Reynolds v. Commissioner of Internal Revenue

• Decision Date: 07 October 1940
• Docket Number: No. 4641.,4641.
• Citation: 114 F.2d 804
• Parties: REYNOLDS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

114 F.2d 804 (1940)

REYNOLDS v. COMMISSIONER OF INTERNAL REVENUE.

No. 4641.

United States Circuit Court of Appeals, Fourth Circuit.

October 7, 1940.

J. Gilmer Korner, Jr., of Washington, D. C., and H. G. Hudson, of Winston-Salem, N. C. (Stratton Coyner, of Winston-Salem, N. C., on the brief), for petitioner.

Joseph M. Jones, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before SOPER and DOBIE, Circuit Judges, and CHESNUT, District Judge.

SOPER, Circuit Judge.

On April 4, 1934, the taxpayer, Richard J. Reynolds, received certain securities from a trustee in accordance with the terms of the will of R. J. Reynolds, his father, who died on July 19, 1918. Later in 1934 the taxpayer sold some of the securities at a profit; and the question is whether, in ascertaining the cost basis under the taxing statute of that year, the securities were acquired when he received them from the trustee, or when his father died and the will became effective. The Commissioner of Internal Revenue asserted that the acquisition took place upon the father's death and determined a deficiency of $33,878.61. From the approval of this determination by the Board of Tax Appeals, the taxpayer appealed.

The will directs that the residue of the estate shall be divided by the executor between the wife of the testator and his children living at his death and the living issue of any deceased child, per stirpes; i. e., one-third to the wife and two-thirds to the children and the issue of any deceased child, to be equally divided among them, share and share alike, but subject, as to the two-thirds of the residue left to the children, to the following trust: The children's shares are devised and bequeathed to the Safe Deposit and Trust Company of Baltimore as trustee, to collect therefrom for their equal benefit all the income until they severally arrive at the age of 21 years, meanwhile making necessary payments out of the income to the widow for the support and education of each of the children. The trustee is further directed to pay to each child between the ages of 21 and 28 certain monies out of his or her share of the income, and to accumulate the balance of the income for his or her benefit "until he or she shall respectively attain the age of 28 years when each of them shall become entitled to and shall respectively receive from said trustee his or her share of the corpus of my estate, together with the accumulated income aforesaid".

The will also provides that if any of the children should die before he arrives at the age of 28 years, then his share of the estate shall be further held in trust for the benefit of his devisees by will until he would have arrived at the age of 28 years if he had lived, when the trust shall cease and the estate shall become payable to his devisees; and if any of the children should die before arriving at the age of 28 years, without having made a will but leaving issue, then his share shall be held in trust for the benefit of his children until he would have reached the age of 28 years had he survived, when the trust shall cease and the estate shall become vested in his children; and if any of the testator's children should die without a will and without issue living at the termination of the trust, then his share shall be held in like trusts for the surviving children.

In effect, two-thirds of the residue of the estate is devised and bequeathed to a trustee to divide it into as many shares as there were surviving children, the trustee to collect the income from each share and pay over a portion thereof to the child or for his benefit, and to accumulate the rest of the income until the child should reach the age of 28 years and then to pay over to the child the accumulation and the share of the corpus; but if he should die before the age of 28 years, then his share should be paid to his devisees, or if no will, to his surviving children, and if no will or children, then to the surviving children of the testator. Thus the corpus of two-thirds of the residue of the estate was devised in trust to an indefinite class of persons, but no member of the class was to take a part of the corpus unless he should reach the age of 28 years.

The trustee received the trust properties from the executor of the estate in 1926; and on April 4, 1934, when the taxpayer became 28 years of age, distributed to him his share, including the securities sold by him in the taxable year. Some of these securities had been received by the trustee from the decedent's estate and others had been acquired by the trustee in intermediate transactions under the terms of the will. The Commissioner, in computing the taxpayer's gain upon the sale of the securities, used as the basis the value of the securities at the time of the testator's death as to those then held by him, and the cost of the securities to the trustee as to those which it acquired thereafter. The position of the taxpayer before the Board of Tax Appeals and before this court is that since he did not become entitled to the property until April 4, 1934, he did not acquire any of it prior to that date within the meaning of the statute.

