Kingsbury v. Commissioner

K. R. KINGSBURY, PETITIONER, ET AL., 1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kingsbury v. Commissioner

Docket Nos. 56382, 62510, 62676, 62718, 62784, 62813.

United States Board of Tax Appeals

31 B.T.A. 1126 ; 1935 BTA LEXIS 1018 ;

January 29, 1935 , Promulgated

*1018 In 1921 the officers of a company made contracts with the company by which they agreed to remain in the service of the company for five years and the company agreed, by way of additional compensation, to set up trust funds, the income of which was to be paid to the officers during the five-year period and thereafter for life if the officers remained in service for such five-year period; the officers were to receive also at the end of the five-year period powers of appointment by which the corpus of the trusts could be directed by the wills of the officers to any of their heirs. The trusts were set up, the income paid and the officers remained in the service of the company five years. The next year (1927) a supplemental contract was entered into terminating the trusts and conveying the title to the trust corpus to the officers absolutely. Held that upon the expiration of the five-year period a life estate in the income of the trusts and a limited power of appointment as to the remainder vested in the officers; that the vesting of the life estate and the power of appointment was a taxable event requiring the return as income of the value of the property so received. Held, *1019 further, that in the next year, upon the transfer of title to the stock the taxpayers became vested with the remainders and taxable on the value thereof as income.

V. K. Butler, Jr., Esq., for the petitioners.

Allin H. Pierce, Esq., and Irving M. Tullar, Esq., for the respondent.

VAN FOSSAN

*1127 These proceedings were brought to redetermine deficiencies in the income taxes of the petitioners for the year 1927. The following amounts were determined by the respondent: Docket

No. Petitioner Deficiency

56382 K. R. Kingsbury $56,277.27

62510 Ralph C. Warner 20,934.04

62718 Virginia W. Hanna, Executrix,

estate of R. J. Hanna 46,389.08

62784 H. T. Harper 27,237.55

62813 H. M. Storey 39,976.53

62676 Judson McClintock Hillman

and the Farmers & Merchants National Bank,

Administrators, estate of F. H. Hillman 45,694.66

The petitioners in their petitions claimed large amounts of refunds but now have waived their right thereto.

The primary allegation of error, common to all the proceedings, is that the respondent erred in including in the petitioner's taxable income for the year 1927 *1020 the fair market value of certain stock by reason of the receipt by the petitioners during the taxable year of certificates evidencing shares of stock of the Standard Oil Co. of California, a Delaware corporation, the certificates having been previously held by a trust theretofore created by the Standard Oil Co., a California corporation.

The petitioners further allege that the respondent erred in including in their taxable income for 1927 any portion of the shares representing a 100 percent stock dividend declared and issued by the Standard Oil Co., a California corporation, on December 30, 1922. They assert that the respondent erred specifically in including in such income that portion of such stock referable and attrigutable to the earned and undistributed surplus of the company accumulated by it between April 18, 1921, and December 31, 1922.

A collateral issue in Docket No. 56382 (K. R. Kingsbury), is whether the petitioner elected to file a joint return for himself and his wife or, because of the declaration accompanying his return, the return so filed reflected his intent to file a separate return.

All other issues were settled by stipulation or were abandoned.

FINDINGS *1021 OF FACT.

Certain facts were stipulated substantially ad follows:

The petitioners, K. R. Kingsbury, Ralph C. Warner, H. T. Harper and H. M. Storey are all residents of the State of California.

Judson McClintock Hillman and the Farmers & Merchants National Bank of Los Angeles are the duly appointed and qualified administrators with the will annexed of the estate of F. H. Hillman, deceased (1928). Virginia W. Hanna is the duly qualified executrix of the estate of R. J. Hanna (deceased since the hearing).

*1128 During the years 1921 to 1927, inclusive, K. R. Kingsbury, Ralph C. Warner, R. J. Hanna, H. T. Harper, H. M. Storey and F. H. Hillman held the following offices, respectively, in Standard Oil Co., a California corporation: K. R. Kingsbury President

Ralph C. Warner Treasurer

R. J. Hanna Vice president

H. T. Harper Vice president

H. M. Storey Vice president

F. H. Hillman Vice president

During the year 1927 the said persons occupied similar offices with the Standard Oil Co. of California, a Delaware corporation, which on or about March 29, 1926, succeeded to the business and all of the assets of the Standard Oil Co. (California), and *1022 the said persons thereafter devoted all their time and attention to their duties as such. For purposes of identification and reference the said persons are hereinafter designated collectively as "officers", or in the singular as "officer."

