1928 BTA LEXIS 3549">*3549 1. The transfer by decedent of certain stock in trust for his son, with reservation of the income therefrom to the donor during his life and thereafter to his widow during her life, was intended to, and did, take effect in possession and enjoyment at death; the property was transferred after the passage of the taxing statute. Held, the value of the stock is properly included in the gross estate for estate tax purposes.
2. Upon the evidence, the valuation determined by respondent is approved.
12 B.T.A. 375">*375 This proceeding results from the determination by respondent of a deficiency in estate tax amounting to $3,996.87.
Petitioners allege error with reference to two issues: (1) At the time when decedent died the common capital stock of the Brownell Improvement Co. did not have a value in excess of $128.22 per share, consequently the value of $259.68 determined by respondent is erroneous; (2) The value of 900 shares of the stock, the subject of a transfer in trust, should not be included for estate-tax purposes in the amount of the gross estate.
1928 BTA LEXIS 3549">*3550 FINDINGS OF FACT.
Under date of November 19, 1919, the decedent, Jefferson Hodgkins, executed an agreement providing so far as material here, as follows:
MEMORANDUM OF AGREEMENT, Entered into this 19th day of November, A.D. 1919, between JEFFERSON HODGKINS, of Chicago, Illinois, (hereinafter referred to as the "Donor"), and the CENTRAL TRUST COMPANY OF ILLINOIS, a corporation duly authorized under the laws of the State of Illinois to accept and execute trusts, (hereinafter referred to as the "Trustee").
WITNESSETH:
That, Whereas, the Donor desires to create a trust for the use and benefit of the Donor and certain beneficiaries hereinafter mentioned upon the terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the premises and for the purpose of accomplishing the objects hereinafter more particularly set forth, the Donor has sold, assigned, transferred, set over and delivered and by these presents does sell, assign, transfer, set over and deliver unto the said Trustee, irrevocably, all and singular those certain securities and properties described and set forth in the schedule hereto attached, marked Exhibit "A" and made a part hereof.
12 B.T.A. 375">*376 1928 BTA LEXIS 3549">*3551 FIRST: Said Trustee shall receive, hold, manage, and control and in its discretion exchange or vary, pledge, mortgage, sell and convey all or any part of the securities or other property at any time composing the trust estate, upon such terms and conditions as it may deem proper, and no person taking any such property or securities from said Trustee by way of sale, lease, mortgage, pledge or exchange shall be required to see to the application of the purchase money, or the rents, issues, profits or proceeds of such sale, lease, mortgage, pledge or exchange, or to inquire as to the authority of the Trustee in the premises. The Trustee shall collect and receive all dividends, rents, issues, profits and income of the trust estate, and shall invest and reinvest all or any part of the principal thereof in real, personal or mixed property, and generally manage, and control all of said trust property and all investments and reinvestments thereof in its absolute discretion without limitation as to such investments to the classes of securities or property which are now or may hereafter be prescribed by law as those in which trust funds shall be invested, it being the intention of the Donor1928 BTA LEXIS 3549">*3552 to confer upon the Trustee with respect to the said trust estate all of the powers of management and control that the Donor would have had were the Donor then in the sole and absolute possession and control of the property composing said trust estate.
SECOND: The Trustee is expressly authorized, without prejudice to its right to compensation for its services as Trustee hereunder, to purchase securities with the funds of the Trust estate from its own investment departments upon the same terms and at the same prices as such securities are offered for sale to the general public.
THIRD: The Donor hereby expressly reserves to any beneficiary, for the time being, the privilege of depositing with the Trustee, from time to time, other and additional moneys, securities and property which shall thereupon become and constitute a part of the trust estate hereby created, but nothing in this paragraph contained shall be construed as conferring upon the Donor or any other beneficiary of this trust any power of withdrawal or substitution of the securities or property held by the Trustee hereunder or any power to revoke the trust created by this agreement in whole or in part.
FOURTH: The net1928 BTA LEXIS 3549">*3553 income from the trust estate shall be paid by the Trustee in quarterly installments to the Donor and upon the death of the Donor, to the surviving wife of the Donor, if any during her natural life.
