Shares in mutual funds can be "sold" by the shareholder only
back to the fund, and only at a set redemption price. Treas.Reg. §
20.2031-8(b), requiring that such shares be valued for federal
estate tax purposes at the current public offering ("asked") price,
which is determined by adding a load or sales charge to the net
asset value, is clearly inconsistent with the Investment Company
Act of 1940, and is therefore invalid. Pp.
411 U. S.
550-557.
457 F.2d 567, affirmed.
WHITE, J., delivered the opinion of the Court, in which DOUGLAS,
BRENNAN, MARSHALL, BLACKMUN, and POWELL, JJ., joined. STEWART, J.,
filed a dissenting opinion, in which BURGER, C.J., and REHNQUIST,
JJ, joined,
post p.
411 U. S.
557.
MR. JUSTICE WHITE delivered the opinion of the Court.
The Internal Revenue Code of 1954 requires that, for estate tax
purposes, the "value" of all property held by a decedent at the
time of death be included in the gross estate. 26 U.S.C. § 2031. By
regulation, the Secretary of the Treasury has determined that
shares in open-end investment companies, or mutual funds, are to be
valued at their public offering price or "asked" price at the
date
Page 411 U. S. 547
of death. Treas.Reg. on Estate Tax § 20.2031-8(b) (1963). The
question this case presents is whether that determination is
reasonable in the context of the market for mutual fund shares.
At the time of her death in 1964, Ethel B. Bennett owned
approximately 8,700 shares of three mutual funds that are regulated
by the Investment Company Act of 1940, 54 Stat. 789, as amended, 15
U.S.C. § 80a-1
et seq. [
Footnote 1] The 1940 Act seeks generally to regulate
publicly held companies that are engaged in investing in
securities. Open-end investment companies, or mutual funds,
"dominate" this industry. 1966 SEC Report 43. Unquestionably, the
unique characteristic of mutual funds is that they are permitted,
under the Act, to market their shares continuously to the public,
but are required to be prepared to redeem outstanding shares at any
time. § 80a-22(e). The redemption "bid" price that a shareholder
may receive is set by the Act at approximately the fractional value
per share of the fund's net assets at the time of redemption. §
80a2(a)(32). In contrast, the "asked" price, or the price at which
the fund initially offers its shares to the public, includes not
only the net asset value per share at the time of sale, but also a
fixed sales charge or "sales load" assessed by the fund's principal
underwriter who acts as an agent in marketing the fund's shares. §
80a-2(a)(35). [
Footnote 2]
Page 411 U. S. 548
Sales loads vary within fixed limits from mutual fund to mutual
fund, but all are paid to the fund's underwriters; the charges do
not become part of the assets of the fund. [
Footnote 3] The sales loads of the funds held by the
decedent ranged from seven and eight percent to one percent of the
fractional net asset value of the funds' shares.
Page 411 U. S. 549
Private trading in mutual fund shares is virtually nonexistent.
[
Footnote 4] Thus, at any given
time, under the statutory scheme created by the Investment Company
Act, shares of any open-end mutual fund with a sales load are being
sold at two distinct prices. Initial purchases by the public are
made from the fund, at the "asked" price, which includes the load.
But shareholders "sell" their shares back to the fund at the
statutorily defined redemption or bid price.
Respondent is the executor of the decedent's estate. On the
federal estate tax return, he reported the value of the mutual fund
shares held by the decedent at their redemption price, which
amounted to about $124,400. The Commissioner assessed a deficiency
based upon his valuation of the shares at their public offering or
asked price, pursuant to Treas.Reg. § 20.2031-8(b). [
Footnote 5] Valued
Page 411 U. S. 550
on that basis, the shares were worth approximately $133,300.
Respondent paid the deficiency of about $3,100, including interest,
filed a timely claim for a refund, and, when that claim was denied,
commenced a refund action in Federal District Court on the ground
that the valuation based on § 20.2031-8(b) was unreasonable. The
District Court agreed with respondent, and held the Regulation
invalid.
323 F.
Supp. 769. The Court of Appeals affirmed. 457 F.2d 567. We
granted the Government's petition for certiorari, 409 U.S. 840,
because of the conflict among the circuits. [
Footnote 6]
We recognize that this Court is not in the business of
administering the tax laws of the Nation. Congress has delegated
that task to the Secretary of the Treasury, 26 U.S.C. § 7805(a),
and regulations promulgated under his authority, if found to
"implement the congressional mandate in some reasonable manner,"
must be upheld.
