*259 Decision will be entered under Rule 50.
1. By written agreement, petitioner was employed for the calendar year 1938 by Wilmington Construction Company as its general building superintendent, for which he was to receive a fixed salary plus 50 per cent of the corporate profits. At the end of the year, no further written agreement was executed, but petitioner continued in his employment with Wilmington on the understanding that his remuneration would continue to include 50 per cent of Wilmington's profits. Edge Moor Realty Company was later organized, and petitioner became its general manager under a similar understanding. Howard Perkins was president of Wilmington, and he and his wife, Alexandrine Perkins, owned all of the stock of Wilmington and Edge Moor.
2. Perkins was killed on July 10, 1947, in the crash of an airplane owned by Wilmington. Petitioner, a passenger in the plane, was injured in the crash, and subsequently filed suit against Wilmington for damages to cover the injuries sustained. Petitioner's employment by Wilmington was thereafter terminated, and based on his understanding of the terms of his employment, he made claim to one-half of the assets of Wilmington*260 and Edge Moor, after allowing for the capital contributed to each corporation by Perkins and Alexandrine. As being without merit, both Alexandrine and Perkins' estate resisted petitioner's claim against Wilmington and Edge Moor. At that time, petitioner, Perkins' estate, Alexandrine, and Edge Moor were indebted to Wilmington for substantial and undisputed amounts. After extended negotiations, the claims as between petitioner and Wilmington and Edge Moor, and as between Wilmington and Alexandrine, Perkins' estate, and Edge Moor were all settled in one settlement, and all of the parties thereto in joint instrument executed mutual releases.
3. Under the settlement, Alexandrine transferred all of the Wilmington stock to petitioner, receiving therefor $ 5,335.34 in cash and certain accounts receivable, notes, and accrued interest covering amounts owing to Wilmington by Alexandrine, Perkins' estate, Edge Moor, and Highland Gardens Realty Company. Petitioner received the Wilmington stock and cash in a net amount of $ 15,986.95. He released Wilmington and Edge Moor from his claim to one-half the corporate profits of each. In addition, and in satisfaction of his claim for injuries resulting*261 from the airplane crash, he received $ 35,000 from Wilmington and $ 5,000 from Wilmington's insurer.
4. Held, that the Wilmington stock and the net amount in cash were received by petitioner in settlement of his claim for 50 per cent of the profits of Wilmington and Edge Moor, and represented compensation for the services he had previously rendered those corporations.
*759 The respondent determined a deficiency in income tax against the petitioners for the year 1949 in the amount of $ 318,998.62. The issues raised are (1) whether petitioner Joseph R. Culhane, in 1949, constructively received a dividend in the amount of $ 450,000 from Wilmington Construction Company, and (2), in the alternative, *262 whether in 1949 he received payment of compensation for prior services in the form of the stock of Wilmington Construction Company and to the extent of the fair market value thereof.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
The petitioners are husband and wife, and residents of West Chester, Pennsylvania. They filed their joint income tax return for the year 1949 with the collector of internal revenue for the first district of Pennsylvania. The return was filed on a cash basis and by the calendar year.
Joseph R. Culhane, hereafter referred to as petitioner, had been in the building business for a number of years prior to 1937, and on occasions had testified as an expert witness in court proceedings involving *760 real estate valuations. In 1937, at a time when he was negotiating for the purchase of some lots in Edgewood Hills for building purposes, he encountered an old friend, Howard A. Perkins, who was an employee of the real estate department of the duPont Company. Perkins expressed an interest in going into the construction business with petitioner, with Perkins to provide the capital and petitioner the "know-how."
On December*263 31, 1937, the Wilmington Construction Company, hereafter referred to as Wilmington, was organized under the laws of Delaware. A stated purpose was to engage in real estate development and general contracting. The corporation was authorized to issue 1,000 shares of common stock having a par value of $ 100 per share. No other class of stock was authorized.
At the first meeting of the board of directors of Wilmington on January 4, 1938, Perkins was elected president and petitioner vice president. The original directors of the corporation were Perkins, Lammot duPont, Jr., and petitioner.
On January 6, 1938, certificate No. 1 for 150 shares of the common stock of Wilmington, having a par value of $ 100 per share, was issued to Perkins, in consideration of his payment of $ 15,000 to the corporation.
On January 11, 1938, an agreement between Wilmington and petitioner for the period January 1, 1938, to January 1, 1939, was executed. Petitioner agreed to act as general building superintendent for Wilmington, supervising its construction of residential properties, in return for which he was to receive $ 3,600 for the year, payable monthly, plus 50 per cent of the profits of the business. *264 The agreement provided that it was intended that the salary authorized for petitioner as vice president of Wilmington in the amount of $ 3,600, by a prior act of the board of directors, would be the same as the salary therein provided for him as general superintendent, except that as general superintendent he would be further entitled to 50 per cent of the profits.
In addition to 50 per cent of the profits of the business realized during the period of his employment, petitioner was also to be entitled to 50 per cent of the profits arising from houses erected during his employment but not sold until after the termination of such employment. In the case of such houses petitioner was to be limited to participation in the profits of no more than 12 houses so erected.
On July 22, 1938, certificate No. 2 for 100 shares of the common stock of Wilmington, having a par value of $ 100 per share, was issued to Alexandrine duPont Perkins, hereafter referred to as Alexandrine, then the wife of Perkins, in consideration of her payment of $ 10,000 to the corporation. Certificate No. 3 for 580 shares of the *761 common stock of Wilmington, having a par value of $ 100 per share, was issued*265 to Perkins on October 31, 1938, in consideration of his payment of $ 58,000 to the corporation.
At and after January 1, 1939, the final date of petitioner's employment under the written contract of January 1, 1938, no further written agreement of employment was executed, but petitioner had an understanding with Perkins that he would continue to work for Wilmington on the basis of a 50 per cent division of Wilmington's profits.
In 1939 or 1940, Edge Moor Realty Company, hereafter referred to as Edge Moor, was organized. Petitioner rendered services to Edge Moor under a similar understanding that he would be entitled to 50 per cent of the profits of that corporation.
