                         T.C. Memo. 2000-3



                      UNITED STATES TAX COURT



               ESTATE OF WILLIAM BUSCH, DECEASED,
               MARY DANA, EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16441-97.            Filed January 5, 2000.


     Nickolas P. Tooliatos II and Erin Kvistad (specially

recognized), for petitioner.

     Elizabeth L. Groenewegen and Rebecca T. Hill, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent determined that there should be

an increase in the reported value of certain real property

resulting in a $1,974,500 Federal estate tax deficiency.

Petitioner disagrees with respondent’s value determination and
                                - 2 -

also contends that the value reported on the estate tax return

was overstated and that the estate should be entitled to a refund

due to an overpayment of estate tax.     We consider here the fair

market value of the realty and the applicability and/or amount of

any fractional discount.

                           FINDINGS OF FACT1

     William Busch (decedent) a resident of California, died on

February 26, 1993, at the age of 98.     The executor and personal

representative of the estate, Mary E. Dana, resided in California

at the time the petition was filed.     In a timely filed estate tax

return, decedent’s one-half interest in 90.74 acres of real

property (Busch property) was reported at a value of $3,810,000.

The reported value was based on an appraisal report prepared by

DeVoe & Associates (DeVoe), which was attached to the estate tax

return.   DeVoe, based on comparables of residential development

properties, concluded that the fair market value for the entire

fee simple interest was $12,700,000 and discounted, by 40

percent, decedent’s one-half interest ($6,350,000) to arrive at

the $3,810,000 return value.

     Based on the amounts that had been reported by the estate,

respondent assessed $1,674,465 in estate taxes.    The estate paid

$300,000 with the estate’s extension to file, and an additional

$75,000 was paid after respondent assessed the tax based on the

     1
       The parties’ stipulation of facts and exhibits are
incorporated by this reference.
                               - 3 -

return, leaving an unpaid balance in the assessed estate tax

liability of $1,299,465.   The estate requested and received

extensions of time within which to pay estate tax under section

6161.2   After examination of the estate tax return, respondent

determined that the fair market value of decedent’s one-half

interest in the Busch property was $7,400,000, or $3,590,000

greater than the amount reported by the estate.

     The Busch property was improved by three dwelling units and

farm equipment storage facilities.     Decedent was born in 1894 and

resided on the property throughout his life.    Decedent originally

coowned the property with his brother, but at the time of

decedent’s death, his coowner was a trust established by Velma

Busch (decedent’s sister-in-law) who was then 97 years old.

Velma Busch died during October 1996.    Prior to his death,

decedent and his coowner(s) were generally not interested in

selling the property.   Decedent left his one-half interest in the

Busch property to Mary and Eugene Dana, decedent’s niece and her

husband.

     The Busch property was located in unincorporated Alameda

County, adjoining the city of Pleasanton.    Historically, the

property had been used for agricultural purposes and was so zoned

by Alameda County.   Alameda County had a 100-acre agricultural

     2
       All section references are to the Internal Revenue Code in
effect as of the date of decedent’s death, and all Rule
references are to the Tax Court Rules of Practice and Procedure,
unless otherwise indicated.
                               - 4 -

property minimum and had denied a 1982 request to split the Busch

property into two separate agricultural use parcels.   Although

the Busch property was not within Pleasanton’s city limits, it

was within its sphere of influence, and future development would

be dependent upon annexation into Pleasanton.   Under Pleasanton’s

General Plan in effect February 1993, most of the Busch property

was designated as medium density residential and a small portion

was designated high density residential.   The Busch property

originally included 25 additional acres on its western side that

were sold and used for agricultural purposes and, ultimately, the

25 acres were developed into a mixed residential neighborhood.

     During 1986, a 16.66-acre portion of the Busch property was

sold to Pleasanton for use as a maintenance and operations

facility for $1,718,620 or approximately $103,000 per acre.

During 1987, the Pleasanton School District made an offer to

purchase approximately 20 acres of the Busch property for about

$100,000 per acre.   During 1993 the School District was again

looking for a future (1995-96) school site.   In an internal

school district 1991 planning document it was recommended that a

21.5-acre parcel of the Busch property be considered, and it was

estimated that the value was $250,000 per acre.   The school

district normally hires a consultant to provide a fair market

value of land in which the district has an interest.   In 1993,

the school district was also looking for a maintenance and

operations facility.   In connection with its search for a site,
                                - 5 -

the School District was provided a $175,000-per-acre estimate of

the value for the Busch property.

     After decedent’s death in February 1993, the estate

fiduciary began consideration of the development of the Busch

property.   In March 1993, the fiduciary’s legal counsel, who was

experienced in processing land through the entitlement process,

contacted a civil engineer to report on the potential use of the

Busch property for a residential subdivision.    The engineer

submitted a draft preliminary site analysis on July 3, 1993.    The

draft outlined the challenges and difficulties that could be

encountered in development, including the evolving political

climate in Pleasanton.    A final report was submitted during

August 1993.

     During January 1994, the fiduciary’s legal counsel sent nine

letters to potential purchasers of the Busch property, inviting

their inquiries.   Eight of the letter recipients were involved in

residential subdivision and/or development. The ninth letter was

sent to a local church’s site committee that had expressed an

interest in the Busch property.    The counsel had discussions with

the school district and several of the developers concerning the

sale of the property.    Four of the developers sent letters

indicating an intent to buy or option, and of their interest in

acquiring the Busch property.    Because the envisioned transaction

would be one where the buyer/developer would essentially become a

partner of the estate, the fiduciary’s legal counsel sought to
                                 - 6 -

find a match with a developer that understood the politics of

Pleasanton and the entitlement process.    He recommended that the

offer of Ponderosa Homes (Ponderosa) be accepted.

