On September 12, 1923, petitioner, Edward B. Douglas, entered into an agreement with his wife and the Minneapolis Trust Company, by which he transferred securities in trust for his wife's benefit. Out of the income of the trust estate the trustee was to pay Mrs. Douglas annually the sum of $15,000, up to November 6, 1927, and thereafter $21,000. Deficiencies were to be made up in a prescribed manner. Excess income (in case the principal was not impaired) was to be paid to petitioner. On the death of his wife, he was to receive the property free of the trust. Petitioner reserved the right to designate securities for investment, subject, however, to the approval of the trustee acting in that respect on behalf of Mrs. Douglas.
The parties stipulated that the provisions for Mrs. Douglas were 'in lieu of, and in full settlement of alimony, and of any and all dower rights or statutory interests in the estate' of her husband, and 'in lieu of any and all claims for separate maintenance and allowance for her support.'
Three days later, Mrs. Douglas obtained a decree of absolute divorce in a district court of the state of Minnesota. The decree provided: 'It is further adjudged and decreed that the defendant provide and create the trust fund as set out in that certain agreement between said parties and the Minneapolis Trust Company as trustee now on file with said trustee, and that the plaintiff have the provision therein made in lieu of all other alimony or interest in the property or estate of the defendant and that neither party have any costs or disbursements herein.'
The question in this case relates to the net income of the trust which was distributed to Mrs. Douglas in the years 1927 and 1928. The Commissioner of Internal Revenue determined that these amounts were income to the petitioner. Taxes assessed accordingly were paid by petitioner under protest, claim for refund was disallowed, and this suit was brought to recover the amount paid. Judgment for petitioner was reversed by the Circuit Court of Appeals. 73 F. (2d) 130. We granted certiorari (295 U.S. 722, 55 S.Ct. 642, 79 L.Ed. 1675, April 8, 1935) in view of an asserted conflict with the decision of the Circuit Court of Appeals of the Seventh Circuit in the case of Schweitzer v. Commissioner of Internal Revenue, 75 F.(2d) 702, 705, 706.
Petitioner contends that the agreement created an irrevocable trust; that under the Revenue Acts petitioner and Mrs. Douglas were separate taxpayers; and that, having accepted the benefits of the trust, she was taxable upon the income she received as beneficiary. Revenue Act 1926, § 219, 26 USCA §§ 161-167 notes; Revenue Act 1928, §§ 161, 162, 167, 26 USCA §§ 161, 162, 167 note; Helvering v. Butterworth, 290 U.S. 365, 369, 370, 54 S.Ct. 221, 78 L.Ed. 365. The Circuit Court of Appeals decided that the income was taxable to the petitioner, since it went to the discharge of his legal obligation; that is, the income was devoted to payments which petitioner was bound to make under the decree of the Minnesota court. 73 F.(2d) 130, page 133.