Pearce v. Commissioner of Internal Revenue

• Decision Date: 09 March 1942
• Docket Number: No. 306,306
• Citation: 62 S.Ct. 754,86 L.Ed. 1016,315 U.S. 543
• Parties: PEARCE v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

315 U.S. 543

62 S.Ct. 754

86 L.Ed. 1016

PEARCE

v COMMISSIONER OF INTERNAL REVENUE.

No. 306.

Argued Feb. 5, 1942.

Decided March 9, 1942.

[Syllabus from pages 543-545 intentionally omitted] Mr. Gordon S. P. Kleeberg, of New York City, for petitioner.

Mr. Gordon B. Tweedy, of Washington, D.C., for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

Petitioner and her husband separated in 1913. There was an agreement providing for monthly payments by the husband for her support. That agreement was amended in 1916 so as to provide monthly payments to her of $500 for life. Her husband, however, was given an option to terminate the arrangement by purchasing an annuity contract from a life insurance company which would pay petitioner $500 a month for the rest of her life. In 1917 petitioner obtained an absolute divorce in Texas, her husband entering a personal appearance. Neither alimony nor a property settlement was mentioned in the divorce decree. There were no children. Several months after the divorce Mr. Pearce purchased an annuity from an insurance company for petitioner's benefit. The annuity provided for a payment of $500 per month during her life.

Neither petitioner nor Mr. Pearce included the $6000 received by her under the annuity contract in their federal income tax returns for 1935 and 1936. The Commissioner sent deficiency notices to both of them. Each appealed to the Board of Tax Appeals. At the hearing the Commissioner contended that the payments were income of petitioner. The Board upheld that contention. 42 B.T.A. 91. The Circuit Court of Appeals affirmed the judgment of the Board, one judge dissenting. 2 Cir., 120 F.2d 228. We granted the petition for certiorari, 314 U.S. 593, 62 S.Ct. 98, 86 L.Ed. —-, because of the manner in which that court applied the rule of Helvering v. Fitch, 309 U.S. 149, 60 S.Ct. 427, 84 L.Ed. 665, and Helvering v. Leonard, 310 U.S. 80, 60 S.Ct. 780, 84 L.Ed. 1087, in case the ex-wife rather than the husband was sought to be taxed on alleged alimony payments.

The Circuit Court of Appeals reached the conclusion that petitioner was liable by the following line of reasoning. The determination of the Commissioner that the monthly payments were income of petitioner was presumptively correct; the burden to show error rested on petitioner. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212. Error might be shown by submitting 'clear and convincing proof' (Helvering v. Fitch, supra, 309 U.S. page 156, 60 S.Ct. page 430, 84 L.Ed. 665) that the payments were made pursuant to a continuing obligation of her former husband to provide for her support, so as to make the rule of Douglas v. Willcuts, 296 U.S. 1, 56 S.Ct. 59, 80 L.Ed. 3, 101 A.L.R. 391, applicable. The burden of establishing error is not sustained by a divorced wife merely by showing that an obligation of her former husband might have continued despite the divorce. Since it is doubtful and uncertain under Texas law whether petitioner's former husband was discharged of his marital obligation by the settlement in question, petitioner failed to show that the presumptively correct determination that she was liable was erroneous.

We do no think that that was a correct application of the rule of the Fitch and Leonard cases. Those cases hold that the income is taxable to the former husband not only where it is clear that payments to his ex-wife were made pursuant to a continuing liability created by his contract or by local law but also where his undertaking or local law makes that question doubtful or uncertain. Those cases, like Douglas v. Willcuts, supra, involved situations where the divorced husband was sought to be taxed on payments to his ex-wife. But the rule which they express supplies the criteria for determining, in absence of a different statutory formula, whether payments received by the ex-wife are properly taxable to her or to her divorced husband. If the Commissioner proceeds against the ex-wife, she sustains her burden of rebutting his presumptively correct determination merely by showing doubts and uncertainties as to whether the payments were made pursuant to her former husband's continuing obligation to support her. If the Commissioner proceeds against her former husband he sustains his burden by submitting clear and convincing proof that the payments were not made pursuant to any such continuing obligation. Helvering v. Fuller, 310 U.S. 69, 60 S.Ct. 784, 84 L.Ed. 1082. The other course would make the liability of the divorced wife or the divorced husband wholly dependent on the election of the Commissioner to proceed against one rather than the other where, for example, local law was uncertain. But the rule of Douglas v. Willcuts, supra, rests on a more substantial basis. Its roots are in local law and the undertakings of the husband. It calls for the use of the same criteria whether the husband or the wife is sought to be taxed.

