                        T.C. Memo. 1996-112



                      UNITED STATES TAX COURT



                  JANE O. KOSMAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27091-93.         Filed March 11, 1996.



     James M. Bausch, Larry A. Holle, and Terry R. Wittler, for

petitioner.

     Albert B. Kerkhove, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     COLVIN, Judge:   Respondent determined that petitioner

Jane O. Kosman has gift tax deficiencies of $158,136 for 1986 and

$15,157 for 1987.

     The issue for decision is the fair market value of Kosman,

Inc., stock that petitioner gave to her children on September 30,
                                  - 2 -


1986, and March 31, 1987.      To decide the value of that stock, we

must decide the following issues:

     (1)    The value of Kosman, Inc.'s 12,834 shares of

Scottsbluff National Corp. stock.      We hold that it was $3,278,009

on September 30, 1986, and $3,530,454 on March 31, 1987.

     (2)    The value of Kosman, Inc.'s 2,000 shares of Western

National Bank stock.      We hold that it was $120,000 on

September 30, 1986, and $144,000 on March 31, 1987.

     (3)    The value per share before discounts of Kosman, Inc.,

voting and nonvoting common stock.        We hold that it was $219.80

on September 30, 1986, and $247.45 on March 31, 1987.

     (4)    The appropriate discounts to apply in valuing the

Kosman, Inc., stock that petitioner gave to her children.       We

apply a minority interest discount of 10 percent and a lack of

marketability discount of 15 percent to the voting and nonvoting

shares, and a 4-percent discount for lack of voting power to the

nonvoting shares.

     The fair market value of Kosman, Inc., stock that petitioner

gave to her children after applying the discounts in (4) to the

value per share of Kosman, Inc.'s stock in (3) is as follows:

                              Petitioner's    Respondent's
   Date          Stock           Expert         Experts       Holding

  9/30/86     Voting common      $116.24          $294       $164.85

              Nonvoting           100.74           282        156.06
               common
                                 - 3 -


  3/31/87   Voting common       131.76           294        185.58

            Nonvoting           114.19           282        175.69
             common

     Section references are to the Internal Revenue Code in

effect for the years in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

1.   Petitioner

     Petitioner lived in Scottsbluff, Nebraska, when she filed

the petition in this case.

     In 1986 and 1987, the stock of Scottsbluff National Corp.

was held by members of the Kosman, Lindig, and Ostenberg-

Fleisbach families, and by current and former employees and

directors of Scottsbluff National Bank.      Harve Ostenberg formerly

was the majority shareholder and president of Scottsbluff

National Bank.    Harve Ostenberg and his first wife are

petitioner’s parents.    The Lindig family members inherited their

stock in Scottsbluff National Corp. from William Ostenberg.

William Ostenberg was Harve Ostenberg's brother and a shareholder

of Scottsbluff National Bank.    The members of the Ostenberg-

Fleisbach family derived their stock in Scottsbluff National Bank

from C.S. Ostenberg and C.H. Fleisbach.      C.S. Ostenberg and C.H.

Fleisbach were sons of Harve Ostenberg's second wife and her

first husband.
                                 - 4 -


2.   Scottsbluff National Bank

     Scottsbluff National Bank was chartered in 1909.      It was

owned by Harve and William Ostenberg.    From 1909 to 1944, Harve

Ostenberg owned a majority of the outstanding shares of stock in

Scottsbluff National Bank and served as president.    Henry Kosman

(petitioner's husband) was the bank's president from 1951 to

1982.   H.H. Kosman (petitioner's son) has been the bank's

president from 1991 until the time of the trial in this case.

     Before 1986, the main office of Scottsbluff National Bank

was in downtown Scottsbluff, Nebraska.    It also had a drive-in

branch office in downtown Scottsbluff and another branch in

eastern Scottsbluff.   In 1987, Scottsbluff National Bank acquired

another building next to its main building.    Both buildings were

then remodeled.   The remodeling was completed in 1989.

3.   Western National Bank

     Western National Bank was chartered in 1965.    The

shareholders of Scottsbluff National Bank were instrumental in

forming Western National Bank.    Western National Bank and

Scottsbluff National Bank had substantially the same

shareholders.   In 1986 and 1987, Western National Bank's main

office was in Scottsbluff.   It also had a drive-in branch office

in Scottsbluff.
                                - 5 -


4.   Scottsbluff National Corp.

     Scottsbluff National Corp. was formed in 1974 as the parent

holding company of Scottsbluff National Bank.   Scottsbluff

National Bank became the wholly owned subsidiary of Scottsbluff

National Corp. when the bank's shareholders exchanged their

shares of the bank's stock for shares of the parent holding

company's stock.    From 1974 to 1987, Scottsbluff National Corp.

conducted no material business operations and held no assets

other than its stock in Scottsbluff National Bank.

5.   Kosman, Inc.

     Before 1980, banks in Nebraska could not have branch

offices.   By 1980, however, banking statutes were amended to

allow banks to have branch offices and to permit formation of

multibank holding companies.

     Kosman, Inc., was incorporated around July 1986 to serve as

a holding company for the Kosman family's interest in Scottsbluff

National Corp.   At all times pertinent to this case, the

outstanding shares of stock of Kosman, Inc., consisted of 5,000

shares of voting common stock, 5,000 shares of nonvoting common

stock, and 12,000 shares of voting preferred stock.

     In 1986 and 1987, Kosman, Inc.'s only assets were its stock

in Scottsbluff National Corp. and Western National Bank.    During

this period, Kosman, Inc., owned 12,834 (32.085 percent) of the

40,000 shares of stock in Scottsbluff National Corp. and 2,000
                                - 6 -


(10 percent) of the 20,000 shares of stock in Western National

Bank.    Scottsbluff National Corp. owned 100 percent of the stock

of Scottsbluff National Bank.

