REVISED OCTOBER 12, 2001

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

____________________

No. 00-60489

____________________

ESTATE OF HELEN BOLTON JAMESON, DECEASED,

NORTHERN TRUST BANK OF TEXAS, N.A., INDEPENDENT EXECUTOR

Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE

Respondent-Appellee.

_________________________________________________________________

On Appeal from the United States Tax Court

_________________________________________________________________ September 18, 2001

Before JONES, DeMOSS, and BENAVIDES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

The Estate of Helen Jameson appeals following a Tax Court

decision assessing a deficiency against it. The Estate argues that

the Tax Court clearly erred in valuing assets of Johnco, Inc.

(“Johnco”), a holding company that is part of the estate. It also

raises a plausible but unsustainable c onstitutional challenge to

the estate tax as applied in this case . As we agree that the

court’s valuations were in error, we vacate and remand for further

proceedings.2 I. FACTS

This dispute arises from a series of bequests from John

Jameson to his wife Helen Jameson, and from Helen to their children

Andrew and Dinah Jameson.

A. Mr. Jameson’s Bequest of Johnco Shares to Andrew and Helen.

Mr. Jameson incorporated the privately held holding

company Johnco in 1968. At his death in May 1990, he owned 82,865

of Johnco’s 83,000 shares as separate property. In his will, Mr.

Jameson bequeathed $106,251 in Johnco shares to Andrew to fund a

unified estate tax credit, directing that the shares be “valued by

independent appraisal as of my date of death.” The remainder of

Mr. Jameson’s shares passed to his wife.

Helen, the init ial executrix of Mr. Jameson’s estate,

filed an estate tax return in which she reported the value of the

Johnco stock passing through the estate at $86.80 per share. The

source of this share value is unclear. This tax return was never

amended.

Helen died in S eptember 1991. Northern Trust Bank of

Texas (“Northern Trust”) became the executor of both spouses’

estates. Northern Trust asked Rauscher Pierce Refsnes, Inc.

(“Rauscher”) to appraise both estates in December 1992. Although

the appraisal of Mr. Jameson’s estate is n ot in the record, its

conclusion that Johnco shares were worth only $44.65 per share at

the time of his death appears in his wife’s estate appraisal.3 Northern Trust used the $44.65 figure to calculate that

Andrew was entitled to 2,380 Johnco shares to satisfy the $106,251

he was entitled to receive under Mr. Jameson’s will. Northern

Trust concluded that Helen received John’s remaining 80,485 shares

of Johnco. Had Northern Trust used the $86.80 share value, Andrew

would have received 1,224 sha res and Mrs. Jameson would have

received 81,641 shares.

B. The Family Settlement Agreement.

Mrs. Jameson left Andrew and Dinah equal shares of her

estate. The siblings entered into a December 1993 settlement

agreement (“Family Settlement Agreement”) dividing her estate.

Separate counsel re presented Andrew and Dinah during the

negotiations.

The Family Settlement Agreement as s igned a value of

$4.025 million to Mrs. Jameson’s estate’s 80,485 shares of Johnco

and gave the shares to Andrew. This established an implicit per

share value of $ 50.01. Dinah received $ 4.025 million in cash,

marketable securities, and other assets.

C. Johnco’s Timber Property.

Johnco’s principal asset is 5,405 acres of timberland in

Louisiana (the “Timber Property”) that it acquired in 1986. The

company does not harvest or transport its own timber. Rather,

Johnco earns over 80% of its revenue by receiving fees from

companies that harvest timber on the property. The Timber

Property’s gross revenues averaged roughly $154,000 annually from1 The parties stipulated to Johnco gross revenue figures that

averaged $192,480 over the preceding four years. Since the Timber Property

accounted for about 80% of these revenues, the property’s average revenues

should have been roughly $154,000.

4 1988-91. 1 Johnco’s average net income over this period was

$60,803. The parties stipulated that the Timber Property was

“well-managed.”

