Estate of Gloeckner v. Commissioner

T.C. Memo. 1996-148

UNITED STATES TAX COURT

ESTATE OF FREDERICK CARL GLOECKNER,
DECEASED, JOSEPH A. SIMONE, AND
DOUGLAS DILLON, CO-EXECUTORS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8747-94. Filed March 25, 1996.

R determined a deficiency in Federal estate tax
liability. R contends that decedent’s executors
underreported the value of certain shares of stock in a
closely held corporation that D held on the date of his
death. Those shares were subject to a restrictive
agreement that obligated decedent’s executors to sell,
and the company to buy, a certain number of shares. R
contends that the value of D’s shares is $4,580,000.
The executors contend that the value of those shares is
$2,298,161.25, which is the amount received by the
estate pursuant to the restrictive agreement.

1. Held: The price term in the restrictive
agreement does not control the value of the stock for
Federal estate tax purposes.

2. Held, further, the value of the stock for
Federal estate tax purposes is $4,000,000.
 - 2 -

James E. Daniels and Steven D. Goldberg, for petitioner.

Drita Tonuzi and Cheryl A. McInroy, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: Respondent determined a deficiency in

Federal estate tax liability of $2,951,937. The sole issue

remaining for decision is the value of certain shares of stock

that Frederick Carl Gloeckner (decedent) owned on the date of his

death. All section references are to the Internal Revenue Code

in effect at the time of decedent’s death, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some facts have been stipulated and are so found. The

stipulation of facts filed by the parties and accompanying

exhibits is incorporated herein by this reference.

Decedent

Decedent died testate on July 28, 1990. The co-executors of

decedent’s estate (the estate) are Joseph A. Simone and Douglas

Dillon (collectively, the executors). Decedent was survived by a

nephew, a niece, a grandnephew, and a grandniece (his kin).

Fred C. Gloeckner & Company

Fred C. Gloeckner & Co., Inc. (the company), is a New York

corporation organized in 1934. At least until the time of

decedent’s death, the principal place of business of the company
 - 3 -

was in New York City. At the time of decedent’s death, he owned

14,265 shares of stock in the company: 4,230 shares of common

stock, 3,375 shares of 4-percent preferred stock, and 6,660

shares of 6-percent preferred stock (sometimes, collectively,

decedent’s shares).

The company was in the business of selling horticultural

products (such as plants, foliage, bulbs, seeds, and supplies) at

wholesale. The company did not sell cut flowers or other

finished products at retail.

The 1960 Redemption Agreement

On December 19, 1960, the shareholders of the company were

decedent, Gustav H. Poesch (Poesch), and Leonard J. Seiger

(Seiger). Each shareholder owned both common stock and 4-percent

preferred stock. On that date, those shareholders subscribed to

an agreement restricting their rights to dispose of their shares

of stock in the company (the 1960 redemption agreement).

The 1960 redemption agreement restricted the right of each

subscriber to dispose of his shares during his lifetime. The

parties agreed that, if a shareholder decided to transfer any of

his shares, the company had the option, for a period of 3 months,

to purchase those shares that the shareholder wished to transfer.

They also agreed that if a shareholder ceased to be connected

with the company (for a reason other than death), the company had

the option to purchase all of that shareholder’s shares. The

option price for the preferred shares was the shares’ par value
 - 4 -

plus an amount equal to any accumulated but unpaid dividends.

The option price for the common shares was $100 a share. The

1960 redemption agreement provided for yearly revaluations of the

option price for common shares.

Joseph A. Simone

Joseph A. Simone (Simone) went to work for the company in

1975. He had just graduated from college, and his first job with

the company was that of office boy. Simone continued his

education after starting work with the company, earning an MBA

from Fordham University in 1979. Also by 1979, Simone was

involved in every facet of the company’s operations.

Subsequently, he became an officer of the company. Simone was

elected to the board of directors of the company in 1984 or 1985.

Simone and decedent developed a close personal relationship.

Decedent loaned Simone money ($80,000 in 1981 and $95,000 in a

later year). Decedent named Simone a beneficiary in wills

executed by decedent between 1985 and 1987.

