*3785 1. On the evidence, it is held that the value determined by the Commissioner of certain shares of stock in the Penberthy Injector Co., of Detroit, as of the date of decedent's death, is excessive and the proper valuation thereof is determined.
2. The Commissioner's action in including in decedent's gross estate the value of certain stocks transferred in trust prior to the effective date of the Revenue Act of 1921, which was in force at the time of decedent's death, on the theory that the conveyance was intended to take effect in possession or enjoyment at or after his death, is reversed.
*535 This is a proceeding for the redetermination of a deficiency in estate tax of the estate of Stephen O. Johnson, deceased, in the amount of $24,057.84.
The petitioners allege that the Commissioner erred in valuing the stock of the Penberthy Injector Co., of Detroit, at $285 per share, at the time of decedent's death, instead of $117, as valued by them, and they further allege that the Commissioner erred in including in the*3786 gross estate the value of certain secrities which the decedent had, under the circumstances and conditions hereinafter appearing, transferred in trust.
FINDINGS OF FACT.
Homer S. Johnson and Charles B. Johnson, residents of the State of Michigan, are the executors of the estate of Stephen O. Johnson, deceased.
Stephen O. Johnson died on May 17, 1924. At the time of his death he owned 614 shares, par value $25, of the common stock of the Penberthy Injector Co., of Detroit, which had at that time a book value of $204.17 per share.
The Penberthy Injector Co., whose stock has always been closely held and of which there have been no sales, either public or private, to evidence value, has been engaged for several years, in addition to the manufacture of injectors for boilers, in the development and manufacture of special appliances for automobiles as well as other specialties.
The business of developing, manufacturing and marketing special appliances is subject to unusual hazards due to the fact that an appliance may be found unmarketable for various reasons. Such was the experience of the Penberthy Injector Co., and in years prior to 1921 it had incurred losses in the development*3787 of appliances, which either were produced in small quantities or not produced at all. The losses thus incurred were not charged off in those years, but in 1921 the losses previously sustained, together with a loss in inventory sustained in that year, were charged off, the total amount being $337,570.81. While the loss charged off in 1921 was abnormal in character when compared with the experience of the company in years prior and subsequent thereto, it was occasioned in part by an accumulation of losses sustained in previous years in addition to the *536 general market conditions causing the inventory loss. The net profits of the company over the period of years from 1914 to 1925, inclusive, were:
| 1914 | $1,336.92 |
| 1915 | 48,292.33 |
| 1916 | 94,560.46 |
| 1917 | 86,432.91 |
| 1918 | 67,394.26 |
| 1919 | 25,431.44 |
| 1920 | $77,198.45 |
| 1921 (loss) | 337,570.81 |
| 1922 | 100,651.04 |
| 1923 | 187,495.23 |
| 1924 | 150,000.00 |
| 1925 | 176,000.00 |
The average net profit, including the loss of 1921, for the ten-year period from 1914 to 1923, inclusive, was $35,122.21, and for the same period, exclusive of the 1921 loss, it was $68,879.30. The average net profit, including the loss of 1921 for*3788 the twelve-year period from 1914 to 1925, inclusive, was $56,435.18, and for the same period, exclusive of the 1921 loss, it was $84,566.08.
The total dividends paid on common stock during the ten-year period from 1914 to 1923, inclusive, were in the amount of $145,000, or an average of $7.50 per share per annum. However, in the years 1918, 1921, 1922, and 1923 dividends were not paid on common stock. Whether dividends were paid in 1924 and 1925 is not disclosed.
In July, 1919, there were issued 5,000 shares, par value $100, of 8 per cent preferred stock, payable quarterly. On December 31, 1923, preferred stock in the amount of $394,400 was outstanding, and on May 17, 1924, the amount was $385,900, the dividends thereon amounting to $30,872 annually.
