                        T.C. Memo. 2003-258



                     UNITED STATES TAX COURT



                CLARISSA W. LAPPO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11811-01.           Filed September 3, 2003.


     J. A. Cragwall, Jr., Norbert F. Kugele, and Dean F. Pacific

for petitioner.

     John Stevens and Robert D. Heitmeyer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Respondent determined a $998,508

deficiency in petitioner’s 1996 Federal gift tax.   The issue for

decision is the fair market value of interests in a family

limited partnership that petitioner transferred in 1996.
                                 - 2 -

      Unless otherwise indicated, all section references are to

the Internal Revenue Code as amended, and all Rule references are

to the Tax Court Rules of Practice and Procedure.

                         FINDINGS OF FACT

      The parties have stipulated many of the facts, which we

incorporate by this reference.    When petitioner filed her

petition, she resided in Fruitport, Michigan.

A.   Formation of the Lappo Family Limited Partnership

      On October 20, 1995, petitioner and her daughter, Clarajane

Middlecamp (Clarajane), formed, pursuant to Georgia law, the

Lappo Family Limited Partnership (the partnership).    On April 19,

1996, petitioner and Clarajane conveyed to it a portfolio of

marketable securities (principally municipal bonds) and certain

parcels of Michigan real estate that were subject to a long-term

lease.1

      After these initial capital contributions, petitioner’s and

Clarajane’s respective partnership interests were as follows:

                     General               Limited
                   Partnership           Partnership
Partner              Interest              Interest      Total

Petitioner             1.0                   98.7         99.7
Clarajane               .2                     .1           .3
   Total               1.2                   98.8        100.0


      1
       The real estate parcels, in Fruitport, Mich., and South
Haven, Mich., were sites of two retail lumberyards formerly owned
and operated by the Lappo family. In June 1995, Wickes Lumber
Co. purchased all the lumberyard assets other than the real
estate and entered into a 15-year lease for the real estate.
                                   - 3 -

      The allocation of initial partnership interests was based on

the December 31, 1995, market value of the assets contributed to

the partnership.     The appraised market value of the real estate

was $1,860,000.     The market value of the securities was

$1,318,609.

B.   Petitioner’s Gifts of Partnership Interests

      1.    The April 19, 1996, Gifts

      On April 19, 1996, petitioner transferred a 69.4815368-

percent limited partnership interest, representing the following

gifts:     a 66.80917-percent limited partnership interest to

Clarajane as Trustee of the Lappo Generation Trust; and a

0.6680917-percent interest to each of her four grandchildren,

Seth R. Middlecamp, Lisa Middlecamp-Silky, Wendy Thomas, and

Alyson Middlecamp.

      2.    The July 2, 1996, Gift

      On July 2, 1996, petitioner gave her remaining 29.2184632-

percent limited partnership interest to Clarajane in her

individual capacity.

      Consequently, after these gifts, the partnership interests

were as follows:

                       General          Limited
                     Partnership      Partnership
Partner                Interest         Interest          Total

Petitioner               1.0                   –-        1.0000000
Clarajane                 .2               29.3184632   29.5184632
Lappo Generation
 Trust                    --            66.8091700      66.8091700
                                 - 4 -

Seth R. Middlecamp        --             .6680917          .6680917
Lisa Middlecamp-
 Silky                   --              .6680917          .6680917
Wendy Thomas             --              .6680917          .6680917
Alyson Middlecamp        --              .6680917          .6680917

Total                    1.2          98.8            100.0

C.   The Partnership Agreement

      Under the partnership agreement, the general partners have

exclusive authority to manage the operations and affairs of the

partnership and to make all decisions regarding its business,

including the distribution of cash.      No partner can:   (a)

Withdraw any part of her capital or receive any distributions

from the partnership except as provided for in the partnership

agreement; (b) demand or receive any assets other than cash in

return for her capital interest; or (c) be paid interest on any

capital contributed to or accumulated in the partnership.

Withdrawal of a general partner will cause dissolution of the

partnership unless there is at least one other general partner to

carry on the partnership’s business or unless all remaining

partners agree to continue the partnership and to appoint one or

more general partners.

      In general, the limited partners have no rights to

participate in managing or controlling the partnership’s

business.   A limited partner may assign his or her interest, but

such assignment will not dissolve the partnership or entitle the

assignee to become a partner or to exercise any rights as a
                               - 5 -

partner (unless the general partners give their prior consent);

rather, the assignee will be entitled only to receive

distributions to which the assignor would have been entitled.

