5,000 shares of National Steel Corporation stock, and indicated need for haste in the matter. The trustee undertook to furnish the stock in the time required, but for its own convenience forwarded to the transfer agent of the Steel Corporation 5,000 shares of stock held by the D. M. Weir Trust. This was in the interest of time, as that trust had made a sale of such stock shortly before the instant sale and had then furnished proof to the transfer agent of the authority of the trustee to dispose of the stock. No such authority had been established as to the stock of the E. T. Weir Trust, and to prevent delay the D. M. Weir Trust stock was used.
This sale was on July 6, 1935, and was for $234,732.74. On August 14, 1935, 5,000 shares of the stock of the E. T. Weir Trust was sold for $327,237.50, and $46,252.38 was transferred from that trust to the D. M. Weir Trust pursuant to the equalization agreement. On August 20, 1935, all the beneficiaries of both trusts signed a paper authorizing the trustee to transfer $46,252.38 from the E. T. Weir Trust to the D. M. Weir Trust.
After tax return by the trustee of the E. T. Weir Trust, and several adjustments thereof with which we are not concerned, the Commissioner of Internal Revenue held that the E. T. Weir Trust had derived proceeds of $327,237.50 from the sale of its 5,000 shares of stock and a gain of $271,665.50. That is, he held that the transfer of $46,252.38 to the D. M. Weir Trust in recognition of the equalization agreement was ineffective, from an Internal Revenue standpoint, to reduce the gain as it appeared upon the face of the sale. The judgment in the instant action depends upon correctness or the reverse of the Commissioner's ruling.
Counsel for the defendant contends that the instant case is controlled by Davidson v. Commissioner, 305 U.S. 44, 59 S. Ct. 43, 83 L. Ed. 31. As we view that decision it is not based upon the same principle as the instant matter. In that case the taxpayer directed his broker to sell, and his bank to deliver to the broker, certain shares which he had recently purchased. By mistake the bank delivered certain shares which had been purchased at an earlier date and for less in amount than those the taxpayer wanted to sell, and his profit was greater than it would have been had the recently purchased shares been sold. Return was made upon the supposition that the stock had been sold as directed. Having made a greater gain from the stock actually sold than had been returned by him, the taxpayer was required to pay the tax upon that greater gain.
Davidson v. Commissioner, supra, is not the instant case.In this case we have, in effect, an agreement between the trustees of two distinct trusts. Having each stock of the same company, and each interested in disposing of a portion of it and diversifying his holdings, they entered into the equalization agreement for sale as a common venture. Should one of them, finding that he would profit thereby, have fraudulently disclaimed the agreement, the other would have had legal redress; and surely, in case one trustee were compelled to pay a judgment to the other in the taxable year, none could be found who would contend that the amount so recovered constituted a taxable gain of the delinquent trustee. What logical reason exists for a different conclusion where a valid agreement, entered into by the beneficiaries of each trust and recognized by the trustee, has been voluntarily carried out? None, any more than equitable reason exists for taxing the D. M. Weir Trust with a gain of $46,252.38, and then taxing the E. T. Weir Trust with the same $46,252.38 as a gain of that trust in the same year, as was done.
No charge of a breach of trust can be asserted against the trustee in this action. An agreement for a joint transaction, first verbal and later confirmed in writing, was entered into by all the beneficiaries of both trusts. Such an agreement, followed by the trustee of both trusts, is approved by Internal Revenue Law. Isaac W. Frank Trust of 1927, 44 B.T.A. 934; Revenue Act 1934, § 831(a) (3), 26 U.S.C.A. Int.Rev. Code, § 3797(a) (2). In holding that the execution of the agreement by the trustee was invalid the Commissioner of Internal Revenue was acting beyond his powers.
Judgment in favor of the complainant will be entered.
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