                       T.C. Memo.  1998-185



                     UNITED STATES TAX COURT



     ESTATE OF ELDON L. AUKER, DECEASED, KIMBERLEE J. AUKER,
INDEPENDENT PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER
               OF INTERNAL REVENUE, Respondent



     Docket No.  13150-96.                 Filed May 19, 1998. 



          E's estate includes real estate and interests in
     five family-owned entities, the assets of which include
     real estate and interests in two other family-owned
     entities that own real estate.  E's real estate
     consists of three apartment complexes.  Collectively,
     the entities' real estate consists of commercial rental
     property, residential rental property, vacant land, and
     developed property held for sale.  R and E agree that
     all the real estate mentioned above must be valued in
     order to determine the value of E's gross estate; and
     they agree on the value of each parcel of real estate,
     before any discount for market absorption; and they
     agree that large marketability and control discounts
     apply to most of the interests.  R and E dispute
     whether a market absorption discount inheres in the
     value of E's real estate and the entities' real estate. 
          Held: A 6.189-percent market absorption discount
     inheres in the value of each apartment complex; none of
                                 - 2 -


     the other real estate is valued by reference to a
     market absorption discount. 

     Russell E. Bowers and Bernard L. McAra, for petitioner. 

     Trevor T. Wetherington, for respondent. 



             MEMORANDUM FINDINGS OF FACT AND OPINION

     LARO, Judge:   The Estate of Eldon L. Auker, Deceased,

Kimberlee J. Auker, Independent Personal Representative,

petitioned the Court to redetermine respondent's determination of

a $1,810,737 deficiency in Federal estate tax.    Following

concessions by the parties, the only issue left to decide is

whether a discount for market absorption inheres in the

August 12, 1992, fair market value of certain assets included in

the Estate of Eldon L. Auker (the estate).    The assets consist of

three apartment complexes (collectively, the apartment complexes)

and interests in five family-owned entities the assets of which

include real estate and interests in two other family-owned

entities that own real estate. 

     We hold that a 6.189-percent market absorption discount

inheres in the fair market value of each apartment complex, and

that the values of the decedent's interests in the entities are

not determined by reference to a market absorption discount. 

Unless otherwise stated, section references are to the applicable

provisions of the Internal Revenue Code.    Rule references are to

the Tax Court Rules of Practice and Procedure. 
                                - 3 -


                          FINDINGS OF FACT

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

The stipulated facts and the exhibits submitted therewith are

incorporated herein by this reference.     When the subject petition

was filed, the estate's legal address was in Grand Blanc,

Michigan.1    Grand Blanc and Flint, Michigan, are located in

Genesee County.     The center of Grand Blanc is approximately

7.5 miles south-southeast from the center of Flint. 

     The decedent developed and managed commercial and

residential real estate in Genesee County until his death on

August 12, 1992.     His oldest child, Kimberlee J. Auker-Cooper

(Ms. Auker-Cooper), is the personal representative of his estate. 

On November 9, 1993, Ms. Auker-Cooper timely filed the estate's

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

Tax Return, with the Commissioner of Internal Revenue (the

Commissioner).     Less than 3 years later, the Commissioner issued

Ms. Auker-Cooper, in her capacity as the estate's representative,

a notice of deficiency listing a $1,810,737 deficiency in Federal

estate tax. 

     During his lifetime, the decedent established a revocable

trust (the Trust), named the “Eldon L. Auker Living Trust”, by

executing an instrument dated October 1, 1980, the provisions of


     1
       The record does not reveal the personal representative's
residence at the time of the petition. 
                                 - 4 -


which were restated in an instrument he executed on May 22, 1992. 

On December 11, 1989, the decedent transferred to the Trust his

title interest, as sole proprietor, in the apartment complexes

which were named The Landings at Fountain Pointe (The Landings),

Fox Hill Glens (Fox Hill), and Stonehenge Gates (Stonehenge). 

The Landings was built in the 1970's, and it is sited on 40.6

acres in Grand Blanc.    The Landings consists of 37 buildings with

a total of 468 living units (424 one- or two-bedroom apartments

and 44 townhouses), a clubhouse, a swimming pool, and tennis

courts.    Grand Blanc is one of Genesee County's more affluent

communities, and its population was growing on the applicable

valuation date. 

     Fox Hill was built from 1985 through 1987, and it is sited

on 31.18 acres in Grand Blanc.     Fox Hill consists of 22 buildings

with a total of 286 living units (264 one- or two-bedroom

apartments and 22 townhouses), a clubhouse, a swimming pool,

tennis courts, and a jogging trail.       Fox Hill is located

approximately 3.5 miles from The Landings. 

     Stonehenge was built in two phases; approximately two-thirds

of the complex was built from 1979 through 1980, and the rest,

which generally consists of five of the more luxurious apartment

buildings in the complex, was built from November 1985 through

January 1986.    Stonehenge is sited on 19.09 acres in Flint, and

it consists of 15 buildings, each with 12 living units (for a
                               - 5 -


total of 180 living units, all of which are one- or two-bedroom

apartments), a clubhouse, a swimming pool, and tennis courts. 

Flint is the largest city in Genesee County, and it is the site

of General Motors (GM) and other large employers.    The population

and economy of Flint were growing on the applicable valuation

date, and it had one of the strongest retail markets in Michigan. 

     Approximately 32 months after the decedent transferred the

apartment complexes to the Trust, he transferred to the Trust his

complete stock interests in family corporations named Auker

Investments, Inc.; Grand Pointe, Inc.; K.A.A., Inc.; and The

Aukers, Community Developers, Ltd.; and his complete ownership

interest in a family general partnership named Eldon L. Auker

Enterprises.    When the decedent died, the Trust owned equity

interests in these entities as follows:   (1) A 100-percent

interest in Auker Investments, Inc., (2) a 5-percent interest in

Grand Pointe, Inc., (3) a 25-percent interest in K.A.A., Inc.,

(4) a 26-percent interest in The Aukers, Community Developers,

Ltd., and (5) a 35.08-percent interest in Eldon L. Auker

Enterprises.    Also at that time, Auker Investments, Inc., owned a

25.57-percent equity interest in Eldon L. Auker Enterprises; The

Aukers, Community Developers, Ltd., owned a 20.27-percent equity

interest in Eldon L. Auker Enterprises and a 20.74-percent equity

interest in a family general partnership named Auker Enterprises;

and Eldon L. Auker Enterprises and Auker Enterprises each owned a
                                         - 6 -


50-percent equity interest in Auker Homes.2                    See the appendix for

a chart of the relationships between the various entities and the

Trust.      The assets, liabilities, and net worth of these entities,

at the values stipulated by the parties without regard to market

absorption discounts, were as follows on the date of the

decedent's death (the applicable valuation date):3
Auker Investments, Inc.

      Assets

               25.57% Interest in Eldon L. Auker Enterprises
$512,000
                  Total                                                   512,000

      Liabilities
               Total                                                        -0-

      Net Worth
                  Total                                                   512,000


Grand Pointe, Inc.

      Assets

               Cash                                                        $3,607
               Accounts and notes receivable                               41,137
               Receivables--other                                          55,425
               Commercial rental property--Fenton Hill Shopping Center    525,000
                                           1040 Hill Road, Grand Blanc
               Land under development--held for sale                     2,660,000
               Equipment and/or vehicles                                       773
                 Total                                                   3,285,942

      Liabilities
               Total                                                     2,258,664

      Net Worth
                  Total                                                  1,027,278
K.A.A., Inc.



      2
       Each remaining equity interest in all of the entities
mentioned above was owned by a member of the Auker family,
either directly or indirectly. 
      3
       To the extent that a real estate interest listed below as
an asset does not reference a street address, we are unable to
determine the specifics of the parcel or parcels of real estate
that relate to that interest. 
                                            - 7 -

         Assets

                  Cash                                                      $6,650
                  Construction in progress                                 115,880
                  Receivable--Eldon L. Auker Enterprises                    55,526
                  Receivable--other                                         10,950
                  Accrued interest on receivables                           21,931
                  100% interest in vacant land                              17,400
                  Equipment and/or vehicles                                 12,504
                     Total                                                 240,841

         Liabilities
                   Total                                                   226,511

         Net Worth
                Total                                                       14,330
The Aukers, Community Developers, Ltd.

         Assets

                  Prepaid Taxes                                             $1,974
                  20.72% interest in Eldon L. Auker Enterprises
415,000
                  20.74% interest in Auker Enterprises                     514,161
                    Total                                                  931,135

         Liabilities
                  Total                                                      -0-

         Net Worth
                     Total                                                 931,135


Eldon L. Auker Enterprises

         Assets

                  Cash                                                      $3,494
                  Inventory-supplies                                         2,024
                  Accounts and notes receivable                            462,069
                  Receivable--Auker Homes                                  510,187
                  Receivable--K.A.A. Enterprises                           306,800
                  Accrued interest on receivables                           60,515
                  Land contracts receivable                                 22,567
                  Commercial Rental Property--Burger King
303,500
                                              11325 S. Saginaw Street,
                                              Grand Blanc
                  Commercial Rental Property--Gingerbread House
113,000
                                              11319 S. Saginaw Street,
                                              Grand Blanc
                  100% interest in residential rental properties           191,800
                  50% interest in residential rental properties
93,440
                  100% interest in vacant land                                55,000
                  50% interest in vacant land                                135,160
                  33.3% interest in vacant land                               41,166
                  50% interest in Auker Homes                              1,576,847
                  Equipment and/or vehicles                                      345
                                                                         1
                     Total                                                 3,878,544

         Liabilities
                                               - 8 -

                     Total                                                     797,588

         Net Worth
                     Total                                                    3,080,956

       1
         We recognize that the total value of these assets is $3,877,914.  The parties
have stipulated that the total value is $3,878,544, and they have not explained the
difference between their stipulated value and the actual value.  We proceed using
the stipulated value. 

Auker Homes

         Assets

                  Cash
$4,942
                  Escrow account--sales in process
93,123
                  Inventory-supplies
14,290
                  Accounts and notes receivable
13,026
                  Receivable--Kings Pointe Enterprises
960,124
                  Receivable--Grand Pointe, Inc.
1,532,150
                  Mortgage receivable--Kings Pointe Enterprises
500,000
                  Accrued interest on receivables
228,758
                  Land contracts receivable
353,906
                  Commercial rental property--Victoria Square Shopping Mall
775,000
                                              4501 Hill Road, Grand Blanc
                  Commercial rental property--Kingsley Square
600,000
                                              6070 Fenton Road, Flint
                  Commercial rental property--Ponderosa
515,000
                                              1030 Hill Road, Grand Blanc
                  Commercial rental property--Richfield Road Medical Center
140,000
                                              5529 Richfield Road, Flint
                  Residential rental properties
263,930
                  Sage Lake Property
475,000
                  Developed residential lots held for sale
370,170
                  Tri-Park development costs
145,240
                  Land held for sale
283,200
                  Equipment and/or vehicles
19,536
                    Total
1
    7,242,395

       Liabilities
                Total
1,986,238
                                              - 9 -

         Net Worth
                     Total
5,256,157
         1
       We recognized that the total value of these assets is $7,287,395.  The
parties have stipulated that the total value is $7,242,395, and they have not
explained the difference between their stipulated value and the actual value.    We
proceed using the stipulated value. 


