## Facts

- Charles K. McClatchy died in 1989 while serving as chairman, CEO, and editor of McClatchy Newspapers, Inc.
- The corporation had Class A publicly traded shares and Class B shares that were not publicly traded, were convertible into Class A, and were subject to a stockholders’ agreement limiting transfer.
- McClatchy owned more than two million shares of Class B stock and, due to his position and holdings, was an “affiliate” under federal securities law.
- As an affiliate, McClatchy’s ability to sell or distribute his shares was limited by SEC Rule 144, reducing marketability.
- The parties stipulated that the shares’ value reflecting Rule 144 restrictions was $12.3375 per share, and that the value absent those restrictions was $15.56 per share.
- At death, the shares passed to the estate, which was not an affiliate; therefore, Rule 144 restrictions no longer applied after death.
- The estate reported the shares at $12.3375 per share; the IRS determined an estate tax deficiency and valued the shares at $15.56 per share.
- The Tax Court agreed with the IRS, valuing the shares without a Rule 144 discount; the estate appealed on stipulated facts.

## Issues

1. For estate tax purposes, must date-of-death fair market value reflect Rule 144 restrictions that applied to the decedent as an affiliate immediately before death, even though the restrictions ceased to apply to the estate after death?

## Decision

- The Ninth Circuit reversed the Tax Court.
- The court held the stock must be valued as of the moment immediately before death, accounting for the Rule 144 restrictions that limited the decedent’s ability to sell.
- The court rejected valuing the stock as if the post-death lapse of affiliate status could be used to ignore restrictions present at the valuation moment.
- The dissent would have affirmed, reasoning the estate’s non-affiliate status permitted unrestricted sales and justified the higher value.

## Legal Principles

- Federal estate tax valuation is determined at the time of death by valuing the interest that ceased by reason of death, using a moment-immediately-before-death approach.
- Fair market value reflects what a hypothetical willing buyer and willing seller, with reasonable knowledge and no compulsion, would agree to at the valuation moment.
- Legal restrictions on transferability or marketability binding on the decedent at the valuation moment are attributes of the property interest and must be reflected in fair market value.
- Post-death changes that merely alter the holder’s ability to sell (including changes that occur because the owner dies) generally may not be used to revalue the decedent’s pre-death property interest.

## Conclusion

The Ninth Circuit held that the estate had to value the decedent’s shares by incorporating SEC Rule 144 marketability restrictions applicable to the decedent immediately before death, even though those restrictions no longer applied to the estate after death.


Estate of McClatchy v. Commissioner, 147 F.3d 1089 (9th Cir. 1998)