*817 1. TRUST INCOME - TAXABLE TO GRANTOR - (a) WHERE RESTRICTED TO DISCHARGE OF OBLIGATION OF GRANTOR. - Income of a trust held taxable to the grantor where its use was restricted to the discharge of the grantor's obligation to support, educate, and maintain his minor son.
2. Id. - (b) POWER TO REVEST - ACCUMULATION OF INCOME FOR GRANTOR. - A deed of trust construed as reserving to the grantor no power to revest in himself title to any part of the corpus and as not authorizing the holding or accumulation of income for future distribution to him, under sections 166 and 167).
3. Id. - (c) ADVERSE INTEREST. - A wife who has minor sons by a former marriage and has them in her custody and is obligated to support them, and who, under the terms of a trust created by her second husband, is directed to use the income for their support and education in such manner and amounts as she deems best, has a real and substantial interest in the disposition of the income adverse to any possible interest of the grantor in any accumulations.
4. Id. - (d) LACKING IN SUBSTANCE. - Trusts for benefit of minors are not lacking in substance by retention of benefits to grantor and may*818 not be disregarded for income tax purposes.
5. Id. - (e) Eight other trusts held to deprive the grantor of so little and to leave in him such privileges and benefits as to justify disregarding the trusts and taxing the income to him.
6. DEDUCTIONS - LOSSES. - Held, that the petitioner entered into two transactions for profit and that deductible losses were sustained in the taxable years.
7. GAIN OR LOSS - BASIS. - Where shares of stock of one corporation are exchanged for shares of a second corporation in a statutory reorganization, the basis of the old shares is divided pro rata among the new and no new lot takes the basis of any particular lot of old shares. Christian W. Von Gunten,28 B.T.A. 702">28 B.T.A. 702; affd., 76 Fed.(2d) 670, followed.
*673 The Commissioner determined the following deficiencies in the income tax of the petitioner:
| 1931 | $13,088.26 |
| 1932 | 16,588.17 |
| 1933 | 9,104.15 |
| 1934 | 81,803.06 |
The issues, excluding those*819 conceded and abandoned, are as follows:
I. Whether the income of a trust created by the petitioner on March 19, 1931, is taxable to the petitioner for all or some of the four years.II. (a) Whether the income of four trusts created by the petitioner on September 22, 1932, is taxable to him for 1932 and 1933.
(b) Whether the income of four trusts created by the petitioner on May 24, 1934, is taxable to him for 1934.
III. Whether the petitioner sustained a deductible loss of $3,872.90 in 1931 from his investment in the National Gift Guild. IV. What the basis was for gain or loss of 1,300 shares of General Baking Co. common stock sold by the petitioner in 1932. V. Whether the petitioner sustained a capital loss in 1932 from the sale of 1,449 shares of General Holding Co., Ltd., stock. VI. Whether the petitioner sustained a deductible loss in 1933 of his investment in the Consolidated Connector Patent Corporation.FINDINGS OF FACT.
The petitioner resides in New York City. He filed his Federal income tax returns for the years 1931 through 1934 with the collector of internal revenue for the third district of New York.
Ruth Gardner Fleischmann was the wife*820 of the petitioner from 1920 until some time after 1935, when they were divorced. They had one son, Peter F. Fleischmann, who was born in 1923. Ruth Gardner Fleischmann had two sons of a former marriage, Stephen B. Botsford, born in 1919, and Robert Gardner Botsford, born in 1918. The Botsford decree of divorce provided that the older child should be supported by the parent who had custody of him and the father *674 should contribute to the support of the younger child as the parties should agree upon from time to time. The two boys lived with the Fleischmanns from 1920 through the taxable years here in controversy. Their father made no contribution towards their support after 1923, although he was fully able to support them. Their mother, likewise, was fully able to support them. The petitioner became very fond of the two boys and treated them like his sons, although he never adopted them and they were at all times known under their own name as sons of Ruth Gardner Fleischmann by her former husband. The petitioner maintained the household in which he, his wife, and the three children lived, although his wife sometimes paid some of the expenses of the group.
The petitioner*821 has been engaged in the publishing business for a number of years. He is president of the F. R. Publishing Corporation, which publishes the magazine "The New Yorker." About 80 percent of his property on March 19, 1931, consisted of 21,555 shares, a majority interest, of the stock of the F. R. Publishing Corporation. He decided to create a trust for the benefit of his son and the two Botsford boys so that their futures might be somewhat assured.
