*156 Decision will be entered under Rule 50.
For several years prior to his death, decedent was an equal partner with his wife in a business in Nashville, Tennessee, known as "Grace's" which was a ladies ready-to-wear shop handling high class merchandise. "Grace's" enjoyed a very profitable trade and had an excellent reputation in the community for reliability and fair dealings. In the estate tax return which was filed, decedent's one-half interest in this business was returned at $ 33,966.82, which was the book value of one-half of the assets of the business at the time of decedent's death and included nothing for the value of good will. The Commissioner in his determination of the deficiency determined that decedent's one-half interest in the partnership at the date of his death, including good will, was $ 55,000. Held, the value of decedent's one-half interest in the partnership business at the time of his death, including good will, was $ 45,000.
*663 The Commissioner has determined a deficiency in estate tax against the Estate of George Marshall Trammell of $ 8,424.91. The deficiency is due to four adjustments made by the Commissioner to the net estate reported on the estate tax return. These adjustments are:
| Sch. B -- Stocks and Bonds | $ 1,752.50 |
| Sch. C -- Mtgs., Notes & Cash | 109.17 |
| Sch. D -- Life Insurance | 8,056.23 |
| Sch. E -- Jointly Owned | 21,033.18 |
| Total | $ 30,951.08 |
The Schedule E adjustment is explained in the deficiency notice, as follows:
With respect to item 2 this schedule in the estate tax return you included the value of decedent's interest in the business carried on under the name of Grace's at $ 33,966.82. It has been determined that the value of the decedent's interest in that business including good will was*158 $ 55,000.00.
The petitioner does not contest adjustments shown above as Sch. B, C, and D adjustments. Petitioner does contest the adjustment shown above as Sch. E. adjustment. Petitioner assigns errors as follows:
(a) The Commissioner erroneously determined that the value of decedent's interest in the business operated by Mrs. Grace Trammell and the decedent as partners under the name of "GRACE'S" was $ 55,000.00 at February 12, 1946.
(b) The Commissioner erroneously failed to allow as additional debts of the decedent deficiencies in income taxes due by the decedent for the years 1944, 1945 and the period ended February 12, 1946, aggregating $ 2,035.39.
(c) The Commissioner erroneously failed to allow additional attorney fees and expenses of administration incurred and to be incurred in the prosecution of this appeal.
It was stipulated at the hearing that additional attorney's fees incurred in the prosecution of this appeal should be allowed in a recomputation under Rule 50. Therefore there is no longer any issue as to the matters raised by petitioner's assignment of error (c). Also we do not understand that respondent is contesting petitioner's right to have as a deduction *159 for additional debts existing at the time of decedent's death, the amount of income tax deficiencies determined against decedent's estate after his death for tax periods prior to his death and ending with his death, and which deficiencies in income taxes plus interest were paid after decedent's death.
*664 A statement from the collector of internal revenue, Nashville, Tennessee, was introduced in evidence as petitioner's Exhibit 4 and will be made a part of our Findings of Fact. It will furnish information and data for any allowance which petitioner is entitled to receive in a recomputation under Rule 50, for the additional debts raised by petitioner's assignment of error (b). So the only issue we have to decide in this proceeding is the one raised by petitioner's assignment of error (a).
FINDINGS OF FACT.
The petitioner is the Estate of George Marshall Trammell by George M. Trammell, Jr., Administrator, de bonis non. George Marshall Trammell died February 12, 1946, and at the time of his death he resided in Nashville, Tennessee. The estate tax return was filed with the collector of internal revenue for the district of Tennessee at Nashville, Tennessee.
The decedent had*160 originally been a bank examiner and then comptroller of a Nashville bank before he became connected with "Grace's." "Grace's" is a ladies ready-to-wear shop in Nashville. Mrs. Grace Trammell, wife of decedent, operated the shop herself before she married decedent, and when decedent and Grace were married decedent became a partner owning a half interest in the business. The Partnership Agreement was entered into on June 29, 1939. It is a short agreement, and is as follows:
AGREEMENT, made this twenty-ninth day of June, 1939, by and between G. M. TRAMMELL and GRACE W. TRAMMELL.
WITNESSETH:
WHEREAS, the parties hereto in equal amounts are the owners of the entire capital stock of the corporation known as GRACE'S, INC., conducting a ready-to-wear business in Nashville, Davidson County, Tennessee, and as such stockholders, desire to surrender said charter of incorporation, and surrender up their stock for cancellation, and have all of the assets of the corporation conveyed to them as partners, and they to assume all of the obligations of the corporation.
