Court Opinion

ID: 4625214
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:56:47.238371+00
Date Added: 2024-06-11T07:56:39.977560
License: Public Domain

ANSON EVANS, PHILIP J. NOONAN, AND WALTER T. NOONAN, TRUSTEES, F. R. NOONAN ESTATE TRUST, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Evans v. CommissionerDocket No. 62664.United States Board of Tax Appeals29 B.T.A. 710; 1934 BTA LEXIS 1491; January 10, 1934, Promulgated 1934 BTA LEXIS 1491">*1491  1.  Fair market value of certain shares of stock determined as of the date of acquisition thereof by the petitioners.  2.  Appraisals of value for estate tax purposes and values reported for capital stock purposes are not conclusive evidence of fair market value and do no more than establish a prima facie value that may be overcome by convincing evidence.  Thomas Gallagher, Esq., for the petitioner.  Arthur H. Fast, Esq., for the respondent.  LANSDON 29 B.T.A. 710">*711  The respondent has determined a deficiency in income tax for the year 1929 in the amount of $62,453.75.  As its cause of action the petitioner alleges that respondent erred in determining the value of certain shares of stock as of September 25, 1920, which was the date of its acquisition thereof.  Many of the material facts have been stipulated, but each party adduced the oral testimony of witnesses.  FINDINGS OF FACT.  The petitioners are trustees of a testamentary trust created by the will of F. R. Noonan, a resident of Alexandria, Minnesota, who died on September 10, 1919.  All reside at Paynesville, Minnesota.  On September 25, 1920, by virtue of a decree of distribution made by the1934 BTA LEXIS 1491">*1492 probate court of Douglas County, Minnesota, they acquired 4,250 shares of the common capital stock of the North American Creamery Co., hereinafter called the corporation.  Thereafter, and on June 21, 1921, they received, as a stock dividend, 4,250 additional shares of such company.  On April 1, 1929, they sold the entire 8,500 shares so acquired for $1,239,000 and in their income tax return for that year reported a loss from such transaction in the amount of $229,075.  Upon audit of the return the respondent reduced the cost basis upon which the petitioners computed the alleged loss to $743,750, made other minor adjustments not in controversy, and determined the deficiency under review.  At the time the stock was acquired by the petitioner the corporation had been in active operation for many years.  It had established a substantial business and a reputation for the quality of its merchandise which resulted in the sale of its products at a premium over the regular market prices of such commodities manufactured by other concerns.  Its sales were effected without advertising or special sales forces.  Its output was purchased by many large corporations dealing in food supplies such1934 BTA LEXIS 1491">*1493  as Swift & Co. and the A. & P. Co.  It never had outstanding any bonds, debentures, notes, or other evidence of indebtedness.  Its authorized common stock was 5,000 shares of the par value of $100 each, closely held and not listed on any exchange.  There were no sales of such stock immediately prior or subsequent to the acquisition of 4,250 shares thereof by the petitioners.  29 B.T.A. 710">*712  At the date of his death, F. R. Noonan, one of the founders of the corporation, owned 4,250 of the 5,000 shares of common capital stock then outstanding.  For several years prior thereto he had been ill and incapacitated for business activities and the actual management of the corporation was in the hands of Philip J. Noonan, a son of the founder, who had been connected with it for 19 years and who personally made sales contracts with large concerns purchasing the products of the corporation.  Walter T. Noonan, another son, and Anson Evans, who had been with the business for many years, were also active in its affairs.  After the death of the elder Noonan the sales and profits of the corporation continued to increase in volume and amount.  Under the will of F. R. Noonan the 4,250 shares of stock1934 BTA LEXIS 1491">*1494  of the corporation which he owned at the date of his death, together with other property were left in trust until sale by the trustees or ultimate distribution to the four children of the decedent.  The petitioners were appointed trustees of such trust by the district court of Douglas County on September 25, 1920, and on that date the estate trust of F. R. Noonan came into existence.  The parties agree that on December 31, 1919, the tangible properties of the corporation had a value of $1,347,971.24, subject to liabilities of $93,016.98, or a net worth of $1,254,954.26.  They further agree that between September 20, 1919, and September 25, 1920, and some time subsequent thereto, the net value of the tangible assets was in the amount above set forth, except that during the year 1920, up to September 20, the net earnings of the corporation, after deducting Federal income taxes, amounted to $91,814.06, and that on June 30, 1920, a dividend in the amount of $100,000 was declared and paid.  The parties agree that for the five-year period prior to the acquisition of the stock in question by the petitioners, the invested capital and net earnings of the corporation were as follows: Invested Net income capitalafter deduct-ing Federalincome taxes1915 (one third)$259,287.03$16,808.581916778,286.82217,663.831917975,950.65120,827.3119181,021,777.96278,483.3119191,278,908.9646,045.301920 (two thirds)823,688.3691,814.06Total5,137,899.78771,642.391934 BTA LEXIS 1491">*1495  For the five-year period above indicated the average invested capital was $1,027,579.96, and the average yearly earnings were $154,328.48.  