FIFTH: Upon the death of the Donor and of the surviving wife of the Donor, if any, the trust herein and hereby created shall not cease and determine, but shall continue during the lifetime of the son of the Donor, to wit: William L. Hodgkins, and during the lifetime of said William L. Hodgkins the income therefrom shall be paid to him, provided, however, that at the expiration of ten (10) years after the death of the wife of the Donor, in case she survives the Donor, and in case she does not survive him, then ten (10) years after the death of the Donor, - the said William L. Hodgkins, if then living, can elect to take over the trust fund or the proceeds thereof in whatever form it may be at such time, and the same shall in such case be and become absolutely the property of said William L. Hodgkins. But if the said William L. Hodgkins shall not at the expiration of said period, make an election to take over and become possessed of said property, the same shall remain in the hands of the1928 BTA LEXIS 3549">*3554 Trustee under the terms of this trust during the entire lifetime of said William L. Hodgkins, and upon his death it shall be divided among such of his widow and children as may then be living, in accordance with the statutes of the State of Illinois, that is to say, one-third to his surviving wife, if any, and two-thirds to his child or children if then living.
12 B.T.A. 375">*377 At any time after the death of the Donor herein, the Trustee shall consult with William L. Hodgkins as to the voting of the stock which shall be vested in the name of said Trustee, and in case of any disagreement as to the method of voting the determination of the said William L. Hodgkins shall be binding upon said Trustee. And it is further agreed between said Donor and the Trustee that if a majority of the stock of the Brownell Improvement Company, without taking into consideration the stock herein placed in trust, shall be sold, then the stock herein placed in trust may be sold at the same price by the said Trustee and the proceeds of such sale shall remain in the hands of the Trustee to be invested, reinvested and managed and the income disposed of in accordance with the provisions hereof. It is further1928 BTA LEXIS 3549">*3555 agreed that if a majority of the holders of the stock of the Brownell Improvement Company, outside of and not considering the stock herein placed in trust, shall decide to lease or sell the property of said corporation or any part thereof, then the Trustee shall join therein and consent to such leasing or sale.
SIXTH: No title in the trust estate hereby created or in the income accruing therefrom or in its accumulations shall vest in any beneficiary hereunder during the continuance of the trust as to such beneficiary, and no beneficiary shall have the right or power to transfer, assign, anticipate or encumber his or her interest in said trust estate or the income therefrom prior to the actual distribution thereof by the Trustee to such beneficiary.
* * *
EXHIBIT A. SCHEDULE OF SECURITIES DEPOSITED:
Certificates representing capital stock of the Brownell Improvement Co., an Illinois corporation, issued in the name of Jefferson Hodgkins, and by him endorsed in blank to Central Trust Company of Illinois, Trustee, as follows:
| Number of shares | |
| Certificate No. - | |
| 162 | 50 |
| 166 | 72 |
| 188 | 174 |
| 202 | 64 |
| 206 | 40 |
| 218 | 500 |
RECEIVED the above securities this 19th1928 BTA LEXIS 3549">*3556 day of November, 1919.
CENTRAL TRUST COMPANY OF ILLINOIS,
BY L. R. STEERE, Secretary.
In 1919, decedent was about 70 or 71 years of age. He was apparently in good health and was actively engaged in his duties as president of the Brownell Improvement Co., except that he occasionally took vacation trips. He had a house in Florida and usually spent one or two of the winter months there. Decedent died on January 2, 1921.