     By a February 25, 1994, letter, Ponderosa presented a letter

of intent to option the Busch property for 36 months or 60 months

after governmental approval, for an exercise price of $12,275,000

or $139,500 per acre (using 88 acres as the base).    Ponderosa

offered $5 million down and $7,275,000 due in two equal payments,

one due in 18 months and the other due 30 months after escrow.

Ponderosa agreed to pay a nonrefundable $10,000 per month for its

option until the sale closed, with no crediting of these payments

to the final price.

     Ponderosa, with about 25 years of residential development

experience, had 75 employees, 6 to 10 active projects, and began

1 to 2 new projects each year.    In its business history,

Ponderosa experienced only a few projects that it was forced to

abandon.   As of January 1994, Ponderosa had built about 1,000

homes in the Pleasanton area and was familiar with the city’s

entitlement process.   Ponderosa was aware of the referendum

against other projects (the Kottinger Hills project and

controversy surrounding the Pleasanton Ridge development), and

the political climate in Pleasanton, but Ponderosa believed that

the Busch property project could work and bid on it.

     In addition to the option agreement by Ponderosa, several

other developers made offers as follows:    (a) Mission Peaks Homes
                                - 7 -

offered to purchase for approximately $17 million, but the final

price would depend upon the number of residential lots approved

for building; (b) Braddock & Logan offered $150,000 per acre; (c)

Greystone Homes considered dividing into 5 parcels, each

consisting of about 18 acres.   After negotiations with several

developers, a two-stage closing was offered to Ponderosa, under

which 44 acres would close in 36 months, and 44 acres would close

no more than 60 months from the date of the agreement.   It was

expected that Pleasanton would scrutinize any development plans

for Busch property and that necessary approval would take as long

as 2 to 3 years.   The offers from developers, including the one

from Ponderosa, were not to be closed in less than 90 days and

anticipated that the property would be approved by Pleasanton for

residential development.

      On June 30, 1994, the coowners of Busch property entered

into an Agreement of Purchase and Sale with Ponderosa, at a base

price of $150,000 per acre.   After the coowners of Busch property

each retained a 1-acre building lot, the remaining property was

to be broken into two portions, approximately 44 acres each, and

delineated as the “Dana Property” (Dana portion) and the “Busch

Property” (Busch portion).    The agreement was designed to provide

for separate closing for each portion, with the Busch portion

closing last.   The purchase price was variable depending on time

and/or the number of building lots approved.   The price was to

increase 9 percent annually from the first closing to either the
                               - 8 -

second closing or June 30, 2000, whichever occurred first.    The

per lot price was also to increase $50,000 for each dwelling lot

approved in excess of 250 with 616 dwelling units stated as the

outside limit.   Accordingly, the combined 88-acre price could

vary from a low of $13,200,000 to a high of $31,500,000.    In

addition to the purchase price, Ponderosa paid $100,000 down and

was to pay $10,000 per month with respect to the Dana portion,

and the payments were to stop at the time of the first closing

with no credit being allowed against the purchase price.    With

respect to the Busch portion, Ponderosa was to pay $5,000 every

30 days beginning after the first closing until the earliest of

the date of the second closing or June 30, 2000.   The $5,000

payments were to be applied to the purchase price.

     The parties to the June 30 agreement expected that the first

closing (to occur no later than June 30, 1997) would complete the

transfer of the Dana portion and the second closing (to occur no

later than December 30, 2000) would complete the transfer of the

Busch portion.   The parties were also aware that the necessary

approval for development would take time and money, and Ponderosa

expected to spend up to $250,000 in seeking approval to develop.

Ponderosa had estimated that on a “fast-track” basis, the

entitlement process would take 18 months.   Ponderosa’s practice

was not to make an outright purchase but to option an interest in

property for development.   At the time of the June 30 agreement,

the parties were aware that the Pleasanton city government and
                               - 9 -

the political environment were less receptive to residential

development than it had been during the 1980's.

     As of 1993, the Pleasanton mayor and two members of a five-

member city council had taken a strong stance against further

development and intended to, at very least, slow growth in

Pleasanton.   As an example, the Kottinger Hills project had been

approved for development in late 1992, but surrounding homeowners

petitioned for a referendum with respect to impact on local

automobile traffic.   In January 1993, the referendum was placed

on the November 1993 local ballot, and the Kottinger Hills

project failed to receive sufficient votes, causing the project

to be discontinued.   In addition, as of June 1992, the Pleasanton

citizenry had also defeated the Pleasanton Ridge project by means

of a ballot initiative.   When the June 1994 agreement was

executed and as of decedent’s date of death, it was foreseeable

that difficulties could be encountered in gaining approval for

property development within the sphere of influence of

Pleasanton.

     As of 1994, Pleasanton had maintained the same General Plan

that had been in effect since 1986.    During 1994, Pleasanton was

updating its General Plan, and at a March 1994 meeting, a

Pleasanton’s Planning Department employee indicated that the

preferred number of lots for the Busch property was 375 or less.

In April 1995, Ponderosa submitted a plan for 449 units on the

Busch property.   During 1995, Pleasanton’s General Plan Steering
                                - 10 -

Committee approved a plan for 391 housing units on the Busch

property. In 1997, in the face of    neighborhood concerns about

traffic patterns, the Planning Commission approved 360 housing

units for the Busch property.    In addition, a neighborhood

committee (by a 7 to 1 vote) agreed to a plan for the Busch

property containing 300 housing units.

