T.C. Memo. 1999-231

UNITED STATES TAX COURT

ESTATE OF FRANK A. BRANSON, DECEASED,

 MARY M. MARCH, EXECUTOR, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10028-95. Filed July 13, 1999.

Robert A. Mills, Marco L. Quazzo, and Mary Catherine Wirth,

for petitioner.

Rebecca T. Hill, Bryce A. Kranzthor, and Elizabeth 

Groenewegen, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARR, Judge: Respondent determined a deficiency of $756,564

in petitioner's Federal estate tax. 
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1All section references are to the Internal Revenue Code in

effect as of the date of decedent's death, and all Rule

references are to the Tax Court Rules of Practice and Procedure,

unless otherwise indicated. All dollar amounts are rounded to

the nearest dollar, unless otherwise indicated. 

The issues for decision are: (1) Whether the fair market

value of 12,889 shares of Savings Bank of Mendocino County

(Savings) on the date of decedent's death was $300 per share as

respondent determined in the notice of deficiency; $181.50, as

petitioner reported on its estate tax return; or some other

amount. We hold it was $276 per share. (2) Whether the fair

market value of 500 shares of common stock of Bank of Willits

(Willits) on the date of decedent's death was $850 per share, as

respondent determined in the notice of deficiency; $485 per

share, as petitioner reported on its estate tax return; or some

other amount. We hold it was $626 per share. (3) Whether, under

section 2053,1 petitioner may deduct certain expenses incurred in

defending its reporting position. We hold it may. 

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulation of facts, supplemental stipulation of facts, and

second supplemental stipulation of facts, and the accompanying

exhibits are incorporated herein by this reference. 

Petitioner is the estate of Frank A. Branson (decedent), who

died testate on November 9, 1991, in Mendocino, California. Mary
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March (March), decedent's daughter, is the executrix and

residuary legatee of the estate. March's legal address was

Potter Valley, California, at the time the petition in this case

was filed.

A. Decedent's Stock Acquisitions

Decedent inherited 12,369 shares of Savings stock and 1,143

shares of Willits stock from his wife, Charlotte, in 1983. The

balance of the Savings shares owned by decedent at the time of

his death was obtained either as gifts from his father-in-law or

by purchase.

B. Savings Bank of Mendocino

1. Background

In 1991, Savings was headquartered in Ukiah, California, and

had seven branch offices. Savings was founded on November 28,

1903, by Judge J.M. Mannon (J.M.) and a few other investors who

contributed $50,000 in total to the venture. J.M. was elected

president of Savings in 1914, and upon his death in 1926, his

son, Charles M. Mannon (C.M.), who was also one of the original

stockholders, was named president of Savings. C.M. was the

father of Charlotte, decedent's wife. Decedent began working for

Savings in 1935, and served as its president from 1964 until

1976, when he became a director. At the time of trial, Charles

B. Mannon (Mannon), the grandson of C.M. and decedent's nephew
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2The results of the years 1986 through 1990 are for 12

months that ended on December 31. Net income for the 12 months

that ended on Dec. 31, 1991, was $4,278,207, which is 23 percent

higher than the same period in 1990.

and March's cousin, was president and chief executive officer of

Savings and a director and the chairman of the board of Willits. 

Savings' stock is not traded on any established exchange or

over-the-counter market.

2. Net Income

For the 12 months that ended on October 31, 1991, Savings

had net income of $4,149,000. For the years 1986 through 1990,2

Savings had net income as follows:

Year Net Income

1986 $2,531,000

1987 2,825,000

1988 3,048,000

1989 3,128,000

1990 3,481,000

Savings' net income increased on average by approximately

10.39 percent per annum for the 5 years preceding decedent's

death. 

Savings has never had a negative income year. Earnings for

1991 were the best ever. Furthermore, provisions for loan losses

decreased from $670,000 (3.6 percent of total interest income) in

1986, to $310,000 (1.1 percent of total interest income) in 1991.

Thus, during this time, provisions for loan losses decreased both

on an absolute basis and as a percentage of interest income.
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3. Dividend History

Savings has a consistent history of paying dividends. For

the 12 months that ended on October 31, 1991, Savings paid common

stock dividends of $8.40 per share. For the years 1986 through

1990, Savings paid dividends as follows:

Dividends Paid 

Year Per Share 

1986 $4.60

1987 5.60

1988 6.60

1989 7.20

1990 7.80

Thus, dividends paid increased every year for the 5 years

preceding decedent's death, on average by approximately 12.8

percent per annum.

4. Total Assets and Shareholder's Equity

At all relevant times, Savings has had 100,000 shares of

common stock issued and outstanding. As of October 31, 1991,

Savings had total assets of $295,428,000 and shareholder's equity

of $28,344,000.

As of December 31, 1986 through 1990, Savings had total

assets and shareholder's equity as follows:

Year Total Assets Shareholder's Equity

1986 $200,959,000 $15,757,000

1987 228,705,000 18,023,000

1988 243,348,000 20,410,000

1989 266,638,000 22,817,000

1990 281,322,000 25,515,000
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Thus, total assets and shareholder's equity increased on

average by approximately 8.0 and 12.46 percent per annum,

respectively, for the 5 years preceding decedent's death.

5. Ownership

At the date of valuation, the shares of Savings stock were

distributed among 215 shareholders as follows:

 Shareholder No. of Shares Percentage

Estate of Frank A. Branson 12,889 12.89

Charles B. Mannon 16,716 16.72

Everett & Martha Coe 17,355 17.35

Others1 53,040 53.04

 Total 100,000 100.00

1The shares held by others are widely distributed, with many

of the shareholders owning less than 3 percent.

6. Sales of Savings Stock

The investment department of Savings maintains an informal

list of people who are interested in buying shares of its stock.

Usually, when a shareholder wants to sell his or her shares, the

shareholder contacts Savings, which informs the shareholder of

the most recent sale price and the current book value of the

stock. Savings then assists the shareholder in finding a buyer

willing to pay the price that the shareholder requires.

Historically, Savings shares have traded at or near book value. 

Since 1980, there have been several sales of blocks of

several hundred shares. In each of these sales, the shares

changed hands on a single day and all the shares traded for the
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3The stipulated amount of this sale is $935,000 (which is

$333.93 per share); however, the amount reported on petitioner's

Form 1041, U.S. Fiduciary Income Tax Return, for 1992 is $938,000

($335 per share). Furthermore, at trial respondent introduced

evidence, a list of sales of Savings shares after 1989 and a list

of sales of Savings shares from 1980 through 1992, which show the

price per share was $335. While stipulations are not set aside

lightly, we have broad discretion in determining whether to hold

a party to a stipulation. See Blohm v. Commissioner, 994 F.2d

1542, 1553 (11th Cir. 1993), affg. T.C. Memo. 1991-636. The

evidence in the record demonstrates that the stipulated amount is

simply incorrect. We are not bound by stipulations of fact that

appear contrary to the facts disclosed by the record. See Rule

91(e); Blohm v. Commissioner, supra. We, therefore, find as a

fact that the 1,111 shares were sold for $938,000 ($335 per

share) on Aug. 27, 1992. 

424 The Western Bank Monitor 123 (1993).

same price per share, although most of the buyers each purchased

less than 100 shares. No blocks of Savings stock comparable to

the size owned by petitioner have ever been sold; the only

shareholders who have ever owned blocks of that size are members

of the Mannon family or their relatives, and none of them have

ever tried to sell their entire interests.

However, on October 9, 1991, decedent sold a total of 1,111

shares for $307 per share to approximately 20 buyers; the book

value on October 31, 1991, was $283.44 per share. On August 27,

1992, petitioner sold 2,800 shares for $335 per share to

approximately 45 buyers;3 the 1992 third-quarter book value was

$321.74 per share.4 Savings assisted petitioner in this sale,

and petitioner made no attempt to sell these shares in any way

other than through Savings.
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5The results of the years 1986 through 1990 are for 12

months that ended on December 31.

