Docket No. 45051 52448 52449 55546.
01-09-1935
MAY ROGERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HORACE S. TUTHILL, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EDNA MAY THRALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Hugh Satterlee, Esq., and I. Herman Sher, Esq., for the petitioners Mason B. Leming, Esq., for the respondent.
Hugh Satterlee, Esq., and I. Herman Sher, Esq., for the petitioners
Mason B. Leming, Esq., for the respondent.
These proceedings were consolidated for hearing and report and involve the redetermination of deficiencies of $8,279.98 and $70,563.17 in income tax for 1925 in the cases of May Rogers and Horace S. Tuthill, Jr., respectively, and deficiencies of $70,095.85 and $1,936.32 in income tax for 1925 and 1928, respectively, in the case of Edna May Thrall. The sole issue in Docket No. 45051 is the fair market value on June 22, 1922, of common stock of the Sheffield Farms Co. and Sheffield Condensed Milk Co. In Docket Nos. 52448 and 52449 the question is the fair market value on September 1, 1919, of common stock of the companies just mentioned and the Sheffield By-Products Co., and, if certain stock of such corporations was acquired on July 29, 1921, by purchase rather than by way of gift, the cost thereof. The March 1, 1913, value of stock of the Sheffield By-Products Co. is also involved in Docket No. 52448. The question involved in Docket No. 55546 is the fair market value on certain dates of preferred stock of the Sheffield Farms Co., and, if a portion of the stock was acquired by purchase instead of by gift, the cost of such stock.
FINDINGS OF FACT.
The Sheffield Farms Co., hereinafter referred to as the Sheffield Co., upon its organization in 1902 under the laws of New York, with an authorized capital stock of 5,000 shares of common stock, each share of the par value of $100, took over the assets and business of a partnership and two corporations engaged in the sale of milk in New York City, in exchange for substantially all of its capital stock. The authorized capital stock of the Sheffield Co. was subsequently increased. The number of shares of stock outstanding at the times indicated was:
April 1, 1902, to March 1, 1909 _________________________ 5,000 January 1, 1910 _________________________________________ 5,930 January 1, 1911, to January 1, 1917 _____________________ 10,000 January 1, 1918, to January 1, 1920 _____________________ 13,298 January 1, 1921, to January 1, 1923 _____________________ 40,000 January 1, 1924 _________________________________________ 40,600 January 1, 1925 _________________________________________ 45,868 August 31, 1925 _________________________________________ 46,135 November 1925 ___________________________________________ 46,771
An issue of nonassessable preferred stock, par value $100, bearing 6 percent per annum cumulative dividends and redeemable after five years from the date of issue at $107.50, was authorized in 1911. The stock was issued from time to time during 1911 and 1917. From the close of 1917 through 1925 there were outstanding 15,000 shares of preferred stock, on which dividends of $90,000 per year were paid quarterly.
The business of the Sheffield Co. has always been principally the sale of milk at retail in and around New York City. In 1919 it was one of the largest distributors of milk in the territory in which it did business.
The tangible assets and surplus of the Sheffield Co. on the dates specified and the corporation's earnings for the fiscal periods ending on such dates, after deducting dividends paid on preferred stock, as reflected by the corporation's books were as follows:
---------------------------------------------------------------------------------------------- Date | Tangible assets | Earnings | Surplus ---------------------------------------------|-----------------|--------------|--------------- March 1, 1904 ______________________________ | $511,972.86 | $70,557.29 | $50,557.29 March 1, 1905 ______________________________ | 660,908.11 | 55,209.35 | 90,766.73 March 1, 1906 ______________________________ | 833,177.95 | 93,085.04 | 163,851.68 March 1, 1907 ______________________________ | 1,246,687.64 | 344,796.25 | 488,765.89 March 1, 1908 ______________________________ | 1,465,698.21 | 220,798.01 | 664,563.90 March 1, 1909 ______________________________ | 1,666,940.26 | 221,694.33 | 816,258.53 Dec. 31, 1909 ______________________________ | 2,061,325.11 | 266,939.54 | 965,758.21 Dec. 31, 1910 ______________________________ | 2,921,654.44 | 307,543.90 | 1,176,395.88 Dec. 31, 1911 ______________________________ | 3,551,579.51 | 291,142,43 | 1,307,538.31 Dec. 31, 1912 ______________________________ | 4,115,656.97 | 414,541.46 | 1,582,079.77 Dec. 31, 1913 ______________________________ | 5,026,408.12 | 419,115.12 | 1,868,694.89 Dec. 31, 1914 ______________________________ | 5,713,228.55 | 454,732.89 | 2,183,177.78 Dec. 31, 1915 ______________________________ | 6,248,171.46 | 311,241.30 | 2,349,669.08 Dec. 31, 1916 ______________________________ | 6,843,491.63 | 419,922.94 | 2,649,592.02 Dec. 31, 1917 ______________________________ | 8,044,150.08 | 303,136.41 | 3,003,293.33 Dec. 31, 1918 ______________________________ | 9,093,422.37 | 678,403.13 | 3,483,092.54 Dec. 31, 1919 ______________________________ | 9,881,859.84 | 707,565.10 | 3,920,975.41 Dec. 31, 1920 ______________________________ | 14,100,590.63 | 816,336.67 | 4,439,323.53 Dec. 31, 1921 ______________________________ | 14,581,341.55 | 271,588.76 | 4,470,912.29 Dec. 31, 1922 ______________________________ | 16,376,268.07 | 360,538.20 | 4,381,471.69 Dec. 31, 1923 ______________________________ | 18,194,558.32 | 910,854.03 | 5,009,025.72 Dec. 31, 1924 ______________________________ | 19,241,053.67 | 1,411,825.81 | 5,967,043.78 ----------------------------------------------------------------------------------------------
Good will was carried on the books March 1, 1903, 1904, 1905, and 1906, at $302,436.51, $259,156.11, $239,460.52, and $154,640.26, respectively. Thereafter the item appeared in the books at a value of $302,436.51.