     Just prior to the June 30, 1997, closing date, the parties

revised their agreement and entered into an Amended and Restated

Agreement of Option to Purchase, which was effective June 1,

1997, and, accordingly, no closing occurred under the original

option agreement.    Under the amended agreement, the $150,000 per-

acre base price and the $50,000 per unit in excess of 250 units

remained the same.   The amended agreement provided for a “Price

Escalator” under which the purchase price for the Dana or Busch

portions would increase by $25,000 per month, beginning June 30,

1997, until the date of the first closing, scheduled for no later

than January 5, 1998.   The first closing under the amended

agreement did not occur, and Ponderosa renewed the option

agreement in March 1998.

     Ponderosa presented a 360-unit site plan to the Pleasanton

Planning Commission and received approval around the end of 1996.

In early 1997, Ponderosa went to the city council, but it was not

until December 2, 1997, that a 300-unit plan was adopted, and it

was determined that the plan would not have significant adverse

effects on the environment.   On December 16, 1997, the city
                              - 11 -

council approved the prezoning of Busch property to a “Planned

Unit Development--Medium Density Residential” and approved a 300-

unit plan for development, conditional upon meeting numerous

requirements involving design and home siting, architectural

features, landscaping, construction of park, noise attenuation,

building code compliance, creating a homeowners’ association,

fire code compliance, street construction, grading and drainage

improvements, utilities and related matters.   Ponderosa also

agreed to provide Pleasanton 5-1/2 acres for use as a city

corporation yard.

     After approval of the plan, local citizens circulated a

petition calling for a referendum involving traffic issues.     In

response to citizen concerns, Ponderosa disseminated materials

attempting to show community benefits that would inure if the

project went through.   During January 1998 the referendum

petition was filed, and the Pleasanton city council, with

Ponderosa’s approval, instead of addressing the question of a

referendum or other alternative, decided to rescind the ordinance

approving the Busch property plan.

     Thereafter, a second amended agreement was entered into and

became effective February 18, 1998.    It called for an additional

$375,000 increase to the purchase price and increased the $50,000

per unit over 250 unit amount to $70,000 per unit.   The Purchase

Price Escalator was increased from $25,000 to $30,000 from

February 18 until the closing.   The second amended agreement had
                              - 12 -

a single February 17, 2001, closing date.   Ponderosa, through

this time, had paid nonrefundable payments (that were not to be

applied to the purchase price) to the Busch property owners

ranging from about $500,000 to about $1 million.   As of the end

of 1998, approval had not yet been received, and Ponderosa

continued to experience difficulties in the process of attempting

to gain approval for development.

                              OPINION

     This case involves the valuation of real property for estate

tax purposes.   We must decide the value of decedent’s one-half

interest in the subject property.   The estate reported a fee

simple value of $12,700,000 and discounted decedent’s one-half

interest ($6,350,000) by 40 percent to reach the $3,810,000 value

reported as includable in the gross estate.   The estate’s

valuation was predicated on the assumption that residential

development is the highest and best use for the property.

Respondent, after examining the estate’s return, valued

decedent’s one-half interest in the property at $7,400,000, also

assuming that residential development is the highest and best use

of the property.   In the context of litigation, petitioner now

contends that decedent’s interest in the property should have

been valued and included in the gross estate at $680,000.3

     3
       We have held that a higher reported value is an admission,
requiring an estate to produce “cogent proof that the reported
values were erroneous.” Estate of Hall v. Commissioner, 92 T.C.
                                                   (continued...)
                              - 13 -

Petitioner argues that the value should be reduced because, as of

the valuation date, it was unlikely that the property had the

potential to be approved for residential development.

     The parties disagree about how to handle the fact that

approval for residential development had not been obtained and

the probative weight, if any, that should be given to the terms

of the June 1994 agreement.   Although the June 1994 agreement was

executed sufficiently close in time to the February 1993 date of

death to be considered, it does not involve a contemporaneous

payment of the contract proceeds.   The agreement calls for

payments at closings that would occur as much as 3 and 6 years in

the future.

     Petitioner contends that the $150,000 per-acre agreement

price was wholly contingent and dependent upon whether the

developer (buyer) was able to obtain entitlement to subdivide the

property for residential development; i.e., that Ponderosa was

not a willing buyer of unapproved land.   Conversely, respondent

contends that the agreement is a contract for sale with a delayed

closing and that the contract price represents what a willing

buyer would be willing to pay in a cash or contemporaneous

transaction, irrespective of whether the entitlements were to be

obtained later.



     3
      (...continued)
312, 337-338 (1989).
                               - 14 -

     Property includable in a decedent’s gross estate is to be

returned at its fair market value generally as of the date of

decedent’s death.   See sec. 2031(a); sec. 20.2031-1(b), Estate

Tax Regs.   Fair market value is “the price at which the property

would change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or to sell and both

having reasonable knowledge of relevant facts.”     United States v.

Cartwright, 411 U.S. 546, 551 (1973); Estate of Hall v.

Commissioner, 92 T.C. 312 (1989); Estate of Heckscher v.

Commissioner, 63 T.C. 485, 490 (1975); sec. 20.2031-1(b), Estate

Tax Regs.; sec. 25.2501-1, Gift Tax Regs.    The willing seller and

buyer are hypothetical rather than specific individuals or

entities.   See Estate of Bright v. United States, 658 F.2d 999,

1005-1006 (5th Cir. 1981).

     The issue is factual and to be resolved from all the

evidence and is, in great part, a question of judgment rather

than mathematics.   See Hamm v. Commissioner, 325 F.2d 934, 940

(8th Cir. 1963), affg. T.C. Memo. 1961-347; Duncan Indus., Inc.

v. Commissioner, 73 T.C. 266 (1979).     The parties, in support of

their positions, have relied on their expert witnesses’ reports

concerning the subject real estate.     In making our determination

we may embrace or reject expert testimony if, in our judgment,

either approach is appropriate.   See Helvering v. National

Grocery Co., 304 U.S. 282 (1938); Sammons v. Commissioner, 838

F.2d 330 (9th Cir. 1988).    If an expert’s opinion is of no
                               - 15 -

assistance to the Court, it will be given little weight.      See

Laureys v.    Commissioner, 92 T.C. 101, 129 (1989).

