1938 BTA LEXIS 812">*812 The value for estate tax purposes on November 19, 1927, of 1,000 shares of Christiana Securities Co. common stock and 250 shares of Delaware Realty & Investment Co. stock determined.
38 B.T.A. 926">*926 This proceeding is before the Board pursuant to a mandate of the Circuit Court of Appeals for the Third Circuit, which remanded the case reported at 29 B.T.A. 196">29 B.T.A. 196 to the Board "for further proceedings in accordance with treasury requlations in redetermining the value of the stock in question."
The principal question in issue before the Board in the case reported at 29 B.T.A. 196">29 B.T.A. 196 was the value for estate tax purposes on November 19, 1927, the date of the death of William Winder Laird, of 1,000 shares of the common stock of the Christiana Securities Co. (hereinafter sometimes referred to as the Christiana Co.), and 250 shares of the Delaware Realty & Investment Co. (hereinafter sometimes referred to as the Delaware Co.). In the determination of the deficiency the respondent valued the Christiana1938 BTA LEXIS 812">*813 shares at $1,760.60 each and the Delaware shares at $15,066.51 each. At the hearing of the proceeding counsel for the respondent conceded an error which affected his determination of the value of the Delaware shares and the 38 B.T.A. 926">*927 value was redetermined by the Board at $15,043.66 each. The Board sustained the determinations of the respondent because of a failure of proof upon the part of the petitioners to show a value of less than $1,760.60 for each share of the Christiana Co. stock and of $15,043.66 for each share of the Delaware Co. stock on November 19, 1927. After the decision by the Supreme Court in Helvering v. Taylor,293 U.S. 507">293 U.S. 507, the Third Circuit reversed the decision of the Board and remanded the case as above noted. Laird v. Commissioner, 85 Fed.(2d) 598.
In its opinion the Circuit Court of Appeals stated:
The question involved in this case is whether or not the determination of the Commissioner was made in accordance with the applicable statutory provisions and treasury regulations.
The Christiana Company and the Delaware Company are both close corporations. Their stock has never been listed or dealt in on any1938 BTA LEXIS 812">*814 stock exchange or market. * * *
The court then quoted the applicable provisions of the Revenue Act of 1926 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; * * *
The court then quoted a portion of Treasury Regulations 70, article 13(3), as follows:
Stock in a close corporation should be valued upon the basis of the company's net worth, earning and dividend-paying capacity, and all other factors having a bearing upon the value of the stock. * * *
The court held that the respondent's determination of values of the stocks in question - on the basis of the per share value at current market prices of the net assets of each of the companies - not only ignored, but directly violated these regulations, and said:
* * * Such stock must be based upon the company's worth, its earning and dividend-paying capacity, and all other factors which have a bearing upon the stock, one of which might be the mean value of the selling price on1938 BTA LEXIS 812">*815 a particular day of the stock which it owns. Neither the Commissioner nor the Board gave any consideration whatever to the earning and dividend-paying capacity of the Christiana and Delaware stock. * * *
The court also observed:
* * * It is common knowledge that the price at which stocks sold in 1927, 1928 and 1929 did not at all reflect their true worth. The earning and dividend-paying capacity of many stocks during that period was less than one per cent per annum of their selling price. * * *
38 B.T.A. 926">*928 Pursuant to the mandate, the Board gave the petitioners and the respondent an opportunity to present additional evidence as to the value of the blocks of stock of Christiana Co. and of the Delaware Co. owned by the decedent at the date of his death, November 19, 1927. At such hearing both the petitioners and the respondent presented much documentary evidence and the testimony of expert witnesses who had spent much time in studying the situation.
FINDINGS OF FACT.
1. The 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.
2. At the time of his1938 BTA LEXIS 812">*816 death the decedent was the owner, among other items of property, of 1,000 shares of the common stock of the Christiana Securities Co. and of 250 shares of the stock of the Delaware Realty & Investment 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 Co. at $800 per share and the stock of the Delaware Co. at $781.17122 per share. The respondent in determining the deficiency in estate tax valued the common stock of the Christiana Co. at $1,760.60 per share and the stock of the Delaware Co. at $15,066.51 per share.
