                        T.C. Memo. 2001-258



                      UNITED STATES TAX COURT



   ESTATE OF JOHN L. BAIRD, DECEASED, ELLEN B. KIRKLAND AND J.
            SAMUEL BAIRD, CO-EXECUTORS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

  ESTATE OF SARAH W. BAIRD, DECEASED, ELLEN B. KIRKLAND AND J.
           SAMUEL BAIRD, CO-EXECUTORS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 8656-99, 8657-99.      Filed September 28, 2001.



     William T.F. Dykes, for petitioners.

     Wanda M. Cohen, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Separate notices of deficiency, containing

determinations of estate tax deficiencies, were issued to the
                                 - 2 -

above-captioned estates.1    For the Estate of John L. Baird,

respondent determined an estate tax deficiency of $104,765.          For

the Estate of Sarah W. Baird, respondent determined an estate tax

deficiency of $240,282.     The sole remaining controversy concerns

the value, at their respective dates of death, of each decedent’s

fractional interest in a family trust holding timberland.2

                          FINDINGS OF FACT

     John L. Baird and Sarah W. Baird were married at all

pertinent times.   John died on December 18, 1994.   Sarah died

less than 1 year later, on November 2, 1995.    At all pertinent

times the coexecutors and decedents resided in Louisiana.       At

their respective times of death, John held a 14/65 interest and

Sarah a 17/65 interest in a trust owning 16 noncontiguous tracts

of timberland, comprising 2,957 acres in Sabine Parish,

Louisiana.    As of December 18, 1994, the undivided fee interest

in the 16 parcels of timberland had a fair market value of

$4,685,333.   As of November 2, 1995, the undivided fee interest



     1
       These cases were consolidated for purposes of trial,
briefing, and opinion.
     2
       In addition to the valuation issues for each estate, the
parties must also reach agreement on the computation of the
allowable amount of administration expenses and the amount of the
credit, if any, allowable to the Estate of Sarah W. Baird. The
parties have settled several other matters concerning increases
and/or reductions to the gross estate of the Estate of John L.
Baird, and all these matters will be left for the Rule 155 phase
of this case. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 3 -

in the 16 parcels of timberland had a fair market value of

$5,091,285.

     On August 1, 1977, John, Sarah, and three of Sarah’s

relatives, as settlors, established an inter vivos trust pursuant

to the laws of Louisiana.   Before the 1977 creation of the family

trust, Sarah, O.E. Williams, and two of their other siblings

coowned several thousand acres of timberland.   With the consent

of his siblings, O.E. Williams initiated a voluntary partition.

The partition was a difficult experience for family members.    The

relatives contributed their respective holdings, resulting in a

14/65 (21.54 percent) and a 17/65 (26.15 percent) undivided

interest in the family trust being held by John and Sarah,

respectively.   The remainder of the trust interests were

contributed by Sarah’s relatives, including 31/65 (47.69 percent)

by her brother, O.E. Williams, and 1.5/65 (2.31 percent) each by

Sarah’s nephew and niece.   The trust was intended to keep the 16

parcels held by family members in undivided ownership.   The

family trust provided for the sale of an interest, but only with

the written consent of all of the beneficiaries.   The 16 parcels

ranged in size from 32 to 320 acres, and most of it was best

suited to use as timberland.   Approximately 140 of the 2,957

acres had some potential for residential development.    Less than

one-half of an acre had residential development as its highest

and best use.
                                 - 4 -

      O.E. Williams has continually managed the trust properties

since the 1970s, and it was expected that he would continue to do

so.   O.E. Williams generally did not consult with his cotrustees

and/or family members in the management of the trust timberland.

His independent management was not necessarily in accord with the

best management practices.

      Reported in John’s estate was his undivided one-half

community property interest in the 14/65 interest in the trust at

a value of $707,972, after applying a 25-percent

fractionalization discount.   In an amended return for John’s

estate, a refund was claimed on the basis of an increased

fractionalization discount of 50 percent.   Ultimately, a 60-

percent discount was claimed by John’s estate.   The 14/65

interest after applying a 50-percent discount was returned at

$550,378.   After applying a 60-percent discount the reported

amount would have been reduced to $504,610.37.

