Ketcham v. Comm'r of Internal Revenue, Docket Nos. 109354
| Decision Date | 18 June 1943 |
| Docket Number | Docket Nos. 109354,110479. |
| Citation | 2 T.C. 159 |
| Parties | KATHARINE C. KETCHAM (FORMERLY KATHARINE C. DUPONT), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Income of a trust made by a former husband for the benefit of his wife and minor children in contemplation of divorce which was not embodied in the Nevada divorce decree, held within the taxable income of the wife except to the extent shown by the evidence to have been used for the support and maintenance of the minor children in discharge of the former husband's parental duty.
2. Under section 3801, Internal Revenue Code, the deficiency of the beneficiary of the trust is not barred by the statute of limitations, since it was determined within one year after the decision of the Board of Tax Appeals holding that the trust income payable to her was not taxable to the grantor of the trust.
3. The deficiency upon the income properly within the petitioner's taxable income held not barred from her return more than an amount of 25 percent of the gross income shown thereon and therefore the five year provision of section 275(c) is applicable, even though she referred to such omitted income in a rider attached to her return. Edward S. Bentley, Esq., for the petitioner.
Clay C. Holmes, Esq., for the respondent.
The Commissioner determined deficiencies in petitioner's individual income tax as follows:
+--------------+
¦1933¦$919.82 ¦
+----+---------¦
¦1935¦2,476.37 ¦
+----+---------¦
¦1936¦2,170.67 ¦
+----+---------¦
¦1937¦1,783.36 ¦
+----+---------¦
¦1938¦1,395.34 ¦
+----+---------¦
¦1939¦894.80 ¦
+--------------+
He determined (1) that petitioner's income includes income from trusts created by her former husband, in excess of amounts used for the support of minor children; (2) that the trust income attributable to petitioner may not be reduced by any part of general household expenses as the father's support and maintenance of the children; and (3) that the deficiencies for 1933, 1935, and 1936 are not barred by the statute of limitations. A stipulation covers most of the facts.
1.— During the taxable years the petitioner resided in New York City. Her income tax returns were filed for 1933 and 1938 in the
third district, and for 1935, 1936, 1937, and 1939 in the second district, of New York. Prior to December 14, 1931, she was the wife of Francis V. duPont. They had three children, Coleman, born June 23, 1918, Eleuthere, born May 21, 1921; and Phoebe, born June 14, 1927. In contemplation of divorce, duPont established two trusts with the Empire Trust Co. of New York as trustee, one dated July 3, 1931, and the other dated October 6, 1931.
The income from both trusts was payable quarterly to the petitioner during her life. Upon her death, the principal of each trust was to be divided into as many equal shares as there were children then surviving and children who had died leaving issue. The settlor retained no power of revocation but had the right to remove the trustee and appoint a successor, and the provisions of the second trust were binding upon the ‘corporate successor.‘ Upon the death of the wife and during the minority of the children, the principal and income of the trusts were payable to the settlor, upon demand, as guardian of the remaindermen during their several minorities. The trust instruments were to be construed under the laws of New York and the trust corpus was stated to be located in New York. The petitioner released and discharged the settlor from all claims for the support and maintenance of herself and of the children when living with her and in and to any part of his property.
Under date of October 20, 1931, the petitioner and duPont made an agreement in respect of the custody, support, and maintenance of the children. It provided that the father as their natural guardian should have the legal custody of the children and should ‘provide for their education and * * * suitably for their support and maintenance, except clothing, when they are living with him‘ and that the mother should provide ‘out of the income from the two trust funds ‘ suitable clothing and proper medical attention for the children, except emergency medical attention, and suitable maintenance and support for the children when living with her.
The petitioner brought suit for divorce in the Second Judicial District Court of Nevada in and for the County of Washoe, and decree of divorce was entered December 14, 1931, which approved the two trust agreements of July 3, 1931, and October 6, 1931, settling the property rights of the parties.
