                         T.C. Memo. 2001-263



                       UNITED STATES TAX COURT



       ESTATE OF ELMA MIDDLETON DAILEY, DECEASED, DONOR,
          K. ROBERT DAILEY, II, EXECUTOR, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

            ESTATE OF ELMA MIDDLETON DAILEY, DECEASED,
          K. ROBERT DAILEY, II, EXECUTOR, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 6251-00, 6262-00.        Filed October 3, 2001.


     Harold A. Chamberlain and Michael C. Riddle, for

petitioners.

     Richard T. Cummings, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:    By notices dated March 15, 2000, respondent

determined a 1992 Federal gift tax deficiency of $53,808 and

section 6651(a) addition to tax of $13,452 relating to docket No.
                                 - 2 -

6251-00, and a Federal estate tax deficiency of $143,932 relating

to docket No. 6262-00.    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.     The issues are the valuation of certain retained and

gift interests in a Family Limited Partnership (FLP) and

liability for the section 6651(a) addition to tax.

                           FINDINGS OF FACT

     When the petitions were filed, K. Robert Dailey II was a

resident of Harris County, Texas, where, in 1997, his mother,

Elma Middleton Dailey, had died, and Mr. Dailey had received an

appointment to be her executor.    On December 2, 1982, Mrs.

Dailey’s husband died, leaving to her, among other things, the

following:

                                 Number of    Value per    Total
     Company                      Shares        Share      Value

     Exxon Corp.                  11,108        $33.63    $373,562
     American Telephone
       & Telegraph Co. (AT&T)       400          65.75      26,300

     On October 20, 1992, Mrs. Dailey executed a will, a

Revocable Living Trust (Trust), and an Agreement of Limited

Partnership (Agreement) of Elma Middleton Dailey FLP.      The will

provided that Mrs. Dailey’s residuary estate would pass to the

Trust, from which her son would receive the corpus outright.

     Upon execution of the Agreement, Mrs. Dailey took a 1-

percent general and a 98-percent limited partnership interest,
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and Mr. Dailey received a 1-percent limited partnership interest.

On November 13, 1992, Mrs. Dailey contributed, to the FLP, 400

AT&T, 20,000 Exxon, and 895 Bell South Corp. shares.        Mr. Dailey

did not contribute any assets to the FLP.         On December 4, 1992,

the Texas Secretary of State filed the FLP’s Certificate of

Limited Partnership.

     On December 8, 1992, Mrs. Dailey signed a letter which

stated that by “the terms of the Elma Middleton Dailey Family

Limited Partnership, this letter shall be sufficient evidence of

my transfer and conveyance to you of the following limited

partnership interest”, giving 45-, 15-, and 38-percent interests

to Mr. Dailey, his wife, and the Trust, respectively.        On that

date, the FLP had $1,267,619, consisting of:

                       Number of           Value per     Total Value
     Company            Shares               Share

     Exxon Corp.        20,000               $60.19       $1,203,750
     AT&T                  400                47.94           19,175
     Bell South            895                49.94           44,694

     On March 16, 1995, Mrs. Dailey appointed Mr. Dailey as the

FLP managing partner.    On July 26, 1995, he replaced her as the

trustee of the Trust and FLP general partner, and her 1-percent

general partnership interest became a limited one.

     On January 10, 1997, Mrs. Dailey died, when the FLP had

$1,047,603, consisting of:
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                     Number of           Value per     Total Value
     Company          Shares               Share

     Exxon Corp.      10,000              $102.88       $1,028,750
     American
      Veterinary Corp. 1,000                10.88           10,875
     Olde Money
       Market Fund     7,978                1.00             7,978

The FLP had substantial unrealized capital gains due to the

increase in the value of the Exxon stock.       On April 17, 1997,

Mrs. Dailey’s attorney filed, and respondent received, a gift tax

return reflecting the gifts of the 45- and 15-percent limited

partnership interests to Mr. Dailey and his wife.       On the gift

tax return, Mrs. Dailey reported a 40-percent discount from the

net asset value (NAV) of the partnership’s assets.

                                OPINION

     The FLP was validly formed pursuant to Texas law, and we do

not disregard it for tax purposes.       See Estate of Strangi v.

