
    PAUL D. AND WINONA E. EDELMAN v. THE UNITED STATES MINERS NATIONAL BANK OF WILKES-BARRE, EXECUTOR OF THE ESTATE OF WILLIAM S. McLEAN AND ELLEN M. McLEAN v. THE UNITED STATES
    No. 18-61
    No. 19-61
    [Decided March 13, 1964.
    Plaintiffs’ motion for rehearing denied June 12, 1964]
    
      
      Bherwin T. McDowell for the plaintiffs. Ballard, Spahr, Andrews c& Ingersoll were on the briefs.
    
      J. Mitchell Reese, Jr., with whom was Assistant Attorney General Louis F. Oberdorfer, for the defendant. Edward B. Smith, Lyle M. Turner and Philip R. Miller were on the brief.
    Before Jones, Chief Judge, Whitaker, Laramore, Dur-eee and Davis, Judges.
    
   Whitaker, Judge,

delivered the opinion of the court:

These cases were referred to Trial Commissioner Wilson Cowen with instructions to report the facts and to recommend the conclusion of law to be entered, supported by an opinion. The commissioner has done so, and the cases are now before us on his report and on briefs and oral argument.

We are in thorough agreement with the findings and the conclusion reached by the commissioner and with much of his reasoning in reaching his conclusion. There are, however, certain general statements in his opinion with which we are not wholly in accord, which has prevented us from adopting his opinion as the opinion of the court, but we have leaned heavily upon it.

These suits, which were consolidated for trial, were brought to recover alleged overpayments of income taxes and interest for the calendar years 1955 and 1956.

Paul D. Edelman and William S. McLean are attorneys-at-law and will generally be referred to herein as plaintiffs, since their wives are parties to these suits only because they filed joint tax returns with their husbands. During the year 1954, plaintiffs performed legal services in a contest over which of two wills of George P. Easer was entitled to probate. They had contracts for contingent fees of 20 percent of the amounts distributable to their clients. The fees were earned in 1954, when the will offered by their clients was admitted to probate, but not until 1955 and 1956 did plaintiffs receive their percentage of the amounts distributable to the beneficiaries whom they represented, paid partly in cash and partly in kind. Plaintiffs kept their books and records and filed their Federal income tax returns on the cash basis of accounting and by calendar years.

The sole issue to be resolved is whether plaintiffs received taxable income in 1954, the year their services were completed, or in 1955 and 1956, the years in which the amounts in issue here were actually received by them.

George P. Easer died on April 18, 1954. A written document dated April 2, 1954, purporting to be his last will and leaving his entire estate to Joseph J. Simner, was offered for probate. Mr. Easer also left a will dated May 6, 1942, in which he left the residue of his property to his relatives. On or about May 5,1954, each of these legatees entered into a contingent fee agreement with plaintiffs to represent them in contesting the above-mentioned will of April 2, 1954. Under the agreement, plaintiffs were entitled to receive 20 percent of all moneys distributable to the beneficiaries out of the estate or received as a result of a settlement. In either event the executor of the estate was authorized to pay the fees directly to plaintiffs, charging such payments to the administration of the estate and deducting them from the beneficiaries’ distributive shares.

On September 14, 1954, the Orphans’ Court of Luzerne County, Pennsylvania, approved a compromise settlement, under the terms of which Joseph Simner agreed to withdraw the will of April 2, 1954, in consideration of a payment of $80,000. The court then directed the probate of the 1942 will, and shortly thereafter letters testamentary were issued to the Tradesmens Bank and Trust Company, a Philadelphia bank, named as executor under that will.

Plaintiffs, on November 1, 1954, filed with the executor their fee agreements. Before making partial distribution pursuant to its first and partial account, which was filed with the Orphans’ Court on May 17,1955, the executor petitioned the court to authorize it to pay directly to the plaintiffs and their associates in the will contest their 20 percent of their clients’ interest in the residuary estate, and to authorize the sale of sufficient shares of Smith, Kline & French Laboratories, Inc., to raise the cash needed therefor. However, in the latter part of July 1955, the executor filed in the Orphans’ Court an amended petition, requesting authority to make distribution in kind to the residuary legatees and their attorneys. On August 29, 1955, the authorization for payment in kind was granted by the court and plaintiffs received 700 shares of the stock of Smith, Kline & French Laboratories on September 12, 1955, a year after the will had been admitted to probate and at a time when the fair market value of the stock had increased from $20.4166 per share (the value at the date of Raser’s death) to $54.50 per share. Plaintiff Edehnan sold his 700 shares in October 1955 and plaintiff McLean sold 525 of his 700 shares in March 1956.

A final distribution in kind consisting of 140 shares of the stock was received by each of the plaintiffs on April 14,1956, two years after decedent’s death and at a time when the market value of the stock was $55.50.