Auker Enterprises

         Assets

                  Cash
$756,890
                  Construction in progress
4,757
                  Receivable--Auker Homes
145,220
                  Accrued interest on receivables
24,499
                  Land contracts receivable
78,800
                  Commercial rental property--5124 Hill Road, Grand Blanc
145,000                  Commercial rental property--6063 Fenton, Grand Blanc
310,000
                  50% interest in commercial rental properties
82,400
                  100% interest in residential rental properties
385,493
                  50% interest in residential rental properties
11,040
                  100% interest in vacant land
177,300
                  50% interest in vacant land
135,160
                  33.3% interest in vacant land
41,163
                  50% interest in Auker Homes
1,576,847
                  Equipment and/or vehicles
31,486
                    Total
3,906,055

         Liabilities
                  Total
92,085

         Net Worth
                     Total
3,813,970

All of the real estate mentioned above (including the apartment

complexes), which we collectively refer to as the subject

property, is located in Genesee County, with the exception of
                               - 10 -


vacant land on Holly Road, Holly Township, Michigan, which is

located in Oakland County, Michigan. 

     Following the decedent's death, the estate paid $39,450 to

the real estate appraising and consulting firm of Allied Real

Estate Appraisers, Inc., to ascertain the "current market value"

on August 12, 1992, of each parcel of the subject property for

Federal estate tax purposes.    Wayne E. Knecht (Mr. Knecht), MAI,4

and Lawrence F. Piper (Mr. Piper), SRA5 (collectively referred to

as the appraisers), two of the firm's certified real estate

appraisers, inspected and valued most of the larger interests,

taking into account the "highest and best use" of each parcel and

assuming that each of the apartment complexes, the Burger King

property located at 11325 S. Saginaw St., Grand Blanc, and the

residential rental property at 6642 Kings Pointe, Grand Blanc,

would be marketed for a period of 18 months, 1 year, and 3 to 6

months, respectively.6   The appraisers arrived at their values by

employing a sales comparison method, income capitalization



     4
       The designation of MAI is awarded to qualifying members of
the American Institute of Real Estate Appraisers, and it is the
most highly recognized appraisal designation within the appraisal
community.  Mr. Knecht has held this designation for
approximately 35 years. 
     5
       The designation of Senior Residential Appraiser is awarded
to qualifying members of the Society of Real Estate Appraisers. 
     6
       In 1992, the average listing for residential property in
Genesee County was 92 days, and the average listing for unsold
properties of all types was 170 days. 
                              - 11 -


method, and cost method.    The appraisers took into account

various data on Genesee County, including its location,

composition, demographics, population density, and accessibility. 

The appraisers followed an industry definition of the term

"market value", under which the term meant:

     MARKET VALUE--The most probable price in terms of money
     which a property should bring in a competitive and open
     market under all conditions requisite to a fair sale,
     the buyer and seller, each acting prudently,
     knowledgeably and assuming the price is not affected by
     undue stimulus. 

     Implicit in this definition is the consummation of a
     sale as of a specific date and the passing of title
     from seller to buyer under conditions whereby:

     1)   buyer and seller are typically motivated. 

     2)   both parties are well informed or well advised,
          and each acting in what they consider their own
          best interest. 

     3)   a reasonable time if [sic] allowed for exposure in
          the open market. 

     4)   payment is made in cash or its equivalent. 

     5)   financing, if any, is on terms generally available
          in the community at the specified date and typical
          for the property type in its locale. 

     6)   the price presents a normal consideration for the
          property sold unaffected by special financing
          amounts and/or terms, services, fees, costs, or
          credits incurred in the transaction.* 

     *REAL ESTATE APPRAISAL TERMINOLOGY, (REVISED EDITION),
     1984, pages 160 & 161. 

     The appraisers explained in their appraisal reports that the

sales comparison method compares a property with similar
                                - 12 -


properties of the same type which sell close to the valuation

date, and that adjustments are made to the sale price of each

comparable property to ascertain the value of the property under

consideration.    Comparable properties, the reports state, are

properties which compare to the property under consideration as

to time and condition of sale (with special emphasis on the

condition of the market), location, physical characteristics,

income characteristics, and terms of financing. 

     The reports also state that the income capitalization method

ascertains from market transactions the ratio of selling price to

net operating income at the time of sale in order to arrive at a

capitalization rate, and that this capitalization rate is applied

to similar property, on the basis of the similar property's net

operating income, in order to value it.     As to the cost method,

the reports state, this method ascertains value through the

following three-step process:    (1) The estimated value of the

land that is part of the property to be valued is ascertained

using the sales comparison method, (2) the cost to reproduce the

property under consideration is estimated at current costs, and

(3) the estimated land value is added to the estimated cost of

reproduction, less depreciation, to arrive at the value of the

property under consideration. 

     In applying the sales comparison method to each of the

apartment complexes, the appraisers could not find any sales in
                              - 13 -


Genesee County of property similar to the apartment complexes,

which occurred near the applicable valuation date.7   Thus, the

appraisers looked to sales of "large apartment complexes in

different parts of the state" and ascertained and analyzed the

five following sales:   (1) The $5,500,000 sale of a 280-unit

complex in Kalamazoo, Michigan, in June 1990, to a Michigan

limited partnership, (2) the $3,050,000 sale of a 142-unit

complex in Ypsilanti, Michigan, in November 1991, to Geo Nyman,

(3) the $1,506,000 sale of a 70-unit complex in Woodhaven,

Michigan, in August 1992, to Kulish, (4) the $2,625,000 sale of

an 81-unit complex in Springfield Township, Michigan, in

September 1991, to Ron Iacobelli, and (5) the $2,590,000 sale of

a 72-unit complex in Ann Arbor, Michigan, in December 1992, to

Sandy Nam.    The appraisers concluded that the respective values

under the sales comparison method for The Landings, Fox Hill, and

Stonehenge were $8,300,000, $9,030,000, and $4,745,000. 

     In applying the cost method to each of the apartment

complexes, the appraisers analyzed three sales of vacant land

near the applicable valuation date and the cost to reproduce each

of the apartment complexes.    The appraisers concluded that the

respective values under the cost method for The Landings, Fox

Hill, and Stonehenge were $8,956,000, $9,640,000, and $4,957,000. 


     7
       Very few apartment complexes in Genesee County actually
compare to the apartment complexes in issue. 
                                - 14 -


     In applying the income capitalization method to each of the

apartment complexes, the appraisers used the band of investment

technique to ascertain a capitalization rate for each complex;

the band of investment technique ascertains an overall rate of

return by reference to a mortgage constant (or loan component)

and an equity dividend rate (or equity component).         Each

complex's total income, expenses, and net operating income for

1991 were:

                         The Landings     Fox Hill    Stonehenge

Total income                $2,074,746   $1,703,700   $945,215
Total expenses               1,968,850      706,700    407,592
Net operating income           105,896      997,000    537,623

and the appraisers ascertained the following pro forma operating

statements to factor into their analysis under the income

capitalization method:

                               The Landings    Fox Hill    Stonehenge

Gross possible rent             $2,826,720 $1,860,780 $1,014,060
Less rebates                      (448,560)   (52,380)   (37,020)
Gross rents after rebates        2,378,160  1,808,400    977,040
Laundry rental income               39,000     10,400      7,600
Carports rental income              14,400     29,754     13,306
Total income                     2,431,560  1,848,554    997,946
Vacancy                           (356,724)   (90,420)   (48,852)
Effective gross income           2,074,836  1,758,134    949,094
Less expenses                     (996,100)  (590,700)  (351,000)
Net income                       1,078,736  1,167,434    598,094

     On the basis of market data, the appraisers calculated an

overall rate of return of 10.238 percent for The Landings.          The

components of this rate were:    (1) A mortgage constant of 7.238

percent, which was based on an 8.5-percent loan with a 25-year
                               - 15 -


amortization, 5-year call, and 75-percent loan to value, and

(2) an equity dividend rate of 3 percent, which was based on a

12-percent equity yield on 25 percent of value.     The appraisers

calculated an overall rate of return of 9.738 percent for

Stonehenge and Fox Hill.     The components of this rate were:

(1) A mortgage constant of 7.238 percent, which was based on an

8.5-percent loan with a 25-year amortization, 5-year call, and

75-percent loan to value, and (2) an equity dividend rate of

2.5 percent, which was based on a 10-percent equity yield on

25 percent of value.8   The appraisers ascertained the

capitalization rate of each complex by adding the corresponding

overall rate of return to a tax cap rate of 2.96 percent.     The

appraisers then ascertained each complex's market value under the

income capitalization method by dividing its pro forma net income

by its capitalization rate.     The appraisers concluded that the

respective values under the income capitalization method for The

Landings, Fox Hill, and Stonehenge were $8,172,000, $9,190,000,

and $4,710,000. 

     In connection with the income capitalization method, the

appraisers also ascertained the capitalization rates of the

following six properties:    (1) The 280-unit complex in Kalamazoo,

Michigan, that sold in June 1990, (2) the 70-unit complex in

     8
       The appraisers applied an equity dividend rate to The
Landings that was higher than for the other two complexes because
The Landings had the highest vacancy rate. 
                                - 16 -


Woodhaven, Michigan, that sold in August 1992, (3) the 81-unit

complex in Springfield Township, Michigan, that sold in

September 1991, (4) the 80-unit complex in Ann Arbor, Michigan,

that sold in December 1992, (5) an apartment complex in

Farmington, Michigan, that sold in May 1991, and (6) a 228-unit

apartment in Meridian Township, Michigan, that sold in August

1990.    The appraisers considered each property's gross income

expectancy, expected reduction in gross income for less than full

occupancy and collection losses, expected annual operating

expenses, the pattern and duration of the property's income

stream, and the anticipated value of the resale of other real

property interest reversions.     The appraisers took into account

the relationship of supply and demand, information on trends and

market anticipation, and the fact that two insurance companies

were looking in August 1992 to make a low-interest loan on the

purchase of income-producing property in or near Genesee County. 

     The appraisers concluded that the values derived under the

income capitalization method were the best indicia of value for

each of the apartment complexes, and that the market values of

The Landings, Fox Hill, and Stonehenge were $8,172,000,

$9,190,000, and $4,710,000, respectively. 

