1928 BTA LEXIS 3483">*3483 1. Transfers of stock made by deceased were not made to take effect in possession or enjoyment at or after death.
2. Value of stock determined for estate-tax purposes.
12 B.T.A. 681">*681 This is a proceeding for the redetermination of a deficiency of $56,548.68 in estate tax under the Revenue Act of 1918. It is alleged 12 B.T.A. 681">*682 that the respondent erred (1) in placing a value of $907.23 and $166.06 per share on the capital stock of the Mona Realty Co. and Nathan Realty Co., respectively, at the time of decedent's death, and (2) in adding to the gross estate the value of 80 shares of stock of the Mona Realty Co. and 2,300 shares of stock of the Nathan Realty Co.
FINDINGS OF FACT.
The petitioner is the executor of the estate of Morris Nathan, who died June 12, 1920.
The Mona Realty Co. and Nathan Realty Co. were organized under the laws of Pennsylvania, September 17, 1917, by the deceased, his wife, Margaret Nathan, and his daughter, Mrs. Hulda N. Elsasser, for the purpose of holding, leasing and selling real estate in the City of Johnstown. The1928 BTA LEXIS 3483">*3484 former had a capital stock of $5,000, consisting of 100 shares each of the par value of $50, and the capital stock of the latter was $175,000, divided into 3,500 shares each of the par value of $50. On November 26, 1917, the stock of the two corporations was issued and delivered as follows:
| Mona Realty Co. | Nathan Realty Co. | ||||
| Certificate | Owner | Shares | Certificate | Owner | Shares |
| No. | No. | ||||
| 3 | Morris Nathan | 20 | 1 | Margaret Nathan | 150 |
| 4 | do | 20 | 2 | Hulda N. Elsasser | 150 |
| 5 | do | 20 | 3-16 | Morris Nathan | 3,200 |
| 6 | Margaret Nathan | 20 | |||
| 7 | Hulda N. Elsasser | 20 |
Immediately upon the delivery of the stock certificates Morris Nathan endorsed certificates Nos. 4 and 5 of the Mona Realty Co. and certificates Nos. 7 to 16, inclusive, of the Nathan Realty Co., each for 200 shares, in blank, placed certificate No. 4 of the former company and certificate Nos. 7 to 11, inclusive, of the latter company, and certificate No. 5 of the Mono Realty Co., and certificates Nos. 12 to 16, inclusive, of the Nathan Realty Co., in envelopes addressed to Leonard Elsasser and David Elsasser, respectively, minor sons of his daughter, Mrs. Hulda N. Elsasser, and delivered1928 BTA LEXIS 3483">*3485 the envelopes, sealed, to the father of the boys with the statement that "These are for the boys," or words to that effect. On the same day, at the direction of Morris, Nathan, the bookkeeper of the corporations made an endorsement on the proper stubs of the stock books that the certificates had been transferred as above stated. No other record of the transfers was made on the books of the corporations. The stock certificates given by Morris Nathan to his two grandchildren 12 B.T.A. 681">*683 remained in the possession of their father until after the death of the donor. There were no further issues or transfers of stock of the two corporations prior to the decedent's death. On and after November 26, 1917, Morris Nathan was the owner of 20 shares of stock in the Mona Realty Co. and 1,200 shares in the Nathan Realty Co., and the balance of the capital stock was owned by his wife, daughter and two grandchildren.
The officers and directors of the corporations from the time of their organization until the death of Morris Nathan, were:
Morris Nathan, president and director; Hulda N. Elsasser, secretary and director; Margaret Nathan, vice president and director; Nelson N. Elsasser, treasurer.
1928 BTA LEXIS 3483">*3486 The Mona Realty Co. holdings of real estate consisted of a parcel of ground having a frontage of 42 feet on the south side of Main Street between Park Place and Franklin Street and a depth of 132 feet to Ebbert Alley, and improved by a church remodeled into a moving picture theatre. This property was purchased by the corporation from Morris Nathan on November 26, 1917, for $115,000, payable $5,000 in stock of the corporation of an equal par value, and the balance one year thereafter with interest at the rate of 2 per cent per annum, secured by a mortgage. Its only source of income was rent of $7,500 per year from this property. At June 12, 1920, the fair market value of the land was $126,000, and improvements $15,000.
The real estate holdings of the Nathan Realty Co. consisted of a lot adjoining the one above described, having a frontage of 80 feet to Park Place and extending an equal width to Ebbert Alley, a distance of 132 feet, and improved by a four-story and basement steel, brick and terra cotta building occupied by M. Nathan & Brother, Inc.; a lot on the corner of Lincoln Street and Park Place, with a frontage of 30 feet on Lincoln Street and a depth of 120 feet to Ebbert1928 BTA LEXIS 3483">*3487 Alley, and improved by a three-story frame double dwelling in front and a two-story warehouse in the rear of the lot; and a lot having a frontage of 24 feet on Lincoln Street, commencing 24 feet from the eastern side of the one just described and a depth of 120 feet to Ebbert Alley, on which was erected a three-story brick building used as a warehouse. The warehouse connected with, and the two lots were immediately in the rear of, the Nathan Realty Co. property on Main Street. These three pieces of property were acquired by the corporation on November 26, 1917, from Morris Nathan in exchange for all of its capital stock of the par value of $175,000. The parties have agreed that the improvements on the Main Street ground had a value at June 12, 1920, of $100,000. The parcel of land had a value of $240,000. The lots on 12 B.T.A. 681">*684 Lincoln Street had a fair market value on June 12, 1920, in the order described, of $21,000 and $15,360. The buildings on the respective lots had a fair market value of $17,000 and $25,000.