United States v. Correll, 389 U.
S. 299,
389 U. S. 307
(1967).
See Bingler v. Johnson, 394 U.
S. 741,
394 U. S.
749-751 (1969);
Commissioner v. South Texas Lumber
Co., 333 U. S. 496,
333 U. S. 501
(1948). But that principle is to set the framework for judicial
analysis; it does not displace it. We find that the contested
regulation is unrealistic and unreasonable, and therefore affirm
the judgment of the Court of Appeals.
In implementing 26 U.S.C. § 2031, the general principle of the
Treasury Regulations is that the value of
Page 411 U. S. 551
property is to be determined by its fair market value at the
time of the decedent's death.
"The fair market value is the price at which the property would
change hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or to sell and both having
reasonable knowledge of relevant facts."
Treas.Reg. § 20.2031-1(b). The willing buyer-willing seller test
of fair market value is nearly as old as the federal income,
estate, and gifts taxes themselves, and is not challenged here.
[
Footnote 7] Under this test,
it is clear that, if the decedent had owned ordinary corporate
stock listed on an exchange, its "value" for estate tax purposes
would be the price the estate could have obtained if it had sold
the stock on the valuation date, that price being, under Treas.Reg.
§ 20.2031-2(b), the mean between the highest and lowest quoted
selling prices on that day. Respondent urges that similar treatment
be given mutual fund shares, and that, accordingly, their value be
measured by the redemption price at the date of death, the only
price that the estate could hope to obtain if the shares had been
sold.
Respondent's argument has the clear ring of common sense to it,
but the United States maintains that the redemption price does not
reflect the price that a willing buyer would pay, inasmuch as the
mutual fund is under a statutory obligation to redeem outstanding
shares whenever they are offered. According to the Government, the
only market for mutual fund shares that has both willing buyers and
willing sellers is the public offering market. Therefore, the price
in that market, the asked
Page 411 U. S. 552
price, is an appropriate basis for valuation. The central
difficulty with this argument is that it unrealistically bifurcates
the statutory scheme for the trading in mutual fund shares. To be
sure, the fund is under an obligation to redeem its shares at the
stated price. 15 U.S.C. § 80a-22(e). But, at the time of the
original purchases, both the fund and the purchasers are aware of
that duty, and both willingly enter into the sale transactions
nonetheless. As Judge Winner correctly observed in
Hicks v.
United States, 335 F.
Supp. 474, 481 (Colo.1971):
"Viewing the contract in this light meets every test of the
'willing buyer-willing seller' definition usually applied in the
determination of market value. The 'willing buyer' is the fully
informed person who agrees to buy the shares, agreeing at that time
to sell them to the fund -- the only available repurchaser -- at
the redemption price. The 'willing seller' is the fund which sells
the shares at market value plus a load charge, and which agrees to
buy the shares back at market less the load charge. That is the
market, and it is the only market. It is a market made up of
informed buyers and an informed seller, all dealing at arm's
length."
In the context of the Investment Company Act, the redemption
price may thus be properly viewed only as the final step in a
voluntary transaction between a willing buyer and a willing seller.
As a matter of statutory law, holders of mutual fund shares cannot
obtain the "asked" price from the fund. That price is never paid by
the fund; it is used by the fund when selling its shares to the
public -- and even then the fund receives merely the net asset
value per share from the sale, with the sales load being paid
directly to the underwriter. In short, the only price that a
shareholder may realize and that the fund -- the only buyer -- will
pay is the redemption
Page 411 U. S. 553
price. In the teeth of this fact, Regulation § 20.20318(b)
purports to assign a value to mutual fund shares that the estate
could not hope to obtain, and that the fund could not offer.
In support of the Regulation, the Government stresses that many
types of property are taxed at values above those which could be
realized during an actual sale. For example, ordinary corporate
stock is valued at its fair market price without taking into
account the brokerage commission that a seller must generally pay
in order to sell the stock. Respondent does not contend that that
approach is inappropriate, or that, for example, the value of
ordinary stock in an estate should be the market price at the time
less anticipated brokerage fees. But § 20.2031-8(b) operates in an
entirely different fashion. The regulation includes as an element
of value the commission cost incurred in the hypothetical
purchase of the mutual fund shares already held in the
decedent's estate. If that principle were carried over to the
ordinary stock situation, then a share traded at $100 on the date
of death would be valued not at $100, as it now is, but at, say,
$102, representing the "value" plus the fee that a person buying
the stock on that day would have to pay. It hardly need be said
that such a valuation method is at least inconsistent with
long-established Treasury practice, and would appear at odds with
the basic notions of valuation embodied in the Internal Revenue
Code. [
Footnote 8]
See
Estate of Wells v. Commissioner, 50 T.C. 871, 880 (1968)
(Tannenwald, J., dissenting).
