United States Court of Appeals for the Fifth Circuit the citizen's national bank of waco, Trustee

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United States Court of Appeals for the Fifth Circuit






Docket No. 26796

Date of Decision: October 3, 1969


Tax Analysts Citation: 1995 TNT 38-69

Principal Code Reference: Section 1015


Provided by Tax Analysts. Copyright 2000 Tax Analysts. All rights reserved.


In 1950, the settlors of several trusts acquired all the capital

stock of Bosque Investment Co. for $498,000. Several years later, they

borrowed $500,000 and pledged the stock as collateral for the loan. Shortly

thereafter, they created trusts for their children and transferred the

Bosque stock and the liability encumbering the stock to the trusts. At the

time of the transfer, the assets of Bosque, as well as its stock, had a

fair market value of $715,000.

The settlors reported the difference between their basis and the

assumed liability as a long-term capital gain on their income tax return

and also filed a gift tax return, reporting the difference between the fair

market value of the stock and the liability assumed as a gift. Less than

six months after the transfer, Bosque was liquidated and its assets were

distributed to the trusts.

On its 1961 returns, each trust reported its share of the fair

market value of the assets received in exchange for the stock, deducted its

basis, and reported the gain as long-term capital gain. Each return

indicated that the stock was acquired by the trust on the date the stock

was acquired by the settlors, pursuant to section 1223, and that the basis

taken was the basis of the stock in the hands of the settlors, pursuant to

section 1015.

The IRS determined that the gain was short-term capital gain,

asserting that the trusts were not entitled to tack the settlors' holding

periods to those of the trusts. The Service applied reg. section 1.1015-4,

which provided that the transferee's basis in property received as

part-gift part-sale was the greater of the amount paid by the transferee or

the transferor's adjusted basis. The IRS asserted that the liability

assumed by the trusts was the amount paid and was greater than the

settlors' basis, and thus the trusts' bases were the amount of the

liability without reference to the transferor's basis. The district court

held in favor of the trust, and the IRS appealed.

The Fifth Circuit affirmed. Section 1015(a), noted Circuit Judge

Goldberg, provided that, for property acquired by gift, the basis would be

the same as it would be in the hands of the donor. Under section 1015(b),

the basis of property acquired by a transfer in trust would be the same as

it would be in the hands of the grantor, increased by the amount of gain or

decreased by the amount of loss recognized to the grantor on the transfer.

Judge Goldberg added that, as an incidental result, section 1015 also

determined whether the transferee was permitted to tack on the transferor's

basis, because the right to tack holding periods under section 1223

depended on the method used to calculate basis.

Reg. section 1.1015-4, however, provided that the transferee was

required to determine his basis by the "price paid" if that amount was

greater than the transferor's basis. The appeals court determined that the

term "price paid" did not dictate a result different from the statute in

ascertaining the transferee's basis, but that the regulation precluding any

tacking of holding periods where, as here, the "price paid" was greater

than the transferor's basis. To that extent, the court ruled, the

regulation was not a reasonable interpretation of the statute and,

therefore, invalid. Accordingly, the court concluded that the trusts were

entitled to tack the transferor's holding period.
US-CT-APP-5, [69-2 USTC ¶9655], The Citizen’s National Bank of Waco, Trustee, Plaintiff-Appellee v. United States of America, Defendant-Appellant , Capital gains and losses: Holding period: Stock: Transfers in trust: Part gift and part sale: Basis determinations: Inconsistent, (Oct. 03, 1969)

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