Rothgery v. United States, 63-69.

• Decision Date: 16 March 1973
• Docket Number: No. 63-69.,63-69.
• Parties: Hal Joseph ROTHGERY, Executor of the Estate of Bernard Anthony Rothgery, Deceased, v. The UNITED STATES.
• Court: U.S. Claims Court

475 F.2d 591 (1973)

Hal Joseph ROTHGERY, Executor of the Estate of Bernard Anthony Rothgery, Deceased, v. The UNITED STATES.

No. 63-69.

United States Court of Claims.

March 16, 1973.

Harlan Pomeroy, Cleveland, Ohio, attorney of record, for plaintiff. Baker, Hostetler & Patterson, Cleveland, Ohio, of counsel.

Jane C. Bergner, Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant. Theodore D. Peyser, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG and BENNETT, Judges.

OPINION

PER CURIAM:

This case was referred to Trial Commissioner Mastin G. White with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 134(h). The commissioner has done so in an opinion and report filed on May 8, 1972. Exceptions to the commissioner's opinion, findings of fact and recommended conclusion of law were filed by plaintiff, and defendant requested that the court adopt the commissioner's findings but urged that the court adopt a different conclusion of law to give effect to an agreement of the parties made at trial. The case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner's opinion, findings of fact and recommended conclusion of law, with a modification in the conclusion of law, it hereby adopts the same, as modified, as the basis for its judgment in this case as hereinafter set forth. Therefore, it is concluded (1) that the plaintiff is not entitled to recover on its claim that the Commissioner of Internal Revenue erroneously valued the decedent's stock in Rothgery Motors, Inc., and (2) that the plaintiff is entitled to recover such amount as results from allowing a deduction for reasonable fees and expenses incurred in connection with the prosecution of this case, together with interest as provided by law, and judgment is entered to that effect. The amount of recovery will be determined in accordance with Rule 131(c).

OPINION OF COMMISSIONER

WHITE, Commissioner:

Hal Joseph Rothgery, the plaintiff, is the son and executor of the estate of Bernard Anthony Rothgery, deceased ("the decedent"). In the present action, the plaintiff seeks to recover federal estate taxes which he paid to the Internal Revenue Service because of deficiencies assessed by that agency in 1965 and 1966.

It is my opinion that the plaintiff is not entitled to recover.

The decedent, a resident of Grafton, in Lorain County, Ohio, died on May 16, 1962. Prior to and at the time of his death, the decedent owned 125 shares, or 50 percent, of the outstanding stock in Rothgery Motors, Inc. ("the corporation"), an Ohio corporation and automobile dealer founded by the decedent and located in Grafton, Ohio. The 125 shares of stock in the corporation owned by the decedent were bequeathed by him in his will to his son, the plaintiff, who already held 124 shares of the corporation's stock. The remaining share of stock in the corporation was held by Jeanne Rothgery, the plaintiff's wife and the decedent's daughter-in-law.

In the federal estate tax return which the plaintiff filed for the decedent's estate, the value of the decedent's 125 shares of stock in the corporation was reported as $7,590, or $60.72 per share. This valuation was reflected in the amount of the estate tax which the plaintiff paid in connection with the return.

The valuation of the corporation's stock at $60.72 per share for federal estate tax purposes was arrived at by using a price-earnings ratio of 12 times the average annual earnings of the corporation for the 4 years immediately preceding the decedent's death, and allocating the resulting amount among the 250 shares of outstanding stock.

After administrative proceedings that will be discussed more fully in another part of this opinion, the Internal Revenue Service assessed and collected from the plaintiff in 1965 and 1966 estate tax deficiencies that were ultimately based upon a valuation of $72,750, or $582 per share, which the IRS placed on the decedent's 125 shares of stock in the corporation.

Therefore, the principal issue before the court in the present case involves a determination of the fair market value of the decedent's 125 shares of stock in the corporation at the time of the decedent's death.

