SCOTUS Reports

Tag: Blockage Discount

  • Calder v. Commissioner, 85 T.C. 713 (1985): Determining Separate Gifts and Blockage Discounts in Trust Transfers

    Calder v. Commissioner, 85 T. C. 713 (1985)

    Transfers to trusts with multiple beneficiaries must be treated as separate gifts for each beneficiary when valuing gifts and applying blockage discounts.

    Summary

    Louisa Calder transferred 1,226 gouaches into four trusts, each with specific beneficiaries, leading to a dispute over whether these constituted four or six separate gifts for tax purposes. The court ruled that the transfers to the trusts with multiple beneficiaries should be treated as six separate gifts, one for each beneficiary. Additionally, the court determined that a blockage discount should be applied to each gift individually, based on actual sales data rather than hypothetical market absorption rates. The court also denied Calder’s claim for annual exclusions under IRC § 2503(b), as the gifts were deemed future interests due to the discretionary nature of income distribution from the trusts.

    Facts

    Louisa Calder, widow of artist Alexander Calder, received 1,226 gouaches from his estate. On December 21, 1976, she transferred these gouaches into four irrevocable trusts: the Davidson Trust and Rower Trust for her daughters, and the Davidson Children Trust and Rower Children Trust for her grandchildren. Each trust had either one or two beneficiaries. Calder reported the total value of the gifts on her gift tax return as $949,750, applying a 60% blockage discount used for the estate tax valuation. The Commissioner argued for six separate gifts and a different blockage discount calculation, resulting in a higher gift tax liability.

    Procedural History

    The Commissioner determined a gift tax deficiency against Calder for the quarter ending December 31, 1976. Calder petitioned the United States Tax Court, challenging the Commissioner’s determination on the number of gifts, the application of the blockage discount, and the availability of annual exclusions under IRC § 2503(b).

    Issue(s)

    1. Whether Calder’s transfers to the four trusts constituted four or six separate gifts for gift tax purposes.
    2. Whether a blockage discount should be applied to each gift separately or on an aggregate basis, and if so, in what amounts.
    3. Whether Calder’s gifts qualified for the $3,000 annual exclusion under IRC § 2503(b).

    Holding

    1. No, because the transfers to trusts with multiple beneficiaries constituted six separate gifts, as each beneficiary’s interest must be considered separately for gift tax purposes.
    2. Yes, a blockage discount should be applied to each gift separately, because the discount must reflect the market’s ability to absorb each gift independently, resulting in a total value of $1,210,000 for the gifts.
    3. No, because the gifts did not create present interests, as the trusts held non-income-producing assets and the beneficiaries had no immediate right to income or principal.

    Court’s Reasoning

    The court relied on established tax law that gifts in trust are treated as gifts to the beneficiaries, not the trust itself. Therefore, the two trusts with multiple beneficiaries were divided into four separate gifts. For the blockage discount, the court followed the regulations and precedent requiring separate valuation of each gift, rejecting the Commissioner’s method of applying a uniform annual sales rate to all gifts. Instead, the court used actual sales data for each gift to determine the appropriate discount, aligning with the factual nature of blockage determinations. Regarding the annual exclusion, the court applied the three-pronged test from Commissioner v. Disston, concluding that the gifts were future interests because there was no assurance of income flow to the beneficiaries from the non-income-producing gouaches.

    Practical Implications

    This decision clarifies that for gift tax purposes, transfers to trusts with multiple beneficiaries must be treated as separate gifts for each beneficiary, affecting how gifts are reported and valued. The ruling also emphasizes the importance of using actual sales data when calculating blockage discounts, which could influence how taxpayers and practitioners approach similar valuations in the future. Furthermore, it underscores the challenges of claiming annual exclusions for gifts of non-income-producing assets, as the court requires a clear and immediate right to income for such exclusions to apply. This case has been cited in subsequent cases dealing with gift tax valuations and the application of blockage discounts, reinforcing its importance in estate and gift tax planning.

