183 F.3d 1034 (9th Cir. 1999)
ESTATE OF ROBERT E. CARTWRIGHT, Deceased, DOROTHY G. CARTWRIGHT, Executrix, Petitioners-Appellants,v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 97-70032
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
Argued and Submitted September 18, 1998--San Francisco, CaliforniaFiled July 12, 1999

John M. Youngquist and Donald L. Feurzeig, Titchell, Maltzman, Mark, Bass, Ohleyer & Mishel, San Francisco, California, for the petitioners-appellants.
Randolf L. Hutter, United States Department of  Justice, Tax Division, Washington, D.C., for the respondent-appellee.
Appeal from a Decision of the United States Tax Court  John O. Colvin, Tax Court Judge, Presiding.  Tax Ct. No. 1447-94.
Before: Thomas G. Nelson, Sidney R.  Thomas, and Barry G. Silverman, Circuit Judges.
Opinion by Judge Silverman; Partial Concurrence and  Partial Dissent by Judge Thomas
SILVERMAN, Circuit Judge:


1
At the time of his death in 1988, Robert E. Cartwright was  the majority shareholder of the law firm of Cartwright, Slobodin, Bokelman, Borowsky, Wartnick, Moore & Harris, Inc.  ("CSB"). When he died, the firm received life insurance proceeds of over five million dollars, which it paid to his estate  under the terms of a shareholders' agreement. In light of the  language of the agreement, the tax court held that the proceeds constituted payment not only for Cartwright's share of  CSB stock, but also for any claims he might have had, in the  words of the agreement, to the firm's "cases or work in  process." As the latter portion would be "income in respect of  a decedent," the court determined that the estate owed a federal income tax deficiency of $1,105,762.


2
On appeal, Cartwright's estate contends that the court erred  in holding that the proceeds redeemed anything other than  Cartwright's stock in the firm. The estate also claims that the  tax court failed to consider properly the effects of advanced client costs, work in process, and the life insurance proceeds  in calculating the value of the stock. We remand to the tax  court for a redetermination of the effects of advanced client  costs and work in process on the stock value, but affirm the  decision of the tax court in all other respects.

FACTUAL AND PROCEDURAL BACKGROUND

3
In 1969 Cartwright and others incorporated CSB. Only  CSB attorneys were shareholders. The firm distributed no dividends, but paid to each associate and shareholder a salary and  distributed its profits as bonuses. CSB's shareholders determined the amounts of the yearly bonuses based on each attorney's contribution to the firm.


4
In a 1973 shareholders' agreement, CSB addressed what  would happen to the interest of a shareholder upon his death.  The agreement provided that CSB would purchase the  deceased shareholder's interest in the firm and, in return, pay  to the shareholder's surviving spouse or estate the following  amounts: (1) the shareholder's actual purchase price for his  CSB stock; (2) any earned but unpaid profits prior to death;  (3) any earned but unpaid salary prior to death; (4) incurred  but un-reimbursed expenses or loans; (5) 25 percent of the net  amount received after death for cases that the shareholder  brought to CSB; (6) ten percent of the net amount received for  cases pending at the date of death that came to the firm due  to the firm name or the efforts of an associate; (7) 25 percent  of the net amount received during the three years following the shareholder's death from cases for clients that the shareholder brought to the firm who provide continuing legal business; and (8) one-half of any life insurance proceeds from  policies on the shareholder's life, to be applied toward the  previous obligations.


