*1040 Petitioner's decedent was president of the X corporation from 1930 until his death in February 1936. X made a practice of paying part of its officers' salaries in cash and giving them negotiable demand notes for the balance, taking as deductions from its income the entire amount of such salaries. This practice coincided with the wishes of its officers, who considered these notes the best investments they could make. X was solvent and the notes were worth their face amount. Decedent received notes of X during the years 1930 to 1935, inclusive. He reported two of these notes as income, but did not report the others. Respondent included the latter in decedent's income for the period January 1 to February 25, 1936, under section 42, Revenue Act of 1936. Held, the items of income represented by such notes were received by decedent in the periods in which such notes were issued to him and are not subject to the application of section 42, Act of 1936.
*1012 The Commissioner has determined a deficiency in income taxes*1041 in the amount of $5,312.84 against the petitioner's decedent for the period from January 1 to and including February 25, 1936, the date of decedent's death, based upon the failure of petitioner to include in the taxable income of the decedent for that period the amounts of certain demand notes held by decedent on his death, which had not been reported in decedent's taxable income for any prior taxable year. Petitioner has brought this proceeding for a redetermination of that deficiency.
The sole question presented is whether under the provisions of section 42 of the Revenue Act of 1936 the amounts of demand notes, and interest earned thereon, which were received by decedent as salary are taxable to him in the year of his death, since they were not reported as income by him in any prior year.
FINDINGS OF FACT.
Petitioner is the sole executor of the estate of George H. Letz, Sr., deceased, of Crown Point, Indiana, who died February 25, 1936. The income tax return for the decedent for the period of January 1 through February 25, 1936, was filed by petitioner with the office of the collector of internal revenue for the district of Indiana.
During the years involved in the*1042 present controversy decedent was at all times employed as president of the Letz Manufacturing Co., an Indiana corporation engaged in the manufacture of agricultural implements. During the years 1930 to 1936, inclusive, the company made a practice of issuing demand notes bearing interest at 5 percent per annum to its officers for a portion of their salaries. The officers were paid in cash only a portion of their annual salaries, and the remainder was credited to their accounts on the books of the company. The company claimed and was allowed a deduction of the total amount of such salaries, both the part paid in cash and the amount represented by credits and notes. The decedent and his brothers and sister, codirectors of the company, elected to leave these amounts with the company and accept notes therefor because they considered it the best investment they could make with their earnings.
The following table indicates the notes made payable to decedent on demand, the dates of issue of these notes, and their amounts:
| Date | Consideration | Amount |
| 5/31/30 | Unpaid salary accrued to date | $14,279.98 |
| 5/31/31 | do | 13,359.83 |
| 5/31/32 | do | 13,403.65 |
| 6/ 1/33 | do | 2,511.60 |
| 6/ 1/33 | Interest on notes for year ended 5/31/33 | 2,564.91 |
| 5/31/34 | Interest on notes for year ended 5/31/34 | 2,391.28 |
| 6/ 1/35 | Interest on notes for year ended 5/31/35 | 2,560.84 |
| Total | 51,072.09 |
*1043 *1013 In addition to the foregoing notes issued to decedent by the company there were also two more notes:
| Date | Consideration | Amount |
| 6/ 1/35 | Renewal of note inherited from E. H. Letz | $1,000 |
| 12/15/35 | do | 500 |
| Total | 1,500 |
These last two notes were received by decedent from the estate of his sister, Eva H. Letz, on her death. The original amount of these notes to Eva H. Letz was different, but certain cash payments made between May 31, 1933, and December 1935, had reduced the balance due thereon to $1,500.
The total of the nine notes mentioned above is $52,572.09. On these notes payment was made of $1,659 on June 4, 1934, and on May 31, 1935, there was charged against these notes on the books of the company the sum of $2,035.71 representing an amount due the corporation on an open account and debited against decedent. Decedent's estate turned over to the company an interest in certain bonds in the amount of $3,031.03, plus accumulated interest thereon in the amount of $65.65, which amounts were credited to him. On May 31, 1936, a single note was issued to decedent's estate by the company in the amount of $51,974.06 representing the total*1044 of the nine notes aforementioned in the amount of $52,572.09, as adjusted by the debits and credits just mentioned.
