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

• Decision Date: 14 February 1989
• Docket Number: Docket No. 39319-86.
• Citation: 92 T.C. 312,92 T.C. No. 19
• Parties: ESTATE OF JOYCE C. HALL, DECEASED, DONALD J. HALL, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

92 T.C. 312

92 T.C. No. 19

ESTATE OF JOYCE C. HALL, DECEASED, DONALD J. HALL, EXECUTOR, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 39319-86.

United States Tax Court

Filed February 14, 1989

P filed a Federal estate tax return and reported its equity interest in H, a closely held corporation, at the adjusted book value of the shares as of the date of decedent's death. The shares were subject to various transfer restrictions and buy- sell agreements establishing adjusted book value as the sales price under the agreements. Based on comparisons with a number of comparable companies, P's experts determined that the adjusted book value provided a reasonable estimate of the fair market value of the shares at the valuation date.

HELD, R's expert erred in, among other things, ignoring the transfer restrictions and in limiting his market comparison to a single comparable. Fair market value was the adjusted book value as of the date of death. Robert J. Sisk, Stuart J. Hendel, Norman C. Kleinberg, David R. Tillinghast, George R. Haydon, Charles Egan, Dwight C. Arn, Karin Greenfield-Sanders, and Russell W. Baker, for the petitioner.

Kendall C. Jones, Lewis R. Carluzzo, and Nancy B. Romano, for the respondent.

COHEN, JUDGE:

Respondent determined a deficiency of $201,776,276.84 in the Federal estate tax of the estate of Joyce C. Hall, deceased, Donald J. Hall, executor. After concessions, the issue for decision is the value for estate tax purposes of decedent's equity interest in Hallmark Cards, Incorporated.

FINDINGS OF FACT

Some of the facts have been stipulated, and the facts set forth in the stipulations are incorporated in our findings by this reference. Joyce C. Hall (decedent) died testate on October 29, 1982. At the time of his death, decedent resided in Leawood, Kansas. Decedent's will, which named his son Donald J. Hall as executor of the estate, was admitted to probate in the District Court of Johnson County, Kansas, on November 29, 1982. Under the provisions of his will, decedent left his entire residuary estate, after specific bequests of his residence and personal belongings to his children, to charity.

Decedent's executor timely filed a Federal estate tax return. All assets included in the gross estate were valued as of the date of death (the valuation date). The gross estate included 70,083,000 shares of Class C common stock of Hallmark Cards, Incorporated (Hallmark), and 1,797,000 certificates of participating interest representing voting trust certificates of Hallmark Class B common stock.

Petitioner reported the Class C common stock on decedent's Federal estate tax return at a value of $1.87835 per share, for a total of $131,640,403.05. Petitioner reported the Certificates of participating Interest on decedent's Federal estate tax return at a value of $1.98157 per share, for a total of $3,560,881.29.

In the notice of deficiency, respondent determined a deficiency of $201,776,276.84, primarily arising from (a) the determination that the value of the gross estate should be increased by $167,614,006.95 as to the Class C common stock; and (b) the determination that the value of the gross estate should be increased by $4,507,648.71 as to the Certificates of participating Interests.

OVERVIEW OF HALLMARK

Originally founded in 1910 and incorporated in 1923, in 1982 Hallmark Cards, Incorporated (Hallmark), was the leader in the United States in the design, manufacture, and sale of greeting cards and related products. Although Hallmark was privately held, if it had been a public corporation it would have ranked in size among the ‘Fortune 500‘ largest industrial companies in the United States.

Decedent was the founder of Hallmark and served as Chairman of the Board until his death. Decedent's son was the Chief Executive Officer of Hallmark at the time of decedent's death. Hallmark's Board of Directors consisted of twelve members, five who were employees of Hallmark, five who were not employees, and two who were family members.

Hallmark grew rapidly in the early years of its business, and by 1927 sales exceeded $1 million. In the 1930's, Hallmark pioneered the use of freestanding display fixtures to sell its cards, an important retailing innovation. In the 1940's, Hallmark began to develop a national market through a nationwide advertising campaign centered on its now familiar slogan ‘when you care enough to send the very best.‘ Hallmark also initiated in the 1940's its first product diversification strategy, selling gift wrap and party goods to complement its greeting card sales.

