*2544 Petitioner acquired certain stock in 1915. In 1918 he placed this stock in trust under the terms of an agreement by which the stock would be held by a trustee until the income therefrom should aggregate a certain amount, such income to be paid to a hospital therein designated. Upon the termination of the trust agreement in 1922 the stock was returned to the petitioner, who sold some of it in 1922 and some in 1923. Held, that in determining gain or loss on the sales no reduction of the cost or acquisition value in 1915 is necessary because of the creation and existence of a trust estate between the dates of acquisition and sale.
*1028 This proceeding involves deficiencies in income tax as determined by the Commissioner for the years 1922 and 1923 in the respective amounts of $75,314.04 and $79,851.10.
Upon motion made by the petitioner and granted by the Board, the issues in this proceeding were severed to the end that the only issue now presented for consideration is whether the basis at which petitioner acquired certain stock in 1915 should*2545 be reduced, for the purpose of computing gain or loss on sales in 1922 and 1923, on account of the creation of a trust of said stock on November 30, 1918, which trust was terminated in January, 1922, prior to the sales *1029 in question. It is understood that in the event the decision on the issue now before us is favorable to the petitioner, no decision will be necessary with respect to the other issue raised in the petition, but that if the decision is favorable to the Commissioner, the case will be restored to the calendar for a further hearing on the merits of the second issue.
The material facts were either admitted in the answer or stipulated by the parties, from which we make the following findings.
FINDINGS OF FACT.
The petitioner is an individual with residence at Wilmington, Del.
On and prior to October 1, 1915, petitioner was the owner of common stock of the E. I. du Pont de Nemours Powder Co., a New Jersey corporation. On said date he received as a property dividend on said stock certain shares of the common stock of a Delaware corporation called E. I. du Pont de Nemours & Co., which shares on that date had a fair market value of $347.50 per share. *2546 Following the decision of the United States Supreme Court in , the petitioner returned said shares as income for 1915 at a valuation of $347.50 per share, and paid an income tax for said year based thereon.
Petitioner continued to hold and own 10,000 of said shares from the date of their receipt by him until November 30, 1918, during which period no stock dividends were declared or paid thereon; and on said date petitioner transferred said 10,000 shares to a trustee by a trust instrument, the material parts of which read as follows:
THIS TRUST AGREEMENT made this 30th day of November, A.D. 1918, by and between PIERRE S. DU PONT, of the City of Wilmington, County of New Castle and State of Delaware, of the first part, and H. RODNEY SHARP, of said City, County and State, of the second part,
WITNESSETH:
THAT WHEREAS the said Pierre S. du Pont is desirous of providing funds for the construction and outfitting of a building to be erected on the grounds of the Chester County Hospital at West Chester, in the County of Chester and Commonwealth of Pennsylvania, said building to be used in connection with and to form a part*2547 of the buildings now owned and occupied by said Chester County Hospital, and to be erected to and designated as a memorial to Lewes A. Mason, deceased; and
WHEREAS the said Pierre S. du Pont to this end desires to provide funds in the amount of Three Hundred Thousand Dollars ($300,000.00) at the times and according to the terms hereinafter set forth;
NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) by the said party of the second part to the party of the first part in hand paid, the receipt whereof is hereby acknowledged, the party of the first part has bargained, sold, assigned, transferred, set over and delivered unto and by these *1030 presents does bargain, sell, assign, transfer, set over and deliver unto the party of the second part the following described personal property, to-wit: ten thousand (10,000) shares of the common capital stock of E. I. du Pont de Nemours and Company, a corporation organized and existing under the laws of the State of Delaware, as evidenced by certificate number E. 11706, , in trust nevertheless for the following purposes and subject to the following provisions, viz:
ARTICLE I. The said trustee shall collect and*2548 receive all dividends, income, profits, gains and benefits arising from said shares of stock or from any other securities which may be substituted for said shares as hereinafter provided, and from time to time as said income, dividends, gains and profits shall accrue, to pay over the same to the Treasurer of the said Chester County Hospital in payment of duly approved vouchers covering the whole or any part of the cost connected with or incident to the construction and outfitting of the aforesaid hospital building.
ARTICLE II. The said trustee shall have the power and authority solely in his discretion to exchange said ten thousand (10,000) shares of the common capital stock of E. I. du Pont de Nemours and Company for other securities or to sell the same and reinvest the proceeds in other securities, such reinvestments to be subject to all the terms and conditions of this trust.
