T.C. Memo. 2006-270

UNITED STATES TAX COURT

ESTATE OF GEORGINA T. GIMBEL, DECEASED,

JANET G. ROGERS, JOANNE M. GIMBEL, AND THOMAS W. GIMBEL,

CO-EXECUTORS AND CO-TRUSTEES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21250-04. Filed December 19, 2006.

Charles P. Rettig, Edward M. Robbins, Jr., Cory Stigile, and

Lewis R. Walton, Jr., for petitioners.

Donna F. Herbert and Michael Zarefsky for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SWIFT, Judge: Respondent determined a $5,248,840 deficiency

in the Federal estate tax of the estate of decedent Georgina T.

Gimbel. 
- 2 -

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect on the date of decedent’s

death.

The only issue for decision is the fair market value of

3,601,267 restricted shares of the common stock of Reliance Steel

and Aluminum Company, a publicly traded New York Stock Exchange

company (Reliance).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Background

Decedent was predeceased by her husband, William Gimbel

(William), who died on December 9, 1998. Decedent died on

June 5, 2000 (the valuation date), while residing in California. 

From the time of her death, decedent’s three children,

Thomas W. Gimbel (Thomas), Janet G. Rogers, and Joanne M. Gimbel,

have served as coexecutors and cotrustees of decedent’s estate,

and each has resided in California.

Reliance was founded in 1939 by William’s uncle, Thomas

Neilan (Mr. Neilan). In 1947, Reliance hired William as an

employee. In the late 1950s, Mr. Neilan died, and upon his death

William received from Mr. Neilan’s estate a 4-percent common

stock interest in Reliance, and William became Reliance’s chief

executive officer. 
- 3 -

William’s employment with Reliance continued until his death

in 1998 by which point William was serving as chairman of

Reliance’s board of directors. Throughout his long business

career with Reliance, William acquired additional privately held,

unregistered shares of Reliance common stock. 

Shortly before William’s death in 1998, William and decedent

established the Gimbel Family Trust (the Trust), and William

transferred to the Trust, among other assets, all of his shares

of Reliance common stock. 

Upon William’s death, the Trust was divided into two

subtrusts: A marital trust and decedent’s survivor trust

(collectively, “the Trusts”). 

Includable in decedent’s gross estate (the estate) were the

shares of Reliance common stock (the estate’s Reliance shares)

held by the Trusts, by decedent’s account in Reliance’s employee

stock ownership plan (ESOP), by decedent’s IRA, and by decedent

individually, as follows:
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1 Trial testimony indicates that a small number of the

Trusts’ 3,548,450 Reliance shares may have been registered. The

evidence also leaves open the possibility that some of the 52,817

Reliance shares held by the ESOP, by the IRA, and by decedent

individually may have been unregistered shares. We accept the

parties’ treatment of the Trusts’ 3,548,450 shares as

unregistered and the remaining 52,817 shares as registered.

 Holder of Estate’s

 Reliance Shares Number of Shares

Marital Trust 1,874,225*

Survivor Trust 1,674,225*

Reliance ESOP 25,161**

Decedent’s IRA 22,500**

Decedent Individually 5,156**

 Total 3,601,267

 * Unregistered shares

** Registered shares

As indicated, of the estate’s total 3,601,267 Reliance

shares, approximately 3,548,450 shares (the shares held in trust)

were unregistered shares. The remaining 52,817 Reliance shares

includable in decedent’s estate held by the ESOP, by the IRA, and

by decedent individually were registered shares.1 On the

valuation date, the estate’s 3,601,267 shares of Reliance common

stock represented approximately 13 percent of the total

27,786,030 shares of Reliance common stock outstanding. 
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History of Reliance

Originally, Reliance’s business consisted of the fabrication

of steel-reinforcing bar. Beginning in the 1950s and continuing

over the next few decades, Reliance expanded its operations,

acquired several companies in the metals industry, and eventually

became a “metal service center”.

As of the valuation date, Reliance had a network of 23

divisions and 12 subsidiaries, 72 processing and distribution

facilities in 21 States and France, approximately 4,000

employees, and Reliance had become the fifth largest metals

service center company in the United States.

