Petition — Estate of Thalheimer v. Commissioner

IN THE

Supreme Court of the United

OcToBER TERM, 1976

No. 4 6 -9 > 2 {

Estate OF ALVIN THALHEIMER, RutH B. ROSENBERG,

SURVIVING Executrix, Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent,

No.

- Esrate or Henrierra G. Biaustern, Hinpa K.

BLAUSTEIN and Rutu B. Rosensera,

SURVIVING ExecuTRICcEs, Petitioners,

Vv.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

CAROLYN E. AGGER

Wat.ter J. RocKLeR

Of Counsel: LAURALEE A. MATTHEWS

a 1229 Nineteenth winest, N.W.

1229 Nineteenth Street, N.W. Washington, D. C. 20036

Washington, D. C. 20036 Joun 8S. McDanten, Jr.

LAWRENCE A. KAUFMAN

CasLe, McDanieL, Bowie 915 The Blaustein Building

and Bonp

915 The Blaustein Building Baltimore, Maryland 21201

Baltimore, Maryland 21201 Attorneys for Petitioners

Press oF Byron S. ADAMS PRINTING, INC., WASHINGTON, D. C.

~~ =

INDEX

Oprntons BELow ee eeeeneeneeneene eeeneeeeeeeeeeeeeee#e#@#

JURISDICTION oer evr epee eeeeeeeee eee eeeeeeeeeeeeeeeeee

QUESTIONS PRESENTED @eeeeoeteeeeseeeeeeseenrteeeaeeereeoaeeee @

STATUTE AND REGULATIONS INVOLVED ............ee0-

Mrawmnemmee om Wee Came ..ccccccccccccccccceccevese

Reasons FoR GRANTING THE WRIT

SUMMARY e@eee 020686 686 “ee ep eeeeereee eee eee eee ee ee ee

l. Tue Decision or THE Court or APPEALS FOR

II.

TIT.

THE Fourtru Circuit Directty CoNnFLicts witH

Decisions oF THE CourRT oF APPEALS FOR THE

Turep Crrcuir

A. Refusal to Consider Factors Depressing

Hypothetical Sale Value ................

B. Failure to Utilize Market Quotations in

Valuing Crown Stock .............ccee0.

Tue Proper Disposition or TH1Is Case INVOLVES

AN Important Question or Law Wuicnu SHouLp

Bs SettTLep BY THIS COURT ..........cccceces

THe Court Betow Deciwep THE Basic Issue

PRESENTED IN A Way Wuicn 1s ConrTRARY TO

THE Principles EstasBuisuep BY Tuts Court IN

EE CIO ok a a eaadduenast

CONCLUSION ...... ie Gk od eae iol oa ded. baie one neae ae

15

16

17

ii CITATIONS

Page

CASES:

Amerada Hess Corp. v. Commissioner, 517 F.2d 75

(3rd Cir. 1975), cert. denied, 423 U.S. 869, 96

Be ek ee ED 6 ok Bind de sccectcccdseass 8, 13, 14, 17

Bishop Trust Company v. United States, 42 A. F, T.R.

SEE CE. TT TOD onc scccccscccscescecess 10, 16

Estate of Maurice Gustave Hecksher, 63 T.C. 485

REED. Wi sdddbdwnedeS eRe REVGUH EE ESEE OES ORNS 10, 15

Estate of Alvin Thalheimer, 33 T.C.M. 877 (1974) ... 2,12

Edwin A. Gallun, 33 T.C.M. 1316 (1974) ............. 15

Hazeltine Corporation v. Commissioner, 89 F.2d 513

CE Ga BED bd bck ccdccscscvensctevencoess 8, 13, 17

Ivan Allen Company v. United States, 422 U.S. 617

TEED enccscnccnacdeudevescvasawesesswenes 8, 16, 17

Laird v. Commissioner, 85 F.2d 598 (8rd Cir. 1936)... 8, 9,

10, 16, 17

Obermer v. United States, 238 F. Supp. 29 (D. Hawaii

Pw rrrrerrer TTT Tree TT TTT ty Ts. 10, 16

Powers v. Commissioner, 312 U.S. 259 (1941) ........ 15

STATUTES AND REGULATIONS:

