Court Opinion

ID: 4592087
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:07:11.189176+00
Date Added: 2024-06-11T07:59:59.384826
License: Public Domain

JOHN J. NEWBERRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  MYRTLE H. NEWBERRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Newberry v. CommissionerDocket Nos. 85780, 87929, 85779, 87930.United States Board of Tax Appeals39 B.T.A. 1123; 1939 BTA LEXIS 924; May 26, 1939, Promulgated 1939 BTA LEXIS 924">*924  The Commissioner determined the fair market value of several blocks of 2,500 shares of stock at the time of their disposition by gift on the basis of the prices per share at which the stock sold on the stock exchange at the basic dates.  Held, that the fair market value of the blocks as thus determined is supported by the evidence, including (a) opinions of experts (arrived at upon study of market conditions, the financial record of the corporation, and a comparison of such corporation and its stock with similar corporations and their stock) that the exchange prices multiplied by the number of shares in the block would have been agreed upon for blocks of 2,500 shares between willing buyers and willing sellers; and (b) stipulated facts and figures respecting the corporation's assets and earnings and the transactions in its stock on the stock exchange over 30-day periods before and after the basic dates.  Thomas L. Zimmerman, Esq., for the petitioners.  Harold F. Noneman, Esq., for the respondent.  MURDOCK 39 B.T.A. 1123">*1124  The Commissioner determined deficiencies in gift taxes as follows: PetitionerDocket No.YearDeficiencyJohn J. Newberry85,7801934$2,575.00Do87,929193514,756.25Myrtle H. Newberry85,77919342,575.00Do87,930193514,756.251939 BTA LEXIS 924">*925  The only question submitted for decision by the Board is that of the fair market value on the date of each gift of the block of J. J. Newberry Co. stock which was the subject of that gift.  FINDINGS OF FACT.  The petitioners are husband and wife.  They each created two trusts on July 6, 1934.  The trusts were for the benefit of their son and daughter.  Each petitioner transferred to each trust created by him or her 2,500 shares of the common stock of the J. J. Newberry Co.  Those transfers were made on July 6, 1934.  Transfers of the same number of shares of the same kind of stock were made to each trust on August 1, 1935.  Each petitioner created two new trusts on December 26, 1935, for the same beneficiaries and on that date each transferred to the two trusts created by him or her 2,500 additional shares of the same stock.  Each transfer was a gift.  The following table shows the value of the stock per share on the three dates as reported by the petitioners in their returns and as determined by the Commissioner: DateReportedDeterminedJuly 6, 1934$35.00$40.75August 1, 193554.5059.50December 26, 193553.5058.75The petitioner, John1939 BTA LEXIS 924">*926  J. Newberry, is president of the J. J. Newberry Co.  That corporation was organized under the laws of Delaware on February 15, 1923.  It succeeded to a business originally established in 1912.  It is engaged both directly and through wholly owned subsidiaries in the business of retailing a wide variety of merchandise ranging in price from five cents to one dollar.  The business grew from one store in 1912 to 450 stores located in 43 different states in 1935.  It did business through subsidiaries in California, Texas, and Virginia, and real estate transactions were carried on through a Delaware subsidiary.  The corporation originally issued 4,000 shares of $100 par value 7 percent cumulative preferred stock and 41,000 shares of no par common stock.  The authorized preferred stock was increased to $5,000,000 par value on August 18, 1926, at which time $2,688,000 par value of that stock was outstanding.  The preferred stock had preference as to 39 B.T.A. 1123">*1125  assets and dividends and was callable at $110 at any time upon notice of 90 days.  It was to have voting power equal to that of the common stock only upon default of three dividends.  Regular quarterly dividends at the annual rate1939 BTA LEXIS 924">*927  of 7 percent were paid on the preferred stock until May 1, 1936, on which date all of that stock was called and the holders were offered 11 shares of new 5 percent series A cumulative preferred stock of the par value of $100 in exchange for 10 of the old 7 percent preferred shares.  Approximately 50,000 of the new 5 percent stock was issued in exchange.  Originally the corporation was authorized to issue 100,000 shares of no par common stock.  That was increased to 400,000 on August 18 1926, and to 800,000 shares on May 10, 1929.  Stock dividends on that stock were declared in the amount of 300 percent on September 1, 1926, and of 50 percent on May 1, 1929.  The common stockholders were given the right on August 10, 1927, to subscribe for 1 share of preferred stock and 3 shares of common at a total price of $360.50 for each 40 shares of common held.  