*1517 1. A decedent left a residuary estate in trust. Included in the residuary estate were 100 shares of a certain kind of stock. These shares were sold by the trustee under this trust. Held, that the time of acquisition of such stock by the testamentary trustee was the date of the death of the decedent; therefore, the basis for determining gain or loss from the sale is the fair market value of the shares at the date of the death of the decedent.
2. Another 100 shares of this same stock were sold by the testamentary trustee at the same time. These shares were first given as the corpus of another trust for the benefit of a daughter until her marriage or death, upon the happening of which they were to become a part of the residuary estate. This daughter married several years after the decedent's death. Held, that the time of acquisition of these shares by the testamentary trustee which sold them was at the date of the death of the decedent, and the basis for determining gain or loss upon this sale was also the fair market value of these shares at the date of the death of the decedent.
*514 In each of these eleven cases the Commissioner determined a deficiency of $6,675.50 in the income-tax liability of the petitioner for the year 1922. The errors assigned which have been left for our consideration may be summarized as follows: (1) The Commissioner determined the gain from the sale of 200 shares of stock of Barber & Company, Inc., by taking as a basis the value of these securities at the date of the decedent's death rather than the value at the dates the petitioners acquired title to the securities; (2) The Commissioner erroneously held that the consideration received by the petitioners included $97,084.35 which was in fact paid to another trust for the release of claims made by beneficiaries of the latter trust.
Two other errors were assigned, but the stipulation disposes of one and the respondent concedes the other. In each case the parties filed a stipulation. These stipulations are identical except for the second paragraph thereof. The stipulation filed at Docket No. 26747 is as follows:
The petitioner above named is a New York corporation with its principal place of business located at No. 45 Wall Street, *1519 New York City.
The petitioner, as trustee under the will of Sarah P. Barber for remainder interest after Arthur Barber, received a notice of deficiency dated February 18, 1927, advising it of a proposed additional income tax of $6,675.50 for the year 1922.
Sarah P. Barber died on August 6, 1917, leaving a last will and testament which was duly admitted to probate in the Bergen County Orphans' Court of New Jersey. On August 23, 1917, in accordance with the terms of her will, the United States Trust Company of New York was duly appointed executor and trustee of her estate.
Prior to the death of Sarah P. Barber and on December 22, 1916, she executed a deed of trust (copy of deed of trust introduced in evidence as petitioner's Exhibit No. 1) in which the United States Trust Company of New York was named as trustee and by the terms of which she conveyed certain property to the trustee to hold the same in trust and pay the income to her for life and upon her death to pay over the income in quarterly installments of equal amounts to her eleven children and upon the death of the first of said children who should die after her, to pay over the principal of said trust fund in equal*1520 shares to such of said children as should then be living and to the issue of such children as should then be deceased, such issue taking per stirpes and not per capita. Among the properties constituting the principal of the trust fund created by the deed of trust were:
| 708 shares | Barber & Company, Inc., stock, |
| 25 shares | Atlantic Stevedoring Company stock, |
| 100 shares | La Plata Steamship Company, Inc., stock, |
| 265 shares | New York Oriental Steamship Company stock. |
On January 8, 1917, the trustee sold these 708 shares of Barber & Company, Inc., stock at $2,500 a share, realizing therefore $1,770,000. This sale was made by the trustee on the direction of Sarah P. Barber pursuant to the terms of the deed of trust.
*515 Upon the death of Sarah P. Barber the petitioner as executor of her estate received:
| 200 shares | Barber & Company, Inc., common stock, |
| 40 shares | Atlantic Stevedoring Company stock, |
| 50 shares | La Plata Steamship Company, Inc., stock, |
| 65 shares | New York & Oriental Steamship Company stock. |
The will of Sarah P. Barber (copy of will introduced in evidence as petitioner's Exhibit No. 2) provides in part as follows:
*1521 SIXTH: I give and bequeath one hundred (100) shares of Barber & Company, Inc., stock now held by me to the United States Trust Company of New York IN TRUST, to hold, manage, invest and reinvest the same and to pay over the net income therefrom to my daughter Edith Sterling Barber until her marriage or death, whichever shall first occur, and upon the happening of such event the principal of the said trust fund shall fall into and become a part of my residuary estate and be disposed of in the same manner as if it had theretofore been held therein.
SEVENTH: I give and bequeath one hundred (100) shares of Barber & Company, Inc., stock now held by me to the United States Trust Company of New York IN TRUST, to hold, manage, invest and reinvest the same and to pay over the net income therefrom to my daughter Elizabeth Wright Barber until her marriage or death, whichever shall first occur, and upon the happening of such event the principal of the said trust fund shall fall into and become a part of my residuary estate and be disposed of in the same manner as if it had theretofore been held therein.
