Commissioner of Internal Revenue v. Copley's Estate, 10426.

• Decision Date: 26 February 1952
• Docket Number: No. 10426.,10426.
• Citation: 194 F.2d 364
• Parties: COMMISSIONER OF INTERNAL REVENUE v. COPLEY'S ESTATE et al.
• Court: U.S. Court of Appeals — Seventh Circuit

194 F.2d 364 (1952)

COMMISSIONER OF INTERNAL REVENUE v. COPLEY'S ESTATE et al.

No. 10426.

United States Court of Appeals Seventh Circuit.

February 26, 1952.

Ellis N. Slack, Acting Asst. Atty. Gen., Hilbert P. Zarky, Special Asst. to the Atty. Gen., Theron Lamar Caudle, Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Special Assts. to the Atty. Gen., for petitioner.

Albert L. Hopkins, Harry D. Orr, Jr. and T. Eugene Foster, all of Chicago, Ill., William C. Childs, Chicago, Ill., for respondents.

Before MAJOR, Chief Judge, KERNER and SWAIM, Circuit Judges.

MAJOR, Chief Judge.

This is a petition by the Commissioner of Internal Revenue to review and reverse a decision of the Tax Court, entered August 11, 1950, exonerating respondents as the executors of the estate of Ira C. Copley from the payment of a gift tax for the years 1936 and 1944.

The decedent (sometimes referred to as the taxpayer) and his intended wife, Chloe Davidson-Worley, on April 18, 1931, while in Paris, France, in contemplation of marriage and in consideration thereof entered into an antenuptial agreement by which "the said party of the first part Copley hereby agrees to pay to said party of the second part the prospective wife, to be effective immediately after the solemnization of said marriage, the sum of one million dollars, the said sum to become and to be her sole and separate property." (Italics ours.) The agreement continued, "In consideration of the payment to her of the said sum of one million dollars, the party of the second part agrees that she will accept and does accept the said sum in lieu of any and all rights, or claims of dower, inheritance and descent in and to the real property of the party of the first part now owned or that may hereafter be acquired by him, and in lieu of any and all other claims which might otherwise arise or accrue to her by reason of said marriage * * *." The party of the second part also agreed, upon the request of the party of the first part, to execute all and any proper instruments of conveyance in order to enable him to sell or convey real estate owned or afterward acquired by him. And it was provided that in the event of her death prior to his, one-half of the said one million dollars should revert to him or, in the event of his death prior to hers, that said one-half should go to his estate.

The parties were married on April 27, 1931, after which they returned to the United States and took up their residence and domicile at Aurora, Illinois, which had long been the domicile and residence of Copley.

On January 1, 1936, Copley assigned and transferred to his wife notes of Southern California Associated Newspapers in the face amount of $500,000. On the following day, the wife entered into a revocable trust agreement with Copley as trustee, and assigned the notes to the trust, to terminate at the death of Copley or his wife, whichever should first occur, at which time the trust property was to go to the wife or her estate.

On November 20, 1944, Copley transferred to his wife cumulative preferred stock of the Copley Press, Inc., in the face amount of $500,000, under a trust agreement entered into between the parties. This agreement recited that "the said Chloe D. Copley does hereby agree and acknowledge that said Ira C. Copley, has, in all manners, performed the agreements on his part to be kept and performed as contemplated in said antenuptial agreement * *."

The Commissioner determined a deficiency in the gift taxes of the taxpayer for the years 1936 and 1944, on the premise that the transactions in those years were transfers "of property by gift" under Sec. 501 of the Revenue Act of 1932, which became effective June 6 of that year. (The present section is the same in all material respects, 26 U.S.C.A. § 1000(a).) The Tax Court decided in favor of the taxpayer, two members dissenting. 15 T.C. 17.

The Commissioner poses the question for decision thus: "Were the gifts completed in the year when taxpayer promised to make the transfers * * *, or in the years when he actually made the transfers * * *?" On the other hand, respondents pose the question thus: "Did the discharge in 1936 and 1944 of the obligation created in 1931 by the antenuptial contract constitute a taxable gift within the meaning of the Revenue Act of 1932 * * *?"