By the 1950's, Hallmark, established as the premium brand of greeting cards, had developed a network of card shops, the ‘class‘ distribution channels, which sold primarily cards and gift items. In 1959, Hallmark introduced the Ambassador brand of products in an effort to augment its sales to the ‘mass‘ distribution channels. The Ambassador brand was not as profitable as the Hallmark brand due to the more competitive marketing environment of the ‘mass‘ channels, and at the valuation date Ambassador represented only 11 percent of Hallmark's business.

In the late 1950's, Hallmark founded its International Division. During the 1970's and early 1980's, Hallmark continued to expand its International Division, and at the valuation date had operations in Canada, Ireland, Germany, New Zealand, England, Scotland, France, and Australia. To expand its product lines and to reduce its reliance on a single source of revenue, Hallmark acquired Trifari, Krussman, and Fishel, a manufacturer of costume jewelry; Charles D. Burnes Company, Inc., a manufacturer of picture frames; and Litho-Krome Company, a lithographic printing shop. Hallmark also had a retail division, which operated three high quality department stores in Kansas City, Missouri. Hallmark's subsidiaries and its retail division were all losing money in the years prior to the valuation date.

During the 1960's, Hallmark embarked on a major real estate development project in Kansas City, Missouri. Hallmark organized a subsidiary, Crown Center Redevelopment Corporation (Crown Center), to undertake this project. Crown Center was unprofitable, and was subsidized by Hallmark throughout its existence to the time of trial in May 1988. On July 17, 1981, two suspended concrete and steel walkways (skywalks) spanning the lobby of the Kansas City Hyatt Regency Hotel, Crown Center, collapsed, killing 114 people and seriously injuring 238 more. At the valuation date, Hallmark and Crown Center were embroiled in major litigation arising out of that disaster.

HALLMARK CAPITAL STOCK

At the valuation date, Hallmark had three classes of stock outstanding — Class A preferred stock, Class B common stock, and Class C common stock. The Class A preferred stock was created in a 1977 recapitalization of Hallmark and was held by the Hallmark Employee profit-Sharing and Ownership Plan (the Plan) and by Hallmark employees participating in the Plan. The Class A preferred stock was a class of nonvoting common stock with dividend and liquidation preferences. Decedent did not own any Class A preferred stock.

The Class B common stock was the sole voting class of common stock. Each share had the right to cast one vote for the election of directors and for any other matter subject to a vote of shareholders. The Class B common stock had a right to receive dividends and liquidating distributions, subject to the preferences for Class A preferred stock.

In 1963, certificates representing all of the shares of Class B common stock were deposited with The First National Bank of Lawrence, Kansas, as trustee under a Trust Indenture dated December 17, 1963 (the 1963 Indenture). Beneficial owners of Class B common stock held certificates of participating interest issued by the trustee, and they retained all of the economic incidents of ownership of the underlying shares, including the right to receive all dividends and the right to vote the shares.

The 1963 Indenture will remain in effect until 20 years after the death of the last survivor of the descendants of decedent who were living on December 17, 1963. It is estimated that this event will occur sometime after the middle of the next century. The 1963 Indenture served to enforce transfer restrictions on the Class B common stock. By its terms, the 1963 Indenture may be terminated or amended only upon the vote of the holders of certificates representing 95 percent of the outstanding Class B common shares. At no time did decedent hold certificates representing 95 percent of the outstanding Class B common shares of Hallmark.

The Class C common stock, created in a 1980 recapitalization of Hallmark, was nonvoting common stock, except to the extent that Missouri law or Hallmark's January 2, 1980, Restated Articles of Incorporation (the Restated Articles) expressly conferred voting rights upon it. Subject to the preferences of the Class A preferred stock, the Class C common stock participated on a share-for-share basis with Class A preferred and Class B common in any dividend or liquidating distribution made by Hallmark.

At the valuation date, decedent owned less than 25 percent of the total outstanding shares of both Class B and Class C common stock. The remaining outstanding shares of Class B and Class C common stock not held by decedent at the valuation date were held by or for his descendants. All Class A preferred stock was held by the Plan.

POLICY TO KEEP HALLMARK PRIVATE

Hallmark maintained a policy against public disclosure of financial information. As of the valuation date, it had always been and continued to be Hallmark's policy to remain a privately held company.

Decedent's objective in ensuring that Hallmark remained a private company was to retain the ability to make long-range decisions without worrying about short-term earnings and stock prices. As a private corporation, Hallmark had a greater ability to maintain the confidentiality of its...