                          T.C. Memo. 2003-348



                        UNITED STATES TAX COURT



      ESTATE OF MILDRED GREEN, DECEASED, THOMAS R. GREEN,
                     EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3839-02.               Filed December 29, 2003.


     Jacqueline A. Dimmitt, Jay L. Levitch, and Lewis E.

Striebeck, Jr., for petitioner.

     Steven W. LaBounty, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:     Respondent determined a $1,205,541 Federal

estate tax deficiency with respect to the Estate of Mildred Green

(the estate).    The issues for decision are:     (1) The proper

allocation of Federal and Missouri estate taxes to the property

bequests in the will of Mildred Green (decedent); (2) the proper
                                - 2 -

allocation of Federal generation-skipping transfer (GST) tax to

the property bequests in decedent’s will; and (3) the fair market

value of decedent’s shares of stock of Royal Bancshares, Inc.1

                           FINDINGS OF FACT

     The parties stipulated some facts, which we incorporate,

along with the associated exhibits, into our findings of fact.

Decedent died on September 26, 1997.    Her domicile at death was

in St. Louis, Missouri.    When the petition was filed, the

executor’s legal residence was in St. Louis, Missouri.

Decedent’s Will

     On November 10, 1997, decedent’s will, dated July 10, 1990,

was admitted to probate.    Section B of Article FIRST of

decedent’s will, which deals with the payment of transfer,

estate, inheritance, succession, and other death taxes, provides:

          B. I direct my Personal Representative to pay,
     out of my estate, all transfer, estate, inheritance,
     succession and other death taxes (exclusive of any
     generation-skipping transfer tax) payable, including
     interest and penalties thereon, if any, assessed by the
     United States or assessed by any state thereof or by
     any foreign government against my estate or against any
     gift, bequest or devise, or assessed by reason of the
     inclusion in my estate for tax purposes of any life
     insurance proceeds, annuity, joint property, property
     held as a tenant by the entirety or any other property
     or interest in property (other than property of any
     trust created by me under an instrument which provides
     otherwise with respect to the property of such trust);


     1
       Respondent represents that, after our resolution of the
above-stated issues, the parties will resolve whether the estate
is entitled to deductions of $49,433 for executor’s commissions
and $8,500 for accountant’s fees.
                               - 3 -

     such taxes shall not be charged against nor deducted
     from any such gift, bequest, devise, life insurance
     proceeds, annuity, joint property, tenancy by the
     entirety property or other property or interest in
     property, upon or by reason of which such taxes are
     assessed and paid. Notwithstanding the foregoing, I
     direct my Personal Representative to pay, out of my
     estate, any tax imposed under Chapter 13 of the
     Internal Federal Revenue Code on property transferred
     in a “direct skip,” as defined in Section 2612(c) of
     the Code; such tax shall not be deducted from or reduce
     the gift, bequest or devise which constitutes a “direct
     skip.”

Article SECOND of decedent’s will provides for the disposition of

all her tangible personal property.    Article THIRD gives one-half

of the “rest, residue and remainder” of decedent’s property to

the Lubin-Green Foundation, which is a charity for purposes of

section 2055.2   Article FOURTH gives the other one-half of the

“rest, residue and remainder” of decedent’s property in trust for

her grandchildren.

     At death, decedent was survived by three grandchildren, each

of whom was an eligible beneficiary under Article FOURTH of

decedent’s will.

Decedent’s Shares of Common Stock of Royal Bancshares, Inc.

     At death, decedent owned 3,276 of the 64,372 shares of

issued and outstanding common stock of Royal Bancshares, Inc.

(RBI).   Decedent’s shares represented 5.09 percent of the

outstanding shares of RBI; hers was the fifth largest holding of


     2
       Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
                                 - 4 -

RBI shares by any one shareholder.       RBI had 62 shareholders at

decedent’s death.   No one person had a controlling interest in

RBI; the largest percentage interest in RBI stock held by any one

shareholder was 14.38 percent.    RBI shares have never been listed

on any securities exchange.

     As of September 30, 1997, RBI had total assets of

$172,613,000.    From 1993 to 1997, RBI’s total assets and earning

assets (interest and dividend-producing assets) increased.         From

1993 to 1997, shareholder equity in RBI increased, and as of

September 30, 1997, totaled $17,369,000.       Compared to other

banking companies in its peer group,3 RBI has an above-average

capital structure and smaller loan losses.

     Between 1993 and 1997, RBI declared the following cash

dividends per share:

          Year                   Cash Dividend Per Share

          1993                              $1.69
          1994                               2.01
          1995                               1.68
          1996                               2.19
          1997                               4.06

     RBI wholly owned a subsidiary, Royal Banks of Missouri

(Royal Banks), a Missouri banking corporation.       On the date of

decedent’s death, Royal Banks operated five branches in the St.


     3
       Royal Bancshares, Inc. (RBI), is a member of “Peer Group
#7” as defined by the Federal Financial Institutions Examination
Counsel, along with 972 other commercial banks having total
assets of $100 to $300 million and with three or more branch
offices in a metropolitan area.
                               - 5 -

Louis metropolitan area.   For the 12-month period October 1,

1996, through September 30, 1997, Royal Banks had earnings of

$1,721,000.