United States Code

Title 26

Cs eae uneen eee 16

a eae cada eee 3

Title 28

FI Ulan Bae Ms Maa POR ie ge 9

Citations continued iii

Code of Federal Regulations Page

Title 17

eh ie a ae ils cua eka uieuie 11

i 11

iit ieee duccdebave 11

I 56 oboe hncasGhs dba Knseksdkuseuses 11

Title 26

co GE ee 2, 3, 10, 11

MI ec cence eas sn cuvevebet< 3

8. Re een nena te 3,13

EE ee eee eens 3

I ede cel seve bivaeonned cas 3, 15

Ee at Rene en 3, 10, 11, 15

OrTHeR AUTHORITIES:

Bills, Reduction in Value of Closely Held Stocks Due

to Income Tax Liabilities, 44 Taxes 487 (1966)... 11

SEC Accounting Series Release No. 113 (Investment

Company Act Release No, 5847) October 21, 1969. 12

SEC Accounting Series No. 116 (Investment Company

Act Release No. 6026) April 13, 1970 ............ 12

IN THE

Supreme Court of the United States

OctToBer TERM, 1976

No.

Estate oF ALVIN THALHEIMER, RutH B. RosenBeEra,

SuRVIVING Executrix, Petitioner,

Vv.

COMMISSIONER OF INTERNAL REVENUE, Respondent,

No.

Estate or Henrretta G. BLAustern, Hitpa K.

BLAvstTEIN and RutxH B. RosEnsBerc,

Survivinc Execurrices, Petitioners,

V.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Petitioners pray that a writ of certiorari issue to

review the judgment of the United States Court of

Appeals for the Fourth Circuit finally entered in this

proceeding on May 24, 1976.

2

OPINIONS BELOW

The memorandum findings of fact and opinion of

the Tax Court are reported at 33 T.C.M. 877 (August

5, 1974) and are reprinted in Appendix A hereto,’ at

pp. la-70a. The decisions of the Tax Court stating

its deficiency determinations were entered December

18, 1974, and are reprinted at App. B., pp. Tla-73a.

The opinion of the Court of Appeals, which is not yet

officially reported, is reprinted at App. C., pp. T4a-

75a. The order of the Court of Appeals, denying a

petition for rehearing, was issued May 24, 1976 and

filed May 26, 1976, and is reprinted at App. D., p. 76a.

JURISDICTION

The initial judgment of the Court of Appeals was

entered on April 13, 1976. A timely petition for rehear-

ing was filed on April 27, 1976, and was denied on May

24, 1976. This petition for certiorari is filed within 90

days of the latter date. Jurisdiction of this Court is

invoked under 28 U.S.C. Section 1254(1).

QUESTIONS PRESENTED

The amount of Federal Estate Tax payable by a de-

cedent’s estate varies directly with the fair market

value’ of the estate’s assets, 7.¢., the amount which could

be realized from a sale. In the present cases, each of

the estates consisted largely of stock in a closely-held

corporation, which itself held large blocks of stoek in

*The separate Appendix to this petition is hereafter cited as

"pen.

* The regulations provide that ‘‘the value of every item of prop-

erty ... is its fair market value ... [which] is the price at which

the property would change hands between a willing buyer and a

willing seller... .’’ Treas. Regs, See. 20.2031-1(b).

“”

vw

publicly traded corporations. The parties and both

courts below agreed that a determination of the value

of the closely-held corporation stock owned by the dece-

dents would depend in large part on the value to the

closely-held corporation of the blocks of stock owned

by it and that therefore it was necessary to determine

the fair market value of such blocks.