In addition, plaintiffs received in 1955 cash distributions of principal in the amounts of $4,853.34 and $4,853.33, respectively, plus comparatively small cash distributions of the income of the estate in both 1955 and 1956.

In their 1954 tax returns plaintiffs did not include in their income any part of the fees received for their services. In 1955 and 1956, they reported as income the cash and also the stock received in those years but at the value of the stock on the date of Raser’s death in 1954. On the ground that the cash distributions were ordinary income in the year received, and that the stock was also ordinary income in the year received, to the full extent of its fair market value at the time received, the Commissioner of Internal Revenue asserted deficiencies against plaintiffs Edehnan in the amounts of $10',551.33 and $2,318.66 for the years 1955 and 1956, respectively, and against plaintiffs McLean in the amounts of $12,848.51 and $1,212.28 for the same years. Plaintiffs paid the deficiencies, together with interest thereon, and filed timely claims for refund.

In their claims for refund and in these suits, plaintiffs have adopted a theory which differs from that used in their tax returns for the years in question. Plaintiffs now contend that they received no income at all from the distribution of cash and stock in 1955 and 1956, the years in which such distributions were actually received and reported in their tax returns. They assert that the contingent fee agreements constituted assignments to each of them of a 20-per-cent interest in the principal of the residuary estate, that such assignments became perfected on September 14, 1954, when the 1942 will was admitted to probate, that the reasonable value of 20 percent of the residuary estate was income to them on that date, and that subsequent actual distributions to them out of the principal of the estate in 1955 and 1956 was not income to them in those years. They say that any gain derived from an appreciation in value of this stock should be recognized only if and when the shares were subsequently sold.

Plaintiffs rely on their fee contracts with the beneficiaries, which read in relevant part as follows:

* * Hi ‡ *
And I do * * * agree to reimburse my said attorney for my proportionate share of all costs incurred under the authority herein contained and I do further * * * agree that, in the event my said attorney and/or his associates, shall be successful in having the purported will of George Prentice Baser, Deceased, dated April 2,1954, declared invalid, or shall effect settlement resulting in the distribution of any monies to me or to my heirs, personal representatives or assigns, by the executor or administrator of George Prentice Baser, Deceased, or by Joseph J. Simner, or his personal representatives, heirs or assigns “I will pay unto my said attorney a contingent fee of twenty percent (20%) of all monies distributable to me out of said estate or received by me as a consequence of such settlement.”
In the event the 1954 will shall be legally determined to be invalid or the controversy regarding the same shall be terminated by settlement, I do hereby authorize the executor and/or administrator of the estate of George Prentice Baser, Deceased, to pay my said attorney or attorneys the contingent fee and costs herein agreed to be paid by me and to charge the same against the costs of administration of said estate and to deduct the same from my distributive share of said estate, and this shall be its sufficient and full authority for such payment and for such deduction and shall be binding upon me, my heirs, personal representatives and assigns.
$ ‡ $

Plaintiffs say these instruments were assignments to them of a 20 percent interest in their clients’ shares in the residuary estate. We do not agree. We think each was nothing more than a promise to pay 20 percent of the amount their client received, secured by an authorization to the executor to pay said amount to plaintiffs. Each instrument reads: “I will pay unto my said attorney a contingent fee of twenty percent (20%) of all monies distributable to me * * * as a consequence of such settlement.” When the settlement was effected, each residuary legatee became entitled to a certain part of the residuary estate, less debts, taxes and costs of administration. Out of this each promised to pay to his attorneys 20 percent thereof. There were no words of transfer or conveyance, merely a promise by the legatees to pay a percentage of his share to his attorneys, and an authorization, but not a direction, to the executor to pay it as a part of the cost of administration and to deduct it from the legatee’s share.

When this agreement was made, it was uncertain whether the legatees under the 1942 will would receive anything. Even after the settlement of the estate had been agreed upon, the share of each legatee had to be legally determined, the assets of the estate had to be reduced to possession, the debts had to be determined, the taxes, both state and Federal, had to be settled, and cost of administration ascertained. Only after this had been done could full distribution be ordered. Only then did plaintiffs become entitled to receive their fees.

Note the difference between this case and Blake v. Commissioner, 20 T.C. 721 (1953), upon which plaintiffs rely: in Blake there was a present, unconditional conveyance effected in the following words:

In consideration for the services heretofore performed and to be performed * * * I hereby bargain, sell and convey unto Mr. Blake an undivided one-fourth (%th) part of all of my right, title and interest in said tract of land, * * *.

There are no such words of conveyance in the case at bar. Here there was a mere promise to pay a percentage of the share awarded to each beneficiary. The attorneys’ rights did not mature until the awards were made to their clients.

