Opinion
Docket No. 31739.
1953-08-6
EDNA W. GARDNER TRUST, THE THIRD NATIONAL BANK AND TRUST COMPANY, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Meredith M. Daubin, Esq., for the petitioner. Reuben D. Clark, Esq., for the respondent.
Robert B. Gardner transferred certain stock in trust to petitioner for benefit of his wife on December 29, 1921. The stock in question was sold at a gain in 1943, and the issue presented pertains to the basis of the stock. Respondent determined that the December 29, 1921, transfer was a voluntary gift so that petitioner takes the substituted basis of the transferor, Robert B. Gardner. Petitioner contends that the transfer was in consideration of the wife's release of marital rights and takes the basis of its agreed value at the time of the transfer in trust. Held, the transfer in trust was a part of a property settlement between husband and wife in which the wife agreed that if the husband would make the transfer of property in trust she would release him from everything, dower rights and other marital rights. The transfer of property to the trust was not a gift as respondent has determined. Petitioner's contention as to the basis of cost is sustained. Meredith M. Daubin, Esq., for the petitioner. Reuben D. Clark, Esq., for the respondent.
Respondent has determined an income tax deficiency of $9,195.06 for the calendar year 1943. The entire deficiency is due to the following adjustment:
It is held that the adjusted basis of 1,125 shares of Gardner-Richardson Company preferred stock, which were called for redemption on July 15, 1943, determined in accordance with the provisions of section 113 of the Internal Revenue Code, was $68,849.83 in lieu of $112,500.00 claimed on your return.
It is held that your taxable net capital gain amounted to $24,637.59, in lieu of $2,812.50 as reported, in accordance with the provisions of section 113 and section 117 of the Internal Revenue Code.
By appropriate assignments of error petitioner contests the adjustment.
FINDINGS OF FACT.
Many of the facts have been stipulated and are found accordingly.
The Third National Bank and Trust Company of Dayton, Ohio, is the successor trustee of the Edna W. Gardner Trust to Edward Tytus Gardner. The petitioner on July 15, 1943, received by way of redemption $105 per share for the 1,125 shares of preferred stock of the Gardner-Richardson Company, a total of $118,125. The petitioner in its Federal fiduciary income and Victory tax return (Treasury Form 1041) filed for the calendar year 1943, reported such redemption as a long-term capital gain, with a sale price of $118,125 and a cost basis of $112,500, resulting in a gain of $5,625, of which 50 per cent, or $2,812.50, was included as taxable income.
The petitioner acquired the 1,125 shares of preferred stock of the Gardner-Richardson Company in 1924, as the result of a reorganization and exchange, for the following corporate stocks which the petitioner at that time surrendered:
+---------------------------------------------------+ ¦The Colin Gardner Paper Co ¦855 shares common stock¦ +---------------------------+-----------------------¦ ¦The Gardner-Harvey Paper Co¦135 shares common stock¦ +---------------------------+-----------------------¦ ¦The Gardner Paper Board Co ¦135 shares common stock¦ +---------------------------------------------------+
The petitioner acquired title to the 855 shares of the Colin Gardner Paper Co., the 135 shares of the Gardner-Harvey Paper Co., and the 135 shares of the Gardner Paper Board Co. on December 29, 1921, from Robert B. Gardner, otherwise known as Robert B. Gardner, Sr., and sometimes hereafter referred to as Robert, under a trust agreement dated December 29, 1921. Prior to that date these shares of stock were owned by Robert B. Gardner, settlor of the trust.
Robert was the husband of Edna Woolley Gardner, sometimes hereafter referred to as Edna, beneficiary under the trust agreement. Robert and Edna were married in May 1913 and had two children, a daughter born in 1914 and a son born in 1917. They lived together in Middletown, Ohio, until June 10, 1921, at which time Robert moved from their home to a hotel in Middletown. Edna continued to live at the Middletown home for several months and then moved to Cincinnati with the children where she stayed for about a year. Subsequent to June 10, 1921, Robert and Edna did not live together as husband and wife. Robert did not return to his house nor did he see his wife after he moved out to the Manchester Hotel; and he did not converse personally with her except for telephone calls when she called to ask him a question. He saw the children, however, when a nurse brought them to see him at the hotel from time to time.
In June 1921, at the time of the separation, Robert and Edna discussed property matters and Robert agreed that he would establish a trust fund and Edna agreed that if he would do so she would release him from everything, her dower rights and everything in connection with their marriage. Each retained lawyers and at first Edna demanded $135,000 to be paid to the trust fund, but later they settled upon the sum of $125,000, which amount constituted about one-half of the then estate of Robert. All negotiations were conducted through their attorneys and not in person.
