Spitzer v. Commissioner of Internal Revenue

• Decision Date: 06 March 1946
• Docket Number: No. 13168.,13168.
• Citation: 153 F.2d 967
• Parties: SPITZER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

153 F.2d 967 (1946)

SPITZER v. COMMISSIONER OF INTERNAL REVENUE.

No. 13168.

Circuit Court of Appeals, Eighth Circuit.

March 6, 1946.

David Baron, of St. Louis, Mo., for petitioner.

Harold C. Wilkenfeld, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Robert N. Anderson, and Leonard Sarner, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before SANBORN, THOMAS, and RIDDICK, Circuit Judges.

RIDDICK, Circuit Judge.

On October 15, 1940, petitioner gave to his wife 75 shares of common stock of the Forest City Manufacturing Company. In his gift tax return for the calendar year 1940 petitioner reported the stock at a value of $186 a share. Petitioner intended the value of the stock to be reported at $286 a share, the book value as of December 31, 1939. He admits liability for whatever difference in tax results because of this error, caused by a mistake made in calculation by the accountant who prepared the gift tax return. The Commissioner fixed the value of the stock at $500 a share and assessed a deficiency. The Tax Court approved the Commissioner's determination. We are asked to reverse on the ground that the finding of the Tax Court as to the value of the stock has no support in the evidence and no reasonable basis in law.

The Forest City Manufacturing Company, a Missouri corporation with principal offices in St. Louis, was organized prior to 1918. In 1919 all of it capital stock was purchased by petitioner Harry H. Spitzer who became president, Simon Spitzer who became vice president, and A. H. Sincoff who became secretary. These men are still executive officers of the company and together with their respective families own substantially all of its capital stock. The company has a capitalization of $300,000, represented by 1,000 shares of common stock of a par value of $100 and 2,000 shares of seven per cent preferred stock of a par value of $100 a share. Prior to 1939 the company was engaged in the manufacture of cotton house dresses and became one of the largest manufacturers engaged in this business in the United States. Since 1939 it has engaged exclusively in the manufacture of junior misses dresses.

The business in which the company is engaged is subject to wide fluctuation and is extremely hazardous. A mistake in the style design of its line of dresses for one season might be sufficient to wreck its business, and the effects of such a mistake may be seriously felt for years in the business of the most successful company. No stocks of companies engaged in the same business as that of the Forest City Manufacturing Company are listed for trading purposes with any stock exchange or traded locally in over-the-counter sales. There is no evidence of sales of stock in the Forest City Manufacturing Company. From the going quotations of other securities in similar but not so hazardous types of business in St. Louis and in other parts of the country in 1940 in both over-the-counter and on the market transactions, it was most usual to find them selling at five or six times their average earnings over a five-year period. The price in some sales was as high as eight times average earnings for the period stated. The listed markets for securities in 1940 were uncertain and unsettled as the result of the war in Europe. These markets suffered a collapse in May 1940 and, although they recovered somewhat in the summer of that year, they faced a difficult situation throughout the year.

From 1930 through 1940 invested capital of the company increased from $200,000 to $300,000; its net profit after taxes from $16,000 to $128,000; its net sales from approximately $2,000,000 to approximately $4,500,000; and earnings available for dividends on common stock from $9,000 to $114,000. The average earnings for the company available for dividends on common stock for the five years ending December 31, 1940, were $68 a share, and the average dividend paid on the common stock during this period was $47 a share. There was no evidence offered to indicate the comparative record of companies engaged in similar business over the five-year period. The trend in the company's earnings available for dividends on the common stock had been steadily upwards since 1936. For the four years ending in 1940 these earnings had averaged approximately $82 a share. After the company changed from the manufacture of women's cotton house dresses to junior misses dresses in 1939, its average earnings for that year and for 1940 available for common stock were approximately $103 a share. Dividends paid in 1939 were $90; in 1940, $75. As noted above, the book value of the common stock as of December 31, 1939, was $286. The 1940 balance sheet of the company indicates that at the time of the gift on the 15th day of October 1940, and prior to the declaration of an annual dividend of $75 a share on the common stock, the book value of the common stock was approximately $400 a share after allowing for the payment of dividends on the preferred stock for the entire year. The book value of common stock as shown by the company's balance sheets is apparently conservative, certainly not excessive.

It would appear from what has been said that the Tax Court's finding of the market value of the common stock at the time of the gift was supported by ample evidence. But petitioner asserts that the market value of the stock at the time of the gift was fixed by an agreement between the company and all of its stockholders, executed in May 1940; and that in any event the Tax Court refused to give any weight to the agreement as a factor important in the determination of the market value of the stock at the time of the gift, and has ignored the testimony of a qualified expert witness for the petitioner who testified that at the time of the gift the fair market value of the common stock of the company was not in excess of two-thirds of its book value on December 31, 1939.

At the time of the execution of the contract relied upon by petitioner, each of the three executive stockholders held 310 1/12 shares of the 1000 shares of the common stock of the company. The purpose of the contract was to insure the continued control of the corporation by these executive stockholders or by the survivors of them. The voting power of all the common stock of the corporation was vested by the contract in the three executive stockholders or the survivors of them. The right of the holders of any of the common or preferred stock of the corporation, other than the executive stockholders, to pledge or encumber their shares was prohibited without the consent of the executive stockholders. The corporation, the executive stockholders, or the survivors of them were given the right to purchase the company's outstanding capital stock at prices fixed by the provisions of the contract and upon certain contingencies expressed in the contract.

On the death of one of the executive stockholders, the corporation was required to purchase from the then holders or their personal representatives all the stock, common or preferred, owned by the executive stockholder at the time of the execution of the contract, or to liquidate, as the surviving executive stockholders might elect. In the event that the surviving executive stockholders decided to purchase from the then holders the stock held by the deceased executive stockholder at the date of the contract, the purchase was to be consummated within three months after his death. The purchase price of the common stock was fixed at its book value as determined by the regular audit of the books of the corporation as of the close of the last preceding fiscal year if the death of the executive stockholder occurred within the first ten months of the fiscal year, or at the book value at the close of the then current fiscal year if the death occurred during the last two months of the fiscal year. The fiscal year of the corporation was the same as the calendar year. If the book value as of the close of the last fiscal year preceding the death of the executive stockholder became the purchase price of the stock, provision was made for adjustment in the purchase price by giving consideration to any substantial changes in capital account which might have taken place in the interim between the close of the preceding fiscal year and the date of the consummation of the purchase, including the maturity of insurance carried upon the life of the deceased executive stockholder, and to certain other accounting factors not important here. At the time of the gift in question the corporation carried insurance upon the life of petitioner in the amount of $100,000. The purchase price of the common stock was to be paid in cash to the extent of the proceeds of the insurance upon the life of the deceased executive stockholder, the balance to be represented by unsecured notes of the corporation, payable over a period of three years, bearing interest at six per cent, and subject to prepayment and to acceleration on default.

In the event the corporation was unable to purchase the stock of a deceased executive stockholder, the contract provided that the purchase should be made by the corporation to the extent that such purchase was lawful, and that the surviving executive stockholders should purchase the remainder of the stock upon the same terms as were provided for purchase by the corporation.

On the death of the second executive stockholder, the corporation was required to purchase upon the same terms as set forth above from the then holders or their personal representatives all stock in the corporation owned by the deceased second executive stockholder or by his wife or lineal descendants at the time of the execution of the contract.

After first obtaining the approval of all the executive stockholders or the survivors of them, the corporation or any of the executive stockholders had the right to purchase any or all of the common or preferred stock...