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MARTHA S. STERN, PETITIONER,
v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stern v. CommissionerDocket No. 90833.United States Board of Tax Appeals 39 B.T.A. 501; 1939 BTA LEXIS 1023;February 28, 1939, Promulgated *1023 Where, conforming to the provisions of a trust theretofore created by herself, taxpayer, with the consent of the income beneficiary, revoked the trust
pro tanto and withdrew certain stock theretofore donated by herself and other stock purchased by the trustee out of corpus, and sold the same,held, the basis for determining gain or loss is, in the first instance, the cost to grantor and, in the second, the cost to fiduciary.Murray Seasongood, Esq., andHarry Stickney, Esq., for the petitioner.Harold F. Noneman, Esq., for the respondent.VAN FOSSAN*502 This proceeding was brought for a redetermination of a deficiency in the petitioner's income tax for the calendar year 1934 in the amount of $193.11. The sole question involved concerns the basis for determining gain or loss on the sale of certain securities sold by petitioner in 1934 where one group of the securities in question theretofore had been purchased by petitioner and transferred with other property to a trustee, and the other group of securities had been purchased by the trustee with funds constituting corpus of the trust, these two groups of securities being subsequently*1024 transferred to petitioner, who was grantor of the trust, the income beneficiary of the trust having consented, pursuant to the terms of the trust, to the partial revocation of the trust.
From the stipulated facts and the exhibit attached thereto we make the following findings of fact.
FINDINGS OF FACT.
Petitioner is a citizen of the United States and resident of Cincinnati, Ohio, and filed her Federal income tax return for the calendar year in question with the collector of internal revenue at Cincinnati.
Under date of June 27, 1927, petitioner, as settlor, executed and delivered to a trust company (hereinafter called the trustee), a trust agreement whereby she transferred to the trustee certain enumerated investments. The trustee was to hold the trust corpus subject to the provisions of the trust agreement, which, in its pertinent parts, provided as follows:
To pay over the net income as and when received to the husband of the Settlor, Max Stern, during his lifetime, and after his death, if the Settlor and her son, Alfred M. Stern, are then surviving, to divide the trust fund into two equal parts and to pay the income from one of said parts to the Settlor, during her*1025 lifetime, and the principal and all accumulated but undistributed income thereof to said Alfred M. Stern, after her death, and the income from the other of said parts to said Alfred M. Stern, during his lifetime, and the principal and all accumulated but undistributed income thereof to said Settlor after his death; provided, however, that whenever after the death of said Max Stern, one of his said survivors dies, the other shall have the option, to be exercised at any time during his or her lifetime, to receive the whole or any part of the principal and accumulated income of his share. In case, however, at the death of said Max Stern, only one of the aforesaid persons, to wit, the Settlor and Alfred M. Stern, is surviving, then the trust fund shall not be divided, but the entire income shall be payable to the survivor, or at his or her option, to be exercised at any time during his or her lifetime, he or she shall receive the whole or any part of the principal and accumulated but undistributed income.
2. In case both the Settlor and said Alfred M. Stern should die during the lifetime of said Max Stern, then he may, at his option, to be exercised at any time during his lifetime, *1026 either continue to receive the income or receive *503 the whole or any part of the principal and accumulated but undistributed income.
3. If all persons entitled to receive income or principal in accordance with the terms hereof, should die before distribution of the whole or any part of the principal has been made, as above provided, then the Trustee shall pay over and deliver the said principal and undistributed income to the residuary legatees named in the last will and testament of the Settlor, in the proportions therein designated and in default of any last will and testament, then to the persons then living who are entitled to distribution of the Settlor's estate under the provisions of the laws of Ohio then in force relating to distribution of personalty on intestacy. * * *
4. The Trustee shall have full power and authority, in its discretion, to hold and retain any of the property coming into its hands hereunder in the same form of investment as that in which it is received by it, although it may not be of the character of investments permitted by law to trustees. It shall also have full power and authority, in its discretion, to improve, sell, lease, mortgage*1027 or exchange the whole or any part of such property, upon such terms and conditions as may to it seem advisable, and to invest and reinvest any of the trust funds held hereunder, in such amounts as it may see fit, in such stocks, bonds or other property, real or personal, as it may, in its discretion, deem advisable, although the same may not be of the character permitted for trustees' investments by the ordinary rules of law.
