T.C. Memo. 1997-53
UNITED STATES TAX COURT
ESTATE OF W. CLYDE WRIGHT, DECEASED,
BRIAN R. WRIGHT, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2554-94. Filed January 29, 1997.
Philip J. Kramer, for petitioner.
Raymond M. Boulanger, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a deficiency of
$2,275,040 in the Federal estate tax of the Estate of W. Clyde
Wright (decedent).
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect on April 20, 1990, the date
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of decedent's death, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
After settlement, the sole issue for decision is the value,
as of October 20, 1990 (the alternate valuation date), of 201,408
shares of common stock of the Wilber Corp. (Wilber Corp).
FINDINGS OF FACT
Many of the facts have been stipulated and are so found.
At the time of decedent's death, decedent resided in Otsego
County, New York. At the time the petition was filed, the
executor resided in Vestal, New York. Petitioner opted to use
the alternate valuation date of October 20, 1990, for purposes of
valuing decedent's stock in Wilber Corp.
At the time of his death, decedent owned 201,408 shares or
23.8 percent of the total 847,524 shares of common stock of
Wilber Corp. Wilber Corp holds 100 percent of the common stock
of Wilber National Bank (Wilber Bank or the bank). Wilber Bank
is a federally chartered bank. Wilber Corp’s stock is not listed
on any stock exchange but is traded infrequently on the over-the-
counter market.
The following schedule identifies, as of October 20, 1990,
the 10 largest shareholders of Wilber Corp, and for each
shareholder the number and percentage of shares owned:
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10 Largest Shareholders Number of Percentage of
of Wilber Corp Shares Owned Total Shares
Estate of W.C. Wright 201,408 23.8
David Wilber 80,000 9.4
Farone Foundation Trust 78,000 9.2
Magdeline Farone Trust 36,764 4.3
Anna Farone Trust 36,764 4.3
Jesuits of Holy Cross 31,412 3.7
Sterling Harrington 30,872 3.6
Shearson Lehman Hutton 16,624 2.0
Ruth Fox Trust 12,804 1.5
Brian R. Wright 12,592 1.5
Total 63.3
As of October 20, 1990, all of the above shareholders had
held their shares of stock in Wilber Corp for many years. The
shareholders in Wilber Corp not identified in the above schedule
were apparently employees who, over the years, were given a few
shares of stock or local investors and charitable trusts that,
over the years, had obtained a few shares of stock.
Wilber Bank was formed in the 1870's as a community bank in
Oneonta, New York. Wilber Bank has had a strong performance
record, relying mainly on the local, rural economy for its
business. Wilber Bank's business consists primarily in making
agricultural, consumer, and real estate loans, and in providing
typical banking services to small businesses and individuals.
During the 1970's, in an unsuccessful attempt to acquire
control of Wilber Bank, the Bank of New York made a tender offer
for all of the shares of stock of Wilber Bank well above book
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value of the shares and above the over-the-counter price of the
shares.
During the 1980's, Wilber Bank developed a strong loan
portfolio. From the mid-1980's through September of 1990, Wilber
Bank's total assets steadily increased, and, overall,
profitability remained constant.
In February of 1990, the shares of stock in Wilber Corp were
split 4-to-1 and increased dividends were declared on the shares.
Also in 1990, while much of the Nation's banking industry was
experiencing an economic downturn due to the savings and loan
crisis, Wilber Bank expanded its activity in the Oneonta region
by acquiring two branches of another local bank.
As of September 30, 1990, Wilber Bank held assets totaling
$284,590,000.
Approximately 10,000 shares of common stock of Wilber Corp
were traded each year on the over-the-counter market. Generally,
no blocks of Wilber Corp stock larger than 500 shares were ever
traded, and the small number of shares of stock in Wilber Corp
that traded in the month of October of 1990 traded at an average
sales price of $50 per share. On or about October 20, 1990,
there existed a waiting list of perhaps 50 investors who were
interested in acquiring shares of stock in Wilber Corp.
Wilber Corp's articles of incorporation state that no
merger, consolidation, dissolution, or sale of all or of
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substantially all of the assets of the corporation may occur
without approval of at least 66 2/3 percent of the shareholders.
On January 20, 1991, petitioner timely filed decedent’s
Federal estate tax return, and, for purposes of valuing the
201,408 shares of stock in Wilber Corp that decedent owned as of
the date of his death, petitioner elected to use on the estate
tax return the alternate valuation date of October 20, 1990.
Petitioner attached to the Federal estate tax return a letter
prepared by Alex Sheshunoff & Co., Inc. (petitioner’s first
expert), a national investment banking firm that maintains a
division specializing in the appraisal of banks and bank stock,
in which this expert valued decedent’s 201,408 shares of stock in
Wilber Corp, after discounting for various factors, at
$7,653,504, or $38 per share.
On audit, respondent obtained an appraisal of decedent's
201,408 shares of stock in Wilber Corp from Business Valuation
Services, Inc. (BVS). Respondent's expert considered the same
basic factors used by petitioner's expert but applied a control
premium, valuing decedent's 201,408 shares of stock in Wilber
Corp at $13,562,815, or $67.34 per share.
