*696 1. A partnership which was engaged in the brokerage business paid a large sum for cancellation of leases upon which it was lessee. At the time of cancellation certain amounts expended for leasehold improvements had not been amortized. Held, that the aggregate of the cost of canceling the leases and the unamortized improvements to the leaseholds is deductible in the year the leases were canceled. Denholm & McKay Co.,2 B.T.A. 444">2 B.T.A. 444, followed.
2. The partnership entered into an agreement with another brokerage firm by which the partnership agreed to urge its customers to transfer their accounts to the other firm, to refrain from competing with the other firm, and to remain a member of various stock exchanges for the 72 1/2-month period of the contract. The other firm agreed to pay the partnership a specified percentage of commissions earned on accounts of the partnership which might be acquired by the other firm. Held, that the execution of the contract did not constitute an exchange giving rise to gain or loss and that, consequently, the partnership realized no gain which might be amortized over the period of the contract.
*400 Respondent determined income tax deficiencies for the calendar year 1936 against the petitioners as follows:
| Alexander J. Cassatt | $875.26 |
| Clement A. Griscom, 3rd | 4,286.22 |
| T. Ellwood Webster | 4,052.01 |
| Charles Watson, 3rd, and Polly Fay Watson | 623.84 |
| Gerard H. Coster | 3,970.68 |
Except for a stipulated adjustment to which effect will be given in the recomputation of the deficiencies under Rule 50, all of each of these deficiencies is in controversy. In computing the income for the calendar year 1936 of a firm in which the petitioners were all *401 partners, the respondent disallowed a deduction of $69,583.30 which the firm claimed to be the portion of the aggregate of the cost of canceling certain leases and the unamortized improvements to its leased premises which was deductible in that year, and retained in that computation $78,706.93 returned by the partnership for that year as income received during that period from a contract by which its brockerage accounts were taken over by another. The propriety*698 of this action is the only issue submitted.
The facts were stipulated. Only those facts necessary for disposition of the issue before us will be set forth in our findings.
FINDINGS OF FACT.
The petitioners are citizens of the United States and were members of the brokerage firm of Cassatt & Co., a limited partnership (hereinafter referred to as the firm), which until January 15, 1935, conducted a brokerage business on the New York Stock Exchange, the New York Curb Exchange, and the Philadelphia Stock Exchange.
Each of the petitioners for the calendar year 1936 filed his income tax return on or about March 15, 1937.
Petitioners Alexander J. Cassatt, Clement A. Griscom, 3rd, and T. Ellwood Webster filed their respective returns with the collector of internal revenue for the first district of Pennsylvania at Philadelphia.
Petitioners Charles Watson, 3rd, and Polly Fay Watson, husband and wife, and Gerard H. Coster filed their respective returns with the collector of internal revenue for the second district of New York at New York City.
For many years prior to January 15, 1935, the firm was a limited partnership, the latest certificate of limited partnership being*699 dated August 1, 1931, as amended by certificates of amendment dated December 26, 1933, and January 7, 1935, all duly executed and filed pursuant to the statutes of the Commonwealth of Pennsylvania and the State of New York. It was engaged in the stock brokerage business and held memberships in the New York Stock Exchange, the New York Curb Exchange, and the Philadelphia Stock Exchange. There were twelve general partners and two limited partners in the firm.
The books of account of the firm were kept and its income tax returns filed on the accrual basis for each calendar year.
On and for some time prior to Anuary 15, 1935, the firm was solvent and able to pay all its debts then due, but its capital had become impaired through losses to such an extent that it was unable to continue in business, and in the latter part of the year 1934 the partners determined to liquidate the firm.
At the time such liquidation was determined upon, six of the general partners, hereinafter called the red partners, had not only lost *402 all of their capital in the firm, but under the provisions of the partnership agreement were indebted in substantial amounts, resulting from losses of the*700 firm, to the remaining six general partners, hereinafter called the black partners.
The firm and its predecessor firms for many years prior to January 15, 1935, had conducted an extensive brokerage or stock exchange business under the name of Cassatt & Co. in Philadelphia and New York. On January 14, 1935, the firm had on its books a total of 9,513 stock exchange customers for whom transactions had been handled within the three years preceding.
