Court Opinion

ID: 4592118
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:07:15.383585+00
Date Added: 2024-06-11T07:50:48.641251
License: Public Domain

I. C. BRADBURY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  EARL C. EIFERT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bradbury v. CommissionerDocket Nos. 45780, 45781.United States Board of Tax Appeals23 B.T.A. 1352; 1931 BTA LEXIS 1723; August 28, 1931, Promulgated 1931 BTA LEXIS 1723">*1723  On April 1, 1920, petitioners executed a contract by which they were given stock interests in a corporation for the purpose of retaining their services.  They sold their stock interests to the corporation in 1925 for a consideration of $200,000 paid to each in said year.  Held, that said stock interests constituted property, and that the difference between the fair market value in 1920 and the selling price in 1925 constituted capital gain taxable to the petitioners in the latter year at the rate applicable to capital gains.  J. S. Seidman, Esq., and F. E. Seidman, C.P.A., for the petitioners.  Brooks fullerton, Esq., for the respondent.  LOVE 23 B.T.A. 1352">*1353  The respondent determined a deficiency in income tax for the year 1925 against the petitioner I. C. Bradbury (Docket No. 45780) in the amount of $20,185.61.  Respondent also determined a deficiency in income tax for the year 1925 against the petitioner Earl C. Eifert (Docket No. 45781) in the amount of $18,727.35.  These proceedings are for the redetermination of said deficiencies, and have been consolidated for hearing and decision.  The issues, which are the same in each case, relate to1931 BTA LEXIS 1723">*1724  a transaction consummated in 1925 by which the petitioners were each paid the sum of $200,000 upon the cancellation of the contracts referred to in the findings of fact.  The questions raised may be briefly stated as follows: (1) Whether said sum was paid to and received by each petitioner as additional compensation for personal services rendered in prior years, or whether the transaction constituted a sale of an interest in the corporation theretofore acquired by the petitioners?  (2) If the transaction constituted a sale of stock rights or an interest in the corporation, what was the amount of taxable gain or profit realized by the petitioners therefrom?  (3) Was such profit ordinary income, or capital gain?  FINDINGS OF FACT.  Petitioners are citizens of the United States, residing at Grand Rapids, Mich.About the year 1913 the petitioner Bradbury became connected with the firm of Howe, Snow, Corrigan & Bertles in the capacity of bookkeeper and cashier.  Said firm was then a partnership engaged in the investment banking business, and was the successor to a previous partnership started in 1911.  During the years 1913 to 1916 Bradbury continued as bookkeeper and cashier for1931 BTA LEXIS 1723">*1725  the firm.  In 1916 the business was incorporated under the name of Howe, Snow, Corrigan & Bertles, hereinafter referred to as the corporation.  Between 1916 and 1929 the name of the corporation was successively changed to Howe, Snow & Bertles and Howe, Snow & Company, and finally became a part of E. H. Rollins & Company.  About the year 1916 the petitioner Bradbury's 23 B.T.A. 1352">*1354  position was changed from bookkeeper and cashier to salesman, in which position he continued until April 1, 1920.  Petitioner Eifert became connected with the corporation on November 1, 1916, as a securities salesman and continued in that position until April 1, 1920.  About March, 1920, petitioners, together with one Kirkhuff, another employee of the corporation, became dissatisfied with their arrangements with the corporation.  Petitioners were then working on a salary and commission basis, and they planned to sever their connections with the corporation unless they could obtain an interest in the business.  They informed the officers of the corporation of their intention and stated that unless they were given a common stock interest in the corporation, they (the petitioners and Kirkhuff) would leave1931 BTA LEXIS 1723">*1726  and build up an organization of their own or get in some other organization of a similar kind.  The stock of the corporation was then owned by three stockholders, Burton A. Howe, Warren H. Snow and William M. Bertles, who were also the directors and officers of the corporation.  Negotiations were carried on between the said stockholders and officers on the one side and the petitioners and Kirkhuff, on the other, which finally resulted in an agreement satisfactory to all parties.  The agreement reached was embodied in a written contract dated April 1, 1920, which was modified by a supplemental contract dated May 18, 1922.  