Under date of April 18, 1921, the Standard Oil Co. (California) entered into a separate written agreement with each of the said officers, which agreements were identical except as to the name of the contracting officer and the sum to be paid in trust for the benefit of such officer. The agreement so made with K. R. Kingsbury, which is typical of all of said agreements, is as follows:

THIS AGREEMENT, dated the 18th day of April, 1921, entered into between STANDARD OIL COMPANY, a corporation, under the laws of the State of California, first party, and K. R. KINGSBURY, second party,

WITNESSETH:

Whereas at the annual meeting of the stockholders of said corporation, held on the 10th day of March, 1921, a resolution was unanimously adopted, which resolution is in words as follows, to wit:

"RESOLVED: That John D. Rockefeller, Jr., Lewis Cass Ledyard, E. S. Harkness, Walter Jennings and Payne Whitney, or such of them as may act, but not less *1023 than three of them, be and they are hereby elected as a special committee of stockholders to adopt a plan to secure the continued services of present officers of this corporation; to provide for a bonus or additional compensation for said officers, or for a fund for their testamentary appointees; to provide for the issue by way of sale or bonus or special compensation or increased stock of this corporation under such plan; to provide for the investment of such bonus or additional compensation, or such fund, in the stock of this corporation by purchase from the treasury stock of the corporation, or otherwise, and to provide for the modification, of such plan, all as may be approved and determined by said committee, with full power to ratify and approve, on behalf of the stockholders of this corporation, such plan and any agreement between the corporation and any officer thereof in respect to the matters, or any of them, herein referred to, and that said committee be and it *1129 is hereby given full power to act on behalf of the stockholders of this corporation in the premises and that such committee shall act upon vote of a majority thereof."

and

Whereas thereafter the *1024 committee elected in and by said resolution met on March 28, 1921, and acting upon vote of a majority, to wit, of all of the members thereof, deeming it desirable that said Kingsbury should continue his services to said corporation as herein provided, and that in consideration thereof he should receive the additional compensation provided for in this agreement, and be assured of provision at his death for any of his heirs designated by him by testamentary appointment, adopted the plan provided in this agreement in order to carry out the purposes specified in said resolution; and

whereas said Kingsbury is an officer, to wit, the President, of said corporation, and said corporation desires that said Kingsbury should continue his services to it, and is willing, in consideration of the agreement of said Kingsbury to continue his services to it as herein provided, to create the trust hereinafter provided for, for the benefit of said Kingsbury and of any of his heirs whom he may by will appoint:

Now, therefore, it is agreed:

First: Said Kingsbury agrees, in consideration of the creation of the trust herein provided for, and of the payment to him of his regular salary, to continue *1025 his services for a period of five years from March 28, 1921, to said corporation, or to any corporation succeeding to the business of said corporation, or succeeding to any part thereof, or to the ownership of the major part of the assets or of a majority of the stock of said corporation.

In the event that said Kingsbury shall be prevented by disability or death from continuing his said services for said period of five years, he shall nevertheless, be deemed to have kept and performed the agreement herein by him agreed to be kept and performed, if he shall have continued his services up to the time of such disability or death.

Second: The corporation agrees, in consideration of the hereinbefore mentioned agreement of said Kingsbury to continue his said services, and by way of compensation, in addition to the payment to said Kingsbury of his regular salary as an officer of said corporation, to create a trust as follows:

1. The corporation shall pay over to Anglo-California Trust Company of San Francisco, California, the sum of three hundred and seventy-five thousand dollars ($375000.00), but, nevertheless, in trust for the following uses and purposes:

(a) To invest the *1026 same in shares of stock of said Standard Oil Company by purchase thereof in the open market, or from the treasury of said Standard Oil Company.

