WATERMAN, Circuit Judge:
We are called upon to decide whether Section 20.2031-8 (b) (1963) of the Treasury Regulations on Estate Tax (1954) which requires that shares of open-end investment companies (mutual funds) are to be valued for estate tax purposes at the public offering or publicly posted asked price is a reasonable regulation. The issue reaches us by a government appeal from a decision of Judge John T. Curtin in the United States District Court for the Western District of New York, reported at 323 F.Supp. 769 (1971), in which the district court held that the regulation was unreasonable. We agree with the court below and affirm the judgment below.
We need not belabor the facts involved in this dispute for they are well set out in the lower court opinion. Ethel Bennett died testate owning shares in three mutual funds which are registered with, and subject to the regulations of, the Securities and Exchange Commission. Upon her death the executor of her estate, Douglas B. Cartwright, filed an estate tax return reporting the value of those shares at their net asset value,
that is, at their bid or redemption price. As we have noted, Treasury Regulation 20.2031-8 (b) set forth in the margin,
requires that shares in such funds be valued at their public offering price, and, accordingly, the Commissioner of Internal Revenue assessed a deficiency. The executor paid the assessed deficiency, and then, alleging overpayment of the tax, on December 6, 1967 filed his claim under 28 U.S.C. §§ 1340 and 1346 in the district court for a refund of $3,092.59. In this case the public offering price is the price at which the shares in the mutual funds are marketed and distributed by Investors Diversified Services, Inc. (IDS). IDS is not an open-end investment company but, rath
er, in addition to its functions of organizing and managing the funds herein involved, it acts in a capacity which is analogous to that of a stockbroker. Shares in the mutual funds organized by IDS are obtained initially by purchase through IDS at a price equal to the net asset value of the shares plus a fee called the sales load or load charge. As found by the court below in 323 F.Supp. at 770-771, the load charge “usually covers the cost of expenses and profit to the broker .... [footnote omitted] ” The nature of the sales is further clarified by the parties’ stipulation of facts for the proceedings below:
IDS is required by § 22(d) of the Investment Company Act of 1940, 15 U.S.C. § 80a-22, to sell shares in these registered investment companies at the current public offering price described in the prospectus (in this instance net asset value plus a maximum sales charge of 8% of the public offering price). IDS receives, in full payment for its services as distributor of these shares, a distribution fee equal to the amount by which the public offering price exceeds net asset value (a sales charge of a maximum of 8% of the public offering price with lesser percentages applying for quantity sales). The remainder of the purchase price is the “net asset value” which is remitted to the investment company. From its fee, IDS pays commission to its sales representatives and other expenses incident to or in connection with the distribution and sale of the investment companies stock.
The cost the investor paid for the sales load is thereafter lost to him, for the ordinary, and, indeed, the only practical, method of disposing of the shares is through redemption by the company, and shares are redeemed at their net asset value as of the date of redemption.
Appellee disregarded Regulation 20.2031-8 (b) and did not include the cost of the sales load as part of the value of his decedent’s mutual fund shares, and thereafter, as stated above, the Commissioner of Internal Revenue assessed a deficiency.
As was observed by the district court at 323 F.Supp. 770:
If Treasury Regulation 20.2031-8 (b) is reasonable, it must be upheld by the court [United States v. Correll, 389 U.S. 299, 306-307, 88 S.Ct. 445, 19 L.Ed.2d 537 (1967)], even if another method of valuing the shares would conform to the statute [Mearkle’s Estate v. Commissioner of Internal Revenue, 129 F.2d 386, 388-389 (3d Cir. 1942)].
The application of a standard of “reasonableness” to the regulation under consideration has produced varied results. The regulation has been previously considered and held valid in Ruehlmann v. Commissioner of Internal Revenue, 418 F.2d 1302 (6 Cir. 1969), affirming the Tax Court, 50 T.C. 871 (1968), cert. denied, 398 U.S. 950, 90 S.Ct. 1869, 26 L.Ed.2d 290 (1970), rehearing denied, 400 U.S. 856, 91 S.Ct. 24, 27 L.Ed.2d 95 (1970). In Howell v. United States, 414 F.2d 45 (7 Cir. 1969), the companion gift tax regulation (Section 25.2512-6(b) (1968) ) was held valid. Contrary-wise, in Davis v. United States, 306 F.Supp. 949 (C.D.Cal.1969), now on appeal by the Government to the Ninth Circuit (No. 25,736), the district court held that the regulation was unreasonable. Moreover, since Judge Cur-tin handed down his decision in the instant case, Judge Winner in the United States District Court for the District of Colorado has also ruled in Hicks v. United States, 335 F.Supp. 474 (1971) that the regulation is unreasonable.
We note that here the Government primarily rests on the same arguments as those it advanced in the court below. Here, as in the district court, the Government has two main bases for supporting its contention that it is reasonable for estate tax purposes to value mutual fund shares at an amount greater than that which the owner could reasonably expect to receive for them. First, it argues that, under the circum
stances peculiar to mutual fund shares, the challenged regulation is in line with the general principles of valuation set out in Treasury Regulation 20.2031-1 (b).
