Jameson v. CIR ( 2001 )

REVISED OCTOBER 12, 2001
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________
No. 00-60489
____________________
ESTATE OF HELEN BOLTON JAMESON, DECEASED,
NORTHERN TRUST BANK OF TEXAS, N.A., INDEPENDENT EXECUTOR
Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE
Respondent-Appellee.
_________________________________________________________________
On Appeal from the United States Tax Court
_________________________________________________________________
September 18, 2001
Before JONES, DeMOSS, and BENAVIDES, Circuit Judges.
EDITH H. JONES, Circuit Judge:
The Estate of Helen Jameson appeals following a Tax Court
decision assessing a deficiency against it. The Estate argues that
the Tax Court clearly erred in valuing assets of Johnco, Inc.
(“Johnco”), a holding company that is part of the estate. It also
raises a plausible but unsustainable constitutional challenge to
the estate tax as applied in this case. As we agree that the
court’s valuations were in error, we vacate and remand for further
proceedings.
I. FACTS
This dispute arises from a series of bequests from John
Jameson to his wife Helen Jameson, and from Helen to their children
Andrew and Dinah Jameson.
A. Mr. Jameson’s Bequest of Johnco Shares to Andrew and Helen.
Mr. Jameson incorporated the privately held holding
company Johnco in 1968. At his death in May 1990, he owned 82,865
of Johnco’s 83,000 shares as separate property. In his will, Mr.
Jameson bequeathed $106,251 in Johnco shares to Andrew to fund a
unified estate tax credit, directing that the shares be “valued by
independent appraisal as of my date of death.” The remainder of
Mr. Jameson’s shares passed to his wife.
Helen, the initial executrix of Mr. Jameson’s estate,
filed an estate tax return in which she reported the value of the
Johnco stock passing through the estate at $86.80 per share. The
source of this share value is unclear. This tax return was never
amended.
Helen died in September 1991. Northern Trust Bank of
Texas (“Northern Trust”) became the executor of both spouses’
estates. Northern Trust asked Rauscher Pierce Refsnes, Inc.
(“Rauscher”) to appraise both estates in December 1992. Although
the appraisal of Mr. Jameson’s estate is not in the record, its
conclusion that Johnco shares were worth only $44.65 per share at
the time of his death appears in his wife’s estate appraisal.
2
Northern Trust used the $44.65 figure to calculate that
Andrew was entitled to 2,380 Johnco shares to satisfy the $106,251
he was entitled to receive under Mr. Jameson’s will. Northern
Trust concluded that Helen received John’s remaining 80,485 shares
of Johnco. Had Northern Trust used the $86.80 share value, Andrew
would have received 1,224 shares and Mrs. Jameson would have
received 81,641 shares.
B. The Family Settlement Agreement.
Mrs. Jameson left Andrew and Dinah equal shares of her
estate. The siblings entered into a December 1993 settlement
agreement (“Family Settlement Agreement”) dividing her estate.
Separate counsel represented Andrew and Dinah during the
negotiations.
The Family Settlement Agreement assigned a value of
$4.025 million to Mrs. Jameson’s estate’s 80,485 shares of Johnco
and gave the shares to Andrew. This established an implicit per
share value of $ 50.01. Dinah received $ 4.025 million in cash,
marketable securities, and other assets.
C. Johnco’s Timber Property.
Johnco’s principal asset is 5,405 acres of timberland in
Louisiana (the “Timber Property”) that it acquired in 1986. The
company does not harvest or transport its own timber. Rather,
Johnco earns over 80% of its revenue by receiving fees from
companies that harvest timber on the property. The Timber
Property’s gross revenues averaged roughly $154,000 annually from
3
1988-91.1 Johnco’s average net income over this period was
$60,803. The parties stipulated that the Timber Property was
“well-managed.”
Northern Trust commissioned an appraisal of the Timber
Property by consultant forester George Screpetis in 1992.
Screpetis noted that the Timber Property was outstanding for timber
production and opined that a buyer of the property would most
likely be a company in the forest products business.
Forester Robert Baker prepared a 1996 report on the
Timber Property on behalf of the IRS. The report stated that the
Timber Property was extremely productive and that its best use was
for timber production. Commending Johnco’s management of the
property, the report predicted that private investors, pension
funds, or local timber companies would be most likely to purchase
it.
