*1036 Decedent and his sons agreed, in writing, to incorporate their partnership and agreed that decedent should hold 666 shares of common and the sons 333 shares of second preferred until decedent's death, at which time the sons were entitled to all the common and decedent's estate to all the second preferred. Decedent's will provided for transfer but required the sons to distribute two thirds of the corporation's undivided profits and surplus account to his estate, to which the sons agreed. Held, that decedent's interest in the 666 shares of common under the contract amounted to the value of the 333 shares of second preferred stock, plus two thirds of the corporation's undivided profits and surplus account.
*772 This proceeding involves a deficiency of $10,692.36 in estate tax. The question presented is whether there should be included in decedent's gross estate 1,000 shares of the second preferred stock of the Newman Manufacturing Co., as reported by the estate, or whether there should be*1037 included in lieu thereof 667 shares of second preferred stock, plus 666 shares of the common stock of that company.
FINDINGS OF FACT.
The decedent, Samuel Newman, died October 8, 1928, and the petitioners herein are the duly appointed executors of his estate.
For a number of years prior to his death Samuel Newman had been engaged in the manufacture of ornamental bronze and architectural metal work in Cincinnati, beginning his business in a small way and developing it in conjunction with his sons to a comparatively large business. The decedent had taken his sons into the business when they were quite young, increasing their duties and responsibilities from time to time until they were actively conducting the business as executives.
The business was started in 1903 as the Newman Manufacturing Co., an Ohio corporation. In 1915 this corporation was dissolved and the business operated thereafter until 1920 by decedent as a sole proprietorship. In January 1920 a partnership was started under an oral agreement between decedent and his three sons upon the basis of a one-fourth division of the profits to each partner. *773 The partnership continued until January 1, 1925, when*1038 the business was incorporated.
At the time the partnership was formed the decedent's sons had made no capital contributions, the capital of the partnership amounting to $44,412.75, which was the net worth of Samuel Newman as a sole proprietor, as of December 31, 1919. At December 31, 1920, the capital accounts of the partners were as follows:
| Samuel Newman | $56,275.97 |
| Sidney J. Newman | 9,069.62 |
| Emil C. Newman | 9,180.99 |
| Walter J. Newman | 9,538.65 |
The net profits of the partnership for the period of its existence, after deducting salaries, were as follows:
| Heating division, | ||
| Year | Profits | loss in addition |
| 1920 | $46,592.46 | |
| 1921 | 21,631.93 | |
| 1922 (loss) | (14,550.83) | $5,479.16 |
| 1923 | 30,547.62 | 1,015.24 |
| 1924 | 52,564.54 | 4,630.78 |
The total net earnings of the partnership exclusive of the losses of the heating division amounted to $136,785.72, or an average of $27,357.14.
The parties stipulated that the records of the partnership for the years 1920 to 1924, inclusive, show that the income was distributed upon the basis of 25 percent to each partner.
Prior to the beginning of the partnership the sons had been paid very meager salaries*1039 by their father, who wanted the business to grow out of the earnings. He told his sons that they were really working for themselves, that eventually they would be the owners of the business, and that the earnings should be left in the business. During the existence of the partnership the sons drew money for their personal expenses, but left the balance of their profits in the business as their father suggested.
At the end of the partnership, and as of January 1, 1925, the total invested capital of the several partners was $152,078.14. The investment accounts of the several partners were as follows:
| Samuel J. Newman | $68,230.69 |
| Sidney J. Newman | 28,075.82 |
| E. C. Newman | 28,211.34 |
| Walter C. Newman | 27,560.29 |
In addition to the foregoing investment accounts of the partners, each partner had a personal account. As of the date of incorporation the personal accounts of the three sons were overdrawn. In *774 order to wipe out these overdrafts the tenth paragraph of the contract between the partners, which contract is hereinafter more fully considered, provided for a $2,000 credit to each of the partners. These credits were made in the partnership books*1040 in the accounts of each of the partners prior to closing the partnership books and drawing down the equities of each partner in the business.
