Opinion
Docket No. 1288.
1944-08-22
HALSTED JAMES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Oscar S. Blinn, Esq., for the petitioner. Scott A. Dahlquist, Esq., for the respondent.
Petitioner gave to his son certain corporate stock in a closely held family corporation which was the subject of a restrictive agreement voluntarily entered into by the stockholders. The agreement, in effect, required any stockholder who might desire to sell his stock to offer it first to the other stockholders at $200 per share. Held, the value of the stock for gift tax purposes is not limited to the price fixed in such restrictive agreement. Oscar S. Blinn, Esq., for the petitioner. Scott A. Dahlquist, Esq., for the respondent.
The Commissioner determined a deficiency in the amount of $587.18 in petitioner's gift tax for the calendar year 1940. The only question at issue is whether the Commissioner erred in the valuation of the corporate stock which was the subject of the gift and with respect to which certain restrictive agreements were in effect.
FINDINGS OF FACT.
Petitioner resides in the Borough of Brooklyn, City and State of New York, and filed his gift tax return for the calendar year 1940 with the collector for the first district of New York.
On June 25, 1940, petitioner transferred as a gift to his son, Halsted James, Jr., an employee of Towns & James, Inc., 100 shares of the capital stock of that corporation.
Towns & James, Inc., is engaged in the wholesale drug business. Its principal office is in New York City, and petitioner is its secretary, as well as a stockholder. The business now conducted by the corporation was established about 1894, and from 1907 to 1931 it was operated under a partnership agreement by members of the James family. In 1931 the business was incorporated under its present name, Towns & James, Inc. All its capital stock has been held by members of the James family since the organization of the corporation.
In the partnership agreement of 1907 it was provided that upon the death of any partner the surviving partners should have the option of paying to the estate of the decedent within five years the amount of his interest in the business, or of incorporating and allotting to the estate its proportionate share of stock. The same provisions applied to the withdrawal of a partner.
After the incorporation all the stockholders entered into an agreement, dated December 28, 1931, providing that if any stockholder should desire to sell his stock, or terminate his relations with the corporation, such owner should give notice to the other stockholders of his intention, and for 90 days thereafter the remaining owners should have the exclusive right to purchase the stock of such owner in proportion to their respective holdings of stock, at 75 percent of its book value, as there defined. If this option was unexercised, or if the stock was not paid for within the specified time, it could thereafter be sold without restriction. Similar provisions were agreed upon to be applicable upon the death of a stockholder.
There was also a specific provision to the effect that the agreement should not be construed to compel the heirs, beneficiaries, or personal representatives of any deceased stockholder to sell his stock, or to prevent the transfer of stock by will or in the administration of an estate.
In 1940 the clause last above mentioned was examined by the stockholders, and it was agreed between them that its effect was to vitiate the primary object of the agreement, which was to keep the ownership of the corporation's stock in the James family. Thereupon as of June 18, 1940, a new agreement was entered into for the purpose of rectifying that error and making some other desired changes. This agreement was in effect at the time petitioner made the gift involved in this proceeding.
By the terms of this agreement, each of the stockholders agreed not to sell his stock until it had been offered to the remaining stockholders under the stipulated terms. Any owner desiring to sell should be required to give to the remaining stockholders an option, for 90 days after notice, to purchase the stock in question at an agreed valuation of $200 per share. The remaining stockholders might elect to take over the stock at the rate of 10 percent per year for 10 years. The same rights and the same terms were to be available to the remaining stockholders in the event of the termination by any stockholder of his active relation with the corporation; or, in the event of the death of a stockholder, against executor or administrator. The remaining stockholders were to be allowed to acquire the stock in proportion to their respective holdings; and it was specifically provided that any stockholder should have the right to transfer, by gift or otherwise, any of his stock to persons already stockholders, or to their sons, brothers, or nephews who were employed by the corporation; that if any such transfer were by sale, the consideration must not exceed $200 per share, in order to avoid competition within the family.
If pursuant to any such offer, the other stockholders purchased less than 10 percent of the entire stock owned by the offeror, then upon the expiration of 180 days, the offeror might sell without restriction that part of his stock constituting the difference between the amount sold to other stockholders and 10 percent of his entire holdings. On any anniversary of his first offer, or thereafter if one year had elapsed since the last offer such owner could initiate another offer under the same arrangement, and sell without restriction, after 180 days, whatever portion of 10 percent of his original holdings or the largest amount which he thereafter held that was not subscribed for by the other stockholders.
The valuation of $200 per share was arrived at after considerable negotiation between the older members of the family, who might be more likely to wish to dispose of their stock and were interested in preventing its undervaluation, and the younger members, who might wish to acquire larger holdings and wished to prevent the fixing of too high a value. The figure of $200 was arrived at by way of compromise as a price fair to all the interested parties for the purpose of establishing an equitable market within the family for the stock.
Notice of the restriction was required by the agreement to be endorsed on the stock certificates, and it was provided that a sale in violation of the agreement would be invalid.
The donee of the gift in question, Halsted James, Jr., son of the donor, was already a stockholder in the corporation, and was actively engaged in the company business at the time of the gift. Petitioner reported the gift, valuing the stock at $200 per share, and paid the gift tax on that basis. Respondent determined the value of the stock to be $310 for gift tax purposes, and assessed the deficiency with the explanation that he had considered the restrictive agreement along with other factors, in fixing the value.
