Estate of Bright v. U.S.

• Decision Date: 01 October 1981
• Docket Number: No. 78-2221,78-2221
• Citation: 658 F.2d 999
• Parties: 81-2 USTC P 13,436 The ESTATE OF Mary Frances Smith BRIGHT, Deceased, by H. R. Bright, Independent Executor, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. . *
• Court: U.S. Court of Appeals — Fifth Circuit

Page 999

658 F.2d 999

81-2 USTC P 13,436

The ESTATE OF Mary Frances Smith BRIGHT, Deceased, by H. R.

Bright, Independent Executor, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 78-2221.

United States Court of Appeals, Fifth Circuit. ^*

Oct. 1, 1981.

M. Carr Ferguson, Asst. Atty. Gen., Philip I. Brennan, Richard W. Perkins, Gilbert E. Andrews, Act. Chief, Ernest J. Brown, Atty., Tax Division, U. S. Dept. of Justice, Washington, D. C., for defendant-appellant.

Thompson, Knight, Simmons & Bullion, J. W. Bullion, Emily A. Parker, Payne & Spradley, Robert B. Payne, Dallas, Tex., for plaintiff-appellee.

Robert Edwin Davis, Rodney J. Owens, Dallas, Tex., Graves, Dougherty, Hearon & Moody, J. Chrys Dougherty, Austin, Tex., J. Lyndell Kirkley, Fort Worth, Tex., B. Hunter Loftin, Carl G. Mueller, Jr., Marvin K. Collie, Houston, Tex., J. David Tracy, Fort Worth, Tex., Vester T. Hughes, Jr., Dallas, Tex., C. W. Wellen, Fulbright & Jaworski, Houston, Tex., for amicus curiae.

Appeal from the United States District Court for the Northern District of Texas.

Before GODBOLD, Chief Judge, BROWN, AINSWORTH, CHARLES

CLARK, RONEY, TJOFLAT, HILL, FAY, RUBIN, VANCE, KRAVITCH, FRANK M. JOHNSON, JR., GARZA, HENDERSON, REAVLEY, POLITZ, HATCHETT, ANDERSON, RANDALL, TATE, SAM D. JOHNSON, and THOMAS A. CLARK, Circuit Judges. ^**

R. LANIER ANDERSON, III, Circuit Judge:

This case presents to the en banc court an important question involving the principles of federal estate tax valuation. Mary Frances Smith Bright died on April 3, 1971. During her lifetime, she and her husband, Mr. Bright, owned 55% of the common stock of East Texas Motor Freight Lines, Inc., 55% of the common stock of twenty-seven affiliated corporations, and 55% of the common and preferred stock of Southern Trust and Mortgage Company (the stock of all such corporations is hereinafter referred to collectively as the "stock").

During her lifetime, Mr. and Mrs. Bright held the 55% block of stock as their community property under the laws of the State of Texas. The remaining forty-five percent is owned by parties unrelated to the Brights; a thirty percent block of stock is owned by H. G. Schiff, and the remaining fifteen percent is owned by two or three other individuals. None of the stock was publicly traded and no market existed for any of the stock on the date of Mrs. Bright's death. Mr. Bright is executor under the will of his wife. The will devised Mrs. Bright's interest in the stock to Mr. Bright as trustee of a trust for the primary benefit of Mrs. Bright's four children.

After audit of the estate tax return, the government assessed a deficiency, which was paid by the estate, and the instant suit for a refund of over $3 million in federal estate taxes and assessed interest was brought in the district court. The sole issue before the district court was the value of the estate's stock. Before the bench trial on the fair market value issue, the district judge ruled as a matter of law that "no element of control can be attributed to the decedent in determining the value of the decedent's interest in the stock ... for estate tax purposes. The parties are hereby ordered to proceed with preparation for trial and trial of this case on that basis." At the trial the district court found that the value of the stock was consistent with the testimony of the estate's expert witnesses, and entered judgment for the estate. The government filed a timely notice of appeal. A panel of this court vacated the judgment of the district court and remanded with instructions, holding that the district court erred in entering the pretrial order relating to the element of control. 619 F.2d 407 (June 18, 1980). The estate's petition for rehearing en banc was granted, and the panel opinion was vacated. 628 F.2d 307 (Oct. 2, 1980). We now affirm the judgment of the district court.

The only issue facing the en banc court is whether the district court erred in entering the above-quoted pretrial order relating to the element of control. We reject the heart of the government's arguments, and also reject a secondary government argument because it was raised for the first time on appeal.

