T.C. Memo. 1999-37

UNITED STATES TAX COURT

ESTATE OF DOROTHY B. FOOTE, DECEASED, JOHN BRUMDER AND

 CAROL COLLINS, PERSONAL REPRESENTATIVES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 621-98. Filed February 5, 1999.

 James William Callison and Jeanne M. Coleman, for 

petitioner.

Frederick J. Lockhart, Jr. and John A. Weeda, for 

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge: Respondent determined a $52,340.53 deficiency

in the Federal estate tax of the Estate of Dorothy B. Foote.

Following concessions, the sole issue for decision is the fair

market value (after application of the appropriate blockage

discount) of 280,507 shares of Applied Power, Inc. (Applied Power
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or the company) class A common stock (Applied Power stock) held by

Dorothy B. Foote's (decedent) revocable trust (the Trust) as of

November 27, 1993, the date of decedent's death. 

All section references are to the Internal Revenue Code as

amended and in effect at decedent's date of death, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulations

of facts are incorporated in our findings by this reference.

On the date of her death, November 27, 1993, decedent was a

resident of Martin County, Florida. John Brumder and Carol Collins

were duly appointed co-personal representatives of decedent's

estate. Mr. Brumder resided in Boulder, Colorado, and Ms. Collins

resided in Longmont, Colorado, at the time the petition in this

case was filed. 

The Applied Power Stock

Applied Power, incorporated in 1910, is an international

manufacturing and distribution company that supplies equipment for

various motion and position control applications to a variety of

industries, including construction, transportation, natural

resource, aerospace, and defense. Its stock is traded on the New

York Stock Exchange (NYSE).

Applied Power's operations are divided into two groups: 
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 GROUP PRODUCTS

Distributed Products

 Enerpac Hydraulic high force tools,

 production automation

components and accessories

 GB Electrical Electrical contractor tools

as well as consumable products

for electrical construction,

repair, and remodeling

 

Engineered Solutions

 Power-Packer Hydraulic actuation systems for

the transportation, medical

equipment, and agricultural

equipment markets 

 

APITECH Electrohydraulic control

valves and systems for 

automotive and mobile equipment

manufacturers

 Barry Controls Standard and customized shock,

vibration, and noise solution

components and systems

During 1993, Applied Power made the following announcements:
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 Date Announcement

Jan. 19, 1993 Applied Power completes sale of Barry

 Control's Helicopter products to Lord

 Corporation. Net cash proceeds of $2

 million.

Mar. 26, 1993 Earnings report for the second quarter

 ended Feb. 28, 1993. Net sales up 1.2%,

 net income up 4.0% for the quarter.

June 18, 1993 Earnings report for the third quarter

 ended May 31. Net sales flat, net 

 income up 8.3% for the quarter.

Aug. 10, 1993 Wright Line, Inc. (a subsidiary of

 Applied Power), sells its European 

 business to Carter-Parratt, Ltd. 

Oct. 1, 1993 Applied Power's GB Electrical unit

 acquires Palmer Industries, Inc.

 Transaction valued at approximately $2

 million.

Oct. 19, 1993 Applied Power signs contract of sale 

 for real estate at Wright Line's U.S.

 headquarters and manufacturing 

 operations for $7.5 million.

Dec. 22, 1993 Earnings report for year ended Aug. 31.

 Net sales up 0.9%, net income down

 8.8% for the year. 

From August 2, 1993, to March 15, 1994, Applied Power stock

traded as follows: 
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APPLIED POWER, INC.

