Phipps v. Commissioner of Internal Revenue , 127 F.2d 214 ( 1942 )

PIUXMAN, Circuit Judge.

This appeal involves the assessment of deficiency gift taxes in the amount of $21,-143.90 for the year 1935. Two questions are presented for consideration: First, whether taxpayer was entitled in his return for 1935 to claim any part of the statutory exemption of $50,000.00 j¹ and,- Second, whether there was substantial evidence to sustain the Board’s valuation placed on 10,000 shares of cumulative preferred stock of the Nevada-California Electric Corporation.

In his return for the calendar year 1932, petitioner claimed an exemption of $12,-000.00 for gifts made during that year. In his return for 1933 he reported gifts aggregating $76,850.00, exclusive of gifts of Liberty Loan Bonds in the amount of $165,-583.33, which he claimed were not subject to the federal gift tax. In the return he claimed a specific exemption of $11,850.00, which, together with other allowable deductions, resulted in no tax due unless the gift of Liberty Loan Bonds was subject to the gift tax. Respondent determined that Liberty Loan Bonds were subject to the gift tax. He increased the aggregate of the gifts by the amount of such bonds, and at the same time increased petitioner’s exemption to $38,000.00, which, together with the $12,000.00 taken in 1932, exhausted his exemption of $50,000.00. On June 10, 1936, the Board of Tax Appeals, on petition for redetermination, sustained the Commissioner. Petitioner appealed, and this court, on August 16, 1937, affirmed the order of the Board. 91 F.2d 627.

Petitioner also filed a gift tax return for the year 1935, in which he claimed an exemption of $26,150.00. On July 20, 1936, respondent advised petitioner by letter that he had disallowed the exemption claimed in the return because in his view the entire exemption of $50,000.00 was exhausted in the 1932 and 1933 returns, and that he proposed to assess an additional tax. On August 7, 1936, petitioner filed a protest specifically excepting to the refusal to allow the asserted exemption. The protest was disallowed, the additional tax was assessed, and on application for a redetermination the Board sustained the Commissioner..

The right to claim the statutory exemption is given to the taxpayer. He may choose not only the years in which he will claim it, but also the amount he will claim each year. Neither the Commissioner nor anyone else may make- this designation. Respondent concedes that the petitioner alone had the right to claim the exemption. However, in 1933 petitioner claimed an exemption which, together with other exemptions, would cancel out his gifts if he was right in his position on the Liberty Loan Bonds, so that no tax was due. This evidenced an intent on his part to claim so much of his exemption as was necessary to avoid the attachment of any tax. This was the construction respondent placed on petitioner’s act, and so, when he increased the taxable gifts by the amount of the Liberty Loan Bonds,- he likewise increased his claimed exemption to $38,000.00, the full remainder of the $50,000.00 exemption, and thereby reduced the amount of the tax due. At no stage of the proceedings involving the 1933 return, neither before respondent, the Board of Tax Appeals, nor in this court on appeal, did petitioner disavow the act of respondent in increasing his exemptions or challenge his right to give him credit for the balancé of his exemption. His sole attack was directed to the- action of respondent in including Liberty Loan Bonds in taxable gifts.

The Board decided the 1933 appeal June 2, 1936. Thereafter respondent was without authority to recompute the 1933 gift tax.² At no time prior thereto did petitioner directly notify respondent that he claimed a part of his exemption in his 1935 return, so as to give him an opportunity to recompute the tax on the 1933 return. Nor is it contended that respondent actually had notice of the claim asserted in the 1935 tax return prior to the decision by the Board on June 2, 1936.

It is argued that although on August 7, 1936, when a written protest was lodged with respondent challenging his right to increase petitioner’s exemption in the 1933 tax return, the time had expired when respondent could redetermine the 1933 tax, nevertheless a remedy to correct the 1933 return was still available. It is true, as pointed out, that an error in the 1933 tax return could have been corrected at any time before the final decision of that matter, either while the matter was pending before the Board or on appeal to this court.³ Failure of respondent to call the attention of the Board or this court in the former case to the new issue raised by petitioner’s protest on August 7 is, however, not decisive here. At no stage in the proceedings, either before the Commissioner, in the petition for review before the Board, or in the appeal before this court, did petitioner challenge the right of respondent to increase his exemption in the 1933 return, or call the attention of the Board or this court to his protest of August 7 and ask that the issue presented for the first time be decided and taken into account in considering the amount due on his 1933 return.

Equitable principles have application in tax problems the same as in other matters. Robinson v. Commissioner, 6 Cir., 100 F.2d 847. Equitable and just results can be obtained in the levy and collection of taxes only if both the government and the taxpayer act in good faith and assume and maintain a consistent position toward each other. In Alamo Nat. Bk. v. Commissioner, 5 Cir., 95 F.2d 622, 623, the court said:

“It is no more right to allow a party to blow hot and cold as suits his interests in tax matters than in other relationships.”

