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In re Estate of Sears

Supreme Court of Ohio
Nov 29, 1961
178 N.E.2d 240 (Ohio 1961)

Opinion

No. 36745

Decided November 29, 1961.

Taxation — Succession tax — Succession consisting of corporate stock — Tax determinable from actual market value thereof — Market value defined.

1. The Ohio succession tax is a tax on the succession of the beneficial interest of each heir, legatee, devisee or other beneficiary of a decedent's estate, and the tax on each succession is determined from the actual market value of the property passing thereunder.

2. Market value is the fair and reasonable cash price which can be obtained in the open market, not at a forced sale or under peculiar circumstances but at voluntary sale between persons who are not under any compulsion or pressure of circumstances and who are free to act; or, in other words, between one who is willing to sell but not compelled to do so and one who is willing to buy but not compelled to do so.

3. For succession tax purposes, the market value of shares of corporate stock is, as of the date of death, the actual market price of such shares in units in which they are usually sold, without regard to any reduction in such market value by reason of the size of a particular block of shares.

APPEAL from the Court of Appeals for Cuyahoga County.

The subject of this litigation is the determination of the Ohio tax on the succession to 8,100 shares of stock issued by the Towmotor Corporation, which shares were a part of the residuary estate of Anna L. Sears who died testate, a resident of Cuyahoga County, on November 28, 1957.

By the terms of her will, the stock in question was bequeathed to designated trustees to be held by them in successive trusts for the lives of testatrix's son, daughter-in-law and granddaughter and, upon the death of the survivor thereof, to be apportioned among the lineal descendents of the granddaughter and continued to be held in trust for varying purposes and under varying conditions.

The trustees under the will were given wide powers, among them being the ones mentioned in the following, which is the only specific reference in the will to the Towmotor stock:

"2. The trustees may retain as an investment of any trust estate, without liability for depreciation in value, any securities or other property received by them pursuant to any provision contained in this will * * *. Without limiting the generality of the foregoing powers, the trustees expressly may retain as an investment, without liability for depreciation in value, any and all securities issued by Towmotor Corporation, however and whenever acquired, irrespective of the proportion of the property comprising any trust estate which may be invested therein. * * *"

The executor of the estate testified, at a hearing on exceptions to the determination of succession tax, that, in the administration of the estate, none of the Towmotor stock had been sold or would need be sold for any reason.

The auditor of Cuyahoga County, under authority of Section 5731.22, Revised Code, ascertained the value of the Towmotor shares at $19.75 per share, that figure being the mean between the bid and asked price of over-the-counter sales on the date of death of decedent.

The Probate Court, in determining the succession tax, applied the so-called blockage rule and fixed the value of the stock at $18 per share. Exceptions filed pursuant to Section 5731.38, Revised Code, were, after a hearing thereon, overruled by the Probate Court.

The Court of Appeals, apparently without written opinion, affirmed the judgment of the Probate Court, and the cause is before this court upon an appeal as of right and pursuant to the allowance of a motion to certify the record.

Mr. Mark McElroy, attorney general, Mr. Milton D. Holmes and Mr. Arthur P. Lambros, for appellant.

Messrs. Thompson, Hine Flory and Mr. Harvey B. Hobson, for appellee.


The sole question for determination here is whether the so-called blockage rule should have been applied in this case in determining the value of the Towmotor stock for succession tax purposes.

It was stipulated before the Probate Court that the mean between the bid and asked price of the stock on the date of death was $19.75 per share.

The testimony of two expert witnesses was offered in the Probate Court, one on behalf of the estate and the other on behalf of the Tax Commissioner. The witness for the estate testified that, in his opinion, the entire block of 8,100 shares could have been sold within a 30-day period without depressing the market only if they were sold by way of a secondary offering, i.e., by discounting them to a brokerage firm which would later have offered them for resale in smaller blocks. He stated that, in his opinion, the discount which would have been required by a brokerage firm would have been $1.75 a share.

By stipulation, the testimony of the expert for the Tax Commissioner was that the 8,100 shares could have been sold in the over-the-counter market at prices prevailing when offered if sales were made in small quantities and if spread over a six-month period without having the effect of depressing the market by reason of the offering.

