Court Opinion

ID: 6256864
Source: CourtListenerOpinion
Date Created: 2022-02-17 21:45:07.938388+00
Date Added: 2024-06-11T08:59:34.523358
License: Public Domain

*165Dissenting Opinion by
Mr. Justice Bell:
Decedent’s executor and legatees appealed from the appraisement by the Commonwealth of Pennsylvania of the stock of Henry I. Beers Corporation at a value of $50. per share as of the date of testator’s death. Because the majority opinion omits many facts which we consider important, it will be necessary to restate and review the facts.
Decedent died August 18,191fl, owning 1666 shares of stock of a small, closely held family corporation which was organized to deal and invest in stocks, bonds, and securities, including its own shares, and in real property. The number of shares outstanding totaled 9996. The shares were inactive and not traded in on any Exchange. They were offered to the members of the family and to the corporation (who were the only available market) and, as a result, the following bona fide sales were made: In 1942, (they were appraised for inheritance tax purposes on the basis of) two sales of 50 shares each at $20. per share; in 19Jfi, 200 shares were sold at $23.50 per share; in 1948, 35 shares were sold at $25. per share; and in 1949, 833 shares were sold at $24.50 per share. There were no other sales. The testimony of three witnesses with vast experience as to the value of stocks was rejected by the Chancellor who substituted the impractical conclusions of theoreticians for the opinions of practical men with more than twenty-five years experience in the trade.
The book value of the stock in 1947 was $58.29 per share; while the average book value of the stock for five years prior to and including 1947 was $58.05 per share. The balance sheet as of January 1, 1947 included four principal items: Cash, $236,000., Marketable Securities, $243,000., Notes Receivable, $95,000., and Real Estate, $76,000. There was no evidence what the marketable securities or real estate consisted of or *166whether they were carried at cost, or whether the notes receivable were worth their face value! The balance sheet showed that the assets had declined from $631,-828.26 as of December 31, 1937 to $584,943.90 as of December 31, 1947, and the surplus from $113,328.26 to $82,943.90.
In 1947, the ordinary net income showed a loss of $1.20 per share and the “income including capital gains and losses” showed a loss of $4.10 a share. In 1946, the ordinary net income showed earnings of $1.10 per share and the “income including capital gains and losses” showed earnings of $7.85 a share. The average earnings over a period of five years was 61‡ per share from so-called ordinary net income; $1.37 a share from “income including capital gains and losses”. The average dividend fdr five years was $1.37 per share; in none of these years was the dividend earned by ordinary income, and in four of the five years it was not earned from “income including capital gains and losses”. The yield from this dividend was only 2.1%, and as we have seen, even this was not earned.
Section 2 of the Act of June 20, 1919, P. L. 521, 72 P.S. §2302 (which imposes an inheritance tax upon the transfer of property by will), provides: “All taxes imposed by this act shall be imposed upon the clear value* of the property subject to the tax. . . .” There appears to be much unnecessary confusion as to what “value” means. “Value” means “market value”: Kaemmerling’s Appeal, 282 Pa. 78, 82, 127 A. 439; Washington County v. Marquis, 233 Pa. 552, 558, 82 A. 756; Susquehanna Collieries Company’s Appeal, 338 Pa. 366, 12 A. 2d 99; Jones v. Costlow, 349 Pa. 136, 36 A. 2d 460. “. . . the only standard of valuation recognized by law in making assessments is market value as distin*167guished from actual value; or, more accurately expressed, actual value limited and defined by market value”: Kaemmerling’s Appeal, 282 Pa. 78, 82, 127 A. 439.*
The majority opinion ignores all the aforesaid authorities and adopts as the yardstick or test of clear value “its estimated net worth” which is No. 6 of the 17 definitions of “value” contained in Webster’s Dictionary. No. 2 defines “value” as “monetary worth of a thing; marketable price; No. 6 as “estimated or assessed worth; . . .”. Yet this is the unrealistic standard on which they predicate their opinion.
The first question is: Shall we adopt as the measuring rod or test of value of a stock, one of Webster’s Dictionary definitions, or shall we follow our own decisions which have adopted the practical yardstick of the market place, viz., market value, which is the price a willing buyer would pay to a willing seller?
If bona fide sales (or sale) are made at or near the date in question these fix the market value and are controlling unless evidence is produced to prove that the sale or sales did not accurately represent or depict the market value, — Cf. Kaemmerling’s Appeal, 282 Pa. 78, 82, supra, — as for example, that the sale was not between a willing buyer and a willing seller; or that a higher sum could have been realized at a public sale than at a private sale, or vice versa; or that the block of stock sold was too small or too large to reflect the real market value; or that it was a forced sale; or a sale at a distorted or inflated price paid to obtain con*168trol; or any other evidence tending to prove that such bona fide sale did not fairly represent or depict the true market value. If, for example, the common stock of U. S. Steel or American Telephone & Telegraph Company or any other active listed stock is to be valued for inheritance tax purposes, it is by practice admitted or indisputable that its market price would be the proper and only measuring rod of its “value” and no consideration would be given to its book value, its estimated net worth or any other factor or yardstick. How, then, is it possible to say that the word “value” in the Inheritance Taw Act does not mean “market value”, but means instead “estimated net worth”?
