-
MATHILDE B. HOOPER, ADMINISTRATRIX OF THE ESTATE OF JAMES P. HOOPER, DECEASED, PETITIONER,
v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hooper v. CommissionerDocket No. 85776.United States Board of Tax Appeals 41 B.T.A. 114; 1940 BTA LEXIS 1230;January 19, 1940, Promulgated *1230 1. Decedent's death occurred in 1933. In 1932, being heavily in debt, he had transferred substantially all of his property, including his life insurance, to a trust, the trustee being authorized to collect his (decedent's) salary of $45,000 per annum and to use it and all other trust income to pay insurance premiums, to pay decedent's wife from $14,000 to $16,000 per annum for family living expenses, to pay off decedent's debts and thereafter to divide the income between decedent and his wefe.
Held, that the value of the property transferred to the trust must be included in decedent's gross estate. , distinguished. Value of property determined.Paul F. Donnelly, 38 B.T.A. 1234">38 B.T.A. 12342. Trust instrument required the trustee to use the major portion of the proceeds of the life insurance policies to liquidate debts or obligations of the estate. To the extent that the proceeds were so used and required to be used, it is
held that such amount constitutes a part of decedent's gross estate;held, further, that the exclusion under section 302(g) of the Revenue Act of 1926 of $40,000 of the proceeds of insurance payable to other beneficiaries may be applied*1231 only against the portion not necessary to be used in paying the debts of the estate. , followed.Estate of Waldo Rohnert, 40 B.T.A. 1319">40 B.T.A. 1319Warren Brock, esq., andGeorge B. Clotheir, Esq., for the petitioner.A. W. Carnduff, Esq., for the respondent.MELLOTT*115 The petitioner contests a deficiency in estate tax determined by the respondent in the amount of $21,549.27. The issues are: (1) Are the assets comprising the corpus of a trust created by the decedent and his wife on January 26, 1932, properly a part of his gross estate? (2) If so, did the respondent err in determining that the value of 3,613 shares of William E. Hooper & Sons Co. stock, on August 3, 1933, was $100 per share? (3) Is the sum of $132,345.73, representing the net proceeds of certain life insurance policies assigned by the decedent to the above trust, properly includable in gross estate? and, if so, (4) May the sum of $40,000 be excluded under the provisions of section 302(g) of the Revenue Act of 1926?
FINDINGS OF FACT.
James P. Hooper, hereinafter referred to as the "decedent", died intestate on August 3, 1933, leaving surviving him his widow, *1232 Mathilde B. Hooper, administratrix of his estate and petitioner herein, and three minor children, Mathilde B., born November 21, 1912, Sarah P., born May 1, 1914, and James P., Jr., born September 10, 1916, all of whom are now living. At the time of his death decedent was a resident of Ruxton, Baltimore County, Maryland, and was 51 years of age.
For many years prior to his death, decedent was vice president and general manager of William E. Hooper & Sons Co., a Maryland corporation engaged in the business of manufacturing and selling cotton duck and similar products, and president of the Hooper Sons *116 Manufacturing Co., a corporation engaged in the business of selling these products. His brother, Robert P. Hooper, was president of the former corporation and vice president of the latter. Prior to the consolidation of these corporations in 1932, decedent owned a minority interest in the stock of each.
On July 15, 1926, the decedent, primarily in connection with the financing of the James P. Hooper Manufacturing Co., a corporation organized by him for the purpose of engaging in the business of manufacturing and selling artificial silk, had become indebted in the sum*1233 of $376,020.20 and was in dire financial straits. On this date decedent was the owner of 2,802 shares of William E. Hooper & Sons Co. stock of which 1,100 shares were pledged as collateral security for the various obligations above mentioned. He also was the owner of 598 shares of Hooper Sons Manufacturing Co. stock, all of which were similarly pledged.
The financial difficulties of the decedent were brought to a head by the offering of certain of his pledged stock in the Hooper Sons Manufacturing Co. for sale at auction in 1926, of which offering the decedent's brother received word, so that he was enabled to prevent the sale from taking place. His brother insisted that decedent, for his own protection and for the protection of the other stockholders of the companies in question, put his financial affairs in such orderly shape as to prevent further offerings of the stock, or further proceedings by his creditors. At the suggestion of his brother, the decedent on July 15, 1926, created a revocable trust to which he conveyed all of his property. This deed of trust, which was formally revoked on January 26, 1932, contained provisions substantially the same as those contained in*1234 an irrevocable deed of trust executed on the latter date, to which reference will hereinafter be made.