As a metal service center, Reliance acquires and processes

to customer specifications various types of raw metals and metal

products. Reliance distributes more than 75,000 metal products

to approximately 65,000 customers in a broad range of industries,

including general manufacturing, construction, transportation,

aerospace, and semiconductor fabrication. 

In September of 1994 Reliance conducted its initial public

stock offering (IPO). Between its 1994 IPO and the June 5, 2000,

valuation date, Reliance completed 18 company acquisitions and 2

strategic asset purchases.

Shortly after William’s death, decedent’s son, Thomas, was

named a director of Reliance.
- 6 -

2 All financial statement information provided is based on

Reliance’s public Securities and Exchange Commission (SEC)

filings for 1997, 1998, 1999, and 2000. As of the end of the

second quarter of 2000, which was 25 days after the June 5, 2000,

valuation date, Reliance held $991 million of assets. For the

first two quarters of 2000, Reliance reported $872 million in net

sales and $80 million in net income (before depreciation,

interest, and income taxes).

Reliance’s 1997, 1998, 1999, and 2000 Financial Condition

The chart below summarizes in millions aspects of Reliance’s

financial statements for 1997, 1998, 1999, and 2000, reflecting

Reliance’s growth in the years prior to and including the June 5,

2000, valuation date:2

 1997 1998 1999 2000 

Total Assets $584 $ 841 $ 900 $ 997

Net Sales 962 1,353 1,511 1,727

Net Income* 82 117 145 157

* Net income before depreciation,

 interest, and income taxes.

The significant annual increases in assets, net sales, and

net income reported on Reliance’s financial statements were

largely attributable to increases in Reliance’s gross profit

margins and to the addition of assets, net sales, and net income

relating to acquired companies.

As of the valuation date, Reliance was negotiating

confidentially for the acquisition of another company. This

potential acquisition purportedly would have represented the

largest acquisition in Reliance’s history and likely would have
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required the use of most of Reliance’s available cash and then

remaining balance in Reliance’s $200 million outstanding line of

credit.

Shortly before the valuation date, Reliance’s board of

directors increased Reliance’s per share quarterly dividends from

5 to 5.5 cents.

On the valuation date, Reliance shares reached a public

trading price high of $21.25, a low of $20.375, and averaged

$20.8125 per share (the valuation date trading price). 

On the valuation date, 18,300 shares of Reliance stock were

publicly traded. In the 10 weeks preceding the valuation date,

average daily trading volume in publicly traded Reliance shares

was approximately 25,000 shares. 

Based on the $20.8125 valuation date trading price for

publicly traded Reliance shares, multiplied by the total

27,786,030 shares of Reliance common stock outstanding, as of the

valuation date Reliance had an equity market capitalization of

approximately $578 million.

As of the valuation date, an active market for options and

other hedging instruments and derivatives relating to Reliance

stock did not exist.

Restricted Nature of Decedent’s Reliance Stock

In addition to the fact that almost all of the estate’s

Reliance shares were unregistered, due to the large number of
- 8 -

3 Both the parties and the experts treat under applicable

Securities and Exchange Commission regulations decedent as an

affiliate and the estate’s 3,601,267 Reliance shares as

restricted. Further, because 3,548,450 of the estate’s 3,601,267

Reliance shares (approximately 99 percent) were unregistered (the

shares held by the Trusts), the parties and the experts treat the

3,548,450 shares as restricted regardless of decedent’s affiliate

status. We accept this treatment of the estate’s Reliance

shares. 

4 SEC Rule 144 limits the amount of a corporation’s

restricted stock that can be sold to the public by a holder of

the restricted stock in any 3-month period to the greater of 1

percent of the outstanding class of stock to be sold or the

average weekly trading volume for the previous 4 weeks. In the

case of Reliance stock, the greater number would be 1 percent of

the outstanding stock, or 277,860 shares.

decedent’s Reliance shares (the shares attributed to her as

trustee and beneficiary of the Trusts and the shares she owned

through her ESOP and IRA and individually), decedent was

considered an “affiliate” (or an affiliated person) of Reliance. 

