Gizella Meszaros, Gaspar Szentner v. Minister of National Revenue, [1982] CTC 2509, 82 DTC 1488

D E Taylor:—These appeals, heard on common evidence on March 11 and 12, 1982, in Calgary, Alberta, are against assessments of income tax for the year 1976, in which the Minister of National Revenue decreased the adjusted cost base (acb) of the shares of Crescent Bakery Ltd (“Crescent”) from the total of $277,777 reported by the appellants, to an amount of $200,000. The difference resulted in additional capital gains to the appellants, and that is the matter in dispute. There were only four common shares in Crescent, three held by Szentner and one by Meszaros, at all times material. The notice of objection of Mr Szetner puts forward a general statement in summarizing the problem from the appellants’ viewpoint:

Since the shares changed hands in 1968 for $200,000 in an arm’s length transaction it does not seem reasonable to value them at the same amount on December 31, 1971. Since the shares were sold in 976 for $375,000 the reassessment assumes that all of the increase in value took place after 1971. We submit that our assumption that the shares increased in equal proportions over the number of months held is valid. Thus the ACB of $277,777 as originally submitted is correct.

The respondent submitted that the fair market value of all the shares in question as at December 31, 1971 was $200,000 and relied, inter alia, upon “Sections 3 and subdivision c, Division B, Part I of the Income Tax Act, RSC 1952, c 148 as amended by s 1 of c 63, SC 1970-71-72, and section 26 of the Income Tax Application Rules, SC 1970-71-72, c 63”.

There was a subsidiary issue which arose only with relation to the appeal of Mrs Meszaros. The Minister pointed out that the proportionate value of Mrs Meszaros’ shares should be further reduced because she was a minority shareholder (holding one share out of a total of four issued), a reduction of 10% was then applied in her case, and the Minister assessed accordingly.

Evidence

Mr Szentner testified regarding the history of Crescent and the critical events which impinged on these appeals. Mrs Meszaros (the other appellant) had been in Crescent with him for a long time and they had a successful business prior to and up to 1968. In January of that year, they had an opportunity to sell Crescent and, after some negotiations, did so for an amount of $198,000. They received $30,000 as a down payment and payments under the agreement of sale totalling about $22,000 during the following year. Certain documents dealing with that sale were filed and while there was no detailed record of inventory or lists and valuations of land, buildings, machinery or equipment for January 1968, the agreement (Exhibit R-4) did give the following asset breakdown:

The agreement pointed out that the purchaser had bought the four shares in the company and, as a result, the assets of the company were transferred. After the payments noted above had been made, the appellants decided that the new owners were not operating the business well and that there might be difficulty collecting the balance of the sale price. Accordingly, they proceeded to take back the business, experiencing some lengthy legal difficulties in the process, which difficulties necessitated them operating the business as a “partnership” for about a year and a half during 1969 and 1970. The two appellants therefore, had received some $52,000 ($30,000 + $22,000) on account of the sale, leaving a balance of some $146,000 owing. According to Szentner, they were required to settle about $35,000 in accounts which were left unpaid by the owners they had displaced (they settled the $35,000 for about $22,000). In addition, they spent a great deal of time and effort getting the business built back up to its former acceptable level. Szentner indicated that during 1970 and 1971, they had also added several thousand dollars’ worth of new or reconditioned equipment.

In January 1976, the shares had once again been sold, this time for $375,000. At this sale, however, Szentner had prepared a list of the machinery and equipment (Exhibit A-1) which totalled $311,615 at at that date. The list, however, did not include valuations for land, buildings, inventory, accounts receivable, etc. He had assigned individual values to such equipment and machinery based on his many years of experience in the business. These assigned amounts he believed to represent about 35% of that which it would cost to purchase and install comparable new machinery and equipment in 1976. In January 1976 when Crescent was sold, it was operating five days a week, 24 hours per day, and had a staff of between 25 and 30 people. Finally, Mr Szentner recounted his long and compatible business relationship with Mrs Meszaros and his total regard for her interest in any commercial dealings.

