Brewster v. Gage

• Citation: 30 F.2d 604
• Decision Date: 04 February 1929
• Docket Number: No. 176.,176.
• Parties: BREWSTER v. GAGE, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Second Circuit

30 F.2d 604 (1929)

BREWSTER v. GAGE, Collector of Internal Revenue.

No. 176.

Circuit Court of Appeals, Second Circuit.

February 4, 1929.

Richard H. Templeton, U. S. Atty., of Buffalo, N. Y., C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and W. H. Trigg, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C. (Richard A. Grimm, U. S. Atty., of Buffalo, N. Y., of counsel), for plaintiff in error.

Castle & Fitch, of Rochester, N. Y. (J. Sawyer Fitch, of Rochester, N. Y., of counsel), for defendant in error.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

MANTON, Circuit Judge.

This action was brought to recover income taxes alleged to have been erroneously and illegally collected as additional taxes for the years 1920, 1921 and 1922. Defendant in error filed his return for these years, and reported profits to him realized on the sale of securities which he received as a residuary legatee under his father's will. His income or profit differs in amount according to the date of the death of his father, May 20, 1918, or the date of distribution, April 19, 1920. The court below held the profit was determinable by subtracting from the sale price the value of the stock so sold at the date of distribution.

Section 213 of the Revenue Act of 1918, 40 Stat. 1065, in referring to the term "gross income," provides that it does not include "the value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income)." And section 202(a) of the Revenue Act of 1918 (40 Stat. 1060) provides that, for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, the basis shall be, in the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date, and, in the case of property acquired on or after that date, the cost thereof. Section 202(a) of the Revenue Act of 1921 (42 Stat. 229) provides that, in ascertaining profit or loss on the sale or other disposition of property acquired after February 28, 1913, "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 question presented to us is whether the defendant in error "acquired," as such residuary legatee, the securities which he sold at the date of his father's death or the date of the order of distribution. Upon death, the executor or administrator of an estate obtains legal title, and maintains it during a suitable period of administration; but he holds the property so obtained as a trustee for the proper administration for all the parties interested therein. The legal title of all personal property of a decedent, including chattels and choses in action, vests in the personal representative as of the date of death of the decedent. Schouler on Wills, § 2061. But a legatee under a will, subject to the use of the property for the purpose of administration, acquires that to which he is entitled at the instant of the testator's death. Matter of Lansing, 182 N. Y. 238, 74 N. E. 882; Vail v. Vail, 49 Conn. 52; Cook v. McDowell, 52 N. J. Eq. 351, 30 A. 24; Hardy v. Boaz, 29 Ala. 168. When the testator makes his will, he makes his gift. The rights of the legatee are thus fixed. Of course, his property is subject to his debts, and the residuary legatee's rights to the property he may obtain must stand proportionately the burden of that obligation. Blood v. Kane, 130 N. Y. 514, 29 N. E. 994, 15 L. R. A. 490.

But the legatee obtains a right which he may convey or devise by will. His is an equitable title. The executor (or administrator, if it be a case of intestacy) must account as the will (or law) directs and perform his trust accordingly. When the decree of distribution is made, it relates back to this original right, and distribution gives to the distribute no new title to the property, but only asserts the property to which title shall attach. Wager v. Wager, 89 N. Y. 161; Foster v. Fifield, 20 Pick. (Mass.) 67; Thompson v. Thomas, 30 Miss. 152. Equitable assets are governed by the same rules as legal assets. Perry on Trusts (6th Ed.) § 357. The owner may sell and dispose of them or make conveyance thereof by will. West v. Burke, 219 N. Y. 7, 113 N. E. 561; Sanders v. Soutter, 136 N. Y. 97, 32 N. E. 638. The legal title which is outstanding in the executor during the period of administration has no value in and of itself, and, had it been sought to have been made the subject of a sale, carrying no right to equitable title, it would have commanded no price nor interfered with the carrying out of the trust of the administrator. To ignore the gain upon so much of the sold title as was equitable would be a subordination of that which is real and substantial to that which is neither. It could not have been the intent of Congress to take the legal title apart or separate from that which would pass as earnings to one who is entitled to the equitable title or beneficial interest in the property.

It surely was not the intent of Congress that the acquisition of a mere legal title should completely wipe out or render untaxable the gain which had been acquired by the equitable ownership, and which was, in fact, realized upon the sale made when the date of distribution arrived. Moreover, it would be an unfortunate construction, which is not demanded by the statute, that would place it within the power of personal representatives and the real owners, namely, the legatees or distributees, to defer distribution in order to escape tax. This should be avoided. Frequently the personal representatives and the beneficiaries are the same persons or members of the same family, and the temptation would be opened, where there is a period of rapidly increasing values, to defer distribution until, in the judgment of all concerned, the peak in the market had been reached, so that thereafter sales of the distributed property would register little or no profit and perhaps losses. It would not do to permit heirs and devisees to bring about a postponement of the acquisition of property for such purposes. Heirs and devisees to realty have legal title vested in them at the date of decedent's death. It is just and reasonable to place both classes of property upon the same basis, without a distinction resting solely upon whether the property be realty or personalty.

The Treasury Department, in considering the Revenue Acts since 1913 and...