                        T.C. Memo. 2000-93



                      UNITED STATES TAX COURT



            ROBERT T. AND KAY F. GOW, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25651-96.                Filed March 20, 2000.



     Craig D. Bell and James C. Roberts, for petitioners.

     William Henck and Timothy B. Heavner, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   In a notice of deficiency dated August 29,

1996, respondent determined the following deficiencies in, and

additions to, petitioners’ Federal income taxes:
                                    - 2 -

                                                Penalties
Year          Deficiency            Sec. 6662(a)1       Sec. 6663(a)

1989           $522,221               $104,444               $391,666
1990            334,663                 66,933                250,997
1991            109,047                 21,809                 81,785
1992            103,224                 20,645                 77,418

 1
      The sec. 6662(a) accuracy-related penalties were determined
as an alternative to the sec. 6663(a) fraud penalties.

         Subsequently, by an amendment to answer, respondent asserted

increased deficiencies and penalties for 1989 and 1991, as follows:

                                                   Penalties
Year          Deficiency            Sec. 6662(a)           Sec. 6663(a)
                                            1
1989           $877,054                                      $657,791
                                            1
1991            153,214                                       114,911
     1
         20 percent of the underpayment to which this section applies.

         After concessions by each party, the issues remaining for

decision are:      (1) The value of shares of stock of Williamsburg

Vacations, Inc. (WVI), awarded to Kay F. Gow (800 shares on

February 16, 1989, and 400 shares on February 15, 1990) as bonuses;

(2) whether WVI’s payments of travel and entertainment expenditures

for certain trips taken by petitioners constitute constructive

dividends to them; (3) whether WVI’s payments of expenditures for

the      procurement   of   an   animal   trophy   collection   constitute

constructive dividends to petitioners; and (4) whether petitioners

are liable for fraud penalties pursuant to section 6663(a), or in

the alternative, accuracy-related penalties pursuant to section

6662(a).
                                   - 3 -

     All section references are to the Internal Revenue Code as in

effect for the years in issue.       All Rule references are to the Tax

Court Rules of Practice and Procedure.           All dollar amounts are

rounded.

                              FINDINGS OF FACT

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

stipulations of facts, stipulations of settled issues, and attached

exhibits are incorporated herein by this reference.

Background

     Petitioners, husband and wife, resided in Norfolk, Virginia,

at the time they filed their petition.

     Kay F. Gow (Dr. Gow) earned a doctor of education (Ed.D.)

degree from Virginia Tech., specializing in business education. As

part of her curriculum she took courses in accounting.                Before

1983, she taught and supervised a business education program at a

public high school in Virginia.        At the time of trial, Robert T.

Gow (Mr. Gow) was a retired civil service employee.

Williamsburg Vacations, Inc. (WVI)

     WVI was incorporated under the laws of Virginia on July 21,

1983.    In November of 1986, WVI became a partner in a joint venture

known as Powhatan Associates.       (The other two members of the joint

venture were Offsite International (Offsite) and Bush Construction

Co. (Bush).       None of the joint venturers were related; each held a

one-third interest in Powhatan Associates.)         During the years in

issue,    WVI’s    sole   income-producing   property   was   its   indirect
                              - 4 -

interest in Powhatan Plantation, a time-share resort project of

Powhatan Associates.

     WVI was authorized to issue 50,000 shares of common stock.

Initially, 650 shares of its stock were issued to Dr. Gow and 350

shares to Horace E. Henderson (Mr. Henderson).     Dr. Gow exchanged

previously acquired land located in North Carolina for her stock.

Mr. Henderson exchanged his note with a face value of $192,230.1

     The initial officers of WVI were:    Mr. Henderson, president;

Mr. Gow, executive vice president; Robert E. Lee, secretary; and E.

Corbell Jones (Mr. Jones), treasurer.    During the years in issue,

Dr. Gow was president and chairman of the board of directors; Mr.

Gow was the secretary and a director of the company.

     On September 30, 1983, Dr. Gow sold 200 shares of her WVI

stock to Mr. Jones and received in exchange Mr. Jones’ agreement to

cancel Mr. Gow’s note in the amount of $119,000.   As a condition of

sale, Mr. Jones agreed that if during his lifetime he desired to

dispose of all or any part of his 200 shares of WVI stock, Dr. Gow

would have the right to repurchase the 200 shares, and upon Mr.

Jones’ death, his estate or successor in interest would sell Dr.

Gow the 200 shares for $119,000, or $595 per share.




     1
          Mr. Henderson defaulted on the payment of his note, and
as a result, WVI instituted suit against him in the Circuit Court
of Virginia Beach on Oct. 20, 1988. Mr. Henderson countersued,
alleging violation of his shareholder rights and requested the
dissolution of WVI.
                                    - 5 -

     Simultaneously with the sale of the 200 shares, Dr. Gow and

Mr. Jones executed a voting trust agreement (VTA).             Under the terms

of the VTA, Dr. Gow and Mr. Jones agreed to, and did, transfer all

of their shares in WVI to Mr. Gow, as trustee of the voting trust.

The trust was to continue until September 30, 1993.             On October 24,

1988, the VTA was amended.         Pursuant to this amendment, Dr. Gow

agreed    to,   and   did,   transfer   all   stock   issued    to   her   since

September 30, 1983 (the date the VTA was executed) to Mr. Gow, as

trustee.    Moreover, Dr. Gow agreed to transfer to the trustee all

stock subsequently issued to, or owned by, her.

         On October 19, 1983, Dr. Gow, Mr. Henderson, and Mr. Jones

signed an agreement to purchase a 256-acre tract of land located 1

mile west of the restored colonial area of Williamsburg, Virginia,

known as Powhatan Plantation. (This property was acquired for

development as a time-share resort.           See infra.)      On January 16,

1984, they assigned their rights in Powhatan Plantation to WVI.

     By early 1984, WVI was in need of operating funds.                    In an

attempt to provide working capital to WVI, Dr. Gow lent the company

$120,000.       WVI was unable to repay this loan, and on August 1,

1985, Dr. Gow accepted 50 shares of WVI’s stock in satisfaction of

the company’s obligation to her.

     On February 16, 1988, WVI’s board of directors approved a

stock bonus plan for Dr. Gow.       Under the terms of the plan, Dr. Gow

was entitled to receive as a bonus up to 10,000 shares of WVI
                                    - 6 -

stock, at a maximum rate of 1,000 shares per year, for 10 years.

The number of shares to be issued annually as a bonus was to be

determined by Dr. Gow.

     In accordance with the stock bonus plan, on February 16, 1989,

WVI issued 800 shares of WVI common stock to Dr. Gow.              On February

15, 1990, WVI issued an additional 400 shares of its common stock

to her as a bonus.      It is the value of these shares at the time of

award that is subject to dispute--the first issue.

Financing History

     WVI borrowed $100,000 from Central Fidelity Bank. These funds

were used to cover startup expenses and other administrative costs.

In late 1983, WVI received an acquisition/development loan from

First American Savings & Loan (First American) in the amount of

$1.75   million;   it   also    received    a     financing   commitment      from

Berkeley Federal Savings (Berkeley) for $10 million.

     In 1984, Bush began construction of, and Offsite marketed, the

time-share project. In early 1985, Berkeley withdrew its loan

commitment,   making    it     difficult    for    WVI   to   timely   meet    its

financial obligations to Bush for construction and to Offsite for

marketing.    WVI became delinquent in its payments to Bush, and in

May 1985, Bush filed a mechanics lien against the project.                     The

project further became mired in financial difficulties when, in

early 1986, over its concern with Bush’s mechanics lien, First

American threatened to terminate its loan to WVI.                  Eventually,
                                     - 7 -

Security Pacific (a local financial institution) agreed to provide

development financing, as well as a bridge loan, to refinance the

First American loan.        Security Pacific conditioned its financing

agreement   on   WVI’s    ability    to    reduce     its   outstanding   debt.

Consequently, in order to obtain debt forgiveness and secure

additional guarantors, WVI proposed a joint venture with Bush and

Offsite.

Powhatan Associates

     On November 19, 1986, WVI, Bush, and Offsite formed Powhatan

Associates.      WVI     contributed      the   development    assets     (which

consisted of the Powhatan Plantation time-share project, land,

unsold inventory, and contractual and other rights associated with

the project net of project liabilities) as well as its services and

expertise as a developer and administrator.             Bush and Offsite each

agreed to forgive the debt owed them by WVI; they further agreed to

guarantee certain liabilities of WVI to repurchase defaulting time-

share contracts under several financial agreements. Offsite agreed

to continue to provide marketing services to the joint venture in

exchange for an allocation of the fees and expenses relating to its

marketing     operations.     Bush   agreed      to    continue   to    provide

construction services to Powhatan Plantation so long as it was

allocated the profits and expenses associated with construction.

