Opinion
Docket No. 2254.
1945-10-12
ESTATE OF CAROLINE MCCULLOCH SPENCER, DECEASED, JOHN MITCHELL SPENCER AND JOHNSON WEST, EXECUTORS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Johnson West, Esq., and Robert S. Miller, Esq., for the petitioner. John H. Pigg, Esq., for the respondent.
In the absence of exceptional circumstances, as here, the prices at which shares of stock are traded on a free public market at the critical date is the best evidence of the fair market value for estate tax purposes of identical shares of stock. Considering such evidence as well as all other evidence in this record, the fair market value of certain stock for estate tax purposes is determined. Johnson West, Esq., and Robert S. Miller, Esq., for the petitioner. John H. Pigg, Esq., for the respondent.
Petitioner seeks a redetermination of an estate tax deficiency of $8,028.27. The sole issue is whether the respondent erred in determining that the fair market value of 3,100 shares of class A common stock of the Hobart Manufacturing Co. was $155,000, or $50 per share, at the time of decedent's death on October 1, 1940. The case was submitted on oral testimony, documentary proof, and exhibits.
FINDINGS OF FACT.
The decedent, Caroline McCulloch Spencer, died a resident of Troy, Ohio, on October 1, 1940. The estate tax return was filed with the collector of internal revenue for the first Ohio district. At the time of her death, decedent owned 3,100 shares of class A common stock of the Hobart Manufacturing Co. These shares were returned as having a value of $35 per share for Federal estate tax purposes, which was the price at which such shares sold on the Cincinnati Stock Exchange on the critical date. In his deficiency notice the respondent determined the fair market value of the shares to be $50.
The Hobart Manufacturing Co. (hereinafter sometimes referred to as the company) was organized in 1897. It is engaged in the manufacture and sale of a variety of electric food cutting and mixing machines for both commercial and home use. The company was recapitalized in 1934, at which time it acquired the Dayton Scale Division of the International Business Machines Corporation. The old common shares of the company were exchanged for class A shares, and class B shares were issued to International Business Machines Corporation as the purchase price of the Dayton Scale Division. Its outstanding capital stock consisted of 200,000 shares of class A and 100,000 class B shares, both without par value. The class A shares were listed only on the Cincinnati Stock Exchange. The class B shares are not listed on any stock exchange. There are between 1,300 and 1,400 holders of A shares residing in 25 states and in some foreign countries. The directors of the company and their families since 1934 have owned approximately 36 percent of the class A shares.
From January 1, 1935, to 1942, inclusive, the number of class A shares sold on the Cincinnati Stock Exchange and the average market price per share are shown in the following schedule:
+--+ ¦¦¦¦ +--+
Shares Average Year sold price per year 1935 7,662 $33.78 1936 5,987 45.30 1937 5,936 42.90 1938 1,767 32.50 1939 2,465 39.45 1940 1,712 37.31 1941 2,441 36.21 1942 1,356 27.54
During the period January 1, 1935, to December 31, 1942, inclusive, 73,599 of class A shares were sold over the counter, at price ranges within one-eighth to one-fourth of a point of the exchange quotation at the time of sale. During such period there were bid and asked prices on the Cincinnati Stock Exchange on practically every trading day. The average yearly range for the 5-year period including the 2 years prior and the 2 years subsequent to 1940 was $34.10. For the period 1935 to 1942, inclusive, the aggregate average annual volume of sales of class A shares to the total number of outstanding shares was 6.38 percent. On the critical date of October 1, 1940, 4 shares of class A stock were sold on the Cincinnati Stock Exchange at $35 per share. The next preceding sale was 15 shares on September 5, 1940, at $34, and the next succeeding sale was 10 shares on October 4, at $34 per share.
The following schedule sets forth, as of December 31, the current assets and liabilities, other assets, earned surplus and net income for the years 1937 to 1942, inclusive:
+-----+ ¦¦¦¦¦¦¦ +-----+
Current Earned Date assets Liabilities Other assets surplus Net income 1937 $10,024,300 $1,734,775 $390,148 $4,957,937 $911,289 1938 10,395,250 1,663,454 374,186 5,225,985 812,706 1939 10,906,263 2,087,793 438,460 5,593,587 910,990 1940 10,181,825 1,956,161 1,119,121 5,046,157 968,515 1941 11,590,761 2,936,322 1,288,099 5,522,151 1,087,274 1942 13,488,904 4,376,834 710,122 6,235,401 854,833
The class A per share book value, earnings, and dividends paid for the years 1935 to 1940, inclusive, are as follows:
+---+ ¦¦¦¦¦ +---+
Dividends Year Book value Earnings paid 1935 $32.03 $2.55 $1.75 1936 33.55 3.50 2.00 1937 34.72 3.20 2.00 1938 35.61 2.88 2.00 1939 36.84 3.21 2.00 1940 35.01 3.40 2.25
The Cincinnati Stock Exchange was not sufficiently active to permit the sale of 3,100 shares of class A stock of the company on any one day at the current market price, but they could have been disposed of within a reasonable time.
The fair market value of 3,100 shares of class A stock of the Hobart Manufacturing Co. on the critical date of October 1, 1940, was $35 per share.
OPINION.
