*794 Petitioners William A. Hines and Ernest W. Marlow, copartners, were retained as counsel by the executors of an estate, without entering into an agreement on the amount of their compensation. When the estate had been fully administered except for the payment of executors' commissions and the transfer of the assets of the estate to the residuary legatee, the executors agreed with counsel that their proposed fee was reasonable. Thereafter within the taxable year, the residuary legatee, a corporation formed by the executors to carry out certain provisions of the decedent's will, adopted a resolution to pay within five years after the transfer of the residuary estate to it, with interest at 2 percent per annum on unpaid balances, so much of the fee as the executors had not paid prior to the transfer of the estate to it. Held, that the partnership, reporting income on the cash basis, did not constructively receive the fee within the taxable year and that the promise to pay of the residuary legatee did not constitute taxable income to the partnership during that period.
*1062 These proceedings, consolidated for hearing and report, involve the redetermination of deficiencies in income taxes for 1933 of $55,973.44 in the case of petitioner William A. Hines and $59,742.18 in the case of each of the remaining petitioners. On brief the respondent concedes error in determining the deficiency proposed for assessment against petitioner Marietta R. Marlow in Docket No. 87400. Accordingly, decision of no deficiency will be entered therein. The issue raised in the petitions of the other petitioners is whether their taxable income should be increased by their distributable share of certain partnership income which respondent determined the partnership constructively received during the taxable year.
FINDINGS OF FACT.
Petitioners William A. Hines and Ernest W. Marlow are attorneys engaged in the practice of law in New York City as copartners, under the name of Marlow & Hines. They have never agreed to a continuation of the firm for a definite period of time. For the year 1933*796 they agreed to divide the net profits of the partnership on an equal basis. Each of the petitioners and the partnership at all times important kept their books and filed their income tax returns on the cash basis.
The will of Michael Friedsam, who died April 6, 1931, was probated in the Surrogate's Court of the County of New York on April 13, 1931, and on April 14, 1931, letters testamentary were issued to John S. Burke, Edwin J. Steiner, and Clarence W. Wood, the executors named in the decedent's will. The executors retained the firm of Marlow & Hines as their attorneys to attend to the probate of the will and all matters incident to the administration of the estate and to the distribution of the assets thereof.
The decedent's will directed the executors "to pay my just debts and funeral expenses as soon after my death as conveniently may be", and provided for the distribution of the residuary estate to his executors, as trustees, for distribution to such charitable and benevolent associations and institutions of learning as they deemed proper.
The executors returned for Federal estate tax a gross estate of about $18,000,000, exclusive of a valuable art collection. The*797 assets of the estate included all of the stock of the Delion Corporation, a personal holding corporation, which the executors returned at a value of about $12,000,000. At the time of his death the decedent owned 4,060 shares and the Delion Corporation owned 356,450 shares, a total of 360,510 shares, of capital stock of B. Altman & Co., a corporation engaged in the business of operating one of the largest department stores in New York City. The 360,510 shares constituted slightly in excess of one-third of the entire capital stock of B. Altman & Co.*1063 On March 28, 1933, the executors, in pursuance of the will of the decedent, gave John S. Burke an option, running until January 1, 1938, to purchase the 360,510 shares of stock for $6 per share. He did not exercise the option.
On March 3, 1932, the executors organized "The Friedsam Foundation, Inc.," under the corporation laws of the State of Delaware, with a life of 25 years, for the purpose of receiving the residuary estate of the decedent. In an agreement entered into March 8, 1933, between the executors and the Friedsam Foundation, Inc., the former agreed to transfer to the latter, in kind, as soon as possible, the*798 residuary estate of the decedent, provided the corporation would hold the executors harmless against claims against the estate, including claims for executors' commissions, legal expenses incurred in connection with the administration of the estate, and taxes. The corporation further agreed that, if at any time as the result of the transfer to it of any portion of the residuary estate of the decedent the executors were without funds to pay claims against the estate, it would put the executors in funds, so far as receipts of the property under the agreement permitted, to discharge the claims and to hold the executors harmless from any damages resulting from such claims.
