*1020 SALES AT LESS THAN MARKET. - The petitioner had certain shares of stock. Similar shares were selling on the market at prices far in excess of the cost of the petitioner's stock. He sold his shares at cost to his minor daughter and three family trusts. Shortly thereafter the purchasers sold the shares on the market at a profit. Held, the petitioner realized no profit from the transactions.
*510 The Commissioner determined a deficiency of $14,863.89 in the petitioner's income tax for the year 1933. He held, in determining that deficiency, that the petitioner, in selling 6,600 shares of common stock of the Celanese Corporation of America to three trusts and a daughter, had, in effect, sold a part of the shares at their current market value, thereby realizing a gain of $49,702.44, and had made a gift of the remaining shares. The petitioner assigns that action of the Commissioner as error and contends that in fact all of the shares sold to each of the four purchasers were sold for the exact cost of those shares and*1021 no shares were sold for an amount in excess of cost. The respondent, although still adhering to his determination, as an alternative, raises an affirmative issue in which he contends as an alternative, raises an affirmative issue in which he contends that the petitioner did not make a bona fide sale of any of the stock to the three family trusts and to the daughter, but instead sold the shares on the market at a profit of $125,761.
FINDINGS OF FACT.
The petitioner, an individual, filed his income tax return for the taxable year with the collector of internal revenue for the second district of New York.
*511 He had executed a trust agreement dated January 19, 1920, creating three trusts, one for the benefit of his wife, Edith G. Fincke, another for the benefit of his daughter Nancy, and a third for the benefit of his son Reginald, Jr. Arthur O. Choate, a close friend of the petitioner, was designated as the trustee of each trust. The trust instrument directed him to hold the trust estate of the one trust during the life of the wife and to distribute the income to her. He was directed to accumulate the income of the other two trusts during the minority of the children*1022 and to distribute the accumulated income and the principal to them when they reached the age of 21 years. The trustee was authorized to make all investments and reinvestments for the three trusts either in property approved by the laws of the State of New York for the investment of trust funds or in such other property as he in his discretion deemed proper. The petitioner intended at the time he created the trusts to make additions to the trusts from time to time and reserved the right to add to the trusts "securities, which the trustee shall receive, hold, manage, sell, invest and reinvest in the same manner specified * * * in respect of the original trust funds."
Choate opened separate accounts for each trust with the brokerage firm of Clark, Dodge & Co. and placed the trust property in those accounts. He was a member of that firm. Choate thereafter managed and controlled the trust accounts. He frequently conferred with the petitioner regarding the investment of the trust property.
Another daughter of the petitioner, Edith G. Fincke, 2d, was born in 1924. The petitioner deposited 100 shares of Pullman Co. stock with Clark, Dodge & Co. in December 1924, in an account opened*1023 at that time for his daughter Edith. The petitioner managed and controlled that account for the sole benefit of his daughter. He never converted any of the principal or income of the account to his personal use. Funds were withdrawn from the account only for the payment of Federal and state income taxes on behalf of the daughter. The petitioner intended to transfer additional property to that account.
The petitioner never made any substantial additions to the above account or to any of the three trusts until the taxable year here in question.
The petitioner purchased 6,600 shares of the common stock of the Celanese Corporation of America between May 3 and May 8, 1933, for $81,055. Four thousand six hundred of the shares were purchased through Clark, Dodge & Co. which thereafter held them for the petitioner. The remaining 2,000 shares were purchased through the brokerage firm of Reynolds, Fish & Co. and were held by that firm until May 29, 1933, when, upon his instructions, they were transferred to Clark, Dodge & Co. for the petitioner's account.
*512 The market price of the stock advanced rapidly during the month of May until it exceeded $30 per share. The petitioner*1024 was aware of this advance. He did not want to sell the stock himself at the current market price because of the income tax liability that would result. He decided to sell at cost one-fourth of his total holdings to each of the three trusts and his daughter Edith. Choate agreed to purchase one-fourth of the stock for each of the three trusts at the cost of the stock to the petitioner. He told the petitioner prior to the date of purchase that he did not think the stock was suitable as a permanent investment for the trusts and, although he was willing to purchase the stock so that the trusts would get the benefit of the increase in price, he nevertheless would thereafter sell the stock.