Mr Edward N Rahal, a chartered accountant with MacGillivray & Co, who had experience in valuation matters, testified regarding the reasonableness of the original $277,777 figure used by the appellants in their tax returns. He also presented a memorandum reflecting the calculation underlying his own valuation of $265,548 before allowance for tax on recapture of capital cost allowance. Because the memorandum summarizes the basis of the hearing, it is reproduced (Exhibit A-2):

MEMORANDUM

VALUATION OF SHARES OF CRESCENT BAKERY LTD

Statement of Material Facts

1. Crescent Bakery Ltd was sold by Meszarus and Szentner in 1968 for $200,000 consisting of cash and an agreement for sale. Due to operating difficulties experienced by the new owners the company was repurchased by Meszarus and Szentner in 1969 for $200,000.

2. As the comapny had been poorly managed for the period it was out of the control of Meszarus and Szentner the net earnings of the company during the years 1969, 1970 and 1971 are not a reflection of the earning potential of the company either prior to 1969 or subsequent to the recovery period.

3. Crescent Bakery Ltd was sold by Meszarus and Szentner in 1976 for $375,000 and V Day Value of $277,777 was determined by prorating the increase in value of the shares of $175,000 over the eight year period between the date of purchase and the date of sale.

4. On July 31, 1979, commenting that the proration procedure was not acceptable, Revenue Canada, utilizing the median rule, proposed a V Day value of $200,000.

5. On March 19, 1980, Revenue Canada placed a value on the shares of the company at $75,000 which was in part calculated based upon an appraisal of the land and buildings prepared by Revenue Canada on June 28, 1978. Revenue Canada has reassessed Meszarus and Szentner on a V Day value of $200,000 and an objection has been filed.

Method of Valuation

In normal circumstances when the growth pattern of a company is not disrupted by a material event such as the sale and repurchase as occurred with Crescent Bakery Ltd there are two methods available for valuation purposes. These methods are the Liquidation Method and the Earnings Method. As there was a material disruption to the company the Earnings Method is not considered appropriate and the Liquidation Method has been used.

Valuation

It would appear logical that sice the company was purchased for $200,000 in 1968 and sold for $375,000 in 1976 that a portion of the increase in value may be attributed to the years 1969, 1970 and 1971. Given that this was a period in which the company operations were restructured to provide for improved earnings it may also be argued that the increase in value in this period should be proportionately higher than in the later years. In addition, during this period the company consummated a purchase of certain equipment from a bankrupt company at distressed prices. Utilizing this equipment on a going concern basis would have enhanced the value of the business during the years 1968 to 1971. Logically, given the increase in value by 1976 and the restructuring of the company the value of the shares should not decrease or hold constant for the period from the date of purchase to V Day on December 31, 1971. Given these circumstances the ascribed value of $277,770 may be argued on the basis of logic.

An alternative approach, and one attempted by Revenue Canada, would be the placing of a value on the fixed assets of the company. As the assets were not valued at December 31, 1971, certain assumptions and logic must be applied to determine the ascribed value. The ascribed value has been determined as follows:

1. Land

On June 28, 1978 Revenue Canada appraised the fair market value of the land as at December 31, 1971 at $18,000. As an alternative appraisal is not available this value has been ascribed. As the book value of the

property was $7,925 the increase in value is	$ 10,075
2. Buildings
On June 28, 1978, Revenue Canada appraised the fair market value of
the buildings as at December 31, 1971 at $56,000. As an alternative ap
praisal is not available this value has been ascribed. As the book value of
the buildings was $33,249 the increase in value is	$ 22,751
3. Equipment
Equipment is valued by the amount that a knowledgeable buyer is pre
pared to pay for the equipment. The value is the economic worth to the
purchaser at the point of purchase and must be distinguished from ac
counting values of either original cost or net book value. The economic
worth of equipment when maintained in useable form increases over time
due to the impact of inflation. This is clearly demonstrated in the case of
the company when in 1976 the purchaser ascribed a value to the equip
ment purchased of $258,315 compared to the accounting basis of net
book value of $29,279. As the economic value of equipment is effected
over time by the inflation rate an adjustment to the purchase price for
asset additions and deletions as well as inflation will produce an ascribed
economic value at December 31, 1971. This ascribed value is calculated
as follows:

