Colgate v. Commissioner

MARY COLGATE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Colgate v. Commissioner Docket No. 61882. United States Board of Tax Appeals 27 B.T.A. 506; 1932 BTA LEXIS 1061; December 30, 1932, Promulgated *1061 1. Held, that under section 113(a)(5) of the Revenue Act of 1928 the basis for determining gain or loss from the sale of personal property acquired upon the termination of a testamentary trust is the fair market value of the property when distributed to the taxpayer after the trust was ended. 2. Petitioner realized a capital net gain during the year 1929 and elected to have it taxed at the rate provided in section 101(a) of the Revenue Act of 1928. Held, the capital net gain should be excluded from ordinary net income in computing the 15 per cent deduction for contributions under section 23(n) of the statute. Carlyle E. Yates, Esq., for the petitioner. I. Graff, Esq., for the respondent. MARQUETTE *506 This proceeding is twofold. First, it is for the redetermination of a deficiency in income tax asserted by the respondent for the year 1929 in the amount of $917.49, of which the sum of $900 is in controversy. The error alleged is that respondent used the March 1, *507 1913, value of certain stock as the basis for computing gain, instead of the value on the date the stock was received by petitioner as remainderman of a*1062 testamentary trust. Second, the proceeding is for the determination of an overpayment of income tax in the amount of $4,794.60 for the year 1929. It is alleged that petitioner erred in computing the amount of allowable deductions on account of contributions. In his answer, respondent alleges that he erroneously allowed, as a deduction for contributions, $12,814.63 more than should have been allowed. He alleges that that amount should be added to petitioner's taxable income for 1929 and that the amount of the deficiency should be increased to $3,993.01. From a stipulation and attached exhibits, filed by both parties, and from the pleadings, we make the following findings of fact. FINDINGS OF FACT. Petitioner's father died in 1904. By his will he created a trust respecting a part of his property, the income from which was to be paid to his widow during her lifetime. At her death one-half the corpus of the trust property was to be paid to such beneficiaries as she should by will appoint, and the other one-half was to be divided equally between petitioner and her brother. Petitioner's mother died intestate on March 22, 1919. On April 28, 1919, petitioner received her*1063 share of the property left in trust by her father. Among other assets so received were 300 shares of stock in The Canton Company. Its market value on March 22, and also on April 29, 1919, was $160 per share. The March 1, 1913, value of the stock was $136 per share. In 1929 petitioner sold it for $596 per share. In her income tax return for 1929 petitioner computed her gain from the sale on the basis of the stock's value in March and April, 1919. Respondent used as a basis the March 1, 1913, value. Petitioner's ordinary net income for 1929, as defined by section 101(c)(7) of the Revenue Act of 1928, was $314,469.11, before the allowance of a deduction for contributions as provided for by section 23(n) of the act. The total amount of contributions made by petitioner in 1929 to organizations within the provisions of section 23(n) was $78,712.50. In her income tax return for 1929 petitioner claimed deduction for contributions in the amount of $59,985, which was allowed by the respondent. Petitioner reported a capital net gain of $684,384.64 for the year 1929 and elected to be taxed thereon at the rate provided in section 101(a) of the Revenue Act of 1928. The capital*1064 gain realized by petitioner in 1929 was not less than $684,384.64. *508 OPINION. MARQUETTE: The first issue is the proper basis for computing gain realized upon the sale of stock in 1929. Petitioner received the stock in 1919 from her father's estate upon the termination of a testamentary trust which had existed since 1904. This identical question was before us in . There, as here, the Revenue Act of 1928 controlled. We there held that under section 113(a)(5) of that act the proper basis for determining gain or loss was the fair market value of the property at the time of its distribution to the taxpayer after termination of the testamentary trust. We adhere to that decision. At the time petitioner received the stock here involved its fair market value was $160 per share and that valuation should be the basis for computing puting the gain derived when the stock was sold in 1929. The second issue relates to the proper basis for computing allowable deductions for contributions. During the year 1929 petitioner made contributions amounting to $78,712.50 to organizations within the scope of section 23(n) of the Revenue*1065 Act of 1928. She claimed and was allowed a deduction of $59,985 on account thereof. She elected to have her capital net gain of $684,384.64 taxed under the provisions of section 101(a) of the Revenue Act of 1928, but now contends that her capital net gain should be included in net income when computing the deduction for contributions. Respondent urges that such computation must be based solely upon petitioner's ordinary net income, amounting to $314,469.11. If so computed the deduction allowable by statute of "15 per centum of the taxpayer's net income as computed without benefit of this subsection" would be only $47,170.37. By his amended answer respondent contends that petitioner has taken a greater deduction than is permissible and that the excess amount of $12,814.63 should be added to income and the deficiency proportionately increased. This question also was before us in , and in . In the former we held that: * * * when a taxpayer avails himself of benefits of section 101(a), he elects, in effect, to have his tax liability determined in two parts; first, upon the ordinary net income*1066 exclusive of his capital net gain, and, second, upon his capital net gain at the 12 1/2 per cent rate; the sum of the two constituting the amount of his tax. Obviously, therefore, the amount of this petitioner's capital net gain should be excluded from the amount of his net income upon which to compute the 15 per cent deduction for contributions within the purview of section 23(n). In , we followed the same principal under reversed conditions. There the taxpayer had sustained a capital net loss. Respondent excluded the loss from consideration in computing *509 ordinary net income, but refused to exclude it in computing deductions for contributions. As a result he found that the taxpayer had a net income subject to tax, but had no net income upon which to compute deductions for contributions. We held that the ordinary net income as computed for taxation also constituted a basis for computing the deduction claimed by the taxpayer. We perceive no distinction between those cases and the present proceeding. It is our judgment, therefore, that petitioner may deduct on account of contributions only $47,170.37, which is the statutory*1067 15 per cent of her ordinary net income for the year 1926. Decision will be entered under Rule 50.