     In litigation, the parties have used different approaches to

valuing the real property.    Petitioner’s expert used comparables

to provide a cash sale price of land for residential development

properties.    Petitioner’s expert then applied substantial

discounts (as much as 80 percent), reducing an average of the

comparable sales to a proposed value of $25,000 per acre.

Petitioner’s trial expert’s $25,000 value is $114,500 less than

the $139,500-per-acre value that had been reported on the

estate’s tax return.    Respondent’s expert was asked to derive a

per-acre value based on the June 1994 agreement.    After reaching

a value based on the agreement, he discounted it to account for

the delay in the closing of the transaction.    Respondent uses the

resulting value as an actual and comparable sale price for the

Busch property.    Although the two approaches reached disparate

results, both are sourced in traditional cash sale principles

involving the use of comparables and may be reconciled.

     In addition to the experts called by the parties for trial,

we must consider petitioner’s appraiser’s report attached to the

estate tax return.    We find analysis of that estate tax return

appraisal necessary because its per-acre value ($139,500) is more

closely allied with contract price ($150,000) and respondent’s

determination.    In addition, the $139,500 value is substantially
                               - 16 -

in excess of the $25,000-per-acre value now advocated by

petitioner.

     Petitioner employed DeVoe, an appraiser, to ascertain the

value of decedent’s interest in the Busch property for purposes

of reporting it on the estate’s tax return.    DeVoe’s report was

attached to the estate tax return and employed what he described

as a “Market Data Approach” to value the property.    That same

approach has also been described as a comparable sales approach

and involves the collecting of information on comparable and

generally contemporaneous sales of like property in the general

locale of the subject property.

     DeVoe relied on nine sales with per-acre prices ranging from

$21,612 to $445,872.    One of the sales referenced by DeVoe was

the 1986 sale of 16.66 acres of the Busch property to Pleasanton

for $103,158 per acre.    In five of the nine sales, the approval

to develop had been obtained and the per-acre price ranged from

$152,439 to $445,872.    In one situation, partial development

approval had been obtained and the per-acre price (based on full

acreage even though all of it was not usable) was $53,043.    The

remaining two sales, for $21,612 and $29,520 per acre, concerned

situations where no approval for development had been obtained.

Other than the 1986 sale of the 16.66-acre Busch parcel, the

sales used by DeVoe occurred during the period April 1989 through

May 1993.
                               - 17 -

     DeVoe refined his sales data universe to arrive at a per-

acre range of $103,158 to $152,439.     DeVoe relied on comparable

values of properties that had been approved for development

arriving at a $139,500 per-acre value.    DeVoe’s approach was

based on the premise that residential development would be the

highest and best use and did not contain a discount for the fact

that the Busch property had not been approved for development as

of the valuation date.   Applying the $139,500 value times 90.74

acres, DeVoe calculated a $12,700,000 value, which he divided in

half to represent decedent’s partial interest.    Finally, DeVoe

applied a 40-percent partial ownership discount to arrive at the

$3,810,000 value reported as part of decedent’s gross estate.

     Petitioner’s trial expert, Norman Hulberg (Hulberg), like

DeVoe, concluded that Busch property should be valued by means of

the comparable sales method.   Hulberg opined that the property’s

highest and best use was to develop it as residential property.

Although Hulberg reached a $25,000-per-acre value, sometime

during November 1997 (prior to reaching the $25,000 value), he

had opined that the Busch property was worth $100,000 per acre.

During cross-examination, Hulberg explained that the decrease in

the values he determined was attributable to facts that occurred

both prior to and after November 1997 and that he had become

aware of only after his November 1997 opinion.    Hulberg’s

explanation was without specificity and did not adequately

explain the reduction.   We surmise that, in great part, Hulberg’s
                               - 18 -

reduction was based on his changed view that the property would

not likely have been approved for development as residential

property.

     Hulberg’s opinion contained references to four Pleasanton

area sales during the period June 1992 through December 1993 with

a per-acre price range of $80,071 to $245,701.    The sales he

chose occurred prior to the June 1994 agreement, and the

transaction concerning the Busch property was accordingly not

factored into Hulberg’s analysis.    He then employed substantial

discounts that he attributed to a lack of development approval

and the political climate or conditions that may affect the

possibility of approval.    Hulberg compared the Busch property

with situations where unimproved land was discounted by as much

as 80 percent for lack of development approval and concluded that

a 60-percent discount4 should be used with respect to the Busch

property.   Included in Hulberg’s analysis, and presumably his

discounts, were adjustments for the time the land would be on the

market prior to sale.   Hulberg opined that the Busch property had

a $25,000 per-acre value.

     Applying the $25,000 per-acre value to the 90 plus acres and

rounding off, Hulberg arrived at a $2,270,000 gross value.    After

a lengthy discussion of various discount concepts, Hulberg


     4
       The range of per-acre values after the decreases appears
to reflect reductions in value ranging from 60 percent to 80
percent.
                              - 19 -

settled on the same discount employed by DeVoe (40 percent) and

thereby concluded that decedent’s one-half interest in the Busch

property at the time of his death had a $680,000 value.

($2,270,000 x .50 (half interest) x .40 (discount) =

$680,000(rounded down)).

