First Nat'l Bank v. Commissioner

*289 This is a proceeding for the redetermination of a deficiency in estate taxes in the amount of $268.55, asserted against the estate of John L. Pitts, who died on May 14, 1924.

It is alleged that the respondent erred in computing the value of the 325/1000 interest owned by the estate in Pitts & Morris and in Pitts & Morris Co., partnerships, to have been $51,585.13 instead of $38,157.76.

FINDINGS OF FACT.

Helen A. Pitts and the First National Bank of Richmond, Va., were, on May 29, 1924, duly qualified in the Albemarle CountyCourt, Va., as administrators of the estate of John L. Pitts, who died May 14, 1924. The bank had charge of all the securities and accounts of the estate and attended to all the clerical details.

At the time of his death, John L. Pitts owned a 32 1/2 per cent interest in the partnerships of Pitts & Morris and Pitts & Morris Co., of Roanoke, Va.Pitts and E. T. Morris had been in partnership since 1902. *2431 Each of them owned a 32 1/2 per cent interest in each partnership. Lindsey Pitts, a son of the decedent, owned a 5 per cent interest in the partnerships. The decedent had not been active in the affairs of the partnerships for 10 years prior to his death. Morris had managed the affairs of both Pitts & Morris and Pitts & Morris Co. The members of each partnership were the same and presumably the two companies were in reality one concern. The business engaged in was a railroad contracting business. Pitts & Morris took the work directly from the railroad companies and then subcontracted the work to Pitts & Morris Co. at the original price. Under the contracts which were entered into, Pitts & Morris Co. did the excavating and Pitts & Morris handled the masonry. The books of the two partnerships were separate but were kept by the same parties.

The bank prepared the estate-tax return for the estate and included therein, in Schedule D-2, Item 2, an amount of $51,585.13, representing the 32 1/2 per cent interest owned by the decedent at the time of his death in the two partnerships. The bank had been submitted a statement of the two partnerships which indicated that they carried*2432 on their books the 32 1/2 per cent interest held by the estate at $51,585.13. The bank, in gathering assets of any estate, customarily passed them on into a control account as soon as they were gathered, at a value that would appear at the time to be proper. In the instant case this partnership interest was included at the book value as submitted to the bank.

Shortly after the death of the decedent the bank called upon E. C. Morris, one of the surviving partners, to come to its office and discuss the question of what should be done with the assets of the estate. *290 He, at that time, submitted to the bank a complete list of all the equipment and other tangible property held by the partnerships which showed the dates of purchase and his views on the condition of each item. The list included the inventory at the book value at that time. The machinery and equipment was included at $70,281.97, the book value, which was the original cost less 15 per cent depreciation each year from the date of purchase. Morris knew that the purpose of furnishing this list was to establish the value of the plant at the date of docedent's death.

The bank officials realized that the maximum*2433 value of the partnerships was as going concerns. About July 5, 1924, Morris informed the bank that he thought that $32,500 was the full value of the machinery and equipment of the partnerships at the time the discussion took place. He offered to purchase the 32 1/2 per cent interest which the estate owned in the partnerships upon the basis of a value of the machinery and equipment of $32,500, or to sell his interest in the partnerships to the estate upon the same basis.

At this time the Norfolk & Western Railroad had decided to extend its tracks, thereby furnishing more work for the partnerships, and Morris' offer was larger than it would have been had it been made at the time of the death of the decedent. Relations between the decedent and Morris had always been pleasant and for this reason Morris' offer was larger than it otherwise would have been. The negotiations were made upon the basis of the partnerships as going concerns.

Thomas V. Purcell, who was trust officer of the bank and who was handling the affairs of the estate, called in Helen A. Pitts, the coadministrator, to discuss this offer and these values. They, in turn, called in Lindsey Pitts, son of the decedent, *2434 who, as pointed out above, also held an interest in the partnership. Lindsey Pitts verified Morris' statements as to the age and condition of the equipment. The matter was then submitted to Allen J. Saville, who at that time was director of the department of public works at Richmond, Va., and who was then engaged in both construction work and the purchasing of supplies incident to his position. He had formerly been a consulting engineer and had done a great deal of work in the neighborhood of Richmond, Va., pittsburgh, Pa., and other cities in the United States.

Lindsey Pitts not only approved the offer of Morris as being fair and reasonable, but he also sold his interest in the partnership to Morris upon this basis. Lindsey Pitts had been working in the plant of the partnerships for a year. He was about 24 or 25 years of age and was very capable. He graduated from the Virginia Military Institute, which is an engineering school, and was later *291 a major in the Army. He was thoroughly familiar with the equipment in question and its condition.