The 1987 Redemption Agreements

In 1987, decedent entered into an agreement restricting his

rights (and the rights of the executors of his estate) to dispose

of his shares of stock in the company (the 1987 redemption

agreement). At that time, the stock of the company was held by

decedent, Poesch, and Simone as follows:1

1
The company issued the 6-percent preferred shares sometime
(continued...)
 - 5 -

Common Stock

Shareholder Number of Shares Percentage
Decedent 4,230 84.6
Poesch 750 15.0
Simone 20 00.4

Preferred Stock

Number of Shares Number of Shares
Shareholder of 4% Preferred of 6% preferred
Decedent 3,375 6,660
Poesch 1,725 1,500
F.C.G. Foundation 2,250 315

Decedent strongly believed that the best interests of the

company would not be served if it were owned and managed by

outsiders, including his family members. Decedent also believed

that Simone was the best candidate to be the chief executive of

the company. Decedent’s plan of corporate succession was to have

Simone both own and manage the company.

At the time of the 1987 redemption agreement, the company’s

senior management consisted of decedent, Poesch, and Simone.

Poesch refused to enter into a similar redemption agreement.

Simone, however, did enter into a similar redemption agreement.

At the time of the 1987 redemption agreement, decedent was

1
(...continued)
after the 1960 redemption agreement was signed.
 - 6 -

86 years old, Poesch was 77 years old, and Simone was 34 years

old.

Among other things, the 1987 redemption agreement provided

that, upon decedent’s death, the company would redeem from

decedent’s estate a sufficient number of decedent’s shares to

provide decedent’s executors with the funds necessary to pay

death taxes, funeral expenses, and administration expenses (the

mandatory redemption). The company had the option to purchase

additional shares (the optional redemption). The 1987 redemption

agreement also gave the company a right of first refusal

restricting decedent’s right to transfer his shares during his

life.

When executed, the 1987 redemption agreement did not contain

any price terms. In order to establish those price terms, the

parties agreed: (1) KPMG Benchmark (Benchmark) would appraise

the value of the company’s shares (the 1987 appraisal), and (2)

that appraisal value would control the agreement’s price terms.

Decedent did not further negotiate the price terms in the 1987

redemption agreement.

The values in the 1987 appraisal were later entered onto the

1987 redemption agreement. Those values were as follows: Common

shares, $440 a share; 4-percent preferred shares, $34.75 a share;

6-percent preferred shares, $48 a share.

The 1987 redemption agreement provided that, with respect to

the mandatory redemption, the company was required to pay the
 - 7 -

redemption price to the estate in a lump sum, either in cash or

by certified check. With respect to the optional redemption and

the right of first refusal, the company could either: (1) Pay

the entire purchase price in cash or by certified check, or

(2) pay the purchase price in equal, semi-annual payments over a

period not to exceed 5 years.

The 1987 Will

In 1987, simultaneously with entering into the 1987

redemption agreement, decedent executed a new will (the 1987

will). Decedent wished his kin to receive the assets of his

estate other than his shares in the company. He did not wish his

kin to bear any portion of either the taxes on his estate or the

expenses of administering the estate. He wished Simone to

receive his common shares in the company. The provisions of the

1987 will are consistent with decedent’s wishes. In particular,

with respect to Simone, one provision of the 1987 will provides

that decedent’s shares of stock in the company that are not

redeemed pursuant to the 1987 redemption agreement pass to

Simone. By another provision of the 1987 will, decedent

bequeaths $40,000 to Simone.

The 1987 Gift

Simultaneously with decedent’s execution of the 1987 will,

he gave Simone 20 shares of common stock in the company, which

represented a .4-percent ownership interest in the company.

The 1988 Sale
 - 8 -

On January 4, 1988, the company redeemed all of Poesch’s

common stock (the 1988 sale). The company redeemed Poesch’s

stock for $290 a share. That amount was to be paid in five equal

annual installments, with interest of 2 percent. Poesch died

prior to the trial of this case.