Even if it were assumed that the public offering price were
somehow relevant to the value of mutual fund shares
Page 411 U. S. 554
privately held, there would still be the difficulty that shares
so held are, in important respects, similar to ordinary corporate
stock held subject to a restrictive agreement (such as a
first-refusal right at a specified price). With respect to the
value of such stock, the Treasury Regulations have provided that
the price that may be obtained in the marketplace does not control.
Rather, so long as the restriction is a
bona fide one, the
value of the shares in the hands of the restricted stockholder is
determined in accordance with the terms of the restriction.
Treas.Reg. § 20.2031-2(h). Outstanding mutual fund shares are
likewise held subject to a restriction, as the Court of Appeals
noted. 457 F.2d at 571. Those shares may not be "sold" at the
public offering price. By statute, they may be "sold" back to the
mutual fund only at the redemption price. We see no valid
justification for disregarding this reality connected with the
ownership of mutual fund shares.
The Government nevertheless argues that Treas.Reg. §
20.2031-8(b) reasonably values the "bundle of rights" that is
transferred with the ownership of the mutual fund shares. [
Footnote 9] For this argument, heavy
reliance is placed on this Court's decisions in
Guggenheim v.
Rasquin, 312 U. S. 254
(1941);
Powers v. Commissioner, 312 U.
S. 259 (1941);
United States v. Ryerson,
312 U. S. 260
(1941), which held that the cash-surrender value of a
single-premium life insurance policy did not necessarily represent
its only taxable value for federal gift tax purposes. [
Footnote 10]
Page 411 U. S. 555
In
Guggenheim, the lead case, the taxpayer purchased
single-premium life insurance policies with an aggregate face value
of one million dollars for approximately $852,000 and, shortly
thereafter, gave the policies to her children. On the gift tax
return, the policies were listed at their cash-surrender value of
about $717,000 -- admittedly the only amount the donor or the
donees could receive if the policies were surrendered. But the
Commissioner valued the gift at the cost of the policies, and this
Court upheld that valuation:
"the owner of a fully paid life insurance policy has more than
the mere right to surrender it; he has the right to retain it for
its investment virtues and to receive the face amount of the policy
upon the insured's death. That these latter rights are deemed by
purchasers of insurance to have substantial value is clear from the
difference between the cost of a single-premium policy and its
immediate or early cash-surrender value. . . ."
312 U.S. at
312 U. S. 257.
Because the "entire bundle of rights in a single-premium policy" is
so difficult to give a realistic value to, the Court deferred to
the Commissioner's determination and permitted valuation to be
based on cost: "Cost is cogent evidence of value."
Id. at
312 U. S. 258.
But, as the District Court observed, 323 F. Supp. at 773, shares in
mutual funds are quite unlike insurance policies, particularly in
light of the policyowner's right to receive the full face value of
the policy upon the insured's death. Moreover, mutual fund shares
present no analogous difficulties in
Page 411 U. S. 556
valuation. On any given day, their commercial value may be
determined by turning to the financial pages of a newspaper.
Obviously, with respect to mutual funds, there are "investment
virtues" and the prospects of capital gains or dividends. But that
is true of any corporate security. Nonetheless, shareholders in
mutual funds are singled out by the Regulation, and their holdings
valued at an unrealistic replacement cost -- which includes
"brokers' commissions" -- while other shareholdings are valued
without regard to such commissions.
