                        T.C. Memo. 2001-128



                      UNITED STATES TAX COURT



              ESTATE OF DUILIO COSTANZA, DECEASED,
           MICHAEL J. COSTANZA, EXECUTOR, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16059-97.                       Filed June 4, 2001.


     Charles L. McKelvie and Rita A. Baird, for petitioner.

     Robert S. Bloink and Meso T. Hammoud, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   The Estate of Duilio Costanza, Deceased,

Michael J. Costanza, Executor, petitioned the Court to

redetermine respondent's determination of a $297,062 deficiency

in its Federal estate tax.   Following concessions, we must decide

whether the gross estate of Duilio Costanza (decedent) includes,

or whether decedent made a taxable gift of, any or all of the
                                - 2 -

value of certain real estate conveyed by his trust in exchange

for a self-canceling installment note (SCIN).   Unless otherwise

indicated, section references are to the Internal Revenue Code

applicable to the date of decedent's death.   Rule references are

to the Tax Court Rules of Practice and Procedure.

                         FINDINGS OF FACT

     Some facts have been stipulated and are so found.   The

stipulation of facts and the exhibits submitted therewith are

incorporated herein by this reference.   Decedent died on May 12,

1993, and the executor of his estate was his son, Michael.

Decedent resided in Burton, Michigan, at the time of his death,

and Michael resided in Grand Blanc, Michigan, when the petition

was filed.

     Decedent was born in Italy on October 21, 1919.   He came to

the United States and worked as a welder for General Motors,

Incorporated (GM) until 1966.   Following his retirement from GM,

he and his wife, Mary Ann, opened an Italian restaurant called

Latina Restaurant and Pizzeria, Inc., (Latina restaurant) on

property they owned in Flint, Michigan, at 1370 Bristol Road

West.   The property was an irregularly shaped parcel of land on

1.91 net acres with 65 feet of frontage on Bristol Road and one

curb cut.

     During the early 1980's, decedent and his wife built a small

retail/office plaza, called "Bristol West", on property they
                                 - 3 -

owned in Flint at 1388 Bristol Road West.    The net area of this

property was 1.87 acres on a rectangular-shaped plot.   It had 178

feet of frontage on Bristol Road West, with a 28-foot curb cut.

The retail office plaza was constructed so that its front was

perpendicular to Bristol Road.

     Both decedent and his wife established revocable trusts for

their property.   Decedent formed his trust on September 30, 1986,

with Michael as the trustee and the residual beneficiary.   The

terms of the trust permitted decedent to withdraw all or part of

the principal of the trust upon notice to Michael, as trustee.

     Decedent’s wife died on May 24, 1991.   At that time, her

revocable trust owned the property on which the Latina restaurant

and the retail/office plaza were located.    Appraisals performed

in the process of settling her estate indicated that the

restaurant property was worth $330,000 on December 20, 1991, and

that the retail/office property was worth $500,000 on May 24,

1991.

     In February 1992, GM announced plans to close its V-8 engine

plant in Flint, Michigan.   The plant employed over 4,000 persons

and was located one-half mile from the Latina restaurant and the

retail/office plaza.   The announcement received substantial

coverage in local newspapers.

     Around this time, decedent decided to retire on income

produced by his investments and return to Italy.   Accordingly, in
                               - 4 -

October 1992, when he was 73 years old, he sought financial

advice from his attorney, John M. Spath.   Mr. Spath suggested

that decedent’s trust sell the restaurant and retail/office

properties to Michael in exchange for a SCIN.    The key component

of the SCIN would be its provision that it would be canceled, and

no more payments would be due, if decedent died before it was

fully paid.   Mr. Spath suggested that this arrangement would both

achieve decedent’s retirement goals and minimize the amount of

estate tax that would be payable on his death.

     Decedent accepted his attorney’s advice, and the transaction

was carried out in December 1992 and January 1993.   Michael

executed a SCIN in the face amount of $830,000 in exchange for

the two properties.   The terms of the SCIN provided that Michael

would repay it in monthly installments over a period of 11 years.