Value

That the value of $60.72 per share which the plaintiff placed upon the decedent's 125 shares of the corporation's stock in preparing the federal estate tax return was grossly inadequate becomes readily apparent when it is noted that the corporation, at the time of the decedent's death, had on hand cash in the amount of $44,661 and marketable securities having a value of $23,247, and that the corporation's liabilities at the time amounted only to $3,223. Thus, if all other assets of the corporation are excluded and consideration is given only to the liquid assets, the corporation's actual net worth at the time of the decedent's death was $64,685. When this amount is allocated among the 250 shares of stock outstanding at the time of the decedent's death, the resulting figure per share of stock, based on the corporation's liquid assets alone, is $258.71 per share, rather than the $60.72 per share stated in the federal estate tax return that was filed for the decedent's estate.

Perhaps it should be stated in this connection that the evidence in the record warrants the inference that the corporation's cash and marketable securities on hand at the time of the decedent's death were not being held by the corporation for any business need. It is true that, prior to the decedent's death, the Chevrolet Motor Division of General Motors Corporation (the corporation was a Chevrolet dealer) had expressed to the decedent its dissatisfaction with the location of the corporation's place of business at the time on Mechanic Street in Grafton, and had suggested to the decedent that he relocate the business. This dissatisfaction was also expressed by the Chevrolet Motor Division to the plaintiff following the decedent's death. Despite pressure from the Chevrolet Motor Division, however, the corporation did not move its place of business until 1965, when the building on Mechanic Street was damaged by a tornado. Furthermore, the land and building on Mechanic Street used by the corporation prior to 1965 did not belong to the corporation, but to a trust which had been established by the decedent and which leased the premises to the corporation. Also, it is pertinent to note that the new premises to which the corporation moved in 1965 were not purchased by the corporation, but by the plaintiff and his wife, who leased such premises to the corporation. Thus, it is fair to infer that the corporation's cash and marketable securities on hand at the time of the decedent's death had not been assembled, and were not being held, for use in connection with any anticipated purchase by the corporation of a new place of business.

In addition to the cash and marketable securities previously mentioned, the corporation at the time of the decedent's death had other assets that exceeded the cash and securities in value. Findings 37-49, which are based upon a careful consideration of the sometimes conflicting evidence in the record respecting the value of the corporation's assets, show that such assets had a total value of $149,111 at the time of the decedent's death on May 16, 1962. This represents the amount that could have been realized from the corporation's assets if the corporation had been liquidated upon the decedent's death. If the corporation's liabilities at the time, in the amount of $3,223, are deducted from the total value of the assets, the result is an actual net worth of $145,878 for the corporation at the time of the decedent's death on May 16, 1962. When the net worth is allocated among the 250 shares of stock outstanding at the time of the decedent's death, the amount per share is $583.51 and the total amount allocable to the decedent's 125 shares of stock is $72,939.

In this connection, the evidence in the record shows that the value of an automobile dealership, such as the corporation, is closely related—and generally corresponds—to the value of its underlying assets.

Market

The plaintiff contends, however, that there was no market for the decedent's stock interest in the corporation after his death on May 16, 1962. This contention is based upon an inference that the acquisition of the decedent's interest in the corporation would have been unattractive to a possible purchaser in view of the circumstances that a purchaser of the decedent's 125 shares would have acquired only a 50 percent interest, and not a controlling interest, in the corporation, that the other 125 shares of the corporation's stock were owned by the plaintiff (124 shares) and his wife (1 share), and that the plaintiff was unwilling to share the management and operation of the corporation with an outsider.

With respect to the plaintiff's contention, it is necessary to begin the resolution of any valuation problem by presupposing a "willing seller." In the present case, therefore, we must begin with the assumption that the decedent's 125 shares of stock in the corporation were not bequeathed by the decedent to his son, the plaintiff, and that such shares were available for sale by the decedent's estate as a "willing seller." If we begin with such an assumption, it is apparent at once that the plaintiff himself would be a "willing buyer" of the decedent's 125 shares of...