TRASK, Circuit Judge:
This is an appeal from a decision of the Tax Court that was adverse to the
Mr. Joslyn died testate, a resident of California, on June 30, 1963. The federal estate tax return for his estate was filed with the District Director of Internal Revenue at Los Angeles, California, on September 30, 1964.
At his death, Mr. Joslyn owned 66,099 shares of the common stock of Joslyn Mfg. and Supply Co. The stock was not then listed on any national exchange but was traded on the "over the counter" market. The 66,099 shares were valued on the return at $3,040,554 as of the date of death. Upon audit by the Commissioner of Internal Revenue, the agent proposed an increase in the date-of-death value of the shares to $3,103,697.43. His computation included an allowance for "blockage" elements in the amount of $366,500.07.
Following exhaustion of the administrative proceedings the single issue raised in the Tax Court was whether the underwriting expenses were deductible as expenses of administration under section
Appellant argues that the adjustment for blockage is not a "deduction" in the ordinary sense but a recognition of the economic fact that a large block of stock dumped upon a market not having enough buyers to purchase it at its quoted price per share will have to be reduced in price in order to be sold. Its value if required to be sold as a block is therefore less than the value per share computed in market terms multiplied by the number of shares to be sold. Recognition of this trading fact is set out in the regulations.
Here the logical fallacy of the "double deduction" rationale is a result of the fortuitous use of hindsight. When the stock was valued in the estate tax return its value was placed at $3,040,554.
The basis for the claimed deduction is section 2053(a)(2) and the regulations which implement it.
It also noted that:
On the face of it, the appellant has brought itself within the plain language of the statute and the regulations unless the method of valuation is considered to embrace a "deduction" that precludes the allowance of the administrative expense as a second claim for the same deduction.
The case law supports appellant's contention that expenses of administration allowed by the Probate Court are generally allowable as a deduction for federal estate tax purposes under section 20-2053-1(b)(2) of the Regulations. Estate of Louis Sternberger, 18 T.C. 836 (1952), aff'd, 207 F.2d 600 (2d Cir.1953), rev'd on other grounds, 348 U.S. 187, 75 S.Ct. 229, 99 L.Ed. 246 (1955).
In declining to consider the deductibility of the expense under section 2053 of the Code, the Tax Court relied upon Haggart's Estate v. Commissioner, 182 F.2d 514 (3d Cir.1950), which reversed the Tax Court decision reported at 13 T.C. 14 (1949), Estate of Elizabeth W. Haggart. We do not find the decision to constitute a precedent for the issue here. In Haggart, the testatrix left her residuary estate to certain trustees after her life interest in an inter-vivos trust established by her had terminated. In computing the gross estate for federal estate tax purposes the Commissioner disallowed the expenses and attorney fee entailed as a cost of settling the inter-vivos
The comment of the court below that "[h]owever, the courts clearly had in mind that a choice would have to be made—they could not be both charged against the value of the property and deducted," is not borne out by any language of the opinion in Haggart's Estate. The case did not pose a problem of blockage. For the same reasons we find the case of Emma Peabody Abbett, 17 T.C. 1293 (1952), relied upon by the Tax Court here, to be inapposite.
Nor do we consider this to be a double deduction problem. In many cases the actual costs of a secondary offering would not be available prior to the filing of the return. The factors then considered in determining value under blockage conditions might well be entirely different. See Ivens Sherr, 20 P-H Tax Ct. Mem. ¶ 51,218 (1951).
In its brief appellee relies upon United States v. Skelly Oil Co., 394 U.S. 678, 89 S.Ct. 1379, 22 L.Ed.2d 642 (1969), an income tax case, as authority for the proposition that the 1954 Internal Revenue Code should not be interpreted to allow "the practical equivalent of double deduction," as proscribed in Charles Ilfield Co. v. Hernandez, 292 U.S. 62, 68, 54 S.Ct. 596, 598, 78 L.Ed. 1127 (1934). But in Skelly as in Ilfield there was in fact a double deduction. Skelly concerned rebates which the corporation was required to refund to its customers for overcharges during 6 prior years. During the prior years it had been permitted to deduct from its gross income a "depletion allowance." In the year in which the refund was made it deducted 100 percent of the amount of the overcharges without any allowance for the fact that in prior years it was not paying a tax on 100 percent of its income. The Court sustained the Commissioner's reduction of the percentage of the depletion allowance from the total deduction claimed upon the theory that otherwise there would have been the "practical equivalent of double deduction." 394 U.S. at 680, 685, 54 S.Ct. 596. But in Skelly, again, there was a deduction in fact in both instances. Here there is not. The question here is not the receipt of money (income) and a deduction from it in the first instance and an attempt to deduct the gross amount in a later return. It is a question of valuation of a particular asset. Here, the tax return submitted a valuation based upon a general appraisal report. The Commissioner then reappraised using subsequently available selling expense figures instead of other alternative methods and by so doing seeks to prevent the Estate from availing itself of the deduction of properly incurred expenses which would otherwise be allowable. To adopt the taxpayer's position does not result in the Estate taking the "practical equivalent of double deduction"; rather, to do otherwise would allow the Commissioner by his selected method of determining value to deprive the taxpayer of a legitimate statutory deduction. We do not believe this was the intent of Congress or that it is a proper interpretation of the estate tax laws.
We therefore conclude that the Tax Court erred in deciding that the allowance of a deduction for payment of taxes and administration and other expenses was impermissible as a "double deduction."
The judgment of the Tax Court is reversed and the cause remanded for further consideration in accordance with this opinion.
"Item 32, Joslyn Mfg. Co. Discount was allowed up to the distribution expenses incurred as follows: Fair market value at date of death determined by taking the mean between the high and low $3,470,197.50 Less: Travel expense $ 489.52 Bond premium for underwriter 13,679.09 Attorneys for underwriter 6,860.35 Reimbursement to Joslyn Mfg. 46,366.66 Additional cost for Joslyn Mfg. 1,081.30 Costs of Kindel & Anderson 1,327.70 Additional costs Kindel & Anderson 399.07 Fees for registration 7,546.38 Underwriters fees 288,750.00 366,500.07 __________ ______________ $3,103,697.43" C.T. at 48.
The return shows that the executor used the figure of $46 per share for a total valuation of $3,040,554. Because the executor does not challenge the agent's recomputation, the appraisal opinion is of no legal significance except to indicate that the valuation process used by the executor for purposes of the return was apparently not based upon a computation involving the expense of a secondary offering.
The applicable regulations provide:
Appellee does not challenge compliance with this regulation but properly points out that it is not conclusive. Pitner v. United States, 388 F.2d 651, 659 (5th Cir.1967).