6.   Gering National Bank

        Gering National Bank in Gering, Nebraska, was declared

insolvent by the Federal Deposit Insurance Corp. (FDIC) around

1986.    The towns of Gering and Scottsbluff are adjacent.

     On August 1, 1986, Scottsbluff National Bank absorbed the

Gering National Bank.    Scottsbluff National Bank also acquired

the real estate, fixtures, and furniture of Gering National Bank

from the FDIC at the end of 1986.    Scottsbluff National Bank paid

a $15,000 premium to the FDIC to acquire Gering National Bank,

which had total deposits of $65 million.    Following the

acquisition, Gering National Bank's office became a branch office

of Scottsbluff National Bank.    After it absorbed Gering National

Bank in 1986, Scottsbluff National Bank had about 120 employees.

7.   Acquisition of Western National Bank by Scottsbluff National
     Corp.

     In October 1986, the board of directors of Scottsbluff

National Corp. approved a plan to acquire Western National Bank.

The plan was approved by the shareholders of both companies and

by the appropriate regulatory authorities between October 1986

and June 30, 1987.    The two banks merged on July 1, 1987.

Western National Bank's shareholders received one share of
                                   - 7 -


Scottsbluff National Corp. stock for each 3.3 shares of Western

National Bank stock.

     Western National Bank's main office became a branch office

of Scottsbluff National Bank, and the branch office of Western

National Bank was closed.    As a result of the merger, about 20

employees of Western National Bank became employees of

Scottsbluff National Bank.

8.   Nebraska Economy

     a.    Statewide

     From late 1986 to early 1987, the Nebraska economy was fair

to poor.    The State's economy grew more slowly than the nation's

economy because of low prices for agricultural commodities

produced in Nebraska.    The average per-acre value of farm land in

Nebraska fell from $730 in 1982 to $335 in 1987, a decline of 54

percent over 5 years.

     b.    Northwestern Nebraska

     From 1984 to 1986, per capita income rose 11.61 percent for

the country and 8.72 percent in northwestern Nebraska (which

includes Scottsbluff).    From 1980 to 1986, total receipts for

farm products in northwestern Nebraska decreased 11.2 percent

before adjustment for inflation.

     Business conditions were poor in northwestern Nebraska

during the middle 1980's.    During 1986 and 1987, uncertainty over

whether the Chicago & Northwestern R.R. Co.'s railway line would
                                                - 8 -


   continue to operate between Merriman and Crawford cast a cloud

   over the economic future of northwestern Nebraska.

            c.    Scottsbluff Area

            There was little reason to be optimistic about the

   Scottsbluff area economy during the last half of 1986 and the

   first half of 1987.             In the early 1980's, the Gering,

   Scottsbluff, and Terrytown area had five commercial banks and two

   savings and loans.             Two of the banks failed in 1986.                  Both of the

   savings and loans failed later.                   The Scottsbluff area suffered

   the highest failure rate of financial institutions for any market

   area in Nebraska during the 1980's.                    The financial outlook for

   Scottsbluff National Bank and Western National Bank was fair to

   poor in 1986.

   9.       Financial Condition of Scottsbluff National Bank in 1986-
            1987

            From 1981 to 1986, Scottsbluff National Bank had income,

   expenses, assets, liabilities, and stockholders' equity as

   follows:
                                 Consolidated Income Statements for
                                     Scottsbluff National Corp.
                                       Years Ended December 31


                 1981           1982          1983          1984          1985           1986
Interest
income      $10,906,440     $12,318,774   $11,962,853   $12,777,147   $12,410,738    $14,307,419

Interest
expense       6,786,820       8,042,931     7,804,350     8,195,381     7,361,058      8,233,708

Net interest
income       4,119,620        4,275,843     4,158,503     4,581,766     5,049,680      6,073,711

Loan loss         156,071       664,383       426,334       590,135     1,540,000      1,320,000
                                           - 9 -

Net interest
income after
loan loss
provision    3,963,549     3,611,460   3,732,169   3,991,631   3,509,680   4,753,711

Noninterest
income          502,049      521,096     513,209     593,281     654,964   1,043,446

Noninterest
expense       2,028,292    2,219,002   2,333,675   2,342,746   2,632,959   3,589,691

Income before
taxes &
securities
trans.        2,437,306    1,913,554   1,911,703   2,242,166   1,531,685   2,207,466

Income
taxes           785,000      380,000     340,000     318,000      43,000     295,000

Income before
securities
trans.        1,652,306    1,533,554   1,571,703   1,924,166   1,488,685   1,912,466

Securities
trans. net
of taxes        (50,598)         262     - 0 -        - 0 -      - 0 -       - 0 -

Net income    1,601,708    1,533,816   1,571,703   1,924,166   1,488,685   1,912,466
                                             - 10 -

                                 Consolidated Balance Sheets for
                                   Scottsbluff National Corp.
                                           December 31


                  1981          1982          1983          1984          1985         1986
Cash &
due from
banks          $7,486,850    $5,665,233    $7,899,122    $8,074,581    $8,296,300   $15,300,513

Investment
securities     22,101,096    28,127,111    29,526,735    36,082,308    44,489,796    64,839,147

Fed. funds
sold &
securities
purchased
u/a resell      8,334,000     9,694,000    12,574,000     6,300,000     4,550,000    11,500,000

Due from
FDIC              - 0 -          - 0 -        - 0 -         - 0 -         - 0 -      33,392,252

Net loan       56,705,401    59,221,104    64,159,394    66,532,321    65,078,845    75,014,696

Premises &
equipment         905,123       823,939       776,627       711,640       676,957     1,255,549

Investment
in direct
financing
leases            - 0 -          - 0 -        - 0 -         - 0 -         506,684       386,869

Other real
estate
owned             - 0 -          - 0 -        - 0 -         - 0 -       2,229,106     2,190,305

Other
assets          2,055,449     2,850,616     3,040,321     3,941,466     2,843,590     5,008,152

Total
assets         97,587,919   106,382,003   117,976,199   121,642,316   128,671,278   208,887,483

Total
deposits       84,779,882    91,969,448   102,308,473   105,620,830   111,666,690   190,521,460

Total
liabilities
               89,268,848    96,689,116   106,871,609   109,053,560   115,013,837   193,817,576
Total
stockholders
equity          8,319,071     9,692,887    11,104,590    12,588,756    13,657,441    15,069,907

Total
liabilities &
stockholders
equity        97,587,919    106,382,003   117,976,199   121,642,316   128,671,278   208,887,483
                              - 11 -


      Scottsbluff National Bank was in fair to good financial

condition on December 31, 1986.   In December 1986, Scottsbluff

National Bank had a secure equity position but a below average

loan loss reserve.   The bank's high profitability in the early

1980's may have been partly because it had made an insufficient

allowance for loan losses.   Scottsbluff National Bank was well

capitalized, consistently profitable, and efficiently run, but

its loan losses were cause for some concern.