     The appraisers used one or more of the three valuation

methods to ascertain the following market values of the other

parcels of real estate which they had inspected.    This real
                                   - 17 -


estate, and the values ascertained by the appraisers, is set

forth below by category:9

Commercial Rental Properties

  G-5529 Richfield Rd.,  Flint (Richfield Rd.  Medical Center)      $140,000
  4501 Hill Rd.,  Grand Blanc (Victoria Square Shopping Mall)       775,000
  6070 Fenton Rd.,  Flint (Kingsley Square Shopping Center)         600,000
  1040 Hill Rd.,  Grand Blanc (Fenton Hill Center)                  525,000
  1030 Hill Rd.,  Grand Blanc (Ponderosa)                           515,000
  11325 S. Saginaw St., Grand Blanc (Burger King)                  303,500
  11319 S. Saginaw St., Grand Blanc (Gingerbread House)            113,000
  5451 S. Saginaw St., Grand Blanc                                  95,000
  5459 S. Saginaw St., Grand Blanc                                 111,000
  5124 E. Hill Rd.,  Grand Blanc                                    145,000
  6063 Fenton Rd.,  Flint                                           310,000
                                                                 3,632,500

Residential Rental Properties

  6642 Kings Pointe, Grand Blanc                                  $175,000
  2381 E. Hill Rd.,  Grand Blanc                                    154,000
                                                                   329,000

Vacant Land

  S/E 1/4 of section 17, Porter Rd.,  Grand Blanc                   $45,000
  Holly Rd.,  Holly Township                                        190,000
  Section 11, Hill Rd.--West of NBD Bank, Grand Blanc               45,000
  S/E corner of Reid Rd. &  Dort Highway, Grand Blanc               294,000
  Section 11, Hill Rd.--East of NBD Bank, Grand Blanc               32,000
  Hill Rd.,  East of Jennings Rd. ( Edson Farm), Mundy Township       89,000
  Section 29, Baldwin Rd.,  Grand Blanc                              72,000
  North Side of Hill Road, East of Genesee Road, Grand Blanc       160,000
                                                                   927,000

The attributes of these parcels are as follows:

Commercial Rental Properties

     Location:                     G-5529 Richfield Rd.,  Flint
     Site size:                    21,760 square feet
     Zoning:                       C-1 (Light commercial)
     Occupancy:                    Dental office referred to as Richfield Rd. 
                                   Medical center
     Improvements:                 Dental office
     Condition of improvements:    Good
     Highest and best use:         Dental office


     9
       The parties have stipulated that these values are the
values of some of the parcels of real estate owned by one or more
of the entities, as set forth supra pp.  6-8. 
                             - 18 -


Location:                    4501 Hill Rd.,  Grand Blanc
Site size:                   162,965 square feet
Zoning:                      B-1 (local business district--commercial)
Occupancy:                   Victoria Square Shopping Mall
Improvements:                One story masonry constructed strip
                             shopping center with 8 tenants and
                             containing a total of 22,535 square feet
Condition of improvements:   Average
Highest and best use:        As improved


Location:                    6070 Fenton Rd.,  Flint
Site size:                   73,870 square feet
Zoning:                      C-3 (regional retail district)
Occupancy:                   Kingsley Square Shopping Center
Improvements:                One story masonry constructed strip
                             shopping mall containing 11,230 square
                             feet, along with site improvements
Condition of improvements:   Good
Highest and best use:        As improved


Location:                    1040 Hill Rd.,  Grand Blanc
Site size:                   Approximately 1.3 acres
Zoning:                      B-2 (community business district)
Occupancy:                   Fenton Hill Center, a strip center
Improvements:                One story masonry constructed strip center
                             mall containing total of 9,000 square
                             feet, along with site improvements
Condition of improvements:   Good
Highest and best use:        As improved


Location:                    1040 Hill Rd.,  Grand Blanc
Site size:                   Approximately 1.45 acres
Zoning:                      B-2 (community business district)
Occupancy:                   Ponderosa Steak House
Improvements:                One story masonry constructed franchise-
                             type restaurant containing 6,164 square
                             feet, along with site improvements
Condition of improvements:   Average
Highest and best use:        As improved


Location:                    11325 S. Saginaw St., Grand Blanc
Site size:                   47,916 square feet
Zoning:                      B-3 (general business district--
                             commercial)
Occupancy:                   Burger King
Improvements:                Fast food restaurant with 3,441 square
                             feet
Condition of improvements:   Average
Highest and best use:        Fast food
                             - 19 -


Location:                    11319 S. Saginaw St., Grand Blanc
                             (Gingerbread House)
Site size:                   24,829 square feet, including 90 feet of
                             road frontage
Zoning:                      B-3 (general business district--
                             commercial)
Occupancy:                   Tenant--Chiropractor
Improvements:                Asphalt parking lot and 2-story building
                             with 4,056 square feet
Condition of improvements:   Average to above average
Highest and best use:        Present use for medicine


Location:                    5451 S. Saginaw St., Grand Blanc
Site size:                   10.2 acres
Zoning:                      B-3 (general business district--
                             commercial)
Occupancy:                   Residence
Improvements:                One story house of 1,232 square feet
Condition of improvements:   Illegal residence
Highest and best use:        Commercial use/development of vacant site


Location:                    5459 S. Saginaw St., Grand Blanc
Site size:                   1.4 acres, with 349 foot road frontage
Zoning:                      B-3 (general business district--
                             commercial)
Occupancy:                   Used car sales
Improvements:                Commercial one-story building with 1,384
                             square feet
Condition of improvements:   Below average
Highest and best use:        Present use with potential for future
                             commercial development


Location:                    5124 E. Hill Rd.,  Grand Blanc
Site size:                   25,000 square feet
Zoning:                      RM-1 (multiple family residential
                             district)
Occupancy:                   Tenant occupied as Food Plus Party Store
Improvements:                One story masonry constructed commercial
                             type building containing 2,400 square
                             feet, along with site improvements
Condition of improvements:   Average
Highest and best use:        As improved


Location:                    6063 Fenton Rd.,  Flint
Site size:                   31,680 square feet
Zoning:                      B-1 (local business district--commercial)
Occupancy:                   Tenant named Trialon Corp.
Improvements:                One story office building with 5,712 quare
                             feet
Condition of improvements:   Good
Highest and best use:        As improved
                                  - 20 -


Residential Rental Properties

     Location:                    6642 Kings Pointe, Grand Blanc
     Site size:                   18,157 square feet
     Zoning:                      Residential
     Improvements:                5 bedroom, 2.5 bath two story house (19
                                  years old), with 3,508 square feet of
                                  living area and attached garage
     Highest and best use:        Residential


     Location:                    2381 E. Hill Rd.,  Grand Blanc
     Site size:                   3 acres
     Zoning:                      B-1 (local business district-commercial)
     Occupancy:                   Residence
     Improvements:                Two story frame house with 1,728 square
                                  feet
     Condition of improvements:   Poor with no value
     Highest and best use:        Commercial use/development of vacant site


Vacant Land

     Location:                    S/E 1/4 of section 17, Porter Rd.,  Grand
                                  Blanc
     Site size:                   30.51 acres plus two outlots of 60' x 95'
                                  and 60' x 190'
     Zoning:                      R-2 (single family houses; farm animals
                                  allowed if site over 10 acres)
     Occupancy:                   Vacant land
     Improvements:                None
     Highest and best use:        Residential land


     Location:                    Holly Rd.,  Holly Township
     Site size:                   Approximately 176 acres
     Zoning:                      AG/RE agricultural residential
     Occupancy:                   Vacant land
     Improvements:                None
     Highest and best use:        Residential land


     Location:                    Section 11, Hill Rd.--west of NBD Bank,
                                  Grand Blanc
     Site size:                   Approximately 6.48 acres
     Zoning:                      west 180' of total parcel: RM-1
                                  (multiple family residential district)
                                  Balance of the site: B-1 (local
                                  business district--commercial)
     Occupancy:                   Vacant land
     Improvements:                None
     Highest and best use:        Multi family
                                  - 21 -


     Location:                    S/E corner of Reid Rd. &  Dort Highway,
                                  Grand Blanc
     Site size:                   68.49 acres (gross)
     Zoning:                      Light industrial and light industrial
                                  research park
     Occupancy:                   Vacant land
     Improvements:                Single family house with 1,381 square feet
     Condition of improvements:   Average or less
     Highest and best use:        Industrial


     Location:                    Section 11, Hill Rd.--east of NBD Bank,
                                  Grand Blanc
     Site size:                   4.54 acres
     Zoning:                      East 271' of total parcel: RM-1
                                  (multiple family residential district)
                                  Balance of the site: B-1 (local
                                  business district--commercial)
     Occupancy:                   Vacant land
     Improvements:                None
     Highest and best use:        Multi family


     Location:                    Hill Rd.,  East of Jennings Rd. ( Edson
                                  Farm), Mundy Township
     Site size:                   81.30 acres
     Zoning:                      R/A--residential agricultural
     Occupancy:                   Vacant land
     Improvements:                None
     Highest and best use:        Residential/agricultural


     Location:                    Section 29, Baldwin Rd.,  Grand Blanc
     Site size:                   Approximately 60 acres
     Zoning:                      AG/RE agricultural residential
     Occupancy:                   Vacant land
     Improvements:                None
     Highest and best use:        Residential


     Location:                    North Side of Hill Road, east of Genesee
                                  Road, Grand Blanc
     Site size:                   22.67 acres
     Zoning:                      B-1 (Local business district-commercial)
     Occupancy:                   Vacant land
     Improvements:                None
     Highest and best use:        Multi family--condominium


     As to the other parcels of the subject property, none of

which the appraisers inspected, the appraisers did not use any of

the valuation methods mentioned above to ascertain value. 
                               - 22 -


The appraisers arrived at the values for this property by

multiplying each property's State equalized value by 2.    These

parcels of property, for which the record does not disclose

individual values or specifics other than general classifications

of category, are set forth below by category:

     Residential Rental Properties

     142 Eddington, Flint
     4492 American Heritage, Grand Blanc
     2517 Torrence, Flint
     2317 Humboldt, Flint
     Wagonwheel, Grand Blanc
     1421 Vermilya, Flint
     829 Campbell, Flint
     623 Neubert, Flint
     3608 Dakota, Flint
     2369 E. Hill Rd.,  Grand Blanc
     1117 Neubert, Flint
     1116 Victoria, Flint
     5255 Perry Rd.,  Grand Blanc
     5273 Perry Rd.,  Grand Blanc
     1127 Belsay Rd.,  Grand Blanc

     Vacant Land

     2269 E. Hill Rd.,  Grand Blanc
     Ottawa Park Lots, Grand Blanc
     Bushdale Lots, Fenton Rd.,  Flint
     Branda (Green Valley), Grand Blanc
     Lot 33 Lapeer Heights, Burton
     Land next to Victoria Shopping Mall, Grand Blanc
     Lake of the north, lot 296, Pineview No.  2, Antrim County

     Developed Property Held For Sale--Residential Lots

     Kings   Pointe--Swamp Lot, Grand Blanc
     Kings   Pointe--Lot 180, Grand Blanc
     Kings   Pointe--Lot 296, Grand Blanc
     Kings   Pointe--Lot 330, Grand Blanc
     Kings   Pointe--Lot 331, Grand Blanc
     Kings   Pointe--Lot 332, Grand Blanc
     Kings   Pointe--Lot 333, Grand Blanc
     Kings   Pointe--Lot 336, Grand Blanc
                             - 23 -


     Kings Pointe--Lot 342, Grand Blanc
     Kings Pointe--Lot 343, Grand Blanc

     Developed Property Held For Sale--Other

     Tri-Park Property
     Grand Pointe Property
     After the estate received the appraisers' list of values for

each parcel of the subject property, the estate paid $14,003 to

John J. Stockdale (Mr. Stockdale), a certified public accountant

(C.P.A.) and appraiser of business interests, to appraise the

decedent's equity interests, taking into account the value of the

real estate as ascertained by the appraisers and any discounts

considered appropriate by Mr. Stockdale.    Mr. Stockdale

ascertained that certain discounts, one of which was not a

discount for market absorption, inhered in the equity interests. 

