Schwartz v. C.I.R.
| Decision Date | 13 July 1977 |
| Docket Number | No. 76-1408,76-1408 |
| Citation | 560 F.2d 311 |
| Court | U.S. Court of Appeals — Eighth Circuit |
| Parties | 77-2 USTC P 13,201 Burnett SCHWARTZ and Estate of Max L. Raskin, Deceased, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
Robert J. Domrese, St. Louis, Mo., for appellant; Carroll J. Donohue, St. Louis, Mo., on brief.
Karl Schmeidler, Atty., Tax Div., Dept. of Justice, Washington, D. C., for appellee; Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Crombie J. D. Garrett and David E. Carmack, Attys., Washington, D. C., on brief.
Before HEANEY and STEPHENSON, Circuit Judges, and STUART, District Judge. *
This appeal is from a decision of the Tax Court holding the petitioners, executors of the estate of Sam Melman, Jr., personally liable for estate taxes owed by the decedent's estate. We reverse and remand for the reasons stated in this opinion.
Sam Melman died in November, 1967. His son, Gene J. Melman, and the petitioners, Burnett Schwartz and Max L. Raskin, were appointed executors without bond of his estate. 1 The estate tax liability of the Melman estate was stipulated to be $29,820, plus a penalty of $1,491 and interest. Neither the estate nor the executors have made payments on the liability. 2
The principal assets of the estate were the decedent's interest in two businesses, the Duro Chrome Corporation and the Melman Fixture Company, which the decedent owned and operated during his lifetime. The value of these assets is the subject of dispute. The largest asset was 2,263 shares of common stock of Duro Chrome, representing seventy-one percent of the corporation's outstanding shares. The Tax Court found that the Duro Chrome stock had a value of $400,000 at the time of the decedent's death. In 1968, Duro Chrome showed a before-tax profit of over $100,000. It showed before-tax losses of $137,163 in 1969, $519,437 in 1970 and $125,217 in the first quarter of 1971. On August 17, 1971, Duro Chrome made a common law assignment for the benefit of creditors. At that time, the stock of Duro Chrome was valueless.
The other principal asset of the estate was the decedent's interest in the Melman Fixture Company. This consisted of fifty-eight percent of its outstanding stock and a receivable from Melman Fixture valued for estate tax purposes at $114,182. The Tax Court found the stock in Melman Fixture to be valueless because the company had shown losses for several years prior to the decedent's death and because it was dependent on the decedent's personal services. The receivable, however, was not valueless because Melman Fixture owned real estate in downtown St. Louis which the St. Louis Redevelopment Authority was expected to acquire. The real estate was sold by the court appointed administrator in October, 1972, to a private party for $65,000. Eight months later, it was sold to the Redevelopment Authority for $140,500. The estate also held other miscellaneous assets valued at approximately $32,800.
The Tax Court found that the principal liabilities of the estate consisted of a debt due Duro Chrome in the amount of $214,336, a debt due Florence Melman, the decedent's widow, in the amount of $110,545; the estate tax liability in the amount of $31,311; a guarantee of a pledge of collateral to secure an indebtedness of Melman Fixture in the amount of $75,000; executors' fees due Schwartz and Raskin in the amount of $26,000; and a $17,968 balance due on a note secured by a mortgage on property owned by the decedent but conveyed to a third party before his death. The petitioners dispute the inclusion of the latter three debts as liabilities of the estate. The inclusion of other miscellaneous debts totaling $65,490 is not disputed.
The only significant distributions made during the administration of the estate were payments to Philip Melman, the decedent's brother, and to Florence Melman, the decedent's widow. The distributions to Florence Melman were made pursuant to the settlement of a probate dispute which had arisen when, contrary to an antenuptial agreement, Florence Melman claimed a one-third interest in the estate under Mo.Rev.Stat. § 474.160. On September 16, 1969, the Probate Court of the City of St. Louis approved a settlement agreement under which Florence Melman would receive a total cash payment in the amount of $108,000 and a Lincoln automobile valued at $2,545. 3
The settlement called for the distribution of the car, an immediate cash payment of $50,000, twenty-nine monthly payments of $1,000 and a final payment of $29,000 at the end of twenty-nine months. At the time of the settlement, the estate had little, if any, cash. However, Melman Fixture had $50,000 in an account at the First National Bank of St. Louis. The Bank released this amount only after the executors pledged the estate's Duro Chrome stock as collateral for the $75,000 owed the Bank by Melman Fixture. Florence Melman actually received only the automobile and cash payments of $72,000.