At a special meeting of the stockholders of Wilmington held on May 9, 1940, Perkins and petitioner were appointed as its executive committee. Alexandrine was elected to the board of directors on November 24, 1941, after Lammot duPont, Jr., had resigned. There were no further changes in the board of directors or in the executive committee until after July 10, 1947, and Perkins continued as president and petitioner as vice president until that date.
On January 10, 1942, Wilmington's charter was amended, whereunder Wilmington's*266 authorized capital stock was increased to 2,000 shares of common stock having a par value of $ 100 per share. On May 8, 1942, certificate No. 4 for 700 shares of the common stock of Wilmington was issued to Alexandrine, in consideration of her payment of $ 70,000 to the corporation.
On August 7, 1946, Wilmington's board of directors authorized the payment of a dividend in the amount of $ 3 per share. This dividend was paid as follows:
| Number of | Amount of | |
| shares | dividend | |
| Alexandrine duPont Perkins | 800 | $ 2,400 |
| Howard A. Perkins | 730 | 2,190 |
At the same meeting, the directors authorized a cash bonus payment in the amount of $ 2,000 to petitioner.
Petitioner at no time prior to July 28, 1949, owned any of the shares of stock of Wilmington or Edge Moor.
Petitioner and Perkins, on July 10, 1947, were riding in a company airplane, which crashed. Perkins was killed, and petitioner was seriously injured.
As of the date of Perkins' death, on July 10, 1947, the capital stock of Wilmington was held as follows:
| Number of | |
| shares | |
| Alexandrine duPont Perkins | 800 |
| Howard A. Perkins | 730 |
*762 On August 8, 1947, Lammot duPont, Jr., was elected a director, and on *267 August 12, 1947, he was elected president of Wilmington.
Petitioner instituted a suit against Wilmington for $ 75,000 damages for personal injuries sustained in the plane crash of July 10, 1947. Wilmington had $ 100,000 insurance, but the insurer disclaimed liability under the policy, on the ground that the plane was not on company business at the time of the accident. The insurer did, however, assign counsel to represent Wilmington, and eventually agreed to pay petitioner $ 5,000, which was in addition to the $ 35,000 to be paid by Wilmington in settlement of the claim.
Although petitioner had been on friendly terms with Alexandrine during the lifetime of her husband, subsequent to Perkins' death petitioner found that she was extremely antagonistic. She indicated that she did not desire to remain associated with the construction business, but wished to divorce herself from it completely at the earliest possible moment.
Alexandrine married George W. Collier on March 30, 1948.
Petitioner, about 1 year after the plane accident, was dismissed from the employ of Wilmington and Edge Moor.
Based on the terms of his employment by Wilmington and Edge Moor, petitioner made a claim to one-half*268 of the assets of these corporations, less the amount of capital contributed by Perkins and Alexandrine. He sought legal counsel, and was advised that his claim would be difficult to prove. His attorney presented the claim to the attorney for Perkins' estate and Alexandrine and was informed that the claim was felt to have no merit, and would not be recognized.
At the same time, Perkins' estate, Alexandrine, Edge Moor, and petitioner owed substantial and undisputed amounts to Wilmington. The amounts due Wilmington from each of these parties as of July 31, 1947, November 30, 1948, and July 28, 1949, were as follows:
| July 31, 1947 | Nov. 30, 1948 | July 28, 1949 | |
| Estate of Howard A. Perkins | $ 95,363.23 | $ 97,142.29 | $ 97,142.29 |
| Alexandrine duPont Perkins | 16,884.86 | 16,594.47 | 16,594.47 |
| Edge Moor Realty Company | 6,317.37 | 305,155.07 | 305,155.07 |
| Joseph R. Culhane | (1) | 66,400.46 | 66,400.46 |
As a basis for negotiations for the settlement of petitioner's claims*269 against Wilmington and Edge Moor, petitioner's attorney, on July 28, 1948, wrote the following letter to the attorney for Alexandrine and Perkins' estate:
Re: Wilmington Construction CompanyEdge Moor Realty Company*763 I am authorized by Mr. Joseph R. Culhane to make the alternative proposals hereinafter stated in connection with the suggested purchase by Mr. Culhane of all of the outstanding capital stock (1) of both of the above named companies and (2) of the capital stock of Wilmington Construction Company only. In making these offers it should be understood that the same are made entirely without prejudice to Mr. Culhane's right to assert his claim to be the owner of 50% of the net assets of both companies in the event a settlement cannot be reached.
It is also to be understood that the offers here made are based upon the balance sheets of June 30, 1948, which have been furnished to Mr. Culhane, and contemplate the acquisition by Mr. Culhane of balance sheet positions. The proposals will require reaudited balance sheet for each company as of date of settlement, and if there are any decreases in asset values other than the specific revaluations made by Mr. Culhane*270 and hereafter noted, or revaluations below Mr. Culhane's figures, or, if there should then be disclosed liabilities, due or contingent, not presently shown (excluding, however, the specific contingent liabilities mentioned in this letter and of which Mr. Culhane has knowledge), the amounts of the offers herein contained shall be adjusted by the deduction of 50% of the amount of asset losses and 50% of the amount of any liabilities, presently due or contingent, not disclosed on the June 30, 1948, balance sheets. *
By way of further preliminary comment I would state that as a basis for these offers Mr. Culhane has had a revaluation made of certain*271 book assets. As to Wilmington Construction, Mr. Culhane's revaluations have resulted in the following changes:
The item appearing on the June 30, 1948 balance sheet entitled "Plans for Edge Moor Gardens Apartments" -- $ 9,742.98 -- has been determined to have no value.
The item "Land -- Edgewood Hills" which appears on the balance sheet at $ 131,860.32 has been revalued at $ 84,000, or 84 lots at $ 1000 a lot.
The item "Land -- McClure Tract" carried at $ 41,943.60 has been revalued at $ 20,000.
The item "Land -- Peters Tract" carried at $ 30,079.32 has been revalued at $ 20,000.
On the other hand Mr. Culhane has revalued the item "Completed Construction held for Investment -- Net of Depreciation -- Edge Moor Garden Houses" at $ 13,500, instead of $ 7,849.20 as carried on the June 30, 1948 balance sheet, and the item "Land -- Highland Gardens" at $ 10,000, instead of the balance sheet figure of $ 4,995.00.
