The Ninth Circuit recently reversed a Tax Court decision, holding that two stock sales after a decedent's death were reliable evidence of the stock's value.

Estate of Kaufman (T.C. Memo. 1999-119, 4-6-1999) involved stock owned by the estate of Alice Friedlander Kaufman, who died in October, 1993. At the time of her death, Alice owned 46,020 shares of stock in a nonpublicly traded manufacturing company. Hers was the largest block of stock owned by any single shareholder of the company (about 20%). Most of the shareholders were related.

Earlier in 1993, A. Max Weitzenhoffer, Jr., who owned the second largest block of stock in the company, offered to buy the shares of stockholders who were no longer interested in the business. He asked Merrill Lynch to appraise the value of a minority interest. Merrill Lynch delivered a formal opinion on March 29, 1994 that the fair market value of a minority interest was $29.77 per share. Max then purchased a total of 16,960 shares from two stockholders for $29.70 per share.

On the estate tax return, Alice's estate relied on the value set by Merrill Lynch valuing each share at $29.77. The IRS determined a value of $70.79 per share and issued a notice of estate tax deficiency.

The estate petitioned the Tax Court for a redetermination, offering the evidence of the sales as well as the testimony of an expert in business valuation. The Tax Court rejected the evidence of the sales on the ground that they were not at arm's length and that they were "not sufficiently similar to the estate's much larger 21.51 percent interest to make their sales price representative of the value of the estate's stock." The IRS conceded that a 20% discount for lack of marketability should be applied to its initial assessment, for a revised value of $56.50 per share. The Tax Court accepted this value for the estate's stock and assessed a deficiency of $209,546 against the estate.

The Ninth Circuit reversed the judgment and remanded to the Tax Court for entry of judgment for the estate. According to the Ninth Circuit's opinion, "The Tax Court disregarded what should have been dispositive, viz., the price at which stock owned by the Estate had traded between willing and knowledgeable buyers and sellers."

The Ninth Circuit found no reason to reject the sales as evidence of the fair market value of the stock. "The sales took place close to the valuation date. The sellers were under no compulsion to sell. There was no reason for them to doubt Weitzenhoffer's report of the Merrill Lynch valuation." The Ninth Circuit also rejected the contention of the IRS that the relationship between the buyer and sellers affected the sale price.