United States v. Cartwright

PETITIONER:United States
LOCATION:Paris Adult Theater

DOCKET NO.: 71-1665
DECIDED BY: Burger Court (1972-1975)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 411 US 546 (1973)
ARGUED: Jan 16, 1973
DECIDED: May 07, 1973

Erwin N. Griswold – for petitioner
Ralph J. Gregg – for respondent

Facts of the case


Audio Transcription for Oral Argument – January 16, 1973 in United States v. Cartwright

Warren E. Burger:

We will hear arguments next in number 71-1665, United States against Cartwright.

Mr. Solicitor General.

Erwin N. Griswold:

Mr. Chief Justice and may it please the Court.

This is a federal estate tax case.

This is here on a writ of certiorari to review a decision of the United States Court of Appeals for the Second Circuit.

It involves one of those narrow but recurring questions which have no place to come for final decision except here and which arrive here only after long continued litigation and multiple decisions in the lower courts.

The question relates to the value to be assigned to mutual fund shares held by the estate of a decedent.

Specifically, it involves the validity of Section 20.1031-8 (b) of the Treasury Regulations on Estate Tax which is printed at pages 25 and 26 of our brief.

Beginning at the bottom of page 25 it provides, “The fair market value of a share in an open-end investment company (commonly known as a mutual fund) is the public offering price of a share.”

Then there is a final clause which is not relevant, “adjusted for any reduction in price available to the public in acquiring the number of shares being valued.”

But the significant part is that the regulation provides that, “The fair market value of a share in an open-end investment company is the public offering price of a share.”

Mr. Solicitor General, prior to the issuance of that regulation however, the Department of Justice did not go off —

Erwin N. Griswold:

Prior to the issuance of that regulation, there was confusion and uncertainty.

There was no clear rule or practice.

The Treasury repeatedly endeavored to use the public offering price.

Very frequently, the matter was settled out as one of the numerous things which came up in the final adjustment with the revenue agent.

When suits were brought, the Department of Justice would not defend the public offering price as the value in the state of the law where there was no regulation and no officially stated rule.

And I dare I say that that is one of the reasons why this regulation upon which we rely here, which was issued on October 10, 1963 by final approval by the Commissioner of Internal Revenue and the Assistant Secretary of the Treasury, and Publication in the Federal Register as a Treasury decision while it provides at the bottom of page 26 in our brief, the provisions of this paragraph shall apply with respect to estates of decedents dying after October 10, 1963.

And the public offering price is what the company offers the share?

Erwin N. Griswold:

The public offering price is the price at which the distributor sells the shares.

It is the price which is stated in a prospectus.

Usually, there is a close arrangement between the distributor and the investment company itself.

The investment company receives the net asset value.

The distributor receives the addition which in this case is usually about 8% often referred to as the load.

And a way to look at it and one to which I shall return is that the public offering price is the retail price at which the shares are sold to the public.

But it is never offered at any other price?

Erwin N. Griswold:

They not only are never offered at any other price by the distributor but the —

Or by the company?

Erwin N. Griswold:

Or by the company.

They could be offered by you or me if we own them —



Erwin N. Griswold:

— at another price.

But the industry has a built-in resale price maintenance provision in the law from the beginning Section 22 of the Investment Company Act provides that no principal underwriter of such security and no dealer which means anybody who is a dealer shall sell any such security to any person except the dealer, a principal underwriter or the issuer except at a current public offering price described in the prospectus.

So that the public offering price is the only lawful price at which it may be sold by a person who is subject to the Investment Company Act which means an underwriter or a dealer.

In this case, that is —

Supposing Mr. Solicitor General, you and I made a deal for shares of IDS that I had.

I take it that IDS would accept their transfer?

Erwin N. Griswold:

Yes, Mr. Justice I understand they not only would but that they must, and apparently, there are very rare sales by one individual to another.

They are discouraged by the industry as much as possible and they are impossible through dealers because a dealer cannot sell except at a public offering price.

Warren E. Burger:

As a practical matter, wouldn’t those transactions likely be limited to the very large blocks where they’d be a large saving?

Erwin N. Griswold:

Not necessarily.

They might be sold between members of the family or —

Warren E. Burger:

Other than that.

Erwin N. Griswold:

— or to its friends or in some special circumstance.

Warren E. Burger:

The real incentive is in the big blocks of the transaction, isn’t it?

The sales —

Erwin N. Griswold:

There would be a substantial amount involved in a big block and a person who had a large block would be reluctant to have them redeemed at the net asset value if he could find some other way to do it.

Apparently, it is still very difficult to sell them by a private individual at anything approaching the public offering price.

In this case, the decedent died on December 4, 1964, somewhat more than a year after the new regulation was put out so that the regulation was applicable.

