106 T.C. No. 9
UNITED STATES TAX COURT
ESTATE OF CHARLES K. MCCLATCHY, DECEASED, WILLIAM K. COBLENTZ AND JAMES MCCLATCHY, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21876-93. Filed April 3, 1996.
Decedent owned shares of stock that before his death were subject to certain securities law restrictions adversely affecting the value of the shares. The restrictions were not applicable to the shares in the hands of decedent's personal representatives, so that the per share value automatically increased from $12.3375 to $15.56 at decedent's death. Held: the per share value for Federal estate tax purposes is $15.56, since that was the value at the "moment" of decedent's death. Ahmanson Foundation v. United States, 674 F.2d 761 (9th Cir. 1981), applied; United States v. Land, 303 F.2d 170 (5th Cir. 1962), followed; sec. 2033, I.R.C., which mandates the inclusion in a decedent's gross estate of the value of all property to the extent of his/her interest therein at the time of death, does not require a different result; Estate of Harper v. Commissioner, 11 T.C. 717 (1948), explained. Jeffry A. Bernstein and James P. Mitchell, for petitioner.
Kathryn K. Vetter, for respondent.
OPINION
NIMS, Judge: In this case, respondent determined a
$5,784,910 Federal estate tax deficiency, and a $1,156,982
addition to tax under section 6662(b)(1). Unless otherwise
indicated, all section references are to sections of the Internal
Revenue Code in effect at decedent's date of death, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
After concessions, the sole remaining issue for decision is
whether certain securities law restrictions that applied to
shares of stock of McClatchy Newspapers, Inc. (the Company) owned
by decedent during his lifetime, but which became inapplicable by
reason of decedent's death, have the effect of limiting the value
of the shares for purposes of establishing the Federal estate tax
liability of decedent's estate.
The parties submitted this case fully stipulated, and the
facts as stipulated are so found. William K. Coblentz and James
McClatchy, decedent's executors, resided in California when they
filed the petition in this case. Decedent's will was probated in
the Superior Court of Sacramento County, Sacramento, California.
The decedent, Charles K. McClatchy, died on Sunday, April
16, 1989. At his death, he owned 2,078,865 Class B Shares of the
Company. The Class B Shares were reported by petitioner on Form - 3 -
706, United States Estate (and Generation-Skipping Transfer) Tax
Return at a $12.3375 per share value for a total value of
$25,647,996.94.
Decedent was a director, chairman of the board, and chief
executive officer (CEO) of the Company at the time of his death.
The Company had two classes of common stock: Class A, which was
publicly traded, and Class B, which was not.
The Class A and Class B stock had identical dividend rights
and equal rights in the event of dissolution or liquidation. The
Class B stock had superior voting rights. Class A shareholders
were entitled to one vote per share; Class B shareholders were
generally entitled to 10 votes per share. Each share of Class B
stock was convertible at any time at the option of the holder
into one share of Class A stock, subject to the restrictions set
out in a Stockholders' Agreement. At the time of his death
decedent owned no Class A stock.
Decedent was an Affiliate of the Company for Federal
securities law purposes because he was CEO and a director of the
Company, a Class B shareholder, and had beneficial ownership of
Class B shares as trustee and beneficiary of certain trusts
holding Class B stock.
The Class B stock owned by decedent prior to his death was
unregistered and restricted for Federal securities law purposes
under Rule 144 of the Securities Act of 1933 (S.E.C. Rule 144). - 4 -
17 C.F.R. sec. 230.144(a)(1) (1989). The same securities law
restrictions would have applied if decedent had at any time
converted his Class B stock to Class A stock; such converted
shares would also have been unregistered and restricted. As a
result, the Class B stock (after conversion to unregistered Class
A stock) could only have been sold by decedent to the public in
accordance with certain volume and manner of sale restrictions
under S.E.C. Rule 144, and any donee or transferee of such shares
would have acquired the shares subject to such restrictions.
Decedent's personal representatives, acting in that
capacity, were not collectively an Affiliate for Federal
securities law purposes and, therefore, were not subject to those
same securities law restrictions applicable to decedent. The
decedent's estate was not an Affiliate for Federal securities law
purposes.
The Federal securities law restrictions that affected
decedent's ability to sell shares of Class B stock (and shares of
Class A stock after a conversion) were not self-imposed or
voluntarily made, and did not result from an agreement or
arrangement by decedent.
Petitioner and respondent have agreed that the fair value of
the Class B Shares for estate tax purposes was $12.3375 if the
securities law restrictions that affected decedent's ability to
dispose of or otherwise transfer the Class B Shares during life - 5 -
are taken into consideration. Petitioner and respondent have
further agreed that the fair value of the Class B Shares for
estate tax purposes was $15.56 per share if the securities law
restrictions applicable to decedent are disregarded for Federal
estate tax valuation purposes.