29 B.T.A. 710">*713  The parties agree that in the five years prior to September 20, 1920, the corporation paid dividends as follows: 1916$20,000191775,000191850,000191975,0001930 (June)100,000Total320,000The parties agree that the net earnings of the corporation, after the payment of Federal taxes, for the five-year period after the stock was acquired by the petitioner were as follows: 1/3 of 1920$45,907.031921176,058.711922304,331.481923136,940.601924110,564.232/3 of 1925255,232.70Total1,029,034.75The parties agree that in arriving at the valuation of the stock in controversy at the time of its acquisition by the estate trust, for the purpose of the 1929 fiduciary return, the petitioners followed the formula adopted by the Government in Appeals and Review Memorandum 34, Cumulative Bulletin, June 1920, p. 31, and computed the same as follows: The sum of $82,206.40, which sum was 8% of the average capital investment for the 5 years previous to the date of acquisition, 1934 BTA LEXIS 1491">*1496  was allocated to earnings from tangible capital.  This sum was then subtracted from the average annual earnings above indicated for said period in the sum of $154,328.48 and the resulting sum of $72,122.08 was allocated to earnings from intangibles for the purpose of arriving at the valuation of good will.  Accordingly, the basis for arriving at value of the aforesaid stock, pursuant to the above formula, was as follows: Value of tangible assets above liabilities or total net worth as above indicated$1,254,954.26Less dividend paid in June 30, 1920100,000.00$1,154,954.26Plus net income after federal taxes and all other expenses from Dec. 31, 1919 to Sept. 25, 192091,814.06Value of tangible assets above liabilities or total net worth on Sept. 25th, 1920$1,246,758.32Earnings from intangibles capitalized on the basis of 15% in accordance with government formula to arrive at good will value: $72,122.08 X 6 2/3 =480,813.87Total value assets of said corporation$1,727,582.19Value per share on basis of 5,000 shares, $345.50 per share.  4,250 shares acquired by Estate Trust at $345.50 per share -Fair Market Value - equal$1,468,375.001934 BTA LEXIS 1491">*1497 29 B.T.A. 710">*714  The general sales of the corporation, not including receipts from small items, for the years indicated below were as follows: YearCreameryGeneralTotal1916$2,548,168.52$892,721.82$3,440,890.3419173,028,955.761,205,389.084,234,344.8419184,034,747.491,492,360.085,527,107.5719195,040,246.172,099,796.877,140,043.0419204,953,983.871,988,808.136,952,792.0019214,303,252.251,348,947.755,652,200.0019225,081,330.171,218,119.846,299,450.0119237,113,823.881,505,629.638,619,453.5119247,863,827.061,729,759.359,593,586.4119259,684,464.602,276,508.1911,960,972.79In its capital stock tax return for the fiscal years ended at June 30, 1916, 1917, 1918, 1919, and 1920, the corporation reported the per share value of its stock in the following respective amounts: $90, $96, $125, $143, and $188.  On April 23, 1920, the shares in question were appraised under the direction of the probate court of Douglas County, Minnesota, at $160 per share, or a total of $680,000.  On September 7, 1920, Anson Evans, Philip J. Noonan, and Walter T. Noonan, as representatives of the estate of F. R. Noonan, 1934 BTA LEXIS 1491">*1498  filed an estate tax return in which such shares were valued at $160 per share, of a total of $680,000.  This valuation was later increased by the Commissioner to $175 per share, or a total of $743,750, for estate tax purposes and was also used by the respondent as the basis for computing gain or loss on the sale by the trust in the taxable year.  OPINION.  LANSDON: The Board is asked to settle only one issue; viz., What was the fair market value of the block of North American Creamery stock in question when it was acquired by the petitioners?  The record discloses a slight confusion as to the date of such acquisition and counsel for petitioners attaches some importance to the fact that it did not physically pass to them until September 25, 1920, although the date of the decedent's death was September 10, 1919.  In contemplation of law the corpus of a testamentary trust passes to the trustees on the date of the death of the testator.  ; ; affd., 1934 BTA LEXIS 1491">*1499 . It follows that gain or loss from the subsequent disposition of the stock must be computed on the basis of its fair market value at September 10, 1919, as provided in section 113(a)(5) of the Revenue Act of 1928.  The respondent has determined that the fair market value of the 4,250 shares of the stock of the corporation at date of acquisition was $743,750.  The petitioners allege that such value was at least $1,468,375.  The fact that petitioners received a 100 percent 29 B.T.A. 710">*715  stock dividend is not material, since they sold the original and dividend shares in a single block, and we shall therefore discuss the share value on the basis of 4,250 shares.  The stock in question was closely held by a family corporation and there were no sales at any time sufficiently near the basic date to establish a fair market value thereof, nor was it listed on any stock exchange.  