They were given the right on May 24, 1928, to subscribe for 1 share of common at $100 per share for every 10 shares held.  They were given similar rights on May 1, 1929, to subscribe for 1 share of common at $60 per share for every 10 shares held, and 35,943 shares were purchased on the latter rights.  The outstanding stock of the1939 BTA LEXIS 924">*928  company at the time of the gifts here in question consisted of $4,814,100 par value of preferred and 380,446 shares of common.  The number of common shares outstanding from 1929 to 1937 fluctuated within limits of about 15,000 shares.  The following table shows the earnings and dividends per share on the common stock of the corporation, the number of stores operated by the affiliated group, and the net sales for the period from 1923 to 1937: YearStores operatedNet salesEarnings per shareCash dividends paid192351$3,564,946.51$4.681924685,114,338.796.421925866,897,413.598.2819261129,985,073.713.06192715115,069,158.693.65None192821020,609,366.024.62$0.30192927927,789,369.403.151.25193033530,187,391.732.221.10193137931,146,802.061.731.10193240633,121,669.831.071.10193341735,146,574.033.06.70193443141,054,217.935.38.80193545043,388,611.374.941.45193646148,376,510.006.032.80193747050,315,454.005.272.40The book value of the common stock on the three dates in question was as follows: July 6, 1934$27.51August 1, 193530.42December 26, 193531.621939 BTA LEXIS 924">*929 39 B.T.A. 1123">*1126  Current assets consisting principally of cash and inventories increased during the period from 1929 to 1935 from $6,672,000 in 1929 to $9,869,000 in 1934 and $9,314,000 in 1935.  Property and equipment increased from $11,000,000 in 1929 to about $15,000,000 in 1930 and subsequent years.  Treasury stock and investments in and advances to subsidiaries were shown on the books of the corporation in only four years of the period 1929 to 1935 as follows: 1929$144,385.681931331,259.111932694,353.641934766,683.86Other assets were shown on the balance sheets for that period.  These amounted to $941,879.48 in 1929 and declined to $325,445.62 in 1934 and to $442,441.79 in 1935.  Current liabilities shown on the balance sheets during the period from 1929 to 1935 amounted to about $3,333,000 in 1929.  They included, in addition to accounts and Federal taxes payable, a note payable of $2,445,000.  They included in subsequent years only accounts payable and Federal taxes payable which amounted to about $1,700,000 in the years 1934 and 1935.  Other liabilities included purchase money mortgages of about $2,500,000 for most years; 10-year gold notes in1939 BTA LEXIS 924">*930  the amount of $5,000,000 for several years prior to 1934, reduced by $1,000,000 in each of the years 1934 and 1935; $1,000,000 of preferred stock of the realty company during the years 1930 to 1935; and some minor items.  The preferred stock was listed on the balance sheet at $5,000,000 and the common stock at $5,208,571.89 in all of the years from 1929 to 1935.  The balance sheets for the years 1929 to 1932 showed earned surplus of about $3,800,000.  The balance sheets for the three subsequent years showed earned surplus as follows: 1933$4,707,759.7819346,090,049.4519356,996,365.52The following table shows sales and quotations of the common stock in question on the New York Stock Exchange on the basic dates or on the nearest available dates: DateShares soldLowHighCloseBidAskedJuly 3, 193410040 3/440 3/440 3/440 1/241July 10, 193410041 1/241 1/241 1/241 1/842 1/2August 1, 193560059 1/459 3/459 1/45960December 26, 193510058 3/458 3/458 3/45859Fifty-one thousand four hundred of the shares were sold on the New York Stock Exchange in 1934, 66,380 in 1935, and1939 BTA LEXIS 924">*931  37,100 in 1936.  A total of 5,500 shares were sold during the period from June 6 to August 6, 1934.  The range during that period was from no sales on 39 B.T.A. 1123">*1127  most of the days to 1,100 shares on one day.  Prices ranged during that period from a low of 31 to a high of 43.  The variation in price between high and low on any one day did not exceed 2 points except on July 26, when 1,100 shares were sold and the price range was 6 1/2 points.  Twenty-five thousand one hundred shares were sold during July and August 1935.  No sales were made on seven business days during that period.  The volume of daily sales on the remaining days ranged from 100 to 2,800 shares.  The price ranged during that period from a low of 51 1/2 at the beginning of the period to a high of 60 3/4 just prior to the middle of August.  The greatest variation in price on any one day during that period was 2 1/4 points.  Nine thousand four hundred shares were sold during the period from November 26, 1935, to January 25, 1936.  The daily sales, excluding days on which there were no sales, ranged from 100 to 1,900 shares.  The period of heaviest trading was from December 4 to December 13, in which period 5,9001939 BTA LEXIS 924">*932  shares were sold.  The price ranged from a low of 56 1/4 to a high of 61 1/4.  