DocketNumber： Docket No. 4561-95
Filed Date： 7/24/1996
Status： Non-Precedential
Modified Date： 4/17/2021
*353 An appropriate order will be issued denying petitioner's motion to exclude the disputed evidence and decision will be entered under Rule 155.
The parties dispute the value of D's stock in E on: (1) The date of D's death and (2) the date of a gift that was made approximately 3 months beforehand. A argues that the per-share value was $ 35.20 on the date of D's death and $ 34.84 on the date of the gift. R determined that the per-share value was $ 72.15 on both dates.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO,
The parties dispute the value *354 argues that the per-share values were $ 35.20 at Decedent's death and $ 34.84 on the date of the gift. Respondent determined that the per-share value was $ 72.15 on both dates.
We hold that the per-share value was $ 50.50885 on both dates. Unless otherwise stated, section references are to the Internal Revenue Code in effect for the Valuation Dates. Rule references are to the Tax Court Rules of Practice and Procedure. Dollars, unless otherwise noted, are rounded to the nearest dollar.
FINDINGS OF FACT
Decedent died on July 16, 1991, while domiciled in Gonzales, Louisiana. Administratrix is his surviving spouse, and she is the administratrix of his estate. *355 services through its wholly owned subsidiaries: Telephone services, telecommunications and electronic equipment sales, answering and secretarial services, and administrative services. On the Valuation Dates, Eatel's wholly owned subsidiaries were: (1) East Ascension Telephone Co., Inc., (2) H & E., Inc., (3) Advanced Tel., Inc., and (4) Eatelnet, Inc.
*356 Eatel's outstanding stock on the Valuation Dates consisted of 868,200 shares of voting stock and 96,466 shares of nonvoting stock. None of this stock was registered with either the Securities & Exchange Commission or the office of the Louisiana Blue Sky Commissioner. None of this stock was publicly traded.
Eatel had approximately 30 shareholders on the Valuation Dates. Most of its shares were owned by: (1) Decedent's family (Scanlan Family), who owned approximately 37.1 percent of Eatel's stock, (2) the Banker family, who owned approximately 35 percent of Eatel's stock, and (3) the King family, who owned approximately 14 percent of Eatel's stock.
On April 12, 1991, Administratrix gave six members of her family a total of 10,667 shares of Eatel voting stock, which were her separate property. *357 (C & A), an investment banking firm in New Orleans, Louisiana, and signed on November 15, 1989, by its founder and president, David Blackshear Hamilton Chaffe III (Mr. Chaffe). The 1989 report reflected C & A's appraisal of DATA as of August 31, 1989, which was performed to "establish the fair market value * * * of DATA in non-marketable, minority blocks of shares." *358 February 1, 1992, a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, was filed on petitioner's behalf. Petitioner's Form 706 reported the date-of-death value of Decedent's Eatel stock at $ 35.20 per share. This amount was based on a two-page valuation report of C & A, signed by Mr. Chaffe on October 21, 1991 (1991 report). C & A prepared the 1991 report by relying heavily on its 1989 report. The 1991 report also states that C & A: (1) Reviewed Eatel's certified financial statements for its calendar years ended December 31, 1989 and 1990, as well as Eatel's uncertified financial statements for the 7-month period ended July 31, 1991, *359 value on July 16, 1991, was $ 52 million. C & A chose a 35-percent marketability discount and multiplied this discount by the $ 52 million figure to conclude that Eatel's "nonmarketable minority value" was $ 33.8 million; i.e., $ 35.20 per share for Eatel's outstanding shares on July 16, 1991.
In September 1992, Eatel's board of directors solicited offers to purchase all of Eatel's stock or assets. By letter dated January 12, 1993, MDJ Communications, Inc., offered to buy all of Eatel's stock for $ 65 million. By letter dated January 13, 1993, Telephone and Data Systems, Inc., offered to buy all of Eatel's stock for $ 48.2 million, "plus the assumption of the existing indebtedness" (which was at least $ 25,547,938 on December 31, 1992). By letter dated January 15, 1993, Century Telephone Enterprises, Inc., offered to buy all of Eatel's stock for $ 65-75 million. By letter dated March 26, 1993, Brighton Communications Corp. (Brighton), *360 offered to buy all of Eatel's stock for $ 72.5 million; i.e., $ 75.1555 per share.
