Blumenthal v. Commissioner

H. H. BLUMENTHAL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Blumenthal v. Commissioner Docket No. 42374. United States Board of Tax Appeals 21 B.T.A. 901; 1930 BTA LEXIS 1768; December 26, 1930, Promulgated *1768 1. Opinion testimony of the taxpayer and an accountant that stock was not readily marketable or ready collateral for loans is held insufficient to overcome respondent's determination that shares received by taxpayer in exchange for assets had a fair market value when received equal to par, since respondent's determination finds support in contemporaneous sales to taxpayer and other incorporators of six-sevenths of the entire stock for cash at par, in the worth of the assets as recognized by the incorporators in authorizing their purchase, and in the facts disclosed by the opening balance sheet, and the first year's earnings indicate that the earnings immediately in prospect at the basic date amply justified valuation at par. 2. The opinions of witnesses on questions of value are to be judged in accordance with the soundness of the reasoning which is disclosed, and the Board can not treat a valuation as authoritative merely because it is stated in the form of an opinion, even though it must give due consideration to the opinions of those whose demonstrated qualifications give their opinions weight or authority. Ewing Laporte, Esq., for the petitioner. Philip*1769 A. Bayer, Esq., for the respondent. STERNHAGEN *901 The respondent determined a deficiency of $653.64 in petitioner's income tax for 1926 by adding to the income shown by his return an uncontroverted item of $60 rent and the item now in issue of $10,000 representing the value of shares of stock received by him in that year from a newly organized corporation in exchange for his assignment to it of an agency contract and a leasehold, both of which had been acquired by him shortly before without cost. The petitioner included no value for the shares in his return, and in this proceeding attacks the respondent's valuation as excessive. FINDINGS OF FACT. Petitioner is an individual residing in Pittsburgh, Pa. In September, 1926, after he had secured without cost the agency for Marmon automobiles for Western Pennsylvania and parts of Ohio and Maryland, with the understanding that a properly financed corporation would be formed, and after he had acquired without cost the lessee's rights in a leasehold of a building in which the business could be conducted, he caused the Marmon Co. of Pittsburgh to be organized. It had capital stock of $71,000 par value. At*1770 the time of organization in 1926, the shares of its stock were issued, $26,000 to *902 petitioner for cash, $15,000 to petitioner's father for cash, $15,000 to Alex Wally for cash, and $5,000 to H. L. Shusler for cash, and $10,000 to petitioner for the agency contract and the leasehold and services. The fair market value of the last mentioned $10,000 par value of shares received by petitioner was $10,000 when received by him in 1926. OPINION. STERNHAGEN: The petitioner presents only an issue of fact. He undertakes to prove that the $10,000 par value of shares received as stated in the facts had no market value when received. After examining the evidence, all of which was taken by deposition, we have found as a fact that the value of the shares was $10,000 as determined by respondent. The shares were received at the time of organization. All of the corporation's shares, aggregating $71,000 par value, were issued for $61,000 cash, the lease, the agency contract and certain undescribed services. The measure of each dollar of par value of shares is 1/71,000 of the total value of the cash, property and services received. Obviously, without some evidence of clear*1771 reason for it, there is no identification of the value of the $10,000 issued to petitioner separately from the rest of the shares issued to him and the other three cash subscribers. The aggregate value of all the shares is ordinarily and, in the absence of proof of special circumstances, equally and proportionately distributable among all the outstanding shares to determine the value of each. Thus, if the corporation had received nothing whatever for the particular $10,000 shares in question, they would still be worth at least 10/71 of $61,000 cash received, or $8,591.54. But the corporation had more than cash behind its shares. When the incorporators first met, on October 11, 1926, they ratified the issuance of this $10,000 of shares in a resolution expressly stating it to be "the considered, careful and unanimous judgment of the meeting that said property [the agency contract and leasehold] and services are essential to the business of the corporation, and have been and are of a full and substantial value to the corporation of not less than $10,000." The first balance sheet of the corporation showed assets of $78,505.15 against liabilities of $5,917.29, capital stock of $71,000*1772 and surplus of $1,587.86, and among the assets are listed "contract and leasehold, $10,000." On the other hand, the evidence lacks facts or opinion sufficient to indicate that the contract and leasehold were worth less than they were recognized to be worth when the shares were issued and shortly thereafter and than they were determined to be worth by respondent. *903 The shares of the corporation were regarded as worth par by the only persons who bought them and who presumably then appraised the possibilities of the business. It is not persuasive for petitioner to say that Wally was willing to invest $15,000 in shares in order to get favorable consideration in automobile purchases and service, or that his father invested because petitioner was later to receive or inherit the shares. See . Actual sales are not to be regarded lightly. , affirming . Nor is the preponderance found in the opinions of petitioner and an accountant that the shares were not readily marketable or ready collateral for loans. This is often*1773 true of property of undisputed value. While we have no special or independent knowledge of the value of these shares, our experience affords some basis for judging the opinions of witnesses in accordance with the soundness of the reasoning which is disclosed. We can not treat a valuation as authoritative merely because it is stated in the form of an opinion, even although we must give due and careful consideration to the opinions of those whose demonstrated qualifications give their opinions weight or authority. There is evidence tending to show that after the first year of operation the corporation had little or no earnings, and this is relied on as establishing little or no value in the shares. But the time of valuation is in 1926, when the shares were received. However speculative the business, the assets on hand and the promise of the future were regarded, by persons willing but under no compulsion to buy, as sufficient to justify investment at par. In the first year the earnings were over $20,000, after substantial salaries were paid. So even if regard may be had to subsequent earnings, those immediately in prospect at the valuation date amply justified the value at par. *1774 When, therefore, the value claimed by the petitioner is subjected to any one of several tests, there is not sufficient substantial evidence to preponderate against the respondent's determination. Whether the test be taken as contemporaneous sales, book value, so-called intrinsic value, or earnings, or all together, the respondent's determination is supported, and the countervailing opinions lack force to overcome it. Judgment will be entered for the respondent.