Her executor valued the shares on her estate tax return at the redemption price, the bid price, or net asset value.

The Commissioner determined in accordance with the regulations that the share should be valued at their public offering price and he determined that a deficiency accordingly.

That difference is the load usually about 8% in an open-end investment trust.

The executor paid the additional tax, filed a claim for refund, filed suit to recover the tax contending that the regulation is invalid, and the District Court agreed and the Court of Appeals affirmed.

The regulation has similarly been held invalid in the Ninth Circuit in Davis against the United States with one dissent.

That case involved $600 and we did not seek to bring it here because the question is here in this case.

On the other hand, the regulation has been upheld in the Sixth Circuit in Ruehlmann against the Commissioner which affirmed a divided decision of the Tax Court of United States and this Court denied certiorari several years ago.

And the companion gift tax regulation has been held valid by the Seventh Circuit in Halliwell against the United States, and similarly there’s been some division in the decisions of the District Courts and the question is now pending before the Tenth Circuit and the Court of Claims.

To make reference to the companion gift tax regulation, what does the Internal Revenue Service do in measuring, for instance, a gift of IDS stock to an unimosounary (ph) donee.

Do they give the value with the load charge or without it?

Erwin N. Griswold:

It is my position Mr. Justice that in determining the value of a gift of a mutual fund share to a charity that under the analogy to the regulation because the regulation applies directly to estate tax and to gift tax that the amount of the deduction is the public offering price exactly the same figure for which we contend here.

I believe our opponents say that there is no evidence that that is actually applied.

I cannot cite clear authorities but it is our position that that is the valuation which should be applied in determining the amount of a gift tax deduction.

Now at first flash, it may seem that the regulation goes a little far.

It’s contended vigorously that the most that the estate can realize from the shares is the bid price or what might be called a liquidating value.

But further consideration, I think shows that that argument is by no means conclusive.

A property is not ordinarily valued in estates at what can be realized from it.

For example, if the decedent owned Blackacre at an agreed valued of a $100,000.

His estate could not ordinarily realize a $100,000 from it.

It would be likely to have to pay a commission on sale of say $6,000 or 6%.

Yet the value of Blackacre for estate tax purposes would undoubtedly be a $100,000 and not the $94,000 that could be realized net on its sale.

And that I think on further reflection is right, if they continue the whole Blackacre, don’t sell it, it’s worth a $100,000.

On the other hand, if they sell back Blackacre, and have to pay a $6,000 commission on sale.

That commission is deductible and only the net amount would be subject to estate tax.

The difference however in them is that in the one case it’s a seller’s commission, in the other case, it’s a buyer’s commission.

Erwin N. Griswold:

Yes, Mr. Justice but I don’t think that really makes any difference because I think that’s really the difference between a sale on the market and a retail sale.

When you sell real estate, you sell it on a market, and similarly, with respect to ordinary stocks and bonds held by a decedent’s estate.

The value for estate tax purposes would not be reduced by a commission on sale even though such a commission would reduce the amount which could actually be realized on the sale of the shares.

Now, in this case, the load becomes a part of the retail price just as the retailers’ markup in a drugstore or a grocery store becomes a part of the retail price including a portion of the markup which he devotes to a commission to his sales people, and yet the retail price would be the fair market value of the property and would include the sales commission.

Mr. Solicitor General, in your Blackacre example, one might sell through an agent but also, one might sell it privately, and might realize the $100,000.

Is that true with respect to a share in a mutual fund?

Erwin N. Griswold:

It is true if you can find a buyer who will pay you the full price.

Experience and the record show that that is a rare occurrence or it does sometimes occur.

The problem of disposing off the shares, suppose you do dispose off them at the net asset value then you can deduct the amount of the difference between the public offering price and the net asset value as in administration expense, if you sell them in connection with the administration of the estate, so that you would only be taxed if you actually do sell them on the net figure.

On the other hand, if you don’t sell them, you have got something which costs the full amount in the only place where you can legally buy them and practically buy them.

The offering price is in fact the price at which large numbers of these shares change hand everyday from willing sellers to willing buyers.

Thus, the record in this case includes Exhibit 11 offered by the taxpayer which shows the numbers of shares sold for a number of different fiscal years for each one of these three funds.

Exhibit 11 shows that in the fiscal year ended October 31st, 1965 which is the year in which the decedent died; Investors Stock Funds sold 15,213,000 shares which works out to about $60,000 per day — about 60,000 shares per day.

Investors Mutual sold 34, 499,000 shares in the year-ended September 30th, 1965, that works out to about a 138,000 shares per day which shows that there were a very large number of willing buyers who were willing to pay the net offering price at retail to sellers who were ready, willing, and available to sell the shares at the public offering price.

