                          T.C. Memo. 1998-63



                        UNITED STATES TAX COURT



      RICHARD J. SALEM AND EILEEN L. SALEM, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

      ROBERT S. SAXON AND BERNICE S. SAXON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 8792-95, 8793-95.         Filed February 17, 1998.



     Vernon Jean Owens, for petitioners.

     William R. McCants, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WRIGHT, Judge:     In these consolidated cases respondent

determined the following deficiencies and penalty in petitioners'

Federal income taxes:
                                       - 2 -


                                                              Penalty
         Petitioners      Docket No.   Year    Deficiency   Sec. 6662(a)

      Richard J. and      8792-95      1987    $49,074         None
        Eileen L. Salem                1990     19,179       $2,487

      Robert S. and      8793-95       1990      7,202         None
        Bernice S. Saxon

      Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.                All

Rule references are to the Tax Court Rules of Practice and

Procedure.

      We must decide the following issues:

      (1) Whether, under section 1366, petitioners Richard J.

Salem and Bernice S. Saxon have sufficient basis from which to

deduct losses incurred by Salem, Saxon & Nielsen, P.A., an S

corporation;

      (2) whether petitioner Richard J. Salem realized gain of

$59,224 upon the distribution of real property from Gulf

Properties of Pinellas County, Florida III, Inc., an S

corporation; and

      (3) whether, if such gain was realized, petitioners Richard

J. Salem and Eileen L. Salem were negligent in failing to report

it.

                               FINDINGS OF FACT

      Some of the facts have been stipulated, and they are so

found.    The stipulation of facts and the exhibits attached

thereto are incorporated herein by this reference.
                               - 3 -


A.   Petitioners

     Petitioners Richard J. Salem (Mr. Salem) and Eileen L. Salem

(Mrs. Salem) are married and resided in Tampa, Florida, when they

filed their petition in this case.     Mr. and Mrs. Salem are

hereinafter sometimes referred to as the Salems.

     Petitioners Robert S. Saxon (Mr. Saxon) and Bernice S. Saxon

(Mrs. Saxon) are married and resided in Clearwater, Florida, when

they filed their petition in this case.     Mr. and Mrs. Saxon are

hereinafter sometimes referred to as the Saxons.

B.   Salem, Saxon & Nielsen, P.A.

     1.   Background

     Mr. Salem and Mrs. Saxon are attorneys who are shareholders

in the law firm of Salem, Saxon & Nielsen, P.A. (SS&N).     During

the taxable year 1990, Mr. Salem owned 450 shares of the stock of

SS&N, and Mrs. Saxon owned 50 shares.     Their general law practice

is business oriented and includes litigation.    Mr. Salem was

admitted to practice before this Court in 1975.

     During the mid-1980's, SS&N began borrowing money from the

Bank of Tampa (the bank).   From 1987 through 1990, the bank made

loans to SS&N on the following dates in the amounts indicated:
                                  - 4 -


                      No.       Date            Amount

                      1        9/22/87         $150,000
                      2        1/28/88           100,000
                      3        9/27/88           150,000
                                               1
                      4        7/18/89            360,000
                      5       12/04/89           275,300
                                              2
                      6       12/04/89            635,300
                      7        3/12/90           137,971
                      8        3/12/90           150,000
                                              2
                      9        3/12/90            300,000
                                              2
                      10       3/12/90            816,097
                      11       6/30/90        3
                                                  300,000
                                                 3
                      12       9/19/90             66,112
     1
         Increase and renewal of existing loan.
     2
         Consolidation and renewal of existing loans.
     3
         Renewal of existing loan.

