Harding v. Comm'r of Internal Revenue, Docket No. 6098.
| Decision Date | 22 December 1948 |
| Docket Number | Docket No. 6098. |
| Citation | 11 T.C. 1051 |
| Parties | WILLIAM BARCLAY HARDING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner and wife agreed to separate, and that he pay her $350,000 cash, plus $5,000 per annum for approximately one year and thereafter one-fourth of his spendable income, as defined, until she should die or remarry, in consideration of her release of rights to support and maintenance of herself and children, dower, and all other marital rights in his property. The agreement specified that it was to be binding regardless of divorce. There is no proof that divorce was then contemplated. The wife obtained a divorce more than one year and eight months later and the decree adopted and ordered compliance with the agreement. The $350,000 was paid at once and the other payments made as agreed until the wife's remarriage about two years later. Held, that the payment of $350,000 to the wife was a transfer for an adequate and full consideration in money or money's worth and was not a gift. George R. Sheriff, Esq., and William G. McKnight, Jr., Esq., for the petitioner.
Walt Mandry, Esq., for the respondent.
The Commissioner has determined a deficiency of $47,879.94 in petitioner's gift tax for the year 1941. The deficiency results from the addition to the gifts reported in the return filed by petitioner of ‘Item 1— Transfers to Constance Fox Harding in connection with separation agreement, $353,053.32. ‘ The Commissioner explained his action in the deficiency notice as follows:
It is held that the above transfers, made in 1941 to your wife, Constance Fox Harding, in connection with a separation agreement, were made without a full and adequate consideration in money or money's worth and therefore were gifts within the meaning of Chapter 4 of the Internal Revenue Code.
The petitioner contests this determination of the Commissioner by appropriate assignments of error. At the hearing respondent conceded that $3,053.32 of the amount which he had determined was not a gift. The issue is, therefore, whether petitioner in 1941 made gifts of $350,000 as now contended by respondent.
The Federal gift tax return for 1931 was filed by the petitioner with the collector of internal revenue for the second district of New York.
The petitioner, born November 16, 1906, and Constance Fox Harding, born March 25, 1908, were married March 30, 1929. Of that marriage there were born three children: Dorothea, born in November 1930; James Horace, born in July 1932; and Timothy Fox, born in October 1934. On April 1, 1941, petitioner and his wife began to live apart, and they have so continued since that time. On October 24, 1941, they entered into an agreement in writing. In pertinent part, after reciting the marriage, the birth of the children, the arising of differences between husband and wife, and the separation on April 1, 1941, their desire to settle and adjust forever all rights of support and maintenance, all property rights, and all other rights, claims or demands arising out of the marriage relationship and concerning the custody of the children, and the fact that each is fully informed regarding the extent of the estate, income, and financial prospects of the other, considers the agreement fair and equitable, and has been fully advised by independent counsel, the agreement provides that in consideration of the premises, mutual covenants, and agreements and the sum of $350,000 paid by the husband to the wife simultaneously with the agreement, they will continue to live separate and apart the rest of their lives; that the wife during her life shall have sole custody of the children, he to assume such custody of minor children if she dies during the minority of any of them (except that he shall have the right at her convenience to communicate with the children and to visit them and have them visit him, and that the husband and wife will consult as to schools and training of the children); that the wife shall pay the expense of support, maintenance, and education of the children while they are with her and the husband shall pay such expenses while they reside with him; that she shall own and he releases to her all tangible personal property in her possession or situated at her house and premises at Holmdel, New Jersey, that he owns, and she releases to him his tangible personal property, in his possession; that she accepts the $350,000 ‘and the provisions made for her benefit in Article Sixth hereof, in lieu of, and as full consideration for the surrender of, all right of the wife for support and maintenance, right of alimony, right to share in any property of the husband and any other rights of the wife against the husband or his property or estate‘; that (in article sixth) he further agrees to pay for her support and maintenance and the support, education, and maintenance of the children in monthly installments commencing November 1, 1941, $5,000 per year until December 31, 1942, and thereafter one-quarter of his spendable income until her death or remarriage, or until his death; that spendable income is defined as all income received by him (except capital gains, and capital losses shall not be computed) over the Federal and state income taxes payable by him on such income, without deduction except personal exemption; that (article seventh) each releases and relinquishes to the other all claims by reason of the marriage with respect to property belonging to the other and any right to share in his or her estate, and the right to dower or curtesy, and the election to take against last will and testament of the other or to secure administration of the estate of the other; that the wife ‘hereby releases the husband from all obligations to support and maintain her, except as herein provided, and agrees that she will not make application to any court for alimony, maintenance, support, counsel fees or for the enforcement of any other right herein released‘; also that ‘there are no representations, warranties, conditions, promises, or undertakings other than those set forth in this agreement, which contains the entire agreement of the parties hereto and shall be binding upon them, their respective heirs, legal representatives and assigns whether the marriage between them continues or whether such marriage be hereafter dissolved by decree of divorce.‘
Petitioner and his wife had each engaged the services of attorneys, who actively represented them in the matter of negotiating the separation agreement. The petitioner wished a separation, formalized by an agreement. She did not, at the time she consulted attorneys, know whether she wished a separation or not. The wife's brother was an attorney and worked with her attorney in reaching the settlement. ‘There was a certain amount of difference in point of view which at some times amounted to a little bitterness which crept in because (the parties) had a considerable difference of opinion as to what the basis of settlement should be.‘ Petitioner recognized that he had an obligation, but felt he would like to settle it for a minimum amount because he was in the security business and was familiar with handling money, and felt that should it turn out in the long run that the settlement was too small and ‘they‘ ran out of money the obligation would still be there and that the money was better in his hands than it would be if it were in the hands of a woman who was unfamiliar with the handling of money. Therefore, his effort was to reach a settlement which he felt was sufficient, but not more than that. He would not go higher than $350,000 because he was afraid cash in his wife's hands might be a target for somebody, might disappear, and he would still have the obligation to support the children. Petitioner first offered $250,000. The wife's first offer was $700,000, she and her counsel considering the $250,000 to be grossly inadequate. She kept partial records of the items of support of herself and the children prior to the separation agreement, and a part of the costs so recorded was used in the negotiations. She and her attorney took the view that the settlement must provide her and the children with $20,000 to $25,000 a year for support. Her counsel asked for a statement of the petitioner's assets, which was submitted to him. The statement showed petitioner to have net worth as of October 1, 1941, of $1,198,107.29. The wife owned securities valued at $68,761.33, and the residence, which, with improvements, cost $65,000. Prior to that time the petitioner had made gifts to the children of a value of $70,170.53. After the separation the wife...
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