In my opinion the price of $157,880 is a full one for the aforesaid property, taking into consideration the restrictive covenants, which restrictive covenants are, in my opinion, adequate.

Piper, likewise, expressed his approval of the sales price in letters to petitioner and to Morgan. In his letter to petitioner he stated:

I have carefully read a copy of the Agreement of Sale between you and Mr. and Mrs. Brewster and have given particular attention to the various restrictive covenants which are to be contained in the Deed you will give to them.

It is my opinion that the sales price of $157,880.00 is a very full price when the aforementioned restrictive covenants are taken into consideration.

Pursuant to the agreement of sale petitioner deeded the property to Brewster and his wife February 7, 1955. The deed provided that the property would not

1. Be used for commercial or industrial purposes, but shall be used only for residential and/or farming purposes, such as, but not by way of limitation, the breeding, raising, boarding, training, selling and showing of horses, cattle or other livestock. The Grantees further covenant for themselves, their heirs and assigns, that they will not apply for any change in the present zoning status of said property in order to have it rezoned or reclassified for another or different use other than its present use.

2. Be sold, transferred or conveyed (or otherwise subdivided) in parcels of land containing less than fifty (50) acres of land per parcel.

3. Be sold, transferred or conveyed, even in parcels containing fifty (50) acres or more of land per parcel to anyone other than a limited class of persons hereinafter referred to, without first notifying the Grantor in writing, or if the Grantor be then deceased, her then surviving children, of such proposed sale; and the Grantor, or if she be then deceased, then any one of her then surviving children shall have the right within sixty (60) days of the giving of such notice to purchase such parcel so proposed to be sold, at the same price and upon the same terms and conditions as contained in said proposed sale. In the event that a minor child of the Grantor shall have the right to purchase, as set forth above, the legal guardian of such child shall be required to exercise the right to purchase on behalf of such minor child within said sixty (60) day period, and upon the failure of said guardian to so exercise said right within said sixty (60) day period, then and in that event the right of such minor to so purchase shall thereupon expire and cease to exist. The Grantees specifically reserve the right to sell, transfer or convey absolutely or upon such terms and conditions as the Grantees deem proper, but always subject to the covenants and restrictions in this deed contained, one or more parcels of land containing not less than fifty (50) acres or more of land per parcel, to a limited class of persons, namely, the Grantee's parents, children, stepchildren, and not more than two other persons who are either brothers and/or sisters of either of the Grantees without first offering said parcel to the Grantor, or if she be then deceased, to her then surviving children, as in this deed provided.

The above restrictive provisions were not to apply to certain portions of the property conveyed and were reciprocal in that they were to become inoperative (1) if the grantor should convey to others than her descendants the remainder of the Worthington Farm and the Snow Hill Farm lands, or (2) should sell or utilize any of such lands for commercial or industrial purposes, or (3) should sell any of such

lands in parcels of less than 50 acres. The restrictive provisions were to run with the land for a period of 30 years from the date of the sale.

Two real estate appraisers were employed by the executors to appraise the real estate left in the estate of petitioner's deceased husband. In their reports one of them valued the properties conveyed to Brewster at the date of Martin's death at $161,790, while the other (who had been employed by petitioner to appraise the property sold to Brewster) valued them at $200,000. The executors who prepared the estate tax return used the higher value of $200,000 for the reason that it would give petitioner a higher base for the property which she retained. The use of the higher value did not result in any increase in the amount of the estate tax. These appraisals of the property were made after the execution of the agreement of sale with Brewster. Nothing occurred in any way affecting the value of the property in question during the interval between Martin's death and petitioner's sale of the property to Brewster.

The restrictions placed on the property in the deed to Brewster did not have any effect on the price which he was willing to pay for it, since they did not limit the uses for which he acquired the property.