By April 1933 the executors had completed the administration of the estate except Federal estate tax proceedings, the payment of executors' commissions and counsel fees to Marlow & Hines, and final accounting and the distribution of the residuary estate to the Friedsam Foundation, Inc. At that time the estate had about $2,000,000 of liquid assets and Marlow was aware of its financial condition.
The petitioners had no correspondence or written contract with the executors regarding the employment of their law partnership*799 as counsel, and did not discuss the question of a fee for their services with the executors until a few days prior to April 24, 1933. At that time petitioner Marlow, during the course of a conversation with Burke, proposed a fee of $250,000, an amount Burke regarded as reasonable and fair. The other executors were then consulted by Marlow and agreed to the reasonableness of the fee. None of the executors agreed to pay the fee in 1933. The Delion Corporation and the estate together had cash in excess of $250,000. The understandings had with the executors about the payment of the fee and other matters discussed involving the affairs of the estate were incorporated by Marlow in a letter of April 24, 1933, for transmission to the Friedsam Foundation, Inc. The letter was signed by the executors and Marlow & Hines, and in so far as material here, read as follows:
After the payment of all the specific legacies and the various taxes and incidental expenses connected with the administration of the estate, there is left only about $125,000 cash funds in the hands of the executors. To pay executors' *1064 commissions and the fees of their attorneys now, would necessitate the sale*800 of a substantial amount of the investments held by the estate. This would cause a substantial loss to the residuary legatee by reason of the present condition of the stock market.
Recognizing the desirability of not forcing a sale of any securities at the present low market and the desirability of conserving the estate, the executors submit to you the following proposition:
If it be agreed to waive a formal court accounting and to settle the estate upon releases, we can and will transfer and turn over to you as expeditiously as may be, the residuary estate of Michael Friedsam, deceased, under the terms of our agreement of March 8th, 1932, provided, and (a) upon condition that you will undertake to pay each of the three executors in lieu of his commissions, the sum of $290,000.00 less any sums that may be paid them prior to the completion of the transfer herein contemplated, and further (b) upon condition that you will undertake to pay Marlow & Hines, counsel to the executors, as compensation for their services, the sum of $250,000.00 which the executors have agreed to be a fair and reasonable compensation, less any sums that may be paid by the executors on account thereof prior*801 to completion of the transfer herein contemplated.
* * *
If this proposition meets with your approval we, the executors, and Marlow & Hines, our counsel, are willing to permit you to liquidate the above obligations when and as you are in funds and when and as it be most convenient to you, provided and upon condition that each of said sums be liquidated within the period of five years from the date hereof and that deferred payments when made, shall be made with interest at the rate of two (2) percent per annum from the 1st day of April, 1933.
The rate of interest was fixed at 2 percent per annum so that it would not exceed the return on securities in the residuary estate.
