                            T.C. Memo. 1997-483



                          UNITED STATES TAX COURT



                      IRENE EISENBERG, Petitioner v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent


        Docket No. 17267-95.                     Filed October 27, 1997.


        Martin A. Stoll, for petitioner.

        Drita Tonuzi, for respondent.


                            MEMORANDUM OPINION

        HAMBLEN, Judge: This matter is before the Court on the

parties' cross-motions for summary judgment pursuant to Rule

121.1       Both parties submitted memoranda in support of their

respective positions.



        1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code as in effect for the years at issue,
and Rule references are to the Tax Court Rules of Practice and
Procedure.
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       Respondent determined deficiencies in petitioner's Federal

gift taxes for the taxable years 1991, 1992, and 1993 in the

amounts of $20,157.99, $38,257.15, and $3,319.55, respectively.

The deficiencies are attributable to respondent's disallowance of

petitioner's valuations of closely held corporate stock.

       Respondent and petitioner have both alleged in their

respective motions that there are no genuine issues as to

material facts and that a decision may be rendered as a matter of

law.    We agree with their allegations.   Consequently, the case

herein is ripe for summary judgment.

       The sole issue for decision is whether, in determining the

Federal gift tax value of her stock in a corporation, on the

basis of the net asset value method of valuation, petitioner may

take into account the full amount of the capital gain taxes

attributable to the built-in gain on the corporation's sole asset

at certain stock transfer dates.

Background

       At the time of the filing of the petition in this case,

Irene Eisenberg, petitioner, resided in New York, New York.       On

January 25, 1980, Avenue N Realty Corp. (the corporation) was

organized under the laws of the State of New York.     From its

inception, petitioner held all issued and outstanding common

stock of the corporation, which comprised 1,000 shares.     The

corporation made an election, effective on January 1, 1987, to be
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treated as a subchapter S corporation.   Subsequently, on January

1, 1989, the corporation's S election was revoked.   During the

years at issue, the corporation was a subchapter C corporation

for Federal tax purposes.

     The principal asset of the corporation, other than cash, was

a building in Brooklyn, New York (the property), which was leased

to third parties.   The corporation received income from the rents

generated from the lease appurtenant to the property during the

years at issue.   Prior to and during the years at issue, the

corporation's only income was from the active trade or business

of renting the property.

     On December 23, 1991, the first transfer date, petitioner

made gifts of 668 shares of stock in the corporation as follows:

(1) 334 shares to her son, Joseph Eisenberg; (2) 167 shares to

her granddaughter, Joanne B. Bayer; and (3) 167 shares to her

grandson, David Blum.   Subsequently, on September 30, 1992, the

second transfer date, and on February 23, 1993, the third

transfer date, petitioner gave as gifts 275 shares and 57 shares

of stock in the corporation, respectively, to her son Joseph

Eisenberg.

     The fair market value of the stock, after a 25-percent

minority discount, was $517.20 per share on the first transfer

date, $356.71 per share on the second transfer date, and $341.77

per share on the third transfer date.
                                - 4 -


     On the first, second, and third transfer dates, the

property's adjusted basis was $69,500, $67,906, and $67,108,

respectively.   At the time of the first transfer, the fair market

value of the property was $600,000.     At the time of the second

and third transfers, the fair market value of the property was

$470,000.   The corporation, however, did not possess a plan to

liquidate, sell, or distribute the property in conjunction with

the stock transfers.

     On or about October 16, 1992, April 16, 1993, and April 12,

1994, respondent received petitioner's timely filed Federal gift

tax returns, Form 709, for the taxable years 1991, 1992, and

1993, respectively.    Respondent issued a statutory notice of

deficiency to petitioner on July, 18, 1995.

     On August 12 and September 9, 1996, respondent and

petitioner, respectively, filed motions for summary judgment with

this Court.2




     2
      Subsequently, on Oct. 18, 1996, petitioner amended her
petition in this matter. Petitioner stated that the inclusion of
certain taxes is necessary for the computation of the unified
credit utilized by petitioner with respect to her Forms 709 for
the years at issue. Specifically, petitioner sought to
incorporate, in this matter, certain taxes imposed by the State
of New York, to decrease the value of the corporate stock. On
Dec. 12, 1996, respondent filed an answer to petitioner's
amendment to her petition. In light of our disposition of this
case, we do not address this issue.
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Discussion3

     Rule 121 provides for summary judgment on legal issues in

controversies where there is no genuine issue of material fact.

