When is Fair Market Value Determined?
Estate of Helen M. Noble v. Commissioner
In Estate of Noble v. Commissioner , the lax Court gave little attention in its 30-page opinion to the reports of two experts. Instead, it focused the decision on a discussion of a sale of the subject block some 14 months after the date of death (the valuation date). Two important issues are raised by Noble.
- The relevance of post-valuation date transactions or events ("subsequent events" in determining the fair market value of non-publicly traded interests; and,
- The meaning of the concept of "arm's length transactions" in the context of determinations of fair market value.
This article addresses both issues in the context of Noble and within one appraiser's understanding of the meaning of fair market value.
CASE BACKGROUND
The subject of the valuation was 116 shares of Glenwood State Bank ("the Bank"), representing 11.6% of its 1,000 shares outstanding at September 2, 1996, the date of death of Helen M. Noble ("the Estate"). Glenwood State Bank was a small ($81 million in total assets), over-capitalized (17.5% equity-to-assets ratio), low-earning bank (3% to 5% return on equity for the last four years) located in rural Glenwood, lowa. Historical growth of the balance sheet had been anemic prior to the valuation date, and prospects for future growth were similar.
Management's philosophy, implemented over many years, was to reinvest all earnings back into the Bank and to pay no shareholder dividends. There was no market for the Bank's shares.
The Estate's 11.6% block of the Bank's stock was the only block of the Bank that Glenwood Bancorporation, the parent holding company ("the Company"), did not own at the valuation date. The Company had, over a period of many years, gradually consolidated its ownership of the Bank to this point. The Company's historical philosophy had mirrored that of the Bank, and no dividends were paid historically or anticipated for the near future.
In short, the subject 11.6% interest in the Bank was not a very attractive investment, when viewed in terms of then-current expectations for growth, dividends, and overall returns for publicly traded bank shares.