  • Estate of Van Horne v. Commissioner, 82 T.C. 817 (1984): Valuing Estate Tax Deductions Using Actuarial Tables

    Estate of Van Horne v. Commissioner, 82 T. C. 817 (1984)

    The value of a claim against an estate for estate tax deduction purposes must be determined using actuarial tables as of the date of the decedent’s death, regardless of subsequent events.

    Summary

    In Estate of Van Horne, the Tax Court held that the value of a life interest claim against an estate, for purposes of an estate tax deduction, must be calculated using actuarial tables as of the date of the decedent’s death. The case involved the estate of Ada E. Van Horne, where her ex-husband James had a life interest claim that was unexpectedly extinguished by his early death. The court rejected the IRS’s argument to value the claim based on actual payments made before James’s death, affirming the use of actuarial tables as established by the Supreme Court in Ithaca Trust Co. v. United States. Additionally, the court found no basis for applying a ‘blockage’ discount to the valuation of the estate’s remaining Wrigley stock, as the market conditions did not justify such a discount.

    Facts

    Ada E. Van Horne died on September 4, 1976, with her estate obligated to pay her ex-husband, James Van Horne, $5,000 monthly for life under a divorce decree. James filed a claim against the estate, which was approved. However, James died unexpectedly on April 20, 1977, after receiving only $35,000. The estate sought a deduction based on the actuarial value of James’s life interest at the time of Ada’s death, while the IRS argued for a deduction based only on the payments made before James’s death. Additionally, the estate held 56,454 shares of Wrigley stock, selling 42,416 shares before the alternate valuation date, and claimed a ‘blockage’ discount on the remaining 14,038 shares.

    Procedural History

    The estate filed a timely estate tax return and elected to value the estate on the alternate valuation date of March 4, 1977. The IRS determined a deficiency, leading to a dispute over the valuation of James’s life interest claim and the applicability of a ‘blockage’ discount on the Wrigley stock. The case was submitted to the Tax Court based on stipulated facts.

    Issue(s)

    1. Whether the value of a life interest claim against the estate for purposes of the section 2053(a)(3) deduction should be calculated using actuarial tables as of the date of the decedent’s death or based on actual payments made before the claimant’s unexpected death.
    2. Whether the estate’s remaining Wrigley stock should be valued with a ‘blockage’ discount due to the size of the block relative to market liquidity.

    Holding

    1. Yes, because the value of the claim must be determined using actuarial tables as of the date of the decedent’s death, consistent with the principle established in Ithaca Trust Co. v. United States.
    2. No, because the estate failed to demonstrate that the market price of the stock on the alternate valuation date did not reflect the fair market value of the remaining shares.

    Court’s Reasoning

    The court relied heavily on the Supreme Court’s decision in Ithaca Trust Co. v. United States, which held that estate valuation must be based on actuarial probabilities at the time of death, not on subsequent events. The court found that James’s life interest claim was enforceable at Ada’s death and should thus be valued using actuarial tables, rejecting the IRS’s argument that only actual payments should be considered. The court distinguished cases where post-death events were relevant to the enforceability of claims, not their valuation. Regarding the ‘blockage’ discount, the court found that the estate did not show that the market price on the alternate valuation date was an inaccurate reflection of the value of the remaining Wrigley stock, given the market’s capacity to absorb the shares without significant price depression.

    Practical Implications

    This decision reinforces the use of actuarial tables for valuing estate tax deductions based on life interests, ensuring consistency and predictability in estate planning and tax calculations. It clarifies that subsequent events affecting the life interest do not alter the valuation established at the time of death. For practitioners, this means advising clients to use actuarial valuations in estate planning without concern for unforeseen events. The ruling on the ‘blockage’ discount underscores the need for clear evidence of market impact when seeking such discounts, affecting how estates manage and value large stock holdings. Subsequent cases like Estate of Lester and Estate of Hagmann have continued to apply and distinguish this principle, shaping estate tax practice.

