                      T.C. Memo. 1998-251



                    UNITED STATES TAX COURT



    ESTATE OF MARIO E. BOSCA, DECEASED, MARIE A. BAKER
       FORMERLY MARIE A. BOSCA, EXECUTOR, Petitioner
      v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14997-94, 15051-94.    Filed July 8, 1998.



     Harvey Dunn, for petitioner.

     Jeffrey L. Bassin and Stephen J. Neubeck, for

respondent.



          MEMORANDUM FINDINGS OF FACT AND OPINION

     WHALEN, Judge:    Respondent issued notices of

deficiency to the Estate of Mario E. Bosca, deceased, in

which respondent determined the following estate and gift

tax deficiencies:
                             - 2 -




          Docket No. 14997-94:

Type of Tax     Period       Date of Death    Deficiency
  Estate         1990           9/5/90         $204,900

Docket No. 15051-94:

Type of Tax     Period                        Deficiency
   Gift          1989             --            $46,517
   Gift          1990             --            782,159


     By an amended answer filed in each of the above cases,

respondent asserts that the estate tax deficiency is

$2,157,593, rather than the above amount determined in the

notice of deficiency, and that the gift tax deficiency for

1990 is $1,581,641, rather than the above amount determined

in the notice of deficiency.

     After concessions, the issue for decision in these

consolidated cases is the value of the gifts that the

decedent made to his two sons by means of a 1990

transaction in which he and his wife exchanged voting

common stock in his closely held corporation for nonvoting

common stock with the result that his sons ended up owning

all of the voting stock of the corporation.


                       FINDINGS OF FACT

     Some of the facts have been stipulated by the parties

and are so found.   The stipulation of facts filed by the
                            - 3 -


parties and the attached exhibits are incorporated herein

by this reference.   Mr. Mario E. Bosca, the decedent, died

testate on September 5, 1990.    He was a resident of the

State of Ohio at the time of his death.    He was survived by

his wife of many years, Mrs. Marie A. Baker, formerly known

as Ms. Marie A. Bosca, and their two sons, Mr. Christopher

B. Bosca and Mr. Anthony G. Bosca.    Ms. Baker, the

executrix of the decedent's estate, resided in Ohio at the

time the petitions were filed.


Hugo Bosca Co., Inc.

     In 1912, the decedent's father, Mr. Hugo Bosca,

started manufacturing and selling leather products, such

as wallets, billfolds, and purses.    Initially, he had two

partners, but he became the sole owner of the business

sometime in the 1930's.   In 1948, Mr. Hugo Bosca's two

sons, Mr. Orsino H. Bosca and the decedent, became the

principal owners of the business, and they caused it to be

incorporated in the State of Ohio as the Hugo Bosca Co.,

Inc. (referred to herein as HBC).    Some years later,

effective January 1, 1989, HBC elected to be treated as a

subchapter S corporation.

      After the decedent and his brother obtained ownership

of HBC, the brother became HBC's vice president and

treasurer.   He oversaw the financial management of the
                            - 4 -


business, and he was involved in HBC's advertising and

marketing and its promotional campaigns.   The decedent

became HBC's president.   His duties included designing the

leather products to be sold, purchasing the materials, and

overseeing their manufacture.

     Under its original articles of incorporation, HBC was

authorized to have outstanding a maximum of 2,500 shares

of stock, of which 2,000 could be common shares with a par

value of $100 each, and 500 could be preferred shares with

a par value of $100 each.   On or about November 3, 1980,

HBC issued a certificate for 805 shares of voting common

stock to Mr. Orsino Bosca and a certificate for an equal

number of shares to the decedent.   The stock represented by

those certificates was the only outstanding stock of HBC at

the time.


1981 Buy-Sell Agreement and Mr. Orsino Bosca's Death

     From time to time, the decedent and his brother

entered into buy-sell agreements with HBC under which HBC

agreed to purchase its own stock from the estate of the

shareholder who was the first to die.   The October 8, 1981,

buy-sell agreement provides in part as follows:


     (1) Upon the death of the first to die of Orsino
     H. Bosca and Mario E. Bosca [the decedent], the
     Corporation [HBC] shall within seven months after
     the appointment of an executor, administrator or
                            - 5 -


     other legal representative of the estate of such
     decedent purchase all of the shares owned by such
     decedent at his death, together with any shares
     previously transferred by such decedent to his
     wife or lineal descendants, and the decedent's
     estate and any other holder of such shares shall
     sell and transfer to the corporation all of such
     shares, including shares previously transferred
     by decedent as aforesaid, at the price provided
     below, and the Seller(s) shall endorse and
     deliver to the Corporation the certificates
     evidencing such shares purchased and sold under
     this Agreement.


The agreement further provides that the purchase price to

be paid for the stock was the book value at the end of the

month preceding the shareholder's death.