Now, the third fund, Investors Selective Fund was considerably smaller.

Erwin N. Griswold:

It sold 1,500,000 shares during the applicable fiscal year but even that would work out to 6,000 shares per day which passed from willing sellers to willing buyers.

Now, this is very persuasive evidence it seems to me that the offering price is in fact the price at which these shares really transfer from a willing seller to willing buyer or at least that the regulation which provides that they should be valued on this basis prospectively applied is a proper one for the Commissioner of Internal Revenue to make and should be sustained by this Court.

Mr. Solicitor General, is it really accurate to say that a fiduciary of an estate can find a willing buyer at the public offering price?

Erwin N. Griswold:

No, Mr. Justice but I don’t think that’s necessary.

Perhaps, this is as good a point as any to bring in this Court’s decision in Guggenheim against Rasquin which involved a gift, a gift of a paid up life insurance policy.

And the contention was there made on behalf of the taxpayer that the gift should be valued at the surrender value of the life insurance policy which is the only amount which the donee could obtain either from the insurance company or from a bank if it wanted to borrow on the policy.

And this Court held in Guggenheim against Rasquin that the proper value for gift tax purposes was the cost of that policy.

This was the price which would have to be paid in order to obtain such a policy.

This is in effect not the liquidating value which the surrender value would be but the retail price of the policy, and it used as analogy a gift by a man to his wife of a new automobile.

Let’s say that the automobile was a Cadillac which costs $65,000 for he paid $65,000.

He drove it to the house in order to deliver it to his wife as a gift.

By that time, it was a used car and it could be turned into a dealer only for a sum considerably less than $65,000.

But the regulations have always provided that the value in such a case is the retail price, the price which would have to be paid for such an item.

And now let me take for example these very mutual funds here.

Mr. Solicitor General, the regulations have always provided that but it’s not without some reluctance on the part of tax counsel to concede that they are right and —

Erwin N. Griswold:

I don’t think —

Now that I’ve interrupted you —

Erwin N. Griswold:

— Mr. Justice, there’s been much reluctance since Guggenheim and Rasquin which is 30 years ago.

Well, let me ask one thing which gives me some perceptual difficulty.

It seems to me, there are two sets of willing sellers and willing buyers here.

There is, if you will, the estate and the fund, and there is on the other side of that coin the fund and the buyer in the market place.

And one could say that the Government’s position is link in the buyer in the one couple with the seller and the other in eliminating the fund.

Is this perceptually difficulty?

Erwin N. Griswold:

Well, Mr. Justice there are difficulties here of course.

Nevertheless, to me, the really controlling factor in determining whether the regulation made by the Treasury can be sustained or not.

After all, this Court doesn’t have to decide whether it’s right.

This Court need only decide that it was proper for the Treasury to make this regulation.

And the fact is that very large numbers of these shares are transferred everyday between willing sellers and willing buyers at the net asset price.

Now, it is said in the Guggenheim case that, oh, well the insurance policy had a lot of value above and beyond the surrender value and it’s proper to take that into account in determining the value of the insurance policy.

But same thing is equally applicable here.

Erwin N. Griswold:

Mutual fund shares are widely sold on the representation which has great substance but this is the only way that a small investor can get diversification.

They are also sold on the representation which may or may not work out an experience but presumably has some effect to it and at least for which people are wiling to pay that through the mutual fund, you can get expert management.

You can get before your relatively small investment the same kind of supervision and watching and care and foresight that a very large investor can have.

Are there any other examples of the Revenue Service valuing an asset at an amount that the owner of it can never realize under any conditions whatsoever?

Erwin N. Griswold:

Well, yes Mr. Justice.

Guggenheim and Rasquin, and the life insurance policy is —

Under any conditions?

Erwin N. Griswold:

Under any conditions the — well, I don’t know what to say.

Just as much as here because the share may be valued at its net asset value on the decedent’s death at $10,000, let us say, although, he can only realize 9,200 by turning it in.

But by the time, he does turn it in, the market has gone way up and he gets $11,000 for it.

There’s no impossibility of his obtaining the full amount of the value which is determined at the date of the decedent’s death.

Warren E. Burger:

What about the situation — excuse me, Mr. Justice White —

Well, have you said — you’d never let him off for that amount then either?

Do you have the load charge on to that?

Erwin N. Griswold:

No, I don’t think you would add any load charge on to that.

If he’s later sold the shares for $10,000 — for $11,000, he would have a gain of $1,000 and of only $1,000 although he had in fact realized 1,800 more than he could have realized on the date of death.

Well, but you don’t do that in other context, do you?

How about an ordinary share of stock?