The trust agreement dated December 29, 1921, was drawn by Edna's attorney, in which agreement it was provided that $125,000 should be paid to the trust. This trust agreement detailed the payment as follows:
+---------------------------------------------------------------+ ¦Cash ¦$12,500 ¦ +------------------------------------------------------+--------¦ ¦855 shares of Gardner Paper Company, 135 shares of the¦ ¦ +------------------------------------------------------+--------¦ ¦Gardner-Harvery Paper Company, and 135 shares of ¦ ¦ +------------------------------------------------------+--------¦ ¦the Gardner Paper Board Company ¦112,500 ¦ +------------------------------------------------------+--------¦ ¦Total ¦$125,000¦ +---------------------------------------------------------------+
After execution Robert discovered that the trust agreement which he had signed had not given him his full release and freedom as had been agreed. Edna then refused to give the agreed release until one-half of the salary of Robert was set aside for her. Thereafter, things were stalemated for about a year. Then, after negotiations over a period of about 6 months, the agreement of June 30, 1923, was made.
The two agreements dated December 29, 1921, and June 30, 1923, were in conformity with the oral agreement between the parties at the time of the separation in June 1921, whereby Edna would give to Robert a full release from all interest in and to his property, including dower and inheritance, in consideration of the establishment of a trust for her benefit.
The trust agreement dated December 29, 1921, was executed by Robert, Edna, and Edward Tytus Gardner, as trustee. This agreement provided, in part, as follows:
Said transfer being a voluntary gift on the part of said Robert B. Gardner for the benefit of his wife, Edna Woolley Gardner, and the children of said Robert B. Gardner and his said wife Edna Woolley Gardner, now living or which may be hereafter born to them, shall be held and disposed of by said Trustee for the following purposes, to-wit:
(a) Said Trustee shall act without compensation, but after deducting taxes, clerical and other incidental expenses in the handling of said trust, shall pay over to Edna Woolley Gardner, for life, in equal quarterly installments, all income received from said securities, or from any securities which may be substituted therefor as hereinafter provided.
(b) Upon the death of said Edna Woolley Gardner such income shall be paid to the children of said Robert B. Gardner and Edna Woolley Gardner, who may be living at the time of her death, equally, and in the event that at that time any child shall have died leaving children surviving, such surviving child or children shall receive the share which its or their parent would have received if living at the time of the death of said Edna Woolley Gardner.
(c) Upon the death of said Edna Woolley Gardner, no children or descendants of the deceased children of the parties then being living, said securities and any accumulated income thereon shall become the property of Robert B. Gardner, or his heirs at law.
(d) Said trust shall continue, and the income therefrom be disposed of as hereinbefore provided during the life of said Edna Woolley Gardner, and unless the same shall terminate by failure of issue of the parties living at her death, as provided in paragraph (c), shall continue thereafter until the youngest child of the parties hereto shall have arrived at the age of twenty-one (21) years, and then terminate by payment of the principal and any accumulated income to the children of the parties hereto in equal shares, the children or heirs of any deceased child taking the share of his deceased parent per stirpes and not per capita.
(e) In the event that during the life of said parties, Robert B. Gardner and Edna Woolley Gardner, they should cease to be man and wife, and said Edna Woolley Gardner should remarry, from and after that event the Trustee shall pay only one-half of the income of said trust estate to Edna Woolley Gardner for her life, and upon her death shall make payments of the income of said one-half of said estate to said children or descendants of the parties as hereinafter provided; and from and after such remarriage of said Edna Woolley Gardner, shall make payments of the income of the other half of said estate to said children of the parties for life, and dispose of the remainder therein, in the event of the death of any of such children, as hereinbefore provided, and in the event of such remarriage, the principal shall be disposed of in the same manner as provided in Paragraph (d) hereof.
(f) The Trustee shall at all times vote the stocks, included in said trust, as directed by the donor, Robert B. Gardner.
(g) In event of the sale by said Robert B. Gardner of all or any of said stock, whether separately or by reason of reorganization, merger, or other disposition of the stocks of said corporation, said Robert B. Gardner shall have the privilege at any and all times to substitute for any or all of the stocks contained in this trust, other securities of equal value as to security and yield of income.
(h) Said Robert B. Gardner shall also have the privilege, at any time, of purchasing any or all of said securities for cash, which shall be substituted by the Trustee for the securities so purchased, the price therefor to be equal to the par value of said securities.
