94 N.J. Eq. 398 | N.J. Super. Ct. App. Div. | 1923
The executors of the estate of Francis A. Hall, deceased, have appealed from the tax of $4,567.74 levied *by the comptroller of the State of New Jersey against tire estate of the said decedent under the provisions of the so-called Transfer-Inheritance Tax act. Comp. Stat. p. 5301.
It appears that the comptroller, in Iris computation of the taxable assets of tire estate, included therein an item of goodwill or interest in the partnership business of Frank A. Hall & Sons, upon the ground that a transfer thereof had been made by decedent in Iris lifetime, in contemplation of death or to take effect at death, and assessed the value thereof at $135,860.76.
The appellants contend (a) that no transfer of good-will was in fact made; (b) that if any such transfer was made it was not done in contemplation of death nor to take effect at death, and hence does not come within the statute; and (c) that even if made, and subject to taxation, the comptroller’s valuation was excessive and the tax based thereon therefore erroneous.
(Appeal was taken also in regard to another portion of the tax proceedings, but was not argued, it being stated to the court that a compromise thereasto has been agreed upon.)
Decedent was a manufacturer of beds and bedding, carrjdng on business at some four establishments in New York and one in Philadelphia. In 1910 he took two of his sons into partnership with him; in 1918 this was dissolved and a new partnership entered into which included these three and also decedent’s third son; on May 23d, 1919, this second partnership was dissolved, decedent retiring from the business and the sons forming a new partnership- to take it over and carry it on. On each of these three occasions the interests, rights and liabilities of the several parties involved were specifically provided for in carefully-drawn contracts. On June 14th, 1919, he executed his last will and testament; and on July 18th, 1919,'he died, aged seventy-four, his death being the result of heart trouble, from which he had suffered for some four years.
By the 1910 agreement the copartnership thereby formed specifically “taires over as of this date the business heretofore conducted by the said Francis A. Hall under the name of Frank A. Hall,” and is to conduct that business under the name of Frank A. Hall & Sons. Decedent “contributed” to the capital stock of the partnership “all the stock in trade, book accounts, money in bank, fixtures and other property not herein specially excepted of the business heretofore carried on by him as a going concern.” Good-will was not amongst the specially excepted property, which consisted of real estate, leasehold interests, patent rights, and the like, all of which the decedent leased to the partnership at certain rentals. Compensation, however (at six per cent, per annum on the book value thereof), was also to be paid to- decedent for the use of the property “contributed” by him to the capital stock. The other parties contributed nothing to the capital stock, but were to receive interest on certain sums which they already had “on deposit with the business.” Each partner was to receive interest on any ascertained profits left by him in the business. The profits and losses were to be shared in certain percentages. The partnership- was to- continue until terminated by death or withdrawal. On the death of Francis A. Hall, his personal representatives were to have the right, at their option, to become partners in his place. On the death of either off the others, the surviving partners bad the right to “purchase the interest of the deceased partner.” If Francis A. Hall desired to terminate the partnership he had the right to “purchase the interest” of the others, or either of them. If either of the other two desired to withdraw, the remaining two had the right to purchase his interest. “Upon and after dissolution” the exclusive right to th-e business use of the name Frank A. Hall, Frank A. Hall & Son, Frank A. Hall & Sons or- Frank A. Hall & Co. “shall belong to and be vested in said Francis A. Hall or his personal representatives.”
By the agreement of 1918 the old partnership was dissolved and a partnership was formed among the three prior partners and the decedent’s third son, which partnership “takes over as of this date the business heretofore conducted by * * * Frank A. Hall & Sons.” The same name is retained. “Francis A. Hall contributes to the capital stock of the copartnership all the stock in trade, book accounts, money in bank, fixtures and other property of the business heretofore carried on by him (s>ic) as a going concern,” and is to receive the same six per cent, annual compensation on the book value of said property. The other partners contribute to the partnership capital the respective amounts standing to their credit on the books of the old firm. Francis A. Hall also contributes the real estate (which he had reserved in 1910), but reserved and retained the patents, though licensing the- use. All patents, &e., developed or acquired by the partnership “shall also become his sole property.” By another clause the amount contributed by Francis Á. Hall as capital is specified as $300,000, the “balance beyond that to his credit on the books of the old concern being repayable to him as below provided.” The provisions as to profits are peculiar; decedent was to receive six per cent, on said sum of $300,000, “which as between partners shall be treated as an expense; and in consideration of the-priority thus given him he waives all claim to further profits.” The profits—obviously over and above this six per cent.— were to be divided among the other three partners, to the extent of eighty-five per cent, thereof, the other fifteen per cent, to be applied each year to reduce Francis A. Hall’s capital in the firm down to the $300,000, and thereafter to be accumulated as a contingency fund. “All losses shall be charged against and borne by the partners in the same proportion in which they share the profits as aforesaid.” The agreement also contains the same provisions in regard to termination by death or withdrawal and the respective rights in such contingencies, as the agreement of 1910. It also contains the same clause as to the right to- the name after dissolution.
