Zanuck v. Commissioner of Internal Revenue

• Decision Date: 28 May 1945
• Docket Number: 10731.,No. 10732,10732
• Parties: ZANUCK v. COMMISSIONER OF INTERNAL REVENUE (two cases).
• Court: U.S. Court of Appeals — Ninth Circuit

149 F.2d 714 (1945)

ZANUCK v. COMMISSIONER OF INTERNAL REVENUE (two cases).

Nos. 10732, 10731.

Circuit Court of Appeals, Ninth Circuit.

May 28, 1945.

Mabel Walker Willebrandt, of Los Angeles, Cal., for petitioners.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, L. W. Post, and Maryhelen Wigle, Sp. Assts. to Atty. Gen., for respondent.

Before DENMAN, STEPHENS, and BONE, Circuit Judges.

BONE, Circuit Judge.

Taxpayers, husband and wife, seek review of an adverse decision of the Tax Court sustaining a determination of the Commissioner of Internal Revenue. On October 5, 1939, they made a gift of 30,000 shares of the common stock of Twentieth Century-Fox Film Corporation to three children, this stock being transferred to certain trusts created for each child. At the time, the husband was an important officer of Fox Film which is one of the largest of the motion picture companies. World War II was just beginning and the movie industry was confronted with labor troubles. These two factors, along with others touching the financial condition of the corporation, are asserted by taxpayers as having a decisive bearing on the actual, intrinsic worth of the stock on the date of the gift. The Commissioner refused to accept the value of $11 per share reported by taxpayers in their gift tax return and determined the true value of the stock to be $14.25 per share at the time of the transfer, which figure was also the mean between the highest and lowest quoted selling prices of the stock on the New York Stock Exchange on the date of the transfers. The Tax Court sustained the Commissioner's determination.

Taxpayers object to the use of market price as a criterion of value, asserting that in this case certain "unusual circumstances", i. e., the war, made very uncertain the value of large foreign holdings of Fox Film; also that the war and current labor troubles affected the intrinsic worth of the stock and that all of these factors unite to establish the "actual, intrinsic value." Separate cases of taxpayers were consolidated for hearing and opinion in the Tax Court and likewise consolidated for review here. They are to be decided as one case.

The applicable statute (Section 506, Revenue Act of 1932, Section 1005, I.R.C., 26 U.S.C.A.Int.Rev.Code, § 1005) uses but does not define the word value or prescribe how it shall be determined.¹ Congress did not enact a statutory definition and Treasury Regulations were devised to meet the necessities of practical application of the statute. Cf. Brooks v. Willcutts, 8 Cir., 78 F.2d 270. The regulations have long provided for the use of market prices in determining value (Art. 19(3), Treasury Regulations 79 (1933 and 1936 eds.); Section 86.19 (c), Treasury Regulations 108) and during such period there has been no relevant change in the above cited law. For regulations involved see footnote².

The stock was listed on the New York Stock Exchange and was the subject of active trading over the years, including all of the period relevant to this inquiry. In their brief, taxpayers do not repudiate market price as a yardstick nor do they insist that the Commissioner is wrong in emphasizing market price. They frankly concede that "often market is as good a measuring stick for value as may be found" and that "in many cases it will be the easiest obtainable and best criterion of value." Their main contention is that the "unusual circumstances" mentioned were not considered and weighed by the Commissioner; that they took market into consideration in returning the value of the stock gift but also weighed the other information referred to "which the public knew but did not know how to weigh." They admit that market price is one of the many elements to consider in appraising property but also insist that value does not mean market price, and by using that term, Congress meant intrinsic worth of a thing. The criterion of value authorized by Treasury Regulations and here applied by the Commissioner and sustained by the Tax Court is assailed as doing violence to and limiting the "intent" of Congress as expressed in the statute (Section 506, Revenue Act of 1932, supra). In the Tax Court, no reliance was placed on the blockage theory or that sales of this stock had been pegged or distorted by market manipulation on the day of the gift. In this court, taxpayers specifically disclaim any reliance on the blockage theory. They rely solely on the argument that the statute taxes only value, and that for the Commissioner to refuse, because of the regulations, to receive taxpayers' return based on a value arrived at by considering the "unusual factors of War and Strike", as well as market, is "an arbitrary and unreasonable restriction of the Statute," resulting in an excessive and illegal addition to the gift tax.