The SCIN provided for the payment of interest at a rate which

increased every 24 months.   The initial interest rate was 6.25

percent, and the rate increased by one half percent at each 24-

month interval, until reaching a final rate for the last 12

months of 8.75 percent.   The SCIN also provided that, if decedent

died before the principal and interest had been paid, it would be

canceled and no more payments would be required.

      Michael’s obligations under the SCIN were secured by a

registered mortgage on both properties.    The documents effecting

the transaction, including the quitclaim deeds, the mortgage and
                                 - 5 -

the SCIN, are all dated December 15, 1992.    Michael signed these

documents both as the purchaser in his capacity as trustee of his

own revocable trust and as the seller in his capacity as trustee

of decedent’s revocable trust.    The parties did not, in fact,

execute the documents until after that date--late in December

1992 or early in January 1993.

     In 1978, decedent had a myocardial infarction.    Decedent

underwent successful single artery heart bypass surgery at the

University of Michigan in 1982.    Decedent had been suffering from

angina and severe coronary disease since at least April 1991.      In

the winter of 1992, decedent traveled to California, seeking to

spend time in a warmer climate.    While he was in California he

developed chest pains and returned home.    He entered the hospital

in Flint on January 25, 1993, for testing.    The resulting

diagnosis on January 29, 1993, indicated that decedent suffered

from angina pectoris, congestive heart failure, and

atherosclerotic heart disease.    The diagnostic report explained

his prognosis as "Poor.   Patient and family are aware."   Decedent

and Michael consulted with doctors and decided that decedent

would again have to undergo bypass surgery.

      The quitclaim deeds and mortgages for the restaurant and

shopping mall were registered in February 1993.    Michael did not

make the first three payments required by the SCIN in a timely

fashion.   In March, he made out three checks, each for the
                                - 6 -

agreed-upon monthly payment of $8,710.    He altered the dates he

had originally written on all three checks, to indicate that they

had been written on January 1, 1993, February 2, 1993, and March

1, 1993.    He also wrote memorandum lines on the checks to

indicate the month for which the payment was intended.    Michael,

in his capacity as trustee of decedent’s trust, deposited all

three checks into decedent’s trust account on March 8, 1993.

After writing these three checks, Michael did not make any other

payments on the SCIN.

     Decedent underwent a second coronary bypass operation on May

11, 1993.    He died the next day "in the postoperative period

following his re-do coronary artery bypass grafting” having had

“a severe toxic reaction, presumably to the Protamine required to

reverse his heparinization”.

     Decedent’s Federal estate tax return indicated that no tax

was due.    The return identified the SCIN and included a copy as

an exhibit.   The return indicated that the value of the SCIN was

zero.   It stated that "pursuant to the terms of the note the note

was cancelled upon the death of Duilio Costanza."

     Respondent issued a timely notice of deficiency proposing an

increase of $803,868 in decedent’s gross estate.    The notice

explained that the proposed increase reflected respondent’s

conclusion that “[T]he sale between decedent’s trust and

Michael’s trust (the decedent’s son) is not recognized because it
                               - 7 -

is not a bona fide sale and because full and adequate

consideration was not received”.   Through an amendment to answer,

respondent asserted that the sale transaction, if valid, was a

bargain sale and that decedent's adjusted taxable gifts should be

increased under section 2001(b)(1)(B) by the amount of the

bargain component.

                              OPINION

     Section 2512(b) provides that where property is transferred

for less than an adequate or full consideration in money or

money’s worth, then the amount by which the value of the property

exceeds the value of the consideration shall be deemed a gift and

shall be included in computing the amount of gifts made during

the calendar year.   Section 2001(b) provides that the value of a

decedent’s lifetime adjusted taxable gifts (other than gifts

includible in the gross estate of the decedent) shall enter into

the computation of the Federal estate tax.

