Court Opinion

ID: 9642542
Source: CourtListenerOpinion
Date Created: 2023-08-22 18:02:00.224952+00
Date Added: 2024-06-11T11:52:50.491775
License: Public Domain

*472GARDNER, Circuit Judge
(dissenting).
The facts and issues presented by the petition for review in this ease have been quite fairly and succinctly stated in the opinion of Judge Booth. There are two issues: (1) What was the fair market value of the stock inherited by the petitioner, on November 4, 1918; and (2) was the method employed by 'the Commissioner of Internal Revenue in computing the tax a proper method?
It is conceded, as noted in the foregoing opinion, that the stock was not a listed, stock and had no regular market value in the primary sense. It was therefore proper to resort to the value of the assets of the corporation and its indebtedness for the purpose of determining the market value of the stock. Arneson v. Nerger, 34 S. D. 201, 147 N. W. 982; Muck v. Hayden, 173 Mo. App. 27, 155 S. W. 889; White v. Jouett, 147 Ky. 197, 144 S. W. 55; Collins v. Denny Clay Co., 41 Wash. 136, 82 P. 1012. The assets of the corporation consisted of stock in another corporation whose only property was certain timber lands, so that ultimately the question is dependent upon the value of these timber lands. The solution of this question is dependent upon the volume or amount of timber an I its quality. The question is also affected by the amount of the indebtedness of the corporation. It is to be observed that both parties agree as to the volume of the timber, and neither is there any dispute as to the character and quality of the timber nor as to the amount of the corporation’s indebtedness, so that the only disputed question of fact is the stumpage value per thousand on November 4, 1918.
The commissioner, in determining the value of this stock, accepted and adopted the appraisal made by the probate court of St. Louis county, Minn., in the matter of the estate of Elizabeth B. Williams, deceased, wife of the petitioner. The commissioner in his report states that: “The appraisal made by the appraiser appointed by the Probate Court of St. Louis County, Minnesota, was entered on Form 706 Federal Estate Tax Return. The return was examined by Revenue Agent Hall in 1920. He made no change from the amount returned, nor was it subsequently changed by the Bureau. It may also be stated that the appraisal had been based on cruises made by the corporation, and same were satisfactory to the executors and the Revenue Agent.” This report contains the following pertinent statement:
“Statement of Alberni-Pacific Co. as at November 4, 1918:
Timber estimated' 1,173,204,- ■ 000 feet, equals 1,173,204 thousand. Value $1,00 per thousand .............. $1,173,204.00
Less debts of' Albemi-Paeifie Co. .............. 75,000.00
Valuation of A-P stock.. $1,098,204.00
80% owned by Red Cliff Land & Timber Co. is........... 875,563.20
Less indebtedness of Red Cliff Co....................... 100,000.00
Valuation of 4000 shares of the Red Cliff Land & Lumber Co. stock.........’........ 77*8,563.20
Value per share is $194.64. ..”
Before the Board of Tax Appeals, the petitioner offered testimony of expert, timber-men who were familiar with values of timber of this character in the locality where this timber was located. Referring to this testimony the board in its decision says: '
“A great deal of testimony was presented by petitioner of expert' timbermen who were familiar 'with values of properties similar to these which composed the bulk of the assets of these corporations, but none of the witnesses had ever seen these properties or claimed to have any personal, knowledge of their value. The petitioner sought to establish a value for the timber properties by introducing in evidence the contract of sale of them made in 1911 with the Von Alvensteben Company for the expressed consideration of $2,228,700 and treating this fixed sum as their true market value in 1911. He then attempted to establish their value as of November, 1918, by testimony of expert witnesses to the effect that values of like properties, once established, rarely receded or diminished. The infirmity of this evidence, aside from its novelty and remoteness, is that it is based upon a false hypothesis, in assuming that the figure expressed in the Von Alvensteben contract is any evidence whatever as to the value of the property at that time. The transaction provided for in that contract was an installment sale in which the purchase price was payable in amounts spread over a period of five years. In these circumstances the actual price received by the seller was not the sum total of the payments provided in the contract, but the cash paid, plus the value of the contract itself at date of sale.”
The board seems to have swept aside all the testimony produced by the petitioner as to value and accepted the findings of the pro*473bate court. In the course of the opinion of the board it is said with reference to this valuation fixed by the probate court of St. Louis county, Minn.:
“This valuation was adopted by the respondent in determining the profit to petitioner from the sale and this finding we are bound to approve unless the presumption in favor of its correctness is overcome by convincing proof presented by the petitioner.”
