*3287 Valuation of capital stock for estate-tax purposes determined.
*249 This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $7,648.67. It is alleged that the respondent erred in valuing certain stock held by the decedent at the time of his death.
FINDINGS OF FACT.
The petitioner is one of the three duly appointed executors of the Estate of David Weingarten, who died November 29, 1919. At the time of his death the decedent owned 1,000 shares of the stock of the Weingarten Bros. Realty Co., a corporation having a capitalization of $300,000, divided into 3,000 shares of the par value of $100, and 6,100 shares of the capital stock of the East Eleventh Street Holding Co., a corporation having an authorized capital stock of $61,000, divided into 12,200 shares, par value $5. The balance of the capital stock of the East Eleventh Street Holding Co. was held by Oscar Weingarten. The remainder of the stock of the Weingarten Bros. Realty Co. was owned by Oscar*3288 and Levi Weingarten. The Weingarten Bros. Realty Co. owned all of the capital stock of the Weinbros Real Estate Co., amounting to $150,000 par value.
The balance sheet of the Weingarten Bros. Realty Co. on January 1, 1920, discloses the following:
| Assets | Liabilities | ||
| Lawrence Street property | $28,000.00 | Capital stock | $300,000.00 |
| High Street property | 190,501.08 | Surplus | 126,930.43 |
| Summit Street property | 102,577.51 | Accruals | 6,044.04 |
| Halsey Street property | 393,808.99 | Oscar Weingarten | 30,478.74 |
| Weinbros R.E. Co. cap. stock | 150,000.00 | F. A. Keeney security | 25,000.00 |
| Wm. E. Lehman per a/c | 6,250.00 | Nankin Garden security | 2,890.62 |
| Wm. E. Lehman Halsey St. a/c | 3,899.47 | Gevas & Laines security | 1,000.00 |
| Estate of David Weingarten | 1,966.38 | Bills payable | 50,000.00 |
| Levi Weingarten | 28,512.36 | Mortgage payable, | |
| Lakeside | 10,000.00 | ||
| Weinbros R.E. Co. loan | 491,717.03 | Mortgage payable, | |
| Halsey Street | 200,000.00 | ||
| Cash | 2,823.05 | Mortgage payable High | |
| and S. Sts | 75,000.00 | ||
| Weingarten Bros. loan | 454,122.26 | ||
| Reserve for | |||
| depreciation | 100,369.78 | ||
| Sinking fund | 18,220.00 | ||
| 1,400,055.87 | 1,400,055.87 |
*250 *3289 All of the corporation's assets are shown by the accounts in the above balance sheet and the parties have stipulated that the value of the assets and the amount of the current liabilities as of the date of death of the decedent was in the amount shown in the accounts of the above statement, with the exception of the value of the stock of the Weinbros Real Estate Co. and the sinking fund shown as a liability in the amount of $18,220.
The profit and loss statements of the Weingarten Bros. Realty Co. for the years 1915 to 1919, inclusive, disclose the following:
| Gain | Loss | |
| 1915 | $4,863.59 | |
| 1916 | 3,408.97 | |
| 1917 | $726.88 | |
| 1918 | 6,765.99 | |
| 1919 | 5,908.27 |
The average yearly profits during the five-year period, after deducting losses, were $1,032.92. The corporation paid no dividends during the period from 1915 to 1919, inclusive.
The balance sheet of the Weinbros Real Estate Co. on December 31, 1919, according to its books, was as follows:
| Assets | |
| Cash | $663.83 |
| Real estate and buildings | 1,211,777.23 |
| Rents receivable | 10,359.92 |
| 1,222,800.98 | |
| Liabilities | |
| Capital stock | $150,000.00 |
| Surplus | 20,638.79 |
| Mortgage payable | 450,000.00 |
| Reserve for depreciation | 109,004.17 |
| Weingarten Bros. Realty Co | 491,717.03 |
| Accounts payable | 1,440.99 |
| 1,222,800.98 |
*3290 The parties have stipulated that the above balance sheet reflects the value of the corporation's assets and the amount of its current liabilities as of November 29, 1919, with the exception of the value of the Terminal Building located at 50 Court Street, Brooklyn, carried *251 in the account "Real Estate and Buildings," and the amount of the liability under the account "Reserve for Depreciation."