     On April 24, 1996, Royal Banks lent $1.6 million to Robert

and Bonnie Havrilla (the Havrillas).   Jefferson/Keeler Printing

Co. (Jefferson/Keeler) guaranteed this loan.4   By a deed of trust

dated April 24, 1996, Jefferson/Keeler granted a security

interest in certain real property that it owned.5    The Havrillas’

note was current through a payment made in July 1997; however, no

payment was made on the Havrillas’ note for August or September

1997, and at decedent’s death the Havrillas were in default on

their note.

     On August 1, 1997, creditors of Jefferson/Keeler filed an

involuntary petition in Federal District Court seeking relief

under chapter 7 of the United States Bankruptcy Code.    Royal

Banks was not a petitioning creditor in this case.    The District

Court granted Jefferson/Keeler’s motion to convert the

involuntary bankruptcy case to a voluntary case under chapter 11



     4
       The guaranty was unconditional, absolute, and irrevocable.
The guaranty did not require Royal Banks of Missouri (Royal
Banks), as a condition to performance by Jefferson/Keeler
Printing Co. (Jefferson/Keeler), to seek collection from Robert
and Bonnie Havrillas (the Havrillas) or to enforce any security
interests or liens granted to Royal Banks by the Havrillas.
     5
       As of March 1996, the property was appraised at $2.1
million. Before the security interest was granted, there were no
other security interests or liens with respect to the property.
                                 - 6 -

of the United States Bankruptcy Code.    On September 12, 1997,

counsel for Royal Banks filed a notice of appearance in the

voluntary bankruptcy case.

Decedent’s Estate Tax Return

     On November 9, 1998, the estate filed a Form 706, United

States Estate (and Generation-Skipping Transfer) Tax Return,

reporting a gross estate of $3,331,853.    The estate included

decedent’s 3,276 shares of RBI stock in the gross estate at an

estate tax value of $163,800, or $50 per share.    The estate

claimed a charitable contribution deduction of $1,565,678 for the

bequest to the Lubin-Green Foundation.    On Schedule R,

Generation-Skipping Transfer Tax, the estate reported the

property transferred in trust to decedent’s grandchildren as a

direct skip with an estate tax value of $1,565,678.    In reporting

these amounts, the estate allocated and charged all estate

(Federal and Missouri) and GST tax to the portion of the estate

that passed in trust to decedent’s grandchildren.

Notice of Deficiency

     On August 30, 1999, respondent commenced an examination of

the estate and GST tax return.    By notice of deficiency,

respondent determined a $1,205,541 deficiency in the estate and

GST tax.   Respondent determined that at the date of decedent’s

death the fair market value of the 3,276 shares of RBI stock was

$1,048,320, rather than $163,800, as shown on the estate’s tax
                                 - 7 -

return.    Respondent also determined that the allowable charitable

contribution deduction for the bequest to the Lubin-Green

Foundation was $801,723, rather than $1,565,678, as shown on

decedent’s estate tax return, on the basis of a determination

that 50 percent of the estate taxes (Federal and Missouri),

including interest and penalties, and all the GST tax should be

allocated against the amount passing to the Lubin-Green

Foundation.

                                OPINION

A.   Allocation of Federal and Missouri Estate Taxes (Apart From
     GST Tax)

     Generally, the manner in which estate taxes are apportioned

to the assets included in a decedent’s gross estate is determined

under State law.    Riggs v. Del Drago, 317 U.S. 95, 98 (1942).        In

this case, the parties agree that Missouri law governs the

apportionment of the estate’s taxes.       Missouri has no

apportionment statute.    See Estate of Boder v. Albrecht Art

Museum, 850 S.W.2d 76, 78 (Mo. 1993).       The apportionment of taxes

is instead determined according to the decedent’s intent, looking

first to the decedent’s testamentary instrument.        Id.   If the

decedent’s intent is clear, it is to be given effect.         Id. at 79.

If the decedent’s intent is unclear, judicial construction of the

instrument(s) is appropriate.     Id.     If the decedent’s intent

cannot be determined, the doctrine of equitable apportionment

applies.   Id.; St. Louis Union Trust Co. v. Krueger, 377 S.W.2d
                               - 8 -

303 (Mo. 1964); Hammond v. Wheeler, 347 S.W.2d 884 (Mo. 1961);

Carpenter v. Carpenter, 267 S.W.2d 632 (Mo. 1954).   “The doctrine

of equitable apportionment places the burden of the federal

estate tax on the property that generates the tax and exonerates

from the burden the property which does not.”   Estate of Boder v.

Albrecht Art Museum, supra at 78-79 (citing Jones v. Jones, 376

S.W.2d 210, 212 (Mo. 1964)).

     In the notice of deficiency, respondent determined that

decedent intended 50 percent of her Federal and Missouri estate

taxes (exclusive of GST tax) to be paid out of the charitable

bequest and the other 50 percent to be paid out of the bequest in

trust for her grandchildren.   For the first time on brief,

respondent has abandoned this position in favor of a new theory:

respondent now argues that decedent intended the estate taxes to

be paid entirely out of the charitable bequest to the Lubin-Green

Foundation.   The estate argues that decedent’s will contains no

clear expression of intent regarding the allocation of estate

taxes, and, therefore, the doctrine of equitable apportionment

requires an allocation of all estate taxes to the property

passing in trust to decedent’s grandchildren.