     We must decide whether decedent’s gross estate, or

adjustable taxable gifts, includes any or all of the value of the

Latina restaurant and Bristol West retail/office properties that

were conveyed by decedent’s trust in exchange for the SCIN.    A

SCIN is a debt obligation that by its terms is extinguished at

the death of the seller-creditor, with the remaining note balance

canceled automatically.   The asserted advantage of a SCIN over an

ordinary installment sale is that if the seller dies before the
                                - 8 -

expiration of the installment term the remaining value of the

installments are not included in the seller’s estate.1

     Intrafamily transactions are subject to rigid scrutiny, and

transfers between family members are presumed to be gifts.   A

sale of property from a parent to a child in exchange for an

installment obligation will not be "bona fide" absent an

affirmative showing that there existed at the time of the

transaction a "real expectation of repayment and intent to

enforce the collection of the indebtedness."    Estate of Van Anda

v. Commissioner, 12 T.C. 1158, 1162 (1949), affd. 192 F.2d 391

(2d Cir. 1951).    There we explained that "the giving of a note or

other evidence of indebtedness which may be legally enforceable

is not in itself conclusive of the existence of a bona fide debt.

* * *    It must be clearly shown that it was the intention of the

parties to create a debtor-creditor status."    Id.

     Here, the documents giving effect to the transfer were all

executed after December 15, 1992, but were backdated to suggest

that they had been signed on that date.   Although the SCIN, dated

December 15, 1992, required the initial payment to be made on

January 1, 1993, there is no evidence that the SCIN had even been



     1
        See Estate of Moss v. Commissioner, 74 T.C. 1239 (1980);
Banoff & Hartz, "New Tax Court Case Expands Opportunities for
Self-Canceling Installment Notes", 76 J. Taxn. 332 (1992); cf.
Estate of Frane v. Commissioner, 98 T.C. 341 (1992), affd. in
part and revd. in part 998 F.2d 567 (8th Cir. 1993); Estate of
Musgrove v. United States, 33 Fed. Cl. 657 (1995).
                               - 9 -

executed before January 6, 1993.   Michael made only the first

three payments required by the terms of the SCIN, but he did not

make those payments until March 8, 1993.   All three payments were

untimely.

     In an affidavit dated December 29, 1998, Michael stated: "I

was fully able and willing to make all payments due under the

Mortgage Note on a timely basis, but was instructed by my father

to make the payments on a quarterly basis to limit the number of

bank transactions."   The only time Michael made such a payment,

however, Michael executed three separate checks, all of which

were separately processed by the drawee bank.   Additionally,

Michael changed the dates he had written on all three checks to

match memorandum lines on the checks indicating that each was

intended to reflect payment for one of the first three months of

1993.   Moreover, although his father lived until May 12, 1993,

Michael did not make any other payments on the SCIN.

     These circumstances persuade us that the conveyance of the

restaurant and retail/office properties from decedent’s trust to

Michael Costanza’s trust was not a bona fide transaction for full

and adequate consideration.

     Michael, as trustee of his father’s trust, executed the

documents necessary to transfer that trust’s interest in the

restaurant and shopping center properties to himself.   Although

he did so with the full understanding and consent of his father,
                              - 10 -

the transfer took place without an objective showing by either of

them that they meant to enforce the payment provisions of the

transfer.   To the contrary, the haphazard and, at times,

contradictory manner in which Michael undertook to make payments

to his father falls short of establishing that there was a valid

arm’s-length sale of the commercial properties involved.    The

situation is instead analogous to one we addressed in Estate of

Labombarde v. Commissioner, 58 T.C. 745, 754-755 (1972), affd.

per order (1st Cir. Aug. 21, 1973), where a widow transferred her

interest in some real estate to her children.   There we said:

          While unquestionably money or money’s worth was
     received by decedent during her lifetime, we are
     constrained to hold that the purpose of the payment was
     not to create a debt but rather in furtherance of the
     children’s admirable desire to see their widowed mother
     live out her days in a style to which she was
     accustomed. As is understandable in the exemplary
     family situation, there simply was no intent to create
     a bona fide debt.

      Under these circumstances, we believe that the provisions

of section 2512(b) are dispositive.    As respondent has asserted

in his Amended Answer, decedent’s transfer to Michael was a gift

to the extent that it exceeded the consideration actually paid.