With respect to Edge Moor Realty Company, three items --
Land on which Buildings are situated, Schedule A-1, $ 28,295.69
Buildings owned, Schedule A-2 (less reserve for depreciation), $ 196,940.75
Theatre + furniture & fixtures (less reserve for depreciation), $ 11,245.24*272 have been revalued at an aggregate of $ 182,400. This revaluation has been based upon the best offers received to date, to the knowledge of Mr. Culhane. In addition, the items, "Highland Gardens -- capital stock" carried at $ 500.00, *764 and "Tredyffrin Country Club" carried at $ 2,080.21 have been determined to be worthless. The two items "Improvements to land on Gov. Printz Blvd., $ 1,491.05" and "Land, not improved & not developed -- Schedule A-3" carried at $ 16,502.23, have been revalued at $ 12,000 in the aggregate.
The above are the specific revaluations made by Mr. Culhane in preparing his proposals and are excluded from the reservation above made as to settlement date adjustments, unless re-audited balance sheets as of that date disclose, as to any item, a figure less than Mr. Culhane's revaluations.
The following proposals also take into consideration certain contingent liabilities which do not appear*273 on the June 30, 1948 balance sheets. They are --
1. The pending Waldo [sic] suit against Wilmington Construction Company and Edge Moor Realty Company for $ 86,000.
2. A contingent tax liability based upon possible disallowance by the Bureau of the long term capital gain basis used in tax reports for 1945, 1946, and 1947, and involving, if the reported basis be disallowed, additional taxes in the amount of approximately $ 120,000.
3. Liabilities under the Highland Gardens bonds of about $ 3,000,000.
These items of contingent liabilities are likewise excluded from the reservation pertaining to settlement date adjustments.
On Mr. Culhane's behalf I make the following proposals:
Proposal No. 1Mr. Culhane offers $ 375,000 in cash for all of the issued and outstanding capital stock of Wilmington Construction Company and Edge Moor Realty Company, free and clear of all liens, encumbrances or claims (including tax claims of whatever character). A specific condition of this offer is that credit be given against the purchase price of $ 375,000 for the amount of the existing items of indebtedness of the Estate of Howard A. Perkins and Alexandrine duPont Collier, both to Wilmington *274 Construction Company and to Edge Moor Realty Company, without interest. These items of indebtedness are not broken down on the June 30, 1948 balance sheet, but according to the July 31, 1947 statements, Howard A. Perkins then owed Wilmington Construction Company $ 95,363.23 and Edge Moor Realty Company $ 6,317.37, and Mrs. Collier owed Wilmington Construction Company $ 16,884.86.
Proposal No. 2Mr. Culhane proposes to purchase all of the issued and outstanding capital stock of Wilmington Construction Company only for $ 350,000, to be paid as follows:
$ 46,955.21 in cash at date of settlement.
$ 303,044.79 by the extinguishment of two items of indebtedness to Wilmington Construction Company by Edge Moor Realty Company of $ 180,286.48 and $ 122,758.31 respectively.
The mechanics of making the $ 303,044.79 payment is something to be worked out between us if your client is interested in this proposal and it is not my purpose in this letter to indicate the precise modus operandi. This proposal contemplates, of course, the release by Mr. Culhane of any claim to share in the net assets of Edge Moor Realty Company, and the payment by him in full, without interest, of any existing*275 indebtedness by him to that company.
It is also a specific condition of this Proposal No. 2 that, in the event the pending Waldo [sic] suit shall result in an adjudication of liability on the part of Wilmington Construction Company, Edge Moor Realty Company and/or *765 Alexandrine duPont Collier will indemnify Wilmington Construction Company to the extent of 50% of such liability.
Each of the foregoing proposals present, I believe, very definite considerations of advantage to Mrs. Collier which will, I am sure, be readily apparent to you. At the same time we avoid protracted and expensive litigation. I shall hold myself in readiness to discuss this matter with you at any time mutually convenient.
At the time of the sale by Wilmington in 1945 of homes in the Highland Gardens residential development, Wilmington was indebted to the Connecticut General Life Insurance Company under a bond and mortgage for $ 3,241,414.65. This was divided into 784 separate mortgages on the individual homes, which mortgages were assumed by the home purchasers who made the monthly payments thereon. While Wilmington was not released from its liability 1 under the bond, it sustained no loss on*276 the mortgages.
In 1947, Abraham H. Waldow and Mark M. Waldow had brought suit for sales commissions against Edge Moor and Wilmington in the United States District Court for Delaware in the sum of $ 81,000. As of July 29, 1949, the suit had been argued but not decided. Subsequently decision was entered in favor of Edge Moor and Wilmington.
Although Alexandrine did not desire to dispose of her interest in Edge Moor, she was not averse to the use of the Wilmington stock, all of which belonged to her and Perkins' estate, as the means of settling the above claims and cross-claims. For purposes of such settlement, petitioner was agreeable to a valuation of $ 375,000 for the Wilmington stock, and at a meeting on November 26, 1948, a basis for the eventual settlement was agreed upon.
On December 29, 1948, petitioner's attorney wrote to the attorney for Perkins' estate and Alexandrine, in part, as follows:
The purpose*277 of this letter is to restate briefly the points of our discussions at yesterday's conference.
1. The basis of our agreement should be recognized as expressed in your letter to me of December 1, 1948 as follows:
"The price to be paid for this stock is an amount which equals the indebtedness of Edge Moor Realty Company to Wilmington Construction Company, the indebtedness from the Estate of Howard A. Perkins to Wilmington Construction Company, the indebtedness of Alexandrine duP. Collier to Wilmington Construction Company and $ 25,000.00 in cash. This offer was based upon a financial statement of the Company as of June 30, 1948, and is subject to plus or minus adjustments to be determined by an audit of Wilmington Construction Company by a certified public accountant as of November 30, 1948."
In my letter to you of December 6, 1948 I said that "Your letter of December 1, 1948 expresses the substance of the verbal agreement reached in your office last Friday afternoon between Mrs. Collier and Mr. Culhane." The reservations *766 stated in my letter had nothing to do with the "base" of the agreement as correctly expressed by you.