     Decedent’s will states, in relevant part, that decedent

directs her personal representative “to pay, out of my estate,

all transfer, estate * * * and other death taxes (exclusive of

any generation-skipping transfer tax)”.   The will goes on to
                                - 9 -

state that the estate tax “shall not be charged against nor

deducted from any such gift, bequest, devise, * * * or other

property or interest in property, upon or by reason of which such

taxes are assessed and paid”.

     In the first instance, we might agree that this language

represents an attempt on the part of decedent to apportion the

estate taxes arising at her death.      Arguably, this language might

be read to reflect an intent on the part of decedent that the

principles of equitable apportionment shall not apply.

Nevertheless, the language in decedent’s will is not altogether

clear as to who ultimately should bear the estate tax burden.

     Respondent argues that the “plain, unambiguous” meaning of

the language in decedent’s will is that estate taxes are to be

allocated entirely against the charitable bequest to the Lubin-

Green Foundation.   If this language has a “plain and unambiguous”

meaning, it eludes us, as it evidently eluded respondent inasmuch

as he previously interpreted the will language to provide for a

50-50 allocation against the residuary bequests.     The language in

decedent's will does not purport to express who ultimately should

bear the estate tax burden; rather, it provides that certain

transfers or property shall not be charged with the estate taxes.

This language does not expressly or implicitly charge the estate

taxes to the property passing to the Lubin-Green Foundation.
                              - 10 -

     Respondent focuses on the language “upon or by reason of

which such taxes are assessed and paid” and contends that this

language exonerates from payment of estate taxes all gifts,

bequests, and devises other than the residuary bequest to the

Lubin-Green Foundation, reasoning that this is the only gift,

bequest, or devise that does not constitute property upon or by

reason of which such taxes are assessed and paid.   Respondent’s

construction may be tenable but is by no means compelled when the

specific language that respondent relies upon is read in context

with other language in decedent’s will, including the provisions

dealing with the residuary bequest to the Lubin-Green Foundation

and the residuary bequest in trust to decedent’s grandchildren.

     For example, if, as respondent contends, the language in

question requires the property passing to the Lubin-Green

Foundation to bear all the estate taxes, then that is the

property “upon which” all the taxes are ultimately assessed and

paid, and consequently that property would also be exonerated

from the payment of estate taxes.   Taken to its logical

conclusion, then, this language might be read to exonerate all

gifts, bequests, and devises from being charged with the estate

taxes (other than GST tax).

     Also, in the absence of some clearer expression of

decedent’s intent, we would be hard pressed to infer an intent on

her part to allocate all the estate taxes against the charitable
                              - 11 -

bequest.   See sec. 2055(c) (limiting charitable contribution

deduction to amount of charitable bequest reduced by amount of

taxes payable out of that bequest).    This is especially true when

we consider the equivalency that the will otherwise gives to the

charitable bequest and the bequest in trust to decedent’s

grandchildren.   These bequests are designated in decedent’s will

to each constitute one half of the “rest, residue, and remainder”

of decedent’s property.6

     We agree with the estate that decedent’s will lacks a clear

expression of intent as to who is ultimately to bear the burden

of the estate taxes.   The will as a whole is ambiguous on this

score.   Although decedent’s will provision is susceptible to a

number of plausible ways of apportioning the estate taxes, none

of these interpretations provides a sustainable basis for

apportioning the estate taxes between the bequest in trust to

decedent’s grandchildren and the charitable bequest to the Lubin-

Green Foundation.   Under these circumstances, Missouri judicial

precedents dictate that we apply the doctrine of equitable


     6
       This designation might support respondent’s original
interpretation, which he has now abandoned, that the will
requires a 50-50 allocation of the estate taxes between the
charitable bequest and the bequest in trust for the
grandchildren. Although this interpretation is plausible, it has
no express support in the specific provision of decedent’s will
dealing with the apportionment of taxes. Also, the fact that
both of the interpretations that respondent has forwarded, as
well as other possible interpretations, are similarly plausible
supports our ultimate conclusion that the will is ambiguous as to
the proper apportionment of the estate taxes.
                              - 12 -

apportionment.   We hold, therefore, that no portion of the estate

taxes (other than GST tax) is allocable to the bequest to the

Lubin-Green Foundation.   Cf. Estate of McCutchan v. Commissioner,

T.C. Memo. 1979-393.

B.   Allocation of GST Tax

     “Unless otherwise directed pursuant to the governing

instrument by specific reference to the [GST] tax * * *, the tax

imposed * * * on a generation-skipping transfer shall be charged

to the property constituting such transfer.”   Sec. 2603(b).   The

estate argues that decedent’s GST tax should be allocated to the

property that is to pass in trust for the benefit of decedent’s

grandchildren because decedent did not direct otherwise in her

will.   Respondent argues that all GST tax imposed on the transfer

in trust for the benefit of decedent’s grandchildren is to be

allocated against the charitable bequest to the Lubin-Green

Foundation.

     Decedent specifically provided for the payment of GST tax on

property transferred in a “direct skip”.   Decedent’s will directs

that those taxes “shall not be deducted from or reduce the gift,

bequest or devise which constitutes a ‘direct skip.’”   The

parties agree that the transfer in trust for decedent’s

grandchildren constitutes a “direct skip” as defined in section

2612(c).   It follows from the express language in decedent’s will

that the GST tax is not to be deducted from or reduce the
                                - 13 -

transfer in trust for the grandchildren.