  • Rushton v. Commissioner, 60 T.C. 272 (1973): Applying Blockage Discount to Separate Gifts of Stock

    Rushton v. Commissioner, 60 T. C. 272 (1973)

    Each gift of stock must be valued separately for federal gift tax purposes, with any applicable blockage discount considered only in relation to the number of shares in each separate gift.

    Summary

    In Rushton v. Commissioner, the Tax Court addressed the application of the blockage discount to gifts of stock. William J. Rushton and Elizabeth P. Rushton made multiple gifts of Protective Life Insurance Co. stock to various donees on several dates in 1966 and 1967. The key issue was whether the blockage discount should be applied to the total shares gifted on each date or to each separate gift. The court held that each gift must be valued separately, and any blockage discount must be considered only for the shares in each gift, not the aggregate. The court rejected the petitioners’ argument to apply the discount to all shares gifted on the same date, affirming the Commissioner’s valuation based on the mean between published bid and asked prices, as the petitioners failed to provide sufficient evidence to overcome the presumption of correctness in the Commissioner’s determination.

    Facts

    William J. Rushton and Elizabeth P. Rushton made gifts of Protective Life Insurance Co. common stock to various donees on January 3, 1966, June 15, 1966, January 3, 1967, and April 7, 1967. The total shares gifted on these dates were 1,422, 5,000, 6,400, and 2,000 respectively. The stock was primarily traded over-the-counter in Birmingham, with Sterne, Agee & Leach, Inc. , as the principal market maker. The petitioners claimed a blockage discount, arguing that all shares transferred to all donees on the same date should be considered as a single block for valuation purposes. The Commissioner determined the value based on the mean between published bid and asked prices, except for January 3, 1966, and January 3, 1967, where slight adjustments were made.

    Procedural History

    The Commissioner issued statutory notices of deficiency to the Rushtons, determining gift tax deficiencies based on the stock valuations. The petitioners challenged these valuations in the U. S. Tax Court, arguing for the application of a blockage discount to the total shares gifted on each date. The cases were consolidated for trial, briefs, and opinion. The Tax Court ruled in favor of the Commissioner, upholding the valuations and rejecting the petitioners’ blockage discount argument.

    Issue(s)

    1. Whether the blockage discount should be applied to the total shares of stock gifted on each date, rather than to each separate gift.
    2. Whether the petitioners provided sufficient evidence to support the application of a blockage discount to each separate gift of stock.

    Holding

    1. No, because the court determined that each gift must be valued separately, and the blockage discount, if applicable, must be applied only to the shares in each separate gift, not to the aggregate of shares gifted on the same date.
    2. No, because the petitioners failed to provide evidence of the impact on the market of each separate gift of stock, relying instead on the impact of the total shares transferred on each date.

    Court’s Reasoning

    The court relied on the plain language of the gift tax regulations, which specify that blockage applies to each gift separately. The court cited prior cases such as Sewell L. Avery, Robert L. Clause, and Thomas A. Standish, which consistently applied the rule of valuing each gift separately. The court rejected the petitioners’ reliance on Helvering v. Kimberly, Page v. Howell, and Maytag v. Commissioner, finding these cases either distinguishable or not persuasive. The court emphasized that the petitioners failed to provide evidence to support the application of blockage to each separate gift, instead focusing on the impact of the total shares transferred on each date. The court upheld the Commissioner’s valuations, which were based on the mean between published bid and asked prices, as the petitioners did not overcome the presumption of correctness in the Commissioner’s determinations.

    Practical Implications

    This decision clarifies that each gift of stock must be valued separately for federal gift tax purposes, and any blockage discount must be considered only in relation to the shares in each gift, not the aggregate of shares gifted on the same date. Practitioners should ensure that clients provide evidence specific to each gift when seeking to apply a blockage discount. The ruling may affect estate planning strategies involving large gifts of stock, as it limits the potential for using blockage discounts to reduce gift tax liability. This case may also influence how courts evaluate evidence in future cases involving valuation disputes, emphasizing the need for specific evidence related to each gift rather than general market impact arguments.