Two principal arguments constitute the heart of the government's case, the first based on its description of the property transferred as an undivided one-half interest in the control block of 55% of the stock, and the second based on family attribution between the estate's stock interest and the stock interest held individually by Mr. Bright. ¹ First, the government argues that the property to be valued for estate tax purposes is an undivided one-half interest in the control block of 55% of the stock, and that the proper method of valuation would be to value the 55% control block, including a control premium, and then take one-half thereof. Both parties agree that the estate tax is an excise tax on the transfer of property at death, and that the property to be valued is the property which is actually transferred, as contrasted with the interest held by the decedent before death or the interest held by the legatee after death. United States v. Land, 303 F.2d 170 (5th Cir. 1962). See also Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647 (1929); Edwards v. Slocum, 264 U.S. 61, 44 S.Ct. 293, 68 L.Ed. 564 (1924); Connecticut Bank and Trust Company v. United States, 439 F.2d 931 (2nd Cir. 1971); Walter v. United States, 341 F.2d 182 (6th Cir. 1965); Commissioner v. Chase Manhattan Bank, 259 F.2d 231 (5th Cir. 1958). Both also agree that state law, Texas in this case, determines precisely what property is transferred. Morgan v. Commissioner, 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585 (1940); Duncan v. United States, 247 F.2d 845 (5th Cir. 1957). Both parties agree that, under Texas law, the stock at issue was the community property of Mr. and Mrs. Bright during her life, that Mrs. Bright's death dissolved the community, that upon death the community is divided equally, that each spouse can exercise testamentary disposition over only his or her own half of the community, and that "only the decedent's half is includable in his gross estate for federal tax purposes." Commissioner v. Chase Manhattan Bank, 259 F.2d at 239. Under Texas law, upon the division of the community at death, each spouse owns an undivided one-half interest in each item of community property. Caddell v. Lufkin Land & Lumber Co., 255 S.W. 397 (Tex.Com.App., 1923).

In its brief the government argued that, because the interest to be valued was an undivided one-half interest in the full 55% control block, the proper method would be to value the whole, including its control premium, and then take one-half thereof to establish the value of the estate's undivided one-half interest. The estate points out that the government's argument overlooks the fact that the block of stock is subject to the right of partition under Texas law at the instance of either the surviving spouse or the estate of the deceased's spouse. Tex.Prob.Code Ann. § 385 (Vernon 1980). The government has not argued that partition would not be freely granted in a case involving fungible shares, such as this case. Thus, the estate has no means to prevent the conversion of its interest into shares representing a 271/2% block, and we conclude that the estate's interest is the equivalent of a 271/2% block of the stock. Accordingly, we reject the government's approach of valuing the 55% control block, with its control premium, and then taking one-half thereof. Accord Estate of Lee v. Commissioner, 69 T.C. 860 (1978).

Having determined that the property which is to be valued for estate tax purposes is the 271/2% block of stock owned by the estate, we turn to the government's second argument, which is based on the doctrine of family attribution ² between the successive holders of interest to be taxed the decedent, the executor, and the legatee, on the one hand, and the related party, Mr. Bright, on the other. The government argues that the following facts are relevant and should have been considered by the district court in valuing the 271/2% block: the fact that Mr. and Mrs. Bright were husband and wife and held their stock during her lifetime as a control block of 55%; the fact that Mr. Bright held the estate's 271/2% block after her death as executor and subsequently as trustee of the testamentary trust for their children, while he simultaneously held another 271/2% block in his individual capacity, thus continuing the control block after death; and the fact that the government might be able to adduce evidence that Mr. Bright, as executor or trustee, would not be willing to sell the estate's 271/2% block as a minority interest, but would be willing to sell it only as part of the block of 55% including his individually-owned stock so that a sustantial control premium could be realized. ³ Such facts and evidence, the government argues, would have formed the basis of expert testimony that the value of the estate's stock includes some control premium. For several reasons, we reject the government's attempt to import into this area of the estate tax law this kind of family attribution, and we hold that the foregoing evidence proffered by the government is not admissible to prove the value of the stock at issue.

First, we reject any family attribution to the estate's stock because established case law requires this result. A recent case directly in point is Estate of Lee v. Commissioner, supra. There Mr. and Mrs. Lee held as community property 4,000 of the 5,000 outstanding shares of the common stock of a closely held corporation. They also held all 50,000 shares of the preferred stock. Upon the death of Mrs. Lee, the community was dissolved, leaving Mr. Lee and the estate of Mrs. Lee each with an undivided one-half interest in each item of the community property. 69 T.C. at 873. The Tax Court held that this was the equivalent of 2,000...