I realize that memory is often a frail reed *278 and, for this reason, in matters of this nature, it is my practice to make contemporaneous private memoranda of verbal discussions and agreements. In line with this practice, I prepared the following longhand office memorandum immediately upon my return to my office after our conference on November 26, 1948:
"Conference 11/26/48 at office of Robt H. Richards, Jr. Present: R.H.R., Jr., Mrs. Collier, Lammott duPont, Jr., Thos. Herlihy, Jos. Culhane and JRM.
Agreed: J.C. to acquire all capital stock of Wilm. Const. Co. for a figure exceeding by $ 25,000 the aggregate of indebtedness of Edgemoor R. Co. to W.C.Co., Perkins & Mrs. C. to Wilmington C. Co., (approx. $ 415,000 & $ 25,000). Culhane to relinquish claim to assets or profits Edgemoor, W.C. Co. to indemnity Edgemoor vs. liability in Waldo suit (100% indemnity). Settlement based upon 6/30/48 balance sheet position. Audited statement 11/30 by Coe C. & Co. to be made & adjustments up or down to be made at settlement."
This memo is, of course, self serving, but it leaves no vestige of doubt in my mind (if there were otherwise any doubt, which there is not) as to what the basis of our agreement was.
2. We dispute the asset*279 item of "Account Receivable, Highland Gardens Realty Co. -- $ 23,848.81" appearing on the Coe, Campbell and Lukens, November 30th balance sheet and contend that the item should either be eliminated entirely or reduced to the value of its admitted collectibility, which is the amount of the indebtedness of Edge Moor Realty Company and the Perkins Estate to Highland Gardens.
It is pointed out that the June 30th balance sheet showed for the Highland Gardens "account receivable" item a red or minus figure of $ 14,098.19 which, as Mr. Lukens explained it, means an "account payable" or a liability of Wilmington Construction Company to Highland Gardens of that amount.
With the transposition of an actual receivable of $ 23,848.81 from a minus $ 14,098.19, the November 30th balance sheet shows, in respect of this item, an increase in assets in the algebraic sum of $ 37,947. I am inclined to believe that you recognize the justice of our position on this item and that it can be adjusted between us on an equitable basis.
In this connection I have in mind the tacit recognition either by you or Mr. duPont, or both, that you were not insisting that Mr. Culhane pay for the collectible*280 part of the Highland Gardens item and also cause Wilmington Construction Company to give a free release to Highland Gardens for the entire amount.
3. The possibility of contingent federal tax claims in respect of past corporate operations and profits gives rise to a situation where I cannot advise Mr. Culhane to assume the risk without satisfactory indemnity by the seller. I made an appropriate reservation in respect of possible undisclosed liabilities in my letter to you of December 6th. As I told you at our conference, we are now willing to assume the risk of undisclosed liabilities, excepting only future federal tax liabilities in respect of corporate operations prior to November 30, 1948 (and also, of course, the bill of Judge Herlihy mentioned in item 4 hereof).
Possible federal tax liability arises out of two possible situations, viz., (a) the disallowance of a capital gain base and the assessment of normal income taxes and (b) the invocation by the Bureau of Section 102 of the Revenue Act with respect to accumulated and undistributed corporate surpluses.
Of course, we do not concede the validity of any additional federal tax liability and will resist to the utmost any*281 attempt at assessment on any theory. The risk is, however, a serious one and one Mr. Culhane cannot afford to assume.
*767 4. Judge Herlihy's bill for legal services rendered Wilmington Construction Company to November 30, 1948. This bill, having been placed in Mr. duPont's hands on November 30th should, we urge, be included in the November 30th balance sheet as a corporate liability and whether $ 5,000 or some other figure is the correct amount to recognize and pay, is, we believe, a matter for you and your clients to work out with Judge Herlihy.
If the existing differences between us in respect of the foregoing items can be worked out between us we propose a settlement to be worked out by the following steps:
(a) The directors (Culhane not participating) to meet and authorize a confession of judgment in Mr. Culhane's favor in the federal court damage case, in the sum of $ 40,000, and to authorize the assignment of the insurance policy back to the insurer. The insurance company will then pay Mr. Culhane $ 5,000 and the corporation, from its available cash, will pay Mr. Culhane $ 35,000.
(b) Mr. Culhane will then buy from Mrs. Collier, 100 shares at $ 275 a share and will *282 pay her $ 27,500.
(c) The board will then authorize and consummate the purchase by the corporation from Mrs. Collier of 1430 shares at a price per share which, with the $ 27,500 paid by Culhane to Mrs. Collier, will equalize the settlement figure (This will also be found to be a figure of around $ 275 a share).
(d) Mrs. Collier and the Perkins Estate will then pay their debts to Wilmington Construction Company and Mrs. Collier will purchase, for full value, an assignment of the accounts and notes receivable due Wilmington Construction Company from Edge Moor Realty Company.
(e) The old board and officers will resign one by one and a board of Culhane's nomination will be elected one by one to fill the vacancies as they occur.
(f) The giving of all required releases and acquitances.
After January 12, 1949, and until July 28, 1949, the directors of Wilmington were Alexandrine, Lammot duPont, Jr., and Ann J. Fuqua.
By letter dated June 15, 1949, the Bureau of Internal Revenue sent a 30-day letter to Wilmington, proposing a deficiency in income tax for 1946 of $ 32,678.37 and for 1947 of $ 77,203.73. The proposed deficiency for 1946 was attributable to the disallowance of $ 3,774 for Christmas*283 gifts to officers and employees and to the treatment of gains on the sale of real property in the amount of $ 310,050.54 as ordinary income, rather than as gains from the sale of property used in the trade or business. The proposed deficiency for 1947 was based on the disallowance of cash Christmas gifts of $ 4,174 and to the treatment of gains from the sale of real property in the amount of $ 649,485.69 as ordinary income, rather than as gains from the sale of property used in the trade or business. To the date of trial herein, none of the proposed deficiencies for 1946 and 1947 had in fact been determined against Wilmington.
