Curry's Estate v. U.S.

• Decision Date: 12 April 1983
• Docket Number: Nos. 82-1500,82-2519,s. 82-1500
• Citation: 706 F.2d 1424
• Parties: 83-1 USTC P 13,518 ESTATE OF Bernard CURRY, Union Bank and Trust of New Albany, Trustee, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1424

706 F.2d 1424

83-1 USTC P 13,518

ESTATE OF Bernard CURRY, Union Bank and Trust of New Albany,

Trustee, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

Nos. 82-1500, 82-2519.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 20, 1983.

Decided April 12, 1983.

Farley P. Katz, Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Charles F. Cremer, Jr., Charles F. Cremer, Jr. & Co., Indianapolis, Ind., for plaintiff-appellee.

Before BAUER and WOOD, Circuit Judges, and EVANS, District Judge. ^*

HARLINGTON WOOD, Jr., Circuit Judge.

This is a consolidated appeal from the district court's judgment entered on a jury verdict awarding the estate of B.L. Curry a refund of federal estate taxes in the amount of $209,904.59 plus interest. On appeal, the government challenges as error the district court's giving of two jury instructions objected to by the government and the failure to tender to the jury two of the government's proffered instructions. The government also challenges the district court's award of attorney's fees to the estate under the Equal Access to Justice Act, 28 U.S.C. Sec. 2412(d)(1)(A). Because we find that the district court erred in tendering certain instructions and refusing to tender certain other instructions to the jury, we vacate the judgment of the district court, 549 F.Supp. 47, reverse its award of attorney's fees to the estate, and remand for a new trial.

I.

This case arose from a dispute between the estate and the government concerning the proper value, for federal estate tax purposes, of B.L. Curry's stock in B.L. Curry and Sons, Inc., a closely held Indiana corporation engaged in the manufacture of wood veneer. At the time of B.L. Curry's death, the authorized and issued stock of the company was composed of 1500 shares of voting common stock and 4500 shares of Class A non-voting common stock; all 6000 shares were held by B.L. Curry and his children. B.L. Curry himself owned 800 shares of the voting common stock, enough to give him voting control over the company, and in addition 1360 shares of non-voting common stock.

On the decedent's estate tax return, the executor valued B.L. Curry's voting stock in the company at $135,312, or $169.14 per share, and his non-voting stock at $25,554.40, or $18.79 per share. The government disagreed with these valuations after an audit, and instead assigned values of $400 per share and $300 per share to the decedent's voting and non-voting stock, respectively. As a result, the estate was assessed an additional $199,218.84 in taxes. After payment of this increment, the estate's administrative refund efforts were unavailing, and the instant litigation ensued.

At trial, Halsey Sandford, the estate's principal valuation witness, valued the estate's voting and non-voting stock differently In valuing the 800 voting shares, Sandford also averaged their going concern and liquidation values. He arrived at a going concern value of $100 by augmenting each share's intrinsic value by a sixty percent control premium factor; he arrived at a $191 per share liquidation value by discounting net asset value by twenty-five percent to compensate for liquidation expenses. The two resultant figures were averaged to yield a $150 per share value for the 800 voting shares (totalling $120,000), as contrasted with $56.25 per share for the non-voting shares (totalling $76,500).

even though the estate possessed sufficient voting stock to provide it with fifty-three percent voting control over the company. On cross-examination, Sandford explained that this bifurcated analysis assumed that the two blocks of stocks would be sold separately. In order to value the 1360 non-voting shares, Sandford testified, he first posited a hypothetical $125 per share public trading price based on the dual factors of the company's projected earnings as a going concern and the liquidation value of the company's assets, with emphasis given to the former. This figure was then discounted by half to reflect the non-marketability of the company's stock and by an additional ten percent to reflect the existence of stock purchase restrictions in the company's articles of incorporation--discounts which yielded a bottom line figure of $56.25 per share.