If there were no recent bona fide sales (or sale), or if they do not accurately represent or depict the true market value it is at times difficult to determine market value. In such cases the appraisers, in determining the market value of the stock may take into consideration the following factors, inter alia: The nature of the business of the corporation; the industry of which it is a part, and the corporation’s position therein; its present earnings, and its earnings record over a period of years; its price times earnings ratio; its present dividend and its past dividend record; its management; its past history; the future outlook for its business; the amount and the nature of its assets and liabilities; the potential market for the stock; the book value; as well as the amount of stock owned by the decedent, i.e., whether he owned a majority, or a large block, or a small percentage of the corporation’s outstanding stock, and the dollar value involved.
The second question involved is the weight to be given to each of the aforesaid factors. This will necessarily often vary, but we should avail ourselves of the practical experience of those who daily buy and sell *169or deal in such commodities in the markets (or specialize or conduct research therein), and give to each factor the weight and importance which the trade under the circumstances attaches thereto.
The Commonwealth’s appraiser admitted that “the principal factor in fixing the value of this stock at $50. a share was its booh value as shown by its corporate returns filed in the Department of Revenue of some $58. a share over an average of five years”. As was so well said by Chief Justice Drew in Aldrich v. Geahry, 367 Pa. 252, 255, 80 A. 2d 59: “The tax return did not purport to show the market value but only the book value of the assets. The booh value is rarely an accurate representation of the marhet value. Particularly is this true in a small, closed corporation. . . . See Jones v. Costlow, 349 Pa. 136, 36 A. 2d 460.” What the Chief Justice so aptly said in that case, viz.: that market value and book value are very different and frequently bear no relation to each other; and that book value is rarely ever an accurate representation of the market value (particularly in a small closed corporation), is well known to everyone who frequently purchases or sells stock and is universally recognized by leading brokers and bankers as an accurate market axiom. Generally speaking, booh value is one of the least important factors in determining marhet value; while price times earnings ratio and yield are two of the most important factors in determining market value..
Moreover, the Commonwealth’s appraiser valued this stock at a figure 80 times its average five year earnings of ordinary net income and 36 times its average five year “earnings including profits from capital gains and losses”. The unfairness of the Commonwealth’s valuation on a price earnings ratio basis is further graphically illustrated by the fact if the “or*170dinary earnings” or the “capital gains and losses earnings” of the corporation in 1947 had been 1‡ a share instead of a loss of $1.20 a share, and $4.10 a share respectively, the Commonwealth’s appraisal would Be 5000 times earnings. It is well known by every banker and broker in America that the stock of many of the leading corporations of America, which are listed and actively traded in on the New York Stock Exchange, have a market value of from five to fifteen times earnings.* How then is it possible to fairly appraise in 1947 this inactive, unlisted and virtually unknown stock at 80 times its average five year earnings, or even at 36 times its average five year “earnings including profits from capital gains”, when at that time Union Pacific Railroad Company common stock could be bought (using its mean market price for that year) at 6.3 times its 1947 earnings, Standard Oil Company of New Jersey at 7.6 times its earnings, General Motors at 9.4 times its earnings, and even E. I. duPont deNemours (reflecting its outstanding management, and the growth prospects of the chemical business) at 18.7 times its earnings! Putting it more succinctly, unless a purchaser wished to liquidate the company and needed the stock for control, can anyone imagine a willing buyer paying $83,300. or $50. a share for decedent’s block of stock?
In tax matters, federal and state, where there are no recent bona fide sales, it sometimes happens, perhaps unconsciously, that the factor or formula upon which most reliance is placed is that which will produce the largest tax in that case. If there is a sincere difference of opinion on the subject of value, we should attach greater weight to the unbiased opinion of the *171Trade, who have the additional advantage of wide practical market experience.
In the face of the actual bona fide sale of the stock of this corporation in 1947, and in view of all the other facts in this case, it was not only clear error to appraise the decedent’s stock at $50. a share, but it was so unreasonable as to be utterly unjustifiable.* The same conclusion would be reached even if it be assumed, arguendo, that the sale of this stock comprised too small a block to depict the true market value.
I would reverse the judgment of the court below and affirm appellant’s valuation of this stock for inheritance tax purposes at $23.50 a share.

 Italics throughout, ours.

 See to the same effect the Act of June 17, 1913, P. L. 507, §1, as amended which imposes a tax of “four mills on each dollar of the value thereof”. The word “value” has always been construed (with respect to stocks, bonds, mortgages, notes, judgments, etc.) to mean not par value or face value or book value or estimated worth, but market value.

 As an example, tbe price earnings ratio as shown by Standard & Poor’s Daily Stock Price Indexes for 50 industrial common stocks at the end of the third quarter of 1947, was 9.06.

 Mr. L. M. Campbell, vice president and trust officer of the Oil City National Bank (and now present Secretary of Banking of the Commonwealth of Pennsylvania), with thirty years experience, who had full discretionary powers of investing more than $20 million dollars of trust funds, termed this valuation “ridiculous”.