Bingham died and her will left
Wise $5M to be paid on her 40th birthday, which was payable in either cash
or securities (aka stocks and bonds). Bingham's trustees paid Wise
partially in cash and partially in securities.
The securities had been
purchased by Bingham years earlier and had significantly appreciated in
value between the time Bingham died and when Wise received the
inheritance.
The IRS ordered the trustees
to pay $367k in taxes on the securities as a capital gain.
The IRS argued that if the
trustees had sold the securities and given the cash to Wise, then the
sale would have been a realized gain
and thus taxable.
The trustees argued that the
securities were an inheritance and should not be taxable because they had
not been sold and no gain was realized.
Basically the trustees were
saying that there was no realized gain until Wise sold the securities. They argued that this was more
like an exchange of property. If Bingham had given Wise a house in her
will, the estate would not be responsible for paying taxes on the
increased value of the house.
The Tax Court found for the
IRS. The trustees appealed.
The Appellate Court affirmed.
The Appellate Court looked
to the relevant section of the tax code (then 26 U.S.C. §117, now 26 U.S.C. §1222) and found that capital gain is
realized whenever there is a "sale or exchange."
In this case, the Court
found that there was an "exchange" when the securities were
transferred to Wise. Therefore, the gain was realized.
The Court found that since
Bingham's will offered the trustees a choice of paying Wise in cash or
securities, it was not the same as if Bingham had made a bequest of
property.