      Under the partnership agreement, the partnership may

purchase all, but not less than all, of a limited partner’s

interest upon the limited partner’s death or upon any transfer of

the limited partner’s interest by operation of law.   The purchase

price will be the fair market value as agreed upon by the limited

partner and the partnership or else as determined by appraisal.

      If a limited partner undertakes to sell his or her interest,

the partnership has the right of first refusal.   If the

partnership elects to buy the limited partner’s entire interest,

the price to be paid will be the price set forth in the selling

partner’s original proposal, less 15 percent.

      The partnership is to continue until December 31, 2045,

unless it is dissolved sooner by consent of all the partners, by

the withdrawal of a general partner (in the absence of another

general partner to carry on the partnership’s business), or by

entry of a decree of judicial dissolution.

D.   Petitioner’s Gift Tax Returns

      On April 11, 1997, petitioner filed a Federal gift tax

return, reporting her April 19, 1996, gifts of limited

partnership interests, which she valued at $1,040,000.     With this

return she remitted $153,000 of reported gift tax liability.    On
                                 - 6 -

February 6, 1998, petitioner filed an amended Federal gift tax

return, reporting her July 2, 1996, gift to Clarajane of a

29.218462-percent limited partnership interest which had been

omitted from her original 1996 gift tax return.     Petitioner

valued the July 2, 1996, gift at $423,871 and remitted an

additional $177,265 of gift taxes.

E.   Notice of Deficiency

      In the notice of deficiency, issued June 19, 2001,

respondent determined that petitioner’s 1996 gifts of partnership

interests should be increased from the originally reported

$1,040,000 to $3,137,287, resulting in a $998,508 gift tax

deficiency as determined by reference to petitioner’s originally

filed gift tax return.2     Respondent credited the additional

$177,265 that petitioner had paid with her amended gift tax

return as an advance payment of the gift tax deficiency so

determined.

                                OPINION

A.   The Parties’ Positions

      The only issue remaining in dispute is the fair market


      2
       In addition to the valuation issue, the notice of
deficiency also raised these alternative contentions: (1) There
was no economic substance to the partnership’s formation and
operation; (2) the partnership interests should be valued without
regard to any restriction on the right to use or sell the
property within the meaning of sec. 2703(a)(2); and (3)
petitioner made a taxable gift upon the partnership’s formation.
The parties have stipulated that all such alternative contentions
have been “withdrawn”.
                               - 7 -

values of the limited partnership interests that petitioner

transferred during 1996.   The parties generally agree that these

fair market values should be determined by reference to the net

asset values (NAVs) of the partnership’s assets (i.e., its real

estate holdings and marketable securities portfolio), reduced by

minority interest and marketability discounts.   The parties agree

on the NAVs of the partnership’s assets.3   They disagree on the

size of the applicable minority interest and marketability

discounts.   Petitioner bears the burden of proof.   See Rule

142(a).4




     3
       At trial, petitioner agreed to use respondent’s (overall
slightly higher) figures for the NAVs of the partnership’s
securities portfolio: $1,296,882 as of Apr. 19, 1996, and
$1,379,531 as of July 2, 1996. The parties also agree that the
fair market value of the partnership’s real estate holdings was
$1,860,000 at all relevant times. This agreed-upon value of the
real estate is based on an appraisal report dated Jan. 24, 1996,
and represents the market value of the leased fee estate as
determined by an independent appraiser using a discounted
cashflow analysis.
     4
       Effective for court proceedings arising in connection with
examinations commencing after July 22, 1998, if certain
requirements are met, sec. 7491(a) shifts to the Commissioner the
burden of proof with respect to factual issues relevant to
ascertaining the tax liability of the taxpayer. Internal Revenue
Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L.
105-206, sec. 3001(a), 112 Stat. 726. Respondent asserts and
petitioner does not dispute that respondent’s examination of
petitioner’s 1996 gift tax return commenced in 1997.
Accordingly, the burden-shifting provisions of sec. 7491(a) are
inapplicable here.
                                  - 8 -

B.   The Parties’ Experts

      In support of their positions, each party relies on an

expert opinion.    We evaluate expert opinions in light of all the

evidence in the record and may accept or reject expert testimony,

in whole or in part, according to our own judgment.      Helvering v.