A further modification was agreed upon in October, 1922, whereupon a new instrument was executed by the parties, under date of October 12, 1922, embracing the original contract and the agreed modifications, reading in material part as follows: MEMORANDUM OF AGREEMENT between HOWE, SNOW & BERTLES, INCORPORATED, (hereinafter called the "Corporation"), party of the first part, BURTON A. HOWE, WARREN H. SNOW and WILLIAM M. BERTLES, (hereinafter called the "Old Stockholders"), parties of the second part, and I. C. BRADBURY, J. D. KIRKHUFF and EARL C. EIFERT, (Herein1931 BTA LEXIS 1723">*1727  called the "New Stockholders"), parties of the third part.  WHEREAS, on or about the First Day of April, A.D. 1920, a certain Reorganization Agreement for HOWE, SNOW, CORRIGAN & BERTLES was entered into by the parties hereto and on or about the Eighteenth Day of May, 1922, a certain Amendment thereto was made and executed by all the parties hereto, and WHEREAS, it is deemed advisable to make certain additional changes in the REORGANIZATION AGREEMENT of April 1, 1920 and to incorporate said Reorganization Agreement and the changes thereto in one contract.  Now, THEREFORE, IT IS AGREED between the parties hereto that the basis of reorganization is as set out hereinafter and that the contract of April 1, 1920, and the Amendments thereto are hereby rendered null and void.  IT IS FURTHER AGREED AS FOLLOWS: 1.  As soon as it is deemed practicable to do so by the Corporation and its attorneys, the Corporation will be reorganized.  23 B.T.A. 1352">*1355  2.  In the meantime pending the completion of the reorganization which may be an indefinite length of time, the property rights in the Corporation of all parties are hereby determined and fixed in accordance with the rights as they would1931 BTA LEXIS 1723">*1728  have existed respectively in case the reorganization had become effective as of April 1, 1920, and the property rights in the Corporation belonging to both the Old and New Stockholders shall be precisely as though the Corporation hereinafter defined and provided for had been completed and the stock issued as of April 1, 1920 and the rights of all parties from and after that date are defined and limited by this agreement.  3.  As soon as it is deemed feasible and advisable to do so by the Corporation and its counsel, the Corporation shall be reorganized under the name of HOWE, SNOW & BERTLES, INCORPORATED, or some other appropriate name, with a capital stock consisting of not more than Seven Thousand Five Hundred (7,500) shares of Seven Per cent, (7%) Cumulative Preferred Stock of par value of $100 each (provided this amount of preferred is deemed desirable by the Corporation and its Counsel) and Seven Thousand Five Hundred (7,500) Shares of Common Stock having a par value of $100 per share or no par value as it may be deemed advisable at the time the reorganization is actually made effective.  4.  The Preferred Stock provided for will be redeemed at par on April 1, 1950, and will1931 BTA LEXIS 1723">*1729  be subject to redemption at the option of the Corporation on any dividend date at One Hundred Five (105) Per Cent of its par value plus accrued dividends on thirty days' notice.  It will be entitled to Seven Per Cent (7%) Cumulative dividends payable quarterly.  A sinking fund will be established amounting to a maximum or Twenty Per Cent (20%) of the annual net earnings of the Corporation after Federal Taxes and Preferred Stock dividends are provided for, which sinking fund shall be used at the end of each fiscal year as determined by the Board of Directors, for the redemption of preferred stock.  The Preferred stock will not vote until dividends are in arrears and in case of liquidation of the Corporation, the preferred Stock, both principal and dividends will be paid before any distribution is made to the holders of common stock.  5.  The Preferred Stock will be issued to the Old Stockholders in equal shares to each Old Stockholder.  The Seven Thousand Five Hundred Shares (7,500) of Common Stock will be issued as follows: Nineteen Hundred Shares to each of the Old Stockholders, Six Hundred Shares to each of the New Stockholders.  The stock will all be issued without payment1931 BTA LEXIS 1723">*1730  of additional consideration but solely in consideration of the conveyance to the new or reorganized Corporation of the entire assets, business and good will of the present Corporation, party of the first part hereto.  Such assets shall include the stock of the GARDNER PETROLEUM COMPANY which the Corporation may own or which may have been owned by any of the parties of the Second part personally as of April 1, 1920.  6.  The salaries of the parties hereto shall be fixed from April 1, 1920, until otherwise agreed upon as follows: The Parties of the Second Part - $32,500 per year each, The Parties of the Third Part - $8,000 per year each.  7.  