A settlement of the claims of Wilmington against Perkins' estate, Alexandrine, and Edge Moor and of the claims of petitioner against Wilmington and Edge Moor was effected on July 28, 1949, with the result that petitioner was awarded $ 40,000 in settlement of his claim for damages for personal injuries, $ 35,000 from Wilmington and $ 5,000 from Wilmington's insurer, and in satisfaction of all other claims he *768 received all of the stock of Wilmington, plus a net amount of $ 15,986.95 in cash from Wilmington. The claims of Wilmington against Alexandrine, *284 Perkins' estate, Highland Gardens Realty Company, and Edge Moor were assigned to Alexandrine, in consideration for the transfer by her of all of the outstanding shares of Wilmington stock to petitioner, who also paid over to Alexandrine $ 5,335.34 of a cash sum of $ 21,322.29 he had received from Wilmington.
The steps taken in effecting the settlement, all on July 28, 1949, and the form thereof, were as hereafter set forth.
At a meeting of the board of directors of Wilmington held on July 28, 1949, at 2 p.m., the entire board of directors, consisting of Alexandrine, Lammot duPont, Jr., and Ann J. Fuqua, voted to pay $ 35,000 to petitioner, plus his court costs, upon the payment of $ 5,000 to petitioner by the Indemnity Insurance Company of North America. This payment was intended to effect a compromise settlement of petitioner's suit for damages arising from personal injuries claimed to have been sustained in the crash of the company airplane on July 10, 1947. Following the adoption of this resolution, Ann Fuqua resigned as director and secretary of Wilmington, and Norman J. Shea, petitioner's accountant, was elected as a director to fill the vacancy created thereby. Lammot duPont, *285 Jr., resigned as president and director, and petitioner was elected as a director to fill the vacancy created thereby. Alexandrine resigned as vice president and director, and James R. Morford, petitioner's attorney, was elected as a director to fill the vacancy created thereby. The new directors thereupon elected the following officers:
Joseph R. Culhane, president.
James R. Morford, vice president.
Norman J. Shea, secretary.
Norman J. Shea, treasurer.
Thirty minutes later, at a meeting of the newly elected board of directors of Wilmington, petitioner "announced that he was acquiring the entire capital stock of the Company but that he needed the assistance of the Company in financing this purchase. It was considered to the best interest of the Company that the President acquire its entire capital stock."
Petitioner, James R. Morford, and Norman J. Shea, constituting the entire board of directors, adopted the following resolution:
Resolved by the Board of Directors of Wilmington Construction Company that Wilmington Construction Company loan to Joseph R. Culhane the sum of $ 450,000.00, which indebtedness is to be evidenced by a note in like amount payable to the order of Wilmington*286 Construction Company and executed by Joseph R. Culhane. The amount of said loan is to be paid to Mr. Culhane by the assignment to him of all the Company's right, title and interest in and to the accounts receivable, notes and accrued interest receivable, with all interest due or to become due thereon, listed below, and the payment of cash in the amount of $ 21,322.29, as follows: *769
| Account receivable from Edge Moor Realty Company in the | |
| amount of | $ 124,257.65 |
| Accrued interest receivable from Edge Moor Realty Company | |
| in the amount of | 610.94 |
| Note receivable, Edge Moor Realty Company, in the amount | |
| of | 180,286.48 |
| Account receivable from Highland Gardens Realty Company | |
| in the face amount of $ 23,848.81, but written off to its true | |
| value of | 9,785.88 |
| Account receivable from the Estate of Howard A. Perkins, | |
| deceased, in the amount of | 47,142.29 |
| Note of Howard A. Perkins in the amount of | 50,000.00 |
| Note of Alexandrine duPont Perkins (presently Alexandrine | |
| duPont Collier) in the amount of | 16,594.47 |
Also on July 28, 1949, and in effecting the settlement between petitioner and Wilmington and Edge Moor, and between Wilmington and Alexandrine, Perkins' estate, *287 Edge Moor, and others, three written instruments were executed. One such instrument was executed by Wilmington, and was as follows:
For Value Received, WILMINGTON CONSTRUCTION COMPANY hereby assigns, transfers and sets over unto JOSEPH R. CULHANE, his heirs, executors, administrators and assigns, all its right, title and interest in and to the accounts receivable, notes and accrued interest receivable, with all interest due or to become due thereon, listed below, that is to say:
| Account receivable from Edge Moor Realty Company in the | |
| amount of | $ 124,257.65 |
| Accrued interest receivable from Edge Motor Realty Company | |
| in the amount of | 610.94 |
| Note receivable, Edge Moor Realty Company, in the amount | |
| of | 180,286.48 |
| Account receivable from Highland Gardens Realty Company, | |
| in the face amount of | 23,848.81 |
| (The above account receivable appears on the balance sheet | |
| audit of Wilmington Construction Company as of November | |
| 30, 1948, prepared by Coe, Campbell & Lukens, in the face | |
| amount given above but has since been written off to a value | |
| of $ 9,785.88) | |
| Account receivable from the Estate of Howard A. Perkins, | |
| deceased, in the amount of | 47,142.29 |
| Note of Howard A. Perkins in the amount of | 50,000.00 |
| Note of Alexandrine duPont Perkins (presently Alexandrine | |
| duPont Collier) in the amount of | 16,594.47 |
| This assignment is made without recourse to the assignor herein. |
*288 In Witness Whereof, WILMINGTON CONSTRUCTION COMPANY has caused its corporate name to be hereunto subscribed by its Vice President and its corporate seal affixed by its Secretary, all on this 28th day of July, 1949.
