Michigan Trust Co. v. Commissioner

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. TRUST COMPANY, ROY C. FULLER, MAURICE A. LAMBIE AND EMIL TYDEN, CO-EXECUTORS OF THE ESTATE OF RICHARD B. MESSER, DECEASED, PETITIONERS, v. Michigan Trust Co. v. Commissioner Docket No. 42513. United States Board of Tax Appeals 27 B.T.A. 556; 1933 BTA LEXIS 1324; January 31, 1933, Promulgated *1324 1. Evidence held insufficient to establish that the respondent's valuation of stocks owned by the decedent in closely held corporations was erroneous. 2. Under the circumstances of this case, the respondent erred in refusing to deduct from the gross estate as a bequest to charity the value of the remainder interest in one-third of the residuary estate. Oscar E. Waer, Esq., for the petitioners. Lewis S. Pendleton, Esq., for the respondent. MATTHEWS *557 This proceeding is for the redetermination of a deficiency in estate tax in the amount of $5,049.47. The allegations of error upon which the parties joined issue are: (1) The increase in value of the common stock of the Hastings Table Company from $25 to $40 per share; (2) the increase in value of the common stock of the International Seal & Lock Company from $80 to $150 per share; (3) the increase in value of the common stock of the Viking Corporation from $250 to $840 per share; (4) the disallowance, except in the sum of $4,670.71, of the claim for $43,765.35 for charitable bequests under the terms of the will. FINDINGS OF FACT. The petitioners are the executors of the estate*1325 of Richard B. Messer, who died testate, a resident of Hastings, Michigan, December 29, 1926. The executors duly filed an estate tax return for the estate of decedent and included in the gross estate 3,094 shares of the common stock of the Hastings Table Company at a fair market value of $20 per share at date of death, or $61,880; 800 shares of the common stock of the International Seal & Lock Company at a fair market value of $80 per share at date of death, or $64,000; 40 shares of the common stock of the Viking Corporation at a fair market value of $400 per share at date of death, or $16,000. The respondent in the audit of the return increased the value of the common stock of the Hastings Table Company to $123,760, or $40 per share; the common stock of the International Seal & Lock Company to $120,000, or $150 per share; and the common stock of the Viking Corporation to $33,600, or $840 per share. Each of the three above-named companies is a close corporation and there were no "quoted" market values for the stocks of these companies at or near the date of the decedent's death. The decedent held at the time of his death trustees' certificates for the shares of stock owned by*1326 him in these companies, which certificates were all issued pursuant to trust agreements signed by the majority stockholders of the respective companies. Each of the trust agreements was entered into on August 28, 1923, and was to remain in force for a period of ten years unless sooner terminated by an agreement in writing signed by stockholders owning two-thirds of the stock deposited thereunder. It was provided in the trust agreements that the trustees should vote the stock as a unit. The principal purpose of the agreements was to keep the control of the companies in the *558 hands of the persons owning the stocks at the time the agreements were executed. The material portions of the trust agreement with reference to the stock of the Hastings Table Company, which are identical with those for the other companies except that different values were placed on the stocks, read as follows: For the purpose of this agreement the value of the stock deposited hereunder is agreed upon at $35.00 per share, and such value shall obtain until March 1, 1924; between the 1st day of January, 1924, and the 1st day of March, 1924, said stockholders shall by action of a two-thirds majority*1327 of them in interest fix the value of said stock per share during the year beginning March 1, 1924; and between January 1 and March 1 of each year thereafter during the term of this agreement the stockholders shall in like manner fix the value of said stock for the purpose of this contract for the ensuing year from March 1 to March 1. In case of the death of any stockholder the remaining stockholders, parties hereto, shall be entitled (in case the representatives of the estate of the decedent desire to sell his stock, but not otherwise) to purchase the stock of such deceased stockholder at the price obtaining at the time of said decedent's death during a period of three (3) months thereafter; and the stockholders hereby agree for themselves, their respective heirs, representatives and assigns, that their holdings of stock shall not be sold to others than the surviving stockholders, parties hereto, unless such surviving stockholders shall have declined, after the period herein provided, to purchase the stock. * * * In case any one of the surviving stockholders, parties hereto, shall not elect to purchase his proportionate share of the stock of said decedent (his representatives being*1328 willing to sell), such shares shall be available for the other surviving stockholders. In like manner, in case any stockholder shall desire to dispose of his stock during the period of this agreement the remaining stockholders, parties hereto, shall have the right to purchase his stock at the price then obtaining; and any stockholder so desiring to sell his stock during his lifetime shall, and hereby does, give to the other stockholders, the right and option to purchase the same during a period of three (3) months after notice to them of his desire to sell. The trust agreements of August 28, 1923, were supplemented each