South Carolina National Bank v. McLeod

• Decision Date: 25 July 1966
• Docket Number: Civ. A. No. 8765.
• Citation: 256 F. Supp. 913
• Parties: The SOUTH CAROLINA NATIONAL BANK and Julian Mitchell, Jr., Executors of the Estate of Julian Mitchell, Plaintiffs, v. H. M. McLEOD, Director of Internal Revenue for the District of South Carolina, Defendant.
• Court: U.S. District Court — District of South Carolina

256 F. Supp. 913

The SOUTH CAROLINA NATIONAL BANK and Julian Mitchell, Jr., Executors of the Estate of Julian Mitchell, Plaintiffs, v. H. M. McLEOD, Director of Internal Revenue for the District of South Carolina, Defendant.

Civ. A. No. 8765.

United States District Court D. South Carolina, Charleston Division.

July 25, 1966.

Huger Sinkler and Albert Simons, Jr., of Sinkler, Gibbs & Simons, Burnett R. Maybank of Maybank & Manucy, Charleston, S. C., for plaintiffs.

Terrell L. Glenn, U. S. Atty., Columbia, S. C., by Walter J. Tribbey, Atty., Tax Div., Dept. of Justice, Washington, D. C., for defendant.

ORDER

SIMONS, District Judge.

This is an action under Section 7422 of the Internal Revenue Code of 1954 to recover the amount of a deficiency assessment with interest levied by the Director of Internal Revenue and paid by plaintiffs under protest. The jurisdiction of this court is conferred by Title 28, U.S.C., Section 1340, as amended.

Plaintiffs filed with defendant on February 26, 1962 a Federal Estate Tax Return for the Estate of Julian Mitchell, who died testate November 30, 1960, valuing 100 shares of stock of The News and Courier Company of Charleston, South Carolina at $700.00 per share, and 179 shares of The Evening Post Publishing Company also of Charleston at $640.00 per share. Defendant subsequently determined that the fair market value as of the critical date of the News and Courier stock was $980.00 per share, and the Evening Post stock was $980.00 per share.

In accordance with such increased valuation, an additional amount of estate tax and interest was assessed against the Mitchell Estate; and on February 19, 1965 plaintiffs paid defendant under protest the sum of $38,745.38, consisting of a deficiency assessment of $32,878.20, and interest thereon to February 19, 1965 in the amount of $5,867.18. Plaintiffs duly filed a claim for refund of said amount which defendant denied. Plaintiffs thereafter instituted this action for refund of the sum of $38,745.38. The case was tried before the court without a jury in Charleston, South Carolina on March 1, 1966.

The issue before the court is the "fair market value" of the stocks in question as of November 30, 1960. "Fair market value" is that price which a willing buyer would pay a willing seller, neither being under compulsion to buy nor sell, and both being fully informed. O'Malley v. Ames, 197 F.2d 256 (8th Cir. 1952); Bader v. United States, 172 F.Supp. 833 (S.D.Ill.1959); Jenkins v. Smith, 21 F.Supp. 251 (D.Conn.1937); Olson v. United States, 292 U.S. 246, 54 S.Ct. 704, 78 L.Ed. 1236 (1934).

A determination as to value by the Commissioner of Internal Revenue is presumptively correct, and the burden is upon plaintiff to prove by a preponderance of the evidence that the government's evaluation of the stock in question was erroneous. Western Maryland Ry. v. United States, 227 F.2d 576 (4th Cir. 1955). Plaintiffs must also assume the burden of proving a different "fair market value".

Although there is evidence before the court of transactions involving the purchase and sale of the News and Courier and Evening Post stocks, the small amounts of stock involved and the infrequency of such transactions require the court to consider all the relevant circumstances connected with the corporations in determining the fair market value of their stocks. See Heiner v. Crosby, 24 F.2d 191 (3rd Cir. 1928). In Snyder's Estate v. United States, 285 F. 2d 857 (4th Cir. 1961), the Court said:

"Closely held corporate stock cannot be valued reasonably by the application of any inflexible formula. One tailored to the particular case must be found, and that can be done only after a discriminating consideration of all information bearing upon an enlightened prediction of the future.

"Financial data is important only to the extent it furnishes a basis for an informed judgment of the future performance of the particular company, for investors buy stock of this kind out of reasoned hope in the future, not out of pride in the past. Specific data may be determinative in one case, but quite immaterial in another. If a corporation is about to go into liquidation, the entire answer may be found in liquidating values, * * *. The use of relevant data must vary with other circumstances. * * *

"A prudent investor, searching for a basis for a reasonable estimate of the future, does not depend upon averages alone. He searches for significant trends, and his use of data that measures past performance must be governed by all of those considerations which enter into managerial projections of sales and earnings."