Prior to entering into the agreement of January 6, 1925, the partners had numerous conferences in the office of their attorney, who represented each of the partners individually, relative to the rights of each of them under the proposed incorporation of the business. The sons took the position that they were each entitled to one fourth of the common stock and entitled to preferred as their interests appeared in the invested capital of the partnership. Samuel Newman was unwilling to give his sons full control. He was willing to incorporate and forego partnership rights, if a distribution of stock could be made so as to give him control during his lifetime, or until he retired. At the same time decedent wanted the preferred stock to secure permanency of investment and a steady income for those dependent upon him. The sons finally agreed to give the father control until he died or retired, because they saw possibilities in the business and felt that the arrangement was temporary, since their father was then 72 years of age.
The contract*1041 of January 6, 1925, providing for the incorporation of the partnership business, was drafted by counsel as a result of these conferences and discussions in his office. The pertinent portions of this contract read as follows (the first party being the decedent, and the second, third, and fourth parties, the sons):
The second, third and fourth parties hereto agree that the second preferred stock which they receive in the corporation to be formed shall not be sold, transferred, mortgaged, pledged or conveyed by them during the lifetime of the first party hereto, it being the intent and purpose that said stock must be so held by the second, third and fourth parties hereto so that upon the transfer to them of the common stock held by the first party hereto with the exception of the one share necessary to qualify Joseph L. Meyer as a fifth stockholder and director they will be able immediately upon such transfer to them of said common stock to transfer all their right, title and interest in the second preferred shares held by them to the first party or to the estate of the first party hereto or to whomsoever the first party may designate by his last will or otherwise.
The first party*1042 hereto agrees that, on his death should he not have transferred during his lifetime to the second, third and fourth parties hereto the common shares held by him in the corporation and which are two-thirds of the common stock of the company less the one share held by Joseph L. Meyer as the fifth stockholder, there shall be transferred by the executor or administrator of his estate to the second, third and fourth parties the common stock held by him in said corporation and which common stock of said corporation shall be the two-thirds of the common stock capitalization less however the one share held by Joseph L. Meyer as a stockholder, it being the intention of *775 all of the parties hereto that on the death of the first party, the second, third and fourth parties shall become the sole owners with the exception of the one share necessary to qualify the said Joseph L. Meyer as the fifth stockholder and director, of all of the common stock of said corporation whatever its ultimate capitalization may be, and the first party's estate shall own and control all of the second preferred stock of said corporation whatever its ultimate capitalization, the first party to dispose of said*1043 second preferred stock after his death by will or in such a manner as he sees fit. The first party agrees that in order to carry out this agreement, should he die without having already transferred said common shares to the second, third and fourth parties in his lifetime, he will so provide by his will for the transfer of said shares to the second, third and fourth parties hereto.
The second, third and fourth parties hereto agree, having received all of the common stock owned by the first party either in his lifetime or in his death, either through the last will and testament of the first party or otherwise, except the one share held by Joseph L. Meyer, that they will make no claim either as heir or next of kin of the first party against any of the second preferred stock of said corporation so that the first party may be free to dispose of said second preferred stock in any manner he sees fit.
It is further agreed between the parties hereto that in view of the fact that the partnership business is indebted to the various parties hereto for money loaned and for profits undistributed that they will credit the partnership and the corporation to be hereinafter formed on account*1044 of the money so due them to the extent of two thousand ($2,000.00) dollars each.
The corporation to be hereinafter formed is to have transferred to it all of the assets of the former partnership and said corporation is to assume all liabilities of said partnership except that due the first, second, third and fourth parties hereto which liabilities due the first, second, third and fourth parties are extinguished and deemed satisfied by the credit given each of the parties for the sum of two thousand ($2,000.00) dollars each as hereinbefore provided and the issuance of the first preferred stock to the first, second and third parties hereto.