(b) To hold the shares of stock of said Standard Oil Company so purchased, and any other shares of stock and/or other securities and/or property received by said Trustee in exchange or substitution therefor upon any consolidation, reorganization, dissolution, or other change of corporate form of said Standard Oil Company, or of any corporation the shares of stock and/or other securities of which shall be held by said Trustee, as well as any property received by the Trustee upon any sale of the assets of any corporation, the shares of stock and/or securities of which shall be at any time held by said Trustee, and also and stock dividends declared at any time upon any shares of stock and/or other *1130 securities held by said Trustee. All of the property in this subdivision "b" mentioned shall be deemed the corpus or capital of the trust hereby created, and the same is hereinafter called "the said trust fund."

(c) To pay over, except as in subdivision "e" hereof provided, the income from the said trust fund, as and when the same *1027 may be received by said Trustee, to said Kingsbury as long as he may live. Rights to purchase additional shares of stock and/or securities held by the Trustee, shall belong to, and be exercised by, said Kingsbury, and the Trustee shall make the necessary assignments and execute the necessary documents to enable said Kingsbury to exercise such rights.

(d) Upon the death of said Kingabury, except as in subdivision "e" hereof provided, this trust shall forthwith terminate, and the said Trustee shall, upon such termination of this trust, forthwith deliver the said trust fund to such heirs of said Kingsbury as said Kingsbury may by his will have appointed.

(e) In the event said Kingsbury, unless prevented by death or disability, ceases to continue the services in paragraph "First" hereof by him agreed to be rendered for said period of five years (from March 28, 1921), exclusive of all other salaried service by him, then upon such cessation of said services, his right to further income from said trust fund shall forthwith cease, and said trust shall forthwith terminate and said Trustee shall forthwith deliver the said trust fund to said Standard Oil Company, but any payments theretofore *1028 made to said Kingsbury by said Trustee shall be retained by him. In the event said Kingsbury should die before the expiration of said period of five years, but while in the continuance of said services, then upon the death of said Kingsbury this trust shall forthwith terminate, and the said Trustee shall forthwith, upon such termination of this trust, deliver the said trust fund to such heirs of said Kingsbury as said Kingsbury may by his will have appointed. If said Kingsbury's services to said Standard Oil Company should cease before the expiration of said period of five years because of the disability of said Kingsbury, then the payment of the income from said trust fund, as long as he may live, and the disposition of the remainder, shall be the same as if he had continued his said services for said period of five years.

The interest of said Kingsbury in the said trust and in the said trust fund shall be that solely of a beneficiary for life, with a contingent power of appointment as to the remainder hereinbefore provided, but said power shall be nonassignable and no contract for its exercise shall be valid; it being the intent hereof that said power shall be subject to said *1029 Kingsbury's exercise at all times prior to his death, unrestricted except as herein provided.

In the event of a sale of the assets of any corporation the shares of stock and/or securities of which are held by said Trustee, or its consolidation, reorganization, dissolution, or other change of corporate form, then the Trustee shall acquire new securities, and shall deal with the shares of stock and/or securities of the corporation then held by it, upon the same terms and conditions and in the same manner as may be done by the holders of fifty-one per cent of the then issued stock of such corporation.

Third: This agreement shall not be modified except by consent in writing of said Standard Oil Company and of said Kingsbury, and the approval of stockholders of said Standard Oil Company holding, at the time of such modification, a majority of the outstanding or issued capital stock of the said Standard Oil Company, and acting either by vote at an annual or special meeting of stockholders, or through a committee appointed at such annual or special meeting.

IN WITNESS WHEREOF, * * *.

*1131 The said agreements were duly ratified and approved on behalf of the stockholders *1030 of the corporation under date of April 26, 1921, when the signatures of the members of the special stockholders' committee were attached.

