Hamm v. CIR

• Decision Date: 30 December 1963
• Docket Number: 17122.,No. 17121,17121
• Parties: Marie H. HAMM, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. William HAMM, Jr., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

325 F.2d 934 (1963)

Marie H. HAMM, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

William HAMM, Jr., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 17121, 17122.

United States Court of Appeals Eighth Circuit.

December 30, 1963.

Joseph A. Maun, of Maun, Hazel, Green, Hayes, Simon & Aretz, St. Paul, Minn., Lawrence J. Hayes, St. Paul, Minn., on the brief, for petitioners.

Ralph A. Muoio, Attorney, Department of Justice, Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Tax Division, Washington, D. C., John B. Jones, Jr., Lee A. Jackson, Donald P. Horwitz, Attorneys, Department of Justice, Washington, D. C., on the brief, for respondent.

Before SANBORN and BLACKMUN, Circuit Judges, and STEPHENSON, District Judge.

BLACKMUN, Circuit Judge.

The Tax Court has upheld asserted deficiencies in the 1953 federal gift taxes of Marie H. Hamm and William Hamm, Jr., in the respective amounts of $317,281.96 and $456,138.53. Judge Pierce's opinion, 79 pages in length and not reviewed by the full court, is T. C. Memo 1961-347. Each taxpayer has petitioned for review.

The Hamms are husband and wife and residents of Minnesota. Each filed a timely gift tax return for 1953. By these returns they consented, as § 1000(f) of the Internal Revenue Code of 1939 permitted, that gifts made by either of them to third persons during the year might be considered as having been made one-half by each.

The reported 1953 gifts were made by Mr. Hamm to two trusts created under separate declarations executed by him on July 18 of that year. The first gift to each trust consisted of $40,000 in cash at its inception. The second gift to each trust was made on December 30, 1953; it consisted of 130 shares, for one trust, and 133 1/3 shares, for the other trust, of common stock of United Properties, Incorporated. This stock was valued at $100 per share in Mr. Hamm's return. The division of the gifts between husband and wife; the assertion, under § 1004(a) (2) (B), of deductions for a claimed charitable portion of the gifts; and the taking into account of net gifts made in prior tax years, resulted in the payment of 1953 gift taxes upon the returns as filed of approximately $8,600 for Mrs. Hamm and $13,200 for Mr. Hamm.

The substantial deficiencies upheld by the Tax Court are attributable (a) to the upward adjustment of the value of the United common from the returned figure of $100 per share to $8,506.40 per share and (b) to the disallowance of the deductions for the claimed charitable portions.

The charitable feature is not in contest on this review so we are confronted with only the valuation issue. As a consequence, the provisions of the trust instruments are of no great import here. It suffices merely to say that the declaration for the one trust provides that net income until March 1, 1964, is to be paid to The Hamm Foundation, Inc.; that from March 1, 1964, through 1969, net income is to be accumulated; and that on January 1, 1970, the trust corpus and the accumulations are to be distributed to the taxpayers' son Edward, if living, or, if not, to issue or other named alternate beneficiaries. The declaration for the second trust contains parallel provisions except that the taxpayers' son William is the principal individual beneficiary.

United is a Minnesota corporation organized in December 1937. Shareholders of Theo. Hamm Brewing Company, Saint Paul, caused United to be formed so that it could hold real estate and other property formerly held by the brewing company. Later United acquired additional real estate and other interests.

At all times from its inception and through 1953, United's issued and outstanding stock consisted of 1,000 common shares and 35,000 cumulative preferred shares. Each class had a $100 par value. Neither was listed on any stock exchange or traded over the counter. No sale of United stock was effected prior to the trial.

When United was formed both its common and preferred shares were issued two-fifths to Mr. Hamm and one-fifth to each of his three sisters. By December 1953 the holdings of United's stock had become more diversified in the sense that some shares were then held by children and trustees. The 2-1-1-1 ratio as between family branches, however, remained. The December gifts by Mr. Hamm did not change this family ratio although they eliminated his personal holding of common.

United's directors for the five years preceding the gifts consisted of Mr. Hamm, the husbands of two of the sisters, and the taxpayers' attorney; its officers were the same two brothers-in-law, the attorney, and two others.

