*1047 1. The value of 1,109,859 shares of stock of the A corporation, owned by a partnership in which decedent had an interest at the time of his death, determined. Market prices at which small lots sold, held not conclusive of the fair market value of the large lot.
2. The fair market value as of the date of decedent's death of certain open account loans made to the A corporation by the partnership of which he was a member determined.
3. The value of the decedent's interest in a partnership may not be reduced because of contingent liabilities resulting (a) from the firm's guaranty of obligations of the A corporation, most of the stock of which the firm owned; (b) from the decedent's promise to pay any final debit balance that might exist in the account of his son upon the termination and liquidation of ventures in which the son had an interest under the terms of a partnership agreement; and (c) from the estate's obligation under the partnership articles to respond to demands by the firm to make advances to it in connection with firm enterprises.
4. The value of the decedent's interest in a partnership may not be reduced because of a provision in the partnership agreement*1048 providing for the purchase of the interest of one of the partners, subsequent to the death of decedent, where the evidence does not indicate that the partnership interest to be purchased, and which was purchased, was worth less than the amount which the partnership promised to pay, and did pay, therefor.
5. Petitioner's alternative contention that certain amounts paid in connection with the liabilities referred to in subdivisions 3 and 4 should be allowed as deductions from the gross estate considered. Held, under the evidence, the amounts are not deductible.
6. Value of a small lot of stock of the A corporation owned by the decedent individually determined.
7. Decedent deposited certain stock with a partnership as collateral security for the payment of any final debit balance that might exist in the account of his son upon the final termination and liquidation of ventures in which the son had an interest. Part of the stock was redeemed by the issuing corporation and the proceeds were substituted as collateral in place of the stock redeemed. Held, that the amount of the proceeds so substituted should be included in the decedent's gross estate.
8. Decedent*1049 created a trust for the benefit of his son and the latter's child or children, reserving the power "to alter, define, and prescribe the relative interests of the beneficiaries in the trust fund or the income thereof." Held, that the value of the trust corpus at the date of the death of the decedent is includable in his gross estate.
*252 Petitioner contests a deficiency in estate tax determined by the respondent in the amount of $3,709,704.03. Many issues raised by the pleadings were stipulated by the parties and effect will be given thereto upon settlement under Rule 50.
The controverted issues are:
(1) What was the value of decedent's interest at date of death in Guggenheim Brothers "Old Firm"? The items necessary to the valuation of this interest with respect to which the parties are not in agreement are: (a) The value, if any, at the date of death, of 1,109,859 shares of the common stock*1050 of the Anglo-Chilean Consolidated Nitrate Corporation owned by the old firm; (b) the value at date of death of $25,325,000 open account loans made to this corporation by the old firm; and (c) the effect upon the decedent's proprietary interest in the firm of certain alleged contingent liabilities existing at date of death.
(2) What was the value of decedent's interest at date of death in Guggenheim Brothers "New Firm"?
(3) Should the petitioner be allowed, as deductions from the gross estate, certain amounts which she paid subsequent to decedent's death or which she was obligated to pay, at the time of his death, under the partnership agreements?
(4) What was the value, if any, of 1,720 shares of the common stock of the Anglo-Chilean Consolidated Nitrate Corporation owned by the decedent at the date of death?
(5) Did the so-called "Special Deposit" of $79,900 constitute a part of the decedent's estate?
(6) Should there be included in the gross estate of the decedent, the value at the time of his death of securities constituting the corpus of a trust created by him for the benefit of M. Robert Guggenheim and others?
(7) What are the deductions for income taxes, administration*1051 expenses, and credit for state inheritance taxes? The parties have agreed that they will attempt to reach an agreement as to these deductions prior to the settlement under Rule 50 and that this question need not be considered by the Board at this time.
The petitioner contends that there is no deficiency in estate tax and that she is entitled to a refund of $521,064.15.
The parties are in agreement as to the facts pertaining to the decedent's interest in the Guggenheim Brothers "New Firm", the so-called "Special Deposit" of $79,900, and the trust created by the decedent for the benefit of M. Robert Guggenheim and others. No facts pertaining to these issues will be included in our findings; but those essential to an understanding of the issues raised will be set out in our opinion.
*253 FINDINGS OF FACT.
1. Daniel Guggenheim (hereinafter referred to as the decedent) died testate Sunday, September 28, 1930. At the time of his death he was a resident of the village of Sands Point, Nassau County, New York. Petitioner is the duly appointed and qualified executrix of his estate.
2. At the time of his death, the decedent was a member of two partnerships known as*1052 "Guggenheim Brothers Old Firm" and "Guggenheim Brothers New Firm," hereinafter referred to as the old firm and the new firm.
3. In his will, the decedent recited that he had for many years been a partner in the old firm and the new firm; that he had entered into various undertakings prior to the execution of the will, and might enter into others prior to his death, some of which might remain to be performed in whole or in part after his death; and that he ratified and affirmed the articles of partnership and agreements and undertakings to which his estate might be subject at the date of his death. Accordingly he directed his executrix "to perform and carry into effect all the provisions affecting my estate contained in any such articles of copartnership, agreements and undertakings; and * * * to do all such acts and things and to execute all such agreements as she * * * shall deem necessary * * * to facilitate the continuation, development and extension of any and all ventures, undertakings and enterprises in which any of said firms of Guggenheim Brothers shall be engaged at the time of my death, * * *." The executrix was also given full power and authority, in her discretion, *1053 to settle, adjust, and compromise any claims in favor of, or against, the estate upon such terms as she should deem advisable.
4. The old firm is a continuation of a partnership created under an agreement dated March 6, 1916, between Isaac Guggenheim, Daniel Guggenheim, Morris Guggenheim (otherwise known as Murry Guggenheim), Solomon R. Guggenheim (otherwise known as S. R. Guggenheim), Simon Guggenheim, Edmond A. Guggenheim, Harry F. Guggenheim, and William C. Potter. The partnership articles were modified and extended from time to time by various supplemental agreements and amendments.
5. The new firm was created June 26, 1925. The partners were Daniel, Morris, S.R., and Simon Guggenheim, J. K. MacGowan, and E. A. Cappelen Smith. On that date they executed a partnership agreement governing the activities of the new partnership, setting forth the relationship between the old firm and the new firm and fixing a term expiring on January 1, 1930. Under the terms of this agreement, the old firm transferred to the new firm certain of its assets and provided that the old firm should retain the remainder of the assets and business, including, among others, the Anglo-Chilean Nitrate*1054 *254 enterprise. It was agreed that the old firm should not enter into any new business after January 1, 1925, and that all new business and enterprises arising after that date should be carried on by the new firm. By agreement dated November 25, 1929, the partnership of the new firm was extended, with certain modifications to January 1, 1935.
6. The only old firm partnership agreements material to this proceeding are the original agreement dated March 6, 1916, supplemental agreement dated January 12, 1922, retirement agreement dated November 28, 1923, and the final agreement dated June 26, 1925.
7. The original agreement, as amended from time to time, was in existence at the date of the decedent's death. The capital of the firm was $1,000,000, contributed equally by the five elder Guggenheims; the profits and losses were to be shared and borne at the rate of 15 percent each by Isaac, Daniel, Morris, Solomon, and Simon, and at the rate of 8 1/3 percent each by Edmond A. and Harry F. Guggenheim and William C. Potter; the death or retirement of any of the partners would not dissolve the firm, but the firm continued as between the survivors, and the share of the deceased*1055 or retiring partner was vested in the surviving partners; in the case of a deceased or retiring partner, no allowance was to be made for good will or the right to use the firm name, but both accrued to the surviving partners without any obligation to make compensation; the personal representative of a deceased partner or a retiring partner had the right to continue the interest of such deceased or retiring partner in any venture or enterprise in which the firm was then engaged, provided a notice of election to participate was given within three months and an undertaking entered into the the reimbursement of such outlays and expenditures as might be made by the remaining partners in connection with such ventures or enterprises and of the obligations incurred by them by reason thereof; but if no election were made, the right to participate in the firm enterprises ceased; in the case of an election and undertaking the estate or retiring partner had no control over the operation or management of such venture or enterprise, but solely the right to share in the profits thereof, and the remaining partners had "an absolute and unfettered discretion" to conduct and manage the business of the*1056 venture or enterprise without any obligation to account until after the liquidation of such venture or enterprise.
8. Potter retired from the firm on February 1, 1921. The supplemental agreement changed the percentages of Edmond A. and Harry F. Guggenheim from 8 1/3 to 12 1/2.
9. Isaac Guggenheim died October 10, 1922. His executors elected to continue his interest in the ventures in which the old firm was engaged at the time of his death, including the Anglo-Chilean nitrate enterprise, which will hereinafter be discussed.
*255 10. Harry F. and Edmond A. Guggenheim retired from the old firm on February 28, 1923. In connection with their retirement, various controversies and questions arose between the two retiring partners and the estate of Isaac Guggenheim and the remaining partners in regard to their respective rights and liabilities. These questions were settled by the retirement agreement, dated November 28, 1923, but actually signed in April 1924. The parties to the agreement were Daniel, Murry, Solomon R., and Simon Guggenheim, referred to as the "remaining partners." the executors of the estate of Isaac Guggenheim, deceased, Daniel Guggenheim and Murry*1057 Guggenheim, individually, and Harry F. and Edmond A. Guggenheim, referred to as the "retiring partners." The agreement recited the death of Isaac, the retirement of Harry and Edmond, the existence of the claims and controversies, and the desire "to settle and compromise the same upon the terms and provisions hereinafter contained." The terms and provisions may be summarized as follows:
(1) The interest of each of the Retiring Partners "shall continue in all ventures, undertakings and enterprises in which the said co-partnership was engaged on March 1, 1923", with the exception of the so-called "Copper Selling Agency" and certain other ventures not here material. The Retiring Partners "shall not be called upon to make any payment to the Executors or to the Remaining Partners of any debit balance which may now or hereafter appear upon the books and accounts of the co-partnership as an indebtedness of said Retiring Partners", nor shall either of the Retiring Partners be called upon to furnish "any undertaking, advance any moneys, or in any way become obligated for his proportionate share of the outlays and expenditures" already made or which may be made in connection with any partnership*1058 venture, undertaking or enterprise.
(2) The Remaining Partners on their part severally agreed with the Retiring Partners "to advance from time to time such moneys as may be necessary and advisable, in the judgment of the Remaining partners, for the respective proportionate shares of the Retiring Partners", in connection with any and all partnership ventures and enterprises in which the Retiring Partners have a continuing interest, "such advances to be charged against the respective interests of the Retiring Partners on the partnership books", with interest at reasonable rates but not to exceed 6%. The Remaining Partners, if and when they, in the exercise of their judgment, advanced monies for their own account, were under obligation at the same time to advance monies on behalf of the Retiring Partners in the proper proportion.
(3) It was agreed that "upon the termination and liquidation of each of the partnership ventures" in which the Retiring Partners had an interest, each of the Retiring Partners shall be credited with his respective share "of the final profits or charged with his respective share of the final losses" determined as resulting from such venture, "and the losses*1059 from unprofitable ventures * * * if any, shall be set off against the profits of profitable ventures * * * until all of such ventures * * * shall have been finally liquidated and terminated, at which time if, after charging against each of the Retiring Partners, his respective share of such losses, together with any debit balance appearing against him on the books of the copartnership, there remain any profits, each of the Retiring Partners shall be entitled to his *256 respective share thereof." On the other hand, if, after making such deductions, a net loss exists so that the books show a final debit balance against the Retiring Partner, "then and in such event Daniel Guggenheim, * * * hereby individually agrees with the Retiring Partners, the Remaining Partners and the Executors" that he will, within thirty days after the ascertainment of such final debit balance pay, on demand, "the respective share of each of them on account of the debit balance thus shown against the said Harry F. Guggenheim"; while Murry Guggenheim in the same language individually agreed to pay the respective share on account of the debit balance against Edmond A. Guggenheim. However, "neither of the*1060 Retiring Partners shall be individually obligated for the payment of any such debit balance" either to the Remaining Partners or to the Executors or to Daniel or Murry Guggenheim, nor shall either Daniel or Murry have any such claim or right of recovery against the Retiring Partners, or either of them, for or on account of any sums paid by Daniel or Murry.
(4) Notwithstanding these provisions, the Agreement gave to the Retiring Partners the right at any time to make payment of any debit balance appearing on the partnership books, provided written notice of the election was given and provided that there was executed and delivered an undertaking for the payment by the Retiring Partner making such election of all sums of money necessary to reimburse the Remaining Partners on account of outlays made or to be made in connection with the ventures in which the Retiring Partners had a continuing interest. Upon such an election and the making of such an undertaking, the Retiring Partner would then be entitled to his proportionate share of any and all distributions, and the Remaining Partners would be discharged from making any further advances on account of the Retiring Partner; Daniel*1061 Guggenheim would be would be discharged and released from his obligation to pay any final debit balance in respect of Harry F. Guggenheim, and Murry Guggenheim would be released from his obligation in respect of Edmond A. Guggenheim. If at any time the books of the partnership showed a credit balance in favor of the Retiring Partners, or either of them, they were given the right to exercise a similar election by serving the written notice and furnishing the required undertaking.
(5) In next to the last paragraph, it was provided that the agreement is "in full satisfaction and discharge of all claims whatsoever" of the Retiring Partners against any of the other parties to the instrument.
(6) Except as modified by this Agreement, it was provided that the Partnership Agreement of March 6, 1916, as amended, "is hereby confirmed,"
11. Neither before the decedent's death nor since have either of the retiring partners, Harry or Edmond, made any election or filed any undertaking which released either Daniel or Murry Guggenheim from the obligations which they incurred under the retirement agreement.
12. On June 26, 1925, the old firm, which at that time consisted of Daniel, Murry, *1062 S.R., and Simon Guggenheim, was extended to January 1, 1930, by the final agreement dated June 26, 1925. This agreement was in force and effect at the date of the decedent's death. It amended the original agreement by providing that the profits and losses of the partnership should be enjoyed and borne by Daniel, Murry, S.R., and Simon, in equal proportions; and that the obligations and rights of ex-partners "shall be effective without the filing of any document to such effect." The four partners agreed to advance moneys for firm enterprises, including moneys necessary to take up *257 firm losses. Ex-partners were bound by the agreement as to all moneys which the firm might request for outlays and expenditures made in connection with enterprises in respect of which such ex-partners had obligations and rights, and in connection with losses directly assignable to such enterprises. Under the agreement an ex-partner's share of the firm capital was to be repaid only upon the liquidation of the last enterprise in which he retained rights and obligations, and his share of the profits or losses from such enterprises was to be paid by the firm to him or by him to the firm, as the*1063 case might be, within 90 days from the date of liquidation. It was expressly provided that an ex-partner was to have no control over, or voice in, the operation and management of the enterprises in respect of which his rights and obligations were continued. Upon the termination of the partnership period a majority of the then partners were given the right to continue business under the firm name.
13. After January 1, 1930, and until the death of the decedent, the four partners continued to carry on the business of the old firm under the final agreement. Since decedent's death the surviving partners have carried on the same business under the same agreement.
14. For many years prior to the decedent's death, the business of the old firm consisted principally of the initiation, development, and promotion of new commercial and mining enterprises. It included the development of processes to meet the particular metallurgical problems involved in the enterprise, bringing it to a point where it was a commercial venture, and thereafter managing it for a short or a long period. Such enterprises were usually begun and carried out by the firm either for, or with, some outside participation. *1064 At a certain stage of its development the enterprise was usually incorporated. It did not, however, generally cease to be a firm enterprise by reason of its incorporation, the stock of the corporation being retained by the firm. When the development of the enterprise was deemed complete, the securities held by the firm were usually distributed to the partners and other participants.
15. As a general rule the enterprises were financed in their early stages by direct advances by the firm, and after their incorporation by loans from the firm. The firm also sometimes guaranteed loans by banks and others to corporations conducting firm enterprises. In some cases, as in the case of the Anglo-Chilean Consolidated Nitrate Corporation, the investment of the firm up to a certain point was refinanced by the public issue of securities. Even after such public financing, however, the business continued to be operated as a firm enterprise, the firm continuing to make devances for its support.
16. As the capital of the firm was comparatively small in relation to the size of its activities, the funds required for the development of *258 firm enterprises were largely contributed*1065 by means of loans by the various partners to the firm either of cash or securities. The assets of the firm at any given time, therefore, usually consisted of interests in various firm enterprises, which before their incorporation were carried as book accounts, and after their incorporation were represented by the stocks of corporations carrying on such enterprises and loans by the firm to such corporations. A large part of its liabilities usually consisted of loans from its members and guarantees by the firm of indebtedness of corporations carrying on enterprises of the firm.
17. The principal business of the old firm at the date of the decedent's death consisted of the enterprise carried on by the Anglo-Chilean Consolidated Nitrate Corporation (hereinafter referred to as Anglo-Chilean). The principal assets of the old firm on that date consisted of the stock and obligations of that corporation and the principal liabilities of the firm grew out of that enterprise.
18. Anglo-Chilean had outstanding at the date of the death of the decedent 1,756,750 shares of common stock without nominal or par value. Although the old firm was the nominal owner of 1,170,320 shares, the parties*1066 agree that, for the purpose of computing the interest of the decedent in the old firm, it was the actual owner on the date of the death of decedent of only 1,109,859 shares.
19. In addition to the 1,170,320 shares above mentioned, 146,300 shares were held by the old firm at the date of the decedent's death for certain individuals under agreement, subject to the control of the firm, and 223,280 shares were owned on that date by participants in the Nitrate Syndicate to whom they had originally been issued. No part of these 1,539,900 shares had at any time been sold or dealt in upon the market from the time of the issuance of such shares to the date of the decedent's death.
19a. Guggenheim Brothers became interested in Chilean nitrate shortly before 1916. Certain amounts were expended in experimentation, and, when the partnership now constituting the old firm was formed in 1916, it took over this account, known as the "Nitrate Prospect Account." As early as 1911, the Guggenheims individually had become interested in Chile copper, and in this connection one of the Guggenheim engineers, E. A. Cappelen Smith, had developed a very successful process for extracting copper electrolytically*1067 from low grade ore of a particular character. This process, known as the leaching process, was highly successful, and in March 1923 the Guggenheims sold out the Chile copper enterprise at a profit of approximately $70,000,000.
20. The Chile copper properties are only about 50 or 100 miles from the nitrate fields, and the Guggenheims asked the engineer who had been successful in developing the copper leaching process to work *259 out, if possible, a new nitrate process which would supersede the antiquated processes then in use. The engineer succeeded in his efforts and developed what was known as the "Guggenheim Process." It was subjected to experimental tests. In November 1922 a plant was obtained and a demonstrated run was made of the new process. The test run was completed in 1923 and was considered a success. This was about the time the Guggenheims sold out the copper enterprise.
21. Prior to the development of the Guggenheim process, the sole method of extracting sodium nitrate from the crude ore or "caliche" was by the Shanks process. Under it no attempt was made to use ore containing less than 16 or 17 percent nitrate and the ore, after being hand mined, *1068 was transported from the field to the plant, sometimes by mule carts and sometimes by railroad. Under the Guggenheim process, the nitrate-bearing caliche is broken up by the process of drilling and exploding, it is picked up by electric shovels, loaded on cars located on movable tracks, and taken to the crushers. Mechanization of operations increased the output per man to approximately three times that obtained under the Shanks process, with resultant economies in labor costs. The Guggenheim process permits the use of ore containing as low as 7 or 8 percent nitrate, and secures approximately twice as much nitrate out of a given area as can be obtained under the Shanks process at a saving of $5 per metric ton. The capital costs for both Shanks and Guggenheim process plants of the same nitrate capacity were substantially the same.
22. From early in the nitrate enterprise, Guggenheim Brothers had contemplated two lines of activities, the development and exploitation of patented processes for producing nitrate under the process developed by their engineer, and the use of the process in the commercial production of nitrate upon a large scale. In 1924 the patents and processes were*1069 transferred to an account known as the "Guggenheim Nitrate Syndicate" and the commercial activities were transferred to an account known as the "Coya Norte Syndicate."
23. The Guggenheim Nitrate Syndicate continued to hold the patents covering the Guggenheim process until June 1929. On the organization of Anglo-Chilean in 1924, it was granted a nonexclusive license to use the Guggenheim process in exchange for 5,500 shares of Anglo-Chilean preferred stock. In June 1929 the syndicate transferred all of its assets, including the patents, to Anglo-Chilean (through a corporation known as the Nitrate Research Corporation) for approximately $300,000 and the syndicate was dissolved.
24. In September 1924 the Coya Norte Syndicate (through the South American Products Corporation, all of the stock of which was owned by the old firm) purchased from the Chilean Government certain nitrate-bearing lands, known as the Coya Norte lands, for *260 $3,186,503. After this purchase, the old firm expended sums upon the beneficiation of these lands, making the total cost approximately $3,446,500.
25. In December 1924 the old firm entered into a contract with the Anglo-Chilean Nitrate*1070 & Railway Co. Ltd., a British corporation, owning properties adjacent to the Coya Norte lands and a railway running to the port of Tocopilla. Under this contract the old firm agreed to incorporate a new company to purchase the entire assets of the British company for Pound 3,600,000 principal amount of 7 percent first mortgage debenture stock secured by a first mortgage on the railway concessions, equipment, and realty of the British company, and also on the Coya Norte lands (which were to be conveyed to the new corporation) and on a new Guggenheim process nitrate plant to be built on the Coya Norte lands.
26. Pursuant to this agreement Anglo-Chilean was organized on December 22, 1924, under the laws of Delaware, with a capitalization of $10,000,000 par value 7 percent preferred stock, consisting of 100,000 shares of the par value of $100 each, and 1,600,000 common shares without par value. There was issued to the old firm $550,000 par value of the preferred stock, acting for themselves and others, in return for a nonexclusive license granted to Anglo-Chilean to use the Guggenheim process. Under an agreement dated December 23, 1924, the remainder of the preferred stock ($9,450,000*1071 par value) and all of the common stock of Anglo-Chilean was issued to the old firm, acting for themselves and others, in exchange for (a) the Coya Norte lands, and (b) an agreement by the old firm to pay to Anglo-Chilean $5,975,000 by July 1, 1926, which sum was subsequently paid.
