                       T.C. Memo. 2000-157




                      UNITED STATES TAX COURT



                  JAMES H. JAPHET, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

         JAMES H. JAPHET ENTERPRISES, INC., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 6509-98, 6510-98.     Filed May 15, 2000.



     A. Chris Heinrichs, for petitioners.

     Gerald L. Brantley, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioners’ income tax as follows:1



     1
        These cases were consolidated for trial, briefing, and
opinion.
                                  - 2 -

                             James H. Japhet

                      Year                Deficiency
                      1993                 $13,636

                  James H. Japhet Enterprises, Inc.

                   FYE Oct. 31            Deficiency
                      1993                 $13,429

       The sole issue for decision is whether the fair market value

of an apartment building petitioner James H. Japhet Enterprises,

Inc., sold to its sole shareholder, petitioner James H. Japhet,

on August 10, 1993, was $106,000, as petitioners contend;

$139,900, as respondent contends; or some other amount.     We hold

that it was $106,000.    As a result of our holding, we conclude

that petitioner James H. Japhet did not receive a constructive

dividend in 1993 on the sale of the apartment building, and that

petitioner James H. Japhet Enterprises, Inc., recognized no gain

in fiscal year 1993 on that sale.

       References to petitioner are to James H. Japhet.   References

to petitioner corporation are to James H. Japhet Enterprises,

Inc.    Section references are to the Internal Revenue Code in

effect during the year in issue.      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.

A.     Petitioner and Petitioner Corporation

       Petitioner resided in San Antonio, Texas, when he filed his
                               - 3 -

petition in these cases.   Petitioner corporation had its

principal place of business in San Antonio, Texas, during the

year in issue and when it filed the petition.    Petitioner is (and

was in the year in issue) the president of petitioner

corporation.

     Petitioner incorporated petitioner corporation in Texas on

November 1, 1977.   Petitioner corporation uses the accrual method

of accounting.   Petitioner corporation has primarily been

involved in the construction and sale of residential real estate

since it was formed.

B.   Petitioner Corporation’s Sale of the Apartment Building to
     Petitioner

     On August 10, 1993, petitioner corporation sold petitioner a

four-unit apartment building (the apartment building) located at

7519 Windsor Oaks, San Antonio, Texas, for $105,465.    Petitioner

corporation’s adjusted tax basis in the building was $105,465 on

the date of sale.   The sale price of the apartment building

equaled its value on petitioner corporation’s books, computed as

follows:

           Building costs                       $126,668
           Land costs                            + 8,224
           Less depreciation                     (29,427)
           Net book value                        105,465

     Petitioner corporation built the apartment building in 1985.

It has two apartments with three bedrooms and two baths, and two

apartments with two bedrooms and one bath.   Its exterior walls
                                - 4 -

are about 19-percent brick.

                               OPINION

A.   The Fair Market Value of the Apartment Building

     We must decide the fair market value of the apartment

building transferred by petitioner corporation to petitioner on

August 10, 1993.   Fair market value is the price at which the

property would change hands between a willing buyer and a willing

seller, neither being under any compulsion to buy or to sell and

both having reasonable knowledge of the relevant facts.   See

United States v. Cartwright, 411 U.S. 546, 551 (1973); Propstra

v. United States, 680 F.2d 1248, 1251 (9th Cir. 1982); sec.

20.2031-1(b), Estate Tax Regs.; sec. 25.2512-1, Gift Tax Regs.

Respondent contends that the fair market value of the apartment

building was $139,900 on August 10, 1993.   Petitioners contend

that the fair market value was $106,000.

B.   Expert Witnesses

     Both parties relied on expert witnesses.   We may accept or

reject expert testimony according to our own judgment, and we may

be selective in deciding what parts of an expert’s opinion, if

any, we accept.    See Helvering v. National Grocery Co., 304 U.S.

282, 295 (1938); Parker v. Commissioner, 86 T.C. 547, 562 (1986).

Martyn C. Glen (Glen) and Jack L. Wolff (Wolff) testified for

petitioners.   Edwin A. Kurek (Kurek) testified for respondent.

The experts agreed that the comparable sales method was the best
                                 - 5 -

method for estimating the value of the apartment building.      Glen

and Kurek each used 7600 Windsor Oaks and 7592 Windsor Oaks as

comparable properties.     Glen also used 7518 Windsor Oaks as a

comparable property.     The sales dates and sales prices of the

three comparable properties, and the sales date of the apartment

building at issue, were as follows:

        Property                         Sales date and price

     Comparable sales
     7600 Windsor Oaks                    May 1993–-$140,670
     7592 Windsor Oaks                    May 1993–-$139,660

     7518 Windsor Oaks                    Feb. 1993-–$63,000

     Apartment building at issue
     7519 Windsor Oaks                    Aug. 10, 1993–-$105,465

     The opinions of petitioners’ and respondent’s experts and

the positions of the parties as to the value of the apartment

building at issue on August 10, 1993, are as follows:
                                     - 6 -

                    Comparable       Income      Cost method   Estimated
                   sales method      method                      value
                                                               1
Petitioners’          --               --           --          $106,000
returns,
petitions,
and brief
Deficiency
notices and          --                --           --             139,900
answers
Petitioners’        $106,000        $104,390      $106,403         106,000
expert Glen
Respondent’s         139,900         138,700       147,000         139,900
expert Kurek

        1
       Petitioners reported on their returns and asserted in the
petitions that the fair market value of the apartment building
was $105,465. On brief, they contend that its value was
$106,000.

