FITTS'ESTATE v. Commissioner of Internal Revenue
| Decision Date | 03 December 1956 |
| Docket Number | No. 15586.,15586. |
| Citation | 237 F.2d 729 |
| Parties | ESTATE of Cora R. FITTS, Deceased, J. Russel Fitts and Frank E. Tyler, Co-Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Frank E. Tyler, Kansas City, Mo. (Henry W. Logan and Dietrich, Tyler & Davis, Kansas City, Mo., on the brief), for petitioners.
Carolyn R. Just, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson, Attorney, Department of Justice, Washington, D. C., on the brief), for respondent.
Before JOHNSEN, VAN OOSTERHOUT, and WHITTAKER, Circuit Judges.
Rehearing and Transfer to Court en banc Denied December 3, 1956.
VAN OOSTERHOUT, Circuit Judge.
The executors of the Estate of Cora R. Fitts, Deceased, have filed a timely petition to review the decision of the Tax Court of the United States placing for estate tax purposes a valuation of $375 per share upon 263 11/12 shares of stock in the Fitts Dry Goods Company, hereinafter called Fitts Company, owned by Cora Fitts on the date of her death, February 10, 1949. This court has jurisdiction. Internal Revenue Code of 1954, § 7482, 26 U.S.C. § 7482.
The principal issue is whether the Tax Court's determination of value of the Fitts Company stock is clearly erroneous. Petitioners also contend error was committed in excluding evidence of valuation of the Fitts Company stock by an internal revenue agent in connection with the Webster Estate. The executors of the Cora Fitts Estate in their estate tax return valued the Fitts Company stock at $150 per share. The Commissioner in his deficiency determination found the value of the stock to be $600 per share.
The Fitts Company is a closely held family corporation engaged in the wholesale dry goods business in Kansas City. At the time of Mrs. Fitts' death there were 1,510 shares of $100 par value stock of the Fitts Company outstanding, of which the family owned 1,037½ shares. Jesse Fitts, husband of the decedent, became interested in Fitts Company in 1906. Since 1929 the Fitts family has been in control. J. Russel Fitts, the decedent's son and the beneficiary of decedent's Fitts stock, is president and principal managing officer of the company. Other members of the family are with the company in executive capacities.
Many of the financial records of the Fitts Company are in the record by stipulation, including summaries prepared by an accountant for the period from December 31, 1944, to 1954, inclusive, of balance sheets, gross sales, net income, and dividends. The reconciled balance sheets show that during the 1944-1954 period the book value of the Fitts stock has at all times been above $500 per share and that the book value for 1949 was $685.31 per share. Dividends of $15 per share were paid for 1944 through 1949. Net earnings per share after taxes were as follows:
Net Income
Year Per Share
1945 ........................ $ 43.79
1946 ......................... 173.64
1947 .......................... 44.12
1948 .......................... 49.21
1949 ......................... (36.91)
1950 .......................... 59.07
It is conceded that the 1946 profits were due to unusual war conditions. The Tax Court fairly summarizes the petitioners' evidence as to the value of the Fitts stock as follows:
Petitioners' witnesses testified that the book value had but little bearing upon market value, and that in many listed stocks, market value ranged from one-fourth to one-half of book value. An effort was made to compare the Fitts Company stock with various other stocks, but substantial differences exist between the companies used for comparison and the Fitts Company. The testimony of petitioners' experts shows that they relied to considerable extent upon the stipulated financial records. The facts will be further developed hereinafter.
The issue the Tax Court was required to determine was the fair market value of the Fitts Company stock on February 10, 1949. The executors of the Fitts estate elected to have the estate valued as of the date of Mrs. Fitts' death.
Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell. Treasury Regulations 105, § 81.10; O'Malley v. Ames, 8 Cir., 197 F.2d 256. The Fitts Company stock is not listed upon any stock exchange. In determining the value of unlisted stocks, actual sales made in reasonable amounts at arm's length, in the normal course of business, within a reasonable time before or after the basic date, are the best criterion of market value. Treasury Regulations 105, § 81.10(c); Elmhurst Cemetery Co. of Joliet v. Commissioner, 300 U.S. 37, 39, 57 S. Ct. 324, 81 L.Ed. 491. A few small sales of Fitts Company stock were made between members of the Fitts family at prices ranging from $110 to $128 per share. The prior sales occurred three years or more before the basic date and the subsequent sales were five years after the basic date. Such sales were too remote to require the Tax Court legally to regard them as establishing value upon the basic date. Moreover, the burden is upon the taxpayer to demonstrate that the sales relied upon are arm's length sales in the normal course of business. Brooks v. Willcuts, 8 Cir., 78 F.2d 270, 272. The petitioners have not met this burden.
Treasury Regulations 105, § 81.10(c), provides that, absent bona fide sales or bids and offers, the value of an unlisted stock is arrived at * * *" This regulation is elaborated upon in Rev.Rul. 54-77, §§ 2 and 4, 1954-1 Cum.Bull. 187. We quote in part from such ruling as follows:
This court in O'Malley v. Ames, supra, 197 F.2d at page 258, in considering a stock valuation problem similar to the one with which we are confronted here, states:
* * *"
Other cases in which in the absence of bona fide sales the value of closely held stock was determined upon the basis of financial data of the company are: Bank of California, National Ass'n v. Commissioner, 9 Cir., 133 F.2d 428; Kline v. Commissioner, 3 Cir., 130 F.2d 742; O'Bryan v. Commissioner, 6 Cir., 127 F.2d 645. See also Mertens Law of Federal Income Taxation, Vol. 10A, § 59.25.
The financial data in the record fully support the Tax Court's valuation. The 1949 balance sheet shows the Fitts Company to be in excellent financial condition and relatively liquid. The assets total $1,339,601. Of this total, $218,964 is cash, $559,490 merchandise inventory, and $420,131 accounts receivable. Ninety-three per cent of the accounts receivable was paid within ninety days. No item of goodwill is included in the assets. The physical plant is carried at $79,900. Furniture and fixtures and land are carried at $1 each. Current liabilities total $354,862. Capital is carried at $151,000 and retained earnings amount to $833,738. There is some evidence of a decline in sales. The sales for each of the years 1944 and 1945 were in the neighborhood of $5,000,000. They reached a peak in the banner year of 1946 of $7,500,000, were about $6,300,000 in 1948, and about $4,500,000 in 1949. There was evidence that the decrease in sales was due to an increase in chain stores and increased direct sales from manufacturers to retailers. The company had been in business a long time, was in good financial position, and had an excellent credit...
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