I. Trust of March 19, 1931. - Petitioner executed a trust agreement on March 19, 1931, and transferred to the trustee, his wife, 6,000 shares of stock of the F. R. Publishing Corporation. The trustee was directed to divide the fund into three separate equal parts "and to apply the net income of one (1) of such parts to the support, education, and maintenance" of each of the three boys, the son Peter and the two Botsford boys, "during their minority in such manner and amounts as she may in her sole discretion deem best." Then follows:
As each such child or stepchild attains the age of twenty-one (21) years the Grantor may, if he shall then be living, elect whether the trust for such child or stepchild shall terminate and the principal*822 thereof, together with any accumulations of income, be paid over to the grantor's said wife, RUTH GARDNER FLEISCHMANN, absolutely, if she shall then be living, and if she shall not then be living to distribute the same in such manner as the Grantor may direct, or whether the trust shall continue and the income thereof be paid to such child or stepchild absolutely so long as he shall live, and the principal thereof distributed on the death of such child or stepchild in such manner as such child or stepchild may by his last Will and Testament direct, or such other final distribution or provision as the Grantor may at that time, namely, as each such child or stepchild attains the age of twenty-one years, direct.
In the event that the Grantor shall fail to make such election either by written notice to the Trustee or by proper provision in his last Will and Testament then the trust for each such child or stepchild shall terminate as each such child or stepchild attains his majority, and the principal thereof paid over to the said Ruth Gardner Fleischmann absolutely if she shall be then living, and if she shall not be then living the Trustee shall continue to hold said fund or funds*823 and pay the income thereof to such child or stepchild so long as he shall live, and on his death shall distribute the same in such manner *675 as he may by his last Will and Testament direct, and if he shall die without exercising the power of appointment given him hereunder then to distribute the same to such person or persons as would be entitled to take his estate had he died intestate under the laws of the State of New York.
In the event that any such child or stepchild shall die during his minority the principal of his trust as it shall then consist shall be paid over to the said Ruth Gardner Fleischmann absolutely.
A later provision is as follows:
(5) The Grantor reserves to himself the right of nominating at later dates the ultimate recipient of the principal of the three (3) separate trusts herein created and other discretionary powers as herein described, but the transfer of principal hereunder shall be absolute and irrevocable.
The grantor reserved the right to substitute other securities and the right to substitute another trustee. The trustee was not to sell trust property or reinvest trust funds except as directed by the grantor and was to furnish proxies*824 as directed by the grantor.
The trustee continued to hold the certificates for the 6,000 shares of F. R. Publishing Corporation stock throughout the years here involved. No substitution was made. The trustee voted the stock. The corporation paid the following amounts to the trustee as dividends on the 6,000 shares during the taxable years:
| 1931 | $39,000 |
| 1932 | 18,000 |
| 1933 | 17,325 |
| 1934 | 61,500 |
The income of the trust was used by the trustee for the support, education, and maintenance of the three children. The petitioner has never received any of the income of the trust.
The Commissioner, in determining the deficiencies, included the following amounts in the income of the petitioner as representing the income of the trust:
| 1931 | $23,023.94 |
| 1932 | 18,000.00 |
| 1933 | 17,325.00 |
| 1934 | 61,500.00 |
Robert Gardner Botsford attained his majority in July 1938, and his one-third of the trust property was distributed to his mother at the direction of the petitioner, given pursuant to his right of election. The mother at that time was the wife of another, having obtained a divorce from the petitioner.
The petitioner intended to set aside the property*825 for the three children permanently by the creation of the trust and he did not intend to reserve to himself any power to revest in himself title to any of the trust property.
II. Income from trusts of September 22, 1932, and May 24, 1934. - The petitioner, on September 22, 1932, entered into four agreements *676 between himself, as settlor, and his wife, as trustee, for the establishment of four separate trusts. The agreements are identical, except as to the beneficiaries named therein. The petitioner, his wife, and his brother, Charles R. Fleischmann, were beneficiaries of each trust. The petitioner's son, his two stepsons, his two sisters, and his niece and two of her children were also beneficiaries, but none was a beneficiary of all four trusts. Some of the beneficiaries were minors when the agreements were made. Each agreement states that the "settlor hereby assigns, transfers and sets over unto the Trustee" 3,000 shares of stock of the F. R. Publishing Corporation, and that such property:
* * * is now in the hands of F. R. Publishing Corporation * * * and Charles Russell Fleischmann * * * as collateral for certain loans heretofore made by the settlor with*826 the aforementioned. The trustee shall not be obligated to pay said loans either as to interest or principal or to relieve the said securities from their liability as collateral for the aforementioned loans or to withdraw such securities as such collateral, it being the specific intention of this agreement to convey to the trustee the settlor's equity in said property for the purposes herein expressed.
