In re McMullen's Estate

The next of lcin of the decedent appeal from an order entered upon the report of the transfer tax appraiser.

The decedent at the time of her death was the owner of 232 shares of the capital stock of the Central Dairy Company, a corporation engaged in dealing in milk and dairy products. She died on January 18, 1914. Letters of administration were issued to the public administrator on September 8, 1914, and the shares of stock were sold on April 20, 1915. The par value of the stock was $50 per share, and at the sale 140 shares were sold at $37 per share and 92 shares were sold at $36 per share.

The appraiser valued the shares of stock at the sum of $78 per share. He arrived at the said amount by giving each of the shares a value of $36.92, based upon the physical assets of the company. To this he added the sum of $49.76 per share for good will, thus fixing the gross value of each share at $86.68. From this amount he allowed 10 per cent, deduction for depreciation.

The appellant contends that this valuation is unjustified, and, as there is no dispute about the value of the physical assets, the questions which remain are whether the appraiser was warranted in giving no w'eight at all to the testimony offered to show the value at the time of the transfer, and ho the evidence of the actual sales prices of the shares under consideration, and others sold during the life of the corporation, and, if SO', whether he erred in his method of arriving at his valuation of good will.

The corporation in question was organized in May, 1912, with a capital stock of $600,000. The outstanding capital stock amounted to $533,450, evidenced by 10,669 shares. From the date of its incorporation to February, 1915, there were some 28 transfers of stock. The sales made nearest to the date of the death of the decedent were one of 53 shares, purchased by the son and daughter of the treasurer in July, 1913, at $25, and one of 84 shares which were sold at $30 per share in December, 1913. The treasurer of the company testifies that the shares of stock bought by his son and daughter were a bargain and below the market price, and that in his opinion the same were worth $43 or $44 per share in July, 1913, and $40 to $41 per share in January, 1913, and a few dollars more in January,. 1914.

In my opinion the public administrator used diligence and good judgment in advertising the sale and in giving notice to people who would in the ordinary course of affairs be most familiar with the value of the stock, and hence be most likely to be interested in its purchase. The results showed this for it appears that there were in attendance at the time of the sale between 25 and 35 persons.

The sale was conducted at public auction, and before the stock was sold the report of an expert accountant, who had examined the books of the company at the instance of the appraiser, was read to the assembled prospective bidders. The shares were sold in blocks of 10, with the exception of the last block offered, which consisted of 12 shares. The bids upon the first lot offered began at $25 per share, and went up gradually to $37 per share. Thereafter 13 more blocks were sold at that figure. Then 8 blocks were sold at $36 per share each, the bids having begun at $25 for each share and advancing to that figure, and the final block of 12 shares was also sold at $36 per share. The testimony is that there were 7 or 8, or possibly 10, bids. Eight people bought stock. There is no evidence of any understanding or agreement among the bidders to limit the amounts of their bids, and no contention that there was such an agreement. I believe that the sale was properly conducted.

I am satisfied that if, in the opinion of the stockholders present at this auction sale, the shares were worth more than they brought at that time, and it seems to me that the stockholders of all others should have known what they were really worth, the probabilities are very strong that they would not have stood by and seen them sold at a sacrifice. If, therefore, the amount realized at a public auction, after due and proper advertising, and conducted in a proper and legal way, is any criterion of market value, and in my opinion it is, then the prices which were realized at the time of the sale in question represented the value of the shares of stock at the time of the sale, and I so conclude.

[3] The value at the time of sale is not that upon which the tax is fixed, however. The transfer which is taxed is that which takes place at the time of death, and it is the fair market value at that time which forms the basis of the tax. Laws of 1909, c. 62 (Consol. Laws, c. 60) § 230. See Matter of Penfold, 216 N. Y. 171 , 110 N. E. 499 , recently decided by the Court of Appeals, in which many cases to that effect are cited.

While there are decisions to the effect that remote sales are not binding on the appraiser as to the value of the security at the date of death, I do not believe that they go so far as to hold that, where the shares under consideration were sold in a manner and under conditions which fix the market value thereof 15 months after the date of death, and which may throw light upon their value at the time of death, the appraiser must close his eyes entirely to them in appraising property whose market value must of necessity be at best only an approximation. See Marvin v. Medberry, 13 Wkly. Dig. 544 ; Matter of Roos, 90 Misc. Rep. 521 , 154 N. Y. Supp. 939 .

Under those conditions I believe that the sale mentioned should have been considered by him, not as necessarily conclusive, but as one of the sales which, together with the others made during the life of the corporation, might have aided him in fixing the market value which is the subject of the tax. Matter of Smith, 71 App. Div. 602 , 76 N. Y. Supp. 185 .

It is urged that when the shares were sold the European war was in progress, and that this had some effect. The stock is not listed and not dealt in on any exchange, and the business was one which I do-not believe was directly affected by the war. It may be, however, that the latter exercised a depressing effect on the value of these shares of stock, and the appraiser, of course, had a right to consider this possibility.

[5] Apparently the other sales made during the life of the corporation were not considered by the appraiser, nor was the testimony of the officer of the company, which in my opinion was entitle4 to some weight, because unimpeached and uncontradicted, and given by one who it appears from his testimony was fully conversant with the affairs of the corporation. Cabble v. Cabble, 111 App. Div. 426 , 97 N. Y. Supp. 773 . The appraiser limited himself entirely to a calculation of the assets and an estimate of the good will in fixing the value of the various shares. In this, I think he erred; he should, in my opinion, have also considered the prices brought at the other sales, and the testimony of the treasurer referred to. The fact that the returns to the shareholders from the profits of the corporation during its 20 months of existence would be large of itself does not give the appraiser the authority to ignore actual sales of the stock. Matter of Smith, supra. The method of fixing value by ascertaining the value of assets and good will should only be resorted to when there are no sales from which it can be ascertained.

