TAX COURT OPINION

Case: Estate of Frank A. Branson, Deceased; Mary M. March, Executor
Docket Number: 10028-95
Judge: Parr
Opinion Type: memo
Filed: 07/13/1999
Pages: 50

T.C. Memo. 1999-231 UNITED STATES TAX COURT ESTATE OF FRANK A. BRANSON, DECEASED, MARY M. MARCH, EXECUTOR, Petitioner y. 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, Judoe: Respondent determined a deficiency of $756,564 in petitioner's Federal estate tax. JUL 13 1999 058 - 2 - The issues for decision are: (1) Whether the fair market value of 1?,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; $181.5C, as petitioner reported on its estate tax return; or some other amount. 40 hold it was $276 per share. (2) Whether the fair market va Lue of 500 shares of common stock of Bank of Willits (Willits) oh the date of decedent's death was $850 per share, as responden: determined in the notice of deficiency; $485 per share, as petitioner reported on its estate tax return; or some other amontt. We hold it was $626 per share. (3) Whether, under section 22b3,1 petitioner may deduct certain expenses incurred in defending :.ts reporting position. We hold it may. FINDINGS OF FAC Some c-f the facts have been stipulated and are so found. The stipu LLtion of facts, supplemental stipulation of facts, and second su plemental stipulation of facts, and the accompanying exhibits are incorporated herein by this reference. Peti:joner is the estate of Frank A. Branson (decedent), who died testat e on November 9, 1991, in Mendocino, California. Mary 1All section references are to the Internal Revenue Code in effect as c f the date of decedent's death, and all Rule referencea are to the Tax Court Rules of Practice and Procedure, unless oth(rwise indicated. All dollar amounts are rounded to the nearest dollar, unless otherwise indicated. - 3 - 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 ½he 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. Savinos 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. - 4 - and March'n cousin, was president and chief executive officer of Savings av! a director and the chairman of the board of Willits. Saviac s' stock is not traded on any established exchange or over-the-:c>unter market. 2. Et Income For :le 12 months that ended on October 31, 1991, Savings had net ilc ome of $4,149,000. For the years 1986 through 1990,2 Savings h,1Ü net income as follows: Year 1986 1987 1988 1989 1990 Net Income $2,531,000 2,825,000 3,048,000 3,'128,000 3,481,000 Savinçs' net income increased on average by approxima:ely 10.39 percent per annum for the 5 years preceding decedent's death. Savinçs 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 inc)me) in. 1986, to M110,000 (1.1 percent of total interest income) il 1991. Thus, dur:.rg this time, provisions for loan losses decreas ad both on an absoJute basis and as a percentage of interest incoma. 2The r3sults of the years 1986 through 1990 are for 1 months that ended on December 31. Net that endecl on Dec. 31, 1991, was $4,278,207, which is 23 parcent higher thar the same period in 1990. income for the 12 m>nths - 5 - 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: Year 1986 1987 1988 1989 1990 Dividends Paid Per Share $4.60 5.60 6.60 7.20 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 1986 1987 1988 1989 1990 Total Assets Shareholder's Equity $200,959,000 228,705,000 243,348,000 266,638,000 281,322,000 $15,757,000 18,023,000 20,410,000 22,817,000 25,515,000 Thus, total.assets and shareholder's equity increasec on average by approximately 8.0 and 12.46 percent per annum, respective.y, for the 5 years preceding decedent's death. 5 . 2(n_e.r_s h in At the date of valuation, the shares of Savings stock were distributed among 215 shareholders as follows: Shareholder No. of Shares Percentage Estat of Frank A. Branson Charle B. Mannon Evere;t & Martha Coe Other s¹ Tot11 12,889 16,716 17,355 53,040 300,000 J2.89 J 6.72 37.35 £ 3.04 1CO.00 ¹The thares held by others are widely distributed, with many of the sha reholders owning less than 3 percent. 6. S-iles of Savings Stock The i1vestment department of Savings maintains an informal list of people who are interested in buping shares of its stock. Usually, wlen a shareholder wants to se.).1 his or her share s, the shareholde r contacts Savings, which informs the shareholder of the most rJcent sale price and the current book value of the stock. Sa7ings 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 ialue. Since 1980, there have been severa:. sales of blocks of. several huTdred shares. In each of therie sales, the shares changed taTds on a single day and all the shares traded for the 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. 