WILMINGTON CONSTRUCTION COMPANY,
By /s/ James R. Morford
Vice PresidentAttest: /s/ Norman J. Shea
Secretary*770 A second instrument, as follows, was executed by Alexandrine duPont Collier:
I, ALEXANDRINE duPONT COLLIER, hereby sell, assign, transfer and set over unto JOSEPH R. CULHANE, his heirs, executors, administrators and assigns, 1,530 shares of the capital stock of Wilmington Construction Company, a corporation of the State of Delaware, in consideration of the purchase price paid to me in the amount of $ 434,013.05, the receipt of which is hereby acknowledged to have been paid to me by the payment of $ 5,335.34 in cash and by the assignment to me of certain accounts receivable, notes and accrued interest receivable, with all interest due or to become due thereon, which were formerly owed to Wilmington Construction Company by the debtors hereinafter listed and in the amounts hereinafter listed and which have this day been assigned by Wilmington Construction*289 Company to Joseph R. Culhane and by Joseph R. Culhane to me, as follows:
| Account receivable from Edge Moor Realty Company in the | |
| amount of | $ 124,257.65 |
| Accrued interest receivable from Edge Moor Realty Company | |
| in the amount of | 610.94 |
| Note receivable, Edge Moor Realty Company, in the amount of | 180,286.48 |
| Account receivable from Highland Gardens Realty Company | |
| in the face amount of $ 23,848.81 but written off to its true | |
| value of | 9,785.88 |
| Account receivable from the Estate of Howard A. Perkins, | |
| deceased, in the amount of | 47,142.29 |
| Note of Howard A. Perkins in the amount of | 50,000.00 |
| Note of Alexandrine duPont Perkins (presently Alexandrine | |
| duPont Collier) in the amount of | 16,594.47 |
In Witness Whereof I have hereunto set my hand and seal this 28th day of July, 1949.
/s/ Alexandrine duPont Collier [Seal]
Witness:
/s/ Robert H. Richards, Jr.
The third document was a mutual release, signed by all of the parties to the settlement. It represented the concluding and final document of the agreement and settlement between the parties, and was as follows:
Whereas, contemporaneously with this release, Joseph R. Culhane of Delaware County, Commonwealth of Pennsylvania, *290 has acquired from Alexandrine duPont Collier of New Castle County, State of Delaware, all of the outstanding capital stock of Wilmington Construction Company, a Delaware corporation; and
Whereas, the capital stock of Wilmington Construction Company so owned and held by Alexandrine duPont Collier, prior to the acquisition thereof by Joseph R. Culhane was, in part, acquired by her from the Estate of Howard A. Perkins, deceased, which estate is presently being administered by Lammot duPont, Jr., and Wilmington Trust Company as administrators, in New Castle County, Delaware; and
Whereas, the said Alexandrine duPont Collier is the sole stockholder of Edge Moor Realty Company, a Delaware corporation, the said Wilmington Construction Company is a creditor of the said Edge Moor Realty Company and the said Edge Moor Realty Company is the sole stockholder of Highland Gardens Realty Company; and
*771 Whereas, the said Alexandrine duPont Collier, together with Lammot duPont, Jr., and Ann J. Fuqua and Chester A. Mellinger, hereinafter named, are all officers and/or directors of Wilmington Construction Company, Edge Moor Realty Company and Highland Gardens Realty Company; and
Whereas, it is*291 the intention of the parties to this release, that any and all claims, demands and causes of action, if any, of whatsoever nature, whether matured, contingent or inchoate, existing by any party hereto against any other party or against any of the other parties hereto at the date of this release, shall be extinguished and forever barred; expressly excepting from this release however, the following claims and obligations, which are the subject of arrangement and disposition, as between certain of the parties hereto, by separate instruments and agreements in writing made contemporaneously herewith, namely:
Accounts and notes receivable due Wilmington Construction Company as follows:
| By Edge Moor Realty Company | |
| Note receivable | $ 180,286.48 |
| Account receivable | 124,257.65 |
| By Highland Gardens Realty Company, $ 23,848.81 as of November | |
| 30, 1948, adjusted as of December 31, 1948 by a write-down | |
| of the uncollectible part thereof to | 9,785.88 |
| By estate of Howard A. Perkins | |
| Note receivable | 50,000.00 |
| Account receivable | 47,142.29 |
| By Alexandrine duPont Collier | |
| Note receivable | 16,594.47 |
| By Joseph R. Culhane | |
| Note receivable | 30,000.00 |
| Account receivable | 36,400.46 |
*292 together with interest, if any, on any of the foregoing items to the date hereof.
Claim of Joseph R. Culhane against Wilmington Construction Company for personal injuries as evidenced by complaint in a certain cause pending in the United States District Court for the Eastern District of Pennsylvania wherein Joseph R. Culhane is plaintiff and Wilmington Construction Company is defendant (Civil Action No. 7930) in the amount of $ 75,000.
The following agreements, made contemporaneously herewith, are also specifically excepted from this release:
Agreement of indemnity in respect of certain pending litigation given by Wilmington Construction Company to Edge Moor Realty Company.
Agreement of indemnity with respect to federal tax liabilities, given by Alexandrine duPont Collier to Joseph R. Culhane and Wilmington Construction Company.
Now Therefore Be It Known, that for and in consideration of the premises and in further consideration of the sum of One Dollar ($ 1.00) in hand paid by each of the parties hereto to each of the other parties, the receipt whereof is hereby mutually acknowledged, the undersigned parties to this release have remised, released and forever discharged, and*293 by these presents do, each for himself, herself and itself, his, her and its respective heirs, executors, administrators, successors and assigns, remise, release and forever discharge each of the other parties to this release, his, her andits respetive heirs, executors, administrators, successors and assigns of all and from all, and all manner of action and actions, cause and causes of actions, suits, debts dues, sums of money, *772 accounts, reckonings, bonds, bills, specialities, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands, whatsoever, in law or in equity, which against each other party to this release, each such party hereto ever had, now has or which his, her or its heirs, executors, administrators, successors and assigns, hereafter can, shall or may have, for, upon or by reason of any matter, cause or thing whatsoever, from the beginning of the world to the day of the date of these presents; expressly excepting and excluding however from the terms of this release the several claims and obligations, as between certain of the parties hereto, above recited.
In Witness Whereof*294 the individual parties to this release have hereunto set their respective hands and seals and the corporate parties have caused these presents to be duly executed in their corporate names by their proper officers, with their respective corporate seals affixed and duly attested; all done this 28th day of July, A.D. 1949.
WILMINGTON CONSTRUCTION COMPANY
By /s/ J. R. Culhane
PresidentAttest /s/ Norman J. Shea
SecretaryEDGE MOOR REALTY COMPANY
By /s/ Lammot duPont, Jr.
PresidentAttest /s/ Ann J. Fuqua
SecretaryHIGHLAND GARDENS REALTY COMPANY
By /s/ Lammot duPont, Jr.
