*1237 1. Shares of a corporation held by an employee with the restriction that he could not sell them without its consent, and upon his resignation or death they should be offered to the corporation for a price equal to 75 percent of the book value at the last closing or 50 percent if the employee resigns under certain conditions or 33 1/3 percent if the employee is discharged, and the corporation might buy them at that figure within a year after the employment is ended, which shares are given by the employee to another, held, for gift tax purposes, not to be without value.
2. The value fixed by the Commissioner held not shown to be too high.
*1052 The Commissioner determined a deficiency of $13,140.44 in petitioner's gift tax for 1937. Petitioner assails the value determined for shares transferred to a trust.
FINDINGS OF FACT.
Petitioner, a resident of Merion, Pennsylvania, on December 24, 1937, executed an irrevocable trust, declaring that he had caused to be transferred to his name as trustee 4,500 common shares of E.J.Lavino & Co.*1238 , "being Voting Trust Certificate No. 11, issued under the terms of a certain Voting Trust Agreement dated January 4, 1930." As trustee, he was to collect the dividends, pay charges incident to management, and pay the net income for his life to his wife, Ellen S. Kline. After his death, interest and principal were to be paid to his wife, son, or the son's descendants.
Petitioner became an employee of E.J.Lavino & Co. in 1919, and has been a director and executive vice president since 1927. On November 22, 1928, the company distributed 3,000 shares of its common stock, pursuant to a directors' resolution authorizing the president and the chairman of the board of directors "to donate and transfer' certain shares then held in the treasury to "such of the officers or employees of the corporation as they may determine, * * * subject, however, to such conditions, restrictions and agreements as they shall in their discretion impose and make * * *." The conditions and restrictions were embodied in a written instrument which each distributee signed, agreeing not to sell his shares without the company's consent as long as he should remain in its employ, and in the event of death *1053 *1239 or the severance of his connection with the company, to offer his stock to the company:
at a price not to exceed seventy-five percent (75%) of its book value as shown on the Company's statement at the date of the last previous closing of its books for a period of one year from the date of his death or of such severance of connection with the Company, during which period the Company shall have the option to purchase all or any part of such stock, * * *
In the event that the employee should sever his connection with the company "under conditions not acceptable to its Board of Directors or with which the said Board is not in sympathy", he was to offer his stock to the company on the above terms "at a price not to exceed fifty percent. (50%) of its book value", and in the event that he should be discharged for cause, "at a price not to exceed thirty-three and one-third percent. (33 1/3%) of its book value." The agreement was made binding on his executors, administrators, and successors. All share certificates issued to the employees bore this endorsement:
This certificate and the shares of stock represented thereby are transferable only upon compliance with the covenants and conditions*1240 set forth in an agreement in writing between the stockholder and the Company dated November 22, 1928.
Of the 3,000 shares so distributed in 1928, petitioner received 700. On October 22, 1929, the company distributed 10,300 more shares on the same conditions; petitioner received 3,800. After an amendment of its charter the company recalled its old share certificates and issued new ones in place thereof, and on January 4, 1930, petitioner received a certificate for 4,500 new shares of common stock, subject to the same restriction agreement. On the same date, holders of 45,200 of the 50,000 issued common shares executed an agreement with Edward J. and Edwin M. Lavino, as trustees, whereby certificates for the common shares, endorsed in blank, were transferred to the trustees with full voting rights, and the trustees issued to each depositor a "Common Stock Trust Certificate" for the number of shares deposited by him, entitling him to receive that nember on termination of the trust at the end of ten years (or earlier in the trustees' discretion), and in the meanwhile to receive payments equal to the dividends collected by the trustees on that number of shares. The certificates were*1241 transferable, but bound "each successive holder hereof to all the terms and provisions of [the trust] agreement the same as if such holder were a party thereto." The trustees surrendered all deposited certificates to the company and received a single new certificate for 45,200 common shares. Of the deposited shares, 25,500 were not subject to the restriction agreement; the remainder were subject to it.
Petitioner deposited his certificate for 4,500 common shares, and received a common stock trust certificate for a like number. He endorsed *1054 this in blank and delivered it to the trustees on December 24, 1937, and on the same date they issued to him, as trustee, common stock trust certificate No. 11, of which he declared himself trustee by the trust instrument of the same date, above described. On December 1, 1937, the company's directors:
RESOLVED that there would be no objection on the part of the Corporation to the transfer of common stock registered in the name of Charles T. Kline, subject to restriction agreement, to Charles T. Kline, Trustee, for the benefit of Ellen S. Kline, the said stock after transfer to still be subject to the restriction agreement heretofore*1242 obtaining.
On December 24, 1937, petitioner was 59 years of age and had a life expectancy of 14.1 years. His services as a director and executive vice president of the company were satisfactory to its officers and directors, and he has since continued in those capacities.
