DocketNumber： Docket Nos. 18038-80, 2951-82.
Filed Date： 6/6/1985
Status： Non-Precedential
Modified Date： 11/20/2020
1985 Tax Ct. Memo LEXIS 360">*360
WHITAKER,
To the extent that some of the facts relevant to this proceeding already were determined in our previous opinions, we will merely summarize them here and incorporate our prior opinions by reference. The stock that we1985 Tax Ct. Memo LEXIS 360">*362 are called upon to value was purchased by Prentice I. Robinson (Robinson), one of the petitioners in docket No. 18038-80, by the exercise, on March 4, 1974, of a stock option granted to him by Centronics Data Computer Corp. and Subsidiaries (Centronics), petitioner in docket No. 2951-82. On that date, Robinson acquired 153,000 shares of Centronics stock by means of the option for $ .667 per share, although the stock was worth considerably more. On
The shares represented by this certificate have not been registered under the Securities Act of 1933 and may not be sold, offered for sale or otherwise transferred or disposed of unless a registration statement under such Act is in effect with respect thereto or unless the company has received an opinion of counsel satisfactory to it, that an exemption from such registration is applicable to said shares.
The parties have stipulated that: (1) Upon exercising his option on March 4, 1974, Robinson owned approximately 3.2 percent of the total outstanding common stock of Centronics; 1985 Tax Ct. Memo LEXIS 360">*363 and (2) if the 1,200,000 Centronics shares held by Centronics management are excluded, on March 4, 1974 Robinson's shares represented approximately 4.3 percent of the total outstanding Centronics stock.
When Robinson and Centronics entered into the subject option agreement in early 1969, there was no public market for Centronics stock. At that time, Centronics was closely held, with most of its stock owned by its President and Vice President. A public offering of newly-issued shares of Centronics stock took place in August 1969, after which time the stock was traded over the counter until November 18, 1974, when the publicly held shares of Centronics were first listed for trading on the New York Stock Exchange.
| 1974 | |
| January | 331,600 |
| February | 288,800 |
| March | 415,100 |
| April | 327,100 |
| May | 395,500 |
| June | 237,800 |
| July | 349,400 |
| August | 276,700 |
| September | 338,800 |
| October | 566,100 |
| November | 266,500 |
| December | 274,600 |
| TOTAL: | 4,068,000 |
1985 Tax Ct. Memo LEXIS 360">*364 During March 1974, daily trading volume ranged from 8,000 to 42,300 shares, and average daily volume amounted to 19,767 shares. On March 4, 1974, trading volume was 11,900 shares. Robinson's 153,000 shares of Centronics stock constituted approximately two full weeks of trading volume.
The bid price of Centronics stock was approximately $30 per share in October 1973. It declined during November 1973, and during December 1973 and the first quarter of 1974 it was trading at between $16 and $21 per share. During this period the stock market generally was declining. On March 4, 1974, the average of the bid ($19.75) and the asked ($20.50) prices for Centronics shares was $20.125 per share.
The additional 200,000 shares held by Caesars World were sold by means of a secondary offering on February 14, 1974. Forty-seven underwriters agreed to purchase specific amounts of the shares from Caesars World, and all 200,000 shares were offered to the public by the underwriters for $17.75 per share. All 200,000 shares were quickly acquired by
1985 Tax Ct. Memo LEXIS 360">*368 Historically, the universally accepted definition of "fair market value" has been 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 sell and both having reasonable knowledge of relevant facts.
1985 Tax Ct. Memo LEXIS 360">*369 Section 83(a) provides an exception to this traditional definition, however, by providing that fair market value is to be "determined without regard to any restriction other than a restriction which by its terms will never lapse." Although Robinson's stock here constituted "lettered" stock which could not be sold publicly without being first registered, we have held that, under the section 83(a) definition of fair market value, restrictions under Federal securities laws are to be disregarded.
Robinson's expert witness, Lawrence H. Danzig, presented a study which concluded that Robinson's stock should be discounted 40 percent from the closing market price of Centronics common stock on March 4, 1974.He further expressed the opinion that
In his secondary distribution analysis, he observed that the first step toward such a sale of a large block of stock is preparation of a registration statement and prospectus for the SEC, followed by review of that statement by the SEC, and a 20-day registration period before the stock is issued. Since the public becomes aware of the impending sale in advance of the actual sale date, but1985 Tax Ct. Memo LEXIS 360">*372 the underwriters customarily do not become bound to purchase the stock until the actual sale date, he reasoned, the appropriate period during which to measure decline in stock value attributable to blockage--or "market pressure," as he calls it--started 60 trading days before registration and continued until 20 days after the date the stock was sold. He selected five companies (one of which was Centronics itself, the other four of which were, like Centronics, primarily manufacturers of computer components, and were relatively new, profitable companies, doing business in the United States) that had registered secondary distributions during 1974 and computed the closing market prices of those companies' stock at 20-day
1985 Tax Ct. Memo LEXIS 360">*374 Mr. Danzig's private placement analysis was considerably less complicated. It was based upon a sample taken by the SEC between January 1, 1966 and June 30, 1969, which showed that privately sold stock was priced at discounts of up to 40 percent from the price that could be obtained in a public distribution of the same securities. From this he concluded that a 40 percent discount was appropriately applied to a hypothetical private sale of Centronics stock in March 1974.
