1928 BTA LEXIS 3752">*3752 1. Petitioner held taxable upon gain from the sale in 1919 of certain shares of stock alleged to have been previously conveyed as a gift to her daughter.
2. Where personal property was transferred subject to conditions limiting its use by the transferee, with a possibility of reversion to the transferor, and where the facts show that the transferor did not intend to relinquish all dominion and control of the property, held, that such transfer did not constitute an absolute gift inter vivos.
3. The exchange of stock of one corporation for debenture bonds of another corporation held to have resulted in taxable gain under section 202 of the Revenue Act of 1921. Amount of such gain stipulated by the parties.
11 B.T.A. 621">*621 Deficiencies have been asserted for the years 1919, 1921 and 1922 in the respective amounts of $56,034.06, $139.90 and $8,272.81. The only allegations of error are - (1) that the Commissioner erroneously included in income for the year 1919 the amount of $114,330.75 as profit from the sale of securities; and (2) that the Commissioner1928 BTA LEXIS 3752">*3753 erroneously determined that income resulted to the taxpayer for the year 1922 from an exchange of certain shares of stock of The Texas Co. for convertible debenture bonds of the Galena-Signal Oil Co.
While it is alleged in the petition that the additional taxes for the year 1921 are in controversy, there is no assignment of error in respect of the Commissioner's determination of such taxes and there has been adduced no evidence in respect thereof.
11 B.T.A. 621">*622 FINDINGS OF FACT.
The petitioner, Margaret M. Edson, is the wife of J. A. Edson, president of the Kansas City Southern Railway Co. During the tax years in controversy she was residing with her husband in Kansas City, Mo. She had living two children - E. G. Edson, a son, and Geraldyne Edson Pratt, a daughter.
In the year 1919, Geraldyne Edson Pratt lived with her parents in Kansas City. She was thirty-five years of age and had been married and divorced several years previously. She had but little means of her own and was largely dependent upon her parents for support.
Being desirous of providing an independent income for her daughter, the petitioner, in the year 1919, instructed her brokers, Houston, Fible & 1928 BTA LEXIS 3752">*3754 Co., of Kansas City, to transfer from her own to her daughter's account 708 shares of stock of The Texas Co. The said 708 shares were a small portion of the petitioner's holdings of said stock. She had a considerable estate in her own name independent of that of her husband. On being so instructed, Houston, Fible & Co. opened an account in their books in the name of Geraldyne Edson Pratt and transferred thereto 708 shares of the stock of The Texas Co. then standing in the petitioner's name. The transfer was made in several installments, the first on April 12, 1919, and the last in July of that year. On April 12, 1919, the petitioner wrote the following letter to Geraldyne Edson Pratt:
TO MRS. GERALDYNE EDSON PRATT.
DEAR GERALDYNE: I have transferred to you two hundred shares of Texas Oil Company stock as a gift, with this reservation, that when you sell the stock you invest the proceeds in United States Government securities, to so remain during your life, with the further understanding that no part of the principal will be disposed of either by sale or used for loan.
The income use as your best judgment may dictate.
Should death occur to you before either your father1928 BTA LEXIS 3752">*3755 or myself, then the securities will revert to me, otherwise to him.
If married and no issue, the preceding paragraph will prevail.
If issue, the securities will be left in trust for the issue.
Your mother,
(Signed) Mrs. J. A. EDSON.
ACCEPTED:
(Signed) GERALDYNE EDSON PRATT.
In July, 1919, the 708 shares of stock standing in the name of Geraldyne Edson Pratt were sold by the said firm of Houston, Fible & Co. for approximately $185,000 and the proceeds were placed in the First National Bank of Kansas City, Mo., to the account of the said Geraldyne Edson Pratt. Soon thereafter $100,000 of this amount was invested in Victory loan notes. The notes were purchased by the First National Bank upon instructions given by Geraldyne Edson Pratt and were registered in her name. Thereafter 11 B.T.A. 621">*623 the bonds were kept at the bank in a safe-deposit box in her name and the interest accruing thereon was collected by her and deposited from time to time to her account. Of the remaining $85,000, a loan of approximately $80,000 was made to J. A. Edson, which was evidenced by an interest-bearing promissory note payable to Geraldyne Edson Pratt. The loan was paid in the year 19251928 BTA LEXIS 3752">*3756 with other securities.
