Jones v. Comm'r of Internal Revenue
| Decision Date | 23 October 1973 |
| Docket Number | Docket No. 3026-72. |
| Citation | 61 T.C. 78 |
| Parties | LAURENCE D. JONES AND OLGA JONES, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Thomas D. Roberts, for the petitioners.
Joyce Elaine Britt and Peter D. Bakutes, for the respondent.
In 1915 D made an inter vivos gift of certain securities to a trust which he established at the same time. Upon the death of the income beneficiary in 1953, T; who had a contingent interest in the remainder, received distribution of her share of those securities. Held, in computing gain upon disposition of the securities in 1969. T's basis must be determined with reference to their fair market value in 1915 rather than in 1953. Sec. 1015(c), I.R.C. 1954. Richard Archbold, 40 B.T.A. 1238,affirmed115 F.2d 1005 (C.A. 2), certiorari denied313 U.S. 584, followed.
The Commissioner determined a $40,435 deficiency in petitioners' 1969 income tax. The sole remaining issue involves ascertainment of the basis of certain shares of stock received by petitioner Olga Jones in 1953 out of the remainder of a trust that had been created in 1915. The outcome depends upon whether the ‘time of * * * acquisition’ of the shares, under section 1015(c), I.R.C. 1954 (), was in 1915 or 1953. The facts have been stipulated.
Petitioners filed a joint Federal income tax return for the calendar year 1969 with the Internal Revenue Service Center at Ogden, Utah, and resided in Lafayette; Calif., at the time of the filing of their petitioner herein.
On or after May 20, 1953, Olga Jones (petitioner) received certain shares of stock from a trust that had been created in 1915 by one Frank Pauson. By an instrument executed in California on December 8, 1915, Pauson, a California resident, had declared his intention that 20 shares of stock in Frank Pauson & Sons (a California corporation) be held for the use and benefit of his daughter Olga Wilson. The trust instrument, which did not purport to be revocable, directed the trustees to distribute dividends declared on the 20 shares to the beneficiary or beneficiaries in a manner prescribed therein and ultimately to dispose of the corpus itself as follows:
Upon the youngest surviving child of OLGA WILSON reaching the age of twenty-five (25) years, and upon the death of OLGA WILSON, if she shall live until her youngest surviving child shall reach the age of twenty-five (25) years, the said shares shall be distributed amongst the then surviving children of said OLGA WILSON, share and share alike. Provided, however, that if any of the children of said OLGA WILSON shall die leaving issue, the share of such child shall be divided amongst his or her children share and share alike.
Pauson died on November 26, 1916. At the time he had executed the trust instrument, Olga Wilson had two living sons, Frank and Charles Wilson. In 1936 Frank Wilson married Frances Smith, and petitioner, born August 11, 1938, was the sole issue of that marriage. On September 28, 1944, following the death of petitioner's father on May 9, 1944, petitioner was adopted by Olga Wilson pursuant to a decree of a California court.
Olga Wilson died on April 26, 1953. She was survived by her son Charles, who was then over the age of 25 years, and by petitioner, her grandchild and adopted daughter, who was then 14 years old. A California court appointed a guardian for petitioner on May 18, 1953.
On May 20, 1953, petitioner's guardian and Charles Wilson and the sole surviving trustee of the Pauson trust entered into a written agreement pursuant to which the trust was terminated and the 20 shares of stock representing its corpus were transferred, 10 shares apiece, to Charles and petitioner (through her guardian). After petitioner's marriage to one J. W. Davis on August 26, 1953, her guardianship was terminated and the 10 shares of Pauson stock held by her former guardian were delivered to her outright and registered in her name. Dividends declared on those shares after the execution of the May 20, 1953, agreement were paid to petitioner's guardian until the time of her marriage and the termination of her guardianship and directly to petitioner thereafter.
Charles Wilson repudiated the May 20, 1953, agreement on January 29, 1959, and commenced an action in a California court to recover the 10 shares of Pauson stock then held by petitioner. The court announced its decision against the plaintiff on October 4, 1960.