In January, 1921, the Brownell Improvement Co., hereinafter referred to as the Company, was engaged in the quarrying and crushing of stone and sale of same to railroads, contractors and farmers. Its output was adapted for use in concrete construction work and for public roads and street construction. Farmers used the fine pulverizations for fertilizer or soil conditioner. The quarry and plant of 12 B.T.A. 375">*378 the Company was located at Thornton, about five miles south of the southern limits of the City of Chicago, or about 22 miles from the City Hall. The Company served customers in Chicago and vicinity, and the territory south along the Illinois Central Railroad for a distance of about 125 miles. The plant had direct connections with the Chicago and1928 BTA LEXIS 3549">*3557 Eastern Illinois R.R. and with the Baltimore & Ohio Chicago Terminal R.R., and indirect connections with the Illinois Central R.R. and the Chicago, Terre Haute & Southwestern R.R. Trucking conditions were poor as the hard-surfaced highway to Thornton was not completed until later. The Company owned between 500 and 550 acres, of which approximately 60 acres had been quarried to a depth practicable with reference to economical production. The deposits of stone were uncovered by stripping. The deposits were found to vary greatly in the lands actually quarried. The extent of the deposits had not then been ascertained. During the period from 1917 to 1921, inclusive, the Company purchased 40 acres of land adjacent to the quarry at a price of $300 per acre.
The machinery and equipment of the Company included six steam shovels of 95-ton type made by the Bucyrus Company; one No. 24 primary gyratory crusher; four No. 7 1/2 secondary crushers made by Allis Chalmers Co. and Power Mining Co.; three small reducing crushers Nos. 2, 4, and 6; one 70-ton Baldwin locomotive; six 30-ton locomotives; one saddle tank 60-ton locomotive; and one other locomotive. The locomotives were in bad secondhand1928 BTA LEXIS 3549">*3558 condition. There was a boiler plant and steam turbine bath installed in 1913. The capacity of the power plant was 1,200 horsepower. There were also a 72-inch conveyor, 132 feet long; a grizzly; four No. 9 elevators; four open-end screens, 60 inches by 24 feet; ten closed-end screens 60 inches by 24 feet; two style B crusher rolls 42 inches by 24 inches; a jet condenser; three centrifugal pumps; and various motors.
On January 2, 1921, secondhand stone crushing equipment was selling at from 35 per cent to 50 per cent of the prices for new equipment.
On January 2, 1921, the outstanding capital stock of the Company amounted to 3,000 shares, par value $100 per share, of which decedent held 76 shares, the above trustee 900 shares, and William L. Hodgkins, the son of decedent, 1,961 shares. The stock was not listed on any exchange. The son of decedent had not offered his stock for sale nor had he received any offers for the purchase of it. No dividends had been paid on the stock since 1913.
At the end of 1920, conditions in the business of the Company were disturbed although the situation, industrially, was recovering from the previous period of readjustment. The situation1928 BTA LEXIS 3549">*3559 with reference to the construction of public roads by the State was tangled, due to the 12 B.T.A. 375">*379 letting of contracts to weak contractors who failed, and the bonding companies in many cases were completing the work. A large amount of public road construction was authorized or under way under various bond issues.
The return for estate-tax purposes included the 900 shares of stock transferred to the trustee in 1919, at a value of $128.22 per share. Respondent has included the amount of the value of the 900 shares and also of 76 additional shares of the same stock in the gross estate at a valuation of $259.68 per share, arrived at upon the basis of the following computation:
| Balance sheet December 31, 1920 | |||
| Amended balance | Treasury | Difference | |
| sheet per books | Department's | ||
| fair value | |||
| ASSETS | |||