Redemption of Decedent’s Stock

Decedent died on July 28, 1990. Under the 1987 redemption

agreement, the company was obligated to purchase from decedent’s

estate sufficient shares to provide decedent’s executors with the

funds necessary to pay death taxes and certain other obligations.

Decedent’s assets, other than his shares in the company, had

substantially appreciated in value. To provide decedent’s

executors with the funds necessary to pay death taxes and other

expenses, the company was required to redeem all of decedent’s

shares. The company, however, was insufficiently liquid to pay

for all of those shares in a lump sum. Therefore, on April 28,

1991, the company and the estate entered into an agreement

amending the 1987 redemption agreement (the 1991 amendment). The

1991 amendment allows the company to make installment payments in

redemption of decedent’s shares.

The Sherman Appraisal

Respondent’s expert, Henry Sherman (Sherman), determined

that the aggregate value of decedent’s shares in the company on

January 28, 1991, was $4,580,000. Sherman determined that, on

that date, the value of each share of common, 4-percent
 - 9 -

preferred, and 6-percent preferred stock was $965, $40, and

$54.55, respectively.

Because he could find no acceptable comparable companies,

Sherman did not analyze the values of comparable companies in

determining the value of decedent’s shares. Sherman gave little

or no weight to the 1988 sale. Also, respondent instructed

Sherman not to consider the 1987 redemption agreement. Moreover,

Sherman did not: (1) Make a site inspection of the company’s

premises, (2) interview the management of the company, (3) secure

information about the company from potential outside sources such

as suppliers, customers, competitors, or financial institutions,

or (4) obtain information about the company’s competitors.

Finally, the only information that Sherman had on the industry in

which the company did business consisted of retail sales data

that was provided by a trade association.

The Company and the Horticultural Industry

The Company. In January 1991, the company was not operated

in the most profitable manner: In order to maintain its sales

levels, the company relied to a significant extent on many slow-

paying customers. The company used antiquated methods for

processing and tracking orders and accounts. Many of the

company’s operations were not computerized, and sales orders were

recorded manually.
 - 10 -

The company’s administrative offices were understaffed and,

because of the company’s New York City location, it was difficult

to recruit workers with a satisfactory knowledge of horticulture.

Trends In the Horticultural Industry. Retail sales of

horticultural products increased approximately $500 million

(2-3 percent) from 1989 to 1990. That rate constituted a

decreased rate of growth from previous years. Some of the

industry growth at the retail level came from sales of imported

horticultural products. Because the company sold products only

to wholesalers, it did not necessarily benefit from retail

growth.

In addition to foreign competition, the company faced

competition from mass merchandisers and discounters. The growing

presence of those competitors at the retail level exerted

downward pressure on wholesale prices, adversely affecting the

company, which sold to wholesalers.

Finally, the company did not make arrangements to secure

exclusive sources of supply for its specialized products, whereas

the company’s competitors had made such arrangements. Those

arrangements enabled the company’s competitors to command higher

prices for their goods.

Estate Tax Return

The executors timely filed Form 706, United States Estate

(and Generation Skipping Transfer) Tax Return. On that return

the executors reported that the value of decedent’s shares was
 - 11 -

$2,298,161.25. That was the amount paid for the shares under the

1987 redemption agreement. The executors elected alternate

valuation, as provided for in section 2032.

Value of Decedent’s Shares

The value of decedent’s shares on the alternate valuation

date was $4,000,000.

OPINION

I. Introduction

A. Questions Presented

This case concerns the value for Federal estate tax purposes

of certain shares of stock in Fred C. Gloeckner & Co. (the

company) owned by decedent at the time of his death. The

executors of decedent’s estate valued those shares at

$2,298,261.25 on the estate tax return they filed. In the

statutory notice of deficiency, respondent determined that the

value of the shares (decedent’s shares) was $6,000,000. At

trial, however, respondent conceded that the value of decedent’s

shares was, at most, $4,580,000.

B. Arguments of the Parties

The executors claim that the value of decedent’s shares is

the value stated in the estate tax return because that is the

amount paid by the company pursuant to the 1987 redemption

agreement. They argue that the 1987 redemption agreement

established the fair market value of those shares because it was

a binding agreement entered into for a valid business purpose.
 - 12 -

See May v. McGowan, 194 F.2d 396 (2d Cir. 1952); Lomb v. Sugden,

82 F.2d 166 (2d Cir. 1936); Wilson v. Bowers, 57 F.2d 682 (2d

Cir. 1932).