Natl. Grocery Co., 304 U.S. 282, 295 (1938); Shepherd v.

Commissioner, 115 T.C. 376 (2000), affd. 283 F.3d 1258 (11th Cir.

2002); Estate of Newhouse v. Commissioner, 94 T.C. 193, 217

(1990).    “The persuasiveness of an expert’s opinion depends

largely upon the disclosed facts on which it is based.”      Estate

of Davis v. Commissioner, 110 T.C. 530, 538 (1998).      We may be

selective in our use of any part of an expert’s opinion.      Id.

      1.   Petitioner’s Expert

      Petitioner’s expert, Robert P. Oliver (Mr. Oliver), is an

accredited appraiser who has been with Management Planning, Inc.

(MPI), since 1975 and has served as its president since 1996.

MPI has been in the business of preparing financial analyses of

closely held businesses and in evaluating securities of such

businesses since 1939.      Mr. Oliver is an author and speaker on

valuation and related topics.

      In his direct testimony, Mr. Oliver concluded that a 7.5-

percent minority interest discount is appropriate with respect to

the marketable securities component of the partnership interests.

With respect to the real estate component, he concluded that a
                                  - 9 -

35-percent minority interest discount should apply to

petitioner’s April 19, 1996, gifts, and a 30-percent minority

interest discount to her July 2, 1996, gift.     In addition, Mr.

Oliver concluded that there should be a 35-percent marketability

discount for each gift.

     2.   Respondent’s Expert

     Respondent’s expert, Dr. Alan C. Shapiro (Dr. Shapiro), is

the Ivadelle and Theodore Johnson Professor of Banking and

Finance and past chairman of the Department of Finance and

Business Economics, Marshall School of Business, University of

Southern California (USC).      He is also an outside director of

LECG, LLC, an economic and financial consulting company.      Prior

to joining USC in 1978, he taught at the Wharton School of

Business at the University of Pennsylvania and has been a

visiting professor at Yale, the University of California at Los

Angeles, the University of British Columbia, and the Stockholm

School of Economics.   He is the author of numerous academic

articles and books on corporate finance.

     In his direct testimony, Dr. Shapiro concluded that the

partnership interests should be valued to reflect an 8.5-percent

minority interest discount and an 8.3-percent marketability

discount.
                                - 10 -

C.   Minority Interest Discount

      In estimating the fair market value of a noncontrolling

interest in a closely held business entity, it may be appropriate

to decrease NAV to reflect lack of control inherent in the

interest.    See, e.g., Estate of Andrews v. Commissioner, 79 T.C.

938, 953 (1982).

      1.   Marketable Securities

      As previously indicated, with respect to the marketable

securities component of the partnership interests, petitioner’s

expert recommends a 7.5-percent minority interest discount,

whereas respondent’s expert recommends an 8.5-percent minority

interest discount.    The parties agree that the difference is not

significant.     At trial, petitioner agreed to use respondent’s

slightly higher net asset values for the marketable securities.

Out of fairness to petitioner, we also use Dr. Shapiro’s slightly

higher 8.5-percent minority interest discount rate.

      2.   Real Estate

            a.   Selection of Guideline Companies

      Both experts agree that publicly traded real estate

investment trusts (REITs) provide an appropriate starting point

for determining the minority interest discount with regard to the

partnership’s real estate holdings.      They disagree, however, on

which REITs should be used for comparison and on the analysis of

the REITs data.
                                - 11 -

                i.    Petitioner’s Expert

     To select his guideline companies, Mr. Oliver started with

over 400 REITs and real estate companies listed in Moody’s Bank

and Finance Manual.    From this initial group of over 400, he

eliminated all but seven companies (three REITS and four real

estate companies) as being insufficiently comparable to the

partnership.5   For instance, he eliminated numerous companies

that did not report current appraisals of their real estate

assets.   He also eliminated other companies that he considered to

have investment characteristics dissimilar to the partnership.

     We are not persuaded that Mr. Oliver’s guideline group is

sufficiently large or made up of companies sufficiently

comparable to the partnership.    “While we have utilized small

samples in other valuation contexts, we have also recognized the

basic premise that ‘[a]s similarity to the company to be valued

decreases, the number of required comparables increases’.”