However, plaintiffs assert that the fee agreements were assignments because the Orphans’ Court found them to be such. On August 29,1955, the court said:

In our opinion, each agreement constitutes an assignment of the particular beneficiary’s interest in the residue of this estate up to twenty percent (20%) of “all moneys distributable” to such beneficiary from this estate.

This declaration of the Orphans’ Court was not necessary in the administration of the estate; it had no effect on the settlement of it; whether the agreements were assignments or mere promises to pay, the result was the same. Calling them assignments made no difference; distribution of the assets of the estate was not affected by whatever name they were called. The Orphans’ Court’s opinion that they were assignments had relevance only in determining liability for Federal taxes, and hence it is not binding here. See Note, The Bole of State Law in Federal Tax Deterrwmations, 72 Harv. L. Kev. 1350 (1959).

The 3d Circuit Court of Appeals in Gallagher v. Smith, 223 F. 2d 218 (3d Cir. 1955), relied upon by plaintiffs, properly held that the effect of a state court determination, that a taxpayer had only a one-thirtieth interest in the income of a trust rather than the entire interest, was binding on a Federal court in deciding how much of the trust income was taxable to her. But the court recognized that when a state court has not determined the taxpayer’s entitlement to property as against the claims of others but “has merely made a determination of some other question of law or fact asserted to be involved in the federal tax case,” (Id. at p. 222) the Federal court may freely disregard what the state court has done. Here the decision of the Orphans’ Court did not serve to adjudicate plaintiffs’ rights to property as against adverse claimants; it was in the nature of an advisory opinion to some future Federal court that might consider the tax consequences of plaintiffs’ claims on the estate.

But, our holding that the instruments were not assignments does not necessarily determine the question whether the fees were includible in income in 1954, when the 1942 will was admitted to probate. A taxpayer on the cash receipts and disbursements 'basis, commonly called the cash basis, must report as income all receipts of cash or its equivalent in the year of receipt. The question before us is whether these agreements were the equivalents of cash; otherwise stated, were they readily convertible into cash ?

A chose in action cannot represent income when received by a cash basis taxpayer unless it is embodied in a -written instrument (Ruprecht v. Commissioner, 16 B.T.A. 919 (1929), aff'd 39 F. 2d 458 (5th Cir. 1930)) and unless the amount of the obligation is ascertainable in the taxable year, and the instrument can be readily converted into cash in the ordinary course of business, and not wholly as a speculative matter. In The Denver & Rio Grande Western R.R. Co. v. United States, 162 Ct. Cl. 1, 8-9, 318 F. 2d 922, 926 (1963), we said, “* * * an obligation to pay in the future can have a current market value, or represent current income, only if it is currently capable of somehow being traded, disposed of, or realized — i.e., negotiated, assigned, transferred, or paid.” The purpose of this test is to prevent inchoate interests from being taxable at a stage when the value of such interests is wholly speculative and to avoid thrusting both taxpayers and the Government into “the briarpatch of valuation-sans-market.” Id. at p. 11, 318 F. 2d at 928. When this test of tax-ability is applied, it is clear that the contingent fee agreements held by plaintiffs were not the equivalent of cash either on May 5, 1954, when they were executed, or on September 14, 1954, when the 1942 will was probated.

The contract rights which plaintiffs received by virtue of the contingent fee agreements were conditional executory rights to receive a percentage of an estate subject to a will contest. Although this contest was settled on September 14, 1954, the net value of the estate could not have been determined until after due notice to creditors, known and unknown, to file their claims and the time allotted to them to do so bad expired, nor until Federal estate taxes and state inheritance taxes and the cost of administration had been determined. In no event could there have been a full distribution of the estate until all of these things had been done. Any distribution beforehand was at the peril of the executor, and could not have 'been compelled. The interests of these plaintiffs could not have been reduced to cash in 1954; they were entirely too speculative to permit ready saleability.

Legal notice of the probate of the estate (required by the laws of Pennsylvania) was not given through advertisements in newspapers until May 19,1955. Unknown creditors might have appeared as a result of such advertisements with claims which would have had to be satisfied. The claims of the state and Federal tax authorities constituted prior claims against the assets of the estate, and the amount of these claims had not been determined in 1954. The Federal estate tax could not be determined until April 18, 1955, for prior to that time no decision had been made whether to value the assets of the estate as of the date of decedent’s death or within one year thereafter.

Furthermore, the record shows that in August 1955, almost a year after the date on which plaintiffs claimed their property rights vested, the executor retained approximately $204,000 of the funds of the estate in its hands “for a further administration and accounting to be made upon completion of an audit by the Federal Government of the Federal estate tax return and of decedent’s income tax returns for 1953 and 1954, the payment of any additional taxes to the Commonwealth of Pennsylvania and any additional administrative costs in connection with the transfer of securities.”