      On December 31, 1986, Scottsbluff National Bank was the

seventh largest bank in Nebraska.   Seven of the 10 largest

Nebraska banks were located in Lincoln or Omaha, Nebraska.

On December 31, 1986, Scottsbluff National Bank had a loan-to-

deposit ratio of 40.21 percent, the lowest of the 10 largest

banks in Nebraska.   The average loan-to-deposit ratio for the

10 banks was 58.7 percent.   Of the 10 largest banks in Nebraska,

Scottsbluff National Bank had the third highest percentage of

agricultural loans and the fourth highest percentage of

nonperforming loans.

10.   Financial Condition of Western National Bank in 1984-1987

      From 1984 to 1986, Western National Bank had income,

expenses, assets, liabilities, and equity capital as follows:
                             - 12 -



           Income Statements of Western National Bank
                     Years Ended December 31

                          1984           1985          1986

Operating expenses     $2,732,952     $2,899,963    $2,466,955

Income (loss) before
income taxes &
securities gains          295,747       (119,316)      116,943

Income tax provision
(credit)                   66,699       (105,979)        6,000

Income (loss) before
securities gains          229,048        (13,337)      110,943

Securities gains              434          4,697         2,042

Net income (loss)         229,482         (8,640)      112,985
                               - 13 -


               Balance Sheets of Western National Bank
                       Years Ended December 31

                             1984          1985          1986
Cash & due from
banks                     $2,368,946    $1,868,176   $1,460,320

U.S. securities            2,755,558     3,883,924    5,406,542

U.S. agencies                399,750       249,750       249,750

State & municipal
obligations                1,852,372     1,430,747    1,196,568

Federal Reserve stock
& corp. stock                 10,800        10,800        10,800

Federal funds
sold & securities
purchased u/a to
resell                     3,400,000     5,200,000    7,900,000

Net loans                 14,470,239    12,813,498   11,013,761

Bank premises &
equipment                    285,455       242,245       209,999

Other assets                 831,193       733,031       609,622

Total assets              26,374,313    26,432,171   28,057,362

Total deposits            23,598,064    23,760,548   25,357,602

Other liabilities            554,840       459,660       407,191

Total liabilities         24,152,904    24,220,208   25,764,793

Total equity capital       2,221,409     2,211,963    2,292,569

Total liabilities and
equity capital            26,374,313    26,432,171   28,057,362



     Western National Bank's income was uneven from 1982 to 1986.

Its income dropped from the previous year in 1983 and 1985.
                                 - 14 -


These changes were primarily due to its declining loan income.

The decline in loan income was closely related to a decrease in

Western National Bank's net loan assets.

      Western National had significant problems with bad loans

during the early and middle 1980's.       At the start of 1985,

Western National Bank had $88,000 in its loan loss reserve.        In

1985, it had net loan losses of $462,000, which caused it to have

a net loss for 1985.    It normally takes at least several years

for a bank to correct problems with bad loans.

11.   Book Values and Dividend Payment Histories of Scottsbluff
      National Corp. and Western National Bank

      The book values of Scottsbluff National Corp. and Western

National Bank on September 30, 1986, and March 31, 1987, were as

follows:

                                 9/30/86                       3/31/87
                  9/30/86      Book Value        3/31/87     Book Value
Corporation     Book Value      Per Share      Book Value     Per Share

Scottsbluff $14,595,077.21       $364.88    $15,719,232.71    $392.98
 Natl. Corp.
Western       2,231,862.00        111.59      2,331,145.79     116.56
 Natl. Bank



      From 1981 to 1986, Scottsbluff National Corp. paid dividends

per share as follows:

                Year         Dividends Per Share
                1981                $4.00
                1982                 4.00
                1983                 4.00
                1984                11.00
                1985                10.50
                1986                12.50
                                - 15 -


      Western National Bank paid no dividends in 1985 and

dividends of 80 cents per share in 1986.

12.   Petitioner's Gifts of Shares in Kosman, Inc.

      Before September 30, 1986, petitioner owned 2,340 shares

(46.8 percent) of the voting common stock of Kosman, Inc.; 2,340

shares (46.8 percent) of the nonvoting common stock of Kosman,

Inc.; and 5,616 shares (46.8 percent) of the voting preferred

stock of Kosman, Inc.    On September 30, 1986, and March 31, 1987,

petitioner gave the following shares of Kosman, Inc., stock to

her children:

                      Date Of        Voting         Nonvoting
      Donee             Gift      Common Shares   Common Shares

 H.H. Kosman          9/30/86       1,703.41             --
 Dianna Kosman        9/30/86          --             1,281.54
 Ann Burkholder       9/30/86         223.08          1,058.46
                      3/31/87         348.41             --

      Those gifts are the subject of this case.   Petitioner also

gave 94.77 and 530 shares of Kosman, Inc., voting preferred stock

to Ann Burkholder and Diana Kosman, respectively, on March 31,

1987.    The value of that stock is not in dispute.   From July 21,

1986, to the end of 1987, petitioner did not own a majority of

the outstanding voting shares of Kosman, Inc.