McCord v. Commissioner, 120 T.C. 358, 384 (2003) (quoting Estate

of Heck v. Commissioner, T.C. Memo. 2002-34).    For the relevant

period, the four real estate companies included in Mr. Oliver’s

guideline group appear dissimilar to the partnership in




     5
       Mr. Oliver’s seven valuation guideline companies included
these three REITS: BRE Properties, Inc.; Cedar Income Fund,
Ltd.; and Meridian Industrial Trust, Inc. His guideline
companies included these four real estate companies: Arbor Prop.
Trust (Arbor); Catellus Dev. Corp. (Catellus); The Rouse Co.
(Rouse); and Shopco Laurel Centre, L.P. (Shopco).
                              - 12 -

fundamental ways that might be expected to skew the price-to-NAV

discounts of the guideline companies upward.6

               ii.   Respondent’s Expert

     Dr. Shapiro started with the “core coverage group” of 62

real estate companies as reported by Green Street Advisors, Inc.

(Green Street).7   He eliminated 10 companies that were not REITs

or that had what he believed were “substantially different

investment characteristics” from the partnership.   The record

does not reveal the identities of the 52 REITs included in Dr.

Shapiro’s guideline group.   Petitioner does not dispute, however,

that they are all REITs–-a consideration of some significance,

given that the parties agree that REITs are an appropriate

starting point for determining the minority interest discount.

     6
        For the relevant period, Catellus and Rouse were, unlike
the partnership, highly leveraged taxable entities. Shopco,
unlike the partnership, was in extreme financial trouble during
the relevant period. Arbor had cut its dividends by 36 percent
from the prior year, suggesting financial difficulty. The record
contains no suggestion that the partnership was experiencing
financial difficulties during any relevant period.

     Although Mr. Oliver purports to make an adjustment to his
guideline data reflecting that the partnership was in a better
financial position than his guideline companies, as explained
below, this factor is simply included in undifferentiated fashion
among various other factors that result in his net adjustment
increasing the partnership’s price-to-NAV discount relative to
his guideline companies.
     7
       Green Street Advisors, Inc. (Green Street), is an
independent research and consulting firm concentrating on REITs
and other publicly traded real estate companies. Respondent
asserts, and petitioner does not dispute, that the REITs included
in the Green Street reports make up 80 percent of the market
capitalization of the overall market of about 200 REITs.
                                  - 13 -

Moreover, we believe the size of Dr. Shapiro’s sample was

sufficiently large to make tolerable any dissimilarities between

the partnership and the REITs in his guideline group.     See McCord

v. Commissioner, supra at 385.

     Petitioner complains that Dr. Shapiro’s guideline group is

inappropriate because Green Street derived NAVs using a valuation

method different from that used to value the partnership’s real

estate.     The valuation method used by Green Street, however,

appears similar to that used to value the partnership’s real

estate.8    In any event, even if the valuation methods are not

identical, insofar as each method is reliable and unbiased (and

petitioner does not contend that either is not), each might be

expected to produce reasonable valuations so as to provide a

meaningful basis for comparing share prices to net asset values.

             b.   Price-to-NAV Discounts

                   i.   Petitioner’s Expert

         To determine the NAVs of his seven guideline companies, Mr.

Oliver reviewed their reported book values and then made what his

expert report tersely describes as “certain adjustments” to

adjust these book values upward to reflect “appraised values


     8
       The parties generally agree that Green Street derived its
NAVs in large part by applying various capitalization rates to
the real estate net operating income generated by each company’s
portfolio. The appraisal report upon which the agreed-upon value
of the partnership’s real estate is based reflects a similar
valuation method based on a discounted cashflow analysis of the
partnership’s net rental income stream.
                               - 14 -

disclosed by management.”   Comparing these NAVs to quoted share

prices, Mr. Oliver concluded that the median price-to-NAV

discount for the guideline companies was 29.3 percent on April

19, 1996, and 20.3 percent on July 2, 1996.

     Mr. Oliver then considered a number of factors that he said

differentiated the partnership from his seven guideline

companies.    On the one hand, he concluded, the partnership had a

“much stronger” financial position than the guideline companies,

which would indicate a relatively smaller price-to-NAV discount

for the partnership interests.    On the other hand, he concluded,

certain factors augured for a deeper price-to-NAV discount:     The

partnership had “very small” real estate holdings compared to the

guideline companies; it was dependent on just one primary tenant;

and as a newly formed entity, it lacked a track record of

operations.   The net effect of such factors, Mr. Oliver

concluded, was that a minority interest investor would value the

partnership’s real estate component at a deeper discount than the

guideline median price-to-NAV discount.   In the final analysis,

he concluded that the appropriate minority interest discount was

35 percent for petitioner’s April 19, 1996, gifts of partnership

interests and 30 percent for petitioner’s July 2, 1996, gift.

