the contrary, a sworn appraisal by an expert appraiser is required. If real estate has been sold, under the conditions set out in § 290, within a reasonable time after the decedent's death, the sale price will govern. Where no sale has been made, the criterion of value is the best price which could have been obtained within a reasonable period of the decedent's death. . . . The assessed valuation should be considered, but is not conclusive. All relevant facts and all elements of value should be considered in every case.* A cemetery lot owned by the decedent is part of his gross estate, but its value is limited to the salable value of such part of it as is not designed for the interment of the decedent or members of his family. § 292. Ascertaining the Value of Stocks and Bonds The value of stocks and bonds listed upon a stock exchange must for federal estate tax purposes be obtained by taking the mean between the highest and the lowest sale price upon the day of death, provided the sales were made in the regular course of business, and not for the special purpose of establishing value. This provision is manifestly unfair, as while one sale may have been made at an exceptionally high or low price, all other sales may have been normal. A weighted average would be more just. If there were no sales upon the date of death, the price nearest to that date, and within a reasonable period thereof, either before or after death, must be taken. If the stock is not listed upon an exchange, but is dealt in actively by brokers or has any other active market, the latest sale price prior to the day of death will govern. In the valuation of stocks, care should be taken to see that a dividend declared but not paid is not twice included in the Article 15 of Regulations 37. amount of the estate; that is, if the dividend is shown as a separate asset, the value of the stock "ex-dividend" should be given. The valuation of stocks not usually sold on the open market, such as those of close corporations, depends in part on the value of the good-will, an element which enters into the valuation of partnership interests also. Since a true market value cannot be obtained by an examination of selling prices, the worth of the corporation is obtained by adding the value of the good-will or earning power of the company to the amount of the net assets. The value of the total thus obtained, divided by the number of shares of participating stock outstanding, is the value per share. In appraising inactive stocks and stocks of close corporations, dividends paid, private sales, opinions of experts, and value of property held, may all be considered. § 293. The Value of Good-Will Good-will is in the nature of things an element of a going enterprise only, and a business to get the benefit of it must be continued. The rules for computing the value of good-will are to some extent flexible. The net profits of the business are taken for three or more years prior to the date as of which the value is desired. Five is the number for federal estate and corporation capital stock tax purposes. These profits are then averaged. From this average profit is sometimes deducted interest on the invested capital, and in a partnership the reasonable value of the services of the partners, if salaries for them have not been charged against profits. What remains is the annual value of the good-will. This is to be multiplied by the number of years it may continue. Three years is the usual time taken in New York State practice, but when the business has elements of permanency, a longer time should be taken. In valuing the good-will of the famous jewelry house of Tiffany and Company, a New York court held thai the annual good-will should be multiplied by ten. Tiffany and Company had been established for more than sixty years, and the good-will was likely to exist for a long time." In the Matter of Ball, 161 App. Div. (N. Y.) 79, the court settled the matter by saying that there were three facts that entered into the analysis of business profits in order to ascertain the value of the good-will: 8 I. The interest on capital invested. 2. The personal services of the partners. 3. The amount of profits for which the good-will is responsible. In the business in which the decedent, Ball, was interested, he owned the greater portion of the invested capital. The profits for the last year before he died were cut down because of a removal, so the court fixed five years as the period to be taken, and Ball's share of the annual profits averaged in round numbers, $81,500. From this was deducted $7,000 interest on his share of the investment and $30,000, the rather high figure allowed for his personal services to the business. This left $44,500 as the annual value of the good-will. At three years' purchase this came to $133,500. On this amount the transfer tax was calculated. In the Matter of Keohon, 60 Misc. (N. Y.) 508, the decedent had conducted a trucking business for fifteen years. The net capital invested was $30,600. The average annual profits for two years were... from this was deducted decedent's salary. leaving from this was deducted 6 per cent on investment.. Matter of Moore, 97 Misc. (N. Y.) 238. Good-will is always a debit, speaking in accounting terms. $26,600 5,000 $21,600 1,836 annual value of good-will. three years' profit... taxable value of good-will.... $19,764 3 $59,292 In determining the value of the capital stock of corporations, the Bureau of Internal Revenue seems inclined to consider six years as the minimum life of good-will, although the Bureau, instead of multiplying the net earnings by a number of years, capitalizes: ... the average annual income on a percentage basis that But for estate tax purposes the regulations say: Return should be made upon the basis of the value of the stock, as evidenced by the clear value of the excess of the assets of the corporation over its liabilities, and its earning capacity for the five years preceding the death of the decedent. Where the earnings of the corporation have been greater than a fair return on its invested capital, computed according to the nature of the business, there should be added to the net value of the other assets of the business the value of the good-will, computed in accordance with sound accounting principles. Where the earnings of the corporation have been less than a fair return on the invested capital, if the difference is material and the decreased earnings affect value, the net worth of the corporation as disclosed by its balance sheet may be adjusted on a reasonable basis to allow for this decreased value.10 The good-will is to be computed "according to sound accounting principles." In other words, every case must be Form 707, Bureau of Internal Revenue. 10 Article 15 of Regulations 37. decided on its merits, and the examples given above cannot be considered conclusive, but only as showing what has been held under various conditions. § 294. Valuing Partnership Interests ner. The title to partnership property is in the surviving part The executor takes the deceased partner's interest in the surplus. To value such an interest requires the same procedure as to value close corporation stocks. A partnership agreement as to the value of each partner's interest would bear weight, but would not be conclusive. The books may be examined by an accountant whose report would give a basis for accurate appraisal. A partnership interest is personal property. In this country real estate belonging to a partnership is, for all firm purposes, treated as personal property, but if in case of death there should be a surplus, it would be treated as real property and would go to the heirs. That is, it is considered as personal property only so far as need be for the partnership purposes. There are cases, however, where it has been provided in the partnership articles that all real estate is to be considered as personal property. In such cases the manifest intention would prevail, and the real estate itself and the proceeds when sold would be considered as personal property, and in case of death of a partner would be distributed as personal property. The same rules would apply to the assessment of inheritance taxes.11 The worth of the business, then, is the value of the other net assets plus the value of the good-will, and the value of each partner's interest is his proportionate share of that worth. The good-will is an asset of the firm, and the estate of a partner who has died is usually entitled to its proportion and is liable to a transfer tax on its value. 11 Barney v. Pike, 94 App. Div. (N. Y.) 199; Darrow v. Calkind, 154 N. Y 503. |