Crescent Bakery Ltd

Ascribed Economic Value of Equipment for the Year Ending December 31

	Consumer	Current Year		Prior Year
	Price	Estimated	Asset	Calculated
Year Index		Value Value	Additions	Value Value
1975	144.3	$258,315	$(5,700)	$252,615
1974	131.8	230,732	(4,628)	226,104
1973	117.2	201,058	(9,068)	191,990
1972	107.4	175,936	(5,742)	170,194
1971	102.2	161,953		—

The net book value of the equipment was $16,345 at May 31, 1972 and $14,921 at May 31, 1971. As additional costs and accumulated depreciation were roughly the same over the period a December 31, 1971 net book value is considered to be the average or $15,583 The (sic) would

result in an increase in value of	$146,370
4. Automotive Equipment
The utilization of automotive equipment for economic purposes is also
ascribed an economic value in the same manner as the equipment. In
1976 the purchaser ascribed a value to the automotive equipment of
$53,300. The ascribed value at December 31, 1971 is calculated as fol
lows:

Crescent Bakery Ltd

Ascribed Economic Value of Equipment for the Years Ending Dollars (sic)

	Consumer	Current Year		Prior Year
	Price	Estimated	Asset	Calculated
Year Index		Value Value	Additions	Value Value
1975	144.3	$53,300	$ 8,176	$61,476
1974	131.8	56,151	(11,775)	44,376
1973	117.2	39,460	(5,309)	34,151
1972	107.4	31,295	7,328	38,623
1971	102.2	36,753	—
				—

The net book value of the automotive equipment at May 31, 1972 was $13,465 and at May 31, 1971 the net book value was $9,137 for an estimated average of $11,301 at December 31, 1971. This would result in an

increase in value of

$ 25,452

The valuation of the shares of the company, in addition to the ascribed economic value of the assets, also includes the shareholders’ equity in the company and a provision for txa on the recapture of depreciation. The shareholders’ equity at May 31, 1972 was $64,414 and at May 31, 1971 the equity was $52,948. The May 31, 1972 equity position includes $3,028 in prior period adjustments which should be added to the May 31, 1971 equity for a revised equity position as at May 31, 1971 of $55,976. Assuming that the earnings for the year ending May 31, 1972 were earned proportionately through the year the estimated equity position as at December 31, 1971 is $60,898.

The estimated tax on the recapture of depreciation at December 31, 1971 is $21,065 distributed as $4,656 on the building, $11,776 on the equipment and $4,633 on the automotive equipment.

The value of the shares as at December 31, 1971 is calculated based upon the above factors at $244,481 distributed as follows:

Crescent Bakery Ltd

Ascribed Economic Value of Shares as at December 31, 1971

Shareholders’ Equity		$ 60,898
Increase in Value of Fixed Assets:
Land	$ 10,075
Buildings	22,751
Equipment	146,370
Automotive Equipment	25,452	204,648
Increase in Value		265,548
Tax on Recapture of Capital Cost Allowance		21,065
Value of Shares		$244,481

As at December 31, 1971 there were 4 shares issued and outstanding by Crescent Bakery Ltd. Of these shares 3 were held by Szentner and 1 was held by Meszarus. In their valuation of the shares on March 19, 1980 Revenue Canada ascribed a discount of 10% to the Meszarus share due to the minority position. In Our opinion, as the company was closely held, this discount should not be applied and each share should be ascribed an equal value of $61,120.25.

