*861 The entire consideration in cash and its equivalent paid to the respective petitioners by the remainderman, their son, for their life interests in parallel trusts they had previously created, held, taxable as ordinary income.
*484 The respondent determined deficiencies in the income taxes of the petitioners as follows:
| Petitioner | Year | Amount |
| 1936 | $38,416.10 | |
| Estate of F. S. Bell | 1937 | 233.92 |
| 1936 | 36,530.83 | |
| Frances L. Bell | 1937 | 880.35 |
Certain concessions and adjustments have been made by the petitioners and the respondent so that the only issues now presented are *485 whether the amounts received by the petitioners on the transfer of their life interests in the income from securities held under trust constituted ordinary income, taxable in full as held by respondent, or capital gain, as contended by petitioners. The consideration of this question involves the further question of the basis, if any, of computing gain.
FINDINGS OF FACT.
Certain facts were stipulated and as so stipulated are adopted as*862 findings of fact. The material portions of such facts, supplemented by facts admitted in the pleadings, are substantially as follows:
The petitioner, Laird Bell, is the duly appointed, qualified and acting executor of the estate of Frederic S. Bell, deceased, who died March 15, 1938, a resident of Minnesota. Laird Bell resides in Winnetka, Illinois. The petitioner, Frances L. Bell, is an individual residing in Winona, Minnesota. Both petitioners filed their returns with the collector of internal revenue for the district of Minnesota.
The Thorncroft Co. was organized under the laws of Delaware on December 10, 1924, with an authorized capital stock of $350,000, divided into 1,750 shares of preferred stock and 1,750 shares of common stock, each having a par value of $100 per share. All of this stock was issued on December 26, 1924, to Frederic S. Bell, Frances L. Bell, and Laird Bell in exchange for certain securities which were transferred by the stockholders to the corporation. Frederic S. Bell and Frances L. Bell were husband and wife. Laird Bell is the son of Frederic S. Bell and Frances L. Bell. In exchange for such transfers the Thorncroft Co. issued 550 shares of preferred*863 and 550 shares of its common stock to Frederic S. Bell; 600 shares of preferred and 600 shares of its common stock to Frances L. Bell; and 600 shares of preferred and 600 shares of its common stock to Laird Bell. Immediately after the exchange the same persons were the sole owners of the entire outstanding capital stock of Thorncroft Co. and the amount of stock received by each of them was substantially in proportion to his interest in the securities transferred to the corporation prior to the exchange.
The adjusted basis for determining gain in the hands of Frederic S. Bell, of his 550 shares of Thorncroft Co. common stock immediately prior to April 28, 1932 (computed in accordance with section 113(a) and (b) of the Revenue Act of 1936), was $838.7781 per share, or a total of $461,327.96. The adjusted basis for determining gain in the hands of Frances L. Bell of her 600 shares of Thorncroft Co. common stock immediately prior to April 28, 1932 (computed in accordance with section 113(a) and (b) of the Revenue Act of 1936), was $838.7554 per share, or a total of $503,253.24.
Between April 28, 1932, and February 1, 1936, the Thorncroft Co. *486 made tax-free distributions*864 to its common stockholders (that is, distributions not out of earnings or profits) amounting to $40 per share.
On April 28, 1932, Frederic S. Bell and Frances L. Bell executed parallel trust instruments. In the trust instrument executed by Frederic S. Bell he was grantor and Laird Bell, George R. Little, and Willard L. Hillyer were the trustees. The corpus of the trust consisted of 550 shares of the common stock of the Thorncroft Co. The trustees were required to pay to Frances L. Bell, during her lifetime, the entire net income of the trust estate and upon her death to deliver the trust estate to Laird Bell. In the trust instrument executed by Frances L. Bell she was the grantor and Laird Bell, George R. Little, and Frederic S. Bell were trustees. The corpus likewise was 550 shares of common stock of the Thorncroft Co. The provisions establishing the life estate and the remainder interest were identical with those of the Frederic S. Bell trust, but with Frederic S. Bell as the beneficiary of the life interest and Laird Bell the remainderman.