One of the aforementioned notes was reported by decedent in his income tax return for the year in which the note was issued to decedent by the company; that is, the note in the principal amount of $2,560.84 issued in 1935. With regard to the demand note dated May 30, 1931, in the principal amount of $13,359.83, it was held by the internal revenue agent in charge in 1933 that this amount was constructively received by decedent in 1931 and was properly includable in his income for the year 1931. Taxes were paid on these amounts, and respondent does not now seek to tax these amounts again to decedent. None of the remaining seven notes was reported as income by the decedent, except that, due to the various adjustments, the note of May 31, 1932, was called in and a new note issued May 31, 1936, in the amount of $12,805.62, of which $9,708.94 had not been taxed. Decedent kept his books and reported his income on a cash basis.
The notes above referred to were on their faces demand notes payable to decedent or his order. At all times after their issuance they were*1045 worth 100 cents on the dollar, the company was solvent, and payment in full could have been had by demand on the company, *1014 except for a short period of a few months in 1935 when, pursuant to a loan agreement between the company and the First National Bank of Chicago in the amount of $50,000, payment of outstanding notes to the officers of the company was subordinated to payment of the loan to the bank. This loan was paid off in full during the year 1935.
No waivers were ever signed with regard to any taxable years as to which the statute of limitations had already or might in the future bar the respondent from determining ordinary deficiencies, although requests therefor were made by an internal revenue agent in 1933, when examination of the books of decedent's brother, Otto, was made. No examination of decedent's books was made at this time, although those books and records were always available to respondent's agent.
OPINION.
KERN: As previously stated, the sole issue for our determination is whether the Commissioner correctly included within the taxable income of decedent for the period of January 1 to February 25, 1936 (the date of his death), the total of*1046 certain amounts credited to decedent on the books of the Letz Manufacturing Co. prior to January 1, 1936, which credits were evidenced by negotiable notes payable on demand then held by decedent. As set forth in our findings of fact, part of this amount was attributable to back salary and interest thereon and the remaining $1,500 was by reason of a credit inherited from the estate of decedent's sister.
At all times, except for a period of a few months in 1935, the amounts of these notes were subject to decedent's demand for payment. The testimony of the manager of the Port Authority Branch of the National City Bank and John H. Letz, a responsible officer of the Letz Manufacturing Co., as supplemented by the books of that company, has convinced us that the notes held by decedent were at all times worth their face amount and could have been paid by the company on decedent's demand at any time up until the date of his death, except for a short restricted period in 1935 not deemed material.
Petitioner, therefore, urges us to find that the various amounts credited to his decedent were constructively received by him in the years when first credited to his account. This doctrine*1047 of constructive receipt is of importance only where taxpayers keep their books and report their income on a cash receipts and disbursements basis. If a certain income is made subject to his unqualified control within a taxable year, we say that that income was received by the taxpayer within the taxable year even though not reduced to possession until *1015 a later date. In the instant case the decedent could have had receipt upon demand. The corporation was solvent. Therefore, if the respondent had determined that decedent had constructively received from the corporation the amounts called for by the several notes in the years of their respective issue, we would have perforce sustained such a determination. ; ; ; .
However, because of the latent equitable character of this doctrine of constructive receipt, we doubt whether under the circumstances of this case, petitioner can invoke its application. *1048 ; affd., .
We do not labor this point, for we feel that there has been more than constructive receipt by decedent of the amounts evidenced by the notes. By a long standing regulation taxpayers are required to include in income notes received by them in payment for services to the amount of their fair market value. Regulations 94, article 22 (a)-4, which does not differ materially from prior regulations, provides as follows:
Notes or other evidences of indebtedness received in payment for services constitute income to the amount of their fair market value. A taxpayer receiving as compensation a note regarded as good for its face value at maturity, but not bearing interest, shall treat as income as of the time of receipt the fair discounted value of the note at such time. Thus, if it appears that such a note is or could be discounted on a 6 percent basis, the recipient shall include such note in his gross income to the amount of its face value less discount computed at the prevailing rate for such transactions. If the payments due on a note so accounted for are met as they become due, there*1049 should be included as income in respect of each such payment so much thereof as represents recovery for the discount originally deducted.
The theory of this and similar regulations is that the taxpayer receiving a note having a fair market value has actually received as income something of value equivalent, to the extent of that value, to cash, which is just as includible in his income as cash would be. . Its receipt is not a fiction, to be used as a juridical tool for the accomplishment of an equitable result, but is a factual reality.
In the instant proceeding, when notes payable to decedent or his order on demand were issued, representing credits on account of salary payable to him, decedent had not only constructively received the income but must be treated as having actually received cash to the extent of their fair market value, which we have found to be the face amount thereof. ; Roswell Magill on "Taxable Income", pp. 156, 157. The evidence discloses that the original negotiable demand notes were all issued prior to the taxable year, and, consequently, the amounts*1050 in question were properly includible *1016 in decedent's taxable income prior to the taxable period here before us.
