Amerada Hess Corporation, Successor by Merger to Hess Oil & Chemical Corporation (J. D. Callendar Financial Vice-Pres.) v. Commissioner of Internal Revenue. Amerada Hess Corporation, Successor by Merger to Hess Oil & Chemical Corporation (Harold N. Bast, Vice-Pres.) v. Commissioner of Internal Revenue. White Farm Equipment Company, a Delaware Corporation (Successor to Oliver Corporation, a Delaware Corp.) v. Commissioner of Internal RevenueAmerada Hess Corporation, Successor by Merger to Hess Oil & Chemical Corporation (J. D. Callendar Financial Vice-Pres.) v. Commissioner of Internal Revenue. Amerada Hess Corporation, Successor by Merger to Hess Oil & Chemical Corporation (Harold N. Bast, Vice-Pres.) v. Commissioner of Internal Revenue. White Farm Equipment Company, a Delaware Corporation (Successor to Oliver Corporation, a Delaware Corp.) v. Commissioner of Internal Revenue

May 13, 1975

74-1633

Versions:

Norman Sinrich, S. L. Warhaftig, Paul R. Hessel, David Klingsberg, Esq., of Kaye, Scholer, Fierman, Hays & Handler, New York City, for appellant Amerada Hess Corp.

Meyer Rothwacks, Scott P. Crampton, Ernest J. Brown, Meade Whitaker, Gilbert E. Andrews, Bennet N. Hollander, and Michael J. Roach, Esq., Tax Div., U. S. Dept. of Justice, Washington, D. C., for Commissioner of Internal Revenue, appellee in Nos. 74-1633/4 and appellant in No. 74-1635.

Andre M. Saltoun, Dennis I. Meyer, Francis D. Morrissey, and Neal J. Block, Baker & McKenzie, Chicago, Ill., for appellee White Farm Equipment Co.

Before VAN DUSEN, GIBBONS and HUNTER, Circuit Judges.

OPINION OF THE COURT

VAN DUSEN, Circuit Judge.

On this appeal, Amerada Hess Corporation¹ challenges the Tax Court‘s determination of a deficiency in Hess’ income tax payments for 1964 and 1965;² the Commissioner appeals the same court‘s decision³ that White Farm Equipment Company⁴ had overpaid taxes in the years 1960, 1961 and 1962.⁵

The case has its genesis in a routinely complex corporate acquisition. In March 1960, Oliver Corporation,⁶ Hess’ predecessor,⁷ and White Motor Company,⁸ which owns White Farm,⁹ entered into negotiations aimed at the sale of Oliver‘s farm equipment business¹⁰ to White. The negotiations with White constituted Oliver‘s third attempt in two years to dispose of its farm equipment business.¹¹ Oliver originally sought a cash deal, but when it became apparent that White would not be able to raise enough cash, it was agreed that the bulk of the acquisition price would be paid in White common stock.¹² In order to establish the number of shares which Oliver would receive, the parties had to assign the stock a value. An initial figure of $50.00 per share was adjusted to $48.50 per share. This latter figure represented the closing price of White common quoted by the New York Stock Exchange on June 23, 1960, the date on which the adjustment in assigned value was proposed.

After several months’ negotiations,¹³ an agreement setting out the terms for White‘s acquisition of the Oliver assets was executed on October 3, 1960, subject to approval by shareholders of both corporations.¹⁴ White was to acquire substantially all the working assets of Oliver‘s farm equipment business¹⁵ in exchange for 655,000 shares of White common stock, plus an amount of cash to be determined as of the closing date. The agreement contained a formula, based on the book value of Oliver‘s assets, for ascertaining the total dollar price which White was to pay Oliver.¹⁶ The 655,000 shares of stock, at the assigned value of $48.50 per share, represented $31,767,500.00 of the purchase price. If the value of Oliver‘s assets on the closing date, October 31, 1960, exceeded $31,767,500.00, White would pay Oliver the difference in cash. Conversely, if the value of the assets was less than $31,767,500.00, Oliver would pay White the difference in cash. N.T. 84; White Motor Company Proxy Statement, Exhibit 19-O, at p. 3, P (c). Despite the slide in the stock‘s quoted price between June 23 and October 3, the parties made no attempt to renegotiate the $48.50 per share figure. The assigned value continued to fix the portion of the purchase price Oliver would receive in stock and, thereby, to determine the amount of cash that would change hands. However, neither the written agreement nor any negotiations predating that agreement indicated that the assigned value had any tax or accounting significance.¹⁷

Besides terms relating to the purchase price, the agreement included a Trust Agreement. The White shares were to be held in trust until they were either distributed pro rata to Oliver shareholders, in exchange for Oliver common stock, or sold.¹⁸ Should the shares be sold, no more than 10,000 shares could be acquired by any one purchaser.¹⁹

At special shareholders’ meetings held on October 31, 1960, the shareholders of both White and Oliver approved the agreement. On that date, Oliver transferred its assets to White; in return, White delivered the 655,000 shares to the trustee, paid Oliver $1,508,550.00 in cash, and assumed $281,396.00 of Oliver‘s liabilities.²⁰ White common traded on the New York Stock Exchange at an average price of $36.3125 on October 31. White initially recorded the Oliver assets on its books in an amount which reflected a per share valuation of $36.3125. However, before closing its books for 1960, White was advised by its accountants²¹ to carry the assets at a figure reflecting the assigned valuation of $48.50 per share. White accordingly adjusted the entries to correspond with the higher, assigned value. Oliver²² entered the White common on its books at an aggregate value of $23,784,688.00, which represented a per share price of $36.3125. No alterations were made in this entry.

