Francis v. Commissioner ( 1929 )

FRANCIS FRANCIS, GUARDIAN OF FRANCIS FRANCIS, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

EVELYN FRANCIS FANE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Francis v. Commissioner

Docket Nos. 16724, 16725.

United States Board of Tax Appeals

15 B.T.A. 1332; 1929 BTA LEXIS 2683;

April 10, 1929, Promulgated

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1. Petitioners were remaindermen under a declaration of trust of personalty made originally in 1892. The life tenant died March 3, 1921, and under state law petitioners became at once entitled and the trust ceased except for the power of the trustee to sell. The trustee thereafter sold and distributed the proceeds. Held, the sale resulted in gain or loss to petitioners and the basis thereof is the value of property sold when legally acquired on March 3, 1921.

2. Section 202(a)(2), providing the basis for ascertaining gain or loss on the sale of property acquired by gift after December 31, 1920, is not applicable.

Montgomery, B. Angell, Esq., for the petitioners.

F. R. Shearer, Esq., for the respondent.

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STERNHAGEN

These proceedings involve deficiencies for 1921 of $4,681.09 and $4,680.82. The questions involved are whether the petitioners suffered loss upon the sale of stocks by the trustee under a certain trust instrument and, if so, what is the measure of that loss. All the following facts were pleaded and admitted, and hearing was had on the petitioners' motions for judgments on the pleadings.

FINDINGS OF FACT.

The petitioner, Francis Francis, is a British subject, resident in England. On January 7, 1921, he was duly appointed guardian of his infant son, Francis Francis, Jr., and of his daughter, the petitioner, Evelyn Francis Fane, then Evelyn Francis, by the Chancery Division of the High Court of Justice in England. On January 31, 1922, he was duly appointed ancillary guardian of his children by decree of the Surrogate's Court in and for the County of New York, State of New York, and qualified as such. As guardian he executed and filed on behalf of each ward an income-tax return for the calendar year 1921. The daughter became of age on April 11, 1925. Thereupon the guardian duly accounted in the Surrogate's Court, and a final decree was entered on such accounting July 21, 1926. The daughter was married on July 7, 1925, to a British subject, and now resides in England. The present American mailing address of each petitioner is c/o Davis, Polk, Wardwell, Gardiner and Reed, 44 Wall Street, New York, N.Y.

Under date of February 3, 1892, Jabez A. Bostwick, grandfather of Francis Francis, Jr., and Evelyn Fane, executed the following deed of trust:

1. INDENTURE made this third day of February, A.D. 1892, at the City of New York, between JABEZ A. BOSTWOCK, of said City, party of the first part, and "THE NEW YORK LIFE INSURANCE AND TRUST COMPANY" a corporation organized under the laws of the State of New Yrok, party of the second part.

2. WHEREAS said party of the first part is desirous of providing, settling and assuring a personal income for his daughter Fannie E. Bostwick:

3. Now THIS INDENTURE WITNESSETH, that for the purpose of carrying the aforesaid desire into effect, and in consideration of One Dollar to him paid by said party of the second part, the receipt of which is hereby acknowledged, the party of the first part doth by these presents grant, give, convey, assign and set over unto said party of the second part One Thousand Shares of the common stock of the Standard Gas Light Company of New York.

4. TO HAVE AND TO HOLD the same with all the rights, privileges, increase, income, interest and appurtenances belonging thereto, unto said party of the second part, to the uses, upon the trusts, and with the powers and provisions and for the ends, intents and purposes hereinafter limited, declared and expressed of and concerning the same, that is to say:

5. SAID TRUSTEE shall collect and receive all dividends or other income or increase payable on or arising from or accruing to said certificates, and after deducting all proper and reasonable charges and expenses in and about the management of said property and the administration of said trust, the net income or increase as the same shall accrue, shall be paid to my said daughter on her personal receipt.

6. If upon the death of my said daughter she shall leave issue a child or children, or there shall be surviving a child or children of any deceased child of hers, then said Trustee shall distribute and pay over said certificates or the proceeds thereof, or the substituted securities, or any securities held by said Trustee under and by virtue of this deed or trust, or the proceeds thereof, to said issue equally, and to the child or children of any deceased child of my daughter, the share of any deceased child to belong as one share of his or her issue. PROVIDED that any child or issue of deceased child of my said daughter, who shall not be a citizen and a resident of the United States of America, shall receive no share of the distribution of said property, but their shares shall be distributed to such children or issue of deceased children as are citizens and residents of the United States, and if there are none such, then the property shall be disposed of as hereinafter provided.