Respondent argues that the 1987 redemption agreement does

not establish the fair market value of decedent’s shares, and

that the fair market value is the value determined by

respondent’s expert witness, Henry Sherman (Sherman). Respondent

argues that the 1987 redemption agreement does not establish the

fair market value of decedent’s shares because: (1) The 1987

redemption agreement is not a binding contract under New York

law, (2) section 2703 requires that we disregard the 1987

redemption agreement, and (3) the price established by the 1987

redemption agreement cannot be trusted because the agreement is

simply a substitute for a testamentary device.

C. Approach of the Court

We disagree with respondent’s arguments that the 1987

redemption agreement is not binding or that section 2703 requires

that we disregard the agreement. We agree with respondent’s

argument, however, that the 1987 redemption agreement is a

substitute for a testamentary disposition designed to pass

decedent’s shares for less than full and adequate consideration.

We do not agree with respondent that the value of decedent’s

shares is the value determined by respondent’s expert. We have

found that the value of decedent’s shares on the alternate

valuation date was $4,000,000.
 - 13 -

II. The 1987 Redemption Agreement Is a Valid Contract

A. Introduction

Respondent argues that the 1987 redemption agreement is

invalid under New York law for any of the three following

reasons: (1) It was not supported by consideration, (2) the

price term was originally left blank, thus rendering the contract

void for indefiniteness, or (3) as the controlling shareholder,

decedent was free to ignore its terms. Respondent has not

convinced us that any of those reasons has merit.

B. Consideration

Given the preexistence of the 1960 redemption agreement,

respondent contends that decedent’s promises contained in the

1987 redemption agreement do not constitute legal consideration.

Decedent’s promises under the 1987 redemption agreement, however,

differ from decedent’s promises under the 1960 redemption

agreement. Among other things, the 1960 redemption agreement

does not deal with the 6-percent preferred stock (which stock had

not been issued in 1960), while the 1987 redemption agreement

does. We do not think that a New York court would find the 1987

agreement void for want of consideration. Cf. Zervos v. S.S. Sam

Houston, 427 F. Supp. 500, 505 (S.D.N.Y. 1976) (holding the

contract at issue invalid for want of consideration because one

of the parties to that contract was already bound, under a prior

contract, to perform acts identical to the acts that it agreed to
 - 14 -

perform under the contract at issue), affd. 636 F.2d 1203 (2d

Cir. 1980).

C. Open Price Term

New York courts will enforce a contract where the parties

leave the price term open, provided that: (1) The parties

intended to enter into a contract, and (2) the price “can be

determined objectively without the need for new expressions by

the parties”. Cobble Hill Nursing Home, Inc. v. Henry & Warren

Corp., 548 N.E.2d 203, 206 (N.Y. 1989). The 1987 redemption

agreement was enforceable, because the price terms therein could

be objectively determined by reference to the 1987 appraisal.

See In re McManus, 440 N.Y.S.2d 954, 957-958 (App. Div. 1981)

(holding that a contract that restricted the transfer of closely

held corporate stock was valid notwithstanding the open price

term, because the price could be computed in accordance with a

formula contained in the agreement), affd. 432 N.E.2d 601 (N.Y.

1982).

D. Controlling Shareholder

Finally, respondent argues that decedent’s “complete control

over the affairs of the corporation made the agreement

meaningless and nonbinding during his lifetime.” Respondent,

however, offers no support for that assertion. In the absence of

evidence indicating that decedent, Simone, or the company, viewed

the 1987 redemption agreement itself as something other than a

valid and enforceable contract, we will not ignore the 1987
 - 15 -

redemption agreement. See In re Estate of Spaziani, 480 N.Y.S.2d

854, 856 (Sur. Ct. 1984) (New York courts will enforce

restrictions on a shareholder’s right to dispose of his stock).

Respondent has proven no facts showing the invalidity of the 1987

redemption agreement.