LEECH, Judge:
The issues presented is the fair market value of 3,100 shares of class A capital stock of the Hobart Manufacturing Co. on October 1, 1940, for Federal estate tax purposes. The stock was reported for those purposes at a value of $35 per share. This value was increased by the respondent to $50. Since 1926 the shares of that corporation have been listed only on the Cincinnati Stock Exchange.
Petitioner relies heavily on the regulations promulgated by the Treasury as to the valuation of stocks and bonds listed on a stock exchange.
Those regulations provide in substance that where stock is listed on a stock exchange, the mean between the highest and lowest selling prices on the valuation date shall be considered as the fair market value per share. The respondent, however, stresses another provision of the same regulations providing, in effect, that, where the selling or bid and asked prices do not reflect the fair market value, then some reasonable modification of such basis or other relevant facts and elements of value shall be considered in determining fair market value. The practical definition of fair market value that has been repeatedly applied in cases coming before the courts is that now contained in the same regulation that ‘The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell.‘ The respondent argues that his determination enjoys the presumption of correctness and that petitioner has failed to sustain its burden of showing the fair market value to be other than that determined by him. Petitioner counters with the argument that where the respondent refuses to accept the selling price established on a regular stock exchange, he has the burden of showing the other relevant facts and elements of value. Since the evidence adduced is sufficiently ample to enable us to determine the question of fact involved, we think it is unnecessary to pass upon these conflicting positions.
SEC. 81.10 (Regulations 105) Valuation of Property.— (a) General.—The value of every item of property includible in the gross estate is the fair market value thereof at the time of the decedent's death: * * * The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. * * * Such value is to be determined by ascertaining as a basis the fair market value as of the applicable valuation date of each unit of the property. For example, in the case of shares of stock or bonds, such unit of property is a share or a bond. All relevant facts and elements of value as of the applicable valuation date should be considered in every case.(c) Stocks and bonds.— The value of stocks and bonds, within the meaning of the Internal Revenue Code, is the fair market value per share or bond on the applicable valuation date.In the case of stocks and bonds listed on a stock exchange the mean between the highest and lowest quoted selling prices on the valuation date shall be considered as the fair market value per share or bond. If there were no sales on the valuation date, such value shall be determined by taking the mean between the highest and lowest sales on the nearest date before and the nearest date after the valuation date (both such nearest dates being within a reasonable period), and by prorating the difference between such mean prices to the valuation date, and by adding or subtracting, as the case may be, such prorated portion of the difference to or from the mean price obtaining on such nearest date before the valuation date. * * *If actual sale prices or quoted bona fide bid and asked prices are available on a date within a reasonable period prior to the valuation date, but if no actual sale prices or bona fide bid and asked prices are available on a date within a reasonable period after the valuation date, or vice versa, then the mean between such highest and lowest available sale prices or bid and asked prices may be taken as the value.In cases in which it is established that the value per bond or share of any security determined on the basis of selling or bid and asked prices as herein provided does not reflect the fair market value thereof, then some reasonable modification of such basis or other relevant facts and elements of value shall be considered in determining fair market value.
The parties have stipulated that we may take judicial notice of all the evidence, both oral and documentary, introduced in a proceeding before this Court in the case of the Estate of Herbert L. Johnston, Docket No. 110075. In a memorandum opinion entered June 22, 1943, we determined the value of 7,564 shares of class A stock of the Hobart Manufacturing Co. to be $36 per share as of January 21, 1938. We have examined the record in that case and find it helpful in some aspects of our present problem. Since our task is to determine the value of certain shares on a given date 2 years and 10 months later than the critical date involved there, the finding of fact as to the value of class A shares in that case is not decisive in the instant proceeding.
The evidence here consists of the stock market record of the class A shares, the volume of actual sales on the exchange, the over-the-counter transactions, the company balance sheets, the income statements and the dividends paid of the Hobart Manufacturing Co. for a period of several years. Expert testimony was presented to the effect that the Cincinnati Stock Exchange was a free market, that the prices at which the shares sold and the bid and asked prices truly reflected the fair market value of the shares of the Hobart Manufacturing Co. on the respective dates. No evidence was presented showing the existence of facts and elements of value which were unknown to respective buyers and sellers. The evidence here further discloses that while the Cincinnati Stock Exchange is not an active market, the annual volume of sales of class A shares averaged 6.38 percent of the total outstanding shares and that this percentage compares favorably to 6.9 percent average of 23 comparable industrial companies whose shares are listed on the New York Stock Exchange. The volume of sales and the consistency of the market price trend over the several years indicate the sales upon the Cincinnati Stock Exchange were predicated upon fair market value of the class A shares of the Hobart Manufacturing Co. The prices at which shares of stock are actually traded on an open public market on the pertinent date have been held generally to be the best evidence of the fair market value on that date, in the absence of exceptional circumstances. John J. Newberry, 39 B.T.A. 1123; Frank J. Kier et al., Executors, 28 B.T.A. 633; Estate of Leonard B. McKitterick, 42 B.T.A. 130. Giving due consideration to all the evidence disclosed by this record, we conclude that the value of the class A shares of the Hobart Manufacturing Co. on October 1, 1940, was $35 per share, and we so find as a fact. Petitioner is sustained on the issue of value.
Decision will be entered under Rule 50.