Oakley, Egbert S.

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University of Minnesota Law SchoolScholarship RepositoryMinnesota Law Review1918Gross and Net Inheritance Tax ValuesEgbert S. OakleyFollow this and additional works at: https://scholarship.law.umn.edu/mlrPart of the Law CommonsThis Article is brought to you for free and open access by the University of Minnesota Law School. It has been accepted for inclusion in Minnesota LawReview collection by an authorized administrator of the Scholarship Repository. For more information, please contact lenzx009@umn.edu.Recommended CitationOakley, Egbert S., "Gross and Net Inheritance Tax Values" (1918). Minnesota Law Review. 1237.https://scholarship.law.umn.edu/mlr/1237MINNESOTA LAW REVIEWGROSS AND NET INHERITANCE TAX VALUESTiE states have the absolute right to declare what dispositionshall be made of the property of deceased persons. A sovereignstate may escheat all of the propierty of a decedent subject to hisdebts.The privilege of taking property by will or inheritance is nota natural right. Wisconsin is the only state which has questionedthis doctrine.1States granting succession privileges may tax the same. Alegacy becomes the property of the beneficiary only after it hassuffer~ed a diminution to the amount of the tax.2 The payment ofthe tax is a condition imposed. Upon complying with such con-dition, the state assents to the transfer.While the state has the paramount right to regulate successions,the Federal government may, if it does not interfere with theexercised rights of the state, exact an inheritance tax from thebeneficiaries.2The tax is on the transfer and not upon the property but thefull and true value in money of the property passing4 is themeasure by which the tax is computed. In Minnesota, the taxesimposed take effect upon the death of the person from whom thetransfer is made.5 The value as of the date of death governs andthe same is not affected by subsequent appreciation or depreci-ation.6The difficulty, if any, in ascertaining the full and true valuein money is occasioned by the character of the property involved.As to real estate, the assessor's full and true value for ordinarytaxation purposes is not controlling.7  The rules employed incourts of general jurisdiction to ascertain land values govern.If the land is encumbered, the amount of mortgage or other liensI Nunnemacher v. State, (1906) 129 Wis. 190, 108 N. W. 627, 9 L. R. A.(N.S.) 121.2United States v. Perkins, (1896) 163 U. S. 625, 41 L. Ed. 287, 16S. C. R. 1073.3 Knowlton v. Moore, (1900) 178 U. S. 41, 44 L. Ed. 969, 20 S. C. R. 747.4 Minn. G. S. 1913 Sec. 2272.5 Minn. G. S. 1913 Sec. 2273.6 Matter of Penfold, (1915) 216 N.Y. 163, 110 N.E. 497, Ann. Cas.1916A 783 and note.7 In re Estate of McGhee v. State, (1898) 105 Iowa 9, 74 N. W. 695.GROSS AND NET INHERITANCE TAX VALUESshould be deducted in arriving at the value of the decedent'sinterest therein.Bonds listed on exchanges fix their own value to be the quotedsale price plus accrued interest. If such securities are not listed,then the value of the security given, the term of the bond andthe rate of interest, together with the prescribed time for paymentthereof, furnish the data from which is calculated the value as ofany given date. The value of listed stocks is ordinarily determinedby the record of sales on the stock exchange. If, however, anestate holds large blocks of stock, which, if all offered for sale atonce, might depress the market, then it is proper to take theaverage price for a reasonable period.In Walker v. People," the court said:"'Fair market value' has never been construed to mean theselling price of property at a forced or involuntary sale. InPeoria Gaslight Co. v. Peoria Terminal Railway Co. 146 Ill. 372,it was said (p. 377) : 'The theory, upon which evidence of salesof other similar property in the neighborhood at about the sametime is held to be admissible, is that it tends to show the fair mar-ket value of the property sought to be condemned. . . . Butit seems very clear that, to have that tendency, they must havebeen made under circumstances where they are not compulsory,and where the vendor is not compelled to sell at all events, but isat liberty to invite competition among those Uesiring to becomepurchasers.'""The very fact, that the market would be depressed by forcinglarge blocks of stock upon it, and forcing such large blocks ofstock to sale, indicates that such a sale is not a proper test of thefair cash value of the stock.""The quotations of the stock exchange may be temporarily un-certain