year by agreements fixing the values of the stocks for the ensuing year. On January 12, 1926, supplemental agreements covering the values of the stocks of the three companies for the next ensuing year were entered into as follows: For the purposes of the agreement of August 28th, 1923, the value of the stock of the Hastings Table Company of Hastings, Michigan, deposited thereunder is agreed upon at Twenty-five Dollars ($25.00) per share and such value shall obtain from March 1st, 1926 to March 1st, 1927. For the purpose of the agreement of August 28th, 1923, *1329 the value of the stock of the International Seal & Lock Company, of Hastings, Michigan, deposited thereunder is agreed upon at Eighty Dollars ($80.00) per share and such value shall obtain from March 1st, 1926 to March 1st, 1927. For the purpose of the agreement of August 28th, 1923, the value of the stock of the Viking Corporation of Hastings, Michigan, deposited thereunder *559 is agreed upon at Two Hundred Fifty Dollars ($250.00) per share and such value shall obtain from March 1st, 1926 to March 1st, 1927. The decedent, after making numerous specific bequests to the persons named in his will, bequeathed to trustees such sum as would yield a net income of $300 per year, it being provided that $25 per month should be paid to Walter Frost during his lifetime, and after the death of Walter Frost the funds and property then belonging to the trust created for his benefit should be transferred to and become a part of the residuary trust fund created under Paragraph XIII of the will. Paragraph XIII of the will reads in part as follows: I give and bequeath all of the rest, residue and remainder of my estate, of which I shall die seized or possessed or to which I shall be*1330 entitled at my death, and wherever the same may be situated, to the said Roy C. Fuller, Maurice A. Lambie, Emil Tyden, and The Michigan Trust Company, IN TRUST, however, for the following purposes: * * * (c) To hold one-third thereof in trust for the benefit of my said daughter, Grace Anderson, as follows: (1) To pay the net income therefrom to her in quarter-annual installments or oftener from the date of my death and during her lifetime; and in the event that such net income, together with her individual means, is insufficient to provide for her support, care, and maintenance, then to use and pay to her such further amounts from the principal of this share as may be necessary for such purposes; the amounts and occasions for all principal payments, however, shall be wholly within the discretion of my trustees and their judgment shall be conclusive. (2) After the death of my said daughter if she survives me, or after my death if she does not survive me, to pay the sum of Two Thousand Dollars ($2,000) to her estate, and to transfer the balance of the funds and property belonging to this share to the Residuary Trust Fund created under sub-paragraph (g) hereof, and to hold and*1331 dispose of the same as a part thereof. * * * (g) To hold and continue in trust perpetually any funds or property transferred from the trusts created under Paragraph No. X of this will and under sub-paragraphs (c), (d), (e), and (f) hereof, in a fund to be known as my "Residuary Trust Funds," and to dispose of the net income therefrom, perpetually, as follows: (1) To pay therefrom such sum, annually, to the Pennock Hospital of Hastings, Michigan, or its successors, for the uses and purposes of said institution, or its successors, as may be necessary to make up any deficit represented by excess of disbursements of said institution made for operation and maintenance expenses over the receipts and income received by it from all sources for the last preceding calendar year, PROVIDED, however, that the amount payable to said institution, or its successors, during any year shall not be less than the sum of Ten Thousand Dollars ($10,000), except that when the net income from this trust is less than the sum of Ten Thousand Dollars ($10,000) then the amount payable shall not exceed the amount of the actual net income. *560 (2) To use and pay such sums from the balance of the*1332 net income, if any, as in the discretion of my said trustees, may seem proper to aid and assist in the care, maintenance and education of such needy children who are under the age of eighteen (18) years and residents of Barry County, Michigan, as may be recommended to them by the Probate Judge of said County or the other judicial officer having jurisdiction of juvenile affairs; my said trustees shall have full discretion as to the advisability of applying all or any part of said balance of the net income to the uses specified in this sub-paragraph or in the succeeding sub-paragraph (3) hereof. (3) To pay any balance of net income, if any, to such charitable, benevolent, or educational institutions organized under the laws of the State of Michigan, as my said trustees may select, giving preference, if possible, to organizations resident or operating in said Barry County or in the City of Hastings, Michigan, including the Boy Scouts and the Young Men's Christian Association. The decedent's gross estate amounted to more than $300,000, and the income accruing to the decedent's daughter, Grace Anderson, from her one-third of the residuary estate has run about $6,000 per year. Grace*1333 Anderson was fifty-four years of age at the time of the decedent's death. Her husband was living and they had one child, a married daughter, who was also provided for in the decedent's will. In the estate tax return filed by the petitioners a deduction was claimed in the sum of $4,770.70, representing the value of the remainder interest in the trust created for Walter Frost, and a further deduction was claimed in the sum of $38,994.65, representing the value of the remainder interest in the trust created for Grace Anderson, making a total of $43,765.35, which the petitioners claim to be the amounts passing to charity under the terms of the will. The respondent has allowed a deduction in the sum of $4,670.71, representing the amount passing to charity after the death of the life beneficiary, Walter Frost, and has entirely disallowed the deduction of $38,994.65. OPINION. MATTHEWS: Two issues are presented: (1) Whether the respondent erred in his determination of the values of certain stocks owned by the decedent; and (2) whether the respondent erred in refusing to deduct from the gross estate as a bequest to charity the value of the remainder interest in one-third of the residuary*1334 estate. 