                        T.C. Memo. 1996-286



                      UNITED STATES TAX COURT



      ESTATE OF ROBERT E. CARTWRIGHT, DECEASED, DOROTHY G.
      CARTWRIGHT, EXECUTRIX, Petitioner v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket No. 1447-94.                        Filed June 20, 1996.



     John M. Youngquist and Donald L. Feurzeig, for petitioner.

     Cynthia K. Hustad and Elaine L. Sierra, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined that the Estate of

Robert E. Cartwright (petitioner) had a deficiency in Federal

income tax of $1,142,472 for 1988.

     Robert E. Cartwright (decedent) owned 71.43 percent of the

stock of the law firm of Cartwright, Slobodin, Bokelman,

Borowsky, Wartnick, Moore & Harris, Inc. (CSB), a subchapter C
                                - 2 -


corporation.    CSB bought life insurance which paid $5,062,029 to

CSB upon decedent’s death.    CSB paid that amount to decedent’s

estate.   After concessions, the issues for decision are:

     1.     Whether the life insurance proceeds were paid to

decedent's estate solely to redeem his CSB stock, as petitioner

contends, or partly for his CSB stock and partly for any claims

for cases or work in process, as respondent contends.    We hold

that $1,105,762 of the payment was for decedent's CSB stock, and

the remainder was for any claims for cases or work in process.

     2.   Whether the part of the payment which was made for any

claims for cases or work in process is income in respect of a

decedent under section 691.    We hold that it is.

     Section references are to the Internal Revenue Code in

effect for the year in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.

     At the request of CSB, which request neither party opposed,

we sealed parts of the transcript and certain documents which

were admitted into evidence.

                          FINDINGS OF FACT


     Some of the facts have been stipulated and are so found.

Dorothy G. Cartwright lived in California when she filed the

petition.
                                - 3 -


A.   Decedent

     Decedent was born on July 9, 1925.    He earned his bachelor

of science degree, with honors, from the University of California

at Berkeley in 1948, and his law degree, with honors, from the

Boalt Hall School of Law, University of California in 1951.

Decedent was admitted to practice law in California in 1951.     He

concentrated his practice in personal injury and products

liability law.    He authored articles in professional journals and

coauthored several treatises on products liability law.

B.   Decedent's Law Firm

     In 1969, decedent and several others started a law firm.

They incorporated the firm of Cartwright, Saroyan, Martin &

Sucherman, Inc. (CSB),1 as a professional corporation under

California law.    CSB's office is in San Francisco.   CSB has

always been a subchapter C corporation.    Decedent was CSB's

majority shareholder and chairman of the board until he died.

     CSB's shareholders were attorneys licensed to practice law

in California.    A shareholder could sell his shares only to an

existing CSB shareholder unless the other shareholders consented

to a sale.   In the 1973 shareholders’ agreement (described in

par. C below), CSB set the price of the stock very low and did


     1
       The law firm had different names from 1969 to 1988. It
was named Cartwright, Slobodin, Bokelman, Borowsky, Wartnick,
Moore & Harris, Inc., when decedent died. We refer to the firm
as CSB even though its name occasionally changed.
                                - 4 -


not consider its value.    This was done to give new shareholders

an incentive to stay with the firm and to produce business.

Decedent and several other shareholders paid $1 per share.

Shareholders who joined CSB after 1973 paid $13 and $15 per

share.

     CSB specialized in personal injury law.     CSB earned

contingency fees based on the amount awarded to a client in each

case.    Under CSB's client contingency fee arrangement,2 the

client paid fees only if money was obtained by settlement or a

judgment.    CSB advanced the out-of-pocket costs.   For cases

settled before trial, CSB deducted costs and then took one-third

as attorney's fees and gave two-thirds to the client.     For cases

that went to trial, CSB deducted out-of-pocket costs, took 40

percent as attorney's fees, and gave 60 percent to the client.

     CSB paid a salary to each associate and shareholder.       CSB

did not pay dividends.    Each year, CSB distributed any money not

needed for operating expenses as bonuses to the associates and

shareholders.    CSB's shareholders met to decide how much of the

profits each shareholder would receive.     CSB paid bonuses based

on each attorney's contribution to CSB.     There was no formula to

calculate each shareholder's bonus.     Compensation and bonuses

were not set based on how many shares each shareholder owned.

     2
       CSB calculated its contingency fees differently for
medical malpractice cases than for other contingency fee cases.
                               - 5 -


     Associates received referral fees but shareholders did not.

If an associate brought a case to CSB (i.e., was the “source

attorney”), he or she would get 25 percent of CSB's fees after

the first $5,000.   CSB kept records showing who brought each case

to CSB and showing which attorney had a right to receive fees.

C.   CSB's Shareholders Agreement

     CSB's shareholders executed a shareholders’ agreement (the

1973 agreement) on January 23, 1973.    Under the 1973 agreement,

CSB agreed to buy a deceased shareholder's interest in CSB and

pay the shareholder's widow3 or estate the following amounts:

     1.   The amount the deceased shareholder paid for his stock.

     2.   A share of the amount of any earned but unpaid

          corporate profits or dividends.

     3.   The amount of any earned but unpaid salary of the

          deceased shareholder.

     4.   The amount of any incurred expenses or loans

          unreimbursed to the shareholder.

     5.   Twenty-five percent of the net amount received by CSB

          after the shareholder's death for cases the deceased

          shareholder brought to CSB.

     6.   Ten percent of the net amount CSB received on cases

          pending when the shareholder died which came to CSB


     3
       The 1973 agreement uses the term “widow”, not “surviving
spouse”.
                                 - 6 -


             because of the CSB firm name or which were brought by

             an associate.

