McNeil Tax Assessment Case , 435 Pa. 553 ( 1969 )

Opinion by

Me. Justice O’Bbien,

Robert J. McNeil and Henry S. McNeil, on December 31, 1964, owned respectively 145,910 shares and 189,799 shares of the common stock of Johnson & Johnson, Inc. Pursuant to the provisions of the Montgomery County personal property tax, they filed returns, listing their shares of Johnson & Johnson. Each valued his shares at 70% of the closing price of the stock on December 31, 1964. The Board of Assessment and Revision of Taxes of Montgomery County rejected these valuations and assessed the stock at its full value as reflected by the December 31, 1964, closing price. The stock closed on the exchange on December 31, 1964, at $111.75 per share.

The McNeils appealed the valuation of the Board to the Court of Common Pleas of Montgomery County, which evaluated the shares at 90% of their December 31st close. The Board appealed to the Superior Court. That Court, in an opinion by Judge Hoffman, remanded the matter to the Court of Common Pleas for further proceedings. Judge Jacobs noted that he would affirm on the opinion of the Court of Common Pleas and Judge Montgomery filed a dissenting opinion in which Judge Hannum joined. Both the McNeils and the County filed petitions for allocatur which we granted, limited to the question of the applicability of “blockage” in personal property tax evaluation. Subsequently, the City of Philadelphia sought and was granted leave to intervene. The City briefed and argued the case in support of the position of the County.

The critical question which the courts below had to determine was whether the theory of “blockage” is applicable to the valuation of large blocks of stock in personal property tax evaluations. The Act of June 17, 1913, P. L. 507, 72 P.S. 4821, provides for County personal property taxes at the rate of 4 mills and §4.1 of the Act, 72 P.S. 4843.1, requires annual evaluation of all taxable property. In this case the valuation date, fixed annually for the valuation of stock, is December 31st.

Judge Hoffman reached the conclusion that the situation is analogous to that which exists in estate, gift and inheritance tax laws. He concluded that the large shareholdings of the taxpayers would cause a depression in the market for those stocks, should they desire to dispose of their holdings. He therefore reasoned that their actual value is less than the value reflected by the trading of a limited number of shares of that stock on the exchange on the valuation date. He remanded the matter because he was dissatisfied with the method used by the Court of Common Pleas in determining the 90% valuation. First of all, he found that the expert witnesses considered an average of the McNeil brothers’ shares in order to reach their conclusion that the stock price would be depressed by 6% if a secondary distribution, the most practical and economical method of liquidating these blocks of stock, were undertaken. He directed the Court of Common Pleas to take additional testimony in which any such depression should be considered individually for the two taxpayers by the expert witnesses. Secondly, Judge Hoffman concluded that the 4% which the Court of Common Pleas allowed as the profit for the underwriters of a secondary distribution was not a proper item for consideration in reducing the stock valuation on a theory of blockage. For those, reasons, among others, the majority of the Superior Court held that although the blockage theory applies in personal property tax cases, the method used in determining the blockage factor on the evaluation of these large stock-holdings was improper.

Judge Montgomery, in his dissenting opinion, argued that blockage should not apply. lie pointed out in his dissent: “From the joint research of the attorneys and the court, no precedent can be found for the application of the blockage rule in evaluating securities for personal property tax purposes. To me the reason is obvious. To do so would mean that factors not present, and therefore, irrelevant, must be considered in making the evaluation. Those factors determine the effect the projected sale of the securities held by any one taxpayer might have on their value. Such effect might be depressionary or inflationary, depending on still other factors, viz., the manner of making the sale, the need of the holder to sell, the general condition of the security market at the particular moment of sale, the state of the general economy which in turn would be determined by still other factors, etc., ad infinitum.” (Emphasis in original). It is clear that if blockage is applied in personal property tax evaluations, imponderables too numerous to contemplate would be introduced into the process. In addition to the factors enumerated by Judge Montgomery, one could add the most recent actions of the Federal Reserve Board, the prime interest rate, the actions of any number of committees of Congress, the state of the Paris peace negotiations and the actions of over a hundred foreign governments, to mention only a few. If for no other reason, the practical problem of evaluation which would be created precludes the application of the principle.

Moreover, we are not convinced that the analogy to the death tax situations is valid. In death tax evaluations, there may be good reason requiring the sale of the asset to be evaluated. Liquidation might be required for the payment of debts or taxes, or even because legatees did not choose to take in kind. In any event, in all such situations, there is an actual transfer of ownership. In personal property tax cases, the property is being held as an investment, is not being transferred, and tbe spectre of required sale does not loom over the evaluation. In considering whether blockage should apply to large blocks of stock for purposes of the Florida Intangible Personal Property Taxation Law, the Florida Supreme Court held, Florida National Bank v. Simpson, 59 So. 2d 751 (1952), “The Chancellor found from the evidence that there was no necessity for placing large blocks of shares of stock on the market nor was there even a probability that it would or might be done and consequently, there was no occasion for invocation of the ‘Blockage Rule.’ The majority concurs in this view and is further of the opinion that the burden of showing the necessity or probability of a sale, or some facts which would make this rule or doctrine applicable was on the plaintiffs and that they not only failed to meet this burden but their positive testimony shows that there was no necessity or probability that the stock would be sold.” We find no basis for the application of the blockage rule.

Furthermore, in addition to our previously expressed view that efficiency of operation requires evaluation based solely on the closing market price per share, we are convinced that common usage dictates that result. We believe that the Legislature intended the words “actual value” as used in the personal property tax act to mean the closing market price when dealing with shares of stock listed on the stock exchange. That is the method by which laymen and stock brokers alike determine the actual value of listed stocks, irrespective of the number of shares held or traded. Mutual funds and common trust funds determine the actual value of their holdings by simple reference to the market quotation, regardless of the size of the block held. These accepted facts were surely within the contemplation of the General Assembly when the words “actual value” were used and we will give those words their usual, customary and plain meaning for the evaluation of listed stocks for personal property tax purposes.

Since we hold, for the reasons stated, that blockage is inapplicable in the evaluations under consideration, we need not, nor do we, reach the very interesting question of whether the allowance of blockage in such situations does violence to the uniformity requirement of the Pennsylvania Constitution.

The judgments of the Superior Court and of the Court of Common Pleas of Montgomery County are reversed and the cases are remanded to the Court of Common Pleas of Montgomery County with instructions to reinstate the evaluations fixed by the Board of Assessment and Revision of Taxes of Montgomery County.

Mr. Justice Jones took no part in the consideration or decision of this case.