The proposition was accepted by the Friedsam Foundation, Inc., on April 27, 1933. Pursuant to the agreement, all of the assets of the estate of the decedent were transferred to the Friedsam Foundation, Inc., as residuary legatee, as of April 1, 1933, and immediately thereafter the transferee began to function as a charitable institution. The books of the Friedsam Foundation, Inc., were opened by the following journal entry made as of April 1, 1933:
| Cash on Deposit | $116,320.15 | |
| Bonds | 2,102,103.75 | |
| Stocks | 12,590,759.13 | |
| Mortgages Receivable | 671,737.50 | |
| Notes and Loans Receivable | 934,976.48 | |
| Accrued Interest Receivable | 59,933.19 | |
| Real Estate 44-6 East 68th Street - Suspense | 450,000.00 | |
| Cemetery Plot - Salem Fields - Suspense | ||
| Judgments Receivable | 901.38 | |
| Administration and General Expenses (Organization) | 337.15 | |
| Accounts Payable: | ||
| John Stephen Burke | $290,000.00 | |
| Edwin J. Steiner | 290,000.00 | |
| Clarence W. Wood | 290,000.00 | |
| Marlow and Hines | 250,000.00 | |
| Investment Fund | 15,807,068.73 |
*802 *1065 During the course of their discussion about the amount and time of payment of the legal fee, petitioner Marlow and Burke were aware of the fact that the income tax liability of the petitioners of the amount thereof would be less if the fee was paid in installments over several years. This fact, however, was not the principal reason for giving the Friedsam Foundation, Inc., the right to pay the fee in installments. The plan of payment proposed in the letter was prompted by a desire of the executors to distribute the residuary estate as soon as possible in order to enable the Friedsam Foundation, Inc., to begin to function. At the time he discussed the plan with the executors, Marlow was of the opinion that there was no justification for asking the executors to pay the legal fee on terms different from executors' commissions.
The petitioners did not at any time render a bill to the executors for their services or make demand for payment in full. Other than a certified copy of the resolution adopted by the trustees of the Friedsam Foundation, Inc., on April 27, 1933, accepting the proposition set forth in the letter of April 24, 1933, the partnership received nothing*803 fixing the amount of the fee or the time of payment.
The executors made a formal accounting of the estate of the decedent to the Friedsam Foundation, Inc., on or about December 28, 1933. On December 28, 1933, the Friedsam Foundation, Inc., accepted the formal accounting in full payment of its interest in the estate of the decedent and gave the executors a release of claims and demands as residuary legatee under the will of the decedent. No final accounting was filed in the Surrogate's Court.
During the early part of May 1933, John S. Burke, Clarence W. Wood, and Edwin J. Steiner succeeded the trustees elected at the time the Friedsam Foundation, Inc., was organized and at all times material thereafter continued to act as sole trustees for the Friedsam Foundation, Inc.
Between November 8 and December 27, 1933, the Friedsam Foundation, Inc., purchased 20 blocks of stock and $500,000 principal amount of United States bonds at an aggregate cost of $661,745.23. On December 4, 1933, it sold two blocks of bonds for $25,000.
The Delion Corporation had about $500,000 cash on deposit September 30, 1933. It was kept in existence during 1933, with cash on *1066 hand, to*804 pay, if necessary, a claim of about $350,000 asseted by the Bureau of Internal Revenue for additional taxes. Upon the settlement of the claim in October 1933, the corporation was dissolved.
The balance sheet of the Friedsam Foundation, Inc., at December 31, 1933, disclosed that its assets were about $9,000,000 in excess of its liabilities.
The legal fee of $250,000 was paid by the Friedsam Foundation, Inc., to Marlow & Hines in installments and was distributed between the partners as follows:
| Payments | Distributions | ||
| Date | Amount | Ernest W. Marlow | William A. Hines |
| June 18, 1934 | $20,000 | $10,000 | $10,000 |
| May 14, 1935 | 25,000 | 12,500 | 12,500 |
| Dec. 23, 1935 | 15,000 | 7,500 | 7,500 |
| Nov. 18, 1936 | 50,000 | 30,000 | 20,000 |
| July 26, 1937 | 25,000 | ||
| Dec. 18, 1937 | 25,000 | 30,000 | 20,000 |
| Apr. 1, 1938 | 90,000 | 54,000 | 36,000 |
The amounts distributed to the petitioners were reported as and when received, but were not included in their taxable net income, and the tax thereon has not been paid. In addition to these sums, the Friedsam Foundation, Inc., paid to Marlow & Hines on April 1 and October 1 of each year beginning with October 1, 1933, interest at the*805 rate of 2 percent per annum upon unpaid balances. The sum of $2,500 paid for interest to October 1, 1933, was reported as income in the partnership return filed by Marlow & Hines for 1933.