Taxpayers stress the holdings in Guggenheim v. Rasquin, 312 U.S. 254, 61 S.Ct. 507, 85 L.Ed. 813, and the companion cases of Powers v. Commissioner of Internal Revenue, 312 U.S. 259, 61 S.Ct. 509, 85 L. Ed. 817 and United States v. Ryerson, 312 U.S. 260, 61 S.Ct. 479, 85 L.Ed. 819, as supporting their position that what criterion should be employed for determining value of gifts, is a question of law, and therefore subject to review here. These three cases laid down a rule for the proper evaluation of paid-up policies of life insurance for gift tax purposes, in the absence of any sort of interpretative regulation that by its terms could be regarded as covering this sort of "property". See footnote bottom of page 257 of 312 U.S., 61 S.Ct. 508, 85 L.Ed. 813, Rasquin case. Apparently, the only regulation that had been there suggested as applicable, dealt in general terms with "the value of property." It is obvious that such a regulation was, in itself, of more than questionable value as a "yardstick" wherewith to measure value of this type of "property." In the leading (Rasquin) case, the Supreme Court stresses the nature of the gift in these particular cases as the necessarily determining valuation factor.

These cases seem clearly distinguishable from those in which there are solid bench marks of value on which sound and commonly accepted concepts of value can be and are generally based in every day business practice. They illustrate a situation characterized and complicated by an absence of an "interpretative regulation" to aid in the process of valuation. The court held that in dealing with this particular type of "property," not then dealt with in the regulations, cost, rather than cash-surrender value, was the proper yardstick of value for gift tax purposes, stating that "cost * * * is the only suggested criterion which reflects the value * * *. Cost in this situation is not market price in the normal sense of the term. But the absence of market price is no barrier to valuation. * * * Accordingly, the problem here involves an interpretation of `value' in § 506 unaided by an interpretative regulation." 312 U.S. p. 258, 61 S.Ct. 509, 85 L.Ed. 813, Rasquin case, supra. Emphasis added.

We are unable to conclude that the criterion of value adopted in these three cases was specifically intended to overturn and sweep away the well established rule applicable in valuation proceedings affecting stock which is the subject of daily and extensive dealings on the New York Stock Exchange. The language of the decisions does not support the view, if that is the view of taxpayers, that an applicable regulation may not be an appropriate and highly influential guide in a situation such as the one presented in the instant case. We agree, however, that the subject of yardsticks for the evaluation of stock does present a question of law reviewable by this court.

Commissioner here contends that (1) the question of value of the stock is one of fact and that the findings of the Tax Court thereon must be sustained if supported by substantial evidence; (2) that the Commissioner's determination is prima facie correct and taxpayers have the burden of overcoming the presumption; (Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 and cases cited; Emerald Oil Co. v. Commissioner of Internal Revenue, 10 Cir., 72 F.2d 681, 684; Buck v. Helvering, 9 Cir., 73 F.2d 760, 763; Kinney's Estate v. Commissioner of Internal Revenue, 9 Cir., 80 F.2d 568, 572; Gamble v. Commissioner of Internal Revenue, 6 Cir., 101 F.2d 565, 567, certiorari denied, 306 U.S. 664, 59 S.Ct. 790, 83 L.Ed. 1061; Helvering v. Bruun, 309 U.S. 461, 468, 60 S.Ct. 631, 84 L.Ed. 864; Burnet v. Houston, 283 U.S. 223, 227, 51 S.Ct. 413, 75 L.Ed. 991) (3) that there is no adequate basis for any contention that the regulations are invalid since they are in no sense arbitrary or unreasonable, but on the contrary, consistent with the statute.

This court has held that the question of the value of stock is peculiarly one of fact and the findings of the Tax Court thereon will not be overturned if they are supported by substantial evidence. Roth v. Wardell, 9 Cir., 77 F.2d 124, 125. As bearing on this general principle, see Helvering v. Safe Deposit & Trust Co. of Baltimore, 4 Cir., 95 F.2d 806; Kinney's Estate v. Commissioner of Internal Revenue, supra; Old Mission Cement Co. v. Commissioner of Internal Revenue, 9 Cir., 69 F.2d 676; Gamble v. Commissioner of Internal Revenue, supra; Frischkorn Development Co. v. Commissioner of Internal Revenue, 6 Cir., 88 F.2d 1009.

We do not believe that, as a matter of law, an improper criterion of value was here adopted by the Tax Court and we so hold. Under the facts and measured off against all the evidence in this case, we cannot say that the decision was "not in accordance with law." The rulings of the Tax Court on questions of law, while not as conclusive as its findings of fact, are nevertheless persuasive, and it is desirable for a reviewing court to have the benefit of such rulings. This doctrine finds lodgment in such cases as Hormel v. Helvering, 312 U.S. 552 (see note page 556), 61 S.Ct. 719, 85...