Under applicable Federal security laws, because of decedent’s

status as an affiliate, as of the valuation date, the public

resale of the estate’s 3,601,267 Reliance shares generally would

be restricted.3 

Under Securities and Exchange Commission Rule 144, 17 C.F.R.

section 230.144 (1999) (SEC Rule 144), the estate would not be

allowed to sell to the public more than 277,860 of its 3,601,267

restricted Reliance shares in any 3-month period.4 Thus, selling

the estate’s 3,601,267 Reliance shares in the public market under

the SEC Rule 144 sales restriction would take a minimum of

approximately 3 years and 3 months (i.e., 39 months).
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Also, in order to sell shares under SEC Rule 144, an

affiliate must first hold the restricted shares for 1 year. As

of the valuation date, the 1-year SEC Rule 144 holding period

applicable to the estate’s Reliance shares had been satisfied,

and the Reliance shares could immediately be sold to the public,

subject to the SEC Rule 144 quarterly sales restriction. 

In a private placement or under SEC Rule 144A, 17 C.F.R.

230.144A (1992) (SEC Rule 144A), the estate’s 3,601,267 Reliance

shares could be sold to certain types of investors immediately

without the SEC Rule 144 sales restriction. However, any of the

estate’s Reliance shares that would be sold in a private

placement or under SEC Rule 144A would still be restricted, and a

purchaser of the estate’s Reliance shares would be subject to the

same public resale restrictions as the estate.

Consequently, due to liquidity requirements, institutional

investors most likely would not have been willing to purchase the

estate’s Reliance shares.

Reliance Stock Repurchase Plan

On December 15, 1994, the Reliance board of directors

adopted a formal stock repurchase plan which allowed for the

repurchase by Reliance of up to 2.25 million shares of Reliance

stock. On August 31, 1998, the Reliance board of directors

increased to 6 million the number of Reliance shares that
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Reliance was authorized to repurchase under the stock repurchase

plan.

From December 1994 through the valuation date, under

Reliance’s stock repurchase plan Reliance repurchased in the

public market approximately 1.37 million shares (2.7 million

after adjustment for a stock split) of Reliance stock for

approximately $27 million. The largest repurchase of Reliance

stock that occurred during this period, both in number of shares

and dollar amount, occurred during an 11-day period in October of

1998 when Reliance for $11,090,017 repurchased on the open market

430,800 Reliance shares (646,200 shares after adjustment for a

stock split).

On May 25, 2000, about 2 weeks before the June 5, 2000,

valuation date, Dave Hannah (Hannah), Reliance’s CEO, made a

presentation at a steel industry conference. In his

presentation, Hannah reported that 1999 represented a “record

year” for Reliance and that Reliance would consider repurchasing

Reliance shares at around $19 a share, as it had done in the

recent past.

October 30, 2000, Repurchase by Reliance of 2,270,000 

of the Estate’s Reliance Shares 

Prior to her death, decedent had not discussed with Reliance

management the possibility that Reliance, upon decedent’s death,

might repurchase decedent’s Reliance shares. 
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Shortly after decedent’s death, representatives of the

estate inquired of Reliance’s management whether they were aware

of any investors who might be interested in purchasing some of

the estate’s Reliance shares. Reliance’s management, on behalf

of the estate, asked Reliance’s investment banking firm (DLJ) to

try to identify private institutional or strategic investors who

might be willing to purchase a significant block of the estate’s

Reliance shares. DLJ made some inquiries in this regard but was

not able to identify an interested investor for the estate’s

Reliance shares. At that point, members of the Reliance board of

directors began discussing the possibility of Reliance

repurchasing some of the estate’s Reliance shares. 

Hannah approached the estate’s attorney and told him that

Reliance’s management may be willing to approve Reliance’s

repurchase of some of the estate’s Reliance shares. Hannah

explained to the estate’s attorney that Reliance’s management

would have to evaluate any repurchase in light of the pending

company acquisition, the possible need and ability to obtain

additional financing, and the impact of a leveraged repurchase on

Reliance’s financial ratios.