3. The Christiana Co. was a family holding corporation, organized in 1915. Its principal asset has at all times consisted of common shares of stock of the E. I. du Pont de Nemours & Co. Its capital stock from 1923 to 1927, inclusive, consisted of 150,000 shares of common stock of the par value of $100 each and 150,000 shares of 7 percent preferred stock of a like par value. On November 19, 1927, it had 35 common stockholders and 115 preferred stockholders. Its officers and directors were the principal officers of E. I. du Pont de Nemours1938 BTA LEXIS 812">*817 &, Co. (sometimes hereinafter referred to as the du Pont Co.). The common stock of the company has never been listed on any stock exchange and has never been dealt in in any market.
4. The books of the Christiana Co. show total assets at the close of each year as follows:
| 1923 | $41,408,164.12 |
| 1924 | 39,619,030.82 |
| 1925 | 39,712,269.76 |
| 1926 | 39,506,428.65 |
| 1927 | 41,256,763.38 |
Its principal asset on December 31, 1923, consisted of 301,256 shares of du Pont common stock carried at $36,448,695.37, and on December 38 B.T.A. 926">*929 31, 1924, of 300,000 shares of this stock carried at $36,293,516.57. The number of shares was increased to 420,000 by a stock dividend in 1925 and to 840,000 by a split-up of the shares 2 for 1 in 1926. The stock was, however, carried on the books of account at $36,293,516.57 at the close of each of the years 1924 to 1927, inclusive. Its next important asset consisted of shares of stock of the Atlas Powder Co. It owned 49,500 shares at the end of each of the years 1923 to 1926, inclusive, which were carried on the books at $2,104,410. The number of shares was increased to 70,571 in 1927, which appear on the balance sheet at December 31, 1927, at1938 BTA LEXIS 812">*818 a cost or valuation of $3,368,670.
The only liabilities of the company at December 31, 1923 (exclusive of capital stock and surplus) amounted to $6,300,000, $6,000,000 of which consisted of collateral trust gold bonds. At December 31, 1924, its liabilities amounted to $3,962,500, of which $3,000,000 consisted of collateral trust gold bonds. Its only liabilities at December 31, 1925, amounted to $2,662,500, of which $2,400,000 consisted of collateral trust gold bonds. The only liabilities at December 31, 1926, and December 31, 1927, consisted of dividends payable on preferred stock of $262,500.
5. The net earnings of the Christiana Co. were as follows:
| 1923 | $1,786,569.86 |
| 1924 | 2,198,366.70 |
| 1925 | 3,643,238.94 |
| 1926 | 9,244,158.89 |
| 1927 | 13,300,334.73 |
Practically all of the net earnings for all years consisted of dividends received upon the company's holdings of du Pont Co. common stock. The amount thus received in 1927 was $13,020,000.
6. The net earnings of the Christiana Co. per share of common stock and the dividends paid per share of common stock for the years 1923 to 1927, inclusive, were as follows:
| Year | Earnings | Dividends |
| 1923 | $4.91 | $4 |
| 1924 | 7.65 | 4 |
| 1925 | 17.29 | 8 |
| 1926 | 54.63 | 40 |
| 1927 | 81.67 | 70 |
1938 BTA LEXIS 812">*819 The average annual earnings per share of common stock for the years 1923 to 1927, inclusive, were $33.23, and for the years 1925 to 1927, inclusive, $51.20. The average dividends paid per share of common stock for the years 1923 to 1927, inclusive, were $25.20 and for the years 1925 to 1927, inclusive, $39.33.
38 B.T.A. 926">*930 7. The method by which the respondent determined the value of the common stock of the Christiana Co. as of the date of the 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 and 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 |
1938 BTA LEXIS 812">*820 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.
In making this computation the respondent used the median between the high and low prices at which common stock of the E. I. de Pont 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.
8. During the years 1923 to 1927, inclusive, the du Pont Co. owned a substantial block of the common stock of the General Motors Corporation. Its balance sheet in 1927 shows as follows:
| Investments: | |
| General Motors Corporation Common Stock - equivalent to 3,992,488 shares carried at $30.00 per share (3,937,500 shares of which are represented by E. I. du Pont de Nemours & Company's 70% interest in General Motors Securities Company) | $119,774,640.00 |
The income of the du Pont Co. from dividends upon the stock of the General Motors Corporation and the earnings of the du Pont Co. available for common dividends (including dividends received from 38 B.T.A. 926">*931 the General Motors Corporation in the computation) for the years 1923 to 1927, inclusive, 1938 BTA LEXIS 812">*821 were as follows:
| Year | From General Motors Corporation dividends | Total earnings available for du Pont common stock |
| 1923 | $8,346,800 | $14,207,735.21 |
| 1924 | 6,423,000 | 12,926,619.48 |
| 1925 | 9,296,706 | 19,928,626.56 |
| 1926 | 23,621,946 | 37,199,164.45 |
| 1927 | 28,941,598 | 41,113,968.36 |
Earnings for 1926 include approximately $2,000,000 of interest received upon refund of taxes overpaid for prior years.