The trusts were to terminate upon the death of the settlor and the principal, together with any additions thereto, was to be paid over to his estate. The trustee was authorized to take control and management of the property and to invest and reinvest the same and receive the income, and, during the life of the settlor, to pay over and distribute the whole or any part of the net income annually, in such amounts and proportions as she might, in her sole, absolute, and uncontrolled discretion determine, to and among one or more of the beneficiaries, in accordance with their respective needs, of which she was to be the sole judge; and to accumulate the balance of the net income, if any, for the benefit of such of the beneficiaries who were infants at the time of accumulation, in such*827 proportions among them as the trustee might in her sole discretion determine, and all income so accumulated was to be paid over to the person for whose benefit it was accumulated upon his attaining the age of 21, or if he died before attaining that age, to those who would be entitled to take in case of his intestacy. The trustee was directed to hold the property coming into her hands as an investment, but the settlor reserved the right to direct the sale or leasing of any property and also the purchase of any property or the investment of any funds of the trust. The trustee was required to hold any property purchased as an investment until otherwise directed by the settlor without liability for losses. The settlor further reserved the right to transfer to the trust any other investments, securities, or property that he might wish to substitute for property constituting the principal, which property was to be held by the trustee subject to all the conditions of the trust, with the understanding *677 that any property so substituted should be of equal market value on the date of substitution to the property for which the substitution was made.
The agreements contained a*828 provision reading as follows:
The trust herein created may be revoked in whole or in part by the settlor by an instrument in writing executed after December 31, 1933. The settlor may at any time, by an instrument or instruments in writing, extend the period during which this instrument may not be revoked.
The petitioner's wife signified her acceptance of the trusts by joining in the execution of the agreements.
The certificates were outstanding in the name of the petitioner when the agreements were executed, and at that time he caused them to be canceled and had new certificates issued in the name of Ruth Gardner Fleischmann, as trustee.
The trustee received from the corporation cash dividends on the stock, in the amounts of $18,000 in 1932, $34,650 in 1933, and $9,000 in 1934, which sums were deposited in separate bank accounts opened by her for each trust in her name as trustee. The same amounts were distributed to the petitioner by the trustee in January of the year following that in which they were received by her.
The petitioner executed an instrument on December 28, 1933, extending to January 1, 1938, the period within which the 1932 trusts could not be revoked. *829 The petitioner revoked the trusts on May 24, 1934, with the consent of his wife, acting individually and as trustee, and upon the advice of his attorney. The stock certificates outstanding in the name of the trustee were canceled and new certificates were issued in the name of the petitioner.
The petitioner, on May 24, 1934, entered into four agreements between himself, as settlor, and his wife, as trustee, for the establishment of four separate trusts. The beneficiaries of each trust were the same as in each of the 1932 trusts. The new trusts were to terminate on January 1, 1936, or upon the death of the petitioner if he should die before that date, and the principal, together with any additions thereto, was to be paid over to him on that date or to his estate if he should die before that date. They contained a provision that "the settlor does not reserve the right to revoke this trust in whole or in part." The remaining provisions were identical with those of the 1932 agreements. They included a similar recital that the property was in the hands of the F. R. Publishing Corporation and Charles Russell Fleischmann as collateral for loans. The petitioner caused the certificates*830 which were issued in his name on May 24, 1934, to be canceled and had new certificates issued on the same day in the name of Ruth Gardner Fleischmann, as trustee.
The trustee during 1934 received from the corporation cash dividends on the stock in the amount of $28,500 for each trust, or a *678 total of $114,000. The amounts so received were deposited by her in separate bank accounts opened for each of the 1934 trusts in her name as trustee. The entire amount of $114,000 was distributed to the petitioner in January 1935.
The trustee filed fiduciary returns for the years 1932 and 1933 in which she reported the income of the four trusts for those years. The income of $9,000 received in 1934, representing the March dividend paid to the 1932 trusts, was reported by the petitioner, on the advice of his counsel, in his income tax return for the year 1934 as income from revocable trusts.