In the trust instrument of January 26, 1932, decedent named Henry R. W. Smith of Philadelphia, as trustee, and conveyed to him in trust all of his property, real, personal, and mixed, and all of his income thereafter coming due (including his salary from William E. Hooper & Sons Co., which at that time was $45,000 per annum), for the following uses and purposes:
(1) To pay all taxes, assessments and charges of any character, including interest charges against the trust property, against the decedent, and on loans on policies of insurance, and expenses and disbursements properly incurred in connection with the management and administration of the estate;
(2) To pay the premiums on such insurance on decedent's life, as the trustee, in his discretion, might, from time to time, maintain, it being provided that all policies in force at the time of the creation of the trust should be irrevocably assigned, or made over, to the trustee, with full power to cancel or borrow thereon and receive all the proceeds thereof;
*117 (3) To pay a sum equal to 36% of the gross income of*1235 the trust, but not in excess of $16,200 per annum, nor less than $14,000 per annum, to Mathilde B. Hooper, wife of the decedent, with the provision that out of such payments, she should maintain a home for herself and decedent, and pay the cost of supporting and educating their children, but without liability to account for any balance or surplus;
(4) To use the balance of the income or any funds in his hands as trustee to make payments, pro rata, on account of the principal of the obligations of the decedent listed in Schedule "A" attached to the deed of trust, totaling $61,250, until payment of these obligations in full. Thereafter, the trustee was to pay the obligations of $98,972.25 listed in Schedule "B" and then those totaling $97,065.79 listed in Schedule "C".
(5) After payment of all the above-mentioned obligations, then as to the income on the balance of the trust estate, one-half thereof was to be paid to Mathilde B. Hooper, (in lieu of the payments referred to in subparagraph (3) above), and the other one-half thereof was to be paid to the decedent, during their joint lives. Upon the death of either, the trustee was to pay all the income to the survivor, with certain*1236 exceptions not here material.
The 1932 deed of trust expressly provided that the trustee should receive no commission or compensation for his services.
Upon the execution and delivery of the 1932 deed of trust, the following assets were duly assigned and transferred to the trustee:
2,560 shares William E. Hooper & Sons Co. common stock, par value $100. 358 shares Hooper Sons Manufacturing Co. common stock, par $100value. $200 Mobile and Birmingham Railway Co. 5% bonds, due 1945. $400 Kansas City Public Service Co. 1st mtg. bonds. 2-6/10 shares Kansas City Railway Co. pfd. 6-6/10 shares Kansas City Railway Co. common. 6 shares Boston Maritime Corporation. 2 shares American Telephone & Telegraph. 2 shares Consolidated Gas, Elec. Lt. & Power Co. pfd. 2 shares Curtis Publishing Co. pfd. 3 shares Delaware Railroad Co. 4 shares Northern Central Railway Co. Cash $5,334.77. Certain of these assets were at that time and thereafter held as collateral security for debts of the decedent, and at that time or shortly thereafter all policies of insurance then in force on the decedent's life were either assigned or otherwise made over to the trustee, *1237 or were canceled or surrendered as hereinafter set forth.
As of January 1, 1932, Hooper Sons Manufacturing Co. was merged with, and absorbed by, William E. Hooper & Sons Co., and the stock of the former was surrendered by the holders thereof in exchange for stock of the latter. As a result of the merger and transfers, in connection therewith, the trustee became the holder of a total of 3,613 shares of the stock of William E. Hooper & Sons Co.
*118 Prior to the date of the decedent's death, that is, during the period from January 26, 1932, until August 3, 1933, the trustee under said 1932 deed of trust received and collected the total amount of $74,985.64, as follows:
Nature of receipts 1/26/32-12/31/32 1/1/33-8/3/33 Salary of James P. Hooper $32,346.50 $17,216.50 Dividends and other income 1,521.59 206.67 Cash-surrender value of canceled life insurance 23,694.38 None Total 57,562.47 17,423.17 and made disbursements in the total of $78,493.04, as follows:
Nature of payments 1/26/32-12/31/32 1/1/33-8/3/33 Income to decedent's wife $13,770.00 $8,505.00 Life insurance premiums 2,710.20 2,480.45 Payments to creditors: Interest 11,407.89 6,222.30 Principal 30,463.11 None Other payments 1,815.02 1,119.07 Total 60,166.22 18,326.82 *1238 On January 26, 1932, the date of the execution and delivery of the deed of trust, there were 15 policies of insurance in force on the decedent's life, aggregating $260,000 in face amount. Within a few months following the execution and delivery of the 1932 deed of trust, the insurance on decedent's life was reduced by the trustee, to an aggregate face amount of $150,000 by the surrender or reduction of $110,000 insurance as follows:
(a) Five policies, aggregating $65,000, were canceled and surrendered and the surrender values, less loans and interest, were paid to the trustee.