3The stipulated amount of this sale is $935,000 (which is for 1992 is $938,000 the amount reported on petitioner's Furthermore, at trial respondent introduced $333.93 per share); however, Form 1041, U.S. Fiduciary Income Tax Return, ($335 per share). 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. 1542, 1553 (11th Cir. 1993), affg. T.C. Memo. 1991-636. evidence in the record demonstrates that the stipulated amount simply incorrect. appear contrary to the facts disclosed by the record. 91(e); Blohm v. Commissioner, supra. We, fact that the 1,111 shares were sold for $938,000 ($335 per share) on Aug. 27, 1992. We are not bound by stipulations of fact that See Blohm v. Commissioner, 994 F.2d The is therefore, find as a See Rule 424 The Western Bank Monitor 123 (1993). - 8 - C. Bank o Willits 1. Background Willi;s has two branches and provides a full range of banking se rvices to individual and commdrcial customers. Willits was incorporated on April 11, 1904, and began business with $50,000 of paid-in capital. Decedent's father-in-law, C.F., was Willits' president from 1928 until 1957. Willits' stock is not traded on iny established exchange or over-the-counter market. 't 2. Na I For tTe 12 months that ended on September 30, 1991, Willits had net income of $819,000. For the yedrs 1986 through 1!·90,5 Willits had net income as follows: Year 1986 1987 1988 1989 1990 Net Income $624,000 659,000 1 714,000 711,000 734,000 Thus, net income increased on average by approximate.y 5.59 percent per annum during the 5 years prëceding decedent's death. Furthermore, except for 1989, net income increased every rear. Durjng this time, the provision for loan losses increased from $55,000 in 1986 to $70,000 in 1991; however, it decreased as SThe cesults of the years 1986 through 1990 are for :.2 months thêt ended on December 31. - 9 _ 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 paÈd dividends as follows: Year 1986 1987 1988 1989 1990 Dividends Paid Per Share $18 22 24 26 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 1986 1987 1988 1989 Total Assets Shareholder's Equity $40,665,000 41,442,000 47,540,000 52,290,000 $4,013,000 4,496,000 5,017,000 5,236,000 - 10 - 1990 54,666,000 5,716,000 Thus. total assets and shareholder's equity increased each year durily the 5 years preceding decedent's death; total assets increased on average by approximately 6.20 percent per annum and sharehold n's equity by 9.94 percent per annum. 5. fh11_ers.h_ip At t 1< date of valuation, the shares of Willits stock were distributec among 48 shareholders as follows: Shareholder No. of Shares Percentage Esta:( of Frank A. Branson Char.<s B. Mannon Everoit & Martha Coe Othe ¹ To 21 500 2,441 1,414 3,645 8,000 6.25 30.51 17.68 45.56 100.00 ¹Of tha shares held by others, 19.9 percent are owned by two out-of-St.tte shareholders and the balance by local residents who own very :mall percentages. 6. Sales of Willits Stock Historically, very few Willits shares have been trade each year. A tctal of 1,062 shares changed hands in 22 transac ions from February 1980 until the valuation date. No shares we e sold during 19fr/ 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 instanceL in 1980 a totcl of 64 shares was traded in our sales, 60 of hose shares were sold .as qualifying shares by a board member to three - 11 - 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 6The parties stipulated that decedent sold 424 shares for in 1985. However, this stipulation $151,550 ($357.43 per share) is contrary to a buyer's (Mannon's) the sales of Willits shares from 1980 through 1992, which was offered into evidence as a joint exhibit. testimony and a list of all The evidence in the (continued...) - 12 - selling price of these shares was near their book value. The book valte of the Willits stock on September 30, 1991, was $806 per share. Petitioner sold 500 shares on August 12, 1992, for $ 25,000 ($850 per 3hare). The book value of the shares on July 3., 1992, was $875 p3r share. Petitioner did not independently value the shares bef>re the sale; rather, March and Mannon used the book value of t Èe stock as a reference to se the sale price. Furth armore, petitioner did not contact or engage any . . brokers or agents for this sale. Insteàd, March asked Ma non to find buyer; for the stock. Mannon confined his search for buyers to the Willits board of directors. Rebecca Brown, an executive officer an.1 shareholder, bought 10 sharës; Bozarth, a boa d member and shareholder, bought 125 shar s in the name of his logging company; and Mannon bought 365 shares (10 of which he gave to a .ongtime employee). I . D. Petitioner's Sales and March's Recognition of Gain Under.decedent's will, the 12,889 5hares of Savings stock and the 500 shares of Willits stock were distributed as follows: (1) 4,000 .;hares of Savings stock in trust for the benefit of 6(.. c ontinued) record denonstrates that the stipulatior is incorrect. We, therefore, per share between December 1985 and January 1986. 