Harold Elliott, a consulting forester who had worked for
the Jamesons for many years, testified at trial that Johnco’s
management was interested primarily in covering expenses and not in
making a big profit. Elliott testified that Johnco cut timber
conservatively. He also testified that timber grew on the property
1
The parties stipulated to Johnco gross revenue figures that
averaged $192,480 over the preceding four years. Since the Timber Property
accounted for about 80% of these revenues, the property’s average revenues
should have been roughly $154,000.
4
at the rate of 8 to 10% a year.
The parties stipulated that, at Mrs. Jameson’s death,
Johnco had a basis of $217,850 in the Timber Property and that the
property was worth $6 million. At trial, the parties disputed how
the value of Johnco’s interest in the Timber Property was affected
by the capital gains taxes the company would incur through timber
or land sales.
Both parties presented expert reports and testimony on
Johnco’s fair market value given its low basis in the Timber
Property. Clyde Buck, a managing director of Rauscher, prepared a
new appraisal on behalf of the estate (“New Rauscher Appraisal”).
This appraisal considered three possible scenarios for a buyer of
Johnco under discount rates ranging from 20 to 30%: 1) an immediate
“fire sale” of the Timber Property; 2) a rapid but controlled sale
of Timber Property parcels within twenty-four months; and 3)
ongoing operation of the Timber Property.
Buck testified that he had no information that Johnco was
operating in a wasteful manner. Based on the stipulation that the
Timber Property was worth $ 6 million, however, Buck concluded that
a buyer of Johnco would realize the most income through an
immediate liquidation. On the other hand, a buyer would realize
the least income by far if it operated the Timber Property as a
going concern. After subtracting the taxes that a buyer would
incur by immediately selling the Timber Property, Buck concluded
that Johnco’s interest in the property was worth only $4.8 million.
5
John Lax of Arthur Andersen LLP also presented an
appraisal on behalf of Mrs. Jameson’s Estate (“Andersen
Appraisal”). Lax estimated the debt payments a potential buyer
would incur if it financed $5 million of Johnco’s purchase price.
He concluded that Johnco’s projected future cash flow would not
cover the debt payments. He also asserted that a buyer would
demand a return on equity of 17-22% for a risky investment like the
Timber Property. Lax concluded that a buyer of Johnco would
liquidate the Timber Property within a year. After calculating
capital gains taxes based on this conclusion, Lax determined that
Johnco’s interest in the Timber Property was worth only $4.13
million.
Francis Burns then testified and presented a report on
behalf of the IRS. Burns was a principal in the financial
consulting firm IPC Group LLC. Burns argued against any capital
gains discount based on an immediate liquidation of the Timber
Property by a buyer of Johnco. He stated that this discount was
counterintuitive, since it assumed that an entity would purchase
Johnco and then “immediately turn around and sell what [it] just
purchased.”
D. Johnco’s Tanglewood Property.
Johnco also owned a parcel of unimproved land in Harris
County, Texas (the “Tanglewood Property”). The parties stipulated
that this property was worth $240,000 at Helen’s death, and that
Johnco held a basis of $110,740 in it.
6
Mrs. Jameson’s Estate did not specifically indicate that
a buyer of Johnco would immediately liquidate the Tanglewood
Property, but the New Rauscher Appraisal incorporated the value of
this property when it calculated a capital gains discount for
Johnco’s assets. Thus, this appraisal assumed that a buyer of
Johnco would realize capital gains through an immediate sale of the
Tanglewood Property.
E. The Tax Court decision.
The Tax Court first considered the number of Johnco
shares that passed to Mrs. Jameson’s Estate after John’s bequest of
$106,251 in Johnco shares to Andrew. The court observed that the
$44.65 appraised share value used by Helen’s estate managers
conflicted with the $86.80 share value reported on Mr. Jameson’s
estate tax return. The court also noted that the $44.65 share
value reduced Mr. Jameson’s property available for a marital
deduction, and it opined that Mr. Jameson’s will intended to
maximize this deduction. While noting that the 1992 appraisal of
Mr. Jameson’s estate was not in the record, the court expressed
doubt about Rauscher’s valuation methodologies. The court applied
the $86.80 share value and concluded that Mrs. Jameson’s Estate
owned 81,641 Johnco shares.
The Tax Court then turned to valuing Johnco. Although
the court acknowledged that Andrew and Dinah negotiated the 1993
Family Settlement Agreement at arm’s length, it refused to adopt
the share value adopted in that agreement since the agreement
7
relied on the Rauscher appraisal, and the appraisal was flawed
because it assumed a liquidation of the Timber Property.
