Kalb v. Commissioner

LOUIS KALB, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Kalb v. Commissioner Docket No. 19422. United States Board of Tax Appeals 15 B.T.A. 886; 1929 BTA LEXIS 2773; March 15, 1929, Promulgated *2773 1. DATE OF ACQUISITION OF INTEREST IN PROPERTY. - Under the facts in the case at bar and the law of Wisconsin, where the property was situated, held that petitioner acquired his interest in the property in question in January, 1919 (at the death of the grantor), within the meaning of section 292(a)(3) of the Revenue Act of 1921. 2. VALUE OF PROPERTY in January, 1919, determined for purpose of determining gain derived from sale in 1921. S. P. Huntington, Esq., for the petitioner. J. A. O'Callaghan, Esq., for the respondent. TRUSSELL *886 This proceeding has been brought from respondent's determination of a deficiency in the amount of $971.99 in petitioner's income tax for the year 1921. Petitioner alleges (1) that he acquired the property in question in 1919, instead of 1914, as determined by respondent, and (2) that the value of the said property in 1919 is the basis for computing the profit on the sale thereof in 1921, instead of the value in 1914, as used by respondent in determining the deficiency in question. FINDINGS OF FACT. Petitioner is a resident of Green Bay, Wis. In 1914 petitioner's mother executed the following*2774 document: WHEREAS, Mary Kalb has arrived at an advanced age, is feeble in body and is desirous of relieving herself of business cares and worry, and of the management of her property, and for those purposes among others is desirous *887 of placing the active management and control of her property and business in the hands of persons named herein as Trustees, Now therefore KNOW ALL MEN BY THESE PRESENTS that I, Mary Kalb, party of the first part residing in the City of Green Bay, Wisconsin, in consideration of the premises and of One Dollar to her in hand paid, and other valuable consideration, and to effectuate the provisions hereinafter contained do hereby grant, bargain, sell, assign, set-over, transfer and convey unto Louis E. Kalb, Nora Collette and Walter Kustermann, as Trustees in trust never-the-less to carry out, perform, effectuate the trust herein contained, the following described real estate situated in the County of Brown, State of Wisconsin, to wit: (Description of personal and real property, including that in question, omitted.) Said property, both real and personal, is conveyed in trust to said Trustees for the following uses and purposes: 1. Said Trustees*2775 shall rent, handle, manage, and control, loan and invest said property and collect the rents, interest, income, and profits therefrom; pay the taxes, insurance and repairs thereon; and during the life of said Mary Kalb pay to her quarter yearly, or oftener all the rents, interest, income and profits therefrom, not used in the payment of the aforesaid and other necessary charges in caring for and maintaining such property. 2. Said Trustees shall have power to sell, make, execute and acknowledge deeds, leases, conveyances, mortgages, assignments, releases, satisfactions, to alienate and dispose of any or all of said real estate and personal property, and to invest and reinvest the proceeds thereof in other real or personal property in securities, loans investments in their judgment and discretion. Such property so purchased or substituted shall be, and be held in trust in place and stead of that disposed of, and the rent, income, interest and profit therefrom shall be paid to said Mary Kalb during her life as above provided. 3. If by reason of the illness of said Mary Kalb, or necessity, said net income shall not be sufficient to maintain her in the way she has heretofore lived, *2776 and what her then condition may require by way of medical attention, nursing and care, then said Trustees shall apply such part of the principal of said trust, either of the principal of the personal property, or real property , or both, for her support and benefit, from time to time as may be necessary or proper or suitable. 4. After her death said Trustees shall use sufficient of said income or principal for a suitable funeral and burial. 5. Said Trustees shall receive no compensation for their services in performing the trust hereby reposed, but shall be paid the necessary expenses and disbursements that they may be put to in properly executing this trust. 6. After the death of said Mary Kalb, the One Thousand ($1000) Dollars mentioned in her will shall be paid in trust for the benefit of her son, Otto Kalb to be held by the persons and under the Trust, terms and conditions designated in the Will of said Mary Kalb heretofore made and executed. 