*749 A father and son had been estranged for many years. The father was the majority stockholder of a corporation. The son was a valuable employee of the corporation. The father, in order to satisfy the demands of the son and retain his services for the corporation, gave the son an option to purchase his stock at his death at a price which was high in relation to current sales. The agreement could be and was changed by the mutual consent of the two. The son exercised the option and bought the stock at his father's death. Held, the excess of the fair market value of the stock at date of death over the option price was improperly included in the decedent's gross estate. Neither (c) nor (d) of section 302 applies.
*246 The Commissioner determined a deficiency in estate tax of $ 297,100.11. The principal issue is whether the value of the gross estate should include the value at the time of death of 50,830 shares of the common stock of the Driver-Harris Co. which the decedent had transferred to a trustee under an agreement made in 1924 and amended*750 in 1925 and 1926. The petitioners also claim that additional deductions should be allowed for executors' commissions, attorneys' fees, and a debt and an annuity which the decedent agreed to pay to his sister, Edith M. Bensel. A claim was also made for a deduction on account of an alleged debt due Amy Wright. The petitioners argue this latter point in their brief, but, since the point was expressly waived at the hearing and since the evidence is insufficient to support the claim in any event, it will not be discussed further. Other assignments of error made in the petition have been waived.
*247 FINDINGS OF FACT.
Frank L. Driver, Sr., the decedent, died testate in Belgium on August 26, 1930. He was then 60 years of age. He was at the time of his death a resident of East Orange, New Jersey. He was survived by his wife, Minnie E. Driver, his son, Frank L. Driver, Jr., two sisters, Edith M. Bensel and Mildred B. Tracy, and a brother, Wilbur B. Driver.
The decedent had spent a great deal of his time in conducting the affairs of the Driver-Harris Co. (hereafter called the company). That company was organized in 1899 by the decedent, his brother Wilbur, and several*751 others. It has since been engaged in the business of manufacturing nickel alloys and special alloy castings. The decedent was president and general manager of the company for a number of years up to July 1925. Thereafter, as chairman of the board of directors, he continued to exercise general supervision over the affairs of the company until his death. The outstanding common stock of the company from 1921 to 1929 consisted of 10,000 shares of common stock of the par value of $100 per share. The decedent owned 5,083 of those shares on May 19, 1924.
Frank L. Driver, Jr., the decedent's son, was born in 1892. The decedent deserted his wife and his son in 1902, left them without resources, and thereafter contributed nothing to their support except $35 a week which he was required to pay his wife as a result of an action brought for maintenance in 1910. The father and the son were never good friends during the period here involved. The father did not have a fatherly interest in or an affection for his son. Their relations were frequently unfriendly and at times openly hostile. The father refused to educate his son. The son, after repeated refusals, was employed in 1914 by*752 the company at a wage of $ 9 a week. He obtained this employment through the influence of his uncle, Wilbur B. Driver, then a vice president of the company. His employment by the company continued from that time to the date of the hearing. He became familiar with all of the business of the company. He gained a thorough knowledge of the methods of production and became an able executive. His compensation was increased from time to time, as he assumed more important duties. The decedent recognized his ability as time went on and realized that his services were of great value to the company. His salary in 1930 was $40,000.
A. Bensel, the husband of the decedent's sister Edith, was an official of the company. He was extremely unfriendly to Frank L. Driver, Jr., and, through his influence with the decedent, delayed, as much as possible, the advancement of the son. The son learned *248 in 1924 that Bensel was again planning to bring about his dismissal. He discussed the matter with his father, stating that he was dissatisfied with the conditions of his employment and demanded some guarantee from the decedent against dismissal. The decedent, some time later, advised the*753 son that after consultation with his attorney he had decided to sell all of his common stock to the son.
A conference was held between the decedent, his son, and their attorneys. This resulted in the execution of an agreement dated May 19, 1924. The decedent, by the terms of the agreement, transferred all of his common stock, 5,083 shares, to a trustee who was to receive the income and pay it to the decedent during his lifetime. The trust was to terminate in case the son predeceased the father. In case the father predeceased the son, the trustee was to pay the net income to the son and the son was to purchase the shares from the trustee at $ 65 per share. The purchase price of $ 330,395 was payable in fixed annual installments over a period of twenty years from the death of the decedent, with the privilege of paying larger amounts. The trustee was to transfer the stock to the son when payments had been made in full. All money received for the stock was to be paid by the trustee to the decedent's executors or administrators. There was no penalty if the son failed to make the purchase. The trustee was required to give the decedent during his lifetime the sole and exclusive*754 right to vote the stock. Thereafter this right was to be in the son until default. The agreement further provided that the decedent's personal representative, after his death, should pay his wife, Minnie E. Driver, an annuity of $ 3,000 during her life. It further provided that the decedent and his son "may at any time alter, modify or amend [the agreement] by an agreement in writing." Certificates for the 5,083 shares were endorsed in blank and delivered to the trustee.