Eventually, at an October 18, 2000, meeting, Reliance’s

board of directors (with Thomas excused) approved the repurchase

of up to $50 million worth of the estate’s Reliance shares at

$19.35 per share. The record is not clear as to how Reliance’s
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directors established the $19.35 per share repurchase price, but

trial testimony indicates that management took into account

advice from DLJ to the effect that the Reliance stock repurchase

price should reflect a 10 to 15 percent discount from the trading

price of the stock.

At the same meeting, in order to fund the authorized 

$50 million repurchase of Reliance stock from the estate, the

Reliance directors authorized, pending bank approval, increasing

Reliance’s existing credit line by $50 million -- from $200

million to $250 million.

On October 30, 2000, after receiving the $50 million

increase to its credit line, Reliance privately repurchased 2.27

million shares of the estate’s Reliance stock at $19.35 per

share, for a total price of $43,924,500. The 2.27 million shares

repurchased by Reliance represent 63 percent of the estate’s

3,601,267 Reliance shares.

Federal Estate Tax Return, Audit, and Valuation Reports

 On September 5, 2001, the estate’s Federal estate tax

return was timely filed. 

In connection with the preparation of the above estate tax

return, the estate’s attorney retained Gregory Range (Range) to

value the estate’s Reliance shares. In his report dated 

November 13, 2000, Range concluded that the value at which the

estate’s Reliance shares should be included in decedent’s gross
- 13 -

5 Gregory Range (Range) discounted the estate’s Reliance

shares by 20 percent from the $20.625 valuation date closing

trading price instead of from the $20.8125 valuation date average

trading price as required in sec. 20.2031-2(b)(1), Estate Tax

Regs. In a letter to the estate’s attorney attached to his

valuation report, Range states: “If the IRS wants to express the

fair market value in terms of the discount from the mean of the

high and the low prices as of the valuation date, then the

discount would be 20.72%.” For convenience and uniformity with

the other experts, we use for Range’s discount 20.72 percent.

estate was the $20.8125 valuation date trading price for publicly

traded Reliance shares discounted by 20.72 percent to reflect

lack of marketability and liquidity relating to the resale

restrictions applicable to the estate’s Reliance shares and to

the size of the block of the estate’s Reliance shares in relation

to the volume of publicly traded shares of Reliance stock.5

On audit, respondent determined that the estate’s Reliance

shares should be discounted from the valuation date trading price

but by only 8 percent. The notice of deficiency and the record

herein do not reflect how respondent calculated this

8-percent discount.

For trial, both the estate and respondent retained new

valuation experts. On December 18, 2005, Ken Nunes (Nunes),

respondent’s new valuation expert, finalized a report in which he

concluded that the estate’s Reliance shares should be included in

decedent’s gross estate at the valuation date trading price

discounted by 9 percent. 
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On December 22, 2005, Curtis Kimball (Kimball), the estate’s

new valuation expert, finalized a report in which he concluded

that the estate’s Reliance shares should be included in

decedent’s gross estate at the valuation date trading price

discounted by 17 percent. 

The schedule below sets forth the percentage discount from

the valuation date trading price, the discounted per share value,

and the total value of the estate’s Reliance shares as reported

on the estate’s Federal estate tax return, as asserted by the

estate at trial, as determined in respondent’s notice of

deficiency, and as asserted by respondent at trial:

 Discount

From Trading

 Price 

Discounted 

 Per Share

 Value 

Discounted Total

Value of Estate’s

 Reliance Shares 

Estate Tax Return

(Range) 20.7% $16.50 $59,420,918

Petitioner’s Expert

(Kimball) 17.0% 17.27 62,209,637

Respondent’s Notice

of Deficiency 8.0% 19.15 68,964,263

Respondent’s Trial

Expert (Nunes) 9.0% 18.94 68,207,998

OPINION

Generally, under section 2031(a) the value of a decedent’s

gross estate is based on the fair market value of property owned

by the decedent as of the date of death. 
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For Federal estate tax purposes, the term “fair market

value” is defined as the price at which property would change

hands between a willing buyer and a willing seller, neither being

under any compulsion to buy or sell and both having reasonable

knowledge of relevant facts. United States v. Cartwright, 411

U.S. 546, 551 (1973); sec. 20.2031-1(b), Estate Tax Regs.

