In re Cowles' Estate

• Decision Date: 30 June 1950
• Docket Number: 31112.
• Citation: 219 P.2d 964,36 Wn.2d 710
• Court: Washington Supreme Court
• Parties: In re COWLES' ESTATE. COWLES et al. v. STATE et al.

219 P.2d 964

36 Wn.2d 710

In re COWLES' ESTATE.

COWLES et al. v. STATE et al.

No. 31112.

Supreme Court of Washington.

June 30, 1950

Department 2.

Witherspoon, Witherspoon & Kelley, Spokane, for appellants.

Smith Troy, William C. Klein, Olympia, for respondents

ROBINSON, Justice.

On October 5, 1943 William H. Cowles, as owner of certain capital stock in three newspaper corporations, entered into a contract with his son William H. Cowles, Jr., the managing head of the corporations, by the terms of which he gave the latter an option to purchase two thousand nineteen shares of the capital stock of the Cowles Publishing Company (publisher of the Spokane Spokesman Review) for $130 per share; two thousand nineteen shares of the capital stock of the Spokane Chronicle Company for $120 per share; and fifteen hundred shares of the capital stock of the Spokane Engraving Company for $10 per share. This included substantially all of the stock of the Spokane Engraving Company, and approximately one-fourth of the stock of the other two companies. The remainder of the stock in these companies was and is owned in its entirety by members of the Cowles family. It is not listed on the market.

The contract provided that the option could be exercised at any time during the three-month period commencing October 1, 1953, and ending December 31, 1953, providing that the optionee, W. H Cowles, Jr., should have remained actively engaged in the business conducted by the three corporations in an executive or administrative capacity during the period from the date of the contract to and including September 30, 1953. It further provided that, in the event of the death of W. H. Cowles prior to October 1, 1953, W. H. Cowles, Jr., should have the right to exercise the option at any time within twelve months after his father's death, provided that he had met the conditions avove set forth until that time. Should he fail to exercise the terms of the option within the twelve-month period, this was not to affect his right to exercise it during the period from October 1 to December 31 1953. Consideration for the option was stated to be the sum of $10,000, paid by W. H Cowles, Jr., to W. H. Cowles, receipt of which was acknowledged in the contract, and the promise of the former to remain actively engaged in an executive or administrative capacity in the business during the ten-year period above mentioned.

At the time of the execution of this contract, W. H. Cowles was seventy-eight years old. He died testate in Spokane on January 15, 1946. His will provided that the bulk of his estate be placed in trusts, set up for the benefit of his surviving grandchildren, these children of W. H. Cowles, Jr., his sister, and his deceased brother. W. H. Cowles, Jr., was named as one of the trustees of these trusts, and the will provided that he should have the right to vote all of the shares of stock of the three companies. W. H. Cowles, Jr., was also named as an executor of the estate. Although he had remained in an executive capacity with the companies until the time of his father's death, he did not exercise the option during the twelve-month period subsequent to that event. Providing he continues in his present position, he will presumably have another opportunity to do so in 1953.

In the meantime, in accordance with the provisions of Rem.Rev.Stat. (Sup.), § 11211, three appraisers of the estate were duly appointed, respondent Patrick H. Winston being the appraiser recommended by the supervisor of the division of inheritance tax and escheat of the tax commission of the state of Washington. The two other appraisers, being of the opinion that the executors of the estate were required to sell the three newspaper stocks at the option contract values hereinabove set forth, to W. H. Cowles, Jr., if requested, based their appraisal of these stocks upon the said option contract values. Mr. Winston refused to approve this appraisal. He filed separate findings with respect to the general inventory and appraisement, reading, in part, as follows: '3. That with respect to the value of the 2,019 shares of the Cowles Publishing Company, the 2,019 shares of the Spokane Chronicle Company and the 1,498 shares of the Spokane American Engraving Company inventoried in the above estate, the said Patrick H. Winston makes no separate findings whatsoever upon the grounds and for the reasons that the findings as to the value of such stocks as filed by the other two appraisers is based upon the prices contained in a certain option of Cotober 1, 1943, and that the undersigned appraiser has refused to accept such option prices as determinative of the appraisal value of such stocks and that in order to make separate findings of [sic] any findings whatsoever as to the full value of such stocks it is necessary that the undersigned, appraiser and all of the appraisers be provided with the books, records and all other pertinent information with respect to such corporations, and that such books, records and other pertinent information has not been supplied or been made available to the said Patrick H. Winston.'