¹⁹The 10,000 share restriction was included to prevent any one individual from buying a sufficient number of shares to obtain working control of White. The 655,000 shares acquired by Oliver represented 23.7 per cent. of White‘s outstanding stock

During the time the trustee held the shares pending distribution, the stock was to be voted pro rata according to the instructions of Oliver‘s shareholders. Oliver‘s directors had no power to vote as a block the shares held by the trustee.²⁰

²¹See N.T. 89, 91; 61 T.C. at 204

²²As a result of shareholder ratification of the agreement, Oliver‘s name was changed to Cletrac Corporation on October 31

²³These returns were actually filed by White‘s farm equipment subsidiary, which eventually became White Farm. See note 9, supra

²⁴See note 9, supra. The deficiency was actually assessed against Oliver Corporation, but the case caption was amended when Oliver became White Farm

²⁵See note 7, supra

²⁶White Farm‘s predecessor, Oliver, filed its petition appealing from the Commissioner‘s assertion of a deficiency in its tax on September 22, 1969. Amerada Hess filed its petition on September 8, 1970

²⁷See note 3, supra

²⁸But see Seas Shipping Co. v. Commissioner, 371 F.2d 528, 529 (2d Cir.), cert. denied, 387 U.S. 943, 87 S.Ct. 2076, 18 L.Ed.2d 1330 (1967)

²⁹There is no dispute that the correct valuation date is October 31, 1960

³⁰“Intrinsic value” refers to a valuation based on the underlying assets and earnings of a business. “Book value” is a type of intrinsic value. According to the “barter-equation” approach, the value of property given up in an exchange is computed by equating it to the value of the property received in the same exchange

³¹The market may also be an inappropriate measure because the type of stock traded on the exchange differs from the type traded by the parties to the particular transaction. In Ray, etc., Copper Co. v. United States, 268 U.S. 373, 45 S.Ct. 526, 69 L.Ed. 1003 (1925), the Court held that it was not error to use the value of corporate assets rather than the market to fix the value of capital stock, since “(t)he capital stock of a corporation . . . and its shares of stock are entirely different things. The value of one bears no fixed or necessary relation to the value of the other.” Id. at 377, 45 S.Ct. at 528 (citations omitted)

³²In such a situation, the market price is enhanced by a “control premium.”

³³Selling off a very large block of shares which are identical to all other such shares available on the market creates a supply in excess of demand. It is widely accepted that the market quotation of such shares should be reduced to compensate for this price-depressing effect. The reduction is referred to as a “blockage discount.”

³⁴In Strong v. Rogers, this court held that the “wild and unreasonable” market prices during 1927-1929 did not conclusively establish the correct income tax valuation, as they failed to fix a “fair” market value. This view has been disapproved by the commentators. See Porter, supra at 283; Bonbright, supra at 1022

³⁵The Tax Court cites “W. E. Telling Est., a Memorandum Opinion of this Court dated June 28, 1944, where the Court held that negotiations for the sale of stock at a price in excess of the stock‘s trading price on the Cleveland Exchange controlled the fair market value of the stock for estate tax purposes.” Whatever other distinctions may exist between Telling and the present case, it suffices to observe that “memorandum decisions . . . are not generally cited as authorities by the Tax Court or other courts, and are intended to involved questions turning on fact issues or previously decided points.” Surrey, Warren, McDaniel and Ault, Federal Income Taxation, Vol. I, 64 (1972). Moreover, Richard E. Wiles, Jr., 60 T.C. 56, 63 (en banc) (1973), aff‘d on other grounds, 499 F.2d 255 (10th Cir. 1974), cert. denied, 419 U.S. 996, 95 S.Ct. 310, 42 L.Ed.2d 270 (1974), rejected the argument, which was raised by the Commissioner in that case, that the agreed values for stock should be used to compute the amount realized. In Wiles, the Tax Court clearly took the position that “we cannot subscribe to the suggestion that petitioner and (his wife) could have valued those stocks more accurately than the highly organized markets in which they are traded daily. Indeed, cases cited by the Commissioner state that the fair market value of a publicly traded stock is the average of the market high and low upon transfer.”

³⁶See, e. g., Ray etc., Copper Co. v. United States, 268 U.S. 373, 45 S.Ct. 526, 69 L.Ed. 1003 (1925), cited at 61 T.C. 214 (capital stock having no market); Bar L Ranch, Inc. v. Phinney, 426 F.2d 995 (5th Cir. 1970), cited at 61 T.C. 213 (valuation of notes or accounts receivable of an insolvent obligor, there being no market for such paper); Ullmann v. Commissioner, 264 F.2d 305 (2d Cir. 1959), cited at 61 T.C. 209 (involving the characterization and valuation of a covenant not to compete a commodity also lacking a market on the exchange or over the counter); Glen W. Lucas, Jr., 58 T.C. 1022 (1972); Edmond E. Maseeh, 52 T.C. 18 (1969), cited at 61 T.C. 211 (also involving covenants not to compete); Southern Natural Gas Co. v. United States, 412 F.2d 1222, 188 Ct.Cl. 302 (1969), cited at 61 T.C. 208 (“The preferred stock in question was newly issued and was neither listed on any exchange nor traded over the counter. Such private sales as had occurred were insignificant. Accordingly, it had no established or readily ascertainable market value or price . . . other than the value assigned to the shares by the contracting parties.“), 412 F.2d at 1250-51

³⁷Authority for this proposition is Judge Friendly‘s concurrence in Seas Shipping Co. v. Commissioner, 371 F.2d 528 (2d Cir.), cert. denied, 387 U.S. 943, 87 S.Ct. 2076, 18 L.Ed.2d 1330 (1967), which is distinguishable because the parties’ agreed price was, in that case, also found reasonable by the Maritime Commission. In Estate of Rogers v. Commissioner, 445 F.2d 1020 (2d Cir. 1971), also relied on by the Tax Court, the question was the fair market value of real estate and of a mortgage on real estate items with no clear market such as that for fungible goods

³⁸The Danielson court also implied that a valuation agreement could be freely attacked by the Commissioner an implication which runs counter to the Tax Court‘s reasoning in the present case

“Next, we are not here involved with a situation where the Commissioner is attacking the transaction in the form selected by the parties, . . . . Where the Commissioner attacks the formal agreement the Court involved is required to examine the ‘substance’ and not merely the ‘form’ of the transaction. This is so for the very good reason that the legitimate operation of the tax laws is not to be frustrated by forced adherence to the mere form in which the parties may choose to reflect their transaction. . . . In contrast, the Commissioner here is attempting to hold a party to his agreement unless that party can show in effect that it is not truly the agreement of the parties. And to allow the Commissioner alone to pierce formal arrangements does not involve any disparity of treatment because taxpayers have it within their own control to choose in the first place whatever arrangements they care to make.”

