Estate of Bell v. Commissioner of Internal Revenue, Docket No. 105150
| Decision Date | 27 February 1942 |
| Docket Number | 105151.,Docket No. 105150 |
| Parties | ESTATE OF F. S. BELL, DECEASED, LAIRD BELL, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FRANCES L. BELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
William N. Haddad, Esq., for the petitioners.
John D. Kiley, Esq., for the respondent.
The respondent determined deficiencies in the income taxes of the petitioners as follows:
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Petitioner | Year | Amount
-------------------------------------------------|---------|-----------
| | 1936 | $38,416.10
Estate of F. S. Bell ___________________________ | Certain concessions and adjustments have been made by the petitioners and the respondent so that the only issues now presented are whether the amounts received by the petitioners on the transfer of their life interests in the income from securities held under trust constituted ordinary income, taxable in full as held by respondent, or capital gain, as contended by petitioners. The consideration of this question involves the further question of the basis, if any, of computing gain.
FINDINGS OF FACT.
Certain facts were stipulated and as so stipulated are adopted as findings of fact. The material portions of such facts, supplemented by facts admitted in the pleadings, are substantially as follows:
The petitioner, Laird Bell, is the duly appointed, qualified and acting executor of the estate of Frederic S. Bell, deceased, who died March 15, 1938, a resident of Minnesota. Laird Bell resides in Winnetka, Illinois. The petitioner, Frances L. Bell, is an individual residing in Winona, Minnesota. Both petitioners filed their returns with the collector of internal revenue for the district of Minnesota.
The Thorncroft Co. was organized under the laws of Delaware on December 10, 1924, with an authorized capital stock of $350,000, divided into 1,750 shares of preferred stock and 1,750 shares of common stock, each having a par value of $100 per share. All of this stock was issued on December 26, 1924, to Frederic S. Bell, Frances L. Bell, and Laird Bell in exchange for certain securities which were transferred by the stockholders to the corporation. Frederic S. Bell and Frances L. Bell were husband and wife. Laird Bell is the son of Frederic S. Bell and Frances L. Bell. In exchange for such transfers the Thorncroft Co. issued 550 shares of preferred and 550 shares of its common stock to Frederic S. Bell; 600 shares of preferred and 600 shares of its common stock to Frances L. Bell; and 600 shares of preferred and 600 shares of its common stock to Laird Bell. Immediately after the exchange the same persons were the sole owners of the entire outstanding capital stock of Thorncroft Co. and the amount of stock received by each of them was substantially in proportion to his interest in the securities transferred to the corporation prior to the exchange.
The adjusted basis for determining gain in the hands of Frederic S. Bell, of his 550 shares of Thorncroft Co. common stock immediately prior to April 28, 1932 (computed in accordance with section 113 (a) and (b) of the Revenue Act of 1936), was $838.7781 per share, or a total of $461,327.96. The adjusted basis for determining gain in the hands of Frances L. Bell of her 600 shares of Thorncroft Co. common stock immediately prior to April 28, 1932 (computed in accordance with section 113 (a) and (b) of the Revenue Act of 1936), was $838.7554 per share, or a total of $503,253.24.
Between April 28, 1932, and February 1, 1936, the Thorncroft Co. made tax-free distributions to its common stockholders (that is, distributions not out of earnings or profits) amounting to $40 per share.
On April 28, 1932, Frederic S. Bell and Frances L. Bell executed parallel trust instruments. In the trust instrument executed by Frederic S. Bell he was grantor and Laird Bell, George R. Little, and Willard L. Hillyer were the trustees. The corpus of the trust consisted of 550 shares of the common stock of the Thorncroft Co. The trustees were required to pay to Frances L. Bell, during her lifetime, the entire net income of the trust estate and upon her death to deliver the trust estate to Laird Bell. In the trust instrument executed by Frances L. Bell she was the grantor and Laird Bell, George R. Little, and Frederic S. Bell were trustees. The corpus likewise was 550 shares of common stock of the Thorncroft Co. The provisions establishing the life estate and the remainder interest were identical with those of the Frederic S. Bell trust, but with Frederic S. Bell as the beneficiary of the life interest and Laird Bell the remainderman.