NOW, THEREFORE, we, G. M. Trammell and Grace W. Trammell do hereby for ourselves, and our respective heirs, executors and administrators, *161 agree to become partners in the business of ladies ready-to-wear, under the firm name of GRACE'S, for a term beginning June 30, 1939, and continuing until such partnership is dissolved by mutual consent. We agree that each of us shall contribute one-half of the assets conveyed to us by Grace's, Inc., as our contribution to partnership capital, including bank accounts, choses in action, etc., and that we will, at all times, keep proper books of account and give our best efforts to making the business successful.
We agree that we shall, at all times, be owners of the partnership property in equal amounts, and that gains and profits shall be distributed to us from time to time in equal amounts as we may determine, which may be in the form of a salary, or merely as a drawing account against profits, as we may determine.
In the event this agreement is terminated by the death or inability to act of either of said partners, it is expressly agreed that the surviving partner may *665 continue the business as theretofore, and buy out the business of such partner, by paying therefor the reasonable value of the partner's property as may be determined from the books of the partnership, paying*162 nothing for good will, and taking into account depreciation, etc.
IN WITNESS WHEREOF, we have hereupto set our names, this twenty-ninth day of June, 1939, in duplicate, each of us having a copy thereof.
(Signed) G. M. Trammell
(Signed) Grace W. Trammell.
The surviving partner, Grace W. Trammell, did buy the decedent's interest in the partnership at book value. This purchase was made by her on January 31, 1948, nearly two years after decedent's death. The book value of the decedent's interest at the time of his death as shown by the balance sheet was $ 33,966.82 and this is the value listed in the return for estate tax.
It is stipulated that the earnings for the following years will be as stated: January 1, 1936, to December 31, 1936, there was a $ 4,975.18 loss; January 1, 1937, to December 31, 1937, there was an $ 8,394.12 loss; January 1, 1938, to December 31, 1938, there was a $ 733.68 gain; January 1, 1939, to June 30, 1939, there was $ 479.54 loss; July 1, 1939, to June 30, 1940, there was a gain of $ 18,162.58; July 1, 1940, to June 30, 1941, there was $ 21,182.99 gain; July 1, 1941, to June 30, 1942, $ 22,221.90 gain; July 1, 1942, to June 30, 1943, $ 61,045.22 gain; July*163 1, 1943, to June 30, 1944, $ 99,435.42 gain; July 1, 1944, to June 30, 1945, $ 105,730.49 gain. For the years 1936 through June 30, 1939, the business was operated as a corporation, and the net earnings figures are arrived at after the deduction of all salaries and business expenses. From June 30, 1940, through June 30, 1945, the business was operated as a partnership. During these particular years the earnings shown in the figures which have been stipulated are without any deduction for salaries to partners. The value of decedent's interest at the time of his death in the business carried on under the name of "Grace's," including good will, was $ 45,000.
The following statement of the acting collector of internal revenue, Nashville, Tennessee, with reference to the payment of additional income taxes after decedent's death was introduced in evidence as petitioner's Exhibit 4, and reads as follows:
Estate of G. M. Trammell
c/o Mr. E. J. Walsh, Attorney
Commerce Union Bank Building
Nashville, Tennessee
Dear Mr. Walsh:
You are advised that additional 1944 income tax was assessed against Mr. Trammell in the amount of $ 1,590.04, plus interest of $ 430.88, and that this amount *164 was paid October 4, 1949.
Additional 1945 tax was assessed in the amount of $ 370.28, plus interest of $ 78.12, and this amount was also paid October 4, 1949.
*666 Additional 1946 tax was assessed in the amount of $ 592.35, plus interest of $ 105.41, which was paid April 4, 1950.
Additional 1947 tax was assessed in the amount of $ 2,655.87 plus interest of $ 313.28, and paid April 4, 1950.
Additional tax for the period 1/1/48 to 2/12/48 was assessed in the amount of $ 75.07 plus interest of $ 13.36. There was also assessed against the Estate for the period from 2/12/48 to 12/31/48 additional tax of $ 318.92 plus interest of $ 18.48, the last two assessments were paid April 4, 1950.
Very truly yours,
E. M. McCann, Acting Collector/S/c
By: W. A. Shull, Chief of Accounts
Income Tax Division
Room 107 -- U. S. Court House.
OPINION.
Originally there were three issues in this proceeding. At the hearing it was agreed that petitioner would be entitled to an additional deduction for attorney's fees incurred in the present appeal to the Tax Court and that this additional deduction will be settled in a recomputation under Rule 50. Therefore assignment of error (c) is no longer in the *165 case.
Also respondent agrees that petitioner is entitled to an additional deduction for debts existing at the time of decedent's death, said debts consisting of income tax deficiencies determined against decedent for periods existing prior to his death and for a period ending with his death.
