*279 Decision will be entered under Rule 50.
Fair market value of decedent's interest in a partnership determined as of December 31, 1947.
*324 The respondent has determined a deficiency in estate tax in the amount of $ 142,477.71.
The sole issue herein concerns the value at which the decedent's interest in a partnership business is includible in his gross estate under the provisions of section 811 of the Internal Revenue Code.
Respondent has conceded that the decedent's estate is entitled to an additional deduction in the amount of $ 5,165.05 for 1947 income taxes and has stipulated with petitioners that upon the submission of satisfactory proof, such attorneys' fees and *280 expenses as are incurred and paid in connection with this proceeding will be allowed as a deduction in proceedings under Rule 50.
FINDINGS OF FACT.
The petitioners Anne W. Maddock and the Girard Trust Company are the executors of the estate of the decedent, Henry A. Maddock, who died at the age of 61 on October 3, 1947. Decedent's will was probated in the office of the Register of Wills, Delaware County, Pennsylvania, on October 14, 1947. The petitioners as executors of the decedent's estate filed a Federal estate tax return on December 28, 1948, with the collector of internal revenue for the first district of Pennsylvania.
At the time of decedent's death, he and his brother, Percy Maddock, were engaged as partners in a business which handled the wholesale and retail sale of mill and industrial supplies, tools, and equipment. The business was first established in 1878 when Alfred M. Maddock, the father of decedent and Percy, entered into a partnership known as Powell and Maddock. In 1904 the partnership of Powell and Maddock was dissolved and the business was thereafter conducted under the name of "Maddock and Company." In 1903 the decedent, and in 1908 Percy, entered the business*281 as employees, continuing in that capacity until 1923 when they were admitted as partners with their father.
*325 After the retirement of their father in 1930, decedent and Percy entered into an oral partnership agreement to continue the business under the name of "Maddock and Company." They orally agreed to share equally in profits and losses, to devote their entire time to the business, and to take no other partner into the business without the approval of both and that neither could give away or sell his partnership interest to any outsider or go on the notes of any person. The partnership was operated under this agreement until the decedent's death on October 3, 1947.
On July 29, 1931, an agreement was entered into by and between the decedent, Percy, and the Girard Trust Company, as trustee, whereby life insurance policies in the amount of $ 75,000 were taken out on the life of each partner and the proceeds therefrom made payable to the trustee. The agreement provided that the trustee was to pay over the insurance proceeds it collected to the executor or administrator of the estate of the partner first to die in full or part settlement of the deceased partner's interest *282 in Maddock and Company. The precise method for computing the deceased partner's interest in the business and the manner of payment of any amount due his estate in excess of the insurance proceeds by the surviving partner were set out in detail therein. It was provided that the agreement would continue for a period of 5 years, and that any of its provisions could be altered or amended in writing by both partners.
The insurance premiums were thereafter paid by the partnership and the cash surrender value of the policies was carried as an asset on the partnership books.
The agreement of July 29, 1931, was subsequently renewed for additional 5-year periods on July 30, 1936, and February 3, 1942.
On January 24, 1946, the parties to the original agreement of July 29, 1931, entered into a new agreement which expressly revoked all but one of the provisions of the prior agreement. The agreement of January 24, 1946, in so far as material to the issue herein, provided as follows:
FOURTH: Upon the death of either partner, Trustee shall pay to his estate the proceeds of the policies of life insurance which Trustee shall have collected under the policies on his life, less such compensation as*283 shall be due Trustee as is hereinafter provided. The sum so collected shall be in full or in part settlement (as the case may be) of the interest of the deceased partner in the entire partnership business, property and assets of Maddock and Company. Said interest shall be ascertained and shall be as follows: It shall be that sum which shall be shown to be his by the capital account on the partnership books as of the last annual Inventory and Statement next preceding the date of his death, less any withdrawals made by him and less his share of any losses between the date of said Statement and the date of his death (as to both items) and plus one-half of the net profits, if any, earned in that period, provided that the net profits or losses for said period shall be calculated as though the percentage of gross profits for the applicable portion of the year of his death were *326 the same as the percentage which was earned in fact during the whole calendar year just previous to the year in which he shall have died, unless some other method for calculating said net profits be mutually acceptable to Trustee, to the surviving partner, and to the estate of the deceased*284 partner.
