Opinion ID: 6860040
Heading Depth: 1
Heading Rank: 1

Heading: Basis of Valuation.

Text: This point is whether in estimating property gains and losses from sales of property and depletion or depreciation of sueh properties the basic value is that of acquisition cost to the testator or of value at death of the testator. This question is presented without dispute as to facts and is, therefore, purely a question of law. The applicable law is to be found in the acts of Congress, departmental regulations in accordance with sueh acts, and judicial decisions construing such Acts and sueh Regulations. These returns were made under and these taxes are governed by the Revenue Acts of 1921 (42 Stat. 227) and 1924 (43 Stat. 253). Neither of these acts contains any separate provision, expressly defining this basis as applied to income of estates of deceased persons in course of administration. Both the 1921 act (section 202 [42 Stat. 229]) and the 1924 act (section 204 [26 USCA § 935 and lióte]) define, generally, the “Basis for Determining Gain or Loss” from sale or other disposition of property during the tax year, and the act of 1924 (section 204) also defines the basis for “Depletion, and Depreciation.” These definitions are under “Part I. — General Provisions” of “Title II. — Income Tax,” and, therefore, should be taken as generally applicable to all taxpayers subject to- taxation under title 2, unless subsequently qualified in the act. There are no such express qualifications here pertinent. Generally speaking and as far as here material, the basis declared in the above acts is the value (measured by cost or inventory) of acquisition by the taxpayer. It was not until the Revenue Act of 1928 (45 Stat. 791 [26 USCA § 2001 et seq.]) that Congress declared a rale specifically applicable to gains and losses from sals» by executors and administrator’s of property coming from the testal or. In section 113 (a) (5), 45 Stat. 818, 819, 26 USCA § 2113 (a) (5), it is declared “If the property was acquired by the deeqdent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent.” This provision was effective May 29, 1928, 8 a. m., and was not retroactive. However, there was a provision in section 702 (45 Stat. 879, 26 USCA § 2702), which applied to earlier tax years. Subsection (a) of that section (26 USCA § 2702 (a) provided that where returns of such gains or losses had been, made for a prior tax year either on the basis of value at decedent’s death or on a basis “in accordance with the regulations in force at the time such return was filed,” such used basis should control “unless claim for refund or credit in respect of sueh basis, or a written election not to come within the provisions of this, subsection” be filed by the estate within the limitation for filing claims. Petitioner here has duly filed such written election and is, therefore, not bound by this subsection. Subsection (b), (26 USCA § 2702 (b), declares that where subsection (a) does not govern, the basis for such, gain or loss shall be “such basis as is in accordance with the law properly applicable thereto, without regard to any provision of this chapter.” The situation resulting from the above state of statutory law and from petitioner’s election under section 702 (a) is that there is no applicable statutory expression specifically dealing with the proper basis for estates of decedents. In promulgating regulations for carrying out the Revenue Act of 1948 (similar to the acts of 1921, and 1924 in the matter involved hero), the Department declared that the basis of estimating gains or losses on sales by an executor in calculating income taxes of the estate was the value at death of decedent. This continued the administration rule under similar Regulations as to the acts of 1921, 1924, and 1926 until the decision of the Court of Claims in McKinney v. United States, 62 Ct. Cl. 180, on May 3, 1926, which held that the basis was not value at death of decedent but acquisition value to Mm. Conforming to this decision, the above regulation was replaced by one making the basis the value of acquisition by decedent. This change remained in effect several months until the de^eision by the Court of Claims in Nichols v. United States, 64 Ct. Cl. 241, on November 7, 1927. Construing the Nichols Case as overruling the McKinney Case, the Department restored its former regulation and this continued the administrative rule until passage of the Revenue Act of 1928. The force of these regulations in the matter before us is twofold: First, it settles the purpose of section 702 of the Revenue Act of 1928 to be one of repose for taxpayers (not barred by limitations) who were satisfied with the basis of their returns made in accordance with value at