Rheinstrom v. Willcuts, 3830.
| Decision Date | 27 December 1938 |
| Docket Number | No. 3830.,3830. |
| Citation | 26 F. Supp. 306 |
| Parties | RHEINSTROM v. WILLCUTS et al. |
| Court | U.S. District Court — District of Minnesota |
Arnold L. Guesmer, of Minneapolis, Minn., for plaintiff.
J. E. Garvey, Sp. Asst. to Atty. Gen., and Victor E. Anderson, U. S. Atty., and Linus J. Hammond, Asst. U. S. Atty., both of St. Paul, Minn., for defendants.
This case was submitted on a stipulation of facts and oral testimony taken in open court. From the stipulation of facts it appears that on and prior to March 1, 1913, there were outstanding and issued 400 shares of common stock of the Cream of Wheat Company of the par value of $100 per share. There was no other outstanding stock of the company, nor were there bonds or mortgages against the property. The plaintiff herein owned four shares of stock. In 1929, in a non-taxable reorganization, the Cream of Wheat stockholders received 600,000 shares of no-par value stock in place of the 400 shares above mentioned. In lieu of the four shares theretofore owned, the plaintiff received 6,000 of the new shares as a result of the reorganization. On March 1, 1913, the Cream of Wheat Company was a closely held, unlisted stock. The record discloses no sales thereof prior to that date. In the month of June, 1929, some time before the 14th of the month, plaintiff sold 1380 of her 6000 shares for the sum of $51,004.80. In her tax return filed March 15, 1930, plaintiff showed a profit of $16,504.80 on the sale of the 1380 shares, arrived at as the difference between the sale price of $51,004.80 and a value of the stock claimed as of March 1, 1913, of $34,500. The Commissioner of Internal Revenue determined that the March 1, 1913, value of this stock was $15,636.53 per share (which value was reduced to $10.424353 per share by the 1500 to 1 split up in 1929), making a net profit on the sale of said shares of $36,619.19 instead of the amount claimed by plaintiff, and that there was a deficiency tax due in the amount of $2966.76, together with interest amounting to $466.67, or a total of $3433.43, which plaintiff paid to avoid a penalty and thereafter filed a claim for refund, which in turn was denied and disallowed. This action seeks recovery of the amount so paid.
The essence of the dispute is the question, what was the fair market value of Cream of Wheat stock on March 1, 1913? The statute involved reads as follows:
Section 113(b), Revenue Act of 1928, c. 852, 45 Stat. 791, 821, 26 U.S.C.A. § 113 note. "(b) Property Acquired before March 1, 1913.—The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be:
It must be determined whether plaintiff has established by a fair preponderance of the evidence that the March 1, 1913, fair market value of the stock involved was an amount in excess of the value determined by the Commissioner.
The Cream of Wheat Company commenced operations in Grand Forks, North Dakota, about 1898, in the manufacture of a breakfast food made from a wheat product supplied the company by various flour mills. The company moved to Minneapolis where manufacture was successfully continued and its product enjoyed an extensive market both at home and abroad. It operated on a small capital with small tangibles and small inventories. It possessed excellent management and produced tremendous returns on the amount invested, as shown for the five or six year period immediately preceding March 1, 1913. It sold its product, consisting of 36 twenty-eight ounce packages to the case, at $4.12 per case. Its price was never varied during the period in question. Prior to the advent of the so-called package breakfast foods, the then used products were largely sold in bulk and at the time in question, so far as the record discloses, the principal companies engaged in the production of breakfast food products were the Quaker Oats, Shredded Wheat Biscuit and the Cream of Wheat Companies. The Quaker Oats and the Shredded Wheat Companies were listed stock, both having common and preferred widely dealt in.
The testimony on behalf of the plaintiff, aside from the exhibits and what appears in the statement of facts, was supplied by three witnesses. Mr. Sidney R. Mather, who became associated with the company in 1902 and left them in 1919, was an accountant and office manager and ran the business in the absence of Mr. Mapes and Mr. Clifford, the dominating figures in the company, neither of whom was called as witnesses. From this witness's testimony it appears that the factory employed from 250 to 300 persons and from 25 to 40, depending upon conditions, were employed in the office. He testified further that on March 1, 1913, the business was systematized and that it was not difficult for him to manage it in the absence of Mr. Mapes and Mr. Clifford, who would be away from two to three months each at a time. That it was without a traffic manager other than himself and that Mr. Mapes looked after the advertising. There was but one factory. This witness did not assume to express an opinion as to value of the stock at any time and other than as to the character and manner of operation his testimony is not enlightening on the question of value.
The plaintiff relies largely upon the disclosures contained in Exhibits A, B and C attached to the stipulation of facts. Exhibit A is designated "Balance Sheet, Tangibles Only"; Exhibit B, "Earnings Statements 1908 to 1913, inclusive"; and Exhibit C is to be considered in connection with the other two exhibits. It sets forth the dividends paid from 1908 to 1912, inclusive, and the two months of January and February, 1913. It also shows the advertising expense over the period and the growth in the sale of cases from 515,972 in 1908 to 640,854 at the end of 1912. Like information is supplied for the two month period of January and February, 1913. It also discloses the wage cost in 1908 to have been $95,079.19 for the factory and $14,451.94 for the office, and for 1912 for the factory $123,731.73 and for the office $17,135.05. It paid dividends in 1908 of $400,000; in 1909 of $460,000; in 1910 of $520,000; in 1911 of $640,000, and in 1912 of $540,000. In January 1913 it paid $40,000 and in February 1913 $80,000.
The company had net income for the years 1908 to February 28, 1913, both inclusive as follows:
1908 .................. $396,847.78
1909 .................. 440,870.89
1910 .................. 524,768.94
1911 .................. 626,731.39
1912 .................. 612,574.43
January and
February 1913 .................. 109,362.14
From January 1, 1908, to February 28, 1913, the net tangible assets of the company averaged $635,000, approximately.
The other two witnesses for the plaintiff, Mr. Justus F. Lowe, who is an investment banker of twenty-five years' experience located in Minneapolis, and Mr. Todd W. Lewis, who was associated with the Charles E. Lewis Company during the period involved, his company being buyers in securities and commodities, testified that they had made a complete study of these exhibits, and in the light of their view that conditions were fairly normal as to business on March 1, 1913, and considering the small inventory with accompanying reduced hazard and lesser insurance outlay, the small physical investment with resulting small depreciation, the absence of outstanding debt except current debts, the small credit risk involved in the receivables shown, the increase in the sale of the product, stability of the price charged and yearly earnings, reached the conclusion that the value of the stock outstanding on that date was approximately $20 per share, giving the company a value of approximately $12,000,000, which represented the capitalization of $600,000 yearly dividends at 5%, or twenty times earnings, and that the same was a conservative investment was the opinion of both witnesses.
Due to the fact that there were no sales of...
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