The du Pont Co. was the owner of stocks in a large number of other companies. When it owned the majority of the common stock of another company it reported as its own income its proportionate share of the total earnings in that company. When it was a minority stockholder in another company it reported as its own income only the dividends received from the other company. The companies in which the du Pont Co. was a minority stockholder included the General Motors Corporation, United States Steel Corporation, and several foreign corporations in which the undistributed earnings were unimportant. Some of such corporations, such as the General Motors Corporation, in turn received dividends from other companies which had undistributed earnings in excess of their dividend1938 BTA LEXIS 812">*822 payments.
9. The "equity" per share of common stock of the Christiana Co. in the undistributed earnings of all corporations whose common stock was represented, directly or indirectly, in the portfolio of securities held, including in such "equity" the pro rata share of the du Pont Co. in the undistributed earnings of the General Motors Corporation and its subsidiaries, for the years 1923 to 1927, inclusive, was approximately as follows:
| 1923 | $37.60 |
| 1924 | 19.32 |
| 1925 | 57.37 |
| 1926 | 64.85 |
| 1927 | 49.18 |
The average "equity" in such undistributed profits of such corporations for the years 1923 to 1927, inclusive, was $45.66 per share of common stock of the Christiana Co., and for the years 1925 to 1927, inclusive, was $57.13 per share.
10. The net earnings of the Christiana Co. and of the Delaware Co. were derived principally from the du Pont Co., which in turn derived more than 60 percent of its earnings from the General 38 B.T.A. 926">*932 Motors Corporation. During 1927 and for many years prior thereto, the Christiana Co. owned 31.559 percent of the du Pont Co.'s common shares, which in turn owned 22.975 percent of the common stock of the General Motors Corporation. 1938 BTA LEXIS 812">*823 On August 10, 1925, the du Pont Co. distributed a 40 percent stock dividend on its common shares and in September or October 1926 each stockholder received two shares of no par common stock for each share surrendered. Thereafter, the number of common shares outstanding was 2,661,658, of which the Christiana Co. owned 840,000.
The net earnings on the common stock of the du Pont Co. for each calendar year, the amount earned on each share, the dividends paid, and the dividends paid on each share upon the basis of the 2,661,658 shares outstanding on December 31, 1927, are shown by the following table:
| Year | Net earnings | Earnings per share | Dividends paid | Dividends paid per share |
| 1923 | $14,207,735.21 | $5.34 | $6,177,273.50 | $2.32 |
| 1924 | 12,926,619.48 | 4.86 | 7,603,540.00 | 2.85 |
| 1925 | 19,928,626.56 | 7.49 | 11,404,429.50 | 4.28 |
| 1926 | 37,199,164.45 | 13.99 | 27,947,409.00 | 10.50 |
| 1927 | 41,113,968.36 | 15.45 | 41,255,696.00 | 15.50 |
The average net earnings per common share for the five-year period 1923 to 1927 upon the basis of he number of shares outstanding on December 31, 1927, were $9.42 per share, and the average amount of dividends paid each year was $7.09 per1938 BTA LEXIS 812">*824 share. For the three-year period 1925 to 1927 the average net earnings per common share were $12.30 per share, and the average dividend paid was $10.09 per share.
11. The following table shows the ratio of earnings of du Pont common stock (upon the basis of the number of shares outstanding in 1927) to the average stock exchange prices. The average price is the median between the high and low prices on the exchange for each year:
| Year | Average price | Earnings per share | Percent earned on average price |
| 1923 | $45 1/2 | $5.34 | 11.73 |
| 1924 | 45 1/2 | 4.86 | 10.70 |
| 1925 | 91 3/4 | 7.49 | 8.22 |
| 1926 | 139 | 13.99 | 10.09 |
| 1927 | 256 | 15.45 | 6.03 |
For the entire five-year period the average price at which the shares sold (based upon the median between the high and low price of each year) is $116; the average net earnings per share were $9.43; and the percent earned on the average for the five-year period was 8.13.
