*3079 Only the excess realized on a chose in action over the value thereof at the date of the death of a decedent constitutes taxable income when received by the executors.
*1244 These proceedings, consolidated for the purpose of hearing and decision, are for the redetermination of deficiencies in income tax as follows:
| Estate of William Blodget, Docket No. 10344 - | |
| For the taxable period beginning June 28, 1923, and ending December31, 1923 | $2,990.86 |
| William P. Blodget, Docket No. 29392 - | |
| 1924 | 1,407.46 |
| Fannie H. Blodget, Docket No. 29393 - | |
| 1924 | 2,662.38 |
The point in issue is whether the petitioners are liable to income tax in respect of such part of the profits of a partnership as were received by them during 1923 and 1924 as was included in the value of the gross estate of the decedent and subject to Federal estate tax.
FINDINGS OF FACT.
1. William Blodget died on June 28, 1923, a resident of Massachusetts, leaving a will under which his widow, Fannie H. Blodget, and his son, William P. Blodget, were appointed his executors. *3080 Under the will Fannie H. Blodget acquired a three-fifths share in the rest, residue and remainder of the estate of William Blodget, and his son, William P. Blodget, acquired a two-fifths share in such rest, residue and remainder of his estate.
2. William Blodget, at the time of his death, was the senior member of the firm of Blodget & Co., dealers in investment securities, having its principal office in Boston, Mass. The firm was one of long standing, although the particular partnership in existence on the date of the death of William Blodget had been in existence only since December 30, 1922.
3. On the date of the death of William Blodget, the partnership of Blodget & Co. was composed of six individuals, only three of whom, however, including William Blodget, had capital invested in the partnership. The names of the partners and their respective shares in the net profits of the partnership were as follows:
| Per cent | |
| William Blodget | 19 |
| Charles E. Ober | 20 |
| R. Hugh Carleton | 19 |
| Bayard F. Pope | 17 |
| J. Dana Thomas | 15 |
| Arthur C. Dunmore | 10 |
| Total | 100 |
4. The net profits of the partnership of Blodget & Co., were arrived at by first deducting from gross*3081 profits the interest paid to each partner who had capital invested in the firm, together with all other expenses of the business.
5. The articles of copartnership of Blodget & Co., provided that upon the death of any partner the capital of the partner so dying *1245 should remain in the firm, and the partnership should continue for a term of one year after such death, as if there had been no death.
6. Under the above referred to provisions of the articles of copartnership of Blodget & Co., the capital of William Blodget invested in the partnership on the date of his death, on June 28, 1923, was left in the business until June 28, 1924. On this partnership capital remaining in the business interest was paid by the partnership to the executors of the estate of William Blodget at the rate of 7 per cent. This interest for the period from June 28, 1923, to December 31, 1923, amounted to $20,302.82 and for the period from January 1, 1924, to June 28, 1924, amounted to a substantially similar amount.
7. The interest paid on the partnership capital of William Blodget, which remained in the business for the year following his death, has been returned as taxable income for*3082 the years when received and the taxes thereon have been duly paid.
8. The 19 per cent share of the net profits of Blodget & Co. for the year following the date of the death of William Blodget, to which he would have been entitled had he survived and which was paid to his estate in accordance with the provisions of the articles of copartnership, amounted to $54,766.41. Of this amount $21,283.50 was received by the executors of the estate of William Blodget during the period from June 28, 1923, to December 31, 1923. The balance of said $54,766.41 of the net profits, amounting to $33,482.91, was received by the executors of the estate of William Blodget during the year 1924 and was distributed by them in that year, together with all the remaining assets of the estate of William Blodget, to the two residuary legatees under the will of William Blodget, a three-fifths interest being thus distributed to Fannie H. Blodget and a two-fifths interest to William P. Blodget.
9. The executors of the estate of William Blodget did not regard the $21,283.50 of net profits of Blodget & Co., which they received during the period June 28, 1923, to December 31, 1923, as taxable income and accordingly*3083 did not report the same in their return of income for the estate for that period. The Commissioner, however, has increased the taxable net income of the estate of William Blodget for the above mentioned period by adding to the net income reported $21,283.50 and as a result has determined that there was a deficiency in tax for that period of $2,990.86.