The following distributions of assets from the estate were made after September 16, 1969, the date the settlement with Florence Melman was approved by the Probate Court:
Distributee Date Amount Purpose
----------- ---- ------ -------
Philip Melman, 9-26-69 $ 1,000 Payment of debt owned
Brother of Deceased by decedent
9-29-69 $ 500
Florence Melman, 9-29-69 $25,000 Family allowance
Wife of Deceased
$ 7,500 Homestead allowance
$17,500 Distribution to an heir
9-30-69 $ 2,545 Value of Lincoln
automobile representing a
distribution to an heir
10-16-69 $ 1,000 Distribution to an heir
thru per (22 monthly payments
7-16-71 month were made)
-------
TOTAL........... $76,045
It is undisputed that the estate was insolvent at the time the payments were discontinued on July, 1971.
Executors who pay debts to third parties before debts due the United States when the estate is insolvent, may be held personally liable under §§ 3466 4 and 3467 5 of the Revised Statutes, 31 U.S.C. §§ 191 and192, for the amount owed by the estate to the United States. 6 In this case, the Tax Court found that the estate was insolvent as of September 16, 1969, and held that the petitioners were, therefore, liable for estate taxes in an amount equal to a series of payments made after that date to the brother and the widow of the decedent. 7 Alternatively, the Tax Court held that, even if the estate was initially solvent, it was deemed to have been insolvent during the period when these payments were made because at least some of the payments were made after the estate became insolvent. We disagree with both of these conclusions of the Tax Court.
The Tax Court found that the estate's financial position as of September 16, 1969, was as follows:
Based on the above balance sheet, the Tax Court found that the estate was insolvent at the time the executors made all the above listed distributions to Philip Melman and to Florence Melman. This finding is one of fact, Kaufman v. Tredway, 195 U.S. 271, 273, 25 S.Ct. 33, 49 L.Ed. 190 (1904), and is reversible only if it is clearly erroneous. Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960); American National Bank & Trust Co. of Chicago, Ill. v. Bone, 333 F.2d 984, 986 (8th Cir. 1964). The principal issue raised on appeal is whether the Tax Court erred in valuing the Duro Chrome stock at $250,000 as of September 16, 1969. After a careful review of the record, we conclude that the valuation of $250,000 is not supported by the record and, indeed, is inconsistent with other factual findings of the Tax Court.
We recognize that the proper valuation of the Duro Chrome stock is basically a question of judgment requiring the consideration of a number of factors. See Hamm v. C. I. R., 325 F.2d 934, 938 (8th Cir. 1963), cert. denied, 377 U.S. 993, 84 S.Ct. 1920, 12 L.Ed.2d 1046 (1964). Among the factors to be considered are the value of the corporation's assets, its earnings and loss record, its management, its financial condition, its balance sheet and book value, and any other factor that an informed purchaser and an informed seller would consider in a sales transaction. Riss v. C. I. R.,478 F.2d 1160, 1164 (8th Cir. 1973), affirming, 56 T.C. 388 (1971); Hamm v. C. I. R., supra at 938-939; Arc Realty Co. v. C. I. R., 295 F.2d 98, 102-103 (8th Cir. 1961); O'Malley v. Ames, 197 F.2d 256, 257-258 (8th Cir. 1952).
The Tax Court did not explain its $250,000 valuation of the estate's Duro Chrome stock. 8 The Commissioner lists several factors supporting a lower valuation of the stock in September, 1969, than at the time of the decedent's death in November,...
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