     7.      Twenty-five percent of the net amount received during

             the 3 years after the shareholder’s death from business

             clients who the deceased shareholder brought to CSB.

     8.      One-half of the proceeds of life insurance bought by

             CSB on the life of the deceased shareholder to apply

             towards the amounts listed in 1.-7., above.

     Article IV of the 1973 agreement provides for the buyout

of the interest of a shareholder who dies, retires, becomes

disabled, or is expelled.     The 1973 agreement grants a lien

to the deceased shareholder's widow for the amount of the

percentages listed in the 1973 agreement of fees earned on cases

for which the deceased shareholder was entitled to be paid.

     Shareholder H. Greig Fowler (Fowler) left CSB in August

1984.     Under the 1973 agreement, CSB owed Fowler $31,794 for his

share of CSB's retained earnings when he left the firm plus the

amount he paid for his stock.     CSB and Fowler agreed in October

1986 that CSB would pay him $25,000 for his stock ($25 per share)

and for any claims he had against CSB arising out of his

employment by CSB.     Fowler agreed to reimburse CSB for any client

costs it advanced and to pay CSB 25 percent of the net fees he

recovered on any case he took with him.
                                - 7 -


     In 1987, shareholder Lowell Sucherman (Sucherman) left CSB.

Under the 1973 agreement, CSB owed Sucherman $233,698 for his

share of CSB's retained earnings when he left the firm plus the

amount he paid for his stock.    CSB offset what it owed Sucherman

under the 1973 agreement by the costs it advanced on cases that

he took with him and paid him $185,000 (about $46 per share).

Sucherman agreed to pay CSB 25 percent of the net fees he

recovered on any of the cases he took with him.

D.   The 1988 Amendment Providing Payment for Decedent's Interest
     in CSB Upon His Death

     The shareholders amended the 1973 agreement on January 4,

1988.   The 1988 amendment applied only to decedent.

     Decedent's interest in CSB consisted of stock and claims to

fees earned on cases he brought to CSB.     Under the 1973

agreement, CSB would have owed a large amount to decedent's

estate because decedent had brought more than one-half of the

pending cases to CSB when he died.      Decedent wanted to amend the

1973 agreement in 1988 to provide enough funds to maintain his

widow's standard of living and to make it easier for CSB to

survive his departure.

     Under the 1988 amendment, CSB bought two life insurance

policies on decedent's life from Prudential Insurance Co. of

America (Prudential).    Each policy paid a $2,500,000 death

benefit.   CSB paid monthly premiums of $10,000 to $11,000 for

the two policies.   CSB owned and was the beneficiary under the
                                - 8 -


policies.    The 1988 amendment stated that the amount of the life

insurance proceeds equaled the value of decedent's stock and any

claims on behalf of decedent for cases or work in process.    It

also stated that payment of the insurance proceeds extinguished

any claims that decedent or his estate might make against CSB for

his interest in CSB and work in process.4

E.   Decedent's Death

     Decedent died on June 30, 1988.    No other CSB shareholder

had died or retired before decedent.    Decedent lived in


     4
         The 1988 amendment provides in part:

     4.c. In the event of the death of Robert E.
     Cartwright, the proceeds of said policies payable to
     the Corporation will be exclusively used to purchase
     and acquire from the estate and heirs of Robert E.
     Cartwright all of Mr. Cartwright's stock in the
     Corporation together with any claim to any cases or
     work in process that may otherwise be made on behalf
     of Robert E. Cartwright. In this regard, the
     Corporation agrees to buy all of said stock and
     Robert E. Cartwright agrees to sell it. The value of
     said stock and claim in said cases and work in process
     is hereby fixed as the amount of proceeds of said life
     insurance policies. Any amounts owed to Mr. Cartwright
     for unpaid salary or expenses will be additionally paid
     or reimbursed to his Estate;

                *     *     *     *     *       *   *

     4.e. All payments from said life insurance proceeds
     when received shall be deposited in a trust account
     established for the sole purpose of consummating said
     purchase and will forthwith be paid to the Estate of
     Robert E. Cartwright and will constitute full and
     complete compensation to Robert E. Cartwright, his
     Estate and heirs of any and all interest in the
     Corporation and work in process and would therefore,
     upon payment of such insurance proceeds, extinguish
     such claims;
                               - 9 -


California when he died.   His widow, Dorothy G. Cartwright, was

appointed executrix of his estate on August 18, 1988.

     In June 1988, the following people owned CSB stock:

Shareholder        Ownership Percentage   Number of Shares

 Robert E. Cartwright        71.43               10,000
 Jack L. Slobodin            10.71                1,500
 Robert U. Bokelman            3.57                 500
 Philip Borowsky               3.57                 500
 Harry F. Wartnick             3.57                 500
 Michael B. Moore              3.57                 500
 Lee S. Harris                 3.57                 500
                            1
                              99.99              14,000
     1
       The stipulation does not state why the ownership
percentages total only 99.99 percent.

F.   The Estate’s Receipt and Tax Treatment of the Life Insurance
     Proceeds

     Prudential paid CSB $5,062,029 from the two life insurance

policies.   This amount included the $2,500,000 death benefit

under each of the two policies and $62,029 in premium adjustments

and interest.

     CSB paid $5,062,029 to the estate on December 1, 1988.