Petitioner argues that the Class B shares subject to
securities law restrictions comprise the "interest" in property
under section 2033 that was transferred by decedent at death,
that the value of such interest is all that is included in
decedent's gross estate, and that the value of the interest
transferred by decedent is determined by valuing only the
restricted share interest of decedent.
Petitioner also urges that assuming, for the sake of
argument, valuation under section 2031 is at issue, the proper
measure of value for the interest transferred is limited to that
which decedent could have realized during his lifetime because
the securities law restrictions were not self-imposed, and the
facts do not present an abuse situation.
Lastly, petitioner argues that an unrestricted valuation for
the Class B shares would be inconsistent with the underlying
policy of the unified estate and gift tax system.
Respondent argues that the securities law restrictions
lapsed at decedent's death and should not be considered in
valuing the Class B shares at the moment of death because the - 6 -
valuation of decedent's Class B stock for Federal estate tax
purposes must take into account any changes brought about by
decedent's death.
Respondent also argues that the unified gift and estate
transfer tax system does not require that the pre-death
securities law restrictions be taken into account because the
legislative history does not support petitioner's position, that
the willing-buyer willing-seller standard provides an objective
test for determining value, and that the same standard is used to
determine the amount of a gift and the amount of property
includable in the gross estate.
We believe the correct result in this case is pointed to by
the decision of the Court of Appeals for the Ninth Circuit (the
Court to which an appeal in this case would normally be directed)
in Ahmanson Foundation v. United States, 674 F.2d 761 (9th Cir.
1981). For our present purposes, the essential facts in that
case were as follows: Ahmanson, at his death, owned 15 percent
of a savings and loan association of which 81 percent was owned
by HFA, a holding company. Decedent controlled, through a
revocable trust, 600 out of 1,000 shares of voting common stock
of HFA, and an income interest in 11,000 out of 106,711 shares of
nonvoting common stock of HFA. Also held in the revocable trust
were all of the shares of Ahmanco Inc., a corporate shell with no - 7 -
assets prior to Ahmanson's death. There were 99 nonvoting shares
and one voting share of Ahmanco common stock outstanding.
At the moment of decedent's death, Ahmanco, the erstwhile
shell, became unconditionally entitled to the 600 shares of
voting HFA stock under the terms of certain declarations of
trust. Under the same declarations of trust, Ahmanson
Foundation, a charitable trust received the 99 nonvoting shares
of Ahmanco. The one voting share of Ahmanco remained in the
Ahmanson family.
On the foregoing facts, Ahmanson Foundation argued that the
value of the HFA stock should be disregarded, and that the
Ahmanco stock should be valued in separate units, with most of
the value being allocated to the block of nonvoting stock going
to charity, and a relatively nominal value being allocated to one
share of voting stock going to the family.
The Ninth Circuit held that even though Ahmanco had no
assets, and therefore no value at the moment before decedent's
death, "we must valuate the HFA and Ahmanco stock as of the
moment of [the decedent's] death, bearing in mind that the HFA
shares, in their entirety, have become an asset of Ahmanco. In
effect, this is to valuate the Ahmanco stock." 674 F.2d at 767.
Thus, the Court valued the Ahmanco stock, not before decedent's
death, when the stock had no value, nor after decedent's death,
when the ownership became fragmented under the estate plan, but - 8 -
at the precise moment of death. "Therefore", said the Court, "we
are instructed to determine the value at the moment of death of
the 600 shares of HFA stock and the 100 shares of Ahmanco stock.
In doing so we must take into account any transformations of the
property that are logically prior to its distribution to the
beneficiaries." Id. (citation omitted).
Unlike the situation in Ahmanson, we are not called upon to
consider the effect of any plan of postdeath distribution of
decedent's corporate stock in the case before us. We are
nevertheless required to determine the consequences of the
valuation change that occurred at the moment of death. The Court
in Ahmanson states that it is "undisputed" that value is to be
determined at the moment of death, citing as settled law an
analogous holding in United States v. Land, 303 F.2d 170, 171-175
(5th Cir. 1962).
In the Land case, the Court of Appeals for the Fifth Circuit
held that the fair market value of a partnership interest at the
death of a partner was its full value in a situation where the
partnership agreement provided that if any member wished to
withdraw from the partnership during his lifetime, another
partner would have the option of purchasing the withdrawing
partner's interest at two-thirds of its calculated value. But,
at the death of a partner a surviving partner would be entitled
to purchase the decedent's interest at its full value. - 9 -
The Fifth Circuit very succinctly stated the basis for its
holding in the following language:
Brief as is the instant of death, the court must pinpoint its valuation at this instant--the moment of truth, when the ownership of the decedent ends and the ownership of the successors begins. It is a fallacy, therefore, to argue value before--or--after death on the notion that valuation must be determined by the value either of the interest that ceases or of the interest that begins. Instead, the valuation is determined by the interest that passes, and the value of the interest before or after death is pertinent only as it serves to indicate the value at death. In the usual case death brings no change in the value of property. It is only in the few cases where death alters value, as well as ownership, that it is necessary to determine whether the value at the time of death reflects the change caused by death, for example, loss of services of a valuable partner to a small business. [303 F.2d at 172; emphasis in original.]
