*2858 1. A trustee, holding common stock for investment purposes, exchanged it for Federal, State, municipal and railway bonds, which he thereafter held for the same use and purposes as the stock. Held, there was an exchange of property for property of a "like kind or use," within section 202(c)(1), Act 1921, and no gain could be recognized. Margaret M. Edson,11 B.T.A. 621">11 B.T.A. 621, overruled, in part.
2. The words "or use," as used in that section, are to be construed as applying to property held for investment as well as property held for productive use in trade or business.
3. Regulations 62, article 1566, goes beyond the statute and is unauthorized.
*401 This proceeding involves a deficiency in income tax of $146,996.87 for 1922, resulting from the respondent's action in increasing income by the amount of profit determined to have been realized upon an exchange of property. Petitioner contends that under section 202(c)(1) of the Revenue Act of 1921 no gain is recognizable on the transaction.
FINDINGS*2859 OF FACT.
The petitioners have their offices in New York, N.Y. They were the executors of and are now trustees under the will of William Hall Walker, who died November 29, 1917.
The provisions of this will pertinent to this proceeding are:
II. I give and bequeath unto the following named persons the sums hereinafter mentioned, free and clear of all succession dues, transfer or inheritance taxes or other charges whatsoever, said sums to be paid as soon as possible after my death.* * *
To my cousin, Antoinette Hall Webster, widow of William Webster, of Hartford, Connecticut, an annuity of Two Thousand Dollars ($2,000), beginning *402 with the date of my death, and payable in quarterly installments; and I hereby direct my executors hereinafter named to set aside and invest such principal sum as may be necessary to provide such annuity; [There follow six other bequests of annuities varying from $1,000 to $2,000, making an aggregate of $10,100 in annuities. The provisions of each are identical except as to beneficiary and amount].
* * *
I also give and bequeath to my said trustees the sum of One Million Five Hundred Thousand Dollars ($1,500,000.) to be invested*2860 and re-invested by them, and direct that the income thereof, or so much as may be necessary, be used by them for the payment of the taxes, assessments, insurance and other charges, and in the general maintenance, replacement and upkeep of "Brookside," paying over one-half of the excess of the annual income, if any, unto my wife and one-half thereof, unto my daughter, during their joint lives, and after the death of one, dividing the same in the above mentioned ratio between the survivor and the executors or administrators of the one so dying until the death of the survivor, if my daughter shall die before my wife, and paying all of said excess income to my daughter if she shall survive my wife.
The above trusts of the real estate and property known as "Brookside" and of the personal property to the extent of One Million Five Hundred Thousand Dollars ($1,500,000.) aforesaid, may be terminated in either of the following ways, and I make the following provisions for the distribution of principal accordingly:
(1) By the death of the survivor of my said wife and daughter:
(2) By a joint request in writing signed by my said wife and daughter, or the survivor of them, addressed to*2861 my Trustees requesting the termination of the said trust.
Upon the termination of the said trust my said Trustees shall in their discretion and as soon as they deem it wise with due regard to the best interests of my estate, sell and convert all of the principal of the said trusts into money, which shall then fall into and become a part of my residuary estate.
* * *
V. All the rest, residue and remainder of my estate, including all lapsed legacies, I give, devise and bequeath unto the LAWYERS TITLE AND TRUST COMPANY, a corporation organized under the laws of the State of New York, and RICHARD T. GREENE, counsellor-at-law, of the City of New York, as Trustees, in trust, however, for the following uses and purposes, that is to say:To invest and re-invest the same, and after the payment of all necessary and proper charges and expenses against the same, to pay the net income arising therefrom quarterly, beginning with the day of the date of my death, as follows:
One-half thereof to my beloved wife, HARRIET DANA WALKER, and one-half thereof to my daughter, GERTRUDE DUDLEY WALKER, during the joint lives of my said wife and daughter, and upon the death or my said wife, to pay*2862 the whole of said income to my said daughter, for and during the term of her natural life. If my said daughter should die before my wife, then the income of my said estate which my daughter would have received if living, I give and bequeath unto such person or persons as my said daughter may be her last will and testament nominate. Upon the death of the survivor of my said wife and daughter, I give, devise and bequeath the principal of said residuary estate to such person or persons as my said daughter may by her last will and *403 testament have appointed. I request that my attorney, Richard T. Greene, of the firm of Greene, Hurd & Stowell, 43 Exchange Place, Borough of Manhattan, City of New York, draw the special attention of my said daughter to this provision of my will and request her immediately upon my decease to exercise the power of disposition by will herein given.
