1937 BTA LEXIS 831 | B.T.A. | 1937
Lead Opinion
OPINION.
This is a proceeding .for the redetermination of a deficiency in estate tax in the amount of $6,796.43. The issues are (1) whether respondent erred in determining the value at which the decedent’s remainder interest in a certain trust should be included in his gross estate, and (2) whether respondent erred in determining that the amount of a refund of income tax of the decedent for the year 1928, together with the interest thereon, should be included in the gross estate.
Petitioner’s decedent, Milton Sills, died testate at Los Angeles,. California, on September 16, 1930.
Gwladys Edith Sills was born on November 5, 1886, and on September 15, 1925, was the wife of decedent. Dorothy Gardyne Sills, daughter of decedent and Gwladys Edith Sills, was born on April 19, 1911.
On September 15, 1925, decedent entered into a written agreement with the Guaranty Trust Co. of New York, whereby decedent transferred to the trust company, as trustee, and to its successors in trust, certain property and securities. Said trustee accepted the trust, and on September 16, 1930, held the trust property subject to the terms and conditions of the agreement of September 15, 1925.
The trust agreement provided that the trustee was to receive, hold, manage, sell, invest, and keep invested the trust property and securities, and to collect the income therefrom, and, after deducting the necessary expenses of administration, to pay over the net income, to the extent of $5,000 during the first year, $10,000 during the second year, and $15,000 during each of the remaining years of the trust, in equal monthly installments, to Gwladys Edith Sills, during her lifetime, and to pay over all the net income in excess thereof, at the end of each year of the life of the trust, to decedent or his estate.
The trust instrument further provided that at the death of Gwladys Edith Sills, if the daughter, Dorothy Gardyne Sills, be then deceased, all the principal of the trust should revert to, and be conveyed, transferred, and paid over by the trustee to the decedent
Decedent agreed in the trust instrument that if at any time after October 1,1927, by reason of the depreciation or default of any of the property or securities held in the trust, the total market value of the principal should be less than $300,000, he wrould, if his wife should then be living, deliver additional property and securities equal in market value to such deficiency to the trustee to be held under the terms and conditions of the trust agreement. Decedent further agreed that he would at all times have provision made by his last will and testament to the effect that if his wife survived him and if at the date of his death the total market value of all the property and securities held in the trust was less than $300,000, property and securities equal to the amount by which the said total market value should be less than $300,000, belonging to his estate, should be by his executor taken from his estate and delivered to the trust to be held under the terms and conditions of the trust instrument and to become a part of the principal of the trust.
As determined by respondent, and as alleged in the petition, the properties and securities in said trust had a total market value on September 15, 1930, of $309,733.92. The par value was $316,000, as disclosed by the list of securities in evidence.
Respondent determined that the fair market value, at the time of . death, of decedent’s interest in the annual net income of the trust in excess of $15,000 was $30,000, and included that value in the gross estate.
Respondent determined the value of decedent’s interest in the excess net income by assuming that the average earnings of the trust during the lifetime of Gwladys Edith Sills in excess of $15,000 would be $1,500 per annum and that such excess should be capitalized at 5 percent.
Respondent determined that the value at the time of death of the interest of decedent in the principal of the trust, subject to the life tenancies of Gwladys Edith and Dorothy Gardyne Sills, was $82,325.47.
On or about November 20, 1930, petitioner, as executor of the decedent’s estate, filed with the collector of internal revenue at Los Angeles, California, a claim for refund of a part of the Federal income tax paid by decedent for the year 1928. On or about March 3, 1931, respondent determined that the corrected income tax liability of the decedent for the year 1928 was $16,541.28 and that decedent had made an overpayment for that year in the amount of $22,212.14. Subsequently, during the month of October 1931, respondent refunded the overpayment of $22,212.14, together with interest thereon in the amount of $1,617.73. In determining the deficiency respondent included said overpayment of tax, together with the interest thereon, as a part of the decedent’s gross estate in the full amount of $23,829.87.
Of the amount so refunded, $17,599.32 represented tax paid by the decedent on his wife’s share of his community earnings as determined by the respondent. This amount was credited against the corresponding deficiency found by the respondent against decedent’s wife in making the adjustment. The remainder of the refund, including interest thereon, was paid to petitioner in the amount of $6,471.79, as executor of the estate.
Under the first issue petitioner contends that the fair value at the date of death of all of the decedent’s interests in both the income and corpus of the trust was not in excess of $21,500, and that respondent erred in determining the value to be $112,325.47.
