Robinson v. Commissioner

*467 Before the Court are motions for partial summary judgment, in which the petitioners in both of the above-cited dockets ask us to determine whether so-called "blockage" should be taken into account in valuing shares of stock. Centronics Data Computer Corp. and Subsidiaries (Centronics), petitioner in docket No. 2951-82, contends that blockage constitutes a "restriction" which by its terms will lapse and thus should be excluded from the determination of fair market value of the stock under section 83(a)(1). ¹ The petitioners in docket No. 18038-80 claim that blockage is not a restriction at all; rather, they assert, it is a factor that consistently*99 has been considered over the years in determining fair market value. Respondent agrees with petitioners Robinson. For the following reasons, we also agree with petitioners Robinson. Accordingly, we grant the Robinsons' motion and deny Centronics' motion.

*468 FINDINGS OF FACT

The facts pertaining to the instant proceeding have been described in detail in our earlier opinion of Robinson v. Commissioner, 82 T.C. 444 (1984), and are incorporated herein by reference. Briefly stated, the stock at issue herein was obtained by Prentice I. Robinson (Robinson), one of the petitioners in docket No. 18038-80, pursuant to the exercise in 1974 of an option granted to him in 1969 by Centronics in consideration of his accepting employment by Centronics for a 5-year period. In the related case, we held that section 83 is applicable to the transaction. Under section 83(a), Robinson must*100 include in his gross income as of March 4, 1974, the difference between the fair market value of the 153,000 shares of Centronics stock over the amount paid for it on that date. The fair market value of that stock on that date is to be determined in a subsequent proceeding. To assist the experts in formulating their testimony as to value, the parties here ask us to decide whether or not the concept of blockage, if otherwise an appropriate factor, may be utilized.

OPINION

Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of relevant facts. United States v. Cartwright, 411 U.S. 546, 551 (1973). Where stock is listed and freely marketed on a recognized exchange, the mean price between the high and low trading prices on a given date is usually the fair market value for that date. Meyer v. Commissioner, 46 T.C. 65, 106 (1966). Blockage, if proven, may alter that figure.

The term "blockage" is simply a shorthand reference to the fact that --

the size of the block of stock to*101 be valued in relation to the number of shares changing hands in sales may be relevant in determining whether selling prices [of small blocks of stock] reflect the fair market value of the block of stock to be valued. [Sec. 20.2031-2(e), Estate Tax Regs.]

We, along with other courts, and finally respondent, have long recognized that where a block of stock is so large that it cannot *469 be sold in the appropriate securities market within a reasonable time without seriously depressing the market, the normal selling price, for example the quoted prices on a stock exchange at which small blocks of stock actually changed hands, should be discounted. See, e.g., Safe Deposit & Trust Co. of Baltimore v. Commissioner, 35 B.T.A. 259 (1937), affd. 95 F.2d 806 (4th Cir. 1938); Estate of Damon v. Commissioner, 49 T.C. 108, 117 (1967).

Under section 83(a), a restriction which will lapse is not taken into account in valuing shares of stock received as consideration for services. Hence, Centronics asserts that blockage is a restriction which will lapse; thus it is not to be taken into account in the*102 valuation determination. Robinson argues that blockage is simply not a restriction of any kind. We agree with Robinson. A "restriction" is not defined per se in section 83, although the regulations thereunder define a "nonlapse restriction" in part as a "permanent limitation on the transferability of property." Sec. 1.83-3(h), Income Tax Regs. We have held that a restriction includes both contractual and statutory limitations upon transferability. Pledger v. Commissioner, 71 T.C. 618 (1979), affd. 641 F.2d 287 (5th Cir. 1981). ²

Blockage has no defined life, but -- as with other purely economic*103 market factors -- it may appear and disappear as to a block of stock of a specific size, although the potential for a blockage effect is always present if the necessary conditions coalesce. The very phrasing of the parenthetical language of section 83(a) -- "determined without regard to any restriction other than a restriction which by its terms will never lapse" (emphasis added) -- indicates that, in order for something to be a "restriction," it must contain "terms" which indicate whether or not it lapses. Unlike every condition held to be a restriction under section 83, blockage does not have any "terms." Nor is it a principle of law, legal limitation, or even a rule of economic theory. Safe Deposit & Trust Co. of Baltimore v. Commissioner, supra at 263; compare Horwith v. Commissioner, 71 T.C. 932 (1979). Thus, it is not a "limitation" at all *470 within the intendment of the applicable regulations. It restricts neither the transferability of shares nor the ownership of proceeds from their sale. It is simply a factor affecting market value. Cf. sec. 20.2031-2(e), Estate Tax Regs.; sec. 25.2512-2(e), Gift*104 Tax Regs.

We also note that Centronics has cited no case in which blockage was held to be a restriction or other than an aspect of the determination of fair market value. The cases upon which Centronics relies, with which we are in full accord, relate to contractual restrictions or legal restrictions under Federal securities laws. See Pledger v. Commissioner, supra;Sakol v. Commissioner, 67 T.C. 986 (1977), affd. 574 F.2d 694 (2d Cir. 1978), cert. denied 439 U.S. 859 (1978). It is a far cry from contractual or statutory provisions which limit a shareholder's ability to dispose of his stock or legal deterrents against "insider trading" and the phenomenon of "blockage." ³*105 Robinson, on the other hand, correctly notes that this Court has held that blockage does not constitute a restriction within the meaning of section 1.421-6(d)(2)(i), ⁴ Income Tax Regs.Frank v. Commissioner, 54 T.C. 75 (1970), affd. 447 F.2d 552 (7th Cir. 1971).

While not directly on point, ⁵*107 in the absence of contrary case law pertaining to the meaning of the term "restriction" under section *106 83, our holding in Frank provides a useful analogy. In that case, the taxpayer's expert had testified that the taxpayer's *471 stock was subject to a restriction which had a significant effect on its value under the above-cited regulation in part because the taxpayer's holdings of stock were quite large. 54 T.C. at 95. We rejected this argument, stating:

The fact that petitioner's holdings were large would not appear to constitute in and of itself a "restriction" upon the marketability of petitioner's stock within the intendment of the regulations but merely a factor to be considered in determining the market value of such stock. [Frank v. Commissioner, 54 T.C. at 96.]

We see no relevant distinction between our holding in Frank pertaining to regulations under section 421 and the issue before us. Thus, to the extent that we have addressed the question, we have held that blockage is not a restriction. ⁶

We conclude that blockage is not a restriction within the meaning of section 83(a)(1)⁷ and thus, if the facts warrant, may be taken into account in determining the fair market value of Robinson's stock.

*108 Appropriate orders will be entered.