On or about April 18, 1921, Standard Oil Co. (California), acting in accordance with the terms of the aforesaid agreements, paid in trust to Anglo-California Trust Co. of San Francisco, California, as trustee, the respective sums for investment pursuant to the terms of the aforesaid agreements with the following persons: K. R. Kingsbury $375,000

Ralph C. Warner 150,000

R. J. Hanna $300,000

H. T. Harper 200,000

H. M. Storey 300,000

F. H. Hillman 325,000

1,650,000

Following the receipt of the foregoing sums, Anglo-California Trust Co., as trustee, employed such sums to purchase shares of stock of Standard Oil Co. (California), and thereafter held said shares of stock in trust under the terms of the respective agreements with the said officers, as follows: K. R. Kingsbury 5,067 shares

Ralph C. Warner 2,027 shares

R. J. Hanna 4,054 shares

H. T. Harper 2,702 shares

H. M. Storey 4,054 shares

F. H. Hillman 4,391 shares

The said stock eas evidenced by a single certificate for 22,295 shares, *1031 issued and registered by Standard Oil Co. (California) in the name of Anglo-California Trust Co., trustee. All of the said shares were original issue stock bought from Standard Oil Co. (California) at $74 a share, the fair market price on the date of purchase.

Under date of June 30, 1921, the trustee addressed a letter to each of said officers, of which the following letter to K. R. Kingsbury is typical:

San Francisco, Cal., July 30, 1921.

Mr. K. R. Kingsbury

200 Bush Street

San Francisco, Calif.

Dear Sir:

We have received from Standard Oil Company (California) $375,000.00 which, in accordance with the agreement dated April 18, 1921, between said corporation and yourself, we have invested in 5067 shares of capital stock of said corporation, and which shares we hold upon the trusts set forth in said agreement.

ANGLO-CALIFORNIA TRUST COMPANY

By M. FLEISHHACKER, President.

*1132 On December 3, 1922, Standard Oil Co. (California) declared a 100 percent stock dividend to its stockholders. The stock dividends issued with respect to the shares of stock of said company held by Anglo-California Trust Co. as trustee under the respective agreements of the *1032 officers, were issued to and received by the trustee on December 30, 1922, in the form of one certificate issued and registered in the name of the said trustee. The said additional shares of capital stock, received as stock dividends, were thereafter held by the trustee in addition to the shares of stock which it theretofore had held. Following the receipt of said stock dividends, the shares of stock of the Standard Oil Co. (California) held by the trustee for the benefit of the officers were as follows: K. R. Kingsbury 10,134 shares

Ralph C. Warner 4,054 shares

R. J. Hanna 8,108 shares

H. T. Harper 5,404 shares

H. M. Storey 8,108 shares

F. H. Hillman 8,782 shares

Ordinary dividends paid by Standard Oil Co. (California) on the said stock held by the trustee were paid to Anglo-California Trust Co., trustee, and in turn paid by the said trustee to the respective officers pursuant to the terms of the respective aforesaid agreements. the amounts of cash dividends so received by the officers are not involved in the present proceeding.

In 1923 the Standard Oil Co. (California) issued rights to its stockholders to subscribe for, at a specified price, new *1033 and additional shares of stock, in the proportion of one new share of stock for each eight shares of stock held by the stockholders. The respective officers, here involved, exercised such rights to subscribe, with respect to the shares of stock held by the trustee. Under the trust agreements dated April 18, 1921, the respective officers had the right to exercise rights to subscribe and to take stock so subscribed for. The additional shares of stock so acquired by the officers are not involved in the present proceeding.

Each of the petitioners continued his services to the Standard Oil Co. (California) to and including March 28, 1926, but no action was taken by anyone, at that time, to have the aforesaid agreements terminated, to have any of the several trusts dissolved, or to have any of the property held by the trustee distributed. The fair market value of the stock of the Standard Oil Co. (California) on March 28, 1926, was $55 a share.

On or about March 29, 1926, the Standard Oil Co. (California) transferred all of its assets to the Standard Oil Co. of California *1133 (a Delaware corporation), in consideration of the issuance by the said Delaware corporation of *1034 shares of its own capital stock to the stockholders of the said California corporation for the shares of stock of the California corporation which they then held, on a share for share basis. Pursuant to the said transaction, the Anglo-California Trust Co., as trustee, on March 29, 1926, surrendered the shares of stock of the Standard Oil Co. (California) which it held for the benefit of the officers, for equal numbers of shares of stock of the Standard Oil Co. of California (Delaware); and thereafter the said trustee continued to hold the said shares of stock of Standard Oil Co. of California (Delaware) for the benefit of the said officers, in lieu of the shares of stock of the Standard Oil Co. (California) which it theretofore had held.