Neither corporation paid any dividends prior to the death of Morris Nathan. Their net income each year was credited to surplus, and loaned, in part, to Nathan1928 BTA LEXIS 3483">*3488 without interest. At his death he owed the Mona Realty Co. $11,764.19 and the Nathan Realty Co. $56,417.75, which amounts the Orphans' Count for Cambria County, Pennsylvania, in a decree of September 5, 1921, ordered the petitioner to pay the respective corporations.
The books of the corporations on June 30, 1920, no material changes having occurred after June 12, 1920, showed assets and liabilities as follows:
| Mona Realty Co. | |||
| ASSETS | LIABILITIES | ||
| Cash | $1,274.17 | Accrued interest | $1,100.00 |
| Due from Nathan | 11,764.19 | Accrued taxes (local) | 299.25 |
| Real estate | 111,250.00 | Mortgage | 110,000.00 |
| Surplus | 7,889.11 | ||
| Capital stock | 5,000.00 | ||
| 124,288.36 | 124,288.36 | ||
| Nathan Realty Co. | |||
| Cash | $123.33 | Accounts payable | $10,000.00 |
| Due from Nathan | 56,417.75 | Accrued income tax | 668.36 |
| Rent due | 4,340.00 | Accrued city and State taxes | 1,310.70 |
| Real estate | 165,625.00 | Surplus | 39,527.02 |
| Capital stock | 175,000.00 | ||
| 226,506.08 | 226,506.08 |
The earnings of the Nathan Realty Company in 1918 and 1919 were $17,135.21 and $12,830.27, respectively.
On November 26, 1917, when Morris Nathan assigned the stock to his grandchildren, 1928 BTA LEXIS 3483">*3489 he was about 55 years of age and in good health, and appeared to be well and strong up to a few hours prior to his death. The latter part of May, 1920, Nathan, in company with at least one other person, left Johnstown for a trip through the State of Maine. After spending some time at Bangor and about a week at Magasset Lake, Maine, where they did considerable walking and canoeing, they went to Moose Head Lake. At about 9 o'clock the evening of June 12, 1920, while Nathan and his companion were preparing for a fishing trip the next morning, the former developed a severe coughing spell and died an hour later. No doctor was available to attend him during his last illness. The opinion of Nathan's companion was that the former died from an attack of acute indigestion.
12 B.T.A. 681">*685 OPINION.
ARUNDELL: In determining the deficiency in dispute the respondent included in the decedent's gross estate the value of all of the stock of the two corporations under the theory that the stock issued to Mrs. Nathan and Mrs. Elsasser, and the stock assigned by Nathan to his grandchildren, were transfers made by the decedent to take effect in possession or enjoyment at or after his death. The1928 BTA LEXIS 3483">*3490 evidence before us is contrary to such contention.
Immediately after the acceptance on November 26, 1917, by the board of directors of each corporation of the offers made by the deceased for the sale of the properties described in our findings of fact, in part or full payment of which all of the capital stock of each corporation was issued, Morris Nathan directed that certificates for 20 shares each in the Mona Realty Co. and 150 shares each in the Nathan Realty Co. be issued in favor of his wife, and his daughter, Mrs. Hulda N. Elsasser. This was done, and upon the delivery of the certificates to him he promptly handed them to the persons in whose favor they had been executed. Neither Mrs. Nathan nor Mrs. Elsasser ever transferred the certificates back to the deceased. They continued to hold the stock until after Nathan's death on June 12, 1920. With the exception of the stock certificates issued to Mr. Nathan and Mrs. Elsasser, all the capital stock of the Nathan Realty Co. was executed in favor of and delivered to the deceased on November 26, 1917. Immediately upon the delivery of the stock to him he endorsed certificates Nos. 4 and 5 of the Mona Realty Co., each for 201928 BTA LEXIS 3483">*3491 shares, and Nos. 7 to 16, inclusive, of the Nathan Realty Co., each for 200 shares, in blank, inserted the stock in equal proportions in envelopes addressed to Leonard and David Elsasser, minor grandchildren, and after sealing the envelopes handed them to the father of the boys with the statement that "These are for the boys" or words to that effect. He then directed the bookkeeper of the corporations to make an endorsement on the stubs of the certificates that the stock had been transferred to his grandsons, which was done. The stock, endorsed in blank by the record owner, remained in the possession of the father of the transferees until after the death of the decedent.