I think it important to bear in mind that there is no dispute as to the'estimated volume of timber. Neither is there any dispute as to the character and quality of this timber. The commissioner concluded that on November 4, 1918, it had a reasonable market value of $1 per thousand stumpage, while the petitioner contends that it was worth $2 per thousand. The inquiry on this question is therefore quite a limited one, to wit: What was the market value per thousand feet of this potential lumber November 4,1918 ? On this question the evidence shows that the timber was well located and accessible for logging operations ; that the largest boats afloat could land near the timber and the tract was heavily timbered, running largely to fir. Approximately 90 per cent, of this timber land was crown grant land, and hence not subject to license fees or dues as were ordinary lands.
The witness Scanlon, eminently qualified to speak on the subject of timber values, as he had operated in the immediate location of these lands, testified that the timber consisted largely of fir, hemlock, and spruce. Companies with which he was connected, and in which he was an owner, owned timber in practically all sections of British Columbia, and he had a general knowledge of the timber on these lands and of timber generally throughout the whole area of Vancouver Island and British Columbia. lie testified that in 1918 this timber was worth at least $2 per thousand. He testified to the sale of the Hnmbird tract of 300,000,000 feet of crown grant lands in Vancouver, which 'was purchased in 1908 at $1.50 per thousand feet. Adjoining this tract was a tract designated as block 1369 in which he was interested, and the federal government placed a value of $1.50 per thousand feet on this tract as of March 1, 1913, and in 3920 it sold for $2.50 per thousand feet. lie also referred to a tract as block 75, shown in the record and by map, in which he was interested, which contained 650,000,000 feet in Vancouver Island, and this was valued by the federal government March .1, 1913, at $1.75 per thousand. He also testified that the cost of logging the Alberni-Pacifie would be considerably cheaper than the cost of logging this block 75.
Another witness, Thomas D. Merrill, thoroughly qualified as an expert timberman, who was an officer of numerous British Columbia timber companies with an annual output of 150,000,000 feet and whose operations were largely in his hands, testified that timber lands in British Columbia ran largely to fir and that it was the predominate type of timber in that country; that fir, cedar, and spruce were of about the same value; that the timber lands were of one general type and much the same in character in that district. He testified to a sale of a tract of 60,000,000 feet in 1918 at $2.50 per thousand, consisting mostly of fir, which, as he says, is the predominate type in Vancouver Island and-British Columbia.
The witness Prank A. Brewer, who had cruised timber in many states and in British Columbia during thirty-five years, testified to a tract designated as the Royce tract in British Columbia of 800,000,000 feet of timber. This was licensed land, subject to a royalty of 75 cents per thousand, and this tract sold for $1 per thousand in 1922, which with the royalty would make it cost in excess of $1.75 per thousand.
On the sale of this timber land to the Von Alvensteben Company, there was actually paid on the purchase price $1,074,089.37, and the purchase price was in excess of $2 per thousand. Experienced timberrnen all testified that the timber was worth as much November 4, 1918, as it was at the date of this sale. There could he no doubt of the bona tides of this sale, hut the board said in effect that it was no evidence whatever as to the value of the property. The sales above referred to occurred in 1908, 1918, 1920, and 1922, and it is observed that the March 1, 1913, values placed on this British Columbia and Vancouver Island timber by the federal government range from $1.50 to $1.75 per thousand feet. It seems to me that the evidence of these sales of similar tracts of nearby timber conclusively shows that the value of this timber in 1918 was approximately $2 per thousand feet and that there is no substantial evidence in the record to sustain the valuation fixed, by the commissioner and the board.
It is apparent that the board wholly disregarded the evidence as to the sale of the property in 1911. What is said by this court in North American Telegraph Co. v. Northern Pacific Ry. Co., 254 P. 417, 418, in a case heard before Judges Hook, Carland, and Am*474idon, is here pertinent. Referring to the term “market value,” it is there said:
“The term is, however, frequently used in a figurative sense, as meaning the fair or reasonable value of the property — that is, such a value as the property would have if it were dealt in according to the practices of a market overt. This is the meaning which the term usually has when applied to real property. To prove market value when it is used in this secondary or figurative sense, it is proper to receive evidence of individual transactions, even offers made in good faith for property of like "character, the nature of the property, its location, its rental value, the uses to which it can be put, and all the manifold elements which are admissible to show the fair and reasonable value of property which is not so traded in as to give it a market value in the primary sense of the term.”
It is apparent also that the board erroneously took as its standard a cash value and not the market value. Dady v. Condit, 209 Ill. 488, 70 N. E. 1088; Anderson v. Ketcham, 41 S. D. 515, 171 N. W. 764; Richardson v. Howard, 23 S. D. 86, 120 K W. 768. The market value of property of this character would be such price as property of this sort would ordinarily bring on usual terms, and it cannot be said that there was anything unusual about the terms of sale, and the sale has every indication of being in good faith, as very substantial payments of money' were made on the contract.
I think, too, that it is quite apparent that the board gave controlling effect to the findings of the probate court which were adopted by the commissioner. In the opinion it "is said:
“This finding we are bound to approve, unless the presumption in favor of its correctness is overcome by convincing proof presented by the- petitioner.”
