Opinion
Docket No. 10354.
1947-07-31
ESTATE OF FRANK A. CRUIKSHANK, DECEASED, RUBY CRUIKSHANK WALLACE, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Bertram H. Kenyon, Esq., for the petitioner. Hobby H. McCall, Esq., for the respondent.
Valuation of unlisted stock of family investment company by reference to value of underlying assets, held to call for use of market value of assets, without diminution for potential commissions, or taxes which would become due if converted into cash. Bertram H. Kenyon, Esq., for the petitioner. Hobby H. McCall, Esq., for the respondent.
This proceeding challenges a deficiency of $6,558.75 in estate tax, and has as its primary issue the question of the propriety of deducting potential commissions and taxes on the liquidation of underlying assets in the valuation of the stock of a family holding corporation.
The case was presented by stipulation and evidence adduced at the hearing. Facts hereinafter appearing which are not from the stipulation are otherwise found from the record.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioner is the duly appointed executrix by and under the will of Frank A. Cruikshank, the decedent herein, who died December 8, 1943. The Federal estate tax return was filed with the collector of internal revenue, Pittsburgh, Pennsylvania, on December 29, 1944.
Petitioner elected not to have the gross estate of the decedent valued in accordance with values as of a date or dates subsequent to decedent's death, as authorized by section 811(j) of the Internal Revenue Code.
Decedent at the time of his death was the owner and registered holder of 547 shares of the capital stock of Cruikshank Investment Co. These were reported in the Federal estate tax return at a value of $167.50 per share, or a total valuation of $91,622.50.
Cruikshank Investment Co. is a corporation, organized and existing under the laws of the Commonwealth of Pennsylvania. Its capital stock consisted of 2,079 shares, all of which were owned by the Cruikshank family. The decedent's interest therein at date of decedent's death amounted to 26.31 per cent of the total outstanding shares. The remaining shares of stock of Cruikshank Investment Co. were owned as follows:
+------------------------------------------------------------------------+ ¦Stockholder ¦Relation to decedent¦Stock held (shares)¦Percentage¦ +--------------------+--------------------+-------------------+----------¦ ¦ ¦ ¦ ¦ ¦ +--------------------+--------------------+-------------------+----------¦ ¦Vinton W. Cruikshank¦Brother ¦542 ¦26.07 ¦ +--------------------+--------------------+-------------------+----------¦ ¦A. W. Cruikshank ¦Brother ¦392 ¦18.85 ¦ +--------------------+--------------------+-------------------+----------¦ ¦Ruth C. Emerick ¦Sister ¦373 ¦17.94 ¦ +--------------------+--------------------+-------------------+----------¦ ¦Ruby C. Cruikshank ¦Wife ¦35 ¦1.68 ¦ +--------------------+--------------------+-------------------+----------¦ ¦Alva M. Cruikshank ¦Sister-in-law ¦85 ¦4.08 ¦ +--------------------+--------------------+-------------------+----------¦ ¦Bernice C. Hodgdon ¦Niece ¦60 ¦2.89 ¦ +--------------------+--------------------+-------------------+----------¦ ¦S. Wayne Cruikshank ¦Nephew ¦45 ¦2.16 ¦ +--------------------+--------------------+-------------------+----------¦ ¦ ¦ ¦ ¦ ¦ +------------------------------------------------------------------------+
By decedent's last will and testament he left his entire estate to his wife for life, with an unrestricted power to consume and dispose of it. It was provided that any balance at her death was to go:
+--------------------------------------------------------+ ¦To my brother, Allen W. Cruikshank ¦two-ninths part;¦ +---------------------------------------+----------------¦ ¦To my brother, Vinton W. Cruikshank ¦two-ninths part;¦ +---------------------------------------+----------------¦ ¦To my sister, Ruth Cruikshank Emery ¦two-ninths part;¦ +---------------------------------------+----------------¦ ¦To my sister-in-law, Mae E. Graham ¦one-ninth part; ¦ +---------------------------------------+----------------¦ ¦To my sister-in-law, Cordie C. Perry ¦one-ninth part; ¦ +---------------------------------------+----------------¦ ¦To my sister-in-law, Bernyce C. Mayhugh¦one-ninth part. ¦ +--------------------------------------------------------+
Decedent's wife made inquiries respecting the sale of her 35 shares and the 547 shares in the estate. No sale was consummated. The other stockholders were not willing to buy the stock.
