had been made. Thus in effect, if not in form, the trust agreement was security for his continuing obligation which would be discharged at least pro tanto as income from those bonds was received by the trustee. Hence the case in substance is the same as those where pursuant to contract or arrangement an obligation is discharged by another for the taxpayer’s benefit; see Old Colony Trust Co. v. Commissioner, 279 U. S. 716 ; United States v. Boston & Maine Railroad, 279 U. S. 732 ; or where the taxpayer creates a trust, the income of which is applied to the discharge of his debt. See Helvering v. Blumenthal, 296 U. S. 552 . Here, as there, the taxpayer received a'benefit by the payments. The catalogue of benefits is not depleted when primary obligations are discharged. For these reasons that portion of the trust income which was received from the guaranteed bonds was clearly taxable to respondent.

Apparently, however, a portion of that income was received from other trust property. But we think that was also taxable to respondent though for another reason.

As we have seen, the divorce decree approved, affirmed and made part of the judgment the separation agreement providing for the “support and maintenance” of the wife. Her maintenance and support were secured not only by the trust agreement and other property settlements but also by the personal obligation of the husband to contribute an annual sum. The Circuit Court of Appeals held that under New York law the terms of the trust would not be changed “unless the wife can disaffirm it for fraud, overreaching, or the like,” citing Galusha v. Galusha, 116 N. Y. 635 ; 22 N. E. 1114 ; 138 N. Y. 272 ; 33 N. E. 1062 ; Cain v. Cain, 188 App. Div. 780 ; 177 N. Y. S. 178 ; Hamlin v. Hamlin, 224 App. Div. 168 ; 230 N. Y. S. 51 . If the case was here on application of local law under the rule of Erie R. Co. v. Tompkins, 304 U. S. 64 , we would not be

inclined to disturb that finding. But it is not. Here respondent is seeking to escape one of the normal incidents of the federal income tax. For that purpose he invokes the aid of New York law. In Helvering v. Fitch, supra, we stated that where the divorced husband desires to avoid the general rule expressed in Douglas v. Willcuts, supra, he carries a distinct burden of establishing not by mere inference and conjecture but by “clear and convincing proof” that local law and the alimony trust have given him a full discharge. We do not think that respondent has sustained that burden.

As stated by the Circuit Court of Appeals, it does seem clear that mere property settlements, though' incorporated into the decree, may not be modified pursuant to the reserved statutory powers of the court, contained in N. Y. Civil Prac. Act §§ 1155, 1170. See Cain v. Cain, supra; Goldfish v. Goldfish, 193 App. Div. 686 ; 184 N. Y. S. 512 . Schnitzer v. Buerger, 237 App. Div. 622 ; 262 N. Y. S. 385 . Nevertheless these settlements may be remade by the court not only where an ordinary contract may be set aside but also where they are unfair, inequitable and unjust. Hamlin v. Hamlin, supra. Cf. Tirrell v. Tirrell, 232 N. Y. 224 ; 133 N. E. 569 . As stated by the court in the Hamlin case (224 App. Div. at p. 171) the requirement is that “such contracts be not only free from taint of actual fraud or coercion but also fair and reasonably sufficient having regard to the station in life and circumstances of the parties.” More important to this case, however, are Kunker v. Kumker, 230 App. Div. 641 ; 246 N. Y. S. 118 and Holahan v. Holahan, 234 App. Div. 572 ; 255 N. Y. S. 693 . They make it plain that the covenants of a separation agreement are not “an insuperable obstacle to obtaining relief by modification of the allowances.” Holahan v. Holahan, supra, p. 574 . Cf. Severance v. Severance, 260 N. Y. 432 ; 183 N.

the provision in the separate agreement, approved by the decree, is for support and maintenance (Kunker v. Kunker and Holahan v. Holahan, supra) but not where it is -in settlement of claims of ownership to specified property. Goldfish v. Goldfish and Schnitzer v. Buerger, supra. The provisions of the separation agreement and the trust agreement here in question specifically relate to and were designed to afford support and maintenance for the wife. Unlike the purpose of the trust agreement in Schnitzer v. Buerger, supra, the purpose here apparently was not to compose any controversies over the securities. We need not decide whether the court retained the power to> require respondent to make additional payments to the wife in case, say, all the securities in trust turned out to be worthless. All we do hold is that respondent has not shown by “clear and convincing proof” that the court lacks the power to add to his personal obligations in any such circumstances.

Reversed.

Mr. Justice Reed concurs in the result for the reasons stated in the dissent in Helvering v. Fuller, ante, p. 76.

The Chief Justice, Mr. Justice McReynolds, and Mr. Justice Roberts are of the opinion that the judgment of the Circuit Court of Appeals should. be affirmed.