Court Opinion

ID: 9425267
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:14:14.685647+00
Date Added: 2024-06-11T17:22:54.432121
License: Public Domain

Mr. Justice Stewart,
with whom The Chief Justice and Mr. Justice Rehnquist join,
dissenting.
This case presents a narrow issue of law regarding the valuation of certain assets — shares in an open-end investment company or “mutual fund” — for purposes of the federal estate tax. The case turns upon a single question of law: whether or not § 20.2031-8 (b) of the Treasury Regulations, which provides a specific method for valuing such shares, represents a reasonable implementation of the legislation enacted by Congress.
*558On December 4, 1964, Mrs. Ethel Bennett died testate leaving, among other property, several thousand shares in three separate mutual funds. Each of the funds in question is managed by a firm known as Investors Diversified Services, Inc., and all are subject to regulation by the Securities and Exchange Commission under the Investment Company Act of 1940. In his tax return for the estate, the respondent, Mrs. Bennett's executor, valued these shares at their so-called “net asset value,” that is, the amount at which the estate is entitled, as a matter of law, to have the shares redeemed by the issuer. The net asset value of a mutual fund share is calculated daily by the issuing company, and is equivalent to the fractional value per share of the fund’s total net assets on that day. In addition to serving as a gauge for the redemption value of fund shares already issued, net asset value is also employed by the issuing companies in determining the price at which they will offer new shares in the fund to the public on any given day. In general, such shares are sold to the public at their net asset value plus a sales charge or “load.” The load is a varying percentage of the value of the shares sold, and fluctuates in accordance with the size of the purchase. In the case of Mrs. Bennett’s shares, the maximum allowable sales load at the time of her death ranged between 7% and 8%, and the minimum was 1%.
Upon receipt of respondent’s return, the Commissioner, acting in accordance with Treas. Reg. § 20.2031-8 (b),* assessed a deficiency, contending that the value of *559Mrs. Bennett’s shares for federal estate tax purposes was their public offering price on the date of her death, that is, the price which a member of the public would have had to pay to acquire similar shares from the issuer. This price would, of course, encompass not only the net asset value of the shares, but also the applicable sales load. Such a method of valuation for mutual fund shares is expressly prescribed by the Treasury Regulation noted above. Thus, the sole question before us is whether that Regulation constitutes a reasonable exercise by the Commissioner of his statutory power to prescribe “all needful rules” for the proper enforcement of the tax laws, see 26 U. S. C. § 7805, or whether the Regulation is so inherently unreasonable and inconsistent with the statute as to be invalid. United States v. Correll, 389 U. S. 299; Bingler v. Johnson, 394 U. S. 741. Upon the facts presented by this case, I cannot say that the Commissioner’s Regulation is invalid, and I therefore dissent from the decision of the Court.
At the outset, it may be well to note the basic general rule with respect to valuation that prevails under our estate tax laws. This rule is embodied in Treas. Reg. § 20.2031-1 (b), and provides that the value of property includable in a decedent’s estate shall be the fair market value of such property at the date of the decedent’s death. “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” 26 CFR § 20-2031-1 (b).
The difficulty in applying this rule to mutual fund shares — a difficulty which, no doubt, led the Commissioner to promulgate Regulation § 20.2031-8 (b) — is that such shares once issued are not subject to disposition in a market of “willing buyers” and “willing sellers.” Indeed, as both the District Court and the Court of Appeals *560noted, the only practical means of disposing of mutual fund shares once acquired is redemption, and redemption cannot be deemed a sale of the sort described in the general rule (26 CFR § 20.2031-1 (b)), since the party purchasing (the issuing company) is under an absolute obligation to redeem the shares when tendered, and the party selling has no practical alternative, if he wishes to liquidate his holdings, other than to offer them to the issuing company for redemption.
This being the case, the Commissioner was faced with the problem of establishing a method of valuing the shares most nearly equal to their inherent worth. In doing so, he chose not to treat their redemption value as dispositive of this question. In promulgating his Regulation, he might rationally have considered that “on demand” redemption at net asset value is but one of many rights incident to the ownership of mutual fund shares.
For example, in the case of Mrs. Bennett’s shares, her estate had not only the right to redeem them “on demand,” but also to retain them; and if it had done so it would have possessed not only the normal dividend and capital gains rights associated with most investments, but also the right to have such dividends and capital gains as accrued applied toward the purchase of additional shares at a price below that which a member of the general public would have had to pay for such shares. In addition, under the investment contracts involved here, Mrs. Bennett’s estate would have had the right to exchange her shares in any one of the three mutual funds involved for those of either or both of the other funds managed by Investors Diversified Services, Inc. — without paying the usual sales charge or load.