     The estate argues that decedent’s will fails to instruct the

executor not to “charge” the GST tax to the trusts for the

grandchildren, as the estate contends the language of section

2603(b) contemplates it must.    Contrary to the estate’s argument,

section 2603(b) does not require any specific language to elect

out of the general apportionment scheme of that section, except

for a specific reference to the GST tax.      It is sufficient that

decedent’s will made manifest her intent to elect out of the

general, statutory apportionment scheme and made a specific

reference to the GST tax.    Cf. Estate of Monroe v. Commissioner,

104 T.C. 352, 363-365 (1995), revd. and remanded on another

ground 124 F.3d 699 (5th Cir. 1997).

     The estate contends that the will provision relating to GST

tax is “unclear and contradictory”.      The estate claims that if

the GST tax is paid out of the estate and charged to the

charitable bequest, “the charitable deduction would go down, the

estate taxes would consequently go up and the bequest to the

grandchildren would go down by their share of the additional

estate tax, which would ‘reduce’ the bequest to the grandchildren

in contravention of the express language of the GST Tax

Provision.”   We are unpersuaded by the estate’s argument, which

seems to us more “unclear and contradictory” than the will

provisions in question.     The estate’s argument, focusing on the
                              - 14 -

supposed collateral estate-tax effects of allocating the GST tax

to the charitable bequest, ignores the more direct and proximate

effect that would result from allocating the GST tax against the

grandchildren’s bequests.   Even if, as the estate suggests,

allocating the GST tax against the noncharitable bequests would

lower the estate’s overall estate-tax burden, we are unpersuaded

that such an allocation would not reduce the amounts ultimately

received by the grandchildren, since the GST tax would then be

borne entirely by their shares, in contravention of the will

provision that the GST tax “not * * * reduce the gift, bequest,

or devise which constitutes a ‘direct skip’”.

     We hold that the GST tax is not chargeable to the transfer

in trust for decedent’s grandchildren but rather is to be charged

to the charitable bequest to the Lubin-Green Foundation.

C.   Valuation of Decedent’s 3,276 Shares of RBI Stock

     Generally, the value of a decedent’s gross estate is

determined by including the value of all property, real or

personal, tangible or intangible, wherever situated.     Sec.

2031(a).   The value of every item of property includable in a

decedent’s gross estate is its fair market value at the time of

the decedent’s death (or the alternate valuation date).     Sec.

20.2031-1(b), Estate Tax Regs.   The fair market value of property

is the price at which the property would change hands between a

willing buyer and a willing seller, neither being under a
                               - 15 -

compulsion to buy or to sell and both having reasonable knowledge

of relevant facts.    Id.; see United States v. Cartwright, 411

U.S. 546, 551 (1973).

     For unlisted stocks, the best indicators of fair market

value are actual arm’s-length sales in the normal course of

business within a reasonable time before or after the date of

death.    Estate of Andrews v. Commissioner, 79 T.C. 938, 940

(1982).    Where actual sale prices are unavailable, the stock

value is determined by weighing the corporation’s net worth,

prospective earning power, dividend-paying capacity, and other

relevant factors.    Id.; sec. 20.2031-2(f), Estate Tax Regs.

Valuation of stock is a purely factual determination; there is no

one universally applicable formula.     Hamm v. Commissioner, 325

F.2d 934, 938 (8th Cir. 1963), affg. T.C. Memo. 1961-347.

     The parties dispute the fair market value of decedent’s

3,276 shares of RBI stock.    Respondent, who determined in the

notice of deficiency that the fair market value of the shares was

$1,048,320 ($320 per share), now contends that the fair market

value was $860,000 ($262.52 per share).    The estate, which

reported on the estate tax return that the fair market value of

the shares was $163,800 ($50 per share), now contends that the

fair market value was $655,200 ($200 per share).7


     7
       Generally, the estate bears the burden of proof. See Rule
142(a). Effective for court proceedings arising in connection
                                                   (continued...)
                                  - 16 -

     Each party relies on an expert opinion.     We evaluate expert

opinions in light of all the evidence in the record and may

accept or reject expert testimony, in whole or in part, according

to our own judgment.     Helvering v. Natl. Grocery Co., 304 U.S.

282, 295 (1938); Shepherd v. Commissioner, 115 T.C. 376 (2000),

affd. 283 F.3d 1258 (11th Cir. 2002).      We may be selective in our

use of any part of an expert’s opinion.      Estate of Davis v.

Commissioner, 110 T.C. 530, 538 (1998).

     1.     The Estate’s Expert

     The estate’s expert, Gary L. Schroeder, is accredited by the

American Society of Appraisers as a senior appraiser in the

valuation of businesses and intangible assets.     He has been

actively engaged in the appraisal and consulting profession since

1981.     Mr. Schroeder determined that, as of September 26, 1997,

the fair market value of 100 percent of the shares of RBI stock,

on a controlling-interest basis, was $25,900,000.     He determined

a $12,900,000 aggregate value for RBI stock after allowing a 17-




     7
      (...continued)
with examinations commencing after July 22, 1998, if certain
requirements are met under sec. 7491(a), the burden of proof
shall be on the Commissioner as to any factual issue relevant to
ascertaining the tax liability of the taxpayer. See Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, sec. 3001(c), 112 Stat. 727. The examination in the
instant case commenced after July 22, 1998. Nevertheless,
neither party addresses whether the requirements of sec. 7491(a)
have been met, and, in any event, we do not decide any factual
issue on the basis of which party bears the burden of proof.
                                - 17 -

percent minority interest discount and a 40-percent lack of

marketability discount.

