*103 Decision will be entered under Rule 50.
1. Shares of stock in a closely held corporation valued for estate tax purposes.
2. Decedent received from the estate of her husband a note which had been taxed as a part of his estate within five years prior to her death. The proceeds from the payment of the note were deposited in decedent's bank account. Held, that the previously taxed property has been identified and the amount thereof is deductible under section 812 (c) of the Internal Revenue Code.
*259 This proceeding has been instituted for the purpose of testing the correctness of the respondent's determination of a deficiency in estate tax in the amount of $ 4,327.05.
The petition raises two issues: (1) The fair market value of the capital stock of the Heberlein Patent Corporation, and (2) the right of the petitioner to treat the sum of $ 8,460 as previously taxed property.
FINDINGS OF FACT.
Petitioner is a corporation, organized and existing under the laws of the State of New York, with its principal office in New York, New York. The petitioner was duly appointed sole executor of the last will and testament of Lillian May Schroeder, deceased, and is now *260 acting as such executor. The estate tax return here involved was filed with the collector of internal revenue for the second district of New York.
Decedent died January 16, 1946, and her executor has elected*105 that the value of decedent's gross estate shall be determined as of the optional valuation date of January 16, 1947.
The decedent owned 750 shares of the capital stock of the Heberlein Patent Corporation (hereinafter sometimes called Heberlein) at the date of her death. Petitioner valued these shares at $ 20 per share in decedent's estate tax return. In the notice of deficiency respondent determined the fair market value of the shares on January 16, 1947, to be $ 41.84 per share.
Heberlein was organized and is existing under the laws of the State of New York. It exploits textile patents which it acquires from its principal stockholder, a textile finishing company in Switzerland. The yield from a portion of the patents pertaining to the production of fancy print effects on fabrics depends on the trend of fashion. The corporation has 10,000 shares of capital stock outstanding, all closely held and not listed on any securities exchange or traded in over the counter. A Swiss corporation owns 6,775 shares and three Swiss nationals own 1,750 shares. The remaining 1,475 shares are owned by Americans.
The Heberlein Patent Corporation derives its income from royalties on patents,*106 interest, dividends, and gains on sales of securities listed on the New York Stock Exchange.
The net worth and net income (or loss) of Heberlein, according to its books, for the period of five fiscal years beginning with November 30, 1942, were as follows:
| Year | Net worth | Net income |
| 1942 | $ 366,144.73 | ($ 5,627.87) |
| 1943 | 363,911.70 | 9,396.02 |
| 1944 | 360,206.62 | (3,755.08) |
| 1945 | 362,353.01 | (1,874.88) |
| 1946 | 361,547.93 | (706.83) |
The only dividend paid during this period was $ 1.25 per share in 1943.
The net worth of Heberlein according to its books as of November 30, 1946, was $ 396,007.20, after adjustments to reflect the market value of the securities owned by the corporation as of that date. It owned numerous patents as of November 30, 1946, which were carried on its books at cost, less depreciation, in the amount of $ 52,583.72. The Commissioner, in determining the value of the stock, valued these patents at $ 75,000.
Income derived by Heberlein from its patents for the period of five fiscal years beginning with November 30, 1942, was as follows: *261
| Royalties paid | Net royalties | ||
| Royalties | to others on | from patents | |
| Year | received from | account of | retained by |
| patents | patents | Heberlein | |
| 1942 | $ 74,141.57 | $ 31,497.29 | $ 42,644.28 |
| 1943 | 46,420.60 | 20,868.05 | 25,552.55 |
| 1944 | 28,343.53 | 12,619.23 | 15,724.30 |
| 1945 | 19,553.28 | 8,550.28 | 11,038.00 |
| 1946 | 18,339.78 | 7,416.89 | 10,992.89 |
*107 The only sale of shares of the capital stock of the Heberlein Patent Corporation in 22 years was the sale by an estate of 100 shares to Max Held, its president, for $ 25 per share in May 1947.
Pursuant to the provisions of Presidential Order No. 8389, as amended, and by virtue of the ownership of a majority of the stock of the corporation by Swiss nationals, the Heberlein Patent Corporation was required, on the valuation date, to conduct all of its business under the supervision of the Federal Reserve Bank of New York.
On January 16, 1947, there was no reasonable prospect that the future gross income from royalties of Heberlein would be substantially increased over what it had been in the two fiscal years previous to that date.
The fair market value of the shares of stock of Heberlein Patent Corporation on January 16, 1947, was $ 25.
The decedent, Lillian May Schroeder, died within five years from the date of the death of her husband, F. August Schroeder. Part of the gross estate of F. August Schroeder situated within the United States was a promissory note in the face amount of $ 16,000, signed by 205 East 74th Street, Inc., which note was inherited by this decedent. On the*108 date of death of F. August Schroeder, there was due and owing on this note $ 11,500, on which a Federal estate tax was paid.
