## Facts

- Parents acquired all stock of a closely held corporation (Bosque Investment Company) in 1950 with an aggregate basis of $498,468.
- The parents later borrowed $500,000 and pledged the Bosque stock as collateral.
- The parents created separate trusts for their children and transferred all Bosque stock to the trusts when the stock’s value was $714,601, subject to the $500,000 indebtedness.
- The trusts assumed the $500,000 debt; the transfer was treated as part sale (debt assumed) and part gift (value exceeding the debt).
- On their 1961 returns, the parents reported long-term capital gain to the extent debt assumed exceeded their basis and filed gift tax returns for the excess value over the debt.
- Less than six months after the transfer, Bosque liquidated and distributed its assets to the trusts.
- The trusts reported the liquidation gain as long-term capital gain by using the parents’ original acquisition date, thereby tacking the parents’ holding period.
- The IRS recharacterized the trusts’ gain as short-term on the theory that tacking was not allowed for this part gift–part sale transfer, and the trustee sued for a refund.

## Issues

1. Whether trusts receiving stock in a part gift–part sale transfer may tack the settlors’ holding period to determine long-term capital gain on a subsequent liquidation.
2. Whether the applicable Treasury Regulations bar tacking in part gift–part sale transactions unless the transferee’s “cost” exceeds the transferor’s basis.

## Decision

- The Fifth Circuit affirmed the judgment for the trustee.
- The court held the trustee could tack the settlors’ holding period to the trusts’ holding period.
- The liquidation gains were properly treated as long-term capital gains rather than short-term capital gains.

## Legal Principles

- When a transferee’s basis in property is determined by reference to the transferor’s basis, the holding period generally carries over to the transferee absent a clear regulatory prohibition.
- A transfer that is part sale (assumption of debt) and part gift does not, by itself, prevent tacking of the transferor’s holding period.
- Treasury Regulations governing part gift–part sale transactions should not be read to create technical, irrational distinctions that deny long-term treatment where the regulatory text does not clearly require that result.

## Conclusion

The Fifth Circuit held that stock transferred to trusts subject to assumed debt in a part gift–part sale transaction carried the settlors’ holding period to the trusts, making the trusts’ liquidation gains long-term capital gains.


Citizen’s Nat’l Bank of Waco, Tr. v. United States, 417 F.2d 675 (5th Cir. 1969)