Provided, however, that during the lives of the Settlor and of her brother, Edwin A. Seasongood, a resident of New York City, no sales, purchases or changes of investments shall be made by the Trustee without the approval of either the Settlor or said Edwin A. Seasongood, and the Settlor reserves the right, at her option, to direct the Trustee to retain any investments at any time held by it hereunder or to direct the sale or exchange of any such investment and to designate the stocks, bonds or other property, real or personal, in which the trust fund or any reinvestment thereof shall be invested, or to direct the issuance of voting proxies under any stock held hereunder, and the said Edwin A. Seasongood shall have the same right during his lifetime, whether*1028 the Settlor be then living or not, to give directions to Trustee with regard to any of the matters mentioned in this paragraph; provided, however, that the Trustee shall be under no liability for any loss arising from any action taken or omitted to be taken by the Trustee at the direction of the Settlor or Edwin A. Seasongood.
* * *
6. The trust hereby created shall be deemed a New York trust and shall, in all respects, be governed by the laws of the State of New York.
7. The Settlor may at any time modify, alter or revoke this agreement, in whole or in part, by instrument or instruments in writing delivered to the Trustee, provided she has first obtained the written consent of said Max Stern, or if he shall no longer be living, then the written consent of said Alfred M. Stern; provided, however, that the duties, powers and liabilities of the Trustee hereunder, shall not be substantially increased without its written consent.
Petitioner's husband, Max Stern, the income beneficiary under the trust, is now living. Petitioner's son, Alfred M. Stern, a contingent beneficiary under the trust agreement, died May 23, 1929.
*504 Among the securities transferred in trust*1029 to the trustee by petitioner at the time of the creation of the trust agreement were 25 shares of stock of the Remington Rand Co. which petitioner previously had acquired by purchase at a total cost of $2,445.51.
No dividends were declared or had been received by the trustee on these 25 shares of Remington Rand Co. stock during the years 1932, 1933, and 1934 up to and including the time when these shares were withdrawn from the trust by the petitioner and sold, as hereinafter set forth, and the Remington Rand Co. stock paid no dividends during the year 1935.
On May 7, 1929, the trustee purchased 50 shares of stock of the Lambert Co. for which it paid $6,762.50. This stock was purchased by the trustee from funds constituting the corpus of the trust, the corpus of the trust being the property transferred by the petitioner to the trustee at the time of the creation of the trust.
This Lambert Co. stock paid dividends during the years 1932 to 1935, inclusive, as follows: 1932, $7 per share; 1933, $4 per share; 1934, $3 per share; and 1935, $2.75 per share.
On October 3, 1934, with the written consent of her husband, Max Stern, the income beneficiary of the trust, petitioner*1030 withdrew from the trust the aforesaid 25 shares of Remington Rand Co. stock. On this date these shares had a fair market value of $1,073.50. On October 9, 1934, petitioner sold these shares of stock for $1,040.85.
On December 5, 1934, with the written consent of her husband, Max Stern, the income beneficiary of the trust, petitioner withdrew from the trust the aforesaid 50 shares of Lambert Co. stock. On this date these shares had a fair market value of $1,440.50. On December 11, 1934, petitioner sold these shares for $1,456.72.
In her income tax return for the calendar year 1934, petitioner deducted the following losses with respect to the sales of Remington Rand and Lambert Co. stock:
(a) 25 shares Remington Rand stock - Cost to petitioner on April 29, 1927 $2,445.51 Selling price, 1934 1,040.85 Difference 1,404.66 40% deducted 561.86 (b) 50 shares Lambert Co. stock - Cost to trustee on May 7, 1929 $6,762.50 Selling price, 1934 1,456.72 Difference 5,305.78 40% deducted 2,122.31 *505 The total losses deducted by petitioner on account of the sales of Remington Rand and Lambert Co. stock were:
Remington Rand $561.86 Lambert Company 2,122.31 Total 2,684.17 *1031 Petitioner realized gains from the sale or exchange of other securities which are not in controversy, amounting to $1,720.29 after the application of the proper percentages thereto. She, therefore, deducted as a claimed capital loss the sum of $963.88, the difference between the aforesaid amounts, aggregating $2,684.17, and the gain which is not in controversy, amounting to $1,720.29.