378 F.2d at 774-75 (citations omitted). The Tax Court, finding that appellants had failed to meet the looser “strong proff” standard, did not decide whether Danielson applied. 61 T.C. at 211.³⁹

⁴⁰See note 39, supra

⁴¹The only effect of the restriction as to the number of shares that might be sold to a single purchaser was to negate any control possibilities. See note 19, supra. This restriction does not, therefore, qualify as an “exceptional” attribute

⁴²Both findings are unimpeachable under the “clearly erroneous” rule. See Commissioner v. Duberstein, 363 U.S. 278, 289-91, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960)

⁴³See Part I-A, supra

⁴⁴In fact, there was evidence that strongly implied the opposite. The aggregate book value of the assets was $42,905,763.00

Statement of John Peter Dragin, p. 6, Tax Ct. Docket Nos. 4792-69 and 5842-70.

The purchase price computed according to paragraph 7 of the October 3, 1960, agreement, see note 16, supra, was $34,215,446. Kriser, who appraised some of the assets for White, attached to the real estate, plants, and equipment a “liquidating value” price. Kriser‘s statement noted that ” ‘liquidating value’ is to be distinguished from ‘fair market value.’ . . . Liquidating value is similar to fair market value, except that a reasonable time to find a purchaser is not allowed. It generally restricts the class of buyers to spontaneous buyers those who would attend an auction sale and buy on the spot, after only a short period of inspection or thought.” Statement of Sidney P. Kriser, Tax Court Docket Nos. 4792-69 & 5842-70, at 5.

J. P. Dragin, who also inspected the same assets, averred that, in his experience, “fair market values (of real estate) were higher than book values due to increasing costs and rising real estate values.” Statement of John Peter Dragin, Tax Court Docket Nos. 4792-69 & 5842-70, pp. 9, 7. He also admitted that he had made no “effort to inspect and appraise the branch machinery and equipment to the extent we did the other assets” because the agreed purchase price of $383,570.00 “was minor in relation to the total transaction.” Id. at 9. Dragin also stated that the book value of the tooling, which was in excess of the agreed purchase price, was “conservative and considerable amounts of tooling having no book value could still be used in production and would have substantial value . . . .” Id. at 11. The inventory, for which White agreed to pay $19 million, had a book value of approximately $24 million. Dragin found its replacement value to be approximately $32 million. These examples of the diverse views of, and approaches to, the value of these various assets underscore the complexity of asset valuation. They also raise questions as to the solidity of the basis for the Tax Court‘s conclusion that “the value assigned in the . . . agreement . . . constitutes a much more reliable measure of the value of those shares” than the market place. 61 T.C. at 215.⁴⁵

⁴⁶Although the Tax Court expressed doubt as to the validity of the experts’ methods of computing the discount, there was no contradictory testimony to discredit these valuations by several experts who reached very similar conclusions. See N.T. 342, 346-47; 349; 357-59; 443, 447-48; 453-65; 472-80, 492-502

^1-1The majority seems to hold that the applicability of blockage is a question of law which necessarily follows from our holding in Part I of this opinion. In turn, the majority concludes that the amount of blockage is a question of fact. Because White failed to offer any expert testimony, the majority accepts Hess’ testimony on this fact

In my view, both the applicability of and the amount of blockage are factual questions. The applicability of blockage does not necessarily follow from our holding in Part I. The tax court made a factual determination that blockage was inappropriate on the facts of this case. Thus, the issue of the appropriate amount of blockage, which is all that the majority addresses, was not reached by the tax court and should not be reached by us.^2-1

In my view, the cases cited by the majority do not hold that the applicability of blockage is a question of law. In Commissioner v. Stewart‘s Estate, 153 F.2d 17 (3d Cir., 1946), decedent Stewart held a block of stock which was valued at the market price on the date of death. Under treasury regulations prevailing at the time, the tax court could and in fact did consider “other relevant facts and elements of value.” (emphasis added.) 153 F.2d at 19, including a discount for blockage. In affirming, this court held that the tax court “did not err when it found ‘fair market value’ by weighing all relevant indicia of what the stocks would bring at market.” (emphasis added) 153 F.2d at 19. Determination of what factors are relevant to valuation are peculiarly factual. Stewart‘s Estate in no way holds that blockage is required as a matter of law whenever market price is used to value a block of securities

Similarly in Richardson v. Commissioner, 151 F.2d 102 (2d Cir., 1945) the Second Circuit affirmed the tax court‘s determination that a blockage discount was inappropriate. The court stated:

. . . Surely the Tax Court, if not convinced by the evidence, was not obliged to accept the conclusions expressed by the petitioner‘s experts. . . . Nor are we at liberty to disturb the ultimate finding merely because an independent appraisal of the evidence might have led us to some different finding of the underlying facts and factors. 151 F.2d at 104 (citations deleted).

Once again the factual nature of the tax court‘s decision whether or not to apply blockage is evidenced.