ARTICLE III. Upon the death, incapacity or refusal to act of the said trustee, Lammot du Pont, of Christiana Hundred, New Castle County, State of Delaware, and Irenee du Pont, of Christiana Hundred, New Castle County, State of Delaware, in the order named, are hereby appointed to the trusteeship with*2549 all the powers and subject to all the conditions, restrictions and limitations of this trust.
ARTICLE IV. (a) This trust is founded upon the express condition that all payments made on account of the construction or outfitting of said hospital building or in connection therewith, shall be in accordance with plans which have the approval of the party of the first part. Such payments shall be made by the trustee entirely in his discretion, and there shall be no liability upon him for the application, misapplication or non-application of the funds for the construction and outfitting of said hospital building. It is, however, specifically provided that no vouchers shall be paid unless same shall be approved by the trustees of the Chester County Hospital or their agent.
(b) When the total payments made by the trustee as aforesaid shall aggregate the sum of Three Hundred Thousand Dollars ($300,000.00), the principal trust fund and any income, profits or benefits remaining in the hands of the trustee, cash or otherwise, shall be returned to the party of the first part or to the legal representative of his estate.
(c) If the said hospital building shall be constructed and outfitted*2550 at a cost less than Three Hundred Thousand Dollars ($300,000.00), the trustee shall turn over the difference between this sum and Three Hundred Thousand Dollars ($300,000.00) to the trustees of the Chester County Hospital, the same to be invested by them as an endowment fund, the income from which to be available for the maintenance of said hospital.
(d) In the event that the income from this trust fund is insufficient to speedily meet the payments due for the construction and outfitting of said hospital building, the trustee is hereby empowered to borrow such sums as may be necessary to meet these payments, pledging all or any part of the trust fund as collateral to secure such loan or loans, and he shall further in his discretion be empowered to sell a portion of the trust fund to meet such payments.
* * *
*1031 On September 26, 1919, the trustee having continued to hold the said 10,000 shares of stock under the terms of the foregoing trust agreement, the petitioner executed a supplemental trust agreement which had the effect of changing the original instrument only in that the trust should continue until the total income, profits, or benefits received by the trustee*2551 should aggregate $600,000 instead of $300,000 as provided in the original instrument.
The trust agreement was terminated on January 28, 1922, and shares of stock then held by the trustee were retransferred to the petitioner. Between the creation of the trust on November 30, 1918, and the termination thereof on January 28, 1922, the following stock dividends upon said stock were received by the trustee:
| Corpus | Date | Dividend rate | Number of shares |
| Per cent | |||
| Shares: | |||
| 10,000 | June 15, 1920 | 2 1/2 | 250 |
| 10,250 | Sept. 15, 1920 | 2 1/2 | 1 256 10/40 |
| 10,506 | Dec. 15, 1920 | 2 1/2 | 1 262 26/40 |
On divers dates during the year 1922, petitioner disposed of 4,129 shares of said common stock of E. I. du Pont de Nemours & Co. by making a gift to Alice Belin du Pont of 500 of said shares and selling 3,629 of said shares for an aggregate of $327,287 (approximately $90.19 per share), said shares so disposed of being a portion of the shares previously transferred in trust and retransferred to petitioner upon the termination of the trust estate as above set forth and of the dividend shares mentioned above. Petitioner*2552 duly filed with the then collector of internal revenue at Wilmington, Del., a Federal income-tax return for the year 1922 and deducted from the gross income shown thereon an alleged loss on the sale of said 3,629 shares of $882,512.73. In computing the amount of loss, petitioner used as his cost basis his original cost basis of $347.50 per share diluted by 424 stock dividend shares declared and paid upon said shares in the year 1920 and transferred to the petitioner on the termination of the trust.
On December 29, 1922, petitioner received a stock dividend of 50 per cent upon the balance of his holdings of said common stock of E. I. du Pont de Nemours & Co., said dividend consisting of 3,147 1/2 shares of common stock of said company.