Northern Trust commissioned an appraisa l of the Timber

Property by consultant forester Georg e Screpetis in 1992.

Screpetis noted that the Timber Property was outstanding for timber

production and opined that a buyer of the property would most

likely be a company in the forest products business.

Forester Robert Baker prepared a 1996 report on the

Timber Property on behalf of the IRS. The report stated that the

Timber Property was extremely productive and that its best use was

for timber production. Commending Johnco’s management of the

property, the report predicted that private investo rs, pension

funds, or local timber companies would be most likely to purchase

it.

Harold Elliott, a consulting forester who had worked for

the Jamesons for many years, testified at trial that Johnco’s

management was interested primarily in covering expenses and not in

making a big profit. Elliott testified that Johnco cut timber

conservatively. He also testified that timber grew on the property5

at the rate of 8 to 10% a year.

The parties stipulated that, at Mrs. Jameson’s death,

Johnco had a basis of $217,850 in the Timber Property and that the

property was worth $6 million. At trial, the parties disputed how

the value of Johnco’s interest in the Timber Property was affected

by the capital gains taxes the company would incur through timber

or land sales.

Both parties presented expert r eports and testimony on

Johnco’s fair market value given its low basis in the Timber

Property. Clyde Buck, a managing director of Rauscher, prepared a

new appraisal on behalf of the estate (“New Rauscher Appraisal”).

This appraisal considered three possible scenarios for a buyer of

Johnco under discount rates ranging from 20 to 30%: 1) an immediate

“fire sale” of the Timber Property; 2) a rapid but controlled sale

of Timber Property parc els within twenty-four months; and 3)

ongoing operation of the Timber Property.

Buck testified that he had no information that Johnco was

operating in a wasteful manner. Based on the stipulation that the

Timber Property was worth $ 6 million, however, Buck concluded that

a buyer of Johnco would realize the most income through an

immediate liquidation. On the other hand, a buyer would realize

the least income by far if it operated the Timber Property as a

going concern. After subtracting the taxes that a buyer would

incur by immediately selling the Timber Property, Buck concluded

that Johnco’s interest in the property was worth only $4.8 million.6 Jo hn Lax of Arthur Andersen LLP also presented an

appraisal on behalf of Mrs. Ja meson’s Estate (“Andersen

Appraisal”). Lax estimated the debt payments a potential buyer

would incur if it financed $5 million of Johnco’s purchase price.

He concluded that Johnco’s projected future cash flow w ould not

cover the debt payments. He also asserted that a buyer would

demand a return on equity of 17-22% for a risky investment like the

Timber Property. Lax concluded that a buyer of Johnco would

liquidate the Timber Property within a year. After calculating

capital gains taxes based on this conclusion, Lax determined that

Johnco’s interest in the Timber Property was worth o nly $4.13

million.

Francis Burns then te stified and presented a report on

behalf of the IRS. Burns was a principal in the financial

consulting firm IPC Group LLC. Burns argued against any capital

gains discount based on an immediate liquidation of the Timber

Property by a buyer of Johnco. He stated that this discount was

counterin tuitive, since it assumed that an entity would purchase

Johnco and then “immediately turn around and sell what [it] just

purchased.”

D. Johnco’s Tanglewood Property.

Johnco also owned a parcel of unimproved land in Harris

County, Texas (the “Tanglewood Property”). The parties stipulated

that this property was worth $240,000 at Helen’s death, and that

Johnco held a basis of $110,740 in it.7 Mrs. Jameson’s Estate did not specifically indicate that

a buyer of Johnco would i mmediately liquidate the Tanglewood

Property, but the New Rauscher Appraisal incorporated the value of

this property when it calculated a capital gains discount for

Johnco’s assets. Thus, this appraisal assumed that a buyer of

Johnco would realize capital gains through an immediate sale of the

Tanglewood Property.