10. William P. Blodget and Fannie H. Blodget did not regard any part of the $33,482.91 of net profits of Blodget & Co. for the period from January 1, 1924, to June 28, 1924, which was distributed to them by the executors of the estate of William Blodget, together with the rest and residue of the estate of William Blodget during the year 1924, as taxable income and accordingly did not *1246 report the same in their respective returns of income for the year 1924. The Commissioner has, however, increased the taxable net income of William P. Blodget for 1924 by the amount of $13,393.16 and that of Fannie H. Blodget by $20,089.75 on account of such net profits, resulting in the principal part of the deficiencies appealed from in Docket Nos. 29392 and 29393.
11. The right of the estate of William Blodget, under the articles*3084 of copartnership of Blodget & Co., to receive the same share of the net profits of Blodget & Co. for the period from June 28, 1923, to June 28, 1924, to which William Blodget would have been entitled had he survived, had a fair market value on June 28, 1923, the date of the death of William Blodget, of $49,346.15. This is the amount determined by the Commissioner to be the value of such right in the audit of the Federal estate-tax return of William Blodget, deceased.
OPINION.
SMITH: The question presented by these proceedings is the amount of the net profits of the partnership of Blodget & Co. for the year ended June 28, 1924, which is liable to income tax to the petitioners. The amount of these profits was $54,766.41. The petitioners accounted for none of these profits in their returns. The parties have stipulated that the right of the estate of William Blodget to receive these profits at the date of his death was $49,346.15. This is the value placed upon them by the respondent in the audit of the estate-tax return and it has been stipulated by the parties hereto that such was the fair market value of the right. The petitioners submit that only the excess of $54,766.41*3085 over $49,346.15, or $5,420.26, can properly be regarded as taxable income to the executors or beneficiaries of the estate of William Blodget.
It has been established by numerous decisions of the Board, as well as of the courts, that for Federal income-tax purposes the executors of the estate of a decedent take over the assets of the decedent including choses in action at their fair market value on the date of the decedent's death and not at the cost of such assets to the decedent. ; ; ; ; ; writ of certiorari denied April 16, 1928, .
The right of the estate of William Blodget to receive the year following the death of William Blodget the same share of the net profits of Blodget & Co. which William Blodget would have been entitled to receive had he survived was a valuable contractual right or chose in action constituting a part of the assets*3086 of William *1247 Blodget which passed on his death to the executors of his estate. If the executors had sold the right to receive such profits for $49,346.15 it is apparent that the estate would have realized no taxable income from the transaction. The right which the executors received to collect these profits was a capital asset of the estate and the value of such asset received by the executors constituted the basis for determining a gain or loss upon the disposition thereof. Only the excess received on the disposition of the asset constituted taxable income. ; . Compare also , wherein it was held that payments received under an annuity do not constitute taxable income except to the extent that they exceed the cost of the annuity. Also compare , wherein it was held that interest accrued to the date of decedent's death on securities owned by him and dividends declared prior to his death but payable after his death on stocks owned by him*3087 were a part of the corpus or principal of his estate.
The situation which obtains in these proceedings is substantially different from that in . In that case it was held that the profits of the partnership received by the estate were liable to income tax when received by the executors. It did not appear in that case that the choses in action which passed to the executors at the date of the death of the decedent had a fair market value. No specific value was assigned to the chose in action. In the present proceedings the value of the chose in action is stipulated.
Only $21,283.50 of the profits of the partnership for the year following the date of the death of William Blodget was paid over to the executors during the year 1923. This is less than the capital value of the right to receive such profits. It could not be determined at the close of 1923 that the executors would receive any further amount from the partnership. The amount received in 1923 must, therefore, be considered simply the return of a part of the capital represented by the chose in action. In 1924 the executors received and distributed to the beneficiaries*3088 under the will $5,420.26 of profits from the partnership in excess of the value of the right to receive them at the date of the death of the decedent. This excess was clearly taxable to the beneficiaries, two-fifths to William P. Blodget and three-fifths to Fannie H. Blodget.
Judgment of no deficiency will be entered in the case of Docket No. 10344, and under Rule 50 in the case of Docket Nos. 29392 and 29393.