In view of these facts, it cannot be said that plaintiffs, who kept their accounts on a cash basis, constructively received in 1954 the income in dispute.

It is conceded, of course, that the stock had a fair market value when distributed to plaintiffs. It was the equivalent of cash and therefore income was realized when the stock was received.

The second issue presented affects only the plaintiffs in docket No. 18-61. The question is whether the total premiums paid for health and accident insurance policies were properly deductible as expenses for medical care. Defendant conceded in open court that the total premiums paid are deductible as expenses for medical care. Subsequently, defendant confirmed its concession by letter to the court. Judgment will be entered for the plaintiffs in No. 18-61 on this count of their petition.

It follows from the foregoing that plaintiffs in docket No. 19-61 are not entitled to recover and that their petition will be dismissed; that plaintiffs in docket No. 18-61 are not entitled to recover on the cause of action asserted in Count I of the petition, and the petition as to it is dismissed, but that they are entitled to recover on the cause of action contained in Count II of their petition. The amount of such recovery is to be determined pursuant to Rule 38(c).

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Wilson Cowen, and the briefs and argument of counsel, makes findings of fact as follows:

1. These actions, which involve common questions of law and fact, were consolidated for trial. The suits were filed by plaintiffs to recover alleged overpayment of income taxes, together with interest thereon, for the calendar years 1955 and 1956.

2. Plaintiffs are residents of the State of Pennsylvania and in each action the plaintiffs, husband and wife, are individuals and have filed these suits in their own right.

3. Plaintiffs keep their books and records and file their Federal income tax returns on the cash basis of accounting and by calendar years.

4. For the calendar years 1955 and 1956 the plaintiffs Edelman timely filed joint Federal income tax returns with the District Director of Internal Revenue for the Philadelphia District, Philadelphia, Pennsylvania, and paid the tax shown to be due thereon in the amounts of $14,641.45 and $9,155.15, respectively. Winona E. Edelman is a party only because of the fact that she filed joint returns with her husband, Paul D. Edelman.

5. For the calendar years 1955 and 1956 the plaintiffs McLean timely filed joint Federal income tax returns with the District Director of Internal Revenue for the Scranton District, Scranton, Pennsylvania, and paid the tax shown to be due thereon in the amounts of $3,426.92 and $3,671.77, respectively. Ellen M. McLean is a party only because of the fact that she filed joint returns with her husband, William S. McLean.

6. Plaintiffs Paul D. Edelman and William S. McLean are attorneys at law.

7. George P. Raser (hereinafter referred to as decedent) died on April 18, 1954, leaving a will dated May 6, 1942, in which, after providing for six charitable bequests of $1,000 each, he provided that the residue of his estate should be divided into five equal parts. One part was to be distributed to his brother, or his descendants per stirpes, and the remaining four parts were to be distributed per stirpes to the then living descendants of his three deceased brothers and deceased sister. The Tradesmens National Bank and Trust Company of Philadelphia, Pennsylvania, was appointed executor of the will.

8. Subsequent to the decedent’s death, a written instrument bearing date April 2, 1954, and purporting to be the last will of decedent was offered for probate. Under the terms of this written instrument all of decedent’s estate was bequeathed to one Joseph J. Simner.

9. By written agreements executed on or about May 5, 1954, Paul D. Edelman and William S. McLean agreed to represent certain beneficiaries under decedent’s contested will dated May 6,1942, before the Orphans’ Court of Luzerne County, Pennsylvania. The terms of these agreements were identical. Each of these agreements, hereinafter referred to as contingent fee agreements, was entitled “Appointment of Attorney”. By the terms of each agreement Paul D. Edel-man (William S. McLean) was appointed by the 'beneficiary concerned to represent the beneficiary in contesting the purported will of April 2, 1954, and authorized the attorney to select other attorneys to be associated with him in the will contest. The contingent fee agreement under which Paul D. Edelman was appointed to represent one of the beneficiaries is typical of the other agreements and it provided in pertinent part as follows:

