On certification to the Superior Court, Appellate Division.
For affirmance -- Justices Mountain, Pashman, Clifford and Schreiber. For reversal -- Chief Justice Hughes and Justices Sullivan and Handler. The opinion of the court was delivered by Mountain, J. Handler, J., dissenting. Chief Justice Hughes and Justice Sullivan join in this opinion.
The executors of the estate of Haakon I. Romnes filed a transfer inheritance tax return with the New Jersey Transfer Inheritance Tax Bureau, listing among the decedent's assets a survivor's annuity that derived from an employee benefit plan of the decedent's employer, American Telephone and Telegraph Company. The annuity provided for annual fixed income payments to decedent's widow, Aimee C. Romnes, which would continue during the remainder of her lifetime. In valuing this asset, the executors claimed the right to take as a reduction the commuted value, as of the date of death, of all estimated federal income taxes that would thenceforth be payable by Mrs. Romnes upon her annual receipt of those payments. The Bureau denied the claim, as did the Appellate Division, 148 N.J. Super. 401 (1977). We granted certification upon the executors' petition. 74 N.J. 284 (1977).
The decedent died on November 19, 1973. As an employee of American Telephone & Telegraph Company he was a member of the Company funded "Plan for Employees' Pensions, Disability Benefits and Death Benefits." Among the elective options available to an employee-member was a pension payable to a surviving spouse and denominated an "annuitant's pension." To take advantage of this option an eligible employee could elect to receive a smaller monthly amount upon his retirement and during his own lifetime, than the maximum to which he was entitled. Thereafter, upon his death, one-third of the reduced pension would be paid to his designee for the remainder of that person's lifetime. The decedent's normal retirement pension under the plan was $12,794.45 per month. He exercised his option in favor of the annuitant's pension, however, and thereby became entitled to receive a reduced monthly amount of $11,297.50 so that upon his death his spouse would then receive an annuitant's monthly pension of $3,765.84 for life (later increased to $4,425.76 as a result of adjustments not relevant for present purposes).
Upon decedent's death the executors included in the transfer inheritance tax return the gross value of the annuitant's pension in the amount of $350,000. There is no dispute as to the accuracy of this calculation. They claimed, however, the right to reduce this sum by the commuted value, as of the date of decedent's death, of estimated federal income taxes which decedent's spouse would be required to pay upon receipt of the monthly pension payments.*fn1 The amount of taxes thus calculated by the executors was approximately $96,430. Again there is no dispute as to the calculation. Thus the executors claim that the taxable value of this annuity should be reduced to $254,200.
Originally the executors took the position that an administrative regulation, N.J.A.C. 18:26-8.10(d)*fn2 should be
interpreted -- or redrafted -- to afford them the relief they sought. While the case was pending in the Appellate Division, and before that court had rendered any decision, the Bureau repealed this particular regulation. Repeal Notice, 8 N.J.R. 356 (July 8, 1976); Deletion Notice, effective August 3, 1976, 8 N.J.R. 445 (September 9, 1976). In reply to a direct inquiry from this Court, the executors-appellants stated that they no longer place reliance upon the repealed regulation. We think this position is sound and accordingly will not refer further to this now-repealed rule.
The executors' present contention can perhaps be stated thus: The fund from which the annuity is to be paid was accumulated during Mr. Romnes' lifetime, forming, as it did, a part of the compensation he received from his employer. This part of his compensation -- his employer's contribution to his pension plan -- was not taxable to decedent during his lifetime, since it qualified for exemption under 26 U.S.C.A. § 402. But the tax obligation was only deferred. After Mr. Romnes' death the annuity payments his wife would receive, created in effect by her husband's lifetime earnings, would be subject to the federal income tax. Therefore the annuity payments, "accrued" at the decedent's death, may be said to reach Mrs. Romnes already burdened with this deferred tax obligation. Hence, the argument concludes, in placing a value upon the annuity, it is only fair and right that the amount of these income tax obligations be taken by way of reduction. Otherwise expressed, it is argued that since Mrs. Romnes will never enjoy in a beneficial sense that portion of her annuity payments that must be devoted to paying income taxes, she should not now be required to pay an inheritance tax upon what she will never beneficially receive.
The contention, so phrased, has great plausibility. But for the reasons set forth below we conclude that it is quite untenable.
