# Petition — Estate of Thalheimer v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_0451%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1976 - **Citation:** 429 U.S. 921 ## Text 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_0451%3A1. Public record. Not legal advice.