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Kenan v. Commissioner

Brief Fact Summary. Taxpayers were trustees for a trust set up in Mrs. Bingham’s will. She provided that $5 million in cash or securities should be provided to her niece when she turned forty years old.

Synopsis of Rule of Law. The gain from the sale or other disposition of property shall be the excess of the amount realized over the adjusted basis.

Points of Law - Legal Principles in this Case for Law Students.

Under the Revenue Acts of 1918 and 1921, which provide, §§ 202 (a), that for the purpose of ascertaining the gain derived or loss sustained from the sale of property acquired on or after March 1, 1913, the basis shall be its cost, the latter Act declaring also that in case of property acquired by bequest, devise, or inheritance, the basis shall be the fair market price or value of such property at the time of such acquisition, the basis of calculation in the case of stocks acquired by the taxpayer as a residuary legatee and sold by him, is not their value at the date of the decree of distribution, but their value at the date of the testator's death.

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Facts. Mrs. Bingham died and provided that her trustees should pay $5 million to her niece, Louise Clisby Wise, when she turns forty. The trustees had the option to pay it in securities, but chose to pay partly in cash and partly in securities when Wise turned forty. The Commissioner determined that the distribution of the securities resulted in capital gains which were taxable. The taxpayers argued that they did not realize gain from the sale or exchange of capital assets nor income by delivering the securities to the devisee.

Issue. Did the trustees realize a capital gain by using the securities to settle the claim?

Held. Circuit Judge Hand issued the opinion for the United States Second Circuit Court of Appeals in holding that the trustees did realize a capital gain and it should be taxed accordingly.

Discussion. The Court of Appeals did not limit what “other disposition” was intended to mean. Here the increase in value of the securities was realized and benefited by the trust. This is different than a specific bequest of property.

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