(b) One policy, in the sum of $25,000, was surrendered by the trustee, who applied for and obtained in lieu thereof, a policy of the same company in the face amount of $15,000.
(c) Three policies aggregating in face amount $75,000 were respectively reduced in aggregate face amount to $35,000.
The aforesaid cancellations and reductions were made with the full knowledge and approval of the decedent, who was consulted with respect to the same but had no power to control the decision of the trustee. The net surrender value received by the trustee totaled $23,694.38, and was applied by him during 1932*1239 towards principal and interest due to creditors of decedent, listed in schedule "A" attached to said 1932 deed of trust.
At the time of decedent's death on August 3, 1933, the amount of principal due and owing to the creditors listed in schedule "A" attached to the 1932 deed of trust totaled $38,157; the amount of *119 principal due and owing to the creditors listed in schedule "B" attached to the deed of trust totaled $98,972.25; and the amounts of principal due and owing to the creditors listed in schedule "C" attached to the deed of trust totaled $87,065.79, which sums, with interest accrued to date of death, and a minor item of $9.32, for clubdues, are the deductions claimed by the taxpayer, and allowed by the Commissioner, as shown on schedules I ($195,009.82) and J ($30,015.50), of the estate tax return.
The principal of the trust on the date of decedent's death included the following assets, in addition to the policies of insurance referred to below:
3,613 shares William E. Hooper & Sons Co. common stock, par value $100 Cash: $1,937.37
and the other miscellaneous assets heretofore listed as having been transferred to the trustee at the time of the execution*1240 and delivery of the trust deed.
At the time of the said decedent's death, nine policies of insurance on his life, in the aggregate face amount of $150,000, were in full force and effect, and the net proceeds thereof, after adjustment for loans, interest, and dividends, being the sum of $132,639.31, were paid to and received by the trustee during September 1933.
At the time of decedent's death, Henry R. W. Smith, trustee, was named assignee by absolute and irrevocable assignment in six of the policies of insurance, and was irrevocably designated as beneficiary of two of the policies of insurance, the assignments and designations of beneficiary having been duly accepted by the companies in question, and appropriately endorsed on the policies shortly following the executing of said 1932 deed of trust. The decedent reserved to himself no power to borrow on the policies, or to receive the cash surrender value thereof, or otherwise to exercise any of the incidents of ownership therein, all of which appear from the policies and the riders thereto attached.
One of the policies, in the face amount of $15,000, was issued to Henry R. W. Smith, trustee, in his capacity as trustee, on*1241 May 7, 1932, having been issued by the company on his application, joined in by the decedent, to replace a preexisting policy of the company in the face amount of $25,000, dated April 19, 1925, which preexisting policy had previously, on February 18, 1932, been absolutely assigned to Henry R. W. Smith, trustee as aforesaid. The decedent, at no time, acquired or received any of the incidents of ownership in the new $15,000 policy, which was issued to the trustee as aforesaid.
During the period from January 26, 1932, to August 3, 1933, the premiums on all the policies of life insurance were paid by the trustee under the 1932 deed of trust.
*120 The total net proceeds of said policies, with interest thereon, being the total amount of $132,639.31, were collected and received by the trustee after the decedent's death and were applied and distributed by the trustee as follows: First, to the payment of certain interest due to creditors of decedent listed in the schedules attached to the 1932 deed of trust, in the sum of $920.65; second, to the payment of the balance of principal of $38,157 remaining due to the creditors listed in Schedule A attached to the deed of trust; and*1242 third, to the payment of 80 percent of the principal amounts due to the creditors listed in schedule B attached to the deed of trust, being the sum of $79,177.79. The balance of the proceeds was retained and held by the trustee for the continuing purposes of the trust.
