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Thursday, January 11, 2007


Shares of stock, like other assets, are subject to estate tax based on fair market valuation at the date of death (or six months after using alternate valuation rules). If the stock is publicly traded, the value is easily determined based on the trading values on the date of death or the alternate valuation date.

At times, a decedent may own shares in a publicly traded corporation, but his or her shares are not registered for public sale. Further, the shares may be owned by affiliates of the public company, triggering Rule 144 restrictions on resale. In these situations, a discount off of the trading values for the shares is appropriate. Such cases may degenerate into a "battle of the experts" between the IRS and the estate to determine what appropriate valuation methodology and discount applies.

Such a battle occurred in the recent case of Estate of Georgina T. Gimbel, et al. v. Comm., TC Memo 2006-270 (12/19/2006). In the case, the decedent's shares were both unregistered and subject to Rule 144 resale restrictions. The Tax Court made some interesting observations and conclusions in arriving at a final value:

1. The Court found that the "dribble-out" method of valuation applied to a number of the shares. This method is based on Rule 144 restrictions, which limit the number of shares of restricted stock that can be sold in any 3 month period. The maximum number of shares that can be sold is the greater of 1 percent of the outstanding class of stock to be sold or the average weekly trading volume for the previous 4 weeks. In the case, this formula when applied meant that it would take at least 39 months to sell all of the decedent's shares. The dribble-out method applies time value of money discounting principles and risk of loss due to value fluctuations, to discount value for the required delay if it was desired to sell the shares. The Court found that a 14.4-percent discount from the valuation date trading value was appropriate.

2. In factoring in that the shares were not registered for public sale, the Court considered the likelihood (or actually, the unlikelihood) that the company would register the shares for sale.

3. Another factor in accounting for the nonregistered nature of the shares was the likelihood that the subject shares could be sold "unregistered" in a private placement.

4. Another valuation factor was the likelihood that the issuer of the shares would repurchase the shares from the successor owners.

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