  • Havemeyer v. Commissioner, 12 T.C. 644 (1949): Valuation of Gifted Stock Blocks

    Havemeyer v. Commissioner, 12 T.C. 644 (1949)

    When valuing large blocks of gifted stock, the fair market value may deviate from the mean between the highest and lowest quoted selling prices if evidence demonstrates that the market could not absorb the block at that price.

    Summary

    The petitioner contested the Commissioner’s valuation of gifted Armstrong Cork stock. The Commissioner used the mean between the highest and lowest selling prices on the gift date. The petitioner argued for a lower value, considering the large block size and the market’s inability to absorb it at the quoted prices. The Tax Court held that the Commissioner’s method didn’t reflect the fair market value. The court considered expert testimony and a “Special Offering” of the stock on the same date, concluding the stock’s value was lower than the Commissioner’s determination, thereby acknowledging that block size and market conditions can influence valuation.

    Facts

    On October 26, 1943, the petitioner made four separate gifts of Armstrong Cork Company stock, each consisting of 4,000 shares. The Commissioner determined a value of $37.25 per share based on the mean between the highest and lowest selling prices on the New York Stock Exchange that day. The petitioner argued the stock was worth $36.295 per share, accounting for the block size and the market’s limited ability to absorb such quantities. A “Special Offering” of 4,000 shares of the same stock occurred on the same day. Only 600 shares were traded on the regular market that day, besides the special offering. The officials of the New York Stock Exchange concluded that the regular market could not absorb 4,000 shares within a reasonable time and at a reasonable price or prices.

    Procedural History

    The Commissioner assessed a gift tax deficiency based on a valuation of $37.25 per share. The petitioner challenged this valuation in the Tax Court. The Tax Court considered evidence presented by the petitioner, including expert testimony and details regarding a “Special Offering” of the stock. The Commissioner presented no evidence.

    Issue(s)

    Whether the Commissioner’s method of valuation, using the mean between the highest and lowest quoted selling prices, accurately reflects the fair market value of the gifted Armstrong Cork stock, considering the large block size and market conditions?

    Holding

    No, because the evidence presented demonstrated that the market could not absorb the large block of stock at the price determined by the Commissioner’s method; therefore, the Commissioner’s valuation did not reflect the fair market value.

    Court’s Reasoning

    The court recognized that while the Commissioner’s regulations (Regulations 108, sec. 86.19 (c)) generally consider the mean between high and low prices as fair market value, this isn’t absolute. The court emphasized that fair market value is a question of fact, and other relevant factors should be considered if the standard formula doesn’t reflect reality. The court gave weight to expert testimony, finding that the market was “thin” and couldn’t absorb the 4,000-share blocks at the quoted prices. The court also distinguished between a “voluntary” market and a “solicited” market and noted that because the market on the 26th included a “Special Offering” that the market prices on the 25th were a better indication of how the market would react. Quoting Heiner v. Crosby, the court highlighted that it is proper to consider whether the circumstances under which sales are made at a certain price were unusual, and to the kind of market in which the sales were made. The court determined that the fair market value was $36.295 per share, lower than the Commissioner’s $37.25, taking into account the block size, market thinness, and the “Special Offering”.

    Practical Implications

    This case illustrates that the valuation of large blocks of stock for tax purposes requires a nuanced approach, going beyond simple reliance on stock exchange quotations. Attorneys must present evidence demonstrating the market’s capacity to absorb the stock at the quoted prices. Factors like block size, market liquidity, and the presence of “Special Offerings” or secondary distributions are critical. The case highlights the importance of expert testimony in establishing the true fair market value. Later cases may cite Havemeyer to support the argument that mechanical application of valuation formulas is inappropriate when evidence suggests a different fair market value. It emphasizes that the regulations provide a guide, but factual evidence trumps a formulaic approach when there are marketability issues to consider.

  • McMillan v. Commissioner, 4 T.C. 263 (1944): Valuation of Stock Gifts in Large Blocks for Gift Tax Purposes

    McMillan v. Commissioner, 4 T.C. 263 (1944)

    When valuing large blocks of publicly traded stock for gift tax purposes, the fair market value should reflect the impact of the block’s size on the market, considering methods like secondary distribution or sales over a reasonable period, rather than assuming a single-day open market sale.