The regulations for the management of the Corporation shall be provided for by appropriate By-Laws which so far as consistent shall be substantially the same as the By-Laws of the Corporation now existing, but with restrictions upon the transfer of both the Preferred and Common Stock and provisions for sale of the interest or stock in the Corporation by the Second and Third Parties, namely: 23 B.T.A. 1352">*1356  None of the stockholders, either parties of the Second or Third Part hereto, shall at any time sell their interest or stock in the Corporation1931 BTA LEXIS 1723">*1731  except in compliance with this agreement.  In case any one of the New Stockholders or Old Stockholders desires to sell his interest or stock, he shall notify the Old Stockholders and the Old Stockholders shall then have the right to purchase the same during a thirty day period at the price at which it is offered, and in case the Old Stockholders or any of them do not purchase the same within said period, the New Stockholders have the like, right and option during the next thirty days, and in case they do not purchase the same within such period, the stockholder desiring to sell, may offer his stock to outside interests at the same price.  In case said stockholder is unable to sell his stock to outside parties at the price named and desires to reduce the price of the same, he must first offer his stock to the New and Old Stockholders as herein provided at the reduced price, it being the intent of this paragraph that any stockholder desiring to sell his stock or interest in the business shall first give the Old and then the New Stockholders the opportunity to purchase his stock at the same price at which he can sell it to outside interests.  8.  The Corporation has taken out and will1931 BTA LEXIS 1723">*1732  maintain corporation insurance in the amount of Two Hundred Fifty Thousand ($250,000) on the life of each one of the Old Stockholders, which insurance shall be made payable to the Corporation.  On the death of the Old Stockholders or any one of them, the Proceeds of such insurance on the life of such deceased stockholder shall be paid to his heirs, executors, administrators, or assigns for the purchase and transfer to the reorganized corporation of the Two Hundred Fifty Thousand Dollars ($250,000) Preferred Stock of the reorganized Corporation standing in his name or in the name of his assigns or in case of his decease, prior to the completion of such reorganization, then in full satisfaction of the right of said deceased Old Stockholder, to have issued to him Two Hundred Fifty Thousand Dollars ($250,000) par value of the Preferred Stock of such reorganized Corporation and for the transfer to the Corporation of such right, provided, however, that as part of the consideration for such payment, such deceased Old Stockholder's personal representatives shall participate in such reorganization according to the true intent and meaning of this contract and shall be entitled to receive the1931 BTA LEXIS 1723">*1733  same benefits under this agreement and the same interest in the reorganized Corporation as the other Old Stockholders shall receive, except the Preferred Stock, which shall be retired by the proceeds of said insurance.  9.  In case of the death of any one of the Old Stockholders or New Stockholders, the Corporation shall at the option of the executor or other personal representative of said deceased Stockholder, exercised within ninety days from the date of death of the stockholder, purchase and retire the Common Stock of the deceased party at the price fixed for the then current year and pay for the same not exceeding two years from the date of the death of the stockholder and as much sooner as it is reasonably possible to do so consistent with the business of the Corporation, together with interest at the rate of Six per cent, (6%) per annum, figured from the date of the death of the Stockholder.  In case such payment is not made forthwith upon the election by the deceased Stockholder's representatives to sell, then his heirs, representatives, or assigns shall be paid, in addition to the amount hereinbefore provided, an amount of the profits of the business proportionate to the1931 BTA LEXIS 1723">*1734  unpaid balance, but the amount due shall not be decreased on account of any losses occurring in the business.  10.  On or before January 31st of each year, beginning as of January 31st, 1922, the Old Stockholders shall by unanimous agreement fix the value of the Common Stock issued, or to be issued, in accordance with the terms of this agreement and notice shall be given to the New Stockholders of the value fixed.  