The questions presented are whether in making these

determinations :

1. Asa matter of law, must factors, such as blockage,

restrictions on resale and potential capital gains

taxes, all of which would both reduce the net

amount actually realizable from a sale and would

necessarily be taken into account by a potential

buyer of the closely-held corporation stock, be dis-

regarded solely because the closely-held corpora-

tion did not contemplate making an immediate sale

of the blocks owned by it.

2. As a matter of law, may the prices st which the

listed stock of one of the corporations was traded

on the stock exchange be completely ignored in

determining fair market value.

STATUTE AND REGULATIONS INVOLVED

The statute and regulations involved in this ease are

Section 2031 of the Internal Revenue Code of 1954 (26

U.S.C. See. 2031) and Sections 20.2031-1(b) and

20.2031-2(a), (b), (e), (e), and (f), of the Treasury

Regulations on Estate Tax (26 C.F.R. Sees. 20.2031-

1(b) and 20.2031-2(a), (b), (e), (e), and (f)). These

provisions are set forth at App. E, pp. 77a-80a.

4

STATEMENT OF THE CASE

These two consolidated cases involve alleged Federal

estate tax deficiencies of more than $1 million. The

Court of Appeals affirmed per curiam the Tax Court’s

deficiency determinations.’

The sole issue presented to the Tax Court in each

case was the value of decedents’ stockholdings in a

closely-held corporation, American Trading and Pro-

duction Company (hereafter ‘‘Atapco’’). The parties

and the Courts below agreed that this issue required a

determination of Atapeo’s net asset value (1.e., the fair

market value of its assets less liabilities) which, in turn,

required a determination of the fair market value of

Atapeo’s very large stockholdings in publicly traded

companies.*

At the time of decedents’ deaths, Atapco held large

blocks of stock of several publie companies, including

Standard Oil of Indiana (‘‘Indiana’’); Standard Oil

of New Jersey (‘‘Jersey’’) ; Crown Central Petroleum

Corporation (‘‘Crown’’); United States Fidelity and

Guaranty Corporation (‘‘U.S.F.&G.’’); and Union

Trust Company of Maryland (‘Union Trust’’). (R.12-

19.) °

* The Tax Court determined the following deficiencies: Estate of

Alvin Thalheimer (date of death, July 8, 1965), $676,349.71; Estate

of Henrietta G. Blaustein (date of death, December 8, 1965),

$481,228.02. (App. B. pp. 71a-73a.) The Court of Appeals affirmed

but ordered a remand to correct an error favoring the Government

(to which a relatively small amount of tax was attributable).

* The parties stipulated the net asset values of Atapco’s several

operating divisions. The issue of how much the value of decedents’

Atapco stock was less than an aliquot portion of Atapeo’s net asset

value is not presented in this petition for certiorari.

5«*R.”’ designates references to the Joint Appendix filed in the

Court of Appeals.

5

All of these stockholdings were affected by factors

which would limit the net amount which Atapco could

realize from a sale to a willing buyer, the only proper

criterion for determining the value of such holdings

for tax purposes. Atapco’s Indiana, Crown and Union

Trust holdings were particularly large.’ The petition-

ers’ expert witness, Mr. Alvin Friedman of Kuhn, Loeb

& Co., presented undisputed testimony in the Tax

Court that those holdings were subject to blockage and

could not have been sold in a reasonable period of time

without reducing the selling price per share substan-

tially below the prevailing market prices for small lots

of Indiana, Crown and Union Trust stock. Mr. Fried-

man also presented undisputed testimony that the sale

of Atapeo’s holdings in Indiana, Crown and Union

Trust was subject to serious restrictions under the

Federal Securities laws. (R. 55-57, 545e-548e. )

In addition to the restrictions affecting Atapco’s

freedom to sell its Indiana, Crown and Union Trust

holdings, Atapeo had an extremely low basis in almost

all of its stockholdings and could not have sold its

holdings without incurring substantial capital gains

tax, which would further have reduced the amounts

realizable from the sales by Atapeo. (R. 56-57; 545e-

549e. )

Mr. Friedman further testified that a buyer of Atap-

co shares would take into account the restrictions and

conditions which would depress the value of Atapco’s

main assets and would also take into account the eapi-

* Atapeo was the largest single Indiana shareholder in 1965, with

2.94% of the total 70,794,742 shares outstanding. Atapco held

48.8% of outstanding Crown stock in 1965. Atapeo owned 28,710

shares of Union Trust which was approximately 5% of the total

shares outstanding.