     Mr. Oliver has inadequately explained how he derived the

NAVs that are critical to his computation of the price-to-NAV
                              - 15 -

discounts.   The record does not adequately reflect the management

disclosures that led to Mr. Oliver’s upward adjustments of the

companies’ reported book values, with a directly corresponding

upward effect on his price-to-NAV discount computations.9

Moreover, Mr. Oliver has failed adequately to explain the

apparent volatility in his recommended price-to-NAV discounts

over less than 3 months (decreasing from 29.3 percent on April

19, 1996, to 20.3 percent on July 2, 1996).10   It seems most

likely that the volatility results from the small size of his

sample and the inclusion of entities that are insufficiently

comparable to the partnership.11

     Moreover, we are unconvinced of the appropriateness of the

upward adjustments Mr. Oliver made to this volatile guideline

company data to account for factors specific to the partnership.

     9
       Some of these upward adjustments are very large. For
instance, in determining a $25,928,000 NAV for Shopco as of July
2, 1996, Mr. Oliver started with a reported book value of
$4,862,000 and adjusted it upward by $21,066,000.
     10
       When questioned about this volatility at trial, Mr.
Oliver merely observed that the discount rates changed “because
the stock prices of these guideline companies are changing.”
     11
       If we exclude from Mr. Oliver’s guideline group the four
real estate companies that we have found to be dissimilar to the
partnership (admittedly thereby exacerbating the problem of the
smallness of his sample), the median price-to-NAV relationship
for the remaining three REITs is, as of Apr. 19, 1996, a 5.3-
percent discount, and as of July 2, 1996, a .5-percent premium.
As we shall presently see, these data are generally in line with
the price-to-NAV data indicated by Dr. Shapiro’s REITs guideline
group.
                              - 16 -

He does not explain how he quantified each factor, how the

factors were netted, or why the net effect should result in an

upward adjustment to the median guideline company discounts,

rather than a downward adjustment or a wash.12   Nor does Mr.

Oliver explain why this fixed set of factors should result in a

5.7-percent upward adjustment for petitioner’s April 1996 gifts

but a 9.7-percent (70-percent larger) upward adjustment for

another gift less than 3 months later.   It seems most likely that

Mr. Oliver’s upward adjustments are, to some extent, plug numbers

used to justify his ultimate, very round minority interest

discount figures of 35 percent and 30 percent for April 19, 1996,

and July 2, 1996, respectively.

     Mr. Oliver opined that the reasonableness of his recommended

minority interest discounts was confirmed by reference to the

average 36-percent price-to-NAV discount that he calculated for a

select group of 14 publicly registered, nonpublicly traded real

estate limited partnerships (RELPs).13   The record provides,


     12
       More particularly, although Mr. Oliver acknowledges that
the partnership was stronger financially than his guideline
companies and that this factor augurs for a smaller discount for
the partnership interests, he does not explain how he ultimately
concluded that netting this factor against various other factors
results in the particular upward adjustments to his guideline
company discounts referenced above.
     13
       To make these calculations, Mr. Oliver relied on a study
by Partnership Profiles, Inc., of Dallas, Tex., comparing the
NAVs of RELPs with their trading prices in the secondary market.
He used as his guideline group 14 of the 167 RELPs covered by the
                                                   (continued...)
                                 - 17 -

however, an insufficient basis for us to make an informed

judgment as to the partnership’s comparability to these 14 RELPs

or as to the reliability of the methods used to determine NAVs

and market prices for these 14 RELPs.14     In addition, petitioner

concedes that the trading volume of RELPs, which do not trade on

organized stock exchanges, is very low.     Consequently, Mr.

Oliver’s reliance on the published RELP market prices seems

questionable.

                ii.   Respondent’s Expert

     Dr. Shapiro compared Green Street-reported market prices and

NAVs to conclude that for the relevant period, his 52 guideline

REITs traded at a 4.8-percent median price-to-NAV premium.      To be

conservative and to account for the difference that the

partnership, unlike REITs, is not obligated to pay large and

regular distributions to its interest holders, Dr. Shapiro looked

below the median, to the 15th percentile, and began with an .8-

percent discount as of March 25, 1996, and a 1.48-percent premium

as of June 25, 1996.




