*933 1. Under a contract for the future sale of shares and their deposit in escrow until the price was paid, held, the seller continued to be the owner of the shares and a dividend declared and paid while they were still in escrow is included in his income even though it operated to reduce the price.
2. An agreement by the owner of shares to pay an attorney as compensation for services a percentage of amounts received by the owner as dividends or proceeds of sale does not serve to exclude the amount of such percentage from the shareholder's income.
*949 The Commissioner determined a deficiency of $1,635.36 in petitioner's income tax for 1936. Petitioner assails the value of inherited shares used as basis in the computation of gain on the sale of the shares. In an amended answer the Commissioner prays an increase in the determined gain on the ground that the sale involved other shares, of which an attorney received the sale proceeds; he also prays the inclusion in petitioner's income of a dividend on the shares then in escrow, which dividend*934 by contract was applied in reduction of the vendee's notes for the purchase price.
FINDINGS OF FACT.
Petitioner, a resident of Evanston, Illinois, is the widow of Charles B. Moore, who died testate on November 9, 1929. Petitioner was the sole legatee under his will and the executrix of his estate. Among the estate's assets which she acquired were 400 shares of the Ajax Hand Brake Co., an Illinois corporation organized in December 1925 and engaged in the manufacture and sale of hand brakes for freight cars. On May 29, 1931, petitioner received a certificate for 4,000 Ajax shares, pursuant to a recapitalization plan whereby the company issued 10 new shares of no par value for each of its 1,000 outstanding shares of $5 par value.
1. During December 1935 petitioner, among other Ajax shareholders, entered into negotiations for the sale of 6,000 Ajax shares to G. N. DeGuire, a salesman of Ajax products. The proposal included all of petitioner's 4,000 shares and lesser quantities belonging to others. Detailed conditions were discussed and modifications were suggested by DeGuire, December 21, 26, and 27. On December 28, 1935, petitioner's representative wrote DeGuire that he*935 was authorized by petitioner to *950 accept the offer as modified; that he personally agreed to it, and would:
draw up a formal contract to be executed by the parties upon your return. I told Mrs. Moore * * * that you had stated that the matter could be concluded upon your return about January 6th. In the meantime I will prepare the notes and other papers * * *.
The written contract, which recited that it was "made and entered into at Chicago, Illinois, as of the 31st day of December, 1935", provided that:
the party of the first part [petitioner] agrees to sell to the party of the third part [DeGuire] four thousand (4,000) shares of the capital stock of said Ajax Hand Brake Company for the sum of Forty Three Thousand Nine Hundred Four Dollars ($43,904.00) paid in cash upon the execution of this agreement, the receipt whereof by the party of the first part is hereby acknowledged, and the further sum of Fifty Two Thousand and Ninety Six Dollars ($52,096.00) to be evidenced by four certain promissory notes executed by the party of the third part, all dated December 31, 1935 * * *.
The notes were to become due, one for $17,365 in one year, two for $8,682 each in*936 two years, and one for $17,367 in three years. All were to bear 5 percent interest and were permitted to be paid before maturity at DeGuire's option.
The party of the first part will endorse in blank certificates of such stock, aggregating the total number of shares to be sold by her, and will affix the necessary transfer tax stamps thereto, and will attach a certificate or certificates for * * *
1,332 shares to the first note, for 667 shares to each of the second and third, and for 1,334 shares to the fourth.
The parties hereto will deposit the said notes and certificates of stock attached to them with the HARRIS TRUST AND SAVINGS BANK of Chicago, Illinois, to be held by it in escrow * * *.
under the condition that upon DeGuire's delivery of a certified check for the amount of a note at its maturity or before, together with evidence that interest had been fully paid, the bank should deliver to DeGuire the note and certificate attached; and upon DeGuire's failure to pay the principal and interest of a note at maturity, the note and certificate attached should be delivered to petitioner. Petitioner and another, whose shares were covered by like terms in the same contract, *937 were to:
have the right at all times to vote the stock owned by them and standing in their names on the books of the company, notwithstanding the certificates therefor shall have been endorsed in blank and attached to the said notes.
But they agreed "as stockholders" to vote at the election of directors for a person nominated by DeGuire until two of the four notes had been paid and thereafter to vote for three persons nominated by DeGuire. All parties to the contract agreed that until all of the notes were paid *951 they would not vote for any increase in the company's authorized capital stock and that neither they nor their nominee directors would vote for any dividend without DeGuire's approval, or for any officer not nominated by him, or for any officer's salary; it was understood that the company's commissions and business expenses should be continued at current rates and that depositories of its funds, the signing of its checks, and loans for the conduct of its business should conform to DeGuire's wishes.
All dividends which may be paid, during the life of this agreement, on the stock of the Ajax Hand Brake Company agreed hereby to be sold, shall be credited by*938 the recipient thereof upon the principal and interest of the next one of the said notes thereafter to become due.
It is understood and agreed that the party of the third part shall not be personally liable under this agreement or otherwise or upon any of the said notes, and that the only remedy of the parties of the first and second parts in the event of the failure of the party of the third part to pay any of the said notes and accruing interest thereon, shall be the right to the re-delivery of the certificate or certificates of stock attached thereto.
On January 16, 1936, petitioner surrendered certificates for 4,000 shares to the company's secretary, who thereupon issued to her four new certificates for 1,332, 667, 667, and 1,334 shares, respectively, which she endorsed in blank. On the same date the notes and certificates were deposited with the Harris Trust & Savings Bank, to be held in accordance with the terms of the agreement, and transfer stamps were purchased for the certificates with funds furnished to the bank.
