                        T.C. Memo. 1999-368



                      UNITED STATES TAX COURT



  ESTATE OF HELEN J. SMITH, DECEASED, FREDERIC L. FOILL II AND
       CASSANDRA F. VALLERY, CO-EXECUTORS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25881-96.                 Filed November 5, 1999.



     Aaron P. Rosenfeld and Richard R. Stedman, for petitioner.

     Edward L. Walter, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined a deficiency of $522,710

in petitioner’s Federal estate tax.   We must decide the value of

Helen J. Smith’s shares of stock in two companies, Jones Farm

Inc. (JFI), and First National Bank of Waverly (FNBW), as of her

death on January 25, 1993.   When she died, Helen J. Smith
                               - 2 -

(decedent) held one-third of the stock of JFI and 12 percent of

the stock of FNBW.

      Unless otherwise noted, all section references are to the

Internal Revenue Code in effect as of the date of decedent’s

death, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

                          FINDINGS OF FACT

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

incorporate by this reference the stipulation of facts, the

supplemental stipulation of facts, and the attached exhibits.     At

the time of filing the petition, coexecutor Frederic L. Foill II

resided in Waverly, Ohio, and the estate of decedent was

administered in Pike County, Ohio.     The parties have stipulated

that the estate had a Waverly, Ohio, address at the time the

petition was filed.

JFI

      JFI was an Ohio corporation that operated a farm in Pike

County, Ohio, that had been in decedent’s family for many years.

JFI was an S corporation within the meaning of section 1361(a).

Pike County is a rural, primarily agricultural county with low

economic growth.   In 1942, decedent and her two sisters each

inherited a one-third interest in their father’s farm.    When the

farm was later incorporated as JFI, each sister received
                                - 3 -

one-third of the shares of stock.    At the time of her death,

decedent owned one-third, or 195, of the total 585 shares.

     The farm was situated on approximately 1,300 acres, half of

which were bottomland subject to flooding and half of which were

forest and pasture.    JFI was actively engaged in farming, with

earnings for the years from 1988 through 1992 varying from a low

of $9,243 in 1990 to a high of $28,145 in 1992.    JFI paid

dividends only in amounts sufficient to meet its shareholders’

tax liabilities with respect to JFI’s operations.    JFI’s farming

operations were managed and conducted by an unrelated individual

serving as farm manager pursuant to a contract of indefinite

duration.   The manager was compensated with a salary and various

benefits, plus a 5-percent share of farm profits.    On the date of

decedent’s death, the undiscounted value of JFI was $1,818 per

share.

     On the estate tax return, petitioner claimed a value for

decedent’s shares in JFI of $331.94 per share.    In the notice of

deficiency, respondent valued decedent’s shares in JFI at

$1,636.32 per share.    Respondent now concedes that the value of

decedent’s shares in JFI is no greater than $1,029 per share.

                       ULTIMATE FINDING OF FACT

     The fair market value of decedent’s 195 shares in JFI at the

date of decedent’s death was $439 per share, or a total of

$85,605.
                                 - 4 -

FNBW

       FNBW was a corporation that operated a bank in Pike County,

Ohio, that had been in decedent’s family for many years.      On the

date of decedent’s death, there were 100,000 shares of FNBW

outstanding and 95 shareholders.    Decedent owned 12,000 shares in

FNBW when she died.    On December 31, 1992, 25 days before

decedent’s death, FNBW’s total assets were $103,884,000 and total

stockholder equity was $11,249,000.      In the period from 1988

through 1992, FNBW’s earnings increased each year from $917,000

in 1988 to $1,423,000 in 1992.    In the same period, its dividends

also increased each year from $348,000 in 1988 to $640,000 in

1992.

       On the estate tax return, petitioner claimed a value for

decedent’s shares in FNBW of $73.67 per share.      In the notice of

deficiency, respondent valued decedent’s shares in FNBW at

$159.53 per share.

                      ULTIMATE FINDING OF FACT

       The fair market value of decedent’s 12,000 shares in FNBW at

the date of decedent’s death was $98 per share, or a total of

$1,176,000.

                               OPINION

       We must decide the fair market value of decedent’s shares of

stock in JFI and FNBW on the date of decedent’s death on

January 25, 1993.    Both parties rely upon expert opinions.
                                - 5 -

      Fair market value is defined as “‘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.’”    United

States v. Cartwright, 411 U.S. 546, 551 (1973) (quoting sec.

20.2031-1(b), Estate Tax Regs.).   Expert opinion sometimes aids

the Court in determining valuation; other times, it does not.

See Laureys v. Commissioner, 92 T.C. 101, 129 (1989).    We

evaluate such opinions in light of the demonstrated

qualifications of the expert and all other evidence of value in

the record.   See Estate of Newhouse v. Commissioner, 94 T.C. 193,

217 (1990).   We are not bound, however, by the opinion of any

expert witness when that opinion contravenes our judgment.    See

id.   We may accept the opinion of an expert in its entirety, see

Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74 T.C.

441, 452 (1980), or we may be selective in the use of any portion

thereof, see Parker v. Commissioner, 86 T.C. 547, 562 (1986).

      The best method to value a corporation’s stock is to rely on

actual arm’s-length sales of the stock within a reasonable period

of the valuation date.   See Estate of Andrews v. Commissioner, 79

T.C. 938, 940 (1982).    There were no such sales for JFI or FNBW.

Thus, all of the experts used less direct methods of valuation.
                               - 6 -

JFI

      To support the values claimed for the JFI stock, petitioner

presented the testimony and expert reports of Richard D. Hitt,

Jr., of KPMG Peat Marwick (who had valued JFI for the estate tax

return) and Thomas A. Egan, Jr., of Management Planning, Inc.

(who had valued JFI in preparation for trial).    Respondent

presented the testimony and expert report of Travis Keath of

Business Valuation Services, Inc.   The parties stipulated that

all of these experts were qualified appraisers.

      The parties stipulated that the undiscounted value of JFI

was $1,818 per share, and the task of the appraisers was to

decide to what extent to discount this value to reflect the value

of decedent’s one-third stock interest in the corporation at the

time of her death.   Each of the experts calculated two discounts:

A minority interest (or lack of control) discount and a lack of

marketability discount.

