and transferred to Rosen under the contract of sale, and Rosen had executed and delivered the mortgage on the property to the mortgagee. However that may be, it is not necessary for us to base our decision upon inferences or doubtful conclusions of fact. The parties stipulated in clear and unambiguous language (1) that on February 2, 1923, Marx entered into a contract with Rosen whereby Marx agreed to sell the property in question to Rosen for $313,000; (2) that Marx, acting for himself and the petitioner, then exercised the option to purchase the fee title for $95,000 in accordance with the terms of the lease; and (3) that the owner of the fee title then conveyed title in the fee to Marx, who in turn conveyed title to Rosen, pursuant to the contract of purchase. (See paragraphs 6 and 7 of the stipulation, set out in our findings of fact hereinabove.) This stipulation of the parties, we think, is binding upon us, and its plain legal effect can not be avoided or modified by the ambiguous testimony of the petitioner, even if such testimony be construed to be in conflict with the stipulation. On the other hand, Rosen did not obtain the $95,000 until he acquired the property. This was a part of the $225,000 loan procured by Rosen on the property as security. It is difficult to see how he could have used the property as security for a loan until he first acquired the property. In any event we think the testimony that the $95,000 was paid out of Rosen's money is a conclusion not warranted by this record. Prior to the purchase of the fee by Marx, acting for himself and the petitioner, the legal title to the building erected by them on the leased premises was in the lessor. Upon the purchase of the fee, the legal title to the whole property vested in Marx, who held same for himself and the petitioner, and the leasehold merged in the fee. This is the generally recognized rule, Wisconsin Nat. Bank, 4 B. T. A. 109, at pp. 112, 113, and authorities cited. The same rule prevails in Illinois. Carroll v. Ballance, 26 Ill. 9; Bond v. Moore, 236 Ill. 576; 86 N. E. 386, 391; Hill v. Hill, 264 Ill. 219; 106 N. E. 262, 265. It follows that the profit derived by the petitioner from the transaction in question represents his share of the gain realized from the sale of the fee title, which was purchased and sold within the taxable year by Marx, acting for himself and the petitioner. Hence, said property, to wit, the fee title, did not constitute a "capital asset within the meaning of the taxing statute, since it had not been held by Marx and the petitioner for more than two years prior to the sale, and the profit derived is not taxable as capital gain, but as ordinary income. Reviewed by the Board. Judgment will be entered for the respondent. THOMAS M. SCHUMACHER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 43965. Promulgated March 7, 1933. Payment by a holding company to petitioner, who had been an Joseph J. Klein, Esq., for the petitioner. OPINION. ARUNDELL: This proceeding involves a deficiency in income tax for the calendar year 1924 in the amount of $1,448.76, all of which is in controversy. At the hearing counsel for the parties stipulated that the amount reported as dividends received and included in income for surtax purposes should be reduced from $26,825 to $24,746. This reduction will be reflected in the recomputation to be made under Rule 50. There is but one other issue, namely, whether the amount of $75,000 received by petitioner in 1924 constituted taxable income or was a gift, and hence exempt from tax. The petitioner testified briefly, relating some of the circumstances surrounding the alleged gift. The essential facts were stipulated in detail and we adopt the stipulation filed as our findings of fact, setting forth here only a brief summary sufficient to an understanding of the question involved. From January 1, 1924, to October 31, 1924, petitioner was president of the El Paso and Southwestern Railroad Company, hereafter called the operating company. He was paid in full salary due him as an employee of the operating company up to the conclusion of his employment on October 31, 1924. The stock of the operating company was owned by a holding company, the El Paso and Southwestern Company, until November 1, 1924, when it transferred the stock of the operating company to the Southern Pacific Company in exchange for certain stocks and bonds of the latter company. In the latter part of 1924 after the holding company had effected the exchange the stockholders of the holding company authorized the directors thereof to pay "additional compensation" to officers and employees "in recognition of long and faithful service of the officers and employees of the Railroad." Pursuant to the authority so granted checks were issued to the persons selected to receive additional compensation. Of the checks so issued petitioner received one dated December 26, 1924, in the amount of $75,000, and another dated January 2, 1925, in the amount of $100,000. Each of these checks was accompanied by a card upon which was printed "With appreciation and best wishes of El Paso and Southwestern Company from Committee appointed November 19, 1924." No deduction for tax purposes with respect to the distribution to officers and employees was taken by the stockholder's committee, the holding company, any of the stockholders thereof, or the operating company. The amount of $75,000 received by petitioner in 1924 has been included by the respondent in petitioner's taxable income for that year. The question of whether the distributions made in 1924 and 1925 by the holding company to officers and employees of the operating company constituted taxable income has been involved in several cases. In William C. Barnes, 17 B. T. A. 1002, it was claimed by William C. Barnes, vice president of the operating company and Eugene Fox, general traffic manager of the operating company, that the amounts they received in 1924 out of the distribution made by the holding company were gifts and not additional compensation. We sustained the claim of the petitioners, holding that all the essential elements of the gift were present in the distribution. Since the opinion in those cases was rendered the Court of Claims, in Schumacher