261 P. 893 | Or. | 1927
AFFIRMED. REHEARING DENIED. On November 7, 1923, Linda A. Frank died bequeathing to her son, Henry J. Frank, 42 shares of stock in the Blumauer-Frank Drug Company, a corporation engaged in the wholesale drug business in the City of Portland. In the administration of the estate, the appraisers, for the purpose of determining the amount of inheritance tax, placed a valuation of $78,978.90 upon the stock, or $1,880.45 for each share. Upon the adoption of the report of the appraisers, the State Treasurer filed objections asserting that the stock was not appraised at its actual value. After hearing, the court set aside its former order approving the report of the appraisers, and reassessed the stock upon a basis of $3,911.30 for each share. The executor of the estate appeals.
This corporation was organized with a capital stock of $200,000, divided into 200 shares of the par value of $1,000 each. The stock is closely held by the members of the Frank family and is not listed or offered for sale on the open market. The record discloses that, for the ten years prior to and including the year of the death of decedent in 1923, the earnings of the corporation averaged $43,862.30 per year. For the five years prior to and including 1923 the earnings averaged $26,378.90. In appellant's brief the average earnings for such period was, according to our arithmetic, erroneously stated to be $30,087.29. The greatest profit was $106,481.67, in 1917, during the war period. However, in 1921 there was great deflation in prices as a result of the war and the company sustained a loss of $97,169.11. The corporation paid no dividends on the stock until the year 1917 and since then has declared an annual dividend of 6 per cent on its capitalization. In other words, $12,000 *289 was each year distributed among the stockholders and the balance of the earnings used in the business as working capital.
The trial court, in keeping with the contention of the State Treasurer, determined the amount of inheritance tax by assessing the stock on the basis of its "book value." The total valuation of the stock was thus found to be $781,832.78. The appraisers took the average earnings for a period of five years and considered this as 8 per cent of the value of the stock. They fixed the total valuation of the stock at $376,091 — computed on the basis of the average earnings as stated in appellant's brief — or a valuation of $78,978.90 for the 42 shares. However, if the average earnings for five years, as we compute it, is $26,378.90 and this sum represents 8 per cent of the value of the stock, then its total valuation, according to appellant's theory, would be $329,736.25 and not $376,091.
What is the correct method for computing an inheritance tax upon stock in a close corporation such as the evidence discloses this to be? How can we best arrive at the true value of this stock? The statute (Section 1216, Or. L.) provides that the property shall be appraised at its "market value." We think "market value" is used synonymously with "cash value" or "actual value": Tax Com. of Ohio v. Clark,
A method of computation which would lead to inequitable or unjust results should be rejected. It is not advisable to lay down a hard-and-fast rule *291
which should be followed in estimating the value of stock in a close corporation. Any method used must stand the test of reason. After all, courts should be more concerned with results than methods. In recent years the tendency is toward a consideration of all factors, such as (1) asset value; (2) selling price; (3) earning capacity, and the result obtained is the effect of compromise: Pinkerton Millsap's Inheritance and Estate Taxes, § 324. It may, however, be stated with some degree of certainty that the value of stock in close corporations may be best determined for inheritance tax purposes by using its book value as a basis, unless there is evidence disclosing that such would lead to unreasonable or inequitable results: In re Valentine, 147 N.Y. Supp. 231; In re Dupignac's Estate, supra; In re Jones'Estate,
The appraisers' valuation of the stock is based primarily upon the earnings of the corporation for a five-year period, whereas, if the same method had been applied to a ten-year period, the value of each share of stock would be $2,816.39 rather than $1,880.45 per share. The World War caused abnormal price conditions. If, in estimating average *292 yearly earnings, it was proper to take into consideration the great deflation in prices and the loss sustained in 1921, it would seem that this should be balanced with the immense profit earned in 1917. In 1923, there was a profit of approximately $74,000. The stipulation discloses that, at the end of that year, the invested capital of the business amounted to approximately $781,000. Deducting the amount of the earnings from the invested capital at the end of the year, it amounts to $707,000. It will thus be seen that over 10 per cent on invested capital was earned during the year. There was an average return of over 8 per cent on the average investment during the five-year period considered by the appraisers. In view of the earning capacity of the stock, and other factors taken into consideration, we think the valuation placed upon it by the lower court represents approximately its market value. If this stock were offered for sale on the open market and it could be shown to a prospective purchaser that the earnings on the original capital over a ten-year period had averaged 22 1/2 per cent and that it would earn over 10 per cent on his investment on the basis of its book value, it is reasonable to assume that there would be no difficulty in disposing of the stock.
We conclude that the decree of the lower court should be affirmed.
AFFIRMED. REHEARING DENIED.
RAND, C.J., and BEAN and BROWN, JJ., concur. *293
