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MCNEIL TAX ASSESSMENT CASE (11/14/68)

decided: November 14, 1968.

MCNEIL TAX ASSESSMENT CASE


Appeals from order of Court of Common Pleas of Montgomery County, Nos. 65-9103 and 65-9104, in re appeals of Robert L. McNeil, Jr. and Henry S. McNeil to Board of Assessment and Revision of Taxes.

COUNSEL

Roger B. Reynolds, Solicitor, Montgomery County, with him Anthony J. Giangiulio, Solicitor, Board of Assessment and Revision of Taxes, for appellant.

Edward Fackenthal, with him William L. O'Hey, Jr., and Henderson, Wetherill & O'Hey, for appellees.

Wright, P. J., Watkins, Montgomery, Jacobs, Hoffman, Spaulding, and Hannum, JJ. Opinion by Hoffman, J. Jacobs, J., would affirm on the opinion of the lower court. Dissenting Opinion by Montgomery, J. Hannum, J., joins in this dissenting opinion.

Author: Hoffman

[ 213 Pa. Super. Page 357]

The question involved in this case is the calculation of the aggregate actual value of Johnson & Johnson, Inc. (Johnson) common stock owned by appellees,

[ 213 Pa. Super. Page 358]

Robert L. McNeil, Jr. and Henry S. McNeil as of December 31, 1964, for the purpose of the Montgomery County Personal Property Tax.

The Act of June 17, 1913, P. L. 507, Section 1, as amended, 72 P.S. 4821, provides, inter alia, that: "All personal property of the classes hereinafter enumerated, owned, held or possessed by any resident . . . is hereby made taxable annually for county purposes, . . . at the rate of four mills on each dollar of the value thereof. . . ." Section 4.1 of said Act 72 P.S. 4843.1, provides: "(a) For the purpose of ascertaining the amount of tax payable under this act, it shall be the duty of every resident liable to pay such tax on or before the fifteenth day of February of each year to transmit . . . a return certified as provided in this act: (1) The aggregate actual value of each part of the different classes of property made taxable by this act, held, owned or possessed by such resident as of the date fixed annually, in the manner provided herein. . . ."

It is undisputed that the date fixed annually for the valuation of said stock is December 31st and that Johnson common stock is one of the classes of property made taxable by said act.

On December 31, 1964, the common stock of Johnson was selling on the New York Stock Exchange at $111.75 a share. Both appellants filed personal property tax returns in which they valued their shares at thirty per cent less than the value which would have resulted had the full stock market price been employed.

The Montgomery County Board of Assessment and Revision of Taxes (Board) valued these shares at the full stock exchange price of $111.75 resulting in an increased assessment for each of the taxpayers.

The taxpayers appealed to the Court of Common Pleas of Montgomery County. The court, after a full

[ 213 Pa. Super. Page 359]

    hearing, ordered that the shares in question be valued at 90% of the stock exchange price. The Board has appealed from that ruling.

In analyzing the contentions of the parties, it becomes necessary to recognize and explore fully the theory which serves as the basis of the taxpayer's case. It is known generally in federal estate gift and inheritance tax law, as "blockage." The theory of blockage is set out in Lowndes & Kramer, Federal Estate and Gift Tax (2nd ed., § 18.26, 1962), as follows: "Taxpayers have frequently contended where a large block of stock was to be valued that actual sales at or around the valuation date did not fairly reflect the fair market value of the stock, because they failed to discount the depressing effect which the sale of such a large number of shares would have on the market. This is called blockage. In a blockage situation, the unit of value is still the fair market price of a single share of stock; blockage requires that the price per share be lowered to reflect the effect of marketing such a large number of shares."

The concept of blockage was repudiated by the Internal Revenue Service for many years. It was not recognized until the courts first adopted it. See Helvering v. Maytag, 125 F. 2d 55 (1942); Helvering v. Safe Deposit & Trust Co. of Baltimore, 95 F. 2d 806 (1938); Commissioner v. Shattuck, 97 F. 2d 790 (1938); Bartol v. McGinnes, 185 F. Supp. 659 (1960). It has now impliedly been recognized as an appropriate theory by the Internal Revenue Service as evidenced by the federal estate tax regulations which provide at 20.2031-2(e): "In certain exceptional cases, the size of the block of stock to be valued in relation to the number of shares changing hands in sales may be relevant in determining whether selling prices reflect the fair market value of the block of stock to be

[ 213 Pa. Super. Page 360]

    valued. If the executor can show that the block of stock to be valued is so large in relation to the actual sales on the existing market that it could not be liquidated in a reasonable time without depressing the market, the price at which the block could be sold as such outside the usual market, as through an underwriter, may be a more accurate indication of value than market quotations."

Many state courts have similarly recognized the blockage theory in the estate and inheritance tax areas. See Newberry v. Walsh, 20 N.J. 484, 120 A.2d 242 (1956); Calvert v. Kattar, 301 S.W. 2d 318 (Tex. Civ. App. 1957); Citizens Fidelity Bank and Trust Co. v. Reeves, 259 S.W. 2d 432 (Ky. 1953). Valuation of Corporation Stock for Purpose of Succession, Inheritance or Estate Tax As Affected By Quantity Involved, 23 A.L.R. 2d 775, 787.

Indeed, even here in Pennsylvania, our Supreme Court recognized the blockage theory in inheritance tax cases in Clabby's Estate, 308 Pa. 287 (1932). The Court there, while denying blockage to that taxpayer, noted:

"The test is, value at the date of death. But, the value of a few shares of stock on the day of death does not always fix the value of large blocks of stock, in this case over 8,500 shares . . .

"While market quotations on the day of death are evidence of value of stock, they are not conclusive of the actual value of the stock at that time. In fixing value, other evidence having a tendency either to decrease or increase the value as of the day of death is competent and should be considered. The rule for determining value for inheritance taxation contemplates a range of the entire market and the averaging of prices as found running through a reasonable period of time . . . Men who have had experience in selling

[ 213 Pa. Super. Page 361]

    stock in lots both large and small are therefore competent to give an opinion as to the effect of dumping a large block of stock on the market. It was therefore competent to show what in the opinion of the experts the value of the stock thus sold would be under actual conditions in business."

Blockage, to date, however, has not been applied in the personal property tax area. No case in any jurisdiction which has discussed the matter has come to our attention.

There are two issues, therefore, for us to determine in this case:

A. Does blockage properly apply in considering the value of shares assessed for the purpose of personal property taxes?

B. If so, did the court properly apply blockage in this case?

A. Does "blockage" apply in considering the value of shares assessed for the purpose of personal property taxation in Pennsylvania?

The Board argues that the term "value" as used in the act imposing the personal property tax must be given its ordinary and customary meaning, which is the value established by reference to the stock exchange quotation. In our opinion, the Board's total reliance on the exchange price is unduly restrictive, since it uses a standard without regard to that standard's relevance or meaning.

In using the word "value", the legislature undoubtedly recognized that a corporation's securities are subject to various methods of valuation. Reference might be made to book value, asset value, earnings statements, or any one of the other methods by which stock is valued. In virtually all tax areas, however, the term "value" has been understood to mean fair market value.

Thus, in real estate assessment cases, the Supreme Court has often reiterated that: "The term actual value

[ 213 Pa. Super. Page 362]

    means the market value and market value has been defined as the price which a purchaser, willing but not obliged to buy would pay an owner, willing but not obliged to sell. . . ." Deitch Co. v. Board of ...


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