     All of the above loans were represented by notes signed by

Mr. Salem or Mrs. Saxon as an officer of SS&N.         All loans, except

loan No. 1, were secured by SS&N's accounts receivable,

furniture, fixtures, and equipment.       All of the notes provided

that the bank was given a lien and a security interest (obligor

lien) in:

     all property of each Obligor now or at any time
     hereafter in the possession of Bank in any capacity
     whatsoever, including but not limited to any balance or
     share of any deposit, trust, or agency account, as
     security for the payment of this note * * *

The term "Obligor" included each maker, endorser, surety, and

guarantor of the note.      Mr. Salem personally guaranteed 100

percent of SS&N's debt to the bank, and Mrs. Saxon personally

guaranteed 10 percent of the debt.        Except for the obligor lien,
                               - 5 -


neither Mr. Salem nor Mrs. Saxon pledged any personal assets to

secure SS&N's debt to the bank.

     SS&N was a C corporation from 1981 through September of

1989.   On December 15, 1989, SS&N elected to be an S corporation

effective as of October 1, 1989.

     The accounting firm of Laventhol & Horwath (L&H) prepared

the corporate income tax return for SS&N for the taxable year

ending December 31, 1989.   Eileen Sharkey of L&H sent the

following letter dated September 6, 1990, to Mr. Salem:

     Dear Richard:

          In preparing the corporate income tax return for
     the period ended December 31, 1989 for Salem, Saxon and
     Nielsen, P.A., we have discussed various issues with
     Bernice. This letter covers one particular tax item of
     significance, principally to you.

          On December 31, 1989, the professional association
     had loans outstanding of approximately $710,000 payable
     to the Bank of Tampa. It is our understanding that the
     loans were made to Salem, Saxon and Nielsen, P.A., with
     your personal guarantee. The issue is the Internal
     Revenue Service's lack of recognition of a guarantee as
     part of tax basis as further discussed below. As you
     know, the professional association has incurred a loss
     of $43,330 for the year ended December 31, 1989. Your
     share of the loss is approximately $37,000 and
     represents a tax benefit on your individual return of
     approximately $12,000. By taking a tax position
     contrary to the Internal Revenue Service, your return
     is subject to controversy.

          Subchapter S Corporation losses that pass through
     to the shareholders are fully deductible only to the
     extent that the shareholders have basis in the S
     Corporation stock, plus basis in their loans to the S
     Corporation (Internal Revenue Section 1366(d)(1)).
     Applying this provision to Salem, Saxon & Nielsen,
     P.A., your current basis would be de minimis, and your
                                - 6 -


     deductible loss on your individual income tax return
     for 1989 would also be de minimis. Of course, the
     remaining loss would be available for the carryforward
     to future years. With your concurrence, we will take
     the tax return position that the loan guarantee
     provides you basis to take the losses. In order to
     avoid penalties in the event the Internal Revenue
     Service should prevail upon challenge, the rules
     require the tax return to be based on "substantial
     authority," as defined. We believe Selfe v. United
     States, * * * 778 F.2d 769 (11th Cir. 1985) provides
     such authority. In this case, the court applied a
     debt-equity analysis and held that a shareholder's
     guarantee of a loan made to a Subchapter S Corporation
     may be treated for tax purposes as an equity investment
     in the corporation where the lender looks to the
     shareholder as the primary obligor. However, this case
     is unique to the 11th Circuit and does not have the
     Commissioner's acquiescence. Therefore, upon
     examination, a controversy may arise.

          The safest course of action and the one we
     recommend is to restructure the loans so that you are a
     co-maker rather than a guarantor. In this way, you can
     clearly demonstrate that you have basis in the losses
     which flow through on your individual income tax return
     and take full advantage of the concomitant tax
     benefits.

     In September and October of 1990, Mr. Salem and Mrs. Saxon

executed the following new notes (replacement notes) that, except

for No. 14, replaced the existing notes representing SS&N's debt

to the bank:

                      No.      Date           Amount
                                          1
                      13     9/30/90       $275,000
                      14     9/30/90            25,000
                                           2
                      15     9/30/90         300,000
                                              3
                      16    10/18/90            66,112
                      17    10/18/90        4
                                              757,805
     1
         Renewal of loan No. 11.
     2
         Consolidation and renewal of loans No. 13 & No. 14.
     3
         Renewal of loan No. 12.
     4
         Renewal of loan No. 10.
                               - 7 -


     The replacement notes were signed by Mrs. Saxon as vice

president on behalf of SS&N and by Mr. Salem and Mrs. Saxon as

individuals.   The security on the replacement notes remained the

same as on the original.   During 1990, SS&N made all payments to

the bank on the loans.

