KENAN V. COMMISSIONER 114 F.2d 217 (2nd Cir. 1940) CASE BRIEF

KENAN V. COMMISSIONER

114 F.2d 217 (2nd Cir. 1940)

NATURE OF THE CASE: This was a dispute over the sale or exchange provisions of the Revenue Act. Kenan (P), the trustee of a testamentary trust, appealed the decision of the Board of Tax Appeals holding that the distribution of securities to the legatee of the trust resulted in capital gains taxable to P under the Revenue Act of 1934, 26 U.S.C.S. 117.

FACTS: Bingham died and left a will that placed her residuary estate in trust. The residuary part provided that her trustees should pay a certain amount annually to her niece, Louise, until the latter reached the age of forty at which time the estate was to pay her $5,000,000. The will then provided that the trustees should have the right to substitute for the payment of the monies due to the niece, payment in marketable securities of a value equal to the sum to be paid; the selection of securities and the valuation of them was to be done by the Trustees. Louise became 40 in 1935 and the trustees decided to pay her in cash and in securities. The IRS determined that the distribution of the securities to Louise resulted in capital gains taxable to the trustees under section 117. The deficiency was determined to be $367,687.12. The tax board affirmed that decision. However, on appeal the trustees claimed that they realized no gain from the sale or exchange of capital assets or income of any type from delivering those assets to Louise. The IRS also appealed contending that they were wrong in the first instance in that the entire gain was ordinary income and they should be able to assess a deficiency of $1,238,841.99; the gain was not covered by 117.

ISSUE:

RULE OF LAW:

HOLDING AND DECISION:

LEGAL ANALYSIS:

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