Guggenheim v. Helvering, 15.

• Decision Date: 05 February 1941
• Docket Number: No. 15.,15.
• Citation: 117 F.2d 469
• Parties: GUGGENHEIM v. HELVERING, Com'r of Internal Revenue.
• Court: U.S. Court of Appeals — Second Circuit

117 F.2d 469 (1941)

GUGGENHEIM v. HELVERING, Com'r of Internal Revenue.

No. 15.

Circuit Court of Appeals, Second Circuit.

February 5, 1941.

COPYRIGHT MATERIAL OMITTED

Montgomery B. Angell, of New York City, for petitioner.

Carlton Fox, Sp. Asst. to Atty. Gen., for respondent.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

L. HAND, Circuit Judge.

This appeal is from an order of the Board of Tax Appeals assessing a deficiency in the estate tax due from the petitioner, as executrix of Daniel Guggenheim; the questions raised are of two kinds: (1) The proper value of items concededly includable in the gross estate; (2) whether certain items should be included at all. The first and most important of these is the proper value of the decedent's interest in what is described as the "Old Firm." The other questions are (1) the value of his interest in the "New Firm"; (2) the inclusion in his estate of some collateral held by the "Old Firm" against his obligations; and (3) the inclusion of the corpus of a trust fund. The Board made very elaborate findings of fact and wrote a long and careful opinion (39 B.T.A. 251); later supplemented by another, confined to the trust estate (40 B.T.A. 181). We shall assume familiarity with the facts as there stated and shall restate them only so far as is necessary to make the discussion intelligible.

The decedent at the time of his death, September 28, 1930, was a member of two partnerships, called the "Old Firm" and the "New Firm," each composed chiefly though not altogether of members of his family. The "New Firm" had been formed on June 26, 1925; it was composed of four Guggenheim brothers and two outsiders and to it the "Old Firm" transferred some of its assets. The "Old Firm" was formed in 1916; the original partners were five Guggenheim brothers, the decedent's son, his nephew, and one outsider; before September 28, 1930, one of the brothers had died, the two sons had retired — though they retained interests in the assets — and the outsider was completely out. By the agreement of separation the "Old Firm" was to confine itself to ventures already on foot on January 1, 1925, although these were not to be wound up but to be pressed to a conclusion. In the original articles the partners had agreed that any retiring or dying partner should have an option to keep his share in any of the enterprises under way when he retired or died, upon condition that he or his estate should reimburse the remaining partners for any future outlays made to carry them out. The occasion and extent of these calls upon him was absolutely within the discretion of the remaining partners, as was the general conduct and duration of the business. This provision was later changed so that the dying or retiring partner had no option to withdraw, but was obliged to leave his interest in the firm and to make all payments demanded, as though he had exercised his option under the original articles; and so the articles stood on September 28, 1930. Moreover, an ex-partner could withdraw no part of his share until the last venture had been completely wound up in which he was interested. When the two sons retired in 1923 a separate agreement was made by which the remaining partners agreed on their behalf to finance the sons' interests in any undertakings then pending, but the father of each agreed to bear that part of his son's debit which the son's share should not be able to meet.

Although the partners had originally been engaged in the exploitation of copper mines, they had acquired holdings of Chilean nitrates as far back as 1916, and after they had closed out the copper business in 1923 a report in that year of one of their engineers which disclosed a newly discovered method of treating nitrate ores awakened an increased interest in that business. The firm secured patents on this process and in December, 1924, organized a corporation, called the Anglo-Chilean Company, to exploit it. This company's assets, acquired in one way or another, were large nitrate beds, a non-exclusive license in the patents and about $6,000,000 of promised cash. For these it gave $10,000,000 of preferred shares and 1,600,000 common shares without par value. Later the preferred shares were redeemed by issuing bonds, and a railway was bought for a second issue of bonds. In 1929 it also acquired control of another nitrate company called Lautaro Ltd. through financing not necessary to describe; this company owned large nitrate beds and some plants operated by the old extraction processes. To acquire the Lautaro properties the Anglo-Chilean company borrowed largely; and at the death of the decedent the unpaid remainder of these loans came to more than $1,900,000, which the "Old Firm" had guaranteed. The Anglo-Chilean company had also borrowed about $10,000,000 in addition which the "Old Firm" had similarly guaranteed; and had also incurred some $25,000,000 on open account, of which the "Old Firm" owned about 55%. The "Old Firm's" interests in the company on September 28, 1930, consisted of that proportion of the accounts and about 666,000 of the common shares.

