*2619 Decedent's will bequeathed his entire estate to his wife with the reservation that if she remarried she should properly provide for his children. Suit was brought by the widow, individually, and as administratrix for construction of the will. The Court of Appeals for the State of Kentucky held that by the terms of the will the widow should have an absolute estate if she remained unmarried, but if she remarried, she should make "proper provision" for the testator's children. The petitioners herein, children of testator, received from their mother certain shares of stock in a company, which was liquidated the same day. The widow never remarried. Held that the transfer of the stock was essentially a gift from the mother and that no gain resulted from the liquidation.
*187 In these proceedings, which have been consolidated, the petitioners seek a redetermination of their income-tax liability for the calendar year 1920, for which year the respondent has determined a deficiency of $1,291.90 as to each.
*188 The petitioners allege that the respondent*2620 erred in including the gross income of each a profit of $8,070.42, resulting from the liquidation on June 30, 1920, of the Keyser Coal Co. The respondent determined that the petitioners each inherited from their father 41 2/3 shares of the capital stock of the Keyser Coal Co.; that the fair market value of the stock on the date of the father's death (January 11, 1918) was $521.18 per share; that the fair market value on the date of liquidation (June 30, 1920) was $714.87 per share; and that the increase in value of $193.69 per share, or $8,070.42 for the 41 2/3 shares, represented taxable income to each of the petitioners. The petitioners contend that each of them received 41 2/3 shares of stock on June 30, 1920, immediately preceding the liquidation of the corporation, as a gift from their mother, and that the basis for determining gain or loss on the liquidation would be the value at the date of gift, which value was equal to the value of the property received in liquidation, and that, therefore, they realized neither gain nor loss on the liquidation. The facts have been stipulated.
FINDINGS OF FACT.
The petitioners are individuals residing in Patton, Pa., and are children*2621 of John F. Prindible, who died testate on January 11, 1918, a resident of Johnson County, Kentucky.
The will of John F. Prindible was duly made and executed on February 9, 1914, and filed in the Probate Court of Johnson County, on February 4, 1918. It read as follows:
I, the undersigned, having complete confidence and that she was largely instrumental in accumulating the entire amount of my estate do hereby bequeath to my wife, Ada Hager Prindible, all my personal and real property feeling confident that she will make a fair allowance to my daughter, Hazel A. Prindible, of Washington, D.C., and properly provide for Loretta Hager Prindible, my daughter and John Prindible my son, both the latter children by her. I make no restriction on her re-marrying, except in case she does she shall at once make proper provision for my children. In other words, I want my brother, George E. Prindible, of Patton, Pa., to be made Administrator and in case he would not serve, for him to have a proper one in his judgment to be appointed. Said administrator to allow Ada Hager Prindible a sum not to exceed $600.00 per year, if she wishes same, and said administrator to pay Hazel A. Prindible the*2622 sum of three thousand dollars in cash or good security.
(Signed) J. F. Prindible.
The surviving widow, Ada Hager Prindible, was appointed administratrix, with the will annexed, of the estate of the decedent.
On March 8, 1918, the appraiser of the estate appointed by the Probate Court of Johnson County, Kentucky, placed a value of $25,000 on the 125 shares of stock in the Keyser Coal Co. which were owned by the decedent at the time of his death. This stock, together *189 with other personal property, constituted all of the personal property of the decedent, the total appraisement on which was $51,600.
An action was instituted in the Circuit Court of Johnson County, Kentucky, by Ada Hager Prindible in her capacity as administratrix, and as an individual against Loretta Hager Prindible and John F. Prindible, Jr., the petitioners herein, children and sole issue of her marriage with the testator, and Hazel A. Justice, adult daughter of a former marriage of the testator, for construction and interpretation of the will. The court held that the widow, Ada Hager Prindible, took an absolute estate in the property devised and bequeathed. The guardian ad litem for John*2623 F. Prindible, Jr., appealed to the Court of Appeals (highest court in Kentucky), which court, in the case of ; , reversed the lower court and held that the testator clearly intended that his wife should have an absolute estate if she remained unmarried, but if she remarried, she should make proper provision for the testator's children and that "if at any time the widow desires to marry she should ask the chancellor to construe the will and determine what is a suitable provision for the children."
