Court Opinion

ID: 6875606
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:07:17.314984+00
Date Added: 2024-06-11T16:05:29.361763
License: Public Domain

McLELLAN, District Judge
(dissenting).
In 1932, the taxpayer owned 121 shares of Androscoggin Corporation 6% Cumulative Preferred A stock, for which she received in that year $12,100. The question is the amount of taxable gain which then occurred. This involves a consideration of the cost basis of the stock. The Board of Tax Appeals took as such basis the market value in 1921, when the stock was turned over to the taxpayer by testamentary trustees who theretofore had held it for her benefit. The Commissioner of Internal Revenue contended and now urges that the cost basis is the market value in 1915 of stock of another corporation, the Andros-, coggin Electric Company, which in that year was received by trustees for the taxpayer’s benefit.
The facts need not be repeated in detail. In 1914, Winfield S. Libbey died testate. Under the residuary clause of his will, certain property was left to trustees who out of a portion of it were to set up a trust for the benefit of his son and his daughter. The son and daughter were to receive the income from the trust and then after some years it was to be transferred to them discharged of all trusts. The executors distributed the residuary estate to the trustees in 1915. The trust set up for the testator’s son and daughter included stock in the Androscoggin Electric Company, at least 121 shares of which were held for the benefit of the testator’s daughter, the taxpayer in this proceeding. The situation in 1915, then, was that all legacies had been paid and the estate closed.
In 1920, the trustees exchanged the Androscoggin Electric Company stock for an equal number of shares in the Androscoggin Corporation. In 1921, the trustees deliver*462ed 121' shares' of Androscoggin Corporation stock to the taxpayer and as to those shares the trust ended.
The Board of Tax Appeals decided that the value of this stock in 1921 is the correct cost basis. The majority affirms the Board’s decision on two grounds, one of which was not considered by the Board and is mentioned in neither brief. The ground not so considered is that the stock which the taxpayer disposed of in 1932 is not the same stock which was received by the trustees from the executors in 1915. I think with respect that this is irrelevant.
After quoting Section 202 (b) of the Revenue Act of 1918, 40 Stat. 1060, which provides that when in connection with a reorganization a person receives in place of stock owned by him new stock of no greater par value, no gain of loss shall be deemed to occur from the exchange and the new stock received1 shall be treated as taking the place of the stock exchanged, the majority says this section is without applicability to this case. The opinion goes on to say -that it “does not appear that the sale or exchange of the common stock of the Electric Company was had ‘in connection with a reorganization’ of that company or a ‘merger, or .consolidation’ of it with some other company.” The facts found by the Board tend to show a statutory reorganization, for their opinion states:
“At the close of the administration of the'estate the trustees under the will received from the executors thereof shares of the common stock of the Androscoggin Electric Company with* a par value of $100 a share. In 1920 the trustees exchanged such shares of common stock of Androscoggin Electric Company for an equal number of shares of the 6 percent preferred series A stock of the Androscoggin Corporation with a par value of $100 a share. The Androscoggin Corporation was formed by the Central Maine Power Company in 1920. The Central Maine Power Company owned all thé common stock of the Androscoggin Corporation. The preferred stock of the Androscoggin Corporation was issued share for share to holders of all the common stock of the Androscoggin Electric Company.
“On April 12, 1921, the trustees distributed to the petitioner shares of the cumulative 6 percent series A stock of Androscoggin Corporation. This distribution was made by them as a portion of the one-third part directed by the will of Winfield S. Lib-bey to be distributed to the petitioner ‘at the expiration of said second period of three years’, as set forth in the above excerpt.
“The said 121 shares disposed of by the petitioner on January 1, 1932, were a portion of the distribution made on April 12, 1921.”
But it is unnecessary to determine whether all the elements of a statutory tax-free reorganization are here presented. The record shows nothing to the contrary. It is one thing to support a decision upon findings supported by evidence, though different from the grounds on which the decision was based. It is quite another thing to supply facts not in the record and then to decide the case upon such facts. The pleadings and the Board’s findings show that everyone treated the old stock as the same as the new, and the record contains, no basis for a contrary finding.
As a second reason for the inapplicability of that section of the Revenue Act in 1918 quoted in the majority opinion, the court says in substance that if there were no statutory reorganization and the “preferred shares were then ‘treated as taking the place’ of the common shares, it would not follow that the value of the preferred shares in 1915 was $10 a share (as the petitioner would have us understand), for those shares were not then in existence.” True, they were not then' in existence. True, they had no pre-natal value. But the question is not the value of the new stock. It is the cost basis that counts. Clearly, in the hands of the trustees the cost basis of the new stock is the cost basis of the old stock, which is its value in 1915 when distributed to the trustees.
The crucial question is whether the cost basis to the trustees and to the beneficiary of the trust is the same. This depends upon when the “distribution to the taxpayer” occurred. Was it when the property was distributed to trustees for the taxpayer’s benefit, or was it when the trustees turned it over to the taxpayer as beneficiary of the trust? Of course the relation of trustee and beneficiary differs radically from that of agent and principal. There is no quarrel with the Board’s view that a trustee as such is not the cestui’s agent. But, as of a date as early as the delivery of the trust res to the trustees, they had the legal title and the taxpayer the full beneficial interest or equitable title to it. While the question is debatable, I *463think there was a distribution of the stock to the taxpayer within the meaning of the statute when the stock was delivered by the executors to the trustees for the taxpayer’s benefit. I cannot think that the Congress, in providing as the cost basis of property later sold “the fair market value of the property at the time of the distribution to the taxpayer,” intended to' go beyond the time when the executor paid the legacies and closed the estate. Such a construction would permit increments to the value of property held in trust for many years to escape taxation in case of a subsequent sale by a former beneficiary after a termination of the trust. Cases involving the vesting of contingent remainders are beside the point and United States v. Van Nostrand, 1 Cir., 94 F.2d 510, on which the majority opinion rests in part, and in which the contention here made was not presented, requires no other conclusion. As applied to the facts here appearing, the distribution to which the statute refers is distribution by the executors to trustees for the taxpayer’s benefit, and not a distribution by trustees years after the property had passed out of the testator’s estate. To this effect is Judge Thomas’ opinion in Jenkins v. Smith, Collector, D.C., 21 F.Supp. 433.
I think, with deference, that the decision of the Board of Tax Appeals should be reversed.