      Sarah’s 17/65 interest was reported in her estate’s tax

return at a value of $665,686, after applying a 50-percent

fractionalization discount.   In an amended return for Sarah’s

estate, a refund was claimed on the basis of a 60-percent

increased fractionalization discount, which resulted in a

reported value of $449,456.27.

      Respondent determined that John’s 14/65 interest had a date

of death fair market value of $975,091.   Respondent determined
                                 - 5 -

that Sarah’s 17/65 interest had a date of death fair market value

of $1,290,211.

                               OPINION

     We consider here circumstances where a married couple die

within 1 year of each other.   Each decedent, at the time of his

or her death, held a partial interest in a family trust.    The

trust, in turn, held 16 parcels of timberland.    The parties agree

on the fair market value of the 16 parcels of timberland on the

date of each decedent’s death.    The controversy centers on the

amount of discount applied where each decedent held a fractional

interest through the family trust.

     Generally, the estates have approached valuation by means of

what they consider to be comparable sales of fractional

interests.   On the basis of the relatively limited universe of

the sales of partial interests in timberland, the estates’

experts have opined that discounts should range from 55 percent

to as much as 90 percent.   Respondent agrees that some discount

is appropriate, but he contends that the size of the discounts

proposed by the estates is excessive and that the estates’

experts are merely advocates for petitioners’ position.

     Valuation of a property interest for Federal estate tax

purposes is a factual question.    See Estate of Bonner v. United

States, 84 F.3d 196, 197 (5th Cir. 1996); Sammons v.

Commissioner, 838 F.2d 330, 333 (9th Cir. 1988), affg. on this
                               - 6 -

point and revg. in part on another ground T.C. Memo. 1986-318.

The fair market value of a property interest is determined under

the “willing buyer-willing seller standard” set forth in section

20.2031-1(b), Estate Tax Regs., as follows:

     The fair market value is 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 sell and both having reasonable knowledge of
     relevant facts. The fair market value of a particular
     item of property includible in the decedent’s gross
     estate is not to be determined by a forced sale price.
     Nor is the fair market value of an item of property to
     be determined by the sale price of the item in a market
     other than that in which such item is most commonly
     sold to the public, taking into account the location of
     the item wherever appropriate * * *.

     It is implicit that the buyer and seller have knowledge of

all the relevant facts concerning the valuation property.      United

States v. Cartwright, 411 U.S. 546, 551 (1973).   It is also

implicit that the buyer and seller would aim to maximize profit

and/or minimize cost in the setting of a hypothetical sale.     See

Estate of Watts v. Commissioner, 823 F.2d 483, 486 (11th Cir.

1987), affg. T.C. Memo. 1985-595; Estate of Newhouse v.

Commissioner, 94 T.C. 193, 218 (1990).   Therefore, we consider

the view of both the hypothetical buyer and seller.   Kolom v.

Commissioner, 644 F.2d 1282, 1288 (9th Cir. 1981), affg. 71 T.C.

235 (1978).

     The estates offered three expert witnesses, and respondent

offered one.   The estates’ experts were found to be qualified,

and their reports were received as their direct testimony in
                                - 7 -

accord with this Court’s Rules of Practice and Procedure.

Respondent’s expert, however, was found not to be specifically

qualified to assist the trier of fact (Court) on the question of

the discount to be applied, if any, to a fractional interest in

timberland.

     It is noted that the parties stipulated the fair market

value of the undivided fee interest.    Further, the parties agree

that there should be some discount because of the nature of the

decedents’ ownership.   The only question we consider is the

amount of the discount applicable to the fractional interests

held by the decedents at their dates of death.

     Valuation of an interest in property is a highly factual

pursuit, and it is within the Court’s discretion to evaluate the

cogency of the expert witnesses’ conclusions or opinions.

Sammons v. Commissioner, supra.    Opinions of experts are

evaluated in light of each expert’s demonstrated qualifications

and the evidence in the record.    Estate of Davis v. Commissioner,

110 T.C. 530, 538 (1998) (and cases cited therein).    We may

accept or reject all or part of an expert’s opinion.    Id.

The Estates’ Expert Witnesses

     The estates rely on three expert witnesses to support their

proposed discounts for the partial interests under consideration.