C. Bank of Willits

1. Background

Willits has two branches and provides a full range of

banking services to individual and commercial customers. Willits

was incorporated on April 11, 1904, and began business with

$50,000 of paid-in capital. Decedent's father-in-law, C.M., was

Willits' president from 1928 until 1957. Willits' stock is not

traded on any established exchange or over-the-counter market.

2. Net Income

For the 12 months that ended on September 30, 1991, Willits

had net income of $819,000. For the years 1986 through 1990,5

Willits had net income as follows:

Year Net Income

1986 $624,000 

1987 659,000

1988 714,000

1989 711,000

1990 734,000

Thus, net income increased on average by approximately 5.59

percent per annum during the 5 years preceding decedent's death. 

Furthermore, except for 1989, net income increased every year. 

During this time, the provision for loan losses increased

from $55,000 in 1986 to $70,000 in 1991; however, it decreased as
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a percentage of total interest income from 1.41 percent in 1986

to 1.29 percent in 1991.

3. Dividend History

 Willits has a history of paying dividends. Dividends paid 

increased each year during the 5 years preceding decedent's

death. For the 12 months that ended on September 30, 1991, the

dividends were $29 per share. For the years 1986 through 1990,

Savings paid dividends as follows:

Dividends Paid 

Year Per Share 

1986 $18

1987 22

1988 24

1989 26

1990 28

Thus, dividends paid increased during this measurement

period on average by approximately 10.01 percent per annum. 

4. Assets and Shareholder's Equity

At all relevant times, Willits had 8,000 shares of common

stock issued and outstanding. As of September 30, 1991, total

assets were $54,929,000 and shareholder's equity was $6,448,000. 

As of December 31, 1986 through 1990, Willits had total

assets and shareholder's equity as follows:

Year Total Assets Shareholder's Equity

1986 $40,665,000 $4,013,000

1987 41,442,000 4,496,000

1988 47,540,000 5,017,000

1989 52,290,000 5,236,000
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1990 54,666,000 5,716,000

Thus, total assets and shareholder's equity increased each

year during the 5 years preceding decedent's death; total assets

increased on average by approximately 6.20 percent per annum and

shareholder's equity by 9.94 percent per annum. 

5. Ownership

At the date of valuation, the shares of Willits stock were

distributed among 48 shareholders as follows:

 Shareholder No. of Shares Percentage

Estate of Frank A. Branson 500 6.25

Charles B. Mannon 2,441 30.51

Everett & Martha Coe 1,414 17.68

Others1 3,645 45.56

 Total 8,000 100.00

1Of the shares held by others, 19.9 percent are owned by two

out-of-State shareholders and the balance by local residents who

own very small percentages.

6. Sales of Willits Stock

Historically, very few Willits shares have been traded each

year. A total of 1,062 shares changed hands in 22 transactions

from February 1980 until the valuation date. No shares were sold

during 1987 or for more than 4 years after April 1988. Most of

the sales were by Willits board members either to Willits

employees, board members, or directors, or to induce qualified

persons to become board members or officers. For instance, in

1980 a total of 64 shares was traded in four sales, 60 of those

shares were sold as qualifying shares by a board member to three
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6The parties stipulated that decedent sold 424 shares for

$151,550 ($357.43 per share) in 1985. However, this stipulation

is contrary to a buyer's (Mannon's) testimony and a list of all

the sales of Willits shares from 1980 through 1992, which was

offered into evidence as a joint exhibit. The evidence in the

(continued...)

persons hired by Willits; two as executive officers and one as a

director. Similarly, the only shares that changed hands in 1981

were 20 qualifying shares, which Mannon sold as an inducement to

a new board member; in 1982, the only shares traded were 20

shares sold by a departing executive officer to an incoming

officer. The most recent sale before the valuation date was

Mannon's sale of 20 qualifying shares to Dick Bozarth (Bozarth)

on March 23, 1988, for $500 per share.

Consequently, in these 22 transactions there were only six

sellers and three buyers who were not Willits employees, board

members, or directors. Most of the sellers, with the exception

of decedent, sold few shares; decedent sold 674 shares. Most of

the buyers, with the exception of Mannon, purchased minimal

interests. Mannon was a buyer in seven of the sales and

purchased a total of 663 shares; 572 from members of his family

and 91 from other sellers.

Historically, Willits shares have traded at or near book

value. For instance, decedent sold 174 of the Willits shares in

1984 for $56,550 ($325 per share) and 500 shares between December

1985 and January 1986 for $190,000 ($380 per share).6 The
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6(...continued)

record demonstrates that the stipulation is incorrect. We,

therefore, find as a fact that decedent sold 500 shares for $380

per share between December 1985 and January 1986. See supra note

3.

selling price of these shares was near their book value. The

book value of the Willits stock on September 30, 1991, was $806

per share.

Petitioner sold 500 shares on August 12, 1992, for $425,000

($850 per share). The book value of the shares on July 31, 1992,

was $875 per share. Petitioner did not independently value the

shares before the sale; rather, March and Mannon used the book

value of the stock as a reference to set the sale price.

Furthermore, petitioner did not contact or engage any

brokers or agents for this sale. Instead, March asked Mannon to

find buyers for the stock. Mannon confined his search for buyers

to the Willits board of directors. Rebecca Brown, an executive

officer and shareholder, bought 10 shares; Bozarth, a board

member and shareholder, bought 125 shares in the name of his

logging company; and Mannon bought 365 shares (10 of which he

gave to a longtime employee).

D. Petitioner's Sales and March's Recognition of Gain

Under decedent's will, the 12,889 shares of Savings stock

and the 500 shares of Willits stock were distributed as follows: 

(1) 4,000 shares of Savings stock in trust for the benefit of
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decedent's widow during her life, and upon her death, the

remainder to be distributed to March; (2) 1,000 shares of Savings

stock in trust for each of decedent's four grandchildren; and 

(3) the remaining 4,889 shares of Savings stock and 500 shares of

Willits stock to March as part of the residue of the estate. The

will provided that all estate taxes were to be paid from the

residue of the estate.

Pursuant to a court order, March was granted authority to

sell 2,800 shares of Savings stock at $335 per share and 500

shares of Willits stock at $850 per share. March sold the shares

and paid Federal and State of California estate taxes of

$1,008,698 and $200,632, respectively. March, as executrix and

residuary legatee, assumed individual liability for any estate

taxes later found due from petitioner.

Petitioner reported the value of the Savings and Willits

shares as $181.50 and $485, respectively, per share, on its Form

706, United States Estate (and Generation-Skipping Transfer) Tax

Return. Petitioner reported the capital gain from the sales of

the Savings and Willits shares on Schedule D of its 1992 Form

1041, U.S. Fiduciary Income Tax Return, which it filed on or

about April 15, 1993. Petitioner calculated the gain by

subtracting the value of the shares reported on the estate tax

return from the amount received from their sale. Petitioner

reported $429,800 of gain from the sale of the Savings shares and
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7Petitioner also reported $6,955 of long-term capital gain

from the sale of 2,000 shares of PG&E stock and a $738 net longterm capital loss carryover from 1991. The value of the PG&E

shares and the loss carryover are not at issue in this case.

$182,500 from the sale of the Willits shares.7 Petitioner,

however, did not pay any tax on these gains; instead, it reported

a net long-term capital gain distribution of $610,274 to March on

Schedule K-1, Beneficiary's Share of Income, Deductions, Credits,

Etc., which it attached to the Form 1041.

March and her husband, Charles March, filed their 1992 Form

1040, U.S. Individual Income Tax Return, using the status of

"Married filing joint return", on or about April 15, 1993, and

paid the tax due. March reported the $610,274 gain on line 13 of

Schedule D, which was attached to the Form 1040, as "Net longterm gain or (loss) from partnerships, S corporations, and

fiduciaries".

