Appeal from United States Board of Tax Appeals.
Before BIGGS, MARIS, and JONES, Circuit Judges.
In 1931 Warren Webster, Sr., now deceased, transferred securities, without consideration, to a trust bearing his name. At the time of the transfer the fair market value of the securities was less than the basis to the donor. In 1936 the trustees sold the securities.The sale price was less than the basis to the donor but more than the fair market value at the time of the transfer in trust. In their 1936 income tax returns the trustees used the basis to the donor in determining gain or loss resulting from the sale and claimed a deductible loss. The Commissioner disallowed the claimed deduction. In determining that there was no loss as a result of the sale of the securities the Commissioner used as a basis the fair market value of the securities at the time of the gift in trust. The Board of Tax Appeals held this to be error. In two cases involving trusts created by Herman F. W. Dannenbaum in 1932 and presenting substantially similar facts and issues the Board entered similar decisions. We now have for determination the Commissioner's petitions to review these three decisions of the Board.
The problem arises because the donor's transfer of securities in each case was both a gift and a transfer in trust. Section 113(a) of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int. Rev. Code § 113(a) (2, 3), provides one rule for determining loss resulting from a sale in the case of property acquired by gift and another in the case of property transferred in trust. The question which we must decide is which rule is applicable to the facts of the cases before us.
The relevant portion of the section dealing with the basis for determining gain or loss provides:
" § 113. Adjusted basis for determining gain or loss -
"(a) Basis (unadjusted) of property. The basis of property shall be the cost of such property; except that -
"(2) Gifts after December 31, 1920. If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that for the purpose of determining loss the basis shall be the basis so determined or the fair market value of the property at the time of the gift, whichever is lower. * * *
"(3) Transfer in trust after December 31, 1920. If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by a bequest or devise) the basis shall be the same as it would be in the hands of the grantor, increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made."
The taxpayers successfully contended before the Board that since the property was acquired as a result of a transfer in trust subparagraph (a)(3) was applicable. The Commissioner urges that subparagraph (a)(3) must be restricted solely to those transfers in trust which are made for a valuable consideration, that the transfer in this case was a gift since it was made without consideration and that subparagraph (a)(2) is, therefore, applicable. It is obvious that if both subparagraphs are construed broadly they both apply since the tranfers with which we are concerned are at once both gifts and transfers in trust. Such a construction is clearly inadmissible since its effect would be to apply conflicting rules to the same transaction. We must, therefore, determine whether subparagraph (a)(2) applies only to those gifts which are not transfers in trust or whether subparagraph (a)(3) applies only to those transfers in trust which are not gifts. We find no justification for so limiting the application of subparagraph (a)(3) either in its language or in its legislative history. On the other hand the legislative history of the Revenue Acts supports the view that subparagraph (a)(2) is not intended to apply to any transfers in trust even though made by way of gift.
In the first place, as will later appear, subparagraph (a)(3) was enacted three years later than subparagraph (a)(2). The phrase "transfer in trust" as used in subparagraph (a)(3) was broad enough to describe a transfer without valuable consideration as well as one made for consideration.As a practical matter the normal application of the phrase would be to a voluntary trust created by way of gift since the occasions when consideration passes for a transfer in trust are comparatively rare. Although in drafting subparagraph (a)(3) Congress expressly excepted transfers in trust by bequest or devise from its purview it did not enlarge that exception so as to include all other types of transfers in trust made without valuable consideration.Had Congress intended that the existing provisions of subparagraph (a)(2) should apply to gifts in trust it would have been appropriate to have added to the parenthetical clause of subparagraph (a)(3) which now reads "(other than by a transfer in trust by a bequest or devise)" an additional qualification such as "or by a transfer intrust by way of gift."
Furthermore it will be observed that subparagraph (a)(3) if restricted to transfers in trust for a valuable consideration would become meaningless. Section 113(a) provides as a general rule that the basis of property sold shall be cost.Then follows in the section a list of ninetten exceptions of which subparagraph (a)(3) is one. When that subparagraph is applied to a trust created for a valuable consideration, the basis carried forward from the donor is, under the final clause of the subparagraph,*fn1 to be increased by the gain or decreased by the loss relized by him in the transfer. In either case the resulting basis is the equivalent of the cost to the transferee.It will thus be seen that under the narrow interpretation urged by the Commissioner the exception contained in subparagraph (a)(3) becomes no exception to but merely a reiteration of the general rule of Section 113(a).The only case in which the subparagraph becomes an actual exception is the case of a transfer in trust without consideration. Obviously the subparagraph should be so construed we it meaning and function. So construed we think it was intended to apply primarily to transfers in trust without consideration and, by the final clause to which we have referred, to deprive transfers in trust for a valuable consideration of the benefits of the exception, relegating them to the ordinary rule applicable to property generally.
The legislative history of subparagraph (a)(3) indicates that it and not subparagraph (a)(2) was intended by Congress to apply to voluntary transfers in trust. The substance of Section 113(a)(3) governing the basis for determining gain or loss resulting from the sale of property acquired by transfer in trust first appeared in the revenue Act of 1924 as Section 204(a)(3), 26 U.S.C.A. Int. Rev. Acts, page 7. This section was added at that time because there was some difference of opinion as to whether Section 202(a)(2) of the Revenue Act of 1921, 42 Sat. 229, which dealt with the basis for determining gain or loss upon the sale or property ...