The respondent determined a deficiency of $22,258.49 in the gift tax of the petitioner for the year 1940.
The sole issue is the proper valuation of certain shares of the common stock of Montgomery Ward Co. and United States Gypsum Co. which on December 31, 1940, were transferred as gifts under trust agreements.
FINDINGS OF FACT.
Certain facts were stipulated and as so stipulated are adopted as findings of fact. They are set forth in great detail in the stipulation, but may be summarized as follows, all other facts and figures therein being incorporated by reference.
The petitioner is an individual residing in Evanston, Illinois, and maintains his office in Chicago. He filed his gift tax return for the year 1940 with the collector of internal revenue for the first district of Illinois.
On December 31, 1940, the petitioner made gifts of 8,000 shares of the common stock of the United States Gypsum Co., an Illinois corporation, hereinafter called Gypsum, and 13,000 shares of the common stock of Montgomery Ward Co., an Illinois corporation, hereinafter called Ward, to the Northern Trust Co. of Chicago, Illinois, and Hortense Wisner Avery, as trustees, to hold in trust for the use and benefit of the petitioner's daughter, Nancy Avery Follansbee, and her husband, Rogers Follansbee, and others.
On December 31, 1940, and contemporaneously with the above gift, the petitioner made gifts of 8,000 shares of the common stock of Gypsum and 13,000 shares of the common stock of Ward to the Northern Trust Co. of Chicago, Illinois, and Hortense Wisner Avery, as trustees, to hold in trust for the use and benefit of the petitioner's daughter, Arla Avery McMillan, and her husband, William Benton McMillan, and others.
In the petitioner's gift tax return for the year 1940 he reported such gifts as follows: Value at Item No. Description of gift, motive and donee's Date of date of name and address gift gift 1 ......... 8,000 shares United States Gypsum Co. 12-31-40 $968,000 common stock, 13,000 shares Montgomery Ward Co. common stock; the Northern Trust Co. and Hortense Wisner Avery, co-trustees, under agreement with Sewell L. Avery, dated Dec. 31, 1940, for the benefit of Arla Avery McMillan and William Benton McMillan and others, 50 S. LaSalle St., Chicago. 2 ......... 8,000 shares United States Gypsum Co. 12-31-40 968,000 common stock, 13,000 shares Montgomery Ward Co. common stock; the Northern Trust Co. and Hortense Wisner Avery, co-trustees under agreement with Sewell L. Avery, dated Dec. 31, 1940, for the benefit of Nancy Avery Follansbee and Rogers Follansbee and others, 50 S. LaSalle St., Chicago. -------- ---------- Total... ......................................... 1,936,000 A notation was made in a blank space under schedule B of the said return, otherwise unused, reading as follows:
Note: In view of the number of shares involved the market quotations on December 31, 1940 were not indicative of the actual values. The values, as stated above, are as follows — United States Gypsum Company at 62 1/2, Montgomery Ward Co. at 36. These values are 2 points and 1 1/2 points, respectively, below the mean market quotations for December 31, 1940.
Prior to making the gifts the petitioner held the shares of stock of the corporations for investment. None of the shares of stock have been sold by the donees thereof and the donees have held such shares of stock for investment since the date of the gifts.
For many years prior to and including the year 1940 Ward published detailed annual reports, which included statements of its properties, financial status, activities, earnings, and dividends. Such annual reports were supplemented by reports of quarterly earnings, as the results of its operations became available during each year. These reports were mailed to stockholders, and digests thereof were given wide circulation by publications recognized as authoritative in the investment and financial community. Such publications included the Commercial and Financial Chronicle, Standard Statistics, and Poor's and Moody's Industrial Manuals. Quarterly and annual reports were also published in the Wall Street Journal. The company also filed its annual reports with the Securities and Exchange Commission. During all material times herein the accounting period of Ward was the fiscal year ended January 31 in each year.
The reports of Montgomery Ward Co. above referred to were substantially accurate. On January 31, 1941, the outstanding common shares (no par) were 5,217,147. On January 31, 1941, there were 59,373 common shareholders. The common shares were listed and traded on the New York and Chicago Stock Exchanges, and also were traded in the unlisted department on the Boston, Detroit, Los Angeles, Philadelphia, Pittsburgh, and San Francisco Stock Exchanges.