     2.   Respondent’s Expert

     Respondent’s expert, William C. Herber, is an associate

member (candidate) of the American Society of Appraisers and a

member of the Institute of Business Appraisers, Inc.    Mr. Herber

prepares valuations and market analyses of real estate, business

enterprises, and intangible property rights.    He has worked in

the valuation field since approximately 1985.    Mr. Herber

determined that, as of September 26, 1997, the fair market value

of 100 percent of the shares of RBI stock before consideration of

any discounts was $26,500,000.    Mr. Herber determined an $860,000

($262.52 per share) value for decedent’s shares of RBI stock.      In

determining this value, Mr. Herber allowed a 15-percent minority

interest discount and a 25-percent discount for lack of

marketability.

     The experts agree to a considerable extent on the valuation

of RBI stock.    Indeed, the aggregate values the experts

determined are relatively close.    The greatest difference in the

experts’ respective positions relates to the lack of

marketability discount.

     D.   Pre-Discount Aggregate Value of RBI Stock

     1.    Income Approach

     Both experts used an income approach to value RBI stock and
                               - 18 -

arrived at nearly identical values:      Mr. Schroeder determined a

value of $23,370,000, and Mr. Herber determined a value of

$23,300,000.    Respondent’s brief states:    “The experts offered by

the parties are in agreement as to the value of the Royal

Bancshares derived from the discounted net income method.”

Considering this concession and out of fairness to the estate, we

accept Mr. Herber’s $23,300,000 estimate of the value of RBI

stock under the income approach.

     2.   Market Approaches

           a.   Guideline Analysis

     Using a market approach, both experts used a guideline

analysis of publicly held banks and a transaction analysis of

acquisitions of privately held banks.      Using the guideline

analysis, the experts arrived at similar values for RBI stock:

Mr. Schroeder determined a value of $28,330,000, and Mr. Herber

determined a value of $28 million.      Respondent’s brief states:

“The experts offered by the parties are in agreement on the value

of Royal Bancshares suggested by publicly-traded guideline

banks.”   Considering this concession and out of fairness to the

estate, we accept Mr. Herber’s $28 million estimate of the value

of RBI stock using the guideline analysis.

          b.    Transaction Analysis

     Under the transaction analysis, both experts identified a

number of transactions involving the acquisition of privately
                                  - 19 -

held banks which the experts determined were similar to RBI’s

banking company.

                  i.    The Estate’s Expert

     Mr. Schroeder obtained information relating to five banks

located in either Illinois or Missouri that were acquired within

the 9-month period before September 26, 1997.     Mr. Schroeder

determined a range of multiples from the price-to-earnings,

price-to-equity, and price-to-assets ratios of the acquired

banks.   Because Royal Banks appeared to be located in a more

urban area than the acquired banks and because of “the potential

of a significant pending loan impairment on a loan granted to

Jefferson Printing”, Mr. Schroeder selected multiples between the

median and the low end of the range derived from the acquired

banks.   Mr. Schroeder determined a controlling interest value of

$25,920,000 for RBI stock using the transaction analysis.

                  ii.    Respondent’s Expert

     Mr. Herber obtained information concerning private banks

that were similar to RBI, focusing on privately held commercial

banks whose sales were announced and completed between January

1996 and September 26, 1997, and that had assets between $20 and

$200 million.   He selected nine acquired banks that he determined

to be comparable to RBI.      He determined average and median price-

to-earnings, price-to-equity, and price-to-assets ratios of the

acquired banks.    He compared these ratios to RBI’s ratios and
                                - 20 -

selected appropriate multiples for RBI stock.    Mr. Herber

determined a value of $28,500,000 for RBI stock using the

transaction analysis.     In reaching his conclusions, Mr. Herber,

unlike Mr. Schroeder, did not consider the effects of any

potential loan impairment.

               iii.     Effect of Potential Loan Impairment

     In their disagreement over the experts’ transaction

analyses, the parties focus on whether the multiples that the

experts selected should reflect the impairment risk of the loan

to the Havrillas and the pending bankruptcy of Jefferson/Keeler.8

Although Mr. Schroeder considered the potential of a loan

impairment in his report, it is unclear whether or to what extent

it depressed his appraisal.9    Accordingly, we are unpersuaded

that Mr. Herber’s failure to consider the potential loan

impairment materially undermines his valuation recommendations.




     8
       The difference in the values that the estate’s expert,
Gary L. Schroeder, and respondent’s expert, William C. Herber,
determined is not solely attributable to differing treatments of
the potential loan impairment. The experts also relied upon
different guideline transactions, which resulted in the use of
different price/earnings, price/equity, and price/assets ratios.
Respondent, however, raises no issues as to the remaining aspects
of Mr. Schroeder’s transaction analysis, including his selection
of guideline transactions. Similarly, the estate does not appear
to dispute the remaining aspects of Mr. Herber’s transaction
analysis.
     9
       Furthermore, the record reflects that Mr. Schroeder’s
knowledge and understanding of the circumstances of the loan
impairment were, in key respects, faulty.
                                  - 21 -

                  iv.   Conclusion

     On the basis of all the evidence and using our best

judgment, we find that the transaction analysis indicates a value

of $27,500,000.

