Court Opinion

ID: 9494007
Source: CourtListenerOpinion
Date Created: 2023-08-05 15:26:14.75462+00
Date Added: 2024-06-11T17:56:09.744659
License: Public Domain

WILLIAM A. FLETCHER, Circuit Judge,
dissenting:
I respectfully dissent.
I agree with the majority that the question before us is the value of 18 shares of A stock in the J.R. Simplot Co. at the time of Richard R. Simplot’s death. Because I can find no clear error either in the value the Tax Court found for the A shares, or in the methodology that it employed to determine that value, I would affirm the Tax Court’s decision.
I
There are two classes of Simplot Co. stock, A and B. Class A shares have voting rights; class B shares do not. There are 76.445 A shares and 141,288.584 B shares. The A and B shares have equal rights to dividends and to liquidation distributions. That is, one A share receives precisely as much as one B share. A right of first refusal applies to anyone who wishes to sell A shares. Any shareholder who wishes to sell A shares must first give the company 180 days in which to purchase the shares on the same terms as those which the shareholder offered to the would-be purchaser. If the company does not purchase the shares, the shareholder must offer the shares, on the same terms, to the other A shareholders for a second period of 180 days.
Richard Simplot was one of four children of the company’s founder, J.R. Sim-plot. Richard and his siblings were the only owners of the A shares. At the time of Richard’s death, Richard, Don Simplot, and Gay Simplot Otter each owned 18 A shares, each representing 23.55% of the A shares. Scott Simplot owned 22.445 A shares, representing 29.35% of the A shares.
Richard also owned 2.79% of the B shares at the time of his death, while Don, Gay, and Scott owned 3.04%, 3.12%, and 5.65% of the B shares, respectively. A trust, whose beneficiaries were Richard’s family members, owned 20.46% of the B shares. Another trust, whose beneficiaries were Richard’s and Don’s family members, owned 24.65% of the B shares. A third trust, whose beneficiaries were other Sim-plot family members and their affiliates, owned 19.14% of the B shares. An employee stock option plan owned the remaining 3.46% of the B shares.
Simplot Co. was founded in the 1930s and incorporated in 1955. The company has never, in its entire history, paid a dividend to its shareholders. During fiscal year 1993, which ended two months after Richard’s death, the company made a profit of $37,825,000 on net sales and other income of $1,798,176,000. The parties agree with the Tax Court’s conclusion that at the date of Richard’s death, the total equity value of the company was $830,000,000.
The Tax Court determined that the 18 A shares owned by Richard’s estate were worth approximately $3.9 million. The *1197question before us is whether this finding can be sustained.
II
I begin by noting that valuations are factual findings to which we apply a highly deferential standard of review. See Sammons v. Comm’r, 838 F.2d 330, 333-34 (9th Cir.1988) (“Trial courts have particularly broad discretion with respect to questions of valuation.”). Our deference extends to the Tax Court’s choice of a valuation methodology. See Estate of O’Connell v. Comm’r, 640 F.2d 249, 251-52 (9th Cir.1981) (the Tax Court has “broad discretion in determining what method of valuation most fairly represents the fair market value of the stock in issue in light of the facts presented at trial”). We can reverse only if the Tax Court’s findings were clearly erroneous. See Trust Services of America, Inc. v. United States, 885 F.2d 561, 568 (9th Cir.1989).
The relevant regulations state that the value of each item of property in the decedent’s estate should be measured by its “fair market value,” defined as “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.” Treas. Reg. § 20.2031-1(b).
Why would a willing buyer have been willing to pay a little less than four million dollars for 18 A shares? The two best reasons are either that the buyer hopes to achieve control of the company himself or herself, or hopes to sell to someone else who wants to achieve control of the company.
The first of these two possibilities is less likely. A buyer seeking to control the company has to be in a position to benefit from that control. To benefit significantly from control the buyer would need to hold a significant equity position in the company, through ownership of the B shares. In addition, the buyer could achieve control only by persuading Simplot family members to sell their A shares. This is likely to happen, if at all, in the fairly distant future, and only if the family members believe that the buyer will act in their interests.
The second of the two possibilities is more likely. Simplot Co." is enormously valuable, but owners of B shares cannot easily derive economic advantage from their ownership, because the company has never paid dividends and because B shares are not publicly traded. Because they do not have voting rights, B shareholders have no way to force liquidation of the company and distribution of the proceeds. This means that Simplot family members, or trusts with family members as beneficiaries, need to own a controlling percentage of A shares in order to force the payment of dividends, force liquidation, or take the company public, and thereby realize a return from their ownership of B shares.
None of the siblings individually owns enough A shares to control the company. If the estate’s shares were combined with Scott’s, however, the owner of the combined shares would own 52.90% and would have control, or if the estate’s shares were combined with Don’s and Gay’s, the owner of the combined shares would own 70.65% of the shares and would have control.
