*968 1. Where the decedent created a trust, the corpus of which consisted of life insurance taken out by him upon his life (designated as the Primary Trust Fund) and shares of corporate stock (designated as the Secondary Trust Fund), the net income from the secondary fund to be used to pay premiums on the life insurance policies, and, upon the further trust, after December 27, 1933, or the prior death of the trustor, to pay over the income or trust corpus to trustor's wife and children, or issue of children then living, and the trustor reserved the right to change the beneficiaries of the trust, the value of the corpus of the trust at the date of death of the decedent must be included in decedent's gross estate pursuant to the provisions of section 302(c) of the Revenue Act of 1926.
2. The value of certain shares of stock owned by the decedent at the date of his death determined.
*196 This is a proceeding for the redetermination of a deficiency in estate tax of $641,276.18. One of the issues raised*969 has been settled by stipulation. The questions in issue are (1) whether there should be included in the gross estate of the decedent the value of a certain trust fund, the corpus of which consisted of life insurance taken out by the decedent upon his life (designated as the Primary Trust Fund), and shares of corporate stock (designated as the Secondary Trust Fund), the net income from the secondary fund to be used to pay premiums on the life insurance, and, upon the further trust, after *197 December 27, 1933, or the prior death of the trustor, to pay over the income and/or trust corpus to trustor's wife and/or children, or issue of children then living, where the trustor reserved the right to change the beneficiaries of the trust; (2) the value of 1,000 shares of the common capital stock of the Christiana Securities Co.; (3) the value of 250 shares of stock of the Delaware Realty & Investment Co.; and (4) the value of 143 shares of the capital stock of the Glenden Land Co.
FINDINGS OF FACT.
Petitioners are the duly appointed, qualified and acting executors of the will of William Winder Laird, who died a resident of Wilmington, Delaware, on November 19, 1927.
At the*970 time of his death, decedent was the owner, among other items of property, of 1,000 common shares of the Christiana Securities Co., of 250 shares of the Delaware Realty & Investment Co., and of 143 shares of Glenden Land Co. The executors of the decedent's will, in making the return for Federal estate tax on the transfer of the net estate of the decedent, valued the common stock of the Christiana Securities Co. at $800 per share; the stock of the Delaware Realty & Investment Co. at $781.17122 per share; and the stock of the Glenden Land Co. at $340.21 per share. The respondent in determining the deficiency in estate tax in this case valued the common stock of the Christiana Securities Co. at $1,760.60 per share; the stock of the Delaware Realty & Investment Co. at $15,066.51 per share; and the stock of the Glenden Land Co. at $397.31 per share.
On December 27, 1923, the decedent entered into an agreement with the Wilmington Trust Co., under which he transferred to that company certain life insurance policies in the principal amount of $131,000 taken out by him upon his life (designated as the Primary Trust Fund) and 500 shares of Christiana Securities Co. preferred stock (designated*971 as the Secondary Trust Fund), the net income from the secondary fund to be used to pay premiums on the life insurance policies, and upon the further trust, after December 27, 1933, or the prior death of the trustor, to pay over the income and/or trust corpus to trustor's wife and/or children or issue of children then living. The twelfth paragraph of the trust provides as follows:
Trustor expressly reserves the right at any time during the term of this Agreement to change the beneficiary or beneficiaries of any trust herein contained and created, and to substitute new and other beneficiaries in lieu thereof, and Trustee agrees to observe any such change of beneficiary upon the written instruction of Trustor, in the same manner and with the same force and effect as though such substituted beneficiary had been originally included in this Agreement, provided however, that such substitution shall in each instance *198 become effective hereunder only as of the date of such written instructions of Trustor, and provided still further, that in the exercise of this right Trustor may not name himself, or his estate the beneficiary hereunder.
In the Federal estate tax return filed*972 by the petitioners, the value of the trust fund at the date of death of the decedent was not included in the gross estate. The respondent in computing the deficiency has included such value in the gross estate.
The Christiana Securities Co. had outstanding on the date of decedent's death 150,000 shares of common stock of the par value of $100 per share and 150,000 shares of 7 percent preferred stock of the par value of $100 per share. The common stock of this company has never been listed on any stock exchange and has never been dealt in in any market. The value of the preferred stock at the date of the death of the decedent was $109 per share. The common stock is closely held.