The court then considered capital gains tax discounts for
Johnco’s assets based on the company’s low basis in them. It
refused to apply a discount for the Tanglewood Property, stating
that the parties had failed to address this issue. The court did
decide to apply a discount for the capital gains tax liability that
Johnco would incur from ongoing sales of timber. It rejected a
discount reflecting an immediate sale of the Timber Property,
however, concluding that a buyer would operate the property on an
ongoing basis.
The court designed a model to estimate the capital gains
taxes that Johnco would incur if it operated the Timber Property as
a going concern. The parties had not presented evidence on this
specific issue. The court’s model assumed that Johnco would sell
10% of its timber annually to follow a sustainable yield pattern
and that a 4% rate of inflation would apply. Along with these
assumptions, the model estimated that the Timber Property would
realize $600,000 in revenues in year one and similar inflation-
adjusted revenues in later years. It applied a 20% discount rate,
within the range of the taxpayer’s expert estimates, and determined
that the present value of capital gains taxes Johnco would
8
eventually pay is approximately $873,000. Consequently, Johnco’s
interest in the Timber Property was worth roughly $5.1 million.2
Based on its conclusions, the Tax Court found that Johnco
shares were worth $71 each and assessed a deficiency against Mrs.
Jameson’s Estate, which has appealed.
II. STANDARD OF REVIEW
We review the Tax Court’s factual findings for clear
error. Estate of Clayton v. Comm’r, 976 F.2d 1486, 1490 (5th Cir.
1992). Clear error exists if this court is left with a definite
and firm conviction that a mistake has been made. Streber v.
Comm’r, 138 F.3d 216, 219 (5th Cir. 1998). We review the Tax
Court’s legal conclusions de novo, applying the same standards as
that court. Estate of Clayton, 976 F.2d at 1490.
III. DISCUSSION
A. Valuation of the Timber Property
The value of the Johnco stock for estate tax purposes
depended principally on the fair market value of the Timber
Property at the date of Helen’s death. The concept of fair market
value represents the price that a willing buyer would pay a willing
seller, if both have reasonable knowledge of the facts and neither
is under compulsion. Estate of Bright v. United States, 658 F.2d
999, 1005 (5th Cir. 1981). The buyer and seller are hypothetical,
2
This value reflects a capital gains tax discount of
$872,920.
9
not actual persons, and each is a rational economic actor, that is,
each seeks to maximize his advantage in the context of the market
that exists at the date of valuation. Estate of Newhouse v.
Comm’r, 94 T.C. 193, 217 (1990). Valuation is a question of fact
that may be reversed only for clear error by this court.
Although the parties stipulated to a fair market value of
$6 million for the Timber Property, they disagreed whether in
valuing Johnco stock, the Estate was entitled to a discount because
of the substantial capital gains that would be recognized as timber
is harvested and sold. In Johnco’s hands, the Timber Property had
appreciated enormously since its original purchase, and its basis
for tax purposes was $217,850. Any sale of Johnco stock would
transfer the Timber Property with the built-in capital gains
liability. The estate’s valuation experts opined that the only
sound economic strategy for a hypothetical purchaser of Johnco
would be to liquidate the Timber Property immediately and pay off
the 34% capital gains tax. The Commissioner’s expert opined,
however, that, in part due to creative alternative tax strategies
to offset the built-in tax liability, no discount should be
recognized.
The Tax Court found neither side’s argument fully
persuasive. Contrary to the Commissioner’s view, the court
concluded that some discount for built-in capital gains should be
acknowledged based on its recent decision in Estate of Davis v.
Comm’r, 110 T.C. 530 (1998). Estate of Davis held that in
10
determining the fair market value of closely held stock after
repeal of the General Utilities doctrine, 3 built-in capital gains
discounts are not precluded and are appropriate in some
circumstances. Id. at 547. The Tax Court also rejected the
Estate’s valuation of Johnco stock, which it viewed as having been
incorrectly derived from Johnco’s income rather than its assets.
The Tax Court found that the Johnco stock is properly valued under
Revenue Ruling 59-60, 1959-1 C.B. 237, according to the fair market
value of its assets. The IRS has typically applied an asset
approach when a closely held corporation functions as a holding
company, and earnings are relatively low in comparison to the fair
market value of the underlying assets. See Estate of Davis, 110
T.C. at 536-37. Finally, the Tax Court rejected the Estate’s
methodology that contemplated immediate liquidation of the Timber
Property rather than, as the government’s forestry expert
testified, its sound cultivation and continued management.