OPINION
Fair market value is defined as the price at which property
would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having
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reasonable knowledge of relevant facts. United States v.
Cartwright, 411 U.S. 546, 551 (1973); Collins v. Commissioner,
3 F.3d 625, 633 (2d Cir. 1993), affg. T.C. Memo. 1992-478; Estate
of Hall v. Commissioner, 92 T.C. 312, 335 (1989); sec.
20.2031-1(b), Estate Tax Regs. The question of fair market value
involves a question of fact, and the trier of fact must weigh all
relevant evidence and draw appropriate inferences. Commissioner
v. Scottish Am. Inv. Co., 323 U.S. 119, 123-125 (1944); Hamm v.
Commissioner, 325 F.2d 934, 938 (8th Cir. 1963), affg. T.C. Memo.
1961-347; Estate of Newhouse v. Commissioner, 94 T.C. 193, 217
(1990); Estate of Andrews v. Commissioner, 79 T.C. 938, 940
(1982).
In valuing shares of stock, the price at which shares are
sold, on a stock exchange, in an over-the-counter market, or
otherwise, is often the best evidence of the value. Dellacroce
v. Commissioner, 83 T.C. 269, 288 (1984); Estate of Damon v.
Commissioner, 49 T.C. 108, 115 (1967); sec. 20.2031-2(b)(1),
Estate Tax Regs.
In addition to the selling price of shares of stock, other
factors and elements of value are often considered, particularly
where stock of a nonpublicly traded company is being valued.
Estate of Gilford v. Commissioner, 88 T.C. 38, 49 (1987); sec.
20.2031-2(e), Estate Tax Regs. Additional factors that are
relevant in valuing shares of stock include the following:
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(1) The economic outlook in general and the condition
and outlook of the specific industry;
(2) The book value of the stock and financial
condition of the company;
(3) The earning capacity of the company;
(4) The dividend-paying capacity;
(5) Whether or not the enterprise has goodwill or
other intangible value;
(6) The market price of shares of stock of companies
engaged in the same or similar line of
business;
(7) The company's net worth.
(8) The size of the block of stock to be valued.
See sec. 20.2031-2(f)(2), Estate Tax Regs.; Rev. Rul. 59-60,
1959-1 C.B. 237.
Petitioner’s first expert rated Wilber Bank, in comparison
to other U.S. banks with similar total assets, with respect to
return on assets, return on equity, asset quality (specifically
nonperforming loans), and liquidity, as indicated in the
following schedule:
Rating of Wilber Bank Among U.S.
Factors of Comparison Banks With Similar Total Assets
Return on Assets Top 4%
Return on Equity Top 21%
Nonperforming Loans Bottom 41%
Liquidity Bottom 31%
In October of 1990, an independent report published by First
Albany Corp. (First Albany report), a regional investment banking
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company, rated Wilber Bank as having the highest estimated 1990
earnings per share and the second highest estimated 1990 dividend
payment per share of any upstate New York commercial bank. Out
of the upstate New York commercial banks, the First Albany report
recommended that investors purchase shares of stock in four banks
or bank holding companies, one of which was Wilber Corp.
In the instant case, shares of stock in Wilber Corp were
traded in small quantities in the over-the-counter market on and
around the valuation date, at a price of approximately $50 per
share. Both parties' experts appear to have used this figure as
a starting point in valuing decedent's 201,408 shares of stock in
Wilber Corp.
Petitioner's first expert valued the shares of stock in
Wilber Corp at $7,653,504, or $38 per share. Petitioner’s expert
utilized: (1) The comparable market approach to valuation,
comparing Wilber Corp's book value, earnings per share, price-to-
book-value ratio, adjusted book value, and adjusted earnings with
those of similarly sized, publicly traded banks and bank holding
companies, and (2) the income or investment value approach to
valuation, calculating the net present value and future earnings
of Wilber Corp and the return on investment using a 12-percent
rate of return. Also, although the size of the block of stock
was considered and taken into account in arriving at a value of
$38 per share, petitioner's first expert testified that he did
not factor in a specific and separate discount or premium
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percentage to reflect the size of the block of stock to be
valued.
For the 10 years subsequent to the valuation date,
petitioner's first expert projected for Wilber Corp a low
dividend yield, low asset growth, low net income growth, low
return on average assets, and low return on average equity.
At trial, petitioner's second expert focused on the
significant size of the block of stock to be valued, the limited
type and number of investors that would be capable of purchasing
the large block of stock (namely, banks and other financial
institutions), and the regulatory restrictions that he believed
would discourage such investors from purchasing the block of
stock.
Petitioner's second expert opined that the October sales
price of approximately $50 per share on the over-the-counter
market did not accurately indicate the price that investors would
pay for the shares of decedent's stock if all 201,408 shares
became available at the same time. Petitioner's second expert
concluded that the market could only absorb a sale of 15,000 to
20,000 shares of stock in Wilber Corp at the October sales price
of approximately $50 per share, and that, within a reasonable
period of time, the increased supply of shares would flood the
market and cause the market price of the shares to decrease to
perhaps as low as $34 per share.