This means that when a willing hypothetical seller and buyer negotiate a price •for the A shares, they would do so knowing that members of the Simplot family have economic incentives to pay a large premium for these shares. The hypothetical buyer and seller in our case are therefore in a situation similar to that in Estate of Bright v. United States, 658 F.2d 999 (5th Cir.1981). The issue in Bright was the value of 27.5% of the voting stock of a *1198closely held corporation, where the remaining stock was held in similarly sized blocks. The Commissioner in that case argued that because the willing seller and willing buyer both have “reasonable knowledge of relevant facts,” Treas. Reg. § 20.2031-l(b), the valuation of the shares should take account of the value that the other owners of sizable blocks of voting stock would place on the shares. The court of appeals was unwilling to entertain this argument because it had not been timely made. Estate of Bright, 658 F.2d at 1008. But Judge Rubin, in dissent from his colleagues’ unwillingness to entertain the argument, made clear where the argument led. Judge Rubin wrote:
[The] classic formulation assumes shrewd traders on both sides. Such traders would know that Mr. Bright owned 27.5% of the stock, Mr. Schiff owned 30%, and that the 27.5% available from the willing seller [of the estate’s shares] would give control to Bright or to Shiff or could be used to maneuver a course between them.
Id. at 1009.
The question then becomes whether Scott, who owns 29.35% of the A shares, would be willing to pay a little less than four million dollars in order to gain voting control of a company worth $830 million, or whether Don and Gay, who together own 47.10% of the A shares, would be willing to pay that amount to gain such control. I believe the answer is clear. Scott, Don, and Gay would each be extremely interested in controlling the A shares, because with control of the A shares they could make decisions — such as issuing dividends or taking the company public — that would be of economic advantage to them and their descendants given their substantial ownership interest of the B shares and their descendants’ beneficial ownership of B shares. Scott, Don, and Gay themselves have substantial ownership of B shares, and trusts benefitting their descendants have much greater ownership of B shares. Once the B share interest is taken into account, the disjunction between voting rights and economic interests disappears with respect to Scott, Don, and Gay. Given these facts, our hypothetical buyer, “maneuvering a course between them,” would be able to able to sell 18 A shares for a substantial amount. In my view, that amount probably exceeds the $3.9 million valuation reached by the Tax Court. At the very least, I can find no clear error in the Tax Court’s valuation of $3.9 million.
Ill
I also find no clear error in the methodology used by the Tax Court. The Tax Court faced a difficult valuation challenge. Traditional studies measure voting premiums on a per-share basis, using data from companies with dual-class stock trading on American stock exchanges. There were grounds for believing that these studies would not be helpful in the present case, given the Simplot Co.’s unusual capital structure in which there were 1,848 B shares for every A share. For example, data from United States stock exchanges is not particularly helpful because the major public exchanges do not allow dramatic imbalances between economic rights and voting rights.
The Tax Court met the challenge by calculating the value of the voting rights premium as a percentage of the equity value of the company, believing that this provided the most realistic measurement of value. A simple voting rights premium, in which the value of one voting share is compared with the value of one non-voting share, would have been problematic, in the Tax Court’s view, because the premium would have depended on the ratio between voting and non-voting shares. This ratio, as this case demonstrates, can vary widely *1199between companies. An equity value premium, by contrast, does not depend on the ratio between voting and non-voting shares.
The Commissioner’s experts, relying on a diverse range of studies including some drawing data from non-U.S. markets, offered testimony supporting a voting rights premium for the A shares of between 3% and 10% of the company’s equity value. The Tax Court chose the lower-end figure of 3%. This established a voting rights premium for the A shares as a class of about $25 million. The Tax Court took account of the fact that there were restrictions on the ability of a buyer to sell the A shares by applying a marketability discount of 35%. The Tax Court then found that the estate’s nearly one-quarter voting interest in an $830 million dollar company was worth $3.9 million. The Tax Court assessed no tax penalty because, in its view, Simplot’s estate had reasonably relied on its expert.
The majority believes that the Tax Court’s methodology was clearly erroneous because the Tax Court “valued an asset not before it — all the Class A stock representing complete control.” Opinion at 6178. I do not believe that this is so. First, the Tax Court relied on expert testimony about the amount of voting rights premiums in comparable circumstances. The Tax Court chose a percentage of equity value, rather than a per-share percentage mark-up, as the means to measure the premium accorded to voting rights. This choice of yardstick, however, did not alter what the Tax Court was measuring. The Tax Court specifically noted that it was only valuing a minority voting interest, and that a control interest would be worth substantially more. Second, the valuation of the A shares as a class was simply one step in determining a per-share value of the A shares, and therefore the value of the 18 A shares owned by the estate.
As I noted above, the Tax Court has broad discretion in choosing its valuation methodology. See Estate of O’Connell, 640 F.2d at 251-52. Here, the Tax Court gave a reasoned account of its decision to rely on the findings of two expert witnesses presented by the Commissioner. These witnesses had extensive experience in valuation and presented evidence based on numerous valuation studies. I can find no clear error in the Tax Court’s methodology that warrants reversal.
IV
Under the majority’s view, there is no fair market value whatsoever for the right to vote the 18 A shares. In its view, one A share is worth precisely the same as one B share. The majority therefore concludes that the fair market value of shares representing 23.5% of the voting shares of a company with sales of $1.8 billion and an equity value of $830 million is only $54,450.
I do not believe that the majority’s conclusion comports with economic reality. For someone who owns only A shares, the right to vote does not translate directly into an ability to gain economic benefits from that right. However, for those who own both A shares and B shares — in particular, Scott, Don, and Gay — the right to vote does translate directly into an ability to gain economic benefit. The hypothetical buyer and seller of 18 A shares, reasonably informed of all relevant facts, would be aware of the interests of Scott, Don, and Gay, and would negotiate a price that would reflect them. Given these facts, I believe that the Tax Court’s finding that $3.9 million was the value of the 18 A shares, is not clearly erroneous, and I would affirm the Tax Court’s decision.