Pearce v. Commissioner, 315 U.S. 543 (1942)
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Pearce v. Commissioner of Internal Revenue
No. 306
Argued February 5, 1942
Decided March 9, 1942
315 U.S. 543
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE SECOND CIRCUIT
Syllabus
l. A divorced wife, when taxed on payments received from an annuity provided by her former husband by way of settlement in connection with their divorce, can rebut the presumption sustaining the tax by merely raising doubts and uncertainties as to whether the payments were made pursuant to a continuing obligation of the husband to support her. P. 547.
The husband, on the other hand, to avoid the tax, if laid upon him, bears the burden of proving clearly and convincingly that the payments were not made pursuant to any such continuing obligation.
2. Anticipating divorce, a husband made an agreement with his wife for the termination of his obligation to pay for her support in the event that he purchased for her a certain annuity. After their divorce (in Texas), the annuity was purchased in accordance with the agreement, and the annuity payments which she received were taxed as her income by the federal Government.
Held:
(1) The wife’s contention that the tax on the payments should have been laid on the husband cannot be based on a continuing contractual obligation to contribute to her support, because the agreement and its fulfillment terminated his personal obligation to make payments. P. 547.
(2) Assuming that the power of the Texas court to make future division of property as between the husband and wife is equivalent to a power to provide permanent alimony, yet the wife failed to rebut the presumption of correctness sustaining the tax, not having shown that it was at least doubtful and uncertain whether that court, as an incident to its power to require the husband to support her, retained control over the annuity contract or the income from it. P. 549.
3. A property settlement made for the purpose of maintaining or supporting a divorced wife may be treated for income tax purposes as mere security for the husband’s continuing obligation, dependent on such considerations as whether it contains, or is interrelated with, contractual obligations of the husband for her support, whether the court has a reserved power to alter or modify it, or whether the husband retains any substantial interest in the property conveyed. Where the settlement carries some of the earmarks of a security device, then the power of the court to add to the husband’s personal obligations may be especially significant. P. 552.
4. But where the settlement appears to be absolute and outright, and on its face vests in the wife the indicia of complete ownership, it will be treated as that which it purports to be, in absence of evidence that it was only a security device for the husband’s continuing obligation to support. P. 552.
5. In this case, the wife made no showing whatsoever that the Texas court retained the power to reallocate the income from the annuity contract or to control it in any way as an incident of its power to require the husband to support the wife; nor did she show that the court imposed any personal obligation on the husband in respect to the settlement in question. P. 552.
6. Proof that the Texas court might add to the husband’s personal obligations as an incident to a future property settlement is no substitute for proof that the court had the power to remake the property settlement actually consummated. P. 553.
120 F.2d 228 affirmed.
Certiorari, 314 U.S. 593, to review a judgment affirming a decision of the Board of Tax Appeals sustaining a deficiency assessment. 42 B.T.A. 91.