The board falls into the error of weighing presumption against evidence. Where statutes provide that on proof of an accident a presumption of negligence arises, the courts have universally held that when, under such circumstances, the defendant proves its freedom from negligence, the presumption of law disappears, and there is no issue to submit to the jury. It is a recognized principle of evidence that presumption is not evidence, and cannot , be weighed in the balance with evidence. Lincoln v. French, 105 U. S. 614, 26 L. Ed. 1189; Western R. R. Co. v. Henderson, 279 U. S. 639, 49 S. Ct. 445, 73 L. Ed. 884; Peters v. Lohr, 24 S. D. 605, 124 N. W. 853.
On the one factor on which there was any controversy, to wit, the value per thousand feet of lumber, the evidence on behalf of the-petitioner is overwhelming, if, indeed, not uncontradicted, and hence I am inclined to the view that the valuation as found is not sustained by substantial evidence and is the result of a misapprehension as to the law applicable to the facts, and should be set aside. Boggs & Buhl, Inc., v. Commissioner (C. C. A.) 34 F.(2d) 859; 860; Chicago Ry. Equipment Co. v. Blair (C. C. A.) 20 F.(2d) 10, 12. What is said in the opinion in Boggs & Buhl, Inc., v. Commissioner, supra, is apposite. It is there said:
“All the direct and expert testimony as to-the value of the good will was that it had a value of $1,000,000 and more. There is no-direct testimony to the contrary. However, the testimony of the experts was as to their opinion; but as they were men of wide business experience, acquainted with the business of the petitioner, and lived in Pittsburgh, their opinion was entitled to great weight and’ careful consideration. While the board may, as a general principle, reject expert testimony and reach a conclusion in accordance with its own knowledge, experience, and' judgment, yet it must have knowledge of and experience with the particular subject under consideration. There is no evidence that the-board had any independent and personal knowledge whatever of the business, reputation, and good will of the petitioner. Therefore it could not set aside or disregard all the positive and affirmative evidence as to the value of the good will, and base its conclusion upon conjecture. Midland Valley R. R. Co. v. Fulgham (C. C. A.) 181 F. 91, 95; De Ford v. Commissioner (C. C. A.) 29 F.(2d) 532. Consequently it should not have disregarded the only positive and direct evidence as to the value of the good will of the petitioner. Its order will accordingly be modified, and good will allowed to the extent of $975,000.”
In Chicago Ry. Equipment Co. v. Blair, supra, it was urged that the taxpayer was required to adduce convincing evidence of error and that the rule went' further than the ordinary rule as to burden of proof. In considering this contention, the court said:
“Of course, every trier of fact should decide eases upon a conviction reached from a consideration of the evidence, and clearly evidence that produces such conviction must be satisfactory and convincing; but it is a well-known rule of law that triers of fact must be satisfied and convinced,. if the evidence ad*475dueed, fairly considered, preponderates for or against a given proposition. When the evidence before a trier of fact ought to be convincing, ho may not say that it is not. Whether he is a judge or a commissioner, the facts must be fairly and judicially weighed, and a determination reached thereon.”
The method of computing the tax is also an issue. On the sale of the stock, Williams received from a corporation organized for the purpose of taking over the holdings of the company, part cash and the balance in bonds of that company. I am of the view that that part of the consideration represented by the bonds was not subject to a tax. Section 203 of the Revenue Act of 1926 (26 USCA § 934) provides that no gain or' loss shall be recognized if stock or securities in a corporation a party to reorganization are in pursuance of the plan of reorganization, accepted solely for the stock or securities of such corporation or in another corporation, a party to the reorganization. Manifestly, had Williams taken all bonds, no loss or gain should have been recognized; but it is contended that both the cash and the bonds received are on the same basis because of the provisions of paragraph (d) (1), which reads as follows:
“(d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.”
The board has construed the bonds as “other property.” Now, it appears that the transaction was in effect an exchange of all of the stock of all of the stockholders of the old company, whereby they received approximately one-half in money and one-half in bonds issued by the now or reorganized company. So far as the bonds were concerned, they would not, it seems to me, constitute “other property.” Under the ruling of the Tax Board in this ease, if one should exchange his stock valued at $100,000 in one company for $1 in cash and $99,999 in stock or bonds of the new or reorganized company, then he would have to account for the stock or bonds as “other property”; but if he accepted stock or bonds of the value of $100,-000, he would not have to account for any gain. I am inclined to the view that no such absurdity was intended by this statute, and that the words “other property” should be construed to mean property other than the stock or bonds of the reorganized company. As to such property there has been no liquidation. It simply continues in the same business in a different form. This construction would seem to give effect to the intent of the legislation and would be consistent with the other provisions of the act.
I am therefore of the view that the decision of the Board of Tax Appeals should be reversed.