6

tal gains tax which would reduee the amounts realiza-

ble from a sale by Atapeo. (R. 56-57 ;71; 545e-549e. )

The Government presented no evidence in the Tax

Court to refute Mr. Friedman’s conclusions that block-

age, Federal Securities law restrictions and capital

gains taxes would reduce the amount Atapceo could real-

ize from a sale of its stockholdings and that a potential

buyer of Atapeo stock would take these adverse factors

into account in negotiating a price. However, the Gov-

ernment’s witness, Mr. O’Farrell (an I.R.S. employee),

asserted that factors depressing the net amounts real-

izable on a sale of Atapeo’s stockholdings should not

be considered in determining Atapco’s net asset value,

because Atapco was a ‘‘ going coneern”’ not contemplat-

ing an immediate sale of its assets. Without ever testi-

fying as to what effect such depressing factors would

have had on the price which a willing buyer would have

been prepared to pay for Atapceo’s stock, Mr. O’Farrell

simply proceeded to value Atapeo’s holdings in public

companies (except Crown) at the prices prevailing in

the market for unrestricted small lots of stock in those

companies, without adjustment to reflect the factors,

expenses and tax costs which would reduce the value of

Atapeo’s large holdings. (R. 617e-643e.)

In the case of Atapeo’s Crown stockholdings, Mr.

O’Farrell not only failed to adjust stock market prices

downward to reflect the factors which would reduce

what Atapeo could realize, but he completely disregard-

ed the quoted prices of Crown stock on the American

Stock Exchange. He valued Atapco’s large, restricted

block of Crown stock at book value, more than twice

the quoted market price for unrestricted shares, assert-

ing that the market for Crown stock was ‘‘thin.”’ (R.

101-102, 617e-643e.) However, the stipulated, undisput-

Co ht Aa ear A oe ee ee

7

ed evidence showed that trading in Crown stock was as

heavy at the valuation dates as trading in Jersey or

Indiana stock, for which Mr. O’Farrell used quoted

market prices without any concern for a ‘‘thin’’ mar-

ket. (R. 12, 15-16, 190e-191e, 235e-240e, 277e-278e ; Pet.

Br. 37-39.)'

The basie issue presented to the Tax Court was

whether under proper standards for valuation the un-

disputed blockage, restrictions on sales and tax costs,

all of which would have substantially reduced the

amount Atapeo could have realized from a sale of its

stockholdings, should be considered in determining

Atapeo’s net asset value and, therefore, in determining

the fair market value of the Atapeo stock owned by the

decedents. A subsidiary issue was whether Crown stock

could be valued without any regard to its quoted stock

exchange prices.

The Tax Court held as a matter of law that, solely

because no sale was imminent, the factors which would

reduce the amount Atapco could realize from a sale

could not be considered in determining the net asset

value of Atapco stock.’ In addition, the Tax Court held

that stock of Crown should be valued in Atapeo’s hands

at book value, which was more than twice the price

for that stock established in market trades on the

valuation dates.

7“ Pet. Br.’’ refers to the petitioners’ brief filed in the Court of

Appeals,

* However, the unlikelihood of imminent sales did not prevent the

Tax Court from accepting Mr. O’Farrell’s use of market prices for

sales of small unrestricted lots to value Atapco’s large, restricted

stockholdings.