    Summary

    The case concerns the valuation of Montgomery Ward & Co. and United States Gypsum Co. stock that the petitioner gifted to trusts for his daughters and their husbands. The Commissioner assessed gift taxes based on the mean between the highest and lowest quoted selling price on the date of the gifts. The petitioner argued that the large blocks of stock should be valued considering the impact of their size on the market, specifically through secondary distribution. The Tax Court determined that for gift tax purposes, there were four separate gifts, but that valuation should consider how such large blocks would realistically be sold, not on a single day on the open market.

    Facts

    The petitioner made gifts of Montgomery Ward & Co. and United States Gypsum Co. stock on December 31, 1940, placing the stock in trust for his two daughters and their respective husbands. The total gift consisted of 26,000 shares of Montgomery Ward and 16,000 shares of Gypsum stock. The trust agreements specified separate trusts for each daughter and her husband, with each trust receiving half of the stock. The stock was publicly traded. The Commissioner determined the value of the stock based on the average of the high and low trading prices on the date of the gift.

    Procedural History

    The Commissioner assessed gift taxes based on a valuation of the stock using the average trading price on the date of the gift. The petitioner contested the Commissioner’s valuation in the Tax Court, arguing that the valuation should reflect the impact of the large block size. The Tax Court reviewed the Commissioner’s determination.

    Issue(s)

    1. Whether the gifts should be considered as one, two, or four separate gifts for valuation purposes under gift tax statutes.
    2. Whether the fair market value of the stock should be determined based on the mean between the highest and lowest quoted selling price on the date of the gift, or whether the size of the stock blocks necessitates consideration of alternative valuation methods.

    Holding

    1. Yes, because the trust instruments specifically created separate trusts for each daughter and her husband, the gifts should be considered four separate gifts for valuation purposes.
    2. No, because the sheer size of the stock blocks would have a depressing effect on the market if sold at once, the fair market value should be determined considering alternative methods like secondary distribution or sales over a reasonable period.

    Court’s Reasoning

    The court reasoned that the trust agreements explicitly created separate trusts for each daughter and her husband, indicating the donor’s intent to make individual gifts to each beneficiary. Citing Helvering v. Hutchings, the court emphasized that the number of donees is determined by the trust instrument. Regarding valuation, the court acknowledged the Commissioner’s reliance on regulations dictating the use of average trading prices for listed stocks. However, the court also recognized the principle that the size of the block can impact the per-share value, citing Helvering v. Maytag. The court stated that “the correct criterion is the fair market value of all of the stock comprising the gift, not merely a single share thereof.” The court found that selling such large blocks on the open market on a single day would have demoralized the market. Instead, the court considered the likelihood of secondary distribution or sales over a reasonable period. The court considered expert testimony and the trend of prices to determine the fair market value, which was lower than the Commissioner’s assessment.

    Practical Implications

    This case provides guidance on valuing large blocks of stock for gift tax purposes. It highlights that the size of the block is a critical factor that cannot be ignored when valuing stock gifts, particularly when dealing with significant holdings that would affect market prices. Practitioners must consider alternative valuation methods beyond the simple average of high and low trading prices, such as secondary distributions or sales over a reasonable time frame. The case emphasizes the importance of presenting expert testimony to support alternative valuation methods. It also reinforces the principle that gift tax is applied to the donee rather than the trust itself, solidifying the legal implications of clearly drafted trust documents that clearly outline the intended beneficiaries. Later cases would cite this one when considering blockage discounts.

  • McMillan v. Commissioner, 4 T.C. 263 (1944): Valuation of Large Blocks of Stock for Gift Tax Purposes

    McMillan v. Commissioner, 4 T.C. 263 (1944)

    For gift tax purposes, the fair market value of a large block of publicly traded stock should reflect the price a willing buyer would pay for the block as a whole, considering the impact its size has on market price, and not simply the mean between the high and low prices on the exchange for a single share on the date of the gift.

