*1268 The value for estate tax purposes of the decedent's interest in a partnership composed of himself and his son, which terminated with his death, held, to be one-fourth of the book value of the assets of the partnership and not one-fourth of 10 times the average annual earnings of the partnership for the period of 5 years prior to the death of the decedent.
*843 This proceeding is for the redetermination of a deficiency $13of,256.03 in the estate tax of Leopold Kaffie, deceased. The only question in issue is whether the value for estate tax purposes of decedent's interest in a partnership business, which had been conducted for a number of years by decedent and his son under the name of Kaffie Lumber & Building Co., was one-fourth of the book value of the partnership assets, which did not include therein any value for good will, or one-fourth of 10 times the average annual earnings of the partnership for a period of 5 years prior to the death of the decedent, as determined by the respondent, such determination being based solely upon large earnings of*1269 the partnership.
FINDINGS OF FACT.
The petitioners, residents of Corpus Christi, Texas, are the sole heirs at law of Leopold Kaffie, a physician, who died a resident of Corpus Christi on September 29, 1937. For his estate the petitioners filed an estate tax return with the collector of internal revenue for the first district of Texas, at Austin. In such return was reported the value of decedent's interest in a partnership, the Kaffie Lumber & Building Co., of which the decedent and his son, Harold Kaffie, were equal partners, as being one-fourth of the book value of the partnership assets at the date of the death of the decedent, namely, $97,252.41. The partnership books did not reflect any value for intangibles. Therespondent, upon the theory that the earnings of the partnership reflect a large value for intangibles or good will, determined that the value of the partnership assets at date of death was 10 times the average annual earnings of the partnership for the 5-year period prior to decedent's death and took one-fourth of the amount, or $171,093.35, as the value of decedent's interest in the partnership at date of death *844 and substituted that amount for the $97,252.41*1270 returned in his determination of the deficiency.
Leopold Kaffie, the decedent, left no will and no administration was had upon his estate because it owned no debts. The sole and only heirs of the decedent are Jeanette Kaffie, his widow, a daughtr, Saera Kaffie, and a son, Harold Kaffie, all of whom are over the age of 21 years and were at the time of decedent's death.
In the fall of 1927, or the spring of 1928, the decedent began to buy lumber and building materials and supplies under the name of Kaffie Lumber & Building Co. for the principal purpose of supplying his needs in the construction of buildings. Gradually, in 1928 and1929, he began to sell small quantities of lumber and building materials to the public at retail. This business increased so that by March 1, 1931, the principal business of the Kaffie Lumber & BuildingCo. consisted of the purchase of lumber and building materials at wholesale and their sale at retail. On March 1, 1931, the decedent sold the business to his son, Harold Kaffie, who continued to operate it under the same name until December 31, 1932.
On January 1, 1933, the decedent and his son, Harold, formed a partnership for the purpose of engaging*1271 in the lumber business, each owning a one-half interest therein. This business was also conducted under the name of Kaffie Lumber & building Co., with its office and principal place of business in Corpus Christi. The articles of copartnership contained no provision relating to good will; nothing was ever paid and nothing was set up on the books of the partnership for good will. The partnership continued to operate the business for which it was organized until the death of the decedent on September 29, 1937.
The one-half partnership interest in the Kaffie Lumber & BuildingCo. held by the decedent at the time of his death represented community property of decedent and his wife, Jeanette Kaffie. Upondecedent's death one-half of his one-half interest in the partnership passed, under the applicable provisions of law, in equal shares to decedent's only children, Harold Kaffie and Saera Kaffie.
Immediately after the decedent's death a new partnership was formed by Harold Kaffie, Jeanette Kaffie, and Saera Kaffie for the purpose of continuing the lumber business at the same location. Thenew partnership was conducted under the name of Kaffie Lumber & Building Co. In the new partnership*1272 Harold Kaffie owned a five-eighths interest, Jeanette Kaffie a two-eighths interest, and SaeraKaffie a one-eighth interest.
