GIFT TAX ‑- CORPORATE STOCK ‑- VALUATION OF GIFT ‑- EFFECT OF AGREEMENT ON VALUE OF STOCK
A price fixed by stockholders of a corporation in an agreement for the sale or purchase of stock to or from themselves is not binding upon the State in fixing the value of the stock for gift tax purposes, but is one of the factors which must be considered in determining such value.
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May 15, 1953
Honorable E. C. Huntley
Tax Commission of the State of Washington
Olympia, Washington Cite as: AGO 53-55 No. 50
You have requested our opinion whether the price fixed by two stockholders holding the majority stock of a corporation between themselves for the purpose of assuring continued control of the corporation fixes the value of the stock for gift tax purposes.
We conclude that, while the price so fixed is of considerable significance in determining value, it is but one of the factors which must be considered.
Attached to your letter is a buy and sell agreement in which the donor and another shareholder of the corporation, who together hold the majority of the shares in the corporation, each agreed that the survivor would buy the other's stock upon his death for $100 a share. The agreement permitted gifts of the shares subject to its terms.
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RCW 83.56.090 provides in part:
"If a gift is made of property other than money, the amount thereof shall be its true and fair value in money, less any encumbrance thereon at the time such gift is made, and such value shall be determined by the tax commission, and any party in interest may, within thirty days, appeal to the superior court from such determination."
Thus, the amount of the gift is its
"true and fair value in money * * * and such value shall be determined by the tax commission * * *."
This unusually clear and specific language forecloses an arbitrary setting of value for gift tax purposes by a donor of stock. The tax commission itself is expressly directed to determine the money value of the gift.
There appear to be no Washington cases concerning valuation for gift tax purposes. However, our court inIn re Cowles' Estate, 36 Wn. (2d) 710, 219 P. (2d) 964 (1950), considered the problem of valuation of stocks under the inheritance tax statutes. The decedent had entered into an option contract with his son whereby the son obtained the right to purchase decedent's stock in several corporations for varying fixed sums per share. The court held the option contract did not control the appraisal of the stock since the appraisers must consider all factors when determining the value of an estate. At 36 Wn. (2d) 719, the court held:
"It may be that, in some situations, the option price fixed in an agreement restricting the sale of stock should establish the market value for tax purposes; the better view would seem to be that the whole matter lies in the realm of fact and is best ascertained upon all the evidence. [Citing cases]."
In Paul, Federal Estate & Gift Taxation, 1946 Supplement, page 785,et seq., it is stated:
"While restrictive agreements may be taken into consideration in fixing market value, and sometimes may [[Orig. Op. Page 3]] control by themselves, other factors of valuation are generally relevant. A restriction is a factor to be considered, but it may do no more than depress value. The answer in the ordinary case must be a judgment which takes cognizance of every factor."
This analysis, of course, pertains to Federal law, but the wording of the Washington statute is much stronger than that of the Federal statute, I.R.C. § 1005, which provides:
"If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift."
Edwin S. Cohen, in N.Y.U.'s 5th Annual Institute on Federal Taxation, p. 70, comments that
"* * * no clear prediction can be made as to the effect of a restrictive agreement in a gift tax case where the option is not presently exercisable. The value of the right of retention of the stock looms large in fixing the value of the gift. The value of the right of retention in turn depends greatly upon the period which may be expected to elapse before the option may become operative and the probability of its then being exercised. For example, if the option becomes operative at the death of the donor, his life expectancy must be taken into account. If it becomes operative when his employment terminates, the practical prospects of his ceasing to be an employee must be weighed. If it becomes operative only on termination of employment without the consent of the company's board of directors, the likelihood of the board's consent must also be considered."
Spitzer v. Commissioner, 153 F. (2d) 967 (8th Cir. 1946), 5 A.L.R. (2d) 1114, was a case similar to the situation posed here. The A.L.R. headnote to theSpitzer case states:
"[Where] stock in a corporation, all of which was held [[Orig. Op. Page 4]] by its three executives, is subject to an agreement that on the death of any one of them, or retirement without consent of the others, his stock shall be purchased by the corporation or the other stockholders at its book value, or the corporation liquidated, as the surviving executive stockholders may elect, while a factor to be considered in fixing, for Federal gift tax purposes, the value of a gift of stock made by a stockholder while still active in the business, is not controlling." (Emphasis supplied)
Commissioner v. McCann, 146 F. (2d) 385 (2nd Cir. 1944), holds substantially the same as theSpitzer case.
Although the particular situation herein involves an irrevocable buy and sell agreement, the principle of the Spitzer case and the tests set forth in the Cohen article must prevail. However, the additional fact must be borne in mind that the type of restrictive agreement here involved would ordinarily tend to depress the market value of the stock. It is therefore apparent that no general rule can be formulated which would aptly apply to every situation, for each situation must be evaluated upon its own peculiar facts with the principle in mind that while restrictive agreements are not controlling for gift tax purposes, they are a substantial factor which must be considered in determining value.
The gift of this stock about which you inquire passed only an ownership subject to sale for a fixed consideration should the donor predecease the other majority shareholder. The degree of likelihood that the stock will become subject to sale pursuant to the agreement, and the approximate time such sale might occur, can be approximately ascertained by applying the principles set forth by Cohen,supra. However, the likelihood that the sale will occur is but one of the factors which must be considered when determining the money value of the gift as required by RCW 83.56.090.
Very truly yours,
Assistant Attorney General