We think the Commissioner in the question as posed, as well as in his brief, over-simplifies the situation. Typical of numerous statements in his brief are: "In this case taxpayer's agreement to transfer property remained wholly executory until after the gift tax statute was enacted"; "The agreement * * * remained wholly executory for several years"; "The taxable event is the `transfer * * * of property,' not the creation of an unsecured obligation to transfer property in the future," and "The agreement remains wholly executory, and the `transfer * * * of property' for tax purposes takes place when the property is actually transferred."

Copley in 1931 did not agree to transfer property to his wife in 1936 or 1944 or any other year. What he did was to obligate himself unconditionally to pay her "immediately after the solemnization of said marriage, the sum of one million dollars," which obligation became effective upon their marriage nine days later. And the nature of the transaction is not altered by the fact that Mrs. Copley at a subsequent time agreed to accept corporate stocks and notes in lieu of that which Copley had promised.

Under the law of Copley's residence and domicile (Illinois), there is no question but that the agreement of the parties, upon their marriage, became a binding and legally enforceable obligation. We need not cite cases in support of this proposition because it is so conceded by petitioner. Copley's obligation to pay his wife one million dollars the next day after their marriage was a debt and possessed all the indicia of a promissory note payable on demand. She could have assigned and conveyed good title to the instrument which evidenced his obligation to pay, and either Mrs. Copley or her assignee could have maintained an action against Copley and recovered a judgment. And it can hardly be questioned but that Copley by the obligation thus assumed depleted the net worth of his estate and that the net worth of his wife's estate was augmented, each to the extent of one million dollars.

Thus, the rights and obligations of Copley and his wife had become definitely fixed more than one year prior to the enactment of the gift tax act of 1932. True, at that time Copley had not discharged the contractual debt or obligation which he owed to his wife and, so far as the record discloses, she had made no effort to enforce payment. And any reason why discharge of the obligation was delayed we think immaterial. The point is that his wife in 1936 and 1944 agreed to and did accept on each occasion $500,000 in securities in discharge of Copley's obligation and in lieu of the money which he was obligated to pay her. It is contrary to reason and common sense to say that the delivery of such property by Copley in 1936 and 1944, and its acceptance by his wife, was other than a discharge of the 1931 obligation. However, unrealistic as it appears upon its face, the Commissioner contends that the transactions during the later years were transfers "of property by gift."

We start out with a decision of the Tax Court in favor of the taxpayer. As was said in Commissioner v. Wemyss, 324 U.S. 303, 307, 65 S.Ct. 652, 654, 89 L.Ed. 958, concerning a similar decision by the Tax Court, "Its conclusion on the issue before it was no less to be respected than were the issues which we deemed it was entitled to decide as it did in Dobson v. Commissioner of Internal Revenue, 320 U.S. 489, 64 S.Ct. 239 88 L.Ed. 248; Commissioner of Internal Revenue v. Heininger, 320 U.S. 467, 64 S.Ct. 249 88 L.Ed. 171; Commissioner of Internal Revenue v. Scottish American Investment Co., 323 U.S. 119, 65 S.Ct. 169 89 L.Ed. 113."

The Commissioner places much reliance upon the Wemyss case and Merrill v. Fahs, 324 U.S. 308, 65 S.Ct. 655, 89 L.Ed. 963, decided by the Supreme Court on the same date. The Tax Court in the instant case distinguishes those cases on the ground that "These parties contracted when there was no gift tax law in effect. Gifts made in 1931 were not subject to any gift tax." In those cases the transfer of the property held to be "by gift" related to the performance of an antenuptial agreement but a study of the two opinions makes it plain that the court was considering the transaction as a whole, that is, the agreement and its performance, both of which took place simultaneously in the Wemyss case and within the same taxable year in the Fahs case.

The reasoning of both cases, Wemyss case, 324 U.S. at page 304, 65 S.Ct. at page 653, 89 L.Ed. 958, Fahs case, 324 U.S. at page 310, 65 S.Ct. 655, 89 L.Ed. 963, is predicated solely upon the court's interpretation of Sec. 503 of the gift tax act of 1932, which reads as follows: "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 title, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year."

The court in each case held that the receipt of property for the release of marital rights did not constitute "an adequate and full consideration in money or money's worth" under the section just quoted. In the absence of this provision, upon which the court bottomed its reasoning and its conclusion, there is no reason to think that the court would have held as it did; in fact, it is more reasonable to believe that it would not have done so. It is also interesting and perhaps pertinent to note that one member of the court dissented in the Wemyss case and four members in the Fahs case. In the former,...