Sometime after December 31, 1988, CSB filed a Form 1099-MISC with

the Internal Revenue Service reporting that it paid $4,080,256

to decedent's estate in 1988 for nonemployee compensation.5


     5
       Petitioner points out that respondent could have issued a
deficiency notice to CSB taking a position inconsistent with
respondent's position in this case and, upon CSB's filing a
petition in this Court, moved to consolidate the two cases.
See Cooney v. Commissioner, 65 T.C. 101, 107-108 (1975) (the
Commissioner may take inconsistent positions with different
parties to protect the revenue); Foxman v. Commissioner, 41 T.C.
535, 548 (1964), affd. 352 F.2d 466 (3d Cir. 1965). We note that
                                                   (continued...)
                              - 10 -


     On October 12, 1989, petitioner filed a Form 1041, U.S.

Fiduciary Income Tax Return, for 1988.   Petitioner did not

include the insurance proceeds in its taxable income.   Petitioner

attached a statement to the return which said that the insurance

proceeds were consideration for the purchase of decedent's stock

in CSB.   In the notice of deficiency, respondent determined that

$4,080,256 of the payment was compensation and that petitioner

has a deficiency of $1,142,472.

                              OPINION

A.   Whether CSB Paid Life Insurance Proceeds to Decedent's
     Estate Solely To Redeem His CSB Stock

     Petitioner contends that the 1988 amendment fixed the

redemption price of decedent’s stock at $5 million.   Respondent

contends that $1,043,733 of the insurance proceeds was paid for

decedent's CSB stock and that $3,956,267 was paid for cases or

work in process.6

     We consider the intent of the parties as shown in their

written agreements in deciding whether a payment from a


     5
      (...continued)
we are not required to decide this case consistently with
respondent's tax treatment of CSB. See Ginsburg v. United
States, 184 Ct. Cl. 444, 396 F.2d 983 (1968); Estate of Bette v.
Commissioner, T.C. Memo. 1977-404.
     6
       Respondent's position assumes that CSB paid $5 million
to decedent's estate. CSB paid $5,062,029 to decedent’s estate,
$62,029 of which was for premium adjustments and interest and
is not in dispute. We treat this as respondent's concession that
$62,029 (in addition to $1,043,733) was paid to redeem decedent's
stock.
                                - 11 -


corporation to a departing shareholder is to redeem stock or to

compensate for services.     Steffen v. Commissioner, 69 T.C. 1049,

1052-1053 (1978); Erickson v. Commissioner, 56 T.C. 1112, 1123

(1971); Estate of Bette v. Commissioner, T.C. Memo. 1977-404.     In

each of those cases, we found that, under the agreement, the

payment from the corporation was made solely for the taxpayer's

stock.    We especially consider a stock price set by the

corporation and shareholder if other evidence shows that the

price set equals the value of the stock.     Smith v. Commissioner,

82 T.C. 705, 715-717 (1984) (we found that the corporation and

the shareholder intended for the payment to be solely to redeem

the taxpayer's stock).     Thus, in deciding whether the $5 million

was paid for stock redemption or work in process, or both, we

begin by considering what CSB and decedent intended as shown by

the 1973 agreement and the 1988 amendment.

     The 1973 agreement provided a formula to determine the

amount to be paid to decedent's estate, but did not specify the

amount.    The 1988 amendment fixed the amount of CSB’s payment to

decedent’s estate.

     CSB bought $5 million of insurance because decedent believed

his widow would need that amount to maintain her standard of

living.    The purchase of life insurance helped CSB to finance

the payment to decedent's estate, helped ensure that CSB would

survive decedent’s death, eliminated the need to account for
                              - 12 -


fees earned on cases decedent brought to CSB, and ensured that

decedent’s widow would receive money promptly after decedent

died.

     The 1973 agreement stated that a deceased shareholder's

estate would be repaid the amount the shareholder paid for CSB

stock, and would be paid any earned but unpaid dividends, 25

percent of the net fees CSB received on cases or from business

clients the shareholder brought to CSB, and certain other

amounts.   The 1988 amendment stated that the insurance payment

was both for decedent's stock and for claims for fees earned on

cases decedent brought to CSB.

     Petitioner argues that the 1988 amendment was a buy-sell

agreement that fixed the redemption price of decedent’s CSB stock

at $5 million.   Petitioner also argues that the parties used the

value of CSB’s work in process only to measure the payment for

decedent’s interest in CSB, and that doing so does not convert

any of that payment to compensation.

     We disagree.   Petitioner's argument overlooks the plain

language of the 1988 amendment.   The 1988 amendment plainly

requires CSB to use the insurance proceeds to buy “all of * * *

[decedent’s] stock in the Corporation together with any claim to

any cases or work in process that may otherwise be made on behalf

of * * * [decedent]."   The 1988 amendment also fixed the value of

“said stock and claim in said cases and work in process” as the
                               - 13 -


amount of the life insurance proceeds.     Philip Borowsky testified

that the parties intended that the $5 million payment to

decedent’s estate was both to redeem decedent’s CSB stock and to

compensate decedent for his work in process.     His testimony was

consistent with the plain language of the 1988 amendment.

     Petitioner contends that CSB and decedent agreed that $5

million was an estimate of the value of decedent’s name and

reputation, i.e., goodwill, to CSB.     We agree that decedent’s

name and reputation were very valuable to CSB.     However, CSB did

not pay the $5 million for goodwill; CSB paid it for decedent’s

stock and any claim to any cases and work in process that might

otherwise be made on behalf of decedent.

     Petitioner argues that the 1973 agreement and the 1988

amendment, which provide that decedent agrees to sell his

interest (in the singular) in CSB, show that the parties meant

that the insurance proceeds were paid solely to redeem decedent's

CSB stock.   We disagree.   The 1973 agreement and the 1988

amendment show that CSB and decedent intended that the payment

was both for decedent's stock interest and his interest in fees

earned on work in process.