7. IF my daughter shall die leaving no children, nor issue of deceased children as aforesaid, then upon her death the said Trustee shall deliver and pay over said certificates and the additions thereto, or substitutes therefor, to the Young Men's Christian Association of New York.

8. THIS TRUST may be terminated by the party of the first part at any time during his natural life by his giving said Trustee a notice in writing of his desire to terminate the same.

Should he give such notice then the said Trustee shall at once make up its bill of charges and on payment of the same it shall deliver to him or his order all of said certificates or the stocks or securities that may have been substituted for them, and then the said certificates or securities shall become his property the same as if this trust had never been made.

It is further provided that this trust may be altered or amended at any time by the party of the first part, as often as he may desire, by his giving notice to the Trustee in writing of such alterations or amendments as he may wish. Upon receiving such alterations or notices, the said alterations or amendments shall at once be endorsed upon each copy of this indenture of trust and shall be signed by each of the parties hereto.

It is further provided that during the natural life of the party of the first part he may at any time withdraw any portion of the certificates or securities substituted therefor, and the party of the second part shall deliver to the party of the first part any portion of the property which at the time is held under this agreement whenever he may so request or direct in writing, or he may exchange any portion of said certificates or other securities by substituting any other stocks, bonds, or other securities as he may in writing request or direct, and any securities so exchange and substituted shall be subject to all the trusts, uses, conditions, powers, limitations, purposes, privileges and restrictions specified in this trust agreement.

This trust may be added to at any time by the party of the first part by depositing such bonds, stocks or other properties with the party of the second part as he may desire and all such deposits or additions shall be subject to all the trusts, uses, conditions, powers, limitations, purposes, privileges and retrictions hereinabove specified, unless otherwise specified when such additions are made.

9. DURING my natural life said Trustee shall not sell or exchange or dispose of said certificates or the proceeds thereof, or any substitutes therefor, or make another investment thereof without my consent thereto in writing, first had and obtained, but on my written request and direction said Trustee shall sell and dispose of said certificates and reinvest the principal thereof in such securities as I shall so direct.

If I shall only direct such sale and give no directions as to reinvestment, then said Trustee shall invest the proceeds of such sale in such securities as the law of New York allows under trusts. PROVIDED that the principal of the proceeds of said certificates and said substituted investment or any other like investment or change shall continue to be held by said Trustee as a mere substitute for said certificates and subject to all the trusts, uses, conditions, powers, limitations, purposes, privileges and restrictions hereinabove specified in respect of said certificates.

10. AT ANY TIME AFTER MY DEATH said Trustee, if in its judgment it shall seem best so to do, provided my said daughter shall so request in writing, may change said certificates or the additions thereto or the substitutes therefor, into an investment into such other good and safe shares or securities as said Trustee and herself shall mutually approve, and if they cannot agree, then said Trustee may invest in such securities as the law of the State of New York allows for trust investments, but as provided in paragraph Nine hereof, said substituted securities shall be held as a mere substitute for said original securities, and subject to all the trusts, uses, conditions, powers, limitations, purposes, privileges and restrictions hereinabove specified.

11. THE SAID party of the second part shall be at liberty to charge as its compensation as Trustee the following commissions: One and one-half per cent. on all income derived from the property held in trust, and on the termination of the trust the usual commissions on the principal that is allowed by law to Trustee, viz: Five per cent. on One Thousand Dollars, two and one-half per cent. on Nine Thousand Dollars, and one per cent. on the balance to be paid at the close or termination of the trust. But, no charge shall be made for any changes or exchanges or substitutions or amendments hereafter except such additions as are provided for in section eight of this instrument, and further that no commission shall be charged on the principal if this trust is terminated during the lifetime of the party of the first part.

12. IT IS PROVIDED hereby that the right and power reserved by me in paragraph nine and in favor of my said daughter in paragraph ten foregoing, to request and direct the sale of the said certificates and reinvestment of the proceeds thereof shall extend also to the securities acquired under said reinvestment, and so in succession to investments and reinvestments as often as I or my said daughter shall direct, or as they may be made in manner and form aforesaid specified, and all such reinvestments shall be impressed with all the foregoing trusts and conditions in this instrument.

13. AND for the purpose of more fully carrying out the provisions of this instrument the said party of the first part doth hereby constitute and appoint the said party of the second part and its successors his attorney for him and in his name and stead to collect, receive, and give acquittance for all interests, income, or dividends that shall accrue to or arise from any of the investments or trust property herein provided for, and sell, assign and collect any such securities and to do any other act that shall be reasonably necessary for the carrying out of this trust.

IN WITNESS WHEREOF said party of the first part has hereunto in triplicate set his hand and seal the day and year first aforesaid.

