Bassett v. Neeld, A--94

• Decision Date: 18 March 1957
• Docket Number: No. A--94,A--94
• Citation: 23 N.J. 551,130 A.2d 1
• Parties: Carroll K. BASSETT, William B. K. Bassett, Robert Watson Pomeroy, II, and Frederick C. Van Duzer, Executors of the Last Will and Testament of Margaret K. Bassett, deceased, Appellants, v. Aaron K. NEELD, Director, Division of Taxation, Department of the Treasury of the State of New Jersey, Respondent. In the Matter of the Transfer Inheritance Tax Assessment in ESTATE of Margaret K. BASSETT, Deceased.
• Court: New Jersey Supreme Court

Page 551

23 N.J. 551

130 A.2d 1

Carroll K. BASSETT, William B. K. Bassett, Robert Watson

Pomeroy, II, and Frederick C. Van Duzer, Executors

of the Last Will and Testament of

Margaret K. Bassett, deceased, Appellants, v. Aaron K. NEELD, Director, Division of Taxation, Department

of the Treasury of the State of New Jersey, Respondent.

In the Matter of the Transfer Inheritance Tax Assessment in

ESTATE of Margaret K. BASSETT, Deceased.

No. A--94.

Supreme Court of New Jersey.

Argued Feb. 25, 1957.

Decided March 18, 1957.

Meredith N. Stiles, Jr., Newark, argued the cause for appellants (Lum, Fairlie & Foster, Newark, attorneys, Ralph E. Lum, Jr., Newark, of counsel).

Joseph A. Jansen, Deputy Atty. Gen., argued the cause for respondent (Grover C. Richman, Jr., Atty. Gen., attorney).

The opinion of the court was delivered by

BURLING, J.

Margaret K. Bassett died on February 28, 1954, a New Jersey resident. The state inheritance tax has an impact upon 2,619 shares of stock of Bassett Estates, Inc., by virtue of gifts made by the decedent in contemplation of death or as a part of her estate at death. The 'clear market value' of the stock (R.S. 54:34--5, N.J.S.A.) was reported at $68.746 per share. The Director of the Division of Taxation has determined the value to be $116.53 per share. From this determination the executors appealed to the Superior Court, Appellate Division (R.S. 54:33--2, N.J.S.A.) and we certified the cause prior to a review below.

Bassett Estates, Inc. was organized in 1930 by the decedent and her late husband, Carroll P. Bassett. They each contributed individually owned real estate and securities to the corporation in exchange for stock. Through the years the stock has been closely held and has remained within the Bassett family. It was never traded on the market. The tenor of the operation has remained the same--a family investment in securities and real estate.

The total appraised value of the corporate assets (balance sheet--12/31/53) was nearly $1,900,000. Of this amount approximately $1,200,000 represented fixed assets of realty and equipment; investment securities amounted to $366,000; the entire stock of the Commonwealth Land Co. was owned by the corporation and was appraised at $165,000; and the balance was in receivable mortgages, notes and other accounts and cash on hand.

The realty holdings consist of rental property in Summit, New Jersey; offices, retail stores and apartments. These are actively managed by nine employees. In addition the corporation owns an extensive farm property of some 700 acres. It receives a rental income from tenants on this property and operates a dairy business which regularly employs six men. The Commonwealth Land Company, a wholly owned subsidiary, owns and rents a small office building and is developing other property for sale as building lots in the Summit area.

In valuing the stock of Bassett Estates, Inc., the examiner in the Transfer Inheritance Tax Bureau restricted his analysis to the net assets of the corporation. That is, he substracted total liabilities from total assets (appraised as of decedent's death) and divided the remainder (net assets) by the total shares outstanding. (In legal parlance this method has been termed a net asset value criterion.) This resulted in a value of $116.53 per share.

The market experts who filed opinions on behalf of the executors did not restrict themselves to a net asset approach. They considered other factors as well, e.g., the minority position of the stock, earnings, dividend record, a by-law restriction upon the sale of the stock. The five opinions submitted ranged from $68.7 to $78 per share as the clear market value.

The examiner did not disregard the expert analyses submitted by the executors because of a mere difference in opinion. They were rejected by holding that the various criteria used in the reports to construct a market value were wholly inapplicable in valuing the stock of 'closely held holding companies.' The examiner's Finding No. 15 recites:

'15. That the appraisal methods employed by the various appraisers for the estate have application, if at all, only in the case of the valuation of shares of stock of closely held operating companies. Such methods, however, have no application, as a matter of law, in the case of the valuation of shares of stock of closely held holding companies, and, for this reason, have been disregarded in establishing the value of the stock of Bassett Estates, Inc.'