27. In January 1925 Anglo-Chilean acquired the properties of the Anglo-Chilean Nitrate & Railway Co. Ltd., pursuant to the provisions of the contract between the old firm and the British company, and issued in exchange therefor Pound 3,600,000 principal amount of 7 percent first mortgage debenture stock secured by a trust deed. This debenture stock was in all material respects similar to American corporate bonds. The indenture securing it provided for the payment of interest at 7 percent in equal half-yearly payments; the stock was redeemable at 105; and there was a sinking fund provision requiring the company to pay over each year Pound 150,000 to the trustees (which was to be increased proportionately if the production of the corporation should exceed 276,000 tons of nitrate per annum), which sums the trustees were required to apply in redemption and cancellation of the stock. In the case of any*1072 merger or consolidation of the company or the transfer of the company's properties in an entirety to another company, it was provided:
* * * that any such consolidation, merger, transfer or conveyance shall be made subject to the continuing charge of this Indenture and that upon any *261 such consolidation merger transfer or conveyance the corporation formed thereby or to which such transfer or conveyance shall have been made shall expressly assume the due and punctual payment of the principal and interest of all of the stock hereby secured and of the due and punctual performance and observance of all the covenants and conditions of this Indenture.
28. The indenture was duly recorded in Chile in the same manner as a real estate mortgage in the United States and constituted an effective hypothecation or mortgage upon the properties.
29. The $5,975,000 which the old firm paid Anglo-Chilean pursuant to the agreement of December 23, 1924, proved inadequate to complete the new nitrate plant. To provide additional funds for this purpose and to enable Anglo-Chilean to redeem the preferred stock issued to the old firm, Anglo-Chilean, in November 1925, issued $16,500,000 principal*1073 amount of 20-year 7 percent sinking fund debenture bonds which, together with an additional issue of 156,760 shares of common stock (making a total of 1,756,750 shares outstanding) were sold in November 1925 to Lehman Brothers, New York bankers. Lehman Brothers sold the bonds and 123,760 shares of the stock to the public, 7 1/2 shares of stock being delivered with each $1,000 bond as a bonus, and retained 33,000 shares of the stock. From the sale of these bonds and stock, Anglo-Chilean realized $15,592,500, and from these funds redeemed the outstanding $10,000,000 par value 7 percent preferred stock at par, with the result that the four Guggenheim brothers, the estate of Isaac Guggenheim, and A. C. Burrage were reimbursed for the greater part of their advances to the enterprise up to that time.
30. The 20-year bonds were secured by indenture dated November 1, 1925, between Anglo-Chilean and the Bankers Trust Co. of New York. They bore interest at the rate of 7 percent and were callable at 107 1/2. The company was required to retire, through a sinking fund, not less than $950,000 of these bonds each year. It was covenated that the company would use the proceeds of the bonds*1074 (1) to complete the construction and equipment of the new plant with a minimum capacity of 260,000 metric tons of nitrate per year and to retire the outstanding preferred stock at par; (2) to electrify approximately 25 miles of the railroad where heavy grades were met, complete a cut-off of approximately 30 miles and provide additional rolling stock, yards, etc.; and (3) to retain the residue for general corporate purposes. It was also covenated that if the funds supplied by these bonds were not sufficient for the purpose of completing the new plant and making the improvements described, the company:
* * * will procure the additional funds so required either through loans or the creation of indebtedness, the obligation of which loans or indebtedness shall be junior to the obligation of the Bonds.
*262 31. Anglo-Chilean further agreed that until the bonds were paid it would not create any mortgage or further encumbrance upon its fixed assets (except a purchase money mortgage or a refunding mortgage), or permit any subsidiary to create such a mortgage or encumbrance, without making provision for the payment of the bonds; that it would not incur any indebtedness which matured*1075 more than twelve months from the date of the creation thereof, except for the acquisition of additional fixed assets; and that it would not sell, lease or dispose of substantially all of its property, or consolidate or merge with any corporation, unless the purchaser, lessee, or successor corporation should assume and agree to pay the bonds and coupons and also agree to perform the covenants and provisions of the indenture.
32. The proceeds of the 20-year bonds available after paying off the preferred stock proved insufficient to complete the new plant and other improvements. To enable Anglo-Chilean to procure the additional funds required, the old firm, or the partners, made loans of securities to it as follows:
(a) Under agreement of October 27, 1926, $3,300,000 of 3 1/2% United States Liberty bonds.
(b) Under agreement of January 18, 1927, sufficient collateral securities to enable Anglo-Chilean to borrow an additional $2,000,000.
(c) Under agreement of June 15, 1927, Murry Guggenheim and S. R. Guggenheim (on behalf of themselves and their two brothers) lent the corporation $5,000,000 in cash.
(d) Under agreement dated December 19, 1927, Daniel, Murry, S.R., and*1076 Simon Guggenheim deposited with certain banks a total of $5,000,000 principal amount of Government and State bonds, which Anglo-Chilean was permitted to use as collateral for short term loans.
33. In October 1928 it became apparent that additional funds would be required by Anglo-Chilean. At the same time it was decided to consolidate all of the various loans to Anglo-Chilean made by the old firm and by the Guggenheims, individually, into a single loan. This was accomplished by an agreement dated November 13, 1928, known as the "Consolidated Loan Agreement." After reciting that the total of the previous loans and the amounts borrowed by the corporation on the securities lent to it was $13,625,000, the agreement provided that the loans be canceled and the securities returned by Anglo-Chilean. The old firm, pursuant to agreement, advanced to Anglo-Chilean $13,625,000 with interest at 6 percent per annum, payable quarterly, such loan to be repaid 12 months from the date of the agreement. This loan of $13,625,000 was junior to the $16,500,000 principal amount of 20-year bonds. The old firm also, pursuant to agreement, loaned Anglo-Chilean at its request further sums up to a total*1077 of $11,700,000, at 6 percent interest, such loans to be repaid 12 months from the date *263 of the consolidated loan agreement. Paragraph 6 of the agreement provided as follows:
Guggenheim Brothers hereby agrees that your indebtedness under the loans of $25,325,000, comprised in this offer, as well as under any further borrowings which may be made by you from us, shall be and hereby is subordinate to your payment of your present and future obligations in connection with dollar Acceptance Credits and Sterling letters of Credit extended or to be extended to you.
34. The loans, all of which were outstanding and unpaid at the date of the decedent's death and which totaled $25,325,000, were not evidenced by notes but were in the form of open accounts. They were due 1 year after November 13, 1928; but by agreement between the parties the due date was extended, first until June 10, 1930, later to December 10, 1930, and finally by a letter from the old firm to Anglo-Chilean dated June 11, 1930, until June 10, 1931. All of these extensions were made subject to the same terms and conditions as originally agreed upon.
35. The cash to make the $25,325,000 loans was obtained*1078 by the old firm from the following sources: (a) $20,850,000 was borrowed from the new firm, which in turn obtained it be advances of $5,212,500 each from Daniel, Murry, S. R., and Simon Guggenheim; (b) $4,475,000 was obtained by borrowing $2,500,000 from the new firm and borrowing $1,975,000 from banking houses through the brokerage firm of L. F. Rothschild & Co. To secure these loans the old firm pledged with the lenders as collateral, securities loaned by Daniel, Murry, S. R., and Simon Guggenheim, and by the estate of Isaac Guggenheim and Albert C. Burrage. Daniel Guggenheim contributed to such collateral $1,000,000 par value 3 1/2 percent Liberty bonds, which were included among the assets of his estate in the estate tax return.
36. Interest at 6 percent was charged on the $20,850,000 of loans, the cash for which had been advanced by the four Guggenheims, and was paid by Anglo-Chilean to the old firm up to January 1, 1930. The decedent's share of the accrued interest upon these loans from January 1, 1930, to the date of his death, amounted to $234,501.40, and was included in the estate tax return.
37. Interest on the remaining $4,475,000 of the loans was paid by Anglo-chilean*1079 to the old firm currently up to the date of decedent's death at the same rate of interest which the firm paid on the funds borrowed for this purpose. At the time of the decedent's death the old firm owed $4,475,000 representing the amounts borrowed by it for the purpose of making loans in that amount to Anglo-Chilean.
38. The Commissioner in his valuation of the decedent's interest in the old firm as of the date of death treated the $25,325,000 loans as collectible at 100 percent of their face value.
*264 39. In June 1929 Anglo-Chilean acquired common stock control of the Lautaro Nitrate Co., Ltd. (hereinafter referred to as Lautaro, Ltd.), a British corporation which owned extensive nitrate properties in Chile, which was the largest producer of Chilean nitrate. Prior thereto Lautaro, Ltd., had outstanding 1,600,000 shares of common stock and Pound 2,175,725 first mortgage 6 1/2 percent debentures. By agreements executed on June 17, 1929, Lautaro, Ltd., reclassified its stock as follows: Pound 8,000,000 7 percent cumulative preference stock (consisting of 1,600,000 shares of a par value of Pound 5 each), issued in exchange for the existing common shares; $3,200,000*1080 7 percent preferred stock (consisting of 320,000 shares of a par value of $100 each) authorized but not issued, being reserved for future use in connection with the conversion privilege in the proposed new $32,000,000 first mortgage gold bonds; and 2,000,000 ordinary shares of the par value of 1 shilling each.
40. A new corporation, known as the Lautaro Nitrate Corporation (hereinafter referred to as Lautaro of Delaware) was organized under the laws of Delaware with a capital stock of 4,000,000 shares without par value. Anglo-Chilean subscribed to 2,340,000 shares the stock of Lautaro of Delaware at 25 cents per share, paying $585,000. Lautaro of Delaware acquired all of the 2,000,000 shares of Lautaro, Ltd., in consideration of Pound 100,000 (approximately $485,000) in cash and 1,660,000 shares of its stock, constituting the balance of its authorized stock. Part of this stock Lautaro, Ltd., distributed to the holders of its preference shares. Anglo-Chilean at the same time granted Lautaro, Ltd., a nonexclusive license to use the Guggenheim patents in consideration of $485,000 in cash. As a result of these transactions, Anglo-Chilean acquired 2,340,000 shares, or approximately*1081 58 percent of the stock of Lautaro of Delaware, and Lautaro of Delaware in turn owned all of the ordinary shilling shares of Lautaro, Ltd.
41. In June 1929 Lautaro, Ltd., through the National City Co., sold an issue of first mortgage 6 percent gold bonds in the principal amount of $32,000,000. Warrants for 10 shares of common stock of Lautaro of Delaware, or 320,000 shares, were delivered with each bond. The bonds were convertible at par into 7 percent preferred dollar shares of Lautaro, Ltd. The Pound 2,175,725 first mortgage 6 1/2 percent debentures remained outstanding.
42. The principal stockholder of Lautaro, Ltd., prior to the acquisition of control by Lautaro of Delaware was Baburizza Lukinovic & Co. (hereinafter referred to as Baburizza), a partnership which had been the managing agent of Lautaro, Ltd., and held profitable management contracts. In return for the cancellation of these contracts and the transfer by Baburizza of certain properties to Lautaro, Ltd., the latter agreed to deliver to Baburizza 740,000 shares of Lautaro of Delaware stock. Baburizza was also entitled to receive as a preference *265 shareholder of Lautaro, Ltd., an additional 75,000*1082 shares of Lautaro of Delaware stock. Baburizza demanded that these 815,000 shares be purchased from it for Pound 1,600,000 in cash. The demand was complied with in order that control of Lautaro, Ltd., might be acquired. Pursuant to an agreement dated June 29, 1929, between Anglo-Chilean and Baburizza, which was guaranteed by the old firm, Anglo-Chilean purchased the 815,000 shares for Pound 1,600,000, payable Pound 400,000 in cash upon delivery of the shares and the balance in the form of three one-year notes of Pound 400,000 each, due October 15, 1930, October 15, 1931, and October 15, 1932, respectively. These shares were delivered to Anglo-Chilean on October 15, 1929.
43. Pursuant to an agreement dated June 25, 1929, in the case of Lehman Brothers, and June 27, 1929, in the case of the National City Co., Anglo-Chilean sold to Lehman Brothers and to the National City Co. one-third each of the 815,000 shares purchased from Baburizza at the cost thereof to Anglo-Chilean, i.e., 271,666 shares each at a price of Pound 533,333, the price being payable at the time and in the manner fixed in the purchase agreement between Anglo-Chilean and Baburizza.
44. The initial payment*1083 of Pound 400,000 under the purchase agreement with Baburizza was made on October 15, 1929. Two-thirds of this amount Anglo-Chilean obtained from payments made by Lehman Brothers and the National City Co. under the resale agreements, and Anglo-Chilean obtained the balance, namely, $648,499.99, by borrowing it from the old firm under the consolidated loan agreement, which amount constituted the unborrowed balance available under that agreement.
45. On March 31, 1930, Anglo-Chilean anticipated the payment of its note to Baburizza due on October 15, 1930. To make this payment, Anglo-Chilean borrowed $639,806.43 from the National City Bank (being one-half of a loan of $1,279,612.85). The old firm guaranteed this loan of $639,806.43. The remainder was obtained from payments made by Lehman Brothers and the National City Co. under their agreements.
46. At the date of decedent's death the following obligations of Anglo-Chilean, incurred in connection with the Baburizza transaction, were outstanding and unpaid:
(a) Pound 800,000 notes of Anglo-Chilean to Baburizza, payable Pound 400,000 October 15, 1931, and Pound 400,000 October 15, 1932; these notes were guaranteed by the old*1084 firm. The net liability which might reasonably be expected in respect to this guarantee was Pound 266,666 or $1,297,733.33, because of the purchase of two-thirds of the 815,000 shares by Lehman Brothers and National City Co.
(b) $1,279,612.85 note of Anglo-Chilean to the National City Bank, of which $639,806.49 was guaranteed by the old firm.
47. Subsequent to the decedent's death, the Pound 800,000 due Baburizza was paid. On October 15, 1931, Lehman Brothers and the National *266 City Co. paid to Anglo-Chilean the third installment due, namely, Pound 133,333 each, and also anticipated the fourth installment due October 15, 1932, and paid the additional sums of Pound 133,333 each. With these funds Anglo-Chilean paid Baburizza its note due October 15, 1931, for Pound 400,000, and, with a small amount borrowed from the National City Bank, anticipated the payment of one-third of its note due October 14, 1932 (Pound 133,333), leaving due Pound 266,666. On or about October 15, 1932, Anglo-Chilean borrowed from the old firm the equivalent in dollars of Pound 266,666 (approximately $920,000), and with these funds paid the remaining two-thirds of its October 15, 1932, note.
*1085 48. The one-half of Anglo-Chilean's note to the National City Bank guaranteed by the old firm, namely, $639,806.49, was increased subsequent to the decedent's death to $730,000. This note was paid off in the following installments, with funds which Anglo-Chilean borrowed from the old firm:
| November 15, 1932 | $230,000 |
| March 17, 1933 | 250,000 |
| May 15, 1933 | 250,000 |
| 730,000 |
49. In addition to the loan of $648,499.99 under the consolidated loan agreement, the old firm advanced to Anglo-Chilean in connection with its Baburizza obligations $1,676,000 in 1932 and 1933 (which included funds to meet Anglo-Chilean's obligation of $730,000 to the National City Bank and the balance due on the last Baburizza note of $920,000). The decedent's share of this amount was $419,000, which the petitioner, upon demand from the old firm, paid to the firm in 1932 and 1933.
50. At the date of the decedent's death Anglo-Chilean had outstanding with various banks in the city of New York the following bank loans, dollar acceptance credits, and sterling letters of credit, which were arranged during the spring and summer of 1930:
| Bank loans: | |
| Bankers Trust Co | $1,000,000 |
| Central Hanover Bank & Trust Co | 1,000,000 |
| 2,000,000 |
| Drawn to date of death | |
| Sterling credits: | |
| Central Hanover Bank & Trust Co | Pound 54,573 |
| Harriman Brothers | 200,000 |
| J. P. Morgan & Co | 200,000 |
| Heidelback, Icklenheimer & Co | 200,000 |
| Anglo-South American Bank | 47,500 |
| Pound 702,073 | |
| Dollar equivalent | $3,423,336.71 |
| Drawn to date of death | |
| Dollar credits: | |
| J. P. Morgan & Co | $1,600,000 |
| Central Hanover Bank & Trust Co | 500,000 |
| National City Bank | 100,000 |
| Chase National Bank | 1,000,000 |
| Guaranty Trust Co | 100,000 |
| International Acceptance Bank | 500,000 |
| French American Banking Corporation | 500,000 |
| Commercial Bank & Trust Co | 500,000 |
| 4,800,000 |
*267 51. These loans and credits were negotiated with the several banks by an officer of Anglo-Chilean, on his representation to the banks (which was a fact) that Guggenheim Brothers stood back of them. No security, however, was pledged for their repayment and they were unsecured except for the guarantee of Guggenheim Brothers.
52. Under the consolidated loan agreement the entire indebtedness of $25,325,000 of Anglo-Chilean and any future borrowings which it might make from the old firm were made subordinate to present and future*1087 obligations of Anglo-Chilean made in connection with the dollar acceptance credits and sterling letters of credit. By letter dated January 17, 1930, to the Bankers Trust Co., by letter dated June 12, 1930, to the Central Hanover Bank & Trust Co., and by letter dated November 7, 1930, to the National City Bank the old firm agreed that all of Anglo-Chilean's indebtedness to it, both existing and future, should be, and was, subordinated to Anglo-Chilean's credit and bank loans extended or to be extended by such banks.
53. The New York banks granting such loans and credits were content with this arrangement until December 1930, when the Bankers Trust Co. before renewing its loans requested a formal written guarantee by the old firm. This was given, and as the loans and credits with the other banking houses became due and were extended, or as new ones were made, the written guarantee of the old firm was in each case supplied. These loans and credits from time to time were extended and renewed by Anglo-Chilean, and upon the organization of Compania Salitrera Anglo-Chilena (hereinafter referred to as Anglo-Chilena), a successor company, it assumed such loans and credits. The loans*1088 and credits as renewed or extended also bore the written guarantee of the old firm.
54. The loans and credits above referred to were ultimately paid by Compania Salitrera Anglo-Chilena. The old firm loaned this company the money with which to meet the bank loans and the dollar and sterling credits when due. Such loans were made over the period from November 20, 1931, to October 17, 1933, and amounted in the aggregate to $9,288,887.50. The decedent's share of the amounts so *268 advanced by the old firm for this purpose was $2,321,221.87, which petitioner, upon demand, paid to the old firm since the decedent's death.
55. After the death of decedent the old firm, under and pursuant to the authority conferred upon the surviving partners under the partnership agreement in effect at that time, made certain additional outlays in connection with the Anglo-Chilean enterprise. When the Compania de Salitre de Chile, hereinafter referred to as "Cosach", was organized in the spring of 1931, the old firm purchased $10,000,000 face value of the new Cosach bonds at 90. Later, in December 1931 the old firm loaned $3,000,000 to Cosach through Anglo-Chilean. Under the terms of the*1089 partnership agreement in effect at the date of death, the petitioner was liable for Daniel's share of these payments. Upon demand from the firms she paid to it $1,721,250, representing decedent's share of the amount paid for the Cosach bonds and $750,000 representing the decedent's share of the $3,000,000 loan.
56. At the date of the decedent's death Edmond A. and Harry F. Guggenheim, former partners of the old firm, under the terms of the retirement agreement, continued to have an interest in certain firm enterprises, including a 11.48 percent participation in the Anglo-Chilean loans and a 12 1/2 percent participation in the Anglo-Chilean stock owned by the old firm. Prior to that date there had been advanced by the members and ex-members of the old firm for the account of Demond, in connection with firm enterprises other than the nitrate enterprises, a total of $1,686,396.02, of which the decedent's share was $344,667.70. There also had been advanced for the account of Harry F. Guggenheim under this agreement and for such purposes a total of $1,525,308.01, of which the decedent's share was $311,528.53. Such advances were charged against Edmond and Harry on the books of the*1090 firm in accounts designated "Indebtedness Accounts" and at the same time Edmond and Harry were credited with their respective participations in the firm enterprises for which such advances were made.
57. In addition to the foregoing, at the date of the decedent's death the four partners had advanced for the account of Edmond for the purpose of providing funds for the loans to Anglo-Chilean, a total of $2,907,310, of which the decedent's share was $726,827.50. A like amount had been advanced by the four partners for the account of Harry for such purpose, of which the decedent's share was $726,827.50.
58. The advances made for the account of Harry were secured by the following collateral: (a) 12 1/2 percent of the Anglo-Chilean stock held by the firm; (b) 11.48 percent of the Anglo-Chilean open account loans; and (c) other assets of a stipulated value of $438,590.82.
*269 59. In computing the value of the decedent's interest in the old firm, the Commissioner excluded the participations of Edmond and Harry in any enterprises of the firm outside of the nitrate enterprise, and excluded their participations in the stock of Anglo-Chilean held by the firm. He did not, *1091 however, make any deduction for the participations of Edmond and Harry in the loans by the firm to Anglo-Chilean, but treated the full amount of these loans as belonging to the four partners of the old firm, including the decedent, and included one-fourth of the value of such loans, with interest thereon, in the decedent's interest in the firm without making any deduction for the participations of Edmond and Harry.
59a. At the date of decedent's death, A. C. Burrage had a participation of 8.16 percent in the Anglo-Chilean loans. Prior to that date the old firm had advanced certain moneys for his account in making such loans, for which advances he was indebted to the old firm. The decedent's participation in such indebtedness on the date of death was $319,879.78. In computing the value of the decedent's interest in the old firm, the Commissioner has not made any deduction for the 8.16 percent participation of A. C. Burrage in the loans made by the old firm to Anglo-Chilean, but has treated the full amount of these loans as belonging to the four partners, including the decedent, and has included one-fourth of the value of such loans, with interest thereon, in decedent's interest*1092 in the old firm.
59b. At the date of decedent's death, the estate of Isaac Guggenheim had a participation of 13.776 percent in the Anglo-Chilean loans. Prior to that date the old firm had advanced certain moneys for the estate's account in making such loans, for which advances the estate was indebted to the old firm. The decedent's participation in such indebtedness on the date of death was $472,463.63. In computing the value of the decedent's interest in the old firm, the Commissioner has not made any deduction for the 13.776 percent participation of the estate of Isaac Guggenheim in the loans made by the old firm to Anglo-Chilean, but has treated the full amount of these loans as belonging to the four partners, including the decedent, and has included one-fourth of the value of such loans, with interest thereon, in decedent's interest in the old firm.
60. In the computation of decedent's interest in the old firm the Commissioner has also included $344,667.70 representing the decedent's share of the indebtedness charged against Edmond on account of enterprises outside of the nitrate enterprise and has also included $726,827.50 as the decedent's share of the total advances*1093 made by the four brothers for the account of Edmond in connection with loans to Anglo-Chilean, together with $837.54 accrued interest thereon, the same being valued at 100 percent of the face amount thereof. *270 Murry Guggenheim, under the retirement agreement, had guaranteed the payment of any final debit balance existing in the account.
60a. In the determination of the value of the decedent's interest in the old firm as set forth in the deficiency letter, the Commissioner has included $319,879.78 for the value of the interest of the decedent in the indebtedness owing by A. C. Burrage to the old firm arising from advances made by the old firm for the account of A. C. Burrage in making loans to Anglo-Chilean, and also has included as an item in such valuation $472,463.63 as the value of the interest of the decedent in the indebtedness owing by the estate of Isaac Guggenheim to the old firm arising from advance made by the old firm for the account of the estate of Isaac Guggenheim in making loans to Anglo-Chilean.