(i) In event that said Robert B. Gardner shall decide to exercise the privilege under Paragraph (g) of substituting other securities for the stocks in the Gardner mills, or, under Paragraph (h), of purchasing such stocks, if such privileges are to be exercised by taking up only a part of said stocks and not all, then said Robert B. Gardner shall exercise such privileges, either or both of them, by taking up said stocks proportionately; that is, for each share of stock in any of said three companies which he takes up, he shall at the same time also take up shares in the other two companies in the proportion of the amounts of each remaining in said trust at the time or times when such privileges shall be exercised.
(j) Edward Tytus Gardner, as Trustee under this Trust Deed, shall have the power in his lifetime, by deed, or upon his death, by will, to appoint his successor. If said Edward Tytus Gardner should become disqualified to act as Trustee, or should cease to act in his lifetime and should designate no successor, or if he should die without having appointed a successor, then said Robert B. Gardner and Edna Woolley Gardner shall endeavor to agree upon a successor, and in the event they cannot do so, the successor shall be appointed by a Court of competent jurisdiction.
The agreement dated June 30, 1923, executed by Robert and Edna provided as follows:
WHEREAS: Robert B. Gardner and Edna Woolley Gardner, his wife, have separated and no longer cohabit as man and wife, and as each desires to make a final settlement of all property rights; and
WHEREAS: Each has been fully advised by counsel and after being so advised has agreed as hereto set forth:
Now, therefore said parties agree as follows:
FIRST: That the provisions of the trust instrument of December 29, 1921, between the parties hereto and Edward Tytus Gardner, Trustee, shall remain in full force and effect and be in no wise changed by this agreement.
SECOND: That the memorandum of agreement between the parties hereto in regard to household expenses, etc., dated December 29, 1921, is hereby canceled.
THIRD: That in addition to the provisions of said trust agreement of December 29, 1921, Robert B. Gardner agrees to pay to Edna Woolley Gardner until such time, if ever, when she shall remarry, (or for her life if she shall never remarry), the full one-half of his salary, to be used by the said Edna Woolley Gardner for the support of herself and the children of the parties hereto, in such manner as shall be determined by the said Edna Woolley Gardner.
In addition thereto, the said Robert B. Gardner agrees that as and when said children shall enter Preparatory School, he will pay the tuition and board of said children at College.
If the parties hereto shall become divorced and the said Edna Woolley Gardner shall remarry, the provision as to payments of salary to the said Edna Woolley Gardner shall forthwith cease and determine, but the provision as to payment of tuition and board in Preparatory School and College for said children shall remain in force and effect.
Each party hereby releases the other from all claims and demands for support, alimony and otherwise, and each party hereby releases all right and expectancy of dower, in and to the real-estate of the other, whether now owned or hereafter acquired, and each party hereby releases all rights of inheritance and all inheritable interest in the estate of the other, whether real or personal, or both.
Each party agrees to execute such further instruments as may from time to time be necessary to accomplish said releases.
It being the intent hereof that all property rights and interests of each party hereto shall be vested in that party, free of all claims, demands, interest, contingent or vested, and all rights of inheritance and descent and distribution and dower to the same extent and same manner as if an absolute decree of divorce had been entered, divorcing said parties and containing the release and discharge herein set forth.
On September 26, 1923, Edna filed a petition for an absolute divorce in the Court of Common Pleas, Butler County, Ohio, in which proceeding a final decree of divorce was entered on December 17, 1923. The decree awarded custody of the children to Edna and included the following provision:
It further appearing that the parties have heretofore to-wit: By two certain agreements in writing entered into December 29, 1921 and June 30, 1923, settled and determined all questions of property, support and alimony between themselves, no order is made respecting the same.
On June 24, 1952, petitioner's predecessor trustee, Edward Tytus Gardner, filed an ‘Intervening Petition for Declaratory Judgment and Instructions to Trustee‘ in the Common the Common Pleas Court of Montgomery County, Ohio, Case No. 94447. The decree of the court also entered on June 24, 1952, provided as follows:
IN THE COMMON PLEAS COURT OF MONTGOMERY COUNTY, OHIO
EDWARD TYTUS GARDNER, As Trustee,
Plaintiff,
— vs.—
ROBERT B. GARDNER, SR.,
EDNA WOOLLEY GARDNER,
ROBERT B. GARDNER JR.,
ELIZABETH GARDNER PALAZZI,
FREDERICK PALAZZI, a minor,
All unborn and unascertained children of ROBERT B. GARDNER, SR., and
EDNA WOOLLEY GARDNER,
All unborn and unascertained children of ROBERT B. GARDNER, JR.,
All unborn and unascertained children of ELIZABETH GARDNER PALAZZI,
0defendants. No. 94,447
DECREE
This cause came on this 24 day of June, 1952, to be heard upon the plaintiff's intervening petition, the answer of Robert B. Gardner, Sr., the answer of Edna Woolley Gardner, the evidence and arguments of counsel and the same was submitted to the Court.
