Estate of Lauder v. Commissioner

Joseph and Estee Lauder and their two sons, Leonard and Ronald, were the only shareholders of a private cosmetic company. The Lauders considered the company’s nonpublic, family nature to be necessary to its continued success. In order to keep the company family-owned, the Lauders entered into consecutive restrictive stockholder agreements. The latest agreement was a first-offer agreement stating that if a family member decided to sell stock or died, the member’s shares would be offered for sale to the remaining family members and the company at a set price before the shares could be sold to anyone else. The agreement’s set price was the company’s book value less value added by the company’s intangible assets. However, much of the company’s value came from its intangible assets, and similar cosmetic companies were selling for two or three times their book values. When Joseph died, the company bought his stock at the tangibles-only book value of approximately $4,100 per share. Joseph’s estate (plaintiff) valued the stock at $4,300 per share on its estate-tax return. The federal government (defendant) valued the shares at $13,250 each and assessed an additional $42 million in estate taxes. The estate petitioned the United States Tax Court for relief, arguing that the agreement’s price was the stock’s value because the estate could not sell the stock for a higher amount.