8

The Court of Appeals for the Fourth Cireuit af-

firmed the Tax Court’s decision per curiam and thus

sanctioned the above conclusions of law by the Tax

Court, notwithstanding that Chief Judge Haynsworth

had noted during the oral argument that, since the val-

ue of property is defined as ‘‘market value,”’ a defini-

tion which requires the assumption of a hypothetical

sale, he had ‘‘grave problems’’ with the Government’s

position that factors relevant to sale value ean be dis-

regarded in estate tax valuation merely because no

actual sale of property appears imminent. The Court

of Appeals also sanctioned the Tax Court’s valuation

of Crown stock without any regard to quoted market

prices,

REASONS FOR GRANTING WRIT

Summary

The Court of Appeals’ decision conflicts squarely

with decisions of the Court of Appeals for the Third

Cireuit. Laird v. Commissioner, 85 F.2d 598 (3d Cir.

1936) ; Amerada Hess Corporation v. Commissioner,

517 F.2d 7) (3d Cir. 1975), cert. denied, 423 U.S. 869,

96 S. Ct. 574 (1975) ; Hazeltine Corporation v. Com-

misstoner, 89 F.2d 513 (3d Cir. 1937).

The decision of the Fourth Cireuit and the conflicting

decisions of the Third Cireuit involve an important

area of law as to which this Court has not directly ad-

dressed itself and which should be settled by this Court.

The decision of the Fourth Circuit is also in conflict

with the principles enunciated by this Court in Zvan

Allen Co. v. United States, 422 U.S. 617 (1975), that

for tax purposes securities owned by corporations

should be valued at the net amounts realizable from

9

their sale rather than on other bases having no eco-

nomie reality.

I.

THE DECISION OF THE COURT OF APPEALS FOR THE

FOURTH CIRCUIT DIRECTLY CONFLICTS WITH DECI-

SIONS OF THE COURT OF APPEALS FOR THE THIRD

CIRCUIT.

A. Refusal to Consider Factors Depressing Hypothetical

Sale Value

The Tax Court held as a matter of law that, regard-

less of the effect in the market of blockage, restrictions

on sale, tax costs and other factors affecting the hypo-

thetical sale value of Atapco’s assets, these elements

could not be considered in valuing Atapco stock be-

cause an immediate sale of the assets was not contem-

plated. (App. A, p. 67a.) The Court of Appeals’ per

curiam affirmance sanctioning this decision conflicts

directly with the decision of the Court of Appeals for

the Third Cireuit. In Laird v. Commissioner, 85 F.2d

598 (3d Cir. 1936), the Third Circuit Court reversed the

Board of Tax Appeals for its failure to consider the

effect of blockage and other restrictive factors on the

market value of stocks held by close corporations, in

determining the value of the latter corporations. No

sales of the stocks by the close corporations was there

contemplated. Nonetheless, the Third Cireuit Court

stated that the Board’s method, which failed to take

account of factors that would affect a hypothetical sale

by the holding corporations—

“TN ]ot only ignored the treasury regulations

prescribing the method by which stock in close

corporations should be valued, but directly violat-

ed these regulations. Stock in such a [close] cor-

poration must not be valued ‘by taking the mean

10

between the highest and lowest quoted selling pric-

es’ of the stock constituting the assets of the eor-

poration to determine the worth of the company.

... The stock in these two close corporations could

not have ben sold on the day of Mr. Laird’s death,

for no one could have forced the sale of all the

stock constituting the assets of the [corporations].

... Even if it could have been done, ... the testi-

mony was that it would have driven the price of

the du Pont stock [held by the corporations] down

from $325 to $125 per share. That of course was a

guess, but it shows that the method which the

Board used was impractical when applied to the

determination of the value of the assets of close

corporations which consist entirely of stock listed

on stock exchanges... .’’ 85 F.2d at 601 (emphasis

supplied).

Other courts have followed the Third Circuit Court’s

approach and have considered the effect on asset value

of factors such as blockage and eapital gains taxes in

valuing closely-held corporations, even though there

was no indication that the corporate assets were about

to be sold. £.g., Obermer v. United States, 238 F. Supp.

