McFeely v. Commissioner , 29 B.T.A. 998 ( 1934 )

NANCY K. MCFEELY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

McFeely v. Commissioner

Docket No. 69492.

United States Board of Tax Appeals

29 B.T.A. 998; 1934 BTA LEXIS 1443;

February 2, 1934, Promulgated

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On August 1, 1925, the petitioner was given by her mother a 10 percent interest in her share in the estate of T. H. Given, in process of administration. At that time the estate had on hand a large amount of securities and more than enough cash to pay its known or probable liabilities. The distributees had agreed to receive their shares in kind, which agreement was of record in court proceedings. On November 3, 1927, there were distributed to the petitioner 1,000 shares of Radio "A" common stock which the petitioner sold on March 14, 1929, at a large profit. In her return for 1929 she reported the profit as capital net gain. The respondent taxed it as other profit, upon the ground that the shares had been held by the petitioner for a period of less than two years. Held, that the gain is taxable as other gain on sales of property held for a period of less than two years.

Harry B. Wassell, Esq., for the petitioner.

W. F. Gibbs, Esq., for the respondent.

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SMITH

This proceeding is for the redetermination of a deficiency in income tax for 1929 in the amount of $35,372.53. The questions in issue are:

(1) Whether the profit realized by the petitioner from the sale of 1,000 shares of Radio "A" common stock was a "capital net gain" or "ordinary net income."

(2) Whether the respondent erred in refusing to determine a constructive distribution of the estate of T. H. Given on May 20, 1925, and thereby establish that date as the date of acquisition by the petitioner of the stock sold.

(3) Whether the Commissioner erred in refusing to determine that the widow-donor acquired at her husband's death on June 28, 1919, an absolute title to her interest in the estate by her election to take against his will in lieu of her dower interest and thereby establish that date as the date of acquisition by the petitioner of the stock sold.

FINDINGS OF FACT.

1. On June 28, 1919, T. H. Given died, leaving his widow, Martha A. Given, and no issue.

2. On July 3, 1919, the will of T. H. Given was filed and probated in the Register's office of Allegheny County, Pennsylvania. Martha A. Given was not mentioned in the will.

3. On July 3, 1919, Martha A. Given filed with the executors her election in writing to take against the will of her husband, T. H. Given, one half of his estate in lieu of her dower under the laws ofPennsylvania. This election was duly filed and recorded in the Recorder's office of Allegheny County. The Orphans' Court of Allegheny County recognized her election and she was duly awarded one half of the estate under the laws of Pennsylvania.

4. On July 3, 1919, letters testamentary were issued to George C. Moore and Arthur E. Braun, and they proceeded to administer the estate.

5. On August 2, 1919, an inventory and appraisement of the estate of T. H. Given was filed in the Register's office of Allegheny County by the executors.

6. In July 1923 a first and partial account was filed by the executors of the estate of T. H. Given, deceased, at #594 September Term, 1923, in the Orphans' Court of Allegheny County. An audit of this account was continued as all the debts of the estate were not paid and the estate was not fully administered.

7. On July 23, 1924, an assignment was made by Martha A. Given to Harry B. Wassell in trust for Nancy K. McFeely of 10 percent of her one half interest in the estate of T. H. Given. This instrument declared that:

The said Harry B. Wassell, or his successor in the trust, to collect, receive and hold the said interest in said estate in trust for the uses and purposes and with the powers following:

In Trust to pay over from time to time the net income therefrom unto the daughter of said Martha A. Given, Mrs. Nancy McFeely, for and during all the term of her natural life, without being subject to debts, engagements or liabilities but freed and discharged therefrom, and without right of anticipation.

In trust upon the death of Mrs. Nancy McFeely before me to pay over the principal and any unexpended balance of any income therefrom to such of my heirs as shall then be designated by me in writing.

In trust upon the death of Mrs. Nancy McFeely after my death then to pay over the principal and any unexpended balance of any income thereof in the manner directed by me in my last Will and Testament, or if not so directed by me then to her nearest relative of my blood.

The validity of this assignment was recognized by the Orphans' Court and distribution decreed thereunder.

8. On March 16, 1925, Martha A. Given reported the gift to her daughter Nancy K. McFeely at its value as of June 23, 1924, the date of the gift, and paid a gift tax thereon in the sum of $2,417.90.