23 B.T.A. 1352">*1357  11.  The Board of Directors shall consist of three members and each of the Parties of the Third Part shall be elected to an office in the Corporation.  The offices of President, vice-President, Secretary and Treasurer shall be filled by the Old Stockholders, who shall constitute the Board of Directors.  After the contract of April 1, 1920, was executed, the authority of both petitioners was immediately increased.  Bradbury was given authority to hire and discharge salesmen, to sign checks and exercise general administrative supervision.  He was elected an assistant secretary and treasurer of the company and took general executive charge of the Grand Rapids office.  Eifert became sales manager and had supervision of all salesmen.  Prior to the execution1931 BTA LEXIS 1723">*1735  of said contract, Bradbury was earning at the rate of $20,000 to $25,000 per year, and Eifert was earning at the rate of approximately $17,000 per year.  From 1920 to 1924, the three original stockholders (called in the contract of 1920 the "old stockholders") spent comparatively little time at the Grand Rapids office of the corporation, the so-called "new stockholders" taking care of the business at that place.  In the latter part of 1924, the old stockholders began negotiations to purchase from the petitioners their respective interests in the corporation under the contracts above referred to, the reorganization provided for not having at that time been carried out.  It was finally agreed that each of petitioners should receive the sum of $200,000 for his interest in the corporation, and under date of May 28, 1925, a contract to take effect as of April 1, 1925, was executed by the corporation and petitioner Bradbury reading in material part as follows: MEMORANDUM OF AGREEMENT made as of the First day of April, 1925, between HOWE, SNOW & BERTLES, INC., of Grand Rapids, Michigan, (herein called the "Company") party of the first part; and I. C. BRADBURY. of the same place, (herein1931 BTA LEXIS 1723">*1736  called the "Vendor"), party of the second part, RECITED: That pursuant to certain agreements heretofore made between the parties hereto and persons interested in said Company, the Vendor became entitled to certain rights and interests in said Company, all of which previous existing contracts and agreements the parties hereto now desire to cancel and terminate.  IT IS, THEREFORE, AGREED between the parties hereto as follows: 1.  The Company hereby agrees to pay to said Vendor forthwith the sum of Two Hundred Thousand Dollars ($200,000) less the present indebtedness of the Vendor to the Company appearing on its books, in consideration of the surrender of the rights and interest of the Vendor herein referred to.  2.  All previous existing contracts and agreements between the parties hereto and all right and interest of the Vendor in said Company or its assets, and all claims of the Vendor against the Company or any of its stockholders are hereby settled, terminated and cancelled; except as herein otherwise provided.  It is expressly agreed, however, that the Vendor has, and shall continue to have, an undivided Eight per cent (8%) interest in the profits which may be realized1931 BTA LEXIS 1723">*1737  out of Sixty-two Thousand Three Hundred Seventy-five (62,375) 23 B.T.A. 1352">*1358  shares of common stock of the Gardner Petroleum Company over and above the sum of Four Dollars ($4.00) per share; and that the Vendor has, and shall continue to have, an undivided 8% interest in One Hundred Thousand Dollars ($100,000) par amount of the common capital stock of the Central Paper Company.  Said stock of the Gardner Petroleum Company and the Central Paper Company shall be handled and disposed of in the sole and absolute discretion of the Company and settlement shall be made with the Vendor when and as the profits thereon are realized and determined.  3.  This contract is personal between the parties and no rights hereunder shall be assigned or transferred, except by will or by inheritance.  On the same date, a similar contract was executed by the corporation and the petitioner Eifert.  Concurrently with the execution of the contracts of May 28, 1925, petitioners entered into employment agreements with the corporation for a period of five years whereby they were each to receive a salary of $15,000 per annum, plus 15 per cent of the net profits realized from the business of the Grand Rapids1931 BTA LEXIS 1723">*1738  office.  At December 31, 1924, Bradbury had drawn from the corporation in anticipation of dividends on his interest in the corporation the amount of $48,835.69, and Eifert similarly had drawn as of said date $36,890.31.  These amounts were in excess of their stipulated salaries, which were credited to their accounts and the withdrawals charged to their accounts.  