Respondent attempted to expose the weaknesses of the estates’

experts in order to show that estates’ proposed discounts are

excessive.
                                - 8 -

     A.    John A. Young

     John A. Young, a real estate appraiser offered by

petitioners, prepared a fractionalization discount study in which

he concluded that fractionalized interest discounts should be at

least 50 percent of the proportionate fee value.    Mr. Young’s

conclusion was based on his analysis of what he considered to be

six comparable sales of fractional interests in timberland in

northwest Louisiana.    Generally, Mr. Young was able to find hard

evidence of the sale price for a fractional interest.

     In order to determine the fair market value of a full fee

interest Mr. Young resorted to secondary information and opinion.

Through conversations with parties to the transactions and other

related information, he predicated a fee fair market value for

each property.    In some instances, the fee values were a matter

of conjecture and were not based on actual or comparable sales.

However, using the full fee value as a base, Mr. Young calculated

the percentage discount of known partial sales.

     The first property regarded as comparable by Mr. Young was a

160-acre tract of timberland that was owned by Pennzoil

Exploration and several other owners.   The buyer was interested

in harvesting the timber and wanted to acquire the 160-acre

tract.    Seven different partial interests were purchased during

the period May 1995 through February 1996.   These purchases gave

the buyer a cumulative interest of almost 32 percent of the
                               - 9 -

undivided 160 acres.   These partial interests were acquired for

amounts that were approximately 58 percent to 62 percent less

than their proportionate shares of the fair market value of the

full fee as estimated by Mr. Young.    During October 1996 the

buyer acquired the remaining two-thirds of the property from

three sellers for approximately 14 percent less than a

proportionate share (i.e., two-thirds) of Mr. Young’s estimated

fair market value of the full fee.

     The second series of partial acquisitions considered by Mr.

Young occurred during September 1994.    It involved 37 different

tracts totaling almost 830 acres which were owned by three

different groups of individuals.   The purchaser acquired three

approximately equal interests for equal purchase prices.    On the

basis of Mr. Young’s estimated fee fair market value, the

fractional purchases were discounted approximately 41 percent.

     In the third series of partial acquisitions during 1993,

seven partial interests, collectively representing almost a 50-

percent interest, were purchased from members of the same family

for what appears to be the same price per acre.    The discounts

from the estimated full-fee fair market value were all

approximately 82 percent, using Mr. Young’s fee value.

     In the fourth series of partial acquisitions, interests in

amounts approximating 35 percent and 7 percent were acquired in

1992, and the remaining 58 percent was acquired in 1995.    The
                               - 10 -

1992 acquisitions were discounted by approximately 59 percent and

65 percent, respectively, and the 1995 acquisition was discounted

by approximately 36 percent.   Again, Mr. Young’s estimate of fee

fair market value was used as the base.

     The fifth and sixth series of partial acquisitions each

involved the acquisition of two 50-percent interests.    The fifth

consisted of acquisitions in 1995 and 1997 with discounts of

approximately 67 percent and 50 percent, respectively.   The sixth

partial acquisition involved two 1997 purchases with fractional

interest discounts of approximately 38 percent and 44 percent,

respectively.

     Mr. Young did not conclude that a particular percentage

would be appropriate for the partial interests that we consider

in these cases.   Instead, Mr. Young opined that on the basis of

the above-described transactions, a discount of at least 50

percent was appropriate for valuing a partial undivided interest

in Louisiana timberland.

     Mr. Young did adjust for differences that might occur where

fractional sales were actually acquisitions by a majority holder.

He showed that substantially smaller fractional discounts

occurred in transactions where the buyer had or achieved control.

Conversely, the discounts were substantially larger where buyers

were purchasing a partial interest and did not have control of

the fee.
                               - 11 -

     Mr. Young also discussed other factors that might affect the

amount of the discount, such as tract size, lack of management

control, the number of coowners, and the cost of acquiring a fee

interest.   He did not, however, provide any guidance as to how

those factors should be taken into account in valuing the 16

parcels of timberland under consideration.

     Although the six sales of timber properties cited by Mr.

Young occurred in northwest Louisiana, respondent contends that

there has been no correlation to the 16 parcels of timberland we

consider in these cases.   In addition, respondent points out that

Mr. Young, in his discussion of the practicality of partition,

assumed that the partition would result in 65 shares.   That

assumption tends to exaggerate the cost of partition.

