Mack v. Comm'r of Internal Revenue
| Decision Date | 29 February 1944 |
| Docket Number | Docket No. 249. |
| Citation | 3 T.C. 390 |
| Parties | J. GORDON MACK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Under the will of his father petitioner was given an option to purchase within a limited time certain shares of stock from the testamentary trustees at approximately one-half of their market value at the time of such purchase. Exercising the option, he purchased five of such shares from the trustees in November 1940, and in December of that year he sold them at a price considerably in excess of the amount which he paid to the trustees. Held, that the basis for the determination of the gain upon the sale is the amount which he paid to the testamentary trustees for them. John A. McCann, Esq., for the petitioner.
J. Harrison Miller, Esq., for the respondent.
This proceeding involves a deficiency of $20.90 in petitioner's income tax for 1940. The question for our determination is the proper basis to be used in determining the gain upon the sale in 1940 of shares of stock which the petitioner acquired under a testamentary option from the trustees under his father's will.
The facts are found as stipulated. They are in substance as follows:
The petitioner is a resident of McKeesport, Pennsylvania. He filed his income tax return for 1940 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh.
On September 27, 1940, petitioner's father, John S. Mack, died testate while a resident of McKeesport. His last will and testament was duly admitted to probate in the Orphan's Court of Allegheny County, Pennsylvania. Paragraph eighth of the will provided in part as follows:
Eighth: All the rest, residue and remainder of my estate, real, personal and mixed, whatsoever, and wheresoever situate, I give, devise and bequeath unto UNION Trust Company OF PITTSBURGH and J. PAUL FIFE, ESQ., in trust, for the following uses, persons and purposes, and with the following powers:
(b) I direct that my Trustees shall set aside Twenty Thousand (20,000) shares of my common capital stock of G. C. MURPHY COMPANY for the benefit of my sons, JOHN GORDON MACK and JAMES S. MACK, and the institutions hereinafter mentioned. At any time during the first ten (10) years after the date of my death my Trustees shall sell and deliver to my said sons said Twenty Thousand (20,000) shares and any stock dividends thereon, or such part thereof as they shall from time to time elect to purchase, at one-half (1/2) the average market price per share as hereinafter defined, each son to be entitled in the aggregate to one-half (1/2) of said Twenty Thousand (20,000) shares and stock dividends, unless the other should fail or refuse to purchase his full one-half (1/2) of the total. For the purpose of this paragraph average market price per share during any calendar month shall be the mean between the high and the low of the market price of said stock during the six (6) calendar months immediately preceding the date of the particular purchase, and the price at which my sons shall be entitled to purchase said stock from time to time shall be one-half (1/2) said average market price. The net proceeds of each such sale and the net cash dividends from said stock (or so much of the stock as shall not have been sold to my sons) after deduction of proper charges and expenses applicable thereto, shall be paid to the following, in the proportions indicated:
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¦The Mack Foundation (created by me during my lifetime) ¦45%¦
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¦Endowment Fund, Westminster College, New Wilmington, Pa ¦20%¦
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¦Bob Jones College, Cleveland, Tennessee ¦20%¦
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¦Southwestern Presbyterian Sanatorium, Albuqueraue, New Mexico¦15%¦
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At the expiration of ten years from the date of my death, such part of said twenty thousand (20,000) share of capital stock and stock dividends thereon as my said sons shall have failed or refused to purchase shall be sold to any purchaser or purchasers at the best price obtainable, as soon as conveniently may be and as soon as may be for the best interests of my estate, and the proceeds thereof shall be paid to the aforementioned institutions in the percentages indicated. My Trustees may, however, at their discretion, if so requested by my sons or either of them, extend beyond said ten year period the time within which said sons or either of them may purchase the shares of stock then remaining unsold, but such extension shall in no event exceed a period of two years and six months.
On November 25, 1940, pursuant to paragraph eighth (b) of the will of his father, petitioner acquired five shares of the common capital stock of the G. C. Murphy Co. from trustees of the trust established by said paragraph. He paid to the testamentary trustees the sum of $170.30 or $34.06 per share for the stock.
The fair market value of said five shares on September 27, 1940, the date of the death of the decedent, was $78 per share.
On December 31, 1940, the petitioner sold the five shares of stock for the net amount of $346.12, or $69.224 per share.
The mean between the high and the low of the market price of the stock during the six calendar months immediately preceding the date of the purchase of the shares by the petitioner was $67.625 per share. For the six calendar months ended August 31, 1940, the mean between the high and the low of the market price of the shares was $69.50 per share.
In his income tax return for 1940 the petitioner reported a short term capital loss on the transaction as follows:
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¦Cost or other basis ¦$360.30¦
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¦Expenses of sale ¦3.26 ¦
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¦Total ¦363.56 ¦
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¦Gross sale price ¦349.38 ¦
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¦Loss to be taken into account¦14.18 ¦
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The respondent in his determination of the deficiency changed the basis from $360.30, or $72.06 per share, as reported, to $170.30, or $34.06 per share, by allowing as a basis only the amount of cash which petitioner paid to the trustees in exercising the option.
It is petitioner's contention that the basis of the shares is not the amount of the cash which he paid to the trustees, but that amount plus the fair market value of the option to purchase the shares from the trustees which he acquired under his father's will. The petitioner submits that, ‘since value at date of decedent's death is the criterion for fixing the value of the option, the formula would work out as follows.
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¦Mean of high and low of the market price of said stock for six ¦ ¦
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¦months,--$67.625÷2= ¦$33.8125¦
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¦Fair market value per share at date of death of decedent ¦$78.00 ¦
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¦Fair market value ($78.00) less amount to be paid ($33.8125) equals¦ ¦
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¦value of option per share, that is ¦$44.1875¦
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On that basis, petitioner'- loss on the subsequent sale of the five shares by him is determined as follows:
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¦Adjusted basis per share:¦ ¦ ¦
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¦Cash ¦$33.8125¦ ¦
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¦Plus value of option ¦44.1875 ¦ ¦
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¦ ¦ ¦$78.00¦
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¦Total for five shares ¦ ¦390.00¦
+-------------------------+--------+------¦
¦Net sales price ¦ ¦346.12¦
+-------------------------+--------+------¦
¦Short term capital loss ¦ ¦43.88 ¦
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Sections 111 and 113, Internal Revenue Code, provide in part as follows:
SEC. 111. DETERMINATION OF AMOUNT OF, AND RECOGNITION OF, GAIN OR LOSS.
(a) COMPUTATION OF GAIN OR LOSS.— The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113(b) for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.
SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) BASIS (UNADJUSTED) OF PROPERTY.— The basis of property shall be the cost of such property; except that—
(5) PROPERTY TRANSMITTED AT DEATH.— If the property was acquired by bequest, devise, or inheritance, * * * the basis shall be the fair market value of such property at the time of such acquisition. * * *
There are authorities which tend to support petitioner's contentions. In Harry F. Robertson, 5 B.T.A. 748, the taxpayer's mother-in-law deeded certain real estate to him for a price considerably less than its fair market value. We held that the taxpayer acquired the property in part by gift, to the extent of the excess of the fair market value over the amount paid, and in part by purchase, and that his basis for computing gain upon a subsequent...
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