Capital Gain

On the basis of the facts and our valuation of the shares as at December 31, 1971, it is our opinion that the capital gain associated with the sale of the company is $177,724 calculated as follows:

Crescent Bakery Ltd

Capital Gain on Sale of Shares

Calculated Adjusted Cost Base

1968 Cost of shares	$200,000
1971 V Day Value	244,481
1976 Proceeds on Disposition	375,000
Median Amount 1 TAR 26	$244,481
Less: Dividends out of 1971 tax paid
Undistributed surplus on hand	47,205
Adjusted Cost Base	$197,276
Calculated Capital Gain
Proceeds on Disposition	$375,000
Less: Adjusted Cost Base	197,276
Capital Gain	$177.724

In our opinion this Capital Gain should be distributed evenly among the 4 out- standing shares resulting in an allocation of the Capital Gain as follows:

Gaspar Szentner	3 Shares	$133,293
Gizella Maszarus	1 Share	44,431
		$177,724
		MacGillivray & Co
		Chartered Accountants

Mr Rahal also made reference to the period of time when the appellants had operated the business as a form of partnership and the manner in which a portion of that period had been incorporated into the company financial statements during the 1970 and 1971 fiscal periods.

In cross-examining Mr Rahal, counsel for the Minister filed certain sets of the financial statements for Crescent and it was agreed by Mr Rahal that as at December 31, 1968 (under the new purchasers), the book values of the fixed assets were shown as:

The same financial statements showed goodwill valued at $82,633.79. Mr Rahal defended his “Consumer Price Index” method of valuing the shares as the only approach possible, given the factors available. He started with the known total selling price of $375,000 in 1976, of which the $311,615 on Exhibit A-1 formed the major part, and worked back to 1971. However, he had not applied the same approach using the “net book value” (supra) at December 31, 1968 or the values indicated in the 1968 sale agreement, and calculated forward to V-Day. In his view, such a procedure (calculating forward) was not warranted since there was no detailed list of individual values of machinery and equipment in 1968, just totals and book values, whereas such a detailed list did exist by virtue of the sale in 1976 and was shown by Exhibit A-1. It was evident from the financial statements filed that the operation had not shown very substantial profits during the 1969-1970 and 1971 periods. In Mr Rahal’s opinion, the rather poor profit pictures for the business shown by the relevant financial statements did not represent the real earning potential of the business.

Mr D Skappie, CGA, an evaluator with Revenue Canada, presented the basis for the Minister’s position, and it is reproduced:

Vancouver Regional Appeals

Vancouver District Office

Vancouver, BC

You have requested our opinion as to the fair market value as at December 31, 1971 of the issued common shares of Crescent Bakery Ltd.

For the purposes of our opinion, fair market value is defined as the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of money or money’s worth.

We understand that at the valuation date, the beneficial ownership of the shares was as follows:

	Number of
Shareholder	Shares	Percent
Mr Gaspar Szentner	3	75
Miss Gizella Meszaros	1	25

~4~ "ÏÔÔ

We understand that you have requested this opinion for the purpose of establishing value for Valuation Day within the meaning of Section 24 of the Income Tax Application Rules, 1971 — that is, at December 31, 1971. It must be recognized that we are not commenting on the present adjusted cost base of the shares for income tax purposes, which may or may not differ from the fair market value of those shares at December 31, 1971.

This request is predicated by the disposition in 1975 of 4 shares of the company in an arm’s length transaction.

In our opinion the fair market value as at December 31, 1971 of the shares owned by

(1)	Gaspar Szentner was	$18,750 per share
(2)	Gizella Meszaros was	16,875 per share

In forming our opinion, we have reviewed and relied on the following information:

(a) The unaudited financial statements of the company for the period January

1,1967 to May 31, 1972, as prepared by a local firm of Chartered Accountants.

(b) An appraisal dated June 28, 1978, prepared by the Department’s Appraisal Section in which they expressed their opinion of the fair market value of the land and buildings owned by the company at December 31, 1971.

Basis of Valuation

Following our review, we determined what, in our view was the fair market value of the outstanding shares of the company “en bloc” at the valuation date. using a liquidation approach, we arrived at a fair market value of the shares “en bloc” of approximately $75,000. (See schedule “A” attached.) This method was chosen as it produced a higher value than the capitalization of earnings method. (See schedule “B” attached.)

The liquidation calculation represents the adjusted equity less liquidation costs such as real estate, legal and accounting fees and taxes on asset realization, recapture and distribution to shareholders. We used the fair market value of the land and buildings as determined by the Department’s Appraisal Section in our calculation. The value of the equipment was taken to be equal to its net book value as the taxpayers could produce no listing or value of the equipment owned by the company at V-Day.

