Early v. Commissioner

52 T.C. 560, 1969 U.S. Tax Ct. LEXIS 102

• Court: United States Tax Court
• Decided: June 26, 1969
• Docket: Docket No. 802-67
• Status: Published

Opinions

opinion

Eespondent argues that the receipt by petitioners of the life estate pursuant to the settlement with the estate was tantamount, under the rationale of Lyeth v. Hoey, 305 U.S. 188 (1938), to an acquisition by “gift, bequest, or inheritance,” precluding amortization of its value by application of section 273, I.E.C. 1954.¹ In addition, respondent obliquely questions wh.eth.er Rose intended a gift to petitioners of the El Paso stock. Petitioners view the settlement as a taxable exchange of property which resulted in no gain or loss because the basis of the property transferred by petitioners should be deemed to equal the value of the life estate received, and contend that this value is properly amortizable in full over the life of the asset-received without allocation to tax-exempt interest income received from the trust:

Petitioner possessed on the date of Rose’s, death certificates representing 70,000 shares of El Paso stock and endorsed stock powers covering the shares naming petitioner and Jeannette-as transferees. Under the Uniform Stock Transfer Act,² a written assignment by separate document is a valid method of transfer, and an endorsement by the person appearing by the certificate to be the owner is effectual as against all persons except the assignor in spite of fraud, duress, mistake, revocation, death, incapacity, or lack of consideration or authority. Moreover, it has been held that possession by the endorsee or his agent of duly endorsed stock certificates establishes prima facie that the transferee has good title to the stock as against the assignor or his representative. Scottish Bank v. Atkinson, 245 N.C. 563, 96 S.E. 2d 837, 839 (1957); In Re Hill's Estate, 30 Ill. App. 2d 243, 174 N.E. 2d 233 (1961); Vincent v. Campbell, 140 N.J. Eq. 140, 53 A. 2d 313 (1947). See also 1 Christy, Transfer of Stock sec. 52 (3d ed. 1964).

It is clear that petitioners held the El Paso stock under a bona fide claim of title and possessed the right to transfer it to a purchaser without notice free of all claim by Rose’s. Estate. McCullen v. Hereford State Bank, 214 F. 2d 185 (C.A. 5, 1954). At no time did the stock become part of Rose’s probate estate. Certain beneficiaries and heirs of Rose threatened action against petitioners to have the stock declared an asset of the estate. In the arm’s-length settlement, an interest in the estate was transferred to petitioners in order to have included in the estate the property to which petitioners held a bona fide claim of title. One valuable property right was exchanged for another. Petitioners made no claim agaimt the estate as heirs or as donees of lifetime gifts from Rose (except as to the $20,000 in specific bequests). Cf. White v. Thomas, 116 F. 2d 147 (C.A. 5, 1940), certiorari denied 313 U.S. 581 (1941).

In Lyeth v. Hoey, supra, the Supreme Court held that property acquired :by an heir under State intestacy laws in compromise of his claim, based upon an alleged invalidity of a will under which he was granted a small legacy, against the estate for a greater portion of that very property constituted “property acquired by gift, bequest, device, or inheritance.” Undeniably, but for the original “gift” in the instant case, petitioners would not have been in a position to acquire the life estate. However, in our judgment this simple “but for” connection does not compel us to attribute gift characteristics to all property thereafter passing through petitioners’ hands. It is plain that Lyeth v. Hoey has no application where the asset, as here, is acquired by purchase or exchange. Cf. White v. Thomas, supra; Bell v. Harrison, 212 F. 2d 253 (C.A. 7, 1954); and William N. Fry, Jr., 31 T.C. 522 (1958), affd. 283 F. 2d 869 (C.A. 6, 1960). We believe that to reach the same conclusion as in Lyeth v. Hoey under the significantly different facts presented here would necessitate an unwarranted extension of the rationale of that case beyond the intent of the Supreme Court.

In White v. Thomas, supra, the rationale of Lyeth v. Hoey was not applied to a settlement in which a claim, based upon a purported inter vivos gift, against specific estate property was compromised by the transfer of estate property dissimilar in nature to that claimed. As a result, the amounts received under the settlement were held not to be “the proceeds of a gift,” but income. In the instant case, technically as well as practically, the life estate in the trust comprised of various assets managed by fiduciaries was not “a part of the very thing claimed,” i.e., a remainder interest in shares of stock.

In our opinion petitioners acquired their joint percentage life estates through the sale or exchange of property, and not by gift, bequest or inheritance. Sherman Ewing, 40 B.T.A. 912 (1939); Commissioner v. Matheson, 82 F. 2d 380 (C.A. 5, 1936), affirming 31 B.T.A. 493 (1934); White v. Thomas, supra; Gist v. United States, (S.D. Cal. 1968, 22 A.F.T.R. 2d 5895, 68-2 U.S.T.C. par. 9667). Accordingly, section 273 is inapplicable.