In Helvering v. Maytag, 125 F.2d 55 (8th Cir., 1942) the tax court stated “the size of a block of listed stock (is only one) . . . factor to be considered (for) . . . valuation for gift or estate tax purposes.” 125 F.2d at 62-63. With this language, the court approved the tax court‘s application of a blockage discount for estate tax purposes. Once again, however, the conclusion is inescapable that the applicability of blockage in a given case hinges on factual determinations.^3-1

^4-1The White stock declined nine percent between the New York Stock Exchange closing of 401/4 on the day of the press release, October 6 and the day of the actual exchange. October 31, when the stock closed at 365/8. The decrease in the New York Stock Exchange price paralleled the release of information to the public. By the date of the actual exchange, the financial community had digested this information and the share price began to rise shortly thereafter. Thus, it was possible for the tax court to have found that discounting had already occurred with the release of information on the proposed exchange

It is interesting to note that the actual pattern of price change of the White stock during the relevant period closely resembles the price activity suggested by Hess’ experts as the basis for blockage discount. For example, there was testimony that the simple average price decline (adjusted for market factors) of three large New York Stock Exchange secondary distributions during 1960 was 12.3 percent during the 2-5 weeks between the day before registration and the day of the offering. See Appendix at 323-26, 511-19.

The similarity between the simulated discount suggested by the experts and the actual decrease in share price which occurred with the release of information is in striking support of my view that to apply a blockage discount in this case is to engage in double counting.^5-1

^6-1In Seas Shipping Co., Inc. v. Commissioner, 371 F.2d 528, 530 n. 3 (2d Cir., 1967), the court implied that a blockage discount could have no applicability where an actual non-market rather than a simulated market transfer was utilized for valuation purposes. Although the language in Seas Shipping is dicta since the case specifically values the shares by a barter exchange method, I deem the court‘s logic relevant and persuasive

Notes

Hereinafter “Hess.”

1-1

The majority seems to hold that the applicability of blockage is a question of law which necessarily follows from our holding in Part I of this opinion. In turn, the majority concludes that the amount of blockage is a question of fact. Because White failed to offer any expert testimony, the majority accepts Hess’ testimony on this fact. In my view, both the applicability of and the amount of blockage are factual questions. The applicability of blockage does not necessarily follow from our holding in Part I. The tax court made a factual determination that blockage was inappropriate on the facts of this case. Thus, the issue of the appropriate amount of blockage, which is all that the majority addresses, was not reached by the tax court and should not be reached by us.

The decision in Docket No. 5842-70 assessed a deficiency for 1964 in the amount of $1,687,232.00. The decision in Docket No. 1367-71 assessed a deficiency for 1965 in the amount of $1,541,601.00. See note 3 infra. Hess is appellant in Nos. 74-1633 and 74-1634.

2-1

In my view, the cases cited by the majority do not hold that the applicability of blockage is a question of law. In , decedent Stewart held a block of stock which was valued at the market price on the date of death. Under treasury regulations prevailing at the time, the tax court could and in fact did consider “other relevant facts and elements of value.” (emphasis added.) , including a discount for blockage. In affirming, this court held that the tax court “did not err when it found ‘fair market value’ by weighing all relevant indicia of what the stocks would bring at market.” (emphasis added) . Determination of what factors are relevant to valuation are peculiarly factual. Stewart‘s Estate in no way holds that blockage is required as a matter of law whenever market price is used to value a block of securities. Similarly in the Second Circuit affirmed the tax court‘s determination that a blockage discount was inappropriate. The court stated: . . . Surely the Tax Court, if not convinced by the evidence, was not obliged to accept the conclusions expressed by the petitioner‘s experts. . . . Nor are we at liberty to disturb the ultimate finding merely because an independent appraisal of the evidence might have led us to some different finding of the underlying facts and factors. (citations deleted). Once again the factual nature of the tax court‘s decision whether or not to apply blockage is evidenced. In the tax court stated “the size of a block of listed stock (is only one) . . . factor to be considered (for) . . . valuation for gift or estate tax purposes.” . With this language, the court approved the tax court‘s application of a blockage discount for estate tax purposes. Once again, however, the conclusion is inescapable that the applicability of blockage in a given case hinges on factual determinations.

. Docket Nos. 5842-70 and 1367-71, see note 2 supra, were consolidated with Docket NO. 4792-69, which involved White Farm‘s income tax liability. See note 5 infra. Since all three docketed cases grew out of single transaction, the Commissioner filed a motion to consolidate the cases. This motion was granted on May 19, 1970, resulting in a joint trial and one opinion covering all cases. On March 28, 1974, Amerada Hess filed timely notices of appeal to the Third, Seventh and Eighth Circuits in Docket Nos. 5842-70 and 1367-71. On April 4, 1974, the Commissioner filed timely notices of appeal to the Third and Seventh Circuits in Docket No. 4792-69. Pursuant to 26 U.S.C. § 7482(b), the Commissioner and White Farm filed a stipulation on June 17, 1974, designating the venue of the Commissioner‘s appeal in the Third Circuit. The appeals of Amerada Hess to the Seventh and Eighth Circuits were dismissed on July 12 and July 1, respectively. On July 29, 1974, this court approved a stipulation entered by all three parties and allowed consolidation of the appeals for purposes of briefing, argument and decision. The Commissioner is appellant in No. 74-1635.

3-1

A press release containing financial data about the proposed transfer was released on October 6, 1960, at least three weeks before the actual exchange took place on October 31. See Appendix at 632

Hereinafter “White Farm.”

4-1

The White stock declined nine percent between the New York Stock Exchange closing of 401/4 on the day of the press release, October 6 and the day of the actual exchange. October 31, when the stock closed at 365/8. The decrease in the New York Stock Exchange price paralleled the release of information to the public. By the date of the actual exchange, the financial community had digested this information and the share price began to rise shortly thereafter. Thus, it was possible for the tax court to have found that discounting had already occurred with the release of information on the proposed exchange. It is interesting to note that the actual pattern of price change of the White stock during the relevant period closely resembles the price activity suggested by Hess’ experts as the basis for blockage discount. For example, there was testimony that the simple average price decline (adjusted for market factors) of three large New York Stock Exchange secondary distributions during 1960 was 12.3 percent during the 2-5 weeks between the day before registration and the day of the offering. See Appendix at 323-26, 511-19. The similarity between the simulated discount suggested by the experts and the actual decrease in share price which occurred with the release of information is in striking support of my view that to apply a blockage discount in this case is to engage in double counting.

