Roosevelt v. Commissioner

GEORGE EMLEN ROOSEVELT, TRUSTEE OF THE ESTATE OF THEODORE ROOSEVELT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Roosevelt v. Commissioner Docket No. 48906. United States Board of Tax Appeals 28 B.T.A. 194; 1933 BTA LEXIS 1155; May 31, 1933, Promulgated *1155 1. Petitioner is the testamentary trustee of the residuary estate under the will of Theodore Roosevelt, who at the date of his death had a vested remainder interest in a testamentary trust created by the will of Cornelius V. S. Roosevelt. In 1925 petitioner received certain shares of stock from the Cornelius Roosevelt trust, some of which shares were in the trust at the date of Theodore Roosevelt's death and others of which had been purchased by Cornelius Roosevelt's trustees after Theodore Roosevelt's death. All of the stock was sold by petitioner in 1926. Held, that the petitioner acquired by bequest Theodore Roosevelt's remainder interest in the Cornelius Roosevelt trust as of the date of death of Theodore Roosevelt. 2. The determination of respondent in which he used the value on the date of Theodore Roosevelt's death of the shares held by the Cornelius Roosevelt trust on such date, and the cost to Cornelius Roosevelt's trustees of the stock acquired after Theodore Roosevelt's death, as the basis for determining gain or loss under section 204(a)(5) of the Revenue Act of 1926, is approved. Brewster v. Gage,280 U.S. 327; Chandler v. Field, 63 Fed.(2d) 13.*1156 Edmund B. Quiggle, Esq., for the petitioner. Frank Schlosser, Esq., for the respondent. MATTHEWS *195 This is a proceeding for the redetermination of a deficiency in income tax for the year 1926 in the amount of $621.65. The only issue is the correct basis to be used for the determination of gain from the sale of certain stocks and securities sold in 1926 by the taxpayer, one of the trustees of the trust created under the will of Theodore Roosevelt. FINDINGS OF FACT. The parties stipulated the facts as follows: I. Theodore Roosevelt died on January 6, 1919, a resident of the State of New York, leaving a will which was admitted to probate by the Surrogate's Court of Nassau County, New York, on or about March 1, 1919. A copy of the will is attached hereto as Exhibit A and made a part hereof. In said will, except for certain bequests of personal effects and the exercise of a power of appointment given to him by his father's will, Theodore Roosevelt devised and bequeathed his entire estate to his executors, in trust, to pay the entire net income to his wife, Edith Kermit Roosevelt, during her life. His wife is still living. By judgment*1157 of the New York Supreme Court entered on or about March 16, 1923, the accounts of the executors of Theodore Roosevelt showing the transfer of the principal of the estate to themselves as trustees as of May 31, 1922, were judicially settled and allowed. II. Cornelius V. S. Roosevelt died September 30, 1887, leaving a will which was admitted to probate by the Surrogate's Court of New York County, New York, on or about March 18, 1888. A copy of this will is attached hereto as Exhibit B and made a part hereof. III. Under said will of Cornelius V. S. Roosevelt he devised and bequeathed his residuary estate, both real and personal, to his executors, in trust, with broad powers in respect to the sale, investment and reinvestment of the principal, and power to lease, alter, repair, improve and build upon any or all of the real estate. The entire net income therefrom was to be paid to his wife, Laura H. Roosevelt, during her life. By the third clause of said will he bequeathed several annuities on and after the death of his wife, which he directed his executors to pay to the annuitants during their respective lives. By the fourth clause of his will, on the death of his wife, *1158 he devised and bequeathed all his estate, real and personal, subject to the payment of said annuities, to certain of his nephews and nieces named in the will, one of these nephews being Theodore Roosevelt. IV. Numerous questions in connection with the will of Cornelius V. S. Roosevelt have been decided by the New York Supreme Court in actions brought from time to time by the executors and trustees. The widow of Cornelius V. S. *196 Roosevelt died on March 20, 1900. On or about December 19, 1901, a judgment was entered by said Court in an action brought by the executors and trustees, holding, among other things, that in order to protect the annuities, they should retain the entire principal of the estate, paying out of the income the specified annuities and paying the balance of the income to the nephews and nieces, their legal representatives, or assigns; and