     SS&N filed Forms 1120S, U.S. Income Tax Return for an S

Corporation, for the short taxable year ending December 31, 1989,

and for the taxable year ending December 31, 1990.   SS&N reported

a loss of $245,711 for the 1990 taxable year, of which $221,140

was allocated to Mr. Salem and $24,571 was allocated to Mrs.

Saxon.

     SS&N's 1990 return reflects loans payable to shareholders in

the amount of $1,110,287, while its ledger for 1990 reflects that

loans in the same amount were payable to the bank.   There were

never any loan documents executed among SS&N, Mr. Salem, and Mrs.

Saxon evidencing loans from the shareholders to the firm.

     2.   Minutes of Meetings of the Officer's Loan Committee and
          the Loan Committee.

     Accurate minutes of the meetings of the bank's Officers Loan

Committee and the Loan Committee (the minutes) were taken at the

time the committees discussed making or extending loans to the

bank's customers.   Minutes of committee meetings considering

personal loans to Mr. Salem and Mrs. Saxon were reported under

the headings of "Richard J. Salem" and "Bernice Saxon".     When the
                                 - 8 -


committees discussed loans to SS&N, the minutes reflected the

discussion under the heading of "Salem, Saxon, & Nielsen, P.A."

        When the committees were considering extending loans to

SS&N, the committees considered SS&N's (1) financial statements,

(2) profitability and strong equity position, (3) deposits

maintained with the bank, (4) proposed use of loan proceeds

(working capital, construction costs of leasehold improvements),

(5) security (furniture, fixtures, and equipment), (6) reputation

and client base, (7) hiring of additional attorneys, and (8) real

property interests.     The committees also considered personal

guaranties of Mr. Salem and Mrs. Saxon and the bank's total

commitment to the firm.     On one occasion, the committee

considered Mr. Salem's annual income of $250,000 and limited

debt.

     The minutes of the Loan Committee meetings of October 11,

1990, August 8, 1991, and June 11, 1992, and the Officers Loan

Committee meetings of July 30, 1991, and July 28, 1992, discuss

Mr. Salem and Mrs. Saxon's guaranties of SS&N's loans, indicating

that the committees were unaware of the substitute notes.

     The minutes of the Loan Committee meeting of August 13,

1992, state that "the firm [SS&N] is currently undergoing an IRS

audit, and they may have to change the borrower of the P.A. loans

to the principals."     The minutes of the Officers Loan Committee

meeting of October 6, 1992, state:
                               - 9 -


     Mr. Martin presented a request for the approval to
     change the borrower on the $1.1 million in loans to
     Salem, Saxon & Nielsen, P.A. to the names of Richard J.
     Salem, Bernice S. Saxon, and Richard A. Nielsen based
     on their pro-rata share ownership of the firm. * * *
     Mr. Martin indicated that as a result of an IRS audit
     the firm is undergoing, the partners are being
     questioned regarding the basis of their individual
     ownerships in the corporation. He mentioned that the
     P.A. will hypothecate its assets as collateral for the
     notes to the partners. He indicated that we will
     continue to have a $700M assignment of life insurance
     on Mr. Salem. He mentioned that Mr. Salem owns 85%,
     Ms. Saxon owns 10%, and Mr. Nielsen owns 5% of the
     firm. * * *

C.   Gulf Properties of Pinellas County, Florida III, Inc.

     Mr. Salem owned a one-third interest in an S corporation

known as Gulf Properties of Pinellas County, Florida III, Inc.

