26 T.C. 1172">*1173 The Commissioner determined a deficiency in income tax for the year 1950 in the amount of $ 100,293.47. During the taxable year, which was after the death of the grantor of the trust, the petitioner trust sold some of the assets of the trust, 4,586.85728 shares of stock of Wenonah Development Co. The Commissioner determined that the basis of the stock was $ 260,159.22, pursuant to section 113 (a) (2), 1939 Code, and that therefore long-term capital gain was understated in the amount of $ 401,173.86, of which 50 per cent, or $ 200,586.93 is taken into account.

The chief question is whether the basis of the stock which the petitioner trust sold in the taxable year, is the basis thereof in the hands of the grantor of the trust, as the Commissioner has1956 U.S. Tax Ct. LEXIS 79">*81 determined, or the value thereof at the date of the grantor's death, under section 113 (a) (5), 1939 Code, as the petitioner contends.

FINDINGS OF FACT.

The petitioner trust was created on May 3, 1932. The presently qualified and acting trustees are Clifford W. Michel, C. Frank Reavis, Jr., Henry C. Brunie, and William B. Franke. The trust is referred to hereinafter as the petitioner.

Petitioner reports its income on the calendar year basis; it filed an income tax return for 1950 with the collector of internal revenue for the second district of New York.

On May 3, 1932, the then Hazel B. Richards, who later became Hazel B. Beckman, created a trust under a trust indenture of the same date by the terms of which three trustees were appointed, namely, C. Frank Reavis, Jr., Edward Wise, and Harold Nathan.

Hazel B. Beckman was the daughter of Jules S. Bache. Jules S. Bache died on March 28, 1944, and Hazel B. Beckman died on January 22, 1947.

At the time of the creation of the trust, Hazel B. Beckman, hereinafter referred to as the grantor, conveyed and transferred to the trust 15,500 shares of stock of Wenonah Development Company, comprising 11,000 shares of class A stock, and 4,5001956 U.S. Tax Ct. LEXIS 79">*82 shares of class B stock.

The term of the trust is during the lives of Dorothy Richards and Barbara Richards, daughters of the donor, and the survivor of them.

The grantor, Hazel B. Beckman, reserved to herself for life the 26 T.C. 1172">*1174 income of the trust. Upon the death of the grantor, the income was to be paid to the donor's surviving children and their descendants until the termination of the trust. The trust income was paid to the grantor during her lifetime.

The trust instrument provided, inter alia, in section 10, for the appointment of successor, or substitute, trustees.

The grantor retained the right, in section 13 of the trust indenture, to revoke the trust in whole or in part, or to modify or alter the trust, at any time during her father's lifetime, with the written consent of her father. Section 13 of the trust indenture dated May 3, 1932, provided as follows:

THIRTEENTH: Notwithstanding anything to the contrary herein contained, the Donor may, at any time during the life of Jules S. Bache, father of the Donor, by instrument in writing executed and acknowledged in the manner required for a deed of real property so as to enable it to be recorded in the State of New1956 U.S. Tax Ct. LEXIS 79">*83 York, and delivered to the Trustees, with the written consent of said Jules S. Bache similarly executed, acknowledged and delivered, revoke this trust in whole or in part and annul the gifts or any of them herein provided, or modify or alter in any manner this Indenture and the trusts then existing and the estates and interests in property hereby created, and in case of such revocation said instrument shall direct the disposition to be made of the trust fund or of the portion thereof affected by such revocation, * * * and no one shall have any right, interest or estate under this Indenture except subject to the proper modification, alteration or revocation thereof. After the death of said Jules S. Bache this trust shall not be revocable.

