Court Opinion

ID: 4608380
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:42:37.290533+00
Date Added: 2024-06-11T07:53:41.965378
License: Public Domain

Estate of Lucretia Davis Jephson, Deceased; David S. Plume, Dermond Ives, and The Chase Manhattan Bank, N.A., Coexecutors, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Jephson v. CommissionerDocket No. 6563-83United States Tax Court87 T.C. 297; 1986 U.S. Tax Ct. LEXIS 69; 87 T.C. No. 18; August 5, 1986, Filed *69 Decision will be entered under Rule 155.  Decedent owned all the stock of two investment companies on the date of her death.  The assets of both companies consisted solely of cash and marketable securities.  Held, the value of the stock of each investment company is its net asset value reduced by the cost of liquidation. John Y. Taggart and Myron G. Finley, for the petitioner.Jack Klinghoffer, for the respondent.  Jacobs, Judge.  JACOBS*297  By statutory notice of deficiency, respondent determined a deficiency of $ 847,458.38 in estate tax due from the Estate of Lucretia Davis Jephson, deceased.  In his amended answer, respondent claimed a $ 263,655.19 increased deficiency; thus the total amount in controversy is $ 1,111,113.57.After concessions, the only matter left for determination is the value of all the outstanding stock of two investment companies, R.B. Davis Investment Co. and Davis Jephson Finance Co., owned by Lucretia Davis Jephson at her death.*298  FINDINGS OF FACTSome of the facts have been stipulated and are so found.  The stipulations of fact and attached exhibits are incorporated herein.Lucretia Davis Jephson died on April 9, 1979; petitioner is her estate.  Petitioner's address at the time the petition was filed was New York, New York.Petitioner reported in a timely filed Federal estate*71  tax return the decedent's stock ownership in two wholly owned corporations, R.B. Davis Investment Co. (R.B. Davis) and Davis Jephson Finance Co. (Jephson Finance).  R.B. Davis and Jephson Finance were investment companies, the former with 4,997 shares outstanding and the latter with 20,000 outstanding shares.  R.B. Davis, formed under the laws of New Jersey in 1905, manufactured baking powder until 1955, when its assets were sold; thereafter, it operated as a holding company.  Jephson Finance was formed in Delaware in 1933, and has been a holding company since its inception.  The assets of both corporations consisted primarily of unleveraged portfolios (managed by Chase Manhattan Bank) of marketable securities with readily ascertainable fair market values on April 9, 1979 (the valuation date), as follows:R. B. DavisBondsFace valueMarket value$ 30, 000 N.Y. State 3.6% due 5/1/87$ 22,839  20, 000 N.Y. State 3.6% due 11/1/8714,980  50, 000 N.Y. State 3.6% due 11/1/8530,865  70,000 Penna. State Gen. Oblig. 5.9% due 12/15/9267,277  50,000 Suffolk County Gen. Oblig. 3/5% due 9/1/8333,630169,591Certificate of DepositMarket valueContinental Illinois Bank 9 1/2% due 3/30/79   principal and accrued interest$ 116,306Common StocksNumber of sharesMarket value1,800Merck & Co.$ 119,7001,000Schlumberger Ltd.$ 106,5636,286Scudder Managed Reserves53,042500Smithline Corp.47,1562,800Standard Oil Co. of Indiana177,4508,000Virginia Electric & Pwr. Co.101,5002,500Yellow Freight Systems Inc.51,5623,500Aluminum Co. America190,3131,500AT&T92,6251,000Avon Products46,7504,000Carolina Power & Light83,0002,000Caterpillar Tractor116,750800Coca-Cola Co.33,0004,000Continental Oil137,2501,000Digital Equipment55,812800E.I. DuPont & Co.114,2501,300Eastman Kodak84,0134,000Florida Power Corp.122,5002,500General Electric119,2193,500General Mills, Inc.87,8592,200Houston Ind. Inc.66,412500IBM159,1884,000International Paper186,2502,500Lowes' Co. Inc.120,3122,000Mapco Inc.62,2501,000McDonald's Corp.42,1252,579,851Total bonds, certificateof deposit, and stocks2,865,748*72 *299 Jephson FinanceBondsFace valueMarket value$ 100,000Baltimore Gen. Oblig. 4.1/4% due 10/15/85$ 87,000100,000California Gen. Oblig. 3.1/2% due 7/1/8194,39050,000Kentucky Gen. Oblig. 3.1/8% due 7/1/8740,030100,000Los Angeles City Unified School 3.1/2%due 2/1/8488,45050,000Mass. Bay Trans. Auth. 3.8% due 3/1/9832,510100,000Milwaukee Met. Sewr. Dist. 33.4% due 2/1/8389,980100,000Minn./St. Paul 3.7% due 1/1/8587,24050,000Nassau County Gen. Oblig. 3.4% due 11/15/8244,525100,000New Jersey Gen. Oblig. 3% due 3/1/8582,96050,000NYS Gen. Oblig. 4% due 11/15/8444,070100,000NYS Gen. Oblig. 4% due 11/15/8683,76070,000Oakdale CA Sewr. Dist. 3.05% due 7/1/200436,00075,000Oregon Gen. Oblig. 3.3/4% due 8/15/7974,460175,000Penna. Gen. Auth. 4.4% due 7/15/83160,860(Unspecified)Texas Gen. Oblig. 3% due 8/1/8620,0931,066,328Certificate of DepositMarket valueContinental Ill. Bank 9 1/2% due 3/30/79   principal and accrued interest$ 536,411Common StocksNumber of sharesMarket value1,500McDonald's Corp.