Upon consideration the court finds that it has jurisdiction of all the parties and the subject matter of the petition as a result of a Decree of this Court of May 9, 1944, entered in this same cause and that said parties are otherwise properly before this Court.
The Court finds that the interests of all unborn and unascertained persons who may have an interest in the subject of this action are all proper and necessary parties to this action and are properly before this Court under the retention of jurisdiction by this Court in its Order of May 9, 1944.
This is an action by the plaintiff as trustee under the written instrument of trust as set forth in the Exhibits and the intervening petition for relief under the provisions of Section 12, 102-1 and 12, 102-16 of the General Code of Ohio and comes under the general equity powers of this Court.
The Court finds that Edna Woolley Gardner and her husband, Robert B. Gardner, Sr. separated from each other by mutual agreement on or about the 10th day of June, 1921 wherein the parties agreed that Edna Woolley Gardner would release all claims, including dower, and right to support by Robert B. Gardner, Sr., in exchange for his promise to create a trust fund for her benefit, and that pursuant to the foregoing verbal agreement Robert B. Gardner, Sr. created a trust fund for the benefit of Edna Woolley Gardner known as the Edna W. Gardner, Trust by the written instrument of December 29, 1921 which was subsequently reaffirmed and became a part of the final settlement agreement executed by the said parties on June 30, 1923.
The Court further finds that on the 29th day of December, 1921, Defendants Robert B. Gardner, Sr. and Edna Woolley Gardner, with Edward Tytus Gardner, as Trustee, entered into, executed, delivered, and accepted the certain trust instrument in writing in the words and figures set forth in the Exhibit, a part of plaintiff's intervening petition; that the securities and cash therein described and referred to were on said 29th day of December, 1921, transferred and delivered by said Robert B. Gardner, Sr., who is the same person referred to in said trust instrument as Robert B. Gardner, to plaintiff Edward Tytus Gardner, as Trustee, and were on or about said date accepted by the said Edward Tytus Gardner as such Trustee.
The Court finds that on the 30th day of June, 1923, Defendants Robert B. Gardner, Sr., and Edna Woolley Gardner entered into, executed, delivered, and accepted a final settlement of all their property rights, reaffirming the Trust Agreement of December 29, 1921, between the parties hereto and Edward Tytus Gardner, Trustee, and, that by such agreement of June 30, 1923, the said parties combined therein the provisions of the Agreement of December 29, 1921 and in addition to the provisions of the said Trust Agreement of December 29, 1921 made further provisions whereby each party released the other from all claims and demands from support, alimony and otherwise, and each party released all rights in expectancy of dower, in and to the real estate of the other, whether now owned or hereafter acquired and each party released all rights of inheritance and all inheritable interest in the estate of the other, whether real or personal, or both.
The Court finds that Robert B. Gardner, Sr. and Edna Woolley Gardner were divorced by a Decree of October 17, 1923, as made by the Court in Butler County, in Action No. 32,036 between the parties, and that the Court, by its decree determined that the parties by the Agreement of December 29, 1921 and June 30, 1923, had settled and determined all questions of property, support and alimony between themselves.
The Court further finds that the Third National Bank and Trust Company of Dayton, as Successor Trustee herein, is required to maintain proper records of the Edna W. Gardner Trust, to render accounts and make distribution from time to time of income and corpus to the beneficiaries entitled thereto.
The Court further finds that to enable the said Trustee to make a determination as between income and corpus for the purpose of distribution to the beneficiaries it is necessary that this Court by its decree determine the legal character, effect and consequences of the Agreement of December 29, 1921, which was reaffirmed and became a part of the final settlement in the Agreement executed June 30, 1923, whereby all property rights of Robert B. Gardner, Sr. and Edna Woolley Gardner were finally determined.
IS IS, THEREFORE, HEREBY ORDERED, ADJUDGED and DECREED that it was the intent of the parties and the legal result of the written instrument of final settlement between the parties of June 30, 1923, that Edna Woolley Gardner, for and in consideration of the establishment and creation of the Edna W. Gardner Trust by Robert B. Gardner, Sr., on December 29, 1921, would release and she has released to Robert B. Gardner, Sr., all her
1921, would release and she has released to Robert B. Gardner, Sr., all
claims for property, including dower and rights of support, maintenance and alimony; and that the property consisting of shares of capital stock at an agreed value of $112,500.00 and cash of $12,500.00, a total of $125,000.00, was transferred by Robert B. Gardner, Sr. to the Trustee of the said Edna W. Gardner Trust for the releases above enumerated by Edna Woolley Gardner. Robert B. Gardner, Sr., by the agreement and transfer of December 29, 1921, did not create a ‘Voluntary Gift‘ in trust for Edna Woolley Gardner.
