Harris v. Commissioner of Internal Revenue

• Decision Date: 27 November 1950
• Docket Number: No. 14,14
• Citation: 340 U.S. 106,95 L.Ed. 111,71 S.Ct. 181
• Parties: HARRIS v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

340 U.S. 106

71 S.Ct. 181

95 L.Ed. 111

HARRIS

v COMMISSIONER OF INTERNAL REVENUE.

No. 14.

Argued Oct. 16, 1950.

Decided Nov. 27, 1950.

Mr. Irwin N. Wilpon, Brooklyn, N.Y., for petitioner.

Mr. Lee A. Jackson, Washington, D.C., for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

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, 65 S.Ct. 652, 89 L.Ed. 958, and Merrill v. Fahs, 324 U.S. 308, 65 S.Ct. 655, 89 L.Ed. 963, 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 made for 'an adequate and full consideration in money or money's worth'. In the estate tax this requirement is limited to deductions for claims based upon 'a promise or agreement';³ but the consideration for the 'promise or agreement' may not be the release of marital rights in the decedent's property. ⁴ In the Wemyss and Merrill cases the question was whether the gift tax was applicable to premarital property settlements. If the standards of the estate tax were to be applied ex proprio vigore in gift tax cases, those transfers would be taxable because there was a 'promise or agreement' touching marital rights in property. We sustained the tax, thus giving 'adequate and full consideration in money or money's worth' the same meaning under both statutes insofar as premarital property settlements or agreements are concerned.

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; as 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 suit then pending; an indemnification from and assumption by him of all liability on a bond and mortgage on certain real property in London, England; and an indemnification against liability in connection with certain real property in the agreement. It was found that the value of the property transferred to Wright exceeded that received by petitioner by $107,150. The Commissioner assessed a gift tax on the theory that any rights which Wright might have given up by entering into the agreement could not be adequate and full consideration.

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 marital 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 should be decreed;' and it provided that the agreement should be submitted to the divorce court 'for its approval.' It went on to say, '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.'

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. That was the theory of Commissioner Internal Revenue v. Maresi, 2 Cir., 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 Internal Revenue v. Converse, 2 Cir., 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.

But the present case is distinguished by reason of a further provision in the undertaking and in the decree. The former provided that 'the covenants in this agreement shall survive and decree of divorce which may be entered.' And the decree stated 'It is ordered that said agreement and said trust agreements forming a part thereof shall survive this decree.' The Court of Appeals turned the case on those provisions. It concluded that since there were two sanctions for the payments and transfers—contempt under the divorce decree and execution under the contract—they were founded not only on the decree but upon both the decree and a 'promise or agreement'. It therefore held the excess of the value of the property which petitioner gave her husband over what he gave her to be taxable as a gift. 178 F.2d 861.

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' of the property with which the gift tax statute is concerned,⁷ 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 agreement' of the parties is the operative fact. In no realistic sense is a court decree a 'promise or agreement' between the parties to a litigation. if finer, more legalistic lines are to be drawn, Congress must do it.

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 property 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 take some weeks before an administrator of her estate can be appointed. Accordingly we enter our judgment as of October 16, 1950, in pursuance of the practice obtaining in those circumstances. See Mitchell v. Overman, 103 U.S. 62, 64—65, 26 L.Ed. 369; McDonald v. Maxwell, 274 U.S. 91, 99, 47 S.Ct. 497, 499, 71 L.Ed. 942.

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. I.R.C. § 1002, 26 U.S.C. § 1002, 26 U.S.C.A. § 1002. In Merrill v. Fahs, 324 U.S. 308, 65 S.Ct. 655, 89 L.Ed. 963, the Court held that an antenuptial settlement is subject to this tax.¹ Believing as I do that the disposition of the case before us largely depends on the weight given to the considerations which there prevailed, recapitulation of them is appropriate. The Court there based its result on the conclusion that a transfer of property pursuant to an antenuptial settlement was not made in exchange for 'an adequate and full consideration in money or money's worth'. This conclusion was reinforced by reading into the gift tax provision the gloss of the interrelated estate tax of the same year that the relinquishment of 'marital rights * * * shall...