     3.     Correlation of Values

     We have found that the following values were indicated under

the income and market approaches that the parties’ experts used:

            Approach (Analysis)             Value Derived

           Income approach                   $23,300,000
           Market approach
             Guideline analysis               28,000,000
             Transaction analysis             27,500,000

Like the experts in their respective reports, we find that each

of these derived values is entitled to equal weight.

Accordingly, we hold that the aggregate value of RBI stock is

appropriately estimated at $26,266,667, before taking into

account any discounts.

E.   Discounts

     The parties and their experts agree that minority interest

and lack of marketability discounts are appropriate in valuing

decedent’s stock interest in RBI.      They disagree about the

amounts of those discounts.

     1.    Minority Interest Discount

     Mr. Schroeder determined a minority interest discount of 17

percent.    Mr. Herber determined a minority interest discount of

15 percent.    Both experts determined the minority interest
                              - 22 -

discount by calculating the inverse of what they considered to be

the appropriate control premium for RBI.   Mr. Herber also

considered other factors in determining his recommended minority

interest discount.

          a.   The Estate’s Expert

     Mr. Schroeder recommended a minority interest discount of 17

percent on the basis of information contained in Mergerstat

Review 1998 regarding offers to acquire a majority interest or

total ownership of public companies.   From this information, with

little explanation, he calculated a control premium of 20 percent

and an implied minority interest discount of 17 percent.     As a

basis for this conclusion, Mr. Schroeder states simply that “For

Royal Banks of Missouri we have selected a control premium of 20%

as being reasonable considering its size, financial performance

and geographic location.”

          b.   Respondent’s Expert

     Mr. Herber relied on a study of minority interest discounts

by Christopher Mercer in Quantifying Marketability Discounts.

The Mercer study indicated a median and average minority interest

discount of 19 percent.   Mr. Herber conducted his own study of

control premiums in transactions involving banking companies.       He

concluded that these transactions indicated median and average

minority interest discounts ranging from 18.4 to 19.6 percent,

which was “equivalent” to the Mercer study results.
                               - 23 -

     Mr. Herber then considered certain additional factors which

led him to reduce the minority interest discount to 15 percent.

First, Mr. Herber claims that decedent’s 5.09-percent stock

interest in RBI is “a substantially larger interest than typical

minority interests in publicly traded shares in banks and this

would result in a minority interest discount which would tend to

be somewhat lower than” the indicated range of 18.4 to 19.6

percent for banking interests.   Mr. Herber offers no independent

evidence or empirical data to verify these conclusions, and we

are unpersuaded that he appropriately relied on this factor in

his discount analysis.

     Second, alluding to the lack of concentration of ownership

in RBI stock, Mr. Herber claims that because decedent held a

relatively large minority interest, 5.09 percent, and because no

single individual controlled the company (with an interest

greater than 50 percent), “the divided interest of the larger

shareholders would tend to keep the applicable minority interest

discount also at the lower range of the market studies for

minority interest discount.”   We are not convinced that

decedent’s interest in RBI stock represents a relatively large

minority interest or that the holder of that size interest faces

less of a challenge in controlling the company.   Mr. Herber’s

suggestion appears purely speculative.   In any event, Mr. Herber
                             - 24 -

determined that this factor indicates a discount at the lower end

of the indicated range, not a discount below that range.

     Mr. Herber also notes that the banking industry is highly

regulated and banking companies are “transparent”; i.e.,

shareholders have access to a great deal of information regarding

banking companies’ performance.   He claims that these factors

support a lower minority interest discount.   Mr. Herber, however,

determined the indicated range of 18.4 to 19.6 percent from his

own study of transactions involving banking companies.     Because

the indicated range presumably takes into account issues relating

to the regulation of banking companies, we are unpersuaded that

these factors support a discount for decedent’s shares lower than

the indicated range.

     Mr. Herber also claims that RBI is well capitalized, has

high returns on equity and assets, maintains a very high rating

in comparison to other banking companies and has offered a

“favorable dividend” over the past 5 years.   He claims that these

factors reduce risk and enhance the attractiveness of a minority

position in RBI relative to other banking companies and support a

lower discount than the indicated range of 18.4 to 19.6 percent.

Mr. Herber does not attempt to quantify the effect of these

additional factors, and he provides no independent evidence or

verification regarding the comparison of RBI and other banking
                              - 25 -

companies.   Mr. Herber has not persuaded us that these factors

support a lower minority interest discount.

          c.   Our Analysis

     We are unsatisfied that either expert has adequately

supported his recommended minority interest discount.    The

estate does not argue for a minority interest discount greater

than 17 percent.   Mr. Herber, who started with a minority

interest discount range of 18.4 to 19.6 percent before making

various adjustments that we do not find well supported, has not

persuaded us that the minority interest discount should be less

than 17 percent.   Accordingly, we hold that a 17-percent minority

interest discount is appropriate in valuing decedent’s shares of

RBI stock.

