Kenan v. Commissioner
114 F.2d 217 (2d Cir. 1940)

  • 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.