Chenoweth v. Comm'r of Internal Revenue (In re Estate of Chenoweth)

• Decision Date: 29 June 1987
• Docket Number: Docket No. 1641-86
• Parties: ESTATE OF DEAN A. CHENOWETH, DECEASED, JULIA JENILEE CHENOWETH, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

88 T.C. 1577

88 T.C. No. 90

ESTATE OF DEAN A. CHENOWETH, DECEASED, JULIA JENILEE CHENOWETH, PERSONAL REPRESENTATIVE, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1641-86

United States Tax Court

Filed June 29, 1987.

D died owning all the outstanding stock of company C. For Federal estate tax purposes, D's estate reported the entire stock interest in the gross estate at a value which R has accepted. D's will left 51% of the C stock, a controlling interest, to his surviving widow in a bequest which qualifies for the marital deduction under sec. 2056, I.R.C. 1954. D's estate now claims that the controlling share of C stock passing to the widow is entitled to additional value for marital deduction purposes because of the control element, above a purely mathematical 51% of the value of all the C stock reported in the gross estate. Upon R's motion for summary judgment,

HELD: D's estate is entitled to show that the 51% majority block of stock passing to the surviving spouse is entitled to an additional value because of the control element. Motion for summary judgment denied. Joseph W. Jacobs, for the petitioner.

Jane T. Dickinson, for the respondent.

OPINION

KORNER, JUDGE:

Respondent determined a deficiency of Federal estate tax against petitioner in the amount of $232,227.50. The sole issue between the parties is whether, in computing the marital deduction to which it is entitled under the provisions of section 2056 ¹ petitioner may value certain stock passing to decedent's surviving spouse by taking into account an alleged additional element of value because of the control which such block of stock has over the company involved.

After the case was at issue, respondent filed a motion for summary judgment, which petitioner opposed, and, after arguments thereon, the Court took the case under advisement. The case is before us in this posture.

Rule 121 provides in pertinent part:

(a) GENERAL: Either party may move, with or without supporting affidavits, for a summary adjudication in his favor upon all or any part of the legal issues in controversy * * *

(b) MOTION AND PROCEEDINGS THEREON: The motion shall be filed and served in accordance with the requirements otherwise applicable * * * An opposing written response, with or without supporting affidavits, shall be filed within such time as the Court may direct. A decision shall thereafter be rendered if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law * * *

Respondent, as the party moving for summary judgment in this case, has the burden of demonstrating that no genuine issue as to any material fact exists, and that he is entitled to judgment as a matter of law. Adickes v. Kress & Co., 398 U.S. 144, 157 (1970); Gulfstream Land and Development v. Commissioner, 71 T.C. 587, 596 (1979). The facts relied upon by respondent must be viewed in the light most favorable to petitioner so that any doubt as to the existence of a genuine issue of material fact will be resolved in favor of denying the motion. Adickes v. Kress & Co., supra; United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); Heyman v. Commerce and Industry Insurance Co., 524 F.2d 1317, 1320 (2d Cir. 1975). Nevertheless, the motion must be granted if the Court is satisfied that no real fact or controversy is present so that the remedy can serve ‘its salutary purpose in avoiding a useless expensive and time-consuming trial where there is no genuine, material fact issue to be tried.‘ Lyons v. Board of Education of Charleston, 523 F.2d 340, 347 (8th Cir. 1975).

Upon examination of the pleadings, respondent's motion for summary judgment and attachments thereto, petitioner's response and the respective statements of the parties at the hearing herein, it appears that the following material facts are not in dispute:

Petitioner herein is the Estate of Dean A. Chenoweth (hereinafter ‘decedent ‘), acting by and through Julia Jenilee Chenoweth (hereinafter ‘Jenny‘), the duly appointed personal representative of the estate. At the time of filing of the petition herein, petitioner's residence was in Tallahassee, Florida.

Decedent died on July 31, 1982. A timely Federal estate tax return was thereafter filed for his estate by the personal representative. The principal asset of decedent's gross estate was all of the outstanding common voting stock of Chenoweth Distributing Company, Inc. (hereinafter the ‘company‘), which was owned by decedent at the date of his death and which was valued in the Federal estate tax return at $2,834,033. For purposes of arriving at the value of the gross estate under section 2031, respondent has accepted this valuation.

