Farmer v. Comm'r of Internal Revenue (In re Estate of Van Horne)
| Decision Date | 26 April 1982 |
| Docket Number | Docket No. 3399-80. |
| Parties | ESTATE of ADA E. VAN HORNE, DECEASED, ROBERT L. FARMER and RICHARD R. COLE, EXECUTORS, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. At her death, decedent was obligated to pay a monthly sum to her former husband for the remainder of his life. Decedent's ex-husband properly filed his claim against decedent's estate, and the claim was approved by the State court with jurisdiction over the estate. Decedent's ex-husband died 7 months after decedent, thus extinguishing the estate's obligation after only seven payments. His early death was unexpected at the time of her death. Held, the obligation was fully enforceable as of the date of decedent's death and the estate is therefore entitled to a deduction for the actuarial value of the debt computed without regard to events occurring subsequent to the date of death. Ithaca Trust Co. v. United States, 279 U.S. 151 (1929), and Estate of Lester v. Commissioner, 57 T.C. 503 (1972), followed; Estate of Hagmann v. Commissioner, 60 T.C. 465 (1973), affd. 492 F.2d 796 (5th Cir. 1974), and related cases, distinguished.
2. Decedent held 56,454 shares of a publicly traded stock at her death. Between the date of death and the alternate valuation date, which was elected by the executors for purposes of valuing the gross estate, 42,416 shares were sold in several blocks, all at a court-approved discount of $2 per share. Held, for purposes of determining whether a “blockage” discount is appropriate in valuing the 14,038 shares remaining in the estate on the alternate valuation date, the relevant block of stock is 14,038 shares. Held, further, in view of the fact that the alternate valuation date marked the beginning of a strong and rising market, the record fails to show that the estate could not dispose of the 14,038 shares within a reasonable period of time without depressing the market price of the stock; the Commissioner therefore did not err in refusing to allow a discount for blockage in respect of the 14,038 shares as of the alternate valuation date. Robert L. Weaver, for the petitioners.
Irene S. Carroll, for the respondent.
The Commissioner determined an estate tax deficiency of $448,828.66 in respect of the Estate of Ada E. Van Horne. Following several concessions by the estate (sometimes referred to as petitioner), two issues remain: (1) Whether, in valuing an undisputed claim of a life interest against the estate for purposes of the deduction under section 2053(a)(3), I.R.C. 1954, the Commissioner properly disregarded the actuarial tables in order to give effect to the claimant's unexpected early death subsequent to the date of the decedent's death, and (2) whether certain stock in the gross estate should be discounted for “blockage.” The case has been submitted on the basis of a stipulation of facts.
Ada E. Van Horne died September 4, 1976, while domiciled in California. The estate tax return was timely filed, on June 1, 1977, with the Internal Revenue Service in Los Angeles, Calif. The executors are Robert L. Farmer, of San Marino, Calif., and Richard R. Cole, of Albuquerque, N. Mex. They elected to value the gross estate on the alternate valuation date, March 4, 1977, rather than the date of death.
At the time of her death, the decedent was obligated, pursuant to an interlocutory judgment of dissolution of marriage, to pay to her surviving ex-husband, James Van Horne, $5,000 per month for spousal support for the remainder of his life. This award of support could not be modified, and the payments were to continue regardless of either his remarriage or her death. The interlocutory judgment provided further that, in the event of her death, all payments thereafter falling due would become payable by her estate.
James filed a creditor's claim on October 29, 1976, within the statutory period prescribed therefor. The executors filed a petition on November 29, 1976, for court approval of the claim, and it was approved by order dated December 27, 1976.
At the time of his former wife's death, James was aware that he had a liver ailment as a result of excessive drinking, but he had no reason to believe that he had a terminal disease. In fact, he was examined by his regular physician a few weeks after his former wife's death, and the physician failed to note any evidence of a life-threatening condition. In March of 1977, however, James' health began to decline and on March 27, 1977, he entered a hospital. At this point, both the physician and James were aware that James had cancer, though apparently this fact was not then disclosed to the executors. James died on April 20, 1977, having received from the estate only $35,000 in respect of his claim for spousal support.
On the estate tax return, the executors claimed a deduction of $596,386.58 for the debt to James. This amount was computed using the actuarial tables found in section 20.2031-10, Estate Tax Regs. The parties have stipulated that the amount computed is correct if use of the actuarial tables is the proper method of valuing the debt. The Government contends, however, that actuarial valuation should be disregarded here because the obligation was in fact extinguished after the payment of only $35,000.