The discounts ascertained by Mr. Stockdale, and the interests to

which they attached, are as follows:   (1) The decedent's

5-percent interest in Grand Pointe, Inc.--35-percent discount for

lack of marketability and lack of control, (2) the decedent's

26-percent interest in The Aukers, Community Developers, Ltd.--

35-percent discount for lack of marketability and lack of

control, (3) the decedent's 35.08-percent interest in Eldon L.

Auker Enterprises--35-percent discount for lack of marketability

and lack of control, (4) each 50-percent interest in Auker

Homes--40 percent discount for lack of marketability and lack of

control, (5) the 20.27-percent interest in Eldon L. Auker
                                - 24 -


Enterprises held by The Aukers, Community Developers, Ltd.--

35-percent discount for lack of marketability and lack of

control, (6) the 25.57-percent interest in Eldon L. Auker

Enterprises held by Auker Investments, Inc.--35-percent discount

for lack of marketability and lack of control, and (7) the

20.27-percent interest in Eldon L. Auker Enterprises held by The

Aukers, Community Developers, Ltd.--35-percent discount for lack

of marketability and lack of control. 

     The estate did not use Mr. Stockdale's values on the

decedent's Federal estate tax return.     After receiving

Mr. Stockdale's values, the estate asked its accounting firm of

Rachor, Purman & Tucker, C.P.A.'s (Rachor, Purman), to apply

market absorption discounts in addition to the discounts

ascertained by Mr. Stockdale.     Rachor, Purman applied a

15-percent market absorption discount to each parcel of the

subject property, and the estate reported the values ascertained

by Mr. Stockdale, as adjusted by these 15-percent discounts, on

the decedent's Federal estate tax return.     The decedent's Federal

estate tax return reported that the applicable value of the

decedent's gross estate for Federal estate tax purposes was

$5,592,994, and that the decedent's taxable estate totaled

$3,968,403.    The estate estimated that it would pay Rachor,

Purman a total of $170,000 for their services in accounting for

the estate.    Whereas the estate paid Allied Real Estate
                              - 25 -


Appraisers, Inc., and Mr. Stockdale to appraise the subject

property, Rachor, Purman's services did not include an appraisal

of any of the subject property. 

     The estate reported the following assets at the values set

forth below:

     Eldon L. Auker Enterprises                    $641,000
     The Aukers, Community Developers, Ltd.         144,000
     Auker Investments, Inc.                        467,000
     K.A.A., Inc.                                    - 0 -
     Grand Pointe, Inc.                              18,000
     The apartment complexes                      2,133,953

These values were derived as follows:

     Eldon L. Auker Enterprises

     (1) The estate reduced by $270,563 the $3,878,544 asset

value ascertained by the appraisers to take into account a

15-percent market absorption discount on the real estate

interests owned by Eldon L. Auker Enterprises or by Auker Homes,

an entity in which Eldon L. Auker Enterprises owned a 50-percent

interest.    The real estate interests owned by Eldon L. Auker

Enterprises, and to which the estate applied 15-percent market

absorption discounts aggregating $139,960, were as follows:

Commercial rental property (Burger King) valued at $303,500,

commercial rental property (Gingerbread House) valued at

$113,000, 100-percent interest in residential rental properties

valued at $191,800, 50-percent interest in residential rental

properties valued at $93,440, 100-percent interest in vacant land

valued at $55,000, 50-percent interest in vacant land valued at
                                - 26 -


$135,160, and 33.3-percent interest in vacant land valued at

$41,166.     The real estate interests owned by Auker Homes, and to

which the estate applied 15-percent market absorption discounts

aggregating $435,346 ($130,603 of which was attributed to

Eldon L. Auker Enterprises after taking into account its

50-percent ownership interest and the 40-percent discount

ascertained by Mr. Stockdale for lack of marketability and lack

of control), were as follows:    Commercial rental property valued

at $775,000, commercial rental property valued at $600,000,

commercial rental property valued at $515,000, commercial rental

property valued at $140,000, residential rental properties valued

at $263,930, developed residential lots held for sale valued at

$370,170, and land held for sale valued at $283,200. 

     (2) The estate ascertained the value of the decedent's

35.08-percent interest in Eldon L. Auker Enterprises by

subtracting Eldon L. Auker Enterprises' liabilities of $797,588

from its adjusted asset value of $3,607,981 ($3,878,544 -

$270,563) and multiplying the balance of $2,810,393 by .3508 to

arrive at $985,886. 

     (3) The estate reduced the $985,886 amount by the 35-percent

discount ascertained by Mr. Stockdale for lack of marketability

and lack of control and rounded the $640,826 balance up to

$641,000. 
                               - 27 -


     Auker Investments, Inc.

     (1) The estate reduced by $45,000 the $512,000 asset value

ascertained by the appraisers to take into account 15-percent

market absorption discounts on the real estate interests owned by

Eldon L. Auker Enterprises, an entity in which Auker Investment,

Inc., owned a 25.57-percent interest, and 15-percent market

absorption discounts on the real estate interests owned by Auker

Homes, an entity in which Eldon L. Auker Enterprises owned a

50-percent interest.    The real estate interests owned by Eldon L.

Auker Enterprises, and to which the estate applied 15-percent

market absorption discounts aggregating $270,563 ($45,000 of

which was attributed to Auker Investments, Inc., after taking

into account its 25.57-percent ownership interest, the 35-percent

discount ascertained by Mr. Stockdale for lack of marketability

and lack of control, and rounding), were set forth above in the

discussion of Eldon L. Auker Enterprises.    The real estate

interests owned by Auker Homes, and to which the estate applied

15-percent market absorption discounts aggregating $435,346

($130,603 of which was attributed to Eldon L. Auker Enterprises

after taking into account its 50-percent ownership interest, the

40-percent discount ascertained by Mr. Stockdale for lack of

marketability and lack of control, and rounding), were also set

forth above in the same discussion. 
                             - 28 -


     (2) The estate ascertained the value of the decedent's

100-percent interest in Auker Investments, Inc., by subtracting

Auker Investment, Inc.'s liabilities of zero from its adjusted

asset value of $467,000 ($512,000 - $45,000) to arrive at

$467,000. 

     K.A.A. Inc.

     (1) The estate reduced by $2,610 the $240,841 asset value

ascertained by the appraisers to take into account a 15-percent

market absorption discount on K.A.A., Inc.'s 100-percent interest

in vacant land valued at $17,400. 

     (2) The estate ascertained the value of the decedent's

25-percent interest in K.A.A., Inc., by subtracting K.A.A.,

Inc.'s liabilities of $226,511 from its adjusted asset value of

$238,231 ($240,841 - $2,610) to arrive at $11,720 and then

multiplying the balance by .25.    The estate reported that the

balance equaled zero. 

     Grand Pointe, Inc.

     (1) The estate reduced by $477,750 the $3,285,942 asset

value ascertained by the appraisers to take into account

15-percent market absorption discounts on Grand Pointe, Inc.'s

commercial rental property valued at $525,000 and land under

development held for sale valued at $2,660,000. 
                                - 29 -


     (2) The estate ascertained the value of the decedent's

5-percent interest in Grand Pointe, Inc., by subtracting Grand

Pointe, Inc.'s liabilities of $2,258,664 from its adjusted asset

value of $2,808,192 ($3,285,942 - $477,750) to arrive at $549,528

and then multiplying the balance by .05 to arrive at $27,476. 

     (3) The estate reduced the $27,476 amount by the 35-percent

discount ascertained by Mr. Stockdale for lack of marketability

and lack of control and rounded the $17,859 balance up to

$18,000. 

     Apartment Complexes

     (1) The estate reduced by $3,310,800 the $22,072,000

aggregate value of the apartment complexes ascertained by the

appraisers ($8,172,000 + $9,190,000 + $4,710,000) to take into

account 15-percent market absorption discounts. 

     (2) The estate added $243,697 to the adjusted value of

$18,761,200 ($22,072,000 - $3,310,800) to reflect other assets

attributable to the apartment complexes and subtracted

$16,870,944 from the resulting amount to reflect the apartment

complexes' total liabilities. 

     (3) The $2,133,953 net fair market value of the apartment

complexes ($19,004,897 - $16,870,944), as reported by the estate,

is broken down as follows:
                                     - 30 -


                                 The Landings   Fox Hill  Stonehenge    Total
Value of apartment complexes as
  ascertained by the appraisers $8,172,000    $9,190,000 $4,710,000 $22,072,000
Market absorption discount @ 15% (1,225,800) (1,378,500)   (706,500) (3,310,800
Value of apartment complexes
  after discount                  6,946,200    7,811,500  4,003,500   18,761,200
Other assets                         48,257      188,975      6,465      243,697
Total liabilities                (6,768,483) (6,462,079) (3,640,382) (16,870,944)
Net fair market value               225,974    1,538,396    369,583    2,133,953

     Respondent made the following relevant adjustments:

                                       Reported Value       Determined Value

     Eldon L. Auker Enterprises            $641,000               $703,000
     Auker Investments, Inc.                467,000                512,000
     K.A.A., Inc.                                 0                 14,000
     Grand Pointe, Inc.                      18,000                 33,000
     Apartment complexes                  2,133,953              5,727,267

Respondent's adjustments stem primarily from disallowing the market

absorption discounts claimed by the estate.           For some unexplained

reason, respondent did not adjust the large discounts ascertained by

Mr. Stockdale for lack of marketability and lack of control. 

     During his life, the decedent helped administer all the subject

property, and he was a focal point in each of the businesses that

held the property.      Shortly after his death, many people expressed

interest in whether the subject property would be sold or retained by

the estate or beneficiaries thereof.           These interested persons

included local and Detroit-based real estate agents who inquired as

to whether the subject property would be marketed for sale, and

whether they could get information on any of the real estate that

would be, or was, offered for sale.         The estate anticipated that

other people would be calling with respect to the subject property. 
                                  - 31 -


Ms. Auker-Cooper, who during the life of the decedent assisted him in

most transactions concerning the subject property, never pursued any

of these inquiries.    Ms. Auker-Cooper never attempted, or intended,

to sell (or cause an entity to sell) any of the subject property

following the decedent's death. 

     The apartment complexes comprised in the aggregate

approximately:   (1) 19 percent of the total number of comparable

complexes in Genesee County, (2) 20 percent of the total number of

comparable units in Genesee County, and (3) 23 percent of the total

assessed value of comparable complexes in Genesee County.    Sales of

real property in Genesee County totaled $224,118,947, $233,473,144,

$254,681,378, $334,900,262, $416,229,204, $467,763,158, and

$484,248,800 in 1990 through 1996, respectively.    Of the total sales

in 1992, which were 4,015 in number, $7,725,174 was attributable to

vacant land (321 sales), $2,168,270 to income-producing property

(42 sales), and $2,706,475 to commercial property (39 sales). 