On January 2, 1935, the firm executed an agreement with E. A. Pierce & Co. (also a member of the New York Stock Exchange), under which the firm agreed to discontinue, on January 15, 1935, the conduct of its stock brokerage business and to attempt to effect the transfer to E. A. Pierce & Co. (hereinafter referred to as Pierce) of all those accounts of its customers which Pierce considered acceptable, in consideration of which Pierce agreed to pay to the firm, for a period of six years from January 15, 1935, 25 percent of the gross brokerage commissions earned and received by Pierce from the accounts so transferred.
This contract provided that Robert K. Cassatt and Joseph W. Wear, who had been general partners of the firm, should become*701 partners of Pierce. The contract contained, among others, the following provisions:
Cassatt shall submit to pierce within seven days after the execution of this agreement, a list of all its customers who have transacted business with Cassatt in the purchase or sale of securities either for cash, or on margin, since January 1, 1932.
Pierce shall examine said list, and within seven days after the receipt thereof, shall submit to Cassatt a list setting forth such of the accounts appearing upon the Cassatt list as shall likewise have been customers of Pierce in the purchase or sale of securities for cash, or on margin, since January 1, 1932.
It was also agreed that Pierce would pay commissions to the firm only in accordance with the rules and regulations of the exchanges upon which the transactions resulting in brokerage commissions were made and that if the firm ceased to be a member firm of those exchanges or, for any other reason, it would be a violation of regulations of those exchanges to make payments of commissions to the firm, Pierce's liability to make such payments would cease until it should again become proper, during the period of the contract, for Pierce to make*702 the payments to the firm.
The contract also contained the following provision:
SIXTH: Cassatt [the firm] agrees that it will exercise its best efforts to effect the transfer of its stock and commodity accounts to Pierce, that it will cooperate in the efforts to continue said accounts with Pierce; and that if Cassatt, or any of the partners thereof, shall, during the period of six years *403 from January 1, 1935, re-enter or engage in the stock brokerage business under the name of "Cassatt", or with "Cassatt" as part of the firm name, the obligation of Pierce to make payment of said 25% (or 20%, as the case may be) of commissions that may thereafter be earned by Pierce on "Cassatt accounts" shall cease and terminate; and each of the partners of Cassatt does hereby covenant and agree with each other and with Pierce and with Cassatt that he will not re-enter or engage in the stock brokerage business under the name of "Cassatt", or with "Cassatt" as part of the firm name, during said period of six (6) years from January 1, 1935. Nothing herein contained, however, shall be construed to limit the right of Cassatt, or any of the partners thereof, to enter into the investment*703 business, or into the business of dealers in securities, either through a corporation using the name "Cassatt", or otherwise.
The agreement further provided that Pierce was in no way obligated to continue in the brokerage business for any specified period of time and was not limited or restricted in any way in its future dealings with accounts transferred from the firm.
The rules of the New York Stock Exchange prohibited any member of the Exchange from dividing commissions with any person or firm not a member of the Exchange. Consequently, in order that the firm might under these rules be permitted to receive the payments to become due to it under the Pierce contract, it was necessary that the firm continue in existence until January 15, 1941, and during such time maintain a membership in the New York Stock Exchange.
In the early part of January 1935 the firm was obligated, as lessee under certain long term leases of office space in Philadelphia and New York, at rentals substantially in excess of the then rental value of the space occupied.
The Arcade Real Estate Co. was the landlord of the Philadelphia office space covering the entire first floor of the Commercial Trust*704 Building, Philadelphia, Pennsylvania, for the term ending August 1, 1941, at an annual rental of $65,153.52. The Irving Trust Co. was the landlord of the New York office space covering the twentieth floor of the Irving Trust Building, New York City, for the term ending April 30, 1941, at an annual rental of $81,000. The Four Hundred Madison Avenue Corporation was the landlord of the New York office space covering the offices at 400 Madison Avenue, New York City, for terms ending at various dates and having an unpaid rental balance of $68,033.16. The total amounts of rent to become due under these three leases for the balance of their respective terms aggregated $1,076,000.
