Kline v. Commissioner of Internal Revenue, 7981.
| Decision Date | 01 September 1942 |
| Docket Number | No. 7981.,7981. |
| Citation | 130 F.2d 742 |
| Parties | KLINE v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Third Circuit |
J. Warren Brock, of Philadelphia, Pa. (Edmonds, Obermayer & Rebmann, of Philadelphia, Pa., on the brief), for appellant.
Joseph M. Jones, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.
Before BIGGS, JONES, and GOODRICH, Circuit Judges.
The petitioner was the owner of a voting trust certificate representing the beneficial interest in 4,500 shares of the stock of E. J. Lavino & Co. On December 24, 1937 the petitioner executed an irrevocable trust and transferred the voting trust certificate to it. He designated himself as trustee and the indenture provided that he was to collect the dividends and pay the net income for his life to his wife. After the settlor's death the interest and principal were to be paid to his wife, to his son, or to his son's descendants.
The sole question presented by the petition at bar is whether the Commissioner's determination of the value of the taxpayer's stock represented by the voting trust certificate which he assigned to the trust which he created was correct for the purposes of the gift tax, for Section 506 of the Revenue Act of 1932, c. 209, 47 Stat. 169, 26 U.S.C. A. Int.Rev.Code § 1005,1 provides that "If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift." We are concerned therefore with the value of the petitioner's stock as of December 24, 1937.
The petitioner acquired his interest in the stock of the Lavino Company and his voting trust certificate as follows. From time to time commencing in November, 1928, the company distributed shares of its common stock to some of its employees. In November, 1928, Kline received 700 shares which was carried on the books at $25 per share and in October, 1929, he received 3,800 additional shares which was carried on the books at $10 per share. By steps which it is unnecessary to detail these shares came to be represented by the petitioner's voting trust certificate which he made the subject of his gift. The petitioner has been a director and the executive vice-president of the corporation since 1927. All the stock issued by the company to its officers and employees was issued subject to a restrictive agreement which provided the terms, conditions and price at which the stock could be disposed of by the individuals who received it. The stock could not be sold without the consent of the company. If the employee died or severed his connection with the company under conditions acceptable to the board of directors, the company was given an option, to be exercised within one year, to purchase all or any part of the employee's shares of stock at a price not to exceed 75% of its book value as shown on the company's statement at the date of the last closing of its books. If the employee severed his connection with the company under conditions not acceptable to the board of directors or with which the board was not in sympathy, the company had the option to purchase within a year all or any part of the employee's shares of stock at a price not to exceed 50% of such book value determined as before. If the employee should be discharged from the company's employment "for cause approved by the board of directors" the company was given an option to purchase within a year all or any part of the employee's stock at a price not to exceed 33 1/3% of book value. The Lavino Company, through its board of directors, approved the transfer of the taxpayer's stock to the trust.
All voting trust certificates issued to employees bore specific endorsement to the effect that the certificate and the shares of stock represented by it were to be transferable only upon compliance with the covenants and conditions which we have just set forth.
The Board of Tax Appeals sustained the findings of the Commissioner putting a value of $43 a share upon the stock. The taxpayer has petitioned this court for review.
The last closing of the books of the Lavino Company prior to December 24, 1937, was as of December 31, 1936. The book value of the stock as shown on the balance sheet as of December 31, 1936, was $36.03 a share. The petitioner in his gift tax return for the year 1937 reported the gift of the stock to the trust at a value of $12.68 a share which was supposed to represent one-third of its value as of December 31, 1936.2 The taxpayer paid a gift tax in the amount of $243.31, apparently assuming that the value of the stock to the trust was one-third of its book value. The Commissioner increased the value of the stock to $43 per share and determined the existence of a deficiency in the petitioner's gift tax in the amount of $13,140.44. At the hearing before the Board the taxpayer produced two expert witnesses who testified as to the value of the stock if it were not subject to the provisions of the restrictive agreement which we have outlined above. The first of these witnesses testified that the common stock, if free of the restrictive covenants, would have a fair market value of $30.90 a share. The second witness testified that if the stock were not subject to the provisions of the restrictive agreement it would have a fair market value within "* * * a low limit of somewheres around 25 and a high limit of somewheres between 35 and 40; but roughly I would say that $30 a share was a fair price, all things considered." The same expert testified that when the stock was considered subject to the restrictive agreement, its fair market value could not be considered to be in excess of the price at which the company would repurchase it. He testified that when the stock was subject to the covenants of the restrictive agreement the stock could not be considered as having any fair market value at all.
The taxpayer takes the position that the testimony of the two experts was the only testimony or evidence in respect...
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