Commissioner of Internal Revenue v. Barnard's Estate

• Decision Date: 25 July 1949
• Docket Number: Docket 21164.,No. 184,184
• Citation: 176 F.2d 233
• Parties: COMMISSIONER OF INTERNAL REVENUE v. BARNARD'S ESTATE. BARNARD'S ESTATE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

176 F.2d 233 (1949)

COMMISSIONER OF INTERNAL REVENUE v. BARNARD'S ESTATE.

BARNARD'S ESTATE v. COMMISSIONER OF INTERNAL REVENUE.

No. 184, Docket 21164.

United States Court of Appeals Second Circuit.

Argued June 8, 1949.

Decided July 25, 1949.

I. Henry Kutz, Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., and Ellis N. Slack, Sp. Asst. to Atty. Gen., on the brief), for petitioner.

James C. Mulligan, of New York City (Delafield, Marsh & Hope and Claude A. Hope, all of New York City, on the brief), for respondent.

Before L. HAND, Chief Judge, and CLARK and FRANK, Circuit Judges.

CLARK, Circuit Judge.

These are cross-petitions for review of a decision of the Tax Court sustaining in part and disallowing the remainder of a deficiency in gift tax determined by the Commissioner. The deficiency arose out of the failure of Josephine S. Barnard, of whose will the petitioner, City Bank Farmers Trust Co., is executor, to include in her 1943 gift tax return two transfers of $50,000 each to her husband, Henry H. Barnard, based respectively upon a separation agreement and a contemporaneous agreement conditioned on a divorce between the parties.

The stipulated facts, pertinent to the review of these petitions, are are follows: Mrs. Barnard and Barnard were married in 1924. In July, 1943, they separated; and on August 12, 1943, they entered into a written separation agreement, whereby Mrs. Barnard promised to pay to Barnard the sum of $50,000, in return for which he relinquished any claims on her property "so that her estate shall go and belong to the person or persons who become entitled thereto by will or by devise, bequest, intestacy, administration or otherwise as if the Husband had died during the lifetime of the Wife." At the same time she relinquished any dower or other rights in his estate. Each also transferred and released to the other any rights in real property owned by the other and agreed not to incur any liabilities upon the other's credit. The agreement further provided that

"In the event of a decree of separation or divorce between the Husband and the Wife, the provisions hereof may be embodied in such decree and may be made a part thereof; provided, however, that no insertion in any such decree of any of the provisions of this agreement or of the substance thereof shall affect or in any manner alter the terms and conditions of this agreement."

Mrs. Barnard paid the $50,000 to Barnard upon the execution of the written agreement. At the same time, the parties entered into an oral agreement, nowhere referred to in the written one, that, when and if Mrs. Barnard obtained a divorce, she would pay an additional $50,000 into a trust fund previously established by her, of which Barnard was the life beneficiary. To guard against the event of her death before she had done so, she executed a codicil to her will the next day, leaving $50,000 in trust for Barnard. Some two months later, on October 20, 1943, she obtained a Nevada divorce. The divorce decree included the following paragraph:

"2. That the written agreement, dated August 12, 1943, made and entered into by the plaintiff and the defendant herein, settling the property rights of the plaintiff and the defendant, and all matters concerning the care, custody and control of the minor children of said parties, a true, full 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' herein, be, and the same hereby is, by this Court, ratified, adopted and approved in all respects, and with the same force and effect as if said agreement were annexed hereto and set out in haec verba as a part hereof; and said agreement is hereby declared to be fair, just and equitable to the plaintiff, to the defendant, and to the said minor children."

A few days after Mrs. Barnard obtained her decree, she carried out the provisions of the oral agreement by making a $50,000 payment to City Bank Farmers Trust Company, trustee of the trust fund for Barnard, thereupon revoking the codicil to her will. The Commissioner held both these payments subject to the gift tax in a deficiency determination which she asked the Tax Court to redetermine. Thereafter she died and City Bank Farmers Trust Company carried on the proceedings as her executor. Judge Black, for the Tax Court, held only the second payment to be subject to the tax, 9 T.C. 61, and later denied the executor's petition for a rehearing. Both the Commissioner and the executor have now petitioned for a review of the decision.

Section 1002 of the Internal Revenue Code, 26 U.S.C.A. § 1002, provides: "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." For the meaning of "adequate and full consideration" we need turn only to the opinion of the Supreme Court in Merrill v. Fahs, 324 U.S. 308, 65 S.Ct. 655, 656, 89 L.Ed. 963.¹ The Court there pointed out that, since the gift tax statutes were designed to prevent tax avoidance by settlements in advance of death, they must be read together with the related provisions of the estate tax. Sanford's Estate v. Commissioner of Internal Revenue, 308 U.S. 39, 60 S.Ct. 51, 84 L.Ed. 20. And since relinquishment of marital property rights is not "adequate and full consideration" for estate tax purposes, it should not be so for gift tax purposes. The explicit provision to this effect, now found in I.R.C. § 812(b), 26 U.S.C.A. § 812(b), is more "cautious redundancy" than a showing of an intention to discriminate between the two taxes; there is every reason "to construe the provisions of both taxes harmoniously." Merrill v. Fahs, supra, 324 U.S. at pages 312, 313, 65 S.Ct. at page 657, 89 L.Ed. 963.

The executor argues that the Merrill case can be distinguished because the transaction involved there was an antenuptial settlement, rather than a separation agreement. But the amount that Mrs. Merrill would have received at Merrill's death would have been taxed to his estate before she received it, just as the amount that Barnard would have received at Mrs. Barnard's death by marital right would have been taxed to the estate before he received it. That is, the gap in the revenue laws which the gift tax was designed to fill is just as apparent in the one situation as the other; and if the two taxes are to be construed harmoniously in the one case, they certainly should be in the other. We regard the suggestion that the one case shows more of a business transaction than the other as bordering upon the fanciful; a transfer as part of a separation agreement ending a marriage in ordinary contemplation is no more for a business purpose than a transfer to induce a...