On May 8, 1920, J. A. Edson wrote the following letter to the president of the First National Bank of Kansas City:
MY DEAR MR. SWINNEY: Mrs. [Margaret Martha] Edson Gave Mrs. Geraldyne Edson Pratt, some Texas Company stock which she (Mrs. Pratt) sold, placing the proceeds in Government bonds to the extent of one hundred thousand dollars (registered). These bonds she (Mrs. Edson) desires to place in trust for Mrs. Pratt through your Company, the 1st National Bank, as suggested. The money is to remain in Government bonds during her life and to be reinvested when present bonds mature, and no part of the principal is to be disposed of either by sale or to be used as collateral for a loan. The income to her therefrom is to be used as her best judgment may dictate.
Should death occur to her before either her mother or father, then the securities will revert to her mother; if the mother's death should occur before the father's, the securities will revert to him - if the death of father and mother occur first, then if she (Mrs. Pratt) be married, and there is no issue, the following paragraph will prevail - if there is issue, the securities are to be held1928 BTA LEXIS 3752">*3757 in trust for such issue:
If no issue and death occur to both father and mother first, then at her (Mrs. Pratt's) death, the securities to remain in trust divided equally between her brother, Edward Gilroy Edson and her sister Ethel's daughter - Miss Margaret Helen Williams.
In the event of her brother's death, his share is to be held in trust for his children and their legal heirs. In the event of Miss Margaret Helen Williams' death, her share to pass to her issue; if no issue, then to the children of Edward Gilroy Edson or their heirs.
It is to be understood that if at any time, by accident or sickness, the income to any particular one named above is not sufficient to meet absolute necessary expenses, with other income they may have, you are authorized to appropriate from time to time from the principal, whatever amount is needed. The same is to apply to the children to meet the expense of their education.
Below is given a list of the securities going to make up the total of $100,000.00:
| Certificate number | Amount of | Date of | Interest rate | Interest due. |
| bond. | Maturity | |||
| Per cent. | ||||
| K-1105 | $50,000 | May 20, 1923 | 4 3/4 | June and Dec. 15. |
| D-4790 | 5,000 | do | 4 3/4 | Do. |
| D-4791 | 5,000 | do | 4 3/4 | Do. |
| D-4792 | 5,000 | do | 4 3/4 | Do. |
| D-4793 | 5,000 | do | 4 3/4 | Do. |
| D-4794 | 5,000 | do | 4 3/4 | Do. |
| D-4795 | 5,000 | do | 4 3/4 | Do. |
| D-4390 | 10,000 | do | 4 3/4 | Do. |
| D-4391 | 10,000 | do | 4 3/4 | Do. |
| 100,000 |
1928 BTA LEXIS 3752">*3758 Yours very truly,
(Signed) J. A. EDSON.
11 B.T.A. 621">*624 The petitioner had discussed the subject matter of this letter with her husband and was fully aware of the letter's contents and purport.
On July 21, 1920, pursuant to the plan outlined in the said letter of May 8, 1920, the following trust agreement was executed:
THIS AGREEMENT, Made and entered into this 21st day of July, 1920, by and between Margaret Martha Edson (hereinafter some times called "grantor"), of Kansas City, Jackson County, Missouri, party of the first part, and The First National Bank, of Kansas City, Missouri (hereinafter some times called "trustee"), a corporation, organized and existing under the laws of the United States, with its principal place of business in Kansas City, Jackson County, Missouri, party of the second part;
WITNESSETH: That the party of the first part being desirous of establishing, creating and providing a trust to be handled, held and used upon the terms hereinafter set forth, has caused to be sold, assigned, transferred, set over and conveyed, unto the party of the second part, its successors and assigns, the following described property, to-wit: Nine United States of America1928 BTA LEXIS 3752">*3759 Government Bonds, particularly described by certificate number, amount, date of maturity, interest rate, and interest due dates, as follows:
| Certificate number. | Amount of | Date of | Interest rate. | Interest due. |
| bond. | Maturity. | |||
| Per cent. | ||||
| K-1105 | $50,000 | May 20, 1923 | 4 3/4 | June and Dec. 15. |
| D-4790 | 5,000 | do | 4 3/4 | Do. |
| D-4791 | 5,000 | do | 4 3/4 | Do. |
| D-4792 | 5,000 | do | 4 3/4 | Do. |
| D-4793 | 5,000 | do | 4 3/4 | Do. |
| D-4794 | 5,000 | do | 4 3/4 | Do. |
| D-4795 | 5,000 | do | 4 3/4 | Do. |
| D-4390 | 10,000 | do | 4 3/4 | Do. |
| D-4391 | 10,000 | do | 4 3/4 | Do. |
and commonly known as United States Victory 4 3/4 Bonds;
The same to be held under and according to the terms of this trust agreement and subject to all of its provisions and which shall collectively be known as the principal of the trust estate, To Have and To Hold the same, and all proceeds thereof and the net income arising therefrom, unto the said party of the second part, its successors and assigns; in trust, however, to be held, handled and used for the purposes and in the manner hereinafter set forth, to-wit:
FIRST. This trust shall be known and designated as the "Margaret Martha Edson Trust. 1928 BTA LEXIS 3752">*3760 "
SECOND. The Trustee shall have full power and authority at any time, and from time to time, to hold, manage and control said trust fund, to sell, assign, convey or otherwise transfer any part or all of said property, upon such terms and conditions as it may deem best; to receive and receipt for the proceeds of any such sale or transfer, to invest or re-invest the same, in its discretion, in bonds issued by the United States Government, and to receive and receipt for any and all income that may be derived from said property or from the investment or re-investment of the proceeds thereof.