In valuing the shares owned by each shareholder at the valuation date, it is our view that:

(a) the shares of Gaspar Szentner should be valued at rateable value having regard to his control position

(b) the shares owned by Gizella Meszaros should be discounted from rateable value by 10% having regard to

(1) the amicable and close personal relationship which apparently existed between the chief shareholder and herself

(2) the size of her shareholding

(3) the illiquidity of her shareholding

In Summary

The Fair Market Value at December 31, 1971:

(1) of all the shares of the company “en bloc”	$75,000
(2) of the shares owned by Gaspar Szentner (being the rateable value
per share)	$18,750
(3) of the share owned by Gizella Meszaros (being the rateable value
per share discounted by 10%)	$16,875

Conclusion

From information which we have available to us it is our opinion that the Fair Market Value of the shares of Crescent Bakery Ltd “en bloc” at December 31, 1971 was $75,000.

Calgary Valuation Section

M D Skapple

March 19/80

SCHEDULE “A”

Crescent Bakery Ltd Calculation of Adjusted Net Book Value as at December 31, 1971

Shareholders’ Equity — May 31, 1972		$64,418
Ada:
Land — Appraised Value	$18,000
— Cost	7,925	10,075
Building — Appraised Value	$56,000
— Net Book Value	33,249	22,751
		$97,244
Less: CCA Recapture
Building 25% of 15,003		3,750
Adjusted Net Book Value — December 31/71		$93,494

Calculation of Liquidation Value
Adjusted Net Book Value — per above			$93,494
Deduct: Realization Expense
Real Estate Commission			$4,700
Liquidation loss on inventory receivable,
equipment and autos			2,500
Tax on Distribution
1971 UIOH (15% of 64414 + 15003 — 3750)			11,350
			18,550
Estimated Liquidation Value — December 31, 1971			$74,944
SCHEDULE “B"
Crescent Bakery Ltd Calculation of Maintainable
After Tax Earnings
	1972	1971
Profit Before Tax	8,838	14,744
Less:
Interest Income	337
Sundry Income	141
Rental Income		13,000
Adjusted Income Before Tax	8,360	1,744
Average Profit (10104 + 2)			$ 5,050
Tax @ 25%			1,262
Maintainable After Tax Profit			$ 3,788
Calculation of Fair Market Value on a Capitalization
of Earnings Basis
Maintainable After Tax Earnings —			$ 3,788
Apply Multiples of 6 & 7
	Low	High
6 X 3788	22,728
7 X 3788		26,516
Fair Market Value			$25,000

Since the results in his report were based on original cost for machinery and equipment, and an agreed upon valued for land and buildings, in Mr Skappie’s view it was reasonably accurate. He had seen nothing that would indicate the assets had a value greater than that ascribed in his report. The Minister, in assessing, had taken the “median” value of $200,000 which was greater than his own calculated fair market value of $75,000. Mr Skapple agreed that there were some minor uncertainties in his report, and that some revisions might be warranted. However, the basic thrust was correct — in his view, the earnings of the business did not reflect any viable basis for using the “going business” method of valuation and, if used, it would not show to the appellants’ advantage. The net effect of the method used by Mr Rahal was an attempt to value it as a “going business” in 1971. He was not aware that any “consumer price index” method was one recognized in valuation procedures. The “liquidation” value method was the only alternative available to him.