And I do by these presents agree to reimburse my said attorney for my proportionate share of all costs incurred under the authority herein contained and I do further by these presents agree that, in the event my said attorney and/or his associates, shall be successful in having the purported will of George Prentice Baser, Deceased, dated April 2, 1954, declared invalid, or shall effect settlement resulting in the distribution of any monies to me or to my heirs, personal representatives or assigns, by the executor or administrator of George Prentice Baser, Deceased, or by Joseph J. Sim-ner, or his personal representatives, heirs or assigns, “I will pay unto my said attorney a contingent fee of twenty per cent (20%) of all monies distributable to me out of said estate or received by me as a consequence of such settlement.”
It is expressly understood, however, that no settlement shall be effected in the matter without my written consent thereto being first obtained.
It is further understood that some of the beneficiaries under the 1942 will of said decedent have advanced certain sums of money for costs and expenses already incurred, and to be incurred, in the said investigation and litigation. I hereby agree that, in the event I shall not have contributed my proportionate share of any sums advanced for such costs, or as a retainer for legal services, I will reimburse the said beneficiaries such amounts as will result in each of the beneficiaries paying his proportionate share thereof; such proportionate share being determined by the quantum of the interest as residuary legatees or remaindermen that each beneficiary under the 1942 will represented 'by said attorney shall bear to all of the residuary or remainder interests represented by said attorney in contesting the validity of the 1954 will (each family group shall bear one-fifth of the total amount of such costs ana expenses).
In the event the 1954 will shall be legally determined to be invalid or the controversy regarding the same shall be terminated by settlement, I do hereby authorize the executor and/or administrator of the estate of George Prentice Raser, Deceased, to pay my said attorney or attorneys the contingent fee and costs herein agreed to be paid by me and to charge the same against the costs of administration of said estate and to deduct the same from my distributive share of said estate, and this shall be its sufficient and full authority for such payment and for such deduction and shall be binding upon me, my heirs, personal representatives and assigns.
In Witness Whereof, I have hereunto set my hand and seal this 5th day of May, 1954.

10. Certain of decedent’s relatives, all being the beneficiaries represented by the plaintiffs herein, claiming under the will dated May 6, 1942, filed a caveat with the Register of Wills opposing the probate of the alleged will of April 2, 1954.

11. After the matter was certified to the Orphans’ Court of Luzerne County, all of the parties in interest entered into a compromise and settlement under the terms of which Joseph J. Simner agreed to withdraw from probate the alleged will of April 2, 1954, in consideration of the payment to him of the sum of $80,000.

12. By decree dated September 14, 1954, the court approved the compromise settlement of the will contest and directed probate of the 1942 will. On or about May 17, 1955, Tradesmens Bank and Trust Company filed with the Orphans’ Court its first and partial account as executor of decedent’s estate. On or about December 16, 1955, the bank filed with the Orphans’ Court its second and final account. On or about February 24, 1956, the bank filed with the Orphan’s Court a supplemental account to its second and final account.

13. On September 14,1954, the services of plaintiffs Edel-man and McLean, under the contingent fee agreements referred to in finding 9, were fully performed with respect to obtaining the decree settling the will contest. However, certain additional services were performed in 1954 and 1955 by Mr. McLean acting as local counsel in Luzerne County for the bank, executor of the decedent’s estate. By agreement with co-counsel for the will contestants, be received no compensation for these services. Because of dissatisfaction expressed by certain legatees under the will with reference to the expenses of the will contest, the bank considered it necessary in order to be fully protected as executor to obtain the court’s permission to distribute directly to the attorneys the amounts provided for in the contingent fee agreements. The bank was first apprised of the fee agreements on November 1, 1954, when it was given a copy of such agreements. Therefore, on or about June 24,1955, the bank executed and filed a “Petition for Leave to Make Distributions in Kind and For Payment of Fees to Attorneys for Various Parties in Interest.” In the petition the bank, as executor, advised the court that cash would be required for the payment of advance counsel fees, including those resulting from the will contest under the contingent fee agreements, and that cash would also be required for the payment of administration expenses and commissions and for distributions to those requesting cash or part cash. The petition requested permission from the court to sell as many shares of the stock of Smith, Kline & French Laboratories as was necessary to satisfy these various cash requirements. However, this plan was subsequently modified in an “Amended Petition for Leave to Make Distribution in Kind and For Payment of Fees to Attorneys for Various Parties in Interest”, which was executed on or about July 25,1955. The original draft of the amended petition was prepared by plaintiff McLean and read in part as follows:

5. Your petitioner believes that the “appointments of attorney” containing the contingent fee agreement and executed by each of the residuary beneficiaries amounts in law to an assignment of 20% of the income and principal of the said estate available for distribution to said beneficiaries.
6. The sales of Smith, Kline & French Laboratories stock already made since January 1st, indicate actual gains of $122,582.02, and the probable gains on the sale of 20% of the remaining 13,600 shares of said stock, namely, 2720 shares, would amount to approximately $108,800. On this basis it is believed that your petitioner may become liable for capital gains tax of approximately $58,000, and your petitioner is advised, and therefore avers, that such capital gains tax is probably payable by your petitioner rather than by the individual beneficiaries.
7. Your petitioner believes that the complications resulting from making distribution in kind to some beneficiaries, and in cash to others; and in converting securities into cash for the payment of the attorneys’ fees would be overcome if your Honorable Court directed distribution in kind, not only to the beneficiaries, but also to their attorneys, under the assignment contained in the contingent fee agreements, and your petitioner is advised that under the authority of Section 734 of the Fiduciaries Act of 1949 (20 P.S. 320.734) the Court is authorized upon cause shown to direct such distribution in kind.

