Schoenheit v. Commissioner

WILLIAM SCHOENHEIT AND KARL BISHOPRIC, EXECUTORS, ESTATE OF KARL VON RUCK, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Schoenheit v. Commissioner Docket Nos. 9857, 9858, 16626. United States Board of Tax Appeals 14 B.T.A. 33; 1928 BTA LEXIS 3031; November 7, 1928, Promulgated *3031 1. Taxable gain determined on an exchange of real estate for stock. 2. Salary credited on books of a corporation but not drawn by petitioners' decedent, held to be properly included in taxable net income of decedent. 3. Dividends paid by the Spray Cotton Mills for the years 1920 and 1921 held properly included in decedent's net income for those years, he being the sole owner of the capital stock. 4. held that under the existing facts the respondent erred in including in decedent's taxable income $200 per month in lieu of rent. 5. Held, that the evidence submitted by the petitioners is insufficient to overcome the presumption that certain shares of stock transferred to relatives of the decedent and his wife were gifts made in contemplation of death. 6. On the evidence submitted, certain sales of stock found to have been for a bona fide consideration and other sales found not to have been made for a fair consideration in money's worth, and such sales held to be transfers made in contemplation of death. 7. The value of the common stock of the Spray Cotton Mills at November 5, 1922, the date of the decedent's death, determined. 8. *3032 Held, that the value of the residuary legacy is not deductible from the gross estate as a charitable, scientific, or educational bequest. 9. Amount of deductions from the gross estate of decedent for Federal income taxes and expenses of administration determined. Julius C. Martin, Esq., Oscar W. Underwood, Jr., Esq., and H. C. Kilpatrick, Esq., for the petitioners. J. F. Greaney, Esq., and Oscar McPeak, Esq., for the respondent. GREEN *33 In these proceedings, which were consolidated for hearing and opinion, the executors of the estate of Karl von Ruck, who died testate on November 5, 1922, seek a redetermination of the decedent's income taxes for the calendar years 1919, 1920, and 1921, for which years the respondent has determined deficiencies in the following amounts, $117,764.71, $32,348.92, and $18,450.67. For the year 1919 the petitioners have paid $7,642.12, leaving in controversy $110,122.59. The petitioners also seek a redetermination of a deficiency in estate tax, which was set forth in the respondent's deficiency letter as $175,252.42 and which in his amended answer he seeks to increase by the amount of $15,408.50, *3033 making a total deficiency in estate tax of $190,660.92. *34 The following issues have been raised by the pleadings: 1. Whether taxable gain was realized by the decedent in transferring, on July 1, 1919, certain real estate to the Spray Cotton Mills, a corporation in which he owned all the capital stock, in consideration for $600,000 par value of stock, plus $75,000 cash or cash credits. 2. Whether a salary of $1,000 per month payable by the Von Ruck Memorial Sanatorium, Inc., for a period from April 1, 1919, to July 1, 1921, and accrued to his account on the books of that corporation should be included in the decedent's taxable net income. 3. Whether the respondent erred in treating the decedent as the sole stockholder of the Spray Cotton Mills, for the years 1920 and 1921 for the purpose of determining whether he was to be taxed on all the dividends paid by that company during those years. 4. That the respondent erred in adding $200 per month to the decedent's income in lieu of rent from July 1, 1919, through the year 1921 on his residence which had been conveyed to the Spray Cotton Mills on July 1, 1919. 5. Whether the gifts of certain shares of the capital*3034 stock of the Spray Cotton Mills, made by the decedent to relatives of himself and of his wife, were transfers thereof in contemplation of death. 6. Whether certain other transfers of the capital stock of the Spray Cotton Mills were bona fide sales thereof for a fair consideration or a transfer thereof in contemplation of death. 7. The value of the common stock of the Spray Cotton Mills at November 5, 1922, the date of the decedent's death. 8. Whether the value of the residuary legacy should be deducted from the gross estate as a charitable bequest. 9. Whether the respondent should have allowed further deductions from the gross estate for Federal income taxes and expenses of administration. FINDINGS OF FACT. (1) Dr. Karl von Ruck, a resident of Asheville, N.C., died November 5, 1922, testate, and William Schoenheit and Karl Bishopric, the duly appointed, qualified and acting executors, have filed the petitions for a redetermination both of the decedent's income taxes for the years 1919 to 1921, inclusive, and for a review of the respondent's determination of the estate tax. The decedent, of German birth but an American citizen, was a man of unusual culture. *3035 His professional education was received in the universities of Europe and America. He had been a resident of Asheville, N.C., for a long period, during which time he established a tubercular sanatorium and through his publications and research *35 work had become recognized by the medical profession as an authority on tuberculosis. Some time prior to 1918 the decedent retired and his sanatorium was leased to his son, Dr. Silvio von Ruck, for a monthly rental of $2,000. In 1918 Silvio von Ruck and his daughter both died suddenly, leaving the decedent without any direct heirs. Although a man then well advanced in years, the decedent immediately upon the death of his son resumed his professional activities and took over the direction and operation of the sanatorium, and was active in this work until his last illness. During the period from 1897 to 1916 the decedent acquired a controlling interest in the Spray Cotton Mills, a North Carolina corporation engaged in the manufacture of cotton at Spray, N.C., and he was on July 1, 1919, the sole stockholder of this corporation. On this date he conveyed to the Spray Cotton Mills certain real estate which had been owned by him*3036 continuously from March 1, 1913, to the date of the conveyance. The consideration paid to him by the corporation was 6,000 shares of newly issued common stock, par value $100 per share, and $75,000 in cash or cash credits. The stock of the corporation was increased from 4,000 to 10,000 shares to take care of this transaction. The respondent found the conveyance to be a sale or exchange of assets resulting in a taxable gain and determined the amount of such gain to be $175,619.25, or the difference between a sales price of $675,000 and a March 1, 1913, value of $499,380.75. It has been stipulated that on March 1, 1913, value of the real estate conveyed to the corporation was $534,380.75, which would reflect a gain of $140,619.25 from the sale or exchange of the said real estate. The property conveyed to the corporation for $75,000 cash and 6,000 shares of its