Kirkwood v. Rowell

Milo L. Rowell, Sr., died June 15, 1951. The state inheritance tax appraiser filed his report on May 21,1953. Therein he appraised 82 shares of stock of the United Warehouse Company, a corporation, at $78,392, or $956 per share, to which report objections were filed by the executors of the Rowell estate, as well as certain representatives of the devisees, legatees, assignees and wards (hereinafter referred to as objectors). One of the questions here presented is whether the court and inheritance tax appraiser incorrectly appraised these shares as to their market value. The other question

The trial judge (Conley) found generally in favor of the State Controller, with some modification as to the amount of the appraisal of the stock and against the State Controller as to the classification placed upon these particular legatees here involved by the inheritance tax appraiser. On September 1, 1953, he ordered that the inheritance tax appraiser “amend his appraisal and report” accordingly, and to “recompute” the character and value of the interest in the property of said decedent and the inheritance tax thereon, and apply the exemptions according to the findings. On October 13, 1953, the amended report was filed and on October 29, the trial judge (Popovich) signed an order approving the amended report, as ordered, and fixed the inheritance tax accordingly. Objectors appeal from that portion of the order of September 1, overruling their objection to the appraisal of the stock as well as that portion of the order of October 29, fixing the inheritance tax thereon. The Controller appealed only from that portion of the order of October 29 reclassifying these certain devisees as Class A, and fixing the inheritance tax accordingly.

Objectors renewed a motion to dismiss the Controller’s appeal on the ground that the order of September 1 was a final order which, in effect, established the basis of the tax. It is contended that more than 60 days elapsed thereafter before he filed his notice of appeal and that the subsequent order fixing the tax was not a final order; that it merely confirmed the mathematical calculations prescribed in the first order. He cited such eases af Zappettini v. Buckles, 167 Cal. 27 [ 138 P. 696 ]; and Chambers v. Hathaway, 187 Cal. 104 [ 200 P. 931 ]. We see no merit to this contention. Among the appealable orders mentioned in section 1240 of the Probate Code is designated an order “fixing an inheritance tax or determining that none is due. ” The order of September 1 is, in effect, an interim order. It did not fix the tax. It amounted to no more than a finding on the issues presented by the contest. It included a direction to the inheritance tax appraiser to amend his appraisal, recompute the character and value of the interest, and apply the exemptions as indicated by the order. Section 14513 of the Revenue and Taxation Code is the statute providing for the action of the court upon Hie conclusion of the hearing on the objections. It provides

The next question is somewhat involved and requires a recitation of the factual background. The clear market value of the property in the estate of Rowell was, for taxation purposes, originally appraised at $550,213.08. This included 82 shares of the United Warehouse Company, a so-called “close corporation” with 279 outstanding shares. (Brooks v. Willcuts, 78 F.2d 270 , 273) i. e., where the stock is closely held. (See Cal. Admin. Code, title 18 (inheritance tax) § 783 (untraded and closely owned securities).) It was organized in 1908, and deceased was one of the five original organizers. It was stipulated and found by the court that the deceased was not related by blood or marriage to any of the other stockholders; that there had been no sales or offer of sales of stock during the period which would be pertinent to the valuation of the stock; that the corporation’s sole business was the rental of warehouse buildings or facilities owned or leased by the corporation and incidental thereto; that it occasionally engaged in the acquisition of real property, the construction of warehouse buildings and the sale of such properties; and that its sole income was from such rentals, plus an occasional capital gain by virtue of a sale of part of its realty. As of June 15, 1951, the corporation leased warehouse properties to certain responsible tenants, which leases were made to expire in 1952 and 1954. These rentals showed a monthly income of approximately $3,400.

The market value of the real property (Parcels A to F inclusive) owned or leased by the corporation, as of June 15, 1951, the date of decedent’s death, was found to be $266,900. Parcel E, the Southern Pacific lease (valuation here in dispute), was appraised at $30,000. It was found by the court that the liabilities of the corporation exceeded its assets, other than real estate, by $15,091.20, and that the net market value of its assets was $251,808.80; that its earnings, before taxes, dividends paid, federal taxes paid, and amounts transferred to surplus, for the years 1909 to 1950, both inclusive, were $348,849.52; that from said sum $223,951.50 Avas paid in dividends, $57,317.02 in federal taxes, and $67,581 Avas transferred to surplus. The court then found that the market value of the