E. Petitioner's Claim for Deductions

After filing the Form 706, petitioner paid $21,226 of

attorney's fees, $8,830 of accountant's fees, and $12,396 of

appraisal costs to defend its reporting position in an audit by

the Internal Revenue Service. Petitioner filed Form 843, Claim

for Refund and Request for Abatement, to claim a refund of the

estate tax paid on these amounts. In addition, petitioner filed

a protective claim for refund of estate tax for additional
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administrative expenses that it expects to incur in further

defending its position.

OPINION

Respondent determined a deficiency of $756,564 in

petitioner's 1991 Federal estate tax. Respondent's determination

was based upon his contention that the date-of-death fair market

values of the 12,889 Savings shares and the 500 Willits shares

were $3,866,700 ($300 per share) and $425,000 ($850 per share),

respectively. Respondent now argues that the values of the

Savings and Willits shares were no less than $3,776,477 ($293 per

share) and $386,000 ($774 per share), respectively. Respondent's

determination as to the fair market value of the subject property

is presumptively correct, and petitioner bears the burden of

proving that the fair market value is lower. See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). 

Petitioner asserts that the values it reported on its return

for the Savings shares, $2,339,354 ($181.50 per share), and the

Willits shares, $242,500 ($485 per share), are correct; however,

it argues that if this Court decides that there is a deficiency,

it is entitled to equitable recoupment of the tax paid on the

gain recognized by March due to the lower bases provided by the

values petitioner reported on its estate tax return.

Finally, petitioner asserts that it is entitled to deduct

certain expenses from the value of the gross estate. The
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expenses are attorney's fees, accountant's fees, and appraisal

costs which were incurred after the estate tax return was filed

to prove the shares' reported values. 

Fair Market Value

Fair market value is defined as the price at which property

would change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or sell and both having

reasonable knowledge of relevant facts. See United States v.

Cartwright, 411 U.S. 546, 551 (1973); Propstra v. United States,

680 F.2d 1248, 1251 (9th Cir. 1982); sec. 20.2031-1(b), Estate

Tax Regs. This is an objective test and requires the property to

be valued from the viewpoint of a hypothetical buyer and seller,

each of whom would seek to maximize his or her profit from any

transaction involving the property. See Propstra v. United

States, supra at 1251-1252; Estate of Jung v. Commissioner, 101

T.C. 412, 438 (1993). Profit maximization must be achieved in

the context of the market conditions and the constraints of the

economy existing at the valuation date. See Estate of Newhouse

v. Commissioner, 94 T.C. 193, 218 (1990). 

For Federal estate tax purposes, the fair market value of

the subject property is generally determined as of the date of

death of the decedent; ordinarily, no consideration is given to

any unforeseeable future event that may have affected the value

of the subject property on some later date. See sec. 20.2031-
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1(b), Estate Tax Regs.; see also First Natl Bank of Kenosha v.

Unites States, 763 F.2d 891, 893-894 (7th Cir. 1985); Estate of

Newhouse v. Commissioner, supra; Estate of Gilford v.

Commissioner, 88 T.C. 38, 52 (1987). 

The question of "Valuation of stock for tax purposes is a

matter of 'pure fact.'" Hamm v. Commissioner, 325 F.2d 934, 938

(8th Cir. 1963) (quoting Penn v. Commissioner, 219 F.2d 18, 20-21

(9th Cir. 1955)), affg. T.C. Memo. 1961-347; Estate of Newhouse

v. Commissioner, supra at 217; see also In re Nathan's Estate v.

Commissioner, 166 F.2d 422, 425 (9th Cir. 1948) (the question of

fair market value for tax purposes is ever one of fact and not of

formula), affg. a Memorandum Opinion of this Court dated July 17,

1946. 

While listed market prices are the benchmarks in the case of

publicly traded stock, in determining the value of unlisted

stocks, actual sales made in reasonable amounts at arm's length,

in the normal course of business within a reasonable time before

or after the valuation date are the best criteria of market

value. See Estate of Fitts v. Commissioner, 237 F.2d 729, 731

(8th Cir. 1956), affg. T.C. Memo. 1955-269; Estate of Andrews v.

Commissioner, 79 T.C. 938, 940 (1982); Duncan Indus., Inc. v.

Commissioner, 73 T.C. 266, 276 (1979); Estate of Campbell v.

Commissioner, T.C. Memo. 1991-615; sec. 20.2031-2(b), Estate Tax

Regs. 
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If it is established that the value of any share of stock

determined on the basis of selling price does not reflect the

fair market value thereof, then some reasonable modification of

that basis or other relevant facts and elements of value are

considered in determining the fair market value. See sec.

20.2031-2(e), Estate Tax Regs. 

Issue 1. Fair Market Value of the Savings Shares

The parties agree that the best indication of the Savings

stock's market value is the actual sale price of the shares.

Petitioner, however, asserts that the actual sale price is just

the starting point for deciding fair market value--that discounts

should be applied to the sale price for minority interest, lack

of marketability, and blockage. Respondent contends that the

actual sale price reflects the discount for minority interest and

lack of marketability. Respondent further contends that in view

of the higher prices received for the shares sold in the postdeath market, no significant discount for blockage is

appropriate. We agree with respondent.

Expert Witnesses

Both sides submitted expert witness reports and presented

expert witness testimony in regard to the value of decedent's

shares of Savings stock at the date of death.

Expert witness testimony is appropriate to help the Court

understand an area requiring specialized training, knowledge, or
- 19 -

judgment. See Fed. R. Evid. 702; Snyder v. Commissioner, 93 T.C.

529, 534 (1989). The Court, however, is not bound by an expert's

opinion. We weigh an expert's testimony in light of his or her

qualifications and with respect to all credible evidence in the

record. Depending on what we believe is appropriate under the

facts and circumstances of the case, we may either reject an

expert's opinion in its entirety, accept it in its entirety, or

accept selective portions of it. See Helvering v. National

Grocery Co., 304 U.S. 282, 294-295 (1938); Seagate Tech., Inc. &

Consol. Subs. v. Commissioner, 102 T.C. 149, 186 (1994). 

Moreover, where experts offer divergent estimates of fair market

value, we decide what weight to give these estimates by examining

the factors they used in arriving at their conclusions. See

Casey v. Commissioner, 38 T.C. 357, 381 (1962). We have broad

discretion in selecting valuation methods, see Estate of

O'Connell v. Commissioner, 640 F.2d 249, 251 (9th Cir. 1981),

affg. on this issue and revg. in part T.C. Memo. 1978-191, and

the weight to be given the facts in reaching our conclusion

because "finding market value is, after all, something for

judgment, experience, and reason", see Colonial Fabrics, Inc. v.

Commissioner, 202 F.2d 105, 107 (2d Cir. 1953), affg. a

Memorandum Opinion of the Court. 

Where necessary, we may reach a determination of value based

upon our own examination of the evidence in the record. See
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Lukens v. Commissioner, 945 F.2d 92, 96 (5th Cir. 1991) (citing

Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976),

affg. T.C. Memo. 1974-285). Finally, because valuation is

necessarily an approximation, it is not required that the value

we determine be one as to which there is specific testimony,

provided it is within the range of figures that properly may be

deduced from the evidence. See Silverman v. Commissioner, supra;

Anderson v. Commissioner, 250 F.2d 242, 249 (5th Cir. 1957),

affg. in part and remanding in part T.C. Memo. 1956-178. With

these principles in mind, we consider the experts' opinions. 

Petitioner's Expert's Opinion

Petitioner's expert is John R. Gasiorowski (Gasiorowski). 

Gasiorowski is the director of Arthur Anderson & Co. Valuation

Services in Northern California, and he has had extensive

experience in valuing businesses. In his report, Gasiorowski

used the market and income methods to value petitioner's Savings

shares. 