Mr Skapple did agree that the business was sold in 1976 as a “going business”, but the progression to that level had not been by a straight incline commencing in 1968 at $200,000 and terminating in 1976 at $375,000. He could see no reason to disregard the virtual collapse of the business after 1968 from which the appellants had apparently rescued it by taking it back in 1969. Neither was Mr Skapple impressed by the argument that the value of the business when it was taken back in 1969 was about $200,000, composed of the $146,000 unpaid balance from the sale, the $35,000 accounts payable assumed, and certain added assets. It could be argued that the $146,000 unpaid balace was worthless (and thereby the reason for taking back the business to salvage whatever possible from it); that $22,000 actually paid (not the $35,000) should be used as part of the calculation if any such amount were permissible; and that no physical evidence of the additions to the assets in 1970 or 1971 had been provided. Noting Mr Szentner’s “35% of new replacement cost’’ as the basis for the value on Exhibit A-1, Mr Skapple indicated that the 1976 cost of such new machinery and equipment would be nearly one (1) million dollars (100/35 $311,615). The historical cost of the known machinery and equipment as shown on the May 31, 1972 balance sheet of Crescent was just over $100,000. The net additions from 1972 to 1976, as shown on the report of Mr Rahal, amounted to some $25,000. He was unable to accept the proposition that assets which originally cost some $125,000 now would cost about $1,000,000 and, even though used for many years, were to be valued at $311,615 in 1976 — almost three times their original cost.

Argument

In argument counsel for the appellants highlighted the fact that Mr Skap- ple’s experience in such valuations had been very limited; that certain discrepancies had been shown in his report; and that the two points of value — $200,000 in 1969 (on re-acquiring the business) and $375,000 in 1976 on its sale — were the most logical to use as the extremes. The process was then only a matter of arriving at a value on December 31, 1971 and the amount of $277,777 estimated by the appellants in the first place was a reasonable midpoint. If that were unacceptable to the Board, Mr Rahal’s “consumer price index’’ method was the most practical alternative — it was based upon historical fact in the record of the country’s economy. The resulting modified figure of $244,481 (for tax purposes) reached by Mr Rahal was the median that should be used. In the circumstances of this case Mr Rahal’s method should not be described as “hindsight’’, it was just a viable and common sense mechanical process for estimating. Counsel referred to case law as follows in support of the valuation:

Bendix Automotive of Canada Limited v The Queen, [1978] CTC 194; 78 DTC 6137;

Blais v MNR, [1979] CTC 2944; 79 DTC 745.

Counsel referred in only a very limited way to the historical and financial documentation which had been filed with the Board.

With regard to the subsidiary issue affecting only Mrs Meszaros (a further reduction of 10% in value), from the testiomony and evidence which had been presented, it was counsel’s position that Mr Meszaros’ one share was worth as much as any one share held by Mr Szentner in view of the fact that they had been in business together for many years and that Crescent had been sold twice — once in 1968 and once in 1976 — with the agreement and consent of both appellants. Further, when it was necessary to take the business back in 1969, it was both Mr Szentner and Mrs Meszaros who had done so — Szentner had not gone looking for another “partner”. Case law referenced included John A Carruthers v MNR, [1979] CTC 3150; 79 DTC 906.

Counsel for the Minister rejected both the basis and the result of the “consumer price index” method used by Mr Rahal in his valuations. The question at issue was the determination of “fair market value” — and that was simply what a willing buyer and a willing seller could arrange as a price at a point in time. That was either value based upon profits a “going business” approach or the “liquidation of assets” approach. While Mr Rahal arrived at his value by using something called the “consumer price index”, it was implicit in his report that he viewed the method as one directly related to the “going business" approach. There was no evidence that a willing buyer would pay the amounts suggested by Mr Rahal as simply the “liquidation value” of the assets. In effect, Mr Rahal said that the "going business” was worth $200,000 in 1968, that no depression of that should be perceived by virtue of the adverse events of 1969 and that it was again a “going business” in 1976 worth $375,000. That theory was unsupportable in light of the facts brought Out at the hearing, according to counsel.

There was no reason to conclude that the assets which were part of the business re-acquired by the appellants in 1969 formed part of a “going business" at that time — indeed the evidence was that the business had nearly been ruined. Taking back the business was probably the only way available to the appellants of cutting their losses. Certainly it had not been shown that the assets sold in 1968 had a value of $200,000 even then the “goodwill” on the balance sheet could not be neglected and the shares were sold, not the assets. There was nothing to show that the “going business” status had been regained by December 31, 1971 — the business profits did not support it. It could not be said that if it (the business) had been regained (thereby bringing the alleged asset value back to some $200,000), it had so dramatically improved that those assets could be valued at $277,777, or even the amount calculated by Mr Rahal by December 31, 1971.

