# Security-First Nat'l Bank v. Commissioner > United States Board of Tax Appeals · April 2, 1937 · 35 B.T.A. 815 URL: https://www.frixlaw.com/law-library/cases/4496349 ## Case - **Full name:** SECURITY-FIRST NATIONAL BANK OF LOS ANGELES, OF THE ESTATE OF MILTON SILLS, DECEDENT, v. COMMISSIONER OF INTERNAL REVENUE - **Court:** United States Board of Tax Appeals - **Decided:** April 2, 1937 - **Citations:** 35 B.T.A. 815; 1937 BTA LEXIS 831 - **Precedential status:** Published - **Opinion:** Dissent by Murdock - **Judges:** Aenold, Murdock, Mellott - **Cited by:** 8 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4496349 ## Opinion text Murdock, dissenting: I think the petitioner is entitled either to a new trial or else to judgment on the valuation issue. Anything short of one of these two solutions is both unfair and unjust to the petitioner. The effect of the prevailing opinion is to fix a value less than that determined by the Commissioner but far greater than that testified to by the witnesses. I know that my colleagues who support the prevailing opinion have no desire to be either unfair or unjust. Apparently they do not fully realize how inconsistent their action is with what took place at the hearing. A former Member of the Board, now deceased, heard the evidence in the case. The question was 'to determine, as of the date of death, the value of the decedent’s rights to receive payments in the future under the trust instrument. The petitioner recognized that it had the burden of proof. It called two witnesses to sustain that burden. It qualified each witness to the satisfaction of the Board Member presiding at the hearing. The witnesses expressed their opinions that at the date of his death the value of the decedent’s rights under the trust was between $20,000 and $21,500. Counsel for the petitioner attempted to have each of these witnesses state in full the method by which he had arrived at his valuation figure. But in the case of each witness the Member presiding refused to allow this explanation to come in under direct examination. The brief cross-examination brought out nothing further and the result was that neither of the *826 witnesses was permitted to give a full explanation of how he had arrived at his opinion of value. The respondent offered no evidence. No specific finding of fact as to value is inadé, but the author of the prevailing opinion, who neither heard nor saw the witnesses, casts their opinions aside and directs that a factor of 6 percent be used in determining the value of the interests in question as of the date of the decedent’s death. This will result in the fixing of a value less than that determined by the Commissioner but almost four times as great as that testified to by the witnesses. I am not concerned for the moment with the question of whether or not there is evidence in the record supporting the use of a 6 percent yield or discount factor. The point I make is that, since the Member who presided at the hearing was satisfied with the qualifications of the witnesses to express opinions and refused to allow their methods to be disclosed under direct examination, it is unfair and unjust to the petitioner for another Member of the Board to cast aside and disregard the opinions of those witnesses on the ground that they did not give convincing reasons supporting their opinions. Yet that is what is being done. The opinions of the witnesses are cast aside and that action is justified as follows: We are not bound to accept the opinions as to valuation of expert witnesses as conclusive, particularly where such opinions are predicated upon factors which we conclude are unsound. Their opinions are to be judged in accordance with the soundness of their reasoning which is disclosed. The Board is at liberty to reject such opinions and form its own opinion on the facts presented. Thus the petitioner has been trapped by the Board. It is another question whether the Board should order a new trial to give counsel for the petitioner a chance to have his witnesses explain their methods of valuation or whether their opinions as expressed should control. The rules of evidence governing in proceeding before the Board are the rules of evidence applicable in the courts of equity in the District'of Columbia. I believe those rules required the Member who presided at the hearing to allow counsel for the petitioner to have his witnesses fully explain their methods of valuation. But, if the Board is not now satisfied to accept the opinions of the only witnesses called, clearly the petitioner is entitled to a new trial and should not receive an adverse decision on the present record. If, however, the Member presiding at the hearing was correct in his ruling, then the Board should find as a fact that the value was $21,500. The opinions of the witnesses were certainly not weakened by the meager cross-examination. It is true that the record contains a partial disclosure of the factors, method and reasoning used by one of the witnesses. But that evidence does not afford a fair basis upon which to hold that the *827 opinions of these witnesses are not entitled to weight. They were denied the right to explain in full. They never made a full explanation and their opinions should not be