*639 The transfers to the two petitioners by their father of similar blocks of certain corporate stock, at a price per share equal to its cost to him but somewhat less than its fair market value, held to be sales and not gifts. Further, held, that the presumption arising under California law that the stock so acquired in each instance constituted community property of the respective petitioner and his wife, is not rebutted by the facts established, and that the dividend received on such stock by each petitioner in the taxable year was properly reported for tax by such petitioner and his wife in equal amounts.
*824 These consolidated proceedings ask redetermination of deficiencies in income tax determined by the respondent for the calendar year 1931 against Kenneth K. Bechtel, in the sum of $435.45, and against Stephen D. Bechtel, in the sum of $857.45. The deficiencies in these cases arise from respondent's inclusion in the income of each of the respective petitioners of the entire amount of dividends*640 received by them in that year on stock standing in their names in the W. A. Bechtel Co. Each petitioner had treated such stock as community property, and included in his individual return one-half of the dividends received. The other half of those dividends was returned for tax by the respective wives of petitioners.
FINDINGS OF FACT.
In 1931, W. A. Bechtel Co. was a corporation doing a large and profitable contracting business in San Francisco. Its president, since its organization in 1925, had been W. A. Bechtel, the father of these two petitioners, and they have been, since that time, officers of the company.
Prior to December 1931, practically all of the stock of W. A. Bechtel Co. was owned by W. A. Bechtel, with the exception of two blocks of 117 shares each which, by contract of December 12, 1930, he had sold to the two petitioners at an agreed price of $175 per share, each purchaser giving his note for $20,475 in payment. Between *825 December 12, 1930, and December 23, 1931, each petitioner paid the interest and a small amount on account of the principal of his note, and received some dividends on his stock. Just prior to December 26, 1931, W. A. Bechtel*641 called in his attorney and stated to him that he desired to sell to each of the petitioners 390 shares of stock in the W. A. Bechtel Co. at $100 per share, which was the cost of this stock to him; and, that the contract under which he had sold each petitioner 117 shares of stock was to be revoked, the father to retain the payments made of interest and principal and each of the petitioners to retain the dividends received by them on this stock. Both of the petitioners were present at this meeting between the father and his attorney. The latter was advised that each petitioner would give his note for $39,000, payable in five years with interest at 6 percent per annum, payable to his father, that the stock acquired would be pledged as collateral to secure payment of the note and interest, and that a contract would be executed providing that, for each $100 paid upon the principal of the note, one share of the stock would be released from pledge. No other security or pledge was mentioned or specified.
After W. A. Bechtel had stated his desires and these arrangements had been made, the attorney for W. A. Bechtel informed the latter that any dividends thereafter paid on that stock would*642 be divided for income tax purposes between petitioners and their respective wives, thus effecting a substantial reduction in such tax. W. A. Bechtel made no suggestion, in this discussion with his attorney, that any portion of the stock to be transferred was intended as a gift. At that conference it was explained and agreed that the two petitioners had long been officers of the W. A. Bechtel Co., had rendered valuable services thereto, and that they were entitled to a larger interest in the company, to the success of which they had contributed much, and that in acknowledgment of this fact, and the future services that were expected to be rendered by them to the company, each would be sold 390 shares of the W. A. Bechtel Co. stock, at its cost. After this discussion and that advice from his attorney, petitioners' father directed his attorney to prepare the necessary papers to effect the transactions agreed upon. This was done. The contract and notes were executed on December 26, 1931. The 390 shares of W. A. Bechtel Co. stock acquired by each petitioner were transferred on the books of the company to the petitioners. The certificates were endorsed in blank and deposited as security*643 for payments of the notes and interest. As an incident of the transaction, the former contracts between W. A. Bechtel and petitioners, under which they had each acquired 117 shares of the *826 W. A. Bechtel Co. stock, were revoked and this stock was returned to W. A. Bechtel. At the same time, W. A. Bechtel made a gift to his wife of one-half of his remaining stock in the W. A. Bechtel Co.
The contracts referred to the pledgor as "sole owner" of the stock, and provided that, until default on the notes, the respective pledgors should be entitled to vote the stock and collect and retain all dividends as his "absolute property."
On March 19, 1932, an agreement was executed by these petitioners and their father and mother, as holders of all the stock of the W. A. Bechtel Co. This agreement granted an option to the survivors, in the event of the death of any such stockholder, to purchase the stock of such decedent stockholder for $200 per share. This price was subject to change by later agreement. Provision was made in the agreement that the contracting parties should each take out life insurance on their respective lives, payable to the others. Such insurance was to provide*644 funds for the exercise of the option. The option price was to be increased by the premiums paid upon this insurance. The wives of the petitioners were not parties to this agreement, but each signed a certificate evidencing their understanding thereof, and releasing all claims to the proceeds of such insurance policies of their husbands, except to the extent they were entitled to such proceeds as beneficiaries of their husbands' estates.
On December 29, 1931, W. A. Bechtel Co. declared a dividend on its stock, of $50 per share, payable on that date. On each of the two blocks of stock thus acquired by these petitioners, there was paid a dividend of $19,500.
During the period here involved, the petitioners were married and living with their wives. Their ligal residence was in the State of California. Each petitioner and his respective wife filed a separate return for the calendar year 1931. The petitioner, in each case, included in his income, one-half of the dividends so received by him, and the other half was returned by his wife.
These dividends were the community income of the respective communities of petitioners and their wives.
OPINION.