The partnership net worth of Kaffie Lumber & Building Co. as of September 30, 1937, exclusive of any intangible value or good will, was shown by the partnership books of account as follows:
| Assets | ||
| Current assets | $392,962.16 | |
| Fixed assets | 26,912.64 | |
| Oil properties | 15,310.56 | |
| Other assets | 7,178.38 | |
| Total assets | $442,363.74 | |
| Liabilities and net worth | ||
| Current liabilities | $53,354.11 | |
| Net worth: | ||
| Leopold Kaffie, 1/2 | $194,504.82 | |
| Harold Kaffie, 1/2 | 194,504.81 | 389,009.63 |
| Total liabilities and net worth | $442,363.74 |
*845 The net sales, net profits, and net worth of the Kaffie Lumber & Building Co. for the calendar years 1930 to 1933, inclusive, are shown as follows:
| Year | Net sales | Net profits | Net worth |
| 1930 | $70,872.62 | $8,708.65 | |
| 1931 | 81,147.71 | 14,723.09 | |
| 1932 | 66,707.92 | 9,944.40 | |
| 1933 | 90,648.02 | 27,539.77 | $106,801.54 |
| 1934 | 140,457.92 | 30,065.23 | 134,788.91 |
| 1935 | 292,205.53 | 66,324.60 | 201,113.51 |
| 1936 | 700,369.99 | 154,099.80 | 350,637.60 |
| 1937 | 798,299.67 | 139,157.31 | 450,239.27 |
*1273 Prior to 1933 the business conducted under the name of Kaffie Lumber & Building Co. was confined to Corpus Christi. After the partnership was formed between the decedent and his son, effective January 1, 1933, the business was expanded. There was a large demand for lumber and building supplies in the oil fields. The son, Harold, contacted these operators and was instrumental in effecting large sales of lumber and building supplies to them. To supply the demand branch offices or lumber yards were set up at different places in Texas. These offices and lumber yards were moved from place to place to suit the convenience of the trade. Harold attended to all such business. The decedent confined his attention to the Corpus Christi Office and to the business in that city. At the date of his death about 75 percent of the sales of lumber and building supplies by the partnership were made to builders and oil operators in the oil fields.
No salaries were paid by the partnership to either of the partners. It has been stipulated for the purposes of this proceeding that an aggregate salary of $15,000 per annum for the partners would be fair and reasonable. The actual withdrawals of*1274 the partners, which were in equal amounts, were $2,077.86 in 1934, $4,994.74 in 1936, and $39,555.64 in 1937. There were no withdrawals by either of the partners in 1933 or 1935.
In his determination of the deficiency the respondent increased the reported value of decedent's interest in the partnership by $73,840.94. Most of this increase, and the only portion here in controversy, resulted from the inclusion in the decedent's interest in the partnership of an amount said to represent one-fourth of the value of the good will of the partnership. The respondent determined the value of decedent's *846 interest in the partnership to be one-fourth of 10 times the average yearly earnings over the 5-year period ended with 1937, as follows:
| Valuation Method: | |
| Average yearly earnings | $83,437.34 |
| Deduct yearly salary allowable to two partners | 15,000.00 |
| Average net earnings | 68,437.34 |
| Capitalized on the basis of ten year purchase (10%) | 684,373.40 |
| Decedent's one-half of the community one-half interest (1/4 $684of,373.40) | 171,093.35 |
The fair market value of decedent's interest in the partnership business which passed to decedent's heirs was $97,252.41.
*1275 OPINION.
SMITH: The question presented by this proceeding is the value for estate tax purposes of the decedent's one-half community interest in his one-half interest in the partnership of Kaffie Lumber & Building Co., which respondent concedes was dissolved by the death of Leopold Kaffie on September 29, 1937. In the estate tax return such value was reported to be $97,252.41, which is one-fourth of the value of the partnership assets at the date of death, as shown by the partnership books of account. The partnership books of account did not, however, show any value for good will. As we understand the record in this proceeding the respondent does not contend that this amount does not reflect the fair market value for estate tax purposes of the decedent's interest in the tangible assets of the partnership which passed to his heirs at his death. He contends, however, that the partnership had a good will which enhanced the value of the decedent's interest in the business which passed to his heirs and that the value of the interest is $171,093.35. The method of his computation of value is shown in our findings of fact. His determination is based solely upon the large earnings*1276 of the partnership in relation to invested capital for the period 1933 to 1937, inclusive.