PresidentAttest /s/ Ann J. Fuqua
SecretarySealed and Delivered in the presence of:
/s/ James R. Morford as to J R C.
/s/ Robert H. Richards, Jr. as to A. duP C.
/s/ J. R. Culhane [Seal]
Joseph R. Culhane
/s/ Alexandrine duPont Collier [Seal]
Alexandrine duPont Collier
/s/ Lammot duPont, Jr. [Seal]
Lammot duPont, Jr.
individually and as Administrator of the Estate of Howard A. Perkins, deceased
/s/ Ann J. Fuqua [Seal]
Ann J. Fuqua
/s/ Chester A. Mellinger [Seal]
Chester A. Mellinger
WILMINGTON TRUST COMPANY
By /s/ (Name indecipherable)
Vice-PresidentBy /s/ (Name indecipherable)
Asst.*295 Secretary
Administrator of the Estate of Howard A. Perkins deceased*773 Petitioner, in a letter dated July 28, 1949, directed to Edge Moor, Highland Gardens Realty Company, Alexandrine duPont Collier, and Lammot duPont, Jr., administrator of the Estate of Howard A. Perkins, deceased, stated that it was his intention, in executing the release of even date, to give up all the claims which he had asserted against the addressees based upon a claim of ownership in the "capital stock, assets and/or profits" of Wilmington and/or Edge Moor.
After the settlement and the transfer of assets from Wilmington to petitioner and thence to Alexandrine, the following assets, with the noted book values, remained in the corporation:
| Cash | $ 83,446.79 |
| Land -- Edgewood Hills | 136,078.96 |
| Land -- Highland Gardens | 4,635.00 |
| Land -- McClure Tract | 41,943.60 |
| Land -- Peters Tract | 30,079.32 |
| Prepaid expenses | 3,135.76 |
| Deposit -- Chester Municipal Authority | 17,797.92 |
| Accounts receivable -- Culhane | 36,400.46 |
| Notes receivable -- Culhane | 30,000.00 |
| Cash surrender value -- Life insurance | 5,100.00 |
| Edgewood Hills building -- Net | 5,818.02 |
| Edge Moor Gardens building -- Net | 3,915.30 |
| Total assets | 398,351.13 |
| Less: Liabilities | 954.70 |
| Total net assets | 397,396.43 |
*296 The $ 35,000 awarded to petitioner by Wilmington in settlement of his claim for damages for personal injuries was credited against Wilmington's account receivable from petitioner, which was $ 66,400.46 as of July 28, 1949. The purported loan to petitioner of $ 450,000 was entered on Wilmington's books as a debit to this account receivable from petitioner and an unsecured note in the principal amount was executed by him on July 28, 1949.
Petitioner's account with Wilmington, as shown by Wilmington's books at the end of subsequent years, disclosed purported debit balances as follows:
| Dec. 31 -- | Amount |
| 1949 | $ 528,977.27 |
| 1950 | 543,127.27 |
| 1951 | 543,585.37 |
| 1952 | 555,285.37 |
| 1953 | 437,569.83 |
No action was ever taken on petitioner's note, and while it was kept in Wilmington's safe for a time, its whereabouts was unknown at the time of the trial in this case. 2
*297 *774 Petitioner's gross income, net income, and salary from Wilmington, as reported on his returns, for the years 1945 through 1951, were as follows:
| Year | Gross | Net income | Salary from |
| income | Wilmington | ||
| 1945 | $ 11,454.09 | $ 7,851.34 | $ 5,200 |
| 1946 | 16,180.70 | 13,228.28 | 7,200 |
| 1947 | 14,751.35 | 12,069.05 | 9,300 |
| 1948 | 7,916.62 | 4,282.36 | 5,000 |
| 1949 | 5,650.00 | 2,887.40 | |
| 1950 | 11,450.00 | 8,478.12 | |
| 1951 | 11,100.00 | 7,180.26 | |
| Total | 78.502.76 | 55,976.81 |
The fair market value of the Wilmington stock transferred to petitioner was $ 397,396.43 at the time of its transfer.
Petitioner received the stock of Wilmington, plus $ 15,986.95, in satisfaction of his claims for compensation for the services he had rendered to Wilmington and Edge Moor.
OPINION.
At no time prior to the conclusion of the settlement on July 28, 1949, was petitioner a stockholder of Wilmington. And regardless of the formalities indulged in in bringing the settlement about, under which petitioner became the sole stockholder of Wilmington, it is patent, we think, that none of the transfers made in effecting the settlement may be regarded as the payment, either actual or constructive, of a dividend*298 by Wilmington to petitioner.
Looking past the formalities indulged in, we have here, by specified transfers and assignments and joint and mutual releases, the settlement and satisfaction of all claims and cross-claims by and between the participants in the said settlement, other than claims specifically excepted. Petitioner was making claim against Wilmington for personal injuries resulting from the airplane crash and for compensation for prior services. He was making a similar claim for compensation against Edge Moor. Alexandrine, in her own right and through Perkins' estate, was the owner of all of the Wilmington stock. At the same time, she, Perkins' estate, Edge Moor, and the Highland Gardens Realty Company were indebted to Wilmington in substantial and, in the main, in undisputed amounts. Alexandrine was not interested in the continued ownership of Wilmington, but did desire to retain her interests in Edge Moor. In such circumstances, the parties negotiated and settled the various claims of all parties; not individually, but interdependently and as a group, the result of which was that by the transfer of the Wilmington stock to petitioner, Alexandrine received the notes*299 and receivables owned by Wilmington against her, Perkins' *775 estate, Edge Moor, and Highland Gardens, plus $ 5,335.34 in cash. The petitioner, in addition to the receipt of the Wilmington stock, which was transferred directly to him by Alexandrine, also received in cash a net amount of $ 15,986.95 from Wilmington, and in addition, he received in satisfaction of his claim for damages for personal injuries $ 35,000 from Wilmington and $ 5,000 from Wilmington's insurer. The petitioner in turn released Wilmington and Edge Moor from his claims against them for compensation for prior services.
