Court Opinion

ID: 4615019
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:31:28.904929+00
Date Added: 2024-06-11T07:54:53.195117
License: Public Domain

Lindsay C. Howard, Petitioner, v. Commissioner of Internal Revenue, Respondent.  Lindsay C. Howard and Lucille K. Howard, Petitioners, v. Commissioner of Internal Revenue, RespondentHoward v. CommissionerDocket Nos. 41735, 41736United States Tax Court23 T.C. 962; 1955 U.S. Tax Ct. LEXIS 233; March 10, 1955, Filed *233 Decisions will be entered under Rule 50.  Father of petitioner created a trust on July 1, 1920, and conveyed to his wife, as trustee, his automobile business together with the property appurtenant thereto.  Under terms of trust indenture petitioner became entitled to receive one-fifth of the net income of the business accumulated between the time of the creation of the trust and the date he reached the age of 21.  In December 1923, the trustee created a corporation and transferred to it the automobile business and its assets in exchange for all of its stock consisting of 15,000 shares.  On March 31, 1925, petitioner reached the age of 21, and the trustee distributed to him 2,728 shares of the corporation's stock in satisfaction of his claim to one-fifth of the accumulated net income. The basis to the trustee of the stock distributed was less than the amount of petitioner's claim.  Held, the basis for gain or loss to petitioner of the shares distributed to him by the trustee is the value of the claim which he surrendered in connection with their acquisition.  A. Calder Mackay, Esq., Adam Y. Bennion, Esq., and Richard N.  Mackay, Esq., for the petitioners.Charles H. Chase, Esq., for *234 the respondent.  Raum, Judge.  RAUM*963  The respondent determined deficiencies in income tax of the petitioners as follows:PetitionerYearDeficienciesLindsay C. Howard19471 $ 2,084.95Lindsay C. Howard and Lucille K. Howard19482 1,461.14The sole issue presented for our determination is the basis for gain or loss of 600 shares of stock of Howard Securities Co. (formerly Howard Automobile Company of Los Angeles) sold by Lindsay C. Howard during the taxable year 1948.The parties are in agreement as to other issues raised by the pleadings and effect will be given to their agreement upon settlement under Rule 50.FINDINGS OF FACT.Most of the facts have been stipulated and the stipulation is incorporated herein by reference.Petitioners were husband and wife and are now living separate and apart.  They are residents of California and filed a joint income tax return for the year 1948 with the collector of internal revenue for the sixth district of California.  Lindsay C. Howard will hereinafter *235 be referred to as the petitioner.Charles S. Howard, petitioner's father, was in the automobile business, buying and selling Buick automobiles and engaging in related activities.  On July 1, 1920, Charles S. Howard conveyed his automobile business, together with appurtenant assets, in trust for the benefit of his wife and four minor sons.  1 His wife was named as *964  trustee.  The trust instrument provided that the trustee conduct the business and apply the net income thereof or of any reinvestment thereof for the benefit of herself and the four sons as follows: That one-fifth of the net income be accumulated for the benefit of each of the sons until he reached the age of 21 years, or until his prior death,  and be paid to him upon reaching such age, or to his heirs if he died prior thereto; that the remaining income and also all thereof not to be accumulated for the sons be applied by the trustee to her own use and benefit; that when each of the sons arrived at the age of 21 years, or upon his prior death, the trustee inform him, or his heirs, of the existence and terms of the trust and of the condition at that time of the business and property; that if the son, or his heirs, within 1 *236 year after being so informed by the trustee, transferred and conveyed to the trustee the portion of the net income of the business and property so accumulated for him, in trust to hold and invest for him, or his heirs, until the termination of the trust, the trustee pay to such son, or his heirs, from time to time one-fifth of the net income accruing from the business and property that are or shall be the subject of the trust from the time he reached the age of 21 years, or died before reaching that age, until the termination of the trust; and that the trust terminate when the youngest son reached the age of 25, or upon the death of the last survivor of the sons if none reached that age.  