Erwin N. Griswold:

If the item is sold on the market, then you do not take into account either buying or selling commission.

On the other hand, if the item is sold at retail, and let’s take jewelry, I’ve already referred to an automobile.

If the item is sold at retail, it is customarily and always has been valued at its retail price.

Of course, you haven’t had your automobile regulation sustain either, do you?

Erwin N. Griswold:

No, Mr. Justice.

The automobile regulation goes back a great many years, and Guggenheim-Rasquin goes back 31 years now.

But this regulation, not only is 12 years old, but it was officially promulgated more than a year before this decedent died and it is in our contention a permissible approach by the Treasury to take to this problem.

As this Court has twice said recently in Correll and in Bingler.

Alternatives are of course available.

Improvements might be imagined but we do not sit as a committee of revision to perfect the administration of the tax laws.

Congress has delegated to the Commissioner not to the courts the task of prescribing all needful rules.

In this area of limitless factual variations, it is the province of Congress and the Commissioner not the courts to make the appropriate adjustment.

Erwin N. Griswold:

The role of the judiciary in cases of this sort begins and ends with assuring that the Commissioner’s regulations fall within his authority to implement the congressional mandate in some reasonable manner.

Warren E. Burger:

What is this case Mr. Solicitor General?


Erwin N. Griswold:

Correll is in 389 U.S. 299.

This potation appears and the citations appears on page 9 of our brief.

Mr. Solicitor General, I am a little bothered by the exchange between you and Mr. Justice Blackmun earlier in just my own analysis of the case.

If the Commissioner had defined the valuation of mutual funds for across the board purposes, I would find it much easier to accept than is definite — applying the definition just to estate tax purposes and apparently living open the question of what a taxpayer who is giving mutual funds toward charity, how that will be valued.

I know you said in answering to Mr. Justice Blackmun’s question, it was your position that you can value it the same way.

But what was the practice of the Treasury at the time that it sought to assess this estate?

Erwin N. Griswold:

Mr. Justice, the regulation is not limited to estate tax.

It also applies expressly to the gift tax and was issued on the same day on the same treasury decision with respect to the gift tax.

With respect to the income tax, I know of nothing which makes clear any practice.

In this respect, it is my position and the position which I would advise the Treasury to follow that they should treat the net asset the public offering price as the value for gift tax purposes for determining the amount of the gift in a deduction under the income tax.

In the meantime —

[Voice Overlap] whether they would do the same thing with respect to an automobile which is given to a hospital?

Erwin N. Griswold:

Yes, Mr. Justice.

If they gave a brand new automobile, I would think they would be entitled to the — let’s say an ambulance, I think they would be entitled to deduct the cost of that automobile as a gift to the hospital.

But suppose it were a used car.

Would it be the retail value?

Erwin N. Griswold:

If it were a used car, I think it would be the price which they properly paid to a dealer in used cars.

In other words, the retail price for a used car.

But let me take — let me take an instance which seems to me to be very close.

Let’s just take a gift of mutual fund shares.

Suppose a man gives his daughter, $10,000 worth of mutual fund shares as a Christmas gifts.

He would suppose I think that he has made a $10,000 gift and that he should make a corresponding report on a gift tax return.

And that is precisely what the regulation prescribed.

This is on page 27 of our brief.

We have set out the gift tax return, likewise, applicable with respect to gifts made after October 10, 1963.

Now that seems clearly the right value for gift tax purposes of mutual fund shares.

And yet, there’s no basis for distinguishing the value for gift tax purposes and the value for estate tax purposes.

Erwin N. Griswold:

If the bid price determines the value for estate tax purposes, then it is hard to see why the bid price should not control the value under the gift tax.

On this basis, the father would have made a gift of $9,200 and not $10,000.

That is his gift would be valued at the net asset value after excluding the load and not at the offering price which was in fact the price at which the willing father purchased the shares from a willing seller and to me the controlling concept here at least in determining whether the treasury had a rational basis for its conclusion is the retail price.

The retail price of these shares is the public offering price not the net asset.

Warren E. Burger:

Mr. Solicitor General, I suppose in the settlement of a very large estate running into many millions of dollars, it’s a common experience to sell large blocks of stock, and there are some SEC regulations that if they were selling one block in one company, they can’t sell it without some clearances and additionally, if it were a large block, it might depress the market.

So the executors hired Goldman Sachs to sell it and the Goldman Sachs charges them a fee of $50,000 to liquidate a couple of million dollars worth of the stock.

That’s what, an expense of administration or deductible?

Erwin N. Griswold:

That is an administration expense which is deductible.

Warren E. Burger:

Only from the income of the estate?

Erwin N. Griswold:

Deductible in computing the net estate for estate tax purposes.

Not the income of the estate.

