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

Heading: The Tax Assessment and Plaintiffs' Claim for a Refund

Text: 7 In November 1985, the Internal Revenue Service (IRS) issued a notice of deficiency based on, inter alia, its view that all of the WPC stock held by the Estate should have been valued at $28.375 per share rather than $25.3725 per share. Accordingly, in April 1986, the IRS assessed a federal estate tax deficiency of $1,095,598.87, plus accrued interest of $557,857.74. 8 After paying the assessment and unsuccessfully filing an administrative claim for a refund, plaintiffs commenced the present action in the district court. To the extent pertinent to this appeal, the complaint sought a refund of estate taxes and assessed interest and penalties totaling $1,510,094.67. 9 Following an extensive stipulation of facts and a bench trial, the district court ruled in favor of plaintiffs in part and in favor of the IRS in part. The court agreed with plaintiffs that, because of the size of the block of shares, the market price of the WPC stock on the day of Meyer's death was not an accurate indicator of the fair market value of the block of WPC stock; and it agreed that a hypothetical offering, with a blockage discount, was an appropriate method for determining the fair market value of the shares. It rejected, however, plaintiffs' contention that the Estate should have been allowed to calculate the fair market value of the shares by deducting from the price paid by the purchaser any underwriting expenses and registration fees that would have been incurred in the hypothetical offering. Noting that 26 U.S.C. Sec. 2053(a)(2) provides for a deduction of administration expenses incurred in selling the property of an estate if the sale is necessary, the court concluded that, [t]o the extent that an estate has incurred deductible expenses for underwriting fees, the fees are deductible as administrative expenses, but they are not to be considered in determining a discount to be accorded in valuing the stock. (Hearing Transcript, Nov. 17, 1992, at 293.) The court noted that, though the rule could be inequitable in some cases, it had been consistently applied in the Internal Revenue Code and regulations. (Id.) Accordingly, the court found that the fair market value of the WPC stock, after a blockage discount, but without any deduction for underwriting fees or other expenses, was $27.125 per share. 10 The court therefore entered a judgment which, in pertinent part, granted plaintiffs' estate tax refund claim only to the extent of $717,013 assessed tax, plus $371,511 assessed interest, totaling $1,088,524.