On December 1, 1936, a dividend of $7 a share was declared, payable on December 15 to shareholders of record on November 18, 1936. As the part of that*939 dividend payable on the 4,000 shares in petitioner's name, a check for $28,000 was drawn by the company to petitioner's order on December 15, 1936; she endorsed it to the order of the Harris Trust & Savings Bank. It was then turned over to DeGuire, and by him forwarded to the bank with instructions to apply it as follows:
| My note due Dec. 31, 1936 to F. H. Moore for 1332 shares | $17,365 |
| My note due Dec. 31, 1937 to F. H. Moore for 667 shares | 8,682 |
| Partial payment on my note due Dec. 31, 1937 | 1,953 |
| 28,000 |
DeGuire further directed the bank to turn the stock certificates over to the company's secretary. On December 16, 1936, petitioner's certificates for 1,332 and 667 shares were surrendered to the secretary and he issued new certificates for 1,332 and 667 shares to Helen A. DeGuire. The 667 and 1,334 shares remaining in escrow were transferred to DeGuire on December 17, 1937. In a letter of June 27, 1936, transmitting to the bank a check for interest, DeGuire referred to the escrowed stock as "pledged as collateral." Before the transfers to *952 DeGuire, petitioner voted the escrowed shares in her name by proxy at stockholders' meetings.
2. For*940 services of one of her attorneys in connection with the estate of her husband, petitioner agreed on January 30, 1930, to pay him $10,000 in cash and 5 percent of any sums received by her as dividends on the 4,000 Ajax shares and as proceeds from their sale. Pursuant to that agreement, she paid him 5 percent of whatever she received as dividends or payment for the shares. The agreement (Exhibit 10) is incorporated herein by reference.
3. On an estate tax return, signed and filed by her as executrix, the value of these shares was placed at $50,000. She relied on her attorneys for the preparation of the return. On her income tax return for 1936, prepared on the cash basis, petitioner reported the sale of the 4,000 shares for $100,000 and a basis to her of $150,000, representing their value at her husband's death.
OPINION.
STERNHAGEN: 1. The respondent affirmatively pleads, in addition to the matters determined in the deficiency notice, that the dividend paid December 15, 1936, is taxable as a dividend to petitioner and is not properly to be regarded as a dividend received by DeGuire and paid by him and received by petitioner in payment of the price of shares. From the*941 evidence it is clear that petitioner was the owner of the shares during the period when they were held in escrow, and that as the record and actual shareholder she was the rightful recipient of the dividend when it was paid on December 15, 1936. Not only is it the general doctrine that title to stock does not pass under an escrow agreement until the conditions are performed, Fletcher, Cyclopedia of Corporations, § 5567, vol. 12, p. 557; ; ; ; ; but specifically the agreement and the circumstances of its performance show that this was the purpose and understanding at all times of the petitioner and DeGuire. Petitioner clearly agreed to sell if and when payment was made to the escrow agent, and until that time she was expressly continued as the shareholder with an agreed limitation upon her voting rights. Upon failure of payment at the appointed time, her obligation to sell was ended and she was, by redelivery, to repossess the certificates. *942 Meanwhile she was to and did receive the dividends which the corporation distributed to its shareholders. Her contemporaneous endorsement and transfer of the dividend to DeGuire so that he might apply the amount against the named price of the shares does not give it the character of a dividend as to him. As *953 in , after she, as shareholder, had received the amount qua dividend and transferred it to DeGuire, it lost its character as a corporate distribution; and, as in , its use by DeGuire was in reduction of the price of the shares. She also ; . We confess our inability to find a satisfying distinction from , unless it be that by the contract, which is not set forth in the findings or opinion, Long had become the owner of the shares during the time they were in escrow. Otherwise we must respectfully differ from that decision.
The petitioner is held to have been the owner of the shares at the time of the payment*943 of the dividend on December 15, 1936, and to have been the recipient of the dividend at that time. The amount thereof is properly within her gross income for 1936.
2. The Commissioner, in the notice of deficiency, treated the petitioner as if she had disposed of 5 percent or 200 shares of her stock in her contract with her attorney for services in regard to her husband's estate. Respondent now affirmatively pleads that this was error and that the petitioner continued to be the owner of 4,000 shares and in law and in fact received the entire $28,000 dividend. In this, the affirmative contention must be sustained. The attorney never owned any of the petitioner's 4,000 shares. She contracted, in lieu of the $12,500 which she was obligated to pay him, to pay him $10,000 at once and an amount (limited to $5,000) measured by a percentage of what she received as dividends or proceeds from the sale of the shares. Before she was obligated to pay she had to receive. The receipt by her was income, irrespective of her obligation as to its contemporaneous or subsequent use to pay for legal services, *944 .
The entire $28,000 is to be included as a dividend in petitioner's income.
3. In respondent's brief, he:
concedes of course that in the event the Board holds that the contract with Mr. DeGuire did not effect a completed sale in January, 1936, and the petitioner is therefore taxable on the $28,000 of dividends, then the petitioner did not realize any taxable gain in 1936 from the sale of the stock. * * *
This concession removes from controversy the issue as to the value of the stock to be used as basis for gain or loss on the sale and the secondary issue as to petitioner's estoppel by reason of the value used in determining estate tax at the time of her husband's death.
Reviewed by the Board.
Decision will be entered under Rule 50.
*954 ARUNDELL, dissenting: Confessing with the majority an inability to satisfactorily distinguish this case from , and being of the opinion that that case correctly decides the question of the taxability of the dividends on the stock in escrow, I think the opinion in this case improperly holds the dividends taxable*945 to the petitioner.
LEECH agrees with this dissent.