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LOMB v. SUGDEN

July 16, 1935

LOMB
v.
SUGDEN, Collector of Internal Revenue



The opinion of the court was delivered by: RIPPEY

RIPPEY, District Judge.

Carrie B. Lomb died October 3, 1929, a resident of Rochester and citizen of the United States, leaving a last will and testament in which Carl F. Lomb was named executor. Mr. Lomb qualified on October 10, 1929, and is still acting as executor.

The executor filed a federal estate tax return under the Revenue Laws of 1926 on August 14, 1930, with the collector for the Twenty-eighth collection district of New York, which showed a gross estate of $473,807.34, and a net estate for tax purposes of $310,685.92. The executor paid the tax liability of $1,785.49 as disclosed by said return and a later assessment of a deficiency tax of $23.22.

 The controversy here centers around the question of the proper valuation to be fixed on 1,500 shares of the capital stock of the Bausch & Lomb Optical Company, a corporation organized and existing under the laws of the state of New York, with principal place of business in Rochester, N.Y. This stock was appraised in the return at $69.445 per share.

 Under the will of Mrs. Lomb, Carl F. Lomb, her husband, who is named executor therein and who was also a signer of the agreement hereinafter referred to, was the sole residuary legatee and, as such, received the stock in question upon the death of Mrs. Lomb.

 The Bausch & Lomb Optical Company was a close corporation. The common stock of the corporation consisted of 60,000 shares of the par value of $100 each. The owners of all of the common stock entered into an agreement in writing, dated May 16, 1928, the pertinent parts of which are as follows:

 "Now therefore, in consideration of the premises, of the provisions hereof to be kept and performed by the respective parties, and of the sum of One Dollar ($1.00), which each party hereby agrees to pay to each of the others, the said undersigned do hereby covenant and agree with each other as follows: * * *

 "Second: That none of the undersigned parties hereto will sell or dispose of any of his or her shares of the common stock of said Bausch & Lomb Optical Company, whether now owned or hereafter acquired, to any other person or party not a party to this agreement, without first offering to sell the same to all the other common stockholders of said Company who are parties hereto.If any of the undersigned shall desire to sell or dispose of any or all of his or her shares of common stock of said Company, the other undersigned stockholders, or such of them as desire to do so, shall have the right to purchase such common shares in proportion to their then respective common stockholdings, at a price per share ten (10) times the average annual net earnings per share of the Bausch & Lomb Optical Company during the five (5) business or fiscal years next preceding such sale, as such average annual net earnings are shown by the account books, inventory books and balance sheets of the Bausch & Lomb Optical Company during those years, provided that such price shall at no time be less than fifty (50) per cent., nor more than one hundred (100) per cent. of book value of such stock as shown by the annual statement of the Bausch & Lomb Optical Company for the business or fiscal year next preceding such sale. Any undersigned stockholder so desiring to sell or dispose of any or all of his or her said common stockholdings shall notify all the other undersigned stockholders thereof in writing. Within ninety (90) days after the receipt of such written notice by such other stockholders, they, or such of them as desire to purchase the common stock offered, shall in writing signify their election so to do. Whenever any such sale occurs hereunder, unless other terms may be agreed upon, one-third (1/3) of the purchase price shall be paid at the time of the sale; one-third (1/3) six months thereafter, and the remaining one-third (1/3) one year thereafter, with interest on the deferred payments at the rate of five (5) per cent. per annum; but the purchaser shall have the right to pay the whole purchase price at the time of the purchase, or at any subsequent time, with interest at five (5) per cent. to the time of payment. If the undersigned stockholders having the right to purchase shares of another stockholder hereunder neglect or refuse to make such purchase within said ninety days, then the stockholder desiring to sell or dispose of his or her common stock shall be entitled to sell to any purchaser he can find. Any undersigned stockholder may, notwithstanding the provisions of this paragraph hereof, give and transfer any or all of his or her shares of such common stock to any or all of the other undersigned stockholders in such manner and in such amounts or proportions as to him or her seems proper.

 "Third: That in the event of the death of any one of the undersigned stockholders, without leaving lawful issue him or her surviving, the other stockholders, parties hereto, shall be entitled to purchase all the common shares of said Bausch & Lomb Optical Company held by the stockholder so dying, at the same price and terms, in all respects, as is provided for the sale and purchase of the shares of a stockholder desiring to sell under the last previous paragraph hereof, provided that any undersigned stockholder, dying without issue, may by will or other instrument to become effective at his or her death, give any or all of his or her shares of such common stock to any or all of the other undersigned stockholders in such manner and in such amounts or proportions as to him or her seems proper, and may also by like method give not to exceed ten (10) per cent. of his or her shares to an outside party or parties. In the event of the neglect or refusal of the undersigned stockholders having the right to purchase under this paragraph to make such purchase, then the heirs, executors and administrators of the stockholder so dying may dispose of the shares of common stock held by him or her in the same manner as is provided for the disposition of shares under the last preceding paragraph in case of the neglect or refusal of stockholders having the right to purchase thereunder to make such purchase.

 "Fourth: That this agreement shall apply to and bind the heirs, executors and administrators of the respective parties."

 The valuation of $69.445 per share fixed as the value of the stock in the return was computed according to the formula set out in the foregoing agreement, it being claimed by the executor that the agreement was binding for the purposes of fixing the tax upon the Collector of Internal Revenue. The record establishes that the total book value of the stock was $8,233,404, or $138.89 per share. The average yearly net earnings of the corporation for the years 1924 to 1928, inclusive, was $911,734.19, or $30.391 per share. The executor thereupon fixed a value as above indicated, which is 50 per cent. of the book value of the stock.

 Section 302(a) of the Revenue Act of 1926, 26 USCA § 1094(a), the provisions of which are applicable in the case at bar, provides that the value of the gross estate shall include all property of the deceased at the time of her death to the extent of her interests therein. Regulation 70, art. 13, subd. 3, so far as pertinent, reads as follows:

 "Stock in a close corporation should be valued upon the basis of the company's net worth, earning and dividend-paying capacity, and all other factors having a bearing upon the value of the stock. Complete financial and other data upon which the estate bases its valuation should be submitted in duplicate with the return."

 "Where as to any particular security conditions of sale or ownership are such that the fair market value, determined as already indicated, would not afford a proper basis for valuation, the Commissioner, on final audit, will establish the value by considering all relevant factors. In any case where the estate contends that the value, if established by the general rules already given, is not the fair market value ...


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