Wood v. United States

• Decision Date: 06 November 1939
• Docket Number: No. 43276.,43276.
• Citation: 29 F. Supp. 853
• Parties: WOOD v. UNITED STATES.
• Court: U.S. Claims Court

29 F. Supp. 853

WOOD v. UNITED STATES.

No. 43276.

Court of Claims.

November 6, 1939.

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Frank J. Albus, of Washington, D. C. (Virgil Y. Moore, of Washington, D. C., George M. Naus, of San Francisco, Cal., and Andrew T. Smith, of Washington, D. C., on the briefs), for plaintiff.

Daniel F. Hickey, of Washington, D. C., and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, Sp. Assts. to Atty. Gen., on the briefs), for the United States.

Before WHALEY, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHITAKER, Judges.

WILLIAMS, Judge.

The sole question for decision in this case is one of fact — the fair market value of 2,323,278 shares of common stock of the E. K. Wood Lumber Co., owned by decedent Walter T. Wood on September 25, 1929, the date of his death.

The executor of the estate placed a valuation of $1 a share on this stock in the Federal estate-tax return made by him. That valuation was not changed by the Commissioner of Internal Revenue and the stock was included in the decedent's gross estate at a valuation of $2,323,278. Subsequently the executor filed a claim for refund of $23,253.94, assigning as the basis therefor the following:

"The assets of the estate of Walter T. Wood included 2,323,278 shares of the common stock of the E. K. Wood Lumber Co., San Francisco, California, which were entered in the Federal estate-tax return of said estate at a value of $1.00 per share or $2,323,278.00. This value was predicated upon the book value of the said stock at the date of decedent's death together with an isolated sale which was consummated more than a year before such date and appraisals of the said stock for estate-tax purposes in 1928 and prior years. The company's earnings record during the previous five years, its business prospects at the date of decedent's death, conditions in the timber industry as a whole, the absence of an open market for the stock, the lack of marketability of many of the company's properties and other important factors were not considered in arriving at such appraised value.

"Based on a consideration of the above factors, the value has been recomputed at 50 cents a share, which results in a corrected estate-tax liability, after giving effect to the eighty percent credit for State inheritance tax of $20,423.67 and an allowable refund of $23,253.94."

The claim for refund was disallowed by the Commissioner and thereafter this suit was timely instituted by the executor.

The legal definition of "fair market value" is well established. In Phillips v. United States, D.C., 12 F.2d 598, 601, the rule is stated: "The test is the fair market value. This may be defined to be the value of the property in money as between one who wishes to purchase and one who wishes to sell; the price at which a seller willing to sell at a fair price, and a buyer willing to buy at a fair price, both having reasonable knowledge of the facts."

The rule is also succinctly stated by the Supreme Court in Adams Express Co. v. Ohio State Auditor, 166 U.S. 185, 17 S.Ct. 604, 606, 41 L.Ed. 965:

"Now, it is a cardinal rule, which should never be forgotten, that whatever property is worth for the purposes of income and sale it is also worth for purposes of taxation. * * *

"The value which property bears in the market, the amount for which its stock can be bought and sold, is the real value. Business men do not pay cash for property in moonshine or dreamland. They buy and pay for that which is of value in its power to produce income, or for purposes of sale."

The E. K. Wood Lumber Company was what is known as a closed or family corporation, the E. K. Wood and related families owning 98 percent of the stock. The stock was not listed on any stock exchange. It is a well recognized fact that stock in such a corporation is hard to sell and is not readily marketable, there being no market except that afforded by the few other stockholders. Cartier v. Commissioner, 6 Cir., 37 F.2d 894; Dohrmann v. Commissioner, 19 B.T.A. 507.

Aside from the inherent difficulty in finding a market for the stock of a family corporation the market value of the stock in question was adversely affected by the unfavorable conditions of the lumber industry generally at the time of decedent's death in 1929. Prior to the year 1924 there had been a great and continually increasing demand for lumber in the northwest and well-managed lumber concerns earned large profits and were quite prosperous. Beginning, however, in the early part of 1924 the demand for lumber began to decline and continued to do so during the remainder of that year and through the years 1925, 1926, 1927, 1928, and 1929. By 1929 the earnings of lumber concerns had reached substantially the point of no earnings at...