At the time Morris first visited the bank, Purcell requested that he have an accountant make up a statement of the condition*2435 of the partnerships and also a supporting inventory as to how the book values were computed. The inventory and statement were sent to Purcell on July 5, 1924.

The following is the inventory, taken on June 30, 1924, of the machinery and equipment of the plant of Pitts & Morris Co.:

*2436 *292 The statement, in summarizing the book value of the machinery and equipment, showed the following:

In the above inventory the equipment was listed at cost, less 15 per cent depreciation per annum, from the time it was first purchased. Most of the equipment had been purchased about three years prior to the time the inventory was taken. Fifteen per cent depreciation was the amount allowed per annum for tax purposes by the United States Government. The locomotives and cars have never been moved since they were purchased and are obsolete.

The method of doing the work changes so rapidly that the equipment bought for one job may not be of any use for the next job. Morris did not get the type of work which he expected and the equipment has never been used since. At the time of the death of the decedent there was very little work in sight. At that time the partnerships were working upon a job at Prichard, Ky., which was finished about 30 days thereafter.

At the time of decedent's death the partnerships had no other contracts. There*2437 was small demand for such a plant as this and if the plant had been liquidated by court proceedings it would have brought no more than $15,000. It was not questioned that Morris, as the owner of the majority remaining interest, had the right, which he claimed, to have the business liquidated by judicial sale.

The following is the statement of the financial condition of the Pitts & Morris Co. at the close of business June 30, 1924, which was furnished to Purcell on July 5, 1924:

The negotiations between Morris and the estate for the sale of the estate's interest in the partnerships continued from July 5, to *293 July 13, but the actual offer was made by Morris on July 5, Morris' offer of $38,157.76 was accepted some time in August, 1924.

The price paid represents a*2438 32 1/2 per cent interest in the inventory of machinery and equipment, plus a like proportion of certain items that were worth face value, such as cash on hand. The price to be paid to the estate for its interest in the partnerships was based upon the statement of assets set forth above but such statement was reconstructed in the following manner:

To the above assets there was added an account known as "rake-off account" not carried on the books of the company, amounting to $2,124.99, increasing the assets to $127,994.75. From this there were deducted liabilities as shown on the statement in the amount of $3,240.24 and Norfolk and Western rent account that had not been rendered the companies on the date of the statement, amounting to $7,400, leaving a total of net assets of $117,354.51. A 32 1/2 per cent interest in assets of this value would be $38,140.22. Morris paid $38,157.76 for this interest, which is slightly in excess of the calculated value, but this slight excess was ignored.

For the purpose of inherintance*2439 taxes of the State of Virginia, the estate filed an inventory showing the value of the 32 1/2 per cent interest of the estate in the partnerships to be $38,157.76. That figure was accepted by the State of Virginia.

The respondent, in computing the estate tax, used the figures in the return. These figures in the return, as stated hereinbefore, represented a 32 1/2 per cent interest in the book value of the assets of the partnerships. There were some assets of fixed value such as cash. The figure of $73,858.97 was used as the value of the equipment during the negotiations with the estate for the sale of the estate's 32 1/2 per cent interest in the partnerships. The respondent held that the amount received upon the sale of the estate's interest in the partnerships did not fairly reflect the value as of the date of the decedent's death and computed the taxes upon the basis of a value for the estate's interest in the partnership, of $51,585.13.

The value of the machinery and equipment of the partnerships at the time of the death of the decedent was no greater than at the date of sale of the estate's interest in the partnerships. The value of such machinery and equipment at the*2440 date of the death of the *294 decedent was not more than $32,500 and the value of the estate's 32 1/2 per cent interest in the total assets of the two partnerships was not greater than $38,157.76.

OPINION.

MCMAHON: The sole question in this proceeding is one of fact as to the value, for estate-tax purposes, of the 32 1/2 per cent interest held by the decedent at the time of his death, May 14, 1924, in the partnerships of Pitts & Morris and Pitts & Morris Co.

In the estate-tax return this interest was included at a value of $51,585.13, which was the figure at which the interest of the decedent was carried on the books of the partnerships. The petitioner now contends that the fair value of the estate at the time of the death of decedent was not greater than $38,157.76. Petitioner contends that certain machinery and equipment which was included in the inventory of the estate at the book value of $73,858.97, was, in fact, worth not more than $32,500.

After a careful consideration of all the evidence presented to us we concluded and found, as a fact, that the value of the machinery and equipment at the time of the death of the decedent was not greater than $32,500, *2441 and that the value at that time of the 32 1/2 per cent interest in the partnerships was not greater than $38,157.76. Upon the redetermination the interest of the decedent in the two partnerships will, therefore, be included at a value of $38,157.76.

Judgment will be entered under Rule 50.