Warren E. Burger:


That’s, what I meant to say.

Erwin N. Griswold:

But in computing the United States for estate tax purposes.

May I ask you, one more question.

Let’s take into a common listed stock which is traded over the market within the aspects of here today.

As I recall, (Inaudible).

Erwin N. Griswold:

Yes, Mr. Justice.

Is it consistent?

Why shouldn’t you take the bid price?

Erwin N. Griswold:

I don’t think so Mr. Justice because I think that that really highlights the very point I am trying to make that the difference between the sale on the market in which case neither selling nor buying commissions are taken into account whether they are paid or not.

And in the case of an over-the-counter share, if it’s sold on that day, then that determines the market price.

If it didn’t sell on that day, then you take the mean between the bid and the asked because that’s the closest you can come.

Although, if it’s sold on the day before or the day after that is also sometimes given some weight in determining the value.

On the other hand —

This is the market totally unavailable to the estate?

Erwin N. Griswold:

What is totally unavailable?

This market of which you speak.

Erwin N. Griswold:

No, not — you talked about the over-the-counter securities.

I’m talking about things which are sold on a market which would include over-the-counter securities.


Erwin N. Griswold:

They are sold on a market.

But this — but the IDS sale is totally unavailable.

Erwin N. Griswold:

The IDS sale is not on the market.

It is at retail.



Erwin N. Griswold:

And that to me is the whole key to this problem.

Yes, but the owner, the executor cannot sell that in market.

Erwin N. Griswold:

A person who buys at retail ordinarily cannot resale because he is not a retailer.

He is a consumer.

If he wants to dispose of whatever he buys whether it’s a fur coat or an automobile or something else.

She has to find somebody who will give him something which will be less than the amount he paid for.

Nevertheless, if the item is a thing which is customarily sold at retail, I think that the value for estate and gift tax purposes should be the retail price but that is in effect what this Court decided in Guggenheim against Rasquin, that that is the foundation for the regulation in this case.

That the regulation though it may not be inevitable and I do not contend that it is, is a rational regulation and that it should be sustained by this Court.

Warren E. Burger:

Thank you Mr. Solicitor General.

Mr. Gregg.

Ralph J. Gregg:

The counsel for the Government has argued on the premise that the sole issue to be decided here is the validity of the regulation.

A mere rebuttal of this would be apt.

I’m sure to only lead the Court with a rather narrow and somewhat blurred vision on what this case is all about.

The real issues are factual.

Were the shares owned by Mr. Bennett at the time of her death worth a $124,000?

That being the amount she could have sold them for, or where they worth a $133,000?

That being the amount the executor would have had to pay a broker to purchase as many additional sales as she already owned.

And thirdly, was the $9,000 difference, that being the amount going to the broker, an asset of Mrs. Bennett’s estate?

It seems to me that the regulation must stand or follow and the answers to those questions.

Then there’s also the constitutional question if the Commissioner may by regulation deprive taxpayers of due process of law by fixing a value, an arbitrate value that precludes the consideration of any other relevant facts.

I hope in a matter of 10 or 12 minutes to give the Court, the benefit I hope of a more broader perspective of the mutual fund issue.

It was in 1962, that I first became involved in the mutual fund issue, first on behalf of a town police officer, and then on the estate of my high school homeroom teacher.

Other cases came along quickly because beginning in 61 and 62, revenue agents were raising the same issue in every estate on mutual fund shares.

Ralph J. Gregg:

We soon discovered that it was useless to argue with revenue agents.

They — even though they privately agreed with us, they said their orders had come from Washington.

There was no one to appeal to inside the Treasury Department.

So what we did was to pay and sue for refunds in the District Courts.

We didn’t have to try those cases because as the counsel for the Government agrees, the Department of Justice agreed with us and ordered — or instructed the IRS to refund our money.

But this was all prior to Act 1211 1963.

There really wasn’t much of an issue to be tried on those days.

There was no doubt then as there’s no doubt today about the value of a mutual funds here.

It’s the amount the shareholder can sell it for by asking the company for his money and the amount is guaranteed.

Warren E. Burger:

Well, what about the Solicitor General’s analogy with the Cadillac?

He took the Cadillac back to the dealer.

He wouldn’t give you the full price for it very likely.

Ralph J. Gregg:

No, sir.

He would not.

As a matter of fact, if you bought a brand new Cadillac and you didn’t even take it out of its showroom and called up another Cadillac dealer and asked him how much he’d give it to you, you’d still get a second-hand car price.

And you would say that if your estate you ought to have the lower the price?

Ralph J. Gregg:

Yes, sir.

By all means.

Because there’s no way you can realize it?

Ralph J. Gregg:

No possible way.