$ 63,1881,200Merck & Co., Inc.79,8002,500Monsanto Co.131,0942,500J. P. Morgan & Co.115,4692,000J. C. Penny Inc.58,8801,000Proctor & Gamble80,7502,000Revlon Inc.99,0003,000Roadway Express84,8259,475Scudder Managed Reserves (Mutual Fund)94,6532,000Standard Oil of Ohio100,7505,000Texas Utilities96,5622,500Union Camp Corp.126,2501,500Union Pacific Corp.94,7813,000American Express Co.92,2504,000AT&T247,0004,000Atlantic Richfield259,2501,500American Natural Resources Co.62,2313,000Bank America Corp.76,1255,000Carolina Power & Light Co.103,7504,000Chase Manhattan Corp.129,7502,500Chubb Corp.98,1253,000Citicorp69,7504,000Colgate-Palmolive Co.69,7502,000Continental Oil Co.68,6252,500Diamond Int'l.92,5002,000Digital Equipment Corp.111,6256,000Dow Chemical170,2502,000Dresser Ind.89,2502,000Eastman Kodak129,2502,500Eaton Corp.94,2194,000Exxon214,2504,000Florida Power & Light110,0002,000General Electric95,3752,200Houston Ind. Inc.66,4121,895IBM603,3217,000IT&T201,2504,500Johnson & Johnson314,7193,000Lowe's Co. Inc.144,3752,000Macy & Co.71,2502,500Marathon Oil168,4375,179,091Total bonds, certificate ofdeposit, and stocks6,781,830*73 *301  The book and market values of the assets, liabilities, and shareholder's equity of each company on the valuation date were as follows:R. B. DavisBook and Market ValueApril 9, 1979SECURITIES:Book valueMarket valueBonds$ 336,000$ 169,591Stocks2,271,0732,579,8512,607,0732,749,442CASH ACCOUNTS:Certificate of depositand accrued interest116,306116,306Investment advisory -principal326326-income3,9023,902Checking94,99694,996Accrued income3,0798,136Total assets2,825,6822,973,108Less: Accounts payable1,6501,650NET WORTH2,824,0322,971,458Common stock499,700499,700Paid in surplus444444Retained earnings2,323,8882,323,888Appreciation - market value147,426SHAREHOLDER'S EQUITY2,824,0322,971,458Per share (4,997 shares)565.15594.65Jephson FinanceBook and Market ValueApril 9, 1979SECURITIESBook valueMarket valueBonds$ 1,694,963$ 1,066,327Stocks3,964,6875,179,091Total5,659,6506,245,418CASH ACCOUNTS:Certificate of depositand accrued interest536,411536,411Investment advisory -principal916916-income15,73315,733Checking231,251231,251Prepaid Federal taxes3,7313,731Accrued income24,072Total assets6,447,6927,057,532Less: Accounts payableNET WORTH6,447,6927,057,532Common stock2,000,0002,000,000Paid in surplus2,7782,778Retained earnings$ 4,444,914$ 4,444,914Appreciation - market value609,840SHAREHOLDER'S EQUITY6,447,6927,057,532Per share (20,000 shares)322.38352.88*74 *302  The cost of liquidating R.B. Davis on the valuation date would have been $ 48,672.30.  The cost of liquidating Jephson Finance on the valuation date would have been $ 46,164.13.Petitioner valued for estate tax purposes the decedent's interests in R.B. Davis and Jephson Finance by applying discounts of 28 percent and 31.3 percent, respectively, to their net asset values, to reflect the lack of marketability of the stock of each company.  The amount of the discount was determined by reference to the discount from net asset value of 10 publicly traded closed-end investment funds which had portfolio profiles similar to those of the two companies involved herein.Respondent claims that the values of the companies are their net asset values, less liquidation expenses.  Respondent argues that no discount for lack of marketability is appropriate because any purchaser of decedent's 100-percent interest in the investment companies would acquire unconditional control over, and access to, their underlying cash and securities.  Respondent further contends that direct ownership of the cash and securities could be obtained in a tax-free transaction pursuant to section 337.  1*75  ULTIMATE FINDINGS OF FACT(1) On April 9, 1979, the stock of R.B. Davis Investment Co. had a value of $ 2,922,786 (i.e., its net asset value, less liquidation expenses).(2) On April 9, 1979, the stock of Jephson Finance Co. had a value of $ 7,011,368 (i.e., its net asset value, less liquidation expenses).*303  OPINIONSection 2031(a) mandates inclusion in the gross estate of the value of all property owned by a decedent at the time of death.  For estate tax purposes, in general, value means fair market value on the applicable valuation date. 2 Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or to sell and both having reasonable knowledge of all relevant facts.  Sec. 20.2031-1(b), Estate Tax Regs.Valuing stock of a closely held corporation*76  is a factual determination for which there is no talismanic formula.  A weighing of all relevant facts and circumstances is required.  