      Expert Opinion of Mr. Egan

      Mr. Egan used two methods to value JFI:   An asset method,

based on a comparison of the price-to-asset ratio of JFI with the

price-to-asset ratio of companies that in his judgment were

generally comparable to JFI; and an earnings method, based on the

investment value of JFI’s projected stream of earnings.
                                 - 7 -

          Asset Value

     Mr. Egan’s approach was first to select a group of companies

comparable to JFI for which net asset value and market value

(i.e., price of stock) were known.       He then calculated the amount

by which the net asset value of these companies was discounted in

reaching market value.   Finally, he adjusted this discount and

applied the adjusted discount to the net asset value of JFI to

compute its market value.   The comparable companies were publicly

traded, so the market value of each was determined from the sale

price of shares of stock on the date of decedent’s death.      Each

sale of stock was of a minority interest.      Thus, the discount

from net asset value that Mr. Egan calculated for the comparable

companies reflected the minority interest discount that he was

trying to determine.

     From 117 real estate companies and real estate investment

trusts for which data was publicly available,      Mr. Egan selected

15 companies that in his view were comparable to JFI.      For each

company, he computed market value (i.e., market price of

outstanding shares) as a percentage of net asset value and took

the median of these percentages, which was 41.3 percent.      Stated

in terms of a discount, the market value of the median company

equaled its net asset value discounted by 58.7 percent.      Mr. Egan

also calculated earnings, cash-flow, and dividends, each as a

percentage of net asset value.    The median of these percentages
                                 - 8 -

was close to or equal to zero, indicating to Mr. Egan that the

companies he chose were valued, for the most part, on the basis

of assets rather than on the basis of earnings, cash-flow, or

dividends.   Considering all relevant factors, Mr. Egan believed

that decedent’s shares of stock in JFI would sell at a discount

from net asset value less than the discount for the comparable

companies, so he chose a discount of 50 percent.    Thus, for his

final step, Mr. Egan applied the discount of 50 percent to a

figure for net asset value for JFI of $1,063,610, for an asset-

based value of $532,000.

          Earnings Value

     Mr. Egan’s approach was to calculate the present value of

JFI’s future earnings stream by developing an estimate of future

earnings, to which he applied a capitalization rate in order to

discount future earnings back to present value.    The

capitalization rate employed was equal to the rate of return

that, in Mr. Egan’s opinion, an investor would require before

deciding to invest in JFI.1

     To estimate the future earnings of JFI, Mr. Egan began with

average annual earnings of JFI for the 5 years previous to 1993

in the amount of $18,111.     He also calculated a 5-year weighted



     1
       In general, the inherent risk in an investment is directly
proportional to the required rate of return from the investment.
Thus, the riskier the investment, the higher the rate of return
required by the investor.
                                - 9 -

average of $19,263.2    He took the average of these two figures,

or $18,687.   Finally, to calculate earnings for 1993, the year of

decedent’s death, he increased the average earnings figure by an

inflation factor of 4 percent, for a total of $19,435.     This was

the income stream to which he applied the capitalization rate.

     To calculate the capitalization rate, Mr. Egan began with

the rate of return for a risk-free investment, using the rate of

return on long-term U.S. Government bonds as of the date of

decedent’s death, or 7.53 percent.      He then attempted to quantify

the risk inherent in an investment in JFI, using a study by

Ibbotson Associates that estimated the historical rate of return

of stocks as compared to the historical rate of return of long-

term Government bonds.    On the basis of the Ibbotson study, Mr.

Egan concluded that investments in smaller companies in general

required a 12.4-percent greater return than investments in

Government bonds.    But Mr. Egan believed that JFI was an even

riskier investment than the smaller companies represented in the

Ibbotson study.3    He, therefore, added an additional 10 percent

to the capitalization rate to account for the risk inherent in

investing in JFI in particular.    This gave him a total of 29.93

     2
       He gave the earnings figure from the most recent year,
1992, a weight (or multiplier) of 5, the figure from the
preceding year, 1991, a weight of 4, and so on, with the figure
from 1988 receiving a weight of 1. He then summed the products
and divided the total by 15, the sum of the weights applied.
     3
       According to Mr. Egan, JFI was much smaller than the
smaller companies represented in the Ibbotson study.
                                - 10 -

percent (7.53 + 12.4 + 10), which he rounded to 30 percent.

Finally, because he assumed that JFI would grow at a rate of 4

percent, he subtracted 4 percent to reflect the rate he believed

an investor would require, 26 percent.

     Mr. Egan’s last step in computing an earnings-based value of

JFI was to divide the estimated future earnings by the

capitalization rate:    $19,435 ÷ .26 = $74,750, which he rounded

to $75,000.

            Weighting the Two Values

     Mr. Egan believed that the greater part of the value of JFI

was due to the value of its assets rather than the value of its

earnings.     He believed that in the case of asset-based companies

with low earnings, such as JFI, investors place more emphasis on

underlying asset value.    This belief was confirmed by his

examination of the 15 comparable companies, which reflected a

median earnings rate of return of zero.      Thus, he gave 70 percent

of the weight of the total value of JFI to the asset-based value

of $532,000 and 30 percent to the earnings-based value of

$75,000.    This resulted in a value of $395,000, or $675 per

share.

            Lack of Marketability Discount

     Finally, Mr. Egan calculated a lack of marketability

discount to reflect that fact that there was not a readily

available market for decedent’s shares in JFI.     Mr. Egan’s
                              - 11 -

approach was to examine publicly traded companies and to compare

sales of stock in the companies on a public market with other

sales of stock in the same companies on a restricted market.     To

do this, Mr. Egan examined sales of unregistered shares of stock,

which were sold in private, unregistered transactions.    Mr. Egan

reviewed a list of 137 private placements of shares of stock.     He

then removed certain sales that he did not feel were comparable

to a sale of stock in JFI, such as sales where the common stock

of the company was not traded on an open market or where the

company had had a recent public offering; sales involving “start-

up companies”, defined as companies with less than $3 million in

sales; and sales involving companies the stock of which was

traded on a large stock exchange such as the New York Stock

Exchange.   From the remaining list, he computed a median discount

of 29.1 percent.

     From this figure, Mr. Egan made an additional adjustment of

5.9 percent to account for two differences between the JFI stock

and the unregistered stock he was examining:   (1) Unregistered

stock in general can, within 2 or 3 years, be sold on a public

market, making it more marketable than stock in JFI; and (2) JFI

was not held to the same disclosure standards as public

companies, making the stock in JFI less marketable, in Mr. Egan’s

view.   Mr. Egan’s final lack of marketability discount was 35

percent (29.1 percent + 5.9 percent).   Applying this discount to
                               - 12 -

his weighted value for JFI, Mr. Egan estimated the value of JFI

to be $439 per share ($675 per share less 35 percent).      Thus,

according to Mr. Egan, the fair market value of decedent’s

interest in JFI was $85,605 (195 shares x $439 per share).