Following Brighton's offer, the Scanlan Family, which then consisted of Decedent's descendants and Administratrix, exercised their right of first refusal and caused Eatel to enter into an agreement with each shareholder who was not a member of the Scanlan Family (Other Shareholders) to sell his or her shares to Eatel at the $ 75.1555 per-share price offered by Brighton. On August 30, 1993, the Other Shareholders agreed with the Scanlan Family to have their shares redeemed at $ 75.1555 per share. In January 1994, Eatel redeemed all of the stock of the Other Shareholders, which was 62.9 percent of Eatel's outstanding stock at that time.
Based on the redemption price, respondent determined that each share of Eatel's voting stock was worth $ 72.15 on July 16, 1991. In the case of Decedent, respondent reduced the $ 72.15 value by 4 percent to account for his minority interest in the company, a minor increase in earnings between the date of his death and the date of the redemption agreement, and the deflation of the dollar from the date of the redemption agreement to the date of Decedent's death. Respondent*361 also used this formula to set the value of the donated stock at $ 72.15 per share, and she increased Decedent's taxable gifts accordingly.
DATA's 1984 through 1987 net income (after taxes) was $ 423,225, $ 854,085, $ 894,990, $ 369,009, respectively, and its net income (after taxes) for the 6-month period ended December 31, 1987, was $ 734,710. *362 There were no sales or redemptions of Eatel stock between 1989 and 1994.
OPINION
Before turning to the primary issue of valuation, we must decide a relevancy objection raised by petitioner (and submitted to and filed by the Court as a written motion) as to stipulations and other evidence relating to the: (1) Offers in 1993 to purchase all of Eatel's stock and (2) redemption of the Other Shareholders' stock at $ 75.1555 per share. Petitioner argues that this evidence (the disputed evidence) is irrelevant for purposes of determining value on the Valuation Dates because: (1) There were no agreements, offers, or negotiations on the Valuation Dates to sell all of Eatel's stock or assets; (2) the offers were for all of Eatel's stock, whereas the issue at hand concerns minority interests; (3) Eatel's 1992 earnings per share increased by more than 27.9 percent over its 1990 earnings per share and by more than 19.95 percent over its 1991 earnings per share; (4) petitioner's expert concluded that the price-earnings multiples of comparable publicly traded telecommunications corporations increased by more than 50 percent between the date of Decedent's death and March 1993; *363 and (5) petitioner's expert concluded that the premiums paid in 1993 for the stock of publicly traded telecommunications corporations were more than 52 percent above the prices at which minority blocks were then trading.
We disagree with petitioner that the disputed evidence is irrelevant to our determination herein. Federal law favors the admission of evidence, and the test of relevancy under Federal law is designed to reach that end.
We find the disputed evidence probative to our determination of value on the Valuation Dates. The best indicator of the value of unlisted stock often is arm's-length sales of that stock at or around the time of valuation, for purposes of determining fair market value, we believe it appropriate to consider*366 sales of properties occurring subsequent to the valuation date if the properties involved are indeed comparable to the subject properties. * * * Of course, appropriate adjustments must be made to take account of differences between the valuation date and the dates of the later-occurring events. For example, there may have been changes in general inflation, people's expectations with respect to the industry, performances of the various components of the business, technology, and the provisions of tax law that might affect fair market values * * * [between the valuation date and the subsequent date of sale]. Although any such changes must be accounted for in determining the evidentiary weight to be given to the later-occurring events, those changes ordinarily are not justification for ignoring the later-occurring events (unless other comparables offer significantly better matches to the property being valued). [Citations and quotation marks omitted.]