THIRD. The Trustee shall pay over and deliver all of the net income derived from said trust fund, at such times as in its discretion it may deem proper, to Geraldyne Edson Pratt, daughter of the grantor herein, for and during the natural life of said Geraldyne Edson Pratt, taking the receipt of said Geraldyne Edson Pratt for such distributions of income as may be made to her, which 11 B.T.A. 621">*625 receipts shall be in full discharge of the Trustee for said income, but without power upon the part of said Geraldyne Edson Pratt, or of the Trustee, to anticipate said income.
FOURTH. Should the said1928 BTA LEXIS 3752">*3761 Geraldyne Edson Pratt die leaving surviving her, her mother, Margaret Martha Edson, then and in that event this trust shall cease and terminate and the principal thereof, together with any undistributed income in the hands of the Trustee, shall be turned over, paid and delivered to the said Margaret Martha Edson, and her receipt therefor shall be in full and final acquittance to said Trustee of all liability hereunder.
Should the said Geraldyne Edson Pratt be predeceased by her mother, Margaret Martha Edson, but survived by her father, Job A. Edson, then and in that event this trust shall also cease and terminate and the principal sums thereof, together with any undistributed income in the hands of the Trustee at such time, shall be turned over, paid and delivered to the said Job A. Edson, and his receipt therefor shall be in full discharge and acquittance of said Trustee of all liability hereunder.
Should the said Geraldyne Edson Pratt be predeceased by both her mother, Margaret Martha Edson, and her father, Job A. Edson, and die during the term of this trust agreement leaving surviving her child or children, or other more remote descendants, then this trust shall continue for1928 BTA LEXIS 3752">*3762 the period hereinafter limited and the income arising therefrom be paid by said Trustee to the said descendants of Geraldyne Edson Pratt, share and share alike, per stirpes and not per capita, or unto their Guardians or Curators so long as they shall remain minors.
FIFTH. Should said Geraldyne Edson Pratt be pre-deceased by both her mother, Margaret Martha Edson, and her father, Job A. Edson, then upon the death of the said Geraldyne Edson Pratt, should she die leaving her surviving no child, children or other more remote descendants, this trust shall continue and be and remain in force until such time as Margaret Helen Williams, hereinafter named as one of the beneficiaries, shall have attained the age of forty years, or would have attained such age had she lived, and the income derived therefrom shall be distributed by the Trustee as follows: One-half thereof to Edward Gilroy Edson, son of the grantor herein, so long as he may live during the pendency of this trust, and in the event of his death prior to the termination of this trust, then to his children or other more remote descendants, share and share alike, per stirpes and not per capita. The income derived1928 BTA LEXIS 3752">*3763 from the other one-half of said trust estate shall be paid by the Trustee to Margaret Helen Williams, grand-daughter of the grantor herein, and to her children or other more remote descendants should she leave such surviving her, in the same manner and upon the same terms as in this clause provided for Edward Gilroy Edson and his descendants.
SIXTH. Should the said Margaret Helen Williams die without leaving surviving her any child, children or other more remote descendants, then her share of all the income derived from said trust estate shall be paid by the Trustee to the said Edward Gilroy Edson, or his children or more remote descendants.
