THE NEW YORK TRUST COMPANY v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 28250.

• Decision Date: 10 April 1933
• Docket Number: Docket No. 28250.
• Parties: THE NEW YORK TRUST COMPANY, AS TRUSTEE UNDER TRUST INDENTURE, DATED DECEMBER 24, 1921, BY AND BETWEEN CONRAD HENRY MATTHIESSEN AND SAID THE NEW YORK TRUST COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

27 B.T.A. 1127 (1933)

THE NEW YORK TRUST COMPANY, AS TRUSTEE UNDER TRUST INDENTURE, DATED DECEMBER 24, 1921, BY AND BETWEEN CONRAD HENRY MATTHIESSEN AND SAID THE NEW YORK TRUST COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 28250.

Board of Tax Appeals.

Promulgated April 10, 1933.

Russell D. Morrill, Esq., and Henry Mannix, Esq., for the petitioner.

Brooks Fullerton, Esq., for the respondent.

This is a proceeding for the redetermination of a deficiency in income tax for the year 1922 in the amount of $238,275.95.

This Board held that this proceeding should be dismissed for lack of jurisdiction (New York Trust Co., Trustee, 20 B. T. A. 162), and it was dismissed. The United States Circuit Court of Appeals for the Second Circuit reversed the order of the Board (New York Trust Co. v. Commissioner, 54 Fed. (2d) 463). Certiorari was denied by the United States Supreme Court, 285 U. S. 556. The cause was remanded to the Board for such further proceeding as should be had.

The following errors are alleged: (1) The respondent has erroneously determined petitioner's gross income for the year 1922 in that he has incorrectly computed the profit realized in that year upon the sale of 6,000 shares of the common stock of the Corn Products Refining Company, such profit having been computed by using as a basis the cost of said stock to petitioner's grantor pursuant to the provisions of section 202 (a) (2) of the Revenue Act of 1921, instead of its fair market value on the date it was acquired by petitioner; (2) in so far as section 202 (a) (2) of the Revenue Act of 1921 purports to authorize respondent to tax to petitioner an alleged profit upon the sale of such stock, computed by using as a basis the cost of said stock to petitioner's grantor, said section is unconstitutional and void; (3) in the event the Board finds that section 202 (a) (2) of the Revenue Act of 1921 is constitutional and that the basis used by respondent in computing the profit was correct, then respondent erred in computing the tax upon said profit at the full normal and surtax rates instead of at the rate of 12½ per cent in accordance with section 206 of the Revenue Act of 1921.

FINDINGS OF FACT.

The petitioner is a corporation, organized under the banking law of the State of New York, and its principal office is at 100 Broadway, New York City.

On April 27, 1906, Conrad Henry Matthiessen acquired 6,000 shares of the common stock of the Corn Products Refining Company at a cost of $141,375, which cost exceeded the value of such shares on March 1, 1913.

By an irrevocable indenture dated December 24, 1921, Conrad Henry Matthiessen transferred the 6,000 shares of common stock of the Corn Products Refining Company to the petitioner in trust to collect the income and dividends therefrom and accumulate the same until such time as his son, Erard A. Matthiessen, should attain the age of 21 years, at which time petitioner was directed to pay over all such accumulated income to such son. Thereafter and until Erard A. Matthiessen should attain the age of 25 years, petitioner was directed to pay the income of the fund to him currently, and upon his reaching such age, to pay over the principal to him. In the event that Erard A. Matthiessen should die before reaching the age of 25 years, it was provided that petitioner should pay over the principal in equal shares to two other sons of the grantor.

On December 24, 1921, the 6,000 shares of common stock of the Corn Products Refining Company had a fair market value of $96.25 per share, or a total fair market value of $577,500.

During the year 1922, the petitioner sold the 6,000 shares of the common stock of the Corn Products Refining Company above referred to, receiving therefor the net amount of $603,385. Petitioner filed a Federal income tax return for the calendar year 1922, wherein it reported a profit of $87,385 on the sale.