NYSE Transactions--1993

 Date High Low Close Volume

08/02/93 15.75 15.5 15.625 2,900

08/03/93 15.75 15.75 15.75 2,000

08/04/93 15.875 15.875 15.875 15,900

08/05/93 16 15.875 16 20,100

08/06/93 16.125 16 16 3,900

08/09/93 16 16 16 7,600

08/10/93 16.25 16 16.125 700

08/11/93 16.125 16 16 20,200

08/12/93 16.125 16.125 16.125 400

08/13/93 16.25 16 16 34,200

08/16/93 15.875 15.75 15.75 3,900

08/17/93 16 15.75 16 9,400

08/18/93 16.25 16 16.25 1,700

08/19/93 16.25 16.125 16.25 6,300

08/20/93 16.75 16.5 16.75 3,500

08/23/93 16.875 16.75 16.75 2,000

08/24/93 17 16.75 17 30,400

08/25/93 17 17 17 5,000

08/26/93 16.875 16.75 16.75 5,400

08/27/93 16.75 16.75 16.75 1,200

08/30/93 16.75 16.75 16.75 1,600

08/31/93 17 16.75 16.875 7,300

09/01/93 17.125 16.875 17.125 700

09/02/93 17.375 17 17.25 50,400

09/03/93 17 16.875 16.875 1,300

09/07/93 17 16.875 17 1,700

09/08/93 16.875 16.875 16.875 4,200

09/09/93 17 16.875 17 4,900

09/10/93 16.875 16.875 16.875 2,600

09/13/93 16.875 16.875 16.875 17,400

09/14/93 17.125 16.875 17 900

09/15/93 17 17 17 300

09/16/93 17.125 17 17 3,400

09/17/93 17.25 16.875 17 2,800

09/20/93 17.25 17 17.125 7,000

09/21/93 17.375 17.25 17.25 700

09/22/93 17.375 17.25 17.375 4,500

09/24/93 17.75 17.5 17.75 8,200

09/27/93 18 17.5 18 1,500

09/28/93 18 17.875 18 6,300

09/29/93 18 18 18 900

09/30/93 18.125 17.875 18.125 4,400

10/01/93 18.25 18 18.25 800

10/04/93 18 17.75 17.75 2,200

10/05/93 17.625 17.625 17.625 900

10/07/93 17.5 17.5 17.5 2,700
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 Date High Low Close Volume

10/08/93 17.5 17.5 17.5 700

10/11/93 17.5 17.5 17.5 100

10/12/93 17.5 17.5 17.5 300

10/13/93 17.5 17.5 17.5 2,700

10/14/93 17.875 17.5 17.875 26,100

10/15/93 17.75 17.75 17.75 3,600

10/18/93 17.75 17.75 17.75 100

10/19/93 18 17.75 18 3,500

10/20/93 17.75 17.625 17.625 1,400

10/21/93 17.625 17.5 17.5 800

10/22/93 17.5 17.375 17.5 700

10/25/93 17.5 17.375 17.375 6,800

10/26/93 17.5 17.375 17.375 34,600

10/27/93 17.25 16.875 16.875 6,500

11/01/93 16.875 16.5 16.5 19,400

11/02/93 16.5 16.375 16.375 7,100

11/03/93 16.25 16 16 6,200

11/04/93 15.875 15.75 15.875 1,200

11/05/93 15.625 15.625 15.625 1,100

11/08/93 15.875 15.75 15.75 5,300

11/09/93 15.75 15.5 15.5 10,400

11/10/93 15.625 15.5 15.5 800

11/11/93 15.375 15.375 15.375 300

11/12/93 15.5 15.375 15.5 11,100

11/15/93 15.375 15.125 15.25 4,200

11/16/93 15 14.75 14.75 18,600

11/17/93 14.75 14.5 14.5 15,100

11/18/93 15.125 14.75 14.875 9,100

11/19/93 15.125 14.75 15.125 8,300

11/22/93 15.25 14.875 15.25 11,800

11/23/93 15.375 15 15.125 77,000

11/24/93 15 15 15 800

11/29/93 15.25 15 15 15,900

11/30/93 15.375 15 15 6,400

12/01/93 15.125 14.625 14.625 52,100

12/02/93 14.875 14.625 14.75 2,800

12/03/93 15 14.875 15 13,700

12/06/93 15.125 15 15 6,500

12/07/93 15 15 15 300

12/08/93 15.625 15.25 15.625 4,600

12/09/93 15.625 15.5 15.625 2,000

12/10/93 15.75 15.5 15.625 2,100

12/13/93 15.875 15.875 15.875 600

12/14/93 15.875 15.75 15.75 2,100

12/15/93 15.75 15.625 15.625 3,000

12/16/93 16 15.625 16 10,200

12/17/93 16.5 16.25 16.5 5,000

12/20/93 16.625 16.25 16.625 18,400

12/21/93 16.5 16.5 16.5 400
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 Date High Low Close Volume

12/22/93 16.25 15.625 15.625 23,700

12/23/93 15.75 15.5 15.75 3,100

12/27/93 16.25 16 16.125 1,500

12/28/93 16.5 16 16.5 15,900

12/29/93 16.5 16.125 16.5 2,900

12/30/93 16.25 16.25 16.25 1,000

12/31/93 16.25 16.25 16.25 900

APPLIED POWER, INC.

NYSE Transactions--1994

 Date High Low Close Volume

01/03/94 16.5 16.25 16.25 10,000

01/04/94 16.5 16.5 16.5 600

01/05/94 16.625 16.375 16.625 2,500

01/06/94 16.5 16.5 16.5 1,700

01/07/94 17 16.375 17 7,400

01/10/94 16.75 16.625 16.625 500

01/11/94 17.375 16.875 17.375 16,200

01/12/94 17.5 17.375 17.375 9,800

01/13/94 17.625 17.25 17.375 10,200

01/14/94 17.375 17.25 17.25 1,500

01/17/94 17.25 17.25 17.25 1,000

01/18/94 17.25 17.25 17.25 8,100

01/19/94 18.125 17.25 18.125 8,600

01/20/94 18.375 18.125 18.25 5,500

01/21/94 18.25 18.25 18.25 12,700

01/24/94 18.25 18.25 18.25 2,900

01/25/94 18.25 18.25 18.25 10,700

01/26/94 18.5 18.375 18.375 6,000

01/27/94 18.375 18.25 18.375 1,900

01/28/94 18.625 18.5 18.5 83,000

01/31/94 18.875 18.625 18.875 14,100

02/01/94 18.625 18.375 18.625 12,800

02/02/94 18.5 18.375 18.375 13,900

02/03/94 18.625 18.25 18.625 5,100

02/04/94 18.375 18 18.375 16,900

02/07/94 18.125 18 18.125 9,200

02/08/94 18.125 18.125 18.125 400

02/09/94 18.5 18.375 18.5 1,400

02/10/94 18.75 18.625 18.625 14,600

02/11/94 18.5 18.5 18.5 2,100

02/14/94 18.875 18.375 18.75 83,200

02/15/94 18.625 18.625 18.625 2,300

02/16/94 19.125 18.5 19.125 26,700

02/17/94 19.25 19 19.125 256,400

02/18/94 19.375 19 19.125 4,900
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 Date High Low Close Volume