The value of the assets estimated by Mr Szentner in January 1976 had been shown to be suspect from any comparative or mathematical basis. All in all, the Minister had taken a most generous view in assigning a total value of $200,00 as of December 31, 1971 to the value of the shares — there was in fact very little to support a V-Day value of more than the $75,000 based on the “liquidation of assets" method used by Mr Skapple. Nevertheless, the Minister had taken the median point of the three possible values ($75,000, $200,000 and $375,000) and accorded it to the taxpayers. The taxpayers, on appeal, had not shown that amount to be insufficient and that was the onus faced by the appellants.

As for the 10% further reduction to Mrs Meszaros, counsel noted that she could not control either the purchase or the sale of the company and that no “third party” would have paid full value (whatever that could be) for her one share, while leaving the remaining three shares in the hands of Szentner. The case law was emphatic in recognizing that a different valuation should be ascribed to minority interests, in counsel’s view.

Findings

The primary issue facing the Board is to determine whether the appellants have shown that the appropriate valuation of the shares of Crescent, as at December 31, 1971, should be greater than $200,000 and, if so, whether it should be $277,777 as originally indicated by the taxpayers, or the net amount of $244,481 as determined by the report of Mr Rahal.

The proposition of the appellants is essentially that they sold the shares for $200,000 in 1968, took them back unimpaired in 1969, and resold them in 1976 for $375,000. (The amount of $200,000 has been generally used in the evidence but it is recognized by the Board that Exhibit A-1 shows the sale price in 1968 was $198,000). According to the testimony given, a straight line linking the two known facts ($200,000 in 1968 and $375,000 in 1976) results in the intermediate valuation at December 31, 1971 of $277,777. If that were the totality of the information, in my view the logic would be irrefutable. The value to be attached to the individual assets or classes of assets actually included in the sales at either time would be irrelevant. It is, however, the appellants themselves who brought into the equation the relevance of the assets to the price negotiated with the purchasers. The only reason for doing so, as far as I am able to determine, was to counteract any argument that the progression from $200,000 to $375,000 continued undamaged and uninterrupted by the events of 1969 and 1970. In effect, while ignoring the asset details earlier quoted from the 1968 sale agreement, the appellants asserted that the $375,000 sale figure in 1976 was based upon the existence and value of tangible assets, not upon intangible assets such as goodwill.

The figure of $311,615 in Exhibit A-1 in itself is subject to serious question as noted in the testimony of Mr Skapple because it is based on some 35% of new equipment cost, according to Mr Szentner. Nevertheless, for it to have any usefulness to the appellants in the present appeals, the situation alleged in 1976 must be consistent with that of both December 31, 1971 as calculated, and the 1968 sale amount — only tangible assets, as opposed to intangible assets, can be taken into account at those dates also. However, also attached to the 1968 corporation tax return filed with the Board as Exhibit R-8 was a balance sheet of Crescent dated March 2, 1968 — the day following the sale of the shares. It shows earned surplus (essentially the net tangible assets) as having a value of $76,835 — a far cry from $200,000. The new owners apparently also showed some $30,000 as an injection of capital and goodwill of $86,806 in a further balance sheet dated October 31, 1968, also attached to Exhibit R-8. After the legal difficulties in re-acquisition of the shares had been overcome and the appellants were in control, on subsequent balance sheets of the company, including those for the taxation years 1971 and 1972, there is no further reference to a “goodwill” valuation.

As I see it, the evidence, particularly the documentary evidence, does not lend support to a conclusion that the $200,000 in 1968 was composed of the same elements as the $375,000 sale in 1976, as the $375,000 is portrayed by the appellants. Without some rational explanation or separate validation, the Board would be quite entitled to reject the appellants’ own valuation of $277,777. As I followed the hearing, the efforts of Mr Rahal were designed to provide such separate validation in support of the assertion that the shares at December 31, 1971 were worth $277,777 (or his actual calculation of $265.548 — see Exhibit A-2) because the shares were worth $375,000 in 1976 and, in turn, becuase there were tangible assets as indicated above to support that valuation in 1976. Obviously, since his alternate calculation did not support the $277,777 calculation proffered by the appellants, that particular amount is no longer in contention. It only remains to be seen if the new amount of $265,548 is supportable since, allegedly, it is not dependent as a calculation on the $200,000 figure in 1968.