Most of the other sales during 1992 were attributable to the sale of

owner-occupied homes. 

                                  OPINION

     Disputes over valuation fill our dockets, and for good reason. 

We approximate that 243 sections of the Code require fair market

value estimates in order to assess tax liability, and that 15 million

tax returns are filed each year on which taxpayers report an event
                                - 32 -


involving a valuation-related issue.      It is no mystery, therefore,

why valuation cases are ubiquitous.     Today, valuation is a highly

sophisticated process.    We cannot realistically expect that litigants

will, will be able to, or will want to, settle, rather than litigate,

their valuation controversies if the law relating to valuation is

vague or unclear.    We must provide guidance on the manner in which we

resolve valuation issues so as to provide a roadmap by which the

Commissioner, taxpayers, and valuation practitioners can comprehend

the rules applicable thereto and use these rules to resolve their

differences.    Clearly articulated rules will also assist appellate

courts in their review of our decisions in the event of an appeal. 

     We decide whether a market absorption discount applies to any of

the subject property, mindful that the estate bears the burden of

proof and that the presence of a market absorption discount is never

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

see Estate of Gilford v. Commissioner, 88 T.C. 38, 57 (1987); see

also Rushton v. Commissioner, 498 F.2d 88 (5th Cir.  1974), affg. 

60 T.C. 272 (1973); Maytag v. Commissioner, 187 F.2d 962 (10th Cir. 

1951), affg.  a Memorandum Opinion of this Court; Staley v.

Commissioner, 41 B.T.A. 752, 775 (1940); Estate of Sawade v.

Commissioner, T.C. Memo.  1984-626, affd.  795 F.2d 45 (8th Cir.  1986). 

The estate argues that a 15-percent market absorption discount

applies to each parcel of the subject property.     The estate claims
                                - 33 -


that a sale of all this property at once would depress the market and

force a seller to accept less for the property than the seller would

otherwise receive if the properties were sold separately over time. 

Respondent counters that a market absorption discount should not be

applied in this case.    Respondent claims that the estate has failed

to show that skilled brokers could not sell all the subject property

in a reasonable time.    Respondent claims that the apartment buildings

could be sold to one buyer to allow the buyer to take advantage of

economies of scale.    Respondent claims that the economic condition of

the subject market has no bearing on the application of a market

absorption discount under the facts herein because the market's

economic condition has been taken into account in ascertaining the

parties' stipulated values. 

     We do not agree with either party in all regards.    Fair market

value is a question of fact, and the trier of fact must weigh all

relevant evidence of value and draw appropriate inferences. 

Commissioner v. Scottish Am.  Inv.  Co., 323 U.S. 119, 123-125 (1944);

Helvering v. National Grocery Co., 304 U.S. 282, 294 (1938);

Symington v. Commissioner, 87 T.C. 892, 896 (1986); Zmuda v.

Commissioner, 79 T.C. 714, 726 (1982), affd.  731 F.2d 1417 (9th Cir. 

1984).    Fair market value is measured on the applicable valuation

date, which, in this case, is the date the decedent died.    See

Estate of Proios v. Commissioner, T.C. Memo.  1994-442; see also
                                - 34 -


Pabst Brewing Co. v. Commissioner, T.C. Memo.  1996-506.    Fair market

value is the price that a willing buyer would pay a willing seller,

both persons having reasonable knowledge of all relevant facts and

neither person compelled to buy or to sell.    United States v.

Cartwright, 411 U.S. 546, 551 (1973); Snyder v. Commissioner, 93 T.C.

529, 539 (1989); Estate of Hall v. Commissioner, 92 T.C. 312, 335

(1989); see also sec.  20.2031-1(b), Estate Tax Regs.    The willing

buyer and the willing seller are hypothetical persons, instead of

specific individuals or entities, and the characteristics of these

hypothetical persons are not always the same as the personal

characteristics of the actual seller or a particular buyer. 

Estate of Bright v. United States, 658 F.2d 999, 1005-1006 (5th Cir. 

1981); Estate of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990). 

The views of both hypothetical persons are taken into account, and

focusing too much on the view of one of these persons, to the neglect

of the view of the other, is contrary to a determination of fair

market value.    See, e.g., Pabst Brewing Co. v. Commissioner, supra;

Estate of Scanlan v. Commissioner, T.C. Memo.  1996-331, affd.  without

published opinion 116 F.3d 1476 (5th Cir.  1997); Estate of Cloutier

v. Commissioner, T.C. Memo.  1996-49. 

     Relevant evidence of value may include consideration of a market

absorption discount.    Such a discount emanates from the law of

blockage, under which courts and the Commissioner have long
                                - 35 -


recognized that the sale of a large block of publicly traded stock

over a reasonable period of time usually depresses the price for

shares of that stock as quoted on the market.10   See, e.g., Maytag v.

Commissioner, supra at 965; Commissioner v. Estate of Stewart,

153 F.2d 17, 18-19 (3d Cir.  1946), affg.  a Memorandum Opinion of this

Court; Groff v. Munford, 150 F.2d 825, 827-828 (2d Cir.  1945);

Phipps v. Commissioner, 127 F.2d 214, 216-217 (10th Cir.  1942), affg. 

43 B.T.A. 1010 (1941); Helvering v. Maytag, 125 F.2d 55, 63 (8th Cir. 

1942), affg.  a Memorandum Opinion of this Court; Page v. Howell,

116 F.2d 158 (5th Cir.  1940); Gamble v. Commissioner, 101 F.2d 565

(6th Cir.  1939), affg.  33 B.T.A. 94 (1935); Helvering v. Kimberly,

97 F.2d 433, 434 (4th Cir.  1938), affg.  per curiam a Memorandum

Opinion of this Court; Helvering v. Safe Deposit & Trust Co., 95 F.2d

806, 811-812 (4th Cir.  1938), affg.  35 B.T.A. 259 (1937);

Commissioner v. Shattuck, 97 F.2d 790, 792 (7th Cir.  1938); Estate of

Damon v. Commissioner, 49 T.C. 108, 117 (1967); Standish v.

Commissioner, 8 T.C. 1204, 1210-1212 (1947); Avery v. Commissioner,


       10
         "Blockage" is the "Recognition in the field of taxation
  of fact that in some instances a large block of stock cannot be
  marketed and turned into cash as readily as a few shares. * * * 
  The discount at which a large block of stock sells below the
  price of a smaller block is blockage."  Black's Law Dictionary
  172 (6th ed.  1990); see also Campbell v. United States, 228 Ct. 
  Cl.  661, 661 F.2d 209, 219 n.12 (1981).  The term "market
  absorption" is more commonly used in the valuation industry to
  describe the blockage effect on assets other than stock.  We use
  the term "market absorption" when we refer to blockage as applied
  to assets other than stock. 
                                  - 36 -


3 T.C. 963, 970-971 (1944); Estate of McKitterick v. Commissioner,

42 B.T.A. 130, 136-137 (1940); sec.  20.2031-2(e), Estate Tax Regs.;11

sec.  25-2512-2(e), Gift Tax Regs. ( language similar to that in sec. 

20.2031-2(e), Estate Tax Regs.).     In other words, the quoted price

for shares of a certain type of stock generally reflects the selling

price of a relatively small number of those shares, and the presence

on the market of a sufficiently large number of those shares tends to

depress the quoted price.     The market can handle only a certain

number of shares of a given stock at a quoted price, and, when a

seller attempts to sell more shares than the market can handle, the

large block of shares tends to flood the market, forcing the seller

to accept a price for all shares that is less than the price set by


       11
            As stated in sec.  20.2031-2(e), Estate Tax Regs.: 

       Where sales at or near the date of death are few or of
       a sporadic nature, such sales alone may not indicate
       fair market value.  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. * * *  On the other hand, if
       the block of stock to be valued represents a
       controlling interest, either actual or effective, in a
       going business, the price at which other lots change
       hands may have little relation to its true value. 
                               - 37 -


the market for some of those shares.     As explained in an opinion of

the Court of Appeals for the Second Circuit authored by Judge

Augustus Hand:

          It is common knowledge that sales of small lots of
     stock on an exchange afford no reliable criterion of value
     per share for large lots which if disposed of rapidly are
     likely to flood the market and thus depress the price. 
     Every skillful broker who wishes to dispose of a block of
     stock larger than the market is likely to absorb without
     sacrifice in price will liquidate slowly by sales of small
     units.  If he disposes of the stock too slowly, he runs the
     risk that a recession in current prices may occur and that
     the prices of his sales may suffer on that account.  If he
     sells too quickly, he is likely to suffer from forcing an
     amount of stock on the market which exceeds the normal
     demand, so that purchasers will only buy at less than going
     rates.  That "the size of the gift of any security is not a
     relevant factor" for consideration in determining market
     value, as the Regulations in force in 1936 prescribed, is
     quite contrary to experience.  If the block is large enough
     and the market thin, size under ordinary circumstances will
     certainly count.  To be sure some unusual factor like a
     struggle for corporate control might cause a large block to
     sell at a higher rate than would a small lot had no such
     struggle begun, but the size of the block to be offered is
     surely a matter for consideration in finding value. 
     [Groff v. Munford, supra at 827.] 

     This Court has expanded the concept of blockage to the sale of

other assets such as art, Calder v. Commissioner, 85 T.C. 713,

722-723 (1985) (market absorption discount applied to gifts of a

large number of works of art created by one artist); Estate of Smith

v, Commissioner, 57 T.C. 650, 658 (1972) (market absorption discount

applied to 425 works of art created by and kept in sculptor's

collection), affd.  on other grounds 510 F.2d 479 (2d Cir.  1975);

Estate of O'Keeffe v. Commissioner, T.C. Memo.  1992-210 (market
                               - 38 -


absorption discount applied to approximately 400 works or groups of

works of art); sheet music, Rimmer v. Commissioner, T.C. Memo. 

1995-215 (market absorption discount applied to charitable

contribution of collection of sheet music containing approximately

85,000 pieces); manuscripts, Jarre v. Commissioner, 64 T.C. 183

(1975) (market absorption discount applied to charitable contribution

of large collection of original music manuscripts and other related

material); books, Skripak v. Commissioner, 84 T.C. 285, 324 (1985)

(market absorption discount applied to charitable contribution of

large collection of books); animal trophies, Epping v. Commissioner,

T.C. Memo.  1992-279 (market absorption discount applied to charitable

gift of mainly animal mounts); Estate of Miller v. Commissioner,

T.C. Memo.  1991-515 (market absorption discount applied to donation

of animal trophies), affd.  without published opinion 983 F.2d 232

(5th Cir.  1993); and real estate, Estate of Sturgis v. Commissioner,

T.C. Memo.  1987-415 (20-percent market absorption discount applied to

11,298.86 acres of undeveloped land); Carr v. Commissioner, T.C.