common stock consisted of the Winyah Sanatorium and adjoining property, operated by the sanatorium and covering about 120 acres, Dr. von Ruck's residence and adjoining grounds of some 20 acres, and certain odd lots near the sanatorium. The Von Ruck Memorial Sanatorium paid a rental of $2,000 per month for the sanatorium*3037 and the decedent occupied the residence free from rent. In the offer of sale a rent-free clause was included for the residence; this reservation was not incorporated in the deed, but the decedent never paid any rent during the subsequent years. The remainder of the property conveyed was unproductive. During the 10 years preceding July 1, 1919, there had been no sales or transfers of shares of stock of the Spray Cotton Mills except such as had been made to the decedent, who about 1915, purchased at par the last minority shares outstanding. The par value of the capital stock issued and outstanding from 1909 to 1917 was $200,000 or less. *36 It was then increased to $400,000, where it remained until July 1, 1919, when it was increased to $1,000,000 as previously described. No stock of this company was offered for public sale during the years 1915 to 1926, nor was any financial statement of the corporation published in any newspaper or stock journal during this period. The book value of the capital stock was at December 31, 1918, about $212 per share, and at December 31, 1919, $157.33 per share, as shown by the balance sheets: Spray Cotton Mills balance sheet at end of year [1922] ASSETS Factory building and site $177,948.52 $117,948.52 $117,975.02 Mill site $15,900.00 $15,900.00 Mill buildings 110,280.38 110,629.54 Miscellaneous real estate 6,760.65 687,260.43 678,508.43 643,534.69 636,015.81 Fire protection account water main 931.30 Machinery and equipment 248,970.17 249,353.37 254,821.66 255,586.37 257,418.15 Office furniture 1,962.31 1,962.31 1,962.31 1,962.31 1,984.31 Winyah furniture and equipment 60,000.00 60,000.00 Employees' Liberty loan 1,378.38 191.38 110.38 110.38 110.38 Liberty bonds 195,000.00 257,414.00 Stocks 9,700.00 12,238.00 Accounts and bills receivable 227,491.82 243,668.74 724,022.92 778,672.07 766,046.46 Cash 97,134.00 30,442.15 201,279.70 26,722.60 41,739.77 Inventory 188,601.77 209,518.22 105,179.74 93,164.20 168,196.04 Treasury stock 26,770.80 Total 1,085,247.62 1,797,759.12 2,083,860.16 1,996,633.00 2,097,970.56 LIABILITIES Capital stock 400,000.00 1,000,000.00 1,000,000.00 1,500,000.00 1,500,000.00 Surplus 369,444.11 389,566.17 472,954.79 171,872.58 186,364.98 Undivided profits 75,551.36 183,784.13 248,917.79 53,140.40 124,269.84 Bills payable 10,000.00 Accounts payable 1,025.18 11,935.93 117,454.95 47,453.94 13,852.59 Cotton futures 13,700.00 Reserve for depreciation 132,622.27 150,370.80 163,123.59 195,041.11 229,048.48 Reserve for income tax 92,904.70 62,102.09 81,409.04 28,124.97 34,434.67 Total 1,085,247.62 1,797,759.12 2,083,860.16 1,995,633.00 2,097,970.56 *3038 The annual earnings of the corporation for the years 1914 to 1919, inclusive, were as follows: Year Profit [1914] $37,517.67 [1915] 13,008.87 [1916] 109,763.32 [1917] $102,423.69 [1918] 75,751.36 [1919] 183,784.13 Dividends on the common stock are shown by the petitioners to have been paid as follows: Year Dividend (per cent) [6] 1909 to 1917 None. [5] Evidence was introduced to the effect that the decedent at the time of the transfer valued the sanatorium at $250,000 and the residence *37 property at $96,000, but there is no evidence that these properties were entered or carried upon the books of the corporation in these amounts. (2) Soon after the death of his son, the decedent caused to be organized a nonstock corporation which was managed by a board of trustees and known as the Von Ruck Memorial Sanatorium, Inc., for the purpose of taking over the operation of the Winyah Sanatorium. The Von Ruck Memorial Sanatorium, Inc., took over the sanatorium on July 1, 1918. The expenditures of this corporation were made only for the purpose of maintaining its establishment, meeting the wages of its*3039 employees and medical staff, and for scientific and charitable purposes. The corporation employed one McMichael as medical examiner from July, 1918, to March, 1919, when his services were dispensed with. McMichael drew a salary of $750 per month. On February 7, 1919, the executive committee, the decedent not being present, adopted a resolution authorizing the payment to Dr. von Ruck of the same salary as that paid to Dr. McMichael, plus certain commissions, or, at his election, $12,000 for one year of service, to be effective July 1, 1918, and running for one year, to July 1, 1919. Dr. von Ruck exercised this election, but directed the sanatorium "to put his salary down at $1,000 per month; that he did not want it at that time." The ledger of the Von Ruck Memorial Sanatorium, Inc., contained a sheet bearing the personal account of the decedent with the institution covering rentals, advances, withdrawals, etc. In pursuance of his instructions with respect to the salary, the bookkeeper opened on the reverse side of this sheet an account market "Dr. Karl von Ruck (SPCH) in Suspense." In this account were entered credits of $1,000 per month from April 30, 1919, to June 30, 1921. *3040 The entries were made each month and represented the accrual of the unpaid salary. Upon being tendered the salary during this period, Dr. von Ruck told the bookkeeper he "didn't want it; to hold it," and when the original Von Ruck Memorial Sanatorium, Inc., was closing out and transferring a part of its assets and business to a new corporation, he told the bookkeeper that the accrued salary "was the property of the Von Ruck Memorial Sanatorium, to pass it back to them." In accordance with this order the bookkeeper closed the salary account on June 30, 1921, by crediting the entire amount of $27,000 to the profit and loss account. During the period from 1918 to June 30, 1921, the Von Ruck Memorial Sanatorium acted as agent for the decedent in the collection of rents from various properties, crediting his account therefor, and in making disbursements on his order or at his direction, for which his account was charged. At any time during this period the decedent could have drawn against the special salary account which, at his *38 direction, was held in suspense. There were throughout the period ample funds for the payment of salaries, the sanatorium having realized for each*3041 year a profit over and above all expenses, which included the salary in question. There is no evidence showing the relinquishment by the decedent of his right to the salary prior to July 1, 1921, when he directed the bookkeeper to pass credit back to the corporation. In the respondent's determination the salary of $1,000 per month was included in the net income of von Ruck for the years 1919, 1920, and 1921, and the entire amount of $27,000 was treated as a donation in 1921. The respondent admits that the decedent kept his books and made his returns on the basis of