The petitioner then told an employee of Clark, Dodge & Co. on May 26, 1933, that he had sold the stock at cost to the three trusts and his daughter Edith, and instructed the employee to make the necessary entries in the petitioner's account and in the accounts of the four purchasers to reflect the transactions. Entries were duly made in the accounts of Clark, Dodge & Co. in accordance with those instructions. The final entries were made on May 29 after receipt of the 2,000 shares from Reynolds, *1025 Fish & Co. The petitioner's account was credited with $81,055, the total selling price, and the shares were taken out of that account. The accounts of the four purchasers were charged with amounts which totaled $81,055 and were credited with the shares, which were held for the benefit of the four purchasers. Stock transfer taxes were paid on each sale. There was not sufficient cash in the account of any of the purchasers to pay one-fourth of the purchase price, but each account contained securities of a value in excess of that amount. Clark, Dodge & Co. sent the usual sales notices to the petitioner and the usual purchase notices to the purchasers. The petitioner at the time of those transactions had no contract or agreement of any kind whereby he was to sell this stock to any prospective purchaser other than those already named.
The petitioner's children, Reginald and Nancy, were more than 21 years of age in May 1933. Choate, as trustee, had not distributed any of the property of the trusts to them, but still held the trust property in the trust accounts with Clark, Dodge & Co. Edith G. Fincke, the petitioner's wife, was living at the time of the transactions here in controversy.
*1026 The stock purchased by the three trusts and by the daughter Edith from the petitioner was sold by the purchasers within a few days after the purchases. The sales were on the New York Stock Exchange to buyers not identified in this record. Choate gave the order to sell on behalf of the three trusts and the petitioner gave the order to sell for the account of his daughter Edith. The following table shows the *513 amount paid by each purchaser to the petitioner, the amount realized by each purchaser in the subsequent sale, and the profit from the later sale.
| Price paid to petitioner | Sale price | Profit | |
| Edith G. Fincke trust | $20,792.69 | $52,929.00 | $32,136.31 |
| Nancy Fincke trust | 20,422.43 | 51,166.50 | 30,744.07 |
| Reginald Fincke, Jr., trust | 20,792.69 | 51,691.50 | 30,898.81 |
| Edith G. Fincke II account | 19,047.19 | 51,029.00 | 31,981.81 |
| Total | 81,055.00 | 206,816.00 | 125,761.00 |
The proceeds from the sales of the stock on the open market were credited to the accounts of the sellers in the amounts shown above. The petitioner never received or appropriated to his own use any of those proceeds. There was reported for each trust and Edith in separate income*1027 tax returns for 1933 the gain derived from the above sales.
The petitioner reported in his income tax return for 1933 that he had sold his Celanese stock at no gain. He filed a gift tax return for the year 1933 in which he reported a gift of $130,145, which was the excess of the market value of the Celanese stock, at the time of the sales to the three trusts and the daughter, over the selling price of $81,055. He paid the gift tax shown in that return.
The Commissioner stated in the notice of deficiency:
On May 3, 1933 you purchased 6,600 shares of Celanese Corporation of America common stock at a net cost price of $81,055.00. On May 27, 1933, 1,650 shares were sold to each of three family trusts and on May 29, 1933, the remaining 1,650 shares were sold to your minor child, Miss Edith G. Fincke II. In all four transactions the selling price used by you was the cost price although the market value at the time of sale was much greater.
That notice contained the further statement that the petitioner had realized a taxable profit of $49,702.44 on the sales, on the theory that since he had sold stock worth $209,550 for $81,055, the transaction should be treated as a sale*1028 of 81,055/209,550 of the 6,600 shares at the current market price and as a gift of the remaining shares.
The petitioner made bona fide sales of one-fourth of his Celanese stock to his daughter Edith and to each of the three trusts for the exact cost of the stock to him. He did not realize any profit from the sales. He did not sell 81,055/209,550 of the stock at the current market price and make a gift of the remaining shares. He did not sell the shares for more than $81,055.
OPINION.
