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

Decision Date12 January 1987
Docket NumberDocket No. 31395-83.
Citation88 T.C. No. 4,88 T.C. 38
PartiesESTATE OF SAUL R. GILFORD, DECEASED, LAUREN E. WURSTER, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Decedent was the largest single shareholder of G Company on the date of his death, owning 381,150 shares, or about 23 percent. This stock was restricted stock under the Federal securities laws. Approximately six months after decedent's death, P agreed to sell its block of G Company stock to C Company for $24 per share pursuant to a merger of G and C Company. HELD, the fair market value of the shares for Federal estate tax purposes determined. HELD FURTHER, in the absence of actual selling prices, the mean of the bona fide bid and asked prices of over-the-counter stock on the date of death is generally the fair market value of the stock. Sec. 2031; sec. 20.2031-2(c), Estate Tax Regs. Here, a discount of 33 percent from such mean is appropriate in light of the restricted nature of the stock. HELD FURTHER, the valuation on the date of death was not affected by the post-death merger price as, at the time of decedent's death, there was no reasonable or intelligent expectation that a merger would take place. Estate of Jephson v. Commissioner, 81 T.C. 999 (1983), followed. Wallace M. Wright and Scribner L. Fauver, for the petitioner.

Frank R. DeSantis, for the respondent.

HAMBLEN, JUDGE:

Respondent determined a deficiency of $4,330,651.21 in the Federal estate tax of the Estate of Saul R. Gilford. After concessions, the sole issue for decision is the date of death fair market value of 381,150 shares of Gilford Instrument Laboratories, Inc., common stock owned by Saul R. Gilford at his death.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly. The stipulation of facts, the supplemental stipulations of fact, and attached exhibits are incorporated herein by this reference.

Petitioner is the Estate of Saul R. Gilford. On November 17, 1979, Saul R. Gilford (the ‘decedent‘) died in a private airplane crash. At the time of his death, decedent's domicile was Oberlin, Ohio. Decedent died testate and Lauren E. Wurster (Wurster) was appointed executor of his estate.

Petitioner's Federal estate tax return was timely filed. The alternate valuation date was not elected. Included within the estate were 381,150 shares of stock in Gilford Instrument Laboratories, Inc. (‘Gilford‘). Petitioner's return listed the value of this stock as $2,801,452.50, or $7.35 per share. In his notice of deficiency, respondent determined that the fair market value of the Gilford stock should be $9,147,600, or $24 per share.

At the time of decedent's death, Gilford, an Ohio corporation, designed, manufactured, and sold scientific instruments for use in the fields of science, medicine, and industry. Gilford's principal products were automated blood analyzers and spectrophotometers and accessory devices. In 1978, Gilford formed a new wholly-owned subsidiary, Gilford Diagnostics, Inc., to manufacture and sell clinical chemistry reagents and related disposable products.

During 1979, Gilford sold and marketed its products in the United States and Canada through direct contact and a sales force of 41 persons. Gilford had wholly-owned subsidiaries in England, France, and Germany which serviced these and certain other countries in North Africa, Europe, and Eastern Europe. 1

Gilford's automated blood analyzers, reagents, and small clinical spectrophotometers were purchased primarily by hospitals and medical laboratories. The research market, consisting of university and private foundation biomedical research laboratories, purchased the research spectrophotometers. Gilford faced competition from small companies and companies as large as DuPont. 2

In Gilford's 1979 Annual Report, the consolidated balance sheets for the fiscal years ending July 31, 1979 and 1978, are as follows:

+-----------------------------------------------------------------------------+
                ¦ASSETS                                                 ¦          ¦          ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Current assets:                                        ¦1979      ¦1978      ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Cash                                                   ¦$770,763  ¦          ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Receivables, less allowance for doubtful accounts of   ¦8,717,681 ¦7,879,350 ¦
                ¦$140,500 in 1979 and $135,300 in 1978                  ¦          ¦          ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Recoverable Federal and foreign income taxes           ¦549,501   ¦          ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Inventories:                                           ¦          ¦          ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Finished products                                      ¦3,486,791 ¦2,595,568 ¦
                +-------------------------------------------------------+----------+----------¦
                ¦In-process products                                    ¦2,384,103 ¦2,697,264 ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Materials and parts                                    ¦2,485,668 ¦1,922,327 ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Service parts                                          ¦1,428,455 ¦1,274,258 ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Deferred income taxes                                  ¦234,200   ¦155,200   ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Prepaid expenses                                       ¦263,848   ¦219,111   ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Total current assets                                   ¦20,321,010¦17,672,831¦
                +-------------------------------------------------------+----------+----------¦
                ¦Property, plant and equipment - at cost                ¦          ¦          ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Land and improvements                                  ¦$302,717  ¦$302,717  ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Buildings and improvements                             ¦3,374,358 ¦3,112,722 ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Machinery, equipment, and other                        ¦5,940,767 ¦5,053,061 ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Construction in progress                               ¦1,575,141 ¦          ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Unexpended construction funds invested by trustee      ¦528,516   ¦          ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Total                                                  ¦11,721,499¦8,468,500 ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Less accumulated depreciation                          ¦3,425,322 ¦3,091,849 ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Property, plant, and equipment net                     ¦8,296,177 ¦5,376,651 ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Other assets                                           ¦195,294   ¦193,984   ¦
                +-------------------------------------------------------+----------+----------¦
                ¦Total                                                  ¦28,812,481¦23,243,466¦
                +-----------------------------------------------------------------------------+
                
+--------------------------------------------------------+
                ¦LIABILITIES AND SHAREHOLDERS' EQUITY¦         ¦         ¦
                +------------------------------------+---------+---------¦
                ¦Current liabilities:                ¦         ¦         ¦
                +------------------------------------+---------+---------¦
                ¦Notes payable                       ¦3,252,000¦2,399,000¦
                +------------------------------------+---------+---------¦
                ¦Current portion of long term debt   ¦334,400  ¦173,200  ¦
                +------------------------------------+---------+---------¦
                ¦Accounts payable                    ¦1,895,000¦1,360,771¦
                +------------------------------------+---------+---------¦
                ¦Accrued expenses:                   ¦         ¦         ¦
                +------------------------------------+---------+---------¦
                ¦Income taxes                        ¦233,083  ¦734,990  ¦
                +------------------------------------+---------+---------¦
                ¦Other taxes                         ¦268,836  ¦196,557  ¦
                +------------------------------------+---------+---------¦
                ¦Salaries and wages                  ¦749,406  ¦718,917  ¦
                +------------------------------------+---------+---------¦
                ¦Employee benefit plans              ¦507,000  ¦448,000  ¦
                +------------------------------------+---------+---------¦
                ¦Other                               ¦432,081  ¦393,033  ¦
                +------------------------------------+---------+---------¦
                ¦Product and service warranties      ¦275,000  ¦283,000  ¦
                +------------------------------------+---------+---------¦
                ¦Unearned service contract revenue   ¦996,000  ¦718,000  ¦
                +------------------------------------+---------+---------¦
                ¦Total current liabilities           ¦8,942,806¦7,425,468¦
                +------------------------------------+---------+---------¦
                ¦Long-term debt:                     ¦         ¦         ¦
                +------------------------------------+---------+---------¦
                ¦Obligations under capital lease     ¦1,670,000¦835,000  ¦
                +------------------------------------+---------+---------¦
                ¦Other                               ¦2,026,500¦254,200  ¦
...

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