In connection with the proposed liquidation of the firm, arrangements were concluded with the Arcade Real Estate Co. and Irving Trust Co. to accept, in cancellation of their leases, the aggregate sum of $370,446.30, of which $248,871.36 was to be payable forthwith and $121,575 payable before January 15, 1941.
Arrangements were concluded also with the 400 Madison Avenue Corporation by which it was paid on or about January 15, 1935, the *404 sum of $34,000 for cancellation of its lease. The total payments*705 to be made to all three landlords aggregated $404,446.36. Of the total aggregate payments of $404,446.36, $57,922.30 represented rentals due for years prior to 1935, leaving $346,524.06 to cover settlement for the cancellation of the unexpired term of the leases.
In connection with the proposed liquidation the firm found it necessary to borrow $160,000, which loan was agreed to be made to the firm by two banks in Philadelphia, the Pennsylvania Co. for Insurances on Lives and Granting Annuities (hereinafter referred to as the Pennsylvania Co.) and the Fidelity-Philadelphia Trust Co., the same to be secured by an assignment of the first moneys to be received under the Pierce contract.
On January 14, 1935, a contract (hereinafter called the banks and landlords agreement) was executed by the firm, two of the landlords (Arcade Real Estate Co. and Irving Trust Co.), the two banks above named, the limited partners of the firm, and the Pennsylvania Co. as trustee, whereby the firm agreed to assign to the trustee "all its right, title and interest in and to the Pierce Contract" and all amounts payable thereunder. After paying all administration expenses, the trustee was to apply the*706 balance of moneys received under this arrangement in the following priority: (1) to the reasonable expenses of the firm during the liquidation period, not to exceed $7,500 per annum; (2) to the payment of the $160,000 loans from the Philadelphia banks, together with interest thereon; (3) to the payment of the amounts due the lessors, the Arcade Real Estate Co. and Irving Trust Co.; (4) to the payment of taxes; (5) to the payment of the capital contributions of the limited partners; (6) to the payment of any balance to the firm.
Pursuant to this contract the firm, on January 15, 1935, assigned to the Pennsylvania Co., as trustee, all its rights under the Pierce contract. This contract was never listed among the assets of the firm on its books.
On January 14, 1935, the red partners of the firm agreed to withdraw therefrom and to release to the black partners all their interest therein. Pursuant to that agreement, the red partners did resign from the firm on February 18, 1935, and released all further interest therein. At the same time Joseph W. Wear and Alexander J. Cassatt also retired from the firm, retaining, however, a certain interest in the assets of the firm, if any, *707 remaining after payment of liabilities to creditors and after repayment to the limited partners of their capital contributions.
From and after February 18, 1935, the firm was continued, Gerard H. Coster, T. Ellwood Webster, Clement A. Griscom, 3rd, and Charles Watson, 3rd, being the sole partners. After January 15, 1935, and to date no business was transacted by the firm, except (1) the transaction of a floor brokerage commission business upon the *405 New York Stock Exchange, exclusively for the account of other members of the exchanges, by the member who held the Stock Exchange seat which the firm was required to maintain, and (2) as was required in connection with the liquidation of the assets of the firm.
Throughout this period none of the partners above named other than Gerard H. Coster was active in the firm, and no payments were received by any of them individually or otherwise from the firm during this period. During this period Coster, as the New York Stock Exchange member of the firm, conducted the floor brokerage business above referred to, and received therefor a salary approximately equal to the commissions earned by him during the period.
Pursuant to*708 the provisions of the Pierce contract, Pierce took over, on or about January 15, 1935, all of the Cassatt accounts except a relatively insignificant number of accounts which it refused to accept. Pierce retained about 95 percent of these customers throughout the period covered by the Pierce contract.