Respondent, in determining the deficiency, has computed the losses on the sales in question as follows:
(a) 25 shares Remington Rand, fair market value on date of withdrawal from trust $1,073.50 Selling price 1,040.85 Difference $ 32.65 (b) 50 shares Lambert Company stock, fair market value on date of withdrawal from trust $1,440.50 Selling price 1,456.72 Gain reportable or loss deductible None Respondent, therefore, determined that petitioner realized a net gain on the sale of capital assets as follows:
Amount of gain not in controversy $1,720.29 Less loss allowed on Remington Rand 32.65 Net gain determined 1,687.64 Petitioner retained as her own the proceeds from the sales of the Remington Rand and Lambert Co. stock. She did not restore to the*1032 trust the proceeds of the sales either in cash or any other property, and no property was transferred by petitioner to the trustee in lieu of, or in place of, the securities so withdrawn.
Petitioner and her husband, Max Stern, each filed separate income tax returns for 1934. Petitioner was born July 16, 1872, and the petitioner's husband, Max Stern, the income beneficiary of the trust referred to herein, was born May 18, 1869.
OPINION.
VAN FOSSAN: The question presented on the above facts is the determination of the basis for gain or loss on the stock withdrawn by petitioner from the trust and thereafter sold. Respondent determined *506 there was a gift of the stock by the trust to the grantor and applied fair market value at the time of such transfer. Sec. 113(a)(2), Revenue Act of 1934. *1033 regulations interpreting the same.
*1034 We start with the statutory provision that "the basis of property shall be cost, except that" - then follow numerous exceptions. The general rule, therefore, is that cost is the basis unless the case in hand falls within one of the exceptions. To qualify under an exception to a general rule, the facts must bring the case strictly within the terms of the exception.
United States v.Dickson, 15 Pet. 141*507 Petitioner suggests that the transfer comes under section 113(a)(3), providing that in case of a "transfer
in trust * * * the basis shall be the same as it would be in the hands of the grantor", etc. Here, however, we do not have a transferin trust. We have what might be called a "transferout of trust." There was a partial revocation of the trust and a withdrawal of part of the corpus. Thus we can not agree that the case falls under this provision.No other exception to the general rule is urged as applicable. We, therefore, are returned to the general rule that the basis is cost. It is a practical problem that confronts us, and some solution must be found. We are not helped by the argument of respondent, which he sums up as follows: "The evidence does not show that the stock sold by the petitioner was not acquired by gift * * *." This is not a case of lack of evidence. We have all the facts. Rather, it is a matter of construing and applying the law. Nor can we agree with respondent's alternative contention that, finding the basis to be cost, the cost to petitioner is zero.
*1036 Assistance to a conclusion is furnished by considering the ruling of the Board in
Pierre S. du Pont, 18 B.T.A. 1028">18 B.T.A. 1028* * * What might have been the situation had there been a sale of the securities*1037 during the existence of the trust, or what is the proper basis for determining gain or loss on account of the sale of reversionary estates during the existence of precedent estates, are not questions here presented for consideration, though in the various situations of such character suggested by the parties, we fail to see where, consistent with the conclusion herein reached, insurmountable difficulties would be encountered.
In
I.T. 1994 , C.B. III-1, it was ruled that where, pursuant to a provision in a trust instrument, the trust property was reconveyed to the settlor, upon his request, prior to March 1, 1913, the basis for *508 determining gain or loss from a subsequent sale is the original cost to the settlor or the value on March 1, 1913, as the case may be. It was there said:It is considered that the taxpayer under the trust instrument was the beneficial owner of the securities in question and held the equitable title. Upon the termination of the trust the legal and equitable title merged and the settlor stood in the same position as if the trust had never been created. The transaction had no effect on the investment of the taxpayer.
G.C.M. 12309 , C.B. XII-2, *1038 though involving sales by the beneficiary, is, by parity of reasoning, to the same general effect that the basis is cost to the grantor of the trust.In
G.C.M. 14350 , C.B. XIV-1, reference is made to the above case ofPierre S. du Pont, in which the Commissioner acquiesced, and consideration given to a case where a taxpayer transferred in trust certain shares of stock, the income to be paid to grantor's wife for her life; upon her death the trust was to terminate and the trust property was to be returned to the grantor; the wife died and the stock was returned to taxpayer grantor and later sold. It was held the basis was the basis in his hands prior to the trust. See alsoSilverthau v.United States, 26 Fed.Supp. 242We are of the opinion, and hold that as to the Remington Rand stock, originally transferred to the trust by petitioner and subsequently withdrawn by a
pro tanto revocation of the trust, the basis for gain or loss is the cost to grantor. The situation as to such stock is the same as though the trust had never been created.The situation as to the Lambert stock, purchased by the trustee out of trust corpus and subsequently*1039 withdrawn by the grantor of the trust, differs, but we believe the same reasoning applies and that cost to the fiduciary is the correct basis. This result would seem to be indicated, by analogy, by article 113(a)(3)-1 of Regulations 86. *509 On acquisition of this stock taxpayer stepped into the shoes of the fiduciary and should acquire its basis. The Lambert stock was purchased out of corpus of the trust. The corpus so used was either the direct donation of taxpayer or the increase of such donation.
