OPINION.
Steenhagen:
The Commissioner determined a deficiency of $33,-878.61 in petitioner's income tax for 1934, resulting from the use of a lower basis than that used by petitioner in computing the capital gain derived from the sale of securities. The case is submitted under Rule 30 upon a written stipulation.
Petitioner's father died July 19, 1918, and by his will two-thirds of the residue of his estate was left in trust. The trustee was directed to pay the widow enough of the income to maintain the children until each became twenty-one, then to pay each child $5,000 or more a year until he became twenty-eight, "when each of them shall become entitled to and shall respectively receive a share of the corpus, together with the accumulated income." Provision was made for distribution in case a child should die before becoming twenty-eight.
The trustee received the trust assets from the estate in 1926 and distributed the proper share of them, including securities, to petitioner on April 4, 1934, when he became twenty-eight. Some of the securities so distributed had been received by the trustee from the decedent's estate and others had been acquired by the trustee in intermediate transactions. Petitioner sold some of the securities during the year at a profit. In computing gain, he used as basis the value on April 4, 1934, when he received them from the trustee. The Commissioner, however, used as basis the lower value of the securities at the time of the father's death in the case of those then held by the father, and their cost to the trustee in the case of those which it had acquired thereafter. The decision turns upon the Revenue Act of 1934, section 113 (a) (5): "If the property was acquired by bequest the basis should be the fair market value of such property at the time of such acquisition."
The petitioner did no doubt receive the very securities only when they were distributed to him in 1934. The question is whether timw of such receipt is what the statute means as the "time of acquisition." That question must be decided primarily with regard for the fulfillment of the purpose of the statute and not only with regard for the generally accepted meaning of the particular phrase. This was the reasoning of Brewster v. Gage, 280 U. S. 327. In point of fact the direct legatee in that case did not receive the bequeathed property before the distribution of the decedent's estate, but the Court held that nevertheless the statutory time of acquisition was the date of decedent's death.
The intendment of the statute requires the same construction here. The intervention of the fiduciary administering the trust involves quite the same difficulties under this very statutory subsection as did the intervention of the fiduciary administering the decedent's estate. As to both, the dominant legislative purpose was to prescribe a basis which would result in taxing the increment in value of the property upon the occasion of its realization. It is plain that such purpose which was promoted only by judicial construction in Brewster v. Gage, supra, as to bequests delayed by administration and distribution of the estate, would be defeated as to bequests delayed by intervening trusts if the same reasoning were not applied. Elizabeth G. Augustus, 40 B. T. A. 1201.
Petitioner argues that the phrase "time of acquisition" must be construed with regard to whether the interest bestowed upon him by the will was a vested or contingent interest; that if a contingent interest it may not be regarded as acquisition of the property, and that by North Carolina law (Reynolds v. Reynolds, 208 N. C. 578; 182 S. E. 341) his interest was a contingent interest until he received the securities by distribution. The argument must be rejected because the proper application of the statute is not dependent upon whether the interest created in petitioner by the trust was but a contingent interest. Elizabeth G. Augustus, supra; Richard Archbold, 40 B. T. A. 1238. Even if it was contingent, the intendment of the statute was that the securities actually received when distributed are to be regarded as putatively acquired by the beneficiary when the testator died, if their identity has been preserved, or when the trustee acquired them by purchase or exchange if the original securities have been disposed of in such an intermediate transaction. The basis of the beneficiary is, therefore, the value at the date of the testator's death as to the securities left by the testator and received by the petitioner, and the basis of the trustee as to the securities acquired by the trustee by purchase or exchange.
Reviewed by the Board.
Decision will be entered for the resfondent.
Van Fossan dissents.