The Commissioner, in determining the deficiencies for the years 1932, 1933, and 1934, included the following amounts in the income of the petitioner:
| 1932 | $18,000 |
| 1933 | 34,650 |
| 1934 | 114,000 |
III. Loss of investment in the National Gift Guild. - The petitioner and*831 Oscar Reigel entered into an agreement in August 1931, for the promotion of a business enterprise under the name of "The National Gift Guild." They undertook to establish special shops in department stores in charge of gift secretaries. The latter were to serve prospective donors who were patrons of the stores by ascertaining from their proposed donees the kind of gift desired by them. The venture was not incorporated. Reigel had conceived the plan and was to render services in promoting it. The petitioner was to furnish the necessary funds. The profits were to be derived from sales of stationery and forms to the stores.
The petitioner made total advances between August and November 1931 amounting to $4,500. The money was deposited in a special bank account, from which the petitioner from time to time made disbursements for stationery, traveling expenses, and a nominal salary for Reigel. Reigel traveled throughout the New England States during the latter part of 1931, and at the close of the Christmas season that year he informed the petitioner that the plan was a failure. No further efforts were thereafter made by the petitioner or Reigel to carry out the plan. The petitioner, *832 at the close of 1931, definitely decided to abandon the venture, paid the remaining bills, and withdrew the balance remaining in the bank account - $627.10. No income whatever had at any time been derived from Reigel's operations, and there were no other assets.
The Commissioner, in determining the deficiency for the year 1931, disallowed a loss claimed on the venture in the amount of $3,873.44. The petitioner entered into the transaction for profit and sustained a loss thereon of $3,872.90 during the year 1931.
*679 IV. Loss on sale of stock of General Baking Co. - The petitioner was the owner on April 1, 1931, of 5,392 shares of preferred and 12,472 shares of common stock of the General Baking Corporation. One thousand nine hundred of the preferred shares were represented by certificates in street names held for the petitioner by his brokers or agents. His basis for gain or loss on those 1,900 shares was $132,705.60. The certificates for the other shares were in his own name. The General Baking Corporation and the General Baking Co. were parties to a statutory reorganization on April 1, 1931. See *833 ; affd., . The petitioner exchanged all of his shares pursuant to that plan of reorganization and received 8,463 shares of common stock of the General Baking Co., certain debentures, and cash. 92.1589 percent of the basis for gain or loss on the preferred shares exchanged is allocable to the new shares received in exchange. Two thousand, eight hundred and fifty of the shares received in exchange were issued in street names and were delivered to the brokers and agents to replace those they held before the reorganization. The petitioner in 1932 sold 1,300 shares of General Baking Co. common from the 2,850 shares in street names for $23,958.60. The Commissioner, in determining the deficiency, held that the basis for the shares sold was $29,412.50 and allowed a deduction of $5,453.90 as an ordinary loss on the sale.
V. Loss on sale of stock of General Holding Co., Ltd. - The petitioner acquired 1,449 shares of stock of the General Holding Co., Ltd., a Canadian mining corporation, at a cost of $19,330. That company was organized in 1923 to develop mica claims located in a remote section of British columbia. *834 The stock was closely held and was unlisted, 7,156 shares being outstanding in 1932. The petitioner's brother-in-law was president of the company and in charge of its operations. The petitioner had purchased the stock upon his recommendation, without other investigation, and relied solely upon him for information concerning the company's activities and condition. The company made substantial expenditures for exploration work and equipment during the years 1924 to 1927. Large outcroppings of mica were found and a tunnel was completed in 1927, which failed to strike the vein. Thereafter the company was in need of additional capital for further development and operation of the claims. It has maintained a working crew and livestock at the mine in order to keep its claims intact at all time material hereto. It expended over $600 between November 1930 and November 1932 for corporate licenses, licenses necessary to hold mineral claims during 1931 and 1932, and the care of the livestock and maintenance of its equipment. It never paid any dividends.
The company was in legal existence on December 31, 1931, and on December 14, 1932. Its assets then consisted of two mining claims, *835 *680 which would not expire until 1941 and 1942, livestock, wagons, buildings, and mining machinery. Those assets had cost it approximately $60,000. It had about $1,500 in cash and no liabilities. The petitioner knew in 1932 that the company was still in existence but had little faith in its prospects. He decided in December 1932 to sell the stock in order to realize a loss for income tax purposes. He delivered the stock on December 14, 1932, to his attorney, with instructions to have it sold at public auction. The stock was sold on that day for $50 by an auctioneer of securities in New York City, and the petitioner thereby realized a capital loss of $19,280. The purchaser was a director of the company who was familiar with its affairs. He knew of the petitioner's purpose to sell the stock, but the petitioner had no understanding with him that he should purchase it.
