*877 1. The value of corporate shares carrying a provision of the articles requiring the holder, desirous of transferring them by sale or gift, to offer them first to the corporation, which may buy them at their book value, held, not limited by reason of the restriction to book value.
2. Corporate shares were left in trust, the income to go successively to two persons for life. One such person had the right to direct the trustee to sell and otherwise change investments. At the end of the second life estate, one-third of the shares were bequeathed to another, provided he elected to buy the other two-thirds at their fair value. In any event the two-thirds were to be converted into cash, and the proceeds were bequeathed to charitable corporations. Held, the bequest to charity is not too uncertain to be deductible.
*338 The Commissioner determined a deficiency of $121,462.10 in estate tax. (1) The petitioner contests the valuation of shares with a restriction on sale. (2) The respondent concedes error in the inclusion of interim income. (3) *878 The respondent demands the disallowance of a charitable deduction.
FINDINGS OF FACT.
James Smith died June 9, 1937. The executors filed an estate tax return in the district of Massachusetts, and elected one year after the decedent's death as the date of valuation of the gross estate.
Among the properties in gross estate were 12,760 shares of Southwell Wool Combing Co., which the decedent as "donor" had transferred to the Worcester County Trust Co. and himself as trustees under a "Living Trust Deed", dated December 1, 1936. By the trust instrument the trustees were to pay to the donor for life the income and such principal as he might direct in writing; upon his death, to pay the income to his son, and upon the son's death or in case the son should have predeceased the donor, to the son's wife for life. Upon the death of the survivor of decedent, his son, and his son's wife, the trustees were to transfer one-third of the Southwell shares then held in trust, "in case there are then held hereunder any [such] shares" to James Southwell if "then living and connected with said Company", but if not, to his son, Philip Southwell, if "then living and connected with said Company. *879 " Such transfer was expressly conditioned, however, upon the intended transferee's purchase within a year of the remaining two-thirds of the Southwell shares held by the trustees and also of a determinable number of such shares held under another "Living Trust Deed" executed by decedent's son on December 1, 1936. The purchase price was to be the fair value of the shares as determined by a certified public accountant selected by the trustees. Subject to the foregoing provision, the trustees were directed to convert trust principal into cash and distribute the cash among designated corporations, all of which were organized and *339 operated exclusively for charitable purposes. Decedent reserved the power to amend, alter, and revoke the trust. The donor retained the right during life to direct the sale of securities and the investments of the trust, and conferred this power on the son after his death. The trustees agreed to vote the Southwell and other shares as the donor should direct, and, after the donor's death, as the son should direct. Except for specific limitation, the trustees were given full authority to sell, encumber, exchange, and transfer trust property "without*880 approval of any court" and to invest and reinvest the proceeds. By a similar trust instrument of the same date, the son transferred his 12,740 shares to the Worcester County Trust Co. and himself as trustees.
35,000 Southwell shares were outstanding. They had no par value and were the corporation's only class of stock. The corporation had been organized in 1922 by members of a few families. It engages in scouring and combing wool by a technical process requiring machinery and equipment which small mills do not have. Its business is with small mills - about 95 percent with four customers - and is well managed by an experienced officer "getting along in years."
To keep the corporation's shares in the hands of the founding families, the stockholders, on July 25, 1935, amended the agreement of association and articles of organization by making all the shares subject to restrictions on sale and transfer. These restrictions, which were endorsed on the share certificates, provided:
Any holder of shares of the common capital stock of the corporation, the executor or administrator of any deceased holder of any such shares, the trustee in bankruptcy or assignee in insolvency of*881 any such shares, the assignee of any such shares sold on execution, desirous of transferring the same either for or by way of gift or otherwise, shall first offer said shares in writing to the directors of the corporation, who may buy them for the use of the corporation at their book value as appears from the books and records of the corporation as of the date of the close of the last prior month of the corporation plus interest from that date at the rate of six (6%) per cent per annum, less any dividends which may have been declared thereon since such date and which shall have been paid or are payable to the seller.
The directors shall have the right to purchase such shares within a period of thirty (30) days from the receipt of such offer but shall not be required to do so and if the directors do not so purchase within such period, such stockholder shall be at liberty to sell and dispose of the said shares at any price whatsoever.