61. The Commissioner has not allowed, either as a deduction in the value of decedent's interest in the old firm or as a deduction from the gross estate, any*1094 amount on account of decedent's guarantee of any final debit balance that may exist in the account of Harry upon the termination and liquidation of ventures in which he had an interest. However, in the computation of decedent's interest in the old firm the Commissioner has not included the decedent's share of any advances made for the account of Harry either in connection with the nitrate or other enterprises.
62. The parties have agreed that if the decedent's share of the advances made by the four partners for the account of Edmond in connection with Anglo-Chilean loans amounting to $726,827.50, with accrued interest thereon, is to be included as an asset in the computation of decedent's interest in the old firm, then in valuing the Anglo-Chilean loans as an asset of the partnership there should be excluded Edmond's participation therein, namely, 11.48 percent of the face amount of these Anglo-Chilean loans.
62a. The parties have also agreed that if the value of the interest of the decedent in the indebtedness owing by A. C. Burrage and the estate of Isaac Guggenheim to the old firm at the time of the decedent's death determined by the Commissioner at $319,879.78 and $472,463.63*1095 respectively, are to be included as assets in the computation of decedent's interest in the old firm, then in valuing the Anglo-Chilean loans as an asset of the partnership there should be excluded A. C. Burrage's participation therein, namely, 8.16 percent, and the estate of Isaac Guggenheim's participation therein, namely, 13.776 percent of the face amount of these Anglo-Chilean loans.
63. Nitrogen products are used chiefly as fertilizers and for the manufacture of explosives, the estimates of use in fertilizer ranging from 60 percent to 90 percent of the world production. On September 28, 1930, the chief sources of the world's supply of fixed inorganic nitrogen were in the form of sodium nitrate from the Chilean *271 nitrate fields; from ammonia in the form of sulphate of ammonia which is manufactured synthetically and is also obtained from byproduct coke and gas ovens; and from various synthetic nitrogen products, including sodium nitrate, calcium nitrate, nitro-chalk (also referred to as cal-nitro), cyanamid, ammonium sulphate, ammonium nitrate, and urea. Organic sources of nitrogen are too small in volume to have any commercial significance.
64. The first nitrogenous*1096 compound to assume importance was potassium nitrate, which was used as early as the thirteenth century in the manufacture of gunpowder. The manufacture of Chilean nitrate for agricultural and commercial purposes was begun in 1831. Ammonia was first recovered as a byproduct in the manufacture of gas in 1845, and by 1890 substantial amounts were being recovered from the manufacture of coke for metallurgical purposes. About 1900 nitrogen was first fixed synthetically in Norway by the electric arc process, and about 1904 nitrogen was fixed in calcium carbide to produce a substance known as cyanamid, which became an important source of nitrogen supply for the fertilizer industry. In 1913 there was developed in Germany the Haber-Bosch process for the manufacture of ammonia by direct synthesis of nitrogen and hydrogen. By the use of this process Germany during the World War provided itself with sufficient nitrogen for both agricultural purposes and national defense without reliance upon Chilean nitrate. This demonstration of nitrogen self-sufficiency by Germany during the war resulted in the installation and operation of similar plants in other countries for the production of nitrogen*1097 synthetically.
65. In 1930 the following nitrogen products were being used as substitutes for and were directly competitive with Chilean nitrate: Liquid ammonia and ammonia solutions; ammonium sulphate, produced synthetically and as a byproduct of the manufacture of coke and gas; synthetic sodium nitrate; ammonium phosphate; nitrochalk or cal-nitro.
66. The following table shows in short tons the net increase in the world capacity for producing nitrogen and the actual production from 1913 to 1930, inclusive:
| World Capacity | ||||||||
| 1913 | 1924 | 1925 | 1926 | 1927 | 1928 | 1929 | 1930 | |
| Byproduct | 325,000 | 410,000 | 420,000 | 430,000 | 465,000 | 510,000 | 545,000 | 572,000 |
| Synthetic | 55,000 | 560,000 | 700,000 | 815,000 | 1,017,000 | 1,310,000 | 1,733,000 | 2,195,000 |
| Cyanamid | 70,000 | 250,000 | 275,000 | 315,000 | 330,000 | 335,000 | 390,000 | 465,000 |
| Total | 450,000 | 1,220,000 | 1,395,000 | 1,560,000 | 1,812,000 | 2,155,000 | 2,668,000 | 3,232,000 |
| Chilean: | ||||||||
| Shanks | 500,000 | 495,000 | 500,000 | 500,000 | 510,000 | 515,000 | 520,000 | 510,000 |
| Guggenheim | 65,000 | 90,000 | 90,000 | 160,000 | ||||
| Total | 500,000 | 495,000 | 500,000 | 500,000 | 575,000 | 605,000 | 610,000 | 670,000 |
| Total world capacity | 950,000 | 1,715,000 | 1,895,000 | 2,060,000 | 2,387,000 | 2,760,000 | 3,278,000 | 3,902,000 |
| World Production | ||||||||
| Byproduct | 320,000 | 352,275 | 368,555 | 397,595 | 440,275 | 466,950 | 496,565 | 476,510 |
| Synthetic | 26,600 | 355,465 | 432,300 | 552,365 | 703,120 | 944,900 | 1,102,145 | 1,018,990 |
| Cyanamid | 35,840 | 120,450 | 145,750 | 181,500 | 207,900 | 214,500 | 250,690 | 255,600 |
| Total | 382,440 | 828,190 | 946,605 | 1,131,460 | 1,351,295 | 1,626,350 | 1,849,400 | 1,751,100 |
| Chilean nitrate | 475,720 | 412,425 | 433,375 | 346,065 | 276,980 | 543,085 | 554,840 | 419,705 |
| Total world production | 858,160 | 1,240,615 | 1,379,980 | 1,477,525 | 1,628,275 | 2,169,435 | 2,404,240 | 2,170,805 |
*1098 *272 67. The annual consumption of inorganic nitrogen, in metric tons, for the nitrate years 1903 to 1931, inclusive, was as follows:
| Consumption of nitrogen as Chilean nitrate | Consumption of byproduct nitrogen (assumed equivalent to production) | ||||||
| Consumption of synthetic nitrogen | Total consumption of fixed inorganic nitrogen | ||||||
| Fiscal year | Metric tons | Percent of total | Metric tons | ||||
| Percent of total | Metric tons | Percent of total | Metric tons | ||||
| 1902-1903 | 223,549 | 66.6 | 112,900 | ||||
| 33.4 | 336,449 | ||||||
| 1903-1904 | 237,693 | 65.8 | 124,250 | 34.2 | 361,943 | ||
| 1904-1905 | 241,969 | 64.4 | 133,940 | 35.6 | 375,909 | ||
| 1905-1906 | 261,175 | 63.7 | 149,660 | 36.3 | 410,835 | ||
| 1906-1907 | 270,732 | 59.3 | 187,120 | 40.7 | 457,852 | ||
| 1907-1908 | 279,579 | 61.0 | 179,320 | 39.0 | 458,899 | ||
| 1908-1909 | 297,387 | 59.2 | 204,400 | 40.8 | 501,787 | ||
| 1909-1910 | 369,321 | 60.6 | 232,360 | 38.1 | 8,000 | 1.3 | 609,681 |
| 1910-1911 | 374,821 | 58.8 | 246,820 | 38.7 | 17,000 | 2.4 | 638,641 |
| 1911-1912 | 377,631 | 56.8 | 257,010 | 38.7 | 30,000 | 4.5 | 664,641 |
| 1912-1913 | 391,776 | 53.2 | 290,460 | 39.4 | 54,000 | 7.4 | 736,236 |
| 1913-1914 | 421,382 | 57.4 | 243,160 | 33.1 | 70,000 | 9.5 | 734,542 |
| 1914-1915 | 185,921 | 29.4 | 240,370 | 38.1 | 205,000 | 32.5 | 631,291 |
| 1915-1916 | 358,350 | 41.3 | 246,400 | 28.5 | 262,000 | 30.2 | 866,750 |
| 1916-1917 | 420,936 | 43.8 | 200,690 | 20.9 | 339,000 | 35.3 | 960,626 |
| 1917-1918 | 404,129 | 38.5 | 229,210 | 21.9 | 416,000 | 39.6 | 1,049,339 |
| 1918-1919 | 351,658 | 38.7 | 300,380 | 33.0 | 256,000 | 28.3 | 908,038 |
| 1919-1920 | 305,242 | 28.3 | 352,000 | 32.6 | 421,000 | 39.1 | 1,078,242 |
| 1920-1921 | 223,012 | 33.3 | 305,000 | 45.5 | 142,000 | 21.2 | 670,012 |
| 1921-1922 | 248,369 | 31.2 | 234,000 | 29.5 | 312,000 | 39.3 | 794,369 |
| 1922-1923 | 347,176 | 34.8 | 156,000 | 15.6 | 496,000 | 49.6 | 999,176 |
| 1923-1924 | 340,000 | 32.1 | 314,800 | 29.6 | 404,200 | 38.3 | 1,059,000 |
| 1924-1925 | 363,000 | 31.6 | 325,700 | 28.3 | 461,100 | 40.1 | 1,149,800 |
| 1925-1926 | 324,200 | 25.8 | 344,400 | 27.4 | 589,900 | 46.8 | 1,258,500 |
| 1926-1927 | 275,158 | 20.1 | 378,500 | 27.5 | 712,677 | 52.4 | 1,366,335 |
| 1927-1928 | 392,722 | 23.9 | 422,000 | 25.6 | 827,669 | 50.5 | 1,642,391 |
| 1928-1929 | 419,450 | 22.4 | 427,000 | 22.8 | 1,025,630 | 54.8 | 1,872,080 |
| 1929-1930 | 363,893 | 18.6 | 475,840 | 24.4 | 1,111,064 | 57.0 | 1,950,797 |
| 1930-1931 | 244,300 | 15.0 | 390,534 | 24.1 | 986,471 | 60.9 | 1,621,305 |
*1099 It requires 6.25 metric tons of nitrate to equal 1 metric ton of nitrogen. There are 2,204.6 pounds in a metric ton.
68. The stocks of unsold Chilean nitrate on hand in Chile and the total world stocks on hand at the end for each nitrate year from June 30, 1920, to June 30, 1931, are shown in the following table:
| End of nitrate year | Stocks in Chile | World stocks |
| Metric tons | Metric tons | |
| 1919-1920 | 1,269,396 | 1,830,228 |
| 1920-1921 | 1,358,699 | 2,467,772 |
| 1921-1922 | 1,616,434 | 1,893,294 |
| 1922-1923 | 1,002,985 | 1,256,985 |
| 1923-1924 | 1,037,795 | 1,247,091 |
| 1924-1925 | 869,343 | 1,238,151 |
| 1925-1926 | 1,228,999 | 1,709,273 |
| 1926-1927 | 1,005,221 | 1,226,201 |
| 1927-1928 | 681,019 | 1,183,431 |
| 1928-1929 | 953,797 | 1,653,821 |
| 1929-1930 | 1,754,867 | 2,337,443 |
| 1930-1931 | 1,645,073 | 2,417,626 |
*273 69. Iodine, as well as sodium nitrate, is produced from nitrate ore. The amount of iodine produced is usually a comparatively small fraction of the available supply and is dependent upon the demand. Anglo-Chilean on September 30, 1930, was a member of the Iodine Producers Association of Chile, which allotted to each of the producers its quota of iodine sales in proportion*1100 ot its output of nitrate. The total world sales of iodine in kilograms from 1926 to 1930, inclusive, segregated between Chilean and other production, was as follows:
| Year | Chile | Others | Total |
| 1926 | 657,601 | 218,933 | 876,534 |
| 1927 | 771,884 | 251,881 | 1,023,765 |
| 1928 | 679,563 | 315,366 | 994,929 |
| 1929 | 624,060 | 315,573 | 939,633 |
| 1930 | 455,401 | 364,808 | 820,209 |
70. At the date of the decedent's death all exports from Chile of nitrate and iodine were, and for many years prior thereto had been, subject to export duties of approximately $12.33 per ton on nitrate and 75 cents per kilo on iodine. On that date, however, Anglo-Chilean and other producers who had joined the Central Selling Organization of the Nitrate Producers Association of Chile, hereinafter discussed, were entitled to a rebate of part of the export tax. Law No. 4863, also hereinafter discussed, had been enacted in July 1930, providing in general for the merger of all the nitrate producing companies into one gigantic corporation. This law authorized the exemption from export taxes of nitrate and iodine produced by such corporation and by other companies which sold their production through it and*1101 subjected themselves to a regime tending toward the general attainment of the purposes of the law.
71. The following table shows the total ordinary income of the Chilean Government in pesos, and the income derived by it from direct taxes or export duties upon nitrate and iodine for the years 1918 to 1928, inclusive:
| Year | Income from nitrate and iodine | Total ordinary income | Percentage from nitrate and iodine |
| Pesos | Pesos | Percent | |
| 1918 | 335,236,307 | 738,251,379 | 45.40 |
| 1919 | 91,464,887 | 379,097,675 | 24.12 |
| 1920 | 316,855,337 | 638,167,530 | 49.65 |
| 1921 | 126,592,899 | 274,441,532 | 48.12 |
| 1922 | 117,567,806 | 375,821,946 | 31.28 |
| 1923 | 229,234,027 | 561,840,153 | 40.78 |
| 1924 | 238,863,773 | 602,632,395 | 39.63 |
| 1925 | 258,705,488 | 695,693,709 | 37.18 |
| 1926 | 175,185,563 | 755,401,152 | 23.19 |
| 1927 | 235,248,408 | 909,129,764 | 25.87 |
| 1928 | 281,007,447 | 1,021,041,399 | 27.52 |
*274 72. At the time of its organization in December 1924, Anglo-Chilean became a member of the Association of Chilean Nitrate Producers (hereinafter referred to as the Nitrate Producers Association) which was a cooperative association of Chilean nitrate producers. The purpose of this*1102 association, which was formed in 1919, was to carry on propaganda throughout the world which would tend to increase the consumption of Chilean nitrate, and to effect sales of nitrate for its members through a central selling agency, the members participating in such sales in accordance with agreed quotas or percentages. The association also, usually in May of each year, fixed the prices at which Chilean nitrate was to be sold and allocated to each member a certain proportion of the total sales of nitrate. However, the prices for the year beginning July 1, 1930, were not fixed until a cartel agreement was reached in August 1930. Expenses of the association were met partly by a contribution exacted from each producer upon the basis of nitrate sold and partly by a contribution made by the Chilean Government. The bylaws of the association required its members to sell their output through its central selling organization; but a member by giving notice could withdraw from the selling organization and continue to be a member subject to control by the association, with respect to the quantity of nitrate produced and the selling prices. Prior to July 1, 1927, Anglo-Chilean notified and*1103 association of its withdrawal from the central selling organization on that date.
73. In July of 1927 the Chilean Government passed Law No. 4144 and pursuant to the provisions therein contained, the President of Chile granted to the nitrate producers who adhered to the central selling organization the right to receive a subsidy upon all nitrate exported, thus establishing a system of rebating part of the export tax. Since Anglo-Chilean was not a member of the central selling organization during the calendar year 1928, it was not entitled to claim the subsidies granted to other nitrate producers.
74. An agreement was entered into on or about December 24, 1928, wherein Anglo-Chilean agreed to adhere to the central selling organization provided the agreements relating thereto would not apply to the United States and its dependencies. Anglo-Chilean reentered the central selling organization on July 1, 1929, and thereafter, up to and including the date of the decedent's death, was a member of it. It was assigned a quota for the nitrate year 1929-1930 of 295,130 tons.
75. Under the bylaws of the Nitrate Producers Association, each producer was free to sell nitrate in such*1104 quantities as it chose, but if a producer sold nitrate in excess of the quota which was assigned to it by the association, such excess sales were deemed for the account *275 of the other members of the association and the producer which exceeded its quota was compelled, at the end of the nitrate year, to buy nitrate to the extent of such excess from the members who had not sold to the extent of their quotas, paying therefor the estimated average price on the coast of Chile, as fixed by the board of directors. The adjustment resulting from such "oversold" or "undersold" position was made as of June 30 of each year, that date being the end of the nitrate year.
76. During the year 1929-1930 Anglo-Chilean's sales in excess of its quota amounted to approximately 149,678 tons, and subsequent to June 30, 1930, it was compelled to purchase from other producers this amount of nitrate at a price of $5,691,328. Upon a final adjustment being made after the decedent's death, the quota of Anglo-Chilean was increased to 305,649 tons and the amount of the "oversold" nitrate it was required to purchase was reduced to 139,159 tons.
77. Having rejoined the central selling organization*1105 of the Nitrate Producers Association on July 1, 1929, Anglo-Chilean was entitled thereafter to claim a refund of export taxes at the same rate paid to the other members. At the date of the decedent's death there was due to Anglo-Chilean, pending settlement with the Chilean Government, $434,537.46 for subsidies for the nitrate year 1929-1930. In addition to this amount, the Minister of the Treasury of Chile orally promised that the Government of Chile would pay Anglo-Chilean subsidies and adjustments for price declines on all nitrate shipped by it during the six months prior to July 1, 1929. The claim of Anglo-Chilean against the Chilean Government for subsidies and adjustments based upon this promise was carried on the books of Anglo-Chilean as of June 30, 1930, at $1,047,042.65. Later a reserve for the full amount of the subsidies and adjustments for price declines totaling $1,481,580.11 ($434,537.46 plus $1,047,042.65) was set up on the books of Anglo-Chilean as of June 30, 1930.
78. As a result of the rapid development of the synthetic nitrogen industry, there was keen competition in the world markets not only among the synthetic products, but also between the synthetically*1106 produced nitrogen products and the natural nitrates from Chile. In an effort to avoid a ruinous price war and stabilize the industry, an association or cartel composed of the principal producers of synthetic and byproduct nitrogen in the world, except those in the United States, was formed in 1929. The producers affiliated with the cartel embraced about 80 percent of the world capacity and included the Chilean producers through the Nitrate Producers Association. In August 1930, at the second meeting of the cartel, an agreement was reached which allocated to the various producing countries, including Chile, the amount of nitrogen products which might be sold *276 in the world markets (excepting the United States) by the nitrogen industry of each country. Under this agreement the production of Chilean nitrate was not curtailed. Prices at which nitrogen products were to be sold in various countries of the world, excluding the United States, for the year ending June 30, 1931, were fixed at the 1930 meeting. The agreement provided that synthetic producers were to be compensated for curtailing production and a fund of pound 3,000,000 was to be raised for that purpose, Chile's*1107 share being one-quarter or pound 750,000, equivalent to $3,645,000 for the year. Producers of nitrogen in the United States were prevented from joining the cartel and fixing prices by reason of the Federal antitrust laws. After the formation of the cartel for the year 1930 and to June 30, 1931, the United States became the most important free market in the world for nitrogen products.
79. Early in January 1930 Robert Marsh, Jr., a consulting engineer and vice president of both Anglo-Chilean and Lautaro, Ltd., sent to E. A. Cappelen Smith, president of Anglo-Chilean, a memorandum dated January 12, 1930, entitled "Rational Development of the Nitrate Industry of Chile." In this memorandum it was pointed out that Chilean nitrate had lost the monopolistic position it enjoyed in the world's nitrogen markets prior to the World War; that since the World War the production of Chile had practically stood still, while synthetic production had absorbed the great increase in the world's consumption of nitrogen; and that unless aggressive steps were taken the producers of synthetic nitrogen would wrest from Chile the participation in the world's market which she then held. Marsh gave the*1108 following reasons why Chile was not enjoying its share of the worldwide increase in the use of nitrogen products:
(1) The cost of nitrate on cancha was about double what it should be because the production end of the business had been largely confined to very small scale operations; (2) the salitre was being handled on an expensive package basis, whereas a large percentage could be handled to great advantage on the bulk basis; and (3) the physical appearance of the package product was poor when compared with the far better appearing synthetic parcel product.
80. In his report Marsh stated that if the industry were completely reconstructed, it should not only be able to retain its present position, but should be able to make consistent advancement in production and earnings. He proposed a reconstruction along the lines of large consolidation coupled with the rational modernization of all production operations from mining and processing completely through to delivery to the consumer. He stated that high cost producing units should be replaced by large fully mechanized low cost units; that *277 cheap, efficient, mechanical means should be employed in place of expensive, *1109 wasteful methods of hand mining wherever possible; that the management and control of the railroads serving the pampas should be centralized; and that port works should be built to permit shipments in bulk, the use of cheap containers, and low handling costs. He predicted that under a thoroughly good organization of propaganda and selling, the Chilean industry would not only hold its present position, but could be pushed forward at the average increased rate of about 7 percent yearly, which would give the Chilean industry its proportionate share in the expansion of the world's nitrate market. He estimated that if his plan were followed Chilean nitrate could be delivered to the port of entry of a consuming country at a cost (exclusive of capital costs) of $20 per metric ton. He concluded his report by recommending that the industry and the Government of Chile get together and work out some sort of an arrangement on a partnership basis.
81. Sometime during the month of January 1930, E. A. Cappelen Smith discussed with the Minister of the Treasury of Chile the advisability of merging the whole nitrate industry of Chile into one corporation having from five to seven plants distributed*1110 strategically throughout the whole nitrate pampas, operating under the Guggenheim process. These plants, under the tentative plan then proposed by Smith, would, in his opinion, enable the nitrate industry to meet all of the demands for nitrate, even in future years, at a lower cost. About two months later word was received that the Chilean Government was very anxious to organize a company which would embrace the entire nitrate industry along the lines indicated by Smith, and the old firm was asked to cooperate in organizing such a company. The Chilean Government was advised that the old firm was willing to cooperate, and a meeting was held in Paris in the early part of April 1930, which was attended by representatives of the Chilean Government and the old firm. In June 1930 a plan for the organization of a new company was reduced to writing, entitled "Outline of Plan Proposed by Government of Chile for the Rationalization of Chilean Nitrate Industry", to which there was attached a project of a special law carrying out the plan. The plan contemplated the organization of a corporation, named "compania Salitre Nationale" and called "Cosana."
82. In a letter dated June 10, 1930, addressed*1111 to Don Pablo Ramirez, representing the Chilean Government, Guggenheim Brothers assured the Government of Chile that they approved the plan and would use their best efforts to bring about its consummation, and that they would recommend the transfer by Anglo-Chilean to *278 Cosana of all of its assets and the transfer by Lautaro of Delaware to Cosana of all of the ordinary shares of Lautaro, Ltd., in consideration of:
(a) The assumption by Cosana of all of the disclosed liabilities of Anglo-Chilean, with the exception of those growing out of the Baburizza transaction;
(b) The issuance to the order of Anglo-Chilean of 6,000,000 Series "B" ordinary shares of Cosana;
(c) The payment by Cosana of the cost of the liquidation of Anglo-Chilean, not to exceed $10,000; and
(d) The issuance to Lautaro of Delaware of 6,000,000 Series "B" ordinary shares of Cosana.