     Court’s Analysis

     We find Mr. Egan’s report to be very persuasive and well

supported by his underlying reasoning.    We conclude, largely on

the basis of Mr. Egan’s report, that the fair market value of

decedent’s interest in JFI was $439 per share on the date of her

death.    Mr. Keath’s report, the only support for the

substantially higher value determined by respondent, was

seriously flawed and unpersuasive.

     It is well established that, in general, an asset-based

method of valuation applies in the case of corporations that are

essentially holding corporations, while an earnings-based method

applies for corporations that are going concerns.    See Estate of

Ford v. Commissioner, T.C. Memo. 1993-580, affd. 53 F.3d 924 (8th

Cir. 1995).    JFI has characteristics of both, given the

significance of real property in a farming operation, and we find

that it is appropriate to consider both asset- and earnings-based

values.    As we said in Estate of Andrews v. Commissioner, 79 T.C.

at 945:

     regardless of whether the corporation is seen as
     primarily an operating company, as opposed to an
     investment company, courts should not restrict
     consideration to only one approach to valuation, such
                               - 13 -

     as capitalization of earnings or net asset values.
     Certainly, the degree to which the corporation is
     actively engaged in producing income rather than merely
     holding property for investment should influence the
     weight to be given to the values arrived at under the
     different approaches but it should not dictate the use
     of one approach to the exclusion of all others.
     [Citations and fn. ref. omitted.]


It is clear that assets were the largest contributor to the value

of JFI.    At the same time, since we are valuing shares in a

corporation rather than the assets themselves, the corporation’s

status as an operating business must be taken into account, which

is accomplished by considering income-based indicators of value.

See id. at 946.    However, as we said in Estate of Andrews v.

Commissioner, supra at 944:    “the value of the underlying real

estate will retain most of its inherent value even if the

corporation is not efficient in securing a stream of * * *

income.”    We believe that Mr. Egan properly considered all of

these factors in giving 70 percent of the weight to asset-based

value and 30 percent to earnings-based value.

     Respondent’s primary dispute with Mr. Egan’s, and more

broadly petitioner’s, approach to valuing JFI is the fact that

Mr. Egan gave some weight to earnings-based value, whereas

respondent believes the value of JFI should be based solely on

its assets.    Respondent argues that the disparity between the

asset-based and earnings-based values demonstrates that only an

asset-based value should be used.    This argument is unpersuasive
                              - 14 -

on its face; by the same argument, the disparity demonstrates

that only an earnings-based value should be used.   Respondent

also argues that as an investment, JFI was valuable only for the

potential appreciation of assets rather than for the stream of

income.   Respondent bases this argument in part on JFI’s policy

of paying dividends only in amounts sufficient to meet the tax

liability it generated as a subchapter S corporation for its

shareholders.   We note, however, that the regulations point to

“prospective earning power and dividend-paying capacity”, rather

than actual dividends paid, as an indicator of value.   Sec.

20.2031-2(f)(2), Estate Tax Regs. (emphasis added).   Further, the

farm manager’s compensation was based in part on a share of JFI’s

profits, weakening any suggestion by respondent that JFI’s

earnings were artificially low.

     As for lack of marketability, respondent does not dispute

Mr. Egan’s use of a 35-percent discount.   As will be seen below,

respondent’s expert, Mr. Keath, applied a lack of marketability

discount of 36.8 percent.

     Expert Opinion of Mr. Hitt

     Mr. Hitt also valued JFI using an asset-based method and an

earnings-based method.
                               - 15 -

          Asset-Based Value

     In connection with determining an asset-based value, Mr.

Hitt used a 38-percent minority interest discount.    To calculate

this number, he began with Mergerstat Review, which contains data

from sales of bank stock in merger transactions, and made

adjustments to account for the fact that JFI was not a bank.

Applying his minority interest discount of 38 percent to the

undiscounted per-share value of $1,818 resulted in a value of

$1,127 per share.

     To compute a lack of marketability discount, Mr. Hitt

started with a figure of 45 percent, based, according to him, on

a comparison to restricted securities and studies of the prices

of stocks before initial public offerings.    He increased the

discount to 50 percent because he believed there would be some

difficulty in selling the farm and to account for costs in

selling the farm.4    Applying the lack of marketability discount

to the discounted per-share value of $1,127 resulted in a value

of $564 per share.5




     4
       Mr. Egan used a 50-percent minority interest discount and
a 35-percent lack of marketability discount, very similar, in end
result, to Mr. Hitt’s 38-percent minority interest discount and
50-percent lack of marketability discount.
     5
       If Mr. Egan had applied his lack of marketability discount
before weighting the two values, as Mr. Hitt did, his asset-based
value would have been $591 per share.
                               - 16 -

            Earnings-Based Value

     Mr. Hitt’s approach in determining an earnings-based value

was basically the same as Mr. Egan’s.    To estimate earnings for

1993, Mr. Hitt started with a figure of earnings from operations

of $26,537, and assuming a 7-percent growth rate, he calculated

projected earnings for 1993 of $28,395.6    For his capitalization

rate, Mr. Hitt relied on the Capital Asset Pricing Model, under

which, according to him, the capitalization rate is calculated by

adding the risk-free investment rate as of the valuation date

with the product of the risk-free rate and an “equity beta”.     The

equity beta is a measurement of the risk of investing in a

specific company in relation to the risk of investing in the

market overall.    A beta of 1 means that the company and the

market are equally risky; a beta greater than, or less than, 1

means the specific company is riskier or less risky,

respectively, than the market overall.     Mr. Hitt used the rate

for 10-year U.S. Government bonds, 7.2 percent according to him,

as the risk-free rate.    His figure for beta was determined from

large publicly traded agribusinesses.7    In addition, he added a

small-company risk premium of an unstated amount.     He computed a


     6
       In contrast, Mr. Egan used a 1993 earnings figure of
$19,435. Mr. Egan’s figure was based on averages of JFI’s
earnings over 5 years, which fluctuated between a low of $9,243
in 1990 and a high of $28,145 in 1992. Mr. Hitt used normalized
earnings from 1992 only in estimating his 1993 earnings figure.
     7
         He did not state what figure he used for beta.
                               - 17 -

rate of 18 percent, which he reduced by 7 percent expected

growth, resulting in a capitalization rate of 11 percent.8    To

compute his earnings-based value for JFI, he divided earnings of

$28,395 by the capitalization rate of .11 for a value of

$258,133.    A one-third interest was therefore worth $86,044.

     To compute a lack of marketability discount, Mr. Hitt

started with the figure of 45 percent based on restricted stock

sales, as he did with the asset-based value calculation.     Here,

however, he did not increase the discount to 50 percent, as he

did in the case of the asset-based value.   In valuing JFI as a

going concern, he did not feel that he should take into account

transaction costs such as the cost of selling the assets.

