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

Heading: Revenue Ruling 83-30

Text: 14 Although there is no dispositive Treasury regulation, in 1983 the IRS issued a pertinent revenue ruling. In Revenue Ruling 83-30 (the 1983 Ruling), the IRS ruled that, in determining the value of a block of stock too large to be sold on the open market without depressing the price, the relevant figure is the price that the public would pay to the underwriter for the stock, and not the price that the underwriter would pay to the estate. Accordingly, underwriting fees should not be considered in determining the blockage discount. Rev.Rul. 83-30, 1983-1 C.B. 224, 225 (1983). The 1983 Ruling went on to hold that [u]nderwriting fees, necessarily incurred in marketing a large block of stock are deductible as an administration expense under section 2053(a)(2) of the Code, and are not considered in determining the blockage discount to be accorded in valuing the stock under section 2031. Rev.Rul. 83-30, 1983-1 C.B. at 225. 15 A revenue ruling represent[s] the official IRS position on application of tax law to specific facts.... Revenue rulings issued by the I.R.S. are entitled to great deference, and have been said to have the force of legal precedent unless unreasonable or inconsistent with the provisions of the Internal Revenue Code. Salomon, Inc. v. United States, 976 F.2d 837, 841 (2d Cir.1992) (internal quotes omitted); Amato v. Western Union International, Inc., 773 F.2d 1402, 1411 (2d Cir.1985), cert. dismissed, 474 U.S. 1113, 106 S.Ct. 1167, 89 L.Ed.2d 288 (1986). We cannot conclude that the position articulated by the IRS in the 1983 Ruling is either unreasonable or inconsistent with any provision of the Code. 16 Fair market value is commonly defined as the price at which the property would change hands between a willing buyer and a willing seller. United States v. Cartwright, 411 U.S. 546, 551, 93 S.Ct. 1713, 1716, 36 L.Ed.2d 528 (1973). In general, when the property is sold through the services of a broker, the brokerage fees are treated as administration expenses rather than as a subtraction from price that lowers the property's fair market value. See, e.g., id. at 553, 93 S.Ct. at 1717 (ordinary corporate stock is valued at its fair market price without taking into account the brokerage commission); Estate of Smith v. Commissioner, 57 T.C. 650, 659, 1972 WL 2557 (1972) (price is amount purchaser would pay exclusive of selling expenses), aff'd on other grounds, 510 F.2d 479 (2d Cir.), cert. denied, 423 U.S. 827, 96 S.Ct. 44, 46 L.Ed.2d 44 (1975); B. Bittker & L. Lokken, 5 Federal Taxation of Income, Estates and Gifts p 135.3.2, at 135-29 (2d ed. 1993) (brokers' commissions ... may be deductible for income or estate tax purposes, but they do not reduce the property's fair market value). Cf. Publicker v. Commissioner, 206 F.2d 250, 256 (3d Cir.1953) (rejecting argument that excise tax on a piece of jewelry should be included in the valuation of that jewelry, lest each time a diamond is sold at retail it acquires as an additional value the amount of the excise tax paid by the seller), cert. denied, 346 U.S. 924, 74 S.Ct. 312, 98 L.Ed. 418 (1954). 17 The 1983 Ruling treats the underwriter in a secondary offering as, in effect, a broker. Such a characterization is consistent with the treatment accorded underwriters by courts. See, e.g., Estate of Joslyn, 566 F.2d 677, 679 (9th Cir.1977) (underwriter's charge ... is in substance the charge ... made to sell the ... shares and, as we understand it, no different than the charge which a real estate broker might make for selling a house). As is true with other sales involving brokers, the 1983 Ruling simply requires the fair market value of the product to be calculated without regard to any brokerage fees incurred. 18 Further, the interpretation given by the 1983 Ruling was designed to prevent the anomaly of permitting an estate to take a double deduction. The Code expressly allows an estate to deduct expenses such as underwriting fees as part of the cost of estate administration. 