29 (D. Hawaii 1964) ; Bishop Trust Company v. United

States, 42 A.F.T.R. 1221 (D. Hawaii 1950). The Tax

Court itself, in a more recent case, took account of the

effect of trapped capital gains tax in valuing the stock

of a holding company. Estate of Maurice Gustave

Hecksher, 63 T.C. 485, 495 (1975).

The Third Circuit Court’s Laird decision and the

cases following the Laird approach properly interpret

Treasury Regulations Section 20.2031-2(f) (2),° which

* Laird interpreted Treasury Regulations 70, Art. XII under

Section 302 of the Revenue Act of 1926. Those Regulations were

substantially identical to the successor, present Treasury Regula-

tions Section 20.2031-2(f) (2) and 20.2031-1(b) under Section 2031

of the Internal Revenue Code of 1954,

11

requires that the net worth, or net asset value, of every

closely-held company be determined for valuation pur-

poses, regardless of whether the corporation is a going

concern. Net asset value is by definition a measure in

which ‘the hypothesis of a sale forms the basis of

value.”’ Bills, Reduction in Value of Closely Ield

Stocks Due to Income Tar Liabilities, 44 Taxes 487,

489 (1966) (emphasis supplied).

The requirement of Regulations Section 20.2031-2(f)

(2), that the net asset value of a corporation be deter-

mined on the basis of a hypothetical sale of its assets,

is a specific application of the basic principle of the

Regulations that—

“The value of every item of property includable

in a decedent’s gross estate ... is its fair market

value....[F Jair market value is the price at which

the property would change hands between a willing

buyer and a willing seller, neither being under any

compulsion to buy or to sell and both having rea-

sonable knowledge of relevant facts.’’ Treas. Regs.

Sec. 20.2031-1(b).

Any potential purchaser of the stock of a corpora-

tion whose primary value resides in its holdings of

stock of other companies would consider, among other

factors, the net value available to the corporation from

a sale of its holdings for its corporate purposes. Thus,

the SEC rules for publicly traded investment ¢om-

panies require all factors affecting the hypothetical

sale value of an investment company’s stockholdings

to be disclosed. Specifically, the SEC requires the

disclosure of trapped capital gains (17 C.F.R. Sees.

210.6-02(f) (2), 210.6-02(i) ; 17 C.F.R. See. 210.6-03-23

and 17 C.F.R. See. 270.2a-4); and has held that it is

improper to value restricted stock at the market price

12

for unrestricted stock. Accounting Series Release

No. 113, Investment Company Act Release No. 5847

(October 21, 1969). See Accounting Series Release

No. 116, Investment Company Act Release No. 6026

(April 13, 1970). The SEC has plainly determined

that these factors would be considered by willing

buyers and sellers of stock in arriving at the market

value of the holding corporation’s stock. Yet the Tax

Court and the Court of Appeals held as a matter of

law, in direct conflict with the Third Cireuit Court,

that these factors cannot be considered in determin-

ing the price that Atapco stock would bring in a sale

between a willing and informed buyer and seller.

It is the Third Circuit’s view, however, which is cor-

rect as a matter of law.

The Court of Appeals in the instant case offered no

reason for its departure from the rule of the Third

Cireuit Court. The only reason offered by the Tax

Court was that Atapco ‘‘is a diverse, viable going con-

cern and there is no evidence of a plan for its liquida-

tion, voluntary or otherwise.’’ 33 T.C.M. at 911, App. A

p. 67a. There is neither authority nor reason for valu-

ing a particular asset at varying amounts depending

on whether or not an imminent sale is contemplated.

Both Courts simply disregarded the Laird case, cases

following Laird, the Regulations, and applicable SEC

criteria in refusing to consider factors which have long

been recognized as relevant to determinations of mar-

ket value, t.e., what a willing buyer would pay.