On February 1, 1936, Frederic S. Bell executed an agreement assigning his right, title, and interest in and to the trust property held by George R. Little, Frederic S. Bell, and Laird Bell, as trustees (the life interest of the Frances L. Bell trust), in consideration of $104,349.26 in cash and securities. In the assignment Frederic S. Bell instructed the trustees to recognize Laird Bell as the owner of his father's interest in the trust property. On the same day Frances L. Bell executed a similar assignment of like tenor, transferring her life interest in the Frederic S. Bell trust property in consideration of $93,060.87 in cash and securities.
Frederic S. Bell was born on March 19, 1859, and Frances L. Bell was born on March 20, 1857.
The present worth of a life estate in a fund of $1 for persons of the respective ages is as follows:
Age Cents
73 __________________________________________________ 21.83712
75 __________________________________________________ 19.65852
77 __________________________________________________ 17.57532
79 __________________________________________________ 15.59432
Frederic S. Bell included in his taxable income for the year 1936 $850 of dividends received from the Chicago Corporation, of which $364 were nontaxable, and the petitioner's income should be reduced accordingly.
The record discloses the following additional facts:
Frederic S. Bell and Frances L. Bell were in good health on April 28, 1932. Both the Frederic S. Bell and Frances L. Bell trusts continued in their original form, with the same corpora, until February 1, 1936. On that date the corpus of the Frederic S. Bell trust was valued at $561,573.84 and the corpus of the Frances L. Bell trust at $561,546.69. These sums included the dividend of $40 per share paid by the Thorncroft Co. in 1934 and held by the trustees in the capital account of the trust. They also included the underlying securities formerly owned by the Thorncroft Corporation, which had been liquidated immediately prior to the transactions.
Laird Bell paid to his father $104,475.76 sic and to his mother $93,060.87 for their life estates in the respective trusts. Upon the receipt of the assignments thereof from his parents Laird Bell requested the trustees to convey the corpora of the trusts to him outright. They did so. Thereafter Laird Bell included in his own income tax returns all income from the former trust assets.
Before the trusts of April 28, 1932, were established, Frederic S. Bell told his son that he and Frances L. Bell contemplated making additional gifts to the son in view of an approaching new gift tax law and asked the son's advice as to the proper method of accomplishing their purpose. The life estate arrangement was suggested by Laird Bell, as was the creation of parallel trusts, which were adopted in part for tax-saving purposes. The number of shares of the Thorncroft stock which were to constitute the corpus was left blank in each trust agreement and the blanks were filled in by Frederic S. Bell.
Laird Bell had been practicing law in Chicago for 25 years prior to April 28, 1932. His father and grandfather had been in the lumber business since 1850. About 1930 Laird Bell had been drawn into the industry through a merger of interests whose stock constituted some of the underlying securities of the Thorncroft Co. His parents desired to recognize their son's growing participation in the lumber industry and to give him a voice of authority in its councils. Both parents had independent means in addition to the Thorncroft stock.
In his income tax return for the year 1936 Frederic S. Bell reported the sale of the above described transaction as a sale of his interest in the trust created by Frances L. Bell as follows:
Gain on sale on Life Estate in Trust created April 8, 1932 by gift
Total value of Trust Estate April 28, 1932 ____________________ $477,873.61
Life Tenant's interest at 21.83712% ___________________________ 101,951.74
Sale of Life's interest February 1, 1936 for __________________ 104,475.76
___________
Profit on sale of Life Interest _______________________________ $2,524.02
Of the $2,524.02 profit, 30 percent, or $757.21, was included in taxable income pursuant to section 117 of the Revenue Act of 1936. The $477,873.61 figure was predicated on the cost of the property to his wife, the grantor of the trust.
Frances L. Bell similarly reported in her 1936 return the above described transaction as a sale of her interest in the trust created by Frederic S. Bell, as follows:
Gain on sale of Life Estate in Trust created April 28, 1932 by gift
Total value of Trust Estate April 28, 1932 ________________________ $467,463.65
Life Tenant's interest at 19.65852% _______________________________ 91,896.44
Sale of Life Interest February 1, 1936 for ________________________ 93,060.87
____________
Profit on sale of Life Interest ___________________________________ $1,164.43
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