Even though the sum so ascertained as due to the estate of the deceased partner shall be less than the amount of insurance collected by Trustee, nevertheless all said insurance money shall be paid over to said estate for his entire interest in the whole partnership business, property and assets of Maddock and Company, and thereupon the insurance on the life of the surviving partner shall be transferred as he shall direct.
Should the insurance so collected be less than the sum shown to be due the estate of the deceased partner for his interest in Maddock and Company, the balance due may be paid by the surviving partner either in cash or by his notes, both of which, if due, shall be paid and delivered to his estate. Said payment (by cash or by notes) shall be made within six months after the death. Should notes be given to the estate of the deceased partner, they shall bear such a rate of interest and be payable at such time or times as shall be satisfactory to said estate, and to the surviving partner, provided,
(a) that a minimum payment of $ 10,000 per year shall be called for;
(b) that the minimum interest rate shall be 6% per year;
(c) that no note shall run for*285 a period longer than five years from the date of the death of said partner; and
(d) that the surviving partner shall have the right to anticipate the payment of any or all of said notes with interest to the date of payment only.
* * * *
SIXTH: Upon receipt of said insurance fund when collected by Trustee and upon receipt of the cash and notes, should such be needed, and upon the assignment of the policies of insurance upon the life of the surviving partner should that be proper as hereinbefore provided, the estate of the deceased partner shall accept such distribution as full settlement of the interest of the deceased partner in the partnership of Maddock and Company.
SEVENTH: This Agreement shall continue unless terminated by any of the following:
(a) a termination notice signed and in writing by both partners and delivered to Trustee.
(b) the lapse or cancellation of the policy or policies on the life of either partner.
(c) the dissolution, insolvency or bankruptcy of Maddock and Company.
(d) the failure of the surviving partner to survive the deceased partner for the term of thirty days, unless within that time settlement for the interest of the deceased partner as herein *286 provided shall have been consummated so far as the surviving partner shall be required to take steps to that end by the provisions hereof.
* * * *
On December 31, 1947, petitioners, as executors of the decedent's estate, and in accordance with the provisions of the agreement of January 24, 1946, transferred to Percy all their right, title, and interest in and to all of the property and assets of Maddock and Company for the sum of $ 256,085.38, which was paid to petitioners by cash and *327 notes from Percy in the amount of $ 181,085.38 and $ 75,000, representing the proceeds of the aforementioned insurance policies, which latter amount was subject to a trustee's fee of $ 1,000.
In the Federal estate tax return filed for the decedent's estate, petitioners elected to have the estate valued in accordance with the optional valuation date provided by section 811 (j) of the Internal Revenue Code. Decedent's total gross estate was reported therein as $ 503,475.67 and included "business" life insurance in the amount of $ 74,000, and the "Decedent's interest in partnership of Maddock & Co." at a value of $ 181,085.38.
At the time of entering into the agreement of July 29, 1931, decedent*287 was 45 and Percy 41 years of age. Both were married at the time and each had two young daughters. Outside of their business association, decedent and Percy were not particularly close to each other, and the decedent in his will did not devise or bequeath any property to Percy.
At the time of decedent's death, the interests of the decedent and Percy in the partnership of Maddock and Company constituted more than one-half of the total value of their respective properties and estates. In entering into the agreements of July 29, 1931, and January 24, 1946, neither decedent nor Percy had any intention of using such agreements to effect a testamentary disposition of any part of their respective partnership interests.
The partnership at all times material to the issues herein was engaged in the business of selling industrial and marine supplies, including tools of all kinds, and light machinery and equipment which it purchased from manufacturers. After the retirement of the partners' father, a marine department handling supplies and equipment for ships was added to the business. The partnership had no patents or trademarks and manufactured none of the articles it sold. With the exception*288 of exclusive selling rights to one type of marine paint, it had no exclusive agency or selling rights covering the products of any manufacturer. The manufacturers from which the partnership purchased its merchandise ordinarily did business with from two to five distributors in a city the size of Philadelphia to whom they sold their products on the same terms. There are at present approximately 15 other concerns in the Philadelphia area engaged in the same general business as Maddock and Company.