| Real estate | $127,298.15 | $127,298.15 | |
| Buildings - plant | 357,803.80 | 357,803.80 | |
| Machinery | 699,439.32 | 699,439.32 | |
| Securities - Liberty bonds | 115,800.00 | 99,902.26 | $15,897.74 |
| Cash | 97,499.12 | 97,499.12 | |
| Notes receivable | 16,095.81 | 16,095.81 | |
| Accounts receivable | 185,756.22 | 185,756.22 | |
| Inventory | 43,878.95 | 43,878.98 | |
| Corporation insurance | 8,700.00 | 8,700.00 | |
| Stock - domestic corporation | 20,000.00 | 12,000.00 | 8,000.00 |
| Quarry lands - cost 3-1-13 | 31,488.39 | 31,488.39 | |
| Quarry lands - appreciation | |||
| to 3-1-13 | 384,511.61 | 384,511.61 | |
| Deferred charges: | |||
| Bond issue expense | 38,036.66 | 38,036.66 | |
| Unexpired insurance | 2,402.19 | 2,402.19 | |
| Total | 2,128,710.25 | 2,064,373.66 | 64,336.59 |
| LIABILITIES | |||
| Bonded debt | 575,000.00 | ||
| Less in treasury | 30,000.00 | ||
| 545,000.00 | 545,000.00 | ||
| Accounts payable | 107,783.27 | 107,783.27 | |
| Notes payable | 89,000.00 | 89,000.00 | |
| Wages payable | 10,375.86 | 10,375.86 | |
| Reserves: | |||
| Depreciation | 463,427.02 | 463,427.02 | |
| Depletion on cost | 4,423.83 | 4,423.83 | |
| Depletion on appreciation | 65,316.47 | 65,316.47 | |
| Capital stock - common | 300,000.00 | ||
| Less in treasury | None. | ||
| 300,000.00 | 300,000.00 | ||
| Capital surplus: | |||
| (Unrealized appreciation) | 319,195.14 | 319,195.14 | |
| Realized appreciation | 65,316.47 | 65,316.47 | |
| Earned surplus | 158,872.19 | 158,872.19 | |
| Total | 2,128,710.25 | 2,128,710.25 | |
| Total assets (fair value) | 2,064,373.66 | ||
| Less liabilities and reserves | 1,285,326.45 | ||
| Net worth (book value, including | |||
| appreciation) | 779,047.21 | ||
| 3,000 shares outstanding, equals | |||
| book value per share of | 259.68 | ||
1928 BTA LEXIS 3549">*3560 In 1919, the company issued its bonds, amounting to $500,000, secured by mortgage on all of its assets. The entire amount of the issue in this year was underwritten by a Chicago trust company and upon their recommendation they sold the bonds to investors at par. Subsequently additional bonds were issued and sold.
12 B.T.A. 375">*380 After adjustments giving effect to deductions for depletion and depreciation allowed by respondent for income-tax purposes, the profits and losses of the Brownell Improvement Co. amounted, according to the books, as follows:
| Year | Gain | Loss |
| 1916 | $82,936.61 | |
| 1917 | $11,346.44 | |
| 1918 | 61,045.00 | |
| 1919 | 75,327.13 | |
| 1920 | 481.36 |
The deductions for depletion were based on the value of the quarry lands as of March 1, 1913, which value was in excess of the original cost.
OPINION.
LOVE: This is an estate tax case. At a date subsequent to the passage of the Revenue Act of 1918, decedent transferred 900 shares (par value $100) of the common capital stock of a corporation to a trust company under a trust agreement reserving the income from the stock to the donor for his lifetime; thereafter the income was reserved to the widow during1928 BTA LEXIS 3549">*3561 her lifetime. After the death of the widow the trust continued for ten years, the income to go to the son of decedent. At the end of the ten years the son could take possession of the property if he chose, or he could leave it in trust, and receive the income. The trustee had full powers of management, control, purchase and sale. The son was entitled to direct the voting of the stock after death of the widow. The right was denied to any beneficiary to transfer, assign, anticipate or encumber his or her interest in the trust estate or the income therefrom prior to actual distribution by the trustee. Decedent died less than two years after the transfer in trust and prior to the repeal of the Revenue Act of 1918.
The return filed for estate-tax purposes included in the gross estate an amount of value attributable to the 900 shares of stock, held by the trustee, based on a value of $128.22 per share. In determining the estate tax, respondent has valued the stock at $259.68 per share.