     Mr. Orsino Bosca died on November 27, 1986.    On

July 6, 1987, HBC purchased Mr. Orsino Bosca's 805 shares

of stock as required by the October 8, 1981, agreement.

HBC agreed to pay $1,670 per share, for a total purchase

price of $1,344,350 (805 shares of stock x $1,670).

Pursuant to the terms of the October 8, 1981, agreement,

HBC made a downpayment in the amount of the proceeds from

insurance policies on the life of Mr. Orsino Bosca,

$970,414.04.   HBC was to pay the balance, $373,935.86, in

annual installments over 10 years, together with interest

at the annual rate of 9 percent.    After the purchase, the

decedent's 805 shares of voting common stock were HBC's

only outstanding stock.
                            - 6 -


Directors and Officers of HBC

     On July 22, 1987, the decedent elected himself, his

wife, and Mr. S.F. Sander to serve as directors of HBC.

Mr. Sander was a certified public accountant who was

retained by HBC.   The decedent served as a director of HBC

until his death.

     On July 23, 1987, the directors of HBC approved the

decedent's transfer of 50 percent of his HBC stock to his

wife, Ms. Marie Baker.   After that, the decedent and his

wife each owned 402.5 shares of HBC's voting common stock.

On July 24, 1987, the directors elected the decedent

president, Mr. Christopher Bosca vice president

and treasurer, and Mr. S.F. Sander secretary.   The decedent

served as president of HBC until his death.


Estate Planning

     In mid-1987, the decedent was diagnosed with lung

cancer.   On August 21, 1987, he underwent surgery for the

removal of a part of one lung.   The decedent returned to

work after the surgery and continued working for HBC until

May 1990.

     Sometime in 1988, the decedent and his wife hired an

attorney, Mr. Fredrick L. Fisher, to give them estate

planning advice.   Mr. Fisher drafted several wills for the

decedent, the last of which was executed on May 25, 1990.
                             - 7 -


     Mr. Fisher first learned that the decedent had

lung cancer in October 1989 during a meeting with

Mr. Christopher Bosca and the decedent.    In February 1990,

Mr. Fisher learned that the decedent's cancer was terminal.

     During a meeting with Mr. Fisher on October 17, 1989,

the decedent asked Mr. Fisher for advice about transferring

voting control of HBC to his sons, Mr. Christopher Bosca

and Mr. Anthony Bosca.    Mr. Fisher recommended a plan of

recapitalization.    In February 1990, Mr. Fisher spoke to

all four members of the Bosca family about the

recapitalization plan.


Ms. Marie Baker's Transfers of Stock in 1989

     On January 2, 1989, Ms. Baker transferred 55 of her

402.5 shares of HBC's voting common stock to each of her

two sons.   The parties to these cases agree that the fair

market value of each share of HBC stock at that time was

$8,708.   Accordingly, Ms. Baker transferred HBC stock worth

$478,940 (55 shares of stock x $8,708) to each son.

After the transfers, HBC's stock was owned as follows:


                              Voting
     Shareholders          Common Stock        Percent

     Decedent                402.5             50.00
     Marie Baker             292.5             36.34
     Anthony Bosca            55.0              6.83
     Christopher Bosca        55.0              6.83
                             - 8 -


                             805.0               100.00


The 1990 Recapitalization

     On May 25, 1990, all of the shareholders of HBC

adopted a resolution amending HBC's articles of

incorporation to allow the corporation to have outstanding

a maximum of 2,500 shares of stock, consisting of 1,500

shares of class A voting common stock and 1,000 shares of

class B nonvoting common stock.      The resolution states as

follows:

     FOURTH: the maximum number of shares which the
     Corporation is authorized to have outstanding
     is twenty-five hundred (2500) consisting of 1500
     Class A voting common shares having a par value
     of $100.00 each and 1000 Class B non-voting
     common shares having a par value of $100.00 each.
     Each class of shares shall be identical in all
     respects, except that the Class B non-voting
     shares shall carry no right to vote for the
     election of directors of the Corporation, and
     no right to vote on any matter presented to the
     shareholders for their vote or approval except
     where otherwise provided by law.


On the same day, the decedent and Mr. Sander, acting as

president and secretary, respectively, of HBC, executed a

certificate of amendment to HBC's articles of

incorporation.

     On May 25, 1990, the directors of HBC also adopted

the following resolutions:
                           - 9 -


     RESOLVED, that the Plan and Agreement of
     Recapitalization attached hereto as Exhibit "A"
     (the "Plan") be adopted, subject to approval of
     all shareholders of the Corporation;

     RESOLVED, FURTHER, that each officer of the
     Corporation be authorized, upon shareholder
     approval of the Plan, to execute and deliver
     the Plan on behalf of the Corporation and to
     take any other action, including without
     limitation the execution of other agreements,
     instruments or documents and the making of
     filings with appropriate governmental entities
     or other persons, which such officer deems
     necessary or appropriate to consummate, or as a
     result of, the transactions contemplated by the
     Plan.