While the bulk of the partnership sales was made to industrial plants and ship operators, it also maintained a small retail business. Its counter sales during the period from 1930 to 1947, inclusive, never exceeded 11.7 per cent in any year and over the whole 18-year period averaged 5.94 per cent of its total sales.
Exclusive of its retail trade, the partnership carried approximately 1,500 to 1,800 customers on its books. Approximately one-quarter of *328 its total sales was made to 25 of these customers. Many of the partnership customers, and particularly the larger ones, maintained purchasing departments or agents to handle their buying, and it was customary for such firms to divide*289 their buying among a number of supply houses rather than to confine their purchases to any one in order to insure a steady source of supply.
The manufacturing concerns from which the partnership purchased its merchandise advertised their products in trade magazines which were purchased by the partnership customers.
The partnership's advertising consisted principally of a catalog which was issued every five or six years. Each printing of catalogs consisted of about 3,000 copies and some of the partnership's larger customers would receive over 100 of such catalogs for use in their plants. The partnership occasionally purchased advertisements in trade magazines or in special programs at the request of its customers, and about twice a year would purchase advertising in a purchasing agent's magazine published in Philadelphia. The following deductions for advertising were claimed by the partnership for the years from 1940 through October 3, 1947:
| 1940 | $ 356,12 |
| 1941 | |
| 1942 | 5,204.50 |
| 1943 | 6,361.17 |
| 1944 | 611.00 |
| 1945 | 666.00 |
| 1946 | 791.00 |
| 1947 (9 mos.) | 612.08 |
The business of the partnership during its entire existence was conducted at premises which it leased at 40 North Sixth Street*290 in Philadelphia. The partners considered the location unsatisfactory due to traffic conditions and in 1946 contacted a real estate agent with a view to obtaining a different location in the north or northeast sections of Philadelphia which would place them nearer their larger customers.
It was particularly important to the business in which the partnership was engaged to have efficient salesmen who would maintain contacts with customers. In 1947, the partnership employed seven "outside" salesmen and four or five "inside" salesmen whose job it was to take orders over the telephone. The oldest salesmen had been with the business for 50 years and the average length of service for all its salesmen was about 30 years. The partnership had no contracts of employment with its salesmen. In addition thereto, the partnership employed approximately five or six counter salesmen, 23 office workers, and 25 persons in the stock and shipping departments.
The partnership's total sales, net profit before and after renegotiation, and net assets as of the end of each of the years 1930 to 1947, inclusive, and as of October 3, 1947, were as follows: *329
| Net profits | ||||
| Year | Total sales | Net profits | after renegotiation | Net assets |
| 1930 | $ 514,509 | $ 10,877 | $ 217,749 | |
| 1931 | 350,233 | (9,386) | 195,317 | |
| 1932 | 211,405 | (24,712) | 166,128 | |
| 1933 | 295,631 | 8,337 | 181,042 | |
| 1934 | 372,988 | 16,518 | 190,505 | |
| 1935 | 421,661 | 18,842 | 198,384 | |
| 1936 | 500,843 | 28,891 | 226,565 | |
| 1937 | 618,448 | 38,920 | 253,213 | |
| 1938 | 447,725 | 7,369 | 240,970 | |
| 1939 | 574,131 | 20,042 | 253,134 | |
| 1940 | 880,920 | 54,599 | 306,324 | |
| 1941 | 1,704,575 | 198,529 | 452,329 | |
| 1942 | 2,063,723 | 221,099 | $ 176,099 | 436,927 |
| 1943 | 1,913,891 | 156,613 | 131,613 | 441,054 |
| 1944 | 2,028,079 | 170,920 | 136,901 | 440,650 |
| 1945 | 1,868,423 | 140,503 | 126,189 | 382,076 |
| 1946 | 1,722,848 | 143,347 | 422,364 | |
| 10/ 3/47 | 1,643,832 | 144,353 | 503,516 | |
| 12/31/47 | 442,271 | 34,630 | 431,085 |
*291 During the years 1931 to 1947, inclusive, the decedent and Percy drew equal "salaries" in the following amounts:
| 1931 | $ 6,000 |
| 1932 | 5,000 |
| 1933 | 5,000 |
| 1934 | 6,872 |
| 1935 | 6,872 |
| 1936 | 6,908 |
| 1937 | 10,000 |
| 1938 | 7,500 |
| 1939 | 10,000 |
| 1940 | 12,500 |
| 1941 | 20,000 |
| 1942 | 20,000 |
| 1943 | 20,000 |
| 1944 | 20,000 |
| 1945 | 20,000 |
| 1946 | 20,000 |
| 1947 (9 mo.) | 20,000 |
The partnership did not carry on its books as an asset any item of good will.