     With respect to Mr. Young’s comparables, respondent provided

some information about each reflecting that the fee value used by

Mr. Young could be too high.   Any reduction in the fee value used

would accordingly and proportionately reduce the percentage

discount that could be attributable to a fractional interest.3




     3
       Mr. Young also provided a report in which he commented on
various assumptions that had been provided by the estates’
counsel. It was not evident how Mr. Young’s comments were
formulated and why he would be qualified to opine on certain of
the assumptions. Accordingly, we do not rely on his commentary
concerning the estates’ assumptions.
                                - 12 -

     B.   Lewis C. Peters

     Lewis C. Peters, a forester/real estate appraiser, like Mr.

Young, opined on the relationship of discounts to undivided

fractional interests in timberland on behalf of petitioners.    He

relied on transactions in fractional interests in timberland in

Maine and in the East Texas/Louisiana area.    Mr. Peters has been

developing information on the sales of fractional interests in

timberland for a number of years, and he has found only two

markets for such property--Maine and East Texas/Louisiana.    In

that regard, Maine had a more active and better established

market than the East Texas/Louisiana area.

     Mr. Peter’s estimated that the mean discount attributable to

fractional interests in timberland is 55 percent.    He relied on

104 transactions that occurred from 1969 through 1997.    Unlike

Mr. Young, Mr. Peters did not adjust for differences that may

occur where fractional sales were actually acquisitions by a

majority holder.   Instead, Mr. Peters simply used a statistical

mean or average of the sales.    Like Mr. Young, Mr. Peters

obtained the full-fee fair market value by talking with owners,

collecting information about subsequent full-fee sales, and

discussing this issue with people in the timberland market.

     Respondent contends that Mr. Peters’s conclusions are

unreliable because many of the alleged comparables were too

remote from the year in question.    Respondent also contends that
                              - 13 -

Mr. Peters’s estimated fair market values were not from reliable

or verifiable sources.   Respondent also points out that Mr.

Peters’s study contained discounts for fractional interests that

varied from 29 percent to 83 percent.   To the extent that

subsequent sales were used to determine the amount of discount,

respondent indicates that neither Mr. Young nor Mr. Peters

adjusted (reduced) the fair market value to reflect any

intervening inflation.

     Finally, respondent points out that Messrs. Young and Peters

both used the Pennzoil sale as a comparable but used differing

data and arrived at differing discounts.   Mr. Peters arrived at

an average 36-percent discount using a fair market value of

almost $474,000, whereas Mr. Young had discounts ranging from

14.10 percent to 62.06 percent using a fair market value of

$420,000.   These discrepancies, respondent contends, reflect a

lack of credibility in the experts’ reports.

     C.   James Steele III

     The estates’ third expert has engaged for more than 20 years

in the business of buying and selling rural Louisiana farm and

timberland with concentration on undivided interests in

relatively small (1,000 acres or less) parcels.   Mr. Steele’s

entity was the purchaser in the Pennzoil transaction relied on by

both Messrs. Young and Peters.
                              - 14 -

     In the Pennzoil transaction, Mr. Steele’s entity was

attempting to purchase a controlling (at least 80 percent) or

complete interest in the Pennzoil property.     Purchases of

Pennzoil fractional interests were initially subjected to

discounts for the fractional interests in amounts generally

around 60 percent.   When the buyer had acquired sufficient

partial interests to hold at least 80 percent, the discounts

precipitously dropped to just over 14 percent.

     This discount pattern confirms the estates’ argument.

Partial interests that do not constitute or result in a

controlling interest are subject to substantially greater

discounts than partial interests acquired by a controlling

interest holder or which result in control of the fee.

     In his report, Mr. Steele concluded that a discount of at

least 55 percent would be appropriate for the purchase of partial

interests in Louisiana timberland.     During his trial testimony

Mr. Steele opined that the value of the partial interests should

be discounted 90 percent from the fair market value of the full

fee interest.

     The Court found Mr. Steele’s testimony helpful and germane

to the valuation of partial interests in Louisiana timberland.