Memo.  1985-19 (30-percent market absorption discount applied to

175 developed lots; no discount applied to 437.5 undeveloped lots);

Estate of Folks v. Commissioner, T.C. Memo.  1982-43 (20-percent

market absorption discount applied to five leased lumberyards with

the same tenant and in the same geographical area); Estate of

Grootemaat v. Commissioner, T.C. Memo.  1979-49 (15-percent market
                                  - 39 -


absorption discount applied to undeveloped lots totaling 302 acres). 

The law of supply and demand supports our application of the concept

of blockage to these assets in that a sale of an exceptionally large

block of one type of property may generate less proceeds than if the

seller were to sell each piece of that block separately at the market

price.    The market may only handle so many pieces of one type of

property in a limited time, and, when the tendered number of a single

type of property is greater than the number that the market can

absorb, the market is unable to handle the exceptionally large block

at that time.    Thus, a seller desiring to sell such a large block at

that time may be forced to sell the block at a price per piece that

is less than the quoted price for each piece. 

     Respondent and the estate both rely on the testimony of experts

to support their respective positions on the presence in this case of

the market absorption discount.     We have wide discretion when it

comes to accepting the testimony of an expert.     Sometimes, he or she

will help us decide a case.    See, e.g., Booth v. Commissioner,

108 T.C. 524, 573 (1997); Trans City Life Ins.,  Co. v. Commissioner,

106 T.C. 274, 302 (1996); see also M.I.C. Ltd. v. Commissioner,

T.C. Memo.  1997-96.    Other times, he or she will not.    See, e.g.,

Estate of Scanlan v. Commissioner, T.C. Memo.  1996-331; Mandelbaum v.

Commissioner, T.C. Memo.  1995-255, affd.  without published opinion

91 F.3d 124 (3d Cir.  1996).    We weigh an expert's testimony in light
                                - 40 -


of his or her qualifications and with proper regard to all other

credible evidence in the record.     We may accept or reject an expert's

opinion in toto, or we may pick and choose the portions of the

opinion which we choose to adopt.     Helvering v. National Grocery Co.,

304 U.S. at 294-295; Parker v. Commissioner, 86 T.C. 547, 562 (1986);

see also Pabst Brewing Co. v. Commissioner, T.C. Memo.  1996-506. 

     We turn to the qualifications and testimony of the four

witnesses whom the Court recognized as experts for purposes of this

proceeding.    First, the Court recognized Mark J. Perry, Ph.D. (Dr.

Perry), as an expert on economics with specialized knowledge on the

economy of Genesee County in 1992.     Dr. Perry received a bachelor of

arts in finance and a master of business administration in finance in

1985 and 1987, respectively, and he received a master of arts in

economics and a Ph.D. in economics in 1991 and 1993, respectively. 

He has taught finance and economics at the university level from 1991

to date, and his employment in the real estate industry consists of

working as a real estate broker from 1982 through 1987 in the area of

St. Paul, Minnesota.    He currently teaches at the Flint campus of the

University of Michigan as an assistant professor of economics and

finance, and he has been in Genesee County for approximately 1 year. 

     Dr. Perry was retained by the estate to examine the economic

conditions in Genesee County from 1990 through 1996, focusing on 1992

vis-a-vis the remaining 6 years.     Dr. Perry testified that the U.S.
                                - 41 -


economy suffered a recession from July 1990 through March 1991 and

that a recession in Genesee County began at the same time, but did

not end until late 1993.    Dr. Perry testified that a "recession"

occurs whenever the gross domestic product decreases for two

consecutive quarters.    Dr. Perry ascertained the following seven

facts concerning the condition of the commercial real estate market

in Genesee County and concluded that these facts affected negatively

the condition of that market and the real estate values therein:

(1) The average annual increase in rent for one- and two-bedroom

apartments in Genesee County for 1987, 1989, 1991, and 1992 was less

than the rate of inflation for the corresponding year, (2) rental

income from the apartment complexes decreased from 1987 through 1992,

(3) Fox Hill's vacancy rate was slightly higher than the average for

the Grand Blanc area, (4) the office vacancy rates in Flint and Grand

Blanc were 21 and 17 percent, respectively, (5) investment in

apartment buildings between 1986 and 1992 declined nationally,

(6) the rate of return on investments in apartment buildings declined

nationally between 1990 and 1992, and the rate of return was negative

in 1992, and (7) the economy in Genesee County was heavily dependent

upon the automobile industry during the years under his review, and

an economic contraction in this industry from 1990 through 1993 had a

negative impact on the economy in Genesee County during those years. 
                               - 42 -


     Second, the Court recognized Steven Jon Shanker, C.P.A. (Mr.

Shanker), as an expert on the market absorption discount.     The estate

retained the accounting firm of Coopers & Lybrand, L.L.P., to

ascertain the rate of the market absorption discount that applied to

each parcel of the subject property, and Mr. Shanker, a partner in

that firm who specializes in valuation, was assigned the job. 

Mr. Shanker has a Bachelor of Arts in Accounting and a Master of

Business Administration in Taxation, and he is a senior member in the

business valuation area of the American Society of Appraisers. 

He has never appraised real estate or applied a market absorption

discount to real estate (before the instant case), but he has valued

many entities whose assets included real estate and has been involved

in numerous blockage situations related to the valuation of stock. 

Many (if not all) of the entities valued by Mr. Shanker were his

clients. 

     Mr. Shanker concluded that a 20-percent market absorption

discount applied to each parcel of the subject property.     In so

doing, he reviewed the appraisers' appraisals and financial,

economic, and census data on Genesee County real estate.     He

analogized an underwriter's role in disposing of stock to the role of

the Resolution Trust Corporation (RTC) in disposing of real estate;

Congress formed the RTC to dispose of real estate held by insolvent

savings and loan institutions (S&L's).    He concluded that "It would
                                - 43 -


be improper to determine Fair Market Value of a large block of real

estate on a market comparable method of single parcels of real estate

without applying a discount." 

     Mr. Shanker performed a four-factor analysis in reaching his

conclusion on the applicability of a 20-percent discount.     He began

by analyzing the depth of the market.     He stated:

     Depth of the market can be described as the quantity of
     transactions, interest in the properties, and potential
     activity both on the buying and the selling sides of the
     market.  Depth is a product of many factors, including the
     total amounts of properties, the breadth of distribution
     among the general public and the overall activity in the
     market.  If the block is so large that it would be
     difficult to sell over a short period, the application of a
     market absorption discount is necessary to arrive at Fair
     Market Value. 

Mr. Shanker concluded that the applicable market at hand had a

"limited market depth" because the appraisers had to look outside the

Genesee County area to find data on comparable sales.     Mr. Shanker

concluded that this factor was a "strong indicator" that a market

absorption discount should be applied to the subject property. 

     Mr. Shanker then analyzed the size of the subject property

vis-a-vis the total property in the market in terms of both the

actual number of properties being sold and the level of activity in

the market.    He concluded that this factor favored applying a market

absorption discount to the subject property.     He stated that the

apartment complexes totaled approximately 20 percent of the

comparable apartment market based on number of units.     He stated that
                                - 44 -


real estate in the Flint area totaled $1.5 billion, excluding real

estate owned by GM, and approximately $2.2 billion if GM was

included.    He stated that reported real estate sales in Genesee

County totaled $255 million in 1992. 

     Mr. Shanker next analyzed the amount of time that was needed to

dispose of the subject property and concluded that this factor

supported applying a market absorption discount.12   He looked to each

parcel of the subject property separately and concluded that it would

take 18 months to sell each parcel.     He stated that the appraisers

assumed that each parcel of the subject property had to be marketed

for 18 months in order to sell it. 

     Mr. Shanker then analyzed the trend of the market as it applied

to a blockage discount.    According to Mr. Shanker, an upward trend in

the market indicates that a block of shares can be sold at the quoted

price within a reasonable amount of time, which negates the

applicability of a blockage discount, while a downward trend leads to

the contrary proposition.    He concluded that this factor supported

applying a market absorption discount to the subject property.      He

stated that the value of real estate in Flint peaked in 1990 at $2.35

billion and declined to $2.25 billion at the end of 1992. 

     After analyzing his factors and concluding that a market

absorption discount applied to the subject property, Mr. Shanker

       12
         Mr. Shanker believes that a market absorption discount
  applies to any asset if it takes more than 6 months to sell it. 
                                - 45 -


turned to ascertaining the amount of this discount.    He analyzed nine

RTC transactions that occurred in Michigan from December 28, 1990,

through July 20, 1992, and ascertained that these properties sold at

discounts from appraised values ranging from 11 to 94 percent, with a

mean of 31 percent and a median of 20 percent.    Mr. Shanker settled

on a discount rate of 20 percent.    Mr. Shanker reviewed some court

cases and some academic studies on blockage discount to assure

himself that 20 percent was the correct discount rate. 

     The third witness whom the Court recognized as an expert was

Douglas K. Hodge, MAI, ARA (Mr. Hodge).13   Mr. Hodge was retained by

respondent to complete a market absorption study on the apartment

complexes, and we recognized Mr. Hodge as an expert on real estate

appraisals, including the applicability of a market absorption

discount.    Mr. Hodge has been the president of Hodge Appraisal Group,

Ltd., from 1991 to date, he received a bachelor of science in finance

in 1983, and he has lived in Michigan all his life.    He began

appraising real estate in 1983, and he is a certified real estate

appraiser in the States of Michigan, Ohio, and Colorado and an ASA

candidate with the American Society of Appraisers.     He has valued a

number of multifamily, retail, and industrial properties in the Flint

area, and he has valued many large apartment complexes in Genesee

       13
         The designation of ARA is awarded to qualifying members
  of the American Society of Farm Managers and Rural Appraisers,
  and it is the highest professional designation offered by that
  society. 
                                  - 46 -


County.      He has testified as an expert in probate court, circuit

courts, Federal bankruptcy court, and this Court. 

     Mr. Hodge concluded that a market absorption discount did not

apply to any of the apartment complexes mainly because no discount

would be necessary in order to market the properties, given an

adequate and standard marketing period of 4 to 6 months.14    Before

writing his report, which was received in evidence, Mr. Hodge toured

the apartment complexes, and he researched extensively the economics

and demographics of both Genesee County and the apartment complexes

in that county.     He also spoke to potential investors and to brokers

as to the amount of time that the apartments would have to be

marketed in order to sell them. 

     Mr. Hodge spent approximately 90 hours, or more than twice the

amount of time spent by Mr. Shanker, in examining the applicability

of a market absorption discount to the apartment complexes. 

Mr. Hodge ascertained from market data that properties such as the

apartment complexes have an appeal outside the general community, and

that one- or two-apartment complexes in Genesee County which were

similar to the complexes at issue sold to nonindividual investors

between the years 1990 and 1995.     Mainly, Mr. Hodge concluded,

investors purchase apartment complexes like the ones at hand as part

of an investment vehicle such as a real estate investment trust. 

