Opinion
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. Plaintiffs are citizens of the United States and reside in New York City. They sue in their capacity as administrators of the estate of Herman Lee Meader, who died February 14, 1930.
2. Plaintiffs filed an estate-tax return for the estate of Herman Lee Meader on September 4, 1930. The return disclosed a gross estate of $1,233,899.04, deductions of $197,486.90, and a net estate of $1,036,412.14. The total Federal estate tax shown due was $51,112.97, but a credit was taken in the amount of $40,890.37 for New York State inheritance taxes paid. The net Federal estate tax in the amount of $10,222.60 was paid on February 10, 1931.
3. The major asset of this estate consisted of 1,000 shares of stock in Lee Meader, Inc., a personal holding corporation, in which Herman Lee Meader owned all of the stock at the time of his death. Lee Meader, Inc., owned all of the stock of the 32nd-33rd Street Corporation. The chief asset of the last named corporation was a leasehold on a building known as the Waldorf building hereinafter referred to.
4. On October 29, 1913, a lease was entered into between William Vincent Astor and the 32nd-33rd Street Corporation covering a large irregular lot on the south side of 33rd Street near that street's intersection with Fifth Avenue in New York City. On March 31, 1914, a lease was entered into between the Brown estate and the 32nd-33rd Street Corporation covering a lot adjoining the Astor lot.
The leases provided for the erection of a tentatively agreed upon store, office, and loft building on the leased properties. Title to the building known as the Waldorf building was to vest immediately in the lessors. To the construction of this building William Vincent Astor was to contribute $562,500 and the Brown estate was to contribute $170,000. The lessee, 32nd-33rd Street Corporation, was to contribute $700,000, of which $150,000 was raised by the sale of bonds drawing 6% interest per annum. Herman Lee Meader brought these bonds and owned them at the time of his death.
5. The aforesaid leases were for a term of twenty years and contained three options to renew for a like term, each term to commence, if the option was exercised, from the date of the expiration of the expired term.
The net rental to be paid annually to William Vincent Astor during the first term of twenty years was $121,250, and the net rental to be paid annually to the Brown estate during the first term of twenty years was $22,000. Under the terms of the leases, the lessee was further obligated to pay all taxes, assessments, water rents, insurance, and other payments that might accrue upon or about the properties.
If the option to renew the leases was exercised the properties were to be reappraised and the rentals to be based upon such reappraised values, but the annual net rentals to the lessors was not to be less than the annual net rentals paid during the previous twenty-year term.
6. The Waldorf building erected under the terms of the leases was a twelve story, store, office, and loft building and was completed in the early part of 1915. The building was of fireproof construction, steel and concrete, faced with brick and stone. It was completely modern and in good condition on February 14, 1930. In 1914 and 1930 the assessed valuation of the land on which the building was erected was $1,600,000, and of the building $1,100,000. The building was well rented at decedent's death to a capacity of more than 90 per cent, which condition had existed with minor changes for at least 4 or 5 years prior to that time.
7. The annual gross rental received by 32nd-33rd Street Corporation from 1925 to 1930, inclusive, and the net income of that corporation for the same period were as follows:
Gross Rentals
Net Income
1925 ....
$429,059.87
$44,601.07
1926 .....
380,791.17
43,171.95
1927 .....
393,399.15
30,767.01
1928 .....
394,466.86
33,495.76
1929 .....
394,471.81
28,157.52
1930 .....
440,511.19
59,994.13
The principal source of income to the corporation was the leasehold on the Waldorf Building. In each year the corporation took a deduction of $26,000 as amortization of its cost of the leasehold, that is, the amounts contributed by it to the construction of the building, and also a deduction of $20,000 as salary to the decedent and both of these deductions were taken in arriving at the net income figures set out above.