E. The Tax Court decision.

The Tax Court first considered the number of Johnco

shares that passed to Mrs. Jameson’s Estate after John’s bequest of

$106,251 in Johnco shares to Andrew. The court observed that the

$44.65 appr aised share value used by Helen’s estate managers

c onflicted with the $86.80 share value reported on Mr. Jameso n’s

estate tax return. The court also noted that the $44.65 share

value reduced Mr. Jameson’s p roperty available for a marital

deduction, and it opined that Mr. Jameson’s will intended to

maximize this deduction. While noting that the 1992 appraisal of

Mr. Jameson’s estate was not in the record, the court expressed

doubt about Rauscher’s valuation methodologies. The court applied

the $86.80 sh are value and concluded that Mrs. Jameson’s Estate

owned 81,641 Johnco shares.

The Tax C ourt then turned to valuing Johnco. Although

the court acknowledged that Andre w and Dinah negotiated the 1993

Family Sett lement Agreement at arm’s length, it refused to adopt

the share value a dopted in that agreement since the agreement8

relied on the Rauscher appraisal, and the appraisal was flawed

because it assumed a liquidation of the Timber Property.

The court then considered capital gains tax discounts for

Johnco’s assets based on the company’s low basis in them. It

refused to apply a discount for the Tan glewood Property, stating

that the parties had failed to address this issue. The court did

decide to apply a discount for the capital gains tax liability that

J ohnco would incur from ongoing sales of timber. It rejected a

discount reflecting an immediate sale of the Timber Property,

however, concluding that a buyer would operate the property on an

ongoing basis.

The court designed a model to estimate the capital gains

taxes that Johnco would incur if it operated the Timber Property as

a going concern. The parties had not presented evidence on this

specific issue. The court’s model assumed that Johnco would sell

10% of its timber annually to follow a sustainable yield pattern

and that a 4% rate of inflation would app ly. Along with these

assumptions, the model estimated that the Timbe r Property would

realize $600,000 in revenue s in year one and similar inflationadjusted revenues in later years. It applied a 20% discount rate,

within the range of the taxpayer’s expert estimates, and determined

that the present value of capital gains taxes Johnco would2 This value reflects a capital gains tax discount of

$872,920.

9 eventually pay is approximately $873,000. Consequently, Johnco’s

interest in the Timber Property was worth roughly $5.1 million. 2

Based on its conclusions, the Tax Court found that Johnco

shares were worth $71 each and assessed a deficiency against Mrs.

Jameson’s Estate, which has appealed.

II. STANDARD OF REVIEW

We review the Tax Court’s factual findings for clear

error. E state of Clayton v. Comm’r

, 976 F.2d 1486, 1490 (5th Cir.

1992). Clear error exists if this court is left with a definite

and firm conv iction that a mistake has been made. S treber v.

Comm’r

, 138 F.3d 216, 219 (5th Cir. 1998). We review the Tax

Court’s legal conclusions de novo, applying the same standards as

that court. Estate of Clayton , 976 F.2d at 1490.

III. DISCUSSION

A. Valuation of the Timber Property

The value of the J ohnco stock for estate tax purposes

depended principally on the fair market value of the Timber

Property at the date of Helen’s death. The concept of fair market

value represents the price that a willing buyer would pay a willing

seller, if both have reasonable knowledge of the facts and neither

is under compulsion. Estate of Bright v. United States , 658 F.2d

999, 1005 (5th Cir. 1981). The buyer and seller are hypothetical,10

not actual persons, and each is a rational economic actor, that is,

each seeks to maximize his advantage in the context of the market

that exists at the date of valuation. E state of Newhouse v.

Comm’r , 94 T.C. 193, 217 (1990). Valuation is a question of fact

that may be reversed only for clear error by this court.

