Tax Comm. v. Clark, Exrx. , 20 Ohio App. 166 ( 1926 )

Jesse R. Clark died September 25, 1921. He owned 8,567 shares of the capital stock of the Union Central Life Insurance Company. At that time this capital stock was $2,500,000, divided into 125,000 shares, par value $20 each. The original proceedings below were under the inheritance tax statutes of Ohio, Section 5331 et seq., General Code. The probate court directed the county auditor to appraise said property at its actual market value as of the date of the accrual of the tax, September 25, 1921. The auditor found its value to be $25 per share, and so reported to the probate court. That court proceeded de novo to appraise said property, and fixed its value at $40 per share. An appeal was taken to the court of common pleas. That court adopted the theory that the payment of cash dividends on the stock was the basis of its valuation, and found the value of the shares to be $30 each. The tax commission of Ohio prosecutes this action to reverse the judgment of the court of common pleas.

Many errors are assigned. The only question before this court is whether or not the court of common pleas erred in adopting the basis it did as a method of determining the actual market value of the stock. Section 5341, General Code, provides that the property shall be appraised at its actual market value. The stock of this company was not for sale or offered on the market. It was what is known as a closely owned or held corporate stock, and, as there were no sales, the tribunal charged with the duty of appraising it, at its actual market value, would necessarily have to resort to means other than sale in fixing that value.

The first question that presents itself is: What is the meaning of "actual market value"? If it means sales on a market, the provision for appraisement would be surplusage. To "appraise" means to value property at what it is worth. It follows that "actual market value" means actual value. The cash dividends paid on the stock would not be a criterion by which the property should be valued for inheritance tax purposes.

Neither is earning capacity of the company the proper basis for determining the value of stock. If we consider the history of the company, from its organization in 1867 down to 1921, the record discloses that the only cash paid by stockholders was $100,000. This was paid at its organization. All increases in the capital stock of the company were made by stock dividends out of the surpluses of the company. These stock dividends, made at different times, brought the capital stock of the company, in 1921, up to $2,500,000; or, in other words, the original investment of $100,000 earned $2,400,000. This does not include the $4,048,191.97 of surplus on hand at the time, nor the cash dividends paid to the stockholders in the 54 years covering the period in question. Such a basis would not be a fair criterion for determining the actual value of the capital stock. There is no showing as to the company's earning capacity in 1921, and nothing to show that it had a greater or less earning capacity in that year than it had in previous years. When the statute provides that the property shall be appraised at its actual market value, it could not be construed to mean that its value was its dividend paying capacity.

Our construction of the statute is that where the stock of a corporation is closely held, actual market value will be construed to mean the actual value of the stock. This value is to be fixed only for the purpose of taxation. The right of succession is based upon the tax being paid. It must be paid at the value of the property fixed by the authority vested with the power to appraise it.

That brings us to the question of what is the status of the stockholder in the corporation. The stockholders own its capital stock, its surplus, and its franchise. "Surplus," in this connection, means that which is left when use is satisfied, or the excess beyond what is prescribed. "Franchise" will be held to include good will, or, as stated in People, ex rel. KnickerbockerFire Ins. Co., v. Coleman, 107 N.Y. 541, 14 N.E. 431:

"The law does not prescribe how the actual value of the capital stock of a corporation is to be ascertained. That is left to the judgment of the assessors, and in appraising the actual value they have a right to resort to all the tests and measures of value which men ordinarily adopt for business purposes in estimating and measuring values of property. They may take into account the business of the corporation, its property, the value of its actual assets, the amount and nature of its present and contingent liabilities, the amount of its dividends."

See, also, 58 L.R.A., 575.

In determining the value of stock by the rule just stated, a court could properly take into consideration the facts and circumstances regarding the business of a corporation, its growth, and financial results.

Our conclusion is that the trial court erred in assuming as the basis for a determination of the value of the stock its dividend earning capacity. The right of succession was to be based on the payment of the tax of the actual market value, which we have construed to mean actual value, and that value should be fixed from a consideration of the fact that the stockholders own the capital stock, its surplus, as herein defined, and its franchise.

The judgment of the court of common pleas will be reversed, and the cause remanded for further proceedings according to law.

Judgment reversed, and cause remanded.

BUCHWALTER, P.J., and HAMILTON, J., concur.