E. Conclusion

We find that the 1987 redemption agreement was a valid and

enforceable contract under New York law.

III. Section 2703 Is Inapplicable

With an exception not here relevant, section 2703 provides:

(a) General Rule--For purposes of this subtitle, the
value of any property shall be determined without
regard to--

(1) any option, agreement, or other
right to acquire or use the property at a
price less than the fair market value of the
property (without regard to such option,
agreement, or right), or

(2) any restriction on the right to sell
or use such property.

Section 2703 applies to any right or restriction created or

“substantially modified” after October 8, 1990. Omnibus Budget

Reconciliation Act of 1990, Pub. L. 101-508, sec.

11602(e)(1)(A)(ii), 104 Stat. 1388, 1388-500.

Because the executors elected alternate valuation, as

provided for in section 2032, we assume that decedent’s shares

were valued for estate tax purposes as of January 28, 1991.

Respondent argues that, in valuing decedent’s shares, we should
 - 16 -

disregard the 1987 redemption agreement because of the 1991

amendment. The 1987 redemption agreement was entered into before

the effective date of section 2703. The 1991 amendment, however,

was entered into on April 28, 1991, which, with regard to

amendments, is after the effective date of section 2703.

Nevertheless, April 28, 1991, also is a date after January 28,

1991 (the alternate valuation date). As of that date

(January 28, 1991) the 1987 redemption agreement was unamended.

Section 2703 is inapplicable.

IV. 1987 Redemption Agreement Not Controlling

A. Background

Section 2001(a) imposes a tax on “the transfer of the

taxable estate of every decedent who is a citizen or resident of

the United States.” Section 2031(a) states: “The value of the

gross estate of the decedent shall be determined by including to

the extent provided for in this part, the value at the time of

his death of all property, real or personal, tangible or

intangible, wherever situated.” Section 2032 provides that the

value of the gross estate may be determined as of a date that,

generally, is 6 months after the decedent’s death, if the

executor so elects.

The standard for valuation is fair market value. Section

20.2031-1(b), Estate Tax Regs., defines fair market value as “the

price at which the property would change hands between a willing

buyer and a willing seller, neither being under any compulsion to
 - 17 -

buy or to sell and both having reasonable knowledge of relevant

facts.” Section 2031(b), in particular, addresses the valuation

of stock not listed on an exchange.

Courts have long held that, with respect to stock in a

closely held corporation, the price term in a restrictive buy-

sell or redemption agreement (a restrictive agreement) can fix

the value of the stock for Federal estate tax purposes. See May

v. McGowan, 194 F.2d 396, 397 (2d Cir. 1952); Lomb v. Sugden,

82 F.2d 166, 167-168 (2d Cir. 1936); Wilson v. Bowers, 57 F.2d

682, 683-684 (2d Cir. 1932). Since the above three cases were

decided, the courts have developed a set of requirements for

determining whether the price set forth in a restrictive

agreement controls for purposes of the Federal estate tax.

Recently, we summarized those requirements in Estate of Lauder v.

Commissioner, T.C. Memo. 1992-736:

It is axiomatic that the offering price must be fixed
and determinable under the agreement. In addition, the
agreement must be binding on the parties both during
life and after death. Finally, the restrictive
agreement must have been entered into for a bona fide
business reason and must not be a substitute for a
testamentary disposition. * * * [Citations omitted.]

Section 20.2031-2(b), Estate Tax Regs., embodies the three

elements of the Lauder analysis:

Even if the decedent is not free to dispose of the
underlying securities at other than the option or
contract price, such price will be disregarded in
determining the value of the securities unless it is
determined under the circumstances of the particular
case that the agreement represents a bona fide business
arrangement and not a device to pass the decedent’s
 - 18 -

shares to the natural objects of his bounty for less
than an adequate and full consideration in money or
money’s worth. * * *

In Estate of Lauder v. Commissioner, supra, we made clear

that it is insufficient that an agreement serve a bona fide

business purpose. For the price set forth in the agreement to

control, the agreement also must not constitute a testamentary

device. Id.

