Estate of Street v. State Bd. of Equalization, 01-A-01-9006-CH00197

• Decision Date: 14 September 1990
• Docket Number: No. 01-A-01-9006-CH00197,01-A-01-9006-CH00197
• Parties: ESTATE OF Gordon P. STREET, et al., Plaintiffs/Appellants, v. STATE BOARD OF EQUALIZATION, et al., Defendants/Appellees.
• Court: Tennessee Court of Appeals

Page 583

812 S.W.2d 583

ESTATE OF Gordon P. STREET, et al., Plaintiffs/Appellants, v. STATE BOARD OF EQUALIZATION, et al., Defendants/Appellees.

No. 01-A-01-9006-CH00197.

Court of Appeals of Tennessee Western Section, at Nashville.

Sept. 14, 1990.

Application for Permission to Appeal

Denied by Supreme Court

Dec. 3, 1990.

John P. Gaither, Hugh J. Moore, Jr., Douglas E. Peck, Hilda H. King, Witt, Gaither & Whitaker, Chattanooga, for plaintiffs/appellants.

Charles W. Burson, Atty. Gen. and Reporter, Daryl J. Brand, Asst. Atty. Gen., Nashville, for defendants/appellees.

FARMER, Judge.

This appeal involves the date of death valuation of certain restricted stock owned by the decedent Gordon P. Street. The Estate of Mr. Street challenged the Assessment Appeals Commission valuation of decedent's stock in the Chancery Court for Davidson County. The Chancellor upheld the Commission's findings except for the dollar valuation which he found to be arbitrary and not substantiated by sufficient evidence. The case was remanded to the Commission for further proceedings on the sole issue of actual dollar value of decedent's stock.

On Mr. Street's death he owned 62.8 percent of the issued and outstanding shares of North American Royalties, Inc. ("NAR"). The minority shares of NAR's common stock, equivalent to 37.2 percent, are publicly traded on the American and Pacific Stock Exchanges. The Tennessee Department of Revenue ("Department") valued Mr. Street's stock at $13.50 per share for inheritance tax purposes. The Department's valuation included a control premium of 50 percent over market price of the NAR publicly traded stock. The Department felt the control premium would reflect the influential factor that a controlling majority shareholder would have on NAR.

Mr. Street's estate, on the other hand, had assessed the value of the stock at $7.00 and $7.40 per share. The Appellant valued the stock between 20 to 25 percent below the publicly-traded stock in order to reflect the restrictions placed on the sale of such stock, the discount associated with the sale of a large block of stock, and problems with liquidity and marketability of the stock.

On April 2, 1986, the Appellant filed an appeal with the State Board of Equalization challenging the Department's appraisal. The Board of Equalization referred the matter to the Assessment Appeals Commission ("Commission") for determination. On May 24, 1988, the Commission concluded that (1) private placement is the proper basis to value decedent's stock; (2) the value of the decedent's NAR stock should at least be the market value of the publicly traded NAR shares; (3) the valuation of the decedent's shares should include a control premium; and (4) the value of the decedent's stock should be set at a value of $10.45 per share.

The Appellant appealed the Commission's findings, claiming error in the valuation of decedent's stock at $10.45 and in the information the Commission relied on to reach its conclusion. The trial court entered the following order on September 19, 1989:

This matter, involving the valuation of certain stock for inheritance tax purposes, was heard by the Court, pursuant to T.C.A. Sec. 4-5-322, on appeal from the decision of the Assessment Appeals Commission of the State Board of Equalization. Upon consideration of the entire record of the proceedings before the Commission, and the briefs and arguments of counsel, the Court announced findings of fact and conclusions of law in a Memorandum, filed September 5, 1989, which is hereby incorporated by reference. In accordance with the findings and conclusions set forth in that Memorandum, it is hereby

ORDERED, ADJUDGED and DECREED, that (1) the Commission's findings (a) that private placement is the correct basis for valuing decedent's stock, (b) that the fair market value of the shares of stock on the date of death would not be less than the value of the actively traded shares on that date, and (c) that the fair market value of the decedent's shares on the date of death should include a premium for control, are AFFIRMED;

(2) The Commission's assignment of $10.45 per share as the taxable value of decedent's stock was arbitrary and not substantiated by sufficient evidence;

(3) This matter is REMANDED to the Assessment Appeals Commission for further proceedings on the sole issue of the precise dollar-value to be placed on the decedent's stock....