Confronted with this issue of valuation the District Court in Ames v. O'Malley, 91 F.Supp. 463 (D.Neb.1950), aff'd 197 F.2d 256 (8th Cir. 1952), articulated the same dilemma that confronts this court at pp. 463-464:

"Pinpointing the issue does not in itself solve our difficulties. The valuation of an intangible asset as of a certain date is one of the most complex problems with which courts are forced to deal. * * * We can derive from the substantive law only formal definitions, so broad as to leave the close questions of meaning entangled with inquiries as to the relevance and the weight of evidence. For instance, the present Revenue Code provides that all property, except inventories, shall be appraised at `fair market value'. 26 U.S.C.A. § 113(a) (1) to (22). The ambiguities of this definition of value become immediately apparent. What is the `market' value is not always the `fair' value, and vice versa. In many situations there is no market for the property in question. What test should govern then? The law tells us that fair market value is a question of fact and in determining * * * fair market value of stock in a corporation due regard should be given to the fair market value of the corporate assets on that date. * * * Let us assume that this standard removes all of the confusion as to exactly `what value' we are searching for. The appraisal of the stock in question is still fraught with difficulty. `This is necessarily true because valuations involve economic prophecies based on a complex and highly controversial technique of inferences from the known to the unknown.'"

Nevertheless, likewise obligated by virtue of its authority this court has analyzed the mass of evidence tendered in this case and arrived at the monetary value felt to most closely represent the fair market value of the newspaper stocks on November 30, 1960, the date of the testator's death.¹

The court, pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, hereby makes the following finding of fact and conclusions of law.

FINDINGS OF FACT

1. The News and Courier Company is a South Carolina corporation which had a total of 1,090 shares of Common Stock outstanding on November 30, 1960, and The Evening Post Publishing Company is also a South Carolina corporation with a total of 1,997 shares of Common Stock outstanding on November 30, 1960. As of that date, of the 1,090 shares of News and Courier stock outstanding, a total of 910 shares or 83.30 percent was held by the management of the company and their families and The Evening Post Publishing Company, a corporation controlled by the management of The News and Courier Company. Of the total of 1,997 shares of Evening Post stock outstanding, a total of 1,665 or 83.37 percent was held by the management of the Company and their families on November 30, 1960. The 100 shares of News and Courier stock held by the Estate of Julian Mitchell represented only 9.17 percent of its outstanding stock, and the 179 shares of Evening Post stock held by the Estate represented only 8.96 percent of its outstanding stock. On November 30, 1960 The News and Courier Company had 14 stockholders, including the Mitchell Estate; and The Evening Post Publishing Company had 20 stockholders, including said Estate. Only three of these stockholders, including the Mitchell Estate, were not related to the officers or directors of the Company. Both corporations are closely held, family corporations with very limited and highly restricted market for their stock, if there is any market at all.

2. The News and Courier and The Evening Post stocks were not listed on any stock exchange, nor were they traded over the counter. During the period January, 1951 through June, 1965, there have been only ten transactions involving stock sales of both of these companies. A list of these transactions is shown below giving the date, seller, purchaser, and the purchase price:

                                        STOCK SALES
                                Evening Post Publishing Company
                                 The News and Courier Company
                                 January 1951 through June 1965
                January 1951
                     1  share Evening Post Common at                      $375.00
                     1  share News & Courier Common at                     290.00
                        Sold by:      Estate of R. M. Zeigler
                                      76 Rutledge Avenue
                                      Charleston, S. C
                        Purchased by: Evening Post and News and Courier
                November 1954
                     10 shares Evening Post at                            $560.00
                        Sold by:      Elizabeth E. Parker
                                      c/o Carolina Savings Bank
                                      Charleston, S. C
                        Purchased by: Hall T. McGee, Sr
                April 1955
                     1  share Evening Post Common at                      $560.00
                     1  share News & Courier Common at                     670.00
                        Sold by:      Evening Post and News and Courier
                                        (from treasury stock)
                        Purchased by: F. B. Gilbreth
                                      430 Maybank Highway
                                      Charleston, S. C
                August 1956:
                     1  share News and Courier Common at                  $550.00
                        Sold by:      Estate of Ethel M. Barry
                                      c/o Irving Trust Company
                                      New York, New York
                        Purchased by: Hall T. McGee, Sr.
                August 1958:
                     40 shares Evening Post Common at

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