As of January 6, 1932, and August 3, 1933, the total outstanding stock of William E. Hooper & Sons Co. was 10,340 shares, held as follows:
Robert P. Hooper 5,052 H. R. W. Smith, trustee under deed of trust dated January 26, 1932 3,613 H. R. W. Smith 53 Lulie P. Hooper 1,575 Abram G. Tatnall 43 Marion B. Hooper 4 Total 10,340 The above stated holdings as of January 26, 1932, include the shares distributed as the result of the merger heretofore mentioned, which was effected as of January 1, 1932, although the shares were not actually distributed until later.
On the date of the decedent's death, Robert P. Hooper held an option to purchase 150 shares of the stock of William E. Hooper & Sons Co. from the trustee of the 1932 deed of trust for the sum of $65 per share, which option, if exercised, would have increased his total shareholdings in the corporation to 5,202. The option was given*1243 to Robert by agreement dated January 26, 1932, and was accompanied by an irrevocable proxy to vote the shares. The price fixed in the option agreement was based by Robert upon a transaction which took place prior to 1926, whereby the decedent had used certain shares of the stock as collateral for loans from two of his sisters at an equivalent price per share, taking into account intervening stock dividends. By the use of this price, which had been previously fixed by the decedent, Robert felt that he would avoid any possibility of future criticism to the effect that he had overreached or taken advantage of his brother. No effort was made to base the option price on fair market value as of the date of the option agreement or as of any other date.
*121 The balance sheet of William E. Hooper & Sons .co. as of December 31, 1932, was as follows:
Assets Liabilities Cash and securities $78,509 Notes to banks $405,000 Receivables 107,068 Accounts payable 27,200 Life insurance 43,242 Other 5,005 Inventory 358,973 Total current 587,792 Total current 437,205 Plant equipment and formulae 1,365,952 Long-term notes 20,000 Miscellaneous 28,917 Capital 1,034,000 Surplus 491,456 Total assets 1,982,661 Total liabilities 1,982,661 *1244 The surplus of $491,456 was not, strictly speaking, and earned surplus, because it reflects action taken by the corporation in prior years transferring the following sums out of depreciation reserves into surplus:
In 1926 $138,870 In 1928 117,348 In 1932 350,000 The profit realized or loss sustained by the William E. Hooper & Sons Co. for each of the seven years prior to 1933 was as follows:
1926, net loss $15,113 1927, net profit 169,779 1928, net profit 50,970 1929, net loss 17,879 1930, net loss $38,485 1931, net loss 66,646 1932, net loss 165,404 The profits for 1927 include a gain of $169,800 on the sale of speculative cotton futures, and the loss for 1931 is net after a gain of $91,216 from similar transactions.
On August 3, 1933, it was apparent that William E. Hooper & Sons Co. was going to have a good year, and the net profit realized by it for that year amounted to approximately $110,000 or $11 per share. The book value of its stock as of August 3, 1933, was approximately $145 per share.
The company's selling agent, Hooper Sons Manufacturing Co., which was absorbed by the merger as of January 1, 1932, showed an*1245 earning record for the corresponding period, as follows:
Net profit Net loss 1926 $20,049 1927 19,902 1928 6,032 1929 25,041 1930 $17,880 1931 30,049 Total 71,024 47,929 *122 During the entire period from 1926 to the date of valuation, the only cash dividend paid by William E. Hooper & Sons Co. was $57,680 in 1926, being $7.10 per share on the 7,210 shares outstanding at that time. Hooper Sons Manufacturing Co. paid cash dividends as follows:
1926 $19,900 1927 15,920 1928 23,880 1929 $15,920 1930 9,950 1931 None The stock of William E. Hooper & Sons Co. has never been listed on any stock exchange, nor traded in over the counter. There is no record of any sales of the stock during the period 1926 to 1932, inclusive, or thereafter until the present date, except for the partial exercise by Robert P. Hooper, as noted below, of his option to buy 150 shares of decedent's stock at $65 per share. In February 1938, at the request of Henry R. W. Smith, the trustee of the 1932 trust, who was without funds to meet the necessary expenses of the trust, Robert purchased 20 shares of the stock and paid the trustee $1,300*1246 for the same, for the accommodation and assistance of decedent's family.