cash receipts and disbursements. (3) On January 16, 1920, and February 15, 1921, the Spray Cotton Mills paid dividends of 10 per cent and 5 per cent, respectively, upon its outstanding stock, par value $1,000,000. These dividends, in the determination of the respondent, have been included in toto in the taxable income of the decedent for the years 1920 and 1921. The petitioners contend that the dividends in the amounts of $69,930 for 1920 and $37,890 for 1921 were paid upon shares owned by stockholders other than the decedent and that these amounts have therefore been erroneously included in his taxable income. *3042 On July 28, 1919, while the decedent was the sole stockholder of the Spray Cotton Mills, he entered into a trust agreement with William Schoenheit, who was his brother-in-law and business agent, whereby he was to convey in trust to said Schoenheit 3,460 shares of the stock in the Spray Cotton Mills. This stock was to be held in trust for certain designated relatives of the decedent, residing in Germany and Switzerland. The agreement specifically provided that the stock should not be transferred of record to the trustee until the accumulated surplus of the corporation had been divided between the stockholders of record by extra dividends paid out of said surplus, or by issue of new stock against said surplus. The intention of the decedent was that the stock which was being given should not participate in the surplus of the Spray Cotton Mills, but should represent only the book value of $100 per share. The agreement provided that the trustee should collect and receive the ordinary annual cash dividends on the 3,460 shares of stock. On August 1, 1919, the decedent assigned certificates representing 1,695 shares of the capital stock of the Spray Cotton Mills, all of which belonged*3043 to him, and stood in his own name or in the names of his nominees, to his wife, Delia M. von Ruck, and on the same day she entered into a trust agreement with William Schoenheit whereby she was to convey 1,553 shares of the said stock in trust to Schoenheit. The agreement made by Delia M. von Ruck and Schoenheit was practically identical with the trust agreement made by the decedent and *39 Schoenheit on July 28, 1919, except that the Delia M. von Ruck agreement provided that the stock was to be held in trust for certain designated relatives of hers. The following receipts were executed in connection with the trust agreements: ASHEVILLE, N.C., July 28, 1919. Received from Dr. Karl von Ruck, the following certificates of stock in Spray Cotton Mills, viz.: Nos. 74, 120, 121, 122, 123, 124, 129, 130, 131, 132, representing a total of 3,588 shares of which 3,460 shares are assigned to his relatives in trust to me, the balance to be returned to him when their stock is transferred on the books of the Spray Cotton Mills. WILLIAM SCHOENHEIT, Trustee. ASHEVILLE, N.C., August 1, 1919. Received from Mrs. Delia M. von Ruck certificates of stock in Spray Cotton*3044 Mills, Nos. 102, 104, 117, 118, 125, 128, representing a total of 1,695 shares of which I hold, as trustee, for her relatives, 1,553 shares and subject to her order 162 shares. WILLIAM SCHOENHEIT, Trustee. William Schoenheit, who was present, was not questioned as to whether or not he received the certificates at the time recited in the receipts. However, it appears from the record that the certificates continued in the possession of the decedent until they were surrendered by him to the secretary of the Spray Cotton Mills for cancellation at varying dates after December 1, 1919. On December 6, 1920, 445 shares of stock were transferred of record on the books of the Spray Cotton Mills, and were issued as follows: Issued to - Number of shares Mrs. Ada M. Welles [273] Wm. Schoenheit, trustee for Burdette Moore [1] Wm. Schoenheit, trustee for Lottie Walters [167] Karl von Ruck [4] Total [445] but were not delivered until late in the year 1921. On April 3, 1921, stock was transferred as follows: To - Number of shares Abbie Moore [333] Grace Schoenheit [333] Mary Bishopric [416] Karl Bishopric [160] Karl von Ruck [2] Ada M. Welles [166] Wm. Schoenheit, trustee, Irwin Ruck [750] Wm. Schoenheit, trustee, Julia Burkhardt [250] Wm. Schoenheit, trustee, Hermann Hartenstein [350] Wm. Schoenheit, trustee, Frieda Hartmann [167] Wm. Schoenheit, trustee, Paulina Mayer [250] Wm. Schoenheit, trustee, Rosa Hubner [250] Wm. Schoenheit, trustee, Louisa Schule [250] Wm. Schoenheit, trustee, Frieda Toelle [250] Wm. Schoenheit, Trustee, Lina Harter [250] Wm. Schoenheit, trustee, Walter Ruck [90] Wm. Schoenheit, trustee, Irma Faessler [120] Wm. Schoenheit, trustee, Frieda Mattil [100] Wm. Schoenheit, trustee, Johanna Ruck [200] Wm. Schoenheit, trustee, Lena Harler [100] Karl von Ruck [40] *3045 *40 The payment by the corporation of the 10 per cent dividend of January 16, 1920, was accomplished as follows: The decedent gave to Bishopric, secretary of the corporation, a list of parties to whom the dividend was to be paid, together with receipts, dated January 10, 1920, signed by William Schoenheit, Trustee, and instructed Bishopric to credit him personally with the entire dividend. Carrying out these instructions, Bishopric opened an account for the various parties, credited them with the dividend, then charged them with the dividend and credited the decedent's account. The Spray Cotton Mills had $50,000 in Federal Land Bank bonds, which were at the decedent's direction tranferred to him in part payment of the dividend, the balance of the $50,000 remaining on the books to his credit. The 5 per cent dividend of February 15, 1921, was paid to the stockholders of record at that time. Checks for that dividend dated February 15, 1921, were drawn by the corporation to persons and in amounts as follows: To - Amount William Schoenheit $835 Wm. Schoenheit, trustee, Burdette Moore 1,670 Wm. Schoenheit, trustee, Lottie Walters [835] Karl Bishopric 2,950 Edward Wm. Schoenheit $3,335 Abbie Moore 3,335 Mary Bishopric 1,220 Ada M. Welles 1,670 *3046 Schoenheit testified that as a trustee or agent or representative he received dividends for the years 1920 and 1921 as follows: For - [1921] Dr. Erwin von Ruck $7,500 Julia Burkhardt 2,500 $1,250 Herman Hartenstein 3,500 1,750 Paulina Mayer 2,500 1,250 Rosa Hubner 2,500 1,250 Frieda Hartmann 2,500 1,250 Louisa Schule 2,500 1,250 Frieda Toelle 2,500 1,250 Lina Harter 3,500 1,750 Walter Ruck [450] Irma Faessler $1,200 $600 Frieda Mattil 1,000 [500] Johanna Ruck 2,000 1,000 H. Burdette Moore 5,000 2,500 Lottie Walters 1,670 [835] Abbie Moore 10,000 5,000 Grace M. Schoenheit 10,000 5,000 Ada M. Welles 5,000 2,250 Mary Bishopric 3,660 1,830 Three thousand seven hundred and fifty dollars, representing the 1921 dividend for the benefit of Erwin von Ruck, was sent to him direct by the decedent, who told Schoenheit not to take any cognizance of it. The other amounts listed for both years were received by Schoenheit early in 1921, in the form of Federal Land Bank bonds delivered