The tangible property of the Sheffield Co. was carried on its books from 1902 to 1920 at cost less depreciation. In 1920, as the result of an appraisal made by the Keystone Appraisal Co. between May 1 and August 30, 1919, under the direction of one of its officers with many years of experience as an appraiser, the Sheffield Co. increased the book value of its tangible assets by $2,549,250. The appraisal was made on the basis of reproduction costs, less depreciation for condition and known existing and future obsolescence.
The Sheffield Co. had a drivers' strike, beginning in 1921 and ending in 1922, which reduced its earnings during the period of the strike.
From 1910 to 1925, inclusive, the Sheffield Co. paid dividends on its common stock as follows:
---------------------------------------------------- Year | Rate | Amount ---------------------------|---------|-------------- | Percent | 1910 _____________________ | ______ | $78,369.23 1911 _____________________ | 11 | 110,000.00 1912 _____________________ | 13 | 130,000.00 1913 _____________________ | 11 | 110,000.00 1914 _____________________ | 12 | 120,000.00 1915 _____________________ | 12 | 120,000.00 1916 _____________________ | 12 | 120,000.00 1917 _____________________ | ______ | 130,298.00 1918 _____________________ | 14 | $186,172.00 1919 _____________________ | 12 | 159,576.00 1920 _____________________ | 15 | 199,470.00 1921 _____________________ | 6 | 240,000.00 1922 _____________________ | 6.5 | 260,000.00 1923 _____________________ | 7 | 283,300.00 1924 _____________________ | 8 | 358,578.50 1925 _____________________ | 5 | 229,894.00
The sales of milk of the Sheffield Co. from 1904 to 1910 averaged $2,788,945 per year. The average number of routes which it owned each year from 1910 and the average number of quarts of milk sold daily on such routes each year, together with the amount of sales for each year, were:
---------------------------------------------------------------------- | | Average | Year | Average | number | Selling | number | of quarts | price | of routes | sold | ---------------------------|-----------|-----------|------------------ 1910 _____________________ | 420 | 102,949 | $5,398,804 1911 _____________________ | 514 | 121,658 | 6,298,875 1912 _____________________ | 538 | 132,081 | 7,388,986 1913 _____________________ | 744 | 184,952 | 9,441,339 1914 _____________________ | 835 | 209,936 | 10,636,457 1915 _____________________ | 904 | 226,740 | 11,606,269 1916 _____________________ | 979 | 246,315 | 13,473,027 1917 _____________________ | 864 | 199,921 | 16,673,305 1918 _____________________ | 898 | 240,118 | $26,344,010 1919 _____________________ | 1,047 | 280,703 | 32,615,817 1920 _____________________ | 1,181 | 327,133 | 38,909,566 1921 _____________________ | 1,286 | 363,867 | 35,915,818 1922 _____________________ | 1,388 | 383,374 | 34,611,885 1923 _____________________ | 1,407 | 414,679 | 41,032,448 1924 _____________________ | 1,654 | 483,718 | 44,666,750 1925 _____________________ | 1,889 | 549,023 | 53,180,886
The fair market value of the common stock of the Sheffield Co. on September 1, 1919, and June 22, 1922, was $344 and $120 per share, respectively. The preferred stock had a fair market value on December 21, 1914, December 20, 1915, January 26, 1917, September 1, 1919, and November 20, 1920, of $95, $100, $94, $85, and $80 per share, respectively.
