Richardson v. Commissioner of Internal Revenue

Decision Date28 January 1946
Docket NumberNo. 154.,154.
Citation151 F.2d 102
PartiesRICHARDSON v. COMMISSIONER OF INTERNAL REVENUE.
CourtU.S. Court of Appeals — Second Circuit

Erwin N. Griswold, of Cambridge, Mass., and Holt S. McKinney, of New York City, for petitioners.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Helen R. Carloss, and Carlton Fox, Sp. Assts. to Atty. Gen., for respondent.

Before EVANS and CHASE, Circuit Judges, and HINCKS, District Judge.

Writ of Certiorari Denied January 28, 1946. See 66 S.Ct. 490.

HINCKS, District Judge.

This is a petition to review a decision of the Tax Court determining certain questions relating to gift taxes assessed against the petitioner.

On December 20, 1935, the petitioner created five trusts, one for each of his five children. In the corpus of each of these trusts was included stock of Vick Chemical, Inc., the aggregate in all of the five corpora being 12,487 shares, and stock of Piedmont Financial Company, Inc., the aggregate in all of the five corpora being 5,100 shares.

The petition here questions the values of these two stocks as found by the Tax Court: it also questions the conclusion of the Tax Court that the petitioner was liable for gift taxes on account of the accumulated income of five trusts created by the petitioner's wife in 1932.

The Vick Stock

There was undisputed evidence that on the critical date, December 20, 1935, 400 shares of this stock were sold on the New York Stock Exchange, where it had long been listed, at a high of 43 and a low of 42¼. These prices were not out of line with its price on the said Exchange throughout the year straddling the critical date. These prices ranged from a low of 35 in June, 1935, to a high of 46 in February, 1936. For this same year the average monthly volume of sales on the Exchange was about 4,000 shares. There was no evidence of sales exceeding 400 shares on a single day. For the six months preceding the critical date, the price trend was moderately upward.

The valuation placed upon the stock by the Tax Court was $42.625 per share. It cannot be said that this valuation was made without evidence. The bare facts just above recited constitute sufficient evidential support for the valuation. The only open question is whether, as the petitioner maintains, the Tax Court in reaching the indicated result erroneously failed to use correct standards of valuation applicable to the situation which it found.

The chief complaint of the petitioner is that the Tax Court failed to take into account the "blockage" factor: he insists that a block upwards of 12,000 shares which in the aggregate was included in the five gift transfers had a unit value less than $42.625 which was the price at which a small lot of 400 shares was sold on the critical date.

The courts, to be sure, take cognizance of the obvious economic fact that a market in which sales of small lots can be accomplished at a specified price may lack the body and breadth necessary to support sales of large blocks of securities at the same unit price. Helvering v. Safe Deposit & Trust Co. of Baltimore, 4 Cir., 95 F.2d 806; Helvering v. Kimberly, 4 Cir., 97 F.2d 433; Page v. Howell, 5 Cir., 116 F.2d 158. However, the tribunal charged with the task of valuation will not lightly deviate from evidence based on actual sales; only when it is convinced by persuasive evidence that at the critical time the market was such that it could not absorb sales in the larger volume at the price level obtaining for small lots will it conclude that such prices must be discounted in arriving at the fair market value of large blocks. Cf. Gamble v. Commissioner of Internal Revenue, 6 Cir., 101 F.2d 565; Mott v. Commissioner of Internal Revenue, 6 Cir., 139 F.2d 317.

Moreover, in cases in which evidence as to actual sale prices is the dominant or even the exclusive factor relied upon in making a valuation, nothing in the law or common sense requires the trier to attempt to ascertain what the property in question would have fetched at a sale through a sales effort begun and ended on the critical date. Surely the fair market value of, say, a residence is not measured by the price which the owner could have obtained for it on the very day upon which he first decided to sell. Rather, the measure there, as in the case here, is what "a skillful broker could within a reasonable period have realized." Bull v. Smith, 2 Cir., 119 F.2d 490; Mott v. Commissioner, supra.

Here, to be sure, there was some evidence from the plaintiff's experts that the contemporary market would not have supported sales for the large, aggregate block involved in these transfers at the Stock Exchange prices for small lots. But there was no evidence from such sources that even the large block in question could not have been disposed of at $42.625 within a period reasonably commensurate with the volume of the transaction by brokers or other financial agents competent to accomplish such a hypothetical transaction. In any event, the opinion of the Tax Court makes it plain that such evidence as it had on this issue failed to persuade it that the block in question could not have been sold at $42.625 within a reasonable period after the critical date. This conclusion, although expressed as an "opinion", was essentially a finding in the negative of a subordinate fact. Surely the Tax Court, if not convinced by the evidence, was not obliged to accept the conclusions expressed by the petitioner's experts. Bull v. Smith, supra. Nor are we at liberty to disturb the ultimate finding merely because an independent appraisal of the evidence might have led us to some different finding of the underlying facts and factors.

Several of the Commissioner's witnesses were asked for their opinions as to value based upon the hypothesis that on the critical date the demand to buy as well as the offers to sell had been increased by 12,000 shares. We agree with petitioner's counsel that opinions based on that hypothesis were not relevant. The issue here was as to the existence of such a demand, — or a potential demand which could be aroused by appropriate sales activities. It contributes nothing to a solution to assume the fact which is the main point at issue.

On the other hand, the testimony of the petitioner's experts did not carry far. They were not asked what one skilled in the liquidation of large blocks would have been expected to realize from a liquidation begun on the critical date (when the prior price trend was upward) and prosecuted by the most appropriate methods over the period believed reasonably necessary to accomplish a liquidation on the most favorable terms. Instead, their only expressed opinions were based upon the results to be expected from a liquidation to be accomplished in the last ten days of December either on the New York Stock Exchange in the ordinary routine or through private sales off the Exchange without any specified activity to develop the market for the block. Such testimony even if accepted at its face value might well have failed to convince the trier that the entire block could not have been liquidated at the value found.

We conclude that the petitioner's dissatisfaction with the result reached is plainly traceable to deficiencies in the proofs, — not to the application of erroneous or superseded standards.

The Piedmont Stock

The Piedmont Financial Company, a Delaware corporation organized in 1925, is an investment company with 100,000 shares of stock outstanding, all of which are owned by thirty-three members of the petitioner's family. Of these shares, 5,100 were included in the five trusts involved in this case.

The securities and other assets of the Piedmont portfolio as of the critical date had a fair market value aggregating $9,808,599.27. There was evidence of accrued income taxes against the corporation and expenses totalling $257,699.20. The resulting difference, $9,550,900, if divided by the number of shares outstanding, would give a quotient of $95.509. This amount was found by the Tax Court to represent not less than the fair market value of the stock.

In its findings the Tax Court included data as to the dividend payments and earnings of the Piedmont stock over a substantial portion of the corporate life. It also included in its findings the corporate balance sheet for the years 1934 to 1936 inclusive. In its opinion the court said that it had considered all this data as also the opinion evidence taken at the trial, and had given due weight "to those factors relevant and pertinent to the determination of the fair market value of this stock," but it failed to specify which factors had been actually applied as having weight and relevance.

The petitioner insists that the result reached demonstrates that the valuation was actually based not on the fair market value of Piedmont stock but on the asset value of the corporation as determined by the market value of the numerous securities and other assets included in its portfolio on the critical date. And...

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