Following the aforesaid transfer, practically all of the shares of Standard Oil Co. (California) were canceled, but the company was not dissolved and it still continues its corporate existence.

On May 18, 1926, the annual meeting of the stockholders of the California corporation was held. The stockholders elected John D. Rockefeller, Jr., Lewis Cass Ledyard, E. S. Harkness, Walter Jennings, and Payne Whitney, or such of them as might act, but *1035 not less than three of them, a special committee of stockholders to modify or otherwise deal with the agreement of April 18, 1921. Thereafter, the members of the said committee, acting under the authority conferred upon them, duly signed their names on the said written agreements to terminate each of the said trusts in testimony of their ratification and approval. The said agreements were identical, except as to the name of the particular officers involved.

* * *

Whereas the second party has completed the period of service provided for in said agreement; and

Whereas the parties hereto and said committee have agreed that said agreement and the trust therein created should be terminated and that the stock held by the Anglo-California Trust Company, the trustee named in said agreement should be delivered to the second party as his free and unrestricted property:

Now, Therefore, the first and second parties hereto agree that that certain agreement entered into between them dated April 18, 1921, and hereinabove referred to, shall be and the same is hereby terminated and the trusts therein created are hereby terminated and that the property subject to the trust provided *1036 for in said agreement shall be delivered and paid over by the trustee to the second party as his free and unrestricted property and thereupon each of the parties to said agreement shall be deemed to have fully discharged and performed all the obligations thereof thereby imposed upon such party.

* * *

*1134 The aforesaid agreements to terminate were thereafter executed by the following parties on the following dates:

Standard Oil Company (California), January 28, 1927.

Standard Oil Company of California (Delaware), January 28, 1927.

Anglo-California Trust Company, trustee, January 28, 1927.

K. R. Kingsbury, January 28, 1927. R. J. Hanna, February 12, 1927. Ralph C. Warner, January 28, 1927.

H. T. Harper, January 28, 1927. H. M. Storey, January 28, 1927. F. H. Hillman, January 28, 1927. In accordance with the agreements to terminate, the several trusts created for the benefit of the respective officers were terminated, the trustee was discharged, and the shares of stock of the Standard Oil Co. of California (Delaware) held by the trustee were delivered by it to the respective officers. The dates on which said shares of stock were distributed *1037 to and received by the respective officers, and the fair market value of the stock as of the date when so received by them are as follows: Name Date received Fair market value

K. R. Kingsbury January 28, 1927 $597,906.00

Ralph C. Warner do 239,186.00

R. J. Hanna February 10, 1927 [sic] 484,959.75

H. T. Harper January 28, 1927 318,836.00

H. M. Storey do 478,372.00

F. H. Hillman do 518,138.00

On the said dates, the certificates for the stock distributed by the trustee were for the first time issued by the Standard Oil Co. of California (Delaware) in the names of the respective officers.

The officers, for Federal income tax purposes, reported the receipt, in 1927, of the said shares of stock delivered to them in that year by the trustee; and they reported as income, in the year 1927, with respect to the receipt of such stock, amounts equal to the sums which had been paid by the Standard Oil Co. (California) to the Anglo-California Trust Co. when the respective trusts were created on or about April 18, 1921.

None of the officers reported as income, for Federal tax purposes in the year 1926, the receipt of any interest in or income from *1038 the aforesaid trust property held by the said Anglo-California Trust Co., trustee, except the amounts of the cash dividends on the said stock which were delivered to them periodically by the trustee. The statutory period within which to make additional assessments against the officers for the year 1926 has now expired.

*1135 When the trust funds were established in 1921, no contribution thereto was made by any of the officers, and no cash or stock was thereafter delivered by any of the officers to the respective funds held by the trustee.

The petitioners kept their accounts and reported their income, for Federal income tax purposes, on the cash receipts and disbursements basis.

The record discloses the following additional facts:

The total earned surplus of the company on December 30, 1922, was $86,939,276.46. The total amount of surplus capitalized on that date to equal the stock dividend was $102,240,935.83. The earnings of the company from April 18, 1921, to December 30, 1922, constituted 18.17 percent of such capitalized surplus.