The trust instrument also provided that upon the termination of the trust the business and all the property then held by the trustee in connection with the business be distributed; that each son, who elected to reconvey to the trustee the portion of the income accumulated for him when he reached the age of 21, receive one-fifth thereof; and that the balance of the business and property be distributed to the trustor's wife, or her heirs, for her or their own use and benefit, as her or their separate *237 property.The book value of the business and property of the Howard Automobile Company transferred in trust on July 1, 1920, was $ 262,511.  No item of goodwill was included in this book value.The earnings of the automobile business for the period July 1, 1920, through December 20, 1923, were as follows:PeriodEarningsJuly 1, 1920 -- June 30, 1921$ 947,742.34July 1, 1921 -- June 30, 1922622,048.31July 1, 1922 -- June 30, 19231,080,735.91July 1, 1923 -- Dec. 20, 1923611,685.58$ 3,262,212.14 In 1923, the trustee desired to incorporate the business of the trust.  By order of the Superior Court of the State of California in and for the City and County of San Francisco, dated November 26, 1923, the trustee was authorized to cause the Howard Automobile Company *965  of Los Angeles, a corporation, to be formed and to transfer to it the assets of the trust in exchange for the stock of the corporation.The Howard Automobile Company of Los Angeles was incorporated on December 6, 1923.  On December 20, 1923, the assets of the trust were transferred to the Howard Automobile Company of Los Angeles in exchange for *238 15,000 shares of its stock. The total issued shares of capital stock of the company were 15,000.  No additional shares were ever issued.  The exchange of assets of the trust for the stock of the Howard Automobile Company of Los Angeles was treated as a nontaxable exchange.On December 20, 1923, the book value of the corporation (based upon the book value of the business as of the time the trust was created, namely, $ 262,511, plus the accumulated income of the trust in the amount of $ 1,897,298.72) was $ 2,159,809.72, or $ 143.9873 per share.At the time the trustee decided to incorporate the business she knew that Charles S. Howard, Jr., would reach the age of 21 on December 22, 1923, and be entitled to receive his share of accumulated income. If he elected to take his share under the terms of the trust, it would have been necessary for the trust to borrow money to pay him.  The corporation was formed so that Charles S. Howard, Jr., could be paid in shares of stock representative of his share of accumulated income.Upon reaching the age of 21, Charles S. Howard, Jr., elected not to reconvey his share of accumulated income and therefore forfeited his interest in the corpus of the trust. *239  There were distributed to him at that time 2,635 shares of stock, representing his share of the accumulated income.The net income of the Howard Automobile Company of Los Angeles for the period December 20, 1923, through December 31, 1925, was as follows:PeriodNet incomeDec. 20, 1923-Dec. 31, 1923$ 13,604.04Jan. 1, 1924-Dec. 31, 1924677,690.48Jan. 1, 1925-Dec. 31, 19251,019,932.63Petitioner Lindsay C. Howard reached the age of 21 on March 31, 1925.  He elected not to reconvey his interest in the accumulated income and thereby forfeited  his capital interest in the trust.  The accumulated earnings of the business of the Howard Automobile Company, after taxes, as of March 31, 1925, and petitioner's one-fifth share thereof, were computed as follows:TotalOne-fifthBook value of Howard Automobile Companyof Los Angeles at March 31, 1925$ 2,990,309.48$ 598,051.90Less: Book value of assets transferred intrust on July 1, 1920262,511.0052,502.20Accumulated earnings$ 2,727,798.48$ 545,559.70*966  The trustee determined that the book value of the stock of the company as of March 31, 1925, was $ 192.6873 per share, and that petitioner was entitled to 2,728 shares of stock in satisfaction of his share *240 of the accumulated earnings of the business from July 1, 1920, to March 31, 1925.  She distributed to petitioner 2,696 shares on March 31, 1925, and an additional 32 shares on January 14, 1929.Howard Automobile Company of Los Angeles paid no dividends on its stock prior to April 25, 1925.The name of Howard Automobile Company of Los Angeles was changed to Howard Securities Co. on January 8, 1948.On December 28, 1948, the petitioner sold 600 shares of the stock of the Howard Securities Co.  for $ 290,880.  