Amerada Hess Corp. v. Commissioner

JAMES HUNTER, III, Circuit Judge

(concurring in part and dissenting in part):

Although I am in substantial agreement with the majority opinion, I cannot agree with the majority’s substitution of its views for those of the tax court on the applicability of blockage. As a result, I must dissent from Part II of the opinion.

Whether the blockage effect is relevant to the value of a security in any given case is a question of fact, Commissioner v. Stewart’s Estate, 153 F.2d 17 (3d Cir., 1946); Richardson v. Commissioner, 151 F.2d 102 (2d Cir., 1945); Helvering v. Maytag, 125 F.2d 55 (8th Cir., 1942). 1 As such, an appellate court may not disturb the findings of the trier of fact unless they are clearly erroneous.. Grove v. First National Bank, 489 F.2d 512, 515 (3d Cir., 1972).

In the instant case the tax court did not treat the blockage issue extensively. Indeed, having accepted the $48.50 value set by the parties in the agreement, the tax court found no need to discuss the application of the blockage rule to the average exchange price of the White stock on the date of the transfer. The tax court did consider blockage, however, in the context of the $48.50 value. Its reluctance to apply blockage to the value of White’s stock, though framed in terms of that $48.50 price, in my view, stems from an assessment of the facts relating to this transfer. Based on this factual assessment, the tax court determined that blockage was not applicable in the instant case. I cannot say that this determination was clearly erroneous. That this court’s treatment of blockage occurs in the average exchange price context rather than in the $48.50 context does not, in my view, affect the correctness or the applicability of the factual assessments made by the tax court.

The majority, apparently viewing the application of the blockage discount as a question of law, summarily rejects the tax court’s conclusion on the issue. 2 See *91 supra at 89. I do not think that blockage follows as a matter of law from our ruling that the value of securities be determined from the average price of traded securities on a given day.

Blockage is merely one aspect of the operation of the stock market which adjusts the price of a stock to reflect the information available to the buying community. Where a transfer of shares has not been disclosed to the financial community, a price adjustment is especially appropriate. In the context of an undisclosed transfer, the market price of a security will likely decline with the release of information if only because of the uncertainty caused by a change in the status quo.

A blockage effect is also relevant where a large block of stock is offered on the market at one time. In this context, the excess supply of shares depresses the market price, resulting in an actual decline in market value. By analogy, when a simulation of a block transfer is used to value a security, a blockage discount is appropriate. 10 Mertens, Law of Federal Income Taxation, § 59.15 at 51 (1970).

The cases cited by the majority deal with valuation in which simulated transfers serve as the basis for valuation. In these estate and gift tax cases, the court theorizes about the value of the transferred shares. See dissenting opinion, cases cited at n. 2 supra and eases cited in majority opinion at 83-85. The financial community has received no information about a transfer of shares in the cited cases. As such, the uncertainty of the market’s reaction to any large scale transfer has not affected the actual market price of the shares to be valued. A discount is applied when it can reasonably be assumed that if information had been released, the share price would have declined.

In addition, however, valuation in estate and gift tax cases often must be derived from a simulated transfer value since no public transfer is contemplated. If an actual block distribution has in fact taken place, the excess supply of shares would have depressed the market price. So, too, in the simulation, this blockage discount effect must be considered in valuing the block of shares.

Thus, it seems to me that there are at least two reasons for applying the blockage discount — discounting for uncertainty and discounting for excess supply— both of which are present in the estate and gift tax cases cited by the majority.

In the instant case, however, neither reason for applying the blockage discount is present. The parties to this transfer insured that the financial community was fully informed of this transfer by public announcements 3 and in fact the market price of the White shares declined as this information was digested by the buying community. 4 To *92 apply a blockage rule when the market has already discounted the shares in reaction to the uncertainties involved in such a transfer is to impose a penalty. In effect, the majority has allowed these shares to be doubly discounted, once by the natural operation of market forces and a second time by the court’s own action. 5

In addition the other traditional reason for applying blockage is entirely absent in this case. Since an actual transfer had taken place, there was no need to simulate the effect of a block transfer or to speculate on the effect of dumping an excess number of shares onto the market. An alternate non-market method of transfer was selected so that the simulated blockage effect had no applicability. 6

In determining that blockage was inappropriate, the tax court, in my view, weighed all of these factors. It is beyond the powers of this court to reassess the facts and to determine that the tax court erred in refusing to apply a blockage discount.