During the period between the date of death of F. August Schroeder on February 9, 1941, to the date of death of this decedent, a total of $ 9,650 was paid to this decedent in reduction of the principal amount of the note, of which total $ 8,460, in monthly installments of $ 150, was deposited by this decedent in a checking account maintained by her in the Lincoln office of the Irving Trust Co. of New York City, as follows:
| Year | Deposited | Not deposited | Total |
| 1941 | $ 1,110 | $ 390 | $ 1,500 |
| 1942 | 1,800 | 200 | 2,000 |
| 1943 | 1,800 | 200 | 2,000 |
| 1944 | 1,800 | 200 | 2,000 |
| 1945 | 1,800 | 200 | 2,000 |
| 1946 | 150 | 150 | |
| Total | 8,460 | 1,190 | 9,650 |
| Unpaid balance on note on Feb. 9, 1941, date of death of F. August | |
| Schroeder | $ 11,500 |
| Deduct total payments | 9,650 |
| Unpaid balance on Jan. 16, 1946, date of death of Lillian | |
| M. Schroeder | 1,850 |
*262 On February 9, 1941, the date of F. August Schroeder's death, there was a balance in this decedent's checking account at the Irving*109 Trust Co. of $ 5,976.51. During the period between the dates of the two deaths there was deposited in the checking account, in addition to $ 8,460 of previously taxed cash, $ 12,805.99 from all sources other than previously taxed cash, making a total of $ 21,265.99 in deposits, and there was withdrawn during the same period a total of $ 14,354.76, leaving a balance in the account on the date of this decedent's death of $ 12,887.74, which has been computed as follows:
| Previously | Other | Total | |
| Year | taxed cash | deposits | deposits |
| 1941 | $ 1,110 | $ 1,670.00 | $ 2,780.00 |
| 1942 | 1,800 | 2,860.00 | 4,660.00 |
| 1943 | 1,800 | 2,810.99 | 4,610.99 |
| 1944 | 1,800 | 2,735.00 | 4,535.00 |
| 1945 | 1,800 | 2,530.00 | 4,330.00 |
| 1946 | 150 | 200.00 | 350.00 |
| Total | 8,460 | 12,805.99 | 21,265.99 |
| Total deposits | $ 21,265.99 |
| Balance in account on Feb. 9, 1941 | 5,976.51 |
| 27,242.50 | |
| Total withdrawals Feb. 9, 1941, through Jan. 16, 1946 | 14,354.76 |
| Balance in account on Jan. 16, 1946 | 12,887.74 |
The aggregate of withdrawals made by this decedent after the death of her husband was at all times less than the total of the balance*110 on the date of her husband's death, plus the deposits from sources other than previously taxed cash made during the period between the two deaths, as shown in the following table:
| Balance on deposit on date of this decedent's death | $ 12,887.74 | |
| Non-previously taxed cash: | ||
| Initial deposit | $ 5,976.51 | |
| Interim deposits | 12,805.99 | |
| 18,782.50 | ||
| Total interim withdrawals | 14,354.76 | |
| 4,427.74 | ||
| Balance | 8,460.00 |
The balance in the bank account of the decedent at the end of each year from 1941 to 1945 was as follows:
| Dec. 31, 1941 | $ 6,627.31 |
| Dec. 31, 1942 | 8,555.53 |
| Dec. 31, 1943 | 10,361.91 |
| Dec. 31, 1944 | 11,546.30 |
| Dec. 31, 1945 | 12,726.95 |
| Jan. 1946 | 12,887.74 |
The credit balance in the account was not at any time less than the amount of previously taxed cash which had been deposited.
Included in the decedent's bank account with the Lincoln branch of the Irving Trust Co. of New York at the time of her death was the sum *263 of $ 8,460 which represented the value of property previously taxed to decedent's husband's estate within five years of decedent's death.
OPINION.
The valuation*111 for estate tax purposes of shares of stock of a closely held corporation imposes at best a difficult question of fact. The matter is made more difficult where, as here, the overwhelming control of the company is in foreigners and the company itself is operating under governmental supervision.
The Heberlein Patent Corporation was primarily organized and operated for the purpose of exploiting in this country the use of certain textile patents of Swiss origin on a royalty basis. The corporation's earnings from this source had been steadily going down in the years immediately prior to decedent's death, partly due to the war and partly due to a change in styles. On the effective date of valuation, the Heberlein Corporation had a large portfolio of American securities of companies whose shares were listed on the New York Stock Exchange.