     Steven Geller (Geller), respondent’s expert, was hired to

analyze the agreement between the Busch property owners and

Ponderosa and determine the per-acre value based on that

agreement.   After reaching a value based on the agreement, he

discounted that value to reflect the time value of the delay that

was expected to be encountered in the closing process.     Geller’s

approach was further limited to one of two fixed scenarios:    One

approach was to assume a closing of the entire property during

June 1997 and the other was to assume two separate closings, one-

half of the property during June 1997 and the other one-half

during June 2000.   Geller reached the conclusion that 360 units

would be paid for at the closing(s) based on the Pleasanton

Planning Commission’s January 1997 approval of 360 units, a fact

that was not known as of June 1994 or February 1993.

     Using the $150,000-per-acre contract price, with an

additional $50,000 times 110 units over 250 (360 - 250 = 110),

Geller arrived at gross values of $19,271,000 and $22,225,895 for

the single and dual closing models, respectively.   Using a 9-

percent discount rate to account for the passage of time until

the closings, Geller concluded that the present value of the
                               - 20 -

Busch property as of the June 1994 agreement date was $15

million, irrespective of whether a single or dual closing

occurred.   Geller’s approach was an attempt at reaching a present

value of the June 1994 agreement.    By using a present value

technique, Geller acknowledges that the June 1994 agreement was

not a cash sale.    Respondent relies on Geller’s value as

reflecting an actual and/or comparable sale that supports

respondent’s value determination in the deficiency notice.

Respondent directs our attention to the fact that Geller’s $15

million value is slightly in excess of the gross value determined

in the deficiency notice.    It does not appear that respondent

discounted for the fact that decedent held a partial interest.

     Both parties used acceptable methodologies for valuing the

subject property.    Although the methodology was appropriate, we

do not agree with all of the techniques, modifications, and/or

discounts that were used to affect the ultimate proposed values.

Hulberg, petitioner’s expert, begins with comparables for

residential development property and, by means of extremely large

discounts, reduces the comparable to $25,000 per acre.    In this

way, Hulberg advances a value for the Busch property that,

essentially, represents a value for unimproved farmland.     Hulberg

expressed the view that the highest and best use of the Busch

property was for residential development and that comparable

sales provide the best method to value unimproved land.      He then

effectively voided those views by using extraordinary discounts
                              - 21 -

for what he thought was the likely possibility that there would

be no approval for residential development.   Hulberg’s conclusion

that residential development would not be approved was a fact

that was not known or reasonably foreseen on the valuation date

or at the time of the execution of the June 1994 agreement.     It

also ignores the fact that the Busch property was actively

pursued by Ponderosa and other knowledgeable developers who

placed a value far in excess of $25,000 on the property.   We do

not accept Hulberg’s $25,000 opinion of value and find his

approach to be nothing more than a disguised attempt to

circumvent and ignore the highest and best use of the property at

the time of valuation and to thereby value it as farmland.

     Petitioner’s advocacy of the $25,000-per-acre value also

ignores the fact that the Busch property abutted the city of

Pleasanton and was adjacent to fully developed residential

property.   More importantly, petitioner did not deal with the

fact that several developers were eager to develop the Busch

property.   In order to accept petitioner’s/Hulberg’s approach, we

would have to conclude that Ponderosa (and the other developers

who were interested in the property) were either unaware of or

did not fully consider the difficulties that could have been

encountered in obtaining approval of the property for development

into residential property.   Other developers offered $150,000 per
                              - 22 -

acre and $17 million.5   The fact that Ponderosa failed to obtain

development approval approximately 4 years later was a fact that

was not known to the parties to the June 1994 agreement.    If

Ponderosa had known or thought that approval was not forthcoming,

it would not have committed its resources and substantial capital

to the Busch property project.   Also, as noted above, other

developers expected that the property could be developed.     In

that regard, Ponderosa paid an amount approximating petitioner’s

proposed net value ($680,000) in expenses pursuing development

approval and in payments made to keep the June 1994 agreement

open for development at a $150,000 plus per-acre contract price.

     The June 1994 agreement price of $150,000 per acre

represents a cash sale price between a willing buyer and willing

seller.   The June 1994 agreement, however, did not require

Ponderosa to pay “cash on the barrel head”.   The agreement and

trial testimony make it clear that both sides were aware of the

foreseeable risks and the difficulties connected with obtaining

approval for residential development.   The political climate in

Pleasanton was also well known to the parties to the June 1994

agreement.   The comparable sales prices used by petitioner’s

appraiser for estate tax purposes and by its trial expert reflect

that the $150,000-per-acre price was reasonable when compared

with similar properties susceptible of residential development.

     5
       The $17 million bid was dependent upon the number of
building lots approved.
                                - 23 -

     Petitioner, by emphasizing what actually happened

(especially in the 1997-98 timeframe), sought to show that it was

unlikely that the property would be approved for development as

residential property within the city of Pleasanton.    We cannot,

however, attribute to a 1993 or 1994 buyer or seller these

unforeseen facts that occurred several years later--in this

instance, 3 to 4 years later.    Nor can we allow such facts to

bear on value unless those facts could be foreseen, known, and

would have influenced a willing buyer and seller.    See United

States v. Cartwright, 411 U.S. 546 (1973).    For purposes of this

case, the statute mandates a date-of-death fair market valuation.

See sec. 2031(a).   The determination of value is to be made as of

the valuation date (i.e., date of death), and knowledge of

unforeseeable future events that may have affected the value

cannot be attributed to the hypothetical buyer or seller.    See

sec. 20.2031-1(b), Estate Tax Regs.

     We find the 1994 agreement to be sufficiently

contemporaneous to represent a benchmark value for the subject

property, and it comports with comparable sales.    As of

decedent’s death, it was likely that the Busch property would be

sold for and/or developed as residential property.    The 1994

agreement represents the usual type agreement entered into by

Ponderosa and other developers.    In that regard, both of

petitioner’s experts (DeVoe and Hulberg) used comparable sales

that comport in price per acre with the price in the June 1994
                              - 24 -

agreement and that occurred within the time period surrounding

the date of death and the June 1994 agreement.6   Petitioner’s

appraiser for estate tax purposes valued the property as

development property.   The estate included a discounted (for the

partial interest) value that was based on its development as

residential property.   At the time its offer was made and

accepted, Ponderosa was generally aware of the political

conditions and possible problems that could be encountered in

obtaining approval for development of the Busch property.