and untrustworthy, if the sales thereon are suddenly af-fected for speculative purposes, or by the forcing upon the mar-ket and to sale of large blocks of stock in an extraordinary mannerwith no explanation of such action, and where the purpose of it isleft to the conjecture of those dealing in the stocks; but suchquotations may be a fair and safe guide where they are taken fora reasonable period of sales made in the usual and ordinary courseof business."In the Estate of Jay Gould, deceased,9 the court said:"It is claimed, however, that the rule should be so construedthat, when the value of large blocks of stock is involved, only the8 (1901) 192 1M. 106 (110) (112), 61 N.E. 489.9 (1897) 19 App. Div. 352, 46 N.Y. Supp. 506, modified 156 N.Y. 423,51 N. E. 287.MINNESOTA LAW REVIEWpurchase and sale in markets of correspondingly large blocks ofstock should be considered, upon the theory that such large blockswould necessarily sell at lower rates than small quantities of stocksold separately, and that throwing large blocks of stock upon themarket all at once would have a tendency to produce a break inthe market, and perhaps a total inability to get more .......Under the construction contended for, the securities involved inthis proceeding might have been shown to be of little or no value,by considering that forcing them upon the market in large blocksat one time would break the market, and make them practicallyunsalable at all."In People v. Coleman,'° it was said:"So the market value of the shares of capital stock maysometimes be above and sometimes below the actual value. Suchvalue may be greatly enhanced or depressed for speculative pur-poses without any change in the actual value. But the marketvalue of any stock which is listed at the stock exchange in NewYork, and largely dealt in from day to day for a series of monthswill usually furnish the best measure of value for all purposes.The competition of sellers and buyers, most of them careful anvigilant to take account of everything affecting value of stock inwhich they deal, and each mindful of his own interests, and seek-ing for some personal gain and advantage, will almost univer-sally, if time sufficient be taken, furnish the true measure of theactual value of stock."In appraising ihe value of unlisted stocks, great difficulty isoften experienced. Such stocks may be in a corporation whichowns a large amount of property and has numerous stockholdersor it may be in a corporation, .the stock of which is closely held,or it may be in a family holding company.In Re Chappell's Estate" presents a case where the decedent"owned 3,219 shares of stock in the National Casket Company.There were 4,350 shares of the par value of $100 each issued andoutstanding. The company paid a 5% dividend and the bookvalue of the stock was $140 per share. In this case the courtsaid:"The true rule for appraising property of this kind is its actualmarket value. The fact that there was not a ready market for alarge amount of the stock has a direct bearing. The amount ofthe stock, the market for it, and whether a large block could besold are elements to be considered in fixing its value."In State v. Pabst,1 2 Mr. Justice Siehecker said:10 (1887) 107 N.Y. 541 (544), 14 N.E. 431.11 (1912) 136 N. Y. Supp. 271.12 (1909) 139 Wis. 561 (594), 121 N.W. 351.GROSS AND NET INHERITANCE TAX VALUES"On the various occasions when he secured stock for the cor-poration or when there were dealings between members of thefamily, the decedent had dealt with this stock on the basis of itsbook value. The transfers shown were apparently made in re-liance on the book value. The evidence adduced showed the divi-dends declared and paid for the years from 1896 to 1904, inclu-sive, and the value of the corporation's assets from 1896 to 1906,inclusive, exclusive of the good ivill of the business. . . . Thefacts and circumstances regarding the business of the corporationand its properties, the progress, growth, and general financial re-sults, furnish a basis for valuation."In Re Brandreth's Estate,'3 the value of shares of stock in thePorous Plaster Company was brought before the court. Thebusiness of the company was that of compounding or manufac-turing pills and plasters under three secret recipes. The corpora-tion for more than 17 years earned and paid from 48 to 60 percefnt. In this case, the court said:"It goes without saying that property of this kind is not sus-ceptible of a market value, and its value cannot be determined byordinary expert testimony. . . . While the earning power ofa corporation is not proof