      Petitioner and the other shareholders of Kosman, Inc., owned

the following shares of Kosman, Inc., stock on the dates shown:
                                  - 16 -


From July 21, 1986, to September 30, 1986--

                   Voting            Nonvoting             Voting
                   Common              Common            Preferred
   Shareholder     Shares     %        Shares      %       Shares      %

  Petitioner     2,340.00 46.80      2,340.00    46.80   5,616.00    46.80
  H.H. Kosman      197.50 3.95         197.50     3.95     474.00     3.95
  Diana Kosman     181.00 3.62         181.00     3.62     434.40     3.62
  Ann Burkholder   361.50 7.23         361.50     7.23     867.60     7.23
  H.D. Kosman    1,920.00 38.40      1,920.00    38.40   4,608.00    38.40
   Trust

From October 1, 1986, to March 31, 1987--

                 Voting              Nonvoting             Voting
                 Common                Common            Preferred
  Shareholder    Shares      %         Shares   %          Shares   %
 Petitioner       413.51     8.27        --    0.00      5,616.00 46.80
 H.H. Kosman    1,900.00    38.02      197.50  3.95        474.00  3.95
 Diana Kosman     181.00     3.62    1,462.54 29.25        434.40  3.62
 Ann Burkholder   584.58    11.69    1,419.96 28.40        867.60  7.23
 H.D. Kosman    1,920.00    38.40    1,920.00 38.40      4,608.00 38.40
  Trust

After March 31, 1987--

                  Voting             Nonvoting        Voting
                  Common              Common        Preferred
  Shareholder     Shares      %        Shares   %      Shares          %
 Petitioner        65.10     1.30        --    0.00 4,991.23         41.59
 H.H. Kosman    1,900.91    38.02      197.50  3.95    474.00         3.95
 Diana Kosman     181.00     3.62    1,462.54 29.25    964.40         8.04
 Ann Burkholder   932.99    18.66    1,419.96 28.40    962.37         8.02
 H.D. Kosman    1,920.00    38.40    1,920.00 38.40 4,608.00         38.40
  Trust

13.   Gift Tax Returns, Notice of Deficiency, and Respondent's
      Amended Answer

      On her 1986 and 1987 gift tax returns, petitioner reported

that the fair market value of Kosman, Inc., stock was $125.63 per

share on September 30, 1986, and $153.62 per share on March 31,

1987.
                                - 17 -


      In preparing her 1986 and 1987 returns, petitioner retained

the certified public accounting firm of Grant Thornton to

appraise the shares.    Petitioner reported the values that Grant

Thornton placed on them.

      In the notice of deficiency, respondent determined that the

fair market value of voting and nonvoting Kosman, Inc., stock was

$223.60 per share on September 30, 1986, and $240.68 per share on

March 31, 1987.   In an amended answer, respondent alleged that

the fair market value per share of the voting and nonvoting

common stock of Kosman, Inc., on September 30, 1986, and

March 31, 1987, was $294 for voting shares and $282 for nonvoting

shares.

      Respondent's position in the amended answer results in a

larger gift tax deficiency than respondent determined in the

notice of deficiency.

14.   Purchases of Scottsbluff National Corp. Stock From Former
      Employees and Others

      There were a few sales of shares of Scottsbluff National

Corp. stock from 1984 to 1988 involving directors and longtime

employees.   These were sales of minority interests.

      Several stock purchase agreements were made with directors

and employees of Scottsbluff National Bank before 1986.    One of

the agreements, made many years before 1986, set a sales price

for Scottsbluff National Bank stock equal to 90 percent of the

shares' book value.     Two other agreements set a sales price equal
                               - 18 -


to the shares' unadjusted book value.    Several of these stock

purchase agreements set a sales price equal to 1.15 times the

shares' unadjusted book value.

     In 1984, petitioner bought 500 shares of Scottsbluff

National Corp. stock from the estate of Ruth Witters for a price

equal to 1.15 times the shares' book value.    Ruth Witters was the

widow of a former longtime employee and vice president of

Scottsbluff National Bank.

     On April 11, 1988, Kosman, Inc., bought 100 shares of

Scottsbluff National Corp. stock from Robert Berggen for $430.85

per share.   The price approximately equaled the book value per

share.   Robert Berggen had been a director of Scottsbluff

National Corp.    He agreed to sell the shares when he left the

board of the corporation.

     On November 23, 1988, the Estate of Lawrence Baltas sold a

total of 100 shares of Scottsbluff National Corp. stock to 10

different parties, including Kosman, Inc., for $543 per share.

On that date, Kosman, Inc., bought 10 shares from the estate for

$543 per share.   The price exceeded the book value per share.

Lawrence Baltas had been a shareholder of Western National Bank.

He acquired his Scottsbluff National Corp. shares when Western

National Bank and Scottsbluff National Bank merged in 1987.    He

left his estate to two charitable foundations in Scottsbluff.

     On December 23, 1988, Kosman, Inc., bought 1,140 shares of

Scottsbluff National Corp. stock from Helen Schwab for $456.29
                                - 19 -


per share.     The price exceeded the shares' book value.   The

shares were sold under purchase agreements made from 1967 to

1975.     Helen Schwab was the widow of a former director of

Scottsbluff National Bank.     Shortly after Kosman, Inc., bought

these shares of stock, it resold 400 of them to Ann Burkholder's

family for $465 per share.     Ann Burkholder is the sister of H.H.

Kosman.     Kosman, Inc., sold the 400 shares to the Burkholder

family because it did not have enough cash to pay for the 1,140

shares it was buying from Helen Schwab.

15.   First Commerce Bancshares, Inc.

        The following findings of fact relate to First Commerce

Bancshares, Inc. (First Commerce), a publicly traded Nebraska

bank both parties considered as comparable to Scottsbluff

National Bank and Western National Bank.

        First Commerce is a bank holding company that operates banks

throughout Nebraska.     In 1985 and 1986, its banking operations

were unprofitable.     However, it had a net profit for 1985 and

1986 in part because it terminated an employee pension plan and

it had securities gains.