The following is a compilation for each month for the period January 1 to December 31, 1940, inclusive, of the recorded number of shares traded, the dates of high prices, high prices, the dates of low prices, and low prices for such period for Ward common stock on the New York Stock Exchange: Date High Low Shares sold 1940 Dates Prices Dates Prices January ............. (1-3) 56 (1-15) 50 3/8 68,100 February ............ (2-5) 55 (2-1) 51 45,800 March ............... (3-7) 55 (3-16) 52 1/8 57,200 April ............... (4-5) 55 7/8 (4-27) 49 3/4 98,200 May ................. (5-1) 49 5/8 (5-21) 31 3/4 240,900 June ................ (6-28) 40 (6-5) 33 1/4 74,200 July ................ (7-31) 42 1/2 (7-10) 38 5/8 31,300 August .............. (8-31) 42 1/8 (8-16) 38 1/2 32,600 September ........... (9-6) 44 1/4 (9-13) 38 5/8 66,700 October ............. (10-3) 42 3/4 (10-29) 38 1/2 73,500 November ............ (11-12) 41 1/2 (11-22) 36 1/2 90,700 December ............ (12-2) 38 1/8 (12-23) 35 1/2 84,400 -------- ---------- --------- ----------- ---------- Total for period .. 963,600 On December 31, 1940, 5,500 shares of Ward were sold, opening at 37 5/8 and closing at 38. The high and low on that day were 38 and 37, respectively.
During the year 1940, 963,600 shares of the common stock of Ward were traded on the New York Stock Exchange. A total of 1,234 different issues were traded on that exchange, of which 41 issues exceeded 960,000 shares traded during the year, or 3.2225 percent of the total number of issues traded. During the year 1941, 797,700 shares were traded. A total of 1,234 different issues were traded in 1941 on the New York Stock Exchange, of which 37 issues exceeded 795,000 shares traded during the year, or 2.99837 percent of the total number of issues traded.
For many years prior to and including the year 1940 Gypsum published detailed annual reports, which included statements of its properties, financial status, activities, earnings, and dividends. Such annual reports were supplemented by reports of quarterly earnings, as the results of its operations became available during each year. These reports were mailed to stockholders, and digests thereof were given wide circulation by publications recognized as authoritative in the investment and financial community. Such publications included the Commercial and Financial Chronicle, Standard Statistics, and Poor's and Moody's Industrial Manuals. Quarterly and annual reports were also published in the Wall Street Journal. The company also filed its annual reports with the Securities and Exchange Commission. During all material times herein the accounting period of United States Gypsum Co. was the calendar year.
The reports of Gypsum above referred to were substantially accurate. On December 31, 1940, the outstanding common shares (par $20) were 1,195,662, exclusive of 56,159 shares of treasury stock, of which 5,476 shares are under option to officers and managers. On December 31, 1940, there were 7,044 common shareholders. The common shares were listed and traded on the New York and Chicago Stock Exchanges, and also were traded in the unlisted department on the Philadelphia Stock Exchange.
The following is a compilation for each month for the period January 1 to December 31, 1940, inclusive, of the recorded number of shares traded, the dates of high prices, high prices, the dates of low prices, and low prices for Gypsum common stock on the New York Stock Exchange: Date High Low Shares sold 1940 Dates Prices Dates Prices January ............. (1-25) 89 (1-15) 82 1/2 10,600 February ............ (2-1) 86 5/8 (2-28) 81 1/2 8,100 March ............... (3-27) 83 1/2 (3-15) 80 1/2 6,300 April ............... (4-9) 86 3/4 (4-27) 80 11,600 May ................. (5-3) 83 1/2 (5-23) 55 1/2 26,400 June ................ (6-1) 59 (6-10) 50 18,500 July ................ (7-31) 65 1/4 (7-2) 53 1/2 10,700 August .............. (8-30) 75 (8-19) 63 5,800 September ........... (9-24) 80 3/8 (9-12) 71 1/2 8,800 October ............. (10-3) 81 (10-31) 73 1/2 15,500 November ............ (11-1) 76 (11-7) 67 1/2 13,200 December ............ (12-3) 71 1/2 (12-27) 61 34,300 --------- ---------- --------- ----------- ---------- Total for period .. 156,600
On December 31, 1940, 1,000 shares of Gypsum were sold, opening at 64 and closing at 66. The high and low on that day were 66 and 63, respectively.