9. On March 6, 1925, a second and partial account of the estate of T. H. Given was filed at #301 April Term, 1925, in the Orphans' Court of Allegheny County. At the audit of this account on May 20, 1925, the executors, under rule of court, filed a sworn statement representing, inter alia:

(c) All creditors whose claims the accountants had notice or knowledge of before filing this account have been paid.

(d) The estate is subject to the payment of direct and collateral inheritance taxes to the State of Pennsylvania and the payment of Federal Inheritance Tax. All Federal taxes have been paid and substantially all state tax; but a balance claimed by the state is under negotiation which when ascertained, the Executors have ample funds to meet.

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(h) The names of all persons having any interest in the estate as legatees, heirs or next of kin, are as follows:

Martha A. Given, widow, of full age.

Arthur E. Braun and George C. Moore, Trustees for Annie Given Kerr (life tenant), of full age;

Arthur E. Braun and George C. Moore (in remainder), of full age.

(1) The property to be distributed under this account consists of stocks, bonds and cash and the parties in interest have elected to accept the same in kind; an agreement in respect thereto executed by all the parties in interest is attached hereto, marked Exhibit "F". Under the said agreement, a portion of the securities and cash shown in this account shall be held by the executors and distribution thereof suspended until the filing of a final account.

On May 20, 1925, the Orphans' Court made the following decree:

And now, to-wit, May 20, 1925, the accounts in this case having been filed and confirmed nisi, and having been examined by the Court, upon consideration thereof it is decreed that said accounts be confirmed absolutely, and it appearing that an agreement by the distributees has been filed providing for distribution of a portion of the fund in the hands of the Accountants, in kind, and distribution of the remainder to be suspended until the filing of a final account, it is ordered that the fund in the hands of the Accountants, to wit, $2,731,772.78, be paid in accordance with the schedule of distribution hereto attached and made part hereof, unless exceptions be filed within ten days, or an appeal be taken herefrom within three weeks.

Under this decree, Harry B. Wassell, as trustee for Nancy K. McFeely, received, inter alia, 900 shares of American Window Glass Machine Co. common stock. No further sale of assets was made by the executors and all of the stocks and bonds making up the remainder were later delivered in kind to the parties entitled thereto.

11. On August 1, 1925, an agreement was made and entered into by and between Martha A. Given, donor, and Nancy K. McFeely, donee, and Nancy K. McFeely as trustee, which provided in material parts as follows:

WHEREAS, by assignment dated June 23rd, 1924, a copy of which is attached hereto, Martha A. Given conveyed to Harry B. Wassell, ten (10%) percent. of all her right, title and interest in the Estate of Thomas Hartley Given, deceased, to be collected by the said Harry B. Wassell and held in trust for Mrs. Nancy McFeely under the terms and conditions set forth in said assignment, and

WHEREAS, the said Harry B. Wassell has presented his resignation as said Trustee and the said Martha A. Given has appointed Mrs. Nancy McFeely as his successor Trustee under the provisions of said instrument, copies of which resignation and appointment are hereto attached, and

WHEREAS, the said Martha A. Given, as the Donor, desires to give to the said Mrs. Nancy McFeely, in addition to the life interest already held by her in said trust, the absolute title and interest therein, and he said Mrs. Nancy McFeely desires to acquire absolutely all said property in which she now has a life interest.

NOW, THEREFORE, THIS AGREEMENT WITNESSETH: That for One ($1.00) Dollar and other good and valuable considerations, to her in hand paid by the said Mrs. Nancy McFeely, it is agreed by and between the parties hereto as follows:

The said Martha A. Given, as Donor, agrees to the termination of said trust and to the transfer and conveyance to Mrs. Nancy McFeely, the present holder of the life interest therein, of the absolute right, title, interest, property, claim and demand of, in and to the said ten (10%) percent. interest in the Estate of Thomas Hartley Given, deceased, as and when collected for her by the said Harry B. Wassell, so that the said Mrs. Nancy McFeely shall then have and receive absolute title to said property, relieved of the conditions and provisions of said trust.