The finding of the Probate Court is summed up in the following paragraph from the entry overruling the exceptions to the determination of succession tax:

"3. The block of 8,100 shares of Towmotor stock owned by the decedent could not have been sold in the existing over-the-counter market within a reasonable period of time, to wit, 30 market trading days, without materially depressing the market price of said shares. The most efficient method of marketing said block of 8,100 shares owned by the estate would be through the sale of said shares to a brokerage underwriter at approximately $18 per share with the consequent resale of the stock by the underwriter group on the over-the-counter market."

Section 5731.02, Revised Code (127 Ohio Laws, 102), in the portions pertinent hereto, read as follows:

"A tax is hereby levied upon the succession to any property passing, in trust or otherwise, to or for the use of a person, institution, or corporation, in the following cases:

"(A) When the succession is by will * * * from a person who was a resident of this state at the time of his death;

"* * *

"Such tax shall be upon the excess of the actual market value of such property over the exemptions made and at the rates prescribed * * *."

This court has consistently held that the tax imposed by the above-quoted statute is a tax on the succession of the beneficial interest of each heir, legatee, devisee or other beneficiary of a decedent's estate. Tax Commission, ex rel. Price, Atty. Genl., v. Lamprecht, Admr., 107 Ohio St. 535; In re Estate of Daniel, 159 Ohio St. 109. It is a tax that is due and payable at the time of the succession. Section 5731.17, Revised Code. The county auditor is, in the first instance, charged with the responsibility of appraising a succession, i.e., the property succeeded to, at its actual market value as of the date of the accrual of the tax. Section 5731.22, Revised Code. From this determination by the auditor and such other evidence as may be offered, the Probate Court determines the actual market value of all estates and the amount of taxes to which the successions are liable. Section 5731.32, Revised Code.

In all the sections of the Succession Tax Chapter of the Revised Code, where it is pertinent so to do, reference is made by the Legislature to the "actual market value" of the succession. So the question to be determined under these sections, both by the county auditor and by the Probate Court, is the actual market value of the succession as of the date of the accrual of the tax, i.e., the date of death. Neither the auditor, Probate Court nor we are concerned with the determination of the "fair cash value" of shares, as that term is used in Section 1701.85, Revised Code, which value is based on the intrinsic value of the shares determined from the assets and liabilities of the the corporation upon consideration of every factor bearing on value. Cf. Roessler v. Security Savings Loan Co., 147 Ohio St. 480.

Market value traditionally has been defined in Ohio as "the fair and reasonable cash price which could be obtained in the open market, not at forced sale or under peculiar circumstances, but at voluntary sale as between persons who are not under any compulsion or pressure of circumstances and who are free to act; or in other words, as between one who wants to sell and is not compelled to do so and one who wants to purchase and is not obliged to do so." City of Cincinnati v. Eversman, 4 O.L.R., 140. See, also, Giesy v. Cincinnati, Wilmington Zanesville Rd. Co., 4 Ohio St. 308; Riegle v. State, 45 Ohio App. 251, 259; McAdams v. Bolsinger, Admr., 71 Ohio Law Abs., 531.

Market value has thus been defined in terms of the willing seller and the willing buyer. It has never been construed to mean the selling price of property at a forced sale, i.e., a sale which the vendor must make immediately without the time or opportunity to find a buyer who will pay a price representing a sum approaching the reasonable worth of the property sold. Ohio Turnpike Commission v. Ellis, 164 Ohio St. 377, 384.

It is urged here, on behalf of the estate, that, since the dumping of 8,100 shares of stock on the market at once would depress the market for that stock, the mean selling price as of the date of death may not be used as the basis of its market value, and that, therefore, some discounted valuation must be accepted in determining the succession tax.

