*784 1. Where the petitioners, as grantors of irrevocable trusts, conveyed certain shares of stock to the trustee named in the trust instruments and these shares were subsequently sold by the trustee, the profits realized from the sale thereof are not taxable to the petitioners.
2. Value of shares of stock determined as of March 1, 1913, and on December 9, 1915, on which latter date the shares were distributed to three of the petitioners.
*208 These proceedings, which have been consolidated, are for the redetermination of deficiencies in income tax for the year 1929, as follows: Docket No. 62985, $4,492.98; Docket No. 73380, $7,431.32; Docket No. 73381, $18,275.54; Docket No. 73382, $13,362.66; and Docket No. 73383, $41,428.50.
The petitioners allege that the respondent erred in determining that the gains realized from the sale of certain shares of stock of the Waterbury Chemical Co. in August 1929 are taxable to the petitioners instead of to the City Bank Farmers Trust Co., as trustee. A second issue is raised with respect*785 to the fair market value of the shares of stock of the Waterbury Chemical Co. as of March 1, 1913, and December 9, 1915, respectively, to be used as the basis for determining the amount of the gain on the sale thereof.
FINDINGS OF FACT.
The Waterbury Chemical Co. was organized in 1898 under the laws of the State of Iowa, with its principal office at Des Moines, Iowa. Its business is the manufacture of pharmaceuticals, one of its chief products being "Waterbury's Compound", which is a cod liver oil preparation. In 1913 the officers of the company were Frank C. Waterbury, president, M. O. Waterbury, vice president, *209 and Eugene W. Waterbury, secretary-treasurer. These officers were all brothers and they owned about three fourths of the stock of the company, the balance being owned by doctors and close associates. M. O. Waterbury died intestate in November 1914 and his stock holdings in the Waterbury Chemical Co. were inherited by his widow, Charlotte M. Waterbury, and his two sons, Donald N. Waterbury and Whitford N. Waterbury, being distributed to them on December 9, 1915.
On August 1, 1929, the petitioners owned the following shares of capital stock of the Waterbury*786 Chemical Co.:
| Shares owned | ||
| Petitioner | $25 par value | $100 par value |
| Edwin L. Bowen | 25 | |
| Donald N. Waterbury | 38 1/3 | |
| Charlotte M. Waterbury | 357 1/3 | 38 1/3 |
| Whitford N. Waterbury | 178 2/3 | 38 1/3 |
| Eugene W. Waterbury | 536 | 115 |
These shares had a total par value of $52,300 out of the total number of issued and outstanding shares of common stock of the par value of $99,900. There was no preferred stock and the shares listed above were different only with respect to the amount of their par value.
Deeds of trust were executed by the petitioners conveying to the City Bank Farmers Trust Co., as trustee, certain shares of stock of the Waterbury Chemical Co., as follows:
| Grantor | Date | Number of | Par value | Beneficiary |
| shares | ||||
| Edwin L. Bowen | 8/1/29 | 12 1/2 | $100 | Ellen Culver Bowen |
| Edwin L. Bowen | 8/1/29 | 12 1/2 | 100 | Ellen Culver Bowen |
| Donald N. Waterbury | 8/7/29 | 27 | 100 | Madelyn Waterbury |
| Whitford N. Waterbury | 8/7/29 | 108 | 25 | Whitford N. Waterbury, Jr. |
| Whitford N. Waterbury | 8/7/29 | 27 | 100 | Phyllis C. Waterbury |
| Charlotte M. Waterbury | 8/9/29 | 162 | 25 | Donald N. Waterbury |
| Charlotte M. Waterbury | 8/9/29 | 162 | 25 | Donald N. Waterbury |
| Eugene W. Waterbury | 8/12/29 | 108 | 25 | Theodore E. Waterbury |
| Eugene W. Waterbury | 8/12/29 | 5 | 100 | Aretta E. Waterbury |
| Do | do | 88 | 25 | Do. |
| Eugene W. Waterbury | 8/12/29 | 27 | 100 | Ada Wick. |
| Eugene W. Waterbury | 8/12/29 | 108 | 25 | Helen B. Dotts. |
| Eugene W. Waterbury | 8/12/29 | 108 | 25 | Laura Sellers. |
*787 The several trust instruments provided that the trusts should be irrevocable until January 1, 1930, and contained a further provision that the grantor should not have the power at any time during any taxable year within the meaning of the revenue laws of the United States to revest in himself title to any part of the corpus of the trust, except upon written notice delivered to the trustee during the preceding taxable year.