The Plan and Agreement of Recapitalization (referred to

herein as the recapitalization agreement) attached to the

above resolutions as exhibit "A" states as follows:


          PLAN AND AGREEMENT OF RECAPITALIZATION

     This Plan and Agreement of Recapitalization is entered
into this 25 day of May, 1990, by and between Mario
Bosca, Marie Bosca and the Hugo Bosca Company, Inc., an
Ohio corporation (the "Corporation"). Mario Bosca and
Marie Bosca are sometimes hereafter referred to as
"Shareholders".

                    Background Information

          A. There are currently outstanding 805
     shares of voting common stock of the Corporation
     ("Voting Shares"). The Voting Shares have a par
     value of $100.00 each. The Voting Shares are
     currently owned as follows:

               Mario Bosca - 402.5 Voting Shares
               Marie Bosca - 292.5 Voting Shares
               Christopher Bosca - 55 Voting
          Shares
               Anthony Bosca - 55 Voting Shares
                      - 10 -


     B. The Corporation's Articles of
Incorporation have been amended to authorize the
issuance of shares of non-voting common stock
having a par value of $100.00 each ("Non-Voting
Shares").

     C. The Shareholders wish to exchange their
Voting Shares for an equal number of Non-Voting
Shares and the Corporation desires to issue such
Non-Voting shares in exchange for the
Shareholders' Voting Shares.

     D. The Board of Directors of the Corpora-
tion has deemed it advisable and for the mutual
benefit of the Corporation and the Shareholders
that such an exchange occur. Accordingly, the
Board of Directors of the Corporation has
approved an exchange by the Shareholders of their
Voting Shares for an identical number of Non-
Voting Shares.
                    Agreement

     1. Exchange. Each Shareholder shall
transfer all such Shareholder's Voting Shares
to the Corporation. In exchange therefor, their
Corporation shall issue to each Shareholder a
number of Non-Voting Shares equal to the number
of such Shareholder's Voting Shares.

     2. Cancellation of Transferred Voting
Shares. At such time as the Shareholders have
transferred their Voting Shares to the Corpora-
tion and, in exchange therefor, received Non-
Voting Shares of the Corporation, the Voting
Shares transferred to the Corporation shall be
cancelled.

     3.   Miscellaneous.

     (a) This Plan and Agreement shall be
construed in accordance with the laws of the
State of Ohio.

     (b) Any number of counterparts hereof may
be executed and each such counterpart shall be
deemed to be an original instrument.
                           - 11 -


          To evidence their acceptance of the terms
     of this Plan and Agreement, the Corporation has
     caused this Plan and Agreement to be signed in
     its corporate name by its duly authorized officer
     and each of the Shareholders has signed such
     Shareholder's name hereto.


      The decedent's sons, Mr. Christopher Bosca and

Mr. Anthony Bosca, were not parties to the recapitalization

agreement.   However, all of the shareholders of HBC,

including the decedent's sons, adopted a resolution

approving the agreement and approving HBC's adoption of it.

     Pursuant to the terms of the recapitalization agree-

ment, the decedent transferred a certificate representing

his 402.5 shares of voting common stock to HBC.   Decedent

signed a "Stock Transfer Power" which states as follows:


     For valuable consideration received, I, Mario
     Bosca, hereby irrevocably and unconditionally
     transfer, assign and convey 402.5 shares of
     common stock of Hugo Bosca Company, Inc., an Ohio
     corporation ("Corporation"), standing in the name
     of Mario Bosca on the books and records of such
     Corporation and represented by certificate number
     #13, to the Corporation. I hereby irrevocably
     constitute and appoint Christopher Bosca as
     attorney-in-fact to transfer said shares of stock
     on the books and records of said Corporation,
     with full power of substitution in the premise.


In exchange, HBC issued to the decedent a certificate for

402.5 shares of HBC "common Nonvoting Class B".   Similarly,

Ms. Baker transferred her 292.5 shares of voting common

stock to HBC and received in exchange 292.5 shares of HBC
                           - 12 -


class B nonvoting common stock.     Finally, each of

decedent's sons transferred to HBC a certificate for his

55 shares of voting common stock and received in exchange

a certificate for 55 shares of "common voting Class A".

     As a result of the above transfers, the decedent and

his wife owned all of the shares of class B nonvoting

common stock and the decedent's sons, Mr. Christopher Bosca

and Mr. Anthony Bosca, owned all of the shares of class A

voting common stock.   Each share of class B nonvoting

common stock was identical in all respects to a share of

class A voting common stock, except that the share of class

B nonvoting common stock had no right to vote for the

election of directors or any other matter presented to the

shareholders for their vote or approval, unless otherwise

provided by law.

Ms. Marie Baker's Transfer of Stock to the Decedent

     On May 25, 1990, the same day as the transfers

described above, Ms. Baker also transferred her 292.5

shares of class B nonvoting common stock to the decedent.