At the time of her death, the decedent, a granddaughter of William Wrigley, Jr., owned 56,454 shares of Wm. Wrigley Jr. Co. common stock (Wrigley stock), which was listed on the New York Stock Exchange. The closing price of the stock on September 3, 1976, the day before her death, was $82.25 per share, but on March 4, 1977, the alternate valuation date, the mean market price of the stock was $73.9375 per share. On both dates, the total number of outstanding shares of Wrigley stock was approximately 3,940,000.
The executors determined that it would be necessary to liquidate a large portion of the estate's Wrigley stock in order to pay the various expenses and taxes due from the estate. To this end, advice was obtained from a representative of Morgan, Stanley & Co., Inc., a member firm of the New York Stock Exchange specializing in the trading of Wrigley stock. The advice given to the executors on or about December 17, 1976, and again to counsel for the executors on February 18, 1977, was that approximately 40,000 shares could feasibly be sold in one of the two following ways: (a) A block sale, with Morgan, Stanley as agent, at a discount from market price at time of sale of between 5 percent and 8 percent; or (b) a nonregistered secondary offering which would depress the market price by an estimated $3 per share.
On February 16, 1977, three Wrigley family members and a family trust offered to purchase certain amounts of stock, totaling 18,916 shares, at a discount of $2 per share from the then market price of $76.25 per share. Upon petition of the executors, court approval of the proposed sale was obtained on February 18, 1977. Pursuant to the court decree, the shares were sold for $74.25 each.
On February 24, 1977, the court granted the executors the authority to sell two additional blocks of the estate's Wrigley stock at a discount of $2 per share from the market price. Philip K. Wrigley purchased 5,000 shares at $71.75 per share, and as to the second block, which consisted of 18,500 shares, an order to sell was placed with Morgan, Stanley. On February 25, 1977, Morgan, Stanley sold the shares in private placements in separate blocks of 16,000 and 2,500 shares, all at the discounted price of $71 per share.
As a result of these dispositions, the estate held only 14,038 shares of Wrigley stock on March 4, 1977, the alternate valuation date. As stated above, the mean market price of the stock on that date was $73.9375 per share. Set forth below is the range of prices and trading volumes for the approximately 4-month period surrounding the alternate valuation date:
+-----------------------------------------------------+
¦1977 ¦MARKET PRICE RANGE ¦
+----------------+------------------------------------¦
¦Week ending— ¦High ¦Low ¦Close ¦Volume (000) ¦
+----------------+------+------+-------+--------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+----------+-----+------+------+-------+--------------¦
¦Jan. ¦7 ¦73.500¦72.000¦72.375 ¦3.5 ¦
+----------+-----+------+------+-------+--------------¦
¦Jan. ¦14 ¦73.000¦72.250¦73.000 ¦3.7 ¦
+----------+-----+------+------+-------+--------------¦
¦Jan. ¦21 ¦73.750¦71.750¦73.750 ¦3.0 ¦
+----------+-----+------+------+-------+--------------¦
¦Jan. ¦28 ¦77.250¦74.250¦77.250 ¦7.1 ¦
+----------+-----+------+------+-------+--------------¦
¦Feb. ¦4 ¦80.000¦76.500¦80.000 ¦5.5 ¦
+----------+-----+------+------+-------+--------------¦
¦Feb. ¦11 ¦80.000¦78.500¦78.500 ¦4.8 ¦
+----------+-----+------+------+-------+--------------¦
¦Feb. ¦18 ¦78.000¦73.750¦73.750 ¦9.0 ¦
+----------+-----+------+------+-------+--------------¦
¦Feb. ¦25 ¦73.875¦71.000¦71.000 ¦1 21.8 ¦
+----------+-----+------+------+-------+--------------¦
¦Mar. ¦4 ¦74.000¦70.375¦74.000 ¦7.9 ¦
+----------+-----+------+------+-------+--------------¦
¦Mar. ¦11 ¦80.500¦74.250¦79.500 ¦42.8 ¦
+----------+-----+------+------+-------+--------------¦
¦Mar. ¦18 ¦81.000¦75.250¦80.000 ¦30.1 ¦
+----------+-----+------+------+-------+--------------¦
¦Mar. ¦25 ¦80.875¦79.250¦79.750 ¦18.7 ¦
+----------+-----+------+------+-------+--------------¦
¦Apr. ¦1 ¦81.500¦80.000¦81.375 ¦13.8 ¦
+----------+-----+------+------+-------+--------------¦
¦Apr. ¦8 ¦81.875¦80.000¦81.375 ¦8.1 ¦
+----------+-----+------+------+-------+--------------¦
¦Apr. ¦15 ¦85.000¦80.250¦85.000 ¦35.4 ¦...To continue reading
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