(Gulf Properties).   On June 30, 1988, Gulf Properties purchased

property located at 300 Gulf Boulevard, Belleair Shores, Florida

(300 Gulf Boulevard), for the purchase price of $600,000.    On

December 28, 1990, Gulf Properties transferred title of 300 Gulf

Boulevard to Mr. Salem, subject to a mortgage in the amount of

$530,900.   Between 1987 and 1992, real property values dropped

significantly in the area of 300 Gulf Boulevard.

D.   Petitioners' Income Tax Returns

     The Salems filed a joint income tax return (Form 1040) and

an amended return (Form 1040X) for the taxable year 1990.    The

Salems reported a net operating loss for 1990 in the amount of

$192,546.   In computing the 1990 net operating loss, the Salems

included the $221,140 loss from SS&N.   The Salems did not report
                               - 10 -


any gain or loss on the distribution of 300 Gulf Boulevard to Mr.

Salem from Gulf Properties, nor did they report any interest

income from SS&N related to the loans or from any deposits with

the bank.   The Salems filed a Form 1045, Application for

Tentative Refund, for the taxable year 1987 claiming a net

operating loss carryback of $127,465 from 1990.

     The Saxons filed a joint return for 1990.    On their return,

the Saxons claimed the $24,571 loss from SS&N allocated to Mrs.

Saxon.

E.   Respondent's Determinations

     In a statutory notice of deficiency dated March 7, 1995,

issued to the Salems, respondent determined that the loss from

SS&N was deductible to the extent of Mr. Salem's basis in his

SS&N stock.   Respondent further determined that Mr. Salem's basis

in his stock as of January 1, 1990, was $259, and that the

Salems' income for 1990 was increased by $220,881.    Additionally,

respondent determined that Mr. Salem realized a capital gain in

the amount of $59,224 from the distribution of 300 Gulf Boulevard

to him from Gulf Properties.   Respondent computed the gain as

follows:

     1988 purchase price of property received        $600,000
     Less mortgage assumed                           (530,900)
     Distribution                                      69,100
     Less shareholder's basis                          (9,876)
     Capital gain                                      59,224
                              - 11 -


     As a result of these adjustments, respondent determined that

the Salems had taxable income of $74,153 for 1990.   As a result

of the adjustments to the Salems' income for 1990, respondent

determined that the net operating loss carryback to 1987 was zero

and increased the Salems' 1987 income by $127,465.

     In a statutory notice of deficiency dated March 7, 1995,

issued to the Saxons, respondent determined that the loss from

SS&N was deductible to the extent of Mrs. Saxon's basis in her

interest in SS&N.   Respondent further determined that her basis

as of January 1, 1990, was $29, and that the Saxons' taxable

income, therefore, was increased by $24,542.

                              OPINION

1.   Claimed Net Operating Loss Deduction

     Section 1366(d)(1) permits an S corporation shareholder to

deduct a proportionate share of the corporation's net operating

loss to the extent that the loss does not exceed the sum of the

adjusted basis of the shareholder's stock in the corporation and

any indebtedness of the S corporation to the shareholder.

     Petitioners argue that the bank looked primarily to Mr.

Salem and Mrs. Saxon for repayment of the loans at issue.

Petitioners contend that the bank in substance made the loans to

Mr. Salem and Mrs. Saxon, and they in turn made loans to SS&N.

Petitioners conclude, therefore, that the loans constituted

indebtedness of the S corporation to its shareholders.
                               - 12 -


     Generally, in order to qualify as "indebtedness" under

section 1366(d), the indebtedness of the S corporation to the

shareholder must have arisen as a result of an actual economic

outlay by the shareholder.    Harris v. United States, 902 F.2d

439, 443 (5th Cir. 1990); Estate of Leavitt v. Commissioner, 875

F.2d 420 (4th Cir. 1989), affg. 90 T.C. 206 (1988); Selfe v.

United States, 778 F.2d 769, 772 (11th Cir. 1985).    This Court

has consistently held that no form of indirect borrowing, be it

guaranty, surety, accommodation, or otherwise, gives rise to

indebtedness from an S corporation to the shareholders unless and

until the shareholders pay part or all of the indebtedness.