During the period of the Pierce contract, to wit, from January 15, 1935, to January 15, 1941, the following payments (constituting 25 percent of the gross commissions received by Pierce from the former customers of the firm) were made by Pierce to the Pennsylvania Co., trustee under the banks and landlords agreement:
| 1935 | $67,133.37 |
| 1936 | 78,706.93 |
| 1937 | 59,453.96 |
| 1938 | 33,055.75 |
| 1939 | 21,733.83 |
| 1940 | $14,819.92 |
| 1941 | 520.90 |
| Total | 275,424.66 |
These payments were applied by the Pennsylvania Co., as trustee, as follows:
| Trustee's commissions and expenses | $6,525.78 | |
| Expenses to maintain firm | 39,920.85 | |
| Payment of loans by Banks: | ||
| Principal | $160,000.00 | |
| Interest | 9,156.88 | |
| 169,156.88 | ||
| Payments to landlords | 59,821.15 | |
| Total payments | 275,424.66 |
On and prior to January 15, 1935, the capital contributions made by the limited partners*709 to the capital of the firm amounted to $850,000. One-half of that amount, or $425,000, was repaid to them at or shortly after January 15, 1935, pursuant to section 7 of the banks and landlords agreement. No part of the remaining $425,000 contributed by the limited partners to the capital of the firm has been returned to them, nor is there any possibility that any part thereof will ever be so returned.
*406 The aggregate capital contributions of the black partners to the firm were as follows:
| Gerard H. Coster | $250,000 |
| Joseph W. Wear | 208,000 |
| Alexander J. Cassatt | 90,000 |
| T. Ellwood Webster | $250,000 |
| Clement A. Griscom, 3rd | 250,000 |
| Charles Watson, 3rd | 75,000 |
No part of any of these capital contributions has at any time been returned to these partners, nor is there any possibility that any part thereof will ever be so returned.
In its return for 1935 the firm deducted the sum of $69,583.30 representing 12/72.5 of the aggregate of the cost of terminating the leases, $346,524.06, and unamortized improvements to the leased premises surrendered in the sum of $73,875.02. This deduction was taken on the theory that these sums of $346,524.06 and $73,875.02*710 should be amortized over the life of the Pierce contract ending January 15, 1941.
In its return for the year 1935 the firm included in gross income the sum received in that year on the Pierce contract, $67,133.37. That return thereby reflected a loss of $39,582.25. This return did not include in gross income any value for the Pierce contract.
In auditing this return in 1937, over the protest of the firm, the Bureau of Internal Revenue increased the deduction of $69,583.30 by the sum of $350,815.78, which was the aggregate of the balance of the unamortized lease improvements and the money settlement with the landlords. The net loss of the firm for 1935 was thus increased to $390,398.03. No part of this increase in net loss was claimed as a deduction by or allowed as a deduction to any members of the firm. None of the partners paid any tax for the year 1935, excepting a small sum paid by Alexander J. Cassatt.
In its return for the year 1936 the firm also deducted the sum of $69,583.30, computed in the same manner and on the same theory as was the similar deduction for 1935. In its return for that year the firm likewise included in gross income the amount received in 1936*711 on the Pierce contract, $78,706.93. That return thereby reflected a loss of $11,055.49.
In its returns for the years 1937 to 1940, inclusive, the firm consistently continued to treat its receipts from the Pierce contract and the settlement with the landlords in cancellation of leases as it had in the years 1935 and 1936.
In auditing the 1936 return of the firm in 1938, the respondent disallowed the deduction of $69,583.30 because respondent had included that item, as well as the balance of the cost to petitioner of its cancellation of the leases, in its return for 1935. By reason of this disallowance and other adjustments not here in question, respondent changed the loss of $11,055.49, as shown on the return, to *407 a profit of $84,967.96. He included in the gross income of each of the petitioners for 1936 his respective share of the firm income so computed.
OPINION.
ARUNDELL: Petitioners argue that the total cost of canceling the leases was not deductible in the year of cancellation but should be spread over the 72 1/2-month period during which the Pierce contract was effective. Similar treatment is also urged for the unamortized cost of certain improvements*712 placed upon the relinquished leaseholds by petitioners. Respondent has treated the entire cost of terminating the leases as an expense deductible in 1935 and has accorded a similar treatment to the unamortized cost of the improvements.