The Commissioner, in determining the deficiency for the year 1932, disallowed a capital loss on this stock in the amount of $19,492.48.
VI. Loss on Barbour patent. - The petitioner in 1929 acquired for $17,500 a one-twelfth interest in a patent known as the Barbour Connector patent, which covered*836 an automatic coupling device for railroad cars. The device was manufactured and about a thousand were sold and installed on cars of several small railroads.
The Consolidated Connector Patent Corporation was organized under the laws of Delaware for the purpose of holding the patent. The patent was transferred to it, and the patent owners were entitled to receive stock of the corporation in proportion to their several interests in the patent. The stock to which the petitioner was entitled was never issued to him.
The Consolidated Connector Patent Corporation made efforts to have the device adopted by the railroads. Upon petition of the Railroad Brotherhoods, the Interstate Commerce Commission directed the railroads to test various automatic coupling devices on the market, including the Barbour device, and such tests were made at Purdue University during the year 1932. The University made an official report on the tests which was unfavorable to the Barbour device, and the railroads refused to adopt it. The petitioner purchased his interest in the patent through Crosby Gaige, who owned a onetwelfth interest and became a director of the Consolidated Connector Patent Corporation. *837 The petitioner relied upon Gaige for information concerning his investment. Gaige knew in the latter part of 1932 that the Barbour device was not standing up well under the tests. The directors of the Consolidated Connector Patent Corporation received a copy of the official report on the tests some time in 1933, and thereupon decided to abandon the corporation and the patent. The charter was permitted to lapse on April 1, 1933, for nonpayment of taxes and the corporation has never been revived. *681 The corporation had no assets of any value on that date and nothing was ever distributed to the stockholders.
The petitioner entered into the transaction for profit, his interest became worthless in 1933, and he thereby sustained a loss in the amount of $17,500.
Incorporated herein by this reference are all facts stipulated or agreed to by the parties not fully set forth above.
OPINION.
MURDOCK: I. Income from the trust of March 19, 1931. - The Commissioner, in determining the deficiencies, included the income of this trust in the income of the petitioner on the ground that the trust was a revocable trust within the provisions of section 166 of the Revenue Acts*838 of 1928, 1932, and 1934. He has now abandoned this contention, except as to the year 1934, and he no longer argues that section 166 of the Revenue Acts of 1928 and 1932 has any application.
That section applies only where the grantor, or the grantor and certain others, had a power "during the taxable year" to revest title to a part of the corpus in the grantor. Since the deed of trust gave no such power, the Commissioner was obviously in error in applying section 166 of the Revenue Acts of 1928 and 1932. The words "during the taxable year" were dropped from section 166 when it was incorporated in the Revenue Act of 1934 and the Commissioner still contends that the income of the trust for 1934 is taxable to the petitioner under the provision of that section to the effect that where at any time the power to revest in the grantor title to any part of the corpus is vested in the grantor, then the income of such portion shall be included in his income.
He relies upon the provisions of the deed of trust giving the petitioner certain elections as each child became 21. Those provisions are quoted in extenso in the findings. The grantor, if alive, could then elect (a) to terminate*839 the trust and give the principal and any accumulated income to his wife, if living, or, if she was dead, "to distribute the same in such manner as the Grantor may direct"; (b) to continue the trust and let the corpus be disposed of by the child at death; and (c) "such other final distribution or provision as the Grantor may at that time, namely, as each child or stepchild attains the age of twenty-one years, direct." The second choice, of course, is not a power within section 166. Neither is the first, since the effective part of it was expressly contingent upon the prior death of the wife. ; . But the Commissioner contends that the third choice permitted the petitioner to distribute the principal and *682 any accumulated income of each one-third to himself. A power to distribute as each child became 21 would be like a similar power exercisable after a certain date. . The force of the respondent's argument might be irresistible if the provision of the deed stood alone. The intent of the grantor is controlling. *840 That intent must be gathered from the entire deed and from all other relevant and admissible evidence. The deed when read as a whole indicates that the petitioner did not reserve any power to revest title to any of the trust property in himself. This is shown not only by the general purpose of the trust (to provide permanently for the three boys) but by the unequivocal language of paragraph (5) stating that the petitioner reserved rights to nominate the ultimate recipients of the principal but "the transfer of principal hereunder shall be absolute and irrevocable." He obviously meant that under no circumstances could he use any of his retained powers to take back the principal for his own. This interpretation of the deed is corroborated by his testimony as to his intent and purpose and by the action which he took when the first boy became 21. We conclude that under none of his reserved powers could the petitioner revest in himself, at any time, title to any of the trust property and section 166 does not apply.