       14
         In fact, Mr. Hodge concluded, an investor could pay a
  premium to acquire all three complexes. 
                                - 47 -


      Fourth, the Court recognized Bruce G. Pollack (Mr. Pollack), who

the estate called as a rebuttal witness, as an expert in the real

estate industry, but whose expertise did not extend to the appraisal

of real estate.    Mr. Pollack is a realtor, and he serves as the

president of a general real estate brokerage business that bears his

name.    He began his real estate career in 1948 in Genesee County and

has continued to work in that county ever since, specializing in

general commercial real estate since 1966.    He has handled

approximately $200 million of real estate in his 49-year career.     He

testified that it would have taken him from 3 to 10 years to sell all

three apartment complexes in 1992 at their "appraisal value", and

that he uses the term "appraisal value" to mean "a ready, willing and

able purchaser and a ready, willing and able seller get together and

determine to do business and arrive at a price with no duress, no

pushing from either side." 

      We do not find any of these experts to be extremely helpful to

us.    With respect to Dr. Perry, his testimony goes directly to the

subject property's market value (i.e., fair market value without

regard to a market absorption discount), and the parties have agreed

that the properties' market values equal the amounts ascertained by

the appraisers.    The appraisers knew about the economic condition of

Genesee County at the time of the decedent's death, and they took

this condition into account when they formulated their opinion on
                                - 48 -


each property's market value.    The same is true with respect to the

seven facts ascertained by Dr. Perry on the condition of the real

estate market in Genesee County.    The appraisers knew about each of

these facts at the time of their appraisals, and we find nothing in

the record to persuade us that they did not give each of these facts

proper regard in arriving at their values.     Discounting the

appraisers' values to reflect the economic condition in Genesee

County on the applicable valuation date, as the estate asks us to do,

would be to double count this effect.     See Estate of Gilford v.

Commissioner, 88 T.C. 38, 58 n.25 (1987).     We decline to do so.15

     Nor are we satisfied with the testimony of Mr. Shanker.     To be

sure, he is biased.    He works professionally valuing assets for his

clients, and we would be advancing his interests as well as the

interests of his clients were we to adopt blindly his opinion, which

is unsupported by the record, on the presence of an across-the-board

20-percent market absorption discount.    We decline to accept the

opinion of a man whose only appearance in this case seems to be as a

spokesman for the interests of his clients and the estate. 

Laureys v. Commissioner, 92 T.C. 101, 129 (1989).     The Court informed

the parties at the start of Mr. Shanker's testimony that we had

       15
         The estate also argues that market absorption discounts
  are warranted because the apartment complexes had a high vacancy
  rate and the rental rates were not keeping up with inflation.  We
  reject these arguments for the same reason as above; namely, that
  the appraisers took these factors into consideration in arriving
  at their values. 
                                 - 49 -


concerns with his ability to testify persuasively on market

absorption discount, and, now that we have heard his testimony and

reviewed the record in full, our concerns have blossomed into firm

convictions. 

     Even if we were to consider Mr. Shanker's opinion on its merits,

we still would not adopt it.     It is full of holes.    First, he assumed

incorrectly that the appraisers valued the subject property by a

"market comparable method".     The appraisers valued the apartment

complexes on the basis of an income capitalization method, and they

valued the remaining parcels of real estate on the basis of an

assortment of methods, one of which was a sales comparison method. 

Second, he assumed incorrectly that the appraisers' values of the

subject property were based on the necessity of marketing each parcel

for 18 months.    The only marketing periods taken into account by the

appraisers were an 18-month period for each of the apartment

complexes, a 1-year period for the Burger King property, and a

3-to-6-month period for the residential rental property at 6642 Kings

Pointe, Grand Blanc.    Third, he assumed incorrectly that any market

absorption discount for the subject property could be tied directly

to the RTC's disposition of real estate held by insolvent S&L's.      The

RTC was obligated to sell the S&L's real estate within a relatively

short time; the hypothetical seller, on the other hand, has a

reasonable time in which to sell the subject property.  The RTC
                                  - 50 -


information also pertained to properties that were not comparable to

the subject property, and we do not know the length of time that the

RTC marketed the properties before selling them.     Fourth, he assumed

incorrectly that an across-the-board discount could apply to each

parcel of the subject property.     We discuss below why this assumption

is incorrect.    Fifth, he assumed incorrectly that a market absorption

discount equals the difference between a property's appraised value

and its actual sale value.    Although it is true that fair market

value for Federal tax purposes could in certain cases equal a

property's appraised value, this does not mean, as Mr. Shanker would

have us hold, that a market absorption discount applies to that

property to the extent that the property actually sells after the

valuation date for less than its appraised value.    Sixth, he assumed

incorrectly that a market absorption discount applies when competing

properties, even if not comparable, are offered for sale in the same

geographical market, and the properties cannot sell within 6 months. 

We discuss below why this assumption is incorrect, but note here that

even the estate acknowledges in its brief that properties compete

against each other only if similar.     Seventh, he acknowledged that

there are individuals and organizations interested in investing large

sums of money in apartment complexes, yet he spoke to no brokers

about selling properties, or how they would go about selling the

properties.    Nor did he perform any independent research on sales or
                                 - 51 -


purchasers of apartment complexes on or before the applicable

valuation date.    Eighth, he cites in his report numerous sales in

1990 through 1992 in which property sold for less than its appraised

value, yet tells us almost nothing about the manner in which the

appraised values were ascertained, let alone the situs or description

of the property sold. 

     We also have concerns with the testimony of Mr. Hodge. 

The thrust of his opinion is that the apartment complexes had an

appeal to investors outside the Genesee County area, and, that, given

this fact, the apartment complexes were readily marketable.     Although

we agree with Mr. Hodge that potential buyers may come from outside

Genesee County, we simply do not believe that this fact, standing

alone, means that a market absorption discount is inapplicable to

this case.    We also have trouble with his conclusion that "investment

vehicles" usually purchase large apartment complexes such as the ones

at hand.     As a point of fact, only one of the five "comparable"

complexes referenced by the appraisers in their analysis of the sales

comparison method sold to an entity rather than an individual. 

     Finding none of the experts dispositive to our decision in this

case,16 we address the issue on the basis of the record before us,

       16
         Mr. Pollack was merely a rebuttal witness, and he
  testified only to the fact that he would have needed 3 to 10
  years to sell the apartments complexes.  His testimony does not
  mean that another broker, working alone or in concert with other
  brokers, would have been unable to sell the apartment complexes
                                                       (continued...)
                                 - 52 -


which is abundant with data on the subject properties and their

marketability.    In passing on whether a market absorption discount

applies in the instant setting, and the amount of such a discount if

it does apply, we utilize a five-part analysis.    First, we examine

the assets to be valued and categorize these assets by type.    Second,

we ascertain the market value (i.e., the fair market value without

consideration of a discount for market absorption) of each asset in

each category, assuming that each asset will be marketed separately. 

Third, we compare the number of assets in each category to the number

of assets of that type which are traded in the market over a

reasonable period of time.     Fourth, we ascertain how much longer than

this reasonable time period it would take to sell at market value (as

defined above) each asset that could not be sold in this reasonable

time period.    Fifth, we discount the value of each asset in the

category of assets that cannot be sold within a reasonable time

period, taking into account the time value of money and the period of

time that the category of assets would have to be marketed in order

to sell each asset therein. 

     1.    Assets To Be Valued

     We start by examining the assets to be valued and categorizing

these assets by type.    Blockage applies to narrowly drawn classes;

namely, shares of stock that are trading on an established market. 

     16
      (...continued)
  more quickly. 
                                  - 53 -


See Amerada Hess Corp. v. Commissioner, 517 F.2d 75, 83 (3d Cir. 

1975), revg.  on other grounds White Farm Equip.  Co. v. Commissioner,

61 T.C. 189 (1973).     The fact that a seller may aim to sell shares of

various classes of stock issued by a single corporation does not

necessarily mean that blockage will occur when the total shares to be

sold are greater than the demand for shares of one class but less

than the demand for shares of all classes.     The same rationale

applies to the sale of real estate.     The mere fact that many parcels

of real estate are marketed contemporaneously does not mean that a

discount for market absorption applies to any or all parcels.       Vacant

land, for example, is different than residential rental property,

which, in turn, is different than commercial rental property.       The

market for vacant land, therefore, may not be affected directly by

whether multiple parcels of residential and/or commercial rental

property are also on the market.     The same is not necessarily true

when the parcels of real estate are the same general type, for

example, multiple parcels of commercial rental property.     Properties

of the same general type will compete against each other when they

are in the same market.      To the extent that the market cannot absorb

all parcels of one type of property, the value for a single parcel as

set by the market without competition from similar parcels will

usually be driven down.17    See Amerada Hess Corp. v. Commissioner,

       17
            In certain cases, the price may be driven up because the
                                                          (continued...)
                                  - 54 -


supra at 83; Heiner v. Crosby, 24 F.2d 191, 193 (3d Cir.  1928). 

     The estate recognizes the fact that only similar properties

compete against each other in the market.    The estate argues that

parcels of real estate are similar when they are used for the same

purpose, for example, as commercial rental property.    According to

the estate, multiple pieces of similar use property will compete in

the market, regardless of each parcel's personal characteristics, and

a market absorption discount will apply when the market cannot absorb

all competing properties.    We do not agree.    We believe that two or

more parcels of real estate will compete against each other only when

the parcels are essentially similar in attributes such as use, value,

size, composition, and quality. 

     The estate, relying somewhat on the law of blockage as applied

to stock, argues that an across-the-board discount of 15 percent

applies to each parcel of the subject property.    We do not agree. 

In the case of stock, the shares of a single class of stock are

fungible, so the market draws no distinction between one share of

that class and another.    Thus, a blockage discount that applies to

     17
      (...continued)
  market may place a premium on owning multiple properties of that
  type.  Rushton v. Commissioner, 498 F.2d 88, 90 n.3 (5th Cir. 
  1974), affg.  60 T.C. 272 (1973); see Bankers Trust Co. v. United
  States, 207 Ct.  Cl.  422, 518 F.2d 1210, 1222 n.8 (1975). 
  Although the subject properties were associated with the
  decedent, a well-known developer, before his death, and much
  interest in the subject properties was shown following the
  decedent's death, we do not believe that a hypothetical buyer
  would have paid a premium to buy any of the subject property. 
                                 - 55 -


one share applies equally to every other share in that class.       In the

case of real estate, however, a different rule applies.       No two

parcels of real estate are the same.       Thus, the application of a

single discount to various parcels of dissimilar real estate, which

by its very nature ignores the uniqueness of each parcel, is usually

inappropriate.     See Estate of O'Keeffe v. Commissioner, T.C. Memo. 

1992-210 (same rationale applied to works of art).       Single rates of

discount apply to each group of essentially similar assets. 