The market method measures the value of an asset through an

analysis of recent sales or offerings of comparable property. If

comparable publicly traded companies can be found, then the stock

prices for those companies can be used to derive benchmarks, such

as financial ratios, which can be applied to the corresponding

financial measures of the subject company to derive a value for

its stock. 
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In applying this method, Gasiorowski first selected eight

publicly traded banks with overall characteristics similar to

Savings as "guideline companies". He then compared the guideline

companies' operating results and financial positions from 1986

through the third quarter of 1991 with Savings' operating results

and financial positions for the same time period. On the basis

of this comparative analysis, Gasiorowski selected certain

financial ratios to value the Savings shares. Giving equal

weight to the price-to-earnings ratios, the price-to-book ratios,

and the price-to-dividend ratios, Gasiorowski concluded that the

"marketable minority value" of the Savings stock was $295 per

share, before considering a discount for lack of marketability.

The marketable minority value is Gasiorowski's "best estimate of

what the Savings Bank stock might sell for if it were publicly

traded."

The income method values an asset based upon the present

value of its future economic benefits. To estimate the value of

the Savings shares with this method, Gasiorowski interviewed

Savings' management concerning the bank's future, and obtained

its 1992 budget. Gasiorowski developed the discount rate used to

calculate the present value of Savings' 1992 estimated net income

by reducing the rate of return that he thought an equity investor

in Savings would require by 4 percent, his estimate of Savings'

long-term growth rate. Using this method, Gasiorowski concluded
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8Restricted stock is stock acquired from an issuer in a

transaction exempt from the registration requirements of the

Federal securities laws. Sales of restricted stock are generally

restricted within the first 2 years after issuance.

9This was a series of updates to a study by John D. Emory. 

The most recent, Emory, "The Value of Marketability as

Illustrated in Initial Public Offerings of Common Stock--November

1995 through April 1997", Bus. Valuation Rev. (Sept. 1997), was

(continued...)

that the shares were worth $350, before considering a discount

for lack of marketability.

Because Gasiorowski considered the market method data to be

more reliable than the income method data, he gave the market

method result greater weight, and concluded that the marketable

minority value of the stock was $310.

Finally, Gasiorowski applied a 30- to 45-percent discount to

the estimated marketable minority value for lack of marketability

and liquidity. In selecting the size of the discount,

Gasiorowski considered various studies of the differences between

the private transaction prices for restricted shares of a

corporation and the contemporaneous sales prices for publicly

traded shares of the same corporation (the restricted stock

studies),8 and a series of initial public offering (IPO) studies

that compared the prices of shares sold in an IPO to the prices

of shares in the same corporation sold in relatively small

amounts no more than 5 months earlier in private transactions

(the IPO studies).9
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9(...continued)

the eighth in the series.

10At trial, Gasiorowski denied using the term "blockage" in

his report. However, we note that in his written report,

Gasiorowski opined that "it would be difficult to sell the 12,889

shares held by the Estate without incurring a significant

discount for the sale of the entire block." Furthermore,

Gasiorowski testified that "after considering the size of the

block, we thought the discount for lack of marketability would be

in the 40 to 45 percent range." Thus, it is evident that when

Gasiorowski considered the marketability of the Savings shares,

he considered the effect of blockage, and that his estimate of

the discount for lack of marketability includes a component for

blockage.

To narrow the range of the discount, Gasiorowski considered

Savings' 1991 revenues, positive earnings history, positive

dividend growth history, payout ratio, and the expected long-term

growth rates of its earnings and dividends. Gasiorowski

concluded that these factors indicated that a discount at the

lower end of the range would be appropriate, before considering

the size of the block held by petitioner.

In considering the appropriate discount for the size of the

block, Gasiorowski estimated that, based on the average number of

shares traded in the 4 prior years, it would take petitioner more

than 8 years to dispose of all its shares unless it was willing

to sell them at a significant discount.10 Accordingly,

Gasiorowski tentatively concluded that a discount of 40 to 45

percent should be applied to the $310 indicated value, which

resulted in a value of $170 to $186 per share.
- 24 -

However, before reaching a definite conclusion of the

stock's value, Gasiorowski interviewed several experts who value

closely held bank stocks. From his discussions with these

experts, Gasiorowski concluded that if a block of stock of the

size held by petitioner were publicly traded, it most likely

would trade at 55 to 60 percent of book value. Applying this

discount to the October 31, 1991, book value of the Savings stock

suggested a public market value of $156 to $170 per share. Thus,

Gasiorowski concluded that the date-of-death fair market value of

petitioner's shares was $170 per share. We do not find

petitioner's opinion persuasive.

Discounts for a Minority Interest and Lack of Marketability

A minority interest discount reflects the minority

shareholder's inability to compel either the payment of dividends

or liquidation in order to realize a pro rata share of a

corporation's net earnings or net asset value. A lack of

marketability discount reflects the fact that there is no ready

market for shares in a closely held corporation. Thus, discounts

for a minority interest and for lack of marketability are

conceptually distinct, and the appropriate percentage rate of

each of them is a question of fact. See Estate of Newhouse v.

Commissioner, 94 T.C. at 249. Gasiorowski concluded that if the

stock were publicly traded, the value of a minority interest

would be $310 per share. This estimated value reflects the
- 25 -

discount for a minority interest in Savings; therefore, the 45-

percent discount that Gasiorowski would apply to the estimated

value must be for only the lack of marketability of petitioner's

block of shares. 

We find Gasiorowski's reliance on the restricted stock

studies for the size of the discount factor to be misplaced,

since the studies analyzed only restricted stock that had a

holding period of 2 years. The Savings shares were not

restricted either by law or by agreement. The fact that Savings

maintained a waiting list of willing buyers is evidence that the

stock's history of low trading volume is due to the shareholder's

preference to hold Savings shares for investment, rather than for

sale. As the investment time horizon of an investor in Savings

stock evidently is long term, we do not believe that

marketability concerns rise to the same level as a security with

a short-term holding period like a restricted stock. See Furman

v. Commissioner, T.C. Memo. 1998-157. Therefore, we find no

persuasive evidence in the record to support reliance on the

restricted stock studies in determining an appropriate

marketability discount. 

Furthermore, we do not find Gasiorowski's conclusions with

respect to the IPO study persuasive. The IPO study compared the

sales prices of relatively small amounts of a corporation's

shares before they were offered to the public to the sales prices
- 26 -

of the same shares sold later in an IPO. The study concluded

that the sales prices in the nonpublic markets were 40 to 45

percent less than sales prices in the IPO's. Thus, Gasiorowski

concluded that the estimated marketable minority value, which he

implicitly assumes is equal to an IPO value, should be reduced by

45 percent to reflect the nonpublic market value of the shares. 

We reject this conclusion for the following reasons. 

Petitioner offered no evidence that the value of the shares

was affected by any change in the market conditions, the

constraints of the economy, or the financial condition of Savings

between the date of decedent's arm's-length sale of 1,111 shares

for $307 per share in the nonpublic market and the valuation date

1 month later. Consequently, if we apply the conclusions of the

IPO study to the case at hand, we find that it is more likely

that $307 is 40 to 45 percent less, rather than more, than the

price at which the same shares would sell in an IPO.

Furthermore, Gasiorowski disregards the fact that the actual

sales value of the shares is nearly identical to his estimated

marketable minority value. The near identity of values indicates

that the marketability of the Savings shares in the nonpublic

market is essentially equal to that of a minority interest in the

public market, in which case no discount for marketability is

required for a minority interest in Savings.
- 27 -

11In this regard, sec. 20.2031-2(e), Estate Tax Regs.,

provides:

In certain exceptional cases, the size of the block of

stock to be valued in relation to the number of shares

changing hands in sales may be relevant in determining

whether selling prices reflect the fair market value of

the block of stock to be valued. If the executor can

show that the block of stock to be valued is so large

in relation to the actual sales on the existing market

that it could not be liquidated in a reasonable time

without depressing the market, the price at which the

block could be sold as such outside the usual market,

as through an underwriter, may be a more accurate

indication of value than market quotations. * * * 

Discount for Blockage

Finally, Gasiorowski considered the lack of marketability

due to the size of the block of shares held by petitioner. 