J. A. BOSTWICK (SEAL)

Witness

WALTER KERR

TO JABEZ A. BOSTWICK and all to whom these presents shall come GREETING:

WHEREAS Jabez A. Bostwick has duly executed to us "The New York Life Insurance and Trust Company" the foregoing and annexed conveyance and instrument of trusts, and has also duly transferred and delivered to us the certificates as described in said instrument in writing.

WE DO hereby accept the same, and said trust, and all the terms and conditions thereof.

WITNESS the signature of said The New York Life Insurance and Trust Company, and its corporate seal hereto in triplicate, this fifth day of February A.D. 1892.

HENRY PARISH

Prest.

(CORPORATE SEAL)

Witness

WALTER KERR

The grantor transferred to the trustee the 1,000 shares of the common stock of the Standard Gas Light Co. of New York.

Under date of February 10, 1892, the grantor substituted certain so-called "Standard Oil Trust" stock and other securities, under the following instrument:

I, JABEZ A. BOSTWICK, have this 10th day of February, 1892, granted given assigned and set over to the New York Life Insurance & Trust Co. One thousand shares of "Standard Oil Trust" and One hundred 6% Certificates of Indebtedness for One thousand dollars each of the New Haven and Derby R.R. Co. due 1900, Nos. 126 to 225 inclusive with interest coupons attached payable Feby and August 1st.

To Have and to hold the same upon the same trusts conditions and terms and for the same uses purposes and interests as are limited declared and expressed in a certain Deed of Trust made and executed by me to the said New York Life Insurance and Trust Company bearing date the third day of February 1892 for the benefit of my daughter Fannie E. Bostwick.

This transfer is hereby made in pursuance of Article 8, of the said Deed of Trust authorizing additions thereto and alterations thereof, and is intended to be an addition to the trust fund transferred by the said Deed.

In Witness whereof I have hereto set my hand and seal and the New York Life Insurance and Trust Co. has hereto caused to be affixed its Corporate seal the day and year above written.

J. A. BOSTWICK (SEAL)

HENRY PARISH

Prest.

(CORPORATE SEAL)

Witness as to both signatures

HENRY PARISH Jr.

I, JABEZ A. BOSTWICK, hereby acknowledge that I have received from the N.Y. Life Ins. and Trust Co. One thousand (1,000) shares of the Common stock of the Standard Gas Light Co. of New York heretofore held as a portion of the trust estate under the Annexed Deed of Trust, and now withdrawn by me in pursuance of the terms of Article 8 of said Deed.

Dated, February 19, 1892

J. A. BOSTWICK

Witness

HENRY PARISH Jr.

Under date of July 22, 1892, the original trust instrument was modified as follows:

NEW YORK, July 22d 1892

HENRY M. PARISH, Esq.

President

New York Life Ins. & Trust Co.

DEAR SIR: -

Referring to my Trust Agreement with you, (The New York Life Insurance & Trust Company) for the benefit of my daughter, Fannie E. Bostwick, (Now Mrs. Frances Bostwick Carstairs) and dated February 3d 1892, I desire to and do hereby make the following changes and amendments, as I am authorized to do under and by the provisions of said Trust Agreement.

I hereby cancel and withdraw the latter clause of Article Six of said agreement which reads as follows -

"Provided that any child or issue of deceased child of my said daughter, who shall not be a citizen of the United States of America, shall receive no share of the distribution of said property but their shares shall be distributed to such children or issue of deceased children as are citizens and residents of the United States, and if there are none such then the property shall be disposed of as hereinafter provided."

I also hereby withdraw and cancel clause seven of said Trust Agreement, which reads as follows: -

"If my daughter shall die leaving no children nor issue of deceased children as aforesaid, then upon her death the said Trustee shall deliver and pay over said certificates and the additions thereto or substitutes therefor to the Young Men's Christian Association of New York," - making both of these clauses on and after the execution of this paper null and void the same as if they never had been written.

I hereby add the following four (4) clauses to said Trust Agreement, as authorized and provided by its terms, provisions and conditions.

First: - If my daughter shall die leaving no issue or issue of deceased children as aforesaid and leaving ahusband who is a person now in being, then the income shall be paid to said surviving husband during his natural life and at his death if he shall leave children him surviving or issue of deceased children of his, then upon his death the said Trustee shall distribute and pay over all the securities then held by said Trustee under any by virtue of said deed of trust or the proceeds thereof to said issue equally to the child or children of any deceased children of his, the share of said deceased child to belong as one share to his or her issue.