Let us look at just one consequence of the acceptance of such a rule. A and B, both residents of the same county, die on the same day. By his will, A bequeaths his 8,100 shares of stock in a particular corporation to X. B, by his will, bequeathes 100 shares of stock in the same corporation to Z. Because dumping 8,100 shares on the market at one time would depress the market for that stock, X's succession is taxed on a discounted value of the stock. Because dumping 100 shares on the market would not depress the market, Z's succession is taxed at the full value of the stock as of the day of death. Thus he who succeeds to a smaller inheritance pays a higher proportion of tax than that paid by one who succeeds to a larger one. Such a result would obviously fly in the face of the policy in Ohio, adopted pursuant to our Constitution, of a graduated succession tax which on a larger succession is at a higher rate than that on a smaller one. Section 7, Article XII, Constitution of Ohio.

In advocating the adoption of this so-called blockage rule, the executor of an estate might well be advocating a position inimical to his duties as executor. In the light of the option now given a fiduciary, in the case of property not disposed of within one year, between valuing shares of stock as of the date of the death of decedent or one year thereafter, for the purposes of federal estate tax computations (Section 2032, Title 26, U.S. Code), it is most unrealistic to believe that a prudent executor, particularly of an estate as large as the one here involved, would even consider dumping 8,100 shares of stock on the over-the-counter market within 30 days of the death of his decedent.

That such would not be the case here is amply pointed up by the provisions of the will establishing the trusts and by the testimony of the executor to the effect that the shares have not been sold and will not need to be sold. As was said by the court in Florida National Bank of Jacksonville v. Simpson (Fla.), 59 So.2d 751, 768, "if no necessity exists for the sale of this large block of stock, and no reason of any kind whatsoever has been shown by the testimony why it should be sold now or at any time in the immediate future, it would be a breach of duty on the part of the trustees to sell this block of stock when they know, as the testimony shows, that if they dumped it on the market all at one time, the market would be depressed and they could not get the full market value as it now exists."

It appears, therefore, that, at least so far as this case is concerned, the adoption of the thesis that the shares should be valued only at the price for which they could be sold within the 30 days following death is unrealistic and arbitrary. The very fact that the market would be depressed by forcing this large block to sale is a strong indication that such a sale should not be the proper test of the market value of the stock. If the market value would be less depressed by a sale within 60 days, why not adopt 60 days as the period? Or why not adopt 90 days, six months or a year as the proper period?

County auditors and probate judges are called upon daily to determine the market value of property passing by way of succession. Concededly, in many areas the rules within which they must make their determinations are arbitrary. And in many instances they should be. As pointed out by Judge Taft in the opinion in Powhatan Mining Co. v. Peck, Tax Commr., 160 Ohio St. 389, 394, "the result may be what will seem to reasonable and intelligent persons to represent the drawing of artificial and arbitrary boundaries or lines. However, such boundaries or lines should be helpful as a guide to those charged with the administration of the tax laws and to members of the bar, who must advise their clients as to the meaning of those laws."

In all probability, it would be rare in the administration of an estate composed of large holdings of corporate stock that such holdings would be sold. In most instances, the shares themselves would pass either directly to a beneficiary or indirectly through a trustee. In either event, the recipient of the beneficial interest would succeed to the entire value of the shares and not to any discounted value based upon a fictitious or hypothetical sale. He should be required to pay a tax based on that entire value to which he has succeeded.

There is great temptation to say that because of the particular facts of this case the so-called blockage rule should not be applied in making the determination of this tax. But the majority of the court is disposed to hold that the blockage rule should be generally disavowed, and that the value of shares of stock for succession tax purposes should be determined to be the actual market price of such shares in units in which they are usually sold as of the date of death, without regard to any reduction in such market value by reason of the size of a particular block of shares.

In so holding, we recognize that some federal courts have applied the blockage principle in determining the federal estate or gift tax. In the majority of those cases, however, there was involved statutory language different from that of the Ohio statute in that the courts used the phrase, "fair market value," rather than "actual market value." Furthermore, we agree with Marshall, C.J., writing in Tax Commission v. Lamprecht, supra, 537, "that federal policies have no bearing upon this inquiry for the reason that, although the federal legislative power is supreme in all those matters where Congress is given any authority over the states, it yet requires no argument to show that the jurisdiction of the federal government does not extend to the taxing powers of the state in raising revenues for carrying on purely state functions." Furthermore, we believe that the conclusions at which we have arrived are more consistent with the theory of the succession tax as delineated in the Constitution and statutes of this state than are the regulations of the federal government.