The court then crafted its own valuation. It accepted
the parties’ $6 million figure as the net asset value for the
Timber Property, while estimating a net present value of the
capital gains tax liability that will be incurred as the timber is
cut. The court used assumptions furnished by the estate, i.e. a
10% annual growth/harvest rate of the timber; a 4% annual inflation
rate in the value of the harvest; a 34% capital gains tax rate; and
3
Gen. Utils. and Operating Co. v. Helvering, 296 U.S. 200, (1935).
11
a 20% discount rate. According to the court’s method, it would
take nine years to pay off the built-in capital gains liability.
Consequently, the present value of the liability, and the reduction
of the fair market value, is approximately $870,000. This
deduction is less than half that sought by the Estate, which sought
full deduction of the built-in $1.9 million capital gain liability
if the Timber Property were to be liquidated immediately.
Although the Tax Court was not required to credit the
valuation testimony of either party, its calculations must be tied
to the record and to sound and consistent economic principle.
Unfortunately, the court deviated from several criteria of fair
market value analysis and thus clearly erred in assessing Johnco’s
stock value. First, the court should not have assumed the
existence of a strategic buyer of the Timber Property, a buyer that
most probably would continue to operate it for timber production.
Fair market value analysis depends instead on a hypothetical rather
than an actual buyer. See Treas. Reg. § 20.2031-1(b); Estate of
Bright, 658 F.2d at 1006; LeFrak v. Comm’r, 66 TCM (CCH) 1297, 1299
(1993). While it may well be true that the Timber Property’s best
use is for sustainable yield timber production, this does not mean
that the first, or economically rational, purchaser of Johnco stock
would so operate or lease the property. That purchaser would have
to take into account the consequences of the unavoidable,
substantial built-in tax liability on the property.
Relatedly, the court’s misplaced emphasis on a purchaser
12
engaged in long-run timber production led to its peremptory denial
of a full discount for the accrued capital gains liability. The
hypothetical willing buyer/willing seller test substitutes evidence
of the actual owner’s or purchaser’s intent with the most
economically rational analysis of a sale. See Eisenberg v. Comm’r,
155 F.3d 50 (2nd Cir. 1998) (vacating and remanding Tax Court
decision because a tax liability upon liquidation or sale for
built-in capital gains was not too speculative, and such potential
liability should be taken into account in valuing the stock even
though no liquidation or sale of the corporation or its assets was
planned at the time of valuation. If the evidence did not support
an economic case for the buyer of Johnco’s stock to engage in long-
term timber production, then the Tax Court’s discount of the
capital gains liability over nine years of further production was
erroneous.
Such was the case here. Recognizing the uncertainties
inherent in the acquisition, the Estate’s experts arrived at
substantial discount rates for any hypothetical investment in the
property. The Tax Court recognized that the discount rate
represents the rate of return necessary to attract capital based on
an asset’s overall investment characteristics. Moreover, the court
did not quarrel with the finding of a 20% annual discount rate, and
it applied that rate to the stream of future capital gain taxes.
Nevertheless, the court simultaneously recognized that no more than
a 14% gross annual rate of return would be received from the
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ongoing production of timber. A reasonable hypothetical investor
who required a 20% rate of return on Johnco stock would not accept
the Timber Property’s modest 14% return. Instead, the investor
would liquidate Johnco quickly and reinvest the proceeds. “Courts
may not permit the positing of transactions which are unlikely and
plainly contrary to the economic interest of a hypothetical buyer.”
Estate of Smith v. Comm’r, 198 F.3d 515, 529 (5th Cir. 1999),
citing Eisenberg, 155 F.3d at 57. The Tax Court’s internally
inconsistent assumptions, that a hypothetical purchaser of Johnco
stock would engage in long-range timber production even though the
Timber Property’s annual rate of return is substantially lower than
the investor’s required return, fatally flawed its decision to
discount the future flow of capital gains taxes.
Whether the record supports other estimates of the value
of Johnco stock is unclear. Because the Tax Court clearly erred in
its approach to the discount of capital gains taxes on the Timber
Property, this issue must be remanded for further consideration.
B. The Family Settlement Agreement.
The Estate argues that the Tax Court clearly erred in
disregarding the share value set forth in Andrew and Dinah's Family
Settlement Agreement. It notes that even the Tax Court recognized
that the two negotiated at arm's length. The Estate asserts that
Estate of Warren v. Comm'r, 981 F.2d 776 (5th Cir.1993), controls.