EIGHTH: All the rest, residue and remainder of my estate, both real and personal and*1522 wheresoever situate, I give, devise and bequeath to the said United States Trust Company of New York IN TRUST, to divide the same into as many shares as I may leave children surviving me and children who have predeceased me leaving issue surviving me and upon the further trust to hold, manage, invest and reinvest one of such shares for the benefit of each child of mine who may survive me, paying over the net income thereof to such child, and upon the death of such child, to pay over the principal of the said share to the then surviving issue of such child, per stirpes, and in the event of such child dying without issue, then to pay over the principal of such share to the then surviving brothers and sisters of such child and the then surviving issue of any pre-deceased brother or sister, such issue to take per stirpes, the share which their parent would have taken if then living. As to the remaining shares of my residuary estate I direct that one of such shares shall be held in trust by the said United States Trust Company of New York for the benefit of the issue collectively of each child of mine who may have predeceased me, leaving issue surviving me. As to each share thus*1523 set apart, I direct the said Trust Company to subdivide it into as many parts as there may be children then surviving of such predeceased son or daughter of mine and to hold, manage, invest and reinvest one of such parts for the benefit of each such child and to pay over the net income to such child during his or her life and upon his or her death to pay over the principal of such part to the then surviving issue of such child per stirpes, and in the event of failure of issue then to the surviving brothers and sisters of such child, the issue of any predeceased brother or sister to take per stirpes the share their parent *516 would have taken if living. And if there should be no brother or sister of the said child then surviving, then to distribute the same among my then surviving children and the issue then surviving of any child of mine who may then be dead, such surviving issue to take per stirpes the share their parent would have taken if living.
The daughter Edith Sterling Barber married prior to the death of Sarah P. Barber. The other daughter Elizabeth Wright Barber did not marry until after her death and on September 27, 1921.
The 100 shares of stock*1524 bequeathed in trust for the benefit of the daughter Elizabeth Wright Barber until her marriage or death was transferred by United States Trust Company of New York from itself as executor to itself as trustee for the benefit of Elizabeth Wright Barber on July 15, 1918, and later said stock was transferred from itself as trustee for the benefit of Elizabeth Wright Barber to itself as trustee of the residuary estate on September 27, 1921, upon the marriage of said daughter.
After the administration of the estate had been completed the United States Trust Company of New York on February 3, 1920, transferred from itself as executor to itself as trustee the residuary estate of the decedent including the 100 shares of stock of Barber & Company, Inc. which had been left in trust for the benefit of Edith Sterling Barber until her marriage, which daughter had married prior to the death of Sarah P. Barber.
St. George Barber, one of Mrs. Barber's children, died on August 26, 1922, leaving no issue him surviving, upon which date the trust created by the deed terminated, and this fund became distributable to Mrs. Barber's ten (10) surviving children in equal shares. After the death of Sarah*1525 P. Barber, a claim was made by some of the beneficiaries under the deed of trust that the information given to Sarah P. Barber by Barber & Company, Inc., in regard to the value of the stock, which information induced her to direct its sale, was inaccurate and misleading, and they claimed that the price obtained for the 708 shares sold pursuant to Mrs. Barber's direction was too small. Thereafter negotiations were entered into between the trustee under the will, the trustee under the deed, Barber & Company, Inc., and Mrs. Barber's children, and on October 19, 1922, the trustee under the will delivered to Barber & Company, Inc., the following stocks held by it, to wit:
200 shares Barber & Company, Inc., stock,
40 shares Atlantic Stevedoring Company stock,
50 shares La Plata Steamship Company, Inc., stock,
65 shares New York and Oriental Steamship Company stock.
And the trustee under the deed delivered to Barber & Company, Inc., the following stocks held by it as such trustee:
25 shares Atlantic Stevedoring Company stock,
100 shares La Plata Steamship Company, Inc., stock,
265 shares New York & Oriental Steamship Company stock.
At the same time there was delivered*1526 to Barber & Company, Inc., releases from all the parties interested covering any claim which the parties might have against that Company on account of any misrepresentations made as to the value of Barber & Company, Inc., stock, and so to the 708 shares sold in 1917, and for such deliveries of stock and releases, Barber & Company, Inc., then paid $1,750,000. to the United States Trust Company of New York as trustee under the will and under the deed. The proceeds of this sale were placed in a separate fund until it should be determined how the money should be divided between the trusts created by the will and the trusts created by the deed. On *517 November 1, 1922, $1,100,000 was transferred to the eleven trusts under the will, and the balance, $650,000, was held in a separate account and thereinafter invested.