The company's books showed a surplus of $1,158,794.63 on December 31, 1926, and of $1,753,779.89 on December 31, 1937. On both dates its capital stock account carried a credit of $500,000 on account of the 50,000 shares of common stock; $142,679.86 was carried as a reserve for doubtful accounts. The company is successfully engaged in the business of shipping, importing ores, and manufacturing refractories. Its earnings and dividends were as follows:
| Year | Gross income | Net income | Preferred dividends paid |
| 1928 | $6,382,077.24 | $144,635.83 | $160,000.00 |
| 1929 | 7,774,397.04 | 805,131.77 | 159,250.00 |
| 1930 | 5,293,829.24 | 275,474.48 | 248,412.50 |
| 1931 | 2,613,241.12 | 75,676.85 | 239,750.00 |
| 1932 | 1,148,419.45 | 141,029.15 | 239,750.00 |
| 1933 | 1,983,912.40 | 92,505.95 | 239,750.00 |
| 1934 | 2,842,180.02 | 14,053.21 | 239,750.00 |
| 1935 | 2,900,405.68 | 272,851.71 | 239,750.00 |
| 1936 | 7,318,238.28 | 569,151.26 | 141,281.25 |
| 1937 | 8,403,870.99 | 838,443.92 | 42,812.50 |
| 1938 | 6,747,467.71 | 229,034.80 | 42,812.50 |
| 1939 | 7,558,900.57 | 812,231.70 | 42,812.50 |
*1243 During 1930 the company distributed among employees 2,100 additional common shares, subject to the same restriction agreement. One-third of their book value on December 31, 1929, was allowed by the Commissioner as a deduction for compensation in computing the company's taxable net income for 1930. In consideration of this allowance, the company waived its claims for certain other deductions.
OPINION.
STERNHAGEN: The petitioner contests the deficiency on the ground that the restriction upon the ownership of the Lavino shares had the effect of depriving them of value; or that if the shares are to be regarded as having value it was no more than the one-third of book value on the preceding December 31, 1936. The Commissioner's determination *1055 is based upon a value of $43 a share, which he arrives at by using the 75 percent provision of the contract, applying it to book value on December 31, 1937, and "excess earnings available on common stock."
The evidence does not, in our opinion, require a holding that the Commissioner's determination of the value of the gift if too high. A restriction upon the right to dispose of shares, imposed by agreement upon the owner, *1244 does not, as a matter of law, deprive the shares of value, ; certiorari denied, ; . , does not require a departure from this view. In holding that the shares there under consideration were without fair market value, the Court relied on a conjunction of "their highly speculative quality" and "the terms of a restrictive agreement making a sale thereof impossible." Petitioner's shares had no highly speculative quality; E.J.Lavino & Co. was old, sound, and prosperous, and, so far as the evidence shows, its stock could be held with substantial assurance of safety. It was not subject to the hazards of a new enterprise, cf. , or danger of dissension among shareholders, cf. . The restriction did not make a sale impossible, although it narrowed the freedom of disposition. Without more, it did not deprive the shares of fair market value, *1245 ; ; ; affd., ; .
A more difficult problem is the determination of the value. Petitioner's insistence that it was no more than one-third of the book figure on December 31, 1936, presupposes his discharge for cause within one year from December 24, 1937, and the company's acceptance in 1937 of his obligatory offer to sell the shares to it at the stipulated price. The record indicates, however, that, while a possibility, such discharge was highly improbable. Petitioner had risen in the company's employ since his connection with it in 1919; his services were satisfactory, and his faculties were not impaired. The shares were given to him because he was recognized as a deserving officer; he has remained so ever since, and the entire record affirmatively indicates the probability of his continued employment and of the directors' disposition to respect his wishes concerning the shares. They approved of the transfer to a trust which*1246 was to continue the ownership after petitioner's death, and it can not be assumed that as a matter of course the company will accept the obligatory offer 75 percent of book value in the event of death, or at 50 percent or 33 1/3 percent, in the event of circumstances requiring it. The company was under no duty to buy the shares, as it had been under no duty to give the employee the *1056 shares in the first place, and if it should not accept an offer within one year after it was made, the restriction apparently was off.
In several cases the price at which shares had to be offered to others under restrictive agreements has been regarded as the limit of fair market value, ; ; ; . But the agreements considered in them were between parties who might be expected to press their bargaining advantage. In , the court thought "the possibility that the options would not be exercised seems too extravagant to require further*1247 refutation." Here, on the contrary, it seems unlikely that any event prior to petitioner's death will require the contractual offer and unlikely that it will be accepted even then. But, if acceptance be presumed, book value as of the close of the preceding year can not be foreseen, and hence no prospective sale price can be set.
The restrictive agreement may have lessened the value of a share, but it can not be said that such reduced value was less than the $43 which the Commissioner has determined. The company's common capital stock account, surplus, dividends paid, and reserve for doubtful accounts at the close of 1937 totaled nearly $2,600,000, which was over $51 for each common share; The dividends of a share and the sharp upward trend of earnings point to a greater value for an unrestricted share. In the absence of sales, the evidence shows plainly that $43 represents a very substantial allowance for the adverse effect of the restriction agreement.
The Commissioner's determination is sustained.
Decision will be entered under Rule 50.