On divers dates during the year 1923 petitioner sold and disposed of 6,000 shares of said common stock of E. I. du Pont de Nemours & Co. for an aggregate of $592,000 (approximately $98.67 per share), said shares so disposed of being a portion of the shares previously transferred in trust and retransferred to petitioner upon the termination *1032 of the trust estate as above set forth and of the dividend shares mentioned above. Petitioner*2553 duly filed with the then collector of internal revenue at Wilmington, Del., a Federal income-tax return for the year 1923 and deducted from the gross income shown thereon an alleged loss on the sale of said 6,000 shares of $780,399.20. In computing the amount of loss, petitioner used as his cost basis his original cost basis of $347.50 per share diluted by 424 stock dividend shares declared and paid in the year 1920 and transferred to the petitioner on the termination of the trust, plus a 50 per cent stock dividend declared and paid on December 29, 1922.
OPINION.
SEAWELL: As a result of the motion granted for a severance of issues in this case, only one question is now presented and that a question of law. This issue may be made clear by stating briefly what occurred in the transactions before us. In 1915 petitioner received certain shares of stock in a manner that represented a cost or acquisition value to him at that time of $347.50 per share. On November 30, 1918, petitioner, being desirous of giving certain funds to a hospital, established a trust under the terms of which he transferred 10,000 shares of the aforementioned stock to a trustee to be held by the trustee until*2554 the dividends, income, profits, gains and benefits received by him and paid over to, or for the benefit of, the hospital should aggregate $300,000. The amount to be accumulated was later increased to $600,000. The provisions of the trust arrangement having been carried out, the stock was returned to the petitioner, who sold some of it in 1922 and some in 1923, at prices ranging from approximately $90 to $100 per share. There was a provision in the trust agreement under which the trustee was given the right to sell stock or corpus in case the stock or corpus did not produce income as soon as was necessary for the speedy completion of the hospital, but the stock with which we are concerned was not sold by the trustee, but was retransferred by him to the person who originally placed it in trust with him, namely, the petitioner. Stock dividends were received by the trustee during the period in which he held the stock, but a consideration of this feature is not necessary to a decision of the issue before us. As argued by both parties and in so far as the principle involved in concerned, we may deal with the situation on the basis that the petitioner acquired certain stock in 1915 which*2555 he placed in trust for a time during which the income was paid to the trustee and in 1922 and 1923, after the termination of the trust and the retransfer of the stock to the petitioner, the petitioner sold some of the stock, and our question is whether, in determining the gain or loss on these sales, cost should be reduced on account of the creation of the trust.
*1033 The contention of the petitioner is that the creation of the trust and the gift thereby made did not amount to a gift of the stock or any part thereof and, therefore, the gain or loss upon the sale of the stock after the termination of the trust is the difference between the cost or acquisition value in 1915 and sales prices received in 1922 and 1923, without any adjustment on account of the creation and existence of the trust for a period between the dates of acquisition and sale. On the other hand, the Commissioner contends that the effect of the creation of the trust was for the settlor or petitioner to give away a part of his property, namely, an estate therein for the period held by the trustee, and, accordingly, a reduction of the acquisition value or cost should be made on account of such gift.
*2556 What we have is an individual who owned stock, a nonwasting asset, and we are asked to decide whether the cost of that stock should be reduced (in determining gain or loss upon its ultimate sale) because an estate for a short period had been carved therefrom, but had expired prior to a sale of the stock. On a careful consideration of the entire situation, we are of the opinion that the petitioner's contention to the effect that cost is not affected thereby should be sustained. Certainly, the rights which the petitioner had in the stock, the corpus so to speak, were no different (leaving out of consideration the stock dividend feature not here material) after the termination of the trust than they were prior to its creation, and both parties seem agreed, and we think rightfully so, that nothing came to the petitioner, either by gift or sale, in so far as corpus is concerned, which he did not already have, when the trust was terminated and there was a falling in of the precedent estate. (Cf. ; certiorari denied, *2557 ; and .) What then occurred was that the petitioner resumed his right to receive the income from the stock. Similarly, when the trust was created, there was, in effect, only the opposite situation, namely, a cessation to the petitioner of his right to collect the income while the trust agreement was in effect. But these considerations affected income and took nothing from the corpus itself. The stock was not depleted or exhausted through the earning of this income, and we fail to see why the cost thereof should be affected merely because the right to receive the income was vested for a time in the trustee for the benefit of the hospital instead of in the petitioner himself.