1. It is the petitioners' contention that the values of the stocks are limited to the prices fixed by the trust agreements, and that even if the respondent is not bound to recognize such prices the evidence establishes that these prices did in fact represent the fair market values of the respective stocks at the date of the decedent's death. The material portions of the trust agreements are quoted in the findings. Under their provisions if any stockholder wishes to dispose *561 of his holdings, or if the representatives of any deceased stockholder desire to sell their stock, but not otherwise, the remaining stockholders are to be given an opportunity to purchase the stock at the price agreed upon before it shall be offered to others. If the stock is offered and no sale is made to any remaining stockholder during a period of three months after notice of desire to sell, there is no prohibition against the sale of the stock to anyone other than a stockholder at any price which the holder may be able to get. It will be seen that in case of the death of any stockholder his representatives are under no obligation to offer his stock to the remaining stockholders, *1335 except that if they desire to sell they can not sell to an outsider until after the expiration of the period specified within which the optionees have the right to purchase the stock at the agreed price. We are of the opinion that the instant case is distinguishable from the case of ; affd., , which is cited and relied upon by the petitioners. In that case it was held that the value of shares of corporate stock to be included in the gross estate could not exceed the amount fixed by purchase options which are irrevocable so far as the estate was concerned. The contract involved therein was specifically enforceable by the optionees, it being expressly provided that within a stated period the two remaining stockholders should have the right to purchase the stock from the estate at the agreed price, so that the executors of the estate took the stock cum onere, that is, with the burden of the option, which option was irrevocable on the part of the executors. In other words, the executors had no choice in the Wilson case but to offer the stock successively to the two optionees, and not until*1336 both had refused the offer was the burden removed and the stock sellable at its market price. As stated above, the facts of the instant case are materially different, and we therefore hold that the values of the stocks are not limited to the price fixed by the trust agreements. In this connection reference is made to the case of , where it was said: Although the parties can restrict the sale price of the stock as between themselves they cannot, by such a contract, restrict the right of the Government to collect taxes upon the actual value of the stock. In that case a contract was signed by all the stockholders of a closely held corporation in which the decedent owned stock which provided that any stockholder desiring to sell his stock should first offer it for sale to the other stockholders at a price represented by the "book *562 value" of the shares. It was held that the evidence was insufficient to establish that the Commissioner's valuation was erroneous. It remains to consider whether the petitioners in this proceeding have proved that the values of the stocks at the date of the decedent's death*1337 were less than the values determined by the respondent. It is to be remembered that the companies are all close corporations and there are no "quoted" market values. It was testified that at the time of the hearing the stock owned by the decedent was still held by his executors and that no actual sales of stock had ever been made under the trust agreements. The prices of the stocks for the ensuing year were fixed between January 1 and March 1. The supplemental agreements fixing the prices were entered into on January 12, 1926, and the decedent died on December 29, 1926, or exactly fifty weeks thereafter. It may be supposed that the prices varied from year to year. For example, in the original trust agreements executed August 28, 1923, the stocks were listed at the respective values of $35, $70 and $200 per share, and for the year 1926 they were listed at $25, $80 and $250 per share. The petitioners must have recognized that the prices fixed by the trust agreements did not represent the actual values of the stocks, because in the estate tax return filed by them the stocks were valued at $20, $80 and $400 per share instead of at $25, $80 and $250 per share. *1338 Apart from the provisions of the trust agreements, the only evidence relative to the values of the stocks is contained in the depositions of Maurice A. Lambie, A. E. Johnson and C. W. Clarke. Lambie is one of the petitioners and each of these witnesses owned stock in one or more of the corporations. They testified that the prices were based upon the assets and earnings