She signed a "Stock Transfer Power" which states as

follows:


     As a gift, I Marie Bosca, hereby irrevocably and
     unconditionally transfer, assign and convey 292.5
     shares of non-voting common stock of Hugo Bosca
     Company, Inc., an Ohio corporation ("Corpora-
     tion"), standing in the name of Marie Bosca on
                                - 13 -


     the books and records of such Corporation and
     represented by certificate number #18, to my
     husband, Mario Bosca. I hereby irrevocably
     constitute and appoint Christopher Bosca as
     attorney-in-fact to transfer said shares of
     stock on the books and records of said
     Corporation, with full power of substitution
     in the premises.


After the transfers, the stock of HBC was owned as follows:


                 Class A     Class B
                 Voting    Nonvoting     Voting Stock    Nonvoting Stock
Shareholders     Common     Common       Percent Owned    Percent Owned

Decedent            --       695              --             100
Marie Baker         --        --              --              --
Anthony Bosca       55        --              50              --
Christopher Bosca   55        --              50              --

                    110      695




Fair Market Value of HBC Stock at the Time of the
Recapitalization

     The parties have stipulated and, accordingly, we find

the following:

     (1) The fair market value of each share of the voting

common stock of HBC immediately before the recapitalization

on May 25, 1990, was $11,827, if the share was part of a

block of stock amounting to 50 percent of the outstanding

stock of the corporation, and was $9,671, if the share was

part of a block of stock amounting to 25 percent of the

outstanding stock of the corporation; and, (2) the fair

market value of each share of class B nonvoting common
                             - 14 -


stock immediately after the recapitalization on May 25,

1990, was $9,415, if the share was part of a block of stock

amounting to either 50 or 25 percent of the outstanding

stock of the corporation.


The Decedent's Death

     The decedent died on September 5, 1990.     At the time

of his death, he held 695 shares of class B nonvoting

common stock in HBC.    The fair market value of each share

of class B nonvoting common stock at that time was $8,843

per share.    Thus, the value of the decedent's stock in HBC

at the time of his death was $6,145,885 ($8,843 x 695).

     On October 1, 1990, the shareholders of HBC elected

Ms. Marie Baker, Mr. Christopher Bosca, and Mr. Anthony

Bosca as directors.    On the same day, the board of

directors elected Mr. Christopher Bosca president,

Mr. Anthony Bosca vice president and treasurer, and

Ms. Marie Baker secretary.

The Decedent's Gift and Estate Tax Returns

     Ms. Marie Baker, acting in her capacity as executrix

of the decedent's estate, filed Form 709, United States

Gift (and Generation-Skipping Transfer) Tax Return, for

the 1990 calendar year.     A supplement to Schedule A,

Computation of Taxable Gifts, attached to the return states

as follows:
                                 - 15 -


    On May 25, 1990, pursuant to a recapitalization
    of the stock of the Hugo Bosca Company, Inc.,
    the Donor exchanged his 402.5 shares of voting
    common stock of the Hugo Bosca Company, Inc.,
    for 402.5 shares of a newly created class of non-
    voting common stock of the Hugo Bosca Company,
    Inc. The non-voting common shares provided the
    same rights as the voting common shares given up
    except for the voting rights. The ownership of
    the shares of stock immediately before and
    immediately after the recapitalization was as
    follows:

                                PRE-RECAP             POST-RECAP

                         Relationship   Voting    Voting   Nonvoting
                           to Donor     Common    Common    Common

     Mario Bosca            Donor       402.5       --       402.5
                                                           [1]
     Marie Bosca            Wife        292.5       --       292.5
     Christopher Bosca      Son          55.0      55.0        --
     Anthony Bosca          Son          55.0      55.0        --

     Under the facts and circumstances of the
     recapitalization, it is the Donor's position that
     the recapitalization did not result in a gift by
     the Donor.

     [1
      This schedule does not reflect Ms. Baker's
     transfer of her HBC stock to the decedent.]


     Ms. Baker also filed Form 706, United States Estate

(and Generation-Skipping Transfer) Tax Return, on behalf of

the decedent's estate.        The return reports a total gross

estate of $9,604,543.03 and total allowable deductions of

$9,008,628.03 for a taxable estate of $595,915.                  It also

reports adjusted taxable gifts of $527,217 for a total of

$1,123,132 subject to tentative tax.             The adjusted taxable

gifts reported on the decedent's estate tax return,
                          - 16 -


$527,217, does not include any amount attributable to the

decedent's participation in the recapitalization.   Schedule

B, Stock and Bonds, of the estate tax return reports that

the decedent owned 695 shares of HBC nonvoting common stock

when he died and that the value of the stock was $7,575,500

or $10,900 per share.