The par value of the outstanding common stock of the Sheffield Condensed Milk Co. (hereinafter referred to as the Milk Co.), and its surplus from 1918 to 1925, as reflected by its books, were as follows:
------------------------------------------------------------ | Par | | Value of | Date | common | Surplus | stock | -------------------------------------|----------|----------- May 31, 1918 _______________________ | $300,000 | $80,597 December 31, 1918 __________________ | 300,500 | 8,723 August 31, 1919 ____________________ | 300,500 | 165,084 December 31, 1919 __________________ | 300,500 | 151,721 December 31, 1920 __________________ | 377,600 | 159,487 July 31, 1921 ______________________ | 397,200 | 45,130 December 31, 1921 __________________ | $397,200 | $169,655 December 31, 1922 __________________ | 397,200 | 96,228 December 31, 1923 __________________ | 397,200 | 87,244 December 31, 1924 __________________ | 397,200 | 100,106 August 31, 1925 ____________________ | 397,200 | 62,591
The books of the corporation reflect that for the fiscal periods ending on the dates specified its net income, before deducting dividends on preferred stock, was as follows:
December 31, 1918 _________________ $10,104 December 31, 1919 _________________ 91,657 December 31, 1920 _________________ 1,734 December 31, 1921 _________________ 24,168 December 31, 1922 (loss) __________ $43,539 December 31, 1923 _________________ 5,016 December 31, 1924 _________________ 12,862 August 31, 1925 (loss) ____________ 35,144
The outstanding preferred stock of the Milk Co. from 1918 to August 31, 1925, was $200,000. Dividends of $14,000 were paid on the stock each year from 1919 to 1923, inclusive. No dividends were paid on the stock in 1924 and 1925.
The common stock of the Milk Co. had a fair market value on September 1, 1919, and June 22, 1922, of $30 and $50 per share, respectively.
The books of the Sheffield By-Products Co., hereinafter referred to as the By-Products Co., reflect that the corporation's earnings, surplus, and the dividends paid by it for the period from January 1, 1914, to the close of 1918, were as follows:
---------------------------------------------------------------------------------------- | | Dividends paid on | | |-----------------------------------------| Surplus Year | Earnings | | | | | end of | | Common | Rate | Preferred | Rate | year | | stock | | stock | | ---------------|----------------|---------|---------|-----------|---------|------------- | | | Percent | | Percent | 1914 _________ | (Loss) $578.39 | $13,035 | 5 | $15,000 | 4 | $18,290.78 1915 _________ | 50,160.33 | 26,070 | 10 | 15,000 | 4 | 27,381.12 1916 _________ | 44,260.20 | 13,035 | 5 | 15,000 | 4 | 19,118.05 1917 _________ | 44,573.33 | 26,070 | 10 | 15,000 | 4 | 22,621.38 1918 _________ | 55,687.56 | 26,070 | 10 | 15,000 | 4 | 37,238.94
Petitioner Tuthill owned 28 shares of common stock of the By-Products Co. on March 1, 1913.
The common stock of the By-Products Co. had a fair market value on March 1, 1913, and September 1, 1919, of $30 per share.
The common stock of all of the corporations and the preferred stock of the Sheffield Co. were not listed on any exchange, and were inactive.
Horace S. Tuthill, Sr., father of petitioners Tuthill and Thrall, died September 1, 1919, leaving a will by which he bequeathed one half of his residuary estate to his wife, Sarah E. Tuthill, and one fourth each to his son and daughter, and appointed the three individuals as executors of his estate. Pursuant to the provisions of their father's will and the terms of an agreement entered into on November 23, 1920, between the residuary legatees, petitioners Tuthill and Thrall each received 320 shares of common stock of the Sheffield Co., 88 shares of common stock of the Milk Co., and 65 shares of common stock of the By-Products Co., and petitioner Thrall also received 42 shares of preferred stock of the Sheffield Co.
The Sheffield Co. declared a 200 percent stock dividend December 31, 1920, on its common stock, pursuant to which petitioner Tuthill acquired 920 shares and petitioner Thrall 640 shares.
During the first half of 1921 Sarah E. Tuthill, then in her seventy-first year of age, spoke to her attorney and petitioners Tuthill and Thrall about the securities she had acquired under the terms of her husband's will, saying that she did not want to be bothered with them; that all she wanted was enough to live on and that she wanted to transfer the stock to her children, with the understanding that they pay to her from time to time such amounts as she might need for living expenses. The attorney first advised against such a plan, but subsequently submitted to Sarah E. Tuthill a draft of agreement to carry the plan into effect, in which the annual income to her was stated in the amount of $30,000 per year. Mrs. Tuthill rejected the suggestion as to the income to be paid her and fixed it at $16,000 per year.
On July 29, 1921, a written agreement was entered into between Sarah E. Tuthill and petitioners Tuthill and Thrall, by the terms of which the latter, jointly and severally, agreed to pay to their mother, commencing August 1, 1921, the sum of $16,000 annually for her life, in monthly installments, in consideration of the transfer to them of certain stock, including shares of common and preferred stock of the Sheffield Co. and common stock of the By-Products Co. and Milk Co. Pursuant to provisions of the agreement, petitioners Tuthill and Thrall, by an instrument executed on the same day, delivered the stock received from their mother, and other shares of the same and other stock, endorsed in blank, to the Metropolitan Trust Co., New York City, in trust, for the faithful performance of their obligations. The first mentioned agreement provided further that, in case of default for a specified time in the payment of any installment of the annual sum, Sarah E. Tuthill could, at her option, sell the stock and apply the proceeds to the purchase of an annuity of $16,000 for life, delivering the remainder of the proceeds of sale, if any, to petitioners Tuthill and Thrall, or cause the transfer of the stock to her name and thereafter hold it as her absolute property, free and clear of any claim of her son and daughter.
