Court Opinion

ID: 4481709
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:03.036695+00
Date Added: 2024-06-11T15:04:09.026013
License: Public Domain

Kern, /., dissenting: Section 1033(a)(3)(A) provides that “if property * * * is * * * involuntarily converted * * * into money * * * the gam (if any) shall be recognized except * * * if the taxpayer * * * for the purpose of replacing the property so converted, purchases other property similar * * * to the property so converted * * *, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion * * * exceeds the cost of such other property.” (Emphasis supplied.) Section 1033 (c) provides that “In the case of property pwrchased by the taxpayer in a transaction described in subsection (a) (3) which resulted in the nonrecognition of any part of the gain realized as a result of * * * involuntary conversion, the basis shall be the cost of such property decreased in the amount of the gain not so recognized.” (Emphasis supplied.) In the context of these sections of the Code and the definition of “taxpayer” in section 7701(a) (14) it is obvious that “the taxpayer” referred to in sections 1033 (a) (3) and 1033 (c) was the person subject to tax on the capital gain realized upon the involuntary conversion. In the instant case “the taxpayer” died before the replacement called for by section 1033(a) (3) (A) was made. While the majority opinion points out that the taxpayer and other adult members of his family intended to make a replacement and some preliminary steps were taken in anticipation of the replacement which they intended, it is significant and cannot be questioned that none of them made the replacement and that none of them intended to or did enter into any binding agreement to make such replacement pending the expiration of a 30-day appeal period after the payment of the award. During that period the taxpayer and his wife invested the proceeds of the condemnation award and took no action committing themselves to the replacement. The taxpayer died 12 days after receiving the award and 18 days before he intended to commit himself to the replacement. Although “the taxpayer” did not and could not perform the acts required as a prerequisite to calling into play the exception provided by section 1083(a) (3) (A) to the general rule of recognition of gain set out in 1033 (a) (3), the majority has concluded that he is nevertheless entitled to the benefits of that exception.1 In reaching this result they state that they have been guided by the rationale of the Third Circuit Court of Appeals in Goodman v. Commissioner, 199 F. 2d 895, which reversed our own case of Estate of Isaac Goodman, 17 T.C. 1017, which was reviewed by the full Court without dissent. Since the instant case is quite different in several crucial respects from the Goodman case and since the Court of Appeals in its reversing opinion confined itself to a consideration of those differences not present in the instant case, I am at loss to understand how the reasoning of that court can be taken as in any way sustaining the view of the majority. One of those crucial differences is that in the Goodman case the replacement property was purchased by the decedent’s estate and the replacement expenditures were made by the deceased taxpayer’s executor acting specifically on behalf of the estate out of funds of the estate, while in the instant case the replacement expenditures were made by trustees of two residuary trusts set up in decedent’s will in which the decedent’s widow was the primary beneficiary and the trustees themselves (decedent’s sons) or their issue were remaindermen. The trustees made these expenditures from the proceeds of a distribution which had been made to them by the executor; the replacement payments were made by the trustees out of their own funds acquired by such distribution from the estate; and title to the replacement property was taken in the names of the trustees and the widow. In this case no payment was made on the replacement property by the executor or anyone authorized to act on behalf of the decedent or his estate, no contract for replacement was executed by any such person on behalf of the decedent or his estate, and neither the executor nor any representative of the estate of the decedent ever acquired title to the replacement property.2  In the Goodmam. case we held that the replacement of condemned property out of the proceeds of a condemnation award must be made by the taxpayer himself and that replacements made by any other person, even by the taxpayer’s executor after his death, were not sufficient to call into play the nonrecognition provisions of the 1939 Code. Our decision in that case was reversed by the Court of Appeals. The opinion of that court states three grounds for reversal. The first ground was that the applicable statute (section 112(f)) quoted in the majority opinion does not specifically require that “the taxpayer” take any action since that section “is stated in the passive sense” thus indicating that Congress was not “concerned about the identity of the actor, so long as he acted on behalf of the taxpayer.” (Emphasis supplied.) Second, the numerous