In their joint income tax return for 1955 petitioners claim an ordinary loss deduction of $43,917.08 on the sale of the real estate to Brewster, this amount being the difference between the amount at which the property was valued in Martin's estate tax return and the price at which it was sold to Brewster, with adjustments for depreciation and costs of the sale. In respondent's determination of the deficiency herein the claimed loss was disallowed for reasons stated as follows:

The loss on the sale of "Worthington Farm" in the amount of $43,917.08 has been disallowed since the difference between the basis of the property of $200,000.00, established on the estate tax return of J. B. [sic] Y. Martin who died on June 25, 1954, and the sales price, as adjusted for settlement costs and depreciation, has been determined to be the value of the restrictions contained in the deed which pertain to the use and future sale of the property for a period of 30 years. These restrictions have been determined to be of a personal benefit to you.

In the alternative, it is held that such loss is not allowable because it is in the nature of a capital expenditure to protect and enhance the value of adjacent real property owned by you.

OPINION.

KERN, Judge: The ownership of property is said to consist of a "bundle of rights" including its free use and enjoyment, the control over it, and the right to dispose of it in any manner not contrary to existing regulatory laws. Restrictive covenants, as applied to the use of land, are said to constitute an interest in the land in the nature of a negative easement. See 26 C.J.S., sec. 162(2).

At the time of petitioner's sale of the property in question it was free of any restrictions. In her sale of the property to Brewster petitioner did not convey to him all of her rights therein but excluded. from the sale the right to use the property for commercial or industrial purposes, the right to sell it in lots of less than 50 acres each, and the right to sell it to the public before first offering it to the grantor or her surviving children.

While the evidence does not establish that the restrictions had any ascertainable value to petitioner, it does show that they did seriously affect the sale value of the property. The testimony of one of petitioner's own expert witnesses was that the restrictions accounted for the full amount of the difference between the $200,000 at which the property was valued for estate tax purposes and the $157,880 for which it was sold to Brewster. The evidence is clear that the property itself suffered no loss of value during this period.

Thus it seems inescapable that what petitioner is claiming here is a loss on the sale of property rights which she did not in fact sell. She retained and still retains a limited interest in the property through these restrictive covenants. That interest, supposedly, is subject to further barter and sale between her and the grantee. Accordingly, the loss deduction claimed by petitioner is disallowed. Decision will be entered for the respondent.

JOAN V. BEETS AND MARJORIE C. YECKEL, COPARTNERS, d.b.a. The THORSON COMPANY, PETITIONERS, V. RENEGOTIATION BOARD, RESPONDENT.

Docket No. 975-R. Filed August 22, 1962.

C. J. Thorson and his son, George O. Thorson, organized a partnership in 1949 under the name of The Thorson Company to do business as a manufacturer's representative, selling products for airborne application and to render sales-engineering services. By January 1, 1952, they decided to convey their respective interests to petitioners, who were C. J.'s daughters and George's sisters. C. J. and George were paid reasonable compensation as employees in 1954, as were two other sales engineer employees, all of whom performed personal services on behalf of the partnership and for its principals. Petitioners had no business experience, performed no personal services for the principals, and rendered only clerical assistance of about 1 hour a day, 5 days a week. They acquired their interests without any consideration or any investment in the business. Held, that of the renegotiable net income of $36,423.32 realized by the partnership during 1954, $15,000 represented excessive profits.

Vincent C. Page, Esq., for the petitioners.

Dennis C. Cronin, Esq., for the respondent.

The respondent, by order dated December 23, 1957, determined that Joan V. Beets and Marjorie C. Yeckel, copartners, d.b.a. The Thorson