38 B.T.A. 926">*933 12. The earnings of the General Motors Corporation available for common stock, the earnings per common share upon the basis of the number outstanding in 1927, the cash dividends paid on the common stock, and the amount paid per common share upon1938 BTA LEXIS 812">*825 the basis of the number of shares outstanding in 1927 follows:
| Year | Earnings available for common stock | Amount per share | Cash dividends paid on common stock | Amount per share |
| 1923 | $65,121,584 | $3.74 | $24,772,026 | $1.42 |
| 1924 | 44,350,853 | 2.55 | 25,030,632 | 1.44 |
| 1925 | 108,376,286 | 6.23 | 61,935,221 | 3.56 |
| 1926 | 178,585,895 | 10.26 | 103,930,993 | 5.97 |
| 1927 | 225,995,496 | 12.99 | 134,836,081 | 7.75 |
The common shares of the General Motors Corporation sold on November 19, 1927, the date of the death of the decedent, at $132 to $132 5/8 per share. The yield on the market price of this listed stock at the date of the death of the decedent, based upon the earnings of the company for the entire year 1927 available for the common stock, was 9.84 percent.
13. Prior to 1925 the Ford Motor Co. produced more than half of all the automobiles produced in the United States. In 1924 it produced 1,993,419 cars or 53 percent of the total, compared with 587,341 produced by the General Motors Corporation, and 1,157,026 produced by all other manufacturers. By 1926 General Motors Corporation, which had entered the field with low priced car, the Chevrolet, began to make serious1938 BTA LEXIS 812">*826 inroads on the business of the Ford Motor Co., which was still marketing "Model T" cars. By the early part of 1927 it was clear that the Ford Motor Co. was going to abandon its Model T car and design a new one. During this period, and especially during most of 1927, the Ford Motor Co. was practically out of production. The following tabulation shows the number of automobiles produced in the United States for the years 1925, 1926, and 1927:
| Automobiles produced | |||
| 1925 | 1926 | 1927 | |
| Ford | 1,990,995 | 1,810,029 | 454,601 |
| General Motors | 835,902 | 1,234,850 | 1,562,748 |
| All others | 1,600,903 | 1,460,782 | 1,563,081 |
| Total | 4,427,800 | 4,505,661 | 3,580,380 |
14. The fair market value of the 1,000 shares of the common stock of the Christiana Securities Co. owned by the decedent at the date of his death on November 19, 1927, was $1,000 per share, or a total of $1,000,000.
38 B.T.A. 926">*934 15. The Delaware Realty & Investment Co. was organized under the laws of Delaware in 1916 and its entire capital stock was held by 29 members of the du Pont family as of the date of decedent's death. There have been no sales of this stock to establish its market price.
16. The1938 BTA LEXIS 812">*827 principal business of this company was and is the management and operation of the annuity contract described below. One active officer of the corporation was paid a salary of $5,000 per annum.
17. Assets of the Delaware Co. on November 19, 1927, as shown by its books, exclusive of certain assets treated by the company as supporting its annuity contract, consisted of cash of $9,369.77 and 19,200 shares of du Pont Co. common stock. The liabilities of the company on the same date, exclusive of the annuity contract liability, were, as shown by its books, capital stock, $800,000, and surplus, $11,879.72.
18. On May 31, 1924, the Delaware Co., as party of the first part, and Pierre S. du Pont and Alice Belin du Pont, his wife, of Wilmington, Delaware, parties of the second part, entered into a contract whereby, for the consideration named therein, the Delaware Co. agreed to pay to Pierre S. du Pont and Alice Belin du Pont, and to to the survivor thereof, an annuity of $900,000 per annum. In case of breach of the contract the parties of the second part were given the right by the contract to have same enforced specifically or to be secured against future breaches, or to have a1938 BTA LEXIS 812">*828 receiver appointed for the company in order to have its assets applied to performance of the contract. A further right was given to the annuitants, but it was purely optional with them alone (in case of breach of the contract by the company), "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," for which purpose alone 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 Co. the following securities:
44,000 shares, Christiana Securities Co., 7% preferred
49,000 shares, Christiana Securities Co., common
12,500 shares, E. I. du Pont de Nemours & Co., debenture
24,000 shares, E. I. du Pont de Nemours & Co., common
12,000 shares, Hercules Powder Co., common
11,000 shares, Atlas Powder Co., common
400 shares, Longwood, Inc.