Prices during the nine days of heavier trading mentioned above, were generally higher than at any other time during this period.  The greatest fluctuation in price in any one day during the period was less than 1 point.  Members of the Newberry family owned either directly or indirectly 234,988 shares of common on July 6, 1934, and 237,001 shares on August 1, 1935.  John J. Newberry owned 50,730 shares on the morning of July 6, 1934, and his holding on the evening of December 26, 1935, had only changed to the extent of the gifts involved in this proceeding.  His wife owned 50,951 shares on the morning of July 6, 1934, 51,951 on the morning of August 1, and 46,951 on the morning of December 26, 1935.  Each of the trusts created by the petitioners on July 6, 1934, and December 26, 1935, contain provisions as follows: The trustees are directed to hold the stock deposited and any Newberry stock thereafter deposited as long as they think it desirable for the best interests of the trust fund, keeping in mind that it is the wish of the grantor that such investment shall be continued and that the grantor does1939 BTA LEXIS 924">*933  not desire it to be sold unless it shall be detrimental to the trust to continue to hold the same.  In the event that the Newberry Co. merges or consolidates with another corporation, the trustees in their discretion are authorized to take over stock of such new corporation and to continue to hold it as part of the trust estate.  The trustees are authorized to vote the Newberry stock, and, in the event John J. Newberry is dead, they are requested to consult with his brother and to vote the stock in the manner suggested by said brother.  The trustees are relieved of all personal liability for any losses incurred by reason of having held or continued to hold the stock investment in the Newberry 39 B.T.A. 1123">*1128  Co., whether such holding shall have been detrimental to the trust estate or otherwise.  The fair market value of the common stock of the Newberry Co. transferred by each of the petitioners, as hereinbefore stated, was $40.75 per share on July 6, 1934, $59.50 per share on August 1, 1935, and $58.75 per share on December 26, 1935.  All facts set forth in the stipulation filed by the parties which are not already included in these findings of fact are included herein by this reference. 1939 BTA LEXIS 924">*934  OPINION.  MURDOCK: The Commissioner conceded at the hearing that the petitioners are entitled to an exclusion of $5,000 for each of the twelve gifts involved in these proceedings.  The only issue for decision by the Board is the value of each of the twelve gifts on the date that it was made.  Each petitioner on each of three dates made two gifts.  Each gift was of 2,500 shares of common stock of the J. J. Newberry Co.  The Commissioner in determining the deficiencies placed a value on each gift by multiplying by 2,500 the unit price at which shares of the stock were currently selling on the New York Stock Exchange.  The petitioners, on their returns, valued the stock at about $5 less than those unit prices.  Their contention would seem to be that the value of each block was about $5 per share less than the current unit price shown by the exchange sales and quotations because of the size of the blocks given in each instance, i.e., that blocks of 5,000 shares, and perhaps even blocks of 2,500 shares, if thrown upon the market at the time the gifts were made would have depressed the market more than 5 points, and the most advantageous way in which such blocks could have been sold1939 BTA LEXIS 924">*935  on the basic dates would have been outside of the market to distributors who would have paid about 5 points under the market to give themselves a profit for handling the transactions.  The conclusion would be that the fair market values of such lots as were given on the basic dates were at least 5 points below the prices being obtained on the market for small blocks.  The regulations of the Commissioner expressly reject the theory that a large block of stock has any different value than would be obtained by multiplying the current market price of a single unit or share by the number of units in the block.  Regulations 79, art. 19.  It has been held that a regulation of this kind is not binding, since it attempts to preclude factors which may have a material bearing on value. ; affd., ; ; ; . Fair market value is primarily a question of fact and all evidence bearing upon it should be considered, including any evidence1939 BTA LEXIS 924">*936  to indicate 39 B.T.A. 1123">*1129  that the market value may be affected by the size of the block.  ; The statute provides that in the case of a gift of property, "the value thereof at the date of the gift shall be considered the amount of the gift." Sec. 506, Revenue Act of 1932.  The parties have proceeded upon the theory that value, as there used, means "fair market value." See Regulations 79, art. 19.  Cf. ; ; ; ; ; ; Regulations 70, art. 13.  We, therefore, assume for the purpose of this opinion, that the value to be determined is the fair market value of each gift on the day it was made.  