The judgment of the Court of Appeals is reversed, and the cause is remanded to the Probate Court of Cuyahoga County for further proceedings in accordance with this opinion.

Judgment reversed.

ZIMMERMAN, acting C.J., MATTHIAS and O'NEILL, JJ., concur.

HERBERT, J., concurs in paragraphs one and two of the syllabus but dissents from paragraph three thereof and from the judgment.

TAFT, J., dissents.

RADCLIFF, J., not participating.

ZIMMERMAN, J., sitting in the place and stead of WEYGANDT, C.J.

RADCLIFF, J., of the Fourth Appellate District, sitting by designation in the place and stead of ZIMMERMAN, J.


As the majority opinion expressly recognizes, the question to be determined by the Probate Court in the instant case was "the actual market value of the succession [ i.e., the 8100 shares of Towmotor Corporation] as of * * * the date of death" of the decedent on November 28, 1957. That question was obviously a question of fact. Since this court does not weigh evidence, it should affirm the determination of that question of fact made by the Probate Court and affirmed by the Court of Appeals if there is substantial evidence in the record to sustain such determination, i.e., if it is a determination that reasonable minds could reach from the evidence presented to the Probate Court.

However, this court is apparently holding that, notwithstanding any other evidence tending to show a lesser value, the value of these 8100 shares must be determined by multiplying by 8100 the market price per share indicated by the mean between the bid and ask prices for such shares on that date on the so-called over-the-counter market (apparently $19.75).

The unsoundness of such a conclusion (which is also apparently irreconcilable with either the majority or minority opinions or the judgment in Roessler v. Security Savings Loan Co., 147 Ohio St. 480, 72 N.E.2d 259) is apparent from a consideration of the record. For example, the evidence affirmatively discloses without dispute that the total sales of Towmotor shares were not in excess of 3819 in October 1957, 6649 in November 1957, 6000 in December 1957 and 7500 in January 1958. Only by completely ignoring the unyielding law of supply and demand can anyone even pretend that prices on the so-called over-the-counter market, where sales averaged only 300 to less than 400 shares a trading day, could conclusively establish a market value for 8100 shares.

As is often the case, the use of labels such as "blockage rule" or "blockage principle" tends to confuse what should be a relatively simple problem.

As a general rule, where shares of stock are listed and are bought and sold upon a stock exchange constantly in large quantities for cash at prices which are recorded, the prices so recorded for such shares on a particular day may be conclusive in determining the value of a block of such shares on that day. McCormick on Damages (Hornbook series, 1935), 166, Section 44. See Citizens Fidelity Bank Trust Co. v. Reeves, Commr. (Ky., 1953), 259 S.W.2d 432. But see Clabby's Estate (1932), 308 Pa. 287, 162 A. 207, 83 A.L.R., 936, State v. Wagner (1951), 233 Minn. 241, 46 N.W.2d 676, 23 A.L.R. (2d), 762, Walker v. People (1901), 192 Ill. 106, 61 N.E. 489, indicating that even in such an instance such recorded prices may not be conclusive.

The writer of this opinion has considerable doubt as to whether such general rule should be applied to a situation like that in the instant case where the buying and selling is not on any exchange but only in a so-called over-the-counter market, especially where there is no evidence of prices on sales but only of bid and ask prices. Perhaps this may explain in part the decision of this court in Roessler v. Security Savings Loan Co., supra ( 147 Ohio St. 480). However, for the purposes of this opinion, it will be assumed, as the majority opinion apparently has, that the general rule would be as applicable in such a situation as where sales prices on an exchange are involved.

The so-called "blockage rule" is an exception to that general rule and, to the extent applicable in the instant case, may be described as follows:

It may be noted that, in some instances, as a result of application of the so-called "blockage rule," a greater value may be placed upon the whole block than would be indicated by merely multiplying the per share market price by the number of shares in the block. See annotation (1952), 23 A.L.R. (2d), 775, 777; Citizens Fidelity Bank Trust Co. v. Reeves, supra (Ky., 259 S.W. [2d], 432, 434); Helvering, Commr., v. Safe Deposit Trust Co. (C.C.A. -4, 1938), 95 F.2d 806, 810.