The respondent reached his valuation of the shares in question by the simple expedient of taking the value of the securities in the portfolio and adding to that figure his value of the patents and, after deducting outstanding liabilities, dividing the remainder by the number of outstanding shares, thus reaching his figure of $ 41.84 per share. But it*112 is obvious that this figure, which would be the liquidating value of the Heberlein Corporation under ideal circumstances and without cost, can not be said to be the fair market value of that corporation's shares. There is no suggestion that Heberlein contemplated liquidation and certainly the shares of the decedent gave no control whatever which could affect the course of action of the corporation. The Heberlein Corporation had incurred losses during four of the past five years and had paid a dividend in only one of those years. There was no market for the stock except among the few individuals interested in the corporation. Only one sale of shares was made in 22 years, and that sale was made in May 1947, a few months after the effective date with which we are concerned. The price received for the 100 shares on that date was $ 25 per share and the stock sold was the stock of a deceased stockholder and the shares were sold to the president of the Heberlein Corporation. A diligent effort resulted in no other prospective purchaser. Admittedly, the sale of one small block of stock can not be said to establish the fair market value of the shares. Nevertheless we think this figure*113 more nearly represents what a willing buyer would pay a willing seller than the figure determined by the respondent.
After careful consideration of the entire record, it is our opinion that the fair market value of the shares in question was $ 25 per share.
*264 The remaining issue deals with the right of the petitioner to a deduction from the decedent's gross estate of the sum of $ 8,460 under the provisions of section 812 (c) of the Internal Revenue Code. 1
*114 Respondent apparently agrees that all of the factors required to entitle petitioner to this deduction with respect to principal payments made by 205 East 74th Street, Inc., on its note inherited from the estate of the prior decedent and deposited in this decedent's checking account have been established, except that respondent has determined that no part of this bank balance has been identified as having been received by this decedent from the prior decedent.
Respondent on brief concedes, as well he may, that the commingling in a common bank account of previously taxed cash with non-previously taxed cash does not necessarily make the previously taxed cash unidentifiable. John D. Ankeny, Executor, 9 B. T. A. 1302; Frances Brawner, Executrix, 15 B. T. A. 1122. As will be noted from the facts as found, the aggregate of withdrawals made by this decedent since the death of her husband was at all times less than the total of the balance on the date of her husband's death, plus the deposits from sources other than previously taxed cash made during the period between the two deaths. Of course, if the previously taxed cash had been deposited in this account*115 and then withdrawn before additional non-previously taxed cash was deposited, it could not be said that the credit balance on the date of decedent's death was traceable to previously taxed cash. But the credit balance in the account was not at any time less than the amount of previously taxed cash which had been deposited. On facts substantially similar with those appearing in the instant case, we have held the identification sufficient. John F. Archbold, Executor, 8 B. T. A. 919; John D. Ankeny, Executor, supra;Estate of James Miller, 3 T. C. 1180. In Frances Brawner, Executrix, supra, where the facts are on all fours, we stated:
* * * Other withdrawals than these mentioned were made during this time from this account by decedent, but inasmuch as the aggregate of such was *265 less than the total deposits, independent of this bequest, made to the same account during the period, it follows that the unexpended balance of this bequest, not withdrawn for investment as hereinbefore noted, remained in said account and formed a part of the assets of the estate of decedent at the time of his death. We have previously*116 held, under such circumstances, that funds thus identified are deductible under section 303 (a) (2), supra, John D. Ankeny, Executor, 9 B. T. A. 1302; John F. Archbold, Executor, 8 B. T. A. 919.
The respondent, in reliance on Rodenbough v. United States, 25 Fed. (2d) 13, and United Statesv. Rodenbough, on remand (Dist. Ct., E. Dist. Pa.), argues that we should indulge the presumption that all withdrawals from petitioner's bank account for personal purposes came from the previously taxed property and as the amount of her withdrawals during the five years from her husband's death to her own death exceeded the amount of the previously taxed property, there has been no proper identification. As pointed out by Judge Duffy in Horlick v. Kuhl, 62 Fed. Supp. 168, 174, the rule as suggested in the Rodenbough case has never been accepted by the Tax Court and, in fact, has only been followed in one case by the District Court for the Southern District of New York.
It is our opinion that the petitioner has identified the sum of $ 8,640 in decedent's bank account at the Irving Trust Co. as previously*117 taxed property of the estate of decedent's husband, who died within the period of five years from decedent's death, and, in the circumstances, this sum is properly deductible in determining the value of decedent's estate.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 812. NET ESTATE.
For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --
* * * *
(c) Property Previously Taxed. -- An amount equal to the value of any property (1) forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent, * * * where such property can be identified as having been received by the decedent * * * from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received. Property includible in the gross estate of the prior decedent under section 811 (f)↩ * * * received by the decedent described in this subsection shall, for the purposes of this subsection, be considered a bequest of such prior decedent * * *. This deduction shall be allowed only where * * * an estate tax imposed under this chapter or any prior Act of Congress, was finally determined and paid by or on behalf of * * * the estate of such prior decedent, * * * and only in the amount finally determined as the value of such property in determining the value of * * * the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate * * *.