Case Name: ESTATE OF Richard R. SIMPLOT, Deceased, John Edward Simplot, Personal Representative, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
Court: United States Court of Appeals for the Ninth Circuit
Jurisdiction: United States
Decision Date: 2001-05-14
Citations: 249 F.3d 1191
Docket Number: No. 00-70013
Parties: ESTATE OF Richard R. SIMPLOT, Deceased, John Edward Simplot, Personal Representative, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Judges: Before: HUG, NOONAN, and W. FLETCHER, Circuit Judges.
Reporter: Federal Reporter 3d Series
Volume: 249
Pages: 1191–1199

Head Matter:
ESTATE OF Richard R. SIMPLOT, Deceased, John Edward Simplot, Personal Representative, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 00-70013.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted Feb. 14, 2001.
Filed May 14, 2001.
Sheldon I. Fink, Sonnenschein Nath & Rosenthal, Chicago, Illinois and D. John Thornton and Gregory A. Byron, Thornton Byron, LLP, Boise, Idaho, for the petitioner-appellant.
Paula Speck, Department of Justice, Washington, D.C., for the respondent-ap-pellee.
Before: HUG, NOONAN, and W. FLETCHER, Circuit Judges.

Opinion:
OPINION
NOONAN, Circuit Judge:
The Estate of Richard R. Simplot (the Estate) appeals the judgment of the Tax Court determining an estate tax deficiency of $2,162,052. We hold that the Tax Court erroneously attributed a premium to minority voting stock in the J.R. Simplot Co. (Simplot). Accordingly, we reverse the judgment of the Tax Court and remand.
BACKGROUND AND PROCEEDINGS
Simplot is headquartered in Boise, Idaho and incorporated in Nevada. It processes frozen food, in particular potatoes; mines, processes and sells phosphate fertilizer; owns large numbers of cattle and sells beef; and owns over 13% of the stock of Micron Technology, Inc.
Simplot stock is divided into Class A and Class B common stock. Only Class A has voting rights. Both classes have a right to dividends, if any are declared, on a per share basis. To date, no common stock dividends have ever been declared. Class B stock has a slight advantage in its treatment on liquidation. Class A stock is subject to a transfer restriction of 360 days during which the company or another Class A shareholder may purchase the stock.
At the time of evaluation the stock was owned as follows:
Class A
Stockholder Number of Shares Percent of Total Class A Shares
Decedent (Richard Simplot) 18.000 23.55%
Don Simplot (Richard's brother) 18.000 23.55
Gay Simplot Otter (Richard's sister) 18.000 23.55
Scott Simplot (Richard's brother) 22.445 29.35%
Total 76.445 100.00%
Class B
Number of Stockholder Shares Percent of Total Class B Shares
Decedent (Richard Simplot) 3,942.048 2.79%
Class A shareholders (Don, Gay and Scott Simplot) 16,677.303 11.79%
Family members of Class A shareholders (children, spouses 27,042.707 and grandchildren) 19.14%
Trusts for descendants of Richard, Don, Gay and Scott 88,732.985 Simplot 62.82%
Simplot ESOP ' 4,893.541 3.46%
Total 141,288.584 100.00%
For the fiscal year ending August 31, 1993, Simplot had net sales of $1,282,526,000 and net income of $37,825,000. The equity value of the company, as found by the Tax Court, was $830 million, so that the return to stockholders in 1993 was slightly over 4%.
At the time of valuation, J.R. Simplot, the company's founder, was the chairman of the board and the dominant person in setting company policy. His three surviving children were also directors of the company, and there were four directors from outside the family circle.
The Estate obtained a valuation of its stock from Morgan Stanley & Co., and on this basis reported the Class A and Class B shares as worth $2,650 per share. The Commissioner of Internal Revenue valued the Class A stock at $801,994 per share and the Class B stock at $3,585 per share. He accordingly assessed a deficiency of $17,662,886 with penalties of $7,057,554.
The Estate petitioned the Tax Court for review. Before the Tax Court the Commissioner conceded that the assessed deficiency was erroneous, thereby forfeiting any presumption of correctness. Clapp v. Commissioner, 875 F.2d 1396, 1403 (9th Cir.1989); Herbert v. Commissioner, 377 F.2d 65, 69 (9th Cir.1966). The Commissioner offered two experts in valuation, Herbert Spiro and Gilbert Matthews, each of whom placed a premium on voting stock because of the skewed relation of the number of voting shares to the number of nonvoting shares. The Estate offered two other valuation experts, Paul J. Much and John R. Ettelson, who testified that the Estate's minority interest in the Class A stock could not extract economic benefits for the shareholder. The Tax Court accepted the valuations proposed by none of the experts, but did accept the view of the Commissioner's experts that a premium should be added to the value of the Class A shares.