26 U.S.C. Sec. 2053(a)(2). In some cases, though none directly addressing the role of underwriting fees in the determination of fair market value of stock for purposes of calculating the value of the gross estate, the courts have ruled that this provision permits such a deduction notwithstanding the specter of a possible double deduction. See, e.g., Estate of Jenner v. Commissioner, 577 F.2d 1100, 1104-05 (7th Cir.1978) (fear of double deduction could not counteract the plain language of 28 U.S.C. Sec. 2053 and deprive an estate of its right to deduct administration expenses such as underwriting fees); Estate of Joslyn, 566 F.2d at 678-79; In re Estate of Joslyn, 500 F.2d 382, 385-87 (9th Cir.1974). Thus, if an estate were allowed both (a) to deduct underwriting fees and other expenses from its initial hypothetical valuation of the stock in calculating the value of the gross estate, and (b) to deduct from the value of the gross estate the actual underwriting fees and expenses as administration expenses pursuant to Sec. 2053(a)(2) in calculating the value of the taxable estate, the estate would receive an unwarranted double benefit. The 1983 Ruling's elimination of the possibility of such a double deduction is hardly unreasonable. Plainly, the IRS was not required to seek to eliminate that possibility by ruling that the deduction expressly provided for by Sec. 2053(a)(2) could not be taken, for such a course would have been inconsistent with the Code. 19 Nor is the 1983 Ruling inconsistent with any other provision of the Code or the Treasury regulations. As noted above, there is no provision of the Code or the regulations that is directly on point. Moreover, the existing Treasury regulations lend some support to the position advanced in the 1983 Ruling. Regulation 20.2031-2(e) provides that a large block of stock may, in appropriate circumstances, be valued at the price at which the block could be sold as such outside the usual market, as through an underwriter. As the 1983 Ruling notes, the use of the preposition through rather than to suggests that the role played by the underwriter is that of conduit to the pertinent purchaser, like the role of any other broker. See Rev.Rul. 83-30, 1983-1 C.B. at 225. Accordingly, the approach taken by the 1983 Ruling, essentially treating underwriting fees as brokerage commissions and prohibiting consideration of those fees in calculating the fair market value of the block of stock, is consistent with Code provisions and Treasury regulations. 20 Plaintiffs' attempt to distinguish the 1983 Ruling on the ground that it dealt with an actual offering, rather than a hypothetical offering, is unpersuasive. While it is true that the 1983 Ruling involved an actual sale, the reasoning that underlies the Ruling is not so limited. The 1983 Ruling clearly indicates that the IRS considers underwriters to be brokers, and requires that they be treated as such for estate tax purposes. That characterization is dispositive of the case at hand. 21 Nor are we persuaded by the contention that, because no deduction for underwriting fees was in fact taken here, it is inequitable to apply the double deduction rationale incorporated in the 1983 Ruling to the present case. In formulating a reasonable and generally applicable approach to estate valuation, the IRS is not required to tailor its rules according to the actions taken by individual taxpayers. Its adoption and consistent application of a reasonable general approach to estate valuation should be upheld even though the motivations that prompted adoption of that approach may not apply to each and every taxpayer. 22 Finally, plaintiffs contend that, even if the 1983 Ruling is controlling, it deals by its terms only with the underwriting fees, and not with the other fees associated with the offering. However, we see no principled way to distinguish the underwriting fees from the other sale-related fees such as legal fees and printing fees. Indeed, since the Estate attempted to obtain a double deduction for these other expenses, by first excluding the estimated amount in calculating the value of the gross estate and then claiming an administration deduction from the value of the gross estate for the actual expenses of the July 1982 offering, the reasoning behind the 1983 Ruling applies here with equal or more force to these expenses. 23 In sum, we conclude that Revenue Ruling 83-30, which held that underwriting fees incurred in a secondary offering of a large block of stock should be excluded from the calculation of the fair market value of the stock for the purposes of computing the value of the gross estate, is neither unreasonable nor contrary to any statutory or regulatory provision. 24 The district court found, and no one disputes, that buyers would have been willing and able to pay for the Estate's WPC shares $27.125 per share, that is, the market price less the blockage discount. The court properly declined to allow a further deduction for hypothetical underwriting fees and other sale-related expenses in arriving at the fair market value of the stock.