holding further that the powers and authorities given by the will to the executors and trustees survived the death of the widow and continued. V. On or about November 14, 1908, a judgment was entered by the New York Supreme Court in another of said actions which contained a provision continuing the powers*1159 and authority of the executors and trustees of Cornelius V. S. Roosevelt in respect to selling, investing, and reinvesting the whole or any part of the principal of the estate, and the leasing, improving and repairing of the real estate, and requiring them to retain the principal as an entire fund for the production of the requisite income. Like provisions were contained in judgments entered by said Court in similar actions instituted in the years 1912 and 1922. VI. In or about April, 1925, after two of the annuitants mentioned in the will of Cornelius V. S. Roosevelt had died, the executors and trustees instituted another action in the New York Supreme Court, having as one of its purposes the releasing of a portion of the principal which the Court had theretofore ordered to be held intact. The judgment which was entered therein on or about December 30, 1925, ordered the retention of a specified portion of the principal which, in the opinion of the Court, was sufficient to assure the payment of the unexpired annuities, and ordered a distribution of the remaining principal to the nephews and nieces named in the will of Cornelius V. S. Roosevelt who survived him, their representatives, *1160 or assigns, stating specifically the fractional shares of that part of the principal to be distributed that each of the parties in interest was entitled to receive, one-tenth of the same being distributable to Edith Kermit Roosevelt, Theodore, roosevelt and George Emlen Roosevelt, as executors of and trustees under the last will and testament of Theodore Roosevelt, deceased. VII. Pursuant to said judgment, there were distributed on December 31, 1925, by the executors and trustees under the will of Cornelius V. S. Roosevelt to the executors and trustees under the will of Theodore Roosevelt, certain shares of common and preferred stock of various corporations, as listed in paragraph XII of this Agreed Statement of Facts. Said securities were sold by the executors and trustees under the will of Theodore Roosevelt in the year 1926 for the sum of $41,157.79. VIII. The executors and trustees under the will of Cornelius V. S. Roosevelt, deceased, in the period from the date of his death in 1887 until December 30, 1925, during which time they were required by the New York Supreme Court to hold the entire principal intact as one fund, made numerous sales, *197 changes, investments*1161 and reinvestments in respect to the trust fund. Some of the securities distributed on December 31, 1925, by the said executors and trustees were left by Cornelius V. S. Roosevelt as part of his estate; others of them were acquired by said executors and trustees after his death and before the death of Theodore Roosevelt; and still others of them were acquired by said executors and trustees after the death of Theodore Roosevelt. IX. In making a distribution under the aforesaid judgment of December 30, 1925, the executors and trustees under the will of Cornelius V. S. Roosevelt had authority to distribute in kind the securities released by said judgment or to sell them and distribute the proceeds. In making a distribution in kind, as was done by them, they had broad discretion in selecting the particular securities to be distributed to any particular distributee, provided such distributee received the proportion to which he was entitled of the entire value of the property distributed. X. For the calendar year 1926 the estate of Theodore Roosevelt by George Emlen Roosevelt, trustee, made two returns, one a fiduciary return on Form 1041 prescribed by the Treasury Department, *1162 and one an income tax return for the estate as an individual on Form 1040. The fiduciary return showed the total income payable to the testator's widow and also showed the estate itself as a beneficiary for the amount of profit realized on the sale of the aforesaid securities. The return on Form 1040 showed this profit amounting to $3,015 as taxable to the estate and computed and paid the tax thereon. XI. The profit of $3,015 from the sale of these securities, as shown on said return, was computed by using as the basis the fair market value of the securities on December 31, 1925, when they were received by the trustees of the estate of Theodore Roosevelt. The notice of deficiency increased said profit by the amount of $13,358.04 by substituting as the basis in