02/22/94 19.375 19.125 19.125 40,800

02/23/94 19 19 19 400

02/24/94 19.125 18.875 18.875 11,200

02/25/94 18.875 18.375 18.375 6,700

02/28/94 18.625 18.375 18.625 600

03/01/94 18.5 18.25 18.375 2,700

03/02/94 18.125 17.625 17.625 3,500

03/03/94 17.5 17 17 3,800

03/04/94 16.875 16.375 16.5 10,600

03/07/94 17.5 16.75 17.5 14,600

03/08/94 18 18 18 4,900

03/09/94 18 17.75 18 5,500

03/10/94 18.375 18.125 18.25 2,300

03/11/94 19.875 18.75 19.625 75,700

03/14/94 19.875 19.25 19.75 129,100

03/15/94 20 19.75 19.875 59,900

At the date of decedent's death (November 27, 1993), the Trust

held, among other assets, 280,507 shares of Applied Power common

stock, constituting approximately 2.2 percent of that class of

outstanding stock (13,013,116 shares). 

Shares of Applied Power stock did not trade on the date of

decedent's death. The average of the mean trading prices of

Applied Power stock for the last trading day preceding decedent's

death, November 24, 1993, and for the first trading day following

decedent's death, November 29, 1993, was $15.125 per share. Thus,

based on a valuation of $15.125 per share, the value of the 280,507

shares of stock in issue was $4,242,668, before any blockage

discount. 

Research Reports

Robert W. Baird & Co., Inc. (Baird), an investment banking

firm located in Milwaukee, Wisconsin, followed Applied Power. On

April 2, 1993, Baird issued a research note (the Baird April
- 9 -

1 The Baird April report listed four categories of

positive restructuring moves made by Applied Power during the

previous 18 months: Staffing reductions; consolidation of

marketing and management; discontinuance of a relatively

unproductive business product line; and the strengthening of

senior management. 

report) which stated that after 18 months of restructuring1 Applied

Power was "poised to benefit from an economic recovery in its end

markets" but that "difficult European and Asian markets will likely

keep a lid on stock performance until fiscal 1994." In its April

report, Baird rated the stock of Applied Power (on a scale of 1 to

4) as a "Hold-3, higher risk", meaning a recommendation to hold the

stock. 

On June 18, 1993, Baird issued another research note (the

Baird June report) on Applied Power. Baird maintained its Hold-3

rating for Applied Power's stock, but the report noted that Applied

Power's third quarter earnings would exceed Baird's prior estimate.

The report also discussed positive developments for several of the

Applied Power operating divisions. Although cautious with respect

to earnings for the remainder of fiscal 1993 and for the first half

of fiscal 1994, the Baird June report projected that Applied Power

would have significant operating leverage and sharply higher

earnings once its European sales grew. 

Standard & Poor's Corp. issued an October 20, 1993, stock

report on Applied Power, giving the stock a B+ ranking. This

report noted Applied Power's increased earnings for the first 9

months of 1993, despite a weakness in worldwide economies. The
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2 The research note stated in pertinent part:

current business trends are still weak, not

yet suggesting annual top-line growth of even

2-3%. Given that the first quarter will most

likely fall short of consensus estimates of

$0.25-$0.26 and the lack of visibility as to

any meaningful recovery, we are reducing our

fiscal year 1994 earnings estimate to $1.15

and maintaining our Hold-3 rating.

 * * * * * * *

Quite simply, Applied Power will not recover

until Europe and Japan improve, and Aerospace

markets at least stabilize. Applied Power is

hoping for stability in Europe and Japan by

the end of this year, but sees substantial

recovery postponed until the 1995-96 period. 

Thus, Applied Power, while not extremely

expensive, is not a compelling value. While

the time to buy Applied Power will occur

before these recoveries actually begin, it

remains too early.

report also noted slightly increased sales for the first 9 months

of Applied Power's 1993 fiscal year and higher pretax income. 

On November 19, 1993, Baird issued another research note on

Applied Power (the Baird November report), captioned "Story

Improving, But Earnings Aren't". This report gave a rating of

"Hold-3, higher risk" (again, a recommendation to hold the stock)

for the Applied Power stock.2 The Baird November report stated

"Positive Developments Are Emerging" and cited six points as "good

news" to support a belief that "Applied Power will see its day." 