*210 The following paragraphs are quoted from the trust created by Eugene W. Waterbury in favor of his son Theodore E. Waterbury, and are typical of like provisions contained in the other deeds of trust:
1. In disposing of the income and principal of this trust the Trustee's duties shall be:
A - During my life and the life of my wife, Aretta Elizabeth Waterbury, and during the life of the survivor of us, to apply to the use of my son, THEODORE E. WATERBURY, so long as he shall live, the sum of Six Hundred Dollars ( $600) of the income thereof, yearly, in twelve equal monthly instalments of Fifty Dollars ( $50) each and to apply to my use during my life, and after my death to the use of my said wife, Aretta Elizabeth Waterbury, during her life, if*788 she is then living, the income thereof from time to time remaining.
B - Upon the death of the survivor of myself and of my said wife, Aretta Elizabeth Waterbury, to pay over the principal thereof to my son, THEODORE E. WATERBURY, if he is then living, or if he is not then living, in equal shares per stirpes to his descendants then living, or if none, to my daughter, HELEN B. DOTTS, or if she is not then living, in equal shares per stirpes to her descendants then living.
C - If no descendant of mine survives my said wife and myself, to pay over the principal of the trust fund then in its hands to such persons as shall then constitute my heirs at law according to the New York laws now governing the descent of real estate.
* * *
5. I reserve the option to direct in writing that the Trustee issue voting proxies for and retain, sell, exchange, invest, reinvest, lease, mortgage or improve any of the trust property held hereunder in such manner as I may direct and without liability to the Trustee for resulting loss. Subject to the exercise of such option, the Trustee, during the continuance of the trust and until actual distribution of the property, shall have full authority*789 in its discretion: To retain property coming into its hands in the same form as received by it and to hold, invest and reinvest the trust fund from time to time held hereunder in such manner and in such property, including common and preferred stocks, as it may deem advisable, all without the legal restrictions otherwise applicable to trustees; * * *
The two trusts created by Edwin L. Bowen were accepted by the trustee on August 2, 1929, and all of the other trusts listed above were accepted by the trustee under date of August 13, 1929. The certificates of stock constituting the corpora of the trusts were delivered to the trustee and attached to the deeds of trust at the time they were accepted. All of these trusts have been continued in force and effect since they were established.
On August 13, 1929, a written contract was executed by and between William R. Warner & Co., as purchaser, and Frank C. Waterbury and Eugene W. Waterbury, as seliers, for the sale of all of the issued and outstanding shares of capital stock of the Waterbury Chemical Co., of Des Moines, Iowa, for the sum of $2,000,000, payable in cash *211 as of July 11, 1929, with interest thereon from that*790 date at the rate of 4 1/4 percent per annum until the date of payment. In this contract it is recited taht the sellers are the owners of a substantial number of the shares of the stock and control the sale of all of the remaining shares of the stock issued and outstanding and are willing themselves to contract for the sale and delivery thereof, as specifically provided in the contract.
Negotiations looking to the purchase of all the outstanding capital stock of the Waterbury Chemical Co. by William R. Warner & Co. had been carried on for several months prior to the execution of this contract and several preliminary conferences had been held by Frank C. Waterbury and Eugene W. Waterbury, representing the stockholders of the Waterbury Chemical Co., and Henry Pfeiffer and G. A. Pfeiffer, president and vice president of the purchaser corporation, which conferences were attended also by counsel for the parties to the contract.