“In general, comparable sales constitute the best
evidence of market value.” United States v. 320.0 Acres of Land,
14
605 F.2d 762, 798 (5th Cir.1979) (holding that courts should
liberally admit evidence of comparable sales and allow the fact-
finder to evaluate them). The more comparable a sale is in
characteristics, proximity, and time, the more probative it is of
value. Id. Courts have observed, however, that agreed valuations
near in time to a decedent’s death are not conclusive. United
States v. Simmons, 346 F.2d 213, 216 (5th Cir.1965) (holding that
a decedent’s tax settlement with the IRS did not establish the
value of his estate’s claim against the IRS as a matter of law);
First Nat'l Bank of Kenosha v. United States, 763 F.2d 891, 895
(7th Cir.1985) (admitting evidence of an agreement valuing property
after the decedent’s death, but observing that such evidence was
not conclusive).
In United States v. Certain Land in City of Fort Worth,
414 F.2d 1026 (5th Cir. 1969), a jury valued a landowner’s
condemned property at $82,000. The government appealed, arguing
that the jury instructions should have placed greater weight on the
fact that the landowner bought the property for $50,000 just
thirteen months before the condemnation. Id. at 1027. Rejecting
the government’s argument, this court noted that land values could
fluctuate considerably in thirteen months. It also observed that
a prior sale of a property is not entitled as a matter of law to
greater weight than sales of comparable property. Id. at 1028
(citing Hickey v. United States, 208 F.2d 269, 273 (3rd Cir.1954)).
Thus, finders of fact may in some cases disregard recent sales of
15
even the very property at issue. Under these general principles,
the court was not required to credit the values premised in the
Family Settlement Agreement.
Further, despite the Estate’s contentions, Warren does
not control. In Warren, the decedent bequeathed part of her estate
to a charity. The charity altered the will distributions through
a settlement with the heirs. The IRS and the estate disputed the
size of the charitable deduction that the estate could claim. This
court concluded that the assets received by the charity under the
bona fide settlement qualified for the deduction under the
applicable statute. Warren, 981 F.2d at 782-84. Warren concerned
the binding status of a settlement of litigation in probate court
on the value of a charitable deduction, not, as here, the
persuasive effect of an out-of-court settlement on the issue of an
asset's value. Warren is not directly relevant to this case.
Here, Andrew and Dinah entered into an agreement valuing
Johnco shares more than two years after Helen’s death. The Tax
Court disregarded the valuation principally because it appeared to
derive from the assumption that a buyer would liquidate Johnco’s
Timber Property quickly. Because we have found the court’s
outright rejection of the liquidation model to be incorrect, its
rejection of the siblings’ negotiated value may also be incorrect.
As a precaution, this finding is vacated and remanded for further
consideration.
16
C. The Tanglewood Property.
The Estate argues that the Tax Court clearly erred by
refusing to apply a capital gains discount for that property.
Contrary to the Tax Court's conclusion, the Estate addressed this
issue in the New Rauscher Appraisal, which calculated Johnco's
value based on an immediate liquidation of all Johnco assets. The
New Rauscher Appraisal includes a capital gains tax discount for
the Tanglewood Property. This property should be subject to a
capital gains discount because a reasonable buyer of Johnco would
consider the company’s low basis in the property in determining a
purchase price. The Tax Court should apply a discount on remand.
D. The Number of Johnco Shares in the Estate.
The Estate asserts that the Tax Court clearly erred in
determining the number of shares that the Mr. Jameson’s Estate
transferred to it. It argues that the Tax Court disregarded
explicit language in Mr. Jameson's will directing that an
independent appraisal establish the number of shares in the bequest
to Andrew. As a result of the appraisal, the Estate owns only
80,485 Johnco shares instead of the 81,641 shares that the Tax
Court attributed to it.
An unambiguous will must be construed as it was written.
El Paso Nat’l Bank v. Shriners Hosp. for Crippled Children, 615
S.W.2d 184, 185 (Tex. 1981).4 Neither we nor the Commissioner nor
4
Mr. Jameson was a Texas resident, so Texas estate cases
apply.
17
the Tax Court may redraft the will or vary provisions to reflect
Mr. Jameson’s presumed intentions. Shriner’s Hosp. for Crippled
Children of Tex. v. Stahl, 610 S.W.2d 147, 151 (Tex. 1980). Mr.
Jameson’s will was unambiguous. It expressly directed that Andrew
receive shares in accordance with an independent appraisal. Even
if Rauscher based Mr. John’s estate’s Appraisal on unreliable
assumptions, as the IRS asserts, this fact does not alter Mr.
Jameson’s explicit intent to transfer shares in accordance with the
valuation.
