Williams v. Commissioner of Internal Revenue

• Decision Date: 13 December 1930
• Docket Number: No. 8830.,8830.
• Citation: 44 F.2d 467
• Parties: WILLIAMS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

44 F.2d 467 (1930)

WILLIAMS v. COMMISSIONER OF INTERNAL REVENUE.

No. 8830.

Circuit Court of Appeals, Eighth Circuit.

October 10, 1930.

Rehearing Denied December 13, 1930.

Paul E. Shorb, of Washington, D. C. (F H. De Groat, of Duluth, Minn., and M. P. Wormhoudt and Covington, Burling & Rublee, all of Washington, D. C., on the brief), for appellant.

Randolph C. Shaw, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key and John H. McEvers, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Percy S. Crewe, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for appellee.

Before KENYON, BOOTH, and GARDNER, Circuit Judges.

BOOTH, Circuit Judge.

This is a petition to review an order of the Board of Tax Appeals which redetermined the deficiency of the petitioner's income tax for the year 1925. The facts leading up to the order are substantially as follows: Petitioner is a resident of Duluth, Minn. November 4, 1918, his wife died testate, leaving an estate which included among its assets 827 shares of the capital stock of the Red Cliff Land & Lumber Company, Limited (herein called the Red Cliff Company), of which the petitioner received as his share 275 2/3 shares. The Red Cliff Company prior to April, 1918, was the owner of large timber tracts in Canada. At that time it sold its holdings to the Alberni-Pacific Lumber Company, Limited (herein called the Alberni-Pacific Company), in exchange for 24,000 shares of the latter's capital stock; and these shares constituted the assets of the Red Cliff Company on November 4, 1918. The Alberni-Pacific Company acquired and owned a logging plant, for which it issued 6,000 shares of its capital stock. These land holdings and this logging camp constituted the assets of the Alberni-Pacific Company. At the time of the death of Mrs. Williams the capital stock of the Red Cliff Company had no market value; but the probate court of St. Louis county, Minn., in the administration of the estate found that the stock of the Red Cliff Company was worth $194.64 a share. This finding was based upon an appraisal made by two appraisers appointed by said probate court, and the appraisal was based, in part at least, upon reports which had been made by cruisers and engineers of the company.

This valuation of the stock of the Red Cliff Company was adopted by the executors of the will of Mrs. Williams in making their return of the value of the stock for federal estate tax purposes.

The shares which the petitioner received of the Red Cliff Company he surrendered later to the liquidating committee of that company, and received in exchange 1,653 shares of the stock of the Alberni-Pacific Company. In 1925 the petitioner sold all his shares of this stock for $131,413.50, of which $69,426 was paid in cash, and $61,987.50 was paid in bonds of the purchasing corporation. The face value of the bonds was $68,875. The purchasing corporation was the new Alberni-Pacific Company, and had been organized to take over the properties of the old company of that name.

The petitioner in making his income tax return for the year 1925 set up the cost of the stock of the Red Cliff Company on the basis of the 1918 appraised value above given, and on this basis the sale in 1925 reflected a gain of $69,426. An amended return was put in by the petitioner, in which he set up the cost of the Red Cliff stock on a different basis; and on this amended basis the sale in 1925 reflected a loss of $22,067.55; and he accompanied his amended return with a claim for refund in the amount of the difference between the income tax as shown by the original return and as shown by the amended return. The amount of this difference was $4,497.17. This claim was disallowed by the commissioner, and a deficiency in the income tax of petitioner was found in the sum of $346.59. This conclusion of the commissioner was affirmed by the Board of Tax Appeals. The present appeal followed.

One of the contentions of petitioner is that the Board of Tax Appeals failed to make any finding as to the fair market value of the stock of the Red Cliff Company in 1918, the date when petitioner acquired it, and that therefore there is no basis for the order made by the board redetermining the deficiency.

We think this contention cannot be sustained. It is true that the Board of Tax Appeals in its findings of fact does not state specifically that the fair market value of the stock of the Red Cliff Company in November, 1918, was $194.64 per share. But it does find that this was the valuation fixed by the probate court in accordance with the laws of the state of Minnesota for estate and inheritance tax purposes, and that this figure was adopted by the executors of the estate in making return for federal estate tax purposes. It also redetermines the tax deficiency at exactly the same figure as the commissioner, who had adopted the valuation above mentioned and had based his deficiency figure thereon. Under these circumstances we think it would be hypercritical to hold that the Board of Tax Appeals had made no finding of valuation of the stock.