5
In 1988 CSB amended the shareholders' agreement only as  it related to the disposition of Cartwright's interest in the firm  upon his death. The amendment recited that CSB had purchased two life insurance policies on Cartwright's life totaling  $5,000,000. Pursuant to the amendment, CSB, the beneficiary  under the polices, would use the proceeds upon Cartwright's  death exclusively to purchase his interest in the firm. The precise language of the 1988 amendment, which is crucial to our  decision, is as follows:


6
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 pro cess 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 sal-  ary or expenses will be additionally paid or reimbursed to his Estate . . . . [emphasis added]


7
Cartwright died on June 30, 1988, the owner of 71.43 percent of the outstanding shares of CSB. As the shareholders  had agreed, CSB paid the proceeds that it received from the  two policies to Cartwright's estate. The total amount was  $5,062,029, which included $62,029 in premium adjustments  and interest. CSB issued a Form 1099-MISC, stating that it  had paid $4,080,256 to the estate as non-employee compensation. The estate, however, did not report the proceeds it  received from CSB as taxable income in its fiduciary income  tax return. Instead, it took the position that the full amount of  the proceeds were paid to redeem Cartwright's stock. The IRS  disagreed, finding that $4,080,256 of the $5,062,029 was  compensation and that the estate owed $1,142,472 for its tax  deficiency.


8
Cartwright's estate appealed to the tax court. The court held  that the plain language of the 1988 amendment made clear  that CSB's payment of the insurance proceeds to Cartwright's  estate was for both Cartwright's stock and for his claim to the  firm's cases or work in process. It found that the amendment  valued the total of these items at $5,000,000.


9
The tax court also concluded that neither CSB's work in  process nor the insurance proceeds, which CSB paid directly  to the estate, should have been considered an asset of CSB for  purposes of valuing Cartwright's stock. Similarly, the court determined that the IRS's exclusion of advanced client costs  in appraising CSB's assets was proper. Finding that the value  of Cartwright's stock was $1,105,762, the court concluded  that the other $3,956,267 of the payment to the estate was taxable as income in respect of a decedent.

DISCUSSION

10
We review decisions of the United States Tax Court on the  same basis as decisions of a district court in a civil bench trial.  Delk v. Commissioner of Internal Revenue, 113 F.3d 984, 986  (9th Cir. 1997). Thus, we review the tax court's interpretation  of contract provisions de novo. Confederated Tribes of Siletz  Indians v. Oregon, 143 F.3d 481, 484 (9th Cir. 1998). We  review its determination of the value of stock for clear error.  Trust Servs. of Am., Inc. v. United States, 885 F.2d 561, 568  (9th Cir. 1989).

I.

11
The first issue for decision is whether the payment to Cartwright's estate was made solely to redeem Cartwright's stock  or whether it was for both Cartwright's stock and his claim  to the firm's cases or work in process. The estate contends  that extrinsic evidence established an intent merely to buy out  Cartwright's shares in the firm and that the 1988 amendment  set the stock redemption value at $5,000,000. It argues that  because the corporation, and not any individual shareholder,  owns CSB's cases and work in process, Cartwright could have no interest in these items other than in his capacity as a  shareholder. The tax court held that both the language of the  amendment and the surrounding circumstances evidenced an  intent to purchase more than Cartwright's shares.


12
We agree with the tax court. As the plain language of  the 1988 amendment explicitly provides, CSB's distribution  of the insurance proceeds to Cartwright's estate constituted  payment for both "Mr. Cartwright's stock together with any  claim to any cases or work in process." This unambiguous  language reflects what Cartwright and his colleagues understood when drafting it--that Cartwright, at the time of his  death, would have or might have an interest in the firm's  "cases or work in process" that the firm agreed to buy out.  The uncontradicted evidence of the firm's practices supports  this conclusion as well. The primary component of Cartwright's compensation was not his salary. It was his bonus,  paid at the end of each year based on his contribution to the  firm. As the firm's majority shareholder, chairman of the  board, and chief rainmaker, Cartwright, at the time of his  death, had a reasonable expectation that he again would be  voted a bonus for the cases that he had brought into the firm  or had worked on himself.