The discount for blockage is based upon the theory that a

large block of stock cannot be marketed and turned into cash as

readily as a few shares; also, where there is only a limited

market for a stock, offering a large block of the stock depresses

the market and lowers the price that can be obtained. See Estate

of Sawade v. Commissioner, T.C. Memo. 1984-626, affd. 795 F.2d 45

(8th Cir. 1986); Richardson v. Commissioner, 151 F.2d 102, 103

(2d Cir. 1945), affg. a Memorandum Opinion of this Court; Phipps

v. Commissioner, 127 F.2d 214, 216 (10th Cir. 1942), affg. 43

B.T.A. 1010 (1941); Safe Deposit & Trust Co. v. Commissioner, 35

B.T.A. 259 (1937), affd. 95 F.2d 806 (4th Cir. 1938); sec.

20.2031-2(e), Estate Tax Regs.11 However, there is no
- 28 -

presumption of blockage. See Maytag v. Commissioner, 187 F.2d

962 (10th Cir. 1951), affg. a Memorandum Opinion of this Court;

du Pont v. Commissioner, 2 T.C. 246, 255 (1943); Safe Deposit &

Trust Co. v. Commissioner, supra. Blockage is not a law of

economics, a principle of law, or a rule of evidence. Blockage

is a question of fact. See Estate of Sawade v. Commissioner,

supra; Estate of Christie v. Commissioner, T.C. Memo. 1974-95. 

"If the price obtainable for a block of stock is influenced by

the size of the block, the existence and extent of this influence

must be proven." Estate of Christie v. Commissioner, supra. 

Petitioner bears the burden of proof in this regard. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); sec.

20.2031-2(e), Estate Tax Regs. 

In valuing a block of stock, we are not required to assume

that the entire block was dumped on the market at one time on the

valuation date. Rather, the inquiry must be directed to the

effect upon the market based on the assumption that the block was

being fed out into the market during a reasonable period of time. 

See Estate of Van Horne v. Commissioner, 78 T.C. 728, 742 (1982),

affd. 720 F.2d 1114 (9th Cir. 1983); Avery v. Commissioner, 3

T.C. 963, 971 (1944); Estate of Sawade v. Commissioner, supra. 

What is a reasonable period of time depends upon all the facts

and circumstances. See Estate of Sawade v. Commissioner, supra. 
- 29 -

Gasiorowski concluded that, because of the stock's history

of low trading volume, it would be difficult to dispose of

petitioner's block of shares without incurring a significant

discount or devaluing the holding by dribbling it into the local

market over a period of time exceeding 8 years. We do not agree

with this conclusion.

Evidence of the quantity of shares that can be sold without

depressing their price is relevant to determining the magnitude

of the discount, if any, that should be applied to their value

for blockage. Therefore, we consider the number of shares that

were sold within a reasonable time of decedent's death, as well

as the price at which they sold, indicative of the fair market

value of the shares at the valuation date.

Gasiorowski based his estimate of the amount of time it

would take petitioner to dribble its stock into the local market

on the average number of shares sold per year during the 11 years

prior to decedent's death. We have found that the waiting list

of willing buyers maintained by Savings is evidence that the

stock's low trading volume is due to the shareholder's preference

for holding the shares for investment, not the lack of willing

buyers. By averaging the sales volumes of the prior years,

Gasiorowski diluted the evidence of the number of shares that

have been sold by willing sellers to willing buyers at any

particular time with the total number of shares that were offered
- 30 -

12For instance, 228 shares changed hands in 1990, 1,534 in

1991, and 3,000 in 1992. The average number of shares sold per

year over this 3-year period is almost 7 times the number sold in

1990, and is about one-half the number of shares sold in 1992.

Thus, the average number of shares sold per year over the 3-year

period does not necessarily represent the number of shares sold

in any particular year, or by a willing seller at any time.

for sale over 11 years.12 Furthermore, we have stated that

later-occurring events that evidence fair market value may be

taken into account. See Estate of Jung v. Commissioner, 101 T.C.

at 431; see also Estate of Newhouse v. Commissioner, 94 T.C. at

218 n.15. In estimating the number of shares that could be sold

per year, Gasiorowski did not consider petitioner's sale of 2,800

shares less than 10 months after the date of decedent's death. 

Accordingly, we find little in Gasiorowski's methodology to

support his opinion of the length of time it would take to

dispose of petitioner's shares. 

As an alternative to dribbling petitioner's shares into the

local market, Gasiorowski considered the consequences of

disposing the block in the public market. Gasiorowski

interviewed several experts who value closely held bank stocks

for their opinion of the price at which petitioner's stock would

trade if it were offered on the public market. The experts'

opinion was that the stock could be expected to trade at a price

ranging from 50 to 70 percent of book value, and most likely at a
- 31 -

13The experts assumed that only petitioner's shares would be

offered on the public market.

14The total number of shares that changed hands during the

12 months beginning on Oct. 9, 1991, is 4,136. This amount

includes the 1,111 shares sold by decedent and the 2,800 sold by

petitioner. All these shares sold for more than book value. 

price of 55 to 60 percent of book value.13 Considering the

nonpublic market that existed at the relevant time and the prices

for which Savings shares actually were sold,14 we think it

extremely unlikely that any willing seller, not under any

compulsion to sell and seeking to maximize his or her profit,

would choose to sell his or her shares in the public market at a

45-to 50-percent discount from book value. We reject this

portion of petitioner's expert opinion.

Respondent's Expert's Opinion

Respondent's expert is Herbert T. Spiro (Spiro). Spiro is

the president of American Valuation Group, Inc., and he has

performed many valuations for respondent in the past. In his

report, Spiro considered the actual sales values and used the

market and income methods to value petitioner's Savings shares. 

Spiro ultimately concluded that the fair market value of the

stock was $3,776,477 ($293 per share).

Spiro found seven publicly traded bank companies that were

sufficiently comparable to Savings to use for the market method

of valuation. Employing a methodology similar to that used by
- 32 -

15We note that in this case, a liquidity discount and a

discount for lack of marketability are conceptually

indistinguishable.

16Spiro relied on the following studies: Pratt, "Discounts

and Premia", Valuation of Closely Held Companies and Inactively

Traded Securities (1990); Maher, "Discounts for Lack of

Marketability for Closely Held Business Interests", 54 TAXES 562

(Sept. 1976); Moroney, "Most Courts Overvalue Closely Held

Stocks", 51 TAXES 144 (Mar. 1973); Emory, "The Value of

Marketability as Illustrated in Initial Public Offerings of

Common Stock", Bus. Valuation Rev. (Dec. 1986); and Emory, "The

Value of Marketability as Illustrated in Initial Public Offerings

of Common Stock (January 1994 through June 1995)", Bus. Valuation

Rev. (Dec. 1995).

petitioner's expert, Spiro selected certain financial ratios to

value the Savings shares. Placing primary weight on the priceto-earnings ratio, secondary weight on the price-to-book ratio,

and little weight on the dividend yield measure, Spiro concluded

that the "indicated value" of a minority interest in Savings

would be $369 per share, if the shares were liquid and freely

traded. 

Because the shares are not quickly convertible into cash,

Spiro applied a liquidity discount to the indicated value.15 To

determine the size of the liquidity discount, Spiro considered

several studies,16 and reviewed 19 opinions of this Court that

were decided after 1983 in which we found a discount separately

and specifically for either lack of marketability or restrictions

on transfer with respect to a closely held company. The

discounts in the studies and cases ranged from 10 to 45 percent.
- 33 -

Spiro next considered the particular facts and circumstances of

the Savings stock, including the existing market for the stock,

the rising price trend of the traded shares, Savings' history of

paying increasing dividends, and the lack of restrictions on

trading the shares. Spiro concluded that a liquidity discount of

20 percent was appropriate and that under the market method the

fair market value of the stock was $295.27 per share.