     We analyze the assets at hand.     When he died, the decedent owned

the apartment buildings and various interests in numerous entities

that owned real estate or interests in other entities that owned real

estate.    The estate and Mr. Shanker ask us to look through the

various interests that the decedent owned at the time of his death

and conclude that the decedent owned 58 parcels of real estate.         This

we will not do.    The decedent structured his business affairs so that

the subject property was owned by various entities, rather than by

him personally.    We will not now disregard the separate entities and

treat the decedent as owning all the subject property.       Because the

entities were viable going concerns on the applicable valuation date,

and neither a sale nor a liquidation of the entity-owned real estate

was contemplated at that time, we conclude that the entity-owned real

estate is ineligible for a market absorption discount.       See, e.g.,

Estate of Andrews v. Commissioner, 79 T.C. 938, 942 (1982), and the
                                  - 56 -


cases cited therein.      Although the District Court in Obermer v.

United States, 238 F. Supp.  29 (D. Haw.  1964), did consider a

"'built-in' capital gains tax" in determining the value of a

corporate interest, as we explained in Estate of McCormick v.

Commissioner, T.C. Memo.  1995-371:

     We do not understand * * * [that case] to stand for a
     general legal principle requiring or even suggesting a
     separate discount or consideration of tax effect to the
     "willing buyer".  As we understand * * * [that case, it
     stands] for the principle that a willing buyer would
     consider the tax effects, among other things, in the
     process of price formulation. 

     As to the apartment complexes, these parcels of real estate may

qualify for a market absorption discount because they were owned

directly by the decedent.     We compare each complex's use, location,

size, age, quality, and value.     We compare the number and type of

units at each complex, and the size of the grounds and the amenities

offered thereon.    We find from our comparisons that each apartment

complex is essentially similar to each other apartment complex. 

We conclude that the apartment complexes are in the same category,

and apply our remaining analysis to these three complexes. 

     2.    Market Value

     We must determine the market value of each apartment complex,

assuming that each complex will be marketed separately.     We are

assisted in this case by the fact that the parties agree that the

market values of the complexes are the values ascertained by the
                                - 57 -


appraisers under an income capitalization method.    Although a

blockage or market absorption discount has almost always been applied

when a market value was ascertained by a sales comparison method, see

generally Bogdanski, Federal Tax Valuation par.  4.04[4], at 4-11

(1996), we believe that a market absorption discount may apply to

market values ascertained by other methods. 

     We conclude that the market values of the apartment complexes

are the values ascertained by the appraisers under the income

capitalization method. 

     3.    Assets Traded in the Market

     We compare the number of apartment complexes owned by the

decedent to the number of comparable apartment complexes that are

traded in the market over a reasonable period of time.    As has been

previously observed, a market absorption discount is applied to

property when the record contains "persuasive evidence that at the

critical time the market was such that it could not absorb sales in

the larger volume at the price level obtaining for small lots". 

Richardson v. Commissioner, 151 F.2d 102, 103 (2d Cir.  1945), affg.  a

Memorandum Opinion of this Court.    We proceed to define the relevant

market for the apartment complexes, and analyze whether the market

could have handled a hypothetical sale of all three complexes. 

     The record reveals numerous sales of apartment complexes in the

State of Michigan.    With respect to sales in Genesee County, however,
                                  - 58 -


we find little market activity in apartment complexes similar to the

three at hand.      We conclude that the market could not have handled

the sale of all three apartment complexes, the aggregate value of

which was $22,072,000, even if the estate were afforded a limited

period of time in which to market them.      To be sure, the appraisers

came to the same conclusion.      They based their value of the complexes

on the assumption that each complex would be marketed for 18

months.18    We also bear in mind that sales of real property in

Genesee County totaled $254,681,378 in 1992, and that the annual

growth in real estate sales in Genesee County was approximately

4.1 and 9.1 percent in 1991 and 1992, respectively, before ballooning

to approximately 31.5 and 24.3 percent in 1993 and 1994,

respectively.      Although a hypothetical person on the applicable

valuation date would have known about an upward trend in sales and

could have expected the upward trend to continue into 1993 and 1994,

we do not believe that he or she could have predicted the large

increases that occurred in 1993 and 1994. 

     4.      Reasonable Time To Market

     We ascertain how long after the valuation date it would have

taken to sell each apartment complex at its market value.      For

blockage purposes, the test is not the amount of proceeds that

       18
         Although the appraisers arrived at their values on the
  basis of a "competitive and open market", we read nothing in
  their reports to suggest that their competitive market included
  competition from the other subject properties. 
                                - 59 -


numerous shares of stock would bring if each share was sold on the

same day.    Estate of Van Horne v. Commissioner, 78 T.C. 728, 742

(1982), affd.  720 F.2d 1114 (9th Cir.  1983); see also Helvering v.

Safe Deposit & Trust Co., 95 F.2d at 812.    The test is the amount

that a hypothetical seller could realize if skilled brokers disposed

of all shares in a reasonable period of time in accordance with

prudent practices of liquidation.    See Richardson v. Commissioner,

supra at 103; Mott v. Commissioner, 139 F.2d 317 (6th Cir.  1943),

affg.  a Memorandum Opinion of this Court; Helvering v. Maytag,

125 F.2d at 63; Bull v. Smith, 119 F.2d 490, 492 (2d Cir.  1941);

Estate of Van Horne v. Commissioner, supra at 742; Frank v.

Commissioner, 54 T.C. 75, 100 (1970), affd.  447 F.2d 552 (7th Cir. 

1971); Estate of Prell v. Commissioner, 48 T.C. 67, 72 (1967).      We

believe that the same test applies in ascertaining the presence of a

market absorption discount.    If hypothetical brokers could have sold

all essentially similar assets within a reasonable period of time

after the valuation date, at the per-piece market rate, then no

discount for market absorption is appropriate.    The assets could be

absorbed by the market quickly, making the quoted market price the

most representative indicium of the assets' value on the valuation

date.    Rushton v. Commissioner, 498 F.2d 88, 92 n.10 (5th Cir.  1974),

affg.  60 T.C. 272 (1973); Bankers Trust Co. v. United States, 207 Ct. 

Cl.  422, 518 F.2d 1210, 1222 (1975). 
                                - 60 -


     The amount of time that a hypothetical broker would need to

dispose of assets is a factual question.     In Estate of Van Horne v.

Commissioner, supra at 742, the Court found no blockage where stock

could have been sold in small blocks without depressing the market

"over a comparatively brief period of, at most, several weeks". 

Earlier, the Court in du Pont v. Commissioner, 2 T.C. 246, 253, 257

(1943), a Court-reviewed Opinion, valued a large block of stock based

on market conditions existing over a 90-day period.      The Court of

Appeals for the Second Circuit has indicated that the price that

could have been obtained for a block of stock if the block had been

liquidated over a 10-day period, without activity to develop the

market, failed to establish the taxpayer's entitlement to a blockage

discount.    Richardson v. Commissioner, supra at 104. 

     All in all, we believe that 6 months is the most time that a

hypothetical broker should be given to dispose of the apartment

complexes before a market absorption discount will inhere in their

fair market value.    The appraisers assumed that each complex had to

be marketed for 18 months in order to be sold, and they factored this

18-month period into their appraisals.     Although the appraisers knew

of the presence of all three complexes, we do not believe that the

appraisers meant for this 18-month period to be the period of time in

which all three complexes would sell.     We believe it would take
                                     - 61 -


18 months to sell one apartment complex.19       In other words, in the

18-month period following the applicable valuation date, a

hypothetical broker could sell either The Landings, Fox Hill, or

Stonehenge.         With respect to the other two complexes, we believe it

would take another 12 months to sell one of them, and another

12 months to sell the other one.        Because the dollar amount of real

estate sales in Genesee County was greater in 1992 than 1991, and

given the public's stated interest in the subject property, we do not

believe that a hypothetical broker would have needed as much time to

market the last two complexes, as the first. 

     5.         Applicable Discount

     We must discount the value of each apartment complex that cannot

be sold within a reasonable time, taking into account the time value

of money and the time that each complex must be marketed in order to

be sold.         For purposes of our analysis, we use the following formula

to calculate the applicable present value rates:       1 - (1 + i/n)-ny;

i equals the discount rate, n equals the number of months over which

the discount rate is compounded,20 and y equals the number of years




          19
         As to respondent's assertion that investors would most
  likely buy the apartment complexes as a block, we find nothing in
  the record supports this assertion.  The record merely shows that
  many individuals and organizations were interested in investing
  large sums of money in apartment complexes. 
          20
               To simplify our calculations, we compound monthly. 
                                - 62 -


involved.    We round percentages to the third decimal point, and we

round dollar amounts to the nearest dollar. 

     The appraisers factored an 18-month marketing period into their

market value of each apartment complex.    Thus, we do not take the

18-month period after the applicable valuation date into account to

arrive at the market absorption discount that applies herein.     We

have concluded that it would take a total of 42 months to sell all

three complexes, or, in other words, 18 months after the end of the

6-month reasonable period of time starting 18 months after the

applicable valuation date.    Thus, one complex would sell within the

reasonable time and the other two would not; of the two that would

sell outside this time, one would sell 6 months after the end of it

and the other would sell 18 months after the end of it. 

     The appraisers applied 9.738-percent capitalization rates to

Stonehenge and Fox Hill and a 10.238-percent capitalization rate to

The Landings in order to ascertain their values.    We believe that

this capitalization rate reflects the time value of money, and that a

weighted average of the rates (i.e., 9.905 percent) is the

appropriate annual rate to use to determine the complexes' market

absorption discount.    As to the base to which this rate is applied,

we use the average market value of the three complexes.    We must

determine how much lower than the market value a hypothetical seller

will have to drop his or her price for each complex in order to sell

all three within a reasonable time after the applicable valuation

date.    It would be inappropriate to apply the full discount to all
                                 - 63 -


three complexes because only two must be discounted in order to sell

them within the reasonable time.    However, if we were to discount two

complexes, but not the other one, the discounted complexes, which are

essentially similar to the remaining complex, but for the discount,

would sell and the complex that was not discounted would not.     To

overcome this dilemma, we determine the discount on each complex that

will not sell within the reasonable of time and apportion one-third

of the aggregate discount to each complex so that a hypothetical

buyer will buy all three complexes within the reasonable time. 

Because we are unsure which complexes will not sell within the

reasonable time, we determine the discount on the basis of the

complexes' average market value. 

     The complexes' average market value is $7,357,333 (($8,172,000

+ $9,190,000 + $4,710,000)/3), and the discount rates for the

complexes that will not sell for 30 and 42 months are 4.813 and

13.754 percent, respectively.    Thus, we apply a 6.189-percent

discount to each apartment complex ((4.813% + 13.754%)/3).    The

dollar discount for each of the complexes is as follows:

     The Landings               $505,765 ($8,172,000 x 6.189%)
     Fox Hill                   $568,769 ($9,190,000 x 6.189%)
     Stonehenge                 $291,502 ($4,710,000 x 6.189%)

     6.    Conclusion

     A market absorption discount of 6.189 percent inheres in the

fair market value of each apartment complex.    None of the other real

estate is valued by reference to a discount for market absorption. 
                               - 64 -


     In reaching our conclusions, we have considered all arguments

made by the parties, and, to the extent not addressed above, find

them to be irrelevant or without merit.    To reflect the foregoing,

                                           Decision will be entered

                                     under Rule 155.