See Commissioner v. Wemyss, 324 U.S. 303, 306 (1945);

Hollingsworth v. Commissioner, 86 T.C. 91, 96 (1986); Harwood v.

Commissioner, 82 T.C. 239, 257 (1984), affd. without published

opinion 786 F.2d 1174 (9th Cir. 1986).
                               - 11 -

     We do not agree with respondent’s original assertion that,

after the transfer of the properties, decedent retained the power

to revoke the transfer, thus requiring the inclusion of their

value in his gross estate under section 2038.   The documents in

evidence do not show that decedent retained such a power.   Nor

does the evidence support a finding that in executing the

transfer Michael violated his duties as a trustee, thus rendering

the transfer revocable by operation of law.   This case is thus

distinguishable from those cases cited by respondent wherein an

attorney made unauthorized gifts to the decedent’s heirs,

rendering such gifts revocable under section 2038.   Cf. Estate of

Swanson v. United States, 46 Fed. Cl. 388 (2000).2

     Our conclusion that the transfer was a gift requires that we

ascertain its value.   That is, we must decide the extent to which

the value of the properties transferred exceeded the

consideration paid.    We believe that the properties were worth at

least $843,000 on December 15, 1992, the date of their sale.3

     Both parties have offered expert valuation testimony and

exhibits to establish the value of the Latina restaurant and



     2
      We note that respondent has not argued on brief that the
value of the gifts should be included in decedent’s gross estate
under sec. 2035, and we do not decide that issue.
     3
      Although the actual sale may have taken place within a few
weeks after Dec. 15, 1992, there is no basis to conclude that the
passage of those few weeks would have affected the properties’
value significantly.
                              - 12 -

Bristol West retail office properties.    We have wide discretion

when it comes to accepting expert testimony.    Sometimes, an

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

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

v. Commissioner, 106 T.C. 274, 302 (1996). Other times, he or she

will not. See, e.g., Mandelbaum v. Commissioner, T.C. Memo. 1995-

255, affd. without published opinion 91 F.3d 124 (3d Cir. 1996).

We weigh an expert's testimony in light of his or her

qualifications and with proper regard to all other credible

evidence in the record.   See Helvering v. National Grocery Co.,

304 U.S. 282, 294 (1938).

     Petitioner claimed that the value of the Latina restaurant

property was $330,000 on December 15, 1992.    Petitioner did not

present testimony to support that value.    Petitioner instead

relied upon the written appraisal prepared in 1991 by Walter P.

Schmidt incident to a valuation of the estate of decedent’s wife.

Mr. Schmidt’s list of qualifications indicates that he has 2

years of college education at Flint Junior College and a real

estate certificate from the University of Michigan.    He is a

"State Certified Real Estate Appraiser" and has listed

substantial experience in valuing real estate.

     Respondent’ expert, Mark Bollinger, studied packaging

engineering at Michigan State University.    He is a member of the

Appraisal Institute, and he also is a "State Certified Real
                               - 13 -

Estate Appraiser”.   The qualification sheet attached to his

reports indicates that he has passed examinations of various

subjects relating to appraisal and that he has extensive

experience in valuing real estate.

     Mr. Schmidt and Mr. Bollinger used similar methods to value

the restaurant property.    Each appraised the property on the

basis of sales of comparable properties, on the basis of

capitalized earnings, and on the basis of the cost needed to

replace the properties, less depreciation.

     Mr. Schmidt determined that an appropriate value for the

building, based upon comparable sales of similar properties, is

$42.50 per square foot.    Mr. Schmidt’s report multiplied the

$42.50 figure by the 6,474 total square feet of the building’s

floor space to arrive at a value of $275,145 for the building.

He also determined that the value of the property without

improvements was $55,000.    The total figure, rounded off, was

$330,000.