Granted, the $86.80 Johnco share value that Helen
reported on her husband’s estate tax return is inconsistent with
Rauscher’s $44.65 valuation. This discrepancy might be important
if we were valuing Johnco shares at Mr. Jameson’s death, but we are
not. Our sole inquiry is to determine the number of shares that
Mr. Jameson granted to Andrew through his will. Since the IRS does
not argue that the Rauscher appraisal was not an “independent
appraisal,” Mrs. Jameson’s estate owns only 80,405 shares of
Johnco.
E. Constitutionality of the Estate Tax.
The Estate raises a challenge to the constitutionality of
the federal estate tax. It argues that the tax as applied in this
case is an unconstitutional direct tax. The Estate concedes that
a tax on property actually transferable to a decedent’s heirs is
18
constitutional. It asserts, however, that a tax on the portion of
the estate used to pay the estate tax is an unconstitutional tax on
a tax, resulting in this case in an effective rate of 92.7% on the
property actually received by the heirs. The Estate contends that
Congress may assess the tax only on assets that a donee actually
receives through the bequest.
The Constitution provides that "[n]o Capitation, or other
direct, Tax shall be laid, unless in Proportion to the Census or
Enumeration herein before directed to be taken." U.S. Const. Art.
I, sec. 9. This provision bars Congress from imposing a "direct"
tax without apportioning it to the population. Congress need not,
however, apportion “an excise upon . . . the shifting from one to
another of any power or privilege incidental to the ownership or
enjoyment of property.” Fernandez v. Wiener, 326 U.S. 340, 352
(1945)
The Supreme Court has repeatedly rejected attempts to
portray the estate tax as an unconstitutional direct tax.
Fernandez, 326 U.S. at 352-58 (holding that the tax was not direct
even though it encompassed a spouse's joint interest in the
decedent's property); Tyler v. United States, 281 U.S. 497, 502-04
(1930) (same); New York Trust Co. v. Eisner, 256 U.S. 345, 348-49
(1921) (holding that the tax was not direct even though the
government imposed it on the estate rather than the recipient);
Knowlton v. Moore, 178 U.S. 41, 82-83 (1900) (holding that the tax
was indirect even though the recipient could not shift the tax to
19
others). These decisions have instead characterized the estate tax
as an indirect excise tax conditioned on the transfer of property
at a grantor’s death.
Congress has broad authority to impose excise estate
taxes:
[T]he power of Congress to impose death taxes is not limited
to the taxation of transfers at death. It extends to the
creation, exercise, acquisition, or relinquishment of any
power or legal privilege which is incident to the ownership
of property, and when any of these is occasioned by death,
it may as readily be the subject of the federal tax as the
transfer of the property at death.
Fernandez, 326 U.S. at 352. This language facially contradicts the
Estate’s argument, since it authorizes taxes not only on the
transfer to the heirs but on the entire property that Helen
relinquished at death.
The Supreme Court’s estate tax decisions have emphasized
that hypertechnical distinctions between direct and indirect taxes
cannot overcome the historical treatment of the tax and practical
considerations. “In determining [whether a tax is direct], no
microscopic examination as to the purely economic or theoretical
nature of the tax should be indulged in for the purpose of
[characterizing it]. . . . Taxation is eminently practical, [and]
a tax should be regarded in its actual, practical results. . . .”
Knowlton, 178 U.S. at 83 (quoting Nicol v. Ames, 173 U.S. 509, 515
(1899)). See also New York Trust Co., 256 U.S. at 349 (“[The
petitioner’s argument fails] not by an attempt to make some
scientific distinction, which would be at least difficult, but on
20
an interpretation of language by its traditional use—on the
practical and historical ground that [the estate tax] has always
been regarded as the antithesis of a direct tax.”)
Whether the explanations provided by the Supreme Court of
the estate tax’s constitutionality are fully persuasive is beside
the point for this lower court. Based on the variety of
constitutional challenges to it that have been made and uniformly
rejected, we see no basis for invalidating the federal estate tax.
CONCLUSION
Based on the foregoing discussion, we VACATE the judgment
of the Tax Court and REMAND for further proceedings, consistent
with this opinion, that will (1) reconsider the amount of the
capital gains discount to the Timber Property; (2) allow a discount
for built-in capital gains on the Tanglewood Property; (3) re-
evaluate the effect of the Family Settlement Agreement;
(4) reconsider the value of the Johnco stock, and (5) attribute
80,485 Johnco shares to the Estate.
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