Walter v. Duffy

• Decision Date: 15 February 1923
• Docket Number: 2939.
• Citation: 287 F. 41
• Parties: WALTER et al. v. DUFFY, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Third Circuit

287 F. 41

WALTER et al. v. DUFFY, Collector of Internal Revenue.

No. 2939.

United States Court of Appeals, Third Circuit.

February 15, 1923

Alfred G. Reeves, of New York City, and Arthur H. Bissell, of Montclair, N.J., for plaintiffs in error.

Walter G. Winne, U.S. Atty., of Hacksensack, N.J., and Frederic M P. Pearse, of Newark, N.J. (Carl A. Mapes and Russell D Burchard, both of Washington, D.C., of counsel), for defendant in error.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

BUFFINGTON Circuit Judge.

In 1913 the state of New Jersey, by its statute of March 24 (Laws N.J. 1913, p. 152), provided for the mutualization of its insurance companies, and authorized the valuation of their shares of stock. In pursuance thereof, the Court of Chancery of that state appointed three commissioners to investigate the affairs of the Prudential Insurance Company and determine its value. At that time and long prior thereto, as well as on March 1, 1913, the decisive income tax date here involved Mrs. Emeline C. Blanchard owned 1,890 shares of such stock and with other stockholders was by notice made a party to the valuation proceeding. There is no proof as to what her stock originally cost her. The commissioner's investigations covered three years, involved a careful study of the assets of the company and the assistance of experts and accountants to determine the value of the shares of its outstanding stock, and it is quite apparent that an attempt to arrive at a fair value thereof by an individual owner, or a casual buyer thereof, was simply impossible, and that a sale or purchase thereof could at best be a mere surmise, and not a dependable standard of value. The report of this commission was duly made to the Court of Chancery, and fixed the value of the stock at $455 per share, was confirmed by it, and the mutualization of the company by the purchase of the stock at that price authorized. In pursuance of this valuation, Mrs. Blanchard in the early part of 1915 transferred her shares and received from the company $455 per share for her 1,881.41 shares. No contention is now made that the company had proved, and the court ruled out an offer to affirmatively prove, that during the years 1913, 1914, and 1915, while this valuation was being made, the company had not changed its financial status or made any gains or losses which affected the value of its stock. During those years she had simply held her stock certificates, and beyond the current dividends received from the company, and which she duly accounted for as income, she had received no additional income, profit, or increment from the stock or certificates. Receiving, as she regarded, no income from that source, she made no return of income therefrom. The taxing authorities, however, proceeded to place a valuation of $262.50 as the value of her stock on March 1, 1913, in pursuance of that section of the Act of September 8, 1916, which provides:

'For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of such gain derived. ' Comp. St. Sec. 6336b (c).

As a result thereof, they held that the stock of Mrs. Blanchard from March 1, 1913, to the date of her surrender of stock to the company, had increased in value $192.50 per share, and they accordingly taxed her with having received such an income thereon, and collected from her, over her protest, the corresponding income tax which is here in controversy.

To the ordinary mind, in the absence of loss or gain of assets of the insurance company or in the intrinsic value of its stock, this situation is inexplicable, for it is apparent that, if the ascertained value of $455 in 1915, which Mrs. Blanchard got from the company, is the true value of her stock, her stock was of that same intrinsic value, viz. $455, when the statutory valuation proceedings were begun in 1913, was their value on March 1, 1913, when the income base value was fixed, and remained $455 during 1914 and 1915, when the valuation investigation proceeded. The judgment of the court below, entered upon a verdict of the jury, having fixed the value of the stock on March 1, 1913, at $262.50, and that an income of $192.50 per share additional was received thereon by Mrs. Blanchard, as contended by the government, this writ of error was sued out by the executors.

Without entering into a discussion of the numerous assignments of error, which involve refusals of evidence, the charge of the court as to what constituted fair market value under the act, the fixation of value by the taxing authorities, etc., we may say that the questions involved in the case may be resolved into the inquiry as to what, under the peculiar facts of this case, as disclosed by the proofs and rejected offers, are the elements which determine the 'fair market price' as provided by the statute. In that regard the charge of the court was:

'This stock of the Prudential Insurance Company was assessed by the representative of the government for taxing purposes as of the value of $262.50 on March 1, 1913. The Revenue Department fixed the fair market value of the Prudential stock as of March 1, 1913, at the sum of $262.50.

We have that to start out with. Suit has been brought by the plaintiffs against the government by executors of the estate of a person who owned some of that stock, in which suit it is alleged that the value of the stock as of March 1, 1913, was $455, or some sum in excess of $262.50. It is the burden of the plaintiff to establish to your satisfaction by a fair preponderance of evidence that the stock was worth more than $262.50 on March 1, 1913. It is stipulated in the case that in January, 1915, almost two years afterwards, some stock was sold for $455 a share. Other evidence regarding the value of the stock indicates the record of sales of stock made both before and after March 1, 1913. You will recall some of the statements of the brokers and the amounts at which they sold stock. It is your duty to decide whether the plaintiff has proved that the stock was worth more than $262.50 on March 1, 1913. In deciding that, you may have to decide, or may incidentally decide, what the stock was worth on that day. Now, shares of stock are worth what they bring, and the best evidence of what they bring is the price they actually did bring when offered for sale and sold upon the Stock Exchange. Where stock was freely dealt in before, on, and after March 1, 1913, the quotations on that date are clearly the best evidence of the value of the shares on that day; but in this case there is no quotation as of March 1, 1913, so it becomes your duty to examine the selling price of stock before and after March 1, 1913, and consider it in finding out what the value was on March 1, 1913.'

And this was supplemented by the approval of points on behalf of the government, viz.:

'(5) It would appear from the witnesses produced by the plaintiffs that the stock was sold in the so-called market where local securities were dealt in at prices ranging from $205 in 1912 to $262.50 in September, 1913, and the jury may take this into consideration in determining the fair market value as of March 1, 1913.

'(6) In the absence of prices to the contrary, the price at which the stock was sold in the open market is the best guide by which to determine fair market value.

And in its refusal of the defendant's request:

'In sales of such stock as that of the Prudential Insurance Company of America, all the elements or factors which make up actual or intrinsic values are to be taken into account.'

At this point we deem it proper to say that, as an abstract statement of the law, the court was right, for undoubtedly the law, as well as the provisions of the governing statute heretofore quoted, is that evidence of intrinsic value is not resorted to when fair market value is evidenced by sales. But the difficulty here is not with the principle, as stated in the charge, but with its application to the peculiar facts of this case.

Turning to such statute, we note the taxpayer's gain-- 'the gain derived'-- was what Congress meant to tax, and it manifestly follows that, where no gain was derived by the taxpayer, no tax was to be imposed. The statute also recognized that 'the gain derived' could be ascertained in two ways, viz.: (a) 'The sale'; or (b) 'other disposition of property.' It also recognized that,...