This action appears correct. It has long been a rule that the consideration paid for the termination or cancellation of a lease by the lessee is deductible in full by him as an ordinary and necessary expense for the year in which the expense is paid or incurred. Sec. 23(a), Revenue Act of 1934; ; ; cf. . With the relinquishment of the leaseholds a loss had been sustained of the unamortized cost of the improvements and, as the statute is specific that losses must be taken in the year sustained, it follows that the proper period to reflect this deduction was the year 1935.
Petitioners contend that if the firm must deduct in the year 1935 the entire cost of terminating the leases, as we have just held, then gain occasioned by the execution of the Pierce contract was also accruable as income*713 in that year. They argue that any other treatment would distort their income, since the termination of the leases and the execution of the contract were both parts of an integral scheme which culminated in the complete liquidation of the firm. They reason that under the Pierce contract the firm received property worth $500,000 in exchange for the transfer of its customers' accounts to Pierce, and that such exchange was one upon which gain was recognized under section 112(a) of the Revenue Act of 1934. Petitioners maintain that the firm's basis for the contract was cost and that cost in this case was the fair market value of the contract at the time of execution, or $500,000.
Petitioners' argument concerning respondent's inclusion in the firm's gross income for 1936 of the $78,706.93 paid to the firm by Pierce is necessarily premised upon their claim that the firm realized gain upon execution of the Pierce contract in 1935. They assert that the firm should be allowed to amortize the amount of its basis (which they claim to be $500,000) over the period of the contract, or that the payments received by the firm from Pierce should be excluded *408 from gross income as a return*714 of capital which does not equal the firm's basis for the contract. It should be mentioned at this point that petitioners did not return this alleged profit in their tax returns for the year 1935.
We are of the opinion that petitioners must fail because the premise upon which they have based their claim is false. Petitioners have not shown that the firm realized gain upon execution of the contract. All that the firm received upon execution of the contract was the promise of Pierce to make certain payments in the future, conditioned upon certain contingencies. The firm gave nothing in exchange for Pierce's promise other than its promises to urge its former clients to transfer their accounts to Pierce and to agree to remain a member of the various exchanges and the promises of its partners to refrain from entering the brokerage business using the name of Cassatt. We disregarded the three month-to-month leases which may have passed to Pierce, as they apparently had only a nominal value. We do not understand that an exchange of promises to perform acts in the future is an exchange of property giving rise to gain or loss. The firm's accounts were not property which could be transferred*715 at will.
Furthermore, even if the firm might be said to have transferred "property" in the nature of good will, we think that the transaction was not a closed one upon which gain might be realized. The contract was of a speculative nature and the promises by either side were not of the sort which can be said to have a fair market value. As the Circuit Court of Appeals for the Second Circuit has said concerning a promise to do something in the future, "it is absurd to speak of a promise to pay a sum in the future as having a 'market value,' fair or unfair. Such rights are sold, if at all, only by seeking out a purchaser and higgling with him on the basis of the particular transaction. Even if we could treat the case as an exchange of property, the profit would be realized only when the promise was performed." . The receipt of a percentage of the commissions depended upon the customers' accounts being transferred to Pierce, the acceptance of those accounts by Pierce, the customers continuing to transact business with Pierce after transfer of the accounts, the firm's refraining from reentering the brokerage business, *716 and Pierce's continuance in the brokerage business. With the obligations conditional and indefinite to the extent here present it is our opinion that the firm's rights under the Pierce contract had no fair market value.
No testimony as such was offered on the question of the value of the Pierce contract. The parties stipulated, however, that certain individuals, if called to the stand, would have testified that the contract had a market value of approximately half a million dollars *409 to the firm. We can not accept this stipulation as establishing that such a conditional, indefinite, and contingent obligation had a fair market value. The actual recovery under the contract was $275,424.66, a sum very much less than the claimed fair market value. Nor does the fact that a bank might have lent funds on the security of the contract necessarily mean any more than that because of the contract the firm was a good moral risk to repay the moneys loaned. The contract with the bankers made the general partners of the Cassatt Co. liable for the repayment of the $160,000 loan.