SEVENTH. When the period shall have arrived when Margaret Helen Williams attains the age of forty years, or would have attained such age if living, then the principal of said trust estate and all income thereof in the hands of the Trustee then undistributed, shall by the Trustee be then turned over, paid and delivered to the beneficiaries then receiving the income from said trust estate in the same proportions that they have been receiving said income, and their receipts therefor, if of lawful age, or of their Guardians or Curators, 11 B.T.A. 621">*626 1928 BTA LEXIS 3752">*3764 if they be minors, shall be in full acquittance and discharge to said Trustee of all liability hereunder.
EIGHTH. It is the intention of the grantor in this instrument that said trust fund shall at all times during the period of this trust be kept to the full sum of One Hundred Thousand Dollars ($100,000.00) in principal so near as may be; but in the event any of the beneficiaries at the time being entitled to distribution of the income of said trust shall by reason of accident or sickness become so situated as in the judgment of the Trustee to render them unable to meet their absolutely necessary expenses, or should it become necessary in the judgment of the said Trustee during the minority of any of the beneficiaries hereunder to use a portion of said principal to provide for the education of said minor beneficiary or beneficiaries, then the Trustee is given power and authority to sell and convert into cash a portion of the part of the principal of said trust fund and turn the proceeds thereof over to such beneficiary or beneficiaries; provided, however, that the proportion of the principal thus converted by the Trustee into cash shall not exceed the proportionate interest of1928 BTA LEXIS 3752">*3765 said dependent beneficiary and provided further that any such advancement from principal shall go in diminution, both as to income and principal, to the share going to such dependent beneficiary. But no other or further advancements or anticipations of either principal or income shall be made by the Trustee or received by any beneficiary under this trust agreement.
NINTH. The party of the first part reserves the right to terminate this trust at any time prior to her death by giving the party of the second part legal notice of revocation and termination, and upon receipt of such notice the Trustee shall deliver all property held subject to the terms of this trust then in its hands, whether principal or income, to the party of the first part and her receipt therefor shall be in full acquittance to said Trustee of all liability hereunder.
IN WITNESS WHEREOF, the party of the first part has hereunto set her hand, and The First National Bank, of Kansas City, Missouri, party of the second part, has caused this instrument to be signed by its President, attested by its Secretary, and its corporate seal to be hereto attached, all done as of the day and year first above written.
1928 BTA LEXIS 3752">*3766 MARGARET MARTHA EDSON,
THE FIRST NATIONAL BANK OF KANSAS CITY, MO.
By E. F. SWINNEY, President.
The bonds transferred to the trustee under the above trust agreement were the same bonds which had been purchased with a part of the proceeds from the sale of the 708 shares of The Texas Co. stock.
On June 29, 1925, the following instrument was executed by the petitioner:
RELINQUISHMENT
WHEREAS, a certain trust agreement was entered into by and between Margaret Martha Edson of Kansas City, Jackson County, Missouri, and The First National Bank of Kansas City, Kansas City, Missouri, on July 21, 1920 in which was contained the following provision:
"NINTH. The party of the first part reserves the right to terminate this trust at any time prior to her death by giving the party of the second part legal notice of revocation and termination, and upon receipt of such notice the Trustee shall deliver all property held subject to the terms of this trust then in its hands, whether principal or income, to the party of the first part and 11 B.T.A. 621">*627 her receipt therefor shall be in full acquittance to said Trustee of all liability hereunder."
NOW, THEREFORE, for good and valuable1928 BTA LEXIS 3752">*3767 consideration the undersigned, Margaret Martha Edson, grantor in the aforesaid Trust agreement, for herself, her heirs, executors, administrators and assigns, does hereby relinquish and forever release any right or power reserved to her in said trust agreement or which may be vested in her by virtue of said trust agreement to terminate or revoke the trust created thereby, it being the intention of this instrument that said trust shall be from the date hereof irrevocable.
IN WITNESS WHEREOF, Margaret Martha Edson has executed this instrument this 29th day of June, 1925, and delivered the original thereof to The First National Bank of Kansas City, Kansas City, Missouri.
(Signed) MARGARET MARTHA EDSON.
Prior to the execution of the relinquishment agreement a revenue agent, acting on behalf of the Commissioner of Internal Revenue, had made an investigation of the petitioner's tax liability for the year 1919 and had commented upon the effect of the ninth paragraph of the trust agreement of July 21, 1920, being the revocable clause of such agreement.