The decedent prior to his last illness was in excellent health, and was an unusually vigorous, active, and athletic man. From the time of his marriage in 1911 until after his arrival in Nantucket, Massachusetts, in July of 1933, decedent was not known to have suffered from any diseases or ailments of any kind, except a slight attack of influenza during the epidemic just after the World War. His usual interests and activities continued until he became suddenly ill in the latter part of July 1933, and nothing that he did or said in January 1932, or at any time prior to his last illness, indicated that he contemplated or had any reason to contemplate imminent death.
Shortly after decedent became ill in July 1933, his condition was diagnosed as inflammation of the gall bladder, and an operation was ordered by his doctors. He was operated on at a Nantucket hospital, and his gall bladder was found to be acutely inflamed and was drained. Two or three days later he died. Following his death an autopsy was made. The cause of his death, as disclosed by the autopsy, was acute inflammation of the liver, resulting*1247 in a general infection of his system. This condition was one that arose suddenly, within two or three weeks prior to his death.
The estate tax return filed by petitioner, as administratrix of the estate of the decedent, contained a statement that the property of the trust at the time of decedent's death "should not properly be included as a part of the estate of the deceased" and this property *123 was not included in the gross estate. Respondent determined the amount includable in the gross estate to be as follows:
Gross estate returned $50,680.00 Property (exclusive of insurance) transferred by decedent under trust of January 26, 1932 364,442.37 Insurance transferred to the January 26, 1932 trust 132,639.31 Total gross estate 547,761.68 The parties agree that the amount of deductions allowable in computing the net estate under the 1932 act is $279,131.92. Included in the above amount of $364,442.37 was $361,300 determined by respondent to be the value of the 3,613 shares of the stock of William E. Hooper & Sons Co. owned by the trust on the date of death.
The fair market value of 3,613 shares of the stock of William E. Hooper & Sons Co. on*1248 August 3, 1933, was $162,585, or $45 per share.
The transfer by decedent of his property to the trust under date of January 26, 1932, was not made in contemplation of death.
OPINION.
MELLOTT: The following schedule shows the respondent's method of computing the net estate under the 1932 Act:
Gross Estate Returned $50,680.00 Add: (a) Property as to which there is no controversy over value 3,142.37 (b) Proceeds of life insurance policies 132,639.31 (c) Value of 3,613 shares of William E. Hooper & Sons Co. stock at $100 per share $361,300.00 Total gross estate 547,761.68 Deductions allowable 279,131.92 Taxable Net Estate 268,629.76 Petitioner contends that none of the property added by the respondent is includable in gross estate; that in any event the value of the 3,613 shares of stock is so much less than that determined by him that there is no taxable net estate; that the proceeds of the life insurance policies are not includable, since the trust was the beneficiary and received the proceeds; and that, even if the insurance proceeds are includable, $40,000 of the amount received should nevertheless be excluded from gross estate under section*1249 302(g) of the Revenue Act of 1926.
It has been found as a fact that the stock had a value of $45 per share ($162,585). The evidence upon which this finding is based *124 will be discussed later. It is apparent that there will be a small deficiency in tax if the property in issue be included in gross estate, so it is necessary that all of petitioner's contentions and alternative contentions be considered.
We shall first consider whether or not the assets of the trust estate are includable in the gross estate of decedent. The applicable statute is section 302(c) of the Revenue Act of 1926, as amended by the Joint Resolution of March 3, 1931, shown in the margin. 1 The portion shown in italics was added by the joint resolution.
*1250 A history of the legislation is shown in . In , decided the same day, the Supreme Court approved the inclusion, in the gross estate of the decedent, of property which she had conveyed to a trust, reserving to herself a life interest in the income. (See , for a further statement of the facts.) A similar holding was made by this Board in .
The cited cases point the way to a solution of the question before us, though the facts are not identical with those of the instant proceeding. The transfer by the decedent was not made "in contemplation of death" as such phrase was construed by the Supreme Court in . At the conclusion of the evidence counsel for the respondent conceded as much and the question is not discussed upon brief. He relies upon the first portion added to the statute by the Joint Resolution of March 3, 1931 - that the transfer was one "under which the transferor has retained for his life or*1251 any period not ending before his death, the possession or enjoyment of, or the income from, the property." In this connection he says: "It is unquestionably true that the income of this trust was intended to, and did in fact, inure to the benefit of the grantor."