It is necessary, therefore, to consider the value of the underlying assets, the opinions of witnesses, and any other competent evidence offered by the parties.  It is stipulated that the net worth of the corporation at December 31, 1919, exclusive of good will, was $1,254,954.26, as represented1934 BTA LEXIS 1491">*1500  by tangible assets owned at that time, and that this figure applies to September 10, 1919, the date of acquisition by the petitioners.  As there were 5,000 shares of stock outstanding at that date, the value of each share, measured by the net worth of the corporation, was almost exactly $250 per share.  The respondent's determination is $175 per share and the petitioners contend for a value of $435.  The evidence discloses that in its capital stock tax returns for the fiscal years ending at June 30, 1916, 1917, 1918, 1919, and 1920, the corporation reported the value per share of its stock for such years in the respective amounts of $90, $96, $125, $143, and $188.  On April 23, 1920, appraisers appointed by the probate court determined a value per share of $160, and such valuation was used in the settlement of estate taxes due to the State of Minnesota and in the Federal estate tax return which the executors filed within one year of the date of the decedent's death.  Upon audit of such return the respondent increased the reported valuation to $175 per share.  In addition to the stipulation the petitioners introduced witnesses who gave their opinions as to the fair market value1934 BTA LEXIS 1491">*1501  of the stock in question at the basic date.  P. J. Noonan, who succeeded his father in the management of the corporation, was an executor of the estate, and is a trustee and one of the petitioners here, was of the opinion that at such date the stock was worth $400 per share.  Thomas A. Roden, long connected with the firm of Wells, Dickey & Co., which deals in securities of private corporations, opined that the stock was worth 15 times its average earning capacity over a period of years, or about $450 per share.  His opinion is based on his general knowledge of the values of stock and on the financial condition of the corporation, but he has no special information about the creamery business.  Marcus P. Angland, a member of a firm of stock brokers, was of the opinion that the stock was worth from $425 to $450 per share on the basic date.  He based his conclusion on the earnings and assets of the corporation and was influenced by the fact that the stock in question was a controlling interest.  29 B.T.A. 710">*716  On behalf of the respondent each of the two appraisers who fixed the value of the stock at $160 per share in 1919 testified that his original estimate was based on facts considered1934 BTA LEXIS 1491">*1502  at the time of the appraisal and that he knew of no changes in the corporation or the market that would require him to make any different estimate.  Each considered the figure arrived at by the appraisal as a fair valuation as of that date.  One of such appraisers is the first vice president and the trust officer of the First National Bank & Trust Co. of Minneapolis.  The other is connected with the Farmers & Mechanics Bank of that city and is a practicing attorney in Minneapolis.  On the basis of the testimony summarized above and of the stipulated facts, the petitioners ask the Board to find that at September 10, 1919, the stock in question had a fair market value of at least $435 per share.  It is obvious that they rely largely on the concededly strong financial condition of the corporation, together with its history and undisputed success as factors in creating good will as an asset, in addition to the tangible properties.  It must be borne in mind, however, that what we are concerned with is the fair market value of the stock at the basic date, rather than actual net worth of the corporation as represented by its tangible and intangible assets, less liabilities.  It is clear1934 BTA LEXIS 1491">*1503  that until after the sale thereof no one connected with the corporation regarded the stock as worth anything like the value now claimed.  Nor does the sale on April 1, 1929, corroborate the value as of September 10, 1919, which is now claimed.  Such sale was made in a period of great commercial activity, at least six months before the now historical decline in the value of corporate stocks began.  On December 31, 1919, the book value of the stock, which did not include any good will, was $250 per share.  After several years of additional prosperous operation it was sold for approximately $290 per share, a price that indicates that the willing purchaser thereof paid little or nothing for the good will which petitioners contend was worth $480,813.87 at September 10, 1919.  Upon due consideration of all the facts and estimates of value, we are of the opinion and find as a fact that at September 12, 1919, the stock in question had a fair market value of $250 per share.  On brief counsel for the petitioners argues strenuously that the valuations placed on the stock for capital stock and estate tax purposes are inadmissible as evidence.  The Board has never considered such valuations to1934 BTA LEXIS 1491">*1504  be conclusive, but they are evidence that must be overcome by the taxpayer claiming higher values for tax purposes in subsequent years.  ; affirming . Decision will be entered under Rule 50.