references in the pertinent regulations to actions required by “the taxpayer” (thus following the phraseology of the original 1921 Act) were not deemed significant, since the Court of Appeals considered “taxpayer” to mean “the taxpayer or one aciimg on his behalf, before or after his death.” (Emphasis supplied.) Third, since the decedent’s estate “acting through the executor made the reinvestment” and since the executor is required to file a return for his decedent’s final period, the court could “see no reason why the executor may not do what the taxpayer could have done to perfect a right which came into being in the final taxable period.” By a footnote the Court of Appeals suggests that the executor as a representative of the decedent taxpayer’s estate may be considered as the taxpayer. None of these grounds of reversal are relevant to the facts of the instant case and consequently the opinion of the Court of Appeals is irrelevant to the problem before us. Section 112(f) of the 1939 Code which governed the disposition of the Goodman case was succeeded in 1951 by what now appears as section 1033 of the 1954 Code which applies to this case. Section 1033(a) (3), applying to “the disposition of * * * converted property” occurring after December 31, 1950, is stated in the active sense and requires certain actions to be taken by “the taxpayer.” The majority opinion dismisses this circumstance as a mere “semantic difference between the two provisions” having no relevance to an interpretation of the statute or, as the majority opinion would have it, the two provisions do not accord “an ‘active’ as contrasted with a ‘passive’ aura * * * to section 1033(a) (3) and [do not require] us to adopt the narrow interpretation of that section which respondent urges upon us.” In view of the fact that the majority relies on the opinion of the Court of Appeals in the Goodman case and the fact that’ that opinion considered as both relevant and persuasive the use of the “passive sense” in section 112(f) as indicating the lack of concern on the part of Congress, “about the identity of the actor,” it would seem only fair to consider a subsequent change in the applicable statute from a “passive sense” to an “active sense” as some indication that Congress had some concern “about the identity of the actor.” At the very least, this change eliminates any “semantic” reason for disregarding the plain literal meaning of the requirements imposed by section 1033(a)(3)(A) as a prerequisite to the availability of the exception to the general rule of the recognition of realized taxable gains which is stated therein. The second and third grounds for reversal obviously have no valid application to the facts of a case such as the one before us where the requisite reinvestment is made, not by the decedent’s executor and personal representative3 who is acting in all respects on behalf and as representative of his estate, but by testamentary trustees who, by the use of distributions made to them by the executors, have acquired title to the replacement property for the benefit of legatees named in decedent’s will. On the crucial question of whether the testamentary trustees may be considered as a matter of law to be acting on behalf of the deceased taxpayer and their actions equated with the actions of the “taxpayer” called for by section 1033 (a) (3) (A) as a prerequisite to the exception granted therein, the majority opinion in effect concedes that testamentary trustees cannot be considered “personal representatives” of a decedent such as executors and are separate legal entities not to be confused with the decedent, his estate or his personal representative.4 Nevertheless the majority contends that “replacement by trustees should be treated no differently than replacement by executors” since they were carrying out by their actions the intent of the decedent formed prior to his death. The opinion continues with the statement that the trustees as “successors in interest” proceeded in “accordance with the decedent’s plan,” and “finished the job.” The conclusion of the majority, “although not free from doubt,” is that “the testamentary trustees were acting on [decedent’s] behalf in making the replacement.” The actions taken by the trustees which accomplished the replacement of the condemned property were taken pursuant to their own intent and the intent of tlieir mother, the beneficiary of the trusts and coowner of the condemned property. That property was business property used by Shore Distributors, Inc., a corporation engaged in the wholesale distribution of plumbing and heating supplies. It is stipulated that all of its stock was held by the decedent, his wife, and the three sons who were the testamentary trustees. It was this corporation which received bids for the construction of the replacement property, and it was this corporation which leased the replacement property from decedent’s widow and the three adult sons of petitioner who were the trustees. As such trustees they held all of decedent’s stock in the corporation during their mother’s lifetime with remainder in themselves or their issue at her death, they owned individually their