computing the profit the value on January 6, 1919 of those securities found by the respondent to have been acquired by the estate of Cornelius V. S. Roosevelt on or prior to that date, and the cost to that estate of those securities found by the respondent to have been acquired by the estate after January 6, 1919. XII. The fair market value of each class of said securities on December 31, 1925, is that shown below*1163 in the column headed "Fair Market Value on Dec. 31, 1925". The fair market value on January 6, 1919, of that part of said securities acquired by the estate of Cornelius V. S. Roosevelt on or prior to that date and/or the cost to the estate of that part of said securities acquired by it after January 6, 1919, are as shown below in the column headed "Cost or Value on Jan. 6, 1919". The amount by which the profit from the sale of each class of said securities reported on the income tax return of the estate of the Theodore Roosevelt was increased in said notice of deficiency is as shown below in the column headed "Increase in Profit." Fair Market Cost or Increase in Value on Value on Profit. Dec. 31, Jan. 6, 1925. 1919. 3 3/10 shares All American Cable $432,30 $253.18 $179.12 7 1/5 shares Bank of Manhattan 1,713.60 600.00 1,113.60 36 shares Chemical National Bank 25,632.00 16,200.00 9,432.00 39 9/10 shares Consolidated Gas Co 3,790.50 1,944.68 1,845.82 20 shares Southern Railway Preferred 1,850.00 1,380.00 470.00 40 shares Southern Atlantic Tel. Co 860.00 640.00 220.00 20 shares Union Pacific Co. Preferred 1,505.00 1,445.00 60.00 25 shares Atchison Topeka & Santa Fe 2,359.39 2,321.89 37.50 Total $38,142.79 $24,784.75 $13,358.04 *1164 *198 Exhibits A and B are the wills of Theodore Roosevelt and Cornelius V. S. Roosevlet, respectively, which are incorporated herein by reference. It is not necessary to set them forth in full, as the material parts are summarized in the above stipulation. OPINION. MATTHEWS: The petitioner is the testamentary trustee of Theodore Roosevelt, who died on January 6, 1919, domiciled in New York. The only question involved is the basis to be used in determining gain or loss on the sale by the trustee in 1926 of certain stock received by him on December 31, 1925, from the trustees of the testamentary trust created by Cornelius V. S. Roosevelt, who died in 1887. Cornelius gave his widow a life estate with remainder over, such remainder interests being charged with the payments of certain annuities. Theodore Roosevelt was one of the remaindermen. The widow died in 1900. The Supreme Court of New York decreed that the trust survived the life tenant's death; that the corpus should be retained by the trustees with the same powers to sell and reinvest as they had had during the life tenant's life; and that the trustees should pay the annuities out of the income of the trust*1165 and distribute the balance of the income to the remainderman. After the death of two of the annuitants the court, on December 30, 1925, authorized a part of the corpus to be distributed to the remainderman. It was Theodore Roosevelt's share of the amount distributed which the trustee of his residuary estate received on December 31, 1925. Under section 204(a)(5) of the Revenue Act of 1926, the basis for determining gain or loss on the sale of property acquired by bequest, devise or inheritance is the fair market value of such property at the date of acquisition. At the time of his death, Theodore Roosevelt had a vested remainder interest in the trust res of the Cornelius Roosevelt trust. At his death this interest became a part of his estate and passed to his testamentary trustees. The trustees were devisees of the residuary estate, which was distributed to them on May 31, 1922. *199 Under the principle of , "the legal title [to the residuary estate] so given [by the decree of distribution] relates back to the date of death." *1166 . Therefore, the date of acquisition by petitioner of Theodore Roosevelt's remainder interest in the Cornelius Roosevelt trust was the date of death of Theodore Roosevelt. By virtue of having acquired Theodore Roosevelt's remainder interest in the Cornelius Roosevelt trust, the petitioner received in 1925 from that trust certain shares of stock. These shares were sold in 1926. The question is, What was the date of acquisition by petitioner of the stock sold in 1926? The petitioner contends that the date of acquisition was the date of distribution to him in 1925; the respondent contends that the time of acquisition was the date of Theodore's death in 1919, and uses as a basis the value of the stocks on such date, except as to stocks bought by Cornelius's trustees after Theodore