The said trust agreement as modified by the relinquishment has remained in effect up to the present time.
In October, 1922, 1928 BTA LEXIS 3752">*3768 the petitioner exchanged 1,200 shares of the capital stock of The Texas Co., a corporation organized under the laws of Texas, for $60,000 par value of debenture bonds of the Galena-Signal Oil Co., a corporation organized under the laws of Pennsylvania. Signal Oil Co., a corporation organized under the laws of Pennsylvania. This transaction resulted in a gain to the petitioner in the amount of $30,540.
OPINION.
SMITH: Since there is no assignment of error and since no evidence has been adduced in respect of the proposed deficiency for the year 1921, the Commissioner's determination for that year is approved.
The only objection made to the Commissioner's computation for the year 1919 is that he has included in gross income the profit from the sale of certain securities which the petitioner claims had been conveyed to her daughter as a gift prior to the date of their sale.
The first question for our consideration is whether the alleged gift by the petitioner to her daughter of the 708 shares of stock of The Texas Co. was an absolute gift. If so, the profit realized upon the subsequent sale of the stock was not income of the petitioner. The petitioner contends that she1928 BTA LEXIS 3752">*3769 transferred the stock in question to her daughter prior to the time of its sale with the definite intention of making an absolute, irrevocable gift and that her only purpose in so doing was to provide for her daughter an independent and indefeasible income for the remainder of her life.
For the determination of the question of the validity of a gift inter vivos certain definite and well recognized rules have been formulated. 11 B.T.A. 621">*628 Presupposing parties legally competent to act there must be (1) a definite intention on the part of the donor to make an absolute gift; (2) delivery of the subject matter of the gift; and (3) acceptance by the donee. The rule has been stated by a few of the numerous authorities as follows:
* * * Among the indispensable conditions of a valid gift are the intention of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject of the gift in praesenti at the very time he undertakes to make the gift; * * * (.)
* * * Gifts inter vivos of personal property, to be effective, must be accompanied by the delivery of the possession, 1928 BTA LEXIS 3752">*3770 the donor parting with all present and future dominion over it; the donor must be divested of, and the donee invested with, the right of property in the subject of the gift; it must be absolute, irrevocable, without any reference to its taking effect at some future time; and without such proof, clear and explicit, the gift fails. (.)
But it is the intention of the alleged donor to give away his property, not the intention of the alleged donee, or his hope or belief, that conditions a valid gift. The clear and certain intention of the donor presently and forever to part with his property is indispensable to such gift. * * * (.)
* * * To constitute a valid gift inter vivos, there must be an intention to give, and a delivery unto the donee, or to some one for him, of the property given. An intention of the donor to give is not alone sufficient. The intention must be executed by a complete and unconditional delivery. Neither will a delivery be sufficient unless made with an intention to give. The transaction must show a completely executed transfer to the donee of the present1928 BTA LEXIS 3752">*3771 right of property and the possession. The donee must become the owner of the property given. [Authorities cited.] (; .)
The question of intent where any doubt exists is generally difficult of determination. It has been said that -
* * * The intent of a person cannot be proven by direct or positive evidence. It is a question of fact, to be proven, like any other fact, by the acts, conduct, and circumstances. * * * (; .)
So far as the evidence shows, the petitioner's first act bearing upon the transaction was her instruction to her brokers by telephone to transfer the stock to her daughter's account. She then wrote the letter of April 12, 1919, to her daughter in which she stated that she had made her a gift of 200 shares of stock, with certain reservations and conditions. At the bottom of this letter the daughter wrote "Accepted" and signed her name. She thus obligated herself to comply with all the conditions stated in the letter.
The petitioner testified that she telephoned to her brokers, Houston, Fible & Co., about1928 BTA LEXIS 3752">*3772 the time she wrote the letter of April 12, 1919, to 11 B.T.A. 621">*629 transfer 708 shares of her Texas Co. stock to her daughter's account; that she had had no conversation with her daughter about making her a gift of the stock prior to that time. Her own words were:
I never talked with her about it, because she was not familiar with business matters, and I was just anxious to fix her so she - so if she lost all the rest she had, she would have that to keep her fed and clothed - the income of $100,000 of Liberty Bonds.