13
The tax court correctly distinguished other cases in which  payments made to a shareholder or his estate were held to  redeem only the shareholder's stock. In Smith v. Commissioner of Internal Revenue, 82 T.C. 705 (1984), the evidence  demonstrated an intent to enter into a stock purchase agreement and that the $25,000 payment was equivalent to the fair market value of the stock. Similarly, in Steffen v. Commissioner of Internal Revenue, 69 T.C. 1049 (1978), the language  of a corporate redemption agreement conclusively established  that the $40,000 paid to a shareholder was solely for his stock  and was not compensation. In Estate of Bette v. Commissioner  of Internal Revenue, 36 T.C.M. (CCH) 1636 (1977), the tax  court relied on the clear terms of a stock redemption agreement. Finally, Erickson v. Commissioner of Internal Revenue,  56 T.C. 1112 (1971), also involved an unambiguous agreement providing only for the purchase of stock. In the instant  case, both the clear language of the 1988 amendment and the  underlying facts compel the conclusion that the parties  intended that CSB buy out more than just Cartwright's shares  of CSB stock. Any claims to work in process were included  in the purchase price.1

II.

14
Having determined that the insurance proceeds constituted  payment for both Cartwright's stock and his claim to cases or  work in process, we must now decide whether the tax court  correctly apportioned the payment between these two components. After hearing conflicting expert testimony from witnesses called by both parties, the court adopted the findings  of the IRS's expert, who relied upon the 1973 agreement and  its 1988 amendment in ascertaining the intent of the parties.


15
The estate argues that, even if the proceeds redeemed Cartwright's stock plus his claim to cases or work in process, the court made three errors in its valuation of his stock: (1) it  failed to consider the effect of CSB's advanced client costs,  (2) it ignored CSB's work in process on its contingent fee  cases, and (3) it should have included the insurance proceeds  as a nonoperating asset of CSB.


16
The estate is correct that the tax court should have  included advanced client costs, which CSB maintained as a  negative asset account, among the firm's assets, because they properly are treated as loans. See Canelo v. Commissioner of  Internal Revenue, 447 F.2d 484, 485 (9th Cir. 1971). The tax  court also should have included the firm's work in process on  contingent fee cases as an asset, since it would have influenced what a willing buyer would have paid for CSB stock.  See Estate of James E. Curry v. Commissioner of Internal  Revenue, 74 T.C. 540, 546-47 (1980).


17
The tax court did not err, however, by not including the  life insurance proceeds as an asset of the firm for stock valuation purposes. It is true that in valuing stock,"consideration  shall also be given to nonoperating assets, including proceeds  of life insurance policies payable to or for the benefit of the  company, to the extent such nonoperating assets have not  been taken into account in the determination of net worth,  prospective earning power and dividend-earning capacity." 26  C.F.R. S 20.2031-2(f)(2). The court, however, properly determined that CSB's insurance policy would not necessarily  affect what a willing buyer would pay for the firm's stock  because it was offset dollar-for-dollar by CSB's obligation to  pay out the entirety of the policy benefits to Cartwright's  estate. See Estate of John L. Huntsman v. Commissioner of  Internal Revenue, 66 T.C. 861, 875 (1976).

CONCLUSION

18
The tax court correctly determined that CSB's payment  of life insurance proceeds to Cartwright's estate redeemed  both Cartwright's stock and his claim to the firm's cases or work in process. The unambiguous language of the 1988  amendment and an understanding of CSB's practices compel  this conclusion. The court erred, however, in calculating what  portion of the proceeds was for Cartwright's stock and what  portion was for his claim to cases or work in process. We  remand to the tax court for a redetermination of the value of  the stock to take into account advanced client costs and work  in process. We affirm in all other respects.


19
AFFIRMED IN PART AND REMANDED.



Notes:


1
 Judge Thomas makes an argument -- not contained in the briefs -that the law firm's 1988 tax return somehow proves that Cartwright was  compensated for his "cases or work in process " before he died and that  therefore, by process of elimination, all of the insurance money paid to the  estate is attributable to the purchase of the stock. We respectfully suggest  that the tax return proves nothing of the sort. The return shows that in  1988, the firm deducted a total of $4,356,256 as compensation to Cartwright. As specifically reported in the return at an addendum to Schedule  E, the firm attributed $4,080,256 of this amount to cases or work in process. This is the amount in controversy -- the amount paid to the estate  from the insurance proceeds and about which it issued a Form 1099-MISC  to the estate. The remaining $276,000, reflected separately in a W-2 form,  was nothing more than the salary that had been paid to Cartwright in 1988  before he died.