In the notice of deficiency, respondent determined that the value of the decedent's one-half interest in Maddock and Company for Federal estate tax purposes was $ 566,905.38 as of December 31, 1947.
The value of decedent's one-half interest in Maddock and Company was $ 256,085.38 as of December 31, 1947.
OPINION.
Respondent has determined a deficiency in estate tax in the amount of $ 142,477.71 based upon the determination that at the time of decedent's death his partnership interest in Maddock and Company had a value of $ 566,905.38 rather than $ 256,085.38 representing the price received and the value reported in the estate tax return by the petitioners as the executors of decedent's estate. Respondent attributes the greater value he has determined to the good will*292 of Maddock and Company which he claims resulted from "such factors as longevity, established name, established products, and stability of customers," and submits that such good will was evidenced by its record of high earnings.
The factors cited by respondent are all recognized elements of good will which, although intangible in nature, constitute a business asset which cannot be disregarded in determining the actual worth of a *330 business. Cf. Texas-Empire Pipe Line Co., 10 T. C. 140, affd., 176 Fed. (2d) 523. However, in fixing the value of the good will of a business, it is equally important to recognize that good will exists as a valuable asset only as an integral part of a going business and cannot be sold, donated, or devised apart from the going business in which it was developed and to which it is thereafter inseparably attached. Sommers v. Commissioner, 63 Fed. (2d) 551; Metropolitan Bank v. St. Louis Dispatch Co., 149 U.S. 436">149 U.S. 436; Pfleghar Hardware Specialty Co. v. Blair, 30 Fed. (2d) 614.
Thus, where a dispute*293 as to the fair market value of a business interest revolves around the existence and the value of good will, it is necessary to determine whether the business possessed good will of any appreciable value and whether the nature of the business and the circumstances surrounding its ownership and operation were such that whatever good will it may have possessed could have survived the transfer of all or a fractional part of the going business.
We are satisfied after a careful consideration of all the evidence herein, including the opinions of the several witnesses called by the parties to testify as to the existence of the value of good will in the business of Maddock and Company and other concerns similarly situated, that Maddock and Company possessed little if any good will of any appreciable value and that the figure at which decedent's one-half partnership interest was actually sold to Percy under the terms of the agreement of January 24, 1946, was fairly representative of the fair market value of the decedent's partnership interest as of December 31, 1947.
The business of Maddock and Company was not unique. The partnership had no patents or trademarks, and with the exception of*294 one minor item of marine paint, held no exclusive agency contracts. It manufactured none of the products it sold and the same nationally known brands were available to its customers at approximately 15 other like dealers in the Philadelphia area. Its advertising program was exceedingly modest in relation to its volume of sales and its retail or counter sales to the general public constituted but a very minor part of its business. Although it carried from 1,500 to 1,800 customers on its books, approximately one-quarter of all sales was made to 25 of these customers who maintained their own purchasing agents and followed the practice of spreading their purchases among different suppliers. The location of the business was satisfactory but apparently not of critical importance for it was shown that because of traffic conditions and the location of its principal customers a move to north or northeast Philadelphia was contemplated in 1946. Moreover, the success of the partnership business was dependent to a large extent upon the ability and experience of its salesmen who had been employed in the business on an average of 30 years. The partnership held no *331 employment contracts*295 with its salesmen and at no time did it have any practical means of insuring the continuance of their services. Moreover, it appears from the testimony of various witnesses that both partners were active in the day-to-day operation of the business, and that of the two partners, the decedent was more widely known and enjoyed the reputation of being the dominant partner. It was certain that upon the death or withdrawal of either partner, the business would be deprived of his business ability and any good will attributable to his presence therein.