In contrast to Sandford, the government's main valuation witness assigned an identical value to the decedent's voting and non-voting shares: $290.50 (for a total of $627,480). This figure was derived through an earnings multiplier approach, the multiplier having been based upon a review of market multiples in comparable industries. The resultant figure was in turn adjusted to reflect selling costs, excess working capital and earnings history. The government's witness also testified that the liquidation value proffered by Sandford should be viewed as the minimum value attributable to the decedent's stock.

The court refused to give two of the government's proffered instructions. The first would have required the jury to value the decedent's non-voting stock at the same level as his voting stock, while the second would have prevented the jury from finding a value below that which the estate conceded was realizable upon liquidation. In addition to rejecting these instructions, the district court instructed the jury, over the government's objections, that "[i]f you find plaintiff's corporation was prosperous and the idea of liquidating it was more remote, then you should give stronger emphasis on [sic] earning power and payment of dividends" and that, in valuing the stock, the jury could consider the effect of the stock purchase restrictions contained in the company's articles of incorporation.

The jury accepted the differential values for decedent's voting and non-voting stock testified to by the estate's expert, and the district court accordingly entered judgment for the estate in the amount of $209,904.59 plus interest. Several months later, the district court entered its judgment awarding the estate costs, including attorney's fees, in the amount of $39,851.72 plus statutory costs. On appeal, the government contends that the district court erred in refusing to tender to the jury the government's two proffered instructions, in tendering those to which the government objected, and in awarding attorney's fees to the estate.

II.

A. The Equivalency Instructions

The government first assigns as error the court's refusal to instruct the jury, as the government requested, that "[b]ecause the decedent had voting control of the company, I instruct you that in valuing [decedent's] interest in the company the non-voting stock was worth as much per share as the voting stock." In support of its instruction, the government argues that, for estate tax purposes, the property transferred must be valued as the decedent held it, not in the form it could conceivably take in a subsequent transfer, and that, in the Section 2001 of the Internal Revenue Code of 1954, 26 U.S.C. Sec. 2031(a) provides that the value of the gross estate of the decedent is determined by including "all property" therein. The corresponding Treasury Regulations provide that the value of includible property is its "fair market value" at the time of decedent's death. Section 20.2031-1(b), Treasury Regulations on Estate Tax (1954 Code). That regulation states further that the "fair market value is 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 to sell and both having reasonable knowledge of the relevant facts." Id. The first question for our purposes thus becomes whether the property of which the fair market value is to be assessed should be viewed as it exists in the hands of the estate, or as it may exist if fortuitously balkanized through a chain of post-death transactions.

hands of the estate, the absence of voting control appurtenant to some of the shares of stock would not diminish their value, as voting control still resided in the decedent's power. The estate, by contrast, argues that the decedent's stock holdings were more properly split into separate voting and non-voting blocks prior to valuation, and that the non-voting stock could possess a lesser value even if considered as part of a single bundle including its voting counterpart. In our view both the law and common sense compel the conclusion that the fair market value of the non-voting stock in thehands of an estate with sufficient shares of voting stock to ensure the estate's control of a corporation cannot be less than the value of the estate's voting stock. Therefore, we conclude, in rejecting the government's instruction, the district court erred as a matter of law to the substantial prejudice of the rights of the government. ¹

We believe that the first perspective comports more fully with the nature of the estate tax. As the Supreme Court has explained, the estate tax was not conceived as "a tax upon succession and receipt of benefits under the law or the will. It was death duties as distinguished from a legacy or succession tax. What this law taxes is not the interest to which the legatees and devisees succeeded on death, but the interest which ceased by reason of the death." YMCA v. Davis, 264 U.S. 47, 50, 44 S.Ct. 291, 292, 68 L.Ed. 558 (1924). Other courts have emphasized that the resultant "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." United States v. Land, 303 F.2d 170 (5th Cir.1962) (emphasis in original); see also Estate of Bright v. United States, 658 F.2d 999 (5th Cir.1981). ² The interest that passed in this case was the decedent's interest in an 1160-share bundle of stock, the 800 voting shares of which assured complete corporate control. Plainly, then, to meet the mandate of the Code, those shares are to be valued as part and parcel of the...