Thus it is clear that decedent should have reported as income those credits in the years in which they first became subject to his unfettered command. This he did not do except in two instances, and those particular credits are not in issue. Since the amounts were properly taxable to the decedent prior to 1936 and all facts relative thereto were open to the Commissioner's agents prior to 1936, the petitioner argues that section 42 of the Revenue Act of 1936 has no applicability here. That section reads as follows:
SEC. 42. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.
* * * In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. [Emphasis ours.]
Whether or not petitioner is taxable depends upon the construction and effect of the italicized words of the statute. Thus it becomes necessary to ascertain the meaning of those words. *1051 The entire last sentence of section 42, set forth above, is relatively new. Section 42 of the 1934 and 1936 laws repeats the provision contained in the 1918 and subsequent laws that items of gross income shall be included in the return for the year in which the taxpayer receives them, unless, under his method of accounting, they should properly be accounted for as of a different period; and then adds the new matter set forth above. The section is one primarily concerned with accounting. The purpose behind and the reason for the addition of this new sentence to section 42 is probably best set forth in the report of the House Ways and Means Committee, 73d Cong. (1934), 2d sess., H. Rept. 704, p. 24, wherein it is stated that the courts have held that income accrued to a decedent on the cash basis prior to his death is not income to the estate, and under the law as it then existed, unless such income be taxable to the decedent, it would escape income taxation altogether. The Committee reported that section 42, therefore, had been drawn to require the inclusion in the income of a decedent of all amounts accrued up to the date of his death regardless of the fact that the taxpayer may*1052 have kept his books on the cash basis. Since no further purpose is attributed to the proposed addition in the subcommittee reports or the reports of the Senate Finance Committee or the Conference Committee, we conclude that the new matter was intended to apply to only one situation, that is, where income was accruable in the broad sense of the word by a decedent, who was on a cash basis, prior to his death, but was reduced to possession only after his death. Our interpretation of this section is substantiated by the words of the *1017 section itself: "if not otherwise properly includible in respect of such period or a prior period."
Respondent argues that the rationale of , is that the intention of Congress in enacting section 42 was "to reach all income earned during the life of a decedent that would otherwise escape the income tax," citing . The interpretation placed upon this quotation is unwarranted. When properly construed, in the light of its context, the words of the court, supra, should read "all income earned during the life of a decedent but not*1053 received by him * * *."
The words of the section itself preclude such an interpretation. It refers only to "amounts accrued." Obviously, amounts received are not "amounts accrued." Here, as we have shown, decedent actually received the items of income in years prior to his death. Section 42 further limits its application to "amounts accrued * * * if not otherwise properly includible in respect of * * * a prior period." As we have shown, the items of income here involved were properly includible in decedent's income in periods prior to the taxable period in which the date of his death fell.
Where the words of a tax statute limit its applicability it can not be argued that untoward circumstances made it applicable to the specific circumstances under which the lawmakers provided that it should be impotent.
There is a further point of controversy between the parties. The Commissioner included the amount of $35,707.04 in the decedent's income tax return for the taxable period before us as representing the total of salary and interest credited to decedent on the company's books on his death which had not been previously included in taxable income of the decedent. Petitioner claims*1054 that the total amount of salary and interest credited to decedent on the company's books at his death which had not been previously included in income of decedent is not $35,707.04 but $31,456.72. We have concluded from the evidence that the total amount credited to decedent by the company on his death was $51,974.06, of which amount $1,500 was inherited by decedent and $3,096.68 represented decedent's share in a certain bond issue which was transferred to the company. It appears that the respondent does not seek to include these latter two amounts within the unreported income claimed to give rise to the asserted deficiency, for respondent's brief states that the issue involves only accrued salary and interest. The parties have agreed that income tax has already been paid on salary and interest in the amount of $15.920.67, included in the total amount credited to decedent at the time of his death. The bookkeeper for the company having testified *1018 that these were the only credits outstanding in decedent's favor on the company's books at his death, we conclude that respondent's total is erroneous and accept the figures as proven by petitioner and set forth in our findings*1055 of fact. Since we have already determined the law to be in petitioner's favor, however, this rejection of respondent's determination is of no importance.
Reviewed by the Board.
Decision will be entered under Rule 50.
STERNHAGEN, ARUNDELL, BLACK, MELLOTT, and OPPER dissent.