The net earnings of the Christiana Securities Co. for the years 1923 to 1927, inclusive, were as follows:
| 1923 | $1,834,000 |
| 1924 | 2,198,000 |
| 1925 | 3,643,000 |
| 1926 | 9,244,000 |
| 1927 | 13,300,000 |
The liabilities of the Christiana Securities Co., as shown by its books, as of the date of the decedent's death, were as follows:
| 7% preferred stock | $15,000,000.00 |
| Common stock | 15,000,000.00 |
| Income tax payable | 6,650.97 |
| Notes payable | 500,000.00 |
| Surplus | 10,470,392.78 |
*973 The method by which the respondent determined the value of the common stock of the Christiana Securities Co. as of the date of death of the decedent was from a reconstruction of the balance sheet as follows:
| BALANCE SHEET | |
| November 19, 1927 | |
| Assets: | |
| Cash | $256,397.85 |
| (B) 840,000 shares Common Stock of E. I. du Pont de Nemours & Co., 325 3/4 per share | 273,630,000.00 |
| (B) 70,571 shares Common Stock of Atlas Powder Co., at 65 7/8 per share | 4,648,864.63 |
| 730 shares of stock of Every Evening Printing Co | 250,000.00 |
| 6,000 shares of stock of News Journal Co | 600,000.00 |
| Accounts Receivable - Every Evening Printing Co | 210,000.00 |
| Furniture & Fixtures | 2,353.07 |
| Total assets | $279,597,615.55 |
| Liabilities: | |
| 7% preferred stock | $15,000,000.00 |
| Common stock | 15,000,000.00 |
| Income tax payable | 6,650.97 |
| Notes payable | 500,000.00 |
| Surplus | 249,090,964.58 |
| Total capital stock, surplus and liabilities | $279,597,615.55 |
NOTE: (B) New York Stock Exchange as per Financial & Commercial Chronicle. Capital and surplus as adjusted above $264,090,964.58 or $1,760.60 per share.
*199 In making this computation, the respondent used the median between the high*974 and low prices at which common stock of the E. I. duPont de Nemours & Co. and of the Atlas Powder Co. sold on the New York Stock Exchange on November 19, 1927, the date of death of the decedent. By using the closing price at which the stock of these two companies sold on the date of death the value of 840,000 shares of common stock of the E. I. duPont de Nemours & Co. would have been $271,950,000, and the value of 70,571 shares of common stock of the Atlas Powder Co., $4,481,258.
Sales of the E. I. duPont de Nemours & Co. common stock on the New York Stock Exchange were as follows:
| Period | Shares sold |
| August 1927 | 241,500 |
| September 1927 | 195,600 |
| October 1927 | 160,600 |
| November 1927 | 119,900 |
| December 1927 | 49,600 |
| January 1928 | 41,200 |
| February 1928 | 63,700 |
On November 19, 1927, the number of outstanding shares of E. I. duPont de Nemours & Co. was 2,661,658, of which the Christiana Securities Co. owned 840,000 shares.
There was but a thin market for the common stock of the Atlas Powder Co. The stock was not widely distributed. The Christiana Securities Co. sold its 70,571 shares of the Atlas Powder Co. common stock at private sale on November 7, 1928, at*975 $66.67 per share, on which date the Atlas Powder Co. common stock was being sold on the New York Stock Exchange at $82.75 per share.
The Delaware Realty & Investment Co. was organized under the laws of Delaware in 1916, and its entire stock was closely held by the duPont family as of the date of decedent's death, and there have been no sales to establish its market value. The principal business of this company was and is the management and operation of the annuity contract described below. One active officer of the corporation is paid a salary of $5,000 per annum.
*200 The assets of the Delaware Realty & Investment Co. on November 19, 1927, as shown by its books, exclusive of the assets supporting the annuity contract, consisted of cash of $9,369.77, and 19,200 shares of E. I. duPont de Nemours & Co. common stock. The liabilities of this company on the same date were, as shown by its books just referred to: capital stock, $800,000; and surplus, $11,879.72.