The stock of Cruikshank Investment Co. was not listed on any stock exchange at date of decedent's death. Cruikshank Investment Co. was an investment holding company and not an operating company on the date of decedent's death.
The last sale of stock of the Cruikshank Investment Co. was made on October 20, 1933, between members of the Cruikshank family, when 185 shares were sold at $118.84 per share.
The assets of Cruikshank Investment Co. on December 8, 1943, consisted entirely of cash, stocks, bonds, and real estate. The assets and the fair market values thereof, plus the dividends declared and payable on the stock at December 8, 1943, were as follows:
+-----------------------------------------------------------------------------+ ¦ ¦Fair market value ¦ +---------------------------------------------------------+-------------------¦ ¦ ¦at Dec. 8, 1943 ¦ +---------------------------------------------------------+-------------------¦ ¦Cash ¦$4,432.84 ¦ +---------------------------------------------------------+-------------------¦ ¦1,600 shares Arkansas Natural Gas Co. pfd. at 9 7/8 ¦15,800.00 ¦ +---------------------------------------------------------+-------------------¦ ¦25 shares Goodyear Tire & Rubber Co. pfd. at 103 ¦2,575.00 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividend to S/R 11/15/43, payable 12/15/43 at $1.25 ¦31.25 ¦ +---------------------------------------------------------+-------------------¦ ¦800 shares Pittsburgh Brewing Co. pfd. at 40 3/4 ¦32,600.00 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividend to S/R 11/23/43, payable 12/10/43 at $1 ¦800.00 ¦ +---------------------------------------------------------+-------------------¦ ¦100 shares Harbison-Walker Refractories Co. com. at 15 1/¦1,550.00 ¦ ¦2 ¦ ¦ +---------------------------------------------------------+-------------------¦ ¦2,202 shares Armstrong Cork Co. com. at 36 1/2 ¦80,373.00 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividend to S/R 12/6/43, payable 12/23/43 at 35 ¦770.70 ¦ +---------------------------------------------------------+-------------------¦ ¦6,043 shares Lone Star Gas Co. at 8 1/8 ¦49,099.38 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividends to S/R 11/15/43, payable 12/11/43 at 20 ¦1,208.60 ¦ +---------------------------------------------------------+-------------------¦ ¦150 shares United States Steel Corporation com. at 51 1/2¦7,725.00 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividend to S/R 11/19/43, payable 12/20/43 at $1 ¦150.00 ¦ +---------------------------------------------------------+-------------------¦ ¦200 shares Columbia Gas & Electric Corporation 6% pfd. at¦14,775.00 ¦ ¦73 7/8 ¦ ¦ +---------------------------------------------------------+-------------------¦ ¦280 shares Sinclair Oil Co. at 10 5/8 ¦2,975.00 ¦ +---------------------------------------------------------+-------------------¦ ¦1,800 shares Pittsburgh Plate Glass Co. at 92 1/2 ¦166,500.00 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividend to S/R 11/23/43, payable 12/10/43 at 1.75 ¦3,150.00 ¦ +---------------------------------------------------------+-------------------¦ ¦200 shares Socony-Vacuum Oil Co. at 12 1/8 ¦2,425.00 ¦ +---------------------------------------------------------+-------------------¦ ¦100 shares General Motors Corporation at 50 5/8 ¦5,062.50 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividend to S/R 11/12/43, payable 12/13/43 at 50 ¦50.00 ¦ +---------------------------------------------------------+-------------------¦ ¦450 shares Atlantic Refining Co. common at 25 3/8 ¦11,418.75 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividend to S/R 11/22/43, payable 12/15/43 at 45 ¦202.50 ¦ +---------------------------------------------------------+-------------------¦ ¦250 shares General Foods Corporation at 40 3/8 ¦10,093.75 ¦ +---------------------------------------------------------+-------------------¦ ¦400 shares Mohawk Carpet Co. at 29 1/8 ¦11,650.00 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividend to S/R 11/26/43, payable 12/9/43 at 50 ¦200.00 ¦ +---------------------------------------------------------+-------------------¦ ¦300 shares Westinghouse Air Brake Co. at 21 3/8 ¦6,412.50 ¦ +---------------------------------------------------------+-------------------¦ ¦Dividend to S/R 11/12/43, payable 12/10/43 at 50 ¦150.00 ¦ +---------------------------------------------------------+-------------------¦ ¦200 shares Granite City Steel Co. at 10 1/8 ¦2,025.00 ¦ +---------------------------------------------------------+-------------------¦ ¦1,292 shares Duquesne Brewing Co. at 14.3125 ¦18,491.75 ¦ +---------------------------------------------------------+-------------------¦ ¦$1,000 p. v. Shannopin Club bond at 20 ¦200.00 ¦ +---------------------------------------------------------+-------------------¦ ¦Bellevue real estate ¦15,858.57 ¦ +---------------------------------------------------------+-------------------¦ ¦Total ¦468,756.09 ¦ +-----------------------------------------------------------------------------+
The total outstanding liabilities recorded on the books of Cruikshank Investment Co. on December 8, 1943, were $1,990.88.