     Among other adjustments made in the notice of gift

tax deficiency issued to the decedent's estate, respondent

determined that the decedent made gifts to his two sons

in connection with the recapitalization.   Respondent

determined that the aggregate amount of the gifts was

equal to the difference between what the decedent gave up,

$7,618,117.50 (i.e., 402.5 shares of voting common stock

x $18,927 per share), and what he received in return,

$5,859,997.50 (i.e., 402.5 shares of class B nonvoting

common stock x $14,559 per share).   Thus, respondent

determined that the decedent made gifts to his two sons

in the aggregate amount of $1,758,120.   The notice of gift

tax deficiency describes this adjustment as follows:


          It is further determined that the donor
          transferred 402.5 shares of the voting
          common stock of the Hugo Bosca Company
          to Christopher Bosca and Anthony Bosca
          in exchange for the same number of non-
          voting shares of Hugo Bosca Company
          stock resulting in a gift of
          $1,758,120.00 to Christopher Bosca and
          Anthony Bosca.
                          - 17 -



Respondent further determined that the decedent's total

amount of taxable gifts as of the end of 1990 amounted to

$2,491,175, of which the gifts made in connection with the

recapitalization are the principal component.

     Among other adjustments made in the notice of estate

tax deficiency issued to the decedent's estate, respondent

determined that the adjusted taxable gifts reported on the

decedent's estate tax return, $527,217, should be increased

to reflect the gifts determined in the notice of gift tax

deficiency, including the gifts made to the decedent's two

sons in connection with the recapitalization.   The notice

of deficiency describes this adjustment in the following

terms:


          The amount of $527,217.00 shown on the
     estate tax return as adjusted taxable gifts
     is increased $1,963,958.00 as a result of the
     increase in the amount of adjusted taxable gifts
     made by the decedent during the years in 1988,
     1989 and 1990. Accordingly, it is determined
     that the amount of adjusted taxable gifts added
     to the taxable estate is $2,491,175.00.


                         OPINION

     In the gift and estate tax returns that are the

subject of these consolidated cases, the decedent's estate

took the position that no gifts were made by the decedent

when he exchanged voting common stock for nonvoting common
                               - 18 -


stock in the recapitalization of HBC, described above.

Respondent determined in the notice of deficiency and takes

the position in these proceedings that the decedent's

exchange of stock was a transfer of property for less than

adequate and full consideration in money or money's worth,

as described in section 2512(b).           Unless stated otherwise,

section references concerning the estate tax are to the

Internal Revenue Code as in effect on the date of the

decedent's death, and section references concerning the

gift tax are to the Internal Revenue Code as in effect

during the years in issue.       Consequently, respondent

determined in the notice of deficiency and argues here that

the amount by which the value of the decedent's voting

common stock exceeds the value of the nonvoting common

stock received in the recapitalization is a gift to the

decedent's two sons, the only persons who held voting stock

after the transaction.      Respondent's methodology in the

notice is the same as respondent's position in these

proceedings, but the values differ.           The following schedule

summarizes respondent's position in the notice of

deficiency and respondent's position at trial:


                                            Notice of    Position
                                            Deficiency   at Trial
                                                         1
Value of a share of voting common stock     $18,927       $11,827
  before the recapitalization if held as
                                 - 19 -


 part of a 50-percent block of stock
                                                         1
Value of a share of class B nonvoting       $14,559      $9,415
  common stock after the recapitalization
  if held as part of a 50- or 25-
  percent block of stock

Difference                                   $4,368      $2,412

Number of shares                              402.5          402.5

Aggregate value of gifts made             $1,758,120   $970,830
  by the decedent to his sons


     1
      Stipulated by the parties.


We note that neither party contends that the special

valuation rules of sections 2701 through 2704 apply to the

decedent's transfer that is the subject of these cases.

See Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-

508, sec. 11602(a), 104 Stat. 1388-491.

     Petitioner argues that by exchanging his voting common

stock in HBC for class B nonvoting common stock, the only

thing the decedent gave up in the recapitalization was the

right to vote his 402.5 shares of stock in HBC.              In this

connection, petitioner emphasizes that the recapitalization

effected no change in the assets, liabilities, or share-

holders equity of HBC, either in the absolute or relatively

among the shareholders.         Thus, according to petitioner, the

decedent did not suffer any loss or reduction of his

interest in the shareholders equity of HBC.            It follows,

according to petitioner, that the decedent made no gift in
                             - 20 -


connection with the recapitalization.    Petitioner also

argues that the voting rights attributable to the

decedent's 402.5 shares of common stock were of no value to

HBC and there was nothing of value that his sons, as

shareholders of HBC, received from HBC as a result of the

recapitalization.

     Notwithstanding its position that no gifts were made,

petitioner's principal position is that any gifts made by

the decedent must be valued under section 2512(a), not

section 2512(b).    Petitioner argues that, at most, the

decedent made two simultaneous but separate gifts, one to

each of his sons, consisting of "a naked 25 percent of

the voting power of HBC with no equity in HBC being

transferred."   Petitioner further argues that, under

section 2512(a), the aggregate value of the gifts is

$24,150; that is, $60 multiplied by the 402.5 shares of

stock that the decedent exchanged in the recapitalization.