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.

17 F.3d 965 (7th Cir. 1994); Naftel v. Commissioner, 85 T.C. 527,

528-529 (1985); Jacklin v. Commissioner, 79 T.C. 340, 344 (1982).

The burden is on the moving party to show that it is entitled to

summary judgment and that the matter may be decided on the basis

of the documents before this Court.     Espinoza v. Commissioner, 78

T.C. 412, 416 (1982); Gulfstream Land & Dev. Corp. v.

Commissioner, 71 T.C. 587, 596 (1979); Giordano v. Commissioner,

63 T.C. 462 (1975).   Summary judgment is intended to expedite

litigation and avoid unnecessary and expensive trials.        Florida

Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988).

     Section 2501 imposes, generally, a tax on gifts of property

by an individual.   The gift is measured by the value of the

property passing from the donor; if the gift is made in property,

the property's value at the date of the gift is considered the

amount of the gift.   Sec. 2512(a).    Fair market value is

determined to be the price at which the property would change

hands between a willing buyer and a willing seller, neither party


     3
      Both parties have presented objections to individual
stipulations on the grounds of relevance. We find them to be
without merit and/or irrelevant to the decision of this case.
Consequently, we do not address these matters.
                               - 6 -


being under any compulsion to buy or to sell, and both having a

reasonable knowledge of the relevant facts.   United States v.

Cartwright, 411 U.S. 546, 551 (1973); sec. 25.2512-1, Gift Tax

Regs.

     Here, the parties have agreed that the net asset value

method is appropriate for the valuation of the stock of the

corporation.   They are also in agreement as to the fair market

value of the property in question and the valuation of the shares

as reported on petitioner's Federal gift tax returns.   The

parties further agree that the corporation would have recognized

capital gains in the amount of $530,500, $402,094, and $402,892

for the taxable years 1991, 1992, and 1993, respectively, if the

property had been disposed of in a taxable disposition (built-in

capital gain).   However, the parties diverge on whether, in

arriving at the corporation's net asset value, adjustments should

be made to reflect costs that would, potentially, be incurred if

its assets were liquidated.

     Petitioner contends that, for gift tax purposes, she is

entitled to take into account the full amount of capital gain

taxes to reduce the fair market value of the stock of the

corporation.   Simply put, petitioner argues that a willing

purchaser of the corporate stock would have discounted the

otherwise applicable fair market value because of the income tax

liability inherent in the aforementioned property.   The parties
                               - 7 -


have stipulated the amounts that would have been realized in the

years under consideration if a sale of the property had actually

taken place.   In that regard, petitioner computed the capital

gain tax reductions as though the corporation had sold the

property in a taxable disposition on the transfer dates.4

     Respondent, on the other hand, argues that petitioner is not

entitled to reduce the fair market value of the corporate stock

to account for potential capital gain taxes since there was no

liquidation, distribution, or sale of the stock at the transfer

dates.5

     This Court has repeatedly held that no reduction in the

value of closely held stock to reflect potential capital gains is

warranted where the evidence fails to establish that a

liquidation of the corporation or sale of the corporation's

assets is likely to occur.   Ward v. Commissioner, 87 T.C. 78,

103-104 (1986); Estate of Andrews v. Commissioner, 79 T.C. 938,

     4
      In particular, petitioner claimed reductions based upon the
assumption that the potential capital gains would be subject to
Federal income tax, New York State Franchise Tax on Business
Corporations, and New York City General Corporation Tax in the
aggregate amounts of $240,079, $181,969, and $182,330 for the
taxable years 1991, 1992, and 1993, respectively. Petitioner
subsequently amended her petition, seeking to increase these
taxes to $255,221, $193,256, and $190,774 for the taxable years
1991, 1992, and 1993, respectively. See supra note 2.
     5
      Petitioner states that if we decide against her motion for
summary judgment, then she reserves the right to present
additional evidence to determine the full amount of taxes that
may, indeed, be taken into account. Our holding in this regard
renders this issue moot. See supra note 2.
                                - 8 -


