In re Nathan's Estate

• Decision Date: 24 February 1948
• Docket Number: No. 11625.,11625.
• Citation: 166 F.2d 422
• Parties: In re NATHAN'S ESTATE. HAMBURGER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

166 F.2d 422 (1948)

In re NATHAN'S ESTATE.

HAMBURGER v. COMMISSIONER OF INTERNAL REVENUE.

No. 11625.

Circuit Court of Appeals, Ninth Circuit.

February 24, 1948.

Claude I. Parker, Ralph W. Smith and J. Everett Blum, all of Los Angeles, Cal., and L. A. Luce, of Washington, D. C., for petitioner.

Theron Lamar Caudle, Asst. Atty. Gen., Helen R. Carloss, Robert N. Anderson, Maryhelen Wigle and I. Henry Kutz, Spc. Assts. to the Atty. Gen., for respondent.

Before DENMAN, HEALY and BONE,

BONE, Circuit Judge.

This is a petition for review of a decision of the Tax Court involving the valuation of shares of stock for purposes of Federal estate tax.

Petitioner is executrix of the estate of Belle Alice Hamburger Nathan, who, at the time of her death on October 13, 1940, owned 425.817 shares of common stock in A. Hamburger & Sons, Inc., and 104.167 shares of common stock in Hamburger Realty Company. The executors elected to have the assets of the estate valued on the optional date of October 13, 1941, as authorized by Sec. 811(j) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 811(j), and returned the stock in A. Hamburger & Sons, Inc. at a value of $983.35 per share, and the stock in Hamburger Realty Company at $2,113.55 per share. Respondent commissioner in a deficiency notice valued the stocks at $1,200 per share and $4,850 per share, respectively. A petition for redetermination of deficiency and recovery of alleged overpayment was filed with the Tax Court, petitioner therein contending for values of $300 and $1,300 per share, respectively, and respondent thereupon redetermined the values at $1,000 and $3,900 per share, respectively. The Tax Court sustained this latter determination of the commissioner.

From the stipulation of the parties, the corporate records and other exhibits in evidence, and the undisputed findings of the Tax Court, the following may be taken as established facts.

As of the basic date there were 3,744 outstanding shares of common stock in A. Hamburger & Sons, Inc. and 1,000 outstanding shares of common stock in Hamburger Realty Company, the stock of both corporations having a par value of $1,000 per share. Neither corporation had issued any stock other than the common stock referred to nor had they issued any bonds. All the stock in both corporations was owned or controlled by brothers and sisters of the Hamburger family, whose ages ranged from 72 to 84 years. None of the stock had ever been sold or listed on any exchange and both enterprises were closed family corporations. Because of inharmonious family relations some of the stockholders were not on speaking terms and each participated in the corporate affairs through his attorney; no younger persons had been trained to assume the operation of the corporations.

In the year 1923 Hamburger Realty Company leased certain real property in the City of Los Angeles to A. Hamburger & Sons, Inc. for a term of 20 years at an annual rental of $250,000. A. Hamburger & Sons, Inc. then sub-leased this property for a concurrent term to the May Department Stores Co. at an annual rental of over $500,000. Hamburger Realty Company then directly leased the property to the May Company at an annual rental of $300,000 for a term of 30 years, this term to commence January 1, 1943, this being the expiration date of the lease to A. Hamburger & Sons, Inc. and the sublease to May Company.

A. Hamburger & Sons, Inc. had a net worth of $3,881,767.33. Its assets were comprised primarily of United States Government bonds, parcels of real estate and amounts due from its stockholders and affiliated corporations. Its principal source of income was the May Company lease, which was not reflected as an asset in its balance sheet. During the years 1936 to 1943 it paid out in dividends slightly more than its available net income — the stockholders anticipated and borrowed the earnings each year, leaving no earnings for corporate operations. For the 1936-1943 period, the average annual dividends paid were $75.93 per share, average annual earnings per share being $68.26. Some $1,920,000 of the corporation's assets were loaned to its stockholders, or to corporations in which they were interested, at two per cent interest or at no interest at all; the loans to stockholders were represented by thirty year notes bearing two per cent interest on unpaid balances. An additional $384,000 was due from stockholders on open accounts upon which apparently no interest was charged.