Sarah E. Tuthill died December 1, 1921, leaving all of her property to petitioners Tuthill and Thrall. Prior thereto petitioners Tuthill and Thrall paid her the sum of $5,333.36 pursuant to the provisions of the contract of July 29, 1921. This amount was considerably less than the fair market value of the stock at the time of the transfer. Thereafter the trustee returned to petitioners Tuthill and Thrall all of the stock they had placed in trust for the faithful performance of the contract. Each of them received from the trustee, among other stocks, 960 and 87 shares of common stock of the Sheffield Co. and Milk Co., respectively, and Tuthill received 63 shares and Thrall 64 shares of common stock of the By-Products Co. Petitioner Thrall also received 104 shares of preferred stock of the Sheffield Co.
Sarah E. Tuthill was born July 25, 1850. For a person of her age an annuity of $16,000 a year, payable monthly, would have cost and had a fair market value on July 29, 1921, of $144,634, as computed by the Mutual Life Insurance Co. of New York.
In the income tax return filed on behalf of Sarah E. Tuthill by petitioner Tuthill and others, as executors of her estate, for the period of 1921 ending December 1, 1921, no loss was claimed on account of the stock transferred to petitioners Tuthill and Thrall by the provisions of the contract of July 29, 1921.
On December 21, 1914, December 20, 1915, and January 26, 1917, Horace S. Tuthill, Sr., gave petitioner Thrall 5, 5, and 10 shares, respectively, of preferred stock of the Sheffield Co.
In June 1923 petitioner Rogers received 261 shares of common stock of the Sheffield Co. and 50 shares of common stock of the Milk Co. as the sole beneficiary under the will of her husband, Willis E. Rogers, who died June 22, 1922.
In November 1925 the National Dairy Products Corporation purchased all of the outstanding common stock of the Sheffield Co., Milk Co., and By-Products Co., including the shares then owned by the petitioners, at $500 per share for the stock of the Sheffield Co. and $100 per share for the stock of the other corporations.
In 1928 petitioner Thrall sold all of her 166 shares of preferred stock of the Sheffield Co. for $107.50 per share.
In the estate tax return filed by petitioners Tuthill and Thrall and their mother, as executors of the estate of Horace S. Tuthill, Sr., the common stock of the Sheffield Co., Milk Co., and By-Products Co. was returned for estate tax purposes at a value, respectively, of $151.67, $30 and nothing per share, and the preferred stock of the Sheffield Co. was returned at a value of $85 per share. In his audit of the return the respondent did not change the values returned for stock of the Sheffield Co. and Milk Co., but determined a value of $30 per share for the By-Products Co. stock. The executors returned the common stock of the Sheffield Co., Milk Co., and By-Products Co. for transfer taxes in the State of New York at $140, $30, and nothing per share, respectively, and the preferred stock of the Sheffield Co. at a value of $85 per share.
In the Federal estate tax return and New York State transfer tax return filed by petitioner Rogers and George C. Rogers as executors of the estate of Willis E. Rogers, the common stock of the Sheffield Co. and Milk Co. was reported to be $100 and $50 per share, respectively. The respondent increased the value of the Sheffield Co. stock to $105 per share, but did not alter the figure given as the value of the Milk Co. stock.
In their respective income tax returns for 1925 the petitioners reported, and in his audit of the returns the respondent determined, the following amounts per share as the basis for computing gain realized on the sale of common stock of the corporations:
------------------------------------------------------------------------------- | | Tuthill | Manner in which acquired | Rogers | and | Respondent | | Thrall | ----------------------------------------|----------|------------|-------------- Sheffield Co. stock: | | | Bequest Sept. 1, 1919 _____________ | ________ | $914.61 | 1 $151.67 Contract July 29, 1921 ____________ | ________ | 304.87 | 2 1.7721 Bequest June 22, 1922 _____________ | $327 | _______ | 1 105.00 Milk Co. stock: | | | Bequest Sept. 1, 1919 _____________ | ________ | 100.00 | 1 30.00 Contract July 29, 1921 ____________ | ________ | 100.00 | 2 1.051 Bequest June 22, 1922 _____________ | 78 | _______ | 1 50.00 By-Products Co. stock: | | | Purchase before Mar. 1, 1913 _______ | ________ |3 100.00 | 30.00 Bequest Sept. 1, 1919 ______________ | ________ | 100.00 | 1 30.00 Contract July 29, 1921 _____________ | ________ | 100.00 | 2 1.051 ------------------------------------------------------------------------------- 1 Fair market value being the same as respondent determined in his audit of the returns filed for the estates of Horace S. Tuthill, Sr., and Willis E. Rogers. 2 Cost. 3 Horace S. Tuthill, Jr., only.