To incorporate the actual sales value into his analysis, and

to reflect the amount of time it would take to sell a block of

shares the size of petitioner's, Spiro assumed that the

shareholder could go to a lender and hypothecate the block for a

loan. To repay the loan, the shareholder would sell the shares

over the next 8 years and 3 months at a rate equal to the number

of shares that were sold on average per month during the first 10

months of 1991. Spiro estimated the prices for which the shares

would sell in future years by increasing the actual price at

which decedent sold 1,111 shares in 1991 by a factor that was a

conservative reflection of the historic growth rate of the

stock's book value. In this calculation, Spiro included his

estimation of the cash-flow from future dividends paid. Finally,

Spiro assumed that the shareholder would pay 2 percentage points

above the prime rate, which was 7.5 percent at the date of

valuation, for the loan. Therefore, he calculated the present
- 34 -

value of the cash-flow from the stock sales and dividends using

9.5 percent as a discount factor.

Using this piecemeal sales method, Spiro concluded that the

"implied price per share" was $308. This amount represents an

illiquid minority value and requires no further adjustment.

To value the shares by the income method, Spiro capitalized

Savings' 1992 pro forma cash-flow. To make this determination,

Spiro made certain assumptions regarding Savings' 1992 net

interest income, provision for loan losses, other operating

income and expenses, income taxes, and additions to equity

capital. Spiro developed the discount rate he used to calculate

the present value of the estimated cash-flow by reducing the rate

of return that he thought an equity investor in Savings would

require by 7 percent, his estimate of Savings' long-term growth

rate.

Using this method, Spiro concluded that the minority value

of the stock was $331 per share, before considering a liquidity

discount. After applying the 20-percent liquidity discount,

Spiro concluded that the fair market value of the stock was $266

per share.

To reconcile the results of the different methods, Spiro

calculated the weighted average of the different values. Spiro

assigned the results of the piecemeal sales method 40 percent of

the total, the market method 35 percent, and the income method 25
- 35 -

17Price-to-earnings ratio.

18The selected companies and their growth trends and priceto-earnings ratios are as follows:

 Growth Trends

 Company 1-Year 3-Year P/E Ratios

California Bancshares, Inc. -18.73 5.58 11.02

Civic Bancorp -32.32 22.91 7.95

First Commercial Bancorp -25.91 11.64 5.75

The Pacific Bank 2.11 -1.24 8.01

Redwood Empire Bankcorp 148.56 32.22 9.02

University National Bank 1.54 3.21 9.64

Westamerica Bancorporation 14.35 38.99 9.05

There is no significant correlation between the companies'

growth rates and price-to-earnings ratios. Spiro's data does not

(continued...)

percent. Spiro concluded that the fair market values of

petitioner's stock was $293 per share. 

We reject part of respondent's expert's opinion and accept

part. In the market method section of his written report, Spiro

stated that the "P/E ratio[17] is principally influenced by

earnings growth, with higher-growth companies trading on average

at higher P/E ratios." Spiro chose a price-to-earnings ratio for

Savings by comparing Savings' 1-year and 3-year growth trends to

the average of the selected companies' growth trends, and derived

a share price of $373.41 from that ratio.

In analyzing the data Spiro used to derive this value, we

find no statistically significant correlation between the seven

selected companies' growth trends and their price-to-earnings

ratios.18 Using the average of these companies' growth trends to
- 36 -

18(...continued)

support his premise that the price-to-earnings ratio is

principally influenced by earnings growth, or that knowledge of a

company's net income growth trend helps to predict its price-toearnings ratio. See Freund & Smith, Statistics: A First Course,

441 (4th ed. 1986); Kroeber & LaForge, The Manager's Guide to

Statistics and Quantitative Methods, 147-148 (1980).

19Spiro conceded at trial that the stock would not secure

(continued...)

determine a price earnings multiple for Savings is akin to a

navigator averaging compass points chosen at random to plot a

course. We reject this part of Spiro's opinion, because the data

he used does not support his conclusion.

We reject Spiro's reliance on the restricted sales and IPO

studies for the same reasons we have already expressed in

addressing the opinion of petitioner's expert.

We do not agree with the implied share value that Spiro

obtained using his piecemeal sales method. To calculate this

value, Spiro assumed that a lender would make the same

assumptions as he did regarding the future values of the shares,

the amount of the dividends, and the number of shares that could

be sold per year, and that the lender would make a loan equal to

100 percent of the present value of the future cash-flow, which

would be secured in total only by the shares. 

We think that a lender would require the entire block of

stock as security for a loan equal to only a part of the stock's

value;19 therefore, a loan for the total amount of the value of
- 37 -

19(...continued)

the entire amount of the loan.

20Spiro noted in his written report that his estimate is

"conservative in light of the fact that [petitioner] sold * * *

2,800 shares in 1992".

the shares would, in part, have to be otherwise secured. The

interest rate charged the borrower for the portion of the loan

not secured by the Savings shares (the unsecured portion) would

depend upon the creditworthiness of the borrower. The actual

interest rate would thus be a weighted average of the rates

charged for the secured and unsecured portions of the loan. 

Consequently, the actual interest rate would vary depending upon

the creditworthiness of the particular borrower.

By using a valuation method that is dependent upon the

interest rate available to a particular borrower, instead of the

market rate of return required by investors in this type of

security, Spiro calculated the value of the stock to a particular

borrower, not the fair market value of the shares.

 Finally, we disagree with Spiro's estimate of the amount of

time it would take to dispose of the shares for the same reason

we disagreed with petitioner's estimate.20

We think that the actual sales value of the 1,111 shares

sold at arm's length to unrelated parties 1 month before

decedent's death provides the best indication of the value of the

shares. The price at which these shares sold reflects the
- 38 -

21Decedent sold 1,111 shares at 8.31 percent above book

value; petitioner sold 2,800 shares at 4.12 percent above book

value.

market's appreciation of the value of a minority interest in

Savings stock and its awareness of the stock's limited

marketability. 

Moreover, no evidence was offered of any change in the

market conditions, the constraints of the economy, or the

financial condition of Savings between the date of decedent's

sale of 1,111 shares and the date of petitioner's sale of 2,800

shares that would have affected the demand for the shares. Thus,

the fact that decedent's block of shares sold quickly once it was

offered, and that approximately 10 months later petitioner's

larger block of shares sold equally quickly, indicates that the

market for Savings' shares is considerably more liquid than

either petitioner or respondent opined. 

However, although Mannon testified that after petitioner's

sale some of the buyers expressed an interest in purchasing more

shares, he also testified that others could have bought no more.

Furthermore, although the blocks of stock sold by decedent and

petitioner sold quickly and the shares in petitioner's sale sold

for a higher price than the shares in decedent's earlier sale,

the amount by which the actual sales price exceeded book value

was slightly less in the later sale than in the earlier sale.21
- 39 -

Therefore, the number of Savings shares that can be sold without

affecting price is uncertain, but not unlimited. 

The facts and circumstances of this case indicate that a 10-

percent discount for blockage is appropriate. Accordingly, we

find that the fair market value of petitioner's Savings stock is

$276 per share.

Issue 2. Fair Market Value of the Willits Shares

Respondent determined that the value of petitioner's Willits

stock was $850 per share; however, he now contends that the dateof-death fair market value of petitioner's Willits stock is $774

per share. Respondent bases his contention on the results of

petitioner's sale of all its shares approximately 9 months after

decedent's death. 

Petitioner asserts that the value of the stock is $485 per

share, but concedes on brief that the evidence supports a

valuation in the range of $485 to $662 per share. Petitioner

further asserts that the sales history of Willits' stock is

evidence that there is no market for the shares, and that the

price it received for the shares is not representative of their

fair market value because the shares were not sold at arm's

length.