to him by the decedent, with the exception of $1,670 paid to Mrs. Welles in February, 1921, and about $1,290 paid to Mrs. Schoenheit*3047 in February or March, 1921; no remittance of the items held by him to the parties listed was made by Schoenheit prior *41 to May and November, 1925. The Federal Land Bank bonds were exchanged by Schoenheit after consultation with the decedent either for Philippine bonds or for stock of the Spray Cotton Mills, heretofore owned by the decedent. The record indicated that the decedent had the amounts in Schoenheit's hands "held on account of inheritance tax." Dividends for 1922 and later years were remitted by Schoenheit to the various parties within a few days of their receipt by him. Bishopric, the secretary of the Spray Cotton Mills, testified that prior to October 6, 1920, to his knowledge there were no stockholders in the corporation other than the decedent, whom he understood to be the sole stockholder at that time. That, as a usual thing, the decedent ran the corporation to suit himself, and that Bishopric as secretary handled the 1920 dividends under instructions of the decedent without knowing any reasons and that he was not aware of the trust agreements at that time. While the stock was transferred of record as stated above, there is no evidence to show that it*3048 was delivered to the transferees, nor that there was any intention on the part of the decedent to relinquish dominion at the time of transfer. Dividends declared during the years 1920 and 1921, at his express direction, were paid to him and he made the distribution. (4) One of the provisions of the contract of July 1, 1919, between the decedent and the Spray Cotton Mills provided that the residence property was to be occupied by the decedent, and his wife or the survivor, rent free. This reservation was not incorporated in the deed, but there is no evidence that any rent was paid during the lifetime of the decedent who survived his wife. (5) The decedent was 73 years old at the date of his death, November 5, 1922. He was a man of unusual energy, but a recluse, interested in flowers, music, and tubercular research. It was his habit to spend several hours each day in connection with his medical duties at his sanatorium, and the remainder at his residence in study and research. He was not in the habit of discussing his health with his medical associates and rarely had any medical advice. In 1918 he had an attack of bronchial pneumonia and was confined to his home for two or*3049 three weeks. In the fall of 1920 he had an attack which he personally diagnosed as bronchial asthma. About December, 1920, he asked Dr. Flack of the sanatorium staff to examine him. Dr. Flack diagnosed his ailment as being chronic myocarditis. The decedent was not in agreement with this finding, but after reading certain medical treatises in connection with the study of his condition, did accept the diagnosis in March or April, 1921. A synopsis of his condition, with his medical history from August, *42 1913, to July 4, 1921, was sent to Dr. Barker of John Hopkins Medical School, who confirmed the diagnosis. In March or April, 1921, the decedent stated to Dr. Flack that he realized that his condition was serious and that his life expectancy was limited to from two to four years. In August, 1921, the decedent wrote Dr. Barker, and, after setting forth his condition, asked this question: Judging from the details of the case as I have given them to you and considering that I really have lived my life and have reached the age of 72, what do you really think is a reasonable expectancy of the period during which I might be able to attend to my affairs? I have so many irons*3050 in the fire and, while I am arranging them as well as I can, yet if I could anticipate a little bit, I would very much like to do so. Dr. Barker called his attention to some cases of myocarditis recorded in medical works, but suggested that he get his affairs in order. (6) The respondent included in the gross estate of the decedent the November 5, 1922, value, as determined by him, of certain shares of the capital stock of the Spray Cotton Mills which he found to have been transferred by the decedent prior to his death as follows, holding such transfers to have been in contemplation of death: Date To Number of shares Value at decedent's death as determined by respondent Nov. 6, 1920 Various relatives of decedent's wife 2,331 $347,319 Apr. 3, 1921 Decedent's foreign relatives transferred to William Schoenheit, trustee $3,460 515,540 Do Various relatives of decedent's wife 1,837 273,713 7,628 1,136,572 Of the shares above mentioned, 3,460 were included in the trust agreement executed by decedent and William Schoenheit on July 28, 1919, and 1,533 in the trust agreement of August 1, 1919, executed by Delia M. von Ruck and William Schoenheit, *3051 trustee. The stock remained in the possession of the decedent until the dates on which it was transferred on the books of the corporation. A 10 per cent dividend was declared and paid to the decedent on January 16, 1920. The proceeds of this dividend were transferred to William Schoenheit, who receipted for the same as trustee for the various persons designated in the trust agreements and transmitted amounts in proportion to the two agreements. A 5 per cent dividend was again declared on February 15, 1921, and William Schoenheit received direct from the corporation amounts in conformity with the trust agreements. *43 On October 6, 1920, Bishopric, a nephew of Mrs. von Ruck, who was secretary of the corporation, was told that he might receive dividends on 167 shares of stock, which at that time were registered in his name, but which were actually owned by the decedent, who had during the war transferred a number of shares in order that the list of stockholders of the corporation might not show too many names of German origin. Bishopric in October, 1920, recognized the decedent as the sole stockholder of the Spray Cotton Mills and carried out all instructions from*3052 the decedent in regard to the corporation, and at that time knew nothing about the trust agreements. The notice of deficiency also included in the gross estate of the decedent certain shares of the capital stock of the Spray Cotton Mills which he found to have been transferred by the decedent prior to his death by way of sales for less than a fair consideration, as follows: Date To - Number of shares Value at decedent's death as determined by respondent Apr. 3, 1921 Karl Bishopric [160] $23,840 Aug. 1, 1922 Various relatives of decedent's wife 1,042 155,258 Oct. 2, 1922 do [89] 13,261 Oct. 27, 1922 Balance of stock owned by decedent transferred to Spray Cotton Mills [420] 62,580 1,711 254,939 holding such transfers to have been made for less than a fair consideration and in contemplation of death. The notice of deficiency discloses that the respondent allowed credits against the values so determined as follows: Amount paid for 160 shares at $70, transferred to Karl