American Trust Co. v. Commissioner

AMERICAN TRUST CO., ADMINISTRATOR, ESTATE OF GEORGE E. BENNIE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

American Trust Co. v. Commissioner

Docket No. 12962.

United States Board of Tax Appeals 13 B.T.A. 105 ; 1928 BTA LEXIS 3311 ; July 27, 1928 , Promulgated *3311 Where the value of shares of stock in a going corporation must be determined by the net worth of the corporation as of a certain date, held, the company's own inventory taken shortly after the date in question more truly reflects the net worth than does an estimated liquidation value.

Jesse I. Miller, Esq., for the petitioner.

L. S. Pendleton, Esq., for the respondent.

MARQUETTE *105 This proceeding is for the redetermination of a deficiency in estate taxes asserted by the respondent amounting to $2,813.38. The deficiency arises from: (1) Including in the corporate assets of Alexander Bennie & Co., the sum of $100,000 which was the proceeds of an insurance policy upon the life of George E. Bennie and which sum was paid to the company some weeks after Bennie's death; and (2) valuing the shares of stock in Alexander Bennie & Co., held by the decedent at the time of his death, at $167.62 per share instead of $142 per share, which the petitioner claims was the real value at the time of the decedent's death.

FINDINGS OF FACT.

The petitioner is a Tennessee corporation, duly appointed and qualified as the administrator with the will annexed *3312 of the estate of George E. Bennie, who died November 11, 1923.

Alexander Bennie & Co., hereinafter called the company, was incorporated about 1912. Of the 1,500 shares of common stock of the company issued and outstanding at the time of the decedent's death, the decedent owned 1,290. At that time this stock had a book value of $167.62 per share.

The company was a mercantile concern doing business both at wholesale and retail in automobile tires, overalls, work shirts, dress shirts, jewelry, neckwear, laces, hosiery, light hardware, pants, etc.

The retail store in Nashville was conducted on the Piggly-Wiggly *106 plan. In the wholesale department goods were sent to retail dealers on consignment, with the privilege of returning unsold goods. The nature of the business resulted in making the stock on hand one of broken lots, which reduced its value for disposition as an entirety. The handling of the goods in the retail store, and the shopworn condition of the consignment goods which were returned, further reduced their sale value. This reduction in value, from all causes, amounted to approximately 20 per cent. However, the company did not attempt to make any such *3313 reduction in making up its annual inventories, but listed all goods on hand at cost, except that where merchandise was so damaged as to be worthless it was put aside and not included in the inventory.

The inventory taken at the end of December, 1923, about six or seven weeks after Bennie's death, showed stock on hand, valued at cost, to the amount of $125,525.51; it showed machinery and fixtures of the value of $19,993.02. This included $3,129.35 as the value of a machine for molding automobile tires which had been used in former years but which, the petitioner claims, had been obsolete and entirely worthless for several years. This valuation of machinery and fixtures, except the tire-molding machine, was not the cost price, but was the estimated net value after deducting depreciation.

During March, 1925, the company began to liquidate its business. This was completed in March, 1926. When they were finally sold, the machinery and fixtures brought only $2,726.29. The stock on hand and the machinery and fixtures were not sold hurriedly to the first offerer, but were disposed of from time to time at the best prices obtainable. The merchandise sold for an aggregate sum of less *3314 than $100,000.

Some years before his death, Bennie's life was insured in favor of the company for $100,000. This sum was paid to the company some weeks after Bennie died. The respondent, in determining the value of the company's capital stock when Bennie died, included this $100,000 as company assets. The petitioner disputed the correctness of such inclusion in his petition but abandoned that contention at the hearing.

OPINION.

MARQUETTE: The only issue for our determination is as to the value of the common stock of Alexander Bennie & Co. when George E. Bennie died in November, 1923. But as that value depends upon the worth of the assets of that company at that time, we must first ascertain such worth. There is no dispute except as to two items of the assets: (1) Merchandise on hand, valued by the petitioner at *107 $100,000 and by the respondent at $125,525.51; and (2) machinery and fixtures, valued by the petitioner at $5,897.44 and by the respondent at $19,993.02.

The respondent has followed the inventory values fixed by the company itself less than two months after Bennie died. The merchandise was inventoried at cost, not because this reflected its true *3315 value, but because, owing to the nature of the consignment business carried on, it was impossible to determine accurately the exact value of the merchandise stock. It is very evident that when goods were returned by the consignees, sometimes after a lapse of months and in broken lots, the sale value had depreciated. The testimony shows that this depreciation sometimes ran as high as 50 per cent. Goods in the retail department were also damaged by customers handling them. The 20 per cent depreciation in sale value would seem to be not unreasonable if we consider the matter on the basis of liquidating values. But at the time of Bennie's death and for more than a year afterward the company was a going concern. Its merchandise stock on hand in November, 1923, was undoubtedly different from that on hand in March, 1925, when liquidation began; and its value may have been different also. As a going concern it valued its goods more highly than it would on a liquidating basis, and properly so. It is as a going concern that we must consider the company and the value of its merchandise on hand. On that basis we think the evidence insufficient to disturb the determination of the respondent *3316 as to the value of the merchandise in stock at the time of Bennie's death.

The same reasoning applies to the valuation of the machinery and fixtures, with the exception of the tire-molding machine. Annual depreciation had been taken upon these assets, and the inventory figure on December 31, 1923, represented their fair value as working assets of a going concern. The evidence shows that the tire-molding machine had not been used for some considerable time prior to the end of 1923; that Bennie carried it on the books at its cost value, but in a separate account apart from the other machinery and fixtures; that he did this on the chance that tire conditions might so change as to revive the usefulness of the machine. The machine was, however, entirely useless; repeated efforts to realize something on it, even as scrap metal, proved fruitless. We are disposed to allow the petitioner a deduction of the price of that machine, namely, $3,129.35.

The estate tax should be recomputed, valuing the machinery and fixtures at $16,867.67 instead of $19,993.02.

Judgment will be entered under Rule 50.