Harris v. Commissioner

Delivered the opinion of the Court.

The federal estate tax and the federal gift tax, as held in a line of cases ending with Commissioner v. Wemyss, 324 U. S. 303, and Merrill v. Fahs, 324 U. S. 308, are construed in pari materia, since the purpose of the gift tax is to complement the estate tax by preventing tax-free depletion of the transferor’s estate during his lifetime. Both the gift tax and the estate tax exclude transfers made for “an adequate and full consideration in money or money’s worth.” In the estate tax this requirement is limited to deductions for claims based upon “a promise or agreement”; but the consideration for the “promise or agreement” may not be the release of marital rights in the decedent’s property. In the Wemyss and Merrill cases the question was whether the gift tax was applicable to premarital property settlements. If the standards of the estate tax were to be applied ex proprio vigore in gift tax cases, those transfers would be taxable because there was a “promise or agreement” touching marital rights in property. We sustained the tax, thus giving “adequate and full consideration in money or money’s worth” the same meaning under both statutes insofar as premarital property settlements or agreements are concerned.

The present case raises the question whether Wemyss and Merrill require the imposition of the gift tax in the type of post-nuptial settlement of property rights involved here.

Petitioner divorced her husband, Reginald Wright, in Nevada in 1943. Both she and her husband had substantial property interests. They reached an understanding as respects the unscrambling of those interests, the settlement of all litigated claims to the separate properties, the assumption of obligations, and the transfer of properties.

Wright received from petitioner the creation of a trust for his lifetime of the income from her remainder interest in a then-existing trust; an assumption by her of an in-débtedness of his of $47,650; and her promise to pay him $416.66 a month for ten years.

Petitioner received from Wright 21/90 of certain real property in controversy; a discontinuance of a partition suit then pending; an indemnification from and assumption by him of all liability on a bond and mortage on certain real property in London, England; and an indemnification against liability in connection with certain real property in the agreement. It was found that the value of the property transferred to Wright exceeded that received by petitioner by $107,150. The Commissioner assessed a gift tax on the theory that any rights which Wright might have given up by entering into the agreement could not be adequate and full consideration.

If the parties had without 'more gone ahead and voluntarily unravelled their business interests on the basis of this compromise, there would be no question that the gift tax would be payable. For there would have been a “promise or agreement” that effected a relinquishment of marital rights in property. It therefore would fall under the ban of the provision of the estate tax which by judicial construction has been incorporated into the gift tax statute.

But the parties did not simply undertake a voluntary contractual division of their property interests. They were faced with the fact that Nevada law not only authorized but instructed the divorce court to decree a just and equitable disposition of both the community and the separate property of the parties. The agreement recited that it was executed in order to effect a settlement of the respective property rights of the parties “in the event a divorce should be decreed”; and it provided that the agreement should be submitted to the divorce court “for its approval.” It went on to say, “It is of the essence of this agreement that the settlement herein provided for shall not become operative in any manner nor shall any of the Recitals or covenants herein become binding upon either party unless a decree of absolute divorce between the parties shall be entered in the pending Nevada action.”

If the agreement had stopped there and were in fact submitted to the court, it is clear that the gift tax would not be applicable. That arrangement would not be a “promise or agreement” in the statutory sense. It would be wholly conditional upon the entry of the decree; the divorce court might or might not accept the provisions of the arrangement as the measure of the respective obligations ; it might indeed add to or subtract from them. The decree, not the arrangement submitted to the court, would fix the rights and obligations of the parties. That was the theory of Commissioner v. Maresi, 156 F. 2d 929, and we think it sound.

Even the Commissioner concedes that that result would be correct in case the property settlement was litigated in the divorce action. That was what happened in Commissioner v. Converse, 163 F. 2d 131, where' the divorce court decreed a lump-sum award in lieu of monthly payments provided by the separation agreement. Yet without the decree there would be no enforceable, existing agreement whether the settlement was litigated or unliti-gated. Both require the approval of the court before an obligation arises. The happenstance that the divorce court might approve the entire settlement, or modify it in unsubstantial details, or work out material changes seems to us unimportant. In each case it is the decree that creates the rights and the duties; and a decree is not a “promise or agreement” in any sense — popular or statutory.