Second, the Government seeks to analogize its method of valuing shares in mutual funds to the method of valuing single premium insurance policies sustained by the Supreme Court in Guggenheim v. Rasquin, 312 U.S. 254, 61 S.Ct. 507, 85 L.Ed. 813 (1941). These two main lines of the Government’s argument were adequately refuted in Judge Curtin’s opinion below and we fully concur in his reasoning disposing of them. We will not restate the district court’s conclusions found in 323 F.Supp. at 772-773, but instead address ourselves to some of the more peripheral issues the Government raises on appeal.
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WATERMAN, Circuit Judge:
We are called upon to decide whether Section 20.2031-8 (b) (1963) of the Treasury Regulations on Estate Tax (1954) which requires that shares of open-end investment companies (mutual funds) are to be valued for estate tax purposes at the public offering or publicly posted asked price is a reasonable regulation. The issue reaches us by a government appeal from a decision of Judge John T. Curtin in the United States District Court for the Western District of New York, reported at 323 F.Supp. 769 (1971), in which the district court held that the regulation was unreasonable. We agree with the court below and affirm the judgment below.
We need not belabor the facts involved in this dispute for they are well set out in the lower court opinion. Ethel Bennett died testate owning shares in three mutual funds which are registered with, and subject to the regulations of, the Securities and Exchange Commission. Upon her death the executor of her estate, Douglas B. Cartwright, filed an estate tax return reporting the value of those shares at their net asset value,
that is, at their bid or redemption price. As we have noted, Treasury Regulation 20.2031-8 (b) set forth in the margin,
requires that shares in such funds be valued at their public offering price, and, accordingly, the Commissioner of Internal Revenue assessed a deficiency. The executor paid the assessed deficiency, and then, alleging overpayment of the tax, on December 6, 1967 filed his claim under 28 U.S.C. §§ 1340 and 1346 in the district court for a refund of $3,092.59. In this case the public offering price is the price at which the shares in the mutual funds are marketed and distributed by Investors Diversified Services, Inc. (IDS). IDS is not an open-end investment company but, rath
er, in addition to its functions of organizing and managing the funds herein involved, it acts in a capacity which is analogous to that of a stockbroker. Shares in the mutual funds organized by IDS are obtained initially by purchase through IDS at a price equal to the net asset value of the shares plus a fee called the sales load or load charge. As found by the court below in 323 F.Supp. at 770-771, the load charge “usually covers the cost of expenses and profit to the broker .... [footnote omitted] ” The nature of the sales is further clarified by the parties’ stipulation of facts for the proceedings below:
IDS is required by § 22(d) of the Investment Company Act of 1940, 15 U.S.C. § 80a-22, to sell shares in these registered investment companies at the current public offering price described in the prospectus (in this instance net asset value plus a maximum sales charge of 8% of the public offering price). IDS receives, in full payment for its services as distributor of these shares, a distribution fee equal to the amount by which the public offering price exceeds net asset value (a sales charge of a maximum of 8% of the public offering price with lesser percentages applying for quantity sales). The remainder of the purchase price is the “net asset value” which is remitted to the investment company. From its fee, IDS pays commission to its sales representatives and other expenses incident to or in connection with the distribution and sale of the investment companies stock.
The cost the investor paid for the sales load is thereafter lost to him, for the ordinary, and, indeed, the only practical, method of disposing of the shares is through redemption by the company, and shares are redeemed at their net asset value as of the date of redemption.
Appellee disregarded Regulation 20.2031-8 (b) and did not include the cost of the sales load as part of the value of his decedent’s mutual fund shares, and thereafter, as stated above, the Commissioner of Internal Revenue assessed a deficiency.
As was observed by the district court at 323 F.Supp. 770:
If Treasury Regulation 20.2031-8 (b) is reasonable, it must be upheld by the court [United States v. Correll, 389 U.S. 299, 306-307, 88 S.Ct. 445, 19 L.Ed.2d 537 (1967)], even if another method of valuing the shares would conform to the statute [Mearkle’s Estate v. Commissioner of Internal Revenue, 129 F.2d 386, 388-389 (3d Cir. 1942)].
The application of a standard of “reasonableness” to the regulation under consideration has produced varied results. The regulation has been previously considered and held valid in Ruehlmann v. Commissioner of Internal Revenue, 418 F.2d 1302 (6 Cir. 1969), affirming the Tax Court, 50 T.C. 871 (1968), cert. denied, 398 U.S. 950, 90 S.Ct. 1869, 26 L.Ed.2d 290 (1970), rehearing denied, 400 U.S. 856, 91 S.Ct. 24, 27 L.Ed.2d 95 (1970). In Howell v. United States, 414 F.2d 45 (7 Cir. 1969), the companion gift tax regulation (Section 25.2512-6(b) (1968) ) was held valid. Contrary-wise, in Davis v. United States, 306 F.Supp. 949 (C.D.Cal.1969), now on appeal by the Government to the Ninth Circuit (No. 25,736), the district court held that the regulation was unreasonable. Moreover, since Judge Cur-tin handed down his decision in the instant case, Judge Winner in the United States District Court for the District of Colorado has also ruled in Hicks v. United States, 335 F.Supp. 474 (1971) that the regulation is unreasonable.