Although the parties stipulated to a fair market value of

$6 million for the Timber Property, they disagreed whet her in

valuing Johnco stock, the Estate was entitled to a discount because

of the substantial capital gains that would be recognized as timber

is harvested and sold. In Johnco’s hands, the Timber Property had

appreciated enormously since its original purchase, and its basis

for tax purposes was $217,850. Any sale of Johnco stock would

transfer the Timber Property with the built-in capi tal gains

l iability. The estate’s valuation experts opined that the only

sound economic strategy for a hypothetical purchaser of Johnco

would be to liquidate the Timber Property immediately and pay off

the 34% capital g ains tax. The Commissioner’s expert opined,

however, that, in part due to creative alternative tax strategies

to offset the built-in tax liability, no discount should be

recognized.

The Tax Court f ound neither side’s argument fully

persuasive. Contrary to the Commissioner’s view, the court

concluded that some discount for built-in capital gains should be

acknowledged based on its recent decision in Estate of Davis v.

Comm’r

, 110 T.C. 530 (1998). E state of Davis held that in3 Gen. Utils. and Operating Co. v. Helvering , 296 U.S. 200, (1935).

11 determining the fair market v alue of closely held stock after

repeal of the General Utilitie s doctrine, 3 built-in capital gains

discounts are not preclude d and are appropriate in some

circumstances. I d

. at 547. The Tax Court also rejected the

Estate’s valuation of Johnco stock, which it viewed as having been

incorrectly deriv ed from Johnco’s income rather than its assets.

The Tax Court found that the Johnco stock is properly valued under

Revenue Ruling 59-60, 1959-1 C.B. 237, according to the fair market

value of its assets. The IRS has typically applied an asset

approach when a cl osely held corporation functions as a holding

company, and earnings are relatively low in comparison to the fair

market value of the underlying assets. S ee Estate of Davis

, 110

T.C. at 536-37. Finally, the Tax Court rejected the Estate’s

methodology that contemplated immediate liquidation of the Timber

Property rathe r than, as the government’s forestry expert

testified, its sound cultivation and continued management.

The court the n crafted its own valuation. It accepted

t he parties’ $6 million figure as the net asset value for the

Timber Property, while esti mating a net present value of the

capital gains tax liability that will be incurred as the timber is

cut. The court used assumptions furnished by the estate, i.e. a

10% annual growth/harvest rate of the timber; a 4% annual inflation

rate in the value of the harvest; a 34% capital gains tax rate; and12

a 20% dis count rate. According to the court’s method, it would

take nine years to pay off the built-in capital gains liability.

Consequently, the present value of the liability, and the reduction

of the fair market value, is approximately $870,000. This

deduction is less than half that sought by the Estate, which sought

full deduction of the built-in $1.9 million capital gain liability

if the Timber Property were to be liquidated immediately.

Alt hough the Tax Court was not required to credit the

valuation testimony of either party, its calculations must be tied

to the record and to sound and consistent economic principle.

Unfortunately, the court deviated from several criteria of fair

market value analysis and thus clearly erred in assessing Johnco’s

stock value. First, the court should not have assumed the

existence of a strategic buyer of the Timber Property, a buyer that

most probably would continue to operate it for timber production.

Fair market value analysis depends instead on a hypothetical rather

than an actual buyer. S ee Trea s. Reg. § 20.2031-1(b); E state of

Bright

, 658 F.2d at 1006; LeFrak v. Comm’r

, 66 TCM (CCH) 1297, 1299

(1993). While it may well be true that the Timber Property’s best

use is for sustainable yield timber production, this does not mean

that the first, or economically rational, purchaser of Johnco stock

would so operate or lease the property. That purchaser would have

to take into account the consequences of the unavoidable,

substantial built-in tax liability on the property.

