Opinion ID: 1166559
Heading Depth: 1
Heading Rank: 1

Heading: the valuation of stock

Text: The Morrison estate included 266,662 shares of MK stock. This was approximately 11.29% of the 2,362,763 shares of MK stock outstanding at Morrison's death. On the date of Morrison's death, the mid-point between the bid and asked price of MK stock traded on the Boise over-the-counter market [1] was $17.6875 per share, while the representative asked closing price given by the National Quotation Bureau was $18.25 per share. The stock was initially valued in the estate proceedings for both estate and inheritance tax purposes at $17.6875 per share. When the State Tax Commission asserted an additional tax deficiency because the estate had failed to compute the tax on the entire bequest, including the inheritance taxes paid by the estate, the estate moved to amend its inheritance tax return to value these shares for inheritance tax purposes at $15 each. This amendment was based upon the estate's application of the so-called blockage rule. According to the estate, the blockage rule is a valuation procedure used to determine the value of blocks of stock larger than the amounts of that stock normally traded. As the estate has characterized the rule in its brief, it is a determination of the value that would have been realized had the stock been sold on the only market upon which it could have been sold within a reasonable time, in effect the wholesale as opposed to the retail market, i.e., a rule based upon the price which one could have obtained by selling the stock in the existing market when there may be no willing buyers of such large blocks of stock in the existing market. The administrator of the Inheritance Tax Division declined to revalue the stock in accordance with this rule. The estate appealed to the State Tax Commission which also refused to apply the blockage rule urged by the estate. From that decision, the estate appealed to the district court. Before the district court the parties entered into a pretrial order containing the following stipulation of fact: (e) The inventory submitted by estate appraisers and the original inheritance tax return filed fixed a value of $17.6875 per share for Morrison-Knudsen stock. This was the mid-point price between bid and asked on the Boise over-the-counter market. The amended return reported a total value that equated to $15.00 per share as a result of application of the blockage rule. The per share discount of $3.25 per share used by Mr. Will Richeson, Jr., the appraiser, was applied to a unit value of $18.25 per share, `the representative closing asked price' reported by the National Quotation Bureau on July 19, 1971, the date of death and not to the $17.6875 a share originally reported. The appraisal report supporting application of the blockage rule is a proper application of that rule if that rule can be properly applied in this or any other case.  (Emphasis added). Mr. Richeson's letter, which was attached to and made a part of the pretrial order, contained the following statement:  In placing a value on large blocks of stock traded Over-The-Counter, we generally consider, among other things, the number of shares involved, the number of firms making a trading market in the stock and the daily volume and price movement in the stock... . ... [W]e believe the following general guidelines would apply in this case. Large blocks of shares of unlisted companies are valued at discounts from the quoted market of the publicly traded shares, because of their lack of liquidity. These discounts normally range from 10%-20% for relatively low multiple companies with large capitalizations, to 25%-40% for more thinly capitalized companies with volatile shares. Based solely on the foregoing, it is our opinion that Morrison-Knudsen would fall in the range for low multiple companies with large capitalizations and that a fair and reasonable value for the said shares on July 19, 1971, would be at a $3 1/4 per share discount from a representative closing asked price of $18 1/4 on that day, which has been supplied to us by the National Quotation Bureau, resulting in a total value of $3,999,930 for the 266,662 shares, or $15. a share.  (Emphasis added). The facts in this case were stipulated and therefore the district court did not make findings of fact. It entered a memorandum opinion which is sufficient to serve as its conclusions of law. See I.R.C.P. 52(a). In that opinion it described the blockage rule as one allowing a large block of stock [to] be appraised at its market value on the date of death as a block sold over a reasonable period of time. The court then concluded that this blockage rule was legally acceptable and, based upon the stipulation contained in the pretrial order, determined that it should be applied. The State Tax Commission has assigned this application of the blockage rule as error. The starting point in our analysis is I.C. §§ 14-401 et seq., the Idaho Transfer and Inheritance Tax Act. These statutes clearly provide that although the Idaho inheritance tax is collected by the estate upon property which was once in the decedent's estate, I.C. §§ 14-401, -402, -413, the tax is not levied upon the value of the property in the estate or the value of the property in the estate less deductions and exemptions, but instead it is levied upon the value of a distributee's share of the estate less the distributee's deductions and exemptions, I.C. §§ 14-406, -407, -408, -413. Thus, in calculating the inheritance tax due on one distributee's share, one considers only the property received by the distributee, not all the property present in the entire estate. To do otherwise would transform this tax from an inheritance tax to an estate tax and be contrary to the provision of statute. The record before us does not disclose whether the 266,662 shares of MK stock in the Morrison estate were given to a single distributee or to several distributees. [2] Thus, it is clear that if a blockage rule for the valuation of stock can be applied, it cannot be applied to the total block of stock in the estate because the inheritance tax is not levied on the total block, but must instead be applied to each block of stock received by each distributee and each block of stock must be valued separately. The valuation procedure followed by the estate's appraiser, Mr. Richardson, applied the blockage rule to the entire block of 266,662 shares of stock in the estate, rather than the block which each distributee received. This was erroneous, in spite of the stipulation of the parties that his ... appraisal report ... is a proper application of that [the blockage] rule if that rule can be properly applied in this or in any other case... . If a blockage rule can be applied, it may only be applied to each distributee's individual block. The valuation of all the stock in the estate as a single block was incorrect. Cf. Rushton v. Commissioner of Internal Revenue, 498 F.2d 88 (5th Cir.1974), which concludes that gifts of stock to several donees may not be blocked together as one gift for valuation for federal gift taxes. Thus, we must decide whether a blockage rule of the kind described by the estate in its brief and the district court in its decision may be applied under the relevant statutes to each individual distributee's block of stock.