On January 4, 1994, Baird issued yet another research note

(the Baird January report) for Applied Power, raising Applied

Power's stock's rating to a "Buy-2" rating. 
- 11 -

Financial Review

The portion captioned "Management's Discussion and Analysis of

Results of Operations and Financial Condition" of Applied Power's

Form 10-Q (filed with the Securities and Exchange Commission) for

the quarter ended November 30, 1993, states:

RESULTS OF CONTINUING OPERATIONS (Dollars are

in thousands except for per share amounts)

Net earnings for the first quarter were

$2,580, or $0.20 per share, compared to a loss

of $1,048, or $0.08 per share in the prior

year, which included a $4,355 charge for the

cumulative effect of adopting a new accounting

pronouncement for postretirement benefits.

Earnings before accounting changes for the

first quarter of fiscal 1994 were $2,580, or

$0.20 per share, compared to $3,307, or $.25

per share, for the same period last year. 

Sales for the first quarter of fiscal 1994

were $91,097, down slightly from $91,721

reported in the same quarter last year. Due

to poor economic conditions, results at the

Company's operations in Europe and Japan were

weak, with sales declines from last year of

11% and 2%, respectively. Sales in North

America increased 4% over last year.

Sales increases were recorded at GB

Electrical, Power-Packer, and APITECH of 15%,

8% and 100%, respectively. Due to poor

economic conditions in Europe and Japan,

Enerpac sales declined 7% from last year.

First quarter sales at Barry Controls were

lower than the comparable period last year due

to reduced demand from aircraft manufacturers,

as well as the sale of the helicopter product

line in the second quarter of fiscal 1993.

The Company's overall gross profit margin

declined from 37.8% in the first quarter of

fiscal 1993 to 37.2% in the most recent

quarter, reflecting an unfavorable shift in

product mix.
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Operating expenses for the first quarter of

fiscal 1994 were approximately equal with

those in the comparable period last year.

Increased engineering costs related to product

development and prototypes at Barry Controls

and Power-Packer were offset by operating

efficiencies realized as a result of fiscal

1993 restructuring of Barry Controls.

Interest expense declined from the first

quarter of fiscal 1993 due to reductions in

outstanding indebtedness and lower market

interest rates.

Other-net operating expenses in fiscal 1993

included certain non-recurring gains.

A $4,355 net charge was recorded in the

quarter ended November 30, 1992 to reflect the

Company's adoption of SFAS No. 106 -

"Employers' Accounting for Postretirement

Benefits Other Than Pensions".

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $1,546 at

November 30, 1993 and $939 at August 31, 1993.

In order to minimize interest expense, the

Company intentionally maintains low cash

balances and uses available cash to reduce

short-term bank borrowings.

After considering non-cash items and changes

in operating assets and liabilities, the

Company generated $2,979 of cash in operating

activities in the first three months of fiscal

1994, compared with $(43) in the comparable

prior year period. Earnings of $2,580,

coupled with non-cash items of $4,014,

generated $6,594 of cash in the most recent

quarter. However, income tax payments

partially offset this cash generation.

The Company used $3,771 of cash in investing

activities in the first quarter of fiscal

1994, the majority of which was utilized for

capital expenditures and the acquisition of

Palmer Industries.

Debt was reduced from $117,931 at August 31,

1993 to $112,422 at November 30, 1993,
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primarily reflecting the application of the

Datafile sale proceeds against outstanding

indebtedness.

The Company's revolving credit agreements

expire within the next twelve months.

Accordingly, all outstanding indebtedness

under such agreements has been included in

"Current maturities of long-term debt" in the

Condensed Consolidated Balance Sheet. The

Company anticipates either extending these

agreements or entering into new facilities

prior to their expiration.

The Company anticipates that funds generated

from operations and available under short and

long-term credit facilities will be adequate

to meet anticipated requirements for the

foreseeable future.

Postdeath Events

At the beginning of calendar year 1994, Bank One Wisconsin

Trust Co. (Bank One) was requested to explore the possibility of

selling one or more blocks of the Applied Power stock held by the

Trust to one or more investors (as had been discussed by the

trustees at a December 1993 meeting), and to propose a plan for

selling any remaining shares on the open market in a manner that

would have a minimal adverse pricing effect. 

On February 17, 1994, Bank One, on behalf of the Trust, sold

200,000 shares of the Trust's block of Applied Power stock at a

price of $19 per share. The shares were sold through Cantor

Fitzgerald & Co. in one or more negotiated trade or trades. The

transaction results were reported on the NYSE. (The reported NYSE

high and low trading quotes for Applied Power on February 17, 1994,

were $19.25 per share and $19 per share, respectively.) 
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3 The table below summarizes the Trust's 1994 sales of its

Applied Power shares:

 

 

 Applied Price Previous 

Trade Total Shares Per Day 

Date Volume Sold Share High Low Close Close

2/17 256,400 200,000 $19.000 $19.250 $19.000 $19.125 $19.125

2/22 40,800 40,000 19.250 19.375 19.125 19.125 19.125

3/11 76,200 40,507 19.500 19.875 18.750 19.625 18.250

On February 22, 1994, Bank One, on behalf of the Trust, sold

an additional 40,000 shares of the Trust's block of Applied Power

stock at $19.25 per share through Jefferies & Co., Inc.

