Miller v. Commissioner

Memorandum Findings of Fact and Opinion

This case involves a gift tax deficiency in the amount of $45,893.44 for the calendar year 1947. The sole issue is the value of certain common stock that petitioner gave to his wife and children on July 9, 1947. A second issue which involved petitioner's right to an exclusion of $3,000, in connection with a gift made in 1946, was conceded by the respondent and effect will be given thereto in the computation under Rule 50.

Some of the facts were stipulated.

Findings of Fact

The stipulated facts are so found and are incorporated herein by reference.

The petitioner, an individual, resides in Denver, Colorado. He filed a gift tax return for 1947 with the collector of internal revenue *271 at Denver, on March 14, 1948. He reported gifts thereon totaling 1,750 shares of Miller's Groceteria Company common stock, par value $1.00 per share, which he made to members of his family on July 9, 1947, as follows:

Miller's Groceteria Company, hereinafter referred to as Millers, is an outgrowth of a grocery business started in 1903 in Denver, Colorado, as a sole proprietorship by Jacob Miller. In subsequent years, Morris Miller and Max Miller, sons of Jacob Miller, worked with their father. In 1919 the sons opened their own grocery store as a partnership, and in 1920 their father joined them. In 1921 the first additional store was opened, and during the nineteen-twenties a number of other stores were added to the chain. The business was incorporated in Colorado on June 3, 1931. During the nineteen-thirties Millers continued to expand, and during these years developed the super-market idea *272 of merchandising. By June 30, 1947, Millers had 13 super-market stores in operation and total sales for the preceding 12 months of $13,200,000.

Control and management of Millers have always rested in the Miller family. As of July 9, 1947, the Miller family owned all of the 190,000 shares of preferred stock issued and outstanding. There were also outstanding as of that date 10,000 shares of common stock, par value $1.00 per share. ¹ The common stockholders and their holdings after the gifts were made on July 9, 1947, were:

Joseph Sunshine *273 purchased his 300 shares of common stock from Max Miller on February 17, 1947, at a price of $85.95 per share, its book value.

By agreement of the preferred stockholders, no dividends were required to be paid on the preferred stock until the year 1944, and regular dividends of five cents per share were maintained thereafter. The dividends paid on the common stock prior to July 9, 1947, were as follows:

On or about November 12, 1947, the articles of incorporation of Millers were amended, and the authorized capital structure was changed to consist of the following stock:

Class A Preferred 5% Cumulative - 200,000 shares, $1.00 par value.

Class B Common (possessing all voting rights) - 50,000 shares, $10.00 par value.

Class C Common - 50,000 shares, $10.00 par value.

Exchange of the old stock for the new stock was approved on the following basis:

Preferred Stock: Old preferred stock exchanged for new Class A preferred on a share-for-share basis.

Class B Common: Each share of old $1.00 par value common stock exchanged for five shares of new Class B common stock.

Class C stock was sold to employees of Millers, 5,400 shares in 1947, and 200 *274 shares in 1949. This stock, while it shared equally in earnings and assets with the Class B stock, was nonvoting and had limitations on its negotiability.

Millers' invested capital, sales, earnings per share on its $1.00 par value common stock, and the book value per share of such common stock, for the period 1940-1949, inclusive, were as follows:

Millers' net income before taxes, its net profit after taxes, and the amount of earnings available for common stock after preferred dividends, for the period 1940 to 1949, inclusive, were as follows:

Millers' *275 ratio of its sales to its invested capital as compared with the average ratio of 10 small chain stores ² and 9 large chain stores ³ for the years 1940 to 1949, inclusive, were as follows:

Millers' ratio of net income before taxes to sales as compared with average ratios for the same large and small chain-store groups, and Millers' earnings on invested capital as compared with the average of such chain stores for the *276 years 1940 to 1949, inclusive, were as follows:

The averages of the earnings-price ratios and the dividend yields for such large and small grocery chains for the years 1940 to 1949, inclusive, were as follows: ^4*277

At the date of gift, Millers' common stock was an unlisted, inactive, closely-held corporate stock; and with the one exception aforementioned, no sales of such stock had occurred.

In computing the deficiency herein, respondent valued Millers' common stock on July 9, 1947, at $225 per share.

The fair market value of Millers' common stock on July 9, 1947, was $140 per share.

Opinion

RICE, Judge: Petitioner offered the testimony of two expert witnesses and the respondent offered the testimony of one expert witness as to the value of the common stock that was the subject matter of the gifts. We have carefully considered the testimony of these witnesses, the numerous exhibits offered in support of their opinions, and have weighed the relevant factors in fixing the value found for the stock on the critical date. We have omitted facts occurring in 1951 from *278 our findings as being too remote from July 9, 1947, to be material.

Where, as here, the stock is closely held by members of a family, and actual sales are insufficient to establish a market price, we have considered, among other factors, the nature and history of the corporate business, its position in the industry, the market value of stocks of competing and comparable companies, the net value of the underlying corporate assets, the earnings of the corporation, its sales, invested capital, dividends paid, the book value of its assets, and its prospects for the future, based on past accomplishments, its future prospects at the date of the gift, and general economic conditions existing at that time. We have accorded to each relevant factor the weight to which it was, in our judgment, entitled. Based thereon, we have found as a fact that each share of stock on the date of the gift had a value of $140 per share. Since this value exceeds the value at which the stock was reported for gift tax purposes, there will be, as a result of our holding, an additional gift tax liability.

Decision will be entered under Rule 50.