Applying the lack of marketability discount resulted in a value

of $47,324, or $243 per share.9

            Weighting the Values

     Mr. Hitt believed that the greater part of the value of JFI

was due to the value of its earnings rather than the value of its

assets.   He gave 75 percent of the weight of the total value of

JFI to the earnings-based value of $564 per share, and 25 percent

to the asset-based value of $243 per share.    This resulted in a

value of $323 per share.

     8
       Mr. Egan used a risk-free rate of 7.53 percent and a
capitalization rate of 26 percent.
     9
       If Mr. Egan had applied his lack of marketability discount
before weighting the two values, as Mr. Hitt did, his earnings-
based value would have been $83 per share.
                               - 18 -

     Court’s Analysis

     We found Mr. Hitt’s approach to be less useful than Mr.

Egan’s, largely because he did not provide as much detail from

which we could judge the merits of his reasoning.    Moreover, we

believe that his decision to give 75 percent of the weight to

earnings-based value and 25 percent to asset-based value was

incorrect, considering all the facts and circumstances of JFI.

As we noted earlier, “the value of the underlying real estate

will retain most of its inherent value even if the corporation is

not efficient in securing a stream of * * * income.”    Estate of

Andrews v. Commissioner, 79 T.C. at 944.    Mr. Hitt’s choice of

weights ignores this principle.    Ultimately, however, we note

that by applying Mr. Egan’s weighting but otherwise accepting Mr.

Hitt’s report, we reach a result fairly close to the value of JFI

we have found to be correct.   Applying a weight of 70 percent to

Mr. Hitt’s asset-based value of $564 per share and 30 percent to

his earnings-based value of $243 per share results in a value of

$468 per share, a value much closer to the Court’s value of $439

per share than to the value proposed by respondent of $1,029 per

share.

     Expert Opinion of Mr. Keath

     In valuing the JFI stock, Mr. Keath calculated an asset-

based value only, because he believed that no part of the value

of JFI should be attributed to earnings.
                              - 19 -

          Minority Interest Discount

     To determine an appropriate minority interest discount to

apply to his asset-based value, Mr. Keath used a list of 13

publicly traded real estate investment trusts (REIT’s) culled

from Realty Stock Review.   As with Mr. Egan’s approach, the

underlying premise for using publicly traded companies was that

each trade of shares of stock involved a minority interest, and

therefore the prices at which the shares were traded reflected

any inherent minority interest discount.    He computed the average

by which market value of equity plus debt (which he termed total

capital) exceeded net asset value plus debt.    By Mr. Keath’s

computation, the average REIT reflected a premium for a minority

interest rather than a discount:    On average, the market value of

total capital exceeded net asset value plus debt by 1.5 percent.

     The next step in Mr. Keath’s analysis was to make

adjustments to this figure of 1.5 percent to account for the

differences between JFI and the average REIT.    His method was to

compile a list of 12 characteristics of REIT’s, and then to

assess   whether JFI was higher or lower than the average with

respect to each characteristic.    The premise underlying Mr.

Keath’s method was that 95 percent of all REIT’s would fall

within two standard deviations of the average REIT, and therefore

that there was a 95-percent chance that each of the 12
                               - 20 -

characteristics would be within two standard deviations of

average.

     After completing his analysis, he found that JFI differed

from the average REIT by -11.7 percent.    Since the average REIT

reflected a minority interest premium of 1.5 percent, JFI would

reflect a minority interest discount of -10.2 percent (1.5

percent - 11.7 percent).

           Lack of Marketability

     Mr. Keath used the same basic method to calculate a discount

for lack of marketability.    From various studies of restricted

stock sales, Mr. Keath estimated that the average discount for

lack of marketability for operating companies was 30 percent.

From this figure, he made adjustments using eight characteristics

to find that JFI reflected a greater discount than the average

REIT of 6.8 percent, resulting in a lack of marketability

discount of 36.8 percent.10

           Applying the Discounts

     Mr. Keath then applied the 10.2-percent minority interest

discount and the 36.8-percent lack of marketability discount to

the undiscounted value of JFI of $1,818 per share.    In his




     10
       As noted previously, this figure is very close to the
lack of marketability discount of 35 percent used by Mr. Egan.
                                - 21 -

opinion, at the time of her death decedent’s 195 shares of JFI

were worth $1,02911 per share, or a total of $200,655.

     Court’s Analysis

     We reject Mr. Keath’s method entirely, for two reasons.

First of all, Mr. Keath failed to consider earnings in his

estimate of the value of JFI, basing his entire estimate on the

assets of JFI.     This, as we have already explained, was

inappropriate, and Mr. Keath’s failure to consider earnings value

at all undermines the reliability of his report.

     Second, we think that the details of Mr. Keath’s analysis

show that, whether or not his method might reach an acceptable

result if properly applied, it was plainly misapplied in this

case.     Mr. Keath’s method depends on the assumption that the

REIT’s he chose were a representative sample of all REIT’s; if

not, he could not claim that 95 percent of all REIT’s fell within

two standard deviations of the average.       This is the fundamental

problem with Mr. Keath’s approach.       We find it quite unlikely

that the REIT’s on Mr. Keath’s list fell into a standard

distribution.12    The range among the REIT’s he used varied

     11
          Mr. Keath presumably did some rounding to reach this
figure.
     12
       There is no evidence in the record telling us how the
REIT’s were chosen by Realty Stock Review magazine. The reason
Mr. Keath used this list was that it was the only list of REIT’s
he was aware of that included independently valued net asset
values. He admitted that his standard deviation analysis assumed

                                                        (continued...)
                              - 22 -

enormously:   On one end, market value of total capital exceeded

net asset value plus debt by 75.4 percent; on the other, market

value of total capital was less than net asset value plus debt by

42.2 percent.   When market value of total capital exceeded net

asset value plus debt, as it did for most of the REIT’s in his

sample, Mr. Keath referred to this as a minority interest

premium.   His report suggests that for a majority of REIT’s,

there is a substantial minority interest premium rather than a

minority interest discount, and that the average REIT reflects a

minority interest premium.   The notion that there is a premium

associated with a minority interest contradicts this Court’s

precedents, the weight of expert commentary, and common sense.

See, e.g., Estate of Newhouse v. Commissioner, 94 T.C. at 249.

The fact that Mr. Keath’s data reflects this trend suggests that

there is something wrong with his data, his analysis, or both.

