Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 59-47

1959-1 C.B. 198

Sec. 1002

IRS Headnote

The transfer of securities to a trust, under a separation agreement, results in income to the transferor to the extent of the amount of any appreciation in their value over the basis of the transferor, where his obligation to make payments to the wife is terminated when he has transferred a specific aggregate amount to the trust. However, where such transfer can never serve any purpose other than to act as a conduit by which he makes payments to the wife and, of itself, does not discharge any obligation of the transferor, the appreciation in value does not result in income to him.

Revenue Ruling 57-506, C.B. 1957-2, 65, distinguished from Revenue Ruling 57-507, C.B. 1957-2, 511.

Full Text

Rev. Rul. 59-47

The Internal Revenue Service has been requested to distinguish between its holding in Revenue Ruling 57-506, C.B. 1957-2, 65 and that in Revenue Ruling 57-507, C.B. 1957-2, 511, with respect to the issue presented in both rulings relative to the Federal income tax consequences to a husband who, pursuant to a separation agreement transfers property, which has appreciated in value in his hands, to a trust, to make payments toward the discharge of his marital obligations to his wife.

In both Revenue Ruling 57-506 and 57-507, supra , the husband transferred to a trust stock which had greatly appreciated in value in his hands, with the provision that the trust income be used to make specified payments to the wife. In both instances, if trust income was not sufficient to make the payments, the husband was obligated to contribute the deficit from his own income. After death or remarriage of the wife, the stock comprising trust corpus was to be transferred to charitable or educational institutions.

The relevant issue in both rulings is whether the transfer of the stock to the trust results in income to the husband inasmuch as such stock had greatly appreciated in value in his hands since he originally acquired it. Revenue Ruling 57-507 holds that the husband did realize income from the transfer, whereas Revenue Ruling 57-506 holds that he did not.

Although the factual situations presented in both rulings under consideration appear, upon a casual reading, to be substantially the same, one important factual difference resulted in the opposite holdings in the two cases. In the situation presented in Revenue Ruling 57-507, there was a provision in the separation agreement to the effect that if the husband, at any time prior to the death of the wife, had transferred securities or other property of a specified aggregate amount to the trust, then his obligation to make periodic payments ceased and the wife was entitled to receive only the trust income. Therefore, each transfer of property to the trust was in effect a partial payment toward his eventual discharge of a fixed obligation and each such transfer constituted a taxable event. The use of appreciated property to discharge a money obligation results in taxation of the amount of the appreciation to the transferor. See International Freighting Corporation, Inc. v. Commissioner , 135 Fed.(2d) 310.

On the other hand, under the facts stated in Revenue Ruling 57-506, the trust created by the husband can never serve any purpose other than to act as a conduit by which he makes payments to his wife. Thus, inasmuch as the payments into the trust do not discharge any obligation of the husband, the appreciation in the value of the stock before the transfer is not income to him.