The son, in the negotiations leading up to the agreement, had endeavored to have the purchase price fixed at less than $ 65 a share. The nearest sales were at a much lower figure. The father said that he had thoroughly considered the elements of value, in his opinion the stock was worth $ 65 a share, and the son could "take it or leave it" at that price. The son in 1925 persuaded his father to reduce the price, and on April 21, 1925, they modified the agreement by fixing the price at $ 34.428 per share. sales of the stock near that date were at lower figures.
The son was elected president of the company in 1925. When the Bensels then learned of the transfer of the stock by the decedent, Bensel resigned*755 as sales manager and a quarrel ensued between the decedent and his sister, Edith M. Bensel. In the latter part of 1925 Bensel expressed a desire to reenter the employ of the company. The decedent informed the son that he proposed to reemploy Bensel. *249 The son objected. The decedent thereupon stated that unless the son consented the decedent would vote him out of office at the next stockholders' meeting in March 1926.
The decedent was in Florida during February. The son on February 2, 1926, executed a new agreement between himself and the decedent. He did this upon advice of counsel and without the knowledge or consent of the decedent. He used for the purpose a power of attorney which the decedent had theretofore given him. The new agreement purported to modify the agreement of May 19, 1924, by providing that the voting rights in the stock should be exercised by the trustee during the lifetime of the decedent under written instructions given jointly by the decedent and his son, and the right of the son to purchase should survive and should be assignable by him or his estate even though he predeceased the decedent. When the decedent learned of this act, he reiterated*756 his intention to reemploy Bensel, refused to see his son, refused to discuss the matter with his son, and resented the son's attempt to prevent him from voting the stock. He filed suit on March 15, 1926, against the son and the trustee, to cancel all of the agreements, to enjoin the trustee from voting the stock, and to compel the trustee to execute an irrevocable proxy to the decedent. The controversy was finally settled after many conferences. A consent decree was entered rescinding the agreement of February 2, 1926, confirming the two earlier agreements, and directing repayment by the decedent to the son of a loan of $5,000. The decedent and the son on June 7, 1926, executed an agreement pursuant to the settlement further modifying their earlier agreements. The purchase price of the stock was changed to $ 59.02 per share, or a total of $300,000. A discount was to be allowed on any installment paid in advance. The rights of the son were not to terminate in case he predeceased his father. The trustees were required to vote the stock, for certain named persons as directors, and in some other matters, in accordance with the written directions of the decedent and his son. During*757 1926 sales of the stock had been made at prices ranging from $ 25 to $ 65 per share. The father had insisted that the price to the son should be fixed at $ 65, but finally agreed to the lower amount fixed in the agreement of June 7, 1926.
The par value of the common stock was reduced from $ 100 per share to $ 10 a share in November 1929, and the trustees received a new certificate for 50,830 shares. The corporation has paid no dividends on its common stock since 1921.
The son, after the death of his father, notified the trustees that he intended to purchase the stock and pay for it in full at once. He deposited $ 300,000 with the trustees. He could not agree with the trustees upon the amount allowable as a discount, and, upon their application, a declaratory decree was entered by the chancery court *250 on March 14, 1931, fixing the amount to be paid at $ 232,500. The trustees turned over that amount to the executors of the decedent's estate and returned the balance of the $ 300,000 to the son. The executors reported the $ 232,500 as a part of the gross estate. The respondent determined that the value of the shares at the date of death was $ 69.75 per share, and*758 increased the gross estate by $ 3,312,892.50 as "value of property transferred in excess of consideration paid." The parties have stipulated that the fair market value of the 50,830 shares at the date of death was $ 60 a share or $ 3,049,800. The agreement of May 19, 1924, as amended in 1925 and 1926, was a bona fide contract for the sale of the shares for an adequate and full consideration in money or money's worth.
The Commissioner, in determining the deficiency, allowed deductions of $ 11,244.24 for executors' commissions and $ 10,000 for attorneys' fees out of deductions claimed in the amount of $ 18,721.10 as executors' commissions and $ 18,700 as attorneys' fees. The probate court, after the determination of the deficiency, approved the final account of the executors and authorized payment of $ 4,554.55 for executors' commissions and $ 10,000 for attorneys' fees out of the balance of the estate remaining for distribution.