     Conclusion: The Value of Decedent’s Shares in JFI

     As we have stated, we believe that Mr. Egan’s report is the

most reliable and persuasive, and we accept his conclusions.

Thus, we find that decedent’s 195 shares in JFI at the time of

her death were worth $439 per share, or a total of $85,605.




     12
      (...continued)
a standard distribution for the REIT’s in his sample, but he
offered no evidence of this fact.
                               - 23 -

FNBW

       As with JFI, there were no actual arm’s-length sales of FNBW

stock, and therefore all of the experts relied on less direct

methods of valuing FNBW.13

       Petitioner presented the testimony and expert reports of Mr.

Hitt (who had valued FNBW for the estate tax return) and Mr. Egan

(who had valued FNBW in preparation for trial).    Respondent

presented the testimony and expert report of Charles F. Haywood,

a professor at the University of Kentucky.    As noted above, the

parties stipulated that Mr. Hitt and Mr. Egan were qualified

appraisers.    At trial, petitioner objected to the qualifications

of Mr. Haywood but ultimately withdrew the objection.    We found

all of the reports to be useful, although all required

adjustments to address certain flaws, in the Court’s view.

       Mr. Hitt’s Report

       Mr. Hitt used an exclusively earnings-based approach to

value FNBW, combining three methods:    Price to earnings (P/E)

ratio, price to equity (P/Eqt) ratio, and capitalized future

earnings.




       13
       There were some actual sales of the stock of FNBW in 1990
and 1991, but all three experts agree that none of them were at
arm’s length. In addition, there was an actual sale of stock in
1985 that may or may not have been at arm’s length, but we find
that it was not within a reasonable time of the valuation date in
this case.
                                - 24 -

          P/E Ratio, P/Eqt Ratio

     For the P/E ratio and P/Eqt ratio methods, Mr. Hitt’s

approach was to compare the P/E and P/Eqt ratios of FNBW with

those of comparable entities.     Using the average ratios of the

comparable companies and the earnings and equity of FNBW, Mr.

Hitt sought to calculate the price (i.e., market value) of FNBW.

     In selecting comparable companies, Mr. Hitt did not feel

there were enough publicly traded companies from which he could

derive comparable transactions, i.e., transactions involving

banks of similar size and geographic market, so he did not

compare FNBW to public companies.     Instead, he examined

acquisitions of banks located in Indiana or Ohio with less than

$300 million in assets, resulting in a list of seven banks that

were sold within 18 months of the valuation date.     Six of the

seven were in Indiana; one was in Ohio.     He reduced this list

from seven to two, choosing banks with particular characteristics

that were comparable to FNBW.14    The two banks satisfied each of

the following three criteria (the respective figure for FNBW,

according to Mr. Hitt’s calculations, is in parentheses):     Growth

rate between 0 and 8 percent (6.2 percent), return on assets

(ROA) between 1.0 and 1.4 percent (1.41 percent), and capital to

asset ratio between 8.5 and 12.5 percent (10.83 percent).


     14
       According to Mr. Hitt, FNBW was “in the top of its peer
group” with respect to return on assets, and therefore he found
just two banks that he considered to be comparable to FNBW.
                                - 25 -

     The average P/E ratio of the two banks was 13.08.    The

average P/Eqt ratio was 1.56.    Mr. Hitt felt that FNBW was a

better performer than these banks, so he used a P/E ratio of 14

and a P/Eqt ratio of 1.6.   Applying these numbers to FNBW’s 1992

earnings of $1,423,000 and stockholder equity as of December 31,

1992, of $11,249,000 resulted in prediscount values per share for

FNBW of $199.22 and $179.98, respectively.     Mr. Hitt applied a

minority interest discount rate of 32 percent based, according to

him, on data from Mergerstat Review.     He also applied a lack of

marketability discount of 45 percent, which he obtained from

examining sales of restricted stock.     His final value based on

the P/E-ratio method was $74.51, and his final value based on the

P/Eqt-ratio method was $67.31.

           Capitalized Future Earnings

     In this method, essentially the same as the earnings-based

method used for JFI, Mr. Hitt sought to estimate the income that

FNBW would generate in the future and then to calculate its

present value.   The earnings stream was projected by first

applying a 4-percent annual growth rate to the asset base, to

calculate average assets in each year for the next 5 years.

Although FNBW’s ROA for 1992 was 1.41, Mr. Hitt applied the

historical ROA figure of 1.19 to each of the five yearly asset

figures.   Also, Mr. Hitt made certain assumptions about the

amount of income that FNBW would pay to shareholders as
                                - 26 -

dividends.     First, Mr. Hitt assumed that an amount of excess

capital, $2,938,280, would be paid out in year 1.     Next, he

assumed that FNBW would maintain a capital-to-asset ratio of 8

percent and calculated the minimum equity required to maintain

that ratio.     Finally, he assumed that the yearly income would be

used in two ways:     Part of it would become retained earnings in

order to maintain the 8-percent capital-to-asset ratio; the

remainder would be distributed to the shareholders.     The amount

distributed to shareholders was then discounted to present value

using a capitalization rate of 14.7 percent.

     As with JFI, Mr. Hitt used the Capital Asset Pricing Model

to calculate the capitalization rate.     His figure for beta, 1.05,

was determined from averages of small publicly traded regional

banks.    To calculate the capitalization rate, he began with the

rate for U.S. Government bonds as of the valuation date, which,

according to him, was 7.2 percent, and he added the product of

the beta of 1.05 times 7.2 percent, for a total of 14.7

percent.15    This capitalization rate already took into account

any minority interest discount, so a further such discount was

not applied.    Mr. Hitt considered adjusting this rate to a higher

number to reflect the greater risk associated with FNBW’s lack of

geographic diversification; but he felt that this factor was



     15
       Although 7.2 + (1.05 x 7.2) = 14.76, Mr. Hitt rounded the
figure to 14.7.
                               - 27 -

offset by FNBW’s traditionally low net charge-off of loans, so he

made no adjustment.

     Mr. Hitt also calculated a figure for FNBW’s income stream

in perpetuity, beginning after the initial 5-year period ended.

After the 5-year period, Mr. Hitt used a growth rate of 2.5,

rather than the 4 percent he used for the first 5 years.      Also,

he assumed that, after the 5-year period, 84 percent of FNBW’s

income was to be paid as dividends, because the remaining 16

percent would be needed to maintain capital requirements.

     Finally, he summed the following:   (1) The amount that was

assumed paid out immediately as a dividend (which had present

value equal to itself, because it was a current distribution);

(2) the present values for each year of earnings during the

initial 5-year period; and (3) the present value of the

perpetuity figure.    This resulted in a per-share value of

$117.22.   Once again, he applied a lack of marketability discount

of 45 percent.   Thus, his figure for capitalized future earnings

value was $64.47.