decedent’s death or in accordance with regulations existing at the time of return. Secondly, the fact that the regulations in force when the acts of 1921, 1924 and 1928 were, without material change, enacted had for years continuously prescribed date of death as the basis and the first act (that of 1928) enacted after such regulations had been questioned prescribed that basis argue strongly for application of the rule of statutory construction that such undisturbed administrative construction is the one intended by Congress. United States v. Dakota-Montana Oil Co., 288 U. S. 459, 466, 53 S. Ct. 435, 77 L. Ed. 893; Massachusetts Mut. Life Ins. Co. v. United States, 288 U. S. 269, 273, 53 S. Ct. 337, 77 L. Ed. 739; Murphy Oil Co. v. Burnet, 287 U. S. 299, 307, 53 S. Ct. 161, 77 L. Ed. 318; Brewster v. Gage, 280 U. S. 327, 336, 337, 50 S. Ct. 115, 74 L. Ed. 457. As to the decisions, there is a direct conflict. Those announcing the basis as being value at death of the decedent are Bray, Administratrix, 4 B. T. A. 42; Straight, Executrix, 7 B. T. A. 177; Bankers Trust Co. v. Bowers (D. C. N. Y.) 23 F.(2d) 941. Those announcing the basis as being value or cost of acquisition to decedent are tbe following in tbe Court of Claims: McKinney v. United States, 62 Ct. Cl. 180, certiorari denied 273 U. S. 716, 47 S. Ct. 108, 71 L. Ed. 855; Elmhirst v. United States, 38 F.(2d) 915 (same as Straight, Executrix, 7 B. T. A. 177, above); Myers v. United States, 51 F. (2d) 145; and see last paragraph of opinion in McCann v. United States, 48 F.(2d) 446. Able discussions for the former basis are in tbe Straight and Bankers’ Trust Company Cases and the dissenting opinion in the Myers Case; the same as to the latter basis are in the McKinney and Elmhirst Cases. Also, see Bingham v. Long, 249 Mass. 79, 144 N. E. 77, 33 A. L. R. 809. Expressions in Brewster v. Gage, 280 U. S. 327, 50 S. Ct. 115, 74 L. Ed. 457, have been urged by tbe Commissioner as being a determination of this matter in bis favor here. The executor argues that these expressions are dicta. The expressions intended are as follows (p. 335 of 280 U. S., 50 S. Ct. 115, 117): “The Revenue Act of 1918 and subsequent acts taxed incomes of estates during the period of the administration, including profits on sales of property, and such gains are calculated on value at date of decedent’s death.  There appears to be no reason why gains or losses to the estate should be calculated on one basis and those to tbe residuary legatees on another.” That ease involved the question of date of acquisition by a residuary legatee of personal property which he had sold in the taxable years involved. Tbe controversy was whether bis acquisition for tax purposes was the date of death of the testator or the date of distribution to tbe legatee. While the question there was different from that here, yet tbe language above quoted is tbe expression by the court of one reason for its decision. It is a well considered opinion. This language was not lightly used and it may not be lightly put aside. Though not spoken as to tbe matter now before us, we would hesitate to regard it other than as on the very edge of controlling authority. Much has been well said on either side in the above eases and the matter is far from being free from doubt. It seems to us, however, that tbe predominance is in favor of construing tbe intent of Congress to be that the basis should be value at death of the decedent. Since Congress has not expressly spoken on this specific matter in the acts earlier than 1928, we must seek its intent from the more general provisions of the acts — particularly those here involved, of 1921 and 1924. Both acts define an estate of a decedent as a “taxpayer” (42 Stat. 227, § 2; 43 Stat. 253 and 254, § 2 [26 USCA § 1262]); both specifically provide for taxation of the income of an estate during administration (42 Stat. 246, § 219; 43 Stat. 275, § 219 [26 USCA § 960 note]); both include profits from sale of property by tbe taxpayer in taxable income (42 Stat. 237, § 213; 43 Stat. 256, § 203 [26 USCA § 934]); and each establishes the basis of calculating gain or loss by such sales as tlie value on March 1, 1913, or the latter date of acquisition (42 Stat. 229, § 202; 43 Stat. 258, § 204 [26 USCA § 935 and note]). Also, in the same acts and as part of the general scheme of taxation under each act is a title providing for estate taxes of deceased persons and the “gross estate” for purposes of such taxes is “the value at the time of Ms death of all property, real or personal, tangible or intangible, wherever situated” (42 Stat. 278, § 402; 43 Stat. 304, §. 