In reaching the amount of $265,548, Mr Rahal based his calculation on a consumer price index regressively applied to the values ascribed to the tangible assets in Exhibit A-1. he attempts to avoid the 1968 balance sheet asset cost figure contradiction and the conflict with the 1968 sale agreement showing “goodwill” which doomed Mr Szentner’s “straight line” method. But in doing so, Mr Rahal accepts without question the validity of Mr Szentner’s proposition that there was value in hard assets in January 1976 to support the 1976 sale of the shares — no goodwill or other intangibles.

In my view, there are at least two good reasons which should have cautioned Mr Rahal against following the above route. First, Exhibit A-1 (the list of values) was not prepared independently and can have no substance other than that which can be attributed to Mr Szentner’s background and experience. Counsel for the respondent, in cross-examining Mr Szentner, disclosed a great many individual areas and items in Exhibit A-1 which reflect badly on its accuracy. The details on it cannot be reconciled with known and recorded specific amounts of certain assets, a fact not too difficult to determine. Its separate verification, both as to existence and value by a recognized appraiser, might have been expected under the circumstances. But its major weakness comes from the general basis of “35% of 1976 cost” which Mr Szentner used in arriving at the alleged values assigned to the items of machinery and equipment. As noted before, this 35% basis would indicate a 1976 cost of almost one million dollars for the machinery and equipment sold. Assuming that the consumer price index application has any validity at all (a tenuous proposition in itself), this would lead to a calculated cost in 1971 of approximately $700,000 and a cost in 1968 of some $550,000. Exhibit R-8 shows that the original cost of all tangible assets (including accounts receivable and inventory) was approximately $150,000. It is not the role of the Board to reconcile these apparent substantial discrepancies in the evidence and testimony, but they invalidate Mr Rahal’s use of Exhibit A-1 for any calculations. In summary, the appellants have failed to support the figures proposed — either the $277,777 or the $265,548 as having validity.

There is a further caution that could be noted, although it has worked to the advantage of the appellants in the assessments — there is little or no support for the Minister’s agreement that any loss in value of Crescent as a going business had been recouped by December 31, 1971 after reacquisition in 1969. It is my view that any goodwill which was present in the Original sale (and I am satisfied it was calculated as having some value) had dissipated by the time of the re-acquisition. The acceptance by the Minister of his own median valuation of $200,000 for the shares as at December 31, 1971 is generous in the extreme since it is not based upon “liquidation” value and the evidence does not support it as related to a “going business’.

On the subsidiary point (the 10% reduction in the value of the one share held by Mrs Meszaros), I hold a somewhat different view. It is true that a minority shareholding usually is subject to additional and different valuation constraints in that it cannot take sole direction of corporate affairs, nor can a possible purchaser anticipate much more than a passive role in such direction (see Lauder v MNR, [1979] CTC 2911; 79 DTC 764). However, in this case I am convinced by the testimony of Mr Szentner and by the events as they unfolded during the period 1968 to 1976 that the two appellants were virtually inseparable business partners — indeed they apparently operated as partners rather than in a corporate framework during a part of the 1969- 1970 re-acquisition period. I accept the testimony of Mr Szentner that he did not, and he would not, dispose of the shares of Crescent without the agreement of Mrs Meszaros.

Decision

The appeal of Mr Gaspar Szentner is dismissed. The appeal of Mrs Gizella Meszaros is allowed in part in order that the value of her one share in Crescent Bakery Ltd shall be calculated at all relevant times as equivalent to a share held by Mr Szentner. In all other respects her appeal is dismissed. The entire matter is referred back to the respondent for reconsideration and reassessment in a manner not inconsistent with these reasons for decision.

Appeal allowed in part.