The parties agreed that WVI would receive all of its administration

costs (including reasonable salaries), plus 1-1/2 percent of the
                                      - 8 -

gross proceeds after a certain level of development had been

reached.    This   development    fee    was   designed   to    equalize   the

estimated profit margins among Offsite, Bush, and WVI.

     As the administrative partner of Powhatan Associates, WVI was

responsible for the strategic planning and day-to-day operation of

Powhatan    Plantation.        WVI’s    responsibilities       included:   (1)

Reviewing   and    approving    all    time-share   sales   contracts;     (2)

obtaining financing for the joint venture; (3) preparing all

required reports and accountings; (4) servicing and collecting

joint venture mortgage portfolios; (5) monitoring product quality

and customer satisfaction; and (6) coordinating the construction

schedules and inventory availability.

     Nonroutine matters required the approval of all three members

of the joint venture.

     The joint venture agreement contained restrictions on the

transferability or sale of an interest in the joint venture.               In

pertinent part, it provided:
                              - 9 -

                    RESTRICTIONS ON TRANSFER

     2.   Transfer of Venture Interest After Bona Fide Offer

               (a) Notice of Offer. In the event * * *
          [Bush, WVI, or Offsite] desires to transfer
          all or some of its Venture Interest after
          receiving   a   bona   fide   offer  from   an
          independent third party, it must first: (i)
          obtain the express prior written consent of
          all Venturers, or (ii) notify each of the
          other Venturers * * * in writing, of all of
          the relevant facts of the proposed transaction
          and its intention with respect to such Venture
          Interest or any right or interest therein * *
          * The * * * [nontransferring partner] shall
          have a right of first refusal to purchase the
          Subject Interest at a price and pursuant to
          the procedures and conditions set forth
          hereinafter.

               (b) Purchase Price. The purchase price
          to be paid to the Transferring Venturer for
          the Subject Interest, if the Non-Transferring
          Venturer(s) exercise their rights of first
          refusal * * * shall be the price set forth in
          the Notice of Offer, or the appraised value;
          provided, that if the consideration to be paid
          by the proposed transferee is other than the
          payment of cash in full within thirty (30)
          days of the acceptance of the offer of the
          proposed   transferee   by  the   Transferring
          Venturer, the Joint Venture shall cause an
          independent appraiser * * * to establish the
          cash equivalent of such other consideration.

     In 1997, the joint venture sold Powhatan Plantation and

another time-share resort they owned to Signature Resorts, Inc., a

publicly traded company now known as Suntera Resorts, Inc., for

$59.1 million.
                                   - 10 -

Powhatan Plantation Resort

        Powhatan Plantation was part of an original land grant that

was conveyed to a prominent colonial family in 1640.            Located on

the property is a manor house that was built circa 1735 and

occupied by Mary Toliver.        The manor house, as restored, was the

centerpiece of Powhatan Plantation.         On the 20 acres surrounding

the manor house were formal gardens, numerous outbuildings, indoor

and outdoor pools, athletic facilities, meeting rooms, and three

food establishments, including a gourmet restaurant. The remaining

236 acres included open lands, a ring of woods, private roads, and

the time-share condominiums and townhouses.

        The   Powhatan    Plantation   resort   has   a   colonial   working

plantation theme.        It was marketed as a luxury resort suitable for

families to discover and explore the history of the surrounding

area.    The first sale of a time-share unit occurred in late 1984.

As of February 1989, a total of 106 residential units had been

sold; that number increased to 140 the following year.

     The time-share program offered by Powhatan Associates conveyed

either a 1/52 or a 1/104 undivided interest in an annual or

biannual time-share estate.        A purchaser of a time-share unit at

Powhatan Plantation was entitled to the exclusive use and enjoyment

of a unit during a designated and fixed week each year.                 The

purchaser became a member of the Powhatan Plantation Owner’s

Association, which allowed the purchaser (or vacationer) to use
                                    - 11 -

designated common and recreation areas, as well as the resources of

Resorts Condominium International, a time-share exchange network.

Hawaii and Key West Trips

     Petitioners    believed   that    firsthand   observation    of   other

vacation resorts was necessary to maintain a competitive edge in

the time-share industry.      Between 1984 and 1992, on at least seven

occasions, WVI’s board of directors approved the expenditure of:

            such sums as are necessary in travel and
            entertainment to visit other luxury resorts
            and   hotels  in   order  to   keep  Powhatan
            Plantation competitive in product, services,
            and to remain knowledgeable about innovations
            in the resort industry and to seek new
            business opportunities and to engage in or
            sponsor retreats with political or business
            persons affecting the resort industry.

WVI bore all these expenses, with no commitment of reimbursement

from Powhatan Associates.

     Beginning in 1986, and continuing through the years in issue,

petitioners made numerous trips to Hawaii and Key West, Florida.

Most of these trips were taken around the Thanksgiving, Christmas,

and New Year’s holidays and often lasted between 2 and 3 weeks.

     During these trips, petitioners conducted “interviews” with

guests of the resorts, took tours of the resort facilities and

premises,   and    examined   the   kitchen   amenities   and    menus   for

compatibility     with   Powhatan   Plantation.     The   purpose   of   the

interviews and inspections was to gauge customer service and

determine the level and efficiency of those services each resort
                                  - 12 -

was   providing.    Petitioners   rarely,   if    ever,   spoke   with   the

management of these resorts.

        On a number of occasions, other members of the “WVI management

team” accompanied petitioners on these trips.             On at least one

occasion each, David Legere (president of Offsite) and Senator

Stanley Walker, along with their spouses, traveled with petitioners

and had their expenses paid by WVI.         On these trips, petitioners

and their associates stayed at first-class resorts and dined at the

finest restaurants.      During their December 1990 trip to Hawaii,

petitioners stayed at the Halekulani Hotel for $850 per night and

dined at the La Mer restaurant for meals costing $900 or more; the

next month they stayed at the Lodge at Koele for $900 per night and

dined at expensive restaurants, with one meal costing over $2,000.

        On these trips, petitioners enjoyed room service and many of

the local attractions. Over the course of 4 days, petitioners

incurred $462 in room service charges.           During this same period,

petitioners visited local tourist attractions such as Sea Life

Park, Ala Moana shopping center, and the Waipio Valley historical

site.

      During the audit for the years in question (discussed infra),

Dr. Gow was requested to provide itineraries for the trips to

Hawaii and Key West. These itineraries, which purport to summarize

petitioners’ activities during those trips, were reconstructed by
                              - 13 -

Dr. Gow between 1993 and 1995, on the basis of invoices and

“whatever records” petitioners maintained.

     The total cost of travel, lodging, meals, and other related

expenses WVI incurred for trips to Hawaii during the years in issue

were as follows:

                   Year       Expenditures

                   1989           $71,700
                   1990            67,454
                   1991            44,857
                   1992            83,929

WVI deducted these amounts, subject to the statutory limits on

travel and entertainment expenses.

     The total cost of travel, lodging, meals, and other related

expenses WVI incurred for trips to Key West during the years in

issue were as follows:

                   Year       Expenditures

                   1989           $7,536
                   1990           14,256
                   1991           14,395
                   1992           11,281

WVI deducted these amounts, subject to the statutory limits on

travel and entertainment expenses.
                                 - 14 -

Procurement and Use of Animal Trophies

     WVI incurred expenditures for travel, food, lodging, and

professional guide fees in connection with the procurement of a

world-class   animal    trophy   collection   (as    well   as   taxidermy

expenses) as follows:

               Year                    Expenditures

                1989                      $130,376
                1990                       124,803
                1991                       242,498
                1992                        74,696

Under Dr. Gow’s direction, Deborah Lee (Ms. Lee), WVI’s controller

and accountant, recorded these costs in the company’s general

ledger as an “expense” rather than in an asset account.

     The animal trophy collection was to be used purportedly as a

marketing strategy for the time-share project; namely, (1) as an

amenity at Powhatan Plantation, and (2) as a traveling display to

generate time-share leads at State and regional chapter meetings of

the Safari Club and the National Rifle Association.

     In order to acquire a world-class animal trophy collection,

Mr. Gow hunted the animals in their natural habitat, mostly at the

Y.O. Ranch.    (Y.O. Ranch is a 500,000-acre tract of property

located in Texas that housed over 60 species of imported African

plains wildlife.)      Mr. Gow also traveled to Alaska and other

locations within the United States in search of exotic game such as

moose, Armenian red sheep, sable, kudu, caribou, and elk.          Mr. Gow

employed hunting guides on these trips and usually took Dr. Gow
                                       - 15 -

along    because    he    “[enjoyed]    spending    time   with    her”.     Also

accompanying Mr. Gow on the hunting trips were Louis Schreiner and

his wife.       (Mr. Schreiner was on the board of the Safari Club and

owned     the    Y.O.     Ranch.)    Upon   returning    from     these    hunting

excursions, Mr. Gow would hire a taxidermist to create the animal

mounts.