C.      Petitioners’ Experts

     1.     Wolff

     Wolff appraised the apartment building in August 1991 for

NCNB Bank for refinancing purposes.           He estimated that its fair

market value was $85,000.         He used 7527 Windsor Oaks as a

comparable property.       7527 Windsor Oaks had the same size and

number of rental units as the apartment building and was sold in

January 1991 for $79,000.         Wolff testified that the value of the

apartment building could reasonably have increased to $106,000 in

1993.

     2.     Glen

     Glen inspected the apartment building in May 1997.              He

estimated that its fair market value was $106,000 as of August
                                - 7 -

10, 1993.

     Glen estimated that 7600 Windsor Oaks and 7592 Windsor Oaks

were worth more than the apartment building because, for example,

the buildings at 7600 Windsor Oaks and 7592 Windsor Oaks both had

exterior lighting and a separate, offstreet parking lot with

designated parking spaces, and each had a two-door communal

entry, which offers more security for tenants.    In contrast, the

apartment building did not have exterior lighting, had one door

to each of its four units, had nose-in parking off the street,

and had a significantly smaller parking area than did the parking

lots of 7600 Windsor Oaks and 7592 Windsor Oaks.    Glen also said

that 7600 Windsor Oaks and 7592 Windsor Oaks were worth more

because they had larger living areas, two of their four rental

units were larger than the rental units in the apartment

building, they were 2 years newer than the apartment building,

and they had assumable financing.

     Glen testified that the average increase in residential

property values in San Antonio from 1991 to 1993 was 21 percent.

Based on Wolff’s estimate that the apartment building was worth

$85,000 in 1991, and Glen’s estimate that it was worth $106,000

in 1993, the value of the apartment building increased by 24.7

percent.    This is consistent with Glen’s valuation of the

apartment building.

     Glen estimated that 7518 Windsor Oaks was worth less than
                               - 8 -

the apartment building because 7518 Windsor Oaks had 2,768 square

feet and the apartment building had 4,409 square feet, a

difference of 37 percent.

D.   Respondent’s Expert--Kurek

     Kurek estimated that the fair market value of the apartment

building was $139,900 as of August 10, 1993.   He inspected the

property in May 1996 and March 1999.

     Kurek testified that 7592 Windsor Oaks and 7600 Windsor Oaks

were so similar to the apartment building that no adjustments to

their prices were needed.   He testified that the greater

aesthetic appeal of the apartment building, as compared to the

boxlike appearance of 7600 Windsor Oaks and 7592 Windsor Oaks,

offsets the amount of any adjustment for the smaller amount of

exterior brick and the smaller area for parking.   Kurek also said

that 7518 Windsor Oaks was not comparable to the apartment

building because it was only about half the size of the apartment

building.

E.   Analysis

     We find that Glen’s and Wolff’s analysis is more reasonable

than Kurek’s.   Glen estimated that the apartment building at

issue was worth substantially more than 7518 Windsor Oaks, which

sold for $63,000, because the apartment building at issue was

larger.   He estimated that it was worth substantially less than

7600 Windsor Oaks and 7592 Windsor Oaks because the apartment
                                - 9 -

building was inferior to those buildings in several ways.   We

believe Glen reasonably adjusted for the differences between the

comparable properties and the apartment building.   We disagree

with Kurek’s estimate because he did not adequately consider

those differences, and because he did not use 7518 Windsor Oaks

as a comparable.    Wolff’s report is helpful because he estimated

in 1991 that the apartment building was worth $85,000, and he

testified that it could reasonably have increased in value to

$106,000 in 1993.

     Respondent contends that Glen’s use of 7518 Windsor Oaks as

a comparable property caused him to undervalue the apartment

building.   We disagree that the properties are not comparable.

The apartment building and 7518 Windsor Oaks were both built in

1985 and are of identical construction.   7518 Windsor Oaks, 7600

Windsor Oaks, 7592 Windsor Oaks, and the apartment building each

have four residential apartments.   7518 Windsor Oaks is much

smaller, but Glen considerated that difference in estimating the

value of the apartment building.    Properties need not be the same

size to be used as comparables.2

     Glen subtracted 10 percent from his estimate of the value of

the apartment building compared to 7600 Windsor Oaks and 7592



     2
        Wolff testified that properties may not be comparable if
they vary greatly in size, but he did not state an opinion on
whether 7518 Windsor Oaks and the apartment building were
comparable.
                               - 10 -

Windsor Oaks to take into account the fact that those buildings

had assumable financing.   Respondent contends that Glen

undervalued the apartment building because Glen did not compute

whether an assumption would be more advantageous than a

conventional mortgage, and because Glen did not know the interest

rates on the assumable notes on the 7600 Windsor Oaks and 7592

Windsor Oaks properties.   We disagree.   Glen explained that an

assumable mortgage increases the value of a building since a

buyer need not qualify for a mortgage, incur substantial closing

costs, or provide as large a downpayment as the buyer would if

the property had a conventional mortgage.    There is nothing

persuasive in the record to the contrary.    Thus, we accept Glen’s

analysis on this point.

     Respondent contends that Glen’s appraisal was defective

because he did not estimate how much it would cost to conform the

apartment building to the comparable properties.    We disagree.

The purpose of an appraisal is to estimate the value of a

property, not to determine the cost of conforming it to a

comparable property.

     Based on the foregoing,


                                          Decisions will be entered

                                    for petitioners.