The considerations already discussed also prevent the accrual of the sums the firm hoped to realize*717 under the Pierce contract, as there is lacking the definiteness of liability to pay upon which the application of the accrual system of accounting is based. As stated in ,
* * * The underlying thought is that pecuniary obligations payable to the taxpayer are considered discharged when incurred, . These must be unconditional obligations, ; and they must be definitely payable, . * * *
The complete lack of definiteness in Pierce's obligations would require the treatment laid down by the Supreme Court in , in which it was held that income was not realized at the time the transaction was entered into, but after the recovery of the taxpayer's basis, the profit, if any, being taxable when and as received. This holding has been followed consistently by the courts and the Board. *718 ; affd., ; ; affd., . The case of , certainly may not be taken as an authority contrary to , and must rest on its own particular facts. It follows that the amount which the firm received in the taxable year under the Pierce contract must be accounted for as of that time and, as there is no cost basis shown, the total receipts must be included in the firm's gross income.
For the several reasons set forth above we are of the opinion the respondent should be sustained on this point.
We are not unmindful of the fact that some hardship arises from petitioners' inability to offset the cost of canceling the leaseholds against the income received under the Pierce contract. But to use this circumstance as a ground for announcing as a legal proposition that income is presently realized upon the entering into of a contract of the nature here involved would be indeed unfortunate. In this very case, if petitioners' theory were adopted they would*719 have been required to pay a tax based on the firm's receipt of $500,000 gain, whereas the firm finally received only $275,424.66. Our fiscal system *410 is geared upon a yearly basis and at times hardships arise by reason thereof. Nevertheless, what we are dealing with is a law which has for its purpose the raising of revenue to run the Government and set periods are necessary for the fixing of each taxpayer's obligations.
Reviewed by the Board.
Decisions will be entered under Rule 50.
BLACK, concurring: I concur in the result reached, but I do not agree with that part of the majority opinion which holds that the case of Robert J. Boudreau,45 B.T.A. 390">45 B.T.A. 390, is distinguishable on its facts.
I dissented in the Boudreau case. The essence of my dissent was that contracts which provide for future payments contingent upon indeterminable events which may never occur should not be treated as income when entered into, even though they do have a definite ascertainable fair market value. I am still of the same opinion as expressed in that dissent and, therefore, concur in the result reached by the majority opinion herein.
LEECH, dissenting: The majority opinion concedes that the result it reaches is a "hardship." I agree. But the deficiency here, substantial as it is, involves only one year. This same "hardship" will necessarily follow the petitioners through the remaining five years of the Pierce contract. I think such a result is wholly unjustified.
Undoubtedly the majority is correct in requiring the firm to deduct as a business expense, in the year of payment, the consideration it paid for canceling the leases. But, in my judgment, the income arising from the sale of its customers' accounts in that same year should be similarly treated and so included in income. Any other treatment would greatly distort income.
The firm and its predecessors had been engaged extensively in the stock brokerage business for many years in Philadelphia and New York. In January 1935 its capital had become impaired. While yet solvent the firm decided to liquidate. Among its assets the firm possessed good will in the form of customers' accounts - the result of its "many years" in business. In order to meet its liquidating liabilities, particularly the consideration required to release the firm*721 from its long term leases, it transferred its good will, evidenced by its customers' accounts, to Pierce in exchange for the Pierce contract. This transfer included an option on several leaseholds of the firm.
I think that the firm's good will, in the form of its customers' accounts, was property, that the Pierce contract had a fair market *411 value of $480,000 when so received, and that the transaction was therefore taxable. Revenue Act of 1934, secs. 111(b) and 112(a). Under sections 113(a) and 114(a), the basis of the Pierce contract for the computation of gain or loss on its disposition and exhaustion was its "cost" to the firm. ; affd., ; ; reversed on another point, ; , reversing . That "cost" is the fair market value of the accounts exchanged for the contract - $480,000. The Pierce contract was used in its business by the firm throughout the six-year life of the contract. Upon those two premises, in my judgment, *722 the firm is entitled to amortize that "cost" over the life of the contract, and so to the deduction in the taxable year of one-sixth of that basis, or $80,000. ; .