Petitioner, inferentially conceding that the income did inure to the benefit of the grantor, argues that during his life the benefits were "indirect"; that he did not retain "the possession or enjoyment of, or the income from, the property"; that a holding to the effect such rights were retained can only be reached by applying the rationale of , and kindred cases; that *125 it is an artificial rule to be applied only in income tax cases; and that this Board has previously taken the position, in (appeal pending C.C.A., 8th Cir.), that it can not, and will not, be applied, in estate tax cases.
In the case relied upon by petitioner it was pointed out that an estate tax controversy "must be decided under the specific provisions of section 302(c) as amended, rather than upon any analogy from income*1252 tax cases [and that] the language of the statute does not clearly indicate that it was intended to apply to a situation like" the one then before the Board. Holding that the settlor had "retained no right to receive the income, and any enjoyment of the property or right to the income from the property came to him in a very indirect manner, if at all", it was stated:
"The use of the income was not limited to the discharge of his legal obligations." In the instant proceeding, however, the use of the income of the trust was, for all practical purposes, limited to the discharge of the settlor's legal obligations. He had a legal and moral obligation to provide for the support of his family, including the maintenance, education, and support of his children. This obligation was cast upon the trust. The trust instrument directed that 36 percent of the gross income of the trust, but not to exceed $16,000 nor to be less than $14,000 per annum, be paid over to the wife "for the upkeep and maintenance of the property" owned and occupied by her and the settlor and that "the entire cost of maintaining, educating and supporting" their children, "together with all household and living*1253 expenses" be paid by her. The next obligation of the trust was to give effect to the settlor's expressed wish that sufficient insurance upon his life be kept in force so that "the ultimate payment of the principal of the debts listed on Schedules A and B shall be protected so far as possible." The third obligation of the trust was to pay "from time to time pro rata on account of the principal of the indebtedness due" by the settlor.
The income of the trust was applied as directed. The settlor's salary from William E. Hooper & Sons Co., which was apparently $45,000 per annum, was paid to the trustee in the aggregate amount of $49,563. (Cf. ). Other income of the trust was nominal, amounting to less than $1,800. However, it withdrew the cash surrender value of certain insurance policies, amounting to $23,692.47, so that its receipts, during the time which elapsed between its creation and the death of the decedent, amounted to approximately $78,000. During the same period it distributed to the wife $22,275, which she used as directed, paid $48,093.30 to the settlor's creditors, used $2,934.09 for "other payments" (not otherwise identified*1254 in the evidence), and paid $5,190.65 as premiums upon his life insurance.
*126 After the death of the decedent the trustee paid the creditors listed in the schedules attached to the trust instrument the aggregate amount of $118,255.44. The obligation so liquidated constituted part of the deductions claimed by petitioner in schedules I and J of the estate tax return and have been allowed by the respondent. Summarizing, we think it can not be gainsaid that the income of the trust created by this decedent was used for the discharge of his legal obligations; and a practical interpretation of the terms of the trust instrument leads to the conclusion that no other application could have been made of such income, at least until the full amount of the indebtedness had been paid. The
Connelly case,supra, is therefore distinguishable upon its facts.The transfer by the decedent seems to have been, and we hold that it was, one under which he "retained for his life or any period not ending before his death, the possession or enjoyment of, or the income from, the property." It follows that the respondent did not err in including the value of the property transferred in*1255 his gross estate.
Petitioner argues that even if the value of the stock must be included in gross estate the proceeds of the life insurance policies need not be. She cites section 302(g) of the Revenue Act of 1926, 2 as supporting not only this contention but her alternative one that, in any event, she is entitled to the $40,000 exclusion referred to in the last sentence of the section.
