The following is a statement of Association's net income or loss and the dividends paid for the indicated fiscal years ended July 31:

• After deduction of losses totaling $51,518 on the sale of real estate and corporate stocks.

On March 22, 1942, the date of the death of Lelia E. Coulter, Association's assets consisted of the following items, which had the fair market values indicated:

On March 22, 1942, the real estate market in Los Angeles was in a confused condition. Association's original acquisition of frontage on Wilshire Boulevard was at a cost of about $1,300 per front foot. On December 30, 1942, a vacant corner lot on the same side of Wilshire as Asssociation's property, but about two blocks farther out from the business area, and admittedly a less desirable location, sold for about $402 per front foot. Some of Association's frontage on Wilshire Boulevard was acquired in 1937 at costs of $200 and $236 per front foot. So far as disclosed, there were no sales in the vicinity on or about March 22, 1942, of properties similar or comparable to Association's improved property. Nor was there any similar property in the vicinity that was being occupied under lease at that time.

Following the Japanese attack on Pearl Harbor, the securities markets experienced a substantial decline, and to March 22, 1942, the average price of typical high grade common stocks had declined to near the lowest point in the preceding seven years.

The liabilities of Association totaled $785,060.95, of which $312,500 represented the unpaid balance of the first mortgage and $422,014.82 the unpaid balance of the second mortgage. The net value of the assets of Association on March 22, 1942, was $322,306.65, or $107.44 per share if prorated equally among the 3,000 outstanding shares of its stock.

In determining the deficiency the respondent determined that the net asset value of Association's stock on March 22, 1942, was $163.88 per share and that the fair market value of the 999% shares held by the trust was $150 per share.

On March 22, 1942, the fair market value of the 999 shares of stock in Association held by the trust was $90 per share.

The decedent's husband, Frank M. Coulter, was the son of B. F. Coulter by the latter's first wife. After the first wife's death, B. F. Coulter married Alice W. Coulter. To the latter marriage there was born a daughter, Frances Coulter, who married R. P. McReynolds.

In 1927 Alice Coulter and Frances McReynolds owned two-thirds of the stock in Dry Goods and in Association. On October 24, 1927, they entered into a contract with McReynolds which recited that they deemed it for the best interests of the corporations that he should remain in charge of the properties and affairs of the corporations as executive manager so long as he was willing, and mentally and physically able to serve. In consideration of his withdrawal of his proposal to resign and his promise to continue to devote his best efforts to the management of the corporations in the manner in which he had been accustomed to do for several years past, they agreed as follows:

(1) That during their respective lives they would not sell their stock or part with its voting power without the consent of McReynolds. (2) That provision would be made in their respective wills appointing the survivor of them, together with McReynolds, as trustee of the stock, so that voting power would be controlled by the survivor or by McReynolds as trustee, if he should survive both of them "so long as he may be actively engaged in supervising or managing the affairs of said corporations, or either of them.”

(3) That, so long as McReynolds was mentally and physically able to supervise and control the management of the business, and so long as it seemed to them for the best interests of the corporations to do so, they would cooperate to retain him as executive manager of both corporations, and then being of the belief that it was for the best interests of the corporations and their stockholders that he should remain in charge as theretofore, they would use their influence to the end that his compensation should be commensurate with the value of his services and not less than his then salary of $15,000 a year.

(4) That in event McReynolds' tenure of office should cease or his compensation be reduced through no fault of his own, he should be entitled to sufficient of the dividends upon their stock to bring his annual income to $12,500, to which obligation their stock was to be deemed pledged as security.

(5) That in event of the sale of their stock or upon liquidation of the corporations McReynolds was to receive 15 per cent of the net proceeds received by them from their stock.

On March 1, 1935, the foregoing contract was amended by the three parties by an agreement reciting that it was inadvisable, if not impossible, to continue payment to McReynolds of the compensation provided for in the contract of October 24, 1927. By the amendment he was granted the privilege of continuing as manager of the corporations at such compensation as the parties might deem commensurate with the value of his services and the ability of the corporations to pay, or of continuing in charge and delegating a part of his supervisory duties, or of retiring entirely from the active management. The amendment expressly reaffirmed the provisions of the original contract regarding "the trusteeship of the stock and reservation of voting power to Dr. McReynolds in the event of the death of either or both of the undersigned until he arrives at the age of seventy-five years," as well as all other matters unaffected by the amendment.