There is a substantial difference between rejecting Per se all accepted criteria in establishing market value of closely held stock and considering these aids but attributing minimal significance to them upon the facts of a particular case. In re Nathan's Estate, 166 F.2d 422, 426, 427 (9 Cir.1948). Our inquiry concerns the former situation; questions which might arise from the latter are not before us.

The starting point in valuation problems is the statute itself. R.S. 54:34--5, N.J.S.A. ordains that the transfer inheritance tax is to be computed upon 'the clear market value of the property transferred.' Grell v. Kelly, 132 N.J.L. 450, 451, 41 A.2d 122 (Sup.Ct.1945). Given an established market the solution is simple; absent actual sales the appraiser moves into a hypothetical market, Newberry v. Walsh, 20 N.J. 484, 497, 120 A.2d 242 (1956), which he constructs by using criteria which will likely gauge the thinking of one who desires but is not compelled to sell and one who is willing but not compelled to buy. Schroeder v. Zink, 4 N.J. 1, 13, 71 A.2d 321 (1950). This is a highly complex process which does not admit of exactness. The difficulty, however, is not to be overcome by disregarding it. 'The statutory standard is the one by which the bureau's determinations of value are and must be controlled.' Tracy v. Alexander, 17 N.J. 397, 401, 111 A.2d 492, 494 (1955); Grell v. Kelly, supra.

Net asset value (sometimes referred to as 'book value') is seldom the same as clear market value. Ketler v. Commissioner, 196 F.2d 822, 827 (7 Cir. 1952); Aldrich v. Geahry, 367 Pa. 252, 80 A.2d 59, 61 (Sup.Ct.1951). One authority suggests that an assumption of equality is justified only in the case of an investment or holding company in which the book value of the principal assets are adjusted daily to reflect their current market value. Stiegelmeier, 'Valuation of Closely Held Stock for Estate Tax Purposes,' 45 Ill. Bar J. 18, 22 (1956). An inventive idea without facilities to produce it may be worth more on the market than a plant without ideas. Market value reflects the degree of confidence in potential earnings while net asset or book value disregards all but the present.

Because the statute speaks in terms of 'clear market value' the decided emphasis is upon that pole of valuation. For example, in Grell v. Kelly, supra, the former Supreme Court gave decisive preference to a private sale of stock for which no active market existed as against the Director's valuation upon net assets. The rationale of Grell was emphasized in Tracy v. Alexander, supra, although we found no legal fault in starting with a net asset base and discounting that by virtue of other relevant factors where closely held stock was involved. There is strong indication in Renwick v. Martin, 126 N.J.Eq. 564, 605, 10 A.2d 293 (Prerog.1939), and Plum v. Martin, 132 N.J.Eq. 1, 6, 26 A.2d 529 (Prerog.1942), that asset value alone is the only proper consideration where the stock is closely held. These cases cited In re Moore's Estate, 104 N.J.Eq. 400, 145 A. 727, 728 (Prerog.1929), in support where asset value was the sole ingredient because 'the 'clear market value' is impossible of ascertainment.' This attitude was disapproved in Grell v. Kelly, supra, and Tracy v. Alexander, supra. And it is to be noted that the Moore case, 104 N.J.Eq. at page 402, 145 A. at page 728, went only so far as to say:

'* * * at any rate, such a determination (i.e., on net asset or book value) may be taken as a basis, and modified according to such other circumstances as appear * * * which might affect the valuation.' (Explanation supplied.)

That this was the thought of Vice-Chancellor Buchanan in the Moore case is evident by his opinion in Wimpfheimer v. Martin, 127 N.J.Eq. 587, at page 602, 14 A.2d 59, at page 68 (Prerog.1940), where he stated:

'So, also, to determine the value of these notes, under the circumstances, the 'book value' method of determination may properly be used as a basis. Appellants, indeed, do not contend otherwise. The 'book value', however, is not necessarily to be taken as the actual market value,--the 'clear market value' or 'fair market value' prescribed by the statute. It is to be taken as the Basis, and is to be modified according to such other circumstances as appear (if any) which might affect the valuation. In re Moore's Estate, supra. In the instant case there are such other circumstances.'

The conclusion to be drawn from the statute and decisional authority is that the Director is obliged...