The petitioner's purpose in making the transfer to her daughter, as shown by her oral testimony, that is, to provide her daughter with an independent income for life, is clearly the intention shown in the letter of April 12, 1919. We believe that the first paragraph of the letter must be construed as contemplating the sale of the stock and the purchase of government securities with the proceeds and as intending the same as one of the conditions of the gift. This paragraph reads as follows:
I have transferred to you two hundred shares of Texas Oil Company stock as a gift, with this reservation, that when you sell the stock you invest the proceeds in United States1928 BTA LEXIS 3752">*3773 Government securities, to so remain during your life, with the further understanding that no part of the principal will be disposed of either by sale or used for loan.
The second paragraph of the letter reading "the income use as your best judgment may dictate" shows a definite intention to make an absolute and unconditional gift of the income from the securities. The letter further provides:
Should death occur to you before either your father or myself, then the securities will revert to me, otherwise to him.
If married and no issue, the preceding paragraph will prevail.
If issue, the securities will be left in trust for the issue.
All of the 708 shares of stock were transferred to the daughter's account at intervals over a short period of time, in accordance with petitioner's instructions to her brokers, and soon thereafter were sold by the brokers and the proceeds deposited at the bank to the daughter's credit. The dates of the sales and the amounts received were as follows:
| Date. | Shares. | Amounts. |
| May 5, 1919 | 200 | $46,000 |
| June 24, 1919 | 200 | 53,350 |
| July 16, 1919 | 100 | 28,000 |
| Sept. 9, 1919 | 100 | 27,100 |
| Oct. 7, 1919 | 108 | 30,786 |
While the1928 BTA LEXIS 3752">*3774 letter of April 12 refers specifically to only 200 shares of stock, we may reasonably assume that the other 508 shares were transferred upon the same conditions.
11 B.T.A. 621">*630 It may be well to state here that we deem the requirements for delivery and possession to have been satisfactorily met by the transfer of the stock to the donee's account in the books of Houston, Fible & Co.
* * * A delivery is sufficient if made to a third person for the grantee or beneficiary, "without reservation, and with the intention that it shall take effect from that time, and shall operate as a transfer of the title." ; ; ; . ()
See also ; .
There certainly exists some doubt, however, as to whether the petitioner intended absolutely and irrevocably to divest herself of all title, dominion and control of the stock and to vest1928 BTA LEXIS 3752">*3775 the same in the beneficiary. We will first consider the conditions expressly made in the letter declaring the gift. We do not find the rule inflexible that any condition whatsoever attached to a gift renders it invalid. In , it was held that a donor may attach a condition to a gift in praesenti if that condition be not inconsistent with possession or control of the thing given. The court there said:
The underlying question of these assignments is, what are the essentials required by the law to constitute a valid gift of personal property inter vivos, in a case like the present? Undoubtedly, there must be shown an intention to give; that is, an expressed purpose to divest the donor of title in and ownership of the thing given, carried into effect and evidenced by a delivery of possession to the donee, and acceptance by him. It, of course, inheres in the conception of the possession essential to a completed gift, that the donee should have such control, and such control only, of the subject matter of the gift, as is consistent with the ownership purported to be transferred to him. What shall constitute the essential delivery, 1928 BTA LEXIS 3752">*3776 possession or control, must depend always on the circumstances of each case and the environment of the parties. * * *
The court was there considering primarily whether retention by the donor of physical control of the thing given invalidated the gift. The donor had handed over to the donees, his brothers, certain securities, stating that they were a gift but that he, the donor, desired the donees to give him the coupons maturing thereon during his life. The bonds were then placed for safekeeping in a vault to which the donor and the donees had access. Thereafter the donor visited the vault and removed the coupons himself. The court held that such partial control did not invalidate the gift nor did the condition that the donor was to receive the income from the securities for life.
The Supreme Court of Missouri in , had before it a situation very similar to the one in the case at bar. By a certain testamentary writing it was provided as follows:
11 B.T.A. 621">*631 I give to [naming the donees] the following described notes and bonds, or any reinvestment of the same that may hereafter be made, * * * reserving, however, for my own1928 BTA LEXIS 3752">*3777 use, during my life, the income and interest from said bonds and notes, and restraining them from making any disposition of the principal of said bonds and notes during my life, and also reserving the right to reinvest any money from the payment of these notes and bonds as to me may seem fit, * * *.