8. After the death of the decedent on February 14, 1930, his administrators employed appraisers to appraise the assets included in his estate. To appraise the real estate, stocks and bonds, they employed an appraisal firm in New York City which had been engaged in that work for many years, and that concern assigned to the work a man who had been engaged in real estate work in New York City since 1912 and had been with the firm for several years. In arriving at the value of decedent's stock in his personal holding company it became necessary to value the leasehold interest heretofore referred to, and the appraiser fixed a value for that leasehold interest as of February 14, 1930, of $775,000. His appraisal was completed prior to, and submitted to decedent's administrators on, or about, May 6, 1930. One of the administrators is a real estate broker who had been connected with the decedent's enterprises for many years, a part of which time he was an officer of the 32nd-33rd Street Corporation.
Decedent's administrators accepted the appraisal without question or protest and used the values fixed by that appraisal for both Federal estate, and New York State inheritance-tax purposes. After an examination of the Federal estate-tax return the Commissioner accepted the values for the leasehold as fixed by the appraiser and submitted by plaintiffs.
9. August 30, 1932, plaintiffs filed a claim for refund of $7,000 on the following ground:
"Value of property assessed was erroneously computed by Samuel Marx, Inc., appraiser. The stock of 32nd-33rd Street Corporation was appraised at $1,108,040.08. The amount that stock should have been appraised for should be $200,000. The reason for the error was due to the failure of the appraiser to read the terms of the lease, the principal asset of the estate, which lease expired with three years. Instead the appraiser assessed the value as though the lease expired eighty years from the time appraised."
The Commissioner rejected that claim March 9, 1933.
10. The evidence submitted by plaintiffs is insufficient to show error in the Commissioner's determination of the value of the leasehold. Maurice Kay, of Washington, D.C., for plaintiffs.
John W. Hussey, of Washington, D.C., and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
WHALEY, Judge.
The plaintiffs bring this suit to recover the estate tax paid on leaseholds which are claimed to have been over-valued by the Commissioner of Internal Revenue. The real question involved is whether the evidence submitted by the plaintiffs overcomes by its preponderance the valuation determined by the Commissioner of Internal Revenue on these leaseholds.
The facts have been found with minute detail and with full particularity. It is only necessary for a full understanding of the situation to state that Herman Lee Meader was the owner of the stock of a personal holding company and died on February 14, 1930, leaving these shares as a part of his estate. Among the assets of one of the corporations whose stock was held by the holding company were two leases on the Waldorf building situated on 33rd Street in the city of New York. At the date of his death the leases had run for approximately 16 years of the 20-year period but there was a provision in the leases for a renewal at the expiration of the first period but there was a provision in the leases for a renewal at the expiration of the first period for an extended period of 20 years and for two other renewals of a like number of years. Of the total cost of this building, the corporation had contributed $550,000 in cash and had issued bonds at 6% for $150,000. When the testator died the money contributed by the corporation in cash had been returned to the extent of some $400,000 by yearly amortization. Besides this amount a salary of $20,000 a year was charged for Meader's services and interest on the bonds paid and all other expenses of maintaining the building as a rental property.
After his death, his executors, plaintiffs in this case, employed an expert real estate firm to make an appraisal of these leases and in May, 1930, a report was made by this appraiser valuing the leases at $775,000. In arriving at this valuation, the unexpired period of the first term and the first renewal period of 20 years were taken into consideration. In making that valuation the appraiser used average annual earnings from the leaseholds for the years prior to the decedent's death of $61,000, which was conservative since the net earnings set out in our findings take into consideration a deduction of $26,000 annually for the amortization of the cost of the leaseholds which of course should be added to the net earnings shown. It should be observed further that the net income for 1930 was $59,994.13, which, when increased by the amortization deduction of $26,000, would show net income for that year, which was the year of decedent's death, of approximately $86,000. The plaintiffs used this appraisal in making a return to the State of New York for inheritance tax purposes and furnished it to the Commissioner of Internal Revenue for Federal estate tax purposes.
The Commissioner of Internal Revenue had an expert to make a detailed examination of the value of these leaseholds as submitted by plaintiffs and he approved plaintiffs' valuation. The New York State inheritance tax was paid and taken as a deduction against the Federal estate tax and the plaintiffs paid a Federal estate tax of $10,222.60. These events occurred shortly after the basic date on which the valuation is required to be fixed, that is, February 14, 1930, the date of the death of the decedent.