7. Within one year after the death of Mary Kalb, the residue, balance and remainder of said trust estate, and all property held in trust hereunder, both real and personal, shall be by said Trustees, conveyed in equal shares*2777 to Louis E. Kalb, Nora Collette and Walter Kustermann, and to his or her heirs, and assigns forever. And the trust hereby created shall thereupon terminate, and said parties shall be entitled and own the same in the proportions aforesaid. In the event of the death of either of said named persons without issue, prior to the death of Mary Kalb, then said trust property shall be equally divided among those surviving. But if there be issue, it shall take in place and stead of its parent. *888 8. It shall take the concurrence of said three Trustees to sell, deed, convey, mortgage or encumber and dispose of any real estate. But a majority of said Trustees may do and perform any other act required by this Trust. In the event of the death of any of said named Trustees prior to said Mary Kalb, his or her place shall not be supplied, but the Trust shall be handled, managed and controlled and executed by the remaining Trustees. IN WITNESS WHEREOF I have hereunto set my hand and seal this 15th day of January, 1914. (Signed) MARY KALB (SEAL) Petitioner was one of the three trustees named in the above document. Mary Kalb died in January, 1919, and in March, 1919, the*2778 said trustees executed the following deed conveying to petitioner the property in question: KNOW ALL MEN BY THESE PRESENTS: That Louis E. Kalb, Nora Collette and Walter Kustermann, as Trustees under a Deed of Trust dated January 15, 1914, made by Mary Kalb to them, and recorded January 19, 1914, in Volume 132, of Mortgages Page 262, Brown County, Wis., records, by virtue of the powers therein contained and in performance and execution of such trust, and Walter W. Kustermann, single and Nora Collette, individually, and as an agreed partition of the real estate, among and between said three named persons, Grantors, parties of the first part and in consideration of $1.00 to them in hand paid, receipt whereof is confessed and acknowledged, do hereby grant, bargain, sell, set over, transfer and Convey unto Louis E. Kalb, his heirs and assigns, Grantee, party of the second part, the following described real estate situated in Brown County, Wis. (Description omitted.) To have and to hold said described premises to the said Louis E. Kalb, his heirs and assigns forever. IN WITNESS WHEREOF: said Trustees and individuals have herewith set their hands and seals as such, this 20th day*2779 of March, A.D. 1919. Signed, sealed and delivered in presence of: SOL. P. HUNTINGTON R. KUSTERMANN G. C. NEUBAUER R. J. DIEKER LOUIS E. KALB (Seal) NORA COLLETTE (Seal) WALTER W. KUSTERMANN (Seal) As Trustees under deed of Trust, recorded 132 Mortgages 262 Brown County, Wis. Records. The property in question is a farm containing approximately 60 acres, situated in the township of Allouez and about one mile south of the city limits of Green Bay. The property, a long strip of land, extended from the East River and fronted on Webster Avenue, the boulevard between the cities of Green Bay and De Pere. The property was under cultivation in 1919, and also in 1921, when sold by petitioner, but a great deal of the surrounding property had been subdivided and sold for building lots, upon which large and small residences had been erected in 1919. The farm was well situated for purposes of subdivision in 1919, particularly that portion which fronted on Webster Avenue. There was a street car line and a paved *889 highway between Green Bay and De Pere, which were separated by the township of Allouez, which has been developing into a residential section for the past*2780 20 years. Had the farm been platted and subdivided in 1919 into four lots to the acre, such lots would have had an average value of $200 each, based upon the prevailing values of the surrounding lands. The land in question had a fair market value of $20,000 in January, 1919, and petitioner sold the said land in 1921 for $23,000. The old farm buildings on the land had deteriorated to such an extent that they had practically no value in 1919. The respondent determined that petitioner acquired a vested interest in the trust property in 1914; that the value of such interest was $10,833 in 1914, and that petitioner realized a profit of $12,167 upon the sale in 1921, such action resulting in the deficiency in question. In his return for 1921 petitioner reported a profit of $3,000 upon the sale of the farm property acquired by him as his share or interest in the trust property. OPINION. TRUSSELL: In 1914 Mary Kalb, petitioner's mother, deeded practically all of her real and personal property to petitioner and two other persons in trust for her benefit during the balance of her lifetime and within one year after her death the said trustees were directed to convey the residue, *2781 balance and remainder in