        First Commerce was formed in 1985 by consolidating six bank

holding companies, each of which owned one bank.     One family

owned a majority of the stock of each of the holding companies.

The transactions under which the six bank holding companies were

consolidated into First Commerce were not at arm's-length.
                              - 20 -


     Before the consolidation, several of the bank holding

companies had operating agreements with the Comptroller of the

Currency.   These agreements generally required the bank to

correct problem loans, to maintain a prescribed minimum level of

capital, and to pay dividends only according to sound banking

practice.   After the consolidation, five of the six banks owned

by National Commerce Bancshares, Inc., paid no dividends.

                              OPINION

1.   Background

     Section 2501 imposes a tax on gifts of property by an

individual.   Gift tax is based on the fair market value of the

property on the date of the gift.   Sec. 2512(a).   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 the relevant facts.    United States v. Cartwright,

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

     If the stock does not sell for its fair market value, then

reasonable modifications of that price are made to decide its

fair market value.   See sec. 20.2031-2(e), Estate Tax Regs.   If

selling prices for stock are unavailable, then we decide its fair

market value by considering factors such as the company's net

worth, earning power, dividend-paying capacity, management,

goodwill, position in the industry, the economic outlook in its

industry, and the values of publicly traded stock of comparable
                               - 21 -


corporations.   See sec. 20.2031-2(f), Estate Tax Regs.   The fair

market value of stock is a question of fact.    Hamm v.

Commissioner, 325 F.2d 934, 938 (8th Cir. 1963), affg. T.C. Memo.

1961-347.

     Each party called expert witnesses to testify at trial.

They each valued petitioner’s Kosman, Inc., stock by valuing the

Scottsbluff National Corp. stock and Western National Bank stock

that Kosman, Inc., owned.    We are not bound by the opinion of any

expert witness, and we may accept or reject expert testimony

exercising our sound judgment.    Helvering v. National Grocery

Co., 304 U.S. 282, 295 (1938); Fitts' Estate v. Commissioner, 237

F.2d 729, 732-733 (8th Cir. 1956), affg. T.C. Memo. 1955-269;

IT&S of Iowa, Inc. v. Commissioner, 97 T.C. 496, 508 (1991).

     Petitioner has the burden of proving that respondent's

determinations in the notice of deficiency are erroneous.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Respondent

has the burden of proving the increased deficiency asserted in

the amended answer.    Rule 142(b).

2.   Value of Kosman Inc.’s Scottsbluff National Corp. Stock

     Petitioner's expert and respondent's experts concluded that

the value of Kosman, Inc.'s Scottsbluff National Corp. stock was

as follows:

                                               Value Of Scottsbluff
              Expert        Valuation Date       Natl. Corp. Stock
            Petitioner’s       9/30/86            $2,810,133
              Expert           3/31/87             2,991,447
            Respondent's       9/30/86             4,633,555
              Experts          3/31/87             4,633,555
                               - 22 -



     a.    Petitioner’s Expert’s Estimate of the Value of Kosman,
           Inc.'s Scottsbluff National Corp. Stock

     Petitioner's expert compared Scottsbluff National Bank to

Nebraska’s nine other largest banks.    He noted that, of those

banks, only First National Bank of Columbus (the sixth largest),

Scottsbluff National Bank (the seventh largest), and Delay

National Bank of Norfolk (the eighth largest) were not located in

Omaha or Lincoln, Nebraska.

     Petitioner's expert concluded that Scottsbluff National Bank

had strengths and weaknesses compared to Nebraska’s nine other

banks.    He noted that Scottsbluff National Bank consistently

produced substantial profits and that it had an acceptable amount

of overhead expense.    He stated that the primary weaknesses of

Scottsbluff National Bank were that much of its loan portfolio

was in agricultural loans and that the percentage of its

nonperforming loans was higher than six of the nine other largest

Nebraska banks.

     Petitioner's expert considered as possible comparables four

publicly traded bank holding companies that owned one or more of

the 10 largest Nebraska banks.    These four companies were:

Norwest Corp., which owned Norwest Bank in Omaha (Nebraska's

largest bank); FirsTier Financial, which owned FirsTier Bank in

Omaha (the second largest bank) and FirsTier Bank in Lincoln (the

third largest bank); First National of Nebraska, which owned

First National Bank of Omaha (the fourth largest bank); and First
                              - 23 -


Commerce Bankshares, Inc. (First Commerce), which owned National

Bank of Commerce in Lincoln (the fifth largest bank).

     Petitioner's expert rejected using Norwest Corp. as a

comparable because it was large and owned several other banks in

the upper Midwest.   He rejected using FirsTier Financial as a

comparable because it owned two large and well established

Lincoln and Omaha banks.   He rejected using First National of

Nebraska as a comparable because it had a large credit card

business.

     Petitioner's expert believed that First Commerce was the

most comparable to Scottsbluff National Corp. because First

Commerce had substantial banking interests outside of Lincoln and

Omaha.   National Bank of Commerce in Lincoln represented 53

percent of First Commerce's total assets.   First Commerce also

owned banks in Grand Island, Hastings, Kearney, North Platte, and

West Point, Nebraska, and owned industrial loan companies in

Columbus, Lincoln, and Scottsbluff.    First Commerce stock traded

for $13.25 per share on September 30, 1986, and March 31, 1987,

which petitioner’s expert estimated was 57.7 percent of its book

value per share of $22.97 on December 31, 1986.