Warren E. Burger:

How would the Cadillac be valued if it was on order and the man died as he left the dealer’s establishment?

Ralph J. Gregg:

That would depend sir, would it, on whether or not the retail dealer required the fellow to take delivery.

Warren E. Burger:

Well —

Ralph J. Gregg:

In that case, it would be a used car if he begged off and —

Warren E. Burger:

Assuming he’s going to stand on his contract to file a claim against the estate if he doesn’t get a check.

Ralph J. Gregg:

Then he has a brand new car which he has bought taken title to becomes a second-hand automobile.

If he calls up the —

Warren E. Burger:

At least the dealer would — the dealer might settle with the executors by refunding or accepting just his load?

Ralph J. Gregg:

It might very well.

But the dealer would certainly say to him.

Ralph J. Gregg:

I’ve sold you the car.

I got my commission.

I got 23 other Cadillac just like it sitting up in a lot.

I got to pay my salesman to sell those.

I can’t give you all your money back.

If you’re going to give him all his money back, you wouldn’t have sued him in the first place.

And this test that I am talking about for mutual fund shares what they’re worth is exactly the same test that they use for determining the value of a General Motors for example.

It’s what the shareholder can sell it for.

The amount revenue agents were talking about was the amount that will cost the executor to purchase his many additional shares as the decedent already had.

Paying a broker, an 8% commission for shares the decedent didn’t —

If I own a share of General Motors and it’s worth a $100 in the market and I have to pay a commission, I’d still get realize maybe 98 — 96 but I still have to include it in a 100.

Ralph J. Gregg:

If you say — if you have to pay for it sir — Your Honor?

No, if I own a —

Ralph J. Gregg:

If you own a share.

— share of General Motors and I included a $100 even though if I sold it, I — and to pay a commission, I might only get 96.

Ralph J. Gregg:

I’m sure that’s true because if I say to my broker, I’d like to sell the share —

If only I can realize more than 96 but it’s includible in my estate.

Is that included?

Ralph J. Gregg:

I agree with you 100%.

Warren E. Burger:

The 4% is just like the Goldman Sachs’ commission that Solicitor General and I were talking about isn’t it?

Ralph J. Gregg:

The what one?

Warren E. Burger:

The 4%.

The commission is an expense of the administration.

Ralph J. Gregg:

No, it isn’t that.

Under the cases, only if it’s necessary.

Only if the — if you’re paid on the higher price, pay the estate tax on the higher price, you have a higher basis.

If it’s then sold by the executor in order to and it’s necessary to affect the administration and everything of that character.

The Treasury says you may deduct the administration expense but you’ll find it in all the cases, they’re bitterly opposing the deduction on the grounds it wasn’t necessary to affect administration or to affect distribution or to pay expenses.

It’s a capital loss and I don’t see how the Government says you can take it as an administration expense in an estate.

And if you sell merely to protect yourself against an anticipated dropping market, do you get the administrative expense deduction?

Ralph J. Gregg:

Not at all.

Not necessary for the administration to affect distribution.

Just as you say if you tell your broker to sell your share of General Motors and other fellow says to buy one and the sale takes place at a $100.

That’s the price at which the share changed hands between a willing buyer and a willing seller under the regulation.

One fellow gets only 98 and the other pays a 102.

But the commissions paid are immaterial on the question of value and the Commissioner agrees.

But you see here, he wants to add the purchasing commission.

What do you have to say however at the Solicitor General’s statement that there are many thousands of buyers on the date of death who are willing to pay net asset value plus the load?

Ralph J. Gregg:

That’s the lifeblood of the whole industry during the past year for example, the number of sales at the redemption price for many months exceeded purchases at the public offering place.

This is continuous in their sales in both markets but the only market to which Mrs. Bennett had access or her executor was the bid price market.

The amount she could sell it for.

Well, you’re using my two sets of buyers and sellers.

Ralph J. Gregg:

Yes, yes, Mr. Justice.

I think, I find it quite well in the brief that the only difference really between the prices of which mutual fund share sell and those who have listed corporations or the way they’re reported in the paper, ones reported with a purchasing commission, the others are reported without any reference to purchasing commissions.

And that’s why – but the only difference between the two, that’s why this regulation around arouse such bitter opposition among the taxpayers, their lawyers and accountants because it seemed to them that the Government was merely sleeping over on them the use of the wrong price as quoted in the financial pages of the paper.

Now, there was no doubt in my mind that the Commissioner was going to lose this argument if the question is, what’s the value of the mutual fund share?

And I dare say that this case wouldn’t be before this Court today except for one thing.

The Commissioner has a very powerful weapon to use in such situations.

It’s a regulation.

A regulation gives the Commissioner an overwhelming advantage.