We think, however, that petitioner has not maintained her burden in this case. Her former husband was not under a continuing contractual obligation to contribute to her support. For the agreement made in 1916 provided for the termination of his personal obligation to make payments to her in the event that he purchased the designated annuity. And so far as Texas law is concerned, she has not maintained her burden. Her showing as to Texas law is illustrated by the following.

By statute in Texas alimony may be awarded during the pendency of a suit for a divorce 'until a final decree shall be made in the case'. Vernon's Ann.Civ.St. Art. 4637. 'This statute is exclusive in its very nature, and no alimony can be decreed by any court in this state except under its express terms.' Martin v. Martin, Tex.Com.App., 17 S.W.2d 789, 791, 792. It has been broadly stated in Phillips v. Phillips, Tex.Civ.App., 203 S.W. 77, 79 that, 'In this state the legal duty of the husband to support his wife ceases upon the severance of the marital bonds, nor has a court the power to decree that a husband or his property may be subjected to such support after divorce. Permanent alimony is not provided for by Texas statutes.' And see Pape v. Pape, 13 Tex.Civ.App. 99, 35 S.W. 479; Boyd v. Boyd, 22 Tex.Civ.App. 200, 54 S.W. 380. It is, however, provided by statute that the divorce court shall order 'a division of the estate of the parties in such a way as the court shall deem just and right, having due regard to the rights of each party and their children, if any.' Vernon's Ann.Civ.St. Art. 4638. That power extends not only to community property but to the separate property of the husband. Ex parte Scott, 133 Tex. 1, 123 S.W.2d 306; Clark v. Clark, Tex.Civ.App., 35 S.W.2d 189; Berg v. Berg, Tex.Civ.App., 115 S.W.2d 1171; Keton v. Clark, Tex.Civ.App., 67 S.W.2d 437. At times the divorce court has made such a division of the estate as apparently to impose on the husband a personal obligation to make stated payments to his wife. Wiley v. Wiley, 33 Tex. 358. Furthermore, a divorce decree which does not settle the rights of the parties to community property may not preclude a subsequent suit by the wife to establish her rights in it. See Gray v. Thomas, 83 Tex. 246, 18 S.W. 721. And the decree may be corrected to conform to the intention of the parties. Keller v. Keller, 135 Tex. 260, 141 S.W.2d 308. The power of the court to modify a property settlement previously approved, so as to give the wife an interest in property not covered by the earlier decree, has been denied in absence of fraud or mistake. Cannon v. Cannon, Tex.Civ.App., 43 S.W.2d 134. Petitioner challenges the reliability of the latter case because on appeal the case was dismissed for want of jurisdiction (121 Tex. 634), which meant either disagreement with the reasoning but approval of the result, or lack of jurisdiction. Vernon's Ann.Civ.St. Art. 1728. And see Republic Ins. Co. v. Highland Park Independent School Dist., 133 Tex. 545, 125 S.W.2d 270.

We need not, however, endeavor to resolve that doubt. Nor need we speculate as to the power of the court at some future time to order a division of property in this case and as an incident thereto to impose on petitioner's husband a personal obligation as was apparently done by the divorce decree in Wiley v. Wiley, supra. See 6 Tex.L.Rev. 344 discussing Helm v. Helm, Tex.Civ.App., 291 S.W. 648. For even though petitioner established that the divorce court retained that broad power, not specifically reserved, and even though we assume that the power to make a division of property is the equivalent of a power to provide permanent alimony, she has not maintained her burden of rebutting the presumptively correct determination of the Commissioner that the income from this annuity contract was taxable to her. In order to maintain that burden she would have to show that it was at least doubtful and uncertain whether the Texas court, as an incident of its power to require the husband to support his wife, retained control over this annuity contract or the income from it. That at least is the result unless we are to broaden the base on which the Fitch, Fuller, and Leonard cases rest.

Those cases involved so-called alimony trusts. In each the trust was irrevocable. In each the husband had an obligation to support his wife.

In the Fitch case the trust provided that the wife was to receive during her life $600 a month from the income of the trust property; the husband, the balance. We held that the husband had not shown by 'clear and convincing proof' that 'in Iowa divorce law the court has lost all jurisdiction to alter or revise the amount of income payable to the wife from an enterprise which has been placed in trust. For all that we know it might retain the power to reallocate the income from that property even though it lacked the power to add to or subtract from the corpus or to tap other sources of income. If it did have such power, then it could be said that a...