Where the evidence establishes that a block of shares to be valued as of a particular day is so large that its sale on and during a reasonable period before and after that day would necessarily and substantially have depressed the price of such shares, then the prices recorded on that exchange for such shares on that day will not be conclusive in determining the value of that block of shares on that day.

As stated in Estate of McKitterick (1940), 42 B.T.A., 130, 137, the basis for this so-called "blockage rule" is "that the actual market is so relatively narrow, as compared with the stock * * * to be valued, as to destroy or seriously affect the weight of the prices in such market as evidence of the" value of the stock to be valued.

This so-called "blockage rule" does not exclude evidence as to prices on the exchange but merely permits the consideration of other competent and relevant evidence on the question of fact as to the market value of the block of stock. In some instances, the other evidence may not be such as to even justify the trier of the facts in finding a value less than that which would be arrived at by multiplying the number of shares in the block by the recorded stock exchange price per share on the valuation date. See Mott v. Commissioner of Internal Revenue (C.C.A. -6, 1943), 139 F.2d 317. This so-called "blockage rule" does not authorize a valuation at a forced sale price (see Helvering, Commr., v. Safe Deposit Trust Co. [C.C.A. -4, 1938], 95 F. [2d], 806, 812) although the majority opinion apparently assumes that it does.

The holding of the majority in the instant case, that the market value of the block of 8100 shares must equal 8100 times the market value for one share or 81 times the market value for 100 shares, results from a failure to recognize that the property being valued is a block of 8100 shares and not 8100 blocks of one share each or even 81 blocks of 100 shares each. This holding is certainly inconsistent with the holdings of this court in Sowers, Supt., v. Schaeffer (1949), 152 Ohio St. 65, 87 N.E.2d 257; (1951), 155 Ohio St. 454, 99 N.E.2d 313. On both occasions when that case was before this court, we held that the property there condemned should be valued as a whole even though the value of the whole was less than the aggregate of the values of the several interests or estates therein.

See also McCormick on Damages (Hornbook series, 1935), 165, Section 44, where the heading reads in part:

"The market value of property is its value as a whole. Thus a stock of goods is taken at its wholesale value, and a tract of land at its value as a tract, and not the total value of the lots, taken singly."

Suppose a large city department store purchases 8100 identical bottles of perfume for $8100 and immediately puts these bottles on sale at $3 each and sells an average of 20 bottles a day over a period of about 11 months. Suppose also that, at the end of those 11 months, sales of these bottles have begun to decline and the store then puts the remaining 2100 bottles on sale at $0.80 a bottle and disposes of them within a month. Thus, it would have realized $19,680 gross on its $8100 purchase in about a year. Of course, its net recovery would have been much less because of overhead, advertising and other selling expenses. Certainly, after the first 100 bottles had been sold within the first five days at $3 a bottle, the market value of a single bottle at that time would have been $3. However, no reasonable person would suggest that the market value as a whole at that time of the remaining 8000 bottles would have been 8000 times $3 or $24,000, although a decision such as that being rendered in the instant case would necessarily lead to such a conclusion.

In the instant case, we are not confronted with the question whether the trier of the facts must reject the indicated over-the-counter price for a few shares on the valuation date as the sole criterion for the valuation of these 8100 shares. See Newberry et al., Exrs., v. Walsh, Dir. (1956), 20 N.J. 484, 120 A.2d 242, which reversed a decision of the trier of the facts on the ground that he should have rejected stock exchange prices as the sole criterion for valuation of a large block of shares. Some of the cases cited as rejecting the so-called "blockage rule" merely represent holdings that in such a situation the trier of the facts may (not that he must) value the 8100-share block at a figure which is equal to 8100 times such over-the-counter price per share on the date of the decedent's death. See for example State v. Wagner, supra ( 233 Minn. 241).