Hamburger Realty Company had a net worth of $3,927,153.64. Of its approximately $4,500,000 in assets, $4,000,000 was represented by the property leased to A. Hamburger & Sons, Inc. and to May Company. The market value of this property was arrived at by giving effect to the lease and lease rentals discounted on a seven per cent basis, and adding the residual value of the property. The rentals from that property constituted the great majority of its income. During the years 1936 to 1943 it paid out dividends in excess of its available earnings, average annual earnings per share being $157.16 and average annual dividends paid per share, $165.64. This corporation had made no loans to its stockholders.

Petitioner produced two witnesses who appraised the stock in A. Hamburger & Sons, Inc. at values of $337.50 and $297.66 per share, on the basis of expected earnings of $25 per share, after loss of the May Company lease in 1943, capitalized at ten and seven times earnings, respectively, plus the worth of dividends to be received before termination of the lease. These witnesses appraised the stock in Hamburger Realty Company at values of $2,000 and $1,750 per share, on the basis of expected earnings of $180 and $175 per share, including allowance for increase from the May Company rentals, capitalized eleven and ten times earnings, respectively.

The witness for respondent gave values of $3,900 per share for the stock in Hamburger Realty Company and $1,000 per share for the stock in A. Hamburger & Sons, Inc., apparently arrived at by giving dominant weight to the net worth of the two corporations, dividing this by the number of outstanding shares and modifying the resulting amounts into round figures.

Witnesses for both petitioner and respondent testified that they took into consideration all the various factors hereinafter mentioned in arriving at their estimated valuations.

The Tax Court in its opinion reasoned as follows: (1) that because of the abnormal dividend paying system of these corporations and the stockholders' use of corporate assets, the dividend records and normal evaluation criteria were not helpful in this case; (2) that the method used by the parties in valuing the property leased by Hamburger Realty Company and the falsely low income created by loans of A. Hamburger & Sons, Inc. to its stockholders gave sufficient consideration to the corporations' incomes as an evaluating factor; (3) that in view of these facts and the closely held nature of the corporations, the stock in which had never been sold to the public, the fair market value of the assets remained the only available factor which could be intelligently used in fixing the values of the shares in question.

Petitioner's basic contention is that the Tax Court erred, as a matter of law, in failing to consider factors of evaluation such as earnings and dividends-paying capacity, marketability, expert testimony, income taxes and expenses, and all other relevant factors.

The parties agree that the case comes within the purview of Treasury Regulations 105, Section 81.10, promulgated under Section 811 of the Internal Revenue Code, 26 U.S.C.A., § 811, the relevant portions of which are set forth in the margin.¹ The essentially pertinent part of this regulation provides that "if actual sales or bona fide bid and asked prices are not available," the fair market value of corporate stock is to be arrived at by giving consideration to "the basis of the company's net worth, earning power, dividend-paying capacity, and all other relevant factors having a bearing upon the value of the stock. * * * However, the weight to be accorded such comparisons or other evidentiary factors considered in the determination of a value depends upon the facts of each case."

The question of fair market value for tax purposes is ever one of fact and not of formula, and we have repeatedly held that a decision of the Tax Court on this question will be sustained if supported by substantial evidence. Old Mission Portland Cement Co. v. Commissioner, 9 Cir., 69 F.2d 676; Roth v. Wardell, 9 Cir., 77 F.2d 124; Kinney's Estate v. Commissioner, 9 Cir., 80 F.2d 568; Zanuck v. Commissioner, 9 Cir., 149 F.2d 714, 160 A.L.R. 661.

Petitioner apparently acknowledges the foreging principle but insists that the Tax Court here did not consider the factors of value which the law and Treasury Regulations require it to consider, citing Laird v. Commissioner, 3 Cir., 85 F.2d 598; Weber v. Rasquin, 2 Cir., 101 F.2d 62; Worcester County Trust Co. v. Commissioner, 1 Cir., 134 F.2d 578; Commissioner v. McCann, 2 Cir., 146 F.2d 385. In each of these cases the Board of Tax Appeals or Tax Court, in appraising the value of stock, had either directly contravened the applicable Treasury Regulations or had employed a method of valuation, which, in the particular circumstances, was not in accordance with law. We have no quarrel with these decisions, but we do not find them determinative on the dissimilar facts with which we are confronted in this case. Cases can be found in which primary or exclusive emphasis has been properly placed upon one or the other of almost every factor which the regulations state are to be considered in the determination of fair market value.

It is evident that petitioner is exercised principally because of the Tax Court's alleged failure to consider the earnings and dividend-paying capacity of the two corporations.² The Tax Court in its opinion, after reviewing the...