On February 1, 1936, Frederic S. Bell executed an agreement assigning his right, title, and interest in and to the trust property*865 held by George R. Little, Frederic S. Bell, and Laird Bell, as trustees (the life interest of the Frances L. Bell trust), in consideration of $104,349.26 in cash and securities. In the assignment Frederic S. Bell instructed the trustees to recognize Laird Bell as the owner of his father's interest in the trust property. On the same day Frances L. Bell executed a similar assignment of like tenor, transferring her life interest in the Frederic S. Bell trust property in consideration of $93,060.87 in cash and securities.
Frederic S. Bell was born on March 19, 1859, and Frances L. Bell was born on March 20, 1857.
The present worth of a life estate in a fund of $1 for persons of the respective ages is as follows:
| Age | Cents |
| 73 | 21.83712 |
| 75 | 19.65852 |
| 77 | 17.57532 |
| 79 | 15.59432 |
Frederic S. Bell included in his taxable income for the year 1936 $850 of dividends received from the Chicago Corporation, of which $364 were nontaxable, and the petitioner's income should be reduced accordingly.
The record discloses the following additional facts:
Frederic S. Bell and Frances L. Bell were in good health on April 28, 1932. Both the Frederic S. Bell and Frances*866 L. Bell trusts continued *487 in their original form, with the same corpora, until February 1, 1936. On that date the corpus of the Frederic S. Bell trust was valued at $561,573.84 and the corpus of the Frances L. Bell trust at $561,546.69. These sums included the dividend of $40 per share paid by the Thorncroft Co. in 1934 and held by the trustees in the capital account of the trust. They also included the underlying securities formerly owned by the Thorncroft Corporation, which had been liquidated immediately prior to the transactions.
Laird Bell paid to his father $104,475.76 [sic ] and to his mother $93,060.87 for their life estates in the respective trusts. Upon the receipt of the assignments thereof from his parents Laird Bell requested the trustees to convey the corpora of the trusts to him outright. They did so. Thereafter Laird Bell included in his own income tax returns all income from the former trust assets.
Before the trusts of April 28, 1932, were established, Frederic S. Bell told his son that he and Frances L. Bell contemplated making additional gifts to the son in view of an approaching new gift tax law and asked the son's advice as to the*867 proper method of accomplishing their purpose. The life estate arrangement was suggested by Laird Bell, as was the creation of parallel trusts, which were adopted in part for tax-saving purposes. The number of shares of the Thorncroft stock which were to constitute the corpus was left blank in each trust agreement and the blanks were filled in by Frederic S. Bell.
Laird Bell had been practicing law in Chicago for 25 years prior to April 28, 1932. His father and grandfather had been in the lumber business since 1850. About 1930 Laird Bell had been drawn into the industry through a merger of interests whose stock constituted some of the underlying securities of the Thorncroft Co. His parents desired to recognize their son's growing participation in the lumber industry and to give him a voice of authority in its councils. Both parents had independent means in addition to the Thorncroft stock.
In his income tax return for the year 1936 Frederic S. Bell reported the sale of the above described transaction as a sale of his interest in the trust created by Frances L. Bell as follows:
| Gain on sale on Life Estate in Trust created April 8, 1932 by gift: | |
| Total value of Trust Estate April 28, 1932 | $477,873.61 |
| Life Tenant's interest at 21.83712% | 101,951.74 |
| Sale of Life's interest February 1, 1936 for | 104,475.76 |
| Profit on sale of Life Interest | $2,524.02 |
*868 Of the $2,524.02 profit, 30 percent, or $757.21, was included in taxable income pursuant to section 117 of the Revenue Act of 1936. The $477,873.61 figure was predicated on the cost of the property to his wife, the grantor of the trust.