Other portions of the contract provide for the organization of an Ohio corporation with a capitalization of $50,000 first preferred stock, $100,000 second preferred stock, $100,000 common stock; set forth the character, privileges, benefits, and rights of the different classes of stock; declare an intention that the common and second preferred stock shall always be of the same amount except in case of common stock dividends; provide for payment of insurance premiums on the lives of the sons by the corporation and in case of the death of any*1045 of them, the survivors to have the right to acquire deceased's stock at corporate book value, the proceeds of the insurance to apply against the purchase price; in case of dissatisfaction on the part of any of the boys, a method of purchasing his interest by others is provided for; provision is made for salaries, the amount thereof payable to each of the former partners by the corporation; the sons agree to devote all of their time to corporation business while drawing salaries from it; the parties for themselves, their heirs, executors, and administrators agree to do or cause to be done all things necessary to comply with the agreement. Provision was *776 also made for the issuance of the capital stock as hereinafter described.
The corporation was formed in accordance with the provisions of the foregoing contract of the partners, the articles of incorporation being filed in the office of the Secretary of State of Ohio on January 14, 1925. Up to the date of decedent's death there was no amendment of the corporate charter. The capital stock was in the amounts and classes set forth in the agreement of January 6, 1925, and was issued as follows:
First preferred stock:
*1046 476 shares to Samuel Newman
12 shares to Sidney J. Newman
12 shares to Emil C. Newman
Second preferred stock:
667 shares to Samuel Newman
111 shares to Sidney J. Newman
111 shares to Emil C. Newman
111 shares to Walter J. Newman
Common stock:
666 shares to Samuel Newman
111 shares to Sidney J. Newman
111 shares to Emil C. Newman
111 shares to Walter J. Newman
1 share to Joseph L. Meyer (qualifying share)
There were no transfers of shares between the date of issuance and the date of decedent's death as to any class of stock, except the first preferred in which transfers were made from time to time for retirement of 10 percent of this stock each year in accordance with the agreement and charter provisions. After decedent's death transfers of common stock occurred on December 7, 1928, when 222 shares were transferred to each of decedent's sons out of his original certificate for 666 shares. Also on December 7, 1928, transfers of 111 shares of second preferred stock were made by each of decedent's sons to the estate of Samuel Newman.
The will of Samuel Newman, dated March 17, 1928, provided for carrying out the provisions of paragraph "Fifthly" of the*1047 agreement of January 6, 1925, hereinabove set forth, by item nine thereof, which states:
Having entered into a contract on the 6th day of January, 1925, with my sons, Sidney J. Newman, Emil C. Newman and Walter J. Newman, wherein I agreed that, on the incorporation under the laws of Ohio of the business of The Newman Manufacturing Company, I would on my death give to my said sons, Sidney J. Newman, Emil C. Newman and Walter J. Newman, all of the common stock in said company of which I may be the owner and which was fixed by said contract at two-thirds of the common stock less one share thereof to Joseph L. Meyer, I hereby order and direct my executors hereinafter named, *777 as soon as possible after my death, to transfer and convey to my said sons, Sidney J. Newman, Emil C. Newman and Walter J. Newman, said shares of common stock, less the one share in the name of Joseph L. Meyer, and if any of my aforesaid sons shall have died before I do, then to the estate or estates of such deceased son or sons or their widows or next of kin; however said transfer of my common stock shall not be made by my executors until said Sidney J. Newman, Emil C. Newman and Walter J. Newman, or*1048 in case of their death, their widows and (or) next of kin transfer and convey to my executors and trustees hereinafter named the shares of second preferred stock held by them in The Newman Manufacturing Company, an Ohio Corporation, and which shares must amount to one-third of the second preferred stock issue of said company and further my executors hereinafter named shall not transfer my common stock until said Sidney J. Newman, Emil C. Newman and Walter J. Newman or in case of their death, their widows and (or) next of kin cause The Newman Manufacturing Company to distribute to my estate as hereinafter provided two-thirds of the accumulated surplus and undivided profits to the credit of The Newman Manufacturing Company at the time of my death, said accumulated surplus and undivided profits having been established through my efforts and desire during my lifetime as I, being the majority stockholder of the said The Newman Manufacturing Company and the founder of said business, desired that The Newman Manufacturing Company accumulate as large a surplus and undivided profit account as possible for the furtherance of the business and for that reason did not cause The Newman Manufacturing*1049 Company to distribute the greater portion of its earnings from time to time to myself and the rest of the stockholders as dividends.