        The planned animal trophy museum to be located on Powhatan

Plantation was never built. Nor was there ever a traveling display

of the mounts.          Rather, the animal mounts were displayed at both

the Y.O. Ranch and Bob’s Gun & Tackle Shop (Bob’s) in Norfolk,

Virginia. (A total of 31 animal mounts were displayed at Bob’s and

more than 31 others were displayed at the Y.O. Ranch.)                Initially,

the animal mounts at Bob’s were identified with note cards bearing

the name of Mr. Gow and certifying the animal mounts’ world record

status. Approximately a year later, and at the advice of their tax

preparers, petitioners sent Bob’s a letter indicating that the

animal     mounts       were   the    property     of   Powhatan     Plantation.

Subsequently, the note cards were replaced with formal plaques

bearing the name “Powhatan Plantation”.

        In 1991, Bob’s placed 18 of the animal mounts in storage.               In

1997, Signature Resorts, Inc., purchased all the assets of WVI,

including the animal trophy collection.

        In 1989, 1990, and 1992, WVI deducted all costs incurred for

the procurement and display of the animal trophy collection, except
                              - 16 -

for $220 in 1990 and $1,760 in 1992, which were not deducted by

virtue of travel and entertainment statutory limitations in effect

for those years.    In 1991, WVI capitalized $137,410 in animal

trophy collection expenses and deducted $104,175.     The remaining

$913 was not deducted because of the travel and entertainment

statutory limitations.

WVI’s and Petitioners’ Audits for 1989-92

     In July 1991, Revenue Agent Richard Puchaty audited WVI’s tax

returns. Petitioners’ tax returns were included in the audit after

Revenue Agent Puchaty noticed an unusual pattern of recording

expenses relating to the animal trophy collection across four

different accounts in the company’s general ledger.   Revenue Agent

Puchaty concluded that in light of continual mischaracterization of

the animal trophy accounts throughout the company’s ledger, as well

as his difficulty in locating the animal trophy expenses entries,

these expenses were intentionally being hidden.     In an effort to

clarify WVI’s ledger system, Revenue Agent Puchaty sought an

interview with both Dr. Gow and Ms. Lee; his request was denied.

Petitioners’ 1989-92 Tax Returns

     On their 1989 and 1990 returns, petitioners reported the

values of the stock awarded to Dr. Gow as $40,000 and $20,000,

respectively.   They did not seek an expert valuation of the stock

before reporting the aforementioned values on their tax returns.

Petitioners reported no dividend income for 1989 and 1990, and
                                     - 17 -

reported $420 and $2,094 of dividend income for 1991 and 1992,

respectively. The dividend income reported for 1991 and 1992 was

not attributable to any distributions from WVI.

Notice of Deficiency

      In the notice of deficiency, respondent determined that the

fair market value of the stock awarded to Dr. Gow on February 16,

1989, was $1,600,000, and the fair market value of the stock

awarded to her on February 15, 1990, was $800,000.                  After the

issuance   of   the   notice    of   deficiency,     respondent’s   valuation

experts revalued the stock awards at $2,142,313 and $597,353 at

their respective valuation dates.

      Respondent      also     determined     that    petitioners    received

constructive dividends from WVI for 1989, 1990, 1991, and 1992 in

the   amounts   of    $305,072,      $395,225,   $341,521,   and    $323,281,

respectively.      By amendment to answer, respondent increased the

amount for 1991 to $479,844.          In his posttrial brief, respondent

concedes that certain expenses paid by WVI in 1989-92 do not

constitute constructive dividends to petitioners.

      On the basis of respondent’s redetermination of the values of

the stock awards and the increase in the amount of the 1991

constructive dividend, the deficiencies asserted for 1989 and 1991

increased to $877,054 and $153,214, respectively.
                               - 18 -

                               OPINION

Issue 1.    The Fair Market Value of WVI’s Common Stock

     The first issue presented involves the valuation of shares of

WVI’s stock awarded to Dr. Gow as a bonus.   The parties agree that

the value of these shares constitutes income to Dr. Gow.

     The standard for valuation is fair market value, which is

defined as “the price at which the property would change hands

between a willing buyer and a willing seller, neither being under

any compulsion to buy or to sell and both having reasonable

knowledge of relevant facts.”     United States v. Cartwright, 411

U.S. 546, 551 (1973); Collins v. Commissioner, 3 F.3d 625, 633 (2d

Cir. 1993), affg. T.C. Memo. 1992-478; Estate of Newhouse v.

Commissioner, 94 T.C. 193, 217 (1990). This standard is objective,

using a purely hypothetical willing buyer and willing seller, each

of whom would seek to maximize his or her profit.    See Estate of

Watts v. Commissioner, 823 F.2d 483, 486 (11th Cir. 1987), affg.

T.C. Memo. 1985-595; Estate of Simplot v. Commissioner, 112 T.C.

130, 151-152 (1999); Estate of Mitchell v. Commissioner, T.C. Memo.

1997-461. The hypothetical buyer and seller are not specific

individuals and their characteristics are not necessarily the same

as the personal characteristics of an actual seller or a particular

buyer.     See Propstra v. United States, 680 F.2d 1248, 1251-1252

(9th Cir. 1982); Estate of Newhouse v. Commissioner, supra at 218.

However, the hypothetical sale should not be construed in a factual
                                - 19 -

vacuum.    See Estate of Andrews v. Commissioner, 79 T.C. 938, 956

(1982).

     The two WVI stock awards are from a private, closely held

corporation.   There were no arm’s-length sales of the stock before

the date of the stock award.    Accordingly, we determine the value

of the stock awarded indirectly by considering the following

factors:

     “(a) The nature of the business      and    the   history   of   the
     enterprise from its inception.

     (b) The economic outlook in general and the condition and
     outlook of the specific industry in particular.

     (c) The book value of the stock and the financial condition
     of the business.

     (d)   The earning capacity of the company.

     (e)   The dividend-paying capacity * * *.

     (f) Whether or not the enterprise has goodwill or other
     intangible value.

     (g) * * * the size of the block of stock to be valued.
     [and]

     (h) The market price of stocks of corporations engaged in the
     same or similar line of business having their stocks actively
     traded in a free and open market, either on an exchange or
     over-the-counter.”

Estate of Simplot v. Commissioner, supra at 153 (quoting Rev. Rul.

59-60, 1959-1 C.B. 237, 238).

     Ultimately, valuation is a question of fact; all facts and

circumstances are to be examined on the date of valuation without

regard to hindsight.    See Commissioner v. Scottish Am. Inv. Co.,
                                    - 20 -

323 U.S. 119, 123-125 (1994); Estate of Jung v. Commissioner, 101

T.C. 412, 423-424 (1993); Skripak v. Commissioner, 84 T.C. 285, 320

(1985).       However, future events that are reasonably foreseeable at

the valuation date may be considered in determining fair market

value.    See Estate of Newhouse v. Commissioner, supra at 218.

       Both respondent and petitioners rely upon the report and

testimony of their respective expert witnesses to establish the

value of the shares of WVI’s stock awarded to Dr. Gow.             We weigh

the expert’s testimony in light of the expert’s qualifications as

well     as    other   credible   evidence.   See   Estate   of   Christ   v.

Commissioner, 480 F.2d 171, 174 (9th Cir. 1973), affg. 54 T.C. 493

(1970); Estate of Newhouse v. Commissioner, supra at 217.            We are

not bound by the opinion of any expert witness; we may reach a

decision as to the value of property based upon our own analysis of

all the evidence in the record, see Silverman v. Commissioner, 538

F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285, using all

of one party’s expert analysis, or selectively using any portion of

either analysis, see Estate of Simplot v. Commissioner, supra at

155; Parker v. Commissioner, 86 T.C. 547, 562 (1986); Buffalo Tool

& Die Manufacturing Co. v. Commissioner, 74 T.C. 441, 452 (1980).

Additionally, we may derive the fair market value of property from

within a permissible range of values that may be arrived at from

consideration of all the evidence.        See Silverman v. Commissioner,

supra; Estate of Simplot v. Commissioner, supra.
                                         - 21 -

       A.    Valuation by Petitioners’ Expert

       Petitioners’        expert,      Peter   Gampel      (Mr.   Gampel),       is     the

director of the Florida and Caribbean valuation services group of

Arthur Andersen & Co.             In determining the value of the shares of

WVI stock awarded to Dr. Gow (800 shares on February 16, 1989, and

400 shares on February 15, 1990), Mr. Gampel first valued WVI’s

one-third interest in Powhatan Associates, and then adjusted the

book    values     of     WVI’s   assets   to   their    fair      market       values    to

determine the equity value of WVI as of the applicable valuation

date.       Next, Mr. Gampel applied discounts to the shares of stock

awarded      to    Dr.    Gow   to   reflect    lack   of    control      and    lack    of

marketability.            Mr.   Gampel    ultimately     arrived     at     a    value    of

$685,000 for the 800 shares of WVI stock awarded to Dr. Gow on

February 16, 1989, and $299,000 for the 400 shares awarded to Dr.