           Weighting the Methods

     Mr. Hitt felt that each of the three values deserved roughly

equal weight, although he believed that the capitalized future

earnings value was slightly more important.    Therefore, he

weighted his three figures as follows:    30 percent for the P/E-

ratio value of $74.51, 30 percent for the P/Eqt-ratio value of
                                - 28 -

$67.31, and 40 percent for the capitalized future earnings value

of $64.47.    His final value was $68.33 per share.

     Court’s Analysis

     We found Mr. Hitt’s analysis to be useful and largely

correct.     However, we find that there was one error in Mr. Hitt’s

approach:    the use of a lack of marketability discount in

calculating the P/E and P/Eqt ratio values.    According to Mr.

Hitt, he did not rely on a comparison to publicly traded

companies in estimating the value of FNBW.    Therefore, because

the comparable companies he chose to calculate P/E and P/Eqt

ratios were not publicly traded, their stock price presumably

also reflected a lack of marketability.    Thus, to further

discount the value indicated by the comparison to nonpublicly

traded companies for lack of marketability was not appropriate.

     If Mr. Hitt’s approach is adjusted to eliminate the lack of

marketability discount from the P/E ratio and P/Eqt ratio

methods, the following results are produced:

     P/E value = $135.47 (.68 x $199.22)

     P/Eqt value = $122.39 (.68 x $179.98)

The capitalized future earnings value of $64.47 is unaffected by

the elimination of a lack of marketability discount.    Weighting

the adjusted values in the same manner as Mr. Hitt produces a

final value of $103 per share.
                                - 29 -

     Mr. Egan’s Report

     Mr. Egan’s report used an approach similar to Mr. Hitt’s:

Finding comparable companies, calculating various ratios, and

then applying the ratios to FNBW to determine its market value.

Mr. Egan relied on four ratios, two of which were also used by

Mr. Hitt:16   P/E, P/Eqt, price/5-year earnings (P/E5),17 and

price/dividends (P/D).    However, because Mr. Egan used sales of

minority interests rather than acquisitions of entire banks (as

Mr. Hitt did), he did not apply a minority interest discount.

          Comparable Companies

     To create a list of comparable companies, Mr. Egan started

with a list of commercial banks based in Ohio and chose banks

that satisfied four criteria:    (1) Publicly available financial

statements, (2) publicly held and actively traded common stock,

(3) common stock price exceeding $2 per share, and (4) assets

under $1 billion.   Seven banks met these criteria.

          Ratios

     To calculate the P/E, P/E5, and P/Eqt ratios, Mr. Egan used

the per-share traded price of each company on the date of

decedent’s death and obtained figures for earnings during 1992,


     16
       Although Mr. Hitt also employed P/E and P/Eqt ratios, his
numerical values were different because he used different
comparables.
     17
       For this ratio, Mr. Egan calculated a weighted average of
FNBW’S earnings from 1988 to 1992 using the same method used in
calculating a weighted average of JFI’s earnings.
                                - 30 -

earnings over 5 years, and equity from the companies’ financial

records.    The median figures were as follows:   P/E = 11.1, P/E5 =

13.4, and P/Eqt = 1.316.18

     Mr. Egan’s method of calculating the P/D ratio was more

complex.    First, he calculated three ratios for each of the

comparable companies:    P/D, dividends/5-year earnings (D/E5), and

dividends/1992 earnings (D/E).19    The latter two were also

computed for FNBW.    He ranked the seven comparable companies in

ascending order by P/D ratio.    Mr. Egan believed that in general

with respect to his sample, the P/D ratio was inversely

proportional to the other two ratios.    The D/E5 and D/E ratios of

FNBW were each the second highest in the list, which indicated to

Mr. Egan that the P/D ratio of FNBW should be the second lowest

in the list.    Thus, Mr. Egan examined the lowest and second

lowest P/D ratios of the companies on the list and estimated

FNBW’s P/D ratio to be between the two.    His result was a P/D

ratio of 25.

     Using the four ratios, he calculated values for FNBW as

follows:

P/E ratio of 11.1 x 1992 earnings of $1,423,000 = $15,795,000
P/E5 ratio of 13.4 x 5-year earnings of $1,254,000 = $16,804,000
P/Eqt ratio of 1.316 x 1992 equity of $11,249,000 = $14,804,000
P/D ratio of 25.0 x dividends of $640,000 = $16,000,000


     18
       By comparison, Mr. Hitt computed a P/E ratio of 14 and a
P/Eqt ratio of 1.6, based on his comparables.
     19
          “Dividends” here means the previous year’s dividends.
                               - 31 -

He took the average of these four numbers, $15,850,750, and

rounded to $16 million as the value of FNBW before application of

any discounts.

            Discount Based on General Factors

     Mr. Egan applied a 30-percent discount to his figure of $16

million because he believed that FNBW was in general less

valuable than the comparable companies from which he derived the

ratios.    His report discussed both “qualitative” and

“quantitative” differences between FNBW and the comparable

companies in his list.

     Mr. Egan relied on two “qualitative” factors:    FNBW’s size

and FNBW’s small geographic market.     With respect to FNBW’s size,

Mr. Egan stated that FNBW had total assets of $104 million, while

the comparable companies had assets of $370 million to $625

million.    In Mr. Egan’s view, smallness gives rise to certain

disadvantages:    The small company is less able to weather

financial adversity, to attract top-quality management, to

protect against emergencies, to finance growth, to compete

aggressively, or to maintain depth of management.    With respect

to geographic area, the same types of disadvantages apply:    The

financial health of FNBW was tied to the economy of Pike County

alone, FNBW provided fewer services, and FNBW operated fewer

branches.
                               - 32 -

     Mr. Egan relied on numerous “quantitative” factors.     In

general, according to Mr. Egan’s report, FNBW was superior to the

comparable companies with respect to factors relating to

financial soundness and inferior with respect to factors relating

to income growth potential.    Mr. Egan’s report made the following

comparisons:    FNBW had slightly less total income, and

substantially less net income, than the median comparable

company.    Also, FNBW grew less than the median.   The median had a

substantially higher total income to net worth ratio.      On the

other hand, FNBW had a substantially higher net income to total

income ratio.    Thus, the net income to net worth ratio (also

known as return on equity) was almost the same between the median

and FNBW.    With respect to the ratio of net income to total

assets, also known as return on assets, FNBW substantially

outperformed the median.

