## Facts

- In 1931, nine days before their marriage, Ira C. Copley and Chloe Copley entered a prenuptial (antenuptial) contract.
- Under the contract, Chloe agreed to relinquish her marital rights to make claims against Ira’s property after marriage.
- In exchange, Ira agreed to pay Chloe $1,000,000.
- Congress enacted the first federal gift tax in 1932, taxing transfers not made for “adequate and full consideration in money or money’s worth.”
- In 1936, Ira transferred $500,000 worth of stock to Chloe as partial performance of the $1,000,000 promise.
- In 1944, Ira transferred another $500,000 worth of stock to complete the promised payment.
- After Ira’s death, the Commissioner of Internal Revenue determined the estate owed gift tax on the 1936 and 1944 stock transfers.
- The Commissioner argued the taxable transfers occurred in 1936 and 1944 and that, under Supreme Court precedent addressing prenuptial arrangements, such transfers were treated as gifts because the relinquishment of marital rights was not “money or money’s worth.”
- The estate petitioned the United States Tax Court for redetermination, arguing the relevant transfer occurred in 1931 when the contract became binding upon marriage, before any federal gift tax existed.
- The Tax Court ruled for the estate, concluding the 1936 and 1944 stock transfers were not taxable gifts, and the Commissioner appealed.

## Issues

1. For gift-tax purposes, were Ira Copley’s 1936 and 1944 stock transfers taxable gifts when they were made pursuant to a binding 1931 prenuptial obligation formed before enactment of the federal gift tax?

## Decision

- The Seventh Circuit affirmed the Tax Court.
- The court held the 1936 and 1944 stock transfers were not taxable gifts.
- The court treated the prenuptial contract as becoming binding upon the 1931 marriage and viewed the later stock transfers as satisfaction of an enforceable obligation fixed before the gift tax existed.
- The court rejected the Commissioner’s attempt to treat the later deliveries, standing alone, as the taxable “transfers” under the 1932 statute in these circumstances.

## Legal Principles

- A transfer for federal gift-tax purposes may be treated as occurring when a binding obligation is created and enforceable rights are exchanged, rather than when property is later delivered to perform that obligation.
- Performance after enactment of the gift tax does not necessarily create a taxable gift when it merely discharges a bona fide, enforceable obligation that became fixed before the gift tax was enacted.
- In evaluating taxability of post-enactment payments under a prenuptial contract, courts may distinguish cases involving agreements formed while the gift tax was already in effect from cases involving performance of obligations formed before the tax existed.

## Conclusion

The Seventh Circuit held that Ira Copley’s 1936 and 1944 stock transfers to his wife were not taxable gifts because they were made to satisfy a binding $1,000,000 obligation created by a 1931 prenuptial contract that became enforceable upon marriage, before Congress enacted the federal gift tax in 1932.


Commissioner v. Estate of Copley, 194 F.2d 364 (1952)