Relatedly, the court’s misplaced emphasis on a purchaser13

engaged in long-run timber production led to its peremptory denial

of a full discount for the accrued capita l gains liability. The

hypothetical willing buyer/willing seller test substitutes evidence

of the actual owner’s or purchaser’s intent w ith the most

economically rational analysis of a sale. S ee Eisenberg v. Comm’r

,

155 F.3d 50 (2nd Cir. 1998) (vacating and remanding Tax Court

decision because a tax liability upon liquidation or sa le for

built-in capital gains was not too speculative, and such potential

liability should be taken into account in valuing the stock even

though no liquidation or sale of the corporation or its assets was

planned at the time of valuation. If the evidence did not support

an economic case for the buyer of Johnco’s stock to engage in longterm timber production, then the Tax Court’s discou nt of the

capital gains liability over nine years of further production was

erroneous.

Such was the ca se here. Recognizing the uncertainties

inherent in the acquisition, the Estate’s experts arrived at

substantial discount rates for any hypothetical investment in the

property. The Tax Court recognized that the discount rate

represents the rate of return necessary to attract capital based on

an asset’s overall investment characteristics. Moreover, the court

did not quarrel with the finding of a 20% annual discount rate, and

it applied that rate to the stream of future capital gain taxes.

Nevertheless, the court simultaneously recognized that no more than

a 1 4% gross annual rate of return would be received from the14

ongoing production of timber. A reasonable hypothetical investor

who required a 20% rate of return on Johnco stock would not accept

the Timber Property’s modest 14% return. Instead, the investor

would liquidate Johnco quickly and reinvest the proceeds. “Courts

may not permit the positing of transactions which are unlikely and

plainly contrary to the economic interest of a hypothetical buyer.”

Estate of Smith v. Comm’r , 198 F.3d 515, 529 (5th Cir. 1999),

citing Eisenberg

, 155 F.3d at 57. The Tax Court’s internally

inconsistent assumptions, that a hypothetical purchaser of Johnco

stock would engage in long-range timber production even though the

Timber Property’s annual rate of return is substantially lower than

the investor’s required return, fatally flawed its decision to

discount the future flow of capital gains taxes.

Whether the record supports other estimates of the value

of Johnco stock is unclear. Because the Tax Court clearly erred in

its approach to the discount of capital gains taxes on the Timber

Property, this issue must be remanded for further consideration.

B. The Family Settlement Agreement.

The Estat e argues that the Tax Court clearly erred in

disregarding the share value set forth in Andrew and Dinah's Family

Settlement Agreement. It notes that even the Tax Court recognized

that the two negotiated at arm's length. The Estate asserts that

Estate of Warren v. Comm'r

, 981 F.2d 776 (5th Cir.1993), controls.

“In general, comparable sales constitute the best

evidence of market value.” United States v. 320.0 Acres of Land

,15

605 F.2d 762, 798 (5th Cir.1979) (holdi ng that courts should

liberally admit evidence of comparable sa les and allow the factfinder to evaluate them). The more comparable a sale is in

characteristics, proximity, and time, the more probative it is of

value. I d. Courts have observed, however, that agreed valuations

near in time to a decedent’s death are not conclusive

. U nited

States v. Simmons , 346 F.2d 213, 216 (5th Cir.1965) (holding that

a decedent’s tax settlement with the IRS did not establish the

value of his es tate’s claim against the IRS as a matter of law);

First Nat'l Bank o f Kenosha v. United States , 763 F.2d 891, 895

(7th Cir.1985) (admitting evidence of an agreement valuing property

after the dec edent’s death, but observing that such evidence was

not conclusive).

In United States v. Certain Land in City of Fort Worth

,

414 F.2d 1026 (5th Cir. 1969), a jury valued a landowner’s

condemned property at $82,000. The government appealed, arguing

that the jury instructions should have placed greater weight on the

fact that the landowner bought the proper ty for $50,000 just

thirteen months before the condemnation. Id . at 1027. Rejecting

the government’s argument, this court noted that land values could

fluctuate considerably in thirteen months. It also observed that

a prior sale of a property is not entitled as a m atter of law to

greater weight than sales of comparable property. I d. at 1028

(citing Hickey v. United States

, 208 F.2d 269, 273 (3 rd Cir.1954)).