equal shares to Louis E. Kalb, petitioner, Nora Collette, and Walter Kustermann, and their heirs and assigns forever, but in the event either of the said persons predecease Mary Kalb without issue, it was directed that the remainder of the trust property be equally divided among those surviving. During the lifetime of Mary Kalb the trustees were empowered to manage, control, rent, sell, mortgage, invest or reinvest the proceeds from any sales of the trust property; to pay all taxes, charges and maintenance on the property; and to pay to Mary Kalb all the net income, rents, profits and interest from all the trust property. The deed of trust further provides that if the net income from the trust property is not sufficient for the maintenance of Mary Kalb, then the trustees "shall apply such part of the principal of said trust, either of the principal of the personal property, or real property, or both, for her support and benefit, from time to time as may be necessary or proper or suitable." The property affected by that trust deed was situated in the State of Wisconsin, and there is no question but that the laws of that state control with respect to the*2782 property rights created by said trust deed. The Wisconsin Statutes, 1925, ch. 230, sec. 13, provides: Vested and contingent estates. Future estates are either vested or contingent. They are vested when there is a person in being who would have an immediate right to the possession of the lands upon the ceasing of the *890 intermediate or precedent estate. They are contingent whilst the person to whom, or the event upon which, they are limited to take effect remains uncertain. Until the death of Mary Kalb, who held the beneficial ownership during her life, it was uncertain as to who the remaindermen would be. The trust deed provided that the remaindermen who were to take the trust property after the death of the grantor, must survive the grantor or, predeceasing her, they must have been survived by their issue who would "take in the place and stead of its parent." There also existed another uncertainty, namely, whether any remainder would exist at the death of Mary Kalb for the trust deed, provided that any or all of the trust property was to be used for her benefit and maintenance if the income therefrom should be insufficient for such purpose, and, further, that after*2783 her death the "Trustees shall use sufficient of said income or principal for a suitable funeral and burial." We are of the opinion that whatever estate, interest, property or right which passed to petitioner under the trust deed in 1914 was contingent and that respondent erred in determining that petitioner acquired in 1914 a vested interest in one-third of the trust property as it existed on January 15, 1914. Cf. Benner v. Mauer,133 Wis. 325; 113 N.W. 663; Greeney v. Greeney,145 Wis. 621; 145 N.W. 201. The grant to the remaindermen was testamentary in substantial effect, for it was intended to take effect in possession or enjoyment at or after death. The Revenue Act of 1921 provides: 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.*2784 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. * * * SEC. 402. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated - * * * (c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), * * * (Italics supplied.) Upon the death of Mary Kalb in January, 1919, petitioner acquired the right of possession or enjoyment of and a vested interest in the remainder of the trust property, for at that time the remaindermen *891 and the existence of a remainder of the trust became fixed and certain. From that time petitioner, the grantee, had the uncontrolled right or power to dispose of his interest in the property, the value of which was ascertainable*2785 at that time. We are of the opinion that in January, 1919, at the death of Mary Kalb, petitioner acquired the property interest within the meaning of section 202(a)(3) of the Revenue Act of 1921 and that the value of his interest at that time should be used in determining the gain or loss derived from the sale in 1921. On March 20, 1919, the trustees deeded the farm property here in question to petitioner as his share or interest in trust property. The uncontradicted testimony of the several qualified witnesses as to the values in 1919 of surrounding property as well as to the value of property in question convinces us that it had a fair market value of $20,000 in January, 1919. The few farm buildings on the property had practically no value in 1919 and no question has been raised with respect to them. The property was sold in 1921 for $23,000, petitioner returned a profit of $3,000 therefrom for the taxable year 1921, and respondent erred in adding any greater amount to petitioner's gross income on account of said sale. Judgment will be entered pursuant to Rule 50.