OPINION.
Sternhagen :
Each of the petitioners in 1933 sold securities which he had received after 1925 from the trustee of an express inter vivos trust created prior to January 1, 1921, by each of two of his grandparents, and upon such sale computed his gain or loss upon the basis of the value of the securities at the time they were received by him from the trustee. The Commissioner held that the proper basis was that which would have been applicable to the trustee had the trustee sold. As to each petitioner, use of the trustee's basis resulted in a greater gain or smaller loss than the taxpayer had shown on his return, and the following deficiencies in income tax were therefore determined for 1933:
Richard Archbold (Docket No. 89559)_$4,381.12
Adrian Archbold (Docket No. 89732)_ 4,387.09
John Archbold (Docket No. 89752)_ 6,897.44
Archbold van Benren (Docket No. 90823)_ 1,206.05
The cases were submitted on four separate stipulations, which, except for specific details, are similar. The only determination called for is the proper basis, the respondent defending the use of the trustee's basis and the petitioners claiming the use of the value of the securities at the date of distribution to them. In each case the date of distribution of the securities is a different date, when each became twenty-one, between 1925 and the time of sale in 1933.
Counsel have based their opposing contentions upon the question whether the original trusts which were made prior to January 1, 1921, created vested or contingent interests, the petitioners claiming that the interests were contingent and the respondent that they were vested. It is apparently assumed by both that if the interests were contingent the securities were not acquired until actual distribution, while if the original interests were vested, the securities were acquired directly when they were transferred in trust. Thus the fulcrum of the argument is taken to be section 113 (a) (4) of the Revenue Act of 1932. While the interest of each petitioner in the trust corpus was probably a contingent interest when the trust was created and remained so until he became twenty-one and received the securities from the trustee, and a fortiori was no more than a contingent interest in the specific securities which were not originally in the trust corpus, we leave that question undecided, since it does not dispose of the issue. The word "acquisition" of the property as used in the Federal revenue act is not necessarily hedged about by the common law refinements of vested and contingent interests in the corpus of the trust; certainly not if there are other grounds upon which a proper construction should rest.
It is true that, speaking with meticulous accuracy, the property sold by petitioners — that is, the very securities — was acquired by them not by a transfer in trust but by a transfer out of trust. But such a literal construction would defeat the plain purpose of the basis provision of the statute since 1921. This purpose was primarily to tax the increment in value of gift property between the time it is bought by the donor and the time thereafter when by sale or other taxable disposition by the donee there is a taxable occasion. The purpose of the plan was expounded and approved in Taft v. Bowers, 278 U. S. 470, relating to direct gifts. In the 1924 Act, gifts by way of trust were expressly dealt with to the same effect. Taxing the increment carried with it the correlative allowance for deduction of losses.
Petitioners, however, would have it held that, although the legislative purpose is fairly plain, the statutory language "transfer in trust" falls short of achieving it. As to gifts by trust to a contingent beneficiary, the increment in value between the trustee's acquisition and a sale by btm is taxed but the increment between thei trustee's acquisition and its distribution to the beneficiary would escape tax. The term "transfer in trust" is not so clear that it must be construed to permit this hole in section 113, even though the refusal to exempt the gain has the incidental result of allowing the greater deduction for loss. When the distributee sells property received by virtue of a trust made before January 1, 1921, his basis is that which would have been applicable to the trustee. As to property received by the taxpayer in distribution which had been acquired by the trustee by purchase, such basis is cost to the trustee, which is the basis to the last preceding owner who acquired otherwise than by gift. As to property received in distribution which the trustee had acquired by the original transfer by the settlor, the basis is value at the time of the original transfer.
The respondent's determination is sustained.
Reviewed by the Board.
Decision will he entered wnder Bule 50.
KeRN dissents.
SEC. 113. ADHJSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) or Property. — The basis of property shall be the cost of such property; except that—
(4) 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 provisions of this paragraph shall apply to the acquisition of such property interests as are specified in section 402 (e) of the Revenue Act of 1921, or in section 302 (f) of the Revenue Act of 1924 or the Revenue Act of 1926 (relating to property passing under power of appointment) regardless of the time of acquistion.