On May 31, 1924, the Delaware Realty & Investment Co., as party of the first part, and Pierre S. duPont and Alice Belin duPont, his wife, of Wilmington, Delaware, parties of the second part, entered into a contract*976 whereby, for the consideration named therein, the Delaware Realty & Investment Co. agreed to pay to Pierre S. duPont and Alice Belin duPont, and to the survivor thereof, an annuity of $900,000 per annum. In case of breach of the contract the parties of the second part had an option "to cancel this contract and enforce the repayment" to them or the survivor "of the then value of the said annuity calculated according to the table hereto attached." The value of the annuity at December 31, 1927, as shown by the table attached, was $12,390,930, and decreased in each succeeding year. As consideration for this contract, the parties of the second part transferred to the Delaware Realty & Investment Co. the following securities:
44,000 shares, Christiana Securities Co. 7% preferred
49,000 shares, Christiana Securities Co. common
12,500 shares, E. I. duPont de Nemours & Co. debenture
24,000 shares, E. I. duPont de Nemours & Co. common
12,000 shares, Hercules Powder Co. common
11,000 shares, Atlas Powder Co. common
400 shares, Longwood, Inc., capital
Lands in Chester County, Pennsylvania, under lease to Longwood, Inc. (not including residence and 50 acres surrounding same)
*977 which property was accepted by the Delaware Realty & Investment Co. at a valuation of $13,500,000. The contract provided in part as follows:
* * * and the said party of the first part, for itself and its successors, doth hereby further covenant, promise and agree to and with the said ANNUITANTS and each of them, severally, his or her Heirs, Executors, Administrators and Assigns, by these presents, that it, the said party of the first part, shall not and will not distribute by way of dividend or otherwise to its stockholders, or use to pay salaries or for any other purpose than paying the annuity hereby granted, any of the income or earnings, if any, received by the party of the first part from the real and personal property hereinabove mentioned and referred to as constituting the consideration paid to the party of the first part for the granting of the annuity granted hereby, or any of the income or earnings, if any, received by the said party of the first part from any property, *201 of any nature whatsoever, into which the said above mentioned real and personal property may have been converted by the said party of the first part, but, on the other hand, all of any such*978 income or earnings shall be applied to the payment of the said annuity and if, at any time before the termination of the said annuity, there shall be an excess of such income or earning above the amount necessary to pay the instalment of said annuity then due or falling due, such excess shall be accumulated by the said party of the first part and held or invested by it as a reserve and guarantee fund to secure the payment of the said annuity, until and unless the reserve and guarantee fund, thus accumulated or in any other manner derived, applicable to this annuity contract and to the payment of the annuity granted hereby, shall amount to at least thirty per cent (30%) of the value, calculated according to the said table, of the said annuity, so that the aggregate of said reserve and what remains of the original consideration paid for said annuity shall equal one hundred and thirty per cent (130%) of the then value of said annuity, so calculated, and thereafter such reserve shall not, at any time, be reduced below thirty per cent (30%) of such value by any payment therefrom other than a payment of the annuity hereby granted; * * *
Pierre S. duPont was born January 15, 1870, and Alice*979 Belin duPont was born July 15, 1871. The present worth on November 19, 1927, of an ordinary annuity of $900,000 per annum to two persons of the ages of Pierre S. duPont and his wife, Alice Belin duPont, and to the survivor, was $12,658,151, and 30 percent of that amount, being the reserve provided for in the contract of May 31, 1924, amounted to $3,797,445.30.
The capital stock of the Delaware Realty & Investment Co. consisted of 8,000 shares of the par value of $100 per share. Of these shares, the decedent owned 250 shares. Pierre S. duPont and Alice Belin duPont are not and never have been shareholders of this company.
