## Facts

- Joseph H. Lauder, a founder and principal owner of a closely held cosmetics business (EJL Corporation), died owning shares of EJL common stock.
- EJL’s shareholders were limited to Lauder family members, who sought to keep the company closely held and family controlled.
- The shareholders executed a restrictive first-offer agreement requiring a shareholder (or estate) to offer shares first to the corporation and then to remaining shareholders.
- The agreement fixed the purchase price by a formula based on adjusted book value focused on tangible assets and excluding substantial intangible value (e.g., goodwill and brand-related value).
- Upon Joseph Lauder’s death, the corporation purchased his shares pursuant to the agreement at the formula price.
- The estate reported a per-share value close to the agreement price on the estate tax return; the Commissioner asserted a substantially higher fair market value and determined a large estate tax deficiency.
- The dispute centered on whether the agreement price governed valuation for federal estate tax purposes or whether the stock had to be valued at fair market value independent of the contract formula.

## Issues

1. Whether the shareholder agreement’s formula price controlled the estate-tax value of the decedent’s EJL stock under I.R.C. § 2031 and Treas. Reg. § 20.2031-2(h).
2. Whether the agreement was a bona fide business arrangement rather than a device to transfer shares to family members for less than adequate and full consideration.
3. Whether the agreement’s pricing terms were comparable to arm’s-length arrangements such that the contract price could be used as evidence of fair market value.

## Decision

- The Tax Court held that the shareholder agreement’s formula price did not control the estate-tax valuation of the decedent’s EJL shares.
- The court concluded the agreement operated primarily as a device to permit transfer of stock to family members for less than adequate and full consideration in money or money’s worth.
- Because the agreement failed the requirements of Treas. Reg. § 20.2031-2(h), the court required valuation of the stock at its actual fair market value without being bound by the contract formula.

## Legal Principles

- For estate-tax valuation of closely held stock, a buy-sell or shareholder agreement price controls only if it reflects a bona fide business arrangement, is not a device to transfer wealth to the natural objects of the decedent’s bounty for less than adequate consideration, and is comparable to arm’s-length terms. (Treas. Reg. § 20.2031-2(h).)
- A formula price that predictably and materially understates economic value—such as one keyed to tangibles-only book value in a business where intangibles drive value—supports a finding that the agreement is a wealth-transfer device rather than a valuation benchmark.
- When the agreement does not satisfy the regulatory conditions, the estate must determine fair market value under general valuation standards, and the contract price is not determinative.

## Conclusion

The Tax Court refused to treat a family shareholder agreement’s adjusted-book-value formula as the estate-tax value of closely held stock where the agreement chiefly functioned to shift shares within the family at a discounted price, requiring an independent fair market value determination.


Estate of Lauder v. Comm'r, 64 T.C.M. (CCH) 1643 (T.C. 1992)