Under this 1918 agreement decedent was of course a partner. He had a large interest, some $300,000 (by far the largest interest), in the firm’s capital, at the risk of the business. He had an interest in the profits, to an amount equal to six per cent, on his share of the capital, which interest was prior to the interests of the other partners in the profits, and might be compared to the interest of a preferred stockholder in a corporation. He was chargeable with a part of the losses which were to be borne by the partners in the same proportion as they shared the profits. He had the majority control, under the agreement, “in all matters of partnership' policy and action.” He had also the right heretofore mentioned (to state the legal effect of it in a different form from that in which the agreement expresses it) to compel all the other partners to withdraw from the business on paying them the book value of their interests; and the right, upon any dissolution, to the exclusive use of the business name.
The agreement of May 23d, 1919, is as follows:
“By mutual agreement the copartnership heretofore existing under the name of Frank A. Hall & Sons is hereby dissolved and terminated, Francis A. Hall now retiring from said business. It is agreed that his capital as shown by the credit to him on the firm books is the amount to which he is entitled, and that the same is no longer capital invested in said business, but is a deposit to his credit, payable to him on demand or as soon as same can be realized in cash. The other partners shall have the right to continue the business under the same firm name and hereby agree to do so, their respective interests and compensation and shares in profits being in the same proportion as heretofore. The old copartnership articles shall apply except as modified by the retirement of Francis A. Hall.”
- That, however, does not terminate the necessity of further investigation of the transaction. It is the essential character of the transaction which is to be looked at, not the mere legal form thereof. As I had occasion to point out in Re Bottomley, 92 N. J. Eq. 202, the statute specifically applies to transfers made by way of bargain or sale. Appellants would scarcely contend that a transfer made in contemplation of death or to take effect at death, consisting in an exchange, with due legal formality, whereby decedent conveyed .to the beneficiary securities worth $100,000 in return for a building lot worth $500, would not be taxable. The inquiry must be as to whether or not the net practical result and effect of the transaction is a substantial diminution of the assets of the decedent.
Gauged by that standard, therefore, and as to this particular point, it seems to me that the comptroller has not erred in finding a taxable transfer. By the agreement' of May 23d, 1919, the decedent gained, it may be said, relief from risk of loss of his capital in the partnership', and relief from risk of loss of his own individual assets, in the hazards of the firm’s business. As a matter of fact, it would seem from
This good-will was the property of the firm1, as I have hereinbefore pointed out. The decedent, however, had the right ¡to acquire it, with the business, without paying anything for it, since it in nowise figured in the book entries or the book value of the partners’ shares, and it was the latter only which decedent would have to pay if he dissolved the partnership and took over the business, good-will, name and all.
The comptroller has perhaps committed a technical error in assessing under the name of “good-will of firm of Frank A. Hall & Go.” this asset of decedent which was not good-will, but strictly speaking a right or interest—a right to acquire the good-will. This, however, is a mere matter of words and not of substantive error; and does not warrant a reversal. It clearly appears from the report of the comptroller’s appraiser that that which was appraised was decedent’s right and interest in the firm passing under and by the dissolution agreement.
Upon the second issue, as to whether or not the transfer was made by decedent in contemplation of death, I find no ground for disturbing the findings of the comptroller that it was so made. It has already been laid down in Re Pierce, 89 N. J. Eq. 171, that the function of this court on these appeals is not to weigh the evidence or substitute its judgment for that of the 'comptroller, but to determine whether or not error has been committed. So the comptroller’s finding in this behalf is not to be reversed if there was -before him sufficient evidence to support -that finding. That there was sufficient evidence therefor is apparent from the record. It appears that' decedent was seventy-four years old; that he suffered from heart trouble for several years, which was particularly serious because of his age; the nature of this trouble
We come now to- the last contention of appellants, namely, that the appraisement of the good-will or interest was erroneous and excessive and the tax computed thereon therefore likewise erroneous and excessive. As already noted, the value of the right to acquire the good-will, free, is essentially the same as the value of the good-will itself. The value of the good-will of a business is naturally not susceptible of determination with exactitude. The usual method is to- take the actual annual net profits of the business for a period of years, add them and divide by the number of year’s, thus obtaining the average annual net profit, and then to multiply that average profit by a certain number of years. This last multiplier is called the “number of years purchase” and varies, of course, with the particular circumstances in each case. In some instances two years has been taken, in others, three, four and five. Three years purchase seems fairly well accepted as a reasonable and conservative figure in ordinary cases. Cf. In re Ball, 161 App. Div. (N. Y.) 79.
The question as to what years are to be taken, in computing the average, is, however, a question of fact and of judgment under the circumstances and the proofs before the comptroller, and is not for tire judgment of this court in substitution for that of the comptroller. In re Pierce, supra. Appellants fail to prove that error was committed by the comptroller under the evidence. True it is that the net profits during the years 1913, 1914 and 1915 were considerably less than during the next three years; but the record shows that the annual profits had been continuously increasing since the original formation of the partnership in 1910. Moreover, even if the profits in the years 1916-18 were abnormally large, due to war conditions, the transfer .was made in the early part of 1919, and the same conditions apparently continued, inasmuch as the profits for 1919 were $118,000, as against $72,000, $67,000 and $68,000 for the previous years.
The tax will be affirmed.