The unrealistic nature of this difference in treatment may be
demonstrated by comparing the treatment of shares in load funds,
such as the decedent's, with shares in no-load funds. Obviously,
even if it could be argued that there are relevant differences
between mutual fund shares generally and corporate stock, there are
no differences in terms of "investment virtues" or related
interests between no-load and load fund shares. Indeed, as the
terms imply, the only real distinction between the two is that one
imposes an initial sales charge, and the other does not. [
Footnote 11] Nonetheless, under the
Regulation, a share in a no-load fund is valued at its net asset
value, while a share in a load fund is valued at net asset value
plus sales charge. To further illustrate, consider a decedent who
had purchased one share in each of two no-load mutual funds at $100
per share. The decedent died before either appreciated, but after
one of the funds had changed to a load fund. Although both shares
are still worth $100, and could be redeemed for only that amount,
the Regulation would require that one be valued at $100 and the
other at $100 plus the new load charge. A regulation that results
in such differing treatment of identical property should be
supported by something more than a transparent analogy to life
insurance.
Page 411 U. S. 557
We recognize that, normally, "Treasury regulations must be
sustained unless unreasonable and plainly inconsistent with the
revenue statutes."
Commissioner v. South Texas Lumber Co.,
333 U.S. at
333 U. S. 501.
But even if the Regulation contested here is not, on its face,
technically inconsistent with § 2031 of the Internal Revenue Code,
it is manifestly inconsistent with the most elementary provisions
of the Investment Company Act of 1940, and operates without regard
for the market in mutual fund shares that the Act created and
regulates.
Cf. L. E. Shunk Latex Products, Inc. v.
Commissioner, 18 T.C. 940 (1952). Congress surely could not
have intended § 2031 to be interpreted in such a manner. The
Regulation also imposes an unreasonable and unrealistic measure of
value. We agree with Judge Tannenwald, who stated at the very
outset of the dispute over Regulation § 20.2031-8(b), that
"it does not follow that, because [the Commissioner] has a
choice of alternatives, his choice should be sustained where the
alternative chosen is unrealistic. In such a situation, the
regulations embodying that choice should be held to be
unreasonable."
Estate of Wells v. Commissioner, 50 T.C. at 878
(dissenting opinion).
The judgment of the Court of Appeals is affirmed.
It is so ordered.
[
Footnote 1]
The decedent owned 2,568.422 shares of Investors Mutual, Inc. in
her own name, and 2,067.531 shares as trustee for her daughter. The
decedent also owned 2,269.376 shares of Investors Stock Fund, Inc.,
and 1,869.159 shares of Investors Selective Fund, Inc.
For thorough discussions of the operations of open-end
investment companies,
see SEC Report on Public Policy
Implications of Investment Company Growth, H.R.Rep. No. 2337, 89th
Cong., 2d Sess. (1966) (hereinafter 1966 SEC Report); SEC Report of
Special Study of Securities Markets, c. XI, Open-End Investment
Companies (Mutual Funds), H.R.Doc. No. 95, pt. 4, 88th Cong., 1st
Sess. (1963) (hereinafter 1963 Special Study).
[
Footnote 2]
A number of mutual funds are so-called "no-load funds"; in such
cases, the bid and asked prices are the same.
See 1966 SEC
Report 58-59. The underwriter for all three funds involved in this
case is Investors Diversified Services, Inc. (IDS), which is not
itself an open-end investment company. IDS also serves as the
investment manager of the funds, for which it receives separate
management fees.
See 15 U.S.C. § 80a-15.
[
Footnote 3]
The 1963 Special Study 96-97 explained the trading in mutual
fund shares as follows:
"Mutual fund shares are not traded on exchanges or generally in
the over-the-counter market, as are other securities, but are sold
by the fund through a principal underwriter, and redeemed by the
fund, at prices which are related to 'net asset value.' The net
asset value per share is normally computed twice daily by taking
the market value at the time of all portfolio securities, adding
the value of other assets and subtracting liabilities, and dividing
the result by the number of shares outstanding. Shares of most
funds are sold for a price equal to their net asset value plus a
sales charge or commission, commonly referred to as the 'sales
load,' and usually ranging from 7.5 to 8.5 percent of the amount
paid, or 8.1 to 9.3 percent of the amount invested. A few funds,
however, known as 'no-load' funds, offer their shares for sale at
net asset value without a sales charge. Shares of most funds are
redeemed or repurchased by the funds at their net asset value,
although a few funds charge a small redemption fee. The result of
this pricing system, it is apparent, is that the entire cost of
selling fund shares is generally borne exclusively by the purchaser
of new shares, and not by the fund itself. In this respect, the
offering of mutual fund shares differs from, say, the offering of
new shares by a closed-end investment company or an additional
offering 'at the market' of shares of an exchange-listed security,
where at least a portion of the selling cost is borne by the
company selling the shares."