Petitioner sold its 500 shares of Willits stock for $850 per

share; 365 of the shares were purchased by Mannon. At the time

he purchased the shares, Mannon owned more than 30 percent of
- 40 -

Willits' outstanding shares, and was a director and chairman of

the board of Willits, March's cousin, and decedent's nephew. 

Mannon testified that he bought the shares even though he did not

want them, because March was a family member, the estate taxes

were due, and he could not find another buyer.

We previously have held that "Forced sales of stock to

family members to enable them to pay estate taxes are in no way

reflective of fair market value because the sales occurred under

unusual circumstances." See Estate of Oman v. Commissioner, T.C.

Memo. 1987-71; see also Estate of Miller v. Commissioner, T.C.

Memo. 1959-235. Considering the relationship of the parties and

petitioner's need for funds to pay the estate taxes, we find that

Mannon was an accommodating buyer, not a willing buyer. 

Therefore, we do not consider the sale to Mannon in deciding the

fair market value of petitioner's shares.

However, at the time petitioner sold the shares to Mannon,

petitioner also sold 125 shares to Bozarth and 10 shares to

Brown. Bozarth is a director of Willits and Brown is an

executive officer; both had their positions with Willits and were

shareholders before they purchased these shares. Furthermore,

neither one has any relationship with either petitioner or March. 

We consider the price Bozarth and Brown paid evidence of the

value of a minority interest in Willits.
- 41 -

Petitioner argues that a discount is warranted for the

"gloomy state" of the 1991 economy, Willits' past history of

economic loss, the absence of any real market for the shares, and

the extended holding period required to dispose of petitioner's

block. Only petitioner's last two assertions have any basis in

fact.

Willits' 1991 annual report to shareholders stated that it

"will show a sizeable increase in profits" even though the

"economy was such that the increase in deposits was very meager." 

In fact, Willits showed a 15-percent increase in net income

compared to 1990. Thus, Willits appeared to be weathering the

gloomy state of the economy rather well.

Furthermore, petitioner's assertion that Willits has a

history of economic loss is not supported by the record. Mannon

testified that he thought Willits actually may have suffered a

negative income year in either 1981 or 1982, but that Willits

performed well in the late 1980's. We do not find Mannon's

testimony supports a finding that Willits has a history of loss,

and petitioner offered no other evidence to support this

assertion. Accordingly, we do not consider either of these

assertions in deciding the value of petitioner's shares.

Both sides submitted expert witness reports and presented

expert witness testimony in regard to the value of decedent's

shares of Willits stock at the date of death.
- 42 -

Petitioner's Expert's Opinion

Petitioner's expert is Jeffrey T. Tarbell (Tarbell). 

Tarbell is a senior associate of Willamette Management

Associates, and was a qualified expert at the time he prepared

his report. Tarbell's testimony at trial was cryptic and

unhelpful; we, therefore, rely upon only the written report for

his opinion. Tarbell did not consider petitioner's sale of its

stock in his analysis. 

Tarbell selected nine publicly traded banks comparable to

Willits as guideline companies and used the market method to

value the Willits shares. Tarbell compared Willits' earnings per

share for the last 12 months to the guideline companies' earnings

per share for the same period, and selected four companies that

had earnings growth rates similar to Willits. Using the

companies' ratios for guidance, Tarbell selected a multiple to

apply to Willits' earnings per share, and derived an indicated

value of $902 per share. He repeated the same process with

Willits' 5-year average earnings per share, and derived an

indicated value of $945 per share.

Tarbell compared the guideline companies' dividend payout

ratios to their dividend yields. He found that there was a

relationship between the payout ratios and the dividend yields,

and that the companies with higher payout ratios have higher

dividend yields. Tarbell selected one company from the guideline
- 43 -

companies that had a payout ratio and an increase in its 12-month

earnings similar to those of Willits, and applied its dividend

yield rate to Willits' current dividend. This process produced

an indicated value of $788 per share.

Tarbell analyzed the price-to-book value ratios and the

current returns on equity of the guideline companies and found

that there was a strong relationship between the ratios. He

selected two companies that had returns on book value similar to

Willits and determined that a multiple of 1.10 was appropriate to

apply to Willits' book value. This process resulted in an

indicated value of $887 per share.

Finally, Tarbell weighted the indicated values derived from

the various valuation methods according to his opinion of their

relative significance and concluded that the publicly traded

minority value of Willits stock was $882 per share, before

considering a discount for lack of marketability.

Tarbell opined that a 45-percent discount for lack of

marketability was appropriate due to the limited market for

Willits stock and the size of petitioner's block, and concluded

that the fair market value of the stock was $485 per share. 

Petitioner's report does not state separately the amounts of the

limited market and blockage components of the discount.
- 44 -

22In addition to the Emory IPO studies earlier cited by

Gasiorowski and Spiro, see supra notes 9 and 16, Tarbell cited

the following restricted stock studies: Gelman, "An EconomistFinancial Analyst's Approach to Valuing Stock of a Closely Held

Company", 36 J. Taxn. 353 (June 1972); Moroney, "Most Courts

Overvalue Closely Held Stocks", 51 TAXES 144 (Mar. 1973);

Moroney, "Why 25 Percent Discount for Nonmarketability in One

Valuation, 100 Percent in Another?", 55 TAXES 316 (May 1977);

Maher, "Discounts for Lack of Marketability for Closely Held

Business Interests", 54 TAXES 562 (Sept. 1976); Trout,

"Estimation of the Discount Associated with the Transfer of

Restricted Securities", 55 TAXES 381 (June 1977); "Revenue Ruling

77-287 Revisited," SRC Quarterly Reports (Spring 1983); Bolten,

"Discounts for the Stocks of Closely Held Corporations", 123 Trs.

& Ests. 22 (Dec. 1984).

Tarbell cited the usual restricted stock and IPO studies,22

and Rev. Rul. 77-287, 1977-2 C.B. 319, to support his opinion of

the discount. Rev. Rul 77-287, supra, sets forth guidelines for

valuing securities that cannot be immediately resold because they

are restricted from resale pursuant to Federal securities law. 

The Willits shares are not restricted from trading by either

law or agreement. Petitioner offered no evidence of any

shareholders who were unable to sell their shares once offered

for sale. Therefore, there is no evidence that the low trading

volume is due to any reason other than the shareholder's

preference to hold the shares for long-term investment, rather

than sale. Accordingly, we find no persuasive evidence in the

record to justify reliance on the restricted stock studies in

determining an appropriate marketability discount. 
- 45 -

23This amount does not include the 365 shares sold to

Mannon.

Furthermore, in considering the trading history of the

shares, Tarbell did not consider petitioner's arm's-length sale

of approximately 1.69 percent23 of Willits' issued and

outstanding shares at a price near book value to unrelated

parties less than 10 months after decedent's death. Therefore,

Tarbell did not consider all the evidence relevant to deciding

the size of the discount. Accordingly, we give little weight to

this portion of petitioner's opinion.

Respondent's Expert's Opinion

Respondent's expert is Spiro. In his report, Spiro used the

market and income methods and considered the actual sales to

value petitioner's Willits shares. Spiro ultimately concluded

that the fair market value of the stock was $774 per share.

Spiro found five publicly traded bank companies that were

sufficiently comparable to Willits to use as guideline companies

for the market method of valuation. Employing the same

methodology that he used to value the Savings shares, Spiro

selected certain financial ratios to value the Willits shares. 

Weighting the price-to-earnings ratio 50 percent, the price-tobook ratio 40 percent, and the dividend yield measure 10 percent,

Spiro derived an indicated value of $944 per share for a minority

interest in Willits, if the shares were liquid and freely traded. 
- 46 -

Spiro applied a liquidity discount to the indicated value. 