The evidence shows that the stock issued to Mrs. Nathan and Mrs. Elsasser was never owned by the deceased and that the assignments to the grandchildren were absolute and unconditional transfers to take effect immediately. The respondent erred in including the value of this stock in the gross estate of the deceased.
The respondent has placed a valuation of $907.23 and $166.06 per share on the capital stock of the Mona Realty Co. and Nathan Realty Co., respectively, as of June 12, 1920, for estate-tax purposes. 1928 BTA LEXIS 3483">*3492 We 12 B.T.A. 681">*686 have not been informed of the method employed by him in determining such values, but it would seem that he placed higher valuations on the real estate holdings of the two corporations than we have found from all the evidence before us. The petitioner is contending for a stock valuation of $200 a share for the Mona Realty Co. and $80 per share for the Nathan Realty Co. In the determination of these values counsel for the petitioner used a unique method. In the case of the former company he first adjusted the value of the real estate holdings by accepting as the proper value thereof the average of the values placed upon the lot and buildings by petitioner's witnesses and from the increased value of the corporation's assets over its liabilities, finds a value of each share of stock of $418.89. To this figure he added the book value of the stock figured according to the value at which the real estate was carried on the books ($128.89) and the average of the values at which the stock was returned in 1920 and 1921 for capital stock purposes ($84.31). From the sum of these figures he reached an average of $210.70, which he proceded to reduce to $200 because the value1928 BTA LEXIS 3483">*3493 of the stock of the minority interest in a close corporation is not equal to a proportionate value of the whole. A similar method was used in reaching a value for the stock of the Nathan Realty Co. The valuations lack a proper basis and can not be accepted as the proper values of the stock in question.
The stock of both corporations was closely held and there have not been any sales in the open market to use as a basis or a guide for a valuation here. Under such circumstances, we will examine the assets and earnings of the corporations and from these and other relevant evidence in the record, reach values having a proper relation thereto.
Neither corporation had any source of income other than rents from their properties. The property of the Mona Realty Company was under lease at an annual rental of $7,500 per annum. This rental was practically net, since under the terms of the lease the lessee was required to keep the building in repair; make such improvements as might be necessary under state laws; pay all water, gas, electricity and heating bills; pay taxes and assessments and keep the building insured against loss by fire in the sum of $13,500. At June 12, 1920, the1928 BTA LEXIS 3483">*3494 lease had about 2 years and 3 months yet to run. From the time of its organization to that date the corporation built up a surplus of $7,889.11. We have not been advised of the terms of the leases under which te real estate of the Nathan Realty Co. was being rented. In 1918 and 1919 its earnings were $17,135.21 and $12,830.27, respectively.
12 B.T.A. 681">*687 All of the four witnesses presented by the petitioner to testify concerning the fair market value of the real estate of the two corporations were, because of their business connections, years of experience and knowledge of property values in the business section of Johnstown, especially qualified to express an opinion on the worth of the property in question. Three of these witnesses had had from 20 to 30 years of experience in the real estate or an associated business and had been engaged for many years in making appraisals of real estate in Johnstown for railroads, life insurance companies and local financial institutions. The other witness, David Barry, had been cashier or president of the First National Bank of Johnstown for 27 years, and in his official capacity he passed upon the value of property for the purpose of making1928 BTA LEXIS 3483">*3495 loans thereon. We have been favorably impressed with the qualifications of these witnesses to express an opinion on the fair market value of the assets in question. Three of these witnesses testified that the Main Street land had a fair market value of $3,000 a front foot. The other witness placed a valuation of $2,800 a front foot on the lot owned by the Mona Realty Co. and $3,080 a front foot on the ground owned by the Nathan Realty Co. Their valuations on the theatre building range from $12,000 to $16,000. Their valuations of the lots and buildings located on Lincoln Street were qually as consistent.
In this proceeding the respondent submitted the depositions of five witnesses who testified of values on some of the property somewhat in excess of the petitioner's witnesses. None of these witnesses testified on the value of the improvements on the Lincoln Street lots and only one of them expressed an opinion on the land. With the exception of H. H. Benford, who had been engaged in the real estate and insurance business for 30 years, we were not favorably impressed with their qualifications as expert witnesses and were, therefore, unable to attach much weight to their opinions. 1928 BTA LEXIS 3483">*3496 After carefully considering the testimony as a whole, we are satisfied that the valuations found in our findings of fact represent the fair market value of the various properties as of June 12, 1920, the date of the decedent's death.
By adjusting the assets of the corporations on account of the values we have found for their real estate holdings, we find that the net worth of the Mona Realty Co. on June 12, 1920, was $42,639.11, or $426.39 per share, and the Nathan Realty Co. $467,262, or $133.50 per share. From all the evidence we are of the opinion that these figures represent proper values for the stock in question as of June 12, 1920, for the purpose of determining the estate-tax liability of the estate.
Judgment will be entered under Rule 50.