     13
      (...continued)
Partnership Profiles study.
     14
       In his expert report, Mr. Oliver states that the NAVs of
the 167 RELPs covered by the Partnership Profiles “represent
either estimates by general partners, appraised values determined
by independent appraisers retained on behalf of the partnerships,
or some combination of the two.”
                              - 18 -

     Dr. Shapiro concluded that these 15th-percentile REITs data

should be adjusted downward in petitioner’s favor to remove a

liquidity premium that is inherent in REITs; i.e., a premium that

arises because REIT interests, unlike the assets underlying them,

are publicly traded in reasonably liquid markets.    To gauge the

size of this inherent liquidity premium, Dr. Shapiro referred to

an academic study of private placement discounts for a period

ending just before the valuation dates for the subject

partnership interests.   Bajaj et al., “Firm Value and

Marketability Discounts”, 27 J. Corp. L. 89 (2001) (hereinafter

the Bajaj study).   On the basis of the Bajaj study, Dr. Shapiro

concluded that, for the relevant time period, liquid assets such

as REITs were trading at a premium of about 7.5 percent over

illiquid assets such as the partnership interests.   Subtracting

this 7.5-percent liquidity premium from the previously indicated

15th-percentile REITs data, he concluded that the real estate

component of the partnership interests should be valued to

reflect minority interest discounts of 8.3 percent (-.8 minus

7.5) and 6 percent (1.48 minus 7.5), as of April 19, 1996, and

July 2, 1996, respectively.

     Dr. Shapiro then compared these results to his own study

which suggested that minority interests in holding companies

trade at a discount of 8.5 percent relative to controlling

interests in holding companies.   Adjudging holding companies to
                                - 19 -

be comparable to the partnership in certain respects, he

concluded that to be conservative he would apply this more

favorable 8.5-percent minority interest discount to the

partnership interests.

     Dr. Shapiro’s study on holding companies is not in evidence.

The minimal description of it in his testimony provides an

inadequate basis for us to rely upon it in determining the

appropriate minority interest discount here.

     We agree with Dr. Shapiro that, in order to derive a

minority interest discount factor from REIT price-to-NAV data,

one must account for the liquidity premium inherent in REIT data

prices.     See McCord v. Commissioner, 120 T.C. at 385.   In

quantifying that liquidity premium, however, we hesitate to rely

on a single academic study–-particularly one that Dr. Shapiro did

not participate in preparing and could not elaborate upon first

hand.     We therefore seek common ground between the Bajaj study

and similar studies (the Wruck study and the Hertzel & Smith

study)15 cited therein.

     According to the Bajaj study, the Wruck study found that the

average discount observed in unregistered private placements



     15
       Wruck, “Equity Ownership Concentration and Firm Value:
Evidence from Private Equity Financings”, 23 J. Fin. Econ. 3
(1989); Hertzel & Smith, “Market Discounts and Shareholder Gains
for Placing Equity Privately”, 48 J. Fin. 459 (1993). We discuss
such “private placement” studies more fully in the context of the
marketability discount.
                               - 20 -

exceeded the average discount observed in registered private

placements by 17.6 percentage points.16   The differential

reported in the Hertzel & Smith study is 13.5 percentage

points.17   Those figures are consistent with the differential

reported in the Bajaj study, 14.09 points.18   The average of

these three figures is approximately 15 percent, which yields a

liquidity premium of 17.6 percent (1/[1 - .15]).19

     Using a liquidity premium of 17.6 percent, we arrive at

minority interest discounts of 18.4 percent (.8-percent price-to-

NAV discount less 17.6-percent liquidity premium) for the April

16, 1996, gifts and 16.12 percent (1.48-percent price-to-NAV

premium less 17.6-percent liquidity premium) for the July 2,

1996, gift.    Following Dr. Shapiro’s lead, we round these figures

up slightly to a uniform 19-percent minority interest discount

rate, which we shall apply to the real estate component of the

partnership interests.




