Valuation of Closely-Held Stock for Federal Tax Purposes: Approach to an Objective Method

* Research Assistant in Statistics, The School of Business, The University of Chicago. ** Associate Professor of Finance, The School of Business, The University of Chicago. ***Member of the Ohio Bar. 1. This excludes unlisted stock which is traded over-the-counter. 2. U.S. Treas. Reg. 105, ?81.10(c) (1944); U.S. Treas. Reg. 108, ?86.19(c) (1943). There is no assurance the market would have absorbed additional shares on a given date at then prevailing prices; the market might have been broken under the weight of further offerings. The judge-made blockage rule is a response to this difficulty. This rule, applicable only in respect of large blocks of stock, Mott v. Commissioner, 139 F.2d 317 (6th Cir. 1943), permits the stock to be valued at the lowerthan-market figure which could have been realized, according to the testimony of experts, by means of a special offering or secondary distribution, that is, off-theexchange merchandising by specialists over a period of time. Havemeyer v. United States, 59 F. Supp. 537 (Ct. Cl. 1949), cert. denied, 326 U.S. 759 (1945); Groff v. Munford, 150 F.2d 825 (2d Cir. 1945); Thomas A. Standish, 8 T.C. 1204 (1947), Acq. 1947-2 CuM. BULL. 4. Thus blockage substitutes unverifiable estimates for the objective criterion of actual sales or bona fide bid and asked prices. But, in contrast with the procedure followed in valuing closely-held stocks, the issue is sharply defined (What could have been realized by means of a special offering or secondary distribution?) and relevant considerations are correspondingly delimited. The regulations themselves leave the door open for escape in hard cases from the objective market-price-equals-value rule: "In cases in which it is established that the value per bond or share of any security determined on the basis of selling or bid and asked prices as herein provided does not reflect the fair market value thereof, then some reasonable modification of such basis or other relevant facts and elements of value shall be considered in determining fair market value." U.S. Treas. Reg. 105, ? 81.10(c) (1944); U.S. Treas. Reg. 108, ?86.19(c) (1943). MONTGOMERY, FEDERAL TAXES-ESTATES, TRUSTS AND GIFTs 626 (1949-1950), lists 16 cases in which the value of stock was determined to be less than the quoted market price. Such cases, however, may fairly be considered exceptions and, aside from cases involving very large blocks of stock, the courts are not easily persuaded to depart from market quotations. E.g., Estate of Caroline McCulloch Spencer, 5 T.C. 904, Aca. 1946-1 CUM. BULL. 4. (166)