On June 30, 1920, immediately preceding the liquidation of the Keyser Coal Co., Ada Hager Prindible transferred 41 2/3 shares of the stock of that company to each of the petitioners herein. On July 17, 1920, she filed with the Johnson County Court her final report entitled "Settlement And Final Discharge of Administratrix," wherein she referred to the above transfers as follows:
Individually and as administratrix aforesaid, she has caused transfer of the 125 shares of Keyser Coal Co. stock to be made as follows:
| To herself | 41 2/3 shares |
| To Loretta H. Prindible, Daughter | 41 2/3 shares |
| To George E. Prindible, Trustee, interest for the | |
| sole use and benefit of John F. Prindible, Jr., | |
| son | 41 2/3 shares |
*2624 The appraised value of said shares was $25,000.00 which added to appraised value of the other shares herein set forth, shows complete and entire payment and distribution of the estate chargeable in first instance to her as administratrix aforesaid, and the voluntary settlement upon and for the use of Loretta H. Prindible and John F. Prindible, Jr., of one-third, each in kind, of the Keyser Coal Company stock and the principal asset of the said estate.
She herewith files receipts showing receipt of said shares by and on behalf of her said children, as also the statement in writing of Loretta Prindible, adult daughter, of her own approval of the terms of this paper as settlement. (Italics supplied.)
The receipt for the shares of the stock in question, given on behalf of John F. Prindible, Jr., is dated June 30, 1920, signed by George E. Prindible, Trustee, and reads as follows:
Received of Ada H. Prindible, Certificate No. - for Forty-one and two-thirds (41 2/3) shares of the Capital stock of the Keyser Coal Co., as given and transferred *190 by her to the undersigned Trustee of John F. Prindible, Jr., to be held under the trusts of an instrument dated June 30, 1920, as*2625 Trustee upon the trust therein mentioned.
The part of the "receipt" and "statement in writing" of Loretta H. Prindible which is material here is as follows:
KNOW ALL MEN BY THESE PRESENTS:
That I, Loretta Prindible, adult daughter of John F. Prindible and Ada Hager Prindible, hereby acknowledged to have received Certificate No. - for forty-one and two-thirds (41 2/3) shares of the Capital Stock of the Keyser Coal Co., a corporation, as gift by and from said Ada Hager Prindible, and accepting same, do hereby release and forever acquit and discharge said Ada Hager Prindible, as administratrix, her and his personal representatives, from further accounting or liability to account to me as one of the children of said John F. Prindible, deceased, and especially so discharge her as administratrix aforesaid, her successor or successors in said trust, and individually as widow and legatee under the will of my said deceased father, bearing date February 9, 1914, and in particular, release and discharge her as administratrix aforesaid and individually, of all obligation to provide or make settlement or provision whatever, for settlement of any matter or thing of value in the contingency*2626 set forth in the said will, and construed by the opinion of the Court of Appeals of Kentucky, rendered on the 16th day of December, 1919, reported pages 583-4, 216, Southwestern reporter, a copy of which I acknowledge to have received and read, and also of and from any claim or demand whatsoever, either I, my heirs, personal representatives or assigns have, ever had, or could have or assert against the said Ada Hager Prindible, as administratrix aforesaid, or individually as heir at law, devisee, legatee or distributee of the estate of John F. Prindible, deceased. (Italics supplied.)
On June 30, 1920, and immediately after the transfer of the stock as outlined above, the Keyser Coal Co. was dissolved and the business was thereafter conducted as a partnership consisting of the mother and the two petitioners with each individual owning a one-third interest in the partnership.
The fair market value of the stock of the Keyser Coal Co. on January 11, 1918, and June 30, 1920, was $521.18 and $714.87 per share, respectively.
Ada Hager Prindible has never remarried.
OPINION.
GREEN: The respondent has determined the deficiencies here in question on the theory that the petitioners*2627 each inherited the 41 2/3 shares of the stock of the Keyser Coal Co. from their father on January 11, 1918, and that the basis for determining gain or loss on the liquidation was the value of the stock on January 11, 1918. In his brief the respondent apparently abandons the theory upon which his determination was based, and now contends that the stock in question was transferred to the petitioners by their mother, in consideration of the release by them of any claims which they might *191 have against her; that the cost of such claims represents the basis for determining gain or loss on the liquidation; that there has been no showing by the petitioners as to the cost of the claims relinquished; that the burden of proof was upon the petitioners; and that they should, therefore, have judgment rendered against them for lack of proof.
