*70 Decisions will be entered under Rule 50.
Amounts received by former shareholder for transfer of stock pursuant to agreement requiring surrender of all stock holdings upon retirement from active employment held, on facts, proceeds of sale of capital assets so as to permit full recovery of basis prior to taxation of any further receipts as capital gains, even though sale price was measured by contingent future dividends. Burnet v. Logan, 283 U.S. 404">283 U.S. 404, followed.
*979 Respondent determined deficiencies*71 in decedent Raymond T. Marshall's 2 income taxes as follows:
| Year | Deficiency |
| 1946 | $ 220.41 |
| 1947 | 2,923.07 |
| 1948 | 10,942.47 |
| 1949 | 14,962.92 |
Certain overpayments are also claimed for each year in controversy. Respondent now concedes the full deductibility of a $ 500 charitable contribution in the year 1949. The sole issue is whether certain payments received by decedent during the years in controversy, pursuant to an agreement made upon relinquishing his stock, should be taxed as ordinary dividends, with an amortization deduction of original cost of the stock prorated over the life of the agreement, rather than as payments of purchase price resulting in long-term capital gains following the initial recovery of the cost basis of the relinquished stock.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
Raymond T. Marshall, hereinafter referred to as decedent, *72 was an individual residing in South Orange, New Jersey, during the years in controversy. He filed separate income tax returns for the years 1946, 1947, and 1949, and a joint return with his wife for the year 1948, with the collector for the fifth district of New Jersey.
*980 Johnson & Higgins, hereinafter called the Corporation, is a corporation organized under the laws of the State of New Jersey in 1899. On December 31, 1945, decedent owned 3,500 shares of the Corporation's stock, evidenced by stock certificates, which had been owned by him for periods ranging from 3 to 22 years. Twenty-five hundred of these shares had a cost basis of $ 48,659. The other thousand shares had a basis of $ 1,000. On December 31, 1945, decedent was a director and employee of Johnson & Higgins, as he had been for many years prior thereto. At all times material herein, the Corporation's certificate of incorporation stated that the stock of the Corporation could be held only by a director, officer, or employee actively engaged in the service of the Corporation. When a stockholder ceased to be so engaged, he was required to surrender his stock to the Corporation. In exchange therefor, he was*73 entitled to receive either a lump-sum payment or, at his option, he might enter into an agreement whereby he was entitled to payments for a period of time up to 10 years contingent upon the Corporation's rate of dividends in each of the years covered by the agreement. This agreement was evidenced by a certificate received in exchange for the surrendered stock. When a director retires, the shares which he formerly held are later reissued to a remaining director at a nominal value of $ 1 per share. The reason for the nominal value lies in the fact that the reissued stock does not provide for the payment of dividends until the existing contractual obligation incorporated into the 10-year certificates is carried out. Decedent had acquired 1,000 such nominal value shares at $ 1 per share because there was an outstanding obligation to the prior stockholder under such an agreement.
On January 2, 1946, decedent, being 68 years old and in failing health, resigned as a director and employee of the Corporation and retired from its active services. On that day, decedent delivered to the Corporation's treasurer his certificates representing 3,500 shares of stock. On that day, the Corporation*74 issued to decedent two 10-year certificates. One certificate, exchanged for 2,500 shares of stock, entitled decedent to payments, during a 10-year period beginning January 2, 1946, of "all dividends that may be declared payable in respect of said stock * * *." The other certificate entitled decedent to the same right with respect to the other 1,000 shares, but only for a 3-year period beginning in 1953. On January 8, 1946, the Corporation delivered these two certificates to decedent, and decedent executed an endorsement on the back of the certificates representing his 3,500 shares of stock, thereby effecting the assignment of those shares to the Corporation.
Payments to be made on 10-year certificates are determined by the Corporation's earnings over the 10-year period. If the Corporation earned nothing, there would not have been any payments.
*981 During the taxable year 1946, the Corporation made payments to decedent pursuant to the 10-year certificate exchanged for the block of 2,500 shares totaling $ 12,500. During the taxable year 1947, the Corporation made payments to decedent pursuant to that certificate totaling $ 28,025. During the taxable year 1948, the Corporation*75 made payments to decedent pursuant to that certificate totaling $ 61,750. During the taxable year 1949, the Corporation made payments to decedent pursuant to that certificate totaling $ 56,875.
The Corporation regularly transferred to and paid from its general reserve the amounts required as installments on the 10-year certificate. Its certificate of incorporation provided that its general reserve could not be used for payment of dividends, but could be used for the acquisition of its own capital stock.