     We conclude that CSB's payment of the life insurance

proceeds to decedent's estate was for both decedent's CSB stock

and his claim based on CSB’s cases or work in process.
                                - 14 -


B.   Whether Payments by Corporations to Departing Shareholders
     Are To Redeem Stock or for Other Purposes

     Petitioner relies on several cases in which a corporation

made payments to a departing shareholder to redeem the

shareholder's stock.     Smith v. Commissioner, supra; Steffen v.

Commissioner, supra; Erickson v. Commissioner, supra; Estate of

Bette v. Commissioner, supra.     Petitioner contends that these

cases require us to hold that CSB’s $5 million payment to

decedent’s estate was entirely for decedent’s stock.        We

disagree.    In each of these cases, the shareholders and

corporation intended the payment to be for stock.     The facts are

different here.     Unlike the agreements at issue in those cases,

the agreement here provides that the $5 million payment was for

both stock and work in process.     Petitioner treats factual

findings in those cases as legal holdings and then asks us to

find facts here like the facts found in those cases.        We discuss

these cases in more detail next.

     1.     Smith

     In Smith v. Commissioner, supra, the taxpayer sold his stock

to two other shareholders.    The stock purchase agreement required

the corporation to pay $8,500 to the taxpayer for his stock and

$14,750 for commissions.     Id. at 708-709.   Two of the

shareholders later agreed to pay $10,000 to the taxpayer for

his stock interest.     Id. at 710-711.   The corporation paid the

taxpayer $14,974.     Id. at 711, 712 n.5.   The agreement and
                                - 15 -


the Form 1099 the corporation issued to the taxpayer described

the $14,974 payment as commissions.      Id. at 712.   We held that

the parties meant for the total payment of $24,974 to be for

stock redemption because the taxpayer had no right to receive

commissions, the other shareholders intended to use the

corporation's income to buy the taxpayer's stock, and the fair

market value of the stock was about $25,000.      Id. at 716-717.

     Petitioner argues that the amount of insurance CSB bought

($5 million) is evidence of the fair market value of decedent’s

stock, as in Smith.     We disagree.   CSB bought the insurance

policies to pay decedent’s estate $5 million for his stock and

any claims for cases or work in process.     CSB and decedent did

not choose the amount of the insurance policies because it was

the fair market value of decedent’s stock; they chose it as a

price for both decedent's stock and any claim for cases or work

in process.

     2.   Steffen

     In Steffen v. Commissioner, 69 T.C. 1049 (1978), a medical

corporation paid $40,000 to redeem the stock of one of its

shareholders.    Id. at 1049.   In setting that price, the

corporation considered the value of its accounts receivable.

Id. at 1051.    Despite that fact, we held that none of the payment

was compensation; we held that the $40,000 was paid solely for

the taxpayer’s stock.     Id. at 1053.
                               - 16 -


     Petitioner argues that, like the accounts receivable in

Steffen, the source-attorney fees provision in the 1973 agreement

was a financing arrangement by which future CSB fees would be

used to redeem a retiring or deceased shareholder’s stock.     We

disagree.    The $5 million payment was for both decedent’s CSB

stock and any claims for work in process; in Steffen, we found

that the corporation paid the taxpayer solely for his stock.

Unlike Steffen, CSB and decedent did not intend to measure the

value of decedent’s CSB stock solely by the amount of the

insurance payment.

     3.     Erickson and Estate of Bette

     Petitioner relies on Erickson v. Commissioner, 56 T.C. at

1123-1124, and Estate of Bette v. Commissioner, T.C. Memo. 1977-

404, because in those cases the parties to stock redemption

agreements included unpaid profits in measuring the value of the

stock.    Petitioner's reliance is misplaced.   Unlike the agreement

in the instant case, the written agreements in Erickson and

Estate of Bette were solely stock redemption agreements.     Here,

as we have stated, the agreement provided for payment not only to

redeem stock, but also for any claims to cases or work in

process.

C.   CSB's Ownership of Work in Process

     Petitioner asserts that, under California law, work in

process is a corporate asset and that shareholders do not own
                              - 17 -


corporate assets such as work in process.     Union Bank v.

Anderson, 232 Cal. App. 3d 941, 950, 283 Cal. Rptr. 823, 827 (Ct.

App. 1991); see Moline Properties, Inc. v. Commissioner, 319 U.S.

436 (1943).   Petitioner argues that decedent could not sell work

in process on cases he brought to CSB, and, thus, he sold only

his CSB stock.

     Petitioner's argument misses the mark.    Respondent does not

dispute that work in process is a corporate asset or contend that

decedent sold work in process.   Rather, respondent points out,

and we have found, that decedent and CSB agreed that CSB paid $5

million in insurance proceeds both for CSB stock and for any

claim he had to work in process.

     Petitioner points out that Sucherman and Fowler agreed to

pay CSB 25 percent of net fees they received on cases they took

when they left CSB.   Petitioner argues that their agreement to

pay fees to CSB shows that the CSB shareholders did not own an

interest in the fees paid on work in process.    Petitioner's

argument misses the point.   The 1973 agreement requires a

departing shareholder who takes any cases to pay to CSB 25

percent of the net fees received from those cases.    The fact

that Sucherman and Fowler did so is irrelevant to deciding the

character of the $5 million payment to decedent's estate.
                              - 18 -


D.   Whether the Fact That CSB Was the Beneficiary Under the
     Life Insurance Policies Determines Whether the Payments
     to Decedent's Estate Were To Redeem Stock or for Work in
     Process

     Petitioner argues that, under section 20.2031-2(f)(2),

Estate Tax Regs.,7 Estate of Huntsman v. Commissioner, 66 T.C.