The letter stated, among other things, the following:
The above amounts of 6,000,000 Series B. Ordinary Shares for Anglo-Chilean and Lautaro Nitrate Corporation may be reduced to such amounts as in your and our joint opinion may be necessary in order that the Series B Shares remaining may be sufficient to enable Cosana*1112 to offer fair terms to the remainder of the nitrate producing companies, but in no event shall the above amounts be reduced below 5,250,000 Series B. Ordinary Shares for each company. Any reduction is to be shared equally by the two companies. * * *
* * *
We have discussed with you, representing the Government of Chile, the terms set forth above, and we understand that they are satisfactory to the Government and that the Government will recommend to the Board of Directors of Cosana the acquisition upon such terms of the said assets of Anglo-Chilean and of the Ordinary Shares of The Lautaro Nitrate Company, Limited. * * *
* * *
The attached Outline of Plan contemplates that Cosana will as soon as possible float a bond issue for the purpose among other things of paying off part of the floating debt which will have been assumed by Cosana. We wish it to be clearly understood that among the floating debt to be paid off is the sum of approximately $23,000,000 U.S.A. now owed by Anglo-Chilean to the undersigned firm, and that it will be paid off promptly upon the receipt by Cosana of the proceeds of the bond issue.
We recognize that in carrying the Plan through to consummation*1113 it may become necessary to amplify the attached Outline, or even to modify in some respects the Outline or the Project of Law attached thereto, and as long as the law is not changed to increase the capital above 3,000,000,000 pesos we hereby consent to any amplifications or modifications in the Outline or Project of Law which may be consented to by E. A. Cappelen Smith and W. E. Wells.
It is understood that there shall be no obligation on the part of anyone under this letter if the Project of Law is not enacted and put into effect, either in its present form or as it may be changed pursuant to the provisions of the last preceding paragraph.
If this letter is satisfactory to the Government of Chile as a statement of the adherence to Cosana of the companies listed above, we would appreciate your signing the attached copy of this letter and returning it to us.
The letter was approved by Don Pablo Ramirez on behalf of the Chilean Government.
*279 83. The name of the projected company was changed from "Compania Salitre Nacional" to "Compania de Salitre de Chile." The Chilean Government objected to the use of the word "Nacional" in connection with the projected company*1114 because it thought that the use of this word might indicate it was a government enterprise.
84. On July 21, 1930, the Chilean Congress passed Law No. 4863, authorizing the formation of a corporation named "Compania de Salitre de Chile" and called "Cosach." This law provided that Cosach was to have an authorized capital of 15,000,000 series A ordinary shares, par value 100 pesos each, and 15,000,000 series B shares, par value 100 pesos each, either ordinary or preferred. The entire 15,000,000 series A shares were to be issued to the Chilean Govenment in exchange for the benefits and concessions accorded to the company by the law, and for granting to the company for exploitation 150,000,000 tons of recoverable nitrate. Series B shares were to be issued to existing nitrate producers in exchange for properties or stock of the producing companies. The series B preferred shares were not to exceed 500,000,000 pesos in value. The law further provided that the nitrate and iodine produced by Cosach should be exempt from export duties, and that the President of the Republic should declare exempt from payment of export duties the nitrate producers which sold their production through Cosach*1115 and subjected themselves to a regime tending toward the general attainment of the purposes of the law. These producers and Cosach were subject to the payment of all other taxes, contributions and duties. The law also provided that Cosach should make each year for the four years 1930-1933 the following minimum payments to the Government of Chile by way of dividends on series A shares and income taxes:
| 1930 | 186,000,000 pesos |
| 1931 | 180,000,000 pesos |
| 1932 | 160,000,000 pesos |
| 1933 | 140,000,000 pesos |
The amount of export duties on nitrate and iodine received by the Government of Chile in these years from other nitrate producers was to be credited against these payments. Cosach was to be administered by a board of directors composed of twelve members, four of whom were to represent series A shares; seven to be elected by the holders of ordinary shares of series B; and one by the holders of preferred shares of series B. The board of directors was authorized to contract debts and to guarantee the dividends and obligations of and make loans to the companies incorporated into or controlled by Cosach. If, however, any such acts of the board were opposed by representatives*1116 of series A shares, or were considered by said representatives *280 to be of national importance, they were not to be effective until the opposition was withdrawn.
85. The provisions of Law No. 4863 were substantially the same as those contained in the "Outline of Plan proposed by Government of Chile for the Rationalization of the Chilean Nitrate Industry." The new law, however, made no specific mention of an initial bond issue of approximately $110,000,000 to be floated by the new company to finance the construction of two new plants, to fund floating obligations of the constituent companies, and to provide additional working capital. Such a bond issue was mentioned in the outline of plan for the rationalization of the Chilean nitrate industry, and apparently was contemplated when Law No. 4863 was enacted. Before issuing any bonds, however, it was deemed expedient to have a complete audit, as of June 30, 1930, of the books of approximately thirty companies that had agreed to join Cosach. This audit was started in April or May 1930, and the situation disclosed by it was not known until about a month after the death of the decedent.
86. The Guggenheim Brothers learned*1117 of the provisions of Law No. 4863 a few days prior to the signing of the bill by the President of Chile. After studying the law, they informed representatives of the Chilean Government of certain defects in it and asked that it be amended. The Chilean authorities felt it would be unwise to suggest amendments, as they had encountered difficulty in getting the law passed; and, if it were put back in Congress, they feared any amendments might be more extensive than contemplated. They advised Guggenheim Brothers to wait a while and they would find some way later on of making the necessary amendments. The Chilean Congress adjourned in January 1931. Before adjournment it passed Law No. 4945, giving the President power to issue decree laws.
87. On October 14, 1930, a commission was appointed to proceed with the organization of Cosach, execute the corresponding deeds and draft its bylaws. By Decree with Force of Law No. 12, of February 24, 1931, some modifications were made in Law No. 4863. The bylaws of Cosach were approved and the existence of the corporation authorized by Supreme Decree 2100, of March 20, 1931, and the corporation was declared to be legally installed by Supreme*1118 Decree of April 22, 1931. One-half of Cosach's shares were issued to the Chilean Government and one-half to the nitrate producers.
88. Anglo-Chilean and Lautaro, Ltd., were brought into Cosach through the following steps: A new corporation known as Anglo-Chilena (organized under the laws of Chile) was formed, to which Anglo-Chilean transferred all its assets, including the stock of *281 Lautaro of Delaware, in exchange for all the stock of Anglo-Chilena and the assumption by the latter of the Anglo-Chilean liabilities, except the $25,325,000 due the old firm, the $1,297,733.33 due Baburizza, and the $639,806.42 due National City Bank. Anglo-Chilean exchanged the Anglo-Chilena shares for 8,318,335 shares of Cosach B stock, and Cosach assumed $24,676,500 of the amount due the old firm, which represented the full amount of the loans less the last installment received under the consolidated loan agreement of $648,499.99 used as part of the initial payment in the Baburizza transaction. Anglo-Chilean distributed 7,027,000 of the 8,318,335 shares of Cosach stock which it received to its stockholders, retaining 1,291,335 shares in its treasury. Anglo-Chilena surrendered its*1119 Lautaro of Delaware shares to that company in exchange for 1,220,834 shares of Lautaro, Ltd., stock; Lautaro of Delaware transferred the remainder of its Lautaro, Ltd., shares (779,166) to Cosach in exchange for 2,181,665 shares of stock of the latter, which were delivered to the minority stockholders of Lautaro of Delaware in return for the surrender of their shares of that company; Lautaro of Delaware, being stripped of its assets, was dissolved.
89. As a result of the above transactions, Anglo-Chilean remained in existence, owing Baburizza $1,297,733.33, National City Bank $639,806.42, and the old firm $648,499.99; $24,676,500 of the old firm loans to Anglo-Chilean had been assumed by Cosach and the old firm acquired certain shares of Cosach through distribution from Anglo-Chilean. Anglo-Chilena continued as a subsidiary of Cosach, which owned all of its stock. Anglo-Chilena owned all of the physical assets formerly owned by Anglo-Chilean and had assumed all of its liabilities, with the exceptions noted. Lautaro, Ltd., continued in existence, 61 percent of its stock being owned by Anglo-Chilena and 39 percent by Cosach.
90. The $24,676,500 indebtedness of Anglo-Chilean*1120 to the old firm assumed by Cosach was funded by the issuance to the old firm of $10,179,000 in prior secured bonds of Cosach, and $16,965,000 secured bonds of Cosach. The prior secured bonds of Cosach, amounting to $33,000,000, had as security the first right to the proceeds from the 60-peso charge on each metric ton of nitrate shipped from Chile. If this charge produced enough money it was also to be security for the Cosach secured bonds. Before undertaking to assume this 60-peso charge Cosach required the old firm to purchase and pay cash for $10,000,000 face value prior secured Cosach bonds at 90, plus accrued interest. Later, in December 1931, the old firm loaned $3,000,000 to Cosach through Anglo-Chilean.
91. It was reasonably foreseeable as of September 28, 1930, that Cosach would soon be organized; that Anglo-Chilean would receive *282 in exchange for its assets over 8,000,000 shares of Cosach B stock; and that its liabilities, with the exception of those growing out of the Baburizza transaction, would be assumed by Cosach.
92. During the period from July 1931 to December 1932 governments rose and fell in Chile in frequent succession. Cosach was ultimately*1121 dissolved by a decree of the then President of Chile dated January 2, 1933. In this decree the President declared that the purposes and fundamental conditions of Law No. 4863, as contained in the text of the law, were not complied with in that the formation of the corporation was authorized under such conditions that it permitted the contributions of private parties to exceed 1,500 million pesos; that the conditions for the contribution of the nitrate reserves of the Government of Chile were changed by article 8 of the bylaws; that the articles of agreement provided that the board of directors might delegate its powers and responsibilities to third parties; and that the right of directors representing the Government of Chile to veto resolutions of the board concerning matters they considered of national importance was restricted by the articles of agreement. This decree also stated that "By Decree with Force of Law No. 12 of February 24th, 1931 * * * substantial modifications were made in Law 4,863"; and that "The Honorable Senate declared at its session of November 3rd, 1931, in the exercise of its exclusive powers, and acting as a Court of Justice, that when the Decree with force*1122 of Law No. 12 was enacted 'the law that authorized the formation of Compania de Salitre de Chile was trampled upon' and that law was not complied with in that by-laws couched in terms contrary to its provisions and the rules laid down for the formation and functioning of corporations were approved * * *."
93. The physical properties of Anglo-Chilean on September 28, 1930, consisted of certain nitrate ore deposits in Chile containing 137,000,000 metric tons of caliche deliverable to crushers, which would produce approximately 8,100,000 metric tons of saleable sodium nitrate; mining and transportation equipment; a plant at Maria Elena for the extraction of sodium nitrate from nitrate ore (caliche) by the Guggenheim process; three plants, Oficinas Coya, Santa Isabel, and Peregrina, with a total productive capacity of 157,000 metric tons annually (then shut down and not since in operation), for the extraction of sodium nitrate from caliche by the Shanks process; a railway extending from the port of Tocopilla on the west coast of Chile to the Maria Elena plant and other nitrate plants in the Tocopilla pampa; certain harbor works and moles at the port of Tocopilla, and waterworks and*1123 lands used in connection with the nitrate enterprise in Chile. In addition to its physical properties, Anglo-Chilean owned 2,446,483 1/3 shares of ordinary or common stock of Lautaro of Delaware*283 (out of 4,000,000 shares outstanding), which in turn owned all of the common stock of Lautaro, Ltd., a British corporation. Anglo-Chilean also owned all of the stock of two small subsidiaries, the Anglo-Chilean Nitrate Sales Corporation and Anglo-Chilean Nitrate Co., Ltd.
94. The Maria Elena plant was the only plant in existence on September 28, 1930, employing the Guggenheim process, and it was the first plant established on a commercial basis. Construction of the plant was begun in 1925 and by June 30, 1930, construction costs amounted to $27,827,663.03, exclusive of ore property, railway and harbor works. The capacity of this plant at date of death was 550,000 metric tons of nitrate per year. The plant was designed to treat mechanically mined ore. The change from hand mined to mechanically mined was not completed until November 1930. This plant had power shovels and strippers for stripping and mining the ore; electric locomotives and cars for bringing the ore to the*1124 plant; equipment for crushing the ore, including the largest sized crushers then in existence; ten leaching tanks for leaching the ore, each 150 feet long, 80 feet wide and 20 feet deep, and holding approximately 7,000 tons of ore in solution; a crystallizing plant, where the nitrate was precipitated from the solution by means of refrigeration; centrifugal dryers, where the nitrate was dried to about 3 percent moisture; a graining plant, where the nitrate was grained by being melted at 700 degrees and sprayed through a nozzle; a bagging plant, where the nitrate was bagged and made ready for shipment; and a power plant, including 9 Diesel engines of 22,000 horsepower. The plant was located in the midst of a desert on the Tocopilla pampa, and was entirely dependent upon outside sources for machinery, equipment, supplies, and food.
95. The railroad properties consisted of a line extending from the port of Tocopilla on the west coast of Chile up over the coastal mountains to the Tocopilla pampa, where it divided into two branches, one extending southeasterly to the Maria Elena plant, and the other northeasterly to certain other plants on the pampa. Grades through the mountains were*1125 extremely steep, rising over 4,000 feet in about 25 miles. The railroad was electrified from the port to the point beyond the district of heavy grades. Early in 1930 the southern branch of the railway was extended to the location of the new Pedro de Valdivia plant of Lautaro, Ltd., then under construction. The railroad included about 230 kilometers of main track, or about 135 miles, and had about 1,000 cars and 50 locomotives, of which 7 were electric. It was used chiefly to haul nitrate to the port of shipment and to haul fuel oil from the coast to the nitrate plants. The harbor works and moles at the port of Tocopilla consisted of the usual *284 equipment for the handling and trans-shipment of freight on the west coast of Chile, where there are no natural harbors.
96. Prior to the date of the decedent's death, Anglo-Chilean had begun certain additions to its Maria Elena plant which had not been completed on that date. Between June 30 and September 30, 1930, Anglo-Chilean actually expended $1,094,452, on the construction of these additions and after the date of the decedent's death an additional $1,686,436 was spent on additions to the plant contemplated before September 30, 1930.
*1126 97. The following table shows in metric tons the nitrate produced by Anglo-Chilean between January 1, 1925, and June 30, 1931:
| Maria Elena | |||||
| Shanks production (Officina Coya et al.) | Hand mined | Mechanically mined | Total | Total, all sources | |
| 1925 | 70,630 | 70,630 | |||
| 1926 | 40,486 | 40,486 | |||
| 1927 | 48,492 | 73,667 | 95,000 | 168,667 | 217,159 |
| 1928 | 50,328 | 111,079 | 247,000 | 358,079 | 408,407 |
| 1929 (6 months) | 24,185 | 50,163 | 143,000 | 193,163 | 217,348 |
| 1929-1930 | 32,683 | 122,793 | 347,000 | 469,793 | 502,476 |
| 1930-1931 | nil | 60,877 | 447,000 | 507,877 | 507,877 |
The following table shows Anglo-Chilean's average cost per ton f.a.s. Chile of producing nitrate under the Guggenheim process from mechanically mined ore during various periods. (These prices do not include selling expenses, commissions, carrying charges, or other expenses incurred beyond the port of shipment, interest on funded or unfunded debts, allowances for depreciation and depletion, new capital expenses, or credit for bulk shipments or for byproduct iodine.)
| Year ended - | Year ended - | ||||
| 12/31/27 | 12/31/28 | 6 months ended 6/30/29 | 6/30/30 | 6/30/31 | |
| Average cost per metric ton including bagging and loading expenses | $22.24 | $17.16 | $20.28 | $17.97 | $16.01 |
| Nitrate Producers Association "propaganda expense" | .96 | .65 | .61 | .92 | .91 |
| Chilean export duties | 12.40 | 12.51 | 12.48 | 12.48 | 12.50 |
| Total cost f.a.s. Chile | 35.60 | 30.37 | 33.37 | 31.37 | 29.42 |
*1127 From experience in operating the Maria Elena plant it was reasonably foreseeable on September 28, 1930, that the average cost per ton f.a.s. Chile of producing nitrate under the Guggenheim process from *285 mechanically mined ore would be reduced approximately $1 per metric ton.
The average prices per metric ton f.a.s. Chile obtained by Anglo-Chilean and by the entire Chilean nitrate industry were as follows:
| Year ended - | Industry generally | Anglo-Chilean |
| June 30, 1927 | $46.94 | $40.87 |
| June 30, 1928 | 40.96 | |
| Dec. 31, 1928 | 40.30 | |
| June 30, 1929 | 40.52 | (6 mos.) 39.99 |
| June 30, 1930 | 37.69 | 37.98 |
| June 30, 1931 | 31.75 | 31.25 |
98. The annual sales of nitrate by Anglo-Chilean from January 1, 1927, to June 30, 1930, were as follows:
| Calendar year 1927 | 102,121 metric tons |
| Calendar year 1928 | 319,183 metric tons |
| 6 months ended June 30, 1920 | 276,023 metric tons |
| 12 months ended June 30, 1930 | 444,808 metric tons |
While the annual sales of nitrate by Anglo-Chilean for the 12 months ended June 30, 1930, amounted to 444,808 metric tons, this amount exceeded the quota of nitrate assigned to it by the Nitrate Producers Association and Anglo-Chilean*1128 was required to purchase from other producers an aggregate of 139,159 tons.
99. The condensed balance sheet of Anglo-Chilean (without subsidiary companies) as of September 30, 1930, is as follows:
| ASSETS | |
| Cash | $1,651,530 |
| Nitrate, caliche and iodine inventories | 6,383,988 |
| Nitrate receivable - excess of sales quota | 4,835,563 |
| Materials and supplies | 3,196,665 |
| Accounts receivable: | |
| Chilean Government subsidy claim | 1,481,580 |
| Other | 4,181,549 |
| Stock of Lautaro Nitrate Corp. of Delaware | 3,362,536 |
| Treasury bonds and other investments | 677,929 |
| Deferred charges | 1,370,337 |
| Property (less depreciation) | 43,019,835 |
| Patents and trade marks | 1,049,429 |
| 71,210,941 | |
| LIABILITIES | |
| Bank loans, sterling and dollar credits | $10,266,038 |
| Payable to Nitrate Producers Association for nitrate sold in excess of sales quota | 5,691,329 |
| Accrued interest and other accounts payable | 3,301,303 |
| Notes payable - Baburizza Lukinovic & Co | 3,893,200 |
| Guggenheim Brothers - advances | 25,325,000 |
| Guggenheim Brothers - advances - interest | 963,192 |
| First mortgage debenture stock | 16,058,625 |
| 20-year debenture bonds | 14,600,000 |
| Reserves for repairs, renewals, employers liability, etc | 570,829 |
| Deferred credits | 67,357 |
| Capital stock | 1,756,750 |
| Deficit | 12,209,759 |
| Depletion reserve | 927,077 |
| 71,210,941 |
*1129 *286 100. Aside from the stock of Lautaro of Delaware, Anglo-Chilean, on September 30, 1930, owned all the stock of two subsidiaries, Anglo-Chilean Nitrate Sales Corporation, which had been acquired for $100,000, and Anglo-Chilean Nitrate Co., Ltd., which had been acquired for $48,755.78. The balance sheets of these subsidiaries as of June 30, 1930, were as follows:
| Anglo-Chilean Nitrate Sales Corporation | Anglo-Chilean Nitrate Co. Ltd. | |
| ASSETS | ||
| Cash | $9,153.58 | $5,251.86 |
| Nitrate on hand and in transit | 816,280.08 | 52,537.92 |
| Accounts receivable | 201,488.71 | 60,463.52 |
| Investment in Baltic Mercantile & Shipping Exchange, Ltd | 407.02 | |
| Deferred charges | 254.40 | |
| Property | 413.63 | |
| Less Reserve for depreciation | (100.58) | |
| Total | 1,027,176.77 | 118,973.37 |
| LIABILITIES | ||
| Accounts payable to parent company | $818,011.35 | $40,318.97 |
| Sundry | 106,480.48 | 22,089.11 |
| Capital stock | 100,000.00 | 48,755.78 |
| Surplus from operations | 2,684.94 | 7,809.51 |
| Total | 1,027,176.77 | 118,973.37 |
101. Anglo-Chilean sustained deficits during every year of its operation up to June 30, 1930. The following is a condensed consolidated statement of the income, profit and loss, *1130 and deficit of Anglo-Chilean for various periods between January 1, 1925, and June 30, 1930:
(Table omitted)
*288 102. The following is a condensed balance sheet as of September 30, 1930, of Lautaro of Delaware, a majority of the voting stock of which was owned by Anglo-Chilean at the date of the decedent's death:
| ASSETS | |
| Investment in 2,000,000 ordinary shilling shares of the Lautaro Nitrate Co., Ltd | $901,253.60 |
| Organization expense | 47,958.66 |
| Accounts receivable | 34,852.17 |
| Cash | 32,355.72 |
| Total assets | 1,016,420.15 |
| LIABILITIES | |
| Capital stock (4,000,000 shares of no par value) | $1,000,000.00 |
| Accounts payable | 55,793.35 |
| Deficit | 39,373.20 |
| Total liabilities | 1,016,420.15 |
103. On September 28, 1930, Lautaro, Ltd., owned 26 nitrate plants for the production of nitrate by the Shanks process. Prior to 1930, this corporation was producing at these plants about 25 percent of the total consumption of Chilean nitrate, and during the year ended June 30, 1930, produced 640,178 metric tons of nitrate. On the date of the decedent's death Lautaro, Ltd., was engaged in the construction of a new Guggenheim procees plant at Pedro de Valdivia with the*1131 proceeds of the sale of $32,000,000 first mortgage bonds. Construction of this plant under the supervision of Guggenheim Brothers commenced about January 1, 1930, and the plant was substantially completed and producing nitrate in May 1931. The plant had a designed capacity of 540,000 metric tons per annum. The nitrate in the ore available for treatment by Lautaro, Ltd., at this plant and owned by the company was approximately 17,370,000 metric tons. Lands owned by others near the Pedro de Valdivia plant contained 8,255,000 metric tons of nitrate deliverable to crushers.