In computing the profit realized by petitioner upon this sale, the respondent used as a basis the cost of such stock to Conrad Henry Matthiessen instead of its fair market value as of the date it was acquired by the petitioner. As shown by the notice of deficiency, the respondent treated the transaction whereby Conrad Henry Matthiessen transferred the stock in trust as a gift and computed the profit under article 1562 of Regulations 62, which article deals with property acquired by gift after December 31, 1920.

Erard Matthiessen had not reached the age of 21 during the year 1922.

OPINION.

McMAHON:

We must first determine the proper basis for the computation of gain or loss upon the sale by the petitioner in 1922 of 6,000 shares of common stock of the Corn Products Refining Company which were acquired by petitioner as trustee in 1921.

The respondent has held that the subdivision (2) of section 202 (a) of the Revenue Act of 1921¹ is here applicable and that the proper basis to be used is the cost of such stock to the donor.

The respondent has held that the irrevocable indenture dated December 24, 1921, accomplished a gift of the 6,000 shares of stock in question. There is no evidence to show that it did not accomplish a gift. On the contrary, it appears that Conrad Henry Matthiessen parted with all dominion over the subject matter. A gift may be made by a transfer in trust where, as here, the grantor relinquishes all dominion over the subject matter. Murray Guggenheim, 24 B. T. A. 1181, affirmed by the Supreme Court in Burnet v. Guggenheim, 288 U. S. 280, which reversed the United States Circuit Court of Appeals decision in Guggenheim v. Commissioner, 58 Fed. (2d) 188. See also Bok v. McCaughn, 42 Fed. (2d) 616. The petitioner, however, contends that subdivision (2) of section 202 (a), in referring to property "acquired by gift after December 31, 1920," means property acquired by the taxpayer, that the trustee is the taxpayer herein involved, and that since the trustee did not acquire the property by gift, but as trustee, subdivision (2) of section 202 (a) does not apply here. This contention is not well founded. In Security Trust Co. et al., Trustees, 25 B. T. A. 29, 38, we stated:

* * * Here the testator actually created the trust by his will. The trust, not the trustees, is the taxpayer. The trustees are only one of the component parts of the taxpayer. They hold legal title to and possession of the property and act for the taxpayer. They never acquired a beneficial interest in the trust property — that goes to the cestuis que trustent, who are also a part of the trust. * * *

Upon the record before us we can not hold that under subdivision (2) of section 202 (a) the property in question was not "acquired by gift after December 31, 1920." This view is, we believe, in accord with the purpose of the section of the revenue act in question.

The Ways and Means Committee report and the Finance Committee report upon the Revenue Act of 1921 contain the following discussion of subdivision (2) of section 202 (a):

* * * An essential change, however, is made in the treatment of property acquired by gift. No explicit rule is found in the present statute for determining the gain derived or the loss sustained on the sale of property acquired by gift; but the Bureau of Internal Revenue holds that under existing law the proper basis is the fair market price or value of such property at the time of its acquisition. This rule has been the source of serious evasion and abuse. Taxpayers having property which has come to be worth far more than it cost to give such property to wives or relatives by whom it may be sold without realizing a gain unless the selling price is in excess of the value of the property at the time of the gift. The proposed bill in paragraph (2) of subdivision (a) provides a new and just rule, namely, that in the case of property acquired by gift after December 31, 1920, the basis for computing gain or loss shall be the same as the property would have in the hands of the donor or the last preceding owner by whom it was not acquired by gift. * * *

In Rice v. Eisner, 16 Fed. (2d) 358, the following appears:

The act of 1921 was apparently passed for quite another reason, that is, in the future to prevent donors from escaping the high taxes prevailing by giving property to their wives or children. As the latter would be allowed on any subsequent sales to subtract the value of the gift when they received it, and as a gift was not a sale as regards the donor, all increment escaped taxation which had accrued during the ownership of the donors. As to earlier gifts the...