The trust was amended by the grantor, with the written consent of Jules S. Bache, by instrument dated December 30, 1943, and section 13 was thereby modified and altered to read in part as follows:

THIRTEENTH: The Donor hereby expressly reserves the right at any time and from time to time with the written consent of each one of such of the following Trustees who are then in office viz: the said C. Frank Reavis, Jr. and the said Lewis L. Fawcett, to1956 U.S. Tax Ct. LEXIS 79">*84 amend this indenture and the trusts hereby created in any respect whatsoever and as often as desired and also to revoke the same either in whole or in part, by an instrument in writing signed and acknowledged as deeds of real estate are required to be acknowledged to entitle them to be recorded in the State of New York and delivered to the Trustees. If either the said C. Frank Reavis, Jr. or the said Lewis L. Fawcett shall cease at any time and for any reason to remain in the office of Trustee, then the foregoing rights of amendment and revocation may thereafter be exercised by the Donor at any time and from time to time with the written consent of each one of such of the following Trustees who are then in office, viz: the said C. Frank Reavis, Jr., the said Lewis L. Fawcett and the said William B. Franke. In case of any revocation pursuant to any of the foregoing provisions, the Donor shall have and possess again free and discharged from the trusts hereby created all the property then in the hands of the Trustees in respect of which the trust has been revoked * * *. If at any time and for any reason neither the said C. Frank Reavis, Jr., nor the said Lewis L. Fawcett, nor the 1956 U.S. Tax Ct. LEXIS 79">*85 said William B. Franke shall remain in the office of Trustee hereunder, then at the time when the last one of said individuals in office shall cease to remain in office this Indenture and the trusts hereby created 26 T.C. 1172">*1175 shall become and be irrevocable and shall not be subject to amendment or revocation either in whole or in part by the Donor either alone or in conjunction with any other person or persons.

On December 30, 1943, when the first amendment of the trust was executed, C. Frank Reavis, Jr., and Clifford W. Michel were the trustees. In addition to modifying and amending section 13 of the trust indenture, the grantor, in the instrument executed on December 30, 1943, also amended section 10 of the indenture, relating to the appointment of successor trustees. By this amendment, Lewis L. Fawcett and William B. Franke were appointed co-trustees, so that there were four trustees, Reavis, Michel, Fawcett, and Franke. Section 10 of the trust indenture was amended on December 30, 1943, to read as follows:

TENTH: Lewis L. Fawcett and William B. Franke are hereby constituted and appointed co-Trustees hereunder. If at any time and for any reason the number of Trustees in office1956 U.S. Tax Ct. LEXIS 79">*86 shall be less than four the Trustees or Trustee remaining in office are authorized and directed by an instrument in writing to appoint some individual or individuals as substituted Trustee or Trustees hereunder to fill the vacancy or vacancies then existing so that there shall be four Trustees in office. Such co-Trustees and such substituted Trustee or Trustees shall, without giving any security, have all the rights, powers, privileges and discretions (including the foregoing power of appointment but not including, except in the case of such co-Trustees, the power of consent as contained in Section THIRTEENTH hereof) conferred upon the Trustees by the provisions of this Indenture in like manner as though such co-Trustees, and such substituted Trustee or Trustees were original parties hereto. Nothing herein contained, however, shall be construed to require the filling of vacancies to enable the remaining Trustees or Trustee to act pending the appointment of a new Trustee or Trustees.

Under the provisions of section 13, as amended on December 30, 1943, the grantor reserved the right to amend or revoke the trust, in whole or in part, at any time up to and until none of the three trustees1956 U.S. Tax Ct. LEXIS 79">*87 named in section 13, as amended, namely, Reavis, Fawcett, and Franke remained in the office of trustee, at which time the trust shall become irrevocable and not subject to amendment. Also, under the provisions of section 13, as amended, the grantor could amend or revoke, in whole or in part, the trust with the written consent of the two named trustees in office, Reavis and Fawcett. Or if either Reavis or Fawcett no longer served as a trustee, then the revocation or amendment by the grantor could be made with the written consent of each one of such of the following trustees, Reavis, Fawcett, and Franke, who served as a trustee at the time of the proposed amendment or revocation. In other words, by the terms of the amendment of section 13, on December 30, 1943, the grantor could amend or revoke the trust with the written consent of either two trustees, or one trustee, out of three named trustees, depending upon whether two or one of the three named trustees was in the office of a trustee.