Estate of Leavitt v. Commissioner, 90 T.C. at 216; Raynor v.

Commissioner, 50 T.C. 762, 770-771 (1968).    Prior to such

payment, "liability" of the shareholders to a third party may

exist, but not debt of the corporation to the shareholders.

Raynor v. Commissioner, supra at 771.

     The precise question before us is whether Mr. Salem and Mrs.

Saxon made an economic outlay by signing as comakers of the notes

payable to the bank.    Petitioners rely chiefly upon the opinion

of the U.S. Court of Appeals for the Eleventh Circuit in Selfe v.

United States, supra.    We are bound under the Golsen rule to

follow the opinion of the Eleventh Circuit because an appeal in

this case would be made to that court.    Golsen v. Commissioner,

54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971).
                               - 13 -


     The Eleventh Circuit agreed that economic outlay is required

before stockholders in an S corporation may increase their basis,

and that "In most cases, a mere guarantee of a corporate loan is

insufficient, absent subrogation, to increase a taxpayer's

basis."   Selfe v. United States, supra at 774.   The court noted,

however, that "a guarantor who has pledged stock to secure a loan

has experienced an economic outlay to the extent that that

pledged stock is not available as collateral for other

investments."    Id. at 772 n.7.

     Relying upon the principles of Plantation Patterns, Inc. v.

Commissioner, 462 F.2d 712 (5th Cir. 1972), affg. T.C. Memo.

1970-182, the Eleventh Circuit held that "a shareholder guarantee

of a loan may be treated for tax purposes as an equity investment

in the corporation where the lender looks to the shareholder as

the primary obligor."    Selfe v. United States, supra at 774.   The

court concluded that "under the principles of Plantation

Patterns, a shareholder who has guaranteed a loan to a Subchapter

S corporation may increase her basis where the facts demonstrate

that, in substance, the shareholder has borrowed funds and

subsequently advanced them to her corporation."    Id. at 773.   In

Selfe, the specific issue before the court was whether any

material facts were at issue making summary judgment

inappropriate.   Finding that such issues existed, the court
                               - 14 -


remanded for a determination of whether or not the lender looked

primarily to the taxpayer for repayment.

     We find that the facts in this case are substantially

different from those in the Selfe case.    In Selfe, the lender

originally extended a credit line to the taxpayer in

consideration of her pledge of 4,500 shares of stock in a

corporation.    When her business was later incorporated in a new

corporation, the lender converted the loans made on the existing

credit line to corporate loans, accompanied by the taxpayer's

agreement guaranteeing the corporation's indebtedness to the

bank.    By contrast, in this case, the bank originally made the

loans to the corporation.    Although Mr. Salem and Mrs. Saxon

guaranteed the loans, they never pledged any personal property to

secure the debt.1   After SS&N elected to be an S corporation, the

initiative to add Mr. Salem and Mrs. Saxon as comakers came from

them, not from the bank.

     Furthermore, the record in this case shows that the bank

looked primarily to the corporation for repayment of the notes.

The minutes of the bank's loan committees indicate that, when the

committees were considering extending loans to SS&N, the

committees considered the corporation's financial statements,


     1
       Petitioners argue that the notes granted the bank a lien
on any property or deposits of the guarantors or comakers held by
the bank. There is no evidence that the bank ever held any
personal deposits of the Salems or Saxons.
                                - 15 -


profitability and strong equity position, deposits maintained

with the bank, proposed use of loan proceeds, security

(furniture, fixtures, and equipment), reputation and client base,

hiring of additional attorneys, real property interests, and

total indebtedness to the bank.    Applying the test applied by the

Eleventh Circuit in Selfe v. United States, supra, we find that

the loans were made to the corporation and not to the

shareholders.   See Spencer v. Commissioner, 110 T.C.        (1998).