The above restriction shall not apply to any transfer by the executor or administrator of a deceased stockholder to legatees or next of kin of such deceased stockholder in the distribution of his estate, whether under the terms of his will or under*882 the provisions of interstate law. [Sic.]
The board of directors may from time to time by vote in specific instances waive compliance by a seller with the foregoing provisions.
* * *
On *340 July 25, 1935, and at decedent's death, the Southwell shares were held as follows:
| Holder | Shares |
| James Smith (decedent) | 12,760 |
| William B. Smith (son) | 12,740 |
| Jacob Reed | 50 |
| Ann Putnam Reed | 1,950 |
| Lyda M. Hood | 1,600 |
| Henry G. Hood | 400 |
| Elizabeth Hood | 1,000 |
| Dorothy H. Atherton | 1,000 |
| Henry G. Hod, Trustee | 1,000 |
| James Southwell | 2,400 |
| Philip H. Southwell | 100 |
None has been offered to the company for sale, and no sale of any shares has been made subsequent to July 25, 1935. The shares are not listed. The book value of a Southwell share at the valuation date was $15.46. The fair market value of a share on June 9, 1938, was $35.
OPINION.
STERNHAGEN: 1. The petitioner insists that the fair market value of decedent's shares at the time of his death was limited to the stipulated book value of $15.46 each, because the articles of the corporation required the shareholder, if he wanted to sell shares, to offer them first to the corporation*883 at book value. The Commissioner determined the value, "based upon its [the corporation's] income, balance sheets, and other relevant factors", at $35.
The petitioner's principal contention is that the fair market value of the shares can not be greater than the price at which the corporation could have bought them if decedent had wanted to sell. The shareholder was not required to sell or prohibited from selling. He had the right to retain the shares until death and make a testamentary transfer, and this the decedent did. His successor owner could continue the ownership under the same conditions. Only if a shareholder chose to sell was he required to make an offer to the corporation at book value of the time. The corporation had no absolute right to demand sale - it had no "call" - which fixed the price at which the shareholder could be required to sell. If the corporation wanted his shares before the shareholder wanted to sell at book value, it could dicker with him for a price and book value would not be a determinant of the price. He and the corporation would be the ordinary willing seller and buyer, and fair market value would be the price upon which they would agree, *884 with a presumed knowledge of the facts. The restriction leaves the value unaffected and only restricts the field of available purchasers in the first instance, if the shareholder should wish to sell. It can not be said that such a restriction necessarily affects the fair market value. In , the Board said:
Our problem requires the assumption of a fair and willing seller and a fair and willing buyer under all the circumstances. The stock provision does not prevent a transaction between such persons and it is the value arrived at in a free and *341 open transaction between them which must be determined. The can not be checkmated by a statement at the outset that the stock is not readily marketable. We do not construe a fair market as meaning that the whole world must be a potential buyer, but only that there are sufficient available persons able to buy to assure a fair and reasonable price in the light of the circumstances affecting value.
In , the Board said:
The petitioners contend that since the contract of December 31, 1920, restricted the sale of*885 this stock by requiring that it should first be offered to the other stockholders at its book value without taking into consideration any good will, it had no higher value than that fixed by the contract. The contract provided that any stockholder desiring to sell his stock should first offer it for sale to the other stockholders, but, if after sixty days none of the other stockholders wished to purchase, it, he could then offer the stock to outsiders. It is apparent, however, that the stock must have had a value in excess of the book value. The company had been in business since 1907, first as a partnership and then as a corporation. It had made substantial earnings and had a good will of a considerable value. Although the parties can restrict the sale price of the stock as between themselves they can not, by such a contract, restrict the right of the Government to collect taxes upon the actual value of the stock.
See also ; .
Cases which hold that restrictions obligating the owner to sell at a fixed price provide a ceiling for valuation are distinguishable. *886 Cf. ; ; ; .
Since the restrictive provision of the share is held not to affect the value, it is not necessary to consider whether the restriction had practical force to constrain the decedent in view of the large proportion of shares which he and his son owned, giving them the power to cause the repeal of the restriction, or a waiver by the directors.