The decision in Docket No. 4792-69 computed overpayments in the amounts of $425,702.20 (1960), $1,572,710.04 (1961), and $248,059.32 (1962).

5-1

See n. 4 supra

Hereinafter “Oliver.”

6-1

In , the court implied that a blockage discount could have no applicability where an actual non-market rather than a simulated market transfer was utilized for valuation purposes. Although the language in Seas Shipping is dicta since the case specifically values the shares by a barter exchange method, I deem the court‘s logic relevant and persuasive

After the transaction which gave rise to the suit, Oliver (referred to by the Tax Court as “Old Oliver“), first changed its name to Cletrac Corporation and then, in 1962, merged with Hess, Inc. to form Hess Oil and Chemical Corporation. In 1969, yet another merger between Hess Oil and Chemical Corp. and Amerada Petroleum Corp. produced Amerada Hess Corp., the appellant in Nos. 74-1633 and 74-1634.

Hereinafter “White.”

After the acquisition of its assets and name by White, Oliver Corporation (referred to by the Tax Court as “New Oliver“) was a wholly-owned subsidiary of White Motor. In 1969, New Oliver merged with Minneapolis Moline, Inc.; the surviving corporation was renamed White Farm Equipment Company. White Farm, the wholly-owned subsidiary of White, is appellee in No. 74-1635.

The manufacture and marketing of farm equipment was Oliver‘s primary business at the time. See N.T. 194-95.

In 1959, Oliver had “shaken hands” on an agreement for a share exchange with Studebaker-Packard. However, the Studebaker-Packard Board of Directors failed to approve the plan. Just before the negotiations with White began, Minneapolis Moline, another farm equipment manufacturer, proposed a purchase and lease of certain assets. Oliver pursued the White deal to the exclusion of Minneapolis Moline‘s offer, however. See Exhibit 15-K (Minutes of a Special Meeting of the Board of Directors of the Oliver Corporation, June 23, 1960). The reasons for Oliver‘s desire to sell were set forth in its proxy statement, Exhibit 18-N, as follows: “The Board of Directors of Oliver has been concerned over the Company‘s long-range prospects. Profits in recent years have not been satisfactory. Earnings in 1959 were slightly under 5% of net worth. Dividends in 1959 were slightly under 2% of net worth. The common stock of Oliver has been selling at a substantial discount under the Stockholders’ Investment (net worth or book value). . . . The process of improving profit levels of Oliver is a lengthy task. In recent years, Oliver has discontinued or combined several operations in order to eliminate losses, improve efficiency, and release capital. . . . As an alternative, the Board of Directors has sought to merge Oliver with another company, or to sell its business to another company in order to obtain the benefits of the greater efficiency inherent in integrated manufacturing and of an expanded sales organization. In recent years there have been lengthy negotiations with several companies, looking toward merger or sale.”

See N.T. 193. White was not to acquire Oliver‘s cash, accounts receivable, or liabilities, although eventually a very small proportion of Oliver‘s liabilities was assumed. See N.T. 197. The payment of some cash “boot” was contemplated.

On June 17, 1960, White submitted its first formal proposal for purchasing “all the tangible assets of The Oliver Corporation . . . held or used in connection with their farm equipment business . . ..” Exhibit 11. Because Oliver‘s inventory was constantly changing, no dollar amount could be fixed as the purchase price before October 31, 1960, the designated closing date. Therefore, the proposal set forth a formula, based on the book value of the assets to be acquired, for computing the price White would pay for the business. “The purchase price is to be an amount equal to the aggregate sum of the book value (after depreciation) of the fixed assets to be sold plus the book value (on the LIFO basis and after deducting the reserve for obsolescence) of the inventory to be sold, less 20%, of the aggregate sum of the book value of said fixed assets and of said inventory determined as aforesaid.” Exhibit 11. The price would be computed on the closing date and would be paid “(a) by the delivery of five hundred thousand (500,000) shares of Common Stock of The White Motor Company, to be considered as having a value of Twenty-five Million Dollars ($25,000,000), and (b) the balance of the purchase price . . . (would) be paid in cash or in debentures at par . . . .” Id. White thus valued its shares at $50.00 per share. Oliver‘s Board of Directors considered this proposal at its meeting on June 23, 1960. The Board was favorably disposed toward dealing with White, but suggested a change in both the number and the value of the shares offered by White, as shown by this Resolution adopted that date: “Resolved, that Alva W. Phelps and A. L. Mailman be, and they hereby are, authorized to continue negotiations with The White Motor Company for the sale of certain assets of the Company to The White Motor Company on the basis of the letter dated June 17, 1960, from J. P. Dragin, Executive Vice President of The White Motor Company, to A. L. Mailman, except that instead of a portion of the purchase price being paid by 500,000 shares of The White Motor Company common stock valued at $50 per share, a portion shall be paid by one share of The White Motor Company‘s common stock for each five shares of The Oliver Corporation‘s outstanding Common Stock (including that under option), which payment shall be valued on the basis of the closing market price of The White Motor Company stock on June 23, 1960.” No serious attempt to effect the five-for-one stock distribution was made by A. L. Mailman, Oliver‘s chief negotiator, on Oliver‘s behalf and it was deleted from the final agreement. N.T. 261. Oliver would accept White shares valued, not at $50.00 per share, but at $48.50 per share, the June 23, 1960, closing price of White common on the New York Stock Exchange. White agreed to the change in valuation. Due to difficulties which White encountered in obtaining sufficient funds to secure the $20,000,000. of working capital needed for the farm equipment business and to pay the cash “boot” for the acquisition, the number of shares to be received by Oliver was subsequently increased to 655,000. The assigned valuation of $48.50 per share was unchanged, however, even though the stock exchange price of White common had fallen several points since June 23, 1960. See Exhibits 17-M; 18-N.