Lands in Chester County, Pennsylvania, under lease to Longwood, Inc. (not including residence and 50 acres surrounding same)
which property was accepted by the Delaware1938 BTA LEXIS 812">*829 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 Heirs, Executors, Administrators 38 B.T.A. 926">*935 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 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 income or earnings shall be applied to the payment of the said annuity1938 BTA LEXIS 812">*830 and if, at any time before the termination of the said annuity, there shall be an excess of such income or earnings 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 party 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; * * *
19. The capital stock of the Delaware Co. consisted of 8,000 shares of the par value of $100 per share. Of these shares1938 BTA LEXIS 812">*831 the decedent owned 250 shares. Neither Pierre S. du Pont nor Alice Belin du Pont is or ever was a shareholder of this company.
20. The books of account of he Delaware Co. show total assets at the close of each year as follows:
| 1924 | $14,364,277.76 |
| 1925 | 14,699,338.25 |
| 1926 | 17,175,752.86 |
| 1927 | 18,589,561.31 |
The only liability of the company, aside from capital stock at the end of each year of $800,000, consists of reserves claimed to be required under the annuity contract as follows:
| December 31, 1924 | $13,568,500.00 |
| December 31, 1925 | 13,895,500.00 |
| December 31, 1926 | 16,366,755.23 |
| December 31, 1927 | 17,769,857.78 |
21. In the valuation of the stock of the Delaware Co. for estate tax purposes, the petitioners excluded the value of the securities which had been transferred by Pierre S. du Pont to support the annuity contract and also the assets which constituted the annuity reserve fund; and petitioners also excluded from their calculations the liability of the annuity contract. The method by which the 38 B.T.A. 926">*936 respondent determined the value of the shares of stock of this company was by a reconstruction of the balance sheet of the company1938 BTA LEXIS 812">*832 as follows:
| 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 | |
| $126,743,493.03 | ||
| Deduct - Present worth of annuity of $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 |
1938 BTA LEXIS 812">*833 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.
38 B.T.A. 926">*937 22. The net earnings of the Delaware Co. for the years 1925 to 1927, inclusive, were as follows:
| 1925 | $650,762.49 |
| 1926 | 2,910,775.61 |
| 1927 | 5,134,315.45 |
The amounts so stated include all earnings from its own capital assets and also from both the annuity fund assets and the annuity fund reserve assets. In computing such earnings there has been deducted the amount by which the annual payment for the annuity exceeds the decrease in the present value of the annuity on the basis of the table attached to the annuity contract.
23. The net earnings of the Delaware Co. per share of stock and the dividends paid per share of stock for the years 1925 to 1927, inclusive, were as follows:
| Year | Earnings | Dividends |
| 1925 | $81.35 | $9 |
| 1926 | 363.85 | 24 |
| 1927 | 641.79 | 435 |
The average annual earnings per share of stock for the years 1925 to 1927, inclusive, were $362.33. The average annual dividends per share1938 BTA LEXIS 812">*834 of stock for the same three-year period were $156.
24. All of the capital stock of Longwood, Inc., was owned by the Delaware Co. One of the principal assets of Longwood was real estate. Other assets included life insurance policies on the life of Pierre S. du Pont, stocks of bank and trust companies, various preferred stocks, and notes. Its net income for the years 1925 to 1927, inclusive, was as follows:
| 1925 | $11,045.14 |
| 1926 | 72,493.30 |
| 1927 | 87,475.23 |
The respondent determined the fair market value of the capital stock of Longwood, Inc., to be $5,299,680.55. This valuation was based upon valuing the assets of that corporation, rather than upon its earnings. At the rehearing, the valuation witnesses for the petitioners adopted the respondent's valuation of such stock for the purpose of computing the value of the stock of the Delaware Co.
25. The fair market value of the 250 shares of stock of the Delaware Co. owned by the decedent at the date of his death on November 19, 1927, was $8,500 per share, or a total of $2,125,000.
OPINION.
SMITH: It is the petitioners' contention under the mandate proceeding in this case that the value for estate tax1938 BTA LEXIS 812">*835 purposes of the 1,000 common shares of Christiana Securities Co., and of the 250 shares of 38 B.T.A. 926">*938 Delaware Realty & Investment Co. on November 19, 1927, the date of the death of the decedent, was $758 per share and $6,046 per share, respectively. The respondent, on the other hand, contends that the value of the Christiana Co. shares at the date of the death of the decedent was $1,760.60 per share and of the Delaware Co. shares $15,043.66 per share, or the same amounts as originally determined. He contends that "upon the basis of the company's net worth, earning and dividend-paying capacity, and all other factors having a bearing upon the value of the stock", as required by article 13(3) of Regulations 70, the values are as claimed by him; furthermore, that the evidence presented before the Board at the rehearing warrants such values.
