## Facts

- Howard Winston Cook was a major owner of Central Bancompany, Inc., a Missouri bank holding company.
- On December 24, 1976, Cook transferred 1,725 shares of Central Bancompany common stock to an irrevocable trust for the benefit of his children.
- Central Bancompany’s shares were not publicly traded, so there was no active market price on the gift date.
- In 1977, Cook filed a gift-tax return reporting a $2,250 gift-tax liability, based on valuing the shares at $40 per share.
- Cook died on May 8, 1978.
- In 1982, the United States issued a notice of gift-tax deficiency of $84,063, valuing the stock at $257 per share.
- The estate paid the assessment and filed a refund claim; after the refund claim was denied or not allowed, the estate brought a refund action.
- As of 1976, Central Bancompany was the seventh largest bank holding company in Missouri and controlled the dominant bank in central Missouri.
- In 1976, Central Bancompany had about $421 million in assets and about $41 million in stockholder equity.
- On the valuation date, reported figures included book value of $211.38 per share, net income of $18.54 per share, and dividends of $1.80 per share.
- Stock sales from 1973 to 1982 occurred at prices ranging from $36 to $68.18 per share, but the sales were sporadic and the prices were set by the company’s owners and managers rather than a competitive market.
- Both sides offered valuation testimony; the court found neither side’s valuation convincing and performed its own valuation analysis.
- Using data from publicly traded Missouri bank holding companies, the court examined bid-price-to-book-value ratios (about 51% to 92%) and noted that a $40 value implied about 19% of book value.
- The court also compared price-to-earnings and dividend-yield measures to the publicly traded Missouri bank holding company group, producing ratio-based value indications (including about $141.62 per share using book-value ratios and about $122.36 per share using earnings ratios).

## Issues

1. What was the fair market value of Central Bancompany, Inc. common stock on December 24, 1976, for federal gift-tax purposes?
2. How much weight should be given to sporadic private sales where prices were set by owners and managers, as compared with financial measures and data from publicly traded bank holding companies?

## Decision

- The court held that the estate’s reported $40 per-share value did not reflect fair market value given Central Bancompany’s size, profitability, and financial results.
- The court also held that the government’s $257 per-share value was not supported on the record presented.
- The court discounted the evidentiary value of the sporadic private sales because they were infrequent and not priced through an open, arm’s-length market process.
- Rejecting both parties’ valuation presentations, the court determined an intermediate per-share fair market value by analyzing Central Bancompany’s book value, earnings, dividends, and trading ratios of publicly traded Missouri bank holding companies.
- Judgment was entered on the court-determined value, resulting in tax due that was higher than the estate reported but lower than the government’s deficiency position.

## Legal Principles

- For federal gift tax, fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of relevant facts.
- When valuing closely held stock with no public market, the trier of fact may consider multiple indicators, including book value/net worth, earnings, dividend-paying capacity, and market data from similar publicly traded companies.
- Prior sales of the same stock can be evidence of value, but sales that are sporadic, thinly traded, or influenced by insiders may carry limited weight.
- Trading ratios of similar publicly traded companies (such as price-to-book, price-to-earnings, and dividend yield) may be used to estimate what a hypothetical market price would be for a nonpublic company with comparable financial characteristics.
- A court is not bound by either party’s valuation testimony and may reach its own value finding using the evidentiary record and standard valuation approaches.

## Conclusion

In this gift-tax refund case, the district court determined the fair market value of closely held Central Bancompany stock transferred to a family trust by discounting sporadic insider-influenced private sale prices and relying instead on the company’s strong book value, earnings, and dividends, as well as ratio comparisons to publicly traded Missouri bank holding companies; the court rejected both the estate’s low valuation and the government’s high valuation and set its own intermediate value for the gifted shares.


Estate of Cook v. United States, 86-2 U.S.T.C. ¶ 13,678 (1986)