(Jefferies), in one or more negotiated trade or trades. The

transaction results were reported on the NYSE. (The reported NYSE

high and low trading quotes for Applied Power on February 22, 1994,

were $19.375 per share and $19.125 per share, respectively.) 

On March 11, 1994, Bank One, on behalf of the Trust, sold the

balance of the Trust's block of stock (40,507 shares) at $19.50 per

share through Jefferies, in one or more negotiated trade or trades.

The transaction results were reported on the NYSE. (The reported

NYSE high and low trading quotes for Applied Power on March 11,

1994, were $19.875 per share and $18.75 per share, respectively.3)

Estate Tax Return, Notice of Deficiency, and Petition

On Schedule G of its estate tax return (filed November 8,

1994), petitioner valued the 280,507 Applied Power shares in

question as of decedent's date of death at $4,020,600.24, or

$14.333 per share, claiming a blockage discount of $0.792 per
- 15 -

4 The return stated the discount to be 75 cents per

share.

share4 (representing a 5.24-percent discount from the mean between

the highest and lowest quoted selling prices). Neither an appraisal

nor supporting documentation was attached to the estate tax return

to support the selected blockage discount. 

In connection with an Internal Revenue Service (IRS)

examination of petitioner's tax return, the estate submitted to the

IRS a January 24, 1996, appraisal prepared by Baird's John D. Emory

(the Emory report) which concluded that an 8-percent blockage

discount was appropriate (or a fair market value for the stock of

$13.915 per share). 

The estate also submitted an appraisal report prepared on July

7, 1997, by Robert E. Kleeman, Jr., of Clifton Gunderson, L.L.C.,

a certified public accounting and consulting firm (the July 1997

Kleeman report), which concluded that a 22.5-percent discount was

appropriate (or a fair market value for the stock of $11.72 per

share). Mr. Kleeman arrived at this conclusion, in part, by

selecting 18 reported blockage discount Tax Court cases which he

determined to be "factually similar to the matter under

discussion". The discounts in the selected cases ranged from 8.1

percent to 52.9 percent. The average or mean discount was 26

percent, and the median discount was 19 percent. Mr. Kleeman

averaged the mean and median discount to arrive at the 22.5-percent

discount. (In obtaining the average discount, Mr. Kleeman equally

weighted the discount allowed in each of his selected cases. In
- 16 -

obtaining the median discount, he selected a value such that half

the discounts in his selected cases fell above that value and half

below.) 

In the notice of deficiency mailed on October 15, 1997,

respondent determined, in pertinent part, that the reported value

of the Applied Power stock owned by the Trust was understated.

Respondent determined that the blockage discount should be $0.125

per share (representing a 0.83-percent discount from the mean

between the highest and lowest quoted selling prices applicable to

the date of death) rather than $0.792 per share as claimed by the

estate on the return. 

 On October 29, 1997, the estate's co-personal representatives

filed an amended estate tax return requesting a refund (on Form

843) of $352,799.99, in light of the Emory and July 1997 Kleeman

reports. The personal representatives determined that the fair

market value for the 280,507 shares in issue was $3,288,000, based

on an $11.72 per-share valuation. In reaching this valuation, the

personal representatives determined that a $3.405 per-share

blockage discount (representing a 22.5-percent discount from the

mean between the highest and lowest quoted selling prices

applicable to the date of death) was appropriate. The July 1997

Kleeman report was attached to the amended return in order to

substantiate the estate's position. 

ULTIMATE FINDING OF FACT

The value of the Trust's 280,507 shares of common stock on the

valuation date was $4,102,414.88, or $14.625 per share. This
- 17 -

conclusion is based upon the stock's having a per-share date-ofdeath fair market value of $15.125, before application of a 50-

cent-per-share (or a 3.3-percent) blockage discount.

OPINION

The fundamental issue involved herein concerns the appropriate

blockage discount, if any, to be used in valuing the 280,507 shares

at issue on the date of decedent's death. Petitioner maintains

that a 22.5-percent blockage discount is in order, whereas

respondent contends (in the Answer to the petition and in

respondent's posttrial brief) that no blockage discount is

appropriate, but if one is, then the amount of the discount should

not exceed 3.3 percent. 

We begin our task by reiterating several well-established and

often-stated principles. First, in valuing property for estate tax

purposes the standard for valuation is fair market value, which is

defined as "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 reasonable

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

U.S. 546, 551 (1973); Collins v. Commissioner, 3 F.3d 625, 633 (2d

Cir. 1993), affg. T.C. Memo. 1992-478; sec. 20.2031-1(b), Estate

Tax Regs. Second, where shares of stock are the property being

valued, we look to whether the stock is publicly traded. If it is,

then: (1) The price at which the stock is sold on a stock exchange

or on the over-the-counter market generally is the best evidence of

the stock's value, Dellacroce v. Commissioner, 83 T.C. 269, 288
- 18 -

5 Determining a reasonable period of time "depends on all

the facts and circumstances". Estate of Sawade v. Commissioner,

T.C. Memo. 1984-626, affd. 795 F.2d 45 (8th Cir. 1986). Periods

of up to a year have been found to be reasonable, id., although

the periods may be much shorter if factors such as market

volatility and time limitations so dictate, see, e.g., Du Pont v.