Two classes of cases frequently arise where the question involved is a determination of the person taxable on account of income accruing under conditions somewhat analogous to that involved in the case at bar. One class is illustrated by (affd., ), wherein there was held to be a mere *1034 assignment of income to be earned and that such income*2558 was taxable to the grantor, even though received by the grantee, since the property itself or corpus out of which the income was earned was retained, both as to ownership and control, by the grantor, and the assignment was nothing more than a "gift grant" of the income in advance of its receipt. See also ; , and . The other class of cases is illustrated by , wherein the recipient of the income or beneficiary was taxed. In that case, upon the death of one Brady, the residue of an estate was left in trust, a condition of the trust being that one Gavit was to receive the income from a certain part of the estate for a period not exceeding 15 years and upon the happening of certain contingencies, or expiration of a certain period, the fund was to go over. The Supreme Court held that amounts received by Gavit constituted taxable income to him. The argument of the Commissioner is that because in the first class of cases the owner of the corpus is taxable on the income received by the grantee*2559 or assignee whereas in the second class, the recipient of the income is taxed, it therefore follows that in the latter situation the income is being taxed to the recipient because the donor or settlor of the trust transferred a part of the property itself or corpus to the beneficiary or trustee for the benefit of the beneficiary in such a manner that there was, in fact, a disposition of a part of the corpus which would require a reduction of the corpus to the extent of the disposition thus made. We are unable, however, to agree that such a conclusion follows from That case, of course, involved the taxability of income arising from a trust estate and did not purport to decide the nature of the interest in corpus, if any, which passed to the trustee for the benefit of Gavit. In fact, the court said:
* * * The language quoted leaves 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. It seems to us hardly less clear that even if there were a specific provision that A should have no interest in the*2560 corpus, the payments would be income none the less, within the meaning of the statute and the Constitution, and by popular speech. * * * (Italics supplied.)
And further the court, in commenting on the theory of the courts below, stated that it did not regard it as conclusive whether the bequest carried an interest in the corpus of the fund which produced the income. What was taxed to the beneficiary in that case was income which arose from, and became separated from, the trust fund itself, and can not be said to be authority for the proposition that *1035 there was a gift of corpus to Gavit which would serve to deplete or reduce the trust estate itself.
We fail to see any basic difference between the case now before us and that of the owner of property in fee who leases it for a period of years under a lease in which a bonus is paid at the beginning of the lease and a stipulated rental each year. Not only is the rental received each year income to the lessor, but also the bonus received when the lease is executed and the lessor is not allowed a deduction from such income on account of the capital interest which he had in the fee from which the estate for years was carved. *2561 ; ; and . We do not understand the situation would be different if the lessor should make the lease through a trust arrangement under which he would receive the income. In either event the lessor would be taxable on the entire rental received without a reduction for a return of capital. Certainly, if we are to carry the Commissioner's theory to its logical conclusion, we must recognize a horizontal severance of capital cost because of the granting of the estate for years and allow the lessor a return of this capital cost through deductions from income arising as this estate is exhausting, but such deductions have been disallowed in the cases referred to above. And to carry the analogy one step further in the case of the sale of the property after the lease had terminated, it could hardly be contended that the cost should be reduced because a lease had existed for a time. To do this would amount to double taxation in that the entire income arising during the existence of the lease was taxable to the lessor or owner of the fee*2562 without a deduction on account of a return of capital and then a reduction would also be made of the cost on account of the estate which was carved out through the execution of the lease. And this would be the identical situation with respect to the case with which we are concerned in that if the beneficiary had been taxable instead of nontaxable on account of its charitable nature, we would (following ), tax the entire income arising from this trust arrangement to the beneficiary without a deduction on account of the exhaustion of capital, and then, following the Commissioner's theory, make a reduction in cost, in case of sale after the termination of the trust, on account of the prior existence of a precedent estate which we have refused to consider as having been exhausted in such a manner as to permit a reduction of the income therefrom through a return of the capital which produced the income. Consistency and sound reasoning are opposed to such results.
*1036 On the whole, we are of the opinion that the creation of the trust did not operate to reduce the cost or acquisition-value basis of the stock placed in trust and sold*2563 subsequent to its termination. The stock sold in 1922 and 1923 was the same stock in which the petitioner made an investment in 1915 and we are unable to see that there was any reduction of this investment merely because for a time the petitioner did not receive the income therefrom. What might have been the situation had there been a sale of the securities during the existence of the trust, or what is the proper basis for determining gain or loss on account of the sale of reversionary estates during the existence of precedent estates, are not questions here presented for consideration, though in the various situations of such character suggested by the parties, we fail to see where, consistent with the conclusion herein reach, insurmountable difficulties would be encountered.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. Fractional shares were sold by trustee. ↩