26 T.C. 1172">*1176 The trust was further amended by the grantor, with the written consent of Reavis and Fawcett, by instrument dated December 12, 1946, so as to provide for the payment by the trustees of1956 U.S. Tax Ct. LEXIS 79">*88 any estate and inheritance taxes arising out of the inclusion of the trust property in the grantor's estate, out of the income or principal of the trust estate.

From the date of the creation of the trust and until the death of Hazel B. Beckman on January 22, 1947, Reavis served in the office of trustee. Also, prior to and until the grantor's death, Fawcett served in the office of trustee. Reavis and Fawcett survived Hazel B. Beckman. The trust did not become an irrevocable trust, under the terms of the trust, as amended, during the lifetime of Hazel B. Beckman.

Neither Jules S. Bache, Reavis, nor Fawcett had any beneficial interest in the trust.

An amended estate tax return was filed on behalf of the Estate of Hazel B. Beckman, Deceased, on October 11, 1948, in which the assets of the trust were reported as includible in her estate. The Estate of Hazel B. Beckman, Deceased, as finally determined by the Commissioner for the purpose of Federal estate tax, had a total value of $ 2,402,260.05, which amount included the 15,500 shares of stock of Wenonah Development Company, the entire corpus of the trust, at a value of $ 144.18 per share, or $ 2,234,790. The value of the stock of 1956 U.S. Tax Ct. LEXIS 79">*89 Wenonah Development Company was $ 144.18 per share at the date of death of Hazel B. Beckman.

The total amount of the estate tax determined by the Commissioner against the Estate of Hazel B. Beckman, Deceased, was $ 920,907.42, of which the petitioner trust paid $ 897,379.64 on or about November 20 and 21, 1950. The petitioner trust charged the payments to the capital account of the trust on its books.

In order to make these payments of estate tax, the petitioner trust, by agreement dated November 10, 1950, agreed to sell, as of November 15, 1950, to Wenonah Development Company 4,586.85728 shares of capital stock of Wenonah Development Company at a total sales price of $ 897,379.64.

In its income tax return for the year 1950 petitioner reported a long-term capital gain resulting from the sale of the stock as follows:

The Commissioner determined the basis of the 4,586.85728 shares of stock to be about $ 56.71 per share, or $ 260,159.22, which was the basis of the stock in the hands of Hazel B. Beckman, 1956 U.S. Tax Ct. LEXIS 79">*90 the grantor, rather 26 T.C. 1172">*1177 than the value of the stock at the date of the grantor's death. Accordingly, the respondent increased the amount of the capital gain realized in the taxable year by $ 401,173.86, of which 50 per cent, $ 200,586.93, was taken into account.

The stipulated facts are incorporated herein by this reference.

The Commissioner stated in part in the deficiency notice that:

(a) It has been determined that the cost basis of 4,586.85728 shares of Wenonah Development Co. stock sold by you during 1950 is $ 260,159.22 pursuant to section 113 (a) (2) of the Internal Revenue Code [1939]. * * *

OPINION.

The petitioner, the Beckman trust, sold in the taxable year, which was after the death of the petitioner's creator, Hazel B. Beckman, some of the Wenonah stock which she had transferred to the Beckman trust at the time she created the trust on May 3, 1932. The question is, "What is the basis of the stock for the purpose of computing the amount of petitioner's capital gain?"

The petitioner contends that the second sentence of section 113 (a) (5), 1939 Code, as it applies to property transferred by a grantor dying before January 1, 1952 (i. e., prior to amendment thereof1956 U.S. Tax Ct. LEXIS 79">*91 by section 203 of the Technical Changes Act of 1953), is controlling. It provides as follows:

In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor's death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor's death. * * * [Emphasis supplied.]

If the second sentence of section 113 (a) (5) is controlling here, the basis of the stock is its value at the date of the grantor's death, or $ 144.18 per share.

