Detroit Trust Co. v. Commissioner

*340 The Commissioner determined a deficiency in estate tax amounting to $132,576. The only error assigned is:

The Commissioner of Internal Revenue has erroneously increased the valuation of 11,010 shares of common stock of Crowley, Milner and Company, Detroit, Michigan, owned by the deceased at the date of death from $2,202,000.00 as reported on the return for Federal estate tax to an amount of $3,027,750.00 - representing an increase in valuation from $200.00 per share to $275.00 per share.

FINDINGS OF FACT.

The petitioners are executors under the will of Joseph J. Crowley. Their principal office is at Detroit, Michigan. Joseph J. Crowley died on November 1, 1925, at which time he owned 11,010 shares of common stock out of 49,001 shares of common stock and 4,959 shares of preferred stock outstanding of Crowley, Milner & Company, Detroit, Michigan. Crowley, Milner & Company was a corporation organized under the laws of Michigan*1543 on August 7, 1914. From the date of its incorporation it has operated a general retail department *341 store in Detroit, Michigan. It took over the business previously operated by the partnership of Crowley and Milner. Originally, Milner owned one-half of the stock and the Crowley brothers owner the other half. Milner died about September 2, 1922. At the time of his death the common stock was owned as follows:

Emery and Jones had been employed in the business even before the incorporation. Emery was general manager until he resigned in 1927. Jones then became general manager. Milner and the Crowleys had permitted them to buy the stock which they owned at book value.

After Milner's death the Crowleys, Emery and Jones discussed the question of whether the company should purchase the Milner stock. The Crowleys had some negotiations with the executors and trustees of Milner's estate. Before anything was done Emery notified the other stockholders*1544 that he would not go along with them, but would do his own negotiating for the Milner stock. On October 25, 1924, he entered into a contract with the executors and trustees of the Milner estate for the purchase of Milner's 20,810 shares of common stock at $250 per share. Five hundred thousand dollars was to be paid in cash in the year 1925 and the balance of $4,702,500 was to be paid in seven equal annual installments, the first due July 1, 1926. Emery gave his notes for the deferred payments and the whole purchase price was to bear interest at 6 per cent from October 25, 1924. Emery pledged all of his own stock and all of the stock just acquired from the Milner estate as security to be held by the Toledo Trust Company until his whole debt to the Milner estate was paid. The agreement also provided that a majority of five individuals, including Emery, should vote the stock until the notes were fully paid.

Emery expected to make his payments to the Milners for the most part out of earnings of the corporation. In February, 1925, while Emery controlled the board of directors, a cash dividend of $20 per share on common stock was declared. The amount of this dividend was much larger*1545 than the company had usually paid previously. *342 This and other actions resulting from Emery's control of the corporation created an unfriendly feeling between the Crowleys and Emery. On or about October 14, 1925, the three Crowleys filed a bill in the Circuit Court for Wayne County, Michigan, against Emery, the corporation, and the directors elected by him, charging that Emery had concealed the purchase, had no funds to complete it, and intended to use the corporate earnings for that purpose, to the detriment of the corporation, by the declaration of large dividends. The bill contained a prayer that the defendants be enjoined from declaring any further dividends on the common stock of the corporation; that Emery be enjoined from conducting the affairs of the corporation with the view of meeting his personal obligations, and from disposing of the stock acquired from the Milner trustees; that he be compelled to disclose the circumstances under which he made the purchase; that if the deal be found to be to the disadvantage of the corporation it be held null and void or, if advantageous, for the benefit of the stockholders; and that Emery be enjoined from voting the Milner*1546 stock. On this bill a temporary restraining order was issued ex parte at some time not disclosed by the record, by which (a) the defendants and each of them were temporarily enjoined from declaring and further cash dividends on the common stock of the corporation of Crowley Milner & Company; (b) the defendant Emery was temporarily enjoined from conducting the finances or other affairs of said corporation with a view to meeting his personal obligations or otherwise for his personal benefit in any wise in disregard of the best interests of all stockholders, and from selling or otherwise disposing of the shares of Crowley Milner & Company acquired by him from the trustees of the estate of William L. Milner, deceased; and (c) the defendant Emery was enjoined from voting the shares of stock acquired by him from the estate of William L. Milner, deceased.