Likewise, the sellers had consulted several sources of expertise

and were aware of the value of their property and had the

opportunity to choose from several different firms that were

interested in a development type agreement.   Petitioner and

respondent agree that the “highest and best use” of the Busch

property was residential development.   The property physically

abutted Pleasanton and existing residential housing.   There was

contiguous street access to the existing residential areas within



     6
       DeVoe’s comparables are set forth in the body of this
opinion. The four sales Hulberg offered as comparables had
prices ranging from $80,071 to $245,701 per acre. A simple
average of the four sales referenced in Hulberg’s report is
$145,559. Hulberg, however, discounted the four sale prices by
as much as 80 percent to reflect his view of the inability to
obtain approval from the city of Pleasanton for residential
development, causing the range to drop to $16,014 through
$73,710. Accordingly, there is sufficient corroborative evidence
to accept the $150,000-per-acre price from the June 1994
agreement as a starting point for our consideration of the fair
market value.
                                - 25 -

the city of Pleasanton.    At the time of decedent’s death, other

Pleasanton residential developments were in progress.

     The record reflects that, at the time of decedent’s death,

the climate for residential development in Pleasanton was

weakening, and, to that extent, we agree with petitioner that the

price that a willing buyer would offer to a willing seller would

be affected.   See, e.g., Estate of Ratcliffe v. Commissioner,

T.C. Memo. 1992-305.   Any such price differential, however, would

normally have been accounted for in Ponderosa’s offer and the

acceptance of same.    Ponderosa’s offer, in effect, was not to pay

$150,000 per acre at the time the agreement was made, and it was

contingent on acquiring approval to develop from Pleasanton.

Ponderosa, aware of the risks, was willing to invest its money

and time in pursuing development.    In that regard, Ponderosa

expended between $500,000 and $1 million in the form of payments

to the sellers and expenses in pursuing the entitlements for

residential development.

     In order to adjust for the passage of time in connection

with the difficulties expected in obtaining development approval,

we must decide upon an appropriate discount rate to adjust the

$150,000-per-acre cash price.    Respondent’s expert used a present

value approach to account for the delay in payment.    Respondent’s

expert, however, applied the discount to a gross value inflated

by attributing an optimum approval of 360 housing units.    Geller

started with the $150,000-per-acre contract price and added
                                  - 26 -

$50,000 for each unit he expected to be approved in excess of

250.       Geller’s computation of the $50,000 amounts for excess

units was chosen based on the 1997 planning board approval for

360 units.7

       We do not use the 360 housing unit approval figure because

it was not foreseeable by the parties to the June 1994 agreement

or as of the date of decedent’s death.       Considering property set

asides for streets, utilities, and unusable portions, 250 units

seems a reasonable estimate for a base figure.       In addition, the

parties to the June 1994 agreement used 250 as their base amount

and provided for premium increases to the price to be paid only

if approval for more than 250 units occurred.       Normally a cash

price is not discounted for the passage of time in the context of

a fair market valuation as of a date certain.       It would be

appropriate, however, to discount the cash price here due to the

expected time delay in obtaining approval for development.8         We

note that the parties anticipated that the contract price should




       7
       In addition to the $50,000 excess unit amounts, Geller
factored in the $10,000 and $5,000 amounts, but we do not
consider those part of the contract price because they appear to
be payments to maintain the seller’s rights and to compensate the
buyer for keeping the property under contract. To some extent,
those amounts address the question of time value and,
accordingly, it would be duplicative to make them a part of the
contract price or present value computation.
       8
       We assume that Ponderosa would not have entered into this
contract unless it expected to gain approval, and any risk that
approval would not be obtained was de minimis or remote.
                              - 27 -

be increased by about 9 percent per annum, and so they used a 9-

percent factor.

     Accepting a $150,000 cash per-acre value, the 90.74 acres

would produce a $13,611,000 gross value.   We accept the 9-percent

discount rate and apply it to the agreement’s contemplated two

closings, to wit:   no later than 3 and 6 years from June 1994.

These closing dates represented outside limits, and the closings

could possibly have occurred earlier.   It was estimated that, as

of June 1994, the entitlement process would, on a fast track,

take about 1-1/2 years and, at the outside, 3 to 4 years.   We use

the 3- and 6-year dates (the limits of the June 1994 agreement)

to account for the lapse of time until payment and account for

the 1 year and several months by which the date of death preceded

the June 1994 agreement.   Because of the known difficulties

expected to be encountered in the approval process, it is also

reasonable to use the 3- and 6-year closing dates and discount

one-half of the contract price to account for a 3-year delay and

the other to account for a 6-year delay.   Using a 9-percent

discount rate, we hold that the present value of the $13,611,000

contract price would be $9,312,992 (present value of one-half of

$13,611,000 at 9 percent for a 3-year period ($5,255,095) and

one-half of $13,611,000 at 9 percent for a 6-year period

($4,057,897)).

     As a final matter, we consider the appropriate fractional

discount, if any, that should be applied to decedent’s one-half
                               - 28 -

of the $9,312,992 present value of the Busch property at the time

of decedent’s death.    The need for employing a discount is

dependent on whether decedent’s partial interest would have an

effect on marketability.    See generally Propstra v. United

States, 680 F.2d 1248 (9th Cir. 1982); Estate of Bright v. United

States, 658 F.2d 999 (5th Cir. 1981).    Petitioner bears the

burden of showing that a discount is appropriate and the amount

of any such discount.    See Rule 142(a); Estate of Van Horne v.