The balance sheet of the Penberthy Injector Co. as of December 31, 1923, is as follows:
| ASSETS. | |||
| Property account: | |||
| Land, buildings, machinery and equip- | |||
| ment, at cost - | |||
| Land | $18,185.41 | ||
| Buildings | 83,501.68 | ||
| Machinery and equipment | 260,759.01 | ||
| Tools and patterns | 65,299.73 | ||
| Office equipment | 19,500.15 | ||
| Automobiles and delivery equipment | 5,467.06 | ||
| Together | 452,713.04 | ||
| Less reserve for depreciation | 172,299.88 | ||
| 280,413.16 | |||
| Patents, good will, selling rights, etc | 87,914.72 | ||
| 368,327.88 | |||
| NOTE: The land, having a book value of | |||
| $19,096.30, has been valued by inde- | |||
| pendent appraisers as at December 31, | |||
| 1921, at $190,575. | |||
| Investments (at cost): | |||
| Land contracts receivable | $21,464.27 | ||
| Stock of House Financing Corporation | 11,300.00 | ||
| Other investments | 3,400.00 | ||
| $36,164.27 | |||
| Current assets: | |||
| Inventories as taken and certified by | |||
| company officials, at cost or market, | |||
| whichever is lower | 502,252.54 | ||
| Notes and accounts receivable: | |||
| Customers | $126,344.56 | ||
| Officers and employees | 32,879.37 | ||
| Sundry debtors | 1,453.58 | ||
| Together | 160,677.51 | ||
| Less reserve for doubtful accounts | 11,000.00 | ||
| 149,677.51 | |||
| Cash on hand and in banks | 58,563.54 | ||
| 710,493.59 | |||
| Deferred charges to future operations: | |||
| Prepaid taxes | 13,142.58 | ||
| Prepaid interest | 1,335.88 | ||
| Development expense | 6,270.39 | ||
| Unexpired insurance premiums and mis- | |||
| cellaneous | 4,006.02 | ||
| 24,754.87 | |||
| 1,139,740.61 | |||
| LIABILITIES | |||
| Capital stock: | |||
| 8% cumulative preferred authorized and | |||
| issued, 5,000 shares of $100 each | $500,000.00 | ||
| Deduct - | |||
| 1,050 shares retired | $105,000.00 | ||
| 6 shares held for retirement | 600.00 | ||
| 105,600.00 | |||
| Outstanding | 394,400.00 | ||
| Common - | |||
| Authorized and issued, 2,000 shares of | |||
| $25.00 each | 50,000.00 | ||
| $444,400.00 | |||
| Land contracts payable | 19,191.98 | ||
| Current liabilities: | |||
| Notes payable - bank loans | 250,000.00 | ||
| Accounts payable - | |||
| Trade | $24,813.14 | ||
| Sundry creditors | 17,650.17 | ||
| $42,463.31 | |||
| Accrued pay rolls and bonus, etc | 25,338.55 | ||
| 317,801.86 | |||
| Surplus: | |||
| Balance at January 1, 1923 | 204,333.07 | ||
| And net profits for the year ending | |||
| December 31, 1923 | 187,495.23 | ||
| Together | 391,828.30 | ||
| Deduct dividends paid on preferred | |||
| stock, 8% | 33,481.53 | ||
| 358,346.77 | |||
| 1,139,740.61 | |||
*3789 *538 The real estate shown on the foregoing balance sheet, as land $18,185.41 and buildings $83,501.68, had a fair market value at the date of decedent's death of approximately $267,000.
In their return, the executors reported the value of the stock of the Penberthy Injector Co., held by decedent at the time of his death, to be $117 per share. The executors arrived at that value by capitalizing at 15 per cent the amount of $35,122.21 determined by them to be the average net profit over the period of 1914 to 1923, inclusive.
The Commissioner, in determining the deficiency, increased the value of the 614 shares from $117 to $285 per share. In arriving at this value, the Commissioner, among other things, did not consider the loss charged off in 1921 as a factor bearing on the value of the stock.
On October 11, 1918, the decedent voluntarily placed 988 shares of stock of the Penberthy Injector Co., of Detroit, and 800 shares of stock of the Penberthy Injector Co., ltd., of Canada, in trust for his life and directed the trustees to pay to him "during his life from the dividends on said stock in each year such sum as with the dividend by him received in said year on stock*3790 in said companies standing in his name and any salary received from such companies shall equal the sum of Forth Thousand Dollars." At the decedent's death the corpus of the trust was to be distributed by the trustees among his children.