The evidence does not establish that in fact the fair market value of the shares was less than $35, as the Commissioner had determined. It is stipulated that the net earnings of the corporation were as follows:
| 1933 | $173,550.50 |
| 1934 | 46,484.26 |
| 1935 | 222,726.77 |
| 1936 | 131,753.25 |
| 1937 | 87,833.65 |
The total for the five years is $662,348.43, and the straight average is $132,469.69. The evidence does not give life to these figures and the wide variations are not explained. By themselves they provide an inadequate foundation upon which to form a judgment as to actual value of the shares. The*887 stipulation contains the statement, "if the Board should find that notwithstanding the restriction on the sale and transfer of the Southwell Wool Combing Company Stock the *342 value should be computed upon the basis of average net income of the past five years, such value would be as follows:
10 times average earnings $35.00 per share
9 times average earnings 34.06 per share
8 times average earnings 30.00 per share
7 times average earnings 29.49 per share
6 times average earnings 22.71 per share
5 times average earnings 18.92 per share
It is not agreed that the value of this stock should be computed on this basis."
The Board is in no position to "find that the value should be computed on the basis of average net income", for the question of fair market value is ever one of fact and not of formula. Net earnings are important but they are only one of the many factors upon which value of shares may be considered, and the significance to be given to such figures depends upon the evidence of all the circumstances in which they are found. Cf. *888 , (at 1170). Without knowledge of the setting in which the earnings appear, they lack substantial evidentiary force from which a useful inference of fair market value can be drawn. Furthermore, it would be entirely unwarranted for the Board, without evidence supporting it, to select a multiple of average earnings as the basis for a finding of fair market value.
Other than these stipulated figures, the evidence consists of the opinions of two witnesses largely based upon a supposed analogy of shares of New England taxtile corporations. The Southwell corporation was not a textile corporation and these opinions do not lead to a conclusion as to the fair market value of the Southwell shares on the date of death. The evidence does not contain data upon which a finding can be made that the fair market value of the shares was less than the $35 a share which the Commissioner has determined. That value must be adopted, not because of the stipulated formula of ten times average earnings, but because there is no adequate evidence proving it to be incorrect or another figure to be correct. 1
*889 2. The respondent concedes that the income of the period between the date of death and the selected valuation date was improperly included by him in the gross estate and that it should be eliminated.
3. The respondent reduced the deduction for bequests to charity to $182,951.02, and now, by affirmative answer, pleads error in allowing any such deduction, on the ground that the amount thereof is too uncertain for computation.
The only uncertainty in the bequest to the charities of the various securities other than the Southwell shares rested in the power of the son to direct the trustee to change investments and in the normal *343 fluctuations in such investments during the lives of the son and his wife. Both these uncertainties are commonplace circumstances in a bequest to charity after intervening lives, and the value of such bequests is readily determinable by the application of actuarial data of the probable period before ultimate distribution to the charity, ; Regulations 80, art. 44. 2
Of the 12,760 shares of the Southwell corporation, one-third, *890 or 4,253 1/3 shares, was bequeathed conditionally to Southwell if he should buy the other two-thirds, and the petitioner does not contend that this one-third is within the charitable deduction. The uncertainty is only applicable to the one-third. There is no uncertainty as to the two-thirds; they must, after the second life expires, be converted into cash and distributed to the charities. Since the restriction upon the sale of the shares did not affect the fair market value at the time of death, such fair market value of $35 a share is no less the factor upon which to base the deduction of such shares as were bequeathed to charity than it is a factor of the value of the gross estate. The fair market value of the 8,506 2/3 Southwell shares at the date of death must be added to the uncontested fair market value of the various other securities to determine the total basis to which to apply the actuarial factor for calculating the value of the future expectancy of the charities.
The decisions upon which the respondent relies for the proposition that uncertainty precludes a charitable deduction involve uncertainties other than the mere possibility of fluctuation in value before the*891 charity is to receive. In ; certiorari denied, , the charity could only expect to receive such property as would be left after the decedent's widow during her life had without constraint exercised her "desire." The court held that this untrammeled power of the widow over the property made it uncertain whether any property whatever would ultimately be distributed to the charity. Nothing, however, in the present bequest to charity discloses an uncertainty except the possibility that the securities could not survive the possibility of the exercise by the son of his reasonable discretion in changing investments. Such a possibility of disappearance of the corpus is too remote to defeat the deduction.
Decision will be entered under Rule 50.