The said Mrs. Nancy McFeely, as Donee of said life interest and Trustee of said Trust estate, does hereby agree to the termination of said trust and to the transfer and conveyance to her absolutely of the said ten (10%) percent. interest in the Estate of Thomas Hartley Given, deceased, as and when collected by the said Harry B. Wassell.

On the same date Harry B. Wassell resigned as trustee of the estate created for Nancy K. McFeely by assignment of Martha A. Given dated June 23, 1924, and Martha A. Given by a separate instrument appointed Nancy K. McFeely to fill the vacancy caused by the resignation of Harry B. Wassell as trustee. The validity of these instruments was thereafter recognized by the Orphans' Court in making distribution thereunder.

12. On August 5, 1927, the third and partial account of the estate of T. H. Given was filed by the executors at #84 October Term, 1927, in the Orphans' Court of Allegheny County showing a balance of stocks, bonds, and cash, after distribution of May 20, 1925, of $1,339,108.93 (as per exhibit #6 attached to the stipulation).

13. On November 3, 1927, a further delivery of assets upon which distribution had been suspended was ordered and Nancy K. McFeely received, among other assets, certificates for 1,000 shares of Radio "A" common stock and 150 shares of American Window Glass Machine Co. common stock.

14. On March 14, 1929, Nancy K. McFeely sold he said 1,000 shares of Radio "A" stock which were a part of the gift for the sum of $484,460. This stock had been valued for gift tax purposes as of June 23, 1924, at $20,625, showing a net gain of $463,835.

15. On December 19, 1929, Nancy K. McFeely sold the said 1,050 shares of American Window Glass Machine Co. common stock which were a part of the gift for the sum of $19,950. This stock had been valued for gift tax purposes as of June 23, 1924, at $89,100, showing a loss of $69,150.

16. In March 1930 Nancy K. McFeely filed her 1929 income tax return, claiming and reporting as capital net gain a net profit of $394,685 on the sale of the Radio "A" common stock and American Window Glass Machine Co. common stock, upon which she paid a capital gain tax of $46,335.63. In such return she set up June 23, 1924, as the date she had acquired the property sold and used its value as of that date in determining the capital gain reported.

17. The respondent determined that there was a capital net loss on the sale of 150 shares of American Window Glass Machine Co. common stock of $174.75 and a capital net loss on the sale of 900 shares of this stock of $64,048.50, or a total capital loss of $64,223.25 as claimed by Nancy K. McFeely in her 1929 income tax return.

18. The respondent determined that there was an ordinary profit of $404,085 on the sale of 1,000 shares of Radio "A" common stock instead of a capital net gain of $463,835 as claimed by Nancy K. McFeely in her 1929 return. November 3, 1927, was used by the respondent as the basic date for his determination of gain or loss on the sale of 1,000 shares of Radio "A" common stock and 150 shares of American Window Glass Machine Co. common stock.

OPINION.

SMITH: The question presented by this proceeding is the amount of taxable profit realized by the petitioner from the sale of 1,000 shares of Radio "A" common stock on March 14, 1929, for the sum of $484,460, and whether the profit realized was a capital net gain or ordinary net income. The petitioner contends that, whatever the amount of the profit, it was a capital net gain within the meaning of the statute, and the respondent contends that it was ordinary net profit and not taxable under the capital net gain provisions of the statute. The contentions of the respondent are set forth in his deficiency notice to the petitioner under date of December 16, 1932, as follows:

3. The profit of $404,085.00 on the sale of 1,000 shares of Radio Corporation of America "A" has been included in schedule 8. Your contention that the profit on the sale of this stock represented capital net gain under the provisions of Section 101 of the Revenue Act of 1928 for the reason that you acquired an absolute right in property of value in 1925 and sold such property in 1929, more than two years later, has been considered.

Section 101(c)(8)(B) of the Revenue Act of 1928 provides as follows:

"In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 113, such property has, for the purpose of determining gain or loss from a sale or exchang, the same basis in whole or in part in his hands as it would have in the hands of such other person."

It appears that the stock in question was acquired under an assignment by your mother of a portion of her interest in the Estate of T. H. Given and the basis for gain or loss purposes in accordance with section 113(a)(2) of the Revenue Act of 1928 is the same as it would have been in your mother's hands. Therefore, the period during which your mother held the property should be added to the period it was held by you in order to determine the total period for which the particular property was held.

