THE SECOND CIRCUIT REAFFIRMS THE EFFICACY OF RESTRICTIVE STOCK AGREEMENTS TO CONTROL ESTATE TAX VALUATION

Owners of close corporations have for many years entered into agreements with each other requiring a stockholder who wishes to dispose of his holdings first to offer them to his fellow stockholders or to the corporation and, in the case of death, granting to the survivors or the corporation an option to buy the shares from the decedent's estate. Such agreements either fix a price per share or contain a formula or a provision for appraisal under which such price is to be determined. About twenty years ago two leading cases both decided by the United States Court of Appeals for the Second Circuit, Wilson v. Bowers and Lomb v. Sugden, established the rule that the existence at date of death of a valid enforceable option, exercise of which would compel the executor to sell the shares at the stipulated price, fixes their value for federal estate tax purposes at the option price. This rule was held applicable even though the option was not exercised and despite the fact that the fair market value at date of death of shares not subject to such a restriction might exceed the agreement price.