The respondent has determined that the basis of the stock is the same as it would be in the hands of the grantor, or about $ 56.71 per share. He made this determination under section 113 (a) (2), and on brief he contends that the basis of the trust property was properly determined under section 113 (a) (2). ¹ The pertinent provisions of section 11326 T.C. 1172">*1178 (a) (2) and (5), as amended by section 143 of the Revenue1956 U.S. Tax Ct. LEXIS 79">*92 Act of 1942, and as they apply to property transferred by a grantor dying before January 1, 1952, are set forth in the margin. ²

1956 U.S. Tax Ct. LEXIS 79">*93 Since the basis provisions of section 113 (a) (2) apply to property acquired by a transfer in trust by a gift (cf. sec. 113 (a) (3), as amended by sec. 143 (b), 1942 Act); and since the second sentence of section 113 (a) (5) excepts from the operation of section 113 (a) (2) property transferred to a trust which reserves to the grantor the trust income for life and the right to revoke the trust, and treats such transfer of property to a trust as if the trust instrument had been a will executed on the day of the grantor's death, the issue before us turns on whether the Beckman trust comes within section 113 (a) (5). That is to say, the question is whether the transfer of the stock to the Beckman trust is to be treated as a testamentary transfer or an inter vivos gift to a trust.

The question is one of first impression under section 113 (a) (5).

The Beckman trust instrument was a trust, the income of which was payable to the grantor for life. Therefore, it meets one of the specifications of the second sentence of section 113 (a) (5). The trust instrument also reserved to the grantor at all times prior to her death the right to revoke the trust with the consent of two nonadverse trustees, 1956 U.S. Tax Ct. LEXIS 79">*94 or one nonadverse trustee, as the situation might exist. It is the nature of the reserved power to revoke, set forth in the amended trust instrument, which gives rise to the issue because respondent takes the view that the specification in section 113 (a) (5) is not met if the power to revoke which is reserved to the grantor in the trust instrument is a power to revoke in conjunction with another person, even though that person does not have any adverse interest in the trust. The petitioner argues, in effect, that the intendment and purpose of section 113 (a) (5), which relates to the basis of property 26 T.C. 1172">*1179 transmitted at death, becomes evident by comparison with section 113 (a) (2), which relates to the basis of property acquired by gift, and by giving consideration to the principles underlying the gift tax provision of the Code and the established rules of law pertaining to gifts for Federal tax purposes. That is to say, the petitioner contends that since, for tax purposes, "a gift is not consummate until put beyond recall," Burnet v. Guggenheim, 288 U.S. 280">288 U.S. 280, 288 U.S. 280">286; and since a transfer of property in trust where the power to revest in 1956 U.S. Tax Ct. LEXIS 79">*95 the donor title to such property is vested in the donor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such property or the income therefrom, is not a completed gift (Regs. 108, sec. 86.13); it is proper to conclude that there is no essential difference, for purposes of the second sentence of section 113 (a) (5), between a trust which reserves to the grantor at all times prior to death the right to revoke the trust in conjunction with a trustee who does not have an adverse interest, and a trust which reserves to the grantor alone the right to revoke the trust.

It is concluded that the Beckman trust comes within the provisions of the second sentence of section 113 (a) (5), and, therefore, that the basis of the stock transferred to the trust in petitioner's hands, after the death of the grantor, is the fair market value at the date of the grantor's death. In arriving at this conclusion, we have given consideration to the legislative history, such as there is, of the original enactment of section 113 (a) (5) as section 113 (a) (5) of the Revenue Act of 1928; to the committee reports accompanying the revenue bill of 1928; 1956 U.S. Tax Ct. LEXIS 79">*96 and to established principles of tax law. It is not necessary to review all of these factors at length; what seems to be sufficient is set forth.

