Bell v. Harrison

• Decision Date: 27 April 1954
• Docket Number: No. 10814,10815.,10814
• Citation: 212 F.2d 253
• Parties: BELL v. HARRISON. BELL v. UNITED STATES.
• Court: U.S. Court of Appeals — Seventh Circuit

212 F.2d 253 (1954)

BELL v. HARRISON.

BELL v. UNITED STATES.

Nos. 10814, 10815.

United States Court of Appeals, Seventh Circuit.

April 27, 1954.

H. Brian Holland, Howard P. Locke, Asst. Attys. Gen., Robert Tieken, U. S. Atty., Chicago, Ill., Ellis N. Slack, Lee A. Jackson, Robert B. Ross, Sp. Assts. to Atty. Gen., Otto Kerner, Jr., U. S. Atty., John A. Looby, Jr., Asst. U. S. Atty., Chicago, Ill., for appellant.

Albert L. Hopkins, Frank B. Sanders, Chicago, Ill. (Hopkins, Sutter, Halls, DeWolfe & Owen, Chicago, Ill., of counsel), for appellee.

Before MAJOR, Chief Judge, and LINDLEY and SWAIM, Circuit Judges.

MAJOR, Chief Judge.

Each of these appeals presents for decision the same question and the cases have been consolidated, as they were in the district court. The sole issue is whether plaintiff, having purchased two life estates for which he admittedly paid full and fair value, measured by the life expectancies of the respective sellers, is entitled to recover his cost through amortization over the periods of the life expectancies, i. e., by ratable annual deductions from the amounts received by him each year subsequent to such purchases.

The district court as a basis for the judgments from which the appeals come rendered an opinion which incorporates the court's findings of fact as stipulated by the parties, as well as its conclusions of law and reasons therefor. Bell v. Harrison, D.C., 108 F.Supp. 300. Reference to that opinion obviates the necessity for a detailed statement of facts.

Briefly, the actions were brought to recover federal income taxes allegedly overpaid by plaintiff for the years 1936 to 1941, both inclusive. On April 28, 1932, plaintiff's father and mother created reciprocal trusts, each making the other a life beneficiary with remainder over to the plaintiff (taxpayer). On February 1, 1936, the latter purchased the respective life estates of his parents. At that time the value of the corpus of the trust created by his father was $561,573.84, the value of his mother's life estate therein was $93,060.87, the value of the corpus of the trust created by his mother was $561,546.69, and the value of his father's life estate therein was $104,349.26. Plaintiff paid to his father and mother respectively the value of their life estates. The corpus of both trusts consisted of corporate stock which was delivered to the plaintiff upon purchase, some of which was subsequently transferred to his children as a gift.

We think this brief statement is sufficient as a premise for the controverted issue. Plaintiff contends that he made a capital expenditure and acquired a capital asset or right which was wasting in value with time and, regardless of the fact that he was the remainderman, that he was entitled to recover the amount of his capital expenditure — his cost basis — by amortization over the life expectancies of his parents, that is, by ratable annual deductions from the amounts received by him each year as income as the result of his purchase. On the other hand, defendant (the government) contends that the purchase by plaintiff, the remainderman, of the life interest of his parents resulted in a merger of the two estates, particularly in view of the fact that plaintiff evidenced no intent to preserve the two interests separate and distinct. Upon this basis it is argued that for tax purposes there was no life interest to amortize after the merger and that the capital invested in the purchase of the life interest can be recouped only at the time of sale or other disposition by way of being added to the cost basis of such property.

The government's contention is bottomed entirely upon this premise of merger which it is insisted destroyed the right which plaintiff as the purchaser of the life estate of his parents would otherwise have had, to amortize the amounts paid over the period of the life expectancies of his parents. At any rate, we so understand this to be the position of the government because it is conceded that plaintiff would have been entitled to such treatment taxwise, absent the fact that he was the remainderman named in the trusts. In other words, if these life interests had been purchased by a third party, there would be no question but that such party would be entitled to amortization.

A study of the cases reveals that the problem before us is difficult of solution, although the weight of authority, such as it is, sustains plaintiff's contention. In Elmer J. Keitel v. Commissioner, 15 B.T.A. 903, the facts, without reciting them, are sufficiently similar to those of the instant case to raise the same legal problem. The court, in deciding the issue in favor of the taxpayer, stated, 15 B.T.A. at page 907: "Where, as in this proceeding, the personal property is reproductive, the holder of the life interest does not possess the right to consume it and is entitled only to its use and income. So that what petitioner purchased was the right to use his mother's interest during her life or widowhood. The fact that petitioner owned a remainder interest in part of what he so purchased does not affect the question here presented. * * What he purchased, and that is all that concerns us, was a terminable estate and the termination of the estate will end all that he purchased." The court then discussed and compared the situation to that of the purchaser of a lease and stated, 15 B.T.A. at page 907: "Nor can we perceive any difference in this respect between the purchase of a lease of a life interest and the purchase of the life interest itself. In both cases the interest is terminable and exhaustible for income-tax purposes."

This decision and reasoning of the Board of Tax Appeals (now the Tax Court) has been approvingly cited by that court in a number of subsequent cases. Bell v. Commissioner, 46 B.T.A. 484, 490; Wolff v. Commissioner, 7 T.C. 717, 721; Penn v. Commissioner, 16 T. C. 1497, 1500. In the Wolff case, the court stated: "Had petitioner paid to her stepmother the purchase price of the latter's life estate in a lump sum, the amount represented thereby would have constituted an investment in a capital asset, exhaustible and therefore recoverable through deduction over the life of the asset acquired, that is, the life expectancy of the stepmother."

In the Bell case the Board of Tax Appeals considered the treatment to be accorded the mother of the instant plaintiff on account of the sale of his life interest in his wife's trust, being one of the trusts involved in the present proceeding. The Board held that the gain realized on such sale was to be taxed at capital gains rates and in doing so stated, 46 B.T.A. at page 490: "On the other hand the vendee of a life estate has a capital investment exhaustible by charges against income over its duration. Citing cases, including the Keitel case. That this purchaser referring to petitioner in the instant case happened also to be the remainderman can not affect the principle and may even lack significance." It is asserted by the government that this statement by the Board was dictum. Assuming such to be the case, we think it is entitled to some...