Petition by Sterling Newell and W. E. Clark, executors under the will of Charles C. Ingalls, deceased, against the Commissioner of Internal Revenue, to review a decision of the United States Board of Tax Appeals fixing a deficiency in the estate tax of Charles C. Ingalls, deceased.
Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.
The instant appeal involves the correctness of the assessment of a $20,259.52 deficiency in the estate tax of Charles C. Ingalls, deceased. Petitioners' attack is directed to a single issue, one of fact, to-wit, the value of decedent's 3,281 shares of common stock of the Ingalls Stone Company.
The facts: Decedent died October 24, 1928, owning 2,258 shares of the preferred stock and 3,281 shares of the common stock of the Ingalls Stone Company. The balance of that company's stock, constituting only a minority interest, was owned by relatives and employees of the corporation. The Ingalls Stone Company was a close corporation under the complete domination and control of decedent. For some years prior to his death, its business had been conducted most successfully.
For the purpose of ascertaining the Indiana inheritance tax, the preferred stock was appraised at $75 per shere and the common stock at $154.10 per share. The Commissioner determined the value of the preferred stock to be $100 per share and the common stock to be $250 per share. The Board of Tax Appeals found:
"The fair market value of the decedent's stock at the date of his death was $75 per share for the preferred and $242.44 per share for the common."
Petitioners accept the finding of $75 per share for the preferred stock. They dispute only the correctness of the finding of $242.44 per share for the common stock.
The findings and opinion of the Board show clearly that it reached its conclusion as to the fair market value of the common stock by first ascertaining its book value and then, basing its conclusion on the company's earning capacity, found that the book value was also the fair market value of said stock.
Petitioners challenge the correctness of this finding because (a) the book value of the stock was not $242.44; (b) the earnings were not 35.54%, exclsuive of dividends upon preferred stock; and (c) the inclusion of $300,000 in the company's assets, which was the amount received by the company on life insurance policies covering decedent's life, should have been reduced by the amount of the loss which the company sustained due to the death of its founder and guiding spirit.
Book Value of the Stock. Assuming that the Board was endeavoring to ascertain the book value of the common stock, it erred when it placed the value of the outstanding preferred stock at only $75 per share. While the market value of this preferred stock was but $75, its value for the purpose of determining the book value of the common stock was par, or $100 per share. To ascertain the book value of the common stock, the Board therefore should have deducted from the company's assets, $268,400 instead of $201,300, as the book value of the outstanding preferred stock.
Earning Capacity. Nor is this the only error in the Board's computations. In the last paragraph of the Board's opinion, we find the following:
"The average earnings per common share during such period after the allowance of dividends upon the average number of preferred shares outstanding during the period equal $35.54 per share for the common stock and it is furthermore to be noted that the company had valuable contracts on its books at the date of the death of the decedent and the testimony shows that the profits for the year 1929 were in excess of those for 1928."
The evidence conclusively showed the earnings for each of the six years prior to the death of decedent. Instead of earning 35.54% exclusive of dividends paid upon the preferred stock, it earned about that ...