Second: - If my daughter's said surviving husband shall die leaving no children or issue of deceased children as aforesaid then said Trustee shall divide all the property and securities then held under said Trust Agreement into two equal parts, and distribute one part to the Young Men's Christian Association of New York City, N.Y. and the other part to the Wake Forest College of Wake Forest, State of North Carolina.

Third: - These added clauses shall not be construed in any way as superseding or taking precedence of any original clauses which are not changed hereby.

Fourth: - This amendment of said trust is executed in triplicate, one copy of which is to be attached to each of the three copies of said Trust Agreement.

J. A. BOSTWICK (SEAL)

HENRY PARISH

Prest

(CORPORATE SEAL)

Witness

JOS. R. KEARNY

Secy

Under date of July 28, 1892, the following instrument was executed:

I, JABEZ A. BOSTWICK, hereby acknowledge that I have received this 28th day of July 1892 from the New York Life Ins. & Trust Co. One hundred 6% Certificates of Indebtedness for One thousand dollars each of the New Haven and Derby R.R. Co. due 1900, Nos. 126 to 225 inclusive together with all the unmatured interest coupons:

And also, I have the same day granted, given, assigned and set over to the New York Life Inst. & Trust Co. Five hundred (500) shares of the "Standard Oil Trust," TO HAVE and to hold the same upon the same trusts conditions and terms and for the same uses purposes and interests as are limited declared and xpressed in a certain deed of Trust made and executed by me to the said N.Y. Life Ins. & Trust Co. bearing date the third day of February 1892 for the benefit of my daughter Fannie E. Bostwick, now Mrs. Frances Bostwick Carstairs.

This exchange is hereby made in pursuance of Article 8, of the said Deed of Trust, authorizing such exchanges of securities.

In witness whereof I have hereto set my hand and seal and the N.Y. Life Ins. & Trust Company has hereto caused to be affixed its Corporate seal the day and year above written.

J. A. BOSTWICK (SEAL)

HENRY PARISH

Prest.

(CORPORATE SEAL)

Witness as to both

HENRY PARISH Jr.

The grantor died in 1892.

In 1912 the so-called "Standard Oil Trust" was dissolved pursuant to court decree. As a result thereof the "Standard Oil Trust" shares held by the trustee were duly surrendered and stock in the several segregated companies theretofore composing the Standard Oil Turst was received in exchange and held subject to the terms of the trust, including the shares of stock referred to below.

Fannie E. Bostwick, the life tenant under the above deed of trust, died March 3, 1921, leaving surviving on her death, Marion Barbara Carstairs, a child by a prior marriage, and Francis Francis, Jr., and the now Evelyn Francis Fane, children by her second marriage with Francis Francis.

Upon the death of the said life tenant, the New York Life Insurance & Trust Co. instituted an action in the Supreme Court in and for the County of New York for the judicial settlement of its account as trustee of the trust aforesaid, asking judgment directing a distribution of the trust funds among those entitled thereto. In 1922 judgment was entered in this action settling such accounts and directing a distribution equally among the said three children of Fannie E. Bostwick, which in due course was done.

After the death of the said Fannie E. Bostwick on March 3, 1921, and within the calendar year 1921, the New York Life Insurance & Trust Co. sold certain of the stocks composing the trust corpus theretofore substituted for the said "Standard Oil Trust" shares. These shares, the price at which they were sold, the 1912 values thereof as of the date on which the several companies belonging to the Standard Oil Trust were segregated pursuant to court decision, the March 1, 1913, values, and the vlaues used by petitioners in determining gain or loss are as follows:

1921	Securities	Selling price	1912 values as of date of segregation	Mar. 1, 1913	Value used
June 10	18 shs. Northern Pipe Line Co	$1,583.28	$2,124.00	$2,052.00	$2,052.00
July 8	1 sh. Swan & Finch Co	24.96	800.00	215.00	215.00
	47 shs. Indiana Pipe Line Co	3,477.04	5,875.00	6,251.00	5,875.00
	770676/983383 sh. Vacuum Oil Co	203.72	125.33	135.52	135.52
	743402/983383 sh. Standard Oil Co. of Ohio	268.33	132.13	211.40	211.40
	786706/983383 sh. South Penn Oil	131.96	63.75	120.63	120.63
	514058/983383 sh. Prairie Oil & Gas	216.90	156.90	168.93	168.93
	463936/983383 sh. Chesebrough Mfg. Co	75.44	327.35	313.22	313.22
July 7	76 shs. New York Transit Co	10,028.96	19,760.00	25,080.00	19,760.00
	85 shs. Galena Signal Oil Co	2,461.60	18,275.00	24,905.00	18,275.00
June 23	53 shs. Southwest Penn. Pipe Line Co	2,647.88	12,720.00	8,639.00	8,639.00
July 8	10 shs. Washington Oil	279.96	250.00	310.00	279.96
	1 sh. Borne Scrymser	339.96	225.00	290.00	290.00
	77 shs. Southern Pipe Line Co	6,156.92	16,555.00	19,480.00	16,555.00
		27,897.91			72,890.66