To determine the size of the discount, Spiro relied on the same

studies and opinions that he relied upon in determining the size

of the discount to apply to the Savings stock. He also

considered the particular facts and circumstances of the Willits

stock, including the level of Willits' public recognition in the

local community, its history of paying increasing dividends, the

lack of restrictions on trading the shares, the existing market

for the stock, and the stock's trading history. Spiro concluded

that a liquidity discount of 20 percent was appropriate, and that

the fair market value of the stock was $755 per share. 

Spiro used his piecemeal sales method to estimate the

present value of the Willits shares in the same way that he used

it to estimate the value of the Savings shares, except he assumed

that 125 Willits shares could be sold each year for the next 4

years at a price approximating their book value at the time of

sale. Using this method, Spiro concluded that the implied price

per share was $816.

To value the shares by the income method, Spiro capitalized

Willits' pro forma cash-flow. To calculate the pro forma cashflow, Spiro made certain assumptions regarding Willits' 1992 net

income, provision for loan losses, other operating income and

expenses, income taxes, and additions to equity capital. He

developed the discount rate to calculate the present value of the
- 47 -

24The selected companies and their growth trends and priceto-earnings ratios are as follows:

 Growth Trends

 Company 1-Year 3-Year P/E Ratios

Redwood Empire Bankcorp 148.56 32.22 9.02

(continued...)

pro forma cash-flow by reducing the rate of return that he

thought an equity investor in Willits would require by 7 percent,

his estimate of Willits' long-term growth rate.

Using this method, Spiro concluded that the minority value

of the stock was $952 per share, before considering a liquidity

discount. After applying the 20-percent liquidity discount,

Spiro concluded that the fair market value of the stock was $732

per share.

To reconcile the results of the different methods, Spiro

weighted the results of the piecemeal sales method 40 percent,

the market method 35 percent, and the income method 25 percent,

and concluded that the fair market value of the stock was $774

per share.

We accept part of respondent's expert's opinion and reject

part. We reject the portion of the market method analysis in

which Spiro calculated Willits' price-to-earnings multiple from

the guideline companies' multiples because there is no

statistically significant correlation between the selected

companies' net income growth trends and their price-to-earnings

multiples.24
- 48 -

24(...continued)

First Commercial Bancorp -25.91 11.64 5.75

Civic Bancorp -32.32 22.91 7.95

California Bancshares, Inc. -18.73 5.58 11.02

University National Bank 1.54 3.21 9.64

In deciding the size of the discount, Spiro reviewed the

conclusions of restricted stock and IPO studies, and considered

the facts and circumstances of the Willits stock. We find no

persuasive evidence in the record to support reliance on the

restricted stock studies in determining an appropriate

marketability discount. 

In considering the particular facts and circumstances of the

stock, Spiro found that Willits' publication of its annual report

addressed to shareholders and other constituents is evidence that

Willits has a high level of public recognition. We do not find

that publishing its annual report supports a finding that Willits

enjoyed a high level of public recognition. 

Spiro concluded that there was an established market for the

shares. The trading history of Willits stock does not support

this conclusion. The evidence shows that except for decedent's

sales, few shares were traded on an occasional basis, and most of

the transactions were between family members, and Willits'

directors, officers, and employees. We accord this part of

Spiro's opinion little weight.
- 49 -

Finally, we reject the value Spiro obtained with his

piecemeal sales method, because we think the method results in

the value of the stock to a particular borrower, not the fair

market value.

We think that petitioner's sale of 135 shares at arm's

length to unrelated parties after decedent's death provides the

best indication of the value of a minority interest in Willits. 

In this transaction, the shares were purchased by persons whom we

presume have knowledge of the limits of the market and the value

of a minority interest in Willits. 

Moreover, Willits shares have historically traded at or near

book value. In petitioner's sale, the shares sold for

approximately 2.9 percent less than their book value at the time

of sale. The book value provided this Court nearest the date of

valuation was $806. Accordingly, we find that the value of a

minority interest on the date of valuation was $783, before

applying a discount for blockage.

The market for the Willits' shares was limited, and

petitioner could not have sold its block of shares in a

reasonable period of time without depressing the market and

lowering the price. Accordingly, we apply a 20-percent discount

for blockage and find that the fair market value of the Willits

stock is $626 per share.
- 50 -

Issue 3. Whether Petitioner May Deduct the Expense of Defending 

Its Reporting Position

Petitioner asserts by amended petition that certain expenses

it incurred defending its reporting position with regard to the

value of the Savings and Willits shares are administration

expenses deductible from the value of the gross estate. 

Respondent did not address this issue at trial or on brief.

Section 2053(a)(2) provides that administration expenses

shall be deducted from the value of the gross estate if they are

allowable by the law of the jurisdiction under which the estate

is being administered. Administration expenses include

attorney's fees and miscellaneous expenses. See sec. 20.2053-

3(a), Estate Tax Regs. Miscellaneous administration expenses

include accountant's fees and appraiser's fees. See sec.

20.2053-3(d)(1), Estate Tax Regs. The amounts deductible as

administration expenses are limited to such expenses as are

actually and necessarily incurred in the administration of the

decedent's estate. See sec. 20.2053-3(a), Estate Tax Regs. 

However, expenditures not essential to the proper settlement of

the estate but incurred for the individual benefit of the heirs,

legatees, or devisees, may not be taken as deductions. See id.

Attorney's fees incurred by beneficiaries incident to litigation

as to their respective interests are not deductible if the
- 51 -

25California law provides:

The personal representative may also employ or retain

tax counsel, tax auditors, accountants, or other tax

experts for the performance of any action which such

persons, respectively, may lawfully perform in the

computation, reporting, or making of tax returns, or in

negotiations or litigation which may be necessary for

the final determination and payment of taxes, and pay

from the funds of the estate for such services. [Cal.

Prob. Code Ann. sec. 10801(b) (West 1998).]

These amounts are in addition to the compensation allowed

under Sec. 10800 for all ordinary services of the personal

representative. See Cal. Prob. Code Ann. sec. 10801(a) (West

1998). 

litigation is not essential to the proper settlement of the

estate. See sec. 20.2053-3(c)(3), Estate Tax Regs. 

California law allows the personal representative to employ

tax experts in negotiations or litigation that may be necessary

for the final determination and payment of taxes and to pay the

experts from the funds of the estate.25 The litigation

undertaken by petitioner in this case was in response to

respondent's determination of a deficiency in petitioner's

Federal estate tax. The litigation did not relate to the

respective interests of the heirs, nor was it incurred for their

individual benefit. Accordingly, we conclude that the

administrative expenses petitioner claims are of the type that

are allowable under California law and the regulations. 

Respondent's regulations provide that a deduction for

attorney's fees incurred in contesting an asserted deficiency or
- 52 -

in prosecuting a claim for refund should be claimed at the time

the deficiency is contested or the refund claim is prosecuted. 

See sec. 20.2053-3(c)(2), Estate Tax Regs. Furthermore, a

deduction for these fees shall not be denied, and the sufficiency

of a claim for refund shall not be questioned, solely by reason

of the fact that the amount of the fees to be paid was not

established at the time that the right to the deduction was

claimed. See id.

 Petitioner has met the requirements for claiming the

deductions. Petitioner paid $21,226 of attorney's fees, $8,830

of accountant's fees, and $12,396 of appraisal costs to defend

its reporting position in an audit by the Internal Revenue

Service. Petitioner filed Form 843, Claim for Refund and Request

for Abatement, to claim a refund of the estate tax paid on these

amounts soon after filing its petition in this case. At that

time, petitioner also filed a protective claim for refund of

estate tax for additional administration expenses that it expects

to incur in further defending its position. 
- 53 -

Respondent did not address this issue either at trial or on

brief. Accordingly, we find that petitioner may deduct the

reasonable administration expenses incurred in settlement of the

estate. 

To reflect the foregoing, 

Decision will be entered

 under Rule 155.