But this is not all. Article 1594(b) of Regulation No. 65 (October 6, 1924) of the Treasury Department relating to income tax reads, in part, as follows:

"In the case of property acquired by bequest, devise, or inheritance its value as appraised for the purpose of the Federal Estate tax or in the case of estates not subject to that tax, its value as appraised in the State court for the purpose of State inheritance taxes shall be deemed to be its fair market value when acquired."

These regulations have the force and effect of law when not in conflict with statutory provisions on the same subject-matter. United States v. Eaton, 144 U. S. 677, 12 S. Ct. 764, 36 L. Ed. 591; United States v. Grimaud, 220 U. S. 506, 31 S. Ct. 480, 55 L. Ed. 563; Maryland Cas. Co. v. United States, 251 U. S. 342, 349, 40 S. Ct. 155, 64 L. Ed. 297; Daeuffer-Lieberman Brewing Co. v. United States (C. C. A.) 36 F.(2d) 568.

In the case at bar we find no conflict between the regulation quoted and the statutory provision, section 204(a)(5) of the Revenue Act of 1926, 26 USCA § 935(a)(5) reading as follows:

"Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that — * * *

"(5) If the property was acquired by bequest, devise, or inheritance, the basis shall be the fair market value of such property at the time of such acquisition."

Giving effect, therefore, to the regulation provision, it is clear that the finding of the Board of Tax Appeals relative to the appraised value of the stock for the purpose of the federal estate tax is a finding of its fair market value when acquired by appellant.

Another contention of petitioner is that the Board of Tax Appeals in making its findings and conclusions proceeded on an erroneous theory of law, viz.: That the board was bound to approve the valuation of the commissioner unless the presumption in favor of its correctness was overcome by convincing proof by the petitioner.

We shall not undertake to follow counsel for petitioner in their discussion as to the theoretical status of presumptions in the law of evidence. It will suffice to ascertain whether the rulings and action of the Board of Tax Appeals relative to the evidence in the instant case were in accord with well-established principles.

Rule 30 of the Board of Tax Appeals reads as follows:

"Burden of Proof. — The burden of proof shall be upon the petitioner, except that in respect of any new matter of fact pleaded in his answer, it shall be upon the respondent."

This rule has been enforced by the board in numerous cases. Appeal of J. M. Lyon, 1 B. T. A. 378; Helen Pitts Parker v. Com'r of Internal Revenue, 14 B. T. A. 1185, 1197. And similar holdings have been made by the courts. Brown v. Com'r (C. C. A.) 22 F. (2d) 797; Avery v. Com'r (C. C. A.) 22 F. (2d) 6, 55 A. L. R. 1277; Bishoff v. Com'r (C. C. A.) 27 F.(2d) 91; Coon Auto Co. v. Com'r, 35 F.(2d) 504 (C. C. A. 8); Wickwire v. Reinecke, 275 U. S. 101, 48 S. Ct. 43, 72 L. Ed. 184; Reinecke v. Spalding, 280 U. S. 227, 50 S. Ct. 96, 74 L. Ed. 385.

The presumption in favor of the commissioner's finding may be overcome by evidence. Walter R. McCarthy, Ex'r, v. Com'r of Internal Revenue, 9 B. T. A. 525; United States v. Rindskopf, 105 U. S. 418, 26 L. Ed. 1131; Wickwire v. Reinecke, supra; Reinecke v. Spalding, supra; Coon Auto Co. v. Com'r, supra; Fidelity & Columbia Tr. Co. v. Lucas (D. C.) 7 F.(2d) 146.

The value at which securities are returned for estate tax purposes is prima facie the value for the purpose of computing gain or loss on subsequent sale. Article 1594(c) of Regulations No. 65, supra; Appeal of Elizabeth J. Bray, 4 B. T. A. 42.

With these principles in mind, let us examine the procedure in the case at bar. Petitioner offered a considerable amount of evidence in an endeavor to prove that the fair market value of the Red Cliff Company stock in November, 1918, was greater than $194.64 per share. The appraisers in the probate court in arriving at this value per share of stock had used as a basis stumpage value of the timber owned by the Red Cliff Company at $1 per thousand. The evidence introduced by petitioner before the Board of Tax Appeals was almost entirely directed to the stumpage value of the timber in November, 1918. Testimony of experts in the lumber business was received tending to show that the stumpage value was as high as $2 per thousand. This testimony of the experts was of two kinds: (1) Their opinions based upon their personal knowledge of the timber on the lands in question or nearby lands; (2) their opinions based upon an alleged sale in 1911 of the timber on the very lands in question, and their knowledge of any changes in value between 1911 and 19...