942 (1982); Estate of Piper v. Commissioner, 72 T.C. 1062, 1087

(1979); Estate of Robinson v. Commissioner, 69 T.C. 222, 226

(1977); Estate of Cruikshank v. Commissioner, 9 T.C. 162, 165

(1947).6    Moreover, we have also held that a discount to asset

values for the "lost use of money" is inappropriate because it

fails to recognize that the underlying assets will themselves

appreciate, most likely, at a rate similar to that applied as a

discount.    Estate of Andrews v. Commissioner, supra at 950.

     The seminal case, Estate of Cruikshank v. Commissioner,

supra, held that potential capital gain taxes were not includable

in the computation for a discount in the valuation of certain

corporate shares.    In that case, the taxpayer held stock in a

closely held corporation which was an investment holding company.

The parties agreed that the corporation should be appraised on

the basis of the value of its underlying assets.    The issue

presented was whether the value of the underlying assets should

be reduced by amounts of commissions and stamp and capital gain

taxes which would become payable if the assets were sold.    We

stated:


     6
      See also Estate of Gray v. Commissioner, T.C. Memo. 1997-
67; Estate of Luton v. Commissioner, T.C. Memo. 1994-539; Estate
of Ford v. Commissioner, T.C. Memo. 1993-580, affd. 53 F.3d 924
(8th Cir. 1995); Estate of McTighe v. Commissioner, T.C. Memo.
1977-410; Estate of Thalheimer v. Commissioner, T.C. Memo. 1974-
203, affd. on this issue and remanded without published opinion
532 F.2d 751 (4th Cir. 1976); Gallun v. Commissioner, T.C. Memo.
1974-284.
                                - 9 -



     the costs of disposal like broker's commissions are not
     a proper deduction. Estate of Henry E. Huntington, * *
     * [36 B.T.A. 698 (1937)]. Still less do we think a
     hypothetical and supposititious liability for taxes on
     sales not made nor projected to be a necessary
     impairment of existing value. We need not assume that
     conversion into cash is the only use available to an
     owner, for property which we know would cost him market
     value to replace. * * * [Id. at 165.]

     Subsequently, in Estate of Piper v. Commissioner, supra, the

issue for our consideration was the valuation of the stock of two

investment companies for gift tax purposes.   The taxpayer sought

to discount the value of the stock for potential capital gain

taxes at the corporate level.   We rejected such an approach,

holding:

     We consider such a discount unwarranted under the net
     asset valuation technique employed herein, where there
     is no evidence that a liquidation of the investment
     companies was planned or that it could not have been
     accomplished without incurring a capital gains tax at
     the corporate level. [Id. at 1087.]


As we aptly stated in Ward v. Commissioner, supra at 104 (quoting

Estate of Cruikshank v. Commissioner, supra at 165): "'We need

not assume that conversion into cash is the only use available to

an owner, for property which we know would cost him market value

to replace.'"   Consequently, taxpayers may not obtain a valuation

discount for estate and gift tax purposes based on an event that

may not transpire.   Hence, "When liquidation is only speculative,

the valuation of assets should not take these costs into account
                             - 10 -


because it is unlikely they will ever be incurred."   Estate of

Andrews v. Commissioner, supra at 942 (emphasis added).

     In sum, the primary reason for disallowing a discount for

capital gain taxes in this situation is that the tax liability

itself is deemed to be speculative.   Specifically, in the above

cases, there was a failure to show the requisite likelihood that

the beneficiaries would liquidate the corporation or sell the

underlying assets and incur the tax and other expenses.    Further,

there was no showing that a hypothetical willing buyer would

desire to purchase the stock with the view toward liquidating the

corporation or selling the assets, such that the potential tax

liability would be of material and significant concern.7

     Petitioner contends that Estate of Piper v. Commissioner,

supra at 1087, and Estate of Luton v. Commissioner, T.C. Memo.