20
THOMAS, Circuit Judge, concurring in part and dissenting in  part:


21
I agree with much of the majority opinion.1 However, a  close analysis of the record can only lead to one conclusion:  the $5 million paid to Cartwright's estate was compensation  solely for his stock in the law firm. Under the shareholders'  agreement, the life insurance proceeds were to be paid to  Cartwright's estate for the value of his stock and any claims  he had to the firm's work in process. At the time of his death,  Cartwright had no legal claim to the law firm's work in process apart from his shareholder interest. Thus, the entire  amount should have been allocated to stock value. Because a  million dollar tax was improperly imposed, I respectfully dissent.


22
* Robert Cartwright founded the law firm and built it into a  successful practice. At the time of his death, he was responsible for 90% of the firm's business. The 1973 shareholders'  agreement provided that upon the death of a shareholder, his  or her estate would receive, among other compensation, 25%  of the net proceeds attributable to cases (s)he brought to the firm. The agreement further granted the deceased shareholder's estate a lien on each case from which the estate was entitled to be paid.


23
The undisputed evidence is that Cartwright became concerned about this provision as it applied to him. He wanted to  make sure his wife was adequately compensated at his death,  and he wanted to assure the firm's continuation. As Philip  Borowsky, a fellow shareholder who was the assistant managing shareholder at the time of Cartwright's death, testified:


24
[H]e pretty much dominated the firm. He had the majority vote. And we were concerned that he feel good about what was being done, and we wanted to -- and we were very impressed with his concerns, that his position was that he brought in over 90 per cent of the business and, in the event that he died, the firm could not survive if it was to pay 25 percent of the fees on those cases to his estate. And he didn't want us to be in ongoing discussions with his wife for years in the future as to what that amount would be.


25
To address these concerns, Michael Bezazian of Prudential  Insurance Company was retained. He advised Cartwright and  the firm that they should fairly value Cartwright's interest in  the business and fund the payment of the interest through life  insurance. He attended a portion of a firm meeting in 1988  where he was advised that the shareholders had agreed to a $5  million valuation for Cartwright's interest in the firm. At the  meeting, the shareholders adopted an amendment to the 1973  shareholders' agreement that supplanted the agreement as it  applied to Cartwright. The 1988 amendment provided for the  purchase of $5 million in life insurance and:


26
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. Cart wright. 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 sal ary or expenses will be additionally paid or reimbursed to his Estate.


27
The amendment only applied "as long as said life insurance  policy continues to be in force." Otherwise, by the amendment's terms, "paragraphs 4. and 5. of the existing Shareholders Agreement will apply, unaffected by this amendment."  Paragraphs 4 and 5 of the 1973 shareholders' agreement provided for compensation upon death based on a percentage of  work in process attributable to the shareholder's efforts. Thus,  the clear intent and effect of the Cartwright amendment was  to fix the value of his interest in the business, to provide a  means for purchasing it, and to extinguish any independent  claim his estate might have upon his death in the firm's work  in process. Indeed, Borowsky, who drafted the language along  with Cartwright, testified:


28
Q. . . . And did you have in your own mind . . . at the time this was signed [in] January `88 that Robert Cartwright had an interest in the corporate assets, other than as a shareholder, while he was living?


29
A. As I said before, the purpose of acquiring the insurance policies was to satisfy any claims of -- the main purpose of it was to satisfy any claims his estate would have for cases he had brought into the firm.


30
Q. But his estate would only have claims based upon the `73 shareholders' agreement. Isn't that correct?


31
A. That's right.


32
Q. And this was superseding it in the situation of his death, was it not? I mean, that's what - A. That's right.


33
Q. Okay. So what claim could they have under this, except that they would -- you know, let's say for some reason there's some defect and we still claim under the `73 agreement. Isn't -- wasn't this a clause that made sure that there would be no claim under the `73 agreement?