     In preparing his valuation of the restaurant property for

respondent, Mr. Bollinger consulted Mr. Schmidt’s 1991 valuation

report and township assessment cards.    He also performed a visual

inspection of the exterior of the building in January 2000.      He

was not asked to perform interior inspections.    Because the

property was being leased to its owners, he did not inquire into

what the leasing arrangements for the building located on the
                               - 14 -

appraised property were in 1992.    Mr. Bollinger opined that the

comparative sales approach produced the most reliable data in the

case of a restaurant.   He determined that this approach supported

a value of $388,000 for the restaurant and the land upon which it

was located.

     Three of the four comparable sales used by Mr. Bollinger

were also cited in Mr. Schmidt’s 1991 appraisal (#2,3,5).    The

most recent of these occurred more than 3 years before the

valuation date.   The fourth property (#1) used by Mr. Bollinger

sold in 1992, closer to the valuation date.    We do not find that

property comparable to decedent’s property for a number of

reasons.   The fourth property had 29,140 square feet of interior

space, almost four times larger than the property being valued

(6,474 square feet).    The fourth property was located on 4.18

acres of land as compared to the subject property, which was

located on 1.9 acres.   The fourth property was zoned C-3 "highway

service", had a frontage of 447 feet, and contained a separate

retail store.   It also had 125,000 square feet of asphalt parking

and 5,800 square feet of concrete walks and patios.   In contrast,

the subject property was zoned C-1, "local business district",

had a frontage of only 64 feet, contained no additional retail

facilities, and had 10,941 square feet of parking.

     The principal difference between the two comparable sales

valuations (other than the inclusion of the 1992 sale which we
                               - 15 -

have found to be an improper comparison) arises from the method

of valuing the vacant land as a constituent of overall value.

     We have some reservations about Mr. Schmidt’s valuation of

$55,000 for the land alone.    This value reflects a value of 75

cents per square foot for the land.     No other comparable property

reflected land values that low.    In order to make the cost of

other vacant properties "comparable" to the subject property, Mr.

Schmidt subjected their square-foot values to discounts ranging

between 55 and 80 percent.    He based these discounts upon his

perception that decedent’s property was inferior in size and

location.   His report does not justify discounts of that

magnitude, and, as noted, he was not called to testify in support

of his valuation.

     Respondent’s witness, Mr. Bollinger, using comparable

properties, found that the value of the land alone was $125,000.

When he valued comparable restaurant properties, however, he

amalgamated their land and building costs then divided the total

by the square footage of the buildings to arrive at a value per

square foot.   On the basis of these calculations, he determined

that an appropriate value for the subject property was $60 per

square foot.   We believe that Mr. Bollinger’s method does not

accurately reflect the underlying vacant land values and thus

distorts the total value calculation.    The Latina restaurant was

situated on a relatively large piece of land.    Most of the
                               - 16 -

comparable properties had a lesser amount of land when compared

to the area of the restaurant buildings located on those

properties.   The per-square foot value of their properties was

therefore somewhat higher.    Using figures based upon these

comparable sites thus tended to overstate the square-foot value

of the Latina restaurant.

     The value of the land upon which the restaurant was located

had a street frontage of only 64 feet, compared to frontages of

comparable properties of 147 feet, 150 feet, and 197 feet.      Mr.

Schmidt’s downward adjustments of 55 to 80 percent for comparable

properties, however, is not justifiable.    On the other hand,

while Mr. Bollinger’s valuation does take into account the

inferior frontage, it does not do so enough.    Having considered

both reports, we believe that the value of the land, separate

from the value of the improvements upon it, was $100,000 as of

the valuation date.

     The two appraisers’ values of the improvements on the

property are very close.    Mr. Schmidt arrived at a value of

$275,145.   Similarly, when Mr. Bollinger’s valuation of the land,

some $125,000, is subtracted from his overall appraisal of the

property of $388,000, the resulting value of the improvements is

$264,000.   We conclude that the building was worth $270,000.

Accordingly we believe that, based on comparable sales, the
                              - 17 -

overall value for the restaurant property, both land and

improvements, was approximately $370,000 on December 15, 1992.