“14. The Oliver Corporation agrees that it will cause a meeting of its shareholders to be duly called, which will be held not later than October 31, 1960, . . . . Said meeting shall be called and held for the purpose of acting upon a proposal to approve and authorize this Agreement and the sale to the White Company of properties and assets of The Oliver Corporation as in this Agreement set forth, for the consideration and upon the terms and conditions in this Agreement provided . . . and The Oliver Corporation agrees that its Board of Directors will do all things necessary or proper on its part to be done to authorize and provide for the carrying out of the provisions of this Agreement and that affirmative action by its shareholders on said proposal will be recommended to its shareholders by its Board of Directors. 15. The White Company agrees that it will cause a meeting of its shareholders to be duly called, which will be held not later than October 31, 1960 . . .. Said meeting shall be called and held for the purpose of acting upon a proposal to approve this Agreement and the purchase by the White Company of properties and assets of The Oliver Corporation as in this Agreement set forth, for the consideration and upon the terms and conditions in this Agreement provided, and the White Company agrees that its Board of Directors will do all things necessary or proper on the part of the White Company to be done to authorize and provide for the carrying out of the provisions of this Agreement, and that affirmative action by its shareholders on said proposal will be recommended to its shareholders by its Board of Directors.” White Motor Company Proxy Statement, Exhibit 19-O.

See note 12, supra. White also acquired Oliver‘s two foreign subsidiaries, Oliver International, S. A., and The Oliver Corporation, Argentina, S. A.

“7. Subject to the conditions in this Agreement set forth, the White Company agrees to pay to The Oliver Corporation for all of the properties and assets hereinabove described . . . a sum which is equal to the sum of fifty per cent (50%) of the book value, at the close of business on the Closing Date, of the closed South Bend Foundry, plus eighty per cent (80%) of the book value, at the close of business on the Closing Date, of the inventories and, except the closed South Bend Foundry, of the land, land improvements, buildings and improvements, railroad sidings, machinery and equipment, furniture and fixtures, dies, jigs, fixtures, material handling equipment, patterns, flasks, automobiles, trucks, tractors and other additions in process, purchased by the White Company from The Oliver Corporation under the provisions of this Agreement. The book value at the close of business on the Closing Date, of the property in the preceding sentence described shall be determined in the same manner and by the same accounting methods in all respects, including the LIFO method of taking and pricing inventories and the methods of allowances for obsolescence and depreciation (not including the Reserve for Losses on Fixed Assets in Closed Plants) of fixed assets, as were used and reflected in the ‘Consolidated Statement of Financial Position’ of The Oliver Corporation and subsidiaries, as of October 31, 1959, which was certified by Arthur Andersen & Co. and included in the ‘1959 Annual Report’ of The Oliver Corporation (except that certain items of consigned inventory may be transferred to trade receivables through note settlements). 8. The purchase price hereinabove provided for in paragraph 7 shall be paid as follows: The sum of Thirty-one Million Seven Hundred Sixty-seven Thousand Five Hundred Dollars ($31,767,500) shall be paid by the White Company by the delivery, on the Closing Date, to The Cleveland Trust Company, of Cleveland, Ohio, of certificates for six hundred fifty-five thousand (655,000) shares of the Common Stock of the White Company, made out and registered in the name of said The Cleveland Trust Company, or its nominee, to be held and disposed of by said Trust Company as provided in the Trust Agreement . . .. As soon as practicable after the Closing Date, the purchase price of the properties and assets . . . at the close of business on the Closing Date, shall be computed in the manner hereinabove . . . provided, and thereupon the White Company shall forthwith pay to The Oliver Corporation the unpaid balance, if any, of said purchase price, as so computed, by check payable to the order of The Oliver Corporation. If the said computation shall show that the purchase price is less than Thirty-one Million Seven Hundred Sixty-seven Thousand Five Hundred Dollars ($31,767,500), The Oliver Corporation shall forthwith pay to the White Company by The Oliver Corporation‘s check the difference between the said purchase price and the said sum of Thirty-one Million Seven Hundred Sixty-seven Thousand Five Hundred Dollars ($31,767,500).” Id.

Indeed, there were indications in both companies’ proxy statements that the $48.50 valuation was not meant to control for tax or accounting purposes. As J. P. Dragin, White‘s chief negotiator, recognized in his trial testimony, N.T. 75, the notes to the pro forma balance sheet included in White‘s proxy materials implied that the market value on the closing date would control for accounting purposes: “NOTE C The pro forma adjustments are as follows: (2) These amounts represent the excess of Oliver book value over White acquisition cost. The amount of excess will be adjusted for the difference between the assigned value of $48.50 per share of White common stock and its market value on the closing date. (3) Issuance of 655,000 shares of common stock at an assigned value of $48.50 per share, or an aggregate of $31,767,500, of which the sum of $1.00 per share is credited to the Common Stock Account and the sum of $47.50 per share is credited to Capital in Excess of Par Value of Capital Stock. The aggregate credit to Capital in Excess of Par Value of Capital Stock of $31,112,500 is subject to a decrease or an increase in the same amount as the adjustment to the excess referred to in Note C(2) above.” Exhibit 19-O, Note C, at page 20. The Oliver proxy materials also indicated that the market price on the closing date would control for tax purposes: “Among other things, they are subject to variations in inventories (including inventories to be sold to White), trade receivables, bank debt, other items, profit or loss for the period from July 31, 1960, to October 31, 1960, tax adjustments which may arise from the difference between the assigned value of $48.50 per share of White common stock and its fair value on the Closing Date, and matters which are not foreseen by the Directors at this time. A decline in the value of the White common stock prior to the Closing Date will increase the loss on the sale. This increase in loss would amount to $4,912,500 if that value were the closing market price of White common stock on September 26, 1960. In addition, as indicated on page 4, the Closing Date may be a date later than October 31, 1960. Oliver makes no representation as to what the market value of White common stock will be at the Closing Date. (1) In October, 1960, the Company entered into an agreement with The White Motor Company providing for the sale of the farm equipment business and certain related assets of Oliver to White at an assigned value of $31,767,500, and for cash estimated at $9,045,000 depending on the book value of the assets at the closing date. The aggregate market value of White common stock to be issued was $4,912,500 less than the assigned value thereof based on the closing price of White stock on the New York Stock Exchange on September 26, 1960. Based upon the table on page 7, prepared by the Company, the net book value as of July 31, 1960, of the assets to be sold ($51,410,000) exceeds the sum of the estimated cash and the market value of the 655,000 shares of White stock to be received. As discussed on page 8, the ultimate loss on the transaction is dependent upon the book value of the assets to be sold, the Federal income tax status of the company and the fair value of White common stock at the closing date, which is expected to be October 31, 1960, and the determination of reserve adjustments that may be required at that date. No recognition has been given in the accompanying consolidated financial statements and the summary of consolidated earnings to this potential loss on sale of assets.”