The term "fair market value" has been considered and defined frequently.  The definition may be stated as the price which would probably be agreed upon by a seller willing, but under no compulsion, 1939 BTA LEXIS 924">*937  to sell, and a buyer willing, but under no compulsion, to buy, where both have reasonable knowledge of the facts. ; ; ; Actual sales made under under such circumstances are reliable, if not the best, evidence of fair market value.  ; ; ; ; ; ; ; certiorari denied, . However, fair market value may be determined in the absence of actual sales and may even be shown to be different from the price at which actual sales were made.  1939 BTA LEXIS 924">*938 ;All parties to these proceedings seem to agree that the prices at which sales were being made on the New York Stock Exchange are the most reliable indication of fair market value on that day.  The petitioners accept the New York Stock Exchange prices as conclusive proof of the value on each of the basic dates of small blocks of J. J. Newberry Co. stock.  Their sole contention seems to be that those prices would have to be discounted about 5 points in order to arrive at the fair market value of a block of 2,500 or 5,000 shares.  The parties have stipulated all of the basic facts and figures which are in the reocrd.  The testimony consisted of opinion evidence given by three witnesses called by the petitioner and two called by the respondent.  The three witnesses called by the petitioner were called apparently to testify, and they did testify, that the market for the Newberry stock 39 B.T.A. 1123">*1130  was so thin that it would have been seriously depressed by the offer of a block of 2,500 or 5,000 shares, and such a block could have been disposed of to best advantage by a sale outside1939 BTA LEXIS 924">*939  of the exchange to a dealer who would have paid about 5 points under the market for the shares and then would have sold them privately to customers at the same prices which prevailed upon the exchange.  The first witness did not express an opinion as to the extent of the decline in market price which would have resulted from throwing such a block of shares on the market, nor did he express any opinion as to the price which could have been obtained for a block of 2,500 shares sold outside of the exchange.  The second witness said the market would have been changed two or three points by an offer of 500 shares; it could not absorb 5,000 shares without a price reduction of several points; and a distributing house would pay 8 or 10 percent under the last sale.  He stated, after considerable hesitation, that in his opinion the fair market value of 5,000 shares would be 8 or 10 percent less than the exchange price.  Later, he changed his testimony to say that the lower price would not reflect the fair market value.  When he was asked what would happen if someone went into the market to buy 5,000 shares and another person went into the market to sell 5,000 shares, he replied that a sale of1939 BTA LEXIS 924">*940  5,000 shares would take place at the current market price.  The third witness said that a sale to a distributor at about 5 points below the current market price would have been the most advantageous way to dispose of a block of 5,000 shares.  Although he said that in his opinion the fair market value of a block of that size on any of the basic dates was the current market price less 5 points, he would not venture an opinion as to the price which would have been agreed upon between a willing purchaser and a willing seller dealing for a block of 5,000 shares where each was reasonably familiar with the facts and neither was under any compulsion to deal.  The testimony of these three witnesses has been carefully considered in an effort to give to that evidence such weight as it deserves.  Yet, if their testimony and the stipulation were the only evidence, such evidence would probably be insufficient to show that the "fair market value" of any of the gifts made by these petitioners was less than the amount determined by the Commissioner.  Counsel for the petitioners has neither filed a brief nor argued the case orally.  Consequently, it is difficult to know exactly what he had in mind1939 BTA LEXIS 924">*941  when he presented his evidence or to know what he thought of the case after all of the evidence was in.  It is possible, of course, that he was convinced upon consideration of the evidence that the Commissioner had not erred.  However that may be, he has not offered any argument to explain why he consistently inquired about the effect of throwing a block of 5,000 shares upon the market and refrained from inquiring as to the probable price between willing buyers and sellers.  39 B.T.A. 1123">*1131  Each of the gifts in question was of 2,500 shares.  Each gift was separate from every other gift.  The petitioners have claimed and are being allowed separate exclusions of $5,000 for each gift.  