Although there are sales of fractional interests in timberland in

Louisiana, such activity is relatively infrequent, and only

limited information about such sales is available.     Mr. Steele
                               - 15 -

was either aware of or involved in most of the known sales of

fractional interests in Louisiana.      He also makes his living from

such sales and is well known to lawyers, courts, and others as a

resource in situations where fractional interests and/or

partition is involved.

     Mr. Steele evaluates timber and mineral properties on the

basis of the idiosyncracies of the ownership and related

conditions.   So, for example, he may seek out disgruntled family

members who own a partial interest and are seeking to sell their

interest.   In such situations, Mr. Steele has studied the

potential for and used partition as a means to make a profit from

the partial interest.    According to Mr. Steele, those situations

require “staying power” because of the potential for resistance

by the remaining family/coowners who may resist partition, either

in kind or by licitation.4   Mr. Steele had a personal experience

where his acquired partial interest was tied up for as long as 21

years.   In general, Mr. Steele’s experience reflects that it is

not unusual for partition to take as long as 5 years.

     Mr. Steele’s unique and extensive experience makes him

particularly well qualified to address the amount of discount for

a fractional interest in Louisiana timberland.     Although Mr.

Steele and petitioners’ other experts opined, in general, that


     4
       “Licitation” is a term used to describe the sale of
partitioned realty and the division and distribution of the sale
proceeds as opposed to partition in kind where the property is
divided and distributed to the coowners.
                              - 16 -

fractional interests in Louisiana timberland should be discounted

by 55 percent, those opinions were based on means or averages of

the fractional sales information available.   We also note that

the full fair market value of the properties used as comparables

may have been questionable, so that the discounts could have been

smaller or larger depending upon whether the actual fair market

value was lower or higher.

     Mr. Steele’s personal experiences during more than 20 years

of involvement with fractional interests in Louisiana, reflect

the following.

     (1) The fact that the market is severely limited drives

prices down (increasing discounts).    Most buyers have no desire

to expend the time and expense to acquire full ownership.

Generally, timber companies are not interested in purchasing

fractional interests and lending institutions are not likely to

lend money to holders of fractional interests.

     (2) Problems arise concerning the management of undivided

interest properties.   There is a tendency for persons who own

partial interests in property to expend less time and money than

they would have spent on solely owned property, resulting in some

amount of mismanagement.

     (3) Louisiana fractional interest holders with less than an

80-percent interest lack control over the use of the timber

without consent of the other owners.
                             - 17 -

     (4) The choices available to a Louisiana fractional interest

holder with less than 80-percent ownership are to:

          (a) Sell the fractional interest but incur the

     additional expense of advertising and/or locating a

     buyer;

          (b) buy out the other interests.   This process can

     involve expenses and delays related to locating fractional

     interest holders, recording expenses, deed preparation,

     title opinions, and the possibility of perfecting title with

     respect to ancestral predecessors of current owners;

          (c) attempt voluntary partition in kind, which is often

     “complex, rancorous, and protracted”.   It has been Mr.

     Steele’s experience that the problems encountered increase

     as the number of fractional owners increases.   In some

     instances it may reach a point where agreement becomes

     impossible;

          (d) bring suit for partition in kind or by licitation.

     This process will result in “significant legal expense” and

     delays.

     (5) The delay associated with partition is at least 1 year,

but it is more likely to take several years.   In the interim

expenses are being incurred and the investment in the fractional

interest is “frozen”.
                              - 18 -

     (6) It has been Mr. Steele’s experience that unexpected

expenses occur in connection with perfecting sole ownership or

control.   It has been his experience that unanticipated legal

problems may arise.

     (7) The buyer of an undivided interest must have financial

“staying power” and be able to buy the entire property at any

partition sale because of the possibility of underbidding of

amounts that would be proportionately less than the cost of the

undivided interest.

     Mr. Steele considers the following factors in determining

the amount of discount that should be applied in the purchase of

a fractional interest:   Fair market value of 100-percent

ownership; percentage available for sale; total number of owners;

“staying power” of existing owners; property location; number of

tracts; number of acres; ability to influence property management

by the buyer of a fractional interest; continuity of the tracts;

access to the property(ies); topography (including wetland

classifications); and mineral value, either in or out of

production.

     Using his knowledge and experience, he opined in his written

report that the discount for the fractional interests under

consideration should be at least 55 percent.   During his trial

testimony, Mr. Steele concluded that he would discount the

fractional interests in question by 90 percent on the basis of
                              - 19 -

the following:   (1) The fractional interests are held in a trust

causing an inability to directly access any proceeds of

partition; (2) the beneficial fractional interest holders were

from the same family generally resulting in less agreement on a

course of action;5 (3) partition suits in Louisiana require that

all mineral owners be made parties to the proceeding; (4) the

costs of partition might be assessed against and borne by the

instigating partial interest holder; and (5) a buyer of a 14/65

or 17/65 interest would have no control and the other interests

could limit profitable use or sale of the property.   In this

case, the property has been poorly managed by one of the

beneficiaries/family members for years, and the only remedy would

be to wait until other interest holders die or to attempt

partition.

     The reasons cited by Mr. Steele do not support his

conclusion for a 90-percent discount.   Several of the reasons he

cites were already considered in his written report to arrive at

his “at least 55 percent” discount opinion.   We do agree,

however, with his observation that this family has experienced

prior disagreement, which precipitated the creation of the trust.

In addition, one family member has been allowed to independently


     5
       Because of Mr. Steele’s reputation and willingness to be
involved in partial interests, disgruntled family members seek
him out to purchase their fractional interests. In those
experiences he has found that the likelihood of disagreement is
greater among family members.
                                - 20 -

manage the 16 parcels, and it has been shown that his management

was poor.   These are facts that were available to and would

certainly influence a knowledgeable buyer and should be factored

into the discount percentage.

The Possibility of Partition--Effect on Value

     The estates argue that the use of partition, as a legal

matter, is fraught with uncertainty.     Relying on their experts,

petitioners contend that partition of the properties in question

would be protracted, thus increasing the discount on the

fractional interests in issue.    Respondent disagrees with

petitioners and contends that the properties could be relatively

easily partitioned in 3 or 4 months if partition were

uncontested.

     Generally, the “Potential costs and fees associated with

partition or other legal controversies among owners, along with a

limited market for fractional interests and lack of control, are

all considerations rationally related to the value of an asset.”

Estate of Bonner v. United States, 84 F.3d 196, 197-198 (5th Cir.

1996).   Accordingly, the cost of partition does not set some

absolute limit on the amount of discount.     Instead, it is a

factor to be considered.

     Each party has attempted to either maximize or minimize the

effect that partition may have upon the discount attributable to

a fractional interest in timberland.     There is no way to
                              - 21 -

accurately predict that partition will be necessary.   It is

possible that the remaining family members may be open to

dividing or managing the property in accord with a new owner’s

wishes.   Conversely, it is also possible that the remaining

family members will be adverse to a new owner’s wishes.

     Here, the estates have shown that, under Louisiana law,

there are uncertainties and disabilities associated with an

undivided minority interest in property.   That is especially true

here where the property is held in trust and where the family

members have previously experienced difficulties and have allowed

one family member to manage the properties without holding him to

a high standard.   It has also been shown that the family members

placed the property into trust in order to keep the property in

their family.   The circumstances that would have been perceived

by a willing buyer indicate that the remaining family members

would be resistant to and make it difficult for an outside buyer.

We reach this conclusion, in part, on the basis of the family’s

propensity to allow poor management of the timberland to their

own financial detriment.   Accordingly, some additional discount

is appropriate on the basis of the record in this case.

     The evidence, experts’ reports, and other testimony reflect

that the market for partial interests was extremely limited.    One

of petitioners’ experts, Mr. Steele, was the buyer of many such

properties.   His experiences reflected that partition under the
                               - 22 -

facts of these cases would have been difficult, protracted, and

expensive.

The Variations Between the Estates’ Reported Values and Those
Maintained for Trial

     Finally, we consider the escalation of the discounts claimed

by the estates.    John’s estate initially reported a value for the

fractional interest that was discounted by only 25 percent.    By

the time Sarah died, the value of her fractional interest was

reported at a value that was discounted by 50 percent.    At that

point, John’s estate amended its return and claimed a 50-percent

discount.    As these matters were further developed during the

audit examination and controversy, information was discovered

that caused the estates to further reduce the reported value of

the fractional interests by claiming a 60-percent discount.