This value is based on the stipulation of the parties that

"The per share fair market value of voting rights in the

Company, prior to the exchange on May 25, 1990, as part of

a 25 percent voting interest with no equity attached to

such interest was $60.00."

     In the alternative, petitioner argues that if the

gifts made through the decedent's participation in the
                                - 21 -


recapitalization are to be valued under section 2512(b)

and section 25.2511-1(h)(1), Gift Tax Regs., as

respondent argues, then respondent's valuation is still

wrong.     According to petitioner, respondent has incorrectly

valued the transaction as a single gift of 50 percent of

HBC's stock of which half went to each son, rather than as

two gifts of 25 percent of HBC's stock, one to each son.

The following schedule compares petitioner's alternative

position with respondent's position:


                                                             Petitioner's
                                            Respondent's     Alternative
                                              Position         Position
                                            1
Value of a share of voting stock before      $11,827
  the recapitalization if held as part
  of a 50-percent block of stock
                                                              1
    If held as part of a                                       $9,671
    25-percent block of stock
                                                1
Value of a share of class B nonvoting            $9,415       $9,415
  common stock after the recapitalization
  if held as part of a 50- or 25-percent
  block of stock

Difference                                          $2,412        $256

Number of shares                                    402.5         402.5

Aggregate value of gifts made               $970,830         $103,040
  by the decedent to his sons

1
 Stipulated by the parties.


Petitioner bears the burden of disproving respondent's

valuations.      Rule 142(a), Tax Court Rules of Practice and
                            - 22 -


Procedure.   All Rule references are to the Tax Court Rules of

Practice and Procedure.

     Section 2501 imposes a tax on the transfer of property

by gift.   Sec. 2501(a); sec. 25.2501-1(a), Gift Tax Regs.

The gift tax is an excise tax on the transfer of property

and is not a tax on the subject of the gift.    Sec. 25.2511-

1(a), Gift Tax Regs.   It applies to all gift transfers

whether the gift is direct or indirect, and whether the

property is real or personal, tangible or intangible.     Sec.

2511(a); sec. 25.2511-1(a), Gift Tax Regs.    It applies not

only to transfers which, being without valuable

consideration, accord with the common law concept of gifts,

but also to sales, exchanges, and other dispositions of

property not made in the ordinary course of business, to

the extent that the value of the property transferred by

the donor exceeds the value in money or money's worth of

the consideration given therefor.    Sec. 2512(b);

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

25.2512-8, Gift Tax Regs.

     Generally, the value of the property on the date

of the gift is considered the amount of the gift.    Sec.

2512(a); sec. 25.2512-1, Gift Tax Regs.    The value of

the property is the price at which it would change hands

between a willing buyer and a willing seller, neither
                            - 23 -


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

having reasonable knowledge of the relevant facts.

Secs. 25.2512-1, 25.2512-3, Gift Tax Regs.; see also Snyder

v. Commissioner, 93 T.C. 529, 539 (1989); Estate of Hall

v. Commissioner, 92 T.C. 312, 335 (1989); See generally

United States v. Cartwright, 411 U.S. 546 (1973).

     We reject petitioner's first argument that the

decedent made no gift in connection with the recapital-

ization.   A transfer of property by an individual to a

corporation for less than adequate and full consideration

in money or money's worth generally represents gifts by the

individual to the shareholders of the corporation to the

extent of each shareholder's proportionate interest in the

corporation.   See Kincaid v. United States, 682 F.2d 1220,

1224, 1226 (5th Cir. 1982); Heringer v. Commissioner, 235

F.2d 149, 151 (9th Cir. 1956), modifying and remanding

21 T.C. 607 (1954); CTUW Georgia Ketteman Hollingsworth v.

Commissioner, 86 T.C. 91, 97 (1986); sec. 25.2511-1(h)(1),

Gift Tax Regs.; cf. Chanin v. United States, 183 Ct. Cl.

840, 393 F.2d 972 (1968).   This is no less true when the

property transferred to the corporation by the donor is the

corporation's own stock.

     In these cases, the decedent transferred property to

HBC in the form of voting common stock and received in
                           - 24 -


return other property of less value in the form of

nonvoting common stock.   The difference in values between

what the decedent gave up and what he received is deemed a

gift pursuant to section 2512(b).   Petitioner's argument

that the decedent made no gift because no change in the

equity of the corporation resulted from the

recapitalization or because the decedent only transferred

voting rights which were of no value to the corporation

disregards the broad and comprehensive meaning of the

terms "gift" and "property" as used in section 2512.    The

committee reports which accompanied the enactment of a

predecessor of section 2501 state as follows:


          The terms "property," "transfer," "gift,"
     and "indirectly" are used in the broadest and
     most comprehensive sense; the term "property"
     reaching every species of right or interest
     protected by law and having an exchangeable
     value.