Although each of the petitioners gave away a total of 5,000 shares on each date, and the total shares given by the two petitioners on each date was 10,000 shares, they have advanced no argument that blocks of 5,000 shares or 10,000 shares should be considered in determining the value of each gift of 2,500 shares.  Cf. ; 1939 BTA LEXIS 924">*942 . They did not offer any evidence to show that the value of any gift of 2,500 shares was any less by reason of the fact that on the same day three other gifts of equal size were made.  Cf. . Such a circumstance might possibly be material in some cases as, for example, in the case of a gift of perishable goods, where the value could be realized by the donee only through a sale on the market.  But the property donated in this case was not perishable.  It had a continuing value and the benefit to the recipient was not dependent upon a sale.  Indeed, the trusts provided that the gifts should be retained for a considerable time without sale.  Therefore, it seems important to keep in mind only blocks of 2,500 shares.  Furthermore, the petitioners have advanced no argument to support their theory that fair market value is to be determined by the effect of throwing large blocks of stock on the exchange for sale on one day or, in the alternative, of disposing of those blocks by private sale through distributors.  Cf. 1939 BTA LEXIS 924">*943 . They assume that the thin market was due to a shortage of buyers and failed to realize that it may have been due to a shortage of sellers.  While an offer of 5,000 shares on a single day might have depressed the market in one case, it might have had the opposite effect in the other.  Another possibility would have been to feed the shares into the market intelligently over a reasonable period of time.  Cf. . Although we are not convinced that it is of primary importance in this case to determine the effect of throwing large blocks of stock on the exchange for sale on each of the basic dates (cf. ), nevertheless some discussion of the testimony of the petitioners' witnesses and of market conditions indicated by the stipulation may not be amiss.  The witnesses were familiar with the market activities in Newberry stock and had some general knowledge of the Newberry Co. but they had made no special study of the history and earnings of that company.  Two of the three witnesses did not express any opinion as to the price which would1939 BTA LEXIS 924">*944  probably have been agreed upon on any of the basic dates for blocks of 2,500 or 5,000 shares between willing buyers and sellers reasonably familiar with the facts and under no compulsion to deal.  The third witness expressed the 39 B.T.A. 1123">*1132  opinion that that price would be the current market price on any of the basic dates. The record of sales for 30 days prior and subsequent to July 6, 1934, indicates that relatively few shares of the stock were changing hands during that period.  There were no sales on many days, while on others the sales were limited to small blocks.  However, 3,200 shares were sold on 4 days, July 25, 26, 27, and 30.  A small sale had taken place on the 24th at 40 1/2.  The price ranged from 38 to 40 on the 25th, when 700 shares were sold.  It varied from 31 to 37 1/2 on the 26th when 1,100 shares were sold, and it closed on the 30th at 34.  The next sale was at 37 1/2 on August 3.  Those figures might indicate that the sale of the 3,200 shares had driven the market down.  The record of sales for 30 days prior and subsequent to August 1, 1935, shows a great many more sales.  Furthermore, although 2,800 shares were sold on July 9, 1,600 on July 10, and 1,7001939 BTA LEXIS 924">*945  on July 11, there was a small but steady rise during those days in prices.  The prices held up under sales and even increased during this period.  Three thousand one hundred shares were sold during the week of August 1 with little or no market fluctuation.  It is difficult to believe that the market as it actually existed at that time could not have absorbed 2,500 or even 5,000 shares within a reasonably short time without any decline in the market price.  The figures for the period around December 26, 1935, show fewer sales, yet there were substantial sales on various days during that period without any substantial change in the prices.  Three thousand four hundred shares were sold on December 4 and 5, and the market prices increased during those days.  The prices were fairly steady over the entire period.  The records themselves do not indicate that if there had been a willing seller on any of the basic dates of blocks of the size here in question, he would have been unable to dispose of his shares within a reasonable time on or about the basic dates at prices substantially the same as the then current market prices.  His offer might have improved the market, it might have had no1939 BTA LEXIS 924">*946  influence on the market, or it might have forced the market down.  The last assumption seems no more reasonable than the other two.  The question for determination is the fair market value of a block of 2,500 shares on each of the basic dates in the light of all of the evidence in the case.  