The question before the Board is essentially one of fact. It is a difficult one to answer. There have never been any sales of the shares of stock of either of the corporations in question which would throw light upon the question. No case coming before the Board or the courts where the facts are comparable has been cited.
To prove their1938 BTA LEXIS 812">*836 contentions the petitioners have presented the evidence of a number of witnesses, some of whom have made an extended study of the situation. As a result of their studies, two of the witnesses have expressed the opinion that the value of the Christiana Co. shares at the date of death was $975 per share and of the Delaware Co. shares $7,841 per share. The basis of their estimate of $975 per share for the Christiana Co. shares is that the average annual earnings for the three years 1925, 1926, and 1927, including the dividends and interest received by the Christiana Co. plus the undistributed earnings of underlying companies, were $108.33 per share. They have multiplied these average annual earnings by nine in order to obtain the value of $975 per share. In a similar manner they have valued the shares of the Delaware Co. by adding to average annual earnings received of $349.41 per share for the same three-year period (should be $362.33 per share) their estimate of the undistributed earnings of the underlying companies of $548.02 per share and multiplied the total by eight, which gave a value of $7,179 per share, to which sum was added $662.26 per share which was the value determined1938 BTA LEXIS 812">*837 by the respondent for the shares of Longwood, Inc., owned by the Delaware Co. The result is a fair market value of the Delaware Co. shares of $7,841 per share. These witnesses were of the opinion that the earnings of the Delaware Co., including the undistributed earnings of the underlying companies, should be multiplied by eight rather than by nine, since it was conceivable that a part of the undistributed earnings of the underlying companies would never be received by the Delaware Co. by reason of the taxation of those earnings as they passed through the several corporations 38 B.T.A. 926">*939 to the treasury of the Delaware Co., and also by reason of the fact that the Delaware Co. had an undetermined liability in respect of that company's annuity contract which required the payment of an annuity of $900,000 for an undetermined period.
Another witness for the petitioners was of the opinion that the fair market value of the Christiana Co. shares on November 19, 1927, was $758 per share and of the Delaware Co. shares $6,046 per share. He was of the opinion that the other witnesses for the petitioners erred in multiplying the earnings of the Christiana Co. shares by nine and of the Delaware1938 BTA LEXIS 812">*838 Co. by eight in obtaining their valuations. He reached his valuations by multiplying the average annual earnings for the three-year period 1925 to 1927, inclusive, of the Christiana Co. shares by seven and of the Delaware Co. shares by six.
The respondent, on the other hand, has presented the testimony of two valuation witnesses, one of whom was of the opinion that the value of the Christiana Co. shares on November 19, 1927, was $2,095 per share, based solely upon the earnings attributable to reasonably similar stocks, and after consideration of the fair market value previously determined on the basis of the net worth of the assets, which was $1,760.60 per share. He considered the asset basis of valuation as the most reliable measure of value and stated his opinion that $1,760.60 was the minimum fair market value of the Christiana Co. shares as at the date of death. Similarly, he valued the shares of stock of the Delaware Co. at $14,950 per share on the basis of its dividend-paying capacity, at $17,400 per share solely upon the basis of its earning capacity, and at $15,043.63 solely upon the basis of the net worth of the company's assets.
Another witness for the respondent1938 BTA LEXIS 812">*839 valued the Christiana Co. shares at $2,000 per share and the Delaware Co. shares at $17,000 per share in a retail market, and at $1,840 per share for the Christiana shares and at $15,250 per share for the Delaware shares in a wholesale market, or one in which a banker would buy the shares for resale to the public. The Government witnesses were of the opinion that, since there was an active demand for investment trust shares as at the date of the death of the decedent, bankers would have been glad of an opportunity to purchase the shares of stock in question and to have issued certificates of beneficial interest against them for sale to the public after the manner in which fixed investment trusts were operating at that time.
After making a careful study of each company's net worth and earning and dividend-paying capacity, and after taking into account all other factors having a bearing on the value of the stock as required by article 13(3) of Regulations 70, the Board has reached the conclusion that the fair market value of the Christiana Co. common 38 B.T.A. 926">*940 shares at the date of the death of the decedent was $1,000 per share, and of the Delaware Co. $8,500 per share. We shall1938 BTA LEXIS 812">*840 not in this opinion attempt to set forth all of the factors which have led us to reach these valuations or the weight which we have given to each of the various factors. We have taken into account not only the factors which appear in our findings of fact, but many others brought out in the evidence. We deem it appropriate, however, to set forth some of the considerations which have led us to our conclusion.