The Terminal Building was a 12-story, cellar-and-subcellar structure of brick and steel construction, built in 1912, 1913, or 1914, at a cost of $1,211,777.23. It had an entrance from the subway under one of the adjoining streets. The corporation also owned the lot on which the building was erected. This property is situated in the business section of Brooklyn, within not more than 200 feet of Borough Hall, a municipal building. The construction of Borough Hall was advocated by citizens many years before 1923, when its erection was authorized, and 1924, when building operations were started. Real estate in the neighborhood of Borough Hall is considered to be among the best in the city.
The Terminal Building, together with the lot, was sold by Weinbros Real Estate Co. in*3291 the summer or early fall of 1923, for $1,325,000, on terms of $200,000 cash and subject to a first mortgage of $450,000 and a second mortgage of $675,000. Title passed under the agreement of sale on January 2, 1924. Prior to this sale there was little activity in the sale of real property in Borough Hall section and after the sale was recorded, sales were active. The Terminal Building had a fair market value at November 29, 1919, of $1,100,000.
The profits made and the losses sustained by the Weinbros Real Estate Co. from 1914 to 1919, inclusive, from the operation of the Terminal Building, were as follows:
| Gain | Loss | |
| 1914 | $17,298.10 | |
| 1915 | 24,648.21 | |
| 1916 | $4,479.59 | |
| 1917 | 1,077.99 | |
| 1918 | 11,154.81 | |
| 1919 | 12,299.21 |
The average yearly net profit, after deducting losses, was $2,515.10. No dividends were paid prior to 1920.
The value on November 29, 1919, of the 1,000 shares of stock the decedent owned in Weingarten Bros. Realty Co. was $154,338.72.
Under date of December 20, 1904, the Protestant Church of Saint Marks in the Bowery leased to Simon Uhlfelder, Abraham Weinberg, and Fanny Heilbrun for a period of 21 years, at an annual rental*3292 of $2,610, $1,560, and $2,830, a total of $7,000, three lots located, respectively, at 301-309 East Eleventh Street, and 304-308 and 310-316 East Twelfth Street, New York City. The clauses of the leases pertaining to the payment by the lessees of taxes, assessments, etc., and the right of renewal, read as follows:
Second - That the said parties of the second part, their executors, administrators - or assigns, shall and will at their own proper costs and charges pay *252 and discharge all such duties, taxes, assessments and payments of what nature or kind soever, extraordinary as well as ordinary, as shall, during the term hereby demised, by any authority, and for whatsoever purpose, be imposed on, or grow due and payable out of, and for, or by reason of the said demised premises and every or any part thereof, within ninety days after the same shall become a lien on the demised premises,
And it is further mutually covenanted and agreed by and between the parties to these presents, that if at the expiration of the term hereby granted, the said parties of the second part, their executors, administrators, - or assigns, shall have faithfully performed, and kept all and singular*3293 the covenants, conditions, provisos, and agreements in this indenture contained, then the parties of the first part, their successors or assigns, upon request made in writing at least ninety days prior to the expiration of said term, shall and will grant to the said parties of the second part, their executors, administrators - or assigns, at their expense, a renewal of this lease for a second term of twenty-one years to commence at the expiration of the term hereby granted, at a yearly rent to be determined as hereinafter provided, and to be payable in like manner and on the same days as the rent reserved in the present indenture.