Under section 14512 of the Revenue and Taxation Code, for the purpose of the hearing, the report of the inheritance tax appraiser is presumed to be correct. There was received in evidence a stipulation as to certain facts in relation to Parcel E. It was therein agreed that the Southern Pacific Company owned said real property near its tracks; that it was leased to the United Warehouse Corporation, and that in appraising the “underlying assets” of the corporation, the appraiser placed a valuation of $30,000 upon it and a valuation of $236,900 upon the remaining parcels owned by the corporation. Objectors called the inheritance tax appraiser as their witness to determine what method he followed in appraising the value of the stock in question. He testified he viewed the properties, made a breakdown of all of the improvements, considered the age of the buildings, the cooling system, plumbing, etc., cost of reproduction, and considered property depreciation, the balance sheet showing the earnings of the corporation since 1937, and items of expense; that he reviewed the leases existing thereon as to length, rental income, responsibility of lessees, the length of time the corporation had been in this business, its nature, the likelihood of continued prosperity, competition in the business, its location in the industrial area, the market value of the individual properties, and took “into consideration all of the matters submitted to him which he could develop ’ ’; that he determined the present market value of the underlying assets, subtracted the liabilities and “divided the balance by the number of shares issued” but he believed he made a mathematical error because “it didn’t come out like it should” so the actual appraised value should be $902 instead of $956 per share.

Thereupon objectors produced stock exchange and investment experts who testified generally that the stock in question Avas not a listed stock but that of a close corporation; that in determining the fair market value of such stock, consideration is given to many factors, i. e., the history of the corporation as to previous earnings, the present balance sheet, future market as to buyer and seller, dividend history and policy, possible future earnings, AA'hether or not the stock is a minority

One expert appraiser witness placed the fair market value of this stock at approximately $250 per share. He fully related the factors considered by him, and Ms reasons for the opinion expressed. Milo E. Rowell, son of deceased, was attorney for the warehouse corporation for many years. He testified as to Ms qualifications, training, and experience in handling financial affairs of the family in general, and fully qualified himself as a witness in this respect. He testified generally as to the properties of the warehouse corporation and furnished data upon which the experts based their opinion as to the market value of the shares in question. He was also one of the main beneficiaries under the will.

In rebuttal, the inheritance tax appraiser, after relating Ms years of experience as such, testified that in appraising Parcel E, the warehouse property leased from the Southern Pacific Company, he took into consideration the present reproduction cost of the building and estimated it to be $135,850; that he depreciated it by 80 per cent, leaving a residue of $27,120; that he then considered the income from the property, past and present; that the present income was approximately $875 per month and after deducting $150 per month (rental to Southern Pacific Company) he arrived at the figure of $725 per month, which would produce an annual income of $8,700, before deducting taxes; that he did not consider the 30-day cancellation clause in the lease as a too-

It appears to be objectors’ contention that the record conclusively shows that the inheritance tax appraiser, in appraising the market value of the stock, solely, literally and erroneously followed the rule laid down in Estate of Felton, 176 Cal. 663 [ 169 P. 392 ], wherein it was stated that the Felton Company was a close family corporation; that its shares of stock were never upon the market and never had been sold privately; that “According to the views of respondent the only way to establish the market value of such shares of stock is to ascertain the value of the property which they represent, assigning to each share its proportionate worth.” The court therein stated: ‘ ‘ This is the method of determining market value which has been adopted in New York and approved by the courts.” (Citing cases.) And that the court was “in accord with respondent’s theory that under the circumstances of this case the method of reaching the value of the shares of stock which was adopted was the proper one.” It was then stated that there was no force in the appellant’s contention that the stock was of less value since it was a minority interest, béeause appellant eventually obtained á majority interest in the corporation. It then said that “Appellant owns a majority of the stock, the other shares belonging to his sister. While the particular stock subject to the lax is less than half of the issue, appellant, as its possessor, is not under the disadvantage that sometimes confront holders of minority interests.” In that case a list of the properties of the corporation was furnished by one of the appellants to

It does appear from the testimony of the inheritance tax appraiser that most of the factors indicated by the objectors were considered by him, and that he used such factors as he believed to be material and pertinent in determining the valuation of the corporation’s assets. If the valuation subsequently placed upon this property, considering all these fae

The finding that Parcel E had a valuation of $30,000 has evidentiary support. It is the rule that every conflcting inference and all conflicting evidence must be construed by this reviewing court on appeal in a manner most favorable to support the findings of the trial court. We must therefore conclude that its findings were based, not on the inheritance"tax appraiser’s opinion, but on all the facts of the case. (Estate of Teel, 25 Cal.2d 520 , 526 [ 154 P.2d 384 ].)

The appeal of the State Controller presents a much closer question. Decedent, at the time of his death, in addition to other heirs, left surviving him a daughter, Judith L. Willmette. She had two children by legal adoption. The decedent left certain property to them. The inheritance tax appraiser, in his report to the court, taxed said property to them at the rates and exemptions of Class D transferees, that is, as strangers. Objectors filed objections to this report, contending that these adopted children were entitled to the rates and exemptions of Class A transferees. The trial court so found, under subdivisions (c) and (d) of section 13307 of the Revenue and Taxation Code which, at the time of death, read in part as follows:

" ' Class A transferee ’ means any of the following:

“(a) A transferee who is the husband, . . . lineal ancestor, or lineal issue of the decedent.