     16
       Bajaj et al., “Firm Value and Marketability Discounts,”
27 J. Corp. L. 89, 98 (2001).
     17
          Id. at 99.
     18
          Id. at 107.
     19
       As Dr. Shapiro explains in his expert report: “If an
illiquid security trades at a discount of 7% relative to a liquid
asset, the liquid asset is trading at a premium of about 7.5%
from the illiquid asset [1/(1-7%)].”
                               - 21 -

     3.   Conclusion

     As explained above, we find that an 8.5-percent minority

interest discount is appropriate in valuing the marketable

securities component of the partnership interests and a 19-

percent minority interest discount is appropriate in valuing the

real estate component of the partnership interests.    These

minority interest discount factors yield weighted averages of

14.70 percent and 14.49 percent, as of April 19, 1996, and July

2, 1996, respectively.20   Rounding these weighted averages, we

conclude that an overall minority interest discount




     20
       As of Apr. 19, 1996, these minority interest discount
factors yield a weighted average of 14.70 percent, as calculated
below:
                                        Percent   Percent
          Asset               Percent   Disc.     Weighted
          Class               of NAV    Factor    Average

     Marketable Securities      .41       8.5          3.49
     Real Estate                .59      19.0         11.21

     Total Weighted Average                           14.70

     As of July 2, 1996, these minority interest discount factors
yield a weighted average of 14.49 percent, as calculated below:

                                         Percent   Percent
           Asset               Percent   Disc.     Weighted
           Class               of NAV    Factor    Average

     Marketable Securities      .43       8.5       3.66
     Real Estate                .57       19       10.83

     Total Weighted Average                        14.49
                                - 22 -

of 15 percent is appropriate in determining the fair market value

of each gifted partnership interest.

D.   Marketability Discount

      The experts agree that private placements of publicly traded

stock are an appropriate starting place for determining a

marketability discount here.    The experts disagree on the

appropriate private placements to be considered and what is

measured by those comparisons.    The experts also disagree on the

inferences to be drawn from the partnership’s specific

characteristics.

      1.   Empirical Analysis

            a.   Petitioner’s Expert

      Mr. Oliver compared private-market prices of unregistered

(restricted) shares in public corporations with the public-market

prices of unrestricted but otherwise identical shares in the same

corporations.21    He attributes the price difference to the

restricted shares’ lack of marketability.

     More particularly, starting with a preexisting MPI study

analyzing 197 private transactions in common stocks of actively

traded corporations from 1980 through 1995, Mr. Oliver identified

a guideline group of 39 transactions in unregistered (restricted)


      21
       Restricted shares, because they have not been registered
with the SEC, generally cannot be sold in the public market for a
2-year period. See 17 C.F.R. sec. 230.144(d)(1) (1996). In 1997
the required holding period was shortened to 1 year. See 62 Fed.
Reg. 9242 (Feb. 28, 1997).
                                - 23 -

stock.    He determined that these 39 transactions occurred at

prices reflecting discounts of 5.2 percent to 57.6 percent from

the public-market price, with the median discount being 29.3

percent.

     Thirteen of the 39 companies in Mr. Oliver’s guideline group

appear to be high-technology companies and also to have some of

the highest discounts, ostensibly reflecting greater risk.22     We

are unpersuaded that these 13 companies are comparable to the

partnership.     If these 13 companies are removed from Mr. Oliver’s

guideline group, the median discount of the remaining 26

companies is 19.45 percent.

            b.   Respondent’s Expert

     Dr. Shapiro again relied primarily on the Bajaj study, which

analyzed discounts observed in private placements of registered

shares as well as private placements of unregistered (restricted)

shares.    The Bajaj study concluded that the portion of private

placement discounts attributable solely to impaired marketability

was 7.2 percent.



     22
       These 13 companies and their indicated discounts are:
Electro Nucleonics (24.8 percent); Bioplasty, Inc. (31.1
percent); Sym-Tek Systems, Inc. (31.6 percent); Anaren Microwave,
Inc. (34.2 percent); North Hills Electronics, Inc. (36.6
percent); Newport Pharmaceuticals, Intl., Inc. (37.8 percent);
Quadrex Corp. (39.4 percent); Del Electronics (41 percent); Ion
Laser Technology, Inc. (41.1 percent); Chantal Pharmaceutical
Corp. (44.8 percent); Western Digital Corp. (47.3 percent);
Photographic Sciences Corp. (49.5 percent); and AW Computer
Systems, Inc. (57.3 percent).
                                 - 24 -

     We note initially that, in this context, we prefer Dr.

Shapiro’s “private placement” approach (as embodied in the Bajaj

study) over Mr. Oliver’s more narrow “restricted stock” approach.