     Petitioners contend that the facts in this case are the same

as those in Gilday v. Commissioner, T.C. Memo. 1982-242.     We

disagree.   In Gilday, the bank originally made the loan to the S

corporation, and the shareholders guaranteed the loan.    Later,

the shareholders gave their personal note to the bank and the

bank canceled the corporation's notes.    We held that the

substitution of the shareholders' note to the bank for the notes

of the corporation created a valid debt from the corporation to

the shareholder.   We think the facts in this case are

distinguishable from those in Gilday.    As we noted in Hitchins v.

Commissioner, 103 T.C. 711, 718 (1994), the shareholders in

Gilday became the "sole obligors" to the bank.    In this case

petitioners merely signed the notes as comakers, the

corporation's debt was not canceled, and the corporation's assets

continued to secure the debt.    The fact that petitioners were
                               - 16 -


comakers rather than guarantors does not change our analysis.

Nigh v. Commissioner, T.C. Memo. 1990-349.

     Furthermore, after Mr. Salem and Mrs. Saxon signed the notes

as comakers, the bank continued to look primarily to the

corporation for repayment.    Applying the test of the Eleventh

Circuit in Selfe v. United States, supra, we conclude that,

regardless of the form of the notes, the debts in substance

continued to be loans from the bank to the corporation.

     We conclude further that, under debt-equity principles, the

loans from the bank were made to SS&N, not to the shareholders,

and that the shareholders, therefore, did not lend or contribute

the loan proceeds to SS&N.    The loan documentation consistently

treats the loans as loans to SS&N.      The loans were to be repaid

in the normal course of events from the business revenues of

SS&N.   Upon default, the loans were to be repaid from the

collateral SS&N gave to secure the loans, including any life

insurance proceeds in the event of Mr. Salem's death.     See debt-

equity factors set forth in Plantation Patterns, Inc. v.

Commissioner, supra at 718.    For all purposes other than the

computations of the shareholder tax basis, SS&N and its

shareholders treated the loans as having been made primarily and

directly from the bank to SS&N.
                              - 17 -


     Accordingly, we hold that petitioners are not entitled to

deduct a net operating loss from SS&N in excess of their bases in

their stock as determined by respondent.

2.   Whether Mr. Salem Realized Gain Upon Distribution of 300
     Gulf Boulevard From Gulf Properties

     Respondent's position is that during 1990 Mr. Salem realized

a capital gain distribution of $59,224 when Gulf Properties

transferred the title of 300 Gulf Boulevard to him.   Whether gain

was realized depends upon the property's fair market value on

December 28, 1990, when Mr. Salem received it.   Respondent

contends that its fair market value on that date was $600,000.

To the contrary, Mr. Salem contends that its fair market value

was no more than $540,000, thus resulting in no gain to him.    The

Salems did not report any gain on their joint income tax return

for 1990 because Mr. Salem's basis in Gulf Properties ($9,876)

and the mortgage indebtedness he assumed ($530,900) totaled

$540,776, which he believed exceeded the property's fair market

value on the date of the distribution.

     Petitioners' evidence on the issue of the fair market value

of the property consists of Mr. Salem's testimony and the report

of an expert, Ron Lozano.   Respondent did not submit a report by

an expert but relies upon the purchase price paid for the

property by Gulf Properties in 1988 and values shown on the

Salems' tax returns and financial statements.
                               - 18 -


     The fair market value of property on a particular date is a

factual question and requires consideration and weighing of all

relevant evidence in the record.    Orth v. Commissioner, 813 F.2d

837, 842 (7th Cir. 1987), affg. Lio v. Commissioner, 85 T.C. 56

(1985); Mauldin v. Commissioner, 60 T.C. 749, 759 (1973); Kaplan

v. Commissioner, 43 T.C. 663, 665 (1965).    The determination of

the value of property is a matter of judgment rather than of

mathematics.    Hamm v. Commissioner, 325 F.2d 934, 940 (8th Cir.

1963), affg. T.C. Memo. 1961-347.   Since valuation is necessarily

an approximation, it is not required that the value we determine

be one as to which there is specific evidence, provided that it

is within the range of figures that properly may be deduced from

the record.    Silverman v. Commissioner, 538 F.2d 927, 933 (2d

Cir. 1976), affg. T.C. Memo. 1974-285; Hamm v. Commissioner,

supra at 939-940.