Roosevelt's death, where he would use cost to Cornelius's trustees. Since the corpus of the Cornelius Roosevelt trust had changed in form from time to time by investment and reinvestment, the petitioner complains that respondent's method will result in inequalities since Theodore, while living, and his trustees after his death, had no right*1167 to particular stock, but only to a pro rata share of the whole corpus. The applicability here of the general principle laid down by the Supreme Court in , is also denied, since that case did not involve an intervening trust between decedent and legatee. This Board in , and in , and the Circuit Court of Appeals for the First Circuit in ,, considered the question as to the time of acquisition by the remainderman of property held in a testamentary trust. The same principle is involved in the instant case. In all three cases the principles of , were followed and it was held that the time of acquisition was the date of death of the testator from whom the right was acquired. In the Griscom and Huggett cases, the contention had been made that the time of acquisition was at the death of the life tenant and that the value of the property at the death of the life tenant was the basis for valuing the property received by the remainderman. *1168 In the Chandler case, it was contended that the date of distribution to the remainderman was the date of acquisition, and value on such date was the proper basis to be used. In each case the testamentary trustees had the power to sell and reinvest, and it was argued that because of such power the remainderman might not receive the same property as the decedent left. In *200 each case it so happened that the remainderman did receive the identical property left by the decedent. In the Huggett case, the respondent had contended and we held that the value of the remainderman's interest in the property as of the date of the death of the testator, and not the value of the property itself at that date, should be used as the basis. On appeal of the Huggett case to the Court of Appeals of the District of Columbia, our decision was modified to the extent of holding that it was error to reduce the value of the property at the basic date by the value of the interest of the life tenant. We have no such question here, inasmuch as the respondent has used as a basis the value of the property itself. Under the principle of *1169 , and the application thereof by the Board in the Griscom and the Huggett cases, and by the court in Chandler v. Field, the general rule is that title to property received by a remainderman relates back to the date of death of the testator from whom such right was acquired. Under this rule, the title to stocks received by petitioner in 1925 which had been held by the Cornelius Roosevelt trust at the date of Theodore Roosevelt's death relates back to Theodore Roosevelt's death. Therefore, we affirm the action of the respondent in using the value of such stock on January 6, 1919, the date of Theodore Roosevelt's death, as the basis for determining the gain or loss on the sale of such stock. In the instant case, the Cornelius V. S. Roosevelt trustees had the power to sell and reinvest, and did sell and reinvest, a part of the corpus; and some of the stocks received by petitioner were acquired by the Cornelius Roosevelt trust after Theodore Roosevelt's death. As to these stocks, the Commissioner used the cost to the Cornelius Roosevelt trust as the basis to be used by petitioner. This means that the date of acquisition*1170 by the remainderman (petitioner) was the date of purchase by the Cornelius Roosevelt trust. We think this is correct. As said above, the title to property devised or bequeathed to a testamentary trustee relates back to the date of death of testator. If the trustee sells any of the trust property for a price in excess of value at date of acquisition, a taxable gain is realized. That is a closed transaction as to such property. Neither remainderman nor trustee has any further interest in it. If the proceeds are used in the purchase of other property, the date of acquisition of such property by the trustee is the date of purchase and the basis in the trustee's hands is cost. The remainderman's interest in the property is acquired at the same time as the trustee acquires legal title to the property. Therefore, when such property is distributed to the remainderman *201 his legal title relates back to the time he acquired his remainder interest in the property, namely the date of acquisition by the trustee. The determination of respondent is approved. Reviewed by the Board. Judgment will be entered for the respondent.