If petitioner wanted to challenge the action of respondent in increasifig his claimed exemption in the 1933 return, he should have done so at some stage of the proceedings in which that return was in issue. It was there that this should have:been done, so that not only could the issue be determined, but the resulting equities also be adjusted. Having failed to do so, he may not challenge the action of respondent in increasing his exemption at this late hour. Wheelock v. Commissioner, 5 Cir., 77 F.2d 474. It will be presumed that he ratified the action of respondent in increasing his exemption in his 1933 return, which resulted in a lower tax to him at that time.

In 1935 petitioner made gifts of preferred stock in the Nevada-California Electric Company to thirteen persons, in the total amount of 10,000 shares. Twelve of the gifts were made to relatives and one to his secretary. They varied from 2,500 to 100 shares each, and were all made on the same day. The value placed on the stock in the return by petitioner was $50.00 per share. Respondent increased the value to $51.00 per share. In his petition for redetermination of the tax, petitioner contended that the value did not exceed $40.00 per share. This contention is bottomed largely on the so-called “blockage” theory. The reasoning on which this theory of valuation is based is that a large block of stock cannot ordinarily be marketed and turned into cash as readily as a few shares; also, that where there is only a limited market for a stock, offering a large block of the stock depresses the market and lowers the price that can be obtained for the stock. The conclusion that flows from this premise is that evidence of sales of small blocks of stock is not a criterion of the value of a large block of the same stock.

The ultimate place of the “blockage” theory in the field of valuation has not yet been finally determined. The most that the courts have said is that it is a factor to be considered along with all others in determining value in computing gift taxes under the statute. Gamble v. Commissioner, 6 Cir., 101 F.2d 565; Commissioner v. Shat-tuck, 7 Cir., 97 F.2d 790; Richardson v. Helvering, 65 App.D.C. 105, 80 F.2d 548; Roth v. Warded, 9 Cir., 77 F.2d 124; Robertson v. Routzahn, Collector, 6 Cir., 75 F.2d 537.

Petitioner treated the block of stock as a single gift, while the Board held that the transaction constituted thirteen separate gifts to thirteen individuals. Petitioner offered no testimony as to the value of the thirteen blocks if they are to be treated as such. Our attention has not been directed to any case where this precise question has been either considered or decided. In Helvering v. Kimberly, 4 Cir., 97 F.2d 433, and Commissioner v. Shattuck, supra, gifts of the same stock were made by one donor on the same day to different persons. The court in each case held that the value of a large block of stock was a factor to be considered, but the decisions did not turn on whether the stock should be treated as a single block or as separate blocks to each donee.

There is much force in the argument advanced by respondent in support of its position on this point. It is not necessary, however, to resolve this conflict in the views of the parties, because, as we view the problem, whether the transaction be treated as a single gift or thirteen separate gifts, the decision must nevertheless be the same. In addition to the evidence of the experts, the Board received other evidence tending to show the market value of the stock in question as established in Denver, in transactions over the counter during the year 1935; the New York Curb Exchange sales from September to November, inclusive; the number of shares of stock and the prices thereof sold during the year in question; the operating earnings of the company; the surplus before dividends for the five preceding years; the operating earnings for three months in 1935 compared . with corresponding months in the preceding year; the earnings on the preferred stock; the reduction,of its bonded and debenture indebtedness; and the increase of the unappropriated surplus at the end of 1935 over the preceding year. The evidence established that for six years, including 1935, the preferred stock earned a 12.02 per cent return on a valuation of $51.00 per share. After giving consideration to all this evidence, including the evidence of the experts, the Board fixed the value of the stock that is now being challenged.

It does not appear what, if any, weight the Board ascribed to the expert testimony in reaching its ultimate conclusion. It may have rejected it entirely. But this it had a right to do. “A fact-finding body may disregard the opinion of an expert and use its own judgment in arriving at value.” Emerald Oil Co. v. Commissioner, 10 Cir., 72 F.2d 681, 683; see, also, Gamble v. Commissioner, supra. It may not, however, reject opinion evidence and make an arbitrary finding of value not supported by any substantial evidence. Emerald Oil Co. v. Commissioner, supra. Here there is substantial evidence in the record which supports the valuation fixed by the Board, and it must therefore stand.

Affirmed.

1 Sec. 505 (a)(1), Revenue Act of 1932: ‘‘(1) Specific exemption. An exemption of $50,000, less the aggregate of the amounts claimed and allowed as specific exemption for preceding calendar years.” 26 U.S.O.A. Int.Rev.Acts, page 586.

2 See. 513 (f), Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Aets, page 590.

3 Section 513 (e), Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 591; Section 1003 (b), Revenue Act of 1926, 26 U.S.C.A. Int.Rev.Acts, page 313.