861, 875 (1976), and Estate of Clarke v. Commissioner, T.C.

Memo. 1976-328, the $5 million in life insurance proceeds was

a nonoperating asset of CSB because CSB owned the policies.

Petitioner contends that we should include the insurance proceeds

as a CSB asset in valuing decedent's stock.

     We disagree.   First, the fact that CSB was the beneficiary

under the insurance policies does not show whether the parties

agreed for the payment to be for stock and for any claim based

on work in process.   Second, payments to a shareholder/employee

are not necessarily made to redeem stock merely because the

corporation owns property which was paid to the

shareholder/employee.   Third, the insurance proceeds do not




     7
       Sec. 20.2031-2(f)(2), Estate Tax Regs., provides that, in
valuing stock where actual sales prices and bid and asked prices
are unavailable, the IRS considers the corporation’s net worth,
prospective earning power, and dividend-paying capacity. The
regulations state that other factors are also considered, such as
nonoperating assets, including life insurance policies payable to
or for the benefit of the corporation, to the extent that the
nonoperating assets have not been taken into account in
calculating net worth, prospective earning power, and dividend-
earning capacity.
                              - 19 -


affect the value of decedent’s stock because the entire proceeds

were paid to decedent’s estate.

     Petitioner contends that the buy-sell provision in the 1988

amendment established the value of decedent’s stock.    Sec.

20.2031-2(h), Estate Tax Regs.    We disagree.   The 1988 amendment

fixed the value of decedent’s stock and his claim to cases or

work in process.

     Petitioner points out that in Estate of Huntsman and Estate

of Clarke we treated insurance proceeds payable to the

corporation as a corporate asset.    Petitioner's reliance on those

cases is misplaced.   In Estate of Huntsman, life insurance

proceeds were paid to two corporations under a stock redemption

agreement.   The corporations used 43 percent of the proceeds to

redeem a portion of the stock of both corporations from the sole

shareholder’s estate, used 32 percent for working capital, and

kept 25 percent to finance possible additional stock redemptions

from the deceased shareholder's estate.    In valuing the stock, we

considered the fact that the corporations had a strong cash

position because at least one-third of the insurance proceeds

could be used for working capital.     Estate of Huntsman v.

Commissioner, supra at 874-875.

     Unlike the corporation in Estate of Huntsman, CSB paid all

of the insurance proceeds to decedent’s estate; none of the

proceeds could be used as working capital.    We said in Estate of
                               - 20 -


Huntsman that a buyer would not pay more for stock based on the

corporation's ownership of life insurance if the proceeds would

be largely offset by the corporation’s liabilities.    Id. at 875.

That is the case here.

     In Estate of Clarke v. Commissioner, supra, we held that, in

valuing the stock of a corporation, the taxpayer’s experts’ erred

in not including the insurance policy on the life of the deceased

taxpayer under which $39,675 was paid to the corporation.

     In Estate of Clarke, the corporation was not required to pay

the proceeds to the taxpayer’s estate.    In contrast, in the

instant case, the life insurance proceeds were paid to the

corporation, but they could not be used for working capital

because they were to be paid to decedent’s estate.

     We conclude that the $5 million insurance proceeds do not

increase the value of decedent’s CSB stock.    We also conclude

that the fact that CSB was the beneficiary of and owned the

insurance proceeds does not determine whether CSB and decedent

agreed that payment was made solely to redeem his stock, as

petitioner contends, or partly to redeem his stock and partly

for any claim for cases or work in process, as we have found.

E.   The Value of Decedent's CSB Stock on June 30, 1988
     Petitioner contends that decedent's stock was worth

$5,556,6158 when he died on June 30, 1988.    Respondent contends

     8
         Petitioner computes the value of decedent’s stock as
                                                     (continued...)
                              - 21 -


that decedent's stock was worth $1,043,7339 on that date.

Respondent subtracted $1,043,733 from the $5 million in insurance

proceeds CSB paid to decedent’s estate to calculate how much of

the insurance payment was not for his stock.   We agree with

respondent because respondent's position is more consistent with

both the stock redemption price stated in the 1973 agreement and

the value of CSB stock independent of that agreement.

     Petitioner and respondent each called expert witnesses to

give their opinions about the value of decedent’s CSB stock.

Expert opinions can aid the Court in understanding an area

requiring specialized training, knowledge, or judgment.     However,

as the trier of fact, the Court is not bound by the experts'

opinions.   Helvering v. National Grocery Co., 304 U.S. 282, 295

(1938).   The opinions of expert witnesses are weighed according

to their qualifications and other relevant evidence.    Anderson v.


     8
      (...continued)
follows:

     CSB retained earnings               $1,087,799
     Present value of advanced client
          costs                             676,641
     Insurance proceeds                   5,000,000
                                          6,764,440

     Decedent’s 71.43 percent share       4,831,839
     15-percent control premium             724,776
     Value of decedent's CSB stock        5,556,615

     9
       We add $62,029 to that amount for premium adjustments and
interest which were not in dispute. See supra note 6.
                             - 22 -


Commissioner, 250 F.2d 242, 249 (5th Cir. 1957), affg. in part

and remanding in part T.C. Memo. 1956-178; Johnson v.

Commissioner, 85 T.C. 469, 477 (1985).

     Respondent's expert was Herbert T. Spiro (Spiro).    On

September 11, 1992, Spiro estimated that decedent's 71.43-

interest in CSB was worth $907,594 ($897,594 plus the $10,000

that decedent paid for the stock).    Respondent hired Spiro to

prepare the appraisal during respondent’s audit of CSB's 1988 tax

return.