The willing buyer and the willing seller are hypothetical

persons, rather than specific individuals or entities, and

individual characteristics of the hypothetical persons or

entities are not necessarily the same as the characteristics of

the eventual actual seller or actual buyer. Estate of Simplot v.

Commissioner, 249 F.3d 1191, 1195 (9th Cir. 2001), revg. 112 T.C.

130 (1999); Estate of Mellinger v. Commissioner, 112 T.C. 26, 33

(1999).

For shares of publicly traded stock, the average of the

highest and lowest quoted selling prices on the valuation date

generally establishes the value of the shares. Section 20.2031-

2(b)(1), Estate Tax Regs. However, if a taxpayer establishes

that the quoted selling prices do not reflect the fair market

value of the shares, then some reasonable modification of the

selling price and other relevant facts and elements of value may

be considered in determining the fair market value. Estate of

Gilford v. Commissioner, 88 T.C. 38, 48 (1987); sec. 20.2031-

2(e), Estate Tax Regs. For example, sale restrictions on shares
- 16 -

of stock may affect the valuation of the shares. Shackleford v.

United States, 262 F.3d 1028, 1032 (9th Cir. 2001); Bayley v.

Commissioner, 624 F.2d 884, 885 (9th Cir. 1980), affg. 69 T.C.

234 (1977). 

Property included in an estate is valued as of the date of

the decedent’s death, and subsequent post-death events relating

to the property being valued generally are to be disregarded. 

Ithaca Trust Co. v. United States, 279 U.S. 151, 155 (1929);

Succession of McCord v. Commissioner, 461 F.3d 614, 626 (5th Cir.

2006), revg. 120 T.C. 358 (2003).

However, subsequent events which are reasonably foreseeable

as of the valuation date may be considered because they would be

foreseeable by a willing buyer and a willing seller, and they

therefore would affect the valuation of the property as of the

date of death. Saltzman v. Commissioner, 131 F.3d 87, 93 (2d

Cir. 1997), revg. T.C. Memo. 1994-641; Trust Servs. of Am., Inc.

v. United States, 885 F.2d 561, 569 (9th Cir. 1989); Morris v.

Commissioner, 761 F.2d 1195, 1201 (6th Cir. 1985), affg. T.C.

Memo. 1982-508; Estate of Gilford v. Commissioner, supra at 54.

One expert may be persuasive on a particular element of

valuation, and another expert may be persuasive on another

element. See Parker v. Commissioner, 86 T.C. 547, 562 (1986).

Consequently, a court may adopt some and reject other portions of
- 17 -

expert reports. See Helvering v. Natl. Grocery Co., 304 U.S. 282

(1938).

Comparison of Experts’ Appraisal

In this case, the experts focused primarily on four general

valuation methods to estimate the fair market value of the

estate’s 3,601,267 Reliance shares: (1) A secondary public

offering of the estate’s Reliance shares, (2) a private placement

with a third party or a sale under SEC Rule 144A (hereafter

private placement), (3) a Reliance repurchase, and (4) open

market public sales subject to the SEC Rule 144 sales restriction

(dribble out). 

Secondary Public Offering and Private Placement

Kimball and Nunes testified that for business reasons

Reliance probably would not have approved a secondary public

offering in which the estate’s Reliance shares would be sold. 

Range also acknowledged that a secondary public offering might be

unrealistic.

We agree with the experts that as of the valuation date 

Reliance probably would not have approved a secondary public

offering of the estate’s Reliance shares. Among other things, in

order to conduct a secondary public offering of the estate’s

Reliance shares, Reliance would have been required, in violation

of a confidentiality agreement, to disclose to the public the
- 18 -

pending company acquisition which was being negotiated as of the

valuation date. 

Regarding the viability of a private placement, the evidence

indicates that, other than a repurchase by Reliance, as of the

valuation date a private market for the estate’s Reliance shares

did not exist. Hannah testified, and the experts generally

agreed, that as of the valuation date there existed no strategic

investors for Reliance stock. The estate’s inability, despite

the attempt of its representatives, to locate a strategic

investor for the estate’s Reliance shares corroborates our

finding that as of the valuation date strategic investors for the

estate’s Reliance shares did not exist.

