Nicolai

The question raised by the petition to review now before us, is whether income received by a trustee of a so-called alimony trust and paid by the trustee to a divorced wife, is income taxable to the husband who was the creator of the trust.

A person may have taxable income without having personally received it. For example, if A owes a debt to B (which if paid to B would be income taxable to him), and B owes a debt to C, B derives taxable income where A pays C to discharge A’s debt to B and B’s debt to C. 1 The transaction is treated the same as if A paid his debt to B, and B paid his debt to C. Likewise, where B owes C and transfers property to A, as trustee, who pays B’s debt to C with income derived from the corpus of the trust (which if paid to B would be income taxable to him), B has derived taxable income.

The same principle applies where a divorce decree imposes an obligation on B and requires him to pay alimony to C, and B transfers property to A, as trustee, who pays the income from such property to C in discharge of the alimony award.

The principle is carried still further with respect to alimony trusts. In the event that B and C reach an agreement that in…