Prior to the Revenue Act of 1928, none of the revenue acts specifically provided for the basis to be employed in computing gain or loss on a sale of property by an executor or administrator. Nevertheless, for many years, the Commissioner's regulations provided that the basis should be the fair market value of the property at the decedent's death, until the decision in McKinney v. United States, 62 Ct. Cl. 180">62 Ct. Cl. 180 (1926), certiorari denied 273 U.S. 716">273 U.S. 716, in which the Court of Claims held that the basis in the hands of the executor or administrator is the same as the basis in the hands of the decedent. This Court (then the Board of Tax Appeals) took the contrary view, holding in Dorothy Payne Whitney Straight, Executrix, 7 B. T. A. 177 (1927), that the basis for determining gain or loss in the hands of an executrix was the value of the property at the date of the decedent's death. Following denial of certiorari in the McKinney case, the Commissioner1956 U.S. Tax Ct. LEXIS 79">*97 promulgated Treasury Decisions 4010, 4011, and 4012 changing his previous rule so as to provide that basis in the hands of an executor 26 T.C. 1172">*1180 or administrator should be the same as it would have been if the decedent had sold the property. Report of the Joint Committee of Congress on Internal Revenue Taxation to the Committee on Ways and Means and to the Committee on Finance, dated Nov. 15, 1927, p. 74. As a result, and upon requests and recommendations to the Committee on Ways and Means, section 113 (a) (5) was enacted. Some of its provisions served clarification purposes. It took the place of section 204 (a) (5) of the 1926 Revenue Act. See Seidman, Legislative History of Federal Income Tax Laws, 1933-1861, pp. 532, 533, 534, which contains excerpts from committee reports and references to the hearings of the Committee on Ways and Means.

At the time that the provisions of section 113 (a) (5) of the 1928 Act were being considered, what is now the second sentence of section 113 (a) (5) was written into the draft, when the revenue bill of 1928 was in the committee of conference, as a special rule, and the purpose thereof is stated in the conference report, H. Rept. No. 1882, 1956 U.S. Tax Ct. LEXIS 79">*98 70th Cong., 1st Sess., p. 15, 1939- 1 C. B. (Part 2) 447-8, as follows:

A special rule is provided in section 113 (a) (5) by which to determine the basis of property transferred in trust with the right reserved to the grantor at all times prior to his death to revoke the trust where the sale or other disposition of property occurs after the death of the grantor. This rule includes sales or other dispositions by the trustee and also by a beneficiary of the trust. In view of the complete right of revocation in such cases on the part of the grantor at all times between the date of creation of the trust and his death, it is proper to view the property for all practical purposes as belonging to the grantor rather than the beneficiaries and to treat the property as vesting in the beneficiaries according to the terms of the trust instrument, not at the date of creation of the trust, but rather on the date of the grantor's death, for the purpose of determining gain or loss on sale or other disposition of the property after the grantor's death by the trustee or by a beneficiary. Accordingly, it is provided that the basis of such property in the hands of1956 U.S. Tax Ct. LEXIS 79">*99 the persons entitled thereto by the terms of the trust instrument after the grantor's death shall be the same as if the trust instrument had been a will executed on the date of his death. Thus property acquired by virtue of revocable trusts of the kind described is treated, for all practical purposes, the same as though it had been transmitted by the grantor by will at his death. [Emphasis supplied.]

As we understand the limited record of the legislative history of what is now the second sentence of section 113 (a) (5), it was added to the draft of that section in the interest of uniformity with the treatment given to an executor or administrator in the preceding part of the section. The rule by which to determine the basis of property transferred in trust with the right reserved to the grantor to revoke the trust prior to his death, where the sale of such property occurred after the death of the grantor, was so stated (as we understand) so that a trustee or beneficiary who sold such property after the death of the grantor would be in the same position, with respect to basis, as an 26 T.C. 1172">*1181 executor or administrator who sold property; i. e., the basis of property sold by 1956 U.S. Tax Ct. LEXIS 79">*100 an executor, or an administrator, or a trustee of the kind of trust described, or a beneficiary of such trust would be, in the hands of each, the fair market value of the property at the time of the death of the decedent.