     Expert opinion is admissible if it will assist the trier of

fact to understand evidence that will determine the fact in

issue.   See Fed. R. Evid. 702.   The trier of fact must weigh such

evidence in light of the demonstrated qualifications of the

expert and all other credible evidence.     Estate of Christ v.

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

493 (1970); IT&S of Iowa, Inc. v. Commissioner, 97 T.C. 496, 508

(1991); Parker v. Commissioner, 86 T.C. 547, 561 (1986).    The

persuasiveness of an expert's conclusion depends largely upon the
                                - 19 -


disclosed facts on which it is based.    See Tripp v. Commissioner,

337 F.2d 432, 434 (7th Cir. 1964), affg. T.C. Memo. 1963-244.       We

are not bound by the formulas and opinions proffered by an

expert, especially when they are contrary to our judgment.      Orth

v. Commissioner, supra; Estate of Kreis v. Commissioner, 227 F.2d

753, 755 (6th Cir. 1955), affg. T.C. Memo. 1954-139.    Instead, we

may reach a decision of value based on our own analysis of all

the evidence in the record.     Silverman v. Commissioner, supra;

Hamm v. Commissioner, supra at 940-941.     While we may accept the

opinion of an expert in its entirety, Buffalo Tool & Die

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

may be selective in the use of any portion of such an opinion,

Parker v. Commissioner, supra at 562.     We may reject the opinion

of an expert in its entirety.    Orth v. Commissioner, supra;

Parker v. Commissioner, supra at 562-565.     A sound valuation is

based upon all relevant facts, and we may reach a decision as to

the value of the property based on our own analysis of all the

evidence in the record.   Silverman v. Commissioner, supra at 933;

Hamm v. Commissioner, supra at 941.

     Even if only one party proffers the opinion of an expert,

such as is the case here, we are not required to accord that

opinion total or even partial acceptance.     Tripp v. Commissioner,

supra; Estate of Gilford v. Commissioner, 88 T.C. 38, 56 (1987).

Where there is a significant error in that opinion, appropriate
                               - 20 -


adjustments will be made.    Estate of Gilford v. Commissioner,

supra.   We note, however, that counsel for respondent did not see

fit to cross-examine petitioners' expert during the trial of this

case.

     Petitioners' expert used the comparable sales method in

arriving at a value for the property.    The "comparable sales"

method functions by:   (1) Locating properties as physically

similar as possible to the subject property which (2) have been

sold on the open market in noncollusive, nonforced sales for cash

or cash equivalent, within (3) a reasonable time of the date for

which a value of the subject property is desired.    Once these

properties are located, those features of the subject property

which are most pertinent to its value are compared to those same

features on the comparable properties.    Since no two sales and no

two properties can be identical, the values of those features of

the comparable properties which are relevant to the value of the

subject property are adjusted until they are equivalent to those

of the subject property.    This Court has found the comparable

sales valuation method to be a reasonable one and has used it in

the past.    Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1,

19 (1979).

     Petitioners' Expert Report

     Petitioners' expert appraised the subject property in 1994.

In his report, he concluded that the value of the property as of
                                - 21 -


August 4, 1993, was $575,000.    Where an expert's report is based

upon an incorrect assumption (such as the valuation date in this

case), the Court may still use it to construct reliable estimates

of value by adjusting for the faulty assumption.    Anselmo v.

Commissioner, 80 T.C. 872, 884-885 (1983), affd. 757 F.2d 1208

(11th Cir. 1985).   In making the valuation, petitioners' expert

relied on comparable sales of three properties.    The expert

report provides the following additional information:

     1.   Single family homes or condominium units with a

waterfront view will command the highest prices.    Although bay

view sites are desirable in the market place, bay view sites are

considered to be an inferior view to the open gulf view of 300

Gulf Boulevard.