And it is further mutually covenanted and agreed by and between the parties to these presents that at the expiration of the second term of twenty-one years (if the parties of the second part, their executors, administrators - or assigns, shall have elected to hire the premises for such term), the parties of the first part their successors or assigns, will, at their own election, either (1) grant to the parties of the second part, their executors, administrators - or assigns, at or their expense, a renewal of this lease, for a third term of twenty-one years, *3294 to commence at the expiration of the second term, at a yearly rent to be determined as hereinafter provided and to be payable in like manner and on the same days as the rent reserved in the present lease; or (2) purchase the building or buildings, with their appurtenances, which may have been erected by the parties of the second part, their executors, administrators or assigns, and which may then be standing on the said premises, at their value, to be determined as hereinafter provided. Such renewal agreements shall operate as a renewal of all the covenants, conditions, provisos and agreements of this indenture except the foregoing covenants for renewal.
The tenement houses located on the lots were 5-story buildings, having in some cases one or more stores on the ground floor; contained apartments of from 2 to 5 rooms each; were from 55 to 60 years old; had no air shafts; had wooden stairways; and did not contain any modern conveniences.
The leases were purchased by the East Eleventh Street Holding Co. in 1912 or 1913 from a referee in bankruptcy for the sum of $73,331.50, and in 1918 were sublet to Jacob Bolton for a period of five years at an annual rental of $18,000.
*3295 The leases were sold and assigned by the East Eleventh Street Holding Co. to Jacob Bolton on November 15, 1921, for the sum of $100,000, payable $10,000 cash, $6,000 annually to and including 1927, and $10,000 per year thereafter until the balance was paid in full. The deferred payments were secured by a mortgage on the leasehold. At the time of their sale the leases had about four years yet to run under their original terms.
*253 The balance sheet of the East Eleventh Street Holding Co. on January 1, 1920 - no substantial changes having taken place in the accounts after November 29, 1919 - according to the statement submitted in evidence, was as follows:
| Assets | |
| Investment | $73,331.50 |
| Bills receivable | 500.00 |
| M. Beckman | 142.00 |
| Henry London | 1,608.81 |
| Cash | 2,424.68 |
| 78,006.99 | |
| Income (deficit) | 24,599.39 |
| Total | 102,606.38 |
| Liabilities | |
| Capital stock | $61,000.00 |
| M. Beckman security | 150.00 |
| Reserve for depreciation | 19,380.27 |
| Paradiso 310 | 35.00 |
| Zinoca 314 | 32.00 |
| Weingarten Bros | 7,510.66 |
| Jacob Bolton security | 1,600.00 |
| O. & D. Weingarten | 12,898.45 |
| Total | 102,606.38 |
The corporation had no assets other than those shown by the above accounts*3296 and had no rental income aside from the sum of $18,000 due each year from Jacob Bolton as a sublessee.
The profits and losses of the East Eleventh Street Holding Co. between 1915 and 1919 according to the books of account, were:
| Gain | Loss | |
| 1915 | $4,380.31 | |
| 1916 | $428.67 | |
| 1917 | 534.55 | |
| 1918 | 6,929.77 | |
| 1919 | 229.09 |
The net loss of the corporation over the five-year period was $10,117.77. It did not pay any dividends prior to 1920.
The decedent's 6,100 shares of stock of the East Eleventh Street Holding Co. had a value of $18,300 on November 29, 1919.
On an audit of the return filed by the estate the respondent increased the value of the 1,000 shares of stock of Weingarten Bros. Realty Co. owned by the deceased at the time of his death from $149,190 to $223,265.38, and the 6,100 shares of stock the deceased held in the East Eleventh Street Holding Co. from $18,300 to $39,833.
OPINION.
ARUNDELL: The petitioner returned the stock owned by the deceased in the Weingarten Bros. Realty Co. at a value of $149,190, and the stock of the East Eleventh Street Holding Co. at a value of $18,300. In each case the amount was based entirely upon the value*3297 of the assets behind the stock. The stock values determined by the respondent were found in the same manner, but on the basis of a valuation of $1,325,000 for the office building owned by the Weinbros *254 Real Estate Co., this amount being the price for which the property was sold in 1923, instead of $1,102,773.06, the book value used by the petitioner, and a valuation of $100,000 for the three leases owned by the East Eleventh Street Holding Co. in lieu of the lesser valuation used by the petitioner. The petitioner is now claiming that the Weingarten Bros. Realty Co. stock is worth $75,000 and that the other stock is without value.
