Source: https://casetext.com/case/estate-of-blount-v-cir
Timestamp: 2019-03-26 12:40:54
Document Index: 13234755

Matched Legal Cases: ['§ 11602', '§ 2703', '§ 25', '§ 2703', '§ 25', '§ 2703', '§ 25', '§ 20']

Estate of Blount v. C.I.R, 428 F.3d 1338 | Casetext
Estate of Blount v. C.I.R
428 F.3d 1338 (11th Cir. 2005)
Estate of Blountv.C.I.R
United States Court of Appeals, Eleventh CircuitOct 31, 2005
No. 04-15013.
Sara Lynn Doyle, R. Douglas Wright, Alfred B. Adams, III, Holland Knight, LLP, Atlanta, GA, for Petitioner-Appellant.
In the early 1990s, BCC purchased insurance policies solely for the purpose of ensuring that the business could continue operations, while fulfilling its commitments to purchase stock under the agreement. These policies would provide roughly $3 million, respectively, for the repurchasing of Jennings and Blount's stock. In 1992, BCC also began an employee stock ownership program ("ESOP") to which the company made annual contributions, either by purchasing stock from Blount and Jennings or by new issuances. Annual valuations were completed by a third party to facilitate the ESOP purchases. For example, as of January 1995, BCC was valued at roughly $7.9 million.
For purposes of this opinion, we round the relevant numbers. We defer to the factual findings of the Tax Court for the establishment of share values to four decimal places and the accurate breakdown of dollars and cents. See Estate of Blount v. Comm'r, 87 T.C.M. 1303, 2004 WL 1059517 (2004).
In November 1996, Blount executed an amendment to the 1981 stock-purchase agreement that bound himself and BCC to exchange $4 million for the shares that Blount owned at his death. The 1996 agreement was substantially similar to the subsection in the 1981 agreement regarding the purchase of shares upon the death of the holder. Unlike the 1981 agreement, however, the 1996 agreement did not provide for future price adjustments in accordance with book value, which functionally locked the price at the January 1996 value of BCC. The 1996 agreement also differed from the 1981 agreement by removing the ability of BCC to pay its obligation in installments.
The Tax Court noted that Blount realized that he was undervaluing his shares by a third. See Estate of Blount, 87 T.C.M. at 1307. The court observed that Blount "was aware when he signed the 1996 agreement setting the price for his shares at $4 million ($92.85/share) that the most recent [Business Valuation Services, Inc.] appraisal had valued BCC at approximately $8 million ($155.32/share), suggesting that [Blount's] shares had a fair market value of approximately $6.7 million." Id.
Fodor determined that the income-based value of the company was $5.8 million and that the asset-based value was $7.9 million, which he blended at a ratio of 3:1. This resulted in Fodor's $6 million estimate. The Tax Court noted in passing that Fodor did not account for the insurance proceeds, nor did he account for the premium usually associated with a controlling 83% interest in a company. Id. at 1308-09. The Tax Court, nonetheless, adopted Fodor's estimate as a starting point.
The Tax Court, however, completely ignored the significant value Blount represented to the corporation. There is no discussion of the effect on BCC of losing Blount's leadership, connections, and general know-how. Because the Tax Court's conclusion is within the range of values suggested by the experts in the case, the result is not clearly erroneous.
This exception was codified and further limited in the Omnibus Budget Reconciliation Act of 1990, Pub.L. 101-508, 104 Stat. 1388 ("OBRA"). This law applies to all agreements created or substantially modified after 8 October 1990. See OBRA § 11602(e). Under OBRA, the agreement also must (1) have a bona fide business purpose, (2) not permit a wealth transfer to the natural objects of the decedent's bounty, and (3) be comparable to similar arrangements negotiated at arm's length. See I.R.C. § 2703; Treas. Reg. § 25.2703-1(b).
Citing the congressional record, courts generally agree that the limitation in I.R.C. § 2703 should be read in conjunction with the court-created rule. See Blount, 87 T.C.M. at 1310 (citing 136 Cong. Rec. S15683 (daily ed. Oct. 18, 1990)). The redundancy of " bona fide business purpose" stands out, but under this construction, OBRA clarifies the third prong of the case law exception: the buy-sell agreement must have a business purpose, not be a testamentary disposition, and must be comparable to other transactions in the industry.