LEECH: In determining*645 the deficiency here in question respondent has determined that the stock of the W. A. Bechtel Co. had a fair market value on December 26, 1931, of $175 per share and that the transfer of stock to the two petitioners by their father at a purported consideration of $100 per share was, in effect, a sale of four-sevenths of the transferred stock for an aggregate consideration of $39,000, and was a gift of the remaining three-sevenths of such stock. Accordingly, he treated the three-sevenths determined by him to *827 have been a gift, as separate property of the petitioner in each case, and three-sevenths of the total dividend paid in each instance to be taxable to the respective petitioner. The remaining four-sevenths he treated as community property. Respondent now asks an increase of the deficiency in each case on the theory that the entire 390 shares of stock acquired by each petitioner were the separate property of the latter and all of the dividends received on such stock were taxable to them individually.
The California Civil Code provides:
SEC. 163. All property owned by the husband before marriage, and that acquired afterwards by gift, bequest, devise, or descent, *646 * * * is his separate property.
SEC. 164. All other property acquired after marriage by either husband or wife, or both, including real property situated in this state, and personal property wherever situated, heretofore or hereafter acquired while domiciled elsewhere, which would not have been the separate property of either if acquired while domiciled in this state, is community property; * * *
SEC. 687. Community property is property acquired by husband and wife, or either, during marriage, when not acquired as the separate property of either.
The rule is clear under the California decisions, that property acquired by residents of California during coverture is presumed to be community property and that before such property can be treated as separate property this presumption must be overcome by evidence that it was acquired with funds constituting the separate property of the husband or wife, was acquired upon the credit of the separate property of one or the other, alone, as distinguished from the credit of the community, or was acquired by gift. *647 ; ; ; ; ; . The Board has recognized this rule. As we said in :
So, that, whether or not the property in question was separate or community, i.e., whether or not the Ellis case, cited by the respondent, or the Schuyler case, relied upon by the petitioner, should be followed, depends upon whether or not that presumption that the borrowed funds with which the stock was purchased were community funds, has been successfully overcome. We are of the opinion that it has not.
Here the disputed stock was acquired by each of these petitioners during their marriage and residence in California. Thus the presumption arises in each case that such stock is community property. It has been so considered by the petitioners and their wives. The issue here submitted in each case is determined by the answer to the inquiry as to whether the evidence is sufficient to rebut the legal presumption.
*648 *828 Respondent argues that, because the sale price of the stock was less than its fair market value, the excess above that value constituted a gift; and that, since the sole security for the payment of both notes for $39,000 was the stock acquired, it must follow that the credit given in the transaction for the portion of stock actually sold, was on the security of the three-sevenths of the stock acquired by gift as the separate property of the individual petitioners. He contends that those facts and circumstances rebut the presumption under California law that the stock on which the disputed dividends were paid was acquired as part of the community estate, and that the case is controlled by In ; .
This position is premised upon a gift to petitioners of three-sevenths of the stock they here respectively acquired. In our opinion, the fact of a gift is contradicted by the record here.
A standard definition of gift is: "A voluntary transfer of property by one to another, without any consideration or compensation therefor." *649 ; .
Intent to make a gift is a sine qua non of a gift. ; affd., ; ; affd., . The presence of consideration here contradicts an intention to make a gift (; certiorari denied, ), particularly since the law imposed no gift tax and no benefit, to the transferor, was apparently obtainable by artificially clothing a gift as a sale.
Here the facts disclose that both the transferor of the disputed stock and its recipients, the petitioners, intended the transaction to be a sale and not a gift. Consideration passed. It is true that the fair market value of the transferred stock was in excess of the price specified in the contract. But, nevertheless, it was a transfer for a very valuable monetary consideration. And, there was additional consideration in the form of past and future services to the company in which the father was deeply interested financially, as*650 well as for personal reasons. ;.
Although we are of the opinion that the transfers by W. A. Bechtel of all of this stock to the petitioners, his sons, were sales and not gifts, assuming that three-sevenths of the stock transferred was a gift, as respondent contends, then it would seem that the intent of the donor was to make a gift of that stock to the respective communities, from which it would properly follow that such stock was so given and received.
Nor is the designation in each contract of December 26, 1932, of the pledgor as the "sole owner" of the stock, and the dividends *829 thereon as his "absolute property", controlling here. In construing a written agreement, we are not restrained by the parol evidence rule which operates only between the parties thereto. . This Board is entitled, in the circumstances, to know the conditions and circumstances surrounding the parties at the time the contract was made, so as to put us, as nearly as possible, in the position of those parties. *651 . When this is done here, the importance of those references is nullified. In each case the agreement was drawn by the attorney, to effect a certain result. That was the guarantee of payment of each note and the protection of each petitioner in the matter of stock rights as against the holder of the note. The attorney considered that, under the conditions of these transfers, each petitioner received the stock as community property, and communicated this opinion to petitioners and their father.
The respondent argues that the failure of the respective wives of the petitioners to execute the agreement of March 19, 1932, containing the mutual options, and the execution of a certificate evidencing their understanding of the agreement and releasing their claims to the proceeds of the insurance policies therein provided to be taken out by their husbands, except to the extent entitled thereto as beneficiaries of their husbands' estates, contradict the theory that petitioners acquired this stock as community property. We do not agree. The explanation of these circumstances by the attorney who drew the original contracts*652 of December 26, 1931, as well as the option agreements, three months later, is reasonable and convincing. The consent of the wives of the petitioners to the option agreement was evidenced because of the understanding that the stock was community property, and to preclude the raising of any question as to the right of the wives to any part of the proceeds of the insurance policies to be taken out by their husbands. Without such releases, the wives of the petitioners might have claimed a part of those proceeds on the ground that the premiums thereon had been paid from dividends received on the stock or from other community income. See ; ; ; ; ; . We conclude that the record evidence does not rebut the legal presumption here effective that the 390 shares of stock acquired by each of these petitioners was community property, and taxable as such.
Decision will be entered under Rule 50.*653