It was not until August 30, 1932, that plaintiffs filed a claim for refund on the ground that the assessment made on the basis of the appraiser's valuation was erroneous, claiming that the appraiser should not have taken into consideration the first renewal period of 20 years. After due consideration the Commissioner disallowed the claim.
This case was tried in 1936 and both the appraiser for the estate and the appraiser for the Commissioner of Internal Revenue testified that the values placed on these leases were the true market values at the time of the death of the testator. One of the plaintiffs herein is a real-estate dealer in the City of New York, well acquainted with values of property, and he accepted the appraisal made by the appraiser for the estate, furnished it to the State of New York for inheritance tax purposes and also to the Commissioner of Internal Revenue for the purpose of establishing a value on these leaseholds.
The evidence discloses that the highest rentals and the largest net revenue were received during the year 1930 and that the real-estate market did not begin to decline because of the depression until about 1931. The proof shows that the testimony of the plaintiffs' witnesses was affected by what happened in the years following 1930 when the world-wide depression caused real-estate values to shrink abnormally.
In our opinion, the preponderant weight of the evidence is in favor of the Commissioner of Internal Revenue in the valuation placed by him upon the leases in making his determination. There remains only the question of whether the plaintiffs' appraiser was justified in taking into consideration, in arriving at the value of these leaseholds, the renewal period of 20 years, or was he confined solely to the value of the leases for the remaining years of the first period.
The plaintiffs have cited many cases but we do not think these cases sustain their position. None of them is apposite.
In Bonwit Teller & Co. v. Commissioner of Internal Revenue, 2 Cir., 53 F.2d 381, 383, 82 A.L.R. 325, it was held that in allowing deductions on account of amortizing the cost of a leasehold, the cost should be amortized over the original term of the lease but the court also held:
"Despite the uncertainty of the rental to be paid during the extension, the option may give additional value to the lease, just as many other types of provisions might give the lease value."
The history of the rental values of this property shows that at the time of the death of the testator, if continued at their present rate, they would have amortized the $550,000 contributed by Meader by the end of the original term. It actually shows that the leaseholds were valuable and paying propositions and the renewal period was a valuable asset to the estate which could have been disposed of in the active real-estate market which existed at that time.
Plaintiffs' whole case is based on what occurred after 1930 in the declining real-estate market but we are concerned only with the value of the leaseholds as of the 14th of February, 1930. What occurred afterwards sheds no light on what was the real value on the day of the death of the testator and the evidence clearly shows that, judging the future by the past, the renewal period of these leaseholds would be very valuable to the estate. In Ithaca Trust Company v. United States, 279 U.S. 151, 155, 49 S.Ct. 291, 292, 73 L.Ed. 647, the court said: " * * * Therefore the value of the thing to be taxed must be estimated as of the time when the act is done. But the value of property at a given time depends upon the relative intensity of the social desire for it at that time, expressed in the money that it would bring in the market. See International Harvester Co. v. Kentucky, 234 U.S. 216, 222, 34 S.Ct. 853, 58 L.Ed. 1284. Like all values, as the word is used by the law, it depends largely on more or less certain prophecies of the future, and the value is no less real at that time if later the prophecy turns out false than when it comes out true. See Lewellyn v. Electric Reduction Co., 275 U.S. 243, 247, 48 S.Ct. 63, 72 L.Ed. 262; City of New York v. Sage, 239 U.S. 57, 61, 36 S.Ct. 25, 60 L.Ed. 143. Tempting as it is to correct uncertain probabilities by the now certain fact, we are of opinion that it cannot be done, * * *."
See also 719 Fifth Avenue v. United States, 5 F.Supp. 909, 912, 78 Ct.Cl. 707, 713, in which it was held: " * * * The amount subsequently received by the plaintiff for rentals and its net income from the premises are not admissible as evidence of the value of its leasehold interest on March 1, 1913. The plaintiff was taking some risk when it expected, if matters went well, to receive a profit. No one would otherwise lease the premises and agree to put up an expensive building."
In our opinion the Commissioner was correct in arriving at his determination of the values of the leaseholds on the date of the death of the testator.
The petition is dismissed. It is so ordered.