     In their capitalization of income analyses, both appraisers

concluded that an independent owner of the property would expect

an effective rate of return of 11 percent.    Mr. Schmidt

estimated, in 1991, that the building would produce rentals of

$7.50 per square foot.   After adjusting for anticipated vacancies

and expenses, he arrived at a value of $335,000.    Mr. Bollinger’s

later report assumed the same space should rent at $8 per square

foot.   After adjustments, he arrived at a value of $385,000.     Mr.

Schmidt’s appraisal relies on leases negotiated in 1985 and 1982.

Mr. Bollinger’s higher rate is based upon a comparison with three

other restaurants that were leased in 1991 and 1992.    We find

that Mr. Bollinger can justify the higher rental rate based upon

more recent data.   Nevertheless, both appraisers use other

figures in the capitalization process that seem somewhat

arbitrary.   For example, they assume widely differing vacancy

rates and expenses.   Each appraiser’s assumptions operate to

support that appraiser’s comparable sales valuations.    Neither

appraiser, however, justifies these assumptions in any meaningful

detail.   We believe under the facts herein that their comparable

sales analyses are more reliable.

     The same considerations apply to the appraisers’ use of the

cost-less-depreciation method of valuation.    Mr. Schmidt arrives
                              - 18 -

at a valuation, using this cost approach, of $340,000, an amount

that approximates his comparable sales value.   Mr. Bollinger’s

cost replacement approach yields a value of $390,000, which is

close to his comparable sales value.   As was the case with

comparable sales, the principal difference in the two cost

analyses arises from the different assumed values for the

underlying land.   Mr. Schmidt values the underlying land at

$55,000, and Mr. Bollinger values it at $125,000.   As noted

above, we have found the value of the underlying land to be

$100,000.   When we substitute this value into each expert’s cost-

replacement analysis, we arrive at values that are close to

$375,000.   We believe, however, that factors used in the cost-

replacement analyses are more speculative than those in the

comparable sales analyses.   We conclude that the two appraisers’

cost replacement valuations are not as accurate as the $370,000

value derived by way of the comparable sales method.

     We are concerned, however, that neither appraiser has taken

into account the closing of General Motors’ V-8 engine plant.

This facility, which employed more than 4,000 people, was located

half a mile from decedent’s restaurant.   Mr. Schmidt’s appraisal

does not take this event into consideration because he prepared

the report before General Motors announced the closure.   Mr.

Bollinger’s appraisal concluded that "Displacement of employees
                              - 19 -

caused by downsizing and/or closing of plants is typically

absorbed in other local plants, based on seniority."

     We think that Mr. Bollinger’s conclusions are too

optimistic.   They fail to take into account the close proximity

of the V-8 engine plant to the subject property.   The closing

would affect business because of the decrease in employee

traffic, the absence of visitors to the plant, and the effect the

closing would have on other local businesses.   The publicity that

accompanied the announcement would have alerted any buyer of

commercial real estate of the proposed plant closing.    Any such

buyer would expect to pay less for the property after the

announcement than before.   We believe that the announcement of

the plant closing justifies a 10-percent discount to the value of

the property.   We therefore conclude that the $370,000 value,

which was made without consideration of the General Motors

announcement, should be reduced to $333,000.

     Both petitioner and respondent presented expert testimony

and expert reports to support their valuations of Bristol West

retail/office property.   Again, both experts utilized a sales

comparison approach, a capitalization of income approach, and a

cost replacement approach to determine the value of the subject

property.

     Petitioner’s expert in this regard was David K. Rexroth, who

prepared a report and testified at the trial of this case.   Mr.
                               - 20 -

Rexroth graduated with a B.A. degree from Olivet Nazarene

University in Kankakee, Illinois.    He is a State-certified

appraiser in the State of Michigan and a member of the Appraisal

Institute.    He has been a full-time real estate appraiser since

1973.    Mr. Bollinger was again the appraiser who prepared a

report and testified on behalf of respondent.

     Mr. Rexroth examined comparable sales of small retail/office

properties and concluded that a fair price for the subject

property would be $44.75 per square foot of building space.     This

amount, multiplied by the 11,000 square feet of the subject

retail/office building, yielded a value of $492,000 at the time

of sale.