In the valuation of the stock of the Delaware Realty & Investment Co. for estate tax purposes, the petitioners excluded the value of the securities which had been transferred by Pierre S. duPont and his wife, Alice Belin duPont, to support their annuity contract and likewise the assets which constituted the annuity reserve fund. The method by which the respondent determined the value of the shares of stock of this company is shown by the following:
| BALANCE SHEET | ||
| NOVEMBER 19, 1927 | ||
| Assets: | ||
| Cash | $9,369.77 | |
| (B) 19,200 shares common stock of E. I. du Pont de Nemours & Co. at 325 3/4 | 6,254,400.00 | |
| Total assets | $6,263,769.77 | |
| Liabilities | ||
| Capital stock (par $100) | $800,000.00 | |
| Surplus | 5,463,769.77 | |
| Total capital stock and surplus | $6,263,769.77 | |
| Add - Assets of Annuity Fund | ||
| 44,000 shares 7% pfd. stock, Christiana Securities Co., at 109 | $4,796,000.00 | |
| 49,000 shares common stock Christiana Securities Co., at 1,760.60 | 86,269,400.00 | |
| (B) 12,500 Debentures - E. I. du Pont de Nemours at 114 3/4 | 1,434,375.00 | |
| (B) 67,200 shares common - E. I. du Pont de Nemours at 325 3/4 | 21,890,400.00 | |
| (C) 12,000 shares common - Hercules Powder Co., at 192 | 2,304,000.00 | |
| (B) 11,000 shares common - Atlas Powder Co., at 65 7/8 | 724,625.00 | |
| 400 shares common - Longwood, Inc. | 5,299,680.55 | |
| Real Estate - Chester County, Pa. | 3,600.00 | |
| $122,722,080.55 | ||
| Add - Annuity Reserve Fund | 4,021,412.48 | |
| Deduct - Present worth of annuity of | $126,743,493.03 | |
| $900,000, payable $75,000 monthly over life of two annuitants | 12,475,139.13 | |
| $114,268,353.90 | ||
| Difference to be added | 114,268,353.90 | |
| $120,532,123.67 |
*980 NOTES: (B) New York Stock Exchange as per Commercial & Financial Chronicle.
(C) New York Curb, as per Commercial & Financial Chronicle. Capital stock, surplus and equity in annuity fund $120,532,123.67 or $15,066.51 per share.
*202 The value of the securities held by the annuity reserve fund on November 19, 1927, was computed by the respondent as follows:
| DELAWARE REALTY & INVESTMENT CO. | |
| ANNUITY RESERVE FUND | |
| (B) 1000 shares Am. Smelt. & Ref'g. 7% pfd. at 131 5/8 | $131,625.00 |
| (B) 500 shares Am. Tobacco 6% pfd. at 179 1/8 | 89,562.50 |
| (B) 5500 shares duPont 6% deb. at 114 3/4 | 631,125.00 |
| (B) 1000 General Motors 7% pfd. at 125 1/8 | 125,125.00 |
| (B) 1500 shares Mack Truck 1st pfd. at 110 | 165,000.00 |
| (B) 1500 shares N.Y.C. & St. L. 6% pfd. at 106 3/4 | 160,125.00 |
| (B) 1000 shares No. Amer. Co. 6% pfd. ( $50 par) at 54 1/4 | 54,250.00 |
| (B) 1000 shares U.S. Rubber 1st Pfd. at 96 1/4 | 96,250.00 |
| (B) 12,600 shares U.S. Steel Com. at 144 | 1,814,400.00 |
| (B) 4000 shares Westinghouse Air Brake at 44 | 176,000.00 |
| Real Estate | 3,600.00 |
| (A) 200 $1,000 General Motors Acceptance Corp. 1/3/28 at 100 | $200,000.00 |
| (A) 100 $1,000 General Motors Acceptance Corp. 1/16/28 Serial Bonds at 100 | 100,000.00 |
| (A) 100 $1,000 General Motors Acceptance Corp. 12/15/27 at 100 | 100,000.00 |
| (A) 55 $1,000 General Motors Acceptance Corp. 3/1/28 at 100 5/16 | 55,171.78 |
| (B) 50 $1,000 C.R.I. & Pac. 4 1/2 6/1/28 at 99 1/2 | 49,750.00 |
| (B) 15 $1,000 Am. Tel. & Tel. 4's, 7/1/29 at 99 1/2 | 14,925.00 |
| (B) 50 $1,000 St. Louis & S.F. 5's, 2/1/28 at 101 | 50,500.00 |
| Total Securities | $4,017,409.28 |
| Accrued Dividends | 4,003,20 |
| Total | $4,021,412.48 |
*981 NOTES: (A) Local Quotations as per Commercial & Financial Chronicle.
(B) New York Stock Exchange as per Commercial & Financial Chronicle.