104. The following is a condensed balance sheet as of June 30, 1930. of Lautaro, Ltd.:
| Pounds sterling | Dollars at 4.8665 | |
| ASSETS | ||
| Current: | ||
| Cash | 62,498- 0- 3 | 304,146.58 |
| Accounts receivable | 83,316-14-11 | 405,460.94 |
| Inventories of Caliche, Nitrate and Iodine at cost | 2,696,148- 4- 5 | 13,120,805.32 |
| Total current assets | 2,841,962-19- 7 | 13,830,412.84 |
| "Pedro de Valdivia" construction funds | 4,825,313-12- 0 | 23,482,388.64 |
| Inventories of stores, materials and supplies at cost | 1,031,526-15-11 | 5,019,925.15 |
| Amounts dur from other companies in respect of sales participation year 1929-1930 | 663,926- 0- 0 | 3,230,995.89 |
| Sundry other assets | 246,954-17- 4 | 1,201,805.86 |
| Capital assets | 10,700,669-16-10 | 52,074,809.78 |
| Deferred charges | 605,230- 5- 1 | 2,945,353.03 |
| Total | 20,915,584- 6- 9 | 101,785,691.19 |
| LIABILITIES | ||
| Courrent liabilities | 2,833,958- 3-11 | 13,791,457.56 |
| Accounts payable to other nitrate companies | 84,059- 0- 9 | 409,073.31 |
| Nitrate to be delivered to adjust sales participation year 1929-1930 | 585,549- 0- 3 | 2,849,574.27 |
| F.A.S. nitrate sales corresponding to year 1930-1931 | 4,109-17- 1 | 20,000.61 |
| Funded debt: | ||
| First mortgage 6 1/2% debentures | Pound 2,175,725- 0-0 $10,588,165.70 | |
| First mortgage 6% gold bonds 6,575,567-13-1 32,000,000.00 | ||
| 8,751,292-13- 1 | 42,588,165.70 | |
| Reserves | 154,316-14- 5 | 750,982.33 |
| Capital Stock: | ||
| Preferred | 8,000,000- 0- 0 | 38,932,000.00 |
| Common | 100,000- 0- 0 | 486,650.00 |
| Earned surplus account | 402,298-17- 3 | 1,957,787.41 |
| Total | 20,915,584- 6- 9 | 101,785,691.19 |
*1132 *289 105. Anglo-Chilean common stock was listed on the New York Curb in November 1926. There were no sales of the stock on the date of the decedent's death, which was a Sunday. The Commissioner, in valuing the decedent's interest in the firm, has valued the block of stock held by the old firm at 22 5/8 per share, which was the price at which 400 shares sold on September 29, 1930, on the New York Curb.
106. The daily high and low prices and the volume of sales of Anglo-Chilean stock on the New York Curb for the month of September 1930 were as follows:
| September | High | Low | Sales |
| 2 | 29 1/2 | 29 1/8 | 800 |
| 3 | 29 | 26 1/8 | 2,200 |
| 4-13 incl. (no sales) | |||
| 15 | 27 1/2 | 27 1/4 | 200 |
| 16 | 26 5/8 | 20 1/2 | 500 |
| 17 and 18 (no sales) | |||
| 19 | 26 1/2 | 26 | 600 |
| 20 | 25 3/4 | 25 3/4 | 100 |
| 22 | 25 1/2 | 24 5/8 | 400 |
| 23 | 25 | 24 1/4 | 500 |
| 24 | 24 5/8 | 24 | 900 |
| 25 | 23 3/4 | 23 5/8 | 200 |
| 26 | 22 3/4 | 22 5/8 | 200 |
| 27 (no sales) | |||
| 29 | 22 5/8 | 22 1/4 | 400 |
| 30 | 20 1/4 | 19 1/2 | 700 |
| Total sales for month | 7,700 |
*290 107. The monthly high and low prices and total sales of Anglo-Chilean stock for the first eight months of 1930 were as follows:
| Month | High | Low | Sales |
| January | 22 | 15 3/4 | 5,500 |
| February | 19 5/8 | 18 1/8 | 1,100 |
| March | 27 | 18 5/8 | 22,000 |
| April | 41 | 27 1/4 | 79,200 |
| May | 43 3/8 | 31 1/8 | 70,600 |
| June | 40 1/2 | 25 | 23,200 |
| July | 38 1/4 | 26 1/4 | 10,600 |
| August | 35 | 29 5/8 | 6,500 |
*1133 108. Only approximately 200,000 of the 1,756,750 shares of the common stock of Anglo-Chilean outstanding on September 28, 1930, had ever been sold or dealt in on the market from the time of the issuance of such shares.
109. Between August 4 and September 29, 1930, the books of the Anglo-Chilean transfer agent showed 66 transfers totaling 10,127 shares of Anglo-Chilean stock. The number of transfers each day ranged from 1 to 7, and the number of shares transferred each day ranged from 7 to 1,600.
110. The Anglo-Chilean 20-year debenture bonds were listed on the New York Stock Exchange, and at the time of the decedent's death were selling at a price between 90 and 92. During September 1930 there were transactions in such bonds on only 5 days. The prices ranged from a high of 96 7/8 on September 5 to a low of 91 1/2 on September 29. Only 97 bonds in all were sold during September, and on 2 of the 5 days, including September 29, only 7 of the bonds changed hands. The Lautaro, Ltd., 7 percent preferred stock was sold on the London Exchange at the date of the death of the decedent at $15 to $17 per share. The bid and asked prices on the London Exchange for the Lautaro of*1134 Delaware common stock of which Anglo-Chilean owned 2,400,000, were, on the date of death $6 and $6.50.
111. The decedent, at the time of his death, owned 1,720 shares of the common stock of Anglo-Chilean, 20 of which had been purchased by him November 27, 1929, from one of his employees for $440, and 700 of which had been acquired by him in December of 1929 when he took over the stock, which he had originally purchased for another, at a cost of $24,807.15. The remaining 1,000 shares were in an account with a broker, which the decedent had opened for the benefit of a third person, and had been purchased for the account at a cost of $20,950. After decedent's death petitioner paid the debit in the account, the third person relinquished all claims to the stock, and it was taken over by the estate.
111a. The Guggenheim Brothers Old Firm on the date of the decedent's death had a 60 percent interest in the 1,109,859 shares of the capital stock of Anglo-Chilean, and a 55.104 percent interest in the open account loans of $25,325,000. The decedent had a 25 percent interest in the old firm.
*291 112. The value of Anglo-Chilean stock on the date of the death of decedent was*1135 $9.40 per share.
113. The value at the date of death of the open account loans made by the old firm to Anglo-Chilean was $25,325,000.
113a. The value of the decedent's interest at the date of death in Guggenheim Brothers Old Firm was $6,318,039.44.
114. An estate tax return was filed with the collector of internal revenue for the first district of New York on September 25, 1931. Therein the net estate of the decedent was valued at $17,198,664.44, and the amount of the tax, less certain credits, was shown to be $558,646.58. Thereafter the petitioner discovered that an erroneous deduction had been taken, and that the estate tax, according to the return, should have been $563,606.58. This amount was paid to the collector of internal revenue as follows: $124,000 on December 15, 1930; $434,646.58 on September 23, 1931; and $4,960 on September 25, 1931. On December 14, 1933, the petitioner filed with the collector of internal revenue a claim for the refund of $521,064.05 Federal estate taxes, paid as aforesaid, or such other amount as is legally refundable.
115. A notice of deficiency was mailed to the petitioner as executrix of the decedent's estate on July 27, 1934. *1136 In such notice the Commissioner determined that there was a deficiency in Federal estate tax amounting to $3,709,704.03, before allowing certain credits. The deficiency was based upon a determination that the value of the net estate of the decedent was $24,574,253.04.
OPINION.
MELLOTT: Section 302(a) of the Revenue Act of 1926 provides, in substance, that the value of the gross estate of a decedent shall be determined by including therein the value, at the time of his death, of his interest in all property, real or personal, tangible or intangible. The parties have stipulated the value of a portion of the property and property rights owned by this decedent and the extent of his interest in other property. Effect will be given to the stipulations in settlement under Rule 50. In addition, the parties have stipulated the facts pertaining to the decedent's interest in the new firm; the special deposit of $79,900; the trust created for M. Robert Guggenheim and others; and many of the facts tending to show value or lack of value in the property to be evaluated.
The first item with reference to which the parties are not in agreement as to value, but in connection with which they*1137 have agreed upon many of the facts, is the decedent's interest in the old firm. All items necessary to determine the value of this interest have been stipulated except (a) the value, at the date of death, of 1,109,859 shares of the common stock of Anglo-Chilean; and (b) the value of $25,325,000 *292 open account loans made by the firm to Anglo-Chilean. Having determined these facts, it will then be necessary to determine (c) the effect, if any, upon the decedent's interest in the firm of certain alleged "Contingent Liabilities of the Decedent to the Old Firm." These questions will be considered in the order stated under the general subject of
I. - Decedent's Interest in Old Firm.
(a) Value of 1,109,859 shares Anglo-Chilean stock. - The parties agree that "value" as used in section 302(a), supra, means "the fair market value" of the property or property rights. Art. 13, Regulations 70; Ithaca Trust Co. v. United States,279 U.S. 151">279 U.S. 151; Brooks-Scanlon Corporation v. United States,265 U.S. 106">265 U.S. 106; *1138 Frank J. Kier et al., Executors,28 B.T.A. 633">28 B.T.A. 633; Eleanor Lansburgh, Administratrix,35 B.T.A. 928">35 B.T.A. 928. Recognizing that "fair market value" is primarily a question of fact to be determined from all the competent evidence, Heiner v. Crosby, 24 Fed.(2d) 191; James Couzens,11 B.T.A. 1040">11 B.T.A. 1040; they defined it in their hypothetical questions to the witnesses as "the price at which a seller is willing to sell at a fair price and a buyer is willing to buy at a fair price, neither being under any compulsion to trade and both having reasonable knowledge of the facts." The definition is simple and reasonably accurate. Cf. Crowell v. Commissioner, 62 Fed.(2d) 51. A judicial determination of the fact is quite difficult; but it must nevertheless be made.
Before reviewing the evidence the contentions of the parties will be briefly stated. Respondent contends that market quotations provide the best, most definite, and most easily ascertainable measure of fair market value; that they disclose what actual willing buyers and sellers have determined it to be; and that where such prices are available no other evidence*1139 of value should be considered. In support of this contention he cites several court and Board decisions holding, in effect, that, in the absence of exceptional or extraordinary conditions giving an abnormal value for the moment to the stock, or a showing of peculiar or unusual circumstances affecting its value, the price, as reflected by the trading in the stock on a fair, "unrigged" market must be accepted as its fair market value. The market quotation on the crucial date was 22 5/8, which was the price at which 400 shares sold on September 29, 1930.
Petitioner contends that the stock had no fair market value, tested by any of the established theories of valuation - earnings, dividend yields, liquidation values, book values, etc.; that in determining the question all facts existing on or before the date of the death of the decedent, as well as all facts which might reasonably have been anticipated from them should be considered; that the prices on the "curb" were artificial and unsound and therefore entitled to no weight; *293 that the market was exceedingly "thin" and represented merely a "speculative" value fixed by those willing to take a "long chance"; that market*1140 prices are merely one factor to be taken into consideration in determining value; and that the courts and this Board have consistently refused to attach any more significance to them.
It is true, as respondent contends, that, generally speaking, the prices at which stocks are bought and sold on the open market furnish the best evidence of value. Grant Co. v. Duggan, 94 Fed.(2d) 859; Rice v. Eisner, 16 Fed.(2d) 358; certiorari denied, 273 U.S. 764">273 U.S. 764; T. W. Henritze,28 B.T.A. 1173">28 B.T.A. 1173; Anita Owens Hoffer,24 B.T.A. 22">24 B.T.A. 22; Hazeltine Corporation v. Commissioner, 89 Fed.(2d) 513; Susan T. Freshman,33 B.T.A. 394">33 B.T.A. 394; William S. Gordon,33 B.T.A. 460">33 B.T.A. 460. But they do not constitute the only evidence of value and are not always conclusive. Heiner v. Crosby, supra;Crowell v. Commissioner, supra;Hazeltine Corporation v. Commissioner, supra;Rogers v. Strong, 72 Fed.(2d) 455; *1141 Safe Deposit & Trust Co. of Baltimore, Executor,35 B.T.A. 259">35 B.T.A. 259; affd., 95 Fed.(2d) 806; Laird v. Commissioner, 85 Fed.(2d) 598. Market value is primarily a question of fact and all evidence tending to establish it should be considered. The prices at which shares of stock are sold on the market may be, and probably are, preferable from the standpoint of simplicity of administration to an evaluation made by an analysis of assets, earnings, future prospects of the issuing company, and other factors tending to establish the value of such stock; but we can not exclude all evidence other than market prices simply because to do so simplifies our task. This was the ruling made throughout the hearing. It was based upon a recognition of the fact that our responsibility is to determine judicially the value of a large block of stock. Obviously a purchaser of more than a million shares of the stock of a corporation might reasonably have been expected to make a more exhaustive study or examination of the affairs of the issuing corporation than would have been made by a purchaser of a few hundred shares. The petitioner was therefore permitted*1142 to show all of the data which a prospective purchaser and seller of a large block of stock would have considered before agreeing upon its fair market value, to the end that the Board might be placed in a position to make a fair and intelligent determination of the question presented. This included evidence of events occurring prior to decedent's death; facts known to exist on that date, including market prices; and evidence tending to show facts which might reasonably have been foreseen or anticipated on the date of death. The basic facts are shown in our findings. Some of the evidence upon which they are based will be referred to briefly; but no attempt will be made to make a complete summary of all of the evidence or to assign to every fact its precise relation to the conclusion reached.
*294 The pampas of Chile contain the world's largest known deposits of nitrate. By a process of leaching the crushed ore or caliche in which the nitrate is contained, it may be recovered in commercial quantities and used as a fertilizer or in the manufacture of explosives. It has been so recovered and used for approximately a century and for many years prior to the death of the decedent*1143 it had been Chile's chief source of revenue. Prior to the World, War, Chilean nitrate occupied a dominant position in the nitrogen industry of the world, notwithstanding the fact that nitrogenous products were also being recovered as a byproduct of the coke industry and were being produced in small amounts synthetically. Germany demonstrated during the World War that a nation could produce synthetically all of its necessary supply of nitrogen, and since then plants have been constructed in other nations. As a result, Chile, as is graphically shown in finding No. 66, lost its position of dominance in the industry, though the amount of nitrate she processed and sold did not decrease. This, in brief, was the picture when the old firm decided to engage in the commercial production of Chilean nitrate on a large scale.
The business of the Guggenheims was primarily the promotion and development of commercial and mining properties. They were leading figures in this field. In 1923 they sold their Chilean copper interests at a profit of approximately $70,000,000. This enterprise having been terminated so successfully, it was natural that other similar ones should be sought for development. *1144 The Chilean nitrate industry was then using an antiquated, inefficient, hand-mining method of producing nitrate, known as the Shanks process. Experiments conducted by the engineering staff of the old firm had by that time disclosed that modern production methods could be successfully applied to that industry. This experimentation resulted in the development of the Guggenheim process, demonstrated it to be far more efficient than the Shanks process, and indicated that if it were placed in general use at least 40 percent more saleable nitrate could be secured from a given area at a saving of approximately $5 per metric ton. Shortly thereafter, in December 1924, Anglo-Chilean was organized; and its use of the Guggenheim process demonstrated that twice as much nitrate could be recovered out of a given area as could be obtained by the Shanks process.
After the organization of Anglo-Chilean, the Guggenheims transferred to it certain nitrate bearing lands which they had purchased, and loaned it large sums of money for the construction of the Maria Elena Guggenheim process plant. In 1925 the corporation acquired railway and port facilities and additional nitrate lands. While the Maria*1145 Elena plant was being constructed in 1925 and 1926, Anglo-Chilean*295 produced all of its nitrate in three Shanks process plants from hand-mined ore. The construction of this plant to a minimum capacity of 260,000 tons was completed in April 1927 and mechanical mining operations were started for the first time. Production began at a low rate because of the necessity of training Chilean workmen and adjusting the various low scale units. In 1927 the company advised its stockholders that it had decided, in view of the highly satisfactory results obtained from the operation of the plant, to increase its capacity to approximately 500,000 tons of nitrate per year, and in 1928 it announced its intention to center eventually all production at the Maria Elena plant.
In 1929 Anglo-Chilean acquired a controlling interest in Lautaro of Delaware, which in turn owned all of the common stock of Lautaro, Ltd. The latter corporation had the most extensive holdings of nitrate bearing lands in Chile, and was the largest producer of Chilean nitrate. The stockholders of Anglo-Chilean were advised that it intended to introduce the Guggenheim process into the operations of Lautaro, Ltd., *1146 and it was estimated that "when the new Guggenheim Process plant of the Lautaro Company is completed and in full operation the annual earnings of the Lautaro Company after depreciation and depletion will be at the rate of approximately $1.66 for each share of" Lautaro of Delaware stock.
During 1929 and 1930 Anglo-Chilean was gradually working toward its objective, i.e., the production of nitrate under the Guggenheim process at the Maria Elena plant from wholly mechanically mined ore. Its Shanks process plants were shut down in March 1930. At the time of the decedent's death, additions and alterations were being made at the Maria Elena plant with a view to increasing the efficiency of its operations and to lowering production costs. The change from hand to mechanical mining was not completed until November 1930.
During the years prior to the decedent's death, the operations of Anglo-Chilean resulted in deficits (finding 101), all of which were reported to its stockholders in semiannual and annual reports. One of the important factors causing such deficits was that during these years Anglo-Chilean was in a transitory or development stage. It had not as yet operated a completely*1147 finished Guggenheim process plant using only mechanically mined ore. As finding 97 shows, the amount of nitrate produced in the Maria Elena plant from mechanically mined ore was relatively small until the fiscal year ending June 30, 1930. Other important factors contributing to the deficits were high interest charges, quota restrictions imposed on producers by the Nitrate Producers Association, and export taxes. During the year ended June 30, 1930, Anglo-Chilean sold 444,808 metric tons of *296 nitrate, which was approximately 149,678 tons in excess of its quota, and was compelled to purchase the amount oversold at a price of $5,691,328 from other less fortunate producers.
At the time of the Marsh report in January 1930, the future prospects of the Chilean nitrate industry were not particularly bright. The producers of synthetic nitrogen had absorbed most of the increase in the world consumption of nitrogen following the World War; prices received from Chilean nitrate had been steadily declining; and Chilean producers, with the exception of Anglo-Chilean and Lautaro, Ltd., had taken no steps to modernize their methods of producing nitrate or to lower their costs of production. *1148 According to the Marsh report, most of the producing companies in Chile, even with a 17 shilling f.a.s. selling price, showed a general lack of earnings. Anglo-Chilean, the owner of the only modern low-cost Guggenheim process plant, was hampered in the marketing of its product by quota restrictions imposed by the Nitrate Producers Association. Under such circumstances, it is not surprising that the old firm and the officers of Anglo-Chilean should initiate steps to remedy the situation.
The steps leading to the consolidation of the Chilean nitrate industry and the formation of Cosach have been set forth in our findings. The object sought to be accomplished were (1) the reduction of costs by concentrating production, to a large extent, in efficient Guggenheim process plants, eliminating 30-odd boards of directors, and placing all of the management in one company; (2) the elimination of the export tax by taking the Government of Chile in as a partner; and (3) the creation of one company which "could present a united front everywhere and deal as an entity rather than through the Nitrate Producers Association." The Chilean nitrate producers were confident that the solution of their*1149 difficulties lay in utilizing new processes, constructing new plants, and in reorganization. In the report to the stockholders of Anglo-Chilean covering the fiscal year ending June 30, 1930, it was stated that: "With the contemplated consolidation of the Chilean industry, and the closing of high-cost plants, it is expected that the entire production of your company's Maria Elena Plant will be marketed currently, with a corresponding increase in earnings."
The evidence convinces us, and we have found as a fact, that it was reasonably foreseeable on September 28, 1930, that Cosach would soon be organized; that Anglo-Chilean would receive in exchange for its assets over 8,000,000 shares of Cosach B stock; and that its liabilities, with the exception of those growing out of the Baburizza transaction, would be assumed by Cosach. Petitioner has asked us to find that the plan set forth in the "Outline of Plan Proposed by Government of Chile for the Rationalization of Chilean Nitrate*297 Industry" was never put into effect; that Guggenheim Brothers found that the Cosach plan as incorporated in Law No. 4863 was unworkable due to legal difficulties and practical obstacles; and that*1150 the plan as contained in such law was not carried out.
No effort will be made to point out all of the evidence justifying the making of the finding which has been made or our refusal to make the requested findings; but the following observations are not amiss:
The original proposal to merge the nitrate industry of Chile into one corporation having from five to seven plants operating under the Guggenheim process was submitted by the Guggenheim Brothers to the Chilean Government and approved by it in January 1930. Thereafter, and prior to the decedent's death, the Chilean Government, with the cooperation of the Guggenheim Brothers, was engaged in working out the details necessary to bring about this gigantic merger. A plan was drafted and submitted to the Chilean nitrate producers. During March, April, and May 1930 each of the producing companies presented balance sheets pro forma. By the end of June 1930, 90 percent of the producing capacity of Chile, including Anglo-Chilean and Lautaro of Delaware, had been committed to the plan. In July 1930 the Cosach law was enacted. After studying the law the Guggenheim Brothers advised the Chilean Government of certain defects contained*1151 therein, and were advised by the Chilean Government that it would find some way later on of making the necessary amendments.
This, briefly stated, was the situation as it existed at the time of the decedent's death. We believe it justifies our finding that it was reasonably foreseeable on September 28, 1930, that Cosach would soon be organized and that what was ultimately done would be done. Faced with these facts, a prospective purchaser of the stock of Anglo-Chilean on that date, would not have been primarily concerned with the future of Anglo-Chilean, as an independent company, but would have attached considerable importance to the effect the organization of Cosach would have upon the value of Anglo-Chilean stock.