On the basis of book value, the stock was worth $385.05 per share as of December 31, 1939, and $383.47 as of December 31, 1940. These figures do not include any value for good will, since the corporate books do not list such an item for the reason that the corporation does not manufacture any of the goods which it sells and does not own any trade-marks. This is the usual situation in wholesale drug businesses.
For the year 1939 the corporation earned $20.30 per share of capital stock and for 1940 it earned $19.23 per share.
During 1939 dividends were paid totaling $14 per share, and during 1940 they were paid at the rate of $21 per share.
The stock has never been listed or sold on any exchange.
During 1939, prior to the execution of the agreement now in force, petitioner had made another gift to his son of this stock. He then valued the stock for gift tax purposes at $310. This figure was in excess of 75 percent of the book value of the stock, as provided in the agreement then in effect, but in making the valuation petitioner was not acting under expert or legal advice.
The value of the stock on June 25, 1940, was $310 per share.
OPINION.
KERN, Judge:
The sole question with which we are here concerned is whether the Commissioner erroneously valued the stock which petitioner transferred by gift to his son. Petitioner contends the value of the stock, for the purpose of computing the gift tax on the transfer, must be limited to the amount at which petitioner and the other stockholders of the issuing corporation, by voluntary agreement, agreed to offer it to each other in the event they should wish at any time to sell their stock. The respondent's position is that the depressive effect of the restrictive agreement was one of the factors considered by him in fixing the value, but that he is not limited by such a contract to the price fixed therein.
It is agreed that the book value of the stock was $385.05 per share as of the end of 1939, and $383.47 per share as of the end of 1940. It was closely held by members of the James family, and no sales were shown to have occurred, at least in recent years.
There is no question about the validity of the contract between the stockholders. The question is simply whether the contract, voluntarily entered into, must have the effect of reducing for gift tax purposes the value of the stock covered by the contract to the amount of the price fixed by the restrictive agreement.
Petitioner suggests the irreconcilability of the judicial decision in this field. He relies principally on Wilson v. Bowers, 57 Fed.(2d) 682, and Lomb v. Sugden, 82 Fed.(2d) 166. Upon careful analysis, however, we think these decisions are distinguishable from the instant case.
It has been the consistent view of this Court in cases where the stockholder is under no obligation to sell by reason of his contract, but has simply agreed to offer his stock to others on certain stated terms if he should desire to sell, that such an agreement does not have the effect of limiting the value upon which the Government may compute its tax to the amount at which the stock is to be offered if the owner decides to sell. See Estate of George Walker, 23 B.T.A. 663; Michigan Trust Co. et al., Executors, 27 B.T.A. 556; Frederick A. Koch, Jr., Executor, 28 B.T.A. 363; Estate of James Smith, 46 B.T.A. 337. See also Kline v. Commissioner, 44 B.T.A. 1052; affd., 130 Fed.(2d) 742.
Each of these cases is distinguishable from Wilson v. Bowers, supra; Lomb v. Sugden, supra; Helvering v. Salvage, 297 U.S. 106; and Commissioner v. Bensel, 100 Fed.(2d) 639, cited by petitioner. In those cases, on the date as of which the value was to be determined there had already been granted a valid, binding, irrevocable option to purchase, specifically enforceable. The holder had no choice to refrain from selling at the stipulated price. The stock was already impressed with the onus of the option.
In Estate of James Smith, supra, this Court expressly distinguished that line of decisions from the facts in a case such as this, where the agreement was simply that the stockholder would offer an option when and if he ever desired to sell. On appeal, the Circuit Court for the First Circuit disagreed with our view that, in the latter type of case, the agreement should not be taken into consideration in arriving at the taxable value, but it was of the opinion that the price set out in the agreement was not to be considered as of itself fixing the value for tax purposes. See Worcester County Trust Co. v. Commissioner, 134 Fed.(2d) 578.
In the instant case the respondent does not contend that the restrictive agreement under which the shares are held is not a factor to be considered in the determination of the value of the transferred shares for gift tax purposes. He has determined their value to be $310 a share at a time when their book value was considerably in excess of this amount; and in his determination of deficiency he stated that he considered the restrictive agreement together with the net worth, earning power, and dividend-paying capacity in determining the value of the gift in question. Therefore, we do not have before us the question of whether the restrictive agreement should be ignored entirely in a determination of the value of the securities which are the subject of the gift. It may well be that where the restrictive agreement is merely an agreement to grant an option at a certain price if the owner, at some future time, decides to sell, and the restriction is the result of voluntary action on the part of the stockholder after he has acquired the stock, we would adhere to our views as stated in the cases above cited and hold that the restrictive agreement should be ignored in gift tax valuation cases, in spite of the opinion of the Circuit Court of Appeals for the First Circuit in Worcester County Trust Co. v. Commissioner, supra. However, since the respondent has not ignored the restrictive agreement in his determination of deficiency and has made no contention on brief that it should be ignored, we do not decide this point.
We do decide that the price set out in the restrictive agreement does not, of itself, determine the value of the stock. This disposes of petitioner's primary contention, which is, in effect, that the value of the stock for gift tax purposes can not be in excess of the price set out in the restrictive agreement. He also contends, in the alternative, that the respondent did not make sufficient allowance for the depressing effect of the restrictive agreement upon the actual value of the stock. However, he submitted no evidence as to the value of the shares which controverts the determination of respondent as to value, or which indicates in any way how much the restrictive agreement has depressed the actual value of the stock. In the absence of such evidence, the respondent's determination is approved. See Raymond J. Moore, 3 T.C. 1205.
Decision will be entered for the respondent.