*1040 The holding above made as to the two lots of stock brings the case within the general statutory provision with which we started our consideration and is consonant with the rule of law that unless an exception to the general rule is clearly proved the general rule governs.
Reviewed by the Board.
Decision will be entered under Rule 50. MELLOTT (Concurring in part)MELLOTT (Dissenting in part)MELLOTT, concurring and dissenting: I concur in the portion of the opinion of the majority holding that, under
Pierre S. du Pont, 18 B.T.A. 1028">18 B.T.A. 1028Petitioner and the trust created by her are separate taxpayers. "* * * The law has seen fit to deal with * * * [the] abstraction * * * [of a trust] for income tax purposes as a separate existence, making its own return under the hand of the fiduciary and claiming and receiving its own appropriate deductions. *1041 "
Anderson v.Wilson, 289 U.S. 20">289 U.S. 20Jane B. Shiverick, 37 B.T.A. 454">37 B.T.A. 454Helvering v.Helmholz, 296 U.S. 93">296 U.S. 93White v.Poor, 296 U.S. 98">296 U.S. 98Merchants Loan & Trust Co. v.Smietanka, 255 U.S. 509">255 U.S. 509The Commissioner has gone on the theory that the trust made a gift of the Lambert stock, which had cost it $6,762.50, to petitioner. Accordingly he has allowed her, as a basis for the computation of her gain or loss, the fair market value of the stock when it was turned over to her, or $1,440.50. Inasmuch as she sold it a few days later for substantially the same amount, he*1042 has held that she neither gained nor lost by the transaction. He arrives at this conclusion by treating her acquisition of the stock as governed by section 113(a) *510 (2), which provides, in substance, that if property was acquired by gift after December 31, 1920, the basis for the purpose of determining loss is either the cost basis of the donor "or the fair market value at the time of the gift, whichever is lower." If petitioner is upheld in her contention that no gift was made, then cost is her basis; and under the stipulated facts that is zero.
In my opinion the Commissioner should be sustained in his holding that petitioner's basis for the Lambert stock was its fair market value on the date she acquired it from the trust.
Footnotes
1. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) BASIS (UNADJUSTED) OF PROPERTY. - The basis of property shall be the cost of such property; except that -
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(2) GIFTS 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, except that for the purpose of determining loss the basis shall be the basis so determined or the fair market value of the property at the time of the gift, whichever is lower. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner 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 in the hands of such donor or last preceding owner 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. ↩
2. (3) TRANSFER IN TRUST AFTER DECEMBER 31, 1920. - If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by a bequest or devise) the basis shall be the same as it would be in the hands of the grantor, increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made. ↩
3. ART. 113(a)(3)-1.
Transfer in trust after December 31, 1920. - (a) Property included. - Section 113(a)(3) applies in general to all property acquired after December 31, 1920, by transfer in trust. It does not apply to property acquired as agift by transfer in trust, or by bequest or devise; or by an instrument which, under section 113(a)(5), is to be treated as though it were a will. With these exceptions, sction 113(a)(3) applies to all property acquired after December 31, 1920, by any transfer in trust of whatever description. If the transfer in trust be a gift, it is not within section 113(a)(3), but is within section 113(a)(2) or section 113(a)(4).(b) Basis. - The basis of property so acquired is the same as it would be in the hands of the grantor, increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made. If the taxpayer acquired the property by a transfer in trust, this basis applies whether the property be in the hands of the trustee, or the beneficiary, and whether prior to the termination of the trust and distribution of the property, or thereafter.(c) Reinvestments by fiduciary. - If the property is an investment made by the fiduciary (as, for example, in the case of a sale by the fiduciary of property transferred by the grantor, and the reinvestment of the proceeds), the cost or other basis to the fiduciary is taken in lieu of the basis specified in paragraph(b).↩
Document Info
Docket Number： Docket No. 90833.
Judges： Fossan, Mellott
Filed Date： 2/28/1939
Precedential Status： Precedential
Modified Date： 11/2/2024