Appeal of McNeil

• Citation: 213 Pa.Super. 356,247 A.2d 813
• Parties: Appeal of Robert L. McNEIL, Jr., to the Board of Assessment and Revision of Taxes. Appeal of Henry S. McNEIL to the Board of Assessment and Revision of Taxes. Appeal of MONTGOMERY COUNTY BOARD OF ASSESSMENT AND REVISION OF TAXES et al.
• Decision Date: 14 November 1968
• Court: Pennsylvania Superior Court

Page 813

247 A.2d 813

213 Pa.Super. 356

Appeal of Robert L. McNEIL, Jr., to the Board of Assessment

and Revision of Taxes. Appeal of Henry S. McNEIL to the

Board of Assessment

and Revision of Taxes. Appeal of MONTGOMERY COUNTY BOARD OF

ASSESSMENT AND REVISION OF TAXES et al.

Superior Court of Pennsylvania.

Nov. 14, 1968.

Petition for Allowance of Appeal Granted Feb. 20, 24, 1969.

Roger B. Reynolds, Solicitor, Montgomery County, Anthony J. Giangiulio, Solicitor Bd. of Assessment and Revision of Taxes, Norristown, for appellant.

Edward Fackenthal, William L. O'Hey, Jr., Henderson, Wetherill & O'Hey, Norristown, for appellee.

Before WRIGHT, P.J., and WATKINS, MONTGOMERY, JACOBS, HOFFMAN, SPAULDING and HANNUM, JJ.

HOFFMAN, Judge.

The question involved in this case is the calculation of the aggregate actual value of Johnson & Johnson, Inc. (Johnson) common stock owned by appellees, Robert L. McNeil, Jr. and Henry S. McNeil as of December 31, 1964, for the purpose of the Montgomery County Personal Property Tax.

'The Act of June 17, 1913, P.L. 507, Section 1, as amended, 72 P.S. § 4821 provides inter alia, that: 'All personal property of the classes hereinafter enumerated, owned, held or possessed by any resident * * * is hereby made taxable annually for county purposes, * * * at the rate of four mills of each dollar of the value thereof * * *. '' Section 4.1 of said Act 72 P.S. § 4843.1 provides: '(a) For the purpose of ascertaining the amount of tax payable under this act, it shall be the duty of every resident liable to pay such tax on or before fifteenth day of February of each year to transmit * * * a return certified as provided in this act: (1) The aggregate actual value of each part of the different classes of property made taxable by this act, held, owned or possessed by such resident as of the date fixed annually, in the manner provided herein * * *.'

It is undisputed that the date fixed annually for the valuation of said stock is December 31st and that Johnson common stock is one of the classes of property made taxable by said act.

On December 31, 1964, the common stock of Johnson was selling on the New York Stock Exchange at $111.75 a share. Both appellants filed personal property tax returns in which they valued their shares at thirty per cent less than the value which would have resulted had the full stock market price been employed.

The Montgomery County Board of Assessment and Revision of Taxes (Board) valued these shares at the full stock exchange price of $111.75 resulting in an increased assessment for each of the taxpayers.

The taxpayers appealed to the Court of Common Pleas of Montgomery County. The court, after a full hearing, ordered that the shares in question be valued at 90% Of the stock exchange price. The Board has appealed from that ruling.

In analyzing the contentions of the parties, it becomes necessary to recognize and explore fully the theory which serves as the basis of the taxpayer's case. It is known generally in federal estate gift and inheritance tax law, as 'blockage.' The theory of blockage is set out in Lowndes & Kramer, Federal Estate and Gift Tax, (2nd ed. § 18.26 1962) as follows: 'Taxpayers have frequently contended where a large block of stock was to be valued that actual sales at or around the valuation date did not fairly reflect the fair market value of the stock, because they failed to discount the depressing effect which the sale of such a large number of shares would have on the market. This is called blockage. In a blockage situation, the unit of value is still the fair market price of a single share of stock; blockage requires that the price per share be lowered to reflect the effect of marketing such a large number of shares.'

The concept of blockage was repudiated by the Internal Revenue Service for many years. It was not recognized until the courts first adopted it. See Helvering v. Maytag, 125 F.2d 55 (1942); Helvering v. Safe Deposit & Trust Co. of Baltimore, 95 F.2d 806, (4 Cir., 1938); Commissioner of Internal Revenue v. S. F. Shattuck, 97 F.2d 790 (7 Cir., 1938); Bartol v. McGinnes, 185 F.Supp. 659 (D.C., 1960). It has now impliedly been recognized as an appropriate theory by the Internal Revenue Service as evidenced by the federal estate tax regulations which provide at 20.2031--2(e): 'In certain exceptional cases, the size of the block of stock to be valued in relation to the number of shares changing hands in sales may be relevant in determining whether selling prices reflect the fair market value of the block of stock to be valued. If the executor can show that the block of stock to be valued is so large in relation to the actual sales on the existing market that it could not be liquidated in a reasonable time without depressing the market, the price at which the block could be sold as such outside the usual market, as through as underwriter, may be a more accurate indication of value than market quotation.'