Respondent relies upon the same section and upon his regulation (art. 26, Regulations 80) interpreting it. 3 He quotes from the Board's decision in *1256 , as follows:
* * * It, therefore, seems clear to us that Congress, in enacting section 302 of the Revenue Act of 1924, intended that there should be included in the gross estate of a decedent the full amount of his life insurance which after his death is subject to the payment of charges against his estate * * *, and that it was not the intention of Congress in enacting subdivision (g) of that section to exempt from taxation life insurance meeting such tests, although in terms payable to someone other than the executor. * * *
Since the filing of briefs we have had occasion to consider somewhat the same question as that now before us in
Pacific National *127 , and *1257 . In the former case we held that proceeds of insurance, though payable to a trustee, to the extent that they were required to be used in liquidating debts or obligations of the estate, must be included in gross estate under 302(g) and that the $40,000 exclusion could not be applied against the amount so used. In the latter case we held that, notwithstanding the fact all of the proceeds of insurance could have been used, if necessary, to pay charges against the estate, there should be included in gross estate only the amount actually used, the $40,000 exclusion to be applied to the remainder. Upon theauthority of these cases we therefore hold that $118,255.44 of the proceeds of the life insurance policies should be included in gross estate. The remainder of the amount received ($132,636.31-$118,255.44), being less than $40,000, may not be included.In arriving at a value of $45 per share for the William E. Hooper & Sons Co. stock, we have considered the stipulated facts, the testimony of three witnesses presented as experts by petitioner, and all other evidence bearing upon the question. No witnesses testified as experts*1258 in behalf of respondent.
All of the witnesses for petitioner were qualified to express opinions as to the value of the stock on the basic date, i.e., August 3, 1933. One testified that it was not in excess of $20 per share; another testified to a value of between $10 and $20 a share, "nearer ten than twenty"; while the third arrived at a value of between $15 and $25, and stated "it would work out under twenty." From their testimony it appears that they considered, among other things, the record of earnings, not only of the company itself, but also of its selling agent, the Hooper Sons Manufacturing Co., for the years 1926 to 1931, inclusive, prior to the merger of these companies, and for the years 1932 and 1933, after the merger; the book value of the stock; the cash dividend record of the two companies; the impairment of the surplus account by losses of the business, and the maintenance of this account by transfers from depreciation reserves; the ratio of current assets to current liabilities; absence of any regular or established market for the stock; the fact that 3,613 shares constituted a minority interest; unsettled business conditions owing to the depression and other factors, *1259 and the availability of other more desirable stocks at low prices.
In support of his contention that the stock had a fair market value of $100 per share on August 3, 1933, respondent points to its book value of approximately $145 per share; earnings of $11 per share in 1933 and approximately $10 per share in 1934; a definite upswing in the industry at the end of the month preceding the date of valuation; an entry on the books of the corporation of $8,570 as the *128 "excess of par value over cost of 306 shares of the corporate capital stock cancelled during 1932"; the issuance by the corporation in 1932 of 340 shares at par; and evidence indicating that there were several interfamily transactions in the stock prior and subsequent to the decedent's death.
The only evidence of interfamily transactions in the stock is contained in the testimony of petitioner's witnesses. Two of the witnesses, who were called by the petitioner as experts, were asked by respondent's counsel on cross-examination if they knew of sales made by the decedent to members of his family prior to his death of small amounts of the stock for $90 and $100 per share. Neither of them had any personal knowledge*1260 of such sales, although one testified he had been told that sales at $65 and $90 per share had been made. The secretary and assistant treasurer of the company, who is also the trustee under the trust, testified that some time prior to 1926 decedent had borrowed money from his two sisters and had given each of them 70 shares of the stock as collateral, based on $90 a share, with a privilege of buying it back from them at that price. Subsequently there was a stock dividend and the two sisters each received a certificate for 97 shares for the 70 shares so that they then had in the place of 70 shares at $90 a share, 97 shares at $65 a share. When on January 26, 1932, decedent's brother, Robert, acquired an option to purchase for $65 a share 150 shares of the Hooper Co. stock from the trustee, the price he agreed to pay was based upon that used in the previous transaction between the decedent and his sisters. No effort was made to base the option price on the fair market value of the stock as of the date of the option agreement. Robert Hooper testified that he never exercised the option prior to the decedent's death because he did not consider that the stock was worth $65 a share. *1261 After the decedent's death the trustee was in financial difficulties and asked Robert to purchase 20 shares at $65 so that he might have some funds to run the estate. Robert did so, but he testified that it was only as an accommodation to the trustee. Interfamily transactions, such as those described above, are entitled to little, if any, weight in determining the fair market value of the stock on the basic date.
While it is true that two of petitioner's exhibits indicate that 340 shares of the stock were issued at par in 1932 and that an entry was made in that year indicating that the company had acquired 306 shares of its stock at $71 per share, or $8,570 less than the par value of these shares, the facts and circumstances surrounding these transactions are not disclosed. In our opinion, however, they are not indicative of the price a willing buyer and seller would agree upon for 3,613 shares on August 3, 1933, but were bookkeeping adjustments *129 in connection with the merger of the parent company and its subsidiary selling agent.