Commissioner, 2 T.C. 246 (1943); Estate of Sawade v.

Commissioner, supra. 

(1984); Estate of Damon v. Commissioner, 49 T.C. 108, 115 (1967);

sec. 20.2031-2(b)(1), Estate Tax Regs.; and (2) the stock's fair

market value is the mean between the highest and lowest quoted

selling prices on the valuation date, sec. 20.2031-2(b), Estate Tax

Regs. However, if as here no sales occurred on the valuation date,

fair market value is determined by taking a weighted average of the

means between the highest and lowest sales on the nearest dates

before and after the valuation date. Sec. 20.2031-2(b), Estate Tax

Regs. (Here, the parties have stipulated that the weighted average

mean per-share market price of the stock being valued is $15.125.)

Third, where a block of stock could not have been sold on the

valuation date (or within a reasonable period5 thereafter) without

affecting market price, a "blockage" discount is appropriate.

Richardson v. Commissioner, 151 F.2d 102, 103 (2d Cir. 1945), affg.

a Memorandum Opinion of this Court. In this regard, section

20.2031-2(e), Estate Tax Regs., provides in pertinent part: 
- 19 -

In certain exceptional cases, the size of the

block of stock to be valued in relation to the

number of shares changing hands in sales may be

relevant in determining whether selling prices

reflect the fair market value of the block of

stock to be valued. If the executor can show

that the block of stock to be valued is so

large in relation to the actual sales on the

existing market that it could not be liquidated

in a reasonable time without depressing the

market, the price at which the block could be

sold as such outside the usual market, as

through an underwriter, may be a more accurate

indication of value than market quotations. *

* *

This regulation further states that complete data and support of

any blockage discount must be submitted with a taxpayer's return.

There is no presumption of blockage. Maytag v. Commissioner,

187 F.2d 962 (10th Cir. 1951), affg. a Memorandum Opinion of this

Court. Petitioner bears the burden of proof in this regard.

Rushton v. Commissioner, 498 F.2d 88, 94 (5th Cir. 1974), affg. 60

T.C. 272 (1973); Maytag v. Commissioner, supra. "Blockage is not a

rule of law, but a question of fact. If the price obtainable for

a block of stock is influenced by the size of the block, the

existence and extent of this influence must be proven." Estate of

Christie v. Commissioner, T.C. Memo. 1974-95; see Estate of Damon

v. Commissioner, supra at 117. Several factors are helpful in

determining the size of an appropriate blockage discount: The mean

market quotation for the security on the valuation date, the size

of the block in relation to the total outstanding stock, the

trading activity in the stock on or near the valuation date, the

depth and trend of the market for the security, and the market
- 20 -

depth and trend as a whole (measured at and after the valuation

date). See, e.g., Estate of Christie v. Commissioner, supra.

With the foregoing in mind, the stage is now set for our

consideration of the expert opinions offered by each of the parties

in support of their respective positions as to the blockage

discount to be herein applied. 

Petitioner's Expert

 Mr. Kleeman (the individual who wrote a July 1997 report

discussed supra p. 15) was petitioner's expert witness. He has an

undergraduate degree in accounting, is a licensed certified public

accountant, and heads the business valuation practice of the

accounting firm of Clifton Gunderson, L.L.C. At the time of trial,

he held three business valuation designations (one each from the

American Institute of Certified Public Accountants, the American

Society of Appraisers, and the National Association of Certified

Valuation Analysts). 

Practically all of the 60 to 80 business valuation assignments

Mr. Kleeman prepares or reviews every year consist of valuations

concerning closely held companies. In addition to the work he

performed for petitioner, Mr. Kleeman participated in a few other

assignments involving the application of the blockage discount in

determining the value of publicly traded stock. 

Mr. Kleeman prepared his September 1998 report for purposes of

this trial. He therein concluded that a 22.5-percent blockage

discount was appropriate in valuing the stock at issue, resulting

in a valuation of $11.72 per share or total of $3,288,000 for all
- 21 -

the stock at issue. In preparing his September 1998 report, Mr.

Kleeman relied on public information available before the date of

decedent's death, such as the April, June, and November Baird

reports, the Form 10-Q filed by Applied Power with the Securities

and Exchange Commission for the quarter ended November 30, 1993,

the trading prices and volumes of Applied Power's stock, and the

relative size of the Trust's block of stock to the total issued and

outstanding stock of Applied Power. In preparing his report, Mr.

Kleeman also considered the Emory report, the post-date-of-death

sales of the block at issue, and a select group of reported

blockage discount cases. 