But the present case is distinguished by reason of a further provision in the undertaking and in the decree. The former provided that “the covenants in this agreement shall survive any decree of divorce which may be entered.” And the decree stated “It is ordered that said agreement and said trust agreements forming a part thereof shall survive this decree.” The Court of Appeals turned the case on those provisions. It concluded that since there were two sanctions for the payments and transfers — contempt under the divorce decree and execution under the contract — they were founded not only on the decree but upon both the decree and a “promise or agreement.” It therefore held the excess of the value of the property which petitioner gave her husband over what he gave her to be taxable as a gift. 178 F. 2d 861.

We, however, think that the gift tax statute is concerned with the source of rights, not with the manner in which rights at some distant time may be enforced. Remedies for enforcement will vary from state to state. It is “the transfer” of the property with which the gift tax statute is concerned, not the sanctions which the law supplies to enforce transfers. If “the transfer” of marital rights in property is effected by the parties, it is pursuant to a “promise or agreement” in the meaning of the statute. If “the transfer” is effected by court decree, no “promise or agreement” of the parties is the operative fact. In no realistic sense is a court decree a “promise or agreement” between the parties to a litigation. If finer, more legalistic lines are to be drawn, Congress must do it.

If, as we hold, the case is free from any “promise or agreement” concerning marital rights in property, it presents no remaining problems of difficulty. The Treasury Regulations recognize as tax free “a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent).” This transaction is not “in the ordinary course of business” in any conventional sense. Few transactions between husband and wife ever would be; and those under the aegis of a divorce court are not. But if two partners on dissolution of the firm entered into a transaction of this character or if chancery did it for them, there would seem to be no doubt that the unscrambling of the business interests would satisfy the spirit of the Regulations. No reason is apparent why husband and wife should be under a heavier handicap absent a statute which brings all marital property settlements under the gift tax.

We are now advised that since submission of the case on October 16, 1950, petitioner has died, and that it will take some weeks before an administrator of her estate can be appointed. Accordingly we enter our judgment as of October 16, 1950, in pursuance of the practice obtaining in those circumstances. See Mitchell v. Overman, 103 U. S. 62, 64-65; McDonald v. Maxwell, 274 U. S. 91, 99.

Reversed.

Section 1002 of 26 U. S. C. (1946 ed.) provides: “Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.” (Italics added.)

Section 812 of 26 U. S. C. (1946 ed.) provides: “For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate — . . . (b) Expenses, losses, indebtedness, and taxes. Such amounts — . . . (3) for claims against the estate, (4) for unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, ... as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered,' but not including any income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate, succession, legacy, or inheritance taxes. The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth .... For the purposes of this subchapter, a relinquishment or promised relinquishment of dower, curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the decedent’s property or estate, shall not be considered to any extent a consideration ‘in money or money’s worth.’ ” (Italics added.)

See § 812 (b) supra, note 2.

Ibid.

See § 812 (b) supra, note 2.

At the time of the divorce Nevada Compiled Laws (Supp. 1931-1941) § 9463 provided: “In granting a divorce, the court may award such alimony to the wife and shall make such disposition of the community and separate property of the parties as shall appear just and equitable, having regard to the respective merits of the parties and to the condition in which they will be left by such divorce, and to the party through whom the property was acquired, and to the burdens, if any, imposed upon it for the benefit of the children. . . ."

Section 1000 of 26 U. S. C. (1946 ed.) provides: “(a) For the calendar year 1940 and each calendar year thereafter a tax, computed as provided in section 1001, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift. ... (b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but, in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States.” (Italics added.)

Section 86.8 of Treas. Reg. 108 provides: “Transfers reached by the statute are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration in money or money’s worth to the extent that the value of the property-transferred by the donor exceeds the value of the consideration given therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth. A consideration not reducible to a money value, as love and affection, promise of marriage, etc., is to be wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift.”