        Mr. Bollinger also examined comparable sales and arrived at

a value of $52 per square foot, yielding a comparable value of

$572,000 for the subject property.

     Mr. Rexroth and Mr. Bollinger reviewed sales of three of the

same closely comparable properties.     Their separate evaluations

of two such properties were fairly consistent.    Mr. Rexroth

generally applied a more substantial discount.    With respect to

the third common comparable property, Mr. Rexroth and Mr.

Bollinger went different ways.    Mr. Rexroth applied a discount to

the sale price, while Mr. Bollinger added a premium.    Their

difference is principally attributable to differing evaluations

of the property’s location, access, and visibility.
                                - 21 -

     Having reviewed each of their determinations, we believe

that a price of $48 per square foot as of December 15, 1992, is

appropriate.   Mr. Rexroth’s aggregate value of $44.75 reflects

substantial discounts that he applied to the comparable

properties, based upon their allegedly superior locations.     We

believe that these discounts are too pessimistic.    On the other

hand, Mr. Bollinger’s valuation gives insufficient consideration

to the perpendicular orientation of the retail plaza building on

its lot.    This orientation had an adverse impact upon its value.

Having considered both reports, we believe that the retail office

plaza would have sold for $48 per square foot on December 15,

1992, or a total of $528,000.

     Each party also performed a capitalization-of-earnings

approach.   For petitioner, Mr. Rexroth found that the shopping

center building property ought to generate rentals of $8.50 per

square foot per year, or a total of $93,500.    From this amount,

he deducted $25,750 to reflect expenses and vacancies, producing

an annual net income $67,750.    He further concluded that a

capitalization factor of 11.5 percent was appropriate, but,

because he determined that the property paid too much in local

taxes, he increased that factor to 14.5 percent.    The presumed

net rentals of $67,750, capitalized at the 14.5-percent rate,

would produce a value of $467,500.
                              - 22 -

     For respondent, Mr. Bollinger determined that the property

should earn $8.75 per square foot and be capitalized at a rate of

11 percent.   While he shared Mr. Rexroth’s conclusion that the

property paid too much in local taxes, Mr. Bollinger did not

increase the capitalization rate on that account.   Instead, he

adjusted the amount of anticipated future expenses.    From

projected annual earnings of $96,250, he deducted expenses of

$28,272, and he deducted an additional $4,813 representing a 5-

percent vacancy rate.   The resulting annual income of $63,165,

capitalized at an 11-percent rate, produced a value of $575,000.

     Initially, we believe that the assumed vacancy rates

determined by each appraiser are unrealistic.   Mr. Rexroth

forecast a vacancy rate of 15 percent over the entire forecast

period.   He noted the building’s unusual configuration on its lot

and the fact that the area’s actual gross rental for the previous

5 years reflected an abnormally higher vacancy rate.    The vacancy

rate used in Mr. Rexroth’s calculation is somewhat pessimistic.

The vacancy rate closest in time to the sale date is attributable

to the departure of a tax-preparation service from the building’s

largest unit.   There is no reason to assume that the largest

office site would be the one most often vacant.   Although

occasional vacancies could be expected, they would be more likely

to occur in the more numerous smaller units.
                              - 23 -

     We also disagree with the respondent’s assumptions on the

projected vacancy rate.   Mr. Bollinger assumed a 5-percent rate.

We find this estimate to be overly optimistic.    Taking into

account its prior history, there is no indication that the

building would be unusually successful in keeping tenants.      On

balance, we think that the projected gross income of the shopping

mall should be reduced by a proposed vacancy rate of 12 percent,

in addition to other expenses.   Mr. Bollinger also computed a

"leased fee" projection, taking into account current tenants’

rentals, plus anticipated fees, expenses, and vacancies over an

11-year period.   He noted that, at the time of valuation, the

building had an 18.2-percent vacancy rate.   This vacancy rate was

constant from April 1991 until December 1992.    Mr. Bollinger,

however, estimated a first year vacancy rate of 10 percent,

reducing to a 5-percent rate in all subsequent years.    As noted

above, however, we find such a low projected vacancy rate to be

unrealistic.