Bishopric, Apr. 3, 1921 $11,200.00 Amount paid for 1551 shares at $63.74 transferred Aug. 1, 1922, Oct. 2, 1922, and Oct. 27, 1922 98,860.74 Total 110,060.74 *3053 But the respondent by his amended answer now alleges that this action was erroneous and that the credits should not have been allowed as a reduction of the value of the property transferred. The transfer of April 3, 1921, of 160 shares to Karl Bishopric at $70 per share was a cash sale for the price stipulated, with the additional consideration that Bishopric was to reduce his salary and commission contract under which he was employed by the corporation. *44 About August 1, 1922, the decedent offered to sell to certain of his wife's relatives Spray Cotton Mills stock at its cost to him, namely, $63.74 per share. This offer was accepted and stock was transferred as follows: Date To - Number of shares Apr. 3, 1921 Karl Bishopric [160] Aug. 1, 1922 Abbie Moore [193] Do Wm. Schoenheit [361] Do Grace Schoenheit [165] Do Karl Bishopric [323] Oct. 2, 1922 do [31] Oct. 2, 1922 Abbie Moore [20] Do Grace M. Schoenheit [20] Do Wm. Schoenheit [18] Oct. 27, 1922 Spray Cotton Mills [420] Total 1,711 About the same time the decedent sold 322 shares to the Von Ruck Research Laboratory at a price not disclosed in the record. The stock purchased*3054 by the relatives of Delia M. von Ruck was all paid for in cash or its equivalent. The shares transferred to Abbie Moore and Grace M. Schoenheit were acquired by William Schoenheit as their agent or representative. The price of $63.74 a share appears to have been an estimate of the cost of the stock to the decedent, who told Mrs. Schoenheit at the time that the stock was a good investment; that "it was cheaper than it was ordinarily sold"; and that he was letting it go cheaper than he would sell to any one else. (7) The shares of the capital stock of the Spray Cotton Mills which the respondent included in the gross estate were included at a value of $149 per share, which he determined to be the value thereof at the date of the decedent's death, November 5, 1922. The petitioners contend that the value of such shares at the time of the decedent's death was not in excess of $58.72 per share. The balance sheets of the corporation for the years 1918 to 1922, inclusive, have been previously set out in the findings of fact. The annual earnings of the Spray Cotton Mills for the years 1909 to 1912, inclusive, were as follows: Year Profit Loss [1909] $9,311.82 [1910] $2,816.95 [1911] 2,639.39 [1912] 3,837.49 [1913] 2,240.96 [1914] 37,517.67 [1915] 13,008.87 [1916] $109,763.32 [1917] 102,423.69 [1918] 75,751.36 [1919] 183,784.13 [1920] 248,522.24 [1921] 83,140.40 *3055 The earnings stated for 1921 represent the earnings on both common and preferred stock. *45 The capital stock of the Spray Cotton Mills outstanding for the years 1909 to 1922, inclusive, was as follows: Year Common stock (par) Preferred stock (par) [1909] $200,000 [1910] 200,000 [1911] 200,000 [1912] 174,600 [1913] 174,600 [1914] 200,000 [1915] 190,000 [1916] $190,000 [1917] 400,000 [1918] 400,000 [1919] 1,000,000 [1920] 1,000,000 [1921] 1,000,000 $500,000 [1922] 1,000,000 500,000 The common stock was increased to $400,000 par, in August, 1917, and to $1,000,000 par, July 1, 1919. Dividends on the common stock were paid as follows: Year Dividends Per cent [6] 1909 to 1917 None. [5] A 6 per cent dividend was paid on the preferred stock in 1921. The personal accounts and bills receivable of the Spray Cotton Mills at December 31, 1922, were $47,163.71. The balance of the amount, $766,046.46, shown by the December 31, 1922, balance sheet as accounts and bills receivable, represents bonds, notes and certificates of deposit. Bonds were carried on the books at cost, and there were*3056 included in accounts and bills receivable as shown by the December 31, 1922, balance sheet, bonds the purchase price of which amounted to more than $690,000. The accounts and bills receivable reflected by the balance sheet of the corporation as at October 31, 1922, in the amount of $804,574.16, comprise personal accounts receivable, notes, certificates of deposit and bonds. The personal accounts receivable included amounted to $63,451.69. Bonds, certificates of deposit and notes in the total amount of $734,342.23 were held by the Spray Cotton Mills at October 31, 1922, which was the nearest date a balance was taken to the time the decedent died, November 5, 1922. (8) In the respondent's determination no deduction from the gross estate was allowed for a residuary bequest of the decedent to the Von Ruck Research Laboratory, Inc. The petitioners allege that the respondent erred and that such a deduction should be allowed under the provisions of section 403(a)(3) of the Revenue Act of 1921. *46 The decedent, on August 20, 1918, incorporated the Von Ruck Memorial Sanatorium, Inc., a nonstock corporation. On July 15, 1921, its name was changed to "The Von Ruck Research*3057 Laboratory, Incorporated." On July 20, 1921, the Von Ruck Memorial Sanatorium, Inc., a stock corporation, was formed. The latter corporation took over the operation of the sanatorium, and the Von Ruck Research Laboratory, Inc., engaged in research work and the manufacture of vaccine. The decedent's will designated the Von Ruck Research Laboratory, Inc., as the residuary legatee of his estate and directed that the residuary fund should be used by that corporation for scientific research, study, and experiment in tuberculosis, or for the aid of tubercular persons who are patients in the Von Ruck Sanatorium, Inc., and who may be in need and unable to procure adequate and satisfactory treatment. The will further provided that if a majority of the trustees of the Von Ruck Research Laboratory, Inc., should conclude and determine that the object and purpose for which the corporation was organized had been attained, or that a further continuance of the work would attain no useful purpose, the corporation should be discontinued and the residuary fund returned to his estate to be divided among his relatives and those of Delia M. von Ruck. The Von Ruck Research Laboratory, Inc., was a*3058 nonstock corporation, operated by trustees, which according to its charter was formed "to conduct, control, manage and maintain hotels, sanatoriums, sanatoria, hospitals, in Asheville, North Carolina, or elsewhere, for the prevention and treatment of tuberculosis and other diseases, and for the cure, treatment, and immunization of persons suffering from tuberculosis, and any and all other diseases and maladies, in the discretion of the Board of Trustees of said corporation." The purpose of the incorporators was that all profits which may be derived from any business conducted by the corporation should be used exclusively for the benefit of persons suffering from, or threatened with the diseases treated at the sanatoria, and who are not financially able to pay the necessary and full expense thereof. The laboratory occupied quarters in the sanatorium and gave all its