The dates of birth of the officers of the company (the original taxpayers) are as follows: K. R. Kingsbury January 2, 1876

Ralph C. Warner March 14, 1866

R. J. Hanna April 4, 1860

H. T. Harper March 18, 1870

H. M. Storey January 24, 1874

F. H. Hillman April 16, 1862

*1039 In 1926 the trusts might reasonably have been expected to yield a continuing return of 4 1/2 percent.

The reasonable values at March 28, 1926, of the life estates, the reasonable values at January 28, 1927, of the remainders without deduction of any value for the power of appointment, and the amounts returned for taxation in 1927 by the petitioners on account of the receipt of title to the stock were, respectively, as follows: Value of Value of Amounts returned

Petitioner life estates remainders for taxation

K. R. Kingsbury $306,899 $275,978 $375,000

Ralph C. Warner 93,193 142,617 150,000

R. J. Hanna 148,117 326,264 300,000

H. T. Harper 140,744 172,218 200,000

H. M. Storey 234,547 232,860 300,000

F. H. Hillman 174,253 338,626 325,000

The fair market value of the stock of Standard Oil Co. (California) on January 28, 1927, was $59 per share.

On or about March 15, 1928, petitioner K. R. Kingsbury filed a return of income of himself and his wife for the year 1927 on a single form and included therein the community income of them both. He attached thereto the following form of protest:

Of the amount shown on the attached *1040 return, $291,602.25 of the gross income is there shown under protest and the tax thereon is paid under protest on the ground that the same is the wife's share of the community income and is no portion of the income of the husband.

*1136 The total amount of salary and director's fees received by the petitioner Kingsbury in 1927, subsequent to July 29 of that year, was $42,200. On the petitioner's return, in answer to the question: "Is this a joint return of husband and wife?", he stated, "Yes."

It was stipulated orally that R. J. Hanna sustained a loss with respect to his interest in the Fix lease in the amount of $2,921.25 and that he owned and possessed such property for a period of more than two years prior to the sale thereof.

OPINION.

VAN FOSSAN: The major issue before us is whether or not the fair market value in January and February 1927 of the Standard Oil Co. stock delivered to the petitioners at such time constituted taxable income. If the respondent be not sustained in full in this contention but it be held that income in some amount accrued, the petitioners concede that the value of the remainders passed to them in that year is income under section 219(f) *1041 of the Revenue Act of 1926. 2 They further agree to forego their right to refunds in case the value of those remainders is found to be less than the income reported by them in the taxable year on account of the transaction.

The facts involved in this issue may be summarized briefly. On March 10, 1921, the stockholders of the Standard Oil *1042 Co. of California became convinced that it was for the best interests of the corporation to be assured of the continuous service of its officers for a period of five years and that in order to do so the officers should be offered a bonus, or special or additional compensation. Negotiations to that end resulted in the execution of the agreements of April 18, 1921, set forth in the findings of fact.

The salient provisions of that agreement were that the officer should continue his services for a period of five years from March 28, 1921, and that the company would create a trust by paying a definite amount of money to the trustee, who should purchase with it Standard Oil Co. stock. That stock, together with any securities received in liquidation or reorganization and any stock dividends thereon, was to be held by the trustee for the period of five years, provided the officer remained with the company, and, subject to the condition of his remaining with the company for the five-year period, *1137 the income from the trust fund was to be paid to him for life. At his death the trust was to terminate and the trust fund was to be delivered to such heirs of the officer as he might *1043 have appointed by his will. The agreement was subject to modification by the written consent of the officer and the company. If the officer should leave the service of the company the trust was to end, the payments of the income should cease, and the corpus was to revert to the company. During the five-year period the disability of the officer while in the company's service did not abrogate the contract and, upon his death, under such conditions, the trust fund was to be delivered to the designated remaindermen.

The funds so provided for were paid to the trustee and the trustee proceeded to purchase the stock for the benefit of the several trusts, as directed in the trust instruments, and to pay the officers the income therefrom currently. All of the officers remained with the company during the entire five-year period which expired March 28, 1926. Some time after it expired, the company, through its stockholders and a special committee named for the purpose, and the officers, modified the agreements of April 18, 1921, by providing that the corpus of the trust should be transferred to the officers as their "free and unrestricted property" and the trust be terminated. The modifying *1044 agreements were dated September 8, 1926, but were not executed fully until January 28, 1927 (February 12, 1927, as to R. J. Hanna), on which dates the stock was delivered to the petitioners.

