CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.
Hughes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Stone, Roberts, Cardozo
MR. JUSTICE BUTLER delivered the opinion of the Court.
This controversy arises out of the calculation of an income tax on the gain realized on the sale of property by a trustee in 1922. April 27, 1906, one Matthiessen acquired 6,000 shares of stock at a cost of $141,375. Its value on March 1, 1913, was less than cost. December 4, 1921, desiring to make provision for his son, Erard, he transferred the stock to the New York Trust Company in trust for him with remainder over in case of his death. When the trust was created the market value of the stock was $577,500. The trustee sold it in 1922 for $603,385. In the tax return for that year the trustee included $87,385 as the gain resulting from the sale. That figure was reached by subtracting the cost of the shares to the trustor, then claimed to be $516,000, from the amount the trustee received for them. But the trustee then, as it always has, insisted that the gain should be calculated on the basis of the value at the time of the creation of the trust. And it applied the rate of 12 1/2 per cent., applicable to capital gains. The Commissioner ascertained gain on the principle adopted in the return but found the cost to trustor to be $141,375. He applied the normal and surtax rates that ordinarily are laid upon the incomes of individuals and by the use of these factors arrived at an additional assessment of $238,275.95.*fn1 The Board of Tax Appeals sustained the determination. 27 B.T.A.
. The lower court held that the gain had been correctly ascertained, but that it was taxable at 12 1/2 per cent. 68 F.2d 19. These writs were granted on petition of the Commissioner and cross-petition of the trustee.
The questions are: (1) Whether the gain resulting from the trustee's sale is the difference between price paid by trustor and that received by trustee, and (2) if so, whether the 12 1/2 per cent. rate is applicable.
The Revenue Act of 1921, 42 Stat. 227, governs. Section 2 (9) defines taxpayer to include any person, trust or estate subject to a tax imposed by the Act. Section 202 (a) provides: "That the basis for ascertaining the gain derived . . . from a sale . . . of property . . . shall be the cost of such property; except that . . . (2) In the case of such property, acquired by gift after December 31, 1920, the basis shall be the same as that which it would have in the hands of the donor." Section 206 (a) (6) defines capital assets to be "property acquired and held by the taxpayer for profit or investment for more than two years" and (b) provides that the net gain from the sale of capital assets may be taxed at the rate of 12 1/2 per cent. instead of at the ordinary rates. Section 219 (a) declares that the normal and surtax on net incomes of individuals shall apply to the income of property held in trust, including (3) income held for future distribution; (b) the fiduciary is required to make the return of income for the trust. And subsection (c) provides that in cases under (a) (3) the tax shall be imposed upon the net income of the trust and shall be paid by the fiduciary.
By the trust indenture, which recites mutual covenants and agreements and the payment of $10 by each to the other as the consideration, the trustor did "sell, assign, transfer, and convey" the 6,000 shares "in trust, nevertheless, for the benefit of" his son, Erard, "to be administered by the trustee" under specified terms and conditions
among which are these: The trustee was required to hold the shares and any property purchased out of the avails, to collect and retain income until the twenty-first birthday of Erard, then to pay him the accumulated income, thereafter to pay him current income until he attained the age of twenty-five years, and at that time to deliver to him the principal and undistributed income. During the life of the trustor, the trustee was not to sell or reinvest without the written consent and approval of the trustor. In case of Erard's death before the age of twenty-five, the entire estate was to go to other sons of the trustor.
The trustor irrevocably disposed of the shares. He did not sell but made a gift. Burnet v. Guggenheim, 288 U.S. 280. He gave the trustee legal title temporarily to be held to enable it to conserve, administer and transfer the property for the use and benefit of his son to whom he gave the beneficial interest. It may rightly be said that the trustee and beneficiary "acquired by gift" as meant by § 202 (a).*fn2 If the broad definition in § 2 (9) stood alone, either might be regarded as the taxpayer but it is qualified by the rule that the trustee must pay the tax. It follows that the trustee properly may be regarded as the taxpayer and, for the purpose of calculating the gain, as having assumed the place of the trustor. Section 202 (a) (2) was enacted to prevent evasion of taxes on capital gains. Taft v. Bowers, 278 U.S. 470, 479, 482. And see Cooper v. United States, 280 U.S. 409. Transfers to trustees for the benefit of others are clearly within the reason for the enactment.
They may be used to avoid burdens intended to be imposed, quite as effectively as may gifts that are directly made. The difference between the cost to the trustor in 1906 and the amount for which the trustee sold in 1922 was rightly taken as taxable income of the trust.
We come to the question whether the gain derived from the trustee's sale is taxable at 12 1/2 per cent. That rate is not applicable unless the shares were "capital assets" defined by § 206 (a) (6) to be "property acquired and held by the taxpayer for profit or investment for more than two years." The time between the creation of the trust and the sale was less than the specified period and, if the words alone are to be looked to, the shares were not by the taxpayer "held . . . for more than two years." Soon after the passage of the Act the Income Tax Unit of the Bureau of Internal Revenue ruled that property transferred to a trustee, for purposes and upon terms and conditions analogous to those expressed in the indenture before us, which remained in his hands less than two years was not "capital assets" and that the resulting gain was not taxable at the 12 1/2 per cent. rate. That construction was followed by the Board of Tax Appeals, the Circuit Court of ...