The first issue presents a question of the value for estate-tax purposes of the 900 shares of stock held in trust and also of 76 shares of the same stock admittedly belonging to decedent. The1928 BTA LEXIS 3549">*3562 total outstanding stock was 3,000 shares. The son of decedent held 1,961 shares. The combined holdings of father, son and trustee aggregating 2,937 shares, were therefore, very "close." The corporation was 12 B.T.A. 375">*381 a "family enterprise." The stock was not listed on any exchange. It had not been offered for sale and had not been the subject of an offer to purchase. A fair value must be arrived at by other means than market sales or quotations. Respondent has valued the stock through the assets behind it. Petitioners contend that the net values assigned to the assets of the corporation by respondent, based upon the books, with adjustments to reflect depreciation and depletion allowed for income-tax purposes, together with the appreciation in value attributable to the quarry lands as of March 1, 1913, yield a value based on a net worth which is far in excess of the fair market value of the capital stock. This result is attributed in part to over-valuation of the plant and the quarry lands of petitioner. The testimony is conflicting with reference to the plant. We believe that, in spite of breakdowns, it was in good condition. The record does not discolose a value in 19211928 BTA LEXIS 3549">*3563 of the machinery and equipment other than its book value. There is no evidence of the extent of the deposits of stone. Purchases of insignificant amounts of contiguous land are testified to. There is little satisfactory evidence upon which to base a finding of any definite amount. We are not convinced of error in the amount of the net worth determined by respondent.
The further contention of petitioners relates to the fair market value for the stock as distinguished from the net worth of the corporation. It is claimed to be far below the net worth due to the prevailing business depression and to a failure to pay any dividends since 1913. We are able to agree with petitioners that the market values of stocks frequently are below the book values and also that the question of dividends is a valuation factor, yet we think in this case the value of the assets, all tangible, may not be disregarded to the extent required by an acceptance of the opinions of the expert witnesses for petitioner as expressed in answer to questions embodying numerous hypotheses. This is apparently realized by petitioners for they offer to accept a value in excess of the experts' valuations.
Not long1928 BTA LEXIS 3549">*3564 before the death of decedent, the corporation issued, and a conservative banking organization underwrote and recommended, a mortgage bond issue of $500,000 par value. The transactions must have been the occasion of a consideration of the values of the assets of the corporation, particularly of the fixed assets upon which would rest the main reliance for the security for the bonds. Even though there is no further evidence before us in this connection, we are of the opinion that the amount of the bond issue is indicative of an approximate value of the fixed assets which, combined with the unquestioned amount of the net current assets, will yield a value for the stock considerably in excess of the value claimed by petitioner. 12 B.T.A. 375">*382 The unavoidable conclusion is that the low value claimed by petitioner is not sustained by the record taken in its entirety, and furthermore the extent of the alleged error, if any, of respondent, can not be determined.
The second issue relates to the inclusion in the amount of the gross estate of the value of the 900 shares of stock previously transferred in trust. Petitioner contends that section 402(c) of the Revenue Act of 1918, does not apply, 1928 BTA LEXIS 3549">*3565 since the transfer took effect immediately, and furthermore, the provisions of the taxing statute are unconstitutional.
The issue is not controlled by , where the transfer in trust was made prior to the passage of the taxing act, nor by , where no interest whatever in the property was reserved. We have previously had occasion to consider a transfer of corporate stock with reservation, for life, of the income therefrom in , and we held that under the Revenue Act of 1921, the amount of the value of the stock should be included in the gross estate. We cited In ; , wherein the court said:
The only income stocks can produce is the dividend declared thereon, and the reservation of the dividends for life is the reservation of an estate for life. A stockholder has no title to the earnings of a corporation before a dividend is declared. Until that time the earnings pass with the stock as an incident thereof, * * * though a remainder may vest in1928 BTA LEXIS 3549">*3566 title at its creation, it cannot vest in possession until the determination of the prior estate.
The provisions of the Revenue Act of 1918, so far as material here, were identical with those of the Revenue Act of 1921. The issue presents the same question of interpretation of the phrase "take effect in possession or enjoyment at or after death." We do not lack appreciation of the confusion due to the various conflicting interpretations as pointed out in . However, after consideration of all of the provisions of the trust agreement and referring to an asset of the characteristics peculiar to corporate common stock, we believe that it can not be said, in the instant case, that any measurable amount of either possession or enjoyment took effect as distinguished from vested title prior to the death of decedent. The entire value attributable to the stock in our opinion is the amount properly to be considered in the value for estate-tax purposes. Cf. ; 1928 BTA LEXIS 3549">*3567 ; ; ; ; .
Judgment will be entered for the respondent.