    Summary

    The taxpayer made gifts of large blocks of Montgomery Ward & Co. and United States Gypsum Co. stock to two trusts, each benefiting his daughter and her husband. The Commissioner determined the gift tax based on the average of the high and low trading prices on the gift date. The taxpayer argued the value should be lower, reflecting the discount necessary to sell such large blocks. The Tax Court held that while there were four separate gifts (one to each beneficiary), the valuation should consider the impact of the block size on the market, allowing for a discount to reflect the realities of selling large quantities of stock.

    Facts

    The petitioner, McMillan, created two trusts on December 31, 1940. One trust benefited his daughter, Arla, and her husband, William. The other benefited his other daughter and her husband. Each trust received 13,000 shares of Montgomery Ward stock and 8,000 shares of United States Gypsum stock. The trust agreements specified that each daughter and her husband were to receive income from one-half of the assets held in their respective trust. Montgomery Ward stock was trading between $37 and $38 on the New York Stock Exchange on the date of the gift. United States Gypsum was trading at $64-$65 per share. The taxpayer argued that these large blocks could only be sold via secondary distribution at a discounted price.

    Procedural History

    The Commissioner assessed a gift tax deficiency based on valuing the stock at the average of the high and low prices on the exchange. The taxpayer petitioned the Tax Court for a redetermination of the deficiency, arguing for a lower valuation based on the block size.

    Issue(s)

    1. Whether the gifts should be valued as four separate gifts, one to each beneficiary, or as two gifts, one to each trust, or as a single gift of the aggregate shares.
    2. Whether the fair market value of the stock should be determined based on the average of the high and low prices on the exchange on the date of the gift, or whether the valuation should consider the impact of the large block size on market price.

    Holding

    1. Yes, because the trust instruments clearly created separate trusts for each beneficiary, and the Supreme Court has established that such separate beneficial interests constitute separate gifts.
    2. No, because the valuation must account for the impact of the block size on the market price; the average of the high and low price on the exchange may not accurately reflect the price a willing buyer would pay for such a large block.

    Court’s Reasoning

    The court determined that the trust agreements created four separate gifts, emphasizing the language specifying separate trusts for each daughter and her husband. The court cited Helvering v. Hutchings, 312 U.S. 393, and United States v. Pelzer, 312 U.S. 399, to support the conclusion that separate beneficial interests constitute separate gifts for gift tax purposes.

    Regarding valuation, the court recognized that the size of the block of stock could affect its per-share value, citing Helvering v. Maytag, 125 F.2d 55. It stated that “either secondary distribution or sales over a reasonable period of time after the basic date would have been resorted to to dispose of blocks of stock of the size of the four gifts here in question. To have offered it on the open market in one day would have demoralized the market.” The court determined values for the stock that took into account market trends, various valuation theories, the experience of other vendors making comparable offerings, and expert opinion.

    Practical Implications

    McMillan establishes that when valuing large blocks of publicly traded stock for gift tax purposes, the size of the block and its potential impact on the market price must be considered. This decision rejected a purely mechanical application of the average of high and low trading prices on the exchange. Instead, the court emphasized a more realistic assessment of what a willing buyer would pay for the entire block. This case provides a basis for arguing for valuation discounts in similar situations involving large blocks of stock or other assets. Later cases have cited McMillan for the proposition that fair market value considers all relevant factors, especially the impact of the block size on pricing, influencing subsequent valuation disputes. This approach can be used in estate tax or other contexts where fair market value is relevant.

  • Du Pont v. Commissioner, 2 T.C. 246 (1943): Gift Tax on Relinquished Power to Designate Beneficiary

    2 T.C. 246 (1943)

    The relinquishment of a retained power to designate beneficiaries of a trust remainder constitutes a taxable gift, and the value of a large block of stock may deviate from market prices.