           The words "transfer * * * by gift" and
     "whether * * * direct or indirect" are designed
     to cover and comprehend all transactions (subject
     to certain express conditions and limitations)
     whereby, and to the extent * * * that, property
     or a property right is donatively passed to or
     conferred upon another, regardless of the means
     or the device employed in its accomplishment.
     For example, (1) a transfer of property by a
     corporation without a consideration, or one less
     than adequate and fully in money or money's
     worth, to B would constitute a gift from the
     stockholders of the corporation to B; (2) a
     transfer by A to a corporation owned by his
     children would constitute a gift to the children
     * * *
                           - 25 -




H. Rept. 708, 72d Cong., 1st Sess. (1932), 1939-1 C.B.

(Part 2) 457, 476-477; S. Rept. 665, 72d Cong., 1st Sess.

(1932), 1939-1 C.B. (Part 2) 496, 524.

     Petitioner's principal argument is based on the

proposition that there is a fundamental difference between

the valuation of property under section 2512(a) and section

2512(b).   According to petitioner, section 2512(a) applies

to a "direct gift"; that is, a transfer in which the donor

"makes a gift of property and receives nothing back or

receives back some part of which he owned when he made the

transfer."   On the other hand, section 2512(b) applies to

transactions involving "the transfer of property where the

property rights received in the exchange are different in

whole or in part from those given up."    Petitioner's brief

summarizes this distinction as follows:


          In short, a transfer that involves
     relinquishing property with a bundle of rights
     and receiving back the same property with the
     bundle of rights reduced is a direct gift with
     the value of the rights transferred determined
     under I.R.C. §2512(a). Where a transfer involves
     relinquishing property with a bundle of rights
     and receiving some of those rights back, plus
     others, or totally different rights, the issue
     of "money's worth" comes up and the valuation
     is under I.R.C. §2512(b).
                           - 26 -


According to petitioner, the decedent "made a direct

transfer of his voting rights to his sons"; he "did not

* * * transfer his voting shares to HBC for less than

adequate and full consideration in money or money's worth".

Therefore, according to petitioner, "respondents [sic]

reliance on §2512(b) and Treas. Reg. §2511-1(h)(1) [sic]

has no basis in fact or law, makes no sense, and is a

totally unreasonable and unrealistic approach to this

case."

     We also reject this argument.   First, there is nothing

in section 2512 or the cases decided thereunder to suggest

that section 2512(a) applies to "direct gifts" in which the

donor receives nothing in return or receives some part of

the gift, and section 2512(b) applies to other gifts in

which the donor receives back property rights that are

different from, or in addition to, the donor's property

rights in the gift.   Section 2512(a) is a general provision

dealing with "gifts" that are "made in property".    It

provides that the value of the property on the date of the

gift shall be considered the amount of the gift.    Sec.

2512(a).   The statute provides no definition of the term

"gift", but, as noted above, Congress intended to use the

term in its broadest and most comprehensive sense.

Commissioner v. Wemyss, 324 U.S. at 306; H. Rept. 708,
                           - 27 -


supra, 1939-1 C.B. (Part 2) at 476-477; S. Rept. 665,

supra, 1939-1 C.B. (Part 2) at 524.   Section 2512(b)

applies "Where property is transferred for less than an

adequate and full consideration in money or money's worth".

If property is so transferred, then section 2512(b)

provides that the excess of the value of the property over

the consideration received "shall be deemed a gift".    Thus,

Congress dispensed with the requirement of finding

"donative intent" and made every transfer of property,

other than one in the ordinary course of business, subject

to gift tax to the extent that it is not made for "an

adequate and full consideration in money or money's worth".

Sec. 2512(b); Commissioner v. Wemyss, supra at 306-307;

sec. 25.2512-8, Gift Tax Regs.

     Contrary to the premise of petitioner's brief,

subsections (a) and (b) of section 2512 do not prescribe

different methods of valuing property.   The value of the

property transferred by gift whether described by section

2512(a) or section 2512(b) 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.   Sec. 25.2512-1, Gift Tax Regs.   There is

no authority for the premise of petitioner's brief that
                            - 28 -


the amount of the "gift" determined under section 2512(a)

differs from the amount "deemed a gift" under section

2512(b).

     Second, we agree with respondent's approach in these

cases under which respondent measured the difference

between the value of the 402.5 shares of voting stock that

the decedent transferred to the corporation and the value

of the 402.5 shares of nonvoting stock that he received in

return.    See, e.g., Kincaid v. United States, 682 F.2d 1220

(5th Cir. 1982); Estate of Trenchard v. Commissioner, T.C.

Memo. 1995-121, T.C. Memo. 1995-232; Estate of Higgins v.

Commissioner, T.C. Memo. 1991-47.      We agree with respondent

that pursuant to section 2512(b), the difference between

those values is deemed a gift.