The petitioners contend that the transfer of the stock by the mother, on June 30, 1920, was an absolute gift by her to her children; that the basis for determining gain or loss on the liquidation is the fair market value of the stock on the date of the gift; and that, since the value of the stock on that date was equal to the value of the petitioners' *2628 interest in the succeeding partnership, there could be neither gain nor loss from the liquidation. As an alternative, the petitioners further contend that the basis for determining subsequent gain or loss on a distribution to a beneficiary, either on a vested or contingent interest, is that value of the personal property on the date of distribution and not on the date of death of the decedent, and cites .
Section 213(b)(3) of the Revenue Act of 1918, specifically excludes from gross income "the value of property acquired by gift, bequest, devise, or descent."
The reorganization of a business by dissolving a corporation and transferring its capital and surplus to a partnership, the members of which have the same proportionate interests, results, under the 1918 Act, in the realization of gain or loss to the stockholders in the from of a liquidating dividend. .
Section 201(c) of the Revenue Act of 1918, provides that "Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby*2629 shall be taxed to the distributee as other gains or profits."
The basis for determining subsequent gain or loss on the disposition of property acquired by gift prior to January 1, 1921, is the fair market value of the property on the date of gift. ; .
In our opinion, the facts, when analyzed, resolve themselves into two separate transactions, each one of which should be tested for the purpose of ascertaining whether the petitioners realized a taxable gain or loss. The first transaction is that by which Ada Hager Prindible transferred the stock to the petitioners. Did the latter, at that moment, realize a taxable gain or sustain a loss? The second transaction occurred when the corporation was dissolved and liquidated. Did the petitioners, at that time, realize a taxable gain or *192 sustain a loss? We think both questions should be answered in the negative.
The first transaction was essentially a gift from the mother to the petitioners and as such is specifically excluded from gross income. Section 213(b)(3), supra.*2630 True, the petitioner, Loretta H. Prindible, signed a receipt for the stock, in which she forever released and discharged her mother from all claims she might have against her under her father's will, in case her mother remarried. But at the time of the transfer of the stock, the mother had not remarried and the petitioners had no vested claim against her individually or as administratrix. "A claim dependent upon a future contingency - on the happening of an event which may never happen - does not accrue until the event happens; until then, it is not a claim." . In , the United States Supreme Court distinguishes vested and contingent rights as follows:
A vested right is defined by Fearne, in his work upon Contingent Remainders, as "an immediate fixed right of present or future enjoyment;" and by Chancellor Kent as "an immediate right of present enjoyment, or a present fixed right of future enjoyment." 4 Kent Com. 202. It is said by Mr. Justice Cooley that "rights are vested, in contradistinction to be expectant or contingent. They are vested when*2631 the right to enjoyment, present or prospective, has become the property of some particular person or persons as a present interest. They are expectant, when they depend upon the continued existence of the present condition of things until the happening of some future event. They are contingent, when they are only to come into existence on an event or condition which may not happen or be performed until some other event may prevent their vesting." Rpinciples of Const. Law, 332.
We are of the opinion that until the mother remarried, the petitioners had nothing susceptible of valuation. The mother had an "absolute estate" in the property left by her husband, "subject to be defeated to the extent of a proper provision for his children in case she remarried." The transfer of the stock by her to the petitioners, on June 30, 1920, was entirely voluntary, and, in our opinion, constituted an absolute gift thereof to her children.
The second transaction resulted in neither gain nor loss to the petitioners. The fair market value, on June 30, 1920, of the stock of the Keyser Coal Co. received by each of the petitioners was $29,786.25, *2632 or $714.87 per share. This value was equal to the value of the petitioners' interest in the succeeding partnership. There was, therefore, no gain or loss to the petitioners, upon the dissolution and liquidation of the Keyser Coal Co.
Judgments of no deficiency will be entered for each petitioner.