Gow on February 15, 1990.

        In valuing WVI’s interest in Powhatan Associates, Mr. Gampel

first determined the aggregate value of Powhatan Associates as of

February 16, 1989, and February 15, 1990, and in doing so he used

the income approach, adopting the discounted cash-flow method. The

discounted cash-flow method is based upon the premise that a

business is worth the present value of all future benefits it will

produce      for    its    owner(s),     with   each    expected     future       benefit

discounted at a rate that reflects the risk that those benefits

will not be realized.                The discount rate selected is generally
                                  - 22 -

based on rates of return available (as of the valuation date) from

alternative investments of similar type and quality.           Application

of this method requires forecasting future benefits from the

ownership of the operations as well as future investments required

to maintain the level of benefits.

       Mr. Gampel determined Powhatan Associates’ anticipated income

stream by (1) projecting the number of time-share intervals sold as

of the respective valuation dates, and (2) estimating the sale

price for those intervals.       He projected the number of intervals

sold   by   averaging   the   interval   sales   for   the   2-year   period

preceding each valuation date.      (The interval sales were 1,408 for

1987, 1,754 for 1988, and 1,749 for 1989.)        Next, he divided total

sales by intervals sold for each of 1987, 1988, and 1989 in order

to arrive at the average interval price for each year.            By using

this methodology, Mr. Gampel determined the average interval price

to be $11,400 for 1987, $13,100 for 1988, and $13,300 for 1989, and

the average interval price for the 1987-88 period to be $12,250,

and for the 1988-89 period to be $13,200.

       Mr. Gampel then considered cost of sales for the intervals,

taking into account construction costs, project amenities, sales

commissions, and the development fee payable by Powhatan Associates

to WVI.     He estimated cost of sales to be 71 percent for the 1989

valuation date and 69 percent for the 1990 valuation date.                In

making this determination, Mr. Gampel considered interest income,
                                       - 23 -

interest      expense,      income     taxes,     administration     costs,     and

amortization for financing commitments.             After estimating Powhatan

Associates’ net income for both valuation dates, in order to arrive

at Powhatan Associates’ estimated annual cash-flow stream, Mr.

Gampel considered noncash charges, capital expenditures, changes in

net working capital, and debt.

      Next,       Mr.   Gampel   developed   a    discount   rate    through   the

summation method that combined:

              a   risk-free rate of return of                8.93%
              a   market risk premium of                     3.97
              a   small stock risk premium of                9.02
              a   company specific risk premium of           10.0

                  Total                                      31.92
                  Rounded                                    32.0

The   32-percent        discount     rate   was   then   applied     to   Powhatan

Associates’ estimated cash-flow stream for both valuation dates.

      On the basis of his discounted cash-flow analysis, Mr. Gampel

opined that (1) the fair market value of Powhatan Associates was

approximately $11.7 million as of February 16, 1989, and $14

million as of February 15, 1990; and (2) WVI’s one-third interest

in Powhatan Associates (before discounts to reflect lack of control

and lack of marketability) was approximately $3.9 million as of

February 16, 1989, and $4.7 million as of February 15, 1990.

      Mr. Gampel reduced the value of WVI’s one-third interest in

Powhatan Associates by two discounts: A minority interest (or lack

of control) discount and a lack of marketability discount.                    These
                                  - 24 -

discounts were applied separately. After examining data on control

premium studies, Mr. Gampel concluded that a 15-percent minority

interest discount was appropriate for both valuation dates.                In

addition,     Mr.   Gampel   concluded     that   a   30-percent    lack   of

marketability discount for both valuation dates was appropriate on

the   basis   of    the   following   factors:    The   lack   of   “special

purchasers” in the time-share industry, the restrictive nature of

the buy-sell provision in the joint venture agreement, the overall

restrictions placed on transferability of the joint venture’s

interest, and the size and composition of each partner’s one-third

interest. Accordingly, after applying discounts to reflect lack of

control and lack of marketability, Mr. Gampel opined that the value

of WVI’s one-third interest in Powhatan Associates was $2,321,690

as of February 16, 1989, and $2,770,320 as of February 15, 1990.

      After determining the value of WVI’s one-third interest in

Powhatan Associates, Mr. Gampel adjusted the book value of WVI’s

other assets to fair market value as of February 16, 1989, and

February 15, 1990.        After making these adjustments, Mr. Gampel

determined that WVI’s adjusted book value was $3,328,707 as of

February 16, 1989, and $4,040,947 as of February 15, 1990.                 To

these values, Mr. Gampel applied a 15-percent contingency discount

that further reduced the adjusted book values of WVI to $2,829,401

as of February 16, 1989, and $3,434,805 as of February 15, 1990.
                                      - 25 -

     Mr. Gampel’s final step in valuing the stock bonuses was to

apply a second level (at the WVI level) of minority interest and

lack of marketability discounts.           Mr. Gampel believed that for the

February 16, 1989, stock issuance, a 20-percent minority interest

discount and a 30-percent lack of marketability discount were

appropriate. For the February 15, 1990, stock issuance, Mr. Gampel

believed that a 30-percent minority interest discount and a 30-

percent    lack      of   marketability    discount     were    appropriate.    In

determining the extent of the minority interest discount, Mr.

Gampel considered the following factors: (1) The size of the stock

issuance (800 and 400 shares), which represents only a minority

interest in WVI; (2) the existence of the VTA at both valuation

dates; (3) a lack of “swing vote” characteristics in each stock

issuance; (4) a lack of “special purchasers” in the marketplace;

(5) WVI’s historical reluctance to distribute dividends; (6) the

terms of the buy-sale agreement and other restrictions on the

transferability of WVI’s stock; (7) the lack of recent sales of

similar interests in WVI; and (8) the existence of the ongoing

litigation.      In determining the marketability discount, Mr. Gampel

reviewed a number of empirical studies that were performed in an

effort    to    quantify    average     levels    of   discounts   for   lack   of

marketability in the marketplace and considered the following

factors:       (1)    The   lack   of     an     organized     market    for    the

purchasing/selling of interests; (2) lack of sales of similar
                               - 26 -

interests; (3) the remoteness of a sale of Powhatan Associates; and

(4) the probability of an event giving rise to a dispute among the

venturers.

     By applying these discounts, Mr. Gampel concluded that the

fair market value of the stock bonus to Dr. Gow was $685,000

($856.25 per share) on February 16, 1989, and $299,000 ($747.50 per

share) on February 15, 1990.

     B.   Valuation by Respondent’s Experts

     Respondent relied upon two expert witnesses:     Diane Maiden

(Ms. Maiden) and Deborah Kalmar (Ms. Kalmar), both of whom are

employed full time by the Internal Revenue Service.   Ms. Maiden, a

real estate appraiser, valued Powhatan Associates’ inventory of

time-share intervals and the land yet to be developed as time-share

property.2   Ms. Kalmar, a business valuation expert, used Ms.

Maiden’s valuations to complete respondent’s valuation of the stock

bonuses awarded to Dr. Gow.

     Ms. Maiden valued the income-producing property of Powhatan

Plantation using the discounted cash-flow method because of the



     2
          On Feb. 16, 1989, the project was in phase III of its
planned development, with approximately 50 acres (146 units) of
the 256-acre site devoted to the project. By Feb. 15, 1990, 65
acres (196 units) had been devoted to the project. According to
the zoning and final site plan, approved by the James City County
Board of Supervisors in April 1984, only 500 residential units
could be built on the 256 acres. Therefore, in 1989, 206 acres
remained to be developed with a maximum of 354 residences and in
1990, 191 acres remained which could be developed with 304
residences.
                                    - 27 -

income-producing nature of the property.        To project the number of

time-share sales, she relied on Powhatan Associates’ annual reports

to   the   Virginia    Department   of   Professional   and   Occupational

Regulation’s real estate board, the public offering statement for

the project, and computer printouts of 1989 and 1990 sales provided

by petitioners.       Ms. Maiden determined that potentially 500 units

could be built, and after taking into account the number (5,497) of

intervals which had been sold as of February 16, 1989, 20,003

intervals remained for sale.3       She projected annual sales of 1,800

intervals for 1989 and 1,900 intervals for each of the subsequent

years until the total number of intervals (20,003) that remained to

be sold as of February 1989 was sold.          To determine a weighted

average interval sales price, Ms. Maiden used the audited financial

statements of Powhatan Associates and a price list for sale in 1997

(the only existing price list), in addition to the information used

to project the number of time-share units sold.          On the basis of

this information, Ms. Maiden determined a weighted average sale

price of $14,000 for all years in the projection period.           The net

operating income per interval was then estimated, using Powhatan




      3
          In calculating the number of intervals which could be
sold, both experts used 51 intervals per unit.
                                     - 28 -

Associates’ financial statements and Powhatan Associates’ marketing

and construction agreements, as follows:

     Average interval sales price:               $14,000
     Expenses:
          Sales/marketing                          45.0
          Cost of construction                     25.0
          Development fees                          1.5
          Reserves for amenities                    1.5

             Total                                 73.0

     Net operating income per interval                              $3,780
     ($14,000 - (73% x 14,000 = $10,220))

     On the basis of the assumptions that (1) as of February 1989,

20,003 intervals     remained   for     sale,    (2)   1,800   of   the   20,003

intervals would be sold in year 1, 1,900 of the intervals would be

sold in each of the years 2-10, and 1,103 intervals would be sold

in year 11, and (3) the net operating income per interval would be

$3,780, Ms. Maiden calculated the income stream that could be

generated   from   the   sale   of    Powhatan    Plantation’s      time-share

properties to be $75,611,340 for 1989 and $69,586,020 for 1990.