The incidence of the estate tax is upon "the transfer of the net estate." Sec. 301 (a), Revenue Act of 1926. Section 302 of that act (as amended by section 404 of the Revenue Act of 1934 - 48 Stat. 754), declares in part:
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 the United States -
(a) To the extent of the interest therein of the decedent at the time of his death.
Regulations 80 (1937 Edition), pertaining to the estate tax imposed by the Revenue Act of 1926, as amended, provides in part as follows:
*847 ART. 10. Valuation of property. - (a) General. - The value of every item of property includible in the gross estate is the fair market value thereof [italics ours] at the time of the decedent's death; * * * The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. *1277 * * * All relevant facts and elements of value as of the applicable valuation date should be considered in every case. * * *
* * *
(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 respondent's determination that the fair market value of the decedent's interest in the partnership of Kaffie Lumber & Building Co. at the date of his death was $171,093.35*1278 is presumably correct. The burden of proof of showing otherwise is upon the petitioners. In an effort to bear such burden they have presented to the Board all of the material facts with respect to the carrying on of the partnership business, its earnings, invested capital, etc.
So far as the Board has been able to determine the question presented by this proceeding is one of first impression. The Board has in many cases been requested to redetermine deficiencies in estate tax of estates of deceased persons owning shares of stock of corporations where the respondent has found that the value of the shares was in excess of cost or of the book value, due to the element of good will or other intangibles. Those cases are not, however, in point in this proceeding; for a corporation has a life independent of the life of a deceased stockholder.
Also, it seems plain that where a decedent has operated a business as sole proprietor the business might have a value in excess of the cost or book value of the tangible assets of the business at date of death. The location of the business and the name under which it was conducted might give the property to be valued a fair market value in*1279 excess of the cost or book value of the assets. In any consideration of such a case the question is the fair market value of the assets left by the decedent which are transferred to his heirs or legatees by reason of his death.
We apprehend that the same rule would apply in the case of the death of a partner in a profitable business. In Rowley on Partnership *848 (1916), it is stated at section 278: "Partnership property includes the good will of the firm", citing ; ; ; ; ; ; affd., . Upon the death of a partner the surviving partner, at least under the laws of Texas, holds the assets of the dissolved partnership as trustee for the purpose of paying the debts of the partnership, winding up its affairs, and paying over to the deceased representatives their shares of the partnership assets. *1280 ; . If the partnership assets can be sold or liquidated at a price in excess of the net worth of the partnership, as shown by its books of account at the date of the death of the deceased partner, the deceased partner's representatives are entitled to received their share of the net assets. In the proceeding at bar that would be one-fourth of the total.
It is a general rule, however, that the surviving partner may set up business for himself at the old stand without being liable for damages to the good will as a part of the firm assets. ; ; ; ; ; ; ; ; ; ; ; *1281 . He may also solicit the customers the old business where not prevented from doing so by the articles of copartnership, as is the condition which obtains in this case, without being liable to account to the deceased's representatives therefor. He may also conduct such business by the use of his own surname in connection therewith. He is not barred from so doing by the fact that a like business under the same name was formerly conducted by a partnership of which he was a member. . It was said in the Goidl case:
* * * It is now well settled that every person has the right to honestly use his own name in his own business, and any injury resulting from such use is damnum absque injuria. * * *.
It is difficult to see, upon the facts which obtain in the instant proceeding, wherein the decedent's interest in the Kaffie Lumber & Building Co. which passed to his heirs had a value in excess of one-fourth of the value of the tangible assets of the business. What is there in the facts of the case which would warrant a*1282 willing buyer to pay more for the decedent's interest in the business than he would receive upon a liquidation of the tangible assets?