income from the sale of vaccine, which it manufactured, to the stock corporation in payment for rent, light, etc., and the board of its employees. For the three years prior to July 1, 1921, the Von Ruck Memorial Sanatorium, Inc., starting with assets of $6,907.97 donated by the decedent, made a profit of $88,969.68. *3059 The income was derived from board and treatment of patients; all patients from whom collection could be made were charged. When patients overstayed their capacity to pay the charges made were, during this *47 period, written off as bad debts. Certain patients were treated but not charged. After the stock corporation was organized and took over the operation of the sanatorium, items similar to the bad debts just referred to were no longer written off the books but were charged to the Von Ruck Research Laboratory, Inc., and paid by it. There is no evidence that the profits of the research laboratory have ever been distributed to any trustee or to any person other than the Von Ruck Memorial Sanatorium, Inc. (9) The petitioners claimed deductions on account of funeral expenses, administration expenses and debts of decedent which were allowed by the respondent in the amounts claimed on the return. Since the return was filed, the petitioners have expended additional amounts in payment for services of attorneys, expenses of witnesses and in settlement of claims. Income taxes heretofore paid by the petitioners, properly deductible from the gross estate, amount to $9,614.78. *3060 Administration expenses, paid or incurred, including the decedent's note to Abbie Moore, and the specific exemption of $50,000, properly deductible from the gross estate, amount to $194,718.08, of which amount $95,243.48 was allowed as a deduction in the original determination of the respondent. OPINION. GREEN: These proceedings were brought by the executors of Karl von Ruck for a redetermination of the decedent's income taxes for the calendar years 1919, 1920, and 1921, and also for a redetermination of the estate tax. The decedent was a cultured German physician, who for a great number of years resided at Asheville, N.C., where he had established a tubercular sanatorium. He appears to have been an extremely dominating character, endowed with unusual business ability, who surrounded himself with relatives who, with the exception of his son, were never allowed to assume any position of real authority in his various business ventures. For some time prior to 1918 he had been retired from active practice of his profession and had leased his sanatorium to his son, Dr. Silvio von Ruck, who continued its operation until the time of his death in 1918. Almost simultaneously with*3061 the death of his son was the death of the son's daughter, leaving the decedent with no direct heirs. Upon the death of the son, the decedent again resumed his professional activities and was so engaged until the time of his death. Nine issues were raised by the pleadings in the proceedings. The consolidated opinion will follow the same order in which we have found the facts. *48 (1) The respondent contends that the decedent realized a taxable gain of $140,619.25 from the sale of certain real estate to the Spray Cotton Mills on July 1, 1919. The petitioners contend (a) that the stock received by the decedent had no fair market value; (b) that the stock received did not have a fair market value in excess of $56 per share; and (c) that the transfer of property by an individual to a corporation of which he owns all the stock in exchange for additional shares can not result in gain to an individual under the Sixteenth Amendment, or the Revenue Act of 1918. On July 1, 1919, the decedent was the sole owner of the stock of the Spray Cotton Mills, which was capitalized at $400,000. At about this date he caused the capital stock to be increased to 10,000 shares of $100 par*3062 value each. In return for the additional 6,000 shares of stock and $75,000 in cash or cash credits, he caused to be conveyed to the corporation his residence which he valued at $96,000, the Winyah Sanatorium, which he valued at $250,000, and other real estate adjacent to the two properties. The sanatorium paid a rental of $2,000 per month. The evident intent was to convey the residence with a rent-free reservation during the lifetime of the decedent and his wife. The remainder of the property was nonincome producing. From 1916 to the date of the transfer the only stock sales were to the decedent, who paid par for the last stock acquired by him. The company, from 1916 to 1919, inclusive, shows earnings of $109,763.32, $102,423.69, $75,751.36, and $183,784.13, respectively. The method of determining the value of stock issued in exchange for property has been considered by the Board in Appeal of William Ziegler, Jr.,1 B.T.A. 186-192, where we held: The usual method of appraising stock issued for property where there is no evidence of the market value of the stock is to say that the stock is deemed equivalent in value to the property for which it was issued, *3063 and by determining the value of the property one can determine the value of the stock. In the instant case we are of the opinion that the fair market value of the property transferred was $675,000. Applying the rule laid down in the Ziegler appeal, the fair market value of the Spray Cotton Mills stock exchanged therefor is the same amount. This is the figure used by the respondent and the petitioners have offered no proof that convinces us that the fair market value of the stock was in a different amount than that here found. See also Appeal of Napoleon B. Burge, et al,4 B.T.A. 732. (2) The second issue involves the question of whether a salary of $1,000 per month payable to the decedent by the Von Ruck Memorial Sanatorium, Inc., for a period from April 1, 1919, to July 1, 1921, and accrued to his account on the books of that corporation, should be included in the decedent's taxable net income. *49 We have found that a salary of $1,000 a month for a period of one year was voted by the trustees of the corporation, and that for a period of 27 months credits of this amount were made to the decedent's account on the books of the corporation. *3064 It appears also that the corporation acted through another account as the banker for the decedent. The decedent declined to draw any of the accumulated salary, but there is nothing in the record to show prior to the time that he finally returned the salary that he ever had any intention of relinquishing possession of it. We are of the opinion that of the $27,000 thus credited, $21,000 should be included in taxable income. Appeal of Mattlage,3 B.T.A. 242. In Appeal of Brander,3 B.T.A. 231, we said: Brander (the taxpayer), as president, could at any moment have elected to take the $2,904.49 * * * and no one else could have prevented him. The corporation had sufficient assets to pay him and there was no one to dispute his right to it. * * * During the year he permitted the corporation to change its