*488 Frances L. Bell similarly reported in her 1936 return the above described transaction as a sale of her interest in the trust created by Frederic S. Bell, as follows:
| Gain on sale of Life Estate in Trust created April 28, 1932 by gift | |
| Total value of Trust Estate April 28, 1932 | $467,463.65 |
| Life Tenant's interest at 19.65852% | 91,896.44 |
| Sale of Life Interest February 1, 1936 for | 93,060.87 |
| Profit on sale of Life Interest | $1,164.43 |
On the $1,164.43 profit, 30 percent, or $349.33, was included in taxable income pursuant to section 117 of the Revenue Act of 1936. The $467,463.65 figure was predicated on the cost of the property to her husband, the grantor of the trust.
In making his determinations of deficiencies the respondent treated the entire selling prices of $104,475.76 and $93,060.87, respectively, as ordinary income taxable in full.
OPINION.
*869 OPPER: It is not open to question that the interest of a life tenant limited to the right to receive income is taxable in full as such. . The Court there found "no doubt in our minds that if a fund were given to trustees for A for life with remainder over, the income received by the trustees and paid over to A would be income of A under the statute." The question we have to decide is whether the price paid in one sum for that interest, arrived at by the parties for all practical purposes by computing the present value of a life estate for the life of a person of the age of the life tenant, can be made to partake of the nature of capital and the gain be limited as though a capital transaction had taken place by the mere process of concentration and anticipation. We do not think it can.
In , the Supreme Court had before it a similar question. There, by way of a compromise settlement, the taxpayer had required its lessee to make a cash payment in order to obtain the cancellation of the lease. In reaching the conclusion that the entire amount received was taxable as ordinary income, *870 the Court said of the definition of gross income:
* * * Plainly this definition reached the rent paid prior to cancellation just as it would have embraced subsequent payments if the lease had never been canceled. It would have included a prepayment of the discounted value of unmatured rental payments whether received at the inception of the lease or at any time thereafter. * * * So far as the application of § 22(a) is concerned, it is immaterial that petitioner chose to accept an amount less than the strict present value of the unmatured rental payments rather than to engage in litigation, possibly uncertain and expensive.
The latter consideration, of course, need not concern us here. As we *489 have noted, the selling price was a close approximation of the discounted value of the probable future payments.
We are not unmindful of the observation in , that "a gift of the income of a fund ordinarily is treated by equity as creating an interest in the fund"; nor that in , it was held that the assignment of income from a trust fund carried with it such a property interest*871 in the fund that the transferee and not the transferor was taxable upon the income as received. Cf. . But the statement quoted did not prevent the Court in the Gavit case from holding that all of the payments received were taxable as ordinary income; and in the Blair case the question was not whether income from a life estate could be saved from the burden of the income tax but only the person upon whom that payment should be charged. We think the point is sufficiently answered by a further quotation from :
The consideration received for cancellation of the lease was not a return of capital. We assume that the lease was "property", whatever that signifies abstractly. * * * Simply because the lease was "property" the amount received for its cancellation was not a return of capital, quite apart from the fact that "property" and "capital" are not necessarily synonymous * * *. Where, as in this case, the disputed amount was essentially a substitute for rental payments which § 22(a) espressly characterizes as gross income, it must be regarded as ordinary income, and it*872 is immaterial that for some purposes the contract creating the right to such payments may be treated as "property" or "capital".
See also , affd. (C.C.A., 6th Cir.), .
Even more than in , where it was said that "conceding that the ownership of a bond involves both the right to receive principal and the right to receive income, it is a highly artificial concept that an interest payment is a disposition pro tanto of the latter right * * *"; here transfer of the life estate, consisting only of the right to receive the income, should not be thought of as a diminution of capital merely because the income is lumped together and collected in a single payment.
These petitioners have no such right in the principal of the trust as would entitle them to any return of capital through deductions for the exhaustion or "shrinkage" of the interest represented by their life estates. ; certiorari denied, *873 ; ; affd. (C.C.A., 7th Cir.), ; certiorari denied, . The failure to give them an opportunity to recover any capital interest by offsetting a basis against the receipt of discounted income accordingly imposes no unfair burden. It is not as though they had bought the life interest, and thus had a *490 cost basis of that right by virtue of the purchase. Such basis in the trust corpus as might otherwise have existed has been transferred to the trust, Revenue Act of 1936, sec. 113, or to the remainderman. ; . It has not been lost. Its benefits will be recovered by one or the other of those transferees. If it is no longer available to petitioners, that is only because of the voluntary act by which they accomplished the transfer to the trust.