The majority opinion disallows any such deduction, on the ground that no taxable exchange occurred in 1935. This conclusion is based upon two premises: (1) No property was transferred by the firm to Pierce, nor was its good will in the form of its customers' accounts conveyed to Pierce, but, instead, Pierce merely employed certain members of the firm for six years to render services in acquiring new accounts for Pierce, and (2) the 1935 transaction was not then closed, since the Pierce contract had no fair market value when received by the firm. Although the majority opinion states that the proceeding was submitted on a stipulation of facts, it includes a "findings of fact", referred to as "Only those facts necessary for disposition of the issue before us * * *", upon which its two premises are supported. I think those "findings of fact" omit some of the stipulated facts upon which the first premise must be decided, *723 and practically all of the facts and evidence upon which the second must be based.
The first of these positions is not taken directly even by the respondent. Obviously, though probably of little value, the leasehold options transferred were property. That the firm possessed valuable property in the form of good will, evidenced by its 9,513 customers' accounts, is hardly open to doubt. See ; , and cases therein cited. By the present contract the firm agreed to convey this good will - in the form of its customers' accounts - to Pierce. It is stipulated that under the contract the firm agreed to "transfer to E. A. Pierce & Co. (hereinafter called Pierce) all accounts of its customers, in consideration of * * *" Pierce's promise to pay therefor. Pierce thereupon occupied at least part of the brokerage office space theretofore occupied *412 by the firm. Whatever may be said about the theoretical impossibility of the firm transferring its customers' accounts, certainly it could and did convey its good will to Pierce. The*724 only tangible evidence of that good will was the firm's customers' accounts. The stark fact is that 95 percent of those accounts not only were transferred to Pierce, but remained there throughout the life of the contract. The future payments to be made under that contract were in no sense compensation for future services. They were payable not for any effort or services to Pierce by the members of the firm, but for the business Pierce secured by the transfer. The death of every member of the firm, at least after the identification of the "Cassatt accounts", would not have affected the obligation of Pierce under the contract so long as the firm retained the seat on the New York Stock Exchange to comply with the rules of that body. Under the contract these payments were to be made for the firm's good will, measured by the actual value of that good will to Pierce.
The second premise of the majority, which is the only point seriously argued by the respondent, is that the transaction in January 1935 was not closed and therefore taxable, since the Pierce contract had no fair market value when then received by the firm.
It reaches this conclusion despite the following facts and*725 evidence, all of which and more will be found in the stipulation.
At the time of the sale and transfer of its good will in the form of customers' accounts to Pierce, the firm was a going solvent brokerage business with a history covering many years. It then had 9,513 customers. In the year just closed the firm had realized gross commissions of $439,248.04 from these accounts and, for each of the preceding six years, an average of $843,021.93. Such a sale of the accounts of an established brokerage business was not an unusual thing.
The opinion of E. A. Pierce, senior partner in Pierce, is that the Pierce contract had a fair market value to the firm on the critical date of not less than $500,000. He had been in the stock exchange business for 40 years and, during that period, his firm had made many similar acquisitions of the accounts of brokerage houses. From that experience he expected, on the date of the contract, that at least 90 percent of the business of the firm would be retained by Pierce, that the annual average stock exchange business in general would be at least as good in the following six years as it had been in the preceding six years, that he knew the average*726 gross income received by the firm from its stock exchange business for each of the four preceding years had been $575,000, and that as a consequence he then anticipated that over the ensuing six years the gross commissions to be received by Pierce from the firm customers' accounts would amount to not less than $3,000,000, of which, under the contract, $750,000 would have *413 been payable to the firm. The opinion of Robert K. Cassatt, who had been the senior partner in the firm until his resignation therefrom in February 1935 in connection with the liquidation, is that it had a similar value. He was thoroughly familiar with and in charge of the business of the firm. He also believed on the critical date that the stock exchange business would be as good during the following six years as it had been during the preceding four years and that the income of the firm from the Pierce contract would be no less than $10,000 per month, or an aggregate of $720,000.