B. Business Arrangement; Testamentary Device

We have no doubt that the 1987 redemption agreement served

both business and testamentary purposes. On brief, the executors

concede the following: “Decedent had dual motives for the 1987

Redemption Agreement: a succession plan for the Company and an

estate tax plan to transfer the bulk of his assets to * * * [his

kin], free and clear of federal and state estate taxes and

administration expenses.” Moreover, the executors admit:

“Decedent’s objective to perpetuate his company’s existence may

have, in theory, reduced the incentive to achieve the highest

possible price for his heirs.” Nevertheless, the executors

insist: “there is no evidence in the record from which one could

reasonably conclude as a factual matter that Decedent was willing

to sacrifice a higher purchase price at the expense of * * * [his

kin].”

We agree with that statement so far as it goes. It must be

remembered, however, that the kin would suffer only if the

agreement price for the shares was inadequate to fund death taxes
 - 19 -

and certain other expenses. Except to the extent necessary to

fund those liabilities, decedent’s common shares had been

bequeathed to Simone. The relevant beneficiaries under the 1987

will are thus (1) decedent’s kin and (2) Simone. If we assume

that decedent’s testamentary intent was to maximize the benefit

to both groups, so long as neither group benefited at the expense

of the other, then it is consistent also to assume that decedent

had no interest in the shares being valued for estate tax

purposes at an amount greater than necessary to fund death taxes

and certain other expenses. Indeed, it is consistent to assume

that decedent had an interest in not having the shares valued at

an amount greater than necessary to satisfy those liabilities.

That is because a greater value would not benefit the kin while,

at the same time, the resulting increase in the estate tax would

only further burden the company (which was required to redeem the

shares in an amount sufficient to fund the death taxes and other

expenses) and, by the same token, reduce the value of the bequest

to Simone, who was 52 years younger than decedent.

Based on the foregoing analysis, we believe that the

inference fairly may be drawn that decedent entered into the 1987

redemption agreement for, among other purposes, a testamentary

purpose, viz, to reduce the tax on his estate. We are not

persuaded to the contrary by the fact that Simone entered into a

similar agreement. Simone received the shares subject to his

agreement pursuant to decedent’s overall plan, and Simone likely
 - 20 -

took into account his own possible future benefit from ascribing

to the shares a value that would be a low estate tax value in the

decedent’s estate. In Estate of Lauder v. Commissioner, supra,

to determine whether we should disregard the inference that the

agreement there in question was designed to serve a testamentary

purpose, we looked to whether the price to be paid for the

decedent’s stock under the agreement reflected adequate and full

consideration in money or money’s worth as of the date the

agreement was executed.

The burden is on the executors to prove that the price to be

paid for decedent’s shares under the 1987 redemption agreement

reflected adequate and full consideration in money or money’s

worth when the agreement was executed. Rule 142(a). The

executors have failed to carry that burden. The price terms in

the 1987 redemption agreement were determined pursuant to the

1987 appraisal. The 1987 appraisal was the subject of a motion

in limine by respondent to exclude that document from evidence

because of the executors’ failure to comply with Rule 143(f),

which concerns itself with expert witness reports. Respondent’s

motion was granted, and the 1987 appraisal was not received in

evidence as an expert witness report. Simone testified that, as

of the time of decedent’s death, and based in part of his review

of the 1987 appraisal, the value of the company was “in the

range of $2 million”. Although we found Simone’s testimony to be

forthright, and it is generally accepted that an owner is
 - 21 -

competent to testify as to the value of his property, e.g., Juden

v. Commissioner, T.C. Memo. 1987-302, affd. 865 F.2d 960 (8th

Cir. 1989); Root v. Commissioner, T.C. Memo. 1981-330; O’Rourke

v. Commissioner, T.C. Memo. 1981-279, Simone did not convince us

that the prices set in the 1987 redemption agreement reflected

adequate and full consideration. The weight to be given to the

testimony of an owner of property as to the value of the property

depends upon the owner’s knowledge, experience, method of

valuation, and other relevant considerations. E.g., Root v.