     Ms. Maiden then considered the proper discount rate to be used

to bring the estimated future income stream to present value.

Ultimately, Ms. Maiden determined that a 25-percent discount rate

was appropriate, using “the band of investment” method, which is a

“synthesis of mortgage and equity * * * [yield] rates, which market

data discloses as applicable to comparable properties”. The method

selected is “a weighted average of rates of return by the lender

and equity investor”. In arriving at the 25-percent discount rate,
                               - 29 -

Ms. Maiden combined the safe rate of return from the 10-year U.S.

Treasury bond (9.17 percent and 8.47 percent on the two valuation

dates) and the equity rate expected by land and real estate

developers (between 15 and 30 percent).     Believing that the risk

and lack of liquidity inherent in the time-share industry increases

the discount rate, Ms. Maiden selected the higher end of the range.

     Use of the 25-percent discount rate resulted in Powhatan

Associates’ inventory of time-share intervals and the land yet to

be developed having a fair market value of $28,732,000 as of

February 16, 1989, and $28,402,000 as of February 15, 1990.

     Respondent’s experts adjusted (increased) Powhatan Associates’

yearend audited balance sheet to reflect the fair market values of

the inventory and land. Using the first-in first-out (FIFO) method

of inventory, they determined the division between inventory and

land fair market values to be as follows:

   2/16/89 Inventory on hand–-1,949 intervals

                               (Rounded)
                      Number   Net Value    Discounted Value (25%)

Sales (projected)     1,800     $3,381          $6,085,498
Remaining inventory     149      2,705             403,045
Value allocated to
 inventory of
 intervals            1,949                      6,488,543
   Total FMV                                    28,732,000
   Value allocated
     to land                                    22,243,457
                                      - 30 -

   2/15/90 Inventory on hand–-2,905 intervals

                                      (Rounded)
                           Number     Net Value    Discounted Value (25%)

Sales (projected)          1,900       $3,381            $6,423,581
Remaining inventory        1,005        2,705             2,718,525
Value allocated to
 inventory of
 intervals                 2,905                          9,142,106
   Total FMV                                             28,402,000
   Value allocated
     to land                                             19,259,894

       Powhatan Associates’ balance sheet line items (other than

inventory     and   land    devoted    to   time-share    development)   were

interpolated from the close of the end of the prior year to the

applicable valuation date (at a straight-line rate) to reflect the

time       difference.4     (No provision for taxes was included in

determining the overall value of Powhatan Associates on the basis

that no tax is paid at the joint venture level.)               After making

these adjustments, respondent’s experts concluded that (1) the

venturers’ equity in Powhatan Associates was $32,866,718 as of

February 16, 1989, and $35,001,760 as of February 15, 1990, and (2)

WVI’s one-third pro rata interest in Powhatan Associates (before

discounts to reflect lack of control and lack of marketability) was

$10,955,573 as of February 16, 1989, and $11,667,253 as of February

15, 1990.




       4
          The interpolation factor for Feb. 16, 1989, was 47
days/365 days, and for Feb. 15, 1990, was 46 days/365 days.
                                - 31 -

     Next,   respondent’s    experts   considered   whether   discounts

(either for lack of marketability or for minority interest, or

both) were appropriate.     Initially, the experts did not believe a

discount for lack of marketability was appropriate at the joint

venture level. Subsequently, they concluded that a 10-percent lack

of marketability discount was appropriate, stating:

          The chief asset of Powhatan Associates is the
     inventory and land to be developed for time shares, and
     ample allowance for lack of marketability was taken into
     account for that asset, both in the projections of income
     and in the application of a relatively large discount
     rate. There is judicial precedent for this judgment not
     to duplicate discounts already taken.

The experts further concluded that at the joint venture level only

a relatively small discount (5 percent) for a minority interest was

appropriate, stating:

     The history of the joint venture displays a careful
     attention to conservative development: inventory was kept
     low, and areas were built in clusters close to one
     another and the amenities, to allow for maximum use of
     the residual acreage should the time share development
     slow or cease. This history was taken into account in
     the real estate appraiser’s finding of fair market value
     of the time share property.     There is no reason that
     these practices should change if another entity stepped
     into the shoes of WVI as administrator of the project.
     The exit provisions of the joint venture agreement
     provide for a purchase (by the other venturers) of a
     selling venturer’s interest at fair market value or at
     the price offered by a bona fide third party.           A
     purchaser of a 1/3 interest might have the opportunity to
     purchase the entire entity under those exit provisions.
     We apply a 5% discount for the WVI minority interest to
     account for the risk that a purchaser of 1/3 interest
     might be invited to purchase all of the venture but be
     unwilling to do so, thus cancelling the 1/3 interest
     purchase. Because of the profitability of the venture to
     the other two “partners”, this scenario is unlikely.
                                    - 32 -


After application of these two discounts, respondent’s experts

opined      that   WVI’s    one-third    pro   rata   interest    in    Powhatan

Associates was $9,367,015 as of February 16, 1989, and $9,975,502

as of February 15, 1990.

      This discounted value of WVI’s interest in Powhatan Associates

was incorporated into the balance sheet of WVI.                    The experts

further adjusted WVI’s balance sheet (1) to account for the fair

market value of a 1-1/2-percent development fee payable to WVI from

Powhatan Associates, (2) to apply a provision for the present value

of taxes to be paid at the time of the time-share sales, and (3) to

reduce from book to fair market value the interest WVI held in a

parcel of undeveloped land in North Carolina.                  On the basis of

these adjustments, the experts determined (1) the fair market value

of WVI was $6,880,694 as of February 16, 1989, and $7,466,913 as of

February 15, 1990, and (2) the pro rata value of the 800 shares and

the   400    shares   was   $2,975,435    as   of   February    16,    1989,   and

$1,327,451 as of February 15, 1990.

      In arriving at the value of the 1989 and 1990 stock issuance,

respondent’s experts’ final step was to sequentially apply (1) a

20-percent ($595,087) minority interest discount and a 10-percent

lack of marketability discount ($238,035) for 1989, and (2) a 50-

percent ($663,726) minority interest discount and a 10-percent

($66,373) lack of marketability discount for 1990. Having done so,

respondent’s experts determined that the fair market value of the
                                      - 33 -

February 16, 1989, stock issuance to Dr. Gow was $2,142,313 ($2,678

per share), and the fair market value of the February 15, 1990,

stock issuance to Dr. Gow was $597,353 ($1,493 per share).

     In determining the fair market value of the stock bonus, the

experts considered the VTA agreement and the fact that Dr. Gow, at

her election, could receive within 10 years up to 10,000 shares, at

a maximum of 1,000 shares per year.              The experts believed that

before    purchase    an   informed    hypothetical   buyer   would    require

protection against the potential dilution effect of the share

authorization, as well as the placing of the stock in a voting

trust.

     C.    Court’s Analysis and Conclusion

     For ease of understanding, we have set forth in the appendices

hereto a comparison of Mr. Gampel’s and Ms. Maiden’s-Ms. Kalmar’s

valuations.    Giving      due   consideration   to   the   totality   of   the

evidence before us, and in particular the testimony and reports of

the expert witnesses, we find the analysis and conclusions of

respondent’s experts more persuasive than those of petitioners’

expert.     Consequently, we accept, with modifications discussed

hereinafter, Ms. Maiden’s and Ms. Kalmar’s valuations.