34
A. Yes.


35
Q. Okay. And did I get an answer to my question  of, did you have in your mind any understanding at the time you signed this agreement that Robert Cart wright had an interest, an independent interest in the cases that he brought in, you know, aside from his death? And he was not dead at that point, obviously. Did he have an independent interest in corporate assets? Easy question.


36
A. He had an interest as a shareholder.


37
Q. As a shareholder?


38
A. Yes.


39
Q. Okay. And was there any question in your mind -- I think you've already articulated this, but now I think we're at the point of drafting the agreement and entering into the agreement. Was there any ques tion in your mind that what it was going to alleviate with respect to the corporation was this future infi nite claim of 25 percent, 10 percent, 25 percent in the various aspects of the business ad infinitum  if he died? It was going to eliminate that problem that was created by the original agreement?


40
A. That's right.


41
In sum, the clear language of the 1988 amendment, as well  as the uncontradicted testimony of the shareholder who drafted it with Cartwright, demonstrate that any right Cartwright had to work in process under the 1973 agreement was  extinguished by the 1988 amendment.


42
The case of Steffen v. Commissioner, 69 T.C. 1049 (1978),  is instructive. In that case, physician-shareholders of a professional service corporation executed a stock redemption agreement. See Steffen, 69 T.C. at 1050-51. After one of the  physicians left the corporation, a dispute arose as to whether  the payout made under the stock redemption agreement was  for redemption of stock or for salary based on accounts  receivable. See id. at 1052. The tax court rejected the corporation's argument that the payment included salary based on  accounts receivable, noting that "as an employee Dr. Steffen  had no legal interest in the accounts receivable. " Id. at 1053.  The court went on to explain:


43
The accounts receivable do not represent the services which the employees have rendered the Corporation, but, rather, the services that the Corporation, through its employees, has rendered to others. In other words, the accounts receivable are obligations owed to the Corporation, not obligations owed by the Cor poration to its employees. This distinction may be blurred in a closely held professional service corpo ration because of the dual role of the employee stockholders, but it must nevertheless be recognized.


44
Id. Like the corporation in Steffen, the law firm, not Cart- wright individually, owned any amounts ultimately realized as  a result of the work in process.


45
The results in Steffen are consistent with the real issue in  this case: what was the "income in respect of the decedent"  pursuant to 26 U.S.C. S 691? To be considered income in  respect of the decedent, the decedent must have had a right to  receive the income at the time of his or her death. See Estate  of Peterson v. Commissioner, 667 F.2d 675, 679 (8th Cir.  1981). As the court noted in that case:


46
Although it is pertinent to inquire whether the income received after deathwas attributable to activ ities and economic efforts of the decedent in his life time, these activities and efforts must give rise to a right to that income. And the right is to be distin guished from the activity which creates the right. Absent such a right, no matter how great the activi ties or efforts, there would be no taxable income under S 691.


47
Id. (quoting Trust Co. v. Ross, 392 F.2d 694, 695 (5th Cir.  1967) (per curiam)).


48
Although Cartwright's economic efforts contributed mightily to the firm's success, Cartwright had no right, apart from  his shareholder interest, to the firm's work in process at the  time of his death. The interest his estate would have had in a  certain percentage of Cartwright's own work in process under the 1973 shareholders' agreement was extinguished by the  1988 amendment.


49
In interpreting the 1988 amendment, the tax court placed  great weight on the phrase "together with any claim to any  cases or work in process that may otherwise be made on  behalf of Robert E. Cartwright," construing it to mean that  Cartwright retained some residual rights in work in process  under the 1973 agreement. However, the plain language of the  phrase belies this interpretation. The amendment refers not to  payment for "stock and work in process," but rather for stock  and "claims to any cases or work in process that may otherwise be made" (emphasis added). In short, the phrase was  merely confirming the intent of the parties to extinguish the  claims to work in process that Cartwright's estate would have  had under the 1973 agreement or would have been able to  assert if the insurance policies had lapsed. Use of the phrase  "that may otherwise be made" in any other context simply  does not make sense.