     Petitioner's expert concluded that Scottsbluff National

Corp. was in better financial condition than First Commerce, and

that its stock would trade at 60 percent of its book value per

share on September 30, 1986, and March 31, 1987.   Petitioner's
                                - 24 -


expert concluded that the value of Kosman, Inc.'s Scottsbluff

National Corp. stock was as follows:

                  Date        Total Value    Value Per Share

               9/30/86       $2,810,133         $218.96
               3/31/87        2,991,447          233.09



     b.    Respondent's Experts’ Estimate of the Value of Kosman,
           Inc.'s Scottsbluff National Corp. Stock

     Respondent relied on expert reports coauthored by three

experts.   They used:    (1) An income method, based on Scottsbluff

National Corp.'s projected after tax earnings over a 5-year

period; and (2) a market method, based on the price of stock in

comparable banks.    To apply the income method, respondent's

experts estimated the present value of Scottsbluff National

Bank's projected after-tax earnings for 5 years.    They used a

14-percent discount rate on the assumption that an investment

in Scottsbluff National Bank was comparable to one in "Standard &

Poor’s 500 small capitalized companies".    Respondent's experts

concluded that a 100-percent stock interest in Scottsbluff

National Corp. was worth $19.2 million on September 30, 1986, and

March 31, 1987.

     To apply the market method, respondent's experts used as

comparables First Commerce and First National Bank of Nebraska.

They estimated that First Commerce stock traded at 54 percent of

its book value per share on December 31, 1986.    They noted that

Scottsbluff National Corp. was more profitable and paid higher
                               - 25 -


dividends per share than First Commerce, and had no long-term

debt.   Respondent's experts said that investors would value

Scottsbluff National Corp. at a higher multiple of earnings and

percentage of book value per share than First Commerce.

     Respondent's experts estimated that shares of First National

of Nebraska stock traded at 86 percent of its book value per

share on December 31, 1986.    They noted that First National of

Nebraska was larger, more diversified, more profitable, and had

better income growth than Scottsbluff National Corp.     They said

that the market would value Scottsbluff National Corp. at a lower

percentage of book value per share than First National of

Nebraska.   Despite that conclusion, respondent’s experts

estimated, using the market method, that Scottsbluff National

Corp. stock would sell at 125 percent of book value per share.

They did not explain this inconsistency.    Using a market method,

they concluded that a 100-percent stock interest in Scottsbluff

National was worth $18.8 million on September 30, 1986, and

March 31, 1987.

     As discussed above, respondent's experts valued a    stock

interest in Scottsbluff National Corp. at $19.2 million under an

income method.    They concluded that the fair market value of a

100-percent stock interest in Scottsbluff National Corp. was $19

million on September 30, 1986, and March 31, 1987.

     Respondent's experts applied a 15-percent minority interest

discount and a 10-percent discount for lack of marketability in
                              - 26 -


valuing Kosman, Inc.'s Scottsbluff National Corp. stock.

Respondent's experts concluded that the fair market value of

Kosman, Inc.'s 32.085 percent stock interest in Scottsbluff

National Corp. was $4,663,555 on September 30, 1986, and

March 31, 1987.

     c.   Analysis: Value of Kosman, Inc.'s Scottsbluff National
          Corp. Stock

     Petitioner's expert acknowledged that Scottsbluff National

Corp. was in better financial condition than First Commerce, the

company he considered to be most comparable.   Petitioner's expert

estimated that First Commerce stock sold at 57.7 percent of its

book value per share on September 30, 1986, and March 31, 1987.

Petitioner's expert concluded that shares of Scottsbluff National

Corp. stock would sell at 60 percent of book value per share.     We

believe that 60 percent is too low, considering Scottsbluff

National Corp.'s better financial condition.

     Petitioner's expert said that by September 30, 1986, the

investing public thought the northwestern Nebraska economy might

improve soon.   Petitioner's expert noted that from mid-1985 to

September 30, 1986, the price of First Commerce stock increased

76 percent from $7.50 per share to $13.25 per share.

     Respondent's experts used as comparables four non-Nebraska

bank holding companies, including Mark Twain Bancshares in

St. Louis, Missouri.   Respondent's experts did not adequately
                              - 27 -


address whether economic conditions in those bank markets and in

northwestern Nebraska were similar.

     Respondent's experts chose as one of their comparables First

National of Nebraska, the stock they estimated traded at 86

percent of its book value per share on September 30, 1986, and

March 31, 1987.   They said that Scottsbluff National Corp.'s

stock was worth less than 86 percent of its book value per share,

yet they valued Scottsbluff National Corp. stock at 125 percent

of its book value per share under the market method.

     To apply the income method, respondent's experts used a

14-percent discount rate because that rate is used to value

a Standard & Poor's 500 small capitalized company.   We do not

believe that a 14-percent discount rate recognizes the economic

outlook for Scottsbluff National Bank.

     Respondent argues that Scottsbluff National Corp. stock sold

at 100 to 115 percent of its book value per share from 1984 to

1988.   With one exception, the sales on which respondent relies

involved former employees, directors, or their families.     The

shareholders received higher prices for their shares because of

their association with the corporation.

     We conclude that the fair market value of Kosman, Inc.'s

Scottsbluff National Corp. stock was 70 percent of its book value

per share.   This figure is between the 86 percent used by

respondent's experts and the 60 percent used by petitioner's

expert.   We hold that the fair market value of Kosman, Inc.'s
                                      - 28 -


32.085 percent stock interest in Scottsbluff National Corp. was

$3,278,009 on September 30, 1986, and $3,530,454 on March 30,

1987.

3.   Value of Kosman, Inc.’s Western National Bank Stock

        Petitioner's expert and respondent's experts concluded that

the value of Kosman, Inc.'s 2,000 shares of Western National Bank

stock was as follows:

                                                     Value Of
                                           Value     Western
                          Valuation         Per      National
        Expert               Date          Share    Bank Stock

        Petitioner’s       9/30/86         $46.00    $92,000
          expert           3/31/87          70.63    141,260
        Respondent's       9/30/86          76.50    153,000
          experts          3/31/87          76.50    153,000



        a.   Petitioner’s Expert’s Estimate of the Value of Kosman,
             Inc.'s Western National Bank Stock

        Petitioner’s expert used two different methods to estimate

the value of Kosman, Inc.'s Western National Bank stock for each

valuation date.        For September 30, 1986, petitioner’s expert said

that Lincoln Bank South in Lincoln, Nebraska, was comparable to

Western National Bank.       However, petitioner's expert said that a

prospective buyer would substantially discount Western National

Bank's stock because Western National Bank had a high percentage

of nonperforming loans and Lincoln, Nebraska, had better economic

conditions.
                               - 29 -


     On September 30, 1986, Lincoln Bank South's stock was

publicly traded at $3 per share, which was 61.2 percent of its

book value per share.    Petitioner's expert concluded that Western

National Bank stock should be discounted substantially.