In this case, the decree of distribution of the stock was not made until November 3, 1927 and that date governs for gain or loss purposes under section 113(a)(5) of the Revenue Act of 1928. In view of this fact it is inconsistent to hold that the stock was in your mother's hands prior to November 3, 1927, the date of the decree of distribution. That date which governs for gain or loss purposes, as the law specially so provides, should be used also for capital gain determination. Since the Radio Corporation stock was sold on March 14, 1929, not having been held by you nor by the donor for a period of two years from November 3, 1927, the profit may not be considered capital net gain but is subject to both normal tax and surtax.

Section 101 of the Revenue Act of 1928, so far as is material to our determination, is as follows:

(a) Tax in case of capital net gain. - In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12 1/2 per centum of the capital net gain.

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(c) Definitions. - For the purposes of this title -

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(8) "Capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business) * * *. For the purposes of this definition -

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(B) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 113, such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.

Section 113 of the same act provides in material part as follows:

(a) Property acquired after February 28, 1913. - The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -

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(2) GIFT AFTER DECEMBER 31, 1920. - If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. If the facts necessary to determine such basis are unknown to the donee, the Commissioner shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis shall be the fair market value of such property as found by the Commissioner as of the date or approximate date at which, according to the best information that the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner;

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(5) PROPERTY TRANSMITTED AT DEATH. - If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent's estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the detath of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor's death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor's death.

It will be noted from our findings that T. H. Given died testate on June 28, 1919. In his will he made no provision for his widow. The widow, on July 3, 1919, elected to take, against the will of her deceased husband, one half of his estate in lieu of her dower under the laws of Pennsylvania. By virtue of such election one half of the estate of her deceased husband vested in her immediately and absolutely. . It was not, however, one half of the specific assets of the estate which became her property by virtue of the election, but only one half of the estate after the debts and other charges of administration should be paid. The basis for determining the gain or loss upon the sale in 1929 of personal property acquired by the widow, Martha A. Given, from the estate of her deceased husband was the value thereof at the date of distribution to her. Section 113(a)(5), Revenue Act of 1928; .

The petitioner contends that there was a constructive distribution of the estate of T. H. Given on May 20, 1925; that in legal effect the 1,000 shares of Radio "A" common stock were distributed to Martha A. Given on that date and that Martha A. Given was the owner of them until they were given to the petitioner by virtue of the agreement of August 1, 1925; that by virtue of section 101(c)(8)(B) the time during which the securities were in the ownership of Martha A. Given should be added to the time during which the ownership was in the petitioner for the purpose of determining whether the profit realized upon the sale on March 14, 1929, was capital net gain or ordinary net income.

In our opinion the evidence does not support the contentions of the petitioner. While the shares of stock were in the custody of the executors of the estate of T. H. Given they were not in any proper sense "held" by the petitioner. If the executors by agreement of the parties or otherwise had sold the shares and realized a profit therefrom the profit would unquestionably have been taxable to the estate and not to the beneficiaries. .

It seems clear that if Martha A. Given had not assigned any portion of her estate to the petitioner, but had received the 1,000 shares of Radio stock in question on November 3, 1927, and had sold them on March 14, 1929, the profit would have constituted ordinary net income and would have been taxable accordingly, for she would have held them for a period of less than two years at date of sale. Section 113(a)(5). We can not see that the petitioner stands in any better position than her donor.

Conceivably, if in 1929 the petitioner had sold, not the 1,000 shares of Radio stock in question, but her interest in the estate of T. H. Given, the profit would have constituted capital gain; for she acquired that interest by gift from her mother on August 1, 1925, and would have owned it for a period of more than two years at date of sale. But she did not sell the gift res or a fractional part of it. She sold shares of stock which were distributed to her by the executors of the estate on November 3, 1927. Prior to that date the dominion and control over the shares were in the executors of the estate and not in the petitioner. In view of these facts we think that it can not be said that the petitioner held them for a period of two years at the date of sale. ; . Contra, . The respondent's contention on this point is sustained.

No contention is made by the petitioner as to the value of the 1,000 shares of Radio "A" common stock at the basic date, claimed by the respondent to be November 3, 1927. In the absence of evidence showing error on the part of the respondent in his determination, his valuation is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.