We are of the opinion that the Government witnesses have given too much weight to the market quotations of the shares of stock owned by each of these companies in arriving at their determinations of value. The market quotations of the du Pont Co. common shares practically doubled in market price from January to November 19, 1927. The shares sold as low as $168 per share in January, and at more than double that price in October 1927. The median between the high and the low price at which the shares sold on November 19, 1927, was $325.75 per share. The respondent used this value in determining the fair market price on November 19, 1927, of 840,000 shares of the du Pont Co. stock in reaching his determination of a value of $1,760.60 per share for the Christiana Co. shares, 1938 BTA LEXIS 812">*841 as shown in the deficiency notice. If the decedent had died in January 1927, at a time when the du Pont Co. shares were selling at $168 per share, the value of the Christiana Co. shares determined upon the basis used by the respondent would be only approximately one-half of the value determined by him for the shares on November 19, 1927.
The earnings of both the Christiana Co. and the Delaware Co. were largely dependent upon the earnings of the General Motors Corporation. That corporation contributed between 60 and 70 percent of the earnings of the du Pont Co., which, in turn, was the principal source of the earnings of the Christiana Co. and of the Delaware Co. The earnings of the General Motors Corporation showed a large increase in 1926 and 1927 over the earnings of prior years. A large part of such increase was due to the fact that the Ford Motor Co., which had been the principal manufacturer of automobiles in the United States prior to 1927, was practically out of production in 1927. Beginning about 1924 or 1925, there was a demand on the part of the public for a faster automobile than the Ford Model T that was then being produced. That car was obsolescent in 1925 and1938 BTA LEXIS 812">*842 1926. The public was buying a better or higher-priced car than the Ford Model T. The Ford Motor Co., in 1926 or in 1927, saw the handwriting on the wall and decided to abandon the manufacture of the Ford Model T and to change over to the production of a faster and more up-to-date car. During this period of transition the General Motors Corporation enjoyed great prosperity. The evidence shows that whereas in 1925 38 B.T.A. 926">*941 nearly 2,000,000 Ford cars had been produced, the number produced in 1927 was only 454,601. The General Motors Corporation was the beneficiary of this decline in the production of the Ford Motor Co. The latter company had, however, an enormous plant. It was well recognized that it would be back in production within a short time with a car which might prove a formidable competitor with the cars produced and sold by the General Motors Corporation. The prospective earnings of the General Motors Corporation for a period of two or three years could be forecast as early as 1926. The Board is of the opinion that those earnings could be forecast in January 1927, as well as in November 1927.
A further fact to be taken into consideration is that, if the Christiana1938 BTA LEXIS 812">*843 Co. had attempted in November 1927 to sell any large block of its holdings of the du Pont Co. shares, the probabilities are that it could not have realized anything like $325.75 per share for its total holdings of 840,000 shares - approximately one-third of the outstanding common shares of the du Pont Co. Some witnesses for the petitioners were of the opinion that if the Christiana Co. sold all of its 840,000 shares of du Pont Co. stock the market price would have declined to perhaps $125 per share. Even though the price might not have declined to that extent, the Board is satisfied that the company could not have realized anything like $325.75 per share for all of its holdings of du Pont Co. common stock.
It is further to be noted that if the Christiana Co. and the Delaware Co. had liquidated its holdings of du Pont Co. common stock, of Atlas Powder Co. stock, and of Hercules Powder Co. stock at approximately the quotation prices on November 19, 1927, the companies would have been subject to large income taxes upon the profits realized. Accordingly, a stockholder of the Christiana Co. or of the Delaware Co. could not have received in cash the full amount of the proceeds received1938 BTA LEXIS 812">*844 by those companies from the sale of their investments.
Both the Christiana Co. and the Delaware Co. were family holding corporations. The principal investment of the Christiana Co. was in the shares of stock of the du Pont Co. The principal investment of the Delaware Co. was either in the shares of the du Pont Co. or in the shares of the Christiana Co. All of the witnesses are agreed that the principles of valuation to be applied are essentially such as would apply to industrial companies.