In her income tax return for 1928, petitioner Thrall reported gain realized from the sale of preferred stock of the Sheffield Co. on the basis of a fair market value of $100 per share on the various dates she acquired the stock. The respondent did not change the basis used for the five shares of stock acquired by gift on December 20, 1915. He used a basis of $95 per share for the stock acquired on December 21, 1914; $94 per share for the stock acquired on January 26, 1917; $85 per share for the stock acquired by bequest of her father; and $2.98 per share for the stock acquired from her mother under the contract of July 29, 1921.
The New York State Tax Commission determined that the common stock of the Sheffield Co. had a fair market value of $914.61 on January 1, 1919, for the purpose of New York State income taxes, and that the common stock of the Milk Co. and By-Products Co. had a fair market value at that time for a like purpose of $100 per share. The fair market value determined for the common stock of the Sheffield Co. was computed on the basis of assets behind the stock. Book value was used for tangible assets and good will value was computed by allowing a return of 6 percent on tangibles and capitalizing the excess at 10 percent. The valuations determined for stock of the Milk Co. and By-Products Co. were based upon balance sheets of the corporations as of January 1, 1919.
OPINION.
SEAWELL:
Petitioners Tuthill and Thrall insist that the stock they acquired from their mother under the provisions of the contract of July 29, 1921, was by way of gift, and the respondent adheres to the conclusion he reached at the time of determining the deficiencies, that the transaction was an outright sale of securities for an annuity. On this theory the respondent limited the cost basis of each kind of stock so acquired to a proportionate part of $5,333.36, the amount paid to Sarah E. Tuthill under the contract prior to her death on December 1, 1921, based upon the values placed on the stocks for estate tax purposes.
If we were bound to look no further than the bare words of the contract there would be reason to find for the respondent, for the instrument contains many earmarks of an outright sale. But we may consider both the form and substance of the transaction in reaching a solution of the problem. Phelps v. Commissioner, 54 Fed. (2d) 289, affirming 20 B. T. A. 866; certiorari denied, 285 U. S. 558.
In Albert Russel Erskine, 26 B. T. A. 147, a written instrument provided that the petitioner should have the "right and option to buy and receive" certain stock at a specified price less than its true market value, but from all the facts we concluded that the agreement was essentially a contract of employment. In the case of G. Wildy Gibbs, 28 B. T. A. 18, there was a transfer of property of a value of $412,131.60 encumbered by mortgages in the amount of $215,652.50 in trust, for the sole benefit of the petitioners, with the proviso that the beneficiaries assume the mortgages and pay their mother, the grantor, $100 per month for her life. The grantor died one year after the transfer. We held that the difference between the actual consideration paid and the fair market value of the property at the time of transfer must be regarded as a gift, and that the basis for computing gain realized on sale of the property by the beneficiaries in 1920 was the fair market value of the property when transferred to the trustee. In so holding we rejected claims of the Commissioner that the transaction was an outright sale and that the basis for determining gain on the sale by the petitioners was the amount of the mortgages, plus the amount actually paid.
Other cases, involving varying facts, are to the same effect. Harry F. Robertson, 5 B. T. A. 748; E. D. Knight, 28 B. T. A. 188; Phelps v. Commissioner, supra ; Robinson v. Commissioner, 59 Fed. (2d) 1008.
In the instant case we think there is an abundance of proof that the transaction was improperly classified in the contract. On several occasions during the spring and summer of 1921 Sarah E. Tuthill indicated a desire to give the securities bequeathed to her by her husband, together with the 1,280 shares of common stock of the Sheffield Co. which she had received under the 200 percent stock dividend declared December 31, 1920, to her son and daughter, with the understanding that they pay to her from time to time what she might need for living expenses. Her attorney suggested an annuity of $30,000 per year, but she considered such an amount excessive. After some deliberation she fixed the annuity at $16,000 per year and consented, on the advice of counsel, to execute a written agreement providing, among other things, for the deposit of collateral as security for the payment of the amount in monthly installments.
There is no indication in the record that any of the parties to the transaction considered the fair market value of the stock involved when determining upon the annual payment of $16,000. The transferor was then living at the home of petitioner Thrall and did not need a large sum for living expenses. Apparently in the absence of suggestions of her attorney she would have transferred the stock to her son and daughter without the formality of an agreement. Had the transaction been carried on at arm's length, each party striving for the best possible bargain, the value of the stock would have been inquired into, for it is agreed that an annuity of $16,000 per year could have been purchased by the transferor on July 29, 1921, for $144,634. The stock of the Sheffield Co., Milk Co., and By-Products Co. actually had a fair market value at that time considerably in excess of what the annuity agreed upon would have cost.
We are of the opinion, and so hold, that the difference between the cost to the petitioners and the fair market value of the stock was a gift.