United's articles provide that its voting power is vested solely in the common; that holders of the preferred have no right to vote for any purpose; that the preferred is entitled to semi-annual dividends of 3½% which are cumulative without interest; that no dividend on common may be paid until all delinquent dividends on preferred have been paid; that in the event of liquidation holders of preferred have preference over common shareholders to the extent of the preferred's par value plus all unpaid dividends; and that any or all of the outstanding preferred is redeemable at any time at the option of the directors at $105 per share plus accumulated dividends.

The amount necessary to satisfy the annual dividend requirement on the preferred is $245,000. Some preferred dividends, always less than this annual requirement, were paid by United through its fiscal year 1941 but none was paid thereafter. As of December 31, 1953, the accumulated and unpaid preferred dividends were $3,685,500. No dividend was ever paid on the common.

On the date of the gifts United held either title or long term leases for 68 parcels of real estate, most of which were improved properties located in the City of Saint Paul. It also then held all or substantially all the shares of 8 corporations with businesses located in or near Saint Paul. Two of these were each the parent of a wholly owned subsidiary. United also held cash, marketable securities, notes, contracts, and mortgages receivable, interests in oil and gas properties, and other assets. Its operations consisted primarily of holding and managing its real properties, holding the shares of its subsidiaries and its oil and gas interests and other properties, and receiving the rents, dividends and other income from these investments. It did not manufacture or produce any product. It did not act as a dealer in real estate, securities, or other property. It seldom sold any investment.

The Tax Court found that United's underlying net assets had a fair market value on the date of the gifts of $18,870,456. This finding is not challenged by the taxpayers here. The details of this computation of underlying asset value are set forth at length in the Tax Court's opinion and they need not be repeated here.

From this underlying net asset value figure the Tax Court deducted a total of $7,185,500, consisting of $3,500,000 for the par value of the outstanding 35,000 preferred shares plus the $3,685,500 preferred dividend arrearages. This left $11,684,956 as that portion of the underlying net asset value allocable to the 1,000 shares of outstanding common, or $11,684.96 for each common share.

It will be observed that the Tax Court, in determining the capital amount attributable to the preferred, did not include an additional $5 per share for the premium required if the preferred were to be redeemed. If this $5 increment, or $175,000, were taken into account, then the computation results in an underlying net asset value of the $11,509.96 ($11,684.96 less $175) allocable to each share of common.

As stated above, the Commissioner in his statutory notice of deficiency had determined that the value of the gift common was $8,506.40 per share. The Tax Court, obviously directing itself to this determination by the Commissioner, and in view of its finding of underlying net asset value per share of common, made an ultimate finding that the value of the gift common "was, at the time of the gifts, not less than $8,506.40 per share" and held that the taxpayers had failed to establish error as to this determination of value.

The taxpayers emphasize that the gifts were minority interests in the voting stock and that the usual problems incident to the valuation of a minority interest in a closely held corporation are made even more complicated here by (1) the nature of the underlying assets, viz., a large number of real estate parcels concentrated in one area and stocks of wholly owned subsidiaries which also have never been the subject of a sale; (2) the existence of the preferred and its substantial dividend arrearages; and (3) United's obligations under long term leases for a total rent liability in excess of $24,000,000, the existence of which renders liquidation impossible. The taxpayers then raise four points: (1) that the Tax Court failed to find the facts specially and to state separately its conclusions of law thereon; (2) that it failed to make any finding as to the actual market value of United Common; (3) that it failed to make any finding as to the value of a minority interest in the United Common; and (4) that the evidence compelled a finding that the market value of a minority interest in that stock was $735 per share.

Before discussing these points we note the principles, most of them well established, to which the parties refer. A presumption of correctness attends the Commissioner's deficiency determination and, apart from fraud, the taxpayers have the burden of showing it to be incorrect. Wickwire v. Reinecke, 275 U.S. 101, 105, 48 S.Ct. 43, 72 L.Ed. 184 (1927); Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1933). The clearly erroneous standard applies to findings made by the Tax Court. Idol v. Commissioner, 319 F.2d 647, 651 (8 Cir.1963). When a gift is made in property its value at the date of the gift governs for gift tax...