Worcester County Tr. Co. v. Commissioner of Internal Rev., 3812.

• Decision Date: 29 March 1943
• Docket Number: No. 3812.,3812.
• Citation: 134 F.2d 578
• Parties: WORCESTER COUNTY TRUST CO. et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

134 F.2d 578 (1943)

WORCESTER COUNTY TRUST CO. et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 3812.

Circuit Court of Appeals, First Circuit.

March 29, 1943.

James A. Crotty, Sumner B. Tilton, Jay Clark, Jr., George H. Mason, and Vaughan, Esty, Clark & Crotty, all of Worcester, for petitioners.

Maryhelen Wigle, Sp. Asst. to the Atty. Gen., and Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and A. F. Prescott, Sp. Assts. to the Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Ralph F. Staubly, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for Commissioner of Internal Revenue.

Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.

WOODBURY, Circuit Judge.

This is a petition by the executors of the estate of James Smith for review of that part of a decision of the United States Board of Tax Appeals, now the Tax Court of the United States, which sustained the Commissioner's determination of the value for estate tax purposes of certain shares of stock which it is admitted were properly included in their decedent's gross estate.

From the record on review and the opinion of the Board it appears that James Smith died on June 9, 1937, and that his executors elected to value his gross estate as of one year after the date of death. In his gross estate were 12,760 shares of no par value capital stock of the Southwell Wool Combing Company, a Massachusetts corporation. It appears that this Company was organized in 1922 by members of a few families and that since that time it has engaged in the business of scouring and combing wool by a technical process requiring machinery and equipment which small textile mills do not have, but which large ones do. Its business, therefore, is done entirely with small mills; about 95% thereof being with four customers. The Company has but one salaried official, who is an experienced and capable manager, but who is now getting along in years.

On July 25, 1935, in order to keep the Company's stock in the founding families, the stockholders voted to amend the articles of incorporation by inserting therein restrictions upon the sale and transfer of its shares. These restrictions, which are endorsed on each certificate of stock, read as follows:

"Any holder of shares of the common capital stock of the corporation, the executor or administrator of any deceased holder of any such shares, the trustee in bankruptcy or assignee in insolvency of any such shares, the assignee of any such shares sold on execution, desirous of transferring the same either for value or by way of gift or otherwise, shall first offer said shares in writing to the directors of the corporation, who may buy them for the use of the corporation at their book value as appears from the books and records of the corporation as of the date of the close of the last prior month of the corporation plus interest from that date at the rate of six (6%) per cent per annum, less any dividends which may have been declared thereon since such date and which shall have been paid or are payable to the seller.

"The directors shall have the right to purchase such shares within a period of thirty (30) days from the receipt of such offer but shall not be required to do so and if the directors do not so purchase within such period, such stockholder shall be at liberty to sell and dispose of the said shares at any price whatsoever.

"The above restriction shall not apply to any transfer by the executor or administrator of a deceased stockholder to legatees or next of kin of such deceased stockholder in the distribution of his estate, whether under the terms of his will or under the provisions of interstate (sic) law.

"The board of directors may from time to time by vote in specific instances waive compliance by a seller with the foregoing provisions."

The Company's shares have never been listed on any exchange and since the date of the amendment no shares have either been offered to the Company for sale or have been sold. From a stipulation of facts filed at the hearing before the Board of Tax Appeals it appears that the book value of the stock as of the close of the last month prior to the date selected by the executors for the valuation of their decedent's estate, plus interest and less dividends, was $15.46 per share. This was the figure used by the executors in their estate tax return, but the Commissioner's determination of value, based, as he said, upon the Company's "income, balance sheets, and other relevant factors" was $35 per share and he assessed a deficiency accordingly. In the stipulation referred to above the parties agreed that the Commissioner's figure is exactly ten times the average net earnings of the Company over the five year period from 1933 to 1937, inclusive.

On the basis of the foregoing facts the Board sustained the Commissioner's determination of value although it admitted in its opinion that it was "in no position to `find that the value should be computed on the basis of average net income', for the question of fair market value is ever one of fact and not of formula. Net earnings are important but they are only one of the many factors upon which value of shares may be considered, and the significance to be given to such figures depends upon the evidence of all the circumstances in which they are found. Without knowledge of the setting in which the earnings appear, they lack substantial evidentiary forces from which a useful inference of fair market value can be drawn. Furthermore, it would be entirely unwarranted for the Board, without evidence supporting it, to select a multiple of average earnings as the basis for a finding of fair market value." But the Board went on to conclude the part of its decision which the petitioners ask us to review with the statement: "The evidence does not contain data upon which a finding can be made that the fair market value of the shares was less than the $35 a share which the Commissioner has determined. That value must be adopted, not because of the stipulated formula of ten times average earnings, but because there is no adequate evidence proving it to be incorrect or another figure to be correct."

The petitioners contend that the Board erred in ruling as a matter of law that the Commissioner's determination of value must be sustained because there was no adequate evidence to prove his valuation incorrect or another valuation correct; that the Board's decision was based upon an erroneous conclusion of law, that is, the conclusion that the restriction on the sale of the stock imposed by the amendment of July 25, 1935, did not affect its value; and that the Board in its decision erroneously disregarded evidence. The Commissioner, on the other hand, argues that the Board should be sustained because his valuation, which the Board upheld, was presumptively correct, and the petitioners have failed to sustain their burden of proof which, he says, is not only to show that his valuation was wrong but also to show affirmatively that some other valuation is correct.

The Commissioner is mistaken as to the extent of the burden of proof which rests upon taxpayers in proceedings of this sort. In actions brought in district courts of the United States to recover taxes which have already been paid the taxpayer has the burden "specifically to show not merely that the assessment was erroneous but also the amount to which he was entitled" (Helvering v. Taylor, 293 U.S. 507, 514, 55 S.Ct. 287, 290, 79 L.Ed. 623; see also Forbes v. Hassett, 1 Cir., 124 F.2d 925), but in petitions such as this, that is petitions brought in the Board of Tax Appeals for redetermination of a deficiency set forth by the Commissioner, the burden on the taxpayer is not as onerous. The extent of a taxpayer's burden in proceedings of this latter sort was stated by the Supreme Court in Helvering v. Taylor, supra, as follows:

"We find nothing in the statutes, the rules of the Board or our decisions that gives any support to the idea that the Commissioner's...