For Federal estate tax purposes, property includable in a decedent's*367 gross estate is valued on either: (1) The date of the decedent's death or (2) the alternate valuation date as provided under section 2032. Secs. 2031(a) and 2032(a); sec. 20.2031-1(b), Estate Tax Regs. For Federal gift tax purposes, property is valued on the date of the gift. Sec. 2512(a); sec. 25.2512-1, Gift Tax Regs. In both cases, value is a factual determination for which the trier of fact must weigh all relevant evidence and draw appropriate inferences and conclusions.
Special rules govern the valuation of corporate stock. When stock is listed on an established securities market, the stock's value usually equals its listed market price. When stock is not listed on an established securities market, the stock's value is usually based on arm's-length sales (if any) that have occurred within a reasonable time of the valuation date. In the absence of any such arm's-length sales, the value of unlisted*369 stock is based on the value of listed stock of the subject corporation, or, if the corporation has no listed stock, the listed stock of like corporations engaged in the same or a similar line of business.
*370 Respondent did not call an expert at trial to support her determination that the value of the subject stock was $ 72.15 per share on the Valuation Dates. Petitioner called its expert, Mr. Chaffe, to support its asserted values, and the Court received his expert report into evidence.
*371 Petitioner argues that it must prevail in this case because respondent did not call an expert to contradict Mr. Chaffe's testimony. We disagree. Petitioner must prove that respondent's determination of the subject values is incorrect.
We reject Mr. Chaffe's opinion. He is unhelpful to us in resolving the issues herein. We were unimpressed by his testimony during trial, and we are unpersuaded by the conclusions reached in his expert report. Mr. Chaffe was unable to answer coherently many questions raised by the Court on conclusions reached in his reports, and he was unable to explain certain parts of the analysis contained in the reports. He arbitrarily applied a 35-percent marketability discount*373 to the subject shares. He did not adequately discuss the publicly traded companies which he compared to Eatel, and he did not set forth their age, business, or product line with any specificity. He made no mention of a hypothetical buyer or a hypothetical seller, and, indeed, we read his expert report to be skewed in favor of a low value for the stock.
Mr. Chaffe relied primarily on his 1989 report to ascertain the value set forth in the 1991 report. We are unpersuaded that the company valued in 1989 (DATA) was sufficiently similar to the company valued in 1991 (Eatel) to make such reliance reasonable. Whereas the 1989 report states that Mr. Chaffe toured DATA's facilities on October 10, 1989, there is nothing in his testimony or the 1991 report to suggest that he did likewise before preparing the 1991 report, or that he took any other meaningful step to independently verify that Eatel's operation in 1991 was the same as DATA's operation in 1989. Indeed, the 1991 report is silent with respect to Eatel's then-current business. Although the 1991 report states that C & A discussed Eatel's business decisions with Eatel's president, neither the 1991 report nor the record as a whole reveals*374 the substance or extent of those discussions.
Even assuming, arguendo, that DATA's and Eatel's operations were similar enough to allow Mr. Chaffe to rely reasonably on his 1989 report, we find other faults with the 1991 report. First, the 1991 report does not adequately account for the fact that Eatel's 1991 earnings increased dramatically over DATA's earnings for the years covered by the 1989 report. Second, the 1991 report does not adequately take into account that Eatel began paying dividends after the time covered by the 1989 report. Third, the 1991 report makes no reference to the 1989 report's statement that DATA's disposition in 1988 of a second-tier subsidiary did away with a business that had a negative effect on earnings; e.g., the 1991 report does not discuss the effect of that disposition on Eatel's 1991 net worth. Fourth, the 1989 report evidences an anticipated growth of DATA's subsidiaries by 1991 through incorporation of technology, transformation, and changes in operation, yet the 1991 report does not discuss the results of this anticipated growth or its effect on Eatel's net worth. Fifth, the 1989 report explains that "the large increase in 1988 income was the result*375 of a single sale of stock held by the Company [DATA] which resulted in a pre-tax gain of approximately $ 4,752,417 which was invested in temporary cash investments." But neither the 1989 report nor the 1991 report explains the dramatically higher net income (after taxes) for years after 1988, as compared to years before. Sixth, the 1991 report refers to the financial data of publicly traded