The provisions herein contained in favor of my wife are in lieu of dower and right of dower and thirds in my estate.
* * *
VIII. I have for many years been the owner of a large number of shares of the Eastman Kodak Company. I wish my executors and trustees to have absolute freedom of decision*2863 and action regarding the sale of such shares, and I expressly authorize them to continue to hold such shares as a part of the investment of the trust funds herein provided, so long as in their judgment it may be advisable and for the best interest of my estate so to do. From my personal knowledge of this Company I have perfect confidence that the company is and probably always will be ably managed, and I caution my executors and trustees that the shares of this Company are closely held, and, therefore, have a limited market, and that to throw them suddenly upon the market or in large blocks would probably result in their being sold for far less than their real value.
I also hold certain other investments in stocks and well selected bonds and I authorize my executors and trustees to continue to hold them in whole or in part in the investment of the funds of the trusts herein provided for.
A part of the estate of the deceased consisted of 5,534 shares of common stock of the Eastman Kodak Co. These shares were valued by the respondent at $450 per share for estate-tax purposes.
Pursuant to the terms of the will these shares were received by the petitioners in trust to hold the*2864 same, with power to reinvest and to pay the income therefrom for the purposes specified in the will.
From 1918 to, on, or about April 6, 1922, the shares were held by the petitioners as an investment. The income from this and all other property received by them was deposited in one bank account, which was paid out by them as provided in the will, including the payment of the above annuities.
On or about April 6, 1922, the petitioners exchanged these shares for Federal, State, municipal and railway bonds having a then fair market value of $3,666,275.
During 1922 and thereafter, except for some small portion retired or disposed of subsequent to 1922, the petitioners held these bonds for investment, in the place of and for the same purposes as the shares of stock of the Eastman Kodak Co. During 1922 and thereafter they paid out the income therefrom for the same purposes for which they had paid out the income from the shares of stock theretofore held by them.
The petitioners duly filed a fiduciary return of income for 1922 showing a net income of $123,102.77, setting forth fully therein the above exchange and claiming that no gain or loss could be recognized *404 thereon*2865 under section 202(c)(1) of the Revenue Act of 1921. No gain on the exchange was included in the income reported therein.
Thereafter the respondent caused an inquiry to be made into the exchange, computed a gain thereon of $1,175,975, and ruled that such a gain was recognized for income-tax purposes under the Revenue Act of 1921, resulting in the determination of the deficiency here in controversy.
OPINION.
STERNHAGEN: The petitioners are, and during the year 1922 were, the trustees of an active trust taxable for 1922 under section 219, Revenue Act of 1921. During 1922, having held for the investment purposes of the trust, 5,534 shares of the common stock of Eastman Kodak Co., the income of which had been used for distribution under the trust, they exchanged such stock for Federal, State, municipal and railway bonds and thereafter used the income therefrom in the same way. None of the primary facts are in dispute; the only controversy is as to whether the gain of $1,175,975 escapes recognition and its consequent tax because of section 202(c)(1), Revenue Act 1921. This provision is as follows:
(c) For the purposes of this title, on an exchange of property, real, personal*2866 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-trade or other property held primarily for sale), is exchanged for property of a like kind or use.
It is clear that this was an exchange of property held for investment for other property held for investment . Not only was this proven in fact by the testimony of one of the executors and trustees, but this was the obvious necessity of the trust under its terms. The refusal of the respondent to treat the exchange as within section 202(c)(1) is based on his view, clearly expressed in his Regulations 62, article 1566, that bonds are not property "of a like kind" as stock. In thus narrowing the question he also treats the words "or use" as not applicable to investment property but applicable only to productive business property.