On August 14, 1929, or the day following the execution of the contract and in accordance with its provisions, a further conference was held in the office of the attorneys for the purchaser corporation, and the certificates for all the issued and outstanding*791 shares of stock of the Waterbury Chemical Co. were then delivered to the purchaser corporation in exchange for the agreed purchase price, which was paid by check. All the petitioners except Edwin L. Bowen attended this meeting, as did the officers of the purchaser corporation and their respective counsel, and in addition there were also present representatives of the City Bank Farmers Trust Co., the trustee named in the above described deeds of trust. The assistant trust officer of the City Bank Farmers Trust Co. received the money paid by the purchaser for those shares of stock which constituted the corpus of each trust listed above and had been delivered to the City Bank Farmers Trust Co., as trustee, at the time the trust instruments were accepted.
The sellers received the net amount of $1,850 per share for the shares of stock of the Waterbury Chemical Co. having a par value of $100 each, and the net amount of $462.50 per share for the shares of stock having a par value of $25 each.
The fair market value of the shares of stock of the Waterbury Chemical Co. having a par value of $100 each was $350 per share as of march 1, 1913, and on December 9, 1915, its fair market value*792 was $315 per share; one fourth of these amounts represents the fair market value of the shares having a par value of $25 each.
In the individual income tax returns filed by the petitioners herein for the year 1929 no profit was reported by any of them with *212 respect to the sale of those shares of stock which had been transferred and delivered to the City Bank Farmers Trust Co. under the circumstances set out above. The City Bank Farmers Trust Co. filed separate income tax returns for each trust and reported the gain on the sale of the shares of stock held by it as trustee. Petitioner Edwin L. Bowen owned no stock of the Waterbury Chemical Co. except the 25 shares of stock which he conveyed to the trustee under the two deeds of trust dated August 1, 1929. The other four petitioners did not include all of their stock in the deeds of trust executed by them, and they reported in their income tax returns for 1929 profits on account of the shares of stock sold by them direct to William R. Warner & Co., under the terms of the contract dated August 13, 1929.
Petitioner Eugene W. Waterbury had acquired his stock prior to March 1, 1913. The three remaining petitioners, Donald*793 N. Waterbury, Charlotte M. Waterbury, and Whitford N. Waterbury, has acquired their stock on December 9, 1915, the date of distribution to them, and in computing their profits on the sale thereof they used as the basis for determining gain a value on that date of $332.41 per share for the shares of stock having a par value of $100 each; one fourth of this amount was applied to the shares having a par value of $25 each.
The respondent refused to determine that any of the gain from the sale of the stock of the Waterbury Chemical Co. was taxable to the City Bank Farmers Trust Co. as trustee, and increased the taxable income reported by each petitioner by adding thereto the gain realized from the sale of the shares of stock conveyed in trust to the City Bank Farmers Trust Co. For the shares of stock having a par value of $100 each the respondent determined a value of $150 per share, both with respect to the stock owned on March 1, 1913, and the stock acquired by inheritance on December 9, 1915.
OPINION.
MATTHEWS: We are of the opinion that the trust instruments which we have described in our findings were valid and effective to pass title to the shares of stock constituting the*794 corpus of each trust and that the gains realized on the sale of these shares of stock in August 1929 were properly reported by the City Bank Farmers Trust Co. as trustee. These shares of stock were transferred and delivered to the trustee at the time the trusts were accepted, and this was done prior to the execution on August 13, 1929, of the agreement to sell the entire capital stock of the Waterbury Chemical Co. Clearly, the stock did not belong to the petitioners, the grantors *213 of the trusts, after the trusts were accepted. All of the trusts were irrevocable except upon written notice delivered to the trustee during the preceding taxable year, and they have been continued in force and effect ever since they were established. In accordance with the provisions of the trust instruments under which the petitioners, as grantors reserved the option to direct the trustee to sell any of the trust property, the trustee was directed to sell and did sell all of the stock of the Waterbury Chemical Co. which it held in trust and retained the proceeds thereof for the uses of the trusts. It follows that the respondent erred in adding to the taxable income reported by the petitioners*795 for 1929 the gains which were realized by the trustee from the sale of these shares of stock.