Even if a strategic investor for Reliance shares did exist,

the estate’s Reliance block represented a minority interest that

likely would not have been marketable to a strategic investor

because of industry trends towards acquisition of entire

companies. 

Further, due to the resale restrictions on the estate’s

Reliance shares, which would have been also applicable to a

purchaser of the estate’s restricted Reliance shares, an

institutional investor, because of the need to maintain liquidity

in its investments, likely would not have been interested in

purchasing the estate’s Reliance shares. 
- 19 -

We conclude that as of the valuation date a disposition of

the estate’s Reliance shares through either a secondary public

offering or a private placement was not likely.

Reliance Repurchase

In his report, Range does not discuss the foreseeability of

Reliance repurchasing the estate’s Reliance shares. 

Kimball concludes that as of the valuation date it was not

reasonably foreseeable that Reliance would repurchase any of the

estate’s Reliance shares, and he therefore does not factor a

repurchase of the estate’s Reliance shares into his valuation. 

Kimball does note that if Reliance were to repurchase the

estate’s Reliance shares, the shares would be discounted in the

same manner as if they had been sold in a private placement. 

Nunes concludes that as of the valuation date it was

reasonably foreseeable that Reliance would repurchase 50 percent

of the estate’s Reliance shares and that the discount on the

sales price for the repurchase would be 13.9 percent. Nunes does

not indicate specifically how he concludes that it was reasonably

foreseeable that 50 percent of the estate’s Reliance shares would

be repurchased. 

Nunes arrives at his 13.9-percent repurchase discount in a

two-step process. Nunes first calculates a 12.5-percent

repurchase discount based on the following: (1) For the actual

October 2000 repurchase of a significant portion of the estate’s
- 20 -

Reliance shares DLJ apparently suggested to Reliance management a

discount range of 10 to 15 percent; (2) Hannah told Nunes, and

also testified, that if on the valuation date the estate had

asked Reliance to repurchase some of the estate’s Reliance

shares, and if Reliance at that time was interested in

repurchasing the shares, Reliance management would have sought

and relied on DLJ’s advice; and (3) Reliance’s financial and

business position did not appear materially to change between the

June 2000 valuation date and the actual October 2000 repurchase

date. Based on the foregoing, Nunes assumes that on the June 5,

2000, valuation date DLJ would have suggested to Reliance the

same 10- to 15-percent discount range DLJ suggested in October of

2000. Nunes then chooses the 12.5-percent midpoint of the above

range for his repurchase price discount from the valuation date

trading price. 

Nunes’ second step in his valuation of the 50 percent of the

estate’s Reliance shares that he treats as repurchased by

Reliance involves discounting the estimated sales proceeds that

would be realized on the repurchase to account for holding costs

and the time value of money during the estimated 3-month period

after the valuation date to complete the repurchase. Nunes

calculates that the discount adjustment relating to this 3-month

period increased the repurchase discount from 12.5 percent to

13.9 percent. 
- 21 -

We agree that as of the valuation date a repurchase by

Reliance was reasonably foreseeable. Reliance’s repurchase plan

had been in place for several years. Reliance had a track record

for repurchasing a significant number of shares. Hannah, 10 days

prior to the valuation date, had stated publicly that Reliance

would favorably consider repurchasing Reliance shares at

approximately $19 a share, although Hannah did not indicate how

many shares Reliance might be willing to repurchase. We

disagree, however, that it was reasonably foreseeable that

Reliance would repurchase 50 percent of the estate’s Reliance

shares.

As of the valuation date, Reliance was negotiating a large

company acquisition which, if successful, would have required

significant cash and credit. Considering that the potential

acquisition would have stretched Reliance’s financial capacity,

we do not believe it reasonably foreseeable, as of the valuation

date, that Reliance would repurchase 50 percent of the estate’s

Reliance shares. 