The Concept of Market Value
All parties agree that the single issue in this case is the question of value: For New Jersey transfer inheritance tax purposes, what value should be ascribed to Mrs. Romnes' annuity? All parties also agree -- or at least give lip service to the proposition -- that to decide this issue it is necessary to determine the clear market value of the asset. The relevant statute so provides:
Taxes imposed by Chapters 33 to 36 of this title (§ 54:33-1 et seq.) shall be computed upon the clear market value of the property transferred. [ N.J.S.A. 54:34-5; emphasis added]*fn3
There is no real disagreement as to the definition of market value. It has very recently been accurately stated as follows:
[Market value is] the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. [ Lavene v. Lavene, 162 N.J. Super. 187, 192 (Ch. Div. 1978)]
This time-honored definition has been accepted by practically every court in the land. It applies regardless of the purpose for which market value is sought, be it eminent domain, equitable distribution, taxes or whatever. Where
there is a real, active market, this determination is simple. For instance, the market value of shares of stock of corporations listed on a stock exchange can be determined directly by reference to published market quotations. Market value of residential or business real estate can usually be determined by an examination of comparable sales, representing, as they do, the judgment of the marketplace. But with respect to certain other assets, the fixing of market value may be more difficult. This is true, for instance, with respect to shares of stock of a closely held corporation, which are seldom or never bought and sold. It is also true, at least to some extent, of various kinds of income interests, including an annuity such as we have here. In such cases, where a real, active market is not available with respect to a particular asset, the concept of market value is nonetheless retained; it is never abandoned for anything else. What we do, at least as far as New Jersey transfer inheritance taxes are concerned, is to create a hypothetical buyer and a hypothetical seller, whom we then place in a hypothetical marketplace. We attribute to each of these persons all information which might affect value, and then, weighing all relevant factors, decide how they would reach a price satisfactory to each. The process is well described in a leading treatise upon this subject:
The courts have adopted the position that all factors that would fix a price in the market place must be considered in the process of valuing an asset. In every situation where an asset must be valued, an artificial market place must be created, with a willing buyer and seller, each having knowledge of all the factors which will affect the final price. [ Beck, New Jersey Inheritance and Estate Taxes, 55 (1974)]
This Court has often said the same thing.
The starting point in valuation problems is the statute itself. R.S. 54:34-5 ordains that the transfer inheritance tax is to be computed upon "the clear market value of the property transferred." Grell v. Kelly, 132 N.J.L. 450, 451 (Sup. Ct. 1945). Given an
established market the solution is simple; absent actual sales the appraiser moves into a hypothetical market, Newberry v. Walsh, 20 N.J. 484, 497 (1956), which he constructs by using criteria which will likely gauge the thinking of one who desires but is not compelled to sell and one who is willing but not compelled to buy. Schroeder v. Zink, 4 N.J. 1, 13 (1950). This is a highly complex process which does not admit of exactness. The difficulty, however, is not to be overcome by disregarding it. "The statutory standard is the one by which the bureau's determinations of value are and must be controlled." Tracy v. Alexander, 17 N.J. 397, 401 (1955); Grell v. Kelly, supra. [ Bassett v. Neeld, 23 N.J. 551, 555-56 (1957)]
The bureau's duty under R.S. 54:34-5 is to determine the "clear market value" of the property subject to the tax. The clear market value is the fair value of the property as between one who desires but is not compelled to buy and one who is willing but not compelled to sell. Schroeder v. Zink, 4 N.J. 1, 13 (1950). Determination of value is often difficult in the case of shares of stock closely held and seldom or never sold, but, however difficult the discovery of such market value, the statutory standard is the one by which the bureau's determinations of value are and must be controlled. [ Tracy v. Alexander, 17 N.J. 397, 401 (1955)]
It is immaterial, of course, that no sale has taken place. If market value is to be an index of appraisal we necessarily deal in a hypothetical transaction so far as the claimant is concerned. [ Newberry v. Walsh, 20 N.J. 484, 497 (1956)]
Justice (later Chief Justice) Case, speaking for our former Supreme Court, expressed the point especially well. In considering the value of shares of a closely held corporation, he said:
The mandatory statutory direction (R.S. 54:34-5) is that "taxes imposed . . . shall be computed upon the clear market value of the property transferred." We think that the legislature used those words in their ordinary meaning. The tax is computed upon value; upon market value; upon the clear market value. Some kinds of
property always have a market and a quickly ascertainable price in that market; as for instance certain widely distributed securities traded daily in large volume on the floor of an exchange. Other classes of property have a "slow" but nevertheless a definite market; and real estate properties are ordinarily such. Still other classes of property, such as stock holdings in small, closely held corporations, present a difficult problem. . . . The problem may not be solved by disregarding it. It can be very perplexing; so perplexing that the Prerogative Court in such a case (In re Moore, 104 N.J. Eq. 400) was led to declare that "the clear market value is impossible of ascertainment" -- an observation that we hesitate to accept for the reason that it seems to exclude the mandatory statutory scheme of appraisal.
However difficult it may be to discover the market value of an asset, such a discovery must, under the statute, remain the goal. What the property may be worth to the seller or what it may be worth to the buyer is important chiefly as a criterion to help in establishing market value. [ Grell v. Kelly, 132 N.J.L. 450, 451-52 (Sup. Ct. 1945)]
In such a hypothetical market we apply an objective standard. "The test of market value is objective." Baetjer v. United States, 143 F.2d 391, 396 (1st Cir. 1944). Or, as another court has put it,
The test of fair market value is completely objective and has no reference to the peculiar position of the particular seller making the sale. [ Kansas City Star Co. v. Wisconsin Dept. of ...