Petitioner’s expert calculated the amount of the discount by

using a letter written by Professor O. Maurice Joy of the

University of Kansas which was attached to petitioner’s expert’s

report.   Respondent retained Professor Joy to value the stock of

Western National Bank and Scottsbluff National Corp. as of

September 30, 1986, and March 31, 1987.    Professor Joy estimated

that the stock of Western National Bank had a fair market value

of $46 per share on September 30, 1986.    Petitioner's expert

relied on that amount.

     Scottsbluff National Corp. and Western National Bank agreed

to merge on March 4, 1987.    Western National Bank's shareholders

received one share of Scottsbluff National Corp. stock for 3.3

shares of Western National Bank's stock.    Petitioner’s expert

assumed that 3.3 shares of Western National Bank equaled the

value of one share of Scottsbluff National Bank which

petitioner’s expert estimated to be $233.09 per share.    He

concluded that the fair market value of Western National Bank

shares on March 31, 1987, was $70.63 per share and the fair

market value of Kosman, Inc.’s holdings of Western National Bank

was $141,260.
                               - 30 -


     b.   Respondent’s Experts’ Estimate of the Value of Kosman,
          Inc.'s Western National Bank Stock

     Respondent’s experts used two income methods and a market

method to value Kosman Inc.'s Western National Bank stock based

on the value of the bank's projected income.    The income methods

they used are a discounted cash-flow method and a capitalization

of earnings method.

     Using the income methods, respondent's experts estimated the

present value of Western National Bank's projected after tax

earnings over 5 years.    They used a discount rate of 15 percent.

They believed an investment in Western National Bank was

comparable to an investment in "Standard & Poor’s 500 small

capitalized companies”.    Under the income methods respondent's

experts concluded that a 100-percent stock interest in Western

National Bank was worth $2 million.

     Under the market method, respondent's experts chose as

comparables six banks, five of which were in agricultural areas.

Each of the six banks was acquired in a private transaction.

Three of the six banks were in Kansas, two were in Nebraska, and

one was in North Dakota.    Using a market method, respondent's

experts concluded that a 100-percent stock interest in Western

National Bank was worth $2.35 million.

     As discussed above, respondent's experts concluded that a

100-percent stock interest in Western National Bank was worth $2

million under an income method.    They concluded that the fair
                              - 31 -


market value of a 100-percent stock interest in Western National

Bank was $2.25 million on September 30, 1986, and March 31, 1987.

     Respondent's experts applied a minority interest discount

of 20 percent and a lack of marketability discount of 15 percent

to value Kosman, Inc.'s stock interest in Western National Bank.

 They concluded that the fair market value of Kosman, Inc.'s 10-

percent stock interest in Western National bank was $153,000 on

September 30, 1986, and March 31, 1987.

     c.   Analysis: Value of Kosman, Inc.’s Western National
          Bank Stock

     We believe that the approach used by the experts for both

parties is reasonable for the March 31, 1987, valuation.

However, we believe that respondent's experts overestimated the

value of Western National Bank stock.   They used two income

methods, but placed undue emphasis on the higher capitalization

of earnings ($2,010,000) and disregarded the discounted cash-flow

method ($1,620,000).   We believe their income method estimate

should be reduced slightly.   None of the banks that they believed

were comparable performed like Western National Bank.   The

average price-to-earnings ratio of the six banks that they

selected as comparables was 22.17 to 1.   Western National Bank

was less profitable than five of the six comparables.   They

assumed a price-to-earnings ratio of 20 to 1, but did not give

their basis for that assumption.   We believe their market value

method estimate should be reduced slightly.   We reduce their
                                - 32 -


appraised value of Western National Bank by 2 percent.    Using the

discounts they chose, the fair market value of Kosman Inc.'s 10-

percent ownership interest in Western National Bank is about

$144,000.

     Petitioner's expert assumed that the merger agreement ratio

was accurate and that his estimate of the value of Scottsbluff

National Corp. stock was correct.    We believe that the merger

ratio generally reflects fair market value.    However, as

discussed above, we have found that his estimate of the value of

Scottsbluff National Corp. is slightly low.    We conclude that the

fair market value of Kosman, Inc.’s shares of Western National

Bank on March 31, 1987, was $144,000 or $72 per share.

     We give petitioner’s expert’s estimate of value on

September 30, 1986, less weight because petitioner’s expert used

the $46 amount in Professor Joy’s letter out of context, without

using any of Professor Joy's other conclusions.    Professor Joy’s

letter was a single page of conclusions with no analysis.

Petitioner did not use Professor Joy’s value of Western National

Bank stock on March 31, 1987.    We believe petitioner's expert's

estimate is too low.

     Respondent’s experts concluded that there was no significant

change in conditions from September 30, 1986, to March 31, 1987,

that affected the value of Western National Bank stock.      We

disagree.   In October 1986, the board of directors of Scottsbluff

National Corp. approved a plan to acquire Western National Bank
                             - 33 -


by merger, which is a significant change in conditions.   Thus,

respondent's experts’ estimate is too high.   We conclude that the

fair market value of Kosman, Inc.'s Western National Bank stock

was $120,000 ($60 per share) on September 30, 1986.   See Webster

Investors, Inc. v. Commissioner, 291 F.2d 192, 194 (2d Cir.

1961), affg. T.C. Memo. 1960-74.