Respondent based his determination of the existence and the value of good will primarily upon the partnership's record of high earnings. In Estate of Leopold Kaffie, 44 B. T. A. 843, wherein the same issue was presented and the same formulae for the valuation of good will were employed by the respondent, we emphasized that it does not necessarily follow from the fact that a business enjoys large earnings that it possesses any appreciable good will. We pointed out that "the large earnings may be due to the efforts of the partners, to the exercise of business judgment, or to fortuitous circumstances in no wise*296 related to good will." In our opinion, such factors were chiefly responsible for the success enjoyed by Maddock and Company. Moreover, we think it is of particular significance that in determining the value of the decedent's interest herein, respondent selected a 10-year period of earnings from 1938 to 1947, inclusive, which period embraced 7 years of abnormally high business activity resulting from the demands of war production and postwar reconversion to consumer goods.
Even if we were to agree with respondent's contention that Maddock and Company possessed good will of substantial value, it would by no means follow that the decedent could have realized any value for his share of such good will by demanding a dissolution and liquidation of the business and a sale of his partnership interest prior to his death. As we have previously pointed out, whatever good will may have been possessed by Maddock and Company could not have survived as an asset separate and apart from the going business, and it is clear that decedent could not have required the sale of the going business simply by demanding a dissolution of the partnership. The services and reputation of the decedent and his *297 brother were not subject to sale nor could anything have been realized for the established name of the business, the services of its salesmen, and their personal connections with customers. Decedent could not have compelled Percy to execute a covenant not to compete in connection with the liquidation and sale of the partnership assets, and, in fixing the price he would pay, no informed purchaser would have failed to recognize the depressive effect of the loss of decedent's association with the business and of Percy's right to open a competing business in the same locality, to solicit old customers, to employ the same salesmen, and to use the name *332 Maddock in any new firm name. We are convinced that had the decedent during his lifetime decided to bring about a dissolution and liquidation of the partnership as respondent suggests, he could not have realized any greater value for his one-half interest than the price fixed under the agreement of January 24, 1946.
At the hearing, three witnesses, two produced by the petitioners and one by the respondent, expressed opinions as to the value of the decedent's one-half interest. Petitioners' two witnesses set the value at $ 225,000*298 and $ 234,000, respectively. On the other hand, respondent's witness fixed the value at $ 457,000 which was substantially less than the value of approximately $ 567,000 determined in the notice of deficiency. Testimony of this character is merely advisory and is not binding upon our determination, nor are we required to reconcile such conflicting opinions. We have studied with great care the values submitted by all three witnesses and have weighed the merits of the various elements upon which they based their determinations and have found them inconclusive. It suffices to say that we have concluded after a full consideration of all the facts and circumstances which we have set out in our findings of fact and have discussed in some detail above that a willing and informed purchaser would not have offered or paid any sum greater than $ 256,085.38 for the decedent's one-half interest in the partnership as of December 31, 1947. Therefore, we conclude that the sum of $ 256,085.38 must be accepted as the value at which decedent's interest is includible in his estate for Federal tax purposes.
In view of our disposition of the issue as to the fair market value of decedent's partnership*299 interest as of December 31, 1947, it is unnecessary for us to discuss or pass upon the issue raised by the parties as to the significance of the restrictions imposed by the oral partnership agreement and the agreement of January 24, 1946, upon the decedent's right to dispose of his partnership interest during his lifetime and after his death.
Decision will be entered under Rule 50.