Pursuant to the contracts of May 28, 1925, Bradbury was paid the amount of $151,164.31, and Eifert was paid the amount of $163,109.69.  These payments were made to petitioners during the year 1925.  The net profits of the corporation for the calendar years 1920 to 1924, both inclusive, as shown by the profit and loss account on its books, were as follows: 1920$20,726.111921106,744.521922274,068.061923147,394.471924656,851.02The fair market value of the 8 per cent interest of each of petitioners in the corporation, as provided by the contract of April 1, 1920, was $85,000 at said date.  For the year 1925, and for years prior and subsequent thereto, petitioners filed Federal income-tax returns on the basis of cash receipts and disbursements.  In their respective returns for the taxable1931 BTA LEXIS 1723">*1739  year 1925, petitioners each reported the entire amount of $200,000 as capital gain on the sale of their interests in the corporation.  Respondent in each case treated the entire $200,000 as compensation for personal services taxable as ordinary income at normal and surtax rates.  23 B.T.A. 1352">*1359  OPINION.  LOVE: The pleadings in these proceedings raise substantially only one issue, but in that connection a number of collateral or secondary questions arise.  The primary issue concerns the amount of taxable income derived by petitioners in 1925 from the transactions evidenced by the contracts referred to in our findings of fact, above.  During the taxable year 1925 petitioners each received from the corporation the sum of $200,000, less amounts theretofore withdrawn by them in excess of salary, in consideration of the surrender of their rights and interests in the corporation and the cancellation of said contracts, with the exception of certain reserved interests not here material.  Each petitioner reported in his return for 1925 the entire amount of $200,000 as capital gain, and now contends that the amount so reported was excessive, in that the maximum amount of taxable capital1931 BTA LEXIS 1723">*1740  gain realized was not more than $115,000.  In each case the respondent treated the entire amount of $200,000 as ordinary income subject to tax at the normal and surtax rates.  The respondent contends, first, that said amounts represent compensation paid to petitioners in the taxable year for personal services rendered in prior years, and, second, that even if said amounts be regarded as consideration paid for the cancellation of the contracts, the entire amount is taxable as ordinary income, since the contracts cost petitioners nothing.  The questions arising under the issue are: (1) Did petitioners, by the contract of April 1, 1920, thereby and at said time acquire a definite and vested interest in the corporation?  (2) Did the petitioners, by the contracts of May 28, 1925, effective as of April 1, 1925, sell their vested interests in the corporation for the consideration stated, or was the amount of $200,000 paid to each as compensation for personal services rendered?  (3) If the transaction was a sale of property rights, to what basis are petitioners entitled in computing the gain derived from such sale?  (4) Was the contract of April 1, 1920, which was merged or restated in the1931 BTA LEXIS 1723">*1741  contract of October 12, 1922, a "capital asset" in the hands of petitioners, so that the gain derived by them upon its cancellation is subject to tax at the rate applicable to capital gains?  (5) Were the amounts in excess of salaries, withdrawn by petitioners prior to 1925, income to petitioners in the taxable year?  These questions will be considered in the order stated.  Question 1. What result was effected by the contract of April 1, 1920?  Under this contract, did petitioners at that time become the owners of definite interests in the corporation, or, as contended by the respondent, did the contract merely constitute a promise on 23 B.T.A. 1352">*1360  the part of the corporation and its stockholders to give to each of petitioners 8 per cent of the common stock of the corporation at same indefinite date in the future when the corporation should be "reorganized" as provided in the contract? The answers to these questions, we think, are to be found in the plain and unambiguous language of the instrument itself, which clearly sets forth the intention of the parties.  Prior to the execution of the contract, Howe, Snow and Bertles were the only stockholders of the corporation.  They1931 BTA LEXIS 1723">*1742  are referred to in the contract as the "old stockholders" and petitioners are referred to as "new stockholders." The instrument provided that "As soon as it is deemed feasible and advisable to do so by the Corporation, and its counsel, the Corporation shall be reorganized," etc.  