Distribution to Oliver shareholders was dependent upon Oliver‘s receiving an Internal Revenue Service ruling to the effect that such a distribution would be taxed to the shareholders as a capital gain or loss, rather than as an ordinary dividend. The ruling was received and distribution of White stock to Oliver‘s shareholders began on July 31, 1961. The Tax Court found that “approximately 653,770 shares of the block of 655,000 shares were either distributed directly to the Old Oliver shareholders or sold on the market and the proceeds made available to the shareholders. The remainder . . . was held by Old Oliver as an investment.”

The 10,000 share restriction was included to prevent any one individual from buying a sufficient number of shares to obtain working control of White. The 655,000 shares acquired by Oliver represented 23.7 per cent. of White‘s outstanding stock. During the time the trustee held the shares pending distribution, the stock was to be voted pro rata according to the instructions of Oliver‘s shareholders. Oliver‘s directors had no power to vote as a block the shares held by the trustee.

See note 12, supra

See N.T. 89, 91;

As a result of shareholder ratification of the agreement, Oliver‘s name was changed to Cletrac Corporation on October 31

These returns were actually filed by White‘s farm equipment subsidiary, which eventually became White Farm. See note 9, supra

See note 9, supra. The deficiency was actually assessed against Oliver Corporation, but the case caption was amended when Oliver became White Farm

See note 7, supra

White Farm‘s predecessor, Oliver, filed its petition appealing from the Commissioner‘s assertion of a deficiency in its tax on September 22, 1969. Amerada Hess filed its petition on September 8, 1970

See note 3, supra

But see , cert. denied, , ,

There is no dispute that the correct valuation date is October 31, 1960

“Intrinsic value” refers to a valuation based on the underlying assets and earnings of a business. “Book value” is a type of intrinsic value. According to the “barter-equation” approach, the value of property given up in an exchange is computed by equating it to the value of the property received in the same exchange

The market may also be an inappropriate measure because the type of stock traded on the exchange differs from the type traded by the parties to the particular transaction. In , , , the Court held that it was not error to use the value of corporate assets rather than the market to fix the value of capital stock, since “(t)he capital stock of a corporation . . . and its shares of stock are entirely different things. The value of one bears no fixed or necessary relation to the value of the other.” , (citations omitted)

In such a situation, the market price is enhanced by a “control premium.”

Selling off a very large block of shares which are identical to all other such shares available on the market creates a supply in excess of demand. It is widely accepted that the market quotation of such shares should be reduced to compensate for this price-depressing effect. The reduction is referred to as a “blockage discount.”

In Strong v. Rogers, this court held that the “wild and unreasonable” market prices during 1927-1929 did not conclusively establish the correct income tax valuation, as they failed to fix a “fair” market value. This view has been disapproved by the commentators. See Porter, supra at 283; Bonbright, supra at 1022

The Tax Court cites “W. E. Telling Est., a Memorandum Opinion of this Court dated June 28, 1944, where the Court held that negotiations for the sale of stock at a price in excess of the stock‘s trading price on the Cleveland Exchange controlled the fair market value of the stock for estate tax purposes.” Whatever other distinctions may exist between Telling and the present case, it suffices to observe that “memorandum decisions . . . are not generally cited as authorities by the Tax Court or other courts, and are intended to involved questions turning on fact issues or previously decided points.” Surrey, Warren, McDaniel and Ault, Federal Income Taxation, Vol. I, 64 (1972). Moreover, , aff‘d on other grounds, , cert. denied, , , , rejected the argument, which was raised by the Commissioner in that case, that the agreed values for stock should be used to compute the amount realized. In Wiles, the Tax Court clearly took the position that “we cannot subscribe to the suggestion that petitioner and (his wife) could have valued those stocks more accurately than the highly organized markets in which they are traded daily. Indeed, cases cited by the Commissioner state that the fair market value of a publicly traded stock is the average of the market high and low upon transfer.”