Thus, finders of fact may in some cases disregard recent sales of16

even the very property at issue. Under these general principles,

the court was not required to credit the values prem ised in the

Family Settlement Agreement.

Further, despite the Estate’s contentions, Warren does

not control. In W arren

, the decedent bequeathed part of her estate

to a charity. The charity altered the will distributions through

a settlement with the heirs. The IRS and the estate disputed the

size of the charitable deduction that the estate could claim. This

court concluded that the assets received by the charity under the

bona fide settlement qualif ied for the deduction under the

applicable statute. W arren

, 981 F.2d at 782-84. W arren concerned

the binding status of a settlement of litigation in probate court

on the value of a charitable deduction, not, as here, the

persuasive effect of an out-of-court settlement on the issue of an

asset's value. Warren is not directly relevant to this case.

Here, Andrew and Dinah entered into an agreement valuing

John co shares more than two years after Helen’s death. The Tax

Court disregarded the valuation principally because it appeared to

derive from the assumption that a buyer would liqui date Johnco’s

Timber Property quickly. Because we have found the court’s

outrigh t rejection of the liquidation model to be incorrect, its

rejection of the siblings’ negotiated value may also be incorrect.

As a precaution, this finding is vacated and remanded for further

consideration.4 Mr. Jameson was a Texas resident, so Texas estate cases

apply.

17 C. The Tanglewood Property.

The Es tate argues that the Tax Court clearly erred by

refusing to apply a capital gains discount for that property.

Contrary to the Tax Court's conclusion, the Estate addressed this

issue in the New Rauscher Appraisal, which calculated Johnco's

value based on an immediate liquidation of all Johnco assets. The

New Rauscher Appraisal includes a capital gains tax discount for

the Tanglewood Property. This property should be subject to a

capital gains discount because a reasonable buyer of Johnco would

consider the company’s low basis in the property in determining a

purchase price. The Tax Court should apply a discount on remand.

D. The Number of Johnco Shares in the Estate.

The Estate asserts that the Tax Court clearly erred in

determining the number of shares that the Mr. Jameson’s Estate

transferred to it. It argues that the Tax Court disregarded

explicit language in Mr. Jameson's will directing that an

independent appraisal establish the number of shares in the bequest

to Andrew. As a result of the appraisal, the Estate owns only

80,485 Johnco shares instead of the 81,641 shares that the Tax

Court attributed to it.

An unambiguous will must be construed as it was written.

El Paso Nat’l Bank v. Shriners Hosp. for Crippled Children

, 615

S.W.2d 184, 185 (Tex. 1981). 4 Neither we nor the Commissioner nor18

the Tax Court may redraft the will or vary provisions to reflect

Mr. Jameson’s presumed intentions. S hrin er’s Hosp. for Crippled

Children of Tex. v. Stahl , 610 S.W.2d 147, 151 (Tex. 1980). Mr.

Jameson’s will was unambiguous. It expressly directed that Andrew

receive shares in accordance with an independent appraisal. Even

if Rauscher based Mr. John’s estate’s Appraisal on unreliable

assumptions, as the IRS asserts, this fact does not alter Mr.

Jameson’s explicit intent to transfer shares in accordance with the

valuation.

Granted, the $86.80 Johnc o share value that Helen

reported on her husband’s estate ta x return is inconsistent with

Rauscher’s $44.65 valuation. This discrepancy might be important

if we were valuing Johnco shares at Mr. Jameson’s death, but we are

not. Our sole inquiry is to determine the number of shares that

Mr. Jameson granted to Andrew through his will. Since the IRS does

not argue that the Rauscher appra isal was not an “independent

appraisal,” Mrs. Jameson’s estate owns only 80,405 shares of

Johnco.