We note that here the Government primarily rests on the same arguments as those it advanced in the court below. Here, as in the district court, the Government has two main bases for supporting its contention that it is reasonable for estate tax purposes to value mutual fund shares at an amount greater than that which the owner could reasonably expect to receive for them. First, it argues that, under the circum
stances peculiar to mutual fund shares, the challenged regulation is in line with the general principles of valuation set out in Treasury Regulation 20.2031-1 (b).
Second, the Government seeks to analogize its method of valuing shares in mutual funds to the method of valuing single premium insurance policies sustained by the Supreme Court in Guggenheim v. Rasquin, 312 U.S. 254, 61 S.Ct. 507, 85 L.Ed. 813 (1941). These two main lines of the Government’s argument were adequately refuted in Judge Curtin’s opinion below and we fully concur in his reasoning disposing of them. We will not restate the district court’s conclusions found in 323 F.Supp. at 772-773, but instead address ourselves to some of the more peripheral issues the Government raises on appeal.
The Government forcefully contends that mutual fund shares have a value beyond the redemption price and that that value is reasonably measured by the added amount represented by the load charge. We quote from page 17 of its brief: “The estate and the decedent’s beneficiaries may continue to own the mutual fund shares, which provide not only the right to redeem, but also the right to retain the property for its investment features, which include the possibility of capital gains and dividends which may be used to purchase additional shares at less than the public offering price . . ., the diversification of investment for a small outlay, and expert management.” This argument applies with equal force to the shares of numbers of corporations listed on the stock exchanges, not only to the mutual fund shares. Clearly, the commissions paid to brokers when shares in these companies are bought or sold are not in payment for, or a measure of, the value beyond the resale price, but are rather simply compensation to the broker for his services. The fallacy in the Government’s
position was demonstrated by Tax Court Judge Tannenwald when he spoke for the minority of the Tax Court in Wells v. Commissioner, 50 T.C. 871, 880 (1968).
That court by a vote of 7 to 6 held the regulation in issue here to be a reasonable one. Judge Tannenwald stated:
The emphasis by the majority on the fact that the estate and the beneficiaries may continue to own the mutual fund shares and thereby enjoy the benefits of ownership is, in my opinion, wholly misplaced. These possibilities exist with respect to every type of security. If the majority standard is correct, it would be no less “appropriate” to use replacement cost with respect to marketable securities of all kinds. This, however, is simply not the law. That there may be an equivalence of replacement cost and fair market value in some situations does not justify the substitution of the former for the latter as the criterion in other situations where different considerations are involved.
The Government suggests that the challenged regulation only applies a general principle of valuation to the valuation of mutual fund shares, viz., a unit of property is worth what a purchaser would have to pay to obtain similar property in the open market, that is, its retail price, and points to Treasury Regulation 20.2031-1 (b)
as support for the suggestion. However, if there is indeed a widely accepted principle of valuation contained within that recently revised regulation, it is most certainly embodied in the sentence, “All relevant facts and elements of value as of the applicable valuation date shall be considered in every case.” We would agree with the
Ruehlmann
case,
supra
418 F.2d at 1034, that the retail sales price of a property unit may be an important factor in the determination of its fair market value; yet it is also clear that other factors can affect the price which a willing seller reasonably could expect to receive from a sale of that particular unit, and if these other factors cause the retail price to be an unreasonable or unrealistic value standard, the retail price has not always been followed in valuation disputes as the sole criterion of value.
In his dissent in
Wells, supra
50 T.C. at 878, Judge Tannenwald cited two examples of this principle which we find very persuasive. He pointed out that “when the open-market price of bonds is less than par but the bonds can be applied at par in payment of the decedent’s estate tax, the par value is includable in the gross estate. Bankers Trust Co. v. United States, 284 F.2d 537 (C.A.2, 1960), certiorari denied 366 U.S. 903, 81 S.Ct. 1047, 6 L.Ed.2d 204 (1961); Candler v. United States, 303 F.2d 439 (C.A.5, 1962).” He also found support for the principle in a Treasury Regulation relating to an area which is strikingly similar to that in the present case, a regulation relative to the valuation of shares of corporate stock which are subject to a restrictive agreement that they cannot be sold unless first offered to the corporation itself, or to a third person, at a specified price. If such a restriction upon the transfer of stock is created in an arm’s length transaction, Treasury Regulation 20.2031-2(h) (1958) requires that the price so specified be determined to be the fair market value of the shares.
Thus according to generally accepted principles of valuation, the Government’s theories of retail value should not be applied in this case. As we have stated, fair market valuation requires that consideration be accorded to all factors affecting the value of the property and not the retail sales price alone. Obviously, here, the estate can realistically expect to receive only the net asset value of the shares, not the price the general public would pay for them. We therefore agree with the court below that Treasury Regulation 20.2031-8 (b) is an unreasonable regulation.
The lower court judgment for taxpayer is affirmed.