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Both of petitioner's experts opined that a control premium
should not be applied to decedent's block of 201,408 shares
because they believed that the shares (representing 23.8 percent
of the stock in Wilber Corp) did not constitute a controlling
interest. Based on their valuations and on their analyses with
respect to the number of shares to be valued, petitioner's
experts concluded that, as of October 20, 1990, the value of the
201,408 shares of Wilber Corp's stock that were owned by decedent
at the time of his death was $7,653,504, or $38 per share.
Respondent's expert relied primarily on a market transaction
approach to valuation in concluding that, as of October 20, 1990,
the value of decedent's shares of stock in Wilber Corp was
$13,562,815, or $67.34 per share. Respondent's expert
acknowledged that, in October of 1990, the economy was in a
recession and that in the Northeast region the economy was
experiencing a particular downturn due to financial difficulties
of its two primary industries, defense and finance.
With respect, however, specifically to the Oneonta, New York
region, respondent's expert concluded that the region (because it
was more rural and less tied to the defense and finance
industries) was less likely to be affected by general economic
difficulties of the Nation and of the Northeast region.
Respondent's expert concluded that petitioner's experts'
valuations of the shares of stock in Wilber Corp were
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unreasonably low and inconsistent with Wilber Corp's historically
strong financial position.
Respondent's expert then relied heavily on a hypothetical
scenario in which a single investor or group of investors
(purchasers) might purchase decedent's entire block of stock
(representing a 23.8-percent interest in Wilber Corp) and use
this block of stock to force the Farone family trusts, the
Jesuits of Holy Cross, other charitable trusts, and other current
holders of shares of stock in Wilber Corp to sell their shares to
the purchasers, enabling the purchasers to acquire at least 51
percent or effective control of Wilber Corp. Because of
respondent’s expert’s opinion that his hypothetical scenario had
a realistic possibility of becoming a reality, respondent's
expert opined that a conservative control premium of
approximately 35 percent should be applied to the average over-
the-counter sales price of $50 per share. Finally, respondent's
expert concluded that because the market for shares of stock in
Wilber Corp was thin, not for lack of buyers, but for lack of
willing sellers, the size of the block of stock should not be
considered significant and no blockage discount should apply.
Although we conclude that petitioner's experts made
unreasonably low projections regarding the future financial
condition, profitability, and overall performance of Wilber Bank,
we find petitioner's experts generally more credible and their
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valuation methods and opinions more correct than those of
respondent's expert.
Based simply on comparable market data used by each of the
experts and in the First Albany report, the average market price
of shares of stock in regional banks similar to Wilber Bank was
approximately $22 per share.
With respect to respondent's expert's valuation, we find his
comparable market analysis contradictory and the explanation
thereof somewhat cursory. We do, however, agree with
respondent's expert's opinion regarding his more positive picture
of Wilber Bank's financial position. Although Wilber Bank did
experience an increase in the amount of nonperforming loans in
1990, we are not convinced that such loans reflected for Wilber
Bank a permanent downturn in profitability. In general, the
shares of stock in Wilber Corp were in demand and the regional
investment community regarded Wilber Corp to be in excellent
condition.
In view, however, of the loyalties of the shareholders of
Wilber Corp, we find respondent's scenario, in which hypothetical
investors would purchase decedent’s entire block of 201,408
shares of stock as well as an additional 27.2 percent of the
shares and thereby gain a 51-percent controlling interest in
Wilber Corp, an unlikely scenario unsupported by the facts.
In this case, there is no credible evidence that decedent's
block of 201,408 shares of stock in Wilber Corp should be
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considered part of a control group. Also, respondent's expert,
in concluding that decedent's 23.8-percent interest should
somehow be treated as part of a hypothetical 51-percent
controlling interest, effectively ignores the requirement present
in Wilber Corp's articles of incorporation of a 66 2/3-percent
super majority for decisions regarding the merger, consolidation,
dissolution, or sale of all or substantially all of the assets of
the bank.
Respondent argues that a control premium is justified,
because decedent's block of stock arguably could control one
member of the Board of Directors and thereby "substantially
influence" corporate action and cause the sale of the bank.
Before a control premium may be applied, however, something more
than "substantial influence" is required. See Estate of Newhouse
v. Commissioner, 94 T.C. 193, 251-252 (1990).
Based on our analysis of petitioner's experts’ opinions
(implicitly reflecting a blockage discount), we use as our
starting point the $38 per-share value calculated by petitioner's
experts. Adjusting upward this figure based on the excellent
financial condition of Wilber Bank, and taking into account the
$50 per-share average sales price of Wilber Corp stock in the
thinly traded over-the-counter market, we conclude that on
October 20, 1990, the value of the 201,408 shares of stock in
Wilber Corp was $9,063,360, or $45 per share.
To reflect the foregoing,
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Decision will be entered
under Rule 155.