
    Matter of the Estate of Paul Gumbinner, Deceased.
    (Surrogate’s Court, New York County,
    October, 1915.)
    Taxes — transfer tax — when good-will constitutes an asset of decedent’s estate — wills — evidence — report of appraiser.
    While the facts that decedent, who for nearly twenty years immediately preceding his death had conducted a manufacturing business, did not advertise in trade publications or daily newspapers but depended solely upon traveling salesmen for the sale of his manufactured product may be considered in estimating the good will of the business they do not necessarily prove that there was no good-will; if, after deducting a reasonable sum for the services of decedent and for interest on capital invested, the business showed profits it had a good-will that constituted an asset of decedent’s estate.
    
      The average net profits of the business for the five years next preceding the date of decedent’s death, to be ascertained as indicated by the court, multiplied by two, held to represent the value of the good-will of the business.
    The evidence showing that certain machinery in a factory located in another state and run by decedent in connection with his business did not constitute a part of the building and was not erected in such a manner that its removal would materially alter or deface the building, the appraiser was correct in including in the assets of the estate the said machinery.
    Decedent having directed that the income from his residuary estate be paid to his widow and daughter during their respective lives and upon the death of the survivor that the principal be divided among the surviving issue of the daughter per stirpes and in the event of her death without leaving issue such remainder to be divided into sixty equal parts and paid to the various legatees mentioned in the will, the remainder should be divided into sixty parts and each legacy presently taxed as if it were bequeathed to an individual of the five per cent, class.
    Appeal from an order assessing a transfer tax.
    Lafayette B. Gleason (Schuyler O. Carlton, and Alexander Otis, of counsel), for state comptroller.
    Albert Erdman (M. R. Ryttenberg,. of counsel), for executor.
   Fowler, S.

The executors of decedent’s estate appeal from the order assessing a transfer tax upon the estate and allege that the appraiser’s valuation of the business conducted by the decedent prior to his death was excessive. The decedent was the sole owner of the business conducted by him under the name of Paul Gumbinner Company.

The appraiser estimated the value of the business at $286,067.14. His report, however, does not contain an itemized statement showing the value which he placed upon the various items constituting the assets of the business. The evidence before him showed that the market value of the merchandise on hand at the date of decedent’s death was sixty-six per cent of its cost price; that the value of the machinery in the factories was $7,835.10, although it was carried on the books at about $66,000, and that the value of the entire business, exclusive of good will, was $239,821.04.

Much evidence was submitted by the executors to show that the business had no good will. While it has been established by the decedent in 1892 for the manufacture of silken neckwear, veilings, etc., he owned no patents or trade marks in connection with it; he did not advertise in trade publications or the daily newspapers, but depended upon traveling salesmen for the sale of his manufactured products. While these facts should be taken into consideration in estimating the value of the gbqd will, they do not necessarily prove that there was no good will. The business was conducted under the same name for more than eighteen years and, so far as the evidence discloses, had the same principal office during that time. If, therefore, it showed profits, after deducting a reasonable sum for the services of the decedent and for interest on the capital invested, it had a good will that constituted an asset of the estate.

The executors have submitted a statement showing the gross profits for the years 1903 to 1909 inclusive. This statement shows an average deduction of about $3,000 as “ income from investments.” There is no explanation of the nature of these investments. If it is income from the investment of any part of the capital employed in the business it should be deducted from- the interest allowed on the capital in ascertaining the net profits for the purpose of determining the value of the good will. In the statement referred to the executors also claim a deduction of $15,000 each year from the gross profits for depreciation' of buildings, fixtures, machinery and-stock. It appears that the decedent in his annual statements did not make any allowance for depreciation of buildings, machinery, etc. There is no evidence in the appraiser’s report as to the character of the buildings used by the decedent as factories, but the increase in the value of the ground is usually equivalent to any depreciation in the value of a brick or stone structure, erected upon it. The decedent’s books do not show any allowance for depreciation of the stock inventoried at. the end of each year. This, however, is merely a detail of bookkeeping, as, if the deduction for depreciation were made in the inventoried value of the stock each- year, such deduction would necessarily be reflected in-the profit and loss account of the succeeding year, and would not substantially alter the ratio between capital and profit and loss as shown on the books of the company. As the executors ask for a deduction for depreciation of merchandise inventoried, without allowing for such deduction in calculating profit and loss at the end of the year, their contention in this respect should not be allowed. They should, however, be allowed a reasonable deduction for depreciation of machinery and fixtures. These become worn and obsolete in the course of fifteen or twenty years, and a fund should be set aside for their replacement. As the evidence shows that most of the machinery installed by the decedent in his factories in 1892 was still in operation at the time of his death, although in a worn and dilapidated condition, I think a reasonable deduction for depreciation upon- such machinery would be a percentage which would produce a fund sufficient to replace them in eighteen years. For this purpos'e a depreciation of 6 per cent is liberal and should be allowed by the appraiser.

The drawings of the decedent for his personal account should, in the absence of evdence that they were excessive, be regarded as the value of his services to the business, and should also be deducted in arriving at the net profits. There should also be deducted interest on the capital employed. As these items are contained in the statement submitted to the appraiser by the executors, it is only necessary to modify that statement by reducing their estimate of depreciation, namely, $15,000, to the figure represented by the deduction of 6 per cent upon the value of the machinery in both factories. The average net profits for the five years preceding the date of decedent’s death, ascertained as here indicated, and multiplied by two, will represent the value of the good will. /

The appraiser was correct in including in the assets of decedent’s estate the machinery in the .factory at Emaus, Pa., as the evidence showed that this machinery did not constitute part of the building, and that it was not erected in such a manner that its removal would materially alter or deface the building.

The executors also appeal from that part of the order entered upon appraiser’s report which assessed a tax upon the remainder after the life estates, of decedent’s widow and daughter, as if such remainder passed to one beneficiary of the 5 per cent class. The testator directed that the income from his residuary estate be paid to his widow and daughter during their respective lives, and upon the death of the survivor that the principal be divided among the surviving issue of the daughter per stirpes; in the event of the daughter dying without leaving issue, such remainder to be divided into sixty equal parts and paid to the various legatees mentioned in 'the will.

Section 230 of the Tax Law provides that when property is transferred in trust, and the interests of the transferees are dependent upon conditions whereby they may be defeated or abridged, a tax shall be imposed upon the transfer at the highest rate which, upon the happening of any of the contingencies or conditions, would be possible. In Matter of Zborowski, 213 N. Y. 109, it was held that such interests are presently taxable. The contingency which would defeat the vesting in possession of the interests bequeathed to the issue of the daughter would be the death of the daughter without issue, and the highest rate which could be imposed upon the remainder would be the rate at which it would be assessed in such a contingency. Therefore, the remainder should be divided into sixty parts, and each legacy taxed as if it were bequeathed to an individual of the 5 per cent class. That part of the remainder which would go to exempt corporations in the contingency mentioned is not now subject to taxation.

The order fixing tax will be reversed and the appraiser’s report remitted to him for the purpose of ascertaining the value of the good will as herein indicated. The order to be entered upon his report should conform to this decision in regard to the taxation of the remainder.

Order reversed and appraiser’s report remitted.  