That decedent’s interest in the excess income and his reversionary interest in the corpus, subject to the rights of the beneficiaries to receive the specified income for life, constituted valuable property rights is admitted by both parties. That the fair value of such property rights at the date of death should be included in the decedent’s gross estate is also conceded by the parties. And it is further agreed that the proper method of determining the amount of such value is to reduce the value of the property rights to their present worth at the date of decedent’s death on the basis of the life expectancies of the life tenants as ascertained by the generally recognized mortality tables. The use of such method is provided for in respondent’s Regulations 70, article 13, and has been approved by both the Board and the courts in many cases. See Simpson v. United States, 252 U. S. 547; Ithaca Trust Co. v. United States. 279 U. S. 151; William Huggett, 24 B. T. A. 669, 675; James Klein Bowen, 27 B. T. A. 824, 828; Fidelity-Philadelphia Trust Co. et al., Executors, 27 B. T. A. 972, 979.
When witness Creer was asked on direct examination how he arrived at the value placed on the interest, the Member who heard the case expressed the opinion that that was a matter for cross-examination. Attorney for petitioner thereupon withdrew the question.
When witness Meloth stated as his opinion that the fair market value as of September 16, 1930, of the interest was approximately $20,000, attorney for petitioner stated, “I would like Your Honor to know his reasons for that determination but if you think otherwise, I won’t question him further.” The Member replied that when an expert qualifies and then gives his opinion he did not see the necessity of bolstering him up any further; to which petitioner’s attorney replied, “All right, I will just ask one or two questions with respect to the value of any of the claim for refund.”
We do not think petitioner has any cause for complaint on account of these statements of the presiding Member at the hearing, especially in view of the fact that witness Meloth did give the basis of his determination in fixing value.
An examination of the testimony of petitioner’s expert witnesses in the light of other facts in the record convinces us that their opinion as to the value of the decedent’s interest in the trust on September 16, 1930, can be given very little weight. It appears evident from their testimony that the value placed by them is not the fair market value of the interest, but a highly speculative value. Witness Creer testified that, in 20 years’ experience in the trust department of a bank which had the administration of about $400,000,000 of trust funds, he had only known of three or four instances of transfers of such interests. In one of these, the only specific instance he gave, he testified that “the transfer of the interest was upon a basis which, under any contingency, would have been highly profitable to the purchaser.” Petitioner’s return was prepared under the supervision of this witness and, upon being asked on direct examination how he arrived at the value of $21,500 reported in the return, he said:
A. An asset of that kind is, of course, hard to value. The market for it is restricted. No one will buy an interest of that kind where it is based on contingencies of lives, except on a basis that is going to work out a good profit, no matter what contingency happens. * * *
Witness Meloth characterized the interest of the decedent in the trust as not being “bankable”, or having any collateral value; as not being liquid. He testified that it would find a very small, if any, market value; and, further, that he thought a purchaser would rather buy something he would have in his possession to do with as he pleased than to purchase something in which he had only a very theoretical interest, running over a long period of time.
Measured by this yardstick the interest of the decedent was no different from any other estate in remainder. Such estates are not generally considered “bankable” in the ordinary acceptation of that term or as havifig collateral value. Certainly they are not “liquid”, since they can come into possession only at the termination of the intervening estate, but, notwithstanding these facts, the Board and the courts have repeatedly sustained the Commissioner’s method of computing their value bj^ the use of the mortality tables at a rate of 4 percent.
In Simpson v. United States, supra, the taxpayer objected to the assumption by the trial court of a rate of 4 percent as the value of money in computing the tax, and in disposing of this contention, the Supreme Court said :
* * * we take judicial notice of the fact that at the time this tax was collected, 4 per cent was very generally assumed to be the fair value or earning power of money safely invested. Both the method and rate adopted in this case have been assumed by this court, without discussion, as proper in computing the amount of tax that has been collected * * *.
Meloth further testified that as of September 16, 1930, the fair return of money safely invested in the highest grade bonds was 4y2 percent, which would increase to between 5 and 6 percent in the more speculative grades, and that the securities in the trust ranged from a high grade to a medium grade or speculative character.