We think "the interest that passes" in the case before us is
the value of the shares unencumbered by the securities act
restrictions; i.e., $15.56 per share. As stated earlier, this is
the value agreed to by the parties if the securities law
restrictions applicable to decedent are disregarded for Federal
estate tax valuation purposes, as we think they must be. As
stated in the Land case, in the few cases where death alters
value, it is necessary to determine whether the value at the time
of death reflects the change caused by death. In our case, the
change in value was caused by death because at the instant of
death, the securities law restrictions no longer applied. The
valuation depressant occasioned by the securities law
restrictions during decedent's lifetime became interesting - 10 -
history--nothing more--at the instant of his death, and unlike
the usual case where death brings no change in value, the
restricted value of the shares in decedent's hands while he was
living does not serve to control the value transferred.
The parties have brought to our attention, in addition to
Ahmanson Foundation v. United States, supra, a number of cases in
this Court and others where the holding in the Land case has been
cited with approval and relied upon. A non-all-inclusive list of
such cases includes: Estate of Bright v. United States, 658 F.2d
999 (5th Cir. 1981); Estate of Chenoweth v. Commissioner, 88 T.C.
1577 (1987); Estate of Harrison v. Commissioner, T.C. Memo. 1987-
8. As respondent points out on brief, Propstra v. United States,
680 F.2d 1248 (9th Cir. 1982), does not cite the Land case, but
relies heavily on Bright, so it can be said that Propstra relies
indirectly on Land.
None of the cases included in the above list involved a fact
situation sufficiently analogous to the facts of the instant case
to warrant discussion herein, and to do so, we believe, would
lengthen this Opinion without providing any equivalent aid to our
analysis. We believe the moment-of-death concept as delineated
in the Land case has been accepted widely enough by the Ninth
Circuit, other Courts of Appeal, and this Court, as to constitute
established law, and that it is applicable to the facts of this
case. We so hold. - 11 -
Petitioner cites and strongly relies upon our decision in
Estate of Harper v. Commissioner, 11 T.C. 717 (1948). Petitioner
cites Harper to support the proposition that for estate tax
purposes the value that is transferred under section 2033 is the
realizable value of an asset during decedent's life and no more.
Section 2033 provides:
Sec. 2033. Property In Which The Decedent Had An Interest.
The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.
Petitioner states on brief that "In Harper the Court faced
the precise issue of this case". We do not agree.
On the surface, some of the words of Harper might, when read
out of context, appear to support petitioner's position. There
we concluded our Opinion by saying that
At the time of her death the decedent had an interest in notes the value of which did not exceed the value of the assets held as security therefor plus the net worth of the makers, and that is the interest which ceased at her death. We hold that the petitioner correctly returned the value of the interest of the decedent in the notes at the time of her death for estate tax purposes. [11 T.C. at 720.]
This passage was in response to an argument by the Commissioner
that the value of the notes was enhanced because immediately upon
the death of the decedent the makers of the notes, who were also
Harper's heirs, became invested with more than sufficient assets
to satisfy their obligation. Id. - 12 -
Harper deals with an entirely different situation than that
present here. Our decision in Harper is consistent with Ahmanson
Foundation, supra, which states:
We must distinguish, however, the effect of "predistribution" transformations and changes in value brought about by the testator's death, from changes in value resulting from the fact that under the decedent's estate plan the assets in the gross estate ultimately come to rest in the hands of different beneficiaries. [Ahmanson Foundation v. United States, 674 F.2d at 768.]
The estate tax is a tax on the privilege of passing on property,
not a tax on the privilege of receiving property. "The tax is on
the act of the testator not on the receipt of the property by the
legatees." Ithaca Trust Co. v. United States, 279 U.S. 151, 155
(1929). Unlike Harper, petitioner's case does not involve a
change in value resulting from the distribution of decedent's
estate.