companies, nominally in similar lines of business, yet never explains how those companies were selected, or in what respects the lines of business were similar to Eatel's. *376 The 1991 report states that the shares of Eatel are not marketable, yet fails to explain sufficiently why this is so. Mr. Chaffe testified at trial that "There are very rare exceptions when there is any willing buyer at all at any price for minority shares of a nonpublicly-traded company". This testimony is unsupported by the record, unpersuasive by itself, and implausible. We find that the shares were marketable. As a point of fact, the 1989 report notes that some shares of DATA were sold in 1985, and a 1986 gift tax return reports that a corporate competitor of DATA had offered to buy a former shareholder's minority interest in DATA (approximately 23.8 percent) at a premium in 1985. We also note that Eatel's 21 shareholders in 1989 grew to approximately 30 on the Valuation Dates. Although we reject Mr. Chaffe's opinion in full, we do not believe that the value of the subject stock was $ 72.15 on both dates, as respondent determined. We find incredible that the 4-percent discount reflected in the notice of deficiency adequately accounts for both a marketability and minority discount, as well as the change in the setting from the date of the redemption agreement to the date of Decedent's*377 death. We proceed to determine the value of the stock on the Valuation Dates. The record does not allow us to make a precise determination of the stock's values; thus, we rely on our common sense, knowledge, and experience to help us ascertain these values. Valuation, which is simply an approximation, is inherently imprecise and usually capable of resolution only by a Solomon-like pronouncement. We start with the redemption price of $ 75.1555 because we believe that it represents the arm's-length value for all of Eatel's stock in August 1993. We adjust this price to account for the passage of time, as well as the change in the setting from the date of Decedent's death to the date of the redemption agreement. We also adjust this price to take into account the marketability and minority discounts. In an ideal world, these two discounts*378 are computed separately, as are the alterations for the change in setting. See We find no material alteration in the value of the shares between the date of the gift and the date of death. Thus we find that the date-of-gift value equals the date-of-death value. Accordingly, we hold that the date-of-gift value is $ 50.50885 per share. We have considered all arguments made by the parties. To the extent that we have not discussed any of their arguments, we have found them to be without merit. To reflect the foregoing,
1. Throughout this Memorandum Opinion, we sometimes use the shorthand "value" to refer to fair market value.↩
2. We do not know where Administratrix resided at the time of the petition.↩
3. The parties have not explained (and the record does not reveal) whether the change from DATA to Eatel was merely one in name, or whether it stemmed from a corporate acquisition or reorganization. Although petitioner's counsel stated during trial that "The name [of DATA] was changed [to Eatel] as of August 31, [1989]," there is no evidence in the record to support that statement. See
4. At least one of these donees, namely, John D. Scanlan, was already a shareholder of Eatel.↩
5. The 1989 report states that DATA has 21 shareholders.↩
6. C & A also looked at the relevant financial statements of Eatel's subsidiaries.↩
7. The 6-month period stemmed from DATA's change to the calendar year from a fiscal year ended June 30. An income statement included in Exhibit 3 erroneously lists this 6-month period as ended on June 30, 1987.↩
8. We are unable to determine Eatel's net income (before taxes) or dividends for 1993 because the record does not reveal Eatel's financial data for that year.↩
9. Like corporations are determined by reference to the subject corporation's age, business (e.g., manufacturer, retailer), product line, and gross receipts.↩
10. At the outset, we note that the expert report deals only with the date-of-death value.↩
11. Petitioner has implied throughout this proceeding that respondent's determination is invalid because it is not supported by an appraisal. Although petitioner did not argue this issue on brief, we note in passing that we disagree. This argument has previously been considered by the Court, and we have rejected it. See, e.g.,
12. In this regard, we give little weight to the conclusions of Mr. Chaffe that: (1) The price-earnings multiples of comparable publicly traded telecommunications corporations increased by more than 50 percent between the date of Decedent's death and March 1993, and (2) the premiums paid in 1993 for the stock of publicly traded telecommunications corporations were more than 52 percent above the prices at which minority blocks were then trading.↩
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