     The final issue is whether the voting common stock

that the decedent transferred to HBC should be valued as a

single block of 50 percent of the stock of the corporation

or as two blocks of 25 percent.      As mentioned above, if the

decedent's voting stock is valued as a single block, then

the parties have stipulated that each share of stock was

worth $11,827 immediately before the recapitalization.

In that event, the difference between what the decedent

transferred to HBC and what he received in return is

$2,412, and the decedent's gifts to his sons will be valued
                            - 29 -


in the aggregate amount of $970,830.    On the other hand, if

the stock is valued as two 25-percent blocks, then the

parties have stipulated that each share of stock was worth

$9,671 immediately before the recapitalization.    In that

event, the difference between what the decedent transferred

to HBC and what he received is $256 and the gifts will be

valued in the aggregate amount of $103,040.    In passing, we

note respondent does not take the position that, for

purposes of valuing decedent's stock, we must take into

account the voting stock transferred to the corporation by

Ms. Baker.

     Generally, the gift tax applies to a transfer of

property by way of gift.   Secs. 25.2501-1(a)(1), 25.2511-

1(a), Gift Tax Regs.   As mentioned above, the value of the

property at the date of the gift is considered the amount

of the gift.   Sec. 2512(a).   Thus, for purposes of

computing the gift tax, each separate gift must be valued

separately.    Rushton v. Commissioner, 498 F.2d 88, 93

(5th Cir. 1974), affg. 60 T.C. 272 (1973); Calder v.

Commissioner, 85 T.C. 713, 720-721 (1985); Standish v.

Commissioner, 8 T.C. 1204, 1209 (1947); Clause v.

Commissioner, 5 T.C. 647, 649-650 (1945), affd. per curiam

154 F.2d 655 (3d Cir. 1946); Avery v. Commissioner, 3 T.C.

963, 970 (1944); Phipps v. Commissioner, 43 B.T.A. 1010
                             - 30 -


(1941), affd. 127 F.2d 214 (10th Cir. 1942); Adair v.

Commissioner, T.C. Memo. 1987-494; Hipp v. Commissioner,

T.C. Memo. 1983-746; Whittemore v. Fitzpatrick, 127 F.

Supp. 710 (D. Conn. 1954).    For example, we have rejected

attempts by taxpayers to aggregate separate gifts of stock

made on the same day in order to claim a blockage discount,

and we have held that each separate gift must be valued

separately.   See, e.g., Rushton v. Commissioner, 60 T.C.

272 (1973); Phipps v. Commissioner, supra.    Similarly, we

have rejected an attempt by the Commissioner to aggregate

separate gifts of stock made on the same day by a majority

stockholder to members of his family in order to value the

gifts as "control stock".    See Estate of Heppenstall v.

Commissioner, a Memorandum Opinion of this Court dated

Jan. 31, 1949.   We have applied the principle of valuing

separate gifts separately not only in the case of the gifts

made by a donor directly to several donees but also in the

case of gifts made indirectly through a trust.    See, e.g.,

Calder v. Commissioner, supra at 720-721; Avery v.

Commissioner, supra; See generally Helvering v. Hutchings,

312 U.S. 393 (1941); Whittemore v. Fitzpatrick, supra.

     As mentioned above, a transfer of property to a

corporation for less than adequate and full consideration

generally represents gifts by the donor to the individual
                             - 31 -


shareholders of the corporation to the extent of their

proportionate interests in the corporation.      Kincaid v.

United States, supra at 1224, 1226; Heringer v.

Commissioner, 235 F.2d 149 (9th Cir. 1956); CTUW Georgia

Ketteman Hollingsworth v. Commissioner, 86 T.C. at 96-97.

Sec. 25.2511-1(h)(1), Gift Tax Regs.     Applying the

principle that separate gifts must be valued separately, it

follows that each such gift to a stockholder of a

corporation must be valued separately.     Cf. Estate of

Hitchon v. Commissioner, 45 T.C. 96 (1965).

     In these cases, the decedent through his participation

in the recapitalization indirectly made gifts to his two

sons.   In valuing the gifts, respondent takes the position

that the stock transferred by the decedent to the

corporation should be treated as a single block of stock

and should be valued accordingly.      Thus, respondent has

aggregated the decedent's stock for purposes of valuing the

gifts he made to his sons.    In our view, this approach

violates the principle that separate gifts should be valued

separately.   We agree that the decedent surrendered stock

in the recapitalization that represented 50 percent of the

voting stock of the corporation.      However, the decedent did

not convey 50 percent of the voting stock of the

corporation to either of the donees or to both of them
                           - 32 -


jointly.   See Estate of Heppenstall v. Commissioner, supra.

Respondent has committed error by valuing the decedent's

stock as if he had.   Cf. Estate of Bright v. United States,

658 F.2d 999, 1003 (5th Cir. 1981).

     In light of the foregoing,


                              Decisions will be entered

                         under Rule 155.