While we find Mr. Danzig's study to be most innovative and interesting, we are not convinced that it accurately measures blockage in a case such as this where valuation is to be determined by means of a peculiar standard under section 83. Mr. Danzig's testimony makes it clear that he valued Robinson's "lettered" stock within the framework that public sale was prohibited without a registration statement meeting SEC requirements. determine. Moreover, the study does not, in our opinion, 1985 Tax Ct. Memo LEXIS 360">*375 adequately show the extent to which general decline of Centronics stock for reasons unrelated to the secondary distribution may have contributed to the downward "pressure" experienced in the months before the secondary distribution. While he clearly recognized the problem and attempted to factor out other causes which contributed to the decline in price by dividing his index by the broad over-the-counter index, it has not been shown that Centronics stock had been following such index or, if it had, that it would have continued to do so during the period studied absent a secondary distribution. 1985 Tax Ct. Memo LEXIS 360">*376 shares, trading volume and the market
Respondent's expert, John A. Carter, was clearly instructed to value Robinson's shares as though they were already registered. He analyzed Robinson's block of shares in relation to the number of outstanding and freely trading shares of Centronics stock on March 4, 1974, as well as the company's trading volume on and around that date. He also considered the views expressed in publications concerning the perception of Centronics stock and compared Centronics' trading level with that
Despite the clear interest in Centronics stock that the market demonstrated in the heavy trading volume that occurred in early 1974, Mr. Carter concluded that Robinson's block of 153,000 shares could only have been placed in a secondary offering or a private sale similar to those that were made by Caesars World in January and February 1974. Accordingly, based on the Caesars World discounts from prevailing over-the-counter prices, he concluded that a discount of 16.2 percent was appropriate if the shares were viewed as "previously registered," and a 22 percent discount was1985 Tax Ct. Memo LEXIS 360">*380 called for if they were viewed as requiring registration. On brief, respondent contends that Mr. Carter's testimony was "redetermined" to the extent that any registration costs or other potential selling expenses were included in his recommended discount. Thus, respondent now urges that Robinson's
Mr. Carter's approach does not suffer from the shortcomings of Mr. Danzig's "market pressure" approach, nor does it contain the conclusory generalities of Mr. Ratchick's testimony, which we found to be unconvincing. Moreover, he was correct in relying principally upon two reasonably contemporaneous transactions which demonstrate the discount experienced in marketing large blocks of Centronics stock. The problem with Mr. Carter's analysis is that he assumed, contrary to Mr. Danzig, that the only blockage discount in the Caesar's World secondary offering was represented by the difference between the actual offering price and the average bid and asked prices on the date on which the underwriters set the offering price. He failed1985 Tax Ct. Memo LEXIS 360">*381 altogether to recognize that such average prices were already then depressed as a result of the initial announcement of the registered offering in the prior October, a fact convincingly established by Mr. Danzig. Our problem with Mr. Danzig's study was not with his general thesis that there was a striking drop in the stock price which resulted solely from the announcement of the offering; rather, he did not satisfy us that he had adequately factored out other circumstances which contributed to the decline in the price between the applicable dates. We are satisfied that, if Robinson's shares had been marketed other than through a private sale, the assistance of one or more brokers would have been
On the basis of the experts' testimony and all of the other evidence before us, we are satisfied that Robinson could not have sold his stock within a reasonable period1985 Tax Ct. Memo LEXIS 360">*382 of time at over-the-counter prevailing prices. Experts for both Robinson and respondent in this proceeding testified clearly to this effect. 1985 Tax Ct. Memo LEXIS 360">*383
The record is not, however, sufficiently complete for us to arrive at a blockage discount on the basis of a hypothetical secondary distribution. To market Robinson's shares in a secondary distribution on March 4, planning would have begun in January 1974--prior to the Caesars World offering. Thus, the lead underwriter of the Caesars1985 Tax Ct. Memo LEXIS 360">*385 World offering almost certainly would have found out about the Robinson proposed distribution by or before the effective date of the Caesars World distribution. Common sense would also dictate that the Robinson lead broker would have undertaken at least to coordinate his offering with that of Caesars World or perhaps even joined forces. two offerings were actually combined, coordination would have been impossible. But even if both parties were willing to combine the offerings, lead time to revise the registration statement and prospectus would have been required. There is simply no end to such speculation. An equally likely hypothesis is that any broker advising Robinson would have concluded that, because of these problems, a secondary offering was at best impracticable as of March 4, 1974. Unfortunately, the record is totally devoid of any evidence1985 Tax Ct. Memo LEXIS 360">*386 as to solutions to these obvious problems. Of more significance, we have no evidence at all as to blockage discount in a Robinson offering coordinated with the Caesars World offering, although we do have a basis for determining blockage in a private sale. For this reason, we are confined to a consideration of blockage discount in the context of a private sale. We find this to be an entirely reasonable conclusion to this case since in our judgment and based upon the entire record we believe that a private sale would have been the most likely method of disposition of the Robinson shares on March 4, 1974. Accordingly, our blockage discount determination is based solely on a private sale hypothesis.