The decedent, after deserting his wife and son in 1902, lived with his sister, Edith M. Bensel, until 1912. He maintained a home of his own from 1912 until he went to Europe in 1926, but spent much of his time with the Bensels, who set aside a room*759 in their house for his exclusive use. Edith M. Bensel supervised the furnishing and maintenance of the decedent's home and his farm. She assisted in the entertainment of his business guests. She was a stockholder of the company, took an active interest in its business, and discussed its affairs with the decedent. The decedent agreed orally in 1917 to pay her $ 5,000 a year for her services. He never made any payments pursuant to this agreement but frequently made gifts to his sister. After he went to Europe, his sister attended to most of his business affairs, using a general power of attorney from the decedent. She visited him in Belgium in August 1927, at which time he entered into a written contract to pay her $ 10,000 on October 1, 1927, and $ 5,000 annually thereafter during her life. The consideration was stated to be past services and the continued administration of his business and personal affairs in the United States during his life. The agreement provided that the payments should be a first lien on his salary from the company and on all sums received by his estate under the agreement with his son of June 7, 1926. The only amount paid under this agreement was $ *760 3,000, which the sister retained out of the decedent's salary. She was born in 1879. The executors deducted on the estate tax return as debts due by the decedent to Edith M. Bensel the amounts of $ 25,000 and $ 60,895.95. The latter amount was described *251 as "annuity under contract of August 6, 1927." The commissioner disallowed the deductions.
This sister, as a result of her services and the contract of August 6, 1927, had a bona fide claim against the decedent's estate at the time of his death. The extent to which this claim was incurred or contracted for an adequate and full consideration in money or money's worth was $ 15,000.
OPINION.
MURDOCK: The Commissioner contends that the stipulated value at the date of death of the 50,830 shares of common stock of Driver-Harris Co. was properly included in the decedent's gross estate. His first contention is that section 302(d) of the Revenue Act of 1926 is authority for including these shares. It provides that the value of the gross estate shall include the value at the time of 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, *761 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." He also contends that the property may be included under section 302(c) as a transfer in contemplation of or intended to take effect in possession or enjoyment at or after death. Both provisions have the following exception: "except in case of a bona fide sale for an adequate and full consideration in money or money's worth." The decedent transferred the shares in question to a trustee. Apparently the transfer was irrevocable, but the enjoyment of the interest was subject at the date of his death to change through the exercise of a power by the decedent in conjunction with his son to alter, amend, or modify the agreement. If it should be decided that this was a case of a bona fide sale for an adequate and full consideration in money or money's worth, neither (c) nor (d) of section 302 will be applicable. For this purpose it may be assumed that the language of (d) is broad enough to cover this transfer (see, however, *762 ), and under such circumstances the questions of whether or not the transfer was in contemplation of death or was made to take effect in possession or enjoyment at or after death need not be decided.
Before deciding the question of consideration, it may be proper to state that there is a great deal of evidence in this record relating to the question of contemplation of death. Evidence of the decedent's state of health shows that he enjoyed good health and was quite active up to January 1925. He suffered at that time a hemiplegic attack which resulted in partial and temporary paralysis. His recovery was rapid, the paralysis disappeared, and he soon returned *252 to his duties. He intended to procure a divorce and remarry. He made a will on June 8, 1926, which was admitted to probate after his death. He stated in the will that he made no provision therein for his son or for his wife because of other provisions which he had theretofore made for them. The evidence does not disclose that he had made any provisions for them other than those contained in the agreement of May 19, 1924, as amended. The proceeds of the sale*763 of the stock to his son were bequeathed to certain persons in stated proportions. He also bequeathed specific property and a large part of the proceeds of the sale to the woman he intended to marry, in case she should be his lawful wife at the date of his death. No provision had been made for her in previous wills. He went to Europe in July 1926 for recreation and also for business purposes. He never returned to the United States, but he kept in close touch with the business of the company, and the officers and directors visited him regularly to discuss matters of business. He continued to receive his salary of $ 33,000 a year. There is also evidence of the earnings and of the assets of the company. This evidence has been carefully considered, but we have deemed unnecessary a statement of it in the findings of fact.
The provisions of sections 302(c) and (d) were remedial legislation enacted to prevent the evasion of estate taxes. The Supreme Court said in :
The purpose of Congress in adding clause (d) to the section as it stood in an earlier act was to prevent the avoidance of the tax by the device*764 of joining with the grantor in the exercise of the power of revocation someone whom he believed would comply with his wishes.