The Commissioner makes arguments in his brief for the first time that the income of the trust is taxable to the petitioner on grounds other than the provisions of section*841 166. The petitioner complains of this change on the part of the Commissioner and argues that the Commissioner thereby raised an affirmative issue upon which he has the burden of proof. The Board has said many times that the real question for decision is the correctness of the action of the Commissioner and not the correctness of the reason which he assigned in his notice of deficiency. ; ; affd., ; ; ; affd., ; . Here he included the income of the trust in the income of the petitioner and still insists that that income was properly included in the income of the petitioner. He merely assigns a new reason for his action. The burden of proof does not shift under such circumstances although such a delayed reversal of reasoning is unfortunate and might justify a further hearing if the petitioner claimed surprise and desired to introduce further proof to meet the*842 change. He has known of the present contentions of the respondent since about July 1, 1939, and has made no request to introduce additional evidence. He does not claim surprise, but attempts to answer all of the arguments of the respondent. The change made by the *683 Commissioner in , was not a mere change in the reason assigned for a particular action and that case is not in point.
One of the new arguments made by the respondent in his brief is that there was no substance to the trust and it should be disregarded for income tax purposes in accordance with principles announced in ; ; appeal dismissed, ; ; reversed, ; and The reasons assigned by the respondent are wholly inadequate for his purpose. This trust was created for a legitimate and laudable purpose and was used to carry out that purpose. *843 The transfer was complete and the income was used for the benefit of others than the petitioner. The petitioner did not retain privileges and benefits so substantial as to justify treating the income and corpus as his own. Cf. .
Another new argument made by the respondent in his brief is that one-third of the income of the trust was to be used for the support, education, and maintenance of the petitioner's son and, therefore, was taxable to the petitioner under , and . The trustee was directed to apply the income from one-third of the trust "to the support, education, and maintenance" of the son during his minority "in such manner and amounts as she may in her sole discretion deem best." Reference to possible accumulations does not change the fact that the income was to be used eventually and used only for the support, education, and maintenance of the son. That was the primary purpose of this part of the trust. Cf. *844 . Furthermore, the petitioner testified that, to the best of his knowledge, the income was used to support, educate, and maintain his son. Cf. ; . This case is not distinguishable from Thus, one-third of the income for each year was taxable to the grantor under the cases cited. The respondent recognizes that the petitioner was under no obligation to support the Botsford boys and does not contend that the principles of the above cases have any further application.
Another argument made by the respondent to support his determination is that section 167 applies, since the income of the trust could be accumulated and the petitioner could then take the accumulations for himself. Section 167 of the Revenue Act of 1928 refers only to income over which the grantor, alone or in conjunction with some other person, may exercise a discretion. Here the grantor could exercise no discretion as to the disposition of any current income. The *684 sole discretion was lodged in the*845 trustee. Sections 167(a)(1) of the Revenue Acts of 1932 and 1934, upon which the respondent relies, are different in this respect. They provide that where any part of the income of a trust is, or, in the discretion of any person not having a substantial adverse interest in the disposition of such part of the income, may be held or accumulated for future distribution to the grantor, then such part of the income of the trust shall be included in computing the net income of the grantor. The discussion above in regard to the intent of the grantor and his rights of election is a complete answer to this contention of the respondent, since it led to the conclusion that he retained no right to take any of the accumulations for himself under any circumstances. Furthermore, the argument is unsound in other respects. It does not appear that the trustee ever accumulated any of the income or that she was authorized to accumulate any amount, except as a means of spreading current income over an appropriate period. She was eventually to use all of the income for the support, education, and maintenance of the boys. Cf. *846 ;;. If no income was to be accumulated, none could ever get to the grantor under his power of election. Certainly the deed does not indicate an intent to have the trustee accumulate income so that the grantor could recapture it when a child became 21.