Marlow & Hines has acted as counsel for the Friedsam Foundation, Inc., since the time of its incorporation. The partnership regards the activities of the Friedsam Foundation, Inc., as a final step in completing the administration of the estate of the decedent and will not charge it a fee for legal services rendered and to be rendered.
OPINION.
DISNEY: Aside from interest in the amount of $2,500 for the sixmonth period prior to October 1, 1933, which was returned as taxable income, none of the fee or interest thereon was actually received by the partnership in 1933. The respondent included the amount of the fee, plus interest in the amount of $1,250 for the period from October 1, 1933, to the close of the year, in gross income of the partnership on the ground that it was constructively received in 1933. He adheres to the doctrine upon brief before us.
The inclusion in the partnership's gross income of an amount for interest accrued on the full amount of the fee for the three-month*806 *1067 period after October 1, 1933, was a clear violation of the well settled rule that taxpayers on the cash basis are not subject to tax on accrued items of income. ; (521). On this issue the respondent is reversed.
It was announced in , that the doctrine of constructive receipt should be sparingly applied. See also . In ; affd., ; we said: "But, in general, income should not be construed to have been received prior to the date of actual receipt except where a taxpayer turns his back upon income or does not choose to receive income which he could have if he chose." The doctrine will not be applied except in a clear case. . In , we said:
* * * that amounts due from a corporation but unpaid, are not to be included in the income of an individual reporting his income*807 on a cash basis unless it appears that the money was available to him, that the corporation was able and ready to pay him, that his right to receive was not restricted and that his failure to receive resulted from exercise of his own choice.
Other statements of the doctrine are to the same effect. ; .
The petitioners argue that the agreement between the partnership and the Foundation was the only one entered into for payment of the fee and that we must look to it alone for the amount to be paid and the time of payment. They have overlooked the fact that by a provision of the agreement the liability of the Foundation was limited to the unpaid portion of the fee at the time of completion of the transfer of the residuary estate. This term of the agreement gave the executors the right to pay part or all of the fee to the partnership at any time prior to completion of the transfer. Thus the understanding had with the executors was not limited, as alleged, to mere approval of the reasonableness of the fee, but conferred upon the partnership no right to require payment from the*808 executors.
The employment of the petitioners as counsel rendered the executors personally liable for a reasonable fee, subject to reimbursement by way of a credit in their accounts. 24 C.J. 66; ; ; ; . Counsel in such cases do not acquire a lien against assets of the estate for the amount of their charges. ;; ; ; . The executors did not at any time in 1933 unqualifiedly agree to pay the fee or set aside in an account or otherwise a fund from which to pay it. The partnership limited its right to receive payment from the executors to such amount as the executors, in their discretion, elected to pay prior to the transfer *1068 of the assets of the estate to the Foundation. They made no payment, and when the transfer had been accomplished the executors were under no obligation to pay until at least after default*809 by the Foundation. The terms of the agreement with the Foundation did not compel it to pay the fee within the taxable year, and none of its was paid.