On February 15, 1926, the above order was dissolved and a temporary injunction granted restraining Emery from selling any of the Milner stock. In November, 1927, the suit was settled by the corporation purchasing all of Emery's common stock at $295 a share. Prior to the date of settlement, a dividend of $3 a share was declared*1547 on the common stock and Emery received his share. Emery was no longer connected with the corporation. The record of this suit was suppressed by the court at the request of the parties and no mention of it appeared in the newspapers.

On January 20, 1926, Jones, who was named as a defendant in the Crowley's bill, entered into a contract with Emery whereby he agreed to purchase and Emery agreed to sell 2,450 shares of the common *343 stock at $250 a share. This sale was to date back to some date in 1924 which is not disclosed by the record. Jones was to pay interest and to receive all dividends from that date. In the final settlement of the differences of the Crowleys, Emery, and the corporation, Jones received a payment from Emery, the amount of which is not shown by the record.

The following table shows the gross sales less returns and allowances, and the net earnings of the corporation:

*1548 The average net earnings for the years 1921 to 1926, inclusive, were $1,579,965.05. From November 1, 1925, to January 22, 1926, the earnings amounted to about $425,000. In 1925 the corporation spent over $1,500,000 in erecting an annex to its store.

The parties stipulated that the consolidated balance sheets of the company were as follows:

*344 The parties stipulated that the following figures are correct:

*1550 The common stock of Crowley, Milner & Company was never listed on any exchange until sometime after November 1, 1927.

On the return made by the estate of the decedent the 11,010 shares of common stock of Crowley, Milner & Company were included in the decedent's gross estate at a value of $2,202,000. In determining the deficiency the Commissioner included these shares in the decedent's gross estate at a value of $3,027,750. The value of November 1, 1925, of the 11,010 shares of the common stock of Crowley, Milner & Company owned by Joseph J. Crowley was $2,752,500.

OPINION.

MURDOCK: There is but one thing to be determined in this case, namely, the value of the 11,010 shares of Crowley, Milner & Company common stock on November 1, 1925, the date of the owner's death. His executors returned this stock for Federal estate-tax purposes at $200 per share. The Commissioner increased this value to $275 per share. At the close of the hearing the Commissioner amended his pleadings to claim that the stock was worth $310 per share, and the petitioner then by amendment, claimed that the value was not in excess of $180 per share. We can see no reasonable basis for the value of $275*1551 placed on the stock by the Commissioner and the claim for a value of $310 is not supported by the evidence.

Evidence was introduced of many facts and circumstances which are too remote from the date of death to have any real probative value. In addition, the record contains the testimony of two witnesses who gave opinions as to the value of the stock. One was Jones and the other an investment banker of Detroit. The latter reached his conclusion principally from a consideration of data furnished him shortly before the hearing. He did his best to value the stock and stated that in his opinion it was worth $190 per share on November 1, 1925. We feel that an extended discussion of the strength and weakness of various parts of his testimony is unnecessary *345 because there is better evidence of value in the record than the opinion of this expert witness. Cf. .

Jones placed the value of the stock at the decedent's death at book value less Christmas earnings. But what Jones did is far more convincing than what Jones said. Two months and twenty days after Crowley's death, Jones agreed to buy 2,450 shares of stock*1552 from Emery. This sale was to date back for its effect to some date in 1924 which is not disclosed by the record. Jones was to pay interest and receive all dividends from that date. The interest just about offsets the dividend so far as we can see. Here was a meeting of the minds of a purchaser and a seller, both familiar with the facts, and neither, so far as we know, forced to buy or sell. The situation had not materially changed from the date of the decedent's death except that the corporation had conducted its business through a Christmas season. We do not know whether the results of this Christmas season were better or worse than might have been anticipated on November 1, 1925. It seems fair to assume that they were neither. This agreement was reached with full knowledge of the pending suit. It involved a minority interest. The price agreed upon was $250 per share. The last sale preceding the decedent's death was that made by the Milner estate to Emery on October 25, 1924. This was about one year before the decedent's death. The price agreed upon was $250 per share.

We are convinced on the record before us that the value of the decedent's stock at the date of his*1553 death was $250 per share. In reaching this conclusion we have considered not only the evidence discussed above, but all of the other evidence, including that relating to the location of the store, its history, prospects, dividends, earnings and financial condition, the nature of the business in which it was engaged, and the pending litigation.

Judgment will be entered under Rule 50.