judged and found wanting upon the fragments of their explanations contained in this record. The Board, rejecting both the determination of the Commissioner and the value testified to by the witnesses, directs that a value be determined by the use of a 6 percent discount factor. Ordinarily the Board is not bound by opinions of witnesses. But it should have good reasons if it is to disregard their testimony. Here I think the Board has misunderstood the effect of various factors and has expressed inadequate and unsound reasons for its action. This is, of course, aside from the more serious mistake discussed above. The petitioner agrees that some amount may properly be included in the gross estate representing the value at the date of death of the decedent’s rights to receive future payments of income and corpus under the trust instrument. The parties are in agreement that the uncertainties in regard to the element of time involved -in the valuations may be resolved by the use of mortality tables. The decedent’s rights under the trust instrument involved certain risks dependent upon future earning power of the trust property, the safety of the trust investments, and perhaps other factors. Those uncertainties can not be resolved by the use of mortality tables, and the parties are in disagreement as to the proper factor to be used in making allowance for the risks involved. The Commissioner has set forth in his regulations a table for use in determining the present value of future payments. No doubt that table is useful in many ways to the Commissioner, particularly for the guidance of subordinates in the Bureau of Internal Revenue, but the promulgation of such a table in the Commissioner’s-regulations was never intended to have and does not have “the force and effect of law.” Safe Deposit & Trust Co. of Baltimore, Executor, 35 B. T. A. 259. Neither does it establish a rule of evidence. There is no evidence and no authorities are cited to show whether, or to what extent, such a table, or some modification of it, might be properly used in a case like the present one. The Commissioner did not use the table in determin--ing the deficiency and does not urge its use now. The table is based upon a 4 percent discount factor. The Commissioner computed the value in question on the basis of a 5 percent discount or yield figure instead of the 4 percent used in the table. Since the securities in the trust were yielding in excess of 5 percent it may be fair to conclude that the Commissioner erred in valuing the reversionary interest on only a 5 percent yield basis. But what justification is there in the record for the selection by the Board of a 6 percent discount factor? *828 The record contains a description of the securities in the trust at the date of the decedent’s death, with certain other information in regard to the value and earnings of those securities. But this evidence neither weakened the opinions of the witnesses nor established a basis for the determination by the Board of a- different value from that given by the witnesses. They gave their opinions in the light of that evidence. The function of the Board is to hear the evidence and determine the facts from that evidence. The Board has no expert knowledge of its own relating to values. If it had any special knowledge bearing upon this case it could not properly use that knowledge in the decision of the case. The facts must come from the record, not from the mind of the Board. Value is a question of fact. The facts which demonstrate value or lack of it must be proven. The Members of the Board have no way of determining from the present record that 6 percent is a proper factor of discount or yield to be used in the valuation of this particular property. The prevailing opinion is open to further criticism because therein fault is found with the opinions of the witnesses without good reason, the current earning power of money safely invested is confused with the percentage of yield which a purchaser of the rights in question might expect and demand, and at one place the present worth of the securities in the trust is discussed as if that were the question in issue. Those securities had been placed in a trust. The decedent had neither possession nor control. A possible purchaser of the decedent’s interest would have no more than he had. Such an investment might well be unattractive from the standpoint of possession, control, liquidity, and current earnings. These and other characteristics of the rights might be expected to have an important bearing upon the value of this interest at the time of the decedent’s death. Counsel for the petitioner apparently obtained the best qualified witnesses that were available. Yet these men knew of only a few instances where there had been transfers of interests such as those involved herein. The Board Members probably have no independent knowledge of any such transfers, and, if they have, they have no right to use it in deciding this case. Yet the opinions of the witnesses are cast aside and there are substituted the opinions of persons less well informed on the subject of the value of the particular interests in question. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4496349. Public record. Not legal advice.