Opinion ID: 669102
Heading Depth: 2
Heading Rank: 1

Heading: The Estate

Text: 2 The facts, which were largely stipulated in the district court, can be stated briefly. Gillespie and Morgan are executors of the estate of Eugene Meyer, III (the Estate). At the time of his death, Meyer was a member of the board of directors of the Washington Post Company (WPC), the publisher of several newspapers and magazines including The Washington Post and Newsweek. Meyer's gross estate included 743,500 shares of the Class B common stock of WPC. Because these shares constituted approximately 6.54% of the 11,370,218 shares of WPC Class B common stock then outstanding, the Estate was an issuer of that class of stock within the meaning of Sec. 2(4) of the Securities Act of 1933 (the Act), 15 U.S.C. Sec. 77b(4) (1988), and was an affiliate of WPC within the meaning of Rule 144(a)(1) promulgated under the Act (Rule 144), 17 C.F.R. Sec. 230.144(a)(1). Accordingly, federal law limited the methods by which the bulk of the Estate's WPC shares could be sold. 3 On February 24, 1982, the date of Meyer's death, the mean trading price of a share of WPC stock on the American Stock Exchange was $28.375. Thereafter, the price of the stock rose, and in May and June of 1982, the Estate disposed of a total of 211,000 WPC shares pursuant to Rule 144, which exempts the sale of a limited number of shares from the Act's registration requirement, see 15 U.S.C. Sec. 77e (1988), at prices ranging between $34 and $35 per share. Plaintiffs determined that in light of the size of the remaining block of shares and the legal restrictions, the disposition method that would maximize the value of those shares to the Estate would be an underwritten secondary offering. Accordingly, on July 9, 1982, the Estate sold an additional 422,500 shares pursuant to a registered underwritten secondary offering (the July 1982 offering). The proceeds received by the Estate from its underwriter, Salomon Brothers Inc. (Salomon), totaled $14,365,000, or $34 per share. In connection with this offering, the Estate incurred expenses of $213,142, which included, inter alia, accounting fees, legal fees, printing fees, and registration fees, but did not include underwriting fees. Plaintiffs and Salomon agreed that, as an underwriting fee for the transaction, Salomon would be allowed to retain possession of the proceeds of the sale of the 422,500 shares until the 90th day following the sale and would make no payment to the Estate for the use of those funds during the 90-day period. 4 In seeking to place a value on the Estate's original 743,500 WPC shares for tax purposes, plaintiffs sought the opinion of Salomon as to the price, expense, and yield that could have been realized in a secondary offering immediately after Meyer's death (the hypothetical offering). In an opinion dated November 22, 1982, Salomon concluded that the hypothetical offering would have yielded $25.3725 per share to the Estate. It arrived at that figure by starting with the $28.375-per-share mean open-market trading price of WPC stock on the date of Meyer's death, and deducting (a) $1.375 per share as the projected price depression that would have resulted from the announced sale of so large a block of stock (the blockage discount), (b) $1.1475 per share as the amount that an underwriter would have demanded as compensation for selling the shares (the underwriter fees), and (c) $0.48 per share as the other expenses that would have been incurred by the Estate in connection with the registration of such an offering (the other expenses). 5 Relying on these calculations, plaintiffs used the $25.3725-per-share figure in their valuation of the WPC shares on the Estate's federal estate tax return. The Estate also claimed $213,142, representing the expenses incurred in the July 1982 offering, in deductions as administration expenses pursuant to 26 U.S.C. Sec. 2053(a)(2) (1988). The Estate did not claim a deduction for underwriting fees in connection with that offering. 6