(Footnote omitted .)
[
Footnote 4]
See Estate of Wells v. Commissioner, 50 T.C. 871, 873
(1968),
aff'd sub nom. Ruchlmann v. Commissioner, 418 F.2d
1302 (CA6 1969),
cert. denied, 398 U.S. 950 (1970); 1966
SEC Report 42; and 1963 Special Study 96.
[
Footnote 5]
The regulation reads, in part, as follows:
"(b)
Valuation of shares in an open-end investment
company."
"(1) 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, adjusted for any reduction in price available to
the public in acquiring the number of shares being valued. In the
absence of an affirmative showing of the public offering price in
effect at the time of death, the last public offering price quoted
by the company for the date of death shall be presumed to be the
applicable public offering price. . . ."
"(2) The provisions of this paragraph shall apply with respect
to estates of decedents dying after October 10, 1963."
This regulation was promulgated in 1963, T.D. 6680, 28 Fed.Reg.
10872, after some years of confusion within the Treasury Department
and between that Department and the Department of .Justice.
See the District Court's opinion,
323 F.
Supp. 769, 777. A corresponding regulation was adopted for gift
tax purposes. Treas.Reg. § 25.2512-6(b).
[
Footnote 6]
In
Estate of Wells v. Commissioner, supra, the Tax
Court sustained the regulation, with six judges dissenting. That
decision was affirmed by the Sixth Circuit in
Rehlmann v.
Commissioner, 418 F.2d 1302 (1969),
cert. . denied,
398 U.S. 950 (1970). The companion gift tax regulation was upheld
in
Howell v. United States, 414 F.2d 45 (CA7 1969).
Regulation § 20.2031-8(b) was held invalid in
Davis v. United
States, 460 F.2d 769 (CA9 1972),
aff'g 306 F.
Supp. 949 (CD Cal.1969).
See also Hicks v. United
States, 335 F.
Supp. 474 (Colo.1971),
appeal pending in the Tenth
Circuit, No. 72-1360.
[
Footnote 7]
See Treas.Reg. 63 Relating to Estate Tax Under the
Revenue Act of 1921, Art. 13 (1922 ed.) ("The criterion of such
value is the price which a willing buyer will pay to a willing
seller for the property in question under the circumstances
existing at the date of the decedent's death . . ."); Treas.Reg.
105 Relating to the Estate Tax Under the Internal Revenue Code (of
1939), § 81.10 (1942).
[
Footnote 8]
Whatever the situations may be where it is realistic and
appropriate under Treas.Reg. § 20.2031-1(b) to use a standardized
retail price to measure value for estate tax purposes, it is
sufficient to note here that, for the reasons given, the valuation
of mutual fund shares does not present one of those situations.
[
Footnote 9]
The Government argues that, as a practical matter, an estate
would rarely be hurt by valuation of mutual fund shares at the
asked price, because Treas.Reg. § 20.2053-3(d)(2) permits an estate
to deduct the difference between the asked and bid prices if the
shares are sold to pay certain enumerated expenses. By its terms,
however, that regulation applies only if "the sale is
necessary" to pay those expenses. (Emphasis added.) In any
event, the regulation is inapplicable altogether if the shares are
transferred in kind to an heir or legatee.
[
Footnote 10]
It is no coincidence that the contested regulation was placed in
Treas.Reg. § 20.2031-8, which deals with "[v]aluation of certain
life insurance and annuity contracts. . . ." But we agree with
Judge Winner:
"The Commissioner cannot cross-breed life insurance and
investment trust shares by the simple expedient of discussing them
in separate paragraphs of a single regulation."
Hicks v. United States, 335 F. Supp. at 482.
[
Footnote 11]
See 1966 SEC Report 51-59.
MR. JUSTICE STEWART, with whom THE CHIEF JUSTICE and MR. JUSTICE
REHNQUIST join, dissenting.
This case presents a narrow issue of law regarding the valuation
of certain assets -- shares in an open-end investment company or
"mutual fund" -- for purposes of the federal estate tax. The case
turns upon a single question of law: whether or not § 20.2031-8(b)
of the Treasury Regulations, which provides a specific method for
valuing such shares, represents a reasonable implementation of the
legislation enacted by Congress.
