Docket No. 92788.
11-24-1939
ELSIE VAN VRANKEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Lee McCanliss, Esq., for the petitioner. Allen T. Akin, Esq., for the respondent.
Lee McCanliss, Esq., for the petitioner.
Allen T. Akin, Esq., for the respondent.
This proceeding is for the redetermination of a deficiency in petitioner's income tax for the year 1935 in the amount of $8,170.22.
Respondent having conceded an issue as to the deduction of the value of an intervening life estate, the sole issue remaining before the Board is whether the basis of certain property received by petitioner under the terms of her father's will should be determined by its value at her father's death or by its value at the time of distribution.
FINDINGS OF FACT.
Petitioner is an individual, residing in Brooklyn, New York. Petitioner's father, John S. Eakins, died August 16, 1915, leaving a will which was admitted to probate August 31, 1915. The will provided that a trust should be established of the residue of the estate in behalf of testator's wife, Amelia A. Eakins, for life, and upon her death the trustees were directed:
Sixth: * * *
III. To transfer, deliver and pay over to my daughter, ELSIE VAN VRANKEN, if she shall outlive my wife, the remaining equal one-half part of the remainder of my estate, to be hers absolutely and forever.
If my daughter, ELSIE VAN VRANKEN, should die during her mother's lifetime, leaving lawful issue her surviving, then, upon the death of my wife, I order and direct my said Executors and Trustees to transfer, deliver and pay over the remaining one-half part to the issue of my daughter, ELSIE VAN VRANKEN, in equal shares, per stirpes and not per capita.
Petitioner's mother, Amelia A. Eakins, died April 26, 1930.
Included in John S. Eakins' estate were 50 shares of Union Pacific Railway stock, 25 shares of Delaware & Hudson Railway stock and 500 shares of American Gas & Electric Co. stock. As part of her share of the remainder of the estate of her father, petitioner received the above mentioned securities after the death of her mother, the life beneficiary. The value of the stocks on August 16, 1915, the date of testator's death, was $10,930.77. At the death of petitioner's mother, April 26, 1930, the stocks were worth $89,153.12. In 1935 petitioner sold the aforementioned stocks for $24,394.
On January 10, 1918, the interest of petitioner under the will of her father was appraised and a state transfer tax assessed and fixed. The Surrogate's Court decree designated the beneficiary and described her interest as a "remainder * * * which is now vested in Elsie Van Vranken, daughter, subject to be divested by her death before the death of the life tenant, * * *."
A minimum and a maximum transfer tax were assessed against petitioner's interest. The minimum tax was paid and the difference between the minimum and the maximum tax was placed on deposit with the taxing authorities. By decree dated November 14, 1930, the Surrogate's Court finally fixed the amount of transfer tax at the minimum rate.
In filing her income tax return for the year 1935, petitioner claimed a loss of $64,759.12 on the sale of the aforementioned securities and claimed 40 percent, or $25,903.64, as a loss deduction. Petitioner determined the loss by using the 1930 valuation as the basis.
In computing the deficiency in question the respondent used as the basis the value of the securities at the date of the death of petitioner's father.
OPINION.
VAN FOSSAN:
The question before the Board is whether the basis for determining gain or loss on sale of stocks which petitioner received by bequest of her father must be determined by their value at the time of his death or by their value at the time of distribution, after the death of her mother and the extinction of her life interest. Petitioner contends that until the death of her mother her interest was contingent and, hence, she did not acquire the property until that time. Respondent argues that petitioner had a vested interest in the property and acquired the stocks at the testator's decease.
The basis of the property must be determined under the Revenue Act of 1934, since that was the act in effect at the time the sale was made. Elizabeth P. Patterson, 33 B. T. A. 57. The pertinent section of the 1934 Act provides:
SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) BASIS (UNADJUSTED) OF PROPERTY. — The basis of property shall be the cost of such property; except that
* * * * * * *
(5) PROPERTY TRANSMITTED AT DEATH. — If the property was acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. * * *
* * *
This above provision is similar to section 202 (a) (3) of the Revenue Act of 1921 and section 204 (a) (5) of the Revenue Acts of 1924 and 1926.
BASIS FOR DETERMINING GAIN OR LOSS.
SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that —
* * * * * * *
(3) In the case of such property, acquired by bequest, devise, or inheritance, the basis shall be the fair market price or value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (c) or (e) of section 402.
