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BADER v. UNITED STATES

March 26, 1959

CLAIR B. BADER, EXECUTOR OF ESTATE OF E.G. BADER, DECEASED, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT. CLAIR B. BADER AND MARGARET BADER, PLAINTIFFS, V. UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Mercer, Chief Judge.

The above-entitled actions have been consolidated for trial and the cases have been tried. In Civil Action No. 1717, taxpayer, Clair B. Bader, sues in his representative capacity as the duly appointed Executor of the estate of his father, E.G. Bader, the decedent. The decedent died on June 2, 1951 and the taxpayer as Executor filed an estate tax return on July 25, 1952 in which return he included as property owned by the decedent on the date of his death, 77 shares of stock in Bader and Company, this being a corporation engaged in the grain, feed and elevator business, said business having been founded and managed by the decedent. In due course of time the estate tax return was audited which resulted in a determination by the Commissioner of Internal Revenue that the fair market value of this stock on June 2, 1951 was $1,250 per share. A deficiency was asserted against the estate based on this valuation and said deficiency was paid in full. In this action the taxpayer contends that the value determined by the Commissioner was erroneous and that the fair market value of these 77 shares of stock on the date of decedent's death was actually $521.83 per share. On July 30, 1954 taxpayer filed a timely claim for refund and upon the Commissioner's failure to act favorably on taxpayer's claim for refund the present action was instituted. The only issue presented in this case is the fair market value for federal estate tax purposes of 77 shares of common stock of Bader and Company owned by the decedent on June 2, 1951, the date of his death.

"June 10, 1937

"Astoria, Illinois

  "This agreement entered into between E.G. Bader and
  my son, Clair B. Bader, June 10, 1937. It is
  understood that if he continues to work for the
  companies 10 years I will give him a bonus of
  $5,000.00 (Five Thousand Dollars) in cash or the
  equivalent of stock in either companies. Stock to be
  valued at $100.00 par value. The choice being up to
  my son.

"S/ E.G. Bader"

The taxpayer worked the period of ten years and accordingly on May 2, 1949 he received 40 shares of Bader and Company stock and 10 shares of Bader Motor Company stock. In connection with an audit of the estate tax return involved in Civil No. 1717, the Commissioner determined that this stock constituted additional 1949 income to the taxpayer. No dispute exists as to the value of the 10 shares of Bader Motor Company stock and the parties agree that this stock was worth $250 per share on May 2, 1949. A dispute exists as to the fair market value on May 2, 1949 of the 40 shares of Bader and Company stock, the government contending that the value of these shares on the date in question was $1,250 and the taxpayer contends that the fair market value on May 2, 1949 of said shares was $416 per share, this being one-third of an alleged $1,250 book value of such shares of stock in 1949.

In the original audit of taxpayers' 1949 income tax return, the examining revenue agent allowed and computed the taxpayers' income tax on a long term basis covering the ten years from June 10, 1937 to June 10, 1947. On review of this finding the Appellate staff of the Internal Revenue Service determined that this case was not a proper one for application of Section 107(a), Internal Revenue Code of 1939, 26 U.S.C.A. § 107(a). This determination was based upon the fact that the other compensation received by the taxpayer during the 1937 to 1947 period, being the salary from the two corporations, was sufficiently large so as to constitute more than 20% of the taxpayer's total compensation for this period. The taxpayer contends in this action that the taxpayer's corporate salary can not be used to apply against the limitation of compensation received in excess of 20 per cent for the reason that the compensation and stock was from a different source than the compensation in salary.

The taxpayer filed a timely claim for refund, the claim being based on the allegations that the Commissioner had overvalued the Bader and Company stock as of May 2, 1949 and that the Commissioner had erred in including in the taxpayer's compensation the salary received by him for the ten year period for the purpose of determining whether the taxpayer had received over 80 per cent of his total compensation for services in one year.

The taxpayer's claim for refund was disallowed and the suit in Civil Action No. 1850 followed. Two issues are presented in this case, namely, the fair cash market value of the Bader and Company stock, being 40 shares, on May 2, 1949, and the applicability or inapplicability of Sec. 107(a), or, stated in another way, whether the salary received by the taxpayer from his employer corporations should be counted toward the 80 per cent limitation contained in Sec. 107(a) of the Internal Revenue Code of 1939, when he was paid in one year (1949) for ten years' services to such corporations.

Fair market value is defined as the price at which property would change hands between a willing buyer and a willing seller, neither of whom is under any compulsion to buy or to sell and both of whom are reasonably well informed as to the facts having a bearing on value.

The Commissioner of Internal Revenue in Revenue Ruling 54-77 (1954) provides that the following factors are fundamental and require careful analysis in each evaluation case:

  (a) The nature of the business and the history of the
      enterprise, including the date of incorporation.
  (b) The economic outlook in general and the condition
      and outlook of the specific industry in
      particular.
  (c) The book value of the stock and the financial
      condition of the business.

(d) The earning capacity of the company.

(e) The dividend paying ...


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