50
Thus, this case is akin to Smith v. Commissioner , 82 T.C.  705, 708-09 (1984), in which a sale of stock agreement specified payments for stock and commissions. The court concluded that although the word "commissions" was used, the  value should be attributed to stock alone because the shareholder had no right to commissions. See Smith , 82 T.C. at  717. Similarly, in this case, even though the 1988 amendments referred to both stock and work in process, Cartwright  had no right to work in process at death independent of his  shareholder interest. Thus, as in Smith, the payments made to his estate from the life insurance proceeds should be treated  as compensation for stock alone.


51
Given that Cartwright had no independent, enforceable  right to the law firm's work in process when he died, the tax  court erred in allocating a portion of the $5 million payment  to work in process. By undisputed testimony of the parties  and in conformance with generally accepted accounting principles, the corporation alone owned the firm's work in process  at the time of Cartwright's death. Thus, the tax court erred in  treating the bulk of the payment to the estate as "income in  respect of the decedent."

II

52
Because the payment to Cartwright's estate was only for  the purchase of stock, no appraisal of the stock was necessary  --the parties already had agreed on its value. There is nothing  wrong with this; shareholders are entitled to specify stock  value for departing shareholders in advance by agreement so  long as the value is determined by a bona fide, arm's length  business arrangement that is not a device to transfer property  to members of the decedent's family for less than fair market  value. See 26 U.S.C. S 2703(b). That is precisely what was  done in this case.


53
Although a new valuation should not have been conducted,  the tax court undertook that task anyway. In doing so, it com- mitted further error by improperly crediting an expert  appraisal founded on how other shareholders had fared when  compensated under the 1973 agreement. Cf. Conkling v.  Turner, 18 F.3d 1285, 1303-04 (5th Cir. 1994) (rejecting  appraisal based on superceded prior agreement). This error  was compounded by the fact that payments made under the  1973 agreement to departing shareholders were not intended  to equal the value of their stock. To the contrary, under the  1973 agreement the corporation's work in process was  entirely segregated from corporate assets and the departing  shareholder was compensated for a percentage of the recovery  of his or her own work in process. Thus, the methods and purposes of pay outs to departing shareholders under the 1973  agreement were entirely different from a normal corporate  stock valuation, resulting in an artificially deflated stock value2.  Because the calculation of the amount owed under the 1973  agreement was entirely different from a determination of  stock value, the IRS was comparing apples and eggs.


54
The majority recognizes the error in excluding work in process from stock valuation; indeed, it has held that the tax court  erred in doing so. Nevertheless, it endorses the tax court's  reliance on a methodology that specifically excludes work in  process from the valuation equation. Determining stock value  by utilizing the 1973 formula, which specifically excluded  work in process, could only yield an inherently skewed result.  Thus, the tax court also erred in its valuation methodology as  a matter of law by using evidence adduced from the superseded 1973 agreement.

III

55
The majority holds that the phrase "claims to any cases or  work in process that may otherwise be made" means the  expectancy that Cartwright had to be paid a "bonus" in the  year of his death. However, this is an argument not made by  either party, and the record and the firm's system of shareholder compensation contradicts it.


56
The undisputed testimony was that shareholders were paid  a low fixed salary, but were given additional compensation  annually in the form of a bonus. This bonus was dispensed  from undistributed profits near the end of each year. The allocation of the bonus was not made by formula; rather, the  bonus was distributed on a purely discretionary basis by  shareholder vote. Because the bonus was distributed from  cash, it could not reflect a disbursement of work in process  which, by definition, had not yet been converted to cash. It  also could not constitute a distribution based on "cases"  because the undisputed evidence was that it was based purely  on the exercise of shareholder discretion. Indeed, none of the  parties has argued that the annual bonus was intended to be  embraced by the shareholder buyout language. None of the  historic buyouts upon which the Commissioner relied support  such an interpretation. Indeed, contrary to the majority's interpretation, the 1988 amendment specifically provides that  "[a]ny amounts owed to Mr. Cartwright for unpaid salary or  expenses will be additionally paid or reimbursed to his  Estate." Absent any evidence of intent and without supporting  contract language, the majority errs in allocating a portion of  the life insurance payment to an anticipated bonus.