*203 At the time the Delaware Realty & Investment Co. entered into the annuity contract on May 31, 1924, the officers and stockholders of the company estimated that the company would not be able to enjoy any of the income of this annuity fund for a period of at least 10 years from the execution of the contract on May 31, 1924, and this was upon the assumption that the dividends and income from the securities in this fund would continue to be paid at the then prevailing rates. But the reserve required by the contract was created in less time than had been anticipated. Regular payments of the fixed annuity were made, and out of the surplus earnings special dividends were paid on the stock of the Delaware Realty & Investment Co. as follows:
| January 18, 1927 | 150% |
| May 5, 1927 | 100% |
| July 1, 1927 | 75% |
| October 1, 1927 | 75% |
| January 6, 1928 | 275% |
| April 2, 1928 | 100% |
| July 7, 1928 | 300% |
| October 1, 1928 | 120% |
The shares of stock of the Glenden Land Co., which was a holding corporation, were closely held. The market*982 value has never been established by sales in the open market. The respondent determined the value of this stock upon the basis of an adjusted balance sheet in which he included among the assets the face value of insurance policies on the life of William Winder Laird, which were collected by the company after his death, in the amount of $1,039,288.37. The petitioners excluded this asset from the total assets in the determination of the fair value of the stock returned at $340.21 per share.
OPINION.
SMITH: The first question presented by this proceeding is the correctness of the action of the respondent in including in the gross estate of the decedent the value of a trust fund held by the Wilmington Trust Co. This trust fund was created by an agreement *204 between the decedent and the Wilmington Trust Co. dated December 27, 1923. Pursuant to this agreement, the decedent transferred to the trust company certain life insurance policies taken out by him upon his life (designated as the Primary Trust Fund), and shares of corporate stock (designated as the Secondary Trust Fund), the net income from the secondary fund to be used to pay premiums on the life insurance, and*983 upon the further trust, after December 27, 1933, or the prior death of the trustor, to pay over the income and/or trust corpus to trustor's wife and/or children or issue of children then living. The trustor reserved the right to change the beneficiaries of the trust. It is by virtue of this reservation made in the trust instrument that the respondent has included the value of the trust fund in the gross estate. No question is raised as to the value of the trust fund as of the date of death of the decedent. The respondent has included this fund in the gross estate by virtue of section 302 of the Revenue Act of 1926, which, so far as material, is as follows:
SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated -
(a) To the extent of the interest therein of the decedent at the time of his death;
* * *
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, *984 either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent reliquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * *
* * *
(h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.
In , the Supreme Court stated:
So long as the privilege of succession has not been fully exercised it may be reached by the tax. * * * And in determining whether it has been so exercised technical distinctions between vested remainders and other interests are of little avail, for the shifting of the economic benefits and burdens of property, which is the subject of a succession tax, may even in the case of a vested remainder be restricted or suspended by other*985 legal devices. * * * The beneficiary's acquisition of the property is equally incomplete whether the power be reserved to the donor or another. * * *
To *205 the same effect, see ; ; . On brief, the petitioners state that they are "not able successfully to argue that it [] is not applicable to the first point in this case * * * so the first point need not further be considered," The action of the Commissioner in including the value of the trust fund in the gross estate is sustained upon the principles of law enunciated in the above cited decisions.
The remaining questions for the determination of the Board relate to the value of certain shares of stock of the Christiana Securities Co., Delaware Realty & Investment Co. and Glenden Land Co. owned by the decedent at date of death. These shares were returned by the petitioners for estate tax purposes at $800, $781.17122 and $340.21 per share, respectively. The respondent in the determination*986 of the deficiency increased the values to $1,760.60 per share, $15,066.51 per share, and $397.31 per share, respectively. The stock of all of these companies was closely held by members of the duPont family. There have never been any sales establishing the market value of them. In the absence of such sales the respondent valued the assets of each company, consisting principally of listed stocks, and divided the net worth of each company by the number of shares outstanding for the purpose of arriving at the value of each share. This is upon the principle that for inheritance tax purposes a determination can and must be made of the value of the shares of stock in a closely held corporation by reference to the value of the physical property of the corporation, its success, earnings, etc. ; ; ; ; ; ; *987 ; ; . Cf. also ; .