In accordance with the judicial determination of the Bergen County Orphans' Court (copy of opinion of that Court, petitioner's Exhibit No. 3, introduced as evidence) the total consideration of $1,750,000 received for the stock under the will and the stock in the trust under the deed was allocated as follows:
| ALLOCATED TO STOCK TRANSFERRED BY TRUSTEE UNDER DEED | |
| 25 shares Atlantic Stevedoring Company stock | |
| 100 shares La Plata Steamship Company, Inc., stock | |
| 265 shares New York & Oriental Steamship Company stock | $73,140.80 |
| ALLOCATED TO STOCK TRANSFERRED BY TRUSTEE UNDER WILL | |
| 40 shares of Atlantic Stevedoring Company stock | |
| 50 shares La Plata Steamship Company, Inc., stock | |
| 65 shares New York & Oriental Steamship Company stock | 40,562.85 |
| 200 shares Barber & Company, Inc., stock | 1,539,212.00 |
| Total | 1,652,915.65 |
*1527 The balance in the amount of $97,084.35 was credited to the account of United States Trust Company of New York as trustee under the deed of trust as representing the amount paid for the release of claims. The above sum of $1,652,915.65 plus the $97,084.35 accounts for the consideration of $1,750,000.
The petitioner as trustee of the residuary estate filed income tax returns for the eleven trusts created by the will in 1922 and accounted for the gain on the sale of stock held in those trusts on the basis of a consideration received in the amount of $1,100,000 reporting one-eleventh of the gain in each trust. The Commissioner has considered the gain to the petitioner as trustee under the will to be the difference between the value of the stock claimed by the Commissioner as of the date of the death of the decedent and the total amount of $1,750,000 (copy of agent's report covering one of the eleven trusts under the will, which is identical with each report for each trust, introduced as petitioner's Exhibit 4) and failed to allocate any part of said amount to the trusts under the deed and to the releases of the claims heretofore mentioned, resulting in an additional tax of $6,675.50*1528 to each of the eleven trusts.
The fair market value of the stock of Barber & Company, Inc. as of August 6, 1917, the date of the death of Sarah P. Barber, was $4,000 per share.
The fair market value of the stock of Barber & Company, Inc., as of July 15, 1918 and February 3, 1920, was $4,500 per share.
The fair market value of the stock of Barber & Company, Inc., as of September 27, 1921, was $7,000 per share.
OPINION.
MURDOCK: The petitioner in each of these cases is a trustee under the will of Sarah P. Barber. It happens that the same corporation is also a trustee under a deed executed by Sarah P. Barber. The second assignment of error raises the question of whether or not the *518 Commissioner erred in holding that the purchase price received by the petitioners from the disposition of certain shares of stock included $97,084.35. The petitioners point out that this amount was never received by the trusts which are the taxpayers in these cases, but that this amount was allocated to and received by the trusts created by the deed. The probate court allocated this amount to the release of claims made by beneficiaries of the trust created by the deed.
The following*1529 quotations are taken from the respondent's brief:
The respondent admits that the profit attributable to the sale of the stocks by the trustee under the deed is not taxable to the trustee for remainder interests under the will. However, the respondent does not admit that $11,043.55 is the correct net amount. It is the respondent's position that the whole amount received on the sale, $1,750,000, is attributable to the sale of the stocks, and that none of the proceeds of the sale is attributable to the release of the claims.
* * * The very gist of the transaction shows that the entire consideration paid was for the stock, therefore, the $97,084.35 should be prorated between the $73,140.80 attributable to the trustee under the deed of trust and the $1,579,774.85 attributable to the trustee under the will, or $4,295.40 and $93,206.71, respectively. The respondent further admits that the amounts of $11,043.55 plus $4,295.40, or $15,338.95, is not taxable to the petitioners, but maintains that $1,579,744.85 plus $93,206.71, or $1,672,951.56, is the correct gross sales price on which to compute the net profit to the petitioners on the sale.