     2.   Lack of Marketability Discount

     Mr. Schroeder determined a lack of marketability discount of

40 percent, and Mr. Herber determined a lack of marketability

discount of 25 percent.   Both experts used information from
                                - 26 -

restricted stock studies.10    Mr. Schroeder also used information

from initial public offering (IPO) studies.11

          a.     The Estate’s Expert

     In determining an appropriate lack of marketability

discount, Mr. Schroeder relied on restricted stock studies that

indicated discounts ranging from 31.2 to 45 percent and an

overall average discount of 34.9 percent.    He also relied on IPO

studies that indicated an average lack of marketability discount

ranging from 43 to 45.7 percent and an overall average discount

of 44.4 percent.    After considering certain factors influencing

the marketability of RBI shares, Mr. Schroeder concluded that the

factors supporting a higher discount would slightly outweigh the

factors supporting a lower discount, and he selected a discount

of 40 percent.

     Mr. Schroeder considered the potential impairment of the

loan to the Havrillas and the pending bankruptcy of



     10
       Restricted stock studies compare private-market prices of
unregistered (restricted) shares in public companies with the
public-market prices of unrestricted but otherwise identical
shares in the same corporations. See McCord v. Commissioner, 120
T.C. 358, 387-388 (2003). Historically, restricted shares
generally could not be resold in the public market for 2 years.
See 17 C.F.R. sec. 230.144(d)(1) (1996). In 1997, the required
holding period was shortened to 1 year. See 62 Fed. Reg. 9242
(Feb. 28, 1997).
     11
       Initial public offering (IPO) studies compare the
private-market price of shares sold before a company goes public
with the public-market price obtained in the IPO of the shares or
shortly thereafter. See McCord v. Commissioner, supra at 387.
                                - 27 -

Jefferson/Keeler as factors indicating a higher discount.        For

the reasons discussed above (including Mr. Schroeder’s

demonstrated incomplete knowledge of the potential loan

impairment and the pending bankruptcy), we find Mr. Schroeder’s

reliance on these factors unpersuasive.12

     Mr. Schroeder also considered seven prior transactions

involving shares of RBI stock as supporting a higher lack of

marketability discount.     Six of those transactions, however,

occurred between 1990 and 1994--more than 3 years before

decedent’s death; the remaining transaction occurred in January

1998.     Mr. Schroeder provided no specifics about the prior

transactions, and we have no basis for concluding they were at

arm’s length.     See Rev. Rul. 59-60, sec. 4.02(g), 1959-1 C.B.

237, 241-242.     Furthermore, Mr. Schroeder does not indicate

whether or to what extent the information from the prior

transactions affected his overall conclusion of an appropriate

lack of marketability discount.     Instead, he states equivocally

that the existence of prior transactions is “usually a factor

that would decrease the lack of marketability discount[;]

however, the prior transactions have been at prices which are



     12
       Moreover, Mr. Schroeder has failed to adequately explain
why he considered this factor both in reaching an aggregate value
for RBI stock and in calculating a lack of marketability
discount. We are unpersuaded that Mr. Schroeder’s double
counting of this factor would not lead to understating the value
of decedent’s shares.
                                - 28 -

significantly below our appraisal value which is a factor that

would increase the lack of marketability discount.”

     In sum, we believe that Mr. Schroeder’s consideration of the

potential loan impairment, the pending bankruptcy, and the prior

transactions cause his recommended lack of marketability discount

to be overstated.    The remaining factors that he identified in

his report support a lower lack of marketability discount.

            b.   Respondent’s Expert

     In determining an appropriate lack of marketability

discount, Mr. Herber relied on restricted stock studies

indicating median discounts ranging from 24 to 45 percent, with

median results from most of the studies trending in a narrow

range from 30 to 35 percent.    Mr. Herber placed considerable

reliance on a Management Planning, Inc. study, which “indicates

that a discount ranged overall from 26.2% to 32.7% with a central

tendency of 30.5% overall”.    Mr. Herber suggested that RBI’s

relatively smaller gross income and earnings supported a greater

discount, but that “the overriding relative stability of the

companies earnings would contribute to a lower applicable lack of

marketability discount”.    He also indicated that the companies in

the studies tended not to pay dividends.    Thus, in Mr. Herber’s

view, the fact that RBI paid dividends would support a lower

discount.    Mr. Herber concluded that these factors together
                              - 29 -

suggested a lower discount than “the 30% overall average found

for all observations in the Management Planning Study.”

     Mr. Herber also considered certain factors identified in

Mandelbaum v. Commissioner, T.C. Memo. 1995-255, affd. 91 F.3d

124 (3d Cir. 1996), for determining whether an appropriate

discount for lack of marketability should be higher than, the

same as, or lower than the indicated range of discounts.13   In

considering these factors, Mr. Herber observed that a lack of

marketability discount applicable to decedent’s stock interest

“would have a strong central tendency relative to the overall

studies.”   Taking into account RBI’s stability of earnings and

its lower overall company risk as a bank, however, he recommended

a 25-percent discount for lack of marketability, which he

characterizes as being at the “slightly lower end” of the

indicated range of median discounts.