Of significance also is the fact that the largest prior

Reliance repurchase was the October 1998 series of stock

repurchases totaling 646,200 shares for $11,090,017. The

repurchase of 50 percent of the estate’s Reliance shares would

have cost Reliance approximately three times as much as the

October 1998 repurchases.
- 22 -

 After evaluating the history of Reliance’s repurchases and

the valuation date financial and business conditions of Reliance,

and understanding that valuation is inherently imprecise, we

conclude that, as of the valuation date, it was reasonably

foreseeable that Reliance would be financially able and willing

to repurchase 20 percent, or 720,253, of the estate’s 3,601,267

Reliance shares.

Though we find some flaws and imprecision in both steps of

Nunes’ discount methodology, neither of the estate’s experts

provided a distinct methodology for estimating a repurchase

discount. We conclude that in this case the 13.9-percent

repurchase discount used by Nunes is appropriate to utilize in

the valuation of the 20 percent of the estate’s Reliance shares

that we conclude it was foreseeable would have been repurchased

by Reliance. 

Dribble-Out Method for the 2,881,014 Balance of Reliance Shares

We conclude that the 2,881,014 balance of the estate’s

Reliance shares should be valued under the dribble-out method.

The experts agree that, at the SEC Rule 144 rate of 277,860

shares per 3-month period, it would take 3.25 years (the dribbleout period) to liquidate the estate’s 3,601,267 Reliance shares. 

The experts, however, use different methodologies for discounting

the future sales proceeds to reflect the time value of money and

the risk that Reliance’s stock price might decrease during the
- 23 -

6 Range’s report considers only the 3,548,450 Reliance

shares held in trust. On the estate’s estate tax return,

however, the estate applies to all of the estate’s 3,601,267

Reliance shares the same discount that Range applies to the

Trusts’ 3,548,450 shares.

dribble-out period. Below we analyze the experts’ methods for

valuing the estate’s Reliance shares under the dribble-out

method.

(1) Range Report

By multiplying the estate’s Reliance shares by the $20.625

valuation date closing trading price (see supra note 5), Range

calculates the dribble-out sales proceeds for the estate’s

Reliance shares to be $73,186,781.6 Using a risk-free rate of

return, Range then discounts the $73,186,781 sales proceeds to a

$65,764,163 present value as of the June 5, 2000, valuation date. 

Range further concludes that a hypothetical investor

dribbling out the estate’s Reliance shares would purchase put

options to enable the Reliance shares to be sold at the valuation

date price throughout the dribble-out period. Range calculates a

$10,494,345 cost for put options that would allow the Reliance

shares to be sold for $20.625 a share throughout the entire

dribble-out period. Range then subtracts from his $65,764,163

present value for the estate’s dribbled out Reliance shares his

$10,494,345 estimated cost for the put options, resulting in a

net dribble-out discounted value of $55,269,818, reflecting a
- 24 -

7 Instead of including in his calculation of future value

estimated future dividends that would be paid with respect to the

estate’s Reliance shares during the dribble-out period, Range

includes estimated Reliance dividends in the pricing of the put

option contracts.

24.5-percent overall discount from the valuation date trading value.

(2) Kimball Report

By multiplying the estate’s 3,601,267 Reliance shares by the

$20.8125 valuation date trading price, Kimball calculates the

dribble-out sales proceeds of the estate’s Reliance shares to be

$74,951,369. To the $74,951,369, Kimball adds the $1,083,656 in

estimated dividends to be paid on the estate’s Reliance shares

during the dribble-out period, resulting in $76,035,025.7

Kimball then discounts the $76,035,025 to present value

using a discount factor equal to a 13.2-percent expected rate of

return on Reliance equity. Applying the 13.2-percent discount to

$76,035,025, Kimball calculates a $61,910,012 valuation date

present value for the estate’s Reliance shares, reflecting a

17.4-percent overall discount from the valuation date trading

price.