An examination of the list of securities in the trust, which is in evidence, shows their average market value on September 15,1930, to be approximately 97%, and more than 50 percent of them were above par. This was approximately a year after the crash of the stock market in 1929, and, we think, justifies the conclusion that the securities were generally of a high and medium grade, with, perhaps, a relatively small portion of a more speculative character. The securities all consisted of bonds except 100 shares of $6 preferred stock which had a market value of $92 per share. To say that securities of this type having par value of $316,000 and a
It is common knowledge that residuary interests, such as we have here, are family interests, not regularly dealt in by investors, and seldom sold. It is evident that such interests have no readily ascertainable market value that can be established by sales. Therefore the regulations of the Commissioner, which have the force and effect of law, cf. Maryland Casualty Co. v. United States, 251 U. S. 342; Crocker v. Lucas, 37 Fed. (2d) 275, require that the value of such interests be determined by the use of the mortality tables, taking as a basis the fair market value of the property included in the intervening estate. This fair market value is treated as cash in computing the value of the interest which is included in the- gross estate for tax purposes. If the trust property here consisted of cash or Government bonds, it could not be seriously argued that the use of a factor of 10 percent would be justified by the law and the regulations or by the decisions of the Board and the courts, in determining the value of the residuary interest of the decedent’s estate. But cash must be invested in securities or other income-producing property in order to carry out the purposes of the trust, and where, as here, the trustees have the power to sell and reinvest, the situations are not materially different. Furthermore under the laws of the State of New York, which is the situs of this trust, there are very strict regulations as to the character of securities in which the trustees may invest. Personal Property Law of New York, sec. 21.
We are not bound to accept the opinions as to valuation of expert witnesses as conclusive, particularly where such opinions are predicated upon factors which we conclude are unsound. Their opinions are to be judged in accordance with the soundness of their reasoning which is disclosed. The Board is at liberty to reject such opinions and form its own opinion on the facts presented. Fidelity Title & Trust Co. v. Commissioner, 64 Fed. (2d) 52. Cf. Saxman Coal & Coke Co. v. Commissioner, 43 Fed. (2d) 556; Wessel v. United States, 49 Fed. (2d) 137; H. H. Blumenthal, 21 B. T. A. 901; Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893; Dayton Power & Light Co. v. Public Utilities Commission of Ohio, 292 U. S. 290. The Board is not bound by expert testimony solely because there was no witness to contradict it, Old Mission Portland Cement Co. v. Commissioner, 69 Fed. (2d) 676.
The computation of the value of the residuary estate under article 13 of Regulations 70 is in accordance with the accepted practice of the Treasury Department, which has time and again been approved by this Board and the courts. Article 13 provides for the use of an interest rate of 4 percent, compounded annually, but because of the fact that the decedent had an interest in the income of the trust over the specified amount to be paid to the beneficiaries, which had averaged up to the time of his death approximately $1,500 a year, and the further fact that the average annual earnings of the trust had been about 5% percent, respondent deemed it proper, in computing the deficiency, to use a rate of 5 percent rather than 4 percent.
The record shows that $170,000, par value of the securities, carried an interest rate of from 6 to 7 percent; that $71,000 par value carried an interest rate of 5y2 percent and $76,000 par value carried an interest rate of 5 percent. While the excess income may have averaged $1,500 in prior years and undoubtedly had some value which should be considered, there is no assurance that it will continue and it must be regarded as very speculative. Considering the whole record, including the speculative character of some of. the securities and the length of time involved in the life expectancy, and the interest rate which they carry, we think a factor of 6 percent is fair and reasonable.
In determining the deficiency the Commissioner considered the average excess income as $1,500 and computed its value at $30,000, which Avas deducted from the value of the trust property before computing its present worth. Since the $1,500 does not represent a fixed annuity, but may fluctuate or cease altogether, we think this treatment is in error. The value of the remainder interest should be computed by determining the present Avorth of the entire trust
At the hearing counsel for petitioner stated that respondent had made a slight error in the selection of one of the factors used in computing the value of the reversionary interest in that part of the trust corpus subject to the life estate of the daughter, and further indicated that respondent conceded such error. However, counsel for respondent did not reply, and no proof was offered on the point. The error, if any, may be corrected on final settlement under Rule 50.
The second issue calls in question the correctness of the respondent’s action in including in the gross estate the face value of a claim for refund of decedent’s income tax for 1928, allowed and paid in October 1931, together with the interest thereon. Inasmuch as the claim for refund arose on account of the decedent having included all of his community earnings in his return instead of only half of them, petitioner contends that since the right to recover the amount of the claim was dependent upon the outcome of litigation then pending in the courts involving the right of married persons in California each to make a separate return of one-half of the community income, which question was settled by the Supreme Court’s decision in United States v. Malcolm, 282 U. S. 792, rendered January 19, 1931, the claim for refund in controversy had no fair market value at the time of decedent’s death and hence should not be included in any amount in the gross estate.