It is true that the resolution adopted by the board of directors immediately after petitioner took control of Wilmington did recite that petitioner had received a loan of $ 450,000 from Wilmington, in the form of assignments of the various receivables and cash, and that the loan was to be evidenced by a note, and further, a note was actually executed by petitioner and his personal account on Wilmington's books was debited with the amount thereof. It is also true that, by credits, the nature of which is not shown, the debit balance in petitioner's account on Wilmington's books was reduced*300 to an amount below $ 450,000, namely, to $ 437,569.83, at some time during 1953. We are convinced, however, that the language of the resolution, the giving of the note, and the entry of the amount thereof as a debit against petitioner on Wilmington's books, though formalities indulged in in effecting settlement, were not of the substance of the settlement effected, wherein and whereby petitioner acquired all of Wilmington's stock.
Aside from the unexplained credit in 1953 reducing petitioner's debit balance on Wilmington's books to an amount less than the face of the note, there is no evidence that any effort was ever made to collect the note. The note itself was misplaced, lost, or discarded prior to the time of the trial herein, with no apparent effort to replace or collect it. According to the record, Wilmington, though still in existence, was dormant, but as to the disposition of the corporate assets, it is silent. Furthermore, it is clear, we think, that any obligation on the part of petitioner which might be said to have arisen with respect to his receipt of the above-mentioned receivables, which he immediately assigned to Alexandrine, was covered by the joint and mutual*301 release executed as a part of the settlement and by all of the parties to the said settlement. By the terms of this release, all claims, except those specifically enumerated, were released, and though petitioner's prior debt to Wilmington and certain of the contemporaneously created obligations were specifically excepted from release, there was no mention or exclusion of the purported debt of $ 450,000, although, if ever of substance, it was in existence at the time Wilmington joined with the others in the execution of the release.
Petitioner contends that no consideration was received by him in satisfaction of his claim for compensation. He relies upon the testimony of the attorneys for the parties to the settlement. It is to be *776 noted, however, that the letter of petitioner's attorney to Alexandrine's attorney, under date of July 28, 1948, clearly stated that petitioner reserved the right to press his claim to the profits of both Wilmington and Edge Moor if no settlement was reached, but in the event of a settlement, the claim against Edge Moor would be released and protracted and expensive litigation avoided. In matter of fact, the settlement as finally agreed upon*302 included the release by petitioner of his claims to the profits of Wilmington as well as Edge Moor.
It is our opinion, on the facts of record, that in satisfaction of his claims for compensation for prior services he had rendered to Wilmington and Edge Moor, petitioner received the stock of Wilmington and cash in a net amount of $ 15,986.95, and as compensation, the cash and the Wilmington stock in the amount of its fair market value are taxable to him as ordinary income. We so hold.
It is apparent from the evidence, we think, that as between the parties the settlement, including the value at which the Wilmington stock was taken into account, was based on the value of the Wilmington assets. It would thus appear that in agreeing to the settlement, the petitioner accepted the Wilmington stock at the value represented by the Wilmington assets, after the cash distribution, part of which went to Alexandrine with the remainder being retained by him, and after the assignment of the notes and receivables, which were assigned to Alexandrine along with the above-indicated cash. The facts further show that for the purposes of settlement the net value of the assets as retained by Wilmington*303 was $ 397,396.43, as set out in our Findings of Fact. This value represents the asset value shown by a "balance sheet audit" prepared as of November 30, 1948, and later reduced by the "write-down" of one asset and the expenses of operation during the period November 30, 1948, to July 28, 1949, all of which was in keeping with the basis of settlement agreed upon.
At the trial, the petitioner, in the course of his testimony, questioned such asset value with respect to only one of the assets retained by Wilmington. As to that asset, he testified merely that it had been appraised at a stated figure which was less than the book value at which it had been included. The appraiser was not identified or called to testify, and the evidence does not, in our opinion, justify a finding other than that the fair market value of the assets was equal to the book or "balance sheet audit" value, as agreed upon by the parties for the purpose of settlement.
Petitioner makes the further argument that the fair market value of the assets was greater than the fair market value of the stock of Wilmington because the company was subject to certain contingent liabilities. These liabilities were a contingent*304 liability for Federal income tax, claimed sales commissions, which were the subject matter *777 of a pending suit, and such liability as Wilmington might have under a bond supported by mortgages on a number of residential properties.
The joint and mutual release executed as a part of the settlement indicates that the contingent Federal tax liability was covered by an agreement by Alexandrine to indemnify petitioner and Wilmington with respect thereto. We can only conclude that this indemnification would effectively relieve Wilmington of any liability for possible income tax deficiencies relating to prior years.
With respect to the sales commissions, the evidence does not indicate that the parties either did not know or reasonably expect at the time of settlement that the suit for commissions would be concluded, as shortly thereafter it was, without liability to Wilmington.
As to the bond and the individual mortgages, the record does not show the exact nature of the contingent liability, but the impression from the evidence is that Wilmington was only secondarily liable and the mortgages were well secured by the residences to which they attached. There is no claim or indication*305 that any losses were ever sustained.
In such circumstances, and on the evidence appearing, we have concluded that the contingent liabilities did not reduce the fair market value of the Wilmington stock to an amount less than the value of the supporting or underlying assets. We have accordingly found as a fact that the fair market value of the Wilmington stock received by petitioner pursuant to the settlement was at the time of receipt $ 397,396.43.
Decision will be entered under Rule 50.
Footnotes
1. While the exact amount owed by petitioner as of this date is not revealed by the record, petitioner testified he had secured many loans from Wilmington during its existence, including one of $ 30,000 in 1947.↩
*. By way of example only Mr. Culhane is advised that Wilmington Construction Company has a contractual commitment of approximately $ 33,000 for road work at Edge Moor Gardens, and Edgwood [sic↩] Hills. This liability, if it exists, has not been taken into consideration in the offers here made but would properly be reflected on the proposed settlement date balance sheet.
+. This item should read "theatre furniture & fixtures" instead of "theatre, furniture & fixtures."↩
1. Other than the original amount, the record does not show the outstanding liability at any particular time.↩
2. While petitioner testified that Wilmington, though dormant, was still in existence at the time of the trial herein, there is no evidence as to the disposition of its assets, or as to its net worth if it still had assets.↩