v. United States, 74 Ct. Cls. 720; 55 Fed. (2d) 1007, has held that the amount of $100,000 received by the petitioner before us here in 1925 as above described was taxable as compensation for services rendered and was not a gift. The United States Circuit Court of Appeals for the Fifth Circuit, in Bass v. Hawley, 62 Fed. (2d) 721, held that the share of the distribution received in 1925 by Hawley, general auditor of the operating company, was a bonus or compensation paid him in recognition of long and faithful service and was not a gift. Upon careful consideration of the facts, the arguments of the parties, and several opinions rendered concerning the nature of the distributions made by the operating company, we believe that the opinions by the Court of Claims and the Circuit Court of Appeals present the sounder view. In line with those opinions we hold that the $75,000 received by petitioner in 1924 was an item of taxable income and we decline to follow our holding in the Barnes case, supra. Reviewed by the Board. Decision will be entered under Rule 50. SOUTH MEMPHIS LAND COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVenue, ResponDENT. Docket No. 44500. Promulgated March 7, 1933. Market value of assets owned by petitioner at March 1, 1913, determined. F. E. Hagler, Esq., and E. C. Reynolds, Esq., for the petitioner. R. W. Wilson, Esq., for the respondent. OPINION. LANSDON: The respondent has determined deficiencies in income taxes for the years 1925 and 1926 in the respective amounts of $12,347.74 and $782.65. The petitioner contends (1) that it sustained a net loss in 1924 in the amount of $7,409.99, resulting from the compromise of certain litigation which the respondent has refused to carry forward to reduce its tax liability for 1925; (2) that it sustained a net loss in 1925 resulting from the sale of a certain light and power franchise which it acquired before March 1, 1913; and (3) that the respondent erroneously computed the profits resulting from the sale in 1926 of shares of stock which it acquired before March 1, 1913. The determination of these several contentions requires the Board to find the fair market value at March 1, 1913, of the contract, franchise and stock owned by the petitioner on that date. The parties have filed a stipulation of facts, which is incorporated herein by reference, and the petitioner has adduced certain oral and documentary evidence intended to establish the values in controversy. Petitioner is a Tennessee corporation, with its principal office at Memphis. In or about 1905, it acquired about 4,000 acres of land approximately one mile south of the corporate limits of Memphis. Something like 200 acres of such land were suitable for industrial sites and the remainder was well adapted to residential purposes. Since the date of its incorporation it has been engaged in subdividing and selling such land. When acquired this land above described was served by only one railway, the Illinois Central, and switching charges for handling cars over that road were about $2 per car higher than for locations within the city of Memphis. In order to attract industries, it was necessary to have better railway facilities and lower switching rates. Accordingly, the petitioner, on September 14, 1905, entered into a contract with the Union Railway Company, a subsidiary of the Missouri Pacific Railway, which provided for the construction of the tracks and switches necessary to the development of its acreage suitable for industrial sites. Under the terms of such contract the peti tioner paid the Union Railway Company $12,500, which was to be used before January 1, 1907, for the construction of a levee to protect the proposed track extensions, and the railway agreed to construct the specified trackage on or before January 1, 1907, and, after completion, to establish switching charges not in excess of rates prevailing in Memphis. When the Union Railway Company undertook the construction of the tracks provided for in the contract it was enjoined from crossing the tracks of the Illinois Central at grade. Long continued litigation followed, during which it was impossible to build the trackage provided for in the contract. In 1924 such litigation was terminated by a compromise settlement in which the petitioner surrendered its contract and received $50,500. Relying on its contract with the Union Railway Company, the petitioner, prior to January 1, 1907, sold to the McLean Hardwood Company a 10-acre tract for a sawmill site and in the conveyance guaranteed that the proposed trackage would be constructed. Upon the default of the Union Railway Company as to the proposed construction the lumber company sued the petitioner for damages. and in the first trial was awarded a favorable decision, which was reversed by a higher court, but subsequent litigation resulted in judg ment against the petitioner for $17,500, which was affirmed by the Circuit Court of Appeals and accepted by the parties as final. On July 2, 1914, in full settlement thereof, the petitioner paid the lumber company $25,978.69, which included all the costs and expenses incurred by the plaintiff in the prosecution of the suit. In its income tax return for 1924, the petitioner reported no profit from the receipt of the $50,500 by it in the compromise in which it surrendered its contract as set out above. Upon audit of such return the respondent determined taxable income therefrom in the amount of $13,456.69, which he computed by deducting from the said $50,500 the amounts of $25,978.69 and $11,064.62, representing the judgment and legal expenses paid by the petitioner as the result of the damage suit of the McLean Hardwood Company. The petitioner contends that the respondent erroneously disallowed any value of the contract in question as of March 1, 1913, and at the hearing undertook to prove a substantial value thereof at that date. Section 204 (b) of the Revenue Act of 1924 provides that: The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be (A) the cost of such property or (B) the fair market value of such property as of March 1, 1913, whichever is greater. The evidence indicates that the contract, if accomplished, would have added greatly to the value of the land owned by the petitioner |