The petitioners' witnesses were of the opinion that the valuation could be best obtained by multiplying the average annual earnings of each company, including the undistributed earnings of underlying companies for the three-year period 1925 to 1927, by nine or by eight 38 B.T.A. 926">*942 for the Christiana Co., and by eight or by seven for the Delaware Co. Counsel for the respondent submits that these multipliers are far too small in the light of all of the evidence in the case. The petitioners' witnesses have cited authorities on "valuation" to the effect that the value of industrial stocks are in many cases determined by multiplying the average annual earnings over a three or five-year period1938 BTA LEXIS 812">*845 by ten or a smaller multiplier.
The evidence in this case shows that the shares of common stock of General Motors Corporation, on November 19, 1927, sold at a low of 132 and at a high of 132 5/8. The earnings of that company for 1927, not including undistributed earnings of subsidiary companies, are shown by the corporation's annual report as having amounted to $12.99 per share. The sale price of the shares on the date of the death of the decedent was, therefore, approximately ten times the earnings for the year.
The earnings of the du Pont Co., including the company's equity in the undistributed earnings of certain subsidiaries of that company, including its proportionate share of the undistributed earnings of the General Motors Corporation for the years 1923 to 1927, inclusive, were $24.70, $17.62, $28.78, $21.89, and $24.06, respectively, per share, computed upon the basis of the number of shares outstanding at the close of each year. The median between the high and the low market price of the shares computed on the number of shares outstanding at the close of each year was 127 3/8, 127, 183 5/8, 139, and 256, respectively. Upon the basis of such median prices the de Pont1938 BTA LEXIS 812">*846 shares sold on the market at approximately five times the earnings for the years 1923 and 1925, at six times the earnings for 1924, 1925, and 1926, and at ten times the earnings for 1927. They sold at approximately thirteen times the 1927 earnings on November 19, 1927.
The Board is of the opinion that the fair market value of the shares of the Delaware Co. would be a somewhat smaller times average annual earnings for the three-year period than in the case of the Christiana Co. shares. The reason for this is that the estimated earnings of the underlying companies might suffer some attrition in passing through the treasuries of the several corporations. This might arise from expenses of the companies and from future taxes which might be imposed upon the several corporations. The earnings of the subsidiaries of the General Motors Corporation would be received by the Delaware Co. by being passed through the treasuries of the General Motors Corporation, the du Pont Co., and the Christiana Securities Co.
We think it clear that an investment in the shares of stock of the Christiana Co. or of the Delaware Co. would be less attractive than 38 B.T.A. 926">*943 an investment in either the stock1938 BTA LEXIS 812">*847 of the General Motors Corporation or the du Pont Co. There was no established market for the shares of either the Christiana Co. or of the Delaware Co. The public did not generally know of the existence of the companies. Little information regarding them could be obtained from financial publications. A purchaser of the shares would find no established market for them in case he desired to sell them. He would further find that the shares were not acceptable as collateral for loans with banks, since there was no established market for them.
It should also be noted that a purchaser of the Christiana Co. shares or of the Delaware Co. shares did not have any direct interest in the shares of stock owned by these companies as investments. A purchaser was not in any position to take advantage of the high prices which were obtaining in the market for the du Pont Co. shares. The history of the Christiana Co. shows that it had held its interest in the du Pont Co. for a period of many years without any substantial change in the number of shares held. The same is also true of the Delaware Co. The shares owned by these companies were not for sale. The companies were not operated, as1938 BTA LEXIS 812">*848 many investment trusts, with an idea of selling the shares on a favorable market. Therefore, a prospective investor would look primarily to the earnings of the company from dividends to be received on its investments.
The earnings of the Christiana Co. for 1927 were $81.67 per share and the dividends paid were $70 per share. From a careful study of all of the evidence the Board is of the opinion that a prospective purchaser might expect to receive over a period of future years dividends of $70 per share and perhaps somewhat more, although, of course, the earnings would be affected by business conditions.
From a consideration of all of the evidence the Board has reached its conclusion that the fair market value of the Christiana Co. shares on November 19, 1927, was $1,000 per share and of the Delaware Co. shares, $8,500 per share.
At the rehearing of this proceeding counsel for the petitioners made an additional claim for the deduction from the gross estate of administration expenses consisting of commissions to be paid to the executors, and additional attorneys' fees in connection with the litigation. Such fees paid or payable are a legal deduction from gross income. It1938 BTA LEXIS 812">*849 does not appear, however, that any executors' fees have been paid or that any ever will be paid. In the absence of any showing of payment they may not be allowed as a deduction. Attorneys' fees paid or payable are deductions from the gross estate.
Reviewed by the Board.
Judgment will be entered under Rule 50.