We think there is no support for respondent's refusal to apply*2867 the words "or use" to investment property. However logical it might otherwise be to treat the word "use" as if its meaning were the same in each of its two places in the single sentence, the history of the provision in Congress destroys this construction and shows that the words "like kind or use" were intended by Congress to be applied to all the property received in any such exchange as is covered by the *405 paragraph. As the provision appeared in the original House Bill, H.R. 8245, section 202(d), it was in the form as finally enacted. The House Committee on Ways and Means, to which the bill was referred, said in its report:
The bill (subdivision (d), p. 6) provides new and explicit rules for determining gain or loss where property is exchange for other property. Under existing law, "when property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any * * *." Probably no part of the present income-tax law has been productive of so much uncertainty and litigation or has more seriously interfered with those business readjustments*2868 which are peculiarly necessary under existing conditions. Under existing law the presumption is in favor of taxation. The proposed bill modifies that presumption by providing that on an exchange of property for property no gain or loss shall be recognized unless the property received in exchange has a definite and readily realizable market value; and specifies in addition certain classes of exchanges on which no gain or loss is recognized even if the property received in exchange has a readily realizable market value. The preceding amendments, if adopted, will be removing a source of grave uncertainty, not only permit business to go forward with the readjustments required by existing conditions but will also considerably increase the revenue by preventing taxpayers from taking colorable losses in wash sales and other fictitious exchanges. Proper safeguards are found in subdivisions (e) and (f), which provide that where property is exchanged for other property and no gain or loss is recognized the property received shall be treated as taking the place of the property exchanged, for the purpose of determining gain or loss and for the purpose of determining certain important deductions, *2869 such as those for depreciation.
The Sentate received the bill in this form and struck out the words "investment or for," leaving the provisions as follows:
(1) When any such property held for productive use in trade or business (not including stock-in-trade or other property held primarily for sale), is exchanged for property of a like kind or use.
The Finance Committee in its report to the Senate said:
Section 202 (subdivision c) provides for those exchanges or "trades" in which, although a technical "gain" may be realized under the present law, the taxpayer actually realizes no cash profit.
Under existing law "when property is exchanged for other property, the property received in exchange shall, for the purpose of determining gain or loss, be treated as the equivalent of cash to the amount of its fair market value, if any * * *." Probably no part of the present income tax law has been productive of so much uncertainty or has more seriously interfered with necessary business readjustments. The existing law makes a presumption in favor of taxation. The proposed act modifies that presumption by providing that in the case of an exchange of property for property no gain*2870 or loss shall be recognized unless the property received in exchange has a readily realizable market value, and specifies in addition certain classes of exchanges on which no gain or loss is recognized even if the property received in exchange has a readily realizable market value. These classes comprise the cases where productive property (other than stock in trade or property held primarily *406 for sale) used in a trade or business is changed for property of a like kind or use; where in any corporate reorganization or readjustment stock or securities are exchanged for stock or securities of a corporation which is a party to or results from such reorganization; and where an individual or individuals transfer property to a corporation and after such transfer are in control of such corporation.
The preceding amendments, if adopted, will, by removing a source of grave uncertainty and by eliminating many technical constructions which are economically unsound, not only permit business to go forward with the readjustments required by existing conditions but also will considerably increase the revenue by preventing taxpayers from taking colorable losses in wash sales and other*2871 fictitious exchanges.
Proper safeguards are found in subdivision (d), which provides that where property is exchanged for other property or where property is involuntarily converted into cash and the proceeds of such conversion are used to replace the property converted, or where a wash sale is not recognized, the property received in exchange shall be treated as taking the place of the original property.
The bill then went to conference and the Conference Committee of both houses restored the stricken words and in its report said:
Amendment 41: The House bill provided that when property held for investment is exchanged for property of a like kind or use no gain or loss shall be recognized even if the property received in exchange has a readily realizable market value. The Senate amendment strikes out this provisions; and the Senate recedes.