Finally, the estates’ litigating position, based on Mr. Steele’s

testimony, was that both fractional interests should be

discounted by 90 percent.

     Respondent points to the escalation of the discounts and

contends that it merely reflects the estates’ propensity to take

aggressive and excessive positions.     Respondent contends that the

discount initially claimed by John’s estate was closer to the

correct amount and should represent the maximum amount to which

either estate should be entitled.    The estates have shown,

however, that the discounts initially claimed did not take into
                              - 23 -

account the true marketplace and the price that would be paid by

a willing buyer.

     The 25-percent discount used by John’s estate was based on

the return preparers’ analysis of a court opinion in which a

discount for a fractional interest was found.6   When the return

preparer increased the amount to 50 percent, he relied on a

series of court opinions in which discounts for fractional

interests were allowed.7   Although it may be appropriate to

consider the amounts of discounts decided by courts in prior

cases, those discounts are not intended as minimum or maximum

limits for certain types of discounts.8   The amount of discount



     6
       John’s estate’s tax return preparer relied on Estate of
Bright v. United States, 658 F.2d 999 (5th Cir. 1981).
     7
       The preparer, in support of a 50-percent discount in the
amended return, relied on a series of cases of which the
following are representative: Propstra v. United States, 680
F.2d 1248 (9th Cir. 1982); Estate of Campanari v. Commissioner, 5
T.C. 488 (1945); Estate of Cervin v. Commissioner, T.C. Memo.
1994-550; LeFrak v. Commissioner, T.C. Memo. 1993-526; and Estate
of Youle v. Commissioner, T.C. Memo. 1989-138. We note that the
cited opinions appear to be relied upon for their general
rationale and not because 50-percent discounts were allowed.
     8
       The parties in estate tax cases often play a “valuation
game” and advocate high and low values to provide the finder of
facts with limits within which the parties may be satisfied with
the final decision. Because of that phenomenon, we may expect
that estates will report the lowest possible value, and that the
Commissioner will determine the highest possible value. Those
very dynamics may raise suspicion about the parties’ positions on
estate tax valuation issues. In this case, however, the facts
reflect that, initially, John’s estate was not playing the
“game”. Even after the “game” began, both John’s and Sarah’s
estates did not get up to speed until the trial had commenced.
                               - 24 -

in each case must be determined ad hoc, and the facts in each

case must provide the basis for the proper amount of discount.

The facts in this case, along with our understanding of the

actual marketplace, reflect that fractional interests in rural

Louisiana timberland sell at substantial discounts and, hence,

the estate’s reporting positions were conservative in their

approach to discounting.

Conclusion

     After considering the record and the experts’ reports and

testimony, we hold that the estates have established 55 percent

as a mean and/or average amount by which fractional interests in

Louisiana timberland which do not result in control are

discounted.    We are also convinced that the peculiar

circumstances shown to exist with respect to the decedents’

remaining family members support an increased discount.

     We have placed reliance in Mr. Steele’s expertise and actual

practical experience.    His report and testimony were based on his

personal knowledge and experience in the very marketplace under

consideration.    Mr. Steele’s “at least 55-percent discount” in

his written report comported with the other experts’ findings and

conclusions.    Mr. Steele’s trial testimony suggesting a 90-

percent discount, however, was unfounded and without support in

the record.    We find it hard to accept that a willing seller

would accept 10 cents on the dollar for a partial interest in
                             - 25 -

timberland, and no such comparables were shown to exist.9

     Although there are no truly comparable sales in this record,

the detail available on the Pennzoil transaction does provide

some measure of a contemporaneous arm’s-length transaction.    In

the series of Pennzoil transactions the discounts before

acquisition of a controlling interest hovered around 60 percent.

On the basis of that example and the other factors discussed

above, we hold that John’s and Sarah’s fractional interests

should be discounted 60 percent, as claimed by the estates, from

the fair market values agreed to by the parties.

     To reflect the foregoing and considering the parties’

agreements,

                                   Decisions will be entered

                              under Rule 155.




     9
       It appears that Mr. Steele’s suggested 90-percent discount
may represent only a buyer’s point of view. Perhaps it would
serve as a low bid to initiate negotiations.