No one was opposed to inclusion in the amended petition of any of the statements made therein.

14. A Eeport of Audit of the Orphans’ Court of Luzerne County, Pennsylvania, dated August 18,1955, was confirmed on August 29, 1955, and a partial distribution ordered in accordance with the terms of the audit. This Eeport of Audit contained, among others, the following statements:

At audit there was offered in evidence certain so-called “Appointments of Attorney”. .These “Appointments of Attorney” were executed in connection with the will contest by all the beneficiaries in this estate and named Paul D. Edelman, Esq., and/or William S. McLean, Esq., to represent such beneficiaries. * * *
* t- * * *
In our opinion, each agreement constitutes an assignment of the particular beneficiary’s interest in the residue of this estate up to twenty per cent (20%) of “all moneys distributable” to such beneficiary from this estate.
*****
* * * It now appears that all of the beneficiaries request distribution in kind.
By far the greater part of the assets to be distributed by accountant are the shares of Smith, Kline and French Laboratories’ common stock. * * *
Under section 734 of the Fiduciaries Act of 1949 we are given a broad discretionary power concerning distribution in kind. In the exercise of the discretion vested in us by section 734, we authorize and direct the executor-accountant to make distribution in kind of Smith, Kline and French Laboratories common stock.
That portion of the prayer of the amended petition filed by the executor-accountant praying, inter alia, for permission to distribute at this time 11,250 shares of Smith, Kline and French Laboratories common stock, pay the specific legacies to the six named charities, in cash, and retain the balance of the assets [$204,147.47] for further administration and accounting, is hereby granted.

15. The assets comprising decedent’s estate, all transactions in respect thereof and all receipts and disbursements of principal and income (other than final distribution of the balances of principal and income shown in the executor’s supplemental account to its second and final account) are as disclosed in the accounts of Tradesmens Bank and Trust Company as executor of decedent’s estate and in the Beport of Audit referred to in the preceding finding.

16. No briefs were filed or arguments heard with respect to any of the questions dealt with by the Orphans’ Court in the Beport of Audit.

17. Under the contingent fee agreements referred to in finding 9, plaintiffs were authorized to and did associate with them other counsel. The division among plaintiffs and such other counsel of the total counsel fees paid under the terms of the agreements was as follows:

Counsel
Portion of Total Fee Paid
Clement A. Briggs, Esq_ %o-
Nat M. Turnbull, Esq_ 34o-
Ballard, Spabr, Andrews & In-' gersoll_
Plaintiff Paul D. Edelman_
Plaintiff William S. McLean_
% each of balance remaining after payment to Messrs. Briggs and Turn-bull.

18. Distributions of principal and income shown in the various accounts of Tradesmens Bank and Trust Company as having been made to “Boyd Lee Spahr, Esq.” were for the account of plaintiffs and the other counsel named in finding 17 and were distributed among plaintiffs and such other counsel in the proportions therein stated. These amounts were in payment of their fees as provided for in the contingent fee agreements.

19. As his share of counsel fees earned pursuant to the “Appointment of Attorney” quoted in finding 9 and divided according to the formula set forth above, plaintiff Edelman received distributions in cash, and in kind from the estate in 1954, 1955, and 1956, as follows:

Principal Income IS 5It Distributions Distributions
Cash-$2, 800.00 $507.50
1055
Cash_ 4,853.34 1, 029.00
Capital stock, Smith, Kline & French Laboratories, in kind_ 700 shares _
1956
Cash_ 312. 07
Capital stock, Smith, Kline & French Laboratories, in kind-140 shares _

20. As his share of counsel fees earned pursuant to the “Appointment of Attorney” quoted in finding 9 and divided according to the formula set forth above, plaintiff McLean received distributions in cash and in kind from the estate in 1954, 1955, and 1956 in the same amounts as stated in the preceding finding with respect to plaintiff Edelman, except that in lieu of the principal cash distribution of $4,853.34 in 1955 and the income cash distribution of $312.07 in 1956, plaintiff McLean received distributions of $4,853.33 and $312.06, respectively.