of the value of its property, neverthelessit is competent evidence of value, and is a feature to be consideredin determining the valuation to be placed upon the stock for thepurposes of taxation. . . . Where it is impossible to ascertaina market value of the stock of a corporation by reason of the factthat there is none, the state does not thereby lose the tax uponthe transfer. Under such circumstances, the actual value willbe presumed to be the market value until the contrary isshown.In Re Smith's Estate,14 the decedent owned stock in a newlyorganized industrial corporation which had paid an 8% dividendin the first year of its operation. About the time of decedent'sdeath, an officer of the company sold stock of the par value of$100,000 for $50,000, which amount he considered was a fairvalue. In this case, the court held that in the absence of evidenceother than the amount of the first dividend paid, the sale pricewas controlling.Often in arriving at the value of unlisted stocks good will isan important factor. It may be a very valuable asset but no hardand fast rule could be laid down whereby the value of the samemay be ascertained. One of the most recent cases involving thevalue of good will is In Re Moore's Estate, 5 wherein was con-'3 (1899) 28 Misc. Rep. 468, 59 N. Y. Supp. 1092 (1096), (reversed butupon different grounds 58 App. Div. 575, 69 N. Y. Supp. 142.)'4 (1902) 71 App. Div. 602, 76 N. Y. Supp. 185.15 (1916) 97 Misc. Rep. 238 (240), 161 N.Y. Supp. 142.MINNESOTA LAW REVIEWsidered the value of good will in "Tiffany & Company." JudgeFowler, writing the opinion said:"The appraiser ascertained the value of the good will bydeducting interest at the rate of six per cent per annum on thecapital employed by the company in its business from the averageannual net profits in its business from the average annual netprofits of the business and multiplying the difference by ten. Thisgave the value of the good will as $1,507,922.40. No exceptionwas taken to the amount which the appraiser adopted as theaverage annual net profits, but it is contended that the value ofthe good will should be ascertained by multiplying the average netprofits by three or five instead of ten, the latter being the figureused by the appraiser."The cases in this country are not uniform in regard to thenumber of years' purchase by which the average annual net profitsmay be multiplied for the purpose of determining the value of thegood will. Most of the American cases adopt a period rangingfrom two to six years, the number being dependent upon thenature of the business, the length of time during which it hasbeen established at a particular place and the extent to which itis known to the public. Tiffany & Company has an enviableinternational reputation as a craftsman and tradesman; it hasbeen established in New York city for more than sixty years. Ifsix years' purchase of the average annual net profits was con-sidered not an unreasonable value of the good will in a case wherethe question of good will related to the name under which anumber of candy stores were conducted (Von Au v. Magen-heimer, 126 App. Div. 257) it would seem that the good will ofa company having the prominence, the permanency and the estab-lished reputation of Tiffany & Company should be worth at leastten years' purchase of the annual net profits."In Re Keahon's Estate' it was held that to determine the valueof the good will of a business for the purpose of a transfer taxthe net earnings of a single year should be multiplied by a certainnumber of years; the number depending upon. the nature of thebusiness.Generally the rule is that the value of unlisted stocks is ascer-tained by consideration of the book value, earnings and good will.In some instances, it may be necessary to reduce the book valueon account of the depreciation. Such usually occurs in connectionwith bills and accounts receivable, and merchandise which is of acharacter where the fashions are fickle.The rule governing the valuation of closely held stock alsodeftrmines the value of co-partnership interests. Often it is16 (1908) 60 Misc. Rep. 508, 113 N. Y. Supp. 926.GROSS AND NET INHERITANCE TAX VALUESprovided by agreement that the surviving partner or partnersmay purchase the decedent's interest in the business for an amountmuch less than its full and true value. Such agreements do not,however, fix the value for inheritance tax purposes. The state isentitled to a tax upon the full and true value in money on theproperty passing." In such cases, a portion of the property maybe taxable as a gift made to take effect in possession or enjoymentat death.' 