By item eleven of his will Samuel Newman gave and bequeathed his two thirds of the undivided profits and surplus account of the Newman Manufacturing Co. to his six sons and daughters in equal parts.
At a special meeting of the stockholders of the Newman Manufacturing Co., held on November 27, 1928, "to take care of the moneys due the estate of Samuel Newman, deceased", it was determined to issue third preferred stock in the amount of $140,000 to satisfy the obligations of the corporation to the decedent, which obligations amounted to $113,473.28 for moneys loaned and advanced and salaries not drawn, plus $52,960.86 as decedent's share in the accumulated profits and surplus account. At this meeting the sons waived their claim to one half of the $52,960.86 bequeathed by item eleven of the decedent's will.
The estate tax return included 1,000 shares of second preferred stock at a value of $100,000 in the gross estate, but failed to include therein any value for common stock of the Newman Manufacturing Co. or the value of any interest therein, if*1050 any, owned by decedent at the date of his death. The respondent determined that decedent owned only 667 shares of second preferred stock, valued at $66,700, but that he owned 666 shares of common stock in the company, which respondent value at $525 a share in computing the value of decedent's gross estate.
*778 OPINION.
ARUNDELL: Section 302 of the Revenue Act of 1926 provides that:
The value of a decedent's gross estate shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated -
(a) to the extent of the interest therein of the decedent at the time of his death;
* * *
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * *
Petitioners contend that, since the statute includes in the gross estate only decedent's interest in the 666 shares of common stock, no value is includable because the contract of January 6, 1925, effected*1051 a bona fide sale of decedent's interest for an adequate and full consideration in money's worth.
Respondent contends that, since the stock stood in decedent's name on the corporation's books and was continuously in decedent's possession until he died, decedent was the owner thereof and the value of the shares should be included in decedent's gross estate. Respondent points to the provisions in decedent's will requiring the distribution of two thirds of the corporation's undivided profits and surplus account to his estate before transfer of the common stock, as corroborative of decedent's ownership of said 666 shares.
In the final analysis the real question here is the extent of decedent's interest under the contract. What were his rights and obligations thereunder? Did his interest amount to absolute ownership of the entire 666 shares of common stock, or was it something less than that? Decedent's executors fixed the amount of his interest as $33,300; the respondent fixed the amount of decedent's interest as $349,650, based upon a valuation of $525 per share for the common stock. In other words the executors claimed that decedent's interest in the 666 shares of common amounted*1052 to no more than the 333 shares of second preferred stock that he was entitled to receive under the contract. Respondent ignores any contract right in decedent to the 333 shares of second preferred, holding that his interest in the common is the full value thereof.
There can be no doubt from the record as to the intent of the partners. The preliminary discussions and the contract of January 6, 1925, establish the intention to be an ultimate exchange of second preferred for common, so that the sons would hold all the common and the father all the second preferred. Furthermore, the record is clear that the parties themselves understood that this was the *779 agreement as manifested by the transfers of December 7, 1928, which accomplished the results previously agreed upon.
Obviously, under the contract, decedent held legal title to the common stock. He had continuous possession of the 666 shares and exercised the privileges with respect thereto. However, it cannot be denied that the sons acquired an equitable title to the stock in consideration for their consent to the stock distribution agreed upon, and waiver of any claim against decedent's estate as to the second*1053 preferred stock. At the time the sons agreed to the terms imposed by their father, they collectively owned approximately 55 percent of the partnership capital. By the terms of the contract which they accepted, their collective interest was reduced to 28 percent of the entire capital stock of the corporation until retirement of their father from the business, or until his death. This detriment to the sons was certainly sufficient consideration to support the proposition that the sons purchased the common stock, delivery to be made in futuro.
