Helvering v. Leonard
| Decision Date | 30 June 1939 |
| Docket Number | No. 34.,34. |
| Citation | 105 F.2d 900 |
| Parties | HELVERING, Com'r of Internal Revenue, v. LEONARD. LEONARD v. HELVERING, Com'r of Internal Revenue. |
| Court | U.S. Court of Appeals — Second Circuit |
J. Donald Duncan, of New York City, for Leonard.
James W. Morris, Asst. Atty. Gen., and Sewall Key, and L. W. Post, Sp. Assts. to Atty. Gen., for Helvering, Commissioner.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
This case comes up upon appeals by the Commissioner and the taxpayer from an order of the Board of Tax Appeals, assessing a deficiency against the taxpayer for the year 1929. The facts are as follows: On December 27, 1928, the wife of Leonard, the taxpayer, who was already living apart from him, began a suit for divorce against him in New York. While this was pending, the spouses executed two instruments, a deed of trust and a separation agreement, both on June 4, 1929. The deed conveyed property worth about $650,000 to a trustee, which was to pay $5,000 annually to each of the couple's three children, and the remainder of the income to the wife: the other provisions of the deed are not relevant to this controversy. The separation agreement recited the deed and the expectation of both parties that the wife would receive an income of $15,000 from the trust, and an equal sum from earlier gifts, so that she would have an invested income of $30,000 from all sources. To bring her total allowance for maintenance up to $65,000, Leonard promised to pay her $35,000 more, as a maximum, subject however to reduction to not less than $10,000, if he should later convince the divorce court that his means no longer justified any larger sum. In consideration of these provisions the wife agreed to assume all her living expenses, thus discharging the husband from his duty of support. The decree of divorce, which became absolute in October 22, 1929, incorporated the separation agreement, "approved and affirmed" it, and directed Leonard to pay his wife $35,000 "during the term of her natural life". Between June 4th and December 31, 1929, the trustee received income of $16,191.34 from the trust property, of which it distributed $5,200 to the wife, and five twelfths of $5,000 — $2,083.33 — to each of the three children, leaving an undistributed balance of income for that period of about $4,700. The Board assessed Leonard upon the income distributed to his wife and minor children on the theory that these payments were in discharge of his continuing marital and paternal duties, but refused to assess him upon the undistributed income. Both parties appealed.
So far as we have found, no case has ever arisen in which a husband has discharged his duty of maintenance by the payment of a lump sum, but we are confident that in such a case any income, derived by the wife from the money received, would be assessed against her, regardless of the fact that the payment had relieved the husband pro tanto. Her income would be altogether beyond his control, its increase or decrease would not affect him at all, and it could be regarded as still his, only by the most patent fiction. We see no difference, when, instead of a lump sum, the husband creates a trust in discharge of his duty; and in the only two cases where that situation has come before the courts, the income has been held to be taxable to the wife. Commissioner v. Tuttle, 6 Cir., 89 F.2d 112; Fitch v. Commissioner, 8 Cir., 103 F.2d 702. On the other hand such trusts will be only security if the husband's duty continues after decree, because the law or the decree, reserves power to the divorce court to change its original award. Douglas v. Willcuts, 296 U.S. 1, 56 S.Ct. 59, 80 L.Ed. 3, 101 A.L.R. 391, was such a case. The spouses lived in Minnesota, by whose law the divorce court, not only was not bound by any agreement between them, but — and this was the critical fact — might later change the original allowance, if circumstances made it desirable. That was true also of Helvering v. Coxey, 297 U.S. 694, 56 S.Ct. 498, 80 L.Ed. 986, where the spouses lived in New Jersey, in which a settlement, though made with the wife's concurrence, does not end the power of the divorce court. Greenberg v. Greenberg, 99 N.J.Eq. 461, 133 A. 768. The question therefore is whether a decree in the state of the divorce terminates the husband's duty and substitutes finally the provisions which it incorporates. In New York §§ 1155 & 1170 of the Civil Practice Act do indeed give the divorce court power to change allowances fixed in the original decree; and § 51 of the Domestic Relations Law, Consol.Laws N.Y. c. 14, forbids a wife's making an agreement discharging her husband's duty to support her. Nevertheless, a settlement made in discharge of the husband's duty is finally binding upon the parties to the divorce, if incorporated into the decree; and its terms will not be changed, unless the wife can disaffirm it for fraud, overreaching, or the like. Galusha v. Galusha, 116 N.Y. 635, 22 N.E. 1114, 6 L.R.A. 487, 15 Am.St.Rep. 453; Id., 138 N.Y. 272, 33 N.E. 1062; ...
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