The Anglo-Chilean company never made any money; it operated at varying deficits during the years 1925-1929 inclusive and for the first six months of 1930, though there was some improvement in 1928 and 1929. The whole industry in Chile had been badly hurt by the competition of synthetic nitrates and was in a most unsatisfactory condition despite the new process; but in January, 1930, Marsh, the company's engineer, made a report suggesting a "reconstruction," which he thought likely to put the company upon a paying basis. The president of the company thereupon opened negotiations with the Chilean Treasury for a consolidation of all nitrate producers into a cartel or monopoly, under government auspices, and by April of that year the outlines of a plan had been agreed upon. The "Old Firm" was willing to go into this scheme and the plan was fully articulated by June; it was proposed that the government should have a half interest in the new venture. The public must have learned of these negotiations and have regarded them hopefully, for the common shares of Anglo-Chilean rose on the New York Curb from about 18 in January to above 30 in June. Obstacles arose in carrying out the original plan — which among other things had involved the assumption by the cartel of all the open accounts of the Anglo-Chilean company — but with some changes these were overcome and the project was finally agreed upon and went into effect in 1931. Meanwhile the decedent had died and at his death the shares had fallen to about 23 on the Curb. The Board found that on September 28, 1930, it was to be expected that the cartel would be organized and that it was still supposed that it would assume all the Anglo-Chilean debts except about $1,900,000. It was part of the plan that the burden of the export excises formerly imposed upon nitrates should be substantially relieved, and that the quota system which had been in force should be done away with; both these changes were considered advantageous to the industry. The cartel was not a success; the industry did not prosper under it; it collapsed by the summer of 1932 and was dissolved at the beginning of the next year.

The first challenge to the Board's ruling is that it found $9.40 as the value of the Anglo-Chilean shares on September 28, 1930, and that the open accounts were worth par. The petitioner argues that we should hold that there was no evidence that the shares had any value at all, or that the accounts could have been worth more than fifty cents on the dollar. We do not conceal the difficulty of finding the value of such securities in such quantities; yet people were actually buying and selling the shares freely and in substantial numbers at more than twice the value which the Board found, and it seems to us palpably untrue to say that they could have been worth nothing at all. If one could have looked ahead, the hopes on which such values were based would have been seen to be unfounded; the cartel was not destined to pull Chilean nitrates out of the mire; but there can be no question that at the moment when — unhappily for his estate — the decedent chanced to die, those hopes were shared as well by persons in a position to know the facts as by the general public. What happened later has nothing to do with the case. Ithaca Trust Co. v. United States, 279 U. S. 151, 49 S.Ct. 291, 73 L.Ed. 647. It would have been irrelevant for instance if on September 30, 1930, an earthquake had swallowed every acre of the company's nitrate beds with all its plants. It is true that in valuing patents for income tax purposes two circuits have taken the opposite view. H. H. Miller Industries v. Commissioner, 6 Cir., 61 F.2d 412; American Chemical Paint Co. v. Commissioner, 3 Cir., 66 F.2d 381. Moreover, in Nachod & United States Signal Co. v. Helvering, 74 F.2d 164, the Sixth Circuit reaffirmed the same doctrine, this time upon the supposed authority of Sinclair Refining Co. v. Jenkins Petroleum Process, 289 U.S. 689, 53 S.Ct. 736, 77 L.Ed. 1449, 88 A.L.R. 496. Nevertheless, with deference, it appears to us that this involved a misunderstanding of the Supreme Court, and that both courts have confused two quite different questions. In Sinclair Refining Co. v. Jenkins Petroleum Process, supra, the court was passing upon the damages suffered by a promisee from the breach of a contract to assign a patent, and held that it was proper to look to what the seller had earned by exploiting it after the breach. There the test was that amount which would put the buyer in as good position as though the seller had performed, and the best way to learn that would have been to wait and see what the patent actually brought in. Estimates of its value are mere makeshifts permissible only because the suit cannot wait so long. There are indeed situations when present value is...