Helvering v. Safe Deposit & Trust Co. of Baltimore

• Decision Date: 05 April 1938
• Docket Number: No. 4262.,4262.
• Citation: 95 F.2d 806
• Parties: HELVERING, Commissioner of Internal Revenue, v. SAFE DEPOSIT & TRUST CO. OF BALTIMORE.
• Court: U.S. Court of Appeals — Fourth Circuit

95 F.2d 806 (1938)

HELVERING, Commissioner of Internal Revenue, v. SAFE DEPOSIT & TRUST CO. OF BALTIMORE.

No. 4262.

Circuit Court of Appeals, Fourth Circuit.

April 5, 1938.

Maurice J. Mahoney, Sp. Asst. to the Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for petitioner.

Charles McH. Howard, of Baltimore, Md., for respondent.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

The petition for review presents two questions which arise in determining the value of the net estate of a decedent subject to the federal estate tax under sections 302 and 303 of the Revenue Act of 1926, 44 Stat. 9, 70, 72: (1) Whether the value of a block of shares of stock, on the date of decedent's death, must be determined by ascertaining the market value on that date of a single share, in accordance with Article 13 of Regulations 80 promulgated under the Revenue Acts of 1926 and 1932; and (2) whether the amount of a pledge of a contribution by the decedent to a charitable organization, paid after his death, may be deducted from the value of the gross estate.

When Henry Walters, a resident of Baltimore, died on November 30, 1931, he owned 35,966 shares of stock of the Atlantic Coast Line Railroad Company, and 104,663 shares of the Atlantic Coast Line Company of Connecticut, a holding company, both of which were valued in the estate tax return at $30 per share; and he also owned 1,000 shares of stock of the Safe Deposit & Trust Company of Baltimore, which were returned at a value of $550 per share.

The stock of the railroad company was actively dealt in on the New York Stock Exchange, and on November 30, 1931, the date of the decedent's death, the average of the high and low prices was $44 per share in sales aggregating 600 shares. The Commissioner of Internal Revenue accepted this figure as the value per share of the entire block of 35,966 shares. The holding company owned about 27 per cent. of the stock of the railroad company, and other securities. The stock of the holding company was not listed on the New York Stock Exchange, but was listed on the Baltimore and Richmond stock exchanges. Sales were infrequent. From September 25, 1931, to February 2, 1932, the price of the stock on the Baltimore Stock Exchange was pegged at $68; that is, sales at less than $68 were prohibited either on or off the Exchange by members thereof. On the Richmond Exchange there was a sale of 34 shares on November 24, 1931, six days before the death of the decedent, at $44 per share; and a sale of 8 shares on December 7, 1931, seven days after his death, at $30 per share. The Commissioner accepted $44 per share, the price at which the stock was sold on the date nearest to the decedent's death, as the value per share of the entire block of 104,663 shares. Upon appeal the Board of Tax Appeals valued the stock of both railroad company and holding company at $35 per share. The stock of the Safe Deposit & Trust Company was not listed on any exchange, but frequent sales were made through a brokerage firm in Baltimore that dealt in the stock. Sales between November 9 and November 25, 1931, were made at prices ranging from $640 to $670 per share. The Commissioner determined the value to be $635 per share for the entire block of 1,000 shares. The Board fixed the value at $600 per share.

The testimony of experienced witnesses on behalf of the taxpayer with regard to the value of the 35,966 shares of railroad company stock indicated a value not in excess of $35 per share on the day of death. Factors entering into the estimate included the quoted market price on that day, the volume of sales, the trend of the securities market, the prospects, earnings, and expenses of the company, and especially the number of shares involved which was so large that it could not have been marketed except over a period of not less than two months, and only then at a price much less than that obtainable from the comparatively few shares sold on November 30, 1931. As a matter of fact, an amount of stock equal to the holdings of the estate was sold on the New York Stock Exchange in the period between December 1, 1931, and March 7, 1932, at an average price of $33.92 per share.