3. find as a fact that decedent sold 500 shares for $380 See supra note - 13 - 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. Pursuaht 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 - 14 - $182, 500 f com the sale of the Willits shares.7 Petitione , however, did not pay any tax on these gnins; instead, it reported a net long -term capital gain distribution of $610,274 to barch on Schedule K-1, Beneficiary's Share of Inc:ome, Deductions, redits, Etc., whic1 it attached to the Form 104 .. March and her husband, Charles Marc:h, filed their 1992 Form 1040, U.E. Individual Income Tax Return using the status of "Married f i'ling joint return", on or about April 15, 1993 and paid the tax due. March reported the $510,274 gain on li e 13 of Schedule D, which was attached to the Form 1040, as "Net ong- term gair or (loss) from partnerships, 3 corporations, and fiduciari es". E. Petit ioner's Claim for Deductions After filing the Form 706, petitioler paid $21,226 of attorney s fees, $8, 830 of accountant ' s fees, and $12, 396 of appraisa. costs to defend its reporting position in an audit by the Internal Revenue Service. Petitionar filed Form 843, Claim for Refuric and Request for Abatement, t3 claim a refund o the estate tn> paid on these amounts. In addition, petitioner filed a protecti ve claim for refund of estate tax for additional Pet itioner also reported $6, 955 o long-term capita . gain from the tale of 2,000 shares of PG&E stock and a $738 net term cap .t al shares anc the loss carryover are not at loss carryover from 1991. issue in this case. The value of the IPG&E long- - 15 - 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 $3,86É,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 - 16 - expenses re attorney's fees, accountant's fees, and appraisal costs which were incurred after the estate tax return was filed to prove :he shares' reported values. Fair Mark3 . Value Fair narket value is defined as the price at which property would cha Tye hands between a willing buy er and a willing seller, neither be..ng under any compulsion to bt y or sell and both having reasonabla 1cnowledge of relevant facts. See United States v. Cartwright 411 U.S. 546, 551 (1973); Propstra v. United States, 680 F.2d 1.48, 1251 (9th Cir. 1982); sec. 20.2031-1(b), E tate Tax Regs. This is an objective test anc. requires the pro erty to be valued from the viewpoint of a hypottetical buyer and seller, each of whom would seek to maximize his or her profit fro any transactia l involving the property. Sec Props.tra v.. United States, sup_r_a at 1251-1252; Estate of Jt no v. Commissioner, 101 T.C. 412, 138 (1993). Profit maximization must be achieved in the contex: of the market conditions anc! the constraints of the economy ex .sting at the valuation date. See Estate of Newhouse v. Commiss Loner, 94 T. C. 193, 218 (1990) . For F 3deral estate tax purposes, the fair market value of the subjec: property is generally deternined as of the date of death of t le decedent; ordinarily, no consideration is given to any unfore3eeable future event that may have affected the value of the sub ject property on some later date. See sec. 20. 031- - 17 - 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. Ü955)), 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. - 18 - If it is established that the.value of any share of stock determined on the basis of selling price does not reflect the fair mark3t value thereof, then some ressonable modificat on of that basis or other relevant facts and elements of value are considere d in determining the fair market value. See sec. 20.2031-2(o), Estate Tax Regs. Issue 1. 'air Market Value of the Savirgs Shares The pdrties agree that the best incication of the Savings stock's ma ket 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. Responcent contends that the actual salo price reflects the discount for minority interest and lack of ma:ketability. Respondent furtrer contends that dn view of the higher prices received for the sr.ares sold in the post- death market, no significant discount for blockage is appropriato. We agree with respondent. Expert Witlesses Both sides submitted expert witnese reports and presented expert witless testimony in regard to the value of decedent's shares of 3avings stock at the date of death. Exper: witness testimony is appropriate to help the dourt 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 selebtive 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 - 20 - Lukens v. Jommissioner, 945 F.2d 92, 96 (5th Cir. 1991) (citing Silvermar I. Commissioner, 538 F.2d 927, 933 (2d Cir. 197 ), affg. T.C. Memo. 1974-285). Finally, because valuation i necessaril/ an