Davis v. United States, 25736.

• Citation: 460 F.2d 769
• Decision Date: 23 May 1972
• Docket Number: No. 25736.,25736.
• Parties: Robert C. DAVIS, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

460 F.2d 769 (1972)

Robert C. DAVIS, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 25736.

United States Court of Appeals, Ninth Circuit.

May 23, 1972.

David E. Carmack, Asst. Atty. Gen. (argued), Gilbert E. Andrews, Johnnie

M. Walters, Asst. Attys. Gen., Lee A. Jackson, Acting Asst. Atty. Gen., Washington, D. C., Robert L. Meyer, U. S. Atty., Mason C. Lewis, Charles H. Magnuson, Asst. U. S. Attys., Los Angeles, Cal., for defendant-appellant.

Dickinson Thatcher (argued), of Clarke, Swink, Thatcher, & Leary, North Hollywood, Cal., Stanton H. Zarrow, of O'Melveny & Myers, Los Angeles, Cal., for plaintiff-appellee.

Before BARNES, BROWNING and TRASK, Circuit Judges.

TRASK, Circuit Judge:

The United States appeals from a decision of the district court adjudging the taxpayer entitled to a refund of federal estate taxes paid in the sum of $604.84, plus interest. The controversy concerns the validity of Treasury Regulation § 20.2031-8(b) (1),¹ which specifies how shares of an open-end investment company must be valued for estate tax purposes. Jurisdiction of the district court was conferred by 28 U.S.C. § 1346, and the case is properly before us under 28 U.S.C. § 1291. The opinion of the district court is reported at 306 F.Supp. 949 (C.D.Cal.1969). We affirm.

On March 29, 1965, the date of the death of Isabelle Mildred Davis, she and her husband were owners in joint tenancy of 9,518 shares of Affiliated Fund, Inc., an open-end investment company or mutual fund. Such an organization sells shares in itself and with the proceeds engages in the business of investing, reinvesting and trading in securities. It continuously sells its shares to the public and must continually offer to redeem them.² The selling price to the public, the "asked" or "offering" price, is the net asset value per share of the total securities owned by the company, plus a sales commission or "sales load," which is a varying percentage of the asked price depending upon the value of the number of shares purchased in a single transaction.³ The sales load of Affiliated ranges from 2½ percent on sales of $100,000 or more to 7½ percent on sales of $5,000 or less. The price at which this Fund will redeem its shares is the net asset value.⁴ Thus, if the taxpayer had purchased 9,518 shares on the market at date of death, the cost would have been $89,754.74, and would have included the sales load. Had the taxpayer asked the Fund to redeem its shares on that date, he would have received $86,233.08, the computed net asset value without sales load.⁵

The taxpayer valued the shares on the estate tax return at the amount for which they could be redeemed, $86,233.08. The Internal Revenue Service, relying on Treasury Regulation § 20.2031-8(b), which requires that shares in a mutual fund be valued for estate tax purposes at the public offering price, at $89,754.-74,⁶ assessed a deficiency. It was paid and this suit filed for its recovery as an estate tax illegally assessed and collected.

No question exists as to the ownership of the shares; there is likewise no question but that under Treasury Regulation § 20.2031-8(b), value at date of death is the amount a purchaser would have to pay to Affiliated Fund, Inc., in order to acquire the shares. We must sustain this Treasury Regulation if it is reasonable and consistent with the statute under which it was promulgated. Commissioner v. South Texas Co., 333 U.S. 496, 68 S.Ct. 695, 92 L.Ed. 831 (1948).

The Internal Revenue Code of 1954, as amended, provides that 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. 26 U.S.C. §§ 2031, 2033. The implementing regulations under the statute define valuation in general in the classic legal formula:

"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 relevant facts." Treas.Reg. § 20.2031-1(b).

The application of this traditional test ordinarily results in a single price. Once the willing buyer and the willing seller have agreed, the figure is the same for both. Here, however, there are two prices. The willing buyer, the unrestrained public at time of purchase, must pay $9.43 per share, and the willing seller, the unrestrained public at time of sale, may obtain only $9.06 per share. The Treasury Department has solved the impasse by categorically declaring that the estate of a decedent is in the position of a buyer, and the value is $9.43 per share. Treas.Reg. § 20-2031-8(b) (1).

It is difficult to rationalize this regulation with the command of the statute which requires that the value of the gross estate shall include the value of all property "to the extent of the interest therein of the decedent . . . . " 26 U.S.C. § 2033. By no stretch of the imagination does the decedent have an "interest" in the $.37 per share difference representing the sales load. He cannot make a transfer so that his tranferee may realize this amount; he cannot realize it himself either as a part of his own certificate or separated from it. The sales load is similar to a broker's commission charged on the purchase of stocks listed on a stock exchange. Under Treasury Regulation § 20.2031-2(b), this sales charge is not a part of the gross estate.⁷

The authorities are divided. Ruehlmann v. Commissioner, 418 F.2d 1302 (6th Cir. 1969), cert. denied, 398 U.S. 950, 90 S.Ct. 1869, 26 L.Ed.2d 290 (1970), and Howell v. United States, 414 F.2d 45 (7th Cir. 1969), hold that the regulation in question is valid. Cart-wright v. United States, 457 F.2d 567 (2d Cir. 1972), Hicks v. United States, 335 F.Supp. 474 (D.Colo.1971), and the district court in this case decided that the regulation is invalid.

Ruehlmann v. Commissioner, supra, without critical examination of the valuation problem on an a priori basis, accepted the Tax Court's interpretation of the regulation as reasonable and consistent with the Internal Revenue Code.

Howell v. United States, supra, involved a gift of mutual fund shares and a challenge to the applicable gift tax regulation.⁸ The court rejected the taxpayer's argument, that the redemption price controlled because it was the only figure upon which the willing buyer (mutual fund) and the willing seller (shareholder) could agree, upon the ground that the market for redemption of mutual fund shares was not an open market. As a practical matter for determining value, however, the redemption market is the market upon which both parties agree when the shares are purchased. The mutual fund chooses to operate in such form under the law and the public buys shares in the fund fully apprised of its redemption opportunities through company prospectuses.

The court in Howell also considered the decision in Guggenheim v. Rasquin, 312 U.S. 254, 61 S.Ct. 507, 85 L.Ed. 813 (1941), as lending support to its position. In Guggenheim, the Court considered the value for gift tax purposes of a single-premium life insurance policy which was irrevocably assigned simultaneously with its issue. The cost of the policy was $852,438.50, its face value was $1,000,000 and its cash surrender value was $717,344.81. The donor's gift tax return listed the value as the cash surrender value; the...