     Petitioner’s expert was Alan W. Johnson (Johnson).    He

estimated that CSB stock was worth $5,200,000 and that decedent’s

71.43 percent of that stock was worth $3,714,000.

     1.   Respondent’s Expert’s Analysis and the 1973 Agreement

     The $5 million payment was in lieu of the payment decedent’s

estate would have received under the 1973 agreement.    The 1988

amendment said that the $5 million payment was for both stock

redemption and work in process.   The 1988 amendment did not

specify how much of the $5 million was for stock redemption and

how much was for work in process.    The 1988 amendment changed how

the 1973 agreement was to be implemented by providing for the use

of insurance proceeds but did not change the fact that the

payment was for stock and any claims to cases or work in process.

Thus, to decide how much of the $5 million payment was for

decedent's stock and how much was for work in process, we will
                               - 23 -


consider how much CSB would have paid to decedent’s estate for

those amounts under the 1973 agreement.

     Petitioner does not dispute the appropriateness of using a

redemption price established by the parties but argues that the

agreed redemption price was $5 million.    We disagree because,

as we found above, the $5 million payment was for both stock

redemption and any claims for work in process.

     Respondent's expert properly considered the 1973 agreement

and the 1988 amendment.    In contrast, petitioner's expert

disregarded the agreements.

     Spiro concluded that, on June 30, 1988, CSB had retained

earnings of $592,233 and undistributed pretax earnings of

$1,109,883, of which $665,398 was available to distribute to the

shareholders after paying Federal and State corporate income

taxes.    Spiro added retained earnings and undistributed pretax

earnings available for distribution after paying taxes for total

retained earnings for CSB of $1,256,631.10   Spiro multiplied

$1,256,631 by decedent's 71.43 percent interest in CSB ($897,594)

and added decedent’s $10,000 basis in his stock.    He concluded

that the value of decedent’s shares was $907,594.   Thus, under

the 1973 agreement, CSB would have redeemed decedent’s CSB stock


     10
       Petitioner's expert calculated that CSB had a lower
amount of retained earnings of $1,087,799. We apply respondent's
expert's calculation of retained earnings because it is more
favorable to petitioner.
                                - 24 -


for $907,594, consisting of:    (a) $10,000 that decedent paid for

the stock, and (b) $897,594, decedent’s pro rata share of CSB’s

earned but unpaid profits.

     Spiro also applied a 15-percent control premium.    He

concluded that the value of decedent’s CSB stock was $1,043,733.

     Under the 1973 agreement, not more than 19 percent of CSB’s

payment to decedent’s estate would have been for decedent’s CSB

stock, and at least 81 percent would have been for his work in

process.    If we apply those percentages to the $5 million

payment, not more than $950,000 of the $5 million insurance

proceeds was paid for decedent’s CSB stock, and at least

$4,050,000 was paid for his work in process.     This analysis

justifies respondent's position that only $1,105,762 was paid to

redeem decedent's stock.

     Petitioner argues that part of Spiro’s report was

inadmissible because it included his legal opinion about the

meaning of the 1973 agreement and the 1988 amendment.     Petitioner

is sounding a false alarm.    We do not consider Spiro’s legal

opinions in deciding this case.     Aguilar v. International

Longshoremen’s Union Local #10, 966 F.2d 443, 447 (9th Cir.

1992); Marx v. Diners' Club, Inc., 550 F.2d 505, 509 (2d Cir.

1977).     However, it is appropriate that Spiro disclose the

assumptions he made about the rights of CSB and decedent under

the 1973 agreement and the 1988 amendment.     Knowing his
                              - 25 -


assumptions helps us to evaluate his conclusions.     We agree with

his assumptions and believe he used the proper analysis to value

decedent’s CSB stock.

     Petitioner points out that Spiro did not include CSB’s work

in process on contingent fee cases as a CSB asset in valuing

decedent's CSB stock and contends that Spiro incorrectly assumed

that the shareholders, not CSB, owned the work in process.      We

disagree for the reasons stated above in paragraphs C and D.

     Petitioner contends that Spiro mistakenly failed to consider

client costs advanced by CSB in contingent fee cases as a CSB

asset.   Ithaca Trust Co. v. United States, 279 U.S. 151 (1929);

Estate of Van Horne v. Commissioner, 78 T.C. 735 (1982), affd.

720 F.2d 1114 (9th Cir. 1983); Estate of Curry v. Commissioner,

74 T.C. 540, 546-547 (1980) (contingent legal fees, by virtue of

their contingency, are not automatically excluded from the gross

estate; rather, the contingent nature of the contract bears on

the factual question of valuation).    We disagree.   Spiro’s

exclusion of advanced client costs was proper because he

estimated the value of decedent’s CSB stock under the stock

redemption provisions of the 1973 agreement and the 1988

amendment.

     Finally, petitioner contends that Spiro erred in concluding

that the shareholders’ agreement was followed in the past when

shareholders withdrew from CSB, and points out that Mr. Borowsky
                                - 26 -


testified that shareholders who had left CSB before decedent died

were not paid based on the shareholders’ agreement but were paid

on an ad hoc basis.   We do not so find based on the record here

relating to the departures of Fowler and Sucherman from CSB.

     2.   Petitioner’s Expert

     As stated above, petitioner’s expert, Johnson, appraised CSB

at $5,200,000 and decedent's 71.43-percent interest in CSB at

$3,714,000.