     7
      In Ward v. Commissioner, 87 T.C. 78, 104 (1986), this Court
summarized its position as follows:

     there is no evidence that the liquidation of the entire
     corporation is imminent or even contemplated. Under
     such circumstances, "We need not assume that conversion
     into cash is the only use available to an owner, for
     property which we know would cost him market value to
     replace." Estate of Cruikshank v. Commissioner, 9 T.C.
     162, 165 (1947). A hypothetical willing buyer of the
     shares in an arm's-length sale could expect no
     reduction in price for sales expenses and taxes that he
     might incur in a subsequent sale of either the shares
     or the corporation's underlying assets. When
     liquidation is only speculative, such costs are not to
     be taken into account. Estate of Andrews v.
     Commissioner, 79 T.C. at 942; Estate of Piper v.
     Commissioner, 72 T.C. 1062, 1086-1087 (1979); Estate of
     Cruikshank v. Commissioner, supra. [Fn. ref. omitted.]
                                  - 11 -


1994-539, among other cases, represent the denial of a discount

for potential capital gain taxes was based, in part, on the

possibility that the taxes could be avoided by liquidating the

corporation.

        In that regard, petitioner argues that those cases have lost

their vitality as a result of the October 22, 1986, enactment of

the Tax Reform Act of 1986 (TRA), Pub. L. 99-514, sec. 631, 100

Stat. 2269.       Specifically, petitioner contends that the

amendments made by the TRA to sections 336 and 337 repealed the

General Utilities doctrine.8      Petitioner states that prior to the

effective date of TRA, the corporation could have liquidated

completely and distributed the property and cash to her, or to

any other individual or entity, without recognizing the built-in

gain.       Further, petitioner asserts that, subsequent to the

effective date of TRA, she does not possess the ability to

completely liquidate the corporation without the recognition of

the built-in gain.       See e.g., secs. 336(a) and 337.   As a result,

petitioner argues that it is now a virtual certainty that if the

        8
      The General Utilities doctrine originated in General
Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935). The
holding of that opinion allowed a corporation to avoid
recognition of gain on the distribution of appreciated property
to its shareholders. In 1954, Congress codified the General
Utilities doctrine in sec. 311. Pursuant to the Tax Reform Act
of 1986 (TRA), Pub. L. 99-514, sec. 631(a), (c), 100 Stat. 2085,
2269, corporations are now required to recognize gain on the
distribution of appreciated property except in certain limited
circumstances. Secs. 311, 336 as amended by TRA sec. 631(a),
(c).
                               - 12 -


corporation is liquidated, capital gain taxes will be imposed at

the corporate level.    Moreover, petitioner states that any

"willing buyer" of the corporate stock, having "reasonable

knowledge" of the applicability of the capital gain taxes, would

reduce the price paid for the stock by the full amount of the

tax.    Sec. 25.2512-1, Gift Tax Regs.   Thus, petitioner argues

that this change in the law justifies the allowance of a discount

for potential taxes.

       In contrast, respondent counters that a hypothetical buyer

possesses the option of avoiding the imposition of any capital

gain taxes through the purchase of corporate stock and the

continuation of the business of leasing the property in question

through the corporate form.    Thus, respondent asserts that any

individual or entity may indefinitely defer taxes.     Additionally,

respondent argues that there are several transactions in which

the corporation may transfer the property to a new corporation in

exchange for the new corporation's stock and thus avoid the

recognition of gain.    See e.g., secs. 351 and 355.

       We agree with respondent that a discount for capital gain

taxes does not apply here.    As noted, we have held that a

discount for potential costs of sale or liquidation, whether in

the nature of selling expenses or income taxes that might be

incurred, is inappropriate where the sale or liquidation is

itself speculative.
                              - 13 -


     In this instance, both parties have stipulated that there

was no plan of liquidation.   Accordingly, it is inapposite to

apply a discount for potential capital gain taxes when the

recognition event itself is purely speculative.

     For the foregoing reasons, we will (1) grant respondent's

motion for summary judgment and (2) deny petitioner's motion for

summary judgment.

                                    An appropriate order and

                               decision will be entered for

                               respondent.