Considering all of the sales and the testimony of the treasurer as to the value and allowing for a possible depression between the date

[6] If the appraiser was right in giving no weight to the sales, public and private, nor to the opinion of the treasurer of the company, then we come to a consideration of the method adopted by him in ascertaining the value of the good will. During the 20 months of the corporation’s existence, the profits were large, and the appraiser has estimated tire value of its good will by taking a 6 years’ purchase on the average net annual profit over an allowance of 6 per cent, on capital invested. The general method followed by him for ascertaining the value of good will, namely, talcing a number of years’ purchase and multiplying tire average annual profits thereby, has received the sanction of courts of original and appellate jurisdiction. Matter of Silkman, 121 App. Div. 202 , 105 N. Y. Supp. 872 ; Von Au v. Magenheimer, 115 App. Div. 84 , 100 N. Y. Supp. 659 ; Id., 126 App. Div. 257 , 110 N. Y. Supp. 629 , affirmed 196 N. Y. 510 , 89 N. E. 1114 .

[7] Hence it only remains to consider whether the number of years’ purchase which the appraiser took was, under the circumstances, warranted. He justifies his taking a 6 years’ purchase, although the corporation was only in existence for 1 year and 8 months, by the contention that it was carrying on the business of the Mutual Milk & Cream Company. The latter corporation was organized in 1899 or 1900, and upon tire prganization of the Central Dairy Company as stated in May, 1912, the stockholders of tire Mutual Milk & Cream Company were given the privilege to subscribe for stock in the new Central Dairy Company. The Mutual Milk & Cream Company tiren tránsferred to the Central- Dairy Company certain personal property, fixtures, and the good will of the wholesale business of the Mutual Milk & Cream Company in the boroughs of Manhattan and the Bronx and of all wholesale routes of said company, excepting certain contracts with some 70 firms named. The said agreement, however, contained a provision that nothing therein contained should be held or construed as limiting or restraining the right of the parties to compete in the wholesale milk business after a date about 3 months thereafter.

It appears that, in consideration of the Mutual Milk & Cream Company agreeing not to compete with the Central Dairy Company in the wholesale routes for 3 months, the Central Dairy Company paid the sum of $62,500. The new company, therefore, was not doing business under the name of the old company, and after the expiration of 3 months might be forced to compete with the old company. Under such circumstances, I do not see force in the contention that it was practically the old corporation and enjoyed its good will.

In the case of Commissioners of Inland Revenue v. Muller & Co.’s Margarine, Ltd., [1901] L. R. App. Cas. 217, at 223, Lord Macnaghten defined good will as follows:

“It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start.”

“Good will embraces at least two elements, the advantage of continuing an established business in its old place, and of continuing it under the old style or name. While it is not necessarily altogether local, it is usually to a great extent, and must of necessity be, an incident to a place, an established business, or a name known to the trade.”

In the matter before the court, the name under which the new corporation carried on business was not the same as that of the old firm. There were no trade-marks, brands, or other distinguishing business devices of the old firm used by the new one, and, while the term “good will” was used in the instrument of transfer, the fact appears to be that the old company gave the new one the right to do business for 3 months with certain of its customers without molestation from or competition with the old corporation. When the 3 months were over, the old company had the right to compete with the new one, and certainly under such conditions the latter cannot be said, at least after that time, to have enjoyed the good will of the former.

[8] Good will should be based upon a calculation of profits before the death of the decedent (Matter of Silkman, supra), and the life of a corporation should be one of the elements considered (Matter of Demarest, 157 N. Y. Supp. 653 ). Under the circumstances, the taking of a 6 years’ purchase was not proper in my opinion. A careful examination of the cases fails to disclose one in which the years of purchase were more than the total life of the corporation. Thus, in Matter of Ball, 161 App. Div. 79 , 146 N. Y. Supp. 499 , the average annual profits were multiplied by 2, the corporation being 7 years old; in Matter of Silkman, supra, the same were multiplied by 2, the corporation having been in existence 19 years; in Von Au v. Magenheimer, supra, the same were multiplied by 6, the life of the corporation being over 10 years; in Matter of Keahon, 60 Misc. Rep. 508 , 113 N. Y. Supp. 926 , they were multiplied by 3, the corporate existence being 15 years; in Matter of Weatherbee, 157 N. Y. Supp. 652 , they were multiplied by 5, the life of the corporation being 30 years ; and in Matter of Gumbinner, 92 Misc. Rep. 104 , 155 N. Y. Supp. 188 , the purchase was 2 years, and the life of the corporation 18 years.

It will be seen from these matters that there is no fixed rule for taking any specific number of years’ purchase of the average profits. In Von Au v. Magenheimer, supra, the Appellate Division said that the number of years’ purchase that were to be taken was a question of fact.

If the appraiser was right in disregarding the sales and the testimony of the treasurer, and in basing his valuation entirely on the so-called book value of the stock plus the value of the good will, then I think that under all the circumstances a more just result would have been reached if he had taken the actual net profits made during the life of the corporation, about 20 months, as being the value of the good will, instead of a 6 years’ purchase of the average annual profits. If this be done, and the figure thus obtained be substituted for that

I accordingly hold that the said shares should have been appraised at $44 per share. The appeal is sustained, the order reversed, and the report remitted to the appraiser for correction as indicated.

Appeal sustained, and order reversed.