A study of all of the evidence convinces us that there were no actual sales of the stock to serve as a basis for determining what a*1262 willing buyer and a willing seller would agree upon as a fair price. In the absence of sales, the material factors to be considered in determining the fair market value of the stock of a close corporation, such as we are now dealing with, are: earning capacity and anticipated profits; book value; dividend yields; and such other facts and circumstances surrounding the corporation and its business as would be considered by a prospective buyer and seller. A prospective buyer would give some consideration to the book value of $145 a share. He would realize, however, that the company was a going concern, and that, even if it be assumed that the book value could be realized upon the liquidation of the corporation, there was no indication that it was to be liquidated. Moreover, he would also realize that "minority stock interests in a 'closed' corporation are usually worth much than the proportionate share of the assets to which they attach." . In our opinion, the factor which he would consider as the most important would be what the stock would earn. See *1263 .
The evidence discloses that the company had a poor earnings record. In 1932 it operated at a loss of $165,404, and its total net loss for the period 1926 to 1932 (including the profit and loss of its selling agent prior to January 1, 1932, the effective date of the merger) was $59,683, or a loss of $5.77 per share. In March 1933, after the bank holiday, its business increased; and on August 3, 1933, it could reasonably have been anticipated that it would realize, and it did realize, a substantial profit for the year. The testimony of petitioner's witnesses convinces us, however, that the increase in business and profits following the bank holiday in 1933 was largely due to fear of a violent sudden inflation, and to the rise in the prices of raw materials when the country went off the gold standard. It therefore was not a true indication of what might be expected in the future.
The cash dividend record of the company and its subsidiary combined for the period 1926 to 1932, inclusive, was $143,250, or only about $2 per share per annum; but even this rate was not justified by the earnings of the seven year*1264 period, in view of the net loss referred to above. The company's surplus account, which had been impaired by the losses of the business, was maintained by the transfer from its depreciation reserve of $138,870 in 1926, $117,348 in 1928, and $350,000 in 1932. At the end of the year 1932 the company's current assets amounted to $587,792 and its current liabilities, which *130 consisted almost entirely of notes payable to banks, amounted to $437,205.
The witnesses who expressed opinions as to the value of the stock on the basic date testified that they had considered all of the facts to which reference has just been made. They concluded that the value was between $15 and $25 per share. This estimate seems to us to be entirely too low. But the value placed upon it by the Commissioner in his determination is much too high. Our duty - difficult as it is - is to determine a
fair market value. We have tried to do so and have determined it to be $45 per share. This figure happens to be the same as that used by the petitioner when she filed the estate return, before any controversy had arisen. We accept it, not because of that fact, but because we believe it to be about*1265 what a buyer, willing, but not compelled to buy, would pay and a seller, willing, but not compelled to sell, would accept, both having reasonable knoweldge of all the facts.We compute the net estate as follows:
Gross estate returned $50,680.00 Add: (a) Property transferred to the trust, no controversy as to value 3,142.37 (b) Value of 3,613 shares of stock at $45 per share 162,585.00 (c) Proceeds of life insurance 118,255.44 Gross estate 334,662.81 Deductions (1926 Act) 329,131.92 Net estate (1926 Act) 5,530.89 Net estate (1932 Act) 55,530.89 Deficiency shall be recomputed in accordance with the views herein expressed and,
Decision will be entered under Rule 50. Footnotes
1. The value of the gross estate of the decedent shall be determined by including the value of the time of his death of all property, real or personal, tangible or intangible, wherever situated * * *
* * *
"(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death,
including a transfer under which the transferor has retained for his life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom;↩ except in case of a bona fide sale for an adequate and full consideration in money or money's worth." 46 Stat. 1516.2. 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 -
* * *
(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life. ↩
3. ART. 26.
Insurance in favor of the estate.↩ - The provisions requiring the inclusion in the gross estate of all insurance receivable by the executor, without any exemption, applies to * * * all insurance which is in fact receivable by, or for the benefit of, the estate. * * *
Document Info
Docket Number: Docket No. 85776.
Judges: Mellott
Filed Date: 1/19/1940
Precedential Status: Precedential
Modified Date: 10/19/2024