On examination of the agreements it is obvious that during the five-year period the officers owned nothing but a right to receive the income from the trust fund from day to day as it currently accrued, subject at all times to the condition precedent of their continuing in the service of the company. Cessation of that service for any cause except disability or death defeated all right to income and corpus and nullified the power to designate the remaindermen. Conversely, the company held the potential right of repossession during the entire term and only at its expiration and after the officers had remained in its service throughout that period did it relinquish that right. In 1926, however, the right of the petitioners to receive the income from the trust fund for life matured completely and unconditionally. The condition being fully performed, the life estate and the power of appointment vested.

It is clear that the underlying and motivating reason for paying the "bonus", or additional *1045 compensation, to the officers was to induce them to remain with the company for five years. At the moment that condition was fulfilled the officers became possessed of a valuable right which unquestionably was property. Retention of the title by the trustee did not affect the rights so acquired or prevent their *1138 vesting. ; . The value of the right so acquired became income in that year. , and cases there cited.

In the application of the income and estate tax laws to given sets of facts, we are often met by situations in which absolute accuracy or mathematical certainty can not be established. In such situations resort must be had to those methods of determination most likely to represent substantial, or probable, accuracy. In this category of cases would fall the valuation of life estates, or remainders. Necessarily, any value assigned to a life estate or a remainder must be predicated on certain assumptions. But the problem is not for that reason insoluble. The Supreme Court has said that the *1046 value of a life estate is "to be determined by ascertaining in terms of money what the property constituting that interest would bring in the market, subject to such uncertainty as ordinarily attaches to such an inquiry. . Similar observations apply as to remainders.

In the instant cases we may start with the assumption that the value of the life estate, plus the value of the remainder, represents the total value of the stock. Likewise, it seems reasonable to conclude that a power of appointment as to the remainder of property subject to a life estate, limited only in that appointment may be exercised only on behalf of one's heirs, is a property right of substantial value. Though less than the entire value of the remainder, in that ownership of the remainder includes, inter alia, the present power of disposition, it is, nevertheless, a valuable property right. The life estate and the power of appointment having vested in the officers in 1926, it follows that the value of the property that passed in 1927 under the supplemental agreements must be the residuum after deducting the value of the property theretofore *1047 vested.

Respondent's contention is based on the erroneous assumption that there was no taxable event in 1926 and overlooks the fact that, under the original contract, upon the expiration of the five-year period, the life estate in the income and the limited power of appointment as to the remainder both vested in the officers. If respondent's position, that the first taxable event occurred in 1927 when title to the corpus was transferred, be sound, it would seem to be a simple matter for recipients of income under circumstances such as these to avoid tax. Assume that the parties had not elected to enter into the second contract but the matter rested on the first agreement alone. If respondent's contention be adopted and it be held there was no taxable event in 1926, no tax would ever be collected from the parties who received and enjoyed such life estate and power of appointment. *1139 Neither would there seem to be any basis for collecting the income tax from the heirs who might take under the wills of the several officers. Thus the income would never be taxed.

Respondent cites *1048 ; affd., , and In our judgment these cases clearly support the conclusion that a taxable event occurred in 1926.

Applying the above premises to the facts before us, we have found (1) the reasonable values of the life estates in 1926, (2) the reasonable values in 1927 of the remainders without deduction of any value for the power of appointment, and (3) the amount determined by each petitioner as the value of property received in 1927, the figures used being the cost to the company in 1921 of the stock placed in the respective trust funds. On analysis of these figures it will be seen that as to petitioners Kingsbury, Warner, Harper, and Storey the value of the remainder is less than the value returned by them, respectively, in their 1927 tax returns. Obviously, therefore, no additional tax is due from these petitioners on account of the receipt of the stock in that year. As hereinbefore noted, petitioners, by their counsel, have waived all rights as to any refunds that might be due consequent on the determination by the Board of the value of the property *1049 received in 1927.