4.   Value of Kosman, Inc.’s Voting and Nonvoting Stock Before
     Discounts

     a.   Value of Kosman, Inc.'s Scottsbluff National Corp. and
          Western National Bank Stock

     Petitioner's and respondent's experts' opinions and our

holding as to the value of Kosman, Inc.'s Scottsbluff National

Corp. and Western National Bank stock on September 30, 1986, and

March 31, 1987, are as follows:
                               - 34 -


Valuation                   Petitioner's    Respondent's
  Date          Stock         Expert          Experts        Holding

 9/30/86     Scottsbluff   $2,810,133      $4,663,555      $3,278,009
              Natl. Corp.
             Western Natl.     92,000         153,000        120,000
              Bank
 3/31/87     Scottsbluff    2,991,447       4,663,555      3,530,454
              Natl. Corp.
             Western Natl.    141,260         153,000        144,000
              Bank

     b.     Value Per Share of Kosman, Inc.'s Voting and Nonvoting
            Common Shares

     Before allowing for discounts, the experts' opinions and our

holding as to the value per share of Kosman, Inc.'s stock on

September 30, 1986, and March 31, 1987, are as follows:

 Valuation                  Petitioner's    Respondent's
   Date           Stock       Expert          Experts        Holding

 9/30/86       Voting &
                nonvoting
                common         $172.21         $363.22      $218.80

 3/31/87       Voting &
                nonvoting
                common          195.20          363.22       247.17
                               - 35 -


5.   Discounts for Stock of Kosman, Inc.

      The experts applied the following discounts:

                               Petitioner's      Respondent's
             Discount            Expert            Experts

           Voting &
           nonvoting stock

           Minority interest   10 percent        10 percent
           lack of market-     25 percent        10 percent
             ability

           Nonvoting stock

           Lack of voting      10 percent         4 percent
             power

      a.   Minority Interest Discount

      Both parties' experts applied a 10-percent minority interest

discount to value the voting and nonvoting Kosman, Inc., stock

that petitioner gave to her children.      We apply a 10-percent

minority discount.

      b.   Lack of Marketability Discount

      Petitioner's expert applied a 25-percent marketability

discount to the stock of Kosman, Inc.      He cited a 1971 Securities

and Exchange Commission (SEC) study of sales of restricted stock

by over-the-counter publicly owned companies in which the stock

was discounted for lack of marketability by 30 to 40 percent.      He

said that the SEC study suggested use of a significant discount

here.
                              - 36 -


     Petitioner's expert also cited a 1994 Wall Street Journal

article which applied a discount for lack of marketability

because of a SEC regulation that requires foreign investors to

hold shares they buy from public companies for 40 days before

they can sell the shares in the United States if they do not

register or disclose the sale.   However, petitioner did not show

that the corporations in the article were comparable to Western

National Bank or that a 40-day restriction applies.

     Respondent's experts applied a 10-percent discount for lack

of marketability to the stock of Kosman, Inc.   They said that

the smaller the block of privately held shares, the greater the

discount for lack of marketability owing to the minority

interest.   They said a study by FMV Opinions, Inc. (FMV study),

found marketability discounts of companies, such as Scottsbluff

National Bank, with earnings of over $1 million ranging from 10

to 20 percent.   They interpreted the 10- to 20-percent range in

the FMV study to be the total discount for marketability.    They

believed an additional 10 percent discount for lack of

marketability was proper because, when added to the 9-percent

discount for marketability they applied for Scottsbluff National

Bank, the total (19 percent) discount was at the upper range

reported in the FMV study.
                              - 37 -


     Based on the arguments of the parties and the record, we

conclude that a 15-percent discount for lack of marketability is

appropriate for the stock of Kosman, Inc.

     c.   Nonvoting Share Discount

     Petitioner's expert applied a discount of 10 percent to the

nonvoting common shares.   He cited an example where a buyer

received a 38.9-percent discount, but he did not compare that

transaction to this case or explain why he chose 10 percent.

     Respondent's experts applied a 4-percent discount.   They

cited a study published in the April 1983 issue of "Journal of

Financial Economics" (JFE) ("The Market Value of Control in

Publicly Traded Corporations"), by R.C. Lease, J.. McConnel, and

W.H. Mikkleson.   The JFE study evaluated premiums paid for sales

of nonvoting shares in publicly traded corporations which had

stock with two different voting rights.   The JFE study showed

that premiums for superior voting rights usually ranged from 2 to

4 percent.   Respondent's experts said that the JFE study shows

that a 2- to 4-percent discount should apply to stock with

inferior voting rights in this case, even though Kosman, Inc.,

stock was not publicly traded.   We apply a discount of 4 percent

to value the nonvoting common shares.   E.g., Wallace v. United

States, 566 F. Supp. 904, 917 (D. Mass. 1981) (voting shares

valued at 5 percent higher premium than nonvoting shares); Estate
                                 - 38 -


of Winkler v. Commissioner, T.C. Memo. 1989-231 (nonvoting shares

had less value than voting shares).

     d.     Summary of Discounts

     The experts' opinions and our holding as to the discounts to

apply in valuing Kosman, Inc., stock that petitioner gave to her

children are as follows:

                             Petitioner's     Respondent's
 Discount       Stock          Expert           Experts        Holding

 Minority      Voting &
 interest        nonvoting
                 common       10 percent      10 percent     10 percent

 Lack of       Voting &
 marketab.       nonvoting
                 common       25 percent      10 percent     15 percent


 Lack of       Nonvoting      10 percent       4 percent      4 percent
 voting          common
 power

6.   Value of Kosman, Inc., Stock That Petitioner Gave to Her
     Children

     We conclude that the fair market value per share of the

stock of Kosman, Inc., that petitioner gave to her children was

as follows:

                                Voting         Nonvoting
                                 Stock           Stock

  September 30, 1986           $164.85          $156.06
  March 31, 1987                185.58           175.69


     To reflect the foregoing,
                                                Decision will be entered

                                           under Rule 155.