Mr. Kleeman prepared a linear regression analysis of the

stock's trading volume and prices leading up to the valuation date

in order to forecast how the Trust might best sell its stock

without seriously depressing the market. He concluded that the

Trust could not dispose of its block of stock over a reasonable

period of time without depressing the stock's market price. He

assumed that disposal of the 280,507 shares of stock would have to

occur over a period of 40 days, in 7,000-share-per-day increments

(i.e., twice the average daily trading volumes for November and

December 1993), and that these sales would result in a price

decline of approximately 9 cents per day. Using these assumptions,

he determined that the present value of proceeds from the

transactions would be approximately $3,288,000, or $11.72 per

share. 
- 22 -

6 As an investment banker (with over 21 years

experience), Mr. Davis' work is primarily performed in three

areas: (1) Raising capital through public offerings and private

placements; (2) representing buyers and sellers of companies in

mergers and acquisitions; and (3) providing financial advisory

services, valuations, and expert testimony in investment banking

transactions. 

Respondent's Expert

Respondent's expert, Richard L. Davis, a chartered financial

analyst, is the managing director and senior vice president of the

corporate finance department of Southwest Securities, Inc., an

investment banking firm6 and a member of the NYSE. Mr. Davis has

a master's degree in business administration, concentrating in

finance. The majority of Mr. Davis' assignments over the years

have involved securities of publicly traded companies or publicly

traded issues of privately held or previously privately held

companies.

 Mr. Davis opined that a 3.3-percent blockage discount is

appropriate. When applied to the agreed $15.125 per-share price

(the weighted average mean per-share market price of the stock),

the 3.3-percent blockage discount results in a $14.625 per-share

valuation or a $4,102,414.88 total value. 

Mr. Davis determined that market activity in the Applied Power

stock on or about the valuation date was free from abnormal factors

and influences; thus, he concluded that the trading prices for

Applied Power's stock were representative of the stock's fair

market value. Mr. Davis felt that this conclusion was buttressed

by the fact that ultimately most of the Trust's Applied Power stock
- 23 -

(240,000 of the 280,507 shares) was sold within 90 days of the date

of decedent's death at prices which did not depress the previous

day's trading price for the stock. He further found support for

his 3.3-percent blockage discount conclusion in the fact that all

the shares were sold within approximately 110 days after the date

of decedent's death at prices somewhat higher than the price before

decedent's death. 

Mr. Davis considered the following factors in arriving at his

conclusion: (1) The shares at issue represented 2.2 percent of the

total shares outstanding; (2) relative to Applied Power's daily

trading volume, the size of the Trust's block represented the

number of Applied Power's shares traded during an average 29-day

period during 1993; (3) there were no resale restrictions on the

block; (4) there was moderate volatility with a flat or stable

stock price trend; (5) the size of the trading "float" of the stock

(90 percent of the shares outstanding); (6) the general stock

market trend (which was stable to moderately rising) in 1993; (7)

the stock in issue traded on NYSE; (8) the most recent projected

earnings trend of the company (which was moderately upward); (9)

the market price performance of the stock vis-a-vis the general

stock market; (10) Applied Power's dividend-paying record; (11) the

current outlook for the company; (12) U.S. economic trends; (13)

the number of Applied Power shareholders (558 as of October 31,

1993), including institutions (30); (14) the percentage (60

percent) of institutional ownership of the shares of Applied Power;

and (15) the stock was a marginable security. 
- 24 -

7 The following table demonstrates the market

"acceptability" on each of the 8 days during 1993 on which more

than 50,000 shares of Applied Power common stock were traded:

 

 Previous Price Price

 Day Dollar Percent

Date Volume High Low Close Close Change Change 

2/25 62,600 $17.750 $17.500 $17.625 $17.875 ($0.250) -1.4%

3/11 56,600 17.625 17.375 17.500 17.375 0.125 0.7

4/08 57,300 17.750 17.500 17.625 17.625 --- 0.0

5/04 99,400 17.250 16.750 17.250 17.000 0.250 1.5

5/12 104,000 16.875 16.625 16.625 16.875 (0.250) -1.5

9/02 50,400 17.375 17.000 17.250 17.125 0.125 0.7

11/23 77,000 15.375 15.000 15.125 15.250 (0.125) -0.8

12/01 52,100 15.125 14.625 14.625 15.000 (0.375) -2.5

 

In determining the blockage discount to be accorded to the

Trust's stock, Mr. Davis tabulated statistics involving 8 days in

1993 where more than 50,000 shares of Applied Power stock were

traded,7 comparing the closing price on each of those days with the

previous day's close, and noting that the largest down tick trading

day was 2.5 percent while for one of the largest trading volume

days there was an up tick of 1.5 percent. 

Mr. Davis stated that taken together, the following factors

substantiate his conclusion: (1) The close proximity of the sale

of all of the Trust's stock (within 3-1/2 months of the valuation

date); (2) the number of days (only 3) taken to accomplish the

disposal of all of the Trust's stock; and (3) the apparent ease of

the sale of all the Trust's stock and lack of disruption in the

market price of Applied Power stock. 
- 25 -

Concluding, Mr. Davis opined that the sale of the Trust's

block of Applied Power stock, when added to the supply of shares

regularly coming on the market at the time of decedent's death,

would have only a moderately depressing effect on the normal

pricing of the shares, making appropriate a 3.3-percent blockage

discount. 