When Caesars World sold 200,000 shares of Centronics stock in a private sale on January 3, 1974, the selling price was approximately 21 percent below the average bid and asked prices on or around that date. A Robinson private sale would have been materially different1985 Tax Ct. Memo LEXIS 360">*387 from the Caesars World private sale in some respects, however. On the one hand, the successful distribution
Ignoring as we must the effect which the SEC restriction unquestionably would have had on the actual fair market value of the Robinson shares, but basing our opinion upon the entire
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all rule references are to the Tax Court Rules of Practice and Procedure.↩
2. The underwriting discounts and commissions of $1.30 were approximately 7.3 percent of the gross offering price. This is a typical amount in the industry for such discounts and commissions. ↩
3. The estimated selling expenses were unusually high--7.2 percent of gross offering price--because they included registration costs. Without registration costs, these expenses would have been 3 to 4 percent of the gross offering price. ↩
4. The expert who prepared these figures did not explain why he used the bid and asked prices on February 12, 1974 to compare with the shares offered on February 14, 1974. We assume that this is because the offering price is agreed upon a short time prior to the offering.↩
5. Robinson contends in his brief that, because respondent at trial asserted a fair market value for Robinson's stock that was less than that asserted in the notice of deficiency, there is no presumption of correctness and, consequently, respondent bears the burden of proof. The law is clearly to the contrary.
6. We note that the parties and the cases generally have used the words "average" and "mean" interchangeably. Since there is no evidence in the record concerning the "mean" of the bid and asked prices of Centronics stock, we will use the "average" here.↩
7. See
8. We note in this regard that one of the regulations under section 83 dealing with valuation of nonqualified stock options refers to the rules of valuation set forth in the estate tax regulations.
9. After trial, we received an exhibit using the Standard & Poor's Office Business Equipment Index instead of the NASDAQ Composite Index to attempt to factor out market decline. While by our computation the results are similar, we are not satisfied that the exhibit resolved our problems discussed in the text.↩
10. For example, at trial he agreed that in his secondary offering study he was valuing shares that were registerable, but not yet registered until the time they were offered. In the private placement portion of his study, he valued unregistered shares. He also frankly agreed that his report did not have any data concerning the impact on the market of introducing 153,000 more shares that were already registered. ↩
11. Mr. Danzig did not, for example, study the performance of stocks of companies comparable to Centronics which did not have secondary offerings to factor out unrelated decline. ↩
12. We note Mr. Danzig's recognition of this problem at trial, when he guessed that "the market pressure effect must be more pronounced in a fallen [sic] market than a rising market." He also admitted that the market was falling in early 1974. ↩
13. For example, one of the comparable companies, Measurex Corp., had a secondary offering of 2,800 shares, which constituted 0.1 percent of its outstanding shares. Its trading volume was between 100,000 and 200,000 shares during each period prior to and during registration and jumped to 500,900 in the 20 days following registration. Despite the apparently insignificant number of shares, the market pressure declined from 25.2 in the period 1-20 days before registration to 6.2 in the registration period. Since Mr. Danzig indicated that there were no other extraneous factors exerting pressure on the stock indices of his chosen companies, he apparently would advocate a discount of 19 percent for the blockage generated by these 2,800 shares, an obviously absurd result.↩
14. We note a contrary conclusion reached in
15. Centronics contends in its brief that we should not allow any discount for blockage because the number of shares being valued is less than the total Centronics shares traded in a year. See
16. The ordinary costs of selling securities are not subtracted from trading prices in fixing fair market value, but it is not entirely clear whether the extra costs of a hypothetical secondary distribution should be deducted. See C. Lowndes, R. Kramer & J. McCord, Federal Estate and Gift Taxes, p. 533 (3rd ed. 1974). Respondent clearly has taken the position in the estate tax context in
17. It would have been useful if one of the parties had called a representative of Blyth Eastman Dillon & Co., Inc., the lead underwriter in the Caesars World distribution, to testify in this proceeding, but no one did so.↩
18. $20.125 - 18% ($20.125) = $16.50. ↩
19. This figure was derived as follows:
| Fair market value per share | $ 16.50 |
| Amount paid | - .667 |
| 15.833 | |
| Total number shares | X 153,000.00 |
| Income under § 83(a) | $2,422,449.00 |
20. The year of Centronics' deduction was stipulated to by the parties, as discussed in one of our prior opinions. See
estate-of-louis-b-gresham-deceased-thomas-d-gresham-and-plaza-bank-and ( 1985 )
United States v. Cartwright ( 1973 )
Seymour Silverman v. Commissioner of Internal Revenue ( 1976 )
Marie H. Hamm v. Commissioner of Internal Revenue, William ... ( 1963 )
Commissioner of Internal Revenue v. Shattuck ( 1938 )
estate-of-ada-e-van-horne-deceased-robert-l-farmer-and-richard-r-cole ( 1983 )