It is stipulated that the partnership was retained "to attend to the probate of said will and to attend to all matters incident to the administration of the estate and to the distribution of the assets thereof." For services as counsel for the administration of the estate it was agreed between the partnership and the executors, in 1933, that $250,000 was a reasonable fee, but the executors did not agree to pay such amount in 1933 or otherwise, and never paid it. The statute of New York provides that commissions of executors or administrators are not earned until the services have been rendered and the account settled. The same applies in logic to the attorneys' fees here involved. At the time of discussion of the reasonableness of $250,000 as attorneys' fees, and at the time of the proposition between the attorneys, executors, and residuary legatee on April 24, 1933, the attorneys' services had not been completed. Federal estate tax proceedings were still pending, the executors' final account had not been settled in the ordinary*810 manner of probate, and, though the statute permitted that such final accounting be dispensed with by settlement and distribution satisfactory to the residuary legatee, that was not done until December 1933. Until that date it is obvious that the attorneys had no right to demand their fee from the executors. By and previous to the time, however, a tripartite agreement between the attorneys, executors, and residuary legatee had provided for payment of attorneys' fees by the residuary legatee throughout a possible period of five years. The rights against the residuary legatee had their inception upon the legatee's taking over the assets - but the attorneys' services were not yet finished. Clearly, we think, the attorneys could not successfully have maintained an action against the executors for the $250,000 fee at the time they agreed with the executors and residuary legatee to accept it within five years. They had not yet performed perhaps the most important part of the stipulated services, "to attend to all matters incident to * * * the distribution of the assets" of the estate. In fact, since the partnership considered the activities of the Friedsam Foundation, the residuary*811 legatee, as a final step in the completion of the administration of the estate of the decedent and a continuation of the legal services of administering it, and will not charge further fee for services rendered it, it is apparent that the services, payment for which is here involved, were not completed even with full transfer of the assets of the estate to the Friedsam Foundation. No principle of constructive receipt requires, we think, that the attorneys' fees not yet fully earned, and not yet available to *1069 the attorneys for that reason, be considered income received, contrary to agreement (entered into prior to right to make demand) that they be received over a possible period of five years - as in fact they were received.
While questions of the kind involved here are controlled by the peculiar facts of the case, the facts prevailing in several decided cases suggest the answer here. In , the court, in deciding that commissions received by an insurance agent on renewal premiums paid on policies of insurance written prior to March 1, 1913, are includable in taxable income in the year of receipt, pointed out that counsel*812 who completed his services for a client in October 1915 and received his pay therefor in February 1916, pursuant to a bill rendered in December 1915, was not taxable until 1916 on the amount received. In ; certiorari denied, , the taxpayer had the power, as executor of three estates, to pay himself in 1916 for services rendered in that year, or wait until he prepared partial or final accounts in subsequent years. He exercised the right to have the services he performed in 1916 paid in 1917, when he prepared partial accounts. The court held that the amount received in 1917 was taxable in that year, and that no part of it could be allocated to 1916. In ; affd., , the taxpayer as trustee of trusts created by him for the benefit of his children had the right under the provisions of the trust agreements to deduct and retain annually as compensation for his services a sum equal to 3 percent of the gross income of the trusts. He made no charge for his services and received nothing. It was held that the doctrine of constructive*813 receipt did not apply. The case of , is to the same effect.
The case of , is not to the contrary. There the amount owing for oil sold was standing to the credit of the taxpayer on the books of the pipe line company and was available to him upon presentation of an executed division order. Here there was no unqualified agreement on the part of the executors or the residuary legatee to pay in 1933 upon demand. The income was not subject to the command of the partnership and at no time in 1933 were the petitioners in a position to enjoy the income as in . It was error for the respondent to include the fee in gross income of the partnership for 1933 on the ground that it was constructively received.
The respondent contends in a supplemental reply brief that the agreement of the Foundation to pay the fee should be treated as the equivalent of the cash received within the taxable year. He argues that the agreement to pay was an evidence of indebtedness received in payment for services and "fully equivalent to a promissory note, or a certificate of*814 stock" and that it "represented a payment of the claim in property by the debtor."
*1070 Gross income includes compensation for services rendered "in whatever form paid." Sec. 22(a), Revenue Act of 1932. Regulations promulgated under the statute provide that "Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income." Art. 53, Regulations 77.
Numerous cases are cited by the respondent as establishing the doctrine that income may be derived in the form of money's worth. The cases relied upon involved in general the receipt in connection with sales and as compensation for services rendered, stock, bonds, notes, or tangible property. It is well settled that property of that sort may be taxed to the recipient at its fair market value. The respondent does not claim, aside from the constructive receipt theory already discussed, that the right reserved by the executors to pay the fee in whole or in part prior to the transfer of the residuary estate to the Foundation was equivalent to receipt by the partnership of taxable income in the amount of $250,000 or any other amount. He relies*815 only upon the promise to pay made by the residuary legatee as resulting in taxable income to the partnership in 1933.