In 1969, Frank Pauson & Sons was liquidated, and in return for her 10 shares of stock petitioner received assets having a fair market value of $335,2921 as of the date of liquidation. On their 1969 income tax return, petitioners reported a long-term capital gain from that transaction in the amount of $166,954. The basis of the Pauson stock used in computing the gain ($188,338) was the value of the shares as of May 20, 1953 ($180,808), plus the amount petitioner had incurred and paid in the defense of her rights under the agreement of that date ($7,530). The 1969 tax return stated the date of acquisition of the stock to be June 1953. The Commissioner determined that the basis of the stock was only $43,803 and that petitioner had therefore realized a long-term capital gain of $311,489 upon its disposition. The basis figure used by the Commissioner was the value of the shares as of December 8, 1915 ($36,273), plus $7,530. Only the date as of which basis must be determined is in controversy; the parties have stipulated to the correctness of the basis figure used in respect of each date.
There is no dispute between the parties that petitioner's basis in her 10 shares of Pauson stock must consist of two elements: (1) an amount to be determined under section 1015 of the 1954 Code, which relates to the ‘Basis of Property Acquired by Gifts and Transfers in Trust’; plus (2) the amount she incurred and paid in defense of her rights under the agreement of May 20, 1953 ($7,530). There is no controversy as to the second component, and the parties are further in agreement that the relevant provisions of section 1015 in respect of the first component are those of subsection (c), which provides as follows:
SEC. 1015. BASIS OF PROPERTY ACQUIRED BY GIFTS AND TRANSFERS IN TRUST.
(c) GIFT OR TRANSFER IN TRUST BEFORE JANUARY 1, 1921.— If the property was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition.
The issue between the parties under section 1015(c) involves the ‘time of * * * acquisition’ of the Pauson stock. Petitioner argues that under California law and the terms of the 1915 trust instrument, her remainder interest in 10 shares of Pauson stock was contingent upon her surviving Olga Wilson and attaining the age of 25, that she first acquired a vested interest in the stock upon the execution of the agreement of May 20, 1953, that the ‘time of * * * acquisition’ in section 1015(c) refers to the moment when the ultimate beneficiary of a gift or transfer in trust first acquires a vested interest in the transferred property,2 and that the first component of her basis therefore must be the value of the shares as of May 20, 1953 ($180,808). The Commissioner maintains that the ‘time of * * * acquisition’ was December 8, 1915, when the various interests in the trust were created and when the shares were transferred to the trust, that the time of vesting of petitioner's rights in the stock is irrelevant under the statute, and that the first component of petitioner's basis is the value of the stock on December 8, 1915 ($36,273). We hold that the Commissioner is correct.
Section 1015(c) may be read to support the view of either party, for the statute fails to make clear precisely what is meant by ‘acquisition’ of property transferred in trust. There is obvious force to petitioner's suggestion that ‘time of * * * acquisition’ refers to the moment when a remainderman's interest in the corpus first vests, but the phrase is equally susceptible of a construction making relevant the time of acquisition by a trustee, with the simultaneous creation of some interest in the ultimate taker who may or may not be ascertainable at that time. The legislative history of the statute convinces us, however, that the latter interpretation was the one intended.
Rules explicitly governing the basis of property acquired by inter vivos transfers in trust first appeared in section 204 of the Revenue Act of 1924, ch. 234, 43 Stat. 253, 258. The 1924 trust provisions were coordinated with rules covering the basis of property acquired by gift (see H. Rept. No. 179, 68th Cong., 1st Sess., p. 16 (1924); S. Rept. No. 398, 68th Cong., 1st Sess., p. 17 (1924)), which had been introduced by section 202(a)(2) of the Revenue Act of 1921, ch. 136, 42 Stat. 227, 229. The 1921 legislation had created the distinction, still called for by section 1015 of the 1954 Code, between property acquired by gift after December 31, 1920 (which was to have the same basis as it had in the hands of the donor), and on or before December 31, 1920 (which was to have a basis equal to the value of the property at the ‘time of * * * acquisition’). The reason for the adoption of the post-1920 carryover rule was to correct an administrative interpretation of prior law3 holding that the basis of property acquired by gift was its value at the time of its acquisition,4 which Congress saw in 1921 as ‘the source of serious evasion and abuse’ when appreciated property was donated. H. Rept. No. 350, 67th Cong., 1st Sess., p. 9 (1921); S. Rept. No. 275, 67th Cong., 1st Sess., pp. 10-11 (1921).
The Revenue Act of 1924 merely applied the gift basis rules of the 1921 statute to inter vivos transfers in trust as well as gifts (although provision was made for adjustments in basis to reflect gain or loss recognized by a grantor in respect of property acquired...
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