Respondent did not determine in the notice of deficiency, plead in the answer, or make any argument in the brief that the transaction, if characterized as a “sale or exchange,” resulted in a gain to petitioners and, in effect, concedes that the properties exchanged should be deemed to be of equal value resulting in a “cost” to them, for purposes of amortization, of the actuarial value, as of the date of transfer, of the life estate received.³ Petitioners properly added the $20,000 legal fee incurred by them in the settlement proceedings to this value in determining “cost.” Pennroad Corporation, 21 T.C. 1087 (1954); Jones’ Estate v. Commissioner, 127 F. 2d 281 (C.A. 5, 1942). Thus, no issues as to gain or basis are raised herein.

It is well established that the cost of purchasing a life estate measured by the life of the grantor is amortizable over his life expectancy. May T. Hrobon, 41 T.C. 476, 503 (1964); Bell v. Harrison, supra; William N. Fry, Jr., supra; Elmer J. Keitel, 15 B.T.A. 903 (1929). The concept of recoupment of investment is equally operable in a case such as this where the purchased life interest is measured by the grantee’s own life. We so hold.

Since petitioner’s life estate constitutes property held for the production of income, its amortized cost is deductible under section 167(a) (2)⁴ unless disallowed in whole or in part by section 265.⁵

A portion of the trust income paid to petitioners duriiig the years 1964 and 1965 constituted taxable income and the remainder constituted tax-exempt interest income. Under the plain, unambiguous provisions of section 265, expenses allocable to tax-exempt interest income are disallowed only to the extent of amounts otherwise deductible under section 212. See Rev. Rul. 61-86, 1961-1 C.B. 41.

It is not disputed that the amortized cost is deductible, if at all, under section 167(a) (2). See KIRO, Inc., 51 T.C. 155 (1968). Undeniably, the provisions of section 167(a) (2) are parallel to those of section 212,⁶ and a logical case may be made that section 265 should have included a reference to section 167(a) (2). “However, our present problem is to interpret the Act passed, not to determine what type of an Act could have been passed.” Gellman v. United States, 235 F. 2d 87, 93 (C.A. 8, 1956). “It is not our responsibility to rewrite the statute. We must interpret it as we find it.” Mary E. Burrow Trust, 39 T.C. 1080, 1091 (1963), affd. 333 F. 2d 66 (C.A. 10, 1964).

We are not called upon to interpret a necessarily ambiguous phrase such as “capital assets,” Corn Products Co. v. Commissioner, 350 U.S. 46 (1955), or an imprecise economic concept such as “loss,” Helvering v. Owens, 305 U.S. 468 (1939), which may be interpreted broadly or narrowly according to the basic congressional purpose. Therefore, we find no occasion to resort to speculation as to legislative intent.

We conclude that petitioners are entitled to a depreciation deduction during the years in issue under section 167 (a) (2), unaffected by section 265, for the full amortized cost of their life interests in the estate trust.

Reviewed by the Court.

Decision will be entered under Bule 50.

1 All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.

SEC. 273. HOLDERS OF LIFE OR TERMINABLE INTEREST.

Amounts paid under the laws of a State, a Territory, the District of Columbia, a possession of the United States, or a foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time.

2 Tex. Rev. Civ. Stat. Ann. art. 1302-6.01 et seq. (1962), which was derived from Acts 1943, 48th Leg., p. 722, ch. 397, sec. 26. These provisions have the effect of making shares of corporate stock fully negotiable. Snyder Motor Co. v. Universal Credit Co., 199 S.W. 2d 792 (Tex. Civ. App. 1947).

3 By way of settlement under the Federal gift tax provisions, respondent determined that Rose made a gift to petitioners in 1957, the value of which should be measured by the actuarial value of the life estate ultimately received by them.

4 SEC. 167. DEPRECIATION.

(a) General Rule. — There shaU be allowed as a depreciation deduction a reasonable allowance for the exhaustion, • wear and tear (including a reasonable allowance for obsolescence)—

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(2) of property held for the production of income.

5 SEC. 265. EXPENSES AND INTEREST RELATING TO TAX-EXEMPT' INCOME.

No deduction shall be allowed for—

(1) Expenses. — Any amount otherwise allowable as a deduction which is allocable¹ to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this subtitle, or any amount otherwise allowable under section 212 (relating to expenses for production of income) which is allocable to interest (whether or not any amount of such interest is received or accrued) wholly exempt from the taxes imposed by this subtitle.

6 SEC. 212. EXPENSES FOR PRODUCTION OF INCOME.

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—

(1) for the production or collection of income;

(2) for the management, conservation, or maintenance of property held for the production of income; or

(8) in connection with the determination, collection, or refund of any tax.

1 The fact that Lyeth v. Hoey involved income tax has not precluded the extension of its principle to the estate and gift tax areas. Cf. White v. Thomas, 116 F. 2d 147 (C.A. 5, 1940) ; see Charlotte Keller, 41 B.T.A. 478, 484 (1940); 1 Mertens, Law of Federal Gift and Estate Taxation, sec. 4.20, fn. 93.