The contemplated "reorganization" appears to have consisted merely of a new set-up of the capital structure of the corporation, with a possible change of name.  There was no provision for the dissolution for the then existing corporation and the organization of a new or successor corporation.  Under the so-called "reorganization" plan, the corporation was to have a capital stock consisting of 7,500 shares of 7 per cent cumulative preferred stock of the par value of $100 per share, and 7,500 shares of common stock of the same par value, or no par value, as might be deemed advisable at the time the "reorganization" was made effective.  It was provided that the preferred stock should be issued to the "old stockholders" in equal shares, and that the common stock should be issued 1,900 shares to each of the "old stockholders" and 600 shares to each of the "new stockholders." Thus, each of the new stockholders, 1931 BTA LEXIS 1723">*1743  including the petitioners, was to receive 8 per cent of the common stock of the corporation.  The contract further provided: The right and interest of the new stockholders respectively in the new corporation * * * shall become effective as of the First day of April, 1920, and their property rights and rights of dividends and other revenue and income from the corporation shall be precisely as though the corporation, hereinafter defined and provided for, had been completed and the stock issued as of April 1, 1920, and the rights of all parties from and after that date are defined and limited by this agreement.  Not only were petitioners each given a definite interest in the corporation effective on and after April 1, 1920, but the contract provided that in the case of an increase of the capital, "each of the parties shall have the option to maintain his proportionate interest in the corporation as established by this agreement." Upon consideration of the instrument as a whole, in the light of the surrounding facts and circumstances disclosed by the record, it is our opinion that, immediately upon execution of the contract, 23 B.T.A. 1352">*1361  petitioners each became the beneficial owner1931 BTA LEXIS 1723">*1744  of 600 shares, or 8 per cent, of the common stock of the corporation precisely to the same extent as if the so-called reorganization had been effected on that date and a stock certificate issued to each petitioner for the interest given to him.  As such stockholder, each petitioner became entitled on April 1, 1920, to receive dividends upon the stock given to him and to exercise all other rights, privileges and duties of stockholders.  Pursuant to the contract and by virtue of his ownership of the stock interest, each petitioner was elected an officer of the corporation and his authority correspondingly increased.  Prior to the date of the contract, petitioners were highly valued employees of the corporation and they had theretofore made known their intention of severing their connections with the corporation unless they were given an interest in the business.  The old stockholders, who were also the directors and officers of the corporation, desired to retain their services, and to that end each petitioner was given an 8 per cent interest in the corporation and its assets on April 1, 1920.  The fact that the contemplated "reorganization" was not effected on said date the stock certificates1931 BTA LEXIS 1723">*1745  issued to petitioners is immaterial.  A stock certificate merely constitutes evidence of ownership of an interest in a corporation; it is not the stock itself nor esesntial to the ownership thereof.  ; Fletcher on Corporations, vol. V., p. 5604, § 3426. Question 2. Did the petitioners, by the contracts dated May 28, 1925, each sell as of April 1, 1925, his stock or interest in the corporation for $200,000, or was the amount paid to each compensation for personal services?  A separate contract, each identical in term with the other, was executed by the corporation and petitioners, and each contract was designated "Contract for Sale of Interest." Petitioner in each contract was referred to as the "Vendor" and in each contract it was provided that: The Company hereby agrees to pay to said Vendor forthwith the sum of Two Hundred Thousand Dollars ($200,000), less the present indebtedness of the Vendor to the Company appearing on its books, in consideration of the surrender of the rights and interest of the Vendor herein referred to.  The rights and interest referred to are explained in the succeeding paragraph of the contract1931 BTA LEXIS 1723">*1746  as "all rights and interest of the Vendor in said Company or its assets," with exceptions not material here.  