McReynolds was 70 years of age when the decedent herein died. Alice Coulter died in 1937 and Frances C. McReynolds died on August 12, 1942, at the age of 61. Both left wills placing in trust two-thirds of the stock of both corporations and vesting the voting rights thereto in McReynolds for his lifetime. McReynolds was executor of the estate of Frances C. McReynolds. On February 1, 1943, he filed a creditor's claim against the estate upon the above mentioned contract, alleging that all parties thereto had complied with all of its terms, that he was receiving a salary as manager of the corporations of $14,169 per annum and was continuing in such capacity at a like salary, and that the contract as amended was binding upon the representatives and heirs of Frances C. McReynolds and was an allowable claim against her estate. The claim was allowed by the probate court. On final distribution of the estate the stock was distributed to McReynolds, as trustee, and he is still acting as trustee.

McReynolds is and has been a practicing physician and surgeon, as well as president and general manager of both corporations. He has maintained a medical office in downtown Los Angeles for a great many years. He is at the store of Dry Goods each day from about 8:30 to 10:30 a. m. and from about 2:30 until 4 p. m. The remainder of his time is devoted to his medical practice. He directs the policies of the company.

The following is a statement of Dry Goods' merchandising sales, merchandising income (or loss), nonrecurring gain (or loss) on sales of securities, etc., dividends or interest from securities, the total net

income (or loss), and the dividends paid for the indicated fiscal years ended July 31:

From the first of 1940 and continuing thereafter there was a tremendous influx of war workers to Los Angeles, so that the demand for merchandise in the local market was greater than the supply. The balance sheets of Dry Goods as of July 31 of the indicated years show the following:

On March 22, 1942, loans on the highest grade of first mortgages on major buildings in Los Angeles were being made at an interest rate of 412 to 5 per cent per annum. A fair grade of first mortgage loans on Los Angeles business property was selling on that date at a rate of 61⁄2 to 7 per cent per annum. More speculative mortgage loans were selling to produce a current yield up to 13 per cent.

The net worth of the assets of Dry Goods on March 22, 1942, the date of the death of Lelia E. Coulter, was $1,345,981.21, or an amount

of $448.66 per share if prorated equally among the 3,000 shares of stock outstanding.

In determining the deficiency the respondent determined that the fair market value of the 999 shares of stock in Dry Goods held by the trust was $350 per share on March 22, 1942.

The fair market value of the said shares on that date was $275 per share.

OPINION.

The ultimate question under this issue is the fair market value on March 22, 1942, of the 999 shares of stock in Association and of the 999 shares of stock in Dry Goods held by the trust on that date. Subsidiary questions are the fair market value of Association's land and building on Wilshire Boulevard and the fair market value of the unpaid portion of Association's demand note secured by a second mortgage on the Wilshire Boulevard property and held by Dry Goods. The subsidiary questions are of significance only in ascertaining the asset value of the shares in the respective corporations. Respecting the Wilshire Boulevard property, the petitioner contends that its value was not in excess of $600,000 and that the value of Association's stock was $79.68 a share. The respondent contends that the value of the property was at least $850,000 and that the value of Association's stock was $150 a share. As to the unpaid portion of Association's note in the amount of $422,014.82, the petitioner contends that it had no greater value than 40 per cent of the face amount thereof and that the value of the stock in Dry Goods was $56.50 per share. The respondent's position is that the value of the note was equal to the face amount of the unpaid portion thereof and that the stock in Dry Goods had a value of at least $340 per share.

After carefully considering all of the evidence, including opinion testimony bearing on the respective questions and contentions, we have found as facts that on March 22, 1942, the fair market value of the Wilshire Boulevard property was $690,000, the value of Association's stock was $90 per share, the value of the unpaid portion of Association's note was approximately 60 per cent of face or $253,210, and the value of the stock in Dry Goods was $275 per share.

Decision will be entered under Rule 50.