Many state courts have similarly recognized the blockage theory in the estate and inheritance tax areas. See Newberry v. Walsh, 20 N.J. 484, 120 A.2d 242 (1956); Calvert v. Kattar, 301 S.W.2d 318 (Tex.Civ.App.1957); Citizens Fidelity Bank and Trust Co. v. Reeves, 259 S.W.2d 432 (Ky.1953). Valuation of Corporation Stock for Purpose of Succession, Inheritance or Estate Tax as Affected By Quantity Involved, 23 A.L.R.2d 787.

Indeed, even here in Pennsylvania, our Supreme Court recognized the blockage theory in inheritance tax cases in Clabby's Estate, 308 Pa. 287, 162 A. 207, 83 A.L.R. 936 (1932). The Court there, while denying blockage to that taxpayer, noted:

'The test is, value at the date of death. But, the value of a few shares of stock on the day of death does not always fix the value of large blocks of stock, in this case over 8,500 shares * * *

'While market quotations on the day of death are evidence of value of stock, they are not conclusive of the actual value of the stock at that time. In fixing value, other evidence having a tendency either to decrease or increase the value as of the day of death is competent and should be considered. The rule for determining value for inheritance taxation contemplates a range of the entire market and the averaging of prices as found running through a reasonable period of time * * * Men who have had experience in selling stock in lots both large and small are therefore competent to give an opinion as to the effect of dumping a large block of stock on the market. It was therefore competent to show what in the opinion of the experts the value of the stock thus sold would be under actual conditions in business.'

Blockage, to date, however, has not been applied in the personal property tax area. No case in any jurisdiction which has discussed the matter has come to our attention.

There are two issues, therefore, for us to determine in this case:

A. Does blockage properly apply in considering the value of shares assessed for the purpose of personal property taxes?

B. If so, did the court properly apply blockage in this case?

A. Does 'blockage' apply in considering the value of shares assessed for the purpose of personal property taxation in Pennsylvania?

The Board argues that the term 'value' as used in the act imposing the personal property tax must be given its ordinary and customary meaning, which is the value established by reference to the stock exchange quotation. In our opinion, the Board's total reliance on the exchange price is unduly restrictive, since it uses a standard without regard to that standard's relevance or meaning.

In using the word 'value', the legislature undoubtedly recognized that a corporation's securities are subject to various methods of valuation. Reference might be made to book value, asset value, earnings statements, or any one of the other methods by which stock is valued. In virtually all tax areas, however, the term 'value' has been understood to mean fair market value.

Thus, in real estate assessment cases, the Supreme Court has often reiterated that: 'The term actual value means the market value and market value has been defined as the price which a purchaser, willing but not obliged to buy would pay an owner, willing but not obliged to sell * * *.' Deitch Co. v. Board of Property Assessment, Appeals and Review of Allegheny County, 417 Pa. 213, 217, 209 A.2d 397, 400 (1965).

Similarly, as noted in Clabby's Estate, supra, involving the Pennsylvania Inheritance Tax, our Supreme Court interpreted the word 'value' to mean the fair market value of the stock.

What the Board fails to consider, is that the stock market figure is most often employed not because of its inherent infallibility but because, ordinarily, it is the best evidence of fair market value. As we have already noted, however, this quotation may be unreliable in considering the value of large blocks of stock. In those instances, the stock market quotation, if accepted, would represent only fictional fair market value, with respect to the block in question.

The Board suggests that personal property tax should not receive the blockage treatment accorded estate and inheritance taxes because the latter involves a transfer of property. The personal property tax, on the other hand, involves no transfer, and the fair market sales value is purely fictional, since no transfer actually occurs.

There would, perhaps, be some validity to this argument if blockage, in the past, had been recognized only in those estate and inheritance tax cases involving a forced liquidation and sale. In point of fact, however, blockage has been recognized as appropriate even in those situations where estates have not been liquidated, the stock has not been sold, and the valuation is made only for the purpose of tax assessment. See Newberry v. Walsh, supra; Clabby's Estate, supra. We find no reason, therefore, to recognize blockage in the case of inheritance taxes while ignoring it in the personal property...