Under decedent's will, duly probated, decedent left 255 shares, or 51 percent, of the company's stock to his surviving wife, Jenny, and 245 shares, or 49 percent, of the company's stock to his daughter by a prior marriage, Kelli Chenoweth. So far as the bequest to Jenny is concerned, there is no dispute between the parties that the bequest was outright and qualifies for the marital deduction provided by section 2056. The parties are likewise in agreement that under Florida law, which governs here, the 51 percent stock interest passing to Jenny gives her complete control of the company.

As filed with respondent, decedent's estate tax return claimed a marital deduction with respect to the stock interest in the company passing to Jenny in the amount of $1,445,356, which was precisely 51 percent of the date of death value of $2,834,033 for all the stock. In the petition filed herein, however, petitioner now claims that the value of the company's stock passing to Jenny for marital deduction purposes should be $1,996,038, arrived at by adding a ‘control premium‘ of 38.1 percent to the value of such stock as originally reported.

Respondent contests this claim, and, in his motion for summary judgment, takes the position that, as a matter of law, petitioner is not entitled to increase the value of the controlling interest in the company, and claimed as a marital deduction, above a strict 51 percent share of the value of all the stock of the company, as reported in the gross estate. Petitioner, opposing respondent's motion, contends that there is no such prohibition as a matter of law. The parties are in agreement that if respondent is correct as to his legal proposition, there are no remaining material facts in dispute, and that summary judgment may be granted in his favor. On the other hand, the parties agree that if petitioner is correct on the legal issue presented, then there is a remaining major material fact which is still in dispute, viz, the additional amount of value or control premium which is to be added to the majority block of shares passing to Jenny and for which marital deduction is claimed herein, so that respondent's motion for summary judgment should be denied.

The issue presented here is a novel one, and does not seem to have been directly addressed until now, at least by this Court. It requires us to consider the fundamental nature of the Federal estate tax, as a basis for how assets are to be valued for purposes of inclusion in the gross estate under section 2031. At the same time, we must also consider the nature of the marital deduction provided by section 2056, the valuation of assets qualifying for deduction under that section, and the moment in time when such assets are to be valued.

As particularly relevant herein, section 2001(a) provides:

(a) IMPOSITION. — A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.

We think it is now clear that this tax is an excise tax laid upon the right of the decedent to transmit his property at death and is measured by the value of that property which is transmitted at death. Edwards v. Slocum, 264 U.S. 61 (1924); New York Trust Co. v. Eisner, 256 U.S. 345 (1921).

Section 2031(a) provides:

(a) GENERAL. — The value of the gross estate of the decedent shall be determined by including to the extent provided for in this part, the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.

Section 2033 in turn provides:

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.

We may accept as a first step, then, that for purposes of inclusion in the decedent's gross estate under section 2031, his assets are to be valued at their worth at the moment of death. In this context, and for these purposes, respondent recognizes that a block of stock which represents the controlling interest in a company may be worth more than a block of stock in the same company which does not carry with it the control of the company. Thus, respondent's regulations provide, in part:

On the other hand, if the block of stock to be valued represents a controlling interest, either actual or effective, in a going business, the price at which other lots change hands may have little relation to its true value. [Sec. 20.2031-2(e), Estate Tax Regs.]

The same regulation goes on to provide:

(f) WHERE SELLING PRICES OR BID AND ASKED PRICES ARE UNAVAILABLE. If * * * actual sale prices and bona fide bid and asked prices are lacking, then the fair market value is to be

(1) * * *

(2) In the case of shares of stock, the company's net worth, prospective earning power and dividend paying capacity, and other relevant factors.

Some of the ‘other relevant factors‘ * * * are: * * * the degree of control of the business represented by the block of stock to be valued; * * * (Sec. 20.2031-2(f), Estate Tax Regs.]

The courts have likewise recognized that an additional element of value may be present in a block of shares...