B. Failure To Utilize Market Quotations in Valuing

Crown Stock

The Court below affirmed the Tax Court’s valuation

of Atapeo’s Crown stock at book value without regard

to the market prices at which Crown stock was actually

- ae

13

traded on the American Stock Exchange. This affir-

mance violated the clear mandate of the Regulations

that—

“(T]f there is a market for stocks or bonds, on a

stock exchange, in an over-the-counter market, or

otherwise, the mean between the highest and low-

est quoted selling prices on the valuation date is

the fair market value per share or bond.’’ Treas.

Regs. Sec. 20.2031-2(b) (1).

The decision of the Court below is in direct conflict

with decisions of the Third Circuit Court. Amerada

Hess Corporation vy. Commissioner, 517 F.2d 75 (3d

Cir. 1975), cert. denied, 423 U.S. 869, 96 S. Ct. 574

(1975); Hazeltine Corporation v. Commissioner, 89

F.2d 513 (3d Cir. 1937). In Hazeltine, supra, the Third

Circuit Court reversed a ‘fair market value”’ deter-

mination by the Board of Tax Appeals which ignored

the prices at which stock was actually sold on the

New York Curb Exchange. The Court stated:

‘‘The Board seems to have ignored the evidence of

fair market value furnished by the sales upon the

Curb exchange and in this we think it fell into

error. The primary evidence of the fair market

value of corporate stock is what willing pur-

chasers pay to willing sellers on the open market,

even though the assets of the corporation do not

reflect such values.’’ 89 F.2d at 519 (3d Cir. 1937).

More recently, in Amerada Hess Corporation, supra,

the Third Circuit Court reversed the Tax Court’s de-

termination that the value of a large block of stock

was the amount set by the parties to a corporate ex-

change of the stock for assets for the purpose of de-

termining the number of shares to be issued, rather

than the actual market value at the time the exchange

was made, less a discount for blockage. The Tax Court

14

had concluded that the large block involved made mar-

ket prices unreliable. Nevertheless, the Third Circuit

Court held:

‘‘Where ... the property to be valued consists

of securities traded on a stock exchange, the gen-

eral rule is that the average exchange price quoted

on the valuation date furnishes the most accurate,

as well as the most readily ascertainable, measure

of fair market value ... Market analysts have

developed reliable tec hniques for determining the

amount by which the market price should be ad-

justed to correct for various abnormalities.

The Tax Court, however, neither adopted nor

adapted the market price as the proper index of

valuation in this ease.’’ 517 F.2d at 84.

The Court below, in affirming the Tax Court, placed

itself squarely in opposition to the Third Circuit. In-

stead of directing the Tax Court to ‘‘adopt or adapt’’

market prices, as the Amerada Hess case requires, the

Court below sanctioned the Tax Court’s complete

abandonment of market prices in favor of book value.

Book value was more than twice the market price for

the Crown stock. The only reason given by the Gov-

ernment’s witness for using book value rather than

market price was that the market for the Crown stock

was ‘‘thin.’’*’ Even if the Crown market were deter-

mined to be ‘‘thin,’’ and therefore market values should

not be a wholly determinative starting point for valua-

tion, the asserted ‘‘thinness’’ would not warrant the

arbitrary use of book value instead of applying the

valuation standards developed in the regulations ap-

*° Government counsel, with commendable frankness, made on

oral argument in the Court below the more persuasive statement

that book value was employed in the Crown situation since it pro-

duced a higher valuation than did market value.

15

plicable to the case of stock for which the market does

not accurately reflect the fair market value. Treas.

Regs. Sec. 20.2031-2(e). See Treas. Regs. See. 20.2031-

2(f) (2).

II.

THE PROPER DISPOSITION OF THIS CASE INVOLVES AN

IMPORTANT QUESTION OF LAW WHICH SHOULD BE

SETTLED BY THIS COURT.