Page 411 U. S. 558
On December 4, 1964, Mrs. Ethel Bennett died testate leaving,
among other property, several thousand shares in three separate
mutual funds. Each of the funds in question is managed by a firm
known as Investors Diversified Services, Inc., and all are subject
to regulation by the Securities and Exchange Commission under the
Investment Company Act of 1940. In his tax return for the estate,
the respondent, Mrs. Bennett's executor, valued these shares at
their so-called "net asset value," that is, the amount at which the
estate is entitled, as a matter of law, to have the shares redeemed
by the issuer. The net asset value of a mutual fund share is
calculated daily by the issuing company, and is equivalent to the
fractional value per share of the fund's total net assets on that
day. In addition to serving as a gauge for the redemption value of
fund shares already issued, net asset value is also employed by the
issuing companies in determining the price at which they will offer
new shares in the fund to the public on any given day. In general,
such shares are sold to the public at their net asset value plus a
sales charge or "load." The load is a varying percentage of the
value of the shares sold, and fluctuates in accordance with the
size of the purchase. In the case of Mrs. Bennett's shares, the
maximum allowable sales load at the time of her death ranged
between 7% and 8%, and the minimum was 1%.
Upon receipt of respondent's return, the Commissioner, acting in
accordance with Treas.Reg. § 20.2031-8(b),
* assessed a
deficiency, contending that the value of
Page 411 U. S. 559
Mrs. Bennett's shares for federal estate tax purposes was their
public offering price on the date of her death, that is, the price
which a member of the public would have had to pay to acquire
similar shares from the issuer. This price would, of course,
encompass not only the net asset value of the shares, but also the
applicable sales load. Such a method of valuation for mutual fund
shares is expressly prescribed by the Treasury Regulation noted
above. Thus, the sole question before us is whether that Regulation
constitutes a reasonable exercise by the Commissioner of his
statutory power to prescribe "all needful rules" for the proper
enforcement of the tax laws,
see 26 U.S.C. § 7805, or
whether the Regulation is so inherently unreasonable and
inconsistent with the statute as to be invalid.
United States
v. Correll, 389 U. S. 299;
Bingler v. Johnson, 394 U. S. 741.
Upon the facts presented by this case, I cannot say that the
Commissioner's Regulation is invalid, and I therefore dissent from
the decision of the Court.
At the outset, it may be well to note the basic general rule
with respect to valuation that prevails under our estate tax laws.
This rule is embodied in Treas.Reg. § 20.2031-1(b), and provides
that the value of property includable in a decedent's estate shall
be the fair market value of such property at the date of the
decedent's death.
"The fair market value is the price at which the property would
change hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or to sell and both having
reasonable knowledge of relevant facts."
26 CFR § 20 2031-1(b).
The difficulty in applying this rule to mutual fund shares -- a
difficulty which, no doubt, led the Commissioner to promulgate
Regulation § 20.2031-8(b) -- is that such shares,
once
issued, are not subject to disposition in a market of "willing
buyers" and "willing sellers." Indeed, as both the District Court
and the Court of Appeals
Page 411 U. S. 560
noted, the only practical means of disposing of mutual fund
shares once acquired is redemption, and redemption cannot be deemed
a sale of the sort described in the general rule (26 CFR §
20.2031-1(b)), since the party purchasing (the issuing company) is
under an absolute obligation to redeem the shares when tendered,
and the party selling has no practical alternative, if he wishes to
liquidate his holdings, other than to offer them to the issuing
company for redemption.
This being the case, the Commissioner was faced with the problem
of establishing a method of valuing the shares most nearly equal to
their inherent worth. In doing so, he chose not to treat their
redemption value as dispositive of this question. In promulgating
his Regulation, he might rationally have considered that "on
demand" redemption at net asset value is but one of many rights
incident to the ownership of mutual fund shares.
For example, in the case of Mrs. Bennett's shares, her estate
had not only the right to redeem them "on demand," but also to
retain them; and, if it had done so it would have possessed not
only the normal dividend and capital gains rights associated with
most investments, but also the right to have such dividends and
capital gains as accrued applied toward the purchase of additional
shares at a price
below that which a member of the general
public would have had to pay for such shares. In addition, under
the investment contracts involved here, Mrs. Bennett's estate would
have had the right to exchange her shares in any one of the three
mutual funds involved for those of either or both of the other
funds managed by Investors Diversified Services, Inc. -- without
paying the usual sales charge or load.