It is significant that the only case cited in the majority opinion in the instant case in support of the conclusion that the trier of the facts must so value the 8100-share block is Florida National Bank of Jacksonville v. Simpson (Fla., 1952), 59 So.2d 751, 33 A.L.R. (2d), 581. The opinion in that case, stating the views of a majority of four and a minority of three, refers by name to only one case considering the problem, i.e., Bingham's Admr. v. Commonwealth (1922), 196 Ky. 318, 244 S.W. 781. That case was expressly overruled by Citizens Fidelity Bank Trust Co. v. Reeves, Commr. (Ky., 1953), 259 S.W.2d 432.

A great number of cases have recognized and approved the so-called "blockage rule," at least to the extent that we would have to recognize and approve it in order to affirm the finding of the trier of the facts in the instant case: Newberry et al., Exrs., v. Walsh, Dir. (1956), 20 N.J. 484, 120 A.2d 242; Clabby's Estate (1932), 308 Pa. 287, 162 A. 207, 83 A.L.R., 936; Citizens Fidelity Bank Trust Co. v. Reeves, Commr. (Ky., 1953), 259 S.W.2d 432; Mott v. Commissioner of Internal Revenue (C.C.A.-6, 1943), 139 F.2d 317; Helvering, Commr., v. Maytag (C.C.A.-8, 1942), 125 F.2d 55; Helvering, Commr., v. Safe Deposit Trust Co. of Baltimore (C.C.A.-4, 1938), 95 F.2d 806; Commissioner of Internal Revenue v. Shattuck (C.C.A.-7, 1938), 97 F.2d 790; Calvert, Comptroller, v. Kattar, Exrx. (Tex.Civ.App., 1957), 301 S.W.2d 318; Annotation (1952), 23 A.L.R. (2d), 775.

Some of those cases involved, as does the instant case, a tax on the value of what is received.

In several of those cases, it was contended, as in the instant case, that, since the shares to be valued were not to be sold, the so-called "blockage rule" should have no application. In rejecting that contention, it is said in the recent case of Newberry v. Walsh (1956), supra ( 20 N.J. 484, 497):

"It is immaterial, of course, that no sale has taken place. If market value is to be an index of appraisal we necessarily deal in a hypothetical transaction so far as the claimant is concerned."

Perhaps, the somewhat different view on this question expressed in the opinions in State v. Wagner, supra ( 233 Minn. 241) (construing "full and true value"), and Florida National Bank v. Simpson, supra (Fla., 59 So. [2d], 751) (construing "full cash value"), is explainable by the fact that neither of the statutes involved in those cases used the term "actual market value" as does our statute.

As pointed out in the majority opinion, the Tax Commissioner offered evidence "that the 8100 shares could have been sold in the over-the-counter market at prices prevailing when offered if sales were made in small quantities and if spread over a six-month period without having the effect of depressing the market by reason of the offering." This evidence would probably have been very persuasive to the Probate Court as the trier of the facts if it had been buttressed by evidence that "the market" ( i.e., the prices on the over-the-counter market) had been at least as high during that six-month period as it had been at the date of the decedent's death. However, no such evidence was offered. On the contrary, the only evidence in the record, with regard to prices after the decedent's death, discloses that the over-the-counter price for Towmotor stock declined steadily after the decedent's death on November 28, 1957, until January 1 when it was 15 1/4. Thus, even without any depressing effect from the sale of these 8100 shares, the sale of any part of the 8100 shares during the month after the decedent's death would have necessarily been at prices substantially less than the over-the-counter prices on the date of her death and even lower than the value per share fixed by the decision of the Probate Court. This evidence certainly supports the conclusion of the Probate Court that the over-the-counter per share price quotations for 100-to-300 share lots of Towmotor on the date of the decedent's death should not conclusively determine the per share value of a block of 8100 shares of that stock on that date.


Summaries of

In re Estate of Sears

Supreme Court of Ohio
Nov 29, 1961
178 N.E.2d 240 (Ohio 1961)
Case details for

In re Estate of Sears

Case Details

Full title:IN RE ESTATE OF SEARS: BOWERS, TAX COMMR., APPELLANT v. SEARS, EXR.…

Court:Supreme Court of Ohio

Date published: Nov 29, 1961

Citations

178 N.E.2d 240 (Ohio 1961)
178 N.E.2d 240

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