The income of the trust for the son has been held to be taxable on other grounds and only that of the trusts for the Botsford boys need be considered. The trustee was their mother, she had custody of them, was able to support, educate, and maintain them, and was obligated by the decree of divorce, if not otherwise, to provide for them. It was to her interest to use the income of the trusts to defray the expenses which otherwise might have to be paid from her personal funds. Although she thus acquired no legal interest in the trust income, nevertheless, from a practical standpoint she had a very real and substantial interest in the disposition of the income adverse to any possible interest of the grantor in any accumulations. It is thus immaterial whether her interest*847 in the accumulations under any of the elections of the petitioner might or might not be considered substantially adverse. Cf. ; . Section 167(a)(1) of the Revenue Acts of 1932 and 1934 does not apply to the income of the trusts for the Botsford children.
We hold, in accordance with the foregoing discussion as to the trust of March 19, 1931, that only one-third of the income for the years before us is taxable to the grantor.
II. Income from trusts of September 22, 1932, and May 24, 1934. -
The Commissioner included the income of these trusts in the income *685 of the petitioner upon the theory that section 167(a)(2) of the Revenue Acts of 1932 and 1934 applied. He abandoned 167(a)(2) in his brief as a basis for his action and attempts to justify that action upon other grounds. The petitioner does not complain of this change upon the part of the Commissioner; nevertheless, the discussion under the first issue relating to a similar change is equally applicable here.
One of the contentions of the Commissioner is that a close scrutiny discloses a lack of substance in the*848 trusts, a mere scheme to reduce income taxes, and trusts which should be disregarded for income tax purposes in accordance with the principles announced in ;; and These transactions were within the family of the petitioner and should be closely scrutinized to see what their purpose was and to determine how much substance was in them for income tax purposes. ; affd., ; ; affd., ; ; affd., ; certiorari denied, .
The petitioner testified that he created the trusts to prevent himself from losing his property through his tendency to make unwise investments, to safeguard his property from influences of the prevailing unsettled financial conditions of the times, and to provide for his family and relatives who might have to call upon him for assistance. He did not explain why he created four trusts*849 instead of one.
The first reason is not very convincing in view of the provisions of the trust deeds reserving to the petitioner the absolute power to direct the disposition and acquisition of all trust property and relieving the trustee of all responsibility in such matters. Furthermore, it is not at all clear that "The Settlor's equity" in the shares, which was all that was assigned, had any substantial value. Counsel for the petitioner concede in their reply brief that the petitioner was in error when he testified that the shares were not pledged as collateral in 1932, 1933, and 1934 for the benefit of the petitioner. The record does not show the extent to which the shares were encumbered or the ability and intention of the petitioner to relieve the shares from the lien or liens. Seizure of the shares to satisfy the liens might have left nothing for the trusts. The trusts did not free the property from the danger of unwise investments by the petitioner. Nor does the evidence disclose how the creation of the trusts was a safeguard against the dangers of the times. The trusts might have been used to assist relatives, but in fact all of the income for these years and all*850 except an undisclosed amount in later years was distributed to the petitioner. The trusts were designed to last for short periods only. The first was actually revoked at the will of the petitioner at a time *686 when it was said to be irrevocable. The relatives, other than the wife, were not consulted. These circumstances and others weaken the force of the testimony of the petitioner as to the purpose of the trusts.
The evidence indicates that the petitioner must have had other purposes in creating the trusts. One was a purpose to save taxes. If the income from the shares could be divided among four trusts, instead of being all taxed to one or to the petitioner, the result would be a saving in tax. No other reason for the creation of four trusts instead of one has been suggested. If the trustee could refrain from distributing the income of each year to the petitioner until a few days after the close of the year, section 162(c) might not require that the income be taxed to the petitioner instead of to the four trusts. The original trusts were designed to avoid the application of section 166 of the Revenue Act of 1932. *851 When the change in that section was made by the Revenue Act of 1934, approved on May 10, 1934, the trusts were promptly revoked and new ones created to avoid the application of the new section 166. These circumstances and others indicate that the petitioner and his wife were fully advised and conscious of the tax consequences of their acts. While legitimate methods of avoiding tax are entirely proper, nevertheless, a purpose to avoid tax is not without significance here, since it may be the real purpose back of the transactions and it may be some evidence of a lack of substance for tax purposes in the trusts.
The petitioner testified that he had no agreement or understanding with his wife that she would pay the income of the trusts to him. She actually paid all of the income of the trusts for these years to him. She was even careful to pay it to him after the close of the year so he might not be taxable under section 162(c). His testimony is that she discussed the distributions with him and he knew before the end of the year that she intended to distribute to him.