As to petitioners Hanna and Hillman, the amount returned is less than the value of the remainder - in the case of Hanna in the amount of $26,264 and in that of Hillman in the amount of $13,626. Though we have indicated that the power of appointment which vested in 1926 was a valuable right and if such value were proven would reduce the value of the remainder which passed in 1927, we have no evidence of such value and are, consequently, unable to find that any figure less than the value of the entire remainder should be used in computing the tax due.

Though the above stated conclusions are dispositive of the major issue, a passing word may be in point as to petitioners' contention that the portion of the stock dividends declared and issued on December 30, 1922, attributable to the earned and undistributed surplus of the company accumulated by it between April 18, 1921, and December 31, 1922, or 18.17 percent thereof, became their property upon issuance and was distributable and taxable to them at that time. They contend that the value of the shares of stock so issued to the trustee was income to the officers in 1922; that such stock was constructively received *1050 by the trustee for their benefit; that the amount of such surplus was definitely determined; that they could have forced the trustee to deliver the stock to them at the time; and that, hence, such stock became their property, distributable and taxable to them in 1922. In support of this position they assert that under California *1140 law 3 a stock dividend which represents earned surplus accumulated after the creation of the trust belongs to the life tenant or beneficiary and is lawfully distributable to him immediately upon its issuance. They cite ; ; ; ; .

The fallacy in petitioners' argument lies in their assumption that in 1922 their interest in the trust amounted to a life estate. The petitioners acquired no vested rights in either the income or the corpus of the trust until 1926, when the five-year period expired. At that time they acquired a life estate in the income and a power of appointment as to the remainder. *1051 This being the situation, it can not be held that the accretion to the trust by way of a stock dividend in 1922 became vested in the officers at that time. The cases cited, which presuppose an existing life estate, are not in point.

Moreover, it is to be remembered that we are dealing with income arising under Federal taxing acts. The Supreme Court has held that under such laws stock dividends are not income. . In this case the stock dividend was not income per se. The stock arising from the dividend gives rise to income only by virtue of being transferred to petitioners as additional compensation, a very different and wholly unrelated concept. For this reason the California statute against accumulation of trust income can have no application. Nor does it matter that the California courts take a different view of the character of a stock dividend and hold it to be income in some instances.

On brief respondent raises the question of estoppel against petitioners because they did not return the values of the life estates and the powers of appointment in 1926. It is perhaps sufficient to observe that estoppel must be *1052 both pleaded and proved. In the instant cases it was neither pleaded nor does the record reveal the facts necessary to establish the same.

In Docket No. 56382 K. R. Kingsbury, the petitioner, asserts that because of the refusal of the collector of internal revenue for the first district of California, in which he resided, to permit him and his wife to file separate returns on a community property basis, he was compelled to file his own return on a single form, including therein the community property of them both. He claims that his intent to file separate returns is deducible from the protest attached to his return and that, therefore, he must be deemed to have elected to file separate returns. Consequently, he asserts, the community income received subsequent to July 29, 1927, 4 should be taxed equally to himself and his wife.

*1141 The record contains no evidence that the collector refused to accept the returns of the petitioner and his wife on a community property basis, nor that the petitioner tendered such returns either before or after March 15, 1928. *1053 The return filed states that it is a joint return. So far as we are advised no amended returns were ever offered or filed. No segregations of income into individual and community sources were made. The facts presented do not warrant the conclusion that Kingsbury and his wife elected to file separate returns or that one half of the petitioner's income received from July 29 to December 31, 1927, is taxable to his wife. Cf. ; .

All other issues raised by the pleadings and not abandoned by the petitioners may be settled in accordance with the stipulations of record.

Reviewed by the Board.

Decision will be entered under Rule 50.

Footnotes

1. Proceedings of the following petitioners are consolidated herewith: Ralph C. Warner; Virginia W. Hanna, Executrix of the Estate of R. J. Hanna, Deceased; H. T. Harper; H. M. Storey; and Judson McClintock Hillman and The Farmers and Merchants National Bank of Los Angeles, Administrators of the Estate of F. H. Hillman. ↩

2. SEC. 219. (f) A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under this section, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in by him. Such distributees shall for the purpose of the normal tax be allowed as credits such part of the amount so distributed or made available as represents the items specified in subdivisions (a) and (b) of section 216. ↩

3. Secs. 722, 723, 724, 725, Civil Code of California. ↩

4. See . ↩