302 [26 USCA § 1094 note]). From the above statutory provisions, as well as others in these acts, not here particularly referred to, it is clear that the estate of a decedent is made a taxable unity or entity 1 both for estate taxes and for income taxes. Also, it is clear that in estimating income taxes gain or loss from sales during a taxable year are applicable to estates and also that in determining such gain or loss the value at acquisition by the taxpayer is the basis. The executor or administrator is the taxpayer of such an estate. There is no difficulty in applying to him the general statutory requirement, applicable to all individual taxpayers, that the basis shall be value at acquisition by the taxpayer. The time of acquisition by the executor or administrator is the date of his decedent’s death. The value at that date conforms to the statutory basis. The manner of acquisition is not important. The statutes clearly apply this basis to acquisitions of a closely similar character (42 Stat. 229, § 202 (a) (3); 43 Stat. 258, § 204 (a) (5) [26 USCA § 935 and note]). The important consideration is that the statutes establish or recognize certain entities for income taxation purposes — one of these being an estate of a decedent during administration and settlement — and the measure prescribed .for determining taxable income arising from gains or losses through sale or other realization upon property by such an entity is confined to such gains or losses accruing to such entity and no other; they are not concerned with what has happened before the property became that of the entity being faxed. Anderson v. Wilson, 289 U. S. 20, 26, 27, 53 S. Ct. 417, 77 L. Ed. 1004; Brewster v. Gage, 280 U. S. 327, 335, 50 S. Ct. 115, 74 L. Ed. 457; Merchants’ Loan & Trust Co. v. Smietanka, 255 U. S. 509, 516, 517, 41 S. Ct. 386, 65 L. Ed. 751, 15 A. L. R. 1305; Busch v. Commissioner, 50 F.(2d) 800; 802 (C. C. A. 5); McCann v. United States (Ct. Cl.) 48 F.(2d) 446, 448; Abell v. Tait, 30 F.(2d) 54, 55 (C. C. A. 4); Whitcomb v. Blair, 58 App. D. C. 104, 25 F.(2d) 528, 529; Baltzell v. Mitchell, 3 F.(2d) 423, 431 (C. C. A. 1) certiorari denied 268 U. S. 690, 45 S. Ct. 510, 69 L. Ed. 1159; Bankers’ Trust Co. v. Bowers, 295 F. 89, 94 (C. C. A. 2); Nichols v. United States, 64 Ct. Cl. 241, certiorari denied 277 U. S. 584, 48 S. Ct. 432, 72 L. Ed. 999. If there bo doubt as to the meaning of these statutes when all pertinent parts are considered, then another reason for eousti uing the statutes as fixing the basis as being value at death of the decedent is that the basis must be cither that or acquisition value to the decedent and that the latter would lead to injustice. The injustice arises from 'the situation that the “gross estate” prescribed for the estate tax is the value of all property of decedent at the time of death. Such valuation necessarily reflects increases or decreases in value of each property item occurring between time of acquisition by decedent and time of his death — if the value has increased that increase is taxed while if it has decreased that decrease diminishes the gross estate value to the same extent. Thus, such increase or decrease directly affects the amount of estate tax. From this situation, the injustice of making acquisition value to decedent the basis for income taxation of the estate manifests itself: in one of two ways (dependent on the movement of value of the property) and Jesuits either in double taxation or in escape (partial or entire) from taxation intended by. the statutes. The only other basis suggested as possible — the use of value at death of decedent — avoids both of these results and, 1 hero-fore, should be adopted as the moaning of the statutes since there is nothing in the entire expression in these two' income tax statutes forbidding or even inconsistent with its use. This rule that statutes should bo construed; to prevent hardship or unjust consequences unless tlxe language of the statules compels a different conclusion is here applicable, is salutary and is firmly established. Burnet v. Guggenheim, 288 U. S. 280, 285, 53 S. Ct. 369, 77 L. Ed. 748; Knowlton v. Moore, 178 U. S. 41, 77, 20 S. Ct. 747, 44 L. Ed. 969; Piper v. Willcuts, 64 F.(2d) 813, 814 (C. C. A. 8); Grier v. Kennan, 64 F.(2d) 605, 607 (C. C. A. 8).; Missouri Pac. R. Co. v. Holt, 293 F. 155; 162 (C. C. A. 8) certiorari denied, 264 U. S. 584, 44 S. Ct. 333, 68 L. Ed. 861; Bankers’ Trust Co. v. Bowers, 295 F. 89, 96 (C. C. A. 2). We must conclude that the Board correctly affirmed the aetion of the Commissioner in taking value at time of death of Hartley as the basis for estimating gain or loss on sales, during these tax years, by the executor of property -belonging to the estate. For the same general reasons, estimates of depreciation or depletion of such properties should be upon the same value basis.