Rebuttals

Mr. Kleeman believed that Mr. Davis' 3.3-percent blockage

discount conclusion is based virtually exclusively on information

that became available (and events that occurred) after the

valuation date and that such postdate information and events were

not foreseeable as of the valuation date. In Mr. Kleeman's

opinion, the economic conditions leading to the Trust's 1994 sales

were significantly different than the conditions existing as of the

date of decedent's death, and were not reasonably foreseeable at

that time (i.e., the upgrading of its rating of Applied Power

stock from a "Hold-3" to a "Buy-2" rating by Baird in January 1994.

Further, Mr. Kleeman noted that 8 days before decedent's death,

Baird had rated Applied Power stock as a "higher risk".) 

Respondent counters Mr. Kleeman's criticism by pointing to Mr.

Kleeman's own September 1998 report and testimony, which according

to respondent show that Mr. Kleeman arrived at his 22.5-percent

discount figure by performing a price trend analysis for the

Applied Power stock and projecting that trend forward to a postdate-of-death absorption period. Respondent further asserts that

in preparing his "regression analysis", Mr. Kleeman made several
- 26 -

erroneous assumptions (i.e., the Applied Power stock would not be

absorbed by the market at a volume greater than twice the stock's

average daily trading volume for the months of November and

December 1993, and the price trend for the Applied Power stock for

the 40 trading days preceding the valuation date should be

projected forward to the 40 trading days following the valuation

date). 

Respondent complains that to a large extent, Mr. Kleeman's

calculation of a 22.5-percent blockage discount was determined by

using 18 selected blockage discount tax cases. We also find fault

with this approach. Each case is different, and the determination

of a blockage discount, if any, depends upon the particular facts

and circumstances involved. In obtaining the average discount from

these cases, Mr. Kleeman weighted the discount allowed in each

equally; and in obtaining the median discount for the stock of

Applied Power, he selected a value such that half the discounts in

his selected cases fell above that value and half below. 

Responding to Mr. Kleeman's criticism of his report, Mr. Davis

maintained that he (Mr. Davis) arrived at a 3.3-percent blockage

discount primarily by considering events occurring before the date

of death. Moreover, Mr. Davis maintained that he did not arrive at

his blockage discount conclusion by considering post-valuation date

sales, but rather used those sales to substantiate his conclusion.

Court's Analysis and Conclusion

Giving due consideration to the totality of the evidence

before us, we find Mr. Davis' report to be more reliable than that
- 27 -

of Mr. Kleeman. We agree with, and therefore accept, Mr. Davis'

analysis. We do so for the following reasons:

First, Mr. Davis properly considered the relevant factors: (1)

The relative size of the Trust's block of stock in relationship to

the number of shares of stock outstanding, (2) the ownership of

other blocks of stock, (3) current and historical trading volumes

of shares of Applied Power stock, and (4) recent company-specific

events. Mr. Davis also reviewed general economic conditions and

securities market trends and sentiment. 

Second, in determining the size of the blockage discount to be

applied, Mr. Davis tabulated information relating to eight 50,000-

share-plus-trading days of Applied Power common stock in 1993,

comparing the stock's closing price on each of those days with its

previous day's closing price, and noted that the largest down tick

trading day was 2.5 percent, whereas on one of the largest trading

volume days there was an up tick of 1.5 percent. On the basis of

this comparison, Mr. Davis concluded that only a modest blockage

discount would be appropriate. 

We are mindful that as a general rule only facts known at the

valuation date are considered in determining the property's value.

However, subsequent market activities may provide helpful

comparable sales. See Estate of Newhouse v. Commissioner, 94 T.C.

193, 218 n.15 (1990). Here, we believe the three sales by the

Trust within 3-1/2 months of decedent's death to be relevant and

reasonably proximate to the valuation date. This 3-1/2-month
- 28 -

period was, in our opinion, a reasonable period of time following

the valuation date.

Petitioner failed to show that the market price of the stock

on the valuation date was an inaccurate reflection of the true

value of the Trust's block of stock. The relative size of the block

of stock at issue in relation to the amount of Applied Power stock

outstanding, plus the monthly and yearly trading volumes for the

stock of Applied Power, plus the fact that the entire block of

stock was sold within an acceptable period of time after the

valuation date (and on 3 trading days) suggest that only a minimal

blockage discount is warranted. In our opinion, the depressing

effect on the market of the Trust's sale of its stock is not

commensurate with the 22.5-percent blockage discount estimate of

Mr. Kleeman.

To summarize, we conclude that a 50-cent-per-share or 3.3-

percent blockage discount (as advocated by Mr. Davis) is warranted

herein. Thus, the value of petitioner's 280,507 Applied Power

common stock on the valuation date was $4,102,414.88, or $14.625

per share. 

To reflect concessions and to permit petitioner to claim

additional administrative expenses pursuant to section 2053, 

 Decision will be entered

 under Rule 155.