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Louis v. United States

November 15, 1966


Knoch, Kiley and Fairchild, Circuit Judges.

Author: Knoch

KNOCH, Circuit Judge.

The defendant-appellant, the United States of America, has appealed from a judgment entered against it in an action brought by the plaintiffs-appellees, John J. Louis, Jr. and Harris Trust & Savings Bank, Executors of the Will of John J. Louis, deceased, to recover alleged overpayment of federal estate tax on the estate of the decedent.

The appellant contends that the District Court erred in denying its motion for a new trial.

At his death on February 19, 1959, the decedent John J. Louis, owned 235,000 shares of S.C. Johnson & Sons, Inc., commonly known as Johnson's Wax Company, hereinafter called the "company." A timely federal estate tax return had been filed by the executors showing tax due in the amount of $532,534.97, which was paid. The executors valued the shares at $3.25 as of the date of death.

On audit, the government proposed to increase the valuation of the shares to $11.50 per share. After a conference, the government proposed to value the shares at $5.50 per share. The executors paid an additional federal estate tax of $205,838.78, plus interest of $33,812.31. Subsequently, deficiency was assessed in the amount of $1,621,982.61, on a basis of $20 per share. This was paid with interest of $298,889.17 on June 24, 1962. When claim for refund was denied, suit was brought in the United States District Court to recover the additional amount paid because of the increase in valuation.

The issue of the value of the stock for federal estate tax purposes was tried before the jury who set the value as of the date of death at $5.34 per share.

There is no question that the record provides ample support for the jury's verdict. The taxpayers presented an impressive array of expert witnesses, including the former chief inheritance tax officer of the State of Illinois who had accepted the figure of $3.25 on behalf of the State, who described in detail the manner in which they arrived at their valuations, which varied from $3.25 to $6, together with display of large, easily read charts which simplified the process for the jury.

The government's expert witnesses, on the other hand, used as "comparables" a number of prosperous, well-known concerns whose stock was listed on the stock exchange, many of which were much larger than this company, on the theory that they were in the same or similar line of business, although as the jury must have known, many were in the drug or packaged food business. Plaut v. Smith, D. Conn., 82 F. Supp. 42, 48-49, affd. sub nom Plaut v. Munford, 2 Cir., 1951, 188 F.2d 543, 546. They ignored such elements as dividends. One witness applied his formula to Colgate-Palmolive as though its price were unknown and produced an error of almost 50%.

The government argues, however, that it did not have a fair trial free of prejudicial error. In seeking a new trial, the government relies on two grounds:

First, that the Court committed error in allowing the taxpayers to rely on a sale occurring more than two years prior to the evaluation date, in alleged violation of the Court's own pretrial ruling; and

Second, the alleged misconduct of counsel for the taxpayers.

In the course of pretrial proceedings it was conceded that the $5.50 valuation (on which additional sums had been paid by the executors in the belief that the case had been settled) was not a final determination and was not binding on the government. That figure had been approved in the District office but had been rejected by the Regional office. The government contends that this proposed settlement figure was improperly brought to the attention of the jury with its prejudicial suggestion that the government really thought that the fair market value of the stock did not exceed $5.50 per share.

One of the witnesses for the taxpayers, William H. Froembgen, vice-president of the Harris Trust & Savings Bank, testified concerning his lengthy experience in probate and estate administration, particularly in the valuation of the stock of closely held corporations. He described his supervision of the administration of the Louis estate and how he valued the stock of the company, listing the criteria employed, such as the small minority interest involved (less than 6%), the principal stockholder owning more than 50% of the voting stock; the payment of only one ...

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