Harris v. Comm'r of Internal Revenue, Docket No. 11616.

Citation10 T.C. 741
Decision Date30 April 1948
Docket NumberDocket No. 11616.
PartiesCORNELIA HARRIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

1. GIFT TAX— NONRESIDENT ALIEN— BANK DEPOSITS.— Money on deposit in American banks is not exempt or excluded from gift tax as property without the United States on the theory that section 863(b) of the estate tax chapter is to be read into the gift tax chapter.

2. GIFT TAX— PREMIUMS ON INSURANCE.— Payments of premiums by wife on policy belonging exclusively to husband were not precluded from being gift on ground that wife had an interest in the policies as husband's heir.

3. GIFT TAX— SETTLEMENT AT DIVORCE.— Payments by wife pursuant to property settlement adopted in decree of divorce held not gifts, following Estate of Josephine S. Barnard, 9 T.C. 61. Irwin N. Wilpon, Esq., for the petitioner.

Scott A. Dahlquist, Esq., for the respondent.

The Commissioner determined the following deficiencies in gift tax:

+----------------------------------------------+
                ¦Year¦Tax      ¦Penalty¦Year¦Tax       ¦Penalty¦
                +----+---------+-------+----+----------+-------¦
                ¦1940¦$1,275.32¦       ¦1943¦$31,434.34¦       ¦
                +----+---------+-------+----+----------+-------¦
                ¦1941¦13,699.83¦       ¦1944¦1,365.00  ¦       ¦
                +----+---------+-------+----+----------+-------¦
                ¦1942¦9,861.53 ¦       ¦1945¦360.00    ¦$90.00 ¦
                +----------------------------------------------+
                

The parties settled a number of their differences, leaving the following issues for decision:

(1) Did the petitioner, a nonresident alien, make taxable gifts by transferring funds to or for her husband from her bank account in a New York bank?

(2) If so, were checks, in payment of premiums on his annuity insurance policy, gifts?

(3) Were transfers by the petitioner to her husband, pursuant to a property settlement agreement adopted in a decree of divorce, taxable gifts?

(4) If so, was her promise in that agreement to make monthly payments to her husband a gift when the promise was made, or only later, as payments were made?

(5) If the promise was a gift, should the value be reduced by the income tax on the gross amount to be paid?

FINDINGS OF FACT.

The petitioner filed gift tax returns for the years 1940 to 1944, inclusive, with the collector of internal revenue for the third district of New York.

The petitioner was born an American citizen, in New York City, on February 1, 1883. Her name was Cornelia Brady. She became a British subject in 1903 through her marriage to Leland H. De langley, a British subject. They were divorced in 1924 and three months later she married Reginald Wright, also a British subject, who was fourteen years, three months, and eighteen days younger than she. They have no children. The petitioner obtained a divorce from Wright in Reno, Nevada, on March 6, 1943.

The petitioner resided in England from 1903 until she and Wright came to the United States, on September 20, 1940. They came in order to get away from the war in Europe and intended to return after the conclusion of the war. They did not dispose of their houses, one in London and one in Biarritz, France. They entered the United States on a temporary one-year visa, permitting them to remain until September 20, 1941. That visa was renewed later for another year, permitting them to remain until September 20, 1942. They resided in leased quarters at the Hotel Pierre in New York City until August 1942, when the petitioner separated from Wright. Shortly thereafter she went to Reno, Nevada. She reclaimed her American citizenship there on November 21, 1942, and on March 6, 1943, was granted the divorce from Wright.

Both the petitioner and Wright have remained in the United States since September 20, 1940.

The respondent concedes that the petitioner was in the United States as a nonresident alien from September 20, 1940, until some time in September 1942.

The petitioner has never been engaged in business in the United States. She maintained several bank accounts in the National City Bank of New York, in which she had money on deposit and on which an attorney at law held a power of attorney, made all deposits, and drew checks on her behalf. The National City Bank was a corporation carrying on the banking business.

The petitioner gave Wright the following amounts from her accounts in the National City Bank during the period from September 20, 1940, to September 1942: $29,095.91 during 1940, $76,170.59 during 1941, and $39,455.18 during 1942. She also paid $1,800.03 in 1940 and $3,605.22 in 1941 from the same accounts as premiums on an endowment policy of insurance owned entirely by Wright. The insured was Wright and the policy was to become payable to him, or his executors, administrators, or assigns on May 12, 1953, or at his earlier death.

The petitioner and Wright entered into a property settlement agreement on February 27, 1943. The net worth of the petitioner's estate was in excess of $1,000,000 at that time. The net worth of Wright's estate at that time was substantial. Each agreed to release completely the property of the other from all claims arising out of their marriage. Each transferred property of substantial value to the other.

The Commissioner determined that the value of the property transferred to Wright exceeded that transferred to the petitioner by $117,903.03 and now agrees that the difference is $107,150.78, including $41,291.88 representing the then value of her promise to pay Wright $416.66 monthly for ten years. The court, in granting the divorce, approved the property settlement agreement and found that the payments of $416.66 per month was ‘in discharge of a legal obligation which, because of the marital relationship, has been imposed upon the plaintiff.‘

OPINION.

MURDOCK, Judge:

The respondent concedes in his brief that the petitioner was a nonresident aline when she made the transfers during 1940, 1941, and 1942 which are in dispute under the first issue. The evidence alone might leave a question a to residence, cf. John Henry Chapman, 9 T.C. 619, but the Court accepts the agreement of the parties for the purpose of this case. The point upon which the parties disagree in regard to these transfers is whether they are free from gift tax because made from moneys upon deposit in a bank in the United States. Both the estate tax and the gift tax chapters provide that they apply, in the case of nonresident aliens, only to transfers of property situated within the United States. Secs. 861(a) and 1000(b), I.R.C. Section 863(b) of the estate tax chapter expressly provides that ‘any moneys deposited with any person carrying on the banking business, by or for a nonresident not a citizen of the United States who was not engaged in business in the United States at the time of his death‘ shall not ‘be deemed property within the United States.‘ The gift chapter contains no such provision. The petitioner argues, nevertheless, that the two chapters must be read in pari materia so that ‘property within the United States‘ means the same in each. The Commissioner argues that bank deposits are property within the United States for gift tax purposes, since it took a special provision of the estate tax chapter to exclude them from the estate tax and no similar exemption was granted for gift tax purposes.

The argument of the petitioner in regard to the purpose of the gift tax and its relation to the estate tax and the cases cited have been carefully considered. The Supreme Court has said on more than one occasion that the two taxes are in pari materia and must be construed together and ‘there is every reason for giving the same words in the gift tax the same reading.‘ Sanford v. Commissioner, 308 U.S. 39; Merrill v. Fahs, 324 U.S. 308. The petitioner relies particularly upon Commissioner v. Bristol, 121 Fed.(2d) 129, revers...

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