We are of the opinion that the contention urged by the petitioner is not sound. The full amount of the claim was actually due and owing to the decedent at the time he died, and was in fact paid with interest in the following year. The claim was in reality worth its face value, and we think under the circumstances present here so much of it as represented an overpayment on the separate property of the decedent should be included at such value in the gross estate.
The burden of petitioner’s argument is that the claim had no fair market value at the time of decedent’s death for the reason that no prudent person would have purchased such a claim in the face of the uncertainties existing prior to the above mentioned decision-of the Supreme Court in 1931. While it is undoubtedly true that fair market value is the basis upon which property may properly be included in determining the value of the gross estate of a decedent, we think it does not follow that, under the statute, property clearly having a definite intrinsic or actual value may be excluded merely because at the moment of death there may have been no
It is generally conceded by most of tbe courts which have had to deal with the subject that there is no definite formula by which to determine fair market value as that term is used in the tax statutes. The question, as all agree, is necessarily one of fact to be determined by the evidence, * * *. Actual sales may be shown, as may also intrinsic value; book value may be considered, as also earning capacity. These are all elements which tend to the ascertainment of fair market value, and when considered together or singly, may establish the fact.
It has been held that corporate stock had a fair market value for tax purposes even though it was not listed on the stock exchange, and there was no dealers’ market for it, and there was no evidence of any sales. In such case, the intrinsic or actual value or book value may be taken as the1 equivalent of fair market value. French Dry Cleaning Co. v. Commissioner, 72 Fed. (2d) 167.
The full amount of the claim with interest was paid in 1931, but a portion of the refund appears to have been applied against the deficiency in the income tax of the decedent’s wife for 1928, which deficiency arose on account of adjustments in connection with the returns of herself and the decedent during the taxable year. Petitioner claims in the alternative that only one-half of the amount actually refunded to the estate in cash should be included in the gross estate for purposes of the estate tax.
The action of respondent in including the $17,599.32 in the value of the estate and at the same time using it to pay the deficiency in tax of decedent’s wife is not consistent. The theory on which it might be used to pay the wife’s deficiency is based on the assumption that the community income returned by the husband belonged one-half to the wife and that to the extent of the income tax on the wife’s one-half it was her money used to pay the tax. Cf. Clayton v. United States, 44 Fed. (2d) 427. If this be true then it could not be included in the estate of her husband because under the community property laws of California it never became a part of his estate. Upon the death of the decedent the community was dissolved and one-half of all existing community property belonged to the surviving spouse. The wife’s half undoubtedly included all of the refund applicable to her half of the community property and, even were it refundable to the decedent’s estate under the law governing refunds, it would not be an asset of the estate but a liability existing in favor of the wife and would have been payable to her or the executor as a part of her share of the community property under the law of California.
What wre have said above applies to the principal amount of the claim and the interest accrued to the date of decedent’s death. That part of the interest which accrued subsequent to decedent’s death represents compensation for the use of the money thereafter and up to the time of payment. It constitutes income to the estate and does not enter into the value of the estate at the time the decedent died. The amount to be included in the gross estate will be modified accordingly.
The memorandum opinion heretofore entered in this case, having been reconsidered, is hereby revoked.
Reviewed by the Board.
Judgment will be entered under Ride 50.
Dissenting Opinion
dissenting: I think the petitioner is entitled either to a new trial or else to judgment on the valuation issue. Anything short of one of these two solutions is both unfair and unjust to the petitioner. The effect of the prevailing opinion is to fix a value less than that determined by the Commissioner but far greater than that testified to by the witnesses. I know that my colleagues who support the prevailing opinion have no desire to be either unfair or unjust. Apparently they do not fully realize how inconsistent their action is with what took place at the hearing.
