Rev. Rul. 83-30

1983-1 C.B. 224, 1983-8 I.R.B. 7.

                       Internal Revenue Service
                                 Revenue Ruling

                     VALUATION;  STOCK;  UNDERWRITING FEES

                            Published: Feb. 22, 1983

SECTION 2031. - -DEFINITION OF GROSS ESTATE, 26 CFR 20.2031-2: Valuation of stocks and bonds

(Also Section 2053; 20.2053-3.)

  Valuation;  stock;  underwriting fees.  Underwriting fees that are incurred in marketing a large block of stock are not considered in determining blockage discount to be accorded in valuing the stock under section 2031 of the Code, but are deductible as an administration expense under section 2053(a)(2).

ISSUE

  Are underwriting fees, incurred in marketing a large block of stock, considered in determining a blockage discount to be accorded in valuing the stock under section 2031 of the Internal Revenue Code, or are the fees deductible as administration expenses under section 2053(a)(2)?

FACTS

  D died on March 5, 1982, owning 100,000 shares of M Corporation stock, which were listed on a national securities exchange and had a quoted market price. The block did not require registration with the Securities and Exchange Commission for sale to the public.

  It was necessary for D's executor to sell the block of stock in order to pay debts, expenses, and taxes for the estate.  The executor has demonstrated that the block of stock was large in relation to actual sales and that it could not have been sold over a reasonable period of time without depressing the market price available for the stock.  The executor also has shown that the most reasonable method for disposing of the block of stock was by way of a sale through an underwriter and that, by this method of sale, the stock would reasonably be expected to sell at less than the current quoted market price.

LAW AND ANALYSIS

  Section 20.2031-2(e) of the Estate Tax Regulations provides that if, in certain exceptional cases, 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 the stock 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.

  Section 2053(a)(2) of the Code provides generally for a deduction of the amount of administration expenses incurred by the estate.  Section 20.2053- 3(d)(2) of the regulations allows a deduction for brokerage fees and other expenses incurred in selling property if the sale is necessary to pay the decedent's debts, to pay other administration expenses, to pay taxes, to preserve the estate, or to effect distribution of the estate.

  Estate of Jenner v. Commissioner, 577 F.2d 1100 (7th Cir. 1978), and Estate of Joslyn v. Commissioner, 566 F.2d 677 (9th Cir. 1977), concerned whether underwriting fees are deductible as an administration expense under section 2053(a)(2) of the Code.  Each court held that because the underwriters were not purchasers of stock from the estate, but rather brokers on behalf of the estate, the underwriting fees were allowable deductions.  In each case, the Service had previously accepted a valuation of the stock with a blockage discount that reflected amounts for the underwriting fees and other selling expenses.  Because each court determined that the underwriting fees and other stock sale expenses were deductible as administration expenses, each estate received the benefit of a double reduction of the taxable estate to the extent that the expenses had already been included in the blockage discount.

  In the present case, the executor has met the requirements of section 20.2031-2(e) of the regulations for valuing the block of M Corporation stock based on the highest public sale price obtainable through an alternative method of disposal.  The executor has shown that as of the date of death the price at which the block could have been sold to the public through an underwriter (the most appropriate alternative method of disposal) was expected to be less than the current quoted market price.

  Note that, in such a situation where a blockage discount is allowable, section 20.2031-2(e) of the regulations provides that the price at which the stock could be sold through, rather than to, an underwriter may be a more accurate indication of value than market quotations.  This indicates that the relevant figure is the price that the public would pay to the underwriter for the stock, and not the price that the underwriter would pay to the estate. Accordingly, underwriting fees should not be considered in determining the blockage discount.

  The underwriting fees are deductible under section 2053 of the Code as administration expenses, because the sale through an underwriter was necessary to administer the estate.  See section 20.2053-3(d)(2) of the regulations.

HOLDING

  Underwriting fees, necessarily incurred in marketing a large block of stock are deductible as an administration expense under section 2053(a)(2) of the Code, and are not considered in determining the blockage discount to be accorded in valuing the stock under section 2031.

Rev. Rul. 83-30, 1983-1 C.B. 224, 1983-8 I.R.B. 7.