This clearly indicates, we think, that petitioners acquired in 1920, ownership of definite interests in the corporation, which property rights or interests they sold to the corporation in 1925, each for a consideration of $200,000.  Question 3. Having reached the conclusion that petitioners acquired definite interests in the corporation in 1920, which interests constituted property, and such property having been sold by them 23 B.T.A. 1352">*1362  to the corporation in the taxable year 1925, the next question is, to what basis are petitioners entitled in computing the gain from such sale?  The respondent contends that the basis is cost, and that since the contract of April 1, 1920, cost petitioners nothing, the entire amount received by them upon its cancellation in 1925 represents taxable gain.  This contention, we think, is erroneous.  We are dealing here not with the exhaustion of a contract nor the sale of a contract.  The contract in question was merely evidence of or defined the property rights which petitioners acquired thereunder at the time of its execution.  Those property1931 BTA LEXIS 1723">*1747  rights were given to petitioners on April 1, 1920, for the purpose of retaining their services for the corporation.  It is not necessary to decide whether the property was acquired by petitioners as a gift or as compensation for services.  If acquired as a gift, since acquired before December 31, 1920, the basis for determining the gain or loss from its subsequent sale is the fair market value of the property at the time of such acquisition.  Sec. 204(a)(4), Revenue, act of 1926.  If the property was transferred to petitioners as compensation for services, the property when received constituted taxable income to petitioners, to the extent of its then fair market value, which we have found was $85,000, and only the difference between such fair market value in 1920 and the amount received therefor on its sale in 1925, constitutes taxable gain in the latter year.  ; ; . Question 4. Was the contract of April 1, 1920, a capital asset in the hands of petitioners so that the gain derived upon its cancellation is taxable1931 BTA LEXIS 1723">*1748  at the rate applicable to capital gains?  The property rights acquired by petitioners under the contract in question were held by them for more than two years, namely, from April 1, 1920, to April 1, 1925, and the sale thereof was consummated after December 31, 1921.  Hence, the gain derived is, in our opinion, clearly capital gain within the following provisions of the Revenue Act of 1926: SEC. 208. (a) For the purposes of this title - (1) The term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921; * * * (8) The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business) * * *.  Question 5. This brings us to the last question raised, that is to say, whether or not the amounts withdrawn by petitioners from the corporation prior to 1925, constitute income to or were received by 23 B.T.A. 1352">*1363  petitioners in the taxable year.  There now appears to be no serious controversy between the parties on this point.  Prior to 1925, and subsequent to the execution of the contract of April 1, 1920, no dividends were declared by the corporation1931 BTA LEXIS 1723">*1749  either on the preferred or common stock.  During this period, petitioners withdrew amounts from the corporation from time to time against their rights to receive dividends.  Such amounts were charged to petitioners on their respective accounts on the books of the corporation, and the amounts of their specified salaries credited thereon.  At December 31, 1924, petitioner Bradbury had withdrawn from the corporation $48,835.69 in excess of salary credits, and petitioner Eifert had similarly withdrawn $36,890.31.  The respondent, in his brief, argues that these amounts were received by the respective parties in the taxable year, and petitioners in their brief, in effect, concede the fact.  The debit balances referred to were carried by the corporation on its books as accounts receivable until execution of the contracts on May 28, 1925, when petitioner's accounts were credited each with the amount of $200,000.  The right of petitioners to the amount withdrawn prior to 1925 thus did not become absolute and unconditional until within the latter year, and the view that they received these amounts in said year is, in our opinion, therefore, correct.  Summarizing what we have said above, 1931 BTA LEXIS 1723">*1750  petitioners each acquired by gift on April 1, 1920, property having then a fair market value of $85,000.  They sold said property in 1925 for $200,000.  Each petitioner realized on such sale a capital gain of $115,000.  The deficiencies will be redetermined accordingly.  Judgments will be entered under Ruel 50.