The foregoing discussion of the facts and evidence has been limited to a large extent to the history of the Anglo-Chilean nitrate enterprise. It would serve no useful purpose to set forth in detail all of the other evidence contained in the voluminous record. No effort was spared to apprise us of all of the facts necessary to determine the valuation of Anglo-Chilean stock on the critical date. The evidence includes data showing the history of the Chilean nitrate*1152 industry; the increase in production, capacity and consumption of competing synthetic and byproduct nitrogenous substances; the cost of Chilean nitrate and competing products; the effect of the Guggenheim process on the Chilean industry, including its cost and effciency of operation *298 as compared both to the Shanks process and to the manufacture of competing products; the Chilean labor problem; the inaccessibility of the pampas containing the caliche and the cost of transportation to the consuming countries; the export duties paid and the prospect of their elimination; sales of byproduct iodine; the cost of production and selling prices of Chilean nitrate and competing products; the restrictions on sales and the fixing of prices by the Nitrate Producers Association; the great increase in the consuption of nitrogen products following the World War; the international cartel; the history of Anglo-Chilean, including the deficits sustained; its reports to its stockholders; the assets, liabilities, and earnings of Lautaro, Ltd.; the balance sheets of Anglo-Chilean and its subsidiaries, and of Lautaro of Delaware and Lautaro, Ltd.; the Marsh report; the plan to merge the nitrate*1153 producing companies of Chile into one gigantic corporation; the apparent change in the attitude of the Chilean Government in favor of low cost and more efficient Guggenheim process plants, as evidenced by this plan; the ore reserves of Chile; the annual production, capacity for production, and sales of Chilean nitrate; the stocks of Chilean nitrate on hand; the Cosach law; the issuance to the Chilean Government of all of the series A, shares of Cosach, and the provision that it, through the directors to be elected by such stock, could veto certain resolutions of the board; the provision for a board of directors composed of twelve members, seven of whom were to be elected by the holders of series B shares; the allotment to the Guggenheim interests of a majority of the series B shares; the undertaking by the Government of Chile to transfer to Cosach Government owned nitrate bearing lands containing 150,000,000 tons of nitrate; the minimum payments to be made to the Chilean Government by way of dividends and income tax; and the plan to secure additional working capital, funds for the construction of new plants, and funds to take care of the obligations of the constituent companies through*1154 the floating of a bond issue.
The fact that some bit of evidence or circumstance deemed by either party to be significant has not been mentioned must not be taken as any indication that it has not been considered; all of the competent evidence has been considered. We have not mentioned the testimony of several witnesses, produced by the parties as experts on valuation; it will now be discussed.
An experienced valuation engineer called by the petitioner expressed the opinion that the Anglo-Chilean stock had no fair market value on the basic date whether it be assumed that the company would continue as an independent operating company or as one of the constituent companies under the Cosach plan. Under the first assumption the witness took the balance sheet of the company (finding *299 99) and adjusted it to reflect his judgment of sound values. The first adjustment which he made was in the property account. The $43,019,835 shown on the balance sheet for this account represented the total cost of nitrate deposits, lands, railways, moles, harbor facilities and plants aggregating $51,571,643, less depreciation of $8,551,809. He determined that the sound value of such assets*1155 was $12,800,000, ascertained as follows: Predicting that the total sales of Chilean nitrate in the future would be 2,000,000 tons per year; that Anglo-Chilean's proportion would be 15 percent or 300,000 tons; that the f.a.s. Chile price would be $30 per ton, the cost $25, and the profit $5, he estimated that Anglo-Chilean would have an income from this source of $1,500,000 per annum. He estimated its future sales of iodine would amount to 75,000 kilograms at a profit of $5.30 per kilogram or approximately $300,000 per year and that its profit from other sources would be $100,000 from commercial trading, $912,000 from the railway and $25,000 from other sources. Reducing the estimated future earnings of all the properties to present worth by using a risk rate of 12 percent to represent the return on investment and 4 percent per year to redeem the investment and applying the general principle of Hoskold's formula, he thus determined the value of $12,800,000.
The witness also determined that the sound value of the Lautaro of Delaware stock owned by Anglo-Chilean was $1,493,304 (approximately 61 cents a share) instead of the $3,362,536 shown on the balance sheet; that the patents and*1156 trade marks carried on the balance shet at $1,049,429 had no value; that the account receivable "Chilean Government Subsidy Claim $1,481,580" should be eliminated from assets; and that other adjustments should be made which collectively resulted in increasing the deficit to $45,000,000. He therefore concluded that there were no assets available for the common stock and that it had no value.
The witness reached the same conclusion, assuming that Anglo-Chilean should become, as it did, a part of Cosach. Some of the factors which he considered in forming this conclusion were the right of the Chilean Government to veto resolutions of the directors, though it owned only 50 percent of the stock; the general condition of the nitrate industry at the time of the decedent's death; the probable difficulty which would be experienced in floating the contemplated bond issue; and the substitution of minimum guarantees to the Chilean Government in lieu of the export duties.
The testimony of the witness is not convicting. The property, which he valued without ever having seen it, had cost the Guggenheims more than $51,000,000, a considerable portion of which had been expended by them only*1157 a short time prior to the death of the *300 decedent. Included in this property was the Maria Elena plant, the cost of which by June 30, 1930, had amounted to $27,827,663. The Coya Norte lands had cost approximately $5,000,000, while the property purchased from the Anglo-Chilean Nitrate & Railway Co., including the railway, waterworks, moles, and plants, had cost more than $14,000,000. The Lautaro of Delaware stock, which the witness valued at 61 cents a share, had a bid and asked price on the London stock exchange of more than ten times that amount, and the Guggenheims, National City Co. and Lehman Brothers in the preceding year had dealt in it on a basis of $9.50 per share. The Chilean Government subsidy claim was perhaps a slow asset and even a questionable one; but the record furnishes little information as to the actual value of the Guggenheim process patents and trade marks. While the witness places no value upon them, the respondent upon brief contends that they had a value of at least $12,000,000. He arrives at this conclusion by assuming that the producers of Chilean nitrate could reasonably have been expected to pay a premium or royalty for the use of the process*1158 of at least $1.50 per ton, inasmuch as it would result in a gross profit of $5 per ton. Taking the estimated production of the Chilean producers other than the Maria Elena plant to be 1,200,000 tons per annum and the average life of the patents to be 10 years, he determines the present worth of the patents through the use of the Hoskold formula to be between $12,000,000 and $14,500,000. We do not imply that the patents had any such value; but neither do we find that they had no value, as petitioner's witness concluded. Perhaps the best evidence of the value of these patents would be the price placed upon them by the Guggenheim Brothers and the Chilean Government when the value of the assets of Anglo-Chilean was determined for the purpose of arriving at the amount of Cosach series B shares to be received by Anglo-Chilean; but this price is not disclosed by the record.
We are not impressed by the conclusion reached by this witness that there were no assets available for the capital stock of Anglo-Chilean at the time of decedent's death and therefore it had no value. This conclusion was based upon the deficit disclosed by his "sound" valuation of the assets and upon the deficit*1159 shown on the books of Anglo-Chilean. The books of Anglo-Chilean do not attempt to show the value of its assets, and the "sound" values determined by the witness were based on the assumption that Anglo-Chilean would continue as an independent company, subject to the quota restrictions of the Nitrate Producers Association and export taxes imposed by the Chilean Government. In our opinion neither the book values nor the values determined by the witness cast any light on the question of the fair market value of Anglo-Chilean stock.
*301 Assumptions somewhat similar were made by another witness called by petitioner, who valued the nitrate, iodine, and commercial trading properties of Anglo-Chilean at $7,500,000 and the nitrate and iodine properties of Lautaro, Ltd., at $17,000,000, based upon the present worth of what, in his opinion, was the expected annual income from these properties, assuming that Anglo-Chilean would continue as an independent company.
Another witness called by the petitioner as an expert was an investment banker. He expressed the opinion that the market price of 22 5/8 did not represent the fair market value of the stock. He based it on the fact that*1160 there had been recurring deficits in earnings; declines in the prices of the commodity produced; and that substantial competitioner was resulting from the synthetic products with a resultant loss in sales and undue increase in inventories. He stated that, as an investment banker, he would have advised a prospective purchaser not to purchase the stock at any price. He knew very little about the nitrate business as such or the contemplated plan of merging all of the Chilean producers. His conclusion that the stock had no fair market value is not entitled to any great weight.
An investment counsellor, called as an expert witness for the respondent, stated that in his opinion 22 5/8 represented the fair market value of the stock. He stated that he had made a careful analysis of the "market action" of the Anglo-Chilean and Lautaro securities for the primary purpose of testing the quality of the market to ascertain whether or not it was artificial in any respect and had found nothing to indicate that it was; that he had made studies of the nitrate industry in general, and particularly of Anglo-Chilean, Lautaro, and Cosach; that these studies had disclosed the fact that Anglo-Chilean*1161 was a development enterprise which had not in any year of its history operated a completely finished plant; that the Guggenheim process was of major importance to the whole Chilean industry; that the industry appeared to be roughly of the magnitude of a billion dollars a year; that its growth had not been as rapid as the growth of the competing products because its price was higher; that the industry as a whole was growing at a sensational rate; and that in his opinion the outlook was generally favorable.
The witness expressed the opinion that the price at which a stock sells on the market represents its fair market value if the market itself and the transactions are fair; that if there is a reasonable amount of stock outstanding in the hands of people free to sell it, without restrictions, the market is fair in the absence of duress, misinformation, or market manipulation; that this is true although the stock actually dealt in may represent a comparatively small percentage of the total stock outstanding; that the valume of transactions *302 and fairness of market are not necessarily related; and that lack of earning power in a stock does not necessarily indicate either that*1162 there is no market for it or that it is devoid of value.
The witnesses possessed the necessary qualifications to enable them to express opinions as to the value of Anglo-Chilean stock on September 28, 1930. All displayed an earnest desire to assist this Board in determining it. Witnesses for the petitioner, however, apparently believed that such value should be determined principally by a consideration of the operations of Anglo-Chilean prior to the decedent's death and its questionable future as an independent company, hampered, as it had been, by quota restrictions imposed by the Nitrate Producers Association, by the export taxes, and by the inability of the Shanks process plants to market their production. They gave little consideration to the effect the execution of the plan to merge the Chilean producers into Cosach would have upon the value of the stock. Respondent's witness, on the other hand, believed that the market quotations were conclusive. The difference in the method by which the witnesses approached the question of the fair market value of the stock explains, at least partially, the wide divergence in their opinions.
*1163 The question of the fair market value of the stock on the critical date has been found to be a very difficult one. In discussing a somewhat similar situation, in Safe Deposit & Trust Co. of Baltimore, Executor, supra, this Board said:
That there is room for a fiexible judgment as to the point at which suppositious willing buyers might agree with this seller, should not paralyze the function of deciding. * * * A reasonable figure must be fixed within the bounds of the evidence, and if it be not arbitrary it is not important that it can not be rationalized beyond every logical objection.
Under the facts in the instant proceeding we believe that $9.40 is a reasonable figure "within the bounds of the evidence." The outlook on September 28, 1930, was not as gloomy as petitioner and her witnesses pictured it; but it was not as bright as the market quotations of 22 5/8 would seem to indicate. A purchaser who would have agreed on September 28, 1930, to pay 22 5/8 per share, or more than $25,000,000 for the 1,109,859 shares of Anglo-Chilean stock owned by the old firm, would, in our opinion, have been an "incorrigible optimist"; but he would have been unduly pessimistic*1164 had he concluded that the stock had no fair market value. We hold that the shares of Anglo-Chilean stock owned by the old firm had a fair market value on the date of the death of the decedent of $9.40 per share.
(b) Value of $25,325,000 open account loans. - The next question is the fair market value of the $25,325,000 open account loans made *303 by the old firm to Anglo-Chilean. Respondent determined that they were worth face value, which is presumptively correct. Petitioner upon brief says: "With conditions as they existed on September 28, 1930, definitely indicating a drop in earnings, and since these loans came at the very tail of the procession, either from the standpoint of earnings which might be expected to be realized on such loans or on the basis of a liquidation or reorganization of the company, certainly such loans were worth nothing like face value." In her reply brief, however, she states that she "fees that valuations predicated upon a finding of no value for the stock and a value of 50?? on the dollar for the loans would be a very fair and generous basis of settlement of the law suit as toward the government."
Our decision that the stock had some*1165 value carries with it an implication that the creditors of the corporation, including the old firm, might reasonably have expected to be paid in full; but, independent of such decision, we would reach the conclusion that the loans were worth face value.
The evidence pertaining to the value of the Anglo-Chilean stock and the open account loans is closely related. Much of it has been heretofore discussed in connection with our valuation of the stock, and no part of the discussion need be repeated. All of the competent evidence has been considered. The evidence introduced by petitioner in support of her contention that the open account loans were worth less than face value is subject to the same criticism made in connection with the valuation of the stock, viz., overemphasis of the prospects of Anglo-Chilean as an independent company and a failure to give adequate consideration to the fact that it was reasonably foreseeable on September 28, 1930, that Cosach would soon be organized and would assume all of the disclosed liabilities of Anglo-Chilean, with the exception of those growing out of the Baburizza transaction. In all of the negotiations preceding the death of the decedent*1166 the interested parties treated the loans as being worth face value. No sound reason has been advanced for us to do otherwise. The respondent's determination on this issue, therefore, must be, and it is, sustained.
(c) Contingent liabilities. - The remaining issue is the effect upon the decedent's proprietary interest in the firm of certain so-called contingent liabilities on the date of death. They may be divided into three groups: (1) The liabilities of the old firm as such; (2) the liability under the retirement agreement on account of the Harry F. Guggenheim indebtedness; and (3) the estate's commitment under, the partnership articles to respond to demands for advances by the firm for firm enterprises in which the decedent had an interest, following action by the firm.
*304 Group 1 - Liabilities of the old firm as such. - On the date of death, the old firm was the guarantor of the following obligations incurred by Anglo-Chilean:
| National City Bank loan, March 31, 1930 | $639,806 |
| Baburizza notes, June 29, 1929 | 1,297,733 |
| Bank loans, 1930 | 2,000,000 |
| Sterling credits, 1930 | 3,423,336 |
| Dollar credits, 1924 | 4,800,000 |
| 12,160,875 |
The guaranties*1167 as to the first two items were in writing. After the death of the decedent guaranties as to the other three were reduced to writing.
On the date of decedent's death Anglo-Chilean was primarily liable, and the old firm was secondarily liable, for payment of the loans aggregating $12,160,875. Cosach was formed on March 20, 1931. Its subsidiary Anglo-Chilena assumed the payment of the last three items, bank loans of $2,000,000, sterling credits of $3,423,336, and dollar credits of $4,800,000, but did not assume the payment of the National City Bank loan of $639,806 and Baburizza notes of $1,297,733. They remained the indebtedness of Anglo-Chilean.
The indebtedness of $639,806 represents an amount borrowed from the National City Co. to enable Anglo-Chilean to pay on March 31, 1930, its note to Baburizza due on October 15, 1930. This note, which was increased subsequent to decedent's death to $730,000, was paid off by Anglo-Chilean in the following installments with funds borrowed from the old firm:
| November 15, 1932 | $230,000 |
| March 17, 1933 | 250,000 |
| May 15, 1933 | 250,000 |
The indebtedness of $1,297,733 on the Baburizza notes represents that part of the note*1168 due on October 15, 1932, namely, pound 266,666, which Anglo-Chilean paid on that date with $920,000 borrowed from the old firm.
The bank loans of $2,000,000, sterling credits of $3,423,336, and dollar credits of $4,800,000 were ultimately paid by Anglo-Chilena. The old firm loaned Anglo-Chilena the moneys with which to meet these bank loans and dollar and sterling credits. Such advances were made over the period from November 20, 1931, to October 17, 1932, and amounted in the aggregate to $9,288,887.50. The decedent's share of the amounts advanced by the old firm for the purpose of meeting these loans and credits was $2,321,221.87, which amount the petitioner paid to the old firm upon demand.
Petitioner contends that in fixing the value of the decedent's interest in the old firm for the purpose of imposing estate taxes, an *305 allowance should be made on account of what she designates to be "contingent liabilities" and the actual cash payments made in connection with them.
We can conceive of instances where, in computing the value at date of death of a decedent's interest in a partnership, some reduction in the value of that interest would properly be allowable*1169 on account of contingent liabilities of the firm existing on the date of death which it was compelled to pay subsequent thereto; but the facts here presented do not, in our opinion, justify such a reduction. We have no convincing evidence showing that Anglo-Chilean was insolvent and unable to pay its debts either on the date of death or at the time the liabilities, which were not assumed by Anglo-Chilena, became due. When Cosach was formed in March 1931, Anglo-Chilean received 8,318,335 shares of Cosach series B stock, and distributed all of it to its stockholders with the exception of 1,291,335 shares which it retained in its treasury. Its liabilities at that time amounted to approximately $2,500,000. The evidence does not indicate that the value of the 1,291,335 shares retained was not equal to, or in excess of, the amount of the liabilities. Evidence is also lacking that Anglo-Chilena was insolvent at the time the liabilities which it assumed became due. This corporation acquired all of the assets of Anglo-Chilean, and was in a better position than Anglo-Chilean had been prior to the reorganization because it did not assume the $25,325,000 open account loans.
The old firm's*1170 liability as grarantor could only arise from the failure or refusal of Anglo-Chilean, and its successor Anglo-Chilena, to pay the loans totaling $12,160,875 when they became due. The parties have stipulated that the old firm loaned money to Anglo-Chilean and Anglo-Chilean, and that these corporations paid the indebtedness. The contingent liability of the old firm as guarantor did not, therefore, ripen into an actual liability. When Anglo-Chilean and Anglo-Chilean paid the amounts due, the contingent liability of the old firm as guarantor was eliminated. The old firm then became a creditor of Anglo-Chilean and Anglo-Chilean, not, as petitioner states in her brief, because it was subrogated to the obligee's rights against these corporations, but because of the loans which it had made to them. In view of the uncertainty as of the date of death that the contingent liability of the old firm as a guarantor would ever ripen into an actual liability, and in view of the fact that it never did become an actual liability of the old firm, we are of the opinion that there is no justification for reducing the value of decedent's interest in the old firm by his proportionate share of what the*1171 firm might have been compelled to pay.
*306 Group 2 - Decedent's liability under retirement agreement. - The next contention of petitioner involves the decedent's liability under the retirement agreement to pay to the members of the old firm or their executors their respective shares of any debit balance charged on the firm's books against Harry F. Guggenheim.
Under the terms of the retirement agreement dated November 28, 1923, it was agreed that upon the termination and liquidation of the partnership ventures, each of the retiring partners, Harry F. and Edmond A. Guggenheim, was to be credited with his share of the final profits or charged with his share of the final losses resulting from the ventures in which he had an interest. The losses from unprofitable ventures, if any, were to be set off against the profits of profitable ventures, until all were finally liquidated and terminated. At that time, if there remained any profits, each was to be entitled to his respective share thereof. On the other hand, if a net loss existed and the books showed a final debit balance against Harry F. Guggenheim, then the decedent was obligated to pay on demand to the remaining*1172 partners or their executors, their respective shares on account of the debit balance thus shown against Harry. Murry Guggenheim had obligated himself to make a similar payment in the event of a debit balance against Edmond.
As of the date of the decedent's death the advances which had been made by the three remaining partners and the estate of Isaac Guggenheim for the account of Harry F. Guggenheim, and which were charged against this account on the firm books, were as follows:
| Non nitrate enterprises | $1,213,779.48 |
| Anglo-Chilean enterprise | 2,180,482.50 |
| 3,394,261.98 |
These advances were secured by the following collateral representing Harry's interest in the old firm: (a) 12 1/2 percent of the Anglo-Chilean stock held by the firm; (b) 11.48 percent of the Anglo-Chilean open account loans; and (c) other assets of a stipulated value of $438,590.42. Assuming, as we have found, that the value of the Anglo-Chilean stock was $9.40 per share and that the loans were worth their face value, the value of Harry's collateral was more than four and one-half million dollars.
It is apparent that any liability of the decedent under the terms of the retirement agreement*1173 will not arise until the termination and liquidation of each of the partnership ventures in which the retiring partners have an interest. Even upon the termination and winding up of such ventures the decedent will not be liable unless a final debit balance is shown to exist at that time against Harry. It is entirely possible that Harry's share of the profits from profitable ventures will exceed his share of any losses from unprofitable ventures plus any *307 debit balance resulting from advances made in his behalf by the remaining partners and executors, in which event no liability will attach to the decedent, or to his estate.
The advances made by the three remaining partners and the estate of Isaac Guggenheim for Harry F. Guggenheim increased from a total of $3,394,261.98 at the date of the decedent's death to $5,426,803.67 as of December 31, 1935. On November 24, 1936, petitioner effected a settlement with Murry Guggenheim. He paid the estate $27,000 in cash, and the obligation of the estate to him, on account of advances made by him on behalf of Harry, amounting to $1,716,842.53, was canceled in consideration of the cancellation of his obligation to the estate on*1174 account of the advances made by the decedent or his estate on behalf of Edmond, totaling $1,748,587.95. The agreement of settlement provided for the assignment by Murry to petitioner of "all of his claims against and rights with respect to the assets in the Harry F. Guggenheim account and the rights and property represented by said account." Petitioner made a similar assignment of all of the estate's claims against the Edmond A. Guggenheim account.
Under date of May 11, 1937, petitioner entered into an agreement with Simon Guggenheim to pay him $1,774,681.57, representing the full amount of his participation in the Harry F. Guggenheim account as of January 1, 1937, with an adjustment for interest. In this agreement Simon assigned to petitioner his entire right, title, and interest in the Harry F. Guggenheim account.
A similar agreement was entered into between petitioner and the estate of Isaac Guggenheim on August 2, 1937, providing for the payment of $363,076.38 to that estate, representing its share in the principal of the debit balance against the Harry F. Guggenheim account, with an adjustment for interest. This agreement also provided for the assignment to petitioner*1175 by the estate of Isaac Guggenheim of all of its right, title, and interest in the Harry F. Guggenheim account.
Petitioner has not entered into any agreement with S. R. Guggenheim relative to his participation in the Harry F. Guggenheim account and under date of December 8, 1937, she was advised by attorneys for S. R. Guggenheim that he claimed a lien on any and all funds or credits accruing to Harry F. Guggenheim or to the estate of the decedent because of their interests in enterprises of the firm, in order to protect him in the event of a deficiency in the account.
Calling our attention to the contents of the above mentioned documents, petitioner upon brief states: "There could not be a clearer demonstration of the fact that the obligations of the decedent under the Retirement Agreement to the other partners of the Old Firm constituted a claim against the decedent's interest in the firm." She argues, therefore, that the retirement agreement liability "should be treated *308 as a Firm liability, for whatever the interest of the decedent may be in the Firm, it is perfectly clear that the petitioner, as his Executor, can never realize on such interest until she has met*1176 and satisfied the decedent's liability under the Retirement Agreement on account of Harry's indebtedness." She urges that at least 50 percent of the decedent's liability on account of the Harry indebtedness existing on the date of death should be allowed as a deduction in computing the value of decedent's interest in the old firm.
We agree with petitioner that an intelligent and reasonable buyer and seller of an interest in the partnership as of September 28, 1930, would have considered any liabilities attaching to such an interest on that date. They would probably have reduced its value by the amount of any actual and fixed liabilities then in existence. The amount of any reduction because of contingent liabilities would have depended, however, on the probability that they would at a later date result in a fixed liability which the prospective purchaser would have to pay.