     We agree with respondent that Mr. Gampel’s report contains

fatal errors.        These errors include: (1) His understatement of
                                  - 34 -

Powhatan Associates’ anticipated income stream;5 (2) the size of

the discount rate (32 percent) he developed through the summation

method;   and   (3)   his   application    of   a   15-percent   contingency

discount to reduce the adjusted book values of WVI as of the

valuation dates.      We conclude that these errors resulted in an

unacceptable understatement of fair market value for the stock

bonuses awarded to Dr. Gow.6

     We agree with the valuation methodology used by Ms. Maiden and

Ms. Kalmar (respondent’s experts) but disagree with the quantum of

the discounts they determined for lack of control and lack of




     5
          Mr. Gampel determined Powhatan Associates’ anticipated
income stream by (1) projecting the number of intervals sold, and
(2) estimating the sale price for those units. He projected the
number of intervals sold by averaging the interval sales for the
2-year period preceding each valuation date. He then divided
total sales by intervals sold for each of 1987, 1988, and 1989 in
order to arrive at the average interval price for the applicable
valuation date. By using this methodology, he used $12,250 as
the average interval sale price for the 1987-88 period and
$13,200 for the 1988-89 period. We believe Mr. Gampel’s
methodology to be flawed. The yearly interval sale price was
trending upward, and by 1989 it was $13,300. The interval sale
price used by Mr. Gampel for the 1989 and 1990 valuation dates
was clearly understated, which in turn, resulted in the
understatement of Powhatan Associates’ income stream.
     6
          We are mindful that besides the value of Powhatan
Associates, there are other differences between the experts in
valuing WVI, such as Mr. Gampel’s reducing to 90 percent of face
Mr. Henderson’s note to WVI, whereas Ms. Maiden and Ms. Kalmar
did not. Additionally, Mr. Gampel increased WVI’s adjusted book
value to include WVI’s estimated earnings from the close of the
end of the prior year to each of the respective valuation dates.
We have chosen to disregard these differences but note that they
would result in an overall increase in the value of WVI’s stock.
                                - 35 -

marketability at both the Powhatan Associates and WVI levels.   The

discounts they used were as follows:

                    At Powhatan Associates Level

                                     1989          1990

     Lack of control                      5%         5%
     Lack of marketability               10         10

                             At WVI Level

                                     1989          1990

     Lack of control                     20%        50%
     Lack of marketability               10         10

In contrast to these discounts, Mr. Gampel used the following

discounts:

                    At Powhatan Associates Level

                                     1989          1990

     Lack of control                     15%        15%
     Lack of marketability               30         30

                             At WVI Level

                                     1989          1990

     Lack of control                     20%        30%
     Lack of marketability               30         30

     We have duly considered and studied the factors and reasoning

used by the experts in determining their respective discount

amounts.     In this regard, we found Mr. Gampel’s reasoning to be

well founded and more persuasive than that of Ms. Maiden and Ms.

Kalmar.    Mr. Gampel used empirical studies and factors (stated

supra pp. 24-26) that we believe appropriate in formulating his
                                          - 36 -

opinion as to the discount amounts, whereas respondent’s experts

did not.    We are not persuaded by respondent’s experts’ reasoning

in determining the quantum of the discounts.                    The quantum of the

discount for lack of control ranged from a low of 5 percent at the

joint venture level to a high of 50 percent at the WVI level.

Moreover,    we   are      mindful   that     initially       respondent’s     experts

believed a discount for lack of marketability was not appropriate

at the joint venture level, but eventually changed their minds and

applied a 10-percent discount.             In contrast, Mr. Gampel’s discount

rates were consistent and uniform, ranging from 15 percent for lack

of control at the joint venture level (20 percent for lack of

control at the WVI level) to 30 percent for lack of marketability

at   both   levels.        Consequently,         we   adopt   the   quantum    of   the

discounts for lack of control and lack of marketability at both

levels for both valuation dates as determined by Mr. Gampel.                     Thus,

the valuation conclusions of Ms. Maiden and Ms. Kalmar should be

adjusted (reduced) to reflect Mr. Gampel’s discount amounts.                        This

adjustment     can    be    made     by    the     parties    in    their   Rule    155

computation.

      In reaching our conclusions, we have considered all arguments

raised by the parties in their posttrial briefs.                      We reject, as

apparently    did     petitioners’         own   expert,      the   argument   (which

petitioners’ counsel alleges was conceded by Ms. Kalmar during her

testimony) that the shares of WVI stock awarded to Dr. Gow have no
                                       - 37 -

value because of the existence of the voting trust agreement and

the potential dilution of WVI stock as a consequence of Dr. Gow’s

right to have 10,000 shares of WVI stock issued to her.

Issues 2 and 3.       Constructive Dividends

       We   next    examine   whether     WVI’s     payments     of    petitioners’

expenses for trips to Key West and Hawaii, as well as WVI’s

payments for the acquisition of the animal trophy collection,

constitute constructive dividends to petitioners.

       The amount of these expenditures is not in dispute.                    Rather,

the dispute centers upon whether these expenditures were made

primarily to advance petitioners’ personal interests or were for

legitimate business interests of WVI.               Petitioners maintain that

the trips to both Key West and Hawaii generated numerous ideas and

concepts that were considered and later incorporated by Powhatan

Associates in the time-share resort. Further, petitioners maintain

that the amounts expended on the procurement of the animal trophy

collection created an amenity intended to attract buyers of the

time-share intervals.         Respondent, on the other hand, maintains

that    these      expenditures    were      made   primarily     to       provide    a

substantial personal benefit to petitioners.

       It has long been recognized that when a corporation makes an

expenditure      or   distribution     out    of    its    earnings    and    profits

(without    an     expectation    of   repayment)         primarily   to     confer   a

substantial personal benefit to a shareholder, the value of the
                                        - 38 -

benefit conferred is taxable as a constructive dividend. See secs.

61(a)(7), 301, 316; Ireland v. United States, 621 F.2d 731, 735

(5th Cir. 1980); Loftin & Woodard, Inc. v. United States, 577 F.2d

1206, 1214 (5th Cir. 1978); Hash v. Commissioner, 273 F.2d 248, 250

(4th    Cir.    1959),        affg.    T.C.   Memo.      1959-96;     Falsetti     v.

Commissioner, 85 T.C. 332, 356-357 (1985). A constructive dividend

can take the form of either a distribution of corporate funds, the

use of corporate property for personal purposes, or paying off a

personal      expense    of    the    shareholder   by    the   corporation.     See

Ireland v. United States, supra; Wall v. United States, 164 F.2d

462 (4th Cir. 1947); Martin v. Commissioner, T.C. Memo. 1997-492;

Yarbrough Oldsmobile Cadillac, Inc. v. Commissioner, T.C. Memo.

1995-538.      Control of a corporation by a shareholder as well as a

corporate history of not paying dividends weighs strongly in favor

of   finding    a   constructive       dividend.    See    Yarbrough     Oldsmobile

Caddillac, Inc. v. Commissioner, supra; Thielking v. Commissioner,

T.C. Memo. 1987-227, affd. 855 F.2d 856 (8th Cir. 1988).

       In determining whether or not the expenditure related to the

business of the corporation, we must ascertain whether the payment

or expenditure has independent and substantial importance to the

paying corporation.           See T.J. Enters., Inc. v. Commissioner, 101

T.C.    581    (1993).        An     expenditure    generally     does   not     have

independent      and     substantial      importance      to    the   distributing

corporation if it is not deductible under section 162.                   See, e.g.,
                                  - 39 -

P.R. Farms, Inc. v. Commissioner, 820 F.2d 1084, 1089 (9th Cir.

1987), affg. T.C. Memo. 1984-549; Gill v. Commissioner, T.C. Memo.

1994-92, affd. 76 F.3d 378 (6th Cir. 1996).          Thus, our analysis

begins by focusing upon whether WVI’s expenditures were ordinary

and necessary in the context of the time-share resort industry.        An

expense is ordinary if it is common or frequent in the context of

the particular business out of which it arose.              See Deputy v.

DuPont, 308 U.S. 488, 495 (1940).       An expense is necessary if it is

appropriate and helpful to the operation of the taxpayer’s trade or

business.     See Carbine v. Commissioner, 83 T.C. 356, 363 (1984),

affd. 777 F.2d 662 (11th Cir. 1985).

      A.    Expenditures for the Hawaii and Key West Trips

      Petitioners’ evidence substantiating their activities of their

Key West and Hawaii trips consisted of their testimony and prepared

itineraries.     We view petitioners’ testimony with caution, as it

was self-serving.     In addition, the itineraries were prepared by

petitioners at least a year after the trips and in response to a

tax   audit;    understandably,    we    question   their    reliability.

Moreover, we are unable to ascertain from the itineraries the

business     relevance   of   many      of   petitioners’     activities.

Accordingly, petitioners failed to persuade us that the purpose of

these trips was not primarily their personal benefit. See Grossman

v. Commissioner, T.C. Memo. 1996-452, supplemented by T.C. Memo.

1997-451, affd. 182 F.3d 275 (4th Cir. 1999); Fong v. Commissioner,
                                - 40 -

T.C. Memo. 1991-180. Respondent, on the other hand, produced

numerous billing statements and invoices as well as testimony

regarding WVI’s expenditures for 1991.         We find respondent’s

evidence persuasive.