Petitioners Tuthill and Thrall each received by transfer from their mother 960 shares of common stock of the Sheffield Co., 87 shares of common stock of the Milk Co., and 63 and 64 shares, respectively, of common stock of the By-Products Co. and 103 and 104 shares of preferred stock of the Sheffield Co. Of the 1,920 shares of common stock of the Sheffield Co. included in the gift, the transferor acquired 640 shares on September 1, 1919, under the will of her husband, and 1,280 by reason of the stock dividend declared December 31, 1920. She acquired all of the stock of the Milk Co. and By-Products Co. under her husband's will.
The Revenue Act of 1926, which governs the sales made in 1925, provides in section 204 (a) (2) that if property is acquired by gift after December 31, 1920, "* * * the basis shall be the same as it would be in the hands of the donor * * *." The donor's basis was the fair market value of the property on September 1, 1919, the date of her husband's death. Section 204 (a) (5), Revenue Act of 1926; Brewster v. Gage, 280 U. S. 327; Gertrude B. May et al., Trustees, 26 B. T. A. 1413. The stock dividend did not change the amount of the donor's basis, merely the basis per share of stock. The basis per share for common stock of the Sheffield Co. acquired by petitioners Tuthill and Thrall by gift from their mother is one third of its fair market value on September 1, 1919. Theodore W. Case et al., Trustees, 26 B. T. A. 1044; Gertrude B. May et al., Trustees, supra; Frances Elliott Clark, 28 B. T. A. 1225. The basis for the common stock of the Milk Co. and By-Products Co. is its fair market value on September 1, 1919.
The petitioners alleged in their petitions, maintained at the hearing, and claimed on brief that most of the stocks in question had a fair market value on the basic dates in excess of the amounts used in the returns they filed as coexecutors for estate tax purposes. The value claimed for common stock of the Sheffield Co. as of September 1, 1919, is six times the value reported and determined for estate tax purposes. The respondent contends, inter alia, that the petitioners are estopped to deny the correctness of the values used by them in the returns they filed as executors for estate tax purposes, without pointing to any particular kind of estoppel as controlling. We know of none that would deny the petitioners the right to prove by competent evidence that the securities had fair market values on September 1, 1919, and June 22, 1922, different from the values they used as coexecutors for estate tax purposes.
The value of property as of a particular date is a matter of opinion and evidence. Mere expressions of opinion can not be regarded as misrepresentations of fact to work estoppel. Hurt v. Riffle, 11 Fed. 790; United States Press Associations v. National Newspapers Association, 254 Fed. 284; Quirk v. United States, 45 Fed. (2d) 631. No right of election is involved, as in W. R. Ramsey, 26 B. T. A. 277; affd., 66 Fed. (2d) 316; certiorari denied, 290 U. S. 673, cited by the respondent. The respondent does not claim to have relied, and did not rely, upon the values reported in the estate tax returns. The liability of the respective estates for estate tax was not determined by the respondent until after his agents had investigated the value of the securities. In the case of the estate of Horace S. Tuthill, Sr., he increased the value of the stock of the By-Products Co., and in determining the net estate of Willis E. Rogers he increased the value of the common stock of the Sheffield Co. Obviously, if these petitioners derived any benefit from such course of action it was due, in the final analysis, to errors of judgment on the part of the respondent rather than the executors of the respective estates. The courts have held that an act done in a representative capacity will not estop one in his individual capacity, and vice versa. Rohn v. Rohn, 204 Ill. 184; 68 N. E. 369; Simpson v. People's Ice Mfg. Co., 44 La. Ann. 612; 10 So. 814; Chapman v. Gates, 54 N. Y. 132; Micon v. Lamar, 1 Fed. 14; Morton v. Preston, 18 Mich. 60; White v. Roper, 167 S. E. (Ga.) 177.
Aside from these considerations the answers of the respondent allege no facts on the question, as required by Rule 14 of the Board's rules of practice. Beyond statements made by his counsel at the hearing, he has not raised the issue. As to the necessity of pleading estoppel as a defense, see Philadelphia, Wilmington & Baltimore Railroad Co. v. Howard, 54 U. S. 307; In re Stoddard Bros. Lumber Co., 169 Fed. 190; Grouf v. State National Bank of St. Louis, 40 Fed. (2d) 2; Bamberg Cotton Mills Co., 8 B. T. A. 1236; Package Machinery Co., 28 B. T. A. 980; Duesenberg, Inc. of Delaware, 31 B. T. A. 922.
The petitioners contend that the fair market value of the common stock of the Sheffield Co. on September 1, 1919, and June 22, 1922, was not less than $914.61 and $304.87 per share, respectively. They ask us to give no weight to the values currently made by them as coexecutors for estate tax purposes and sales of the stock at or near the basic dates. The sales, they urge, were insignificant in volume and insufficient to establish fair market value. They argue further that, under the circumstances, it is both proper and essential that the stock be valued by a resort to the assets behind it.