On October 17, 1921, the decedent voluntarily placed 500 shares of the stock of the Penberthy Injector Co., Ltd., of Canada, in trust for the term of his life and directed the trustee to pay the dividends on said stock to Alice J. MacBeth during his, the decedent's, life. The decedent reserved the right, in event that Alice J. MacBeth predeceased him, to change the beneficiary of the trust, and, in the event of failure to make such change of beneficiary, the stock should be added to that comprising the trust of October 11, 1918. On the death of the decedent, the corpus of the trust was to be distributed in the manner indicated and to the beneficiaries designated in the trust agreement.
The shares of stock which were transferred in trust as above described were not included by the executors in the gross estate in the return which they filed for estate-tax purposes.
In determining the deficiency, the Commissioner included, under the provisions*3791 of section 402(c) of the Revenue Act of 1921, in the gross estate the shares transferred in trust as transfers intended to take effect in possession or enjoyment at or after the decedent's death. In respect of these shares, the Commissioner determined the value of the stock of the Penberthy Injector Co., of Detroit, to be *539 $285 per share, and the value of the stock of the Penberthy Injector Co., Ltd., of Canada, to be $110 per share.
OPINION.
LOVE: The petitioners contend that the value of the common stock of the Penberthy Injector Co., of Detroit, as of the date of decedent's death, was $117 per share. The Commissioner, on the other hand, insists that the value of the stock in question had at the time of decedent's death a value of $285 per share.
The stock of the corporation here in question was closely held and we are, therefore, not able to value it upon the basis of sales in the open market. We must, then, look to and be guided by the facts as disclosed by the record in arriving at a fair market value.
The evidence shows that since its organization, with the exception of the year 1921, the corporation prospered. But it must be observed that by its very*3792 nature the business was subject to more than usual business hazards. It had been the experience of the corporation that the business success of any specialty, upon which large amounts had been expended in development, was at best problematical and contingent upon many economic factors. A device or specialty, after extensive development, might be valuable one day and shortly thereafter, having been superseded by an improved device, worthless. Thus the earning power of the corporation, contingent as it is upon many variable economic factors, can not be said to possess normal stability.
In view of all of the evidence, we are of the opinion that the common stock of the Penberthy Injector Co. would not sell on the open market for more than $160 per share and, accordingly, we find that amount to be its value as of the date of decedent's death.
In determining the deficiency herein, the Commissioner included in the gross estate the value of the securities comprising the trusts of October 11, 1918, and October 18, 1921, on the theory that the transfers were intended to take effect in possession or enjoyment at or after the decedent's death.
Assuming, for the purpose of this opinion*3793 only, that the transfers were so made, the Board is of the opinion that the Commissioner erred in including the value of the securities in the gross estate.
Section 402(c) of Title IV of the Revenue Act of 1918 was repealed by section 1400(a) of the Revenue Act of 1921 as of the date of its passage, to wit, November 23, 1921. It is evident, therefore, that the transfers here in question were made before the effective date of section 402(c) of the Revenue Act of 1921 under the provisions of which the Commissioner has included the value of the securities *540 comprising the trusts in the decedent's gross estate. We stated in , that:
Section 402(c) of the Revenue Act of 1921 is identical with section 402(c) of the Revenue Act of 1918, which the Supreme Court has held, in so far as it requires that there shall be included in the gross estate the value of property transferred by a decedent prior to its passage merely because the conveyance was intended to take effect in possession or enjoyment at or after his death, is arbitrary, capricious, and amounts to confiscation, and to such extent is unconstitutional. We can see*3794 no reason for reaching a different conclusion with respect to the 1921 Act from that which was reached with respect to the 1918 Act. Furthermore, we think that the transfer herein involved is of the character of that referred to by the Supreme Court in .
The Board is of the opinion, therefore, that the Commissioner's action taken with respect to the transfers here in question was erroneous, and upon the above-quoted authority, it is reversed.
Judgment will be entered on 15 days' notice, under Rule 50.