If decedent had failed to provide in his will for the transfer, the sons could have compelled the transfer by an action for specific performance. The proposition is laid down in ; , that agreements to devise when founded upon a consideration will be enforced and the heir to whom legal title descends holds it in trust for him to whom it should have been devised. See also ; *1054 ; ; .
In , A contracted to trade cotton for B's mules, the cotton to be delivered by A to C's warehouse, C to sell the cotton and forward the proceeds to B in the amount of the price agreed upon for the mules. B delivered the mules to A, who commenced hauling the cotton to the depot for shipment to C. After delivery of the cotton to the depot but before shipment, A suddenly died. It was held by the court that B had acquired an interest in the cotton to the extent of the price of the mules, that this amount was not assets of A's estate for distribution, and that a court of equity would direct so much of the proceeds of the cotton as equaled the price of the mules to be paid to B.
In , an uncle and his nephew entered into a partnership agreement for the practice of medicine, which provided, inter alia, that upon the senior partner's (uncle) death all his property went to the junior partner. The court held that the agreement was neither a deed*1055 nor a will, but an executory agreement "which determines the rights of parties inter se" and provides for disposition of partnership property upon the happening *780 of a certain event. The court stated further that it is well settled that an agreement upon a valuable consideration to give to another the whole or part of his property at the promissor's death will be specifically enforced in equity both as to real and personal property, if the consideration is duly rendered by the promisee.
One of the leading cases upon the foregoing propositions of law is ; . In this case one sister covenanted in writing with another that if the latter would reside with her as long as she desired that she would give and bequeath to her all the property, real and personal, of which she should die seised. Mary Darling accepted her sister's offer and lived with her until the latter's death, who died without making a will or conveying the property in any way. The Supreme Court of Ohio held that at the death of her sister, Mary Darling was the equitable owner of the property of which her sister died seised, and*1056 in specific performance of the contract was entitled to a conveyance of the legal title from the heirs of her deceased sister.
These decisions, in our opinion, point to the solution of the present issue. The decedent under the contract was the equitable owner of the 333 shares of second preferred held by his sons, and the latter were the beneficial owners by the same contract of the common stock held by their father. Actually the contract separated the legal and equitable titles to a portion of the second preferred, and to a portion of the common stocks between the father and sons, with reciprocal obligations on each to exchange said stocks upon the happening of an event certain to occur but uncertain as to time of occurrence.
By the terms of the contract the decedent obtained an indefeasible interest in the 333 shares of second preferred held by his sons, and the latter obtained a similar interest in the 666 shares of common held by their father. Decedent's will clearly recognized the interests created by the contract of January 6, 1925, and provided for the carrying out of its terms.
The net result of the contract between decedent and his sons was that upon death there*1057 was available for distribution as a part of decedent's estate the second preferred stock, some of which then stood in the decedent's name and the balance of which the sons were bound to and did transfer to the decedent's estate. It may plausibly be argued that the father had some interest in the common stock by reason of its standing in his name at the time of death. However, it is immaterial whether we say that his interest in the corporation is measurable in part by some interest in the common stock plus some interest in the preferred stock held by the sons, or entirely by the second preferred stock. The result is the same either way. If he had an interest in the common stock it would be offset by an enforceable *781 claim of the sons for the stock, which would leave no value for that stock for estate tax purposes, and if he had some interest in the second preferred while it stood in the names of the sons, that became merged in the whole value when upon death the sons became obligated to transfer it to the estate. So, any way that the matter is approached the extent of the decedent's interest in the stock of the corporation was no more than the value of the 1,000 shares*1058 of second preferred stock, to which both the parties have assigned a value of $100 per share.
Whether or not decedent as a matter of right was entitled to an interest amounting to $52,960.86 in the corporate surplus and profits, the acquiescence of the sons in the distribution of that amount to the estate made it a part of the estate and it should be included for the purpose of the Federal estate tax.
Reviewed by the Board.
Decision will be entered under Rule 50.
MURDOCK and MCMAHON concur in the result.