Commissioner, supra; O’Rourke v. Commissioner, supra. In 1987,

Simone had less than a 1-percent ownership interest in the

company, and that interest he obtained by gift. His testimony as

to value was based, in part, on the 1987 appraisal, which is not

in evidence as an expert witness report. Simone also stood to

profit by a low estate tax valuation of the decedent’s shares.

We accord no weight to Simone’s testimony as to what was adequate

and full consideration in 1987.

On January 4, 1988, the company redeemed all of Poesch’s

common stock for $290 a share. That transaction occurred not

long after decedent entered into the 1987 redemption agreement,

and, for that reason, might be considered some evidence of

whether the price to be paid for the decedent’s stock under the

1987 redemption agreement reflected adequate and full

consideration in money or money’s worth as of the date of that

agreement. See, e.g., Estate of Andrews v. Commissioner, 79 T.C.
 - 22 -

938, 940 (1982) (for unlisted stocks, near contemporaneous sales,

in the normal course of business, are the “best criteria of

market value”). Poesch, however, owned only 15 percent of the

common stock of the company. No doubt, therefore, he was forced

to accept some discount. Estate of Jung v. Commissioner, 101

T.C. 412, 434 (1993) (“Cases involving the valuation of minority

holdings in close corporations ordinarily consider a discount or

discounts because the stock is a minority holding and is not

publicly traded.”). Poesch did not testify, since he died

shortly after decedent. We cannot determine from the evidence in

the record how much discount Poesch was forced to bear. In other

words, we cannot work backwards from the $290 a share accepted by

Poesch to an undiscounted value. We are unpersuaded that the

undiscounted value of Poesch’s shares was $440 (the amount

determined for the common shares under the 1987 redemption

agreement). Although we have considered Poesch’s sale in

determining the value of decedent’s shares as of the alternate

valuation date, see infra section V, we do not believe that that

sale is persuasive evidence that the price to be paid for the

decedent’s stock under the 1987 redemption agreement reflected

adequate and full consideration in money or money’s worth when

the agreement was executed. For the reasons stated, and

considering the record as a whole, we find that the executors

have failed to carry their burden of proving that the price to be

paid for decedent’s shares under the 1987 redemption agreement
 - 23 -

reflected adequate and full consideration in money or money’s

worth as of the date of execution of the agreement.

V. Fair Market Value of Decedent’s Shares

Disregarding the 1987 redemption agreement, we must

determine the fair market value of decedent’s shares on the

alternative valuation date. We discount much of Simone’s

testimony for reasons similar to those previously stated.

Respondent has conceded that the value of decedent’s shares is no

greater than $4,580,000. We accept that concession and also find

Sherman’s opinion to be helpful in determining the fair market

value of decedent’s shares.

We do not, however, completely agree with Sherman because we

find some weaknesses in his analysis of the value of decedent’s

shares. First, Sherman did not make an on-site inspection of the

company or interview the company’s management. Second, he could

find no comparable companies on which to base his valuation.

Third, we believe that Sherman did not adequately consider the

effect of competition on the company’s value. The company sold

in the wholesale market. The company was in a poor competitive

position vis-a-vis its domestic competitors, some of which were

vertically integrated. In addition, Sherman did not adequately

analyze the impact of international competition on the company’s

value. In analyzing the conditions in the horticultural

industry, Sherman only analyzed retail sales figures. Sherman,

however, made no effort to determine the extent to which the

growth in the horticultural industry’s retail sales was
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attributable to goods imported for retail sale. That issue is

quite important to a proper determination of the company’s value.

A sharp increase in retail sales of imported goods could cause a

sharp decrease in the company’s value, because the company only

sold products at the wholesale level.

Finally, Sherman did not take into consideration the 1988

sale by Poesch. The 1988 sale was at a discount, and we are

unable to determine at how much of a discount. See section IV,

supra. Nevertheless, we do not believe that the 1988 sale should

have been disregarded by Sherman.

For the above reasons, and considering the record as a

whole, we have found that the value of decedent’s shares on the

alternate valuation date was $4,000,000. We sustain respondent’s

determination of a deficiency to the extent consistent with our

findings.

Decision will be entered

under Rule 155.