The petitioner's valuation of about $1,100,000 for the Terminal Building is supported by the depositions of two expert witnesses, both of whom had had considerable experience in the real estate business and were acquainted with property value in the so-called Borough Hall section of Brooklyn where the building is located. E. J. Grant, one of the two witnesses, had appraised the building for the Weinbros Real Estate Co. on April 25, 1915, October 18, 1922, and again on February 26, 1925, as of December 31, 1919. On each occasion he valued*3298 the land at $600,000 and the building at $500,000. Both witnesses testified that real estate sales were not active in 1919 in the section of the city in which the building was located and that sales did not become active until after the first of January, 1924. E. P. Dalmasse, the other witness, testified that the favorable terms under which the property was sold made it possible for the owner to obtain the price it did.
The uncontradicted evidence of petitioner's witnesses convince us that the fair market value of the Terminal Building at the time of decedent's death was $1,100,000, and that the sales price of the property in 1923, almost four years later, did not represent its fair market value on the basic date.
In determining the value of the stock of the East Eleventh Street Holding Co. the respondent valued the three leases at $100,000, the amount for which the leases were sold in 1921 to Jacob Bolton, the sublessee. He endeavored to substantiate this determination by the testimony of a qualified expert witness, who expressed the opinion that the leases were worth more in 1919 than in 1921 because of the greater length of time they had to run.
We are disposed to give*3299 little or no weight to this testimony as the witness had never examined the property and based his opinion solely on certain assumptions contained in hypothetical questions which we do not believe embodied all of the facts. The petitioner's witness qualified as an expert and testified, in answer to a hypothetical question having as its facts the pertinent provisions of the leases, the gross and net income of the corporation in 1919, and the ownership of its stock, that the leases had a value not in excess of $3,750. He also testified that market conditions for leases on property of the type covered by the agreements were much better in 1921 than in *255 1919, due to a shortage of housing in the later year. We are convinced that the leases were not worth $100,000 on November 29, 1919, and the evidence does not warrant the acceptance of the nominal value testified to by petitioner's witness. From all the evidence we are satisfied that the book figure used by the petitioner represents the fair market value of the leases at the time of decedent's death.
The witness presented by the petitioner to testify as to the value of the stock itself, ad distinguished from the assets*3300 behind it, gave as his opinion that a block of 1,000 out of 3,000 shares of Weingarten Bros. Realty Co. stock was worth $75 or $105 a share, depending upon whether the Terminal Building owned by Weinbros Real Estate Co., all of the capital stock of which was held by the former company, was valued at $1,100,000 or $1,325,000. The hypothetical question used to elicit the opinion is predicated almost entirely upon the operating history of the corporation in 1919 and did not include other facts essentially necessary as a basis to form an opinion on a question of this kind. It has also been observed that the witness only increases the value of the stock $30 a share on an increase in the value of the corporation's principal asset $225,000, or $75 a share.
The stock in both corporations was closely held and none of it appears to have been traded in. None of the corporations ever earned a large profit on their capital investment and all of them operated at a loss during several of the five years immediately preciding 1920. In 1919 the profits of Weingarten Bros. Realty Co. were only $5,908.27; Weinbros Real Estate Co. sustained a loss of $12,299.21 in the operation of the Terminal Building, *3301 and the East Eleventh Street Holding Co.'s profits amounted to but $229.09.
After eliminating the sinking fund account from the current liabilities of the Weingarten Bros. Realty Co., neither party having presented any evidence as to what the account represented, and adjusting the assets of the Weinbros Real Estate Co. to correspond with our finding of value for the Terminal Building, we find that the net worth of the former corporation on November 29, 1919, was $463,016.16 and that the 1,000 shares of stock held by the decedent had a value of $154,338.72 on the date of his death. We are convinced that the evidence supports the value of $18,300 found by the petitioner for the 6,100 shares of stock the decedent held in the East Eleventh Street Holding Co. at the time of his death.
Judgment will be entered under Rule 50.