Company, realized excessive profits for the year ended December 31, 1954, in the amount of $15,000 (reduced to $14,862, after proper adjustment on account of taxes measured by income, other than Federal taxes), derived from contracts and subcontracts subject to renegotiation pursuant to the Renegotiation Act of 1951, as amended. The general question presented is to what extent, if any, the Thorson Company realized excessive profits during the year 1954.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated. Joan V. Beets (nee Joan V. Thorson) and Marjorie C. Yeckel (nee Marjorie C. Thorson) are daughters of C. J. Thorson and sisters of George O. Thorson. During the period beginning January 1, 1952, and extending beyond the year under review, 1954, Joan and Marjorie were copartners in a partnership that did business under the name of The Thorson Company, hereafter sometimes referred to as Thorson or the second partnership. Its address was 1644 North Orange Grove Avenue, Los Angeles, California, the same as C. J. Thorson's residential address, but the business was conducted in a building separate from the home. Thorson, organized on January 1, 1952, was a successor to a partnership that operated under the same name, The Thorson Company, sometimes referred to herein as the first partnership or the Thorson Company. It had operated from the aforesaid address. The first partnership was organized about September 1949, and consisted of C. J. Thorson, hereafter referred to as C. J., and his son, George O. Thorson, hereafter referred to as George, each owning a 50-percent interest. They had no formal partnership agreement. Each partnership operated as a manufacturer's representative and in connection therewith rendered sales-engineering services.

Prior to the formation of the first partnership, C. J. had had legal and financial experience and George had had experience in aviation engineering.

C. J. received a law degree from the University of Colorado Law School in 1914 and was admitted to practice law in Colorado. Thereafter, he taught classes at the university and practiced corporate law. The parties have stipulated that at some time during 1914 to 1922, C. J. did some engineering work for the United States Government and during the war worked in Washington. He was treasurer of California Bank, Los Angeles, from 1922 to 1928. He was a consultant and financial adviser from 1928 to 1941. From 1941 to 1945, he was vice president of San Diego Trust & Savings Bank, and from 1945 to 1947, served as contract termination negotiator for the United States Air Force.

George, during 1940 and 1941, was employed as a final assembly inspector by Lockheed Aircraft Corporation. During the years 1942

to 1946 he was a United States Air Force pilot. He attended the Air Force Flight Engineering School, serving as a flight engineer and as an engineering check or test pilot. He also served as an instructor in the Flight Engineering School and the Flight School. He served 21 months overseas (Pacific area) with bombers and fighters. During the period 1946 through 1948, he served in Alaska as flight captain and chief test pilot, and as sales and traffic manager of the Wein Alaska Airline, the oldest airline in Alaska with a full schedule. He returned from Alaska in January 1949, and for 6 months attended the University of California at Los Angeles, studying courses in economics and business and receiving a B.A. degree.

Little business, if any, was done by the partnership in 1949. In January 1950, it undertook nationwide aircraft sales representation of the Meletron Corporation, a manufacturer in Los Angeles of all types of pressure switches. Meletron's stock was owned by the president of the corporation and his wife. Arrangements were made for George to receive a token part of the common stock and to become the corporation's third officer. As of August 1, 1950, he became vice president and aircraft sales manager, and on the same date entered into an agreement with Meletron on a commission basis. He had no particular duties as vice president but under his contract handled sales and sales engineering of products for airborne application. Active continued participation in the ownership and operation of the Thorson Company was specifically included in the agreement covering George's association with Meletron. George was permitted to apply his time to both organizations as long as he got his work done for Meletron and handled no sales for the Thorson Company in competition with Meletron. He had no daily working hours at Meletron or the Thorson Company, allocating his time as he thought best, one month giving 60 percent of his time to one and 40 percent to the other, and the next month reversing the allocation. Meletron was kept informed of George's work for the Thorson Company.

During the period George was associated with Meletron he negotiated at least four agreements under which the Thorson Company or Thorson became manufacturer's representative of firms which continued to be principals of Thorson during 1954.

On March 1, 1950, George, as an individual, entered into an agreement with Allen Aircraft Products, Inc., Ravenna, Ohio. It was on a "Standard Form of Agreement with Manufacturers' Agent," an extensive document which recited that various items were covered in attached exhibits, entitled "Territory," "List of Products," "Prices and Terms," "Commission Schedule," and several other designations. This principal manufactured valves of various kinds from approximately an inch cube up to a 12-inch cube. They were primarily used