In valuing the shares of stock owned by these family corporations, the respondent used the median between the high and low points at which these shares of stock sold on the sock exchanges on the date fo death of the decedent; viz., November 19, 1927. The petitioners contend that the closing prices of these shares on November 19, 1927, were, in practically all cases, less than the median which was used by the respondent and that the respondent erred in using the median price rather than the closing price. The Board knows of no valid reason for using the closing prices rather than the median prices. The record does not show the hour of death of the decedent, if that were material. The contention of the petitioners upon this point is not sustained.
*206 The decedent, at the date of his death, owned 1,000 common shares of Christiana Securities Co. out of 150,000 shares outstanding. The principal assets of this company consisted*988 of 840,000 shares of common stock of the duPont Co. and 70,571 shares of the common stock of the Atlas Powder Co. The respondent valued the duPont stock at $325.75 per share and the Atlas Powder Co. stock at $65.875 per share for the purpose of making his computation. The petitioners contend that this was in error for the reason that such a block of the duPont Co. stock and of the Atlas Powder Co. stock could not have been sold within any reasonable period after the date of death of the decedent at the quoted prices for these shares. The petitioners introduced the opinion evidence of competent brokers to the effect that an attempt to sell as much as 840,000 shares of the common stock of the duPont Co. in November 1927 would have forced the market price down to such an extent that probably the seller would have received on the average something between $100 and $200 per share and that no market could have been found for as much as 70,571 shares of the common stock of Atlas Powder Co. These witnesses were of opinion that from a syndicate a price of $25 per share might have been realized.
It is to be noted that our problem is not the determination of the fair market value of 840,000*989 shares of the common stock of the duPont Co. and 70,571 shares of the common stock of the Atlas Powder Co. Our problem is that of determining the value of 1,000 common shares of Christiana Securities Co. out of a total issue of 150,000 shares. Cf. .
Section 302 of the Revenue Act of 1926, quoted above, provides that there shall be included in the gross estate the "value" at the time of the decedent's death of all property, real or personal, tangible or intangible, wherever situated. Upon this point the Commissioner has prescribed article 13 of Regulations 70 (1926 edition), which, so far as material, is as follows:
ART. 13. Valuations. - (1) General. - The value of all property includable 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 property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. * * *
* * *
(3) Stocks and bonds. - The value of stocks and bonds listed upon a stock exchange should be determined by taking the mean between the highest and lowest quoted*990 selling prices upon the date of death * * *.
* * *
Stock in a close corporation should be valued upon the basis of the company's net worth, earning and dividend-panying capacity, and all other factors having a bearing upon the value of the stock. Complete financial and other data upon which the estate bases its valuation should be submitted in duplicate with the return.
*207 There is no question here of forcing on the market at the approximate death of the decedent the large block of duPont stock and Atlas Powder Co. stock held by the Christiana Securities Co. Those shares of stock were held as investments by the Christiana Securities Co. So far as anything appears in the record to the contrary, the market quotations for shares of duPont stock on November 19, 1927, represented the market value. The Christiana Securities Co. owned only 31.559 percent of the outstanding common stock of the duPont Co. There is no reason to assume that the quoted price did not represent the market price of the shares which were not held by the Christiana Securities Co. or that that value was an inflated value. It was testified that the lowest price at which duPont common stock sold*991 on the stock exchange in November 1927 was $300.75 per share. The record does not show the prices at which this stock sold immediately after the death of the decedent or in 1928. Furthermore, the record does not show the earnings of the duPont Co. for any year. The same is true of the common stock of the Atlas Powder Co. The petitioners contend that the value used by the respondent in computing the value of the holdings of the Christiana Securities Co. in Atlas Powder Co. common stock of $65.875 per share was too high. But it appears that the Christiana Securities Co. sold its 70,571 shares of common stock of the Atlas Powder Co. at private sale on November 7, 1928, at $66.67 per share.
The respondent found the value of the 1,000 shares of Christiana Securities Co. common stock owned by the decedent at the date of death to be $1,760.60 per share. The Board must assume that the Commissioner's findings were correct, in the absence of proof on the part of the petitioners that such value was incorrect. ; *992 ; ; ; . We think that the petitioners have not sustained the burden imposed upon them of establishing the unsoundness of the Commissioner's determination. His determination is therefore approved.