8The appraisal of countless other items forming a part ofdecedent's estate requires the adoption of such method as willbest establish the full and true value. In many instances experttax testimony alone controls. The value of diamonds, jewelry andpaintings can be determined in no other way.With the value of a decedent's estate established, the nextinquiry is as to the amount of the net estate for distribution; or,in other words, what are the properly allowable deductions beforecomputing the tax? The widow's maintenance, consisting of areasonable amount paid during the time necessary to probate theestate, and her selection of personal property, as provided for bystatute, are treated as deductions. They are not in fact such.They constitute no part of a decedent's estate but are an encum-brance thereon.'9 They are not even subject to debts or admin-istration expenses.Claims filed and properly allowed by the probate court aredeductible, but in this connection it should be kept in attentionas to what constitute claims which may be allowed against anestate in the probate court. Under the Minnesota statute, thecourt has defined the same to be a demand of a pecuniary naturewhich could have been enforced against the decedent in his life-time.20Expenses of last sickness and burial constitute deductibleitems, if reasonable in amount. A suitable monument or tomb-stone consonant with the value of decedent's estate is properlyclassed as a funeral expense. It matters not whether decedentdied intestate or left a will in which no provision was made for a'17 In re Cory's Estate, (N. Y. 1917) 164 N. Y. Supp. 956.Is Comptroller of New York v. Orvis et al., (N. Y. 1917) 166 N.Y.Supp. 126.29 State ex rel. Pettit v. Probate Court of Hennepin County et al.,(Minn. 1917) 163 N. W. 285.20 Knutsen v. Krook, (1910) 111 Minn. 352, 127 N. W. 11.MINNESOTA LAW REVIEWmonument. 21 A note to the Lester case22 contains many inter-esting illustrations of the amounts allowed for tombstones. InTaylor's Estate,23 the court held that it was unreasonable to erectto a deceased person a monument of such a character ts toprovoke comment on the contrast between the lavishness of themonument and the simplicity of the habits and antecedents ofthe deceased.Taxes and assessments, if they became a lien or in effect adebt prior to the date of death, even if not payable, are allowableas deductions ;24 but inheritance taxes imposed by other statesare not allowed as deductions.2 5New York State has refused to allow as a deduction thefederal inheritance tax.2 6 The Minnesota supreme court.recently 27held that such tax was a proper deduction, not upon the groundthat the federal government has paramount right to regulatesuccessions but because Minnesota under its statute has expressedan intention to allow such deduction.Expenses of administration, including appraisers' fees, execu-tor's or administrator's fees, attorneys' fees, and the ordinarymiscellaneous items are, if reasonable in amount, allowable asdeductions. In State v. Probate Court,28 Mr. Justice Brown (nowChief Justice) said:"The expenses of administration are imposed as a matter oflaw, and are caused by the use of the legal machinery providedby the state to wind up the affairs of deceased persons, and cannotordinarily be avoided; hence it is just that they should be deductedfrom the valuation of the estate."In this case it is also clearly pointed out that it is not properto allow as a deduction compensation earned, not in the adminis-tration of the estate, but in the management thereof for the benefitof the legatees and devisees.ST. PAUL, MINNESOTA. EGBERT S. OAKLEY.**Assistant Attorney General.21 State ex rel. Smith, Atty. Gen., v. Probate Court of St. LouisCounty et al., (Minn. 1917) 164 N. W. 365.22 (1915) 169. Iowa 15, 150 N. W. 1033, Ann. Cas. 1917B 255 (263).23 (1894) 3 Pa. Dist. 691.24 In re Liss' Estate, (1902) 39 Misc. Rep. 123, 78 N.Y. Supp. 969;Matter of Baibcock, (1889) 115 N.Y. 450, 22 N. E. 263.22 Matter of Penfold, (1915) 216 N. Y. 163 (171), 110 N. E. 497, Ann.Cas. 1916A 783.26 In re Bierstadt, (N. Y. 1917) 166 N. Y. Supp. 168; In re Sherman,(N. Y. 1917) 166 N. Y. Supp. 19, affirmed in December, 1917, by Courtof Appeals.27 State ex rel. Smith v. Probate Court of Hennepin County et al.,(Minn. 1918) 166 N. W. 125.28 (1907) 101 Minn. 485 (487), 112 N.W. 878.

Gross and Net Inheritance Tax Values

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Gross and Net Inheritance Tax Values

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