We have considered the respondent's alternative argument that section 167 of the Revenue Act of 1928 is here applicable and have concluded that the terms of the trusts involved herein are not such as to bring the income therefrom within the provisions of section 167. See, in this connection, our discussion of the application of this section of the statute in the case of , where the issue thus raised by the respondent was decided adversely to his contention. On the authority of that decision, and for the reasons set out in our opinion therein, we hold that section 167 is not controlling in the instant proceedings.
Inasmuch as petitioner Edwin L. Bowen transferred in trust all of the stock of the Waterbury Chemical Co. which he owned on August 1, 1929, no other issue is presented in Docket No. 62985 and we hold that there is no deficiency in that proceeding.
In determining the tax liability of the other petitioners, who owned shares of stock of the Waterbury Chemical Co. which were not included in the trusts which they established, *796 it will be necessary to decide the fair market value of the stock on the basic dates for the purpose of determining the amount of the gain on the sale thereof by the petitioners.
Petitioner Eugene W. Waterbury acquired his stock prior to March 1, 1913. The stock inherited by Donald N. Waterbury, Charlotte M. Waterbury, and Whitford N. Waterbury was distributed to them on December 9, 1915. The notice of deficiency addressed to Eugene W. Waterbury indicates that he reported capital gain in the amount of $91,872. We do not know what basis was used by him in computing this gain. On August 12, 1929, Eugene W. Waterbury established five trusts and conveyed to the trustee thereunder 32 shares of the par value of $100 each and 412 shares of the par value of $25 each, retaining for himself 83 shares of the par value of $100 each and 124 shares of the par value of $25 each. The other three *214 petitioners computed their profits by using as the basis for determining gain a value on December 9, 1915, of $332.41 per share for the shares of stock having a par value of $100 each.
In computing the deficiencies involved herein the respondent used a value of $150 per share on both*797 the basic dates. In the brief filed on behalf of the respondent it is stated that a value in excess of $250 is not supported by the evidence.
There were no sales of the stock at or about the basic dates. The stock was closely held and was not traded in on any exchange. The only witness to testify with respect to the value of the stock was one Pfeiffer, who was vice president and treasurer of William R. Warner & Co., which purchased all of the stock of the Waterbury Chemical Co. under the terms of the contract dated August 13, 1929. He testified that he had been connected with William R. Warner & Co. since 1908 and during the period of his association with that company he had been called upon to place a value on the business securities of approximately 25 pharmaceutical companies, lavoratories, and similar concerns, which had been purchased by his firm. After having examined the profit and loss statements of the Waterbury Chemical Co. and its balance sheets for the fiscal years ended July 31, 1908, to July 31, 1917, inclusive, which were introduced in evidence, the witness testified that, in his opinion, the fair market value of the entire capital stock of the Waterbury Chemical*798 Co. was $450,000 as of March 1, 1913, and was $405,000 on December 9, 1915. In reaching this conclusion the witness took into consideration, among other factors, the length of time the business had been in existence, how well it was established, the territories covered, the tangible assets of the business, the amount of the sales, the amount of the management expenses, and the fact that the business consisted primarily of one item.
We have carefully examined all the evidence with respect to the value of the stock and have determined that the shares of stock having a par value of $100 each had a March 1, 1913, value of $350 per share and a value of $315 on December 9, 1915; one fourth of these amounts represents the fair market value of the shares having a par value of $25 each.
Judgment of no deficiency will be entered in Docket No. 62985. Judgment will be entered under Rule 50 in Docket Nos. 73380, 73381, 73382, and 73383.