These admissions dispose of one issue*1530 raised by the petitioners, to wit, the action of the Commissioner in including $73,140.80 as part of the consideration for the transfer of stock by the petitioners. Thus, the basis, the consideration, and the profit on the stock transferred by the other trust, that created by deed, drop out of the computation of the profit to the petitioners on the disposition of their stock. But these admissions affect also the issue as to the $97,084.35. They disclose a weakness in the respondent's contention as to this item, for he thus recognizes the propriety of a part of the allocation made by the probate court and only rejects the portion of the court's ruling which holds that the $97,084.35 should be allocated to the trust under the deed as attributable to the release of the claims. We find ourselves unable to follow the respondent in making this distinction between the good and the evil in the court's order. The respondent may be mistaken as to the occasion for the order of the court. It resulted from exceptions taken by the guardian ad litem of the infant grandchildren of Sarah P. Barber to an account filed by the petitioners. These exceptions were that in the account too little*1531 had been allocated to consideration for the petitioners' stock. The court in its order then allocated a larger amount to this item. This case differs from ; affd., , for here the order was not a consent order and the petitioners in this case never received the benefit of any of the money in controversy *519 which was allocated to the other trusts. It is true that the basis of the allocation, book value of the stock, is not a very satisfactory one. The probate court appreciated this, but adopted it, nevertheless, saying:
The book value may or may not be the best criterion, but under the evidence of this case, exercising as it did the main tangible basis for adjustment of the purchase price, it is the most reasonable figure to be used in separating the various items in their proper account.
We can not say that there was a better basis available to the court. Obviously, some allocation was necessary, since a lump sum was paid to separate trusts. The respondent not only does not suggest a better method, but he now adopts that made upon book values and suggests arbitrarily adding to the book*1532 values of each group of stocks a part of the excess cash in proportion to the book value of each group. It may be, as the respondent contends, that the petitioners' proof is weak, but in our opinion, it is sufficient to weight the scales in their favor. The probate court stated that the claim of deceit entered vitally into the settlement, and it allocated a part of the consideration to the settlement of such claims. We accept this allocation. The $97,084.35 will be eliminated from the computation of the profit to the petitioners.
The remaining issue depends upon when the 200 shares of stock of Barber & Company, Inc., mentioned in the sixth and seventh clauses of the will, were acquired by the trustee under the eighth clause of the will. The Commissioner has determined that they were acquired on the date of the death of Sarah P. Barber. The petitioners contend that they acquired the first 100 shares on February 3, 1920, the date on which the United States Trust Company of New York transferred these shares from itself as executor to itself as residuary trustee. Edith married prior to the death of her mother, Sarah P. Barber, and the provision of the sixth clause of the will*1533 for the bequest of these shares in trust for her never became effective. Thus there was no intervening estate as to these shares before they became a part of the residuary estate. This is the same situation that existed in the case of , where we held, following , that the stock was acquired at the date of the decedent's death and the value of the stock on that date was the basis for the computation of gain to the testamentary trustee upon the disposition of the stock. Our ruling is the same in this case as to these 100 shares.
The petitioners contend that the 100 shares which were bequeathed first in trust for Elizabeth were acquired by them on September 27, 1921, the date of Elizabeth's marriage and also the date on which the United States Trust Company of New York transferred this stock *520 from itself as trustee for Elizabeth to itself as residuary trustee. These shares were bequeathed in trust for Elizabeth until her marriage or death, whichever should happen first. The trust was set up, was in existence for about four years after the death of the*1534 testatrix, and ceased in 1921 at the marriage of Elizabeth. The 100 shares fell into the residuary estate upon the marriage of Elizabeth. As to these shares the petitioners are remaindermen under the will. In , and in , we held that a testamentary remainderman acquires the property at the death of the testator. The Huggett case overruled the Griscom case on one point in holding that the value of the remainderman's right rather than the value of the property which he ultimately received was the proper basis for gain or loss upon the subsequent disposition of the property itsel. But this principle can not be applied in this case, for the Commissioner has computed the gain on the value of the stock at the date of the death of the testatrix, has not asked for an increased deficiency, and has not furnished data upon which to make a determination of any other value than the one he has used. We simply affirm the Commissioner on this point. The gain or loss on the sale of the 200 shares of stock of Barber & Company, Inc., will be computed upon the basis of the stipulated value of*1535 the stock on the date of the death of the testatrix. No question is raised as to the valuation of any of the other stock.
Reviewed by the Board.
Judgments will be entered under Rule 50.
Footnotes
1. Other parties petitioning whose cases were consolidated herewith for hearing and opinion are: Trust under the will of Sarah P. Barber for remainder interest after Mabel B. Pershouse by United States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Alice E. Pershouse by United States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Edith B. Bloodgood, by United States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Beatrice B. Cooke, by United States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Constance B. Prosser, by United States Trust Company of New York as Trusee; Trust under the will of Sarah P. Barber for remainder interest after Elizabeth W. McGrew, by United States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Sarah P. Halladay, by United States Trust Company of New York, as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Philip C. Barber, by United States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Theodora B. Stauffen by United States Trust Company of New York, as Trustee; and Trust under the will of Sarah P. Barber for remainder interest after St. George Barber, by United States Trust Company of New York as Trustee. ↩