57
Even if, arguendo, one assumes that the anticipated bonus  was to be included in a shareholder buyout, it would still not  result in the allocation of the life insurance payment made in  this case. The tax court allocated $4,080,256 to "income in  respect of the decedent." A review of the historical practices of the law firm, however, belies such a large allocation to a  bonus. In the five years preceding his death, Cartwright's  bonus ranged from $243,500 to $400,000. For the tax year in  which he died, the sum of all compensation -- salary and  bonus -- paid to all shareholders was $1,084,881. Thus, it  was implausible to assume that Cartwright would have  received a $4 million annual bonus. This amount would have  defied the historical bonus payments made to Cartwright, and  the firm could not have funded it.


58
In addition, although the firm and the estate have disagreed  about nearly everything else, neither of them has suggested  that Cartwright's estate is owed more money on account of an  expectation of a bonus, or that the annual bonus comprised  part of the life insurance payment. To the contrary, an analysis of both the corporate and estate tax returns would indicate  that a bonus already has been paid for the year that Cartwright  died.3 For all these reasons, it would be improper to allocate  any part of the $5 million payment to an expectancy of an  annual bonus, much less four-fifths of the insurance proceeds.

IV

59
In sum, the legal effect of the 1988 amendment was to  define the $5 million payment as compensation for stock  alone. A careful examination of the record supports this conclusion. The tax court erred as a matter of law in concluding  otherwise, resulting in a million dollar error. Thus, I would  reverse the tax court without remanding for further proceedings. Accordingly, I respectfully dissent.



Notes:


1
 I specifically concur in the holding that the tax court erred by excluding advanced client costs and work in process from corporate assets.


2
 A simple example illustrates the point. Assume that the present value  of the entire firm's work in process is $5 million, that Cartwright was  responsible for bringing in 90% of the work in process and that he owned  75% of the corporate stock. Under the 1973 agreement, his estate would  be entitled to 25% of 90% of the present value of the firm's work in process, or $1,125,000 attributable to work in process. Under the 1988  amendment, his estate would not receive any separate compensation for  the work in process attributable to his efforts, but would receive 75% of  the net value of the corporate assets (including all the firm's work in process), or $3,750,000 attributable to the value of work in process. (Of  course, in each case, his estate additionally would receive 75% of the net  value of the other corporate assets.) The point is, of course, that the differing methodologies yield vastly differing answers and it is improper to compare them.


3
 As I noted earlier, the undisputed testimony was that the corporate  practice was to set relatively low monthly salaries. In fact, one shareholder  testified at trial that at a premium price of $10,000 a month "the insurance  policy was the highest-paid shareholder in the firm. " For many years,  Cartwright was paid a salary of approximately $9,000 per month. In tax  years 1985 and 1986, he was paid $15,000 per month. In the tax year prior  to his death, he was paid $18,000 per month in salary. For the tax year in  which he died, Cartwright and his estate were paid $276,000 in addition  to the distribution of life insurance proceeds for the tax year in question.  Although the record does not reflect what portion of this is bonus and  what portion is salary, the sum is roughly proportional to the amount of  total compensation paid to Cartwright (salary and bonus) during the prior  tax year. It is triple what his salary would have been for the proportional  tax year based on previous years' payments. He was never paid as much  as $276,000 annually in salary alone, much less in a five month span.  Thus, the returns and corporate records support the conclusion that the  total compensation paid Cartwright and his estate included both salary and  the annual bonus. The majority concludes otherwise. Although I respectfully disagree, in the end the differences in our interpretation may not be  significant: it is a matter easily resolved on remand. It was not the subject  of debate at trial because neither party contended, as the majority does,  that a portion of the life insurance proceeds should be allocated to payment of the annual bonus.