The same Court in , referring to transfers in contemplation of death and transfers intended to take effect at or after death, said:
The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. They do not apply where a decedent at the time of his death owns property which is subject to an option to purchase by one not the object of his bounty. In that case the decedent's interest in the property can be included in his gross estate at no more than the option price. ; . Cf. ; affd., ; . The respondent contends that the son was the object of his father's bounty, the price fixed was much less than the value of the stock, and to the extent of the*765 excess value the transfer falls within section 302. If the decedent had *253 entered into the contracts in question with an employee in whom he was interested only because of the man's value as an employee, there would be no justification for including in the decedent's gross estate the fair market value of the shares when in fact this person could obtain the stock from the estate on payment of $ 232,500. Yet the decedent would have retained the power to alter or amend in conjunction with this other party. The petitioners contend that Frank L. Driver, Jr., was in no sense the object of his father's bounty, but was only a valuable employee of the company. They point to the unfriendly relations between this father and son and say that the interests of these two persons were adverse and they dealt at arm's length in reaching their agreements. There is reason to believe that the terms which the son obtained in these agreements with his father were no more favorable than he might have obtained had he not been related. The two were constantly bargaining over the price. There is no indication that the decedent had the slightest fatherly interest in or affection for his son. *766 The record as a whole indicates that the father's only reason for desiring to retain the services of the son was that he recognized, as time went on, that the son was the most able man in the employ of the company. The stock was not dealt in extensively prior to 1929, and such sales as there were indicate that the price agreed upon between the father and son was not too low. That is, it was not lower than the price at which persons with adverse interests dealing at arm's length might have been expected to have agreed. The obvious reason for the contracts was that the son was demanding protection and the father realized that the corporation, in which he was the largest stockholder, would lose the services of a valuable employee unless the agreements were entered into.
The agreement gave the son an option to purchase the stock at a certain price immediately after the father's death. Although the actual purchase price was much less than the fair market value of the stock at the date of the decedent's death, when the purchase was made, an increase in value was a circumstance which was within the reasonable contemplation of the parties at the time they entered into the agreement. *767 The increase in value of the shares was probably due in this case to the increased use of radios, in which the products of the company were used. The possibility of increase in the value of the shares may have induced the son to enter into the contract. The adequacy of the consideration must be measured at the time the contract was entered into rather than at the time the option was exercised. The consideration in this case was full and adequate in money or money's worth. The contract originally entered into finally ripened into a bona fide sale for an adequate and full consideration in money or money's worth. It was not a substitute for testamentary *254 disposition nor a device for avoiding estate tax. Thus the transfer to the trustee was within neither the letter nor the spirit of section 302(d) or (c). This is so either because there was a bona fide sale for an adequate and full consideration in money or money's worth or because the circumstances are wholly without the intendment and purpose of the provisions of section 302. This case is like the Wilson and Lomb cases, supra.
The petitioners contend that the Commissioner allowed an insufficient deduction*768 for executors' commissions and attorneys' fees. The Commissioner stated that the amounts allowed by him were the amounts allowed by the court. He makes no argument on this point in his brief. Although there is no evidence that the amounts allowed by the court, that is, $ 4,554.55 as executors' commissions and $ 10,000 as attorneys' fees, have been paid, nevertheless these are proper deductions. ; . Cf. .
The final contention made by the petitioners is that they are entitled to deductions of over $ 85,000 representing claims of Edith M. Bensel against the estate. These claims, they say, consist of $ 25,000 representing $ 10,000 due October 1, 1927, and $ 5,000 due on the first of October 1928, 1929, and 1930, and $ 60,895,95 claimed to be the commuted value of a $ 5,000 annuity computed on the life expectancy of this sister at the date of the decedent's death. The decedent died before October 1, 1930, and during his life his sister collected $ 3,000. Thus*769 the amount due at the date of the decedent's death was certainly not $ 25,000. Furthermore, there is no evidence to show the life expectancy of the sister or the commuted value of the annuity of $ 5,000 for that period. However, these matters are relatively unimportant. The statute allows deductions of "such amounts for * * * claims against the estate * * * to the extent that such claims * * * were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered." Edith M. Bensel, during the decedent's life performed valuable services for him. He contracted in consideration of those services to pay her certain sums of money. The contract was bona fide. There is no reason to believe that her claim is not allowed by the laws of New Jersey. The question is to determine the extent to which her claim was contracted for an adequate and full consideration in money or money's worth. The petitioners must show affirmatively the extent to which the claim was contracted for an adequate and full consideration in money or money's worth. *770 . The evidence shows that the sister performed valuable *255 services for her brother, but it gives but a poor measure of the value of those services in money or its equivalent. This woman was a housewife with a family. She had no business experience. Her services were performed intermittently. We are well satisfied that her services were not equivalent in value to $ 85,000. Although they formed a valuable consideration to support the agreement, that is a different thing from an adequate and full consideration in money or money's worth. ; affd., . The decedent was heavily in debt, lived extravagantly, and he knew and his sister knew that she could not take $ 5,000 out of his salary of $ 33,000 which went through her hands. The amount was beyond his ability to pay. There is evidence that he made other extravagant promises. It seems necessary, under the circumstances, for the Board to determine the extent to which this claim was contracted for an adequate and full consideration in money or money's worth. *771 ; ; ; ; affd., ; ; . "The Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making." . All of the evidence bearing upon this point has been carefully considered and the conclusion has been reached that a proper deduction in this connection is $ 15,000.
Reviewed by the Board.
Decision will be entered under Rule 50.