approximation, it is not required that the value we deterniae be one as to which there is specific testimoÂy, provided i; is within the range of figures that properly may be deduced fr)m 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. Gas:.orowski (Gasiorowski). GasiorowskL is the director of Arthur Anderson & Co. Valuation Services iT Northern California, and he has had extensive experience in valuing businesses. In h:.s 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 0:f comparable property. If comparable publicly traded companies can be found, then the stock prices fcr. those companies can be used to derive benchmarks, such as financial ratios, which can be applied to the corresponding financia] neasures of the subject company to derive a value for its stock. - 21 - 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 Èatios 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's 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 . - 22 - concluded ;hat the shares were worth $3EO, before conside ing a discount for lack of marketability. Becal;e Gasiorowski considered the market method data to be more reliable than the income method dat.a, he gave the market method res ilt greater weight, and conclt:ded that the marketable minority v.tlue of the stock was $310. Final.y, Gasiorowski applied a 30- to 45-percent discount to the estima:igd marketable minority value for lack of marketability and liquidLty. In selecting the size of the discount, GasiorowskL considered various studies of the differences between the privat3 transaction prices for restricted shares of a corporatio and the contemporaneous sales prices for publicly traded staces of the.:same corporation (the restricted sto k studies), and a series of initial public offering (IPO) tudies that compaced the prices of shares sold in an IPO to the prices of shares in the same corporation sold .n relatively small amounts ro more than 5 months earlier in private transactions (the IPO studies). Restricted stock is stock acquireci transaction exempt Federal restrictod within the first 2 years after issuance. f ecurities laws. Sales of restricted stock are generally from an issuer in a from the registratio:1 requirements of the 9This was a series of updates to a study by John D. Èmory. The most recent, Emory, Illustrat ed in Initial Public Offerings of Common Stock--November 1995 throtgh April 1997", Bus. ValuatioT Rev. "The Value of Marketability as (Sept. 1997h, was (continued...) . - 23 - 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 con'sidering 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.1° 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. 9(...continued) the eighth in the series. 1°At 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 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 in the 40 to 45 percent range." 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 blockage. the discount for lack of marketability would be Thus, the 12,889 for - 24 Howev3r, before reaching a definite conclusion of thÀ stock's value, Gasiorowski interviewed neveral experts who value closely Fe Ld bank stocks. From his discussions with thes experts, Gasiorowski concluded that if a block of stock of the size helc ay petitioner were publicly t::aded, it most likely would trada at 55 to 60 percent of book value. Applying his discount to the October 31, 1991, book 'ralue of the Savings stock suggestec public market value of $156 to $170 per share Thus, Gasiorowe ki concluded that the date-of-death fair market value of petitioncr's shares was $170 per share. We do not find petitionEr's opinion persuasive. Discounte for a Minority Interest and Lack of Marketability A minority interest discount reflects the minority shareholcer's inability to compel eithe.: the payment of dividends or liquic.ation 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 fac; that there is no ready market for shares in a closely held corporation. Thus, discounts for a mir crity interest and for lack of marketability are conceptuidly distinct, and the appropriate percentage rate of each of t.hem is a question of fact. Sea Estate of Newhouse v. Commissiorer, 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 t e ; - 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 sano shares sold later in an IPO. The study concluded that the sales prices in the nonpublic markets were 40 to i45 percent le is than sales prices in the IPO's. Thus, Gasiosowski concludec :hat the estimated marketable minority value, which he implicit3y assumes is equal to an IPO value, should be reduced by 45 percert to reflect the nonpublic mariet value of the shares. We reject this conclusion for the following reasons. Petjtibner offered no evidence tha; the value of the shares was affec:ted by any change in the