On behalf of the Commissioner, the opinion was expressed by an investment counselor and expert that the fair market value of the shares on November 30, 1931, was the stock exchange price of $44 per share on that date; that the size of the block had no bearing because the value of the whole should be based on the unit value, which, by custom on the exchange, is the value per share of 100 shares; that the whole block could not have been sold on November 30, 1931, for $44 per share, but that it could have been disposed of in three principal ways at that price under conditions prevailing in 1931 by obtaining an option on it and then offering it to an investment trust; or offering it to a group of railroad capitalists; or forming a syndicate and selling the stock through a group of distribution houses on commission. The opinion was expressed that the decline in the market in the period after November 30, 1931, during which the marketing of so large a block would have had to take place, should not be considered in estimating the value on that date.

In like manner, a valuation of the 104,663 shares of holding company stock from $32 to $40 per share, based on similar considerations, was given by a witness for the taxpayer; while the witness for the government estimated its worth at $44 per share based principally on the price received at the sale six days before the decedent's death and parity with the price of the railroad stock. The records of the transfer agents showed that, exclusive of transfers by estates, a total of 27,432 shares of the holding company's stock was transferred between the day of death and November, 1935.

With regard to the 1,000 shares of stock of the Safe Deposit & Trust Company, a valuation of $570 on the day of death was made by a Baltimore broker who handled more sales of this stock than any one else, taking into consideration the prices received from sales made shortly before and shortly after the decedent's death, the general decline in the company's earnings, the general decline in market conditions, and the fact that so large a block of stock could not have been sold at once, but could have been marketed only through some such arrangement as a pool of brokers. Testimony on behalf of the Commissioner indicated a value of this stock at $635.

The position of the Commissioner is that none of the testimony bearing upon the difficulty of selling large blocks of stock at the current prices obtained for small lots should have been considered by the Board in making its appraisal. The true and only proper course, it is said, is to follow the strict rule laid down in Article 13 of Regulations 80. In substance this regulation provides that the value of all property includible in the gross estate is the fair market value thereof at the time of the decedent's death; that this value is not to be determined by a forced sale price or by an estimate of what a whole block or aggregate would fetch if placed upon the market at one and the same time; that in the case of shares of stock or bonds, the basis for ascertaining the value is the value of a share or a bond to be ascertained by taking the mean between the highest and lowest quoted selling prices upon the date of death, and if there were no sales on the date of death, the value shall be determined by taking the mean between the highest and lowest sales upon the nearest date, either before or after the date of death, if within a reasonable period thereof; and in exceptional cases, in which it is established that this method does not reflect the fair market value of securities, other relevant facts and elements of value will be considered, but the size of holdings of any security is not a relevant factor and will not be considered in the determination. The relevant portions of the regulations are set out in the margin.¹

The values reached by the Commissioner were determined in accordance with this regulation, but the Board declined to follow it. Speaking of its use in valuing the stock of the Atlantic Coast Line Railroad Company, the Board said:

"* * * The petitioner criticizes this as a formalistic mathematical method which in this instance is at variance with reality, primarily because it leaves out of account the paramount circumstance that the block of its shares consisted of 35,966 shares and that the valuation of this large number of shares involves considerations and factors different from those applicable to the unit daily mean market price resulting from a few 100-share transactions. To this end, it introduced the testimony of witnesses with various kinds of experience, to prove that in fact the sale of 35,966 shares could not be accomplished as readily or simply as the sale of 100 or 600 shares, and that both the seller and the purchaser would make a different investigation before a price, or an aggregation of prices could be arrived at. The Commissioner, on the other hand, submitted the testimony of an investment counselor of experience and learning who made an analysis of what were, in his opinion, the considerations affecting the value of a block of stock of this size, and arrived at the conclusion that, since each share must be of the same value as every other share of the same kind, the unit price of 100 or 600 shares sold correctly represented the unit price of all such shares, irrespective of the number in any block. There was evidence that in all probability the New York Stock Exchange would not have permitted such a large block to be offered for sale on one day, and that if it had the price would have thereby been instantly depressed; that a sale not on the Exchange might have been possible to a capitalist or an investment trust or...