National Bank of Detroit v. Department of Treasury

Blair Moody, Jr., J. (for affirmance). We granted leave to appeal to consider whether certain United States Treasury bonds, which were redeemed at par value by an executor in payment of Federal estate taxes, should be valued for Michigan inheritance tax purposes at par value or at the price quoted in the over-the-counter bond market on the date of decedent’s death. We determine that for purposes of the Michigan inheritance tax, the bonds should be appraised at par value to the extent they are used to pay Federal estate taxes. We, therefore, would affirm the Court of Appeals. Facts On Saturday, May 20, 1970, Daisy Gertrude McCornack died, leaving an estate inventoried at $1,334,194.15. Among the assets of the estate were certain issues of United States Treasury bonds with a par or face value of $298,000. The bonds, commonly referred to as "deep discount” or "flower” bonds, are redeemable at par value by estate executors provided (1) the holder owns the bonds on the date of death; (2) the bonds are properly includable as an asset of the estate; and (3) the executor redeems the bonds with the United States Treasury Department and uses the proceeds to pay the Federal estate tax owed by the estate. The executors of the McCornack estate elected to redeem the bonds at par value in partial payment of the Federal estate taxes owed. — 539 — On December 13, 1974, the Wayne Probate Court issued an order determining the Michigan inheritance tax for the estate. For Michigan tax purposes the value of the flower bonds was appraised at par value or $298,000. In a petition for rehearing, decedent’s executors claimed that the probate order had been entered erroneously. The executors argued that the value of the flower bonds should be determined by the price of the bonds on the over-the-counter market. Thus, the value of the bonds for Michigan estate tax purposes would be the price as quoted in the Wall Street Journal on the Friday before and the Monday after decedent’s death or $234,065.93. Subsequently, the probate court revised its order and appraised the bonds at their over-the-counter market value. This order was appealed by the Michigan Department of Treasury to the Wayne Circuit Court, which affirmed. On appeal, the Court of Appeals reversed. 78 Mich App 135; 259 NW2d 396 (1977). Discussion The issue in the instant case is clearly and narrowly drawn: whether United States Treasury bonds, which can be redeemed at par value for Federal estate tax purposes, should be valued for Michigan inheritance tax purposes at par value or at the price quoted on the over-the-counter market. What is unclear, however, is the legal standard to be applied in determining whether par value or the over-the-counter market value controls. The Michigan Legislature has enacted the following formula for the determination of the value of an estate: — 540 — "(1) The report of the appraiser shall be filed in the office of the judge of probate, and from such report and other proof relating to any estate before the judge of probate, the judge of probate shall forthwith, as of course, determine the clear market value of all estates as of the date of transfer.” (Emphasis added.) MCL 205.213; MSA 7.574.1 Although the appropriate standard the probate judge must apply is "clear market value”, the Legislature has not seen fit to define this rather elusive term of art. While the term "clear market value” is often used synonymously with the terms "fair market value”, "market value” and "actual value”,2 the most generally accepted definition of the term is as follows: "With regard to inheritance tax, highest price obtainable. [S]um which property would bring on a fair sale by a willing seller not obliged to sell to a willing buyer not obliged to buy, or fair market value, or cash value.” (Citations omitted.) Black’s Law Dictionary (4th ed), p 318. Thus, the concept of clear market value is composed of three separate but integrated elements: (1) the highest price obtainable; (2) a willing seller not obliged to sell; (3) a willing buyer not obliged to buy. An analysis of the three elements of the definition of clear market value compels us to conclude that for Michigan inheritance tax purposes the — 541 — clear market value of these flower bonds is their par value. I As par value of $298,000 exceeds the over-the-counter value of $234,065.93 by $63,934.07, there can be no doubt that par value in the instant case constitutes the highest price obtainable. II It is also evident that the executors of the McCornack estate, in redeeming the flower bonds in partial payment of Federal estate taxes, constitute a willing seller not obliged to sell. Appellants argue that the estate executors cannot be willing sellers because as executors they owe a fiduciary duty to the estate to sell at the highest price obtainable. Accordingly, because par value constitutes the highest price obtainable, the estate executors are compelled to sell at par value. We think this argument misses the point. First, appellant’s argument ignores the fact that highest price obtainable constitutes an essential element of the definition of clear market value. Second, we are aware that there are in essence two markets for the redemption of flower bonds: The United States government and the over-the-counter bond market. The California Supreme Court has pointedly noted: "It is common knowledge that one of the chief reasons for the purchase of the type of bond here involved is the advantageous marketability at the death of the holder, the United States Government having created an additional market for the bonds in which the estate of the holder is assured of an opportunity to obtain par — 542 — value to the extent there is federal estate tax liability that may be extinguished by their surrender.” In re Estate of Rosenfeld, 62 Cal 2d 432, 434; 42 Cal Rptr 449; 398 P2d 783 (1965). Accord, In the Matter of the Estate of Eggert, 82 Wash 2d 332, 335; 510 P2d 645 (1973). The effect, then, of the establishment by the United States government of an additional