Parker v. Commissioner of Internal Revenue, 11497.

• Decision Date: 11 February 1948
• Docket Number: No. 11497.,11497.
• Citation: 166 F.2d 364
• Parties: PARKER et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

166 F.2d 364 (1948)

PARKER et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11497.

Circuit Court of Appeals, Ninth Circuit.

February 11, 1948.

A. Crawford Greene, Henry D. Costigan, Robert L. Lipman, Stanley Morrison and John Wickson Thomas, all of San Francisco, Cal., for petitioners.

Theron L. Caudle, Asst. Atty. Gen., Sewall Key, Lee A. Jackson, Morton K. Rothschild and Ellis N. Slack, Sp. Assts. to the Atty. Gen., for respondent.

Before STEPHENS, BONE and ORR, Circuit Judges.

BONE, Circuit Judge.

This is an appeal to review a decision of the Tax Court. Petitioners are executors of the last will and testament of J. M. Mannon, Jr., deceased, hereinafter called decedent. The appeal involves the federal income taxes of decedent for the years 1940 and 1941. (See opinion of Tax Court, Mannon's Estate v. C. I. R., 6 T.C. 1174). The Tax Court found the facts as stipulated by the parties, no testimony being taken.¹

Decedent and his wife, Frances Berry Mannon, were married in 1927, and were residents of California and domiciled in that state until the death of decedent in March, 1943. They had three children, born in 1928, 1930 and 1932. In 1938 decedent and his wife executed a property settlement agreement and concurrently set up four irrevocable trusts. The corpus of these trusts had previously been the community property of decedent and his wife, and they were created, one primarily for the benefit of Mrs. Mannon and one primarily for the benefit of each of the three children all of whom were minors throughout the tax years here involved. As shown below, the language of the trust instruments imposed no restriction or limitation upon Mrs. Mannon's use of the income of the trust created for her benefit; nor was her use of the income from the three trusts created for the benefit of the children, restricted or limited during their minority.

Pertinent provisions of these several instruments are here summarized. The property agreement provided that the family residence be conveyed from decedent to his wife, that decedent pay to her so long as they both lived $700 per month, that the property owned by or standing in the name of either (except that transferred to the four trusts) and the earnings of each of them should thereafter constitute their separate property, and that each relinquished all rights in the other's estate. It was provided that the $700 per month was "for her support and maintenance and the support and maintenance of said three minor children during their minority," and that the wife "shall not be called upon to account for said money in any way." It was also provided — and the effect of this statement was considered decisive by the Tax Court — that the conveyance of the real property, payment of the $700 per month, together with establishment of the four trusts "is hereby accepted by second partyMrs. Mannonas and for satisfactory, reasonable and sufficient provision for her support and maintenance."

As part of the same transaction the four irrevocable trusts were also created by decedent and his wife out of their community property — one-half of the property going into the trust for the benefit of the wife and one-sixth of the property going into each of the three trusts for the benefit of the children. Two individuals and a trust company were designated trustees. Income from the trust for the wife was to be paid to her monthly for life, the corpus thereafter to be distributed among the children. Income from the trusts for the children was also to be paid to the wife during their minority, with similar provisions for later distribution of the corpus of the trusts. None of the trust agreements imposed any restriction or obligation as to the wife's use of the income therefrom, and each of the trusts for the children provided that the wife should not be required to account to any one for use of the income. All four of the trust agreements contained a provision that if the trustees should determine that the beneficiary required additional funds for support, maintenance or education, the trustees might pay such funds out of trust principal. (This latter contingency requires no consideration.)

The property and trust agreements were carried into effect and the income from the four trusts was paid to the wife. Whether or to what extent she devoted this income to support and maintenance of herself and of the three children, all of whom survived decedent, does not appear. Very substantial payments were also made by decedent from his separate funds during the taxable years in support and maintenance of his wife and children.

The wife returned the entire trust income during 1940 and 1941 on her separate federal income tax returns and respondent undertook to tax one-half of this income to decedent.²

Respondent's theory, sustained by the Tax Court, is that under the terms of the above mentioned property agreement the trust income (the one-half sought to be charged to decedent) might, in decedent's discretion, have been used to discharge his legal obligation to support and maintain his wife and children. If this construction of the agreement is correct there would seem to be little doubt of decedent's tax liability under the principle announced in Douglas v. Willcuts, 296 U.S. 1, 56 S.Ct. 59, 80 L.Ed. 3, 101 A.L.R. 391.

Both parties to this appeal are in substantial agreement that the decisive issue is whether a proper construction of the terms of the property agreement and trust instruments forces the conclusion that they spell out a legal obligation on decedent's wife to use the trust income for support and maintenance, that is to say, whether decedent, by virtue of their terms, could have required his wife to apply this income to the discharge of this admitted marital obligation. They further agree that unless there is such an obligation to be found in the terms of these instruments, there is no basis for a holding that the trust income was to be used to discharge a legal obligation of decedent, and that it is only upon the basis that the trust income was required to be used to discharge such an obligation, that the income would be taxable to decedent. We therefore concern ourselves with the question of the proper interpretation of the instruments involved, since upon that interpretation must rest a correct disposition of the case.

The Tax Court was of the opinion that the property agreement "surely gave the decedent the legal right to require the wife to first avail herself of the trust income before she could successfully complain that her marital right of support had been violated." If this be true petitioners must be denied the relief they seek.

The difficulty presented by this view of the legal effect of these instruments arises from the fact that it suggests, or assumes, as a practical matter, that Mrs. Mannon could not complain of the adequacy of the support furnished her unless she could show that she had used the trust income for support. We do not agree. On the contrary, we are of the view that if the amounts furnished her were inadequate for her support, she could successfully complain, regardless of how she used the trust income unless she was under a legal obligation to apply the trust income to her own support.

While the trust agreements are complete in themselves and make no reference to the property settlement agreement, they were contemporaneously executed as part of one complete transaction and must be construed together, an elemental proposition postulated by the Tax Court and conceded by the parties.

We are inclined to agree with the premise of the Tax Court that no distinction is to be drawn between the income from the trust for the wife and the trusts for the children — the income was all paid to the wife. The children, during minority, had no interest of substance therein. The point is somewhat controverted by the parties on appeal, but its resolution is unnecessary in our view of the case.

Petitioners contend that there is nothing in the trust instruments themselves which imposes any obligation on the wife to use the trust income for support and maintenance....