     According to petitioners, these trips were undertaken to

investigate and research Powhatan Plantation’s competition in order

to incorporate comparable resort features and services that would

make them more attractive to potential customers.          We view this

assertion with skepticism.     In our opinion, the innovations and

research petitioners sought could have been obtained without the

elements   of   substantial    personal   pleasure.   To    illustrate,

petitioners spent a large amount of time on these trips enjoying

shopping malls, theme parks, and historical locations.          Many of

these trips were taken around the Thanksgiving, Christmas, or New

Year’s holidays and were the only time during the year petitioners

managed to escape their everyday routine.     WVI subsidized many of

the incidental expenses incurred by the spouses of members of the

“management team”.    During some of the activities, dinners costing

$1,000 or more, as well as room service bills of almost $500,

became the norm.     Although it might be ordinary and necessary for

Powhatan Plantation to investigate its competition in the same

geographic area, it has not been shown to be ordinary and necessary

for petitioners to examine resorts that are located in distant

areas and are not in direct competition with Powhatan Plantation.
                                      - 41 -

In light of petitioners’ control of WVI, such expenses become

especially suspect.     We conclude that the primary purpose of these

trips was petitioners’ personal enjoyment.

     Petitioners’ visits were, at best, of marginal benefit to WVI

and the joint venture.        As we have previously stated:

           a trip that is primarily for the taxpayer’s
           individual pleasure is not converted into a
           business trip merely because some short
           portions   of  the   trip   involve   business
           activities, even when it is clear that the
           asserted business activities actually occurred
           and that those business activities actually
           affected the cost of the trip.

Grossman v. Commissioner, supra (citing George R. Holswade, M.D.,

P.C. v. Commissioner, 82 T.C. 686 (1984)).

     In Grossman, a case whose facts are similar to those in this

case, we found that corporate expenses for trips taken by the

taxpayer   and   his   wife    that    had     a   slight   business   component

constituted constructive dividends. In Grossman, the taxpayer and

his wife, the two principal owners in a closely held corporation,

took multiple trips to resort locations across North America,

ostensibly to conduct discussions regarding corporate business.

The taxpayers subsequently caused their corporation to reimburse

them for their expenses.          Relying solely upon the taxpayer’s

assurances that there were no personal expenses involved, the

corporation’s    accountant     claimed        deductions    for   travel    and

entertainment expenses.         In finding that the corporation made

constructive dividends to the taxpayer, we disagreed with the
                                  - 42 -

taxpayer’s characterization of the trips as relating to business,

and held that the predominant purpose of most of the trips, despite

having an incidental business purpose, was personal pleasure.            We

find no reason or distinction that compels a different result in

the case before us.     Petitioners have failed to persuade us that

the   expenditures    were   predominantly   for    business      purposes.

Accordingly, we sustain respondent’s determination that for the

years in issue, the total amounts expended by WVI for petitioners’

entertainment    expenses    to   Hawaii   and    Key     West   constitute

constructive dividends to petitioners.

      B.   Expenditures for the Animal Trophy Collection

      We now turn our attention to WVI’s expenditures for the

procurement of the animal trophy collection. Once again, our

factual analysis focuses upon whether the expenditures have an

independent and substantial importance to the payor corporation.

See Gill v. Commissioner, T.C. Memo. 1994-92.             Although amounts

spent advancing a personal interest of a taxpayer may constitute

constructive    dividends,   amounts   expended     for    the   legitimate

improvement of a corporation’s trade or business do not.

      Petitioners suggest that because the expenditures for the

animal trophy collection constitute capital expenditures, they

should receive different treatment than deductible expenses with

regard to constructive dividend treatment.         We disagree.     Even if

we were to accept the premise that these expenses otherwise were
                                      - 43 -

amortizable under section 263, capital expenditures, if made for

the    personal     benefit      of   the   shareholder,    can    constitute

constructive dividends.       See, e.g., Challenge Manufacturing Co. v.

Commissioner, 37 T.C. 650, 663 (1962); Gill v. Commissioner, supra.

       The expenses incurred for the animal trophy collection were

composed mainly of costs associated with the acquisition and

display of the animal trophy mounts; i.e., acquisition and mounting

costs.      Petitioners contend that the animal trophy collection was

to be used both as a marketing tool and as an amenity of Powhatan

Plantation.      They allege the collection was to tour selected sites

around the country as well as to be placed in a “museum” located on

Powhatan Plantation.      Petitioners assert that such displays would

attract potential buyers of the time-share intervals.                However,

most of the animal trophy mounts were put on display at Bob’s and

the Y.O. Ranch.

       We    find   petitioners’       argument   unconvincing.      Powhatan

Plantation had a colonial working plantation theme, emphasizing the

history of the Williamsburg-Jamestown, Virginia, area. The “world-

class” animal trophy mounts collection was designed to be composed

of    exotic   animals   whose    natural   habitat   did   not   include   the

tidewater area of Virginia.            We do not believe the display of

exotic animals such as elk, caribou, or Armenian red sheep furthers

the historical colonial theme that was in place as a marketing

strategy.      In this respect we are mindful that notably absent from
                                    - 44 -

the marketing brochure created by Offsite to highlight the salient

amenities of the time-share resort was the mention of an animal

trophy collection.         Also revealing is the fact that the other

members of the joint venture were unaware of the acquisition of an

animal trophy collection, which is of significance in view of the

fact that the joint venture agreement required a majority of the

venturers to decide nonroutine matters.

       In acquiring the animal trophy collection, Mr. Gow personally

hunted the animals and made numerous trips to Y.O. Ranch and

Alaska. On several occasions he took his wife along as a traveling

companion.        He used a customized handgun and spent many hours

practicing his shooting skills at a range.                He obviously enjoyed

hunting.    Although the mere enjoyment of one’s work may not alone

transform a work assignment into a hobby, see Sanitary Farms Dairy,

Inc.   v.   Commissioner,     25   T.C.    463,    468    (1955),    petitioners’

enjoyment, along with the questionable business purpose, strongly

suggests    the    hunting   activities     were    for     Mr.    Gow’s    personal

benefit.

       In viewing the entire record, we are convinced that all

expenditures      incurred   for   the    animal    trophy        collection   were

primarily for the personal benefit of petitioners and thus should

be treated as a constructive dividend.             In an attempt to convince

us otherwise, petitioners cite Sanitary Farms Dairy, Inc., as

support that       costs   associated     with    hunting    trips    can    have   a
                                   - 45 -

legitimate business purpose.           In Sanitary Farms Dairy, Inc., we

found that “The cost of a big game hunt in Africa does not sound

like an ordinary and necessary expense of a dairy business in Erie,

Pennsylvania, but the evidence in this case shows clearly that it

was and was so intended.”        Id. at 467.      Unlike here, in Sanitary

Farms Dairy, Inc., we were satisfied from the evidence in the

record that costs associated with the safari actually assisted in

the marketing of the product line of the business.          Thus, Sanitary

Farms Dairy, Inc., is distinguishable from this case and offers no

support to petitioners’ cause.

     In sum, we hold that WVI’s payments of petitioners’ expenses

for trips to Key West and Hawaii, as well as WVI’s payments for the

acquisition    of     the     animal     trophy   collection,   constitute

constructive dividends to petitioners.

Issue 4.    Imposition of the Fraud or Accuracy-Related Penalty

     We now address whether petitioners are liable for the fraud

penalty under section 6663(a) or alternatively the accuracy-related

penalty    under    section   6662(a).      Section   6662(a)   imposes   an

accuracy-related penalty in an amount equal to 20 percent of the

portion of the underpayment attributable to negligence or disregard

of rules or regulations or to a substantial understatement of tax.

However, if section 6663(a) is applicable, a penalty in an amount

equal to 75 percent of the underpayment is imposed.             Respondent

relies primarily on the record in its entirety and concludes that
                                      - 46 -

petitioners engaged in a pattern of conduct that illustrates their

intent   fraudulently    to    evade    payment      of   Federal      income   tax.

Petitioners obviously disagree.

       Fraud is defined as an intentional act of a taxpayer to evade

the payment of tax that is believed to be owing by conduct that

conceals, misleads, or otherwise prevents the collection of such

tax. See Sadler v. Commissioner, 113 T.C. 99, 102 (1999); McGee v.

Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th

Cir. 1975); Snavely v. Commissioner, T.C. Memo. 1994-256.                        The

Commissioner    has   the     burden   of    proving      fraud   by    clear   and

convincing evidence. See sec. 7454(a); Rule 142(b); Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983); Beddow v. Commissioner,

T.C. Memo. 1999-232. To satisfy this burden, the Commissioner must

show: (1) That an underpayment exists; and (2) that the taxpayer

intended to evade taxes known to be owing by engaging in conduct

intended to conceal, mislead, or otherwise prevent the collection

of taxes.    See Parks v. Commissioner, 94 T.C. 654, 660-661 (1990).

       The existence of fraud is a question of fact to be resolved

from   the   entire   record    and    can     be   proven   by   circumstantial

evidence.    See Recklitis v. Commissioner, 91 T.C. 874, 909 (1988);

Grosshandler v. Commissioner, 75 T.C. 1, 19 (1980); Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. 578 F.2d 1383 (1978).

But fraud is not presumed; it is required to be shown through
                                    - 47 -

affirmative evidence.     See Beaver v. Commissioner, 55 T.C. 85, 92

(1970).

