## Facts

- A decedent’s will placed her residuary estate in trust and directed trustees to pay her niece $5,000,000 when the niece reached age 40 or as soon thereafter as consistent with the estate’s interests.
- The will authorized the trustees, in their discretion, to satisfy certain payments either in cash or with marketable securities having equivalent value, with selection and valuation final in the trustees.
- When the niece turned 40, the trustees satisfied the $5,000,000 obligation using a mix of cash and marketable securities.
- The distributed securities had appreciated while held by the trust (some received from the estate, others purchased later).
- The Commissioner determined the trust realized taxable gain from the distribution of appreciated securities and assessed a capital-gain deficiency for the year at issue.
- The Board of Tax Appeals sustained the determination that gain was realized and treated as capital gain, but denied the Commissioner’s request to amend to seek ordinary-income treatment and an increased deficiency.
- The trustees sought review, arguing the distribution did not trigger gain; the Commissioner cross-petitioned, seeking ordinary-income characterization.

## Issues

1. Whether a trust realizes taxable gain when it uses appreciated securities to satisfy a fixed-dollar (pecuniary) obligation to a beneficiary, absent a cash sale to a third party.
2. If gain is realized, whether the transaction is treated as a “sale or exchange” of capital assets subject to capital-gain treatment rather than ordinary income.

## Decision

- The court held the trust realized taxable gain by transferring appreciated securities to satisfy the beneficiary’s fixed $5,000,000 claim.
- The court held the gain was capital gain because the transfer functioned as a taxable “sale or exchange” of capital assets within the capital-gain statute.
- The court affirmed the Board of Tax Appeals and rejected the Commissioner’s attempt to recharacterize the gain as ordinary income and increase the deficiency.

## Legal Principles

- Using appreciated property to discharge a fixed-dollar obligation is a taxable realization event to the transferor because the property’s appreciation is effectively converted into satisfaction of a money claim.
- The satisfaction of a pecuniary bequest with appreciated securities is treated as an exchange of the securities for the release of the beneficiary’s enforceable claim, even without a conventional market sale.
- “Sale or exchange” in the capital-gain provisions is construed broadly to include transfers of capital assets made in satisfaction of money obligations.
- A distribution of appreciated property to satisfy a pecuniary obligation is distinguished from a specific bequest of identified property, which does not involve using assets to discharge a fixed-dollar debt.

## Conclusion

A trust that satisfies a fixed $5 million bequest by distributing appreciated securities recognizes taxable gain, and the gain is treated as capital gain because the transfer is treated as an exchange of the securities for discharge of the beneficiary’s pecuniary claim.


Kenan v. Comm’r, 114 F.2d 217 (2d Cir. 1940)