1943 U.S. Tax Ct. LEXIS 156">*156
1. Income of a trust created by husband two weeks before divorce
2. The mitigating provisions of
1 T.C. 1198">*1198 OPINION.
By this proceeding petitioner contests the determination of income tax deficiencies for 1934, 1935, and 1936 in the respective amounts of $ 150.98, $ 139.34, and $ 97.71. The Commissioner has taken the position, 1943 U.S. Tax Ct. LEXIS 156">*157 in the notice of deficiency as well as before this Court, that the income of a trust for the years in dispute is taxable to petitioner, the trust beneficiary. Whether this is correct presents the first issue. If the Commissioner's view is sustained, the other question is whether assessment of the deficiencies is barred by the statute of limitations; and this in turn depends upon whether respondent is able to bring himself within the mitigating provisions of
Petitioner is an individual and resides in New York City. She and Vincent S. Mulford were married in New York City on March 11, 1931. On September 30, 1931, petitioner and her husband entered into a separation agreement for the purpose of settling their property rights, which incorporated a trust agreement simultaneously executed by the husband as grantor and the Chemical Bank & Trust Co. as trustee. Under the terms of the trust the husband transferred $ 200,000 to the Chemical Bank & Trust Co. in trust, to pay the1943 U.S. Tax Ct. LEXIS 156">*158 net income therefrom monthly to petitioner during her lifetime and upon her death to distribute one-half of the principal to the issue of the 1 T.C. 1198">*1199 husband or, in default thereof, to the husband, if living, or to his estate. After the death of petitioner the income from the other half of the principal was to be paid to petitioner's daughter by a former marriage, and upon the daughter's death the principal was to be delivered to the husband's issue, or if there were none, to the husband, if living, otherwise to his estate.
The separation agreement contained a mutual release of all claims which either party had or might have against the other; and petitioner expressly covenanted that the execution of the trust agreement by the husband "will constitute a complete release to the husband from all further obligations to support and maintain her."
Thereafter petitioner brought suit against her husband in the Second Judicial District Court of the State of Nevada for divorce on the grounds of extreme cruelty. The husband appeared therein by his attorney and answered the complaint. The cause was tried on October 13, 1931, and on the same day the court granted petitioner an absolute 1943 U.S. Tax Ct. LEXIS 156">*159 decree of divorce. The decree made no mention of alimony, but it adopted, approved, and confirmed the settlement agreement and the trust agreement hereinabove referred to.
The income of the trust was paid to petitioner during the years 1934, 1935, and 1936; and in her income tax returns for those years she included as income the following respective amounts received from the trust: $ 8,095.64, $ 7,356.74, and $ 6,142.75. As a result of an examination of the income tax returns of petitioner and Vincent S. Mulford for the years 1934, 1935, and 1936 the Commissioner determined that the income of the trust was taxable to the grantor and not to the petitioner. Thereupon, Vincent S. Mulford paid the deficiencies asserted against him, and the income from the trust reported by the petitioner was eliminated and the following overpayments of tax were scheduled and paid to her on the following dates:
Date of | Date refund | ||
Year | Amount | schedule | was paid |
1934 | $ 150.98 | Apr. 14, 1938 | Nov. 16, 1938 |
1935 | 139.34 | Apr. 14, 1938 | Nov. 16, 1938 |
1936 | 97.71 | Oct. 16, 1939 | Dec.9, 1939 |
On April 22, 1940, the Supreme Court promulgated its decision in the case of
1 T.C. 1198">*1200 The Commissioner thereupon determined that the income of the trust was taxable to petitioner, and on September 27, 1941, a statutory notice of deficiency was issued against her, reinstating the income originally reported by her in her returns for the years 1934, 1935, and 1936.
As respects the proper person to be taxed upon the income of the present trust, this case is on all fours with
We conclude that petitioner is the proper person to be charged with tax upon the trust income.