    Summary

    Henry F. du Pont relinquished his power to designate beneficiaries of a trust he created in 1927, which held E. I. du Pont de Nemours & Co. stock. The trust income was payable to his sister for life, with the remainder to beneficiaries he would designate. In 1939, Du Pont released his power of appointment, leading the IRS to assess a gift tax. The Tax Court addressed whether this relinquishment was a taxable gift and the proper valuation of the gift, considering the large block of stock involved and the appropriate mortality table for valuing the remainder interest. The court found the relinquishment to be a taxable gift, determined a value for the stock lower than the market price, and upheld the IRS’s remainder factor.

    Facts

    In 1927, Henry F. du Pont created a trust with Wilmington Trust Co., transferring 15,000 shares of E. I. du Pont de Nemours & Co. stock. The trust directed income to Louise Evelina du Pont Crowninshield (petitioner’s sister) for life. Upon her death, the trustee was to distribute the fund as petitioner designated to a specific group of beneficiaries. If petitioner failed to designate beneficiaries, the fund would go to his children, or their issue, or Nicholas Ridgely du Pont, or the University of Delaware. On January 4, 1939, petitioner released his right to designate beneficiaries. On that date, the trust held 52,900 shares of du Pont stock.

    Procedural History

    The IRS determined that Du Pont’s relinquishment of the power to designate beneficiaries in 1939 constituted a taxable gift and assessed a deficiency. Du Pont paid a portion of the assessed deficiency and filed a gift tax return stating that no gift tax was due. Du Pont then petitioned the Tax Court challenging the deficiency assessment.

    Issue(s)

    1. Whether the relinquishment of the petitioner’s right and power under the trust agreement constituted a taxable gift.

    2. If the relinquishment was a taxable gift, what was the value of that gift, considering the large block of du Pont stock and the appropriate mortality table for valuing the remainder interest.

    Holding

    1. Yes, because the retention of control over the disposition of the trust property renders the gift incomplete until the power is relinquished.

    2. The value of the gift is determined by valuing the corpus of the estate at $135 per share, using the remainder factor employed by the IRS, because the evidence failed to show that the Commissioner’s method was erroneous or that there are more accurate methods available than the one he used.

    Court’s Reasoning

    The court relied on Sanford’s Estate v. Commissioner, 308 U.S. 39 (1939), stating that the retention of control over the disposition of the trust property rendered the gift incomplete until the power was relinquished. The court reasoned that Du Pont’s power to select beneficiaries meant the original gift was incomplete. The court dismissed the argument that the Revenue Act of 1942 affected this conclusion, finding that the Act was intended to apply to powers received from another person, not powers reserved by the donor themselves. Regarding valuation, the court recognized that the stock exchange prices did not accurately reflect the fair market value of the large block of stock, referencing Safe Deposit & Trust Co. of Baltimore, 35 B.T.A. 259 (1937). The court found the market was thin and a sale of that size would depress prices. The court accepted expert testimony suggesting a lower per-share price and set the fair market value at $135 per share. Finally, the court approved the IRS’s use of the Actuaries’ or Combined Experience Table of Mortality because the petitioner did not demonstrate a more accurate method to value the remainder interest. The court stated that: “Valuation for estate or inheritance tax purposes is computed in some 17 states by the use of the Actuaries’ or Combined Experience Mortality Table… We cannot say under those circumstances that the provisions of the Commissioner’s regulations are unreasonable or arbitrary.”

    Practical Implications

    This case reinforces the principle that relinquishing control over a previously established gift can trigger gift tax liability. It demonstrates that the value of a large block of stock may deviate from the market price due to the potential impact of a large sale on market conditions, leading to the acceptance of expert testimony in determining value. It confirms the acceptability of established mortality tables in valuing remainder interests unless the taxpayer provides evidence of a more accurate method. Later cases citing this decision typically focus on the blockage discount issue, requiring taxpayers to provide solid evidence to support deviations from publicly traded prices. It highlights the IRS’s discretion in valuation methods when taxpayers fail to provide better alternatives. This case impacts estate planning by emphasizing the importance of understanding when retained powers become taxable events.