marke: conditions, the constraints of the economy, or the finaTcial condition of Savings between e 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 _¿.ter. Consequently, if we apply the conclusions of the IPO study to the case at hand, we find that it is more likely that $301 is 40 to 45 percent less, rather than more, than the price at uhich the same shares would sell in an IPO. Furchermore, Gasiorowski disregarcs the fact that the actual sales value of the shares is nearly identical to his estimated marketabl 3 minority value. The near identity of values indicates that the narketability of the Savings shares in the nonpublic market is essentially equal to that of a minority interest ìn the public narket, in which case no discou t for marketabili y is requirec for a minority interest in Savings. - 27 - 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 hnd 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 llIn 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. * * * . - 28 - presumptió 1 of blockage. See Maytag v. Commissioner, 187 F.2d 962 (10th <:ir. 1951), affg. a Memorandum Opinion of this ourt; du Pont v. Commissioner, 2 T.C. 246, 25! (1943); Safe Dep sit & Trust Co. 7. Commissioner, supra. Blockage is not a law f economics, a principle of law, or a rule of evidence. B1 ckage is a question of fact. See Estate of Sawade v. Commissio er, supra; Estate of Christie v. Commission r, T.C. Memo. 1974-95. "If the prite obtainable for a block of stock is influenc d by the size of the block, the existence an 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); Felch v. Helvering, 290 U.S. lli, 115 (1933); sec 20.2031-;:(e), Estate Tax Regs. In "¿,luing a block of stock, we are not required to assume I that the entire block was dumped on the market at one timp on the valuation date. Rather, the inquiry must be directed to the . effect u on the market based on the assumption that the block was being fed out into the market during a reasonable period of time. See Esta:o of Van Horne v. Commissioner, 78 T.C. 728, 742 (1982), affd. 723 F.2d 1114 (9th Cir. 1983); Avery v. Commissioner, 3 T.C. 963, 971 (1944); Estate of Sawade hr. 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 - for sale 3'rer 11 years.12 Furthermore, we have stated that later¬occa ring events that evidence fair market value may be taken int) account. See Estate of Jung v. Commissioner, 101 T.C. at 431; s3e also Estate of Newhouse v. ommissioner, 94 T.C. at 218 n.15. In estimating the number of ·hares that could be sold per year, Gasiorowski did not consider etitioner's sale of 2,800 shares le m than 10 months after the da e of decedent's death. Accordingly>, we find little in Gasiorow ki's methodology to support hl: opinion of the length of tire it would take to dispose o? petitioner's shares. As a.1 alternative to dribbling petitioner's shares into the local marat, Gasiorowski considered the consequences of disposing t he block in the public market. Gasiorowski interviewoc several experts who value closely held bank stocks for their c pinion of the price at which petitioner's stock would trade if .1 were offered on the public market. The experts' opinion w.u that the stock could be expected to trade at a price ranging f cm 50 to 70 percent of book value, and most likely at a 12Èor _nstance, 228 shares changed hands in 1990, 1,524 .in The average nunber of shares sold per the number of shares sold 1991, and :,000 in 1992. year over ihis 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, period doo not necessarily represent in any pa ticular year, or by a willing seller at any time. the iverage number of shares sold oer year over the 3-year - 31 - 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 2petitioner'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 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, includes the 1,111 shares sold by decedent and the 2,800 sold by petitioner. All these shares sold for more than book value. is 4,136. This amount - 32 - petitionec s expert, Spiro selected certain financial ratios to value the bavings shares. Placing primary weight on the rice- to-earnin p; ratio, secondary weight on the price-to-book atio, and little weight on the dividend yield measure, Spiro concluded that the ':ndicated value" of a minority interest in Savings would be M.69 per share, if the shares were liquid and freely traded. Beca uh the shares are not quickly convertible into cash, Spiro apptjed a liquidity discount to the indicated value.15 To determine the size of the liquidity discount, Spiro considered several s :tdies,16 and reviewed 19 opinions of this Court that were decid(d after 1983 in which we found a discount separately and speci'jcally for either lack of marketability or restrictions on transfo2 with respect to a closely held company. The discounts jn the studies and cases ranged from 10 to 45 percent. 