A former Member of the Board, now deceased, heard the evidence in the case. The question was 'to determine, as of the date of death, the value of the decedent’s rights to receive payments in the future under the trust instrument. The petitioner recognized that it had the burden of proof. It called two witnesses to sustain that burden. It qualified each witness to the satisfaction of the Board Member presiding at the hearing. The witnesses expressed their opinions that at the date of his death the value of the decedent’s rights under the trust was between $20,000 and $21,500. Counsel for the petitioner attempted to have each of these witnesses state in full the method by which he had arrived at his valuation figure. But in the case of each witness the Member presiding refused to allow this explanation to come in under direct examination. The brief cross-examination brought out nothing further and the result was that neither of the
No specific finding of fact as to value is inadé, but the author of the prevailing opinion, who neither heard nor saw the witnesses, casts their opinions aside and directs that a factor of 6 percent be used in determining the value of the interests in question as of the date of the decedent’s death. This will result in the fixing of a value less than that determined by the Commissioner but almost four times as great as that testified to by the witnesses. I am not concerned for the moment with the question of whether or not there is evidence in the record supporting the use of a 6 percent yield or discount factor. The point I make is that, since the Member who presided at the hearing was satisfied with the qualifications of the witnesses to express opinions and refused to allow their methods to be disclosed under direct examination, it is unfair and unjust to the petitioner for another Member of the Board to cast aside and disregard the opinions of those witnesses on the ground that they did not give convincing reasons supporting their opinions. Yet that is what is being done. The opinions of the witnesses are cast aside and that action is justified as follows:
We are not bound to accept the opinions as to valuation of expert witnesses as conclusive, particularly where such opinions are predicated upon factors which we conclude are unsound. Their opinions are to be judged in accordance with the soundness of their reasoning which is disclosed. The Board is at liberty to reject such opinions and form its own opinion on the facts presented.
Thus the petitioner has been trapped by the Board.
It is another question whether the Board should order a new trial to give counsel for the petitioner a chance to have his witnesses explain their methods of valuation or whether their opinions as expressed should control. The rules of evidence governing in proceeding before the Board are the rules of evidence applicable in the courts of equity in the District'of Columbia. I believe those rules required the Member who presided at the hearing to allow counsel for the petitioner to have his witnesses fully explain their methods of valuation. But, if the Board is not now satisfied to accept the opinions of the only witnesses called, clearly the petitioner is entitled to a new trial and should not receive an adverse decision on the present record. If, however, the Member presiding at the hearing was correct in his ruling, then the Board should find as a fact that the value was $21,500. The opinions of the witnesses were certainly not weakened by the meager cross-examination. It is true that the record contains a partial disclosure of the factors, method and reasoning used by one of the witnesses. But that evidence does not afford a fair basis upon which to hold that the
The Board, rejecting both the determination of the Commissioner and the value testified to by the witnesses, directs that a value be determined by the use of a 6 percent discount factor. Ordinarily the Board is not bound by opinions of witnesses. But it should have good reasons if it is to disregard their testimony. Here I think the Board has misunderstood the effect of various factors and has expressed inadequate and unsound reasons for its action. This is, of course, aside from the more serious mistake discussed above.
The petitioner agrees that some amount may properly be included in the gross estate representing the value at the date of death of the decedent’s rights to receive future payments of income and corpus under the trust instrument. The parties are in agreement that the uncertainties in regard to the element of time involved -in the valuations may be resolved by the use of mortality tables. The decedent’s rights under the trust instrument involved certain risks dependent upon future earning power of the trust property, the safety of the trust investments, and perhaps other factors. Those uncertainties can not be resolved by the use of mortality tables, and the parties are in disagreement as to the proper factor to be used in making allowance for the risks involved. The Commissioner has set forth in his regulations a table for use in determining the present value of future payments. No doubt that table is useful in many ways to the Commissioner, particularly for the guidance of subordinates in the Bureau of Internal Revenue, but the promulgation of such a table in the Commissioner’s-regulations was never intended to have and does not have “the force and effect of law.” Safe Deposit & Trust Co. of Baltimore, Executor, 35 B. T. A. 259. Neither does it establish a rule of evidence. There is no evidence and no authorities are cited to show whether, or to what extent, such a table, or some modification of it, might be properly used in a case like the present one. The Commissioner did not use the table in determin--ing the deficiency and does not urge its use now. The table is based upon a 4 percent discount factor. The Commissioner computed the value in question on the basis of a 5 percent discount or yield figure instead of the 4 percent used in the table. Since the securities in the trust were yielding in excess of 5 percent it may be fair to conclude that the Commissioner erred in valuing the reversionary interest on only a 5 percent yield basis. But what justification is there in the record for the selection by the Board of a 6 percent discount factor?
Dissenting Opinion
dissenting: The parties seem to agree that the fair value of the interest of the estate in the excess income and in the corpus of the trust can best be determined by reducing them to their present
I agree with the víoavs of Member Murdock, expressed in the dissenting opinion, to the effect that the witnesses should have been allowed to explain their methods of valuation, and, since they were not permitted to do so, I also feel that a new trial should be granted. I am of the opinion, however, that the preesnt record does not justify us in overturning the determination which the respondent made upon the valuation issue.