     Mr. Egan next examined comparisons of ratios that related to

the financial condition of FNBW and the median comparable

company.    His report made the following comparisons:   FNBW had a

substantially higher cash and investments to total assets ratio

than the median and a substantially lower loans to total assets

ratio.   While both FNBW and the median had very high total

liabilities to total assets ratios (typical for banks, which are

usually financed by deposits, which are liabilities), FNBW’s was

a little lower than the median.    For the net worth to total
                              - 33 -

assets ratio, FNBW’s was substantially higher, indicating that

FNBW was financed more through equity than the median.   Mr. Egan

summed up by stating:   “However profitable the asset base of

* * * [FNBW], the conservative nature of those assets does

penalize the company’s income growth and potential therefor.”

     Considering all of the “qualitative” and “quantitative”

factors discussed above, Mr. Egan felt that FNBW was

substantially less valuable than the median comparable company.

To account for these factors, he applied a discount of 30

percent.

           Lack of Marketability Discount

     To calculate a lack of marketability discount, Mr. Egan used

the same analysis, based on restricted stock sales, that he used

with respect to JFI, and applied the same figure, 35 percent.

     To compute the per-share value of FNBW, Mr. Egan began with

his undiscounted value of $16 million, or $160 per share.    He

discounted this by 30 percent for general qualitative and

quantitative factors, then discounted the result by 35 percent

for lack of marketability, producing a value of $73 per share.

     Court’s Analysis

     We find Mr. Egan’s analysis of the undiscounted value of

FNBW, based on the ratios of price to net worth, earnings and

dividends of comparable companies, to be cogent and persuasive.

However, we do not believe that Mr. Egan has made a persuasive
                               - 34 -

case for a discount for general factors of 30 percent.      To

recount, Mr. Egan used a 30-percent discount because he perceived

three differences between FNBW and the comparable companies:

FNBW’S qualitatively inferior features (the smallness of the bank

and of its geographic market), FNBW’s quantitatively superior

financial position, and FNBW’s quantitatively inferior income

growth potential.   In our view, the first two of these factors

would essentially cancel each other.    The qualitative factors

relied upon by Mr. Egan supposedly go to the risk involved in

investing in FNBW, but it is clear that the first group of

quantitative factors shows that FNBW was not a risky investment

at all.   Mr. Egan’s report shows that, although small, FNBW was

well managed, and more conservatively managed, than the median

comparable company.20   Thus, we are left to consider the third

factor that Mr. Egan relied on, FNBW’s inferior income growth

potential.   Even if it is true that FNBW’s income growth was not

promising, its income was very good; according to Mr. Egan’s

report, its return on assets (i.e., net income divided by total

assets) was much better than the median.21   In addition,


     20
       On this point, all the experts agreed. Mr. Hitt believed
that FNBW was “in the top of its peer group” with respect to
return on assets and a better performer than the two comparable
banks he relied on, causing him to adjust his P/E and P/Eqt
ratios accordingly. Similarly, Mr. Haywood, respondent’s expert,
argued persuasively that FNBW was not a risky bank.
     21
       According to Mr. Egan, return on assets “might be the
most scrutinized of all banking ratios”.
                                - 35 -

according to Mr. Egan’s report, it paid more dividends per

earnings than all but one of the comparable companies.

Considering all of the evidence, we conclude that any discount

for general factors within Mr. Egan’s methodology should be

limited to 10 percent.

     If Mr. Egan’s analysis is adjusted to provide a “general

factors” discount limited to 10 percent, the indicated value

becomes $94 per share (undiscounted value of $160 per share, less

10 percent for general factors, less a 35-percent discount for

lack of marketability).

     Mr. Haywood’s Report

     Mr. Haywood used a combination method of an asset-based

value and an earnings-based value to estimate the value of the

FNBW stock.   Mr. Haywood was the only one of the experts who used

an asset-based value in his analysis.

          Asset-Based Value

     In his calculation of asset-based value, Mr. Haywood began

with the book value of stockholder equity and then made

adjustments to this figure to reach market value of stockholder

equity (i.e., net asset value).    Book stockholder equity in FNBW,

according to Mr. Haywood, was $11,249,000.    Mr. Haywood increased

this by two amounts.     First, according to him the market value of

FNBW’s securities portfolio exceeded the portfolio’s book value

by $798,000, so he increased stockholder equity by this amount.
                               - 36 -

Second, he argued that FNBW’s loan loss reserve (which is a

liability reducing stockholder equity) of $492,000 was too large;

i.e., larger than reasonably necessary given FNBW’s historical

experience.    During the 5-year period ending in 1992, FNBW

charged off an average of only .4 percent of unpaid loans.     Thus,

in Mr. Haywood’s view, FNBW needed a loan-loss reserve equal to

only .4 percent of total loans ($33,401,000, according to Mr.

Haywood), or $133,604 (.4% x $33,401,000).     The remaining

“excess” loan loss reserve (rounded to $358,000) was treated as

an increase to stockholder equity by Mr. Haywood.

     Mr. Haywood’s two increases to stockholder equity totaled

$1,156,000, which was a pretax adjustment.     After tax, according

to Mr. Haywood, the increase to stockholder equity would be

$832,000.    Adding this amount to stockholder equity, Mr. Haywood

computed the net asset value of FNBW as $12,081,000, or $120.81

per share.

            Earnings-Based Value

     Mr. Haywood also used the same basic approach used by the

other experts of comparing the P/E ratio of FNBW with the P/E

ratios of comparable entities.     For comparables, Mr. Haywood

began with a list of 26 large, publicly traded banking

organizations in the Midwest.22    Ten of the twenty-six banks were

based in Ohio.    According to him, the average P/E ratio of all 26

     22
       His sources were Value Line Investors Services and
American Banker newspaper’s list of top 225 banks.
                                - 37 -

banks was 13.7, and the average P/E ratio of the 10 Ohio-based

banks was 15.1.     Mr. Haywood chose to apply the higher P/E ratio

of 15.1 to FNBW, in part because the underlying banking

organizations were based in Ohio and in part because Mr. Haywood

believed that FNBW had a strong capital position and consistent

growth in earnings and dividends.23      Applying the P/E ratio of

15.1 to FNBW’s 1992 earnings of $1,423,000 resulted in a price

per share for FNBW of $214.87.

          Weighting the Results

     Mr. Haywood felt that earnings deserved greater weight

because of the strong earnings and dividend performance of FNBW.

Thus, he gave 60 percent of the total weight to his earnings-

based value of $214.87 per share and 40 percent to his asset-

based value of $120.81 per share, for a value of $177.25.