“(b) A transferee whose relationship to the decedent is that of a child adopted by the decedent. . . .

“(c) A transferee to whom the decedent for not less than 10 continuous years prior to the transfer stood in the mutually acknowledged relationship of a parent, if the relationship commenced on or before the transferee’s fifteenth birthday.

“(d) A transferee who is the lineal issue of a child mentioned in subdivision (b) or (c).”

Effective September 9, 1953, subdivision (e) was added to that section and reads:

“(e) A transferee whose relationship to the decedent is that of a person adopted in conformity with the laws of this State by any lineal issue or child mentioned in this section; . . .”

It is conceded that this amendment covers the question at issue in this ease. However, it was not enacted and did not become a law until after the date of decedent’s death. It is the claim of the Controller that these adopted children did not come within the provisions of section 13307, supra, so as to be classified as Class A transferees, and that subsequent legislation, so classifying them was an indication of the intent of the Legislature that, at the time of the death of decedent, it was not so intended, citing such cases as Caminetti v. Pacific Mut. Life Ins. Co., 22 Cal.2d 344 , 353 [ 139 P.2d 908 ]; People v. Santa Fe Fed. Sav. & Loan Assn., 28 Cal.2d 675 , 685 [ 171 P.2d 713 ]; Estate of Pierce, 32 Cal.2d 265 [ 196 P.2d 1 ]; and Estate of Mercer, 205 Cal. 506 [ 271 P. 1067 ].

It seems clear, under the decisions, that there is no legal or blood relationship between these adopted children and the .parents of the adopting parents. See In re Darling, 173 Cal. 221 , 226 [ 159 P. 606 ], where it is said: “The adoption simply fixes the status of the child as to its former and adopted parents. To its grandparents by blood it continues to be a grandchild, and the child of its parents by blood. It does not acquire new grandparents in the persons of the father and mother of an adopting parent.” See also Estate of Jones, 3 Cal.App.2d 395 [ 39 P.2d 847 ]; Estate of Stewart, 30 Cal.App.2d 594 [ 86 P.2d 1071 ]; and Estate of Pierce, supra, p. 269. Accordingly, they are not lineal issue of decedent within the meaning of subdivision (a) of said section. It is only between the adopted children and their adopting parents that such relationship is created. (Estate of Winchester, 140 Cal. 468 [ 74 P. 10 ]; In re Darling, supra; Estate of Morris, 56 Cal.App.2d 715 [ 133 P.2d 452 ].)

The only provision which would have included such adopted children, at the time, would be under the interpre

Although the argument seems somewhat novel, from the wording used in those subdivisions classifying certain transferees, such a transferee is included and would not be excluded even though decedent’s natural daughter would also be classified under subdivision (a). Accordingly, if such adopted grandchildren were originally intended to be so included in Class A transferees, the subsequent clarification of the statute in this respect would not necessarily be an indication that the Legislature did not intend to include them in the first enactment. It is objectors' contention that the amendment appears to be an effort to reframe the original intent of the Legislature and to correct the Controller’s strained construction and method of application of the uncertain language of that section as applied to such adopted children, citing Board of Social Welfare v. County of Los Angeles, 27 Cal.2d 90 [ 162 P.2d 635 ].

The Controller claims that under the Inheritance Tax Law (Stats. 1893, chap. CLXVIII) both natural children and adopted children of a decedent were exempted from the Inheritance Tax Law; that in 1903 (Stats. 1903, chap. CCXXVIII) section 1 thereof was amended to include mutually acknowledged children, and the only problem then before the Legislature was to provide tax exemption for certain children, i. e., illegitimate children, stepchildren, and those occupying a position in loco parentis; that it did not intend to include therein natural children who might already be included in the first exemption; that to do so would be to presume. that the Legislature intended to perform an idle or nugatory act; that the Controller has always construed such adopted children as here mentioned to be strangers to the decedent, citing California Administrative Code, title 18 (inheritance tax) section 631 (Class D transferee); and that accordingly, the construction of a statute by the officials charged with its enforcement over a long period must be given

Although the argument of the Controller has considerable persuasive force, the general policy, presently expressed by the Legislature that legally adopted grandchildren should enjoy the same tax exemption as those of a natural grandchild is not an unreasonable or unjustifiable interpretation of the intent and policy of the Legislature in relation to the first enactment here under consideration. It therefore cannot be said, as a matter of law, that the interpretation placed upon this section, as it previously existed in this respect, is unreasonable and not justifiable.

The motion to dismiss the appeal is denied. Order affirmed.

Barnard, P. J., and Mussell, J., concurred.

A petition for a rehearing was denied May 13, 1955, and appellants’ petition for a hearing by the Supreme Court was denied June 16, 1955. Sehauer, J., and Spence, J., were of the opinion that the petition should be granted.