BASIS FOR DETERMINING GAIN OR LOSS, DEPLETION, AND DEPRECIATION.
SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that —
* * * * * * *
(5) If the property was acquired by bequest, devise, or inheritance, the basis shall be the fair market value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (c) or (e) of section 402 of the Revenue Act of 1921, or in subdivision (c) or (f) of section 302 of the Revenue Act of 1924, or in subdivision (c) or (f) of section 302 of this Act.
The basis of the stocks sold by petitioner in 1935 must, therefore, be determined by their value at the time of acquisition. The rule has been established by cases construing section 202 (a) (3) of the Revenue Act of 1921 and section 204 (a) (5) of the Revenue Acts of 1924 and 1926, that, where a remainder interest vests upon death of a testator, the date of death is the date of acquisition by the remainderman. Brewster v. Gage, 280 U. S. 327; Warner v. Commissioner, 72 Fed. (2d) 225; certiorari denied, 293 U. S. 620; Roebling v. Commissioner, 78 Fed. (2d) 444; Pringle v. Commissioner, 64 Fed. (2d) 863; certiorari denied, 290 U. S. 656; Lane v. Corwin, 63 Fed. (2d) 767; certiorari denied, 290 U. S. 644; Harry C. Kayser, 27 B. T. A. 816.
The law of New York controls as to the question of whether the interest of petitioner was vested or contingent. Freuler v. Helvering, 291 U. S. 35; Blair v. Commissioner, 300 U. S. 5. See Erie Railroad Co. v. Tompkins, 304 U. S. 64.
The New York statutes define vested and contingent remainders:
A future estate is either vested or contingent. It is vested, when there is a person in being, who would have an immediate right to possession of the property, on the determination of all the intermediate or precedent estates. It is contingent while the person to whom or the event on which it is limited to take effect remains uncertain. (N. Y. Stat. ch. 50, Sec. 40, Book 49, McKinney's Consolidated Laws, page 61.)
Under the statutes of New York, limitations of future or contingent interests in personal property are subject to the rules prescribed in respect to future estates in real property. N. Y. Stat., ch. 41, sec. 11; Book 40, McKinney's Consolidated Laws, art. 2, sec. 11. Moreover, the decided cases in New York make no distinction between future interests in personal property and future interests in real property. In re Ryder, 89 N. Y. S. 460; Brooklyn Trust Co. v. Phillips, 134 App. Div. 697; affd., without opinion, 201 N. Y. 561; Vanderpoel v. Burke, 118 N. Y. S. 548.
The Court of Appeals of New York, in Moore v. Litell, 41 N. Y. 66, prescribed a test as to the vesting of remainders which has become a settled rule of construction in New York. The court stated:
If you can point to a man, woman or child, who, if the life estate should now cease, would eo instanti et ipso facto, have an immediate right to possession, then the remainder is vested.
See Harry C. Kayser, supra, and New York cases there cited.
If the above test be applied, we find that petitioner was an ascertained person in being at her father's death and would have been entitled to an immediate right of possession if her mother, the owner of the immediately preceding estate, were to die at that instant. Under the New York law, petitioner's interest was fixed at her father's death. The fact that a vested interest is subject to be divested does not make the interest contingent. Warner v. Commissioner, supra.
The petitioner argues that the New York courts have construed petitioner's interest to be contingent, citing various decisions, all clearly distinguishable on their facts. This contention is also based upon the fact that, in assessing a state transfer tax on the estate of petitioner's father, the surrogate recognized the possibility that petitioner might not survive her mother. A minimum and a maximum transfer tax were assessed for the reason that the remainder might pass to further removed beneficiaries, upon which transfer a higher rate of tax would ensue. The surrogate did not decide that petitioner's interest was contingent. As a matter of fact, the Surrogate's Court, in its decree assessing and fixing the transfer tax, characterized petitioner's interest as a "remainder * * * now vested * * * subject to be divested by her death before the death of the life tenant." If authority were to be attributed to this order here, it would appear to be conclusive against petitioner's contention. We do not rest our decision on such order, however, as the surrogate had not been called to rule on a contested will and did not purport so to do.
In accordance with the principles discussed above, we hold that petitioner's interest was vested at her father's death; that the stocks were then acquired; and that the basis for gain or loss on the stocks in question must be determined as of that date.
Decision will be entered under Rule 50.