In determining such value, section 2031(b) requires that consideration be given, in addition to all relevant factors, to the price of stock of corporations engaged in the same or similar line of business which are listed on an exchange.After considering all relevant facts and circumstances, we find that the date of death values of R.B. Davis and Jephson Finance Co. are their respective net asset values, less the cost of liquidation. The factors that persuaded us in reaching this finding are: (1) All the assets of both investment companies were liquid assets, i.e., cash and marketable securities; (2) neither corporation had any liabilities which had to be seriously considered in valuing the companies; (3) the decedent's 100-percent ownership of both companies gave her (or her estate) the unqualified right to liquidate both companies at any time.  In our opinion, neither the decedent nor her estate nor a hypothetical seller would have sold the stock of either company for less than that which could have been realized through liquidation. We further*77  believe that a hypothetical purchaser would be willing to pay such an amount.  3We recognize that the value of an interest in an investment company is not always equal to its proportionate share of the company's net asset value. For example, we have applied a discount where a minority interest was being *304  valued. , affd. without published opinion ; ; , reversed on another issue sub nom.  . We have also allowed a discount for the nonmarketability*78  of an investment company's stock, particularly where its assets consist of real estate or other nonliquid assets.  ; . Here, however, there is neither a minority interest nor any nonliquid assets.Petitioner does not argue that it is entitled to a minority interest discount, since it owns all of the stock of both companies.  Nevertheless, petitioner indirectly seeks to obtain a minority interest discount by analogizing R.B. Davis and Jephson Finance to publicly traded closed-end investment companies.  We agree that in many respects R.B. Davis and Jephson Finance are comparable to closed-end investment companies.  Also, we recognize that stock in closed-end investment companies often sells for less than net asset value. However, an investor in a closed-end investment company has little or no say in the selection of the company's investment advisor or the company's portfolio and cannot easily force the liquidation of the company.  Petitioner did not present any evidence of sales of controlling interests in closed-end *79  investment companies.  The sale of a controlling interest in a closed-end investment company might well command a premium, rather than be subject to discount. In any event, we find inapposite petitioner's comparison of the sale of 100-percent interests in R.B. Davis and Jephson Finance to sales of minority interests in publicly traded closed-end investment companies.Petitioner next argues that a discount for nonmarketability is warranted.  Petitioner contends that marketable securities and cash, when held in corporate solution, are not readily marketable. This argument ignores the fact that complete ownership of each corporation enables petitioner to obtain, at any time, direct ownership of the corporate assets either through a partial or complete liquidation or through a dividend in kind.*305  Lastly, petitioner argues that a purchaser of the stock of R.B. Davis and Jephson Finance would demand a discount for the existence of unknown liabilities.  Only R.B. Davis was an operating company 4 -- it manufactured baking powder prior to 1955.  The potentially hazardous substance allegedly included in the baking powder manufactured by R.B. Davis is alum, which around 1905 was thought*80  to be hazardous to health.  Petitioner submitted no evidence that alum is hazardous to health or that any liability for its use was ever imposed on R.B. Davis or any other manufacturer of baking powder, or that any hazardous effects of alum had remained undetected for the 24 years which had elapsed between the date R.B. Davis ceased to manufacture baking powder and the date of decedent's death.  In any event, any claim brought against R.B. Davis would probably have been time-barred.  In short, we are not persuaded by this argument and believe that here no discount is warranted for unknown liabilities.Respondent conceded that there should be a reduction for the transactional costs which the owner of R.B. Davis and Jephson Finance stock would incur in obtaining direct ownership of the corporate assets through a liquidation. We have accordingly taken these costs into account in valuing both companies.To reflect the foregoing and the concessions*81  of the parties,Decision will be entered under Rule 155.  Footnotes1. All section references are to the Internal Revenue Code of 1954 as amended and in effect on the date of decedent's death.↩2. A decedent's gross estate is valued as of the date of death, unless the executor elects (pursuant to sec. 2032) the alternate valuation.  Here, no such election was made.↩3. The hypothetical purchaser, by purchasing the companies, would save brokerage fees that otherwise would have to be paid to acquire approximately $ 9 million of marketable securities.↩4. As previously noted, Jephson Finance was at all times an investment company.↩