21. The total fair market value of the assets of the decedent’s estate on September 14, 1954, was $674,252.81, consisting of the following assets:

Cash -$27,235.43
Bonds - 1, 974.00
Stock:
Smith, Kline & French_ 575,750.00
Others- 69,288.38
Watch- 5.00

Liabilities of the estate, as of September 14, 1954, as disclosed by the first and partial account of the executor filed on or about May 17, 1955, totaled $261,795.47. Although a reasonably accurate determination of the value of the known assets and liabilities of the estate could have been made by the bank as of September 14, 1954, the total liabilities of the estate could not have been definitely ascertained at that time for several reasons. The bank was required to give legal notice of the estate through advertisements in the newspapers in order to give any unknown creditors an opportunity to present their claims. These legal notices were published between May 19, 1955 and July 5, 1955. Also, the estate’s tax liability could not be determined on September 14,1954, because the decision had not been made whether to value the assets as of the date of the death of the decedent or one year after the date of death, pursuant to the optional valuation date allowed for Federal tax purposes. The ultimate decision was to value the assets as of the date of the death of the decedent.

22. The fair market value of the capital stock of Smith, Kline & French Laboratories, Inc., on September 14, 1954, was $82.25 per share. Such stock was split three-for-one on November 17, 1954. Thereafter, on November 26, 1954, Tradesmens Bank and Trust Company, as executor of decedent’s estate, received 18,600 shares of capital stock of Smith, Kline & French Laboratories in exchange for the 6,200 shares of said capital stock which it had held immediately prior to that date.

23. On September 12, 1955, the date of the distribution to plaintiffs of the 700 shares each of Smith, Kline & French Laboratories’ capital stock, that stock had a fair market value of $54.50 per share.

24. On April 14, 1956, the date of the distribution to plaintiffs of the 140 shares each of Smith, Kline & French Laboratories’ capital stock, that stock had a fair market value of $55.50 per share.

25. In October 1955 Paul D. Edelman sold the 700 shares of capital stock of Smith, Kline & French Laboratories, received by him in 1955, for $34,023. Paul D. Edelman did not in the years here involved sell any other shares of stock of Smith, Kline & French Laboratories received by him from the estate of George P. Baser.

26. On March 16, 1956, William S. McLean sold 525 of the 700 shares of capital stock of Smith, Kline & French Laboratories received by him in the 1955 distribution, for $26,405.48. William S. McLean did not in the years here involved sell any other shares of stock of Smith, Kline & French Laboratories received from the estate of George P. Baser.

27. In their Federal income tax returns for the years 1955 and 1956, plaintiffs reported the capital stock received from the estate of George P. Easer as taxable ordinary income in the year of receipt thereof to the extent of the value of the stock at the date of death of George P. Easer, viz., $20.4166 per share. (This value is stated to reflect the three-for-one split occurring on November 17,1954, and referred to in finding 22). Plaintiffs reported the 1955 cash distribution of principal (plaintiff Edelman in the amount of $4,853.34 and plaintiff McLean in the amount of $4,853.33) as long-term capital gain in their returns for 1955 and reported all other distributions of cash as ordinary income in their returns for the year in which such distributions were received.

28. In their Federal income tax return for the year 1955, plaintiffs Paul D. Edelman and Winona E. Edelman reported the sale of the 700 shares of stock of Smith, Kline & French Laboratories as long-term capital gain to the extent of the excess of the proceeds of sale over the amount reported as ordinary income in respect of such shares, viz., $20.4166 per share.

29. Upon examination of the Federal income tax returns of plaintiffs Paul D. and Winona E. Edelman, the Commissioner of Internal Eevenue asserted deficiencies in Federal income tax in the amounts of $10,551.33 for 1955 and $2,318.66 for 1956, resulting principally from his determination that the distribution of principal cash in the amount of $4,853.34 and capital stock of Smith, Kline & French Laboratories from the estate of George P. Easer to Paul D. Edelman in the years 1955 and 1956 constituted ordinary income in the year of receipt to the extent of fair market value at the date of receipt.

30. In their Federal income tax return for the year 1956, plaintiffs William S. and Ellen M. McLean reported the sale of the 525 shares of stock of Smith, Kline & French Laboratories as long-term capital gain to the extent of the excess of the proceeds of sale over the amount reported as ordinary income in respect of such shares, viz., $20.4166 per share.

31. Upon examination of the Federal income tax returns of plaintiffs William S. and Ellen M. McLean, the Commissioner of Internal Eevenue asserted deficiencies in Federal income tax in the amounts of $12,848.51 for 1955 and $1,212.28 for 1956, resulting principally from his determination that the distribution of principal cash in the amount of $4,853.33 and capital stock of Smith, Kline & French Laboratories from the estate of George P. Easer to William S. McLean in the years 1955 and 1956 constituted ordinary income in the year of receipt to the extent of fair market value at the date of receipt.

32. Plaintiffs William S. and Ellen M. McLean on November 16, 1959, paid in full the alleged deficiencies in Federal income tax for the years 1955 and 1956 together with interest due thereon in the aggregate amount of $2,806.81, adjusted for credit of $531.86, the amount of an overassessment determined by the Commissioner of Internal Eevenue for the year 1957.