The liability here involved was only to arise in the event that, upon the termination and liquidation of the ventures in which Harry Guggenheim had an interest, his share of the losses from such ventures, plus any debit for advances made in his behalf by the partners, should be in excess of his share of the*1177 profits from such ventures. The evidence indicates that at the date of death the advances made on behalf of Harry were amply secured. He had an interest in the stock of Anglo-Chilean and the open account loans which, as we heretofore pointed out, had a value of approximately $4,500,000. In addition, as we have indicated elsewhere in this opinion, it was readily foreseeable that Anglo-Chilean would receive over 8,000,000 shares of Cosach B stock and that the payment of substantially all of the open account loans would be assumed under the plan then being considered. Under such circumstances we must disagree with petitioner's contention that there was a "lack of any real value in the enterprises in which Harry was interested * * *." In our opinion a prospective purchaser of the decedent's interest in the old firm would not have asked, and a prospective seller would not have given, any deduction from the value of his interest because of his contingent liability under the retirement agreement.
Petitioner lays great stress upon the settlements made with the partners of the old firm subsequent to decedent's death for advances made in behalf of Harry. As pointed out, the decedent's*1178 liability under the retirement agreement was not to attach until it was disclosed, upon the termination or liquidation of the enterprises in which Harry had an interest, that the collateral and profits from those enterprises were not sufficient to take care of the losses and advances. We are unable to determine why petitioner decided to pay the partners *309 for their advances prior to the termination or liquidation of the enterprises in which Harry had an interest. A letter from the attorneys for S. R. Guggenheim to the Guggenheim Brothers dated December 8, 1937, possibly throws some light upon it. In that letter, after pointing out that certain advances had been made by S.R. in behalf of Harry in accordance with the terms of the retirement agreement, and that there were then on hand, and in the future there would probably accrue, certain funds from the Anglo-Chilean enterprise upon the participation interests of Harry and the decedent, it was stated:
This is to notify you that our client claims a lien on any and all such funds or credits in whatever form the same may be, and that we, on his behalf, object to the impairment of the lien and security for his said advances*1179 which would result from turning over of any part of such funds either to Mr. Harry Guggenheim or to the estate of Daniel Guggenheim. It seems obvious that a payment of such funds to the Estate of Daniel Guggenheim, followed by the probable distribution thereof by it to other parties, as we understand has been done in the past despite full notice of our client's claim, would leave our client unprotected, and would relegate him for the probable deficiency to the responsibility of an Estate whose resources and ability, present or future, to discharge this and other large debts, are not known to him.
From this letter it appears that S. R. Guggenheim felt that payments of partnership funds by the old firm to the estate of the decedent were objectionable because the distribution of such funds to the beneficiaries of the estate would leave him unprotected in the event that there was a final debit balance in the Harry F. Guggenheim account.
The evidence does not show why petitioner made settlements with the partners other than S. R.; but it is not unreasonable to assume that she did so because they entertained fears similar to those expressed in the letter. However that may be, it*1180 is to be noted that in each instance where a settlement was made petitioner took an assignment of the partner's right, title, and interest in the Harry F. Guggenheim account. But the payment of these advances by petitioner did not fix the amount of decedent's liability under the retirement agreement. That can only be definitely determined upon the termination or liquidation of the ventures in which Harry had an interest. If at that time the profits from such ventures exceed the amount of the advances, petitioner has the same claim against such profits as the partners who were reimbursed by her would have had if they had awaited that event.
We have not overlooked petitioner's contention that, inasmuch as theCommissioner included decedent's share of the debit balance in the Edmond A. Guggenheim account, totaling $1,071,495.20, as part of the value of his interest in the old firm on the date of death, then Murry Guggenheim's share of the indebtedness of the Harry F. *310 Guggenheim account should therefore be eliminated either in valuing the decedent's interest in the old firm or in computing the value of the gross estate. This contention is not sound. The amount of the*1181 decedent's advances to the Edmond A. Guggenheim account represented an account receivable to him during his lifetime and to his estate after his death. The ultimate payment of these advances was amply secured, first, by the possibility that profits accruing to the account would be sufficient to repay the amount of decedent's advances; and, second, by the guarantee of Murry Guggenheim that in the event they were not, he would make good the deficiency. Under these circumstances respondent did not err in adding to the value of the decedent's interest in the old firm the amount advanced by him for the account of Edmond. It does not follow, however, that the amount advanced by Murry on behalf of Harry should be eliminated, either in valuing the decedent's interest in the old firm or in computing the value of decedent's gross estate. As heretofore pointed out, the decedent's liability for the advances by the other partners was contingent upon there being a final debit balance in Harry's account upon the termination and liquidation of all the enterprises in which Harry had an interest. The amount, if any, that decedent or his estate would have to pay was uncertain on the date of death*1182 and has not as yet been ascertained. In order to justify the claimed deduction, either in computing the value of decedent's interest in the old firm or in computing the value of the gross estate, the burden was on petitioner to prove that on the date of death it was reasonably foreseeable that the contingent liability then existing would eventually ripen into a fixed liability and also to show the amount which she would be required to pay. She has not sustained this burden.
Group 3 - Liabilities arising under partnership articles. - The petitioner's next contention is that some allowance should be made in fixing the value of the decedent's interest in the old firm on account of the estate's commitment under the partnership articles to respond to demands for advances by the firm for firm enterprises in which the estate had an interest.
Under the firm agreement of June 26, 1925, which was in effect when the decedent died and to which decedent was a party, it was provided:
[This agreement] shall bind an ex-partner as to all monies which the firm may request for outlays and expenditures made in connection with enterprises in respect of which such ex-partner has obligations*1183 and rights as above defined in this clause, and in connection with losses directly assignable to such enterprises.
The agreement also provided, in the event a partner or ex-partner:
* * * shall fail, after 30 days notice in writing, to make any advance which by this Article he is obligated to make, the firm shall have from time to *311 time during the continuance of such default the recurring option, in addition to its other rights, either to compel such advances, or to terminate all further rights of such partner or ex-partner * * * and any determination made by the firm in the premises shall be final and conclusive upon such partner or ex-partner.
The will of the decedent contained the following provision with reference to the partnership agreements:
I hereby ratify and confirm all such articles of copartnership and such other agreements and undertakings as the same shall exist at the time of my death, and I direct my Executrix to perform and carry into effect all the provisions affecting my estate contained in any such articles of copartnership, agreements and undertakings.
Subsequent to the decedent's death his estate paid to the old firm $5,211,571 in response*1184 to demands made by it. Of this amount, $419,000 represented the decedent's share of the $1,676,000 loaned by the old firm to Anglo-Chilean in 1932 and 1933 to pay its obligations of $730,000 to the National City Bank and the balance due on the last Baburizza note of $920,000. Of said amount, $2,321,221 represented petitioner's share of loans made by the old firm to Anglo-Chilena during 1931 and 1932, totaling $9,288,887. Anglo-Chilena used these funds to pay the bank loans, dollar credits, and sterling credits which it had assumed when it took over the assets of Anglo-Chilean. Of said amount, $1,721,250 represented petitioner's share of the amount paid by the old firm for $10,000,000 face value Cosach bonds, which it purchased at 90 under the circumstances set out in our findings. Seven hundred and fifty thousand dollars represented petitioner's share of a loan of $3,000,000 made by the old firm to Cosach through Anglo-Chilean in December 1931.
It is apparent from the foregoing that the entire amount of $5,211,471 was used by the old firm for the purpose of making loans either to Anglo-Chilean, Anglo-Chilena, or Cosach through Anglo-Chilean, or for the purpose of purchasing*1185 Cosach bonds. While it is true that the decedent during his lifetime committed himself and his estate to make advances for firm outlays or expenditures, and for losses incurred in connection with enterprises in which he had an interest, there is no way that we can measure, as of the date of the decedent's death, the effect upon the value of his interest in the old firm of his promise to make such advances. In so far as the decedent's promise involved the possible payment of losses incurred in firm enterprises is concerned, it may be that such possibility would have had a depressing effect upon the value of his interest in the old firm as of the date of death. However, it is possible that no losses will be incurred, and that his promise to make advances to the firm will result in increasing the value of his interest in the partnership because of the partnership's investment of money advanced in profitable undertakings. The burden was on petitioner to prove that the *312 decedent's commitment to make advances in response to the demands of the partnership not only decreased the value of his interest in the old firm as of the date of death, but also to show the amount of such*1186 decrease. She has not sustained this burden merely by proving that after his death his estate made advances which were used by the partnership in making loans to corporations which, in the absence of convincing evidence to the contrary, we must assume were solvent, and in purchasing bonds of Cosach.
II. - Value of Decedent's Interest in New Firm.
The next issue involves the value of the decedent's interest in Guggenheim Brothers "New Firm."
The new firm of Guggenheim Brothers was created on June 26, 1925. The partners were Daniel, Morris, S. R., and Simon Guggenheim, J. K. MacGowan, and E. A. Cappelen Smith. The term fixed expired on January 1, 1930. By an agreement dated November 25, 1929, the new firm was extended from January 1, 1930, to January 1, 1935, S. W. Howland replacing J. K. MacGowan as a partner, the latter having retired.
The agreement extending the new firm, which was executed by the decedent, provided that if the amounts which Smith and Howland were entitled to receive out of the firm profits on the basis of their percentages should not equal $150,000 each in any one year, they nevertheless would receive $150,000 each, and in the event the firm profits*1187 were not sufficient to meet these guaranteed minimum payments, "the Guggenheims, in equal shares, shall contribute the amount of such deficiency to the firm for this purpose." The agreement also provided that Howland's interest in Anglo-Chilean was to be 50,000 shares, which were to be placed immediately to his credit. In case Howland should die or become unable to perform his duties during 1930, his interest in the firm was to vest in the four Guggenheims, who were required to pay him or his estate $400,000. In the event of Howland's death or disability during the years 1931, 1932, 1933, or 1934, the amount to be paid him was to be increased by $400,000 each year, and at the end of the partnership term, i.e., January 1, 1935, Howland, at his election, had the right to require the four Guggenheims to purchase his entire interest in the firm and to pay him therefor $2,000,000. The agreement further provided that if any one of the four Guggenheims should cease to be a partner before the settlement with Howland was effected, he or his estate should not be required to participate in the full settlement but should be liable for only a proportionate part, depending upon the date of death*1188 or retirement.
Howland remained a partner throughout the term, and on the expiration of the partnership on January 1, 1935, he elected to, and did, *313 sell his interest. Pursuant to the terms of the partnership agreement, the remaining three Guggenheim partners and the estate of the decedent paid Howland for his interest $2,000,000. The share of the decedent's estate in this payment was $100,000, or three-sixtieths of the total amount. Petitioner paid this amount and received three-sixtieths of Howland's interest in the new firm.
The Commissioner in his notice of deficiency valued the decedent's interest in the new firm, as of the date of death, at $167,288.60. In making this determination he made no allowance for any liability of the decedent's estate to the new firm because of the provision in the agreement for the payment to Howland in the event he decided to sell his interest to the partnership. Petitioner contends that the respondent erred in failing to recognize the existence on the date of death of such liability, which had to be met after the decedent's death by a cash payment out of the estate, and that its existence depressed or reduced the value of the*1189 decedent's interest in the new firm. She further contends that, in view of the payment of $100,000, the decedent's interest in the new firm was worth not more than $67,288.50 at the date of death.
We are unable to agree with this contention. In order to hold that the existence of the agreement depressed or reduced the value of decedent's interest in the new firm as of the date of his death, it would have to appear that the agreement imposed upon petitioner an obligation to pay out money without getting an equivalent return. The stipulated facts, however, do not show that Howland's interest was worth less than the partnership agreed to pay, and eventually did pay, for it, and we can not assume that it was. Under such circumstances, it can not be said that the agreement to purchase Howland's interest, and the agreement of the decedent to pay his proportionate part of the purchase price, depressed the value of the decedent's interest in the new firm. This issue must, therefore, be decided in favor of the respondent.
III. - Deductions by Reason of Payments Required under Partnership Agreements.
In the petition it is stated that in addition to the items previously mentioned*1190 therein and which we have heretofore discussed, "petitioner asserts as deductions" certain others. She says that they should more properly be considered in connection with the valuation of the decedent's interest in the partnership, and, if allowed in that connection, that only the net liability resulting from the decedent's interests in said partnership may be allowed as a deduction from the estate. This conclusion of the pleader seems to be correct; and even though the questions are not separately discussed upon brief, we think that they merit some consideration.
*314 The first item apparently refers to the payments totaling $5,211,471 made by the decedent's estate to the old firm in response to demands made by the firm, and heretofore discussed under the heading of "Group 3 - Liabilities Arising under Partnership Articles", in connection with the valuation of decedent's interest in the old firm. As there pointed out, the amount advanced by petitioner to the old firm subsequent to the decedent's death was used by it for the purpose of making loans either to Anglo-Chilean, Anglo-Chilena, or Cosach through Anglo-Chilean, or for the purpose of purchasing Cosach bonds. The*1191 fact that decedent prior to his death, and his estate thereafter, were obligated to make such advances, and that they were made by his estate, does not entitle the estate to any deduction unless the payments resulted in decreasing the value of the decedent's gross estate. The payments in question did not represent the decedent's share of losses sustained by the old firm, but were made in order that the old firm could make certain loans or investments in corporations which we must assume were solvent in the absence of convincing evidence to the contrary. In making such payments the estate merely took money from one pocket and placed it in another. Under such circumstances no deduction can be allowed in computing the net estate of the decedent.
The next item relates to the liability of the decedent for the payment of the indebtedness account of Harry F. Guggenheim. It has been discussed at length in connection with the valuation of decedent's interest in the old firm. It was there pointed out that there was no matured liability on the part of the estate at the date of the decedent's death and that the petitioner has not shown the amount, if any, which she may eventually have*1192 to pay because of the decedent's agreement to pay any final debit balance existing in the Harry F. Guggenheim account upon the termination and liquidation of the partnership ventures in which Harry had an interest. Although petitioner has cited many cases in her brief wherein the courts and this Board have allowed deductions from the value of the gross estate of contingent claims arising from commercial transactions when the amounts of the claims became fixed subsequent to a decedent's death (Commissioner v. Kelly's Estate, 84 Fed.(2d) 958; Stewart v. Commissioner, 49 Fed.(2d) 987; Percy B. Eckhart, Executor,33 B.T.A. 426">33 B.T.A. 426; petition for review dismissed, 91 Fed.(2d) 1010), no case has been cited, and we know of none, allowing a deduction for a contingent liability existing at the date of death which has not ripened into, and which may never ripen into, an actual liability. Article 29 of Regulations 70 provides that "An item may be entered on the return for deduction though the exact amount thereof is not then known, provided it is ascertainable with reasonable *315 certainty, and will be paid. No deduction*1193 may be taken upon the basis of a vague or uncertain estimate." The amount which the decedent's estate may eventually pay because of his promise to pay any final debit balance in the Harry F. Guggenheim account is not ascertainable with reasonable certainty and we are of the opinion that the respondent did not err in disallowing the claimed deduction.
The third item is the $100,000 paid by petitioner in connection with the acquisition of Howland's interest in the new firm. The facts with reference to such purchase and the guaranty in the new firm partnership agreement of a minimum income of $150,000 per year to S. W. Howland and E. A. Cappelen Smith have heretofore been set forth in connection with the valuation of decedent's interest in the new firm. It is impossible to determine from the evidence whether the agreement to purchase Howland's interest for $2,000,000 was an asset or liability; nor can it be determined whether the estate gained or lost when, in accordance with the agreement, it advanced $100,000 as its share of the purchase price of Howland's interest. In the absence of evidence that the payment of this amount decreased the value of the gross estate of the decedent, *1194 the deduction may not be allowed.
Petitioner's allegation that she is entitled to a deduction of at least $45,690 because of decedent's liability under the guaranty of minimum income to S. W. Howland and E. A. Cappelen Smith must also be disallowed. Liability was to attach to the Guggenheims only in the event that the profits of the new firm were insufficient to meet the guaranteed minimum payments. The evidence does not disclose that the income of the new firm was so low it ever became necessary to call upon either the decedent or his estate. The petition was filed prior to the purchase of Howland's interest in the new firm and the present issue is probably now moot. In any event there is no evidence justifying the deduction of the amount referred to in the petition.
IV. - Value of Anglo-Chilean Stock Owned by Decedent.
The issue concerning the value of the 1,720 shares of the common stock of Anglo-Chilean owned by the decedent at the date of his death has been determined by our finding that the stock had a fair market value of $9.40 per share. The reasons for such finding are set out in the portion of our opinion bearing upon the value of the stock owned by the old*1195 firm.
V. - Special Deposit of $79,900.
The next question is whether or not the so-called "special deposit" of $79,900 constitutes a part of the assets to be included in the decedent's *316 estate. The facts with reference to this issue, though not shown in our findings, have all been stipulated.
Prior to December 1922 the old firm, in which the decedent and Harry F. Guggenheim were at that time partners, acquired certain shares of common and preferred stock of the Sherman Oil Co. as a firm enterprise. During December 1922 the firm allocated to each of its partners, including Harry, their respective participations in such common and preferred stock and charged their accounts accordingly. The stock, however, was not delivered to the partners at that time. In December 1922 Harry sold the rights which had been allotted to him in the preferred and common stock of the Sherman Oil Co. to the decedent for $83,000, which sum Harry thereupon paid to the old firm in reduction of the indebtedness charged against him upon its books. On February 6, 1923, the old firm delivered to Harry 1,860 shares of preferred stock and 1,395 shares of common stock, representing his participation, *1196 and requested that he endorse the stock in blank and redeliver it to the firm to be held as security for the payment of the indebtedness then charged against him on the firm's books. Instead of delivering the stock to the firm, however, Harry delivered it to the decedent. On February 27, 1923, the decedent, upon the request of the firm, surrendered the Sherman Oil stock which he had purchased from Harry and turned it over to the firm to be held by its as collateral against Harry's debit balance with the firm. On February 28, 1923, Harry withdrew as a partner and the various questions between him and the other members of the firm were thereafter settled by the agreement dated November 28, 1923, known as the retirement agreement. After the execution of such agreement the firm continued to hold the above stock as collateral for the indebtedness charged against Harry on its books under the terms of the retirement agreement. During 1929 the Sherman Oil Co. redeemed a part of its preferred stock and the decedent received from it a total of $79,900, representing the proceeds from the redemption at par of 799 shares of preferred stock, being a part of the preferred stock purchased by*1197 him from Harry. As the stock so redeemed was at that time held by the old firm, upon its request the decedent turned over to it his check for $79,900, to make good the depreciated value of the collateral held by the firm to secure Harry's account. The firm credited the proceeds of the check upon the indebtedness charged against Harry on its books.
The amount of Harry's indebtedness on the books of the firm at the date of decedent's death was $1,525,308.01, after the old firm had credited against such indebtedness the sums of $83,000 and $79,900. In the Federal estate tax return filed by the petitioner this item of $79,900, which was carried on the books of the decedent as "Guggenheim Brothers Special Account", was included in the return as an *317 asset of the decedent's estate. In the notice of deficiency, the Commissioner included the $79,900 in the gross estate of the decedent and made no increase in the amount of the decedent's indebtedness in connection with Harry's account.
Petitioner contends that respondent erred in including the $79,900 in the decedent's gross estate. The basis of her contention is set forth in her brief as follows:
* * * The decedent was*1198 obligated to the firm individually to pay any final debit balance charged against Harry F. Guggenheim, and since the $79,900 in reality represented collateral loaned to secure the account, which the decedent himself ultimately was liable to pay, the decedent under no circumstances could ever retrieve or had any right to the $79,900 unless the profits inuring to Harry F. Guggenheim on account of firm enterprises in which he continued to have a participation exceeded the indebtedness charged against his account. On the date of death, this net debit balance amounted to over $4,400,000, with no prospect of any future reduction in any substantial amount by future profits attributable to Harry's account. Accordingly, the item of $79,900 did not represent anything of value to the decedent on the date of death, and should be excluded in computing his gross estate.
It is apparent that petitioner's contention is based on the assumption that it was foreseeable on the date of death that the profits inuring to Harry on account fo firm enterprises in which he continued to have a participation would not equal the amount of any debit balance existing at the time of the final determination or*1199 liquidation of these enterprises, and that therefore the decedent could never expect to reacquire the $79,900 deposited as collateral.
We have already pointed out in connection with our discussion of the liability of the decedent under the retirement agreement (group 2, subdivision (c), issue I) that it was not known at the date of death, or even at the time of the hearing, whether the decedent's estate would, or would not, have to make any payments in connection with his guarantee of any final debit balance in Harry's account. Even though there was a substantial debit balance in the account at the date of the decedent's death, as pointed out in the discussion referred to, it was secured by collateral, in addition to the $79,900, having a value of more than four and one-half million dollars. Obviously, if such collateral is sufficient to take care of the final debit balance, the $79,900 will not be required for that purpose.
It can not be presumed, in the absence of any evidence showing it to be a fact, that there will be a final debit balance in the account when all of the enterprises in which Harry has an interest are terminated. Petitioner's contention that the item did*1200 not represent anything of value to the decedent on the date of death can not be sustained. The $79,900 was properly included by the respondent in decedent's gross estate.
*318 VI. - Inclusion in Gross Estate of Corpus of Trust.
We find the facts pertaining to this issue to be as stipulated. For the purposes of this discussion they may be summarized as follows:
Under date of October 29, 1917, the decedent created a trust for the benefit of his son, Meyer Robert Guggenheim, and the child or children of the latter. The original trust agreement of October 29, 1917, carried a power of revocation "in whole or in part." It was revoked and wholly "Superseded and cancelled" by an agreement dated May 28, 1918.
On the date of decedent's death the agreement executed on May 28, 1918, was in effect as modified and amended by an agreement dated February 14, 1922, and as modified in a minor particular, by the agreement of February 4, 1925. The two material agreements are those of May 18, 1918, and February 14, 1922.
At the time of his death on September 28, 1930, the settlor, Daniel Guggenheim, left surviving him a son, M. Robert Guggenheim (hereinafter referred to as Robert), *1201 and M. R. Cordova Guggenheim (hereinafter referred to as Cordova), the only surviving issue of Robert. At the time of the settlor's death, Robert was 45 years old and his son Cordova was 20 years old. Robert had been married three times. He first married Grace Burnheimer in 1905. A child of this marriage, Daniel Guggenheim, 2nd, was born in 1906 but died in 1925. Cordova, the second child of this marriage, was born in 1910. In 1915 Robert was divorced from his first wife, and during the same year married Margaret Weylin. They were divorced in 1928 and in the same year Robert married his third wife, Elizabeth Eaton. (While it was stipulated that she was "his present wife", the briefs indicate that they have since been divorced and that Robert has been married for the fourth time. This, however, is not material to the present issue.) Robert had no children by either his second or third marriage.