market for the flower bonds is to offer the holder of the bonds a choice of markets in which to redeem the bonds. Insofar as there is Federal estate tax liability and insofar as par value exceeds the over-the-counter market value on the date of decedent’s death, the holder may redeem the bonds in the government market. If on the date of death, however, the value of the bonds on the over-the-counter market exceeds par value as it often does, it would be folly and, perhaps, violation of the fiduciary duty if the holder, acting as a prudent, willing seller, would not redeem the bonds on the over-the-counter market. Therefore, the establishment of the additional bond market offers the bond holder a true choice of redemption markets. The redemption is based upon a prudent election made by the holder. In determining what is clear market value, it is without logic to simply ignore the very market arrangement selected by the holder to sell or redeem the bonds. Ill The converse is equally true, i.e., the United States government, in agreeing to purchase the bonds at par value from the holder, constitutes a willing buyer not obliged to buy. Appellants contend that the United States gov — 543 — ernment by contractually agreeing to redeem the flower bonds in payment of Federal estate taxes is not a willing buyer but is compelled to redeem the bonds. We disagree. Congress in enacting § 6312 of the Internal Revenue Code of 1954 has given the United States Treasury general permissive authority to redeem United States bonds in payment of taxes: "It shall be lawful for the Secretary or his delegate to receive, at par with an adjustment for accrued interest, Treasury bills, notes and certificates of indebtedness issued by the United States in payment of any internal revenue taxes, or in payment for internal revenue stamps, to the extent and under the conditions provided in regulations prescribed by the Secretary or his delegate.” 26 USC 6312. Thus, the authority of the United States Treasury to agree to and to redeem bonds in payment of taxes is entirely permissive and hinges upon the authorization of Congress for such agreement and purchase.3 The permissive quality of the United States government’s agreement to redeem Treasury bonds is dramatically emphasized in the Treasury Department circulars issued for the flower bonds at issue in the instant case: "Any bonds issued hereunder which upon the death of the owner constitute part of his estate, will be — 544 — redeemed at the option of the duly constituted representatives of the deceased owner’s estate, at par and accrued interest to date of payment, provided: "(a) That the bonds were actually owned by the decedent at the time of his death; and "(b) That the Secretary of the Treasury be authorized to apply the entire proceeds of redemption to the payment of Federal estate taxes.” (Emphasis added.) 1955 Treasury Dep’t Circular No. 956, 20 Federal Register 774 (1955), and 1960 Treasury Dep’t Circular No. 1052, 25 Federal Register 8966 (1960). It is obvious from the very language of the circular and from the statutory language that the United States Treasury is under no compulsion to receive Treasury bonds in satisfaction of tax obligations. It voluntarily receives the bonds in payment of Federal estate taxes. If Congress should revoke the authority of the Secretary of the Treasury to accept such bonds in payment of Federal estate taxes or if the Secretary of the Treasury amends the redemption provisions, there is no offer to redeem which can be accepted. From all the above, we hold that for purposes of the Michigan inheritance tax, the United States Treasury bonds at issue should be appraised at par value to the extent they are used to pay Federal estate taxes. We think that our decision today clearly comports with the intent of the Legislature in adopting "clear market value” as the standard to be applied in the appraisal of estates for Michigan tax purposes. We are cognizant of the fact that other jurisdictions have split over the issue before us; but we think that our holding reflects important policy considerations that were similarly addressed by a Justice of the Idaho Supreme Court: "While the Congress of the United States may have — 545 — intended to create a federal estate tax loophole by providing that certain bonds be redeemed at par value in satisfaction of those taxes — presumably in order to increase the attractiveness to investors of the low interest federal bonds — there is no indication that Idaho’s legislature intended a similar loophole in this state’s inheritance tax laws, particularly since Idaho has no interest in facilitating the marketability of federal bonds.” (Emphasis added.) Stein v State Tax Comm, 99 Idaho 70, 74; 577 P2d 798, 802 (1978). (Bakes, J., dissenting.) Conclusion We conclude that United States Treasury bonds which are redeemed at par value for Federal estate tax purposes should be valued at par value for Michigan inheritance tax purposes. We would affirm the Court of Appeals. No costs, a public question. Kavanagh, Levin, and Fitzgerald, JJ., concurred with Blair Moody, Jr., J. Footnotes [1] The date of transfer is the date of death. It is referred to as the date of transfer because it is on that date that any interest in the estate passes from the decedent to the beneficiaries. MCL 205.203; MSA 7.564; MCL 205.204; MSA 7.565. [2] Cf. Anderson v Frischkorn Real Estate Co, 253 Mich 668, 670; 235 NW 894 (1931). [3] We note that 26 USC 6312 was repealed by PL 92-5, § 4(a) (March 17, 1971), with respect to United States obligations issued after March • 3, 1971. Thus, United States Treasury bonds issued after March 3, 1971, cannot be used to pay Federal estate taxes. While this statutory change does not directly affect the specific flower bonds at issue in the instant case, we note further that as of January 31, 1975, in excess of $3.5 billion of the flower bonds were outstanding. The total amount of redeemable bonds outstanding was more than $20.5 billion. Form PD 800-B (Rev Feb, 1975), Dep’t of the Treasury, Bureau of the Public Debt.