Estate of Heinold v. CIR, 15317.
| Decision Date | 17 June 1966 |
| Docket Number | No. 15317.,15317. |
| Citation | 363 F.2d 329 |
| Parties | ESTATE of Matthew I. HEINOLD, Deceased, Virgil W. Heinold, Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Seventh Circuit |
John L. Carey, Bruce R. Bancroft, South Bend, Ind., Delmar R. Hoeppner, Valparaiso, Ind., Edward J. Gray, South Bend, Ind., for petitioner.
Richard M. Roberts, Asst. Atty. Gen., Herbert Grossman, Atty., Tax Div., Lee A. Jackson, Gilbert E. Andrews, Attys., Dept. of Justice, Washington, D. C., for respondent.
Before HASTINGS, Chief Judge and KNOCH and CASTLE, Circuit Judges.
The petitioner, Estate of Matthew I. Heinold, deceased, Virgil W. Heinold, Executor, seeks review of a decision of the Tax Court of the United States finding a deficiency in estate taxes, with specific reference to two disputed issues decided adversely to the petitioner.
The Tax Court held that the fair market value of 25,000 shares of stock owned by decedent at his death was $8 per share rather than the value of approximately half that figure placed on the stock by the petitioner's expert witness, and that the proceeds of certain insurance policies on the decedent's life did not qualify for the marital deduction under § 2056 of the Internal Revenue Code of 1954.
The facts are substantially undisputed. The decedent died a resident of Kouts, Indiana, a small rural community whose sole substantial business, the Heinold Elevator Co., Inc., was established as a sole proprietorship by the decedent in 1937. Two years later, the company bought another grain elevator four miles away in Aylesworth, Indiana. After the original building was destroyed by fire in 1942, a new one was built in 1943. In January, 1947, the decedent gave a 25% interest in the company to each of his three children. The company continued as a partnership although a formal partnership agreement was not made until January, 1956. The company expanded its facilities with the aid of a $160,000 loan in 1951 from the Reconstruction Finance Corporation.
In the fall of 1956, the feed mill was destroyed by a second fire, and the bulk of the fire insurance proceeds went to retire the Reconstruction Finance Corporation loan.
A loan of $250,000 from the Small Business Administration was secured. By January, 1958, a new modern mill was built. The company decided to incorporate to secure needed working capital. On May 1, 1958, the new corporation acquired substantially all the assets and assumed all the liabilities of the old company.
Pursuant to an independent appraisal of the company's assets made in April, 1958, the valuation of the fixed assets was written up $343,097.86 above the company's basis to reflect current appraised market value. Each of the partners received 25,000 shares of $1 par value common stock, and 18,180 shares of this stock were sold to close friends and good customers at $8.50 per share.
In May, 1958, the corporation entered into an underwriting agreement with Northwestern Investment, Inc., which was to use its best efforts to sell up to 50,000 shares within one year after the Indiana Securities Commission's order of approval and to receive 15% of the $10 per share gross selling price.
This public offering was subject to the rights of creditors to apply current indebtedness to stock purchases at $8.65 from June 15 to July 15, 1958. Such creditors' conversions were not expected to exceed $100,000. By July 14, 1958, creditors had bought 4,175 shares at $8.65 per share.
Total sales to the general public for the period July 18, 1958 to June 18, 1959, were 38,712 at $10 per share, involving about 348 transactions and 250 to 300 individuals.
Thus 42,887 of the 50,000 shares offered were sold mostly to purchasers residing in the immediate trading area of the corporation — corporate personnel, their relatives and friends, corporate creditors and customers. By May 15, 1959, a confidential memorandum was issued to department heads of the corporation and to Northwestern that no further stock subscriptions should be accepted after June 15, 1959, as adequate financing had been secured from the sale.
The petitioner feels that these sales provided inadequate basis for determining the fair market value of the stock because the purchasers largely included persons with family or business ties who wished to assist the corporation in raising needed funds and who were furnished only limited data from which the earning power of the business could not be readily estimated.
Each of the salesmen of stock was equipped with a kit to show prospective purchasers. This kit contained parts of the prospectus filed with the Indiana Securities Commission, copy of a magazine article describing the new feed mill, various pictures and descriptions of facilities and employees, financial data on past sales and a projected "Management Estimate" of feed sales for 1958.
The salesmen told prospects that the corporation intended to pay dividends which would provide a 4% return on the offering price of $10. The book value of the stock on May 1, 1958, was $7.71 per share, based on appraised value of the assets. Based on the depreciated original cost basis of the assets, the book value was $4.81 per share.
The petitioner called William E. Stiegelmeyer as an expert witness experienced in the valuation of stocks who spent more than two weeks in his study of this corporation. He used the definition of Fair Market Value, found in Revenue Ruling 59-60: the price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of all relevant facts. Mr. Stiegelmeyer evaluated the stock at $3.17.
The fair market value of the stock was a question of fact. The Tax Court's finding of fact as to value must stand unless clearly erroneous. Tripp v. C. I. R., 7 Cir., 1964, 337 F.2d 432, 434. There was substantial evidence to support the Tax Court's finding of the value of the stock. The opinion of an expert witness was material but not conclusive. Fox River Paper Corp. v. United States, 7 Cir., 1948,...
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