The decedent owned 250 of the 8,000 shares of the Delaware Realty & Investment Co. stock. These shares were returned by the executors at a value of $781.17122 per share. The respondent determined the value at $15,066.51 per share. The difference between the executors' and the respondent's valuation (except as to $4.80 per share) results entirely from the fact that the executors did not consider or value, and the respondent did consider and value, certain securities, hereinafter called annuity securities, as part of the assets of the Delaware Realty & Investment Co. These securities represent the *208 original securities transferred to this company by Pierre S. duPont and Alice*993 Belin duPont, his wife, pursuant to the annuity contract of May 31, 1924, shown in our findings as "Assets of Annuity Fund," and certain securities acquired by the company and carried in the "Annuity Reserve Fund." It is the contention of the petitioners (1) that these securities should not be treated as assets of the company in determining the value of the company's shares of stock; and (2) in the event such securities are regarded as assets of the company, the common shares of stock of the Christiana Securities Co. should not be valued at $1,760.60 per share, as has been done by the respondent, and the common stock of E. I. duPont de Nemours & Co., the common stock of the Hercules Powder Co., and the common stock of the Atlas Powder Co. should not be valued upon the basis at which such stock sold on the New York Stock Exchange at the date of the decedent's death, because of the large blocks of the stocks held by the company.
In support of their contention that the annuity securities, including both the assets of the annuity fund and of the annuity reserve fund, should not be included as an asset of the Delaware Realty & Investment Co. in valuing its stock, it is submitted that:
*994 * * * it is clear from the annuity contract that it is intended thereby that the fund at any time represented by the said securities and property shall be liable for the payment of the annuity and that the annuity is an equitable charge on the whole of said fund, and every dollar's worth thereof, as it exists at every moment of time until the death of the survivor of the two annuitants; that:
* * * The contract limits the right of Delaware Realty and Investment Company to use any income or earnings from the annuity securities to pay dividends to its stockholders or salaries to its employees or for any purpose other than making the annuity payments unless and until a reserve and guarantee fund shall have been accumulated amounting to 30% of a certain valuation therein fixed * * *;
and that "the effect of the contract was to charge and encumber the annuity securities with the contract." It is further submitted that "the fundamental error of the Commissioner consisted in treating this annuity contract as though it were an ordinary life insurance company annuity"; that "under any viewpoint, the Commissioner's determination of value necessarily contemplates that the annuity contract*995 was redeemable." It is then contended that the annuity contract is not redeemable and that the annuity securities or the proceeds which may be received upon a conversion of them must be retained by the company for the purpose of carrying out the conditions of the annuity contract; hence, that the company may not distribute them to its stockholders.
Careful consideration has been given to the above and other arguments made by the petitioners for the exclusion from the assets of *209 the Delaware Realty & Investment Co. of the so-called annuity securities for the purpose of arriving at the value of 250 shares of its capital stock. We are of the opinion, however, that the arguments are largely beside the point. Our problem here is to determine the value for estate tax purposes of 250 shares of the stock of this company out of a total of 8,000 shares. The record does not show the earnings of the company or the earnings of companies whose stocks constituted its principal assets. The record does show, however, that this company paid 400 percent dividends upon its stock in 1927 and 795 percent upon its shares of stock in 1928. Whether these dividends exhausted its earnings*996 is not shown by the record. The evidence appears to be clear that at the time the securities constituting substantially all of the assets of the annuity fund were received by the company on May 31, 1924, their value was $13,500,000. They were accepted as having that value. Under the respondent's method of valuation of these assets, that is, by valuing the shares of stock constituting the principal assets of the annuity fund and the annuity reserve fund, the value of these assets at the date of death of the decedent was $126,743.493.03. The annuity contract has attached thereto a -
Table, referred to in the foregoing indenture, of present values of the annuity thereby granted, based on American Annuitants' Select Mortality Tables (1920 - males and females), and interest rate of approximately 4 3/4 per annum, birth of male annuitant January 15, 1870, and birth of female annuitant July 15, 1871. The present value of the annuity as of May 29, 1924, is shown as $13,500,000. This value decreases in successive years. At December 31, 1927, the present value of the annuity was $12,631,428. The present value of the annuity at December 31, 1977, is placed at $450,000.