investments, and he could just as freely have permitted it to pay its salary debt to him. It was not that the corporation would not pay, but rather that he would not receive. This election to give the corporation the temporary use of the amount is an exercise by him of its enjoyment, and this is one of the primary attributes of income. The Commissioner*3065 therefore correctly determined the taxpayer's income from salary and commission. The remaining $6,000, being the amount credited to the account in 1921, was returned to the corporation within the year and was not income to the decedent. Appeal of H. B. Hill,3 B.T.A. 761. (3) The third question is whether the respondent erred in proposing to tax the decedent, as the sole stockholder, on all the dividends declared and paid by the Spray Cotton Mills for the years 1920 and 1921. The facts here show an individual possessed of a commanding personality approaching 70 years of age, who attempted on July 28, 1919, to create a trust of 3,460 shares of Spray Cotton Mills stock for the benefit of his foreign relatives, and on August 1 assigned 1,695 shares of Spray Cotton Mills stock to his wife, who executed a similar trust agreement naming her relatives as beneficiaries. The trustee named in the above instruments on the date of the trust agreement gave a receipt for the stock named, but it is clear from the record that the stock was not delivered by the decedent at this time, and that he not only continued to hold the stock but through his dominion over the affairs*3066 of the corporation was recognized by the secretary as the sole stockholder. None of the stock mentioned in the trust agreements was delivered to the secretary for cancellation and reissued until April 3, 1921, when it was delivered by the decedent. On December 6, 1920, 445 shares were transferred of record. *50 In spite of the trust agreements and the transfer made on December 6, 1920, the dividends of 10 per cent payable January 16, 1920, and of 5 per cent payable February 15, 1921, were both paid directly to the decedent. Receipts were filed with the corporation, signed by William Schoenheit, the trustee under the above mentioned agreements, but the distribution of the amounts named in the receipts was accomplished by means of funds received from the decedent and in accordance with his instructions. For the determination of the question of the validity of a gift inter vivos certain definite and well recognized rules have been formulated. Assuming parties legally competent to act, there must be, (1) a definite intention on the part of the donor to make an absolute gift; (2) delivery of the subject matter of the gift; and (3) acceptance by the donee. In*3067 the instant case delivery is lacking and, in addition, the donor during the period under consideration continued to exercise dominion. As to the 441 shares of stock transferred of record on December 6, 1920, but not delivered until late in 1921, since these transfers were obviously gifts the same rule should govern as stated above. Accordingly, we are of the opinion that as to this issue the respondent's determination should be sustained. (4) The fourth issue involves the question of whether or not the respondent erred in adding $200 per month to the decedent's income in lieu of rent on his residence which was conveyed to the Spray Cotton Mills on July 1, 1919, from that date through the year 1921. The evident intent of the parties, as shown by the preliminary contracts, was that the decedent and his wife should have the use of this property free from rent during their lifetimes. We have considered this element in arriving at the valuation of $675,000 for the property conveyed, and are accordingly of the opinion that the respondent erred in adding $200 per month to the decedent's income for the period subsequent to the transfer. (5) The fifth issue is whether the gifts*3068 of certain shares of the capital stock of the Spray Cotton Mills made by the decedent to relatives of himself and his wife were transfers thereof in contemplation of death. The Revenue Act of 1921 provides as follows: SEC. 402. That the value of the gross estate of the decedent 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 which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate; * * * (c) *51 To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair consideration in money or money's worth. Any transfer of a material part of his property in the*3069 nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. The intention to make the gifts of the stock in question was expressed in the two trust agreements dated July 28, 1919, and August 1, 1919, respectively. The donor did not relinquish possession of the stock and complete the gift until April 3, 1921. The statute imposes on the plaintiff the duty of showing that gifts made within two years prior to the date of death are not made in contemplation of death. In this case we have an experienced physician, head of a hospital, assisted by trained medical men, in the fall of 1920 calling on a member of his hospital staff for consultation. A diagnosis of myocarditis was made, which the decedent refused to accept until satisfied through personal research on the subject. After he did come to a conclusion, he then sent a synopsis of his medical condition to Dr. Barker of Johns Hopkins, together with tracings of his heart and other information. The diagnosis of myocarditis*3070 was confirmed by Dr. Barker. Subsequently, the decedent wrote to Dr. Barker asking for an estimate as to his life expectancy. It is our opinion that the petitioners have failed to overcome the presumption that these gifts were made in contemplation of death and accordingly the determination of the respondent should be sustained. (6) The respondent included in the gross estate of the decedent the November 5, 1922, value, as determined by him, of certain shares of capital stock of the Spray Cotton Mills which he found to have been transferred by the decedent prior to his death, holding such transfers to have been made in contemplation of death. The total amount received for the 7,628 shares of stock was $110,060.74. In the original letter of determination, the respondent allowed credits of this amount against the values determined as of the date of death. By his amended answer he alleges that the credits should not have been allowed as a reduction of the value of the property transferred. On April 3, 1921, 160 shares of stock were transferred to Karl Bishopric in consideration of the payment of $70 per share and the reduction of Bishopric's contract as secretary with the*3071 Spray Cotton *52 Mills. Under this contract, Bishopric received a salary and commissions which in the prior year had brought him a total compensation of about $14,000. In return for the right to purchase 250 shares, of which he actually purchased 160, he submitted to a reduction of one-half in his salary and commissions. We are of the opinion that as to this sale of 160 shares, it was a bona