MURDOCK: The first question is whether the Commissioner erred in determining the deficiency. He stated in the notice of deficiency that the petitioner had sold the shares for $81,055, and he then made what *514 seems to be an inconsistent holding, that 81,055/209,550 of the shares were sold for $81,055 and a gift was made of the remaining shares. The facts clearly show that the determination of the Commissioner was erroneous. The theory he used in computing a profit is inconsistent with what actually occurred. Cf. . None of the shares were given outright by the petitioner. One-fourth was sold to each purchaser for a certain amount*1029 of money. The total amount received by the petitioner was $81,055, which was exactly what he had paid for the stock and, consequently, he had no gain from the four sales. The Board has held in cases where property has been transferred for a substantial consideration which is less than its market value that such transfers constitute bona fide sales coupled with a gift to the extent of the excess of the market value of the property over the selling price. ; ; . The Commissioner in his determination has not questioned the fact that sales were made and has not held that any sale was lacking in bona fides. Therefore, the petitioner has fully sustained the burden of proof which rested upon him.
The Commissioner by affirmative pleading has raised another issue. He now contends that the petitioner did not make a bona fide sale of any of the shares to the three family trusts and to the daughter, but instead sold the shares on the market for $206,816 and realized a profit of $125,761. The burden of proof on this new issue rested squarely upon the*1030 Commissioner. The contention is contrary in many important particulars to the determination which he made to justify the deficiency. He now argues that the petitioner really sold the shares on the market himself at the current market price and gave his profit to his daughter and the three family trusts. Not only do the facts fail to support this contention, but they show affirmatively that the actual transactions were quite different.
There is no reason whatsoever to disbelieve any of the testimony of the petitioner and Choate. The petitioner's testimony shows that he deliberately refrained from selling this stock on the market, realizing a large profit himself and subjecting himself to income tax on that profit. Cf. , as to propriety of avoiding taxes. It is likewise clear that he sold the stock to the three family trusts and his daughter at cost, having in mind that they in turn could sell the stock at a profit. The sales were complete and proper in all essentials. This was his way of increasing the corpus of the trusts and of increasing the property of his minor daughter. The income tax consequences of those acts*1031 depend upon what was actually done, not upon what might have been done. It was done in such a way that the petitioner realized no profit whatsoever.
*515 The respondent makes no criticism of the sale to the trust for the benefit of the petitioner's wife which requires discussion. The petitioner's two older children were of age in May 1933 and, under the terms of the trust instrument, the corpus and accumulated income of the two trusts could and, perhaps, should have been distributed to them prior to the transactions here in question. The respondent argues from this that the two trusts were nonexistent in May 1933, and the petitioner could not have made any sales to those trusts. The two beneficiaries could have required distributions prior to the purchases and sales here in question, but the fact of the matter is that distributions had not been made, and, so far as we know, the beneficiaries had never asked for distributions. The beneficiaries may ratify the acts of the trustee under such circumstances as are here present. *1032 ; . Not only is there no evidence to indicate that these beneficiaries failed to ratify the acts of this trustee in making these purchases and sales, but it is difficult to believe that the beneficiaries would fail to ratify acts so beneficial to them.
The respondent's argument in regard to the purchase of one-fourth of the shares by the petitioner's daughter Edith is that she was a minor; her account with Clark, Dodge & Co. was opened, managed, and controlled by the petitioner; therefore, either it was his account or he was acting as guardian for his minor daughter; if it was really his own account, obviously he could not sell to himself, and in any event, the profit would be his; whereas, if he was guardian for his daughter, he would have no right to buy this Celanese stock for her, because it was not the kind of stock which a fiduciary would be justified in buying under the laws of New York. The petitioner opened the account for and on behalf of his daughter Edith. None of his actions is inconsistent with the proposition that beneficial ownership of the account was in the daughter. *1033 On the contrary, his actions have always been consistent with that proposition. We are unable to conclude from the evidence that the account belonged to the petitioner. Cf. ; ; . The evidence does not show that the petitioner was ever appointed guardian for his daughter. The account was originally opened with a gift of common stock. We can not believe that any court of competent jurisdiction would nullify the action of the petitioner in selling this valuable stock to his daughter at less than its current market price. The final sale on the market was made on her behalf and for her benefit, and the profit which resulted was hers from the very moment that it was realized. It never belonged to the petitioner and was never received by him.
*516 The evidence does not support the Commissioner's affirmative contention, and we have concluded that the petitioner realized no profit from the disposition of the 6,600 shares of Celanese stock. His action in reporting as gifts the value of ths stock in excess of the purchase price received*1034 by him is not here in question, but it is interesting to note that that action on his part is in accordance with the law and regulations. See sec. 503 of the Revenue Act of 1932; Regulations 79, art. 8.
Decision will be entered for the petitioner.