See, e. g., , , , cited at (capital stock having no market); , cited at (valuation of notes or accounts receivable of an insolvent obligor, there being no market for such paper); , cited at (involving the characterization and valuation of a covenant not to compete a commodity also lacking a market on the exchange or over the counter); ; , cited at (also involving covenants not to compete); , cited at (“The preferred stock in question was newly issued and was neither listed on any exchange nor traded over the counter. Such private sales as had occurred were insignificant. Accordingly, it had no established or readily ascertainable market value or price . . . other than the value assigned to the shares by the contracting parties.“),

Authority for this proposition is Judge Friendly‘s concurrence in , cert. denied, , , , which is distinguishable because the parties’ agreed price was, in that case, also found reasonable by the Maritime Commission. In , also relied on by the Tax Court, the question was the fair market value of real estate and of a mortgage on real estate items with no clear market such as that for fungible goods

The Danielson court also implied that a valuation agreement could be freely attacked by the Commissioner an implication which runs counter to the Tax Court‘s reasoning in the present case. “Next, we are not here involved with a situation where the Commissioner is attacking the transaction in the form selected by the parties, . . . . Where the Commissioner attacks the formal agreement the Court involved is required to examine the ‘substance’ and not merely the ‘form’ of the transaction. This is so for the very good reason that the legitimate operation of the tax laws is not to be frustrated by forced adherence to the mere form in which the parties may choose to reflect their transaction. . . . In contrast, the Commissioner here is attempting to hold a party to his agreement unless that party can show in effect that it is not truly the agreement of the parties. And to allow the Commissioner alone to pierce formal arrangements does not involve any disparity of treatment because taxpayers have it within their own control to choose in the first place whatever arrangements they care to make.” (citations omitted). The Tax Court, finding that appellants had failed to meet the looser “strong proof” standard, did not decide whether Danielson applied. .

As justification for its use of both the “strong proof” standard and the “barter-equation method” of valuation, the Tax Court relied primarily on Seas Shipping Co., supra. In Seas Shipping, the Second Circuit, reluctantly, affirmed the Tax Court‘s use of the barter-equation method to value shares of Moore-McCormack Lines (Mooremac) which were traded on the New York Stock Exchange. Seas Shipping is, however, distinguishable from the case now before this court in several significant respects. At the time the parties agreed to value the Mooremac stock at $30.00 per share, the exchange price of the stock was approximately $23.00 per share. Although the block of 300,000 shares comprised “a 13% ownership in a successful corporation and was the largest block held by any Mooremac shareholder,” the block “did not represent a controlling interest.” . However, as part of the deal, Seas Shipping executed “a contemporaneous voting trust agreement . . . with certain Mooremac shareholders by which (Seas) received control of two directorships on Mooremac‘s board of ten for a period of five years . . . .” This agreement was found by the Tax Court to enhance the value of the shares Seas acquired; the court of appeals saw this factor as a mere make-weight. Other factors considered by the court to support the $30.00 per share agreed value were (1) “Mooremac had agreed to continue, under the same name, the shipping line previously operated by (Seas) and to hire certain of (Seas) employees,” ; (2) “the book value of Mooremac shares during 1957 was in excess of $39,” ; (3) “the annual market of 166,000 shares was too ‘thin’ to fix the value of a block of 300,000 shares,” ; (4) “testimony concerning the value of the ships was ample and convincing,” ; (5) “the Maritime Board in its approval of the sale of the ships, stated that the value of the stock was $30 per share,” . This latter consideration was accorded weight by Judge Friendly in his concurrence at . By contrast, the Tax Court in the present case relied almost entirely on the parties’ evaluation. Of the factors which supported the validity of the agreed share price in Seas Shipping, only the thinness of the market arguably applies in the present case and this cannot be, alone, determinative. See p. 21, infra. In particular, the testimony as to asset value in this case cannot be characterized as either ample or convincing, as it was in Seas Shipping. See note 44, infra. The Tax Court also observed that “the trading price (on October 31, 1960) . . . was the lowest price at which the stock traded in 1960 and 1961.” Id. That price, less than a point below the average selling price on several subsequent days, was not radically out of line with the average exchange quotations in the months immediately preceding the valuation date. There was, moreover, uncontroverted testimony that the market for White common on October 31, 1960, was not an aberrational one. The expert witnesses who testified on this point viewed the steady decline in the price of the stock after June 23 as part of an overall market downturn occasioned by the poor business climate in 1960 and aggravated by the approach of the Presidential election. N.T. 465; 485. In addition, “White was not having a good year, and they were bringing off a fairly large transaction that year (the Oliver acquisition) which added an element of uncertainty to the situation.” N.T. 465. The uncontradicted evidence establishes that the market price on October 31, 1960, was not aberrational, either in terms of a range of contemporaneous quotations on White shares or in terms of the performance of the whole market. The mere fact that the October 31 value was the lowest quoted in 1960 was thus an insufficient basis for rejecting this market price as the fair market value of the stock.

See note 39, supra

The only effect of the restriction as to the number of shares that might be sold to a single purchaser was to negate any control possibilities. See note 19, supra. This restriction does not, therefore, qualify as an “exceptional” attribute

Both findings are unimpeachable under the “clearly erroneous” rule. See , ,

See Part I-A, supra

In fact, there was evidence that strongly implied the opposite. The aggregate book value of the assets was $42,905,763.00.

Old Oliver‘s “Assets Aquired	Book Value at October 31,1960	Purchase Price Computed in Accordance with Paragraph 7 of the October 3,1960 Agreement
1. Real estate on plants were located.	$ 3,698,551	$ 2,958,840
2. Machinery and equipment in the plants.	$ 7,755,727	$ 6,182,976
3. Real estate on which branches were located.	$ 2,861,343	$ 2,207,120
4. Machinery and equipment in the branches.	$ 479,462	$ 383,570
5. Tooling.	$ 3,905,740	$ 3,124,593
6. Inventory.	$23,777,820	$19,022,256
Subtotal	$42,478,643	$33,879,355
Prepaid Expenses	$ 427,120	$ 336,091
TOTAL	$42,905,763	$34,215,446”

Statement of John Peter Dragin, p. 6, Tax Ct. Docket Nos. 4792-69 and 5842-70.

Even though the Tax Court did not have to decide the issue, it appeared to disagree that the blockage discount and the values assigned that discount by the experts’ testimony were relevant in this case. See

Although the Tax Court expressed doubt as to the validity of the experts’ methods of computing the discount, there was no contradictory testimony to discredit these valuations by several experts who reached very similar conclusions. See N.T. 342, 346-47; 349; 357-59; 443, 447-48; 453-65; 472-80, 492-502