First of all, he has the choice of weapons.

He can choose the court he wants the case he wants to try and the court to try it in.

The taxpayer has none of these choices.

Value becomes a secondary issue.

The taxpayer now has the burden of proving that the Commissioner’s regulation is completely unreasonable, arbitrary, and capricious.

And to top it off, the Commissioner has the presumption, a judicial presumption that he is right and the taxpayer is wrong.

This isn’t an isolated instance in which the Commissioner has used his regulations in order to put the taxpayer to disadvantage.

He did it with the second class of stock regulations under the — for professional corporations.

His (Inaudible) regulations for professional corporations.

His business expense regulations under Section 274 just to mention a few that had been struck down recently by the lower courts and he is even now doing it with this Section 42 regulations on multiple corporations where again the taxpayer is going to have a very difficult burden of proving that a purely arbitrary did reallocation of income or expense is so arbitrary as to be completely unreasonable.

Mr. Gregg let me bring you back to Justice White’s question about his one share of General Motors.

Ralph J. Gregg:

Yes, sir.

Is it your position that that should be returned in the estate tax return not at the mean between the high and the low on the day of death, but at that the less the broker’s commission?

Ralph J. Gregg:

No, Your Honor.

Without subtracting or adding commissions of any kind, is the price at which —

Assuming you’re willing [Voice Overlap] at a $100?

Ralph J. Gregg:

At a $100.



And forget about the commissions.

Ralph J. Gregg:

Forget about the commissions of the regulations.

Forget about them completely.

They never have included —

Even though what the regulations do but do you concede that they are right in that respect?

Ralph J. Gregg:

Absolutely correct.

And what, what —

Excuse me.

Why do you say that when you take the position you are as to IDS shares?

Ralph J. Gregg:

Because they’ve added the purchasing commission.

And in a normal transaction for list — maybe I can express it, if I don’t say it right this time.

Let’s take the $5 million portfolio of a rich man on a common stocks.

He pays a tax on a 100% of what those shares can be sold for regardless of commissions.

Here, the Government has ruled the small investor and the mutual fund must pay a tax on a 108% of the amount for which they could be sold.

This I say is wrong.

In the General Motors case, at least you get the $100 in your pocket and you might have expense but in this case, you say it’s impossible for you to ever realize under any conditions more than the net asset value.

Ralph J. Gregg:

That’s all you can get Your Honor.

Warren E. Burger:

Is this a difference in degree or in principle?

A degree between —

Ralph J. Gregg:

Of practicality, as a matter of fact.

Warren E. Burger:

Well, a degree isn’t it?

Warren E. Burger:

The size of the load.

Ralph J. Gregg:

That’s when you purchase.

But what I can get —

Warren E. Burger:

The load comes in this hypothetical case too, 8%.

Ralph J. Gregg:

8% as a purchasing commission on small share levels.

It drops to 4% then to 1% in the large practice.

But that’s purchasing.

What I can get is only the net asset value and it’s stipulated that the only practical method of getting your money is to turn them into the investment company.

Warren E. Burger:

Well, if you’re liquidating a $5 million block of stock to pay an estate and inheritance taxes, probably the only feasible way to dispose off it is to engage a very skilled dealer to handle the liquidation and get the SEC approval.

Ralph J. Gregg:

No, sir.

I must have misspoken Your Honor.

It’s whether you dispose off the stock or not to put it in trust is the question, what are they worth in the date of death?

The $5 million — of common stocks.

They’re valued at a 100% of what they could be sold for on the market with commissions cutting always either way.

But here, the Government is saying that this small investor in mutual funds must pay a tax on 108% of what they can realize.

Warren E. Burger:

Well, they say that with a small or a large investor.

Ralph J. Gregg:

Small or large.

Warren E. Burger:

It’s a question of mutual fund.

Mr. Gregg, when one invests in mutual shares, he pays the 8% you’re talking about at the time he buys the shares.

Ralph J. Gregg:


So, that’s paying a commission at the time of purchase.

Now, when he sells those shares, they are redeemed in accordance with the contract and he has to pay no commission.

Ralph J. Gregg:

Without charge.

That’s right.

Ralph J. Gregg:


But if you sell a 100 shares of General Motors, you do pay a commission?

Ralph J. Gregg:

You do.

And that’s the 2% you’ve been talking about?

Ralph J. Gregg:

That’s the 2% I was talking about.

And if you buy a share, 100 shares of General Motors, you also pay a commission.

Ralph J. Gregg:

You also pay a 2% commission.

But in case of mutual funds, the commission is paid only at the time of purchase?

Ralph J. Gregg:


I think there’s been some confusion as to that.

Ralph J. Gregg:

I see.