The Revenue Act of 1934, Ch. 277, 48 Stat. 680, 26 U.S.C.A. Int.Rev.Code, § 113, provides:

"§ 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, or by the decedent's estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. * * *"

The decision of the Board is in harmony with Art. 113(a)(5) of Treasury Regulations 86, promulgated under the Revenue Act of 1934:

"Art. 113(a)(5)-1. — Basis of Property Acquired by Bequest, Devise, or Inheritance. — (a) Property included. — Section 113(a)(5) applies —

"(1) to all property passing from a decedent by his will or under the law governing the descent and distribution of property of decedents; and

"(2) to property passing under an instrument which, under section 113(a)(5) is treated as though it were a will, but applies to such property only at the times and to the extent prescribed in section 113(a)(5).

"(b) Basis. — Under the law governing wills and the descent and distribution of the property of decedents, all titles to property acquired by bequest, devise, or inheritance relate back to the death of the decedent, even though the interest of him who takes the title was, at the date of death of the decedent, legal, equitable, vested, contingent, general, specific, residual, conditional, executory, or otherwise. Pursuant to this rule of law, section 113(a)(5) prescribes a single uniform basis rule applicable to all property passing from a decedent by will or under the law governing the descent and distribution of the property of decedents. Accordingly, the time of acquisition of such property is the death of the decedent, and its basis is the fair market value at the time of the decedent's death, regardless of the time when the taxpayer comes into possession and enjoyment of the property. * * *"

It will be perceived that under this regulation the time of acquisition of property passing from a decedent by will is the date of the decedent's death, whether the interest of the recipient is vested or contingent. The taxpayer concedes that the title to a vested interest relates back to the death of the decedent; but he contends that he was left only a contingent interest by his father's will, and that such an interest is not acquired within the true meaning of the statute until the contingency takes place. We must therefore first inquire whether the interest of the taxpayer under his father's will was vested or contingent, and the answer must be found in the law of North Carolina. Blair v. Commissioner, 300 U.S. 5, 9, 57 S.Ct. 330, 81 L.Ed. 465; Uterhart v. United States, 240 U.S. 598, 36 S.Ct. 417, 60 L.Ed. 819; Lane v. Corwin, 2 Cir., 63 F.2d 767, 769; Pringle v. Commissioner, 9 Cir., 64 F.2d 863, 864; Becker v. Anchor R. & I. Co., 8 Cir., 71 F.2d 355, 357; Warner v. Commissioner, 2 Cir., 72 F.2d 225, 227; Roebling v. Commissioner, 3 Cir., 78 F.2d 444, 446; Forbes v. Commissioner, 1 Cir., 82 F.2d 204, 206; Twining v. Commissioner, 2 Cir., 83 F.2d 954, 955.

The rule in North Carolina in respect to what constitutes a vested as distinguished from a contingent remainder is in general the same as that of the common law. Hooker v. Bryan, 140 N.C. 402, 404, 53 S.E. 130. In many instances, as in the case at bar, the question arises with reference to an estate in remainder which is conditioned upon a time element. In such a situation the rule is that if the time specified is annexed to the payment only, the gift vests immediately; but where the time is annexed to the gift itself, as when it goes to the legatee when he arrives at a certain age, the bequest does not vest unless and until he arrives at that age. In applying the rule it should be borne in mind that the law favors the vesting of estates, and that a vested interest may be created by language clearly indicating an intent that a definite person shall receive the property, although the instrument subsequently provides that the gift shall not take effect unless a certain condition, such as the arrival of the beneficiary at a certain age, is fulfilled. Obviously the application of the rule is attended with difficulty and the distinctions drawn in the adjudicated cases, even in the same jurisdiction, are not always clear.

In a number of North Carolina cases, a conditional element of time in testamentary dispositions has been held to create a contingent interest, as where a legacy is given to a person when he arrives at his majority. Kent v. Watson, 17 N.C. 366; Giles v. Franks, 17 N.C. 521; ...