The executors of the estate thereupon petitioned the superior court of Spokane county for a citation directing Mr. Winston to appear and show cause why he should not approve and sign the inventory and appraisement as filed by the other appraisers. An answer was filed by Mr. Winston and by the state of Washington, acting through the supervisor of the inheritance tax division of the tax commission, and this answer included a cross-petition praying the court to issue an order requiring the executors to produce books, records, and other information pertinent to the valuing and appraisal of the stock in question. A hearing was held and an order issued by the court dismissing the petition of the executors, and directing them to provided the appraisers with all 'books, records, reports, and other pertinent information of any kind and character whatsoever which may be necessary and reasonable' in making an appraisal of the stock of the three companies. The court specifically found that the option contract was not binding upon the appraisers of the estate in fixing full and fair market values as of the date of the death of the testator. It is from this order that the executors have appealed.

At the hearing, W. H. Cowles, Jr., did not appear, but Mr. A. W. Witherspoon, as counsel for W. H. Cowles, testified that the option agreement had not been drawn up with any thought of tax avoidance. According to his testimony, W. H. Cowles had had certain definite policies as to the management of the Chronicle and the Spokesman-Review which he desired to have continued. It was apparently his feeling that this could best be guaranteed by insuring that his son, W. H. Cowles, Jr., should have a controlling interest in these two papers. W. H. Cowles, Jr., had already purchased one-eighth of the stock therein and held another one-sixth in trust. He further held an option to purchase an additional one-eighth, which was part of the estate of his deceased brother; and by acquiring the one-fourth interest owned by his father, he would hold the controlling interest in the papers. Mr. Witherspoon testified that Mr. Cowles did not wish to will the stock to his son, because that would have been unfair to the rest of his heirs, and hit upon this option plan as a proper solution. It was specified that the period of ten years was fixed in the option contract in order to allow W. H. Cowles, Jr., sufficient time to accumulate funds to exercise his option on the stock in his brother's estate. A set price for the stock was fixed in the option contract so that W. H. Cowles, Jr., could anticipate a definite amount that would be required for him to exercise the option. Mr. Witherspoon testified that he did not recall how this price had been arrived at, and there was no testimony on this point.

Option contracts of the general type here involved are frequently drawn up in connection with closely held businesses. Their use antedates the passage of Federal estate tax laws (Montgomery's Federal Taxes, Estates, Trusts, and Gifts 1948-1949, p. 714), and though they are often drawn up for the express purpose of fixing value for tax purposes (Tarleau, Tax Problems in the Valuation of Property, 25 Taxes, The Tax Magazine (published by the Commerce Clearing House), 520, 522), they are in many cases entered into for motives entirely unrelated to the saving of taxes. Cohen, Restrictive Agreements for Purchase of Stock: Effect on Estate and Gift Tax Valuations, New York University, Fifth Annual Institute on Federal Taxation, p. 54; 2 Paul, Federal Estate and Gift Taxation, 1298, § 18.34. The problem presented by this case--whether the option price should establish the value of the optioned stock for inheritance or estate tax purposes--is not a new one. Unfortunately, in spite of considerable litigation, it is not one to which the courts have found a conclusive solution, and the whole matter is in a state of discouraging confusion. See Paul, Federal Estate and Gift Taxation (1946 Supp.), 785, § 18.34; 2 Bonbright, Valuation of Propcrty, 725. The divergent theories employed by the various courts, Federal and state, in dealing with the matter, and the contradictory results at which they have arrived, are outlined in a note at 5 A.L.R.2d 1122, where most of the relevant cases are considered and discussed. No Washington decision involving the point at issue has been referred to us, nor has research disclosed the existence of any.

In general however, two conflicting solutions to the problem have been found, which, speaking purely for convenience, we may designate as the Pennsylvania and Federal rules. The Pennsylvania rule was set forth in ...