Citizen’s National Bank of Waco v. United States

Citizen’s National Bank (plaintiff) served as trustee over multiple trusts. The settlors of the trusts acquired all stock in Bosque Investment Company (Bosque) in 1950 with a basis of $498,468. A few years later, the settlors borrowed $500,000 and pledged the Bosque stock as collateral for the loan. When the trusts were established, the Bosque stock was worth $714,601 and was encumbered by the noted loan, with the debt being assumed by the trusts. When the settlors transferred the Bosque stock, the settlors reported the transfer on their income taxes as the difference between the indebtedness secured by the stock ($500,000) and the settlor’s basis in the stock ($498,468) as a long-term capital gain. The settlors paid that tax accordingly and filed gift-tax returns, reporting the overage of the total value of the property ($714,601) over the indebtedness transferred ($500,000) as a gift. After the trusts were established, Bosque was liquidated, and its assets were distributed to the trusts. The trusts then filed their own 1961 tax returns and reported the relevant share of the fair market value of assets received, less the original basis in the trusts, and reported the corresponding gain as long-term capital gain, with each trust’s return reflecting tacking of the original trust settlor’s purchase date, with the purchase date listed being the date the settlor obtained the Bosque stock, not the date of transfer to the trust. This caught the government’s (defendant) attention, which argued that the capital gains must be short-term rather than long-term, as tacking was not permitted. Essentially, although the gift and sale rules allowed tacking, the government argued that the part-gift/part-sale rule only allowed tacking when the transferee paid more for the assets than the grantor’s original basis. The trustee then filed suit, and the trial court ruled that the trustees could use tacking, making the gains long-term. The government appealed, arguing that in a part-gift, part-sale transaction, no tacking must be allowed, as the calculation to find the basis made the transferor’s basis and the transferee’s basis the same.