The agreement of May 28, 1918 (dated as of October 29, 1917) was executed by the decedent (the settlor) and a trust company and an individual, as trustees. By this agreement, the trustees were authorized to invest the trust corpus, collect the income therefrom, and pay it over to*1202 the son of the settlor, Robert, called the "Beneficiary", to the extent of $21,000 per year for 10 years from the creation of the trust or until its earlier termination. The remainder of the trust income was to be added to corpus, unless the settlor directed that it be paid to the "Beneficiary"; but the settlor retained the right to reduce the payments at any time to $21,000 a year.
Upon the expiration of the 10-year period, if the trust had not been revoked prior thereto, the trust was to terminate absolutely and the trustees were to pay over the corpus to the "Beneficiary" free of *319 all restrictions; but if the "Beneficiary" died prior to the expiration of the 10-year period, the trust was to be continued for 20 years, during which time the trustees were to pay over the income for the maintenance and education of the child or children surviving the "Beneficiary" until any child or children reached 21 years of age, whereupon the trust income was to go to such child or children until 20 years from the date of their father's death, at which time the trust corpus and all accumulations were to be divided equally among the children. The document contained the following description*1203 of the term "child" and "children":
The term "child" or "children" as used in this paragraph numbered Third in referring to a child, or to children, of the Beneficiary him surviving, shall be taken and held to mean offspring of the Beneficiary, born in lawful wedlock, whether as the fruit of the first or second marriage of the Beneficiary, and whether the parents of any such child or children have or have not been divorced; and any one such child shall have the same rights hereunder, and the same interest in the trust fund, as any other such child, and no other or greater rights or interests.
In the event the beneficiary died prior to the expiration of the 10-year period, leaving no children, the trust corpus and all accumulations were to revert to the settlor, his executors, or administrators.
The trust instrument also contained the following provisions:
FOURTH: The settlor hereby expressly reserves to himself the privilege of increasing the principal of the trust fund, from time to time, by adding thereto other properties, interests and securities. Any such added properties, interests and securities the Trustee shall receive, hold, manage, sell, exchange, invest and reinvest, *1204 deal with and dispose of in the same manner as herein specified in respect of the properties, interests and securities forming the original trust fund.
FIFTH: The trust fund created hereby shall comprise the properties, interests and securities hereinbefore described in their present form, or in any substituted form resulting from the sale or exchange of the same, or otherwise, and also such additional or other properties, interests or securities as may from time to time be added to the trust fund by the Settlor, or substituted by the Settlor for properties or securities previously comprised in the trust fund, or as may from time to time be acquired in the trust fund, or as may from time to time be acquired by the Trustees through investments or reinvestments for the trust fund made in the manner herein provided, of the proceeds of any sales of trust property, or of the income of the trust fund or any part of such income or of any other monies belonging, pertaining or devoted to the uses of the trust.
The settlor reserved the power to "modify or alter in any way or revoke in whole or in part this agreement and the trust then existing, and the estates and interests in property*1205 hereby created and provided for * * *." The agreement provided, however, that:
* * * no power of revocation in this agreement reserved or contained shall apply to the income at any time received or accrued upon the trust fund, or upon the properties, interests or securities originally or at any time comprised therein, or apply to any accumulations or investments of such income; but the *320 legal ownership and title of the Trustees and the beneficial ownership and title of the Beneficiary, or beneficiaries, in and to such income shall be and remain absolute and indefeasible, subject only to such directions as the Settlor may give to the Trustees under the powers herein reserved or contained as to the respective proportions of income to be paid over or accumulated, or as to the investment or reinvestment of accumulations, or varying the respective shares of the beneficiaries to be paid over or accumulated or advancing or changing the time of payment to the Beneficiary, or beneficiaries; but in the event of the revocation of this agreement in respect to the principal or corpus of the trust, the income of the trust fund then in the hands of the Trustees and not theretofore distributed*1206 or disbursed by them, together with all accumulations or investments of such income, shall be paid over to the Beneficiary, or beneficiaries, for whose use and benefit the said trust fund would then be held by the Trustees but for such revocation.
On February 14, 1922, the decedent amended the trust agreement then in effect. After reciting the prior agreement and dispensing with the individual trustee, due to his death, the purposes of the new agreement were stated as follows:
WHEREAS, the Settlor desires: (a) to modify and alter the terms and provisions of the said trust agreement and the terms and conditions of the said trust so created thereunder in certain particulars as hereinafter set out relative to the accumulation or payment of income and the distribution of principal; and (b) to relinquish and divest himself of certain rights and powers reserved or retained by him of directing or controlling the administration of the said trust and the management of the trust fund, and to confer such rights and powers upon and to vest the same in other persons, and (c) to relinquish and divest himself of the right or power reserved to or retained by him of revoking the said agreement*1207 and the trust existing thereunder; * * *
Under this amendatory agreement, the trustee was directed to pay the income of the trust to the extent of $21,000 a year to Robert "for and during his natural life", and to add the remainder of such income to the corpus of the trust. The settlor reserved the right to increase the amount of the payments to Robert to an amount not in excess of the income and to decrease such payments "down to no amount of payment at all." The agreement provided that "if, at the time when any installment of income is payable to any beneficiary hereunder, the income of the trust fund in the hands of the Trustee is insufficient to permit payment to the Beneficiary of an installment at the annual rate of payment then fixed", the trustee was to make up any deficiency out of capital items. It also contained the following provision:
* * * Any and all income of the trust fund, and any and all receipts of sums of money or other cash disbursements in the nature of return of capital or distribution of assets at any time received by the Trustee in excess of the amount thereof paid or payable to a beneficiary hereunder, notwithstanding that such income or receipts may*1208 have been invested in property or securities or otherwise added to or incorporated in the trust fund, shall if and whenever *321 the Settlor shall so direct in writing, and as to the whole or any part of such excess income or receipts, or as to the whole or any part of the property or securities in which the same may have been invested, likewise be paid and delivered to any beneficiary hereunder as a further distribution to such beneficiary in addition to any payments which may have been made at a regular annual rate.
Upon the death of Robert, the trustee was to pay over for the benefit of the child or children of the "Beneficiary" an amount out of income sufficient to provide for the maintenance and support of such child or children until each child reached 21. Thereafter the full portion of such income was to be paid over to each child until the expiration of 20 years following the death of the "Beneficiary." At the expiration of such 20 years, the corpus was to be divided into as many equal parts as there were children of Robert surviving him at the time of his death, and each portion of the corpus was to be paid to such child or children then living or to the estates*1209 of those who had died, and the trust was to terminate. In the event Robert should die leaving no child, or descendants of a child, then the trust fund was to revert to the settlor or to his executors or administrators. The amendatory instrument defined the terms "child" or "children" in the same language used in the earlier instrument.
Decedent relinquished his right to direct or control the administration of the trust and the management of the trust fund and named his three brothers to have and exercise the rights and powers originally reserved to himself in that respect. The agreement provided that the rights and powers so transferred should include the power of increasing or decreasing the amount of the annual payments to be made to Robert. It also provided that the settlor relinquished, abandoned and divested himself of all of the powers reserved to or retained by him in the trust agreement of October 29, 1917, to revoke the trust agreement and the trust existing thereunder. It further provided as follows:
Nothing in this instrument contained shall be deemed to affect or limit the power of the Settlor to modify, alter or correct the provisions of the said trust agreement*1210 of the 29th day of October, 1917, provided that any such modification, alteration or correction shall not operate to revoke the said agreement or the trust existing thereunder, or to frustrate the essential purposes of the trust of making provisions for the son of the Settlor and his children or descendants, or to impair the substantial integrity of the trust fund, or to create a beneficial interest in or under the trust, on behalf of the Settlor or any person not previously beneficially interested therein or thereunder. * * * Nor shall anything in this instrument contained be deemed to affect or limit the power of the Settlor, by directions in writing given to the Trustee, to alter, define and prescribe the relative interests of the beneficiaries in the trust fund or the income thereof, their respective shares in the same, their respective powers with respect to such shares, and the time and manner of making distribution to the beneficiaries, or any of them, by way of advancement, postponement or otherwise, *322 of principal or income, or both, of the trust fund; which power of the Settlor is hereby expressly reaffirmed and reserved, together with the power of causing a final*1211 distribution to be made at any time to or among the beneficiaries, or any of them, and so terminating the trust.
The power to alter, as quoted above, was also contained in the agreement of February 4, 1925, wherein the trust agreement was further amended in certain respects not here material. The entire income of the trust was paid to Robert during the life of the decedent.
The value at the time of the decedent's death of the securities delivered to the trustee on May 28, 1918, at the time of the execution of the revocable trust, was $990,609, taking all of the securities which were redeemed at the amount received by the trustee and giving effect to stock dividends and stock rights. The value, at the time of the decedent's death, of the property in the hands of the trustee on February 14, 1922, when the decedent relinquished the power of revocation was $996,588.89, after giving effect to redemptions, stock dividends, and stock rights. In his notice of deficiency the Commissioner determined that the value at the time of the decedent's death of the securities held by the trustees (including 75 shares of the Anglo-Chilean common stock) was $2,301,462.99. He included this amount*1212 in the gross estate on the ground that the transfers in trust came within the provisions of section 302(d) of the Revenue Act of 1926. The parties have stipulated that the value of the trust corpus at the time of the decedent's death, exclusive of the Anglo-Chilean stock, was $2,289,450.62. The value of the Anglo-Chilean stock determined by us in connection with the valuation issues will be used in determining the value of the 75 shares of such stock in the settlement under Rule 50.
The petitioner contends that no portion of the trust corpus should be included in the decedent's estate because he did not, at the time of his death, have sufficient power to affect the enjoyment of the income or corpus to require its inclusion; that since the settlor divested himself of all substantial power over the income or corpus of the trust prior to the enactment of section 302(d), the retroactive application of the section and the inclusion of the trust corpus in his estate is so arbitrary and capricious as to violate the Fifth Amendment to the Constitution; and that, in any event, if any portion of the trust corpus is includable in the gross estate, then (1) the value of the life estate irrevocably*1213 given to M. Robert Guggenheim should be excluded; and (2) there should be included only the value, on the crucial date, of those securities which were held by the trustees at the time the decedent relinquished the power to revoke the trust.
The respondent disputes all of the contentions of petitioner and insists that the decedent at the time of his death retained the power *323 to change the enjoyment of the trust corpus "through the exercise of a power * * * to alter, amend or revoke * * *"; and that the value of the trust securities as of the date of death should be included in the gross estate under the provisions of section 302(d) of the Revenue Act of 1926.
The section relied upon requires that there be included in the gross estate of a decedent, the value at the time of his death of all property: "To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend or revoke * * *." By section 302(h) of the same act, the foregoing*1214 provision applies whether the transfer was "made * * * before or after the enactment of this Act." Similar provisions were in the 1924 Act, but they were not contained in any of the revenue acts prior to 1924.
In support of his contention, respondent points to the following language of the trust agreements of February 14, 1922, and February 4, 1925:
Nothing in this instrument contained shall be deemed to affect or limit the power of the Settlor to modify, alter or correct the provisions of the said trust agreement made as of the 29th day of October, 1917, as amended and modified, provided that any such modification, alteration or correction shall not operate to revoke the said agreement or the trust existing thereunder, or to frustrate the essential purposes of the trust of making provisions for the son of the Settlor and his children or descendants, or to impair the substantial integrity of the trust fund, or to create a beneficial interest in or under the trust, on behalf of the Settlor or any person not previously beneficially interested therein or thereunder. * * * Nor shall anything in this instrument contained be deemed to affect or limit the power of the Settlor by directions*1215 in writing given to the Trustee, to alter, define and prescribe the relative interests of the beneficiaries in the trust fund or the income thereof, their respective shares in the same, their respective powers with respect to such shares, and the time and manner of making distribution to the beneficiaries, or any of them, by way of advancement, postponement or otherwise, of principal or income, or both, of the trust fund; which power of the Settlor is hereby expressly reaffirmed and reserved, together with the power of causing a final distribution to be made at any time to or among the beneficiaries, or any of them, and so terminating the trust.
He relies principally upon the latter portion of the above quotation.
Petitioner argues that the provision giving the settlor the power to "modify, alter or correct" the provisions of the trust agreement conferred upon the settlor no substantial power over the trust corpus or income at the time of his death because, in view of the restrictions upon the power, he could only modify or correct the trust provisions to clarify its meaning, to remove ambiguities, to define more clearly the duties of the trustees and the like; that the provision*1216 *324 that nothing should affect the power of the settlor to "alter, define and prescribe the relative interests of the beneficiaries in the trust fund or the income thereof", relates only to the interests of Robert's children by his first and second marriages, and not to any interest of Robert, the "Beneficiary", and, inasmuch as only one child of Robert by either his first, second, or third marriages was in existence at the time of the decedent's death, the power to vary the relative interests of the "beneficiaries" was meaningless and carried no valuable incidents; and that the power which the settlor reserved to cause a final distribution and terminate the trust did not actually exist at the date of the decedent's death, since it was to come into being only after Robert's death, which had not then occurred. As to the latter power, petitioner argues that even if it should be regarded as a power which existed prior to Robert's death, the mere power to terminate a trust and distribute the proceeds to the beneficiaries is not a power to "alter, amend or revoke" within the meaning of the statute, citing *1217 Helvering v. Helmholz,296 U.S. 93">296 U.S. 93, and White v. Poor,296 U.S. 98">296 U.S. 98.
The cited cases are authority for holding that the mere power to terminate a trust and distribute the proceeds to the beneficiaries is not a power to alter, amend or revoke; but this was not the only power reserved by the settlor. He reserved the power to "alter, define and prescribe the relative interests of the beneficiaries in the trust fund or the income thereof." This is the power which formed the basis of respondent's determination that the trust corpus should be included in his gross estate. The obvious purpose of Congress in enacting section 302(d), supra, was to prevent the avoidance of estate taxes in cases where settlors retained control over trust estates by reserving in themselves the power to alter, amend, or revoke, even though title could not be regained by them. Until the death of the decedent there was always the possibility of the exercise by him of the reserved power to change and alter the relative interests of the beneficiaries. This power to alter and change the economic benefit gave the decedent a substantial control over the trust property, *1218 and his death, therefore, was "the source of valuable assurance passing from the dead to the living." Porter v. Commissioner,288 U.S. 436">288 U.S. 436. Such power can not be considered a trivial or inconsequential one. Hoblitzelle v. United States,3 Fed.Supp. 331; Holderness v. Commissioner, 86 Fed.(2d) 137; Commissioner v. Chase National Bank of New York, 82 Fed.(2d) 157; certiorari denied, 299 U.S. 552">299 U.S. 552; Porter v. Commissioner, supra;Witherbee v. Commissioner, 70 Fed.(2d) 696.
Petitioner contends that the word "beneficiaries" did not include Robert. Pointing out that in many instances, both in the original *325 agreement and in the amendatory agreement, the word "Beneficiary" referred only to Robert while in several instances the word "beneficiaries" referred only to Robert's children, she concludes that the settlor did not intend to reserve the right to alter Robert's interest, but only to alter the interests of his children. Referring to a paragraph of one of the trust instruments, in which both words were used, - "the income * * * in the hands*1219 of the trustee * * * [in the event of revocation] shall be paid over to the Beneficiary, or beneficiaries" - she states that this is "conclusive proof that a distinction was meant to be made." Other circumstances relied upon by her as indicating that the decedent did not have the power to alter Robert's interest were that he had transferred to his brothers the power of "increasing and/or decreasing the amount of the annual payments to be made to" Robert; and that he had provided by way of negation, in the paragraph in which the power "to modify, alter, or correct" was contained, that the trust should not be revoked, its essential purposes should not be frustrated, the substantial integrity of the trust fund should not be impaired, and no beneficial interest on behalf of the settlor or of any person not previously beneficially interested therein, should be created.
It may be that the word "Beneficiary", beginning with a capital letter, referred in the trust instruments only to Robert; but it does not follow that the word "beneficiaries" referred only to Robert's children. All of the persons for whose benefit a trust is created ordinarily are embraced within the meaning of the*1220 term "beneficiaries." The beneficiaries of the trust created by the decedent were Robert and his children. That the settlor considered Robert as one of the beneficiaries is apparent from his use of such expressions as "any beneficiary", "a beneficiary", "such beneficiary" and the like in various places in the trust instruments, where it is obvious that he intended to include Robert. In the first sentence of the quoted paragraph he speaks of "making provision for the son of the settlor and his children or descendants." We are satisfied that he had all of them in mind when in the next sentence he reserved the power "to alter, define and prescribe the relative interests of the beneficiaries in the trust fund or the income thereof." The last sentence of the same paragraph lends support to this conclusion; for therein he specifcally reserved the power to cause a final distribution to be made among the beneficiaries and so to terminate the trust.
Petitioner's argument that under such a construction of the word "beneficiaries" there would be a conflict between the power reserved to the settlor and that given to his three brothers is not persuasive. The settlor apparently anticipated*1221 that there might be some conflict between the provisions of the paragraph under discussion and *326 other portions of the trust agreements when he provided "Nor shall anything in this instrument contained be deemed to affect or limit the power of the Settlor to alter, define and prescribe the relative interests of the beneficiaries * * *."
We are of the opinion, and hold, that the value of the corpus of the trust must be included in the gross estate of the decedent under section 302(d), supra.
The contention of petitioner that, since the settlor divested himself of all substantial power over the income or corpus of the trust prior to the enactment of section 302(d), the retroactive application of the section and the inclusion of the trust corpus in his estate is so arbitrary and capricious as to violate the Fifth Amendment to the Constitution, can not be sustained. As heretofore pointed out, the settlor did not divest himself of all substantial power over the income or corpus of the trust either prior to the enactment of section 302(d) or prior to his death. It is true that in the amendatory trust agreement of February 14, 1922, he relinquished the power to revoke*1222 the trust; but the relinquishment of this power did not rid his estate of tax liability inasmuch as he reserved the power to change the relative interests of the beneficiaries. He lived after the passage of the Revenue Act of 1926 and could have given up this reserved power, thus freeing his estate of the tax liability here in controversy. Under such circumstances it does not offend the Fifth Amendment to include the value of the trust securities in his gross estate. Porter v. Commissioner, supra;Commissioner v. Chase National Bank of New York, supra.
Nor can petitioner's contention, that in any event the value of the life estate irrevocably given to Robert should be excluded from the decedent's estate, be sustained. Her statement upon brief to the effect "that the decedent at the time of his death had no power to impair or affect in any way the right of Robert to the income of the trust for his life" is not, in our opinion, the conclusion to be drawn from the instruments. The settlor retained the power of defeating any claim of Robert to a life interest when he reserved the right to change the relative interests of the beneficiaries*1223 in the trust fund or the income thereof and to cause a final distribution to be made as he saw fit. Respondent suggests that the existence in decedent's brothers of the power to increase or decrease the payments to Robert made his interest too indefinite to justify its classification as a life estate, and that the brothers were not adverse interests and would undoubtedly have followed the wishes of the decedent in respect of the power assigned to them. While we believe there is some merit in this suggestion, we feel that any discussion of the power decedent might have exercised in conjunction with his brothers over Robert's *327 interest is unnecessary in view of the fact that the decedent alone was in a position to direct the trustees to do anything he desired with the trust corpus and income so long as new beneficial interests were not created.
The final contention of petitioner is that if any of the trust corpus is includable in the estate, then there should be included only the value at the date of the decedent's death of the securities held by the trustees when the decedent relinquished all substantial powers over the trust on February 14, 1922. She points out that*1224 section 302(d) requires that there be included in the gross estate any interest in property "of which the decedent has at any time made a transfer" where the enjoyment was subject "at the date of his death" to change through the reservation of the power to alter, amend, or revoke. She argues that the statute purports to tax, as part of the decedent's estate, property as to which he had made a transfer prior to death; that the Commissioner's regulations 1 require the valuation of that property as of the date of the decedent's death - not the valuation of that property plus all additions and betterments; and that, therefore, the maximum amount includable in the decedent's estate, if any of the trust corpus is to be so included, is the value at the time of death of the property in the hands of the trustee on February 14, 1922, or $996,588.89.
*1225 Petitioner apparently seeks to convey the impression that the difference between $996,588.89, which the parties have stipulated was the value at the time of the decedent's death of the property in the hands of the trustee on February 14, 1922, and $2,289,450.62 (plus the value of 75 shares of Anglo-Chilean stock), which the parties have stipulated was the value at the time of the decedent's death of the securities then comprising the trust corpus, represents the enhanced value of the property at that date due to additions to the property or betterments, by the trustees. Petitioner states that between February 14, 1922, and the decedent's death, he had no control over the investment of the trust corpus; that such control was vested in his three brothers; and taht during that time the brothers made some sales of trust securities, substitutions of others, and that there were, undoubtedly, some capital accretions. The result, according to petitioner, was that the value of the corpus of the trust on the date of death was very much greater than the value on the date of death of the securities in the trust when the decedent relinquished the power to revoke.
*328 While we agree*1226 with petitioner that the value of the trust corpus on the date of death was much greater than the value on the same date of the securities held in trust on February 14, 1922, petitioner has not proved to our satisfaction that the enhanced value was due to any "additions to the property, or betterments" made by the corporate trustee, or by the brothers of the decedent. In the fourth and fifth articles of the trust agreement executed on May 28, 1918, the decedent reserved the right of increasing the principal of the trust fund, from time to time by adding thereto other properties, interests and securities, and of substituting properties for properties or securities in the trust fund. The evidence does not show that the increase in the amount and value of the securities was not the result of transfers made by the decedent pursuant to the right which he retained. We must, therefore, hold that the value at the date of death of all of the securities held in the trust at that time should be included in the gross estate of the decedent.
The deficiency shall be recomputed in accordance with the views herein expressed.
Reviewed by the Board.
Decision will be entered under Rule*1227 50.
SMITH, dissenting: I am of the opinion that the decedent's interest in the old firm at the date of his death was far less than the value determined in the prevailing opinion. In finding 17 it is stated that the principal business of the old firm at the date of decedent's death consisted of the enterprise carried on by the Anglo-Chilean Consolidated Nitrate Corporation. The business of the corporation was in a developmental stage in 1930. It had been operating in the red for a number of years. Synthetic nitrates were largely taking the place of Chilean nitrates. The old firm had invested a vast amount of money in the Anglo-Chilean Consolidated Nitrate Corporation enterprise. There was no certainty that the old firm would ever recover its capital. In point of fact, it was a losing proposition from the beginning. I think that the evidence shows that the old firm stood to lose a large part of its investment in the enterprise. I am of the opinion that the old firm's holding of 1,109,859 shares of the stock of the corporation had no value for the purpose of determining the old firm's assets and I think that its claims against that corporation for moneys*1228 advanced were worth far less than one hundred cents on the dollar.
Footnotes
1. Article 21 of Regulation 70 provides:
"Valuation of property transferred.↩ - The value must be determined as of the date of the decedent's death. * * * Where the transferee makes additions to the property, or betterments, the enhanced value of the property at that date, due to such additions or betterments, is not to be included."