Commissioner, 78 T.C. 728 (1982), affd. 720 F.2d 1114 (9th Cir.

1983).

     Both of petitioner’s appraisers selected a 40-percent

discount to adjust the value to account for decedent’s one-half

ownership in the Busch property.    Petitioner argues that the

expertise they have offered and respondent’s failure to provide

expertise to address this point should result in the Court’s

adopting a 40-percent discount.    Petitioner also makes the

argument that partition was not a viable option because of the

1982 experience of the Busch property owners in failing to obtain

a division of the property into less than a 100-acre parcel for

agricultural purposes.

     Respondent counters that the highest and best use of the

property was residential development, and the estate and its

coowner chose to sell the entire property to a single purchaser.

Respondent also notes that among the sales offered as comparables

by petitioner’s experts some smaller parcels appeared to be no
                              - 29 -

less valuable than larger ones.   In addition, respondent contends

that the growth management policies of Pleasanton might make

approval more easily obtainable for a smaller parcel.    Respondent

also maintains that the Busch property was homogeneous, and,

physically, it could be easily divided or partitioned.

Respondent also contends that it is not axiomatic, as petitioner

seems to argue, that any partial interest must be discounted.

Finally, respondent contends that petitioner has not met the

burden of showing the need for a discount and/or the size of any

such discount.

     The circumstances of this case call for some discount

attributable to the fact that decedent held a partial interest.

In that regard, decedent’s one-half interest was an equal

interest with that of his coowner, and the property owned was

capable of development for residential purposes as two separate

45-acre parcels.   Petitioner points out that during 1982 the

coowners were not permitted to divide the property into two

separate farms, but it was the county’s 100-acre minimum

agricultural use limitation that was the reason for the county’s

denial.   No such acre limitation has been shown to exist for

residential property.   We agree with respondent’s analysis that

the proposed comparables reflect little premium or discount for

the size of the parcel to be developed and that it might have

been beneficial to have a relatively smaller parcel, considering

Pleasanton’s growth management policies.
                               - 30 -

     We do not accept respondent’s argument that no discount

should be employed because the coowners were cooperative and

jointly sought to find a buyer for the Busch property.    That is a

matter of conjecture, and if a buyer purchased decedent’s one-

half interest, there is no showing here that decedent’s sister-

in-law’s trust would have cooperated with any coowner, including

decedent’s estate.   More significantly, the coowners’ intentions

were discernable as of the date of decedent’s death.    It was

obvious that the owners and/or heirs to the Busch property were

not interested in continuing its agricultural use.    Accordingly,

we conclude that some discount for the partial interest is called

for; the question that remains is the size of that discount.

     DeVoe’s partial interest discount was based on five of the

nine comparable sales and ranged from 18.8 percent to 45 percent.

Two of the five involved 50-percent interests, and they had

discounts ranging from 27.5 percent to 45 percent.    DeVoe

concluded that those two sales showed that a large fractional

interest resulted in a larger discount, and he concluded that a

40-percent discount was appropriate.    DeVoe, however, did not

explain what aspects of the two sales relied on were comparable

to the circumstances we consider involving the Busch property.

     Hulberg discussed several factors in also arriving at a 40-

percent discount for the fractional interest decedent held in the

Busch property.   First, he explained that a fractional interest

reflected a lack of control.   Although decedent’s interest was
                                - 31 -

not a majority interest, his coowner’s interest was equal, and so

neither had a majority or minority.      As a result, neither had

control, and both were equal.    Hulberg has treated the

coownership of real property here as though the coowners were in

a partnership relationship, thereby elevating the question of

control.    It does not appear that the coowners operated a

business (farming or otherwise) as partners, and, accordingly,

control is less relevant.    This is a common interest in undivided

and unimproved property, and the question to consider is the

feasability of dividing the property in the case of disagreement

about its use.    In that regard, costs of partition or other legal

controversy, along with other factors, are considerations

rationally involved in the valuing of an asset.      See Estate of

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

     Hulberg opined that partition was feasible under California

law, but that the “ability to partition the property would not

substantially decrease the discount presented by partnership

sales, as such actions could involve a great deal of expense and

delay prior to the liquidation of [a] co-tenancy interest.”      We

cannot accept Hulberg’s premise as a universal principle because

it ignores economies of scale and the relative value of the

property.    For example, assuming a legal cost for partition of

$200,000,9 a $680,000 parcel (as Hulberg opined) might fit the

     9
         Two hundred thousand dollars, assuming a $200 hourly legal
                                                     (continued...)
                                - 32 -

above-quoted principle.    A parcel, one-half of which had a value

of $3 million to $4 million, would easily bear a $200,000

partition cost.    In addition, as of decedent’s death, his

coowner’s share was held in trust for the 97-year-old widow of

the former owner, and neither owner was a resident-farmer at that

time.    The beneficial owners were the heirs of the owner/farmers

who were not actively farming the property.    Those circumstances,

known at the time of    decedent’s death, make it less likely that

partition would be necessary.    That is especially so where great

disparity exists between the values of the land when comparing

its use for agricultural and residential purposes.

     Hulberg used a conglomeration of four different approaches

to arrive at the amount of discount he used to account for

decedent’s partial interest.    First, he discussed a “Company

Survey Method”, which Hulberg described as a “survey of companies

in the business of purchasing and selling partnerships.”      Our

review of Hulberg’s analysis indicates that the partnerships

involved were dissimilar to the Busch property situation.      The

information was derived from the purchase and sale of general

partnership interests, a format different from the Busch property

ownership, which was simply a coownership in real property with

no partnership business or operational type activity.