own stock in the corporation, and their mother, the beneficiary of the trusts, owned her stock.5 It would seem obvious that the actions of the trustees and decedent’s widow in maldng the replacement of the condemned business property were taken, not as merely the pious fulfillment of the wishes of a deceased parent and spouse, but for business reasons connected with their own pecuniary interests as the real' owners of the family business corporation which was to be the lessee of the replacement property as it had been of the condemned property. I am unable to understand the characterization of the trustees by the majority opinion as “successors in interest” and the clear implication that since they are “successors in interest” to decedent they should be considered as acting on decedent’s behalf as if they were executors, i.e., as if they held a legal status which they obviously did not. ISTo authority is cited. With all deference, it is submitted that on the facts here present the trustees are not and cannot be considered as “successors in interest” to decedent. See City of New York v. Turnpike Development Corp., 36 Misc. 2d 704, 233 3 N.Y.S. 2d 887, 890 (1962). Since there is no capacity in law or in equity in which the trustees could act for the decedent in making the replacement and since as a practical matter the trustees were acting in this matter on behalf of themselves (as holders of the legal title and equitable remainder interests) and on behalf of the beneficiary of the trusts, I consider as completely untenable the conclusion of the majority that “the testamentary trustees were acting on his behalf in making the replacement.” Another reed upon which the majority opinion leans is a footnote which attempts to show an administrative construction inconsistent with the respondent’s position in this case, as evidenced by his publication of the Court of Appeals’ opinion in the Goodman case and his application of this opinion to facts having no resemblance to the facts of the instant case in 1954-1 C.B. 296. The short answer is that respondent has never taken an administrative position on facts similar in principle to those before us which is inconsistent with his position in this case. The majority opinion makes a point that section 1033 should be regarded as a relief provision. However it is clear that the relief intended by Congress is not to eliminate from the incidence of Federal taxation ail capital gain realized by a taxpayer upon condemnation but to merely “postpone recognition of involuntry capital gain” under the exceptionl circumstances set out in section 1033 (a) (3) (A). Cotton States Fertilizer Co., 28 T.C. 1169, 1173. In view of the fact that the replacement purchase was made in this case by the testamentary trustees from a distribution of assets made to them by the decedent’s estate it may well be that the basis of the acquired property in the hands of the trustees will be governed by section 1014 and not by section 1033(c). Thus the shocking result of the majority opinion would be to eliminate from any taxation at any time the capital gain realized by decedent prior to his death. Withey, J., agrees with this dissent except for last sentence. FORRESTER and Scott, A/., agree with this dissent.   In this connection, I point out the following facts which have been somewhat glossed over in the majority opinion : (1) The decedent’s will devised the residue of his estate to trustees of two trusts, one being referred to as the marital trust and the other being in effect a supplemental marital trust during his wife’s lifetime. The wife as primary beneficiary was given considerable powers over distributions. Decedent’s three sons were the trustees with broad powers “to invest as they may consider advisable or proper.” The sons or their issue were to take whatever remained in the trusts on the death of their mother. (2) The distributions of the Brown Street property and the General Motors Acceptance Corp. notes were made to the trustees by the executors “in order that said Residuary Trustees may proceed with the completion of said building plans.” (3) The title to the replacement property was held in the names of the widow and the trustees, and the lease of the property executed after the building was completed named the widow and the cotrustees as lessors.    See Briggs v. Walker, 171 U.S. 466, 471, In which the Supreme Court points out that the words “representative,” “legal representative,” or “personal representative” mean “executors or administrators.” To the same effect, see Thompson v. United States, 20 Ct. Cl. 276, 278; Unsatisfied Claim and Judgment Fund v. Hamilton, 256 Md. 56, 259 A. 2d 803, 306. For a Maryland case pointing out a distinction between an executor and a testamentary trustee, see Johnson v. Willis, 147 Md. 237, 127 Atl. 862, 864.    This is true even though, as in this case, the same persons are nominated by the decedent’s will to serve as executors and as testamentary trustees. In Re Oliff’s Estate, 283 Mich. 43, 276 N.W. 893, 894 (1937).    I am unable to find any reference in the majority opinion to these stipulated facts having to do with Shore Distributors, Inc.