A. The 1981 Agreement
We agree with the Tax Court's determination that the 1981 agreement was substantially modified in 1996, thereby making the agreement subject to the tax code changes in 1990 under OBRA. A substantial modification is one "that results in other than a de minimis change to the quality, value, or timing of the rights of any party." Treas. Reg. § 25.2703-1(c)(1). The parties challenge neither the application of Georgia law to the construction of the contract nor the result that the document signed by Blount in 1996 constituted a modification of the 1981 agreement. Therefore, we must determine whether that modification was "substantial" within the terms of the regulation.
1. The Binding During Life Requirement
2. The Comparability Requirement
The Tax Court, reasoning in the alternative, completed the I.R.C. § 2703(b) analysis. It observed that the first two prongs of the test were not at issue. Whether the Taxpayer proved that the agreement was comparable to similar arrangements entered into at arm's length was examined. Similar arrangements are those that "could have been obtained in a fair bargain among unrelated parties in the same business dealing with each other at arm's length," where a fair bargain is one that "conforms to with the general practice of unrelated parties under negotiated agreements in the same business." Treas. Reg. § 25.2703-1(b)(4)(i).
B. The Fair Market Value of BCC
In valuing the corporate stock, "consideration shall also be given to nonoperating assets, including proceeds of life insurance policies payable to or for the benefit of the company, to the extent that such nonoperating assets have not been taken into account in the determination of net worth." Treas. Reg. § 20.2031-2(f)(2). The limiting phrase, "to the extent that such nonoperating assets have not been taken into account," however, precludes the inclusion of the insurance proceeds in this case. Likewise, in Estate of Cartwright v. Commissioner, the Ninth Circuit approved deducting the insurance proceeds from the value of the organization when they were offset by an obligation to pay those proceeds to the estate in a stock buyout. 183 F.3d 1034, 1038 (9th Cir. 1999); see also Estate of Huntsman v. Comm'r, 66 T.C. 861, 875, 1976 WL 3635 (1976).
The Ninth Circuit observed that the Tax Court "properly determined that [the] insurance policy would not necessarily affect what a willing buyer would pay for the firm's stock because it was offset dollar-for-dollar by [the] obligation to pay out the entirety of the policy benefit's to [the] estate." Cartwright, 183 F.3d at 1038.
The Tax Court focused on the word "consideration" to make its judgment about including life insurance proceeds: "The Commissioner argues that our interpretation of section 20.2031-2(f), Estate Tax Regs., frustrates the clear intent of Congress to include corporate-owned life insurance in the estate of its sole shareholder. See H. Rept. No. 2333, 77th Cong., 1st Sess. (1942), 1942-2 C.B. 372, 491; S. Rept. No. 1631, 77th Cong., 2d Sess. (1942) 1942-2 C.B. 504, 677. However, the statements in the legislative history relied upon by the Commissioner indicate only that Congress believed that a sole shareholder was deemed to have the incidents of ownership possessed by his corporation on insurance policies on his life. The regulations now provide that the incidents of ownership held by a corporation are not to be attributed to its shareholder, and no indication is included in the committee reports that Congress intended property owned by a decedent to be includable in his gross estate at other than its fair market value. Consequently, our interpretation of such section does not frustrate a congressional intent. In accordance with section 20.2031-2(f), Estate Tax Regs., we must determine the fair market value of the decedent's stock in the two corporations by applying the customary principles of valuation and by giving `consideration' to the insurance proceeds." Huntsman, 66 T.C. at 875-76.
The rationale in Cartwright is persuasive and consistent with common business sense. BCC acquired the insurance policy for the sole purpose of funding its obligation to purchase Blount's shares in accordance with the stock-purchase agreement. Even when a stock-purchase agreement is inoperative for purposes of establishing the value of the company for tax purposes, the agreement remains an enforceable liability against the valued company, if state law fixes such an obligation. Here the law of Georgia required such a purchase.
Other courts have found — when the restrictive agreement is an attempt to effect a testamentary transfer and avoid the estate tax — that honoring a restrictive element in determining fair market value would be improper. See Estate of True v. Comm'r, 390 F.3d 1210, 1239-41 (10th Cir. 2004) (listing cases that honor restrictive clauses in determining value and cases that do not honor such restrictive clauses). The IRS urges us to adopt the broadest rule that, when an agreement is ignored for valuation purposes, the agreement plays no role in determining the fair market value. We decline to do so because, as proved by this case, such a rule is overinclusive and represents a manifest departure from common business (i.e., market) sense.