Then there is the compelling uncontradicted categorical testimony of the presidents of two Philadelphia banks that those banks, in fact, each loaned the firm $80,000 on the sole security of the Pierce contract. *727 The president of one of the banks who negotiated this loan fixed such fair market value at $480,000. He was familiar with the gross commissions of the firm from its stock exchange business during the four years preceding the execution of the Pierce contract. He corroborated both Pierce and Cassatt as to the stock exchange business to be expected by Pierce during the contract period and the income to the firm therefrom under the contract. The opinion of this banker is substantially corroborated by that of the president of the bank which joined in the loan.
Admittedly, only $275,424.66, as the majority points out, was received by the firm from the Pierce contract. But that certainly does not contradict the existence in January 1935 of any fair market value for the contract. Nor does it discredit or affect the weight to be given the opinions of the witnesses or the loans on the security of that contract. Emphatically is this so when it is noted from the stipulation that the volume of the stock transactions on the New York Stock Exchange, which had already decreased from 1,124,800,410 shares in 1929 to 323,845,634 in 1934, continued that decline to 207,599,749 shares in 1940. *728 Obviously that unparalleled drying up of the stock brokerage business following 1935 could scarcely have been reasonably foreseen at the inception of the contract. See .
This evidence of the existence of a fair market value for the Pierce contract when it was received by the petitioners stands uncontradicted. Respondent offered no testimony. It is true, as the majority opinion states, that "no testimony as such was offered on the question of value of the Pierce contract", but the opinions of Pierce, Cassatt, and the bankers, together with their supporting reasons and the fact that the two Philadelphia banks loaned $160,000 on the sole security of that contract, appear in the stipulation. They were so included without limitation or objection and were therefore accepted by the Board and the respondent as admissible testimony of the existence of fair market value of the Pierce contract at the critical date. On brief, respondent *414 makes this comment: "The Board is not bound as a matter of law to adopt as a determination of value the opinions of these persons, notwithstanding there is no conflicting*729 testimony of other witnesses."
The majority casts aside all this evidence upon its conclusion that , concludes the petitioners on this point. However, its discussion basing that conclusion is supported upon a nonexistent premise. It is stated that the accrual by the firm in 1935 of the amounts it "hoped to receive under the Pierce contract" was not warranted, since in that year there was no liability upon Pierce to pay any amount, and such liability would not arise until a future year, based upon conditions and happenings of that future year. Unquestioned authority is then cited to support that rule. The fact is that petitioners are not asking for the accrual in 1935 by the firm in of the amounts it hoped to receive in the future. They seek no accrual. They want only to include in the firm income of 1935 the fair market value of an asset received in that year in an exchange.
Moreover, quite recently the Board adopted a new construction of the holding in the Logan case. In *730 (on appeal, C.C.A., 5th Cir.), the Board held that the Supreme Court in the Logan case did not mean to say that a promise to pay $450,000 solely out of one-twelfth of the oil produced from an oil lease had no fair market value per se. It was held that the existence of such value was always a question of fact. Thus, despite the fugitive nature and the uncertain commercial existence of oil underground, the Board, in the Boudreau case, sustained the determination of the respondent that such promised oil payment had a fair market value of $188,470.26 when the contract to pay was made and taxed the petitioners upon the receipt of their respective interests in that amount. The Board made that finding in the face of testimony contradicting the existence of any fair market value. Here there is none.
Petitioners rely most strongly on the Boudreau case. The respondent however does not attempt to distinguish it. Neither does the prevailing opinion. I do not think it can be effectively distinguished. As the majority opinion states, of course, *731 , is still the law. But so is , which merely construes Burnet v. Logan.
The majority fears the "hardship" to other taxpayers which will follow the precedent of a decision for the taxpayers here. But, though wrongly in my judgment, the precedent has been established in the Boudreau case. The majority does not propose to overrule it. The taxpayers there were subjected to the consequent "hardship." By the application of the same rule, I think, the taxpayers here should be relieved from six years of "hardship."
TYSON agrees with this dissent.