In Goodman v. Granger, 243 F.2d 264 (3d Cir. 1957), the
court evaluated three employment contracts carrying "contingent
benefits" of $2,000 annually for 15 years after the employee
ceased to be employed by the employer by reason of death or
otherwise. The post-employment contingent payments were to be
made only if the employee did not engage in any competing
business for a certain period of time and if his post-employment
earnings from other work did not exceed a certain amount. The
court held that since the possibility of forfeiture was
extinguished by the decedent's death the contract rights should - 13 -
be given their full value for estate tax purposes. In reaching
this conclusion the court observed that
Since death is the propelling force for the imposition of the tax, it is death which determines the interests to be includible in the gross estate. Interests which terminate on or before death are not a proper subject of the tax. Assets may be acquired or disposed of before death, possibilities of the loss of an asset may become actualities or may disappear. Upon the same principle underlying the inclusion of interests in a decedent's gross estate, valuation of an interest is neither logically made nor feasibly administered until death has occurred. The taxpayer's theory of valuing property before death disregards the fact that generally the estate tax is neither concerned with changes in property interests nor values prior to death. The tax is measured by the value of assets transferred by reason of death, the critical value being that which is determined as of the time of death. [243 F.2d at 268-269; emphasis supplied.]
In a footnote to Goodman v. Granger, the court also observed that
the result reached in Estate of Harper v. Commissioner, 11 T.C.
717 (1948), is consistent with "our approach in the instant case,
although the language used by the Tax Court was perhaps something
less than fortunate." [243 F.2d at 269, fn. 7.]
When the foregoing reasoning is applied to this case, it is
apparent that the stock at issue must be valued without the
S.E.C. Rule 144 restrictions. The decedent was considered an
Affiliate for securities law purposes at the time of his death
and therefore pursuant to S.E.C. Rule 144, he was subject to
stringent volume limitations, disclosure, and other requirements
if he were to dispose of the shares. This stock was transferred
at the moment of death and passed to the decedent's estate. The - 14 -
estate was not an Affiliate and pursuant to S.E.C. Rule 144 could
freely sell the shares without regard to such restrictions.
The Court of Appeals in United States v. Land, 303 F.2d at
172, emphasized the fact that the Federal estate tax is imposed
on the transfer of property, and reasoned that from this it
follows that the valuation of the estate should be made at the
time of transfer; i.e., the "instant of death". Since in the
instant case the securities law restrictions evaporated at the
moment of death, we hold that the shares must be valued free of
the restriction, at $15.56 per share.
As we have previously noted, petitioner makes two additional
arguments. Petitioner emphasizes that the securities law
restrictions were not, through some contrivance, self-imposed by
decedent. Consequently, petitioner says, no potential abuse is
involved, and the estate should therefore receive the tax benefit
of the limitation on value during decedent's lifetime. We would
simply respond by agreeing that in some instances it becomes
necessary to look through form to substance where a decedent was
in a position during his/her lifetime to manipulate the future
value of an asset at death. We believe, however, that in the
absence of atypical circumstances, not present here, the "instant
of death" rule enunciated in United States v. Land, supra, and as
we have applied it, is an objective test where the question of
intent--inherent in contrived value situations--is not relevant. - 15 -
Petitioner also argues that the general policy of the
unified gift and estate transfer tax system (enacted as a part of
The Tax Reform Act of 1976, Pub. L. 94-455, sec. 2001, 90 Stat.
1520, 1846) dictates that the restrictions have an effect on the
determination of value for estate tax purposes, and that since
the securities law restrictions were applicable to gifts by the
decedent, they are required to be taken into account in this case
for the sake of consistency. Petitioner's argument is not
convincing.
According to a Joint Committee "Blue Book", Congress
believed that, as a matter of equity, transfers of the same
amount of wealth should be treated substantially the same when
transfers were made both during life and at death, or made only
upon death. Congress believed that it was desirable to reduce
the disparity of treatment between lifetime transfers and
transfers at death through the adoption of a single unified
estate and gift tax rate schedule providing progressive rates
based on cumulative transfers. See Staff of Joint Committee on
Taxation, General Explanation of the Tax Reform Act of 1976 (J.
Comm. Print), 1976-3 C.B. (Vol. 2) 537. Accordingly, the Tax
Reform Act of 1976 provided a rate schedule for estate and gift
taxes which eliminated the preferential rate for lifetime
transfers. The Tax Reform Act of 1976 also provided for a
unified credit against estate and gift taxes. The amount of the - 16 -
estate tax was to be determined by applying the unified rate
schedule to the aggregate of cumulative transfers during life and
at death and then subtracting the gift taxes payable on the
lifetime transfers. General Explanation, supra.
The Joint Committee explanation indicates that Congress
intended that the transfer tax for the same amount of property
should be the same whether the property was transferred by gift
or at death. There is nothing to suggest that Congress intended
to ignore changes in the value of property that were brought
about by death. In the instant case, the value of property
transferred would depend on whether the stock was donated before
death or whether the stock passed to the estate at the moment of
death, since the nature of the property changed at the moment of
death. The unified gift and estate transfer tax system was not,
we believe, intended to affect the question of value for transfer
tax purposes, whether the tax in question were to be the gift tax
or the estate tax. We consequently cannot accept petitioner's
argument to the contrary.
To reflect the foregoing, and concessions,
Decision will be entered
under Rule 155.