          Lack of Marketability Discount

     Mr. Haywood applied a 10-percent lack of marketability

discount,24 calculated as follows:    After calculating his pre-

discount value for FNBW of $177.25, he estimated the lowest price

at which the current shareholders of FNBW would be willing to

sell their stock.    He believed a shareholder would accept

approximately $160 per share.    This was roughly equal to a


     23
       In comparison, Mr. Hitt used a P/E ratio of 14, and Mr.
Egan used a P/E ratio of 11.1.
     24
       Mr. Hitt’s lack of marketability discount was 45 percent,
and Mr. Egan’s was 35 percent.
                                 - 38 -

10-percent discount.      In choosing this discount, Mr. Haywood

considered the 12,000 shares of stock held by decedent at her

death to be a “swing block” of stock, and this convinced him that

the lack of marketability discount should be relatively small.

His final value for FNBW, after applying the 10-percent lack of

marketability discount, was $159.53 per share.

       Court’s Analysis

       We believe there are several problems with Mr. Haywood’s

analysis but that adjustments to correct for his errors can be

made which result in a reliable estimate of the value of the FNBW

stock.

       The first problem with Mr. Haywood’s analysis is that he

failed to apply a minority interest discount to his asset-based

value.    “Ignoring discounts for lack of control [i.e., minority

interest] and lack of marketability is contrary to long-

established valuation methods well accepted by the Courts in

cases presenting the value of stock in closely held

corporations.”    Estate of Newhouse v. Commissioner, 94 T.C. at

249.    Mr. Haywood’s method was to estimate the net asset value of

FNBW and to treat this as the market value.      However, the owner

of a minority interest in FNBW would not have control of its

assets.    Thus, a minority interest discount is necessary to

achieve an accurate asset-based value for FNBW.      Applying a

minority interest discount of 32 percent, the figure used by Mr.
                                 - 39 -

Hitt,25 to Mr. Haywood’s asset-based value of $120.81 per share

results in an asset-based value of $82 per share.

     The second problem with Mr. Haywood’s approach relates to

his earnings-based value and his selection of a P/E ratio of

15.1, which we find to be too high.       Mr. Haywood acknowledged

that he used banks that were substantially larger than FNBW for

his comparable companies but contended that he was required to do

so by Rev. Rul. 59-60, 1959-1 C.B. 237, 238-239.       See Estate of

Newhouse v. Commissioner, 94 T.C. at 217 (Rev. Rul. 59-60 “has

been widely accepted as setting forth the appropriate criteria to

consider in determining fair market value").       In Mr. Haywood’s

view, Rev. Rul. 59-60, supra, requires the selection of companies

that are comparable in the sense of being “engaged in the same or

similar line of business”, but not comparable in size.       In his

view, the purpose of Rev. Rul. 59-60, supra, was to provide the

proper method for calculating the fair market value of small,

closely held companies using actively traded comparable

companies, so that by definition the comparable companies would

be significantly larger and no adjustment for size should be

made.     We reject this view.   It is beyond dispute that we must

consider all relevant evidence.      See, e.g., Northern Trust Co. v.

Commissioner, 87 T.C. 349, 375 (1986).       Thus, while the sale

price of stock in businesses “engaged in the same or a similar

     25
       Only Mr. Hitt employed a minority discount in his
analysis of FNBW, as Mr. Egan’s methodology did not require one.
                              - 40 -

line of business” is relevant, it is not the only factor.     Estate

of Hall v. Commissioner, 92 T.C. 312, 336 (1989); sec. 20.2031-2

(f), Estate Tax Regs.   We believe that size is a relevant factor

in this case, at least when comparing FNBW to the substantially

larger companies in Mr. Haywood’s sample.26   Because Mr. Haywood

believed that Rev. Rul. 59-60, supra, precluded an adjustment for

size, we are puzzled as to why he assumed an adjustment for

location was appropriate; i.e., using the (higher) average P/E

ratio of banks in Ohio only rather than the (lower) average P/E

ratio of banks in the Midwest.   Thus, we find that he has not

made a persuasive case for the higher average.   We believe he

should have used the P/E ratio of his entire sample of 13.7.

Based on FNBW’s 1992 earnings of $1,423,000, use of the lower P/E

ratio results in an earnings-based value of $195 per share.

      Finally, we disagree with Mr. Haywood’s method and result

in choosing a lack of marketability discount of 10 percent.

Rather than using comparisons such as those used by Mr. Hitt and

Mr. Egan, Mr. Haywood merely offered his subjective judgment of

what price a seller of the stock would accept.   We find this

method somewhat arbitrary and unsupported in the authorities and

case law; moreover, it considers only half of the transaction;

that is, what the willing seller would accept, but not what the

willing buyer would pay.   Moreover, contrary to his belief, we do

     26
       The smallest bank in Mr. Haywood’s sample had more than
10 times the assets, and the deposits, of FNBW.
                               - 41 -

not believe the record supports his conclusion that the 12,000

shares owned by decedent at the time of her death would be a

“swing block”.27   Accordingly, we reject the 10-percent lack of

marketability discount used by Mr. Haywood and find instead that

the lack of marketability discount of 35 percent estimated by Mr.

Egan is appropriately employed here.    Accepting Mr. Haywood’s

weighting of 60 percent for the earnings-based value of $195 and

40 percent for the asset-based value of $82, the value before a

lack of marketability discount would be $150.    Applying a lack of

marketability discount of 35 percent produces a final value of

$97 per share.

     Conclusion:   The Value of Decedent’s Shares in FNBW

     When each of the experts’ computations of the value of the

FNBW stock is adjusted to eliminate the errors that we perceive

in their analyses, the results do not diverge greatly.    As

adjusted, the valuations of Messrs. Hitt, Egan, and Haywood are

$103, $93, and $97 per share, respectively, a range of less than

11 percent.   In these circumstances, we conclude that the most

reliable estimate of value is an average of the three, or $98 per




     27
       Mr. Haywood testified that the block of 12,000 shares
might be a swing block if it was purchased by family members who
already owned a sufficiently large portion of the shares of FNBW.
This view fails to consider the hypothetical buyer of the shares.
See Estate of Hendrickson v. Commissioner, T.C. Memo. 1999-278
(citing Estate of Curry v. United States, 706 F.2d 1424, 1428-
1429, 1431 (7th Cir. 1983)).
                              - 42 -

share.   Thus, we find that decedent’s 12,000 shares of FNBW stock

at the time of her death were worth $98 per share, or $1,176,000.

     We have considered all of the arguments raised by the

parties, including the numerous criticisms of each expert’s

report, and find them without merit to the extent they are not

specifically addressed herein.

     To reflect the foregoing,


                                       Decision will be entered

                                 under Rule 155.