Petitioner introduced in evidence as Exhibit 4, a statement from the collector of internal revenue at Nashville, Tennessee, by which this additional deduction can be determined. An examination of this exhibit shows that it contains information as to payments made after decedent's death which have no relation to periods existing prior to his death or ending with his death. This, of course, would not represent an additional deduction to the estate. The statement does, however, contain information as to payments of deficiencies for periods prior to decedent's death and for a period ending with his death and in that respect would seem sufficient for a correct determination under Rule 50. We do not understand that there is any longer any controversy between the parties as to this issue. Hence, issue (b) is no longer in the case. In fact respondent's brief does not mention issues (b) and (c), thus*166 indicating that he regards them as settled, except as the details of a recomputation under Rule 50. We have, therefore, left for decision only issue (a).
Petitioner states this issue in his brief as follows:
The single question involved is whether the value of decedent's partnership interest in a business partnership should be increased by adding an amount for *667 "good will" to the book value of the partnership interest. Or, stating it differently: Is there any good will value to the one-half undivided interest in the partnership of which decedent was a member?
Respondent states the issue in his brief, as follows:
Where a business, operated as a partnership, had tangible assets of $ 68,433.64, 1 and average annual earnings of $ 86,328.07 for a five-year period ending June 30, 1946, was the value of decedent's one-half interest in the partnership assets at least $ 55,000.00 on the date of his death, * * *?*167
The applicable statute is printed in the margin. 2 Both sides quote the applicable regulation which is printed in the margin. 3
*168 The Commissioner in his determination has relied upon this regulation. No authority is needed, of course, to support the proposition that the respondent's determination is presumed to be correct and the burden of proof is upon the taxpayer to show that the Commissioner is in error. However, in the instant case there is considerable testimony on the value of decedent's interest in the partnership, including good will, at the time of his death, and this is a case, therefore, to be decided upon its merits without reference to the presumption named above.
The petitioner argues that among other reasons why no value for the good will of the partnership should be attributed to decedent's interest in the partnership is that clause in the partnership agreement which reads as follows:
In the event this agreement is terminated by the death or inability to act of either of said partners, it is expressly agreed that the surviving partner may *668 continue the business as theretofore, and buy out the business of such partner, by paying therefor the reasonable value of the partner's property as may be determined from the books of the partnership, paying nothing for good will, and taking into*169 account depreciation, etc.
Respondent argues that while the foregoing provision in the partnership agreement may be binding upon the partners, it is not binding upon the Commissioner in fixing valuation for estate tax purposes under section 811 (a) of the Code and Regulations 105, section 81.10,
In this contention, we think respondent must be sustained.
In , we sustained the Commissioner in including in the gross estate of decedent 2,241 shares of stock of Walker and Heisler, Inc., at a value of $ 192 per share. The taxpayer in that case contended that:
* * * since the contract of December 31, 1920, restricted the sale of 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. * * *
In sustaining the Commissioner's determination and overruling the taxpayers' contention we said:
* * * 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*170 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 , affd. sub nom. , certiorari denied .
In the valuation of the good will of a business there are, of course, several factors to be considered among them being the earning record of the business for several years, the business location, reputation for fair dealing, type of clientele, quality of merchandise, amount and kind of advertising, and public esteem. All of these factors as disclosed by the evidence we have carefully considered in the instant case and we have arrived at the conclusion that the value of decedent's interest at the time of his death in the partnership business carried on under the name of "Grace's" including good will, was $ 45,000. In a recomputation under Rule*171 50 that value should be used instead of $ 55,000 as used by the Commissioner in his determination of the deficiency.
Decision will be entered under Rule 50.
Footnotes
1. Tangible assets also has the figure $ 67,933.64 ($ 500 less) in another part of respondent's brief.↩
2. SEC. 811. GROSS ESTATE.
The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States --
(a) Decedent's Interest. -- To the extent of the interest therein of the decedent at the time of his death;↩
3. REGULATIONS 105.
Sec. 81.10 Valuation of property.
* * * *
(d) Interest in business. -- Care should be taken to arrive at an accurate valuation of any business in which the decedent was interested, whether as partner or proprietor. A fair appraisal as of the applicable valuation date should be made of all the assets of the business, tangible and intangible, including good will, and the business should be given a net value equal to the amount which a willing purchaser, whether an individual or corporation, would pay therefor to a willing seller in view of the net value of the assets and the demonstrated earning capacity. Special attention should be given to fixing an adequate figure for the value of the good will of the business in all cases in which the decedent has not agreed, for an adequate and full consideration in money or money's worth, that his interest therein shall pass at his death to his surviving partner or partners.
The factors hereinbefore stated relative to the valuation of other property, if applicable, will be considered in determining the valuation of an interest in a business held as proprietor or partner. All evidence bearing upon such valuation should be submitted with the return, including copies of reports in any case in which examinations of the business have been made by accountants, engineers, or any technical experts as of or near the applicable valuation date.↩