The petitioner received income from the two trusts as follows:
+----------------------------------------------------------------+
¦Interest¦ ¦ ¦ ¦ ¦ ¦
+--------+------------+-----------+--------+----------+----------¦
¦Year ¦Dividends ¦On New York¦On U.S. ¦Other ¦ ¦
+--------+------------+-----------+--------+----------+----------¦
¦ ¦ ¦and other ¦Treasury¦income ¦Total ¦
+--------+------------+-----------+--------+----------+----------¦
¦ ¦ ¦state bonds¦bonds ¦ ¦ ¦
+--------+------------+-----------+--------+----------+----------¦
¦1933 ¦* $18,289.06¦ ¦$516.52 ¦ ¦$18,805.58¦
+--------+------------+-----------+--------+----------+----------¦
¦1935 ¦23,188.07 ¦ ¦781.28 ¦ ¦23,969.35 ¦
+--------+------------+-----------+--------+----------+----------¦
¦1936 ¦ ¦$459.44 ¦549.09 ¦$20,955.82¦21,964.35 ¦
+--------+------------+-----------+--------+----------+----------¦
¦1937 ¦ ¦9,090.94 ¦ ¦17,826.48 ¦26,917.42 ¦
+--------+------------+-----------+--------+----------+----------¦
¦1938 ¦ ¦9,963.71 ¦ ¦14,576.69 ¦24,540.40 ¦
+--------+------------+-----------+--------+----------+----------¦
¦1939 ¦ ¦11,846.16 ¦ ¦13,909.69 ¦25,755.85 ¦
+----------------------------------------------------------------+
FN* Dividends of $12,609.85 were received in 1933 from the trust of October 6, 1931.
On June 12, 1936, the petitioner and duPont made an ‘Agreement of Compromise,‘ reciting that the net income from the trust had substantially diminished; that the petitioner claimed that duPont had orally agreed that $30,000 a year should be paid to her; and that if the trust income were less in any year he would make good the deficiency; that he denied such oral agreement; that as a result of such dispute the petitioner had instituted a suit on November 15, 1935, in the Nevada court for a modification of the decree of December 14, 1931, so as to conform to the terms of the oral agreement; and that the parties desired to settle and compromise the dispute. It was agreed that the suit be discontinued without costs; that the petitioner should receive during her life ‘at least the net sum of $12,500 in each and every semi-annual period‘ (January 1 to June 30, and July 1 to December 31); that duPont would pay semiannually the difference or deficiency, if any, between $12,500 and the total net amount paid to petitioner by the trustee; that if the petitioner in any semiannual period received more than $12,500 as beneficiary of the trusts, she would, if duPont was not in default, repay to him without interest any deficiencies theretofore paid to her by him; if no deficiencies had been paid, or if paid but repaid, then petitioner could retain any excess ‘as her own, with the obligation however on her part to apply the same against any deficiency payments which (duPont) may have to make thereafter under the terms hereof‘; the agreement should be construed according to the laws of New York and, generally, it ratified and confirmed each of the trust agreements and the custody agreement. Pursuant to the agreement, duPont paid to petitioner certain deficiencies and she reimbursed him therefor and applied excess income to deficiencies as follows:
+------------------------------------------------------------------+
¦ ¦Excess or ¦Paid by ¦Paid by ¦Balance of¦
+----------------------+------------+--------+----------+----------¦
¦6-Month period ended--¦(deficiency)¦duPont ¦petitioner¦excess ¦
+----------------------+------------+--------+----------+----------¦
¦7-1-36 ¦ ¦($857.77) ¦$857.77 ¦ ¦ ¦
+----------------------+-+----------+--------+----------+----------¦
¦12-31-36 ¦ ¦(1,057.99)¦1,057.99¦ ¦ ¦
+----------------------+-+----------+--------+----------+----------¦
¦7-1-37 ¦ ¦1,291.40 ¦ ¦$1,291.40 ¦ ¦
+----------------------+-+----------+--------+----------+----------¦
¦12-31-37 ¦ ¦1,397.66 ¦ ¦624.36 ¦$773.30 ¦
+----------------------+-+----------+--------+----------+----------¦
¦7-1-38 ¦ ¦155.36 ¦ ¦ ¦928.66 ¦
+----------------------+-+----------+--------+----------+----------¦
¦12-31-38 ¦ ¦38.39 ¦ ¦ ¦967.05 ¦
+----------------------+-+----------+--------+----------+----------¦
¦7-1-39 ¦ ¦(711.48) ¦ ¦ ¦255.57 ¦
+----------------------+-+----------+--------+----------+----------¦
¦12-31-39 ¦ ¦1,467.33 ¦ ¦ ¦1,722.90 ¦
+----------------------+-+----------+--------+----------+----------¦
¦7-1-40 ¦)¦ ¦ ¦ ¦ ¦
+----------------------+-+----------+--------+----------+----------¦
¦12-31-40 ¦)¦(1,084.09)¦ ¦ ¦638.81 ¦
+----------------------+-+----------+--------+----------+----------¦
¦7-1-41 ¦)¦ ¦ ¦ ¦ ¦
+----------------------+-+----------+--------+----------+----------¦
¦12-31-41 ¦)¦(231.26) ¦ ¦ ¦407.55 ¦...To continue reading
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