It is commonly said that valuation is not an exact

science. Precisely because of the broad possibilities for

inconsistency which exist in this area, it is imperative

that the basic criteria, which form the only bounds on

the Tax Court’s otherwise complete discretion, be

clearly identified, authoritatively established, and

applied consistently. This Court has recognized that

the criteria to be applied in valuation cases are a mat-

ter of law and has heretofore reversed decisions apply-

ing improper standards. See Powers v. Commissioner,

312 U.S. 259 (1941).

It is a matter of common knowledge that many

closely-held corporations themselves hold stock in

other corporations and that it is frequently necessary

to value these holdings in other corporations in con-

nection with arriving at the value of the closely-held

stock. Within six months after the Tax Court rendered

its decision in the present case, it rendered decisions

in two other cases—Estate of Maurice Gustave Heck-

sher, supra, and Edwin A. Gallun, 33 T.C.M. 1316

(1974)—which involved such a valuation question. In

Hecksher, the Tax Court took into account the effect

of the capital gains tax which would have been in-

eurred on a sale of the securities. In Gallun, it took

into account the effect of blockage which would have

reduced the price obtainable on a sale, but refused to

16

give any effect to the capita! gains tax which would

have been incurred.

The erratie application of valuation standards ex-

emplified by these two cases, and by the conflict between

the Third and Fourth Cireuits, demonstrates the need

for this Court to settle authoritatively the principle

to be followed so that there can be a modicum of uni-

formity and certainty in this area. If these two dece-

dents had lived in Philadelphia instead of Baltimore,

the estate tax liability would have been determined

under the principles enunciated by the Third Cireuit

in Laird and would have been very much less than the

tax determined by the Tax Court and affirmed by the

Fourth Cireuit. This would have also heen true if they

lived in Honolulu, where the courts have followed

Laird. See Obermer vy. United States, supra, and

Bishop Trust Company v. United States, supra.

ITT.

THE COURT BELOW DECIDED THE BASIC ISSUE PRESENTED

IN A WAY WHICH IS CONTRARY TO THE PRINCIPLES

ESTABLISHED BY THIS COURT IN ANOTHER CONTEXT.

It is necessary to determine values of stocks of other

corporations held by a particular corporation not only

for the purposes of determining estate and gift taxes,

but also for other purposes, such as determining the

amounts which are available to meet business needs of

the owning corporation for accumulated earnings tax

purposes.’ In Ivan Allen Company v. United States,

422 U.S. 617 (1975), this Court determined that appre-

ciated stocks owned by the taxpayer should be valued

at their fair market value less the costs of converting

'! The accumulated earnings tax is imposed under Sections 531-37

of the Internal Revenue Code of 1954 (26 U.S.C. Sees. 531-37).

ey ee ee

17

them into cash and the capital gains taxes which would

be payable, rather than at book value. This Court stated

that ‘‘the proper measure of those securities, for the

purposes of the [Sec. 531] tax, is their net realizable

value.’’ 422 U.S. at 629 (emphasis supplied).

It is submitted that the decisions by the Court of

Appeals for the Third Circuit in Laird, Amerada Hess

and Iazeltine, supra, are consistent with the holding

of this Court in Ivan Allen, supra, and that when the

Tax Court ignored these cases and the Court of Ap-

peals for the Fourth Cireuit affirmed the Tax Court,

the present cases were decided in a manner contrary

to the valuation standards enunciated by this Court.

CONCLUSION

For the reasons stated, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

CAROLYN E. AGGER

WALTER J. ROCKLER

LAURALEE A, MATTHEWS

1229 Nineteenth Street, N.W.

Washington, D.C. 20036

Joun S. McDAntet, JR.

LAWRENCE A, KAUFMAN

915 The Blaustein Building

Ba'timore, Maryland 21201

Attorneys for Petitioners

Of Counsel:

ARNOLD & PORTER

1229 Nineteenth Street, N.W.

Washington, D.C. 20036

CaBLE, McDAnteEL, Bowlrk and Bonp

915 The Blaustein Building

Baltimore, Maryland 21201