     13
       The factors identified in Mandelbaum v. Commissioner,
T.C. Memo. 1995-255, affd. 91 F.3d 124 (3d Cir. 1996), include:
(1) The value of the subject corporation’s privately traded
securities vis-a-vis its publicly traded securities; (2) the
corporation’s financial statements; (3) the corporation’s
dividend-paying capacity, its history of paying dividends, and
the amount of its prior dividends; (4) the nature of the
corporation, its history, its position in the industry, and its
economic outlook; (5) the corporation’s management; (6) the
degree of control transferred with the block of stock to be
valued; (7) any restriction on the transferability of the
corporation’s stock; (8) the length of time an investor must hold
the subject stock to realize a sufficient profit; (9) the
corporation’s redemption policy; and (10) the cost of effecting a
public offering of the stock to be valued, e.g., legal,
accounting, and underwriting fees.
                              - 30 -

     We are unpersuaded by Mr. Herber’s conclusions.   In the

first instance, his recommended 25-percent marketability discount

is very nearly at the rock bottom (rather than at the “slightly

lower end”) of the 24- to 45-percent range he says is indicated

by the restricted stock studies he analyzed.   Furthermore, we

question his 24-percent lower range limit.14   He himself states

that most of the restricted stock studies showed median

marketability discounts in a range from 30 to 35 percent.

     In his analysis of the Management Planning, Inc. study, Mr.

Herber compared RBI with the grouping of companies with gross

incomes of $10 to $30 million.   The transactions involving those



     14
       Mr. Herber cites only two studies that he says indicate
median discounts of 24 percent or lower. One of those studies is
the Securities and Exchange Commn. Institutional Investor Study
(SEC study). See Securities and Exchange Commn., Institutional
Investor Study Report, H.R. Doc. 92-64 (Vol. 5), 92d Cong., 1st
Sess. (1971). On cross-examination, however, Mr. Herber was
unable to respond satisfactorily to the estate’s contention that
the SEC study describes various categories of sales transactions,
and that the category for nonreporting over-the-counter
companies, which are most comparable to smaller businesses like
RBI, shows a median price discount of 32.6 percent.

     Mr. Herber also relied on the “Hall/Polacek study” which, in
his opinion, indicated a mean discount of 23 percent. See Hall &
Polacek, “Strategies for Obtaining the Largest Valuation
Discounts,” Estate Planning (Jan./Feb. 1994). The Hall/Polacek
study also indicates, however, that “Lack of marketability
discounts appear to increase as the capitalization of the
corporation decreases below $50 million (30%-40%) compared to
corporations with capitalizations in excess of $100 million (10%-
20%).” Id. at 43-44. Because RBI’s capitalization was below
$50 million, the Hall/Polacek Study would appear to indicate a
higher discount (30 to 40 percent) than the mean discount of 23
percent upon which Mr. Herber relied.
                                - 31 -

companies had an overall average lack of marketability discount

of 30.8 percent.     Mr. Schroeder points out, however, that this

particular group contained only two transactions involving

companies with revenues comparable to RBI’s relatively small

revenues ($12,653,000 for the 12 months preceding decedent’s

death).15    According to Mr. Schroeder, those two transactions had

an overall average lack of marketability discount of 43 percent.

The Management Planning, Inc. study indicates a clear correlation

between the size of a company’s gross income and the size of the

lack of marketability discount.     See Pratt, et al., Valuing a

Business: The Analysis and Appraisal of Closely Held Companies

401 (4th ed. 2000) (“There was clear size effect in the

Management Planning Study, with smaller companies tending to have

larger discounts”).     Mr. Herber admits as much on page 75 of his

report:     “In other words, restricted shares of companies with

higher gross income tended to sell for lower discounts than the

restricted shares of companies with lower gross income.”     Because

RBI had gross income at the lower end of the range indicated in

the Management Planning Study, we might expect the appropriate

discount for RBI to be higher than the overall average lack of

marketability discount of 30.8 percent indicated for the relevant

grouping of companies.


     15
       Mr. Herber was unfamiliar with the two transactions that
Mr. Schroeder identified. He could only testify that “I can look
that up. I would like to see that.”
                               - 32 -

      In sum, we are unpersuaded that Mr. Herber has adequately

supported his recommended 25-percent discount for lack of

marketability.

             c.   Conclusion

      On the basis of all the evidence, and using our best

judgment, we hold that a lack of marketability discount of 35

percent is appropriate for decedent’s shares of RBI stock.     This

discount is at the higher end of the narrow range that Mr. Herber

identified in his report and is consistent with the average

discount that Mr. Schroeder derived from the restricted stock

studies.16

5.   Conclusion

      We conclude that for September 26, 1997, the fair market

value of decedent’s shares of RBI stock is $721,297 ($220.18 per

share), computed as follows:

      Total aggregate value of RBI stock      $26,266,667.00
      5.09 percent of value of stock            1,336,973.00
      Less: 17-percent minority interest
        discount                                 (227,285.00)
                                                1,109,688.00
      Less: 35-percent discount for
        lack of marketability                    (388,391.00)
      FMV of decedent’s shares                    721,297.00
      FMV per share (3,276 shares)                    220.18




      16
       Although we believe that the IPO studies Mr. Schroeder
used are entitled to some consideration, we do not find that
those studies justify a discount greater than 35 percent.
                             - 33 -

     We have considered all contentions the parties have raised.

To the extent not addressed herein, those contentions are without

merit or unnecessary to reach.

     To reflect the foregoing,


                                             Decision will be

                                        entered under Rule 155.