But the majority opinion is incorrect in yet another regard. The majority seems particularly persuaded by White Farm’s decision not to present expert testimony on the appropriateness of blockage. See supra at 89 n. 46. Although the tax court might properly have drawn an adverse inference from White’s failure to present expert testimony, it is not our function to credit the testimony of Hess’ experts when the trier of fact did not. In fact, White Farms did subject Hess’ expert to extensive cross-examination on the blockage issue. By categorically accepting the testimony of Hess’ expert, the majority has usurped the position of the trier of fact, impliedly asserting that White’s cross-examination did not in any way discredit the testimony of Hess’ experts. I do not deem it appropriate for a court of appeals to make factual determinations which of necessity require us to hold that cross-examination was ineffective.

For these reasons I must dissent from the majority opinion. I do not feel that the amount of blockage is an issue before this Court. Since the tax court determined blockage inapplicable to the facts of this case, no remand, in my view, is necessary.

. The majority seems to hold that the applicability of blockage is a question of law which necessarily follows from our holding in Part I of this opinion. In turn, the majority concludes that the amount of blockage is a question of fact. Because White failed to offer any expert testimony, the majority accepts Hess’ testimony on this fact.

In my view, both the applicability of and the amount of blockage are factual questions. The applicability of blockage does not necessarily follow from our holding in Part I. The tax court made a factual determination that blockage was inappropriate on the facts of this case. Thus, the issue of the appropriate amount of blockage, which is all that the majority addresses, was not reached by the tax court and should not be reached by us.

. In my view, the cases cited by the majority do not hold that the applicability of blockage is a question of law. In Commissioner v. Stewart’s Estate, 153 F.2d 17 (3d Cir., 1946), decedent Stewart held a block of stock which was valued at the market price on the date of death. Under treasury regulations prevailing at the time, the tax court could and in fact did consider “other relevant facts and elements of value.” (emphasis added.) 153 F.2d at 19 , including a discount for blockage. In affirming, this court held that the tax court “did not err when it found ‘fair market value’ by weighing all relevant indicia of what the stocks would bring at market.” (emphasis added) 153 F.2d at 19 . Determination of what factors are relevant to valuation are peculiarly factual. Stewart’s Estate in no way holds that blockage is required as a matter of law whenever market price is used to value a block of securities.

Similarly in Richardson v. Commissioner, 151 F.2d 102 (2d Cir., 1945) the Second Circuit affirmed the tax court’s determination that a blockage discount was inappropriate. The court stated:

Surely the Tax Court, if not convinced by the evidence, was not obliged to accept the conclusions expressed by the petitioner’s experts. . . . Nor are we at liberty to disturb the ultimate finding merely because an independent appraisal of the evidence might have led us to some different finding of the underlying facts and factors. 151 F.2d at 104 (citations deleted).

Once again the factual nature of the tax court’s decision whether or hot to apply blockage is evidenced.

In Helvering v. Maytag, 125 F.2d 55 (9th Cir., 1942) the tax court stated “the size of a block of listed stock [is only one] factor to be considered [for] . . . valuation for gift or estate tax purposes.” 151 F.2d at 62-63 . With this language, the court ap *91 proved the tax court’s application of a blockage discount for estate tax purposes. Once again, however, the conclusion is inescapable that the applicability of blockage in a given case hinges on factual determinations.

. A press release containing financial data about the proposed transfer was released on October 6, 1960, at least three weeks before the actual exchange took place on October 31. See Appendix at 632.

. The White stock declined nine percent between the New York Stock Exchange closing of 40'/4 on the day of the press release, October 6 and the day of the actual exchange. October 31, when the stock closed at 365/s. The decrease in the New York Stock Exchange price paralleled the release of information to the public. By the date of the actual exchange, the financial community had digested this information and the share price began to rise shortly thereafter. Thus, it was possible for the tax court to have found that discounting had already occurred with the release of information on the proposed exchange.

It is interesting to note that the actual pattern of price change of the White stock during the relevant period closely resembles the price activity suggested by Hess’ experts as the basis for blockage discount. For example, there was testimony that the simple average price decline (adjusted for market factors) of three large New York Stock Exchange secondary distributions during 1960 was 12.3 percent during the 2-5 weeks between the day before registration and the day of the offering. See Appendix at 323-26, 511-19.

*92 The similarity between the simulated discount suggested by the experts and the actual decrease in share price which occurred with the release of information is in striking support of my view that to apply a blockage discount in this case is to engage in double counting.

. See n. 4 supra.

. In Seas Shipping Co., Inc. v. Commissioner, 371 F.2d 528 , 530 n. 3 (2d Cir., 1967), the court implied that a blockage discount could have no applicability where an actual non-market rather than a simulated market transfer was utilized for . valuation purposes. Although the language in Seas Shipping is dicta since the case specifically values the shares by a barter exchange method, I deem the court’s logic relevant and persuasive.