        Courts have developed various factors or badges which tend to

establish fraud.      These include:      (1) A pattern of understatement

of income; (2) inadequate records; (3) concealment of assets; (4)

income from illegal activities; (5) attempting to conceal illegal

activities;     (6)   implausible    or     inconsistent   explanations   of

behavior; and (7) dealings in cash.            See McGee v. Commissioner,

supra at 260; Snavely v. Commissioner, supra.              In addition, the

taxpayer’s sophistication, education, and intelligence may also be

considered in determining the existence of fraud.             See Sadler v.

Commissioner, supra.          No single factor or any combination of

factors will necessarily lead us to the conclusion that fraud

exists. We must examine whether a pattern of fraudulent intent was

established on the basis of an examination of the entire record.

     Respondent argues that the record is replete with indicia of

fraud     by   petitioners,     including     the   following:   (1)   Gross

undervaluation of the 1989 and 1990 stock bonus awards; (2) the

hiding of the animal trophy collection expenditures by recording

them in different accounts in the company’s general ledger at the

direction of Dr. Gow; (3) lack of petitioners’ credibility in

statements made both at audit and at trial; and (4) charging of

personal items as business expenses.          Moreover, respondent claims

that petitioners’ knowledge of tax and accounting issues supports
                                  - 48 -

a   conclusion   that   they   structured   their   dealings   in   WVI   and

Powhatan Associates in such a way as to purposely evade the payment

of taxes.   We disagree.

      We do not find petitioners to be tax sophisticated.           Although

marginally experienced in business matters, neither Dr. nor Mr. Gow

had substantial knowledge or training in tax law.               Dr. Gow’s

advanced degrees were in the field of education, not business.

Before the formation of WVI, her experience and training dealt more

in the operational management and planning side of business than

with the accounting or economic side.         Several courses in tax do

not make one an expert.          Additionally, we draw no inferences

regarding Dr. Gow’s tax sophistication from a letter she wrote to

her personal accountant (Mr. Bielat) regarding her entitlement to

specific deductions.

      Although we find petitioners’ testimony self-serving, we do

not necessarily find their testimony untruthful or devious.               Nor

are we convinced that petitioners deliberately caused their travel

and entertainment expenses to be hidden in the company’s books in

a way designed to avoid taxes.      The fact that Revenue Agent Puchaty

could not find the expenses in the accounts where he expected them

to be does not persuade us that petitioners intentionally “hid

them”.

      Respondent cites Grossman v. Commissioner, T.C. Memo. 1996-

452, for the proposition that in circumstances similar to those
                              - 49 -

presented here, we upheld the imposition of the fraud penalty under

section 6663(a).   Within the fraud context, we find the situation

in Grossman distinguishable from that involved herein. The taxpayer

in Grossman was a practicing lawyer specializing in Federal income

taxation.   He held an LL.M. in taxation from New York University

and had previously worked for the Internal Revenue Service.     He

obviously possessed a substantial level of sophistication in the

area of tax law.   Here, petitioners, although highly intelligent,

do not possess the same level of tax expertise.

     We recognize that petitioners have grossly undervalued the

stock bonus awards and charged personal items as business expenses.

We have no doubt that petitioners’ conduct in this case comes close

to the line that separates a conscious “disregard of rules or

regulations” from an “intent to evade taxes believed to be owing”.

However, even where there is a strong suspicion of an intent to

evade taxes, we are hesitant to impose the section 6663(a) penalty

unless we are convinced that the Commissioner satisfied his burden

of proof.   See Toussaint v. Commissioner, 743 F.2d 309, 312 (5th

Cir. 1984), affg. T.C. Memo. 1984-25; Petzoldt v. Commissioner, 92

T.C. 661, 700 (1989).   Here, a complete review of the record has

convinced us that respondent has failed to do so.   Accordingly, we

decline to impose the fraud penalty upon petitioners.

     Petitioners, however, have failed to prove that they acted

with reasonable cause and in good faith.   Evidence in the record
                                  - 50 -

persuades us that petitioners negligently disregarded rules or

regulations.    See Neely v. Commissioner, 85 T.C. 934, 947 (1985);

sec.   1.6662-3(b)(1),   Income   Tax   Regs.   Accordingly,   we   hold

petitioners liable for the accuracy-related penalty on the entire

underpayment for the years in issue pursuant to section 6662(a).

       In reaching our conclusions herein, we have considered all of

the arguments presented and, to the extent not discussed above,

find them to be irrelevant or without merit.

       To reflect the foregoing and concessions of the parties,



                                                  Decision will be

                                            entered under Rule 155.
                                 - 51 -

                               APPENDIX A

                   Comparison of Experts’ Valuation of
                    Williamsburg Vacations, Inc. Stock
                          As of February 16, 1989


Valuation Of Powhatan Associates

                                           Petitioners’         Respondent’s
                                              Expert              Experts

“Pre-tax” value of Powhatan                    $18,817,787          $32,866,718
“Post-tax” value of Powhatan                    11,704,663
Pro-rata value of 1/3 joint
 venture interest                                3,902,000           10,955,573
Discount for lack of control       15%            (585,300)    5%      (547,779)
Discount for lack of
  marketability                    30%            (995,010)   10% (1,040,779)

   Fair market value of Powhatan
     1/3 interest                                2,321,690            9,367,015


Valuation Of WVI

                                           Petitioners’         Respondent’s
                                              Expert              Experts

Shareholders’ equity, 12/31/88                   $840,100             $840,086
Estimated earnings to 2/16/89                      359,324
Fair market value of Powhatan                    2,321,690            9,367,015
Fair market value of development
 fee income                                        697,000            1,596,262
FMV promissory note from shareholder                19,223
Land held for investment                            10,000               10,000
Other changes to assets                                                  22,127
Cost basis of Powhatan joint venture              (369,400)            (369,421)
Book amount of promissory note                    (192,230)
Land held for investment at cost                  (357,000)            (357,000)
Tax adjustment                                                       (4,228,419)
Other changes to liabilities                                                207

                                                 3,328,707            6,880,857

Contingency discount                     15%      (499,306)               ---

    Fair market value of Williamsburg
       Vacations, Inc.                           2,829,401            6,880,857
                                 - 52 -

Valuation Of The Shareholdings

                                         Petitioners’         Respondent’s
                                           Expert               Experts

Per share pro-rata value                  $1,529                  $3,719
Pro-rata value of 800 shares           1,223,525               2,975,506
Discount for lack of control       20% (244,705)        20%     (595,101)
Discount for lack of
   marketability                   30%    (293,646)     10%     (238,040)

    Fair market value of 800
      shares in WVI                        685,174             2,142,364

    Rounded                                685,000

    Per share                               856.25                 2,678
                                 - 53 -

                               APPENDIX B

                   Comparison of Experts’ Valuation of
                    Williamsburg Vacations, Inc. Stock
                          As of February 15, 1990

Valuation Of Powhatan Associates

                                            Petitioners’         Respondent’s
                                               Expert              Experts

“Pre-tax” value of Powhatan                     $22,456,921          $35,001,760
“Post-tax” value of Powhatan                     13,968,205
Pro-rata value of 1/3 joint
 venture interest                                 4,656,000           11,667,253
Discount for lack of control        15%            (698,400)    5%      (583,363)
Discount for lack of
  marketability                     30%          (1,187,280)   10% (1,108,389)

    Fair market value of Powhatan
      1/3 interest                                2,770,320            9,975,502

Valuation Of WVI

                                            Petitioners’         Respondent’s
                                               Expert               Experts1

Shareholders’ equity, 12/31/89                  $1,189,400            $1,189,397
Estimated earnings to 2/15/90                       348,794
Fair market value of Powhatan                     2,770,320             9,975,502
Fair market value of development
 fee income                                         799,000             1,557,915
FMV promissory note from shareholder                 19,223
Land held for investment                             10,000                10,000
Other changes to assets                                                    22,126
Cost basis of Powhatan joint venture               (546,560)             (546,556)
Book amount of promissory note                     (192,230)
Land held for investment at cost                   (357,000)             (357,000)
Tax adjustment                                                         (4,391,591)
Other changes to liabilities                                              (12,881)

                                                  4,040,947             7,466,912

Contingency discount                      15%      (606,142)                ---

     Fair market value of Williamsburg
        Vacations, Inc.                           3,434,805             7,466,912

1
      We are mindful that several mathematical errors exist in
respondent’s computation. We do not believe these discrepancies are
material.
                                 - 54 -

Valuation Of The Shareholdings

                                         Petitioners’         Respondent’s
                                           Expert               Experts

Per share pro-rata value                    $1,527               $3,319
Pro-rata value of 400 shares               610,632            1,327,451
Discount for lack of control       30%    (183,190)     50%    (663,725)
Discount for lack of
   marketability                   30%    (128,233)     10%     (66,373)

    Fair market value of 400
      Shares in WVI                        299,210              597,353

    Rounded                                299,000

    Per share                               747.50                1,493