     Johnson used four valuation approaches to estimate the value

of CSB:

     Valuation Method                      Estimated Value

     Adjusted book value                     $5,607,000

     Discounted discretionary cash-flow       5,209,000

     Excess earnings analysis                 4,520,000

     55% rule of thumb                        4,789,000

     60% rule of thumb                        5,125,000

     To apply the adjusted book value method, Johnson considered

two assets not included in CSB’s books:     (a) CSB’s reimbursable

client expenses; i.e., out-of-pocket costs advanced by CSB in

contingency fee cases that are reimbursed when the client

receives a settlement or judgment award, and (b) CSB’s work in

process on its contingent fee cases.     Johnson concluded that

CSB should treat its reimbursable client expenses as an asset
                                - 27 -


because, historically,11 80 percent of those costs had been

reimbursed to CSB, usually within 2 years.    He added as an asset

of CSB a discounted present value of these costs of $676,641.    He

estimated that the June 30, 1988, value of CSB’s work in process

on contingent fee cases was $3,842,143.

     Johnson also used the discounted discretionary cash-flow

(DDCF) method.    He considered expenses (other than compensation)

incurred during the 5-year period before June 30, 1988, in

deciding how to reduce net fees.    He estimated that base

compensation had historically been about 30 percent of CSB’s net

fees.     He estimated the amount of discretionary cash available to

CSB over a 5-year period beginning in 1989, and he used as a

discount the rate of return on 30-year Treasury bonds.    He

estimated the residual value by capitalizing the estimated 1993

cash-flow (which he assumed would continue in perpetuity) at 25

percent.     He calculated that the present value was 15 percent to

estimate the value of CSB.

     Generally, use of the DDCF method requires assumptions to be

made about future revenue, operating costs, and practice trends

to estimate the present value of future discretionary cash-flow

and the future value of the corporation.    Johnson, however, used

actual CSB financial data for June 30, 1988, to December 31,



     11
       Johnson concluded by considering data for years through
1991 that CSB had been reimbursed 80 percent of client costs.
                               - 28 -


1992.   For 1993, Johnson used the average of CSB’s data for 1991

and 1992.   Using the DDCF method, he valued CSB at $5,209,000 as

of June 30, 1988.

     Johnson also analyzed CSB’s excess earnings.   Johnson

admitted that this method is less reliable than the DDCF method.

He adjusted CSB’s net income for 1987 and 1988 to normalize the

compensation paid to its attorneys to that paid by comparable law

practices, assumed CSB had a 12-percent return on equity, and

capitalized the result at 25 percent for goodwill value.      He then

added goodwill to the 1987 and 1988 book (net equity) values.

Using this method, he concluded that CSB was worth $4,525,009 in

1987 and $4,520,143 in 1988.

     Johnson applied two versions of a "rule of thumb" for

valuing CSB stock.   He applied a rule of thumb which assumes that

a firm is worth what it owns plus what it earns.    Pratt, Valuing

Small Businesses and Professional Practices 188-189 (1986).

Johnson admitted that this method is less reliable than the DDCF

method.   He started with book value as of June 30, 1988.     He

added a goodwill element of 55 percent of CSB’s average fees for

the 2 years before 1988 and estimated that the value of CSB was

$4,788,624.   For comparison, he also added a goodwill element of

60 percent of CSB’s average fees for the 2 years before 1988 and

estimated that CSB was worth $5,125,062.
                              - 29 -


     Johnson concluded that CSB was worth $5,200,000 on June 30,

1988; 71.43 percent of that amount is $3,714,000.    Johnson said

that use of a control premium of 15 percent to value decedent’s

CSB stock would be appropriate, but he said that he took a more

conservative approach and did not apply a control premium.

Johnson said that by not applying a premium he might be

understating the value of decedent’s stock.   Johnson estimated

that, if he used a 15-percent control premium to value decedent’s

stock, the value would be $4,217,000.   Petitioner contends that

a 25-percent control premium should have been used, which would

increase the value of decedent’s stock to $4,642,500.

     Contrary to Johnson’s conclusion, we do not think a

hypothetical willing buyer would pay anything close to $5 million

for decedent’s CSB stock.   CSB did not pay dividends.   Decedent

could not sell his CSB stock without the other shareholders’

consent.   Ownership of CSB stock did not entitle the shareholder

to any CSB earnings or profits.   There was no relationship

between stock ownership in CSB and compensation.    Also, the

nature of CSB’s personal injury contingency fee practice was

uncertain.

     Prior sales of CSB stock by Fowler and Sucherman suggest

that decedent’s stock was worth less than $1,105,762 (about $110

per share).   CSB agreed to pay $25 per share to Fowler and $46

per share to Sucherman (after offsetting for the costs advanced
                              - 30 -


by CSB on cases Sucherman took with him from CSB).    Johnson

concluded that decedent’s stock was worth more than $500 per

share, more than 10 times the value of Sucherman’s stock a year

earlier.   The record does not support a finding that decedent’s

stock was worth 10 times as much per share as Sucherman’s stock.

     Petitioner argues that we should use a 25-percent control

premium to value decedent’s CSB stock, citing Estate of Salsbury

v. Commissioner, T.C. Memo. 1975-333 (38.1-percent control

premium applied in valuing a decedent’s 51.8-percent stock

interest in corporation where the decedent controlled the

corporation, including the ability to elect himself president of

the corporation, to declare dividends, and to set his own

compensation).   Johnson said a 15-percent control premium would

not be improper, although he did not apply one.     Spiro testified

that a 15-percent control premium was appropriate.    We accept the

conclusion of the experts that a 15-percent control premium is

appropriate here.   Adjusting for a control premium, we find that

the value of decedent’s stock was $1,105,762.