The Commissioner has determined that the proper method of
valuing
all the rights, both redemptive and otherwise,
incident to the ownership of mutual fund shares is to determine
what a member of the general public,
Page 411 U. S. 561
acting under no constraints, would have had to pay for these
rights if purchased on the open market. And, as noted earlier,
although no such market exists for mutual fund shares
once
issued to an investor, a perfectly normal market of willing
buyers and sellers does exist with respect to such shares prior to
their issuance. Thus, the Commissioner took the price at which the
shares would have sold on this market as fairly reflective of their
inherent worth. I cannot say that this method of valuation adopted
by the Commissioner, and embodied in Regulation § 20.2031-8(b), is
so unreasonable and inconsistent with the statute as to render it
invalid.
The respondent's claim that the regulation is invalid is
grounded upon two principal arguments. First, he says, the estate
is being taxed on an amount in excess of what it can, as a
practical matter, realize from the disposition of the mutual fund
shares. But this is equally true of many other assets subject to
taxation under our estate tax laws. For example, real property
passing into an estate is taxed upon its full fair market value
despite the fact that, as a practical matter, the estate must
usually pay some percentage of that sum in brokerage fees if it
wishes to dispose of the property and receive cash in its stead.
This attack upon the Regulation thus amounts to no less than an
attack upon the whole system of valuation embodied in the Treasury
Regulations on Estate Tax, based as it is upon fair value in an
open market. I am not ready to hold that this long-established and
long-accepted system is basically invalid.
The respondent's second argument is that the Regulation places a
higher valuation on mutual fund shares than is placed upon
registered common stock shares and other similarly traded
securities. This argument assumes that the redemption or net asset
value of a mutual fund share is identical to the fair market value
of a traded security, and, by a parity of reasoning, that the
sales
Page 411 U. S. 562
charge or load associated with mutual fund purchases is
equivalent to the commission that a stockbroker charges a purchaser
of securities. Under this view, the Commissioner would be entitled
to tax mutual fund shares passing into an estate only on their net
asset value, since, in the allegedly comparable situation of common
stock shares, no consideration may be given to brokers' commissions
in arriving at an appropriate valuation for estate tax purposes.
See 26 CFR § 20.2031-2(b).
Although this argument has a certain superficial appeal, the
analogy on which it relies is hardly an exact one. For an estate,
in disposing of marketable securities, must pay a brokerage
commission on their
sale, and will thus realize less than
the amount at which the securities have been valued, while an
estate turning in mutual fund shares for redemption pays no
commission or other surcharge whatever. Moreover, unlike
traditional securities, there is no open trading market for mutual
fund shares once issued and in the hands of an investor. If such a
market of willing buyers and sellers did exist, the Commissioner
would doubtless be bound to treat mutual fund shares exactly like
other securities. But where no market for an asset exists, there
simply is no market price to provide a readily identifiable
standard for valuation. Under these circumstances, it is the
Commissioner's duty under the statute to establish criteria for
determining the true worth of the totality of rights and benefits
incident to ownership of the asset. This the Commission has done in
Regulation § 20.2031-8(b) by providing that the value of a mutual
fund share for federal estate tax purposes shall be the price a
member of the general public would have to pay to acquire such
share. Such an approach to the valuation of assets not regularly
traded in a market of willing buyers and sellers has already been
sustained by this Court in a case closely akin to the case before
us.
See Guggenheim v. Rasquin, 312 U.
S. 254.
Page 411 U. S. 563
Given the peculiar characteristics of mutual fund shares, it is
arguable that the Commissioner might reasonably have adopted a
method of valuation different from that which he has chosen. But
that is a question that is not for us to decide.
"[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 and regulations for the enforcement' of the Internal
Revenue Code. 26 U.S.C. § 7805(a). In this area of limitless
factual variations, 'it is the province of Congress and the
Commissioner, not the courts, to make the appropriate
adjustments.'"
United States v. Correll, 389 U.S. at
389 U. S.
306-307.
See Bingler v. Johnson, 394 U.S. at
394 U. S.
750.
I would reverse the judgment of the Court of Appeals and sustain
the validity of the Regulation.
* The text of the regulation, insofar as relevant here, reads as
follows:
"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, adjusted for any reduction in price available to
the public in acquiring the number of shares being valued. . .
."
There is a companion Gift Tax Regulation of identical import.
See 26 CFR § 25.2512-6(b).