There is nothing in the evidence that leads us to believe that the location of the partnership's lumber business was of any particular *849 value to the business. A breakdown of the fixed assets of the partnership business on September 30, 1937, shows as follows:
| Lumber yards, sheds, etc | $16,987.72 |
| Rent houses | 810.36 |
| Delivery equipment | 8,897.63 |
| Office fixtures | 216.93 |
| Total | 26,912.64 |
Most of the business was done in the oil fields. For such business the partnership found it necessary to "follow the fields", changing its offices and lumber yards to meet the demands of the trade. We can not conceive that location contributed any good will value to the partnership business.
If it be true that the name "Kaffie Lumber & Building Company" had a value, we can not conceive what value it would have to a purchaser of the business, since Harold Kaffie, who was responsible for the profitable business, had the right to continue that business under the name Kaffie Lumber & Building Co. Quite clearly no willing purchaser*1283 of the entire business would have given any more for it by reason of its name. He would appreciate that he would be in competition with the business which was to be carried on under the name of Kaffie Lumber & Building Co. by Harold Kaffie, who, as the evidence shows, had the contacts with the builders and oil operators and, indeed, was the business "go-getter" of the partnership.
Furthermore, it is to be noted that the services of Leopold Kaffie to the partnership were lost by his death. To the extent that his efforts, business acumen, and popularity contributed to the good will, such value died with him.
We have stated above that the determination of the respondent as to the value of the decedent's interest in the partnership is presumptively correct. It is a question as to the amount of proof that the petitioners must offer to rebut that presumption. The petitioners have offered evidence showing the earnings, net worth, and character of the business, and the manner in which it was conducted. They contend that any good will value which the partnership business might have had was lost upon the dissolution of the partnership. In their brief they state:
* * * It is so*1284 stated [that any good will ends with dissolution of a partnership] in a digest often cited and highly regarded by the Texas Courts, 32 Tex. Jur. 278:
"If the firm name consists of the surnames of the partners, dissolution without any agreement or right to take and preserve the name and good will extinguishes both; it is otherwise, possibly, if the name is an assumed one not descriptive of the partners." [Italics ours.]
*850 The respondent has made his determination of the value of the good will solely upon the basis of the earnings of the partnership. We think it is clear, however, that a partnership may have large earnings without having any appreciable good will which survives the partnership. 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 related to good will. Such appears to be the situation in the instant case, for, as testified by Harold Kaffie, there was flush production in certain oil fields which created an enormous demand for lumber during the years 1935, 1936, and 1937. The large earnings of the partnership for those years appear to be due largely to such*1285 demand and not to good will.
We are furthermore of the opinion that the nature of the business was not such that good will, as the term is ordinarily understood, was of particular importance. Of course, honest dealings contribute to the prosperity of any business. But the retail lumber business is not one that is patronized by a large percentage of the public. It caters principally to builders and those having a use for lumber. In the majority of instances builders will purchase from those concerns which offer the lumber at the cheapest price and can make prompt deliveries. There is nothing in the facts in this case which leads us to believe that another retail lumber dealer having the knowledge and business acumen of the Kaffie Lumber & Building Co. could not have entered the field and done as well as that company did.
The respondent has made his computation of an assumed good will upon the basis that the business of the partnership was worth 10 times the average annual earnings for the period 1933 to 1937. It has been recognized that where the evidence clearly warrants the finding of good will the good will may be based upon earnings. See *1286 ; ; affd., ; . The respondent on brief says that his determination of the good will value of the partnership is based upon A.R.M. 34 (1920), Cumulative Bulletin 2, p. 31. He admits, however, that other formulae provided by A.R.M. 34 might be applicable. He states that other formulae, possibly applicable, would show a value for the decedent's interest in the partnership varying from $115,105.46 to $171,093.35. We do not think, however, that any formula for the determination of the value of the good will of the dissolved partnership can be resorted to in this case; for we are of the opinion that the good will value of the partnership which passed to the heirs of Leopold Kaffie, the decedent, had no fair market value at the date of his death.
Reviewed by the Board.
Decision will be entered under Rule 50.
STERNHAGEN, MURDOCK, MELLOTT, and OPPER dissent.