The petitioner for the benefit of Edna acquired by purchase the shares of stock in question pursuant to an oral agreement between Robert and Edna, which agreement culminated in the trust indenture of December 29, 1921, reaffirmed in the agreement of June 30, 1923.
The cost basis to the petitioner of the 1,125 shares of preferred stock of the Gardner-Richardson Company which were redeemed on July 15, 1943, is $112,500.
OPINION.
BLACK, Judge:
This proceeding involves the question of determining the cost basis of certain stock constituting the corpus of the Edna W. Gardner Trust, which stock was redeemed in a taxable exchange in 1943. The cost basis of this stock depends, in turn, on the basis of stock originally transferred to the trust by Robert B. Gardner on December 29, 1921. It has been stipulated between the parties that in the event this Court determines that the transfer of December 29, 1921, was a voluntary gift, the cost basis of the redeemed stock should be $68,849.83, or the cost basis of the original stock in the hands of the settlor. However, in the event this Court determines that Edna W. Gardner and the Edna W. Gardner Trust acquired the original stock by purchase, it has been further stipulated between the parties that the proper basis of the redeemed stock should be $112,500, as reported by petitioner in its return of income for 1943.
It seems to be agreed by the parties that if Robert transferred the shares of stock to the trust as part of a property settlement with his wife in contemplation of divorce and in consideration of which property settlement she was to release to Robert her marital rights, then the trust acquired the stock by purchase and not by gift. But respondent has determined that the trust acquired the stock by gift and he still maintains that view in his brief.
We think it is proper to point out that this case is not one where a husband, living on amicable terms with his wife, makes a gift to her in trust because of the love and affection which he has for her. If we had such a case the result would be entirely different. But we have no such state of facts here.
The situation we have here is in some respects similar to the one we had in Norman Taurog, 11 T.C. 1016. In that case we said:
It would be unreasonable, we think, to say, where, as here, a husband and wife had come to the parting of the ways and had separated and after prolonged negotiations had arrived at a property division in which the wife was to receive one-half of the community property, which property she was entitled to receive under the laws of california and which division of property was to be embodied in the divorce decree and was in fact made a part of the decree, that the husband was thereby making a gift to his wife of the property which was transferred to her. We, therefore, hold, on the strength of the authorities cited above, that the division of community property which took place between petitioner and his wife in an arm's length agreement which was made a part of the divorce decree, was made pursuant to and in discharge of an obligation imposed by the judgment of divorce and was for an adequate and full consideration in money or money's worth and, therefore, was not a gift.
It is true, of course, that the question in the Taurog case, supra, was not the same as that involved here and the facts were somewhat different, nevertheless we think that the underlying reasons which caused us to hold there was no gift from Taurog to his wife in that case should cause us to hold in the instant case that the transfer in trust by Robert to his wife, Edna, was not a gift to her but was part of a property settlement. We so hold. The parties have agreed that if we so hold, then petitioner's cost basis for the stock in question is $112,500.
The respondent's argument that the trust transfer to Edna was a gift from Robert, in ‘essence‘ is that the use of the words ‘voluntary gift‘ in the trust agreement of December 29, 1921, in effect conclusively makes it so. The respondent apparently would have this Court close its eyes to all of the other evidence of record which, in our opinion, shows ‘no donative intent, no gift‘ and that the husband and wife deal in an arm's-length transaction by which the husband transferred property for and in consideration of her releases, which were subsequently carried out in the agreement of June 30, 1923. In Helvering v. F. & R. Lazarus & Co., 308 U.S. 252, the Supreme Court has held: ‘In the field of taxation, administrators of the laws and the courts are concerned with substance and realities, and formal written documents are not rigidly binding.‘
Petitioner contends in the alternative as follows:
It is urged that the Decree of the Ohio Court (Petitioner's Exhibit 6 based upon the complaint, answers, and a hearing with evidence and findings of fact is a final decree which determines that the trust was established in the instant case as a result of an oral agreement and in consideration of the wife's release of dower and inheritance and that such Decree of the Ohio Court is binding upon a Federal Court in determination of the character of the trust. See Edward T. Blair v. Commissioner, 300 U.S. 5, 57 Sup.Ct. 330.
We have included in our Findings of Fact the decree of the Ohio State Court. However, having already decided the issue here involved in petitioner's favor, we do not deem it necessary to decide petitioner's alternative contention.
Decision will be entered for the petitioner.