     3.    Conclusion

     The record amply supports finding a value for decedent’s CSB

stock equal to or less than that determined by respondent.      Thus,

using Spiro’s appraisal method, we value decedent’s CSB stock as

follows:

Decedent’s initial stock investment                     $10,000
Amount of earned but unpaid profits
     as of June 30, 1988                1,256,631
                                - 31 -


Multiplied by decedent’s interest in
     CSB                                    71.43%

Decedent’s pro rata share of CSB’s
     earned but unpaid profits                           897,594

                                                         907,594

15-percent control premium                               136,139

Respondent’s concession (see supra n.6)                   62,029

Value of decedent’s CSB stock                          1,105,762

F.   Income in Respect of a Decedent

     Section 691(a)(1)(A) provides, in pertinent part, as

follows:

           SEC. 691(a).   Inclusion in Gross Income.

          (1) General Rule.--The amount of all items of
     gross income in respect of a decedent which are not
     properly includible in respect of the taxable period
     in which falls the date of his death or a prior period
     * * * shall be included in the gross income, for the
     taxable year when received, of:

          (A) the estate of the decedent, if the right to
     receive the amount is acquired by the decedent's estate
     from the decedent;

     Section 691 and its predecessor, section 126 of the Internal

Revenue Code of 1939, were enacted to accomplish the general

purpose of the Internal Revenue Code that a tax should be paid on

all income and “that death should not rob the United States of

the revenue which otherwise it would have had.”      Linde v.

Commissioner, 213 F.2d 1, 5 (9th Cir. 1954), remanding 17 T.C.

584 (1951).
                                - 32 -


     The statute does not define the term “income in respect of a

decedent”.   Section 1.691(a)-1(b), Income Tax Regs., provides:

          (b) General definition. In general, the term
     "income in respect of a decedent" refers to those
     amounts to which a decedent was entitled as gross
     income but which were not properly includible in
     computing his taxable income for the taxable year
     ending with the date of his death * * *.

     Petitioner argues that the $5 million payment to decedent’s

estate is not income in respect of a decedent under section 691.

Petitioner’s position parallels petitioner’s contention (rejected

above) that the $5 million payment was made exclusively to buy

decedent’s CSB stock.

     Respondent concedes that the payment to decedent’s estate is

not income in respect of a decedent to the extent that it was

paid to buy decedent’s stock.    Thus, we need decide only whether

the $3,956,267 CSB paid to decedent’s estate in lieu of any claim

for work in process is income in respect of a decedent.

     Petitioner contends that there is no income in respect of a

decedent from the sale of stock to the corporation when the

shareholder dies because the sale occurs after the shareholder's

death.   See sec. 1.691(a)-2(b), Example (4), Income Tax Regs.

Petitioner argues that none of the CSB payment to decedent’s

estate is taxable to petitioner as income in respect of a

decedent because:   (1) CSB’s shareholders had no right to

earnings beyond salary or to bonuses until yearend when the

officers decided how to divide CSB’s profits; (2) CSB paid
                              - 33 -


referral fees only to outside attorneys and associates, not

to CSB shareholders; and (3) CSB owned its cases and work in

process.

     Petitioner’s arguments do not take into account the fact

that the payment to decedent’s estate was set at $5 million

pursuant to a written agreement between CSB and decedent and

was made because decedent performed services for CSB, such as

bringing cases to CSB.   CSB’s ownership of work in process, the

rights of other CSB shareholders, and CSB’s practices regarding

the payment of referral fees are not dispositive of whether any

part of the $5 million payment was income in respect of a

decedent.

     The $5 million payment from CSB was income in respect of a

decedent (to the extent it was not payment for decedent’s CSB

stock) because it was attributable to personal services decedent

provided to CSB and was payable on his death.   Estate of Bausch

v. Commissioner, 186 F.2d 313, 314 (2d Cir. 1951) (payments made

voluntarily by a corporation to decedents’ estates upon their

deaths in recognition of services to the corporation are income

in respect of a decedent), affg. 14 T.C. 1433 (1950); Collins v.

United States, 318 F. Supp. 382, 389 (C.D. Cal. 1970) (payments

made pursuant to a written agreement for 5 years to the wife of a

deceased employee of a company were income in respect of a

decedent because the decedent bargained for those payments in

exchange for his services), affd. per curiam 448 F.2d 787 (9th
                               - 34 -


Cir. 1971).    CSB agreed to pay insurance proceeds to decedent’s

estate because he performed valuable services for CSB such as

bringing cases and clients to CSB.      A payment for or in

recognition of a decedent’s services made after the death of a

decedent to his or her estate may be income in respect of a

decedent even if the decedent had no enforceable right to receive

the payment at the date of death.    Estate of Bausch v.

Commissioner, supra; Estate of Daniel v. Commissioner, 173 F.2d

966 (2d Cir. 1949) (bonus awarded after the decedent died), affg.

10 T.C. 631 (1948).

     Petitioner argues that petitioner was entitled to a stepped-

up basis of $5 million in decedent’s stock.      Sec. 1014(b)(6).

We disagree.    The basis of property in the hands of a person

acquiring the property from a decedent is generally its fair

market value at the date of the decedent's death.      Sec. 1014(a).

However, section 1014 does not apply to “property which

constitutes a right to receive an item of income in respect of a

decedent under section 691.”    Sec. 1014(c).    Thus, section 1014

does not apply to CSB’s payment to decedent’s estate to the

extent it is income in respect of a decedent.

     To reflect the foregoing,


                                            Decision will be entered

                                     under Rule 155.