See McCord v. Commissioner, supra at 394.    Absent further

explication of the Bajaj study by Dr. Shapiro, however, and

without the benefit of other empirical studies that would tend to

validate the conclusions of the Bajaj study, we are unpersuaded

that a 7.2-percent discount is an appropriate quantitative

starting point for determining the marketability discount

applicable to the gifted interests in this case.

     Looking instead to the raw data from the Bajaj study, we see

that the average discount with respect to its sample of private

placements is 22.21 percent.23    The Hertzel & Smith study, cited

in the Bajaj study, reported an average discount of 20.14 percent

with respect to its sample of private placements.24    Averaging

those two figures, we conclude that a 21-percent marketability

discount is appropriate before adjustments to incorporate

characteristics specific to the partnership.    We note that this

discount rate is very close to the 19.45-percent median discount




     23
          See Bajaj et al., supra at 107.
     24
       Hertzel & Smith, supra at 470. The other private
placement study cited in the Bajaj study, the Wruck study, does
not reveal an average discount for the overall sample.
                                - 25 -

rate that we determined using Mr. Oliver’s methodology and data,

modified as discussed above.

     2.   Further Adjustments

           a.   Petitioner’s Expert

     Mr. Oliver ultimately concluded that the marketability

discount applicable to the partnership interests should be 35

percent, or 5.7-percent higher than the 29.3-percent median

discount that he determined by reference to his private placement

sample.   He made this upward adjustment to his recommended

marketability discount on the basis of the following

considerations:   The partnership is closely held with no real

prospect of becoming publicly held; the partnership is relatively

small and little known; there is no present market for the

partnership interests; the partnership agreement requires the

partnership to be offered the right of first refusal to purchase,

at a 15-percent discount, limited partnership interests; and the

partnership agreement permits a transferee of a limited

partnership interest to become a substituted limited partner only

with the general partners’ consent.

           b.   Respondent’s Expert

     Dr. Shapiro ultimately concluded that the marketability

discount applicable to the partnership interests should be 8.3

percent, or 1.1-percent higher than the 7.2-percent discount that

he said was indicated by the Bajaj study.   In arriving at this
                                - 26 -

upward adjustment, he considered a number of factors.     He

acknowledged that because the partnership is not scheduled for

dissolution until 2045, the partnership interests are less

marketable than restricted securities, thereby justifying some

additional amount of discount.     As a countervailing

consideration, however, he opined that the appraised value of the

partnership’s real estate already incorporates a lack-of-

marketability discount.     He also acknowledged provisions of the

partnership agreement that generally prevent the assignee of a

limited partner’s interest from becoming a partner and that

require a limited partner who wished to sell his or her entire

interest to offer the partnership a right of first refusal at a

15-percent discount.   He concluded, however, that these

restrictions had little effect on marketability.     He observed,

for instance, that a limited partner could easily circumvent the

15-percent discount associated with the right of first refusal by

selling less than her entire interest.

          c.   Conclusion

     On the basis of all the evidence and using our best

judgment, we conclude that a 3-percent upward adjustment in the

marketability discount rate (as determined by reference to the

previously described empirical studies) is appropriate to

incorporate characteristics specific to the partnership.

Consequently, we find that a discount for lack of marketability
                              - 27 -

of 24 percent is appropriate in determining the fair market value

of each limited partnership interest that petitioner transferred

in 1996.

E.   Conclusion

      We conclude that for April 19, 1996, the fair market value

of the 69.4815368-percent gifted partnership interests is

$1,417,006, computed as follows:

      Total NAV as of 4/19/96                    $3,156,882
      1 percent of NAV                               31,569
      Less: 15-percent minority interest
        discount                                    (4,735)
                                                    26,834
      Less: 24-percent marketability discount       (6,440)

      FMV of 1-percent interest                     20,394
      FMV of 69.4815368-percent interests        1,417,006

      We conclude that for July 2, 1996, the fair market value of

the 29.2184632-percent gifted partnership interest is $611,455,

computed as follows:

      Total NAV as of 7/2/96                     $3,239,531
      1 percent of NAV                               32,395
      Less: 15-percent minority interest
        discount                                    (4,859)
                                                    27,536
      Less: 24-percent marketability discount       (6,609)

      FMV of 1-percent interest                     20,927
      FMV of 29.2184632-percent interest           611,455


      To reflect the foregoing,


                                           Decision will be entered

                                    under Rule 155.