Thus the Act was passed.
This indicates unmistakably that all the words "like kind or use" were intended to be applied indifferently to property received in exchange for investment property and for property held for productive use. Since this is a fair and reasonable interpretation of the language used, the statute must be so construed. *2872 Thus the words "like kind or use," which in their ordinary meaning are of broad scope, are found to elucidate each other and to aid in effectuating the general purpose of the statute.
We are also of opinion that the transactions before us are within the language and purpose of the statute. We see no justification for saying as a matter of law that for the purpose of this statute stocks and bonds are per se not property of like kind or use. The words can not fairly be regarded as importing distinctions which have no relation to the purpose of the statute. Stocks and bonds are both commonly regarded as investment property, and if in any case they are not so in fact it must be because the evidence so indicates. While their legal incidents are different, such differences are not controlling of the scope and purpose of this statutory provision, although they may be of great importance when involved in another statute. Because the Supreme Court held in Marr v. United States,263 U.S. 536">263 U.S. 536, that stock in an old corporation was "an essentially different *407 thing from stock of the same general kind in the new," it does not follow that investment in*2873 one would not have been held of like kind or use as investment in the other, had this statute been under consideration. Both the language and the purpose of the two statutes are different, and the two questions require different methods of approach.
If the test lies in an identity of legal rights inherent in the property, the provisions could be practically nullified. Is preferred stock only to be exchanged for preferred stock, and if so, is all preferred stock to be treated as of like kind? Suppose that instead of exchanging the Eastman stock for several classes of bonds, these trustees had taken in part some common or preferred stock, see Applegate, Executor,10 B.T.A. 705">10 B.T.A. 705; it is not reasonable to say that Congress intended by a method of apportionment or otherwise to tax a part of the gain in the year of exchange and leave the remaining gain unrecognized until a future sale, when the old basis is to be used. Such a distinction would be wholly arbitrary and have no sensible relation to the plan or purpose of the statute. It was apparently intended to ignore the usual gain or loss if an undoubted investor merely shifted his investment into other property - *2874 to soften the sharp lines of the law not only so as to relieve from tax a technical gain but also to prevent the deduction of "colorable losses." To interpret this by setting up a rigid classification as between stocks and bonds would merely change the standard of gain or loss from one technical test to another. By virtue of what test is investment property to be classified, if, as respondent's regulation, article 1566, indicates, all real estate is treated as of a kind, such as city lots and a ranch, E. R. Braley,14 B.T.A. 1153">14 B.T.A. 1153, or a city office building and a suburban apartment house, Pearce, Trustee,13 B.T.A. 150">13 B.T.A. 150, while securities are to be classified according to their "nature," so that stocks of all classes are of like kind, such as common and preferred, Frank Filer,14 B.T.A. 1084">14 B.T.A. 1084, but are not of like kind with debenture bonds, Margaret M. Edson,11 B.T.A. 621">11 B.T.A. 621? To say that industrial bonds, on the one hand, and municipal, State, and Federal bonds, on the other, differ only in "grade or quality" and not in "kind or class" as in respondent's ruling,*2875 GCM 1637, VI-1 CB 166, creates a strained distinction. Congress has laid down no such test in the Act and nothing in its legislative reports indicates such a restriction upon the ordinary meaning of the language used. The regulation goes further than the statute and is in our opinion unauthorized. Morrill v. Jones,106 U.S. 466">106 U.S. 466.
If it be asked, what is the scope of the language used, it can only be said that no classification can be laid down in advance which in any instance would defeat the intendment of the statute. The *408 amending Act of March 4, 1923, has removed both stocks and bonds from the operation of the provision and thus has narrowed the field of difficulty.
We conclude that the exchange shown by the evidence is within the description of section 202(c)(1) and hence that there was no recognizable or taxable gain. The decision in Margaret M. Edson,11 B.T.A. 621">11 B.T.A. 621, is pro tanto overruled.