Commissioner, 115 T.C. 478, 487 (2000); Knight v. Commissioner,

115 T.C. 506, 513-515 (2000).

     The parties agree that, pursuant to section 7491(a),

petitioners have introduced credible evidence, and respondent

shall have the burden of proof, relating to the valuation issue.

     Fair market value is the price at which property would

change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or sell and both having

reasonable knowledge of relevant facts.       Sec. 20.2031-1(b),

Estate Tax Regs.; sec. 25.2512-1, Gift Tax Regs.        On brief, the
                                - 5 -

estate further contends that a “hypothetical, willing buyer may

only become an assignee under this Partnership Agreement and

Texas law”, and Mrs. Dailey “actually transferred” assignee

interests, but there is “no evidence in the record before this

Court regarding the fair market value of any assignee * * *

interests”.   Article IX of the Agreement provides for “Sale of a

Partner’s Interest”, and the Texas Revised Limited Partnership

Act, Tex. Rev. Civ. Stat. Ann. art. 6132a-1 (Vernon 1993),

provides for assignments but does not prohibit sales.   The plain

language of Mrs. Dailey’s December 8, 1992, letter states that

she was transferring partnership interests pursuant to the

Agreement.    See Kerr v. Commissioner, 113 T.C. 449, 463-465

(1999) (rejecting donors’ contention that Texas partnership

transfers were mere assignments).   In addition, the lack of

evidence of the value of any purported assignment supports our

rejection of the estate’s contention.

     Mrs. Dailey gave Mr. Dailey a 1-percent limited partnership

interest on formation, but the FLP had no assets on that date.

Mrs. Dailey made gifts of 45- and 15-percent limited partnership

interests to her son and daughter-in-law, respectively, and thus

retained 39 percent in the trust at death.   The parties

stipulated, however, that Mrs. Dailey retained 40 percent.

Respondent inexplicably does not contend that the initial 1-
                                - 6 -

percent limited partnership interest transferred to Mr. Dailey

had gift tax consequences at formation or funding.

     Both parties agree that the given and retained interests

were, on December 8, 1992, and January 10, 1997, worth their

proportionate share of the NAV of $1,267,619 and $1,047,603 for

gift and estate tax purposes, respectively.   They disagree,

however, about the size of the minority and marketability

discounts.   Both parties’ experts compared the FLP to closed-end

mutual funds, which trade at a discount to NAV, but disagreed on

the amounts of the discounts.   Petitioners’ expert, citing

published data, opined that the aggregate discount is 40 percent

for lack of marketability, control, and liquidity and testified

that he considered the significant amount of unrealized capital

gains relating to the Exxon stock.

     Respondent’s expert, on the other hand, relied in part on an

unpublished study that he coauthored and, in a revised report

submitted at trial, increased the marketability discount

purportedly substantiated by his unpublished study from 12.5

percent to 14.1 percent.   Respondent’s expert opined that an

aggregate discount of 15.72 percent on December 8, 1992, and

13.51 percent on January 10, 1997, should be applied.   At trial,

respondent’s expert testified that he could not recall reviewing

the Agreement and, although he believed that unrealized capital

gains are “an important source of discounts”, he did not review
                                 - 7 -

the documents to determine if the FLP had any such gains.

Respondent’s expert’s testimony was contradictory, unsupported by

the data, and inapplicable to the facts.

     We are “not bound by the opinion of any expert witness when

that opinion is contrary to our own judgment.”        Estate of Gilford

v. Commissioner, 88 T.C. 38, 56 (1987).       Although neither expert

was extraordinary, petitioners’ expert provided a more convincing

and thorough analysis than respondent’s expert.       We conclude that

an aggregate marketability and minority discount of 40 percent is

warranted and is applicable to the aforementioned interests.

     Section 6651(a)(1) imposes an addition to tax for failure to

file a required return on the date prescribed.       This addition to

tax is imposed on the amount of tax required to be shown on the

return.   Although decedent’s gift tax return was filed after the

prescribed due date, the property valuation on the return was

correct and, after application of decedent’s unified credit, no

gift tax was due.   Accordingly, the estate is not liable for the

section 6651(a)(1) addition to tax.

     Contentions we have not addressed are moot, irrelevant, or

meritless.

     To reflect the foregoing,


                                              Decisions will be entered

                                         for petitioners.