In filing income-tax returns for 1921 for his two wards the petitioner, Francis Francis, took as a deduction from the gross income of each the amount of $14,997.58, representing one-third of the loss represented by the difference between the selling price of the stocks and the total of the column headed "Value used." The respondent dissallowed the deduction in each instance on the ground that the loss was attributable to the corpus of the trust and not distributable to the beneficiary.

The respondent made jeopardy assessments of the deficiencies in both instances.

OPINION.

STERNHAGEN: The deduction claimed by each petitioner for 1921 is for a loss said to be realized in the sale in that year by the trust company of securities for less than either the value on March 1, 1913, or the value when received in 1912 in the Standard Oil distribution, the latter figure being apparently taken as representing the statutory cost. United States v. Flannery,268 U.S. 98">268 U.S. 98, and Ludington v. McCaughn,268 U.S. 106">268 U.S. 106. The Commissioner denied the deduction because in his view the trust company was making the sale as a trustee taxable under section 219, Revenue Act of 1921, and the loss therefore was available for deduction only by the trustee and not directly by the petitioners, who, in his view, are the beneficiaries of such trust. If respondent's view be correct, the petitioners' whole case falls and it is conceded that judgment for the full amount should enter for respondent

But petitioners establish that before the sale the trust had come to an end by operation of law, that the property was owned by petitioners and held by the trust company under a dry, passive or nominal trust, and its sale was by them, and that the consequent loss or gain was theirs directly.

With the death of the life tenant, these petitioners as remaindermen became t once entitled, despite the nominal power of the trustee, to sell and distribute the proceeds. New York Real Property Law, §§ 92, 93; Personal Property Law, § 11; Cochrane v. Schell,140 N.Y. 516">140 N.Y. 516; Brown v. Richter,25 App.Div. 239; In re O'Reilly's Estate,82 App.Div. 374; Steinert v. Steinert,161 App.Div. 841; In re Finck's Estate,103 Misc. 526">103 Misc. 526. The sale thereafter must be regarded as a sale by them with such resulting gain or loss to each as may be recognized by the statute.

Section 202, Revenue Act of 1921, provides:

SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that -

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(2) In the case of such property, acquired by gift after December 31, 1920, the basis shall be the same as that which it would have 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 value of such property as found by the Commissioner as of the date or approximate date at which, according to the best information the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner. In the case of such property acquired by gift on or before December 31, 1920, the basis for ascertaining gain or loss from a sale or other disposition thereof shall be the fair market price or value of such property at the time of such acquisition;

(3) In the case of such property, acquired by bequest, devise, or inheritance, the basis shall be the fair market price or value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (c) or (e) of section 402.

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Reading section 202(a)(2) in the light of the statement of purpose contained in both the House and Senate reports upon the bill before it became a law and as it has been adjudicated in Taft v. Bowers,278 U.S. 470">278 U.S. 470, we are of the opinion that it does not, either by intendment or expressly, cover the sale of property acquired as this was. The difference between a gift and a trust has been too well known in the law to permit the view that Congress intended by using the word gift to include trusts and thus to involve the statute in the confusion which would necessarily result. The later provision of section 204, Revenue Act of 1924, demonstrates this. While the petitioners in one sense acquired the property by gift in that they paid nothing for it, there is no reason to attribute this meaning to the Act. They acquired it pursuant to a vested legal right and this right had been theirs since long before the adoption of the Sixteenth Amendment in 1913. We think, therefore, that as to petitioners the property was not "acquired by gift after December 31, 1920" and therefore the exceptional basis of paragraph (2) does not apply.

We think also that paragraph (3) has no application. The trust instruments were not in terms testamentary, nor were property interests acquired by petitioners such as were specified in subdivision (c) or (e) of section 402.

The only basis to apply for the determination of gain or loss is the value at the time of acquisition by petitioners of the property sold, that is March 3, 1921. The petitioners' motion for judgment on the pleadings is therefore denied.

Reviewed by the Board.

TRAMMELL dissents.

PHILLIPS, GREEN

PHILLIPS and GREEN dissent on the ground that the loss on the sale of the securities in question was properly returnable by the trustees under section 219 of the Revenue Act of 1921.