The opinion of the court was delivered by: RIFKIND
The action was brought for the recovery of taxes erroneously assessed and collected for the taxable years 1940 and 1941. It was tried upon a stipulation of facts and the testimony of the taxpayer. The facts are:
The taxpayer is the widow of one Jonas Meyer, who died in October, 1939. At the time of his death Jonas Meyer was doing business in partnership with his son, Z. Edwin Meyer, under written articles of partnership. These articles provided that, upon the death of Jonas Meyer, the surviving partner, Z. Edwin Meyer, should have the power to exercise one of three options, as follows:
'In the event of the death of Jonas Meyer, prior to the death of Z. Edwin Meyer, then the latter shall have the option either to continue the business or to sell or liquidate. * * *
'If Z. Edwin Meyer elects to continue the business, either alone, or with a new partner or partners, then he may take over the business and its assets and liabilities and he may use therein either the firm name of F. & J. Meyer or any other name. If Z. Edwin Meyer elects to use the hereinafter mentioned Eighty-Five Thousand ($ 85,000) Dollars or any part thereof in the continuing business, he shall have the option to do so either (1) by requiring the Estate of Jonas Meyer to retain said sum in the business as a continuing investment in its capital, or (2) by requiring said Estate to become a special partner in the continuing business by the contribution of said sum, or (3) by borrowing said sum from the Estate of Jonas Meyer. * * *
'If Z. Edwin Meyer elects to continue the business and irrespective of which of the options given to him is selected by Z. Edwin Meyer, then the Estate of Jonas Meyer shall permit to remain therein and Z. Edwin Meyer may retain in and for the continuing business, for a period of ten (10) years (but in no event longer than Z. Edwin Meyer continues to manage the business) the sum of Eighty-Five Thousand ($ 85,000) Dollars out of the interest of Jonas Meyer or his Estate in the copartnership. The Estate of Jonas Meyer may withdraw the said sum of Eighty-Five Thousand ($ 85,000) Dollars in the following manner: -- Twenty (20%) percent thereof at the end of three (3) years from the date of the death of Jonas Meyer, Twenty percent (20%) at the end of five (5) years, Twenty percent (20%) at the end of seven (7) years and the balance at the end of ten (10) years; but Z. Edwin Meyer may elect to require the Estate to withdraw this Eighty-Five Thousand ($ 85,000) Dollars or any part thereof at any time or times earlier than hereinbefore specified. * * *
'If Z. Edwin Meyer dies or becomes wholly incapacitated before the full repayment or return of the money so left in or for the continuing business, then the Executors or Administrators of the estate of Jonas Meyer shall have equal voice with the legal representatives of Z. Edwin Meyer or of his estate in the disposition of the business or of its assets, in order to protect the interests of the estate of Jonas Meyer.
'So long as the Estate of Jonas Meyer retains the said Eighty-Five Thousand ($ 85,000) Dollars, or any part thereof, in the business, whether by leaving it in the business as a continuing investment in its capital, or by becoming a Special Partner, or by lending said sum to Z. Edwin Meyer, the Estate shall receive twenty (20%) percent of the net profits of the business, to be computed and paid annually. * * * The Estate of Jonas Meyer shall also receive semi-annually, on June 30th and December 31st of each year, interest on the actual amount retained in the business at the beginning of each semi-annual period (which is likewise to be deducted before net profits are computed); such interest to be paid at the rate of six percent (6%) per annum if the Estate leaves the money in the business as a continuing investment or if the Estate becomes a Special Partner in the business, or at the rate of five and one-half percent (5 1/2 %) if the Estate lends the money to Z. Edwin Meyer. * * * '
In addition to his initial choice of options, Z. Edwin Meyer retained the right to change from one option to another at any time.
After the death of Jonas Meyer, the surviving partner, Z. Edwin Meyer, made a timely election of the first option, namely, to require the estate to retain an investment in the continuing business amounting approximately to $ 80,000.
Under the will of Jonal Meyer, the taxpayer was his sole legatee.
During his lifetime Jonas Meyer had procured two policies of life insurance on the life of his son and partner, Z. Edwin Meyer: one in the sum of $ 7,500. These policies were both issued under date of May 2, 1924, on the continuous payment plan. The gross premiums were $ 448.35 and $ 178.80, respectively. The policies named Jonas Meyer as beneficiary. The investment of the decedent in the continuing business was, by the executors of the estate of Jonas Meyer, assigned to the taxpayer on or about March 8, 1945. The aforesaid policies of insurance also carried the following endorsement:
'May 29, 1940: title and interest assigned to Hannah Meyer, widow of the deceased absolute assignee.
'June 12, 1940: Under absolute assignment, Mrs. Hannah Meyer has the right to change and successively change to any beneficiary ...