In the joint income tax return filed by him and his wife for that year, he claimed a basis for gain or loss of the stock sold of $ 115,612.37, or $ 192.6873 per share, and reported a long-term capital gain of $ 175,267.63.The respondent, by amendment to his answer filed on April 8, 1953, affirmatively alleged that the basis to the petitioner of the stock of Howard Securities Co. sold by him during the year 1948 was $ 139.11 per share, and claimed that the petitioner realized additional capital gain in the amount of $ 32,146.37.  The respondent now contends, on brief, that the correct basis was $ 143.9873 per share.OPINION.The sole issue involves the basis for gain or loss of the 600 *241 shares of stock sold by petitioner during 1948.  The Commissioner contends that since the stock had been received by the trustee on December 20, 1923, in a tax-free exchange and thus acquired a basis of $ 143.9873 per share in the hands of the trustee, that basis carried over in the hands of petitioner when the shares were distributed to him several years later in extinguishment of his claim to his share of the accumulated earnings of the automobile business.  The Commissioner relies upon Maguire v. Commissioner, 313 U.S. 1; Helvering v. Reynolds, 313 U.S. 428; and Richard Archbold, 40 B. T. A. 1238, affirmed, 115 F. 2d 1005 (C. A. 2), certiorari denied, 313 U.S. 584. These cases relate in general to the basis of property distributed in kind by a fiduciary in accordance with the provisions of a testamentary or inter vivos trust.  They do not rule this case, where petitioner surrendered a money claim against the trustee in order to obtain a distribution of a portion of the trust corpus.  The use by the trustee of the stock to satisfy petitioner's claim was a "sale or other disposition" of the stock (cf. sec. 111 (a), I. R. C., 1939), and the claim which petitioner surrendered in order *242 to obtain the stock represented his purchase price for the stock. The stock therefore acquired a basis equal to the amount of that claim.  This result is plainly required *967  by the cases that have dealt with the problem.  Sherman Ewing, 40 B. T. A. 912; Commissioner v. Matheson, 82 F. 2d 280 (C. A. 5), affirming 31 B. T. A. 493; Commissioner v. Brinckerhoff, 168 F. 2d 436 (C. A. 2), affirming 8 T. C. 1045. Cf.  Suisman v. Eaton, 15 F. Supp. 113, affirmed per curiam, 83 F. 2d 1019 (C. A. 2), certiorari denied, 299 U.S. 573; William R. Kenan, 40 B. T. A. 824, affirmed, 114 F. 2d 217 (C. A. 2).The money claim which petitioner gave up in order to acquire the stock was his share of the earnings of the business.  Respondent's suggestion that petitioner did not have a money claim to relinquish is without substance.  Respondent points to a decree entered March 6, 1924, by a California court to the effect that 3,000 shares of the stock "pertain to plaintiff as Trustee of the trust declared * * * for the defendant Lindsay C. Howard." Whatever may be meant by the word "pertain" in that decree, it is plain that the court was not in any way undertaking to subtract from the rights accorded to petitioner *243 in the trust instrument to demand his allocable share of the accumulated earnings of the business, and such claim was clearly a money claim.Moreover, the money claim was not, as respondent maintains in his alternative contention, merely petitioner's allocable share of the earnings of the trust.  The automobile business earned substantial amounts between the date of incorporation and the time when the shares were distributed to petitioner.  Such earnings were not declared as dividends.  But the trust instrument makes clear that petitioner's allocable share was to be one-fifth of the net income of the "business," which accumulated from the date the trust was created to the date that he attained his majority.  Accordingly, the measure of his claim must include not only the income of trust up to the date of incorporation, but also the net income of the corporation from that date until the time that petitioner became 21 years of age.  The trustee acted upon this assumption in computing the number of shares to be distributed to petitioner, and we think that such action was in accord with the correct interpretation of the trust instrument. We therefore rule in petitioner's favor.Decisions *244 will be entered under Rule 50.  Footnotes1. By amendment to the petition, petitioner claims an overpayment for the year 1947 in the amount of $ 10,438.44.↩2. By amendment to his answer, respondent claims an increased deficiency in the amount of $ 9,505.↩1. Charles S. Howard, Jr., Lindsay C. Howard, Frank Robert Howard, and Robert Stuart Howard.↩