The net worth of the Cruikshank Investment Co. on December 8, 1943 (after writing up the assets from cost to appraised values as of that date and without deducting unrecorded liabilities) was $466,756.21. On that basis, the book value of the stock was $224.51 per share on December 8, 1943.
An estimate of the broker's commissions and transfer stamp tax on a sale on December 8, 1943, of stocks of the Cruikshank Investment Co. was $2,839.37 and $851.11, respectively.
A sale on December 8, 1943, of the stocks owned by the Cruikshank Investment Co. would result in a taxable capital gain of $100,792.73, upon which Federal corporate income tax was estimated to be 25 per cent thereof.
Adjustments for the commissions and the stamp and income taxes referred to would result in an adjusted book value of $211.05 per share.
The fair market value of the 547 shares of the capital stock of the Cruikshank Investment Co. on December 8, 1943, was $224.51 per share.
OPINION.
OPPER, Judge:
There is no dispute between the parties as to the necessity of valuing the stock in the closely held corporation of decedent's family by arriving at its net asset value. And the fair market value of the securities and real estate held as assets by the corporation is stipulated. The sole controversy is as to the propriety of reducing that undisputed value by the amounts of commissions and stamp and capital gains taxes which would become payable if the assets were converted into cash by sales.
The corporation was an investment company and not an operating company. It is hence dissimilar to a venture in which buying and selling are ordinary business operations. The property forming the source of the corporation's income would presumably serve its purpose if it were retained for the collection of income. The cost of conversion into cash is hence not a deduction called for by the character of the corporate business. Cf. The Evergreens, 47 B.T.A. 815; affd. (C.C.A., 2d Cir.), 141 Fed.(2d) 927; certiorari denied, 323 U.S. 720; Estate of Henry E. Huntington, 36 B.T.A. 698; cf. Helvering v. Winmill, 305 U.S. 79.
In valuing property as such, as distinguished from a going business, the costs of disposal like broker's commissions are not a proper deduction. Estate of Henry E. Huntington, supra. Still less do we think a hypothetical and supposititious liability for taxes on sales not made nor projected to be a necessary impairment of existing value. We need not assume that conversion into cash is the only use available to an owner, for property which we know would cost him market value to replace. Helvering v. LeGierse, 312 U.S. 531.
Appraisal of the corporation's stock on the conceded approach of asset value seems to us to involve valuing the assets in the same way that they would be if they themselves were the subject of transfer. See Estate of Henry E. Huntington, supra. So approached, there is no place in the calculation for such diminutions as petitioner proposes. It does not contend for reduction of a per share figure because of decedent's minority interest, though it does urge that as a reason for employing liquidation value. Even if the contention were more persuasive in theory, see Richardson v. Commissioner (C.C.A., 2d Cir.), 151 Fed.(2d) 102, there is no evidence here that there was on that account a smaller value for this stock. Since respondent has conceded a slight adjustment below the deficiency as determined.
Decision will be entered under Rule 50.