During January and February 1941 totals of 56,100 and 35,700 shares of Ward common stock were sold on the New York Stock Exchange, with high 39 1/2 and 37 3/8 and low 35 5/8 and 35 1/4, respectively.
During January and February 1941 totals of 12,800 and 5,600 shares of Gypsum were sold on the New York Stock Exchange, with high 69 1/2 and 65 and low 62 1/4 and 60, respectively.
During the year 1940, 155,800 shares of the common stock of Gypsum were traded on the New York Stock Exchange. A total of 1,234 different issues were traded on that exchange, of which 297 issues exceeded 155,000 shares traded during the year, or 24.06 percent of the total number of issues traded. During the year 1941, 169,700 shares were traded. A total of 1,234 different issues were traded in 1941 on the New York Stock Exchange, of which 244 issues exceeded 169,000 shares traded during the year, or 19.77 percent of the total number of issues traded.
On December 31, 1940, the New York Stock Exchange was the exchange where shares of common stock of Gypsum and Ward were principally bought and sold. On that date the market on that exchange for shares of common stock of Gypsum and Ward was a free, fair, open, and unrestricted market, and it was not affected by manipulation. The fair market values per share of the several lots of common stock of Ward and Gypsum which were sold on the New York Stock Exchange were the respective prices per share at which such lots of the stocks were sold in the respective months and on the respective dates as above set forth.
On January 30, 1942, a firm of investment security dealers with membership on the New York Stock Exchange offered, after the close of business on the Exchange on that date, a block of 4,700 shares of Gypsum common stock at a fixed price of 46 7/8 net, which was the closing price for the stock on the Exchange on that date. The block was disposed of upon those terms by secondary distribution. The price received by the original vendors from the distributors was 45 3/8.
The Commissioner determined that the values of the common stock of Ward and Gypsum on the date the gifts were made (December 31, 1940) were $37.50 and $64.50 per share, respectively.
The record discloses the following additional facts:
The trust agreement executed by the petitioner on December 31, 1940, for the benefit of Arla Avery McMillan and her husband, William Benton McMillan, contained the following provisions:
WHEREAS, Settlor desires to create certain trusts for the use and benefit of his daughter, ARLA AVERY McMILLAN, and her husband, WILLIAM BENTON McMILLAN, and the other beneficiaries hereinafter named or described, upon the terms and conditions hereinafter set forth,
NOW, THEREFORE, in consideration of the premises and for the purpose of accomplishing the objects hereinafter more specifically set forth, the Settlor has assigned, transferred and set over and by these presents does hereby assign, transfer and set over unto the Trustees Eight Thousand (8,000) shares of the common stock of the United States Gypsum Company, an Illinois corporation, and Thirteen Thousand (13,000) shares of the common stock of Montgomery Ward Co., Incorporated, an Illinois corporation,
TO HAVE AND TO HOLD the same in trust for the following uses and trusts, that is to say:
FIRST: The Trustees shall divide the trust estate into two separate trusts, one of the trusts to consist of one-half (1/2) of the trust estate to be held by the Trustees for the benefit of Settlor's daughter, ARLA AVERY McMILLAN, and one of the trusts to consist of one-half (1/2) of the trust estate to be held by the Trustees for the benefit of WILLIAM BENTON McMILLAN, the husband of Settlor's daughter ARLA AVERY McMILLAN.