It is claimed that fair market value of the net tangible property of the corporation attributable to each share of common stock was $595.74 on September 1, 1919, and $226.17 on June 22, 1922. Proof of the value of the tangible assets of the corporation on the various dates is limited to an appraisal made in 1919 by the Keystone Appraisal Co. By reason of this appraisal, the assets were written up on the books in December 1920 in the amount of $2,549,250. The appraisal seems to have been made primarily for insurance purposes. The property was valued on the basis of reproduction costs, less depreciation and obsolescence. Appraisals made on such a basis are entitled to little weight in the determination of fair market value. American Steel Wool Manufacturing Co., 14 B. T. A. 762; A. M. Byers Co., 19 B. T. A. 660; National Packing Corporation, 24 B. T. A. 952; Clinton Cotton Mills, Inc., 28 B. T. A. 1312.
Two methods are employed by the petitioners to value good will. Their first method, which they seem to regard as the more accurate, is based upon the number of quarts of milk sold daily during several periods. Using $20 as the value for each quart of milk sold, the petitioners claim good will values on September 1, 1919, of from $5,313,820 to $5,632,580, depending upon whether sales on the basic date, average daily sales during the first or last six months of the year preceding the basic date, or the average daily sales during the year preceding the basic date, are used. By the same computation they reach good will values on June 22, 1922, of from $7,129,720 to $7,403,420. On the basis of the valuations so found most favorable to them, the petitioners contend that the corporation's good will had a value, per share, of $423.56 on September 1, 1919, and $185.08 on June 22, 1922. Their other method of valuing good will consists of allowing 6 percent as a reasonable return on tangible assets and capitalizing the excess at 10 percent. In computing a valuation as of September 1, 1919, they use earnings over four periods ranging from 20 months to six years immediately preceding the basic date. They regard the 20-month period as being in accordance with the formula approved in A. R. M. 34, 2 C. B. 31. Using the 20-month period as a basis, a good will value on September 1, 1919, of $467.97 per share, or $44.41 in excess of the valuation reached by the first method, is obtained, this valuation being in excess of amounts arrived at on the basis of the other periods. To obtain a value as of June 22, 1922, they use earnings over a period of four and one half years. Such calculations produce a good will value on June 22, 1922, of $83.38 per share, an amount considerably less than the values determined by the first method.
The petitioners contend that the values fixed for the stock by the methods just described are fully supported by expert testimony. The opinions of the expert witnesses are based almost entirely upon the assumption that the tangible assets had a fair market value equal to book value. "The capital stock of a corporation, its net assets, and its share of stock are entirely different things. * * * The value of one bears no fixed or necessary relation to the other." Ray Consolidated Copper Co. v. United States, 268 U. S. 373. Expert testimony must be viewed in the light of other facts established by the evidence. Balaban & Katz Corporation v. Commissioner, 30 Fed. (2d) 807; Anchor Co. v. Commissioner, 42 Fed. (2d) 99; Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893; Tracy v. Commissioner, 53 Fed. (2d) 575; James Couzens, 11 B. T. A. 1040; Tex-Penn Oil Co., 28 B. T. A. 917.
The petitioners attempt to analyze the sale made in 1925 to the National Dairy Products Corporation to show the amounts paid respectively for tangible assets and good will, with the view of showing the reasonableness of their computations of value as of prior dates. There is nothing of record to show the manner by which the attorneys in fact, representing the stockholders of the Sheffield Co., and the buyer determined the selling price of $500 per share. The vendors made certain representations to the buyer respecting the net worth of the corporation at the close of the years 1922, 1923, and 1924, and its net profits during the first six months of 1925. These representations the buyer verified by an audit of the books of the Sheffield Co. It does not appear that the buyer ever made an appraisal of the tangible or intangible assets of the Sheffield Co.
The values at which the stock was returned for estate tax purposes are not controlling. Kate I. Nixon, 2 B. T. A. 524; R. B. Cook, 3 B. T. A. 668; Elizabeth J. Bray, Administratrix, 4 B. T. A. 42; David Williams, 15 B. T. A. 227; Edgar M. Carnrick, 21 B. T. A. 12; Lillian G. McEwan, 26 B. T. A. 726. See Sterling Newell et al., Executors, 25 B. T. A. 773; reversed, 66 Fed. (2d) 102. They represent, however, values currently arrived at and are entitled to weight in determining the fair market value of the securities in the light of all of the facts present here.
The record contains evidence of sales of the stock on or about September 1, 1919, at prices from $140 to $235 per share. The volume of the sales was not sufficient to establish a fair market value. The New York State transfer tax return filed for the estate of Willis E. Rogers shows four sales of the stock from May to October 1921, one of 100 shares, at from $100 to $105 per share.
The reasonableness of the rule that fair market value of stock may not be determined by any prescribed standard of measurement, but must result from due consideration to all the facts and relevant evidence, is well illustrated by the facts and claims being made here. They point to values ranging from $140 to in excess of $1,000 per share as of September 1, 1919, the higher amount being based alone on corporate assets of the value claimed by the petitioners.