157e note that in this case, a liquidity discount and a discount indistinguishable. :!cr lack of marketability are conceptually 16Spiro relied on the following stucies: Pratt, "Discounts and Premin', Valuation of Closely Held Companies and Inactively Traded Sectrities (1990); Maher, Marketabi jty for Closely Held Business Interests", 54 TAXES.562 (Sept. 19"€); Moroney, Stocks", b] TAXES 144 (Mar. 1973); Emory, Marketabi.ity as Illustrated in Initial Public Offerings o Common Stock", Bus. Valuation Rev. (Dec. 1986); and Emory, Value of MErketability as Illustrated in Initial Public Offerings of Common Etock (January 1994 through Juae 1995)", Bus. Valuation Rev. "Most Courts Overvalue Closely Held "Discounts for Lack of "The Value of "The (Dec 1995). - 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 incbrporate 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 tle cash-flow from the stock sales and dividends using 9.5 percen ; as a discount factor. Using this piecemeal sales method, Spiro concluded trat the "implied 1 ice per share" was $308. This amount represents an illiquid n.nority value and requires no further adjustment. To v L.ue the shares by the income nethod, Spiro capi alized Savings' L992 pro forma cash-flow. To nake this determinaltion, Spiro mada.bertain assumptions regarding Savings' 1992 net interest Lt.come, provision for loan losses, other operating income an d expenses, income taxes, and additions to equity capital. piro 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 wo ld 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 valle of the stock was $266 per share To reconcile the results of the dif erent methods, Spiro calculatet the weighted average of the dLfferent values. Spiro assigned the results of the piecemeal sa.es method 40 percént of the total, the market method 35 percent, and the income method 25 - 35 - 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[173 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 l'Price-to-earnings ratio. 18The selected companies and their growth trends and price- to-earnings ratios are as follows: . Company Inc. California Bancshares, Civic Bancorp First Commercial Bancorp The Pacific Bank Redwood Empire Bankcorp University National Bank Westamerica Bancorporation 1-Year -18.73 -32.32 -25.91 2.11 148.56 1.54 14.35 Growth Trends 3-Year P/E Ratios 5.58 22.91 11.64 -1.24 32.22 3.21 38.99 11.02 7.95 5.75 8.01 9.02 9.64 9.05 There is no significant correlation between the companies' growth rates and price-to-earnings ratios. Spiro's data does not (continued...) - 36 - determine a price earnings multiple for Savings is akin t a navigatol averaging compass points chosÂn at random to plot a course. Wa reject this part of Spiro's opinion, because the data he used c oes not support his conclusion, We reject Spiro's reliance on the cestricted sales ahd IPO studies :!cr the same reasons we have alceady expressed in addressinc the opinion of petitioner's 3xpert. We dc hot agree with the implied snare value that Spiro obtained using his piecemeal sales method. To calculate this value, Sxro assumed that a lender would make the same assumpti ms as he did regarding the fu ure values of the shares, the amou R of the dividends, and the ntmber of shares that could be sold por 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 chares. We t link that a lender would requ re the entire blo k of stock as security for a loan equal to nly a part of the stock's value;19 t herefore, a loan for the total amount of the va ue of 18 ( , '. continued) support his premise that the price-to-earnings ratio is principally influenced by earnings growth, or that knowlédge of a company's net earnings ratio. 441 (4th ed. 1986); Kroeber & LaForge, The Manager's Guide to Statist:.cs and Quantitative Methods, 147-148 (1980) . income growth trend helps to predict its pbice-toSee Freund & Smith, S:atistics: A First Course, 19Sp _ro conceded at trial that the stock would not secure (cont nued. . . ) - 37 - 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 creditÈorthiness 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 stogk 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 19(...continued) the entire amount of the loan. 20Spiro noted in his written report that his estimate is [petitioner] sold * * "conservative in light of the fact that 2,800 shares in 1992". * - 38 - market's appreciation of the value of a minority interest in Savings stock and its awareness of the tock's limited marketability. Morecver, no evidence was offered af any change in t e market corditions, the constraints of tae economy, or the financia.. condition of Savings between the date of decedent ' s sale of ..,111 shares and the date of petitioner's sale of 2,800 shares t u t woulgi have affected the demand for the share . Thus, the fact that decedent's block of shar s sold quickly on e it was offered, and that approximately 10 mon hs later petitioner's larger bl ack of shares sold equally qu ckly, indicates that the market fo Savings' shares is consider bly more liquid t an either pe:itioner or respondent opined How e ver, although Mannon testifie that af ter petitioner ' s sale son.e of the buyers expressed an i terest in purchasing more shares, he also testified that others ..ould have bought no more. Furtherricre, although the blocks of st ack sold by decedeht and petitiotter sold quickly and the shares in petitioner's sale sold for a h .ç her price than the shares in decedent ' s earlier sale, the amo n t by which the actual sales price exceeded book value was sli yhtly less in the later sale than in the earlier sale.21 21Decedent sold 1,111 shares at 8.31 percent above book value; petitioner sold 2, 800 shares at. 4.12 percent above book value. - 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 RespoÈdent determin·ed that the value of petitioner's Willits stock was $850 per share; however, he now contends that the date- of-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 ' o itstanding -shares, and was a irector and chairman of the boarc )f Willits, March ' s cousin, a d decedent ' s nephew. Mannon tes:ified that he bought the sha es even though he did not want then , because March was a family member, the estate axes were due, and he could not find another buyer. We previously have held that "Forc 3d sales of stock to family mon bers to enable them to pay es bate taxes are in ho way reflecti're bf fair market value because the sales occurred under unusual ejrcumstances." See Estate of Oman v. Commissioner, T.C. Memo. 19F-71; see also Estate of Miller v. Commissioner, T.C. Memo. 1959-235. Considering the relationship of the parties and petitiona.:'s need for funds to pay the estate taxes, we find that Mannon wa a an accommodating buyer, not a willing buyer. I Therefore, we do not consider the sale to Mannon in decialing the fair market value of petitioner's shar s. Hov ever, at the time petitioner s ld the shares to annon, petitior.er also sold 125 shares to Boz rth and 10 shares to Brown·. Eozarth is a director of Willits and Brown is an executi''E officer; both had their positions with Willits and were shareho .c ers before they purchased these shares. Furthe more, neither one has any relationship with either petitioner or March. We cons bler the price Bozarth and Brodn 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 h 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 assertioñ 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 Mannoh'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 irf 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. - 44 - Tarbell cited the usual restricted stock and IPO studies,22 and Rev. Iul. 77-287, 1977-2 C.B. 319, :o support his opinion of the discotnt. Rev. Rul 77-287, supra, ets forth guidelines for valuing :n curities that cannot be immed ately resold because they are rest n cted from resale pursuant to Federal securities! law. The Uillits shares are not restrioted from trading by either law or ag. eement. Petitioner offered ro evidence of any shareholdùr's who were unable to sell treir shares once o fered for sale. Therefore, there is no evidence that the low trading volume is due to any reason other than the shareholder's prefererce to hold the shares for long-term investment,.rather than saJe. Accordingly, we find no pe.:suasive evidence in the record 1c justify reliance on the restricted stock studies in determining an appropriate marketability discount. 22In addition to the Emory IPO studies earlier cited by 36 J. Taxn. 353 (June 1972); Moroney, "Most Courts Gasiorovnki and Spiro, see supra notes 9 and 16, Tarbell cited the following restricted stock studies: Gelman, "An EconomistFinancia. Analyst's Approach to Valuing Stock of a Closely Held Company' Overvalae Closely Held Stocks", 51 TA ES 144 (Mar. 1973); Moroney, Valuatici, 100 Percent Maher, BusineEs Interests", 54 TAXES 562 (Seht. 1976); Trout, "Estimrtion of the Discount Associated with the Transfer of Restricted Securities", 55 TAXES 381 (June 1977); 77-287 Ravisited," SRC Quarterly Repo ts (Spring 1983); Bolten, "Discotnts for the Stocks of.Closely deld Corporations" & Ests "Why 25 Percent Discount for Nonmarketability in One in Another?", 55 TAXES 316 (May 1977); " Discounts for Lack of Marketability for Closely Held. 22 (Dec. 1984). "Revenue Ruliñg 123 Trs. - 45 - 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 portioh 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-to- book 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. 