(3) Nunes Report

Under the dribble-out method, Nunes values only 1,800,364

shares (50 percent of the estate’s 3,601,267 Reliance shares

remaining after the hypothetical repurchase of 50 percent of the
- 25 -

estate’s Reliance shares). Nunes calculates $37,475,695 in gross

sales proceeds on the estate’s 1,800,364 dribble-out shares

(1,800,634 shares times $20.8125). In calculating a discount

under the dribble-out method, Nunes concludes that, in order to

protect against the risk that the price of Reliance stock might

decrease during the extended dribble-out period, a hypothetical

investor would enter into hedging contracts such as “cashless

collars” or “prepaid variable forward contracts,” which hedging

contracts Nunes estimates would cost $1,885,005. From the

$37,475,685 estimated sales proceeds for the estate’s 1,800,364

Reliance shares to be dribbled out, Nunes subtracts the

$1,885,005 estimated cost for the hedging contracts, resulting in

$35,590,680 in net sales proceeds to be realized on the estate’s

1,800,364 dribble-out Reliance shares, reflecting a 5-percent

discount from the valuation date trading value.

Nunes’ 13.9-percent discount applied to the 1,800,363

repurchased shares and the 5-percent discount applied to the

1,800,364 dribble-out shares reflect a combined 9.5-percent

overall discount from the valuation date trading value for all of

the estate’s 3,601,267 Reliance shares.

After reviewing the experts’ reports and the evidence at

trial, we conclude that the hedging contracts used by Range and

Nunes likely would not have been available for a block of stock

such as the estate’s Reliance shares. 
- 26 -

With respect to the put options used by Range in his

dribble-out analysis, we believe the testimony of Kimball that an

active market did not exist for put options on the estate’s

Reliance shares. In order for the estate to purchase put options

on its Reliance shares, the estate would have to find a party

willing to write nonstandard, nontraded put options. Even if a

writer of put options on Reliance stock could be found, the

writer would require a substantial premium due to the inability

to unwind its position by purchasing opposite call options in the

open market and due to other associated market risks.

With respect to the hedging contracts used by Nunes in his

dribble-out analysis, we believe the testimony of both Range and

Kimball that a market for such hedging contracts relating to the

estate’s Reliance shares did not exist. Cashless collars and

prepaid variable forward contracts generally are used with blocks

of stock that are highly liquid and marketable. Due to the size

of the estate’s block of Reliance shares in relation to the

outstanding Reliance shares and the SEC Rule 144 restrictions,

the estate’s Reliance shares lacked liquidity and marketability.

Because we do not agree with either Range’s or Nunes’ use of

hedging contracts and because Kimball’s approach appears to be a

reasonable and generally accepted method, we adopt Kimball’s

dribble-out methodology.
- 27 -

Due to our holding that as of the valuation date 20 percent

(or 720,253 shares) of the estate’s 3,601,267 Reliance shares

likely would be repurchased by Reliance and therefore should be

valued under that method, the dribble-out period for the estate’s

2,881,014 remaining Reliance shares (80 percent of the estate’s

3,601,267 Reliance shares remaining after the Reliance

repurchase) would be shortened from approximately 39 months to 31

months, to account for fewer (namely 2,881,014) Reliance shares

to be dribbled out.

Under Kimball’s methodology, in calculating the estimated

gross value of the dribble-out shares we multiply the 2,881,014

shares to be dribbled out by the $20.8125 valuation date trading

price ($59,961,104) and add the estimated dividends that would be

paid on the estate’s Reliance shares during the dribble-out

period ($744,031) resulting in a total gross value of

$60,705,135. Using Kimball’s 13.2 percent discount rate, the

$60,705,135 gross value would have a $51,414,274 discounted value

as of the valuation date, reflecting a 14.4-percent discount from

the valuation date trading value. 

As set forth in the schedule below, our total fair market

valuation of the estate’s 3,601,267 Reliance shares is

$64,320,892, reflecting a 14.2-percent overall discount from the

$74,951,370 valuation date trading value:
- 28 -

Court’s Fair Market Valuation of

 Estate’s 3,601,267 Reliance Shares 

Valuation

 Method 

Number of

 Shares 

Valuation Date

 Trading Value

 of Shares Discount

 Discounted

 Valuation

 Date Value

Repurchase 720,253 $14,990,266 13.9% $12,906,618

Dribble Out 2,881,014 59,961,104 14.4% 51,414,274

 Total 3,601,267 $74,951,370 14.2% $64,320,892

To reflect the foregoing,

Decision will be entered 

under Rule 155.