When a regulation has been issued the taxpayer job isn’t very easy.

He has the court to explore the facts and decide the case on its merits.

The Government’s position however, is that the only issue to be decided in a vacuum is the validity of the regulation.

And it reminds the Court that if there’s at least some plausible grounds or rational basis for the Commissioner’s decision.

It must be sustained.

Here the Government has offered in its brief and verbally three and assortment of gift tax cases as lending that plausibility, Guggenheim gift tax cases, etcetera.

For what connection is there really between gifts to single premium life insurance policies and life of another, gifts of diamond rings subject to luxury, wartime or excise taxes.

I think that these arguments have to be recognized for what they really are.

A diversionary tactic to persuade the court that the Commissioner wasn’t totally unreasonable, then having gotten all of the plausibility mileage out of these and other equally far fetched analogies like Blackacre, etcetera.

I think, then the Government puts great emphasis I think on the duty of the Court to defer to the judgment of the Court defer to the judgment of the commissioner in choosing between so-called reasonable alternatives citing United States versus Correll and Bingler versus Johnson.

But again, what do those cases have to do with mutual funds shares?

And one of the question was when is the businessman out of town, and the other, what fellowships and scholarships are exempt from income tax?

In both, there are any numbers of definitions, some good, some better, one perhaps the best.

And understandably, the court was reluctant to superimpose its judgment on that of the taxpayer and those cases.

But this isn’t a good, better, or best situation.

It’s a good or bad.

It’s reasonable or unreasonable situation.

If Mrs. Bennett shares are worth $124,000 they couldn’t possibly have been worth the $133,000.

If the $9,000 difference was payable — if her broker would get that, it certainly was an asset of her estate.

And then as I pointed out before with some exemptions, mutual funds are held by people of matter.

It means the middle class investor.

The rich man with the portfolio as I said of a million dollars worth of securities and common stocks listed on the exchanges.

He pays on the estate tax based on the net asset value of his portfolio.

But the Government has ruled here that the small investor must pay a tax on a 108% of the net asset value of his portfolio.

I don’t see how the Commissioner justifies this discrimination and I would surmise that that’s why the Government didn’t ask Congress for a blessing on this new regulation.

Ralph J. Gregg:

He might have been reminded that Congress in passing the investment Company Act of 1940 was recognizing an important public need for a well regulated investment medium for the small investor.

And he might have been told that it wasn’t proper to penalize him for investing in the open-end investment company shares that were provided but that legislation.

Incidentally, counsel for the investment company institute as amicus has given the Court authoritative intelligent, informative brief as amicus explaining the close-end and open-end investment companies, load funds, no load funds, how the estate tax regulation ignores the realities of the market place and in addition, rather senselessly discriminates against the holders of the load fund shareholders.

Our position is that the Commissioner in promulgating this regulation was completely unrealistic and arbitrary and unfair.

By arbitrarily assigning of value of here to these years which the estate could never get under any circumstances at a price that precludes consideration of any other relevant facts which is required by his own regulations.

We think that he deprives the taxpayer’s due process a lot and that’s why on behalf of the many thousands of executors and their attorneys for whom I happen but by sheer chance today to be spokesman.

I respectfully urge this Court to agree with the federal judge of my district and the judges of the Second Circuit Court of Appeals that that value of Mrs. Bennett shares was a $124,000 and that the Commissioner was completely unrealistic, unreasonable, and arbitrary in saying that her estate should have to pay a tax of $9,000 next to $9,000 that even the Government admits her estate could never get for them.

Mr. Gregg, I am sticky and I am not thinking very clearly, tell me again why you can take a position one way with GM and the position another way with IDS?

Ralph J. Gregg:

I didn’t.

It’s the Government who takes that the opposite positions.

They value — the GM share at 100.

They value —

But you were willing to put it in at a hundred?

Ralph J. Gregg:

I certainly am.

But not at a —

Ralph J. Gregg:

If they said you got to value that General Motor share at a hundred plus the 2% purchasing commission.

In other words, the replacement costs I would disagree with them and they be disagreeing with their own regulations because for time and memorial, they have set the value of a General Motor share is 100 not a 102.

But they say that a value of a mutual fund share is not 100, it’s a 108.

Well, looking at it from the other side of that same coin, you’re arguing the IDS situation as what the estate can realize but not the GM situation at what you can realize.

Ralph J. Gregg:

It so happens that with IDS there is no selling commission or redemption charge.

So that I actually do in fact get 100.

With the GM situation, I actually get only 98 but I agree that the price at which the shares change hands was a 100 and that that is the fair market value for estate tax purposes.

Warren E. Burger:

Very well.

Thank you Mr. Gregg.

Thank you Mr. Solicitor General.

The case is submitted.