SECOND: The Trustees shall hold, manage, administer and control all of the trust estate, or so much thereof as shall at any time remain in their hands as such Trustees, either as two separate funds under the two trusts hereinbefore created or as one commingled fund as they in their discretion shall determine and the Trustees shall collect all income, rents and profits thereof * * * and after the payment of all such * * * expenses shall distribute the net income to the persons, at the times and in the manner as follows:
1. The Trustees shall pay over and distribute to the Settlor's daughter, ARLA AVERY McMILLAN, so long as she shall live, all of the net income derived from that certain trust consisting of one-half (1/2) of the trust estate so held by the Trustees for her benefit. * * *
2. The Trustees shall pay over and distribute to said WILLIAM BENTON McMILLAN, so long as he shall live, all of the net income derived from that certain trust consisting of one-half (1/2) of the trust estate so held by the Trustees for his benefit. In the event of the termination by death or otherwise of the interest of said WILLIAM BENTON McMILLAN in the income of the trust so held for his benefit, the Trustees shall divide and pay over all of the net income from such trust to his wife, ARLA AVERY McMILLAN, * * *.
* * * * * * *
SIXTEENTH: The Settlor hereby expressly declares that it is his intention that this instrument and the trusts hereby created shall in all respects and for all purposes be governed, controlled and regulated by the laws of the State of Illinois, and that all questions regarding the construction, interpretation or the validity of this trust instrument or any of its provisions shall be determined solely by the laws of that State.
* * * * * * *
The trust further provided that upon the death of Arla Avery McMillan the net income from her portion of the trust corpus should be paid to her children for life, and, upon the death of her children, to her sister. The income from her husband's portion of the trust corpus, received by her consequent upon his death, was, upon her death, to be paid to her children, and, upon their death, to her sister. If all of the beneficiaries named should die, the income was to be paid to the donor's wife for her lifetime, and thereafter to named museums. In the event of the separation of the petitioner's daughter and her husband, the trust provided that all income payable to the husband under paragraph second, 2, should be paid to the wife.
The trust agreement for the benefit of Nancy Avery Follansbee and her husband contains provisions identical with those appearing in the trust for her sister, with the names of the beneficiaries properly designated.
A secondary distribution of about 80,000 shares of Ward stock was made through the New York Stock Exchange on January 13, 1941. The opening and closing price on that day was 39. The price received by the vendors was 37 1/2. Thereafter, throughout January the price gradually declined.
A "secondary distribution" is a process by which a large block of stock is placed on the market through an underwriting syndicate and distributors, immediately after the close of the market, to be sold at the closing price for the day. This method of the sale of stock by blocks is practically equivalent to a sale by wholesale. Adequate compensation must be paid by the seller to those engaged in this operation. The approval of the stock exchange is required before such a distribution is offered. Protective measures covering the seller, the brokers, and the buying public are carefully imposed and meticulously observed. The net price realized by the vendor varies from $1 to $2 below the price to the public.
On December 31, 1940, if blocks of Ward common stock such as are here involved had been offered for sale on the stock exchange open market, they could not have been sold without demoralizing the market. The stock would have been disposed of through a secondary distribution or by sale in small lots over a period of time. The former method is less subject to speculative fluctuations.
The same situation existed with respect to the Gypsum stock. The Gypsum stock was not as active as the Ward stock, and the market would have been less capable of absorbing it in the regular channels. On December 31, 1940, blocks of Gypsum stock of the size here involved would have been marketed by secondary distribution or by gradual sale in small lots during a period of time thereafter.
The fair market value of 6,500 shares of Ward stock on December 31, 1940, was $36.50 per share, or $237,250. The fair market value of 4,000 shares of Gypsum stock on December 31, 1940 was $64.50 per share, or $258,000. The fair market values of 13,000 shares of Ward and 8,000 shares of Gypsum were $474,500 and $516,000, respectively.
OPINION.
VAN FOSSAN, Judge:
The single issue before us is the correct valuation of shares of Montgomery Ward Co. and United States Gypsum Co. stock made the subject of gift by the petitioner in the trust agreements of December 31, 1940.
The Commissioner follows and relies on his regulations, which state that the fair market value of stocks and bonds listed on the stock exchange is the mean between the highest and lowest quoted selling price on the day of the gift. On this basis he has determined such value to be $37.50 per share for the Ward stock and $64.50 for the Gypsum stock.
Art. 19, Regulations 79 (1936 Ed.), as amended by T. D. 4901, May 18, 1939, 1939-1 (Part I) C. B. 341. This regulation also provides that if the formula prescribed therein does not, under the facts, reflect fair market value, a reasonable modification of the formula or other relevant facts shall be considered.