From a careful consideration of the history of the Sheffield Co., its earning power, sales made of its stock, and all other facts of record, giving to each factor the weight we think it is entitled to, we have determined that the common stock of the Sheffield Co. had a fair market value of $344 per share on September 1, 1919, and $120 per share on June 22, 1922.
The petitioners are claiming that the common stock of the Milk Co. had a fair market value of $100 per share on September 1, 1919, and June 22, 1922. The respondent determined fair market values on such dates of $30 and $50 per share, respectively. These figures agree with values determined by the executors of the estates of Horace S. Tuthill, Sr., and Willis E. Rogers, and the respondent for estate tax purposes. No evidence was offered on the value of the assets behind the stock. Except in 1919 and 1921 the corporation had no net income available for the payment of dividends on common stock. Evidence in the record of sales of, and quotations on, the stock at or about the basic dates supports the determination of the respondent. The valuations placed on the stock by the respondent will not be disturbed.
The common stock of the By-Products Co. was returned by petitioners Tuthill and Thrall as coexecutors of their father's estate at no value. The respondent determined that it had a value of $30 per share as of September 1, 1919. Petitioners Tuthill and Thrall claimed in their income tax returns for 1925 and contend here that the stock had a fair market value on March 1, 1913, and September 1, 1919, of $100 per share for the purpose of computing gain or loss on the sale of the securities to the National Dairy Products Corporation. The respondent determined a fair market value of $30 per share on each date.
The book figures in evidence do not cover any period prior to 1914 or after the close of 1918, and no evidence was offered as to the value of the assets behind the stock in and prior to 1918. Affidavits of appraisers of the stock for New York State transfer tax purposes show that at about September 1, 1919, the current assets were only about $9,000 in excess of liabilities, with $260,700 par value of preferred stock outstanding. There was a sale of an undisclosed number of shares of the stock shortly before September 1, 1919, at $30 per share. The respondent's valuations of $30 per share for this stock on March 1, 1913, and September 1, 1919, will not be disturbed.
Petitioner Thrall sold her holdings of preferred stock of the Sheffield Co. in 1928 and the amount of gain or loss sustained on the sale is governed by the Revenue Act of 1928. Of the 166 shares of stock she sold, she acquired 5, 5, and 10 shares on December 21, 1914, December 20, 1915, and January 26, 1917, respectively, by way of gift from her father. These shares having been acquired by gift prior to December 31, 1920, their basis is a fair market value at the time of acquisition. Section 113 (a) (4). She acquired 42 shares under the will of her father. The basis for these shares is the fair market value on November 20, 1920, the date of distribution to her, having acquired the stock not by specific bequest, but as a residuary legatee. Section 113 (a) (5); First National Bank of Birmingham, 31 B. T. A. 847. Petitioner Thrall acquired the remaining 104 shares on July 29, 1921, by gift from her mother. Of the 207 shares the donor transferred to petitioners Tuthill and Thrall, she acquired 120 shares prior to March 1, 1913, and 82 shares on November 20, 1920, as a residuary legatee of her husband's will. Section 113 (a) (2) of the Revenue Act of 1928 provides that if property was acquired by gift after December 31, 1920, the basis "shall be the same as it would be in the hands of the donor * * *." The donor's basis for the 120 shares she acquired prior to March 1, 1913, was cost or fair market value on March 1, 1913, whichever is greater. Section 113 (b). Her basis for the 82 shares she acquired under the will of her husband was their fair market value on November 20, 1920. Sec. 113 (a) (5).
Petitioner Thrall claims that the fair market value of the preferred stock on the various basic dates was "close to $100" per share. In his computation of the gain realized in the transaction, the respondent determined that the stock acquired by gift on December 21, 1914, December 20, 1915, and January 26, 1917, had a fair market value on such dates of $95, $100, and $94, respectively, per share. Such determinations are approved in the absence of proof of higher fair market values. For the 42 shares she acquired from her father's estate, the respondent determined a fair market value of $85 per share, the value used by him and the executors of the estate of Horace S. Tuthill, Sr., for estate tax purposes. Such evidence as there is in the record respecting the fair market value of the stock on September 1, 1919, supports, rather than overcomes, the presumptive correctness of the respondent's finding of value. Accordingly, it will not be disturbed.
The record does not disclose the source of the specific 104 shares of stock Sarah E. Tuthill gave to petitioner Thrall on July 29, 1921. The respondent did not determine the fair market value of the stock as of March 1, 1913, or November 20, 1920. The proof is that the stock had a fair market value on November 20, 1920, of $80 per share, and from the evidence we can not see that the stock was worth a greater amount on March 1, 1913. The gain realized on the sale of the 104 shares will be computed on the basis of a fair market value of $80 per share.
Reviewed by the Board.
Decision will be entered under Rule 50.