Reviewed by the Board.
Judgment will be entered for the petitioner.
TRAMMELL dissents.
SMITH, dissenting: The record of this action shows that the transaction found by the Board to be*2876 an exchange of 5,534 shares of the common stock of the Eastman Kodak Co. for Federal, State, municipal, and railway bonds having a fair market value of $3,666,275 was of this character: "In addition to the sale for cash of 700 shares Eastman Kodak common stock as set forth in Schedule D herein, the estate disposed of by exchange, during the month of April, 1922, 5,534 shares of the same stock at a stated value of $662.50, receiving in exchange therefor, together with a cash payment on the part of the estate of $1,911.56 bonds as shown by the attached schedule at the values therein stated." (Return of Estate introduced as Exhibit 1.) The full exhibit shows that the estate acquired the bonds of the above character of a value of $3,668,186.56, paying therefor $1,911.56 cash and 5,534 shares Eastman Kodak Co. common stock at a price of $662.50 per share.
How did this transaction differ from a "sale" of the shares and a "purchase" of the bonds? I assume that if it had been denominated a "sale" and not an "exchange" there would be no question but that the profit realized therefrom in the amount of $1,175,975 would be held to be taxable gain. "A sale, in the ordinary sense of the word, *2877 is a transfer of property for a fixed price in money or its equivalent." Iowa v. McFarland,110 U.S. 471">110 U.S. 471. This transaction meets all the requirements of the definition of a sale. As was stated by the court in Commonwealth v. Clark, 14 Gray (Mass.) 372, the distinction between a sale and exchange of property is rather one of shadow than of substance. In both cases the title to property is absolutely transferred, and the same rules of law are applicable to the transaction, whether the consideration of the contract is money or by way of barter. But in this case the consideration was in terms of money. The shares of stock were disposed of at a price of $662.50 per share and the bonds were acquired at specified prices and the difference between the total price of the bonds and the total agreed price of the stocks was settled by a money consideration. The more designation *409 of the transaction as an exchange does not change its essential character.
Even if the transaction may be regarded as an "exchange," I dissent from the proposition that the words "like kind" have no application to the situation. This holding is directly contrary*2878 to the Commissioner's regulations, article 1566 of Regulations 62. If I understand the basis of the opinion of the Board, it is that the shares of stock could have been exchanged for any class of property such as real estate, promissory notes, or even money without incurring liability to tax, provided the property received in exchange were held for the purposes of the trust. It appears to me that the words "like kind" must have some force in the statute. They can not be deleted in its interpretation. But in what case would they have application if not in the instant proceeding?
An inspection of the statute shows that it refers to two classes of property:
(1) That held for investment, and
(2) That held for productive use in trade or business.
It appears to me that the words of the statute, "like kind or use," refer to these two classes of property and that property held for investment must be of a "like kind," and that where there is an exchange of property for productive use in business for other property the property received in exchange must be likewise held for productive use, and that the word "use" has particular application to the latter kind of property. This construction*2879 gives force to all the words of the statute. The Board opinion holds that all that is necessary is that the property received by the petitioners in exchange for their shares of stock must be held for investment; that where it is held for investment the same "use" of the property is made. It appears to me, however, that the property held for investment is not used in the ordinary sense of the term.
If there is any doubt upon the construction of this portion of the statute it should be resolved against the taxpayer and not in his favor, for provisions tending to exemption from tax are strictly construed.
It is further to be observed that regulations of an officer charged with the administration of a taxing statute are entitled to the greatest consideration and are not to be lightly disregarded by the courts. In cases of ambiguity in a statute, contemporaneous construction by a department charged with its enforcement, long followed in practice, is generally held to be controlling. Schell v. Fauche,138 U.S. 562">138 U.S. 562. Under the regulations of the Commissioner shares of stock of one corporation are not property of a "like kind" with bonds of a State or of another*2880 corporation. The Board so held in Margaret M. Edson,11 B.T.A. 621">11 B.T.A. 621. I see no reason for reversing that stand.