Kenan v. Commissioner of Internal Revenue, 276
| Decision Date | 07 August 1940 |
| Docket Number | No. 276,398.,276 |
| Citation | 114 F.2d 217 |
| Parties | KENAN, Jr., v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Second Circuit |
Arthur A. Ballantine and George E. Cleary, both of New York City, for petitioners and cross-respondents William R. Kenan, Jr., and Lawrence C. Haines.
Samuel O. Clark, Asst. Atty. Gen., and Sewall Key and L. W. Post, Sp. Assts. to the Atty. Gen., for respondent and cross-petitioner Commissioner of Internal Revenue.
Before SWAN, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
The testatrix, Mrs. Bingham, died on July 27, 1917, leaving a will under which she placed her residuary estate in trust and provided in item "Seventh" that her trustees should pay a certain amount annually to her niece, Louise Clisby Wise, until the latter reached the age of forty, "at which time or as soon thereafter as compatible with the interests of my estate they shall pay to her the sum of Five Million ($5,000,000.00) Dollars." The will provided in item "Eleventh" that the trustees, in the case of certain payments including that of the $5,000,000 under item "Seventh", should have the right "to substitute for the payment in money, payment in marketable securities of a value equal to the sum to be paid, the selection of the securities to be substituted in any instance, and the valuation of such securities to be done by the Trustees and their selection and valuation to be final."
Louise Clisby Wise became forty years of age on July 28, 1935. The trustees decided to pay her the $5,000,000 partly in cash and partly in securities. The greater part of the securities had been owned by the testator and transferred as part of her estate to the trustees; others had been purchased by the trustees. All had appreciated in value during the period for which they were held by the trustees, and the Commissioner determined that the distribution of the securities to the niece resulted in capital gains which were taxable to the trustees under the rates specified in Section 117 of the Revenue Act of 1934, which limits the percentage of gain to be treated as taxable income on the "sale or exchange" of capital assets. On this basis, the Commissioner determined a deficiency of $367,687.12 in the income tax for the year 1935.
The Board overruled the objections of the trustees to the imposition of any tax and denied a motion of the Commissioner to amend his answer in order to claim the full amount of the appreciation in value as ordinary income rather than a percentage of it as a capital gain, and confirmed the original deficiency determination. The taxpayers contend that the decision of the Board was erroneous because they realized neither gain from the sale or exchange of capital assets nor income of any character by delivering the securities to the legatee pursuant to the permissive terms of the will. The Commissioner contends that gain was realized by the delivery of the securities but that such gain was ordinary income not derived from a sale or exchange and therefore taxable in its entirety. The trustees have filed a petition to review the order of the Board determining the deficiency of $365,687.12 and the Commissioner has filed a cross-petition claiming a deficiency of $1,238,841.99, based on his contention that the gain was not governed by Section 117, and therefore not limited by the percentages therein specified.
The amount of gain is to be determined under Section 111 of the Revenue Act of 1934, which provides:
Section 113, 26 U.S.C.A. Int.Rev.Code, § 113, is claimed by the taxpayers to be relevant and provides:
"(a) The basis of property shall be the cost of such property; except that —
* * * * * *
The Taxpayer's Appeal.
In support of their petition the taxpayers contend that the delivery of the securities of the trust estate to the legatee was a donative disposition of property pursuant to the terms of the will, and that no gain was thereby realized. They argue that when they determined that the legacy should be one of securities, it became for all purposes a bequest of property, just as if the cash alternative had not been provided, and not taxable for the reason that no gain is realized on the transfer by a testamentary trustee of specific securities or other property bequeathed by will to a legatee.
We do not think that the situation here is the same as that of a legacy of specific property. The legatee was never in the position occupied by the recipient of specific securities under a will. She had a claim against the estate for $5,000,000, payable either in cash or securities of that value, but had no title or right to the securities, legal or equitable, until they were delivered to her by the trustees after the exercise of their option. She took none of the chances of a legatee of specific securities or of a share of a residue that the securities might appreciate or decline in value between the time of the death of the testator and the transfer to her by the trustees, but instead had at all times a claim for an unvarying amount in money or its equivalent.
If there had merely been a bequest to the legatee of $5,000,000 and she had agreed with the trustees to take securities of that value, the transaction would have been a "sale or other disposition" of the securities under Suisman v. Eaton, 15 F. Supp. 113, affirmed, 2 Cir., 83 F.2d 1019, certiorari denied 299 U.S. 573, 57 S.Ct. 37, 81 L.Ed. 422. There, a will creating a trust provided that each of the testator's children was to receive $50,000 on attaining the age of twenty-five. The trustee transferred stock of the value of $50,000 to one of the children, Minerva, in satisfaction of her legacy. Judge Hincks said in the district court (15 F.Supp. at page 115), that the "property which the trust estate received from the `sale or other disposition' of said stocks was the discharge of the corpus from Minerva's equitable right to receive $50,000 therefrom; the amount realized, i. e., the `fair market value of the property (other than money) received,' * * * was $50,000; and the excess of the amount realized over the basis...
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