A more difficult question is whether the Commissioner is barred by limitations from proceeding against her for the years 1934 and 1935. This requires a consideration of
1943 U.S. Tax Ct. LEXIS 156">*163
(a) Definitions. -- For the purpose of this section --
(1) Determination. -- The term "determination under the income tax laws" means --
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(C) A final disposition by the Commissioner of a claim for refund. For the purposes of this section a claim for refund shall be deemed finally disposed of by the Commissioner --
(i) as to items with respect to which the claim was allowed, upon the date of allowance of refund * * *.
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(3) Related Taxpayer. -- The term "related taxpayer" means a taxpayer who, with the taxpayer with respect to whom a determination specified in subsection1943 U.S. Tax Ct. LEXIS 156">*164 (b) (1), (2), (3), or (4) is made, stood, in the taxable year with respect to which the erroneous inclusion, exclusion, omission, allowance, or disallowance therein referred to was made, in one of the following relationships: * * * (C) grantor and beneficiary * * *.
(b) Circumstances of Adjustment. -- When a determination under the income tax laws --
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(3) Requires the exclusion from gross income of an item with respect to which tax was paid and which was erroneously excluded or omitted * * * from the gross income of a related taxpayer;
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and, on the date the determination becomes final, correction of the effect of the error is prevented by the operation * * * of any provision of the internal revenue laws other than this section * * *, then the effect of the error shall be corrected by an adjustment made under this section. Such adjustment shall be made only if there is adopted in the determination a position maintained * * * by the taxpayer with respect to whom the determination is made (in case the amount of the adjustment would be assessed and collected in the same manner as a deficiency under section (c)), which position is inconsistent with the erroneous inclusion, 1943 U.S. Tax Ct. LEXIS 156">*165 exclusion, omission, allowance, disallowance, recognition, or nonrecognition, as the case may be. * * *
1 T.C. 1198">*1202 (c) Method of Adjustment. -- The adjustment authorized in subsection (b) shall be made by assessing and collecting, or refunding or crediting, the amount thereof, * * * in the same manner as if it were a deficiency determined by the Commissioner with respect to the taxpayer as to whom the error was made or an overpayment claimed by such taxpayer, as the case may be, for the taxable year with respect to which the error was made, and as if on the date of the determination specified in subsection (b) one year remained before the expiration of the periods of limitation upon assessment or filing claim for refund for such taxable year.
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In the case at bar petitioner and her former husband are related taxpayers within the definition of the statute, occupying the relationship of beneficiary and grantor of a trust. There has been a "determination under the income tax laws," namely, the allowance by the Commissioner of the husband's refund claims. Such determination was made on November 26, 1940, as to the years 1934 and 1935, and on May 20, 1941, as to the year 1936. 1943 U.S. Tax Ct. LEXIS 156">*166 The effect of that determination was to require the exclusion from the husband's gross income "of an item with respect to which tax was paid" by him, namely, the trust income, which item was "erroneously excluded or omitted * * * from the gross income of a related taxpayer," namely, the petitioner.
Correction of the error by collection of a corresponding tax from petitioner, the related taxpayer, is authorized by the procedure set forth in
1943 U.S. Tax Ct. LEXIS 156">*168 The refund to petitioner of 1934 and 1935 taxes, however, was made on November 16, 1938, and the allowance of the husband's refund claims for those years was made on November 26, 1940. On the date of the latter determination two years and ten days had thus elapsed since the making of the erroneous refunds to petitioner, and therefore suit for recovery thereof was barred. Since, also, the ordinary three-year period for issuing a deficiency notice had expired on September 27, 1941, when the present notice of deficiency was issued, it follows that correction of the error by assessing petitioner for the 1934 and 1935 taxes, if made at all, can be made only under
The adjustment under
1. The Revenue Acts of 1934 and 1936 provide:
"SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.
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"(a) General Rule. -- The amount of income taxes imposed by this title shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period."↩
2.
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(b) Refunds Otherwise Erroneous. -- Any portion of an internal revenue tax (or any interest, penalty, additional amount, or addition to such tax) which has been erroneously refunded (if such refund would not be considered as erroneous under section 3774) may be recovered by suit brought in the name of the United States, but only if such suit is begun before the expiration of two years after the making of such refund.↩