                          T.C. Memo. 1997-399



                      UNITED STATES TAX COURT



         POPE & TALBOT, INC., & SUBSIDIARIES, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 530-93.                    Filed September 2, 1997.



     Grady M. Bolding, James E. Burns, Jr., Russell D. Uzes,

Kevin P. Muck, and D. Cameron Baker, for petitioner.

     Milton J. Carter, Jr., Terri Merriam, Henry T. Schaefer,

Christopher D. Hatfield, Randall E. Heath, and Robert F.

Geraghty, for respondent.


                  SUPPLEMENTAL MEMORANDUM OPINION

     RUWE, Judge:   The present dispute arises from the parties'




     *
      This opinion supplements our opinion in Pope & Talbot,
Inc., & Subs. v. Commissioner, T.C. Memo. 1997-116.
differing computations under Rule 155.1

     In our first opinion in this case, Pope & Talbot, Inc., &

Subs. v. Commissioner, 104 T.C. 574 (1995) (Pope & Talbot I), on

motions for partial summary judgment, we held that under section

311(d), petitioner's gain on the distribution of appreciated

property is to be determined as if petitioner sold its interest

in the appreciated property at fair market value on the date of

distribution.   In our subsequent opinion, Pope & Talbot, Inc., &

Subs. v. Commissioner, T.C. Memo. 1997-116 (Pope & Talbot II), we

determined the fair market value of the appreciated property on

the date of distribution.   In addition, we held that petitioner

may offset distribution expenses against its section 311(d) gain.

     In Pope & Talbot II, we made findings of fact which are

summarized as follows.   During 1985, petitioner's operations

included timber, land development, and resort businesses in the

State of Washington.   On December 4, 1985, petitioner's

shareholders approved a plan to transfer the assets from its

Washington businesses to a newly formed limited partnership,

which was to be owned by petitioner's shareholders (the

Partnership).   Pursuant to this plan, petitioner transferred to

the Partnership approximately 78,000 acres of Washington

timberlands and its Washington land development and resort

businesses, which included an additional 4,400 acres.   These



     1
      All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the years in issue.
timberlands and the land development and resort businesses are

collectively referred to as the “Washington properties”.     In Pope

& Talbot II, we held that the fair market value of the Washington

properties was $48.5 million on the date of distribution.

     In addition to the Washington properties, petitioner

transferred $1.5 million in cash to the Partnership for working

capital and sold certain installment notes receivable to the

Partnership for approximately $4.9 million in cash.   The

Partnership issued partnership units to each owner of

petitioner's common stock on a pro rata basis.   Petitioner

incurred $1,364,071 in legal, accounting, investment banking, and

other fees relating to the formation of the Partnership, the

transfer of the Washington properties, and the distribution of

the partnership units.   In Pope & Talbot II, we held that

petitioner can offset these fees against the section 311(d) gain

it realized on the distribution of the Washington properties.     We

directed that decision be entered pursuant to Rule 155.

     Both parties have submitted Rule 155 computations.     The

parties are in agreement regarding the computation for

petitioner's 1986 taxable year.   The parties are also in

agreement regarding the computation for petitioner's 1985 taxable

year, except for the following two items:   (1) Petitioner

maintains that the $1.5 million of working capital is included in

the fair market value of $48.5 million for the Washington
properties; respondent disagrees;2 and (2) respondent maintains

that a portion of the $1,364,071 in expenses should be allocated

to the transfer of $1.5 million in working capital and to the

sale of the installment notes receivable; petitioner disagrees.


Inclusion of Working Capital


     In Pope & Talbot II, the primary issue for decision was the

fair market value of the Washington properties distributed by

petitioner.   Our valuation was limited to the fair market value

of timber, timberland, land development and resort properties,

and related assets on the Washington properties.   Neither the

value of the $1.5 million in cash transferred to the Partnership

nor the value of the installment notes receivable sold to the

Partnership was in dispute in Pope & Talbot II.

     In determining the fair market value of the Washington

properties, we grouped the properties into four separate

categories and described the assets in each category.   These

descriptions include, for example, the amount of merchantable

timber that could be harvested, the amount of land that could be

developed, and the various improvements on the properties.    We

examined the assets in each category and, with the assistance of

expert valuation reports, determined the fair market value of

assets in each category.   We concluded that the value of each


     2
      Petitioner's Rule 155 computation treats the working
capital as part of the Washington properties, in effect, reducing
the fair market value of the Washington properties by $1.5
million.
category of assets making up the Washington properties was as

follows:


             Timber & timberland       $31.0   million
             Development property       10.5   million
             Port Ludlow community       4.5   million
             Port Gamble townsite        2.5   million
               and tree nurseries
                                       $48.5 million


     The $1.5 million in cash transferred to the Partnership was

not included in the assets that we valued.     Furthermore, we did

not consider, nor did we intend to include, any portion of the

working capital in determining the fair market value of the

Washington properties.    Respondent's Rule 155 computation

correctly treats the $1.5 million of working capital as being

separate from the Washington properties that we valued in Pope &

Talbot II.


Allocation of Expenses


     In Pope & Talbot II, we found that petitioner incurred

$1,364,071 in expenses relating to the formation of the

Partnership, the transfer of the Washington properties, and the

distribution of the partnership units.    The overall purpose of

these activities was to distribute the Washington properties.      We

held that petitioner may offset its expenses incurred in

connection with the distribution against its section 311(d) gain.

We did not find that these expenses related to either the

transfer of the cash or the separate sale of the installment
notes receivable.    The $1,364,071 in expenses includes payments

for:    (1) General accounting advice and SEC financial reporting

with regard to the distribution; (2) tax and securities advice

and general counsel work relating to the distribution; (3) a

fairness opinion; (4) fees relating to the mortgage on the

timberlands; (5) fees relating to the listing of the partnership

units; (6) transfer agent fees; (7) legal services in connection

with the distribution; (8) real estate advice; (9) printing the

proxy statement issued in connection with the distribution; and

(10) various other costs such as employee reimbursement for

distribution-related travel and lodging.    The expenses in

question were not incurred for the transfer of cash to the

Partnership or the separate sale of the installment notes

receivable.

       Respondent's Rule 155 computation, however, allocates a

portion of the $1,364,071 in expenses to all assets conveyed to

the Partnership, including the working capital and the

installment notes receivable sold to the Partnership, based upon

their relative values.    Of the total distribution expenses,

respondent's computation allocates $124,726 to the installment

notes receivable and $37,180 to the working capital.    Because

petitioner realized no section 311(d) gain on the distribution of

these two assets, the distribution expenses allocated to these

assets under respondent's computation fail to offset petitioner's

section 311(d) gain.    Respondent's Rule 155 computation, which

allocates $161,906 of the expenses to the working capital and the
installment notes receivable, is incorrect.   The entire

$1,364,071 in expenses should be allocated to the Washington

properties.

     Based upon the foregoing, the parties will be directed to

submit a revised agreed computation and proposed decision under

Rule 155.


                                   An appropriate order will

                              be issued.