The Tax Court found the Class A shares on a per share basis to be "far more valuable than the Class B shares because of the former's inherent potential for influence and control." The Tax Court added that "a hypothetical buyer" of the shares "would gain access to the 'inner circle' of J.R. Simplot Co., and by having a seat at the Class A shareholder's table, over time, the hypothetical buyer potentially could position itself to play a role in the Company. In this regard, we are mindful that 'a journey of a 1,000 miles begins with a single step.' "
The Tax Court went on to "consider the characteristics of the hypothetical buyer" and supposed the buyer could be a Sim-plot, a competitor, a customer, a supplier, or an investor. The buyer "would probably be well-financed, with a long-term investment horizon and no expectations of near-term benefits. The hypothetical buyer might be primarily interested in only one of J.R. Simplot Co.'s two distinct business activities — its food and chemicals divisions — and be a part of a joint venture (that is, one venture being interested in acquiring the food division and the other being interested in acquiring the chemical division)." The Tax Court entertained the possibility that Simplot could be made more profitable by being better managed at the behest of an outsider who bought the 18 shares. The Tax Court went on to envisage the day when the hypothetical buyer of the 18 shares would hold the largest block because the three other Sim-plot children had died and their shares had been divided among their descendants; the Tax Court noted that, even earlier, if combined with Don and Gay's shares together, or with Scott's shares alone, the 18 shares would give control.
In the light of "all of these factors," the Tax Court assigned a premium to the Class A stock over the Class B stock equal to 3% of the equity value of the company, or $24.9 million. Dividing this premium by the number of Class A shares gave each Class A share an individual premium of $325,724.38, for a total value of $331,595.70, subject to a 35% discount for lack of marketability with a resultant value of $215,539. Class B stock was valued at $3,417 per share. The Tax Court held no penalties should be exacted because the Estate in good faith had relied on the advice of its long-term adviser, Morgan Stanley.
The Tax Court determined a deficiency in federal estate tax of $2,162,052. The Estate appeals.
ANALYSIS
The estate tax is levied not on the property transferred but on the transfer itself. Young Men's Christian Ass'n v. Davis, 264 U.S. 47, 50, 44 S.Ct. 291, 68 L.Ed. 558 (1924). The tax is on the act of the testator not on the receipt of the property by the legatees. Ithaca Trust Co. v. United States, 279 U.S. 151, 155, 49 S.Ct. 291, 73 L.Ed. 647 (1929). Consequently we look at the value of the property in the decedent's hands at the time of its transfer by death, 26 U.S.C. § 2033, or at the alternative valuation date provided by the statute, 26 U.S.C. § 2032(a). That the tax falls as an excise on the exercise of transfer underlines the point that the value of the transfer is established at that moment; it is not the potential of the property to be realized at a later date.
The Tax Court in its opinion accurately stated the law: "The standard is objective, using a purely hypothetical willing buyer and willing seller.... The hypothetical persons are not specific individuals or entities." The Commissioner himself in his brief concedes that it is improper to assume that the buyer would be an outsider. The Tax Court, however, departed from this standard apparently because it believed that "the hypothetical sale should not be constructed in a vacuum isolated from the actual facts that affect value." Obviously the facts that determine value must be considered.
The facts supplied by the Tax Court were imaginary scenarios as to who a purchaser might be, how long the purchaser would be willing to wait without any return on his investment, and what combinations the purchaser might be able to effect with Simplot children or grandchildren and what improvements in management of a highly successful company an outsider purchaser might suggest. "All of these factors," i.e., all of these imagined facts, are what the Tax Court based its 3% premium upon. In violation of the law the Tax Court constructed particular possible purchasers.
The Tax Court erred further by finding what premium all the Class A shares as a block would command and then dividing this premium per each Class A share. Doing so, the Tax Court valued an asset not before it — all the Class A stock representing complete control. There was no basis for supposing that whatever value attached to complete control a proportionate share of that value attached to each fraction of the whole. Under the applicable regulations, the fair market value of "each unit of property" is to be ascertained; in the case of shares of stock, "such unit of property is generally a share of stock." 26 C.F.R. § 20.2031-1(b).
The Tax Court committed a third error of law. Even a controlling block of stock is not to be valued at a premium for estate tax purposes, unless the Commissioner can show that a purchaser would be able to use the control "in such a way to assure an increased economic advantage worth paying a premium for." Ahmanson Foundation v. United States, 674 F.2d 761, 770 (9th Cir.1981). Here, on liquidation, all Class B shareholders would fare better than Class A shareholders; any premium paid for the 18 Class A shares be lost. Class A and B had the right to the same dividends. What economic benefits attended 18 shares of Class A stock? No "seat at the table" was assured by this minority interest; it could not elect a director. The Commissioner points out that Class A shareholders had formed businesses that did business with Simplot. If these businesses enjoyed special advantages, the Class A shareholders would have been liable for breach of their fiduciary duty to the Class B shareholders. See Estate of Curry v. United States, 706 F.2d 1424, 1430 (7th Cir.1983).
Much of the Commissioner's argument is devoted to speculation as to what might happen after the valuation date— the Simplots might fall out with each other, the purchaser might find ways of making Simplot more profitable and persuade the company to adopt his strategy, the purchaser might be willing to wait fifteen years to get any return. The speculation is as easily made that the company would go downhill when its founder, J.R. Simplot, 84 at the valuation date, retired; or that McDonald's,' Simplot's largest customer for its potatoes, would change its supplier; or that Micron would prove to be an unwise investment. Speculation is easy but not a proper way to value the transfer at the time of the decedent's death. Olson v. United States, 292 U.S. 246, 259, 54 S.Ct. 704, 78 L.Ed. 1236 (1984). In Richard Simplot's hands at the time of transfer his stock was worth what a willing buyer would have paid for the economic benefits presently attached to the stock. By this standard, a minority holding Class A share was worth no more than a Class B share.
The judgment of the Tax Court is accordingly REVERSED, and the case is REMANDED for entry of judgment in favor of the Estate.