     Mr. Rexroth and Mr. Bollinger both opine that the property

is over-assessed for local taxation.   Unlike Mr. Bollinger, Mr.

Rexroth makes an adjustment for the increased expense caused by

the over assessment by adjusting the capitalization rate.    (“Thus

the current tax rate applicable to the tax year has been built

into the Overall Capitalization Rate”.)   Mr. Rexroth concludes

that the capitalization rate of 11.5 percent should be adjusted
                               - 24 -

upwards by 2.998 percent to account for the over assessment.     No

justification for the magnitude of the increase is given in the

report.    We can find no justification for this adjustment and are

unpersuaded that this methodology is correct.

     In contrast, Mr. Bollinger has assumed that the new owner

would seek to have local officials revalue the property with a

resulting decrease in property taxes.

     We believe that Mr. Bollinger’s analysis more properly

reflects the projected net annual earnings of the shopping mall

property, with the exception of his assumption that the vacancy

rates would be reduced drastically.     When we include a vacancy

rate of 12 percent in arriving at a number for projected net

annual income, we arrive at a figure of $56,428.

     We also believe that Mr. Rexroth’s capitalization figure of

11.5 percent is closer to the mark than Mr. Bollinger’s 11

percent.   The shopping mall was slightly more disadvantaged in

its location on its site when compared to the Latina restaurant.

We therefore believe that Mr. Rexroth’s slightly higher

capitalization rate is appropriate to use in valuing the shopping

mall.   Our conclusion produces the result that, under the

capitalization-of-earnings approach, the value of the shopping

mall property is $490,000.

     Finally, each appraiser utilized similar methods to produce

a cost replacement analysis for the retail shopping property.
                              - 25 -

Petitioner’s witness Mr. Rexroth determined that it would cost

$602,000 to replace the shopping center building and site

improvements.   From this amount, he deducted approximately

$193,000 to reflect depreciation and obsolescence.   He then added

back his estimate of the value of the land upon which the

shopping mall was located to arrive at a cost value of $503,000.

     On behalf of the respondent, Mr. Bollinger presented a

valuation of $639,000 for the building and other improvements, a

deduction of $173,000 for depreciation and obsolescence, and an

addition of $120,000 reflecting his valuation of the vacant land.

His cost-basis total valuation was $585,000.

     We believe that Mr. Rexroth’s valuation is closer to the

mark.   His higher "external" obsolescence figure reflects the

property’s historical difficulty in filling vacancies and in

finding retail tenants.   Taking this form of obsolescence into

account, we think that a fair cost valuation would be $530,000.

     We have concluded that a proper valuation for the property

under the comparable sales valuation method is $528,000.    The

capitalized earnings approach yields a value of $490,000.     Under

the replacement cost method, the proper value is $530,000.    Of

the three methods, we give the greatest weight to the capitalized

earnings approach.   We agree with Mr. Bollinger’s opinion that

the income approach resulted in the most accurate valuation

because an “investor purchasing this building would be basing it
                                - 26 -

[decision to purchase] on the actual lease [arrangements].”     We

conclude that the value of the retail office plaza on the

valuation date was $510,000.

     In contrast to the restaurant property, however, we do not

believe that the value of the retail/office plaza should be

discounted to reflect the announced closing of the nearby General

Motors plant.   The tenants of the retail/office plaza were

principally those who rented office space-–a law firm, a real

estate office, a State agency.    They were the type of businesses

that operated by making appointments with clients; the volume of

their businesses was not likely to be affected by the closing of

a nearby industrial facility.

     We have found that, on December 15, 1992, the restaurant

property had a value of $333,000, and the retail/office plaza had

a value of $510,000.   We therefore hold that the Latina

restaurant property located at 1370 Bristol Road and the Bristol

West retail shopping plaza property located at 1388 Bristol Road

had a combined fair market value of $843,000 as of December 15,

1992.   When the value of the consideration paid, a total of

$26,130, is subtracted, the value of the gift is $816,870.

     In view of the foregoing and because of concessions,

                                          Decision will be entered

                                     under Rule 155.