It is apparent*997 that the market value of the securities constituting the assets of the annuity fund increased enormously from April 31, 1924, to the date of the death of the decedent. The earnings of the corporation were likewise greatly in excess of what the officers of the company estimated they would be in 1924; for it is stipulated that at that time the officers of the company were of the opinion that the company would have no earnings available for distribution to its stockholders for a period of at least 10 years. This was owing to the fact that a reserve of 30 percent of the present value of the annuity must be created out of earnings before dividends were paid upon the stock of the company. The date upon which the earnings had accumulated to this extent is not shown by the record, but it is shown that dividends were being paid upon the stock in 1927 and 1928, as above indicated. We cannot doubt that *210 this annuity contract possessed by the Delaware Realty & Investment Co. was of great value to it and that its value was one of the assets to be taken into consideration in the valuation of the stock on November 19, 1927. We think there is no merit in the petitioner's contention*998 that the value of the annuity contract to the Delaware Realty & Investment Co. should not be taken into consideration in the valuation of its shares of stock. The annual payment of the $900,000 annuity to the decedent's widow was for an indefinite term. In any event, the payment of the annuity terminates upon the death of Alice Belin duPont and then the company possesses its assets free and clear of any claim by the annuitants.
In the valuation of the shares of stock of this company, the respondent used the same method as he used in the valuation of the shares of common stock of the Christiana Securities Co. set out above. He valued the shares of stock owned by the company at the prices at which the shares sold on the date of the death of decedent. It was not possible, however, so to value the common shares of the Christiana Securities Co. and the 400 shares of Longwood, Inc. The principal assets of these companies, however, consisted of listed stocks and bonds, the values of which were easily ascertainable. The respondent used the quoted prices for such securities in the determination of the value of 49,000 common shares of the Christiana Securities Co. and 400 shares of*999 Longwood, Inc. The petitioners make the same argument here as was made with respect to the valuation of the 1,000 common shares of Christiana Securities Co. owned outright by the decedent at the date of his death. For the reasons above stated, we are of the opinion that the evidence does not prove the unsoundness of the respondent's determination. Even though it may be true that the large blocks of stock carried in the annuity and annuity reserve funds could not readily be sold at the prices determined by the respondent, this does not prove that the value of 250 shares of the Delaware Realty & Investment Co. was any less than $15,066.51 per share, the amount determined by the respondent.
It should be noted, however, that in the determination of the value of this stock the respondent considered as a liability of the Delaware Realty & Investment Co. the present worth of an ordinary annuity of $900,000 per annum to two persons of the ages of Pierre S. duPont and his wife, Alice Belin duPont, and to the survivor, as of the date of death of William Winder Laird on November 19, 1927, at $12,475,139.13. The stipulation is to the effect that on this date such present worth was $12,658,151. *1000 In any event, the value of each share of stock of the Delaware Realty & Investment Co. should be recomputed, giving effect to the increased liability shown by the stipulation.
Aside from the error above noted, the determination of the respondent of the value of 250 shares of stock of the Delaware Realty & Investment Co. is sustained.
*211 The final question for determination is the value of 143 shares of the Glenden Land Co. This stock was returned at a value of $340.21 per share and increased by the respondent to $397.31. The only allegation of error upon this point made by the petitioners is that there were included in the assets of this company certain life insurance policies transferred by the decedent to this company at some time prior to his death. The company collected insurance on these policies in the amount of $1,039,288.37. The petitioners contend that no part of this amount should be included in the assets of the company.
The evidence does not show whether these policies had a surrender value. The contention is simply that they did not constitute an asset of the company which is to be taken into consideration in the determination of the value of the*1001 stock. We think that this contention is without merit. We can not doubt that they had some value to the company, even though they had no cash surrender value.
In , we said:
* * * We can not as a matter of law say that the valuation of a share of stock must exclude such an asset [life insurance policy]. That the right of the beneficiary under a policy is an asset seems clear. ; . Whether at any given time it is worth its face or its surrender value or something between is a matter of fact requiring proof. * * *
To the same effect is , wherein the Board held that the shares of stock of the Bulger Block Coal Co. were to be valued as of the date of the decedent's death and that insurance upon the decedent's life, payable to the company, was to be included in the company's assets at its value at the time of decedent's death, which was its face value. We there cited *1002 ; affd., .
For lack of proof that the value of the 143 shares of Glenden Land Co. was less than the amount determined by the respondent, the respondent's determination is sustained.
Reviewed by the Board.
Judgment will be entered under Rule 50.