The petitioner contends that the proper basis of valuing stock transferred in large blocks is the price which the seller or transferor would receive under the custom and usage governing such transactions. He contends that Ward and Gypsum stock in blocks of the size here involved could not have been sold in ordinary course on the market and that the normal and usual method of disposing of such blocks is by secondary distribution, a well recognized practice.
This and other courts have held that the effect of the size of the block of listed stock, given or transferred, upon the value of the stock per share is a question of fact. Helvering v. Maytag, 125 F.2d 55; certiorari denied, 216 U.S. 689 (see cases there cited); Commissioner v. Shattuck, 97 F.2d 790; Helvering v. Safe Deposit Trust Co. of Baltimore, 95 F.2d 806, affirming 35 B. T. A. 259; Henry F. du Pont, 2 T.C. 246. In valuing shares of stock for gift tax purposes the correct criterion is the fair market value of all of the stock comprising the gift, not merely a single share thereof. Helvering v. Maytag, supra.
Petitioner contends that either the two gifts should be considered as one, in which event the value of the stock should be based on the aggregate blocks of 26,000 shares of Montgomery Ward and 16,000 shares of Gypsum, or the corpus of each trust should be considered separately as the gift to be valued, the amounts in question in each instance being 13,000 shares of Montgomery Ward and 8,000 shares of Gypsum. The respondent argues that the petitioner's donation should be divided into four gifts, one each to his two daughters and their respective husbands, the four being the beneficiaries of the trusts. Respondent cites Helvering v. Hutchings, 312 U.S. 393; Lawrence C. Phipps, 43 B. T. A. 1010; affd., 127 F.2d 214, and other cases to support his position.
Respondent's position that four gifts are presented for valuation is well fortified both in the law ( Helvering v. Hutchings, supra; United States v. Pelzer, 312 U.S. 399) and in the provisions of the trust instruments themselves. The trust agreement referring to petitioner's daughter Arla and her husband specifically provided that the "Settlor desires to create certain trusts for the use and benefit of his daughter; ARLA AVERY McMILLAN, and her husband, WILLIAM BENTON McMILLAN, and the other beneficiaries hereinafter named or described, upon the terms and conditions hereinafter set forth."
The agreement further provided:
FIRST: The Trustees shall divide the trust estate into two separate trusts, one of the trusts to consist of one-half (1/2) of the trust estate to be held by the Trustees for the benefit of Settlor's daughter, ARLA AVERY McMILLAN, and one of the trusts to consist of one-half (1/2) of the trust estate to be held by the Trustees for the benefit of WILLIAM BENTON McMILLAN, the husband of Settlor's daughter, ARLA AVERY McMILLAN.
The agreement proceeded to provide that:
1. The Trustees shall pay over and distribute to the Settlor's daughter, ARLA AVERY McMILLAN, so long as she shall live, all of the net income derived from that certain trust consisting of one-half (1/2) of the trust estate so held by the Trustees for her benefit. * * *
with similar provision for the payment to William Benton McMillan so long as he shall live of all of the net income derived "from that certain trust consisting of one-half (1/2) of the trust estate so held by the Trustees for his benefit."
We conclude that for the purposes of the gift tax statutes and for valuation there were four separate gifts, each consisting of 6,500 shares of Montgomery Ward stock and 4,000 shares of Gypsum stock. This conclusion, however, does not entail the consequence urged by respondent that such blocks of stock should be valued as though sold in one day on the open market. We are of the opinion, and the record supports the conclusion, that either secondary distribution or sales over a reasonable period of time after the basic date would have been resorted to to dispose of blocks of stock of the size of the four gifts here in question. To have offered it on the open market in one day would have demoralized the market.
We have indicated in our findings the values of the stocks on the basic date, which values will be used in the computation consequent on this opinion. In arriving at these figures we have given due weight to the trend of prices, the various theories of valuation submitted, and the experience of other vendors making comparable offerings as shown by the record, as well as to the opinion evidence as to values.
Reviewed by the Court.
Decision will be entered under Rule 50.
DISNEY, J., dissents.