The essence of the issues presented by the Estate are:

I. Did the trial court err in holding that a control premium should be included in the valuation of the decedent's stock and that that date of death valuation should not be less than the fair market value of the minority shares?

II. Did the trial court err in concluding that the exclusions of the Shearson Lehman report was harmless error?

III. Did the trial court err in accepting the Commission's reliance on the State's appraisal report?

I.

Appellant contends that the Chancellor erred in concluding that a control premium should be considered in the valuation of decedent's stock. Appellant argues that this control premium fails to take into consideration the factors which negatively impact on decedent's stock. The Appellant also alleges that the "floor" the Commission placed on the decedent's shares is without merit because it inappropriately assumes an unjustified correlation between the minority unrestricted publicly traded shares and the decedent's restricted shares.

We believe the Chancellor was correct in upholding the Commission's findings. In reviewing the Commission's determinations, the Chancellor was governed by T.C.A. Sec. 4-5-322(h). This code provision sets forth the standard of review on appeal of administrative proceedings and provides as follows:

(h) The court may affirm the decision of the agency or remand the case for further proceedings. The court may reverse or modify the decision if the rights of the petitioner have been prejudiced because the administrative findings, inferences, conclusions or decisions are:

(1) In violation of constitutional or statutory provisions;

(2) In excess of the statutory authority of the agency;

(3) Made upon unlawful procedure;

(4) Arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion; or

(5) Unsupported by evidence which is both substantial and material in the light of the entire record.

In determining the substantiality of evidence, the court shall take into account whatever in the record fairly detracts from its weight, but the court shall not substitute its judgment for that of the agency as to the weight of the evidence on questions of fact.

The scope of review in this Court is the same as in the trial court, to review findings of facts of the administrative agency upon a standard of substantial and material evidence. Humana of Tennessee v. Tennessee Health Facilities Commission, 551 S.W.2d 664 (Tenn.1977); DePriest v. Puett, 669 S.W.2d 669 (Tenn.App.1984). What amounts to "substantial and material evidence" as contained in T.C.A. Sec. 4-5-322(h) is not clearly defined in the statute. Generally, the standard requires "something less than a preponderance of the evidence," Wayne County v. Tennessee Solid Waste Disposal Control Board, 756 S.W.2d 274, 280 (Tenn.Ct.App.1988); Consolo v. Federal Maritime Comm'n, 383 U.S. 607, 620, 86 S.Ct. 1018, 1026, 16 L.Ed.2d 131 (1966), "but more than a scintilla or glimmer." Wayne County, 756 S.W.2d at 280; Pace v. Garbage Disposal Dist., 54 Tenn.App. 263, 267, 390 S.W.2d 461, 463 (1965).

In the proceeding before the Commission on November 18 and 19, 1987, both the Appellant and Appellee introduced expert testimony in support of their position. Mr. Street's estate presented testimony by Shearson, Lehman Brothers, Inc., ("Shearson") an investment banking firm, and Associated Valuation Technologies, Inc., ("Associated") an appraisal firm. The Estate's experts testified that a discount instead of a premium should be considered in valuing the decedent's stock. Shearson and Associated concluded that a discount was appropriate because strict security laws limited the liquidity and marketability of the NAR unregistered restricted stock.

The State, on the other hand, presented the testimony and appraisals of Eugene Jones, an estate tax auditor, and a representative of Marshall and Stevens, Inc. an appraisal firm. The State's experts testified that a "control premium," over and above the value of the minority shares, should be reflected in the valuation since the decedent had effective control of a prosperous business through the ownership of 62.8...