of the respective corporations, and that in their opinion these prices represented the fair market values of the stocks; in the words of Johnson, "they tried to arrive at as fair a price as possible, because the stockholders were all represented and no one knew which one would drop out or which one might have to sell." No evidence was introduced with respect to the assets of the corporations, their earnings, the dividends paid, etc. As was said in : We must assume that the petitioner produced all of the evidence which was available or at least all that it cared to present. Since the evidence produced is not reasonably convincing of the value contended for, the loss must fall upon the petitioner. Cf. *1339 ; . Upon the entire record, we must hold that the petitioners have introduced insufficient evidence to overcome the presumption of correctness of the respondent's determination of the values of the *563 stocks, and the respondent's determination is, therefore, approved. See ; ; ; , affirming, in part, . 2. With respect to the issue whether the value of the remainder interest in the trust created for the decedent's daughter constitutes an allowable deduction as a bequest to charity, we are of the opinion that the respondent erred in failing to allow the deduction claimed. It is not questioned that the institutions to which bequests were made by the decedent are corporations which come under the provisions of the act. The petitioners claim a deduction in the sum of $4,770.70, representing*1340 the value of the remainder interest in the trust created for Walter Frost, and the respondent allowed $4,670.71 on account of this item. No point is made by the petitioners that this amount should be larger, but it is earnestly contended that the respondent erred in wholly disallowing the deduction claimed in the sum of $38,994.65, representing the value of the remainder interest in the trust created for Grace Anderson. In the 30-day letter dated August 17, 1929, the respondent states: No deduction is made under this heading of the remainder value of one-third of the residue for the reason that the life tenant is given the right to invade the principal and therefore the charitable bequests have no ascertainable value as of the date of decedent's death. In the case of , the decedent bequeathed the residue of his estate to his wife for life, with authority to use from the principal any sum "that may be necessary to suitably maintain her in as much comfort as she now enjoys." After the death of the wife there were bequests in trust for admitted charities. It was held that inasmuch as the principal that could*1341 be used was only so much as might be necessary to continue the comfort then enjoyed, the standard was fixed in fact and capable of being stated in definite terms of money, and that the provision for the maintenance of the wife did not make the gifts to charity so uncertain as to prevent their deduction from gross income in computing estate tax. As Mr. Justice Holmes so aptly expressed it, "there was no uncertainty appreciably greater than the general uncertainty that attends human affairs." See also ; ; ; . *564 The facts of the case last cited are very similar to those of the instant case. After reviewing several cases, this Board held: It is clear that the testator intended that his widow should have every possible comfort and that her maintenance and support should be the first consideration, but his intention is also clearly and unmistakably expressed with respect to the charitable institutions therein*1342 provided for. There is no doubt but that he considered the amount of his estate sufficient to yield his wife ample means for her proper maintenance and that his further provision for her was merely a protective measure. It was not designed to permit her, at her election, to defeat the terms of the will and deprive the charitable institutions of the bequests made to them. * * * This decision was affirmed by the Circuit Court of Appeals for the Eighth Circuit in . In the instant case the evidence disclosed that the decedent's estate amounted to more than $300,000 and that the income accruing to the decedent's daughter, Grace Anderson, from her one-third of the estate had run about $6,000 per year. Lambie, one of the executors of the decedent's will, further testified that he had known the decedent's daughter, Grace Anderson, for twenty-five years and was acquainted with her husband and knew their mode of living and their financial circumstances. He stated that in his opinion the amount of $6,000 would be sufficient to maintain the decedent's daughter in the condition in which she had been living for the past eight or ten years. It may be noted that*1343 the will provides that "in the event that such a net income, together with her individual means, is insufficient to provide for her support, care and maintenance," etc. It was testified that Grace Anderson's husband was a prosperous business man, having a sufficient income to maintain his family, and also having a very substantial net worth. Grace Anderson was fifty-four years of age at the time of the decedent's death and had only one child, a married daughter, Josephine Anderson Todd, who is also provided for in the decedent's will. Under these circumstances we conclude that the legacies to the charitable institutions named in the will became vested upon the death of the testator. We, therefore, hold that the present values of these bequests at the date of the death of the testator are deductible from the gross estate in determining the net estate subject to taxation, and that the respondent erred in failing to allow the deduction claimed in the amount of $38,994.65. Judgment will be entered under Rule 50.