It was held that such disposition of such notes and bonds and their proceeds could not be enforced as a gift, as the right of control reserved by the donor was inconsistent with absolute ownership by the donees. The court further said:
* * * The transfer to the donees is not absolute and unqualified. The right of control reserved by the donor is inconsistent with absolute ownership by the donees. The donees took no present, unconditional title to the notes so long as the donor retained control of them and their proceeds. It is clear that the donor intended that the gift should not become perfect until his death. The disposition attempted to be made of the notes and bonds and their proceeds cannot therefore be enforced as a gift.
The court did hold, however, that the transaction constituted a valid trust.
In 1928 BTA LEXIS 3752">*3778 ; , the court followed its decision in the Soulard case and held that the attempt to make a gift failed for the reason that the donor retained an interest in and control over the subject matter, but that there was created a valid enforceable trust. In each of these cases the donor or trustor had retained a life interest in the income from the property given. This we believe to be the chief distinction between the case at bar and In ; , the court held that the mere retention by the donor of the power to enjoy the use of the thing given for life did not destroy the validity of the gift. See also The petitioner here, though not retaining any life interest in the income from the securities, did direct that they should be sold and that the proceeds should be reinvested in certain other designated securities, that no part of the principal should ever be disposed of by the beneficiary and that the securities should revert to1928 BTA LEXIS 3752">*3779 her in the event she was predeceased by her daughter, leaving no issue. The daughter was then thirty-five years of age and had been married and divorced four years previously.
There is no necessity for the establishment of a trust here since there is no active duty prescribed for a trustee to perform. The petitioner has attempted to vest in the beneficiary both the equitable title and the legal title, conditionally, which is inconsistent with the theory of a trust. We have no doubt that she could have best carried out the purpose in mind by creating a trust, either declaring 11 B.T.A. 621">*632 herself trustee or conveying legal title to a third person, for the benefit of her daughter, but this was not attempted nor was such intention shown. The rule is well settled in Missouri, as stated in both of the above discussed cases, that the courts will not convert an imperfect gift into a valid trust merely because of such imperfection. See also , and references there given.
About the last of July, 1919, the petitioner and her daughter left for a visit to Japan and did not return until some time in November. On the 21st of July, 1920, 1928 BTA LEXIS 3752">*3780 the trust instrument, set out in the foregoing findings of fact, was executed.
We are convinced from the oral testimony and other evidence that the daughter did not at any time consider herself the absolute owner of The Texas Co. stock or the proceeds from the sale of the stock, and that she did not at any time exercise complete and independent control and ownership over it.
In the light of all the evidence before us, we are of the opinion that the petitioner was the legal owner of the stock at the time of its sale in 1919. In arriving at our conclusion we have tried to ascertain the petitioner's real intention and have taken into consideration all of the circumstances and acts of the parties. It should be borne in mind that the transactions here took place between a mother and father and their daughter who were all living together and among whom there has never been any contention with respect to the matters in question. We believe the evidence clearly shows that the petitioner's primary intention was to provide her daughter with an adequate income for life. She realized that on account of her daughter's lack of business experience and independent knowledge of business affairs1928 BTA LEXIS 3752">*3781 it would be unwise to entrust her with the absolute ownership and control of any large amount of property, and we do not believe that she intended to so do. There was not that fixed purpose at the time the assignment was made to then divest herself of all title, dominion and control of the stock and to vest these irrevocably in her daughter, which was said in , to be essential to a valid gift. We do not believe that where the petitioner set out in her own way to accomplish one thing, in which she failed perhaps for want of competent advice, we should hold that she did by her acts accomplish another thing which she did not intend.
Although the validity of a gift once complete is not brought into question by the subsequent possession of and the exercise of dominion and control over the thing given by the donor, , we believe that the validity of the gift here should be determined not upon any single act of the parties or at any particular time in the series of events related, but that we should consider 11 B.T.A. 621">*633 together all of the acts and circumstances up to the time1928 BTA LEXIS 3752">*3782 that the parties themselves deemed the matter finally settled. To find, as the petitioner asks us to, that a completed gift of the stock is evidenced by the letter of April 12, 1919, we would have to hold that the subsequent trust agreement of July 21, 1920, was without meaning or effect. It appears, however, that this trust agreement was put into effect immediately and has continued to operate up to the present time. The instrument itself is regular and complete, and apparently meets all the requirements of the laws of Missouri with respect to the creation of valid trusts. The petitioner herself conceived the idea of creating the trust and suggested the terms of the agreement. It does not appear that any doubt existed at that time in the minds of the parties as to the petitioner's ownership of the bonds. The trust has never been set aside by the courts of Missouri or attacked heretofore upon any grounds. The trust agreement accomplishes the purpose that the petitioner apparently had in mind from the beginning, and is the means, we think, which the parties would have adopted if they had been properly advised.