The agreement of the Foundation to pay the fee was evidenced by the letter of April 24, 1933, and a resolution adopted by the Foundation on April 27, 1933, which the respondent characterizes as a chose in action and claims "admittedly had a value of at least $250,000." Generally a promise to pay a specified sum of money in the future does not create more than an account receivable in the hands of the creditor, a nontaxable item of taxpayers reporting, as here, on the cash basis. The result would have been no more if the executors, instead of reserving a right to pay prior to the happening of a certain event, had unconditionally promised to pay, for instance, on July 1, 1934. The undertaking of the Foundation created an unconditional obligation on its part to pay a definite sum of money sometime within five years and in its essential characteristics was no different from an ordinary promise to pay by a person primarily liable. The written promise of the Foundation was a property right and no doubt had some value to the partnership. "Such rights are sold, if at*816 all, only by seeking out a purchaser and higgling with him on the basis of the particular transaction" and ordinarily do not have a fair market value. . The respondent has never determined, and the petitioners do not admit, that the promise of the Foundation had a fair market value in 1933 of any amount.
We fail to see that the partnership, by agreeing to look to the Foundation for payment within five years, acquired, for income tax purpose, something unlike what it had before the promise was given. *1071 In general, taxation is levied upon profits realized and not deferred. . In , a petitioner on a cash basis received a demand promissory note as additional evidence of liability of a maker for overdue interest on a series of notes. We held that there was no income received. In , a note and the security therefor and a claim for overdue interest was surrendered in exchange for certificates of indebtedness of debtor's receiver, and we*817 were of the opinion that the transaction was a mere renewal, resulting in no income until payment or other disposition of the certificates received.
In ; affd., ; certiorari denied, , we held that a judgment obtained in 1915 for legal services rendered prior thereto did not represent payment of the claim and that the taxpayers, who reported their income on the cash basis, did not realize taxable income from their services until 1920, when the judgment was paid. Herein, the rights acquired by the partnership in 1933 were inferior to the rights it could have acquired if it had been in a position to reduce its claim to judgment, or had actually done so. As a judgment creditor it could have levied upon property, whereas under the terms of the agreement entered into it was in no position to demand payment in 1933. Yet the above citation indicates that even a judgment obtained would not be taxable in 1933 as income.
Since herein the agreement among the partnership, executors, and residuary legatee provided for payment by the residuary legatee less any amounts paid by executors prior*818 to completion of transfer of the assets of the estate, it is apparent that the promise of residuary legatee to pay was not accepted by the partnership wholly in lieu of rights against the executors; but, assuming that it was so accepted, it is obvious that, as in fact appears on the face of the agreement itself, the services of the attorneys' partnership had not been completed and must continue further. An implied agreement for the continuation and completion of such services is plain. Therefore there was a continuation of contractual rights held by the partnership, involving personal services, the failure to perform which would affect and give rise to defense to the obligation to pay. The new agreement was not accepted as payment, but merely as another agreement to pay, in part for services yet to be rendered. No promissory note was received, and no security given. It would have required evidence outside of the agreement as to whether such services had been performed, a question any prospective purchaser of the agreement would consider. *819 , and cases cited. Such a situation is not one, we think, which lends itself to the application of the principle of receipt of equivalent of cash. The line of division between *1072 contracts so to be considered, and those to be excluded, is not easy to trace, but here the partnership received nothing more from the Foundation than nonnegotiable written evidence of an agreement to pay a definite sum of money at an indefinite time in the future, an account receivable not includable in its gross income. We think this situation is properly classed outside the limits of those where property may be considered equivalent to cash.
The partnership received no property from the Foundation in 1933 taxable as income for services rendered.
Decision will be entered for the petitioners.