33. During the calendar years 1955 and 1956 plaintiffs Paul D. and Winona E. Edelman paid premiums for accident and health insurance in the amounts of $837.80 and $884.50, respectively, for which they claim medical expense deductions on their Federal income tax returns filed for those years.

34. The following is a list of the policies on which premiums were paid during the calendar year 1955 and a summary of the coverage provided in such policies:

(a) Monarch Accident Insurance Company. This policy provided indemnity for loss of life, limb, sight, or time by accidental means, and for loss of time by sickness, plus benefits for hospitalization, for nurses’ fees, and for surgeons’ fees incurred in the treatment of nondisabling injuries.

(b) Aetna Life Insurance Company. This policy provided indemnity for loss of time by disease, plus benefits for surgical fees, hospital charges, and nurses’ fees.

(c) Aetna Life Insurance Company. This policy provided indemnity for loss of limb, sight, or time as a result of bodily injuries through accidental means, plus benefits for surgical fees, hospital charges, and nurses’ fees.

(d) Metropolitan Casualty Insurance Company. This policy provided indemnity for loss of life, limb, sight, speech, hearing or time caused by accidental bodily injury and for loss of time by sickness.

(e) Indemnity Insurance Company of North America. This policy provided indemnity for loss of life, limb, sight, or time resulting from accidental bodily injury and also for loss of time caused by disease.

(f) Fidelity Interstate Life Insurance Company. This policy provided benefits for physicians’ fees in the treatment of illnesses or disease, pins benefits for miscellaneous surgical and hospital services.

(g) Fidelity Interstate Life Insurance Company. This policy provided hospital residence benefits, and for miscellaneous hospital expenses resulting from injuries or sickness.

(h) Aetna Life Insurance Company. This policy provided indemnity for loss of life, limb, or sight and other specified losses caused by bodily injuries effected through accidental means, plus payments for hospital, nurses, medical and surgical expenses.

Paul D. and Winona E. Edelman paid premiums on the same policies during the calendar year 1956. In addition they paid the premium due on a policy issued by Fidelity Interstate Life Insurance Company, providing hospital residence benefits and miscellaneous hospital benefits for injuries or sickness, plus emergency accident expense benefits.

35. Upon audit of the tax returns for 1955 and 1956, the Commissioner of Internal Revenue disallowed the deductions claimed by Paul D. and Winona E. Edelman in respect to the insurance premiums. As a result, medical expense deductions in the sum of $117.31 for 1955 and $777.53 for 1956 were disallowed.

36. Plaintiffs Paul D. and Winona E. Edelman on November 16, 1959, paid in full the alleged deficiencies in Federal income tax for the years 1955 and 1956 together with interest due thereon in the aggregate amount of $2,539.43.

37. On or about April 18, 1960, plaintiffs Edelman and McLean filed timely claims for refund of Federal income tax on Treasury Department form 843 for the taxable years 1955 and 1956.

38. The Commissioner of Internal Revenue disallowed the claims in full by notice sent to plaintiffs Edelman and McLean by certified, mail on January 16, 1961, and September 26,1960, respectively.

CONCLUSION OE LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs in docket No. 19-61 are not entitled to recover and their petition is dismissed; that plaintiffs in docket No. 18-61 are not entitled to recover on the cause of action asserted in Count I of their petition and the petition as to it is dismissed, but that they are entitled to recover on the cause of action set forth in Count II thereof. The amount of recovery will be determined pursuant to Rule 38(c).

In accordance with the opinion of the court and a memorandum report of the commissioner as to the amount due thereunder, it was ordered on August 7,1964, that judgment be entered for plaintiffs Paul D. and Winona E. Edelman for $378.88, plus statutory interest as provided by law. 
      
       Plaintiff William S. McLean died on June 19, 1963, after the commissioner’s report -was filed but before the cases were argued. The Miners National Bank of Wilkes-Barre, the executor of his estate has been substituted as plaintiff in his place. References herein to the plaintiff refer to the decedent wherever appropriate.
     
      
       Plaintiffs contend that, even though the alternate valuation date provided in section 2032 of the Internal Revenue Code of 1954 had not passed in 1954, the maximum size of the Raser estate for estate tax purposes was fixed as of the date of his death. Even though this eventually turned out to be the case, the executor might well have selected the higher estate tax value as of a year after the date of death in order to increase the basis of the estate’s assets in the hands of the distributees or for other sufficient reasons. See Internal Revenue Code for 1954, § 1014 ; See also Casner, estate planning 86, 810 n. 51 (3d ed. 1961).
     
      
       Treas. Reg. § 1.61-2 (1957) (amended by T.D. 6416 (1959) ; T.D. 6696 (1963)).
     