The balance sheet of Johnson & Higgins as at December 31, 1945, was as follows:
Johnson & Higgins, 63 Wall Street, New York 5, New York -- Balance sheet as at December 31, 1945
| Assets | ||
| Cash | $ 2,832.797.87 | |
| Notes and accounts receivable | 2,580,052.48 | |
| Investment in government obligations | 300,000.00 | |
| Other investments | 203,753.00 | |
| Furniture & fixtures, etc | $ 99,150.78 | |
| Less reserve for depreciation | 35,812.02 | |
| 63,338.76 | ||
| Good will | 795,414.00 | |
| $ 6,775,356.11 | ||
| Liabilities and capital | ||
| Accounts payable | $ 4,852,416.83 | |
| Provision for Federal income taxes | 240,543.70 | |
| Federal withholding taxes | 81,098.14 | |
| Accrued social security, unemployment taxes, etc | 6,692.54 | |
| Surplus reserves | 1,081,401.53 | |
| Common stock | 843,956.87 | |
| Earned surplus (deficit) | (330,753.50) | |
| $ 6,775,356.11 |
*76 The stock ledger of Johnson & Higgins as of January 1, 1946, and January 2, 1946, was as follows:
| Stock Ledger | |||
| Shares authorized (no par) | 100,000 | Jan. 1, 1946 | |
| Shares issued | 69,352 | Jan. 1, 1946 | |
| Less: Treasury stock | 924 | Jan. 1, 1946 | |
| 924 | Jan. 1, 1946 | ||
| Issued & outstanding | 68,428 | Jan. 1, 1946 | |
| Marshall stock | -3,500 | Jan. 2, 1946 | |
| 3,500 | Jan. 2, 1946 | ||
| Issued & outstanding | 64,928 | Jan. 2, 1946 | |
| Plus treasury stock | 4,424 | Jan. 2, 1946 | |
| 4,424 | Jan. 2, 1946 | ||
| Shares issued | 69,352 | Jan. 2, 1946 |
*982 The 3,500 shares of the Corporation's stock owned by decedent prior to his surrender of that stock constituted capital assets within the meaning of section 117 of the Internal Revenue Code.
The endorsement and delivery by decedent of his 3,500 shares of the Corporation stock constituted a sale within the meaning of sections 111 and 117.
The surrender by decedent of his 3,500 shares of the Corporation stock on January 8, 1946, and the simultaneous delivery to decedent by the Corporation of its written obligations evidenced by the 10-year certificates, was not a closed transaction for income tax purposes in 1946, because the 10-year certificates*77 had no ascertainable fair market value for income tax purposes when received.
Decedent properly applied the 1946 payments received by him in the total of $ 12,500 against the cost basis of his 2,500 shares of Corporation stock of $ 48,659, thereby reducing his unrecouped cost basis to the sum of $ 36,159, and decedent derived no taxable gain in 1946 by reason of the receipt of the aforesaid payments in that year.
Decedent properly applied the 1947 payments received by him in the total of $ 28,025 against the then remaining cost basis of his Corporation stock of $ 36,159, thereby reducing his unrecouped cost basis to the sum of $ 8,134, and decedent derived no taxable gain in 1947 by reason of the receipt of the aforesaid payments in that year.
Decedent properly applied the payments received by him in the calendar year 1948 in the total sum of $ 61,750 against the then remaining unrecouped cost basis of his Corporation stock of $ 8,134, and reported a long-term capital gain of $ 52,616. Decedent realized a long-term capital gain of $ 53,616 during the calendar year 1948.
During the calendar year 1949, decedent properly reported as a long-term capital gain of $ 56,875 the entire amount*78 received by him in that year as a further payment for the sale of his stock.
OPINION.
When the petitioner sold his stock in Johnson & Higgins as he was required to do by his underlying contract, measurement of the purchase price according to the size of the dividends to be declared for a specific future period seems to us to have been merely fortuitous. Petitioner parted with his stock in all respects as completely as though he had sold it on any other terms; what he was receiving *983 was the purchase price and not dividends on stock, and the transaction would have been no different if the purchase price had been a specified amount in lieu of being indefinite. If the vendor of a life estate is entitled to capital gains treatment, we think it inescapable that petitioner should be accorded no less favorable treatment. See Bell's Estate v. Commissioner, (C. A. 8) 137 F. 2d 454; McAllister v. Commissioner, (C. A. 2) 157 F.2d 235">157 F. 2d 235.
Certainly the mere characterization of these payments as "dividends" does not make them such. See Nordberg Mfg. Co. v. Kuhl, (C. A. 7) 166 F.2d 331">166 F. 2d 331, 334.*79 And no taxable event occurred in 1946 when petitioner surrendered his shares and received the promise of his employer to pay the sales price since the indefinite character of the future payments precluded attributing to the certificates any fair market value. Burnet v. Logan, 283 U.S. 404">283 U.S. 404.
Respondent does not seriously contend that this was not a sale or exchange of petitioner's stock, nor that the stock had not been a capital asset. Where the purchase price is indefinite it is necessary to permit recovery of basis before charging a taxpayer with capital gain since otherwise the possibility will continue to exist that no gain may in fact be realized. Burnet v. Logan, supra.In one respect, however, the petitioner overstated his basis. The 1,000 shares, on which payment would not be commenced until 1953, should not have been included in decedent's recoverable cost. No part of the payments received by him during the years in controversy was allocable to those shares. The consequence is that petitioner's capital gain for the year 1948 was understated by $ 1,000, the amount charged as recovery of basis of the *80 1,000 shares. We find it unnecessary to consider petitioner's alternative contention that these were essentially dividends in partial liquidation under section 115 (c). The result would be the same.
We think petitioner's treatment of the transaction was correct in all respects, except as to the 1,000 shares and that the deficiency must be correspondingly disapproved.
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Estate of Raymond T. Marshall, deceased, Ann M. Cronin and Hazel Lockwood, Executrices, and Estate of May V. Marshall, deceased, Ann M. Cronin, Administratrix c. t. a., Docket No. 36434; and Estate of Raymond T. Marshall, deceased, by Ann M. Cronin and Hazel M. Lockwood, Executrices, Docket No. 39944.↩
2. Decedent filed a joint return with his wife for the year 1948. Her estate is therefore a party in Docket No. 36434.↩