Opinion ID: 1488927
Heading Depth: 1
Heading Rank: 2

Heading: The Piedmont Stock

Text: The Piedmont Financial Company, a Delaware corporation organized in 1925, is an investment company with 100,000 shares of stock outstanding, all of which are owned by thirty-three members of the petitioner's family. Of these shares, 5,100 were included in the five trusts involved in this case. The securities and other assets of the Piedmont portfolio as of the critical date had a fair market value aggregating $9,808,599.27. There was evidence of accrued income taxes against the corporation and expenses totalling $257,699.20. The resulting difference, $9,550,900, if divided by the number of shares outstanding, would give a quotient of $95.509. This amount was found by the Tax Court to represent not less than the fair market value of the stock. In its findings the Tax Court included data as to the dividend payments and earnings of the Piedmont stock over a substantial portion of the corporate life. It also included in its findings the corporate balance sheet for the years 1934 to 1936 inclusive. In its opinion the court said that it had considered all this data as also the opinion evidence taken at the trial, and had given due weight to those factors relevant and pertinent to the determination of the fair market value of this stock, but it failed to specify which factors had been actually applied as having weight and relevance. The petitioner insists that the result reached demonstrates that the valuation was actually based not on the fair market value of Piedmont stock but on the asset value of the corporation as determined by the market value of the numerous securities and other assets included in its portfolio on the critical date. And the petitioner feels especially aggrieved in that the Tax Court appears to have given no weight whatever to the undisputed testimony of his expert witnesses that the sale of the minority block of the Piedmont stock on or about the critical date would have yielded, if sold, an amount substantially less than the value as found. Here again the petitioner disclaims any quarrel with the findings of fact which have been made; its contention is rather that the court erroneously adopted as a criterion of value some theory of intrinsic value as advanced by the respondent's experts rather than that authorized by the applicable regulations. There is, indeed, substantial color to petitioner's contention. At the hearing the petitioner's experts gave testimony, to us at least highly convincing, to the effect that outsiders could not have been found to buy a minority interest in this family corporation except at a substantial discount from a price based on the asset value of the portfolio. Their conclusion was corroborated by other testimony showing that in respect of a group of comparable corporations there was a substantial differential between the price which could actually be obtained for their stock and a price based on their asset value,  a condition that found some support also in the testimony of the respondent's experts as well. This testimony the Commissioner sought to combat not by opinion evidence to a contrary effect but by expert testimony tending to show that for a minority stock interest in a closely held corporation such as this the applicable criterion of value is not the price at which it could be sold but rather its benefit measured in some other way to its owner. Moreover, in the opinion it was noted that although the portfolio had a definitely ascertainable market value there was no market for the stock of Piedmont Financial and it was obvious that it is not the purpose of the Richardson family to sell it on the open market. The opinion of the Tax Judge continued: If the arguments of petitioner were to prevail, any cohesive family owning securities having a market value readily ascertainable from trading on the open public market could organize a family holding corporation, transfer to such corporation the securities which it owns, and then deal with the stock of the family corporation on the basis that it has by reason of petitioner's arguments a market value of only approximately half of the market value of the securities owned by such a corporation, thus cutting in two gift taxes and estate taxes which would otherwise be payable on the transfer of the securities themselves. We cannot agree. Closely-held stock of a family holding company which was never sold on the open market and was never intended by the organizers of the corporation to be sold, but was intended to be held by members of the family to evidence their respective beneficial rights in securities which were bought and sold by the corporation and which were dealt in on the open market, can only be valued in any real or practical way by primarily considering the value of the securities owned by the corporation. Any other approach would, in our opinion, be futile. The trial judge made no express ruling upon the applicability of the conflicting views as to the proper standard which had been pressed vigorously at the hearing: he found only that the stock had a fair market value of not less than $95.509 per share. Nor was there any finding that within a reasonable time through the most suitable commercial channels the stock could have been sold at such a figure. To me, at least, the findings and opinion when read together strongly suggest that the valuation adopted was based upon some such theory as was enunciated by the respondent's experts whereby the controlling criterion of value for stock such as this was taken to be not its fair market value as provided in the applicable regulations of the Treasury Department but rather some notion of intrinsic value. If so, the holding was erroneous. Commissioner of Internal Revenue v. McCann, 2 Cir., 146 F.2d 385; Weber v. Rasquin, 2 Cir., 101 F.2d 62; Laird v. Commissioner of Internal Revenue, 3 Cir., 85 F.2d 598; Worcester County Trust Co. v. Commissioner of Internal Revenue, 1 Cir., 134 F.2d 578. Cf. Guggenheim v. Helvering, 2 Cir., 117 F.2d 469, at page 473. Feeling that there is at least a substantial doubt as to whether the conclusion is based upon proper standards, I should favor a remand so that the Tax Court might have opportunity to correct the error if one was made or to remove the doubt which exists as to the standard which was actually applied. Commissioner v. McCann, supra. My brothers, however, feel that the finding that the fair market value was not less than $95.509 per share sufficiently attests the use of a proper standard and that this court should affirm the valuation as made.