     9
      (...continued)
fee rate, represents 1,000 hours to accomplish partition.
                                - 33 -

Accordingly, the discount percentages represented by that type of

transaction are inapposite.

     Next, Hulberg addressed what he called the “Fractional

Discounting Method”.   That method was set out in an April 1992

journal article, Davidson, “Fractional Interests in Real Estate

Limited Partnerships, The Appraisal Journal, Apr. 1992, at 184-

194, in which 10 factors were used to analyze the amount of a

fractional interest discount.    The factors employed, include:

“Relative risk of the assets held, Historical consistency of

distributions, Condition of the assets, Market’s growth

potential, Portfolio diversification, Strength of management.”

Those factors, to which Hulberg assigned values to arrive at an

estimated 41-percent discount, appear to be the type of factors

that are used in analyzing a going partnership business and not

the simple coownership of raw land.      The remaining four factors

address the control aspects, or lack thereof, of a fractional or

partial interest.   Of the cumulative 41-percent discount reached

by Hulberg, only 12 percent of it was attributable to the lack of

marketability/control factors.    The remaining factors depended

heavily on the fact that the entity was a going partnership

(income sources, etc.) and would, therefore, not be applicable to

measure the partial interest discount in this case.

     Next, Hulberg used a “REIT Survey Method” that “involves an

analysis of discounts found in real estate investment trust

(REIT’s).”   Hulberg indicated that the average discount was 39
                              - 34 -

percent with a range from 30 percent to 40 percent.     Here, again,

Hulberg’s explanation reflected that REIT’s are operating real

estate partnerships that are dissimilar from the simple

coownership of realty that we consider.     The REIT is an entity in

which investors purchase a percentage as an investor in the

activity or business operation in which the REIT is involved.

Accordingly, the REIT-based approach to calculate a discount is

not appropriate.

     Finally, Hulberg referred to his four proposed comparable

sales that he admits “are not highly similar to the subject

property but they do indicate discounts are being taken by the

[purchasers] of * * * fractional interests, and that there is a

market for partial interests in a property.”     The range of

discounts was 29 percent to 41 percent.     The sales selected by

Hulberg included a produce terminal, undeveloped unapproved land,

an office building, and ranchland.     The undeveloped unapproved

land was described as “Standard Oil Pond Grizzly Island (Solano

Co.)”, and Hulberg explained that the property was valued at

$800,000 for a fee and a 25-percent interest was sold for

$130,000.   No further information is provided, and it is not

apparent that this property is comparable or how the $800,000 and

$130,000 values relate to each other.     Accordingly, we do not

find these examples to be helpful.

     Hulberg then proceeded to conclude that the various

referenced approaches resulted in discounts approximating 40
                              - 35 -

percent and that 40 percent is therefore appropriate.   Hulberg,

in addition to addressing the lack of approval for residential

development, factored in the lapse of time in arriving at a 40-

percent discount rate.   We did not find any of Hulberg’s

approaches to be fitting or appropriate to the situation we

consider, although we agree that some discount would be

appropriate.   In summary, Hulberg first discounted by as much as

80 percent, and then discounted the resulting amount by an

additional 41 percent reflecting various factors, including lack

of control, passage of time, and factors that would only be

relevant in the consideration of a going partnership.

     On the other hand, DeVoe, petitioner’s appraiser who was

used to provide a value for the estate tax return, started with a

$137,500-per-acre value and discounted it by 40 percent to

account for the partial interest.   That approach resulted in a

$3,810,000 value’s being reported on the estate tax return.     We

have concluded that the per acre cash value is $150,000 and have

discounted that amount to account for the passage of time and, to

some extent, for the risk associated with the possibility that

approval for development might not be obtained.   That discount

resulted in reducing the value of decedent’s one-half interest

from $6,805,500 ($150,000 x 90.74 x .50) to $4,656,496 (see

present value computations, supra, p. 28) or a reduction of 31.6

percent.   Based on our evaluation of the evidence, it appears

that DeVoe’s valuation appraisal was conservatively performed
                                - 36 -

favoring decedent’s estate.     We reach that conclusion because he

used a per acre value at the lower ranges of the true comparables

and a discount rate at the highest end of the spectrum when

considering the facts in our record.

     A smaller partial interest discount than used by

petitioner’s appraisers would be appropriate in the circumstances

of this case.     As already noted, as of decedent’s death, there

were no owners or potential owners who, like decedent and his

deceased brother/coowner were solely interested in farming the

land.     The heirs of both owners were interested in selling or

developing the land in light of the substantial difference in its

value for that use.     At the date of decedent’s death, his coowner

was a trust for a 97-year-old woman, and there was no doubt that

the highest value of the land was as residential property.     Under

these circumstances a 10-percent discount would be sufficient to

account for the partial interest represented by a simple

coownership in unimproved land.     As already discussed, 10 percent

would also be more than adequate to accommodate reasonable costs

of partition (10 percent of the rounded one-half interest

($4,660,000) or $466,000) in the event that either set of heirs

of the then-current coowners might not be interested in selling

the property for its highest and best use (residential

development).10

     10
          The use of a 10-percent discount for the partial interest
                                                      (continued...)
                             - 37 -

     We accordingly hold that the fair market value of decedent’s

one-half interest in the Busch property at his date of death is

$4,190,496 ($9,312,992 x .50 = $4,656,496 - $466,000 =

$4,190,496).11

     To reflect the foregoing,

                                      Decision will be entered under

                                 Rule 155.




     10
      (...continued)
results in an overall discount from the $150,000 value for
decedent’s one-half interest of 38.4 percent.
     11
       Because we have held that the fair market value that
should have been included in decedent’s gross estate exceeds the
amount reported by the estate, it is not necessary to consider
respondent’s contention that we are without jurisdiction, in the
circumstances of this case, to decide an overpayment in estate
tax.