We think it is made clear in the above-quoted part of the conference report that the legislators were dealing with (in what is now the second sentence of section 113 (a) (5)) those trusts where the property, transferred in trust with the income to be paid to the grantor for life with the right reserved at all times from the creation of the trust until death to the grantor to revoke the trust, should be viewed, "for all practical purposes," "as belonging to the grantor rather than the beneficiaries." With respect to property transferred to such trust, it was intended that for the purpose of determining gain or loss, the property should be treated as vesting in the beneficiaries according to the terms of the trust instrument, "not at the date of the creation of the trust," in which event the basis of the property would be the same as it would be in the hands of the grantor (sec. 113 (a) (2)), "but rather on the date of the grantor's death," so that the basis of the 1956 U.S. Tax Ct. LEXIS 79">*101 property would be the same as if the property had been acquired under a will executed on the date of death, namely, fair market value at the time of death.

The intent throughout section 113 (a) (5) was, as we understand and as heretofore stated, to introduce a uniform rule on the matter of the basis of property upon sale thereof after the death of a decedent; and the inclusion in section 113 (a) (5) of a special rule on basis of property transferred to a trust under the terms of which the property transferred in trust did not vest in the beneficiaries until the death of the grantor was to give effect to the principle that a gift is not consummate until it is beyond recall. Under this view, the respondent's position in this case calls for a restricted and narrow construction of the word "revoke" in section 113 (a) (5) which we believe was not intended by the legislators. Moreover, under this view, we believe it is proper, in construing and applying section 113 (a) (5), to consider whether the terms of the trust instrument reserved to the grantor such control over the ownership of the property and the income of the property transferred in trust as to continue such ownership in the 1956 U.S. Tax Ct. LEXIS 79">*102 grantor at all times from the creation of the trust until the grantor's death. In order to do this, we should not consider the trust indenture provision relating to revocation as an element apart from the provisions reserving the trust income to the grantor for life; and we should consider the trust indenture provision relating to revocation in the light of the rules pertaining to completed inter vivos gifts. From this 26 T.C. 1172">*1182 standpoint, it is pertinent to recall the rules expressed in the following authorities:

The mere interest of a trustee is not an adverse interest. Where taxing acts are involved, we look not to the refinements of title but to the actual command over the property taxed. Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, 281 U.S. 376">378; Tyler v. United States, 281 U.S. 497">281 U.S. 497. See also Reinecke v. Smith, 289 U.S. 172">289 U.S. 172, which states that

A settlor who at every moment retains the power to repossess the corpus and enjoy the income has such a measure of control as justifies the imposition of the tax on him * * *. We think Congress may with reason declare that where one has placed his 1956 U.S. Tax Ct. LEXIS 79">*103 property in trust subject to a right of revocation in himself and another, not a beneficiary, he shall be deemed to be in control of the property.

Under the gift tax regulations, Regulations 108, section 86.3, a gift is not complete if the donor reserves the power to revest the beneficial title to property in himself; and

A donor shall be considered as himself having the power [to revest beneficial title to property in himself] where it is exercisable by him in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom. A trustee, as such, is not a person having an adverse interest in the disposition of the trust property or its income.

There is no doubt whatever, and the respondent has been unable to establish the contrary, that under the terms of the trust instrument, Hazel Beckman's transfer of the Wenonah stock to the trust at its creation was an incomplete gift; that she retained, for all practical purposes, the right to revest the beneficial interest in the stock in herself; and that the power to retake the beneficial interest in the property remained in her until her death. Estate of Sanford v. Commisssioner, 308 U.S. 39">308 U.S. 39;1956 U.S. Tax Ct. LEXIS 79">*104 288 U.S. 280">Burnet v. Guggenheim, supra,Camp v. Commissioner, 195 F.2d 999, 1152; 289 U.S. 172">Reinecke v. Smith, supra. It must be concluded that under the terms of the Beckman trust instrument, for all practical purposes, the stock belonged to the grantor and did not vest in the beneficiaries of the trust until the death of the grantor. Accordingly, the Beckman trust comes within the intendment of the second sentence of section 113 (a) (5). The respondent's determination is reversed.

Both parties have cited Minnie M. Fay Trust "A", 42 B. T. A. 765. There the trust did not reserve to the grantor any power of revocation. That case is not controlling here.

Decision will be entered for the petitioner.