The Commissioner has determined that the proper method of valuing all the rights, both redemptive and otherwise, incident to the ownership of mutual fund shares is to determine what a member of the general pub-*561lie, acting under no constraints, would have had to pay for these rights if purchased on the open market. And, as noted earlier, although no such market exists for mutual fund shares once issued to an investor, a perfectly normal market of willing buyers and sellers does exist with respect to such shares prior to their issuance. Thus, the Commissioner took the price at which the shares would have sold on this market as fairly reflective of their inherent worth. I cannot say that this method of valuation adopted by the Commissioner, and embodied in Regulation § 20.2031-8 (b), is so unreasonable and inconsistent with the statute as to render it invalid.
The respondent’s claim that the regulation is invalid is grounded upon two principal arguments. First, he says, the estate is being taxed on an amount in excess of what it can, as a practical matter, realize from the disposition of the mutual fund shares. But this is equally true of many other assets subject to taxation under our estate tax laws. For example, real property passing into an estate is taxed upon its full fair market value, despite the fact that as a practical matter the estate must usually pay some percentage of that sum in brokerage fees if it wishes to dispose of the property and receive cash in its stead. This attack upon the Regulation thus amounts to no less than an attack upon the whole system of valuation embodied in the Treasury Regulations on Estate Tax, based as it is upon fair value in an open market. I am not ready to hold that this long-established and long-accepted system is basically invalid.
The respondent’s second argument is that the Regulation places a higher valuation on mutual fund shares than is placed upon registered common stock shares and other similarly traded securities. This argument assumes that the redemption or net asset value óf a mutual fund share is identical to the fair market value of a traded security, and, by a parity of reasoning, that the sales *562charge or load associated with mutual fund purchases is equivalent to the commission that a stockbroker charges a purchaser of securities. Under this view, the Commissioner would be entitled to tax mutual fund shares passing into an estate only on their net asset value, since in the allegedly comparable situation of common stock shares no consideration may be given to brokers’ commissions in arriving at an appropriate valuation for estate tax purposes. See 26 CFR § 20.2031-2 (b).
Although this argument has a certain superficial appeal, the analogy on which it relies is hardly an exact one. For an estate in disposing of marketable securities must pay a brokerage commission on their sale, and will thus realize less than the amount at which the securities have been valued, while an estate turning in mutual fund shares for redemption pays no commission or other surcharge whatever. Moreover, unlike traditional securities, there is no open trading market for mutual fund shares once issued and in the hands of an investor. If such a market of willing buyers and sellers did exist, the Commissioner would doubtless be bound to treat mutual fund shares exactly like other securities. But where no market for an asset exists, there simply is no market price to provide a readily identifiable standard for valuation. Under these circumstances, it is the Commissioner’s duty under the statute to establish criteria for determining the true worth of the totality of rights and benefits incident to ownership of the asset. This the Commission has done in Regulation § 20.2031-8 (b) by providing that the value of a mutual fund share for federal estate tax purposes shall be the price a member of the general public would have to pay to acquire such share. Such an approach to the valuation of assets not regularly traded in a market of willing buyers and sellers has already been sustained by this Court in a case closely akin to the case before us. See Guggenheim v. Rasquin, 312 U. S. 254.
*563Given the peculiar characteristics of mutual fund shares, it is arguable that the Commissioner might reasonably have adopted a method of valuation different from that which he has chosen. But that is a question that is not for us to decide. “[We] do not sit as a committee of revision to perfect the administration of the tax laws. Congress has delegated to the Commissioner, not to the courts, the task of prescribing 'all needful rules and regulations for the enforcement’ of the Internal Revenue Code. 26 U. S. C. § 7805 (a). In this area of limitless factual variations, it is the province of Congress and the Commissioner, not the courts, to make the appropriate adjustments.’ ” United States v. Correll, 389 U. S., at 306-307. See Bingler v. Johnson, 394 U. S., at 750.
I would reverse the judgment of the Court of Appeals and sustain the validity of the Regulation.

 The text of the regulation, insofar as relevant here, reads as follows: “The fair market value of a share in an open-end investment company (commonly known as a 'mutual fund’) is the public offering price of a share, adjusted for any reduction in price available to the public in acquiring the number of shares being valued. . . .” There is a companion Gift Tax Regulation of identical import. See 26 CFR §25.2512-6 (b).