It is apparent that these trusts were quite thin. The doubtful value*852 of the equity, the fact that the shares were pledged for the benefit of the petitioner, the short duration, the ease of revocation, the power of control in the grantor, the actual receipt of all income by the petitioner, the lack of any real purpose except to reduce taxes, and the absence of any indication that the interests or needs of any other "beneficiary" was considered during these years, all go to show that the petitioner lost little, if any, actual control over and benefit from his property by the two sets of instruments. Cf. Burnet v. supra; ; ; . The Commissioner's argument does not require a holding that no trusts existed in equity. . The Supreme Court*687 said in the Wells case that "liability may rest upon the enjoyment by the taxpayer of privileges and benefits so substantial and important as to make it reasonable and just to deal with him as if he were the owner, and to tax him on that basis." The Board held in the Wollman case, supra,*853 that the principle thus stated could apply even to income from property placed in trust. It said in the O'Laughlin case that "The Government is not required to tax trusts as separate taxable entities where the terms of the trust instrument and the manner of conducting the trusts indicate that they are not entitled to be distinguished from the grantor for tax purposes." This is another case like that of ;; and , where the trust was so lacking in substance and the grantor retained such powers and benefits that the trust may be disregarded for tax purposes and the income taxed to the grantor.
III. Loss on investment in the National Gift Guild. - The respondent contends that the petitioner did not enter into this transaction for profit, but the evidence clearly shows that he did enter into the transaction with the intention and for the purpose of profit. There is no question as to the fact that a loss occurred in 1931 or as to the amount lost.
IV. Loss on sale of stock of General Baking Co. - The question here is confined to that*854 of the basis to be used. The Board held in ; affd., , that a statutory reorganization occurred an the gain to the stockholders was taxable only to the extent of the cash received. The parties have stipulated all of the facts on this issue, including a statement that, upon the exchange of the preferred stock for stock and debentures of the General Baking Co., 92.1589 percent of the basis is to be allocated to the stock received in exchange. The petitioner contends that 92.1589 percent of the basis of the 1,900 old preferred shares in street names should be divided among the 2,850 new common shares taken in street names because the 2,850 shares are identified as shares received in exchange for the 1,900 preferred shares. The record, even including as it does the facts set forth in the opinion of the Board in the Leary case, fails to show any details of the exchange made on April 1, 1931. The ratio of exchange of old preferred or old common for new common, debentures, and cash is not disclosed. It is not clear that the 1,900 preferred shares were separately exchanged for 2,850 new common shares or that*855 the plan permitted any such separate exchange. But even if that fact were clearly shown, it might not be important. In , the stock of two corporations was exchanged for the stock of one new corporation and the court said that "any calculation of the cost of the shares sold [new shares], based upon the original cost of the *688 shares of only one of the two companies, would be fallacious" and held a correct basis was the cost of all old shares divided equally among the new shares received in exchange. See also .
The respondent contends that the correct basis is obtained by adding the total cost of the old common to 92.1589 percent of the total cost of all old preferred owned by the petitioner and dividing that total basis equally among all of the 8,463 new shares received in the exchange. It is now well established that where stock of one corporation is exchanged for stock of another, in pursuance of a plan of reorganization, the basis of the shares surrendered (after adjustment for any recognized gain or loss) must be allocated equally to the shares acquired, and the*856 cost of some particular lot of the old shares may not be allocated to some particular lot of the new shares. ; affd., ; ; affd., ; ;; ; reversed, ; ; ; . There was in some of the cited cases as much justification for identification and separate allocation of cost as is shown here, yet the holding was that the only practical and proper method was to average the total old bases among all the new shares. The method urged by the respondent is in accordance with those decisions and will be followed here.
V. Loss on sale of stock of General Holding Co., Ltd. - The loss on this stock was $19,280. The respondent contends that the petitioner did not enter into this transaction for profit and the stock*857 became worthless prior to 1932. The facts disprove both of these contentions. The sale was a complete and final disposition of the stock. The purchaser was one who was familiar with the affairs of the company and that circumstance is some corroboration of the other evidence that the stock had not become worthless even in 1932.
VI. Loss on Barbour patent. - The dispute was as to the year in which this loss was sustained. The respondent concedes in his brief that 1933 was the year, the petitioner says the same, and the evidence shows that the loss of $17,500 was sustained in that year.
Decision will be entered under Rule 50.