1928 BTA LEXIS 3752">*3783 It is significant that only little more than half of the proceeds of the 708 shares of stock was ever invested in Government securities. According to the petitioner's own theory of a gift this constituted a violation of the condition subsequent, that "the proceeds" from the sale of the stock be invested in United States Government securities, and rendered the gift subject to repudiation by the donor. .
It permits of no argument that under the circumstances here present the relinquishment of the revocable clause of the trust agreement which was made June 29, 1925, can not be given retroactive effect. The relinquishment was not made until the revenue agent had called the petitioner's attention to the effect of the revocable clause of the trust. Moreover, by its expressed terms, the relinquishment provided that "said trust shall be from the date hereof irrevocable." But since our question goes to the ownership of the stock at the time of its sale in 1919 this phase of the matter is not material to the issue raised.
The remaining issue relates to the exchange by the petitioner in the year 1922 of certain shares of stock in The1928 BTA LEXIS 3752">*3784 Texas Co., a corporation organized under the laws of Texas, for debenture bonds in the Galena-Signal Oil Co., a corporation organized under the laws of Pennsylvania. It is conceded that the bonds received in exchange for the stock had a "readily realizable market value" within the meaning of section 202 of the Revenue Act of 1921, and it is stipulated by the parties that a capital gain in the amount of $30,540 was realized upon the transaction. It is the petitioner's contention that this was an exchange of property held for investment for property of a like kind 11 B.T.A. 621">*634 or use, within the meaning of section 202 of the Revenue Act of 1921, and that the gain thereon is not taxable. Section 202(c)(1) provides that:
(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized -
(1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade1928 BTA LEXIS 3752">*3785 or other property held primarily for sale), is exchanged for property of a like kind or use.
We can not agree with the petitioner's contention. It is not necessary to point out the numerous differences in the character and uses of these two forms of property. Generally a share of stock evidences an interest in the ownership of a corporation, while a bond evidences simply an obligation of the corporation. The bondholder stands somewhat in the position of a mortgagee. The quoted section of the Act is interpreted in the Commissioner's Regulations 62, article 1566(a), in part as follows:
Where property held for investment is exchanged for other property of a like kind, or where property held for productive use in trade or business is exchanged for other property of a like use. The words "like kind" are defined as having reference to the nature or character of the property and not its grade or quality. Therefore under this paragraph no gain or loss is realized by one other than a dealer from the exchange of real estate for real estate, or from the exchange of evidences of indebtedness (such as bonds and notes) for evidences of indebtedness, or from the exchange of shares of stock1928 BTA LEXIS 3752">*3786 for other shares of stock; but one kind or class of property may not, under this paragraph, be exchanged for property of a different kind or class, as shares of stock for bonds or real estate for personal property. * * * (Italics ours.)
In , the Supreme Court held that where stock of a certain character in a corporation organized under the laws of one State was exchanged for stock of a different character in a corporation organized under the laws of another State, where the one corporation had taken over the assets and business of the other, an essentially different interest was acquired which resulted in a taxable gain under the Revenue Act of 1916. In , where we considered a similar transaction with reference to the 1916 Act, we said:
Petitioner held bonds and notes of the Pere Marquette Railroad Co. After the reorganization it held prior preference stock and common stock of the new company, some of which it acquired in exchange for bonds and the larger part of which it acquired from the purchase syndicate for cash. The rights which petitioner possessed by reason1928 BTA LEXIS 3752">*3787 of the ownership of the bonds and notes of the old company were materially different from its rights under the stock of the new company which it acquired. * * *
While it appears that both the stock and the bonds here were held by the petitioner for investment purposes and to that extent were in 11 B.T.A. 621">*635 fact appropriated to the same use, we do not believe that this meets the requirement of the statute that the properties be "of a like kind or use". This phrase refers to the nature of the property and its potential uses, otherwise the word "kind" would be mere surplusage and the statute would be made to say that no taxable gain is derived from the exchange of property, held for investment or for productive use in trade or business, for property of a like use. We believe that the Commissioner's regulations above quoted properly reflect the meaning of the statute and are applicable in the instant case.
Judgment will be entered for the respondent.