On the other hand the vendee of a life estate has a capital investment exhaustible by charges against income over its duration. *874 ; . Cf. ; affd. (C.C.A., 8th Cir.), . That this purchaser happened also to be the remainderman can not affect the principle and may even lack significance. See , P. 907. Certainly nothing in section 24(b) 1 would stand in his way since its operation is limited to an "interest acquired by gift, bequest or inheritance". See Ways & Means Committee Report, Revenue Act of 1921, 67th Cong., 1st sess., H. Rept. 350, p, 12. If that is so and these petitioners escape the tax upon this income whether received in due course or by anticipation, the payment of tax upon it will have been completely avoided, and we can eliminate the distinction from the Hort case, which petitioners seek to draw when they say that:
* * * The $140,000 paid by the tenant in that case was clearly income (and was presumably deductible by the tenant); and if it was not taxable to the landlord, it was not taxable to anyone. * * *
*875 We conclude that the payments received by petitioners in anticipation of their right to receive taxable income continued to partake of that character; that the transfer of their life estate had therefore the result merely of replacing taxable income; and that accordingly the consideration received was taxable in its entirely, as income from the life estate would have been.
We need not consider the further possible contention that assignment of the life estate to the owner of the remainder was in effect nothing more than a release of an outstanding interest and that it *491 should not be treated as a sale or exchange. .
Reviewed by the Board.
Decision will be entered under Rule 50.
LEECH, concurring: Since the facts here support the same distinction from those in Lehman v. Commissioner, 109 Fed.(2d) 99, as was drawn in Marrs McLean,41 B.T.A. 1266">41 B.T.A. 1266, I concur. Cf. Moses L. Parshelsky,46 B.T.A. 456">46 B.T.A. 456.
VAN FOSSAN, dissenting: *876 I am of the opinion that the sale of the life interests in the two trusts should be treated as a sale of property and taxed as capital gain.
Under , the life interest so created was "present property alienable as any other" and the assignment of such a beneficial interest is the assignment of the "right, title and estate in and to property." There would seem to be no ground to question that the sale for cash and its equivalent of the life interest was a sale of property. See also .
The property was acquired by virtue of transfers in trust after December 31, 1920. Section 113(a)(3) is, therefore, pertinent and petitioners' bases are the same as those of the grantors of the trusts, adjusted as provided in section 113(b). The parties stipulate that the adjusted bases of the grantors for the Thorncroft stock, as of the date of creating the trusts, are $461,327.96 as to Frederic S. Bell and $461,315.47 as to Frances L. Bell.
The life interests which were sold being property held by the taxpayers and their grantors under the trusts, for more than ten years (section*877 117(c)(2)) and not falling in a category excluded from the capital gains provisions, it follows that the profit is to be treated as capital gain, taxable as such.
, on which the author of the prevailing opinion relies, is not authority to the contrary. That case involved the relinquishment of a lease in consideration of receipt of $140,000. The payment was held to be income because the relinquishment of future rents was in return for present payment. No sale or disposition of property was involved. The lessor merely got rid of the lease and was free to lease again. The payment was clearly a substitute for the rentals reserved in the lease. In the instant case the property was sold. The statute provides the basis for determining gain. To deny the application of the statute and hold the entire proceeds ordinary gain brings about a result which is at once unjustified in law and arbitrary in fact.
Footnotes
1. SEC. 24. ITEMS NOT DEDUCTIBLE. [Revenue Act of 1936.]
* * *
(b) HOLDERS OF LIFE OR TERMINABLE INTEREST. - Amounts paid under the laws of any State, Territory, District of Columbia, possession of the United States, or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this Act (except the deductions provided for in subsections (1) and (m) of section 23) for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territory, District of Columbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled. ↩