The probable effect of throwing 10,000 shares on the market on any one of those days is merely evidentiary at most.  These petitioners had no desire to sell the stock on any of the basic dates but had entirely different uses for the shares.  If counsel for the petitioners has assumed only a willing seller, he has been in error.  One attempting to give an opinion of fair market value, as defined for present purposes by the Board and the courts, must assume that on the basic date there was a willing seller and also a willing buyer.  This is necessary in order to do justice to both taxpayer and Government 39 B.T.A. 1123">*1133  where, as here, a sale of the property was not even contemplated by the donor and donee and yet a value must be determined.  Cf. 1939 BTA LEXIS 924">*947 ;. Here there is no more reason to believe from the evidence that there was a willing seller of 2,500 or more of the shares on any basic date than there is to believe that there was not a willing buyer for that number of shares.  The witnesses for the petitioners, in stating that the best way to dispose of 5,000 shares was to sell them privately at a discount from the exchange price, were assuming that there were willing sellers, but, apparently, were failing to assume the existence of a willing purchaser on the exchange.  They went, instead, to the exchange records in an effort to determine the number of actual purchasers and the probable reduction in prices which would have to occur before a sufficient number of willing purchasers would appear.  The petitioners, as we have already said, have advanced no argument to show that such a method of procedure is sound in determining "fair market value." However, the decision does not have to be made upon the testimony of the petitioners' witnesses standing alone.  There is, in addition, 1939 BTA LEXIS 924">*948  the testimony of two witnesses called by the respondent.  They were shown to be men well qualified by experience and training to express opinions as to the value of the gifts in question on the basic dates.  We believe that no one interested in determining the fair market value of the Newberry stock on these basic dates would fail to be impressed by the testimony of these two witnesses.  Not only were they familiar with the actual records of sales of the Newberry stock, but they had also studied the history of the Newberry Co. and its business.  They had made studies of market conditions and economic conditions, and had made careful comparison of the Newberry Co. and stock with other similar companies and their stocks.  They considered the current market price on or about each basic date as the best and most reliable starting point from which to determine the fair market value of a block of 2,500 or more shares on those particular dates.  They considered the fact that 10,000 shares in all were given on each basic date.  They studied market conditions and other conditions which might have had some effect in producing the exchange prices to learn, if possible, whether those figures were1939 BTA LEXIS 924">*949  to any extent artificial or whether they could be accepted as a reliable gauge of the fair market value of the stock in larger blocks on each basic date.  They came to the conclusion, after considerable study, that those figures were reliable and were the best indication of the value of blocks such as were the subject of the gifts in question.  We have carefully considered the testimony of these witnesses in an effort to give to it the weight which it deserves.  A review of the testimony of all five witnesses shows that three of them have expressed the belief that the price which probably would 39 B.T.A. 1123">*1134  have been agreed upon for blocks of 2,500 or 5,000 shares on each of the basic dates between willing buyers and willing sellers, not under compulsion to trade but having reasonable knowledge of the facts, would have been the exchange prices multiplied by the number of shares in the blocks.  No witness has expressed a contrary view.  One witness stated that in his opinion the "fair market value" of such blocks on the basic dates would have been 5 points under the current market price on the exchange.  However, it appears from his testimony that the "fair market value" to which1939 BTA LEXIS 924">*950  he referred was not the price which would be agreed upon between a willing purchaser and a willing seller dealing for a block of 5,000 shares, where each was reasonably familiar with the facts and neither was under any compulsion to deal.  We have studied the figures and the facts disclosed by the stipulation of the parties in an effort to properly appraise the testimony of the witnesses and to assign proper weight to the evidence stipulated.  The conclusion which we reached, after fully considering all of the evidence before us, is that the Commissioner correctly determined the value of each gift in determining the deficiencies.  Decision will be entered under Rule 50.