     2.   300 Gulf Boulevard and comparables No. 2 and No. 3 are

located directly on the Gulf of Mexico in the same subdivision.

Since Comparable No. 1 is located on the bay in a neighboring

subdivision within the area, a large adjustment for the inferior

view was warranted.

     3.   The expert rated 300 Gulf Boulevard as being in above-

average condition because the interior of the home had been

renovated and modernized.   The kitchen had been remodeled and had

new cabinets.   The exterior of the home needed painting, and some

of the gutters were rotted.   There were no functional or physical

inadequacies noted during the inspection.
                                            - 22 -


         4.     Because of the lack of sales of gulf front properties,

the expert found it necessary to expand the marketing timeframe.

         Generally, sales of comparable properties represent the best

evidence of the fair market value of real estate, and a sale of

the subject property itself proximate in time to the relevant

valuation date is the best evidence of fair market value.                              Estate

of Spruill v. Commissioner, 88 T.C. 1197, 1229, 1233 (1987).

The following table describes and compares 300 Gulf Boulevard to

three properties that were sold between September of 1992 and May

of 1993, a period of approximately 17 to 29 months after the

valuation date:

ITEM                Subject          Comparable No. 1    Comparable No. 2    Comparable No. 3
                    300 Gulf Blvd.   148 Aleta Dr.       320 Gulf Blvd.      360 Gulf Blvd.

Proximity                            1 Mile Northeast    1 Lot North         2 Lots North

Data Source         Inspection       Public Records      Public Records      Public Records

VALUE ADJUSTMENTS

Lot Size sq.ft.     19,600           12,000    +75,000   19,600              19,600
View                Gulf             Bay                 Gulf                Gulf

Construction/       CBS              CBS       - 2,000   CBS       - 2,000   CBS
Roof                Shingle          Conc.               Conc.               Shingle

Age (years)         43               24        - 4,000   43                  20        - 5,000

Condition           Avg-             Avg-                Average   +5,000    Avg-
                    Good             Good                                    Good

Total Room Count    9                9         - 1,000   9                   9
Bedrooms            3                4                   4                   4
Baths               3                3.5                 3                   3

Gr. Living Space    2,367            3,290     -18,600   3,412     -20,900   2,730     - 7,300

Garage              2 car            2 car               3 car     - 2,000   2 car

Porch, Patio,       None             Pool &    -10,000   None                Pool &    - 8,000
Pools, etc.                          Spa                                     Covered
                                                                             Patio

Fireplaces          1-Brick          None      + 1,000   1-Brick             None      + 1,000

Net Adjustment                                 +40,400             -19,900             -19,300
                                - 23 -


     The expert report computes comparable values of 300 Gulf

Boulevard using the three comparable properties as follows:

                 Comparable     Comparable    Comparable
                    No. 1          No. 2         No.3

Sale date           5/93           1/93          9/92
Sale price        $500,000       $560,000      $600,000
Adjustments         40,400        -19,900       -19,300
Comp. value        540,400        540,100       580,700
 of Subject

     We have carefully considered all of the evidence presented

and have relied more on evidence determined to be more

persuasive.   Specifically, we find comparable No. 2 to be the

most persuasive evidence of the value of 300 Gulf Boulevard.     We

find that the fair market value of 300 Gulf Boulevard at the time

of the transfer to Mr. Salem in December of 1990 was no greater

than $540,100.

     On the basis of that valuation, we hold that the Salems did

not fail to report gain in 1990 on the distribution of the

property to Mr. Salem.

3.   Accuracy-Related Penalty

     Respondent's determination of the accuracy-related penalty

for negligence under section 6662(b)(1) with respect to the

Salems pertains only to the omission from their 1990 income tax

return of the Gulf Properties distribution of 300 Gulf Boulevard.

Since we have held that the Salems did not fail to report gain

from the distribution, it follows that they are not liable for

the accuracy-related negligence penalty for 1990.
                        - 24 -


To reflect our conclusions on the disputed issues,


                              Decisions will be entered

                         under Rule 155.