fide transaction for a fair consideration in money or money's worth. As to the 1,551 shares sold on various dates at a price of $63.74, which represented the estimated cost to the decedent, we are of the opinion that it was not a bona fide sale for a fair consideration in money or money's worth and that the petitioners have failed to show that the sale was not made in contemplation of death. The respondent, by his amended answer, is seeking to increase the deficiency originally made by $110,060.74, which arises by his disallowing the credits from the cash paid for the stock. The statute requires that the property transferred be included in the gross estate "to the extent of any interest therein of which the decedent has at any time made a transfer." Section 302(i) of the Revenue*3072 Act of 1926 contains the provision in respect of a transfer by way of sale that "there shall be included in the gross estate only the excess of the fair market value at the time of death of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent." While there may be some grounds as to the respondent's argument that the amount received should be added to the value determined as of the date of death, we are of the opinion that it was never the intent of Congress to include in the gross estate an amount in excess of the value at the time of the decedent's death, and that the change expressed in the 1926 Act should not be construed as a declaration of a new policy. (7) The seventh issue raised is the value of the common stock of the Spray Cotton Mills at November 5, 1922, the date of the decedent's death. The respondent determined a value of $149 per share as of this date. The petitioners are contending that its value is not in excess of $58.72 per share. Evidence was introduced by the petitioners seeking to use 8 times its average earnings as a basis. The situation is unusual. In 1919 the*3073 decedent conveyed real estate, not necessary for the conduct of his business, to the Spray Cotton Mills, which we have determined had a value of $675,000. For a long period of years the decedent was the sole stockholder of the corporation and he allowed its surplus to accumulate in bonds. *53 An analysis of the net earnings from 1909 to 1918, from 1912 to 1921, and from 1919 to 1921 shows the following average annual earnings per share: $14.89, $18.99, and $17.98, respectively. The balance sheet as at October 31, 1922, within a very few days of the date of the decedent's death, shows bonds, certificates of deposit and notes in the total amount of $734,342.23. No evidence was introduced as to the value of the mill property. With quick assets of $73.43 per share, real estate of $60 per share and no evidence as to the value of the mill, we are of the opinion that the determination of $149 of the respondent as the value of the stock of the Spray Cotton Mills on the date of decedent's death should not be disturbed. (8) The respondent has included the value of the residuary legacy in the gross estate of the decedent. The petitioners contend that it should be deducted*3074 under the provisions of section 403(a)(3) of the Revenue Act of 1921, which provides: SEC. 403. That for the purpose of the tax the value of the net estate shall be determined - (a) In the case of a resident, by deducting from the value of the gross estate - * * * (3) The amount of all bequests, legacies, * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees exclusively for such religious, charitable, scientific, literary, or educational purposes. The Von Ruck Research Laboratory, Inc., the legatee, is a nonstock corporation claimed by the eptitioners to be a charitable institution. It was organized by the decedent in August, 1918, to operate the Winyah Sanatorium property owned by the Spray Cotton Mills, for which it paid a rental of $24,000 a year. Starting with assets of $6,907.97 donated by the decedent, this nonstock corporation accumulated by July, 1921, a profit of $88,969.68. In July, 1921, the name of this corporation was changed*3075 to "The Von Ruck Research Laboratory, Inc.," and the laboratory activities, including the manufacture of tubercular vaccine, were continued. The conduct of the sanatorium was transferred to a newly organized stock corporation, the Von Ruck Memorial Sanatorium, Inc., operated by the decedent for profit. The business was thus segregated into a profit department and a nonprofit department. The two corporations had the same busness manager and the same bookkeeper, and the Research Laboratory occupied space in the sanatorium building. All the tubercular vaccine which the Research Laboratory made was turned over to the Memorial Sanatorium. Prior to the organization of *54 the Research Laboratory, the sanatorium realized losses from uncollectible accounts and the treatment of charity patients. After the organization of the Von Ruck Memorial Sanatorium, Inc., the stock corporation, such items were charged to and paid by the Research Laboratory. With the exception of these payments, the evidence discloses no distribution by the Research Laboratory by way of donations, charitable or noncharitable. The will provides that in case the majority of the trustees of the Von Ruck Research*3076 Laboratory, Inc., shall determine that the object and purposes for which the corporation was created have been attained, or that further maintenance of the corporation will serve no useful purpose, then that part of the assets of the Research Laboratory contributed by the decedent shall be distributed to his heirs and those of Delia von Ruck, as provided under prior provisions of his will. We are of the opinion that the Von Ruck Research Laboratory, Inc., is not such a charitable or scientific organization as to fall within the exemption provided in the statute, and further that where the legatee or trustee is empowered to divert the funds to a use or purpose which would have rendered it not deductible had it been directly so bequeathed or given by the decedent, no deduction should be allowed. Accordingly, the respondent's determination as to this issue should be sustained. (9) The ninth and final issue relates to deductions from the gross estate for expenses of administration paid or incurred, and for Federal taxes paid or to be paid by them on the taxable net income of the decedent for all periods prior to his death. Income taxes have been paid by the executors in the amount*3077 of $9,614.78, which are properly deductible. Administration expenses, paid or incurred, including the decedent's note payable to Abbie Moore and the specific exemption of $50,000, are properly deductible from the gross estate, of which amount $95,234.48 was allowed as a deduction in the determination of the respondent. The parties hereto have agreed that the amount of any deficiency in income taxes for the years 1919, 1920, and 1921, together with interest thereon allowed by law, constitute a proper deduction from the gross estate. Reviewed by the Board. Judgment will be entered under Rule 50.