23This amount does not include the 365 shares sold to Mannon. - 46 - Spiro applied a liquidity discount to the indicated value. To detern ine the size of the discount, piro relied on thh same studies ¿nd opinions that he relied upo in determining the size of the d:scount to apply to the Savings stock. He also consideroc the particular facts and cir umstances of the hillits stock, i ic luding the level of Willits ' ublic recognition in the local co anunity, its history of paying increasing dividends, the lack of rostrictions on trading the sh res, the existing market for the s.ock, and the stock's trading history. Spiro concluded that a liquidity discount of 20 percen was appropriate, and that the fair narket value of the stock was $755 per share. Spir] used his piecemeal sales me hod to estimate the present value of the Willits shares in the same way that he used it to e timate the value of the Saving shares, except h assumed that 12 Willits shares could be sold ach year for the next 4 years a : a price approximating their b ok value at the t me of sale. Uf ing this method, Spiro concl ded that the implied price per shace was $816. To 'ralue the shares by the incom method, Spiro capitalized Willits' pro forma cash-flow. To cal ulate the pro for a cash- flow, Spiro made certain assumptions egarding Willits' 1992 net income,l rovision for loan losses, ot er operating incodie and expenscs, income taxes, and additions to equity capital He developed the discount rate to calcul te the present va ue of the - 47 - pro forma cash-flow by reducing the rate of return that he thought an 'equity investor in Willits would requi-re 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 24The selected companies and their growth trends and price- to-earnings ratios are as follows: Growth Trends Company Redwood Empire Bankcorp 1-Year 148.56 3-Year 32.22 P/E Ratios 9.02 (continued...) - 50 - Issue 3. 4hether Petitioner May Deduct Its Reporting Position the Expense of Defending Petitioner asserts by amended peti ion that certain expenses it incurred defending its reporting pos tion with regard ho the value of the Savings and Willits shares are administration expenses ceductible from the value of e gross estate. Responde did not address this issue trial or on brief. Sec1_on 2053(a)(2) provides that dministration expenses shall be deducted from the value of th gross estate if they are allowable by the law of the jurisdicti n under which the estate is beinc administered. Administration expenses include attorned.s fees and miscellaneous expenses. See sec. 20 2053- 3(a), Eritate Tax Regs. Miscellaneous dministration expenses include Eccountant's fees and appraiser's fees. See sec. 20,2053 - (d)(1), Estate Tax Regs. The amounts deductibl'e as adminis;. ation expenses are limited to such expenses as are actuall/ and necessarily incurred in he administration of the decedent s estate. See sec. 20.2053- (a), Estate Tax Regs. However, expenditures not essential t the proper settlement of the estace but incurred for the indiv dual benefit of the heirs, legate(s, or devisees, may not be taken as deductions. See id. Attorne 's fees incurred by beneficia ies incident to litigation as to ·d eir respective interests are not deductible if the - 51 - 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'h 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 25California law provides: respectively, may lawfully perform in the 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, computation, 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) reporting, or making of tax returns, or in (West 1998).] . These amounts are in addition to the compensation allowed under Sec. 10800 for all ordinary services of the personal representative. 1998). See Cal. Prob. Code Ann. sec. 10801(a) (West - 52 - in prosecu;ing a claim for refund should be claimed at th time the defici3ncy is contested or the refund claim is prosecuted. See sec. 23.2053-3(c) (2), Estate Tax Re s. Furthermore, deductior for these fees shall not be denied, and the sufficiency of a cla:.n for refund shall not be ques;ioned, solely by heason of the fact that the amount of the fees to be paid was not establish d at the time that the right to the deduction was claimed. She Pe::.tioner has met the requireme ts for claiming the deductiow. Petitioner paid $21,226 o attorney's fees, $8,830 of accoui.ant's fees, and $12,396 of a praisal costs to defend its repor :ing position in an audit by he Internal Revenue Service. Petitioner filed Form 843, C aim for Refund and Request for Abatenent, 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 refun of estate i ax for additional administrati n expenses that i expects to incu 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.