E. Constitutionality of the Estate Tax.

The Estate raises a challenge to the constitutionality of

the federal estate tax. It argues that the tax as applied in this

case is an unconstitutional direct tax. The Estate concedes that

a tax on property actually transferable to a decedent’s heirs is19

constitutional. It asserts, however, that a tax on the portion of

the estate used to pay the estate tax is an unconstitutional tax on

a tax, resulting in this case in an effective rate of 92.7% on the

property actually received by the heirs. The Estate contends that

Congress may assess the tax only on ass ets that a donee actually

receives through the bequest.

The Constitution provides that "[n]o Capitation, or other

direct, Tax shall be laid, unless in Proportion to the Census or

Enumeration herein before directed to be taken." U.S. Const. Art.

I, sec. 9. This provision bars Congress from imposing a "direct"

tax without apportioning it to the population. Congress need not,

however, apportion “an excise upon . . . the shifting from one to

another of any power or privilege incidental to the ownership or

enjoyment of property.” F ernandez v. Wiener

, 326 U.S. 340, 352

(1945)

The Supreme Court has repeatedly rejected attempts to

portray the estate tax as an unconstitutional direct tax.

Fernandez

, 326 U.S. at 352-58 (holding that the tax was not direct

even though it encompassed a spouse's joint interest in the

decedent's property); Tyler v. United States

, 281 U.S. 497, 502-04

(1930) (same); New York Trust Co. v. Eisner , 256 U.S. 345, 348-49

(1921) (holding that the tax was not direct even though the

government imposed it on the estate rather than the recipient);

Knowlton v. Moore

, 178 U.S. 41, 82-83 (1900) (holding that the tax

was indirect even though the recipient could not shift the tax to20

others). These decisions have instead characterized the estate tax

as an indirect excise tax conditioned on the transfer of property

at a grantor’s death.

Cong ress has broad authority to impose excise estate

taxes:

[T]he power of Congress to impose death taxes is not limited

to t he taxation of transfers at death. It extends to the

creation, exercise, acquisition, or relinquishment of any

power or legal privilege which is incident to the ownership

of property, and when an y of these is occasioned by death,

it may as readily b e the subject of the federal tax as the

transfer of the property at death.

Fernandez

, 326 U.S. at 352. This language facially contradicts the

Estate’s argument, since it authorizes taxes not only on the

transfer to the heirs but on the entire property that Helen

relinquished at death.

The Supreme Court’s estate tax decisions have emphasized

that hypertechnical distinctions between direct and indirect taxes

cannot overcome the historical treatment of the tax and practical

considerations. “In determining [whether a tax is direct], no

microscop ic examination as to the purely economic or theoretical

nature of the tax should be indulged in for the purpo s e of

[characterizing it]. . . . Taxation is eminently practical, [and]

a tax should be regarded in its actual, practical results. . . .”

Knowlton

, 178 U.S. at 83 (quoting Nicol v. Ames

, 173 U.S. 509, 515

(1899)). S ee also New York Trust Co.

, 256 U.S. at 349 (“[The

petitioner’s argument fails] not by an attempt to make some

scientific distinction, which would be at least difficult, but on21

an interpretation of language by its traditional use—on the

practical and historical ground that [the estate tax] has always

been regarded as the antithesis of a direct tax.”)

Whether the explanations provided by the Supreme Court of

the estate tax’s constitutionality are fully persuasive is beside

the point for this lower court. Based on the variety of

constitutional challenges to it that have been made and uniformly

rejected, we see no basis for invalidating the federal estate tax.

CONCLUSION

Based on the foregoing discussion, we VACATE the judgment

of the Tax C ourt and R EMAND for further proceedings, consistent

with this opinion, that will (1) reconsider the amount of the

capital gains discount to the Timber Property; (2) allow a discount

for built-in capital gains on the Tanglewood Property; (3) reevaluate the effect of the Family Settlement Agreement;

(4) reconsider the value of the Johnco stock, and (5) attribute

80,485 Johnco shares to the Estate.